FEMA penalty discretion and sleeping directors' liability: penalty reduced for the company and managing director, non-executive directors exonerated.

Contravention under FEMA was maintained against the company and its managing director, and liability was not displaced on the facts. Penalty under Section 13(1) was treated as discretionary, so the tribunal moderated the quantum by taking account of mitigating circumstances, including the amount already deposited in compliance with the pre-deposit order. The two non-executive directors were found to be only sleeping directors, with no role in day-to-day affairs and no signature on the import documents, so liability could not be fastened on them under Sections 3(b) and 42. The company and managing director remained liable with reduced penalty, while the two directors were exonerated.

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Issues: (i) whether the company and its managing director were liable for contravention under Section 3(b) of the Foreign Exchange Management Act, 1999 and whether the penalty imposed on them required reduction; (ii) whether the two non-executive directors, who were not involved in the day-to-day affairs of the company, were liable for the alleged contravention.

Issue (i): whether the company and its managing director were liable for contravention under Section 3(b) of the Foreign Exchange Management Act, 1999 and whether the penalty imposed on them required reduction.

Analysis: The finding of contravention against the company was maintained. The managing director was not accepted as exonerated from liability. At the same time, Section 13(1) of the Foreign Exchange Management Act, 1999 was treated as conferring a discretionary power as to quantum of penalty, subject to judicially relevant consideration of the facts and mitigating circumstances. The prior deposit made in compliance of the pre-deposit order was treated as a relevant mitigating factor for reducing the penalty.

Conclusion: The company and its managing director remained liable for the contravention, but the penalty was reduced to the extent of the amount already deposited.

Issue (ii): whether the two non-executive directors, who were not involved in the day-to-day affairs of the company, were liable for the alleged contravention.

Analysis: The two directors were found not to have managed the day-to-day affairs of the company, not to have signed any document in relation to the import transactions, and to have functioned only as sleeping directors. On that basis, they were held not to have been shown responsible for the alleged contravention under Sections 3(b) and 42 of the Foreign Exchange Management Act, 1999.

Conclusion: The two directors were exonerated from liability.

Final Conclusion: The decision preserved the finding of contravention against the company and its managing director while granting relief by reducing their penalty, and it fully relieved the two sleeping directors from liability.

Ratio Decidendi: Under Section 13(1) of the Foreign Exchange Management Act, 1999, penalty is discretionary and may be moderated on mitigating circumstances, and non-managing directors cannot be fastened with liability for contravention absent evidence of participation in the company's affairs or the impugned transaction.

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