Important relief for foreign joint venture partners regarding the enforceability of put and call options
In the past, foreign investors in India have unfortunately often had to experience option rights, guarantees and compensation provided for in investment agreements (joint venture, project contracts, etc.) being undermined by the Indian counterparty by relying on the possible incompatibility of such clauses with the Indian foreign policy Exchange Management Act, 1999 (FEMA) and the Reserve Bank of India (RBI) regulations.
If in doubt, for the Indian contractual partner!
A concrete example that clearly illustrates how Indian contractual partners have previously been able to simply invoke the invalidity of the contractual clauses they signed themselves:
There is a call/put option in a JV contract that is intended to force the Indian contractual partner to sell its shares to the foreign shareholder at a price specified in the contract. If this clause was then drawn, the Indian partner claimed that this clause was invalid because it violated Indian FEMA law and thus “against Indian public order” would be violated as follows:
- Under the FEMA Direct Investment Regulations and the FEMA Guarantee Regulations, such a clause must be approved by the Reserve Bank of India before the contract is concluded.
- Determining the purchase price without valuing the shares at market value at the time of transfer is not permitted under current FEMA regulations.
Investor-friendly ruling and more legal certainty
In this context, the recent judgment of Delhi High Court in the case of Cruz City I Mauritius Holdings v. Unitech Limited, dated April 11.04.2017, XNUMX, is exciting. This now makes it much more difficult for Indian parties to focus on defending the “Indian public order” to appoint.
While the Indian courts have previously mostly placed Indian law above foreign arbitration awards or “international customs”, the court is now interpreting the question of when “Indian public order” is at risk in a much narrower way:
- Foreign titles should only be unenforceable if they violate the fundamental values and principles that underpin Indian laws.
- A violation of specific provisions of FEMA (even if actually found) will no longer be considered sufficient to invoke violation of the “public order of India”.
- According to the High Court's interpretation, a violation of India's FEMA law cannot be equated with a violation of the Indian Constitution or the fundamental legal system.
It will of course remain exciting to see where exactly Indian courts will draw the dividing line in the future, i.e. what counts as part of the “basic Indian legal system” and what does not. But in any case, the current ruling is a small silver lining for foreign investors.
