Compounding of Contraventions under FEMA, 1999 in India

  • August 10, 2022
  • FEMA
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Compounding of Contraventions under FEMA

The Foreign Exchange Management Act, 1999, was approved by the Indian Parliament. Its mission is to consolidate and revise foreign currency legislation to facilitate external commerce and payments, as well as to encourage the orderly growth and maintenance of India’s foreign exchange market. Section 15 of the Foreign Exchange Management Act (FEMA), 1999 empowers the Reserve Bank of India to compound any breach of Section 13 of the FEMA, 1999, except Section 3(a) violations. This article discusses the compounding of contraventions under FEMA, 1999 in India.

Table of Contents

Meaning of Compounding 

Compounding is the process of freely acknowledging a violation of any of the provisions of FEMA, 1999, or the rules/regulations/notifications/orders/directions, or circulars issued under the said Act. The individual in violation of the provisions confesses the error and wants to compound to make it right. This avoids court processes and simplifies and expedites the process. The crime must be compounded within 180 days of the date of receipt of the application by such Reserve Bank of India officers as may be authorized in this regard.

Meaning of Contravention and Compounding of Contravention

Contravention is a violation of the terms of the Foreign Exchange Management Act (FEMA), 1999, as well as the rules, regulations, notifications, orders, instructions, and circulars issued under it. The process of willingly acknowledging the violation, pleading guilty, and seeking restitution is referred to as compounding. 

After providing the contravener with a chance for a personal hearing, the Reserve Bank has the authority to compound any violation as outlined in Section 13 of FEMA, 1999 for a stipulated sum. It is a voluntarily undertaken process in which an individual or a company wants to compound a confessed infraction. It gives comfort to anyone who violates any FEMA, 1999 requirements by lowering transaction expenses. Willful, malafide, and fraudulent transactions, on the other hand, are taken severely and will not be tolerated by the Reserve Bank of India.

Furthermore, according to the proviso to rule 8 (2) of the Foreign Exchange (Compounding Proceedings) Rules, 2000, inserted via GOI notification dated February 20, 2017, if the Directorate of Enforcement (DoE) believes that the compounding proceeding relates to a serious contravention suspected of money laundering, terror financing, or affecting the nation’s sovereignty and integrity, such cases will not be compounded by the Reserve Bank. Furthermore, instances invoking special provisions under section 37(A) of the FEMA, 1999 – related to assets kept outside India in violation of section 4 – will be ineligible for compounding by the Reserve Bank.

Compounding power of RBI

Any violation of the provisions of FEMA, 1999 will be dealt with by the following officers under the direction, control, and supervision of the RBI Governor.

Shown below is the contravention amount and respective compounding authority of RBI-

Up to Rs 10 Lakh RBI Assistant General Manager
The amount above Rs 10 Lakh but less than Rs 40 Lakh Deputy General Manager RBI
The amount of Rs. 40 Lakh and above but less than Rs 100 Lakh General Manager RBI
Rs 100 Lakh and above Chief General Manager RBI

No violations will be incurred unless the amount involved in that breach can escape.

Application for compounding of contraventions under FEMA

Any person who contravenes any provision/rules/regulations/notices/instructions or matters of the order under FEMA, 1999 without a breach of section 3 (a) may apply for compensation and the prescribed costs of Rs. 5000 in the form of a draft claim in favor of ” Reserve Bank of India “. An application may be made if the applicant is notified of a breach by the Reserve Bank or legal authority. An application can also be made for a suo moto when you notice an error.

The request must be made in the prescribed form containing the contact details namely the name of the applicant or his or her authorized officer or representative of the applicant, telephone or mobile number, and email ID. In addition to the request in the prescribed form, the following documents must also be provided:

  • Information in terms of Annexure-II relating to foreign direct investment, Foreign Trade Loans, Direct Overseas Investment, and Branch Office/Liaison Office
  • Copy of Memorandum of Association
  • Recent Examination Sheet and pledge in terms of Annexure III that they are not subject to any investigation/decision of any agency such as the Directorate of Enforcement, CBI, etc. on the date of application. Also, the applicant must notify the Compounding Authority/RBI if any such steps are initiated after the application but on or before the date of issue of the merger order.

If the application for incorporation is not submitted in the prescribed manner or the required particulars, documents or declarations are lost or the application is filed outside the required framework regarding application fees, it will not be processed and will be refunded to the applicant. Once the application has been completed in all respects within the time allotted, the delivery date will be deemed the date of receipt of the application and will be processed accordingly.
Serious violations, namely, violations involving money laundering, terrorist financing, and any matter relating to the sovereignty and integrity of the nation or cases where the applicant fails to pay the amount of the merger order within the specified period will be referred directly to the Enforcement Unit and appropriate action will be taken.
If the applicant repeats certain violations within 3 years such as the violation when the merger order has already been passed, it will not be included and the provisions of FEMA, 1999 will apply. Any violation after the expiration of 3 years will be considered inclusive.

Process for compounding of contraventions under FEMA

Once the request is approved, the RBI will review the same basis for documents and submissions. Also, the Compounding Authority may request additional information or records in support of the merger process. Based on the above, the violation is estimated.

The factors considered to approve the merger order and determine the amount of the violation are:

  • The quantifiable amount made as a contravention
  • Loss caused to any authority/agency/exchequer due to contravention
  • Economic benefits to the applicant due to late compliance
  • Consistency of contravention of contraventions under FEMA
  • Conduct taking disclosures and transactions and submission during hearing

Duration to pay breached amount and Penalty

The amount stated in the case of the breach must be paid in the form of a service adjustment under the Reserve Bank of India within 15 days from the date the order is approved. Once the order has been approved, the offender cannot seek to cancel the order or request a review of the approved order. Upon completion of the consolidated amount, a certificate is issued by the RBI stating the applicant’s compliance with the approved orders. If the offender fails to pay the aggregate amount, he or she will be deemed to have never applied for compensation and will be referred to the Directorate of Enforcement for appropriate action.

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Final words

The RBI issues a certificate certifying the applicant’s compliance with the instructions made upon the realization of the compounded sum. If the contravener fails to pay the compounded sum, it will be treated as if he never applied for the compounding of the violation and will be submitted to the Directorate of Enforcement for appropriate action. Thus it can be concluded that contravention is a violation of the provisions of the Foreign Exchange Management Act (FEMA), 1999, and the rules or other directions or orders issued under it. 

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CS Urvashi Jain is an associate member of the Institute of Company Secretaries of India. Her expertise, inter-alia, is in regulatory approvals, licenses, registrations for any organization set up in India. She posse’s good exposure to compliance management system, legal due diligence, drafting and vetting of various legal agreements. She has good command in drafting manuals, blogs, guides, interpretations and providing opinions on the different core areas of companies act, intellectual properties and taxation.

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