Bombay High Court Quashes ED Order Imposing 25Cr Penalty On Sterlite Industries & Its Directors Over Alleged Violation Of Forex Rules

By this order passed on November 21, 2008, the ED had alleged violation under the Foreign Exchange Management Act, 1999 (FEMA) while acquiring 100% stake in Netherlands based Monte Cello BV which owned two copper mines in Australia.

A division bench of Justices KR Shriram and Milind Jadhav, in a judgment on July 14, while setting aside the November 2008 order, observed, "Passing of the adjudication order after the offence has been compounded, is thus contrary to the statutory provisions discussed hereinabove, is not maintainable and thus without jurisdiction."

Sterlite Industries, its promoter Anil Agarwal and Directors Tarun Jain, Somnath Patil and Lalit Singhvi had approached the High Court against the ED adjudication through a common petition stating that the alleged contravention had already been compounded by the Compounding Authority – Chief General Manager, Reserve Bank of India.

They also contended that the concerned authority, while compounding the contravention on November 20, 2008, had directed a payment of Rs 25 lakh by the company and Rs 1 lakh each by the four Directors as condition precedent for compounding the contravention. These charges were paid via demand drafts the very next day. However, that day itself, the ED adjudicated the contravention and imposed a total penalty of Rs 25.20 crore on the company and its Directors.

It was argued on behalf of the petitioners that under section 15(2) of FEMA, no proceeding or further proceeding can be initiated or continued against the person committing such contravention when it was compounded under sub-section (1) of that provision.

The original notice was issued by the ED on June 11, 2008 alleging contravention of section 6(3)(a) read with sections 42(1) and 42(2) of the FEMA read with Regulations 2, 3, 5, 6 and 9 while remitting USD 43.50 million (Rs 203.82 crore at that time) for the acquisition in the year 2000.

Before the High Court, the ED pleaded that it was never informed that compounding applications were filed before the Compounding Authority despite the petitioners appearing before the ED on several dates during the adjudicatory proceedings. It also submitted that the ED was not impleaded as a party before the Compounding Authority in the compounding proceedings. Since the compounding orders were passed by the Compounding Authority without hearing the ED, the orders were not sustainable, the ED argued.

The petitioners argued that it was the duty of the Compounding Authority to inform the Adjudicating Authority (Special Director, ED) about the compounding order so that any further proceedings may not be continued.

The court, after going through all the relevant sections of the Act as well as the Regulations, observed that the authority which had passed the compounding orders was the correct authority, and that the Compounding Authority was required to bring to the notice of the Adjudicating Authority the fact of compounding of the contravention.

"The Reserve Bank of India in turn has issued certificates to petitioners acknowledging the payment made by petitioners in respect of the each of the compounding order (five in all) and issued five such separate certificates, all dated 06.02.2009, certifying that petitioners have paid the compounding charges in compliance of the compounding orders passed by the Compounding Authority under section 15 of the said Act read with the said Rules," the bench noted.

While granting relief to all the five petitioners, the court further observed, "In these circumstances, we cannot hold petitioners responsible for contravention once the compounding orders have been passed. We have noted that there is a gap of "one day" between the passing of the two sets of orders, i.e., compounding orders and adjudicating order. Be that as it may, petitioners cannot be faulted and held liable for contravention once the compounding orders are passed by the Compounding Authority. That is the mandate of the statute."

The Petitioner in the instant case was represented by Mr. Venkatesh Dhond, Senior Advocate a/w. Mr. Ashutosh Thipsay, Mr. Nishit Dhruva, Mr. Prakash Shinde, Ms. Niyati Merchant, Mr. Yash Dhruva and Mr. Harsh Sheth, Advocates i/by MDP and Partners, whereas the Respondents were represented by Mr. Sandesh Patil.

Case Title : Sterlite Industries (lndia ) Limited and ors v Special Director of Enforcement and ors

Citation: 2022 LiveLaw (Bom) 263 

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