TaxTMI 
TaxTMI 
2023 (1) TMI 336
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....e the final arbitral award dated 07 January 2021 (the Foreign Award) as enforceable by deeming the same to be a decree of this Court under Section 49 of the Arbitration and Conciliation Act, 1996 (the Arbitration Act). A consequent direction to the respondents to jointly and severally pay the sums set out in paragraph 5 of the petition was also prayed for. The following interim applications were filed by the petitioners: O.A.No.76 of 2022 to restrain the first respondent from utilising the sum of INR 265 crores from and out of monies remitted by the third and fourth respondents therein; and A.No.67 of 2022 for a direction to deposit the sum of INR 265 crore in a separate lien marked account. Background 3. The petitioners are shareholders of Haldia Coke and Chemicals Private Limited (the Company). 100 equity shares (on payment of INR 10,000) and 11,09,37,000 compulsorily convertible preference shares (CCPS) (on payment of INR 110,93,70,000) of the Company, representing 100% of the issued and paid-up CCPS, were subscribed to by the first and second petitioners under Share Subscription and Shareholders Agreement dated 31 May 2010. Similarly, 100 equity shares (on payment of INR ....
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....cords the commercial understanding between the parties that the petitioners would invest INR 75,00,00,000 in Shriram EPC from and out of amounts received by them pursuant to the Fourth and Fifth Closing under the SPAs. Both the Fourth SPA and the Second Letter Agreement provide for dispute resolution through arbitration, and the arbitration clause is identical to that under the SPAs and the Letter Agreement. 6. The First to Third SPAs provide for the purchase by the respondents herein of the CCPS or OCPS, as the case may be, at the following consideration: the First SPA at INR 102,76,70,400; the Second SPA at INR 70,73,32,000; and the Third SPA at INR 26,49,97,600. In the aggregate, the consideration payable by the respondents for purchase of the CCPS and OCPS from the petitioners was INR 200,00,00,000. The said consideration was agreed to be paid, jointly and severally, in 14 tranches between 30 September 2015 and 30 June 2018. The remittance of each tranche is referred to as a closing. Upon receipt of part consideration, the proportionate number of CCPS or OCPS, as the case may be, were to be transferred to the respondents. 7. After paying the first tranche of INR 5,00,00,0....
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....ts on the same date and that these agreements constitute a composite and integrated set of agreements. 10. The respondents further submitted that the Foreign Award is liable to be interfered with because it has the effect of enforcing contracts which are opposed to public policy in terms of Sections 23 and 24 of the Indian Contract Act, 1872 (the Contract Act). According to the respondents, the SPAs violate public policy in two respects. First, the Fourth SPA was also executed on 28 September 2015 by and between the petitioners, on the one hand, and SVL Limited, on the other, and that the said SPA provided for the purchase of 62.92% of the equity share capital of Shriram EPC Limited (now SEPC Limited), the second respondent herein, from SVL Limited by the petitioners herein. Therefore, according to the respondents, the object and consideration of the SPAs was to indirectly finance the purchase of the shares of the second respondent, and this violates Section 67(2) of the Companies Act, 2013 (CA 2013) and, therefore, contravenes Sections 23 and 24 of the Contract Act. Secondly, the respondents contended that the SPAs are designed to circumvent the provisions of the Foreign Exchan....
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....percent) on its Total Investment Amount by exercising any of the rights under Clauses 15.2.4, 15.2.3, or 15.2.5 ("Put Buy Back Return"). The Investor shall be entitled to call upon the Company to purchase/complete a buy back of all or part of the Shares held by the Investor ("Buy Back Shares") for an amount equal to the Put Buy Back Return" 15.2.4 Put Option: (a) The Investor shall, subject to the terms and conditions herein specified, be entitled (at its option) (i) to require the promoters and/or Shriram Minerals to purchase or cause any Person to purchase all or any number of Shares held by the Investor in the Company (''Put Securities''), and the promoters and/or Shriram Minerals shall be obliged to purchase or cause to be purchased, the Put securities (''Put Option'') at such price as will provide the Investor, with a return equal to the Put Buy Back Return(the ''Put Price), For the sake of clarity, the procedure for the determination of Fair Market Value as laid down in Clause 15.2.5(e) below shall not be applicable for the determination of the Put Price.'' Thus, he pointed out that the put option p....
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....non resident to a resident is in accordance with regulations, he submitted that the prior approval of the RBI was necessary. In this case, he submitted that the prior approval of the RBI was not applied for or obtained for the purchase of the equity and preference shares from the petitioners by the respondents herein at the price guaranteed under the SPAs. 16. He further submitted that interference is warranted with the Foreign Award because the petitioners did not exercise any of the exit options under the SSHAs. In the absence thereof, the Arbitral Tribunal exceeded the scope of reference by proceeding on the assumption that the put option under the SSHAs was exercised by the petitioners. Since the award of damages proceeds on that erroneous assumption, the Foreign Award should not be recognized and held to be enforceable. 17. The next contention of learned senior counsel was that the SPAs also violate Section 67 (2) of the Companies Act, 2013 (CA 2013) inasmuch as the obligations imposed thereunder tantamount to funding the purchase of shares of Shriram EPC. In order to buttress this contention, learned senior counsel referred to the Fourth SPA and the Second Letter Agreem....
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.... Supreme Court, the order was not interfered with. 20. As regards the award of damages, Mr.Raman pointed out that the Arbitral Tribunal awarded the same by interpreting the relevant contractual clauses. By drawing reference to the reasoning and conclusions of the Arbitral Tribunal, he pointed out that the Arbitral Tribunal noticed that Section 74 of the Contract Act provides for reasonable compensation. He also pointed out that the Arbitral Tribunal accepted the submission of the respondents herein that the measure of damages in a case where a buyer of shares is in breach of an obligation to complete the purchase of shares is ordinarily the difference between the market price of the shares at the time of breach and the agreed consideration for the shares. After noticing that the stipulation under Clause 3(c) of the Letter Agreement exceeded the aggregate consideration of INR 200 crore for the sale shares under the first to third SPAs, the Arbitral Tribunal considered the alternative claim for damages under the First to Third SPAs. Ultimately, the Arbitral Tribunal awarded the total consideration specified in the second to fourteenth tranches, as regards the sale shares, as damag....
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.... (a) the parties to the agreement referred to in section 44 were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or (b) the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or (c) the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration: Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be enforced; or (d) the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; o....
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....9;ble Supreme Court concluded that the court may enforce the foreign award even if such ground is made out. As regards the third category also, namely, violation of the public policy of India, there would be no discretion. 25. In the context of the grounds of challenge herein, there is no doubt that there is no jurisdictional challenge. The challenge is confined to the third category under paragraph 58 of Vijay Karia. In Explanation 1 to Section 48(2), it is clarified that an award is in conflict with the public policy of India only in three circumstances. The first circumstance is if the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81. It is not the case of the respondents herein that the Foreign Award is tainted on grounds of fraud or corruption. The second circumstance specified in Explanation 1 is if the foreign award is in contravention of the fundamental policy of India. The third circumstance is if the foreign award is in conflict with the most basic notions of morality or justice. The respondents did not canvass the proposition that the Foreign Award is in conflict with the basic notions of morality or ju....
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....rchase of shares by a non-resident in an Indian company under the Foreign Direct Investment (FDI) Scheme, which is set out in Schedule 1, and provides for investment under what is described as the automatic route (i.e. without requiring express RBI approval) if the requirements of Schedule 1 are complied with. 29. Since such transaction entails inflow of foreign exchange, except with express RBI approval, the share price should be not less than the fair market value (as determined by any internationally acceptable pricing methodology for valuation of shares on arms length basis duly certified by a chartered accountant or SEBI registered merchant banker). Put differently, the fair market value will operate as a floor price. For a considerable period, there was uncertainty as to whether a clause providing an exit option to a non-resident was permissible. This was clarified by an amendment to the Security Transfer Regulations on 23 May 2014, which enables exit options subject to the condition that exit is at a price not exceeding the price arrived at by any internationally acceptable pricing methodology for valuation of shares on arms length basis duly certified by a chartered acco....
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.... until the Purchasers or any of them have committed a breach of any of their obligations to make any payment under the relevant provisions of the SPAs ("Purchaser Payment Breach"). For the avoidance of doubt, it is clarified that in case of a Purchaser Payment Breach, the rights of the Investors under Clause 15.2 of the Existing SSHA shall forthwith stand reinstated and may be exercised by the Investor, without requirement of any notification or act by the Investors and/or any other Party to the Letter Agreement or the Existing SSHA. (b)If on the date of occurrence of a Purchaser Payment Breach ("Purchaser Payment Date") the Investors have received an amount equal to or greater than Rs.125,00,00,000 (Rupees One Hundred and Twenty Five Crores only) from the Purchasers under the SPAs, then the Purchasers' shall be liable to pay the Investors an amount equal to the difference between the aggregate amount payable by the Purchasers to the Investors under the SPAs and the amount actually received by the Investors until the Purchaser Breach Date. (c)If until the Purchaser Breach Date, the Investors have received an amount which is lesser than Rs.125,00,00,000 (Rupees....
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....tion. This conclusion is unexceptionable because this is the appropriate measure in any contract for the sale of goods. Upon appraisal of the evidence on record, including the closing dates for tranches two to fourteen and the oral and documentary evidence relating to performance of the purchase obligation and the extensions granted in relation thereto, the Arbitral Tribunal further concluded that the date of breach was 11 July 2017. The logical follow-on question was: what was the market value of the shares as of 11 July 2017? On this aspect, the Arbitral Tribunal recorded the following findings at paragraph 246 of the Foreign Award: "246. I accept Mr Mayal's unchallenged evidence that the value of Haldia's equity was likely negligible as at July 2017 and thereafter. I am satisfied that the market value of Haldia's shares from July 2017 onwards was zero." 35. By reckoning the market value of the Company's shares as zero, as on the date of breach, the Arbitral Tribunal concluded, at paragraphs 247 and 258 of the Foreign Award, that the loss caused due to the breach was the total unpaid consideration of INR 195 crore. This amount was directed to be paid i....
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....unt to a breach of some legal principle or legislation which is so 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." Inter alia by relying on Vijay Karia, the Arbitral Tribunal concluded that the SSHAs are not void and that even transfer of shares in exercise of options under the SSHAs could be undertaken with RBI approval. Paragraph 139 of the Foreign Award is of particular relevance and is set out below: "139. Put a different way, it is not the rights and obligations themselves which are contrary to the FEMA regime, it is the transfer of the Sale Shares that is allegedly contrary to the FEMA regime. I agree with the Respondents' analysis at paragraph 88 of their written closing submissions, subject to the qualification that it is open to the Parties to obtain RBI approval for a transfer that is not specifica....
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....hat were subscribed to by the petitioners for the aggregate consideration of about INR 125 crore. In effect, the entire unpaid consideration under the SPAs was directed to be paid as damages. As discussed earlier, the sum of INR 195 crore was arrived at by the Arbitral Tribunal, as representing reasonable compensation, by accepting evidence that the market value of the shares was zero on the date of breach. Especially in that factual context, if obligations under the SPAs had been fulfilled, the respective parties to the SPA could not have paid or received INR 200 crore, in the aggregate, as consideration for these shares without RBI approval. Indeed, as discussed earlier, the Arbitral Tribunal was alive to the requirement of RBI approval but concluded that the absence of such approval is rectifiable by obtaining approval and does not result in the SSHAs or SPAs being rendered void. 40. The Arbitral Tribunal also noticed the judgment of the Delhi High Court in NTT Docomo v. Tata Sons Limited (NTT Docomo)2017 SCC OnLine Del 8078/ (2017) 241 DLT 65, wherein the Court concluded that RBI approval is not required because the amount was awarded as damages. NTT Docomo was a case in whi....
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.... Limited. Since Shriram EPC Limited is a public limited company and one of the purchasers under the First to Third SPAs, it was contended by learned senior counsel that the object and consideration of the SPAs is to finance the purchase of shares of Shriram EPC Limited by the petitioners in terms of the Fourth SPA and the Second Letter Agreement. 43. The Arbitral Tribunal's analysis and conclusions on this issue are set out at paragraphs 91 to 117. After reproducing Section 23 of the Contract Act at paragraph 82, the Arbitral Tribunal took into account the relevant clauses of all the agreements, the admitted position that the fourth and fifth tranches were not paid, the evidence and recorded the following significant findings: "105. In my view, the Respondents have not proven that the object of providing financial assistance contrary to section 67(2) of the Companies Act was "in the contemplation of the parties when they entered into" the transaction. I have reached this conclusion on the basis of the documentary evidence and the Respondents' own factual witness evidence...." "114. Given the Claimants' undisputed objective of exiting their investmen....