Prolonged Stay Abroad Without Intention to Return Qualifies as ‘Resident Outside India’ Under FERA: Bombay High Court Upholds Penalties For Share Dealings Without RBI Approval

“Mere Citizenship Is Not Sufficient – Intention To Return Is Crucial To Determine Residency Under FERA”: Bombay High Court, comprising Justice M.S. Sonak and Justice Jitendra Jain, delivered a reportable judgment in the case of Neha Shroff & Others vs. Union of India, decisively ruling on the interpretation of ‘Person Resident in India’ under the Foreign Exchange Regulation Act, 1973 (FERA).

The Court upheld penalties imposed by the Enforcement Directorate (ED) for purchasing shares in an Indian company without prior Reserve Bank of India (RBI) approval. Dismissing the appeals filed by the Shroff daughters, their mother, and Sujay Trading Corporation, the Court held that the appellants were rightly classified as ‘persons resident outside India’ under Section 2(q) of FERA, owing to their prolonged stay abroad, marital ties in the United States, and clear absence of any intention to return to India.

The Court categorically stated, “Mere Indian citizenship cannot be determinative; the crucial test under Section 2(p) is whether the person had the intention to stay outside India for an uncertain period.”

Share Purchase Without RBI Approval Triggers FERA Action

The case arose from allegations that during 1995-96, the Shroff daughters — Neha, Kiran, and Kanan Shroff — acquired 5,62,600 shares of Ditco Securities Pvt. Ltd., Mumbai, valued at ₹1.68 crore, without obtaining the mandatory approval from the RBI, as required under FERA.

The Enforcement Directorate issued show-cause notices, asserting that the appellants were ‘persons resident outside India’ and that the purchase of shares by them without RBI permission was in violation of Sections 9, 19, and 29 read with Section 68 of FERA.

The penalty orders passed by the Special Director of ED on 30 October 2000, and subsequently confirmed by the Appellate Tribunal for Foreign Exchange on 18 November 2005, imposed penalties ranging from ₹8.5 lakh to ₹41 lakh on each appellant.

The appellants contended that they were merely students in the USA on visitor or student visas and remained ‘persons resident in India’. They argued that the share purchase was lawful and did not attract FERA provisions.

“Intention To Stay Abroad For An Uncertain Period Determines Residency, Not Mere Possession Of Indian Passport”: Court Resolves The Core Legal Issue

Addressing the primary issue of whether the appellants were residents of India or abroad, the Court observed, “Ordinarily, one of the crucial tests for determining the question of residence is whether the appellants had an animus manendi — an intention to stay for an indefinite period at one place.”

Rejecting the appellants’ arguments based merely on citizenship and visa status, the Court noted that “occasional visits to India evidenced by the entries in passports show no intention to return and stay in India.”

The Court relied extensively on the statement of the father, Kishor Shroff, recorded under Section 40 of FERA, where he admitted that Neha had moved to the USA in 1986 and was married to Sanjay Bagai, an established Chartered Accountant in San Francisco. Similarly, Kanan had also moved to the USA in 1994 with her husband Vijay Jaychandran. Kiran had been residing in the USA since 1992 for educational purposes but continued there without any material indicating her return.

The Court emphatically stated, “The length of stay, marriage to persons settled in the USA, and the absence of any clear plan or evidence of intention to return to India cumulatively point to only one conclusion — that the appellants were persons resident outside India under Section 2(q) of FERA.”

“FERA Presumes Culpable Mental State — Burden Is On The Accused To Prove Lawful Status”: Court Upholds Reverse Burden Under Economic Laws

Rejecting the appellants’ argument that the burden to prove residency lay on the Enforcement Directorate, the Court held that FERA operates with a reverse burden of proof.

Referring to Section 59 of FERA, the Court explained, “In any prosecution for an offence under FERA which requires a culpable mental state, the Court shall presume the existence of such mental state. It shall be a defence for the accused to prove the contrary.”

The judgment further clarified, “Even outside the criminal prosecution context, Section 71 imposes the burden on the person proceeded against to demonstrate that he had the requisite RBI permission.”

The Court rejected the contention that a higher standard of proof akin to criminal law was required, stating firmly, “We are not dealing with a criminal prosecution but with regulatory contravention proceedings, where the statutory presumptions under Sections 59 and 71 operate fully.”

“Adverse Inference Is Justified When Parties Suppress Material Facts”: Application Of Section 114(g) Of The Indian Evidence Act Upheld

On the question of whether the Tribunal correctly applied Section 114(g) of the Indian Evidence Act, the Court held that the Tribunal was justified in drawing adverse inferences.

The judgment observed, “The Tribunal has presumed the existence of certain facts which it thought are likely to have happened, having regard to the common course of natural events, human conduct, and private business in relation to the facts of the particular case.”

Rejecting the plea that travel records and visa documents rebutted this presumption, the Court noted, “The travel records of the Shroff daughters do not rebut the circumstances which indicate their intention to stay outside India for an uncertain period.”

“Penalty Is Neither Excessive Nor Disproportionate – Economic Laws Must Be Strictly Enforced”: Court Rejects Plea On Proportionality

Addressing the plea that the penalty was disproportionate since there was no actual loss of foreign exchange, the Court categorically held, “FERA is a regulatory statute that prohibits certain transactions without permission. The requirement is not contingent on whether there was actual loss but on whether permission was obtained.”

The Court firmly stated, “Considering the magnitude of the transactions and the circumstances in which they were carried out, there is no substance in the argument based on any alleged disproportionality in the penalty amounts.”

Bombay High Court Sends A Stern Message On Compliance With Foreign Exchange Laws

In a decisive conclusion, the Court ruled, “The impugned orders made by the Special Director and the Tribunal have correctly applied the relevant legal provisions. We find no merit in these appeals and consequently dismiss the same without any order as to costs.”

The Court vacated all interim reliefs, reinforcing the principle that compliance with foreign exchange laws is mandatory and the burden to prove lawful conduct lies squarely upon the person engaging in cross-border financial transactions.

Date of Decision: 26 June 2025