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FERA, 1973 And Transfer of Immovable Property by a Foreigner

Created: 07 Jul 2024 at 23:29

FERA, 1973 directed foreign citizens to obtain prior permission from RBI for transfers of property.

FERA, 1973 has been repealed by FEMA, 1999 and transfers by foreigners are not prohibited under the new Act.

Saji Koduvath, Advocate, Kottayam.

Abstract

  • Section 31 of FERA, 1973 directed foreign citizens to obtain prior permission from RBI to ‘acquire or hold or transfer or dispose of‘ Immovable Property in India.
  • Several High Courts held that Section 31 was only directory.
  • Supreme Court, held that it was mandatory in Asha John v. Vikram Malhotra (2021).
  • FERA, 1973 has been repealed by FEMA, 1999.
  • FEMA does not prohibit such transfers.
  • By virtue of the decision in Asha John v. Vikram Malhotra, the transfers made by foreigners, violating FERA, 1973, till 1999, stands void.
  • In Asha John v. Vikram Malhotra, the Supreme Court held that the competent court decisions that attained finality, on the supposition that Sec. 31 of FERA was only directory, should not be reopened.

Introduction

  • Section 31 of the Foreign Exchange Regulation Act, 1973 (FERA) stipulates that when a foreign citizen ‘acquire or hold or transfer or dispose of‘ Immovable Property in India, he must have obtained the prior permission for the same from the Reserve Bank of India.
  • Very valuable properties are involved, in several cases, including large plantations.
  • Several High Courts held that it was not a mandatory requirement; but, only a mere directory provision.
  • Contra view was also taken by certain High Courts.
  • The matter was finally placed before the Apex Court in Asha John v. Vikram Malhotra (AIR 2021 SC 2932).

The Supreme Court of India (JJ. Khanwilkar, Indu Malhotra and Ajay Rastogi) held in the landmark decision, Asha John v. Vikram Malhotra (AIR 2021 SC 2932), that the requirement in Sec. 31 was mandatory; and, therefore, the transfer of Immovable property made in India, by foreigners, without prior permission of RBI was void.

  • Note:
  • FERA, 1973 has been repealed by Foreign Exchange Management Act, 1999 (FEMA) and such transfers are not prohibited under the new Act.
  • But, it is important for it is held by the Apex Court that such acquisition and transfers are ‘void‘.

Section 31 (1), Foreign Exchange Regulation Act, 1973

Section 31 (1) reads as under:

  • “31. Restriction on acquisition, holding, etc., of immovable property in India.—
  • (1) No person who is not a citizen of India and no company (other than a banking company) which is not incorporated under any law in force in India shall, except with the previous general or special permission of the Reserve Bank, acquire or hold or transfer or dispose of by sale, mortgage, lease, gift, settlement or otherwise any immovable property situate in India:
  • Provided that …”

Decisions of High Courts – Sec. 31 was not Mandatory

Several High Courts held that Sec. 31 was not mandatory; but, only directory. It includes the following:

  • Piara Singh v. Jagtar Singh (AIR 1987 P&H 93),
  • Ajith Prashad Jain v. N.K. Widhani (AIR 1990 Del. 42),
  • Tufanu vs. Muhammed Abdul Rahman ((1993) 1 Gau LR 306),
  • R. Sambasivam v. Thankavelu (2001-1 LW 161),
  • Geeta Reinboth v. J. Clairs (2005) 1 MP LJ 122,
  • Shivaprakasam v. Elamkovan ((2010) 3 MWN (Civil) 525: 2010 SCC OnLine Mad 4245),
  • Mathu Sree v. Samikkannu ((2013) 1 LW 136: 2012 SCC OnLine Mad 2769),
  • Harrisons Malayalam Ltd. v. State of Kerala, 2018(2) KLT 369.

The Supreme Court Verdict – Asha John v. Vikram Malhotra

Our Apex Court held in Asha John v. Vikram Malhotra (AIR 2021 SC 2932) as under:

  • “The condition predicated in Section 31 of the 1973 Act of obtaining ‘previous’ general or special permission of the RBI for transfer or disposal of immovable property situated in India by sale or mortgage by a person, who is not a citizen of India, is mandatory.”
  • “The decisions of concerned High Courts taking the view that Section 31 of the 1973 (FERA) Act is not mandatory and the transaction in contravention thereof is not void or unenforceable, is not a good law.”

Not to Reopen Cases Became Final by Competent Court Decisions

In this verdict (Asha John v. Vikram Malhotra) it is held that, the ‘transactions which have already become final‘, and the competent court decisions attained finality on the premises that Sec. 31 of FERA was only directory, should not be reopened. It is rendered as under:

  • “However, transactions which have already become final including by virtue of the decision of the court of competent jurisdiction, need not be reopened or disturbed in any manner because of this pronouncement.”

Ambiguity Broods

The words in the decision, ‘transactions which have already become final‘, is ambiguous; and it requires clarification, especially since it is definitely held in this case (Asha John v. Vikram Malhotra) that ‘the transaction (specified in Section 31 of the 1973 Act) entered into in contravention of that provision is void‘. And, also, observed as under:

  • ” ‘A priori, we conclude that the decisions of concerned High Courts taking the view that Section 31 of the 1973 Act is not mandatory and the transaction in contravention thereof is not void or unenforceable, is not a good law“.

Brief History of the case (Asha John v. Vikram Malhotra):

  • A foreigner, Raitte, gifted property to Vikram Malhotra without obtaining permission from RBI under S. 31 of  FERA 1973.
  • Before executing the gift deed she entered into a sale agreement with David, predecessor of Asha John.
  • The foreigner obtained formal permission of RBI under S. 31 on 2-4-1983.
  • The foreigner executed registered sale deed in favour of David on 9-4-1983.
  • David (Plaintiff), predecessor of Asha John, filed suit against Vikram Malhotra (Defendant) to declare the gift deed null and void.
  • Trial Court dismissed the suit.
  • The High Court, in appeal, held that there was no violation of S. 31; and dismissed the appeal, against the plaintiff.

The Supreme Court allowed the appeal, finding:

  • Gift to Vikram Malhotra (Defendant) was without permission from RBI under S. 31 of  FERA. Hence it was void, and
  • Sale to David (Plaintiff), predecessor of Asha John, was after permission from RBI; and hence it was valid.

Argument of appellant in the Supreme Court (Accepted by the Supreme Court).

  • Transfer to the defendant was void, for the reasons:
    • Transfer to the defendant was violative of S. 31; as prior permission of RBI was mandatory.
    • Further, S. 47 directed – “no person shall enter into” such contract; and S. 50 made violation punishable.
    • Object of 1973 Act was stopping capital repatriation (removal).
    • A contract is void if prohibited by a statute under a penalty (even if no express declaration in the Act that it is void).

Argument of Respondents:

  • S. 31 is a directory provision.
  • It does not prohibit transfer.
  • No provision say, violation is void.
  • No consequence provided for violation.
  • Provision for penalty does not make the deed invalid.
  • Penalties are provided in Section 50, no action has been taken RBI.
  • At the most, it would be voidable; and subject to discretion of the RBI.
  • RBI is exclusively responsible for determining the permissibility of the transaction.
  • FERA has been repealed and impugned violation is not void under the preset Act (FEMA).
  • Consistent view of High Courts should not be interfered, as held in Waman Rao v. Union of India, (1981) 2 SCC 362.

The Supreme Court upheld the Contentions of the Appellant, relying on the following earlier Decisions

Mannalal Khetan v. Kedar Nath Khetan, AIR 1977 SC 536;  (1977) 2 SCC 424 Prohibition and negative words can rarely be directory. Under Section 31  read with Sections 47, 50 and 63 of the Act, it is in the nature of prohibition. When penalty is imposed by statute for the purpose of preventing something from being done on some ground of public policy, the thing prohibited, if done, will be treated as void, even though the penalty if imposed is not enforceable.
Union of India & Ors. v. A.K. Pandey, (2009) 10 SCC 552Where a contract, express or implied, is expressly or by implication forbidden by statute, no court will lend its assistance to give it effect. A contract is void if prohibited by a statute under a penalty, even without express declaration that the contract is void, because such a penalty implies a prohibition.
Union of India v. Colonel L.S.N. Murthy & Anr. (2012) 1 SCC 71  The contract would be lawful, unless the consideration and object thereof is of such a nature that, if permitted, it would defeat the provisions of law. And, in such a case the consideration or object is unlawful and would become void and that unless the effect of an agreement results in performance of an unlawful act, an agreement which is otherwise legal cannot be held to be void. Further, if the effect of an agreement did not result in performance of an unlawful act, as a matter of public policy, the court should refuse to declare the contract void with a view to save the bargain entered into by the parties and the solemn promises made thereunder. The Court adverted to the exposition in the earlier decision in Shri Lachoo Mal v. Shri Radhey Shyam, AIR  1971 SC 221 as to what makes an agreement, which is otherwise legal, void is that its performance is impossible except by disobedience of law.

Re: Argument (Propounded in Waman Rao v. Union of India) – Not to Disturb the Consistent View of various Courts

The Supreme Court held as under:

  • “It is not possible to countenance the argument – not to disturb the consistent view of different High Courts on the principle of stare decisis by invoking the dictum in Waman Rao, in reference to Section 31 of the 1973 Act. For, there is conflict of opinion and is not a case of consistent view of all High Courts, having occasion to deal with interpretation of Section 31 of the 1973 Act.”

Following are the decisions cited by the Apex Court – that are in line with the view of the Apex Court:

  • Joaquim Mascarenhas Fiuza v. Jaime Rebello,  1986 SCC OnLine Bom 234 : 1986 Mah LJ 1031,  Bombay High Court (Goa Bench).
  • Sahruvan Nachair  v. V.S. Mohammed Hussain Maracair,  (2001) 1 Mad LJ 188 : 2000 SCC OnLine Mad 737, Madras High Court.
  • William Babu & Anr. v. Helma Roy Alias Emily Carmel,  (2018) 1 Ker LJ 525 : 2017 SCC OnLine Ker 25269, Kerala High Court.
  • Mrs. Shoba Viswanatha v. D.P. Kingsley, 1996 (I) CTC 620 : 1996 SCC Online Mad 319 Madras High  Court.,

Read in this Cluster (Click on the Topic):

Book No. 1.   Handbook of a Civil Lawyer

Civil Procedure Code

Power of attorney

Title, ownership and Possession

Principles and Procedure

Land Laws

Evidence Act – General

Contract Act

Easement

Stamp Act

Book No. 2: A Handbook on Constitutional Issues

Book No. 3: Common Law of CLUBS and SOCIETIES in India

Book No. 4: Common Law of TRUSTS in India

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