Tuesday, August 30, 2016

Failure to report FDI inward remittance or filing of FC-GPR will have serious consequences-

Failure to report FDI inward remittance or filing of FC-GPR will have serious consequences-

The following post had been circulated by me in the google and yahoo groups during February 2010- but still holds good!
 The following case laws handled by RBI , Mumbai will vouch for the seriousness of the issue.

Case No 1:
In one case, an OCB invested in India rupees 8.5 crores (approximately) with the prior approval of FIPB. The OCB wanted to set up a power plant in Chhattisgarh. There was a condition of local participation up to 40per cent. For four years they ran from pillar to post for several Government permissions.

Neither they got Government permission nor could they find a local investor. Ultimately, they were frustrated and gave up the project. Hence they transferred the funds to a sister company where the OCB already had some investments. The Company delayed in filing intimation. The Company could not allot shares to OCB as it could not locate a local investor which was a pre-condition of FIPB approval. In the meanwhile, RBI issued Circular No. 20 dated 14.12.2007 prohibiting allotment of shares beyond 180 days of receipt of funds.

For these offenses, RBI imposed a Compounding sum of more than Rs. 3 crores! Company admits the violations of non-intimation, non-filing of forms; and step down investment. Still, such a stiff penalty for all procedural violations where there is no foreign exchange loss and nothing illegal or immoral!!!

Case No 2

“An NRI couple – husband and wife promoted a company in India and personally became the shareholders. They also floated a wholly owned company in Mauritius. The Indian company decided to take an ECB. It is permitted on “automatic basis” from the shareholder. However, instead of taking loan from the individual shareholders, the Indian company took the ECB of USD 2.3 million from the Mauritian company which was owned by the same individuals.”

“This is a perfectly normal behavior in the international investment market. For the NRIs, investment in personal name or through their own offshore company is the same.

Still, RBI objected to it on technical ground that the Mauritius Company is not the shareholder/collaborator. Parties concerned apologized and assigned the ECB from Mauritian company to the shareholders. Compounding Authority did not accept the apology, ignored the substance of the investment and imposed a Compounding Sum of Rs. 45 lakhs.” This amounts to ignoring the substance of the matter & imposing punishment on technical grounds for an offence which does no harm to anyone.

 According to critics, RBI has levied an improper and heavy fine on the erring companies.

In fact , Mumbai Chartered Accountant Association has represented the same to RBI ,Mumbai to desist from such heavy fines for simple non-filing or in case of non-intentional default.

Why I have raised the issue here is to educate and inform our fellow professionals to be more vigilant and careful in reporting to RBI.

Further , I think , if one fail to report due to inadvertence or due to lack of awareness in change of law , regional RBI always condone the delay unless it is deliberate and intentional.

Please attend one day seminar on FEMA  on 17th September , 2016 at Hotel Vijay Park, Chennai 

Tuesday, August 2, 2016



In Dropti Devi and Another vs Union of India and others case, this interesting question was raised in the Supreme Court of India. 

Learned counsel for the appellants fervently opposed that since FEMA did not regard its infringement as a criminal offence, the whole notion, essence, intent and purpose behind the enactment of preventive detention had ceased to exist and the continuation of such provision was violative of Article 21 read with Articles 14 and 19 of the Constitution. He, thus, submitted that the provision for preventive detention under COFEPOSA of the accused was wholly unsustainable and untenable.

The public prosecutor Mr. Vikram Chaudhari cited that there are cases of preventive detention existing in USA, England, Australia and Germany. He referred to the excerpts from “The Limits of Preventive Detention” by Rinat Kitai – Sangero 2009.

Hence, the important question to be answered is that — whether an accused who infringes the provisions of FEMA can be arrested under the preventive detention Act, namely, the COFEPOSA Act?

It was argued that the objective of FEMA is also promotion of orderly development and maintenance of foreign exchange market in India. Dealing in foreign exchange is regulated by the Act. For violation of foreign exchange regulations, penalty can be levied and such activity is certainly an illegal activity, which is prejudicial to conservation or augmentation of foreign exchange. 

From the objects and reasons of the COFEPOSA Act, it is apparent that the purpose of the Act is to prevent violation of foreign exchange regulations or smuggling activities which are having increasingly deleterious effect on the national economy and thereby serious effect on the security of the State. 

 Section 3 of the COFEPOSA Act, which is not amended or repealed, empowers the authority to exercise its power of detention with a view to preventing any person inter alia from acting in any manner prejudicial to the conservation or augmentation of foreign exchange. If the activity of any person is prejudicial to the conservation or augmentation of foreign exchange, the authority is empowered to make a detention order against such person and the Act does not contemplate that such activity should be an offence.

The main difference between COFEPOSA and FEMA can be illustrated as under:

The COFEPOSA Act deals with preventive detention for violation of foreign exchange regulations
FEMA is for regulation and management of foreign exchange through authorised person and provides for penalty for contravention of the said provisions.
As held in Poonam Lata v. M.L. Wadhawan, (1987) 3 SCC 347)preventive detention law is for effectively keeping out of circulation the detenu during a prescribed period by means of preventive detention.
The object as stated above is for promoting orderly development and maintenance of foreign exchange market in India.
As held in Khudiram Das v. State of W.B., (1975) 2 SCC 8, the power of detention is clearly a preventive measure. It does not partake in any manner of the nature of punishment. It is taken by way of precaution to prevent mischief to the community

Dismissing the writ petition and the criminal miscellaneous application, the Supreme Court of India held that the importance of foreign exchange in the development of a country needs no emphasis. The Foreign Exchange Management Act, 1999 regulates the foreign exchange. The conservation and augmentation of foreign exchange continues to be its important theme. 

Although contravention of its provisions is not regarded as a criminal offence, yet it is an illegal activity jeopardizing the very economic fabric of the country. For violation of foreign exchange regulations, penalty can be levied and its non-compliance results in civil imprisonment of the defaulter