J P Morgan India Private Limited Vs Special Director, Directorate of Enforcement and Anr. (Delhi High Court)
Brief: Offence under FEMA – Distinction between the two stages of the adjudication process – eligible reasons by the respondent no. 1 for the formation of opinion to proceed with the inquiry against the petitioner.
Our Comments: The Adjudicating Authority, under the Scheme of the FEMA, performs a quasi-judicial function as opposed to a purely administrative function. The requirement of giving reasons therefore cannot be undermined and must be insisted upon from the Adjudicating Authority.
These petitions have been filed by the petitioner challenging the Show Cause Notice(s) dated 29.01.2020 and the consequent Order(s) dated 05.06.2020 and the Communication(s) dated 03.09.2020 of the respondent no. 1, proceeding with the inquiry against the petitioner under the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000 (hereinafter referred to as the ‘Adjudication Rules’) on the alleged violation of Section 6(6) of the Foreign Exchange Management Act, 1999 (hereinafter referred to as the ‘FEMA’) read with Regulation 3 of the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2000 (hereinafter referred to as the ‘Place of Business Regulations’). As the Show Cause Notice(s) and the Impugned Order(s)/Communication(s) are based on the same grounds for proceeding against the petitioner and the challenge thereto is common in both the petitions, the petitions are being adjudicated by way of this common judgment and order. The petitioner herein is a private limited company incorporated under the Indian Companies Act, 1956. It is a subsidiary of JP Morgan India Securities Holding Limited, Mauritius (‘JPMISHL’). The genesis of the inquiry launched by the respondents originates from the judgment and order dated 23.07.2019 passed by the Supreme Court in W.P.(C) No. 940 of 2017, titled Bikram Chatterji & Ors. v. Union of India & Ors., finding various fraudulent transactions of Amrapali Group of Companies.
Therefore, in the peculiar facts of the present case, even though the Impugned Opinion of the Adjudicating Authority does not record any reasons for the same, the same is sustained. This shall, however, not be considered as an affirmation of this Court to the manner in which such opinion is to be recorded. It is also made clear that this Court has not expressed any opinion on the merit of the allegations made against the petitioner in the Show Cause Notice or the inquiry.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. These petitions have been filed by the petitioner challenging the Show Cause Notice(s) dated 29.01.2020 and the consequent Order(s) dated 05.06.2020 and the Communication(s) dated 03.09.2020 of the respondent no. 1, proceeding with the inquiry against the petitioner under the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000 (hereinafter referred to as the ‘Adjudication Rules’) on the alleged violation of Section 6(6) of the Foreign Exchange Management Act, 1999 (hereinafter referred to as the ‘FEMA’) read with Regulation 3 of the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2000 (hereinafter referred to as the ‘Place of Business Regulations’).
2. As the Show Cause Notice(s) and the Impugned Order(s)/Communication(s) are based on the same grounds for proceeding against the petitioner and the challenge thereto is common in both the petitions, the petitions are being adjudicated by way of this common judgment and order.
3. The petitioner herein is a private limited company incorporated under the Indian Companies Act, 1956. It is a subsidiary of JP Morgan India Securities Holding Limited, Mauritius (‘JPMISHL’).
4. The genesis of the inquiry launched by the respondents originates from the judgment and order dated 23.07.2019 passed by the Supreme Court in W.P.(C) No. 940 of 2017, titled Bikram Chatterji & Ors. v. Union of India & Ors., finding various fraudulent transactions of Amrapali Group of Companies.
5. In the said judgment and order, various acts of fraud and statutory violations were alleged to have been committed by the JP Morgan Group of Companies. The Supreme Court inter alia observed as under:
“87. The transactions of Amrapali Zodiac Developers Pvt. Ltd. with J.P. Morgan were clearly in order to avoid the provisions of the Companies Act. It is apparent that Mr. Anil Mittal, Statutory Auditor, did not report his interest and disclosed about his relatives and junior employee as Director and shareholders. Mr. Chandan Kumar was a junior employee and Mr. Atul Mittal was his relative. Thus, it is apparent that Rudraksha Infracity Pvt. Ltd. was created for money laundering as aforesaid two Directors and shareholders had no income, Rudraksha Infracity Pvt. Ltd. was incorporated to receive funds from Mannat Buildcraft which was also created by Mr. Chander Wadhwa, CFO through his close associates. After receiving money from Mannat Buildcraft Pvt. Ltd., the same was transferred to J.P. Morgan Investments for purchasing equity shares of Amrapali Zodiac Pvt. Ltd. at an exorbitant price. There was no transaction before or after these transfers of monies in the aforesaid dummy companies. To suit the requirement of J.P. Morgan Investments, in entirety incorrect valuation report was prepared by M/s. Sudit K. Parikh & Co., Chartered Accountants. The methodology and procedures defined of computation of fair market value were not followed at the time of exit. J.P. Morgan was having full control on Amrapali Zodiac Developers and no action could have taken as per clause 10.4.3 without investors’ approval. The profit cannot be recognised until the project is completed. Thus, there cannot be any distributable amount as profit for distribution to J.P. Morgan. It has also been found by the Forensic Auditors that J.P. Morgan was in the knowledge of the fact that Amrapali Zodiac Developers had paid the money received to other companies of Amrapali group. Advances exceeded the limits specified in the shareholders’ agreement, but J.P. Morgan did not ensure bringing back the money. It was accepted by Mr. Suraj Chhabria that it was in his knowledge and that of J.P. Morgan that the money has been diverted from shareholder’s agreement and share subscription agreement. The valuation of the shares did not follow the correct
methodology of discounted cash flow as detailed out by the forensic auditors. The valuation exercise was done backwardly in order to inflate the value of share to siphon out the money of home buyers through J.P. Morgan.
88. The FEMA rules prohibited the kind of transactions which were entered into with J.P. Morgan. Rule 4 of FEMA has been clearly violated. Master Circular No.8/2010-2011 of July 1, 2010, dealing with external commercial borrowings and trade credits clearly provides that external commercial borrowings are not permitted to be utilized for real estate business under the automatic route. The term real estate excludes the development of the integrated township. It was not a case of development of the integrated township. Even if it is taken to be a case of integrated township as submitted on behalf of J.P. Morgan, then also for approval route, hedging is required as pointed out by the Forensic Auditors in their report and borrowers had to submit their report about the signing of loan agreement with the lender for obtaining Loan Registration Number. In case J.P. Morgan had invested in the form of ECB, following would have been the requirements: (i) obtaining Loan Registration Number from the RBI; (ii) file ECB-2 returns every month to the RBI, (iii) to pay tax on interest payment to J.P. Morgan; and (iv) to file income tax return. We are in agreement with the findings of the forensic auditors in this regard. It is clear that it was a methodology adopted by the group to siphon out the funds of the home buyers in violation of the FEMA rules and the notifications and by the creation of dubious companies for which appropriate action is warranted by the concerned authorities.
89. The report of Forensic Audit also indicates that the Company has received a sum of Rs.140 crores during the financial year 2012-13 from IPFFI Singapore PTE Limited under Foreign Direct Investment Scheme. As per FEMA Rules, this amount was to be invested in real estate construction projects only.
90. The IPFFI Singapore PTE Limited which was incorporated on 20.5.2011, entered into a Share Subscription Agreement with ASCPL on 23.8.2012 and paid a sum of Rs.140 crores to ASCPL in the following manner on 7.8.2012:
(a) INR 85 crores received in Axis Bank, Indirapuram Branch on 7.8.2012.
(b) INR 55 crores received in BOB Escrow Account on 7.8.2012.
Thus, a total sum of Rs.140 crores was received in Axis Bank. The amount was received in Axis Bank of INR 85 crores was transferred to Amrapali Centurian Park Pvt. Ltd. in three proportion. On 7.8.2012, Rs.5 crores were transferred. On 8.8.2012, an amount of Rs.50 crores was transferred and on 18.8.2012, Rs.30 crores were transferred. The ACPPL on receiving Rs.85 crores allotted equity shares worth INR 85 lakhs to ASCPL and balance INR 84.15 crores were treated as share premium account. There is no valuation report available as to how the share premium of INR 84.15 crores had been calculated. This transfer of fund by ASCPL to ACPPL is termed as absolutely violative of FDI Rules and agreement. With respect to Rs.55 crores routed from IPFFI Singapore in the Escrow Account of Bank of Baroda, Escrow Account was transferred from 8.8.2012 to 28.9.2012 in the account of Bank of Baroda and used for payment of term loan instalments of OBC and Bank of Maharashtra for repayment of their term loan instalment. This money was not meant for payment of term loan instalment as per FDI Rules. It was to be used in the construction.
91. The ASCPL did not use the money for the project which was received from IPFII Singapore but transferred Rs.85 crores to ACPPL and Rs.55 crores to repay bank loan instalments and repay the outstanding creditors provided for in the books and standing in the books. The said payments have rightly been held by Auditors to be in contravention of the FDI norms and rules and for which the money was brought in India.
92. From 2013 to 2015, ASCPL has paid interest of Rs.58.81 crores @ 17 percent, which is a highly abnormal rate. A sum of Rs.14.41 crores was paid on 31.3.2013. Likewise, on 31.3.2014, Rs.22.20 crores were paid and on 31.3.2015, another amount of Rs.22.20 crores was paid. The violations were made with the knowledge of the IPFII Singapore and they were in connivance with the ASCPL.”
6. The Supreme Court issued inter alia the following direction:
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(vi) In view of the finding recorded by the Forensic Auditors and fraud unearthed, indicating prima facie violation of the FEMA and other fraudulent activities, money laundering, we direct Enforcement Directorate and concerned authorities to investigate and fix liability on persons responsible for such violation and submit the progress report in the Court and let the police also submit the report of the investigation made by them so far.”
7. Relying upon the above judgment and order of the Supreme Court and certain investigations carried out, the respondent no. 2 filed two complaints, being Complaint No(s). 01/2020 and 02/2020, both dated 08.01.2020, against various persons and companies, including the petitioner herein before the respondent no. 1. As far as the petitioner is concerned, the complaints inter alia allege as under:
“14.29 It is further revealed during investigation that no prior approval of RBI was obtained by M/s. JPMIPL & JPMIPM-II for establishing a place of business in India in the name of M/s. JPMIPL thus appears to have contravened the provisions of Regulation 3 of FEM (Establishment in India of a Branch office or a liaison office or a project office or any other place of business) Regulations, 2000.
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14.32 Investigation has revealed that the JPMIPL has been established by JP Morgan Securities Holding Pvt. Ltd. as WOS and is a group company of JP Morgan Chase USA. The salary of the persons entrusted with the businesses in India by JPMIPL is being paid by the USA based company. Thus JPMIPL is place of business in India of JP Morgan Securities Holding Pvt. Ltd. (foreign company).
15. FEMA Contraventions:
The following provisions of Foreign Exchange Management Act, 1999 and Regulations made there-under have been contravened by the Noticees:
