IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated:- 03.03.2011 Coram:- The Hon'ble Mr. Justice T.RAJA Writ Petition No.24534 of 2010 and M.P. No.1 of 2010 1. V.Ramachandran Former Chairman, Helios and Matheson Information Technology Ltd., Adwave Towers, No.9 South Boag Road, T. Nagar, Chennai 600 017. 2. G. Murali Krishna, Managing Director, Helios and Matheson Information Technology ltd., Adwave Towers, No.9 South Boag Road, T. Nagar, Chennai 600 017. ... Petitioners vs. The Special Director, Directorate of Enforcement, 6th Floor, Lok Nayak Bhawan, Khan Market, New Delhi 110 003. ... Respondent Petition under Article 226 of the Constitution of India for the issuance of a writ of certiorari to call for the records of the respondent relating to proceedings No.SDE/SKS/IV/5/2010, dated 03.09.2010, and quash the same. For Petitioners : Mr.R.Krishnamurthy, Senior Counsel for M/s.Pais, Lobo & Alvares For Respondent : Mr.M.Dhandapani, Special counsel for the Directorate of Enforcement. O R D E R The petitioners herein challenge the impugned proceedings https://hcservices.ecourts.gov.in/hcservices/ (No.SDE/KS/IV/5/2010) of the respondent-Special Officer, Enforcement Directorate, dated 03.09.2010, in and by which, a penalty of Rs.5,00,000/- came to be imposed under Section 13 (1) of the Foreign Exchange Management Act, 1999, on each of the petitioners herein by the aforesaid authority for the alleged contravention of the provisions under Section 6 (3)(j) of the Act on the ground that the petitioners offered personal guarantee for a loan amount of US$ 13.5 Million to a resident outside India without obtaining prior permission from the Reserve Bank of India (RBI). 2. Certain vital facts, which are necessary to be pointed out for better appreciation, are concisely outlined here-under:- M/s.Helios and Matheson Information Technology Limited, Chennai- 17, (hereinafter refereed to as H & M Ltd.) is a Public Limited Company and the petitioners herein are its Former Chairman and present Managing Director respectively. M/s.vMoksha Technologies Ltd. (in short 'VMT') is a non-resident Unit in Mauritius, Port Blair. In order to expand its business activities, H & M Ltd. entered into a Sale Purchase Agreement (in short 'SPA') on 11.05.2005 with VMT at Mauritius to acquire 100% of its shares for US$ 13.5 Million with an understanding that the consideration will be first transferred by H & M Ltd. to VMT whereupon, the transferred amount will be re-transferred to H & M Limited who, in turn, will issue redeemable preference service shares of H & M Ltd. in favour of VMT, Mauritius and those shares will be redeemed after 18 months from the date of issue. Consequent to the agreement, VMT, Mauritius, deposited the Original Share Certificates and the Share Transfer Forms duly signed with the agents/Escrow as per the terms of the SPA. The petitioner-H & M Limited secured the approval from Foreign Investment Promotion Board for the said investment in non-convertible preference shares in H & M Limited by a non-resident/VMT, Mauritius. The Government of India, by its proceedings dated 20.06.2005, granted approval for the collaborations between the petitioners and VMT Mauritius subject to the condition that the consideration for the investment in VMT Mauritius shall be paid out of the inward remittance of Foreign Exchange through normal banking channels and further, to invest with H & M Ltd., VMT Mauritius has to follow the procedure prescribed by the Government of India in Press Note No.9/99 whereby it is provided that foreign companies will have to bring the requisite funds from abroad and not leverage the same with the funds from the domestic market. VMT, Mauritius, for remitting US$ 13.5 Million which is equivalent to Rs.58,37,75,195/-, being the consideration for allotment of preference shares in H & M Ltd., availed credit facilities from the State Bank of Mauritius at Mauritius. In order to comply with the https://hcservices.ecourts.gov.in/hcservices/ terms of the SPA, H & M Ltd. gave a letter of lien and guarantee in favour of Chennai Branch of State Bank of Mauritius. Thereafter, on 29.06.2005, the entire sum of Rs.58,37,75,195/- was remitted to the account of H & M Ltd. at the State Bank of Mauritius Branch at Chennai. On the very next day, ie., on 30.06.2005, the said amount credited to the account of H & M Ltd. was re-transmitted to the account of VMT, Mauritius, with the State Bank of Mauritius at Mauritius, towards the consideration for the purchase of 3 subsidiaries of VMT. At this juncture, it is relevant to note that a rift originated between the petitioner-company and the successive Management of the VMT Mauritius on the very transactions referred to above which gave rise to various proceedings including the impugned proceedings under challenge herein. Despite fulfilment of the terms and conditions as contained in the SPA on the part of H & L Ltd., VMT Mauritius committed breach of the terms on account of certain disputes that arose between Rajeev Shawney, the present Chairman of VMT and Pawan Kumar, the then CEO/Chairman of VMT Mauritius. Arbitration Proceedings initiated thereupon by the petitioners to resolve the dispute arose with the Management of VMT Mauritius are still pending. The said Rajeev Shawney is also said to have made false and defamatory allegations against H & M Ltd. and the petitioners apart from lodging a false and frivolous complaint against them alleging commission of serious offences of fraud. Inasmuch as the successive Management of VMT Mauritius alleged fraud in the transaction in question and highlighted the same in the complaint made to the RBI, by letter dated 28.08.2007, the RBI requested the respondent-Department to examine and investigate the issue for necessary action, which resulted in search of the office premises of the petitioners on 12.03.2008 and during such search, incriminating documents were said to have been seized and statements of the individuals recorded including that of the Branch Manager of the State Bank of Mauritius (SBM) at Chennai, who is said to have stated that the petitioners furnished guarantees only to the SBM at Mauritius. Ultimately, after conclusion of the investigation, a show cause notice, dated 21.01.2010, came to be issued against the petitioners stating that they have contravened the provisions under Section 6 (3) (j) of the Foreign Exchange Management Act, 1999 (FEMA) read with Regulation 3 of the Foreign Exchange Management (Guarantees) Regulation 2000 to the extent of US$ 13.5 million equivalent to Rs.58,37,75,193/- in having stood as guarantors for obtaining the loan from State Bank of Mauritius, Mauritius, and requiring them to show cause in writing within 30 days from the date of receipt of the notice as to why adjudicating proceedings as contemplated under Section 13 of FEMA should not be held against them in the manner as provided under Rule (4) of the Foreign Exchange Management (Adjudication Proceedings and https://hcservices.ecourts.gov.in/hcservices/ Appeal) Rules, 2000 (in short 'Rules') and as to why penalty(ies) as provided in Section 13 (1) of FEMA should not be imposed on them. The petitioners submitted a detailed explanation along with a letter, dated 01.07.2010, of their Advocate stating that the Authority has no jurisdiction to proceed against the petitioners and as such, there was no need to have an enquiry at all. At such stage, challenging the proceedings pending before the adjudicating authority, the petitioners filed W.P. Nos.15059 of 15060 of 2010. By common order dated 13.07.2010, this Court found that nothing has been brought on record to substantiate the claim of the petitioners that the principles of natural justice have been violated and so finding, refused to interfere with the show cause notice, however, considering the plea of the petitioners that their grievance would stand redressed if a direction is issued to the respondents for deciding the case of the petitioners on the basis of the explanation offered to the effect that the provisions under Section 6(3)(j) have no application to their case at all, the writ petition came to be disposed of with a direction to the Department to consider such objections within a period of four weeks from the date of receipt of a copy of the order. After disposal of the aforesaid writ petitions, by letter dated 15.07.2010, sent by the Advocates of the petitioners to the respondent- Directorate, it was stated that there was no need for the petitioners to attend the scheduled personal hearing fixed on 16.07.2010. The opportunities given to the petitioners for personal hearings on 12.07.2010 and 14.07.2010 were not availed of by the petitioners. Since the petitioners did not desire to attend the personal hearings as expressed by them in the aforesaid letter and sought to consider their cases based on the explanation offered on 01.07.2010, the authority, taking note of the time-limit prescribed in the order of the learned single Judge, after considering the case of the petitioners as detailed in their explanation, ultimately declined to accept the same and, by the proceedings challenged herein, imposed a penalty of Rs.5 lakhs each on the petitioners herein. 3. Mr.R.Krishnamurthy, learned Senior Counsel appearing for the petitioners, in an arduous endeavour to whittle down the vigour of the impugned order, studiously contended by advancing the following submissions:- (i) The petitioners herein did not stand as guarantors for any non-resident but the letter of comfort-guarantee was given only to a resident of India. Generally, if a person guarantees re-payment of a loan availed of by a borrower, the guarantor would also execute the loan agreement along with the borrower, whereas, in the case on hand, the loan agreement, dated 28.06.2005, executed by VMT in favour SBM, Mauritius, would depict that the borrower alone had executed the loan https://hcservices.ecourts.gov.in/hcservices/ agreement and the petitioners had never executed the agreement along with the borrower as guarantors. The lien and guarantee on the part of the petitioners did not pertain to the loan granted by the SBM at Mauritius but pertains to petitioners' account with SBM at Chennai Branch, which is not a non-resident. Under such circumstances, in a transaction which in no way involves a non-resident as a party, there is no scope for applicability of Section 6(3)(j) of FEMA. (ii) In matters relating to Capital Account Transactions, for a resident to offer guarantee to a non-resident, no permission of the RBI is necessary at all. While sub-Section (2) of Section-6 states that the RBI may, in consultation with the Central Government, specify any class or classes of capital account transactions which are permissible and limit up to which foreign exchange shall be admissible for such transactions, sub-section (1) thereof clearly states that subject to what is provided in sub-Section (2), any person may sell or draw foreign exchange to or from an authorised person for a capital account transaction, provided that the Reserve Bank shall not impose any restriction on the drawal of foreign exchange for payment due on account of amortization of loans or for depreciation of direct investments in the ordinary course of business. Since Section-(3) is very explicit that Clause (j) pertaining to guarantee/surety in respect of any debt/obligation/liability by (i) a person resident in India and owed to a person resident outside India or (ii) by a person outside India, may be regulated by the RBI without prejudice to the generality of the provisions of sub-Section (2), the transactions involved herein would only fall under Section 6 (2) of the Act and the purview of section 6(3) (j) is clearly excluded from application. (iii) When all the transactions had been done through the Chennai Branch of the SBM after obtaining advice of Pricewaterhouse Coopers Pvt. Ltd and Khaitan and Co., if in fact permission of the RBI was necessary, the Chennai Branch of the SBM should have returned the papers submitted by the petitioners-company, instructing them to obtain the requisite permission from the RBI. At any rate, for the default, if any, committed by the authorised dealer-Chennai Branch of SBM, the petitioners cannot be held responsible and the authorized dealer, who acted as an agent of the RBI alone is answerable, however, no charge was ever levelled against the dealer. (iv) After disposal of W.P. Nos.15059 and 15060 of 201, vide order dated 13.07.2010, the respondent was directed to consider the objections submitted by the petitioners on 01.07.2010 and the said authority, having formed an opinion to impose huge penalty on the petitioners declining to accept the explanation offered, before passing the impugned proceedings, should have issued a fresh show-cause notice as provided under Section 4 of the Rules and afforded all reasonable opportunities to substantiate the defence, however, it seems that the authority had already made up his mind to hold against the petitioners https://hcservices.ecourts.gov.in/hcservices/ and such attitude on the part of statutory authorities should be depreciated. (v) In Harbanslal Sahnia v. Indian Oil Corpn. Ltd. (AIR 2003 SC 2120), it has been categorically held that rule of exclusion of writ jurisdiction by availability of an alternative remedy is a rule of discretion and not one of compulsion and that, in an appropriate case, in spite of availability of the alternative remedy, the High Court may still exercise its writ jurisdiction in at least three contingencies viz., (a) where the writ petition seeks enforcement of the Fundamental Rights; (b) where there is failure of principles of natural justice; or (iii) where the orders or proceedings are wholly without jurisdiction or the vires of an Act is challenged. In the light of the above case law, the respondents cannot canvass a plea of alternative remedy available by way of appeal before the appellate authority-Appellate Tribunal for Foreign Exchange (AFTE) under the Act as against the impugned order passed by the original authority. So submitting, learned Senior Counsel states that inasmuch as, in the present case, the authority has proceeded by pre-determining the issue without even considering the basic and core aspects adverted to on the part of the petitioners and the principles of natural justice having not been complied with by not resorting to the course outlined in Section 4 of the Rules for issuance of a fresh show cause notice, the impugned proceedings are rendered invalid in the eye of law, and pleads for grant of the prayer sought for. 4. Controverting the submissions made by the learned Senior Counsel, Mr.M.Dhandapani, learned Special Counsel appearing for the respondent-Directorate would submit that, after exhaustively considering the objections made by the petitioners, the authority could not agree with their claim since the case clearly falls under Section 6 (3) (j), however, the authority was lenient enough in imposing the penalty under challenge and a close reading of the provisions would only suggest that Section 6(2) has no applicability to the petitioners' case. Further, the present writ petition, agitated in the second round of litigation before this Court, by the very same parties may be rejected on the simple ground that as against the present impugned order passed subsequent to the direction issued in W.P. Nos.15059 and 15060 of 2010 by duly considering the issue in the light of the explanation offered by the petitioners, an efficacious alternative remedy under Section 19 is available by way of Appeal before the ATFE and all the grounds raised herein can be very well agitated and canvassed before the said Forum. When all dealings pertaining to permissible capital account transactions as governed by FEMA are stipulated by the RBI, prior permission of the RBI must have been obtained by the petitioners who https://hcservices.ecourts.gov.in/hcservices/ stood guarantors to a non-resident and the present case is clearly covered by Regulation-3 of FEM (Guarantees) Regulation 2000. The respondent even before disposal of the earlier writ petitions on 13.07.2010, fixed the date of personal hearing on 12.07.2010 and even thereafter, they did not avail the opportunity of personal hearing for which the dates given were 14.07.2010 and 16.07.2010. If the petitioners were really looking for an ample opportunity, despite the explanation offered by them, by availing the opportunity of personal hearing fixed on 14.07.2010 and 16.07.2010, either personally or through counsel, they could have effectively projected their pleas and claims, rather, they simply addressed a letter dated 15.07.2010 so vaguely stating that there was no need for them to any more attend the enquiry as the matter could be decided based on the explanation. Thus, the authority, conscious of the fact that the High Court had fixed an outer-limit for disposal of the petitioners' case on the basis of the explanation, proceeded therewith, assessed and dealt in detail with each of the objections made and ultimately, passed the impugned order and in the said order, clear discussion has been made to hold that only the provisions under Section 6(3)(j) of the Act is applicable to the issue in question. Referring to Section 35 of the FEMA which provides that any person aggrieved by any decision or order of the Appellate Tribunal may file an appeal to the High Court within sixty days from the date of communication of the decision or order of the Appellate Tribunal to him on any question of law arising out of such order; and relying on a case law of the Apex Court reported in 2010 CIJ 61 CLJ (Rajkumar Shivhare v. Asst. Director, Directorate of Enforcement) wherein it has been categorically held that when an appeal remedy was provided under the Act, only appeal had to be preferred and the writ petition was not maintainable, learned special counsel submits that, in the present case, the petitioners without exhausting such remedy of appeal has rushed to this Court and further, even if he suffers an adverse order at the hands of the appellate authority, he has further recourse to challenge the appellate order by filing an appeal u/s.35 of the Act to this Court. Under such circumstances, a deep analysis of the case would go to show that it may not be appropriate at this stage for this Court to appreciate the case of the petitioners by delving into the various points raised and hence, the writ petition may be dismissed at the threshold. 5. I have given my thoughtful consideration to the rival submissions made on either side and carefully perused the materials available on record. 6. Admittedly, VMT Ltd. is a holding company, a non-resident at Mauritius with whom the petitioners, in order to promote their https://hcservices.ecourts.gov.in/hcservices/ business, entered into a Sale Purchase Agreement duly signed by both sides on 11.05.2005 and it was agreed that the petitioner-company will acquire 100% shares of VMT for a consideration of US$ 15 million, with an understanding that the consideration will be first transferred to VMT Ltd. whereupon the amount will be re-transferred to H & M Ltd., who in tun will issue redeemable preference shares in favour of VMT and those shares will be redeemed after 18 months from the date of issue. VMT applied for loan from the State Bank of Mauritius at Mauritius and on the basis of the letter of lien and guarantee furnished by the petitioners, the said amount released by SBM at Mauritius was credited to the petitioner's account at the Chennai Branch of SBM on 29.06.2005. In respect of the said transaction, the RBI received a complaint from the present Chairman of VMT stating that the said transaction was fraudulently entered into by collusion between the petitioners and the erstwhile Chairman of the VMT, for, instead of crediting the acquisition proceeds into the accounts of VMT maintained with HSBC Bank, the sum was credited to the VMT's account with the SBM at the Mauritius Branch. The said complaint received by the RBI was forwarded to the respondent-Directorate for enquiry and investigation and on the basis of the materials collected, both oral and documentary, it was found that even though the present transaction between a resident in India/petitioners and a non-resident/VMT at Mauritius falls only under the specified class of permissible capital account transaction in terms of Section 6(2) of FEMA, the same is regulated in terms of Regulation of FEM (Guarantees) Regulation, 2000 issued under Section 6(3)(j) of FEMA. 7. Even though at the first instance after completion of the investigation, the petitioners were issued with a show cause notice on 21.01.2010 and a detailed explanation was offered along with a letter, dated 01.07.2010, from their Counsel to the effect that there was no need to have an enquiry at all, the petitioners did not choose to appear for the personal hearing scheduled on 12.07.2010, rather, they chose to file the writ petitions as mentioned above with an emphatic allegation that the principles of natural justice have been flagrantly violated in their case. One of the grounds taken therein is relevant to be quoted below:- „ That all the materials needed for the enquiry are available on record and the petitioner has no other record to produce or offer any other explanation other than brought to the notice of the respondent during the investigation in the year 2008 and also its explanations offered under in his letter dated 01.07.2010. Hence, there is no need at all to hold any further enquiry and first respondent can hold on the materials already available on record and that I have not contravened any provisions of the said Act. The continuation of the adjudication proceedings in spite of the request made by https://hcservices.ecourts.gov.in/hcservices/ me in my explanation offered to the charges would lead to unnecessary and lengthy proceedings and harassment to me. „ It was further highlighted in the said litigation that guarantee furnished by the petitioners was through a Bank in Chennai viz., SBM's Chennai Branch, and for such issuance of guarantee by a resident in India to a non-resident, permission of RBI is not necessary in terms of Section 6 (2) and the regulations made there-under and further, the respondents have not produced the guarantee alleged to have been issued to the non-resident. While disposing of the writ petition, this Court discarded the strong argument regarding violation of the principles of natural justice and, acting upon the plea of the petitioners that they restrict the prayer to the extent that their grievance would get redressed if a direction was issued to the respondents to consider their claim of non-applicability of Section 6(3) (j) to their case on the basis of the detailed explanation submitted on 01.07.2010, ultimately directed the respondents to consider those objections and pass orders within a period of four weeks from the date of receipt of a copy of the order. 8. At this juncture, it must be taken note of that even during the pendency of the writ petition, personal hearing was scheduled on 12.07.2010 and the writ petition came to be disposed of on 13.07.2010. Two more opportunities were given to the petitioners to attend the personal hearings scheduled on 14.07.2010 and 16.07.2010, but the petitioners did not avail it of. The petitioners could have very well utilised the further opportunity of personal hearing coupled with the direction of this Court for consideration of the case by the respondent in the light of the detailed explanation offered on 01.07.2010, to effectively defend their case and substantiate the claim and pleas now raised as to the applicability of Section 6(2) of FEMA to the complete exclusion of Section 6(3) (j) and the Regulations issued thereunder. It must also be pointed out here that when the petitioners themselves requested this Court that they would be satisfied if a mere direction is issued to consider their claim in the light of the explanation offered, the presumption would be that they only required a decision at the hands of the authority based on the explanation offered and that in the event of an adverse order, they would resort to the further course of remedy as provided under the statute. Therefore, in the subsequent proceedings now adjudicated by this Court, they are estopped from raising the plea of compliance to the principles of natural justice as provided under Rule-4 of the Rules. If they were cautious and conscious enough, in the letter, dated 15.07.2010, sent to the Directorate by the petitioners through their counsel, they could have emphasised that in the event of their case being considered negatively, they may be given a further opportunity by way of giving a fresh