Rule 4 FEMA(Adjudication Proceedings And Appeal), Pertaining To Holding Inquiry Not Followed By ED: Telangana High Court Stays Investigation

A Bench of Justice Surepalli Nanda held, “Taking into consideration the above referred fact and circumstances of the case and also the observations of the Apex Court in judgment dated 05.10.2010 in Nafwar Singh v Director of Enforcement and another reported in 2010 (13) SCC page 255, there shall be stay of enquiry and investigation (through F.No.T-3/HYZO|25|2023) initiated by the respondent against the petitioners. under the Foreign Exchange Management Act, 1999 for a period of four(b4) weeks from the date of receipt of the copy of the order.”

The Court noted that the Foreign Exchange Management Act (FEMA) (Adjudication Proceedings and Appeal) Rules, 2000, specifically Rule 4 mandates that before initiating an inquiry, the Adjudicating Authority must issue a show cause notice to the concerned person.

The Court added, “the adjudicating Authority shall issue a notice to such person requiring him to show cause as to why an inquiry should not be held against him. It is clear from a bare reading of the rule that show-cause notice to be so issued is not for the purposes of making any adjudication into alleged contravention but only for the purpose of deciding whether an inquiry should be held against him or not. Every such notice is required to indicate the nature of contravention alleged to have been committed by the person concerned.”

The Court noted that in this instance, no such notice had been issued to the petitioners.

Senior Advocate Vikram Pooserla appeared for the Petitioners.

The petitioners argued that as of the current date, there were no complaints against them, and the relevant legal procedures had not been followed by the respondents. They contested the press release issued on August 26, 2023 and pointed out that SEBI's directions in the order dated August 22, 2023 did not implicate them under Sections 11(1), 11(4), and 11B(11) of the Securities and Exchange Board of India Act, 1992. The petitioners claimed entitlement to interim relief as sought in the writ petition.

The Court said Section 16 of the Act requires the Adjudicating Authority to initiate an inquiry upon receiving a written complaint, which was lacking in this case. The basis for the respondent's investigation was a SEBI inquiry mentioned in the press release, without any formal complaint being filed against the petitioners.

The Court said, “It is also evident on perusal of the record that enquiry initiated by the respondents is in contravention of Section 16 of the Act which clearly mandates that the Adjudicating Authority must initiate inquiry to adjudicate a contravention of the Act or rules:or regulations thereunder upon receiving a complaint in writing. In the present case, it is evident that the basis for initiation of enquiry by the respondent is the investigation by SEBI as indicated in the press release dated 26.08.2023 and no complaint is registered against the petitioners”

Considering these factors and citing the Supreme Court's judgment in (2010) 13 SCC 255, the Court determined that the respondent's actions did not comply with the prescribed legal procedures.

Therefore, the Court ordered a stay on the inquiry and investigation initiated by the respondent against the petitioners under the Foreign Exchange Management Act, 1999, for a period of four weeks from the receipt of the court's orders.

Furthermore, the Court directed the Standing Counsel for the Central Government, representing the respondent, to submit a detailed counter-affidavit by the next scheduled hearing on October 17, 2023.

Cause Title: M/s. Brightcom Group Ltd. & Anr. v. Directorate of Enforcement

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