2018 (6) TMI 1492 - HC - FEMA

Court quashes ED's communication, directs RBI on compounding applications; upholds proviso to Rule 8(2)

The court admitted the writ petition, quashed the ED's communication, and directed the RBI to proceed with the compounding applications independently. The ... Powers of investigation in relation to the contraventions of the FEMA - Power to compound contravention - Power of Reserve Bank to compound contravention - Held that:- we are in agreement with the petitioner that if the Enforcement Directorate is of the view that the compounding proceedings relate to a serious contravention suspected of money laundering as in this case, then, this court is not prevented from seeking appropriate clarifications from the Enforcement Directorate with regard to presence or availability of material in its possession before it forms the view. In our opinion, the use of the word 'view' hardly makes any difference. Eventually, whether a view can be equated with an opinion or not in the light of the far reaching consequences, the Enforcement Directorate would have to satisfy this court that there is some material available with it, based on which, it communicated to the RBI its view as in this case of serious contravention suspected of money laundering. Thus, there is a broad agreement that this court, in exercise of its powers of judicial review, can seek such answers and clarifications from the Enforcement Directorate. Course adopted by the RBI and its remittance of the proceedings straight away to the adjudicating authority can be questioned by the applicant seeking compounding of the contravention under the FEMA, by making an application to the RBI. Thus, the applicant invoking the RBI's power of compounding can then approach a court of law and challenge both, the refusal or reluctance on the part of RBI to proceed further as also the Enforcement Directorate's communication or view to the aforesaid effect. If that is the constitutional safeguard and protection ensured to every aggrieved applicant, then, it is not necessary to declare the proviso unconstitutional. We agree with Mr. Dwarkadas that no interpretation which totally takes away the power to compound contravention vesting in the RBI be placed on the proviso. We must, on a harmonious and complete reading of the statutory scheme, together with the rules, hold as above and that would ensure that the contravention can be compounded by resort to section 15 and the requisite rules by the RBI. It is only when a situation of the above nature is faced, then, the applicant seeking compounding of the contravention may invoke the powers of judicial review to strike down the actions of the statutory authorities. In no case, the RBI can probe or question the sufficiency or adequacy of the materials regarding the view of the Enforcement Directorate, but must leave the matter to the applicant seeking compounding to workout his/her remedies. That is how we can ensure that the proviso does not become a weapon or tool of unbridled harassment nor will it allow the misuse of the power conferred in the Enforcement Directorate. It is precisely to rule out such exercise of power that we have allowed the view of the Enforcement Directorate to be tested in exercise of our powers of judicial review. It is a right at best to make an application seeking compounding of the contravention, but beyond that, the applicant cannot insist on an order of compounding contravention, as prayed by him, to be passed. The matter is left to the Compounding Authority's discretion and if that discretion is not exercised reasonably, the applicant has a legal remedy available to him/her to approach a court of competent jurisdiction questioning that action of the RBI. Hence, if the exercise of the right to seek compounding of the contravention is controlled and regulated by the statute, then, we cannot agree with Mr. Dwarkadas that the intervention as envisaged by the proviso is unconstitutional or ultra vires the parent Act. While upholding the constitutional validity and legality of the proviso, particularly by reading it in the manner noted above, we are in agreement with Mr.Dwarkadas that in the facts of this case, the RBI was not bound to put an end to the compounding proceedings. We are of the opinion that the compounding proceedings initiated vide the compounding applications of the petitioner and pending before the RBI should proceed, but strictly in accordance with law. Thus, the above discussion concludes this judgment. Rule is made absolute by quashing and setting aside the communication dated 1st December, 2017 and further directing the RBI to consider the compounding applications in accordance with law uninfluenced by the communication of the Enforcement Directorate dated 1st December, 2017 or any prior letters/communications, which are quashed and set aside by this judgment We also proceed to direct the RBI to render the necessary guidance to the petitioner in the matter of compounding of the contraventions under the FEMA. Since it was clearly stated before us by the RBI that it is presently inhibited in considering the compounding applications or proceeding to decide the same in view of the communication/letter of the Enforcement Directorate, then, as a result of quashing of the same, the RBI is free to proceed and decide the same. Issues Involved:1. Admissibility and Disposal of Writ Petition2. Issuance of Writs under Article 226 of the Constitution of India3. Compounding of Contraventions under FEMA4. Powers and Jurisdiction of RBI and Enforcement Directorate5. Constitutional Validity of Proviso to Rule 8(2) of the Foreign Exchange (Compounding Proceedings) Rules, 20006. Judicial Review of Actions by Enforcement DirectorateDetailed Analysis:1. Admissibility and Disposal of Writ PetitionThe court admitted the writ petition and made the Rule returnable forthwith with consent from all parties. The petition was disposed of by this judgment.2. Issuance of Writs under Article 226 of the Constitution of IndiaThe petitioner sought various writs including mandamus and prohibition to guide and restrain the respondents from proceeding with adjudication until the decision on compounding applications. The petitioner also sought certiorari to quash letters/orders returning compounding applications and to strike down the proviso to Rule 8(2) of the Compounding Rules as unconstitutional.3. Compounding of Contraventions under FEMAThe petitioner, a company operating news channels, filed compounding applications with the RBI for alleged FEMA violations. Despite compliance with administrative actions, the RBI returned the applications advising the petitioner to seek guidance from its divisions. The Enforcement Directorate (ED) issued a show cause notice and later communicated to the RBI that the contraventions were serious and suspected of money laundering, thus falling under the proviso to Rule 8(2) of the Compounding Rules.4. Powers and Jurisdiction of RBI and Enforcement DirectorateThe RBI and ED have parallel powers to compound contraventions under FEMA. The proviso to Rule 8(2) allows the ED to prevent the RBI from compounding if the contraventions are suspected of money laundering, terror financing, or affecting national sovereignty. The court emphasized that the RBI's power to compound should not be lightly interfered with and must be based on cogent material.5. Constitutional Validity of Proviso to Rule 8(2) of the Foreign Exchange (Compounding Proceedings) Rules, 2000The court upheld the constitutional validity of the proviso but clarified that the ED must possess reliable, cogent, and satisfactory material to invoke it. The court found that the ED's communication lacked sufficient material to justify the suspicion of money laundering.6. Judicial Review of Actions by Enforcement DirectorateThe court held that the RBI is not bound to act on vague and general communications from the ED. The RBI must proceed with the compounding applications unless the ED provides substantial material to support its view. The court quashed the ED's communication dated 1st December 2017 and directed the RBI to consider the compounding applications in accordance with law.Conclusion:The court quashed the ED's communication and directed the RBI to proceed with the compounding applications uninfluenced by the ED's letters. The court upheld the proviso's validity but emphasized the need for substantial material to support the ED's view. The court's decision ensures that the RBI's statutory power to compound contraventions is not undermined by vague communications from the ED.