One of the quintessential features of an arbitration friendly jurisdiction is a robust award enforcement mechanism. Often such enforcement mechanisms are determined by the interpretation of ‘public policy’ of each jurisdiction. In India, the trajectory of public policy has witnessed dramatic advancements, resulting in a much narrower scope and ambit of interpretation. Consequently, Indian courts have adopted a pro-enforcement stance and this pattern can be observed even in the arbitral awards that have been passed in disputes relating to exchange control laws and securities regulations.
On November 10, 2021, a single bench of the Calcutta High Court passed an order in EIG (Mauritius) Limited vs McNally Bharat Engineering Company Limited, providing for enforcement of a foreign award in relation to a dispute concerning exercise of put option as an exit route under the shareholders’ agreement, rendered by an arbitral tribunal constituted under the aegis of International Chamber of Commerce (“ICC”). This article discusses the contours of the Calcutta High Court decision by recapitulating the cause of action of the dispute, the resultant arbitration award and the controversy arising before the Calcutta High Court. Thereafter, the findings of the Calcutta High Court, in affirming the award, have been deconstructed in light of the precedential standards on the issue, followed by an analysis of the jurisprudential and practical implications of the decision.
II. Contextual Background
EIG Mauritius (“Petitioner”) and McNally Bharat Engineering Company Limited (“Respondent”), had entered into a Shareholder’s Agreement (“SHA”) that provided for transfer of shareholding of a wholly-owned subsidiary of the Respondent i.e. McNally Sayaji Engineering Limited (“MSEL”) to the Petitioner. The SHA listed a cascading set of exit mechanisms for the Petitioner. The Respondent was required to list the shares of MSEL on a stock exchange or provide for public issue of shares. On failure to effect such a listing, the SHA also provided the Petitioner to exercise a put option and required the Respondent to arrange for a third party to purchase portion of shares held by the Petitioner.
When MSEL shares failed to get listed or issued publicly, the Petitioner exercised the put option envisaged under the SHA. However, the Respondent took the stand that the put option could not be enforced since it ran contrary to the Foreign Exchange Management Act, 1999 (“FEMA”), and the Securities Contract Regulation Act, 1956 (“SCRA”).
The arbitral tribunal by majority (with one dissenting opinion) held that the exit mechanisms under the SHA did not contravene the provisions of either FEMA or SCRA and directed the Respondent to pay damages amounting to INR 1,14,01,90,000/- (Rupees One Hundred Fourteen Crores and One Lakh Ninety Thousand Only) to the Petitioner (“Arbitral Award”). The Petitioner approached the Calcutta High Court praying for enforcement of the Arbitral Award, whereas the Respondent contested that the enforcement of the Arbitral Award would be contrary to the fundamental policy of India and, hence, unenforceable under Section 48(2)(b) of the Arbitration and Conciliation Act, 1996 (the “Arbitration Act” or “Act”). In determining the enforceability of the Arbitral Award, the Calcutta High Court was required to determine firstly, the nature of enquiry permitted under Section 48(2)(b) of the Arbitration Act and secondly, the conflict of the Arbitral Award with the FEMA and SCRA provisions.
III. Judicial Analysis
A. Nature of inquiry permitted under Section 48(2)(b) of the Arbitration Act
- High threshold under Section 48 vis-à-vis Section 34 of the Arbitration Act:
The Calcutta High Court reiterated that the party seeking to resist enforcement of an award under Section 48 of the Act must meet a higher threshold as compared to Section 34 of the Act, even though the grounds under the two sections are predominantly similar. This is because the ground of patent illegality appearing on the face of an award envisaged under Section 34(2A) is absent from the host of grounds available under Section 48 of the Act. Furthermore, Section 48 also requires that the proof of existence of conditions meets the tests of unenforceability.
- Violation of Statutory Provision does not amount to Breach of Fundamental Policy of Indian Law:
The Calcutta High Court expounded that contravention of fundamental policy of India must lead to violation of most basic principles of Indian law or notions of justice that form the substratum of the laws of the country. Accordingly, it was stated that mere violation of a statutory provision of law does not amount to breach of fundamental policy of India. For this reasoning, the Calcutta High Court placed reliance on the landmark decision of the Supreme Court in Renusagar Power Co. Ltd. vs. General Electric Co.,, wherein it was held that something more than contravention of law is required to attract the bar of public policy under the Act. This view has been recently affirmed by the Delhi High Court and the Supreme Court and was referenced by the Calcutta High Court.
B. Conflict of the Arbitral Award with SCRA and FEMA provisions
- FEMA and SCRA provisions are not violated:
At the outset, the Calcutta High Court clarified that due to Explanation 2 to Section 48(2)(b) of the Act, the statutory intent is to curtail inquiry on the merits of dispute in considering violation of the fundamental policy of Indian law. The Calcutta High Court went a step ahead and affirmed the reasoning of the arbitral tribunal that FEMA and SCRA provisions are not violated due to exercise of put option.
The arbitral tribunal had examined the definition of ‘Spot Delivery Contract’ under the SCRA, judicial precedent on the issue, and relevant clauses of the SHA to conclude that the exercise of put option under the SHA was principally on spot delivery basis and did not violate the provisions of SCRA. Similarly, in considering the provisions under FEMA, the arbitral tribunal relied on the decision of the Delhi High Court in holding that the option available to the Respondent in procuring a non-resident purchaser for the shares of the Petitioner would not contravene FEMA as it would not apply to a non-resident third party purchaser. The Calcutta High Court stated that the findings of the arbitral tribunal were in line with the commercial purpose of the transaction and the intention of the parties at the time of execution of the SHA. By according due weightage to the interdict contained in Explanation 2 to Section 48(2)(b) of the Act, the Calcutta High Court observed that Arbitral Award contained a comprehensive analysis on each submission of the parties, therefore, the same must not be interfered with.
- FEMA does not constitute the fundamental policy of Indian law
Arguendo, the Calcutta High Court held that FEMA does not form a part of the fundamental policy of India and even violation of FEMA would not render the award unenforceable. The Calcutta High Court relied upon a series of judgments to arrive at this conclusion.
IV. Concluding Comments
The present decision of the Calcutta High Court has cemented the position of the Indian courts that breach of FEMA provisions does not tantamount to violation of fundamental policy of Indian law under Section 48(2)(b) of the Act. However, the Calcutta High Court has not explicitly concerned itself with the question whether the SCRA/ securities law constitutes the fundamental policy of the nation, and if violation of such law could ipso facto contravene the fundamental policy of India. However, given the pro-enforcement approach of the courts and the willingness of the judiciary to adopt a hassle-free and uncontroversial stance on exit routes, including call and put options, breach of securities regulations may not be elevated to violation of fundamental policy of Indian law. Nevertheless, a clear dictum of the Calcutta High Court in this regard would have gone a long way in nuancing the ever in flux principles of public policy of India.
Optimistically, an undertone of a pro-investment outlook of the judiciary can be observed. Not only has the Calcutta High Court resoundingly affirmed the findings of the arbitral tribunal, it has gone a step ahead and provided an uncomplicated lens to the present dispute by viewing the Arbitral Award as a simpliciter money award, which does not provide for enforcement of a put option, but rather it provides for damages to the Petitioner due to breach of obligations by the Respondent and MSEL under the SHA. Furthering the existing position, the decision provides significant authority to litigants in terms of procedural aspects under the Act wherein the Calcutta High Court has held that once an award is considered as a decree of court under Section 49 of the Act, no separate execution proceedings are required thereafter.
It must be noted that while the Calcutta High Court acknowledged its limited power to review the merits owing to Explanation 2 to Section 48(2)(b) of the Act, and undertook limited examination of the position adopted by the arbitral tribunal, it has nonetheless looked at the findings of the arbitral tribunal and affirmed them in light of the commercial intention of the parties at the time of entering the SHA. A question arises that even if the courts are not overruling the findings of the arbitral tribunals, should they delve into the reasonings of the arbitral tribunals and subsequently provide a conclusion as to the correctness of the findings? The standard on exactly how much the courts should re-examine the position of the arbitral tribunal when determining a public policy ground is indeed grey.
The Special Leave Petitions filed against the decision of the Calcutta High Court have been dismissed by the Supreme Court. Accordingly, the decision of the Calcutta High Court and the observations laid therein stand affirmed as law on the subject-matter.
 2021 SCC OnLine Cal 2915
 1994 Supp (1) SCC 644
 Cruz City 1 Mauritius Holdings vs. Unitech Limited, 2017 SCC Online Del 7810
 Vijay Karia vs. Prysmian Cavi E Sistemi SRL, (2020) 11 SCC 1
 Section 2(i), Securities Contract Regulation Act, 1956
 Edelweiss Financial Services Ltd. vs. Percept Finserve Pvt. Ltd , (2019) SCC OnLine Bom 732
 NTT Docomo Inc. vs. Tata Sons Ltd, (2017) SCC Online Del 8078
 Supra, note 3; Supra, note 4; Banyan Tree Growth Capital LLC vs. Axiom Cordages Limited, (2020) SCC Online Bom 781
 Supra, note 8.
 LMJ International Limited. vs. Sleepwell Industries Company Limited, (2019) 5 SCC 302
 McNally Bharat Engineering Company Limited vs EIG (Mauritius) Limited, SLP(C) Nos. 20484-20485/2021