Supreme Court Quashes FEMA Proceedings Where Foundational Facts Absent; Sets Aside Adjudication and Revives Matter from SCN Stage

Case Name: J. Sri Nisha v. Special Director, Directorate of Enforcement and Others
Citation: 2026 INSC 309
Date of Judgment/Order: 01 April 2026
Bench: Hon’ble Mr. Justice Vikram Nath; Hon’ble Mr. Justice Sandeep Mehta

Held: The Supreme Court held that where the foundational requirement of “reason to believe” under Section 37A of FEMA is negated by a reasoned order of the Competent Authority, continuation of adjudication proceedings based on the same allegations is arbitrary and liable to be set aside, and that writ jurisdiction can be exercised even at the stage of show cause notice in exceptional circumstances involving lack of jurisdiction or abuse of process.

Summary: The case arose from FEMA proceedings initiated against the appellants alleging unlawful acquisition and transfer of foreign securities without RBI approval. While seizure proceedings were initiated under Section 37A, the Competent Authority refused to confirm the seizure, recording a categorical finding that there was no material to establish any holding of foreign securities or payment thereof, thereby negating the existence of “reason to believe.” Despite this, the Enforcement Directorate proceeded with adjudication under Section 16 and issued a show cause notice, which was upheld by the High Court on the ground that writ jurisdiction should not be exercised at the SCN stage. The Supreme Court examined the statutory scheme of Section 37A and clarified that the Competent Authority’s role is not a mere formality but involves substantive scrutiny of the existence of foundational facts. It held that once such authority records a finding negating even a prima facie case, the continuation of parallel adjudication proceedings on identical facts becomes untenable. The Court further held that although adjudication and seizure proceedings are distinct, findings that strike at the root of the “reason to believe” cannot be ignored. It also found that the Adjudicating Authority improperly disregarded the Competent Authority’s findings and relied on High Court observations, effectively usurping the role of the appellate authority where an appeal against the Section 37A order was pending.

Decision: The Supreme Court allowed the appeals, set aside the High Court judgments and the adjudication order dated 26.08.2024, revived the proceedings from the stage of show cause notice, and directed that the appellate authority first decide the pending appeal against the Competent Authority’s order within two months, after which adjudication may proceed independently and without being influenced by prior observations, with all pending applications disposed of.