Compounding of Contraventions under FEMA

Ankita Tiwari

20 Mar, 2023

The Indian Parliament enacted the Foreign Exchange Management Act (FEMA) in 1999 and repealed the previous legislation of the Foreign Exchange Regulation Act (FERA), 1973. FEMA consolidates the foreign exchange laws to promote external trade and orderly development of India’s foreign exchange market. FEMA provides provisions for compounding of contraventions.
Compounding is the voluntary admission of contravention before the authorities. It includes admitting the intention and interpretation of the rules and regulations issued under the Act leading to the contravention. Section 15 of the FEMA authorizes the Reserve Bank of India (RBI) to compound the violation of section 13 of FEMA. Apart from section 3(a) contravention all contravention under section 13 of FEMA can be compounded. The provisions relating to the compounding of contravention are like a compromise to settle the matter. Under compounding provisions, a person accepts their inaccuracies and requests to compound their actions. Compounding will regularize and legalize the mistakes or inaccurate actions. It prevents legal actions to be taken against the person. Compounding will also simplify and expedite the process. Compounding of contravention is done by an authorized officer of RBI within 180 days from the date of receipt of application to compound. Further, only the quantifiable violation can be compounded.

RBI’s Power to Compound

The following officers under the direction and control of the Governor of RBI, are responsible for compounding any violation of the provisions of FEMA:

Delegation of Power to Regional and Central Office

To reduce operational issues and improve customer service, the RBI has split the power to compound between the regional and central offices.

The following contraventions are delegated to the Central office in New Delhi:

• Contravention about acquisitions and transfer of immovable property in India.
• Contravention about the acquisition and transfer of immovable property outside India.
• Contravention about establishing a branch office, liaison office or project office in India.
• Contraventions under Foreign Exchange Deposit Regulations, 2000.

The following contraventions are delegated to the regional office:

• Delay in reporting inward remittance for the share issue.
• Delay in filing Form FC-GPR after issuing shares.
• Delay in filing the annual return for Foreign Liabilities and Assets (FLA).
• Delay in submission of Form FC-GPR for transfer of shares from resident to non-resident or vice-versa.
• Delay in issue of shares, refund of share application money after 180 days and mode of fund receipt.
• Issue of ineligible instruments.
• Issue of shares without the consent of RBI or FIPB, in case the consent is required.
• Infringement of pricing guidelines for share issuance.
• Taking on record share transfer by investee company in absence of Form FC-GPR certification.

Regional office set up in Kochi and Panaji is permitted to compound violations or a fine of less than Rs. 1 crore. Regional offices in Mumbai and Thiruvananthapuram compound amount of interest which is greater than or equal to Rs. 1 crore. Further, any other violation other than the violations specified in the application must be reported to the Foreign Exchange Department of RBI in Mumbai.

Application for Compounding of Contraventions

Any person violating any provisions, rules, regulations, circulars, directions, notifications, and orders issued under FEMA can apply for compounding of contravention by depositing a fee of Rs. 5000/- in the form of a demand draft drawn in favor of RBI. However, the compounding provisions do not apply to any violation under section 3(a) of the Act. The application for compounding of contravention can be made as soon as the applicant becomes aware of such contravention by the RBI or the statutory authority. The application is submitted in the prescribed form providing contact details of the applicant and email address. The following documents are required to be submitted along with the application form:

• Details regarding Foreign Direct Investment, External Commercial Borrowings (ECB), Overseas Direct Investment (ODI) and Branch Office or Liaison Office, as prescribed in Annexure II.
• A copy of the Memorandum of Association (MOA^[1]).
• Recent audited Balance Sheet along with an undertaking stating that they are not under any inquiry/investigation/adjudication by any agency like the Directorate of Enforcement or CBI, etc as of the date of application.
• If any proceedings are initiated against the applicant after applying for compounding, then the same should also be notified to the Compounding Authority or RBI before the issuance of the compounding order.

In case the applicant fails to apply in the format prescribed, it will be rejected and returned to the applicant. If the application is completed in all aspects within the time prescribed then the date of submission will be considered as the date of receipt of the application and will accordingly be processed.

Procedure for Compounding of Contraventions

On receiving an application for compounding of contravention, the RBI reviews the documents and submissions. The RBI or the Compounding Authority if required may request further information or documents in support of the compounding procedure. Based on the documents and submissions, the contravention is quantified.

While passing a compounding order, the following factors are taken into account in determining the amount for the contravention:

• The amount of unfair advantage gained as a result of the contravention.
• Amount of loss arising to any authority or agency or exchequer as a result of the contravention.
• Any economic benefit arising to the applicant from delaying or avoiding compliance.
• Track record of the applicant in case of repetitive contravention.
• The conduct of the contravener in undertaking the transaction and the disclosures in the application and submissions at the time of the personal hearing.

What are the contraventions that cannot be compounded?

The following are the non-compoundable contraventions:

• Money Laundering (PMLA)/ Hawala Transactions.
• Terror financing or any other contravention affecting the sovereignty and integrity of the nation.
• Contraventions where the applicant fails to pay the amount as prescribed in the compounding order.
• Matters that are already before ED for investigation and appropriate action.
• Identical contravention committed within three years.

Computation of the amount of contravention

Compounding Order

The compounding order specifies the amount arrived at after compounding of contravention. The amount prescribed in the order must be paid within 15 days from the date of issue of the compounding order in the form of a demand draft in the name of RBI. On issuance of the compounding order, it becomes final and the contravener cannot request for its withdrawal or review. On payment of the compounding amount, the RBI issues a certificate stating that the applicant had complied with the order. If the contravener fails to pay the compounded amount within the prescribed time, it will be treated as if he never applied for compounding of contravention. Further, the contraventions will be referred to the Directorate of Enforcement for appropriate action.

Conclusion

Compounding of contraventions reduces legal disputes and legal proceedings. No legal proceeding takes place or further penalty is levied on the issues compounded. The effect of compounding is that all contraventions stand regularized and the pending procedures are taken on record.

Also Read:
Compounding of offences under FEMA
Compounding of Contraventions under FEMA, 1999