TaxTMI 
TaxTMI 
TaxTMI 
2024 (10) TMI 291
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Special Director arose from a complaint dated 10.10.2011 filed by the Assistant Director, Directorate of Enforcement, Mumbai which led to issue of Show Cause Notices dated 21.10.2011 for alleged contraventions of various provisions of the Foreign Exchange Management Act, 1999 ("FEMA, 1999"). Facts in Brief 2. The relevant facts, briefly, are that the Reserve Bank of India (RBI) vide letter dated 22.04.2009 informed the Directorate of Enforcement (ED) that the Welspun Group had formed a Joint Venture (JV) in Cyprus,namely, Red Lebondal Ltd., Cyprus ("RLL Cyprus") in which the equity capital was subscribed by the following entities: Sl.No. NAME EQUITY HOLDING 1. Intech Metal SA (An entity resident outside India) 19.86% 2. Sh. B.K. Goenka 31.10% (560 shares of Euro 1 each) 3. Welspun Gujarat Stahl Rohren Ltd. 25% (450 shares of Euro 1 each) 4. Welspun Wintex Ltd. 12% (216 shares of Euro 1 each) 5. Krishiraj Trading Ltd. 12% (216 shares of Euro 1 each 3. The RBI further informed that the persons at Sl. Nos. 2, 3, 4 and 5 above had not sent remittance for subscription of equity shares in the said JV, RLL Cyprus, and therefore, the formation of the JV, RLL Cyprus w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion 6(2)(ii) of the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 by making direct investment in an overseas JV which was not engaged in a bona fide business activity. Welspun Gujarat Stahl Rohren Ltd. Welspun Wintex Ltd. Krishi raj Trading Ltd. Contravention of the provisions of Section 6(3)(a) of FEMA read with Regulation 5(1) of Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 for making direct investment outside India otherwise than provided under FEMA. Contravention of the provisions of Section 6(3)(a) of FEMA read with Regulation 6(2)(ii) of the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 by making direct investment is in an overseas JV which was not engaged in a bona fide business activity. Contravention of the provisions of provisions of Section 6(3)(a) read with Regulation 6(4) of Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 by extending guarantees to the joint venture abroad without having made investment by way of contribution to the equity capital of the joint venture. Contravention of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m under Section 13(1) of the FEMA, 1999, he passed the impugned order imposing the following penalties: Sl. No. NAME PENALTY IMPOSED (Rs.) 1. Sh. Balkrishna Goenka Rs 2,00,00,000/- 2. M/s. Welspun Corporation Ltd.* Rs.7,50,00,000/- 3. M/s Krishiraj Trading Ltd. Rs 28,00,00,000/- 4. M/s Welspun Wintex Ltd. Rs 14,00,00,000/- 5. Sh. Balkrishna Goenka, Director of M/s. Welspun Corporation Ltd.*, Welspun Wintex Ltd. and M/s Krishiraj Trading Ltd. Rs 1,00,00,000/- 6. Rajesh R. Mandawewala, Director of M/s M/s. Welspun Corporation Ltd.*, M/s Welspun Wintex Ltd. and M/s Krishiraj Trading Ltd Rs 75,00,000/- 7. Lal T Hotwani, Director of M/s Krishiraj Trading Ltd. Rs 25,00,000/- 8. Muralilal Mittal, Director of M/s. Welspun Corporation Ltd. Rs 25,00,000/- 9. Sh. B.K. Mishra, Director of M/s M/s. Welspun Corporation Ltd Rs 25,00,000/- 10. Sh. K. H. Vishwanathan, Director of M/s M/s. Welspun Corporation * Rs 25,00,000/- 11. Sh. Raj Kumar Jain, Director of M/s M/s. Welspun Corporation Ltd. * Rs 25,00,000/- 12. Sh. Nirmal Gangwal, Director of M/s M/s. Welspun Corporation Ltd. * Rs 25,00,000/- 13. Sh. Asim Chakraborty, Director of M/s M/s. Welspun Corporat....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... USD 27 Mn and USD 56 Mn. respectively. 14. RLL utilized the credit facility availed from ICICI, UK to the extent of USD 50.5 Mn. to subscribe to 1,97,11,184 unsecured fully convertible debentures of Welspun Power and Steel Ltd. (now Welspun Steel Ltd.). It is reiterated that the very purpose of establishment of RLL, Cyprus was to explore global opportunities in steel and textiles sectors, and Welspun Power and Steel Ltd. was already an established entity in the steel sector with a huge business not only in India but other countries such as Saudi Arabia, US etc. It is also submitted that the purpose of availing the credit facility, namely, to invest in the said company was also clearly stated while availing the credit facility from the ICICI, London. 15. Thereafter, the Indian entities filed Form ODI (Overseas Direct Investment) for issuance of corporate guarantee and requested for issue of single Unique Identification Number ('UIN') by RBI through its authorized dealer, the Punjab National Bank (PNB). The PNB, forwarded the said ODI forms with request to the RBI on 28.12.2007. The RBI on 18.03.2008 called for an explanation from PNB for non-reporting of the equity stake.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....out equity contribution was granted for the following actions: - a. Remit funds to RLL towards equity. b. Submit evidence of investment and disinvestment by RLL in CCDs. c. Submit evidence of repayment of loan by RLL. d. Discharge of corporate guarantee 21. The RBI allotted UIN on 29.01.2014. Subsequently, the RBI also granted its No-objection to strike off the name of RLL on 12.02.2014. It is contended that despite the aforesaid developments, the RBI insisted on proceeding with compounding application though the same had become infructuous in view of the Bombay HC Order dated 10.04.2014 allowing the RBI to proceed keeping parties‟ rights intact. The Compounding Authority issued an Order dated 11.04.2014, which was challenged by the appellants in WP No. 1242 of2014. 22. Since compounded amounts were not paid by Indian persons, RBI revoked post facto approval and permission to strike off RLL on 03.04.2014. The Indian persons responded on 09.07.2014 to state that RLL‟s name had already been struck off and that position could not be reversed. 23. On the above facts, it is firstly contended by the appellants that the impugned order failed to consider that Regulat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....7, which uses the term "participation". A harmonious reading of the terms as used in the Regulations and the Master Circular makes it apparent that purchase of shares on "deferred payment basis" is not violative of the provisions of the Act and/or the Regulations, especially since investment is undertaken in a country that allows such payment. Further the Master Circular expressly allows provision of guarantee in a case where there is equity participation. In the instant case, the shares stood transferred to Indian persons concerned on 22.11.2007, with all its attendant rights and liabilities. It is submitted that the investments made by the appellants were shown in the Balance Sheet and the subscription amount that was to be paid when called upon by M/s RLL, Cyprus. As such, the provision of corporate guarantees by the three Indian entities was well within the law. 26. It is also contended that the respondent failed to appreciate that the Master Circular is a tool or aid in construction and is binding on the authorities. Further, the respondent also failed to notice that though not binding, host country law is relevant since FEMA 120/2004 deals with foreign investment. Further, i....
X X X X Extracts X X X X
X X X X Extracts X X X X
..../or deception to render the activity of investment by RLL in the business of WSL as being mala fide. There are just bald and unsubstantiated allegations replete with presumptions and these cannot be used as props by the respondent for sustaining his finding that the investment by RLL was not bona fide. 29. Similarly, the findings rendered by the respondent vis-à-vis applicability of Regulation 7 of FEMA 120/200 which relates to Investment in Financial Services Sector is beyond the allegations in the SCN. In any event, the impugned order failed to appreciate that Regulation 7 of FEMA 120/2004 is not applicable to the present case on hand, since it qualifies that an Indian Entity engaged in financial services sector in India may make investment in an entity outside India subject to certain conditions mentioned therein. On the face of it, the Indian persons concerned in the present case are not engaged in" Financial services sector‟ and thus the very application of Regulation 7 in this case is incorrect. 30. Further, and without prejudice to the contentions above, it is also submitted that the Indian persons have received post facto approval as well as direction, upon a....