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Has the sun finally set? A review of the FEMA sunset clause

The Foreign Exchange Management Act, 1999 (‘FEMA’), brought in to keep pace with the changing dynamics of the Indian economic polity repealed the Foreign Exchange Regulation Act, 1973 (‘FERA’) and came into force on 1-6-2000. Apart from removing criminal prosecution for non-compliance of foreign exchange norms, FEMA also introduced a sunset clause for taking notice of contraventions under FERA. FEMA provided that no adjudicating authority shall take notice of any contravention under FERA two years after the coming into force of FEMA. In other words, it provided a window up to 31-5-2002 for the authorities under FEMA to take notice of contraventions under FERA.

The resultant effect was the issuance of a large number of Show Cause Notices (‘SCN’) on the last few days before the expiry of this period by the authorities under FEMA. The issuance of the show cause notices on the last few days has been challenged and although few High Courts have taken the view that the authority by issuing the show cause notice has taken notice within the sunset clause and therefore the adjudication is not time barred, the said issue is still to be finally decided and settled by the Hon’ble Supreme Court of India.

Not to be out done in the meanwhile, the Directorate of Enforcement (‘DoE’) issued notices for alleged contraventions that took place during the time FERA was in force but wherein the said notices have been issued after 31-5-2002 (and in some cases as late as in 2010). It has been advanced by the DoE that the contravention under FERA continued even after FEMA came into force and hence the SCNs were maintainable. It was yet another instance where the fertile minds and interpretation of our enforcement agencies was at play. But thanks to judicial providence, the Hon’ble Delhi High Court and the Hon’ble Karnataka High Court have held such SCNs to be barred under the Section 49 (3) of FEMA i.e. the sunset clause.

Sunset clause and continuing contravention

The Delhi High Court in the unreported case of Bhupendra V Shah v. Union of India (WP 19881/2004) was considering the jurisdiction of the adjudicating officer to issue SCN dated 10-8-2004 (i.e. after the sunset period of 31-5-2002) for alleged contravention of Sections 7 and 8 of FEMA by an exporter in not-realizing proceeds of export made in 1997-1998 (pertaining to the FERA period). It was emphatically held by the High Court that at the relevant point of time, FEMA was not in force and hence there could be no question of contravening the provisions of FEMA and if at all there was any contravention, it would only be under FERA and the same had to be shown to have continued beyond the two year sunset period.

The Court observed that the legislative intent was very clear in having a limited continuation of two years for contraventions under FERA. Furthermore, it was held on a reading of Section 49 (4) [which is subject to Section 49 (3)] the contraventions under FERA had to be governed by the provisions of FERA. Therefore, the alleged contravention was one under FERA and by virtue of the sunset clause so there was no question of the contravention continuing after 31-5-2002. The Hon’ble Karnataka High Court in an unreported decision of Atul Lall v Union of India WP 16620 / 2010 too has approved the reasoning and quashed a SCN issued under similar circumstances.

However, it may be relevant to note that notwithstanding the authoritative findings and the clear legislative mandate, we still find that a number of notices have been issued by the DoE in utter disregard of the law.

Mutual exclusivity of export realisations and other realisations

Another interesting point that the Hon’ble Delhi High Court ruled on was the mutual exclusivity of Sections 7 (provision dealing with exports) and 8 (provision dealing with the realisation and repatriation of foreign exchange) of FEMA. The Court noted that the foreign exchange laws have always separately addressed export realisations and other realisations apart from export dues. Therefore, for the contravention of non-realisation of export proceeds it was held that Section 8 would be in applicable. The Court also relied upon the case of M G Wagh v Jay Engineering Works Ltd (wherein while introspecting provisions pari materia to Sections 7 and 8 under the FEMA) the Supreme Court held that the provision relating to realisation of export proceeds was exclusively covered by Section 12 FERA, 1947 (pari materia to Section 7 of FEMA). Although the law was settled way back in the year 1987 by the Hon’ble Supreme Court, the adjudicating authority even in the recent past has issued notices alleging contraventions of Section 8 for export realisations.

Conclusion

Despite the clear legislative mandate and the authoritative pronouncement of the Delhi High Court and the Karnataka High Court, the DoE has in certain cases imposed penalty on the basis that the contraventions are continuing in nature. In addition to the heavy burden such a penalty places on the parties, such a stand is a manifest error of law as it renders the very basis of the sunset clause redundant. Therefore, appropriately the aforementioned legal propositions have to be emphasized before the higher forums to set aside such orders.

(The authors Mr. Ugen Tashi Bhutia and Mr. T. Sundar Ramanathan are Senior Consultant and Consultant respectively in Corporate Division, Lakshmi Kumaran & Sridharan, New Delhi)

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