Introduction:
The Calcutta High Court, in a detailed and authoritative judgment, has reaffirmed the statutory powers of the Reserve Bank of India under the Foreign Exchange Regulation Act, 1973 (FERA), to permit the allotment of shares to a Non-Resident Indian against the import of second-hand capital equipment on a non-repatriation basis. The Division Bench comprising Justice Madhuresh Prasad and Justice Supratim Bhattacharya delivered this ruling while deciding an appeal arising out of prolonged litigation concerning the allotment of shares by Ruby General Hospital Company Limited, a company incorporated in 1991. The company was promoted by two Non-Resident Indians, Dr. Kamal Dutta and Dr. Binod Prasad Sinha, along with Sajal Dutta, the appellant and younger brother of Dr. Kamal Dutta. The dispute revolved around the legality of RBI’s permission allowing Dr. Kamal Dutta to receive equity shares against the import of second-hand medical equipment from the United States, which was treated as his capital contribution to the company. The appeal challenged the RBI’s speaking order dated 07.05.2004, passed under Section 19(1)(d) of FERA, permitting issuance of over 30 lakh shares on a non-repatriation basis. The judgment is significant as it not only interprets the scope of RBI’s powers under the repealed FERA regime but also harmonises the regulatory intent behind foreign exchange controls with investment policy directives issued by the Government of India, while simultaneously acknowledging the transition to the FEMA regime.
Arguments of Both Sides:
On behalf of the appellant, Sajal Dutta, it was argued that the permission granted by the Reserve Bank of India for allotment of shares in favour of Dr. Kamal Dutta was legally unsustainable and contrary to the provisions of FERA. The appellant contended that the import of second-hand capital equipment from the USA and its treatment as capital contribution raised serious regulatory concerns and that RBI had mechanically granted approval without proper application of mind. It was further argued that the earlier withdrawal of permission by RBI itself demonstrated that the original approval was flawed, and the repeated grant of permission pursuant to court directions could not cure the inherent illegality. The appellant emphasized that the company had repeatedly approached the High Court because the RBI allegedly failed to comply with judicial directions while reconsidering the matter. According to the appellant, the speaking order dated 07.05.2004 did not properly address the objections raised by the company and overlooked the fact that the Foreign Exchange Regulation Act had already been repealed and replaced by the Foreign Exchange Management Act, 1999. It was submitted that once FERA stood repealed, the RBI could not continue to exercise powers under the repealed statute, and any permission granted thereafter was without jurisdiction. The appellant also attempted to argue that the transaction involved indirect foreign exchange considerations and therefore required stricter scrutiny, and that the allotment of shares adversely affected the rights and interests of other stakeholders in the company.
On the other hand, the Reserve Bank of India, supported by the respondent authorities, strongly defended the impugned permission. The RBI argued that at the relevant time when the transaction was initiated and permissions were sought, FERA governed the field and RBI was the competent statutory authority under Section 19(1)(d) to grant or refuse permission for such transactions. It was submitted that Dr. Kamal Dutta, being a Non-Resident Indian, had directly paid for the import of second-hand medical equipment from the USA and brought the same into India as his capital contribution, which did not involve any outflow of foreign exchange from India. The RBI highlighted that it had relied upon the Government of India DO letter dated 03.01.1994, which clearly laid down policy guidelines permitting such investments, subject to the condition that the shares issued against such imports would be on a non-repatriation basis. The respondents argued that the RBI had acted strictly in accordance with this policy directive and had consciously imposed the non-repatriation condition to safeguard foreign exchange interests. It was further contended that repeated challenges by the company were an abuse of the writ jurisdiction and that the RBI had complied with every judicial direction by reconsidering the matter afresh and passing reasoned orders. Addressing the repeal of FERA, the respondents argued that the saving provisions ensured continuity of actions taken under the repealed statute and, in any event, under FEMA no permission was required at all for such allotment of shares, making the appellant’s challenge even more untenable. The respondents thus submitted that the appeal deserved dismissal as the RBI’s approval was lawful, reasoned, and consistent with both statutory provisions and government policy.
Court’s Judgement:
After carefully examining the factual matrix, statutory framework, and rival submissions, the Calcutta High Court dismissed the appeal and upheld the validity of the RBI’s approval dated 07.05.2004. The Bench observed that the core issue was whether the RBI was empowered under FERA to permit allotment of shares to an NRI against the import of second-hand capital goods on a non-repatriation basis, and answered the same unequivocally in the affirmative. The Court noted that there was no dispute regarding the fact that the amount for importing the medical equipment was directly paid by Dr. Kamal Dutta, the NRI promoter, and therefore there was no outflow of foreign exchange from India. In such circumstances, the RBI was justified in treating the import of equipment as capital contribution. The Court placed significant reliance on the Government of India’s DO letter dated 03.01.1994, which clearly stipulated that where an NRI directly pays for the import of second-hand capital goods, the corresponding investment in the Indian company is permissible only on a non-repatriable basis. The Bench held that the RBI had correctly applied this policy directive while granting permission and had consciously imposed the non-repatriation condition, thereby protecting foreign exchange interests.
The Court rejected the appellant’s contention that the RBI lacked jurisdiction due to the repeal of FERA, holding that although FEMA came into force on 01.06.2000, the transaction and permissions in question were traceable to actions initiated under the FERA regime, and in any case, under FEMA no permission was required for allotment of shares against import of capital goods to NRIs. The Bench observed that this fact alone nullified the appellant’s challenge, as the approval under FERA could not be said to be illegal when the subsequent law was even more liberal. The Court further held that the RBI’s speaking order dated 07.05.2004 demonstrated due application of mind and compliance with earlier judicial directions, and there was no infirmity or arbitrariness warranting interference. The repeated filing of writ petitions by the company challenging the same approval was viewed as unjustified, particularly when the RBI had consistently taken a reasoned and policy-compliant stand. Concluding that the RBI’s approval was in accordance with law and policy, the Bench dismissed the appeal, thereby bringing finality to a long-standing dispute.