Ridhi Gada
Summary: Under the Foreign Exchange Management Act (FEMA), 1999, the Reserve Bank of India (RBI) holds the authority to compound certain contraventions, thereby allowing violators to settle offenses without legal proceedings. Section 15 of FEMA grants this power, designating RBI’s regional offices to handle Foreign Direct Investment (FDI) cases, while the central office deals with issues related to Overseas Direct Investment (ODI), external commercial borrowing (ECB), and other complex cases. The recently updated Compounding Rules, 2024, outline specific roles based on the value of contravention, empowering RBI officers of various ranks to process these applications. The RBI issues compounding orders based on reported cases, with 466 orders issued in 2024, primarily involving FDI. Certain contraventions, such as delays in reporting FDI transactions or issuance of shares to non-residents, may be eligible for regularization through late filing fees under existing guidelines. However, RBI’s compounding power has limitations: applications are ineligible if a similar offense was compounded within the last three years, or if the contravention is deemed serious, non-quantifiable, or affects national integrity. Specific RBI offices handle applications based on the contravention type, underscoring the importance of submission to the correct authority. Applications requiring further investigation or administrative action may be returned unprocessed.
In our earlier article published on October 9, 2024[1], we examined the process of compounding, and the modifications brought about by the Compounding Rules, 2024. In this article, we shall evaluate the powers of RBI to compound under FEMA.
The Reserve Bank of India(RBI) till date[2] issued 466 compounding orders under FEMA during the calendar year 2024. 422 out of the mentioned 466 orders pertain to contraventions involving Foreign Direct Investment followed by ODI, LO/BO/PO, ECB and others.
Analysis of the compounding orders issued:
| Sr. No. | Contravention/ Compounding order pertaiing to | No. of compounding orders issued |
| 1 | Foreign Direct Investment(FDI) | 422 |
| 2 | Overseas Direct Investment(ODI) | 25 |
| 3 | LO/ BO/ PO | 13 |
| 4 | External Commercial Borrowing(ECB) | 3 |
| 5 | Others (Current Account Transations, Foreign Currency Accounts) | 3 |
The Compounding applications involving different contraventions under FDI are dealt by the regional offices whereas the Central office has the authority to look into the residuary cases. The powers of RBI to consider compounding applications are further analysed as below.
Power to Compound by RBI
Section 15 of the FEMA grants the Reserve Bank of India (RBI) the authority to compound violations under the said Act. The Regional office shall have the power to look into contraventions pertaining to FDI, whereas compounding applications on other contraventions shall be issued by central office.
The concerned Regional offices are empowered to review and issue compounding orders for below contraventions:
| Sr. No. | Contravention | Whether option for regularisation by payment of LSF available[3] |
| 1 | Delay in reporting of receipt of remittances in Form Advance Remittance Form (ARF) | No |
| 2 | Delay in reporting of allotment of shares to non-residents in Form FC GPR | Yes, in case of delay does not exceed period of 3 years |
| 3 | Delay in submission of Annual Return on Foreign Liabilities and Asssets (FLA) | Yes, in case of delay does not exceed period of 3 years |
| 4 | Delay in issue of shares/refund of share application money beyond 180 days, mode of receipt of funds | No |
| 5 | Violation of pricing guidelines including failure to obtain valuation report as per Rules/ Regulations, failure to issue shares in accordance with the fair value | No |
| 6 | Issue of ineligible instruments such as non-convertible debentures, partly paid shares, shares with optionality clause, etc. | No |
| 7 | Issue of shares/ capital contribution in case of LLP without obtaining approval of RBI or FIPB respectively, wherever required | No |
| 8 | Delay in reporting transfer of shares in form FC-TRS (including reporting of buy back/ capital reduction/ esop through trust route) on transfer of shares from Resident to Non-Resident and vice versa | Yes, in case of delay does not exceed period of 3 years |
| 9 | Taking transfer on record prior to approval of Form FC TRS | No |
| 10 | Delay in Intimation of Downstream Investment to FIFP/ SIA or submission of Form DI | Yes, in case of delay does not exceed period of 3 years |
| 11 | Delay in reporting of receipt or repatriation of capital contribution in LLP i.e form LLP I/ LLP II | Yes, in case of delay does not exceed period of 3 years |
| 12 | Failure to obtain approval for gift of shares to non residents | No |
Further, the application for the compounding of the contraventions listed below shall be submitted to the Central Office, RBI, New Delhi:
| Sr. No. | Contraventions |
| 1 | Contravention pertaining to acquisition and transfer of immovable property outside India |
| 2 | Contravention pertaining to acquisition and transfer of immovable property in India |
| 3 | Contravention pertaining to establishment in India of branch or office or other place of business |
| 4 | Contravention pertaining to Deposit Regulations |
Any other applications for compounding of contraventions (including contraventions pertaining to provisions/ delay in reporting under Overseas Direct Investment or External Commercial Borrowing) shall be submitted with Cell for Effective Implementation of FEMA (CEFA), Central office, Mumbai. Delay in reporting of transactions under ODI and ECB framework shall have an option for regularisation as per A.P. (DIR Series) Circular No.16 dated September 30, 2022.
The Compounding Rules, 2024 also revised the authority of RBI officers to look into the compounding applications in order to ensure effective disposal of applications. Violation of provisions of the FEMA, 1999 shall be accordingly compounded by the following officers RBI.
| Sum Involved in Contravention | Compounding officer, RBI |
| Does not exceed sixty lakh rupees | Officer not below the rank of the Assistant General Manager |
| Does not exceed two and a half crore rupees | Officer not below the rank of the Deputy General Manager |
| Does not exceed five crore rupees | Officer not below the rank of the General Manager |
| Above five crore rupees, | Officer not below the rank of the Chief General Manager |
Contraventions not to be compounded:
The Compounding Rules outline specific circumstances under which compounding is not permitted. Applicants shall be ineligible for compounding in following cases:
1. Cooling off period of 3 years not expired
Contravention committed by any person within a period of three years from the date on which a similar contravention committed by him was compounded under the rules shall not be eligible for compounding.
2. Pendency of requisite administrative action
The applicant shall be required to complete any administrative action prior to submission of compounding application including obtaining requisite approvals, completion of reporting requirements, adhering to regulatory directions if any.
3. Where the amount involved is not quantifiable
4. Contravention detrimental to the integrity and sovereignty of India
An applicant shall not be eligible for compounding where the Directorate of Enforcement is of the view that the proceeding relates to a serious contravention suspected of money-laundering, terror financing or affecting the sovereignty and integrity of the nation
5. Where the Adjudicating Authority has already passed an order imposing penalty under section 13 of the Act; or the contravention involved requires further investigation.
Compounding applications shall be required to be submitted with the regional or central office of RBI depending on the authority of RBI. While the regional offices are empowered to look into the contraventions pertaining to FDI, the central office shall look into any other contraventions pertaining to ODI, LO/BO/PO or ECB. Submission of compounding applications with competent authority shall be essential for regularisation of contravention by compounding failing which the applications can be returned to the applicant without being processed by RBI.
Notes:-
[1] https://taxguru.in/rbi/rbi-digitizes-compounding-process-fema-1999.html
[2] till date shall mean upto September 21, 2024
[3] While the contraventions under the Act need to be compounded, A.P. (DIR Series) Circular No.16 dated September 30, 2022 also provides for option to regularise by payment of late filing fees in accordance with the circular
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