Delhi HC clarifies Regulation 6 and 9 of RBI FEMA Regulations 2004
The Delhi High Court (“HC”) on December 04, 2020 remanded to the Reserve Bank of India (RBI), an application by Jindal Steel and Power Ltd (“JSPL”) to transmit three hundred million dollars (USD 300 million) to its wholly owned subsidiary Jindal Steel and Power (Mauritius) Ltd. (“JSPML”).
The Delhi High Court in its judgment clarified Rules 6 and 9 of the 2004 RBI Foreign Exchange Management (Transfer or Issue of Any Foreign Security) (Amendment) Regulations, 2004 (FEMA) while disposing of the petition from JSPL in the case of ‘Jindal Steel and Power Ltd v. Reserve Bank of India’ and confirming the transfer of money by them to a foreign affiliate. The powers and discretion of the RBI in approving remittances by an Indian company to its foreign affiliates has been clarified and strengthened by this judgment.
JSPL stated that they had undertaken a corporate guarantee of USD 864.82 million towards loans by JSPML, with RBI's consent, which they had sought to enforce citing unavailability of funds to meet its cash flow requirements. JSPL sought to make additional financial commitments and payments of USD 300 million to aid JSPML, for which it had applied to RBI as per the norms stipulated in FEMA for permission to remit three hundred million dollars USD 300 million to JSPML, by way of equity subscription/loan/corporate guarantee/bank guarantee or thro ugh other permitted mode.
JSPL stated to HC that it had made an application to RBI in view of Regulation 6(2)(iii) read with Regulation 9(1) of FEMA which required an entity/party under investigation/enforcement of an agency or regulatory body to obtain prior approval of RBI for any transaction falling under aforesaid regulations, and that it had applied for approval only because JSPL was admittedly under investigation and facing prosecution of various offences under Indian Penal Code, 1860, Prevention of Corruption Act, 1988, Prevention of Money Laundering Act, 2002 and FEMA Act, 1999.
Ruling in favour of JSPL, the Single Judge Bench of Justice Jayant Nath stated that, the RBI had failed to assign any reasons for rejection of JSPL's application in its original order and supplied reasons for the same only in its counter affidavit submitted later. The HC held that ‘no reference’ had been made by RBI to any of the factors stipulated in Regulation 9(3) of FEMA, and that while ‘the criteria stated in Regulation 9(3) may not be exhaustive and other issues may be taken into account if facts so warrant, no such facts either were stated by RBI.’ Therefore, it held that RBI's rejection order was also in violation of Regulation 9.
The powers and discretion of the RBI in approving remittances by an Indian company to its foreign affiliates has been clarified and strengthened by the ruling.