ECB Contraventions and Compounding Process

Ankita Tiwari

08 May, 2023

The Foreign Exchange Management Act of 1999 (FEMA) provides for a compounding process. Section 15 of FEMA provides that any contravention under section 13 of FEMA can be compounded within 180 days from the date of an application by the person who has committed such contravention. The compounding of contravention is done by the officers of the Reserve Bank of India (RBI) as may be authorized in this regard by the Central Government. Compounding means the process of voluntarily admitting the contravention and seeking redressal. It is the process of seeking regularization of an admitted contravention. The benefits of the compounding process are that no proceedings are initiated, so it saves time and energy and also ensures transparency. Section 13 (1) of FEMA, which prescribes the compounding process, makes an application by the contraven or to RBI to initiate the compounding process. In simple terms, compounding requires voluntary disclosure of the contravention to the RBI. The application should be made by the contraven or as soon as he becomes conscious of the contravention.

The Framework for compounding includes:

1. The Foreign Exchange Management Act of 1999 (FEMA)
2. The Foreign Exchange (Compounding Proceedings) Rules, 2000
3. Master Direction on the compounding of contravention
4. FAQs on compounding of contraventions.
5. Any other direction issued by RBI from time to time
6. As we are discussing the ECB compounding process, therefore, the Exchange Management (Borrowing and Lending) Regulations, 2018 (ECB Regulations) will also be applicable.                

External Commercial Borrowings (ECB) are loans raised by eligible resident entities from recognized foreign entities. ECB compounding process can arise in the following cases:

1. Delay or failure to obtain Loan Registration Number (LRN)
2. Delay or failure to submit Form ECB-2
3. Utilization of ECB proceeds for activities not permissible under the prescribed regulations
4. Any other non-compliance under the regulations

The Application Process for the ECB Compounding Process

1. If there is any contravention to comply with the ECB norms, an application for compounding can be submitted together with a fee of INR 5000 by way of a demand draft in favor of RBI.
2. The application should be as per the format prescribed by the Foreign Exchange (Compounding Proceedings) Rules, 2000.
3. The applicant applying for compounding a contravention relating to ECB has to furnish details as prescribed in Annexure II of the “Master Directions- Compounding of Contravention under FEMA, 1999”. The details required to be furnished along with the application for compounding of contravention in relation to ECB as prescribed under this Annexure are:

1. Name of the applicant
2. Date of incorporation
3. Details of ECB
4. PAN details
5. Nature of activities undertaken
6. Brief description of the foreign lender
7. Whether the applicant is an eligible borrower?
8. Whether the lender is eligible?
9. Is the lender an equity holder?
10. What was the level of holding of the equity holder at the time of the loan agreement?
11. Loan agreement date
12. Amount in Indian Rupee and foreign currency.
13. Rate of Interest
14. Duration of Loan
15. Details of repayment
16. Details of drawdown
17. Details regarding the application and receipt of LRN
18. Details regarding submission of Form ECB-2, period of return and date of submission.
19. Details of the utilization of ECB in Indian Rupee and Foreign Currency.
20. Nature and reasons for contravention
21. Supporting documents regarding contravention.

In addition to the above, the following documents are to be furnished:

1. A copy of the Memorandum of Association
2. Latest audited balance sheet
3. An undertaking as prescribed under Annexure III of the “Master Directions- Compounding of Contravention under FEMA, 1999^[1]”.

• In case an application for compounding has been filed without obtaining proper approvals or permissions, then the contravention will not be compounded unless the required approvals are obtained.

• Any change in address or contact details should be pointed out by the applicant during the pendency of the proceedings before RBI.
• If the application is not as per the format or is incomplete, then it will be returned or the RBI can call for submission of such mandatory details, declarations or documents within a reasonable time.

Pre-requisite of ECB Compounding Process

1. The application for compounding of a contravention has to be filed within 3 years from the date of contravention or the date on which the applicant becomes aware of the contravention. Any subsequent contravention committed after the expiry of 3 years from the date of the previous contravention shall be considered as a first contravention.
2. Where serious contravention is suspected such as money laundering, terror financing or any contravention which affects the sovereignty and integrity of the nation or contraventions where the contraven or fails to pay the sum of contravention will be referred to the Directorate of Enforcement for necessary investigation and action under FEMA or to any other authority instituted for implementation of Prevention of Money Laundering, 2002 or to any other agencies for taking necessary actions.
3. No contravention can be compounded if the adjudication was done by the Directorate of Enforcement and an appeal is filed under section 17 or section 19 of FEMA.
4. When an application for compounding of a contravention is made to the RBI or identified by RBI itself, then the RBI shall examine whether the contravention is material and necessary compounding procedure along with the issues involved and whether it is sensitive or serious.
5. If the Directorate of Enforcement believes that the compounding relates to a serious contravention, then it shall call upon the compounding authority to remit the proceedings to the appropriate adjudicating authority. 

Computation matrix of ECB Compounding Process

Under the ECB Regulations, a fixed amount of INR 10,000/- is applied once for every contravention. On top of the fixed amount, a variable amount is imposed. The computation matrix of the variable amount is prescribed as follows:

The exception to the ECB compounding process

The contravention of delay in filing Form ECB and Form ECB 2 are treated separately. An application for compounding of contravention is not required to be filed in case of delay in filing Form ECB and Form ECB-2. The delay can be regularized by payment of Late Submission Fees (LSF).

The Bottom Line

The ECB application and compounding process is similar to the compounding process of any other contravention under section 13 of the FEMA. Certain additional documents are required to be furnished as prescribed under Annexure to the Master Circular. Further, there are certain exceptions under which the contravention can be regularized by depositing a certain fee. So it can be concluded that the compounding process promotes quick resolution of irregularities and contraventions.

Read our Article: Compounding of Contraventions under FEMA, 1999