Power of RBI to withhold remittance to be made under Automatic route to Wholly owned Subsidiary cannot be used to reject the remittance on whimsical and arbitrary reasons.

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Power of RBI to withhold remittance to be made under Automatic route to Wholly owned Subsidiary cannot be used to reject the remittance on whimsical and arbitrary reasons.

 

 

Reserve Bank of India Vs Jindal STeel and Power Limited

Delhi High Court

Dated: 26th March,2021

 

 

BRIEF FACTS:

  1. The present appeal has been filed by the Reserve Bank of India (being the respondent in W.P.(C) No. 3601/2020 titled Jindal Steel & Power Limited V/s Reserve Bank of India) being aggrieved by the order and judgment dated 04.12.2020.

 

  1. The respondent (original petitioner in W.P.(C) 3601/2020,) herein namely, Jindal Steel & Power Limited filed a writ petition in this Hon’ble Court seeking the following reliefs:-

“A. Issue a writ, order or direction including a writ in the nature of Mandamus, directing Respondent to permit Petitioner to make additional commitments and payments of USD 300 Million to its wholly owned subsidiary namely Jindal Steel and Power (Mauritius) Limited by way of equity subscription or loan or corporate guarantee or bank guarantee or through other permitted mode from Indian Bank for meeting its debt obligations;

 

  1. Pass any other Order(s) as this Hon’ble Court may deem fit in the given facts and circumstances of the present case.”

 

  1. The Respondent is said to be a company with business interest in steel manufacturing, power generation, mining of iron ore, lime stone and coal. To optimise the cost of raw material required for manufacturing and also to have a linkage to raw material like coking coal, the respondent set up various overseas subsidiaries including (i) Jindal Steel & Power (Mauritius) Ltd. (herein after called JSPML), a company incorporated under the laws of Mauritius; (ii) Skyhigh Overseas Ltd. (also called SOL), a company incorporated under the laws of Mauritius; and (iii) Jindal Steel Bolivia (also called JSBSA).

 

 

  1. The respondent has been making overseas direct investment and has also undertaken other financial commitments in respect of aforesaid subsidiaries after getting approval from RBI, through SBI. The respondent’s wholly owned subsidiary JSPML has loans of USD 370 million and has issued corporate guarantees of USD 864.5 million. JSPML has made various obligations towards its lenders. The respondent, JSPML and the lenders have restructured the payment of the aforesaid due amount of lenders by restructuring agreements dated 07.02.2018 and 15.06.2018. This was further revised on 29.05.2020. The respondent has received a letter dated 13.06.2020 from JSPML stating that they do not have the funds available and the lenders may enforce the corporate guarantee of the respondent for the entire amount of USD 864.5 million. In addition, there is also a debt of the wholly owned subsidiary of JSPML namely Jindal Steel Power (Australia) Limited, JSPAL.

 

  1. It is further stated that JSPML does not have funds available to meet its cash flow requirements and also cannot make payment to its wholly owned subsidiary JSPAL. Hence, the respondent sought to make additional financial commitments andpayments of USD 300 million to its wholly owned subsidiaryJSPML for meeting its debt obligations.

 

  1. The appellant filed its counter affidavit before the learned Single Judge and took various objections as under:-

(i) Delhi Court lacks territorial jurisdiction;

(ii) ED is a proper and necessary party; and

(iii) The petition suffers from delay and laches.

(iv) The respondent concealed material information about inquiries and investigations it is facing at the hands of the ED.

(v) Under Regulation 6 and 9 of Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 (“FEMA ODI Regulations”) and more particularly under Regulation 9, the approval of RBI is “subjective” and “based upon RBI’s satisfaction.”

(vi) The RBI under the FEMA is a regulator of Foreign Exchange and has to see the adverse effects on the economy if permission for remission is granted.

 

 

 

  1. The learned single judge considered the objections of the appellant and held as under:-
  2. a) The appellant rejected the application of the respondent on account of objections raised by ED.

 

  1. b) A conjoint reading of Regulation 6 and 9 wouldshow that where an Indian Party is under anyinvestigation by any investigation/enforcement agency or regulatory body, the Indian party can apply under Regulation 9 for making any direct investment in a joint venture or wholly owned subsidiary outside India.

 

  1. c) The learned Single Judge further held that it is clear from the reading of Regulations 6 and 9 that mere existence of an investigation by an investigation/enforcement agency or regulatory body ipso facto does not debar an Indian Party from direct investment in Joint Venture or wholly owned subsidiary outside India.
  2. The learned Single Judge also held that the impugned order dated 30.12.19 is bad as:-
  3. i) No reasons have been given for rejection.
  4. ii) The reasons given in the order communicated vide Email dated 30.12.2019 at 3:29 PM isalso passed contrary to Regulation 9.
  5. The learned Single Judge further held that the appellant while dealing with an application filed under Regulation 9 cannot reject the same at the behest of any other Statutory Agency like CBI, Enforcement Directorate, etc.

 

  1. Lastly, the learned Single Judge held that the commitment and transactions of the respondent were done with prior consent and permission of the appellant. Now the appellant sought to take a U-turn and refused the permission to complete transactions which have already been cleared by the appellant.

 

  1. Hence, the learned Single Judge quashed the impugned order dated 30.12.2019 wherein request for undertaking additional financial commitments was rejected by the appellant.

 

 

  1. Aggrieved by the said order dated 04.12.2020, the appellant, RBI has filed the present appeal. Mr. Jayant Bhushan, learned Sr. Counsel appearing for the appellant has argued the following:-

 

A). That the observations of the learned Single Judge that stated that the order dated 30.12.2019 gives no reason is incorrect and bad in law.

 

  1. The arguments of the learned Sr. Counsel for the appellant is that the reason for rejection communicated to the respondent on 30.12.2019 was an administrative action and unless and until a Statute/Regulation requires decision to be given, administrative decisions do not require “reasons to be given in writing”.

 

  1. Learned Sr. Counsel has further contended that even though the order dated 30.12.2019 require no reasons to be given even then the appellant in order to ensure principles of natural justice, equity and fair-play communicated the reasons vide email dated 30.12.2019 sent at 3:29 PM giving the reasons.

 

The learned council of appellant held that only harmonious construction which can be culled out from conjoint readings of the judgments is that when an administrative or a quasi-judicial order is passed the authorities passing those orders cannot be permitted to substitute their reasons or contents of orders by reference to subsequent affidavits or other actions which did not find place in the order.

B.)  That the case of the appellant cannot fall under Regulation 6 but can only fall under Regulation 9(3) of FEMA ODI Regulations. Regulation 9 reads as under :-

“1) An Indian Party, which does not satisfy the eligibility norms under Regulations 6 or 7 or 8, may apply to the Reserve Bank for approval.

(2) Application for direct investment in Joint Venture/Wholly Owned Subsidiary outside India, or by way of exchange for shares of a foreign company, shall be made in Form ODI, or in Form ODB, as applicable.

 

 

(2A) An application made under sub-regulation (2) in Form ODI

(a) for the purpose of investment by wayof remittance from India, in an existing company outside India, shall be accompanied, by the valuation of shares of the company outside India, made-

(i) where the investment is more than USD 5 (five) million, by a Category I Merchant Banker registered with SEBI or an Investment Banker/Merchant Banker registered with the appropriate regulatory authority in the host country; and

(ii) in all other cases, by a Chartered Accountant or a Certified Public Accountant.

(b) for the purposes of investment by acquisition of shares of an existing company outside India where the consideration is to be paid fully or partly by issue of the Indian party’s shares, shall be accompanied by the valuation carried out by a Category I Merchant Banker registered with the SEBI or an Investment Banker/Merchant Banker registered with the appropriate regulatory authority in the host country.

(3) The Reserve Bank may, inter alia, take into account following factors while considering the application made under sub-regulation (2):-

  1. Prima facie viability of the Joint Venture/Wholly Owned Subsidiary outside India;
  2. Contribution to external trade and other benefits which will accrue to Indiathrough such investment;
  3. Financial position and business track record of the Indian Party and the foreign entity;
  4. Expertise and experience of the Indian Party in the same or related line of activity of the Joint Venture or Wholly Owned Subsidiary outside India.

The learned council of appellant said that DOE being an expert body its opinion was sought and after seeking their opinion which was contained in the letter of 03.12.2019, the appellant conveyed its rejection on 30.12.2019.

 

                 

 

 

SUBMISSIONS BY LEARNED COUNCIL OF RESPONDENT:

  1. (i) The learned Sr. Counsel for the respondent has argued that even assuming without admitting that the reasons can be looked into, the bare perusal of the reasons clearly shows that the sameare arbitrary and whimsical. In support, the learned Sr. Counsel for Respondent has drawn our attention to argue that the reasons communicated in the e-mail of 30.12.2019 as well as in the letter of 03.12.2019 only shows that the Directorate of Enforcement has indicated

(a) pending of FEMA and PMLA cases.

(b) in view of the above DOE has objections.

 

(ii) The learned Sr. Counsel has further stated that it is evident from the entire correspondence, pleadings & documents on records that at best the ED has only expressed “a reservation” and expressing a reservation cannot be construed reason for rejection of permission to remit foreign exchange.

 

(iii)The learned Sr. Counsel has further stated that some investigations & inquiries have been pending against the respondent. It is in this view of the matter that each and every permission that has been granted to the respondent has been without prejudice to any action that may be taken by RBI or any investigative agency on account of any contravention observed at the future date.

 

(iv)The learned Sr. Counsel has further submitted that JSPML, the wholly owned subsidiary of the respondent has already taken the credit of foreign exchange from various lenders and the foreign exchange has already come to the country. It is only this foreign currency which is now being repaid by the respondent.

 

(v) The learned Sr. Counsel has further submitted that under PMLA as per Section 2(U) the only violation is proceeds of crime which is define as under:-

“(u) “proceeds of crime” means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property;”

 

(vi)The present case is not a PMLA violation as it is not the case of the RBI nor is the case of the appellant that the amounts of 90 million USD, 54.99 million USD and 96.15 million USD which were remitted in the past were not used for the purpose for which they were remitted. The learned senior counsel further argued that the letter dated 14th August, 2019 shows that there is not even an investigation against the respondent but only an enquiry.

 

(vii)The learned Sr. Counsel has further drawn our attention to the letter of the 03.09.2020 of DOE to state that the DOE was perfectly satisfied with the order of 24.07.2020 passed by the learned Single Judge which is reproduced herein under:-

 

“15. In these circumstances, in my opinion, the petitioner has made out a prima facie case. The interim directionsas stated in the order of this court dated 19.06.2020 are reiterated.

 

  1. In the facts I pass the following directions:-

The respondent shall permit the petitioner to transmit the sum of 54.99 million USD forthwith before 31.07.2020 as has been prayed for. This permission is however subject to the following:

 

(i)The petitioner shall furnish an undertaking from the Board of Directors that if for some reason this court passes a direction to the petitioner to deposit the said remitted amount amounting to 55 million USD, the petitioner shall forthwith deposit the same

in court.

 

(ii)The petitioner shall give an undertaking that it has unencumbered assets worth 60 million USD or above and that the petitioner shall not sell, alienate or transfer or encumber these assets without prior permission of this Court.”

 

 

 

 

 

 

  1. The learned Sr. Counsel submits that even today they are ready to give an undertaking from the Board of Directors that if for some reason this court passes a direction to the respondent to deposit the said remitted amount amounting to 241.5 million USD, the Respondent shall forthwith deposit the same in court. As well as an undertaking that it has unencumbered assets worth 241.5 million USD or above and that the respondent shall not sell, alienate or transfer or encumber these assets without prior permission of this Court.

ANALYSIS & DECISION OF HON’BLE DELHI HIGH COURT

  1. After considering the entire documents on record and the submissions of the learned Sr. Counsels, we are unable to agree with the contentions of the learned Sr. Counsel for the appellant for the following reasons:-

 

  1. No reasons given in the order dated 30.12.2019

We are of the view that the order dated 30.12.2019 gives no reason for rejecting the application of the respondent. Assuming for the sake of arguments that the reasons are contained in the e-mail of 30.12.2019 as well as in the letter of 03.12.2019, we are also required to see that the reasons so mentioned are not arbitrary, whimsical and in accordance with the scheme of the FEMA. The reasons for rejection must be considered and also must relate to the dominant purpose of the FEMA Regulations which is conservation of Foreign Exchange.

 

The reason contained inthe e-mail of 30.12.2019 namely “ reservation expressed by DOE/on-going investigations” and in the letter of 03.12.2019 namely “ conducting investigations against M/s Jindal Steel Power under FEMA in four cases” and “conducting investigations under PMLA in three cases,” cannot be a ground for denial of permission.

 

The appellant cannot deny approval merely on the premise of pending investigation. It is not the case of the RBI, in the appeal, counter affidavit in the writ petition or argued before us that the remittances made in the past by the respondent have been misused. Till date pursuant to the permission of the RBI the respondent has remitted a total amount of 241.14 million USD (USD 90 million+ USD 54.99 million+ USD 96.15 million).

Since, we have considered the reasons given for rejection in the order dated 30.12.2019 the reliance on Mahender Singh Gill, E.G Nambudiri and Hanuman Prasad case becomes irrelevant.

 

Hence, we hold that even if we look at the reasons for rejection contained in the order dated 30.12.2019, the reasons are arbitrary, whimsical and do not further the scheme of Foreign Exchange Management Act.

 

  1. The reliance on word “ inter alia” under Regulation 9(3)

We have considered the arguments of the learned Sr. Counsel for the appellant as well as learned Sr. Counsel for the respondent.

 

We are of the view that Regulation 9(3)the word “ inter alia” of FEMA ODI Regulations musttake its colour from the scheme, drift and tenor of the Act as well as Regulations.

 

The FEMA ODI Regulations do not contemplate any role of the third party or the agency for approval or for prior approval, least of all investigating agency. The only mention of pending investigation is under Regulation 6(2) (iii) ie. If the Indian Party is under RBI caution list/lists of defaulters or under investigation by an investigation/enforcement agency or by a regulatory body.

 

The very fact that Regulation 9(3) makes a conscious omission of pending investigations, by an investigation/ enforcement agency, further strengthens our opinion that merely an on-going enquiry /pending investigations cannot be a ground for rejection of permission to remit Foreign Exchange.

 

It will be relevant to point out that all permissions given by the appellant have categorically stated “ each permission is without prejudice to any action that may be taken by any investigative agency on account of contravention”

 

We also note with approval that even after “ so-called reservation” indicated by the DOE, the appellant has granted permission to the respondent on 09.09.2020 indicating “ no objection from the FEMA 1999 angle.”

The counter affidavit of the appellant has reiterated that the conditions imposed in the letter of 09.09.2020 are in line with FEMA ODI Regulations.

 

Hence, we hold that thedenial of permission dated 30.12.2019 based uponRegulation 9(3) of FEMA ODI Regulations is wrong.

  1. Not dealt with preliminary objections raised in thecounter affidavit.

We are of the view, that the preliminary objections raised in the counter affidavit are not relevant/ germane to issue in controversy and hence have not been referred to by the learned Single Judge.

  1. Lack of territorial jurisdiction

We are of the view that the authoriseddealer bank i.e. the entity through which overseas direct investment is sought to be made, is State Bank of India, overseas branch New Delhi.

The appellant himself in communication dated 01.01.2008(page 414), has directed the respondent to approach New Delhi Regional Office. Hence, no fault is found in the order of the learned Single Judge in entertaining the writ petition.

  1. ED is a proper &necessary party

The writ petition in the present case is impugning the order dated 30.12.2019 rejecting the respondent’s request to remit funds abroad. The same has to betested in the context of the FEMA ODI Regulations.

iii. Delays and laches

The challenge in the writ petition is to the impugned order of the RBI dated 30.12.2019 and the writ petition has been filed on 17.06.2020. It is pertinent to mention that on account of COVID- 19, there had been a complete lock- down in the country from the last week of March, 2020. Hence, to our mind there is no delay which merits dismissal of the writ petition on this account.

 

 

 

  1. Concealment of material facts

To our minds, after going through thedocuments and hearing the parties, there has been no concealment of any material, fact or information which was relevant to the issue in controversy and which has not been brought to the notice of the learned Single Judge intentionally or malafidely, by the respondent.

Hence, the learned Single Judge has not adverted to thepreliminary objections raised in the counter affidavit.

  1. No finding against ED could have been given without ED being a party.

We are unable to agree with this contention of the appellant as there is no finding given against the ED by the learned Single Judge. The learned Single Judge in Para 38 of the impugned order and judgment dated 04.12.2020 has observed merely that there is nothing on record of the writ court which shows that any demand appears to have been raised by the ED on the respondent. The learned Single Judge has further held that DOE has enough power under various statutory regimes to attach properties and assets of the defaulter individual.

E.The appellant has rejected the application of the respondent at the behest of ED.

The learned Sr. Counsel has relied on State of Bihar v. Asis Kumar Mukherjee (Dr) to contend that he has sought ED’s view to consult and take a considered decision.

We have already, while adverting to the arguments of the learned Sr. Counsel for the appellant in ground (A) held that the reasons for rejection have been merely the apprehension expressed by the ED. The said apprehension of the ED is neither in spirit of the scheme of FEMA nor Regulation 9(3). The reliance of RBI on the apprehensions expressed by ED in its e-mail of 30.12.2019 and the letter of 03.09.2020 itself has been held by us to be incorrect and hence, the rejection by the appellant dated 30.12.2019 isincorrect. In view of the above, the reliance placed on the judgment State of Bihar v. Asis Kumar Mukherjee (Dr) is misplaced.

 

 

 

  1. The appellant taking u-turn by taking permission.

We have already held and we rely on the observation of E.G Nambudiri that “ competent authority has no licence to act arbitrary, he must act in a fair and just manner.” The appellant in the present case has granted four permissions as elaborated by us in paragraph 32&33. The appellant even as late as 09.09.2020 has granted permission to the respondent ie. much after the allegedPanama/Mauritius Leaks on 14.08.2019 subject to

“3. The said approval is subject to the following terms and conditions:

  1. IP shall furnish an undertaking from the Board of Directors, that if on the basis of its investigations DOE, for some reason, requires the IP to deposit equivalent amount of the said financial commitment amounting to USD 407 million, AUD 6.35 million and AUD 40.15 million respectively, the IP shall forthwith deposit the same with their designated AD bank.
  2. The IP shall give an undertaking that it has unencumbered assets worth USD 450 million, AUD 7.00 million and AUD 45.00 million or above and that the IP shall not sell, alienate or transfer or encumber theseassets without prior permission of DOE.”

This clearly shows that the only requirement of the RBI was

  1. an undertaking from the Board of Director to deposit

equivalent amount and

  1. give an undertaking that the respondent has unencumbered

assets worth the remittance amount.

During the course of arguments the learned Sr. Counsel for the

respondent has categorically made the statement that they would give a Board Resolution to deposit equivalent amount of the said financial commitment amounting to USD 241.5 million and an undertaking that it had unencumbered assets worth USD 241.5 million but the same was not acceptable to the respondent. Be that as it may, it is clear that the letter of 09.09.2020 was issued by the respondent after the so-called Panama/Mauritius Leaks and there is no justification or satisfactory explanation as to why the permission was granted even as late as 09.09.2020.

Moreover, the learned Sr. Counsel for the appellant had relied on the Judgment M/s. Mahabir Jute Mills LTD., Gorakhpore Vs. Shri Shibban Lal Saxena and Ors to urge that the very fact that the appellant chose not to challenge the order and in fact comply with the same cannot be held against them. The said judgment need not detain us as we are of the opinion that the order dated 30.12.2019 is itself flawed.

Hence, denial of permission of 30.12.2019 by the respondent isflawed.

  1. No amount of unencumbered asset can be ordered as a condition for granting permission.

The said ground has been raised by the learned Sr. Counsel for the appellant that no amount of unencumbered assets can be ordered as a condition for granting permission as violation for foreign exchange and further that the principle of Foreign Exchange Violation is to conserve valuable foreign exchange.

We have gone though the counter affidavit filed by the appellant as well as the grounds of appeal and in none of the two, the said grounds has been urged or argued. It seems that the said grounds have been argued before us for the first time without there been any pleadings on record. In view of the laws laid down by the Hon’ble Supreme Court, Attar Singh Gurumukh Singh and Ors. Vs. Income Tax Officer, Ludhiana And Ors8. we are unable to look into the said grounds in the absence of pleadings. Without prejudice, assuming the said grounds could have been raised the same is devoid of merit as on 09.09.2020, the RBI itself permits remittance of foreign exchange subject to two conditions namely:

  1. an undertaking from the Board of Director to deposit equivalent amount and
  2. give an undertaking that the respondent has unencumbered assets worth the remittance amount
  3. For the reasons given in this judgment , and in this view of the matter, we find no infirmity in the order and judgment dated04.12.2020 of the learned Single Judge passed in W.P. (C) No. 3601/2020. Consequently, the present appeal is devoid of any merits and is dismissed along with accompanying applications.

 

 

  1. The present application has been filed under Order I Rule 10 read with Section 151 of CPC by the Directorate of Enforcement seeking impleadment as a respondent in the present appeal.

 

  1. The case set up by the DOE is that the DOE informed the appellant that an inquiry under FEMA is being initiated against the respondent and others in respect of purchase and sale of four vessels registered in the name of respondent’s subsidiaries in Marshal Island during the year 2012-017. The applicant has further stated that the present proceedings will have an impact on the investigation being carried out by the DOE and hence sought impleadment in the present application as respondent.

 

 

  1. The law with regard to impleadment has been settled by the Hon’ble Supreme Court in Mumbai International Airport (P) LTD. Vs. Regency Convention Centre and Hotels Private LTD. And Ors.9 as well as VidurImpex And Traders Private Limited And Ors. V.s Tosh Apartments Private Ltd. And Ors. The Hon’ble Supreme Court has stated that a necessary party is the person who ought to be joined as the party in the proceedings and in whose absence an effective decree cannot be passed by the court.

 

  1. A proper party is a person whose presence would enable the court who completely, effectively and properly adjudicate upon all matters and issues, though he may not be the person in favour of or against whom a decree is to be made for the reasons we have elaborated in our judgment dated 26.03.2021.

 

  1. We feel that DOE is neither a proper nor a necessary party to the present proceedings as no relief is claimed against DOE. The disputes in question can be effectively, completely and properly be adjudicated in the absence of applicant.

 

 

 

 

  1. In addition we are also persuaded by the fact that there is no averment in the application as to why DOE chose not to file a similar application for impleadment in the original writ proceedings and has only come up for the first time in the present appeal.

 

  1. The application is totally silent on the said ground. In this view of the matter we find no merit in the application and the same is dismissed.

 

CONCLUSION: This is a landmark judgement by Hon’ble Delhi High Court in which court held that remittance application of a party cannot be defined only on the basis of an investigation or enquiry is going on by ED against the party. In this case RBI has denied remittance of fund by the party to its subsidiary available through Automatic Route without giving due and proper reasons.It is clear from above decision that power of RBI to withhold remittance to be held through Automatic Route to Wholly Owned Subsidiary by an eligible Indian company cannot be used to reject the remittance on Whimsical and arbitrary reasons.                 

DISCLAIMER:  the case law produced here is only for information of readers. In case of necessity do consult with tax consultants.

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