Compounding of contraventions and offences under FEMA

May 25, 2021
FEMA
CA. Sachin Jindal

1. What does Compounding Mean

Compounding is the process of voluntarily admitting the contravention and further pleading guilty and seeking redressal for the same. It provides remedies to any person who contravenes any provisions of FEMA, 1999, except under Section 3(a) of the Act, by minimizing transaction costs.

In other words, compounding means “ to settle a matter by a money payment, in lieu of other liability”.

Foreign Exchange (Compounding Proceedings) Rules, 2000 and RBI FED Master Direction No- 4/2015-16, dated 1-1-2016 on “Compounding of contraventions under FEMA” provide broad framework for compounding of contraventions under FEMA.

Compounding of contraventions under FEMA can be done with in 180 from the date of application for such compounding.

2. What is Compounding of Contraventions Under FEMA?

Contraventions under FEMA are subjected to Penalty prescribed under Section 13(a), which is upto 300% of the sum involved in contravention, and if the sum is not quantifiable then penalty upto Rs. 2 lacs, is liable. Also, if the contravention is ongoing, then a further penalty of Rs. 5000 for every day after the first day that contravention Continues.
Compounding is usually done at a much lower amount as compared to Penalties. Once compounding is done and timely payment is made as per compounding order, then contravention is regularized and no further penalty or proceedings on contravention can be initiated..
The Central Government had made the Foreign Exchange (Compounding Proceedings) Rules, 2000 (“FEMA rules”) relating to compounding contraventions under chapter IV of the Act
In terms of Section 15 of the FEMA 1999, deals power to compound contravention where i.e
- Any contravention under Section 13 of the Act can be compounded
- Application for such compounded can be made any time by the person committing such contravention.
- Such compounded would be done with in 180 days from the date of receipt of application by the Director of Enforcement or such other officers of the Directorate of Enforcement and officers of the Reserve Bank of India, as may be authorized in this behalf by the Central Government and in such manner as may be prescribed.

3. Types of Contraventions under FEMA

Contravention may be a reporting violation under FEMA Act for example :-

Delayed reporting of inward remittance towards Share Allotment
Opening of step down subsidiary (SDS) overseas,
Form FC-GPR after issue of shares to NRI,
Form ESOP on issue of ESOP to Person Resident Outside India (PROI),
Form FC-TRS on sale of shares of Indian Company by/to PROI etc.
It may be delayed in receipt or payment of Foreign Exchange or delayed allotment of shares to PROI.

It can be a contravention of undertaking prohibited transactions or transactions done without approval of RBI/Central Government such as purchase of agricultural land in India by NRI/s acquisition of immovable property in India by a Foreign Citizen, Persons Resident Outside of India, making remittance beyond permissible limit of LRS, raising ECB from non-recognized lenders, opening branch office by PROI without approval of RBI, issue of shares to citizens of countries sharing land border with India etc.

4. What are the prerequisites for compounding under FEMA?

Second contraventions by any person within a period of three years from the date on which a similar contravention committed by him, was compounded previously, such contraventions can not be compounded and relevant provisions of the FEMA, 1999 shall apply.
Any second or subsequent contravention committed after the expiry of a period of three years from the date on which the contravention was previously compounded shall be deemed to be a first contravention.
Contraventions relating to any transactions where proper approval or permission from the any agencies or any statutory authority concerned is required, such contraventions can be considered compoundable only after obtaining approval from the concerned authorities.
Serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation or where the contravener fails to pay the sum for which contravention was compounded within the specified period in terms of the compounding order, shall be referred to the Directorate of Enforcement for further investigation as per FEMA Act 1999, or to the concerned authority under PMLA Act 2002, or to any other agency.
In cases where adjudication has been done by the Directorate of Enforcement and an appeal has been filed under section 17 or section 19 of FEMA Act, 1999, no contravention can be compounded in terms of rule 11 of Foreign Exchange Rules, 2000.The applicant shall provide an undertaking in form of Annex III along with the compounding application that they have not filed any appeal under section 17 or section 19 of FEMA, 1999.
Whenever a contravention is identified by the Reserve Bank or brought to its notice by the entity involved in contravention by way of a reference other than through the prescribed application for compounding, the Bank will continue to decide:
- Whether a contravention is technical and/or minor in nature and, as such, can be dealt with by way of an administrative/ cautionary advice;
- Whether it is material and, hence, is required to be compounded for which the necessary compounding procedure has to be followed; or
- Whether the issues involved are sensitive / serious in nature and, therefore, need to be referred to the Directorate of Enforcement (DOE).
However, 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 the Provisions of the Act

5. When can Compounding Application be made under FEMA

Once the applicant realises the contravention of the provisions of FEMA, either being brought to his notice by RBI or any other statutory authority or auditors or by any other means. He may file a compounding application.
It is important to note that applicants can also make an application for compounding, suo-moto, on becoming aware of the contravention.
There is no time limit for filing a compounding application, even if the contravention was done 20 years back, a compounding application can be filed for the same.

6. Instances when compounding under FEMA is not permissible

Compounding under FEMA is not permissible under following instances.

Serious contraventions suspected such as
- Money laundering,
- Terror financing, or
- Affecting Sovereignty, and integration of the nation.
Cases where adjudication is done and appeal is filed.
Contraventions of transactions where required approvals or permission from the agencies such as enforcement directorate or CBI etc has not been obtained. Such contraventions can be compounded after obtaining those approvals.
Once compounding is done, another compounding on similar contravention cannot be done for the next three years.
Cases where the amount of contravention is not quantifiable.

In the case of NDTV & Asrani Inns and Resort Private Limited, RBI returned the compounding application on ground that the matter is under investigation by Directorate of Enforcement, but Bombay High Court gave directions to RBI to proceed with the compounding application.

7. What is the Procedure for Compounding Offences under FEMA?

Contravention of Section 3(a) of the Act can be compounded by the Enforcement Directorate and rest of contraventions can be compounded by RBI.

Application for compounding to be submitted to the compounding authority along with demand draft of Rs. 5000/- in favour of “Reserve Bank of India” along with the following:
- Application in the format prescribed in the Foreign Exchange (Compounding Proceedings) Rules, 2000.
- Details relating to Foreign Direct Investment, External Commercial Borrowings, Overseas Direct Investment and Branch Office / Liaison Office, as applicable in form Annex- II of the Foreign Exchange (Compounding Proceedings) Rules, 2000.
- A copy of the Memorandum of Association.
- Latest audited balance sheet.
- An undertaking in form Annex- III of the Foreign Exchange (Compounding Proceedings) Rules, 2000 that they are not under any enquiry/investigation/adjudication by any agency such as Directorate of Enforcement, CBI etc as on the date of the application.
- ECS mandate and details of bank account of the Applicant as per Annex- III of the Foreign Exchange (Compounding Proceedings) Rules, 2000.
The Application is examined based on the documents and submissions made and assesses whether the contravention is quantifiable, and if so, the amount of contravention.
The Compounding Authority may call for any information, record or any other documents relevant to the compounding proceedings.
If the contravener fails to submit the additional information/documents called for within the specified period, the application for compounding will be liable for rejection.
In case the application has to be returned where required approvals are not obtained from the authorities concerned or in case of incomplete application for any other reason, the application fees of Rs.5000/-, received along with the application will be returned by crediting the same to the applicant’s account through NEFT as per the ECS mandate. The applicants are advised to furnish their mandate details with their bank account along with the application in the prescribed format.

Process of applying for compounding is quite fast and hassle free. Once application is accepted, compounding would be completed within 180 days from the receipt of a duly completed application.

8. Method of Computing Compounding amount under FEMA

Compounding amount depends upon.

Period of contravention
Undue gains made as result of contravention,
Loss caused to exchequer
Economic benefits accrued to contravener due to delayed compliance
Track record/history of contravener, etc.

Compounding amounts under most contraventions are defined, however, when it involves undue gains, the methodology of calculation is not defined, and it depends largely on the judgement of the compounding officer.

9. Issue of the Compounding Order

The Compounding authority shall pass an compounding order after giving a reasonable opportunity of being heard to all concerned parties but not later than 180 days from the date of application.

However, contravener has the right to attend personal hearing and provide additional documents related to such compounding application.

10. Post Compounding Procedure

The amount to be paid by way of demand draft in favor of the “Reserve Bank of India” within 15 days from the date of the order of compounding of such contravention.
After a compounding order is passed, the contravener has no right to seek to withdraw the order or to hold that the compounding order is void or request review of the order passed by the Compounding Authority.
In case of failure to pay the sum compounded within the time specified in the compounding order, it shall be deemed that the contravener had never made an application for compounding of any contravention under these Rules.
On realization of the sum for which contravention is compounded a certificate in this regard shall be issued by the Reserve Bank subject to the specified conditions, if any, in the order.

11. Legal Effect of Compounding of offences under FEMA?

Compounding being a voluntary process, its orders are neither appealable nor any review mechanism is in place. If payments as per the compounding order are not made within the permitted timeline of 15 days, the compounding process would elapse and the process would be treated as null and void. Thereafter RBI refers the matter to ED for investigation.

There are a few exceptions though In the matter of JVL Agro Industries Private Limited, Allahabad HC was of the view that as petitioner had shown an unconditional willingness to comply with the compounding order, the ends of justice would be met if the Compounding Authority considered the request of the petitioner to pay the penalty even after the expiry of the prescribed period.

12. Penalties for following contraventions/violation under FEMA

S No	Types of Contravention	Formula
1	Reporting Contraventions a. Delay in reporting Inward Remittance, filing of Form FCGPR, Submission of Form FC-TRS, Taking on record transfer of shares by investee Company b. Non submission of ECB Statements c. Non reporting/delay in reporting of acquisition/setup of subsidiaries/step down subsidiaries /changes in the shareholding pattern	Fixed amount : Rs10000/- (applied once for each contravention in a compounding application) + Variable amounts as under: a. Upto 10 lakhs: 1000 per year b. Above 10 Lakhs & below 40 Lakhs: 2500 per year c. 40 lakhs or more and below 100 lakhs: 7000 per year d. Rs. 1-10 Crore: 50000 per year e. Rs. 10-100 Crore: 100000 per year f. Above 100 Crore: 200000 per year
2	Reporting contraventions by LO/BO/PO	As above, subject to a ceiling of Rs.2 lakhs. In the case of Project Office, the amount imposed shall be calculated on 10% of total project cost.
3	In case of non-submission/ delayed submission of APR/ share certificates or AAC or FCGPR (B) or FLA Returns	Rs.10000/- per AAC/APR/FCGPR (B) /FLA Return delayed. Delayed receipt of share certificate – Rs.10000/- per year, the total amount being subject to ceiling of 300% of the amount invested.
4	Non-allotment of shares or allotment/ refund after the stipulated 180 days LO/BO/PO(Other than reporting contraventions)	Rs.30000/- + given percentage: a. 1st year : 0.30% b. 1-2 years : 0.35% c. 2-3 years : 0.40% d. 3-4 years : 0.45% e. 4-5 years : 0.50%> f. 5 years : 0.75% (For project offices the amount of contravention shall be deemed to be 10% of the cost of the project).
4	All other contraventions except Corporate Guarantees but including all contraventions of FEMA 20(R)/2017-RB dated November 07, 2017 other than FLA Returns	Rs.50000/- + given percentage: a. 1st year : 0.50% b. 1-2 years : 0.55% c. 2-3 years : 0.60% d. 3-4 years : 0.65% e. 4-5 years : 0.70% f. >5 years : 0.75%
5	Issue of Corporate Guarantees without UIN/ without permission wherever required /open ended guarantees or any other contravention related to issue of Corporate Guarantees.	Rs.500000/- + given percentage: a. 1st year : 0.050% b. 1-2 years : 0.055% c. 2-3 years : 0.060% d. 3-4 years : 0.065% f. 4-5 years : 0.070% g. >5 years : 0.075% In case the contravention includes the issue of guarantees for raising loans which are invested back into India, the amount imposed may be trebled.