Downside Protection: Not Merely A Lip Service Anymore
Legal Era|November 2017
Downside Protection: Not Merely A Lip Service Anymore

Indian Courts Are Strongly Heading Towards an Approach That Discourages Indian Parties From Using Regulatory Compliances as a Defense for Resisting Contractual Obligations

Two judgments of the Delhi High Court this year have caused a paradigm shift in our approach towards investor protection. The Reserve Bank of India (the RBI) has always maintained that allowing a foreign investor to get a fixed or assured return on its equity investment in India would dilute the ‘risk’ factor, which is characteristic of an equity instrument, and make it akin to debt. With this view, the RBI traditionally opposed all kinds of optionality and finally, in 2014, crystallized the law by validating option contracts, albeit with a rider that a foreign investor cannot be guaranteed an assured exit price. Despite the restriction, exit options and pre-agreed returns on investments are, and have always been, the pivot of investment deals. Indian promoters, probably on the premise that the investor would not be able to enforce such agreements, have been generous in their promises to investors and do not shy away from guaranteeing exits based on performance milestones and other factors. The Delhi High Court has now ruled that the Indian company and its promoters would be held to their word, and protecting investment value is not merely a theoretical right.

The judgments passed in the cases NTT DoCoMo Inc. v Tata Sons Limited and Cruz City 1 Mauritius Holdings v Unitech Limited are in the spirit of the current economic climate and recognize that the need of the hour is to provide a more conducive environment for foreign investments. The rulings stress that contractual commitments be honored and residents not be allowed to take cover under local law to breach commercial agreements that they have entered into with full knowledge of repercussions. A distinction has been drawn between the times of FERA, where the focus was to conserve foreign exchange, to the present-day endeavor to reinvent India as a major investment destination. The writing on the wall is clear – the defense of public policy cannot be used to wriggle out of contractual obligations!


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November 2017