2025 (12) TMI 1615 - HC - FEMA

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 ... Maintainability of the writ petition - non-resident - acts of oppression and mismanagement in the affairs of the company - violation of the principles of natural justice - CLB failed to make out a case for winding up of the company - violation of any right/fundamental right - cost of undue enhancement in shareholding - issue regarding compliance with FERA for the purpose of permission to issue shares HELD THAT:- In the present case, in lieu of his capital contribution Kamal had purchased the second-hand equipment with his own funds, abroad. He had supplied the machinery which was purchased abroad. Such import of second-hand machinery was permissible observing all formalities. It is nobody’s case that the requisite formalities for import was not complied. Since in the present case there was no issue of importation of goods involving outflow of any foreign exchange, RBI has rightly relied upon the DO letter dated 03.01.1994 which governed the transaction carried on by the Company since amount was paid directly by the NRI (Dr. Kamal) against import of second-hand capital goods. Such investment is permissible as manifests from extract of the DO letter dated 03.01.1994, taken note of above, but on non-repatriable basis. In the present case such investment had been permitted and issuance of shares allowed on non-repatriable basis and, therefore, we find no infirmity whatsoever in the permission dated 07.05.2004 granted by the RBI. Insofar as the issue regarding violation of the Foreign Exchange Regulation Act, alleged by Mr. Mukherjee on behalf of Sajal we find no force in such submission. The permission was granted by RBI on 07.05.2004. Much prior thereto the Foreign Exchange Regulation Act was repealed and, in its place, the Foreign Exchange Management Act, 1999 came into effect on 01.06.2000. There is no dispute that under FEMA no permission was required from RBI to allot shares on importation of capital goods to non-resident Indians. The rights and liabilities of the erstwhile FERA were governed by a sunset clause wherein Mr. Mukherjee claimed his client’s rights were preserved under Section 6 of the General Clauses Act. In view of our finding recorded above regarding the approval dated 07.05.2004 being issued by the RBI in accordance with law and under the applicable statutory provisions and directive issued by the Government of India, we find such issue not arising in the facts and circumstances of the present case. No allegation regarding statutory incompetence of the RBI to grant the permission dated 07.05.2004 has been raised. There is also no allegation of mala fide being raised against the GM, RBI, the authority who granted the permission on 17.05.2004. As far as the DO letter dated 03.01.1994 is concerned, the writ petitioner never challenged the same. The RBI decision is founded on such directive. We have given our anxious consideration to the issue. In view of our findings above, we find no infirmity in decision of the learned Single Judge requiring interference by this Court in the present intra Court Appeal. The appeal deserves to be and is hereby dismissed. Issues: (i) Whether the writ petition filed by petitioner No.2 (an individual shareholder) was maintainable after the company withdrew from proceedings; (ii) Whether the Reserve Bank of Indiaorder dated 07.05.2004 granting permission to issue shares to an NRI against import of second-hand capital goods on non-repatriable basis was legally sustainable; (iii) Whether the Apex Courtjudgment in Kamal Kumar Dutta operated as res judicata or estoppel against challenge to the RBI order; (iv) Whether any violation of FERA/FEMA arose from the RBI permission.Issue (i): Whether petitioner No.2 (individual shareholder) had locus standi and the writ petition was maintainable after the companywithdrew.Analysis: The Court examined precedent recognizing that shareholders may invoke writ jurisdiction when State action or statutory decisions directly impair their individual rights or shareholding. The Single Judgerelied on authorities establishing that alteration in shareholding affecting control could confer a personal right to seek relief. The appellate court reiterated that shareholder standing depends on facts and whether individual injury is shown.Conclusion: In favour of Appellant.Issue (ii): Whether the RBI order dated 07.05.2004 granting permission to allot shares against second-hand equipment on non-repatriable basis was unsustainable, contrary to SIA/Industrial Policy, or vitiated by lack of consideration or natural justice.Analysis: The Court reviewed the SIA approval, EXIM policy provisions permitting import of second-hand capital goods (subject to conditions), the Government DO dated 03.01.1994 and the impugned RBI order reasoning. It held that RBI is the competent statutory authority under FERA to grant permission under Sections 19(1)(d) and 29(1)(b) and that judicial interference is limited to cases of perversity, lack of jurisdiction, mala fide or breach of natural justice. On the facts the RBI had considered the DO letter, the EXIM policy, and the change in the company's modus operandi; the order granted issuance on non-repatriable basis and was founded on relevant material and procedure.Conclusion: In favour of Respondent.Issue (iii): Whether the Supreme Court judgment in Kamal Kumar Dutta precluded challenge to the RBI permission by reason of res judicata or estoppel.Analysis: The Court examined the apex courtjudgment and found it took note of the pendency of the writ petition concerning allotment of shares and did not adjudicate the question of issuance of the specific 30,55,329 shares. Therefore the earlier judgment did not decide the RBI permission question and did not operate as res judicata or estoppel on that issue.Conclusion: In favour of Appellant.Issue (iv): Whether the impugned permission violated FERA/FEMA or other statutory provisions so as to render it invalid.Analysis: The Court noted repeal of FERA and enactment of FEMA, the transitional provisions, and that no charge of statutory incompetence or mala fide against RBI was established. The RBI order was held to be consistent with the DO dated 03.01.1994 and statutory framework; no breach of FERA/FEMA was shown that would invalidate the permission.Conclusion: In favour of Respondent.Final Conclusion: Although the individual shareholder had locus to sue, the challenge to the RBI permission dated 07.05.2004 failed on merits; the impugned RBI order is upheld and the appeal is dismissed.Ratio Decidendi: A constitutional court may exercise judicial review over a statutory authoritydecision under Article 226 where the decision is perverse, taken without jurisdiction, in mala fide, or in breach of natural justice; absent such defects, the statutory authority(RBI) may lawfully grant permission to issue shares against import of second-hand capital goods on a non-repatriable basis in accordance with governmental directives such as the DO dated 03.01.1994 and applicable import/EXIM policy.