Comprehensive Overview of the Latest FEMA Compounding Provisions: Key Features & Guidelines
The Reserve Bank of India (RBI) has streamlined the resolution of Foreign Exchange Management Act (FEMA) contraventions through new compounding guidelines, emphasizing time-bound resolution within 180 days of receiving a complete application. The rules stipulate that penalties can reach up to three times the contravened amount (or Rs.2 lakh if not quantifiable), with an additional Rs.5,000 per day for continuing violations. The guidelines specify an extensive list of compoundable contraventions under various FEMA notifications, primarily focusing on delays in statutory reporting (e.g., ARF, FC-GPR, FLA Returns) and violations of pricing or mode of payment norms. Crucially, certain contraventions are non-compoundable, including repeat violations within three years, cases involving property outside India (Section 37A), matters related to money laundering or national security, and cases where adjudication is already complete. Applications must be filed with the relevant RBI regional office with a Rs.10,000 fee plus GST, and the compounding fee structure is now based on a detailed matrix combining a fixed fee with a variable amount calculated by the contravened sum and duration of the delay.
Key Features of New FEMA Compounding provisions:
1. Time-bound Resolution:
RBI must complete compounding proceedings within 180 days from the date of receipt of a complete application. (Para 1.2 of Directions)
If the application is incomplete, RBI will return it. The applicant will have to file a new, complete application, and the 180-day period for compounding will be counted from the date of receipt of the new application (Para 3.5 of Directions)
2. Penalty Limits:
Penalty for a FEMA contravention can be up to three times the sum involved if the amount is quantifiable. If not quantifiable, the penalty can be up to ₹2 lakhs.
For continuing contraventions, an additional penalty of up to ₹5,000 per day may be imposed after the first day of the violation (Para 1.3 of Directions).
3. List of Compoundable Contraventions:
Contraventions as listed under Para 2.1 of Directions are detailed as below:
Notification No. FEMA 20/2000-RB (May 3, 2000)
| Sr No | Regulation/ Para (Directions) | Provisions under that regulation | Name of Forms to be filed | Time limit for filing form |
| 1 | Paragraph 9(1)(A) of Schedule 1 | Delay in reporting receipt of consideration for issue of shares or convertible debentures | ARF (Advance Remittance Form) | 30 days from receipt |
| 2 | Paragraph 9(1)(B) of Schedule 1 | Delay in reporting issue of shares | FC-GPR | 30 days from allotment |
| 3 | Paragraph 9(2) of Schedule 1 | Delay in filing Annual Return on Foreign Liabilities and Assets | FLA Return | 15th July every year |
| 4 | Paragraph 8 of Schedule 1 | Violation in mode of receipt for shares issued o/s India | NA | At transaction |
| 5 | Paragraph 5 of Schedule 1 | Issue price of shares in violation of pricing guidelines | NA | At transaction |
| 6 | Paragraph 2 or of Schedule 1 | Issue of shares without approval of RBI/Govt | FC-GPR / Approval letters | At transaction |
| 7 | Regulation 2(ii) read with Regulation 5(1) | Violation of any regulations in relation to purchase of shares by certain persons resident outside India | NA | NA |
| 8 | Regulation 10A (b)(i) read with paragraph 10 of Schedule 1 | Transfer of share/ convertible debenture of an Indian company by a person resident in India without prior approval of RBI | Reporting forms | At transaction/ reporting |
| 9 | Regulation 10(A)(a) | Transfer of any security of an Indian company by way of gift by a person resident in India without prior approval of RBI | Reporting forms | At transaction/ reporting |
| 10 | Regulation 10B (2) read with paragraph 10 of Schedule 1 | Transfer of share/ convertible debenture of an Indian company by a person resident outside India without prior approval of RBI | Reporting forms | At transaction/ reporting |
| 11 | Regulation 4 | Receiving investment in India from non-resident or taking on record transfer of shares by investee company in violation to relevant provisions | NA | At transaction |
| 12 | Regulation 14(6)(ii)(a) | Delay in reporting of downstream investment by the Bank | – | – |
Notification No. FEMA 20(R)/2017-RB (Nov 7, 2017)
| Sr No | Regulation/Para (Directions) | Provisions under that regulation | Name of Forms to be filed | Time limit for filing form |
| 1 | Regulation 13.1(1) | Delay in reporting receipt of amount of consideration | ARF (Advance Remittance Form) | 30 days from receipt |
| 2 | Regulation 13.1(2) | Delay in reporting issue of capital instruments | FC-GPR | 30 days from allotment |
| 3 | Regulation 13.1(3) | Delay in filing Annual Return on Foreign Liabilities and Assets | FLA Return | 15th July every year |
| 4 | Regulation 13.1(4) | Delay in reporting transfer of capital instruments | FC-TRS | 60 days from transfer/ receipt |
| 5 | Regulation 13.1(7) | Delay in reporting by LLP regarding foreign investment | LLP-I | 30 days from the date of receipt of consideration |
| 6 | Regulation 13.1(8) | Delay in reporting by LLP for disinvestment | LLP-II | 60 days from the date of receipt of funds |
| 7 | Regulation 13.1(11) | Delay in reporting of Downstream Investment | Form DI | 30 days of such investment |
| 8 | Regulation 11 | Violation of Pricing Guidelines | NA | At transaction |
| 9 | Regulation 2(v) read with Regulation 5 | Investment by person resident outside India without permission, if required | – | At transaction |
| 10 | Regulation 4 | Receiving investment in India from non-resident or taking on record transfer of shares by investee company in violation to relevant provisions | NA | At transaction |
| 11 | Regulation 10(5) | Transfer of capital instruments or units of an Indian company on a non-repatriation basis in violation by person resident in India or NRI or OCI without prior approval of RBI | – | – |
| 12 | Regulation 16.B
|
Issue of shares without approval of RBI or Government, wherever required | – | – |
| 13 | Paragraph 2 of Schedule 1 | Violation of mode of payment guidelines for purchase/ sale of capital instruments of an Indian company by a person resident outside India | – | – |
Notification No. FEMA 395/2019-RB (Oct 17, 2019)
| Sr No | Regulation/Para (Directions) | Provisions under that regulation | Name of Forms to be filed | Time limit for filing form |
| 1 | Regulation 3.1(I)(A) | Violation of mode of payment guidelines for purchase/ sale of capital instruments of an Indian company by a person resident outside India | – | – |
| 2 | Regulation 4(1) | Delay in reporting issue of capital instruments | FC-GPR | 30 days from allotment |
| 3 | Regulation 4(2) | Delay in filing Annual Return on Foreign Liabilities and Assets | FLA Return | 15th July every year |
| 4 | Regulation 4(3) | Delay in reporting transfer of capital instruments | FC-TRS | 60 days from transfer/ receipt |
| 5 | Regulation 4(6) | Delay in reporting by LLP regarding foreign investment | LLP-I | 30 days from the date of receipt of consideration |
| 6 | Regulation 4(7) | Delay in reporting by LLP for disinvestment | LLP-II | 60 days from the date of receipt of funds |
| 7 | Regulation 4(11) | Delay in reporting of Downstream Investment | Form DI | 30 days of such investment |
FEM (Non-Debt Instruments) Rules, 2019 (Oct 17, 2019)
| Sr No | Rule (Directions) | Provisions under that regulation | Name of Forms to be filed | Timelimit for filing form |
| 1 | Rule 2(k) read with Rule 5 | Investment by person resident outside India without permission, if required | – | At transaction |
| 2 | Rule 21 | Violation of Pricing Guidelines | NA | At transaction |
| 3 | Rule 4 | Receiving investment in India from non-resident or taking on record transfer of shares by investee company in violation to relevant provisions | NA | At transaction |
| 4 | Rule 9(4) and Rule 13(3) | Transfer of capital instruments or units of an Indian company on a non-repatriation basis in violation by person resident in India or NRI or OCI without prior approval of RBI | – | – |
| 5 | Paragraph 3 (b) of Schedule I | Issue of shares without approval of RBI or Government, wherever required | – | – |
4. Non-Compoundable Cases:
Contraventions falling under Rule 4(2) and Rule 9 of the Compounding Rules, 2024, are not eligible for compounding. List of the contraventions falling under Rule 4(2) and Rule 9 are given below:
| Rule/Section | Description |
| Rule 4(2) | Repeat similar contravention within 3 years of compounding order of previous contravention |
| Rule 9(a) | Amount involved is not quantifiable |
| Rule 9(b) | Attracts Section 37A of FEMA 1999 i.e. dealing in the properties outside India |
| Rule 9(c) | Money laundering, terror financing, sovereignty/integrity concerns |
| Rule 9(d) | Adjudication order already passed by any Adjudicating Authority u/s 13 |
| Rule 9(e) | If the compounding authority believes further investigation is needed to ascertain amount |
| Section 3(a) | Dealing in or transferring foreign exchange outside authorized channels (ED to examine) |
5. Filing of Compounding Application:
Applications must be filed at the RBI Regional Office with jurisdiction over the registered office of the applicant company, or at the FED CO Cell, New Delhi, depending on the nature of the contravention (Para 2.2, 2.3 of Directions)
6. Application Fees and Payment Details:
Fee for filing a compounding application is ₹10,000 plus GST @18%. Payment must be made by demand draft or electronic transfer (NEFT/RTGS), with bank account details provided in Annexure 1 of the Directions. Applicants must also email payment details to RBI within two hours of making the payment.
7. Compounding Fees:
| Type of Contravention | Formula / Penalty Structure | ||||||||||||||
| 1] Reporting/submission contraventions under provisions of: i. FEMA 20/FEMA 20(R)/FEMA 395 ii. FEMA 3/FEMA 3(R) iii. FEMA 120/FEMA 400 iv. Any other reporting contraventions (except those in Row 2 below and of LO/BO/PO) | Fixed amount: INR 10,000/- (applied once for each regulation/rule contravened, in a compounding application) plus
Variable amount:
|
||||||||||||||
| v. Reporting contraventions by LO/BO/PO | As above, subject to ceiling of INR 2 lakhs. In case of Project Office, the amount imposed shall be calculated on 10% of total project cost. | ||||||||||||||
| 2] Submission of AAC/APR/FLAR/Share certificate | Non-submission/delayed submission of: – APR/share certificates (FEMA 120/FEMA 400) – AAC (FEMA 22/FEMA 22(R)) – FCGPR(B) or FLA Returns—FEMA 20/FEMA 20(R)/FEMA 120/FEMA 395/FEMA 400
INR 10,000 per AAC/APR/FCGPR(B)/FLA Return delayed. Delayed/Non-receipt of share certificate—INR 10,000 per year, total amount subject to ceiling of 300% of the amount invested. |
||||||||||||||
| 3A] Allotment/Refunds: Non-allotment of shares or allotment/refund after stipulated period for Foreign Investment
3B] Contraventions (other than reporting contraventions in Para 1(v) above) by LO/BO/PO |
Fixed Amount: INR 30,000/- (applied once for each regulation/rule contravened, in a compounding application) plus
Variable amount:
(For project offices, the amount of contravention shall be deemed to be 10% of the cost of project) |
||||||||||||||
| 4] Any contravention pertaining to issuance of any guarantee (other than reporting contraventions) | Fixed Amount: INR 5,00,000/- (applied once for each regulation/rule contravened, in a compounding application) plus Duration of contravention
Variable amount
In case the contravention includes guarantees for raising loans invested back into India, the amount imposed may be trebled. |
||||||||||||||
| 5] All other non-reporting contraventions | Fixed Amount: INR 50,000/- (once for each regulation/rule, per application) plus Duration of contravention
Variable amount
|
Period Calculation
For reporting contraventions (matrix 1), the period may be apportioned:
{(approx. rounded off to next higher month ÷ 12) X amount for 1 year}
No Sundays/holidays excluded.
Note: Draft Compounding Application Form is attached with FEMA Compounding Rules 2024.
Conclusion:
In my view, revised FEMA compounding provisions reflect RBI’s effort to accelerate resolution of contraventions with clear timelines, defined penalties and detailed guidance on compoundable and non-compoundable cases.
References:
G.S.R. 566 (E) New Delhi, the 12th September, 2024.
Notification No. S.O. 3732(E) [F.NO.1/14/EM/2015], DATED 17-10-2019
Author Bio
