Kiran Raj

The Madras High Court has dismissed multiple writ petitions challenging show cause notices issued by the Directorate of Enforcement under the Foreign Exchange Management Act, 1999 (FEMA) and the Transfer or Issue of Security by a Person Resident Outside India (TISPRO) Regulations, 2000. The court ruled that the petitioners must first exhaust the statutory remedies available under FEMA before approaching the High Court. The court also directed the petitioners to submit their responses before the adjudicating authority within 30 days.

The writ petitions were filed challenging the complaint made by the Directorate of Enforcement, which alleged violations of FEMA and the TISPRO Regulations, 2000. The complaint, filed by the Deputy Director of Enforcement, asserted that the petitioners had contravened Section 6(3)(b) read with Section 47 of FEMA, as well as Regulations 3, 4, and 5 of the TISPRO Regulations, 2000, by receiving Foreign Direct Investment (FDI) without obtaining prior approval from the Government of India.

The complaint stated that Flipkart Online Services Private Limited was incorporated by the petitioners and engaged in the business of wholesale cash and carry, receiving FDI from foreign investors, amounting to Rs. 142,40,38,518, without prior approval from the Government of India. The complaint further alleged that another company, WS Retail Services Limited, was created as a separate entity controlled by the petitioners to engage in business-to-business transactions with Flipkart Online Services Private Limited, which in turn supplied goods for retail sale to customers.

A show cause notice was issued to the petitioners on July 1, 2021, directing them to respond and show cause why adjudication proceedings should not be initiated under Section 16 of FEMA, as provided under Rule 4 of the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000. The notice also stated that if adjudication proceedings were to be initiated, the petitioners would be required to appear either in person or through a legal representative.

The petitioners challenged both the initial complaint and the subsequent show cause notice, raising multiple contentions. They argued that the show cause notice was issued after a delay of nearly ten years, as the alleged transactions took place between 2009 and 2011, and that such a delay rendered the proceedings arbitrary. The petitioners also contended that Section 6(3) of FEMA, which formed the basis of the notice, had been omitted by the Finance Act, 2015, with effect from October 15, 2019, and that the omission of this provision removed the legal foundation for the proceedings against them.

Additionally, the petitioners submitted that the adjudicating authority had already made up its mind against them, as evidenced by the counter-affidavit filed by the respondents, and that requiring them to respond to the notice would violate principles of natural justice. They argued that the writ petitions were maintainable despite the availability of an alternative remedy, as the show cause notice had allegedly been issued without jurisdiction.

The court considered each of the contentions raised by the petitioners. On the issue of delay, the court observed that FEMA does not prescribe a specific limitation period for initiating proceedings under Section 16 but noted that even in the absence of a statutory time limit, actions must be taken within a reasonable period. The court held that the determination of what constitutes a reasonable period is a factual matter that should be adjudicated by the competent authority under FEMA, rather than being examined by the High Court in its writ jurisdiction.

On the argument that the omission of Section 6(3) of FEMA invalidated the proceedings, the court referred to Supreme Court judgments, including Fibre Boards Pvt. Ltd. v. Commissioner of Income Tax and Shree Bhagwati Steel Rolling Mills v. Commissioner of Central Excise, and stated that "the expression ‘repeal’ includes ‘omission,’" and that "Section 6 of the General Clauses Act applies to omitted provisions, thereby allowing past violations of FEMA to be prosecuted." The court further noted that the TISPRO Regulations, 2000, remained in force despite the omission of Section 6(3) of FEMA, as they were "saved under Section 47(3) of FEMA," which was introduced by the Finance Act, 2015.

Regarding the allegation of bias, the petitioners argued that the counter-affidavit filed by the third respondent, the Deputy Director of Enforcement, indicated that the adjudicating authority had already taken a stance against them. The court, however, found that the counter-affidavit had been signed only by the third respondent and not by the adjudicating authority (Special Director of Enforcement). It was further observed that any final order passed by the adjudicating authority would be subject to appeal before the Appellate Tribunal under Section 19 of FEMA and, if necessary, before the High Court under Section 35 of FEMA.

The court stated the principle that writ jurisdiction should not be exercised when an alternative remedy exists, particularly when statutory remedies had not been exhausted. Citing Whirlpool Corporation v. Registrar of Trade Marks, the court held that writ petitions may be entertained only in cases involving violations of fundamental rights, breaches of natural justice, or orders passed without jurisdiction. The court found that none of these exceptions applied in the present case, as the petitioners still had the opportunity to present their case before the adjudicating authority and subsequently appeal to the Appellate Tribunal.

The court dismissed the writ petitions and directed the petitioners to "file their explanations before the Special Director, Adjudicating Authority, within 30 days from the date of the order." The adjudicating authority was instructed to "consider these submissions in accordance with law before taking further action." The court further observed that if the petitioners were dissatisfied with the adjudication proceedings, they could "pursue the appellate remedies provided under FEMA."

Case Title: Sachin Bansal v. The Directorate of Enforcement & Others

Case Number: W.P.Nos.18630, 18682, 24511, 24517, 23019, 23013, 23231, 23237, 23235, 23236, and 20721 of 2021

Bench: Justice S. Sounthar

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