FDI Condition Breach Upheld, Tribunal Cuts Penalty in Real Estate Project Case

Alliance Buildwell Projects Pvt. Ltd. Vs Directorate of Enforcement (Appellate Tribunal Under Safema At New Delhi)

FDI Condition Breach Upheld, Tribunal Cuts Penalty in Real Estate Project Case

The Appellate Tribunal under SAFEMA upheld the finding that M/s Alliance Buildwell Projects Pvt. Ltd. and its directors violated FEMA provisions by failing to meet the mandatory FDI condition of developing at least 50% of a real estate project within five years of statutory approval. Despite receiving approximately ₹43.84 crore in foreign investment, the company completed only about 18% of the project within the stipulated period.

The Tribunal rejected key defenses, holding that:

• Omission of Section 6(3)(b) of FEMA in 2015 does not extinguish liability for earlier contraventions.
• Commercial difficulties or delays do not absolve non-compliance with mandatory FDI conditions.
• Directors in charge of the company’s affairs are liable under Section 42.

However, the Tribunal noted that the funds were received through proper banking channels, remained invested in the project, and there was no diversion or mala fide intent. The violation was regulatory in nature rather than fraudulent.

Accordingly, while confirming the contravention, the Tribunal reduced the penalty from ₹10 crore to ₹5 crore on the company and from ₹1 crore each to ₹50 lakh each on the directors, partly allowing the appeals on the question of quantum

FULL TEXT OF THE ORDER OF APPELLATE TRIBUNAL UNDER SAFEMA AT NEW DELHI

By these batch of appeals, a challenge has been made to the order dated 05.12.2022 passed by Adjudicating Authority wherein penalties were imposed under Section 13(1) read with Section 42 of the Foreign Exchange Management Act, 1999 (FEMA) for contravention of provisions relating to non-fulfilment of conditions governing Foreign Direct Investment (FDI).

2. Information was received to the effect that M/s Alliance Infrastructure Projects Pvt. Ltd. (AIPPL/ a company) is involved in real estate business. The appellant company is a Special Purpose Vehicle incorporated for execution of a real estate project titled “Inner Circle”. Smt. Bommi Reddy Indiramma & Shri Manoj Sai Namburu were directors of the company. During the financial years 2007-2008, the appellant company received Foreign Direct Investment (FDI) of Rs. 43,84,52,366/- (approx.) from foreign investors in accordance with the then FDI policy governing the construction development projects. During the relevant time, FDI in construction development projects was governed by Regulation 5(1) read with Schedule 1 of the FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000. Item 23(c) of Annexure B prescribed a mandatory condition requiring at least 50% of the project to be developed within a period of five years from the date of all statutory approvals. The Appellants obtained the statutory approval from the Hyderabad Metropolitan Development Authority (HMDA) on 19.10.2008. The investigation of the Directorate of Enforcement revealed that the appellant failed to develop 50% of the project within the stipulated five-year’s period. It could develop only 18% of the project within the relevant timeframe.

3. The Adjudicating Authority held that the Appellant Company had contravened the condition stipulated under item 23(c) of Annexure B of Schedule 1 to Regulation 5(1) of the FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, read with Section 6(3)(b) of FEMA, to the extent of Rs. 43,84,52,366/- and imposed a penalty of Rs. 10,00,00,000/- upon the Company and Rs. 1,00,00,000/-upon Noticee Nos. 2 to 4 each.

Submissions of the appellants:

4. The Ld. Counsel for the appellants submitted that there was no deliberate violation of conditions governing the FDI. The investment received from foreign investors were through proper banking channels and reflected in book of accounts. The project was not abandoned rather there was a delay in prescribed development threshold due to circumstances beyond the control of the appellant. It was also contended that the foreign investment remained within the country and was utilized for the stated purpose. The appellant submitted that Section 6(3)(b) of FEMA, stood omitted in the year 2015. The initiation and continuation of proceedings after such omission, without a saving clause expressly preserving penal consequences, is legally unsustainable. The Adjudicating Authority dropped allegation related to delay in reporting and filling of FC-GPR. The Ld. Counsel for the Appellant (notice 2 to 4) are not guilty of any contravention under the FEMA, 1999 as they are mere directors of the company and liability under section 42 of the FEMA, 1999 requires that specific knowledge and responsibility have to be established.

5. On the basis of the above submissions, the appellants prayed that on the basis of the above submissions the penalty may be reduced.

Submission of the Respondents:

6. The Ld. Counsel for the respondent submitted that the condition requiring development of at least 50% of the project within five years from the date of obtaining statutory approvals was a mandatory stipulation under Item 23(c) of Annexure B to Schedule 1 of the FEMA (TISPRO) Regulations, 2000, and was binding upon the Appellant Company at the material time. It is an admitted fact that statutory approval was obtained on 19.10.2008 and approximately 18% of the project was developed within the stipulated time which resulted in contravention of the provision. The respondent also contended that even though the appellants submitted that there were commercial difficulties, political disturbances, market slowdown, or liquidity constraints, however, this would not absolve the Appellants of statutory obligations under FEMA, 1999, especially, when no extension or regulatory relaxation was sought from the competent authority. It may be true that the appellant did not have any mala fide intent and did not divert the funds, however that is not a prerequisite for imposition of penalty. It is further submitted that the omission of Section 6(3)(b) in 2015 will not make appellant free from the liabilities incurred during the time it was in existence, and proceedings initiated in respect of contraventions would be maintainable. The liability of the directors is also justified under Section 42 of FEMA, 1999, as document show that they were in charge of and responsible for the conduct of the Company’s business during the relevant period. Therefore, the penalty imposed is within statutory limits and proportionate to the magnitude of the violation involving foreign investment of approximately Rs. 43.84 Crores.

Findings and analysis:

7. We have heard the arguments and perused the documents on records.

8. The appellant company was a Special Purpose Vehicle (SPV) and received Foreign Direct Investment (FDI) of approximately Rs. 43.84 crores during the year 2007-2008 for executing a villa project at Hyderabad namely “Inner Circle”. The appellant company obtained the requisite statutory approvals on 19.10.2008. The said project could be completed only to the extent of 18 % against the requirement of 50 % as stipulated under Item 23(c) of Annexure B to Schedule 1 of Regulation 5(1) of the FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, read with Section 6(3)(b) of FEMA, 1999. The appellant no. 2-4 were the directors of the appellant company and were in charge of its affairs during the relevant period.

9. Upon consideration of the material on record and the rival submissions advanced, this Tribunal finds no infirmity in the conclusion of the Adjudicating Authority that the Appellants failed to comply with the mandatory condition prescribed under the applicable FDI framework as it stood at the relevant time. The finding of contravention is supported by admitted facts and does not suffer from perversity or legal error warranting interference.

10. The appellants also submitted that the contravention committed under Section 6(3)(b) of FEMA, 1999 would not be maintainable as the provision stood omitted in the year 2015 and therefore subsequent proceedings are legally unsustainable. It is true that the provision stands omitted as on 2015, however, the contravention was committed when the provision was in force. Merely because the provision stood omitted subsequently will not absolve the appellants of the liability under it. Hence, we do not find any reason to interfere with the finding of the Adjudicating Authority.

However, insofar as the quantum of penalty is concerned, it is observed that the foreign investment was received through lawful banking channels, remained deployed within the project, and there is no allegation of diversion or mala fide intent. The breach arises from non-fulfilment of a regulatory milestone rather than from any fraudulent or contumacious conduct. In these circumstances, while the contravention is liable to be upheld, the ends of justice would be adequately met by moderating the penalty to a proportionate extent.

11. Therefore, in light of the above discussion, we feel it proper to cause interference in the impugned order only with regards to the quantum of penalty by reducing the same to Rs. 5 crores for M/s Alliance Buildwell Projects Pvt. Ltd. (the appellant company) and Rs. 50 lakh each on the rest of the appellants.