Liability under Section 42 of FEMA: The Principle of 'Strict Liability' and the Absence of Mens Rea

Introduction

In criminal law, the golden rule is Actus non facit reum nisi mens rea sit rea—the act does not make a person guilty unless the mind is also guilty. But does this protection extend to the boardroom when dealing with foreign exchange violations?The answer, as analyzed in our latest deep-dive, is a resounding No.

Foreign Exchange Management Act, 1999 (FEMA), as an economic statute, operates on the principle of Strict Liability. FEMA serves as the cornerstone of India’s foreign exchange regulatory framework. Shifting from the prohibitive nature of its predecessor (FERA), FEMA is categorized as a civil regulatory statute. One of its most potent provisions is Section 42, which extends liability for contraventions committed by a company to its directors and officers. A recurring point of contention in adjudication is whether a director must have "specific knowledge" or a "guilty mind" (mens rea) to be held liable.

Recent jurisprudence and Appellate Tribunal (SAFEMA) rulings have clarified that the mere position of being "in charge of the affairs of the company" is often sufficient to trigger liability, framing FEMA contraventions as "strict liability" offences.

The Statutory Framework: Section 42

Section 42(1) of FEMA states that where a person committing a contravention is a company, every person who, at the time the contravention was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company shall be deemed guilty.

While Section 42(1) provides a proviso allowing a director to prove the contravention took place without their knowledge or that they exercised due diligence, the burden of proof shifts heavily to the individual once their functional responsibility is established to prove that such contravention was not committed by them, this is a higher threshold to prove.

Judicial Precedents on Mens Rea and Strict Liability

The Supreme Court has consistently held that for civil obligations and economic legislations, the requirement of mens rea is not a prerequisite unless the statute explicitly says so.

1. Chairman, SEBI vs. Shriram Mutual Fund (2006): The Supreme Court held that "the intention of the parties committing such violation becomes totally irrelevant." Penalty is attracted the moment a statutory breach is established. This case is the bedrock for interpreting FEMA as a "strict liability" statute.

2. Union of India vs. Dharamendra Textile Processors (2008): A Three-Judge Bench of the Supreme Court of India clarified that the "classical view" of no mens rea, no crime does not apply to departmental penalties for breaches of civil obligations.

3. Vijeta Marines (P.) Ltd. vs. Additional Director (SAFEMA, 2026): In this case, the SAFEMA Tribunal explicitly cited Shriram Mutual Fund, noting that Section 13(1) of FEMA lacks words like "wilfully" or "knowingly." Consequently, the individual director, was held liable simply because he was the person in charge and had signed relevant documents, regardless of whether there was a "guilty intent."

   
   

Analysis of how Tribunals hold the liability of the directors under FEMA Section 42

The following recent cases illustrate how the "in-charge" status determines liability:

1. Functional Responsibility vs. Specific Knowledge (The Alliance Buildwell Case)

In Alliance Buildwell Projects (P.) Ltd. vs. Directorate of Enforcement (2026), the company received FDI for a villa project but failed to meet a mandatory regulatory milestone—completing at least 50% of the project within five years of statutory approvals. The investigation revealed only 18% development.

The directors raised several significant defenses:

• No Mala Fide Intent: They argued the FDI was received through lawful banking channels and remained deployed in the project.

• External Factors: They cited political disturbances and market slowdowns for the delay.

• Omission of Provision: They contended that since Section 6(3)(b) was omitted in 2015, the proceedings were unsustainable.

The Tribunal’s Findings:

• Persistence of Liability: The Tribunal held that merely because a provision (Section 6(3)(b)) was omitted subsequently, it does not absolve the appellants of liability for contraventions committed while the provision was in force.

• Strict Vicarious Liability: Even though the Tribunal admitted there was no allegation of diversion or mala fide intent, the directors were held vicariously liable under Section 42 because they were in charge of the company's affairs during the relevant period.

• The Milestone Rule: The breach was characterized as a failure to fulfill a "regulatory milestone." This confirms that under FEMA, a simple failure to meet a statutory condition (like the 50% development rule) is enough to hold directors responsible, even if their conduct wasn't "fraudulent or contumacious."

  
  

2. The Distinction of "Sleeping Directors"

The case of Vipin Print Services (P.) Ltd. vs. Assistant Director (2026) provides a crucial nuance. While the Managing Director was held liable for undervaluation of imports, the "sleeping directors" (the wife and son of the MD) were exonerated.

• Key Takeaway: Liability is not attached to the mere title of Director, but to the factum of being in charge of day-to-day affairs. Because the sleeping directors did not sign documents or manage operations, they did not meet the criteria of Section 42, further proving that the "position of being in charge" is the primary trigger, not just holding shares or a seat on the board.

  
  

3. Liability Post-Dissolution - The most interesting one

In Vijeta Marines (P.) Ltd. (2026), the Tribunal ruled that even if a company is "struck off" from the Register of Companies, the liability of the director continues under Section 42 of FEMA read with Section 248 of the Companies Act. The director's liability for "inadvertent failures" was maintained, though the penalty was reduced to meet the ends of justice.

Summary of the Legal Position (As of 2026)

As of 2026, the legal position establishes FEMA as a primarily civil and regulatory statute focused on foreign exchange management rather than traditional criminal punishment. Under this framework, the contravention of statutory provisions is treated as a "strict liability" offence where the requirement of mens rea is excluded to protect the state’s economic interests.

Consequently, the "in charge" test under Section 42 dictates that if a director is responsible for the conduct of business—such as signing documents or overseeing project milestones—specific knowledge of the "wrongfulness" of an act is not required for the imposition of penalties. Furthermore, as demonstrated in Alliance Buildwell, the subsequent omission of a statutory provision does not extinguish liability for past breaches, ensuring that regulatory accountability remains robust regardless of legislative changes or the absence of fraudulent intent.

Conclusion

Section 42 of FEMA acts as a bridge, ensuring that corporate veils do not shield the actual decision-makers from regulatory accountability. For directors, the message is clear: the absence of a "guilty mind" or specific knowledge of a breach is no defense if one is functionally responsible for the company’s operations. Diligence and active oversight are the only safeguards against the strict vicarious liability imposed by FEMA.