Indian courts strengthen enforceability of foreign awards amid FEMA challenges
by Supreme Waskar (Partner) and Dipesh Nassa (Associate)
The Indian foreign exchange laws (FEMA) inter-alia mandates that an inbound cross-border transaction shall not guarantee “assured returns” or be executed at a price below Fair Market Value (FMV). Despite these prohibitions, the jurisprudence on enforcing foreign awards has developed significantly. In recent cases, the Indian courts have held that a foreign arbitral award rendered in favour of a foreign investor based on an underlying agreement that guaranteed assured returns or involved transacting below FMV, is not in contravention of the fundamental policy of Indian law and can be enforced without prior approval of the Reserve Bank of India (RBI).
The Supreme Court of India reinforced this in GPE (India) limited vs Twarit consultancy services private limited (2023 SCC OnLine Mad 46) (GPE Case). The dispute arose from share purchase agreements where foreign investors were promised a guaranteed exit with a specific rate of return. When the Indian parties defaulted, the investors initiated arbitration before the Singapore International Arbitration Centre and secured an award for damages against Indian parties. At the time of enforcement of the award in India, the Madras High Court recognized the award but held that its enforcement was conditional upon obtaining prior RBI approval. Relying on the RBI’s submissions that categorized the remittance of damages as a current account transaction requiring no prior approval of RBI, the Supreme Court of India set aside the High Court’s condition regarding RBI approval. It accepted that the arbitral award constituted compensatory damages for breach of contract rather than assured return or consideration for the transfer of shares. Therefore, the payment was classified as a current account transaction under Section 5 of FEMA requiring no specific prior regulatory approval.
Earlier, in Vijay Karia & others v. Prysmain Cavi E Sistemi SRL & others (2020 11 SCC 1), a dispute emerged from a joint venture agreement (JVA) where the foreign party initiated arbitration before the London Court of International Arbitration (LCIA) alleging material breach of JVA by an Indian party. The resulting foreign award directed the Indian party to sell their shareholding to the foreign party at a discount of 10% to the FMV. The Indian party resisted enforcement on the ground that a transfer of shares at a discounted price violated the pricing guidelines under FEMA and consequently breached the fundamental policy of Indian law. The Supreme Court rejected this resistance and upheld the enforcement. It clarified that FEMA is a permissive legislation intended to manage rather than police foreign exchange and that a rectifiable breach of FEMA statutes does not offend the fundamental policy of Indian law. The Court established that a mere violation of a statutory provision does not render the underlying transaction void or the award unenforceable.
Further, in Cruz City 1 Mauritius Holdings vs Unitech Limited (2017 SCC 7810), the Delhi High Court addressed the issue of assured returns. The dispute arose from a Keepwell Agreement where the foreign investor exercised a put option to exit the investment at a pre-determined rate of return. When the Indian party failed to honour the exit obligation, the investor secured an arbitral award from LCIA for the value of the investment plus the agreed return. The Indian party resisted enforcement by arguing that the award enforced a structure guaranteeing assured returns which is strictly prohibited under FEMA regulations. The High Court rejected this defence and recognized the award. It held that a contravention of a provision of law like FEMA is not synonymous with a contravention of the fundamental policy of Indian law. It observed that a party cannot exploit regulatory objections regarding foreign exchange to avoid contractual liabilities and determined that the award could be enforced as a debt obligation subject to necessary regulatory compliances for remittance.
Conclusion
The Courts have firmly distinguished the earlier Foreign Exchange Regulation Act (FERA) regime, where section 47 expressly voided non-compliant contracts from the current FEMA framework. Unlike the “policing” nature of FERA, FEMA is viewed as “permissive” legislation aimed at managing foreign exchange. Consequently, a breach of FEMA is historically viewed not as a violation of fundamental public policy that voids a transaction, but merely as a curable regulatory defect.
The Supreme Court recently advanced this position in by shifting the lens from “equity exit” to “breach of contract”. Although, in the GPE Case, the underlying share purchase agreements involved INR 200 crores for share transfer, the Tribunal awarded INR 195 Crores (plus interest) as damages for the breach. Relying on the RBI’s own stance, it classified this payout as “compensatory damages” rather than consideration for shares. This crucial distinction effectively converted a capital account transaction (which faces strict pricing and approval norms) into a current account transaction (damages), which requires no specific RBI approval.
Ultimately, the binding nature of contracts now prevails over technical regulatory hurdles, signalling that Indian courts will no longer permit FEMA to be used as a tool to frustrate foreign awards. This ensures that an Indian entity cannot use its own regulatory non-compliance as a shield to escape contractual liability or plainly dishonest conduct.
