2024 (10) TMI 291 - AT - FEMA

Appellate Tribunal sets aside FEMA order on overseas investment, remands case for fresh adjudication considering automatic route provisions

Shri B.K. Goenka, M/s. Welspun Corp. Ltd., M/s. Krishi Raj Trading Ltd., M/s. Welspun Wintex Ltd., Shri Balkrishna Goenka, Shri Rajesh Mandala, Shri Lal T. Hot Wani, Shri Murarilal Mittal, Shri B.K. Misra, Shri K.H. Vishwanathan, Shri Raj Kumar Jain, Shri Nirmal Gangwal, Shri Asim Chakraborty, Shri Ashok Jain Versus The Special Director Directorate of Enforcement, Mumbai

The Appellate Tribunal under SAFEMA set aside an order regarding alleged FEMA contraventions for unauthorized direct investment outside India. The case ... Contravention of FEMA - unauthorized direct investment outside India - direct investment in an overseas JV which was not engaged in a bona fide business activity - Contravention of the provisions of Section 6(3) (a) of FEMA read with Regulation 6(2)(ii) of the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 - as submitted that in the instant case, the appellants adopted the third accepted mode of investment, namely purchase of existing shares of a foreign entity, although on 'deferred payment basis' HELD THAT:- The appellants have raised several pertinent issues during their arguments that the learned adjudicating authority has not at all considered the third mode of 'Direct investment outside India' as defined under Regulation 2(e) of FEMA 120/2004, namely, investment by way of purchase of existing shares of a foreign entity. Secondly, as submitted on behalf of the appellants that since the above-mentioned mode of investment was a valid mode under the Regulation, no specific permission from the RBI was necessitated as the investment was covered under automatic route. It is contended that neither the host country laws nor even the laws in India prohibit subscription to shares on deferred-payment basis - also submitted that the term 'bona fide business activity' not having been defined either under the FEMA, 1999 or the relevant Regulations framed thereunder, it could not be said that credit facilities amounting to USD 52 million from ICICI Bank UK PLC to RLL Cyprus was not for any „bona fide business activity‟, especially in view of the fact that the very purpose of setting up the JV, RLL Cyprus was to explore global opportunities in steel and textile sectors and M/s Welspun Power & Steel Ltd. was an established company with a presence in the steel sector both in India and abroad. Thus we find the impugned order does not throw clear light on the above aspects which were relevant to arriving at a reasoned decision as regards contravention, if any, of FEMA, 1999 and the relevant Regulations framed thereunder and the culpability of the appellants herein, thus in the interest of justice the matters deserve to be remanded back for fresh adjudication. Accordingly, the impugned order is hereby set a side, and the matters are remanded back to the learned adjudicating authority for fresh adjudication and passing of a reasoned order. Issues Involved:1. Alleged contraventions of the Foreign Exchange Management Act, 1999 (FEMA) and related regulations by Indian entities in forming a joint venture in Cyprus.2. Validity of the investment mode chosen by the appellants under FEMA regulations.3. Interpretation of 'bona fide business activity' in relation to the credit facilities availed by the joint venture.4. Compliance with procedural requirements under FEMA for overseas direct investment and provision of corporate guarantees.5. Consideration of post facto approval and the implications of such approvals by the Reserve Bank of India (RBI).Detailed Analysis:1. Alleged Contraventions of FEMA:The proceedings initiated by the Directorate of Enforcement were based on a complaint regarding the formation of a joint venture (JV) in Cyprus by Indian entities without remittance for equity subscription, leading to alleged violations of FEMA. The Special Director of Enforcement found the appellants guilty of contraventions, including unauthorized direct investment outside India and providing guarantees for loans without equity contributions in the JV. Penalties were imposed on the entities and their directors for these violations.2. Validity of the Investment Mode:The appellants contended that their investment in the JV through the purchase of existing shares on a deferred payment basis was a valid mode under Regulation 2(e) of FEMA 120/2004. They argued that this mode did not require prior RBI permission as it was covered under the automatic route. The adjudicating authority was criticized for not considering this third mode of direct investment outside India.3. Interpretation of 'Bona Fide Business Activity':The appellants challenged the finding that the credit facilities availed by the JV were not for bona fide business activities. They argued that the term 'bona fide business activity' is undefined in FEMA and should be interpreted in common parlance. The investment in Welspun Power and Steel Ltd. was claimed to be legitimate and in line with the JV's purpose of exploring global opportunities in steel and textiles.4. Compliance with Procedural Requirements:The appellants argued that the procedural requirements for overseas direct investment and the provision of corporate guarantees were met. They claimed that the RBI was informed of their investment through the authorized dealer, and the provision of guarantees was within legal bounds. The appellants also highlighted the RBI's post facto approval for financial commitments without equity contributions.5. Consideration of Post Facto Approval:The appellants received post facto approval from the RBI following a Bombay High Court order, allowing for financial commitments without equity contributions. They argued that this approval should have been considered by the adjudicating authority, as it demonstrated compliance with FEMA regulations. The appellants contended that the impugned order failed to account for this development.Conclusion:The appellate tribunal found merit in the appellants' arguments, particularly regarding the consideration of the third mode of investment and the interpretation of 'bona fide business activity.' The tribunal noted that the impugned order lacked clarity on these aspects and decided to set aside the order, remanding the matter for fresh adjudication. The tribunal emphasized the need for a reasoned order after affording the appellants a reasonable opportunity to be heard, while also allowing for the possibility of compounding if permissible under law. The appeals were disposed of without any order as to costs.