TMI Blog2019 (5) TMI 817X X X X Extracts X X X X X X X X Extracts X X X X ..... t in within six months from the commencement of the business of the company. Since the business of development and construction of township could not be commenced due to the action of the respondent, the period of compliance with the condition had yet to commence. The allegation is, therefore, premature and, therefore, the question of contravention does not arise. In the light of above, we are of the considered opinion that the Adjudicating Authority has misapplied the condition of Sl. no. 23 in respect of FDI in township development to NRIs contrary to FDI in township development under Sl. no. 2 of Annexure B which is without any condition whatsoever. The impugned order is quashed and set-aside as the appellant no.1 is not guilty of alleged contravention. The penalty imposed was not called for. As regards Ashok Jain is concerned, he has been held guilty by fastening vicarious liability on him. There is no specifically averment of incriminating acts of commission or omission in his part, as the impugned order holding the company is not guilty of contravention. The order against Ashok Jain is also set-aside, even otherwise he is not liable to be punished for contraventio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Shri Nitin Noharia of USA are partners of M2N2, which is a company incorporated in Mauritius. The DFS had sold 100% equity of SDRPL to M2N2 and the investment by M2N2 was treated as Foreign Direct Investment under the automatic route without any prior permission of the RBI or Govt. of India. Since SDPRL is involved in real estate business, it is alleged in the complaint that, foreign direct investment under the automatic route is not available to M2N2 in the purchase of shares of SDRPL. ii) The DFS also sold 29671646 fully paid up equity shares of M/s. Gem Distriparks and Logistics Ltd. (hereinafter referred to as GDLL) for a total consideration of ₹ 89,01,49,380/- to M/s. Balyasny Si Ltd., Mauritius (hereinafter referred to as Balyasny ) which is a part of Shakti Market Fund L.P. USA during Oct/Nov. 2007. It is alleged in the compliant that since GDLL is in infrastructure development, foreign direct investment is not permissible without the permission of RBI/Govt. of India. The proposed business activity of GDLL (now known as Fastlane Distriparks and Logistics Ltd.) was to build, operate, run, manage and provide logistics supports for movement of Cargo, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 3 and Schedule 1 of Regulation 5(1) of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 ( FEMA 20/2000-RB ) in respect of two transactions: a. transfer of shares in M/s S.D. Realty Pvt. Ltd ( SDRPL ) to M/s M2N2 Partners Ltd, Mauritius ( M2N2 ) b. transfer of shares in Gem Distriparks Logistics Ltd (GDLL) to M/s Balyasani SI Ltd, Mauritius; ii. Section 4 of FEMA alleging transfer of foreign exchange outside India. 5. Admittedly, the appellants have been exonerated of the charge of violation of section 4 as the adjudicating order has held in para-54 that the charge not made out for want of essential ingredients and relevant evidence to prove the charge. The appellants have also been exonerated of the charge of contravention in respect of the transaction of sale of GDLL shares to Balyasani by holding in para-53 that the charge of investment in investing company is not sustainable as the FDI has been made in GDLL engaged in infrastructure development, and not in DFS. 6. DFS and SDRPL admittedly are companies incorporated in India; DFS held 100% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso been charged with and held guilty of contravention of Reg. 5(1) r/w Schedule 1 on the sole allegation that the transaction of sale of shares has been made without complying with the condition of the Automatic route and therefore, the purchase of shares ought to have been made only after obtaining the prior permission of the Reserve Bank of India . 11. REGULATION 5(1): A person resident outside India or an entity outside India, whether incorporated or not, may purchase shares of an Indian company under Foreign Direct Investment Scheme, subject to the terms and conditions specified in Schedule 1 . Schedule I, referred to in regulation 5(1) contains the provisions relating to Foreign Direct Investment Scheme laid down by RBI . Relevant paragraphs of the Schedule are : 1. Purchase of equity shares issued by an Indian company : (1) A person resident outside India referred to in sub-regulation (1) of Regulation 5 may purchase shares or convertible debentures issued by an Indian company upto the extent and subject to the terms and conditions set out in this schedule . 2. Automatic Route of Reserve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m resident to non-resident of an Indian company in Sectors other than financial service sector 3.1. At present, the following categories of transfer of shares debentures by way of sale under private arrangement also require prior permission of Reserve Bank Transfer by a person resident in India to person resident outside India Transfer by a person resident outside India to a person resident in India (not applicable) 3.2. As a measure of further simplification of procedures, it has been decided to grant general permission and do away with the requirement of prior approval of Reserve bank for transfer of shares and convertible debentures in respect of the aforesaid categories, under Para 3.1, subject to compliance of the terms and conditions and reporting requirements as furnished in the Annex. ; and vide para 5 Necessary amendment to FEMA 20/2000 Regulations, 2000 are being issued separately . 15. Notification No. 136/2005 RB, (the Amending Regulation) dated 19.07.05 which was referred to in para 44, 45 of Adjudicating order. In pursuance of the aforesaid object a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure), subject to the guidelines mentioned therein. (declaration of object and intent) Accordingly , Notification No. FEMA 20/2000-RB dated 3rd May, 2000, has been amended vide Notification No. FEMA 136/2005-RB... a copy of the Government Notification GSR No. 513(E) dated July 29, 2005 incorporating the amendment is annexed 17. MASTER CIRCULAR ON FOREIGN INVESTMENT IN INDIA (NO. 02/2006-07 DATED JULY 1, 2006) The Master Circular issued by RBI consolidated the provisions of FEMA 20/2000 (as upto July 1, 2007) states the governing regulations in its own language at one place for easy understanding, guidance and compliance. It is not reproduction of statutory text of the regulation. Accordingly, in para 2 of Part I of the Master Circular, the activity of Real Estate Business is listed as one of the activities in which FDI is totally prohibited for all non-residents including NRIs. However, since FDI in the activities of townships, housing, development projects, etc. under automatic route i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in investment in townships, housing, built up infrastructure and construction development projects as an instrument to generate economic activity, create new employment opportunities and toad to the available housing stocks and built up infrastructure, the Government has decided to allow FDI upto 100% under automatic route in townships, housing, built up infrastructure and construction development projects ; (p. 135 of Paper Book) To give effect to the above policy, FEMA 20/2000 was amended by FEMA 136/2005 viz. FEM(Transfer or Issue any Security by a Person Resident outside India) (Third Amendment) Regulation dated 19.07.2005. FEMA 136/2005 added the item of townships, housing, built up infrastructure and construction-development projects at serial no. 23 in Annexure B thereby permitting automatic route for FDI to foreign companies and individuals, which before the amendment was available only to NRIs. As under the Third Amendment, the automatic route in townships, housing, etc. is allowed to foreign companies subject to certain conditions, unlike FDI by NRIs vide sl. no. 2 of Annexure B, that entry (sl. no. 2) was retained unamen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by foreign nationals, admittedly not an NRI; that in pursuance of Govt.‟s policy in regard to FDI in townships, housing, etc. M2N2 made FDI in the equity of SDRPL (engaged in township development, etc.) by availing of automatic route which became available to foreign companies by Third Amendment of 24. There is no dispute that SDRPL is engaged in the activity of development of townships, housing, etc. and in March 2007 when the FDI under automatic route was made by M2N2, the amended Regulation FEMA 20/2000 as issued by RBI vide their statutory Circular No. 07 of 17th August 2005 was in force and at the time the FDI was made by M2N2 in SDRPL, automatic route was available to foreign companies for purchase and transfer of shares of an Indian company engaged in the activity of development of townships, housing, etc. by virtue of the amendment of 2005, which was clarified for that purpose. 25. It is rightly alleged on behalf of the appellant that the Adjudicating Authority has held the appellant guilty in manifest disregard to the amended Annexure B of Schedule 1, read with Reg. 5(1) . Thus, Adjudicating Authority has erred by applyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y has misapplied the condition of Sl. no. 23 in respect of FDI in township development to NRIs contrary to FDI in township development under Sl. no. 2 of Annexure B which is without any condition whatsoever. 30. In view of the aforesaid submissions, the impugned order is quashed and set-aside as the appellant no.1 is not guilty of alleged contravention. The penalty imposed was not called for. 31. As regards Ashok Jain is concerned, he has been held guilty by fastening vicarious liability on him. There is no specifically averment of incriminating acts of commission or omission in his part, as the impugned order holding the company is not guilty of contravention. The order against Ashok Jain is also set-aside, even otherwise he is not liable to be punished for contravention as he has carried out the transaction with due diligence and complied with every formality including the post transaction reporting condition prescribed by RBI. There is no evidence of any disregard or neglect in observing and complying with the provisions of the law. Therefore, the impugned order is set-aside against the appellant no. 2. The appeal filed by the respond ..... X X X X Extracts X X X X X X X X Extracts X X X X
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