RBI Can Permit Non-Repatriable Share Allotment To NRI Against Second-Hand Capital Goods Imports Under FERA Sections 19(1)(D), 29(1)(B); Calcutta HC
Sanchayita Lahkar
The High Court of Calcutta, Division Bench of Justice Madhuresh Prasad and Justice Supratim Bhattacharya dismissed an appeal by a shareholder challenging the Reserve Bank of India’s permission for a company to allot equity shares to an NRI investor against second-hand capital equipment imported for the project. The Bench upheld the RBI’s 07 May 2004 order, holding that the RBI is empowered under the Foreign Exchange Regulation Act, 1973 to allow such allotment on a non-repatriation basis where the NRI directly pays for the import of second-hand capital goods. The judges said the RBI, while granting permission, relied on a Government of India letter dated 03 January 1994 setting out that investments arising from such direct payments are permissible only on a non-repatriable basis.
The dispute arose from the establishment of a hospital project by a company incorporated in 1991 with participation from non-resident Indians and resident shareholders. Approval was obtained from the Secretariat of Industrial Approval for NRI investment, with the project envisaging import of capital goods funded through foreign investment. Subsequently, permission was granted by the Reserve Bank of India for allotment of equity shares to a non-resident investor against import of second-hand medical equipment, treating such import as capital contribution.
The company initially challenged the RBI’s permission through writ proceedings, alleging absence of board approval, violation of industrial policy, and breach of principles of natural justice. During pendency of the writ petition, the company resolved to withdraw from the proceedings. Thereafter, the individual shareholder continued the writ petition in his personal capacity, contending that the impugned approval adversely affected his shareholding and control in the company.
The RBI and the non-resident investor defended the approval by relying on prevailing foreign exchange policy, import regulations, and a Government of India directive permitting capitalization of second-hand equipment on a non-repatriation basis. The matter culminated in an intra-court appeal against dismissal of the writ petition by the Single Judge.
The Division Bench examined the preliminary objection regarding maintainability and recorded that “there may be limited class of cases where grant of permission by RBI may be questioned by an interested party in a proceeding under Article 226 of the Constitution of India on the ground that it was mala fide or that there was no application of mind, or in contravention with the statute or Rules, orders and directions issued under the statute.”
On the issue of locus standi, the Court noted that “allotment of shares in favour of Dr. Kamal would have the direct consequence of shifting control of the company in his favour,” and therefore “directly affect Sajal’s individual rights as a shareholder in the Company.” The Bench recorded that “being a shareholder in a company cannot be made a basis to contend that even individual rights and injury cannot be raised in appropriate judicial proceeding.”
While acknowledging maintainability, the Court examined the merits of the challenge and observed that “RBI is the statutory authority under the law” and that the impugned permission was issued “in exercise of statutory discretion, taking into consideration relevant material being the DO letter dated 03.01.1994.” It further stated that “we are conscious of the limited scope of judicial review in such circumstance” and therefore refrained from substituting its view for that of the statutory authority.
On the applicability of industrial policy and SIA approval, the Bench recorded that “there was a conscious decision to resort to different modus of investment, which did not involve bringing in any foreign capital,” and consequently “there was no occasion whatsoever for the RBI to take into consideration the approval under the SIA policy dated 06.08.1993.”
The Court also noted absence of mala fides, observing that “no allegation regarding statutory incompetence of the RBI to grant the permission dated 07.05.2004 has been raised” and that “the RBI decision is founded on such directive” issued by the Government of India.
The Division Bench recorded that “we find no infirmity in decision of the learned Single Judge requiring interference by this Court in the present intra Court Appeal.” The Court accordingly held that “the appeal deserves to be and is hereby dismissed. OCOT is disposed of accordingly.”
Advocates Representing the Parties
For the Petitioners: Mr. S. N. Mookherjee, Senior Advocate; Mr. Shounak Mitra, Advocate; Mr. Samriddha Sen, Advocate; Mr. Vishwarup Acharyya, Advocate
For the Respondents: Mr. S. N. Mitra, Senior Advocate; Mr. Prantik Garai, Advocate; Mr. Subhojit Roy, Advocate; Mr. Ramanuj Roy Chowdhuri, Advocate; Mr. Atish Majumdar, Advocate; Mr. Debdatta Sen, Senior Advocate; Ms. Suchismita Ghosh Chatterjee, Advocate; Mr. Prasun Ghosh, Advocate
Case Title: Sajal Dutta v. Reserve Bank of India and Others
Case Number: APO 114 of 2016 with WPO 1157 of 2004
Bench: Justice Madhuresh Prasad, Justice Supratim Bhattacharya
