The Foreign Exchange Management Act, 1999 reads like an administrative skeleton: a handful of charging sections, a lattice of delegated rules and regulations, and an adjudication-plus-appeal machinery that deliberately keeps most contraventions out of the criminal courts. The flesh on that skeleton has been supplied by the judiciary. From the FERA-era decisions that survive because FEMA borrowed their architecture, to the post-2000 rulings on the civil character of penalty, the reach of Section 37A seizure, the two-year sunset clause and the liability of company officers, the case law tells you how the Act actually bites. This chapter maps the judgments an exam answer cannot do without, anchoring each to its section, its citation and its precise holding.
Why case law carries FEMA
FEMA is unusual among Indian fiscal statutes in how little it says on its own face. The charging provisions are terse, the heavy lifting is done by Rules and Regulations framed under Sections 6, 46 and 47, and the entire enforcement scheme is administrative: an Adjudicating Authority imposes penalty under Section 13, with an appeal to the Special Director (Appeals) and then to the Appellate Tribunal under Sections 17 and 19, and a further appeal to the High Court on a question of law under Section 35. Criminal prosecution is the exception, confined to the residual situations preserved during transition and to ancillary offences. Because the text is thin, the meaning of "contravention", the standard of culpability, the proportionality of penalty and the limits of coercive powers have all been worked out judicially.
For the judiciary and CLAT-PG aspirant this has a practical consequence. A question on FEMA is rarely answered by reciting the bare section; it is answered by pairing the section with the leading authority that construes it. The same discipline runs through the companion chapters on the FERA-to-FEMA transition and on the regulation of foreign exchange dealings. This chapter assembles those authorities and explains what each decides. The hub for the subject is the FEMA notes index.
The FERA legacy that survives into FEMA
FEMA repealed the draconian Foreign Exchange Regulation Act, 1973, but it did not repeal the jurisprudence built around exchange control. Where FEMA reproduces a FERA concept, the older decisions continue to govern. The most important survivor is Director of Enforcement v. M.C.T.M. Corporation Pvt. Ltd., (1996) 2 SCC 471, where the Supreme Court held that mens rea as understood in criminal law is not an essential ingredient for a penalty under Section 23(1)(a) of the 1947 Act for breach of Section 10; the penalty is attracted the moment the statutory obligation is contravened. The Court described the default as a "blameworthy conduct" giving rise to a civil obligation, "remedial and coercive in nature", to be distinguished from punishment for a crime. That reasoning has been carried wholesale into FEMA adjudication under Section 13.
The corporate-liability question was settled in Standard Chartered Bank v. Directorate of Enforcement, (2005) 4 SCC 530, a 3:2 Constitution Bench verdict. Overruling Asstt. Commissioner v. Velliappa Textiles Ltd., (2003) 11 SCC 405, the Court held that a company can be prosecuted under Section 56 of FERA even though that section prescribes mandatory imprisonment with fine; applying lex non cogit ad impossibilia, the court simply imposes the fine that can be enforced against the body corporate. The principle that a juristic person is not immune from prosecution merely because custodial sentence is impossible remains the governing position and informs how FEMA's penal provisions are read against companies.
LIC v. Escorts and the conclusiveness of RBI permission
Decided under FERA but indispensable to FEMA's investment framework is Life Insurance Corporation of India v. Escorts Ltd., (1986) 1 SCC 264 (AIR 1986 SC 1370). Non-resident companies had acquired Escorts shares under the RBI's Portfolio Investment Scheme; the company's board refused to register the transfers, alleging FERA breaches. The Supreme Court held that once the Reserve Bank grants permission under FERA, a company cannot refuse registration of the shares on the ground that permission ought not to have been granted: the RBI's grant is conclusive and not open to collateral challenge unless shown to be unlawful or beyond power.
The decision matters today because FEMA's whole edifice of foreign investment rests on the same logic of RBI primacy. The contemporary echo is Google India Pvt. Ltd. v. Special Director, Enforcement Directorate (Appellate Tribunal for Foreign Exchange, 2020), where the Tribunal held that no authority has jurisdiction to reinterpret or restrict a permission already granted by the RBI, and that subsequent regularisation by the RBI cures the alleged contravention. Read with the chapter on capital account transactions, Escorts establishes that the regulator's clearance, not the noticee's intent, is the touchstone of compliance.
Section 13 penalty: civil obligation, not punishment
Section 13(1) provides that a person who contravenes FEMA, or any rule, regulation, notification, direction or order, is liable on adjudication to a penalty up to thrice the sum involved where the amount is quantifiable, or up to two lakh rupees where it is not, with a further penalty up to five thousand rupees a day for a continuing contravention. The architecture is unmistakably civil. The Supreme Court's reasoning in M.C.T.M. Corporation (above) supplies the principle: the penalty answers a civil default, so the prosecution need not prove criminal intent.
That civil character is, however, tempered by the discretion the courts insist upon. The foundational authority is Hindustan Steel Ltd. v. State of Orissa, (1969) 2 SCC 627 (AIR 1970 SC 253), where the Supreme Court held that an order imposing penalty for failure to perform a statutory obligation is the result of a quasi-criminal proceeding, and penalty ought not to be imposed unless the party acted deliberately in defiance of law or was guilty of dishonest or contumacious conduct; even where the law permits penalty, it need not be imposed for a technical or venial breach. Although decided under sales-tax law, Hindustan Steel is routinely applied by the FEMA Appellate Tribunal to read a proportionality and good-faith filter into Section 13.
Proportionality and reasoned adjudication
The adjudicating machinery cannot impose the maximum penalty mechanically. In Shashank Vyankatesh Manohar v. Union of India, 2014 (1) Mh.L.J. 838 (affirmed in Union of India v. Shashank Vyankatesh Manohar, the Bombay High Court quashed a show-cause notice issued under Section 42 to the President of the BCCI over allegedly unapproved remittances, holding that the President played no operational role and had directed those in charge to obtain the necessary approvals. The Court emphasised that "due caution and care" must precede a FEMA penalty because non-payment can carry penal consequences under Section 14, including civil imprisonment, and that the Adjudicating Authority must apply its mind to the noticee's objections and record reasons disclosing a link between those objections and the opinion formed.
Proportionality is illustrated by M/s Jaipur IPL Cricket Pvt. Ltd. v. Enforcement Directorate (Appellate Tribunal, 2019), where the Tribunal stressed that FEMA's penal provisions must be construed strictly and penalties must observe proportionality; it reduced a penalty from about Rs. 98.35 crore to Rs. 15 crore. Together these decisions establish that a Section 13 order is judicially reviewable not merely for jurisdiction but for the reasonableness of the quantum and the adequacy of reasons.
The proportionality principle is not a licence to second-guess every figure; it operates within the cap that Section 13 itself fixes, namely thrice the sum involved where quantifiable. What the courts police is the rationality of the exercise: the Adjudicating Authority must explain why a particular multiple was chosen, must weigh mitigating circumstances such as voluntary disclosure, prompt regularisation by the RBI or the technical nature of the lapse, and must avoid treating the statutory maximum as a default. An order that recites the contravention and leaps to the maximum without engaging these factors is vulnerable on appeal under Section 19, and an order that fails to record reasons at all is vulnerable on the additional ground of breach of natural justice. This is why Hindustan Steel remains the most cited proportionality authority in FEMA matters despite its sales-tax origin: it supplies the vocabulary of "deliberate defiance" and "contumacious or dishonest" conduct that the Tribunal uses to calibrate quantum.
Continuing contravention: Suborno Bose
FEMA penalises not only one-time breaches but contraventions that persist, and the limitation and liability consequences of that distinction were settled in Suborno Bose v. Enforcement Directorate, (2020) 5 SCC 562 (decided 5 March 2020). A company had remitted foreign exchange for imports, but the goods lay uncleared in a bonded warehouse and the bill of entry was never submitted, so the foreign exchange was effectively not used for the permitted purpose. The Supreme Court held that a contravention of Section 10(6) of FEMA, read with the obligation to surrender or properly use foreign exchange, is a continuing contravention that subsists until corrective steps are taken.
The practical fallout is twofold. First, limitation does not begin to run from the original remittance but continues so long as the default persists, defeating limitation-based defences. Second, the managing director, being responsible for the company's affairs, was held liable under the corporate-liability provision. Suborno Bose is the leading post-FEMA authority on the "continuing offence" concept and pairs naturally with the obligations discussed in the chapter on holding of foreign exchange.
Director and officer liability under Section 42
Section 42(1) makes every person who, at the time of the contravention, was in charge of and responsible to the company for the conduct of its business liable along with the company, with a proviso protecting those who prove the contravention took place without their knowledge or that they exercised due diligence. The Supreme Court mapped this onto its FERA jurisprudence in Shailendra Swarup v. Deputy Director, Enforcement Directorate, (2020) 16 SCC 561, holding that liability turns on the role a person actually plays, not on the mere designation of director; the complaint must contain specific averments that the person was in charge of and responsible for the conduct of the business.
The High Courts have applied the same filter. In National Fertilizers Ltd. v. Enforcement Directorate (Delhi High Court, 2016) the court reiterated that officers must be shown to have been in charge of day-to-day affairs at the time of the contravention, and in decisions concerning non-executive directors the courts have declined to fasten liability absent that operational nexus. By contrast, in Tips Industries Ltd. v. Special Director, Enforcement Directorate (Appellate Tribunal, 2020) the signing of statutory forms such as the ODA was treated as evidence of responsibility. The takeaway is that Section 42 is not a doctrine of vicarious liability by office; it is a doctrine of responsibility in fact, and the burden under the proviso can be discharged by proof of due diligence.
Two structural features of Section 42 reward attention in an answer. First, sub-section (1) and its proviso operate together: the prosecution must aver and the adjudicator must find that the person was "in charge of and responsible to the company for the conduct of its business" at the relevant time, after which the evidentiary burden shifts to the noticee to bring himself within the proviso. Second, sub-section (2) creates a distinct head of liability for a director, manager, secretary or other officer where the contravention is shown to have been committed with his consent or connivance or is attributable to his neglect, a route that does not require the "in charge" finding at all. The High Courts have been careful to keep these two sub-sections separate, declining to convert the consent-or-connivance head into a presumption against every officer. The cumulative effect of Shailendra Swarup, National Fertilizers and the non-executive-director decisions is a fact-sensitive enquiry that protects passive office-holders while reaching those with genuine operational control.
Section 37A seizure: the Xiaomi challenge
Section 37A, inserted in 2015, is FEMA's sharpest coercive tool. Where the authorised officer has reason to believe that foreign exchange, foreign security or immovable property held outside India is held in contravention of Section 4, he may, after recording reasons, seize value-equivalent assets situated within India; the seizure must be placed before a Competent Authority, who must confirm it within 180 days after hearing the aggrieved person, failing which the seizure lapses, and an appeal lies to the Appellate Tribunal.
The constitutional validity of this power was upheld in Xiaomi Technology India Pvt. Ltd. v. Union of India, 2023 SCC OnLine Kar 24 (Karnataka High Court, Nagaprasanna J., 21 April 2023), which arose from the seizure of over Rs. 5,500 crore in the company's bank accounts. Rejecting the argument that Section 37A confers unbridled, unguided power, the Court held that the provision "does not suffer from any manifest arbitrariness" and that "the provision at every rung provides a safeguard": suspicion may trigger a seizure, but the seizure is not final because the post-seizure procedure, the 180-day confirmation requirement and the appellate remedy under Section 37A(5) supply layered checks. The decision is the leading authority on the seizure power and is best read alongside the substantive prohibition on assets discussed in the chapter on holding of foreign exchange.
The two-year sunset clause for FERA prosecutions
When FERA was repealed with effect from 1 June 2000, Section 49 of FEMA created a transitional bridge. Section 49(3) gave a two-year window for taking cognizance of FERA offences committed before the repeal, and Section 49(4) preserved the old prosecution machinery by legal fiction, as if FERA had not been repealed, for offences within that window. The scope of that bridge was authoritatively settled in First Global Stockbroking (P) Ltd. v. Anil Rishiraj, 2023 SCC OnLine SC 1199 (Oka and Karol JJ., 21 September 2023).
The Court held that an Enforcement Officer appointed and authorised under FERA Section 61(2) retained competence to file a complaint for a FERA offence during the two-year sunset period, provided cognizance was taken within that period. Rejecting the argument that the repeal stripped such officers of authority, the Court reasoned that a statute cannot be construed so as to render any of its provisions otiose; reading Section 49(3) and (4) to defeat pending FERA prosecutions would empty the sunset clause of content. The decision finally resolved a question that had divided the High Courts and is the leading modern authority on the transition, complementing the narrative in the chapter on the FERA-to-FEMA transition.
The Section 6(3) omission paradox
Section 6(3) of FEMA originally empowered the RBI to prohibit, restrict or regulate eleven classes of capital account transactions, including the issue and transfer of securities to and from non-residents. The Finance Act, 2015 amended Section 6 to relocate policy control over capital flows to the Central Government, and Section 6(3) was eventually omitted, with the new Section 6(2A) and a saving in Section 47(3) preserving existing regulations. The repeal-and-save mechanism has generated a genuine interpretive puzzle, sometimes called the "omission paradox".
The difficulty is whether contraventions of regulations framed under the now-omitted Section 6(3) can still be proceeded against, given the general rule that the omission of a provision, unlike its repeal by a repealing Act with a saving clause, can extinguish pending action. High Courts have divided on the point, and commentators have noted that the saving in Section 47(3) and the Supreme Court's guidance on the effect of omission versus repeal should resolve the controversy in favour of continued enforcement of the saved regulations. For aspirants the lesson is doctrinal: always check whether the empowering provision under which a regulation was framed still subsists, a theme developed further in the chapter on capital account transactions.
FEMA, PMLA and the Enforcement Directorate
Because the Enforcement Directorate administers both FEMA and the Prevention of Money-Laundering Act, 2002, students must keep the two regimes distinct. The Supreme Court's exhaustive treatment of the PMLA in Vijay Madanlal Choudhary v. Union of India, 2022 SCC OnLine SC 929 (27 July 2022), is the convenient point of contrast. PMLA is a criminal statute: it carries arrest powers, twin bail conditions and a reverse burden, and the Court held that ED officers are not police officers and that an ECIR is not an FIR.
FEMA is fundamentally different in character. Its contraventions are civil, adjudicated administratively, and attract monetary penalty under Section 13 rather than imprisonment, save for the residual transitional prosecutions and the consequence of default under Section 14. The civil-versus-criminal divide explains why mens rea jurisprudence such as M.C.T.M. Corporation governs FEMA penalty while the PMLA attracts the full apparatus of criminal procedure. A common examination trap is to import PMLA's stringent features into a FEMA answer; the distinction drawn here, read with the chapter on the regulation of foreign exchange dealings, is the safeguard against it.
Compounding and the duty to give reasons
FEMA encourages voluntary settlement: Section 15 permits compounding of any contravention under Section 13 by the Director of Enforcement or other notified officers, except contraventions under Section 3(a), which are reserved for the Directorate's prosecution side. Once a contravention is compounded, no further proceeding may be initiated or continued in respect of the same contravention. The compounding mechanism is built on the premise, drawn from the civil character of FEMA penalty, that the State's interest is primarily remedial rather than punitive.
Running through every stage of the adjudication and seizure machinery is the duty of natural justice. Shashank Vyankatesh Manohar (above) requires the Adjudicating Authority to record reasons engaging with the noticee's objections; Xiaomi locates the validity of Section 37A in its layered hearing safeguards; and the Tribunal's proportionality decisions presuppose a reasoned, reviewable order. The general administrative-law principle that a quasi-judicial authority must give reasons, reinforced across these FEMA decisions, ensures that an adjudication order that is conclusory or fails to grapple with the defence is liable to be set aside on appeal under Section 19 or Section 35.
Synthesis for the exam
Stitched together, the FEMA case law tells a coherent story. The Act's contraventions are civil and remedial, so mens rea is not required (M.C.T.M. Corporation), but penalty is discretionary, proportionate and reason-bound (Hindustan Steel; Shashank Manohar; Jaipur IPL). Companies are liable, and so are officers who are responsible in fact, not merely in name (Standard Chartered Bank; Shailendra Swarup). Continuing contraventions defeat limitation defences (Suborno Bose). The State's coercive seizure power under Section 37A is valid but hedged with safeguards (Xiaomi), and the historic FERA prosecutions could be carried only through the two-year sunset window (First Global Stockbroking). RBI permission is conclusive (Escorts), and FEMA must not be confused with the criminal PMLA (Vijay Madanlal Choudhary).
For a high-scoring answer, name the section, name the case, state the holding in a sentence, and then apply it to the facts. That triad of provision, authority and application is exactly what distinguishes a memorised note from an examined understanding of how the courts have built FEMA into a working law of foreign-exchange management. Return to the FEMA notes hub to consolidate the surrounding chapters.
Frequently asked questions
Is mens rea required to impose a penalty under FEMA?
No. Following Director of Enforcement v. M.C.T.M. Corporation Pvt. Ltd., (1996) 2 SCC 471, criminal-law mens rea is not an essential ingredient. A FEMA contravention is a civil default, and the penalty under Section 13 is attracted once the breach of the statutory obligation is established, irrespective of guilty intention.
Can a company be prosecuted under exchange-control law if the offence carries mandatory imprisonment?
Yes. In Standard Chartered Bank v. Directorate of Enforcement, (2005) 4 SCC 530, a Constitution Bench held that a company can be prosecuted even where the section prescribes mandatory imprisonment with fine; applying lex non cogit ad impossibilia, the court imposes the fine, which is enforceable against the company. It overruled Velliappa Textiles on this point.
What is the significance of the two-year sunset clause in Section 49 of FEMA?
Section 49(3) allowed cognizance of pre-repeal FERA offences only within two years of FERA's repeal on 1 June 2000, and Section 49(4) preserved the old prosecution machinery for that window. In First Global Stockbroking (P) Ltd. v. Anil Rishiraj, 2023 SCC OnLine SC 1199, the Supreme Court held that FERA-authorised Enforcement Officers retained competence to file complaints during this sunset period.
Is the seizure power under Section 37A of FEMA constitutionally valid?
Yes. In Xiaomi Technology India Pvt. Ltd. v. Union of India, 2023 SCC OnLine Kar 24, the Karnataka High Court upheld Section 37A, holding it does not suffer from manifest arbitrariness because the power is hedged with safeguards at every stage, including the recording of reasons, the 180-day confirmation by a Competent Authority and the appeal to the Appellate Tribunal under Section 37A(5).
When is a director personally liable for a company's FEMA contravention?
Under Section 42, only when the person was in charge of and responsible to the company for the conduct of its business at the time of the contravention. Shailendra Swarup v. Deputy Director, Enforcement Directorate, (2020) 16 SCC 561, held that liability depends on the role actually played, not the designation, and the proviso protects a person who proves lack of knowledge or due diligence.
How does FEMA differ from the PMLA in the enforcement scheme?
FEMA contraventions are civil, adjudicated administratively and attract monetary penalty under Section 13, so mens rea is not required. The PMLA, as explained in Vijay Madanlal Choudhary v. Union of India, 2022 SCC OnLine SC 929, is criminal, carrying arrest powers, twin bail conditions and a reverse burden. Importing PMLA's stringent features into a FEMA answer is a common and avoidable error.