The Karnataka High Court on Monday stayed the proceedings initiated by the Enforcement Directorate (ED) under the Foreign Exchange Management Act, 1999 (FEMA) against Malavika Hegde, CEO of Coffee Day Enterprises Limited (CDEL) and wife of late Café Coffee Day founder VG Siddhartha [Malavika Hegde Vs Directorate of Enforcement].
The stay covers a complaint filed in November 2022, a related show cause notice and subsequent hearing notices issued by the FEMA adjudicating authority.
The stay order was passed by Justice Shyama Prasad.
The proceedings arose from foreign direct investment (FDI) received by Coffee Day Enterprises Limited in 2010. The ED has alleged that the funds were utilised for acquisition of shares in Indian companies in violation of FEMA and allied regulations.
In November 2022, the ED filed a complaint before the Special Director of Enforcement, who acts as the adjudicating authority under FEMA. A show cause notice followed soon after.
Malavika Hegde was arrayed as noticee No. 2. This was done in her capacity as the legal representative of her late husband, VG Siddhartha.
Hegde approached the High Court under Articles 226 and 227 of the Constitution. She sought records relating to the show cause notice dated November 23, 2022 and the underlying complaint dated November 3, 2022.
She also sought quashing of the ED’s complaint and the show cause notice issued pursuant to it. In addition, she challenged two later notices issued by the adjudicating authority.
A key argument raised by Hegde related to delay. She contended that the proceedings were initiated nearly 12 years after the relevant FDI transactions and regulatory filings.
According to her, such inordinate delay rendered the action arbitrary. She argued that it violates Articles 14 and 21 of the Constitution.
Another central issue concerned liability under FEMA. Hegde argued that Section 42 of FEMA imposes personal liability. It applies only to persons who were in charge of and responsible for the conduct of the company’s business at the time of the alleged contravention.
She contended that such liability cannot be examined after the death of VG Siddhartha in July 2019.
The petition also relied on Section 43 of FEMA. It said that proceedings against legal representatives can continue only if liability had crystallised during the lifetime of the deceased. According to Hegde, no such adjudication took place in this case.
Hegde further alleged violation of principles of natural justice. She stated that she was never served with the show cause notice issued in November 2022.
She has also challenged the issuance of hearing notices without first considering her reply. This, she argues, violates the mandatory two-stage adjudication process under the FEMA Adjudication Rules
The case will be heard next on February 23.
Hegde was represented by Senior Advocate Sajan Poovayya with advocate Manu Prabhakar Kulkarni from Poovayya & Co.
[Read Order]