Section 37A FEMA “Non-Confirmation” Must Be Appellately Settled Before Section 16 Adjudication Proceeds

Introduction

This Supreme Court decision in J. Sri Nisha v. The Special Director, Adjudicating Authority, Directorate of Enforcement and Anr. (2026 INSC 309, decided on 01-04-2026) concerns the interaction between (i) interim, preventive asset-seizure proceedings under Section 37A of the Foreign Exchange Management Act, 1999 (“FEMA”), and (ii) merits adjudication/penalty proceedings initiated by a show cause notice (“SCN”) under Section 16 of FEMA.

The appellants were M/s. Accord Distilleries & Breweries Pvt. Ltd. and its Directors/family members. The Enforcement Directorate alleged contravention of Section 4 FEMA read with the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004, arising from the acquisition (allegedly without consideration and without RBI approval) of 70 lakh shares in a Singapore entity (M/s. Silver Park International Pte. Ltd.) and subsequent transfers to family members.

A key factual pivot was that the Competent Authority (under Section 37A(3)) refused to confirm the seizure of domestic assets equivalent to the alleged foreign securities, holding that there was no proof of payment/value and therefore no foundation to invoke Section 37A(1). The Department’s appeal against that refusal remained pending before the Appellate Tribunal (SAFEMA). Meanwhile, adjudication under Section 16 proceeded and culminated in a final order imposing penalty and confiscation, relying heavily on High Court observations that treated Section 37A seizure as merely “interim” and non-implicative.

The legal issues therefore included: (a) when writ courts may interfere with an SCN; (b) whether and how a Section 37A(3) refusal to confirm seizure affects Section 16 adjudication; (c) whether an Adjudicating Authority can effectively “undo” a Competent Authority’s Section 37A(3) order while an appeal is pending.

Summary of the Judgment

  • The Supreme Court rejected the respondents’ allegation of suppression; the appellants had disclosed that the SCN culminated in a final order and that statutory appeals were filed.
  • The Court held that the High Court’s blanket approach—treating a writ against an SCN as non-maintainable—was incorrect on the facts; writ interference at the SCN stage is exceptional but permissible where jurisdictional/process abuse is prima facie shown.
  • The Court found the High Court’s reasoning (especially paras 32–34) problematic because it proceeded as if Section 37A(4) governed the situation (i.e., as if seizure were confirmed), while in fact the Competent Authority had set aside the seizure under Section 37A(3).
  • The Court held that the Adjudicating Authority’s final order (26-08-2024) was vitiated because it relied on the High Court’s observations and effectively reversed the Competent Authority’s Section 37A(3) order despite the Department’s appeal being pending—thereby “abdicating” the Appellate Authority’s role.
  • The Supreme Court set aside: (i) the Single Judge’s order (30-11-2023), (ii) the Division Bench judgment (23-07-2024), and (iii) the adjudication order (26-08-2024). Proceedings were revived from the SCN stage.
  • Crucially, the Court directed that the Appellate Authority must first decide the Department’s appeal under Section 37A(5) within two months; only thereafter may SCN proceedings continue, uninfluenced by earlier High Court observations or the Supreme Court’s present observations.

Analysis

Precedents Cited

Union of India v. VICCO Laboratories

The judgment relies on Union of India v. VICCO Laboratories (2007) 13 SCC 270 to restate the controlling principle on writ challenges to SCNs:

  • Normal rule: writ courts should not interfere at the SCN stage because the noticee has an adequate opportunity to respond before the statutory authority.
  • Exceptions (rare): interference is permissible if the SCN is prima facie without jurisdiction or constitutes an abuse of process; mere allegation is insufficient; if factual adjudication is necessary, interference is generally ruled out.

The Supreme Court used this precedent to correct the High Court’s broad statement that writs against SCNs are “not entertainable,” emphasizing that the rule is not “inviolable.” On the case’s facts—where an already-reasoned Section 37A(3) order had declined seizure on lack of foundational material, and where subsequent adjudication and judicial observations risked pre-judging that very foundation— the Court treated the case as falling within the exceptional category warranting intervention.

Legal Reasoning

(1) Statutory architecture: Section 37A is preventive; Section 16 is adjudicatory

The Court characterises Section 37A as a preventive mechanism to secure equivalent domestic assets where foreign assets are suspected to be held outside India in contravention of Section 4. It is meant to prevent frustration of eventual enforcement, not to finally determine contravention.

(2) The “reason to believe” threshold is not illusory; Section 37A(3) is substantive scrutiny

Under Section 37A(1), seizure requires “reason to believe” (recorded in writing) that foreign exchange/foreign security/property outside India is suspected to be held in contravention of Section 4. The Court stresses that this satisfaction is tentative and is expressly subjected to independent scrutiny by the Competent Authority under Sections 37A(2)–(3).

Here, the Competent Authority’s order (03-02-2021) was not treated as a procedural waypoint; it contained a considered conclusion that no asset/value was shown to have been “held” (in the sense relevant for invoking seizure power), and that the Department failed to prove any payment/value foundation. The Supreme Court treated that as materially supporting the appellants’ challenge to the SCN’s “foundation” (while also noting the Department’s appeal against it was pending).

(3) Misapplication of Section 37A(4): it speaks to confirmed seizure, not set-aside seizure

A central doctrinal clarification is the Court’s reading of Section 37A(4): it contemplates that an order “confirming seizure of equivalent asset” continues till disposal of adjudication proceedings, and that the Adjudicating Authority will then issue directions regarding further action. The Supreme Court held that Section 37A(4) does not address the situation where seizure is not confirmed under Section 37A(3).

The High Court repeatedly spoke as if Section 37A(4) applied even though the Competent Authority had set aside the seizure. This, in the Supreme Court’s view, “impliedly efface[d]” the Competent Authority’s findings and risked prejudicing (and effectively pre-empting) the pending statutory appeal.

(4) Institutional discipline: Adjudicating Authority cannot “undo” a Section 37A(3) order mid-appeal

The Adjudicating Authority’s final order explicitly stated “I do not concur with the order of the Competent Authority” and treated the seized properties as “in accordance with” Section 37A—despite the Competent Authority having set the seizure aside and despite the Department’s appeal being sub judice.

The Supreme Court condemned this as effectively displacing the Appellate Authority’s jurisdiction, terming it an “abdication” of the appellate function: the merits adjudicator cannot functionally reverse the Competent Authority’s order while an appeal against it is pending, especially when High Court observations have already blurred the statutory separation by assuming confirmation.

(5) Remedy and sequencing rule crafted by the Court

Instead of merely remanding the adjudication, the Court fashioned a sequencing safeguard:

  • First: decide the Department’s Section 37A(5) appeal (against refusal to confirm seizure) within two months by a reasoned order.
  • Then: recommence SCN proceedings and take them to a logical conclusion, without prejudice from observations in the High Court orders or this judgment.

This sequencing functions as the operative “new rule”/precedential guidance: where Section 37A(3) refusal findings exist and are under appeal, adjudication should not proceed in a manner that nullifies, assumes away, or pre-judges the appellate outcome.

Impact

  • Clarified relationship between seizure and adjudication: While Section 37A is preventive, a Section 37A(3) refusal to confirm seizure (especially on lack of foundational material) cannot be casually treated as irrelevant to adjudication where it goes to the same factual/legal “foundation.”
  • Limits on reliance on Section 37A(4): Courts and authorities must apply Section 37A(4) only when seizure is confirmed; it cannot be used to justify ignoring a set-aside seizure order.
  • Institutional discipline in parallel tracks: Adjudicating Authorities must avoid effectively overruling Competent Authorities (and mooting pending statutory appeals). This strengthens procedural fairness and reduces conflicting determinations within FEMA’s internal architecture.
  • Writ jurisprudence at SCN stage reaffirmed: High Courts must not apply a blanket bar; exceptional cases involving jurisdictional error/abuse of process remain amenable to writ review, consistent with Union of India v. VICCO Laboratories.
  • Practical consequence for enforcement strategy: The Directorate may need to prioritise and promptly pursue Section 37A appeals because pending appellate uncertainty can stall or reset downstream adjudication if authorities proceed in a way that prejudices the appellate function.

Complex Concepts Simplified

Show Cause Notice (SCN)
A formal notice initiating adjudication, requiring the noticee to explain why action (penalty/confiscation) should not be taken. Courts usually avoid interfering at this stage unless the notice is clearly illegal or abusive.
“Reason to believe”
A statutory threshold requiring objective, recorded reasons based on material—more than mere suspicion—before coercive steps (like seizure) can be taken.
Section 37A seizure vs Section 16 adjudication
Section 37A is designed to secure assets (preventive/interim); Section 16 is where the authority decides whether FEMA was violated and imposes consequences (adjudicatory/final).
Competent Authority vs Adjudicating Authority
The Competent Authority reviews and either confirms or sets aside a Section 37A seizure; the Adjudicating Authority decides the contravention and penalty. Their functions are distinct; one cannot collapse the other’s role, especially where an appeal lies.
Corrigendum
A correction/amendment issued to a notice/order. In this case, it was issued after hearing and reserving orders, adding to the procedural grievance.

Conclusion

The Supreme Court’s decision is significant for the procedural governance of FEMA enforcement. It reaffirms that writ courts may, in rare and justified cases, interfere even at the SCN stage, and it draws a crucial distinction between Section 37A(4) scenarios (confirmed seizure) and cases where seizure is set aside under Section 37A(3).

Most importantly, it establishes a discipline of sequencing and institutional respect: when the Competent Authority has refused to confirm seizure and that decision is under statutory appeal, adjudication cannot proceed in a manner that effectively reverses or nullifies that order and thereby pre-empts the appellate forum. The remedy—setting aside both High Court orders and the adjudication order, reviving proceedings from the SCN stage, and directing the Section 37A(5) appeal to be decided first—positions the appellate determination as a necessary procedural anchor before merits adjudication continues.