The Telangana High Court has issued a temporary halt on the Enforcement Directorate's investigation under the Foreign Exchange Management Act, 1999, against the individuals who filed a petition. These individuals have contested the legitimacy of the ED's inquiry, citing various reasons such as the absence of a show-cause notice, the absence of a written complaint, and an alleged improper reliance on SEBI's investigation. This stay order is valid for a duration of four weeks.

A Bench presided over by Justice Surepalli Nanda has decided that, considering the facts and circumstances of the case, and also taking into account the observations made by the Supreme Court in its judgment dated October 5, 2010, in the case of Nafwar Singh v Director of Enforcement and another, as reported in 2010 (13) SCC page 255, there will be a temporary suspension of the inquiry and investigation (conducted under F.No.T-3/HYZO|25|2023) initiated by the respondent against the petitioners under the Foreign Exchange Management Act, 1999. This suspension will be in effect for a period of four weeks from the date of receiving a copy of the order.

The Court has pointed out that according to the Foreign Exchange Management Act (FEMA) (Adjudication Proceedings and Appeal) Rules, 2000, and more specifically Rule 4, it is a requirement that the Adjudicating Authority must first issue a show cause notice to the individual in question before commencing an inquiry.

The Court further elaborated by stating, "The adjudicating Authority is obligated to issue a notice to the concerned person, requesting them to provide reasons as to why an inquiry should not be initiated against them. It is evident from a straightforward reading of the rule that the show-cause notice is not meant for conducting an adjudication into any alleged violation but solely serves the purpose of determining whether an inquiry should be initiated against the individual. Each such notice is required to specify the nature of the alleged violation committed by the person in question."

The Court observed that, in this particular case, the petitioners had not been served with any such notice as required by the law.

The petitioners put forth the argument that, up to the present date, there were no complaints lodged against them, and the proper legal procedures had not been adhered to by the respondents. They contested the validity of the press release issued on August 26, 2023, and highlighted that the directions from SEBI, as outlined in the order dated August 22, 2023, did not implicate them under Sections 11(1), 11(4), and 11B(11) of the Securities and Exchange Board of India Act, 1992. The petitioners asserted their entitlement to interim relief as they had requested in their writ petition.

The Court highlighted that Section 16 of the Act mandates that the Adjudicating Authority should initiate an inquiry upon receiving a written complaint, which was conspicuously absent in this particular case. The respondent's investigation was initiated based on information from a SEBI inquiry mentioned in a press release, and no formal complaint had been filed against the petitioners.

The Court further stated, "Upon examining the records, it is clear that the inquiry initiated by the respondents is in direct violation of Section 16 of the Act, which unambiguously stipulates that the Adjudicating Authority must initiate an inquiry to adjudicate a contravention of the Act or its associated rules and regulations upon the receipt of a written complaint. In the present case, it is evident that the initiation of the inquiry by the respondent was based on the SEBI investigation mentioned in the press release dated August 26, 2023, and no formal complaint had been filed against the petitioners." Taking these factors into account and referencing the Supreme Court's judgment in (2010) 13 SCC 255, the Court concluded that the respondent's actions did not adhere to the prescribed legal procedures.

The court has issued a stay on the inquiry and investigation launched by the respondent against the petitioners under the Foreign Exchange Management Act, 1999. This stay will be in effect for four weeks starting from the receipt of the court's orders. Furthermore, the Court has instructed the Standing Counsel for the Central Government, who represents the respondent, to provide a detailed counter-affidavit before the next scheduled hearing on October 17, 2023.

Case: M/s. Brightcom Group Ltd. & Anr. v. Directorate of Enforcement, WRIT PETITION NO: 27055 OF 2023