As cross-border transactions from India grow, parties carefully assess and choose their dispute resolution mechanism and generally resort to foreign-seated arbitration. While some foreign awards concern and resolve relatively straightforward issues, others arise from more complex disputes and raise questions that go beyond simple enforcement. Typically, a foreign award (passed by a country which has been notified by India as a reciprocating territory) once held to be enforceable under Part II of the (Indian) Arbitration and Conciliation Act, 1996 (as amended) (“Arbitration Act”) is deemed to be a decree of an Indian court, unless the enforcement warrants refusal on the grounds mentioned under the Arbitration Act. But what happens when a foreign award is brought to India for enforcement under the Arbitration Act, and the award requires an outward remittance which would otherwise require prior approval from the Reserve Bank of India (“RBI”) under the Foreign Exchange Management Act, 1999 (“FEMA”)?
This article examines the judicial position as to whether enforcement of such an award can be sought without obtaining prior RBI approval, and if so, what happens thereafter?
Enforcement first, approval later?
As per Section 48 of the Arbitration Act, enforcement of a foreign award may be refused if, inter alia, it is contrary to the fundamental policy of Indian law or the interests of India or morality or justice. Courts in India have examined this standard extensively and needless to add that the jurisprudence on this subject continues to develop. As regards enforcement of foreign awards, where payments directed thereunder may require approval from the RBI, the courts have largely answered this in the affirmative that – the approval may be sought later. In Renusagar Power Co. Ltd. v. General Electric Co.[1], the Hon’ble Supreme Court of India (“Supreme Court”) held that refusal to enforce a foreign award on the ground of public policy must be applied narrowly and for this ground to get triggered, the enforcement of the award must invoke something more than violation of the law of India. In this case, the enforcement of the foreign award under the Foreign Awards (Recognition and Enforcement) Act, 1961 was resisted, amongst other grounds, for violation of the Foreign Exchange Regulation Act, 1973 (“FERA”) (which now stands repealed and replaced with FEMA). The foreign award required payment of the amount in foreign currency to a foreign company by an Indian entity and such remittance to non-residents under FERA would require RBI approval. The Supreme Court held that this was at best a regulatory breach and would certainly not by itself render the foreign award unenforceable, and a post facto approval can be obtained. This decision therefore clarified that even if RBI approval is required for the purposes of making remittances to honour the foreign award, it would not become a ground to resist enforcement.
In a subsequent line of judgments, similar view was resonated in Mukesh H. Mehta and Others v. Harendra H. Mehta and Others[2], Cruz City 1 Mauritius Holdings v. Unitech Limited[3], and Nine Rivers Capital Limited v. Gokul Patnaik and Anr.[4]
Recently, in Vijay Karia and Ors. v. Prysmian Cavi E Sistemi Srl and Ors.[5], enforcement of the foreign award was resisted on the ground of violation of FEMA because it entailed transfer of securities at a discount, not at the market value as required under FEMA and the applicable regulations. The Supreme Court held that Section 48 of the Arbitration Act must be interpreted judicially so as to not deprive any of the parties of their rights under the New York Convention[6]. It was further noted that unlike FERA, FEMA seeks to manage foreign exchange instead of policing it. Where there is contravention of FEMA or any rules made thereunder, post-facto permissions may be obtained once such contraventions are remedied. Therefore, a rectifiable breach under FEMA cannot be said to be violation of fundamental policy of Indian law. Even assuming that the securities had to be sold at the market value of the shares, and a foreign award directs that such shares be sold at a sum less than the market value, RBI may choose to direct so or may choose to condone such breach. Further, even if RBI were to take an action under FEMA, the enforcement of a foreign award cannot be disallowed on this ground. Thus, various judicial pronouncements have laid down the position that enforcement of a foreign award can be obtained without RBI approval, and such approval can be sought later.
Can RBI be heard in such instances?
The decision in NTT Docomo Inc. v. Tata Sons Limited[7] is a significant precedent against this backdrop. Besides addressing the resistance to enforcement of a foreign award on the ground of FEMA violation, this decision discusses in detail whether the foreign award should be held as unenforceable based on an intervention application filed by RBI itself. In this case, the petitioner (NTT Docomo Inc. (“Docomo”)) prayed for enforcement of a foreign award rendered by the London Court of International Arbitration which awarded USD 1.7 billion as damages for breach of the obligations by Tata Sons Limited (“Tata Sons”) under its share subscription agreement with Docomo. During the proceedings, RBI filed an intervention application on the ground that the remittance under the foreign award would contravene FEMA and was hence, illegal and contrary to the public policy of India. Even though Tata Sons and Docomo agreed to settle the matter with Tata Sons agreeing to honour the foreign award, RBI maintained its position. Rejecting the intervention application filed by RBI, the Delhi High Court noted that neither the Arbitration Act nor the Code of Civil Procedure, 1908 confers any locus standi on RBI to intervene in proceedings seeking enforcement of a foreign award to which it is not a party. That apart, it further noted that the remittance directed to be made under the foreign award by Tata Sons to Docomo was in the nature of damages, rather than a transaction of the kind that would ordinarily require RBI approval.
Subsequently, in another instance[8], the Supreme Court considered a similar issue, but this time RBI was asked to file an affidavit on the issue of requirement of its approval for the remittances towards damages for breach of the underlying contract directed to be made under the foreign award. The judgment challenged before the Supreme Court held that the foreign award was enforceable in India, subject to obtaining RBI approval, if required under law. In its affidavit, RBI stated that payment of compensatory damages directed to be made under the foreign award, being in the nature of a current account transaction, is enabled under Section 5 of FEMA read with Foreign Exchange Management (Current Account Transaction) Rules, 2000 by residents to non-resident, and does not trigger RBI approval. Noting this, the Supreme Court observed that there was no impediment insofar as the enforcement of the foreign award was concerned.
RBI approvals: Making a mountain out of a molehill?
When we examine the provisions of FEMA, Section 3 stipulates that no person can, inter alia, make any payment to or for the credit of any person resident outside India in any manner, except in accordance with FEMA or the rules made thereunder, or through a special or general permission of RBI. Further, the fundamental principle under FEMA is that all cross-border payments must be routed through an authorised dealer category-I bank (“AD Bank”), and there are clear penalties prescribed under FEMA for contravention of its provisions or any rules, regulations, directions or notifications issued thereunder. There are two routes for undertaking transactions under FEMA: the automatic route and the approval route. Under the automatic route, the transaction may be undertaken through the entity’s designated AD Bank, without requiring prior approval from the RBI. Whereas under the approval route, prior approval of RBI is required before undertaking the transaction. Any contravention of FEMA, including failure to obtain required approvals, may attract penalties under Section 13 of FEMA up to three times the amount involved where quantifiable, or up to INR 2,00,000 where such amounts are not quantifiable, with an additional penalty of up to INR 5,000 for each day of a continuing contravention.
In other words, FEMA itself provides for the why and how of the approvals to be sought from RBI and what happens in case there is any contravention of FEMA. In all, if a foreign award directs a payment to be made which attracts the provisions of FEMA which necessitates RBI approval (general or special), the concerned party will have to seek such approval. Given this framework and the judicial position, debtors still often resist enforcement of a foreign award contending that absence of RBI approval (where required) violates the fundamental policy of Indian law.
Way forward
The emerging judicial position suggests that the requirement of RBI approval does not, by itself, bar recognition or enforcement of a foreign award in India. Courts have generally treated questions of enforceability as distinct from foreign exchange compliance which should not be used to defeat enforcement at the threshold. From a practical standpoint, this means that a successful award-holder may obtain recognition or an enforcement order even where the underlying remittance would ordinarily require compliance with FEMA or trigger RBI approval.
However, this does not eliminate regulatory risks altogether. Where RBI approvals are required, the remitting party would be required to approach RBI through an AD Bank for any necessary approvals, clarifications, or post facto regularization. For award holders, the strategy for enforcement of foreign awards in India, particularly those which may trigger requirement of approvals from a regulator in India, must be assessed parallelly with attention to the characterization of the payment, the underlying transaction, and the possibility of regulatory engagement at the remittance stage and timelines for the overall execution – not just recognition before a court of law.
Authors:
Aditi Sinha
Principal Associate, Juris Corp
Vaishnavi Panyam
Associate,
Juris Corp
[1] 1987 SCR (3) 858
[2] 1995 (3) BOM CR 686
[3] EX. P. No. 132 of 2014 & EA (OS) Nos. 316 of 2015
[4] O.M.P. (E.F.A.) (COMM.) No.13 of 2019
[5] Civil Appeal No. 1544 of 2020 and Civil Appeal No. 1545 of 2020
[6] Convention on the Recognition and Enforcement of Foreign Arbitral Awards
[7] OMP (EFA) (Comm) No. 7 of 2016
[8] GPE (India) Ltd. & Ors. v. Twarit Consultancy Services Private Limited & Anr. [SLP (C) No. 6856 of 2023]