2019 (5) TMI 817 - AT - FEMA

Tribunal Overturns Penalties for FEMA Violations, Appellants Cleared of Charges

M/s Dominent Financial Services P. Ltd., Ashok Jain Versus The Special Director Directorate of Enforcement, Mumbai And The Special Director Directorate of Enforcement, Mumbai Versus M/s Dominent Financial Services (P) Ltd.

The Tribunal ruled in favor of the appellant company and its director, setting aside penalties imposed on them for alleged violations of FEMA regulations. ... Foreign Direct Investments (FDI) - Non-compliance of the condition of minimum capitalization - requirement of prior permission and allowing automatic route for FDI by foreign companies in township development - Guilty of the charge in respect of the transaction of transfer of shares - liability of director - guilty of the provisions of Reg. 3 & Reg. 5(1) r/w Schedule 1 of FEMA 20/2000 - Restriction on issue or transfer of security by a person resident outside India - HELD THAT:- The minimum amount of FDI is required to be brought in “within a period of six months of commencement of business of the company”. It is evident from the Complaint that the respondent had initiated investigation against the appellant company soon after the first installment of USD 2.5 Million, thereby frustrating further compliance with the condition of minimum capitalization by their own action. The amount of USD 10 Million is required to be brought in within six months from the commencement of the business of the company. Since the business of development and construction of township could not be commenced due to the action of the respondent, the period of compliance with the condition had yet to commence. The allegation is, therefore, premature and, therefore, the question of contravention does not arise. In the light of above, we are of the considered opinion that the Adjudicating Authority has misapplied the condition of Sl. no. 23 in respect of FDI in township development to NRIs contrary to FDI in township development under Sl. no. 2 of Annexure B which is without any condition whatsoever. The impugned order is quashed and set-aside as the appellant no.1 is not guilty of alleged contravention. The penalty imposed was not called for. As regards Ashok Jain is concerned, he has been held guilty by fastening vicarious liability on him. There is no specifically averment of incriminating acts of commission or omission in his part, as the impugned order holding the company is not guilty of contravention. The order against Ashok Jain is also set-aside, even otherwise he is not liable to be punished for contravention as he has carried out the transaction with due diligence and complied with every formality including the post transaction reporting condition prescribed by RBI. There is no evidence of any disregard or neglect in observing and complying with the provisions of the law. Therefore, the impugned order is set-aside against the appellant no. 2. The appeal filed by the respondent has become infructuous in view of appeals filed by the private parties are allowed on the reasons already given. Hence, the same is dismissed. Issues Involved:1. Contravention of Regulation 3 and Schedule 1 of Regulation 5(1) of FEMA 20/2000-RB.2. Alleged transfer of foreign exchange outside India under Section 4 of FEMA.3. Validity of penalties imposed on the appellant company and its director.Issue-wise Detailed Analysis:1. Contravention of Regulation 3 and Schedule 1 of Regulation 5(1) of FEMA 20/2000-RB:The appellants were charged with violating Regulation 3 and Schedule 1 of Regulation 5(1) of FEMA 20/2000-RB in two transactions: the transfer of shares in SDRPL to M2N2 and the transfer of shares in GDLL to Balyasny. Regulation 3 restricts the issue or transfer of security by a person resident outside India. However, the Tribunal found that Regulation 3 does not apply to the appellants as both DFS and SDRPL are residents in India. Therefore, the inclusion of Regulation 3 in the charge was deemed misplaced.Regarding Regulation 5(1), which allows foreign entities to purchase shares of an Indian company under the Foreign Direct Investment (FDI) Scheme subject to conditions specified in Schedule 1, the Tribunal noted that SDRPL was engaged in township development, which falls under the permissible activities for FDI under the automatic route as per the amended Annexure B of Schedule 1. The Tribunal found that the Adjudicating Authority misapplied the conditions of minimum capitalization and the requirement for prior permission from the Reserve Bank of India (RBI). The Tribunal concluded that the appellants did not contravene Regulation 5(1) as the FDI in SDRPL was permissible under the automatic route.2. Alleged Transfer of Foreign Exchange Outside India under Section 4 of FEMA:The appellants were exonerated of the charge of violating Section 4 of FEMA, which pertains to the transfer of foreign exchange outside India. The Adjudicating Authority held that the charge was not made out due to a lack of essential ingredients and relevant evidence to prove the contravention.3. Validity of Penalties Imposed on the Appellant Company and Its Director:The Adjudicating Authority had imposed a penalty of Rs. 50 lakhs on the appellant company and Rs. 5 lakhs on its director, Ashok Jain. The Tribunal found that the penalties were not justified as the appellants were not guilty of the alleged contraventions. The Tribunal noted that the Adjudicating Authority had incorrectly applied the pre-2005 Notification No. FEMA 20/2000 and ignored the amended provisions that allowed automatic route for FDI in township development. The Tribunal also observed that the condition of minimum capitalization was misinterpreted, and the appellants were prematurely accused of non-compliance.The Tribunal set aside the penalties imposed on the appellant company and Ashok Jain, stating that there was no evidence of any disregard or neglect in observing and complying with the provisions of the law. The Tribunal also dismissed the appeal filed by the respondent, as it had become infructuous in light of the Tribunal's decision to allow the appeals filed by the private parties.Conclusion:The Tribunal quashed and set aside the impugned order, holding that the appellant company and its director were not guilty of the alleged contraventions. The penalties imposed were found to be unwarranted, and all appeals and pending interim applications were disposed of without costs.