Compounding of Contraventions/offences under FEMA, 1999

Replacing Foreign Exchange Regulation Act, 1974 (FERA) with Foreign Exchange Management Act, 1999 (FEMA) was a welcome move giving abundant opportunity and confidence to Indian Business, to go global fearlessly, by liberalizing the laws and taking out the draconian portion of law with relaxing provisions. It took more than 50 years to realize and implement the same but as they say, better late than never. FEMA brought new concepts for facilitating transactions and giving confidence to business on overseas dealings, such as introduction of Current & Capital Account Transactions, putting proceedings of contraventions under act in Civil Law instead of Criminal Law under FERA etc.  A provision of much consequence is “Compounding of Contraventions” under section 15 of FEMA. Compounding provisions are governed by Foreign Exchange (Compounding) Rules 2000 as amended.

Black Laws’ Dictionary meaning of “Compounding” is settlement by monetary payment. In case of any contravention by a person under FEMA Rules, Regulations, notification, directions or order made there-under, the person may approach authorities {RBI/Enforcement Directorate (ED), as the case may be} for compounding of contraventions. It is a voluntary process in which an individual or a corporate seeks compounding of an admitted contravention.

The objective of compounding is to provide comfort by minimizing transaction costs, at the same time taking a serious view of willful, mala-fide & fraudulent transactions.

Why Compounding under FEMA:

Contraventions under FEMA is subject to Penalty prescribed under section 13, which is upto 300% of sum involved in contravention, and if the sum is not quantifiable then penalty upto Rs. 2 lacs, is liable. Further, if the contravention is ongoing, then a further penalty of Rs. 5000 for every day after the first day that contravention happened.

Compounding is being done at much lesser amount as compared to Penalty. Once compounding is done and timely payment is made as per compounding order, then contravention is regularized and no further penalty or proceedings on contravention so compounded can be undertaken by RBI/ED.

When can Compounding application be made under FEMA:

Whenever a person realizes the contravention of the provisions of FEMA, either being brought to his notice by RBI or any other statutory authority or auditors or by any other means, he/she may apply for compounding. One can also make an application for compounding, suo-moto, on becoming aware of the contravention. There is no time limit for filing compounding application. Even if contravention has been done 20 years back, the compounding application can be filed.

Types of Contravention under FEMA:

Contravention may be a reporting violation, such as delayed reporting of inward remittance towards Share Allotment, Opening of step down subsidiary (SDS) overseas, Form FC-GPR after issue of shares to NRI, Form ESOP on issue of ESOP to Person Resident Outside India (PROI), Form FC-TRS on sale of shares of Indian Company by/to PROI etc.

It may be delay in receipt or payment of Foreign Exchange or delayed allotment of shares to PROI.

It can be a contravention of undertaking prohibited transactions or transactions done without approval of RBI/Central Government such as purchase of agricultural land in India by NRI/s acquisition of immovable property in India by a Foreign Citizen, PROI, making remittance beyond permissible limit of LRS, raising ECB from non-recognized lenders, opening branch office by PROI without approval of RBI, issue of shares to citizens of countries sharing land border with India etc.

Instances when Compounding under FEMA is Not Permissible:

• Serious contraventions suspected of money laundering, terror financing, or affecting Sovereignty, and integration of the nation
• Cases where adjudication is done and appeal is filed
• Cases where amount of contravention is not quantifiable
• Contraventions of transactions where required approvals or permission from the Government/ statutory authority has not obtained. Such contraventions can be compounded after obtaining those approvals
• Once compounding is done, another compounding on similar contravention cannot be done for next three years

In case of NDTV and Asrani Inns & Resort Private Limited, RBI has returned the compounding application on ground that the matter is under investigation by Directorate of Enforcement, but Bombay High Court has given directions to RBI to proceed with the compounding application.

FEMA Compounding Authority and its process:

Contravention of section 3(a) can be compounded by Enforcement Directorate and rest of contraventions can be compounded by RBI.

Process of applying for compounding is hassle free and fast. Application has to be submitted to authorities with relevant documents. Once application is accepted, compounding would be completed within 180 days from the receipt of a duly complete application. During hearings, it is prudent to plead ignorance rather than arguing and citing references of Case Laws.

At times it has been observed that person accept contravention and apply for compounding rather than devoting time to convince authorities that no contravention has taken place or taking the longer and expensive route of litigation. In case of NDTV, ED has issued notice to NDTV for contraventions under FEMA regulations. Despite being confident that no contravention had taken place, NDTV, considering that the matter may become public and could potentially adversely impact its goodwill, opted for compounding.

Compounding amount depends upon period of contravention, undue gains made as result of contravention, loss caused to exchequer, economic benefits accrued to contravener due to delayed compliance, track record/history of contravener etc. Compounding amount under most contraventions are defined. However, when it involves undue gains, the methodology of calculation is not defined, and it depends largely on the judgement of the compounding officer.

Compounding being a voluntary process, its orders are neither appealable nor any review mechanism is in place. If payments as per the compounding order are not made within permitted timeline of 15 days, compounding process would elapse and the process would be treated as null and void. Thereafter RBI refers the matter to ED for investigation. There are a few exceptions though. In the matter of JVL Agro Industries Private Limited, Allahabad HC was of the view that as petitioner had shown an unconditional willingness to comply with the compounding order, the ends of justice would be met if the Compounding Authority considered the request of the petitioner to pay the penalty even after the expiry of the prescribed period.

Compounding Order on contravention of ODI by Individual

In case of Ramanujam & family (CA 4593 to 4595/2017) remittance of SGD 233600 and SGD 116800 was made under Liberalised Remittance Scheme (LRS), in Oct 2007 and 2010, to overseas Joint Venture (JV) in Singapore towards equity investment @ share price SGD 1 each. Investment in overseas JV (ODI) by Individual was permitted vide Notification No. FEMA 263/RB-2013 dated 5^th March 2013 effective from 5^thAugust 2013 that too only in operating entity. Accordingly, Individual Investment by Ramanujam family in Overseas JV, in the year 2007 and 2010, was contravention of Regulation. Another contravention was investing in overseas entity other than operating entity.

The total investment was divested by Ramanujam family at more than Rs. 30 Cr to Indian Company without seeking prior approval of RBI. The compounding of the matter was done for more than Rs. 16 Cr, highest (in case of individual) since the compounding orders uploaded on RBI website.

Undue gains become part of compounding amount. Cases where investment is done out of India, undue gains can be worked out on certain assumptions of the return that might have accrued in India had the amount been invested in India. Actual Returns minus the assumed Indian return is included in Compounding by compounding authority.  The undue gains in case of Ramanujam family were worked out on basis of assuming return on equity in India @ 30% per annum. While in India also, one might have had multiple times return on right investment with right luck.

Undoubtedly compounding provisions in FEMA is laudable and more than 99% of the Compounding Orders done appear to be fair, logical and considerate. Still detailed reading of a few orders consisting of undue gains, one can’t resist the thinking of “Why not to have a forum for review of compounding orders?” 

About Author:

Vikas Maheshwari, Chartered Accountant, Founder of VM Consulting & Advisory, engaged in interpreting FEMA/PMLA and laws relating to Black Money and Benami Properties. He has more than 3 decades of professional experience and has served at various senior position including CFO, Global Treasury Head etc. in MNCs.

Author can be reached at Email: [email protected] Mobile +91 98811 36320