HC upholds constitutional validity of Section 37A of FEMA

The High Court of Karnataka has upheld constitutional validity of Section 37A of the Foreign Exchange Management Act (FEMA), 1999, which empowers the Enforcement Directorate (ED) to seize in India assets equivalent to any foreign exchange, foreign security or any immovable property held outside India in violation of FEMA.

Justice M. Nagaprasanna delivered the judgment while rejecting the petition filed by Xiaomi Technology India Pvt. Ltd. The judgment, which was pronounced on April 21, was released on May 30.

The company had questioned the constitutional validity of Section 37A while challenging the ED’s April 2022 action of seizing ₹5,551.27 crore lying in company’s bank accounts. The ED had seized the amount on the allegation that the company had sent foreign currency equivalent to ₹5,551.27 crore to three foreign–based entities, which include one Xiaomi group entity, in the guise of royalties in violation of FEMA.

On analysing Section 37A, introduced in the Act in 2015, the court said that “what would unmistakably emerge is that Section 37A of the Act does not suffer from any manifest arbitrariness for this court to strike it down on any of the grounds urged by the petitionercompany.”

The company contended that Section 37A of the Act was unconstitutional and that the provision gave unbridled, unfettered, unguided, uncanalised power to attach bank accounts on mere suspicion, without any reason to believe, and attachment of bank account did violate right to property under Article 300A of the Constitution of India.

Safeguards

Rejects Xiaomi’s petition; asks company to approach the appellate tribunal challenging seizure of ₹5,551.27 crore by ED

Rejecting this contention, the court said Section 37A had several safeguards for the aggrieved persons or entity at every rung as seizure order passed under under Section 37A (1) had to “pass muster through several ladders of administrative, quasijudicial and judicial review before becoming final.”

“Suspicion may trigger seizure. Seizure by itself is not final. There are several procedures after such seizure. Therefore, the submission that it is manifestly arbitrary is to be noted only to be rejected, as the very submission is fundamentally flawed,” Justice Nagaprasanna observed.

The court also declined to accept the allegation made by the company that the competent authority under FEMA had failed to apply its mind before passing order for seizure. “Every submission of the petitionercompany was noted, considered threadbare, and answered by the competent authority. The competent authority has not left any wood on the tree. Therefore, the order does not suffer from nonapplication of mind,” the court observed.

Meanwhile, the court gave liberty to the company to file an appeal before the Appellate Tribunal under Section 37A(5) challenging the seizure order passed by the competent authority.