2026 (1) TMI 857 - AT - FEMA

Ex-post-facto approval of overseas security transfers under FEMA regularises prior non-compliance; source-of-funds breach penalty upheld

Dominant issue 1: Whether ex-post-facto approval by the competent authority validates past non-compliance with the FEMA (Transfer or Issue of Security by ... Regularisation by ex-post-facto approval of the competent authority - transaction relating to transfer of shares - validation of past contraventions - Company moved Form FC TRS to the RBI through the Authorized Dealer Bank - HELD THAT:- The fact that both the press release dated 23.09.2010 and the letter dated 20.06.2016 specify that the approval to the said transaction is Ex- post-facto, it implies that the failure to obtain the prior approval has been dispensed with and regularized by the Competent Authority. We therefore conclude that the contravention of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 cannot hold good by any of the parties involved. The penalties on the Appellant Shri Joju Baby and on the Appellant Shri Kunjukutty Aniyankunju cannot be sustained. With respect to the contravention of Section 3(c) of FEMA held against the Appellant Shri Joju Baby, we find that the Appellant could not explain the source of funding of shares. The Ex-post-facto approval does not exempt the necessity to comply with the other requirements of FEMA as stipulated in the letter dated 20.06.2016. We therefore maintain the penalty on the Appellant Shri Joju Baby for the said contravention. We find that the Order dated 08.02.2019 of this Tribunal has disposed of the Application for waiver of the pre-deposit of the penalty amount with direction to make deposits as pre-deposit. The said amount of pre- deposit shall be adjusted towards the penalty imposed on the Appellant Shri Joju Baby for the said contravention. We partly allow the Appeal. Issues: (i) Whether penalties imposed for contravention of the FEMA regulations relating to transfer/issue of shares can be sustained where the transaction subsequently received ex-post-facto approval from the competent authority; (ii) Whether penalty under Section 3(c) of the FEMA can be sustained against the shareholder who failed to explain the source of funds for acquisition of a portion of shares.Issue (i): Whether penalties for contravention of Regulation 10(A)(b) / Clause 3 to Schedule 4 read with Regulation 5(3)(2) and Regulation 4 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 can be sustained in view of subsequent ex-post-facto approval by the competent authority (FIPB/Ministry).Analysis: The transaction involving issuance/transfer of shares was presented to RBI and then to the competent authority; ex-post-facto approval for the transfer/issue to the non-resident was granted and is on record. The competent authority's subsequent regularisation by way of ex-post-facto approval dispensed with the requirement of prior approval in respect of the same transaction and was relied upon in determining whether the regulatory contravention subsists.Conclusion: The penalties imposed for the alleged contraventions of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 cannot be sustained in respect of the transfer/issue of shares that have been regularised by ex-post-facto approval; appeal in this respect is allowed.Issue (ii): Whether the penalty under Section 3(c) of the Foreign Exchange Management Act, 1999 can be sustained against the shareholder who failed to explain the source of funds for acquisition of 44,350 shares.Analysis: The ex-post-facto approval does not relieve parties of other statutory or regulatory requirements under FEMA. The shareholder failed to satisfactorily explain the source of funds for the specified 44,350 shares; this lack of explanation was treated as establishing contravention under Section 3(c).Conclusion: The penalty imposed under Section 3(c) of the Foreign Exchange Management Act, 1999 in respect of the unexplained source of funds for 44,350 shares is sustainable; the appeal in this respect is partly allowed only to adjust pre-deposit against the penalty.Final Conclusion: The appeal of the first appellant is partly allowed and the appeal of the second appellant is allowed; penalties relating to the transfer/issue of shares regularised by ex-post-facto approval are set aside, while the penalty for unexplained source of funds is maintained and subject to adjustment of the pre-deposit.Ratio Decidendi: Ex-post-facto approval by the competent authority, when recorded for the same transaction, regularises the failure to obtain prior approval and precludes sustaining penalties for that regulatory non-compliance, but does not absolve parties from other statutory obligations such as explaining the source of funds under Section 3(c) of FEMA.