Compounding of Contraventions under FEMA, 1999 in India

Article explains provisions related to Compounding of Contraventions under FEMA, 1999 in India. It covers Contraventions and Penalties under FEMA which can be compounded, Transparency in Process of the Compounding, Powers of officer of Regional office/ FED CO Cell/ CEFA for Compounding, Monetary limit for the Compounding, How to make Application for the Compounding, Format for Application against the Compounding, Fee payable Against the Application for Compounding, Information’s/Details to be furnished for Compounding,  Pre-Requisite for the Compounding Process, Process for Approval against compounding by the RBI, Classification of the nature of Contravention, Process for hearing before an Authority, Completion of Compounding Process and Appeal, Consequences of Failure of Payment of the Penalty, Role of the Directorate of Enforcement (DOE) in Compounding etc.

1. Contraventions and Penalties

(i) Type of the Contraventions under the Section 13 of the FEMA, 1999

(i) Under all provisions of the FEMA, 1999 except under the Section 3(a)

(ii) Or under all rules, regulations, notifications, directions, orders or conditions of the FEMA, 1999.

(ii) These contraventions are liable for penalty and compounding where these are material in nature. However persecution is not permitted against the contravention under the Section 13.

(iv) RBI is also permitted to refer to DOE for taking necessary action where contravener is failed to pay penalty within 15 days from the date of conclusion of compounding proceedings beside the contraventions are under the section 13 of the FEMA, 1999

(ii) Type of the Contraventions under the Section 3(a) of the FEMA, 1999

(a) Where contravener is engaged in hawala transaction, money laundering, national and security concerns or involving in serious infringement of regulatory frame work etc.

(b) Compounding is not permitted by the RBI where the contraventions are under the section 3(a) of the FEMA, 1999. These matters are to be referred by the RBI to the Director of Enforcement (DOE). Hence DOE is permitted to deal against these contraventions where penalty and/or prosecution or both may be levied through Adjudicating Authority for Adjudication (court of DOE)

(iii) Maximum Quantum of the Penalties

(a) Maximum penalty is 300% on sum as involved in contravention where amount is quantifiable

(b) Or maximum penalty of Rs. 2 lac where sum as involved in the contravention is not  quantifiable

(c) And also additional maximum penalty is 5 thousand per day till contravention is continued

(iv) Minimum (Actual) quantum of the penalties

RBI has prescribed fixed plus variable amount of penalties for the compounding’s which are normally applied by the RBI. However minimum (actual) amount of penalty may be higher as depend on the case and circumstances.

 2. Compounding against the Contraventions

(i) Power of the Compounding under the Section 15

Any contravention as specified under the section 13 is to be compounded by the RBI within 180 days from the date of receipt of application from the contravener.

(ii) Process of the Compounding

(a) Compounding is process of voluntarily admitting a contravention by the contravener

(b) And also pleading guilty and seeking redressal (both) to avoid levy of maximum penalty

(iii)  Role of the RBI in Compounding

(a) CEFA (Cell for Effective Implementation of the FEMA, 1999) is working in Foreign Exchange Department of the RBI at Central Office, Mumbai who is controlling the matters relating to all compounding’s.

(b) All Regional offices and FED CO CELL, New Delhi both are independently delegated to deal with the compounding applications for technical and material in nature of the contraventions.

(c) CEFA is also to deal with the compounding applications which are not delegated to the Regional offices and to FED CO CELL, New Delhi

(iv) Application for the Compounding

(a) Application for compounding is to be submitted to the RBI through its respective Regional office or FED CO CELL, New Delhi against contravention committed under the section 13 and 3(a) (both) of the FEMA, 1999

(b) Application for compounding as submitted to the RBI is to be referred to the DOE against the contraventions as committed under the section 3(a) of the FEMA, 1999 for levy of penalty or/and prosecution or both through Adjudicating Authority for Adjudication.

3. Transparency in Process of the Compounding

(i) Public Disclosure of the Compounding Orders

All compounding orders as passed by the RBI w.e.f June 01, 2016 are available for viewing on www.rbi.org.in on monthly basis

(ii) Public Disclosure of the guidelines for an amount is to be levy as penalty

(a) Maximum amount of penalty is 300% on sum involved in the contravention

(b) However minimum (actual) amount of penalty is based on the guidance note as is available on rbi.org.in

(c) Minimum (actual) amount of penalty is varied as depend on the guidance note and also depend on the circumstances of each case individually like Corona – 2019

(d) Normally minimum (actual) amount of penalty is based on the minimum fixed amount plus variable amount vide RBI Circular No. 73, dated May 26, 2016

4. Powers of the officer of Regional office of the RBI for Compounding

• Where Contravention is Quantifiable

(i) AGM of the RBI is permitted to compound where an amount of contravention is maximum 10 Lac

(ii) DGM of the RBI is permitted to compound where an amount of contravention is up to 40 Lac

(iii) GM of the RBI is permitted to compound where an amount of contravention is up to 100 Lac

(iv) CGM of the RBI is permitted to compound where an amount of contravention is minimum 100 Lac

(v) No Compounding is permitted by AGM, DGM, GM or CGM where contravention is not Quantifiable. Hence FED Co CELL, New Delhi is permitted where contravention is not quantifiable

5. Powers of the Regional office of the RBI for Compounding

•  Where Contravention is Quantifiable

(i) For delay in reporting against  inward remittance received for the issue of shares

(ii) For delay in filing of form FC-GPR after the issue of shares

(iii) For delay in filing of Annual Return for the Foreign Liabilities and Assets (FLAs)

(iv) For delay in issue of shares or refund against the share application money received beyond 180 days from the date of receipt.

(v) For violation of pricing guidelines against issue of shares

(vi) For issue of ineligible instruments like

(a) Non convertible debentures

(b) Partly paid shares,

(c)  Shares with optionality clause etc.

(vii) For issue of shares without approval of the RBI or FIPB /Govt. wherever is required.

(viii) For delay in submission of form FC-TRS against transfer of the shares from a resident to non-resident.

(ix)  For delay in submission of form FC-TRS against transfer of the shares from a non-resident to resident.

(x) For taking on record a transfer of shares without having a certified form FC-TRS

(xi) For delay in reporting to the Secretariat for Industrial Assistance, DIPP for a downstream investment by an Indian entity in another Indian entity which are known as an indirect foreign investments (FIs).

(xii) (a) For delay in reporting against receipt of consideration or subscription money for the Capital contribution in company or in LLP

 (b) Or for delay in reporting against receipt for disinvestment or transfer of capital Contribution from a resident to non-resident and also vice versa

(xiii) For delay in reporting against gift of the capital instruments from a resident to non-resident without approval of the RBI

6. Powers of the FED CO Cell of the RBI at New Delhi for the Compounding’s

(i) For the FEMA contraventions relating to the acquisition and transfer of the immovable property as located outside India by the contravener

(ii) For the FEMA contraventions relating to the acquisition and transfer of immovable property as located in India by the contravener

(iii) For the contraventions relating to an establishment in India like:

(a) Branch Office (BO) of the foreign entity in India

(b) Liaison Office (LO) of the foreign entity in India

(c) Project Office (PO) of the foreign entity in India

(iv) For the contraventions falling under Foreign Exchange Management (Deposit) Regulations, 2000

(v) For the contraventions where amount involved is not quantifiable

(vi) Hence these abovementioned powers are not delegated to the Regional offices of the RBI

7. Powers of the CEFA, of the RBI at Fort Mumbai for the Compounding’s

•  CEFA, Mumbai has power for the compounding’s against the contraventions those are not permitted by the Regional offices or FED CO Cell, New Delhi.

8. Monetary limit for the Compounding

(i) No maximum monetary limit is fixed for the compounding

(a) By the CGM of the Regional Offices

(b) By the FED CO Cell at New Delhi

(c) By the CEFA at Fort Mumbai

(ii) However following Regional Offices are having limited power of the compounding like

(a) Kochi

(b) And also Panaji (both) are permitted to compound where contravention is below 100 Lac only

(iii) Regional offices at Mumbai and at Thiruvananthapuram are permitted to compound the  contraventions of Panaji and Kochi respectively where amount of contravention is minimum 100 Lac

9. Application for the Compounding

 (i) Application for the compounding may be submitted suo-moto by the contravener

(ii) Or after receipt of notice by the contravener from the RBI or FIPB/Govt. or any other statutory authority.

(iii)  Or after receipt of information by the contravener from the statutory auditors

10. Format for Application against the Compounding

(i) Format for application is available in the Foreign Exchange ( Compounding Proceedings) Rules, 2000

(ii) Or same form may be downloaded from the RBI’s website by clicking www.rbi.org.in/script/BS-Ap circulars display aspx

11. Fee Against the Application for Compounding

(i) Application in prescribed format along with necessary documents is to be submitted to the respective office of the RBI where compounding application is to be filed at :-

 (a) Respective Regional Office

(b) or FED Co CELL, New Delhi

(c) or CEFA, Fort Mumbai

(ii) And also demand draft (DD) for 5 thousand as drawn in favor of the RBI is be sent along with application for the compounding process purpose

 12. Information’s/Details for the Compounding

 (i) General Information’s for the Contraventions

• (a) Relating to Foreign Direct Investments (FDIs), External Commercial Borrowings (ECBs) or Overseas Direct Investments (ODIs)
• Relating to Branch Office (BO) in India
• Relating to Liaison Office (LO) in India
• Relating to Project Office (PO) in India

 (b) Undertaking is to be submitted that no investigation is pending before any Agency i.e. DOE or CBI etc.

 (c) Copy of Memorandum and Article of Association of the Indian company, if any is to be submitted

(d) Copy of latest audited balance sheet of the Indian company is to be submitted

 (e) Information about enquiry, investigation or adjudication proceedings if any initiated  Against the applicant after date of filing the compounding application but before

Issue of compounding order

(f) Applicant is also required to inform to the compounding authority about the change in address, contact details, if any during pendency of proceeding of the compounding.

 (ii) Specific Information’s for the FDIs

(a) Name of Applicant

(b) Date of Incorporation of the Indian company

(c) Nature of the Activities of the Indian company

(d) Brief particulars of the foreign investors

(e) Details of the foreign inward remittances

(f) Latest audited Balance sheet of the Indian company

(g) Nature and reason of the contravention

 (iii) Specific Information’s for the ECBs

(a) Name of Applicant

(b) Date of Incorporation of the Indian company

(c) Nature of the Activities of the Indian company

(d) Brief particulars of the foreign lenders of the Indian company

(e) Shareholding of lender at time of signing of loan agreement

(f) Date of Loan agreement

(g) Amount in the foreign currency and in Indian rupee

(h) Rate of Interest

(i) Period of loan

(j) Particulars of Repayment

(k) Details of drawdown

(l) Details of Utilization of ECB

(m) Nature and Reason of contravention

(iv) Specific Information’s for the ODIs

(a) Name of Applicant

(b) Date of Incorporation of the Indian company

(c) Nature of the Activities of the Indian company

(d) Name of Overseas entity

(e) Date of Incorporation of overseas entity

(f) Nature of activities of overseas entity

(g) Nature of entity i.e. WOS or JV

(h) Details of remittance sent

(i) Date of remittance

(j) Amount in the foreign currency and in Indian rupee

(k) Details of other ‘financial’ commitments

(l) Detail of UIN as applied and received

(m) Date of receipt of share certificate

(n) Approval of other regulator, if any needed

(o) Details of the APRs submitted

(p) Nature and reason of the contraventions

(q) All relevant supporting documents are to be submitted

 (v) Specific Information’s for the BO or LO

(a) Name of Applicant

(b) Date of Incorporation in India

(c) Date of approval for opening of LO or BO (d) Validity period of approval

(d) Nature of the Activities

(e) Income and Expenditure of LO or BO

(f) Date of submission of Annual Activity Certificate (AAC)

(g) Nature and reason of contravention

(h) All relevant supporting documents are to be submitted

 13. Pre-Requisite for the Compounding Process

(i) (a) No new compounding is permitted where similar contravention is already compounded with in an immediate period of 3(three) years

(b) Hence new compounding is permitted for similar contravention after expiry of the 3 (three) years

 (ii) No compounding is permitted without regularization of the contravention from the RBI, / FIPB or any statutory authority before compounding order is to be passed

(iii) No compounding is permitted where contravention involve any money laundering activity as defined under the Section 3(a) of the FEMA, 1999

 (iv) No compounding is permitted where contravention involve any national and security concerns involving serious infringement of regulatory frame work etc. as defined under the Section 3(a) of the FEMA, 1999

 (v) No compounding is permitted against sensitive or serious nature of contravention as defined under the Section 3(a) of the FEMA, 1999

(vi) No compounding is permitted where appeal is pending before appellate authority against order of the Authority for Adjudication

14.Process for Approval against compounding by the RBI

 (i) The RBI is required to verify that the details and documents are prima-facie in order

 (ii) (a) The RBI is permitted to return the application where details are not completed

(b) Or where contravention is not admitted/accepted

(iii) The RBI is required to examine and to decide the nature of contravention like :-

(a) Technical

(b) Material

(c) Sensitive or serious in nature

 (iv) Technical in Nature

(a) The RBI is required to issue cautionary advice where contravention is technical in nature.

(b) Hence compounding is not required where contravention is technical in nature

(c) Therefore no penalty is to be levied on the contravener.

 (v) Material in Nature

(a) The RBI is required to compound by imposing a minimum penalty

(b) And also the RBI has discretion to give an opportunity to contravener to personally appear before compounding authority for personal hearing where contravention is material in nature. Hence compounding is required where contravention is material in nature.

(c) Therefore penalty is to be levied on the contravener. However prosecution is not permitted against the contravener

(vi) Sensitive or Serious in Nature

(a) The RBI is required to refer to DOE where contravention is sensitive or serious in nature.

(b) Hence the RBI is not permitted for Compounding where contravention is sensitive or serious in nature.

(c) DOE is to decide the quantum of penalty or/and prosecution or both independently without any intervention on the RBI through Adjudicating Authority for Adjudication.

 15. Classification of the nature of Contravention

 (i) The RBI is permitted to decide based on the merits as technical, material or sensitive/ serious in nature

 (ii) Contravener is not permitted to decide himself based on any kind of ‘external’ advice as technical, material or sensitive / serious in nature

(iii) Hence contravener is required to submit an application directly to the RBI for compounding where contravention is happened without any delay. Contravener is not required to submit an application directly to DOE where contravention is although sensitive or serious in nature. Hence RBI will refer to DOE.

 16. Personal Hearing before an Authority 

(i) The RBI is not mandatory required to allow for personal hearing.

(ii) However the RBI is required to give an opportunity to the contravener to submit additional facts and documents.

17. Personal Hearing through an Authorized Representative (AR)

(i)  AR is permitted to attend personal hearing based on the proper written authority of the contravener

 (ii) However contravener to ensure that AR is conversant with the nature of contravention and facts of the related matter

18. Completion of the Compounding Process and Appeal

 (i) Compounding authority RBI is required to issue an order indicating detail of contravention and section of the FEMA, 1999 as contravened

(ii) Amount of minimum fixed plus variable penalty is to be written in the compounding order

(iii) Compounding process is to be treated as complete where payment of penalty is made by the contravener within 15 days from the date of order through demand draft in favor of RBI

 (iv) The RBI is required to issue a certificate for completion of the compounding process where penalty is paid by the contravener

(v) No second adjudication is permitted by the RBI.

(vi) No separate proceeding is to be initiated or continued against contravener where contravention is already compounded and also penalty is paid by the contravener.

(vii) No appeal is permitted against order of compounding as compounding process is based on the ‘voluntary’ admission and disclosure

19.  Failure of Payment of the Penalty

(i) Compounding order is to be treated as cancel where penalty is not paid within 15 days by the contravener.

(ii)  And also this case is to be referred by the RBI

(a) To the DOE for necessary action beside that the contravention was not sensitive or serious in nature or

(b) To the Authority as instituted for implementation of the Prevention of Money Laundering Act (PMLA) 2002 or

(c) To Any other agency like CBI etc. as RBI deemed fit.

20. Role of the Directorate of Enforcement (DOE)

(i) DOE is permitted to investigate the cases as referred by RBI where contraventions are of serious or sensitive in nature under the FEMA, 1999

(ii)  And DOE is also to conclude the case through the Adjudicating Authority for Adjudicating the contravention under the section 3(a) of the FEMA, 1999 where the contravention is serious or sensitive in nature.

(iii)  RBI is not permitted to compound any contravention till the matter is pending before the Adjudicating Authority for Adjudication or pending in appeal against order of the Adjudicating Authority for Adjudication.

(iv) DOE is also permitted to investigate the matter where contravener is failed to pay amount of penalty against the RBI’s order for compounding. In this circumstance RBI is referring the case to the DOE.

 (v) Maximum Penalty and Prosecution

(a) DOE is permitted to conclude the case of contravention through appropriate Adjudication Authority which is an own court of DOE.

(b)  Own court of DOE is permitted to impose a maximum penalty @ 300% of the some involved in contravention or/and imprisonment of maximum 7 years or both

 21. Conclusion on the Compounding Process

(i) The RBI is permitted for Compounding against material in nature contravention only through

(a) Respective Regional office or

(b) FED CO Cell, New Delhi or

(c) CEFA at Fort Mumbai

(ii) No Compounding is required by the RBI against contravention of technical in nature

(iii) No Compounding is permitted by the RBI against contravention of sensitive or serious in nature. DOE is required to conclude the quantum of penalty or/and prosecution or both through the Adjudicating Authority for Adjudication

(iv) (a) Maximum penalty is 300% against quantifiable amount, Rs. 2 Lac against Unquantifiable amount and also Rs. 5000 per day till contravention is continued

(b) Minimum (actual) of penalty against quantifiable amount is determined by the RBI based on certain criteria’s for fixed Plus variable amount of penalty vide AP (DIR Series) circular no. 73 dated May 26, 2016

(v) The RBI is permitted for deciding the nature of contravention like:

(a) Technical

(b) Material

(c) Sensitive or serious

(d) And also for fixing of minimum (actual) penalty based on fixed plus variable criteria not based on maximum penalty like 300% for quantifiable amount of the contravention.

(vi)  (a) No prosecution is initiated by the RBI for the contraventions as defined under the  Section 13 of the FEMA, 1999 where compounding is permitted

(b) However prosecution is initiated by the DOE through the Adjudicating Authority for Adjudication for a contravention as defined under the section 3(a) of the FEMA, 1999 as sensitive or serious where compounding is also not permitted.

(Author can be reached at email address [email protected] or on Mobile No. 9811081957)

Disclaimer : The contents of this presentation are solely for informational purpose. Neither this presentation nor the information contained herein constitutes a contract or will form the basis of a contract. The material contained in this presentation does not constitute/substitute professional advice that may be required before acting on any matter. While every care has been taken in the preparation of this presentation to ensure its accuracy at the time of publication, Satish Agarwal assumes no responsibility for any errors which despite all precautions, may be found herein. In no event shall we be liable for direct or indirect or consequential damages, if any, arising out of or in any way connected with the use of this presentation or the information contained herein.