Overseas Direct Investment, Liberalization/Rationalization

The RBI vide a recent circular, dated May 27, 2011 has made certain changes to the prevailing ODI Regulations. The objective is to provide operational flexibility to Indian Corporates having investment abroad. Some of the changes brought about are with respect to:

(i)  Performance Guarantees issued by the Indian Party.

(ii) Restructuring of the balance sheet of the overseas entity involving write-off of capital and    receivables.

(iii) Disinvestment by the Indian Parties of their stake in an overseas JV/WOS involving write-off.

(iv) Issue of guarantee by an  Indian Party to step down subsidiary of JV /WOS under general  permission.

The Business Standard dated May 28, 2011 reports the reaction of Corporate India to the above mentioned changes.    

Links of Interest

A recent article in livemint discusses the taxation of commodity derivatives.

The Karnataka High Court had an occasion to adjudicate on a Vodafone like case. The judgement is available here.

The Firm discusses the legal challenges and issues surrounding Slump Sales. There has been some debate in recent times over slump sales especially when the sale involves a core area of business. The recent divestment by Kanoria Chemicals of its Chloro Chemical Division (CCD) to Adiya Birla Chemicals (India) Limited (ABCIL) is an example of such a sale. 

Enforcement of Foreign Award, Public Policy: Penn Racquet

A recent post on the Kluwer Arbitartion Blog whilst discussing the recent judgment of the Delhi High Court in Penn Racquet Sports v. Mayor International Limited has sought to argue that the Delhi High Court has taken a contrary approach (according to the post, rightly so) to that of the supreme Court in ONGC v. Saw Pipes Limited ((2003)5 SCC 705). The Kluwer post argues that in Penn Racquet the court has attempted to assign a narrow meaning to the term “Public Policy” as opposed to a wider meaning assigned to the same by the Supreme Court in Saw Pipes. In this post I shall attempt to demonstrate that the abovementioned interpretation of the ruling in Penn Racquet is incorrect.

Before discussing the ruling of the Delhi High Court on the term “public policy”, it would be appropriate to discuss the relevant facts and the contentions of the parties. Penn Racquet Sports (“decree holder”), a company incorporated in the United States had entered into a Trademark License Agreement (“TLA”) with Mayor International Limited (“judgment debtor”), a Company incorporated in India, whereunder the decree holder had granted the judgment debtor license to use the trademark “Penn” for use in certain territories and for certain products. In consideration of the license the judgment debtor agreed to pay an annual royalty to the decree holder. The dispute arose when the judgment debtor refused to pay the annual royalty on the ground that the decree holder had breached the contract by granting a similar license to Nebus Loyalty Limited (“Nebus”). Subsequently the dispute was referred to arbitration and thereafter the decree holder obtained an award in his favour. It is for the enforcement of this award that the decree holder preferred the present enforcement application u/s 47 of the Arbitration and Conciliation Act (“Act”). Needless to state, the judgment debtor challenged the enforcement of the award u/s 48 of the Act.

The judgment debtor contented before the Delhi High Court that the impugned award was against public policy as (i) the award was against the express terms of the contract which rendered it patently illegal and (ii) the arbitral tribunal refused to entertain the counter claim of the judgment debtor, denying it an opportunity to present its case. The judgment debtor relied on Venture Global Engineering v. Satyam Computer Services Limited (AIR 2008 SC 1061) to contend that the foreign award is subject to challenge u/s 34 of the Act, and then relied on Saw Pipes to contend that since the award was patently illegal it could not be enforced. Contrarily, the decree holder contented that while enforcing an award u/s 47-49 of the Act, the court is not mandated to adjudicate on the merits of the dispute. The decree holder further contended that the law laid down in Saw Pipes is only applicable to domestic awards and that the term “Public Policy” has a different connotation u/s 48(2)(b) to that in S. 34(2)(b)(ii) of the Act.

The Delhi High Court upholding the contention(s) of the decree holder, held that the term “public policy” in S. 48(2)(b) of the Act carries a narrower meaning when compared to the meaning assigned to the same term u/s 34(2)(b)(ii) of the Act. The court relied on the Supreme Court decision in Furest Day Lawson v. Jindal Exports (AIR 2001 SC 2293) and its own decision in Jindal Exports v. Furest Day Lawson to hold that a narrow meaning must be given to the term “public policy” u/s 48(2)(b) and only when the most “basic notions of morality and justice” are violated should the court refuse the enforcement of the foreign award. Having drawn a distinction between s. 48(2)(b) and s. 34(2)(b)(ii), as far the tem “public policy” is concerned, the court further seems to have agreed that the ratio of Venture Global was not applicable to the present case as the substantive law governing the contract was not Indian Law (arguably suggesting an implied exclusion of Part I of the Act).             

On a close scrutiny the Delhi High Court’s judgment in Penn Racquet may arguably be in conflict with the ruling in Venture Global, wherein the Supreme Court had held that there is no distinction between s. 34 and s. 48. However, it is incorrect to argue that it tried to assign a narrow meaning to the term “public policy” u/s 34 (which would be the natural conclusion, if one was to argue that the Delhi High Court deviated from the ruling in Saw Pipes). In essence the Delhi High Court never went into scope and ambit of the term “Public Policy” u/s 34 and rightly so. On the contrary, the Court seems to have followed Saw Pipes. In Saw Pipes the appellant had argued that the narrow meaning assigned to the term “public policy” in Renusagar was in context to the fact that the question involved in that case was with regard to the execution of the award which had attained finality. It was further argued that the scheme of S. 34 which deals with setting aside of arbitral award and S. 48 which deals with enforcement of arbitral award are not identical (para. 20). The Supreme Court in Saw Pipes responded to the above argument in the following manner:

“The aforesaid submission of the learned senior counsel requires to be accepted. From the judgments discussed above, it can be held that the term 'public policy of India' is required to be interpreted in the context of the jurisdiction of the Court where the validity of award is challenged before it becomes final and executable. The concept of enforcement of the award after it becomes final is different and the jurisdiction of the Court at that stage could be limited. Similar is the position with regard to the execution of a decree. It is settled law as well as it is provided under Code of Civil Procedure that once the decree has attained finality, in an execution proceeding, it may be challenged only on limited grounds such as the decree being without jurisdiction or nullity. But in a case where the judgment and decree is challenged before the Appellate Court or the Court exercising revisional jurisdiction, the jurisdiction of such Court would be wider.” (para. 22)(emphasis mine) 

In conclusion it is submitted that Penn Racquet does not in essence deviate from the trend that has been pursued by Indian Courts on previous occasions in relation to challenge or enforcement of awards in general and the term “public policy” in particular.

Mandatory CSR: Useful Links

There has been a lot of debate over the government's proposal to make a mandatory spend of 2% on Corporate Social Responsibility ("CSR"). The posts here and here give a brief overview of the proposal and the issues involved therein. One of the principal contentions raised by the corporates is that a mandatory CSR is akin to tax and in essence dilutes the whole concept of CSR.

Today's Business Standard has an interesting article supporting the government's proposal of a mandatory CSR. 

  

S. 5&6 of the Competition Act Notified

The Ministry of Corporate Affairs ("MCA') has notified S. 5 & 6 of the Competition Act, 2002. This inter alia means that the Competition Commission of India ("CCI") will now have the power to monitor Mergers&Acquisitions. The notification is available here.

In this regard the CCI has also made draft regulations. The draft regulation is available here.

Parliament's Power to Enact Laws Having Extra Territorial Operation

In a recent judgement of the Honorable Supreme Court of India in GVK Industries Ltd. v. ITO ( 01.03.2011) the issue relating to the extent to which laws enacted by Parliament can have extra territorial effect under Article 245 of the Constitution of India, has been elaborately discussed. 

The summary of the judgement is available here. 

Regulations to Facilitate Overseas Acquisitions: CII

The Confederation of Indian Industry ("CII") has urged the Government of India to bring forth regulatory changes which would facilitate Overseas Acquisitions. In a memorandum submitted to the DIPP, CII has submitted that the regulatory framework in India hinders Indian Multinationals to pursue global acquisitions. Some of the concerns and suggestions put forth by the CII, in this regard, are:

"A provision is proposed in the Companies Bill 2009 that would restrict the number of step down subsidiaries. This would be a major impediment towards overseas acquisitions by Indian companies. Very often the foreign company to be acquired already has more than one level of subsidiaries and for effecting the acquisition, the Indian company may need to create a SPV which could be a subsidiary of a subsidiary. However, if the Companies Bill is enacted with this restriction, it would prove to be a major hurdle for aspiring Indian companies, which are planning overseas acquisitions."(emphasis mine)

"For investing in the target company, in excess of 60% of its net worth or 100% of its free reserves, the company requires prior shareholders approval. This necessitates disclosure of vital details about the proposed acquisition company to the shareholders, including the price being paid. As a result, sensitive and confidential information, which could be of critical importance to competing bidders, becomes available in the public domain even prior to submitting a bid to the target company."(emphasis mine)

"The Competition Act, 2002 also mandates merger regulation. While the relevant provisions of the Act have not yet been notified; once the process is initiated, the process would conflict with provisions under Companies Act, SEBI’s Preferential Allotment Guidelines, the Takeover Code and the Guidelines issued by DoT for the Telcom sector. This would result in unnecessary references to the Regulator and/or Govt and in some case, litigations. These aspects should be carefully considered before notification of the sections relation to merger regulation by CCI."

The full contents of the memorandum is available here.

S. 11 of the Arbitration Act, 1996: Is the Law Finally Clear!

S. 11 of the Arbitration and Conciliation Act, 1996 (Hereinafter “the Act”) has given rise to a great deal of controversy. There is catena of decisions of the Supreme Court wherein the Apex Court has examined the nature and scope of the enquiry and the jurisdiction of the Chief Justice or his designate while dealing with petitions under Section 11 of the Act. In Alva Aluminium Ltd., Bangkok v. Gabriel India Limited (16.11.2010), the Supreme Court has once again reiterated the law on this subject. The Court in ALVA cited with approval the judgment of the Supreme Court in National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd. (2009(1) SCC 267) wherein the Apex Court had categorized the issue(s) that may arise for consideration before the Chief Justice or his designate in a petition under Section 11 of the Act. In Boghara Polyfab the Court had stated the following proposition of law:

“1. The issues (first category) which the Chief Justice/his designate will have to decide are:

(a) Whether the party making the application has approached the appropriate High Court.

(b) Whether there is an arbitration agreement and whether the party who has applied under Section 11 of the Act, is a party to such an agreement.

2. The issues (second category) which the Chief Justice/his designate may choose to decide (or leave them to the decision of the Arbitral Tribunal) are:

(a) Whether the claim is a dead (long-barred) claim or a live claim.

(b) Whether the parties have concluded the contract/transaction by recording satisfaction of their mutual rights and obligation or by receiving the final payment without objection.

3. The issues (third category) which the Chief Justice/his designate should leave exclusively to the Arbitral Tribunal are:

(a) Whether a claim made falls within the arbitration Clause (as for example, a matter which is reserved for final decision of a departmental authority and excepted or excluded from arbitration).

(b) Merits or any claim involved in the arbitration.”

The other decisions of the Supreme Court which have enunciated the law on this subject are mentioned hereunder:    

• A.P.Tourism Development Corporation v. Pampa Hotels Ltd., 2010 (5) SCC 425
• SBP. v. Patel Engineering Ltd., AIR 2006 SC 540
• Shivnath Rai v. Gaffar, AIR 2008 SC 1906

   

Constitutional Law Conference

School of Law, Christ University is organizing a two day National Conference on the “INDIAN CONSTITUTION IN THE 21^ST CENTURY: A CONCEPTUAL AND CONTEXUAL AUDIT to be held on the 24^th and 25^th of February, 2011. The Conference is broadly structured around four themes namely:

•   Reframing the Constitution: Is it really a need of the hour?
•   National Security and Constitutional Challenges
•  Development and Constitutional Challenges
•  Challenges to the Functions of the Organs of the State

The Conference brings a unique opportunity to share and explore new ideas, concerns and suggestions among academicians, practitioner, policy makers and students. So far the conference has received an overwhelming response in that there are over fifty papers that are expected to be presented on the conference days.

Programme Details:

The first day of the conference will see participation of eminent jurists, academicians and practitioners such as Justice Santosh Hedge, Former Judge, Supreme Court of India, Justice P.P. Naolekar. Former Judge, Supreme Court of India, Prof. V.S. Mallar, Chair Professor (M.K.Nambiar Chair on Constitutional Law) at NLSIU, Shri Uday Holla, Senior Advocate, Supreme Court of India and Shri Aditya Sondhi, Advocate, Supreme Court of India.

The second day of the conference will see presentations by several academicians and students across the country. Leading scholars working in this domain will be moderating each of the sessions on the second day.

Contact

Practitioners, academicians, policy makers and students are invited to register as delegates. The conference brochure is available at http://www.christuniversity.in/msgdisplay.php?id=5&f=2.  Further details will be made available on request. Interested readers can contact the Conference Organizing Committee at conference2011@law.christuniversity.in

Registration Fee

For academicians	750 INR
For two delegates	1000 INR
For students	500 INR

   

   

Indowind Energy v. Wescare: The Unintended Fallout

Justice Raveendran's decision, in Indowind Energy v. Wescare (I) Ltd. & Anr., AIR 2010 SC 1793, is one which is, without doubt, a well-reasoned opinion in respect of Section 7 of the Arbitration and Conciliation Act, 1996, so long as the frame of reference is the facts of the case itself. From a practitioner's perspective, however, the decision has had some unintended consequences, and is today used extensively by Respondents in Section 11 proceedings under the Arbitration Act seeking to question the existence of an arbitration agreement.

The decision in Indowind states - "It is not in dispute that there can be appointment of an arbitrator if there was any dispute between Wescare and Subuthi. The question is when Indowind is not a signatory to the agreement dated 24.2.2006, whether it can be considered to be a 'party' to the arbitration agreement. In the absence of any document signed by the parties as contemplated under Clause (a) of Sub-section (4) of Section 7, and in the absence of existence of an arbitration agreement as contemplated in Clauses (b) or (c) of Sub-section (4) of Section 7 and in the absence of a contract which incorporates the arbitration agreement by reference as contemplated under Sub-section (5) of Section 7, the inescapable conclusion is that Indowind is not a party to the arbitration agreement. In the absence of an arbitration agreement between Wescare and Indowind, no claim against Indowind or no dispute with Indowind can be the subject- matter of reference to an arbitrator. This is evident from a plain, simple and normal reading of Section 7 of the Act."

This insistence on a signature becomes problematic in a different fact situation. Take, for instance, a scenario where party X enters into an agreement with a Consortium consisting of party A and B. Even the agreement states that A is entering into the Agreement on behalf of the Consortium, with A and B being jointly and severally liable to the extent of their interest in the Consortium. The Consortium is, however, not a separate legal entity in law. In such a scenario, given the language in the decision of Indowind, party B, arrayed as Respondent in a Section 11 petition, may take the objection that it was not a signatory to the agreement, and hence was not a "party" to the arbitration agreement. Commercially, this becomes even more problematic for party X when party A (the signatory) is a foreign party and party B is an Indian party, as X, to actually benefit from the litigation, has only two options:-

i. File a parallel suit against B to the extent of B's liability.

ii. In the event of a favourable award against A, go to A's country of incorporation and attempt to enforce the award in entirety, leaving it to A and B to apportion liability.

In my view, the situation becomes worse if B, for instance, has a hand in the breach of the agreement, as opposed to a situation where A is the Operator and the only person responsible for taking steps under the agreement with X. In this situation, even A has the opportunity to wriggle out of arbitration, by using the ratio in Sukanya Holdings v. Jayesh H. Pandya, (2003) 5 SCC 531, wherein it is stated that a cause of action cannot be bifurcated such that part of it is decided by an arbitral tribunal, and part of it is decided in a civil suit. While Sukanya Holdings was in the context of an application made under Section 8 of the Arbitration and Conciliation Act, 1996, some may argue that the principal can be extrapolated in deciding the arbitrability of a dispute in proceedings under Section 11 of the Arbitration and Conciliation Act.

I feel, therefore, that the principle enunciated in Indowind needs to be clarified and extended to the effect that a non-signatory to an arbitration agreement is deemed to be a signatory where, either expressly or impliedly, the party actually signing the agreement is representing such other party (either as agent or otherwise) for the purpose of the contract.