Introduction

The landmark judgment in Asha John Divianathan v. Vikram Malhotra And Others (2021 INSC 121) delivered by the Supreme Court of India on February 26, 2021, addresses the critical issue of property transfers by foreign nationals without prior permission from the Reserve Bank of India (RBI) under Section 31 of the Foreign Exchange Regulation Act, 1973 (FERA).

The case revolves around the validity of gift deeds executed by Mrs. F.L. Raitt, a non-Indian citizen, in favor of Vikram Malhotra without obtaining the requisite RBI permissions. The appellant, represented by Mr. R.P. David, challenged the enforceability of these deeds, asserting their nullity under FERA.

Summary of the Judgment

The Supreme Court scrutinized the transactions executed under Section 31 of FERA, which mandates prior RBI permission for the acquisition, holding, or transfer of immovable property in India by non-citizens. The appellant contended that the gift deeds in question were void and unenforceable due to the absence of such permissions.

Contrary to the findings of various High Courts and the Trial Court, the Supreme Court held that Section 31's requirement for prior RBI permission is mandatory. Consequently, any transfer of immovable property by a non-Indian citizen without such permission is unenforceable and void in law. The Court overruled inconsistent High Court decisions and emphasized the legislative intent behind FERA to restrict foreign investment in Indian real estate.

The judgment resulted in the dismissal of the impugned decisions of the lower courts, granting the appellant possession of the disputed property and eligibility for mesne profits.

Analysis

Precedents Cited

The Supreme Court critically examined precedents that held transactions under Section 31 FERA to be voidable rather than void. Key cases reviewed include:

• Piara Singh v. Jagtar Singh (Punjab & Haryana High Court): Held that lack of RBI permission does not render transactions void.
• Renusagar Power Co. Ltd. v. General Electric Co. (SCC 1994): Discussed enforceability of agreements in violation of FERA provisions.
• Vijay Karia v. Prysmian Cavi E Sistemi SRL (SCC 2020): Compared FERA with FEMA, emphasizing stricter compliance under FERA.
• Joaquim Mascarenhas Fiuza v. Jaime Rebello (Bombay High Court): Affirmed that property transfer without RBI permission is invalid.
• William Babu v. Helma Roy (Kerala High Court): Declared contracts in contravention of Section 31 as void.

The Supreme Court overruled contradictory High Court interpretations, reinforcing the mandatory nature of RBI permissions under Section 31 FERA.

Legal Reasoning

The Court delved into the legislative intent behind FERA, highlighting that it was enacted to regulate foreign exchange and prevent capital repatriation through real estate investments by non-citizens. Section 31 explicitly restricts non-Indian citizens from acquiring, holding, or transferring immovable property without prior RBI approval.

By dissecting related provisions—Sections 47, 50, and 63—the Court established that:

• Section 47: Prohibits contracts that evade FERA provisions, making such agreements unenforceable unless RBI permission is obtained.
• Section 50: Imposes penalties for contraventions of FERA, reinforcing the mandatory compliance.
• Section 63: Empowers courts to confiscate property involved in violations, underscoring the gravity of non-compliance.

The Court distinguished between "void" and "voidable" transactions, categorizing unauthorized transfers under Section 31 as void due to their contravention of public policy and legislative directives.

Furthermore, the Court emphasized that the consistent policy to restrict foreign nationals from real estate dealings aligns with the nation's economic interests, thereby necessitating strict adherence to FERA's provisions.

Impact

This judgment sets a definitive precedent affirming that property transfers by non-Indian citizens without RBI permission are unenforceable and void. The implications are profound for foreign investments in Indian real estate, mandating rigorous compliance with FERA.

It nullifies prior High Court decisions that had lenient interpretations, thereby:

• Restricting unauthorized foreign ownership of immovable property.
• Empowering courts to invalidate such transactions upon challenge.
• Deterring foreign nationals and entities from circumventing RBI regulations.

Additionally, it reinforces the RBI's pivotal role in foreign exchange management and underscores the judiciary's commitment to upholding legislative intent.

Complex Concepts Simplified

Void vs. Voidable Transactions

Void Transactions: These are invalid from the outset. They are treated as if they never existed and cannot be enforced by any party. In this case, property transfers without RBI permission are deemed void because they violate mandatory legislative provisions.

Voidable Transactions: These are initially valid but can be declared invalid through legal action. Unlike void transactions, voidable ones remain enforceable until a court annuls them.

Mandatory vs. Directory Provisions

Mandatory Provisions: These are obligatory rules that must be followed. Non-compliance results in the transaction being void. Section 31 of FERA is deemed mandatory; thus, ignoring its requirements voids the transaction.

Directory Provisions: These are guidelines that courts may consider but are not strictly binding. Non-compliance typically results in penalties rather than invalidation of the transaction.

FERA vs. FEMA

FERA (Foreign Exchange Regulation Act, 1973): Focused on regulating foreign exchange and preventing capital flight by imposing strict controls over foreign ownership of property.

FEMA (Foreign Exchange Management Act, 1999): Replaced FERA with a more liberal approach, emphasizing management rather than regulation of foreign exchange and simplifying compliance for foreign investors.

Conclusion

The Supreme Court's judgment in Asha John Divianathan v. Vikram Malhotra And Others serves as a pivotal clarification on the enforceability of property transactions by non-Indian citizens under Section 31 of FERA. By declaring such unauthorized transfers void and unenforceable, the Court reinforces the legislative intent to regulate foreign investments in Indian real estate strictly. This decision not only rectifies inconsistencies in lower court interpretations but also fortifies the regulatory framework governing foreign ownership, ensuring alignment with India's economic policies and safeguarding against unauthorized capital repatriation.