The Calcutta High Court (HC) has sought replies from the Reserve Bank of India (RBI) and the Government of India on contracts signed by private equities (PEs) with Indian promoters, which give PEs guaranteed return on equity (RoE) investments.
The litigation assumes significance following the death of Coffee Day Enterprises (CDE) founder-chairman, V G Siddhartha, who complained of harassment from a PE investor seeking guaranteed RoE investments. Though Siddhartha has not named any PE, KKR and StanChart PE were the two prominent investors in CDE since 2010 and currently hold stakes.
The public interest litigation was filed by a Kolkata-based lawyer, Sanjib Kumar Dan, and was last heard on July 15 when the Centre’s reply was sought.
The petition said several Indian companies received investments from PEs based overseas, which invested as equity but had clauses proving that the investor can exit the equity investment with assured rate of return, thus, providing the investment the character of a debt instrument.
“The foreign investors are tacitly using the related mode of equity investment to garner the benefits associated with debt instruments through such agreements,” said the petitioner.
Such illegal clauses are being regularly enforced by investors taking recourse to international commercial arbitration. “Such clauses also threaten the unequivocal enforcement under the recently enacted Insolvency and Bankruptcy Code,” added the petitioner.
Interestingly in January 2014, the RBI had already banned such equity investments which give guaranteed returns to an investor. In the case of Tata DoCoMo, the RBI said, according to the Indian law, guaranteed returns are not allowed. Hence, DoCoMo cannot seek guaranteed returns on its investments in Tata Teleservices.
According to the pact between DoCoMo and Tata Sons, the Tatas had given a guarantee that DoCoMo can exit the company with at least 50 per cent of its investment even if the company fails to make money. DoCoMo later moved the London Court of International Arbitration and moved Delhi HC to enforce the award.
The petitioner said the route taken by investors under the garb of equity shareholding not only flouts the external commercial borrowing guidelines, but also helps them mop up an exorbitant rate of return ranging between 15 per cent and 30 per cent. “These are illegally colourable and artificially structured transactions, which need to meet the fait accompli of not being in consonance with the Indian Contract Act. The stock market regulator, the Securities and Exchange Board of India, has already banned such transactions on October 3, 2013, except for spot-delivery contracts or contracts on cash or contracts in derivatives to which the Securities Contracts (Regulation) Act is applied.
The petitioner said various Indian regulatory authorities like the RBI are sending conflicting signals on the guaranteed internal rate of returns and hence, the court should ask them to give clear guidelines on this. The optional clauses, providing assured RoE investments, by their very nature have been illegal in India. And even if there is an assured RoE, it has to be lower than the present sovereign yield curve, i.e., the rate offered by the government on its sovereign bond.