FEMA Put Options: Foreign Award Enforcement and RBI Approval

Put Options, FEMA, and Foreign Arbitral Awards: The Evolving Law on Assured Returns, Enforcement, and RBI Approval

FEMA, Put Options and the Three-Stage Framework for Enforcement

Summary: Foreign investors have long relied on put options to structure exits from Indian investee companies, but the Foreign Exchange Management Act, 1999 (FEMA) restriction on “assured returns” has made these clauses a persistent litigation battleground. This article traces Indian jurisprudence from Vijay Karia (2020) through the Delhi High Court’s Cruz City and NTT DoCoMo decisions, the Bombay High Court’s Banyan Tree ruling, to the Supreme Court’s decisions in GPE (India) (2025), Nine Rivers Capital (2026), and Nagaraj V. Mylandla (2026). The central argument: these rulings do not create a blanket FEMA exemption for guaranteed returns. Instead, they decouple three distinct legal questions the regulatory pricing of the exit, the narrow public-policy grounds for refusing enforcement under Section 48 of the Arbitration and Conciliation Act, 1996, and the regulatory mechanics of foreign exchange remittance.

1. INTRODUCTION: THE THREE-GATE LEGAL FRAMEWORK

A put option in an investment agreement gives a foreign investor the right, but not the obligation, to sell its shares back to promoters or investee entities upon specified triggers, often calculated at a predetermined price or Internal Rate of Return (IRR). FEMA regulatory policy restricts assured equity returns: foreign direct investment (FDI) in equity is expected to bear normal commercial and market risks, whereas a contractually guaranteed exit return functions economically as debt.

When offshore arbitral tribunals award damages or specific performance for breach of these exit clauses, disputing parties frequently conflate distinct stages of legal review. To analyze cross-border put option disputes correctly, courts and practitioners evaluate the dispute through three sequential stages:

Gate 1: Regulatory Pricing & Structure

Does the contractual exit formula comply with FEMA and the Non-Debt Instruments Rules at the time of investment and exercise, or does it promise an impermissible assured return?

Gate 2: Arbitral Award Enforcement

If the arrangement breaches FEMA pricing guidelines, does enforcing a resulting foreign arbitral award violate the “fundamental policy of Indian law” under Section 48(2)(b) of the Arbitration and Conciliation Act, 1996? The narrow scope of the Section 48 public-policy defence has also been considered in TaxGuru’s discussion of Section 48 enforcement.

Gate 3: Execution & Remittance

Once an award is recognized as enforceable, what regulatory approvals or Authorized Dealer (AD) bank processes govern the actual transfer of funds or securities out of India?

The fundamental doctrinal thesis established across this body of case law is that a pricing non-compliance at Gate 1 does not automatically defeat enforcement at Gate 2, nor does an enforcement order at Gate 2 bypass the regulatory mechanisms of Gate 3.

2. PUT OPTIONS UNDER FEMA: OPTIONALITY AND THE PRICING FRAMEWORK

The regulatory treatment of optionality clauses evolved significantly in 2013. Following SEBI’s 3 October 2013 notification, the RBI amended FEMA 20 on 12 November 2013 to expressly recognize optionality clauses in FDI instruments, subject to the absence of an assured exit price and applicable conditions. Under the current Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules), foreign investors may hold equity instruments containing optionality clauses subject to statutory conditions:

• An exit by exercise of an optionality clause must comply with the applicable FEMA pricing framework and statutory minimum lock-in requirements, and cannot guarantee an assured exit price or fixed return.
• For transfers of equity instruments by a person resident outside India to a person resident in India, Rule 21(2)(c) requires compliance with the applicable pricing framework and provides that the non-resident investor cannot be guaranteed an assured exit price and must exit at the price prevailing at the time of exit. For unlisted Indian companies, the valuation framework generally requires fair value determined using an internationally accepted arm’s-length methodology, certified by a Chartered Accountant, a SEBI-registered Merchant Banker, or a practicing Cost Accountant; listed companies remain subject to applicable SEBI pricing guidelines.

The statutory bar against assured returns on foreign equity remains intact. What has evolved through case law is how courts treat the enforcement and remittance of foreign arbitral awards arising from contractual exit breaches.

3. VIJAY KARIA: CONTRAVENTION OF FEMA VS. FUNDAMENTAL POLICY

In Vijay Karia & Ors. v. Prysmian Cavi E Sistemi Srl & Ors., the Supreme Court held that a mere infraction of FEMA does not, without more, constitute a violation of the “fundamental policy of Indian law” under Section 48(2)(b) of the Arbitration and Conciliation Act, 1996.

The Court emphasized that enforcement of a foreign award can be resisted on public policy grounds only if it breaches the most basic notions of morality or justice, or violates core non-derogable legal principles. Because FEMA is primarily an exchange control statute aimed at managing foreign exchange reserves rather than protecting fundamental moral standards, non-compliance with exchange control regulations alone does not justify refusing enforcement under the New York Convention framework.

4. CRUZ CITY AND NTT DOCOMO: ENFORCEABILITY SEPARATED FROM REMITTANCE

The Delhi High Court applied this analytical separation in two foundational 2017 decisions:

• Cruz City 1 Mauritius Holdings v. Unitech Ltd.: The Court rejected a challenge to the enforcement of an award arising out of a put option default, ruling that a FEMA contravention does not by itself offend Indian public policy under Section 48, while noting that foreign exchange remittance remains subject to applicable regulatory provisions and permissions. TaxGuru has also discussed foreign arbitral award enforcement and the judicial approach to public policy.
• NTT DoCoMo Inc. v. Tata Sons Ltd.: The Court enforced an LCIA award of approximately USD 1.17 billion. The tribunal had awarded damages for Tata’s failure to perform its contractual obligation to find a buyer for DoCoMo’s shares at the higher of fair value or 50% of DoCoMo’s acquisition price. The Court held that the awarded sum constituted compensatory damages for breach of contract rather than share consideration governed by FEMA pricing caps.

5. BANYAN TREE: A PUT OPTION STRUCTURED WITHIN THE FEMA PRICING FRAMEWORK

In Banyan Tree Growth Capital L.L.C. v. Axiom Cordages Ltd. & Ors., the Bombay High Court independently examined the terms of a Put Option Deed against the applicable FEMA pricing framework.

The Court rejected the contention that the put option arrangement was void or guaranteed an impermissible return, observing that:

• The contractual put-option price was lower than the fair market value determined under the applicable FDI valuation methodology;
• The deed provided that the investor would receive only what was permissible under prevailing RBI pricing guidelines for remittance in foreign exchange; and
• Any balance could be dealt with separately within India.

In addressing the treatment of amounts that could not be freely repatriated without regulatory permission, the Court also considered the reasoning in IDBI Trusteeship Services Ltd. v. Hubtown Ltd. as relevant to the consequences of exchange restrictions and the distinction between contractual obligations and regulatory permissions, while recognizing that Hubtown was not itself an authority on the interpretation of the FEMA notifications applicable to the case. Banyan Tree established that an option anchored to and constrained by fair market value operates within the boundaries of FEMA.

6. GPE V. TWARIT: DAMAGES AND CURRENT-ACCOUNT TREATMENT

In GPE (India) Ltd. & Ors. v. Twarit Consultancy Services Pvt. Ltd. & Anr., foreign investors sought to enforce a SIAC award granting damages for breach of share purchase agreements entered into after default under a 24% IRR exit clause.

• Madras High Court: The High Court enforced the award under Vijay Karia, but ruled that the awarded damages represented consideration for shares, making the remittance a capital account transaction requiring prior RBI approval.
• Supreme Court: In SLP (C) No. 6856 of 2023, the RBI submitted an affidavit clarifying its regulatory position:
• • While the underlying 24% fixed IRR arrangement had breached FEMA pricing guidelines,
  • The RBI submitted that the compensatory damages awarded, in circumstances where no shares were transferred, constituted a Current Account Transaction under Section 5 of FEMA and therefore did not require prior RBI approval.
• The Supreme Court subsequently disposed of the appeal, recording that there was “no impediment in law” to enforcement.

Key Takeaway: The Supreme Court cleared the remedy (compensatory damages without equity transfer) based on the RBI’s specific regulatory characterization, rather than validating the underlying covenant (which the RBI explicitly maintained had violated FEMA pricing norms). The order should not be read as establishing a general rule that all monetary awards arising from put-option disputes are current-account transactions. TaxGuru’s subsequent discussion of FEMA, current-account transactions and the GPE decision also addresses this distinction.

7. NINE RIVERS V. GOKUL PATNAIK: ENFORCEMENT INVOLVING SHARE PURCHASES

Nine Rivers Capital Ltd. v. Gokul Patnaik & Anr. concerned a foreign award directing the judgment debtors (promoters/purchasers) jointly and severally to purchase an investor’s shares for approximately ₹132.9 crore pursuant to a 25% IRR put option.

The Delhi High Court held that:

• The Court treated the put option as arising upon specified contractual defaults and, in the circumstances of the case, distinguished the arrangement from an unconditional assured exit; and
• The requirement of RBI permission for the contemplated share transfer was treated as a regulatory and execution-stage issue rather than a ground for refusing enforcement of the foreign award under Section 48.

The Supreme Court dismissed the judgment debtors’ Special Leave Petition on 22 April 2026, leaving the High Court’s pro-enforcement decision undisturbed.

8. NAGARAJ V. MYLANDLA: TRANSNATIONAL ISSUE ESTOPPEL AND SHARE SURRENDER

In Nagaraj V. Mylandla v. PI Opportunities Fund-I & Ors., the Supreme Court addressed objections raised against the enforcement of an award granting damages, including objections concerning the subsequent surrender of shares. Unlike GPE, Nagaraj was not principally concerned with the FEMA classification of an exit payment; its significance for the present discussion lies in the Supreme Court’s treatment of enforcement-stage corporate law objections to an award involving share surrender and its recognition of transnational issue estoppel:

• Surrender vs. Buy-Back: The award-debtors argued that surrendering shares against damages amounted to an illegal share buy-back or capital reduction under Sections 66–68 of the Companies Act, 2013. The Supreme Court rejected the characterization of the arrangement as a company buy-back, noting that the award did not direct Financial Software and Systems Private Limited (FSSPL) to purchase its own shares and that, where the individual judgment debtors made the payment, the surrendered shares would accrue to those individuals rather than the company.
• Transnational Issue Estoppel: The Court held that transnational issue estoppel can bar re-litigation in India of issues conclusively determined by the supervisory court at the arbitral seat. Because the Singapore High Court (as seat court) had already considered and dismissed the statutory buy-back objection on its merits, the award-debtors were precluded from re-arguing the point as a Section 48 public policy objection in Indian enforcement proceedings.

9. DIAGNOSTIC MATRIX: LEGAL FRAMEWORK AT A GLANCE

10. Conclusion

The statutory prohibition under FEMA against assured returns on foreign equity remains active under the NDI Rules. However, Indian enforcement jurisprudence maintains a pragmatic distinction between exchange control regulations and the finality of foreign arbitral awards:

1. Regulatory pricing infractions do not, without more, render foreign arbitral awards unenforceable under the public policy defense of Section 48;

2. In GPE (India), pure compensatory damages without an accompanying equity transfer were treated by the RBI as a current-account transaction and therefore did not require prior RBI approval; and

3. Where a substantive issue has been conclusively determined by the supervisory court at the arbitral seat, transnational issue estoppel may prevent that issue from being re-litigated as a Section 48 objection in India.

For commercial parties and transactional counsel, the safest course remains structuring exit pricing within the applicable FEMA valuation and pricing framework at the time of drafting, rather than relying on downstream litigation to resolve regulatory non-compliance.

Cases Discussed

• Nagaraj V. Mylandla v. PI Opportunities Fund-I & Ors. (Supreme Court of India), Special Leave Petition (Civil) Nos. 31866–31868 and 31945–31947 of 2025, decided on 25 March 2026, 2026 INSC 298; 2026 SCC OnLine SC 1218
• Gokul Patnaik & Anr. v. Nine Rivers Capital Ltd. & Ors. (Supreme Court of India), Special Leave Petition (Civil) No. 21109 of 2025, order dated 22 April 2026
• GPE (India) Ltd. & Ors. v. Twarit Consultancy Services Pvt. Ltd. & Anr. (Supreme Court of India), Special Leave Petition (Civil) No. 6856 of 2023, order dated 26 August 2025
• Nine Rivers Capital Ltd. v. Gokul Patnaik & Anr. (Delhi High Court), O.M.P. (E.F.A.) (COMM.) No. 13 of 2019, decided on 2 May 2025, 2025 SCC OnLine Del 2898
• GPE (India) Ltd. & Ors. v. Twarit Consultancy Services Pvt. Ltd. & Anr. (Madras High Court), Arb. O.P. (Com. Div.) No. 88 of 2022, decided on 5 January 2023, 2023 SCC Online Mad 46
• Banyan Tree Growth Capital L.L.C. v. Axiom Cordages Ltd. & Ors. (Bombay High Court), Commercial Arbitration Petition Nos. 475 & 476 of 2019, decided on 30 April 2020, 2020 SCC Online Bom 781
• Vijay Karia & Ors. v. Prysmian Cavi E Sistemi Srl & Ors. (Supreme Court of India), Civil Appeal No. 1544 of 2020, decided on 13 February 2020, (2020) 11 SCC 1; 2020 SCC Online SC 177
• IDBI Trusteeship Services Ltd. v. Hubtown Ltd. (Supreme Court of India), Civil Appeal No. 10860 of 2016, decided on 15 November 2016, (2017) 1 SCC 568; 2016 SCC Online SC 1274
• Cruz City 1 Mauritius Holdings v. Unitech Ltd. (Delhi High Court), Execution Petition No. 131 of 2014, decided on 11 April 2017, (2017) 239 DLT 649; 2017 SCC Online Del 7810
• NTT DoCoMo Inc. v. Tata Sons Ltd. (Delhi High Court), O.M.P. (EFA) (COMM.) No. 7 of 2016, decided on 28 April 2017, (2017) 241 DLT 65; 2017 SCC Online Del 8078