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TMI Blog2019 (2) TMI 1039X X X X Extracts X X X X X X X X Extracts X X X X ..... portant legal issues which have to be gone into. The balance of convenience is also in favour of the appellants. The issue of penalty (being totally disproportionate) as raised by the appellant i.e. grossly arbitrary has also resulted in causing irreparable harm loss and injury to the appellants are to be considered at the time of hearing the appeal on merit. The appeals are pending for the last more than 4 years so as the stay applications. The same have been adjourned one on reason or the other. The appeals could not be decided on merit as the respondent was insisting that before deciding the appeals, the pending application under the provisions of section be decided at the first in stance. Even otherwise the earlier tribunal is merged with the present tribunal in July, 2017 and many files were not transferred on time. In order to strike out the balance between the parties at this stage, direct that without prejudice, the appellants shall deposit ₹ 2 Crores lump-sum with the respondent within eight weeks from today. The hearing of the appeal is expediated. The appeals are listed on 1st July, 2019. All pending applications are disposed of accordingly. - FPA-FE-40/M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (Formerly known as M/s. Welspun Gujarat Stahl Rohren Ltd.) x. Penalty of ₹ 25,00,000 (Twenty five Lakhs only) on Shri K.H. Vishwanathan, Director of M/s. Welspun Corporation (Formerly known as M/s. Welspun Gujarat Stahl Rohren Ltd.) xi. Penalty of Rs. of ₹ 25,00,000 (Twenty five Lakhs only) on Shri Raj Kumar Jain, Director of M/s. Welspun Corporation Ltd. (Formerly known as Welspun Gujarat Stahl Rohren Ltd.) xii. Penalty of Rs. of ₹ 25,00,000 (Twenty five Lakhs only) on Shri Nirmal Gangwal, Director of M/s. Welspun Corporation Ltd. (Formerly known as M/s. Welspun Gujarat Stahl Rohren Ltd.) xiii. Penalty of ₹ 25,00,000 (Twenty five Lakhs only) on Shri Asim Chakraborty, Director of M/s. M/s. Welspun Corporation Ltd. (Formerly known as M/s. Welspun Gujarat Stahl Rohren Ltd.) xiv. Penalty of ₹ 25,00,000 (Twenty five Lakhs only) on Shri Ashok Jain, Director of M/s. Welspun Wintex Ltd. 3. The total penalty ₹ 55,25,00,000/- (Rupees Fifty Five Crores Twenty Five Lakh only) imposed on the appellants by the Adjudicating Authority who directed the appellants to deposite in the Office of Directorate of Enforcement at 23/24, Mittal Cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cations were disposed off by returning the same vide their letter dated 22.04.2009. (c ) The above information was forwarded to the Directorate of Enforcement for necessary action under FEMA and investigation with regard to the utilization of the loan raised by the overseas joint venture namely Red Lebondal Ltd., Cyprus. Based on the said reference from the RBI, investigations were initiated and documents were requisitioned vide Directive dated 19.05.2009 from the aforesaid noticee companies. Vide their respective letters dated 26.05.2009 the noticees confirmed to have issued the guarantee in favour of overseas JV RLLC on 20.12.2007. Thereafter Shri Muralilal Mittal, Authorized representative of the said companies, duly authorized by the Board of Directors vide resolutions dated 11.06.2008, deposed u/s 37 of the FEMA, 1999. In his statements dated 15.06.2009 and 27.05.2011 recorded under section 37 of the FEMA, 1999 he inter alia, stated that the SPV by name Red Lebondal Ltd., Cyprus (herein after referred to as RLLC ) was formed for exploring opportunities outside India in steel and textile sectors, however, the JV did not take up any business activities except having ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of notes to the financial statements for the year ended 31st March, 2009 contending that it showed at page 14 an amount of USD 2143 as debit balance from the shareholder s current account and claimed that the amount of USD 2143 represents the outstanding amount of share capital of Euro 1442 against 1442 equity shares already issued to the individual share holders. Further vide this office letter dated 21.02.2011, the ICICI Bank was directed to furnish documents in relation to the loan sanctioned by its overseas Joint Venture viz. Red Lebondal Ltd., Cyprus. Vide their letter dated 11.03.2011, the ICICI Bank submitted the documents relating to sanction of credit facility to RLLC. Statement of Mr. Girish Nayak, Senior General Manager, ICICI Bank Ltd., was recorded on 4th July, 2011 in which he, inter alia, stated that the ICICI Bank, UK is a wholly owned subsidiary of ICICI Bank Ltd. and is locally incorporated in UK and is regulated by the Financial Services Authority (FSA) of UK and that the guidelines approved by the Boards of the respective subsidiary are presented to the relevant committees of the ICICI Bank for ensuring alignment with the overall policy of the group. He fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uro 18,000/-. The figure for financial commitment was shown as Euro 4500 and US $ 1,40,00,000. Further the method of investment by the Indian party was shown as market purchase for an amount of Euro 4500. III. In part II of Form ODI against reporting of remittances only the amount of guarantee was shown for an amount of US $ 1,40,00,000. IV. ODI part I was submitted by the Indian parties on 20.12.2007 and part II was submitted on 28.12.2007. The AD forwarded ODI form to RBI vide letter dated 28.12.2007. V. The credit arrangement letter between ICICI Bank, UK and Indian entities mentioned sanction of term loan facility to an SPV to be promoted by you along with Internationale Technische Assistanz SA and other associates primarily for financing investments in Welspun Power and Steel Ltd. The above mentioned documents showed that the party had indicated to the authorized dealer that shares in the joint venture would be acquired by market purchase, however Shri Muralilal Mittal in his statements referred above, confirmed that no remittance was made by Shri Balkrishna Goenka, WGSRL, WWL and KTL (herein after collectively referred to as the Indian Party or the Indian Prom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was necessary that there must be equity participation. The fact that the company held shares and had equity participation in the JV Company on the date prior to the issue of the guarantee is undisputed. The Ministry of Commerce Industrial and Tourism, Department of Registrar of Companies and Official Receiver, Nicosia, Cyprus had issued a Certificate indicating the shareholders of the JV Company which included the Indian entity, a copy of the certificate is annexed hereto for your kind reference. Reliance was also placed on Supreme Court Judgments passed in the case of Prem Lala Nahata Vs. Chandi Prasad Sikaria (2007) 2 SCC 551 and Southern Petrochemical Industries Co. Ltd. Vs. Electricity Inspector and ETIO (2007) 5 SCC 447. The case laws were relied upon to emphasize the significance of consolidating statutes in interpretation of legal provisions. The Indian parties extended guarantees to the overseas joint venture viz. RLLCC without contributing to the share capital of the said overseas joint venture and there has been no payment of consideration for acquisition of the shares respectively held by each of the Indian promoters. Against the aforesaid background, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndian Persons and Intech Metals SA. (b) As per the understanding between CCY, Indian persons and Intech Metals, the unpaid share capital against the allotted shares were to be transferred directly to RLL upon call for such share capital by RLL. It is pertinent to note that the shares were transferred to Indian Persons and Intech Metals SA on 22.11.2007 . (c) RLL, being formed for the purpose of exploring global opportunities in steel and textiles, decided to avail the credit facilities of USD 52 million from ICICI Bank, UK, which was extended on the condition that the same shall be secured by Welspun Corp Ltd., Welspun Wintex Ltd. and Krishiraj Trading Limited. by way of joint and several corporate guarantees. Master Circular on Direct Investment by Residents in JV/WOS, dated 02.07.2007 provided that any Indian party or entity may extend loan or guarantee to only those overseas JV/WOS where the said party/entity has equity participation . Since Welspun Corp Ltd., Welspun Wintex Ltd. and Krishiraj Trading Limited (collectively Indian Entities ) were shareholders of RLL, they provided the corporate guarantees to ICICI Bank, UK on 22.12.2007 . (d) RLL, out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 013 filed 2 applications for post facto approval and compounding. 9. Vide order dated 12.12.2013, Overseas Investment Division of RBI granted post-facto approval without any equity contribution in RLL. Thereafter, on 29.01.2014, RBI allotted UIN to RLL and subsequently, Welspun Corp Ltd. applied for remittance of 450 Euros to RLL. It is pertinent to note that the remittances towards the acquisition of shares by Welspun Corp Ltd., Welspun Wintex Ltd., Krishiraj Trading Limited and Sh. Balkrishan Goenka were made on 02.01.2014 vide demand drafts of Punjab National bank bearing nos. 43247, 43248, 43249 and 43250 respectively. Thereafter, by letter dated 12.02.2014, Welspun Corp Ltd. made an application to RBI for striking-off of RLL, which was allowed vide letter dated 03.04.2014. 10. Welspun Corp Ltd. took out chamber summons on 25.04.2014 for amendment of writ petition no. 2489/2013 for reflecting the fact pertaining to ex post-facto approval relating back to the date on which shares were acquired by Indian Persons. During the pendency of the said petition, Welspun Corp Ltd. received letters dated 23.06.2014 and 25.06.2014 wherein RBI sought to revoke the post-facto appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guarantee to or on behalf of the Joint Venture/Wholly Owned Subsidiary abroad, within the permissible financial commitment, provided that the Indian Party has made investment by way of contribution to the equity capital of the Joint Venture. (5) 14. In case co-joint reading of Regulation 6 and Regulation 2(e) of FEMA 120/2004, it is amply clear that in order to make direct investment outside India, the Indian party shall have contribution in the equity capital of JV, by way of purchase of share, or otherwise, as mentioned in Regulation 2(e) of FEMA 120/2004. It is pertinent to note that so long as the purchase of the shares is complete and the title in which shares is transferred, such purchase of shares qualifies as direct investment and actual remittance towards equity share capital is not postulated. 15. In the present facts of the case, the Indian Persons along with the foreign company are the shareholders in the JV in Cyprus i.e. by acquiring the shares in RLL. This acquisition can be established by way of the share certificate issued by Ministry of Commerce, Industry and Tourism, Department of Registrar of Companies and Official Receiver, Nicosia, Cy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia under Regulation 2(e) and Regulation 6(4) of FEMA 120/2004 contain the word contribution , the same is to be read with the language used in paragraph B.1 (a) of the Master Circular No. 1 / 2007 - 08 dated 02.07.2007 which uses the word participation . It is submitted that the word contribution read along with the word participation does not and cannot be restricted to mean transfer of shares against payment but would also include transfer of shares on deferred payment basis, when the same is permissible under the laws of the host country i.e. Cyprus. The Appellants had acquired shares in RLL and the nonpayment of such shares did not derogate from their rights as shareholders as the same is in consonance with the laws of the host country, i.e. Cyprus. The Respondents failed to take notice of the (Indian) Companies Act, 1956 (as applicable then) which allowed private companies to have unpaid share capital and furthermore accept the amount remaining unpaid on any shares held by a member, although no part of that amount has been called up by the company. Further, reliance is placed on the definition of Transfer as provided under the FEMA, 1999 which is as follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermine whether the business of the overseas JV in which direct investment is made is engaged in bona fide business activity or not, it is imperative to comprehend the phrase bona fide activity in the perspective of the Regulations under FEMA 120/2004. The expression direct investment merely excludes portfolio investments and the activity undertaken by RLL was investment in compulsorily convertible debentures of WSL which is a bona fide business activity. 20. Regulation 7 of FEMA (Transfer or Issue of Any Foreign Security) Regulations, 2004 is not applicable in the present case Regulation 7 of FEMA 120/2004 provides that an Indian Entity engaged in Financial Services Sector in India may make investment in an Entity outside India subject to the condition mentioned therein. It is humbly submitted that since in the present case, the Indian Persons are not engaged in the financial services sector in India, the provisions of Regulation 7 are not only not applicable, but also wrongly invoked. Prima facie the Impugned Order is violative of natural justice as it is beyond the scope of Show-Cause Notice since no ground pertaining to violation of Regulation 7 of FEMA 120/200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of compounding amounts to admission of contravention even though the appellant herein have failed to pay the compounding penalty, Rule 10 of Foreign Exchange (Compounding) Proceedings Rules, 2000 shall apply as the appellants have admissions in the said application thus an adverse inference can be drawn against the appellant as Compounding Application is based on premise of accepting contravention. (As also stated in the case of JVL Agro Industries vs. Union of India (2014 (87)ALLCC 413). 24. In reply to the second submission with regard to the above, it is submitted on behalf of the appellants that by letter dated 12.12. 2013, the RBI has granted ex-post facto approval in terms of Circular No. 96 dated 28.03.2012. Having granted post facto approval, the question of violation of FEMA 120/2004 does not arise at all. Further, the Respondent made an oral argument at the time of hearing, that applying for compounding and the same being rejected or having lapsed, means that the Appellant has accepted its guilt and therefore is debarred from challenging the impugned order. This contention is clearly erroneous since it ignores the basic nature of compounding proceedings being witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are factors to be considered and since in the present case, there was no illegal gain to the Appellant, there is no question of imposition of penalty to neutralize such illegal gain. Neither has any basis for quantifying the penalty imposed been disclosed, nor has any guideline for such quantification been disclosed or applied. Therefore, the penalty being totally arbitrary would be hit by Article 14 of the Constitution and must be quashed. 27. It is submitted that the Directors of Appellant Companies are not liable under S.42 (1) of the FEMA Act as there was no personal gain or advantage to any of Directors from the said transaction. It is pertinent to note that there exists no mens rea on the part of Directors and that and that they acted bona fide based on advise obtained/ received by the Company. In this regard, it is submitted that the following Directors were Non-Executive and/ or Independent Directors of the Appellant who were not involved in day to business of the Company: 1. Mr.Ashok Jain was non-executive director at WWL. 2. Mr. Hotwani was working as Head of Supply Chain Management of WCL and a non-executive director at KTL. 3. Mr.Nirmal Gangwal, indepe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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