In Cruz City 1 Mauritius Holdings v. Unitech Limited, a foreign investor, Cruz City, sought to enforce a foreign arbitral award against Unitech (an Indian company) and its wholly owned subsidiary Burley Holdings Ltd. (a Mauritius company). By way of a Shareholders’ Agreement (SHA), Cruz City had invested in Kerrush Investments Limited (a Mauritius company) which, through its downstream subsidiaries in India, was to undertake some real estate projects. Under the SHA, Cruz City was entitled to exercise a put option by which it could call upon Burley to purchase its shares in Kerrush at a “post tax IRR of 15% on the capital contributions made by Cruz City in the event commencement of construction of [a specified real estate project] was delayed before the specified period”. Under a separate Keepwell Agreement entered into between Cruz City, Burley and Unitech, Burley agreed to undertake obligations under the SHA in relation to the put option, and Unitech in turn agreed to make sufficient funds available with Burley so as to enable Burley to undertake its obligations towards Cruz City.

In 2010, due to delays in the specified real estate project, Cruz City exercised the put option. Due to the failure by Burley and Unitech to comply with the same, Cruz City initiated an LCIA arbitration and obtained an award against them. When that award was sought to be enforced before the Delhi High Court, Unitech (amongst other objections) raised issues pertaining to the fact that the enforcement of the arbitral award, being impermissible under FEMA, was contrary to public policy. The issue before the Delhi High Court was whether violation of any regulation or provision of FEMA would automatically offend the public policy of India. After considering the relevant case law, the Court held that the scope of the public policy defense to resist enforcement was very narrow and the same could be equated to offending any particular provision or a statute. It also held that contravention of any provision of an enactment was not synonymous to contravention of fundamental policy of Indian law. The Delhi High Court further clarified that although payments made by Unitech would be subject to the provisions of FEMA and would require the permission of the RBI, the defense raised by Unitech to resist enforcement was not valid. Although the Delhi High Court dismissed the plea of Unitech, the ball is now in the court of the RBI to issue permissions to remit funds pursuant to the arbitral award. If the Tata Docomo case is anything to go by, the RBI in the past has taken a strict stance in such matters. Concerned foreign investors will surely be observing the regulator to see how they respond.