look news india
A big legal news related to the country’s IT and Business Process Management (BPM) sector has come to light. The Karnataka High Court has completely upheld the asset seizure order issued by the Enforcement Directorate (ED), giving a huge blow to global service provider company Genpact India. The court clarified that the action taken by the central probe agency under the Foreign Exchange Management Act (FEMA) and related financial laws is within the ambit of law and there is no solid ground to interfere at this stage.
After this decision of the High Court, the debate regarding compliance of foreign funding, outbound remittance and foreign exchange transactions has intensified in the multinational corporate world. Due to the strict stance of the investigating agencies, legal accountability for multinational companies seems to be becoming more stringent.
The Enforcement Directorate (ED) had issued an interim order to freeze assets against Genpact India as part of its investigation into certain financial transactions, foreign remittances and alleged violations of FEMA. The central agency had alleged that some of the funds sent out of the country by the company and monetary transfers made during corporate restructuring were not in accordance with the prescribed legal provisions.
Genpact had filed a writ petition before a single bench of the Karnataka High Court against this seizure action by the ED. The company’s main argument was that the agency’s seizure action was arbitrary, ultra vires and an undue interference in routine business transactions. The company had approached the court for interim relief and quashing the confiscation order.
The Karnataka High Court dismissed Genpact’s plea after hearing detailed arguments from both sides. The court underlined that under Section 37A of FEMA or other relevant statutory provisions, the competent authority has the power to attach or seize the assets pending investigation if it suspects suspicious transactions in foreign accounts or illegal transfer of Indian assets.
The Court in its judgment said that unless procedural lapses or malpractices in the action of the investigating agency are clearly proved, the constitutional courts should not interfere with the preliminary investigation or seizure orders. The court underlined that the company has the statutory option of presenting its case before the Appellate Tribunal constituted under FEMA, hence it is not appropriate to stop the agency’s proceedings by directly exercising writ jurisdiction.
Karnataka, especially Bengaluru, is home to India’s Silicon Valley and a major hub of global IT companies. This strong decision of the High Court against the huge BPO and IT service provider company like Genpact has brought a big message in the technical corridors of the state and across the country. For multinational companies (MNCs) operating in IT hubs like Bengaluru, Hyderabad, Gurugram, Noida and Pune, rules related to foreign exchange transfers have become more sensitive than ever.
Local business and legal experts believe that after this decision, audit pressure will increase on the compliance departments of foreign subsidiaries based in Bengaluru and Karnataka. Scrutiny of royalty payments, remittance of consultancy fees to foreign parent companies and cross-border transactions will no longer be limited to the Income Tax Department alone, but will also be scrutinized more closely through the lens of FEMA and Prevention of Money Laundering Act (PMLA).
The upholding of the seizure order against Genpact could increase concerns of global companies that run large operations in India. Generally, foreign companies remit profits or inter-company fees earned in India to their parent companies through various financial structures. Central investigative agencies have been continuously investigating such financial transactions closely for the last few years so that tax evasion or illegal fund transfer can be prevented.
The investigation agency’s hands have been strengthened by the court upholding the ED order. Now the way has been paved for the ED to present evidence before the competent authority to confirm the seized properties and issue a detailed show cause notice taking the investigation forward.
After the dismissal of the petition by the Karnataka High Court, Genpact India is now mainly left with two legal avenues. The first option is that the company can challenge the decision of this single bench before the Division Bench of the High Court or can approach the Supreme Court of India, the top court of the country.
The second option is the internal statutory mechanism available under the FEMA Act. The company may try to prove that the financial transactions in question were completely legitimate and carried out through authorized banking channels by presenting its audit records, contract documents and detailed account of bank accounts before the authorized competent authority and the Appellate Tribunal against the ED’s seizure order.