The Reserve Bank of India’s regulations on the conversion of foreign currency arbitral awards fall under the Foreign Exchange Management Act, 1999 (FEMA) governs the process and requirements for converting foreign currency awards into Indian rupees.
Why getting the foreign exchange conversion right is important
When a court or arbitration gives you an award in a foreign currency, converting that amount into Indian rupees at the right time is crucial. If done incorrectly, it can affect how much money you actually receive. Knowing when to convert helps ensure you get the fair amount you’re entitled to. An important aspect that has substantial bearing during the adjudicating the disputes between the parties is the appropriate date for conversion of awarded foreign currency into Indian Rupees (“INR”).
Further it also ensures that financial statements and transactions reflect true value of assets, liabilities, revenues, and expenses in correct currency which ultimately helps in proper financial reporting and analysis. Many countries have specific regulations regarding currency conversion and reporting. This ensures compliance with the regulations and avoids legal and financial penalties.
Why the right conversion date matters
Determining the correct date for conversion can be tricky. Different dates can lead to differences in the final amount you receive, especially if part of the award was paid before the final decision was made. Getting this right helps avoid financial surprises and assists the parties to get the appropriate money value they deserve.
What to watch out for
Problems can come up if part of the award is paid before the final decision or if there are disputes. The recent Supreme Court ruling clears up that the conversion should happen when the award is officially finalized. This helps avoid confusion and ensures you get the correct amount based on the exchange rate at that time. The ever-fluctuating conversion rates could prove to be either a benefit or a loss for the award holder. Hence clarification of SC on such an important aspect is crucial.
What the Supreme Court ruling means for you
The ruling makes it clear that conversion should be based on the date when the award is final. If you get part of the award before the final decision, the conversion should be based on the date of that partial payment. This helps in making sure you receive the correct amount without any unexpected changes.
In DLF Limited v. Koncar Generators and Motors Limited (Civil Appeal No. 7702 of 2019), the Hon’ble Supreme Court addressed the critical issue of determining the appropriate date for converting an arbitral award expressed in foreign currency into Indian rupees. This judgment clarifies the legal position regarding the date of conversion, particularly when the award debtor deposits a portion of the award amount during ongoing proceedings challenging the award.
Key Legal Issue:
- What is the correct date to determine the foreign exchange rate for converting an arbitral award expressed in foreign currency into Indian rupees?
- How does the date of conversion change when the award debtor deposits part of the award amount during the pendency of the challenge to the award?
Court’s Consideration:
The Supreme Court, relying on the statutory framework under the Arbitration and Conciliation Act, 1996, and the principles established in Forasol v. ONGC (1984 Supp SCC 263), held that the foreign exchange rate should be determined on the date the arbitral award becomes enforceable. It was observed by the SC that, according to Part II of the Act, which deals with the enforcement of specific foreign arbitral awards, a foreign arbitral award becomes binding between the parties once it is enforceable under Section 46 of the Act. An award becomes enforceable when any objections against it have been conclusively resolved and dismissed. After a foreign arbitral award is deemed enforceable under the Act, it is considered a court decree according to Section 49. Accordingly, the Court ruled that the date of conversion should be July 1, 2014, when the award attained finality. The Court also examined the implications of the deposits made by the appellants during proceedings.
Conversion Date for Deposited Amounts:
In cases where the award debtor deposits part of the award amount during the pendency of proceedings, the Court distinguished between two scenarios:
- Deposits Withdrawn by the Award Holder: When the award debtor deposits an amount that the award holder is permitted to withdraw, the conversion should be based on the exchange rate on the date of the deposit. The Court emphasized that the award holder should not be allowed to benefit from a later, more favorable exchange rate after choosing not to withdraw the funds.
- Deposits Not Withdrawn: Where the award holder cannot withdraw the deposited amount, the conversion should be based on the exchange rate on the date the award becomes enforceable, as the award holder has not had the benefit of the deposited amount.
Conclusion:
The Supreme Court concluded that the correct date for foreign exchange conversion of an arbitral award is when the award attains finality. For amounts deposited by the award debtor, if the award holder is allowed to withdraw the deposit, the conversion should be based on the deposit date. Otherwise, the conversion should occur on the date the award is enforceable.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Forasol v. ONGC, 1984 Supp SCC 263.