[The Viewpoint] FEMA investigation and corporate criminal liability

This article seeks to broadly highlight the procedure of investigation, inquiry and adjudication under the Foreign Exchange Management Act, 1999 (FEMA) and the applicability of the concept of corporate criminal liability (CCL) throughout this procedure.

The focus of this article is to highlight the factors that can lead to potential risks arising from such proceedings on the concerned body corporate and its key managerial persons (KMPs).

Overview of the Act

FEMA is the central legislation that deals with inbound investments into India, outbound investments from India, and trade and business between India and other countries.

The Reserve Bank of India (RBI), which is vested with wide powers under the Act, makes Regulations under FEMA and the Rules are made by the Central government. Though RBI is the overall controlling authority in respect of the Act, enforcement of the Act has been entrusted to the Directorate of Enforcement (ED).

Introduction to the Enforcement Directorate

The ED has been established as a specialized financial investigation agency by the Central government under Section 36 of the Act. The ED is administrated by the Department of Revenue under the Ministry of Finance and headed by the Director of Enforcement, an Indian Revenue Service Officer.

Procedure of investigation

For investigating contraventions under the Act, the ED is empowered under Section 37. Under this Section, the power of the ED is co-extensive with that of a court trying a suit under Section 30 read with Rules 12, 14 and 15 of Order 11 of the Code of Civil Procedure (CPC).

The various steps of investigation are as follows:

(i) Discovery and Inspection

As noted above, the ED derives its power of discovery and inspection from inter alia Order XI Rule 14 of the CPC. The said provision empowers the ED to order the concerned corporate entity, and therefore its KMPs, to produce such documents in its possession or power as may be relevant in the opinion of the ED.

(ii) Enforcing the attendance of any person

During the investigation, the Investigation Officer (IO) has ample powers to enforce the attendance of any persons, including KMPs. In case of non-appearance, the IO can also proceed to arrest such persons.

(iii) Compelling production of books of accounts and other documents and issuing commissions

While dealing with the question of the extent of documents that the concerned officer can seek under Section 131 of the Income Tax Act during the investigation, the Court in Dwijendra Lal Brahmachari & Ors v. New Central Jute Mills Co Ltd & Anr categorically held that application of mind must be with regard to the question of relevancy of the documents to the case.

(iv) Search and Seizure

Search and seizure may happen at the registered office of the company or at other premises where the IO suspects that documents are kept. Since the ED has been entrusted with the responsibility to investigate economic offences, the powers under the Act are more efficacious than the ones provided to other authorities like police officials investigating cases under the Criminal Procedure Code, 1973, CBI, CID etc.

Judicial checks and balances

As a general rule, courts do not interfere with the investigation process unless it is carried out for malafide reasons, or there is an abuse of power or non-compliance with statutes.

While discussing the scope of judicial scrutiny over the actions of the ED, the Supreme Court in Standard Chartered Bank v. Directorate of Enforcement held that a writ of prohibition can only be issued to prevent a tribunal or authority from proceeding further when the authority proceeds to act without or in excess of jurisdiction; proceeds to act in violation of the rules of natural justice; or proceeds to act under a law which is itself ultra vires or unconstitutional.

Procedure of adjudication

For adjudication under Section 13 of the Act, an Adjudicating Authority (AA) is appointed for the purposes of holding an inquiry. The adjudication under the Act is governed by the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000.

The Act provides that no AA shall hold an inquiry except upon a complaint in writing made by an officer not below the rank of Assistant Director of ED.

(i) Show-cause notice

At the stage of initiation of the adjudication, a show cause notice (notice period of not less than ten days) by AA must be necessarily served to the accused to show cause as to why an inquiry should not be held. This notice also indicates the nature of the contravention alleged to have been committed. This is the first time since the initiation of the investigation that the accused comes to formally know the charges alleged against them.

(ii) Inquiry

After considering the case of the accused, if the AA is of an opinion that inquiry should be held, it issues notice for the appearance of persons, either personally, or through a legal practitioner or Chartered Accountant. At this stage, the AA gives an opportunity to the person to produce documents or evidence as he may consider relevant to the inquiry. While holding the inquiry, the AA has the power to summon and enforce the attendance of any person, and to ask for evidence and documents relevant to the subject matter of inquiry. Not only during the investigation, but even at the stage of inquiry, the AA may summon KMPs. In case the person does not appear, the AA has the authority to proceed ex-parte after recording reasons.

(iii) Imposition of penalty

Upon consideration of the evidence, if the AA is satisfied that a contravention under Section 13 has been committed, it shall by an order in writing, impose the penalty.

An order imposing a penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and a penalty will not ordinarily be imposed unless the party either acted deliberately in defiance of law or was guilty of contumacious or dishonest conduct, or acted in conscious disregard of its obligation. The penalty will not also be imposed merely because it is lawful to do so.

Quantification of penalty

The Appellate Tribunal for Foreign Exchange in Jaipur IPL Cricket Pvt Ltd and Ors v. The Special Director Directorate of Enforcement, Bangalore held that technical violations and denial in nature are to be distinguished from a wilful act done with a mens rea. Therefore, the imposition of a penalty is to be guided by well-established principles of proportionality.

While taking this principle forward, the Supreme Court in Excel Crop Care Limited v. Competition Commission of India and Ors came up with a two-step formula to arrive at a correct quantum of penalty in quasi-criminal proceedings:

(a) Determination of relevant turnover:

The Court observed that the concerned authority should calculate turnover while relying upon audited financial statements or other authentic, reliable records for the relevant period of the offending entity and while considering the facts and circumstances of a particular case.

(b) Determination of appropriate percentage of penalty based on aggravating and mitigating circumstances

After arriving at the relevant turnover, basis nature, gravity, extent and role played by the infringer, and considering other illustrative factors such as duration of participation, the intensity of participation, loss or damage suffered as a result of such contravention, market circumstances in which the contravention took place, nature of the product, market share of the entity, barriers to entry in the market, nature of involvement of the company, bona fides of the company, profit derived from the contravention etc, appropriate percentage of penalty should be imposed.

Procedure post-adjudication

After the AA has adjudicated upon the matter and imposed the penalty thereon, the person concerned has two alternate remedies. They are: compounding of the contravention or appeal against the order of the AA.

1. Compounding

At this stage, the Directors and/or KMPs are required to take an informed and well-thought-out call on whether the concerned body corporate would be willing to opt for this measure, since compounding entails the colour of conviction. The compounding of contraventions under the Act is governed by the Foreign Exchange (Compounding Proceedings) Rules, 2000.

2. Appellate options

(a) Special Director (Appeals) or Appellate Tribunal

Aggrieved by an order passed the by AA under Section 13 of the Act, an appeal may be filed to the Special Director (Appeals) (if the AA was an officer of ranks of Assistant Director of Enforcement or Deputy Director of Enforcement) or to the Appellate Tribunal (if the AA was an officer senior to the aforementioned categories) within 45 days of the order.

(b) High Court

Aggrieved by the order of the Appellate Tribunal, a further appeal to the High Court on any question of law emanating from such order may be filed. The appeal to the High Court must be filed within 60 days of the order of the Appellate Tribunal.

(c) Supreme Court

Aggrieved by the order of the High Court, a SLP may be filed before the Supreme Court of India.

We now touch upon the interplay between corporate criminal liability and the proceedings under the Act.

Who is responsible for the company?

The basic rule of criminal liability revolves around the Latin maxim Actus non facit reum, nisi mens sit rea, which means to make one liable, it must be shown that an act or omission forbidden by law has been done with a guilty state of mind.

Courts in the United Kingdom applied this doctrine in 1914 to the case of Tesco Supermarkets Ltd v. Nattrass and held that as a company is a fictitious entity having no brain or body. The guilt of the senior officers of the company who are its embodiment is said to be of the company, for which the company is accountable. Basis this decision, over a period of time, the guiding principle with regard to corporate criminal liability is that the persons who have enormous control in the day-to-day business of the company and who actively participate in the decision-making of the companies and are not answerable to anybody else within the company must be considered the company itself, as they are performing the same on behalf of the company.

So the actions and mental state of the company’s directors/KMPs are attributed to a company, and the company can be indicted even in those offences mandating mens rea by attributing the actions and the mind of those who have enormous control over the company.

Basis this principle and by Section 42 of the Act, the vicarious liability of the alleged offence committed by the body corporate can be fastened upon the KMPs. As per the said provision, where an offence is committed by a company, every person who, at the time of the contravention, was in charge of, and was responsible to the company for the conduct of its business, is deemed to be also guilty of contravention. Also, if proved that the contravention took place with the consent or connivance of, or is attributable to any neglect of any director, manager, secretary or other officers of the company, such persons are deemed to be guilty of the contravention and are liable to be punished.

In case of failure to pay the penalty imposed under Section 13 of the Act within 90 days from the date on which the notice for payment of the penalty is served, civil imprisonment of the KMPs may be resorted to. Where the amount demanded is more than rupees one crore, the detention may extend up to three years and in all other cases, up to six months.

In a general scenario, no arrest or detention can be made without issuing a show-cause notice to the defaulter. However, arrest or detention without show-cause notice may be done if the AA (for reasons in writing) is satisfied that the defaulter, with the object or effect of obstructing the recovery of penalty, after the issuance of notice has dishonestly transferred, concealed, or removed any part of his property, or the defaulter has means to pay the penalty or some substantial part thereof and refuses or neglects to pay the same. The AA can also issue a warrant for the arrest of the defaulter if it is satisfied, by affidavit or otherwise, that the defaulter is likely to abscond or leave the jurisdiction of the AA.

Conclusion

The concept of corporate criminal liability applies fairly and squarely to offences under the FEMA and Directors and KMPs can be held personally responsible even in a situation where the concerned body corporate is the accused of the purposes of investigation and adjudication under the Act.

However, corporate managers should be specifically cognizant of the fact that the liability of the Directors or the KMPs in no circumstances can be said to extend beyond that of the concerned body corporate. An indiscriminate seizure deracinates the personal liberty and privacy of the citizen and is antithetical to law.

Given the said principle and the ratio of the SR Batliboi judgment as cited above, it is inconceivable as to how the investigating authority under the Act can be permitted access to the personal information and documents of the Directors and the KMPs. Although such a position has yet not been settled by any of the High Courts or the Supreme Court specifically given the powers under Section 37 of the Act, it is our view that taking any contrary view, only to uphold the wide powers of the ED, shall stand contrary to the basic principles of Indian law and shall make the same question on multiple constitutional and legal grounds.

Kapil Dev Sapra is the Founder & Managing Partner and Vikas Dutta heads the litigation practice at Kapil Sapra & Associates.