FEMA COMPOUNDING AND ENFORCEMENT PROCEEDINGS: EXAMINING THE LIMITS OF REGULATORY DISCRETION AND THE POWER TO SEIZE ASSETS
The Karnataka High Court, in Genpact India Pvt. Ltd. v. Directorate of Enforcement, W.P. Nos. 16763 and 7283 of 2026, examined the scope of the Enforcement Directorate’s (ED) powers under the Foreign Exchange Management Act, 1999 (FEMA) in the context of corporate restructuring, foreign borrowings and regulatory compliance. The dispute arose from financial arrangements undertaken by Genpact India in 2015, involving overseas Genpact entities, equity acquisitions, foreign borrowings and the issuance of non-convertible debentures (NCDs). The ED alleged that these arrangements resulted in substantial liabilities being retained by the Indian entity. Approximately ₹7,800 crore was subsequently paid towards discharging the NCD liability between 2018 and 2023.
On 3 February 2026, the ED seized Genpact India’s head-office premises under Section 37A of FEMA. Separately, the ED rejected the company’s application under Rule 10 for a No Objection Certificate (NOC) in relation to a proposed USD 100 million investment in its wholly owned GIFT City subsidiary. An important aspect of the dispute was the Reserve Bank of India’s (RBI) compounding order dated 22 November 2023. The order followed an application concerning delays in reporting foreign inward remittances and the allotment of shares through Form FC-GPR.
The Court was required to consider whether Section 37A of FEMA could be applied retrospectively to transactions predating its commencement on 9 September 2015 and whether the ED could reject the proposed investment-related NOC merely on the ground of a pending investigation, without recording adequate reasons connecting the investigation to the proposed transaction. The proceedings also raised the question of the legal significance of the RBI’s compounding order in determining the scope of further regulatory scrutiny.
KEY FINDINGS
The Court dismissed the challenge to the seizure, holding that sufficient jurisdictional material existed to sustain proceedings under Section 37A. However, it clarified that the provision could not be applied retrospectively to transactions completed before its commencement, while subsequent payments and transfers remained independently examinable. In relation to the NOC, the Court set aside the rejection and remitted the application for fresh consideration through a reasoned decision. It emphasised that the mere pendency of an investigation could not, without more, justify refusal of the proposed investment. The Court did not direct the grant of the NOC or conclusively determine whether the alleged FEMA contraventions had occurred.
The RBI’s compounding order assumed significance in assessing the extent to which an earlier regulatory resolution could affect subsequent enforcement proceedings. Under Section 15 of FEMA, compounding provides a mechanism for resolving specified contraventions. However, its legal effect remains confined to the contravention actually compounded. In the present case, the compounding order concerned delayed reporting through Form FC-GPR. It could not, therefore, be construed as blanket approval of the underlying financial arrangements or as a determination that the broader transactions complied with FEMA. The ED accordingly remained entitled to examine other alleged contraventions falling outside the scope of the compounding order.
SIGNIFICANCE
The ruling delineates legitimate enforcement from the impermissible retrospective exercise of statutory powers, affirming that coercive action must be grounded in applicable law and requisite jurisdictional material while regulatory discretion must be exercised through reasoned decisions. It further clarifies that compounding is neither blanket exoneration nor a mere formality, its effect being confined to the specific contravention resolved. By sustaining the seizure proceedings while directing reconsideration of the NOC application, the Court balanced the ED’s enforcement mandate with statutory discipline, procedural fairness and accountability.
The article is authored by Sidharth Sharma and Arundhati Misra
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