Tribunal upholds penalties for FEMA violations by company and MD investing without RBI approval

The tribunal upheld that the appellant company and its Managing Director contravened Section 6(3)(a) of FEMA and Regulations 5, 6, and 13 by investing in step-down subsidiaries without RBI approval. Penalties imposed were deemed proportionate under FEMA, with the Managing Director held personally liable due to his involvement in company activities. The tribunal dismissed the appeals, affirming the penalties and rejecting requested reliefs.

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Issues Involved:
1. Violation of Section 6(3)(a) of FEMA, 1999 and Regulations 5, 6, and 13 of the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2000.
2. Alleged lack of prior approval from the RBI for investments in step-down subsidiaries.
3. Proportionality of the penalties imposed.
4. Personal liability of the Managing Director, Mr. Kumar S. Taurani.

Detailed Analysis:

1. Violation of Section 6(3)(a) of FEMA, 1999 and Regulations 5, 6, and 13 of the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2000:
The main allegation against the appellant company was that it made investments in three step-down subsidiaries without the permission of the RBI, violating Section 6(3)(a) of FEMA, 1999, and Regulations 5, 6, and 13 of the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2000. The appellant company acquired shares in its Wholly Owned Subsidiary (WOS), Dashmesh International Ltd., Mauritius (DILM), which then invested in the step-down subsidiaries. The company argued that the investments were made to comply with local legislations in the USA and South Africa, but the tribunal found that neither prior approval nor post-facto approval from the RBI was obtained for these investments.

2. Alleged Lack of Prior Approval from the RBI for Investments in Step-down Subsidiaries:
The appellant contended that the investments were made during the pendency of their application for approval from the RBI. They claimed that the RBI had granted clearance for the investments and loans by a letter dated 22.11.2001. However, the tribunal noted that the RBI's letter dated 14.10.2003 did not constitute post-facto approval, as it explicitly mentioned that the acquisitions were made without prior approval and that the company had failed to provide satisfactory clarifications. Consequently, the tribunal concluded that the appellant company had indeed contravened the relevant provisions by not obtaining the necessary approvals.

3. Proportionality of the Penalties Imposed:
The appellant argued that the penalties imposed were disproportionate to the alleged contravention. The tribunal referred to Section 13 of FEMA, 1999, which allows for penalties up to thrice the sum involved in the contravention. The tribunal noted that the total investment in the step-down subsidiaries exceeded six crores INR, making the penalties of Rs. 70,00,000 on the appellant company and Rs. 20,00,000 on the Managing Director not disproportionate. The tribunal held that the Adjudicating Authority had taken a lenient view and imposed penalties less than the proportionate amount.

4. Personal Liability of the Managing Director, Mr. Kumar S. Taurani:
Mr. Kumar S. Taurani argued that he was not responsible for the day-to-day affairs of the company and that the Adjudicating Authority had not substantiated why he was penalized. However, the tribunal found that Mr. Taurani had signed the ODA form submitted to the RBI, indicating his involvement in the company's activities. The tribunal concluded that there was sufficient evidence to hold Mr. Taurani responsible for the contraventions and upheld the penalty imposed on him.

Conclusion:
The tribunal dismissed the appeals, holding that the appellant company and Mr. Kumar S. Taurani had contravened the provisions of Section 6(3)(a) of FEMA and Regulations 5, 6, and 13. The tribunal found no grounds to reduce the penalties imposed by the Adjudicating Authority and rejected the alternate reliefs sought by the appellants.

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