SAFEMA Tribunal Quashes FEMA Penalties in Tamilnad Mercantile Bank Share Transfer Case

Tamilnad Mercantile Bank Ltd. Vs Special Director (Appellate Tribunal Under SAFEMA Delhi)

SAFEMA Appellate Tribunal Quashes FEMA Penalties in Tamilnad Mercantile Bank Share Transfer Case, Holding RBI Approval and Subsequent Transactions Did Not Constitute Contraventions

The Appellate Tribunal under SAFEMA, New Delhi, decided a batch of appeals arising from penalties imposed by the Enforcement Directorate in connection with the transfer of shares of Tamilnad Mercantile Bank Ltd. (TMBL), the opening of escrow accounts, guarantees extended by Standard Chartered Bank, and foreign exchange transactions involving certain directors and officers. The ED had alleged violations of Sections 4, 6, 8 and 42 of FEMA and the relevant FEMA Regulations relating to transfer of shares to non-residents, deposits, guarantees, foreign currency accounts and repatriation of foreign exchange.

The Tribunal examined the long history of the TMB shareholding dispute, the RBI’s communications, Company Law Board proceedings, and the subsequent restructuring of shareholdings. It noted that the initial transfer of shares to non-resident investors was undertaken pursuant to RBI correspondence, and that subsequent transfers between non-resident entities were effected to comply with RBI’s directions to reduce aggregate shareholding below the prescribed threshold. The Tribunal also considered that the bank had approached RBI for compounding/regularisation and that such applications remained pending owing to the ED investigation.

After analysing the statutory provisions and the factual background, the Tribunal concluded that the alleged FEMA contraventions were not established in the manner alleged by the Enforcement Directorate. Consequently, it set aside the impugned adjudication order and the penalties imposed on Tamilnad Mercantile Bank, Standard Chartered Bank and the various directors, officers and other appellants, allowing the batch of appeals.

Cases Discussed

• SEBI v. Shriram Mutual Fund (SC), (2006) 5 SCC 361
• State of Punjab v. Bhatinda District Coop. Milk Producers Union Ltd. (SC), (2007) 11 SCC 363
• Jewel touch (India) Pvt. Ltd. vs. Naheed Hafeez Quraishi & Ors. (Bombay HC), 2008 (3) Bom CR 217
• Kanwar Natwar Singh vs. Directorate of Enforcement & Anr. (SC), (2010) 13 SCC 255
• Shashank Manohar vs. Union of India (Bombay HC), 2014 (1) MHLJ 838
• Government of India vs. Citadel Fine Pharmaceuticals (SC), 1989 (3) SCC 483
• Canara Bank vs. Debasis Das (SC), (2003) 4 SCC 557
• State Bank of Patiala vs. S.K. Sharma (SC), (1996) 3 SCC 364
• Director of Enforcement vs. MCTM Corporation Pvt. Ltd. and Ors. (SC), MANU/SC/0300/1996
• Charan Lal Sahu v. Union of India (SC), (1990) 1 SCC 613 : AIR 1990 SC 1480
• Gadde Venkateswara Rao v. Govt. of A.P. (SC), AIR 1966 SC 828
• Hindustan Steel Ltd. v. State of Orissa (SC), 1969 (2) SCC 627
• Global Trust Bank vs. Kakateya Cements, 2000 (6) ALD 135
• Shashank Vyankatesh Manohar vs. Union of India (Bombay HC), 2013 (5) ALL MR 551

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

This Order disposes of the bunch of Appeals filed by the Appellants as delineated below, against the Order No. SDE/SRO/ CEZO/10/2020(SK) dated 14.08.2020 (Impugned Order), passed by the Special Director, Enforcement Directorate, Government of India, Chennai.

2. Investigation was initiated by the Respondent Directorate on 11.10.2011 on the basis of the information forwarded by Reserve Bank of India (RBI) vide letter No. F.E.C.O. FID 21969/10 21047 (34) 2010-11 dated 16.03.2011. The aforementioned RBI letter pointed out that the actual flow of funds for transfer of shares of Tamilnad Mercantile Bank Ltd. (TMBL) from Sterling Group of Companies to various individuals/entities need to be investigated. For the said purpose RBI also forwarded a copy of Amended and Re-stated Escrow and Transaction Settlement Agreement dated 12.05.2007 entered into among certain entities in relation to transfer of TMBL shares and copies of certain other correspondence. Consequent to such investigation the Respondent Directorate issued the Show Cause Notice (SCN) on 17.12.2014 to 26 Noticees, of whom 23 have filed Appeals as mentioned afore. The SCN was issued on the basis of the Complaint which was filed on 16.12.2014 under Section 16 (3) of Foreign Exchange Management Act, 1999 (FEMA). The Impugned Order has disposed of the SCN in terms of passing an Order relating to four set of issues. The first set of issues arise from transfer of 46,862 shares of TMBL to seven foreign investors without prior approval of RBI for a total consideration of Rs. 113,32,16,884/-. Such transfer of shares has been penalized for contravention of Section 6 (3) (b) of FEMA read with Regulation 4 of the Foreign Exchange Management (FEM) (Transfer or Issue of Security by a Person Resident outside India) Regulation, 2000. While the Appeal filed by TMBL challenges the findings made in the Impugned Order against it on this set of issues, the Appeals filed by the Appellants labelled from Noticee No. 2 to Noticee No. 14 challenge the findings against each of the Noticee, who has been penalized for the aforementioned contraventions in terms of Section 42 of FEMA. The second set of issues has arisen from the fact that subsequent to the transfer of 46,862 shares of TMBL, 13,209 shares of TMBL were further transferred to M/s Sub-Continental Equities Ltd., Mauritius on 26.12.2011 for total consideration of Rs. 90,31,41,094/- and 14,080 shares of TMBL were further transferred to M/s Robert & Adris James Company Ltd., Mauritius for a total consideration of Rs. 70,40,00,000/-. Such transfer of shares has been penalized for contravention of Section 6 (3) (b) of FEMA read with Regulation 4 of the FEM (Transfer or Issue of Security by a Person Resident outside India) Regulation, 2000. While the Appeal filed by TMBL challenges the findings made in the Impugned Order against it on this second set of issues, the Appeals filed by the Appellants labelled from Noticee No. 15 to Noticee No. 24 challenge the findings against each of the Noticee, who have been penalized for the aforementioned contraventions in terms of Section 42 of FEMA. The third set of issues has arisen from opening an Escrow Account in the name of “SCB Project Windmill (Sale Consideration) Escrow Account” and another Escrow Account in the name of “SCB Project Windmill (Shares) Escrow Account” on 12.05.2007 and allowing deposit in the said Escrow account totaling Rs. 113,32,16,884/- from 7 foreign entities, towards transfer of shares of M/s Tamilnad Mercantile Bank, which were not permitted for transfer by the Reserve Bank, and keeping 1,12,151 shares of M/s Tamilnad Mercantile Bank in the “SCB Project Windmill (Shares) Escrow account”, without any permission of the RBI. The third set of issues also relate to taking into custody title deeds of over 62 acres of land owned by Shri Ramesh Vangal (Director of M/s. Katra Holding Pvt. Ltd.) and M/s. Arudrama Developments Pvt. Ltd. (a company in which Shri Ramesh Vanagal was one of the Directors) and taking custody of TMBL shares as collateral/guarantee, in lieu of which Standard Chartered Bank, Mauritius granted a loan of US$ 35.4 Million to three foreign entities viz., M/s GHI I Ltd., M/s Katra Holdings Limited, Mauritius, and M/s RST Limited and a further loan of US$ 20 Million to M/s. Katra Holdings Limited, Mauritius, thus totaling to US$ 55.4 Million, equivalent to Rs. 221,00,00,000/- (approximately), without any special permission from the RBI. The third set of issues have been penalized for the contraventions of Section 6 (3) (f) of FEMA read with Regulation 3 of the FEM (Deposit) Regulations, 2000 and contraventions of Section 6 (3) (j) of FEMA read with Regulation 3 of the FEM (Guarantees) Regulations, 2000. While the Appeal filed by the Standard Chartered Bank challenges the findings made in the Impugned Order against it on this third set of issues, the Appeal filed by the Appellant labelled as Noticee No. 26 challenges the findings against the Noticee, who has been penalized for the aforementioned contraventions in terms of Section 42 of FEMA. The fourth and last set of issues has arisen from the fact that Shri M. G. M. Maran, the then Chairman and Director of TMBL, a person resident in India, without the permission of Reserve Bank of India, opened an account vide No.7102356 with M/s ABN Amro Bank NV., Singapore Branch, Singapore in his name and received foreign exchange amounting to US$ 68,50,000 (equivalent to Rs. 28,08,50,000/-) in the said account from M/s Katra Holdings Limited, Port Louis, Mauritius, as consideration, for facilitating and assigning the rights towards transfer of shares of TMBL in favour of M/s Katra Holdings Limited, consequent to agreement dated 02.03.2006 with M/s Katra Holdings. He also failed to repatriate the same into India. For the aforementioned transactions penalty has been imposed on Shri Maran for the contravention of Sections 4 and 8 of FEMA read with Regulation 3 & 4 of FEM (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2000 and Regulation 3 of FEM (Foreign Currency Accounts by a person resident in India) Regulation 2000. The Appeal filed by Shri M. G. M. Maran challenges not only the penalty imposed on him for the contraventions of FEMA in terms of Section 42 of FEMA for the first and second set of issues, but also the penalty imposed on him for the contraventions of FEMA arising out of fourth set of issues. It is pertinent to mention that the allegation of contravention of the provisions of Regulation 10.A (b) of the FEM (Transfer or Issue of Security by a Person Resident outside India) Regulation, 2000 has been dropped against the TMBL, as well as Chairman, Managing Directors, Directors and CEO, Company Secretary, who held such position at different points in time, since the allegations were found unsustainable in law. Same finding has been made of dropping the allegations for contravention of the provisions of Regulation 10.A (b) of the FEM (Transfer or Issue of Security by a Person Resident outside India) Regulation, 2000 with respect to Standard Chartered Bank and Shri Ranjan Ghosh.