Calcutta High Court Upholds RBI's Authority to Permit NRI Share Allotment Against Second-Hand Imported Equipment on Non-Repatriation Basis

Introduction

In a significant ruling for foreign investment regulations in India, the Calcutta High Court has dismissed an appeal challenging the Reserve Bank of India's (RBI) permission to allot shares to a non-resident Indian (NRI) against the import of second-hand capital equipment on a non-repatriation basis. The decision, delivered in Sajal Dutta v. Reserve Bank of India and Ors. (APO 114 of 2016), was pronounced by a division bench comprising Justice Madhuresh Prasad and Justice Supratim Bhattacharya on December 24, 2025. The court affirmed the RBI's statutory powers under the Foreign Exchange Regulation Act, 1973 (FERA), emphasizing that such permissions align with government policy directives and do not require prior foreign exchange inflows for new equipment imports.

This case stems from a long-standing corporate dispute within Ruby General Hospital Company Limited, where appellant Sajal Dutta, a shareholder and former managing director, contested the share allotment to Dr. Kamal Dutta, an NRI co-founder. The ruling clarifies the RBI's discretion in handling NRI investments involving second-hand goods, potentially easing compliance burdens for companies in similar scenarios, especially post the transition from FERA to the Foreign Exchange Management Act, 1999 (FEMA). While FERA governed the transaction at its inception, the court noted that under FEMA, no such RBI permission is needed for capital goods imports by NRIs, highlighting an evolution in regulatory ease.

The judgment not only resolves the intra-company tussle but also reinforces judicial restraint in reviewing administrative decisions by statutory bodies like the RBI, unless marred by mala fides or jurisdictional errors. This development is particularly relevant amid India's ongoing liberalization of foreign direct investment (FDI) norms, offering reassurance to NRI investors in sectors like healthcare.

Case Background

Ruby General Hospital Company Limited was incorporated in 1991 as a joint venture to establish a hospital and diagnostic center in Kolkata, with a projected cost of Rs. 11 crores. The equity structure envisioned 88% NRI participation (Rs. 8 crores) and 12% from resident Indians. Key promoters included two NRIs—Dr. Kamal Dutta and Dr. Binod Prasad Sinha—and Sajal Dutta, Dr. Kamal's younger brother, alongside an Indian entrepreneur. The NRI investment was initially approved by the Secretariat for Industrial Approvals (SIA) under the Department of Industrial Development, Government of India, via a letter dated August 6, 1993. This approval contemplated the import of new capital goods worth Rs. 4.20 crores financed through NRI equity on a repatriable basis, aligning with the Statement of Industrial Policy dated July 24, 1991 (paragraph 39B), which restricted foreign investments to new, not second-hand, equipment.

Dr. Kamal Dutta, one of the first directors holding 52.74% equity alongside Dr. Sinha, contributed Rs. 4.26 crores, of which approximately Rs. 3.5 crores involved second-hand medical equipment imported from the USA. Sajal Dutta contributed Rs. 1.23 crores and served as managing director. The importation of second-hand equipment deviated from the SIA approval, treating it instead as Dr. Kamal's direct capital contribution without involving company funds or foreign exchange outflows.

The dispute escalated when the company sought RBI permission under Section 19(1)(d) of FERA for issuing 30,55,329 shares of Rs. 10 each to Dr. Kamal on a non-repatriation basis. The RBI initially granted approval on March 29, 1997, but withdrew it on May 20, 1998, following objections from the company (represented by Sajal). This led to a series of writ petitions: WP No. 525 of 1999 and WP No. 1977 of 1999, where the High Court directed hearings. The RBI reinstated permission via a speaking order dated May 7, 2004, by its General Manager in Kolkata, relying on a Government of India (GOI) directive dated January 3, 1994, which permitted capitalization of NRI payments for second-hand imports on non-repatriable terms.

The company, with Sajal as petitioner No. 2, challenged this 2004 order in WP No. 1157 of 2004, alleging violations of natural justice, over-invoicing, and non-compliance with SIA and EXIM policies. A board resolution on September 16, 2006, led the company to withdraw, leaving Sajal as the sole petitioner. Parallel proceedings before the Company Law Board (CLB) under Sections 397 and 398 of the Companies Act, 1956, addressed oppression and mismanagement claims by Dr. Kamal, resulting in a 1999 CLB order (affirmed by the Supreme Court in Kamal Kumar Dutta v. Ruby General Hospital Ltd. , (2006) 7 SCC 613) that restored Dr. Kamal's position but deferred share allotment to the writ outcome.

The single judge dismissed the writ on March 16, 2016, upholding RBI's decision and Sajal's locus standi as a shareholder. Sajal appealed (APO 114 of 2016), with Dr. Kamal filing a cross-objection (OCOT No. 3 of 2016). The appellate bench, after hearing arguments on maintainability, policy compliance, and res judicata, delivered the final verdict in 2025.

The core legal questions included: (1) Whether Sajal, as a shareholder, had locus standi post-company withdrawal; (2) If the RBI's permission contravened SIA/EXIM policies and FERA; and (3) The applicability of the 1994 GOI letter versus earlier approvals, especially post-FERA repeal by FEMA.

Arguments Presented

The appellant, Sajal Dutta, represented by senior advocate S.N. Mookherjee, mounted a multi-pronged attack on the RBI's 2004 permission and the single judge's order. Primarily, he contested maintainability, arguing that the writ was a corporate action withdrawn by the company via its 2006 board resolution, rendering Sajal's continuation as an individual shareholder untenable. He claimed no personal or fundamental right violation under Article 226 of the Constitution, especially since he was no longer a director. Citing Life Insurance Corporation of India v. Escorts Ltd. (1986) 1 SCC 264 and Peerless General Finance & Investment Co. Ltd. v. RBI (1992) 2 SCC 343, Sajal asserted that RBI decisions on share permissions are discretionary and not challengeable absent mala fides, with no provision under FERA for individual shareholder suits.

On merits, Sajal contended the permission violated the SIA approval of August 6, 1993, and paragraph 39B(iii) of the 1991 Industrial Policy, which mandated new equipment financed by remitted NRI funds for repatriable shares. The second-hand, allegedly inferior and over-invoiced equipment imported by Dr. Kamal bypassed this, diluting Sajal's 48% stake and shifting control, infringing his shareholder rights. He argued the RBI ignored Note 4 to paragraph 39B prohibiting second-hand imports and failed to apply the EXIM Policy's residual life requirements strictly. Reliance was placed on Union of India v. ABN Amro Bank (2013) 16 SCC 490 and Elizabeth Jacob v. District Collector (2008) 15 SCC 166 to claim the RBI's non-consideration of binding policies warranted quashing. Additionally, Sajal invoked res judicata from the Supreme Court's 2006 ruling, suggesting the CLB's acceptance of equipment imports barred fresh challenges, while alleging natural justice breaches in denying documents during RBI hearings.

Countering for Dr. Kamal Dutta and the RBI, senior advocate S.N. Mitra (for Dr. Kamal) and Debdatta Sen (for RBI) defended the permission's validity. Mitra argued the writ's maintainability failed post-company withdrawal, as Sajal's role was derivative, not personal, and pursuing it overreached the Supreme Court's oppression findings against him in Kamal Kumar Dutta (supra). He emphasized no foreign exchange outflow occurred—Dr. Kamal paid abroad with personal funds—thus exempting SIA/EXIM applicability, which governed remitted investments. The 1994 GOI letter explicitly allowed non-repatriable capitalization for second-hand imports by NRIs, and EXIM Policy paragraph 25 permitted such goods with a 5-year residual life, duly certified.

The RBI, via Sen, clarified its limited role under Sections 19(1)(d) and 29(1)(b) of FERA: permission was needed only for NRI share issues, granted after scrutiny of documents, including customs valuations reflected in company balance sheets signed by Sajal. The 2004 order addressed three issues—grant of permission, non-repatriable basis, and share quantum—relying on the 1994 directive and EXIM allowances. They dismissed over-invoicing probes as beyond RBI's purview, noting the CLB's 1999 order (affirmed by Supreme Court) had already treated the equipment as share application money, estopping objections. On judicial review, they urged restraint, as no jurisdictional error or non-application of mind existed, with prior High Court interventions validating the process.

These arguments highlighted a tension between corporate governance, foreign investment facilitation, and administrative discretion, with Sajal portraying the permission as a prejudicial deviation and respondents framing it as policy-compliant innovation.

Legal Analysis

The division bench's reasoning meticulously navigated the interplay of administrative law, corporate rights, and foreign exchange regulations, upholding the single judge while clarifying key principles. First, on locus standi, the court rejected Sajal's maintainability challenge, affirming shareholders' independent access to writ jurisdiction under Article 226 when personal rights—such as shareholding dilution and control loss—are impaired. Drawing from Rustom Cavasjee Cooper v. Union of India (AIR 1970 SC 564) and Bennett Coleman & Co. Ltd. v. Union of India (AIR 1973 SC 106), the bench noted that state actions affecting company and shareholder interests conjointly warrant relief, especially in closely held firms like Ruby General where Dr. Kamal's enhanced stake (from 52%) directly impacted Sajal's position. It distinguished Life Insurance Corporation and Peerless , acknowledging RBI's discretion but carving exceptions for mala fides, non-application of mind, or statutory contravention—none proven here.

Central to the analysis was the RBI's reliance on the January 3, 1994, GOI directive from the Ministry of Finance, which authorized capitalization of NRI direct payments for second-hand capital goods on non-repatriable terms, without foreign exchange involvement. The court held this superseded the 1993 SIA approval, which assumed remitted funds for new imports—a modus not pursued. Paragraph 39B of the 1991 Industrial Policy and EXIM Policy (1992-1997, paragraph 25) were deemed inapplicable, as no inflow/outflow of foreign currency occurred; Dr. Kamal's abroad purchase and import complied with residual life certifications. The bench critiqued Sajal's policy citations as misplaced, noting the RBI's 2004 speaking order (under Section 19(1)(d) FERA) addressed this explicitly, post-hearings ensuring natural justice.

Precedents like ABN Amro Bank and Elizabeth Jacob were distinguished: interference arises only for ignored mandatory provisions, not alternative compliant paths. The court invoked Kamal Kumar Dutta (2006) 7 SCC 613, observing the Supreme Court deferred share issues to the writ without res judicata applicability, as no final adjudication occurred. Post-FERA repeal (FEMA effective June 1, 2000), the permission was a legacy validation; under FEMA, no RBI nod is needed for capital goods allotments to NRIs, per sunset clauses and Section 6 of the General Clauses Act, 1897.

This analysis underscores judicial deference to statutory authorities: the RBI's decision, grounded in policy and evidence (e.g., balance sheets, customs docs), evinced no perversity. It delineates repatriable (new goods, remitted funds) vs. non-repatriable (second-hand, direct NRI payment) investments, promoting flexibility in FDI without compromising regulation. The ruling averts overreach into commercial disputes, channeling them to corporate forums like the CLB.

Key Observations

The judgment extracts pivotal insights from the RBI order and GOI directive, emphasizing policy alignment:

• "Such investment is permissible as manifests from extract of the DO letter dated 03.01.1994, but on a non-repatriable basis." (Para 52, highlighting the directive's permissibility for second-hand imports.)

• "Since as per the then existing policy of RBI, capitalization of secondhand equipment could be permitted on non-repatriation basis only, I am of the view that permission shall be granted for issue of shares on non-repatriation basis alone." (From RBI's May 7, 2004, order, quoted in para 50, underscoring the basis for non-repatriability.)

• "In the present case there was no issue of importation of goods involving outflow of any foreign exchange, RBI has rightly relied upon the DO letter dated 03.01.1994 which governed the transaction." (Para 52, clarifying no forex linkage exempted stricter policies.)

• "We find no infirmity whatsoever in the permission dated 07.05.2004 granted by the RBI." (Para 52, affirming the order's legality post-review.)

• "The permission granted to RGHL to Issue shares to the person resident outside India (i.e. to Dr. K. K. Dutta) shall also to be treated as permission to such person... to acquire or hold such shares under section: 29 (1) (b) of the Act." (From RBI order, para 50, linking Sections 19 and 29 of FERA.)

These observations encapsulate the court's endorsement of administrative pragmatism in NRI investments.

Court's Decision

The Calcutta High Court dismissed the appeal (APO 114 of 2016) and disposed of the cross-objection (OCOT No. 3 of 2016), upholding the single judge's March 16, 2016, order. The bench declared the RBI's May 7, 2004, permission valid under FERA Sections 19(1)(d) and 29(1)(b), directing allotment of 30,55,329 shares to Dr. Kamal Dutta on non-repatriation basis against the second-hand equipment import. No costs were imposed, and urgent copies were directed.

Practically, this restores Dr. Kamal's enhanced equity, potentially stabilizing company control post the 2006 Supreme Court affirmation of oppression findings against Sajal. It validates the equipment's capitalization as share application money, as noted in 1994-95/1995-96 balance sheets, closing a 30-year saga.

Implications are profound for legal practice: NRIs can directly import second-hand capital goods for equity without forex remittance, limited to non-repatriable shares per the 1994 directive—still relevant for legacy FERA matters. Under FEMA, this simplifies FDI in manufacturing/healthcare, aligning with eased norms (e.g., automatic route up to 100% in hospitals). Future cases may see fewer RBI challenges, with courts emphasizing evidence-based review over policy reinterpretation. For corporate litigators, it highlights shareholders' writ locus in control disputes but cautions against collateral attacks on administrative permissions. In a post-2020 FDI surge, this bolsters investor confidence, potentially influencing NCLT proceedings on similar import-equity swaps, while underscoring the RBI's pivotal role in balancing regulation and economic growth.