Since 2015 the law allows the Enforcement Directorate (ED) to seize equivalent assets in India for illegally holding assets abroad.
However, this particular provision in the law, though broadly worded, was till now used for foreign exchange violations involving black money and irregular transactions like hawala. But, not anymore.
In two recent cases, the ED has seized the office space and immovable properties of companies which had used regular banking channels to transfer funds abroad under the overseas direct investment (ODI) route. While the companies under question remitted tax paid money and did not use hawala operators, they nonetheless faced harsh actions for using the ODI window to buy properties for personal use and hold funds abroad in an outfit that apparently had no bona fide business activity.
The consequences of ED’s actions are beginning to sink in among several business houses which have in the past used the ODI route to overcome restrictions in individual overseas investments or to take funds out of companies. They now fear that some of their assets in India could remain frozen with ED for these earlier transgressions which rarely drew the glare of the authorities before.
“We believe the Directorate is scrutinising almost every overseas high-value direct investment under ODI regulations as well as under the Liberalised Remittance Scheme (LRS). Indian parties and individuals are being told to justify that the investments are within the provisions of FEMA.
Overseas investments which do not comply with ODI rules and regulations of FEMA will have to start complying, or else, they will have to unwind the structures,” said Rajesh Shah, partner at Jayantilal Thakkar & Company, a CA firm.
While ODI is used by companies to transfer a maximum four times its net worth for a subsidiary or joint venture abroad, the LRS facility is for any resident individual to remit up to $250,000 in foreign assets like bank accounts, stocks, and properties. Thus, the ODI route offering a larger remittance window than LRS has been used to acquire overseas properties for personal use. At least, that’s the allegation by ED.
“The primary condition for making any overseas investment is ensuring the same is for a bona fide business purpose. This needs to be demonstrated on the basis of future actions and there is a write off provision available in case of eventual genuine business losses. Hence, any investments where no business has been initiated or steps not undertaken yet, one should certainly review and undertake necessary corrective steps,” said Moin Ladha, partner at the law firm Khaitan & Co.
Banking circles believe there may have been cases where the ODI route had been used as a convenient mode of payoff. Once the money is transferred, the company holding it transfers the fund to other offshore entities and later folds up by declaring insolvency. Rarely any one had put a question mark to such write-offs or enquire whether the losses were genuine.
But, what can a company, which fears the ED could come after it, do now? Can it regularise the structure by carrying out some business activity? Would a brief period of business satisfy authorities after years of inactivity? Will the Reserve Bank of India (RBI) accept applications of compounding —the process of voluntarily admitting the contravention, pleading guilty and seeking redressal?
According to Siddharth Banwat, partner of a large CA firm in Mumbai, “Wilful, mala fide, and fraudulent transactions are viewed seriously and would not be compounded by the RBI. Besides, the cases attracting the special provisions under section 37(A) of the FEMA — relating to assets held outside India in contravention of section 4, are not eligible for compounding by the RBI.
However, in cases involving violations relating to ODI, one can go for compounding but if the transaction under consideration is in gross violation of primary provisions, then even if one takes suo moto action, it may not always help avoiding implications.”
As ED uses a sweeping law and regulators bring in stricter rules to discourage outflow of money, many companies fear that the past would soon catch up. But, there are others who may have a tough time explaining to ED officials that the intent behind these deals were always kosher and were in line with their interpretation of ODI/LRS regulations which were changed in 2013 and 2022.