FEMA Export Realisation Violations: Tribunal Confirms Director Liability While Granting Relief to Non-Executive Director

Overview of the Dispute

The Appellate Tribunal under SAFEMA at New Delhi delivered a significant ruling in Vallabhbhai Surani Vs Directorate of Enforcement, partly allowing a set of appeals filed against penalties levied under Section 7 of the Foreign Exchange Management Act, 1999 (FEMA, 1999), read with applicable Export Regulations. The case revolved around directors of M/s J.B. Diamonds Ltd., who were penalised for failing to realise export proceeds within the stipulated timeframe and for not fulfilling export obligations against advance payments received from overseas buyers.

The Adjudicating Authority had, through its order dated 28.10.2011 under Section 19 of FEMA, 1999, found that M/s J.B. Diamonds Ltd. had violated Section 7 of FEMA, 1999 read with Regulations 8, 9, 13, and 16(1)(i) of the Foreign Exchange Management (Exports of Goods & Services) Regulations, 2000. Penalties of Rs. 5,00,00,000/- were imposed on the company along with Rs. 5,000/- each on the director appellants.

Background and Facts of the Case

M/s J.B. Diamonds Ltd., incorporated in 1981 and converted to a limited company in 2007, was engaged in importing and exporting rough, cut, and polished diamonds. The company sourced rough diamonds from Belgium, Dubai, Hong Kong, and London, which were processed at three manufacturing facilities located in Surat before being exported.

Intelligence gathered by the Mumbai Zonal Office of the Directorate of Enforcement revealed that the company had not realised export proceeds for a period exceeding twelve months from the respective dates of export. Summons were issued, and statements were recorded from the directors.

In his recorded statement dated 15.02.2010, director Sh. Vallabhbhai P. Surani identified the following persons as directors of the company:

  • Sh. Vallabhbhai P. Surani
  • Sh. Jivarajbhai P. Surani
  • Sh. Bhagwanbhai K. Kukadia
  • Sh. Virjibhai K. Kukadia
  • Sh. Rajeshbhai J. Surani
  • Sh. Suresh V. Kukadia
  • Smt. Kalavatiben V. Surani

He attributed the non-realisation of export remittances to a 30–40% fall in diamond prices during 2008–09, combined with the global economic recession. The company's overseas buyers — located in Hong Kong, UAE, Bangkok, London, Israel, USA, and other countries — had been supplied diamonds on 90 to 120-day credit terms. Due to declining international demand and exchange rate fluctuations, these buyers were unable to clear their dues.

The investigation further disclosed that certain foreign buyers were related parties, with family members of the directors holding positions in those entities. Records from the company's Authorised Dealer also revealed inconsistencies between the figures reported by M/s J.B. Diamonds Ltd. and the corresponding data maintained by the authorised dealer.

Scale of Non-Realisation

The Tribunal noted that export proceeds amounting to USD 117,315,207.13 across 417 export invoices (covering the period 2004–2009) remained unrealised beyond the prescribed time. Additionally, advance payments totalling INR 3,77,21,139/- received from overseas buyers had not been matched with corresponding shipments within one year of receipt, in contravention of Regulation 16(1)(i) of the Foreign Exchange Management (Exports of Goods & Services) Regulations, 2000.

Contentions Raised by the Appellants

Export Proceeds — Global Recession Defence

The appellants, through their counsel, argued that the allegation of wilful inaction was wholly unsustainable. They submitted that out of total exports of approximately Rs. 4,459 crores between 2005 and 2009, foreign exchange worth approximately Rs. 4,140 crores had already been realised — demonstrating that the company had a strong track record of compliance and that the outstanding balance arose solely from extraordinary global economic conditions.

It was further contended that Section 8 of FEMA, 1999 does not define what constitutes "reasonable steps" for an exporter facing payment delays. Similarly, Regulation 15 of the Foreign Exchange Management (Export of Goods & Services) Regulations, 2000 does not prescribe the specific steps an exporter must take to escape liability — it merely empowers the RBI to issue directions to secure payment. The absence of statutory clarity, they argued, made it unjust to hold them liable for not taking steps that were never legislatively enumerated.