Foreign Companies Need RBI Approval To Acquire Security Interest In Indian Immovable Property: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Delhi has held that a foreign company cannot acquire or be assigned a security interest over immovable property in India without the Reserve Bank of India's permission.

Holding that no such approval had been obtained in the present case, the tribunal ruled that Mauritius-based Tropical Ventures Company Ltd. could not claim security rights over the assets of Incab Industries Ltd.

A bench of Chairperson Justice Ashok Bhushan and Technical Member Barun Mitra also upheld Tropical's classification as a related party of Incab Industries Ltd. It confined Tropical's admissible claim to ₹85.79 crore.

The tribunal observed, "The law thus prohibits a company registered or incorporated outside in India to acquire any right interest in immovable property situated in India, permission of RBI is mandatory."

It further held, "When security interest in favour of Leader Berhad [Malaysian promoter] could not have been acquired without RBI permission, Leader Berhad could not have assigned the security interest in favour of Tropical by assignment deed dated 08.03.2007."

Incab Industries Ltd., incorporated in 1920, manufactured iron and steel products. After suffering heavy losses during the 1990s, it was declared a sick company in 2000. Malaysian company Leader Universal Holdings Berhad was inducted as its promoter and furnished guarantees to ICICI Bank, Citibank and HSBC for credit facilities extended to Incab.

The guarantees were invoked in 2000 and 2001. Leader Berhad paid ICICI Bank and Citibank, while its subsidiary, Leader Cable, paid HSBC USD 3.75 million. In March 2007, Leader Berhad assigned its rights to Tropical Ventures for a consideration of USD 1. Tropical later filed a financial creditor's claim of nearly ₹2,000 crore in Incab's corporate insolvency resolution process, including interest.

The resolution professional admitted Tropical's claim at about ₹1,990.63 crore and classified it as a related party, excluding it from the committee of creditors.

Pegasus Assets Reconstruction challenged the admission of the claim. It argued that neither Leader Berhad nor Tropical had obtained the RBI's approval required under the foreign exchange law to acquire a security interest over immovable property in India. It also contended that Tropical's claim included interest far exceeding the principal amount.

Tropical argued that it was neither a holding company nor a subsidiary of Incab and therefore could not be treated as a related party under the Insolvency and Bankruptcy Code. It also contended that, after the assignment, it became subrogated to the rights of the original lenders. Tropical further argued that the RBI notification issued in September 2000 did not apply because the guarantees had been executed before it came into force.

Rejecting those submissions, the tribunal held that Tropical owned 63% of Leader Universal (Mauritius), which in turn held 51.2% of Incab. Incab was therefore a step-down subsidiary of Tropical, making it a related party under the Insolvency and Bankruptcy Code.

The tribunal also upheld the rejection of Tropical's claim arising from HSBC's USD 3.75 million facility. It noted that the payment had been made by Leader Cable, not Leader Berhad. It also found that no formal guarantee agreement had been executed between HSBC, Leader Berhad and Incab. Leader Berhad, therefore, could not have assigned any rights arising from that facility to Tropical.

On the issue of secured creditor status, the tribunal observed that the security interests over Incab's immovable properties had originally been created in favour of Indian lenders. It held that neither Leader Berhad nor Tropical had obtained the RBI's permission required under the Foreign Exchange Regulation Act to acquire those security interests.

The tribunal observed, "Security interest registered with the Registrar of Companies were in favour of Indian Lenders and by virtue of provisions of Foreign Exchange Regulation Act, 1973 no interest in any immovable property could be acquired without permission of RBI."

It further held, "The security cannot be treated to have been transferred in favour of Leader Berhad or in favour of Tropical the Assignee of Leader Berhad. Thus, the security stood discharged and no security interest thus can subsist in favour of Leader Berhad or Tropical."

The tribunal further held that Pegasus had established sufficient grounds to interfere with the resolution professional's admission of Tropical's claim. It dismissed Tropical's appeals challenging its related-party classification and the approved resolution plan. Pegasus' appeal was partly allowed, with the tribunal holding that Tropical's admissible claim stood confined to ₹85.79 crore