West Bridge Ventures II LLC Vs Directorate of Enforcement (Appellate Tribunal under SAFEMA, New Delhi)
FEMA Penalty Reduced from ₹3.72 Crore to ₹92.94 Lakh as Tribunal Finds It Disproportionate
Summary: The Appellate Tribunal under SAFEMA, New Delhi, has reduced a FEMA penalty imposed on West Bridge Ventures II LLC from ₹3,71,77,000 to ₹92,94,250, holding that the original penalty was grossly irrational and disproportionate to the facts.
In West Bridge Ventures II LLC v. Directorate of Enforcement, Chennai, Appeal No. FPA-FE-29/CHN/2023, decided on 4 November 2026, the Tribunal upheld the finding of contravention concerning subscription to rights shares. However, it restricted the penalty to 25% of the amount involved, considering the disclosed banking transactions and the absence of earlier enforcement action.
Background: Equity Investment Followed by Rights Subscription
The appellant acquired 33,600 equity shares of Vasan Health Care Private Limited from its director, Dr. A.M. Arun, under a share purchase agreement dated 21 October 2010.
The purchase price was ₹7,500 per share, aggregating to ₹25.20 crore. Payment was made on 27 October 2010.
On 1 November 2010, the appellant entered into a profit-sharing agreement with Dr. Arun and certain other investors and shareholders. Under the arrangement, if a future third-party transfer generated an internal rate of return exceeding 30%, part of the excess profit would be shared with the sellers.
In May 2014, the appellant participated in a rights issue and subscribed to 1,66,177 Series E compulsorily convertible preference shares (CCPS) and 2,05,593 Series F CCPS. The total subscription amounted to ₹3,71,77,000.
Enforcement Directorate Imposed an Equivalent Penalty
The Special Director, Directorate of Enforcement, imposed a penalty equal to the rights subscription amount through an order dated 6 January 2023.
The contravention concerned Section 6(3)(b) of FEMA, as applicable to the transactions, read with Regulations 3 and 6(2)(iii) of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000.
The appellant challenged both the finding of contravention and the resulting penalty before the Tribunal under Section 19 of FEMA.
Appellant Contested the Alleged Regulatory Breach
The appellant maintained that both its original acquisition and the subsequent rights subscription complied with the applicable regulations.
It also disputed reliance on the profit-sharing agreement. According to the appellant, the arrangement was contingent, no third-party sale occurred, no profit was realised and no payment became payable under it. The company subsequently entered insolvency.
The appellant further argued that it had not received a notice alleging contravention of Regulation 10(A)(d) concerning the alleged deferred-payment arrangement.
Other objections included alleged unequal treatment compared with similarly placed noticees and non-supply of the adjudicating authority’s opinion under Rule 4(3) of the adjudication rules.
Rights Subscription Depended on Compliance of Existing Holding
The Tribunal’s principal reasoning concerned Regulation 6(2)(iii).
Under that provision, the existing shares against which rights securities were offered had to have been acquired and held in accordance with the regulations.
The Tribunal found that the record did not demonstrate compliance with the permission requirement under the second proviso to Regulation 3 for the original acquisition of 33,600 shares.
Consequently, it held that the subsequent rights subscription could not be treated as compliant with Regulation 6(2)(iii).
The Tribunal clarified that the penalty under appeal concerned the 2014 rights subscription. The original acquisition was examined to determine whether the regulatory condition governing that subscription had been satisfied.
Accordingly, it sustained the finding of contravention.
Objection Regarding Non-Supply of Opinion Rejected
The appellant relied on Shashank Vyankatesh Manohar v. Union of India to challenge non-supply of the opinion recorded for proceeding with the inquiry.
The Tribunal examined that decision and Rule 4(3). It noted that the relevant safeguard concerned consideration of objections and disclosure of recorded reasons when sought in the circumstances explained by the precedent.
On the record before it, the Tribunal found nothing showing that the appellant had raised objections upon issuance of the notice under Rule 4(1). It therefore rejected this procedural challenge.
Banking Trail and Earlier Inaction Supported Penalty Reduction
Although the contravention survived, the Tribunal took a different view of the quantum of penalty.
It noted that all transactions had taken place through banking channels and had not been suppressed. There was also a substantial interval between the original acquisition in 2010 and the rights subscription in 2014.
The Tribunal observed that the respondent should have acted on the original acquisition. Against that background, imposing a penalty equal to the entire subsequent rights investment was grossly irrational and disproportionate.
It reduced the penalty to ₹92,94,250, being 25% of ₹3,71,77,000, and partly allowed the appeal.
The decision illustrates that a sustained FEMA contravention does not automatically justify a penalty equal to the transaction value. The surrounding circumstances remain relevant to determining a proportionate penalty.
Cases Discussed
- Shashank Vyankatesh Manohar Vs Union of India (Bombay High Court); Writ Petition No. 5305 of 2013; 07/08/2013; (2014) 1 Mah LJ 838; 2013 (5) ALL MR 551. Relied upon by the appellant concerning the adjudicating authority’s obligation to record reasons and supply its opinion under Rule 4(3). The Tribunal reproduced paragraph 21 and held that the procedural challenge was not established on the facts. See also TaxGuru’s discussion of the precedent and the Rule 4(3) procedure and SAFEMA Tribunal’s discussion of the same precedent.
FULL TEXT OF THE ORIGINAL ORDER OF APPELLATE TRIBUNAL UNDER SAFEMA AT NEW DELHI
By way of this appeal under Section 19 of the Foreign Exchange Management Act, 1999 (in short “the Act of 1999”), a challenge has been made to the order dated 06.01.2023 passed by the Special Director, Directorate of Enforcement imposing penalty of Rs.3,71,77,000/- for contravention of Section 6(3)(b) of the Act of 1999 and Regulations 3 and 6 (2)(iii) of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India), Regulations, 2000 (hereinafter referred to as “Regulations of 2000”)
Brief facts of the case:
2. It is a case where the respondent filed a complaint before the Adjudicating Authority against 10 persons/entities finding contravention of the provisions of the Act of 1999 and the regulations made thereunder. So far as the appellant is concerned, allegation against the entity was in regard to its investment in the shares of M/s Vasan Health Care Private Limited (in short “M/s VHCPL”). It was alleged that the appellant acquired 33,600 equity shares from Dr. A.M. Arun (Director of M/s VHCPL) under a Share Purchase Agreement dated 21.10.2010. The purchase of shares was at the rate of Rs.7,500 per share, for an aggregate consideration of Rs.25,20,00,000/-. The consideration towards the purchase of shares was paid by the appellant to Dr. Arun on 27.10.2010. Five days after acquisition of 33,600 shares, the appellant executed Profit-Sharing Agreement with Dr. Arun and certain other investors and shareholders of M/s VHCPL on 01.11.2010. The Profit-Sharing Agreement contemplated a clause that if shares held by the appellant are transferred to a third party and if the aggregate internal rate of return realized by the appellant exceeds 30% of the relevant invested amount, a portion of such excess profit amount would be transferred to the sellers, which includes Dr. Arun under the Profit-Sharing Agreement. In the month of May, 2014, the appellant participated in the rights issue by M/s VHCPL and subscribed for 1,66,177 Series E compulsorily convertible preference shares (in short “CCPS”) for a sum of Rs.1,66,17,700/- and 2,05,593 Series F CCPS for a sum of Rs.2,05,59,300/- total amounting to a sum of Rs.3,71,77,000/-.
3. The respondent found contravention of the provisions of the Act of 1999 and the Regulations of 2000 and accordingly caused a Show Cause Notice to the appellant. After providing a proper opportunity of hearing to the parties, the impugned order was passed imposing penalty of Rs.3,71,77,000/- on the appellant. Aggrieved by the aforesaid, the present appeal has been preferred.
Arguments of counsel for the appellant:
4. The learned counsel for the appellant submitted that a complaint was filed by the respondent before the Adjudicating Authority in relation to the investment in shares of M/s VHCPL alleged to be in contravention of the provisions of the Act of 1999 and the Regulations of 2000. The contest to the allegation was made disclosing several dates for acquisition of shares and other arrangements to show that the appellant has not contravened Section 6(3)(b) of the Act of 1999 and Regulations 3 and 6 (2)(iii) of the Regulations of 2000. However, ignoring the facts disclosed by the appellant, the impugned order was passed alleging contravention of the provisions referred to above, involving a sum of Rs.3,71,77,000/-, penalty of the equivalent amount was imposed.
5. The learned counsel for the appellant submitted that so far as the initial acquisition of shares of M/s VHCPL in the year 2010 is concerned, there was no contravention of the provisions of the Act of 1999 and the Regulations of 2000. It was not even in regard to the issuance of Series E CCPS and also of Series F for a sum of Rs.3,71,77,000/-. The issuance of the CCPS was in consonance to the Act of 1999 and the Regulations of 2000 yet an allegation of breach of Section 6(3)(b) of the Act of 1999 and Regulations 3 and 6 (2)(iii) of the Regulations of 2000 were made erroneously and has been accepted by the competent authority below.
6. The learned counsel for the appellant while referring to the Profit-Sharing Agreement dated 01.11.2010 submitted that after the said Agreement, no transaction took place and accordingly, an order for imposing penalty in reference to it was wholly illegal taking it to be a case of deferred payment and otherwise, the appellant was not served with a notice alleging contravention of Regulation 10(A)(d) of the Regulations of 2000. Thus, there was no jurisdiction to the Adjudicating Authority to impose penalty in reference to the provisions aforesaid and thus, for the aforesaid reason also, the impugned order deserves to be set aside. It is more so when the subsequent Profit-Sharing Agreement was executed in consonance to the provisions of the Indian Contract Act, 1872. A contingent contract would not take effect unless a contingency happens. In the instant case, no follow-up transaction took place after entering into Profit Sharing Agreement so as to hold a contingent contract or an arrangement for deferment of payment of the consideration amount. In view of the above also, a case is not made out against the appellant for contravention of the provisions of the Act of 1999 and the Regulations of 2000.
7. The learned counsel for the appellant further submitted that when 33,600 shares were never transferred to the third party, no profit was ever realized and even no amount was paid under the Profit-Sharing Agreement. Even otherwise, M/s VHCPL went under insolvency, the question of deferment of the payment of consideration could not have arisen. The Profit-Sharing Agreement extinguished without any transaction, thus issue of contingent liability could not have been taken up and otherwise was not an issue specifically taken against the appellant. The Show Cause Notice was caused to the appellant only in reference to aggregate 3,71,770 CCPS comprising 1,66,177 Series E CCPS and 2,05,593 Series F CCPS. The Special Director committed an error to make the reference of Profit-Sharing Agreement and consequence arising out of it. Thus, for the aforesaid reasons also, the impugned order deserves to be set aside.
8. The further argument of the appellant was in reference to the alleged contravention of Section 6(3)(b) of the Act of 1999. It was submitted that the acquisition of 33,600 equity shares was in accordance with the Regulations of 2000. Since the appellant had acquired the shares lawfully, subsequent subscription of series E and F CCPS could not have been taken in contravention to the Regulations of 2000.
9. Coming to the next issue, the learned counsel for the appellant submitted that discrimination has been caused by the Special Director between the similarly placed entities. Against the appellant, an order imposing the penalty was passed while against Noticee Nos.4 and 5, no such order was passed despite similar allegations. Therefore, the Special Director caused discrimination while passing the impugned order.10. Coming to the last issue, the learned counsel for the appellant submitted that despite a request by the appellant for supply of the copy of the opinion recorded under Rule 4(3) of the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000, it was not supplied. Therefore, the procedure adopted for adjudication of the complaint is to be faulted. The counsel made a reference of the judgment of the Hon’ble Bombay High Court in the case of Shashank Vyankatesh Manohar Vs. Union of India reported in (2014) 1 Mah LJ 838 as well as the Technical Circular No. 11/2024 dated 26.09.2014 issued by the Directorate of Enforcement.
11. With the aforesaid, the learned counsel for the appellant concluded his arguments though he was invited to raise any other legal or factual issue other than what has been referred to above. The learned counsel for the appellant shown his satisfaction to the arguments raised by him for pressing the appeal and closed his arguments.
Arguments of counsel for the respondent:
12. The learned counsel for the respondent contested the appeal. Elaborate arguments were made on each issue raised by the counsel for the appellant and would be referred while recording the finding. It is to avoid repetition of facts and otherwise for the sake of brevity.
Finding of the Tribunal:
13. I have considered the rival submissions of the parties and scanned the record carefully.
14. In the opening paras of this order, I have given reference of the relevant facts of the case. The complaint discloses purchase of 33,600 equity shares by the appellant from Dr. Arun under the Share Purchase Agreement dated 21.10.2010. The purchase of shares was at the rate of Rs.7500 per share, for an aggregate consideration of Rs.25,20,00,000/-. Five days after payment of consideration, the appellant entered into the Profit-Sharing Agreement with Dr. Arun and certain other investors, apart from shareholders of M/s VHCPL. In May, 2014, the appellant participated in the rights issue of M/s VHCPL and subscribed 1,66,177 Series E CCPS for a sum of Rs.1,66,17,700/- and 2,05,593 shares of F Series CCPS for a sum of Rs.2,05,59,300/-. The total amount came to Rs.3,71,77,000/-. The aforesaid has been taken to be in contravention of Section 6(3)(b) of the Act of 1999 and Regulations 3 and 6 (2)(iii) of the Regulations of 2000. The penalty of equivalent amount has been imposed by the authority below.
15. The repealed Section 6(3)(b) of the Act of 1999, apart from Regulations 3 and 6 (2)(iii) of the Regulations of 2000 are quoted hereunder for ready reference:
“Section 6 FEMA – Capital account transactions“
(3) – Without prejudice to the generality of the provisions of sub-section (2), the Reserve Bank may, by regulations, prohibit, restrict or regulate the following:-
(b) transfer or issue of any security by a person resident outside India.”
“Regulation 3 – Restriction on issue or transfer of security by a person resident outside India” Save as otherwise provided in the Act, or rules or regulations made thereunder, no person resident outside India shall issue or transfer any security:
Provided that a security issued prior to, and held on, the date of commencement of these regulations, shall be deemed to have been issued under these regulations and shall accordingly be governed by these regulations:
Provided further that the Reserve Bank may, on an application made to it and for sufficient reasons, permit a person resident outside India to issue or transfer any security, subject to such conditions as may be considered necessary.”
“Regulation 6 – Acquisition of right shares
(2) An Indian company which satisfies the following conditions, may offer to a person resident outside India, equity or preference shares or convertible debentures on right basis, namely:
(iii) The existing shares or debentures against which shares or debentures are issued by the company on right basis were acquired and are held by the person resident outside India in accordance with these regulations.”
16. The reference of the relevant provisions has been given to deal with the argument raised by the counsel for the appellant. It was stated that no contravention of the Act of 1999 and even of the Regulations of 2000 has taken place. It is after acquiring 33,600 equity shares of M/s VHCPL from Dr. A.M. Arun and subsequent acquisition of 3,71,700 CCPS in the year 2014. It is said to be in accordance with the provisions of the Act of 1999 and the Regulations of 2000.
17. To analyze the issue, I have gone through Regulations 3 and 6(2)(iii) of the Regulations of 2000 quoted above. As per the Regulations quoted above and second proviso to Regulation 3, issuance and transfer of security is subject to permission of the RBI on an application made for it. The acquisition of shares should be thus in consonance to the second proviso to Regulation 3 of the Regulations of 2000. If the initial acquisition of shares is not in consonance to the Regulation, rather in contravention to Regulations of 2000, then subsequent acquisition of convertible shares on right basis would also be in contravention of Regulation 6(2)(iii) of the Regulations of 2000. It is for the reason that the acquisition of convertible shares on right basis would be permissible if the existing shares issued by the company were in accordance with the Regulations of 2000. The perusal of the record does not show acquisition of 33,600 shares by the appellant by complying to the second proviso to Regulation 3 of the Regulations of 2000. I am conscious of the fact that a penalty amount in reference to the aforesaid has not been imposed, rather it is in reference to the issuance of shares (CCPS) on right basis and accordingly the first limb for acquisition of 33,600 shares has been referred to find out whether those shares were acquired in accordance with Regulation 3 and if not then subsequent acquisition of CCPS on right basis cannot be considered to be in consonance with the Regulations of 2000. In the light of the facts given above, I do not find any error in the impugned order holding contravention of Section 6(3) of the Act of 1999 and Regulation 6(2)(iii) of the Regulations of 2000 in regard to the acquisition of 3,71,770 shares on rights basis.
18. The counsel for the appellant has alleged non-compliance of Rule 4(3) of the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000. It was submitted that the opinion formed by the competent authority was not supplied to the appellant and, therefore, the procedure given under the Rules of 2000 was not followed. To support the argument, a reference of the judgment of Hon’ble Bombay High Court in the case of Shashank Vyankatesh Manohar (supra) was given. Rule 4(3) of the Rules of 2000 is quoted hereunder for ready reference:
“4. Holding of inquiry
(1),
(2)….
(3) After considering the cause, if any, shown by such person, the Adjudicating Authority is of the opinion that an inquiry should be held, he shall issue a notice fixing a date for the appearance of that person either personally or through his legal practitioner or a chartered accountant duly authorised by him. __”
The perusal of Rule 4(3) of the Rules of 2000 and the judgment of the Hon’ble Bombay High Court in the case of Shashank Vyankatesh Manohar (supra) would make it clear that a copy of the opinion to be served only in a given case. The relevant para of the judgment in Shashank Vyankatesh Manohar (supra) are quoted hereunder:
“21. Thus, in view of the above discussion, we are of the view that Adjudicating Authority after issuing show cause notice and receiving objections to the notice from the noticee, is required to apply his mind to the objections by recording his reasons for forming an opinion on the file. This exercise need not be preceded by personal hearing and the order to be passed on the objections is not required to be detailed order, but it must disclose some link with the objections raised by the noticee and the opinion formed by the Adjudicating Authority. This recording of the opinion of the Adjudicating Authority would be given to the noticee when the proceedings are dropped in the form of an order. However, in cases where the opinion is formed to proceed further with the show cause notice, then a notice for personal hearing is required to be given to the party in terms of Rule 4 of the Adjudication Rules. However, if on receipt of the notice for personal hearing, the recorded reasons are sought for by the noticee, the same should be given. However, this recording of reasons is not an appealable order but it would give the noticee a chance during adjudication proceedings to meet the reasons which led the Adjudicating Authority to form an opinion that he must proceed further with the inquiry against noticee. This would only result in fair procedure which would be in consonance not only with Rule 4 of the Adjudication Rules but with principles of natural justice”.
19. The perusal of the judgment would reveal that on issuance of show cause notice by the Adjudicating Authority, if the objections are submitted by the noticee and the copy of the opinion is sought, then a copy of the opinion is required to be served. In the instant case, there is nothing on record to show objection being raised by the appellant on issuance of notice by the Adjudicating Authority under Rule 4(1) of the Rules of 2000. In absence of an objection, there is no mandate to serve a copy of the opinion thus a case in consonance to Rule 4(3) of the Rules of 2000 and the judgment of the Bombay High Court in the case of Shashank Vyankatesh Manohar (supra) is not made out.
20. The challenge to the order has been made alleging that the appellant has not contravened any of the provisions of the Act of 1999 and the Regulations of 2000 either while acquiring 33,600 equity shares of M/s VHCPL from Dr. Arun for a consideration of Rs.25,20,00,000/- or even while subsequently entering into Profit-Sharing Agreement soon after the purchase of 33,600 equity shares of M/s VHCPL. The appellant thereupon acquired 3,71,770 CCPS in the year 2014. It was again in accordance with the provisions of the Act of 1999 and the Regulations of 2000.
21. The issue aforesaid has been examined by the Special Director in the impugned order. The finding has been recorded that the purchase of E and F Series shares for a sum of Rs.3,71,77,000/- in two trenches was in contravention of Section 6(3)(b) of the Act of 1999 read with Regulations 3 and 6 (2)(iii) of the Regulations of 2000. The allegation was examined after considering the reply filed by the appellant on 07.10.2017 stating that CCPS were rightly offered to the appellant in May, 2014 against the existing equity shares.
22. The finding has been recorded in regard to the contravention referring to the facts of the case. It is more particularly in reference to Regulation 3 and 6(2)(iii) of the Regulations of 2000. Second proviso to Regulation 3 permits acquisition of shares. However, it has to be on an application to the RBI to permit acquisition, which does not exist in the present case. It has a consequence, as given in Regulation 6(2)(iii) of the Regulations of 2000 on allotment of rights shares. I, however, find that all the transactions were through the banking channel and with the time gap because the initial acquisition of shares was in the year 2010 while the rights shares were issued in the year 2014. The respondent should have taken action on the issuance of 33,600 shares in the year 2010, but in absence of an action, rights equity shares were issued in the year 2014 and are subjected to penalty of Rs.3,71,77,000/-. It is grossly irrational and disproportionate to the facts of the case. The appellant had otherwise not suppressed the transactions, rather it remained through the banking channel.
23. In view of the above, I reduce the penalty of Rs.3,71,77,000/- to 25% of the amount involved in this case. The resulted penalty comes to Rs.92,94,250/-. The appeal is partly allowed with the aforesaid.
