Post facto RBI approval can regularise covered foreign exchange transactions and defeat penalties under FERA.

A post facto Reserve Bank of India approval was treated as regularising earlier foreign exchange contraventions to the extent covered by the approval, so penalties for foreign currency accounts and inter-project transfers could not stand. Commission paid to directors was also treated as within an approval for salary payments, rejecting a narrow reading of that approval. Loans to non-resident shareholder-directors were covered by the later approval, and a dividend-related violation could not be sustained where it was not specifically alleged in the show cause notice. The approval also extended to the original share allotment and the consequential bonus and rights shares, so the related contravention findings and penalties were set aside.

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Issues: (i) Whether post facto approval granted by the Reserve Bank of India regularised the alleged contraventions relating to foreign currency accounts and inter-project transfers so as to preclude penalty under the Foreign Exchange Regulation Act, 1973. (ii) Whether payment of commission to directors stood covered by the approval granted for salary payments. (iii) Whether the grant of loans to non-resident shareholder-directors and the dividend-related condition were covered by the approval dated 11 April 1989. (iv) Whether the valuation and allotment of shares, including consequential bonus and rights shares, justified penalty for contravention of the Foreign Exchange Regulation Act, 1973.

Issue (i): Whether post facto approval granted by the Reserve Bank of India regularised the alleged contraventions relating to foreign currency accounts and inter-project transfers so as to preclude penalty under the Foreign Exchange Regulation Act, 1973.

Analysis: The approval granted by the Reserve Bank of India after the transactions was treated as regularising the earlier failure to obtain prior permission. The approval covered the transfer of funds and the operation of the foreign currency accounts, and the infraction was not to be treated as surviving once the approval had been granted.

Conclusion: The penalties imposed for the transactions covered by the post facto approval could not be sustained.

Issue (ii): Whether payment of commission to directors stood covered by the approval granted for salary payments.

Analysis: The approval referred to payment of salaries, and the expression was not defined in the Foreign Exchange Regulation Act, 1973. The Court treated the commission component as falling within the scope of the approval, and rejected a narrow construction that excluded it without justification.

Conclusion: The penalty relating to commission payments was unsustainable.

Issue (iii): Whether the grant of loans to non-resident shareholder-directors and the dividend-related condition were covered by the approval dated 11 April 1989.

Analysis: The approval expressly noticed loans to non-resident shareholders for investment in shares and regularised the share purchase and related financing arrangement. As regards dividends, the alleged violation was not specifically put to notice in the show cause notice, and a finding could not be sustained on an unalleged basis.

Conclusion: The penalties relating to loans and dividend conditions were set aside.

Issue (iv): Whether the valuation and allotment of shares, including consequential bonus and rights shares, justified penalty for contravention of the Foreign Exchange Regulation Act, 1973.

Analysis: The approval regularised the original share allotment and also embraced the consequential bonus and rights shares. The Court held that once the principal allotment stood regularised, the related consequential allotments could not be treated as unauthorised on the reasoning adopted by the adjudicating authority.

Conclusion: The findings of contravention and the penalties on the share-allotment issues were not sustainable.

Final Conclusion: The adjudication order and the appellate tribunal order were set aside, and all penalties challenged in the appeals were annulled.

Ratio Decidendi: A valid post facto approval by the Reserve Bank of India regularises the underlying foreign exchange transaction to the extent covered by the approval, and penalties cannot be sustained where the alleged contravention is encompassed by that approval or where the show cause notice does not clearly allege the basis of violation.

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