How a Single Clause Triggered a ₹80Crore Penalty for PwC

In the world of international business, managing cross-border finances is a complex, high-stakes endeavor. It's tempting to assume that a "grant" from a global partner is a simple transaction. But a landmark case involving PwC India and the Directorate of Enforcement establishes a critical precedent, it isnt so simple to side-step the Foreign Exchange Management Act by simply accepting grants from a foreign entity.

The company was severely penalized for alleged violations of the Foreign Exchange Management Act, 1999 (FEMA). The company challenged this penalty before the Appellant Authority viz. the Appellant Tribunal for Forfeited Property. This appellate ruling has introduced significant nuance to the entire episode and has, critically, addressed a major regulatory lacuna that was susceptible to exploitation. While upholding the core violations, the tribunal slashed the penalty, revealing several counter-intuitive lessons about Indian forex law. This article breaks down the most impactful takeaways from the ruling for any business operating across borders.

1. A "Grant" Isn't Always a Grant: How a Repayment Clause Changed Everything

The core of the dispute originated from funds PwC India received from the PwC global network under agreements explicitly labeled "Grant Agreements" (GAs). The Enforcement Directorate argued that the first two of these, GA-1 and GA-2, were not simple grants but were, in fact, "Capital Account Transactions" (CATs)—a category of financial activity subject to strict regulation.

The tribunal sided with the Directorate, hinging its decision on a single detail: a contingent liability clause. The terms of GA-1 and GA-2 stipulated that if PwC India failed to use the funds for a specific purpose by a set date, the company was legally obligated to return the money.

In its defense, PwC India argued that because the conditions were met on time, the contingency never materialized and thus shouldn't matter. The tribunal rejected this logic, delivering a profound legal insight: the law judges a transaction based on the clauses in the agreement at the time of signing, not on the eventual outcome. The mere possibility of repayment fundamentally altered the nature of the transaction.

Under FEMA, the definition of a Capital Account Transaction is precise and includes any activity that creates a potential, or contingent, liability.

"Capital account transaction means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India..."

This single clause turned a seemingly straightforward grant into a regulated activity. Because it was legally classified as a CAT, the transaction required prior approval from the Reserve Bank of India (RBI)—an approval PwC India had failed to obtain, triggering the first major violation.

2. The "100% Earnings" Account Had One Crucial Exception

The second major violation concerned Grant Agreements 3 through 5. PwC India credited the funds received under these agreements to an Exchange Earner’s Foreign Currency (EEFC) Account. The company believed it was acting in accordance with amended regulations that allowed 100% of foreign exchange earnings to be credited to such an account.

However, the tribunal's finding revealed a critical compliance misstep. The regulations contained a crucial exception: funds "received for meeting specific obligations by the account holder" were not permitted to be credited to an EEFC account. This distinction is vital. "Earnings" typically imply payment for past services rendered, giving the recipient unrestricted use of the funds. In contrast, the grants were for future, specified purposes, making them restricted funds, not earnings.

The Grant Agreements themselves detailed the specific purposes for the funds. As the tribunal noted, PwC India's own written arguments admitted that "the grant was provided to meet certain obligations." This was corroborated by officials from HSBC Bank and the Royal Bank of Scotland, who testified that grants for specific purposes are not considered "earnings" and are not permissible credits to an EEFC account. This highlights a common pitfall: focusing on a permissive headline rule (100% credit allowed) while overlooking the critical exceptions buried in the regulatory fine print.

Conclusion: A Masterclass in Compliance

The PwC case provides a masterclass in the nuances of foreign exchange law, demanding a unified compliance mindset that goes beyond surface-level interpretations. What appeared to be a simple "grant" was, in fact, a web of complex regulatory obligations defined by minute details in contracts and laws. 

How to Legally Buy a London Property with Indian Funds: 4 Surprising Lessons from a Landmark Ruling

Introduction: The Anatomy of a "Legal" Shell Game

Imagine this: an Indian company sends millions to a subsidiary in Singapore, which moves the money to the UAE, which funnels it to a company in the British Virgin Islands (BVI) to buy a London property. This complex chain through offshore jurisdictions sounds like a textbook case of illegal fund diversion.

This is precisely what India's Directorate of Enforcement (ED) accused M/s. Nirayu Pvt. Ltd. of doing. The core accusation was that the company had illegally diverted US $1.6 million to buy a 3BHK apartment, charging it with contravening multiple sections of India’s stringent Foreign Exchange Management Act (FEMA), including Section 4 (unauthorized acquisition of foreign property), Section 10(6) (misuse of remitted funds), and Regulation 5 of the ODI Regulations (investing in a real estate business).

But in a surprising turn of events, a judicial tribunal cleared the company of all charges. What makes this verdict particularly significant is that it was the result of an appeal by the ED. The agency was so convinced of wrongdoing that it challenged an initial ruling by a lower authority that had already exonerated the company. The final decision offers fascinating and counter-intuitive lessons for anyone involved in global business and regulation.

1. A Single Purchase Isn't "Doing Business"

A cornerstone of the ED’s case rested on the assertion that Nirayu Pvt. Ltd. had invested in a "real estate business" abroad, an activity strictly prohibited under India’s Overseas Direct Investment (ODI) Regulations. The purchase of a London apartment seemed to be clear proof.

However, the tribunal’s decision hinged on the precise legal definition of "business." Citing past Supreme Court judgments, it found that the term implies a continuous, systematic activity. Critically, the regulation defines real estate business as the activity of “buying and selling.” The law requires a continuous cycle of both, not a single, solitary transaction.

The counter-intuitive takeaway is that a one-off purchase of a single apartment does not legally constitute being "engaged in real estate business." The company only engaged in a single act of buying, not the continuous trading that the law defines as a business. While Nirayu claimed the property was a guest house to facilitate other trading activities, the legal decision rested squarely on this strict definition.

"...the concept of business in the context must necessarily postulate continuity of transactions. It is not a single, causal or solitary transaction of sale, purchase or storage that would make a person a dealer."

2. Complex International Structures Are Permitted, If Reported

The path the money took was undeniably complex, naturally raising suspicion. The total property purchase price was US $5.5 million, financed with a US $3.9 million loan obtained by the BVI subsidiary and US $1.6 million in funds originating from the Indian parent. The flow of the Indian funds was structured as follows:

• India: M/s. Nirayu Pvt. Ltd. sent US $2.4 million to its Wholly Owned Subsidiary (WOS) in Sangapore;

• Singapore: The Singapore WOS, namely, M/s. Techno Global Holdings Pvt. Ltd then sent funds to its first Setp Down Subsidiary (SDS-1) in UAE;

• UAE: The SDS-1, namely, M/s. Techno Global Trade and Investment Ltd.

• British Virgin Islands (BVI): The final BVI entity, a second Step Down Subsidiary (SDS-2), received funds from both its direct parent in the UAE (SDS-1) and its grandparent subsidiary in Singapore (WOS) to complete the US $1.6 million equity portion of the property purchase.

Despite its convoluted appearance, this "step down subsidiary" structure was found to be perfectly legal. Such multi-layered international structures are common for legitimate business reasons, including tax efficiency, liability isolation between different units, and compliance with jurisdictional investment requirements. The crucial requirement under Indian law, which Nirayu met, was to transparently report the existence and financial activities of this entire structure to the Reserve Bank of India (RBI). This turns a common perception on its head: a structure that appears designed to obscure is legal precisely because it was not hidden.

3. Your Overseas Subsidiary Is a Separate Legal Person

The ED’s case rested on the assertion that the BVI-based subsidiary was merely a "paper entity" controlled by the Indian parent. The agency argued it should be treated as effectively a "person resident in India" (a legal term under FEMA that includes Indian-incorporated companies and their overseas branches, subjecting them to India's foreign exchange laws). This would make the subsidiary subject to the same investment restrictions as its parent.

The tribunal firmly rejected this attempt to disregard the subsidiary's separate legal personality. It drew a clear legal distinction between a "branch or office" of an Indian company and a legally distinct "wholly owned subsidiary" incorporated under the laws of another country. The ED was effectively asking the tribunal to “pierce the corporate veil” and treat the parent and subsidiary as a single entity. The tribunal refused, reinforcing that under FEMA's specific framework, a properly incorporated foreign subsidiary is its own legal person, not a mere extension of its owner.

4. Meticulous Disclosure Is the Ultimate Defense

Ultimately, the company's victory was built not on clever loopholes but on a foundation of meticulous paperwork and procedural compliance. The ED's claims of a secret diversion of funds were defeated because the company had already disclosed its plans to the authorities with radical transparency.

The key documents that formed the basis of its successful defense included:

• Form ODI: Filed for each tranche of money sent abroad, declaring the creation of a Special Purpose Vehicle (SPV) for downstream investment.

• Annual Performance Reports (APRs): Submitted yearly reports to the RBI, substantiating all information about the subsidiaries' activities.

• Activity Codes: In its regulatory filings, the company correctly declared the business activity codes for each subsidiary. This is where the defense became airtight. For the BVI entity that bought the apartment, it declared Activity Code 820.3—"Lessors of real property"—from the outset.

This final detail proved to be the smoking gun of their transparency. By declaring a potential real estate leasing activity to regulators from the very beginning, the company preemptively neutralized the ED's core accusation of a secret, undeclared scheme. The paper trail proved there was no secret to uncover.

Conclusion: A Lesson in Legal Nuance

This case serves as a powerful corrective to the common assumption that complex offshore structures are inherently illegal. The tribunal's ruling makes clear that under Indian law, the litmus test is not structural simplicity, but procedural perfection and radical transparency. An intricate web of overseas entities can be perfectly legitimate, so long as you follow the rules and tell regulators exactly what you are doing.

The ruling leaves us with a thought-provoking question: Does it demonstrate a sophisticated legal framework that understands the realities of modern global business, or does it expose loopholes that prioritize procedural correctness over the apparent intent of a transaction?