Can a Company be Prosecuted under Section 56(1) of FERA Act?

I. Introduction

The corporate vehicle occupies such a large portion of the industrial, commercial and sociological sectors that amenability of the corporation to a criminal law is essential to have a peaceful society with stable economy. According to section 3(42) of the General Clauses Act of 1897² a person is defined as: Any company, association, or group of individuals, whether incorporated or not, is considered a person. Even if the term “person” isn't defined in any way, it invariably includes a company. Section 56 of the FERA states that if any person commits any offence, the person shall be tried under the section without any exception other than what is mentioned in the section itself, this brings up the question, How can a corporate body be imprisoned under the provisions of this section? The section is vague in this sense, however, if we look at the definition of person under the General Clauses Act of 1897, a company is a person regardless of anything else mentioned anywhere else. The applicability of the section has been discussed in the two landmark cases of Asst. Commr. v. Velliappa Textile Ltd. 2003 & Standard Chartered Bank v. Directorate of Enforcement wherein, the supreme court overruled the precedent set by the Velliapa textiles case which said that a corporate body cannot be covered under the provisions of section 56 of The Foreign Exchange Regulation Act.

II. Legal provisions of the fera act³

Foreign Exchange Regulation Act (FERA) was a legislation that came into existence in 1973 with the purpose to regulate dealings in foreign exchange, impose restrictions on certain kinds of payments, to monitor the transactions impinging the foreign exchange and the import and export of currency. FERA primarily prohibited all transactions that are not permitted by RBI. The objective of FERA was to regulate certain payment dealings in foreign exchange and securities transactions that indirectly affects foreign exchange , to conserve precious foreign exchange and to optimize the proper utilization of foreign exchange so as to promote the economic development of the country.

Applicable to all the citizens of India, the objective of FERA, was to conserve the foreign exchange resources of the nation. Some of the key features of the act were as follows:

1. Authorisation by RBI to any person/company to deal in foreign exchange

2. Authorisation to the dealers by the Reserve Bank of India for transacting foreign currencies, subject to review and revocation of the authorisation in the case of non-compliance

3. Authorisation to the money changers for conversion of currencies as per the rates determined by RBI

4. Restrictions on import/export of currencies

5. Restriction on persons other than the authorised dealers to enter into transactions involving the financial currency

6. Restrictions on issue of bearer securities

7. Restrictions on holding or acquiring immovable properties outside India

8. Restrictions on making/receiving payment to/from a resident outside India

9. The Power of RBI to call for information and seize documents, wherever or whenever required

Section 56 in The Foreign Exchange Regulation Act, 1973

56. Offences and prosecutions. —

(1) Without prejudice to any award of penalty by the adjudicating officer under this Act, if any person contravenes any of the provisions of this Act [other than section 13, clause (a) of sub-section (1) of [section 18, section 18A], clause (a) of sub-section (1) of section 19, sub-section (2) of section 44 and sections 57 and 58], or of any rule, direction or order made thereunder he shall, upon conviction by a court, be punishable,—

(i) in the case of an offence the amount or value involved in which exceeds one lakh of rupees, with imprisonment for a term which shall not be less than six months, but which may extend to seven years and with fine: Provided that the court may, for any adequate and special reasons to be mentioned in the judgment, impose a sentence of imprisonment for a term of less than six months;

(ii) in any other case, with imprisonment for a term which may extend to three years or with fine or with both.

According to the provisions of the section, it is clear that the award of penalty exceeding one lakh rupees will be imprisonment for a term of not less than 6 months which may extend to 7 years with fine or any other case where the imprisonment can be extended up to 3 years or fine or both. There is no provision regarding any corporate body getting immunity from imprisonment under the fact that there is no actual body, and it is a body only in the eyes of the law for the purpose of running the company.

III. Corporate criminal liability

Corporate criminal liability is the liability imposed upon a corporation for any criminal act done by any natural person. Liability is imposed so as to regulate the acts of a corporation. The principle of corporate criminal liability is based on the the doctrine making an employer or principal liable for the wrong of an employee or agent if it was committed within the scope of employment or agency ( doctrine of respondeat superior), developed through judicial interpretation of common law where the corporation was made liable for any act done by an agent which is actually not authorized by the corporation. (Washington Gaslight Co. v. Lansden)⁴

In 2003 Supreme Court in Assistant Commissioner, Banglore & Ors. v. Velliappa Textiles Ltd & Anr.⁵ took the view that since an artificial person like a company could not be physically punished to a term of imprisonment, such a section, which makes it mandatory to impose minimum term of imprisonment, cannot apply to the case of artificial person.

There is no controversy when fine is only punishment given under any statute. There is also no lies when statute entrusts the court with discretion to inflict fine or imprisonment, because a company being a Juristic person cannot obviously be sentenced to imprisonment as cannot suffer imprisonment. Judicial controversy lies in that situation when statute prescribes mandatory imprisonment with fine as a punishment for an offence

In the case Standard Chartered Bank & ors v. Directorate of Enforcement & ors ⁶ , it was decided by the Supreme court of India that the question whether a corporation could be prosecuted for offences in which the punishment is imprisonment, which shall be a mandatory punishment by law. But then again it was held previously in the case of Assistant Commissioner, Bangalore and Others v. Velliappa Textiles Ltd. and Anr. , that when an offence of such a nature is committed under which only imprisonment and fine shall be awarded, then it shall become unworkable in case of juristic, as the court shall be bound to give a sentence of imprisonment with fine, and there shall not be any discretion on the part of the court that it shall impose only a fine. Then again referring to the case of Standard Chartered Bank & ors v. Directorate of Enforcement & ors [2005] , it showed an overruling effect. Overruling the above view, it was held by the Supreme Court of India that as far as juristic person was concerned, a discretion was given to the court to read into the section which are highly related to punishment and a sentence of fine could always be imposed, while the sentence of imprisonment could be ignored as it would be exceedingly difficult as in the case of a corporation. The court in such a respect also reasoned, and accepted the contrary views put forward, that a corporation may also be prosecuted for a graver offence, where as they can be prosecuted for a minor offence as the sentence prescribed under custodial sentence or fine. Thus, it was laid down that there shall not be any immunity with respect to the corporations as merely because the prosecution was in respect of offences for which the punishment shall be compulsory imprisonment, it was also held that there is no blanket immunity for any company from any prosecution for serious offences merely because the prosecution would ultimately entail a sentence of mandatory imprisonment. The corporate bodies, such as a firm or company undertake series of activities that affect the life, liberty and property of the citizens. Large scale financial irregularities are done by various corporations. The Court explained its view inter-alia in paragraph 29 of the judgment. It was obvious to the Indian Supreme Court in Standard Chartered Bank (supra) that the legislative intent to prosecute corporate bodies for the offenses committed by them was clear and explicit. The statute in question never intended to exonerate corporations from being prosecuted.

The question for consideration before court was whether a company or a corporation being a juristic person, can be prosecuted for an offence for which mandatory punishment prescribed is imprisonment & fine prosecution is pre-requisite for inflicting any punishment. But it is natural when no punishment can be inflicted, no prosecution can be launched. So, it is clear from Standard Charted case that prosecution can be initiated and fine can be imposed even when imprisonment is given as mandatory punishment with fine.

IV. Conclusion

It is evident from the Standard Chartered case that no corporate body will get immunity from the provisions under section 56 of the FERA, however, the court had also stated that the court is open to interpret the section as it deems fit, with this said, there is a need for a clear and concise amendment to section 56 stating that corporate bodies are liable to whatever provisions the section states. Corporate bodies have become an indispensable part of our economy and have gained an especially important status in the progress of the country, however, the need for better control measures and provisions to make them liable for the respective wrongdoings is at an all-time high. The companies walk free on the grounds of misinterpretation of sections or the vague nature of the provisions. The concept of blanket immunity to a corporate body from a particular section just because one provision does not apply to it should be done away with.

Thus, it is safe to say that there is no immunity to the companies from prosecution just because the prosecution is in respect of offence for which the punishment prescribed is mandatorily imprisonment.

Case study

According to the research, a corporate body or a company can be prosecuted for an offence in which the sentence of imprisonment is a mandatory punishment, therefore, it cannot be given immunity from the whole section. The Standard Chartered bank case makes it abundantly clear that no corporate body gets blanket immunity for its wrongdoing under any circumstance. The company will have to pay the fine even if the provision of imprisonment is a given necessity.

V. Resources

• India, l., 2021. Criminal Liability of Corporate Bodies - Corporate laws in India. [online] Legalserviceindia.com. Available at: <http://www.legalserviceindia.com/arti cles/crcoli.htm> [Accessed 6 August 2021].
• Kapoor, S., 2021. What is Foreign Exchange Regulation Act?. [online] 99 Acres. Available at: <https://www.99acres.com/articles/what-is-foreign-exchange-regulation-act.html> [Accessed 6 August 2021].
• BYJUS. 2021. Difference between FERA and FEMA in India & Their Comparisons. [online] Available at: <https://byjus.com/free-ias-prep/difference-between-fera-and-fema/> [Accessed 6 August 2021].
• Section 56 in The Foreign Exchange Regulation Act, 1973
• India, l., 2021. Criminal Liability of Corporate Bodies - Corporate laws in India. [online] Legalserviceindia.com. Available at: <http://www.legalserviceindia.com/ar ticles/crcoli.htm> [Accessed 6 August 2021].
• Yadav, S., 2021. Standard Chartered Bank And ors v Directorate Of Enforcement And ors. [online] Journal.lawmantra.co.in. Available at: <http://journal.lawmantra.c o.in/?p=142> [Accessed 6 August 2021].

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