With the plethora of the laws and ever changing corporate milieu, people often end up contravening the various provisions of law. Therefore the GoI has provided for the compounding of offences under FEMA, whereby a person can voluntarily accept the contravention and apply for the compounding of offence, seeking redresal without going through the lengthy process of litigation. The main provisions governing the compounding is enumerated below:

1. LAWS GOVERNING COMPOUNDING

The following laws cover the compounding of contraventions under FEMA:

  1. Section 13 of FEMA covers penalties in respect contraventions which are compounded.
  2. Section 14 of FEMA Enforcement of order of adjudication Authority.
  3. Section 15 of FEMA 1999 covers powers to compound contraventions and empowers the Compounding Authority to compound the contraventions.
  4. Master Direction – Reporting under Foreign Exchange Management Act,1999 (Updated as on April 04, 2019)
  5. Master Direction- Compounding of Contraventions under FEMA, 1999 (Updated as on April 04, 2019)
  6. Foreign Exchange(Compounding Proceedings) Rules, 2000 (the Rules) as amended time to time, lay down the basic framework for compounding process

2. CONTRAVENTIONS

Contraventions implies breach of provisions of (a) Foreign Exchange and Management Act, 1999 (b) Rules made under FEMA (c) Regulations (d) Notifications (e) Orders (f) Directions (g) Circulars issued under the FEMA.

3. OFFENCES THAT CAN BE COMPOUNDED (DELEGATION OF POWER)

RBI has been empowered to compound all the section of FEMA except Section 3(a) which can be compounded by Directorate of Enforcement (dealing essentially with Hawala Transactions)

If any person contravenes any provisions of Foreign Exchange Management Act, 1999 (42 of 1999) except clause (a) of Section 3 of that Act, then the same will be compounded in the following manner:

S.NO. SUM INVOLVED IN CONTRAVENTION OFFICER OF RBI
1. Less than or equal to Rs. 10 lacs Assistant General Manager
2. More than Rs. 10 lacs but less than Rs. 40 lacs Deputy General Manager
3. More than or equal to Rs. 40 lacs but less than Rs. 100 lacs General Manager
4. More than or equal to Rs. 100 lacs Chief General Manager

4. OFFENCES THAT CAN BE COMPOUNDED BY THE REGIONAL OFFICES OF RBI

Following are the offences that can be compounded by the Regional Offices of RBI:

  1. Delay in reporting inward remittance received for issue of shares.
  2. Delay in filing form FC(GPR) after issue of shares.
  3. Delay in filing the Annual Return on Foreign Liabilities and Assets (FLA).
  4. Delay in issue of shares/refund of share application money beyond 60 days, mode of receipt of funds, etc.
  5. Violation of pricing guidelines for issue/transfer of shares.
  6. Issue of ineligible instruments
  7. Issue of shares without approval of RBI or Government, wherever required.
  8. Delay in submission of form FC-TRS on transfer of shares from Resident to Non-Resident.
  9. Receiving investment in India from non-resident or taking on record transfer of shares by investee company.

5. OFFENCES THAT CAN BE COMPOUNDED BY THE CENTRAL OFFICE OF RBI

Following are the offences that can be compounded by the Central Office of RBI:

  1. Contraventions relating to acquisition and transfer of immovable property outside India
  2. Contraventions relating to acquisition and transfer of immovable property in India
  3. Contraventions relating to establishment in India of Branch office ,Liaison Office or project office
  4. Contraventions falling under Foreign Exchange Management (Deposit) Regulations , 2000

6. PROCESS OF COMPOUNDING

i. An application to the Compounding Authority needs to be submitted along with the demand draft of Rs. 5000/- along with the following:

  • Compounding application: As per the format prescribed in Annexure II of the Foreign Exchange (Compounding Proceedings) Rules, 2000.
  • Details of Application: In case of contravention relating to Foreign Direct Investment, External Commercial Borrowings (c)Overseas Direct Investment and (d) Branch Office/Liaison Office, the applicants are required to furnish details as per Annexure III of the Foreign Exchange (Compounding Proceedings) Rules, 2000.
  • Undertaking: An undertaking that the applicant is not under any investigation by any agency such as DoE, CBI etc.
  • Copy of Memorandum of Association
  • Latest Audited Balance Sheet

ii. The application will be compounded on the basis of documents and submission made.

iii. The Compounding Authority may call for further information, record or other document.

iv. In case the contravener fails to submit the additional information called within the specified period, the application is liable for rejection.

v. Disposal of compounding application shall be made by issue of compounding order, however where there is a sufficient cause for further investigation, the RBI may refer the matter to Directorate of Enforcement.

7. TIME LIMIT FOR COMPLETION

The application for compounding filed with the RBI for compounding of contravention is required to be disposed off by RBI within 180 days of the receipt of application.

8. PENALTY UNDER COMPOUNDING

The guidance structure for calculating the amount to be imposed on compounding is as below:

Type of contravention Formula
1] Reporting Contraventions
A) FEMA 20

Para 9(1)(A), 9(1)(B), FCTRS (Reg. 10) and taking on record FCTRS (Reg. 4)B) FEMA 3
Non submission of ECB statementsC) FEMA 120
Second/subsequent remittance without obtaining of UIN will be covered under Item 5 below). Non reporting/delay in reporting of acquisition/setup of subsidiaries/step down subsidiaries /changes in the shareholding patternD) Any other reporting contraventions (except those in Item 2 below)
Fixed amount : Rs. 10000/- (applied once for each contravention in a compounding application) + Variable amount as under:
Upto 10 lakhs: 1000 per year
Rs.10-40 lakhs: 2500 per year
Rs.40-100 lakhs: 7000 per year
Rs.1-10 crore : 50000 per year
Rs.10 -100 Crore : 100000 per year
Above Rs.100 Crore : 200000 per year
E) Reporting contraventions by LO/BO/PO As above, subject to ceiling of Rs.2 lakhs. In case of Project Office, the amount of contravention shall be @10% of total project cost.
2] AAC/ APR/ Share certificate delays
In case of non-submission/ delayed submission of APR/ share certificates (FEMA 120) or AAC (FEMA 22) or FCGPR (B) Returns (FEMA 20) or FLA Returns (FEMA 20 (R))
Rs.10000/- per AAC/APR/FCGPR (B) Return delayed.

Delayed receipt of share certificate – Rs.10000/- per year, the total amount being subject to ceiling of 300% of the amount invested.

3]
A] Allotment/Refunds

Para 8 of FEMA 20/2000-RB (non-allotment of shares or allotment/ refund after the stipulated 180 days)B] LO/BO/PO
(Other than reporting contraventions)
Rs.30000/- + given percentage:
1st year : 0.30%
1-2 years : 0.35%
2-3 years : 0.40%
3-4 years : 0.45%
4-5 years : 0.50%
>5 years : 0.75%
(For project offices the amount of contravention shall be deemed to be 10% of the cost of project).
4] All other contraventions except Corporate Guarantees but including all contraventions of FEMA 20(R)/2017-RB dated November 07, 2017 other than FLA Returns Rs.50000/- + given percentage:
1st year : 0.50%
1-2 years : 0.55%
2-3 years : 0.60%
3-4 years : 0.65%
4-5 years : 0.70%
> 5 years : 0.75%
5] Issue of Corporate Guarantees without UIN/ without permission wherever required /open ended guarantees or any other contravention related to issue of Corporate Guarantees. Rs.500000/- + given percentage:
1st year : 0.050%
1-2 years : 0.055%
2-3 years : 0.060%
3-4 years : 0.065%
4-5 years : 0.070%
>5 years : 0.075%In case the contravention includes issue of guarantees for raising loans which are invested back into India, the amount imposed may be trebled.

9. TIME LIMIT FOR THE PAYMENT OF COMPOUNDING PENALTY:

The contravention penalty should be paid within 15 days from the date of the order. In case of non-payment of the amount indicated in the compounding order within 15 days of the order, it will be treated as if the applicant has not made any compounding application to the RBI. Such cases will be referred to the Directorate of Enforcement for necessary action.

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Sakshi Agarwal is a fellow member of the Institute of Company Secretaries of India and a qualified Lawyer. She has experience of more than 10 years in catering the needs of various kinds of entities such as Companies, LLP’s, Partnership Firms etc. in complying with various laws applicable and oth View Full Profile

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