Non-resident share allotment tied to importing second-hand machinery upheld; RBI approval valid, FERA claims rejected, appeal dismissed

The dominant issue was whether the RBI's permission to a non-resident investor for allotment of shares against import of second-hand capital goods was legally infirm for alleged foreign exchange law violations. The HC held that the transaction involved direct payment by the non-resident for permissible import of machinery without any foreign exchange outflow from the company, and was governed by the applicable Government directive requiring a non-repatriable basis; accordingly, the RBI's approval was valid and suffered from no infirmity. The HC further held that allegations founded on FERA were misconceived because FERA had been repealed and, under FEMA, no RBI permission was required for such share allotment. The intra-court appeal was dismissed.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether, after the company withdrew from the writ petition, an individual shareholder could maintain and continue the writ challenge to the Reserve Bank of India's permission for issue/allotment of shares to a non-resident Indian, on the ground of individual injury through dilution/shift of corporate control, and whether such RBI permission is amenable to judicial review under Article 226 in an appropriate case.

(ii) Whether the RBI's permission dated 07.05.2004 allowing issue of shares on a non-repatriation basis against import of second-hand medical equipment was legally infirm for alleged inconsistency with the earlier approval/policy framework relied upon by the writ petitioner, or for non-consideration of relevant material; and whether the Court should interfere within the limited scope of judicial review over RBI's statutory discretion.

(iii) Whether the writ challenge was barred by res judicata/issue estoppel based on earlier findings in company law proceedings, in relation to the allotment of shares forming the subject matter of the RBI permission.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Maintainability by an individual shareholder and amenability of RBI permission to writ review

Legal framework (as discussed by the Court): The Court examined the permissibility of invoking Article 226 to question an RBI permission, recognising that judicial review may lie in a limited class of cases (e.g., mala fide, non-application of mind, contravention of statute/rules/directions, lack of jurisdiction, perversity, or violation of natural justice with civil consequences). It also examined whether a shareholder can approach the writ court where the impugned action affects the shareholder's individual rights.

Interpretation and reasoning: The Court held that the proposition that RBI decisions under its statutory discretion are wholly immune from Article 226 scrutiny cannot be accepted as a rule. It reasoned that constitutional judicial review may be exercised where a statutory decision is without basis, ignores relevant material, lacks jurisdiction, is perverse, or violates natural justice. On locus, the Court accepted the finding that, given the shareholding structure and the effect of further allotment in favour of one principal shareholder, the impugned allotment had a direct consequence of diluting the other shareholder's percentage and shifting control, thereby affecting individual rights beyond a mere corporate grievance.

Conclusion: The Court upheld maintainability at the instance of the continuing shareholder notwithstanding the company's withdrawal, and held that RBI's permission is, in an appropriate case, amenable to writ scrutiny; thus the writ petition was not non-maintainable merely because the company withdrew.

Issue (ii): Validity of RBI permission dated 07.05.2004-non-repatriation basis for shares against second-hand equipment; scope of interference

Legal framework (as discussed by the Court): The Court proceeded on the basis that RBI was the competent statutory authority to grant permission for issuance of shares to a non-resident under the relevant provisions invoked in the RBI order, and assessed whether the impugned permission suffered from jurisdictional error, perversity, or non-consideration of relevant policy/material. The Court also addressed the relevance of the Government of India policy directive letter dated 03.01.1994 relied upon by RBI, and the contention that earlier approval/policy required "new" capital goods.

Interpretation and reasoning: The Court rejected the attack that RBI ignored the earlier approval/policy framework. It found, on the facts, that the originally approved "modus" of foreign investment (involving foreign capital inflow/outflow for procurement of capital goods) was not pursued; instead, there was a conscious shift to a different modus, namely direct import of second-hand medical equipment purchased abroad by the non-resident from his own funds, without the company's foreign exchange outflow. Because of this change, the Court held there was "no occasion whatsoever" for RBI to consider the earlier approval/policy relied on by the writ petitioner. The Court accepted RBI's reliance on the Government directive of 03.01.1994, treating it as relevant governing material: where payment is made directly by NRIs for import of second-hand capital goods, investment is permissible only on a non-repatriable basis. The Court emphasised the limited role of judicial review over RBI's statutory discretion, and found RBI's decision to be based on relevant material, policy, and after hearing the parties, with no jurisdictional defect.

Conclusion: The Court found no infirmity in the RBI permission dated 07.05.2004 granting approval to issue shares on a non-repatriation basis against importation of second-hand medical equipment, and declined to sit in appeal over RBI's discretionary decision within the restrained scope of judicial review.

Issue (iii): Res judicata/issue estoppel from earlier company law proceedings

Legal framework (as discussed by the Court): The Court considered whether prior findings in company law proceedings (including findings of oppression) operated as res judicata/issue estoppel to bar the present challenge to the RBI permission concerning allotment of a specified block of shares.

Interpretation and reasoning: The Court held that the earlier proceedings did not decide the specific issue of issuance/allotment of the relevant equity shares under the RBI permission. It noted that the earlier decision expressly took notice of pendency of the writ proceeding on the share-issuance issue, and did not adjudicate or comment upon the impugned allotment. Therefore, the necessary element of prior final adjudication on the same issue was absent.

Conclusion: The Court rejected the plea of res judicata/issue estoppel as inapplicable because the specific question of issuance of the shares under the RBI permission was not conclusively decided earlier.

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