FEMA compliance prevails over LRS permissions when foreign currency lending to overseas companies needs prior RBI approval.

Liberalised Remittance Scheme permissions did not override a specific FEMA restriction requiring prior RBI approval for lending in foreign exchange to an overseas company, so the contravention on that issue was sustained. Remittances within the permitted LRS limit and the related overseas share investment were treated as compliant under the relevant RBI circular, so no FEMA breach was made out on that count. The penalty for holding foreign exchange abroad was upheld because the funds remained overseas without permission for a prolonged period, and the quantum was found proportionate in light of disclosure, later repatriation, and tax settlement. The common order was affirmed in substance and the cross-appeals failed.

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Issues: (i) Whether the alleged contravention relating to overseas investment under the remittance scheme was made out. (ii) Whether the penalty imposed for holding foreign exchange abroad required interference on the ground of proportionality. (iii) Whether lending in foreign exchange to an overseas company without prior approval of the Reserve Bank of India was permissible.

Issue (i): Whether the alleged contravention relating to overseas investment under the remittance scheme was made out.

Analysis: The remittances were found to have been made within the permissible limit under the Liberalised Remittance Scheme and the subsequent investment in shares of an overseas company was treated as permissible under the relevant RBI circular. The record did not show breach of the FEMA framework on this count.

Conclusion: The alleged contravention was not sustained and was correctly dropped.

Issue (ii): Whether the penalty imposed for holding foreign exchange abroad required interference on the ground of proportionality.

Analysis: The foreign exchange remained held abroad without the requisite permission for a prolonged period. The penalty was imposed after considering the disclosure, later repatriation, and tax settlement, and was assessed at about ten per cent of the contravened amount. No perversity or illegality was found in the quantum.

Conclusion: The penalty did not call for interference and was upheld.

Issue (iii): Whether lending in foreign exchange to an overseas company without prior approval of the Reserve Bank of India was permissible.

Analysis: The claimed support from the Liberalised Remittance Scheme and permissive capital account transaction provisions was rejected. The specific regulatory prohibition on lending in foreign exchange to a foreign company without RBI approval was held to prevail, and the saving clause did not override that restriction.

Conclusion: The contravention was sustained and the penalty was upheld.

Final Conclusion: The common order of the Adjudicating Authority was affirmed in substance, with no ground made out for reduction or interference, and the cross-appeals failed.

Ratio Decidendi: A resident individual cannot rely on the Liberalised Remittance Scheme or general capital account permissions to justify lending in foreign exchange to a foreign company where the specific FEMA borrowing and lending regulation requires prior Reserve Bank approval.

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