2025 (2) TMI 21 - HC - Companies Law

Foreign investors can exit joint venture through Company Law Board formula despite partner's challenge

Cheran Enterprises Private Limited Versus Union of India, The Reserve Bank of India, Axis Bank Ltd., O.R.E. Holdings Limited, ORE Trust, Nandakumar Athappan and CG Holdings Private Limited, Chennai

Cheran Enterprises Private Limited Versus Union of India, The Reserve Bank of India, Axis Bank Ltd., O.R.E. Holdings Limited, ORE Trust, Nandakumar ... ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment revolve around the execution and compliance with the exit formula devised by the Company Law Board (CLB) for foreign investors ORE Holdings and Nandakumar Athappan to exit from a joint venture with Indian company CEPL. The issues include:Whether the exit formula constituted a buy-back of shares requiring compliance with FEMA pricing guidelines.The legality and compliance with FEMA regulations regarding the sale of immovable property to foreign entities or their nominees.The validity of the CLB's orders and their execution, particularly in light of the subsequent judicial proceedings and RBI communications.The implications of the Supreme Court's dismissal of Special Leave Petitions (SLPs) related to the case.ISSUE-WISE DETAILED ANALYSIS1. Exit Formula and Buy-Back of SharesThe primary issue was whether the CLB's order for CEPL to pay Rs. 75 crores to ORE and Rs. 4 crores to Athappan, plus interest, constituted a buy-back of shares requiring compliance with FEMA pricing guidelines. The Court analyzed the CLB's order, which mandated the return of the invested sums with interest, and required the surrender of share certificates for a reduction in share capital. The Court concluded that the order did not imply a buy-back of shares, as it aimed to restore the status quo ante and reduce share capital, not alter shareholding patterns.2. Sale of Immovable Property and FEMA ComplianceThe issue concerned the legality of the sale of VML's immovable property to ORE's nominee, ORE Trust, and Athappan, considering FEMA regulations. The Court noted that the CLB's order allowed the sale of property as an alternative mode of settlement if CEPL failed to repay the invested amounts. The RBI had initially indicated that foreign entities could not acquire immovable property, but later permitted the sale to ORE's nominee. The Court found that the sale complied with applicable laws, as the CLB's order was executed with necessary permissions.3. Judicial Proceedings and Finality of OrdersThe Court examined the judicial proceedings following the CLB's orders, including appeals and the Supreme Court's dismissal of SLPs. The Court emphasized the finality of the CLB's orders and the Supreme Court's endorsement of the sale of VML property, which vested title in the foreign investors' nominee. The Court noted that the petitioner had abandoned arguments on share pricing during earlier proceedings, precluding them from reviving these issues.SIGNIFICANT HOLDINGSThe Court held that the CLB's exit formula did not constitute a buy-back of shares, as it aimed to return the invested sums and reduce share capital. The Court affirmed the legality of the sale of VML property to ORE's nominee, as it complied with FEMA regulations and was executed with necessary permissions. The Court emphasized the finality of the CLB's orders and the Supreme Court's dismissal of related SLPs, which confirmed the validity of the executed sale.The Court dismissed the petition, finding no merit in the petitioner's arguments, and closed all connected miscellaneous petitions without costs. The judgment underscored the importance of fairness and compliance with legal obligations, rejecting the petitioner's attempts to circumvent the CLB's orders and the judicial process.