01 August 2016

Courts might hold guaranteed return of capital clause invalid - Business Standard

I have a piece in today's Business Standard on the Tata-Docomo dispute. Here is the link and below is the full piece:

The Tata Docomo deal poses one of the most interesting conundrums from a legal perspective. This piece is based on the broad contours of the arguments in public domain. And as a lawyer, I may disclaim my views on seeing the definitive agreement between the two. Broadly the issue is that Tata and Docomo entered into an agreement where Docomo invested in Tata’s telecom business. The agreement was signed with a clause guaranteeing at least 50% return of (rather than on) capital in case the company did not do well. While ordinarily, contracts are enforceable, this one had two legal issues.

The first was that for a foreign investor, RBI permits investment in Indian companies through equity or debt route. The debt route is quite restrictive and the equity rather liberal. The foreign exchange Act, FEMA, and RBI’s position on FEMA is that if you make an equity investment, you cannot get a guaranteed return on or of capital. In fact, if you so choose, the equity investment must come as debt and relevant regulations with respect to lending by a foreign entity would kick in. Tata and Docomo did not term it a debt issuance and therefore the investment was valid, but the condition guaranteeing return of capital was not.

The second issue is an old circular under the Securities Contracts (Regulations) Act which prohibits puts and calls in contracts in public companies. The rigour of the circular is now diluted, but it was a broader prohibition then.

While the Supreme Court has in case after case reduced the possibility of court intervention where an arbitral tribunal has passed an order, this may well be a case where courts may hold the clause in the agreement as being invalid. The twist in the tale is that Tata seems to support the payment while RBI is opposing the same. Ultimately, the case will likely take many twists and turns before finally getting decided in the Supreme Court. 

1 comment:

TheCorporateConsultant said...

Sir I have a feeling that the Government will find a way out and pay DoCoMo to maintain good relations with Japan, but it will set a very bad precedent.