Assured Return In FDI: Blurring The Line Between Equity And Debt Vis-À-Vis The Docomo Case
Garima Gupta, Advocate at Bilaspur High Court, Chhattisgarh
Harsh Choubey, Advocate at Bilaspur High Court, Chhattisgarh
ABSTRACT
Foreign Direct Investment (FDI) into India frequently incorporates "assured return" exit clauses within Shareholders' Agreements to mitigate investor risk. These arrangements are governed by Indian foreign exchange regulations, specifically the Foreign Exchange Management Act, 1999 (FEMA) and the Non-Debt Instruments (NDI) Rules, 2019. However, a fundamental conflict exists between these contractual exit options and regulatory mandates: Indian laws strictly prohibit guaranteed exit pricing to prevent foreign investors from disguising debt-like instruments as risk-free equity. Consequently, when an exit is triggered due to underperformance, the guaranteed put option clashes with FEMA valuation rules, which bar share sales below fair market value at the time of exit.
Centered on the landmark NTT Docomo v. Tata Teleservices case, this article examines how the Indian judiciary resolved this conflict by upholding a $1.17 billion arbitral award. By framing the enforcement of an otherwise impermissible pricing clause as a judicial claim for damages arising from a contractual breach, Indian courts effectively navigated rigid FEMA pricing restrictions to prioritize commercial reliability and international investor protection.
