As you are aware that the history of exchange control laws in India goes back to year 1939, when the law relating to exchange control was introduced for th first time as a war measure under the defense of Indian Rules. It was subsequently place on statutory basis by the Foreign Exchange Regulation Act, 1947, then FERA, 1947 has been replaced by FERA, 1973. The main purpose of FERA, Act 1973 is to regulate Foreign Exchange Transactions and to check and prohibit export of Foreign Export from India. All offenses under FERA was considered as criminal offense and heavy penalty of imprisonment were prescribed in the Act, 1973. The main intention of the government through FERA, 1973 is to prohibit and check Foreign Exchange Transaction and keep Foreign Exchange Reserves of India intact.
The main purpose of FERA, 1973 was “ An act to consolidate and amend the law regulating certain payments, dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency, for conservation of the foreign exchange resources and proper utilization thereof in the interest and economic development of the country.
The FERA, 1973 begun with negative presumption approach, that everybody is guilty unless proved innocent. According to Section 24 of FERA, 1947 the burden of proof that a person had requisite permission or the foreign exchange acquired by him had been used for the purpose for which permission was granted rested with him. Under FERA there was “ Presumption of Culpable Mental State”, that every person is presumed to be guilty till he proved innocent. These strict restriction were prohibiting foreign exchange earning in India, affects export from and import in India and hence lesser foreign exchange reserve for development of India.
The implementation of FEMA, 1999 was a paradigm shift in the handling and management of foreign exchange, the object of FEMA, 1999 is “ facilitating external trade and payment for promoting the orderly development and maintaining of foreign exchange markets in India.”
Now FEMA, 1999 is a Civil Law, whereas FERA, 1973 was a Criminal Law. The shift from FERA to FEMA was shift of control of foreign exchange to regulation and promotion and orderly development of foreign exchange market in India. The FEMA is a forward looking act and there is no conception of “ Presumption of Culpable Mental State”. Under FEMA, 1999.
The FEMA, 1999 provides rules and regulations for orderly development of Foreign Exchange Market in India, the act has came with various types of Schemes, such as Liberalized Remittance Scheme for Individuals and others schemes for corporates and other entities. It’s main emphasis is to regulate the export and import and to facilitate the exporter and imports by providing an environment so to increase Foreign Exchange Reserves of India.
There are lots of cases whether companies have tried to flout the FEMA provisions and FDI Policies at their whim and fancies and created the structures to bring in illegitimate money by showcasing it as FDI. There are many case in which black or illegitimate money from abroad sent to India though FDI mode.
LET’S CONSIDER RAJASTHAN ROYALS CASE
FACTS: M/s. Jaipur IPL Private Limited (JIPL) an Indian private limited company, incorporated under provisions of the Companies Act, 1956 in March, 2008. The JIPL is fully owned by EM Sporting Holdings. It is a company, which has been floated “Rajasthan Royals”. The JIPL won the first edition of IPL in 2008. The money was paid from the personal account of Mr. Manoj Badale. The corporate structure was established in accordance with details provided in the bid submission shortly after the bid. It was not established prior to bid. Subsequently on March, 2008 the money was shown as received as FDI in the Company.
The FDI money as claimed did not come into account of the Company and company was incorporated after money came in India. The money actually came into account of Mr. Manoj Badale, who had made the initial payment to BCCI. Mr. Manoj Badale was director for the UK based Emerging Media (IPL), and owned 32.4% stake in JIPL.
In this case the Enforcement Directorate (ED) issued show-cause notices to Jaipur based franchise of the IPL Cricket team Rajasthan Royals for alleged violation of FEMA in April, 2011. The notice was issued by the ED, Mumbai Office . The ED alleged in show-cause notices that JIPL had contravened provisions of FEMA by receiving funds from abroad e illegally. The ED investigations discovered that JIPL was formed in March, 2008, but the initial payment to BCCI in India was made by Mr. Manoj Badale, through his personal account, on behalf of the consortium of investors led by Emerging Media( IPL) Limited.
CONTRAVENTION UNDER FEMA: Under FEMA, a Non-Resident (NRI) can make investment in India as per Section 6 of the FEMA, 1999 read with regulation FEM( Transfer or issue of security by a person resident outside India) Regulation, 2000*. An NRI can remit money to a company for issue of shares normal banking channels or by debit to NRE/FCNR(B) account.
However in this case, it was found that, the company did not exist, when money came to india, even the company had not incorporated. The money came into individual account of Mr. Manoj Badale, who made the initial payment to BCCI . They flouted the FEMA Regulations by bringing in funds by improper channels and they trying to show the funds as FDI. On further investigation it was clear that the funds were flown from UK and the Mauritius.
The ED against show cause notice imposed a penalty of Rs. 100 Crores.
THE APPELLATE TRIBUNAL
The JIPL has filed case against order of ED before Appellate Tribunal and the Appellate Tribunal has upheld FEMA violation charges against Rajasthan Royals promoters in connection with payment of Rs 33 crore made to the Board of Control for Cricket in India (BCCI) for bidding of IPL franchise. However, it reduced penalties imposed on the entities involved and struck down penalties on individual directors in the entities linked to promoters of the IPL franchise.
The tribunal which hears appeals against orders passed by FEMA court accepted the Enforcement Directorate’s (ED) contention that in each of the three tranches of payments made to BCCI, the payments were made by people or entities different from the investor, a Mauritius based entity, to which the shares were supposed to be issued.
The tribunal noted that correspondences exchanged with a Big 4 consulting firm showed that the arrangement was made to route the investment through Mauritius, but the funds were actually coming into India from the United Kingdom, which is not allowed.
It also based its order on the fact that the Reserve Bank of India (RBI) and Foreign Investment Promotion Board (FIPB) twice rejected the application of Rajasthan Royal promoters for issuance of shares. The tribunal also took into account the fact that the company could not provide satisfactory proof of receipt of foreign exchange to FIPB.
However, the tribunal gave respite to many individual directors associated with the entities linked to Rajasthan Royal promoters by striking down the penalties imposed on them by ED. It held that the ED failed to prove that these individuals were involved in day-to-day management of either the Indian or Mauritian entities at the time the alleged violations were committed by these entities in 2008. It noted that mere fact that individuals are directors in a company cannot be the sole basis for imposition of penalty.
Terming the FEMA violations in the case as ‘technical’ and ‘venial’ at best, the tribunal calls the imposition of a huge three times penalty to the tune of Rs 98 Crore on the IPL franchise as untenable and unsustainable, and reduced the same to Rs 15 crore.
1. SECTION 6 OF FEMA, 1999.
Capital account transactions.—
(1) Subject to the provisions of sub-section (2), any person may sell or draw foreign exchange to or from an authorised person for a capital account transaction. —(1) Subject to the provisions of sub-section (2), any person may sell or draw foreign exchange to or from an authorised person for a capital account transaction.”
(2) The Reserve Bank may, in consultation with the Central Government, specify—
(a) any class or classes of capital account transactions which are permissible;
(b) the limit up to which foreign exchange shall be admissible for such transactions: Provided that the Reserve Bank shall not impose any restriction on the drawal of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments in the ordinary course of business.
(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:—
(a) transfer or issue of any foreign security by a person resident in India;
(b) transfer or issue of any security by a person resident outside India;
(c) transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India;
(d) any borrowing or lending in foreign exchange in whatever form or by whatever name called;
(e) any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India;
(f) deposits between persons resident in India and persons resident outside India;
(g) export, import or holding of currency or currency notes;
(h) transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India;
(i) acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India;
(j) giving of a guarantee or surety in respect of any debt, obligation or other liability incurred, —
(i) by a person resident in India and owed to a person resident outside India; or
(ii) by a person resident outside India.
(4) A person resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India.
(5) A person resident outside India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India.
(6) Without prejudice to the provisions of this section, the Reserve Bank may, by regulation, prohibit, restrict, or regulate establishment in India of a branch, office or other place of business by a person resident outside India, for carrying on any activity relating to such branch, office or other place of business.
2. Regulation 5 of FEM( Transfer or issue of security by a person resident outside India) Regulation, 2000
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.
DISCLAIMER: the case law produced here is only for information and knowledge of readers. The views expressed here are the personal views of the author and same would not be considered as professional advice. In case of necessity do consult with professionals.