The enforcement authority exceeded its jurisdiction by penalizing the company without establishing a contravention of FEMA regulations regarding share warrants which had prior FIPB approval.

JUDGMENT

(Prayer: Writ Petitions filed under Article 226 of the Constitution of India praying this Court to issue a writ of certiorari calling for the records of the 1st respondent in relation to the impugned order No.SDE/SRO/CEZO-I/02/2020 (SK) dated 04.03.2020 and quash the same as being arbitrary and illegal.)

1. Assailing the impugned order in and by which the 1st respondent had imposed a penalty on the Directors of the Company and also on the company, the present writ petitions have been filed questioning the said order on the main plea that it is beyond the jurisdiction of the 1st respondent.

2. The narrative of the case of the petitioners, shorn of unnecessary details, is culled out hereunder :-

Shriram Holdings (Madras) Pvt. Ltd. (for short ‘SHMPL’) was incorporated and functioned primarily as a holding company, which held shares and investments in various entities under the umbrella of the Shriram Group. This included inter alia shares held by SHMPL in other entities of the Shriram Investments Ltd. (for short ‘SIL’) and Shriram Overseas Finance Ltd. (for short ‘SOFL’), which entities were Non-Banking Finance Companies. The merger of SIL and SOFL with STFCL was carried out through Scheme of Amalgamation on 25.11.2005 and 1.12.2006 with effect from 1.4.2005.

3. It is the further case of the petitioners that in the year 2005, SHMPL entered into an arrangement with an investment entity, viz., Newbridge India Investments II Ltd., and M/s.Newbridge India Investments III Ltd. (for short ‘Newbridge’), based in Mauritius. In view of the collaboration between Newbridge and SHMPL, investments to a total extent of Rs.600 Crores were to be made in SHMPL, SIL and SOFL. Newbridge, being an entity based outside India, to carry on business transactions with Newbridge, SHMPL ought to get the approval of the Government through Foreign Investment Promotion Board (for short ‘FIPB’) in terms of Section 2 (w) of Foreign Exchange Management Act, 1999 (for short ‘ FEMA , 1999’) and Section 6 of FEMA , 1999 r/w the provisions of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000.

4. It is the further case of the petitioners that in compliance of the aforesaid provisions, Newbridge, vide application dated 28.9.2005, submitted with FIPB, sought approval for investments proposed to be made in India. The application was with a proposal that Newbridge would make investments in SHMPL and for SHMPL to in turn make downstream investments in SIL and SOFL, for the purpose of business of commercial vehicle loan financing. The approval sought was four proposed investment by Newbridge through subscription and/or subsequent acquisition of upto 74% of the equity shares of SHMPL.

5. It is the further averment of the petitioners that the application seeking approval for investment by Newbridge made with the 3rd respondent, viz., FIPB was granted on 27.12.2005. Vide the approval, permission was granted for investments to be made by Newbridge, which permitted foreign equity participation in foreign exchange upto 74% by way of investment through subscription and/or subsequent acquisition of upto 74% of the equity shares of SHMPL; consequential downstream investment by SHMPL in shares and warrants of each of SIL, STFCL and SOFL. Consequent upon the dilution, the holding of SHMPL in SIL, STFCL and SOFL reduced to 40%. The other terms and conditions on the basis of which approval was granted was also laid out by FIPB.

6. It is the further case of the petitioner that subsequent to the approval granted by FIPB, since SIL was merged with STFCL on the basis of the Scheme of Amalgamation approved by the High Court vide order dated 25.11.2005 with effect from 1.4.2005, which fact was brought to the notice of FIPB, approval was sought for, for making downstream investments only in STFCL and SOFL and amendment