I. Introduction
The Bombay High Court’s judgment in Play Games 24*7 Pvt Ltd v. Reserve Bank of India1 is concerning for foreign direct investment (FDI) in India. The meek surrender of the Reserve Bank of India (RBI) and Department for Promotion of Industry and Internal Trade (DPIIT) to the writ jurisdiction of the Court is alarming – RBI is the appropriate authority under the FEMA and must decide on contravention of Foreign Exchange Management Act, 1999 (FEMA). In my humble opinion, the High Court erred in permitting the writ and not questioning the role of RBI – which appears to have completely (and surprisingly) absolve itself of its responsibilities under FEMA. The simple question is who is the authority to ensure that the FEMA (and rules, circulars, regulations) provisions are not violated?
II. Brief Facts
Briefly, the FDI policy prohibits FDI in gambling and betting. Play Games 24*7 Pvt Ltd (the Petitioner) provides platform for online games such as online rummy (RummyCircle), fantasy league games (My11Circle), and social games (Ultimate Teen Pati and Call it Right). The Petitioner received foreign remittances which were to be reported to the RBI under FEMA and regulations therein. There were delays in reporting and also shares were not allotted to the foreign investors within the timelines provided under FEMA. RBI refused to regularise the contraventions and directed the Petitioner to seek compounding of the contraventions. When the Petitioner sought compounding of contraventions, RBI directed it to seek clarification from the DPIIT on whether the foreign investment was legal under the FDI policy. DPIIT, in its affidavit, informed the Court that in March 2018 these contraventions were referred to the Enforcement Directorate (ED) because the business of the Petitioner fell under the prohibited category, thus, violating the FDI policy. The Court concluded that the business of the Petitioner cannot be categorised as “gambling” because there is no reward in these games – the scope of gambling being settled by several Supreme Court judgments. There is thus no prohibition under the FDI policy for such gaming activities – the Court observed.
III. Analysis
Interesting submissions were made by RBI. First, RBI requires for its records some authority, body or court to state that the business activity of the Petitioner is not illegal. Secondly, RBI directed the Petitioner to obtain clarification from the DPIIT because it is the only authority empowered to determine legality of the business of the Petitioner- obviously, RBI could not have suggested the Petitioner to approach the Writ court. Unexpectedly, these submissions were accepted by the Court without questioning the RBI stand -the nodal authority to ensure compliance with the FEMA provisions. Under the FDI policy, FDI is a capital account transaction, which is covered under FEMA. And FEMA is administered by RBI and ED is responsible for enforcement of FEMA2. Therefore, can RBI take a stand that it requires an authority to confirm whether FDI was permissible? No findings by the Court on this account.
Another important aspect is when the matter was referred to the ED, the investigating body under FEMA, in 2018, why ED did not take any action? Let alone any action, nothing in the judgment suggests that the ED made any representation or its stand on the issue. If the ED is the authority to investigate any contravention of FEMA, then the ED must (and should have been) be directed to complete the investigation, rather than deciding the issue – which travels beyond the writ jurisdiction of the Court. The Court did not (and which is a glaring error) question the role of RBI and ED in the entire process, who are mandated to ensure compliance with the FEMA.
The judgment, at para 25, records that the DPIIT, while concluding that the business of the Petitioner is prohibited under FDI policy, did not seek any explanation from the Petitioner. And no material was produced to establish the process adopted by the DPIIT. The judgment observes that the DPIIT proceeded based on the label attached to the games, and there was no in-depth investigation or analysis. The question here is whether the DPIIT is a quasi-judicial body that it must have sought explanation from the Petitioner before its conclusion. Can DPIIT embark on such investigation and is authorised to do so under the FDI policy? It is hard to agree with the conclusion of the Court. In my opinion, DPIIT (rightly) made a prima facie view and referred the dispute to the ED for investigation – which is in with the FDI policy. The correct approach should have been to direct the ED to complete its investigation because the FDI policy is an important policy for foreign remittance, and any dispute (or interpretation) must be investigated by the competent authorities rather than by courts. Additionally, RBI is the expert body to deal with the foreign exchange matters and must decide on any dispute rather than depending on the courts to decide – if this is permitted than foreign investors may lose confidence in the system.
Footnotes
1. WRIT PETITION NO. 3047 OF 2022
2. Para 3, Annexure-5 of the FDI policy
The above is a generic analysis and should not be regarded as a substitute for specific advice based on the facts of a client’s objectives and specific commercial agreements reached. Please do reach out to us at [email protected] for any queries.
