The Reserve Bank of India (‘RBI’) issued a circular[i] on 01.10.2024, which provides revised guidelines for compounding contraventions under the Foreign Exchange Management Act, 1999 (‘FEMA’). Based on the Foreign Exchange (Compounding Proceedings) Rules, 2024 (‘Compounding Rules, 2024’), these guidelines replace the earlier rules established in 2000.
Overview of Circular
1. General Guidelines
a) The guidelines refer to the Compounding Rules, 2024, which regulate the compounding of contraventions under the FEMA. These rules regulate the process for resolving contraventions under the FEMA through compounding.
b) As per s. 15 of the FEMA, individuals who contravene provisions under s. 13 (except s. 3(a)) can apply to the RBI for compounding (i.e., settlement of the violation without litigation). The RBI has 180 days to process these applications, following the procedure outlined in r. 4 of the Compounding Rules, 2024.
c) Under s. 13(1) of the FEMA, anyone who contravenes FEMA regulations, rules, or directions or fails to comply with the RBI authorizations may face penalties up to three times the amount involved. For violations where the amount is not clear, the penalty can go up to Rs. 2 lakhs, with an additional daily fine of Rs. 5,000 for ongoing contraventions.
d) The compounding process, as outlined in s. 15(1) of the FEMA is intended to simplify compliance and reduce costs for individuals involved in foreign exchange violations. However, cases falling under rs. 4(2) and 9 of the Compounding Rules, 2024, are not eligible for compounding.
2. Compounding of the contraventions by the RBI
a) For ease of operations, the RBI's regional offices handle compounding of certain contraventions under specific FEMA regulations such as FEMA 20/2000-RB (dated May 3, 2000), FEMA 20(R)/2017-RB (dated 07.11.2017), Non-Debt Instruments Rules, 2019, and other related regulations. These contraventions typically involve foreign investments, share issuance, and transfer of shares. The RBI's FED, CO Cell-based in New Delhi, handles contraventions related to Liaison/Branch/Project Offices, Non-Resident Foreign Accounts (NRFAD), and Immovable Property (IP). Applications for compounding should be sent to the respective regional offices based on the applicant's location or the FED or CO Cell in New Delhi. For contraventions linked to foreign investment, the jurisdiction is determined by the location of the Indian company's registered office.
b) For contraventions outside the mentioned categories, applications should be submitted to the Cell for Effective Implementation of the FEMA (CEFA) at the Foreign Exchange Department of RBI in Mumbai.
3. Application for Compounding
a) Applicants must submit a compounding application either suo moto or in response to a Memorandum of Contravention issued by the RBI.
b) The application fee is Rs. 10,000 plus 18% GST, payable via demand draft or electronic means (NEFT). The application must be submitted with supporting documents, including FDI, ECB, or ODI details if applicable, and an undertaking regarding any ongoing investigations by the Directorate of Enforcement (‘DoE’).
c) Incomplete applications will be returned, but the application fee is non-refundable. However, re-submitting the application does not require an additional fee.
4. Certain cases are not eligible for compounding
a) If an applicant commits a similar contravention within three years of a previously compounded contravention, they are not eligible for compounding again. After three years, any new violation will be treated as the first offense.
b) Compounding applications will only be processed if the applicant has completed all required administrative actions. These actions may include obtaining necessary approvals, unwinding transactions, repatriating funds, complying with pricing or reporting guidelines, and any other corrective steps needed to rectify the violation.
c) Serious contraventions, such as money laundering, terror financing, or threats to national security, will be referred to the DoE. Additionally, violations where the amount is unquantifiable fall under s. 37A of the FEMA, or has already been penalized by an adjudicating authority, are not eligible for compounding. Similarly, violations under s. 3(a) of the FEMA are excluded from the compounding process by the RBI.
d) When the RBI identifies a contravention, it will determine whether the violation can be compounded or if it is of a serious nature requiring adjudication or investigation by the DoE.
5. Procedure for compounding
a) Once an application is received, the RBI examines the documentation to determine whether contravention can be compounded and assesses the penalty. If more information is needed, the applicant must provide it within a specified period.
b) The RBI considers various factors, such as unfair economic gains, the repetitiveness of the violation, and the applicant's conduct during the investigation while deciding the amount of the compounding penalty.
c) The amount can be up to three times the amount involved, but a guidance note is provided to calculate this based on specific contraventions.
6. Issue of the Compounding Order
a) The Compounding Authority will issue an order within 180 days of receiving the application, allowing the applicant a chance to be heard. The decision will be based on the averments made in the application and other relevant documents. If the applicant chooses to have a personal hearing, the RBI encourages them to attend in person or virtually, without legal representation, as compounding is a voluntary process. The decision to attend or skip the hearing does not impact the penalty amount. The order will be passed based on available information if the applicant does not attend.
b) The Compounding Order will clearly state the relevant provisions of the FEMA that were violated and include specific details of the contravention. If a complaint has been lodged under s. 16 (3) of the FEMA, a copy of the order will be given to the applicant and the Adjudicating Authority.
7. Payment of the amount for which contravention is compounded
a) The compounding amount mentioned in the order shall be paid within 15 days through demand draft, National Electronic Fund Transfer (NEFT), Real Time Gross Settlement (RTGS), or any other permitted electronic method. The order will provide payment instructions, and the applicant must inform the RBI of payment within 2 hours.
b) Once the compounding order is issued, the applicant has no right to withdraw or request a review of the order, as per the Compounding Rules, 2024. Failure to pay the compounded amount within the specified time will result in the application being considered as if it was never filed; if a contravention is not compounded, the provisions of the FEMA will apply, and the individual will have to face the usual legal process. After the payment is received, the RBI will issue a certificate confirming the resolution of the contravention, subject to any conditions outlined in the order.
Our Analysis
The revised guidelines for compounding contraventions under the FEMA simplify and expedite the process for individuals and businesses involved in foreign exchange violations. By offering a clear, structured framework, the guidelines reduce the compliance burden and provide an alternative to lengthy legal procedures. Violators can resolve issues by paying a penalty within a specified timeframe, avoiding litigation.
This system not only promotes regulatory compliance but also ensures a more efficient resolution process and encourages greater adherence to foreign exchange regulations.
End Note
[i] RBI/FED/2024-25/78 A.P. (DIR Series) Circular. No.17/2024-25, Dated 01.10.2024.
Authored by Ritik Kumar Jha, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.