Karnataka HC Quashes ED Action Against Genpact India Under FEMA, Holds S. 37A cannot be Applied Retrospectively [Read Order]

The Karnataka High Court refused to quash the Enforcement Directorate’s seizure action against Genpact India, holding that Section 37A of the Foreign Exchange Management Act, 1999 cannot be applied retrospectively to transactions completed before the provision came into force on September 9, 2015.

The dispute related to transactions carried out during a restructuring of the Genpact Group in 2015. Empower India had issued Non-Convertible Debentures to Genpact Luxembourg on March 25, 2015.

The petitioner’s counsel argued that the transactions were completed before Section 37A came into force. They argued that a completed transaction cannot become a continuing violation only because its effects continue later. They also relied on the Karnataka High Court’s earlier ruling in Canara Bank v. Commissioner of Customs which held that Section 37A cannot operate retrospectively.

The ED’s counsel argued that its action was not based only on the 2015 transactions. They pointed out that payments towards the NCD liability were made between 2018 and 2023. These payments were made after Section 37A came into force, so the ED argued that they could be examined under the provision.

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The Bench comprising Justice Suraj Govindaraj observed that Section 37A cannot be applied to a transaction that was fully completed before September 9, 2015. At the same time, the Court explained that actual payments made after that date are later acts and are different from the mere continuation of an earlier liability.

The court observed “Section 37A cannot be applied retrospectively to the completed transactions of January and March 2015 merely because the consequences of those transactions continued after 09.09.2015.”

The court further explained that the ED was not relying only on the old 2015 transactions. It was also relying on actual payments made between 2018 and 2023, which took place after Section 37A came into force and were alleged to be part of the same arrangement.

The court held that Section 37A cannot be used retrospectively against the completed 2015 transactions but the later payments can be examined under the provision. It dismissed Genpact India’s challenge to the seizure order and also vacated the interim stay on the seizure.

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