Enforceability of Foreign Arbitral Awards Under SCRA and FEMA: Banyan Tree Growth Capital L.L.C. v. Axiom Cordages Limited And Others

Introduction

The case of Banyan Tree Growth Capital L.L.C. v. Axiom Cordages Limited And Others adjudicated by the Bombay High Court on April 30, 2020, delves into the complexities of enforcing foreign arbitral awards within the framework of Indian law, specifically under the Securities Contracts (Regulation) Act, 1956 (SCRA) and the Foreign Exchange Management Act, 1999 (FEMA). This litigation arose from a commercial arbitration where Banyan Tree Growth Capital sought enforcement of a Put Win Award against multiple Indian entities including Axiom Cordages Limited, Responsive Industries Limited, and Wellknown Business Ventures LLP.

The crux of the dispute centered on the legitimacy and enforceability of a Put Option Deed, contested on grounds of inadequate stamping, violation of SCRA provisions, and contravention of FEMA regulations. Additionally, the respondents argued that enforcing the arbitral award would be against India's fundamental public policy.

Summary of the Judgment

The Bombay High Court, presided over by Justice G.S. Kulkarni, examined the enforceability of the arbitral award titled "Put Award" issued on January 15, 2019, by the Singapore International Arbitration Centre (SIAC). The court meticulously addressed each objection raised by the respondents:

• Stamp Duty Compliance: The court dismissed the contention regarding inadequate stamping of the Put Option Deed, highlighting the consistent conduct of the respondents and their failure to raise stamp duty issues during arbitration.
• SCRA Violation: The court concluded that the Put Option Deed did not fall under prohibited forward contracts as it was a shareholders' agreement, not a speculative derivative contract, especially post the 2013 SEBI notification.
• FEMA Compliance: The tribunal found no breach of FEMA regulations, noting that the payment structures aligned with FEMA's fair market value guidelines and did not guarantee assured returns.
• Public Policy: The court emphasized that the arbitral award did not violate India's fundamental public policy, referencing landmark judgments that narrow the interpretation of public policy in arbitration contexts.

Consequently, the court upheld the enforceability of the Put Award, directing its enforcement as a decree and rejecting all oppositions by the respondents.

Analysis

Precedents Cited

The judgment extensively referenced pivotal cases and statutory provisions to substantiate its conclusions:

• Renusagar Power Co. Ltd. v. General Electric Co.: Established the narrow interpretation of 'public policy' in the context of enforcing foreign awards.
• MCX Stock Exchange Ltd. v. SEBI: Differentiated between mere options and contracts falling under SCRA, reinforcing the non-spectulative nature of shareholders' agreements.
• Bagwati Developers Pvt. Ltd. v. Peerless General Finance: Affirmed that SCRA provisions apply uniformly to both listed and unlisted public companies.
• Vijay Karia & Ors. v. Prysmian Cavi E Sistemi SRL & Ors.: Reinforced that violations of FEMA do not inherently breach public policy sufficient to bar enforcement of arbitral awards.

Legal Reasoning

The court's legal reasoning was methodical:

• Stamp Duty Compliance: By referencing the Maharashtra Stamp Act and Supreme Court rulings such as Javer Chand v. Pukhraj Surana, the court underscored that document inadequacies cannot be retroactively challenged once admitted in arbitration.
• SCRA Application: The judgment clarified that the Put Option Deed was a private shareholders' agreement intended for legitimate exit strategy, not speculative trading. It further emphasized that post the 2013 SEBI amendment, such agreements do not violate SCRA provisions.
• FEMA Regulations: The court analyzed FEMA's objectives and rulings, determining that the financial arrangements in the Put Option Deed were compliant, as they did not assure fixed returns but adhered to fair market value principles.
• Public Policy: Drawing from recent Supreme Court dicta, the court maintained that only fundamental breaches affecting India's core legal principles could constitute a violation of public policy, which was not applicable in this arbitration.

Impact

This judgment has profound implications for international investors and Indian companies engaged in complex financial agreements:

• Clarification on SCRA Application: Reinforces that shareholders' agreements with exit options, especially post-SEBI amendments, are not tantamount to speculative derivatives under SCRA.
• Facilitation of Cross-Border Investments: By upholding the enforceability of foreign arbitral awards, the decision fosters a more predictable and secure environment for foreign investments in India.
• Strengthening Arbitration Framework: Affirming the limited scope of public policy exceptions enhances the efficacy of international arbitration as a dispute resolution mechanism in India.
• Compliance Emphasis: Highlights the necessity for Indian entities to adhere strictly to statutory requirements like stamp duties and FEMA norms to avoid future litigations.

Complex Concepts Simplified

Securities Contracts (Regulation) Act, 1956 (SCRA)

SCRA governs the transactions in securities to prevent undesirable speculation. It defines 'securities', 'derivatives', and regulates contracts to ensure fair trading practices. Violations can render contracts null and void.

Foreign Exchange Management Act, 1999 (FEMA)

FEMA manages foreign exchange transactions in India, aiming to facilitate external trade and payments. It regulates the purchase, sale, and transfer of foreign exchange and Indian securities by non-residents, ensuring compliance with valuation norms and disallowing guaranteed returns.

Put Option Deed

A contractual agreement granting Banyan Tree the right to sell its shares in Axiom at a predetermined price under specific conditions. This served as an exit strategy for Banyan Tree's investment, ensuring liquidity and return on investment.

Arbitral Award

An arbitral award is a decision rendered by an arbitration tribunal resolving the dispute between the parties. In this case, the SIAC's Put Award was the subject of enforcement in the Bombay High Court.

Conclusion

The Bombay High Court's judgment in Banyan Tree Growth Capital L.L.C. v. Axiom Cordages Limited And Others underscores the robustness of India's arbitration enforcement framework when aligned with statutory regulations. By dismissing challenges related to stamp duty, SCRA, FEMA, and public policy, the court affirmed the legitimacy of the Put Option Deed and the arbitral award's enforceability. This serves as a testament to India's commitment to upholding international arbitration standards, thereby providing confidence to foreign investors regarding the enforceability of their investment agreements in India. Moving forward, entities engaging in cross-border investments must meticulously ensure compliance with all relevant statutory requirements to safeguard their contractual rights and dispute resolution mechanisms.