On Thursday, arguments on behalf of Tata Sons
were heard by the high court here, against the enforcement of a $1.17 billion London Court of International Arbitration (LCIA) award in favour of Japanese telecom giant NTT DoCoMo. The HC decided to issue a notice to the Reserve Bank of India
(RBI) to clarify its stance in the ongoing dispute. The next date for the hearing is December 21.
The arbitral award is the result of a two-year tussle between the two corporate behemoths on Tata Teleservices, their failed joint venture (JV), in which DoCoMo
holds 26 per cent stake. By their initial agreement, DoCoMo
was given a choice of exiting the venture after three years at a pre-determined share price. Its stake was to be bought by Tata or an external buyer, which the Indian company was to arrange.
In 2014, after the collaboration failed to generate the desired returns, DoCoMo
decided to exercise the exit option. By then, the share price of Tata Tele had plummeted far below the earlier decided exit amount (Rs 58 or fair market value, whichever was higher).
Unable to find a buyer, Tata applied to RBI to purchase the shares themselves as previously agreed. The regulator refused, saying such a transfer could not be made on a subsequent date at pre-determined share prices, going by the foreign exchange regulations. This denial created an impasse that led to the international arbitral proceedings, resulting in the June 22 award by LCIA against Tata. After the award, Tata had again approached RBI for permission to comply but this second application was also rejected by the regulator.
Senior advocate Darius Khambata, appearing on behalf of Tata, began Thursday’s arguments by clarifying the ambit of the challenge put forth by the Indian conglomerate. Khambata contended Tata was and had always been ready to pay the sum as adjudicated but also had an obligation to abide by the laws of India
in this regard.
The Tata counsel provided the court a brief timeline of affairs leading to the present matter and highlighted RBI’s consistent denial for approval, both before and after the LCIA award. Citing relevant case law, Khambata attempted to convince the court that such a stance by the regulator had created a situation frustrating the earlier agreement between the parties, as well as the arbitral adjudication that followed, both of which had to be in conformity with Indian law.
As such, he argued, enforcement of the award was rendered impossible, in line with Section 48(2)(b) of the Arbitration and Conciliation Act of 1996 and in violation of the fundamental policy of India. “If this award is enforced, it allows companies in all such situations to bypass Indian law,” said Khambata in court.
The Tata counsel mentioned how the transfer of shares at pre-determined prices required special regulatory permission, after a 2013 RBI circular prohibiting assured returns for foreign entities. And, that the LCIA award had erroneously excluded the applicability of Indian regulations while arriving at its conclusion, holding Tata unconditionally liable to pay. Khambata also argued the award had masked the performance of the prohibited transfer by terming it ‘damages’. Equity investments, he contended, were always subject to risks, both regulatory and in the market.
To this, the RBI counsel interjected to inform the court that such a transfer could not take place even with a special permission, as provisions of the Foreign Exchange Management Act
and underlying RBI circulars rendered such a transaction mandatorily prohibitive.
“This has become a test case for all such matters in the future”, judge Muralidhar remarked after hearing the arguments. The bench also asked the Tata counsel whether any alternative solution (in line with the good faith clauses in the agreement) could be advanced. The court then issued a formal notice to RBI
As a show of good faith, Tata Sons
had on July 29 deposited the entire amount of the award with the HC registrar, subject to the final verdict. DoCoMo
has filed similar enforcement applications in courts in the UK and the US to realise the June 22 arbitral adjudication.