On 1 April 2026, a Supreme Court bench of Justice Vikram Nath and Justice Sandeep Mehta set aside a FEMA adjudication order imposing penalty and confiscation, and sent the matter back to the show cause notice stage (SLP (Civil) No. 23415 of 2025). The ED had alleged that a company and its directors acquired shares in a Singapore entity without RBI approval, in breach of Section 4 of the Foreign Exchange Management Act, 1999 (FEMA).
What was decided
Assets were seized under Section 37A FEMA in September 2020. In February 2021 the Competent Authority declined to confirm the seizure, finding no evidence that the shares had value or that payment had been made. The ED still issued a show cause notice, and an adjudication order of 26 August 2024 imposed penalty and confiscation. The Madras High Court dismissed the challenges, treating adjudication as independent of seizure.
The Supreme Court held that although seizure and adjudication are separate proceedings, the High Court “erred in treating seizure proceedings as irrelevant”. The refusal to confirm seizure showed no prima facie reason to believe that a contravention had occurred. The Adjudicating Authority had in effect overturned the Competent Authority’s order while the ED’s appeal against it was pending, which the Court called an “impermissible exercise that encroached upon appellate jurisdiction”. Writ petitions against show cause notices are generally discouraged, but they can be maintained in exceptional cases, such as lack of jurisdiction or absence of foundational facts. The pending appeal is to be decided first, within two months.
Why it matters
FEMA proceedings often run on parallel tracks: seizure under Section 37A, adjudication under Section 16, and appeals. The judgment requires these tracks to be consistent. A favourable finding at the seizure stage carries weight and cannot be bypassed by issuing a fresh show cause notice.
For founders, exporters and families with overseas holdings, it also confirms that a direct challenge in the High Court is possible where a show cause notice lacks its basic factual foundation, though such cases remain exceptional.
Practical points
- Keep copies of every order in the case, including the Competent Authority’s order under Section 37A, and cite them in the show cause reply.
- Track any appeal pending against a favourable order. It may affect whether adjudication can go ahead.
- Writ challenges to show cause notices should be limited to clear jurisdictional or factual gaps.
- Where the contravention is technical, consider whether RBI compounding is available as an alternative.
Sources: JurisHour, 3 Apr 2026.
For a confidential discussion on FEMA compliance and compounding, see FEMA and Cross-Border Matters.
General legal information only; not legal advice or solicitation.
