Case BriefsSupreme Court

Supreme Court: The 3-judge bench of AM Khanwilkar*, Indi Malhotra and Ajay Rastogi has held that the condition predicated in Section 31 of the Foreign Exchange Regulation Act, 1973 of obtaining “previous” general or special permission of the RBI for transfer or disposal of immovable property situated in India by sale or mortgage by a person, who is not a citizen of India, is mandatory.

“Until such permission is accorded, in law, the transfer cannot be given effect to; and for contravening with that requirement, the concerned person may be visited with penalty under Section 50 and other consequences provided for in the 1973 Act.”

The important question to be decided before the Court was whether transaction specified in Section 31 of the 1973 Act entered into in contravention of that provision is void or is only voidable and it can be voided at whose instance.

Object of the Statute

1973 Act was brought into force to consolidate and amend the law relating to certain payments, dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency, for the conservation of the foreign exchange resources of the country and the proper utilisation thereof in the interests of the economic development of the country.

Object of Section 31

While introducing the Bill in the Lok Sabha and explaining the object of Section 31 of the 1973 Act,  Mr. Y.B. Chavan, the then Minister of Finance stated:

“As a matter of general policy it has been felt that we should not allow foreign investment in  landed property/buildings constructed by foreigners and foreign controlled companies as such investments offer scope for considerable amount of capital liability by way of capital repatriation. While we may still require foreign investments in certain sophisticated branches of industry, there is no reason why we should allow foreigners and foreign companies to enter real estate business.”

The object of Section 31 of the 1973 Act was thus to minimise the drainage of foreign exchange by way of repatriation of income from immovable property and sale proceeds in case of 16 disposal of property by a person, who is not a citizen of India.  Section 31, hence, puts restriction on acquisition, holding and disposal of immovable property in India by foreigners – non citizens.

Absence of explicit mention of failure to seek previous permission

It is true that the consequences of failure to seek such previous permission has not been explicitly specified in the same provision or elsewhere in the Act, but then the purport of Section 31 must be understood in the context of intent with which it has been enacted, the general policy not to allow foreign investment in landed property/buildings constructed by foreigners or to allow them to enter into real estate business to eschew capital repatriation, including the purport of other provisions of the Act, such as Sections 47, 50 and 63.

Section 47

Sub-Section (1) clearly envisages that no person shall enter into any contract or agreement which would directly or indirectly evade or avoid in any way the operation of any provision of the 1973 Act or of any rule, direction or order made thereunder.  What is significant to notice is that sub¬Section (2) declares that the agreement shall not be invalid if it provides that thing shall not be done without the permission of the Central Government or the RBI.  That would be the implied requirement of the agreement in terms of this provision.

In other words, though ostensibly the agreement would be a conditional one made subject to permission of the Central Government or the RBI, as the case may be and if such term is not expressly mentioned in the agreement, it shall be an implied term of every contract governed by the law — of obtaining permission of the Central Government or the RBI before doing the thing provided for in the agreement.

In that sense, such a term partakes the colour of a statutory contract. Notably, Section 47 of the 1973 Act applies to all the contracts or agreements covered under the 1973 Act, which require previous permission of the RBI.

Section 50

Section 50 reinforces the position that transfer of land situated in India by a person, who is not a citizen of India, would visit with penalty. Indeed, inserting such a provision does not mean that the 1973 Act is a penal statute, but is to provide for penal consequence for contravention of provisions, such as Section 31 of the 1973 Act.

Section 63

Section 63 of the 1973 Act empowers the court trying a contravention under Section 56 which includes one under Section 51 of the 1973 Act, to confiscate the currency, security or any other money or property in respect of which the contravention has taken place. The expression “property” in Section 63, takes within its sweep immovable property referred to in Section 31 of the 1973 Act.

Effect of reading Section 31 with Sections 47, 50 and 63 

“The requirement specified in Section 31 is mandatory and, therefore, contract or agreement including the gift pertaining to transfer of immovable property of a foreign national without previous general or special permission of the RBI, would be unenforceable in law.”

From the analysis of Section 31 of the 1973 Act and upon conjoint reading with Sections 47, 50 and 63 of the same Act, we must hold that the requirement of taking “previous” permission of the RBI   before executing the sale deed or gift deed is the quintessence; and failure to do so must render the transfer unenforceable in law.

“The dispensation under Section 31 mandates “previous” or “prior” permission of the RBI before the transfer takes effect.  For, the RBI is competent to refuse to grant permission in a given case. The sale or gift could be given effect and taken forward only after such permission is accorded by the RBI. There is no possibility of ex post facto permission being granted by the RBI under Section 31 of the 1973 Act.”

Before grant of such permission, if the sale deed or gift deed is challenged by a person affected by the same directly or indirectly and the court declares it to be invalid, despite the document being registered, no clear title would pass on to the recipient or beneficiary under such deed. The clear title would pass on and the deed can be given effect to only if permission is accorded by the RBI under Section 31 of the 1973 Act to such transaction.

“Merely because no provision in the Act makes the transaction void or says that no title in the property passes to the purchaser in case there is contravention of the provisions of Section 31, will be of no avail. That does not validate the transfer referred to in Section 31, which is not backed by “previous” permission of the RBI.”

In light of the general policy that foreigners should not be permitted/allowed to deal with real estate in India; the peremptory condition of seeking previous permission of the RBI before engaging in transactions specified in Section 31 of the 1973 Act and the consequences of penalty in case of contravention, the transfer of immovable property situated in India by a person, who is not a citizen of India, without previous permission of the RBI must be regarded as unenforceable and by implication a prohibited act. That can be avoided by the RBI and also by anyone who is affected directly or indirectly by such a transaction. There is no reason to deny remedy to a person, who is directly or indirectly affected by such a transaction.  He can set up challenge thereto by direct action or even by way of collateral or indirect challenge.

“In other words, until permission is accorded by the RBI, it would not be a lawful contract or agreement within the meaning of Section 10 read with Section 23 of the Contract Act. For, it remains a forbidden transaction unless permission is obtained from the RBI. The fact that the transaction can be taken forward after grant of permission by the RBI does not make the transaction any less forbidden at the time it is entered into. It would nevertheless be a case of transaction opposed to public policy and, thus, unlawful.”

[Asha John Divianathan v. Vikram Malhotra, 2021 SCC OnLine SC 147, decided on 26.02.2021]


*Judgment by: Justice AM Khanwilkar

Know Thy Judge| Justice AM Khanwilkar

Appearances before the Court by:

For appellant: Advocate Navkesh Batra

For respondent: Senior Advocate C.A. Sundram

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Backstage Theatrics of Economical Apparatus

India’s post-independent economic regime was governed by the principle of self-reliance, growth, modernisation and social justice. Colonial exploitation induced the State to reduce foreign interference in India’s economic decisions.

After independence, the Foreign Exchange Regulation Act, 1947 was implemented in consonance with the five-year plans with minor structural changes.

Indian Government approached towards the resurrection of economic growth by adopting the fundamentals of mixed economy. The State emphasised on the development and protection of domestic Indian industries with a wider State control over the operations of the businesses. Imports and investment in key industries from foreign countries were discouraged to reduce the dependence on the foreign countries except oil and petroleum. The public and private spheres were demarcated and were regulated by State.

India aimed import substitution and developed the national economy to become self-reliant. In this regard, the Nehru-Mahalanobis Model was constructed to capitalise heavy industries. This “creation of assets” was imperative to form basic infrastructure of other industries. But the assumption of a closed economy transformed into “export pessimism”.[1] Private industrialists were reluctant to capitalise on emerging industry due lack of funds and incentives to encourage investment. So, the concentration of power and wealth in the hands of the State manifested the socialistic pattern.

The second five-year plan and the Industrial Policy Resolution of 1956 underpinned the licence raj system.

(a) The categorisation of the industries into three schedules paved the way for the “system of licensing” by the virtue of the Industries Development and Regulation Act (IDRA), 1951. The repercussions of “licence raj” impacted the growth and expansion of private sector and investment as big industrialists juxtaposed with budding or prospective industrials misused the system. On the other hand, the foetus industries bore the brunt of the red-tapism and strict licence compliances with respect to region, capital, expansion and production.

(b) Imports were subjected to high tariff rates and quotas to protect the domestic industries. Foreign Direct Investment (FDI) was allowed on mutually advantageous agreements without any financial participation. It means on one hand; they restricted the participation of the foreign exchange in the national economy. On the other hand, India endeavoured to attract the foreign investments in lieu of capital and technology. For instance, strategic industries like power, oil, petroleum, mining, banking and airlines sought technical and financial assistance from Russia, Germany and the United Kingdom.

However, due to shortage of foreign exchange, the prices rose by 30% with growth at a staggering rate of 4.3%.[2] The bureaucratism and the State capitalism coupled with sheer ignorance of the interplay of market forces curtailed the flow of foreign exchange in India. In addition to it, the public borrowings were pegged at a low rate of interest further restraining the savings.

The focus of the State remained on the mobilisation of savings and investment even at the cost of generation and facilitation of investment. The State behaved as a conservative parent to protect the domestic industry like an infant instead of giving opportunity and incentivising the development in an open economy.

Subsequently, the failure of the third five-year plan led to the devaluation of money and inflationary recession. This ongoing foreign exchange crisis facilitated the liberalisation of FDI in the manufacturing sector to finance the foreign exchange.[3] The private foreign investment showed some increment in 1959. Companies like Cadbury Chocolates, Tube Investments, Reckitt and Coleman, Horlicks, Pfizer, Parke-Davis, Otis Elevator, Coke, Pepsi, Vicks, Nestle, Siemens, Pharmacia, Hoechst, BASF entered India.

However, this brief timeline of FDI inflow had ramifications which subdued private investment in India.

(a) Firstly, local industries bore the brunt of technological development. It failed to keep pace with the budding competitiveness from both foreign industries and domestically sound industries in terms of capital, technology, managerial skills and entrepreneur skills.

(b) Secondly, the concessions and incentives which initially profited and attracted the foreign companies led to the outflow on account of remittances of dividends, profits, royalties and technical fee abroad on account of servicing of FDI.

(c) Thirdly, the oil crisis[4] of 1973 worsened the geo-political scenario and adversely impacted the supply of oil due to rise in the prices from $3 per barrel to $12. The oil crisis severely impacted the balance of payments, ultimately leading to taking immediate action in order to conserve the foreign exchange.

Conservative Approach to Foreign Exchange Mechanism in India

The above panoramic view of the economic regime necessitated the legislation of the Monopolies and Restrictive Trade Practices Act, 1969 (MRTP) and the Foreign Exchange Regulation Act, 1973 (FERA). The objective of FERA was to conserve and regulate the foreign exchange within the country in the backdrop of paucity of foreign exchange. It was to ensure proper utilisation of foreign exchange resources in the economic development of India. It aimed at boosting the capital market by regulating the foreign exchange reserves and placing restrictions on profits of MNC’s and helped local businesses to raise capital.

(a) Clause 29 of FERA restricted the establishment of a place of business and acquisition of undertaking in India subject to the permission of RBI. Ownership was pegged up to 40% which required prior permission for sale and pricing of shares.

The provisions of FERA were implemented according to the regulatory framework by the Department of Industrial Development.

According to the rules by the Ministry of Industry, in order to protect small-scale industries, technical and financial foreign collaboration was not considered where indigenous technology was fully developed. Foreign collaborations were only permitted in highly export oriented or sophisticated technological industries. However, it had to fulfil the export obligations by exporting a certain minimum part of annual turnover.

Foreign equity was allowed up to 74% in industries which complied with 60% of export obligations. On the other hand, firms producing goods using highly sophisticated technology for domestic use up to 75% were allowed to have foreign equity by 74%. Foreign firms were permitted to set up industries in the “core” and “heavy industries” except for industries reserved for the public sector. High priority industries which required highly advanced technology and large investments were given automatic permission with foreign equity allowed up to 51%. The decisions related to payments and foreign exchange vested with the RBI. Permissible range of royalty payments and technology transfer agreements were specified for different industries. Foreign investors were barred in trading and industries dealing with consumer goods.

As a result, the manufacturing sector, particularly chemical and metal-based industries, food and beverages industries attracted the foreign direct investment.

It has been observed that business either follows the law to the letter or leaves the country or negotiates or takes pre-emptive action[5] to comply with the regulatory framework of the foreign ownership. Such reaction is imperative to determine the behavioural changes in international business when the legislative regime becomes regulatory in nature.

(a) In response to the legal regime, big companies such as ITC, Ponds, Colgate-Palmolive diluted their foreign equity through public shares. Coca-Cola and IBM[6] decided to leave the Indian territory because they did not want to disclose the secrets behind their products’ formula.

(b) According to the RBI annual report 1977-1978, around 54 companies out of 841 cases had wound up.[7]

(c) Some companies negotiated with the Government to avoid divestment. The deliberations and tactics made by the business houses rendered the implementation of FERA tardy.

(d) Hindustan Unilever diversified its business by revamping the operations in a  technologically advanced fashion along with increasing exports sales in the 1970’s. On the other hand, the business of ITC which was susceptible to Indianisation due to the nature of its business, diluted equity in order to raise funds for diversification in new product lines and businesses.

The implication of the responses of business is significant to understand how the implementation of FERA deviated from the objective of its formation. FERA failed in restricting the activities of the MNCs in India. Moreover, the decrease in foreign reserves due to dividend payments accounted for only 4% on which restrictions of FERA were imposed while the major account of flow of foreign exchange (85%) was constituted by imports itself.[8]

The regulatory regime in pursuit of conserving the scarce foreign exchange, thus divorced itself from generating funds of investment from external sources. RBI was the sole authority to grant approvals and permissions to the dealers as well as rate of foreign exchange. Any violation would invite a criminal obligation with the offender being at sole mercy of the Enforcement Directorate.

The gap between the intent of FERA and actual implementation manifested the reasons behind the failure of the “regulative” and “prohibitive” legislative framework for FDI in India.

(a) Firstly[9], the foreign companies who were directed to dilute their share of equity to transfer the ownership to Indians became “domestic” enterprises. Such industries were granted licences which gave them an opportunity to diversify and expand. The capital generated from such dilution of equity was used to establish industries in which they were prohibited earlier as “foreign enterprise” displacing the small-scale enterprises.

(b) Secondly[10], the companies diversified and expanded by technological collaborations. So the additional royalty payments, technical fees, raw material import bills led to the outflow of foreign exchange.

(c) Thirdly, the myopic view in the generation of savings for investment by the public sector is the failure of the planning process. Instead, the savings were consumed by the public sector due to which the State had to borrow not only to meet the revenue expenditure but also to finance the deficit and investment.

(d) Fourthly, due to financial repression, the nationalisation of banks and restrictions of the capital market further hindered the growth of the economy.

(e) Fifthly, the reservation of the public sector and domestic industries led to the failure in the development of the domestic industries.

Due to these reasons, the gap between the public revenue and expenditure widened. This led to increased borrowing from IMF (International Monetary Fund) in the form of SAP (structural adjustment program)[11]. The economic and industrial landscape in India shook the international confidence and credit rating. The apparent mismanagement of the public sector and repercussions of FERA led to the liberalisation in industrial and trade policies. The pre-1991 liberalisation was at infancy stage which underpinned the formulation of the New Economic Policy, 1991 (NEP). The disequilibrium of the balance of payments (reduction in foreign exchange reserves) led to the structural reformation known as New Economic Policy, 1991.

FEMA (Foreign Exchange Management Act) as Protagonist of the Economic Liberalisation

NEP, 1991 centered around the reduction of State interference in the economy and delicensing of major industries without any investment limits. On the proposed recommendations of the Tarapore Committee, construction of a proper legislative framework was suggested. According to the recommendations, it was necessary to design a legislative framework compatible with “facilitative” or “liberal” ideas of structural reforms. The financial liberalisation came as a tool to promote and facilitate industrialisation in a mixed economy.

As an outcome, Foreign Exchange Management Act, 1999 (FEMA) was enacted to facilitate external trade and payments and to promote orderly maintenance of foreign exchange market in India. In simpler words, FEMA was enacted to remove the hindrances in the inflow of FDI in India. The role of FEMA was to make the business environment conducive to globalisation and to facilitate the incoming of foreign direct investment in India.[12] It governed the liberal aspect of cross-border transactions in the integration of the economies.

(a) Any violation of FEMA, 1999 now attracted civil liability instead of a criminal one as in FERA, 1973. FERA was portrayed as a draconian act and an impediment to the growth of investments in India.[13] The decriminalisation of FERA was a manifestation of a calibrated approach to make the foreign exchange regulations an effective legislation.[14]

(b) NRI and OCB were given the permission to invest 100% in the high priority areas.

(c) The distinction between the role of RBI and Central Government was made. The power to regulate the provisions of FEMA act vested with the RBI viz. Section 47, FEMA, 1999.

The FDI processes post 1991 were classified into automatic and governmental routes.

(a) The automatic routes allowed up to 51% FDI to the industries provided in Industrial Policy Resolution, 1991 after informing the RBI. Government route provided for Foreign Investment Promotion Board (FIPB). FIPB is a single window clearance mechanism for proposals which are not conventionally permitted under the automatic route. It was an amicable process with speedy and transparent mechanism divorced from the red-tapism to encourage FDI in India.

India’s agreement to the status and obligations of International Monetary Fund (IMF), Article VIII provides: … that members shall not impose or engage in certain measures, namely, restrictions on the making of payments and transfers for current international transactions, discriminatory currency arrangements, or multiple currency practices, without the approval of the Fund.

(a) This opened the gates for the market determination of the foreign exchange rate and paved the way for the current account convertibility in 1993.

(b) Since 1993 significant developments took place such as substantial increase in foreign exchange reserves, growth in foreign trade, rationalisation of tariffs, current account convertibility, liberalisation of Indian investments abroad, increased access to external commercial borrowings by Indian corporates and participation of foreign institutional investors in our stock markets.[15]

(c) At the same time, capital account convertibility (CAC) was not initiated due to the prospective ill-effects of CAC in the backdrop of low foreign exchange reserves and disequilibrium in the balance of payments in India.

(d) Adding to the miseries of the Indian economics, the crisis of Mexican and East Asia in 1997 hampered the capital inflow in a liberal capital market. It highlighted the significance of the capacity of the developing economy to prudentially regulate the capital inflow. The newly liberalised economy of India was thus cautioned by the repercussions arising out of the reversed capital inflow.[16]

(e) Consequently, the liberalisation of the capital accounts were effectuated cautiously. They realised the obligations of IMF were not to be construed mechanically, instead, must be subject to certain amount of control and procedural regulations.[17]

Foreign direct investments in India are regulated by Section 6(3)(b) and Section 47 of FEMA, 1999 read with Foreign Exchange Management (Transfer or Issue of a Security by a Person Resident Outside India) Regulations, 2000.

The enactment of FEMA was a tool of the phased liberalisation after 1999 to facilitate convertibility of the capital account transactions. Unlike its predecessor, FEMA did not put an umbrella prohibition on the inflow current account and capital account transactions. Instead, it facilitated the inflow of foreign capital and investments, except some reasonable restrictions in the interest of the public view. Capital account transactions, although liberalised to a certain extent, were regulated by RBI to limit the class of transactions which are to be permitted governed by the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000.

By the virtue of Section 2 of FEMA, the transactions which are explicitly permitted by the RBI in consultation with the Central Government are allowed except:

(a) transactions involving debt instruments; and

(b) durawall of foreign exchange for payments due on account of amortisation of loans or not depreciation of direct investments in the ordinary course of business.

Conclusion

It can be concluded that the transformation in the legislative regulatory framework from a socialist economy to mixed economy is a “gradualist” approach. The systematic structural reform was fundamental in the growth dynamics of capital inflow in India. The amalgamation of the private and public sector had a colossal implication on the investment climate. The participation in the financial globalisation accelerated growth by developing a competitive environment.

The de jure status of FEMA facilitated the robust inflow of investment in the period of economic liberalisation. The enactment of FEMA divorced itself from the conventional skepticism of socialist economy and robustly complemented the macromanagement of foreign exchange flow.

The transition from FERA to FEMA was a fundamental key to create the accessibility to the Indian market for foreign investors. The dawn of FEMA not only succeeded in facilitating the FDI but also generated ample opportunities of economic growth and development.


*Bhumesh Verma is Managing Partner at Corp Comm Legal and can be contacted at bhumesh.verma@corpcommlegal.in. **Namrata Singhal, Third year BBA LLB student, Student Researcher and can be contacted at singhalnamrata25@gmail.com

[1]      Jalal Alamgir, India’s Open-Economy Policy: Globalism, Rivalry, Continuity.

[2]      <http://mospi.nic.in/sites/default/files/Statistical_year_book_india_chapters/Five%20Year%20Plan%20writeup_0.pdf>.

[3]      Nagesh Kumar, Liberalisation and Changing Patterns of Foreign Direct Investments: Has India’s Relative Attractiveness as a Host of FDI Improved? Economic and Political Weekly, Vol. 33, No. 22 (30-5-1998 – 5-6-1998).

[4]      <https://www.theguardian.com/environment/2011/mar/03/1970s-oil-price-shock>.

[5]      Dennis J. Encarnacion and Sushil Vachani, Foreign Ownership: When Hosts Change the Rules, Harvard Business Review, September 1985.

[6]      <https://indianexpress.com/article/explained/express-economic-history-series-3-how-draconian-fera-clause-triggered-flush-of-retail-investors/>.

[7]      Sudip Chaudhuri, FERA: Appearance and Reality, Economic and Political Weekly Vol. 14, No. 16 (21-4-1979).

[8]      K.S. Chalapati Rao, M.R. Murthy and K.V.K. Ranganathan, Foreign Direct Investments in the post-liberalisation period: An Overview, Institute for Studies in Industrial Development, September 1999.

[9]      Yvonne Miller, India’s Regulation of Direct Foreign Investment: Article 29 of the 1973 Foreign Exchange Regulation Act, Boston College Third World Law Journal, January 1981.

[10]    Sudip Chaudhuri, FERA: Appearance and Reality, Economic and Political Weekly Vol. 14, No. 16 (21-4-1979).

[11]    Davinder Kumar Madaan, India’s New Economic Policy – A Macro Study, Indian Journal of Asian Affairs Vols. 8/9, Nos. 1/2 (1995-1996).

[12]    B.B. Tandon and A.K. Vashisht, Financial Sector Reforms: An Unfinished Agenda for Economic Development, 2002.

[13]    Shaji Vikraman, Express Economic History Series- 3: How “Draconian” FERA Clause Triggered Flush of Retail Investors, The Indian Express, 5-4-2017.

[14]    Bharat Vasani, Decriminalising our Company Law—Has the Pendulum Moved Too Far? India Corporate Law, A Cyril Amarchand Mangaldas Blog 5-12-2019.

[15]    K.A. Manshoor v. Govt. of India, 2009 SCC OnLine Mad 1839.

[16]    Revisiting Capital Account Convertibility in the Aftermath of the Currency Crises, Neil Dias Karunaratne, Intereconomics, October 2001.

[17]    Yaga Venugopal Reddy, Governor of the Reserve Bank of India, Point of View: Converting a Tiger, Finance and Development, March 2007, Vol. 44,
No. 1.

Case BriefsSupreme Court

Supreme Court: On the question of liability to be proceeded with for offence under Section 68 of FERA, 1973, the bench of Ashok Bhushan and R. Subhash Reddy, JJ has held that the same depends on the role one plays in the affairs of the company and not on mere designation or status. The Court explained,

“for proceeding against a Director of a company for contravention of provisions of FERA, 1973, the necessary ingredient for proceeding shall be that at the time offence was committed, the Director was in charge of and was responsible to the company for the conduct of the business of the company.”

Drawing correlation between Section 141 of the Negotiable Instruments Act, 1981 and Section 68 of FERA, 1973, the Court explained that Section 141 of NI Act contains the same conditions for a person to be proceeded with and punished for offence as contained in Section 68 of FERA, 1973. While coming to the aforementioned conclusion, the Court noticed that Section 141(1) of NI Act uses the same expression “every person, who, at the time the offence was committed, was in charge of and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence”. It, hence, said that Section 68 of FERA, 1973 as well as Section 141 of the Negotiable Instruments Act deals with the offences by the companies in the same manner.

The bench noticed that Section 68 of FERA, 1973 deals with “Offences by companies” and Section 68(1) creates a legal fiction, i.e., “shall be deemed to be guilty”. The legal fiction triggers on fulfilment of conditions as contained in the section. The words “every person who, at the time of the contravention was committed, was in charge of, and was responsible to, the company for the conduct of business” has to be given some meaning and purpose.

“The provision cannot be read to mean that whosoever was a Director of a company at the relevant time when contravention took place, shall be deemed to be guilty of the contravention. Had the legislature intended that all the Directors irrespective of their role and responsibilities shall be deemed to be guilty of contravention, the section could have been worded in different manner. When a person is proceeded with for committing an offence and is to be punished, necessary ingredients of the offence as required by Section 68 should be present.”

The bench agreed with the submission that FERA, 1973 does not contemplate any complaint but the Scheme of the Act indicates that a person, who is to be proceeded with has to be made aware of the necessary allegations, which may constitute an offence on his part. It said that though a person in the commercial world having a transaction with company is entitled to presume that the Directors of the company are in charge of the affairs of the company, the presumption of a person in the commercial world is a rebuttable presumption and when adjudicating authority proceeds to impose a penalty for a contravention of FERA, 1973, essential ingredients constituting an offence under the FERA read with Section 68 has to be communicated to the person proceeded with to enable him to make effective representation in the matter.

It further explained that in FERA, 1973 for imposing a penalty under Section 50, the adjudicating officer is required to hold an enquiry after giving the person a reasonable opportunity for making a representation in the matter. Even though, FERA, 1973 does not contemplate filing of a written complaint but in proceedings as contemplated by Section 51, the person, who has to be proceeded with has to be informed of the contravention for which penalty proceedings are initiated. The expression “after giving that person a reasonable opportunity for making a representation in the matter” as occurring in Section 51 itself contemplate due communication of the allegations of contravention and unless allegations contains complete ingredients of offence within the meaning of Section 68, it cannot be said that a reasonable opportunity for making a representation in the matter has been given to the person, who is to be proceeded with.

[Shailendra Swarup v. Deputy Director, Enforcement Directorate, 2020 SCC OnLine SC 600 , decided on 27.07.2020]


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Op EdsOP. ED.

A. INTRODUCTION

1. Part II of the Arbitration and Conciliation Act, 1996[1] (“the Act”) defines a foreign award and provides the manner/mode for the execution of a foreign award. Depending on the Convention and the framework agreed upon, foreign awards are separately defined under  Section 44 and Section 53, both of which are dealt with under Chapter I and Chapter II of Part II of the Act.

2. As per Section 44, (which is governed under the New York Convention[2]) foreign award is defined as follows:

“44. Definition.– In this Chapter, unless the context otherwise requires, “foreign award” means an award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law force in India, made on or after the 11th day of October, 1960 –

(a) in pursuance of an agreement in writing for arbitration to which the Convention set forth in the First Schedule applies, and

(b) in one of such territories as the Central Government, being satisfied that reciprocal provisions have been made may, by notification in the Official Gazette, declare to be territories to which the said Convention applies.”

3. As per Section 53, (which is governed under the Geneva Convention) foreign award is defined as follows:

53. Interpretation.— In this Chapter “foreign award” means an arbitral award on differences relating to matters considered as commercial under the law in force in India made after the 28th day of July, 1924,—

(a) in pursuance of an agreement for arbitration to which the Protocol set forth in the Second Schedule applies, and

(b) between persons of whom one is subject to the jurisdiction of some one of such powers as the Central Government, being satisfied that reciprocal provisions have been made, may, by notification in the Official Gazette, declare to be parties to the Convention set forth in the Third Schedule, and of whom the other is subject to the jurisdiction of some other of the Powers aforesaid, and

(c) in one of such territories as the Central Government, being satisfied that reciprocal provisions have been made, may, by like notification, declare to be territories to which the said Convention applies, and for the purposes of this Chapter an award shall not be deemed to be final if any proceedings for the purpose of contesting the validity of the award are pending in the country in which it was made….”

4. According to Section 44 of Chapter I of the Act, a foreign award means an arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India, made on or after 11th October, 1960 in pursuance of an agreement in writing for arbitration. The award has to be passed in one such territory with which India has a reciprocal treaty. Similar conditions are specified under Section 53 for the Geneva Convention Awards. The said Awards can be executed as if it was a decree passed by the civil court of original jurisdiction in India as envisaged under Section 36 of the Act. For execution of the award the format laid down in Order 21 Rule 11 (2) of the Code of Civil Procedure, 1908 for execution of decree is required to be followed.

5. Section 48 of the Act lays down conditions for the enforcement of foreign award. Section 48 of the Act reads as follows:

48. Conditions for enforcement of foreign awards.—(1) Enforcement of a foreign award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the court proof that—

(a) the parties to the agreement referred to in section 44 were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or

(b) the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

(c) the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration:

Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be enforced; or

(d) the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or

(e) the award has not yet become binding on the parties or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.

(2) Enforcement of an arbitral award may also be refused if the court finds that—

(a) the subject-matter of the difference is not capable of settlement by arbitration under the law of India; or

(b) the enforcement of the award would be contrary to the public policy of India.

Explanation 1.– For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,–

(i) the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81; or

(ii) it is in contravention with the fundamental policy of Indian law; or

(iii) it is in conflict with the most basic notions of morality or justice.

Explanation 2. — For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.

(3) If an application for the setting aside or suspension of the award has been made to a competent authority referred to in clause (e) of sub-section (1) the Court may, if it considers it proper, adjourn the decision on the enforcement of the award and may also , on the application of the party claiming enforcement of the award, order the other party to give suitable security.”

6. The grounds mentioned in Section 48 are watertight i.e. no grounds outside Section 48 can be looked at. The enforcement of a foreign award under Section 48 of the Act may be refused only if the party resisting enforcement furnishes to the Court proof that any of the stated grounds has been made out to resist enforcement. The grounds for resisting enforcement of foreign award under Section 48 may be classified into three grounds – (i) grounds which affect the jurisdiction of the arbitration proceedings; (ii) grounds which affect party interest alone; and (iii) grounds which go to the public policy of India, as explained by Explanation to Section 48(2).

7. Through the present article, the author has analysed/discussed the ruling of the Supreme Court in  Vijay Karia  v. Prysmain Cavi E Sistemi SRL[3] , wherein the Court has discussed/dealt with the enforcement of foreign award under Section 48 of the Act.

B. BRIEF FACTS

8. The brief facts of this case are as follows:

8.1 Appellant 1 i.e. Vijay Karia and Appellants 2 to 39 (who are represented by Appellant 1) (collectively referred to as “the appellants”) were non-cooperative shareholders of Ravin Cables Ltd. (“Ravin”). On January 19, 2010, the appellants and Ravin entered into a Joint Venture Agreement with Respondent 1 i.e. Prysmian Cavi E Sistermi SRL (“Respondent 1) (a company registered under the laws of Italy). By virtue of the JVA, Respondent 1 acquired a majority shareholding of Ravin’s share capital. Clause 27 of the JVA provided for dispute resolution, under which any dispute arising under the agreement, would be settled exclusively under the Rules of Arbitration of the London Court of International Arbitration (“LCIA”) and the seat of the Arbitration shall be London, United Kingdom.

8.2 On the same day, under a separate ‘Control Premium Agreement’ Respondent 1 (claimant in the arbitration) paid substantial consideration to the appellant (respondent in the arbitration) as ‘control premium’ towards the acquisition of the share capital of Ravin. As per the terms of the JVA, until the expiry of the integration period, Ravin was to be jointly managed by the CEO & Managing Director and after the efflux of the integration period, Managing Director was solely responsible for managing Ravin. However, during the integration period the existing CEO (earlier appointed by Respondent 1) was removed and replaced by the Board of Directors (at the instance of the appellants). Thereafter, the appellants’ directors opposed the appointment of a CFO whose appointment was assented to by Respondent 1. The interference in the management and control of Ravin led to disputes between the parties.

8.3 As a result, in February 2012, Respondent 1  invoked arbitration proceedings against the appellants, alleging that there have been material breaches committed under the JVA. As a result, the LCIA appointed a sole arbitrator to adjudicate the disputes between the parties. The parties filed their respective claims/counter-claims before the  sole arbitrator.

8.4 Considering the various issues were raised by the respective parties at different stages, the  sole arbitrator passed three (3) Interim arbitral awards and one (1) final arbitral award. After considering the facts and the pleadings, the  sole arbitrator passed the final arbitral award in favour of  Respondent 1 (claimant in the arbitration) and rejected the counter-claims of the appellants. The Arbitral Tribunal allowed all the reliefs sought by Respondent 1 and directed the appellants to transfer 10,252,275 shares held by them to  Respondent 1. The appellants were further directed to reimburse the legal costs of the arbitration as determined by the LCIA Court.

8.5 The final award was never assailed by the appellants before the English Courts and only when the award-holder brought the arbitral award to India for the purpose of its enforcement, the appellants raised certain objections under Section 48 of the Act. The  Single Judge of the  Bombay High Court after dealing with the objections raised by the appellants, stated that the final arbitral award must be recognised and enforced, and the objections raised by the appellants do not fall under the pigeonholes contained in Section 48 of the Act. Since Section 50 of the Act, does not provide an appeal when a foreign award is recognised and enforced by a judgment of a  Single Judge of a High Court, the appellants filed an appeal before the Supreme Court under Section 136 of the Constitution of India.

C. ISSUES RAISED

9. The appellants’ contentions can be categorised broadly into the three ‘pigeonhole’ grounds (para 25) viz. 

(i) that the party was unable to present its case before the Tribunal,

(ii) that the Tribunal failed to deal with the contentions raised by the appellants [under Section 48(1)(b)],

(iii) that the foreign award is against the public policy of India [under Section 48(2)(b)] in two respects viz. (a) that it would be in contravention to the fundamental policy of Indian law; and (b) that it would violate the most basic notions of justice.

10. The issues raised by the appellants were dealt/answered by the Supreme Court as follows –

I. Exercise of power under Article 136 while dealing with an order enforcing the foreign award (para 24):

i Section 37 of the Arbitration Act, which is contained in Part I of the said Act, provides an appeal against either setting aside or refusing to set aside a ‘domestic’ arbitration award. The legislative policy so far as recognition and enforcement of ‘foreign’ arbitration awards is that an appeal is provided against a judgment refusing to recognise and enforce a foreign award. The Act does not provide for an appeal against an order recognising and enforcing an award.

ii This is because the policy of the legislature is that there ought to be only one bite at the cherry in a case where objections are made to the foreign award on the extremely narrow grounds contained in Section 48 of the Act and which have been rejected. This is in consonance with the fact that India is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (“the New York Convention”) and intends – through this legislation – to ensure that a person who belongs to a Convention country, and who, in most cases, has gone through a challenge procedure to the said award in the country of its origin, must then be able to get such award recognised and enforced in India as soon as possible.

iii Bearing this in mind, it is important to remember that the Supreme Court’s jurisdiction under Article 136 should not be used to circumvent the legislative policy so contained. The Court should be very slow in interfering with such judgments, and should entertain an appeal only with a view to settle the law if some new or unique point is raised which has not been answered by the Supreme Court before, so that the Supreme Court judgment may then be used to guide the course of future litigation in this regard. Also, it would only be in a very exceptional case of a blatant disregard of Section 48 of the Arbitration Act that the Supreme Court would interfere with a judgment which recognises and enforces a foreign award however, inelegantly drafted the judgment may be.

II. Public policy post 2015 Amendment (paras 37- 40):

i. By the 2015 Amendment Act[4], Section 48 was amended to delete the ground of “contrary to the interest of India”. Also, what was important was to reiterate Renusagar Power Co. Ltd. v. General Electric Co.[5] position, that the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute [vide Explanation 2 to Section 48(2)].

ii. It will be noticed that in the context of challenge to domestic awards, Section 34 of the Arbitration Act differentiates between international commercial arbitrations held in India and other arbitrations held in India. So far as “the public policy of India” ground is concerned, both Sections 34 and 48 are now identical, so that in an international commercial arbitration conducted in India, the ground of challenge relating to “public policy of India” would be the same as the ground of resisting enforcement of a foreign award in India.

iii. Why it is important to advert to this feature of the 2015 Amendment Act is that all grounds relating to patent illegality appearing on the face of the award are outside the scope of interference with international commercial arbitration awards made in India and foreign awards whose enforcement is resisted in India[6]. This statement of the law applies equally to Section 48 of the Arbitration Act.

iv. Indeed, this approach has commended itself in other jurisdictions as well. Thus, in Sui Southern Gas Co. Ltd. v. Habibullah Coastal Power Co.[7], the Singapore High Court, after setting out the legislative policy of the Model Law that the ‘public policy’ exception is to be narrowly viewed and that an arbitral award that shocks the conscience alone would be set aside.

III. Pro-enforcement Bias (para 47):

i.  US cases show that given the “pro-enforcement bias” of the New York Convention, which has been adopted in Section 48 of the Arbitration Act, 1996 – the burden of proof on parties seeking enforcement has now been placed on parties objecting to enforcement. In the guise of public policy of the country involved, foreign awards cannot be set aside by second guessing the arbitrator’s interpretation of the agreement of the parties; the challenge procedure in the primary jurisdiction gives more leeway to the Courts to interfere with an award than the narrow restrictive grounds contained in the New York Convention when a foreign award’s enforcement is resisted.

IV. Discretion of the Court to enforce foreign awards (paras 48, 49, 50, 52, 55, 56):

i. Enforcement of a foreign award under Section 48 of the Arbitration Act may be refused only if the party resisting enforcement furnishes to the Court proof that any of the stated grounds has been made out to resist enforcement. The said grounds are watertight – no ground outside Section 48 can be looked at. Also, the expression used in Section 48 is “may”.

ii. When the grounds for resisting enforcement of a foreign award under Section 48 are seen, they may be classified into three groups – (i) grounds which affect the jurisdiction of the arbitration proceedings; (ii) grounds which affect party interest alone; and (iii) grounds which go to the public policy of India, as explained by Explanation 1 to Section 48(2).

iii. Where a ground to resist enforcement is made out, by which the very jurisdiction of the tribunal is questioned – such as the arbitration agreement itself not being valid under the law to which the parties have subjected it, or where the subject-matter of difference is not capable of settlement by arbitration under the law of India, it is obvious that there can be no discretion in these matters. Enforcement of a foreign award made without jurisdiction cannot possibly be weighed in the scales for a discretion to be exercised to enforce such award if the scales are tilted in its favour. In simpler words, if an objection made to the jurisdiction of the Arbitral Tribunal, and the parties are able to satisfy that the award was made without the Arbitral Tribunal having jurisdiction, then the Courts have said that they will not exercise its discretion to enforce an award.

iv. On the other hand, where the grounds taken to resist enforcement can be said to be linked to party interest alone, for example, that a party has been unable to present its case before the arbitrator, and which ground is capable of waiver or abandonment, or, the ground being made out, no prejudice has been caused to the party on such ground being made out, a Court may well enforce a foreign award, even if such ground is made out.

v. When it comes to the “public policy of India” ground, again, there would be no discretion in enforcing an award which is induced by fraud or corruption, or which violates the fundamental policy of Indian Law, or is in conflict with the most basic notions of morality or justice.

vi. The expression “may” in Section 48 can, depending upon the context, mean “shall” or as connoting that a residual discretion remains in the Court to enforce a foreign award, despite grounds for its resistance having been made out. What is clear is that the width of this discretion is limited to the circumstances pointed out herein above, in which case a balancing act may be performed by the Court while enforcing a foreign award “or was otherwise unable to present his case”, natural justice under Section 48 and failure to determine a material issue would fall under public policy (para 84).

vii. The expression “was otherwise unable to present his case” occurring in Section 48(1)(b) cannot be given an expansive meaning and would have to be read in the context and colour of the words preceding the said phrase. In short, this expression would be a facet of natural justice, which would be breached only if a fair hearing was not given by the arbitrator to the parties. Read along with the first part of Section 48(1)(b), it is clear that this expression would apply at the hearing stage and not after the award has been delivered, as has been held in Ssangyong[8] (supra).

viii. A good working test for determining whether a party has been unable to present his case is to see whether the factors outside the party’s control have combined to deny the party a fair hearing. Thus, where no opportunity was given to deal with an argument which goes to the root of the case or findings based on evidence which go behind the back of the party and which results in a denial of justice to the prejudice of the party; or additional or new evidence is taken which forms the basis of the award on which a party has been given no opportunity of rebuttal, would, on the facts of a given case, render a foreign award liable to be set aside on the ground that a party has been unable to present his case. This must, of course, be with the caveat that such breach be clearly made out on the facts of a given case, and that awards must always be read supportively with an inclination to uphold rather than destroy, given the minimal interference possible with foreign awards under Section 48.

ix. If a foreign award fails to determine a material issue which goes to the root of the matter or fails to decide a claim or counter-claim in its entirety, the award may shock the conscience of the Court and may be set aside, as was done by the Delhi High Court in Campos Brothers Farm v. Matru Bhumi Supply Chain Pvt. Ltd.[9] on the ground of violation of the public policy of India, in that it would then offend a most basic notion of justice in this country.

x. It must always be remembered that poor reasoning, by which a material issue or claim is rejected, can never fall in this class of cases. Also, issues that the tribunal considered essential and has addressed must be given their due weight – it often happens that the tribunal considers a particular issue as essential and answers it, which by implication would mean that the other issue or issues raised have been implicitly rejected.

xi. For example, two parties may both allege that the other is in breach. A finding that one party is in breach, without expressly stating that the other party is not in breach, would amount to a decision on both a claim and a counterclaim, as to which party is in breach. Similarly, after hearing the parties, a certain sum may be awarded as damages and an issue as to interest may not be answered at all. This again may, on the facts of a given case, amount to an implied rejection of the claim for interest.

xii. The most important point to be considered is that the foreign award must be read as a whole, fairly, and without nit-picking. If read as a whole, the said award has addressed the basic issues raised by the parties and has, in substance, decided the claims and counterclaims of the parties, enforcement must follow.

V. Violation of FEMA Rules and fundamental policy of Indian Law (paras 91, 93):

i. Based on the Non-Debt Instrument Rules[10], it was argued that that the transfer of shares from the Karias (appellants), who are persons resident in India, to  Respondent 1, who is a person resident outside India, cannot be less than the valuation of such shares as done by a duly certified Chartered Accountant, Merchant Banker or Cost Accountant, and, as the sale of such shares at a discount of 10% would violate Rule 21(2)(b)(iii), the fundamental policy of Indian Law contained in the aforesaid Rules would be breached; as a result of which the award cannot be enforced.

ii. The Supreme Court upheld the Delhi High Court judgment in Cruz City Mauritius Holdings v. Unitech Limited[11], wherein the Delhi High Court held that a contravention of a provision of law is insufficient to invoke the defence of public policy when it comes to enforcement of a foreign award. Contravention of any provision of an enactment is not synonymous to contravention of fundamental policy of Indian Law. The expression fundamental policy of Indian Law refers to the principles and the legislative policy on which Indian statutes and laws are founded. The expression “fundamental policy” connotes the basic and substratal rationale, values and principles which form the bedrock of laws in our country. The objections to enforcement on the ground of public policy must be such that offend the core values of a member State’s national policy and which it cannot be expected to compromise. The expression “fundamental policy of law” must be interpreted in that perspective and must mean only the fundamental and substratal legislative policy, not a provision of any enactment. The contention that enforcement of the award against Unitech must be refused on the ground that it violates any one or the other provision of FEMA, cannot be accepted; but, any remittance of the money recovered from Unitech in enforcement of the award would necessarily require compliance of regulatory provisions and/or permissions.

iii. The Supreme Court held (paras 91 and 93) that first and foremost, FEMA – unlike FERA – refers to the nation’s policy of managing foreign exchange instead of policing foreign exchange, the policeman being  Reserve Bank of India under FERA. It is important to remember that Section 47 of FERA no longer exists in FEMA, so that transactions that violate FEMA cannot be held to be void. Also, if a particular act violates any provision of FEMA or the Rules framed thereunder, permission of Reserve Bank of India may be obtained post-facto if such violation can be condoned.

iv. Neither the award, nor the agreement being enforced by the award, can, therefore, be held to be of no effect in law. This being the case, a rectifiable breach under FEMA can never be held to be a violation of the fundamental policy of Indian Law. Even assuming that Rule 21 of the Non-Debt Instrument Rules requires that the shares be sold by a resident of India to a non-resident at a sum which shall not be less than the market value of the shares, and a foreign award directs that such shares be sold at a sum less than the market value,  Reserve Bank of India may choose to step in and direct that the aforesaid shares be sold only at the market value and not at the discounted value, or may choose to condone such breach.

v. Further, even if Reserve Bank of India were to take action under FEMA, the non-enforcement of a foreign award on the ground of violation of   FEMA Regulations or Rules would not arise as the award does not become void on that count.

vi. The fundamental policy of Indian Law, as has been held in Renusagar [12](supra), must amount to a breach of some legal principle or legislation which is so basic to Indian Law that it is not susceptible of being compromised. “Fundamental Policy” refers to the core values of India’s public policy as a nation, which may find expression not only in statutes but also time-honoured, hallowed principles which are followed by the Courts. Judged from this point of view, it is clear that resistance to the enforcement of a foreign award cannot be made on this ground.

D. CONCLUSION

11. After considering the facts and pleading, the Supreme Court confirmed the ruling of the sole arbitrator and dismissed the appeals with heavy costs. The Court stated that their jurisdiction under Article 136 of the Constitution is very limited.

12. On a conjoint reading of the objective of Article V of the New York Convention along with the objectives of the Act, the Supreme Court through the present judgment, has ironed the wrinkles under Section 48 of the Act. The Supreme Court took a holistic view by not just limiting its scope of enquiry to the Indian judgments but has also relied on judgments of various other jurisdictions to arrive at a global consensus on various issues involved in challenging the enforcement of a foreign award. The Supreme Court has adopted a balanced approach while dealing with the scope of judicial interference at the time of enforcement of foreign award and exercising its jurisdiction under Article 136 of the Constitution.


*Alumni (2012-2017) of Government Law College, Mumbai, practicing Advocate at High Court at Mumbai and maybe reached out vatsalapant94@gmail.com. The views expressed herein are personal and do not represent views of any organisation. 

[1] Arbitration and Conciliation Act, 1996 

[2] Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958)

[3] 2020 SCC OnLine SC 177  

[4] Arbitration and Conciliation (Amendment) Act, 2015 

[5] 1994 Supp (1) SCC 644

[6] Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India, (2019) 15 SCC 131 (paras 30 & 43)

[7] [2010] 3 SLR 1 : (2010) SGHC 62

[8] (2019) 15 SCC 131

[9] 2019 SCC OnLine Del 8350

[10] Foreign Exchange Management (Non-debt Instruments) Rules, 2019 

[11] 2017 SCC OnLine Del 7810  

[12] 1994 Supp (1) SCC 644

Case BriefsSupreme Court

Supreme Court: The bench of AM Sapre and Indira Banerjee, JJ has held that the appellate forum for deciding the appeals arising out of the order passed by the Adjudicating Officer under Section 51 of Foreign Exchange Regulation Act, 1973 (FERA) whether filed prior to 01.06.2000 or filed after 01.06.2000 must be the same, i.e., Appellate Tribunal under Foreign Exchange Management Act, 1999 (FEMA)

Going into the legislative intent behind Section 49 (5)(b) of FEMA, that deals with repeal and saving in relation to the action taken and to be taken under FERA, 1973, the Court noticed that the legislature has equated the Appellate Board constituted under FERA with the Appellate Tribunal constituted under FEMA for disposal of the appeals filed under Section 52(2) of FERA against an order passed under Section 51 of FERA which were   pending   before   the   Appellate   Board   which was dissolved on 01.06.2000.  Such appeals stood transferred from the Appellate Board to the Appellate Tribunal for their disposal in accordance with law.

The Court noticed that the Special Director (Appeals) is subordinate in hierarchy to the Appellate Tribunal prescribed under Section 49(5)(2) of FEMA and hence, said that if the argument that the appellate forum in this case for filing appeal is ­ “Special Director (Appeals)” and not the “Appellate Tribunal” under FEMA is accepted, then it will result in anomalous situations which will again be incongruous. The Court explained:

“the orders passed by the Appellate Tribunal in the appeals, which stood transferred to the Appellate Tribunal by virtue of Section 49 (5)(b), are appealable to the High Court under Section 35 of FEMA whereas the orders passed by the Special Director (Appeals) in the   appeals   filed   after   01.06.2000 are not appealable to the High Court under Section 35 of FEMA. So, against the same order, one appellant has a right of appeal to the High Court but the other appellant has no such right of appeal because he suffered   dismissal   of his appeal from Special Director (Appeals) against whose order appeal does not lie under Section 35 to the High Court.”

It was, hence, held that it was not possible to hold that one appeal would be maintainable before the Appellate Tribunal and the other appeal arising out of similar order would be maintainable before the Special Director (Appeals),  who is subordinate in hierarchy to the Appellate Board.  [Union of India v. Premier Ltd., 2019 SCC OnLine SC 95, decided on 29.01.2019]

Case BriefsHigh Courts

Delhi High Court: A Single Judge Bench of the Delhi High Court comprising of Sanjeev Sachdeva, J., allowed a Criminal Revision Petition before it. The petition alleged failure of the respondents to comply with Section 61(2)(ii) of the Foreign Exchange Regulations Act, 1973 (hereinafter ‘FERA’) which prohibits taking cognizance by a court of offences punishable under Section 56 and 57 of FERA unless opportunity is provided to the accused to prove that they had the requisite permission.

The petitioners argued that no such opportunity was provided, therefore, the trial court could not have taken cognizance and framed charges against the petitioners resulting in the proceedings thereto liable to being quashed. The counsel for the respondent, in response, conceded to the argument that there is a requirement of giving an opportunity to the accused to show that they had the requisite information and that it was provided when the accused had appeared before the Authority for recording his statement under Section 40 of FERA, however, the counsel submitted that the accused had failed to produce the permission when enquired about it. She further submitted that there is no mandatory requirement of giving an “opportunity notice”.

The statement was admittedly recorded in 1996, while the offence was alleged to have been committed in 1995. An “Opportunity Notice” was interestingly issued by respondents in 2002 which specifically asked the petitioners to show if they had the requisite permission in accordance with Section 61(2)(ii). However, on reviewing the statements on record, and the document itself, it was found that the notice was neither sent to the correct address nor served on the petitioner. The Court, while observing that there would have been no need to serve a notice in 2002 had an opportunity actually been provided to the petitioner earlier, rejected the arguments of the respondents. Petition allowed. Impugned order quashed. [United India Airways Ltd v. Chief Enforcement Officer, Enforcement Directorate, 2018 SCC OnLine Del 8233, decided on 05.04.2018]

Case BriefsSupreme Court

Supreme Court: In an appeal filed against the order of the Bombay High Court which had dislodged the order of discharge passed by the Chief Metropolitan Magistrate, Mumbai in the case where the company as well as its officer were facing trial for the offence punishable under Section 56(1)(i) of the Foreign Exchange Regulation Act, 1973 for the alleged contravention of the provisions of Sections 18(2) and 18(3) of FERA, the Court allowed the appeal, thereby, restoring the order of the Magistrate.

In the case where the appellants had purchased goods from Korea and Japan by spending foreign exchange, the Appellate Tribunal for Foreign Exchange (Tribunal) held that spending of foreign exchange in international trade by an Indian person is not forbidden by Section 19 of FERA. It was further held that there is no law whereby Indian resident is regulated from entering into international trade and hence, the appellant cannot be held guilty for Section 18(2) read with Section 18(3) of FERA. Hence, the Magistrate had discharged the appellants after application was filed under Section 245 of the Code of Criminal Procedure, 1973 for discharge of the accused. The High Court had, however, held that the order of the Tribunal was based on technical grounds and not merits.

The bench of Dipak Misra and Shiva Kirti Singh, JJ, hence, said that the High Court had totally erred in law as the judgment of the tribunal was decided on merits, inasmuch as findings had been recorded after analysis of facts and the conclusion had been arrived at that the appellants have not violated the provisions of the Act. [Videocon Industries Ltd.  v. State of Maharashtra, 2016 SCC OnLine SC 585, decided on 19.04.2016]