Court affirms compounding order for FEMA contraventions, imposes Rs. 55.12 crore penalty

The court upheld the compounding order issued by the Chief General Manager of the Reserve Bank of India, requiring the petitioner to pay Rs. 57.74 lakhs for contraventions under FEMA. The rejection of the review application was affirmed, and consequences for non-compliance with the compounding order were outlined. The court quantified the contravention amount at Rs. 55.12 crore, justifying the penalty imposed. The petitioner was directed to comply with the compounding order within a specified timeframe, with no costs awarded in the case.

---

---

Issues Involved:
1. Legality of the order dated 23 December 2013 by the Chief General Manager of the Reserve Bank of India.
2. Rejection of the review application by the petitioner.
3. Issuance of summons by the Assistant Director in the Directorate of Enforcement on 22 May 2014.
4. Requirement of prior approval for ODI transactions as per the Reserve Bank's order dated 9 April 2014.
5. Quantifiability of the amount involved in the contravention.
6. Justification for the penalty amount imposed.
7. Compliance with the compounding order and the consequences of non-compliance.

Detailed Analysis:

1. Legality of the Order Dated 23 December 2013:
The petitioner challenged the legality of the order passed by the Chief General Manager of the Reserve Bank of India, which allowed the application for compounding of contraventions under Section 15 of the Foreign Exchange Management Act, 1999 (FEMA), subject to the payment of Rs. 57.74 lakhs within fifteen days. The contraventions involved delayed reporting of remittances and issuance of a corporate guarantee without obtaining a Unique Identification Number (UIN). The petitioner admitted the contraventions but argued that the delay was unintentional and due to ignorance.

2. Rejection of the Review Application:
The petitioner's application for review of the compounding order was dismissed on 23 January 2014 on the ground that the Reserve Bank does not have the power to review such orders. The Chief General Manager noted that the petitioner's representative had admitted the contraventions and pleaded for leniency during the personal hearing.

3. Issuance of Summons by the Directorate of Enforcement:
The petitioner also contested the summons issued by the Assistant Director in the Directorate of Enforcement on 22 May 2014 and the Reserve Bank's order dated 9 April 2014, which required the petitioner to seek prior approval for any ODI transactions. These actions were taken because the petitioner failed to deposit the compounded amount within the specified period, leading to the application of Rule 10 of the Compounding Rules.

4. Requirement of Prior Approval for ODI Transactions:
Due to the petitioner's failure to comply with the compounding order, the Reserve Bank informed the petitioner that it would be under the approval route for ODI transactions instead of the automatic route. This was a consequential order following the non-payment of the compounded amount.

5. Quantifiability of the Amount Involved in the Contravention:
The petitioner argued that the amount involved in the contravention was not quantifiable and, therefore, only a penalty up to Rs. 2 lakhs could be imposed. However, the court found no merit in this submission, as the amount involved was quantified at Rs. 55.12 crore (equivalent to USD 10.515 million). Section 13 of FEMA allows for a penalty up to thrice the sum involved in the contravention when the amount is quantifiable.

6. Justification for the Penalty Amount Imposed:
The court noted that the compounding order took a lenient view, considering the rationale underlying the compounding provisions and the facts of the case. The penalty amount of Rs. 57.74 lakhs was deemed appropriate given the admitted contraventions and the amount involved. The compounding authority applied its mind to all relevant circumstances, and the order was not disproportionate or based on extraneous material.

7. Compliance with the Compounding Order and Consequences of Non-Compliance:
The petitioner failed to deposit the compounded amount within fifteen days, leading to the application of Rule 10, which deems the application for compounding as never made. The court observed that the petitioner had indicated a willingness to deposit the amount during the proceedings and directed the petitioner to forward a demand draft of the compounded amount with interest to the compounding authority within two weeks. The compounding authority was instructed to consider the petitioner's request in light of the proceedings' pendency before the court.

Conclusion:
The court did not interfere with the order of compounding or the subsequent communications by the Reserve Bank and the Directorate of Enforcement. The petition was disposed of with no orders as to costs, allowing the petitioner to comply with the compounding order and seek consideration from the compounding authority.

---