- The provisions of Section 15 of FEMA permit compounding of contraventions and empowers Reserve Bank of India (“RBI”) to compound any contravention, except under section 3 (a) of FEMA on an application made by the person committing such contravention. In order to simplify the procedures for compounding, the Government of India notified Foreign Exchange (Compounding Proceedings) Rules, 2000 (“Rules”).
- The compounding of the contravention under FEMA, 1999 was implemented by the RBI by putting in place the simplified procedures for compounding with effect from February 1, 2005. In order to further rationalize and streamline the process and procedure for compounding and to enhance transparency and effect smooth implementation of the compounding process, RBI has now recently issued circular A.P. (DIR Series) Circular No. 56 dated June 28, 2010 superseding its earlier circular A.P. (DIR Series) Circular No. 31 dated 1 February 2005 on directions contained in compounding of contraventions.
Application for compounding
- The application of compounding shall be examined by the RBI on nature of contravention, keeping in view, the following indicative points:
– Whether the contravention is technical and/or minor in nature and needs only an administrative cautionary advice;
– Whether the contravention is serious and warrants compounding of the contravention; and
– Whether the contravention, prima facie, involves money-laundering, national and security concerns involving serious infringements of the regulatory frame work.
- The compounding authority is required to pass an order within 180 days from the receipt of the completed application for compounding.
Scope and manner of compounding
- The compounding authority exercise jurisdiction in respect of the contravention alleged to have committed in relation to any provision of the FEMA, 1999.
- The compounding authority while passing compounding order shall consider following factors, which are only indicative for passing compounding order and adjudging the quantum of sum on payment of which contravention shall be compounded:
– The amount of gain of unfair advantage, wherever quantifiable, made as a result of the contravention;
– The amount of loss caused to any authority/agency/exchequer as a result of the contravention;
– Economic benefit accruing to the contravener from delayed compliance or compliance avoided;
– The repetitive nature of the contravention, the track record and/ or history of non-compliance of the contravener;
– Contravener’s conduct in undertaking the transaction and in disclosure of full facts in the application and submission made during personal hearing; and
– Any other factor as considered relevant and appropriate.
Payment of amount for which contravention is compounded
- On issuance of compounding order by compounding authority the sum for which contravention is compounded is required to be paid by contravener within 15 days from the date of order of compounding of such contravention. In case of failure to pay the sum compounded within specified time, it shall be deemed that contravener has never made an application for compounding of any contravention.
Prerequisites for compounding process
- Contraventions relating to any transaction where proper approvals or permissions are required from the Government or any other statutory authorities, such contraventions would not be compounded unless the required approvals are obtained from the concerned authorities.
- Contraventions which are willful, intentional or having malafide and fraudulent intentions shall not be considered for compounding in terms of the Rules.
- Cases of contravention, such as, having a money laundering angle, national security concern and/or involving serious infringements of the regulatory framework or where the contravener fails to pay the sum for which contravention was compounded within the specified period shall be referred to the Department of Enforcement (“DOE”) or to any other agency, as deem necessary for further investigation and necessary action under FEMA, 1999 or The Prevention of Money Laundering Act, 2002.
- The RBI generally advises the person of their choice and option to make an application for compounding as and when the contravention comes to its notice. Where no application for compounding is made matter may be brought to notice of DOE for further action.
Conclusion:-One hopes that the above directions of the RBI would achieve the proposed objective of rationalization and streamlining of the process and the procedure for compounding and simultaneously enhance transparency and effect smooth implementation of the compounding process.