2024 (12) TMI 1096 - HC - FEMA

ED cannot deny overseas investment NOC based on mere summons without formal FEMA Section 4 contraventions

Delhi HC ruled in favor of petitioners challenging ED's refusal to grant NOC for overseas direct investment under FEMA. Court held that mere issuance of ... Non-grant of NOC by ED - legal framework under FEMA, 1999, which governs the issuance of such NOCs as a prerequisite for making ODIs - HELD THAT:- As prima facie the Petitioners’ emphasis on adherence to the valuation norms prescribed under FEMA regulations holds merit. They are correct in pointing out that the rules mandate that valuations must be conducted by Category-I merchant bankers registered with SEBI or overseas merchant bankers accredited by the host country’s regulatory authority. TIL has complied with this requirement by engaging a SEBI-registered merchant banker. If the Respondents indeed possess cogent material indicating overvaluation or misuse of foreign exchange, they ought to have initiated proceedings under FEMA, 1999, to substantiate these claims. Presently, it is only an allegation of ED that there has been overvaluation. Therefore, at this stage, the valuation conducted by an expert body which is relied upon by the Petitioner has a probative force and is only being doubted by the ED on the grounds of suspicion. The refusal to grant an NOC must be predicated on clear, cogent, and rational reasons. Mere issuance of summons, absent any formal finding of contravention under Section 4 of FEMA, 1999, or violations of Sections 131 and 132 of the Income Tax Act, 1961, does not meet this threshold. Furthermore, the Court also finds merit in the contention of the Petitioner that the penalty for violations of the provisions of FEMA, 1999 are fiscal in nature and under Section 13 of FEMA, the fiscal penalty would be three times the amount so invested or INR 2 Lakhs in cases where the invested amount is not quantified. On the other hand, the denial of NOC by ED in the present case, has completely restricted the Petitioners from remitting money abroad to its subsidiaries. The prolonged investigation without any conclusion, coupled with a lack of action under FEMA, is insufficient to justify the denial of the Petitioners’ right to make further investments. The Petitioners have a legitimate expectation of conducting their business unhindered, particularly in the absence of definitive findings against them. In sum, mere issuance of summons under Section 37 (1) of FEMA, 1999, without any finding of contravention under Section 4 of FEMA, 1999, and the alleged non-compliance with the provisions of Section 131 and 132 of the Income Tax Act, 1961, cannot be a valid ground for denial of the NOC. It is the Authorised Dealer (bank) who have to ensure that the person making the overseas investment has complied with the conditions prescribed in the FEMA OI Rules, Regulations and Directions. In fact, in the FEMA OI Directions, 2022, under Clause 27, it is provided that the AD shall render themselves liable for penal action under Section 11 and 13 of FEMA, 1999, in case they facilitate remittances without obtaining the requisite documents. It is also important to take note of Section 10(5) of FEMA, 1999, under which, before undertaking any transaction in foreign exchange the authorised person has to reasonably satisfy themselves that the transaction will not involve and is not designed for contravention of any provision of the Act/Rules/Regulations. These regulatory provisions will continue to apply notwithstanding the issuance of LOC and therefore, safeguard the interest of the State. Respondents have thus not demonstrated the contravention of FEMA, 1999 with clear basis, in order to deny the NOC. There must be a nexus between the alleged contravention and the proposing investment which has not been established in the present case. Since the Petitioners have, in good faith, complied with regulatory requirements, it is unreasonable to subject them to indefinite uncertainty. Issues Involved:1. Non-grant of No Objection Certificates (NOC) by the Directorate of Enforcement (ED) under Rule 10 of the Foreign Exchange Management (Overseas Investment) Rules, 2022.2. Allegations of irregularities in overseas investments by the Petitioners, particularly concerning overvaluation of shares and potential violations under FEMA, 1999.3. The legal framework and procedural requirements under FEMA, 1999, for overseas direct investments and issuance of NOCs.Issue-wise Detailed Analysis:1. Non-grant of NOC by the ED:The Petitioners, Times Internet Limited (TIL) and Bennett Coleman & Co. Ltd, sought NOCs from the ED to remit funds to their Wholly Owned Subsidiaries (WOS) abroad, as required under the new FEMA OI Rules, 2022. Their applications were rejected without substantive reasons, prompting them to file writ petitions challenging the rejection. The court found that the impugned communications lacked rationale or justification, violating principles of natural justice. The absence of reasons for rejection rendered the decision arbitrary and liable to be set aside. The court emphasized that the refusal to grant an NOC must be based on clear, cogent, and rational reasons, which were not present in this case.2. Allegations of Irregularities in Overseas Investments:The ED's denial of the NOC was based on allegations of irregularities in the Petitioners' previous overseas investments, particularly concerning the overvaluation of shares in a company named MX Media Company Ltd. The ED alleged that TIL invested in MX Media Co. through an inflated valuation of shares, facilitating the diversion of foreign exchange. Despite these allegations, no formal proceedings or adjudication were initiated against the Petitioners. The court noted that investigations lingering without progress cannot indefinitely impede legitimate business activities. The ongoing investigation, without tangible progress or formal charges, was deemed insufficient to justify the denial of the NOC.3. Legal Framework and Procedural Requirements:The court examined the shift from the earlier regulatory regime to the current framework under the FEMA OI Rules, 2022. The new rules have liberalized the process for overseas investments, allowing Indian entities to make investments for 'bona fide business activity' subject to certain conditions. Rule 10 of the FEMA OI Rules, 2022, requires entities under investigation to obtain an NOC from the relevant agency before making financial commitments abroad. The court highlighted that the mere issuance of summons does not amount to an investigation in terms of FEMA, 1999, and cannot be a valid ground for denial of the NOC. The court also noted that the Authorised Dealer (bank) is responsible for ensuring compliance with the conditions prescribed under the FEMA OI Rules, Regulations, and Directions.Conclusion:The court allowed the writ petitions, quashing the impugned rejection letters and permitting the Petitioners to approach the Authorised Dealer for remittance of investment abroad. The remittance applications were directed to be processed on their own merits as per the applicable rules and regulations under FEMA, 1999. The court underscored the Petitioners' legitimate expectation to conduct their business unhindered, particularly in the absence of definitive findings against them. The decision emphasized the need for a clear nexus between alleged contraventions and proposed investments, which was not established in the present case.