Foreign Investment Structure Seen As A 'Colorable Device' And Held Illegal

• Bombay High Court evaluates a downstream FDI structure to rule that investment in the holding company was a 'sham' structured to invest downstream by way of redeemable instruments.
• Court would not provide assistance in enforcement of transactions which are not compliant with the FDI Policy and FEMA Regulations.
• Courts follow the regulatory approach and scrutinize the various steps in a transaction to hold that such transaction as intended to provide assured return which is not permitted under the FDI Policy and FEMA Regulations.

INTRODUCTION

The recent ruling of the Bombay High Court sets out the approach of the courts to scrutinize transactions to ascertain if the objective of the transaction or the series of connected transactions are compliant with the law. The Court in IDBI Trusteeship Services Limited ("IDBI" or "Petitioner") v. Hubtown Limited ("Hubtown" or "Respondent") declared an investment of INR 418 crores in the holding company as colorable