Offences | Penalties | Compounding Under FEMA with Practical Case Studies

Under the Foreign Exchange Management Act (FEMA) in India, the terms "Offences," "Penalties," and "Compounding" refer to the legal framework and procedures for dealing with violations of foreign exchange rules:

– Offences: These are violations of the provisions of FEMA, which governs the management of foreign exchange in order to facilitate external trade and payments and maintain the foreign exchange market in India. Offences typically involve non-compliance with regulatory requirements such as misreporting or under-reporting of transactions, non-adherence to the rules regarding foreign investments and currency exchanges, etc.

– Penalties: If a person or entity commits an offence under FEMA, they are subject to penalties. These penalties can vary widely depending on the nature and severity of the violation. The penalties might include monetary fines or even imprisonment in severe cases. The amount of the penalty is usually determined by the specific provisions of FEMA that have been violated.

– Compounding: This is a voluntary process that allows the offenders to avoid litigation. When an offence under FEMA is compounded, the accused pays the monetary penalty, and in return, the authorities forego further legal proceedings related to the offence. This process is meant to simplify and expedite the resolution of lesser offences under FEMA. The Reserve Bank of India (RBI) provides specific guidelines on how the compounding process works, including a matrix for calculating the quantum of compounding fees based on the nature of the contravention.

These mechanisms ensure compliance with the foreign exchange rules and help maintain economic stability and integrity within the country's financial system.

By Natwar Thakrar – Partner | N.G. Thakrar & Co., Chartered Accountants

Table of Contents

1. Contraventions and Penalties
2. Compounding of Contraventions
3. Procedure for Compounding
4. Method for Computing Compounding Quantum – RBI Guidance on Compounding Matrix
5. Practical Examples for Computing Compounding Quantum

1. Contraventions and Penalties

• Contravention is an action which is against the Act or Rule made thereunder.
• Contravention means violation, breach, infringement, transgression, trespassing, etc.
• It is  an action which offends against a law, treaty, or ruling.
  • Publishing misleading advertisement is a contravention of the Act.
• Under FEMA, contravention refer to breach of provisions of the Act or non-compliance with the regulatory requirements, undertaking unauthorized activities, or improper conduct in foreign exchange transactions.

1.1 Types of Contraventions

• Contravention of Act
• Contravention of any Rules, Regulations, Notification, Direction
• Contravention of any order issued in exercise of the powers under the Act.
• Contravention further classified as:

1. 1. Sensitive Contraventions: Suspected money laundering, terror financing or affecting sovereignty of the nation
   2. Material Contravention: which are required to be compounded for which necessary compounding procedure has to be followed
   3. Technical Contravention: Contravention identified by the RBI or brought to its notice by the entity involved in contravention by way of a reference other than through the prescribed application for compounding

• Once a compounding application is filed by the concerned entity suo moto, admitting the contravention, the same will not be considered as ‘technical’ or ‘minor’ in nature and the compounding process shall be initiated in terms of section 15 (1) of Foreign Exchange Management Act, 1999 read with Rule 9 of Foreign Exchange (Compounding Proceedings) Rules, 2000.

1.2 Contraventions – Illustrative Examples

• Failure to submit required reports, returns, or information to RBI within the stipulated timeline.
• Engaging in foreign exchange transactions without proper authorization or conducting transactions that are prohibited or restricted under FEMA.
• Non-compliance with foreign direct investment (FDI) guidelines, such as exceeding sectoral caps, incorrect reporting of investment, or contravening conditions imposed by the RBI.
• Non allotment of shares within 2 months
• Non-filing FCGPR within 30 days of allotment
• Non-filing of FCTRS with AD Bank within two months of transfer of shares, where required.
• Purchase of agricultural land/farm house by NRIs/OCIs
• Loan to a foreign company by Individuals under LRS
• Investment in a foreign company abroad without filing Form FC
• Remittance of funds by HO directly to vendors without routing the same through LO/BO/PO
• Delay in receipt of export proceeds beyond prescribed period.
• Netting of proceeds of export sale and import purchase beyond the prescribed time limit
• Acquisition of a immovable property abroad out of borrowed funds

1.3 Penalties

• In terms of Section 13, any person contravening FEMA shall be liable, upon adjudication, to a penalty up to three times the sum involved in contravention, where such amount is quantifiable or up to Rs. 2,00,000, where the amount is directly not quantifiable, with further penalty up to Rs. 5,000 per day after the first day during which such contravention is continuing.
  • Explanation: For the purposes of this sub-section, “property” in respect of which contravention has taken place, shall include:

1. 1. 1. deposits in a bank, where the said property is converted into such deposits;
      2. Indian currency, where the said property is converted into that currency; and
      3. any other property which has resulted out of the conversion of that property.

• Penalty Proceeding is not criminal in nature.
• Penalty cannot be based on guess work, conjecture or surmise.
• The powers of enforcement officers is quasi judicial.
• Punishment by imposition of penalty as well as imprisonment for non payment of penalty would not amount to double jeopardy.

2. Compounding of Contraventions

2.1 What is Compounding of Contravention?

• Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and seeking redressal.
• It is a mechanism whereby the defaulter is reprieved of major legal consequences by affording him with an opportunity to pay a smaller sum of money and also to escape prosecution.
• It provides comfort to individuals and corporate community who commit contravention [except contravention of section 3(a) of the Act] by minimizing transaction costs.
• Compounding of offence is not a right of the defaulter. Competent authority has the power to compound offense in appropriate cases either prior to or following the commencement of legal proceedings.
• Willful, malafide and fraudulent transactions are, however, viewed seriously, which will not be compounded by the Reserve Bank.
• CG under s. 46 read with s. 15(1) of FEMA notified “Compounding Proceedings Rules, 2000” empowering the RBI to compound any contraventions as defined under s. 7, 8 and 9 and the third schedule to FEMA Current Account Rules.
• Further, Vide GSR 609€ dated 13.09.2004, RBI is further empowered to compound all types of contraventions under FEMA, 1999, except contravention of the provisions of s. 3(a).
• Compounding can be considered on an application made by the person committing the contravention for a specified sum. RBI shall offer an opportunity of personal hearing before compounding the contravention.
• Enforcement Directorate (ED) is empowered to compound contravention under s. 3(a) of FEMA {Rule 5}

2.2 Who Can Apply for the Compounding and When?

• Who can apply?

1. 1. Any person who contravenes any provision of FEMA, 1999 [except contraventions under s. 3(a)] or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act or
   2. Contravenes any condition subject to which an authorization is issued by the Reserve Bank
   3. Can apply for compounding to the Reserve Bank.

• When?

1. 1. Suo moto, on becoming aware of the contravention, or
   2. the person is made aware of the contravention by the RBI or any other statutory authority or auditors or by any other means.

• It is expected that the person who has contravened the provisions has regularized the transactions involved in the contravention before filing the compounding application.

2.3 Non-Compoundable Offenses

• Money Laundering (PMLA)/Hawala Transactions
• Matter already a subject matter of Show cause notice issued by the ED ( Refer Para 5.3 of Master Direction on Compounding)
• Identical matter is compounded within a period of previous three years
• Matters is pending in an appeal filed by the applicant
• Matters requires Prior Permission from Government/Department or Ministry
• Where the amount involved in contravention is not directly quantifiable

2.4 Why Compounding?

• Compounding helps in regularizing the mistakes/contraventions
• The procedure is simple and fast
  • One completed application, one hearing and the final order of disposal is passed within 180 days
• No legal proceedings
• No further penalty or prosecution for the issues compounded
• Savings in penalty amount is much higher as compared to the compounding fees levied by the RBI
• All contraventions compounded stand regularized
• Pending documents are admitted and taken on record

2.5 Pre-requisite for Compounding

• Compounding of contraventions pertaining to any transactions requiring regularization or approvals from Government or any statutory authority concerned shall not be compounded unless the required regularization process is completed or necessary approvals are obtained from concerned authorities.
• In cases where adjudication is done by the DoE and an appeal has been filed under section 17 or 19 of the FEMA, no contravention can be compounded in terms of Rule 11 of the Foreign Exchange (Compounding Proceedings) Rules, 2000
• Similar/Identical contravention compounded within a period of three years prior to the contravention also cannot be compounded.

2.6 Compounding Authority

2.7 Delegation to Regional Offices – Notification 20(R)

• Regulation 13.1(1) – Delay in reporting inward remittance for issue of shares
• Regulation 13.1(2) – Delay in filing form FC(GPR) after issue of shares
• Regulation 13.1(3) – Delay in filing Annual Return of the Foreign Liabilities & Assets (FLA)
• Paragraph 2 of Schedule I – Delay in issue of shares/refund of share application money beyond 60 days, mode of receipt of funds, etc.
• Regulation 11 – Violation of pricing guidelines for issue of shares
• Regulation 2(v) read with Regulation 5 – Issue of ineligible instruments
• Regulation 16.B – Issue of shares without prior approval of the RBI or Government, wherever required
• Regulation 13.1(4) – Delay in submission of Form FC- TRS on transfer of shares from Resident to Non-Resident or from Non-resident to resident
• Regulation 4 – Receiving investment in India from non-resident or taking on record transfer of shares by investee company
• Regulation 13.1(11) – Downstream Investment – To notify the Secretariat for Industrial Assistance, DIPP and file Form DI within 30 days
• Regulations 13.1(7) and 13.1(8) – Filing of Form LLP(I) & LLP (II)
• Regulation 10(5) – Schedule IV Violations

2.8 Delegation to Regional Offices – FEM (Non-Debt Instrument) Rules, 2019

• Rule 2(K) read with Rule 5 – Investment in equity instruments in violation of conditions of entry routes, sectoral caps or the investment limits
• Rule 21 – Contravention of Pricing Guidelines
• Paragraph 3(b) of Schedule I – Issue of shares without approval of RBI or Government, wherever required
• Rule 4 – Receiving Investment in India from non-resident or taking on record transfer of shares by investee company in violation of Act or Rules or Regulations
• Rule 9(4) – Transfer of investment in Indian company held on a non-repatriation basis to a person resident outside India by way of gift without the prior approval of the Reserve Bank

2.9 Delegation to Regional Offices –FEM (Mode of Payment and Reporting of Non-Debt Instruments) Regulations

• Regulation 3.1 (I)(A) – Mode of Payment
• Regulation 4(1) – Delay in Reporting issue of equity instruments in FC-GPR within thirty days from the date of issue of equity instruments
• Regulation 4(2) – Delay in filing form FLA by 15th July of each year
• Regulation 4(3) – Delay in reporting transfer of shares in FC- TRS
• Regulation 4(6) – Delay in submission of Form LLP(I) in respect of the receipt of consideration for capital contribution and acquisition of profit shares
• Regulation 4(7) – Delay in submission of Form LLP(II) for disinvestment/transfer of capital contribution or profit share between a resident and a non-resident (or vice versa)
• Regulation 4(11) – Delay in filing form InVi by an investment vehicle which has issued unit to non residents

2.10 Delegation to FED CO Cell, New Delhi

• Upon transfer of work of three divisions of Foreign Investment Division (FID) (viz. LO/BO/PO division), Non Resident Foreign Account Division (NRFAD) and Immovable Property (IP) Division to FED, CO Cell, New Delhi, the officers attached to the FED, CO Cell at New Delhi office are authorized to compound the contraventions as under:

1. 1. FEMA -7 – Contraventions relating to acquisition and transfer of immovable property outside India
   2. FEMA -21 – Contraventions relating to acquisition and transfer of immovable property in India
   3. FEMA -22 – Contraventions relating to establishment of Branch office, Liaison Office or Project office in India
   4. FEMA -5 – Contraventions falling under Foreign Exchange Management (Deposit) Regulations, 2000

• The above contraventions can be compounded by all Regional Offices of FED (except Kochi and Panaji) without any limit on the amount of contravention.
• Kochi and Panaji Regional offices can compound above contraventions for amount below Rs. 1,00,00,000/-.
• The contraventions of Rs. 1,00,00,000/- and above under the jurisdiction of Panaji and Kochi Regional Offices and all other contraventions of FEMA will be compounded at Cell for Effective Implementation of FEMA (CEFA), Mumbai.

3. Procedure for Compounding

3.1 Procedure & Prerequisite for Compounding

• Procedure for compounding is provided in Foreign Exchange (Compounding Proceedings) Rules, 2000 – Rule 1 to 13 and the Master Direction on Compounding.
• The Contraventions should have crystallized

1. 1. Period of contravention,
   2. Amount of contravention and
   3. Rule or Regulation contravened. (PAR)

• In case contravention cannot be quantified, it cannot be compounded [Proviso to Rule 5(1)]
• No Similar contravention should have been committed in past 3 years. [Rule 5 (2)]. For this purpose, any second or subsequent contravention committed after expiry of a period of three years from the date on which the contravention were previously compounded shall be deemed to be a first contravention
• Contraventions should have been duly regularized
  • Approvals/Permissions granted, Excess amounts refunded etc.
• Where any contravention is compounded before adjudication under S 16, no inquiry shall be held for adjudication of such contravention against the person in relation to whom the contravention is so compounded
• No contravention shall be compounded if an appeal has been filed under S 17 or S.19 of the Act

3.2 Procedure for Compounding

• Application in duplicate in prescribed Form to RBI, Exchange Control Department, Central Office, Mumbai
• Furnish details in Annexures – (As provided in Annex – II to Master Direction on Compounding requiring information in 4 Tables + relevant information i.e. information relating to Foreign Direct Investment, External Commercial Borrowings, Overseas Direct Investment and Branch Office/Liaison Office, as the case may be applicable, along with
• An Undertaking (Refer Annex III to Master Direction) that the applicant is not under investigation by agency such as DOE, CBI, etc.
• Provide a copy of Memorandum of Association and the latest audited financials along with the compounding application
• Furnish duly filled in Electronic Clearing System (ECS) Mandate Form (Refer Annex IV to Master Direction)
• Pay Fees by DD Rs. 5,000/- in favour of the “Reserve Bank of India” and payable at MRO
• Examination of the application by RBI
• Calling for additional documents, if required
• Serious contraventions

1. 1. Proviso added to Rule 8(2) of Compounding Rules February 20, 2017 – (money laundering, terror financing, affecting sovereignty and integrity of the nation) including non-payment of penalty in the compounding order
   2. Cases to be remitted to appropriate Adjudicating Authority i.e. DoE

• Material: Non-compliance with regulatory requirements – Compounding by RBI
• Sensitive: Case referred to DoE under Section 37 by virtue of Rule 8(2)
• Opportunity for personal hearing – Optional – RBI encourages applicant to appear directly rather than being represented/accompanied by legal experts/consultants, as compounding process is only for the admitted contraventions
• Passing of compounding order – Within 180 days from the date of receipt of completed application
• Payment of compounding amount within 15 days from the date of order. RBI issues a certificate of completion of the proceedings upon payment of compounding fees
• Where a contravention has been compounded, no further prosecution for the same contravention [Rule 6]
• In case of non-payment of fees amount indicated in compounding order within 15 days of the order, it will be treated as if the applicant has not made any compounding application to the RBI
• Other provisions of FEMA, 1999 in respect of contraventions will apply
• RBI refers such cases to the Directorate of Enforcement for appropriate action
• As the compounding is based on voluntary admissions and disclosures, there cannot be an appeal against the Compounding Order
• The order, however, can be challenged through a WRIT Petition in High Court

3.3 Format for Application

1. Name of the applicant (in BLOCK LETTERS)
2. Full address of the applicant (including Phone and Fax No. and email id)
3. Whetherthe applicant isresident in India orresident outside India
4. Name of the Adjudicating Authority before whom the case is pending
5. Nature of the contravention [according to sub-section (1) of Section 13]
6. Brief facts of the case
7. Details of fee for application of compounding
8. Any otherinformation relevantto the case

I/We declare that the particulars given above are true and correct to the best of my/our knowledge and belief and that I/We am/are willing to accept any direction/order of the Compounding Authority in connection with compounding of my/our case.

Dated :
Name :

(Signature of the Applicant)

3.4 Details Required in Case of Contravention of ECB Guidelines

• Name of the applicant
• Date of incorporation, Income-tax PAN
• Nature of activities undertaken (Please give NIC code – 1987)
• Brief particulars about the foreign lender
• Is the applicant an eligible borrower?
• Is the lender eligible lender? Is the lender an equity holder?
• What is the level of his holding at the time of loan agreement?
• Details of ECB – Amount in Foreign Currency and Indian Rupee
• Rate of interest, Period of loan
• Repayment particulars – date of drawdown, amount In FC and INR
• Details of drawdown
• Details of LRN Number- application and receipt
• Details of ECB 2 returns submitted, Period of return, Date of submission
• Details of Utilization of ECB in Foreign Currency and Indian Rupee
• Nature of contravention and reasons for the contravention
• All supporting documents may be submitted

3.5 Details Required for Contraventions Relating to ODI

• Name of the applicant
• Date of incorporation
• Income-tax PAN
• Nature of activities undertaken (Please give NIC code – 1987)
• Name of Overseas entity
• Date of incorporation of overseas entity
• Nature of activities under taken by overseas entity
• Nature of entity – WOS/JV
• Details of remittance sent- Date of remittance; Amount in FCY and in INR
• Details of other financial Commitment
• Details of UIN applied and received
• Date of receipt of share certificate
• Approval of other regulators if required
• Details of APRs submitted: For the period ended; date of submission
• Nature of contravention and reasons for the contravention
• All supporting documents may be submitted

3.6 Details Required in Case of Contraventions Relating LO/BO in India

• Name of the applicant
• Date of incorporation
• Income-tax PAN
• Nature of activities undertaken (Please give NIC code – 1987)
• Date of approval for opening of Liaison Office/Branch Office
• Validity period of the approval
• Income and expenditure of the LO/BO
• Dates of submission of Annual activity Certificates
• Nature of contravention and reasons for the contravention
• All supporting documents may be submitted

3.7 Tables As per Annex-II to Master Direction

• Date of reporting to RBI and not AD

A= B+C
Please give supporting documents
Table A- Copies of FIRC with date stamp of receipt at RBI
Table B- Copies of FCGPR with date stamp of receipt at RBI
Table C- letter seeking refund/allotment of shares- approval letter from RBI A2 form

• Copies of Balance Sheet during the period of receipt of application money and allotment of shares
• Nature of contravention and reasons for the contravention

3.8 Format of Undertaking

We ______________ hereby confirm/declare that we are not under any enquiry/investigation/adjudication by Directorate of Enforcement, as on the date of this application.

We further undertake to inform to the Compounding Authority/Reserve Bank of India immediately, in writing, if any enquiry/investigation/adjudication proceedings are initiated by the Directorate of Enforcement against us at any time hereafter but on or before the date of issuance of the compounding order in respect of the compounding application filed by us.’

OR

We (Name of the applicant) hereby confirm/declare that I/we am/are or was/were under enquiry/investigation/adjudication by Directorate of Enforcement, and the details are given in the Annex.

We further undertake and confirm that no appeal has been filed by us under section 17 or section 19 of FEMA, 1999.

Signature of the applicant/authorized signatory

Name:

Date:

3.9 Electronic Clearing Service (ECS) Mandate

Name of the Party (Beneficiary):

PAN:

Particulars of the Bank Account –
Name of the Bank, Name of the Branch, Address – (As appearing on the cheque issued by the Bank)

Telephone No: ______________

Type of Account

IFSC Code

The 9 Digit MICR Code Number
(As appearing on the cheque book issued by the Bank)

Account No.
(As appearing on the cheque book issued by the Bank)

Checklist for attachments:
Photocopy of PAN Card
Photocopy of a cancelled blank cheque

We hereby declare that the particulars given above are correct and complete. If the transaction is delayed or not effected at all for reasons of incomplete or incorrect information, we would not hold the user institution responsible.

Signature of the Authorised Signatory

4. Method for Computing Compounding Quantum  – RBI Guidance on Compounding Matrix

Quantum Imposed generally depends upon:

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

4.1 RBI Guidance on Compounding Matrix

4.2 Compounding of Contraventions & Penalties

The compounding matrix is subject to the following provisions:

• Maximum Amount imposed should not exceed 300% of the amount involved in contravention
• If 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 and for the period of the contravention in case of reporting contraventions and @10% p.a. in respect of all other contraventions
• In case of paragraph 8 of Schedule I to FEMA 20/2000 RB contraventions, the amount imposed will be further graded as under:

1. 1. If the shares are allotted after 180 days without the prior approval of Reserve Bank, 1.25 times the amount calculated as per table above (subject to provisos at (i) & (ii) above)
   2. If the shares are not allotted and the amount is refunded after 180 days with the Bank’s permission: 1.50 times the amount calculated as per table above (subject to provisos above)
   3. If the shares are not allotted and the amount is refunded after 180 days without the Bank’s permission: 1.75 times the amount calculated as per table above (subject to provisos above)

Further points to be noted:

• 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 the chart
• 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%
• For calculating amount in respect of reporting contraventions, the period of contravention may be considered proportionately {(approx. rounded off to next higher month ÷ 12) X amount for 1 year}. The total no. of days does not exclude Sundays/holidays
• RBI has clarified that the guidance is meant only for the purpose of broadly indicating the basis on which the amount to be imposed is derived by compounding authorities. The actual amount imposed may sometimes vary, depending on the circumstances of the case taking into account the various factors

5. Practical Examples for Computing Compounding Quantum

5.1 Illustration on Contravention of Para 9(1)(A) or Para 9(1)(B) of Schedule 1 to Notification No. FEMA20/2000-RB

5.2 Illustration Contravention of Para 8 of Schedule 1 to Notification No. FEMA20/2000-RB (Allotment of Shares/Refunds)

5.3 Illustration Availing ECB Without Approval/Not Permitted End Use/Ineligible Borrower

5.4 Illustration Acquisition of Immoveable Property in India

5.5 Dos and Don’ts for Compounding

• Admit each contravention honestly and with a request for leniency
• Spell out each contravention correctly with reference to the Rule, Para, Regulation, etc. violated, amount involved, no of days for delays/contraventions, reasons of contravention
• If any defect is noticed in the application for compounding, file request for modification
• Enclose supporting documents which are relied upon
• Keep all the papers ready at the time of hearing as no adjournment is generally granted
• Language of the application should be polite
• No arguments with the authority at the time of hearing yet the situation and circumstances that lead to contravention can be narrated in brief and politely

5.6 Foreign Exchange (Compounding Proceedings) Rules, 2000