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by sayum
17 June 2026 6:35 AM
"An Authorised Dealer acting under Section 10(5) is neither expected nor permitted to function mechanically. Rather, it is required to undertake an independent assessment of the transaction placed before it and to satisfy itself that the transaction complies with the applicable statutory and regulatory framework," Gauhati High Court, in a significant judgment, has ruled that a writ petition under Article 226 of the Constitution is maintainable against a private commercial bank when it performs the statutory functions of an "Authorised Dealer" under the Foreign Exchange Management Act (FEMA).
A bench of Justice Kaushik Goswami held that while a private bank is not a "State" under Article 12, its role in regulating and processing foreign exchange transactions carries a public law element, making its decisions subject to judicial review for arbitrariness or irrationality.
The court further observed that Authorised Dealer banks are not mere conduits for money but are statutorily obligated under Section 10(5) of FEMA to ensure that transactions do not involve any contravention or evasion of the law. The bench noted that banks are entitled to refuse transactions that trigger sanctions-related concerns, especially when such compliance is mandated by the contractual framework between the bank and the customer.
Background Of The Case
The petitioner, Bitumix India LLP, a merchant trader, challenged the decision of ICICI Bank Limited to decline the processing of certain foreign exchange transactions arising from merchant trade activities. The petitioner had entered into a facility agreement with the bank for a limit of Rs. 10 Crore to facilitate trade between overseas suppliers in the UAE and buyers in Bangladesh.
The bank refused to process the remittances after an investigation by the International Maritime Bureau (IMB) revealed an "Iranian nexus." The IMB report suggested that the goods, contrary to the petitioner’s declarations of UAE origin, were actually shipped from Bandar Abbas, Iran, and involved vessels listed on the US OFAC sanctions list. The petitioner contended that the bank's refusal was arbitrary and that foreign sanctions like those of the OFAC do not possess the force of law in India.
Legal Issues Before The Court
The primary question before the court was whether a writ petition is maintainable against a private scheduled commercial bank regarding its refusal to process foreign exchange transactions. The court was also called upon to determine whether an Authorised Dealer bank possesses the authority under FEMA and the governing contractual framework to undertake sanctions-related scrutiny and refuse processing based on foreign regulatory regimes.
Court’s Observations On Writ Maintainability Against Private Banks
Nature Of Function Over Corporate Identity
The court began by addressing the preliminary objection regarding maintainability. It observed that while decisions like Federal Bank Ltd. v. Sagar Thomas and S. Sobha v. Muthoot Finance Ltd. establish that private financial institutions are not automatically public authorities, the "true test" lies in the nature of the function being performed and the character of the impugned action.
Public Law Element In FEMA Transactions
The bench noted that ICICI Bank functions as an Authorised Dealer Category-I Bank under the statutory framework of FEMA. The processing of foreign exchange is a regulated activity that involves discharging obligations arising under a central statute. Therefore, when a bank exercises powers in this capacity, its actions contain a public law element.
Arbitrariness Amenable To Judicial Review
The court held that the existence of a contractual relationship does not exclude judicial review where allegations of arbitrariness are raised against a body performing a statutory duty. It emphasized that the challenge was founded upon the "unreasonableness" of the bank's exercise of power as an Authorised Dealer, thereby making the writ petitions maintainable.
The Statutory Role Of Authorised Dealers Under Section 10(5) FEMA
Banks Are Not Mere Conduits
The court delved deep into the statutory position of Authorised Dealer Banks under Section 10 of FEMA. It observed that such banks occupy a "central position" and are entrusted with important regulatory responsibilities to ensure compliance with the foreign exchange framework.
Statutory Duty To Scrutinize Transactions
Under Section 10(5) of FEMA, an Authorised Person is required to obtain declarations and information to satisfy itself that a transaction is not designed for the purpose of any contravention or evasion of the Act or its rules. The bench remarked that this provision casts a "statutory obligation" to undertake appropriate scrutiny, verification, and due diligence before processing any transaction.
Independent Assessment Required
Justice Goswami observed that a bank is neither expected nor permitted to function mechanically. The law requires an independent assessment of the transaction’s bona fides. If a bank has reason to believe a contravention is contemplated, it is even required to report the matter to the Reserve Bank of India (RBI).
"The statutory and regulatory framework obliges the bank to examine the matter, seek clarifications where necessary and satisfy itself regarding the permissibility of the transaction before proceeding further."
Contractual Right To Refuse Based On Sanctions
Binding Nature Of Facility Agreements
The court examined the Facility Agreement executed between the petitioner and ICICI Bank. It noted that the agreement contained specific clauses—6.1(xiii) and 6.1(xiv)—which expressly dealt with sanctions compliance. The petitioner had voluntarily undertaken that its transactions would not violate sanctions promulgated by the OFAC, United Nations, or European Union.
Unconditional Right Of Refusal
The bench found that the contract reserved an "unconditional right" for the bank to refuse processing any transaction that violates or "may violate" any sanctions. The court held that the parties had consciously allocated the risk, and once an "Iranian nexus" surfaced, the bank was contractually justified in re-examining the transactions.
Impact Of Misrepresentation And The Iranian Nexus
Failure To Disclose Material Facts
The court highlighted that the IMB report shockingly revealed that the shipments did not take place from the UAE as represented by the petitioner. Instead, the goods were exported from Iran on vessels currently subject to OFAC sanctions. The containers were owned and operated by subsidiaries of the Islamic Republic of Iran Shipping Lines Company (IRISL).
Plea Of Ignorance Rejected
The petitioner’s argument that it was unaware of the Iranian nexus did not find favor with the court. The bench observed that in international trade involving substantial commercial value, the provenance and routing of goods are not matters "wholly beyond the knowledge" of the parties. Even assuming a lack of prior knowledge, it does not dilute the bank’s obligation to act on the discovered information.
Status Of Foreign Sanctions In India
OFAC Sanctions And Municipal Law
Regarding the petitioner's contention that OFAC sanctions are US laws and not enforceable in India, the court agreed that foreign sanctions do not automatically become part of Indian municipal law. It cited precedents like Jolly George Varghese v. Bank of Cochin to affirm that international covenants require domestic legislation to be binding.
Commercial Wisdom And Correspondent Banking
However, the court noted that the bank was not justifying its action solely on the legal enforceability of OFAC rules. Instead, it was acting on "commercial wisdom." The bench observed that sanctions-related concerns have significant operational consequences, as financial institutions depend on international payment and correspondent banking networks.
Protection Of Global Banking Relationships
The court recognized that a bank cannot be compelled to ignore information that could jeopardize its access to international payment systems. Managing such risks is an integral part of a bank's compliance and risk-management functions in the contemporary global financial landscape.
The High Court concluded that the decision-making process adopted by ICICI Bank did not suffer from arbitrariness, mala fides, or procedural impropriety. It held that the bank acted within the framework of its contractual rights and statutory obligations under FEMA. The bench emphasized that a writ court does not sit in appeal over the commercial wisdom of a bank or substitute its own assessment for that of the Authorised Dealer.
Finding no ground for interference under Article 226, the court dismissed the writ petitions and vacated all interim orders. It clarified, however, that the dismissal would not preclude the petitioner from pursuing other civil or contractual remedies available under the law
Date of Decision: 12 June 2026
