How do I file a Compounding of Contravention application under the FEMA Act of 1999?

1. Conceptual Framework

What does compounding of contravention means?

Compounding is the settlement of an offence committed by the contravener by imposing a monetary penalty rather than going to litigation once the contravener admits to committing the offence.

Under the FEMA Act of 1999, which section allows for the compounding of a violation application?

Section 15 of the Foreign Exchange Management Act, 1999 (42 of 1999),  permits the Reserve Bank to compound any contravention as defined under section 13 of the FEMA, 1999, except contraventions under section 3 (a) of FEMA, 1999, on an application made by the person committing such contravention.

2. Application for compounding

All application for compounding may be submitted together with the prescribed fee of Rs.5,000/- by way of a demand draft drawn in favour of “Reserve Bank of India” and payable at the concerned Regional Office/CO Cell New Delhi and by way of a demand draft in favour of “Reserve Bank of India”.

Application submitted to the Reserve Bank must contain contact detail I.e. name of applicant/ authorised official or representative of the applicant, telephone / mobile number and email ID.

The Compounding Authority shall pass an order of compounding after affording an opportunity of being heard to all the concerned as expeditiously as possible as and not later than 180 days from the date of application.

In addition to the application in the prescribed format (Annex I) as mentioned above, the applicant may further provide following information and documents:

  • Annex-II– relating to Foreign Direct Investment, External Commercial Borrowings, Overseas Direct Investment and Branch Office / Liaison Office.
  • Annex-III– An undertaking that they are not under investigation of any agency such as DoE, CBI, etc.
  • Annex-IV– A duly filled ECS mandate form.
  • A Cancelled Cheque copy
  • A copy of the Memorandum of Association and latest audited balance sheet while applying for compounding of contraventions under FEMA, 1999

3. Requirement for compounding process

When would such a contravention be not compounded?

If a person commits a contravention within three years of the date on which a similar contravention committed by him and was compounded under the Compounding Rules then it would not be compounded. However, Any contravention committed after the expiration of a three-year term from the date on which the contravention was previously compounded is considered a first contravention.

Contraventions relating to any transaction for which proper approvals or permission from the Government or any statutory authority concerned, as the case may be, have not been acquired will not be compounded until the required approvals have been obtained from the concerned authorities.

Cases of serious contravention, such as those suspected of money laundering, terror financing, or affecting the nation’s sovereignty and integrity, or where the contravener fails to pay the sum for which the contravention was compounded within the specified period in terms of the compounding order, shall be referred to the Directorate of Enforcement for further investigation or to any other agencies, for necessary action as deemed fit.

No breach can be compounded under Rule 11 of the Foreign Exchange (Compounding Proceedings) Rules, 2000 if the Directorate of Enforcement has adjudicated the matter and an appeal has been lodged under Section 17 or Section 19 of FEMA, 1999. In the undertaking that must be submitted with the compounding application as per Annex III, the petitioner must confirm that they have not filed any appeal under section 17 or section 19 of FEMA, 1999.

In this connection, it is clarified that whenever a contravention is identified by the Reserve Bank or brought to its notice by the entity involved in contravention, the Bank shall examine:

(I) Whether it is material and, hence is required to be compounded for which the necessary compounding procedure has to be followed or

(II) Whether the issues involved are sensitive / serious in nature and, therefore, need to be referred to the Directorate of Enforcement (DOE).

4. Procedure and Scope:

What is the procedure of compounding?

Step 1: Examination of application

Step 2: Calling of any other relevant information, record or documents

Step 3: For the purpose of passing a compounding order and determining sum on payment on which the contravention shall be compounded, the following elements, which are just indicative, may be taken into  account:

  • 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 benefits 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 submissions made during the personal hearing; and any other factor as considered relevant and appropriate.

5. Computation Matrix:

How will the amount of contravention be computed?

Type of Contravention Amount of Contravention
1. Reporting Contravention

A. FEMA 20Para 9(1)(A), 9(1)(B), part B of FC(GPR), FCTRS (Reg. 10) and taking on record FCTRS (Reg. 4)

B. FEMA 3Non submission of ECB statements

C. FEMA 120Non reporting/delay in reporting of acquisition/setup of subsidiaries/step down subsidiaries /changes in the shareholding pattern

D. Any other reporting contraventions (except those in Row 2 below)

E. Reporting contraventions by LO/BO/PO

Rs.10,000/- (Fixed and applied once for each contravention in a compounding application) +

Variable:

1. Up to 10 Lakh – 1,000 (Per Year)

2. 10 Lakh – 40 lakh – 2,500 (Per Year)

3. 40 Lakh – 100 Lakh – 7,000 (Per Year)

4. 1 Crore – 10 Crore – 50,000 (Per Year)

5.  10 Crore – 100 Crore – 1,00,000 (Per Year)

6. Above 100 Crore – 2,00,000 (Per Year)

In case of Project Office, the amount imposed shall be calculated on 10% of total project cost.

2. AAC/ APR/ FLAR/ Share certificate delays

In case of non-submission/ delayed submission of

APR/ share certificates (FEMA 120)

AAC (FEMA 22)

FCGPR (B)

FLA Returns – FEMA 20 / FEMA 20 (R) / FEMA 120/FEMA 395

Rs. 10,000 per delayed return

For 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/Refund

Para 8 of FEMA 20/2000-RB (non-allotment of shares or allotment/ refund after the stipulated 180 days)

B. O/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, – including all contraventions of FEMA20(R)/2017/NDIR, 2019/FEMA 395/ 2019/, except contraventions pertaining to FLA returns and corporate guarantees 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.

1. It should not exceed 300% of the amount of contravention. The above amount is currently subject to the following conditions, viz.

2. If it is < Rs.1,00,000, total amount imposed should not be more than amount of simple interest @ 5% p.a. calculated on the amount of contravention and for period of contravention in case of reporting contravention and @10% p.a. in respect of all other contravention.

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

4. Shares allotted after 180 days without prior approval of RBI – 1.25 *Amount calculated as per table above (subject to provisos at (i) & (ii) above).

5. Shares not allotted and amount refunded after 180 days with bank permission – 1.50 * amount calculated as per table above (subject to provisos at (i) & (ii) above).

6. Shares not allotted and amount refunded after 180 days without bank permission – 1.75 * amount calculated as per table above (subject to provisos at (i) & (ii) above).

7. 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 chart.

8. If party is applying for similar contravention again, the amount calculated as above may be enhanced by 50%.

6. Compounding Order

When will RBI will issue Compounding Order?

RBI will issue Compounding Order  within 180 days from the date of application 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.

7. Payment

When will I pay the contravention amount?

The sum for which the contravention is compounded as specified in the order of compounding shall be paid by way of demand draft in favour of the “Reserve Bank of India” 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 shall be indicated in the compounding order.

Author Bio

Qualification: CS
Company: Prachi Prajapati & Associates
Location: Ahmedabad, Gujarat, India
Member Since: 01 Sep 2021 | Total Posts: 1
Garvi Shah is an associate member of the Institute of Company Secretaries of India for 4 years and a Bachelor of Commerce from Gujarat University. She started her internship in 2014 with Chetan Shah & Associates. After becoming CS, she first got associated with legal start-up Legalwiz.in for View Full Profile

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