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Offshore investors cannot seek legal recourse for assured return investments, says Bombay HC

In a landmark verdict that can severely impact several foreign investors and their investments in Indian real estate projects, the Bombay High Court has ruled that offshore investors cannot seek legal recourse for their assured return investments in India. The court has upheld that FDI in real estate can be made only by way of equity and not debt by way of any fixed return. These assured return investments typically happen through structured quasi debt instruments.

The court has refused relief to Dutch government-backed financial institution FMO against realty developer Hubtown in a suit for recovery of its investment of over Rs 532 crore.

It has observed that the structure of the deal was devised to circumvent restrictions imposed by the FDI regulations. The ruling, for sure, will force many current and future transactions involving FDI into real estate to go for major restructuring.

The court observed that the conduct of FMO in routing the FDI investment through subsidiaries of Hubtown Ltd, Vinca and Amazia against the issuance of optionally partially convertible debentures (OPCD), establishes that FMO was aware that no investment could have been made with a fixed return without bearing an equity investment risks.

In the case filed by IDBI trusteeship Services, on behalf of FMO, against Hubtown as the guarantor, the court has declared the transaction involving FDI with assured returns was a "colourable device" and artificially structured transaction that violated the FDI regulations in India.

The court ruling complicates an issue that has been a cause of endless disputes in the past, with some Indian promoters trying to wriggle out of their commitments under the pretext that the foreign partners cannot claim a fixed return. But the dust had somewhat settled with the government as well as the Reserve Bank of India endorsing such deals. Under the circumstances,it remains to be seen how regulators would view the court verdict.

Foreign investors expect the ruling to affect the sentiments and capital flow towards India.

Article referred: http://economictimes.indiatimes.com/news/politics-and-nation/offshore-investors-cannot-seek-legal-recourse-for-assured-return-investments-says-bombay-hc/articleshow/47535796.cms

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