Procedure for Compounding of Contraventions under FEMA

What is contravention and compounding of contravention?

Contravention is a breach of the provisions of the Foreign Exchange Management Act (FEMA), 1999 and rules/ regulations/ notification/ orders/ directions/ circulars issued there under.

A voluntary process by which an entity committing a contravention can make an application and seek regularization by admitting the contraventions under FEMA on payment of the amount imposed

Who can apply for compounding?

Any person who contravenes any provision of the FEMA, 1999 [except section 3(a)] or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act or contravenes any condition subject to which an authorization is issued by the Reserve Bank, can apply for compounding to the Reserve Bank.

Applications seeking compounding of contraventions under section 3(a) of FEMA, 1999 may be submitted to the Directorate of Enforcement.

Power to compound by Reserve Bank

If any person contravenes any provisions of the Act except clause (a) of Section 3 of that Act:

Provided further that no contravention shall be compounded unless the amount involved in such contravention is quantifiable.

Offences that can be compounded by the Regional Offices of RBI

Following are the offences that can be compounded by the Regional Offices of RBI:

1. Delay in reporting inward remittance received for issue of shares.
2. Delay in filing form FC(GPR) after issue of shares.
3. Delay in filing the Annual Return in respect of the Foreign Liabilities and Assets (FLAR).
4. Delay in issue of shares/refund of share application money beyond 60 days, mode of receipt of funds, etc.
5. Violation of pricing guidelines for issue of shares.
6. Issue of ineligible instruments such as non-convertible debentures, partly paid shares, shares with optionality clause, etc.
7. Issue of shares without approval of RBI or Government respectively, wherever required.
8. Delay in submission of form FC-TRS on transfer of shares from Resident to Non-Resident.
9. Delay in submission of form FC-TRS on transfer of shares from Non-Resident to Resident.
10. Receiving investment in India from non-resident or taking on record transfer of shares by investee company.
11. Delay in reporting the downstream investment made by an Indian entity or an investment vehicle in another Indian entity (which is considered as indirect foreign investment for the investee Indian entity in terms of these regulations), to Secretariat for Industrial Assistance, DIPP.
12. Delay in reporting receipt of amount of consideration for capital contribution and acquisition of profit shares by Limited Liability Partnerships (LLPs)/ delay in reporting disinvestment/transfer of capital contribution or profit share between a resident and a non-resident (or vice-versa) in case of LLPs.
13. Gift of capital instruments by a person resident in India to a person resident outside India without seeking prior approval of the Reserve Bank of India.

Offences that can be compounded by the Foreign Exchange Department (FED) CO Cell, New Delhi

Following are the offences that can be compounded by the officers attached to the FED, CO, Cell at New Delhi:

1. Contraventions relating to acquisition and transfer of immovable property outside India
2. Contraventions relating to acquisition and transfer of immovable property in India
3. Contraventions relating to establishment in India of Branch office, Liaison Office or Project office
4. Contraventions falling under Foreign Exchange Management (Deposit) Regulations, 2000

Pre-requisite for compounding process

Following are pre-requisites those needs to be consider before applying for Compounding applying with RBI:

1. No compounding of similar offence can be done upto three years from the date on which a similar contravention was compounded by the applicant. However, any second or subsequent contravention committed after the expiry of a period of three years from the date on which the contravention was previously compounded shall be deemed to be a first contravention.
2. Contraventions relating to any transaction where proper approvals or permission from the Government or any statutory authority concerned, as the case may be, have not been obtained; such contraventions would not be compounded unless the required approvals are obtained from the concerned authorities.
3. Cases of contravention, such as, those having serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation and/or involving serious infringements of the regulatory framework or where the contravener fails to pay the sum for which contravention was compounded within the specified period in terms of the compounding order, then such offence shall not be dealt by RBI rather be referred to the Directorate of Enforcement for further investigation.
4. In case where adjudication has been done by the Directorate of Enforcement and an appeal has been filed under section 17 or section 19 of FEMA, 1999, no contravention can be compounded in terms of Rule 11 of Foreign Exchange (Compounding Proceedings) Rules, 2000. The applicant shall confirm in the undertaking required to be furnished as per Annex III along with the compounding application that they have not filed any appeal under section 17 or section 19 of FEMA, 1999.
5.  If  the Enforcement Directorate is of the view that the compounding proceeding relates to a serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation, the Compounding Authority shall not proceed with the matter and shall remit the case to the appropriate Adjudicating Authority for adjudicating contravention under the Act.

6. Whenever a contravention is identified by the Reserve Bank or brought to its notice by the entity involved in contravention by way of a reference other than through the prescribed application for compounding, the Bank will continue to decide

• whether a contravention is technical and/or minor in nature and, as such, can be dealt with by way of an administrative/ cautionary advice;
• whether it is material and, hence, is required to be compounded for which the necessary compounding procedure has to be followed or
• whether the issues involved are sensitive / serious in nature and, therefore, need to be referred to the Directorate of Enforcement (DOE).

However, once a compounding application is filed by the concerned entity suo moto, admitting the contravention, the same will not be considered as ‘technical’ or ‘minor’ in nature and the compounding process shall be initiated in terms of section 15 (1) of Foreign Exchange Management Act, 1999 read with Rule 9 of Foreign Exchange (Compounding Proceedings) Rules, 2000.

Procedure for Compounding Offences under FEMA

1. All applications to the Compounding Authority needs to be submitted with the demand draft ₹ 5000/- drawn in favour of “Reserve Bank of India” along with the following documents

• Compounding application:As per the format prescribed in Foreign Exchange (Compounding Proceedings) Rules, 2000.
• Details of Application: In case of contravention relating to Foreign Direct Investment, External Commercial Borrowings, Overseas Direct Investment and Branch Office/Liaison Office, the applicants are required to furnish details as per Annexure II of the Foreign Exchange (Compounding Proceedings) Rules, 2000.
• Undertaking:An undertaking as per Annexure III that the applicant is not under any investigation by any agency such as DoE, CBI etc.
• Copy of Memorandum of Association
• Latest Audited Balance Sheet

2. Application for compounding shall be given to RBI and the Reserve Bank shall examine the application based on the documents and submissions made in the application and assess whether contravention is quantifiable and if so, the amount of contravention.
3. The Compounding Authority may call for further information, record or other document.
4. In case the contravener fails to submit the additional information called within the specified period, the application is liable for rejection.
5. Disposal of compounding application shall be made by issue of compounding order within 180 days of the receipt of application; however where there is a sufficient cause for further investigation, the RBI may refer the matter to Directorate of Enforcement.

Factors considered for passing of a Compounding order

The following factors, which are only indicative, may be taken into consideration for the purpose of passing compounding order and adjudging the quantum of sum on payment of which contravention shall be compounded:

1. the amount of gain of unfair advantage, wherever quantifiable, made as a result of the contravention;
2. the amount of loss caused to any authority/ agency/ exchequer as a result of the contravention;
3. economic benefits accruing to the contravener from delayed compliance or compliance avoided;
4. the repetitive nature of the contravention, the track record and/or history of non-compliance of the contravener;
5. 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.

Criteria for calculation of compounding amount

The guidance structure for calculating the amount to be imposed on compounding is as below:

The contraventions (except FLAR) of FEMA 20 existing and continuing as on November 07, 2017 (i.e. the starting date of contraventions prior to November 07, 2017) will be compounded as per 1(A) above.

The above amounts are presently subject to the following provisos, viz.

• the amount imposed should not exceed 300% of the amount of contravention
• In case the amount of contravention is less than Rs. 1,00,000, the total amount imposed should not be more than amount of simple interest @5% p.a. calculated on the amount of contravention and for the period of the contravention in case of reporting contraventions and @10% p.a. in respect of all other contraventions.
• In case of paragraph 8 of Schedule I to FEMA 20/2000 RB contraventions, the amount imposed will be further graded as under:

• If the shares are allotted after 180 days without the prior approval of Reserve Bank: 25 times the amount calculated as per table above (subject to provisos at (i) & (ii) above).
• If the shares are not allotted and the amount is refunded after 180 days with the Bank’s permission: 50 times the amount calculated as per table above (subject to provisos at (i) & (ii) above).
• If the shares are not allotted and the amount is refunded after 180 days without the Bank’s permission: 75 times the amount calculated as per table above (subject to provisos at (i) & (ii) above).

• In cases where it is established that the contravenor 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.
• If a party who has been compounded earlier applies for compounding again for similar contravention, the amount calculated as above may be enhanced by 50%.

For calculating amount in respect of reporting contraventions under para 1 above (Reporting Contraventions), the period of contravention may be considered proportionately {(approx. rounded off to next higher month ÷ 12) X amount for 1 year}. The total no. of days does not exclude Sundays/holidays.

Time line for Payment of Compounding Penalty

The sum for which the contravention is compounded shall be paid within 15 days from the date of the order of compounding of such contravention.

In case of failure to pay the sum compounded within the time, it shall be deemed that the contravener had never made an application for compounding of any contravention. Such cases will be referred to the Directorate of Enforcement for necessary action.

Can orders be appealed?

Since, compounding is a voluntary process, there is: No provision of appeals against the order of the Compounding Authority; No Request for reduction of amount compounded; No Request for extension of time for payment of amount imposed.

Source: Master Direction- Compounding of Contraventions under FEMA, 1999

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CS Shaffy Mehta

Practicing Company Secretary, M.Com and Commerce Graduate and founder at Shaffy Mehta & Co. She is having an overall 4 years experience of Company Law and other Corporate Laws.