Compounding of offences under FEMA

Narendra Kumar

08 Dec, 2020

To settle a matter by a money payment in lieu of other liability means Compounding. This meaning clearly defines the concept of Compounding as a mechanism that provides the offender with an opportunity to avoid prosecution for the offense committed by him after paying off monitory payment(under FEMA). Compounding of offences under FEMA in the context of law means an agreeable settlement for the purpose of preventing examination and prosecution for an offense, however, Compounding is not an inherent right but provided/delegated by the respective Act under which the offense has been committed.

Basic Concepts of Compounding of Offences under FEMA

• In accordance with the provisions of section 15 of Foreign Exchange Management Act, 1999 (FEMA) which provide compounding of contraventions and empowers the Reserve Bank of India (RBI) to compound any contravention as defined under section 13 of the FEMA, except contraventions under section 3 (a) of FEMA, on an application made by the person committing such contravention.

However, where a contravention has been compounded as above, there can’t be any further proceeding, initiating or continuing, as the case may be, in respect of the contravention so compounded.

• The provisions of Section 13, provides that if any person contravenes any provision of FEMA, or any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or breaches any condition subject to which a consent is issued by the RBI, they will, upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention, where the amount is quantifiable or up to Rupees Two lakhs, where the amount is not directly quantifiable and where the contravention is a continuing one, then the penalty which may extend to ₹ 5000 for every day after the first day during which the contravention continues.

The Central Government had made the Foreign Exchange (Compounding Proceedings) Rules, 2000 relating to compounding contraventions under chapter IV of FEMA whereas, in the exercise of the powers conferred by section 46 read with section 15(1) of Foreign Exchange Management Act.

Power to Compound

If any person contravenes any provisions of FEMA except clause (a) of Section 3 of that Act then the following authorities under RBI shall have the power to entertain the Compounding application on the basis of monetary limits, which are as follows:

*On condition that no contravention will be compounded apart from if the amount involved in such contravention is quantifiable.

A Delegation of Powers to Regional Offices

To facilitate the operational convenience and functioning, compounding powers have been delegated to the Regional Offices of the RBI to compound the following contraventions of FEMA, 1999.

• Delay in reporting inward remittance received for issue of shares.
• Delay in filing form FC (GPR) after the issue of shares.
• Delay in issue of shares/refund of share application money beyond 180 days, mode of receipt of funds, etc.
• Violation of pricing guidelines for issue of shares.
• The issue of ineligible instruments such as non-convertible debentures, partly paid shares, shares with optionality clause, etc.
• The issue of shares without the approval of RBI or FIPB respectively, wherever required.
• Delay in submission of form FC-TRS on the transfer of shares from Resident to Non-Resident.
• Delay in the submission of form FC-TRS on the transfer of shares from Non-Resident to Resident
• Taking on record transfer of shares by Investee Company, in the absence of certified from FC-TRS.

Types of contravention can be considered under Compounding for Offences under FEMA?

The type of contravention is determined to keep in view the following indicative points:

• Is the contravention is technical and/or minor in nature and needs only an administrative cautionary advice;
• Is the contravention is serious in nature and warrants compounding of the contravention; and
• Is the contravention, prima facie, involves money laundering, national and security concerns involving serious infringement of the regulatory framework.

Thus, the RBI reserves the right to categorize the contraventions as stated above and neither the contravener nor others have any right to classify any contravention as technical suo moto.

• The Reserve Bank makes a scrutiny of the application to verify whether the required details and documents furnished by the applicant are prima-facie in order.
• Applications will be returned to the applicant if it’s submitted with incomplete details or where the contravention is not admitted.
• On the receipt of applications, the RBI will examine and decide if the contravention is technical, material or sensitive in nature.
• The applicant will be issued a cautionary advice, if technical. If the contravention is material, it will be compounded by imposing a penalty after giving an opportunity to the contravener to appear before the compounding authority for a personal hearing. The same would be referred to the Directorate of Enforcement (DoE) for further investigation/ action if the contravention is sensitive in nature requiring further investigations.

Procedure of Compounding of Offences under FEMA 

Who can apply?

• Any individual 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 related to which a consent is issued by the Reserve Bank, can apply for compounding to the Reserve Bank.
• Applications looking for compounding of contraventions under section 3(a) of FEMA, 1999 may be submitted to the Directorate of Enforcement.

When to apply?

• On receiving the Notice – When a person is made aware of the contravention of the provisions of FEMA, 1999 by the Reserve Bank or the Foreign Investment Promotion Board (FIPB) or any other statutory authority.
• Suo Moto – one can also make an application for compounding, suo moto, on becoming aware of the contravention.
• Proactively by doing the Due diligence under FEMA

What is the Procedure for Compounding Offences under FEMA? 

• All applications in the prescribed format and other mentioned documents for compounding to submitted along with the prescribed fee of ₹ 5000/- by way of a demand draft drawn in favour of “Reserve Bank of India” and payable at the concerned Regional Office and by way of a demand draft drawn in favour of “Reserve Bank of India” and payable at Mumbai to the Compounding Authority.
• 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.
• The application fees of ₹ 5000/- received along with the application will be returned, in case the application has to be returned where required approvals are not obtained from the authorities or in case of incomplete application or for any other reason.
• Later on, the Compounding application shall be disposed of by the authority within 180 days from the date of receipt of the completed application for compounding.

* During the pendency of the compounding application with Reserve Bank the applicants are advised to give notice of, if any, in the address/ contact details of the applicant.

Method of Computing under FEMA

The RBI is guided by the provisions of section 13 of FEMA, whereby it is said that the amount imposed can be up to three times the amount involved in the contravention. However, the amount imposed is calculated on the basis of guidance note and which is also available on the RBI’s website for information of the general public. However, the guidance note is only for the purpose of indicating the basis on which the amount to be imposed is derived by the compounding authorities. The actual amount imposed may sometimes be different, depending on the situations of the case taking into account the following factors:

• The amount of gain of unfair advantage, wherever quantifiable, made as a result of the contravention.
• Due to contravention the amount of loss caused by any authority/ agency/ exchequer.
• Economic benefits accruing to the contravener from delayed compliance or compliance avoided.
• The repetitive nature of the contravention, the track record and/or history of non-compliance with the contravener.
• Contravener’s conduct in undertaking the transaction and in the disclosure of full facts in the application and submissions made during the personal hearing; and any other factor as considered relevant and appropriate.

Legal Effect of Compounding of offences under FEMA?

• No further penalty or proceedings on the issues compounded
• The procedure which was pending shall be taken on record
• All contraventions compounded stands regularised

Penalties are liveable for following contraventions/violation-

• Contravention of the Act.
• Contravention of Rules, Regulations.
• Contraventions of any of the conditions

Nature of Penalty Proceedings under Compounding of offences under FEMA

• Penalty Proceedings not criminal in nature.
• Penalty cannot be based on guesswork, conjecture or surmise
• The powers of enforcement officers are quasi-judicial.
• The doctrine of Double Jeopardy – Punishment by the imposition of a penalty as well as imprisonment for non-payment of penalty would not amount to double jeopardy. 

Monetary Ceiling on Penalty under Compounding of offences under FEMA

• Sum involved is quantifiable

Up to three times of the sum involved in the contravention.

• Sum involved is not quantifiable

Up to ₹ 2 Lakhs only

Over and above the aforesaid penalty, a recurring penalty of ₹ 5,000 per day can also be levied during the continuance of the offense.

• Prosecution

The penalty has been paid – no prosecution can be initiated.

The penalty is not paid – prosecution can be initiated.

No specified time limit for the imposition of penalty.

Recent Development:

• Public disclosure of Compounding Orders

For disseminating the information pertaining to compounding orders, it has been decided to host the compounding orders passed on or after June 1, 2016, on the Bank’s website (www.rbi.org.in). The data on the website will be updated at monthly intervals.

• Public disclosure of guidelines on the amount imposed during compounding

Now it has been decided to put the guidance note on the Bank’s website for information of the general public, which has already been discussed earlier.

Do’s and Don’ts of Compounding of Offences under FEMA 

• Spell out each contravention correctly
• Give the reasons of contravention
• Amount to be stated
• Delays in number of days to be stated
• If any default identified after making application, request for modification
• Enclose all the supporting documents relying upon
• Keep all the papers ready for hearing as no adjournments are granted
• The language of the application should be polite and the content should give the message of accepting the default
• No arguments at the time of hearing but informing about the situation and circumstances that lead to contravention
• No case laws to be cited
• No previous order on the identical issues to be cited
• Letter of authority on plain paper to be submitted
• Not to irritate the authority
• Plead ignorance

Conclusion

Coordinating with RBI is not an easy task but with the passage of time RBI has been putting a lot of efforts to bridge this connotation and now a day’s every step of RBI is in this direction. A very good instance is the consolidated Master Circular for each subject matter, issued annually or half-yearly, whereby it complies up all the alterations were done or circulars issued during the year, into one so as to give the concerned persons an easy access and comfort while dealing with it and which has also served the base of this article.