2026 (3) TMI 921 - AT - FEMA

Unauthorized online forex derivatives trading triggers liability under FEMA, but mitigating factors can reduce the civil penalty imposed.

Unauthorised online foreign exchange derivative transactions effected by a resident via internet portals using payment cards constitute contraventions of ... Foreign exchange derivative transactions on an online trading portal - without prior RBI permission - civil penalty for statutory contravention - Imposition of penalty under Section 13(1) of FEMA - mens rea - contraventions of Section 47(2)(h) of the Foreign Exchange Management Act, 1999 (FEMA) read with Regulation 3 of Foreign Exchange Management Regulations, 2000, further read with Reserve Bank of India (RBI) AP DIR (Series) No. 53 and RBI AP DIR (Series) No. 46 vide the Impugned Order. Prohibition on entering into foreign exchange derivative contracts without RBI permission - HELD THAT: - The Tribunal found that the Appellant conceded trading on the Easy Market website using HDFC Bank cards totalling Rs. 5,21,02,552.53 and that such transactions fell within the scope of foreign exchange derivative contracts and were entered into without prior permission of the Reserve Bank, in contravention of Regulation 3 of the Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000 and applicable RBI AP DIR instructions. The Tribunal therefore held that the alleged contraventions occurred. [Paras 4, 5, 6] Contraventions of the Regulations and RBI directions established; the Appellant was guilty of engaging in prohibited online forex trading. Penalty liability for contravention of FEMA provisions without requirement of mens rea - HELD THAT:- The Judgment (supra) in the matter of SEBI cited the Judgment in Director of Enforcement vs. MCTM Corporation Pvt. Ltd. and Ors. [1996 (1) TMI 351 - SUPREME COURT] wherein even for FERA 1947 it was held that the contravention shall be breach of a civil obligation which would attract penalty irrespective of the fact whether the contravention was made with any guilty intention or not. The Judgment (supra) in the matter of SEBI, also cited a number of previous Judgments wherein it was held that mens rea is not an essential element for imposing penalty for breach of civil obligations. The Judgment (supra) has clarified that the case of Hindustan Steel Ltd. vs. State of Orissa [1969 (8) TMI 31 - SUPREME COURT] pertained to criminal/quasi criminal proceeding as the provisions of the Act under consideration in that case imposed a punishment of imprisonment and fine as well. The present appeal deals with provisions which are strictly civil obligations and penalty for the contraventions of these provisions are imposable under Section 13(1) of FEMA which provides for penalty only, up to thrice the sum involved in such contravention. Penalty reduced to the lesser quantified amount and pre-deposit to be adjusted against the reduced penalty. Final Conclusion: The Tribunal held that the Appellant committed prohibited online forex derivative transactions without RBI permission, that penalty under Section 13(1) FEMA does not require mens rea and is attractable once contravention is established, but exercised mitigation by reducing the penalty to a lesser amount and adjusting the pre-deposit against it. Issues: (i) Whether the appellant contravened the provisions of the Foreign Exchange Management Act, 1999 and the Foreign Exchange Derivative Regulations/RBI directions by engaging in online foreign exchange derivative trading without prior permission; (ii) Whether penalty is imposable for the contraventions and, if so, what is the appropriate quantum of penalty in light of mitigating factors.Issue (i): Whether unauthorised online forex derivative trading without prior RBI permission constituted contravention of FEMA, 1999 and the Foreign Exchange Derivative Regulations/RBI directions.Analysis: The material establishes that foreign exchange derivative transactions were effected via an online trading portal using credit/debit cards and that such transactions fall within the definition of foreign exchange derivative contracts under Regulation 2(v) and are prohibited without prior RBI permission under Regulation 3. RBI AP DIR (Series) Nos. 53 and 46 specifically treat overseas electronic/internet forex trading effected by residents as attracting liability under FEMA and related compliance obligations.Conclusion: The appellant committed contraventions of the Foreign Exchange Management Act, 1999 and the Foreign Exchange Derivative Regulations/RBI directions by entering into foreign exchange derivative contracts without prior permission.Issue (ii): Whether penalty under Section 13(1) of FEMA is imposable and what reduction, if any, is warranted by mitigating circumstances.Analysis: Section 13(1) permits adjudicatory penalty up to three times the quantifiable amount involved. The statutory text and judicial authorities establish that mens rea is not a precondition for imposition of civil penalties under such provisions. Mitigating facts (lack of deliberate intent, financial loss suffered by the transactor, present earning capacity) are relevant to calibrate the quantum of penalty but do not preclude liability. Applying the statutory ceiling and mitigation, the penalty was reduced from the impugned amount to a proportionate reduced sum, with adjustment of pre-deposit.Conclusion: Penalty is imposable under Section 13(1) of FEMA; on application of mitigating factors the imposed penalty is reduced to a proportionate amount and the pre-deposit adjusted accordingly, resulting in partial allowance of the appeal in favour of the assessee.Final Conclusion: The contraventions are established and civil penalty is authorized under FEMA; however, exercising adjudicatory discretion in view of mitigating circumstances results in a reduction of the penalty and partial allowance of the appeal, producing a net benefit to the assessee.Ratio Decidendi: For civil penalties under Section 13(1) of the Foreign Exchange Management Act, 1999, mens rea is not an essential element and proven contravention attracts penalty, while mitigating circumstances are relevant only to the quantum and proportionality of the penalty.