2015 (5) TMI 940 - HC - Companies Law

Winding up application by Debenture Trustee - Failed to pay the amounts due to the Petitioner under the Deed of Corporate Guarantee - FDI In India in contravention of FDI policy / Fema regulations - Held that - From the afore-stated facts it appears that FMO a foreign entity wanted to invest a substantial sum by way of FDI in a slum rehabilitation project being undertaken in Mumbai by Rubix and an Industrial Park being undertaken by Amazia. The FDI Policy and the statutory FEMA Regulations (which incorporates the FDI Policy as a Schedule thereto) permit FDI in townships construction of houses only by way of equity investments (which is defined to also include debentures which are compulsorily required to be converted into equity CCDs). The FDI Policy and the FEMA Regulations prohibit any other form of investment (non equity) in the said sector with an assured return/rate of return. However FMO was interested in an investment which would ensure an assured fixed return to it. Since this was not permissible under the FEMA Regulations/FDI Policy the investment structure was devised/adopted. The conduct of FMO in routing its FDI nominally through Vinca to Amazia and Rubix against issuance by them of OPCDs and the amendments/provisions made in Vinca s Articles of Association establishes that FMO was fully aware that it could not under the FDI Policy and FEMA Regulations directly invest in the OPCDs or require that its FDI amount/investment be returned back to it with a fixed rate of return after a stipulated period i.e. without bearing an equity investment risk. The complex structure devised for FMO s FDI investment establishes that all parties (including FMO) were aware that the transaction which was premised on return back of the FDI amount along with a fixed rate of return thereon was not permissible under/in violation of the FDI Policy and the FEMA Regulations. It is clear that in claiming the amount and initiating the present proceedings the Petitioner is acting at the instance of FMO/FMO nominees on the Board of Directors of Vinca. This is the stipulation in Vinca s articles and under the DTD. In any event inasmuch as the transaction (based on return of the FDI/principal amount invested along with a fixed rate of return thereon) is not permissible/prohibited under the FDI Policy and the FEMA Regulations neither IDBI nor FMO can seek the assistance of the Court to effectuate/implement/enforce such a prohibited/illegal transaction. The aforesaid facts prima facie support the contention of the Company that the factual matrix and the transaction documents establish that the transaction of routing the FDI through the newly interposed Vinca was a colourable device and was structured to enable FMO to secure repayment of its FDI amount (Rs. 418 crores) and a rate return of 14.5% per annum thereon contrary to the FDI Policy and the statutory FEMA Regulations and in any event the transaction is illegal and prohibited by law is unenforceable and consequently the Bank Guarantee issued by Vinca being part of the said structure is also unenforceable. The FMO is as much a party to the aforestated colourable device/structure designed as the Respondent Company. In my view the Company has raised a dispute which requires adjudication on further evidence in a properly constituted Suit. - Decided against the appellant.

Summary

Issues Involved:
1. Whether the Respondent Company is deemed unable to pay its debts.
2. Validity of the investment structure involving FMO, Vinca, Amazia, and Rubix.
3. Compliance with FDI Policy and FEMA Regulations.
4. Enforceability of the Corporate Guarantee issued by the Respondent Company.
5. Alleged illegality and public policy concerns.

Detailed Analysis:

1. Whether the Respondent Company is deemed unable to pay its debts:
The Petitioner, IDBI Trusteeship Services Ltd., sought winding up of the Respondent Company, Hubtown Ltd., on the ground that the Company is unable to pay its debts. The Petitioner issued notices of default to Amazia and Rubix and subsequently invoked the Corporate Guarantee issued by the Respondent Company. The Respondent Company raised several defenses, arguing that the Guarantee and the Trusteeship of IDBI had been discharged/terminated. However, the court found no substance in these defenses and proceeded to examine the main contentions.

2. Validity of the investment structure involving FMO, Vinca, Amazia, and Rubix:
The investment structure was designed to route FMO's FDI through Vinca to Amazia and Rubix. The court found that Vinca was interposed as a nominal recipient of the FDI, and the real recipients were Amazia and Rubix. The structure was deemed a colorable device to enable FMO to secure a fixed return on its investment, which is not permissible under the FEMA Regulations/FDI Policy. The court held that the structure was an attempt to bypass/circumvent the restrictions imposed by the FDI Policy and FEMA Regulations.

3. Compliance with FDI Policy and FEMA Regulations:
The court examined the FDI Policy and FEMA Regulations, which permit FDI in townships and construction of houses only by way of equity investments, including compulsorily convertible debentures (CCDs). The policy prohibits any other form of investment with an assured return. The court found that the investment structure, which involved routing FMO's FDI through Vinca to Amazia and Rubix against issuance of optionally convertible debentures (OPCDs) with a fixed return, was in violation of the FDI Policy and FEMA Regulations.

4. Enforceability of the Corporate Guarantee issued by the Respondent Company:
The court held that the Corporate Guarantee, though ostensibly in favor of Vinca/IDBI Trusteeship Services, was actually to ensure that FMO received its investment back with interest. Since the structure was designed to circumvent the FDI Policy and FEMA Regulations, the Guarantee was part of the illegal structure and was therefore unenforceable.

5. Alleged illegality and public policy concerns:
The court relied on the principles laid down in the Vodafone International Holdings BV vs. Union of India and Renusagar Power Co. Ltd. vs. General Electric Co. cases, holding that the structure was a colorable device designed to achieve what the law prohibits. The court emphasized that allowing the Petitioner to enforce the Guarantee would be inconsistent with public interest and contrary to the public policy of India.

Conclusion:
The court dismissed the Company Petition, holding that the investment structure was a colorable device to circumvent the FDI Policy and FEMA Regulations. The Corporate Guarantee was deemed unenforceable as it was part of the illegal structure. The court's observations were prima facie and not made upon a detailed adjudication of the disputes raised between the parties.