Xiaomi files appeal before Karnataka High Court against single-judge order upholding Section 37A FEMA

Chinese technology company Xiaomi has challenged an order of the single-judge of the Karnataka High Court upholding the constitutional validity of Section 37A of the Foreign Exchange Management Act (FEMA) [Xiaomi Technology India Pvt Ltd v Union of India]..A Division Bench comprising Chief Justice Prasanna Balachandra Varale and Justice MGS Kamal on Wednesday sought the Central government's response to the plea and posted the case for further consideration on July 11..Single-Judge Justice M Nagaprasanna had rejected the challenge to the constitutional validity of Section 37A, 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," it had held in an order dated April 21. The decision was rendered in a plea by Xiaomi challenging an order of the Enforcement Directorate (ED) seizing ₹5,551.27 crore from its bank accounts..Before, the single-judge, while raising a challenge to the seizure and confirmation orders, the company had 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 and unguided power to the authorities..The respondents had 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 single-judge had examined the issue of maintainability and found that Articles 14 and 21 of the Constitution are available to every person and they are not restricted to the citizens only. However, Articles 15, 16 and 19 are restricted only to citizens, it had said..A ground claiming violation of Article 14 was held maintainable as it was ‘person-centric’ and not ‘citizen-centric’, the single-judge had ruled."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 had upheld the provision. Justice Nagaprasanna had rejected the contention that the provision contained no checks and balances, while detailing the broad contours of safeguards under the law..He had 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," the single-judge had said.The company then preferred the present appeal before a division bench. As per Xiaomi appeal, the single-judge completely failed to appreciate that it is at the time when the seizure order is passed that the power is unsupervised."Further, the Ld. Single Judge failed to appreciate that section 37A of FEMA vests a sudden and unilateral power (without issuing a Show Cause Notice) with the ED to seize a property based in India of an Indian person, without providing for a yardstick as a trigger point," the plea said.Further, the Court failed to consider that the order passed by the competent authority was in gross violation of the principles of natural justice, it was submitted.