Compounding under FEMA, 1999

Article on Compounding of Contraventions Under Foreign Exchange Management Act (FEMA), 1999 explains Power to compound by Reserve Bank,  Power of Enforcement Directorate to Compound Contraventions under FEMA, Delegation of Powers to Regional Offices, Authorisation to compound the contraventions by FED CO Cell, New Delhi, How to make Application for Compounding, Pre-requisite for Compounding Process, Scope and procedure for compounding, Issue of the Compounding Order, Post-compounding procedure and Duties and liabilities of authorized Dealers.

1. Introduction

What is meant by Compounding?

It is also known as Composition of Offence in certain countries. Compounding of an offence is a settlement mechanism, by which, the offender is given an option to pay money in lieu of his prosecution, thereby avoiding a prolonged litigation.

To compound means “to settle a matter by a money payment, in lieu of other liability.”

Compounding of Contraventions under FEMA, 1999

1.1 If any person contravenes any provision of Foreign Exchange Management Act, 1999, (“the Act”) or any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorization is issued by the Reserve Bank, he shall, upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention where the amount is quantifiable or up to Rupees Two lakhs, where the amount is not directly quantifiable and where the contravention is a continuing one, further penalty which may extend to Rupees Five thousand for every day after the first day during which the contravention continues.

1.2 The Central Government had made the Foreign Exchange (Compounding Proceedings) Rules, 2000 (“FEMA rules”) relating to compounding contraventions under chapter IV of the Act.

1.3 In terms of the FEMA Rules effective from June 1, 2000, RBI was empowered to compound all the contraventions of FEMA 1999 except Section 3(a) with a view to providing comfort to individuals and corporate community by minimizing transaction costs, while taking severe view of willful, malafide and fraudulent transactions. Power to Compound the offences under Section 3(a) of the Act is exercised by Enforcement Directorate (dealing essentially with Hawala transactions).

1.4 Any contravention under section 13 of the Act may, on an application made by the person committing such contravention, be compounded within one hundred and eighty days from the date of receipt of application by the officers of the Reserve Bank.

2. Power to compound by Reserve Bank

If any person contravenes any provisions of the Act except clause (a) of Section 3 of that Act:

S.no.	Amount involved in Contravention	Compounding Authority
1.	Upto Rs. 10 Lakhs	Assistant General Manager of RBI
2.	More than Rs. 10 Lakhs but less than Rs. 40 Lakhs	Deputy General Manager of RBI
3.	Rs. 40 Lakhs or more but less than Rs. 1 Crore,	General Manager of RBI
4.	Rs. 1 Crore or more	Chief General Manager of RBI

Note: No contravention shall be compounded by the authority if the amount of contravention is not quantifiable.

3. Power of Enforcement Directorate

If any person contravenes any provisions of clause (a) of Section 3 of the Act:

S.no.	Amount involved in Contravention	Compounding Authority
1.	Upto Rs. 5 Lakhs	Deputy Director of the Directorate of Enforcement
2.	More than Rs. 5 Lakhs but less than Rs. 10 Lakhs	Additional Director of the Directorate of Enforcement;
3.	Rs. 10 Lakhs or more but less than Rs. 50 Lakhs,	Special Director of the Directorate of Enforcement;
4.	Rs. 50 Lakhs or more but less than Rs. 1 Crore or more	Special Director with Deputy Legal Adviser of the Directorate of Enforcement;
5.	Rs. 1 Cr. or More	Director of Enforcement with Special Director of the Enforcement Directorate

Every application for compounding any contravention under this rule shall be made in Form to the Director, Directorate of Enforcement, New Delhi, along with a fee of Rs.5000 by DD in favour of the Compounding Authority.

Note:- No contravention shall be compounded by the compounding authority as prescribed in Para-2 and para-3 above, if the amount of contravention is not quantifiable.

4. Delegation of Powers to Regional Offices

The compounding powers have been delegated to the Regional Offices of the Reserve Bank of India to compound the following contraventions:

S.no.	FEMA Regulations	Brief Description of Contravention
1.	Regulation 13.1(1)	Delay in reporting inward remittance received for issue of shares.
2.	Regulation 13.1(2)	Delay in filing form FC(GPR) after issue of shares.
3.	Regulation 13.1(3)	Delay in filing the Annual Return on Foreign Liabilities and Assets (FLA).
4.	Paragraph 2 of Schedule I	Delay in issue of shares/refund of share application money beyond 60 days, mode of receipt of funds, etc.
5.	Regulation 11	Violation of pricing guidelines for issue/transfer of shares.
6.	Regulation 2 (v) read with Regulation 5	Issue of ineligible instruments.
7.	Regulation 16.B	Issue of shares without approval of RBI or Government, wherever required.
8.	Regulation 13.1(4)	Delay in submission of form FC-TRS on transfer of shares from Resident to Non-Resident or from Non-resident to Resident.
9.	Regulation 4	Receiving investment in India from non-resident or taking on record transfer of shares by investee company.
10.	Regulation 13.1(11)	Delay in reporting the downstream investment made by an Indian entity or an investment vehicle in another Indian entity (which is considered as  indirect foreign investment for the investee Indian entity in terms of these regulations), to Secretariat for Industrial Assistance, DIPP.
11.	Regulations 13.1 (7) and 13.1(8)	Delay in reporting receipt of amount of consideration for capital contribution and acquisition of profit shares by Limited Liability Partnerships (LLPs)/ delay in reporting disinvestment/transfer of capital contribution or profit share between a resident and a non-resident (or vice-versa) in case of LLPs.
12.	Regulation 10(5)	Gift of capital instruments by a person resident in India to a person resident outside India without seeking prior approval of the Reserve Bank of India.

5. Authorisation to compound the contraventions by FED CO Cell, New Delhi

• 5.1 The work of three divisions of Foreign Investment Division (FID) viz. Liaison/ Branch/ Project office(LO/ BO/ PO) division, Non Resident Foreign Account Division (NRFAD) and Immovable Property (IP) Division has been transferred to FED, CO Cell, New Delhi with effect from July 15, 2014. Accordingly the officers attached to the FED, CO, Cell at New Delhi office are now authorized to compound the contraventions as under:

S.no.	FEMA Notification	Brief Description of Contravention
1)	FEMA 7/2000-RB, dated 3-5-2000 [Foreign Exchange Management (Acquisition and transfer of immovable property outside India) Regulations, 2000]	Contraventions relating to acquisition and transfer of immovable property outside India
2)	FEMA 21/2000-RB, dated 3-5-2000 [Foreign Exchange Management (Acquisition and transfer of immovable property in India) Regulations, 2000]	Contraventions relating to acquisition and transfer of immovable property in India
3)	FEMA 22/2000-RB, dated 3-5-2000 [Foreign Exchange Management (Establishment in India of branch or office or other place of business) Regulations, 2000]	Contraventions relating to establishment in India of Branch office, Liaison Office or Project office
4)	FEMA 5/2000-RB, dated 3-5-2000 [Foreign Exchange Management (Deposit) Regulations, 2000]	Contraventions falling under Foreign Exchange Management (Deposit) Regulations, 2000

5.2 The powers to compound the contraventions at Paragraph 4 and Paragraph 5 above have been delegated to all Regional Offices (except Kochi and Panaji) and FED, CO Cell, New Delhi respectively without any limit on the amount of contravention.

Further, Kochi and Panaji Regional offices can compound the contraventions at paragraph 4 for amount of contravention below Rupees one Crore (Rs.1,00,00,000/). The contraventions for amounts of Rupees one Crore (Rs. 1,00,00,000/-) or more under the jurisdiction of Panaji and Kochi Regional Offices with respect to all the delegated powers shall henceforth be compounded at Mumbai RO and Thiruvananthapuram RO respectively. Accordingly, applications for compounding related to the above contraventions may be submitted to the respective Regional Offices under whose jurisdiction they fall or to FED, CO Cell, New Delhi, as applicable. For all other contraventions, applications may continue to be submitted to CEFA, Foreign Exchange Department, Reserve Bank of India, 5th floor, Amar Building, Sir P. M. Road, Fort, Mumbai 400001.

6. Application for Compounding

6.1 All applications for compounding may be submitted together with the prescribed fee of Rs.5000/- by way of a demand draft drawn in favour of “Reserve Bank of India” and payable at the concerned Regional Office and by way of a demand draft drawn in favour of “Reserve Bank of India” and payable at Mumbai for cases submitted to the Compounding Authority, [Cell for Effective implementation of FEMA (CEFA)], Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai.

6.2 Along with the application in the prescribed format, the applicant may also furnish the details relating to Foreign Direct Investment, External Commercial Borrowings, Overseas Direct Investment and Branch Office / Liaison Office, as applicable, a copy of the Memorandum of Association and latest audited balance sheet along with an undertaking that they are not under any enquiry/investigation/adjudication by any agency such as Directorate of Enforcement, CBI etc as on the date of the application and to inform to the  Compounding Authority/RBI immediately, in writing, if any  enquiry/investigation/adjudication proceedings are initiated by any agency against  the applicant after the date of filing the compounding application but on or before the  date of issuance of the compounding order to enable the Bank to complete the compounding process within the time frame.

6.3 In case the application has to be returned where required approvals are not obtained from the authorities concerned or in case of incomplete application for any other reason, the application fees of Rs.5000/-, received along with the application will be returned by crediting the same to the applicant’s account through NEFT as per the ECS mandate. The applicants are advised to furnish their mandate and details of their bank account along with the application in the prescribed format.

6.4 The applicants are also advised to bring to the notice of the compounding authority change, if any, in the address/ contact details of the applicant during the pendency of the compounding application with Reserve Bank.

7. Pre-requisite for Compounding Process

 7.1 In respect of a contravention committed by any person within a period of three years from the date on which a similar contravention committed by him was compounded under the Compounding Rules, such contraventions would not be compounded and relevant provisions of the FEMA, 1999 shall apply. Any second or subsequent contravention committed after the expiry of a period of three years from the date on which the contravention was previously compounded shall be deemed to be a first contravention.

7.2 Contraventions relating to any transaction where proper approvals or permission from the Government or any statutory authority concerned, as the case may be, have not been obtained, such contraventions would not be compounded unless the required approvals are obtained from the concerned authorities.

7.3 Cases of contravention, such as, those having serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation or where the contravener fails to pay the sum for which contravention was compounded within the specified period in terms of the compounding order, shall be referred to the Directorate of Enforcement for further investigation and necessary action under the Act or to the authority instituted for implementation of the Prevention of Money Laundering Act 2002, or to any other agencies, for necessary action as deemed fit.

7.4 In case where adjudication has been done by the Directorate of Enforcement and an appeal has been filed under the Act, no contravention can be compounded under the rules. The applicant shall confirm in the undertaking required to be furnished along with the compounding application that they have not filed any appeal under the Act.

7.5 Whenever a contravention is identified by the Reserve Bank or brought to its notice by the entity involved in contravention by way of a reference other than through the prescribed application for compounding, the Bank will continue to decide:

1. Whether a contravention is technical and/or minor in nature and, as such, can be dealt with by way of an administrative/ cautionary advice;

2. Whether it is material and, hence, is required to be compounded for which the necessary compounding procedure has to be followed; or

3. Whether the issues involved are sensitive / serious in nature and, therefore, need to be referred to the Directorate of Enforcement (DOE).

7.6 However, once a compounding application is filed by the concerned entity suo moto, admitting the contravention, the same will not be considered as ‘technical’ or ‘minor’ in nature and the compounding process shall be initiated in terms of the Provisions of the Act.

7.7 If the Enforcement Directorate is of the view that the compounding proceeding relates to a serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation, the Compounding Authority shall not proceed with the matter and shall remit the case to the appropriate Adjudicating Authority for adjudicating contravention under the Act.

8. Scope and procedure for compounding

The following factors, which are only indicative, may be taken into consideration for the purpose of passing compounding order and adjudging the quantum of sum on payment of which contravention shall be compounded:

1. the amount of gain of unfair advantage, wherever quantifiable, made as a result of the contravention;

2. the amount of loss caused to any authority/ agency/ exchequer as a result of the contravention;

3. economic benefits accruing to the contravener from delayed compliance or compliance avoided;

4. the repetitive nature of the contravention, the track record and/or history of non-compliance of the contravener;

5. contravener’s conduct in undertaking the transaction and in disclosure of full facts in the application and submissions made during the personal hearing; and any other factor as considered relevant and appropriate

9. Issue of the Compounding Order

9.1 The Compounding Authority shall pass an order of compounding after affording an opportunity of being heard to all the concerned as expeditiously as possible and not later than 180 days from the date of application on the basis of the averments made in the application as well as other documents and submissions made in this context by the contravener during the personal hearings.

9.2 The time limit for this purpose would be reckoned from the date of receipt of the completed application for compounding by the Reserve Bank.

9.3 It is to be noted that appearing for a personal hearing by contravener or its authorized representative before the compounding authority is optional and the applicant can choose not to appear for it. The applicant may enclose full information relating to the case with the application and the Compounding Authority will proceed with the processing of the compounding application on the basis of information and documents available in the application for compounding.

or

the applicant may exercise his discretion with regard to appearing for hearing. Further, if the applicant opts for appearing for the personal hearing, the Reserve Bank would encourage the applicant to appear directly for it rather than being represented / accompanied by legal experts / consultants, as compounding is only for admitted contraventions.

9.4 The Compounding Authority will pass a compounding order on the basis of the averments made in the application as well as other documents and submissions made in this context by the contravener during the personal hearings, if any.

9.5 Where the compounding of any contravention is made after making of a complaint under the Act, one copy of the compounding order will be provided to the applicant (the contravener) and also to the Adjudicating Authority.

10. Post-compounding procedure

10.1 The sum for which the contravention is compounded as specified in the order of compounding is payable by way of a demand draft in favour of the “Reserve Bank of India” within fifteen days from the date of the order of compounding of such contravention. The demand draft has to be deposited in the manner as directed in the compounding order.

10.2 On realization of the demand draft for the sum for which contravention is compounded, a certificate in this regard shall be issued by the Reserve Bank subject to the specified conditions, if any, in the order.

10.3 One copy of the compounding order issued shall be supplied to the applicant (the contravener) and also to the Adjudicating Authority, where the compounding of any contravention is made after making of a complaint.

10.4 The provisions of the Rules do not confer any right on the contravener, after a compounding order is passed, to seek to withdraw the order or to hold the compounding order as void or request a review of the order passed by the Compounding Authority.

10.5 In case of failure to pay the sum compounded within the time specified in the compounding order, it shall be deemed that the contravener had never made an application for compounding of any contravention under these Rules.

10.6 In respect of the contraventions of the Act, which are not compounded by the Compounding Authority, other relevant provisions of the Act, including reference to the Directorate of Enforcement shall apply.

11. Duties and liabilities of authorized Dealers

11.1 RBI has entrusted to the Authorised Dealers (ADs) the responsibility of complying with the prescribed rules/ regulations for the foreign exchange transactions and reporting the same as per the directions issued from time to time.

11.2 During the compounding process, on a number of occasions, it has been brought to the notice of RBI by the applicants that the contraventions of the provisions of FEMA by corporates and individuals are due to the acts of omission and commission of the Authorised Dealers and some of the applicants have also produced documentary evidence in support of their claim. Such contraventions being dealt with by the Reserve Bank mainly relate to:

1. Draw down of External Commercial Borrowing (ECB) without obtaining Loan Registration Number (LRN) [Regulations 3 and 6 of FEMA 3/2000];

2. Allowing draw down of ECB under the automatic route from unrecognised lender, to ineligible borrower, for non-permitted end uses, etc. [Regulations 3 and 6 of FEMA 3/2000];

3. Non-filing of form ODI for obtaining UIN before making the second remittance to overseas WOS/JV for Overseas Direct Investment (ODI) [Regulation 6(2)(vi) of FEMA 120/2004];

4. Non-submission of Annual Performance Reports (APRs) / copies of Share Certificates to the AD (and non-reporting thereof by the AD to Reserve Bank) in respect of overseas investments [Regulation 15 of FEMA 120/2004];

5. Delay in submission of the Advance Reporting Format in respect of Foreign Direct Investment (FDI) to the concerned Regional Office of the Reserve Bank [paragraph 9 (1) (A) of Schedule I to FEMA 20/2000];

6. Delay in filing of details after issue of eligible instruments under FDI within 30 days in form FC-GPR to the concerned Regional Office of the Reserve Bank [paragraph 9 (1) (B) of Schedule I to FEMA 20/2000];

7. Delay in filing of details pertaining to transfer of shares for FDI transactions in form FC-TRS by resident individual/companies [Regulation 10 (A) (b) of FEMA 20/2000]; etc.

11.3 Authorised Dealers may take necessary steps to ensure that checks and balances are incorporated in systems relating to dealing with and reporting of foreign exchange transactions to Reserve Bank so that contraventions of the Act due to the acts of omission and commission of the Authorised Dealers do not occur.

11.4 The Reserve Bank may impose on the authorized person a penalty for contravening any direction given by the Reserve Bank under this Act or failing to file any return as directed by the Reserve Bank.

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