2025 (5) TMI 1140 - AT - FEMA

Penalty on the appellant s bank for contraventions of Section 6(3)(b) Section 10(5) and Section 47(3) of FEMA for allowing outward remittance without the approval of RBI - DCF method was applied to determine repurchase price of the share at Rs. 2290 Rs. 2577.25 Rs. 2910 per share having face value of Rs. 10 per share and otherwise purchased at a price of Rs. 1071.81 per share and thereby huge amount was siphoned off at the cost of the home buyers and thus cognizance was taken by the Apex Court HELD THAT - As found that in the head of valuation in the brief summary that no person from Mauritius travelled to India and no person from India travelled to Mauritius. Indian people signed the contract in India and Mauritius people signed the contract in Mauritius. Buyer did not carry out any due diligence nor it appointed any valuer. The appellant was under obligation to call for the information in the case as mandated u/s 10(5) of the Act when C.A. was not given proper access to the record. The company was not having any profit for taking value of the share at Rs. 2290 Rs. 2577.25 and Rs. 2910 per share at time of exist. The outcome of it remained onward remittance of Rs. 140 crores without proper report or certificate. The authorised dealer was bound to follow the direction issued by the RBI from time to time and Regulation 11(2)(b) of the Regulation of 2000 which was required to be read harmonization with liberalization scheme. RBI s approval was not required for the sale of security and onward remittance but it could not have been without adherence of other provisions and by simply in ignorance and the responsibility under Section 10(5) of the Act of 1999 and relying on the valuation certificate issued by the CA when DCF method was based on incorrect data and thereby without following the genuineness of the transaction. Accordingly we are unable to agree with the appellant that it has not contravened the provisions of Section 6(3)(b) Section 10(5) and Section 47(3) of the Act of 1999 read with Regulation 11(2)(b) of the Regulation of 2000 rather we endorse the analysis of the Special Director Directorate of Enforcement on the aforesaid. Imposition of penalty of Rs. 14 crores on the appellant s bank while the penalty has been imposed on other noticees varying from Rs. 85 crores to Rs. 4 crores on different noticees who were taken to be involved in the contravention and otherwise penalty of Rs. 140 crores imposed on JP Morgan apart from the penalty of Rs. 85 crores - As we find that Rs. 14 crores penalty imposed on the appellant bank is disproportionate. The main allegation for contravention of provisions of Act of 1999 and Regulation of 2000 was against other notices and even the appellant but definitely the appellant bank had remitted the amount said to be in terms of the agreement but finding case of contravention of Section 6(3)(b) Section 10(5) and Section 47(3) of the Act of 1999 read with Regulation 11(2)(b) of the Regulation of 2000 the penalty of Rs. 14 crore has been imposed. We find it to disproportionate thus reduce it from Rs. 14 crores to Rs. 1.4 crores on the appellant bank. The amount aforesaid has been deposited towards satisfaction of the pre-deposit as per the order of this Tribunal. Accordingly we cause interference in the impugned order qua the appellant bank only in reference of penalty which is reduced to Rs. 1.4 crores and with the aforesaid appeal is disposed of.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

- Whether the appellant bank contravened Section 6(3)(b), Section 10(5), and Section 47(3) of the Foreign Exchange Management Act, 1999 ("the Act of 1999") read with Regulation 11(2)(b) of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulation, 2000 ("the Regulation of 2000") by allowing outward remittance of Rs. 140 crores without prior approval of the Reserve Bank of India (RBI).

- Whether the appellant bank was obligated to independently verify the valuation report of shares submitted by the Chartered Accountant (CA) before permitting outward remittance.

- Whether RBI's prior approval was mandatory for the outward remittance under the facts and circumstances, or whether compliance with reporting requirements as per RBI Circulars No. 16 and No. 49 sufficed.

- Whether the penalty of Rs. 14 crores imposed on the appellant bank for the alleged contraventions was justified and proportionate.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Contravention of Sections 6(3)(b), 10(5), and 47(3) of the Act of 1999 read with Regulation 11(2)(b) of the Regulation of 2000 for outward remittance without RBI approval

Relevant legal framework and precedents:

Section 6(3)(b) empowers the RBI to regulate the transfer or issue of securities by persons resident outside India. Section 10(5) mandates that an authorized person must ensure that any foreign exchange transaction does not involve contravention or evasion of the Act or its rules, and requires refusal and reporting of suspicious transactions. Section 47(3) preserves the validity of RBI regulations until amended or rescinded by the Central Government. Regulation 11(2)(b) stipulates that outward remittance of sale proceeds of securities by persons resident outside India requires RBI approval unless sold on a recognized stock exchange at ruling market price.

RBI Circular No. 16 (2004) and Circular No. 49 (2010) provide procedural guidelines and pricing norms for transfer of shares and convertible debentures by persons resident outside India, including documentation requirements and conditions for exemption from prior RBI approval subject to reporting.

Court's interpretation and reasoning:

The Tribunal noted that the appellant bank permitted outward remittance of Rs. 140 crores to JP Morgan for repurchase of shares at a premium significantly higher than the original allotment price. The shares had been allotted to JP Morgan at Rs. 1071.81 per share, while repurchase was done at Rs. 2290 to Rs. 2910 per share. The company, Amrapali, had no credible distributable profits during the holding period, and the valuation was based on the Discounted Cash Flow (DCF) method which was found to be flawed and applied for oblique purposes.

The Tribunal held that the appellant bank could not have allowed remittance without satisfying itself that the transaction was not designed to contravene FEMA provisions, as mandated under Section 10(5). Reliance on the CA's valuation certificate alone, without further scrutiny or seeking additional information, was insufficient, especially when the CA was denied access to company records and the valuation methodology was questionable.

It was emphasized that exemption from prior RBI approval under the liberalized circulars was conditional and subject to compliance with procedural safeguards and reporting. The appellant bank failed to ensure compliance with these conditions and thereby contravened the statutory provisions.

Key evidence and findings:

- The share premium increased steeply from Rs. 191 to Rs. 1071.81 within 10 days without credible justification.

- The DCF valuation at the time of repurchase was based on incorrect data and assumptions, lacking due diligence.

- The CA firm's partner confirmed denial of access to critical documents, undermining the valuation's credibility.

- The company followed Project Completion Method for revenue recognition, indicating no distributable profit during the relevant period.

- The RBI did not raise objections on reporting but did not approve the remittance, and the bank did not seek prior approval.

Application of law to facts:

The Tribunal applied the statutory provisions and RBI regulations to the facts, concluding that the appellant bank's conduct in permitting outward remittance without adequate verification and prior approval amounted to contravention of Sections 6(3)(b), 10(5), and 47(3) of the Act read with Regulation 11(2)(b). The bank's reliance solely on the CA's certificate without further inquiry was inconsistent with its statutory duty under Section 10(5) to ensure the transaction was not designed to evade the law.

Treatment of competing arguments:

The appellant argued that RBI approval was not required under the liberalization circulars and that it had complied with all reporting requirements, relying on the CA's valuation certificate. The Tribunal rejected this argument, holding that the exemption from prior approval was conditional and that the bank could not abdicate its responsibility to verify the genuineness of the transaction. The Tribunal emphasized that the bank's role was not merely ministerial or clerical but involved due diligence to prevent contraventions of FEMA.

Conclusions:

The Tribunal concluded that the appellant bank contravened the relevant provisions of the Act and Regulations by permitting outward remittance of Rs. 140 crores without RBI approval and without fulfilling its statutory obligations under Section 10(5) to ensure the transaction's legality.

Issue 2: Obligation of the appellant bank to verify valuation and documents before remittance

Relevant legal framework and precedents:

Section 10(5) of the Act requires an authorized person to obtain declarations and information that reasonably satisfy him that the transaction will not involve contravention or evasion of the Act. RBI Circular No. 16 mandates submission of a certificate indicating fair value of shares from a Chartered Accountant.

Court's interpretation and reasoning:

The Tribunal held that the appellant bank could not blindly rely on the valuation certificate submitted by the CA without further inquiry, especially when the valuation was based on flawed assumptions and the CA was denied access to critical documents. The bank was under a statutory obligation to seek further information to satisfy itself about the genuineness of the transaction and the correctness of the valuation before permitting outward remittance.

Key evidence and findings:

- The CA's valuation was based on the DCF method but was not supported by adequate data or due diligence.

- The bank did not seek additional information or clarification despite apparent discrepancies in share valuation and company profitability.

Application of law to facts:

The Tribunal applied Section 10(5) to hold that the appellant bank failed to discharge its duty to verify the transaction's legality and genuineness, thereby facilitating a transaction designed to circumvent FEMA provisions.

Treatment of competing arguments:

The appellant contended that the bank was not required or equipped to verify valuation and had complied with all procedural requirements by obtaining the CA certificate. The Tribunal rejected this view, clarifying that the statutory obligation under Section 10(5) required the bank to ensure the transaction was not designed to evade the law, which could not be fulfilled by mere acceptance of the CA certificate without scrutiny.

Conclusions:

The Tribunal concluded that the appellant bank failed in its statutory duty under Section 10(5) by not verifying the valuation report and other relevant information before remittance.

Issue 3: Whether penalty of Rs. 14 crores imposed on appellant bank was justified and proportionate

Relevant legal framework and precedents:

Section 13(1) of the Act empowers imposition of monetary penalties for contraventions of the Act and Regulations.

Court's interpretation and reasoning:

The Tribunal agreed that the appellant bank contravened the provisions of the Act and Regulations but found the penalty of Rs. 14 crores disproportionate considering the nature of the bank's involvement, which was limited to remittance facilitation based on existing agreements and documents. The penalty imposed on other noticees ranged from Rs. 4 crores to Rs. 140 crores depending on their degree of involvement.

Key evidence and findings:

- The appellant bank had remitted the amount as per the agreement and based on documents provided by the parties.

- The primary wrongdoing was attributed to other parties involved in the transaction.

Application of law to facts:

The Tribunal applied principles of proportionality and fairness in penalty imposition, reducing the penalty on the appellant bank from Rs. 14 crores to Rs. 1.4 crores.

Treatment of competing arguments:

The appellant sought complete quashing of the penalty, while the respondent supported the full penalty. The Tribunal balanced these positions, confirming contravention but moderating the penalty.

Conclusions:

The Tribunal held that while the appellant bank was liable for contravention, the penalty was excessive and reduced it to Rs. 1.4 crores accordingly.

3. SIGNIFICANT HOLDINGS

- "The appellant could not have ignored that the shares allotted to JP Morgan was at Rs. 1071.81 and outward remittance was taking value of shares at Rs. 2290 Rs. 2577.25 and Rs. 2910 per share without any credible profit to the Amrapali. It could not have relied the report of the CA with blind eyes rather call for the information for compliance of Section 10(5) of the Act to make proper analysis of the value of the share before outward remittance."

- "Exemption of prior approval of RBI was not absolute but conditional. It could not have been utilized by the bank taking the CA report to be the final word though it was one of the documents to be produced but required to be looked into by the appellant before onward remittance of huge amount of Rs. 140 crores."

- "The appellant bank contravened the provisions of Section 6(3)(b), Section 10(5) and Section 47(3) of the Act of 1999 read with Regulation 11(2)(b) of the Regulation of 2000 by allowing outward remittance without RBI approval and without fulfilling its statutory obligations."

- "The penalty of Rs. 14 crores imposed on the appellant bank is disproportionate and is accordingly reduced to Rs. 1.4 crores."