No Justification For Imposing Maximum Penalty: Bombay HC Upholds Penalty Reduction For Rajasthan Royals Owners Over FEMA Violation, Dismisses ED Appeal

The Bombay High Court on Wednesday upheld the reduction of the total penalty imposed on Jaipur IPL Cricket Pvt. Ltd. (JIPL), owner of the Rajasthan Royals franchise, from Rs. 98.35 crores to Rs. 15 crores for violation of foreign exchange laws and regulations.

A division bench of Justice KR Shriram and Justice Neela Gokhale observed that the Special Director of Enforcement failed to provide any justification for imposing a maximum penalty on the company and its directors and promoters.

“We find that the Special Director has completely failed to apply the doctrine of proportionality as interpreted and elucidated by the Apex Court in its various decisions, while choosing to impose maximum penalty on Respondents…We are in agreement with the finding of the Tribunal that in the absence of any discussion or justification pertaining to the basis for imposing the maximum penalty and juxtaposing this with the alleged acts attributed to each individual, the order of the Special Director is unsustainable”, the court held.

The court dismissed ED's appeals under Section 35 of the Foreign Exchange Management Act, 1999 (FEMA). The appeals challenged the order dated July 11, 2019, passed by the Appellate Tribunal for SAFEMA, FEMA, NDPS, PMLA & PBPT Act modifying the Special Director of Enforcement's order and reducing the total penalty from Rs. 98.35 Crores to Rs. 15 Crores.

The Mumbai Zonal office of the Directorate of Enforcement initiated inquiries into the Indian Premier League (IPL) organized by the Board of Control for Cricket in India (BCCI). The ED concluded that there were large-scale irregularities in the functioning of the IPL, leading to allegations against Jaipur IPL Cricket Pvt. Ltd. (JIPL) and its directors and promoters.

During the IPL team ownership bidding process, Emerging Media IPL Ltd., UK, submitted a bid of US$67 million (Rs. 268 Crores) for the 'Rajasthan Royals' team, with payments made in instalments. The franchise agreement was executed by Fraiser Castellino, then CEO of JIPL and Lalit Modi, then Vice President of BCCI and Chairman of IPL and performance deposits of Rs. 20,19,87,410.23 were transferred by one Manoj Badale from UK to BCCI.

Subsequently, the franchise agreement was signed on April 14, 2008, and the balance deposit money, i.e., US$773,480.99 (Rs.23,49,27,410/-) was paid by one EM Sporting Holdings Ltd., Mauritius (EMSH) to BCCI. JIPL is a subsidiary of EMSH.

ED said that these deposits made from various sources violated foreign exchange and investment regulations. The Enforcement Directorate issued four separate show cause notices to JIPL and its promoters, including Ranjit Barthakur, Raghuram Iyer, Fraiser Castellino, Manoj Badale and others and entities like EMSH and ND Investments LLP.

The Special Director found all Respondents guilty of contravening Section 6(3)(b) of FEM read with Regulation 5(1) of the FEM (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 and paragraph 8 of Schedule I further read with Regulation 5 of FEM (Permissible Capital Account Transactions) Regulations, 2000. The Special Director, on January 30, 2013, after considering responses to the show cause notices and conducting hearings, imposed a total penalty of Rs. 98.35 Crores.

JIPL challenged the penalty before the Tribunal, which concluded that the penalty imposed was exorbitant and reduced it to Rs. 15 Crores observing that there was no mens rea on the part of the respondents.

ED challenged the Tribunal's decision in the present appeal before the High Court, presenting sixteen questions of law. However, the High Court observed that these questions were repetitive and focused on factual aspects.

The court primarily noted the lack of justification by the Special Director for imposing the maximum penalty and agreed with the Tribunal's findings. The Tribunal recorded a clear finding that an exorbitant penalty has been imposed upon the individuals arrayed without recording any findings on the specific roles of said individuals, the court observed.

The Tribunal had also found that ED completely failed in the discharge of its burden of proving the role of an individual and specifically proving that the said person was in day-to-day management of the affairs of the company. The imposition of maximum penalty is justified only if it is shown that the person was responsible for the functioning of the company, having some motive to benefit from the transaction, the court noted.

The court highlighted that the Tribunal's analysis considered the individual roles of respondents, finding no loss to the exchequer, remittances remaining in India, proper utilization of funds, and no undue benefits to the respondents. 'Rajasthan Royals' has participated in the IPL since 2008 with no other allegation of contravening any FEMA provisions, the Tribunal had noted.

The court emphasized that the imposition of penalties under FEMA should involve a fair and objective assessment, and the Special Director had failed to apply the doctrine of proportionality.

The court concluded that the Tribunal properly considered all relevant facts and evidence and upheld the Tribunal's decision.

Case no. – FEMA Appeal No. 1 of 2020 with connected cases

Case Title – Special Director, Directorate of Enforcement v. Jaipur IPL Cricket Pvt. Ltd.

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