Supreme Court: A foreigner is not competent to sell or gift an immovable property situated in India without RBIs permission

A person who is not a citizen of India holding immovable property situated in India is obliged to make disclosure and declaration about the same to the Reserve Bank of India. Likewise, if a person intends to dispose of such property by sale, mortgage, lease, gift, settlement or otherwise, they are expected to obtain previous general or special permission from the RBI.

Introduction:

As a matter of general policy, foreign investment in landed property/buildings constructed by foreigners and foreign controlled companies were curbed as such investments offer scope for considerable amount of capital liability by way of capital repatriation. While India still requires foreign investments in certain sophisticated branches of industry, foreigners and foreign companies were still limited from entering the real estate business.

The object and purpose of implementing The Foreign Exchange Regulation Act, 1973 (FERA) was to consolidate and amend the law relating to certain payments, dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency, for the conservation of the foreign exchange resources of the country and the proper utilisation thereof in the interests of the economic development of the country.

Object of Section 31 of the Foreign Exchange Regulation Act:

The object of Section 31 of FERA is to minimise the drainage of foreign exchange by way of repatriation of income from immovable property and sale proceeds in case of disposal of property by a person, who is not a citizen of India. This Section is in place to put restriction on acquisition, holding and disposal of immovable property in India by foreigners (non-citizens).

Key takeaways from this Section:
  • On a bare reading of this ­Section, it becomes clear that a person who is not a citizen of India is not competent to dispose of by sale or gift any immovable property situated in India without previous general or special permission of the RBI.
  • This provision applies to foreign citizens and foreign and FERA companies only.
  • A non-­resident Indian (NRI) citizen is not covered under this provision.
  • A person who is not a citizen of India is required to make an application to the RBI in the prescribed form making necessary disclosures.
  • On receipt of this application, the RBI may either grant or refuse to grant the permission applied for after due inquiry.
  • A default permission can be assumed if no response is received to the application within the specified period.
  • What is significant to notice is that every person who is not a citizen of India holding immovable property situated in India at the time of commencement of the FERA is obliged to make declaration within ninety days from the commencement of the FERA or as may be allowed by the RBI.
  • The RBI had issued a notification on 26th May, 1993 in order to clarify the scope of Section 31 of FERA. The notification was limited to transaction entered into by a foreign citizen of ‘Indian origin’, to deal with real estate in India on certain conditions. The said notification had no application to foreigners or a person who is not a citizen of India, namely, foreign citizens.

Transfer of immovable property in India by foreigners (non-citizens):
  • A person who is not a citizen of India, holding immovable property situated in India, is obliged to make disclosure and declaration in that behalf to the RBI. If a person intends to dispose of such property by sale, mortgage, lease, gift, settlement or otherwise, they are expected to obtain previous general or special permission from the RBI. Only then such transfer could take place.
  • The consequences of failure to seek previous permission has not been explicitly specified under FERA, but then the purport of Section 31 of FERA as explained above, must be understood in the context of intent with which it has been enacted.  
  • The general policy does not allow foreign investment in landed property or the buildings constructed by foreigners and does not allow them to enter into real estate business to eschew capital repatriation, including the purport of other provisions of FERA, such as Sections 47, 50 and 63. Section 47 of FERA clearly envisages that no person can enter into any contract or agreement which would directly or indirectly evade or avoid in any way the operation of any provision of FERA or of any rule, direction or order made thereunder. What is significant to notice is that this Section declares that any such agreement will be valid if the same is done with the permission of the Central Government or the RBI.
  • Section 50 of FERA reinforces the position that transfer of land situated in India by a person, who is not a citizen of India, would visit with penalty.

Section 63 of FERA empowers the court trying a contravention under Section 56 which includes one under Section 51, to confiscate the currency, security or any other money or property in respect of which the contravention has taken place. The expression ‘property’ in Section 63, takes within its sweep immovable property referred to in Section 31 of FERA. To put it differently, the requirement specified in Section 31 is mandatory and, therefore, contract or agreement including the gift pertaining to transfer of immovable property of a foreign national without previous general or special permission of the RBI, would be unenforceable in law.

Status of Contracts under a Penalty:

It is well established that 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. Further, it is settled that prohibition and negative words can rarely be directory. Section 31 of FERA, when read with Sections 47, 50 and 63 of the same Act, states that although it may be a case of seeking previous permission it is in the nature of prohibition as observed in Mannalal Khetan v. Kedar Nath Khetan by the Supreme Court. In every case where a statute imposes a penalty for doing an act, though, the act not prohibited, yet the thing is unlawful because it is not intended that a statute would impose a penalty for a lawful act. 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.

Until a specific permission is accorded by the RBI, it would not be a lawful contract or agreement within the meaning of Section 10 read with Section 23 of the Contract Act. For, it remains a forbidden transaction unless permission is obtained from the RBI. The fact that the transaction can be taken forward after grant of permission by the RBI does not make the transaction any less forbidden at the time it is entered into. It would nevertheless be a case of transaction opposed to public policy and, thus, unlawful.

Supreme Court’s Position on Transactions which are in Contravention of Section 31 of FERA:

In the case of Asha John Divianathan v. Vikram Malhotra, a piece of land was owned by a foreign citizen. The plaintiff in the case had gifted the said property in favour of the respondent but considering that this the land in question was owned by a foreign citizen, this transaction was unenforceable in law. This meant that the respondent had no clear title to transfer this land.

The question before the Supreme Court was in reference to Section 31 of FERA, particularly whether transactions entered into in contravention of the Section are void or not?

The Supreme Court had held that the requirement of seeking previous general or special permission of the RBI in respect of transaction covered by Section 31 of the FERA is mandatory. Resultantly, any sale or gift of property situated in India by a foreigner in contravention thereof would be unenforceable in law.

Conclusion:

The current situation is that the condition predicated in Section 31 of FERA 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. Until such permission is accorded, in law, the transfer cannot be given effect to; and for contravening with that requirement, the concerned person may be visited with penalty under Section 50 and other consequences provided for under FERA.