Monday, 14 December 2015

Whether court can grant leave to defend to defendant if there is fraud on part of plaintiff?

Further the question of the  Defendant not being allowed to  plead its own
wrong also does not arise in the facts of the present case.   Through the present
Petition, the Plaintiff (who is admittedly acting at the instance   of FMO/FMO's
nominees) is in effect seeking the assistance of this Court to enable/enforce recovery
by FMO of its FDI amount and interest thereon (through Vinca), contrary to the
provisions of the FEMA Regulations and FDI policy embodied therein. As has been
held   by   the   Hon'ble   Supreme   Court   in   the   case   of   Immami   Appa   Rao   vs.   G.
Ramalingamurthi (supra), the  Plaintiff who wants orders in his favour, is actually
seeking     the   active   assistance   of   the   Court   to   achieve   what   the   law

prohibits/declares   illegal    and that  is clearly  and  patently  inconsistent  with
public interest.    Moreover, as has been held by the Supreme Court in the above
case, in such a case there can   be no question of estoppel     and  the paramount
consideration of public interest  requires  that the plea be allowed to be raised and
tried.

IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
SUMMONS FOR JUDGMENT NO.39 OF 2013
IN
SUMMARY SUIT  NO.  520  OF 2013
IDBI Trusteeship Services Ltd.  ...Plaintiff
     vs.
Hubtown Ltd.  ...Defendant

                    
                   CORAM:    S.J. KATHAWALLA, J.
             
           Judgment     pronounced on:   8th May, 2015


1. The Plaintiff – IDBI Trusteeship Services Limited has filed the above Summary
Suit for recovery of   a sum of Rs. 532,11,29,364.05 (Rupees Five hundred   and
thirty two crores  eleven lacs twenty nine thousand  three hundred sixty four and
five paise only) with interest   at the rate of 14.75% till the date of actual payment
or realization as prayed for in prayer clause (a) of the suit.  In the above Summary
Suit, the Plaintiff has taken out the above Summons for Judgment praying that
judgment be entered  for the Plaintiff in the above Suit against  the Defendant for
the sum set out hereinabove along with interest. 
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2. The facts in the matter are briefly set out hereunder:
3.  The Plaintiff is a Company incorporated under the Companies Act, 1956 and
is   a   Debenture   Trustee   of   the   debentures   issued   to   Vinca   Developers   Pvt.   Ltd.
(“Vinca”)  by Amazia  Developers Pvt. Ltd. (“Amazia”)  and Rubix Trading Pvt. Ltd.
(“Rubix”).   Amazia   and   Rubix     are   wholly   owned   subsidiaries   of   Vinca.     The
Defendant and its individual promoters collectively own 90 per cent shareholding in
Vinca.  
4. Nederlandse   Financierings   –   Maatschappiji   Voor   Ontwikkelingslanden   N.V.
(“FMO”)  is a Corporation constituted under the Laws of Netherlands. FMO holds 10
per cent   shareholding   in Vinca.     FMO also holds 3 Compulsorily Convertible
Debentures (CCDs) issued by Vinca. The said three CCDs are convertible within a
period of 60 months from December 2009.  Upon such conversion,  FMO will hold
90% shareholding in Vinca.     
5. The investment made by FMO in Vinca  in the form of three CCDs  was used
by   Vinca   to   purchase   Optionally   Convertible   Debentures   (“OPCDs)     issued   by
Amazia   and   Rubix.       In   respect   of   the   OPCDs,   a   Debenture   Subscription   and
Debenture Trust cum Mortgage Deed was executed  on 1st December 2009 between
Amazia, the Defendant and the Plaintiff.  Similarly in respect of the OPCDs issued by
Rubix, a Debenture Subscription and Debenture Trust cum Mortgage Deed dated 1st
December 2009 was executed between Rubix, the Defendant and the Plaintiff as
amended   by   OPCD   Amendment   Agreement   dated   8th  September   2010.     The
aforesaid deeds  shall hereinafter be collectively referred to as “the Debenture Trust
Deeds”(DTDs).       In respect of the liability arising under OPCDs, the Defendant
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executed a Deed of Corporate Guarantee dated 9th December 2009 in favour of the
Plaintiff (the said guarantee). 
6. Under the Articles of Association of  Vinca, the Defendant can nominate two
Directors  and two alternate Directors of Vinca. The Promoters of the Defendant viz.
Hemant Shah and Vyomesh Shah can nominate two Directors and two alternate
Directors of Vinca.     Under the Articles of Association of Vinca, these Directors
nominated by the Defendant and the Promoters of the Defendant are called ACL
Directors.   Under the Articles  of Association of  Vinca, FMO has a right to nominate
two Directors (being the nominee Directors) and two alternate Directors of Vinca.  
7.  According to the Articles of Association of Vinca, ACL Directors are deemed
to be  interested Directors in relation to all matters pertaining to OPCD documents
which include inter alia the guarantee as also the DTDs.  Article 2 (uu) lists out the
various   reserved   matters   and   Article   63   mandates   that   no   decision,   action   or
omission by the management of Vinca  pertaining to the reserved matters  shall be
taken without the consent of Vinca's Board and such consent shall require the
affirmative approval of the nominee Directors on the Board of Vinca. Further any
decision taken without such affirmative approval is null and void.  
8. From 2nd  May 2012, the Plaintiff issued notices of default to Amazia and
Rubix  in respect of the liability under the respective OPCDs issued by Amazia and
Rubix.   On 27th June 2012, the Plaintiff issued notices of redemption calling upon
Amazia and Rubix to fully redeem all the OPCDs at par value.   On 3rd August 2012,
the Plaintiff issued a demand certificate to the Defendant invoking  the guarantee
issued by the Defendant in favour of the Plaintiff on account of the failure of Amazia
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and Rubix to redeem the OPCDs.  On 6th August 2012, a letter was issued on behalf
of Vinca, purportedly terminating the appointment of the Plaintiff as Trustee under
the DTDs.  The Plaintiff on 14th August 2012 sent a reply that Vinca was not entitled
to terminate the Plaintiff as a Trustee since the said  decision could not be taken by
the Directors nominated by the Defendant and its promoters on the Board of Vinca
and in any event the said decision could not be taken without affirmative decision of
the nominee  Directors of FMO and the nominee Directors of FMO had  not given
affirmative vote for termination of Trusteeship of the Plaintiff. 
9. On 19th  December 2012, Vinca wrote to the Plaintiff purportedly discharging
the guarantee. The Plaintiff by its reply dated 26th  December 2012 addressed   to
Vinca  recorded that the purported discharge  of guarantee by Vinca was invalid  and
inoperative.   
10. On 3rd January 2013, the Plaintiff through its Advocates issued a notice to the
Defendant under the provisions of Section  433 (e) read with Section 434 (1) (a) of
the Companies Act, 1956. The Defendant by its reply dated 22nd  January, 2013
raised several defences and refused to make payment to the Plaintiff. The Plaintiff
through its Advocates letter dated 18th  April, 2013, has denied and disputed the
contentions raised by the Defendant in its reply letter dated 22nd January 2013.   
11. The Plaintiff   filed the above Summary Suit on 16th  May, 2013 against the
defendant for recovery of dues under the said Guarantee. Prior to the filing of the
Suit, the Plaintiff on 10th May, 2013 filed Company Petition No. 644 of 2013  seeking
winding up of the  Defendant on the ground that the Defendant has failed to comply
with the statutory notice to pay the amount under the guarantee.  On 12th February
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2014, the Plaintiff filed Summary Suit No. 480 of 2014 for recovery  of the back end
coupon dues payable under the said guarantee which amount was not included in
the above Summary Suit. 
12. The Defendant has filed its affidavit in the Summons for Judgment raising
several contentions. The Plaintiff too has filed affidavits dealing with the contentions
raised by the Defendant. 
13. An additional affidavit is filed on behalf of the Plaintiff dated 4th July 2014 in
Company Petition No. 644 of 2013 bringing on record the following facts: 
(a) The Board  of Directors of Vinca issued an agenda for holding a meeting of its
Board on 3rd July 2014 inter alia for the following purposes:
(i) to     consider   amendment   to   Article   2   (uu)   (I)   under   the   heading
“Reserved Matters”;
(ii) to   approve   convening   of   EGM   of   Vinca   to   alter   the   Articles   of
Association;
(iii) to consider and approve modification of the terms and conditions of
the OPCDs by fully converting OPCDs into equity shares;
(iv) to consider and approve modification of the terms and conditions of
OPCDs issued by Amazia and Rubix by fully converting OPCDs into equity
shares. 
(v) to consider and approve and direct the Directors of  Amazia and Rubix
to convene its Board Meeting and General Meeting in connection with the
decision taken by the Board of Directors of Vinca and to take all necessary
steps to implement the same. 
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(b) In view thereof, FMO filed Suit being Suit (L) No. 626 of 2014 against Vinca
and   others   challenging   the   said   agenda   and   seeking   injunction   restraining   the
Defendants   therein   from   passing   the   resolutions   and/or   implementing   the   said
resolutions, acting on the basis of the said resolutions. 
(c ) An ad­interim order dated  2nd July 2014 was passed in the Notice of Motion
in the said Suit whereby the statement of the Defendants is recorded that pending
further orders the Defendants will not act on the resolutions passed in the meeting of
Vinca held on 3rd July 2014. 
(d) The Nominee Directors  of FMO  attended the meeting and participated in the
meeting  through  video  conferencing  and  though   the   majority directors  were   in
favour of the resolution, the nominee Directors of FMO opposed the same. 
(e) Thought the resolutions as proposed were passed, in view of the statement
made, the said resolutions have not been implemented pending further orders in the
said Notice of Motion. 
14. Dr.   Tulzapurkar,   the   Learned   Senior   Advocate   appearing   for   the   Plaintiff
submitted that the Defendant has failed to pay the amounts due to the Plaintiff
under the Deed of Corporate Guarantee dated 9th  December 2009. The defences
raised by the Defendant are mere moonshine. They are not bona fide and the claim
of the Plaintiff cannot be disputed.  Dr. Tulzapurkar submitted that the contentions
raised by the Defendant in the Affidavits are totally unsustainable and without any
merit whatsoever.  
15.  Mr. Dwarkadas, the Learned Senior Advocate appearing for the Company has
taken me through clauses 1.1.2, 2.1.5, 2.1.11, 3.2.1, 3.3.1, 3.3.2, 6.1, 6.2, 6.2.11,
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6.2.11.1 and 6.2.11.2 of the Foreign Direct Investment (FDI) Policy and clauses  2
(ii), 3, 4 , 5, along with Schedule ­I  and Annexures A and B  to the said Schedule  of
the FEMA Regulations and also the  Reserve Bank of India (RBI)  Circular No. 86
dated  9th January, 2014  in support of his contention that the FDI policy and the
statutory FEMA Regulations (which incorporate the FDI Policy as a schedule thereto)
permit FDI   in townships, construction of houses, only by way of equity and do not
permit any other form of investment  or the giving of a fixed rate of return in the
said sector and that the said Circular demonstrates that the assured rate of return is
not permissible in FDI. Mr. Dwarkadas also took me through the Share Subscription
Agreement (“SSA”) and the DTDs, the Articles of Vinca,  in support of his contention
that if the entire transaction is looked into  as a whole, it is clear that the same was
a colourable and  artificially structured transaction, the object and purpose of which
was to enable FMO to secure a fixed rate of return on its FDI investments in
townships/construction   of   housing,   notwithstanding   the   FEMA   Regulations/FDI
policy,   which permit only an equity investment without any fixed/agreed rate of
return in the said sector. Mr. Dwarkadas submitted that the said  Guarantee  was an
integral part of this artificial and illegal structure and therefore not enforceable in
law.    
16. Since   according   to   the   Defendant,   the   above   submission     is   their   main
submission in the present matter, the same is elaborated as follows: 
16.1   That the FDI Policy and the statutory FEMA Regulations (which incorporate
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
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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. 
16.2    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/owned  by Amazia.   FMO  was  however  only
willing to invest in  the said projects on the basis of an assured /fixed return, which
was and is not permissible under the FEMA Regulations/FDI Policy.  To enable FMO
to bypass/circumvent the said FEMA/FDI prohibitions and get a fixed return of
14.5% per annum on its investment of Rs. 418 crores, the investment structure  (i.e.
investment   by way of CCDs in Vinca   and Vinca purporting to invest the said
amounts in OPCDs of Amazia and Rubix) was devised/adopted as follows:  
i) Vinca was interposed as the Holding Company of   Amazia and Rubix and
Vinca was the nominal recipient of the FDI of Rs. 418 crores from FMO by way of
equity   investment   and   CCDs   (in     apparent   compliance   with   the   FDI/FEMA
Regulations). 
ii) The documents executed for the FDI investment (Subscription Agreement and
Debenture Trust Deed annexed as Schedule 13 thereto), however establish that the
FDI received from FMO, was not intended  for/could not be used by Vinca for any
project   of   its   own   but   was   specifically   required   to   be   immediately   invested
by/through Vinca in OPCDs of Rubix & Amazia, bearing a fixed rate of return of
13.5%. 
iii) Under the FEMA/FDI regulations/policy FMO could not have invested the
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said amounts in Amazia and Rubix through OPCDs bearing a fixed rate of return. By
interposing Vinca (an Indian Company) the amounts   received from FMO were
invested in OPCDs of Amazia and Rubix bearing the fixed 14.5% rate of return. 
iv) At the same time it was provided  (a) that on conversion of the CCDs FMO
would own 99% of the equity of Vinca and further that (b) the Articles of Vinca
were amended to provide that any decision regarding the OPCDs/investment could
only be taken by FMO nominees on the Board of Vinca. (c ) the DTDs for the Amazia
and Rubix  OPCDs provided that the Debenture Trustee/the Plaintiff would only act
on the instructions of the Nominee Directors of FMO. 
v) Accordingly   though   Vinca   was   an   “Indian   Company”   and   the   nominal
recipient of the FDI, the transaction was so structured that:
(a) the FDI amount would be immediately routed by Vinca to Amazia & Rubix
against issue by them of OPCDs bearing a return of 14.5%.
(b) FMO/its Nominee Directors could exclusively deal with the OPCDs and the
Debenture Trustee/IDBI. 
(c ) after receipt by Vinca of the fixed rate of return (14.5 per cent per annum)
from Amazia and Rubix under the OPCDs, FMO would on conversion of the CCDs,
become the owner of   Vinca and thereby receive/become entitled to the amounts
received by  Vinca by way of the fixed rate of return from Amazia and Rubix. 
vi) The   Deed   of   Guarantee     was     contemporaneously   executed   by   the
Respondents on 9th December, 2009 in  favour of the Debenture Trustee(the Plaintiff
herein)   for   securing  the  “due   and   punctual   payment”   of  the  principal   and  the
interest   by   Amazia   and   Rubix   to   Vinca,   actually   to   FMO   and   was   part   of   the
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structure devised to ensure the receipt by FMO at the fixed rate of return of 14.5%.
16.3 That, if the entire transaction is looked at as a whole, it is clear that the
interposing of  Vinca as the nominal recipient of the FDI (against issuance of equity
shares and CCDs) was a colourable  and artificially structured transaction, the object
and purpose of which was to enable FMO to secure a fixed rate of return on its FDI
investments   in   townships/construction   of   housing,   notwithstanding   the   FEMA
Regulations/FDI   Policy   which   permit   only   an   equity   investment   without   any
fixed/agreed rate of return in the said sector.   The said structure was and is not
lawful and was and is opposed to public policy as it was designed to defeat and
would defeat the provisions of law, the FEMA Regulations read with the FDI Policy.
16.4  That, the present  Suit has been filed to effectuate the said illegal object of
securing the said fixed rate of return for FMO. Although IDBI ,the Plaintiff, claims to
be nominally acting on behalf of  Vinca, it is in fact admittedly acting only at the
instance of FMO/FMO's Nominee Directors on the Board of  Vinca.  FMO through its
Nominee Directors on the Board of  Vinca has instructed IDBI to demand the said
sums (principal and agreed rate of return) from Amazia and Rubix and has further
instructed/required IDBI to invoke the said Guarantee and file the present Petition.
This is apparent from the correspondence annexed as Exhibits­C to V to the Petition. 
16.5 That, in the Plaintiff's Affidavit­in­Rejoinder filed in Company Petition
No. 644   of 2013, the Plaintiff (Petitioner therein) admits that it has made its
claim /demand  and initiated proceedings at the instance of FMO/FMO's Nominee
Directors (Refer para 10 (xv) page 14). In para  10 (x) the Plaintiff  deals with the
issue of violation of the FEMA Regulations and has only submitted that FEMA is not
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applicable to the Guarantee  “since  it has been issued by an Indian entity in favour
of another Indian entity”. In paras 10 (xi), (xii) and (xiii) pages 11 and 12, the
Plaintiff   has   merely   denied   that,   “FMO   or   the   Plaintiffs   have   in   any   manner
breached their obligations under the Indian Exchange Control Regulations, the FDI
policy, or any other applicable law.” The Plaintiff has also submitted that, (i) the
Company is estopped from raising this contention and (ii) that the said defence
“lacks commercial morality”.
16.6      That, by the present suit, the Plaintiff, acting at the instance of FMO, is
seeking to utilise the process of this Court to secure  for FMO a 14.5 per cent fixed
rate   of   return     on   its   FDI   investment,   contrary   to   the     statutory
stipulation/prohibition   contained   in   the   FEMA   Regulations   (which
incorporate/embody   the   FDI   Policy),   which   require   FDI   in
townships/housing/construction development projects to be made only by equity
participation(including   compulsorily   convertible   debentures)   and
prohibits/precludes any assured return/rate of return.   It is submitted that this
would be contrary to law, public policy and public interest. 
17. Relying on the decision of the Hon'ble Supreme Court of India in the  case of
Vodafone International Holdings BV vs. Union of India1
, Mr. Dwarkadas submitted that
whilst ascertaining the legal nature of the transaction, it is the task of the Court to
look at the entire transaction as a whole and not to adopt a dissecting approach.  Mr.
Dwarkadas submitted that  if unconditional leave is not granted to the Defendant  to
defend the above suit the same  would amount to actively assisting  the   Plaintiff
1 (2012) 70 Com Cases 369
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to give effect to   the fraud   to which the Plaintiff was a party.   Relying on the
decision of the Hon'ble Supreme Court in the case of Renusagar Power Co. Ltd. vs.
General Electric Company2
,  Mr. Dwarkadas   that the provisions contained in FERA
have been enacted  to safeguard the economic interests of India and any violation of
the said provisions would be contrary to the public policy of India.
18. Apart from the above main submission  the Defendant has also submitted as
follows:  
(i) Relying upon  (a) Chapter 3, paragraphs 3.10, 3.10.1 and 3.10.2 of the FDI
Policy,(b) Chapter 4, paragraphs 4.1.1, 4.1.2 and 4.1.3 of the FDI policy, and (c )
Chapter 6, paragraph 6.2, 6.2.11 of the FDI Policy, it is submitted that an Indian
Company, which has received   foreign   direct investment, can employ its funds
downstream viz. moving funds into its subsidiaries only by making investments in
the form of Equity Capital or compulsorily and mandatorily convertible preference
shares or debentures. Vinca therefore could only have subscribed for   convertible
debentures of Amazia and Rubix and consequently, Vinca's  investment in Amazia
and Rubix  in the form of OPCDs does not satisfy the definition of capital in clause
2.1.5 and is in clear violation of the FDI policy for downstream investments made by
an Indian Company in which there is any foreign investment.
(ii) That investment by an Indian Company in OPCDs issued by its subsidiary
(also   an Indian Company) would amount to an external commercial borrowing.
Therefore  Vinca's investment in OPCDs issued by Amazia and Rubix   in real estate
sector is forbidden by the ECB guidelines. 
2AIR 1994 SC 860
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(iii) That the Plaintiff is nothing but a puppet  of the FMO and is required to act
only on the instructions of the Nominee Directors of FMO;
(iv)   That   the   guarantee   issued   by   Vinca   has   been   discharged   and   that   the
appointment of the Plaintiff as Debenture Trustee has been terminated;
(v)   That Vinca, Amazia and Rubix  are the alter egos of FMO;
(vi)  That even if the doctrine of  pari delicto   may not apply to the parties to the
impugned transaction, the   Defendant is entitled to rely upon the provisions of
Section   23 of the Contract Act which are clearly applicable to the facts of the
present case and which render the corporate guarantee cum   mortgage void and
unenforceable;
(vii) That in view of the decisions   of the Hon'ble Supreme Court in  Mechelec
Engineers and Manu vs. Basic Equipment Corporation3
 and Sunil Enterprises & Anr. vs.
SBI   Commercial   and   International   Bank   Ltd.4
  the   Defendant   is   entitled   to
unconditional leave to defend the suit. 
19 Dr. Tulzapurkar, the Learned Senior Advocate appearing for the Plaintiff, has
submitted that all the submissions advanced on behalf of the Defendant including
that   the   transaction   documents   are   violative     of   the   FDI   policy   and   FEMA
Regulations are incorrect and untenable.     Dr. Tulzapurkar inter alia made the
following submissions:
19.1 That  Vinca has a township  project at village Kanjur which is an FDI eligible
project under Press   Note 2 of 2005 and   that accordingly the FDI investment in
Vinca was in accordance with Press Note 2 of 2005.
3 (1976) 4 SCC 686
4 (1998) 5 SCC 354
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19.2 That once the investment was made by FMO in  Vinca, the amounts received
from the FMO was a fund belonging to Vinca and there was no prohibition   either
in the FDI Policy or in FEMA or any law  for the time being in force  for an Indian
Company to invest its funds in any other Indian Company except that if that money
had been  received  by the first Indian Company i.e.  Vinca  from a Non Resident ,
the same could not be invested in equity or compulsorily  convertible securities in
any Sectors prohibited under the FDI policy. The businesses  carried on by Rubix and
Amazia were in permissible sectors under the FDI policy  and therefore there was no
bar or prohibition against Vinca  from investing funds in Amazia and Rubix in the
form of OPCDs. The investment by  Vinca in Amazia and Rubix  could not be treated
as an investment by FMO. 
19.3 That the FMO could have directly invested in CCDs   of Amazia and Rubix
carrying a fixed  rate of return. There is no prohibition in the FDI policy or FEMA
Regulations against issuance of CCDs bearing interest. 
19.4 That even after conversion of Vinca CCDs  and FMO becoming the 99 per cent
shareholder of Vinca, FMO will have to follow the RBI's pricing guidelines   if it
wants to sell its  Vinca shares and that the price that FMO can receive for the shares
cannot exceed  the price  prescribed by the RBI.
19.5 That the doctrine of Pari delicto   is not applicable;  that the Plaintiff is not a
party to the conspiracy and the Plaintiff is not acting on behalf of FMO. Even if the
Plaintiff is acting on behalf of FMO, the doctrine of pari delicto would not be
applicable      as the Defendant had induced FMO to make  the FDI/investment by
representing that the transaction was FDI/FEMA complaint. The representations and
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assurances made by the Defendant in the relevant documents are reproduced by the
Plaintiff  in sub­clause (iii) of Clause (b) of paragraph  13 of the further submissions
dated 6th August, 2014. 
19.6 That  the alleged illegal purpose of securing a fixed  return  has not been
carried out and if  the proceedings are allowed, the monies under the OPCDs  will
go to Vinca and not to FMO. The said monies  will therefore be an asset of Vinca and
no shareholder of a Company can be regarded  as an owner of an asset belonging to
the Company.  FMO cannot receive the said amounts without complying with the
FDI Regulations for sale of shares and repatriation.
19.7 That the provisions of the FDI policy   extracted by and relied upon by the
Defendant in Chapter II of its submissions only provide for guidelines for calculation
of total foreign investment (both direct and indirect) in an Indian Company, at every
stage of the investment, including downstream investment and are applicable in
cases   where   an   Indian   Company   which   has   received   foreign   direct   investment
chooses to make investment by way of equity instruments (i.e.  in the form of Equity
Capital   or   compulsorily   and   mandatorily   convertible   preference   shares   or
debentures) in its subsidiary companies.  The said Regulations are inapplicable in
cases (like the present case) where the Indian Company which has received foreign
direct investment chooses otherwise and makes investment in debt of an Indian
Company, in permitted sectors.  
19.8 It is submitted that there is no prohibition under the FDI policy or any other
regulation which forbids an Indian Company which has   received foreign direct
investment from making downstream investments in the form of Optionally Partially
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Convertible Debentures in permitted sectors.     It is submitted that it was wholly
permissible for Vinca to make investments in Amazia and Rubix by way of OPCDs
since such investment was in a permitted sector;
19.9 That the ECB guidelines apply only in cases where an investment  by way of
foreign monies in debt instruments is made by a non resident entity into a resident
entity.   It   is   submitted   that   ECB   guidelines   are   inapplicable   in   cases   where   the
investment in debt instrument  is made by an Indian/resident entity into another
Indian/resident entity.   ECB guidelines neither regulate nor prohibit any investment
made by an Indian/resident real estate company in another Indian/resident real
estate Company. 
19.10        The suggestion of the Defendant that the investments   by Vinca   into
Amazia and Rubix, by way of the Optionally Partially Convertible Debentures   is
covered by the ECB  guidelines is flawed and baseless.  
20. Dr. Tulzapurkar has in support of his above submissions   relied upon the
decisions of the Hon'ble Supreme Court   in the case of  Bacha F. Guzdar vs. CIT5
,
Gurmukh Singh v. Amar Singh6
, Kedar Nath Motani v. Prahlad Rai7
, and Sita Ram v.
Radha Bai8. .  Dr. Tulzapurkar therefore submitted that the Summons for judgment  be
allowed.
21.   I have perused the relevant extracts of the FDI Policy, FEMA Regulations
relied upon by the learned Senior Advocates appearing for the parties.  I have also
perused the transaction documents and have considered the submissions advanced
5 AIR 1955 SC 740
6 1991) 3 SCC 79
7 (1960) 1 SCR 861
8 AIR 1968 SC 534
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by the Learned Advocates appearing for the parties as well as the case law relied
upon by them in support of their respective contentions. 
22. From the aforestated 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 prohibits 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 the FMO. Since this was not permissible under the FEMA Regulations/FDI policy,
the following investment structure was devised/adopted.
(i) Vinca was interposed as a holding Company of Amazia and Rubix;
(ii) The SSA dated 20th November, 2009 and the  annexed DTDs were executed
wherein it was provided  that the FDI amount of Rs. 418 crores received  by
Vinca from FMO against issuance of 10 per cent equity  and 3 CCDs to the
FMO, was not to be retained by Vinca or used by Vinca in its own FDI eligible
township/construction projects but the said SSA and the DTDs expressly
stipulated  that  the  FDI  amount  received by Vinca  from FMO  was  to  be
immediately passed on to Amazia and Rubix against issuance by them of
their OPCDs.   Accordingly as submitted on behalf of the Defendant, Vinca
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was only the “nominal recipient”” of the FDI and the real recipients of FMOs
FDI were Amazia and Rubix. 
(iii) Amazia and Rubix in turn issued OPCDs to Vinca bearing interest at 14.5 per
cent per annum. It will not be  out of place to mention here that OPCDs  are
not treated   as equity and the FDI policy and FEMA Regulations do not
permit FDI against the issuance of OPCDs. Accordingly a direct investment by
FMO into Amazia and Rubix against issuance of OPCDs would not have been
permitted   /would   have   been   prohibited   under   the   FDI   policy   /FEMA
Regulations. 
(iv) Contemporaneously  the Articles of Vinca were amended to provide that (i)
on conversion of the three CCDs, FMO would hold/own more than 99% of
Vinca’s total equity shares and (ii) that the FMO nominee Directors on Vinca’s
Board of Directors would alone be entitled to take all decisions/deal with the
OPCDs and the Debenture Trustee i.e. the Plaintiff herein. 
(v) On receipt back by Vinca of the FDI amount of Rs. 418 crores and interest
thereon at 14.5 per cent per annum, FMO could at its will become the 99 per
cent owner of Vinca’s shares and therefore  in fact receive/be entitled to the
said amount.  As submitted by the Defendant, FMO could then either dissolve
Vinca and receive the amount, or could sell the shares of Vinca at a fair value
based on the said amount and also the value of Vinca’s own housing/slum
redevelopment project.
(vi) Accordingly   the interposing of Vinca had no real business or commercial
purpose. Vinca was interposed as the nominal recipient company, only in
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order to route the FDI investment amount  received from FMO, to Amazia
and Rubix against issuance by them of OPCDs bearing interest at 14.5 per
cent   per   annum   and   to   receive   back   the   amount   invested   (i.e.   the   FDI
amount of Rs. 418 crores) and interest thereon at 14.5 per cent per annum
from Amazia and Rubix and to make the same available to FMO. 
(vii)  The guarantee executed by the Company for repayment by Amazia and Rubix
of the FDI  amount of Rs. 418 cores and 14.5 per cent interest thereon
though ostensibly in favour of Vinca/Plaintiff­IDBI Trusteeship Services, was
actually to ensure that FMO received the said amount back with interest as
aforesaid, through Vinca. 
(viii) In claiming the said amount, invoking the Defendant's said guarantee and in
filing   the   present   Suit,     the   Plaintiff   is   admittedly   acting   on   behalf   of
FMO/FMO Nominee and is seeking to receive/recover the said FDI amount
and interest thereon at 14.5 per cent per annum for FMO (through Vinca)
contrary to the FDI policy and the statutory FEMA Regulations. 
23. The Judgment of the Supreme Court in the case of  Vodafone International
Holdings BV vs. UOI  (supra) held that:
(i) “It is the task of the Court to ascertain the legal nature of the transaction and
while doing so it has to look at the entire transaction as a whole and not to
adopt a dissecting approach”  and that a “device which was colourable in nature
had to be ignored as fiscal nullity.” (page 401 para 60)
(ii)  “That whether a transaction is used  principally as a colourable device or the
distribution of earnings, profits and gains is determined by a review of all the
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facts and circumstances surrounding the transaction. (page 403 para 67) 
(iii) That “where the revenue finds that in a holding structure an entity which has no
commercial/business substance has been interposed only to avoid tax, then in
such cases applying the test of fiscal nullity it would be open to the revenue to
discard the interposing of that entity….It is the task of the revenue/court to
ascertain the legal nature of the transaction and while doing so it has to look at
the entire transaction as a whole and not to adopt a dissecting approach.(page
404 para 68)
24. In the case of Immami Appa Rao and others vs. Gollapalli Ramalingamurthi &
Ors. 9
 the Appellant and Respondent No. 2 were members of an HUF. Respondent
No. 2 had suffered heavy business losses. Apprehending that the property would be
lost to the family and taken by his creditors, Respondent No. 2 had executed a
collusive and nominal mortgage of his property in favour of the Respondent No.1.
During the ensuing insolvency proceedings the Respondent No.1  through a benami
purchased   the   said   property.     Thereafter   Respondent   No.1   filed   the   present
proceedings seeking a declaration of his title to the property and for possession
thereof from the Appellant and Respondent No.2.   The High Court recorded   a
finding that Respondent No. 2 had successfully played fraud on his creditors   by
getting the property purchased by Respondent No. 1 benami.   However the High
Court held that the Appellant and Respondent No. 2 were estopped from setting up
the   fraud  against  Respondent     No.1  and  the  High  Court  decreed  the  claim   of
Respondent No.1. The Hon'ble Supreme Court allowed the Appeal and held:
9 AIR 1962 SC 370
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(i)  “Out of the two confederates in fraud, Respondent No.1 wants a decree to
be  passed in his favour and that means he wants the active assistance of
the   Court   in   reaching   the   properties   possession   of   which   has   been
withheld from him by Respondent No.2 and the Appellants”. … … ‘’In
the circumstances, passing a decree in favour of Respondent No. 1 would
be actively assisting Respondent No. 1 to give effect to the fraud to which
he was a party and in that sense the Court would be allowed to be used
as an instrument of fraud and that is clearly and patently inconsistent
with public interest” (para 13 page 375)
(ii)   “There can be   no question of estoppel in such a case for the obvious
reason that the fraud in question was agreed to by both the parties and
both the parties have assisted each other in carrying   out the fraud.
When it is said that a person cannot plead   his own fraud, it really
means that a person cannot be permitted to go to a Court of Law to seek
its assistance and yet base his claim for the Court’s  assistance on the
ground of his fraud…. Yet if the plea of fraud is not allowed to be raised
in defence, the Court would in substance be giving effect to a document
which is void ab initio.   Therefore we are inclined to hold that the
paramount  consideration  of   public  interest  requires  that  the  plea   of
fraud should be allowed to be raised and tried and if it is upheld the
estate should be allowed  to remain where it rests. The adoption of this
course, we think is less injurious to public interest than the alternative
course of giving effect to a fraudulent transfer” (para 15 pg. 375 and
376 )
25. In the case of Renusagar Power Co. Ltd. vs. General Electric Co. (supra),   the
Supreme Court has held (in para 76 at page 891) that “the provisions contained in
the FERA have been enacted to safeguard the economic interests of India and any
violation of the said provisions would be contrary to the public policy of India as
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envisaged  in Section 7 (1) (b) (ii) of the Act”. 
26.   Applying the law laid down in the above judgments: 
(i) it is apparent/established that Vinca was only interposed as the nominal
recipient   of  the  FDI  from   FMO  and  the  nominal  recipient  of  the  OPCD
amount and 14.5% interest thereon back from Amazia & Rubix, and the
transaction   interposing   Vinca   was   only   a   colourable   device/structure
designed   to   enable   FMO   to   claim   and   receive   back   its   FDI
amount/investment and interest thereon at 14.5 % per annum.  
(ii) The   said  structure   device   was   an   attempt  by   FMO   to  bypass/circumvent
/nullify the restrictions imposed by the FDI policy and the FEMA Regulations
which embody the Public Policy of India.
(iii) Since  right from the outset the FMO was aware that the FDI policy  and the
statutory FEMA Regulations permit FDI in townships, construction of houses,
only   by   way   of   equity   investments     and   the   FDI   policy   and   the   FEMA
Regulations prohibits any other form of investments (non­equity) in the said
sector with an assured return/rate of return and therefore structured the
above  device  to bypass/circumvent/nullify the  FDI  policy and the FEMA
Regulations,  the Plaintiff which is admittedly acting at the instance  of FMO
cannot  be  heard to say  that FMO  was induced by the Defendant to make
the FOI/Investment through incorrect representations/assurances.   The FMO
is as much a party to the aforestated  colourable device/structure designed
as the  Defendant  Company.   The case law   relied upon by the Plaintiff
therefore does not lend any assistance to the Plaintiff. 
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(iv) The Plaintiff is acting at the instance of FMO/FMO nominees on the Board of
Directors of Vinca and are by the present Suit, seeking the assistance of this
Court, to enforce and recover the FDI amount and interest thereon at 14.5%
per annum for FMO (through Vinca), contrary to the prohibition contained in
the FDI policy and FEMA Regulations. This  as the Supreme Court has held is
clearly and patently inconsistent with the paramount consideration of public
interest. 
27. It is  contended  on behalf of the  Plaintiff that Vinca  has a township project
at Village Kanjur  which is an FDI eligible project  under Press Note 2 of 2005 and
that accordingly  the FDI investment  in Vinca was in accordance with Press Note 2
of 2005.
27.1   From the aforestated facts   it   is clear that  Vinca was interposed as the
holding   Company   of   Amazia   and   Rubix   only   for   the   purposes   of   the   said
transaction/FDI by FMO and Vinca was only the nominal recipient of the FDI.  The
SSA and the annexed  DTDS made it clear that Vinca was not entitled to retain the
FDI amount, or to utilize the same in any of its own projects. The SSA and DTD
required Vinca to immediately pass on the FDI  amount received from  FMO to
Amazia and Rubix against subscription of OPCDs issued or to be issued by them (i.e.
Amazia and Rubix).  Press Note 2 of 2005 permits FDI investment in the real estate
sector only if it is for a township/construction project.  Accordingly the purported
‘’investment in Vinca” cannot be said to be in accordance with Press Note 2  of 2005
and was not FDI/FEMA complaint. 
28. It  has been  further  contended  on behalf  of  the  Plaintiff  that  Vinca is  a
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separate legal entity and that it was open for Vinca to invest its funds in  Amazia
and   Rubix.    Once   the   FDI   investment   was   made   by  FMO   in   Vinca,  the   funds
belonged  to Vinca and there was no prohibition against Vinca investing the said
amount   received   by   it   from   FMO,   in   OPCDs   of   Amazia   and   Rubix     and   the
investment by Vinca could not be treated as an investment by FMO.  
28.1 The above submission advanced on behalf of the Plaintiff   also cannot be
accepted. The SSA and DTD establish that there was no question of Vinca deciding
of its own volition to invest the FDI amount received by it from FMO in the OPCDs
of Amazia and Rubix. The specific/express terms of the SSA and DTD stipulated that
Vinca could not retain, or itself utilize the FDI amounts received by it from FMO, but
was   required   to   immediately   pass   on   the   same   to   Amazia   and   Rubix   against
subscription of the OPCDs issued/to be issued by them.   Accordingly there was no
question of Vinca choosing to invest in Amazia and Rubix  or of Vinca investing ‘’its
funds” in the OPCDs of Amazia  and Rubix. The investment of the FDI amounts by
FMO   in   OPCDs   of   Amazia   and   Rubix   through   Vinca,   was   contractually   preordained/predetermined.

29. It is contended on behalf of the Plaintiff that the FMO could have directly
invested in CCDs of Amazia  and Rubix carrying a fixed rate of return and that there
is no prohibition in the FDI policy or the FEMA Regulations against issuance of
CCDs bearing interest.   
29.1 The Plaintiff seems to have lost sight of the fact that the FDI policy/FEMA
Regulations   only   permit   FDI     by   way   of     equity     investments   in   Companies
undertaking eligible Townships/construction projects. Accordingly under the FDI
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policy/FEMA   Regulations   the   foreign   investor   has   necessarily   to   undertake   the
equity risk of the project and cannot stipulate for return of its investment/FDI with a
fixed   rate   of   return.     CCDs   (bearing   interest)   which   are   mandatorily   and
compulsorily convertible into equity are  treated as equity under the FDI policy and
the FEMA Regulations. Accordingly, while FMO could have directly invested in CCDs
bearing interest of Amazia & Rubix, the amounts invested would be compulsorily
required to be converted into equity shares of Amazia and Rubix and FMO could not
have required Amazia or Rubix to repay/return the FDI amounts invested.  
30. The Plaintiff has also contended that  the Plaintiff even after conversion of
the Vinca CCDs and FMO becoming  the 99 per cent shareholder of Vinca, FMO will
have to follow RBI’s pricing guidelines if it wants to sell its Vinca shares and that the
price that FMO can receive for the shares cannot exceed the price prescribed by the
RBI.  
30.1 Again the Plaintiff has lost sight of the fact that after receipt back by  Vinca of
the FDI amount of Rs. 418 crores and interest thereon at 14.5% per annum from
Amazia  and   Rubix,  or   from   the  Defendant's  Guarantee,  FMO   could   at   will   on
conversion of the three CCDs become the 99% shareholder/owner of Vinca.  Under
the RBI’s pricing guidelines FMO could then sell its 99% shares in Vinca at a fair
value, which would necessarily reflect/include   the receipt of the said sum and
interest thereon at 14.5 per cent per annum from the OPCDs /the Defendant's
guarantee.  In fact a sale by FMO of its 99% Vinca shares would also include the
value of Vinca’s development/redevelopment project. 
31. According to the Plaintiff, the doctrine of Pari Delicto is not applicable, that
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IDBI is not a party to the conspiracy and IDBI is not acting on behalf of FMO. Even if
IDBI is acting on behalf of FMO, the doctrine of Pari Delicto would not be applicable
as  the Defendant had induced FMO to make the FDI/Investment by representing
that the transaction was FDI/FEMA complaint.  
31.1   The above submission of the Plaintiff cannot be accepted. 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 Plaintiff 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. 
32. The Plaintiff has lastly   contended that the   alleged    illegal purpose of
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securing a fixed return has not been carried out and that if the proceedings are
allowed, the money will go to Vinca and not to FMO.   It has been contended that
FMO cannot receive the sums without complying with the FDI Regulations for sale
of shares and repatriation.   
32.1 This submission too of the Plaintiff cannot be accepted.   The present claim
has been made and the present proceeding has been initiated/filed by the Plaintiff
at the instance of FMO/FMO nominees on Vinca’s Board of Directors, in order to
secure repayment/return of the FDI amount invested along with a fixed rate of
return   thereon   i.e.   for   seeking   the   active   assistance   of   this   Court   to
implement/effectuate/enforce a transaction prohibited by the FDI policy and the
FEMA Regulations.  The contractual documents (SSA & DTD) establish that it was
always agreed and understood that Vinca was only the nominal recipient of the FDI
amount received from FMO and was also only nominally the recipient of the FDI
amount and interest thereon at 14.5 per cent per annum to be received back from
Amazia and Rubix.  On receipt back by Vinca of the FDI amount and 14.5 per cent
interest thereon, FMO can and will by conversion of the three CCDs become the
99% shareholder of Vinca.   Under the FDI policy/FEMA Regulations, FMO can
thereafter sell the shares of Vinca at the fair value, which will necessarily include
the value/benefit of the FDI amount and interest at 14.5 per cent thereon.
33. However, I must also state that I do not find substance qua the following
defences raised by the Defendant: 
33.1 That the Suit deserves to be dismissed on the ground  that the guarantee as
well as trusteeship of IDBI has been discharged/terminated;
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33.2 That under the provisions of the FDI Policy, an Indian Company which has
received foreign direct investment can utilise its funds downstream only for making
investment  by way of equity instruments  (i.e. in the form  of equity capital or
compulsorily and mandatorily  convertible preference shares or debentures);
33.3 That Investment by an Indian Company  in OPCDs issued by subsidiary (also
an Indian Company) would amount to an external commercial borrowings. 
34. Much after the Learned Senior Advocates appearing for the parties concluded
their submissions qua the above issue, the Learned Senior Advocate appearing for
the Plaintiff circulated a judgment of the Division Bench of this Court dated 18/19th
July, 2014, in Videocon Industries Limited vs. Intesa Sanpaolo S.P.A.  and in support of
its submissions relied on paragraphs  23, 24, 28 to 32 and 34 of the same.   The
Learned Senior Advocate appearing for the Plaintiff also circulated a judgment of
the Division Bench of the Delhi High Court dated   30th  July, 2014   in  Zaheer
Mauritius vs. Director of Income Tax (International Taxation)­II  and in support of its
above submissions relied on  paragraphs 21 to 34 of the same.  
35.          As regards the decision of the Division Bench of this Court in Videocon
Industries Ltd. (supra), the Learned Senior Advocate for the Plaintiff has made the
following submissions:
35.1   That the Division Bench of this Court after going   through the   relevant
provisions of FEMA (including the Rules and Regulations thereunder) and the FDI
policy in relation to a Patronage Letter issued by  Videocon Industries Ltd. to Intesa
Sanpaolo S.P.A. has inter alia held in paragraph 34 of its judgment as under:
“Assuming that Videocon have committed any wrong in issuing the
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Patronage  Letter without obtaining permission of the Reserve Bank,
as per the settled legal position, it is not open to a party to take
advantage of its own wrong. In Eurometal Ltd. v. Aluminium Cables
and Conductors (U.P.) Pvt. Ltd.[ (1983) 53 Comp Cas 744 Cal] and
SRM Exploration Pvt. Ltd. v. N &S & N Consultants S.R.O. [ (2012)
4 Comp L.J. 178 (Del) ], Calcutta and Delhi High Courts respectively
have frowned upon Company facing a winding up petition taking  up
such dishonest defence”.
35.2   That   in   relation   to   the   aforesaid   dishonest   defence   taken   by   Videocon
Industries that the Patronage  Letter was issued in contravention of the provisions of
FEMA or in breach  of other legal requirements, the Division Bench of this Court has
inter alia held in para 34 of its judgment as under:
    “ In Eurometal Ltd. v. Aluminium Cables and Conductors (U.P.) Pvt. Ltd.
[ (1983) 53 Comp Cas 744 Cal] and SRM Exploration Pvt. Ltd. v. N &S
& N Consultants S.R.O. [ (2012) 4 Comp L.J. 178 (Del) ], Calcutta and
Delhi High Courts respectively have frowned upon Company facing a
winding up petition taking  up such dishonest defence. In these decisions
High   Courts   have   taken   the   view   that   in   matters   of   commercial
transactions   involving   crores   of   amount   where   the   Company   facing
winding up proceedings had stood a guarantor, if any such defence were
to be accepted, we would be giving a wrong signal and dissuading foreign
commercial   entities   from   relying   on   the   guarantees   given   by   Indian
Companies and which would ultimately undermine the role of India the
world of trade and commerce.  We could not agree less. We, therefore, do
not find any merit in submissions of Dr. Tulzapurkar that the order of
admission of the winding up petition was erroneous on any such count.”
35.3 That     in   the   present     proceedings,   the   Defendant   has   raised   defences,
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including  that the transaction and/or the guarantee are contrary to FEMA and the
FDI policy only in its response dated 22nd  January, 2013, to the statutory notice
addressed by the Plaintiff that is after  about three years of having entered into the
transaction.  In this regard, the relevant observations of this Court in para 34 of the
Videocon Appeal  are as under:
“In   any   view     of   the   matter,   it   is  also  necessary   to   know  that
Videocon had never contended in any of its  correspondence between
2007 till giving reply to the statutory notice   that the Patronage
Letter was issued in contravention of the provisions of FEMA or in
breach of any other legal requirements. The defence is, therefore,
raised for  the first time only after receiving statutory notice i.e. after
almost four years of issuance of the Patronage Letter.:”
35.4      That additionally in para 40 of the Videocon Appeal, this Court has held as
under:
“Applying   the above principles, we have no hesitation in holding
that the dispute raised by Videocon is not at all bonafide, much less
substantial.   The   defence   adopted   by   Videocon   is   not   merely
moonshine but dishonest and therefore the learned Company Judge
was fully justified in passing the order directing Videocon to pay the
amount of the guarantee called Patronage Letter dated 5th June 2007
for 38 Millions Euro”. 
36. In response,  the Learned Senior Advocate appearing for the Defendant has
inter alia submitted that the said judgment is totally inapposite and irrelevant to the
issues in the present Petition.  
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KPPNair 31                                             SJ­39 in  SS 520 of 2013
37. I have gone through the above decision  of the Division Bench of this Court in
Videocon Industries Ltd. (supra).  In that case, Videocon Industries Ltd. had given a
Patronage Letter to Intesa Bank as a condition for the Bank granting a loan of Euro
35 Million to its subsidiary VDC Technologies SPA.   Videocon contended that the
Patronage   Letter/Guarantee   was   issued   in   breach   of   the   FEMA   Guarantee
Regulations 2000 which provided that no person could, without the general or
special   permission   of   the   RBI,   give   a   Guarantee,   which   had   the   effect   of
guaranteeing a debt   or liability owed by a person resident in India to a person
resident outside India, as the prior permission of the RBI was not obtained before
issuing such letter/guarantee. (Judgment para 11 (c ) Pg. 7/8 and para 23 Pg. 17).
37.1 The Hon'ble Division Bench therefore held  that:
(i) the words “with the general or special permission of the RBI”   could not be
construed as requiring the prior permission of the RBI (Para 30 pg. 21).
(ii) The RBI Circular of 27th May 2011 read with Notification dated 8th May 2013
and   the   FAQ   :   answers   to   “Frequently   Asked   Questions”   given   by   the   RBI   re.
Questions 34 and 35 in the FEMA Manual of 2007 “leaves no manner of doubt that it
was permissible for Videocon to give Guarantees for its step down subsidiary, provided
such exposures were within its permissible financial commitments”  and that Videocon
had   never   contended   that   the   same   was   not   within   its   permissible   financial
commitments (Paras 31­33 pgs. 22­25). 
(iii) “Assuming that Videocon had committed any wrong in issuing the patronage
letter without obtaining permission of the RBI, as per the settled legal position, it is
not open to a party to take advantage of its own wrong”. (Para 34 pg. 25).
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KPPNair 32                                             SJ­39 in  SS 520 of 2013
37.2  In the case in hand, I am prima facie of the view that the structure/device of
routing FMO's FDI amount of Rs. 418 crores to Amazia and Rubix through the newly
interposed Vinca (as the nominal recipient of the FDI) was a colourable device
structured only to enable FMO to secure repayment   (through Vinca) of its FDI
amount and interest thereon at 14.75%, contrary to the statutory FEMA Regulations
and   the   FDI   policy   embodied   therein,   which   only   permit   FDI   investment   in
townships/real   estate   development   sector   to   be   made   in   the   form   of   equity
(including Compulsorily Convertible Debentures) and preclude any assured return.
I am also prima facie of the view that the Defendant's guarantee (which is the basis
of the Company Petition No.  644 of 2013)  though ostensibly in favour of Vinca, an
Indian Company, was part of the aforesaid illegal structure/scheme and was given to
ensure  that FMO received back its FDI amount with interest as aforesaid through
Vinca. The Guarantee was therefore part of the aforesaid illegal structures/scheme
and therefore prima facie illegal and unenforceable.   
37.3   Further the question of the  Defendant not being allowed to  plead its own
wrong also does not arise in the facts of the present case.   Through the present
Petition, the Plaintiff (who is admittedly acting at the instance   of FMO/FMO's
nominees) is in effect seeking the assistance of this Court to enable/enforce recovery
by FMO of its FDI amount and interest thereon (through Vinca), contrary to the
provisions of the FEMA Regulations and FDI policy embodied therein. As has been
held   by   the   Hon'ble   Supreme   Court   in   the   case   of   Immami   Appa   Rao   vs.   G.
Ramalingamurthi (supra), the  Plaintiff who wants orders in his favour, is actually
seeking     the   active   assistance   of   the   Court   to   achieve   what   the   law

prohibits/declares   illegal    and that  is clearly  and  patently  inconsistent  with
public interest.    Moreover, as has been held by the Supreme Court in the above
case, in such a case there can   be no question of estoppel     and  the paramount
consideration of public interest  requires  that the plea be allowed to be raised and
tried.
37.4  Therefore in my view the  Plaintiff cannot draw support from the Judgment
in Videocon  Industries Ltd. (supra).
38.  Relying on the case of Zaheer Mauritius (supra), it is submitted on behalf of
the   Plaintiff   that   the   Delhi   High   Court   has     considered   a   similar
transaction/structure, which mandated the payment of fixed interest thereunder and
has upheld the same.   It is further submitted that the Delhi High Court has in
paragraphs 21 to 34 of the Zaheer Mauritius's case enquired into the transaction to
see as to whether any case was made out therein for 'lifting the corporate veil'. It is
submitted that the findings in the said paragraphs support the following contentions
of the Plaintiff.
(i) The   structure/transaction   is   valid   and   is   not   in   contravention   of   FEMA
(including the Rules and Regulations framed thereunder) and/or the FDI policy. 
(ii) The Defendant has sought to make out a case for lifting the corporate veil for
the purpose of considering Vinca, Amazia and Rubix, being parent and subsidiaries,
as one Company.  The Defendant has not brought on  record a shred of material to
show how the facts of the present dispute would mandate lifting of the corporate
veil, but has instead sought to make a case for lifting the corporate veil on the basis
that Amazia  and Rubix are subsidiaries of Vinca and are therefore one entity. The

aforesaid contention is preposterous to say the least, as the sequitur thereto would
be that all subsidiaries are the same entity as their respective parent. 
(iii) No case has been made out for lifting the corporate veil. Without prejudice, it
is submitted  by the Plaintiff that Vinca, Amazia and Rubix are separate and distinct
legal entities with their respective Board of Directors and Articles of Association. The
said Articles of  Association would clearly show that the affairs of Amazia and Rubix
were always intended to  be managed separately and distinctly from that of Vinca.
Accordingly, without  prejudice and for the sake of argument, even if this Court is
inclined to lift the corporate veil, Vinca, Amazia and Rubix cannot be said to be the
same entity. 
39. It is submitted on behalf of the Defendant that the judgment in the case of
Zaheer Mauritius  (supra) is inapposite and irrelevant to the issues presently under
consideration. 
40. I   have   considered   the   submissions   advanced   by   the   Learned   Advocates
appearing     for   the   parties   qua   the   judgment   in   the   case   of   Zaheer   Mauritius
(supra).The relevant facts in that case are briefly set out hereunder:
(i) Vatika  which owned land reserved for being developed as a cyber park, had
set   up   a   JV   company   SH   Tech   Park   Developers   P.   Ltd.   and   had   transferred
development rights in the said land to the JV Company.
(ii) Zaheer Mauritius had entered into a Securities Subscription Agreement and a
Shareholders' Agreement with Vatika and the JV Company, and had invested 100
crores in the JV Company against issuance of equity shares and CCDs by the JV
Company in its favour. 

(iii) The Shareholders  Agreement provided for a  call option by Vatika to acquire
the said shares and CCDs and also provided a put option to Zaheer Mauritius
requiring Vatika to buy the said CCDs and shares.
(iv) Pursuant to the put and call options, Vatika had acquired all the said shares
and CCDs allotted to Zaheer Mauritius. 
(v) The Income  Tax Officer held that the receipt  by Zaheer Mauritius  from the
transfer of the shares/CCDs would be taxed as interest and not as capital gains. The
AAR confirmed the ITO's view and held that as the put and call options were based
on   a   fixed   rate   of   return   on   the   investment   made   by   Zaheer   Mauritius,   the
transaction was essentially a loan to Vatika and had only been structured as an
equity investment in the JV Co. to avoid the incidence of tax. 
(vi) This order of the AAR was challenged before the Delhi High Court. 
(vii) Accordingly the only issue in the Writ Petition was whether the AAR/ITO
were justified in treating the amounts received by Zaheer Mauritius from the sale of
CCDs   as   interest   income   or   whether   the   amount   was   a   capital   gain   and   was
exempted from tax under the India Mauritius Treaty. 
40.1      The Court   has in the said case referred to the fact that under the FDI
policy, FDI in the real estate sector was  permitted only through Equity or CCDs and
held  that the   put and call options were  commercial arrangements between the
parties and   did not change the legal nature of the transaction which was an
investment in and subsequent sale of CCDs of the JV company.  The judgment only
considered, dealt with and decided whether in the context of such call and put
options, the Revenue was entitled to treat the sale proceeds of the CCDs received by

the Foreign Investor as interest income, or whether  the same constituted a capital
gain which was exempt under the treaty between India and Mauritius. No issue was
raised whether such put or call option  in respect of CCDs allotted under FDI (which
provided   for   buy   back   at   a   pre­determined/agreed   price)   violated   the   FEMA
Regulations/FDI policy and the judgment accordingly does not consider or decide
whether such put/call options, were valid under the FEMA Regulations/FDI policy.
The submission of the Plaintiffs that the judgment supports the Plaintiff's case that
“the structure transaction is valid and is not in contravention of FEMA and/or the
FDI Policy” does not appear to be correct. The structure devised by the Plaintiff
­FMO in the instant case  to get back its FDI with a return of 14.75%  was not based
on a buy back agreement as in the case before the Delhi High Court. Moreover, the
RBI has expressly  clarified/stipulated that even such buy back agreements at preagreed
prices are not permissible in the case of CCDs allotted to foreign investors
against FDI as the FDI policy/FEA Regulations does not permit an agreed return on
FDI investment being made in the real estate sector. The RBI has by its circular No.
86   dated   9th  January,   2014,   bearing   Ref.   No.   RBI/2013­2014/436   specifically
clarified that option clauses  in equity  shares and CCDs allotted against FDI in real
estate sector, can only provide for a buy back of securities from the investor at the
price prevailing at the time “so as to enable the investor to exit without  any assured
return”. The RBI circular also expressly stipulates that for transfer/buy back of CCDs
“the guiding principle would be that the non­resident investor is not guaranteed any
assured exit price at the time of making such investment/agreement and shall exit at
the price prevailing at the time of exit.”

40.2 In my view, the Plaintiff is also not correct when they state/submit that the
judgment supports the Plaintiff in contending that  the Defendant had not “brought
on  record a shred of material to show how the facts of the present dispute would
mandate lifting of the corporate veil...”  Even if it is assumed that the corporate veil
is not to be lifted or  Vinca, Amazia and Rubix are to be treated as one Company, as
has  been  mentioned hereinabove, Vinca  interposed  as the  holding  Company of
Amazia and Rubix only for the purpose of structuring FMO's FDI investment into
Amazia   and   Rubix,   through   Vinca   as   the   nominal   recipient.   The   SSA   and   the
annexed Debenture Trust Deed, specifically provided that the FDI amount to be
received by Vinca from FMO against issuance of CCDs and equity shares by Vinca,
was not to be retained by Vinca or used by Vinca in its own projects. The SSA and
Trust Deed in fact expressly stipulated that the FDI amount received by Vinca from
FMO, was to be immediately passed on by Vinca to Amazia and Rubix, against
issuance   by   them   of   OPCDs.   Accordingly   the   SSA   and   the   Trust   Deed   itself
established that Vinca had been interposed  only to provide a facade of compliance
with the FEMA Regulations/FDI policy and was only a nominal recipient of the FDI
and that Vinca was immediately required to route the entire amount received from
FMO  to Amazia and Rubix, against issuance by them of OPCDs.
40.3 Therefore   in   my   view   the   decision   of   the   Delhi   High   Court   in   Zaheer
Mauritius (supra) is also of no assistance to the Plaintiff.
41. The aforesaid facts prima facie support the contention of the Defendant 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.
42. In the circumstances I am of the view that the Defendant has raised triable
issues which require adjudication on further evidence at the time of final disposal of
the suit.  Hence   the following order:
(i) Unconditional  leave is granted to the Defendant to defend the above suit;
(ii) The suit is transferred to the list of commercial causes and the Defendant is
directed to file its written statement on or before 15th June, 2015;.
(iii)  The hearing of the suit is expedited and the Court will endeavour to dispose
of the suit within a period of one year from the date of this order.  It is clarified  that
the Suit shall be  decided without being influenced by any of the observations made
in the present order. 
(iv) Place the  suit for framing of issues on 29th June, 2015. 
        The Summons for Judgement is accordingly disposed of. 
(S. J. KATHAWALLA, J.)

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