Penalty Rationalization under FEMA

The recent ruling of the Appellate Tribunal for Foreign Exchange, New Delhi (Appellate Tribunal) in the matter of Jaipur IPL Cricket Private Limited and Ors. v. The Special Director Directorate of Enforcement, Bangalore, provides an interesting analysis of recognized principles of law vis-à-vis liabilities of officers in default and imposition of penalties under the Foreign Exchange Management Act, 1999 (FEMA).

The dispute in this case involved imposition of penalties under FEMA on Jaipur IPL Cricket Private Limited (JIPL), EM Sporting Holdings Ltd. (EMSH), M/s ND Investments LLP and certain individuals including Suresh Chellaram and Manoj Badale by the Special Director, Enforcement Directorate, Mumbai. The matter concerned 3 overseas remittances (approximately INR 33 crores) made into India for the purpose of setting up and functioning of the Indian Premier League (IPL) team – Rajasthan Royals.

In 2008, Manoj Badale and Suresh Chellaram had participated in a bid floated by the Board of Control for Cricket in India (BCCI) to own and operate teams in the IPL. The bid had included conditions such as (i) the IPL franchises were to be operated through companies incorporated in India and (ii) a tender deposit had to be made as a condition precedent for placing the bid. For these purposes, remittances were made by Manoj Badale (on behalf of the bidder M/s. Emerging Media IPL Limited, U.K) to BCCI so as to participate in the bid. The bid stated the structure to be followed for the investment and that the Indian entity (i.e. the franchise owner), once incorporated, would be held by EMSH. After winning the bid, JIPL was incorporated for the purpose of operating the franchise. Subsequently, another remittance was sent to JIPL by Manoj Badale and ND Investments (and not the proposed holding company- EMSH) for the purpose of making the franchise operational. A last remittance was then directly made by EMSH to BCCI for payment of the remainder of the franchise fee.

JIPL had purported to issue shares to EMSH against the above-mentioned remittances and in this regard, had approached the Reserve Bank of India and the Foreign Investment Promotion Board for approval, which was not granted. Pursuant to investigations conducted by the enforcement directorate, violations of various provisions of FEMA were identified including the remittances not being reported within 30 days of its receipt, shares not being issued against the remittances, the amounts not being refunded within 180 days from the date of receipt (as the shares were not issued) etc., for which the adjudicating authority imposed a total penalty of approximately INR 98 crores (around 3 times the amount involved) on the appellants. Effectively apart from not being able to get shares allotted against the remittances the remitters were also saddled with this penalty. Unhappy with this course of events, an appeal was made to the Appellate Tribunal.

Following a more pragmatic approach, the Appellate Tribunal removed/reduced the penalties on several grounds. First, the Appellate Tribunal held that the enforcement directorate had failed to prove that some of the individual appellants were involved in day-to-day management of JIPL or EMSH at the time the contraventions took place and had imposed penalty in a routine manner without recording any valid findings as per law. Relying on the tests for determination of liability set out by various judicial precedents, the Appellate Tribunal held that penalty cannot be imposed only by virtue of the fact that certain individuals are the directors of a company i.e. a nexus should be established between such person and the alleged contravention. Second, the Appellate Tribunal held that there has been no loss to the exchequer, the funds have remained in India and the remittances were utilized for the purpose for which they were intended. Third, that the principle of ‘proportionality’ requires that any fine imposed should not exceed what is necessary and any quantum of penalty must be fair, objective and based on relevant considerations. Importantly, the Appellate Tribunal observed that discretion of an authority cannot be based on arbitrary, vague or fanciful considerations and as the FEMA violations in the present case are technical and venial in nature, imposition of 3 times penalty- amounting to approximately INR 98 crores is untenable and unsustainable.

The ruling is broadly investor friendly as it highlights the importance of analyzing the facts and circumstances of every offence before imposing penalties. It also strengthens the position of law with regard to factors that are to be looked into while ascertaining liability of individuals in charge of companies. However, given that the Appellate Tribunal has classified the offences as being technical in nature, it is worth reflecting on whether the final penalties of INR 15 crore, being 50 percent of the amounts remitted to India is high and disproportionate considering the admittedly, technical nature of the offences.

Author:

Nandita Bose, Associate

Date: September 17, 2019