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Compounding of offences under FEMA

Varun Hariharan

| Updated: Jul 03, 2020 | Category: FEMA

Compounding of Offences

Compounding of offences is where an individual agrees to not report an offence or convict the offender in the future. Compounding of offences is done for exchange of consideration such as promise, money or property. However, there are many circumstances in the business world where individuals commit mistakes which lead to strict punishments. For such purposes, the Government of India have brought out compounding of offences to make a compromise for such punishments. All the laws in India have specific sections which deal with compounding of offences.

Foreign exchange law is governed by the Foreign Exchange Management Act, 1999 (FEMA). The primary authority for regulating foreign exchange in India is the Reserve Bank of India. Apart from FEMA law, the RBI has brought out various notifications and circulars amending specific regulations dealing with Foreign Exchange matters in India.

Under the FEMA act, section 15 deals with the power to compound an offence or a contravention. Any individual or entity that commits any offence under FEMA can compound the offence by making an application for compounding of offences under FEMA.  The application for compounding of offences must be made to the Director of Enforcement or any other officer of the Directorate of enforcement. Apart from this an application for compounding an offence can be made to the RBI. An offence will be compounded within 180 days of receiving the application.

When an application for compounding an offence has been made no proceeding or further proceeding can be initiated against the individual offender in respect of the same offence. For compounding an offence an individual offender has to first accept that the offence is committed. Then an application for compounding an offence can be made.

Delegation of Authority for Compounding of Offences

There are specific timelines for compounding of offences under FEMA. The authority for compounding of offences has been delegated to the RBI. Various regional offices have the power of compounding offences.  An offence which is committed by an individual or entity would be classified into the following groups based on the amount which the contravention.

The following table depicts the offences based on the amount:

Amount Involved in the Contravention
Sl NoAmount Involved in the ContraventionAuthority for Compounding of Offences
1For an amount up to Rupees 10 Lakhs or BelowThe concerned authority for compounding the offence is the Assistant General Manager of the RBI.
2For an amount which is more than Rupees 10 Lakh but less than Rupees 45 LakhsThe concerned authority for compounding the offence is the Deputy General Manager of the RBI.
3For an amount which is more than Rupees 45 Lakhs but less than 1 CroreThe concerned authority for compounding the offence is the General Manager of the RBI.
4For amounts more than Rupees 1 Crore.The Chief General Manager of the RBI is the concerned authority for compounding the offence.

Compounding of Offences provided to Regional Offices of RBI

Due to plethora of offences under FEMA, the offences are classified and segregated to different regional offices based on the nature and complexity. These offences can be compounded at the respective regional office by making an application.

The following table represents the compliance required under the Foreign Exchange Management Act.

Offences provided to Regional Offices of RBI
Sl NoCompliance under FEMAOffence/ Contravention
1Investment in the form of Foreign Direct Investment (FDI) by subscription in the shares and securitiesAny form of delay in reporting of inward remittance.
2Investment in the form of Foreign Direct Investment by subscription in the shares and securitiesAny form of delay in filing the FORM FC GPR after shares have been issued.
3Annual Returns submitted by companies to RBI for receiving FDI. This must be carried out by all Indian Companies that have received FDI in the current or previous financial year.Any form of delay in filing the annual return for any Foreign Assets and Liabilities (FLA).
4Investment in form of FDI and shares has not been allotted to the investor.Delay in providing refund for the shares/ share application money within a period of 180 days.
5Investment in FDI.Contravening the pricing guidelines related to the issue of shares.
6Indian companies are not allowed to receive NCD (Non Convertible Debentures), Partly Paid Up Shares or Shares which come with an optionality clause under the FDI regime.Companies receiving such instruments are non compliant with the foreign exchange regulations.
7Sector Caps for Specific Investments.Not Seeking Approval from the RBI.
8Investment in an Indian Entity through the transfer of sharesDelay in Submission of FCTRS form. This would be applicable when shares are transferred from a non resident to a resident.

The regional offices of Panaji and Kochi can carry out compounding of offences for the above. This would be applicable where the amount related to contravention of the offence is less than Rupees 1 Crore. For amounts more than 1 Crore, they would be delegated to regional offices that have more authority.  Contravention for amounts more than 1 Crore would be directed to the Cell for Effective Implementation of the FEMA (CEFA), under the Foreign Exchange Department of the RBI, Mumbai.

Applicability of Compounding of Offences for Properties and Setting up of Offices

Compounding of offences for owning immovable property and setting up of foreign offices in India are dealt under a separate division of the RBI. The Foreign Exchange Division (FED) of the RBI has the authority to compound offences. The following would be compoundable by the FED, CO Cell New Delhi:

  • For Acquisition and Transfer of Immovable Property outside India;
  • For Acquisition and Transfer of Immovable Property outside India; and
  • Setting up of Project Office, Liaison Office and Branch Office in India.

Application Process for Compounding of Offences

  • An application for compounding of offences must be submitted to the respective regional office or the FED, CO Cell.
  • If the office has jurisdiction, then it will take up the application for compounding the offence. If the office does not have jurisdiction, then it will transfer it to the CEFA, Foreign Exchange Department.
  • The application has to be supported with the requisite fee of Rs.5000/- through a demand draft in favour of the Reserve Bank of India for regional office. For applications which are submitted to the CEFA, the demand draft must be drawn in favour of RBI Mumbai.
  • The application format and form are present in the Foreign Exchange (Compounding Proceedings) Rules, 2000. The applicant has to provide all information for compounding of offences.
  • With the application, the details and documents as per Annexure II must be submitted. This will include details of Foreign Direct Investment, External Commercial Borrowings, Overseas Direct Investment and Branch Office / Liaison Office. Apart from this copies of the memorandum of association and articles of association must be submitted.
  • A statement must be submitted with the effect that the applicant is not undergoing any form of investigation under the Central Bureau of Investigation (CBI), DOE or any other investigating authority. This statement or declaration must be provided so that the compounding process can take place in time.
  • If there are any inconsistencies with the application such as no proper documentation or non payment of fees, then the fees received with the application would be given back to the applicant. The fees will be credited to the applicants account through the NEFT process as requirement of the Electronic Clearing System (ECS) mandate. The fees will be credited to the applicant’s banks account as provided in Annexure IV of the form. Specific applications require details of Income tax and PAN Card for compounding of offences, without which the application would not be accepted by the authority.
  • Any change in the address or other requirements has to be brought to the notice of the authority.

Compounding Procedure by the Authority

  • The RBI will receive the application on compounding. Upon reviewing the application, the RBI will keep in mind certain criteria for compounding the offence.
  • The authority may request the applicant to provide additional information and documents. If the applicant does not provide documents within the time frame, then the authority can reject the application for compounding.
  • Specific factors will be taken into consideration for compounding of offences under FEMA. The following are the factors which the authority will consider:
  • Any form of amount of gain as an unfair advantage, whether it is measurable.
  • Any form of loss which is caused by the authority or exchequer. Was the loss caused as a result of the contravention?
  • Any form of commercial or economic benefit received from the individual contravener.
  • Was the delay caused intentionally or by mistake?
  • Track record of the individual contravener
  • Whether there have been previous convictions for an offence.
  • Whether the conduct of the contravener is bona fide and carried out in good faith. The amount of disclosure carried out by the individual during the pre transaction and post transaction period.

Penalty for Compounding of Offences under FEMA

Under the provisions of FEMA, the penalty for contravention of any offence is up to three times the amount subject to contravention. However, the amount for compounding an offence would be determined by the authority such as the RBI. Such amount is quantifiable.

Upon receiving the application, the compounding officer would provide a judgement against the application. The judgement must be provided within 180 days of the compounding application. Time can be counted from the day the application is submitted to the RBI.

The applicant can also make a personal representation. If the applicant wants to appear personally then the RBI would direct the applicant to submit the application directly to the compounding officer for the judgement.

The applicant has to either appoint a legal expert or a consultant dealing in compounding matters. If the representative is not able to appear on behalf of the applicant then the judgement would be provided on the available documentation with the authority.

The officer providing the judgement would exercise all powers under FEMA. First the details of the penalty carried out would be mentioned by the officer and a copy of the compounding order would also be provided to the applicant. This would be as per sub rule (2) of Rule 8 of Foreign Exchange (Compounding Proceedings) Rules, 2000. Apart from this a copy of the compounding order will also be present with the adjudicating officer.

Payment after order for compounding for offences

Compounding means to reduce the crime by paying some form of compromise to the other party. Therefore the individual carrying out a contravention would make an application for compounding the contravention under FEMA. If the adjudicating officer has allowed the order for compounding the offence, then the individual would require paying the adjudicating officer and the authority.

The amount for compounding would be paid through a demand draft in favour of the RBI. This payment must be made within 15 days from the compounding order.  The mode of payment and manner in which the demand draft is drawn would be provided in the compounding order.

An order which is passed by the authority is absolute. The individual paying the compounding penalty is not absolved or relinquished from paying the compounding amount after the order is passed. The individual has to compulsorily pay the compounding fee to the authority.

If the amount is not paid within the prescribed period under the Foreign Exchange (Compounding Proceedings) Rules 2000, then the status of the application would be void. The status would be deemed as if the applicant has not made an application for compounding an offence.  When the sum is paid a certificate for compounding would be provided by the RBI.

Conclusion

Compounding of Offences is a mutual compromise between the parties. The parties in compounding include the offender and the authority or victim. All regulations which impose criminal penalties have specific provisions related to compounding of offences. The Government of India has brought out compounding of offences if there is a mistake leading to strict punishments. The law related to foreign exchange has specific provisions for compounding of offences. Based on the amount of contravention and the transaction involved, the jurisdiction for compounding would be decided.

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Varun Hariharan

Varun Hariharan has completed the Legal Practice Course from BPP Law School, Manchester. He has a Masters in Commercial and Corporate Law from the Queen Mary University of London and LLB Honours from Bangor University, UK. He specialises in law related to corporate, artificial intelligence and technology law.

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