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Financial Penalties cannot be imposed through Executive Directives without following Legal Procedures --- Lahore High Court Declares SBP Circular on Export Proceeds Ultra Vires

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Financial Penalties cannot be imposed through Executive Directives without following Legal Procedures --- Lahore High Court Declares SBP Circular on Export Proceeds Ultra Vires

Islamabad 04-02-2025: In a major victory for exporters and businesses, the Lahore High Court (LHC) has declared the State Bank of Pakistan (SBP)’s Circular No.2 of 2023 as unconstitutional and ultra vires. The judgment, delivered by Mr. Justice Shahid Karim in [W.P No.79375 of 2023] (M/s Mumtaz Ghani Textile & Others Vs. Federation of Pakistan & Others), quashed show cause notices issued by SBP and reaffirmed the importance of due process and fair trial rights in financial regulations.

The dispute arose when SBP issued show cause notices to exporters, alleging that they failed to realize full export proceeds within the prescribed 120-day period, as required under Section 12(1) of the Foreign Exchange Regulation Act, 1947 (FERA). The Petitioners challenged SBP’s actions, arguing that the central bank unlawfully imposed financial penalties and marked liens on their export earnings without proper adjudication.

The Court, after analyzing the legal framework, ruled that SBP overstepped its authority by implementing Paragraph 33A of Chapter 12 of the Foreign Exchange (FE) Manual, which imposed automatic financial penalties without judicial review. The Court emphasized that any such penalty must be adjudicated under Section 23B of FERA.

The State Bank lacks authority to impose penalties or liens without adjudication The Section 20(3) of FERA permits SBP to issue directions but does not allow punitive measures. Only an Adjudicating Officer, designated under Section 23B of FERA, has the power to impose penalties.

The automatic imposition of financial penalties through Circular No.2 bypassed the legal adjudication process. Every accused party is entitled to a fair hearing before any financial penalty is imposed. The Court struck down SBP’s actions for violating the principles of due process.

The marking of liens on export proceeds restricted businesses from accessing their own funds, infringing on Article 9 (Right to Liberty) and Article 14 (Right to Dignity and Privacy). The Court held that financial penalties must be imposed through judicial determination, not administrative discretion.

The Section 23B of FERA mandates adjudication before any penalty can be imposed. The SBP attempted to take over the role of the Adjudicating Officer, violating statutory due process. The Court ruled that financial penalties cannot be imposed through executive directives without following legal procedures.

The Court declared SBP’s Circular No.2 of 2023 ultra vires and unconstitutional. Show cause notices issued to exporters under this circular are quashed. The SBP is directed to follow proper adjudication under Section 23B of FERA for any future violations.