No Guilty Mind Needed: Delhi HC Restores a FERA Penalty Cut on the Wrong Grounds

Does a person who handled cash payments on instructions from abroad deserve a lighter FERA penalty because he had no criminal intent and was not paid for it? The Delhi High Court said no in Union of India v. Vijay Chand Baid,¹ setting aside an Appellate Tribunal order that had cut a penalty from Rs 5,00,000 to Rs 15,000 and restoring the Adjudicating Authority’s penalty. A Division Bench of Justices Navin Chawla and Arun Bhardwaj held that “mens rea is not required” for imposing a penalty for violating FERA, and that contravening the Act without receiving any monetary benefit “cannot be the ground to reduce the penalty.” The Court also found that the Tribunal, apart from calling the penalty “disproportionate to the contravention involved,” had not explained why it was so excessive as to defy logic. For practitioners still handling FERA matters, which can run for decades, the judgment shows how far a Tribunal may go in reducing a penalty once the contravention itself is no longer in dispute.

On 12 June 1996, the Enforcement Directorate in Jalandhar was told by the police that Girish Rai had been apprehended with Rs 15 lakh and Rs 1.50 lakh meant for “compensatory payments.” A search of his residence led to further seizures of foreign exchange instruments and Indian currency. In his statement under Section 40 of FERA.² Rai said he had been receiving and making payments in India on the instructions of a person in the Philippines. Another person, Yogesh Sohal, stated that a man who gave his name as “Vicky Pukhraj” had delivered Rs 19,50,000 to Rai at his house, and he identified a photograph of Vijay Chand Baid. Baid, in his own Section 40 statement, admitted that he had received Rs 19,50,000 from an unknown person on the instructions of his brother in Hong Kong and had paid it to Rai.

A show cause notice dated 5 December 1996 alleged that Baid had received and made payments of Rs 19.5 lakh from a person resident in India under the instructions of a person residing abroad, violating Sections 9(1)(b)³ and 9(1)(d) of FERA.⁴ On 2 June 1997, the Adjudicating Authority found him guilty, held that he had used the name Vicky Pukhraj and played the role of a mediator, and imposed a penalty of Rs 5,00,000. The Appellate Tribunal for Foreign Exchange, by an order dated 10 March 2003, upheld the finding of violation but reduced the penalty to Rs 15,000. It reasoned that Baid had acted without criminal intent, had not worked on a compensation basis, and was in an impecunious situation, so the penalty was “thoroughly disproportionate to the contravention involved.” The Union of India appealed under Section 54 of FERA⁵ read with Section 35 of FEMA.⁶

The Proportionality Standard

The Union argued that once guilt was established there was no occasion to interfere with the penalty, that Section 50⁷ permits a penalty of up to five times the value of the contravention, and that absence of mens rea is irrelevant. Baid’s counsel argued that the Tribunal had rightly found no guilty mind, that he was not a man of means, and that there was no evidence he had gained any extraneous consideration.

The Court asked whether a Tribunal can interfere with a penalty merely on a finding of no mens rea, and whether it erred in reducing the penalty as disproportionate. It began from settled law: proportionality permits review of the quantum of a penalty, but courts “do not normally interfere” unless the penalty is “so disproportionate that it shocks the conscience of the Court.” Drawing on Ranjit Thakur v. Union of India and Coimbatore District Central Cooperative Bank v. Coimbatore District Central Cooperative Bank Employees Association,⁸ it noted that interference requires the penalty to be shown as “grossly excessive, disproportionately high or unduly harsh.” Keeping in view Section 50 and the Rs 19.5 lakh involved, the Court held that a penalty of Rs 5 lakh, roughly a quarter of that amount, was not one that could have shocked the Tribunal’s conscience. The Tribunal, it said, had not explained how the penalty could be “so outrageous as to defy logic,” and the Court found no reasons “which may justify such finding in law.”

Mens Rea and Civil Obligations

The Court noted that Baid had not challenged the findings of violation, which had therefore attained finality, and that the Tribunal had reduced the penalty on account of the absence of criminal intent and of any compensation. “In our mind,” the Court said, “both these factors are wrongly applied by the learned Tribunal.”

On mens rea, the Court reproduced the Supreme Court’s discussion in Chairman, SEBI v. Shriram Mutual Fund,⁹ which collects earlier decisions holding that mens rea is not an essential element for imposing a penalty for breach of civil obligations. These include Director of Enforcement v. M.C.T.M. Corporation Pvt. Ltd.,¹⁰ which held, under the earlier FERA of 1947, that a contravention attracts a penalty “irrespective of the fact whether the contravention was made by the defaulter with any ‘guilty intention’ or not.” The extract concludes that “once the contravention is established then the penalty is to follow.” Applying this, the Court held that “for imposition of penalty for violation of the provisions of the FERA, mens rea is not required and further, only because the respondent had violated the said Act without receiving any monetary benefit, cannot be the ground to reduce the penalty.”

The Outcome

The Court set aside the Tribunal’s order and restored the penalty imposed by the Adjudicating Authority. Baid must deposit the remaining amount of the penalty, after adjusting any amount already deposited, with the competent authority within eight weeks from 28 September 2026. The appeal was allowed without costs.

Reading It Alongside Intersales

The judgment makes three practical points. First, the Tribunal’s reduction of the penalty on proportionality grounds must be supported by cogent reasons demonstrating why the penalty is grossly excessive or unduly harsh, having regard to Section 50 and the amount involved in the contravention.. Second, on this Court’s reading, absence of guilty intent and absence of monetary benefit are not reasons for lowering a penalty that follows from breach of a civil obligation. Third, the Court proceeded on the footing that the findings of contravention were final because they were not challenged. One question the judgment does not separately discuss is the respondent’s means. The Tribunal had referred to his impecunious situation and his counsel raised it, but the Court’s reasoning addresses only the absence of intent and of compensation.

Citations

1. Union of India v. Vijay Chand Baid, MISC. APPEAL (FEMA) 39/2025 ↩︎
2. Foreign Exchange Regulation Act, 1973, s 40 ↩︎
3. Foreign Exchange Regulation Act, 1973, s 9(1)(b) ↩︎
4. Foreign Exchange Regulation Act, 1973, s 9(1)(d) ↩︎
5. Foreign Exchange Regulation Act, 1973, s 54 ↩︎
6. Foreign Exchange Regulation Act, 1973, s 35 ↩︎
7. Foreign Exchange Regulation Act, 1973, s 50 ↩︎
8. Ranjit Thakur v Union of India, (1987) 4 SCC 611 ↩︎
9. Chairman, SEBI v Shriram Mutual Fund, (2006) 5 SCC 361 ↩︎
10. Director of Enforcement v MCTM Corporation (P) Ltd., (1996) 2 SCC 471. ↩︎

Expositor(s): Adv. Pratistha Dahiya