Introduction
Receiving a notice from the Enforcement Directorate (ED) or the Adjudicating Authority (AA) under the Foreign Exchange Management Act, 1999 (FEMA), can be an overwhelming experience. This guide offers a practical, step-by-step approach to help you understand and respond effectively to a FEMA show cause notice.
Step 1: Understand What the Show Cause Notice Means
A show cause notice issued by the ED or the AA under FEMA is a formal communication alleging that you have contravened the provisions of FEMA or its associated rules, regulations, orders, or notifications. This notice typically outlines:
- The nature of the alleged contravention(s), including the specific provisions of FEMA that are believed to have been violated.
- The detailed facts and circumstances leading to these alleged contraventions.
- A list of documents that the investigating officer (from the ED) relies upon.
- A requirement for you to show cause, within a specified period (not less than ten days from the date of service), as to why an inquiry should not be held against you.
The ED is the agency established by the Central Government to enforce and administer FEMA, including carrying out inquiries and investigations. After investigation, the ED files a formal complaint before the Adjudicating Authority (AA), which is appointed by the Central Government to hold an inquiry into the alleged contraventions.
Step 2: Act Promptly – Time is of the Essence
It is crucial to take immediate action upon receiving a FEMA notice. Ignoring the notice or delaying your response can have serious consequences, potentially leading to penalties and further legal action. The notice will specify a deadline for your reply, and it is essential to adhere to this timeline. If you require more time to prepare your response, you may consider requesting an extension from the issuing authority, providing valid reasons for the delay.
Step 3: Exercise Your Right to Seek Legal Counsel
Upon receiving a FEMA notice, one of the most important steps you can take is to seek legal counsel from an experienced lawyer who specialises in FEMA and foreign exchange regulations. You also have the option to take the assistance of a Chartered Accountant duly authorised by you to present your case before the AA. Legal counsel can:
- Help you understand the allegations made in the notice and their potential implications.
- Advise you on the strength of your case and the available legal options.
- Assist you in gathering relevant documents and evidence to support your defence.
- Help you draft a comprehensive and legally sound reply to the show cause notice.
- Represent you in any subsequent adjudication proceedings before the AA.
As noted in the context of investigation, even before the AA concludes whether to proceed, there is no bar on seeking assistance from an Advocate or Chartered Accountant.
Step 4: Prepare a Comprehensive Reply
Preparing a detailed and well-supported reply is critical. Your response should:
- Acknowledge receipt of the show cause notice and clearly state your intention to respond.
- Address each allegation made in the notice specifically and factually. Do not make vague or general statements.
- Provide all relevant information and documents that support your case and counter the allegations. This may include financial records, transaction details, agreements, and any other evidence that demonstrates compliance with FEMA provisions or explains the circumstances of the alleged contravention.
- If there was a delay in investigation by the ED, which caused prejudice (for example, difficulty in retaining documents), you can raise this point based on judicial precedents like Innovative Tech Park Ltd. v. Special Director of Enforcement. Courts have recognised that authorities are required to initiate proceedings within a reasonable period where no limitation period is prescribed.
- If the notice pertains to actions taken many years ago, and there has been a significant delay, you may need to address the reasons for the delay and any prejudice caused, referencing principles of natural justice.
- If you believe there has been a misinterpretation of the law or the facts, clearly state your legal arguments, referencing relevant sections of FEMA and any supporting case laws. For instance, if the issue relates to the applicability of FEMA versus the repealed FERA for a past transaction, as seen in Iqbal Singh Sabharwal v. Union of India & Another, you should clearly articulate why FEMA provisions might not be applicable.
- Ensure your reply is clear, concise, and well-organised.
- Submit your reply within the stipulated timeframe to the issuing authority (ED or AA) and retain a copy for your records.
Step 5: Understand the Next Steps – Adjudication Proceedings
After you submit your reply, the Adjudicating Authority will consider your response and may decide to hold an inquiry into the alleged contravention. If an inquiry is deemed necessary, the AA will issue a notice fixing a date for your appearance, either personally or through your legal representative or authorised chartered accountant.
During the adjudication proceedings:
- You will have the opportunity to present your case, produce further documents or evidence, and potentially cross-examine witnesses.
- The AA is not bound by the Indian Evidence Act, 1872.
- The AA is expected to deal with the complaint diligently and try to dispose of it within one year from the date of receipt. If they fail to do so, they should provide reasons in writing.
- After considering the evidence and submissions, the AA will pass a final order, which may include the imposition of a penalty if the contravention is established. Penalties can be up to thrice the sum involved in the contravention or up to ₹2 lakh, with a further penalty for continuing contraventions.
Conclusion: Dealing with a FEMA Show Cause Notice
Receiving a FEMA show cause notice requires a calm, methodical, and prompt response. By understanding the notice, acting quickly, seeking legal counsel, preparing a comprehensive reply, and being aware of the subsequent adjudication process, you can navigate this complex legal terrain effectively and protect your interests.
Citations
- Introduction to Investigation & Adjudication under FEMA
- Innovative Tech Park Ltd. v. Special Director of Enforcement
- Iqbal Singh Sabharwal v. Union of India & Another, 2009(2) 282 P&H
- Foreign Exchange Management Act – FEMA
Article by : Aditya Bhatt
Association: Bhatt and Joshi
