PENALTY ON DIRECTORS CONTRAVENING EXPORT REGULATIONS UNDER FOREIGN EXCHANGE MANAGEMENT ACT, 1999

[Mr. M. GOVINDARAJAN]

Realization and repatriation of foreign exchange

Section 8 of the Foreign Exchange Management Act, 1999 (‘Act’ for short) provides for the realization and repatriation of foreign exchange.  The said section provides that where any amount of foreign exchange is due or has accrued to any person resident in India, such person shall take all reasonable steps to realise and repatriate to India such foreign exchange within such period and in such manner as may be specified by the Reserve Bank.

Regulation 9 of the Foreign Exchange Management (Export of goods and services) Regulations, 2015 (‘Regulations’ for short) provides that the amount representing the full export value of goods / software/ services exported shall be realised and repatriated to India within 9 months or within such period as may be specified by the Reserve Bank, in consultation with the Government, from time to time from the date of export.

Regulation 13 provides that export of goods under special arrangement between the Central Government and Government of a foreign state, or under rupee credits extended by the Central Government to Government of a foreign state shall be governed by the terms and conditions set out in the relative public notices issued by the Trade Control Authority in India and the instructions issued from time to time by the Reserve Bank.       

Contravention by companies

Section 42 of the Act provides that  where a person committing a contravention of any of the provisions of this Act or of any rule, direction or order made thereunder is a company, every person who, at the time the contravention 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 contravention and shall be liable to be proceeded against and punished.  If he proves that the contravention took place without his knowledge or that he exercised due diligence to prevent such contravention, he will not  be punished.

Penalties

Section 13 of the Act provides for penalties for contravening the provisions of the Act, Rules and Regulations made there under by any person.  Such person be liable to a penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or up to Rs.2 lakhs where the amount is not quantifiable, and where such contravention is a continuing one, further penalty which may extend to Rs.5,000/- for every day after the first day during which the contravention continues.  The penalty shall be imposed only after adjudication process is over.

If the Adjudicating Authority deems fits, he may, after recording the reasons in writing, recommend for the initiation of prosecution. If the Director of Enforcement is satisfied, he may, after recording the reasons in writing, may direct prosecution by filing a Criminal Complaint against the guilty person by an officer not below the rank of Assistant Director.

Case law

In SHRI. RAIS AHMED, SHRI. ABDUL SAGIR KHAN VERSUS THE SPECIAL DIRECTOR DIRECTORATE OF ENFORCEMENT, MUMBAI - 2024 (11) TMI 797 - APPELLATE TRIBUNAL UNDER SAFEMA AT NEW DELHI, the appellants were the Directors of Mrugank Investments Limited.  The company made an export to foreign countries through Global Trust Bank Limited to the tune of $903000.  The said company was to realize the export proceeds from the said company in time.  The company failed to recover the same.  The Company sought for extension of the time limit from Reserve Bank of India.  The Reserve Bank of India refused the same.  The Reserve Bank of India put the Company under the caution list restricting its right to make further exports. 

The Special Director, Enforcement Directorate, Mumbai issued  show cause notice on the company and its four directors on 10.10.2015.  The Adjudicating Authority imposed a penalty of Rs.40 lakhs on the company and Rs.4 lakhs on each of its Directors.  The appellants filed an appeal before the Appellate Tribunal.  The Appellate Tribunal waived the condition of pre-deposits.  The Appellate Tribunal directed the appellants to deposit 10% of the penalty amount of penalty imposed against each of them with Bank Guarantee for rest of the ninety per cent of the penalty within 30 days of the receipt of the Order. The appellants approached the High Court which directed the appellants to deposit 10% of the penalty amount of Rs. 4,00,000/ i.e. Rs. 40,000/- and waived the requirement of providing the Bank Guarantees for the rest of the penalty amount.

The two appellants in this case deposited the 10% of the penalty amount.  The appellants submitted the following before the Appellate tribunal-

•  the Appellants had made reasonable efforts to realize the pending export proceeds.
• They sent number of letters and personal reminders to the buyers to expedite the payment of outstanding export proceeds.
• They also visited the buyers and in continuous efforts made by them they could realize part of outstanding export proceeds.
• The said efforts were made known to the Reserve Bank of India.
• The Reserve Bank of India considered their efforts favourably and, therefore, granted necessary extension in the period required for realization. 
• The appellants also instituted legal cases against their buyers before the Mumbai High Court.
• Thereafter they withdrew the case from Mumbai High Court and filed suits before the High Court of Justice, London.
• The appellants took reasonable steps for the recovery of the export proceeds and therefore the provisions of the Act could not be invoked against them.

The appellant prayed to allow their appeal; otherwise prayed for the reduction of penalty amount.

The Department submitted the following before the Appellate Tribunal-

• The impugned order clearly spelt out that the appellants had contravened the provisions of the Act.
• One of the appellants Rais Ahmed admitted that the company was put on caution list of Reserve Bank of India for the non-realization of export proceeds.
• The company had been given extension of time till 31.12.2001.
• The appellants did not produce any documentary evidence for the steps taken by them for the realization of proceeds of export.
• The Reserve Bank of India directed the appellants to contact the Embassy of India but they have not approached the Embassy of India.
• The appellant did not take serious efforts for the legal case in London.

The respondents prayed the Appellate Tribunal to dismiss the appeal.

The Appellate Tribunal considered the submissions of both the parties.  The Appellate Tribunal observed that the conduct of the Appellants in filing Writ Petition before the Hon’ble Bombay High Court and thereafter having yet withdrawn does not reflect the same as reasonable step taken by the Appellants for realization of the pending export proceeds.   The appellants failed to show their correspondence with the High Commission of India in London, in-spite of directions to this effect by the Reserve Bank of India.  The appellants are the responsible Directors for the regular conduct of the business of the company. 

In view of the above, the Appellate Tribunal did not find reason to intervene with the Impugned Order insofar as its findings that the two Appellant Directors have contravened Section 8 of the Foreign Exchange Management Act, 1999 r/w Regulation 9 & 13 of the Foreign Exchange Management (Export of Goods and Services) Regulation 2000 r/w Section 42 of FEMA 1999.  The Appellate Tribunal reduced the penalty from Rs.4 lakhs to Rs.2 lakhs and directed the pre deposit filed by the appellants against the reduced penalty.