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 Much prior thereto the Foreign Exchange Regulation Act was repealed and, in its place, the Foreign Exchange Management Act, 1999 came into effect on 01.06.2000.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. 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.