Nirav Modi, Mallya Under FEO Act: Why the Law Still Has Grey Areas

With two people declared as fugitive economic offenders, FEO Act seems to be gathering steam; questions persist.

Vijay Mallya and Nirav Modi – so far these are the two names that have been declared as fugitive economic offenders since the new Fugitive Economic Offenders Act, 2018 (FEO Act) came into play. While it may seem simple to draw that conclusion for these names – whose financial debacles have been widely reported – the fine print of the law continues to contain grey areas.

Let’s dive deeper into how this law works.

Who Is A ‘Fugitive Economic Offender’?

A ‘fugitive economic offender’ (FEO) has been defined as any individual against whom there is a warrant for arrest in relation to certain specified offences (including offences covered under prevention of money laundering, benami property, and black money legislations), provided the total value involved is Rs 100 crores or above.

The individual must have left India to avoid criminal prosecution or if already abroad, refuses to return to face criminal prosecution in India.

Now, the above definition implies that the intent of this law is not to catch hold of persons who

• can demonstrate that the reason for them leaving India was not to avoid criminal prosecution (whether there was any criminal prosecution or warrant pending against them at the time of their departure from India would be a relevant factor to know);
• were living abroad prior to the issuance of a warrant of arrest.

In case an alleged FEO can demonstrate either of the above, it would be interesting to note how the Indian courts would interpret the definition.

Procedural Aspects

Once Indian authorities believe a person is an FEO, they must file an application in the designated court to declare the person as such. The application, among other details, must include any information available regarding the alleged FEO’s whereabouts, which may be difficult to obtain.

A notice of this application being filed must be served to the alleged FEO, who is then required to appear in court within six weeks from the date of the notice.

To make the process convenient, the new law allows this notice to be sent via email.

However, a similar notice needs to be served to any ‘interested parties’ (not defined in the Act, but may mean lenders, investors, business partners etc). Here, serving the notice via email is not permitted, and this creates a hurdle for authorities as many individuals falling in this category may not have Indian addresses.

Declaration as FEO and Confiscation of Assets

After the Court declares a person an FEO, it may further order the confiscation of the ‘proceeds of crime’ in India or abroad – regardless of whether the same is owned by the FEO or someone else. Further, the scope of this provision also extends to any other property (including any benami property in India or abroad) that is owned, directly or indirectly, by the FEO.

One must note that the language used in the FEO Act implies that confiscation can be sought, not just for the ‘proceeds of crime’, but also for other properties owned by the FEO.

It is crucial for this aspect to be clarified soon. Moreover, the efficacy of such a power without adequate diplomatic cooperation at an international level could have practical challenges.

Appellate Mechanism

If someone wishes to appeal a judgment or order given by the court, such a person will have to approach the High Court. As the High Court is rarely seen to be placed in a ‘fact-finding’ position, this provision is slightly unusual.

Further, any court or tribunal in India may bar a declared FEO from putting forward or defending any civil claim in any civil proceeding before it.

This restriction has also been extended to any company or limited liability partnership (LLP), if a declared FEO is

• an individual filing the claim on behalf of the company or the LLP
• a promoter, key managerial personnel, or majority shareholder of the company
• an individual having a controlling interest in the LLP

Given that the right of an individual to argue and defend oneself is a fundamental right and one of the corner stones of the principles of natural justice, it remains to be seen whether this onerous and harsh provision will sail through; especially since it fails to take into account the jeopardy of the minority stakeholders of such a company/ LLP.

Standard of Proof Under the FEO Act

The standard of proof for matters under the FEO Act is ‘preponderance of probabilities’, which means, based on the evidence, it would be reasonable to conclude that the plaintiff’s claims are true. This is a lower standard than that applied to criminal matters that is,’beyond reasonable doubt’, in which even the slightest possibility of the defendant being innocent despite evidence, showing a preponderance of guilt can result in acquittal.

This raises questions on whether the FEO Act is indeed a criminal statute or a civil one.

Checks & Balances Required

Though, undoubtedly, the enactment of the FEO Act is a bold step, sufficient checks and balances are required so that no provision is misused; especially keeping in mind that a few provisions are borderline draconian in nature.

While some stringent steps were indeed needed to ensure that the wrongdoers are not able to go scot-free, one wonders whether apt and judicious use of the power of arrest would have achieved the same objective.

A fair balance would have to be maintained between India remaining a strict enforcer of its laws and regulations and being an attractive destination to conduct business.

(The authors of this article are Ms Bijal Ajinkya (Partner), Mr Raghav Kumar Bajaj (Principal Associate) and Ms Krutika Chitre (Senior Associate) at Khaitan & Co. The views of the author(s) in this article are personal and do not constitute legal/professional advice of Khaitan & Co. For any further queries or follow up, please contact us at [e-mail]. This is an opinion piece and the views expressed are the authors’ own. The Quint neither endorses nor is responsible for them.)