SEZ Net Foreign Exchange monitoring can trigger penalty before block period ends when performance stays persistently negative.

Bombay HC held that under the SEZ approval conditions and Rules, Net Foreign Exchange performance could be monitored annually and penalty proceedings need not wait for expiry of the full block period where the unit remained persistently negative. The court found that the record showed continuous NFE shortfall during the relevant period, together with incorrect annual performance reporting that created a misleading impression of compliance. On that basis, the challenge to the show cause notice and the penalty order failed, and the finding of breach and the penal consequences for non-fulfilment of SEZ export and NFE obligations were upheld.

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Issues: Whether the show cause notice and penalty for failure to achieve positive Net Foreign Exchange under the Special Economic Zone regime were premature or unsupported, and whether the impugned penalty order called for interference.

Analysis: The approval letter and the SEZ Rules required the unit to achieve positive Net Foreign Exchange during the block period and exposed it to penal action upon failure. The statutory framework in Annexure I to Rule 54 permitted annual monitoring, including issuance of notice where the unit remained Net Foreign Exchange negative by the end of the third year and continuation of negative performance could attract action. The record showed persistent negative Net Foreign Exchange throughout the relevant period and incorrect reporting in the annual performance returns, including an attempt to carry forward earlier negative figures to present a misleading positive position. The contention that action could arise only after expiry of the full five-year period was held to be inconsistent with the scheme of the Rules and the conditions of approval.

Conclusion: The challenge to the initiation of proceedings and to the penalty failed; the findings of breach and the imposition of penalty were upheld.

Final Conclusion: The writ petition was rejected and the impugned orders confirming penal consequences for non-fulfilment of the SEZ export and NFE obligations were sustained.

Ratio Decidendi: Where the SEZ rules and the approval conditions permit annual monitoring of Net Foreign Exchange performance, proceedings need not await expiry of the entire block period if the unit remains persistently negative and has furnished misleading returns.

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