Compounding of Contravention under FEMA

Niki Shah – Partner | SN & Co.

Table of Contents

1. What is Compounding?
2. When should one apply for Compounding?
3. What are Compounding Orders?
4. Total Compounding order passed by RBI
5. Statistical Facts
6. Provisions
7. Powers to Compound
8. Delegation of Powers to Regional Offices/Sub-Offices
9. Contraventions Compounded by FED CO Cell, New Delhi
10. Contravention of Provisions under FEMA, 1999
11. Benefits of Compounding
12. Pre-requisite for Compounding Process
13. Compounding Process
14. Computation of Penalty
15. Penalty to Compounding
16. Late Submission Fees (LSF)
17. Documentation Requirement
18. Compounding Orders

1. What is Compounding?

• Compounding is the admission of a violation of any of the provisions of the FEMA Act of 1999
• It refers to admitting a Contravention, pleading guilty and seeking remedy.
• Or violation of the rules/regulations/notifications/orders/directions, or circulars issued under the Act
• The provisions of section 15 of FEMA, 1999 permit compounding of contravention
• The offence must be compounded within 180 days of the date of receipt of the application.

2. When should one apply for Compounding?

• When a person is made aware of the contravention of the provisions of FEMA, 1999 by

1. the Reserve Bank or
2. any other statutory authority or
3. the auditors or
4. by any other means, she/he may apply for compounding.

• One can also make an application for compounding, suo moto, on becoming
  aware of the contravention.

3. What are Compounding Orders?

• Vide A.P. (Dir Series) Circular No. 73 dated 26/05/2016, RBI decided to opt for public disclosure of compounding orders.
• Till date, 4540 orders have been hosted on the RBI website.
• Compounding orders are concise, outlining facts, emphasizing the violated provision, and specifying the compounding fee.
• Does not hold any precedence value and only immense guidance value.
• Analyzing compounding orders offers key insights into the RBI’s application of FEMA provisions and relevant notifications, providing valuable interpretive principles.

4. Total Compounding order passed by RBI

5. Statistical Facts

6. Provisions

Regulatory Provisions:

• Section 15 of the Foreign Exchange Management Act, 1999 read with Section 13

Governing Provisions:

• Foreign Exchange Management (Compounding Proceedings) Rules, 2000, as amended
• Master Direction on Compounding of Contraventions under FEMA, 1999 – No.04/2015-16 dated January 1, 2016, as amended

7. Powers to Compound

No Contravention shall be compounded unless the amount involved in such contravention is quantifiable.

Section 3(a) of FEMA, 1999 – deal in or transfer any foreign exchange or foreign security to any person not being an authorised person;

8. Delegation of Powers to Regional Offices/Sub-Offices

FEMA 20/2000-RB dated May 3, 2000

• Paragraph 9(1)(A) of Schedule 1
• Paragraph 9(1)(B) of Schedule 1
• Paragraph 9(2) of Schedule 1
• Paragraph 8 of Schedule 1
• Paragraph 5 of Schedule 1
• Regulation 2(ii) read with Regulation 5(1)
• Paragraph 2 or 3 of Schedule 1 (Issue of shares without approval of RBI or Government, wherever required)
• Regulation 10A (b)(i) read with paragraph 10 of Schedule 1
• Regulation 10B (2) read with paragraph 10 of Schedule 1
• Regulation 4 (Receiving investment in India from non-resident or taking on record transfer of shares by investee company)
• Regulation 14(6)(ii)(a)
• Paragraphs 7(1) (for the period upto 02.03.2017) and 6(1) (for the period 03.03.2017 to 06.11.2017) of Schedule 9
• Regulation 10(A)(a)

FEMA 20(R)/ 2017-RB dated November 07, 2017

• Regulation 13.1(1)
• Regulation 13.1(2)
• Regulation 13.1(3)
• Paragraph 2 of Schedule 1
• Regulation 11
• Regulation 2(v) read with Regulation 5
• Regulation 16.B (Issue of shares without approval of RBI or Government, wherever required)
• Regulation 13.1(4)
• Regulation 4 (Receiving investment in India from non-resident or taking on record transfer of shares by investee company)
• Regulation 13.1(11)
• Regulations 13.1(7) and 13.1(8)
• Regulation 10(5)

9. Contraventions Compounded by FED CO Cell, New Delhi

• The officers attached to the FED, CO, Cell at New Delhi office are authorized to compound the contraventions as per details below:

• Amounts Above 1 Crore – Regional Office at Panaji and Kochi will have no jurisdiction. Mumbai Regional Officer and Thiruvananthapuram Regional Office would compound such contraventions.

10. Contravention of Provisions under FEMA, 1999

ODI

• Non submission of form ODI after investment & UIN not allotted
• Not a permitted method of Funding
• Not obtaining Share certificate within stipulated time period from the date of Remittance
• Non Submission of Annual Performance Reports (APR) every year

ECB

• Not an eligible borrower
• Lender not a recognized lender
• Minimum Maturity period not adhere to
• Breach of all in cost ceiling
• End use not a permitted one
• LRN not obtained

FDI

• Non reporting of Inward remittance within 30 days
• Not allotting equity instrument or refunding the amount within 180 days
• Not submitting Form FCGPR within 30 days from the date of allotment
• Non Submission of Form FCTRS on transfer of shares
• Issue of instrument other than equity shares, fully or CCPS as prescribed

Sensitive Contraventions

• Cases involving serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation are categorized as sensitive contraventions.

11. Benefits of Compounding

• It is a voluntary process
• Comforts of citizens and corporate community
• Personal hearing is not mandatory
• Minimizing transaction costs
• Time-bound disposal (180 Days)
• Changing dynamics of our economy
• Simple and hassle-free procedure
• No proceeding or further proceedings initiated or continued
• Absolutely transparent
• It saves time and energy One application – One hearing – One order for one notification.

12. Pre-requisite for Compounding Process

• The company must not make similar contraventions within a 3 year period of compounding.
• Compoundable contraventions requiring approvals from any authorities must obtain necessary permissions before applying for compounding.
• Any suspected serious contraventions such as money laundering, terror financing, or compromising national sovereignty trigger referral to the Directorate of Enforcement for further investigation if the contravener fails to pay the compounding penalty within the stipulated period.
• Contraventions that have undergone adjudication by the Directorate of Enforcement and are under appeal according to sections 17 or 19 of FEMA, 1999, are non compoundable.

13. Compounding Process

• Submission of application to RBI and not AD bank in the prescribed format.
• Payment of fees – of Rs. 5,000/- by way of DD in favour of RBI
• Examination by RBI
• Calling for additional documents, if required
• Opportunity for personal hearing
• Passing compounding order
• Payment of penalty
• Issuance of certificate of payment of a penalty
• Separate formats are provided in Annex II for FDI, ECB, ODI & Branch Office/Liaison Office
• Format for FDI

1. 1. Name of the applicant, Date of incorporation, Income-tax PAN, Nature of activities undertaken (Please give NIC code – 1987/2008), Brief particulars about the foreign investor
   2. Details of foreign inward remittances received by Applicant Company from date of incorporation till date

Table A

* date of reporting to RBI and not AD

Table B

*date of reporting to RBI and notAD

Table C

*date of reporting to RBI and not AD

Table D

A=B+C

14. Computation of Penalty

As per provisions of section 13 of FEMA the amount imposed can be up to three times the amount involved in the contravention. However, the amount imposed is calculated based on guidance note given below.

Additional Provisions

• The amount imposed should not exceed 300% of the amount of contravention
• In case the amount of contravention is less than Rs. One lakh, the total amount imposed should not be more than amount of simple interest @5% p.a. calculated on the amount of contravention.
• In case of Transfer or issue of security by a person resident outside India, the amount imposed will be further graded as under:

• In cases where it is established that the contravener has made undue gains, the amount thereof may be neutralized to a reasonable extent by adding the same to the compounding amount calculated as per
• If a party who has been compounded earlier applies for compounding again for similar contravention, the amount calculated as above may be enhanced by 50%.

15. Penalty to Compounding

• The amount should be paid within 15 days from the date of the order by way of a demand draft drawn on “Reserve Bank of India” and payable at the Regional office/Sub-office/Central Office Cell, New Delhi which has issued the compounding order and at Mumbai if the order is issued by CEFA, Central Office, Mumbai
• Appeal against the order of the Compounding Authority?

There is no provision under the of FE (Compounding Proceedings) Rules, 2000, for an appeal against the order of the Compounding Authority or for a request for reduction of amount imposed or extension of period for payment of the amount imposed.

16. Late Submission Fees (LSF)

• The Late Submission Fee (LSF) was introduced for reporting delays in Foreign Investment (FI), External Commercial Borrowings (ECBs) and Overseas Investment related transactions with effect from November 07, 2017, January 16, 2019 and August 22, 2022 respectively. It has now been decided to bring uniformity in imposition of LSF across functions. The following matrix shall be used henceforth for calculation of LSF, wherever
  applicable:

• Time Frame: LSF option can be availed till a period of three years from the due date of reporting or submission. Post expiry of the said three years, the contravener will continue to have the ability to apply for compounding procedure as established under FEMA for rectifying the delays in filings.
• The new matrix for calculation of LSF may prove either beneficial or detrimental for a contravener, when compared with the old regime, based on variables such as the amount and the time involved (examples)

Major Differences

17. Documentation Requirement

• Compounding application in the format prescribed by RBI From time to time
• Along, with the prescribed fee of Rs. 5000/- by way of a demand draft drawn in favour of “Reserve Bank of India”
• Additional details as per the Annexes- relating to Foreign Direct Investment, External Commercial Borrowings, Overseas Direct Investment and Branch Office/Liaison Office, as applicable
• An undertaking that they are not under investigation of any agency such as DoE, CBI, etc- (No Format specified)
• Duly filled ECS mandate form
• A copy of MoA and latest Audited BS while applying
• Application must contain contact details, name of the applicant, Mobile no.,
  and email Id

18. Compounding Orders

Factors Taken Into Account While Passing Compounding Order

• Amount of gain/unfair advantage received as a result of contravention (wherever quantifiable)
• Amount of loss caused to authority/agency/exchequer due to contravention
• Economic benefit to the contravener due to delayed nature of compliance or avoiding such compliance
• Repetitive nature of contravention. Track record/History of non compliance
• Contravener’s conduct – while undertaking the transaction/disclosure of full facts in Application. Submission made during personal hearing.
• Any other factor considered relevant/appropriate.