Foreign security under FEMA includes transferable subscription rights, and seizure is limited to the equivalent value in India.

Subscription rights in a foreign company that confer transferable and valuable interests were treated as foreign security, so the challenge to action under FEMA failed on that point. The Tribunal held that the Department's appeal under Section 37A(5) was maintainable after reading Section 37A as a whole. It also rejected the argument that the shares had zero value, finding that allotment, reflection in company accounts, and later gift transfer showed a real holding of foreign security. However, seizure under Section 37A can extend only to the value equivalent of the foreign security situated in India, so excessive seizure beyond that limit was modified.

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Issues: (i) Whether the Department's appeal under Section 37A(5) of the Foreign Exchange Management Act, 1999 was maintainable; (ii) whether subscription to shares and subsequent transfer by gift of the foreign company's equity amounted to holding of foreign security in contravention of Section 4 of the Foreign Exchange Management Act, 1999; and (iii) whether the seizure under Section 37A of the Foreign Exchange Management Act, 1999 could be maintained only to the extent of value equivalent of the foreign security and not beyond it.

Issue (i): Whether the Department's appeal under Section 37A(5) of the Foreign Exchange Management Act, 1999 was maintainable.

Analysis: The statutory scheme of Section 37A had to be read as a whole. The opportunity of hearing under sub-sections (3) and (4) to both sides, coupled with the Supreme Court's direction that the Appellate Authority decide the Department's appeal under Section 37A(5), supported a construction that did not exclude the Department from appellate recourse. A restrictive reading would defeat the purpose of the provision and create an inconsistency within the section.

Conclusion: The Department's appeal was held maintainable.

Issue (ii): Whether subscription to shares and subsequent transfer by gift of the foreign company's equity amounted to holding of foreign security in contravention of Section 4 of the Foreign Exchange Management Act, 1999.

Analysis: The record showed that the foreign company had allotted ordinary shares, the shareholders and directors were identified in the financial statements, and the shares were reflected as fully paid in the company accounts. Even if the initial arrangement was described as subscription, it conferred valuable rights and was treated as direct investment outside India under the foreign security regulations. The transfer by gift also demonstrated that the holding had value and was capable of being transferred. The reasoning that the shares had zero value and therefore were outside Section 4 was rejected.

Conclusion: The holding of the foreign security was found to attract Section 4 of the Foreign Exchange Management Act, 1999, and the challenge to the seizure was not accepted in full.

Issue (iii): Whether the seizure under Section 37A of the Foreign Exchange Management Act, 1999 could be maintained only to the extent of value equivalent of the foreign security and not beyond it.

Analysis: Section 37A authorises seizure only of value equivalent situated within India of the foreign security held outside India. The objective is to secure the equivalent value and not to permit multiple or excessive seizures for the same underlying foreign security. On the facts, the seizure already made against certain respondents was adequate, but the seizure against the other respondents was not wholly sustainable to the extent it exceeded the permissible equivalent value.

Conclusion: The seizure was upheld for the amount already representing the permissible equivalent value and was set aside to the extent stated by the Tribunal.

Final Conclusion: The appeal was allowed only in part, with the Tribunal sustaining the legal basis of the proceedings while modifying the impugned order to preserve seizure only to the extent of the permissible value equivalent and to the extent specifically upheld against the concerned respondents.

Ratio Decidendi: For the purpose of Section 37A of the Foreign Exchange Management Act, 1999, subscription rights in a foreign company that confer transferable and valuable interests constitute foreign security, and seizure in India can extend only to the value equivalent of such holding, not beyond that limit.

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