TATA V. DOCOMO: HOW THE ISSUE BECAME TATA & DOCOMO V. RBI?

Delhi High Court Judgment in Tata Sons vs. NTT Docomo: A Landmark Decision for Foreign Investments

The Delhi High Court, in a landmark ruling on April 28, 2017, resolved the long-standing dispute between Tata Sons and NTT Docomo, a Japanese telecom company, over the enforcement of an arbitral award. The case had significant implications for foreign direct investment (FDI) regulations in India and investor confidence in the Indian market.

Background of the Case

• • Parties Involved:

    • Tata Sons (India)
    • NTT Docomo (Japan)

  • Nature of Dispute:

    • NTT Docomo had a 26.5% stake in Tata Teleservices (TTSL), acquired for $2.6 billion in 2009.
    • The Shareholders’ Agreement (SHA) between Tata and Docomo provided an exit clause, allowing Docomo to sell its stake at either fair market value or at least 50% of the original investment ($1.3 billion), whichever was higher.
    • However, in 2014, the Reserve Bank of India (RBI) introduced new FDI rules, which prohibited foreign investors from exiting at pre-determined valuation.
    • Tata Sons was, therefore, unable to honor the SHA’s exit clause, leading NTT Docomo to initiate arbitration in London.

  • Arbitral Award:

    • In June 2016, the London Court of International Arbitration (LCIA) ruled in favor of NTT Docomo, ordering Tata Sons to pay $1.7 billion for breaching its contractual obligations.

  • Subsequent Legal Developments:

    • While Tata initially resisted the enforcement of the arbitral award, it later withdrew objections and agreed to pay.
    • RBI, which was not originally a party, later joined the proceedings, arguing that the settlement violated FEMA regulations and should not be enforced.

Key Legal Issues Before the Delhi High Court

1. 1. Did the RBI have the locus standi (legal standing) to intervene and object to the enforcement of the arbitral award?
   2. Was the SHA and the arbitral award in violation of FEMA and Indian public policy?
   3. Was the settlement agreement between Tata and Docomo valid?

Arguments by the Parties

RBI’s Contentions:

• • Violation of FEMA Regulations:

    • RBI argued that the SHA’s exit clause was contrary to FEMA provisions and FDI norms, which do not permit foreign investors to exit at a pre-determined price exceeding fair market valuation.
    • Cited Regulation 9 of FEMA 20, which mandates that share transfers must be based on an internationally accepted pricing methodology.

  • Against Public Policy:

    • RBI claimed that enforcing the award would contravene Section 6(3) of FEMA, which allows RBI to regulate capital account transactions.
    • The Foreign Investment Promotion Board (FIPB) had only approved Docomo’s investment subject to compliance with RBI/SEBI guidelines.

  • Legal Precedents Supporting RBI’s Position:

    • Referred to State of Punjab v. Amar Singh (1974) and Union Carbide v. Union of India (1991) to argue that Indian courts should reject agreements violating public policy.

Tata Sons & NTT Docomo’s Contentions:

• • RBI Lacked Locus Standi:

    • RBI was not a party to the arbitration agreement, and under Section 48 of the Arbitration and Conciliation Act, 1996, only a party to an arbitral award can object to its enforcement.
    • Allowing RBI to intervene would be against the fundamental policy of Indian arbitration law.

  • SHA Was Not Illegal:

    • Tata argued that FEMA does not absolutely prohibit such transactions, and RBI has the power to grant special permissions under FEMA.
    • The exit clause was a contractual obligation, and commercial contracts cannot be retrospectively invalidated due to regulatory changes.

  • Arbitral Award Was Legally Enforceable:

    • Arbitration tribunals have autonomy in commercial disputes, and foreign arbitral awards should not be interfered with unless they violate Indian public policy.

  • Settlement Agreement Was Valid:

    • Even if the award had issues under FEMA, Tata and Docomo had mutually agreed on consent terms, which should be respected by the courts.

Judgment by the Delhi High Court

The Delhi High Court ruled in favor of Tata Sons and NTT Docomo, rejecting RBI’s intervention and upholding the arbitral award.

1. 1. RBI Had No Standing to Object:

      • Under Sections 48 and 2(h) of the Arbitration and Conciliation Act, 1996, only a party to an arbitration agreement can challenge its enforcement.
      • RBI was not a party, and its intervention was not justified.

   2. SHA Was Not Violative of FEMA:

      • FEMA does not impose an absolute prohibition on contractual obligations.
      • Regulation 9(2) of FEMA 20 allowed for exceptions with RBI’s special permission, which was legally feasible.

   3. Arbitral Award Was Not Against Public Policy:

      • The arbitral tribunal had acted within its jurisdiction, and the award was in accordance with the contractual obligations of the parties.
      • The court ruled that contractual obligations cannot be invalidated retrospectively.

   4. Settlement Agreement Was Valid:

      • Courts have long upheld the validity of settlements even at the execution stage of awards.
      • Tata and Docomo had mutually agreed to settle, and there was no legal basis for RBI to oppose it.

Impact of the Judgment

1. 1. Boost to Foreign Investment Confidence:

      • The ruling reassured foreign investors that India honors international arbitration awards.
      • It reinforced India’s commitment to investor-friendly policies.

   2. Limitations on RBI’s Regulatory Powers in Contractual Disputes:

      • The court curtailed RBI’s ability to interfere in private commercial transactions, especially post-arbitration settlements.

   3. Clarification on FEMA and Contractual Obligations:

      • FEMA does not create a blanket prohibition on exit clauses in SHA agreements.
      • Foreign investors can negotiate exit strategies within the regulatory framework.

   4. Recognition of Arbitration as a Preferred Dispute Resolution Mechanism:

      • Strengthened India’s arbitration-friendly stance, making it more attractive for global businesses.

The Delhi High Court’s decision in Tata Sons v. NTT Docomo was a watershed moment for foreign investments in India. By ruling in favor of contractual autonomy, arbitration awards, and investor rights, the court strengthened India’s image as a fair and predictable business environment.

While the case highlighted the tensions between regulatory compliance (FEMA) and investment protection, it ultimately set a positive precedent ensuring that investors’ rights are protected and that India remains an attractive investment destination.