Compounding of contraventions under FEMA

Compounding of contraventions under FEMA by RBI

The Foreign Exchange Management Act, 1999 (FEMA) is an act passed by the Indian Parliament to consolidate and amend foreign exchange laws with the goal of facilitating external trade and payments and promoting the orderly development and maintenance of India's foreign exchange market.

A violation is a violation or failure to comply with the provisions of the Foreign Exchange Management Act (“Act”), 1999, and the rules, regulations, notifications, orders, circulars, or directions issued thereunder. The Act empowers the Reserve Bank of India (“RBI”) to compound offences, and any violation under Section 13 of the Act can be compounded within one hundred and eighty days (180) of the date of receipt of application by the officers of the RBI. On adjudication, any person who violates the provisions of the Act is liable to pay – • three times the amount involved in the violation if the amount is quantifiable, or • two lakh rupees if the amount is not directly quantifiable.

And, if the contravention is of a continuing nature, a further penalty of Rs. 5,000 for each day after the first that the contravention continues.

Furthermore, Section 15 of the Act provides for Compounding of Contravention, in which the contravener voluntarily admits contravention, pleads guilty, and seeks redress through an application. Section 15 of the Foreign Exchange Management Act (FEMA), 1999 authorises the Reserve Bank of India to compound any violation of Section 13 of the FEMA, 1999, except violations of Section 3 of the FEMA, 1999. (a).

Compounding is the process of voluntarily admitting a violation of any of the provisions of FEMA, 1999 or the rules/regulations/notifications/orders/directions or circulars issued under the said Act. The person in violation of the provisions admits the error and requests compounding to rectify the situation. This avoids legal proceedings and simplifies and expedites the process. The offence must be compounded within 180 days of the date of receipt of the application by such Reserve Bank of India officers as may be authorised in this regard.

RBI Compounding Power:

Any violation of the provisions of FEMA, 1999 will be compounded by the officers listed below, who work under the direction, control, and supervision of the Governor of the RBI.

Sum Involved in Contravention	Compounding Authority
Amount upto Rs 10 Lakh	Assistant General Manager of RBI
Amount more than Rs 10 Lakh but lessthan Rs 40 Lakh	Deputy General Manager of RBI
Amount RS 40 Lakh and more but lessthan Rs 100 Lakh	General Manager of RBI
Amount Rs 100 Lakh and more	Chief General Manager of RBI

No violation shall be compounded unless the amount involved in the violation is quantifiable.

Power Delegation to Regional and Central Offices

To alleviate operational issues and improve customer service, the RBI has delegated compounding

powers to regional and central offices:

The regional offices in Kochi and Panaji can compound the violations for less than Rs 100 Lakh. Compounding shall be handled at Mumbai RO and Thiruvananthapuram RO for contraventions of RS 100 Lakh and above in Panaji and Kochi, respectively.

Aside from the specific contraventions listed, applications for all other contraventions must be submitted to the Foreign Exchange Department of the Reserve Bank of India in Mumbai.

What types of violations can be considered under FEMA's Compounding for Offenses?

The type of contravention is determined by keeping the following indicators in mind:

• Is the violation technical and/or minor in nature and requires only administrative cautionary advice;

• Is the violation serious in nature and warrants compounding of the violation; and

• Is the violation, prima facie, involves money laundering, national and security concerns, and serious infringement of the regulatory framework?

As a result, the RBI reserves the right to categorise the above-mentioned contraventions, and neither the contravener nor others have any right to classify any contravention as technical suo moto.

• The Reserve Bank examines the application to determine whether the required details and documents provided by the applicant are in order prima facie.

• Applications will be returned to the applicant when they are incomplete or the contravention is not admitted.

• Upon receipt of applications, the RBI will review them and determine whether the violation is technical, material, or sensitive in nature.

• If technical, the applicant will be issued a strongly worded advice. If the violation is material, it will be compounded by imposing a penalty after the contravener has been given an opportunity to appear before the compounding authority for a personal hearing.

If the violation is of a sensitive nature and necessitates further investigation, it will be referred to the Directorate of Enforcement (DoE) for further investigation/action.

FEMA's Compounding of Offenses Procedure

Who is eligible to apply?

Any individual who violates any provision of the FEMA, 1999 [except section 3(a)] or violates any rule, regulation, notification, direction, or order issued in exercise of the powers under this Act, or violates any condition for which a consent is issued by the Reserve Bank, may apply to the Reserve Bank for compounding.
Upon receipt of the Notice – When the Reserve Bank, the Foreign Investment Promotion Board (FIPB), or any other statutory authority makes a person aware of a violation of the provisions of FEMA, 1999.
Suo Moto – If you become aware of a violation, you can file a suo moto application for compounding.
Acting pro-actively by performing FEMA Due Diligence

Prerequisites for Contravention Compounding

1. No contraventions of a similar kind may be compounded for three years from the date of the compounding of the contravention. If a contravention of a similar nature occurs after such a period, it will be compounded as if it were the first contravention.

2. Where prior approval of statutory authorities/Government is required for a transaction and such approval has not been obtained, the compounding of such contravention shall not occur for such a period until the requisite approval(s) is obtained.

3. If the contravener fails to pay the sum of the contravention for compounding within the specified time limit, or if there is a serious contravention suspected of money laundering, terror financing, or affecting the sovereignty and integrity of the nation, the case must be referred to the Directorate of Enforcement for further investigation. Any necessary action under the Act, or any authority under the Prevention of Money Laundering Act, or other agencies, can take the necessary actions as deemed fit.

4. No compounding of contravention is permitted under Rule 11 of the Foreign Exchange (Compounding Proceedings) Rules, 2000 (‘Rules') in cases where the adjudication is done by the Directorate of Enforcement and appeals have been made under Section 17 or Section 19 of FEMA. The contravener must expressly state in Annexure III, along with the compounding application, that he has not filed any such appeals.

5. Where a contravention is identified by the RBI or brought forward by the contravener, the bank must confirm the following:

• Whether it is material and must be compounded, and if the necessary procedure was followed.

• Whether the violation is of a sensitive nature and whether it must be reported to the Directorate of Enforcement

FEMA's Method of Calculation:

The RBI is guided by the provisions of FEMA Section 13, which states that the fine can be up to three times the amount involved in the violation. The amount imposed, however, is calculated on the basis of a guidance note, which is also available on the RBI's website for the general public's information. The guidance note, on the other hand, serves only to indicate the basis on which the amount to be imposed is calculated by the compounding authorities. The actual amount imposed may vary depending on the circumstances of the case, taking into account the following factors:

• The amount of gain of unfair advantage made as a result of the contravention, wherever quantifiable.

• The amount of loss caused by any authority/agency/exchequer as a result of the violation.

• Economic benefits accruing to the contravener as a result of delayed or avoided compliance.

• The repeated nature of the contravention, as well as the contravener's track record and/or history of noncompliance.

• The conduct of the contravener in carrying out the transaction, as well as the disclosure of full facts in the application and submissions made during the personal hearing; and any other factor deemed relevant and appropriate.

What are the legal ramifications of combining offences under FEMA?

• There will be no further penalties or proceedings on the issues that have been compounded.

• The previously pending procedure shall be documented.

• All compounded contraventions have been regularised.

Penalties are levied for the following infractions/violations:

• Violation of the Act

• Violation of rules and regulations

• Violations of any of the conditions

Penalty Proceedings under FEMA Compounding of Offenses

• Penalty Proceedings are not criminal in nature.

• Penalty cannot be based on guesswork, conjecture, or surmise.

• Enforcement officers have quasi-judicial powers.

• Double Jeopardy – Punishment by imposition of a penalty as well as imprisonment for non-payment of penalty would not constitute double jeopardy.

Penalty Monetary Cap under FEMA Compounding of Offenses:

• The total amount involved is quantifiable. - Up to three times the amount involved in the violation.

• The total amount involved is not quantifiable.

Only up to 2 lakhs

• In addition to the aforementioned penalty, a recurring penalty of 5,000 per day can be imposed during the course of the offence.

Prosecution

• The penalty has been paid; no further action can be taken.

• If the fine is not paid, a prosecution may be initiated.

• There is no time limit for imposing the penalty.

Dos and Don'ts of FEMA Compounding of Offenses

• Correctly spell each infraction.

• Provide the reasons for the violation.

• Amount to be specified

• Delays in the number of days to be specified

• If any errors are discovered after submitting the application, request that they be corrected.

• Include all supporting documents on which you are relying.

An application for compounding, along with all required documents and a demand draught for Rs. 5000/- (Rupees five thousand only) drawn in favour of the "Reserve Bank of India" in the prescribed format, must be submitted to the RBI. The Application must include pertinent information such as contact information, the applicant's name, the authorised official or representative of the applicant, and an email address. In addition to the Application, the applicant must provide information in the format of Annex II of the Rules relating to Foreign Direct Investment, External Commercial Borrowings, Overseas Direct Investment, and Branch Office / Liaison Office, as applicable, as well as the Memorandum of Association of the company.

If the applicant has not provided adequate details or the required approvals have not been obtained, the application received by the RBI, along with the application fee of INR 5000, will be returned and refunded by crediting the amount to the applicant's account via NEFT as per the ECS mandate and details of their bank account per Annex-IV of the Rules furnished along with the application.

The application must be submitted in the required format, which includes the applicant's name, the name of his or her authorized official or representative, telephone or cell number, and email address. In addition to the application in the required format, the following papers must be submitted:

• Foreign Direct Investment, External Commercial Borrowings, Overseas Direct Investment, and Branch Office/ Liaison Office details as per Annex II

• A copy of the Association's Memorandum

As of the date of application, they are not under any inquiry, investigation, or adjudication by any agency such as the Directorate of Enforcement, CBI, or others, according to Annex III. If any such procedures are begun after the application is filed but before the date of issue of the compounding order, the applicant must notify the compounding authority / RBI.

If the application for compounding is not submitted in the specified format, or if the required data, papers, or declarations are missing, or if the application is submitted without a demand draft for the application costs, it will be rejected and returned to the applicant.

Serious infractions, such as money laundering, terror financing, or anything threatening the nation's sovereignty and integrity, as well as cases where the applicant fails to pay the amount for which a compounding order was issued within the specified time period, will be referred to the Directorate of Enforcement for further investigation and appropriate action will be taken.

If the applicant commits another violation within three years that is identical to the one for which a compounding order has already been issued, the violation will not be compounded again, and the requirements of FEMA, 1999 will apply.

Any violation that occurs after the three-year term has expired is subject to compounding.

Factors that Contribute to the Compounding of Contravention:

For the purpose of passing the compounding order and determining the magnitude of the violation to be compounded, the RBI may consider the following suggestive factors:

• The amount of profit or unfair advantage gained as a result of the violation (if quantified);

• The amount of loss incurred by any authority, exchequer, or the general public as a result of the violation;

• The economic gains accruing to the contravener as a result of the delayed compliance or non-compliance;

• The contravener's track record and/or history, as well as the nature of the violation;

• The contravener's behavior in giving details of a transaction or providing disclosure in the application or in submissions made during the hearing;

• Any other relevant and suitable considerations;

• Any additional variables that are deemed pertinent and suitable.

Compounding Procedure:

When the application is received, the RBI will review the papers and submissions on the same basis. In addition, the Compounding Authority has the authority to request additional information or documents to support the compounding procedure. Contravention is measured based on the information provided above. The following factors are taken into account while passing the compounding order and determining the size of the sum of payment for the contravention:

Computation Matrix

Contraventions of FEMA 20 that were committed on or after November 7, 2017 (i.e. the beginning date of the contravention prior to November 7, 2017) shall be compounded as described in 1(A) above.

Order for Compounding

S.No	Type of Contravention	Details	Existing Formula
1	Reporting Contraventions		Fixed Amount: Rs 10,000 (applied once for each contravention in a compounding application) + Variable Amount as under : Upto Rs. 10 Lakh : Rs1000 per year Above Rs 10 Lakh & below 40 Lakh: Rs 2500 per year Above Rs. 40 Lakh & below 100 Lakh: Rs 7000 per year Rs. 1-10 Crore: Rs 50,000 per year Rs. 10-100 Crore: Rs 100,000 per year Above Rs. 100 Crore: Rs 200,000 per year
	A.FEMA 20	Para 9(1)(A), 9(1)(B), part B of FC(GPR),FCTRS(Reg 10) and taking on record FCTRS (Reg 4)
	B. FEMA 3	Non Submission of ECB statements
	C. FEMA 120	Non reporting/Delay in reporting of Acquisition/Set up of Subsidiaries/Changes in Shareholding pattern
	D. Any other reporting contraventions
	E. Reporting contraventions by LO/BO/PO		As above, subject to ceiling of Rs 2 Lakhs. In case of Project Office, the amount imposed shall be calculated on 10% of total project cost
2	AAC/APR/FLAR/Share Certificate Delays	In case of non-submission /delayed submission of APR/share certificates (FEMA 120) or AAC (FEMA 22) or FCGPR (B) or FLA Returns -FEMA 20/FEMA20(R)/FEMA 120/FEMA 395	Rs 10,000 per AAC/APR/FCGPR (B)/FLA Return delayed. Delayed receipt of share certificate – Rs 10,000/- per year , the total amount being subject to ceiling of 300% of the amount invested

3	A. Allotments/Refunds	Para 8 of FEMA 20/2000-RB (non-allotment of shares or allotment/refund after the stipulated 180 days	Rs 30,000/- + given percentage 1st year – 0.30% 1-2 years – 0.35% 2-3 years – 0.40% 3-4 years – 0.45% 4-5 years – 0.50% >5 years – 0.75% (For Project Offices the amount of contravention shall be deemed to be 10% of the cost of project.)
3	B. LO/BO/PO	Other than reporting contraventions
4	All other Contraventions	Includes all contravention of FEMA20(R)/2017/NDIR, 2019/ FEMA 395/2019, except contraventions pertaining to FLA returns and corporate guarantees	Rs 50,000/- + given percentage 1st year – 0.50% 1-2 years – 0.55% 2-3 years – 0.60% 3-4 years – 0.65% 4-5 years – 0.70% >5 years – 0.75%
5	Issue of Corporate Guarantees	Issuance without UIN/ without permission wherever required/ open ended guarantees or any other contravention related to issue of Corporate Guarantees	Rs 500,000/- + given percentage 1st year – 0.050% 1-2 years – 0.055% 2-3 years – 0.060% 3-4 years – 0.065% 4-5 years – 0.070% >5 years – 0.075%. In case the contravention includes issue of guarantees for raising loans which are invested back into India, the amount imposed may be trebled.

Compounding order shall be passed in the following format:

S. No

Name of the Applicant

Details of the Contravention (Provisions of the Act compounded)

Date of Compounding Order

Amount imposed for compounding of Contravention

Within 15 days after the date of the order, the amount specified in the order for the violation must be paid by demand draft in favor of the Reserve Bank of India. The contravener cannot ask for the order to be withdrawn or for the order to be reviewed once it has been issued. The RBI issues a certificate confirming that the petitioner has complied with the directions imposed upon realisation of the compounded sum. If the contravener fails to pay the compounded sum, it will be treated as if he never applied for compounding and will be sent to the Directorate of Enforcement for further action. Prior to the RBI Circular, when the RBI became aware of a violation, it would classify it under one of the following headings and deal with it as follows:

Technical/minor: by providing an administrative/warning advise;
Material: by requiring compounding of such offenses in accordance with the compounding procedure; and
Sensitive/serious: Violations are reported to the Directorate of Enforcement.

For the sake of thoroughness, technical or minor contraventions would not be considered in situations where a compounding application admitting a contravention was filed.

A violation is no longer classified as "technical" or "minor" according to the RBI Circular. All technical / minor infractions will now be corrected by applying a minimal compounding amount as specified in the Compounding Direction's compounding matrix. This step allows the regulator's decision-making process to be more transparent.

Orders for compounding must be disclosed: The RBI decided in 2016 to make the compounding instructions it made public on its website in order to increase openness. The RBI has opted to provide summary information (rather than uploading compounding orders) for all orders passed on or after March 1, 2020, as per the RBI Circular. The applicant's identity, the nature of the violation, and the sum imposed for compounding the infraction will all be revealed. This will meet the concerns of certain applicants about anonymity while still maintaining openness in the RBI's response to specific breaches.

While the option for classifying contraventions as "technical" or "minor" has been officially removed, the RBI has no intention of using it in practice. The change, on the other hand, will make the procedure more efficient, since parties will be able to continue with compounding for all breaches, even minor/technical ones.

Issue of compounding order:

The Compounding Authority shall issue a compounding order after giving all parties involved an opportunity to be heard, and shall issue the order as soon as feasible, but no later than 180 days from the day the RBI receives the completed application. The RBI further urges the applicant to attend the personal hearing in person, rather than being represented or accompanied by legal professionals or consultants, because compounding is only done for confessed contraventions. The provisions of the Act or the rules, regulations, orders, or notices in respect of which the violation occurred, as well as the facts of the contravention, must be mentioned in the compounding order. According to sub-section (3) of Section 16 of the Act, a copy of the order must be supplied to the contravener (the applicant) as well as the Adjudicating Authority if a complaint has been filed in writing.

Procedure After Compounding

Within 15 days of the date of the order of compounding, the amount for which the violation is compounded as indicated in the order of compounding is due by demand draft in favor of the "Reserve Bank of India." The RBI issues a certificate to the stated conditions, if any, upon receipt of the demand draft for the compounding of violation.

After the Authority issues the compounding order, the contravener cannot and does not have the right to ask for the order to be withdrawn, to declare the order void, or to seek for a review of the Authority's decision. If the contravener fails to pay within the specified time, it will be presumed that the contravener never applied for compounding of the violation.

Conclusion

Coordination with RBI is a difficult undertaking, but with the passage of time, RBI has made significant attempts to bridge this gap, and today, RBI's every move is in this direction. A good example is the consolidated Master Circular for each subject matter, which is issued annually or half-yearly and compiles all of the alterations or circulars issued throughout the year into one document to give the concerned persons easy access and comfort while dealing with it, and which also served as the foundation for this article.

For any information/queries, you can contact us. Our business consulting services spans from the starting of a company or business till that business becomes a successful enterprise in India.

Rajput Jain & Associates Associate will understand your business requirements and help you in compounding of contraventions under FEMA by RBI. Also, we will help to obtain the necessary registrations to open a bank account in the name of your business, thereby proving an identity for the business.

For any information/queries, you can contact us. Our team of experts can provide all the assistance in related to FCRA. For Contact: