TaxTMI 
TaxTMI 
2020 (5) TMI 32
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....ubsequently corrected), of the Singapore International Arbitration Centre (SIAC) Arbitration No. 37 of 2016, as a decree of this court and for prayers consequential to the enforcement of the award. 2. Factual Conspectus Briefly the facts are: To appreciate the nature of the disputes it would be necessary to note as to how the parties stand in their contractual relations. The petitioner (for convenience "Banyan Tree") is a company incorporated under the laws of Mauritius. It is stated to be a closed-ended fund regulated by the Financial Services Commission in Mauritius having its shareholders interalia comprising of large global development financial institutions. The business of Banyan Tree in India is to make investments in mid-market companies with the objective of capital formation for the investee companies and long term capital appreciation for its investors. Banyan Tree is stated to have made an investment of about USD 7.5 million and holds 11.25% of the equity shareholding in respondent no.1-Axiom Cordages Limited which is a company incorporated in India under the provisions of the Companies Act, 1956. (for convenience respondent no. 1 is referred as "Axiom"). Axiom is....
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....hares on the stock exchange. The second exit option was a merger of Axiom into Responsive, whereupon Banyan Tree would receive shares in Responsive, a publicly listed company. The third exit option was that Banyan Tree would exit its investment under the Put Option Deed whereby Banyan Tree would require Responsive and Wellknown to buy its shareholding in Axiom, should the first and second exit options were not to be available to Banyan Tree. 6. In Schedule 16 of the SSA, Banyan Tree's rights to exercise put option were provided in clause 9.1 in the following terms:- "9.1 Put Option The Investors shall have the right to, exercise the Put Option on the Promoters, in accordance with the Put Option Agreement within the Put Option Exercise Period in the manner prescribed therein. For the purpose of this Paragraph: "Put Option" shall mean the option granted by the Promoters to the Investors, to sell the Debentures and/or Equity shares issued upon Conversion and/or Subscription Shares, held by the Investors to the Promoters, in accordance with the Put Option Agreement. "Put Option Agreement" shall mean a put option agreement dated on or about the dat....
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....ese attempts as made by the Promoters could not succeed. Also the Promoters could not list Axiom on a stock exchange and subsequently made an offer to buy out Banyan Tree's shares in Axiom at a price that Banyan Tree refused. Such an offer according to Banyan Tree was also not as per the terms provided under the Put Option Deed. According to Banyan Tree during this entire period the promoters consistently recognized that it was incumbent upon them to provide Banyan Tree with an exit, based on the contractually agreed terms contained in the SSA as also the Put Option Deed. 12. Thereafter in August 2013, in contemplation of a proposed merger of Axiom with Responsive, the parties agreed that Banyan Tree would convert the compulsory convertible debentures it held in Axiom, into equity shares. The merger did not take place, however, Banyan Tree was nonethless required to convert its debentures into equity shares. 13. The first spark, is an event namely on 19 March 2014, Wellknown transferred the Escrow Shares out of the designated demat-Escrow Accounts without authority or consent of Banyan Tree and/or the Escrow Agent to a new account operated solely by Wellknown. Similarly on 23....
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....,346,252.00 (or INR 346.54 per Put Security). This figure being arrived was as per valuation report dated 15 July 2015 prepared by MZSK & Associates, Chartered Accountants, which was subsequently reviewed and endorsed by BDO India LLP in its Review Report dated April 2017. These experts calculated the said fair market value (FMV) of the put securities using the discounted cash flow method which according to Banyan Tree was an internationally accepted valuation method. Banyan Tree contended that as per Axiom's balancehseet the FMV calculated as per Schedule 3 of the Put Option Deed was significantly higher than the FMV derived by MZSK & Associates. The promoters however failed to purchase the put securities as per the terms of the Put Option Deed and as required under the put option notice. Moreover, Responsive on behalf of the Promoters, by its letter dated 30 September 2015 denied liability to buy Banyan Tree's shares alleging that the "Put Option Deed" is illegal, contrary to the laws of India and therefore void-ab-initio. 18. In the circumstances, Banyan Tree by its letter dated 1 October 2015 issued a 'Dispute Notice' as per clause 19.3(a) of the Put Option Deed to the promo....
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....gations under the Put Option Deed. Banyan Tree contended that Responsive and Wellknown had tremendously benefited from Banyan Tree's investment into Axiom. It was contended that the promoters illegally refused to perform their obligations under the Put Option Deed and their conduct of justifying their wrongful breach was contrary to their express representations and warranties. Banyan Tree contended that the Promoters had made clear representations and warranties as to the validity, legality and enforceability of these obligations under the Indian law. Banyan Tree argued that under Clause 7.4 of the Put Option Deed, Banyan Tree was required to obtain special permission from the Reserve Bank of India for the transaction. It was contended that Clause 7.4 provided that not only did the parties anticipate that the sale and purchase of the Put Option Securities might require special approval, but the Put Option Deed clearly allocated the responsibility of such approval as may be necessary to effect the transaction on the Promoters. Banyan Tree contended that the Promoter's obligation under Clause 7.4 was an absolute one and that it was the Promoter's obligation to take all necessary ste....
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....toppel against statute under the Indian jurisprudence. Thus, principal bone of contention of Responsive and Wellknown was that the arbitral tribunal ought to rule that the Put Option Deed was contrary to Indian public policy and secondly unenforceable under Section 23 of the Indian Contract Act 1872. Responsive and Wellknown also objected to the jurisdiction of the tribunal to decide any issue as raised under the Share Subscription Agreement (SSA ). The arbitral tribunal on aforesaid conspectus framed the following three issues:- (i) Whether the Put Option Deed is valid and legal under Indian Law? (ii) Whether the Put Option Deed is legal under FEMA and its secondary legislations? (iii) Whether the Put Option Deed is legal under the SCREA and its secondary legislations? 23. The respondents cross examined Banyan Tree's witnesses but as contended by Banyan Tree chose not to cross examine the valuation expert and accordingly accepted the valuation of the put option shares calculated by Banyan Tree's experts. In August,2017 the arbitral proceedings were closed for an award to be pronounced. Further on 6 September 2017, the Section 9 petition filed by Banya....
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....f the SIAC arbitration. The arbitral tribunal in pursuance of the applications filed by the petitioners issued two partial awards being partial award dated 30 January 2017 and partial award dated 31 August 2017 in relation to reimbursement of deposits. It is contended that these awards were not challenged by the respondents and hence these findings according to Banyan Tree also stand subsumed in the put award and have become binding on the respondents. 26. On 30 January 2019, Banyan Tree applied for correction of certain clerical and/or typographical errors in the put award under rule 29.1 of the SIAC Rules. The arbitral tribunal corrected the put award as requested by Banyan Tree and accordingly a "memorandum of corrections" dated 25 February 2019, came to be issued. Thereafter on 11 February 2019 the respondents filed an application before the arbitral tribunal seeking an additional award and an interpretation of the put award. It is contended that Banyan Tree had opposed the said application interalia contending that the application is beyond the scope of the SIAC rules. It is stated that the said application is pending adjudication. Contentions of Banyan Tree in seeking e....
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....sing the present petition have filed a counter affidavit of Mr K.K. Agarwal who is the authorised signatory on behalf of the respondents, under the respective board resolutions as set out in paragraph one of the reply. The contention of the respondents in opposing the petition is firstly on the ground that there is a section 34 petition filed by the respondents in this Court challenging the put award. It is stated that the said petition is pending, hence the present petition filed under section 47 and 48 of the A&C Act is not maintainable. It is next contended that there is another arbitration pending between the parties under the 'share subscription agreement-SSA', which is the parent agreement under which the put option right was granted to Banyan Tree. It is contended that in the said arbitration a declaration has been sought by the respondents that the put option deed is void ab- initio being illegal and unenforceable hence not binding on the parties. It is thus contended and that any action taken in furtherance thereof shall be against the public policy of India. It is contended that the SSA arbitration is at final stages, the award which would be made in the said arbi....
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....illegal contract. SUBMISSIONS ON BEHALF OF THE RESPONDENTS 31. Mr, Zal Andhyarujina learned counsel for the respondents has made the following submissions opposing the enforcement and execution of the arbitral award : - On Put Option Deed being inadequately stamped At the outset it is contended that the put option deed is insufficiently stamped and cannot be relied upon in the present proceedings. It is contended that the 'Put Option Deed' was required to be stamped as per the provisions of article 5 (c) (ii) or article 5 (h) (A) (iv) of the Maharashtra Stamp Act 1958, whichever is higher. It being stamped with a value of Rs. 300/- is an insufficient stamping. According to the respondents section 47 enjoins upon a party applying for enforcement of a foreign award in India, to produce together with its application interalia "evidence" of the 'agreement for arbitration'. It is contended that section 33 of the Maharashtra Stamp Act 1958, it is the duty of any judicial authority empowered to receive evidence, to impound a document which is found to be unstamped or insufficiently stamped and to further send the said document for adjudication, in keeping with ....
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....astal Marine Constructions and Engineering Ltd. 2019 SCC online SC 55. 32. Respondents' Submissions on illegality of the award Under SCRA It is next submitted that the 'put option' as contained in the Put Option Deed is invalid under the provisions of the Securities Contract Regulation Act 1956 (for short "the SCRA") and the notifications issued thereunder. The avowed public policy of the SCRA is to prevent speculation in securities and the same is also set out in the preamble of the SCRA namely 'an act to prevent undesirable transactions in securities by regulating the business of dealing therein...". Respondents refer to the definition of the term 'derivative', 'option in securities', 'spot delivery contract', as defined under the SCRA as also the provisions of section 16 which provides for power to prohibit contracts in certain cases and more particularly reference to section 18A which deals with contracts on derivatives, in support of this contention. It is submitted that the put option is violative of the provisions of the SCRA and the Foreign Exchange Management Act 1992 and the notifications issued thereunder on different counts as unde....
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....elivery contracts or contracts for cash or hand delivery or contract in derivatives as is permissible under the SCRA. It is submitted that in terms of the said notification, for the purposes of the present case, it was relevant that only contracts for spot delivery and contracts in derivatives in accordance with Section 18 A of the SCRA were permitted. (vi) On 23 May 2011 SEBI by its Interpretative Letter in Vulcan Engineers, issued under the SEBI (Informal Guidance) Scheme, 2003, in a similar contract as in the present case, it was opined that option contracts fall foul of the rule of spot delivery and were prohibited under the provisions of the SCRA. SEBI also opined that a put option, deriving its value from the underlying securities, had to meet the requirements and the mandate of section 18 A of the SCRA. This letter demonstrated SEBI's view being the market regulator in regard to the applicability of the provisions of the SCRA to the put option agreements. This letter of the SEBI was not considered by the arbitral tribunal. (vii) On 3 October 2013 SEBI vide its notification bearing No. LAD -NRO/GN/2013 - 14/26/6667 ("2013 SEBI Notification) issued under ....
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....t be traded on a recognised stock exchange and settlement on the clearing house of the recognised stock exchange. The put option being an option in securities as defined in the SCRA also satisfies the definition of derivative as the value of the put option was derived from the value of the underlying shares, as upon the exercise of the option, the shares of Axiom held by Banyan Tree would have to be purchased by respondent No. 2 and 3. Secondly the exchange fluctuation in regard to the put option was to be its value from the fluctuation in the conversion rates of USD in to INR. To support this contention reliance is placed on the decision of the Madras High Court in Rajshree Sugars and Chemicals limited versus Axis Bank Ltd and others AIR 2011 Madras 144. IV A derivative, like the put option, in the present case therefore, being an option attached to the shares of an unlisted public company, was not permitted at such time and would fall foul of the public policy under the SCRA. This is also bolstered by the observations of SEBI in the Interpretive Letter (supra) dated 23 May 2011 wherein SEBI clearly recorded that forward contracts namely contracts other than spot delivery....
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.... in the present facts. In the said case this court had held that options come into existence upon the exercise thereof, however the said decision did not decide the question of legality of buyback arrangements pursuant to put option vis-a-vis the provisions of section 18 A and the same was kept open, as it was not the ground taken by SEBI in the show cause notice. In the facts of the said case there was nothing to show that the contract would be settled in any manner other than by way of spot delivery. In the facts of the present case the put option deed on consideration of the various provisions makes it clear that the same amounts to a forward contract inasmuch as price at which the put option will be exercised, being the put option price is predetermined price for future transfer of shares and on account of such transfer being effected, one month after the date of exercise of the option, the same will not be settled on a spot delivery basis, as seen from the definitions of 'put option price' and 'put settlement date' as contained in the put option deed. In fact, this decision would support the respondents as in the present case it is an undeniable fact that the p....
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.... This is clear from the following:- (i) the Reserve Bank of India in exercise of the powers under Section 6(3)(b) and section 47 had issued the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, vide notification No. FEMA 20/2000 - RB, dated 3 May 2000 (for short FEMA- 20), to regulate and restrict the transfer or issue of securities by a person resident outside India. The permission to purchase shares by persons resident outside India in an Indian company was governed by the provisions of Regulation 5 NB: Permission for purchase of shares by certain persons resident outside India) of FEMA 20. In 2008 when the investment was made by Banyan Tree in the shares/equity of Axiom by virtue of the share subscription agreement, the transaction was governed by Regulation 5 (1) of FEMA 20. Banyan Tree was granted various investors rights in terms of clause 10 of the share subscription agreement read with schedule 16 thereof which interalia included the right to exercise put option. The provisions of regulation 5 (1), FEMA- 20, do not make any mention of permissibility of optionality clauses in such investments made by pe....
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....gulation 5 clarifying that "shares and convertible debentures containing an optionality clause, but without any option/right to exit at an assured price shall be reckoned as eligible instruments to be issued to a person resident outside India...". (iii) It is submitted that the RBI further clarified the FEMA regime by circular dated 9 January 2014 (circular No. 86) (2014 RBI circular), which leaves no room for doubt that option clauses in foreign investments made under the regime of FEMA 20, were "henceforth be allowed in equity shares and compulsorily and mandatorily convertible preference shares/debentures to be issued to a person resident outside India under the Foreign Direct Investment (FDI) Scheme", but without any right to exit with an assured return. It is submitted that the said Circular in clause 3 thereof also refers to the fact that the RBI since has amended FEMA 20 by the said 2013 RBI notification. Also a Press Release dated 9 January 2014 which leaves no room for doubt that till October 2013 equity shares which were issued to persons resident outside India were not permitted to carry optionality clause and the same was allowed for the first time. These devel....
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....y the arbitral tribunal. The tribunal's reasoning is wholly mistaken, since what constitutes a derivative or not must be a certain from the definition of the term' derivative 'as defined under section 2 (ac) of the SCRA, which specifically includes a 'derivative 'that is a security derived from a debt instrument, a share etc. is also a security which derives its value from the prices, or index of prices, of underlying securities. The term 'securities' is defined in section 2 (h) of the SCRA to include shares, debentures or any other marketable security of like nature. Also the term 'option in securities 'means a contract for the purchase or sale of a right to buy or sell securities in the future and includes a put call option in securities. (iii) It cannot be denied that Banyan Tree was issued debentures of Axiom which were subsequently converted into equity shares, this being the case, the shares in question clearly fell within the definition of the term 'securities'. It is an admitted position that the put option entitles the petitioner to call upon Responsive to purchase the said shares at a pre-determined price at a future date. ....
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....ation of funds from India to a person resident outside India, where the tribunal has held that options in shares of an unlisted company are permitted under FEMA. It is submitted from the RBI circular dated 4 May 2010 up to the issuance of 2013 are in line with the policy under the SCRA, FEMA which also did not recognise optionality clauses in the FDI instruments. Considering the sequence of notifications, the finding of the arbitral tribunal in paragraph 197 of the award is wholly incorrect when it holds that, the legislation such as FEMA and SCRA would not be conflict with each other. This in so far as FEMA permitted put options in shares of a 'private company' and SCRA prohibiting the same, thereby creating an inconsistency. It is evident that FEMA itself recognises the fact that optionality as deployed in shares of public companies was permitted for the first time in October 2013 as reflected in the 2013 RBI notification. Thus the conclusion of the arbitral tribunal in paragraph 197 of the arbitral award that options in shares of private unlisted companies like Axiom, cannot qualify as a derivative for the purposes of the SCRA is erroneous and contrary to the fundamental policy ....
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....ed was geared to ensure that Banyan Tree gets a minimum return of 15%. In fact, when Banyan Tree was aware of the fact that assured return was prohibited by the FEMA regime, at the time of entering into the put option deed, itself, makes it abundantly clear that in the event the fair market value/valuation certificates were to be lower than the target value, the difference between the same would be deposited with the nominee for and on behalf of Banyan Tree at an account in India. This arrangement demonstrated the knowledge that there was an assured return being provided to evade the provisions of law. The findings of the tribunal in this regard based on the decision of the learned single judge of the Delhi High Court in Cruz City 1 Mauritius Holdings versus Unitech Ltd (2017) 239 DLT 649 are completely misconceived. This decision itself is not applicable to the facts of the present case and is clearly distinguishable. This more particularly as the provisions of the SCRA were not considered by the learned Single Judge in the said decision, at all. Even otherwise this decision does not take into consideration the decision of the Supreme Court in Dropti Devi & Anr Versus Union of Ind....
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....uately stamped. The respondents therefore should not be heard to contend that the enforcement petition should not be heard as the put option deed is alleged to be inadequately stamped by the respondent themselves. This is a dishonest plea as taken by the Respondents. The document at all material times was acted upon. Such an argument on change of legal advice cannot be on the ipse-dixit of the legal advice which the respondent received. In any case there is no material that it is not adequately stamped. Conduct of the parties on this document cannot be ignored. (iii) The respondents contention in the present facts that the policy underlying section 18A of the SCRA it is to stop speculation/speculative trading is misplaced, as the put option deed can never result in speculation. Moreover, the notification dated 3 October 13 issued under section 16 and 28 of the SCRA, would establish that the policy of the SCRA is to treat as valid and enforceable, contracts for the purchase or sale of securities, pursuant to exercise of an option contained in a contract in shareholders agreements and the notification also expressly clarifies that the same shall be valid notwithstanding anyt....
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....ldings (supra) is misplaced. Dropti Devi was the case which dealt with a renewed challenge to the constitutional validity of the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (COFEPOSA) on the ground that FEMA had no provision for prosecution and punishment like Section 56 of the FERA and that under FEMA violations were compoundable civil offences. It is in this context, the Supreme Court observed that the conservation and augmentation of foreign exchange continues to be as important as it was under FERA (para 66), although contravention of its provisions is not regarded as a criminal offence (para 67). The Court rejected the challenge to the legality of COFEPOSA and held that there is no constitutional mandate that preventive detention cannot exist for an act where such act is not a criminal offence and does not provide for punishment (para 70). These observations of the Supreme Court while stressing the continued importance of FEMA, do not detract from the said decisions of the High Court that the foreign award in favour of a foreign investor, cannot be assailed as being contrary to the fundamental policy of Indian law on the ground that the co....
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....ntaining an option to buy or sell their own shares cannot be traded or sold and can never be settled by payment of differences. (xii) It is submitted that Section 18A of the SCRA deals only with contracts in derivatives, that is 'options contract', which can be traded, brought sold and settled. Section 18A would not have any applicability to a contract between two shareholders, which contains an option for sale or purchase of their own shares. This distinction between an 'options contract' or a 'contract in derivatives' and a 'contract for sale or purchase of securities', pursuant to the exercise of an option contained in shareholders agreement, is also apparent from the notification dated 3 October 2013 issued under Section 16 and 28 of the SCRA, which reads contracts in derivatives (covered by clause (b)) as distinct and different from a contract for sale or purchase of securities pursuant to the exercise of an option contained in a shareholders agreement, which is covered separately by clause (d) of the said notification. (xiii) It is submitted that the learned Single Judge of this court in Edelweiss Financial Services Ltd versus Percept Finserve Pvt Ltd (supra....
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....ted 3 October 2013 covered 'shareholders agreements' containing an option to purchase/ sell their shares is ex-facie contrary to the language of the notification hence misplaced. It is submitted that the plain language of clause (d) of the said notification, refers only to contracts for the purchase or sale of securities "pursuant to exercise of an option" contained in shareholders agreements. Clause (d) did not and could not cover shareholders agreement containing an option, in view of the settled legal position that such an option was a mere privilege and did not constitute a contract for the sale and purchase of securities and would accordingly not be within the purview of the SCRA. It is submitted that only pursuant to the exercise of an option, would a contract for the sale or purchase of securities would arise falling within the SCRA. (xviii) The respondents submission that the put option deed was illegal and in contravention of the FEMA, as it provided for a fixed and are assured returns at a predetermined rate of 15% also is misconceived and contrary to the legal position. It is submitted that it is well settled that FEMA deals with actual transactions and dealings....
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....investor in India through the Indian company would not result in any fraction of FEMA. (xxi) It is submitted that in fact there is no absolute bar or any prohibition to a foreign investor being paid in excess of the fair market value. The FDI scheme and the pricing guidelines provide general permission to remit/pay to the investor as per the fair market value (FMV) in foreign exchange. Any payment in foreign exchange beyond the fair market value would not be covered by the general permission and would only be made with a special permission of the RBI . This will also precisely the opening given by the respondents advocates M/. Rajani Associates, to Banyan Tree at the time of entering into the SSA and the Put Option Deed. (xxii) The fourth contention of the respondents that the RBI's press release dated 9 January 2014 and Circular dated 9 January 2014, poisted that agreements for FDI containing optionality clauses, entered prior thereto were illegal and invalid also is misconceived and incorrect. In this context it is submitted that the FEMA does not deal with agreements/contracts or render them illegal and covers only those actual transactions/dealings in foreign ....
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.... the A&C Act,, namely the contention of the respondents, that the contract between the parties namely the 'put option deed' is not a valid contract {section 48(a)}, hence enforcement of the foreign award be refused, as the enforcement of the award would be contrary to the public policy of India and/or the fundamental policy of Indian law{Section 48(2)(b)(ii)}. 40. The grounds of objections as raised by the respondents are required to be discussed. As noted above in opposing the enforcement of the arbitral award the respondents have raised the following four objections :- (i) Put option deed is not adequately stamped as per the requirements of the Maharashtra Stamp Act 1958. For this reason this contract itself is illegal. Consequently the arbitration agreement as contained in the 'put option deed' is also illegal. The contract itself being illegal, there arises no question of enforcement of an award which seeks to enforce rights under an illegal contract; (ii) Put option deed is unenforceable and illegal under the provisions of the Securities Contracts (Regulation) Act 1956 (SCRA) and the notifications issued thereunder. (iii) Put option deed is unenfo....
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.... less any objection in regard to the put option deed being insufficiently stamped, as per the requirements of the Maharashtra Stamp Act. Also as noted the arbitral tribunal was not precluded from not considering any objection which could be raised by the respondents arising under the Indian law. 45. Even before this Court, in the detailed counter affidavit filed in the present proceedings opposing enforcement, the respondents did not raise any contention in regard to this document not being adequately stamped. Banyan Tree has contended only that after this petition was listed for hearing, by an additional affidavit dated 21 June 2019, filed on behalf of the respondents this issue of the document not being sufficiently stamped was raised. Thus according to Banyan Tree this objection is completely an afterthought apart from being untenable in law. 46. Banyan Tree has contested this plea of the respondents by placing on record an affidavit in opposition dated 1 July 2019, interalia contending that as a matter of fact and in law the document is adequately stamped, that too at the hands of the respondents at Rupees One Hundred, as per Article 5 (h) (B) of the Maharashtra Stamp Act....
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....se the proceedings were conducted at Singapore. The respondents contention that for the first time, as a statutory requirement, the original/certified copy of the put option deed was required to be produced in the present proceedings, hence it was appropriate for the respondents to raise such objection in the present proceedings is also wholly untenable. This contention is completely oblivious not only to the clear position taken by the respondents before the arbitral tribunal in regard to the document being adequately stamped, but also admitting to the said document so as to be accepted in evidence, on the basis of which the arbitral tribunal adjudicated the rights and obligations of the parties on the Put Option Deed. 49. Certainly when the arbitral tribunal accepted the put option deed in evidence and proceeded to adjudicate the rights of the parties arising under this document, certain legal consequences have occurred, when they take such position on the document. In this context Section 35 of the Maharashtra Stamp Act becomes relevant, which reads thus:- "Section 35. Admission of instrument where not to be questioned. Where an instrument has been admitted ....
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....ondents 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. 53. In any event, respondent No. 2 and 3, on whom an obligation was cast under the put option deed, to pay the requisite stamp duty, when consistently for a substantial period of ten years took a position that the put option deed was adequately stamped at their hands, cannot be heard to say and/ or are estopped in law, to challenge their own action and conduct, in contending that the document is not adequately stamped. Apart from being devastatingly unreasonable, it is too late in time for the respond....
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....o the enforceability /execution of the award on the ground of the put option deed not being adequately stamped stands rejected. II Put option deed being unenforceable and illegal under the provisions of the Securities Contracts (Regulation) Act 1956 (SCRA) and the notifications issued thereunder. 56. The respondents contentions on this question have been noted in the prefatory part of this judgement. However it would be necessary to briefly recapitulate, the objections of the respondents. The objections interalia are on the ground that the put option deed is a contract in securities/derivatives and /or a forward contract, hence the regulatory mechanism as postulated under the SCRA and the notifications issued thereunder becomes applicable, which would lead to a conclusion that the put option deed is invalid and illegal under the SCRA. The contention is that it has been the fundamental policy of Indian law to prohibit all contracts in derivatives except those expressly permitted under the provisions of the SCRA. The put option deed was executed on 12 September 2008, at which point of time SEBI notification dated 1 March 2000 was in operation, interalia prohibiting forward cont....
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....ewith". There was an amendment to the preamble by Act No. 9 of 1995, by which interalia, the words originally appearing after the word "therein" namely "by prohibiting options and"came to be deleted. The legislative intent of the SCRA is thus to 'prevent undesirable transactions in securities' and to provide a mechanism for regulating the business of dealing in securities. The emphasis and the intention of the SCRA is to prevent undesirable transactions. By a legislative exercise it was very easy to include shareholders agreement having a Put Option to be categorised as a undesirable transaction under SCRA. However, there does not appear to be any such express bar to such transaction. 60. The following relevant provisions of the SCRA are also required to be noted :- 2. Definitions - In this Act, unless the context otherwise requires,- (a) "contract" means a contract for or relating to the purchase or sale of securities; ... ... .. ... [(ac)] "derivative" includes- (A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; ....
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....e manner thereby agreed and in which the names of both the buyer and the seller are mentioned; (i) "spot delivery contract" means a contract which provides for- (a) actual delivery of securities and the payment of a price therefore either on the same day as the date of the contract or on the next day, the actual periods taken for the despatch of the securities or the remittance of money therefor through the post being excluded from the computation of the period aforesaid if the parties to the contract do not reside in the same town or locality; (b) transfer of the securities by the depository from the account of a beneficial owner to the account of another beneficial owner when such securities are dealt with by a depository; ................. ................ ................ 16. Power to prohibit contracts in certain cases. - (1) If the Central Government is of opinion that it is necessary to prevent undesirable speculation in specified securities in any State or area, it may, by notification in the Official Gazette, declare that no person in the State or area specified in the notification shall, save with the permission of the Central ....
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....contained prohibition on options in securities came to be deleted. Simultaneously also the words "by prohibiting options and" as contained in the preamble of the SCRA came to be deleted. Thus the effect of the Amending Act was to remove the embargo in dealing with options. 63. Thereafter, by virtue of the Securities Laws (Amendment) Act 1999, the SCRA was amended to incorporate the definition of 'derivative', by insertion of section 2 (aa)[re-lettered as per clause (ac) by Act 1 of 2005 with effect from 12 October 2004]. Also the definition of 'securities' as contained in section 2 (h) came to be amended by incorporating a reference to 'derivative' in clause (ia). Further section 18A came to be incorporated to provide that contracts in derivatives would be legal and valid notwithstanding anything contained in any other law for the time being in force, if such contracts are traded on a recognised stock exchange and settled on the clearing house of the recognised stock exchange, in accordance with the rules and bye-laws of such stock exchange. 64. SEBI thereafter issued a notification dated 1 March 2000 under section 16(1) of the SCRA, providing that to prevent undesirable spec....
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....ns and bylaws of a recognised stock exchange; (c) contracts in pre-emption including right of 1st refusal, or tag -along or drag-along rights contained in shareholders agreements or articles of association of companies or body corporate; (d) contract in shareholders agreements or articles of association of companies or body corporate, for purchase or sale of securities pursuant to exercise of an option contained therein to buy or sell the securities where:- (i) the title and ownership of the underlying securities is held continuously by the selling party to such contract for a minimum period of one year from the date of entering into the contract; (ii) the price of a consideration payable for the sale or purchase of the underlying securities pursuant to exercise of any option contained therein, is in compliance with all the laws for the time being in force as applicable; and (iii) the contract is settled by way of actual delivery of the underlying securities: Provided that the contract specified in clause this (a) to (d) above, shall be in accordance with the provisions of the Foreign Exchange Management Act, 1999 and rules or r....
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.... and Chemicals Limited versus Axis Bank Ltd (supra). 68. To appreciate the respondents contention on applicability of the provisions of the SCRA and the notifications issued thereunder it would be necessary to examine, as to what is the nature of the contract in question under the Put Option Deed and whether it can be considered to be purely a contract in securities/derivative or a future contract and o such examination whether is it possible to reach a conclusion that the provisions of the SCRA or the notifications notifications issued thereunder would create a consequence of invalidating such a contract. 69. It would be relevant to advert some of the clauses of the put option deed which convenience are extracted hereunder: "Interpretation Clause: ... ... ... ... ... Event of Default shall have the meaning assigned to it under the Subscription Agreement; Exercise Period means, in relation to a Put Security, the period from the Issue Date to and including the Expiry Date; Expiry Date means the date earlier of the successful completion of the IPO or (ii) September 30,2015; Put Exercise Notice means a written notice given in....
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....------------ 2. Grant of the Put Option In consideration of the subscription of the Series A Debenture by the Subscriber (which enables to Issuer to fund the capital expenditure necessary for capacity expansion of its existing plants), the Promoters grant to the Investor a Put Option to sell the Put Securities to the Promoters, at the Put Option Price, on the terms and subject to the conditions of this Deed. 3. Exercise of the Put Option 3.1 The Investor shall have the right (but not the obligation), to exercise the Put Option in the Exercise Period in the following manner: (a) The Investor has the option to put up to 25% of the Put Securities to the Promoters, within 12 to 24 months from the Issue Date; (b) The Investor has the option to put up another 25% of the Put Securities to the Promoters, within 24 to 36 months from the Issue Date. Provided that the Investor has the option to put 50% of the Put Securities to the Promoters within 24 to 36 months from the Issue Date if the Investor has not exercised his right under Clause 3.1(a) above; (c) The Investor has the option to put up the balance of the Put Securities unt....
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....r of the Valuation Certificates delivered in respect of the Put Securities in respect of any Put Settlement Date show the value of the Put Securities is less than the Target Value, each Promoter shall, on the relevant Put Settlement Date, remit to the relevant account of the Investor specified in the relevant Put Option Notice, the lower of the amounts specified in those Valuation Certificates. The Promoters shall only to the extent requested by the Investor, deposit the remainder of the Put Option Price with the nominee (on behalf of the Investor) at such account in India as may be specified by the nominee to RIL for this purpose. 7. Warranties and Undertakings 7.1 The Investor represents and warrants to the Promoters and the Promoters represent and warrant to the Investor that : (a) it has the power to execute and deliver this deed and to perform its obligations under it and has taken all action necessary to authorize such execution and delivery and the performance of such obligations; (b) this Deed constitutes legal, valid and binding obligations on it in accordance with its terms; and (c) the execution and delivery by it of this Deed....
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....imes constitute direct, unconditional, unsecured and unsubordinated obligations of the Promoters, and will rank pari passu with all its other unsecured payment obligations, except for obligations mandatorily preferred by law applying to companies generally in India or the jurisdiction of the Promoters; (e) except for the stamp duty payable by the Promoters upon execution of this Deed, the securities transaction tax (if any) payable by the Promoters and the capital gains tax (if any) payable by the Investor, and no withholding or deduction for any taxes, duties, assessment or governmental charges of whatever nature is imposed or made for or on account of any income, registration, transfer or turnover taxes, customs or other duties or taxes of any kind, levied, collected, withheld or assessed by or within India or the jurisdiction of the Promoters in connection with the sale of the Put Securities; (f) the execution by the Promoters constitutes, and the exercise of its rights and performance of its obligations under this Deed will constitute, private and commercial acts performed for private and commercial purposes and will not be entitled to claim immunity from suit....
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....(d). On Banyan Tree exercising put option, Banyan Tree was entitled to the put option price, defined as target value of the put securities as on the put settlement date. Target value as noted above was inter-alia defined by the parties to mean a value that results in an annual yield equal to 15% per annum in USD terms on the total investment amount from the issue date to the date of exercise of the put option or in the event the issuer is ineligible to come out with an IPO by 31 December 2010 and failed to provide an exit to the investor/Banyan Tree through a merger of the issuer/Axiom with Responsive, an annual yield equal to 20.0% per annum in USD terms on the total investment amount, from the issue date to the date of exercise of the put option. In Schedule 3 to the put option deed, the parties agreed in regard to the 'valuation process' interalia to include that at the time of exit the statutory auditors/chartered accountant take the average of prices obtained from the following two valuation multiples to arrive at the target value of the put option: (i) market cap to sales: 2 times (ii) price to book value per share: 4 times the schedule also defined as to wh....
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....ognised by the SCRA. Subsequent thereto by the Securities Laws (Amendment) Act 1999, the SCRA was amended to incorporate the definition of 'derivative', by insertion of Section 2 (ac). Also the definition of the word 'securities' as contained in section 2 (h) came to be amended by incorporating a reference to 'derivative' in the clause (ia). Further section 18A came to be incorporated to provide that contracts in derivatives were legal and valid notwithstanding anything contained in any other law for the time being in force, if such contracts are traded on a recognised stock exchange and settled on the clearing house of the recognised stock exchange, in accordance with the rules and bylaws of such stock exchange. Thereafter, SEBI issued a notification dated 1 March 2000 under section 16(1) of the SCRA, with an intention to prevent undesirable speculation in securities, providing that no person except with the permission of the SEBI shall enter into any contract for the sale or purchase of securities other than such spot delivery contract or contract for cash or hand delivery or special delivery or contract in derivatives as permissible under the SCRA or the Securities and Exchange ....
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....gulations made thereunder (cl.b); and most importantly contracts in shareholders agreements or articles of association of companies for purchase or sale of securities pursuant to exercise of an option contained therein to buy or sell the securities (cl.d). The first proviso to this notification has also recognised that these contracts shall be in accordance with the provisions of the FEMA. The second proviso postulates that nothing contained in the notification shall affect or validate any contract which has been entered into prior to the date of the notification. The second proviso is further clarified by the 'explanation' below it, which clarifies, that contracts mentioned in clauses (c) and (d) of the said notification shall be valid notwithstanding anything contained in Section 18A read with clause (d) of sub-section (1) of section 23 of the SCRA. Significantly as seen from clauses (b) and (d) of this notification distinction has been made in regard to a contract in derivatives {clause(b)} and contracts in shareholders agreements for purchase or sale of securities pursuant to exercise of an option contained therein to buy or sell the securities. 75. In my opinion, on a holis....
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.... Circular No. 86 dated January 9, 2014. ..........................................................................." 77. The legal position as seen from the various decisions would also support the above observations in regard to the validity of the put option deed in SCRA. In MCX Stock Exchange Ltd versus Securities & Exchange Board of India& Ors. (Supra), the Division Bench of this Court was interalia construing the buyback arrangements as contained in the share purchase agreement (SPA) dated 20 August 2009 (date is quite proximate to the Put Option Deed), as entered by the petitioner therein with IL&FS Financial Services Ltd.( IL&FS). IL&FS agreed to purchase shares of the petitioner worth Rs. 159.12 crores from the fourth respondent. On the date of the execution of the SPA a company by name La-Fin Financial Services Pvt Ltd (La-Fin), offered an exit option to IL&FS. An undertaking was also furnished accepting an obligation to purchase in its sole discretion during the agreed period of all the shares purchased by IL&FS under the share purchase agreement at any time after the completion of one year from the date of investment, but not later than 3 years from the date ....
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....he notification that has been issued under the SCRA, a contract for the sale or purchase of securities has to be a spot delivery contract or a contract for cash or hand delivery or special delivery. In the present case, the contract for sale or purchase of the securities would fructify only upon the exercise of the option by PNB or, as the case may be, IL&FS in future. If the option were not to be exercised by them, no contract for sale or purchase of securities would come into existence. Moreover, if the option were to be exercised, there is nothing to indicate that the performance of the contract would be by anything other than by a spot delivery, cash or special delivery. Where securities are dealt with by a depository, the transfer of securities by a depository from the account of a beneficial owner to another beneficial owner is within the ambit of spot delivery. ... .... .... 80. In the present case, there is no contract for the sale and purchase of shares. A contract for the purchase or sale of the shares would come into being only at a future point of time in the eventuality of the party which is granted an option exercising the option in future. Once such....
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.... put option in respect of securities, the contract cannot be termed as a contract in derivatives and illegal under the provisions of Section 18A of the SCRA. I am in complete agreement with the view taken by the learned Single Judge in this case. I am thus, unable to subscribe to the respondents submission that this judgement of the learned Single Judge in any manner mis-interprets the notifications and/or the provisions of the SCRA and/or contrary to the laid down by the Supreme Court in Bhagwati Developers Private Limited versus Peerless General Finance and Investment Company Ltd & Anr (supra). In making this submission the respondents are completely deviating from the basic premise on which the Put Option Deed is founded, as holistically seen. 79. The above discussion would lead to a conclusion 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, whi....
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....4 days buy back of the same or similar securities by the banks at a later date and purchase thereof by the brokers at a price determined on the first date. The ready leg of the transactions was completed with the appellant paying the agreed price and receiving the delivery of the securities which were agreed to be purchased. However before the forward leg of the transactions could be completed, an Ordinance of 1992 leading to be the Special Courts Act, came to be issued. It is in these circumstances, the Custodian appointed under the Special Courts Act, filed applications before the Special Court contending that these contracts entered between the banks and the brokers/ notified persons were illegal under the Banking Regulation Act, 1949 and the SCRA, meaning thereby that in regard to the contract securities the notified persons continued to hold the securities and not the appellant bank and hence the Custodian was entitled to attach such securities. The Special Court accepted the contentions as raised by the Custodian and held the contracts to be void. It is in this context the Supreme Court while upholding the rights created in the appellant/banks in regard to the first/ready leg....
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.... recognised by the said notification. A shareholders agreement containing an option clause would not be a contract of the nature as contemplated by the notification dated 27 June 1969 issued by the Government under section 16 (1) of the SCRA, which was not the case before the Supreme Court when it held that the appellant/BOI Finance Ltd could not have entered into a forward contract with the brokers to sell the securities except by way of spot delivery. 82. The respondents in the written submissions have referred to the judgment in Rajshree Sugars and Chemicals Limited versus Axis Bank Ltd (supra) of the learned Single Judge of the Madras High Court which is in completely in a different context and totally alien to the controversy in the present proceedings. However what is interesting to note is that while discussing on derivates in the facts of the said case it was observed that derivatives are financial instruments used to transfer or hedge the risk. There are four types of derivatives contracts namely forwards, futures, options and swaps. It was observed that they had their origin, perhaps in speculative trading in commodities, several centuries ago and later underwent a met....
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....strict the transfer or issue of securities by a person resident outside India. It is contended that regulation 5 (1) therein governed the purchase of shares by persons resident outside India in an Indian company, which did not make any mention of permissibility of optionality clauses in investments made by persons resident outside India. The contention is that in 2008 when investment was made by Banyan Tree in the shares of Axiom by virtue of the SSA, the said transaction was governed by regulation 5 (1) of FEMA 20, inasmuch as Banyan Tree was granted investors right in terms of clause 10 of the SSA read with Schedule 16 thereof which interalia included the right to exercise put option. This was contrary to regulation 5 (1). However by virtue of the RBI notification dated 12 November 2013 (2013 RBI notification) the provisions of FEMA 2o were amended by adding a proviso to regulation 5 (1), whereby under the regime of FEMA, optionality clauses were permitted for the first time by the RBI in the year 2013. The second contention is regulation 10 (B) (2) (b) (ii) (c) of FEMA 20 which is in regard to the valuation of shares namely that if the shares are not listed on a stock exchange, ....
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.... parties under the put option deed provided for any fixed return to Banyan Tree in violation of FEMA. No doubt when the amount to be remitted materialises, compliances if any required under the FEMA would be made by the Petitioner which the petitioner, is no manner has resisted. It also needs to be noted that the Arbitral Tribunal has observed in the award that the Put Option Price was less than the FMV of the Put shares (computed in accordance with the FDR Regulations) and that payment of Put Option Price would accordingly be permissible under the FEMA Pricing Guidelines and permissions thereunder. In this context even in the decision in IDBI Trusteeship Services Ltd versus Hubtown Ltd. (supra), although dealing with the issue arising under a summary suit, the Supreme Court observed that when the foreign investor (referred as FMO in the said judgment) wished to repatriate the funds then RBI permission would be necessary. It was observed that even if the RBI permission was not granted then again there is no infraction of FEMA Regulations. 86. The arbitral tribunal taking a review of the provisions of the FEMA and the notifications issued thereunder has come to a conclusion that ....
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.... light of subsequent developments and experience in relation to foreign trade and investment. It was subsequently felt that a better course would be to repeal the existing Foreign Exchange Regulation Act in enacting new legislation. Reserve Bank of India was accordingly asked to undertake a fresh exercise and suggest new legislation. A Task force constituted for this purpose, submitted its report in 1994 recommending substantial changes in the existing Act. 1. Significant developments have taken place since 1993 such as substantial increase in our foreign exchange reserves, growth in foreign trade, rationalisation of tariffs, current account convertibility, liberalisation of Indian investments abroad, increased access to external commercial borrowings by Indian corporates and participation of foreign institutional investors in the stock markets. 2. ....... 3. After incorporating certain modifications and suggestions of the Standing Committee on Finance, the Central Government has decided to introduce the Foreign Exchange Management Bill and repeal the Foreign Exchange Regulation Act 1973. The provisions of the Bill aim at consolidating and amending the la....
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....n. 90. In POL India Projects Limited versus Aurelia Reederei Eugen Friederich GMBH (supra) a learned Single Judge of this Court (R.D.Dhanuka. J) also in the context of enforcement of a foreign award was interalia dealing with a similar argument opposing enforcement of an award. The contention of the award debtor was to the effect that under the provisions of Foreign Exchange Management (Guarantees) Regulations, 2000, a letter of guarantee could not have been executed in favour of the award creditor, without the prior permission of the RBI. It was contended that as there was a violation of regulation 3 thereof. The document being entered contrary to law the document itself was illegal and an arbitral award based on an illegal document would be a nullity and in conflict with the public policy of India. The learned Single Judge referring to the decision of the Delhi High Court in SRM Exploration Private Limited (supra) as also to the decision of the Division Bench of this Court in Videocon Industries Ltd versus in Intesa Sanpaolo S.P.A. rejected the contention of the award debtor interalia holding that even if such letter of guarantee was to be issued contrary to the provisions of ....
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.... questioning the enforceability of the award on the grounds of SCRA and the provisions of FEMA and the notifications issued thereunder. The discussion in the aforesaid paragraphs whereby I have held that the objections of the respondents on both the counts namely under the SCRA and the FEMA are untenable, would apply with all force even to reject this objection. A survey of the recent decisions as to how the Courts have interpreted the concept of public policy of India and/ or fundamental policy of the Indian law, in the context of enforceability of a foreign award, would aid the conclusion. 95. The decision of the three Judge Bench of the Supreme Court in Shri Lal Mahal Ltd versus Progetto Grano SPA (2014)2 SCC 433 19, has taken a review of the law in the context of what would be meant by the expression public policy of India in its applicability in enforcement of a foreign award. Considering the earlier decisions in Renusagar Power Co Ltd versus General Electric Co. (1994) Supp. 1 SCC 644, ONGC Ltd versus Saw Pipes Ltd. (2003) 5 SCC 705 and several other judgments it was held that for the purposes of Section 48 (2) (b) of the Arbitration and Conciliation Act, the expression 'p....
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.... under Article I(e) of the Geneva Convention Act of 1927, it is permissible to raise objection to the enforcement of arbitral award on the ground that the recognition or enforcement of the award is contrary to the public policy or to the principles of the law of the country in which it is sought to be relied upon. To the same effect is the provision in Section 7(1) of the Arbitration (Protocol & Convention) Act of 1937 which requires that the enforcement of the foreign award must not be contrary to the public policy or the law of India. Since the expression "public policy" covers the field not covered by the words "and the law of India" which follow the said expression, contravention of law alone will not attract the bar of public policy and something more than contravention of law is required. 66. . . . . . . . . This would mean that "public policy" in Section 7(1)(b)(ii) has been used in a narrower sense and in order to attract the bar of public policy the enforcement of the award must invoke something more than the violation of the law of India. Since the Foreign Awards Act is concerned with recognition and enforcement of foreign awards which are governed by the princip....
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....or (3) justice or morality. The wider meaning given to the expression "public policy of India" occurring in Section 34(2)(b)(ii) in Saw Pipes is not applicable where objection is raised to the enforcement of the foreign award under Section 48(2)(b) ." (emphasis supplied) 96. As noted above, such objection of the respondents also cannot be sustained considering the recent decision of the Supreme Court in Vijay Karia's case (supra) which also refers to the decision of the Supreme Court in Dropti Devi versus Union of India (supra), as relied on behalf of the respondents to support its contention on FEMA. A contention similar to the one as raised by the respondents on FEMA was not accepted. It would be apposite to note as to what the Supreme Court has held in Vijay Karia's case in rejecting such challenge. The Supreme Court observed thus:- 87. It has been argued by the Appellants, based on the Non-Debt Instrument Rules, that a foreign award by which shares have to be purchased at a discounted value, would violate the aforesaid Rules, and therefore, would amount to a violation of the fundamental policy of Indian law. Resultantly, the Appellants contended that as a r....
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....basic to Indian law that it is not susceptible of being compromised. "Fundamental Policy" refers to the core values of India's public policy as a nation, which may find expression not only in statutes but also time-honoured, hallowed principles which are followed by the Courts. Judged from this point of view, it is clear that resistance to the enforcement of a foreign award cannot be made on this ground." 92. The Appellants, however, relied upon certain observations in Dropti Devi V. Union of India (2012) 7 SCC 499. In that case, a challenge was made to the constitutional validity of Section 3 of Conservation of Foreign Exchange and Prevention of Smuggling Activities Act,1974 (hereinafter referred to as "COFEPOSA"), stating that by reason of the new legal regime articulated in FEMA, in replacement of FERA, the said provision has become unconstitutional in the changed situation. This submission was repelled by this Court stating: "66. It is true that provisions of FERA and FEMA differ in some respects, particularly in respect of penalties. It is also true that FEMA does not have provision for prosecution and punishment like Section 56 of FERA and its enforcement fo....
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....llow. In fact, even if the reasoning contained in this judgment is torn out of its specific context and applied to this case, there being no alleged smuggling activity which involves depletion of foreign exchange, as against foreign exchange coming into the country as a result of sale of shares in an Indian company to a foreign company, it does not follow that such violation, even if proved, would breach the fundamental policy of Indian law." 97. The above discussion would lead to an irresistible conclusion that all the objections as raised by the respondents opposing the enforceability of the arbitral award are wholly invalid. None of the grounds as raised by the respondents fall into any of the three categories as enumerated in the decision of Renusagar (supra) and confirmed in Shri Lal Mahal (supra) so as to hold that the arbitral award is against the public policy of India. The arbitral award thus 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 ho....