SAFEMA Tribunal Upholds CFO's Liability for FEMA Violations in FCCB Issue; Penalty Moderated to ₹1,01,000
Background and Overview
The Appellate Tribunal under SAFEMA at New Delhi recently delivered a significant ruling in the matter of Sanjay Pai Vs Special Director, Enforcement Directorate, concerning contraventions of the Foreign Exchange Management Act, 1999 (FEMA) arising out of a Foreign Currency Convertible Bond (FCCB) issuance by M/s Plethico Pharmaceuticals Ltd. The appeal, registered as Appeal No. FPA-FE-65/MUM/2015, challenged the penalty order bearing reference ADJ/05/B/SDE/SWN/2015/FEMA/828 dated 31.03.2015 passed by the Special Director, Enforcement Directorate, Mumbai.
The judgment addresses a critical question in corporate compliance law — whether a senior officer of a company, specifically its Chief Financial Officer, can be held personally liable for FEMA violations attributable to the company, and if so, to what extent the penalty may be imposed.
This ruling carries significant implications for corporate officers involved in cross-border fund-raising transactions, underscoring that designation alone is insufficient to attract liability — but active participation in violating transactions certainly is.
Facts of the Case
The FCCB Transaction
M/s Plethico Pharmaceuticals Ltd., a publicly listed pharmaceutical company, decided to expand its global footprint by pursuing overseas acquisitions, particularly targeting businesses in the United States and Europe. To finance these acquisitions, the company evaluated two broad funding options — equity dilution or debt financing — and ultimately chose to raise funds through an FCCB issue of USD 75 million (approximately ₹297 crore) in the year 2007.
For this purpose, the company engaged Citibank, London as its banker and trustee for the FCCB issue. The FCCB was priced with reference to the closing price of Plethico's shares on the NSE on 15th October, 2007, which stood at ₹447.95 per share. A conversion premium of 35% over this reference price was negotiated with Citibank after extensive discussions involving the bondholders.
The Loan Registration Number (LRN) Controversy
A central point of contention was the delay in obtaining the Loan Registration Number (LRN) from the Reserve Bank of India. The company, through its Authorised Dealer — Bank of Baroda, Indore Branch — submitted Form No. 83 to the RBI on 15.10.2007. Under ordinary circumstances, LRNs are allotted within approximately one week from the date of submission of Form 83.
However, in this instance, the LRN was issued only on 01.01.2008, more than two and a half months after the form was filed. Moreover, the RBI's Department of Statistical Analysis and Computer Services (DESACS) sought specific clearance from the Foreign Exchange Department of RBI before issuing the LRN — a procedure typically associated with the Approval Route rather than the Automatic Route. A detailed meeting was convened by Shri Salim Ganadharan, Chief General Manager, RBI, on 24.12.2007 with company personnel, and the RBI formally granted approval through its letter dated 28th December, 2007 bearing Reference No. FED.CO.ECBD.03.02.802/14996.
The actual remittance of FCCB proceeds from the company's Bank of Baroda, Dubai account took place between 24.12.2007 and 24.08.2008.