Delhi High Court quashes ED’s denial of NOC to Times Internet to invest in foreign subsidiaries

The Delhi High Court on December 17 set aside the decision of Enforcement Directorate (ED) denying a no objection certificate (NOC) to Times Internet Limited (TIL) under the Foreign Exchange Management Act (FEMA) rules to invest in its foreign subsidiary [Times Internet Limited Vs Enforcement Directorate]..The ED had denied the NOC on the ground that TIL and its parent company Bennet Coleman were under investigation for alleged violation of FEMA since 2021. Justice Sanjeev Narula held that such investigations cannot remain in limbo indefinitely, thereby impeding the business of the company. “Investigations lingering in limbo for such an extended period cannot serve as a tool to indefinitely impede a company’s legitimate business activities,” the Court stated. The Court criticised ED’s inaction over a prolonged period of time in the matter.“Nothing prevented the Respondent (ED) from confronting the Petitioners with specific charges and affording them an opportunity to respond. Thus, the ongoing investigation, devoid of any tangible progress or launch of proceedings, cannot ipso facto justify the denial of an NOC, particularly when the Petitioners have sought to comply with regulatory requirements in good faith,” the single-judge said..TIL provides internet-based services, digital content and online advertisements globally. Both TIL and Bennet Coleman have wholly-owned subsidiaries (WOS) abroad - Times Internet Inc. and BCCL Worldwide Inc., respectively. These WOS were set up to support international operations and investments.To fund these subsidiaries as part of their business strategy, the companies applied for NOCs under Rule 10 of the FEMA (Overseas Investment) Rules in August 2023. However, the ED denied their requests. Therefore, they moved the High Court challenging the ED's rejection of their NOC applications.The companies contended that the denial has hindered them from transferring funds, disrupting their investment plans and international operations.FEMA OI rules permits entities under investigation by agencies such as the ED, Central Bureau of Investigation (CBI), or Serious Fraud Investigation Office (SFIO) to secure an NOC before making any financial commitments overseas..TIL argued that ED’s denial of NOC lacked valid reasoning and contradicted the liberalisation intent of FEMA, which encourages foreign investments. It was further contended that summons issued to TIL in 2021 under FEMA do not constitute a formal investigation since the ED had not produced evidence of wrongdoing or initiated adjudication proceedings. Thus, it raised concerns about procedural fairness and the disproportionate impact on TIL’s ability to carry out legitimate overseas business activities.On the other hand, ED claimed that its investigations revealed overvalued investments made by TIL in MX Media Co., a company in the British Virgin Islands, between 2015 and 2020. According to the ED, the investments exceeded the actual share value, facilitating the transfer of $134.97 million abroad. The funds were allegedly misused for purposes other than those declared to the Reserve Bank of India (RBI), prompting the ED to suspect violations of FEMA provisions and initiate proceedings to attach assets equivalent to the misused foreign exchange.The ED also argued that TIL’s declared assets were insufficient to cover the amount under scrutiny, necessitating further investigations into the financials of Bennet Coleman and its shareholders. It was contended that by denying NOCs, it was aiming to prevent additional foreign exchange transfers, ensuring its ability to recover the misused funds..The Court took strong exception to the ED’s approach, calling its rejection arbitrary and lacking in rationale. The court noted that the rejection letter merely stated that “proposal regarding ‘issue NOC’ in this case is hereby rejected by competent authority.” It did not elaborate on the grounds for refusal, the Court observed.Such decisions must be backed by clear, cogent, and rational reasons and absence of detailed reasoning will render ED’s action untenable, the single-judge said. The Court also criticised the prolonged nature of the ED’s investigation. While summons was issued to TIL in 2021 for alleged overvaluation of shares in the overseas investment of 2017-18, no formal proceedings or adjudication followed.“The refusal to grant an NOC must be predicated on clear, cogent, and rational reasons. Mere issuance of summons, absent any formal finding of contravention under Section 4 of FEMA, 1999, or violations of Sections 131 and 132 of the Income Tax Act, 1961, does not meet this threshold,” the judgment said. Mere issuance of summons under Section 37(1) of FEMA without any finding of contravention under Section 4 of FEMA and the alleged non-compliance with the provisions of Section 131 and 132 of the Income Tax Act cannot be a valid ground for denial of the NOC, the Court made it clear.TIL was represented by advocates RK Handoo, Yoginder Handoo and Ashwin Kataria.ED was represented by Additional Solicitor General (ASG) SV Raju along with advocates Anurag Ahluwalia, Samrat Goswami, Abhigyan Siddhant and Gaurav Sarkar..[Read Judgment]