2020 (5) TMI 32 - HC - Indian Laws

Court upholds validity of Put Option Deed, deems it enforceable under securities law.

The court rejected the respondents' objection regarding inadequate stamping of the Put Option Deed, finding it legally untenable as the deed was ... Enforcement of an arbitral award titled as “Put Award” - enforcement of a foreign award - Put Option Deed - entitlement to damages for the non-performance of the Put Option Deed by Responsive and Wellknown - Responsive and Wellknown defended the arbitral claim as made by Banyan Tree to contend that neither Banyan Tree was entitled for specific performance nor damages should be awarded under the Put Option Deed. Put Option Deed Not Being Adequately Stamped - HELD THAT:- It is significant that Banyan Tree in the reply affidavit (to the respondents affidavit raising this objection on the document not been adequately stamped), has categorically contended in paragraph 3 (c) that the stamp duty of ₹ 300/- has been paid by the respondents on the put option deed, under which rupees hundred was paid in accordance with Article 5(h) (B) of the Maharashtra Stamp Act and as the document also contained an indemnity a further stamp duty of Rupees two Hundred was paid under Article 35 of the Maharashtra Stamp Act,(as payable in the year 2008). In the rejoinder affidavit of the respondents dated 12 July 2019, the respondents have thought it proper not to deny this assertion of the petitioner as raised in paragraph 3 (c) of the reply affidavit. Hence the petitioner’s contention in regard to the put option deed being adequately stamped as per the provisions of Article 5 (h) (B) has also been admitted by the respondents. The arbitral tribunal admitted the document in evidence, and has adjudicated the rights and obligations arising under the said document interalia by granting claims as made by the petitioner. Accepting such plea in these circumstances would mean that in exercising jurisdiction under Section 48 of the A & C Act the Court would be reopening the trial as need before the arbitral tribunal even on factual issues. This is certainly not the jurisdiction of the Court under Sections 47 to 49 of the A & C Act. In these circumstances, surely these decisions are of no avail to the respondents - the objection of the respondents to the enforceability /execution of the award on the ground of the put option deed not being adequately stamped stands rejected. Put option deed being unenforceable and illegal under the provisions of the Securities Contracts (Regulation) Act 1956 (SCRA) and the notifications issued thereunder - HELD THAT:- The put option deed which is a fallout of the SPA is a contract between shareholders which recognises the right of Banyan Tree/petitioner to exercise the put option in regard to the put securities. By itself put option deed is not a speculative contract merely because it involves sale of the Put securities. Only on exercise of the put option by issuance of a put option notice, which was exercised by Banyan Tree in the year 2015, an obligation was created on the promoters/respondents to purchase the securities by payment of the put option price. Hence a contract for the sale or purchase of securities had come into existence only in the year 2015 when Banyan tree exercised its option - As the option in favour of the Banyan Tree could neither be dealt nor traded on the stock exchange, being a specific buyback arrangement between the shareholders, there was no question of any speculative transaction between the parties, attracting the provisions of SCRA or the notifications issued thereunder. It is thus not possible to accept the respondents contention that the put option deed fell foul of section 18A of the SCRA, interalia being not traded on a recognised stock exchange. There is nothing illegal when the arbitral tribunal holds that section 18 A of the SCRA does not absolutely prohibit put options in the Put Option Deed and that the contract between two shareholders, containing an option in the nature as contained in the put option deed is completely different from options contract or derivatives contemplated by section 18A of the SCRA. In any event it cannot be held that that tribunal’s view on this question, which is arrived at, on interpretation of the terms and conditions of the put option deed, is an impossible view nay illegal. Put option deed is unenforceable and illegal under the provisions of FEMA - Held that:- Considering the legislative scheme under FEMA it cannot be conceived, that any violation of the provisions of FEMA can either render the put option deed to be illegal or/or the foreign award in question would be rendered unenforceable. In my opinion an unwarranted hair-spitting was resorted in dissecting the notifications when on the basic premise the respondents were not correct, namely to contend that the Put Option Deed would be invalid under the FEMA as the terms thereof offend the notifications. As clearly seen from the authoritative pronouncement of the Supreme Court in Vijay Karia’s case (supra) a challenge to the enforceability of a foreign award on the ground that the contract violates the provisions of FEMA and regulations made thereunder and/or if the award is enforced it may violate the provisions of FEMA is no more res integra. The respondents contentions questioning the enforceability of the arbitral award on the ground of violation of FEMA and/or the regulations made thereunder are thus required to be rejected. Objection on the ground that the award is contrary to the fundamental public policy - HELD THAT:- The arbitral award satisfies all the legal requirements in law so as to be enforced as a decree of this Court. Banyan Tree is correct in its contention that the respondents having accepted investment from Banyan Tree and subsequently being hugely benefited from the same ought to have been fair and honest in their dealing with a foreign party who expected a legitimate exit as explicitly understood and provided for in the Put Option Deed. Banyan Tree is also correct in its contention that the legal pleas apart from being without substance were merely an eye wash so as to make an attempt to deprive Banyan Tree of the fruits of the award. Although the pleas as raised by the respondents can be said to be legal pleas, but the entire approach of the respondents in pursuing the present proceedings was nothing less than converting these proceedings as if it is an appeal knowing well the limited scope of interference under Section 48 of ACA. Taking an overall view of the matter, the respondents in these circumstances cannot deprive Banyan Tree of the fruits of the arbitral award. The Put Award dated January 15, 2019, (as subsequently corrected),in SIAC ARB 37 of 2016 is declared to be binding under section 46 and enforceable as a decree of this Court, under Part II of the Arbitration and Conciliation Act 1996 - Petition allowed. Issues Involved:1. Adequate stamping of the Put Option Deed.2. Legality of the Put Option Deed under the Securities Contracts (Regulation) Act, 1956 (SCRA).3. Legality of the Put Option Deed under the Foreign Exchange Management Act (FEMA).4. Enforcement of the arbitral award being contrary to the fundamental public policy of India.Detailed Analysis:I. Adequate Stamping of the Put Option Deed:Contention:- The respondents argued that the Put Option Deed was insufficiently stamped under the Maharashtra Stamp Act, making it unenforceable.Court's Analysis:- The obligation to stamp the deed was on the respondents, who consistently acted as if it was adequately stamped.- The respondents never raised this issue before the arbitral tribunal or in their initial objections.- Section 35 of the Maharashtra Stamp Act precludes questioning the admission of an instrument in evidence on the ground that it was not duly stamped after it has been admitted.- The Court found that the document was stamped with Rs. 300, which was adequate under Article 5(h)(B) and Article 35 of the Maharashtra Stamp Act.Conclusion:- The respondents' objection on the ground of inadequate stamping was rejected as it was an afterthought and legally untenable.II. Legality of the Put Option Deed under the SCRA:Contention:- The respondents claimed that the Put Option Deed was a contract in securities/derivatives and/or a forward contract, thus violating the SCRA and related notifications.Court's Analysis:- The Put Option Deed was part of a Share Subscription Agreement (SSA) and not intended for speculation.- The legislative amendments to the SCRA and subsequent notifications did not prohibit such options in shareholders' agreements.- The SEBI notification dated 3 October 2013 recognized contracts in shareholders' agreements for the purchase or sale of securities pursuant to the exercise of an option.- The Court distinguished between speculative contracts and shareholders' agreements containing options, concluding that the Put Option Deed was not speculative and did not violate the SCRA.Conclusion:- The Put Option Deed was found to be valid under the SCRA and related notifications.III. Legality of the Put Option Deed under FEMA:Contention:- The respondents argued that the Put Option Deed violated FEMA regulations, which did not permit optionality clauses at the time of execution.Court's Analysis:- The Put Option Deed did not provide for an open-ended assured return and was contingent on specific conditions.- The valuation process under the deed ensured compliance with FDI regulations.- FEMA and its regulations are concerned with the management of foreign exchange and do not void contracts.- The Court referenced several judgments, including the Supreme Court's decision in Vijay Karia and others v. Prysmian Cavi E Sistemi SRL & Ors., affirming that violations of FEMA do not render contracts void or unenforceable.Conclusion:- The Put Option Deed did not violate FEMA, and any required permissions could be obtained post-facto.IV. Enforcement of the Arbitral Award and Public Policy:Contention:- The respondents claimed that enforcing the award would be contrary to the fundamental public policy of India.Court's Analysis:- The scope of public policy in the context of enforcing foreign awards is narrow and limited to fundamental principles.- The objections raised by the respondents did not fall within the categories that would make the enforcement of the award contrary to public policy.- The Court emphasized the limited scope of interference under Section 48 of the Arbitration and Conciliation Act.Conclusion:- The arbitral award was found to be enforceable and not contrary to the public policy of India.Final Orders:- The Put Award dated 15 January 2019, in SIAC ARB 37 of 2016, was declared binding and enforceable as a decree of the Court.- The Escrow Award dated 15 January 2019, in SIAC ARB 36 of 2016, was also declared binding and enforceable.- The respondents’ request for a stay of the judgments was rejected.