Penalties under FEMA Act, 1999

FEMA stands for Foreign Exchange Management Act. It was passed on 1^st June 2000 to facilitate India’s foreign exchange market’s external trades and maintenance. Compliance with FEMA is important else; it will lead to Penalties under FEMA Act.

FEMA brought a significant change because it made all offenses regarding foreign exchange civil offenses instead of criminal offenses as dictated by FERA.

The article specifically talks about the Penalties under FEMA Act, 1999^[1].

Compliance with FEMA

Compliance with the provisions of FEMA is important to avoid Penalties under FEMA Act.

There are 3 stages of compliance:

• Before the transaction;
• During the transaction; and
• After the transaction.

Thus, any person or company that wants to do business in a foreign country or buy foreign securities should comply with FEMA’s provisions to avoid Penalties under FEMA Act.

Offences and Penalties under FEMA Act

Section 13 talks about the Penalties under FEMA Act.

It states that any contravention under FEMA will invite the following penalties:

• The individual would be held liable for a penalty that is thrice the sum involved, where the amount is quantifiable or up to Rs. 2 lakhs, where the amount is not quantifiable. When such contravention continues, Rs. 5000 for every day till the violation persists.
• Further, the adjudicating authority in addition to the penalty may confiscate any currency, security or any other property involved in the contravention.

Section 14 talks about enforcement of the order of the adjudicatory authority.

It states that:

• If anyone fails to make full payment of penalty within 90 days from the date on which the notice payment of penalty was served, he shall be liable to civil imprisonment.
• The order for arrest or civil detention can only be made unless the adjudicating authority has issued a notice to the defaulter to appear before him.
• If the adjudicating authority is satisfied then he may pass the order for arrest of the defaulter.
• Every person arrested under this section, will be brought before the adjudicating authority within 24 hours of his arrest.
• The defaulter should be allowed to defend himself by the adjudicating authority.
• Every person detained in the civil prison in execution of the certificate  may:
• detained when the certificate is of demand of an amount exceeding 1 crore rupees for up to 3 years, or
• in any other case for up to 6 years.
• The defaulter will not be discharged from his liability, even after he is released from the civil detention.

Section 15talks about the power to compound contravention.

It states that:

• An application on any contravention under section 13, made by any person committing the contravention, be compounded within 180 days from the date of receipt by the ED (Director of Enforcement); and
• No further proceeding can be made, where contravention has been compounded.

To have a better understanding, let us look into the meaning of compounding.

What is compounding of contravention?

• Contravention is the violation or breah of provisions under FEMA, 1999.
• Compounding of contraventions is the process wherein the individual or the corporate entity admits the commitiing of the contravention & seeks redressal from the Reserve Bank of India.
• A monetary penalty on the contravener, as he acknowledges that he committed contravention.
• Compounding allows to avoid litigation and fast track the process of determining the penalty.

What is the fee to be paid?

• The applicant has to furnish all the details along with the application form worth Rs. 5000. He must also mention that if the case in under investigation of the ED (Director of Enforcement) or the Prevention of Money Laundering Act, 2002.
• The contravention penalty must be paid within 15 days of the passing of the compounding order.
• If the person failed to pay the penalty within 3 days, then it will be considred as the individual never asked for compounding contravention.
• He will be liable for legal action under FEMA, 1999.
• The compounding processs will be completed within 180 days from the receipt of the request.
• Powers to compound (Section 15) – any contravention under Section 13 may, on application made by the person committing such contravention, be compounded within 180 days from the date of application by Directorate of Enforcement and Reserve Bank of India.

Conclusion

FEMA allows an authorized person to deal in foreign exchange or security. FEMA replaced an old act FERA to bring leniency and flexibility. FEMA’s primary aim is to facilitate external payments & trade and maintain the foreign exchange market in India.

Any person or company that wants to do business in foreign countries or buy foreign securities should comply with FEMA’s provisions to avoid Penalties under FEMA Act.

Read our article:Discontinuation of Reports under Foreign Exchange Management Act