Karnataka High Court upholds Constitutional validity of Section 37A FEMA in Xiaomi plea challenging seizure of accounts

In an order uploaded on its website this week, the Karnataka High Court upheld the constitutional validity of Section 37A of the Foreign Exchange Management Act (FEMA) [Xiaomi Technology India Pvt Ltd v. Union of India]..Justice M Nagaprasanna held that a non-citizen can challenge certain laws of the nation on the ground that it is violative of Article 14 of the Constitution."What would unmistakably emerge is that Articles 14 and 21 of the Constitution of India, the nation’s Grundnorm would be available to every person and they are not restricted to the citizens of the country only," the order stated. However, the challenge to the constitutional validity of Section 37A was rejected, with the Court reasoning that the law did not suffer from manifest arbitrariness."What would unmistakably emerge is that Section 37A of the Act does not suffer from any manifest arbitrariness for this Court to strike it down on any of the grounds urged by the petitioner.".The Court was hearing a plea by Chinese technology company Xiaomi challenging an order of the Enforcement Directorate (ED) seizing ₹5,551.27 crore from its bank accounts.While raising a challenge to the seizure and confirmation orders, the company also challenged the constitutional validity of Section 37A of FEMA, under which proceedings were initiated against it. .According to the petitioners, Section 37A suffered from manifest arbitrariness as it gave unbridled, uncanonised and unguided power to the authorities.This submission was buttressed by the argument that mere suspicion can lead to a seizure order being passed and there are no guidelines to determine what could be a "reason to believe" for the authorities to take action, which makes the statute violative of Article 14. This power, it was argued, was drastic and draconian. .The respondents contended that a challenge to the constitutional validity of Section 37A was not maintainable since the company had its genesis in China and could not challenge laws made in India under the garb of their being manifestly arbitrary..The Court began by examining the issue of maintainability. After examining precedents at length, it was found that Articles 14 and 21 of the Constitution were available to every person and they are not restricted to the citizens only. However, Articles 15, 16 and 19 were restricted only to citizens.A ground claiming violation of Article 14 was held maintainable as it was ‘person-centric’ and not ‘citizen-centric’. "Therefore the first issue that has arisen for consideration qua maintainability is answered in favour of the petitioner holding the petition to be maintainable qua the challenge.".However, on examination of Section 37A, the Court upheld the provision. Justice Nagaprasanna rejected the contention that the provision contained no checks and balances, while detailing the broad contours of safeguards under the law. "It is not, a rung or two rungs, of safeguards and checks, but it is at every rung. The seizure order under sub-section (1) to become final has to pass muster through several ladders of administrative, quasi judicial and judicial review," he underscored. It was further recorded that Section 37A cannot be acted upon only on suspicion. While suspicion may trigger seizure, it was not final. "There are several procedures after such seizure. Therefore, the submission that it is manifestly arbitrary is to be noted only to be rejected, as the very submission is fundamentally flawed.".In this case, it was held that the order affirming seizure of Xiaomi's accounts did bear the stamp of application of mind. Refusing to accept the company's argument, it was stated that the seizure order was neither cryptic nor perfunctory."It is in great detail. It runs into more than 250 pages. It is not the number of pages that matters, but the content in those pages which clearly indicate application of mind.".While rejecting Xiaomi's writ petition, the Court grant the company liberty to appeal before the appellate tribunal under the FEMA..Senior Advocate Udaya Holla along with Advocates Aditya Vikram Bhat, Deepak Chopra, Harpreet Singh, Radhika V and Mithel Reddy appeared for Xiaomi.The respondents were represented by Additional Solicitor General MB Nargund and Advocate Madhukar Deshpande..[Read order]