The story of assured returns and colourable structures


One does not see too many instances of the Indian judiciary with the opportunity to construe and pass a verdict on the Foreign Direct Investment (FDI) Policy as formulated by the Government of India, much less, a verdict that can drastically affect numerous foreign investors and their investments. Last month, in a significant ruling in IDBI Trusteeship Services Limited v Hubtown Limited,  the High Court of Bombay has averred that foreign investors cannot seek legal recourse for investments with assured returns in India, thereby refusing relief to a Dutch financial institution against an Indian realty developer in a suit for recovery of the former’s investment worth over INR 5,320 million.


Nederlandse Financierings – Maatschappiji Voor Ontwikkelingslanden N.V., a Dutch corporation (FMO) acquired equity shares and compulsorily convertible debentures (CCDs) of Indian realty developer, Vinca Developers (Vinca), for INR 4,180 million, of which the equity shares comprised 10% of Vinca’s equity share capital, and upon conversion of the CCDs, FMO would have held approximately 99% shareholding in Vinca.  Until such conversion, Hubtown Limited (Hubtown) and its promoters held 90% of equity share capital in Vinca. FMO’s CCD investment in Vinca was used by Vinca to purchase optionally partially convertible debentures (OPCDs) issued by Amazia Developers (Amazia, which was developing a slum rehabilitation project) and Rubix Trading (Rubix which was developing an industrial park), two wholly-owned subsidiaries of Vinca that were involved in the development of townships in India. OPCDs were permitted securities since the holder was an Indian entity (i.e., Vinca). Following defaults on seemingly assured payments by Amazia and Rubix on the OPCD to Vinca (and thereby impacting returns on FMO’s holding in Vinca), IDBI Trusteeship Services Limited, the debenture trustee filed suit. Also, a summary suit along with a suit for winding up proceedings was filed against Hubtown for the recovery of dues under these OPCDs. 

In this context, the High Court of Bombay ascertained legality of the investment structure in terms of assured returns to FMO, and if the same violated the Indian foreign exchange laws.


The Government of India, and in particular, the Reserve Bank of India (RBI), has always frowned upon the use of non-debt instruments (read external commercial borrowings) and contractual arrangements that even smell of assured returns. This has been a long standing policy and has been set out in Indian foreign exchange laws. 

Although the transaction in question appears to have occurred in two stages – the first being FDI into a holding company, and subsequent investment of the holding company into two operating companies, the Court has debunked the façade and expounded that the structure unmistakeably entails “a colourable and artificially structured transaction, the object and purpose of which was to enable FMO to secure a fixed rate of return on its FDI investments in townships/construction of housing, notwithstanding the FEMA Regulations/FDI policy, which permit only an equity investment without any fixed/agreed rate of return in the said sector.” To credit of the High Court of Bombay, it placed reliance on the Supreme Court verdict in Vodafone International Holdings BV v Union of India in 2012, which stated that a transaction should be viewed as a whole, and not dissected. The Vodafone case states, “It is the task of the Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole and not to adopt a dissecting approach" and that a "device" which was colourable in nature had to be ignored as fiscal nullity.”

In the present case, the High Court of Bombay found that the portrayal of Vinca as the apparent recipient of the FDI against the equity shares and CCDs was a “colourable and artificially structured transaction, the object and purpose of which was to enable FMO to secure a fixed rate of return on its FDI investments”. The structure seems to be clearly in contravention of Indian foreign exchange laws which permit only an equity investment without any fixed/agreed rate of return. The High Court of Bombay found that it was Amazia and Rubix that were involved in the development of townships but not Vinca itself. The downstream investment made by Vinca in these subsidiaries was in the form of OPCDs which gave an assured 14.5% return to Vinca.  Since FMO could convert its CCDs into 99% shareholding in Vinca, in effect, it was FMO that would receive an assured return on its investment, which is unlawful.

Hubtown further sought to make out a case for lifting the corporate veil such that Vinca, Amazia and Rubix, being parent and subsidiaries, would be considered to be one company, implying that Amazia and Rubix being subsidiaries of Vinca, are together one entity. This contention was deemed ludicrous as this would imply that all subsidiaries are the same entity as their parent company. Also, the High Court of Bombay disregarded this assertion stating that even if the corporate veil were to be lifted, it would be found that Vinca existed as the holding company of Amazia and Rubix solely for the purpose of structuring FMO's FDI investment into Amazia and Rubix, through Vinca being the apparent recipient.

The drafting of investment documents was also put to test as it explicitly stated that the FDI amount to be received by Vinca from FMO against issuance of the CCDs and equity shares by Vinca, was not to be retained or used by Vinca in its own projects, but was to be passed on to Amazia and Rubix, against issuance by them of OPCDs. It became clear that Vinca merely provided a ‘facade of compliance’ with the Indian foreign exchange laws.


Those who have been observing developments in this space will not be surprised by this decision, which is largely consistent with India’s foreign investment policy. 

Indian promoters have in the past as well misused provisions of India’s foreign investment laws – whether by approaching RBI with a view to dishonour their call / put options arrangements or denying contractually agreed returns to foreign investors. Memories of foreign investors that suffered in the hands of Government’s somersault on the telecom policy are still fresh. It is time that the Indian regulators and courts set a precedent on Indian companies and promoters who are equally part of such investment structures.

Having said this and on the positive, India’s regulatory environment has seen a remarkable shift in the last couple of years – options are now recognised and permitted both under Indian corporate laws and foreign exchange laws, share transfer provisions have also found positive legislative flavour, and the RBI has been talking of finding a mechanism to permit assured returns. For instance, RBI in its Sixth Bi-Monthly Monetary Policy Statement on 3 February 2015 mentioned that it is consulting ‘with the Government of India to introduce greater flexibility in the pricing of instruments/securities, including an assured return at an appropriate discount over the sovereign yield curve through an embedded optionality clause or in any other manner.’

All is still not lost for FMO in this case as well. This case will be tried in detail (civil suit by leading evidence) in the coming days and it will be an interesting space to watch. 

Abhipsita Kundu is an Associate and Aakash Choubey is a Partner at Khaitan & Co.

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