P L D 2025 Lahore 502 (PLP)

SHAHID KARIM, J.

This order will decide the instant petition as well as connected petitions viz. W.P. No.4124 of 2024, W.P. No.41318 of 2024, W.P. No.53371 of 2024, W.P. No.49184 of 2024, W.P. No.82215 of 2023, W.P. No.13537 of 2024, W.P. No.27478 of 2024, W.P. No.32937 of 2024 and W.P. No.49183 of 2024, which bring a common challenge to the show cause notices issued on various dates by an officer of the State Bank of Pakistan (SBP). These show cause notices have a common language and for facility one of the show cause notice issued in this petition (W.P. No.79375 of 2023) is set out below: "In terms of instructions contained in State Bank's Notification No. F.E.1/2002-SB, dated the 5th January 2022 read with Section 12(1) of the Foreign Exchange Regulation Act (FERA) 1947 and the given undertaking, you are under legal obligation to realize full export proceeds on the due date for payment or within 120 days from the date of shipment, whichever is earlier. However, it is observed that you have not realized the exports proceeds s far/ realized only a part amount and the balance as shown above is still outstanding which is the violation of section 12(1) of FERA, 1947 and the given declaration. You are therefore advised to explain within 21 days from the date of receipt of this show cause whether the full export proceeds have since been realized and if not what are the specific reasons for non-realization, falling which legal/ penal action shall be initiated against you under Section 23B of the said Act."

2. The show cause notice, reproduced above, alleges that the petitioners had realized only a part of the export proceeds and the balance was still outstanding which, in terms of the notice, was a violation of section 12(1) of Foreign Exchange Regulation Act, 1947 ("the Act"). It seeks an explanation from the petitioners failing which it is threatened that legal proceedings will be initiated under Section 23B of the Act. This position is not denied by the learned counsel for the petitioners who state that the proper course to be adopted in such circumstances is for the adjudication process to be triggered by resort to the provisions of section 23B of the Act. Section 23B grants power to the Federal Government to authorize any officer of SBP to act as director of adjudication and thereafter the procedure to be followed by the Adjudicating Officer has been given in the rules framed for the purpose, that is, Adjudication Proceedings and Appeal Rules, 1988. The real challenge, however, in these proceedings is to the Circular issued on 31.03.2023 which is in furtherance of the foreign exchange circular No.1 dated February 13, 2023. By Circular No.2 of 2023 (Circular No.2) dated 31.03.2023 amendment was made in the instructions and accordingly paragraph 33A, Chapter 12 of FE Manual has been revised in the following terms: "33A Delayed Realization of Export Proceeds i. In cases where export proceeds (fully or partially) are realized after the prescribed period (as stipulated in Para 6 of this Chapter), the AD shall convert the export proceeds at the prevailing market exchange rate, credit the same into the exporters' account and subsequently adopt the following procedure: a. The AD shall mark a lien on the amount of export proceeds realized by the exporter, as mentioned below: Number of days export proceeds is delayed Percentage of amount to be marked under lien Upto 30 days 3% From 31 to 60 days 6% Beyond 60 days 9% b. A consolidated statement regarding all such liens by the AD will be submitted by Head/Principal Offices of the ADs to the Director, Foreign Exchange Operations Department (FEOD), SBP-BSC on weekly basis as per prescribed format (Revised Appendix V-20A). c. FEOD shall file a complaint to Foreign Exchange Adjudication Department (FEAD), SBP-BSC with respect to delay in realization of export proceeds for all reported cases. Subsequently, AD shall deposit the fine as ordered by FEAD with SBP (out of the amount marked under lien as per paragraph (a) above) and release the remaining amount to the exporter. In case FEAD does not impose any fine on the exporter, the entire amount under lien would be released to the exporter. d. The above instructions will not be applicable in cases of export bills/export receivables that are discounted by the exporter to the AD."

3. The above instructions will be applicable with immediate effect. Authorized Dealers are advised to bring the above instructions to the knowledge of all their constituents and ensure meticulous compliance of the above instructions."

3. It will be seen from paragraph 33A, set out above, that where the export proceeds are realized after the prescribed period the authorized dealer shall convert the export proceeds at the prevailing market exchange rate and credit the same into the exporters' account. Thereafter the authorized dealer is obliged to adopt the procedure prescribed in the amended paragraph 33A and to mark a lien on the amount of export proceeds realized by the exporter in the percentage of the amount given in the circular. It further provides that in the meantime Foreign Exchange Operation Department shall file a complaint to the Foreign Exchange Adjudication Department with respect to delay in realization of export proceeds. Upon determination the authorized dealer shall deposit the fine as ordered by the Adjudication Department and thereafter SBP will release the remaining amount to the exporter. In case the Adjudication Department does not impose any fine on the exporter, the entire amount under lien would be released to the exporter. Therefore, it is evident that there is a lien marked on a certain percentage of amount of the export proceeds realized by the exporter and from the terms of the impugned circular No.2 of 2023 it is also clear that until the determination is made by the Adjudication Department, the amount under lien cannot be used by the exporter for any purpose and SBP retains its charge over that amount. Doubtless, this is a clog on the right of the authorized dealer / exporters to deal with the amount lying in their bank accounts and realized as proceeds of export.

4. In a nub, the case of the petitioners is that this impinges upon the rights of the petitioners to deal with the amount lying in their accounts at will and is out with the authority of SBP to issue such instructions. SBP, on the other hand, relies upon section 3 read with section 12(3) and section 20(3) of the Act as the source of power to issue such instructions. Section 3 as well as section 12(3) are not relevant and need not be adverted to. Subsection (3) of section 20 on which reliance has been placed by the learned counsel for SBP provides that: "(3) The State Bank may give directions in regard to the making of payments and the doing of other acts by bankers, authorized dealers travel agents, carriers, whether common of private, stoke brokers and other persons who are authorized by the State Bank to do anything in pursuance of this Act in the course of their business, as appear to it to be necessary or expedient for the purpose of securing compliance with the provisions of this Act and any rules, orders or directions made thereunder."

5. In the reply filed by SBP, too, it has been stated that SBP has been empowered by the above provision to issue directions and thus paragraph 33A has been issued lawfully and does not suffer from any illegality.

6. Subsection (3) of section 20 of the Act merely grants power to SBP to give directions in regard to making of payment and doing of other acts, inter alia, by authorized dealers in the course of their business and these directions may be given as appears to SBP to be necessary or expedient for the purpose of securing compliance with the provisions of the Act.

7. So the twin conditions are, firstly, that directions may be issued and which are limited to securing compliance with the provisions of the Act etc. SBP is not at all empowered to add anything or impose stricter conditions to the conditions already prescribed by Rules 1988. Be that as it may, the power to do so vests in the Adjudicating Officer upon a complaint being filed to him, and that too at the conclusion of the hearing after following due process of law. By Circular No.2, SBP has arrogated to itself the power vesting in the Adjudicating Officer by virtue of section 23J of the Act regarding recovery of sums due to the Government in execution of the orders passed by him. This, in turn, is subject to the appellate procedures prescribed by law. Circular No.2 condemns the authorized dealer unheard and is a pre-emptive order issued by use of SBP's dominant position as a regulator. This cannot be countenanced and the act of SBP not only offends the provisions of the Act but also the constitutional rights enshrined in Articles 9, 10A and 14 of the Constitution of Islamic Republic of Pakistan, 1973. It further impinges upon the right to freedom of trade and business guaranteed by Article 18 of the Constitution.

8. Circular No.2, on the other hand, does not seem to have been issued in the course of business of authorized dealers nor has it been issued as necessary or expedient for the purpose of securing compliance with the provisions of the Act. The provisions of the Act merely state that in case the export proceeds are not realized within 120 days, which is an admitted position, then the matter shall be referred to the Adjudicating Officers under Section 23B. At best, SBP could have issued a notification for the purpose of securing compliance with the provisions of section 23B but could not have imposed conditions in the form of paragraph 33A to usurp the powers of Adjudicating Officers under Section 23B of the Act. Subsection (4) of section 23B provides that in case of any contravention including that of subsection (1) of section 12 of the Act or subsection (3) of section 20 of the Act, cognizance shall be taken by the Adjudicating Officer of such contravention who may impose a penalty at the conclusion of that adjudication. The entire procedure has been laid down in the rules where a show cause notice is to be issued to a person regarding alleged contraventions. Thereafter evidence shall be produced before the Adjudication Officer and a right of hearing has to be afforded. All of these procedures are the attributes of fairness which have already been encapsulated in the form of Rules, 1988 and the intent of the legislature in enacting section 23B of the Act read with Rules, 1988 cannot be nullified or circumvented by an administrative order to mark a lien on export proceeds realized by the exporters. This would be tantamount to adjudication by SBP prior to an adjudication process for which the law empowers specific officers of SBP to undertake the enquiry. The constitutional right recognized by Article 10A of the Constitution of Islamic Republic of Pakistan, 1973 is a fundamental right inhering in a person to fair trial and due process for the determination of his civil rights. Circular No.2 by adding paragraph 33A preempts that determination and due process and such powers cannot be given to SBP in the purported exercise of powers under subsection (3) of section 20 of the Act.

8. In view of the above, these petitions are allowed. Circular No.2 of 2023 dated 31.03.2023 by which paragraph 33A was added in Chapter 12 of FE Manual is declared to be ultra vires and without lawful authority. Consequently, the show cause noticed under challenge in these petitions are also struck down. Suffice to say that SBP may proceed in accordance with law and refer the matters to the Adjudicating Officer in terms of section 23B of the Act. SA/M-28/L Petitions allowed.