Court directs RBI to reconsider compounding application, emphasizes hearing requirement under Rule 8.

The court set aside the RBI's order rejecting the compounding application and directed a fresh decision in compliance with Rule 8, emphasizing the necessity of providing a hearing before deciding on compounding contraventions. The court highlighted that the proviso to Rule 8 should not negate the requirement of a hearing and that the RBI must consider objections and afford a hearing before remitting cases related to money-laundering contraventions. The judgment stressed the importance of procedural fairness and compliance with compounding rules.

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Issues Involved:
1. Challenge to the order dated 24-5-2017 by the Reserve Bank of India (RBI) rejecting the petitioner's application for compounding of contravention of Regulation 7 of FEMA.
2. Compliance with Rule 8 of the Foreign Exchange (Compounding Proceedings) Rules, 2000.
3. Retrospective applicability of the proviso to sub-rule (2) of Rule 8.
4. Requirement of providing an opportunity of hearing before rejecting the compounding application.
5. Jurisdiction of RBI to compound contraventions when proceedings under the Prevention of Money-laundering Act, 2002 (PMLA) are initiated.

Detailed Analysis:

1. Challenge to the Order Dated 24-5-2017 by RBI:
The petitioner challenged the RBI's order dated 24-5-2017, which returned their application for compounding of contravention of Regulation 7 of FEMA. The petitioner's application dated 30-12-2016 was not entertained due to ongoing proceedings by the Directorate of Enforcement under PMLA.

2. Compliance with Rule 8 of the Foreign Exchange (Compounding Proceedings) Rules, 2000:
The petitioner argued that Rule 8 provides a procedure for compounding, including an opportunity of being heard. The RBI, as the compounding authority, should have considered the application on its merits and provided a hearing before making a decision. The court noted that the RBI's decision was based on the proviso to sub-rule (2) of Rule 8, added by notification dated 20-2-2017, which states that if the Enforcement Directorate suspects serious contravention related to money-laundering, the compounding authority shall remit the case to the adjudicating authority.

3. Retrospective Applicability of the Proviso to Sub-rule (2) of Rule 8:
The petitioner contended that the proviso to sub-rule (2) of Rule 8, effective from 20-2-2017, should not be applied retrospectively to their application dated 30-12-2016. The court did not delve deeply into the retrospective applicability but emphasized the necessity of providing a hearing before making a decision.

4. Requirement of Providing an Opportunity of Hearing:
The court highlighted that Rule 8(2) mandates an opportunity of being heard before passing an order of compounding. The RBI's contention that the proviso negated this requirement was rejected. The court held that the proviso should be read in conjunction with sub-rule (2), and the obligation to provide a hearing remains intact. The RBI should have considered the objections from the Enforcement Directorate and afforded a hearing to the petitioner before deciding to remit the case.

5. Jurisdiction of RBI to Compound Contraventions When Proceedings under PMLA Are Initiated:
The court referred to the judgment of the Bombay High Court in New Delhi Television Limited v. RBI, which stated that the compounding authority must exercise its power subject to the directions, control, and supervision of the Governor of RBI. The proviso enables the Enforcement Directorate to communicate its view on serious contraventions, and the compounding authority must remit the case to the adjudicating authority if such contraventions are suspected. However, this does not eliminate the requirement of providing a hearing.

Conclusion:
The court set aside the impugned communication dated 24-5-2017 and directed the RBI to take a fresh decision in accordance with law, particularly following the requirement of sub-rule (2) of Rule 8. The petition was allowed to the extent of ensuring compliance with procedural requirements, including providing an opportunity of hearing to the petitioner.

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