M/s Amrapali received funds of INR 140 Crores under the Shareholder Agreement (SHA) and share Subscription Agreement (SSA) for the construction and development of residential houses, flats, and commercial complexes on 23.07.2012 from IPFII-S, Singapore. M/s Amrapali received funds in two bank accounts (including the Appellant Bank) and allotted Equity shares and CCDs against such FDI. The Appellant Bank remitted INR 47.30 Crores to the IPF-II, Singapore, at an interest rate of 17% from 2013 to 2015. The Appellant Bank has been alleged of contravening provisions of Section 10(5) of the FEMA Act for remittance of interest amount and accordingly, a penalty of INR 5 Crores was imposed on the Appellant Bank. As per Section 10(5), the appellant bank was under an obligation to take a declaration and information that may reasonably satisfy that the transaction would not involve, and is not designed for the purpose of any contravention or evasion of the provisions of the FEMA Act.
Therefore, contravention of Section 10(5) of the FEMA Act is found. However, the penalty amount is reduced from INR 5 Crores to INR 5 Lakhs.
1. Brief Facts of the Case:
- The Apex Court ordered an investigation in reference to the violations committed by the Amrapali Group of Companies.
- M/s Amrapali Silicon City Private Limited (M/s Amrapali) was established for the construction and development of residential houses, flats, and commercial complexes.
- M/s Amrapali entered into a Shareholders Agreement (SHA) and Share Subscription Agreement (SSA) with IPFII-S of Singapore for Foreign Direct Investment (FDI) of INR 140 Crores on 23.07.2012.
- Such an amount was credited to two banks of M/s Amrapali, Bank of Baroda, New Delhi, and Axis Bank, Ghaziabad.
- After receiving the FDI of Rs.140 Crores, M/s Amrapali allotted the following securities to IPF-II:
- 1,06,060 Class B Shares (INR 29 Crores);
- 8,11,908 Compulsorily Convertible Debentures (CCDs) (Approx. Rs.111 Crores)
- Therefore, the Bank of Baroda (“The Appellate”) remitted INR 47.30 Crores to IPF-II Singapore for interest @ 17% on the instructions of M/s Amrapali from 2013 to 2015.
- The Appellant has been alleged of contravening provisions of Section 10(5) of the FEMA Act for remittance of Rs.47.3 Crores towards the interest.
- The FDI was taken by the Company for the construction and development of the work. However, such funds were diverted and used for other purposes.
- As per Section 10(5), the appellant bank was under an obligation to take a declaration and information that may reasonably satisfy that the transaction would not involve, and is not designed for the purpose of any contravention or evasion of the provisions of the FEMA Act.
- As per SHA and SSA dated 23.07.2012, the CCDs were to be converted into equities in five years.
- However, the same were not converted even after the expiry of five years and, therefore, it became a case of External Commercial Borrowings (ECB) under the cover of FDI.
- The violations of the terms and conditions of SHA and SSA were found on the face of the record and the agreement was designed to obtain FDI in the form of CCDs to contravene the provisions of FEMA.
- Accordingly, a penalty of INR 5 Crores was imposed on The appellant Bank for contravention of Section 10(5) of the FEMA Act. Accordingly, the Appellant Bank filed this appeal to challenge the order passed by the Special Director, Adjudicating Authority.
2. Relevant Legal Extract
Relevant provisions of the FEMA Act are reiterated below for ready reference:
Section 10(5) of the FEMA Act is reiterated below for ready reference:
The Hon’ble Appellate Tribunal Held that as per Section 10(5) of the FEMA Act, the appellant bank was under an obligation to take a declaration and information from M/s Amrapali. In the given case, FDI was to be used in the construction project but was diverted for some other purpose. The Company was mainly responsible for contravention of provisions of FEMA, but the appellant bank could not have acted as a silent spectator to the events otherwise noticed by the Apex Court.
(1) to (4) xxx
(5) An authorized person shall, before undertaking any transaction in foreign exchange on behalf of any person, require that person to make such declaration and to give such information as will reasonably satisfy him that the transaction will not involve, and is not designed for any contravention or evasion of the provisions of this Act or of any rule, regulation, notification, direction or order made thereunder, and where the said person refuses to comply with any such requirement or makes only unsatisfactory compliance therewith, the authorised person shall refuse in writing to undertake the transaction and shall, if he has reason to believe that any such contravention or evasion as aforesaid is contemplated by the person, report the matter to the Reserve Bank”.
3. Contention of the Appellant
The Appellant submitted that:
- The Appellant has not contravention Section 10(5) of the FEMA Act.
- It remitted a sum of Rs. 47.3 Crores for interest in accordance with SHA and SSA agreements entered between the Company and IPF-II.
- As per the agreements, the interest @17% was payable on CCDs after the completion of the moratorium period of 3 months, and accordingly, the interest was paid between the year 2013 to 2015.
- The CCDs were to be converted into equities in the year 2017 in pursuance to the agreement.
- The appellant could not have analyzed that CCDs would not be converted into equities so as to deny remittance of interest two to three years before the maturity to convert CCD into equity.
- All the information was otherwise sent to the RBI who did not raise any objection.
- Therefore, the respondents have wrongly imposed the penalty of Rs.5 Crores on the appellant bank.
- The Appellant bank has no control over the utilization of funds once the same is disbursed. The appellant bank could not have been made responsible for the diversion of funds by the Company.
- Also, Till the time of remittance of interest between 2013 to 2015, there was no embargo to take permission from the RBI; rather, remittance was permissible without the approval or permission of the RBI.
- The interest in the CCDs was fully, mandatorily & compulsorily convertible and also repatriable without any restrictions as per Chapter-7 `REMITTANCE, REPORTING AND VIOLATION’.
- Accordingly, there was no illegality in the action of the appellant bank to make outward remittance of interest on the CCDs on the instructions of Amrapali.
4. Analysis and findings by the Hon’ble Appellate Tribunal
The Hon’ble Appellate Tribunal made the following analysis and findings:
- The present matter was initiated on the direction of the Apex Court finding violation of the provisions of the FEMA Act and FDI norms.
- The Company did not use the funds on the project for which it was received and transferred the same to one group company and used some amount to repay bank loans and creditors.
- Also, The Apex Court noticed that the interest was paid at a highly abnormal rate of 17% and the violation was made within the knowledge of IPFII-S, Singapore.
- The allegation against the appellant is for making remittance of interest @ 17% which is a higher rate of interest; rather, the Apex Court has taken it to be a highly abnormal rate and accordingly, contravention of Section 10(5) of the FEMA Act has been made.
- The appellant pleaded that it could not have been made responsible for the non-conversion of CCDs into equities to deny remittance of interest, much before the date of conversion of CCDs into equities.
- Conversion of CCDs into equities was to be made in the year 2017.
- However, as per Section 10(5) of the FEMA Act, the appellant bank was under an obligation to take a declaration and information that may reasonably satisfy that the transaction would not involve and is not designed for any contravention or evasion of the provisions of the FEMA Act.
- In the given case, FDI was to be used in the construction project but was diverted for some other purpose.
- The Company was mainly responsible for contravention of provisions of FEMA, but the appellant bank could not have acted as a silent spectator to the events otherwise noticed by the Apex Court and has taken a serious view and directed the Enforcement Directorate to conduct an investigation.
- The FDI funds were diverted after receipt in the bank account of the appellant bank who remitted the interest despite diversion of the fund and its utilization for the purpose other than for which FDI was taken.
- The appellant bank has pleaded that it had no control over the affairs of The Company after the amount came to their account ignoring the fact that the diversion of the amount out of the bank account was to be in the knowledge of the appellant bank otherwise there was no purpose to seek declaration by the authorized person that the transaction is not for contravention of the provisions of the FEMA Act.
- Further, the Appellant Bank contended that if the CCD was not converted into equities in five years, it could not have been termed as be External Commercial Deposit (ECD) so as to seek prior permission of the RBI for remittance of the interest amount.
- The argument raised by the appellant bank cannot be accepted when the Appellant Bank was under obligation to take declaration under Section 10(5) of the FEMA Act.
- Therefore, contravention of Section 10(5) of the FEMA Act is found.
5. Quantum of Penalty
The Hon’ble Appellate Tribunal held that:
- The Penalty amount of INR 5 Crores is disproportionate to the allegation against the appellant bank.
- Therefore, the penalty amount was redacted from INR 5 Crores to Rs.50 lakhs.
6. Final Order
The Appellate Tribunal Held that:
- The Appellant Bank was required to obtain a declaration that the transaction is not for contravention of the provisions of the FEMA Act. Therefore, the contravention of Section 10(5) of the FEMA Act is found.
- The Penalty amount is reduced from INR 5 Crores to INR 50 Lacs.
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