The Sunset Over FERA: An Analysis of Section 49(3) of the Foreign Exchange Management Act, 1999

Introduction

The enactment of the Foreign Exchange Management Act, 1999 (FEMA) marked a paradigm shift in India's foreign exchange regulatory landscape, replacing the stringent Foreign Exchange Regulation Act, 1973 (FERA). Section 49 of FEMA orchestrates this transition, providing for the repeal of FERA and incorporating saving provisions for actions taken and proceedings initiated under the erstwhile regime. Central to this transitional framework is Section 49(3) of FEMA, commonly referred to as the "sunset clause." This provision stipulated a critical two-year limitation period from the commencement of FEMA for authorities to initiate action regarding offences and contraventions under the repealed FERA. This article undertakes a comprehensive analysis of Section 49(3) of FEMA, examining its legislative intent, scope, judicial interpretation, and its interplay with other sub-sections of Section 49, drawing extensively upon key pronouncements of the Indian judiciary.

The Legislative Scheme of Repeal and Saving under Section 49 FEMA

Section 49(1) of FEMA unequivocally repealed FERA, 1973. FEMA was brought into force with effect from June 1, 2000 (First Global Stockbroking Pvt. Ltd. & Ors. v. Anil Rishiraj & Anr., 2023 INSC 845; SK. Rustam v. T.K. Datta, 2024; Ghanshyam Das Moolrajani v. Enforcement Directorate & Ors., 2007 SCC ONLINE RAJ 480). Recognizing the need to manage the transition and address actions and liabilities accrued under FERA, Section 49 incorporates detailed saving provisions. Sub-section (3) of Section 49 is pivotal in this context, providing as follows:

"Notwithstanding anything contained in any other law for the time being in force, no court shall take cognizance of an offence under the repealed Act and no adjudicating officer shall take notice of any contravention under section 51 of the repealed Act after the expiry of a period of two years from the date of the commencement of this Act."

This provision effectively established a "sunset period" from June 1, 2000, to May 31, 2002, within which new proceedings for FERA violations could be initiated (M/s Ganesh Polytex Ltd. & Ors. v. Union Of India & Ors., 2010 SCC ONLINE DEL 3355; Bachraj Bengani v. A.K Roy, 2009 SCC ONLINE DEL 692).

Judicial Interpretation of Key Elements in Section 49(3) FEMA

The judiciary has played a significant role in elucidating the meaning and application of the terms used in Section 49(3) FEMA.

"Cognizance of an offence" and "Take notice of any contravention"

The determination of when a court "takes cognizance" or an adjudicating officer "takes notice" is crucial for ascertaining compliance with the two-year limitation.

With respect to courts, the Supreme Court in S.K Sinha, Chief Enforcement Officer v. Videocon International Ltd. And Others (2008 SCC 2 492), clarified that cognizance is taken when the Magistrate applies their mind to the complaint for the purpose of proceeding with the case, which is typically at the stage of filing the complaint, not necessarily when process is issued. In that case, the complaint was filed in May 2002, within the limitation period, and thus the proceedings were held not to be time-barred under Section 49(3) FEMA. Similarly, in First Global Stockbroking Pvt. Ltd. (2023 INSC 845), cognizance was taken by the Magistrate on the day the complaint was filed, February 11, 2002, which fell within the sunset period.

Regarding adjudicating officers "taking notice" of a contravention under Section 51 of FERA (which dealt with the power to adjudicate), the courts have generally held that this occurs upon the issuance of a Show Cause Notice (SCN). In Dr. S. Ramakrishna v. Enforcement Directorate & Ors. (2010 SCC ONLINE DEL 30), the Delhi High Court opined that the Adjudicating Officer "took notice of the contravention when he issued the notices" to the petitioner. If such notices were issued within the sunset period, the proceedings were not barred. This view is echoed in cases like M/s Ganesh Polytex Ltd. (2010 SCC ONLINE DEL 3355), where a memorandum issued on February 28, 2002, was considered the initiation point, and in SK. Rustam (2024) and Ghanshyam Das Moolrajani (2007 SCC ONLINE RAJ 480), where notices issued to petitioners within two years from June 1, 2000, were deemed valid initiations.

Furthermore, the term "offence" as used in Section 49(3) has been interpreted broadly. The Madras High Court in Arun Mammen v. U.O.I. (2018), citing the Supreme Court's decision in Standard Chartered Bank And Others v. Directorate Of Enforcement And Others (2005 SCC 4 530, as per para 32 of a related SC judgment), noted that "offence" in Section 49(3) includes not only criminal prosecutions but also adjudication proceedings.

The Two-Year Limitation Period (Sunset Clause)

The judiciary has consistently upheld the sanctity of the May 31, 2002, deadline imposed by Section 49(3). In Bachraj Bengani (2009 SCC ONLINE DEL 692), where a complaint for a FERA offence was not filed within this sunset period, the court recognized that cognizance was barred. A significant affirmation of this principle came in Arun Mammen (2018), where the Madras High Court, relying on the Delhi High Court's decision in Bhupendra V. Shah v. Union of India (MANU/DE/4067/2010), quashed a Show Cause Notice issued in 2012 for an alleged FERA contravention that occurred before FEMA's enactment. The court emphasized that the mere fact that related bank statements or information came to light after May 31, 2002, did not extend the limitation period prescribed under Section 49(3) FEMA.

The legislative intent behind this sunset clause was to provide a finite window for initiating actions related to FERA contraventions, thereby facilitating a smoother transition to the FEMA regime and providing certainty (Arun Mammen, 2018; Shri K.N. Garg v. The Special Director, Directorate of Enforcement, Mumbai, 2024). This contrasts with the repeal of FERA, 1947 by FERA, 1973, where the latter did not contain a similar sunset clause, permitting prosecutions for FERA, 1947 contraventions even after its repeal (Shri K.N. Garg, 2024, citing M/s P.V. Mohammad Barmay Sons v. Director Of Enforcement, 1993 [3] SCR 960).

"Notwithstanding anything contained in any other law"

The non-obstante clause at the beginning of Section 49(3) gives it an overriding effect over other laws, including general principles of statutory interpretation such as those found in Section 6 of the General Clauses Act, 1897, specifically concerning the two-year limitation. The decision in Arun Mammen (2018), referencing Bhupendra V. Shah, highlighted that Section 6 of the General Clauses Act stands excluded by the specific sunset clause in Section 49(3) FEMA regarding the initiation of new proceedings. This ensures that the two-year bar is absolute for taking fresh cognizance or notice.

Interplay of Section 49(3) with Other Sub-sections of Section 49

Section 49(3) does not operate in isolation but is part of a larger scheme of repeal and saving within Section 49.

Section 49(4) - Continuation of Proceedings

Section 49(4) of FEMA provides that, subject to sub-section (3), all offences committed under FERA shall continue to be governed by the provisions of FERA as if it had not been repealed. The High Court in Opera House Exports Limited And Others v. Union Of India And Another (2014) held that where a memorandum was issued within the sunset period (May 2, 2001) and adjudication proceedings were carried out under FERA, the substantive provisions of FERA would apply. The Madras High Court in Arun Mammen (2018) observed that a combined reading of Sections 49(3), 49(4), and Section 6 of the General Clauses Act indicates that unless proceedings for a FERA contravention had already commenced before May 31, 2002 (i.e., notice taken or cognizance made within the terms of Section 49(3)), there was no question of such contravention continuing after the expiry of the sunset period. Thus, Section 49(4) allows for the continuation of FERA proceedings only if they were validly initiated within the timeframe mandated by Section 49(3).

Section 49(5) - Savings of Actions Taken under FERA

Section 49(5)(a) of FEMA deems anything done or any action taken under FERA (such as rules, notifications, orders, or notices) to have been done or taken under the corresponding provisions of FEMA, provided they are not inconsistent with FEMA (Thirumalai Chemicals Limited v. Union Of India And Others, 2011). The courts in SK. Rustam (2024) and Ghanshyam Das Moolrajani (2007 SCC ONLINE RAJ 480) noted that Section 49(5) also saves adjudicatory proceedings initiated under FERA where notice was taken by the adjudicatory officer within the two-year period stipulated by Section 49(3). This means that while Section 49(3) sets a deadline for initiating new cognizance or taking fresh notice of FERA contraventions, Section 49(5) ensures the continuity of actions validly taken or proceedings properly commenced under FERA within that timeframe.

Section 49(6) - Application of General Clauses Act

Section 49(6) of FEMA addresses the application of Section 6 of the General Clauses Act, 1897. As interpreted in Thirumalai Chemicals Ltd. (2011) (cited in Shri K.N. Garg, 2024), the initial part of Section 49(6) ("save as otherwise provided in sub-section (3)") explicitly protects the sunset clause. This reinforces the primacy of the two-year limitation in Section 49(3) over the general savings provided by Section 6 of the General Clauses Act concerning the initiation of new proceedings for past FERA violations.

Implications of the Sunset Clause

The sunset clause enshrined in Section 49(3) FEMA has had significant implications. It provided a clear statutory cut-off, bringing finality to the potential initiation of proceedings for FERA contraventions that were not pursued by the authorities within the stipulated two years. This was instrumental in facilitating a structured transition from the more restrictive FERA regime to the liberalized framework of FEMA. While the clause itself is straightforward, judicial interpretation has been essential in clarifying operational aspects, such as what constitutes "taking cognizance" by a court or "taking notice" by an adjudicating officer. These interpretations have been vital in ensuring that the legislative intent of providing a definitive closure, while also preserving actions validly initiated, was effectively realized.

It is important to note that some of the provided reference materials, while contextualizing the FERA-FEMA transition, do not directly bear on the interpretation of Section 49(3). For instance, Standard Chartered Bank (2005 SCC 4 530) primarily dealt with corporate criminal liability under FERA. Cases like Natwar Singh v. Director Of Enforcement And Another (2010) and Suman Sehgal v. Union Of India & Anr (2006) discuss penalties under FEMA itself. Asha John Divianathan v. Vikram Malhotra And Others (2021) pertained to the validity of transactions under substantive FERA provisions. Similarly, SHRI S.JAGATHRAKSHAKAN v. THE SPECIAL DIRECTOR (2023) and M/s Royal Golf Hotels India (P) Ltd. v. The Special Director, Directorate of Enforcement, Cochin (2025) concern contraventions under FEMA, not the FERA sunset clause. The reference to Chhagan Chandrakant Bhujbal v. Union Of India (2016) discusses Section 49(3) of the Prevention of Money Laundering Act (PMLA), which, while a repeal and saving provision, is specific to that statute and offers limited direct analogy to FEMA's distinct clause beyond general principles of statutory interpretation concerning such transitions.

Conclusion

Section 49(3) of the Foreign Exchange Management Act, 1999, stands as a crucial legislative provision that effectively drew a line under the era of the Foreign Exchange Regulation Act, 1973, with respect to the initiation of new proceedings. By imposing a two-year "sunset period," the legislature intended to provide certainty and finality, ensuring that alleged contraventions under the repealed FERA were addressed within a defined timeframe. The Indian judiciary, through consistent interpretation, has reinforced the strict application of this limitation, clarifying key terms like "cognizance" and "taking notice." The courts have also delineated the interplay between Section 49(3) and other saving provisions within Section 49, thereby balancing the need for closure with the preservation of rights and actions validly commenced under the FERA regime. The jurisprudence surrounding Section 49(3) FEMA underscores the judiciary's role in giving effect to legislative intent during periods of significant legal transition, contributing to stability and predictability in the application of foreign exchange laws in India.