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
 

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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.