Summary of this article
RBI can allow shares against second-hand capital imports
NRI investments permitted only on non-repatriation basis terms
Court upholds RBI approval despite repeal of FERA
The Calcutta High Court has ruled that the Reserve Bank of India (RBI) had acted within the mandates of the foreign exchange law when it permitted the issue of shares on a non-repatriable basis against imported second-hand equipment.
It said the Foreign Exchange Regulation Act (FERA), 1973, allowed RBI permit allotment of shares to a non-resident Indian (NRI) in exchange for second-hand capital equipment imported into India. The dispute arose from the incorporation of Ruby General Hospital Company in 1991. The company was set up by two NRIs, Dr. Kamal Dutta and Binod Prasad Sinha, along with Sajal Dutta, the younger brother of Dr. Kamal Dutta.
Importation of Capital Equipment and RBI Authorisation
Dr. Dutta had imported second-hand medical equipment from the US. He used this import as his capital investment to the company. For this purpose, he had approached RBI to allow him to allot shares in value of the imported equipment as stipulated in the FERA, 1973.
Initially, RBI granted permission for the allotment of shares. This was, however, later revoked upon the request of the firm itself. The original approval was then challenged by the company before the Calcutta High Court.
Subsequently, RBI gave approval of allotment of shares once again. The company filed another writ petition to challenge this approval to the High Court, again.
The company once again went to the High Court claiming that some of the instructions, that were previously given, were not duly observed. The challenge related to permission granted under Section 19(1)(d) of the Foreign Exchange Regulation Act, 1973, allowing issuance of over 3 million shares of Rs. 10 each on a non-repatriable basis.
Analysis of Transaction by the Court
The Division Bench questioned whether RBI had lawfully given the permission. According to the court, there was no outflow of foreign exchange in the transaction. The payment of the amount of importing the second-hand capital goods had been made directly by Dr. Kamal Dutta, an NRI.
RBI had also taken into consideration a Government of India policy directive dated January 3, 1994. This directive made it clear that the import of second-hand capital goods under a direct payment by an NRI was only permitted to be made on a non-repatriation basis.
The court noted that RBI was within its right to interpret this policy directive as applied to the case facts. Given that the requirements provided under the directive were met, issuing shares on a non-repatriable basis was legally acceptable, the court observed.
Impact of FEMA on the Case
The Bench also observed the change in law through the course of the events. FERA, 1973 was repealed and the Foreign Exchange Management Act (FEMA), 1999 became effective on June 1, 2000.
The court said that in case of FEMA, no special authorisation from RBI was essential in allotment of shares to NRI against the import capital goods.
Final Decision of the Court
The Calcutta High Court held that the permission of RBI did not have a legal infirmity. The decision that permitted the allotment of shares in terms of second-hand imported capital equipment under the non-repatriation basis was found to be compliant with the law.
New Directive by RBI
In accordance with the directives given by the Calcutta High Court, RBI issued a new order. Under this directive, RBI eventually allowed the company to issue shares to Dr. Kamal Dutta on condition of supply of the second-hand medical equipment imported from the US. The import was considered as his capital contribution and the allotment was made strictly on a non-repatriation basis.
