FEMA

Compounding of Contraventions under FEMA, 1999

Compounding refers to settlement of the offence committed by the contravener by imposing monetary penalty instead of going to litigation. It is a voluntary process where a person or a corporate seeks compounding of an admitted contravention. Section 15 of Foreign Exchange Management Act 1999 allows the Reserve Bank to compound a contravention defined under Section 13 of FEMA 1999, except contraventions under section 3 (a) of the FEMA 1999. Let’s know more on Compounding of contraventions under FEMA.

Application for Compounding of contraventions under FEMA

Application for compounding can be submitted along with the prescribed fee (5000 rupees) through demand draft drawn in favor of the RBI and payable at the concerned regional office/CO Cell New Delhi through demand draft in favor of RBI.

Such application submitted to the RBI should have the contact details of the applicant/authorized official or representative of the applicant.

The compounding authority will pass an order of compounding but not before providing an opportunity of being heard to all concerned as expeditiously as possible (not later than 180 days from the application date).

Apart from the application in the format prescribed, the applicant should further provide the information and documents as enumerated below:

• Annex II- Relating to the FDI, External Commercial Borrowings, Overseas Direct Investment and Branch office/Liaison Office.
• Annex III- Undertaking that they are not under investigation of any agency like DoE, CBI etc.
• Annex IV- Duly filled ECS mandate form.
• Cancelled cheque copy.
• Copy of the MOA and latest audited balance sheet while applying for Compounding of contraventions under FEMA 1999.

When can a contravention not be compounded?

• In case where a person commits a contravention within 3 years of date when such contravention was committed and was compounded under the compounding rules, then it shall not be compounded. However, a contravention committed after the end of 3 year term from the date on which the contravention was compounded previously is deemed as the first contravention.
• Those contraventions that relates to a transaction for which proper approval or permission from the govt. or any statutory authority have not been acquired, such contraventions shall not be compounded until the required approval is obtained from authorities concerned.
• Cases of serious contravention like those accused of money laundering, terrorist financing or affecting the sovereignty of the nation and its integrity or where the contravener doesn’t pay the sum for which the contravention was compounded within the period prescribed in the terms of the compounding order, will be referred to the DoE for further investigation or to such other agency for further action as deemed fit.
• Further, no breach can be compounded under the Rule 11 of the Foreign Exchange (Compounding Proceedings) Rules, 2000, in case where the DoE has adjudicated the matter and appeal has been lodged under Section 17/19 of the FEMA, 1999. The petitioner should confirm in the undertaking that should be submitted along with the compounding application  that they have not filed appeal under 17/19 Sections of the FEMA, 1999^[1].

Hence when a contravention is identified by the Reserve Bank or if it is notified by the entity involved in contravention, the bank must examine the following:

• If it is material and therefore should be compounded for which the prescribed compounding process should be followed; or
• If the issues involved are serious/sensitive in nature and thus should be referred to the Directorate of Enforcement.

Procedure of compounding of contraventions under FEMA

The procedure for compounding are as follows:

• Firstly the application shall be examined;
• Any other relevant information, record or documents can be called for;
• To pass an order of compounding and determining the sum on payment on which the contravention will be compounded, the elements can be taken into account:
• Amount of gain of unfair advantage, if quantifiable, due to contravention;
• The loss amount caused to an authority/agency/exchequer due to the contravention;
• Economy benefits arising to the contravener from delayed compliance or compliance avoided;
• The repetitive nature of the contravention, track record and/or past history of the non-compliance on the part of the contravener;
• The conduct of the contravener in undertaking transaction and in disclosure of full facts in the application and submissions made in the personal hearing and other factors as deemed to be relevant and appropriate.

Compounding order from Reserve Bank

The Reserve Bank shall issue the order of compounding within 180 days from the date of application based on averments made in the application as well as other documents and submissions made in this context from the contravener in the personal hearings.

Making payment of the contravention amount

The sum for which the contravention’s compounded should be paid through the demand draft in favor of the Reserve Bank of India (RBI) within 15 days from the date of the compounding order of such contravention. The manner how the demand draft should be drawn and deposited has to be indicated in the order of compounding.

Conclusion

Hence from the above information, one can conclude that Application for compounding of contraventions under FEMA can be submitted along with the prescribed fee through demand draft drawn in favor of the RBI. The compounding authority will pass the order of compounding but not before providing an opportunity of being heard to all concerned as expeditiously as possible (not later than 180 days from the application date).

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