ED need not communicate reasons for FEMA probe at pre-enquiry stage, Madras HC dismisses India Cements plea

The Madras High Court yesterday dismissed an appeal filed by India Cements challenging the summons issued by the Enforcement Directorate (ED) for alleged violations of the Foreign Exchange Management Act (FEMA), 1999..The alleged violations took place during the South African tour of Chennai Super Kings – the franchise owned by India Cements – during the 2009 edition of the Indian Premier League (IPL)..In doing so, the Division Bench of Justices KK Sasidharan and R Subramanian endorsed the view that the Enforcement Directorate is not bound to communicate its reasons for taking forward the FEMA enquiry to the noticee at the pre-enquiry stage..The case called for an examination of Rule 4 (3) of the FEMA Adjudication Proceedings and Appeal Rules, 2000 (‘FEMA rules’). This provision comes into play after the ED issues a show cause notice, following which objections (if any) are raised to the notice by the noticee..The provision reads as under:.“(3) After considering the cause, if any, shown by such person, the Adjudicating Authority [ED] is of the opinion that an inquiry should be held, he shall issue a notice fixing a date for the appearance of that person either personally or through his legal practitioner or a chartered accountant duly authorised by him.”.In particular, the Madras High Court was called to decide on the following question,.Whether the adjudicating Authority is bound to record his reasons for formation of an opinion under sub-Rule 3 of Rule 4 of the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000 in writing and also communicate the same to the noticee if required by the noticee before proceeding with an enquiry?.The Court has answered this question in the negative, finding that a plain reading of the provision does not signify that there is any such mandatory requirement at the pre-enquiry stage..Case History.The ED had issued a show cause notice to India Cements (noticee) in February 2015. Although India Cements raised objections to the same, the ED thereafter proceeded to issue further notice for the personal appearance of the company in November 2016..In its writ petition challenging this move, India Cements contended that the ED ought to have communicated its reasons for initiating proceedings against the petitioner, so that they could understand the scope of impending enquiry..India Cements took the stand that the ED’s non-recording and non-communication of reasons is fatal to the proceedings. Therefore, the proceedings initiated by the ED was liable to be quashed..The ED had countered that India Cements had erroneously interpreted Rule 4. It was their case that Rule 4 (3) only required that the ED form an opinion that there was a case for further enquiry, despite the explanation offered by the noticee. There was no further requirement that the reasons for such an opinion be recorded and communicated to the noticee before the enquiry..A single judge of the Madras High Court agreed with this view and dismissed the writ petition..Appearing for India Cements before the Division Bench, Senior Counsel PR Raman and advocate C Seethapathy argued that the ED’s reasons for taking forward the FEMA proceedings should necessarily be communicated to the noticee, to prevent arbitrary decisions. In this regard, reliance was placed on the cases of Shashank Vyankatesh Manohar v Union of India and Lalit Kumar Modi v Special Director, Directorate of Enforcement..To the contrary, ASG G Rajagopal took that view that a mandatory requirement of recording and communicating such reasons to the noticees cannot be read into Rule 4 of the FEMA rules..No mandate on ED to communicate reasons for proceedings at pre-enquiry stage.The Madras High Court agreed with the view forwarded by the ED that at the pre-inquiry stage, a requirement to record and communicate reasons to the noticee does not appear on a plain reading of the Rules..“On a plain reading of the provisions, as already stated, we are unable to cull out a requirement of recording of reasons and communication of such reasons to the noticee, even at the stage of consideration of the reply to the show cause notice.”.The Court disagreed with the finding of the Bombay High Court in Shashank Vyankatesh Manohar’s case (thereafter followed by Lalit Kumar Modi’s case), in in so far as it read such a mandatory requirement into Rule 4 (3) of the FEMA rules. It observed,.“The primary reason behind the conclusions of the Bombay High Court appear to be the serious consequences, which would be inflicted upon the noticee against whom an adjudication order may be passed under Section 13 of the Act. .The consequences of a factual finding relating to contravention that may be reached by the adjudicating Authority after a full-fledged enquiry, cannot, in our considered opinion, form the basis for the Court to read into the provision something more than what is required on a plain reading of the provision….…We are unable to persuade ourselves to agree with the decisions of the Bombay High Court inasmuch as they read into the provision, the requirement which is not contemplated under the Rules.”.Rather, the Court endorsed the contrary view in Ramakrishna Settu v. The Special Director, Directorate of Enforcement, wherein the judge observed,.“… I do not think that there is any scope for expanding Rule 4 (3) to mean that the forming of the opinion as required in Rule 4 (3) has to be reflected by an order in writing containing reasons. The interpretation given by the Division Bench of the Bombay High Court in its expression ‘opinion’ appears to be very elastic.”.Alternative interpretation would lead to Disastrous results.The Court took note of concerns that if such a requirement is read into Rule 4 (3) of the FEMA rules, it would lead to impractical consequences..“If we are to read into the provision, such a requirement, the same in our considered opinion would lead to disastrous results, where notices under various enactments which provide for enquiry on the basis of a subjective satisfaction of the adjudicating Authority or the enquiry officer or the Disciplinary Authority would take a stand that those Authorities should also record their reasons for forming an opinion and communicate the same.”.Objections raised by India Cements to be disposed by the final order.The Bench also observed that in this case, the ED had intimated to India Cements that the objections raised by it would be considered at the time of final enquiry..Therefore, the appeal made by India Cements was dismissed, with the Court affirming that,.“…the adjudicating Authority is not under any statutory obligation to communicate his reasons for forming an opinion to conduct an enquiry under sub-Rule 3 of Rule 4 of Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000.”.Read the Order: