Foreign Exchange Management Act (FEMA/ Act), 1999 provides for compounding of contraventions done under the Act.

Any contravention of the Act, any rules, regulations, notification, orders, directions, circulars issued thereunder can be compounded. Compounding is the voluntarily admitting the contravention, pleading guilty and seeking redressal.

The Reserve Bank has the power to compound any contravention under the Act under section 13 of the Act except the contraventions mentioned under section 3(a). It compounds the contravention for a specified sum after offering an opportunity of personal hearing to the applicant.

However, RBI views the wilful, malafide and fraudulent transactions seriously and does not compound. Further, in terms of the proviso to rule 8 (2) of Foreign Exchange (Compounding Proceedings) Rules, 2000 inserted vide GOI notification dated February 20, 2017, 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, such cases will not be compounded by the Reserve Bank.

Any individual or corporate, who contravenes any provision of the FEMA, 1999 [except section 3(a)] or contravenes any rule, regulation, notification, direction or order issued, may apply for compounding. The compounding may be applied suo moto or on making aware of the contravention by RBI, or any other authority or by any other means.

Once the application is made for compounding with requisite documents and fee, the Compounding Authority gives an opportunity of personal hearing, which is optional to attend. The Compounding Authority passes an order indicating details of the contravention and the provisions of FEMA, 1999 that have been contravened. The sum payable for compounding the contravention is indicated in the compounding order. The contravention is compounded by payment of the amount imposed.

Compounding orders passed on or after June 1, 2016 are be published on the RBI’s website on monthly basis. The link to download the Compounding Orders is – https://m.rbi.org.in/scripts/Compoundingorders.aspx

Below are summery of some of the recent compounding orders. This has been compiled to give an idea about the type of contraventions generally committed by individuals/ corporates and being compounded by the Compounding Authority of RBI. The compounding orders are in public domain and can be downloaded from the link as given in the above para.

Compounding Order No. and date Nature and Brief of contravention Relevant provision under FEMA Amount imposed under Compounding
CA No. NDL 358/2018 Date- 3/05/2019 (i) Delay in reporting foreign inward remittance received for issue of shares, and

(ii) Delay in filing Form FC-GPR after issue of shares.

Brief- The applicant company had reported the remittances amounting to Rs. 138,00,000 received from its foreign investor, Dubai, on three occasions with delay ranging from 8 months and 24 days to 1 year beyond the prescribed period, (The reporting of remittance in ARF within 30 days is done away with now)

The applicant had reported the allotment of shares to its foreign investor on three occasions with delay ranging from 8 months and 25 days to 11 months and 23 days beyond the prescribed period.

An Indian company issuing shares or convertible debentures in accordance with these Regulations should report to the Reserve Bank of India as per the prescribed procedure not later than 30 days from the date of receipt of the amount of consideration

Paragraph 9(1)(A) of Schedule 1 to FEMA 20/2000-RB (the provision is not applicable now).

An Indian company issuing shares or convertible debentures or warrants in accordance with these Regulations shall submit through AD bank to the Regional Office concerned of the Reserve Bank under whose jurisdiction the Registered office of the company operates, not later than 30 days from the date of issue of shares or convertible debentures or warrants, a report in Form FC-GPR together with documents prescribed therein.

Paragraph 9(1)(B) of Schedule 1 to FEMA 20/2000-RB

₹ 42,350
C.A. BGL 306/2018 dated-

30/10/2018

Delay in allotment of shares to the foreign investors, persons resident outside India, beyond 180 days of receipt of the inward remittances.

Brief- The company had received inward remittances of                               Rs. 4,96,321.58, and Rs. 3,678.84, amounting to Rs. 5,00,000.42, from the foreign investor in USA, on April 05, 2016, and October 13, 2016, respectively.

Company allotted 50,000 equity shares for a total consideration of Rs.5,00,000.00, on May 26, 2017, to the foreign investor, beyond 180 days from the date of receipt of inward remittances, with prior approval of Reserve Bank of India,

 

if the shares are not issued within 180 days from the date of receipt of the inward remittance, the amount of consideration so received shall be refunded or shares to be issued to the person concerned, provided the Reserve Bank may, on an application made to it and for sufficient reasons permit to issue shares or refund the amount of consideration received towards issue of security.

Paragraph 8 of Schedule 1 to Notification No. FEMA 20/ 2000-RB, read with A.P. (DIR Series) Circular No.20 dated December 14, 2007.

(Now the time limit is 60 days for allotment and 15 days from the 60 days for refund, from the date of the remittance). 

₹ 31,500
CA No. 4868/2019

Date- 11/07/2019

Divestment with write off without fair value.

Brief-The applicant company had set up a WOS abroad and invested in the share capital of the WOS. As the business was not successful, the WOS was wound up with write off without arriving at the valuation of the shares.

The Indian party can transfer shares held in an overseas entity, to another Indian Party or to a person resident outside India, any security held by it in a JV or WOS outside India subject to the condition that- if the shares are not listed on a stock exchange and the shares are disinvested by a private arrangement, the share price is not less than the value certified by a CA/CPA as the fair value of the shares based on the latest audited financial statements of the JV/WOS.

Regulation 15(i) and 16((1)(iii) of Foreign Exchange Management (Transfer or issue of any Foreign Security) Regulations, 2004, notified vide Notification No. FEMA 120/2004-RB dated July 7, 2004 as amended from time to time.

₹ 54,764
CA No. 4852/2018    Date-

21/06/2019

Transfer of foreign security without sale to wife without RBI approval.

Brief– The applicant, a resident individual, worked with an Indian company and was rewarded 8000 shares of its overseas entity in London, to be issued in two tranches. The consideration for the reward of shares equivalent to face value INR 17,532 was deducted from his salary. As per the option available in the reward plan, the applicant named his wife as nominee for 3,000 shares out of 4,000 shares to be received in the second tranche and subsequently shares were allotted in the name of the wife.

Since, the nomination was done without the prior permission of the RBI, it is in contravention of the Regulations.

A person resident in India may transfer the foreign security acquired only by way of sale.

Regulation 22 (4) read with Regulation 3 of the FEM (Transfer or issue of any Foreign Security) Regulations, 2004 notified vide notification no. FEMA 120/2004-RB dated 7/07/2004.

₹ 16,108
 C.A. No. BGL410/2019 Date-

6/08/2019

 Allotment of shares to persons resident outside India, prior to receipt of inward remittances

Brief– The Company had allotted 250,000 shares worth Rs. 25,00,000 in two tranches. However the amount of consideration for the allotment of the shares was received after the date of allotment of shares.

Capital instruments shall be issued to the person resident outside India making such investment within sixty days from the date of receipt of the consideration.

Paragraph 2 of Schedule 1 to Notification No. FEMA 20 (R)/2017- RB, dated November 07, 2017.

₹ 62,500
C.A. No. 928/2019

Date- 27/08/2019

Transfer of shares from resident to non-resident by way of gift without Reserve Bank’s approval.

Brief- The applicant, an individual is a resident shareholder in a private limited company in India. He transferred 180 equity shares of face value ₹ 10 each to non-resident, at a notional value of ₹ 10,626 per share by way of gift without Reserve Bank’s approval.

A person resident in India who proposes to transfer to a person resident outside India any security by way of gift shall make an application to Reserve Bank for its approval.

Regulation 10A(a)(i) of Notification No. FEMA 20/2000-RB.

₹ 22,925
C.A. BGL 378/2019

Date-17/06/2019

Delay in refund of share application money and delay in allotment of shares beyond 180 days from the date of receipt of inward remittance, to a person resident outside India

Brief- The applicant had received funds towards share application money from the non-resident investors.

The company had received inward remittances amounting to ₹19,26,963.50, in three tranches. The company had allotted 250 equity shares worth ₹19,23,000.00, on June 22, 2017, against the amount of consideration of ₹19,26,963.50, and leaving behind an excess share application money of ₹3,963.50. Subsequently, the excess amount of ₹3,963.50, was refunded to the investor on November 09, 2018, beyond the stipulated period of 180 days from the date of inward remittance, with prior approval of Reserve Bank of India. The approval was given vide Reserve Bank’s Letter FE.BG.FID.No. 1257/21.10.304/2018-19, dated October 26, 2018.

Delay in allotment of shares and delay in refund of excess share application money, beyond 180 days from the date of receipt of inward remittance.

Paragraph 8 of Schedule 1 to Notification No. FEMA 20/2000-RB.

(Now the time limit is 60 days for allotment and 15 days from the 60 days for refund, from the date of the remittance).

₹ 137
C.A.111/2019 Dated- 9/08/2019 Delay in refund of share application money beyond the stipulated 75 days of the receipt of inflow to a person resident outside India

Brief– The applicant had received foreign inward remittances towards subscription to equity shares from a foreign investor, but did not allot any share to the foreign investor and returned the money.

The inward remittance of Rs.  1,92,863 was refunded with a delay of 217 days.

If the capital instruments are not issued by the Indian company within sixty days from the date of receipt of the consideration, the amount so received has to be refunded to the person concerned by outward remittance through banking channels or by credit to his NRE/ FCNR(B) accounts, as the case may be, within fifteen days from the date of completion of sixty days.

Para 2(2) of Schedule 1 to Notification No. FEMA 20(R)/2017-RB dated November 7, 2017.

₹ 50,643
 C.A. No.93 /2019

Dated- 20/05/2019

 Acquisition of immovable properties (agricultural land) in India by an NRI without RBI permission.

Brief– a Non-resident Indian acquired six pieces of agricultural land in Gujarat between September 11, 2003 and October 19, 2007 by way of purchase for a total consideration of ₹ 9,75,000, without obtaining prior permission of Reserve Bank of India. And the properties were transferred by him on October 3, 2018.

No person resident outside India shall transfer any immovable property in India, provided that the Reserve Bank may, for sufficient reasons, permit the transfer, subject to such conditions as may be considered necessary.

8 of Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000 notified vide Notification No. FEMA. 21/2000-RB dated 3rd May 2000, as amended from time to time, read with Regulation 3(a) of Notification No. FEMA.21 /2000-RB dated May 03, 2000.

A person resident outside India who is a citizen of India may acquire any immovable property in India other than agricultural / plantation / farm house.

Regulation 3(a) of Notification No. FEMA.21 /2000-RB dated May 03, 2000.

₹ 29,25,000
CA No 4890 / 2019.

Dated- 11/07/2019

 (i) Delay in reporting the issuance of shares under the Employee Stock Options Plans (ESOP) beyond the stipulated time period, and

(ii) Delay in reporting the issuance of bonus shares beyond the stipulated time period.

Brief– The applicant company issued 35000 shares under ESOP (value – Rs. 1,96,00,000/-) on 20/05.2014, to foreign nationals/ Non-resident Indians (NRIs), but delayed the reporting of the same, beyond the stipulated time period.

Further, the applicant delayed in reporting the issuance of bonus shares (total value – Rs. 40,12,500/-) beyond the stipulated time period,

In terms of Regulation 8(3) of Notification No. FEMA. 20/ 2000-RB, which dealt with ‘Issue of shares under Employees’ Stock Options Scheme to persons resident outside India’, as then applicable, “The issuing company shall furnish to the Reserve Bank, within thirty days from the date of issue of shares under the scheme, a report…..”.

Regulation 6B of the above mentioned Notification, “A company issuing right shares or bonus shares or warrants in terms of these Regulations shall report to the Reserve Bank in Form FC-GPR as stipulated in Paragraph 9(1)(B) of Schedule 1 to these Regulations”.

₹ 24,750
 C.A. No.90 /2019                  dated- 26/02/2019 Acquisition of immovable property by non-resident foreign national in India without RBI permission.

Brief– The applicants were non-resident foreign citizens of non-Indian origin at the time of acquisition of the property. They acquired a plot and residential building on the same plot in Kerala.

The applicants were advised by RBI, Kochi vide letter no. KOC.FED.NRFAD / 1125 / 65.27.015/2016-17 dated October 5, 2016 to sell the property under reference to a person resident in India within six months. As advised, the property under reference was sold on April 19, 2017 for a total consideration of   ₹ 75,00,000 to a company incorporated in India.

No person resident outside India shall transfer any immovable property in India, Provided that the Reserve Bank may, for sufficient reasons, permit the transfer, subject to such conditions as may be considered necessary.

Regulation 8 of Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000 notified vide Notification No. FEMA. 21/2000-RB dated May 03, 2000 as amended from time to time.

₹ 30,00,000
 CA No. NDL 393/2019. Dated- 15/07/2019 Delay in reporting transfer of shares from Non-Resident to Resident in Form FC-TRS.

Brief- The applicant, a resident trust, had acquired 380 equity shares of an Indian company from a company in Mauritius, a non-resident company on December 29, 2016 for a consideration of Rs. 380/- paid on December 29, 2016. The applicant reported the transfer of the said shares in Form FC-TRS on September 26, 2018. There was, thus, a delay of 1 year and 7 months in reporting the transfer of shares beyond the prescribed time period of 60 days from the date of payment of the amount of consideration.

 A person resident outside India, may transfer share or convertible debenture of an Indian company, without the prior permission of the Reserve Bank, by way of sale, to a person resident in India subject to the adherence to pricing guidelines, documentation and reporting requirements for such transfers as may be specified by Reserve Bank from time to time. And, in terms of paragraph 10 of Schedule 1 to FEMA 20/2000-RB, in case of transfer of shares of an Indian company by way of sale from a person resident in India to a person resident outside India or vice versa, the transferor/ transferee, resident in India, shall submit to the AD bank a report in the Form FC-TRS, as specified by the Reserve Bank from time to time, within 60 days from the date of receipt or payment of the amount of consideration. The onus of submission of the Form FC-TRS within the specified time shall be on the transferor/ transferee, resident in India.

Regulation 10B(2) of FEMA 20/2000-RB.

₹ 30
C. A. 915/2019 Dated- 27/08/2019 (i) Prior approval was not sought from Reserve Bank in transfer of shares from resident to non-resident by way of gift.

(ii) The face value of the shares transferred by way of gift exceeds 5% of the paid up capital of the Indian Company.

(iii) The value of security to be transferred by the donor together with any security transferred to any person residing outside India as gift in the calendar year exceeds the rupee equivalent of USD 25000/-

Brief-The applicant, an individual is a resident shareholder in the private limited company in India.

The applicant transferred by way of gift 82000 equity shares of face value ₹100/- each to the Non-Resident, at a notional share value of ₹190.93/- without Reserve Bank’s approval. Total consideration involved was Rs. 1,56,56,260 and the date of transfer being 16/05/2010.

A person resident in India who proposes to transfer to a person resident outside India any security by way of gift shall make an application to Reserve Bank for its approval.

Regulation 10A(a)(i) of Notification No. FEMA 20/2000-RB.

A person resident in India who proposes to transfer to a person resident outside India any security by way of gift shall make an application to Reserve Bank and Bank may grant such approval on being satisfied of the condition that the gift does not exceed 5% of the paid-up capital of the Indian company.

Regulation 10A(a)(ii)(b) of Notification No. FEMA 20/2000-RB.

A person resident in India who proposes to transfer to a person resident outside India any security by way of gift shall make an application to Reserve Bank and Bank may grant such approval on being satisfied of the condition that the value of security to be transferred by the donor together with any security transferred to any person residing outside India as gift in the calendar year does not exceed the rupee equivalent of USD 25000.

10A (a)(ii)(e) of Notification No. FEMA 20/2000-RB. 

₹ 10,01,560
CA No. 4910 / 2019 date- 26/07/2019 Where a person committing a contravention of any of the provisions of this Act or of any rule, direction or order made there under is a company, every person who, at the time the contravention was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company as well as the company, shall be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly.

Brief- The applicant was a Director of an Indian company during the relevant period when the company had failed to comply with the conditions which were stipulated for receiving foreign investments and failure to bring the shareholding in line with Regulation 5(1)(i) read with para F.8 of Annex B to Schedule 1 of Notification No. FEMA 20/2000-RB (with respect to four shareholders – the total amount of contravention being Rs. 11,56,28,928) within the time period given by Foreign Investment Promotion Board (FIPB), Ministry of Finance, Government of India. This non-adherence resulted in contravention of the provisions contained in the above mentioned Regulation by the company, for which it was compounded vide Compounding Order dated January 23, 2018.

Where a person committing a contravention of any of the provisions of this Act or of any rule, direction or order made there under is a company, every person who, at the time the contravention was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company as well as the company, shall be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly.

Section 42(1) of FEMA, 1999

₹ 36,563
CA No 4871 / 2019

Dated- 10/07/2019

Extending loan without any equity contribution, to overseas Joint Venture (JV), without prior approval of the Reserve Bank of India,

Brief- The applicant company had set-up an overseas JV, in Mozambique, under ODI on April 22, 2008. The applicant company remitted an amount of USD 275,000 (INR 1,19,15,500) in three tranches from 26.02.2008 to 26.09.2008, as project advance. Subsequently, in June 2009, the applicant company decided to quit the project due to uncertainty around allotment of land. No shares were issued against the remittances sent, and these remittances were treated as loans/ advances by the applicant company. The money has now been brought back into India and the UIN has been closed on 07.05.2019.

An Indian Party may extend a loan or a guarantee to or on behalf of the Joint Venture/ Wholly Owned Subsidiary abroad, within the permissible financial commitment, provided that the Indian Party has made investment by way of contribution to the equity capital of the Joint Venture.

Regulation 6(4) of Notification No. FEMA. 120/2004-RB, as then applicable.

₹ 1,39,366
C.A. No. 85 /2019 dated- 18/03/2019 Transfer of funds from NRE account to ordinary savings account.

Brief- The applicant, being an individual is an OCI and a person non-resident in India The applicant opened and maintained ordinary saving bank account with ICICI Bank ltd and Prime Co-operative Bank Limited. Being a non-resident he is not eligible to open and maintain an ordinary saving account as per extant FEMA guidelines.

The applicant has granted a loan of ₹ 1,39,01,100/- to his friend, a person resident in India in 5 stances starting from 04.01.2013 to 04.09.2014, from his ordinary savings account maintained with ICICI Bank, the amount represented either transfer of funds from his NRE Account maintained with HDFC Bank or amount received from LIC on his father’s death.

For this purpose the applicant has transferred ₹ 85,01,100/- from his NRE Account maintained with HDFC Bank to his ordinary savings account maintained with ICICI Bank.

He also charged 6% interest per annum and earned a total interest of Rs.  35,94,988/-

Permissible debit of NRE account is transfer to NRE / FCNR (B) accounts of the account holder or any other person eligible to maintain such account are stated in Regulation 4(C) of Schedule 1 to Notification No. FEMA. 5/2000-RB dated 3rd May 2000.

Regulations relating to borrowing and lending in rupees between a person resident in India and a person resident outside India contravened.

Regulation 4(i) and (ii) of Notification No. FEMA. 4/ 2000 -RB dated 3rd May 2000 as updated upto 20.09.2013.

₹  113,758

Source- rbi.org.in

Disclaimer: This article has been prepared in good faith on the basis of information available on the date of publication without any independent verification. The Author does not guarantee or warrant the accuracy, reliability, completeness or currency of the information in this publication nor its usefulness in achieving any purpose. The Author will not be liable for any loss, damage, cost or expenses incurred or arising by reason of any person using or relying on information in this publication. Readers are requested to consult a professional before taking any action.

(Author – Sonika Bharati, FCS, LLB, is a Company Secretary in Practice from Delhi and can be contacted at sonika@akgadvisory.com)

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