FEMA Compounding Regulations and Process

Introduction to Compounding

Compounding of contraventions is a voluntary process where an individual or entity admits a contravention under any provision of law and seeks to settle the matter by paying the compounding fees, thus avoiding lengthy legal proceedings and hefty penalties which arise due to the committed contraventions.

FEMA and the Compounding Rules

The Foreign Exchange Management Act 1999 (“FEMA”) lays down provisions for the regulation of foreign exchange in India. Section 15 of FEMA allows for the compounding of contraventions. On 12^th September 2024, the Central Government came up with the Foreign Exchange (Compounding Proceedings) Rules, 2024 in supersession of the earlier Foreign Exchange (Compounding Proceedings) Rules, 2000 to govern the process of compounding under FEMA. These rules detail about the compounding authorities, powers of the compounding authorities, the procedure of compounding and the post-compounding procedures and other allied matters.

Compounding Authorities (“CA”) and their Powers

The Government of India, in consultation with the Reserve Bank of India (RBI), has placed the responsibility of administering the compounding of contraventions with the RBI, except for violations under Section 3(a) (which covers hawala transactions and other severe violations) that are dealt with the Directorate of Enforcement (DoE).

1. Reserve Bank of India (“RBI”):

The RBI is authorized to compound contraventions of provision under any section of FEMA except Section 3(a). The RBI’s compounding powers are determined based on the amount involved in the contravention as follows:

2. Directorate of Enforcement (DoE):

The DoE handles contraventions specifically under Section 3(a) of FEMA. The DoE’s compounding powers are determined based on the amount involved in the contravention as follows:

Process of Compounding:

1. Submission of Application: The applicant must submit an application along with supporting documents in the prescribed Form (which is provided as annexure to the said rules) to the Director, DoE, New Delhi along with a fee of Rs.10,000/- plus GST, as applicable, by demand draft, or National Electronic Fund Transfer (NEFT), or other permissible electronic or online modes of payment, in favour of the CA.

2. Examination by the Compounding Authority (CA): The CA will assess whether the contravention is compoundable and determine the amount involved and they may, in addition to the particulars provided in the prescribed form, call for any information, record or any other documents relevant to the compounding proceeding to be placed before it and may, if necessary, require the applicant to take such action as may be necessary with respect transactions involved in the contravention.

An applicant may choose not to attend a personal hearing, but it is encouraged by the RBI to appear in person instead of being represented by legal professionals.

If further investigation is needed, the matter may be referred to the Directorate of Enforcement (DoE) or relevant agencies such as the Anti-Money Laundering Authority under the Prevention of Money Laundering Act (PMLA), 2002.

3. Timeframe for Compounding: The CA shall issue a Compounding Order within 180 days of receiving a completed application and affording an opportunity of being heard to the applicant. One copy each of the compounding order shall be provided to the applicant and the Adjudicating Authority.

Every compounding order shall specify the provisions of the Act or the rules or the regulations, directions, requisitions or orders made thereunder in respect of which contravention has taken place along with details of the alleged contravention and shall be dated and signed by the compounding authority under his seal.

4. Payment of amount compounded: The sum for which the contravention is compounded as specified in the compounding order shall be paid by demand draft or (NEFT), or Real Time Gross Settlement (RTGS), or such other permissible electronic or online modes of payment, in favour of the CA within 15 days from the date of the compounding order. Upon payment, the RBI will issue a certificate confirming the settlement of the compounding amount. If an application is returned due to any reason, the compounding fee will be refunded, with the amount credited to the applicant’s bank account through NEFT.

It is pertinent to note that:

• Once a contravention is compounded, no further proceedings will be initiated or continued against the contravener
• Contraventions committed within three years of a previously compounded violation are not eligible for compounding.
• In case a person fails to pay the sum compounded he shall be deemed to have never made an application for compounding of any contravention.
• Contraventions involving transactions where government or statutory approvals were not obtained cannot be compounded unless the necessary approvals are secured.

Analysis of Case Law

• In the matter of UASC Services (India) Private Limited, The applicant had filed the compounding application to RBI for compounding the following contraventions of the provisions of FEMA and the regulations issued thereunder:

a. Delay in reporting receipt of foreign inward remittance towards subscription to equity.

b. Delay in filing Form FC GPR after issue of shares to person resident outside India.

c. Delay in filing ‘Annual Return on Foreign Liabilities and Assets’ (FLA Returns).

• The applicant was given an opportunity for personal hearing, for further submission in person and/or for producing documents in support of the application.
• The applicant appeared for personal hearing where the Director of the Company represented the applicant in the office of the CA and admitted the contraventions for which compounding has been sought.
• During the hearing by the Compounding Authority the representative of the applicant submitted that the delay was inadvertent and unintentional. They requested that in view of the foregoing a lenient view may be taken in disposal of the application.
• The CA issued an order stating that it was persuaded to take a lenient view on the amount for which the contraventions are to be compounded and an amount of Rs. 4,90,250/- (Rupees Four Lakh Ninety Thousand Two Hundred Fifty and Zero Paise Only) was imposed on the contravener as the Compounding Amount.

Conclusion

Compounding provides a beneficial alternative to long-term legal proceedings under FEMA. It offers a clear, structured process for resolving contraventions. This approach provides a more efficient means for regulatory authorities to resolve issues, and signals the violator’s intention to rectify the contravention. It fosters trust between the violator and the authorities, showing the intention of contravener to rectify and abide by the law.

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Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement.