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TMI Blog2024 (12) TMI 1096X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the valuation conducted by an expert body which is relied upon by the Petitioner has a probative force and is only being doubted by the ED on the grounds of suspicion. The refusal to grant an NOC must be predicated on clear, cogent, and rational reasons. Mere issuance of summons, absent any formal finding of contravention under Section 4 of FEMA, 1999, or violations of Sections 131 and 132 of the Income Tax Act, 1961, does not meet this threshold. Furthermore, the Court also finds merit in the contention of the Petitioner that the penalty for violations of the provisions of FEMA, 1999 are fiscal in nature and under Section 13 of FEMA, the fiscal penalty would be three times the amount so invested or INR 2 Lakhs in cases where the invested amount is not quantified. On the other hand, the denial of NOC by ED in the present case, has completely restricted the Petitioners from remitting money abroad to its subsidiaries. The prolonged investigation without any conclusion, coupled with a lack of action under FEMA, is insufficient to justify the denial of the Petitioners right to make further investments. The Petitioners have a legitimate expectation of conducting their business unhind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal content, on-line advertisement services on an international scale, operating diverse portals and websites. Both the Petitioner companies have Wholly Owned Subsidiaries [ WOS ] abroad by the names of Times Internet Inc. and BCCL Worldwide Inc., respectively. These WOSs were established by the Petitioners to facilitate international operations and investments. As part of their business strategy, the Petitioners are required to remit funds to these WOS in the form of overseas direct investments. 2. For this purpose, both the Petitioners sought No Objection Certificates [ NOC ] from Respondent No. 1 Directorate of Enforcement [ ED ] under Rule 10 of the Foreign Exchange Management (Overseas Investment) Rules, 2022 [ FEMA OI Rules, 2022 ] . However, their request was denied. The Petitioners argue that the non-grant of NOC has prevented them from transferring funds to their WOS entities, thereby hampering their investment plans and disrupting global operations. Thus, through the present writ petitions, the Petitioners seek to challenge the impugned communications issued by the Respondent, rejecting their applications for NOCs. FACTS 3. Both the Petitioner companies are Indian entitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t they duly complied with the summons, providing the requisite information, and emphasize that no proceedings under FEMA were initiated against them by the ED thereafter. 9. Against this backdrop, when the need arose to make additional investments in their respective WOSs in 2023, the Petitioners, as a matter of good governance and abundant caution, applied for NOCs under Rule 10 of the new FEMA OI Rules, 2022. These applications, however, were rejected by the ED through the impugned communications dated 30th October, 2023 [in W.P.(C) 15242/2023] and 15th November, 2023 [in W.P.(C) 15471/2023] , prompting the Petitioners to approach this Court through the present writ petitions. 10. Pertinently, after the rejection of NOC, ED issued fresh summons to TIL i.e., the Petitioner in W.P.(C) 15242/2023, to appear before them in terms of an ongoing investigation. This was the second summons issued to TIL after two years of the first summons. CONTENTIONS OF THE PARTIES 11. Mr. R.K. Handoo, counsel for the Petitioner makes the following submissions: 11.1 On 22nd August, 2022, the Central Government in exercise of powers under Sections 46 and 47 of FEMA, 1999 notified the FEMA OI Rules, 2022, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose it was availed, the penalty under FEMA, 1999, is for the foreign exchange to be returned and civil adjudication proceedings being initiated against the company. Thus, the rejection of the NOC by ED merely on the basis of an ongoing investigation , without evidence of wrongdoing, contradicts the spirit and purpose of FEMA, 1999, which is to encourage liberalization in foreign trade and investment. 11.8 It is imperative for the Petitioner to make the financial commitments to their subsidiaries in the USA and there is an urgent need to remit money abroad. 11.9 The rejection of the NOC lacks substantive reasons and authority, rendering it untenable in law and contrary to the principles of reasonableness and transparency. The said decision is arbitrary, lacks sufficient reasoning, and is contrary not only to the provisions of FEMA, 1999 but also to the regulations framed thereunder. 12. Per contra, Mr. S.V. Raju, Additional Solicitor General of India appearing for Respondent No. 1 - ED, presents the following arguments: 12.1 The denial of the NOC stems from a strong suspicion of violations under Section 4 of FEMA, 1999, specifically regarding foreign exchange held abroad by TIL. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itioner was successful in channelling funds from India under the guise of ODI in MX Media Co. and park the excess money overseas to the tune of USD 134.97 million, which is equivalent to INR 912.84 Crores. Hence, the Petitioner has taken precious foreign exchange reserves from the country, for purposes other than what was declared to RBI and the Authorised Bank. This amounts to violation of provisions of FEMA, 1999 and the Rules made thereunder. 12.7 On the basis of these findings ED initiated investigation under Section 37 of FEMA, 1999 along with the process of attachment of equivalent amount of property under Section 37A of FEMA, 1999, thus requiring TIL to submit a list of all of its assets. On scrutiny of the details furnished by TIL, it was found that the assets declared by them consist of 99.99% movable assets, with only one immovable asset in the form of a building worth INR 0.35 Crores. Further, the list of its other assets showed that out of a total of 10,309 assets declared, only 2259 assets have a value Rs.1/- amounting to Rs. 71.83 Crores. The rest of the assets had no value. Thus, it was clear that TIL did not have the requisite funds in India for adequate attachment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FEMA Act, rules, regulations and directions issued thereunder [Regulation 5 of FEM (Transfer or Issue of Any Foreign Security) Regulations, 2004] . FEMA (Transfer or Issue of Any Foreign Security) Regulations, 2004, provided for grant of prior permission for Indian entities seeking to make investments abroad [ Regulation 6 of FEM (Transfer or Issue of Any Foreign Security) Regulations, 2004,] . These regulations stipulated the conditions for an Indian party to make a direct investment. Regulation 6(2)(iii) barred Indian entities who were on the RBI s caution list or under investigation by an investigating agency, from obtaining such permissions for overseas investments. The previous regime also required the submission of an Annual Performance Report (APR) [Regulation 6(2)(iv) of FEM (Transfer or Issue of Any Foreign Security) Regulations, 2004] as well as the duly completed Form ODI to the designated Authorised Dealers (AD) [Regulation 6(2)(vi) of FEM (Transfer or Issue of Any Foreign Security) Regulations, 2004] . In fact, Section D of Form ODI requires a categorical declaration from Indian entities and their directors, disclosing any ongoing investigations. The RBI, through its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Thus, clearly, overseas investment by Indian entities has been made easy under the new rules, leaving the prudence of investment up to the Indian entity/person resident in India for bona fide business activity , as per laws of both countries. Rule 9 of the FEMA OI Rules, 2022 reads as under: 9. Overseas Investment. (1) Save as otherwise provided in these rules or the Foreign Exchange Management (Overseas Investment) Regulations, 2022, any investment made outside India by a person resident in India shall be made in a foreign entity engaged in a bona fide business activity, directly or through step down subsidiary or the special-purpose vehicle, subject to the limits and the conditions laid down in these rules and the said regulations: Provided that the structure of such subsidiary or step down subsidiary of the foreign entity shall comply with the structural requirements of a foreign entity: Provided further that Overseas Investment or transfer of such investment including swap of securities in a foreign entity formed, registered or incorporated in Pakistan or in any other jurisdiction as may be advised by the Central Government from time to time shall require prior approval of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction. (2) The No Objection Certificate issued under sub-rule (1) shall be addressed by the lender bank or regulatory body or investigative agency concerned to the designated AD bank with an endorsement to the applicant. [Emphasis added] 20. Rule 10 of FEMA OI Rules, 2022, stipulates the condition for obtaining a No Objection Certificate (NOC) under specific circumstances such as - the person resident in India being under investigation by any financial regulators or investigative agencies such as the ED, CBI, or SFIO. Specifically, Rule 10(2) mandates that persons specified in Rule 10(1) must seek an NOC in writing from the relevant agency. The agency is required to either furnish the NOC or state its objection within 60 days of receiving the application. In the absence of a response within this timeframe, the Rules provide for a presumption of no objection, facilitating the proposed transaction. Importantly, the NOC is to be addressed to the designated Authorised Dealer (Bank), with a copy endorsed to the applicant. 21. Furthermore, it has also been clarified in paragraph 3(iii)(b) of RBI s Circular No. 12 dated 22nd August 2022, that the requirement for approval of entitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge. Thus, it is considered appropriate for this Court to examine these allegations, notwithstanding the absence of reasons in the impugned communications. 24. The Respondents primary ground for rejecting the NOC hinges on the allegation that during previous ODI transactions in 2017 and 2018, the Petitioner in W.P.(C) 15242/2023 i.e., TIL, invested in a company called MX Media Co. through an alleged overvaluation of shares, resulting in excessive outflow of foreign exchange under the guise of legitimate investments. This allegation, relies heavily on the valuation conducted by the valuer appointed by TIL and the share value recorded in the Share Subscription and Shareholders Agreements. The Respondents assert that this created a maze of inflated valuations, facilitating the diversion of precious foreign exchange for purposes not disclosed to the RBI or the Authorised Dealer. 25. While the Respondent s denial of the NOC is ostensibly rooted in pblic interest to prevent valuable foreign exchange from being taken out of the country yet this rationale fails to withstand judicial scrutiny. The issuance of summons under Section 37 (1) of FEMA, 1999, over three years ago, without any subse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the ED on the grounds of suspicion. 27. The refusal to grant an NOC must be predicated on clear, cogent, and rational reasons. Mere issuance of summons, absent any formal finding of contravention under Section 4 of FEMA, 1999, or violations of Sections 131 and 132 of the Income Tax Act, 1961, does not meet this threshold. Furthermore, the Court also finds merit in the contention of the Petitioner that the penalty for violations of the provisions of FEMA, 1999 are fiscal in nature and under Section 13 of FEMA, the fiscal penalty would be three times the amount so invested or INR 2 Lakhs in cases where the invested amount is not quantified. On the other hand, the denial of NOC by ED in the present case, has completely restricted the Petitioners from remitting money abroad to its subsidiaries. The prolonged investigation without any conclusion, coupled with a lack of action under FEMA, is insufficient to justify the denial of the Petitioners right to make further investments. The Petitioners have a legitimate expectation of conducting their business unhindered, particularly in the absence of definitive findings against them. In sum, mere issuance of summons under Section 37 (1) o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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