RBI Issues Guidelines on Compounding FEMA Contraventions

The Reserve Bank of India has issued Circular No. 17/2024-25 on October 1, 2024, outlining the guidelines for compounding contraventions under the Foreign Exchange Management Act (FEMA) of 1999. The new guidelines are based on the recently notified Foreign Exchange (Compounding Proceedings) Rules, 2024, which replace the earlier compounding rules established in 2000. The circular allows for the compounding of certain contraventions specified in Section 13 of FEMA, except those under Section 3(a). Authorized Dealer banks are instructed to implement necessary checks to prevent violations of FEMA regulations and to bring the new guidelines to the attention of their clients. The RBI may impose penalties for any failures in compliance. The compounding process is designed to facilitate easier compliance while reducing the associated costs for violators. Additionally, specific contraventions will be compounded by the Reserve Bank’s regional offices, and comprehensive details of compounding orders will be published on the RBI website. Payments for compounded amounts must be made within 15 days of the order, and failure to comply will void the application for compounding. The circular also supersedes several previous A.P. (DIR Series) circulars.

Reserve Bank of India

RBI/FED/2024-25/78
A.P. (DIR Series) Circular.No.17/2024-25 Dated: October 01, 2024

To,
All Authorised Dealer Category – I banks and Authorised banks

Madam / Sir,

Directions – Compounding of Contraventions under FEMA, 1999

The provisions of section 15 of Foreign Exchange Management Act, 1999 (42 of 1999) [hereinafter referred to as ‘FEMA, 1999’], enable compounding of contraventions and, empowers the Reserve Bank to compound any contravention as defined under section 13 of the FEMA, 1999, except the contraventions under section 3 (a) of FEMA, 1999, on an application made by the person committing such contravention. Government of India vide Notification G.S.R. 566 (E). dated September 12, 2024, has notified the Foreign Exchange (Compounding Proceedings) Rules, 2024 in supersession of the Foreign Exchange (Compounding Proceedings) Rules, 2000.

2. Accordingly, the Directions issued under earlier circulars have been reviewed and the list of earlier circulars superseded by this circular is given in Appendix.

3. Further, in terms of Section 11 (2) of FEMA, 1999, the Reserve Bank may, for the purpose of ensuring the compliance with the provisions of the Act or of any rule, regulation, notification, direction or order made thereunder, direct any authorized person to furnish such information, in such manner, as it deems fit. Authorised Dealers are therefore, advised to take necessary steps to ensure that checks and balances are incorporated in systems relating to dealing with and reporting of foreign exchange transactions so that contraventions of provisions of FEMA, 1999, attributable to the Authorised Dealers do not occur. In this connection, it is reiterated that in terms of Section 11(3) of FEMA, 1999, 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.

4. All AD Category – I banks and Authorised banks may bring the guidelines contained in this circular to the notice of their constituents.

Yours faithfully,

(Dr. Aditya Gaiha)
Chief General Manager in Charge

Guidelines for compounding of contraventions under FEMA, 1999

1. General

1.1 In exercise of the powers conferred by section 46 read with sub-section (1) of Section 15 of FEMA, 1999, the Central Government had formulated/notified the Foreign Exchange (Compounding Proceedings) Rules, 2024 (hereafter referred as ‘Compounding Rules, 2024’) relating to compounding of contraventions under Foreign Exchange Management Act,1999 (42 of 1999) (hereafter referred as ‘FEMA, 1999’).

1.2 In terms of Section 15 of the FEMA, 1999, any contravention under section 13 of FEMA 1999 {except that of Section 3(a) of the Act} may, on an application made by the person committing such contravention (hereafter referred as ‘applicant’), be compounded within one hundred and eighty days from the date of receipt of such application, by the officers of the Reserve Bank, as prescribed in Rule 4 of the Compounding Rules, 2024.

1.3 Accordingly, in terms of Section 13(1) of the Act, if any person contravenes any provision of FEMA, 1999, 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.

1.4 Accordingly, the facility of compounding of contraventions as specified in Section 15(1) of FEMA, 1999, has been provided to persons involved in foreign exchange transactions to reduce compliance burden as well as costs wherever violation of the Act or the Rules and Regulations issued under the Act are involved. However, compounding of contraventions of cases falling under Rule 4(2) and Rule 9 of the Compounding Rules, 2024 shall not be compounded.

2. Compounding of the contraventions by the Reserve Bank

2.1 In order to facilitate operational convenience, contraventions of following Rules and/or Regulations issued under the Act shall be compounded by the compounding authorities of the Reserve Bank at the Regional Offices.

2.2 The contraventions of Rules and/or Regulations related to Liaison/ Branch/ Project office (LO/ BO/ PO), Non-Resident Foreign Account (NRFAD) and Immovable Property (IP) shall be compounded by the compounding authorities of the Reserve Bank attached to the FED, CO, Cell at New Delhi office:

2.3 Accordingly, compounding applications related to any of the above contraventions shall be submitted by the applicants to the respective Regional Offices under whose jurisdiction they fall or to FED, CO Cell, New Delhi, as applicable. With respect to jurisdiction to be exercised by Regional Offices, any compounding application related to foreign investment-related contraventions (as mentioned hereinabove) is to be submitted to the Regional Office having jurisdiction over the registered office of the investee Indian company concerned.

2.4 For all other contraventions, applications may be submitted to the Cell for Effective implementation of FEMA (CEFA), Foreign Exchange Department, Reserve Bank of India, 11th floor, Central Office Building, Shahid Bhagat Singh Road, Fort, Mumbai – 400001.

3. Application for Compounding

3.1 An applicant may submit a compounding application, along with the relevant documents, physically or through PRAVAAH Portal of the Reserve Bank, either suo moto or based on a Memorandum of Contraventions issued by the Reserve Bank. Where an applicant, after issue of the Memorandum of contraventions issued by the Reserve Bank, does not opt for compounding within the period as may be stated in the Memorandum of Contravention, the relevant provisions of the FEMA, 1999, shall apply.

3.2 All compounding applications shall be submitted along with the prescribed fee of ₹10,000/- (plus applicable GST, which at present is 18%) by way of demand draft in favour of “Reserve Bank of India” and payable at the concerned Regional Office/ CO Cell, New Delhi/ Central Office or through National Electronic Fund Transfer (NEFT), or other permissible electronic or online modes of payment. The necessary details for making the payment through electronic mode is provided in Annexure I. It may be ensured that intimation of payment of application fee, to respective Regional Office, CO Cell, or Central Office, as the case may be, shall be made as soon as possible but not later than 2 hours from time of payment, through an email as per the template provided in Para B of Annexure I. In such cases, the compounding application must be accompanied by the payment details including the UTR number evidencing the payment of the application fee.

3.3 The format of the compounding application is appended to the Compounding Rules, 2024. Applications submitted to the Reserve Bank must contain the contact details i.e., Name of the applicant/Authorised official or representative of the applicant, telephone/ mobile number and email ID.

3.4 Along with the compounding application in the prescribed format, the applicant shall also furnish the details as per Annex-II 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, if available, and an undertaking as per Annex-III regarding enquiry/ investigation/ adjudication by Directorate of Enforcement (DOE).

3.5 A compounding application shall be returned where administrative action has not been completed by the applicant or the application is incomplete, or the application fee has not been paid by the applicant. The application fee, if paid, shall not be returned in case of return of the compounding application. However, in case such applications are re-submitted, then the application fee need not be paid again.

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

3.7 In case of an incomplete application, wherever the applicant is allowed by the Reserve Bank to submit any necessary information or documents within a reasonable time, then the date of receipt of such information or documents, as the case may be, shall be taken as the date of receipt of the application.

4. Certain cases not eligible for compounding

4.1 In respect of a contravention committed by any person (applicant) within a period of three years from the date on which a similar contravention was committed and the same was compounded, such contraventions shall not be compounded, and the relevant provisions of the Act shall apply. Any contravention committed after the expiry of a period of three years from the date on which a similar contravention was previously compounded shall be deemed to be a first contravention.

4.2 No compounding application shall be processed unless the requisite administrative action is completed by the applicant.

Explanation: Administrative action shall mean such action as may be necessary with respect to the transactions involved in such contravention (as per Rule 8(1) of the Compounding Rules, 2024) and shall include such corrective action that shall be undertaken by the applicant to bring the transaction involved in contravention in compliance with applicable provisions of FEMA. An indicative (but not exhaustive) list of such administrative actions include:

(i) Obtaining requisite approvals/ permissions from the Government or Reserve Bank or any other statutory authority concerned, as case may be;

(ii) Unwinding/ reversing the transaction;

(iii) Repatriating the receivables due;

(iv) Compliance with pricing guidelines or submission of valuation certificate;

(v) Compliance with reporting requirements;

(vi) any other such corrective action as may be required

4.3 Contraventions of serious nature viz. transactions 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 DoE for further investigation and necessary action under the Act.

4.4 Further, in terms of the Rule 9 of Compounding Rules, 2024, transactions, in which amount involved is not quantifiable or, attracting provisions of Section 37A of the Act or, where the Adjudicating Authority has already passed an order imposing penalty under section 13 of the Act or where the DoE 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, contraventions of such transactions shall not be eligible for compounding by the Reserve Bank.

4.5 Also, in terms of Rule 4(1) of Compounding Rules, 2024, transactions involving contravention of Section 3(a) of the Act shall not be eligible for compounding by the Reserve Bank.

4.6 It is clarified that whenever a contravention is identified by the Reserve Bank or brought to its notice by the person involved in contravention, the Reserve Bank shall examine whether:

i. such contravention(s) may be compounded, and necessary compounding procedure must be followed or

ii. the issues involved are sensitive / serious in nature and, therefore, need to be referred to the DoE for adjudication or further investigation.

5. Procedure for compounding

5.1 On receipt of an application, the Reserve Bank shall examine the application based on the documents and submissions made in the application and assess whether contravention can be compounded in accordance with the Compounding Rules, 2024 and, if so, the sum involved in the contravention.

5.2 The Compounding Authority may call for any information, or any other documents relevant to the compounding proceedings. In case the contravener fails to submit the additional information/documents called for within the specified period, the application for compounding shall be liable to be returned.

5.3 The following factors, which are only indicative, shall be taken into consideration for the purpose of passing compounding order and determining amount on payment of which contravention shall be compounded:

a. Undue gains i.e., the amount of gain of unfair advantage, wherever quantifiable, made as a result of the contravention (or) economic benefits accruing to the contravener from delayed compliance or compliance avoided;

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

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

d. 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.

5.4 As per provisions under section 13 of FEMA,1999, the compounding amount can be up to three times the sum involved in the contravention. The compounding amount payable is calculated based on guidance note given below. It may, however, be noted that the guidance note is meant only for the purpose of broadly indicating the basis on which the compounding amount is derived by the compounding authorities in the Reserve Bank. The actual compounding amount payable may sometimes vary, depending on the circumstances of the case considering the factors indicated in the foregoing paragraph.

I. Guidance Note on Computation Matrix

II. The above amounts are presently subject to the following provisos, viz.

i. The compounding amount payable shall not exceed 300% of the sum involved in contravention.

ii. In case the sum involved in contravention is less than Rupees one lakh, the total compounding amount payable shall not be more than amount of simple interest @5% p.a. calculated on the sum involved in contravention and for the period of contravention in case of reporting contraventions and @10% p.a. in respect of all other contraventions.

iii. In case of paragraph 8 of Schedule I to FEMA 20/2000 RB contraventions, the compounding amount payable will be further graded as under:

a. If the shares are allotted after 180 days without the prior approval of Reserve Bank, 1.25 times the amount calculated as per table above (subject to provisos at (i) & (ii) above).

b. If the shares are not allotted and the amount is refunded after 180 days with the Bank’s permission: 1.50 times the amount calculated as per table above (subject to provisos at (i) & (ii) above).

c. If the shares are not allotted and the amount is refunded after 180 days without the Bank’s permission: 1.75 times the amount calculated as per table above (subject to provisos at (i) & (ii) above).

iv. In cases where it is established that the contravener has made undue gains, the amount thereof may be neutralized to a reasonable extent by adding the same to the compounding amount calculated as per matrix above.

v. If an applicant against whom a compounding order had been passed earlier and applicant didn’t pay the compounding amount as mentioned in such order and reapplies for compounding of contravention relating to the same transaction, the amount calculated as above may be enhanced by 50% of earlier compounding amount subject to sub-para (i) above.

III. For calculating compounding amount in respect of reporting contraventions under para I.1 of above matrix, the period of contravention may be considered proportionately {(approx. rounded off to next higher month ÷ 12) X amount for 1 year}. The total no. of days does not exclude Sundays/holidays.

6. Issue of the Compounding Order

6.1 The Compounding Authority shall pass a compounding order after affording an opportunity of being heard to the applicant as expeditiously as possible and not later than 180 days from the date of receipt of such compounding application by Reserve Bank and complete in all respects, 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.

6.2 If the applicant opts for the personal hearing, the Reserve Bank would encourage the applicant to appear either personally or through a virtual mode rather than being represented / accompanied by legal experts / consultants, as compounding is a voluntary process and only for admitted contraventions. Appearing for or opting out of personal hearing does not have any bearing whatsoever on the compounding amount that may be specified in the compounding order. If the applicant does not opt for personal hearing or absents on the day of hearing, Compounding Authority may pass the order based on available information/ documents.

6.3 The Compounding Order shall specify the provisions of the FEMA, 1999 or any rule, regulation, notification, direction, or order issued in exercise of the powers under FEMA, 1999 in respect of which contravention has taken place along with details of the contravention.

6.4 One copy of the compounding order shall be provided to the applicant and another copy shall also be provided to the Adjudicating Authority, where the compounding of any contravention is made after making of a complaint under sub- section (3) of section 16 of the FEMA, as the case may be.

6.5 The summary information about the compounding orders passed on or after March 01, 2020, shall be hosted on the Reserve Bank’s website (www.rbi.org.in) in the following format:

7. Payment of the amount for which contravention is compounded.

7.1 The compounding amount as specified in the compounding order shall be paid by way of demand draft in favour of the “Reserve Bank of India” or National Electronic Fund Transfer (NEFT), or Real Time Gross Settlement (RTGS), or such other permissible electronic or online modes of payment within 15 days from the date of the order of compounding of such contravention. The manner in which the demand draft has to be drawn and deposited/ details of bank account for transferring through electronic mode of payment shall be indicated in the compounding order. It may be ensured that intimation of payment of amount for which contravention is compounded shall be made as soon as possible, but not later than 2 hours from time of payment in the template provided in Para B of Annexure I.

7.2 The provisions of Compounding Rules, 2024, do not confer any right to the contravener, after a compounding order is passed, to seek to withdraw the order or to hold that the compounding order is void or request review of the order passed by the Compounding Authority.

7.3 In case of failure to pay the sum compounded within the time specified in the compounding order and Compounding Rules, 2024, it shall be deemed that the contravener had never made an application for compounding of any contravention under these Rules.

7.4 In respect of the contraventions of the FEMA, 1999 which are not compounded by the Compounding Authority, the provisions of the Act for contravention shall apply to such person.

7.5 On realization of 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.

Appendix

List of A.P. (DIR Series) Circulars superseded.