FERA compliance requires strict disclosure and RBI permission; undisclosed trading activity and foreign control were scrutinised on substance.

Automatic approval under FERA depended on strict compliance with the declared activity and the conditions in the relevant notification; where the company's Form FC(RBI) disclosed consultancy activity under NIC Code 893 and did not disclose trading in gold coins, the automatic route did not extend to that trading activity. Section 29(1)(a) continued to restrict foreign nationals and foreign-controlled entities from establishing or carrying on business in India without RBI permission, and a circuitous corporate arrangement could be examined on its substance to test compliance. On the bank issue, the evidence did not establish agency or misuse of permission, so no contravention was made out against the bank.

---

---

Issues: (i) Whether an Indian company that applied for foreign collaboration under NIC Code 893 could claim the benefit of the automatic route for a trading company primarily engaged in export under the FERA notifications and Press Notes. (ii) Whether the foreign nationals and foreign shareholder, by establishing and controlling the company, had in substance set up a place of business in India in contravention of section 29(1)(a) of the Foreign Exchange Regulation Act, 1973. (iii) Whether the bank had contravened section 6(4) and section 6(5) of the Foreign Exchange Regulation Act, 1973 while importing and selling gold coins to the company.

Issue (i): Whether an Indian company that applied for foreign collaboration under NIC Code 893 could claim the benefit of the automatic route for a trading company primarily engaged in export under the FERA notifications and Press Notes.

Analysis: The statutory scheme under section 19 and section 29 of FERA, read with Notification No. FERA 180/98-RB dated 13.01.1998 and the relevant Industrial Policy and Press Notes, permitted automatic approval only where the company satisfied the prescribed category and made a true declaration in Form FC(RBI). The declaration furnished by the company described its activity as business management consultancy under NIC Code 893 and treated trading in gold coins as not applicable. On that basis, the registration granted by RBI related only to the declared consultancy activity and not to trading in gold coins. The automatic route could not be extended to an activity not disclosed or not covered by the declaration.

Conclusion: The company was not entitled to the benefit of the automatic route for trading in gold coins, and the finding of contravention was sustained in favour of Revenue.

Issue (ii): Whether the foreign nationals and foreign shareholder, by establishing and controlling the company, had in substance set up a place of business in India in contravention of section 29(1)(a) of the Foreign Exchange Regulation Act, 1973.

Analysis: Section 29(1)(a) imposed a restriction on persons resident outside India, foreign nationals, and foreign companies from establishing or carrying on business in India except with RBI permission. The liberalisation reflected in later amendments did not remove that restriction for foreign entities. The observations in the earlier precedent on liberalisation were held to be context-specific and not a general dispensation from RBI permission. Where the factual matrix suggests a circuitous or sham arrangement to overreach the statute, the corporate veil may be lifted to examine the substance of the transaction. On the facts, the authorities were justified in examining whether the company was in reality a foreign-controlled device to establish business in India without permission.

Conclusion: The interpretation adopted by the adjudicating authority on section 29(1)(a) was upheld, and the challenge to that finding failed.

Issue (iii): Whether the bank had contravened section 6(4) and section 6(5) of the Foreign Exchange Regulation Act, 1973 while importing and selling gold coins to the company.

Analysis: The evidence did not establish that the bank acted as the company's agent or that it failed to act with the satisfaction required for the transaction. The bank had imported the gold on its own behalf and sold it to the company, and the findings of the Tribunal and the High Court that there was no misuse of the RBI permission were based on facts. No sufficient ground was shown to disturb those findings.

Conclusion: No contravention by the bank was made out, and the appeal failed as against the bank.

Final Conclusion: The appeal succeeded against the company and the foreign-controlled entities, but failed as against the bank. The Tribunal's order, as affirmed by the High Court, was set aside in respect of the company-related findings, while the bank-related exoneration was left undisturbed.

Ratio Decidendi: Automatic approval under FERA depends on strict compliance with the declared activity and the conditions of the relevant notification, and a foreign entity cannot evade section 29(1)(a) through a circuitous corporate structure where the arrangement is in substance a device to establish business in India without RBI permission.

---