## Friday, December 11, 2015

### Drafting hall of shame #1: Criminal sanctions for a new concept of exchange control violations

by Pratik Datta.

In recent years, curbing the menace of black money has been at the political forefront. Finally, the Finance Minister, Mr. Arun Jaitley, in his budget speech [at paragraph 103(9)] said:

"The Foreign Exchange Management Act, 1999 (FEMA) is also being amended to the effect that if any foreign exchange, foreign security or any immovable property situated outside India is held in contravention of the provisions of this Act, then action may be taken for seizure and eventual confiscation of assets of equivalent value situated in India. These contraventions are also being made liable for levy of penalty and prosecution with punishment of imprisonment up to five years."

However, the legal change brought in by the Finance Act, 2015, has now created a completely new offence which may detrimentally impact genuine foreign exchange transactions.

### Consequences for businesses: A hypothetical example

The new amendment empowers the Central Government to prescribe a pecuniary threshold. Let's assume that the Central Government prescribes Rs. 1 crore as the threhold. Now, X Ltd, an Indian company, takes a foreign currency loan of GBP Y from a foreign lender in London in compliance with RBI's ECB regulations. If the loan of GBP Y > Rs. 1 crore (prescribed threshold amount), the Indian borrower X Ltd. would be guilty of committing an offence which is punishable with up to 5 years of imprisonment! This effectively constitutes a new layer of capital controls, with criminal sanctions.

### But why is this an offence?

Because of an error in legal drafting. The new section 13(1C) of FEMA says that acquisition of foreign exchange exceeding the threshold prescribed is an offence -- even if such acquisition is otherwise in compliance with RBI's capital controls framework.

Section 4 of FEMA states:

Save as otherwise provided in this Act, no person resident in India shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India.

Following the budget announcement, sections 13(1C) and 37A(1) were inserted in FEMA.

If any person is found to have acquired any foreign exchange, foreign security or immovable property, situated outside India, of the aggregate value exceeding the threshold prescribed under the proviso to sub-section (1) of section 37A, he shall be, in addition to the penalty imposed under sub-section (1A), punishable with imprisonment for a term which may extend to five years and with fine.

Upon receipt of any information or otherwise, if the Authorised Officer prescribed by the Central Government has reason to believe that any foreign exchange, foreign security, or any immovable property, situated outside India, is suspected to have been held in contravention of section 4, he may after recording the reasons in writing, by an order, seize value equivalent, situated within India, of such foreign exchange, foreign security or immovable property:

Provided that no such seizure shall be made in case where the aggregate value of such foreign exchange, foreign security or any immovable property, situated outside India, is less than the value as may be prescribed.

Note, if any foreign exchange, foreign security or immovable property outside India is held in contravention of section 4, then only the power of seizure under section 37A can be triggered. So far, so good.

However, section 13(1C) creates an offence which does not even require any violation of section 4 of FEMA. Note, section 13(1C) does not refer to any contravention of section 4. It only states that acquisition of foreign exchange exceeding the threshold prescribed under section 37A(1) proviso is now an offence. Under FEMA, only Central Government can prescribe. Therefore, the proviso to section 37A(1) empowers the Central Government to prescribe the value of the threshold. And section 13(1C) makes it an offence to acquire foreign exchange, foreign security or immovable property abroad beyond the value prescribed by the Central Government -- even if no other provision of the existing FEMA is violated.

### How to remedy the situation?

FEMA needs to be amended to address this mistake. The words in contravention of section 4' should be inserted into section 13(1C) and it should read like this:

If any person is found to have acquired, in contravention of section 4, any foreign exchange, foreign security or immovable property, situated outside India, of the aggregate value exceeding the threshold prescribed under the proviso to sub-section (1) of section 37A, he shall be, in addition to the penalty imposed under sub-section (1A), punishable with imprisonment for a term which may extend to five years and with fine.

Pratik Datta is a researcher at the National Institute for Public Finance Policy.

1. isnt same problem with new 13(1A)? could procedures mentioned in 13(1B) and 13(1D) considered as saving grace, to prevent this conundrum? thanks.

1. Yes. S. 13(1A) has the same problem. But it does not create an offence.

No. S. 13(1B) and S. 13(1D) will not save the situation. In clause (1B), the Adjudicating Authority has to deem fit' and the Director has to be `satisfied'. What will be the frame of reference for them? It is S. 13(1C). They will read S. 13(1C) and that section will tell them that if the acquired FX amount exceeds the prescribed amount, it is an offence. Accordingly, the Adjudicating Authority will deem it fit and the Director will be satisfied that the legal requirement is met.

If the software itself is bugged, it's no point hoping that somehow the hardware will by some miracle solve the problem and generate the desired output!

2. It appears that the sanction itself becomes the prescription for eg;

1) What if the Person defined under Section 4 nominates any other Person legally qualified to carry out the transaction, then is there is an offence or not?
2) How will the investigations occur in these cases and get concluded.
3) Does the word Person also mean nominees
4) Does the word Person cover related party transaction.
5) What if the related party is qualified to transact
6) Since there is no provision of seizure of property or of the transacted amount,imprisonment would be impossible to achieve given the law of the Evidence.
7) Are there any treaties in place for this

3. Has the value of the threshold prescribed by the Central Government??? Please guide! Thanks

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