2025 (11) TMI 381 - HC - FEMA

High delay in adjudication leads to stay of penalty against company directors; enforcement set aside as disproportionate under FEMA

Shahid Usman Balwa & Ors. Versus The Union of India & Ors.

HC set aside or stayed enforcement of a penalty order and granted ad-interim relief to the company's directors after finding gross delay in adjudication ... Gross delay in adjudication of a show cause notice - issued far back in July 2013 and the same has been adjudicated only in September 2025 - Imposition of penalty on each of the Directors of a company - delays in reporting foreign inward remittances and in filing Form FC-GPR - contravention of paragraph 9(1)(B) of Schedule-1 of Regulation (5)(1) of the Regulations of 2000, read with Section 6(3)(b) of the FEMA Act - HELD THAT:- It is also true that a hearing was given sometime in the year 2018 and thereafter, straight away there was another hearing in August 2025, after which the impugned order was passed in September 2025. Such delay in adjudication of the show cause notice would certainly have an important bearing on the impugned order. This apart, we also, at least prima facie, find that the penalty imposed is rather disproportionate to the violation committed by the Directors of the company, namely the Petitioners. Thus, we are of the opinion that the Petitioners have made out a strong prima facie case for grant of ad-interim relief. We accordingly direct that there shall be ad-interim relief. ISSUES PRESENTED AND CONSIDERED 1. Whether gross delay in adjudication of a show cause notice (issued 2013, adjudicated 2025) vitiates the impugned order imposing monetary penalty under the Foreign Exchange Management Act and its Regulations. 2. Whether the penalty of Rs.50 Crores imposed on individual directors for delays in reporting foreign inward remittances and in filing Form FC-GPR is disproportionate to the contraventions under paragraph 9(1)(A) and 9(1)(B) of Schedule-I of Regulation 5(1) of the Foreign Exchange Management (Transfer or Issue of Securities by a Person Resident outside India) Regulations, 2000 read with Section 6(3)(b) of the FEMA Act. 3. Whether the comparatively small compounding penalty imposed by the Reserve Bank of India on the company is a factor bearing on the reasonableness or proportionality of the large penalty imposed on directors by the adjudicating authority. 4. Whether prima facie satisfaction of delay and disproportionality suffices to grant ad-interim relief restraining enforcement of the adjudication order pending final disposal, and what interim directions are appropriate (including timelines for affidavits and listing). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Delay in adjudication vitiating the order Legal framework: Administrative law principles concerning timely adjudication; fairness and reasonableness in enforcement proceedings; applicable provisions under the FEMA Act and Regulations which create offences/penalties for non-compliance with foreign exchange reporting requirements. Precedent treatment: The judgment does not cite or apply specific precedents; the Court proceeds on established administrative law principles without distinguishing or overruling authority. Interpretation and reasoning: The Court observes that the show cause notice was issued in 2013 but adjudication occurred only in September 2025, with hearings in 2018 and again in August 2025. The Court reasons that such gross delay has an important bearing on the impugned order and, at least prima facie, renders the proceeding susceptible to challenge on grounds of unfairness and prejudice arising from excessive delay in adjudication. Ratio vs. Obiter: The finding that gross delay can vitiate adjudication is treated as ratio for purposes of granting interim relief in the facts of the case (i.e., that delay is a substantive factor to be weighed in the court's consideration). The judgment does not lay down a general rule or fixed timeline; the observation is applied to the present record as a determinative factor for interim relief. Conclusions: The Court concludes that the delay is a prima facie ground undermining the impugned order and supports restraint of enforcement pending final adjudication. Issue 2 - Proportionality of the penalty imposed on directors Legal framework: Principles of proportionality in administrative penalties; requirement that monetary sanctions be commensurate with the nature and gravity of the contravention; relevant FEMA/Regulatory scheme empowering adjudicating authority to impose penalties for delayed reporting/submission under specified regulatory provisions. Precedent treatment: No specific authorities are invoked; the Court applies the proportionality principle in administrative law to evaluate the penalty quantum. Interpretation and reasoning: The Court, on a prima facie basis, finds the penalty of Rs.50 Crores on each director to be 'rather disproportionate' to the violations (delays of approximately 16 days and 13 days in reporting/submission). The comparison with the Reserve Bank of India's compounding fine (Rs.4,20,000 on the company) is noted as persuasive of disproportionality. The Court reasons that excessive penalties, particularly where administrative delay exists, warrant interim protection against enforcement. Ratio vs. Obiter: The conclusion that the penalty is disproportionate in the present facts is part of the ratio supporting interim relief; however, the judgment does not set a legal standard for penalty quantum beyond applying proportionality to the circumstances. Conclusions: The Court determines, prima facie, that the penalty is disproportionate and that this factor, combined with the delay, justifies interim restraint of enforcement actions. Issue 3 - Relevance of RBI compounding fine Legal framework: Interaction between penalties imposed by different regulatory authorities; relevance of prior or concurrent regulatory treatment in assessing reasonableness of subsequent sanctions. Precedent treatment: Not addressed by citation; Court relies on comparative assessment as a contextual indicator. Interpretation and reasoning: The Court notes that the Reserve Bank of India imposed a compounding fine of Rs.4,20,000 on the company for the same or related delays. While the adjudicating authority before the Court imposed a substantially larger penalty on individual directors, the Court treats the RBI penalty as a datum bearing on the proportionality inquiry, observing that the large discrepancy supports the claim of excessiveness. Ratio vs. Obiter: Treated as persuasive, not determinative; the comparative observation informs the Court's prima facie view and interim decision rather than constituting a conclusive legal rule about inter-regulatory penalty consistency. Conclusions: The RBI compounding penalty is a relevant factor that, at least prima facie, indicates disproportion and supports interim relief restraining enforcement. Issue 4 - Entitlement to ad-interim relief and interim directions Legal framework: Principles for grant of interim relief - prima facie case, balance of convenience, and irreparable injury; court's power to stay enforcement pending adjudication; directions concerning pleadings, affidavits, and listing under court's general administrative control. Precedent treatment: No specific precedent invoked; Court applies established interlocutory principles to the facts. Interpretation and reasoning: The Court finds that the Petitioners have made out a strong prima facie case based on delay and disproportionality. On this basis the Court grants ad-interim relief restraining respondents from acting on or taking further steps pursuant to the impugned order dated 08.09.2025. The Court also gives procedural directions: respondent to file an affidavit-in-reply by a fixed date (14.11.2025), petitioners may file affidavit-in-rejoinder by a fixed date (21.11.2025), and the matter is listed for consideration of ad-interim reliefs on 27.11.2025, with the caveat that the Court may dispose the petition at that stage if time permits. Ratio vs. Obiter: The grant of ad-interim relief and procedural directions are operative findings (ratio) for the interim stage. Observations on the strength of the case and the likely impact of delay and disproportionality are factual-legal reasoning supporting interim relief rather than pronouncements of broad legal principle. Conclusions: The Court grants interim injunction restraining enforcement of the adjudication order, imposes a timeline for pleadings and affidavits, and lists the matter for further interim consideration; the Court signals willingness to dispose finally at the next hearing depending on time and material. Caveats and scope 1. The Court's findings on delay and disproportionality are expressed as prima facie conclusions supporting interim relief; they are not final adjudications on the merits. 2. No express precedential rule is laid down concerning permissible adjudication timelines or fixed standards for penalty quantification under FEMA; the decision applies established administrative law principles to the record before the Court.