The Price of Incoherence: Enforcement Discretion, Regulatory Design, and the Future of India’s Overseas Investment Framework

The FEMA reforms of 2022 are a direct expression of Government’s philosophy evidenced across sectors by the repeal of obsolete laws, the rationalisation of compliance requirements, and the substitution of ex ante permissions with ex post accountability.

The 2022 reforms: Easing the path for outward foreign remittances

India is, at present, in the midst of a sweeping and deliberate deregulatory transformation — a sustained governmental effort to dismantle legacy controls, reduce the compliance burden on economic actors, and create an enabling environment that promotes, rather than impedes, legitimate commercial activity. The overarching objective of this deregulatory programme is axiomatic: Regulation ought to facilitate and encourage activities that the State wishes to see more of, not function as a barrier to their undertaking. It is within this broader institutional context that the Foreign Exchange Management (Overseas Investment) Rules, 2022 (FEMA Rules) were notified on 22 August 2022, ushering in a consolidated framework governing overseas investments by persons resident in India. These Rules superseded the earlier regime contained in the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 (2004 Regulations) and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015, with a view to “streamline the existing provisions, expand the scope of overseas investments as well as simplify the procedures for obtaining approvals for such transactions”.

Under the earlier regulations, there existed a near-absolute bar: Regulation 6(2)(iii) of the 2004 Regulations prohibited Indian entities who were on Reserve Bank of India’s (RBI) caution list or under investigation by an investigating agency from undertaking overseas investments altogether. More broadly, the 2004 Regulations imposed a regime of prior approval requirements, prescriptive conditions, and layered controls — an architecture grounded in the philosophy of control rather than facilitation, and one that functioned as a structural impediment to outward foreign investment.

The FEMA Rules marked a deliberate departure. Rule 10 replaced the erstwhile prohibition with a procedural requirement: Persons resident in India who are under investigation by a financial service regulator or any law enforcement agency such as the Central Bureau of Investigation, the Directorate of Enforcement, or the Serious Frauds Investigation Office are now required to obtain a no-objection certificate (NOC) from the agency concerned before making any financial commitment or undertaking disinvestment. The shift is significant — the FEMA Rules substituted a categorical ban with a time-bound procedural safeguard, reaffirming that overseas investment activity should, as a default, remain permissible.

Crucially, the proviso to Rule 10(1) introduces a deemed approval mechanism: where the agency concerned fails to furnish the certificate within 60 days of receipt of the application, “it may be presumed that there was no objection to the proposed transaction”.¹

RBI Circular: A calibrated relaxation of the NOC requirement

On the very same date, i.e., 22 August 2022 —RBI issued AP (DIR Series) Circular No. 12 of 2022, operationalising the FEMA Rules through the Foreign Exchange Management (Overseas Investment) Regulations, 2022 and the Foreign Exchange Management (Overseas Investment) Directions, 2022.²

These instruments were expressly characterised by the Delhi High Court as “delegated legislations” issued by RBI as the “sectoral regulator”.³

Rule 6 of the Circular further relaxes the requirement for seeking NOC under certain conditions. Where an Indian entity has already issued a guarantee in compliance with FEMA provisions prior to the commencement of an investigation or the making of an non-performing asset (NPA) or wilful defaulter classification, and is subsequently required to honour that contractual obligation upon invocation of the guarantee, such a remittance does not constitute a “fresh financial commitment” for the purposes of the FEMA Rules and accordingly does not require an NOC. This is a meaningful, if circumscribed, relaxation, it protects parties who entered into pre-existing, FEMA-compliant commitments from being penalised by subsequently arising investigations or classifications, while preserving the NOC requirement for genuinely prospective financial commitments made in the defined circumstances.

Taken together, these reforms are not isolated technical amendments but constituent elements of India’s broader deregulatory agenda — an agenda that proceeds from the foundational premise that the State’s regulatory apparatus must promote outward investment, not obstruct it. They signal a decisive policy shift towards a more liberalised India, one that actively encourages foreign investment by reducing legacy prohibitions and substituting blanket controls with targeted, rule-based safeguards. The NOC requirement that persists under Rule 10 operates as a carefully defined exception to this liberalised default, not a reaffirmation of the prior approval culture of the 2004 Regulations and must be applied only in the specific circumstances Rule 10 identifies, in a manner consistent with the facilitative objectives of the 2022 framework.

The demarcation of regulatory and enforcement functions

The existing jurisprudence on FEMA recognises a bright-line distinction between the regulatory and enforcement functions. In LIC v. Escorts Ltd., the Supreme Court drew this distinction with force, holding:

84. …under the scheme of the Act, it is the Reserve Bank of India that is constituted and entrusted with the task of regulating and conserving foreign exchange. If one may use such an expression, it is the ‘custodian-general’ of foreign exchange. The task of enforcement is left to the Directorate of Enforcement, but it is the Reserve Bank of India and the Reserve Bank of India alone that has to decide whether permission may or may not be granted under Section 29(1) of the Act. The Act makes it its exclusive privilege and function. No other authority is vested with any power nor may it assume to itself the power to decide the question whether permission may or may not be granted or whether it ought or ought not to have been granted.⁴

The Court further held that “[o]nce permission is granted by RBI, ordinarily it is not open to anyone to go behind the permission and seek to question it”.⁵ Though the decision was rendered under the Foreign Exchange Regulation Act, 1973 (FERA) — the predecessor statute to FEMA — the underlying principle survives: The regulatory domain belongs exclusively to RBI, and enforcement agencies may not, directly or indirectly, arrogate to themselves the power to grant or withhold permissions that fall within the regulator’s province.

This position is reinforced by the scheme of Section 10(5) Foreign Exchange Management Act, 1999 (FEMA Act), which vests the obligation to ensure compliance on the Authorised Dealer Bank (AD), requiring it to “reasonably satisfy” itself that the transaction will not contravene any provision of the Act, Rules, or Regulations, before facilitating a remittance.

Crucially, ADs are not mere administrative conduits: They bear independent statutory liability for ensuring that remittances and financial commitments are permissible under the FEMA and the FEMA Rules at the time of the transaction. Operating as the first line of regulatory oversight at the point of execution, ADs are equipped and indeed duty-bound, to scrutinise the legality of each remittance on its own merits.

The existence of this independent oversight mechanism substantially undermines any justification for blanket rejections of NOC applications by the ED. Where the ED refuses an NOC application without examining the specific facts of the case, the nature of the proposed investment, and the availability of alternative safeguards — including the independent compliance obligation borne by the AD — such a refusal is structurally inconsistent with the design of the 2022 regime.

The 2022 framework was architected on the premise that multi-layered safeguards, of which AD oversight is a central element, operate in tandem to protect the integrity of the FEMA framework. A blanket refusal by the ED effectively nullifies that architecture and reintroduces, through the enforcement channel, the very barriers to overseas investment that the FEMA Rules were designed to dismantle.⁶

The Delhi High Court jurisprudence

Recent decisions of the Delhi High Court have begun to grapple with this tension between the reformed regulatory framework and the continued insistence on NOCs by the Enforcement Directorate.

1. Times Internet Ltd. v. Enforcement Directorate (2024)

In Times Internet, the Delhi High Court examined the rejection of NOC applications filed by Times Internet Limited and its parent entity, Bennet Coleman & Co. Ltd., whose overseas direct investments had come under investigation by the ED.⁷ The Court found that the impugned rejection letters were devoid of substantive reasoning, holding that “[a] rejection of such import, devoid of any rationale or justification, is arbitrary and falls afoul of the principles of natural justice”.⁸ More significantly, the Court addressed the continued insistence on the NOC despite the 2022 reforms and RBI Circular, observing:

“Investigations lingering in limbo for such an extended period cannot serve as a tool to indefinitely impede a company’s legitimate business activities.”⁹

The Court went on to hold that “[t]he refusal to grant an NOC must be predicated on clear, cogent, and rational reasons”, and that “[m]ere issuance of summons, absent any formal finding of contravention under Section 4, Foreign Exchange Management Act, 1999 (FEMA, 1999), or violations of Sections 131 and 132, Income-tax Act, 1961, does not meet this threshold.”¹⁰ The judgment emphasised that “there must be a nexus between the alleged contravention and the proposed investment”, a nexus that was not established in the case before it.¹¹ In quashing the rejection letters, the Court directed the petitioners to approach the AD for remittance, with the transaction to be “processed on its own merits, as per the applicable rules and regulations under FEMA, 1999”.¹² The decision highlights judicial sensitivity to the post-2022 shift: Enforcement agencies cannot, through unreasoned administrative action, effectively recreate a prohibition that the regulator has consciously dismantled.

2. Venkateshwara Hatcheries (P) Ltd. v. Union of India (2023 and 2025)

In Venkateshwara Hatcheries, the petitioner — an Indian entity owning the Blackburn Rovers Football Club through its wholly-owned subsidiaries in England had its NOC application rejected by the ED on 6 March 2023.¹³ The petitioner was compelled to approach the Delhi High Court to secure permission for outward remittances necessary to meet the operational and contractual obligations of the football club. In its order of 31 October 2023, the Court noted the submission that “the inquiry which is going against the petitioner is only at the nascent stage, cannot choke the entire commercial activities of the petitioner”, and found that “[u]ndoubtedly, the functioning of the club is yet not under any cloud of suspicion.”¹⁴ The Court permitted the remittance of GBP 11 million, subject to conditions including a 100 per cent bank guarantee in favour of the ED, end-use certificates, and intimation of each remittance.¹⁵

The Venkateshwara Hatcheries litigation illustrates the practical consequences of the NOC impasse: an entity with legitimate, time-sensitive business obligations — including statutory and contractual commitments in a foreign jurisdiction — is compelled to litigate repeatedly before the High Court simply to remit funds to its own subsidiaries, even as the regulatory framework envisages such investments as permissible under the automatic route.

The persisting trend of blanket NOC rejections

Notwithstanding this emerging jurisprudence, a discernible trend persists wherein NOC applications continue to be met with blanket rejections by the ED, often without examination of the specific facts, the nature of the proposed investment, or the availability of alternative safeguards and in some instances, NOCs are insisted upon in circumstances that fall outside the specific situations identified in Rule 10. The practice raises fundamental questions as to the limits of enforcement discretion under FEMA, the proper scope of the residual NOC requirement, and the risk of regulatory incoherence where enforcement actions operate at cross-purposes with a deliberately facilitative regulatory policy.

At a structural level, the issue is not merely one of interpretive disagreement but of institutional balance. FEMA is designed as a facilitative statute, premised on management rather than control of foreign exchange — a foundational shift from its predecessor, the Foreign Exchange Regulation Act, 1973. The FEMA Rules reinforce this orientation by reducing ex ante approvals and strengthening ex post oversight, with the AD mechanism serving as the operative compliance checkpoint at the transactional level. The NOC requirement that persists under Rule 10 is a carefully calibrated exception to this liberalised default – applicable in defined circumstances and designed to operate as a targeted safeguard, not as a general veto power exercisable at the discretion of an enforcement agency. Where RBI, as the “custodian-general” of foreign exchange has consciously chosen to replace a categorical prohibition with a circumscribed procedural requirement, and where the 2022 framework has placed the primary compliance responsibility at the point of transaction upon the AD, the ED’s resort to blanket NOC rejections is difficult to reconcile with the statutory scheme. As the Supreme Court cautioned in LIC case, “[n]o other authority is vested with any power nor may it assume to itself the power to decide the question whether permission may or may not be granted.”¹⁶ The practice of issuing blanket NOC rejections, without engaging with the specific circumstances of the investment or accounting for the safeguards already built into the framework, does precisely that, and in doing so, effectively re-erects the structural impediments that the FEMA Rules were enacted to dismantle.

Conclusion

India stands at an inflection point in its regulatory evolution. The Government’s sustained and emphatic commitment to deregulation – evidenced across sectors by the repeal of obsolete laws, the rationalisation of compliance requirements, and the substitution of ex ante permissions with ex post accountability, reflects a considered policy choice: that the purpose of regulation is to promote activities that serve the national interest, and that regulatory architecture must be designed to enable, not inhibit, legitimate economic conduct. The FEMA reforms of 2022 are a direct expression of this philosophy. Yet the Enforcement Directorate’s administrative practices, characterised by blanket NOC rejections, unreasoned refusals, and the weaponisation of stale investigations — operate as a direct and palpable impediment to this deregulatory programme. The regulatory landscape under FEMA is one of considerable density and complexity. The RBI and other sectoral regulators routinely issue circulars, notifications, and directions that, as the Delhi High Court has recognised, constitute “delegated legislations” carrying statutory force. If regulated entities may, in good faith, be uncertain about the precise contours of the NOC requirement, it is all the more incumbent upon enforcement agencies — which are institutionally expected to possess full command of the operative framework to apply that requirement only within its prescribed boundaries and to engage substantively with individual applications rather than resorting to blanket obstruction.

A coherent way forward would require reaffirming the primacy of RBI in regulatory design, confining the residual NOC requirement under Rule 10 to its proper purposive scope, and requiring enforcement agencies to examine the specific facts of each application, including the nature of the proposed investment and the adequacy of safeguards such as the independent compliance obligation borne by the AD, before refusing an NOC. The continuation of the ED’s present administrative posture is not merely legally untenable, it is antithetical to the Government’s own deregulatory mandate. India cannot credibly position itself as a jurisdiction that welcomes outward investment and seeks to reduce regulatory friction, while simultaneously permitting an enforcement agency to exercise an unguided administrative veto that nullifies the very liberalisation the sovereign has enacted. Litigants are presently compelled to approach the High Court on a transaction-by-transaction basis to vindicate rights that the reformed framework was designed to confer as a matter of course. Absent realignment between regulatory design and enforcement practice, the promise of a liberalised overseas investment regime will continue to be diluted by legacy control mechanisms operating through enforcement channels and the NOC requirement will remain, in practice, a dead letter that refuses to die.