The Liberalized Remittance Scheme (LRS) is often perceived as a broad window for overseas financial activity. However, a recent judgment by the Appellate Tribunal (SAFEMA) clarifies that while the remittance of money might be legal, the application of those funds is strictly regulated.
The Core Dispute: Facts of the Case
The Enforcement Directorate (ED) initiated an investigation into the financial activities of Mr. Sanjiv Lamba, a resident Indian, alleging three specific violations of FEMA:
- Investment in BVI Company: The individual incorporated ‘Kalobri Investment’ in the British Virgin Islands and invested USD 50,000 into it.
- Foreign Bank Account: He maintained an account with HSBC Geneva between 2000 and 2012 without RBI approval, involving a total volume of approximately USD 2.8 million.
- Overseas Lending: He extended an unsecured loan of GBP 65,211.08 to the same foreign company in 2010 without obtaining prior permission from the RBI
Summary of SAFEMA Judgment: Assistant Director E.D. vs. Sanjiv Lamba [2025]
Contravention I: Investment in Foreign Shares via LRS The first issue involved the appellant incorporating an overseas entity and investing USD 50,000 in its shares using funds remitted under the Liberalized Remittance Scheme (LRS). The Enforcement Directorate (ED) alleged this required prior RBI approval. However, the Tribunal upheld the Adjudicating Authority’s decision to drop this charge, noting that the investment was within the then-applicable LRS limit of USD 200,000. Since the funds were remitted to a Singapore account and used for “capital investment” in shares as permitted by RBI Master Circular No. 05/2009, no prior approval was necessary.
Contravention II: Holding Unauthorised Foreign Bank Accounts The second contravention pertained to the appellant maintaining a bank account with HSBC Geneva from 2000 to 2012 without RBI permission, involving a total volume of approximately USD 2.8 million. While the appellant argued that the violation was technical and that he had voluntarily repatriated the funds and paid taxes via the Income Tax Settlement Commission (ITSC) in 2014, the Tribunal refused to quash the penalty. It held that holding foreign exchange beyond 180 days is a continuing contravention of Section 4 of FEMA. The penalty of ₹88 Lakhs was deemed reasonable and proportionate.
Contravention III: Lending LRS Funds to Foreign Companies The third and most significant ruling involved the appellant providing an unsecured loan of GBP 65,211 to an overseas company using LRS funds. The appellant contended that since LRS allows “Capital Account Transactions,” lending should be permitted. The Tribunal flatly rejected this, clarifying that Regulation 3 of the FEMA (Borrowing or Lending in Foreign Exchange) Regulations, 2000 specifically prohibits resident individuals from extending loans to foreign companies without RBI approval. It ruled that the LRS scheme does not override these specific statutory restrictions, and a penalty of ₹4.50 Lakhs was sustained.
Author Bio
