ASHA JOHN DIVIANATHAN VS VIKRAM MALHOTRA 

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INTRODUCTION

The recent verdict delivered by the Hobble Supreme Court of India in the case of Asha John Divianathan vs Vikram Malhotra and Others (Civil Appeal No.9546 of 2010 ) has captured significant attention with the legal community ,particularly due to its implications for the transfer of immovable property by foreigners in India .The three-judge bench addressed a critical issue concerning the procedural requirements for foreign citizens seeking to transfer or dispose of immovable property within Indian jurisdiction. In its ruling ,the Supreme Court underscored prior approval from the Reserve Bank of India (RBI) as mandated by Section 31 of the Foreign Exchange Regulation act 1973 (FERA). This provision requires that foreign nationals obtain explicit permission from the RBI before executing any transactions involving immovable property in India .The Court’s decision reaffirms that this requirement is not merely directive but a mandatory prerequisite ,thereby clarifying and reinforcing the regulatory framework governing such transactions. The case becomes particularly significant when considering that FERA was repealed and replaced by the Foreign Exchange Management Act (FEMA),1999. Despite this legislative transition ,the Supreme Court’s judgement relied on its plenary powers under Article 142 of the Constitution of India to address the legal issues under the old FERA regime. This decision highlights the Court’s role in ensuring compliance with adapting to contemporary legal ad regulatory changes. Before delving into the analysis of the case and its implications ,it is essential to understand the legal principles underpinning Section 31 of FERA. The Supreme Court’s interpretation of this section provides critical insights into the regulatory requirements for foreign transactions involving immovable property and sets a precedent for future legal and administrative practices. The case not only clarifies existing legal ambiguities but also reaffirms the stringent regulatory oversight required for such transactions ,thereby impacting both foreign investors and legal practitioners navigating property law in India.’’

FACTS OF THE CASE

1. Mrs.F.L.Raitt ,a foreign national and owner of a property ,gifted a portion of it (12,306 square feet)to Vikram Malhotra (respondent No.1) on March 11, 1977 ,and executed a supplementary gift deed on April 19, 1980, without obtaining the required prior permission from the Reserve Bank of India (RBI) under Section 31 of the Foreign Exchange Regulation Act ,1973. Prior to this, on April 5, 1976 ,she had an agreement of sale with Mr.R.P David ,father of the appellant Asha John Divianathan ,and delivered the title deed of the property to him.
2. Subsequently, Mrs.F.L.Raitt granted a power of attorney to Vikram Malhotra on January 9, 1982 ,which was revoked on June 9,1982.
3. She then executed a ratifactory agreement to sell the property to Mr.R.P.David on December 4,1982, followed by a power of attorney in favour of Mr.Peter j.Philip on January 26,1983 .RBI permission was later obtained on April 2, 1983 ,for the sale of the property to Mr.R.P.David ,and a registered sale deed was executed on April 9,1983.
4. On July 30 ,1983, Mrs .F.L.Raitt filed a suit challenging the power of attorney and sale deed. 
5. She passed away on January 8,1984, and was succeeded by Mrs.Ingrid L.Greenwood .Following her on death ,Mr.R.P.David filed three suits, one against Vikram Malhotra to nullify the gift deeds and seek possession and injunction ,and two against Mrs.Ingrid L.Greenwood and Mr.Clive Greenwood for possession of the entire property.
6. The City Civil &Sessions Judge in Bangalore framed nine issues ,including the validity of the gift deeds and power of attorney ,and eventually dismissed Mr.R.p.David’s suit.

ISSUES RAISED

1. The central issue before the court concerned Section 31 of the Foreign Exchange Regulation Act ,1973 ,specifically whether transactions in violation of this section are void or voidable ,and who can void them.
2. In suit No.10328 of 1983 filed by Mrs. F . L. Raitt and Mrs.Ingrid L.Greenwood ,the Trial Court addressed 11 issues .These included whether the power of attorney dated January 26 ,1983 ,executed by Mrs.Raitt in favour of the second defendant ,was obtained through fraud or undue influence ,and if so ,whether it was null and void .
3. The court also considered whether a permanent injunction should be granted to prevent the defendant from acting under the power of attorney ,and whether the sale deed dated April 9,1983 ,should be declared invalid .Despite the detailed issues and evidence ,the Trial Court dismissed suit on August 31 ,2001. 
4. In another suit filed by Mr. R.P. David ,the Trial Court framed 10 issues .These included whether the plaintiff owned the property under the sale deed dated April 9 ,1983 ,and whether Mrs. Florence L.Raitt executed the power of attorney willingly.
5. It also considered whether the power of attorney was obtained by fraud and if the property was bequeathed to the defendant through a will.
6. The court assessed the necessity of the second defendant as a party and the entitlements for declaration ,mesne profits ,and possession of the property.

CONTENTIONS OF APPELLANT

The Appellant’s contentions are centred around the interpretation of the foreign exchange Regulation Act (FERA) and its procedural requirements. The Appellant argues that Section 31 of FERA mandates obtaining prior permission from the Reserve Bank Of India (RBI) for any transaction involving foreign exchange or foreign securities. Consequently ,the Gift Deed executed in favour of Respondent no .1, which pertain to such foreign assets ,are invalid and cannot be enforced against the Appellant and Respondent no.4 without RBI’s prior approval .This argument is grounded in the assertion that any transaction violating this requirement is inherently void. Further ,the Appellant refers to Section 47 of FERA ,which reinforces the requirement for RBI permission and underscores the legal obligation to comply with Section 31 .Additionally ,Section 50 of FERA imposes penalties for violations ,emphasizing that non-compliance is both illegal and punishable ,thus supporting the Appellant’s claim that transactions conducted without RBI’s consent are legally unsustainable .The Appellant also references key case laws ,including Life Insurance Corporation of India vs Escorts Limited and Others and union of India &ors vs A.K. Pandey ,to bolster their argument .These cases highlight the necessity of adhering to statutory requirements and reinforce the principle that non-compliance with FERA regulations renders such transactions invalid.Finally ,the Appellant criticizes the judgement in Piara Singh vs Jagtar Singh and Another ,arguing that it fails to correctly interpret the scope and intent of Section 31 of FERA .They assert that the case does not accuratelyreflect the statutory requirement for RBI approval ad ,as a result ,leads to an enforceability of transactions conducted without this requisite approval.

CONTENTIONS OF RESPONDENT

Respondent No.1 has raised several contentions regarding Section 31 of the Foreign Exchange Regulation Act (FERA). They argue that Section 31 should be viewed as a directory and regulatory measure rather than a prohibitory one. This perspective suggests that while Section 31 regulates the transfer of assets ,such as gifts ,it does not outright prohibit these transfers without prior permission from the Reserve Bank of India (RBI). Furthermore ,it is contended that neither Section 31 nor any other provision in FERA explicitly deems transactions conducted in violation of Section 31 as void .Without such specific provisions ,a transaction that fails to comply with Section 31 does not automically become invalid. Respondent No.1 also asserts that the absence of prior RBI approval does not necessarily render the Gift Deeds in question invalid. Instead ,these deeds should be regarded as valid unless a competent authority or court explicitly declares otherwise. According to the respondent ,eve if a transaction were problematic under Section 31 ,it would be voidable rather than void ,with the RBI holding the discretion to decide whether to act on such transactions .Moreover ,the respondent points out that penalties for violations of FERA are outlined in Section 50 ,but there has been no action or penalties imposed by the RBI or any other party concerning the transactions in question. This action might suggest that such violations are not deemed critical. The respondent emphasises the RBi’s exclusive authority in managing foreign exchange regulations ,assessing that the RbI has the central role in determining the permissibility of traction’s under FERA .This central role reinforces the RBI’s discretion in interpreting and applying FERA’s provisions .Additionally ,Respondent no.1 highlights the distinction between void and voidable transactions as set forth in the Indian Contract Act ,1872.This distinction is crucial for understanding the legal consequences of transactions under FERA.In support of their argument ,Respondent no.1 cites the case of Waman Rao and Others and other judicial precedents that consistently hold that transactions violating Section 31 of FERA should not be considered void .These precedents reinforce the view that the legal interpretation of such transactions is consistent across various High Courts.Finally ,the respondent contends that since FERA has been repealed ,it is appropriate to adhere to the consistent judicial interpretation provided by different High Courts .this approach respects established legal principles and avoids unnecessary disruption of legal precedents related to the enforcement of FERA.

JUDGMENT

In the case at hand ,the Supreme Court of India reviewed the judgement and decree issued by the Trial Court (City Civil and Sessions Judge ,Mayo ,Bangalore) ,which had previously ruled against the Appellant .The Supreme Court overturned this decision ,highlighting the mandatory nature of the condition specified in Section 31 of the foreign Exchange Regulation Act (FERA).Conquently ,the Court declared the Gift Deeds in question as invalid ,unenforceable ,and not binding upon the Appellant .By asserting the importance of compliance with statutory conditions under FERA ,the Apex Court nullified the trial court’s findings regarding the Gift Deeds .Futhermore, the Supreme Court ruled in favour of the Appellant ,granting them entitlement to the possession of the property in dispute .Additionally ,the Court awarded the Appellant mesne profits, as provided under Order 20 Rule 12 of the Civil Procedure Code ,1908. This decision underscores the Court’s commitment to upholding statutory compliance and protecting property rights in accordance with established legal provisions .

ANALYSIS

The Supreme court’s judgement in this case emphasises the stringent enforcement of the Foreign Exchange Regulation Act (FERA), particularly regarding Section 31 ,which mandates obtaining prior approval from the Reserve Bank of India (RBI)  for certain foreign transactions .By citing the Finance minister’s statement in the Lok Sabha during the bill’s introduction ,the Court underscored that FERA’s primary aim was to restrict foreign involvement in the Indian real estate sector. The Court’s interpretation of Section 31 highlighted that the requirement for RBI approval is merely a procedural guideline but a substantive mandate .This approach reinforces the idea that compliance with FERA is crucial, and penalties under Section 50 for non-compliance cannot be circumvented by simply paying fines .Essentially ,the ruling established that contracts violating statutory requirements under FERA are void ,even without an explicit declaration to that effect .This judicial stance undersores that statutory prohibitions ,coupled with penal consequences ,render such contracts legally ineffective ,thereby promoting adherence to regulatory frameworks and safeguarding the legislative intent behind such statutes.

CONCLUSION

The Supreme Court’s ruling in this case clarifies the mandatory nature of compliance with Section 31 of the Foreign Exchange Regulation Act (FERA).The Court’s analysis, grounded in the legislative intent articulated by the Finance Minister during the bill’s introduction ,highlights that FERA’s primary objective was to restrict foreign participation in the Indian real estate sector .The Court reinforced that obtaining prior approval from the Reserve bank of India (RBI) under Section 31 is not a mere procedural formality but a substantive requirement .By interpreting Section 50 of FERA ,which imposes penalties cannot be used as a means to bypass legal obligations .Contracts entered into without the necessary RBI approval are deemed void ,even in the absence of explicit statutory declarations to that effect .This ruling establishes that statutory prohibitions coupled with penal consequences invalidate non-compliant contracts ,thereby upholding the strict enforcement of regulatory standards .The judgement underscores the importance of adhering to statutory mandates and ensures that legal compliance’s is not simply a matter of paying  fines ,but a substantive requirement for the validity of transactions.

 REFERENCES

1.https://indiankanoon.org/doc/110391679/

2.https://blog.ipleaders.in

3.https://www.azbpartners.com

This Article is written by Zil Sachela student of Kes JP Law college ,Mumbai; Intern at Legal Vidhiya. 

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