Genpact case: What Rs 7,800-crore FEMA dispute means for companies

The Karnataka High Court has dismissed a petition filed by Genpact India challenging an Enforcement Directorate (ED) order to seize a property in Gurgaon in connection with an alleged Rs 7,800-crore foreign exchange violation.

The case relates to a series of transactions involving Genpact India, Empower Research Knowledge Services and Genpact Luxembourg. The ED has alleged that the transactions amounted to “round-tripping” — a situation where money is brought into India and later sent out of the country through a series of transactions.

The court's decision allows the ED's proceedings to continue. It does not, by itself, mean that Genpact has been finally found guilty of violating FEMA.

What is the case about?

The ED's case relates to money that came into India through foreign investment and other financial transactions involving Empower Research Knowledge Services.

Empower was later merged with Genpact India.

The ED has alleged that money came into India through foreign direct investment (FDI) and non-convertible debentures (NCDs) and was later sent out of India as repayment of loans and interest to Genpact Luxembourg.

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According to the agency, about Rs 7,800 crore moved out of India between 2018 and 2023 in this manner.

The ED's argument is that these transactions should not be looked at separately. When taken together, the agency says, they show a circular movement of money and may amount to a violation of Section 4 of the Foreign Exchange Management Act (FEMA).

Why is the merger important?

The merger between Empower and Genpact India is at the centre of the dispute.

The ED has argued that Empower had little independent economic substance and that the merger eventually gave the new Genpact India access to the free reserves of Genpact India.

The agency alleges that these reserves were then used to repay loans to Genpact Luxembourg.

In simple terms, the ED's allegation is that money came into India, the companies were reorganised, and money was subsequently sent back overseas as loan repayment.

The agency says this entire sequence needs to be viewed as one transaction rather than as several unrelated corporate activities.

Genpact's argument

Genpact challenged both the seizure order and the rejection of its application for an NOC to make an overseas investment.

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The company argued that the ED had not established a clear connection between the alleged FEMA violation and its proposed overseas investment.

It also argued that the NOC rejection did not properly explain why the application was rejected and that the authorities could not use a later seizure order to provide reasons for an earlier decision.

Genpact also questioned the timing of the action, pointing to the fact that some of the transactions were several years old.

What has High Court said

The High Court has refused to quash the ED's seizure order or the NOC rejection.

This means the matter will continue through the FEMA process.

The court also considered whether Section 37A of FEMA could be applied to older transactions. The court observed that the provision cannot simply be applied retrospectively to transactions that were completed before the provision came into force.

However, if later transactions are part of the same overall arrangement, those subsequent acts can still be examined.

This distinction could become important as the FEMA proceedings continue.

Expert's view

Amit Maheshwari, Managing Partner at tax and consulting firm AKM Global, said the case shows why regulators may look at a series of connected transactions together.

According to Maheshwari, the ED's case is that the investment received by Empower through FDI and NCDs was eventually sent outside India by the new entity formed after the merger, in the form of loan repayments to Genpact Luxembourg.

He said the ED has treated the movement of around Rs 7,800 crore as round-tripping.

“The merger of Empower and Genpact India could not withstand ED's scrutiny for Section 4 of FEMA contravention,” Maheshwari said.

He added that the High Court has allowed the seizure to stand at this stage, leaving Genpact to raise its legal arguments before the competent authority that will decide the seizure proceedings.

Could Genpact face a penalty?

The court's order does not mean that Genpact has automatically become liable to pay Rs 7,800 crore as a penalty.

The next stage will involve the statutory FEMA proceedings.

If a FEMA violation is ultimately established, the law provides for financial penalties and other consequences, including possible confiscation of assets in appropriate circumstances.

Maheshwari said the ED could also examine the overseas money trail from a money-laundering angle if there are allegations that the original FDI itself came from tainted sources.

That would be a separate issue from the FEMA proceedings and would depend on the facts and the findings of the relevant authorities.

Which sectors could be affected?

The case could be closely watched by companies in the IT, IT-enabled services, business-process outsourcing and multinational corporate sectors.

These businesses often have complicated structures involving Indian companies, overseas holding companies, subsidiaries and inter-company loans.

They also frequently undertake mergers, acquisitions, foreign investments and cross-border payments.

The Genpact case highlights a simple point: a transaction may look legal when examined on its own, but regulators can also look at the entire chain of transactions to understand what actually happened to the money.

What does this mean for companies?

Companies involved in cross-border transactions are likely to pay close attention to the commercial reason behind each transaction and maintain clear records showing where money came from and where it went.

Mergers involving overseas entities, inter-company loans and repayment of those loans could receive particular scrutiny if they form part of a larger chain of transactions.

For multinational companies operating in India, the case is therefore a reminder that corporate restructuring, foreign investment and money transfers cannot always be viewed as separate events when regulators are examining a possible FEMA violation.

For Genpact, the legal process is still continuing. The High Court has allowed the ED's seizure action to stand at this stage, but the underlying question of whether the transactions ultimately violated FEMA will be decided in the proceedings that follow.