The Bombay High Court has quashed and set aside a 13-year-old Enforcement Directorate (ED) order that had imposed a penalty of Rs 25.20 crore on Sterlite Industries (India) Ltd and its promoter Anil Agarwal for alleged violation of foreign exchange rules while acquiring Monte Cello BV, an entity that owned copper mines in Australia.

The transaction between Monte Cello Corporation NV and Sterlite took place in 2000, involving consideration of Rs 203.82 crore ($43.5 million then).

Later, in June 2008, the Special Director of Enforcement issued a show-cause notice to the company and its promoter alleging that they were in contravention of the Foreign Exchange Management Act, 1999, at the time of remitting $43.50 million for the acquisition of the two copper mines.

Around the same time, the company filed compounding applications before the Chief General Manager, Reserve Bank of India (RBI), which is the Compounding Authority for challenging the notice issued by the ED.

The RBI considered the submissions of the company and passed five separate compounding orders, directing the company to deposit Rs 25 lakh and its officers Rs 10 lakh each. The said money was deposited as compounding charges by the company and its management.

However, in November 2008, the ED passed an order alleging that the company was in contravention of the Foreign Exchange Management Act (FEMA) provisions and imposed a penalty of Rs 20 crore on the company. Also, the ED had imposed a penalty of Rs 3 crore on Anil Agarwal, Rs 2 crore on Tarun Jain, who was Director of Finance at that point in time, and Rs 10 lakh each on two other officers - Somnath Patil and Lalit Singhvi.

Later, the company challenged the legality and validity of the ED’s November 2008 order in the Bombay High Court.

In a response to ET’s detailed query about whether the company will file a caveat in the Supreme Court in case the department chooses to challenge the ruling, the spokesperson said: “We will consider the same.”

Senior Advocate Venkatesh Dhond and Nishit Dhruva of MDP & Partners, while appearing for Sterlite Industries and Agrawal, argued that proceedings initiated against petitioners by the Special Director of Enforcement by issuing the show-cause-notice came to an end on the passing of the compounding orders.

Countering this, Sandesh Patil, counsel for the ED, argued that the company never informed the ED that they had filed compounding applications before the designated Compounding Authority.

The division bench of Justice KR Shriram and Justice MN Jadhav, while setting aside the penalty imposed by the ED, observed in its order of July 14 that petitioners cannot be faulted and held liable for contravention once the compounding orders are passed by the Compounding Authority.

“The Compounding Authority is a statutory authority which is required to function under the directions of the Governor of the RBI,” said Ashish K Singh, managing partner of Capstone Legal. “All decisions taken by the Compounding Authority are considered to be final and binding. This judgment of the High Court will set a precedent for many cases where even after compounding has been done, ED has wrongly initiated proceedings.”

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