No Specific Complaints, Non-Compliance With Legal Procedures': Telangana High Court Stays Probe Under FEMA Against Brightcom Group

The Telangana High Court has granted an interim stay on the inquiry and investigation initiated by the Enforcement Directorate under Foreign Exchange Management against Brightcom Group Ltd citing non-compliance with legal procedures and the absence of specific complaints.

Justice Surepalli Nanda also directed the Respondent to provide a detailed response in the form of a counter affidavit in the upcoming proceedings.

"..prior to initiating an inquiry, the Adjudicating Authority (i.e. the appointed officers of the respondent) (ED) ought to have issued a show cause notice to the petitioners, which admittedly as borne on record has not been done in the present case. 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."

The Court also relied on the judgement passed by the Supreme Court in Natwar Singh v Director of Enforcement and another to reiterate, that when a procedure is established by law, the authorities are bound by it.

Further Justice Nanda observed that the inquiry initiated against Brightcom by the ED was not in conformity with rule 4 and 16 of the Foreign Exchange Management (Adjudicating proceedings and Appeal) Rules, 2000.

"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 Natwar Singh v Director of Enforcement and another, there shall be stay of enquiry and investigation (through F.No.T-3/HYZO/25/2023) initiated by the respondent against the petitioners."

According to the petitioner, the Securities and Exchange Board of India ("SEBI") initiated proceedings against Brightcom and its directors on the ground that there were alleged irregularities in their financial statements and irregularities in preferential allotments. A show cause notice was issued by SEBI and Brightcom submitted their reply.

Subsequently, in August, a second show cause cum interim order was issued by SEBI against the petitioners, another show cause notice was issued, and both proceedings are pending, none having attained finality.

Meanwhile, on 26.08.2023 a press release was published by the Enforcement Directorate ("ED") regarding an enquiry and investigation based on an investigation being conducted by SEBI regarding alleged impairment of assets of the Company.

On 30th August, the ED issued a summons to the former Chief Financial Officer of the company and conducted search operations in his residence and the residence of the company's auditors. The press release stated that the enquiry revealed that more than 300 crores of loans advanced by Brightcom were partly siphoned off and that Brightcom itself bought the preferential shares issued by round-tripping funds through subsidiaries and conduit entities. 

Aggrieved by this investigation and inquiry, the petitioners moved the High Court seeking to declare these actions as arbitrary, illegal, and in violation of the Foreign Exchange Management Act and the Foreign Exchange Management (Adjudicating Proceedings and Appeal) Rules, 2000.

During the court proceedings, the petitioners asserted that there were no complaints against them and proper legal procedures were not followed by the respondent. They also highlighted that SEBI had issued orders without any specific allegations against the petitioners. Therefore, the petitioners sought interim relief

The court examined relevant legal provisions, including Rule 4 of the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, which mandates the procedure for initiating inquiries and adjudications in cases of contravention. The court referred to a previous judgment of the Supreme Court, emphasizing that the Adjudicating Authority must follow a structured and prescribed procedure under the law.

The court noted that in this case, the inquiry initiated by the respondent did not follow the proper legal procedures as per Rule 4. Additionally, the court highlighted that the inquiry seemed to be based on SEBI's investigation rather than a specific complaint as required by Section 16 of FEMA.

In light of these observations and the legal principles laid down by the Supreme Court, the court ordered a stay on the ongoing inquiry and investigation against the petitioners under FEMA. This stay was granted for a period of four weeks from the date of receipt of the court's order.

The court also directed the Standing Counsel representing the Central Government to file a detailed counter-affidavit in response to the petition.

The case has been scheduled for further proceedings on October 17.

Case Title: M/s Brightcom Group Ltd v. Directorate of Enforcement

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