Are options under FEMA really enforceable?

Are options under FEMA really enforceable?

Are options under FEMA really enforceable?
Abhinav Surana & Sumitava Basu

Exit clauses with downside protection have been a common demand of foreign investors/partners dealing with Indian firms. While the Reserve Bank of India (RBI) had allowed options a few years ago under the Foreign Exchange Management Act (FEMA), it had specified that upon exercise of such an option, the exit should be without any ‘assured return’.

However, enforceability of such clauses/an arbitral award for enforcing such clauses has been a subject matter of dispute – in some cases the Indian party tries to prevent its enforceability by citing violation of FEMA provisions and in the Tata-Docomo case (where the parties had consented), the RBI raised an objection.

In the Tata-Docomo dispute, the Delhi High Court upheld the enforceability of the award against Tata. In the Cruz City I Mauritius Holdings versus Unitech case, the Delhi High Court allowed enforcement of an arbitral award requiring Unitech to honour its obligation pursuant to exercise of a put option.

Kanika Mathew, Associate, Juris Corp
Going by these recent judgments, the FEMA violation argument may not be sufficient defence anymore for the Indian party to avoid honouring its obligations.

The Unitech case

Cruz City had invested in Kerrush Investments Ltd (a Mauritius company) which, through its downstream subsidiaries in India, were to undertake some real estate projects in Mumbai. Under the shareholders’ agreement (SHA) entered by Cruz City at the time of investment, Cruz City was entitled to exercise a put option (in a specified event) pursuant to which Burley (a 100% subsidiary of Unitech) was obligated to purchase its shares in Kerrush at a specified IRR. Under a separate agreement, Burley agreed to undertake obligations under the SHA in relation to the put option, and Unitech, in turn, agreed to make sufficient funds available with Burley to enable Burley to undertake its obligations towards Cruz City.

Cruz City exercised its put option and moved to the London Court of International Arbitration (LCIA) for enforcement of the same, which gave the award in favour of Cruz City. At the time of enforcement of the award before the court, Unitech (amongst others) argued that the award was not enforceable since it was contrary to FEMA (as it obliged Unitech to honour the put option with an ‘assured return’) and consequently violated ‘public policy’ of India.


The court dismissed Unitech’s arguments and held that the ‘public policy’ defence is to be construed narrowly and contravention of specific provisions of FEMA cannot be held to be against public policy. As regards the argument for violation of FEMA, it held that these issues can be addressed by ensuring that no funds are remitted outside the country in enforcement of a foreign award, without the necessary permissions from the RBI.

The court also drew a distinction between the put option with assured return versus put option as a remedy for breach. The put option was exercised by Cruz City because of a failure by Unitech to commence construction of an underlying project within a specified time frame. In this context, the court observed that it is doubtful if the RBI regulation, which prohibits optionality clauses granting assured returns, would be applicable in cases where a foreign investor exercises the option as a remedy for breach.

The Tata-Docomo case


Briefly, in 2009, NTT Docomo (Docomo) and Tata Teleservices Ltd (Tata) entered in an arrangement wherein Docomo purchased around 26.5% in the joint venture entity. As per the agreement between the parties, Docomo had the right (upon Tata’s failure to achieve certain milestones) to require Tata to either find a buyer or purchase itself Docomo’s shareholding at the fair market value (FMV) or 50% of the acquisition price (half acquisition price), whichever is higher. Once, Docomo enforced its sale option, Tata sought the RBI’s permission as the half acquisition price was higher than the maximum permissible price under the FEMA. However, the RBI declined the same.

Things changed after Cyrus Mistry was removed as Tata group chairman and Ratan Tata stepped in as interim chairman and the parties agreed to settle the case. However, the RBI filed an application for opposing the enforceability of award as being violative of FEMA.

The court while allowing enforcement of the award against Tata, held as follows:


  • The court held that in absence of RBI being a party to the dispute, it cannot challenge its enforcement. The court thus refused to accept the submission of the RBI that since the award contemplates the provisions of FEMA and its applicability, it is imperative that the RBI be conferred locus standi to intervene the enforcement proceedings.
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  • The court clarified that the payment by Tata to Docomo falls under ‘damages’ (as against a sale consideration) and the RBI’s apprehensions about this being an ‘assured return’ under FEMA is not sustainable. Since the sale price is less than the purchase price, the court endorsed the view that this is more in the nature of a downside protection and not an ‘assured return’.
  • The court, therefore, concluded that the RBI cannot refuse permission for transfer of funds from Tata to Docomo.
  • The road ahead

    The recent judicial trend suggests that the courts are becoming increasingly sensitive to the rights and interests of foreign investors and the need to protect them against abuse by resident entities who exploit the law to circumvent their payment obligations. The recent judgments mentioned above and the IDBI Trusteeship Services Ltd versus Hubtown Ltd case are clear indicators of the same.

    While the appeal from the Unitech judgment by Unitech or by the RBI in Tata-Docomo case (in case it is held to have locus standi), cannot be ruled out, overall, these developments signal positive signs and will provide comfort to the foreign investors/partners while dealing in India. Hopefully, the regulator’s stand will also change in line with the approach of the court.

    Abhinav Surana is partner, Sumitava Basu is senior associate and Kanika Mathew is associate at law firm Juris Corp.

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