The Delhi High Court has directed Reserve Bank Of India to permit Jindal Steel and Power Ltd. to send $54.99 million to its Mauritius subsidiary.
However, that’s subject to two undertakings—that the company has unencumbered assets worth $60 million and it won’t sell such assets without the court’s approval.
To be sure, RBI regulations allow an Indian company to make direct investments in a wholly-owned subsidiary under the automatic route, subject to certain norms. However, entities that do not fulfill the prescribed criteria must seek prior approval from the central bank before making such investments.
The case emanates from loans worth $307 million given by lenders to Jindal Steel and Power’s overseas subsidiaries. Its Mauritian subsidiary—Jindal Steel and Power (Mauritius) Ltd.—entered into a restructured payment agreement with lenders in 2018, entailing a payment of $153 million by March 2020. The company sought the central bank’s approval for transfer of funds to its Mauritian subsidiary for fulfillment of debt obligations.
The central bank, however, denied approval in December citing certain reservations expressed by the Enforcement Directorate. This refusal prompted the company to file a writ petition seeking directions to the RBI and the investigating agency for permitting the remissions.
Through an interim order, the Delhi High Court directed the central bank to permit a transfer of $90 million by June 30. The company also filed a separate application on similar grounds seeking the court’s directions for remission of amount against the second tranche of repayments falling due on July 31.
A bench comprising Justice Jayant Nath observed that the central bank relied on “cryptic information” given by the Enforcement Directorate for withholding the permission to the steelmaker. The RBI should have exercised its discretion instead of delegating it to the investigating agency, the court said in its order.
RBI’s Arguments
The central bank’s affidavit made the following submissions in support of the denial:
- RBI relied upon an objection from the Enforcement Directorate which contained information about initiation of a fresh enquiry against Jindal Steel.
- The Delhi High Court lacked jurisdiction in the case as both – the head office of the steelmaker as well as the RBI’s foreign exchange department are located in Mumbai. Further, the investigating agency was not impleaded despite being a necessary party in the case.
- Communications from the Enforcement Directorate indicated the pendency of investigations and inquiries against the company.
- As per the agency, an approval for the requisite payments mayb result in non availability of property for attachment thus affecting its investigations.
- Jindal Steel concealed the information on pending as well as past investigations relating to unrealised export proceeds, alleged contravention of the Foreign Exchange Management Act and information relating to purchase and sell of certain vessels.
- And lastly, the bank’s approval is necessary in light of the prosecution against the company under the Indian Penal Code, FEMA and the Prevention of Corruption Act.
Jindal Steel’s Counter
Parag Tripathi, senior counsel for the steelmaker argued that most of the inquiries and investigations by the enforcement directorate were for ‘insignificant’ amounts and had been languishing since many years. Previous transactions with the Mauritian subsidiary were undertaken only after obtaining due permissions from the RBI.
And lastly, while the steelmaker would have been entitled to transmit money under the automatic route in absence of the pending inquiries, a direction from the court was now necessary as RBI’s denial can cause an “irreparable loss” to the company.
Reasons For Directions Against RBI
The high court read into the communication filed by the Enforcement Directorate and granted interim relief to Jindal Steel by observing:
- RBI’s communication to the company was a “non speaking” order as it did not state the reasons for denying the remissions.
- It also noted that the RBI must exercise its discretion under its regulations on the basis of cogent material which are based on factual details.
The court will next hear the matter on August 28.
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