Archana Traders Pvt. Ltd. Vs Assistant Director (Appellate Tribunal under SAFEMA, New Delhi)
FDI Utilised for Purchase of Commercial Property in Prohibited Real-Estate Sector—FEMA Contravention Upheld and Property Confiscated
Summary: The Appellate Tribunal under SAFEMA has held that foreign remittances received as FDI and utilised for purchasing commercial property amounted to investment in the prohibited real-estate business under the FEMA regulations then applicable. The Tribunal upheld the confiscation of the property, though it substantially reduced the monetary penalties imposed on the company and its managing director.
At the same time, the Tribunal completely deleted the penalty imposed on another director because the Enforcement Directorate failed to prove that she was in charge of, or responsible for, the company’s business when the contraventions occurred.
Facts of the case
M/s Archana Traders Pvt. Ltd. received six foreign inward remittances aggregating to approximately ₹4.13 crore between 2006 and 2009. Out of these funds, about ₹3.28 crore was utilised for acquiring commercial property at the mezzanine floor of Narain Manzil, Barakhamba Road, New Delhi.
The Enforcement Directorate found several contraventions, including:
- failure to report receipt of foreign investment to the RBI within the prescribed period;
- failure to allot shares within the stipulated time;
- delayed filing of Form FC-GPR;
- receipt of remittance from one foreign entity but allotment of shares to another entity; and
- utilisation of foreign investment for purchasing property in the prohibited real-estate sector.
The Adjudicating Authority imposed a penalty of ₹1 crore on the company and ₹60 lakh each on its directors, Smt. Prema Radhakrishnan and Shri Naveen Patil. It also ordered confiscation of the commercial property under Section 13(2) of FEMA.
The Special Director (Appeals) upheld the order. The appellants therefore approached the Tribunal.
Company’s defence
The company contended that it was not engaged in the business of real estate. The properties were reflected as fixed assets and not as stock-in-trade. The commercial premises had allegedly been acquired for conducting its own business activities and not for resale or trading.
It was argued that rental income became the company’s principal income only because its records were seized by the CBI, preventing it from commencing or carrying on its intended business.
The company also contended that shares were ultimately issued against the foreign remittances and that the delayed allotment and reporting were merely procedural irregularities. The delay was attributed to the seizure of corporate and statutory records by the CBI and the subsequent difficulties in reconstructing them.
Reliance was placed on the Supreme Court decision in Hindustan Steel Ltd. v. State of Orissa to contend that penalties should not be imposed for technical or venial breaches committed without deliberate defiance.
Tribunal’s findings
The Tribunal rejected the contention that the defaults were merely technical.
It noted that the company had not reported receipt of the foreign investment to the RBI within the prescribed period. In certain cases, shares were issued only after several years. Remittances received in 2008 were reportedly converted into shares only in 2016.
More importantly, one remittance was received from Ringgold Consulting Inc., Singapore, whereas shares were ultimately allotted to New Glory International Investment Ltd. FEMA regulations did not permit shares to be issued to a third party different from the person who had remitted the consideration.
The foreign investor’s correspondence also disclosed that the investment was intended for acquiring the Barakhamba Road commercial property. The Tribunal therefore concluded that the foreign funds had been utilised for investment in the prohibited real-estate sector.
Mens rea not necessary for FEMA penalty
The Tribunal held that liability under Section 13 of FEMA arises from the contravention of a statutory obligation. It is not necessary for the Enforcement Directorate to establish fraud, deliberate intention or guilty mind.
Relying upon Chairman, SEBI v. Shriram Mutual Fund, the Tribunal observed that where the statute imposes a civil obligation, penalty follows once the contravention is established, unless the statutory language specifically requires mens rea.
The decision in Hindustan Steel Ltd. was distinguished on the ground that it concerned penal provisions having a criminal or quasi-criminal character. FEMA contraventions under consideration were civil contraventions attracting monetary penalty.
Confiscation of the property upheld
The Tribunal clarified that confiscation under Section 13(2) of FEMA is not automatic or mandatory. It is a discretionary power that must be exercised judicially, depending upon the facts of each case.
However, in the present case, a direct connection existed between the foreign remittances and the acquisition of the commercial property. Approximately ₹3.28 crore out of the total remittances of ₹4.13 crore had been utilised for acquiring the property.
Since the property represented the utilisation of foreign funds received in contravention of FEMA and was acquired in the restricted real-estate sector, the Tribunal upheld its confiscation.
Personal liability of directors
The Tribunal adopted a differentiated approach while considering the liability of the two directors.
In the case of Shri Naveen Patil, the material on record, including his statements, established his involvement in managing the affairs of the company. He failed to demonstrate that the contraventions occurred without his knowledge or that he had exercised due diligence to prevent them. His liability under Section 42 was therefore upheld.
In contrast, the Enforcement Directorate failed to produce evidence showing that Smt. Prema Radhakrishnan was in charge of or responsible for conducting the company’s business. Merely being a director was insufficient to impose personal liability under Section 42. The penalty of ₹60 lakh imposed on her was consequently deleted in full.
Final relief granted
The Tribunal partly allowed the appeals and modified the penalties as follows:
| Appellant | Original penalty | Penalty sustained |
|---|---|---|
| M/s Archana Traders Pvt. Ltd. | ₹1 crore | ₹50 lakh |
| Shri Naveen Patil | ₹60 lakh | ₹5 lakh |
| Smt. Prema Radhakrishnan | ₹60 lakh | Nil—deleted entirely |
The confiscation of the commercial property was, however, upheld.
Author’s comments
The ruling demonstrates that subsequent allotment of shares does not automatically cure earlier FEMA violations involving delayed reporting, delayed allotment, third-party remittances or use of foreign funds in a prohibited sector.
The characterisation of a property as a fixed asset rather than stock-in-trade may not by itself establish that the company is outside the real-estate restriction. The actual purpose of the foreign investment and its end-use remain crucial.
The decision is equally important on directors’ liability. Section 42 does not permit every director to be penalised merely because of the office held by them. The Enforcement Directorate must establish that the director was in charge of and responsible for the company’s business when the contravention occurred. However, once active involvement is proved, absence of dishonest intention may not provide protection against a civil penalty under FEMA.
The judgment thus strikes a balance: the contravention and confiscation were upheld, but the monetary penalties were made proportionate and the passive director was completely exonerated.
Cases Discussed
- Hindustan Steel Ltd. v. State of Orissa, 1969 (2) SCC 627
- Chairman, SEBI v. Shriram Mutual Fund, (2006) 5 SCC 361
- Director of Enforcement v. MCTM Corporation Pvt. Ltd. and Ors., MANU/SC/0300/1996
- Shailendra Swarup v. Deputy Director, Directorate of Enforcement, (2020) 16 SCC 561
FULL TEXT OF THE JUDGMENT/ORDER OF APPELLATE TRIBUNAL UNDER SAFEMA AT NEW DELHI
1. This Order disposes of the Appeals Nos. FPA-FE-92/DLI/2022 filed by M/s Archana Traders Pvt. Ltd. (ATPL), FPA-FE-95/DLI/2022 filed by Smt. Prema Radhakrishnan and FPA-FE-96/DLI/2022 filed by Shri Naveen Patil, against the Order No. SD(A)/FEMA/22/2020-21/236-238 dated 19.10.2022 (Impugned Order) passed by the Special Director, (Appeals)-FEMA, Directorate of Enforcement, Government of India, New Delhi. The penalties including the confiscation of the immovable property imposed in the Order in Original (OIO) dated 08.07.2020 were upheld in the Impugned Order. Ld. Adjudicating Authority (AA) vide its Order No. ADJ/01/FEMA/DLZO-1/2020/DD(NA) dated 08.07.2020 imposed penalty of Rs. 1,00,00,000/- on M/s ATPL for the contravention of Section 6 (3)(b) of Foreign Exchange Management Act, 1999 (FEMA) read with Paragraphs 2, 8, 9 (1)(A) and 9 (1) (B) of Schedule 1 of Regulation 5(1) of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulation, 2000 further read with RBI Master Circular No. 02/2008-09 dated 01.07.2008. Penalty of Rs. 60,00,000/- was imposed on Ms. Prema Radhakrishana, being one of the Director of M/s ATPL and penalty of Rs. 60,00,000/- was imposed on Shri Naveen Patil, being one of the Director of M/s ATPL vide the Impugned Order, for the aforementioned contraventions in terms of Section 42 of FEMA. The property of 2738 Sq. Ft. of space at Mezzanine Floor of Narain Manzil, 23, Barakhamba Road, New Delhi was confiscated under Section 13 (2) of FEMA for the aforementioned contraventions.
2. Ld. Counsel for the Appellants submitted that the Special Director (Appeals) vide order dated 19.10.2022, passed the non-speaking order in a mechanical nature relying on the reasoning stated by the Adjudicating Authority without any application of mind, dismissed the Appeal of the Appellants and upheld the order passed by the Adjudicating Authority. The Ld. Special Director (Appeals) and Ld. Adjudicating Authority have failed to appreciate that the Appellant was not engaged in real estate business. The properties owned by the Appellant from which rental income is being received cannot be categorized as real estate business, as the Appellant Company had intended to venture into trading and the said properties purchased by the Appellant Company were intended to be utilized as office premises for conducting business activities of Appellant Company. He stressed that the properties owned by the Appellant Company have been shown as a fixed asset and not as stock in trade in the balance sheets of the Company. Thus, the Appellant acquired the properties with no intention to sell or trade the properties. However, before it could commence any business activity, the entire records of the Appellant Company were seized by CBI. Therefore, there was no business activities being conducted by the Company till 2016 – 2017. In the event of no business activity prior to 2016, the profit and loss accounts would automatically reflect rental income as the only source of income in order to keep the Appellant company afloat. The Appellant Company had been engaged in a series of litigation since 2009, due to which, no business activity could have been conducted and neither any internal compliances were possible. The troubles for the Appellant Company worsened with the sudden demise of Shri Radhakrishnan Gopalan in 2011, who was responsible for taking all the business decisions.
3. Ld. Counsel for the Appellants submitted that the Special Director (Appeals) and Adjudicating Authority have failed to appreciate that the remittance for issue of shares was on a non-repatriable basis and ultimately shares have been issued to the remitters from whom remittance have been received. The delay in issuance of shares was due to circumstances beyond the control of the Appellant Company, as the Appellant Company was entangled in CBI investigations. The documents of the Company were seized by the agency, thereby being handicapped in undertaking any business activity. However, ultimately shares have been allocated to all the entities from whom the foreign inward remittance have been received and said contravention is merely a technical one. The penalty imposed by the Respondent was unjustifiable since no money had been remitted outside India and that the shares had been allocated and ultimate objective of the remittance had been met.
4. Ld. Counsel for the Appellants further submitted that the Ld. Special Director (Appeals) and Ld. Adjudicating Authority have failed to appreciate that property bearing 1369 sq. ft. of the address Mezzanine Hall, Mezzanine Floor, Narain Manzil, 23, Barakhamba Road, New Delhi, had been procured from amount received by the Appellant Company in lieu of share allocation on non-repatriable basis. Without prejudice, even otherwise if the shares would have been allocated timely, the property could have been purchased from the said amount. As on date, there is no illegality if the property is held by the Appellant Company as the shares for which foreign remittance was received had been duly allocated. The Adjudicating Authority and the Special Director (Appeals) while confirming the confiscation turned a blind eye to the plight of the Appellant Company and the conditions due to which the shares could not be timely allocated by the Appellant Company.
5. Ld. Counsel for the Appellants contended that the Respondent’s charge regarding the delayed filing of Form FC-GPR and missing statutory certifications were procedural irregularity rather than a substantive breach of foreign exchange laws. Equity shares corresponding to the remittances were duly allotted (including 24,31,800 shares issued on 14.12.2009 to NGIIL), and the delay in completing formal FC-GPR filings stemmed entirely from force majeure events-specifically, the seizure of all corporate register books and original secretarial records by the CBI in February 2010. The case was finally dropped by the CBI vide its chargesheet dated 31.05.2012. Without access to original statutory records, the company’s practicing Company Secretary and Auditors were legally constrained from issuing standard compliance certificates during the operational freeze. Once records were reconstructed, all equity issuances were regularized, demonstrating complete bona fide of the Appellant. Because these capital infusions were entirely non-repatriable, they fell within the statutory definition of Foreign Investment, rendering any allegations of non-compliant Foreign Direct Investment (FDI) legally unsustainable. Ld. Counsel stated that the penalties imposed were disproportionate and cited the Judgment of the Hon’ble Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa [1969 (2) SCC 627] that penal provisions should not be invoked for technical or venial breaches resulting from bona fide administrative delays where there was an absence of deliberate defiance, fraud, or loss to the public exchequer.
6. Ld. Counsel for the Appellants further submitted with respect to the Appellant Shri Naveen Patil that the Appellant was never the Director or in charge of the Company’s affairs during the period in which the all the 6 Remittances were received by the ATPL and can be seen from the records of MCA. The Appellant was once the Director of ATPL from 2002, however ceased to be so on 05.06.2006 and again was inducted as Director on 08.05.2009, at the request of Sh. Radhakrishnan Gopalan who was having deteriorating health day by day, which was admitted case of the Respondent too and there was no denial of the same by the Respondent. The Appellant was added as Director with nominal shareholding of just one share of the Company and Sh. Radhakrishnan Gopalan was managing the day-to-day affairs of the Company till his demise in 2011. It is incorrect to hold the Appellant as a person in charge or having control of the day-to-day affairs of the Company only on presumptions and surmises from the reason of being the authorised representative at the time of filing the Declaration dated 30.12.2008 to the authorised dealer. That an authorised representative for a particular action cannot be said to be the person in charge or control of the Company and therefore, the penalty imposed on the Appellant is illegal and unjustified.
7. Ld. Counsel for the Appellants submitted with respect to the Appellant Smt. Prema Radhakrishnan that the Special Director (Appeals) as well as the Adjudicating Authority erred in failing to appreciate that the Appellant was a Director with no role in the alleged transactions and the Respondent failed to prove that she was the only one responsible for executing the transactions under question and related work or had the knowledge of the said transaction. It is appurtenant to note that all the bank and property records conclusively establish that Shri Radhakrishnan Gopalan was the only authorized representative who initiated, executed, and controlled all transactions. As held by the Hon’ble Supreme Court in Shailendra Swarup v. Deputy Director, Directorate of Enforcement (2020 SCC OnLine SC 600), reaffirming the settled principles in SMS Pharmaceuticals Ltd. v. Neeta Bhalla (2005) 8 SCC 89, that merely being a Director of a Company would not attract Penalty, only the persons who were responsible for the alleged transactions/contraventions and had the knowledge of the transactions will be deemed to be personally liable. It follows from this that if a Director of a Company who was not in charge of and was not responsible for the conduct of the business of the Company at the relevant time, she will not be liable under the provision. Ld. Counsel for the Appellants therefore pleaded to allow all the three Appeals.
8. Ld. Counsel for the Respondent Directorate submitted that the Impugned Order issued by the Special Director (Appeals) is not merely reiteration of the OIO, but after due consideration of the arguments made from both the sides a just and fair Order has been issued. Ld. Counsel further submitted that the individual Appellant Shri Naveen Patil was carrying out the day-to-day affairs and operations of the Appellant Company. While he was the Director of the Appellant Company from 06.11.2002 to 05.06.2006, after a break, he was re-inducted as Director and Managing Director on 05.05.2009. In fact, in his statement under Section 37 of FEMA he confirmed that he was the person in-charge and conducted day to day affairs of the Appellant Company. Ld. Counsel submitted that Shri Patil in statement had categorically mentioned that management comprised of Shri Radha Krishnan Gopalan who expired on 15.07.2011, his wife Smt. Prema Radhakrishanan and Shri Naveen Patil himself. The Appellant Company did not file the intimation to the RBI about the receipt of the said investment within the stipulated one month. Shri Patil could not give any reason for the delay of over six months in allotment of shares to M/s NGIIL, the foreign investor. M/s NGIIL vide its letter dated 10.12.2008 to Shri Patil conveyed its intention to invest for the acquisition of the property at Barakhamba Road, New Delhi. It is also on record that M/s NGIIL sent its remittance through M/s Ring Gold Consulting Inc., Singapore. It is also on record from the Profit and Loss Account, that the Company for the Financial Years 2006-07, 2007-08 and 2008-09 had the only source of income as rentals of the real estate. Ld. Counsel argued that the objectives of the Appellant Company mentioned in the Memorandum of Association, showed that the Company was in realty business. Thus, the Appellant Company invested in the prohibited sector of real estate for the purchase of the property. Ld. Counsel reiterated Paragraph 18 of the Impugned Order:
“18. The Appellant Company has received a total sum of Rs. 4.13 crores by way of 6 inward remittances out of which a sum of Rs. 3.28 crores was converted to purchase the property situated at Mezzanine Floor of Narian Manzil, 23, Barakhamba Road, New Delhi and balance amount was used towards advancing loans and other investments of the Appellant Company. It was further submitted by the respondent department that from the said facts it is manifestly clear that the property situated at Mezzanine Floor of Narian Manzil, 23, Barakhamba Road, New Delhi was purchased directly out of the money received of FEMA Contraventions and thus, the said property was rightly confiscated of section 13(2) of the FEMA and accordingly, penalties were imposed upon the Appellant company along with other persons respectively.”
9. Ld. Counsel for the Respondent Directorate submitted that the Section 6(3) of FEMA was omitted by the Finance Act, 2015 with effect from 15.10.2019. He reiterated that the contravention occurred in the year 2008 and 2009. Ld. Counsel maintained that the relevant provisions were in force at the relevant point of time of occurrence of the contravention. Ld. Counsel stated that the money which has been claimed to have been received as foreign direct investment was utilized on receipt for the purchase of property. In fact, in the instant case the property was purchased first and then after a lapse of eight years shares were issued and that too only after the investigation had been carried out by the Respondent Directorate. Ld. Counsel stated that in the Impugned Order clear findings have been made in Paragraphs 27 and 28 as follows:
“27. The other contraventions like not reporting the transactions to the Reserve Bank of India, not issuing shares within the stipulated time of six months and not sending/remitting back the money if shares were not issued within the stipulated time is established beyond doubt.
28. The appellant could not furnish any reasonable cause for not reporting the transaction to the RBI within stipulated time. The appellant stated that the RBI was informed on 10.09.2018 about the transaction whereas it was supposed to be informed within 3 months of receipt of money. It was during the course of investigation that the appellant furnished information to the RBI.”
Ld. Counsel for the Respondent also stated that the argument of the Appellants that confiscation order could not have been issued without issuing Show Cause Notice (SCN) is erroneous. He submitted that Section 13(2) of FEMA has used the words ‘in addition to any penalty’. Therefore, no SCN is required to make confiscation, because it is merely in the nature of penalty that is leviable in addition to the pecuniary amount imposable under Section 13(1) of FEMA. Ld. Counsel therefore prayed to dismiss the Appeals.
10. We have considered the rival submissions and the material on record. We observe that the following contraventions have been found to have occurred:
a. Para 2 Schedule 1 of the Regulation 5(1) of Foreign Exchange Management (Transfer or issue of Security by a person Resident Outside India) Regulations 2000 r/w Section 6(3)(b) FEMA 1999.
b. Para 9(1)(A) of Schedule 1 of Regulation 5(1) Foreign Exchange Management (Transfer or issue of Security by a person Resident Outside India) Regulations 2000 r/w Section 6(3)(b) FEMA 1999.
c. Para 8 of Schedule 1 Regulation 5(1) of Foreign Exchange Management (Transfer or issue of Security by a person Resident Outside India) Regulations 2000 r/w Section 6(3)(b) FEMA 1999.
d. Para 9(1)(B) of Schedule 1 Regulation 5(1) of Foreign Exchange Management (Transfer or issue of Security by a person Resident Outside India) Regulations 2000 r/w Section 6(3)(b) FEMA 1999.
e. Provisions of Master Circular No. 02/2008-09 dated 1st July 2008 read with Section 6(3)(b) FEMA 1999.
11. In this regard, the relevant provisions of the Foreign Exchange Management (Transfer or issue of Security by a person Resident Outside India) Regulations 2000 are being cited as follows:
Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000
Notification No. FEMA 20 /2000-RB dated 3rd May 2000
RESERVE BANK OF INDIA
(EXCHANGE CONTROL DEPARTMENT)
CENTRAL OFFICE
MUMBAI 400 001
In exercise of the powers conferred by clause (b) of sub-section (3) of Section 6 and Section 47 of the Foreign Exchange Management Act, 1999 (42 of 1999), the Reserve Bank makes the following regulations to prohibit, restrict or regulate, transfer or issue security by a person resident outside India, namely:
1. Short title and commencement :-
(1) These Regulations may be called the Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) Regulations, 2000.
(2) They shall come into effect on the 1st day of June, 2000.
xxxxx
5. Permission for purchase of shares by certain persons resident outside India :-
(1) A person resident outside India (other than a citizen of Bangladesh or Pakistan or Sri Lanka) or an entity outside India, whether incorporated or not, (other than an entity in Bangladesh or Pakistan), may purchase shares or convertible debentures of an Indian company under Foreign Direct Investment Scheme, subject to the terms and conditions specified in Schedule 1.
(2) A registered Foreign Institutional Investor (FII) may purchase shares or convertible debentures of an Indian company under the Portfolio Investment Scheme, subject to the terms and conditions specified in Schedule 2.
(3) A non-resident Indian or an overseas corporate body may purchase shares or convertible debentures of an Indian company –
(i) on a stock exchange under the Portfolio Investment Scheme, subject to the terms and conditions specified in Schedule 3; or/and
(ii) on non-repatriation basis other than under Portfolio Investment Scheme, subject to the terms and conditions specified in Schedule 4.
(4) A non-resident Indian or an overseas corporate body or a registered FII may purchase securities, other than shares or convertible debentures of an Indian company, subject to the terms and conditions specified in Schedule 5.
Schedule I
[ See Regulation (5) (1) ]
Foreign Direct Investment Scheme
1. Purchase by a person resident outside India of equity/preference/convertible preference shares and convertible debentures issued by an Indian company
(1) A person resident outside India referred to in sub-regulation (1) of Regulation 5, may purchase shares or convertible debentures issued by an Indian company up to the extent and subject to the terms and conditions set out in this schedule.
(2) If the person purchasing the shares under this Scheme proposes to be collaborator or proposes to acquire the entire share holding of a new Indian company, he should obtain a prior permission of Central Government if he has a previous venture or tie-up in India through investment in shares or debentures or a technical collaboration or a trade mark agreement or investment by whatever name called in the same field or allied field in which the Indian company issuing the shares is engaged.
2. Automatic Route of Reserve Bank for Issue of shares by an Indian company
(1) An Indian company which is not engaged in any activity, or in manufacturing of item included in Annexure ‘A’ to this Schedule, may issue shares or convertible debentures to a person resident outside India, referred to in paragraph 1 upto the extent specified in Annexure B, subject to compliance with the provisions of the Industrial Policy and Procedures as notified by Secretariat for Industrial Assistance (SIA) in the Ministry of Commerce and Industry, Govt. of India, from time to time.
Provided that:
i) the activity of the issuer company does not require an industrial licence under the provisions of the Industries (Development & Regulation) Act, 1951 or under the locational policy notified by Government of India under the Industrial Policy of 1991 as amended from time to time.
ii) the shares or convertible debentures are not being issued by the Indian company with a view to acquiring existing shares of any Indian company.
Explanation:
A company which proposes to embark on expansion programme to undertake activities or manufacture items included in Annexure B to this schedule may issue shares or debentures out of fresh capital proposed to be issued by it for the purpose of financing expansion programme, upto the extent indicated in Annexure B, subject to compliance with the provisions of this paragraph.
(2) A trading company incorporated in India may issue shares or convertible debentures to the extent of 51 per cent of its capital, to persons resident outside India referred to paragraph 1, subject to the condition that remittance of dividend to the shareholders outside India is made only after the company has secured registration as an Export/Trading/Star Trading /Super Trading House from the Directorate General of Foreign Trade, Ministry of Commerce, Government of India, New Delhi.
(3) A company which is a small scale industrial unit and which is not engaged in any activity or in manufacture of items included in Annexure A, may issue shares or convertible debentures to a person referred to in paragraph 1, to the extent of 24% of its paid-up capital;
Provided that such a company may issue shares in excess of 24% of its paid up capital if
(a) it has given up its small scale status;
(b) it is not engaged or does not propose to engage in manufacture of items reserved for small scale sector, and
(c) it complies with the ceilings specified in AnnexureB.
(4) Notwithstanding anything contained in clause (3) an Export Oriented Unit or a Unit in Free Trade Zone or in Export Processing Zone or in a Software Technology Park or in an Electronic Hardware Technology Park may issue shares or convertible debentures to a person resident outside India referred to in paragraph 1 in excess of 24 per cent provided it complies with the ceilings specified in Annexure B.
xxxxx
8. Mode of payment for shares issued to persons resident outside India
A company in India issuing shares or convertible debentures under this Schedule to a person resident outside India shall receive the amount of consideration for such shares –
i) by inward remittance through normal banking channels, or
ii) by debit to NRE/FCNR account of the person concerned maintained with an authorised dealer/authorised bank.
9. Report by the Indian company
(1) An Indian company issuing shares or convertible debentures in accordance with these Regulations shall submit to Reserve Bank,
A) not later than 30 days from the date of receipt of the amount of consideration, a report indicating:
(i) Name and address of the foreign investors
(ii) Date of receipt of funds and their rupee equivalent
(iii) Name and address of the authorised dealer through whom the funds have been received, and
(iv) Details of the Government approval, if any.
B) not later than 30 days from the date of issue of shares, a report in form FC-GPR together with,
(i) a certificate from the Company Secretary of the company accepting investment from persons resident outside India certifying that
(a) all the requirements of the Companies Act, 1956 have been complied with;
(b) terms and conditions of the Government approval, if any, have been complied with;
(c) the company is eligible to issue shares under these Regulations; and
(d) the company has all original certificates issued by authorised dealers in India evidencing receipt of amount of consideration in accordance with paragraph 9;
(ii) a certificate from Statutory Auditors or Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.
Annexure A
(See paragraph 2)
List of activities or items for which automatic route of Reserve Bank for Investment from Persons Resident Outside India is not available
1. Banking
2. NBFC’s activities in Financial Services Sector
3. Civil Aviation
4. Petroleum including exploration/refinery/marketing
5. Housing & Real Estate Development sector for investment from persons other than NRIs/OCBs.
6. Venture Capital Fund & Venture Capital Company
7. Investing companies in Infrastructure & Service Sector
8. Atomic Energy & related projects
9. Defence and strategic industries
10. Agriculture (including plantation)
11. Print Media
12. Broadcasting
13. Postal services
Annexure B
(See paragraph 2)
Sectoral cap on Investments by Persons Resident Outside India
| Sector | Investment Cap | Description of Activity/Items/Conditions |
|---|---|---|
| 2. Housing and Real Estate | 100% | ONLY NRIs/OCBs are allowed to invest in the areas listed below: (a) Development of serviced plots and construction of residential premises(b) Investment in real estate covering construction of residential and commercial premises including business centres and offices(c) Development of townships(d) City and regional level urban infrastructure facilities, including both roads and bridges. (e) Investment in manufacture of building materials (f) Investment in participatory ventures in (a) to (e) above (g) Investment in housing finance institutions |
The relevant provisions of the RBI Master Circular No. 02/2008-09 dated 01.07.2008 states the following:
“Prohibition on investment in India
(i) Foreign investment in any form is prohibited in a company or a partnership firm or a proprietary concern or any entity, whether incorporated or not (such as Trusts) which is engaged or proposes to incorporated or not (such as Trusts) which is engaged or proposes to engage in the following activities :
(i) Business of chit fund, or
(ii) Nidhi Company, or
(iii) Agricultural or plantation activities, or
(iv) Real estate business, or construction of farm houses
(v) Trading in Transferable Development Rights (TDRs).
(ii) It is clarified that Real Estate Business does not include development of townships, construction of residential/commercial premises, roads or bridges. It is further clarified that partnership firms/proprietorship concerns having investments as per FEMA regulations are not allowed to engage in Print Media sector.
(iii) In addition to the above, investment in the form of FDI is also prohibited in certain sectors such as (Annex-2) :
(i) Retail Trading (except single brand product retailing)
(ii) Atomic Energy
(iii) Lottery Business
(iv) Gambling and Betting
(v) Agriculture (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisiculture and Cultivation of vegetables, mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations (Other than Tea plantations).”
12. It is a matter of record that Sub-Section (3) of Section 6 of FEMA was omitted vide Section 139 (C) of the Finance Act, 2015 (20 of 2015). However, the omission became effective from 15.10.2019 vide S.O. 3715(E). The contraventions occurred from 2006 to 2008 as is obvious from the date of remittances from abroad. Therefore, the provisions of Section 6 (3) of FEMA were in force at the time of the contraventions leaving no ambiguity about the applicability of the Section at that point in time.
13. The statements of Shri Naveen Patil made under the provisions of FEMA have clarified that the foreign remittances received by the Appellant Company were not in the nature of payment for purchases made from the Appellant Company, as were initially described, but were in fact investment into the Appellant Company from abroad. With respect to the first remittance of Rs. 9,46,864/- made on 08.09.2006, the statement of Shri Patil revealed that the amount was received from M/s Burrup Fertilizers Pty. Ltd. as rent in respect of the property bearing No. 1506-1509, 15th Floor, Narain Manzil, 23, Barakhamba Road, New Delhi. In this regard, the lease deed between the erstwhile owner M/s Somdatt Builders Pvt. Ltd. and M/s Burrup Fertilizers Pty. Ltd. was produced during the course of investigation. Further four remittances totaling Rs. 1,70,01,338.90 received on 13.03.2008, 02.12.2008, 05.12.2008 and 17.12.2008 were received from M/s Inter Gulf Chemical/Detergent Factory, Dubai were also subsequently clarified as being FDI remittances for which intimation was not sent to the RBI within the prescribed one month. In fact, the shares against these remittances were issued on 09.03.2016, after eight years, to Smt. Prema Radhakrishnan. We also find that there is no dispute about of the delay in intimation to the RBI either about the receipt of the foreign remittances for the investment or about the issuance of the shares against such remittances. Therefore, there were clear contraventions of Paragraph 9(1)(A) and Paragraph 9(1)(B) of Schedule-I of Regulation 5(1) of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulation, 2000. Further defence taken by the Appellants is that the compliance with respect to the provision for intimation about the receipt of the Foreign Direct Investment (FDI) and issuance of the shares against such receipts was ultimately met. It has therefore been argued that the delay in meeting such compliance was merely technical and venial. The Appellants have cited the Judgment of the Hon’ble Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa [1969 (2) SCC 627].
14. We cannot agree with the contentions of the Appellants. In this regard, the Judgment dated 23.05.2006 of Hon’ble Supreme Court in the matter of The Chairman, SEBI vs. Shriram Mutual Fund & Ors. [(2006) 5 SCC 361] states in paragraph 35:
“In our considered opinion, penalty is attracted as soon as the contravention of the statutory obligation as contemplated by the Act and the Regulation is established and hence the intention of the parties committing such violation becomes wholly irrelevant. A breach of civil obligation which attracts penalty in the nature of fine under the provisions of the Act and the Regulations would immediately attract the levy of penalty irrespective of the fact whether contravention must be made by the defaulter with guilty intention or not. We also further held that unless the language of the statute indicates the need to establish the presence of mens rea, it is wholly unnecessary to ascertain whether such a violation was intentional or not.”
15. The provisions of Section 13(1) and (2) of FEMA are as follows:
“(1) If any person contravenes any provision of this Act, or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorisation is issued by the Reserve Bank, he shall, upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or up to two lakh rupees where the amount is not quantifiable, and where such contravention is a continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues.
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(2) Any Adjudicating Authority adjudging any contravention under sub-section (1), may, if he thinks fit in addition to any penalty which he may impose for such contravention direct that any currency, security or any other money or property in respect of which the contravention has taken place shall be confiscated to the Central Government and further direct that the foreign exchange holdings, if any, of the persons committing the contraventions or any part thereof, shall be brought back into India or shall be retained outside India in accordance with the directions made in this behalf.”
We thus find that there is nothing in the Section which can indicate directly or indirectly requirement of mens rea. Words like “willful”, “deliberately”, “intentionally” etc. are missing. The Hon’ble Supreme Court in the Judgment supra have cited the Judgment in Director of Enforcement vs. MCTM Corporation Pvt. Ltd. and Ors. [MANU/SC/0300/1996], 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 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. His Lordships have clarified that the case of Hindustan Steel Ltd. vs. State of Orissa (supra) 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.
16. The Appellants have strongly contested the confiscation of the property at Mezzanine Floor of Narain Manzil, 23, Barakhamba Road, New Delhi under Section 13(2) of FEMA. The provisions of Section 13(2) of FEMA allow the Adjudicating Authority, if it thinks fit that in addition to the penalty imposed, confiscation be ordered of the property in respect of which the contravention has occurred. It is obvious from the language of Section 13(2) of FEMA that the penal action of confiscation of the property involved in the contravention is in addition to the pecuniary penalty imposed under Section 13(1) of FEMA. The Order of confiscation has been left to the discretion of the Adjudicating Authority which necessarily is to be exercised judiciously. It therefore follows that the Order of confiscation is not mandatory and shall depend upon the facts and circumstances of each case. On examination of the facts and the circumstances of the present case, it is clear that out of the total foreign remittances of Rs. 4.13 Crores an amount of Rs. 3.28 Crores was utilized towards acquisition of the immovable property. We observe that during the investigation, Shri Naveen P. Patil had stated that the amount was invested by way of FDI in M/s ATPL by M/s New Glory International Investment Ltd (NGIIL). For his corroboration, he submitted three letters dated 11.01.2009, 12.11.2008 and 10.12.2008 from M/s. New Glory International Investment Ltd. M/s NGIIL had expressed their interest to invest one million USD for purchase of a commercial property. Vide letter dated 10.12.2008 M/s NGIIL reconfirmed their interest to acquire a property at Barakhamba Road. Vide letter dated 11.01.2009 M/s NGIIL referred to the remittance that they had remitted vide their associates M/s Ringgold Consulting Inc. of Singapore and requested that the shares should be allotted to M/s NGIIL and not in the name of M/s Ringgold Consulting Inc. of Singapore. The provisions of FEMA do not allow that the shares could have been issued to any third party. From the above-mentioned circumstances, it is clear that the Appellant Company had contravened the provisions of FEMA by trying to issue shares to M/s NGIIL even though the remittance was made by M/s Ringgold Consulting Inc., Singapore. Further, the Appellant has also used amount in the restricted sector of real estate by acquiring the property at Barakhamba, New Delhi. It is also to be noted that while the remittance was received on 29.12.2008, the shares were issued to M/s NGIIL on 14.12.2009. Thus, there was not only contravention of Paragraph 9(1)(B) of Schedule-I of Regulation 5(1) of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulation, 2000, but also of RBI Master Circular No. 02/2008-09 dated 01.07.2008 read with Paragraph 2 of Schedule-I of Regulation 5(1) of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulation, 2000. We also find that since the remittance had come from the third party and shares were allotted to M/s NGIIL, the transactions occurred in contravention of Paragraph 8 of Schedule-I of Regulation 5(1) of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulation, 2000. In view of these reasons the impugned property has been judiciously confiscated by the Ld. AA in the OIO and fairly upheld by the Ld. Special Director (Appeals) FEMA in the Impugned Order.
17. We find that the individual Appellant Smt. Prema Radhakrishnan never held a position which made her in-charge and responsible for the conduct of the business of the Appellant Company. The Respondent has been unable to unearth any evidence to this effect. We also observe that she was allotted the shares against the remittance received from M/s Inter Gulf Chemical/Detergent Factory, Dubai in place of her deceased husband. In fact, in spite of gap in between the other individual Appellant Shri Naveen Patil had held the position of Director in the Company. Moreover, he in his statements has admitted his role in managing the affairs of the Company. Shri Patil has not been able to bring forth that the contraventions occurred without his knowledge and that he exercised all due diligence to prevent such contraventions. Shri Patil in his statements revealed initial wrong declarations made to the Banks about the purpose of the remittances.
18. Ld. Counsel for the Appellants has argued that the penalty imposed on the three Appellants are heavy and burdensome. He pleaded to make the penalties proportionate. We therefore reduce the penalty on the Appellant Company to Rs. 50,00,000/- under Section 13(1) of FEMA and confiscate the impugned property at Mezzanine Floor of Narain Manzil, 23, Barakhamba Road, New Delhi under Section 13(2) of FEMA. We reduce the penalty on the individual Appellant Shri Naveen Patil to Rs. 5,00,000/-. We set aside the penalty order against the individual Appellant Smt. Prema Radhakrishnan.
18. In view of the aforementioned discussions and analysis, we partly allow the Appeal No. FPA-FE-92/DLI/2022 filed by M/s Archana Traders Pvt. Ltd. and we partly allow the Appeal No. FPA-FE-96/DLI/2022 filed by Shri Naveen Patil. We allow the Appeal No. FPA-FE-95/DLI/2022 filed by Smt. Prema Radhakrishnan. Applications pending, if any, are disposed of accordingly.
