Foreign Exchange Compounding Proceedings Rules: 2024 vs 2002

Deciphering Distinctions Between Foreign Exchange (Compounding Proceedings) Rules of 2024 And 2002

Introduction

Compounding of contraventions under FEMA Act, 1999 refers to the settlement of the offences committed under FEMA such as violating the provisions or exceeding the prescribed limits by the contravener by imposing monetary penalty instead of going to tedious court procedure or litigation. This is a voluntary process where an individual pursues compounding of an admitted contravention of FEMA. There are instances where the contraventions cannot be compounded, for instance, If someone commits a contravention within three years of the date that a similar contravention of his was compounded under the compounding rules, the applicable provisions will apply and the contravention will not be compounded. On the other hand, a contravention that is committed after three years have passed since the initial compounding date will be considered a first contravention[1]. Similarly, those contraventions that relates to a transaction for which proper approval or permission from the govt. or any statutory authority have not been acquired, such contraventions may not be compounded until the required approval is obtained from concerned authorities.[2]

Provisions of Foreign Exchange Management Act, 1999

Section 15, FEMA, 1999 provides for compounding of contraventions.[3] Accordingly, persons involving in contraventions of the provisions of FEMA Act and are liable for the penalties mentioned under Section 13 may, make an application for compounding and the Director of Enforcement, along with other officers from the Directorate of Enforcement and the Reserve Bank, shall compound it within 180 days from date of receipt of application. However, officers of the RBI cannot compound the contraventions mentioned in Section 3(a) i.e., No one who is not an authorized person can deal in or transfer any foreign securities to another individual.[4] Reading Section 46(1) and (2)(b) empowers the central government to make rules regarding the manner in which the contravention may be compounded.[5] Accordingly, the Foreign Exchange (Compounding Proceedings) Rules, 2000 were made which are now replaced by the new Rules of 2024.[6]

Analyzing the Differences Between the Previous and the New Rules

The Foreign Exchange (Compounding Proceedings) Rules, 2024 supersedes the Rules of 2000.

Rule 2 provides for definitions which remains the same as that of the previous rules except clause (g) is now made sub-rule (2) that “words and expressions used in these rules and not defined but defined in the Act, shall have the meanings respectively assigned to them in the Act.”[7]

Compounding Authorities under Rule 3 remains the same as previous rules.[8]

Rule 4 is one of the important highlights of the 2024 Rules as it increases the contravention amounts for which the compounding authorities (specifically that of RBI) can take action. Now, for an officer not below the rank of Assistant General Manager of the Reserve Bank can compound the contravention amount up to 60 lakhs as compared to the earlier 10 lakhs. For an officer not below the Deputy General Manager, matters that can be undertaken shall be up to 2.5 crores (earlier it was above 10 lakhs up to 40 lakhs). an officer not below the rank of the General Manager of the Reserve Bank shall be responsible in matters where the amount exceeds 2.5 Cr till 5 Cr (earlier it was above 40 lakhs up to 1 Cr) and an officer not below the rank of the Chief General Manager of the Reserve Bank shall be the compounding authority for contravention wherein the contravention sum involved is above 5 Crore rupees (earlier it was above 1 Cr).[9]

Additionally, the sub-rule (4) of Rule 4, increases the fees for filing the application forms from Rs. 5,000/- to Rs. 10,000/- plus GST and mode of payment does not only include demand draft, but also National Electronic Fund Transfer (NEFT), other permissible electronic or online modes of payment.[10] Rule 5 remains the same except a proviso to clause (e) of rule 5 (If the amount involved in a contravention is not quantifiable, such shall not be compounded)[11] has been removed and added to a new rule 9 list of non-compoundable contraventions. Rule 6 remains the same however the term inquiry is changed to inquiry and further inquiry for adjudication of contravention.[12] Rule 7 remains the same.[13] Rule 8 provides for the procedure for compounding, has new elements in it. In sub-rule (1) of Rule 8, a new addition says “in addition to particulars that are being filed in the forms”[14], the compounding Authority may ask for other relevant information however the previous rules only mentions that the compounding authorities may ask for information without filing of form, the new rule says the compounding authority may require the applicant to take such action as may be necessary with respect to transaction involved in the contravention. Sub-rule (2) of Rule 8 gives more clarity as it mentions compounding authorities includes both that is of the Reserve Bank of India and Directorate of Enforcement however before the rules (previous rules) only mentioned compounding authorities without giving the explicit mention of RBI and directorate of enforcement.[15]

Previously in sub-rule (2) of Rule 8, there was a proviso which empowered directorate of enforcement even in cases where RBI’s officers being the compounding authority, to not to proceed with the matter if he suspects any money laundering, terror financing or affecting sovereignty and integrity of the nation and shall remit the case to the appropriate Adjudicating Authority for adjudicating contravention under Section 13.[16] This proviso is now removed and added to the new Rule 9.

New rule 9 provides a list of non-compoundable contraventions which explicitly mentions 5 heads i.e.,

(a) where the amount involved is not quantifiable; or

(b) where the provisions of Section 37A of the Act are applicable; or

(c) where the Directorate of Enforcement feels that the proceeding relates to a serious contravention suspected of money-laundering, terror financing or affecting the sovereignty and integrity of the nation, or

(d) where the Adjudicating Authority has already passed an order imposing penalty under Section 13 of the Act; or

(e) where the compounding authority feels that the contravention involved requires further investigation by the Directorate of Enforcement to ascertain the amount of contravention under Section 13 of the Act.[17]

Rule 10 of the new rules is similar to Rule 9 of the previous rules dealing with payment method of the compounded sum, adding new methods like National Electronic Fund Transfer (NEFT), or Real Time Gross Settlement (RTGS), or such other permissible electronic or online modes of payment apart from demand draft.[18] Previously Rule 11 of the Foreign Exchange (Compounding Proceedings) Rules, 2002 provided one more bar for compounding of a contravention that if an appeal has been filed under Section 17 or Section 19 of the Act,[19] it cannot be compounded rather a new rule 11 has been added which provides for consequences of failure in paying sum compounded as if an application has never been made for compounding of any contravention under these rules, and the provisions of the Act for contravention will apply (similar to the previous Rule 10).[20] Rule 12 and Rule 13 remains the same as that of the previous rules[21] and Rule 14 has been added which provides that the new rules shall not be applied retrospectively i.e. pending proceedings will be in continuation and shall be governed by the old rules i.e., the Foreign Exchange (Compounding Proceedings) Rules, 2002.[22]

Conclusion

To sum-up, the key changes in the rules are as follows:

• Revision in monetary limits of Reserve Bank of India for compounding of contraventions.

• Increment in the fees for filing of compounding application from Rs. 5k to Rs.10k.
• Introduction of digital mode of payments for filing the compounding application and payment of compounding amount.
• List of contraventions that cannot be compounded under Rule 9.

The rules aim to provide enhanced powers to RBI over compounding of offences under FEMA Act. Apart from that, there cannot be seen any substantial changes in the new rules as even the list of non-compoundable offences is derived from the previous rules. This way it has become more structured although the effect of non-compliance with the compounding proceedings still remains the same as if the proceedings did not take place in the first place and accordingly the provisions of the Act will apply.

The press note released with the new rules say:

“As part of a broader initiative to streamline and rationalize existing rules and regulations to further facilitate ease of doing business, the compounding proceeding rules were comprehensively reviewed in consultation with the Reserve Bank of India.

The emphasis has been on enabling provisions to expedite and streamline the processing of compounding applications, introduction of digital payment options for application fees and compounding amounts, and a focus on simplification and rationalization of the provisions to eliminate ambiguity and clarify the process.”[23]

With this analysis of differences, there cannot be seen how the ministry is aiming facilitate ease of doing business. Apart from the introduction of electronic or online modes of payment, there cannot be seen anything very new that fulfils the aim of the new rules.

[1] R. 4(2), the Foreign Exchange (Compounding Proceedings) Rules, 2024.

[2] RBI Master Circular No. 8/2011-12, Available at https://www.rbi.org.in/commonperson/English/Scripts/Notification.aspx?Id=849

[3] S. 15, The Foreign Exchange Management Act, 1999 (Act 42 of 1999).

[4] S. 3(a), the Foreign Exchange Management Act, 1999 (Act 42 of 1999).

[5] S. 46(1) and (2)(b), the Foreign Exchange Management Act, 1999 (Act 42 of 1999).

[6] Vide Notification No. G.S.R. 566(E), Extra., dated 12-09-2024, published in the Gazette of India, dated 12-09-2024.

[7] R. 2, the Foreign Exchange (Compounding Proceedings) Rules, 2024.

[8] R. 3, the Foreign Exchange (Compounding Proceedings) Rules, 2024.

[9] R. 4, the Foreign Exchange (Compounding Proceedings) Rules, 2024.

[10] R. 4(4), the Foreign Exchange (Compounding Proceedings) Rules, 2024.

[11] R. 9, the Foreign Exchange (Compounding Proceedings) Rules, 2024.

[12] R. 6, the Foreign Exchange (Compounding Proceedings) Rules, 2024.

[13] R. 7, the Foreign Exchange (Compounding Proceedings) Rules, 2002.

[14] R. 8(1), the Foreign Exchange (Compounding Proceedings) Rules, 2024.

[15] R. 8(2), the Foreign Exchange (Compounding Proceedings) Rules, 2024.

[16] Proviso to R. 8(2), the Foreign Exchange (Compounding Proceedings) Rules, 2002.

[17] R. 9, the Foreign Exchange (Compounding Proceedings) Rules, 2024.

[18] R. 9, the Foreign Exchange (Compounding Proceedings) Rules, 2002.

[19] R. 11, the Foreign Exchange (Compounding Proceedings) Rules, 2002.

[20] R. 11, the Foreign Exchange (Compounding Proceedings) Rules, 2024.

[21] Rr. 12 and 13, the Foreign Exchange (Compounding Proceedings) Rules, 2002.

[22] R. 14, the Foreign Exchange (Compounding Proceedings) Rules, 2024.

[23] PIB, Press Release dated 12.09.2024, Department of Economic Affairs notifies Foreign Exchange (Compounding Proceedings) Rules, 2024 in pursuance of Union Budget 2024-25 announcement, Available at https://taxguru.in/rbi/foreign-exchange-compounding-proceedings-rules-2024.html