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TMI Blog2024 (10) TMI 291X X X X Extracts X X X X X X X X Extracts X X X X ..... nstant case, the appellants adopted the third accepted mode of investment, namely purchase of existing shares of a foreign entity, although on deferred payment basis HELD THAT:- The appellants have raised several pertinent issues during their arguments that the learned adjudicating authority has not at all considered the third mode of Direct investment outside India as defined under Regulation 2(e) of FEMA 120/2004, namely, investment by way of purchase of existing shares of a foreign entity. Secondly, as submitted on behalf of the appellants that since the above-mentioned mode of investment was a valid mode under the Regulation, no specific permission from the RBI was necessitated as the investment was covered under automatic route. It is contended that neither the host country laws nor even the laws in India prohibit subscription to shares on deferred-payment basis - also submitted that the term bona fide business activity not having been defined either under the FEMA, 1999 or the relevant Regulations framed thereunder, it could not be said that credit facilities amounting to USD 52 million from ICICI Bank UK PLC to RLL Cyprus was not for any bona fide business activity‟, e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RBI. It was further noted that the said JV, RLL Cyprus, had availed credit facility to the tune of USD 52 million from ICICI Bank, London. The credit facility was extended by ICICI Bank, London on the condition that liability of credit facility shall be secured by joint and several corporate guarantees of the Indian partners of the JV, RLL Cyprus, subject to maximum commitment as below: Welspun Gujarat Stahl Rohren Ltd.: USD 14Mn Welspun Wintex Ltd. USD 27Mn Krishi raj Trading Ltd..: USD 56Mn 4 . The RBI opined that the Bank guarantee was assured in favour of the RLL Cyprus, an overseas concern where the Indian companies had no equity stake. The three entities at Sl. No. 3, 4 and 5 of the table above had filed separate compounding applications dated January 9, 2009. All the three companies, however, withdrew their respective compounding applications vide their letters dated March 23, 2009. Accordingly, all the three compounding applications were disposed of by returning the same vide RBI‟s letter dated 22.04.2009. 5 . The above information was forwarded to the ED for necessary action under FEMA, 1999 and investigation regarding the utilization of the loan raised by the overs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Regulation 3 of the Foreign Exchange Management (Guarantees) Regulations, 2000 dared 3rd May 2000 and further read with Regulation 5 of the said Regulations for giving guarantees in respect of foreign currency term loans facility availed by M/s RLLC without complying with the provisions of Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004. Coming to the charges against the directors of the companies, he found that Shri Balkrishna Goenka was the Group Chairman and main promoter of the Welspun Group. As Director of M/s Welspun Gujarat Stahl Rohren Ltd. (now known as Welspun Corporation Ltd.) and M/s Krishiraj Trading Ltd., he was the person in charge and responsible to the respective companies for the conduct of their respective business, during the relevant period. 7 . Further, he found that the following persons, as Directors of the respective companies, were the persons in charge and responsible to the respective companies for the conduct of their respective business, during the relevant period: Sh. Rajesh R. Mandawewala: Director of M/s Welspun Gujarat Stahl Rohren Ltd. (now known as Welspun Corporation Ltd.), M/s Welspun Wintex Ltd. and M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... known as M/s Welspun Gujarat Stahl Rohren Ltd. 9. Aggrieved by the said order of the Ld. Special Director, the appellants herein have filed these appeals assailing the impugned order on various factual and legal grounds. Arguments on Behalf of the Appellants 10 . The learned counsel for the appellants dwelled upon the factual background of the case at great length. It is submitted that a company called Red Lebondal Limited, Cyprus (RLL, Cyprus) was incorporated on 21.05.2007. Certificate of Incorporation of the said company dated 21.05.2007, Register of Members, as also a Certificate of Ministry of Commerce, Industry and Tourism dated 23.05.2007 have been placed on record by the appellants. It is submitted that initially, the said company (RLL, Cyprus) was a single-member company with 1800 shares of Euro 1 each. All the shares of the company were held by M/s CCY Services Ltd. and were unpaid. 11 . Subsequently, on 22.11.2007 shares of RLL, Cyprus was transferred to M/s Intech Metals, SA (an entity resident outside India) and four Indian persons, i.e., three Indian companies and one individual, all belonging to the Welspun Group as follows: M/s Intech Metals SA 350 Shares M/s Welsp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount had been remitted pending receipt of UIN. However, vide letter dt. 15.12.2008, RBI alleged violation of Regulation 6(4) of FEMA 120/2004. On 09.01.2009, Indian entities filed compounding applications, which, however, were withdrawn on 23.03.2009 as there was no contravention involved in the transaction according to the appellants. Vide letter dt. 08.04.2009 addressed to the PNB, the Indian entities requested for remittance of share subscription money to RLL, Cyprus. However, vide their letter dt. 13.04.2009, the PNB responded by saying that remittance can be made only post issuance of UIN. 16 . The RBI returned compounding applications vide letter dated 23.04.2009 and informed ED to investigate the matter vide its letter dated 22.04.2009. 17 . Consequently, a Show Cause Notice (SCN) dated 21.10.2011 was issued to Indian persons by the Directorate of Enforcement (ED) alleging contravention of Section 6(3)(a) of FEMA, 1999 read with Regulation 3, 5, 6(2)(ii) 6(4) of the afore mentioned FEMA 120. The appellants herein were called upon to show cause why action ought not to be taken against them for violation of Section 6(3)(a) of FEMA r/w Sec 42 r/w Reg. 6(4) of FEMA 120. 18 . T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scription to Memorandum of Association OR existing share purchase. The relevant rule reads as below: 2. Definitions e) Direct investment outside India means investment by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity or by way of purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange but does not include portfolio investment. 24 . It is submitted that in the instant case, the appellants adopted the third accepted mode of investment, namely purchase of existing shares of a foreign entity, although on deferred payment basis . It is contended that the paragraph 5.11 of the impugned Order ignores this fact when it states that any investment by an Indian party is permissible under the Automatic Route only in cases where the Indian entity has made investment by way of contribution to the capital or subscription to the Memorandum of Association. No reference is made to the third mode of direct investment outside India, namely, by purchase of existing shares of a foreign entity. Also, the impugned Order fails to notice that the Act and/or the Regulations and/or the Ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l commitments without equity contribution in the JV/WOS may be considered by RBI under the approval route. In the instant case upon application made by the appellants, pursuant to the Hon'ble Bombay High Court order dated 26.09.2013 in W.P. No. 2489/2013, the RBI granted post facto approval for financial commitment without equity contribution. RBI also gave its no objection to striking off the name of RLL from the Register of Companies in Cyprus. The aforesaid clearly demonstrates that the provisions of the Cir No. 96 were clarificatory in nature and applied retrospectively. In any event corporate guarantee was conditional and subject to Indian laws, thus no contravention could have been alleged. Reliance is also placed on the judgment of the Apex Court in LIC v. Escorts (1986) 1 SCC 264 wherein it was held that the RBI has the authority to give ex-post facto permission, and such permission does not necessarily have to be previous permission. 27 . Without prejudice to the aforesaid arguments, it is contended that the impugned Order goes beyond SCN, in as much as it holds the appellants to be in violation of Section 6(2)(ii) of FEMA120/2004, in spite of the fact that the SCN onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y carried out the directions of RBI as advised. 31 . Considering the above submissions, the appellants have strongly contended that the impugned order deserves to be set aside and remanded back for de novo adjudication. Arguments on Behalf of the Respondents 31 . The learned counsel appearing for the respondent Directorate did not make detailed submissions on the merits of the case but conveyed that in the facts and circumstances of the present set of cases, the respondents are also agreeable to have the matter freshly adjudicated. Analysis and Findings 32 . I have considered the facts on record and the submissions from both sides. I find that the appellants have raised several pertinent issues during their arguments. It is firstly contended that the learned adjudicating authority has not at all considered the third mode of Direct investment outside India as defined under Regulation 2(e) of FEMA 120/2004, namely, investment by way of purchase of existing shares of a foreign entity. 33 . Secondly, it has been submitted on behalf of the appellants that since the above-mentioned mode of investment was a valid mode under the Regulation, no specific permission from the RBI was necessita ..... X X X X Extracts X X X X X X X X Extracts X X X X
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