Analysis of Section 37 of FEMA, 1999

An Analysis of Section 37 of the Foreign Exchange Management Act, 1999: Powers of Investigation and Evidentiary Value of Statements

Introduction

The Foreign Exchange Management Act, 1999 (FEMA) was enacted to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of the foreign exchange market in India.[1] This marked a significant shift from its predecessor, the Foreign Exchange Regulation Act, 1973 (FERA), moving towards a more liberalized economic environment. Central to the enforcement mechanism of FEMA are the powers of investigation vested in the Directorate of Enforcement (ED). Section 37 of FEMA equips the Director of Enforcement and other officers of Enforcement with powers to summon persons, examine them, and compel the production of documents, thereby playing a crucial role in unearthing contraventions under the Act. This article undertakes a comprehensive analysis of Section 37 of FEMA, examining the scope of these powers, the judicial interpretation thereof, and the evidentiary value of statements recorded thereunder, drawing upon relevant statutory provisions and case law.

Statutory Framework of Section 37 FEMA

Section 37 of FEMA pertains to the "Power of search, seizure, etc." and is instrumental for the investigative functions of the Enforcement Directorate. While the specific text of Section 37(1) often grants officers of the ED powers analogous to those of Income-tax authorities under the Income Tax Act, 1961, Section 37(3) typically provides that any officer of Enforcement, not below the rank of an Assistant Director, shall have the powers of a civil court for summoning and enforcing the attendance of any person, examining him on oath, discovery and production of documents, etc.[2]

The provision, in essence, allows authorized officers to:

  • Summon any person whose attendance is considered necessary either to give evidence or to produce a document in any inquiry such officer is making for any of the purposes of FEMA.
  • Examine such person on oath.
  • Compel the production of books of account and other documents.

These powers are often explicitly linked to those available to Income Tax authorities under Section 131 of the Income Tax Act, 1961, and by extension, certain powers vested in a civil court under the Code of Civil Procedure, 1908, when trying a suit.[3] The Madras High Court in Ka.Manshoor v. Assistant Director acknowledged summons issued under Section 37 of FEMA read with Section 131 of the Income Tax Act, 1961.[4]

Powers of Investigation under Section 37

Power to Summon and Examine

The power to summon individuals is a cornerstone of any investigation. Section 37 empowers ED officers to require the personal attendance of individuals deemed relevant to an inquiry. As observed in Suman Sehgal v. Union Of India & Anr, summons under Section 37(1) and (3) of FEMA read with Section 131 of the IT Act can require the production of documents like passports.[2] The summons itself often specifies the purpose – to give evidence and/or produce documents – and may warn of penalties for non-compliance.[4]

The examination of such persons is typically on oath, and their statements are recorded. These statements form a critical part of the investigative record and are frequently relied upon in subsequent adjudication proceedings. For instance, in Shri Kumar Satur Nathani v. The Special Director Directorate of Enforcement, Mumbai, statements recorded under Section 37 of FEMA, wherein admissions were made, formed the basis of a complaint under Section 16(3) of FEMA.[5] Similarly, in Gurmeet Singh v. The Special Director, Directorate of Enforcement, Jalandhar, statements recorded under Section 37 were central to the adjudication.[6]

Power to Compel Production of Documents

Alongside summoning individuals, Section 37 confers the power to compel the production of documents relevant to the investigation. This can include passports, bank passbooks, details of immovable properties, and other financial records.[4] The scope of documents that can be sought is broad, provided they are pertinent to the inquiry. The Delhi High Court in Ka.Manshoor considered whether the documents sought amounted to a "roving enquiry," indicating that the power, while wide, is subject to judicial scrutiny for relevance and specificity.[4]

Incorporation of Powers from Other Statutes

A significant aspect of Section 37 is its incorporation of powers from other statutes, notably the Income Tax Act, 1961 (specifically Section 131), and through it, the Code of Civil Procedure, 1908. Section 131 of the Income Tax Act grants income-tax authorities the same powers as are vested in a court under the Code of Civil Procedure, 1908, when trying a suit in respect of discovery and inspection, enforcing the attendance of any person, compelling the production of books of account and other documents, and issuing commissions. This cross-referencing endows ED officers with a robust toolkit for investigation.

Evidentiary Value of Statements Recorded under Section 37 FEMA

The statements recorded under Section 37 of FEMA are of considerable importance, often forming the primary basis for initiating adjudication proceedings and imposing penalties under Section 13 of FEMA.[7] However, their evidentiary value, particularly their admissibility and use in other legal proceedings, has been a subject of judicial discussion.

Admissibility of Statements

A key question is whether statements recorded under Section 37 FEMA are hit by the provisions of the Indian Evidence Act, 1872, particularly Sections 24, 25, and 26. Section 25 of the Evidence Act renders a confession made to a police officer inadmissible. However, courts have generally held that officers of specialized enforcement agencies like Customs or Enforcement Directorate are not "police officers" for the purpose of Section 25. The Supreme Court in K.I Pavunny v. Assistant Collector, dealing with statements under Section 108 of the Customs Act, 1962, clarified that Customs Officers are not police officers.[8] By analogy, ED officers acting under FEMA are also not considered police officers, making statements recorded by them admissible, provided they are otherwise voluntary. The Supreme Court in Directorate Of Enforcement v. Deepak Mahajan And Another, while dealing with FERA, also implicitly recognized the distinct role of ED officers.[9]

Section 24 of the Evidence Act makes a confession irrelevant if it appears to have been caused by inducement, threat, or promise from a person in authority. This principle applies to statements under Section 37 FEMA. The voluntariness of the statement is paramount.[8]

The Delhi High Court in MANIDEEP MAGO v. UNION OF INDIA & ORS. dealt with the contention that confessions recorded under Section 37 FEMA are inadmissible. The ED argued that an FIR was based on several documents and materials, not merely confessional statements, and that there is no absolute bar on statements recorded in certain proceedings being used in another proceeding under another statute.[10]

Requirement of Corroboration

While a statement under Section 37 may be admissible, the question of corroboration, especially for retracted statements, often arises. The Supreme Court in K.I Pavunny, though holding a retracted confession admissible, acknowledged the prudential requirement for some level of corroboration.[8] This principle would extend to statements under Section 37 FEMA. The weight attached to such a statement would depend on the facts and circumstances of each case, including whether it was retracted and the credibility of the retraction.

Use in Other Proceedings

Statements recorded under Section 37 FEMA and materials gathered during such investigations can be used as a basis for initiating proceedings under other laws. In Gautam Jain v. Union Of India And Another, a statement recorded under Section 37 of FEMA was part of the material considered for a detention order under COFEPOSA.[11] The MANIDEEP MAGO case further illustrates that search and seizure operations conducted by the ED under FEMA and statements recorded under Section 37 can form the basis for registration of an FIR under the Indian Penal Code.[10] However, the admissibility of such statements as substantive evidence in a criminal trial would be governed by the provisions of the CrPC and the Evidence Act, and the accused would have the protections available under criminal law, including Article 20(3) of the Constitution (right against self-incrimination).

It is pertinent to note that at the stage of a Section 37 inquiry, the person summoned may not yet be an "accused" in the criminal sense, potentially limiting the immediate applicability of Article 20(3). The Supreme Court in Directorate Of Enforcement v. Deepak Mahajan noted that persons interrogated under special Acts like FERA are not deemed "accused" within the meaning of Article 20(3) at the initial stage of inquiry.[9]

Judicial Interpretation of Section 37 FEMA

Courts have had several occasions to interpret the scope and application of Section 37 FEMA.

  • In Ka.Manshoor v. Assistant Director, the Madras High Court examined a challenge to summons issued under Section 37, considering arguments that the summons lacked application of mind and sought documents amounting to a "roving enquiry." The court implicitly recognized its power to interdict such summons if found to be an abuse of process, though the outcome would depend on the facts.[4]
  • Suman Sehgal v. Union Of India & Anr involved a challenge related to the surrender of a passport pursuant to summons under Section 37. The case highlighted the coercive power inherent in such summons and the procedural aspects of compliance.[2]
  • The Appellate Tribunal For Foreign Exchange in cases like Gurmeet Singh[6] and Shri Kumar Satur Nathani[5] has routinely dealt with appeals arising from adjudication orders based on evidence gathered, including statements under Section 37. These cases underscore the centrality of Section 37 statements in FEMA adjudications.
  • The Delhi High Court in MANIDEEP MAGO v. UNION OF INDIA & ORS. addressed crucial issues regarding the use of Section 37 statements and materials for FIR registration, the necessity of preliminary inquiry by police when FEMA proceedings are ongoing, and the admissibility of such statements in criminal cases. The court noted the ED's argument that impropriety in obtaining evidence does not necessarily affect its admissibility if otherwise relevant.[10]

The judiciary generally upholds the powers of investigation under Section 37, recognizing their necessity for effective enforcement of FEMA, while also ensuring that these powers are exercised fairly and within the bounds of law. The requirement for "reason to believe," as mentioned in the context of Section 37-A (search and seizure) in M/s. Sintex Industries Ltd. v. The Special Director, Directorate of Enforcement, Ahmedabad,[12] would also implicitly guide the exercise of powers under Section 37, ensuring they are not arbitrary.

Relationship with Other Provisions of FEMA and Other Laws

Section 37 is part of a broader enforcement architecture within FEMA. Investigations conducted using Section 37 powers lead to adjudication under Chapter V of FEMA (Sections 16-22, leading to appeals under Sections 17, 19, and 35).[13] Contraventions established through such investigations can lead to penalties under Section 13 of FEMA.[7]

The provisions of Section 37-A, dealing with special provisions relating to assets held abroad in contravention of Section 4, also interact with Section 37. As discussed in M/s. Sintex Industries Ltd., the recording of reasons in writing, as stipulated in Section 37-A(1), must be based on "reason to believe," a principle that underpins investigative actions generally.[12]

The interplay with the Code of Criminal Procedure, 1973 (CrPC) is also significant. While FEMA provides for adjudication of contraventions, if an offence is also made out under other criminal statutes (e.g., Prevention of Money Laundering Act, 2002, or IPC), the CrPC will govern the investigation and trial of such offences. As seen in MANIDEEP MAGO, materials from FEMA investigations can trigger CrPC processes.[10] The Supreme Court's decision in Directorate Of Enforcement v. Deepak Mahajan affirmed the applicability of Section 167(2) CrPC for detention of persons arrested under FERA (and by extension, potentially FEMA, if arrest provisions are invoked), highlighting the integration of special acts with general criminal procedure where not inconsistent.[9]

Conclusion

Section 37 of the Foreign Exchange Management Act, 1999, serves as a vital tool for the Enforcement Directorate in investigating potential contraventions of the Act. By granting powers to summon individuals, examine them on oath, and compel the production of documents, often by incorporating powers from the Income Tax Act and the Code of Civil Procedure, Section 37 enables thorough inquiries into complex financial transactions involving foreign exchange.

Judicial pronouncements have largely affirmed the admissibility of statements recorded under Section 37, provided they are voluntary and not made to "police officers" in the traditional sense. However, principles of fairness, relevance, and the rule against self-incrimination (at the appropriate stage) act as safeguards. While these statements are crucial for FEMA adjudications, their use in parallel criminal proceedings requires careful consideration of criminal evidentiary standards. The ongoing evolution of jurisprudence, particularly concerning the interplay between FEMA investigations and other criminal statutes, continues to shape the contours of Section 37's application, striving for a balance between effective enforcement of economic laws and the protection of individual rights.

References