2011 (9) TMI 428 - HC - FEMA

Compounding - Foreign Exchange from NRO for Equity Subscription - Amount received in names of director instead of sending the amount towards credit to the company s account - Held That - Facts of each case to be seen before compounding .There is a public interest element in the enactment of regulatory statutes such as the FEMA. Whether compounding of a breach would compromise the public interest involved in the enforcement of law has to be considered in the facts of each case. With regard to the sensitivity nature of the contravention the matter will have to be further investigated by the Directorate of Enforcement

Issues:
1. Challenge to order passed by Deputy General Manager of Reserve Bank of India on compounding of contraventions of Foreign Exchange Management Act, 1999.
2. Nature of contraventions observed regarding foreign exchange received from British nationals for equity subscription.
3. Reasons for not allowing compounding application at the present stage.
4. Provisions of Section 15 of Foreign Exchange Management Act, 1999.
5. Guidelines under Foreign Exchange (Compounding Proceedings) Rules, 2000 and Circular No. RBI/2009-10/56.
6. Exercise of power to compound contraventions judiciously considering national security, money laundering, and regulatory framework.
7. Decision to not grant compounding order due to sensitive nature of contravention and need for further investigation by Directorate of Enforcement.

Analysis:

1. The petitioner challenged an order by the Deputy General Manager of the Reserve Bank of India regarding compounding contraventions of the Foreign Exchange Management Act, 1999. The order stated that contraventions observed required further investigation by the Directorate of Enforcement, hence the compounding application was rejected.

2. The contraventions involved foreign exchange received for equity subscription from British nationals, not in compliance with FEMA provisions. The company's activities and source of income were questioned, leading to the decision that contraventions were of a sensitive nature needing further investigation.

3. The reasons for not allowing the compounding application included the method of investment not complying with FEMA, the company's business activities not as stated, and income sources being rent from property occupants. These factors led to the decision that contraventions were sensitive and required Directorate of Enforcement's investigation.

4. Section 15 of the Foreign Exchange Management Act, 1999 allows contraventions to be compounded within 180 days. Once compounded, no further proceedings can be initiated against the contravener regarding the compounded contravention.

5. Guidelines under the Foreign Exchange (Compounding Proceedings) Rules, 2000 and Circular No. RBI/2009-10/56 provide the framework for processing compounding applications. Factors like gain of unfair advantage, loss caused, and contravener's conduct are considered for passing a compounding order.

6. The power to compound contraventions must be exercised judiciously, considering national security, money laundering, and regulatory framework concerns. Public interest and enforcement of law play a crucial role in deciding whether a contravention can be compounded.

7. The decision not to grant a compounding order was based on the sensitive nature of contraventions, requiring further investigation by the Directorate of Enforcement. The court upheld this decision, allowing Reserve Bank of India to take a final view post the investigation's conclusion.

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