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Procedural Aspects of Compounding under FEMA

January 17, 2019     by Nidhi Kapoor

Dealing with RBI has been never been an easy task but with the passage of time RBI has been putting lot of efforts to bridge the procedural gaps. RBI has been taking steps in this direction and a very good example of this is the consolidated Master Circular issued for each subject matter, annually or half yearly, whereby it compiles all the amendments done or circulars issued during the year, into one so as to give a convenient access to updated provisions on the subject and which has also served the base of this article.

Procedural Aspects of Compounding Mechanism under FEMA

On receipt of the application, the Compounding Authority shall review the application and may as well call for additional information, wherever required. In case, after verification the application by RBI is found to be complete in all respects then the contravention is admitted. The action initiated by the RBI on receipt of the application shall depend and be in accordance with the nature and gravity of the contravention. In case the application is found incomplete, then the contravention shall not be admitted and the said application will be returned along with the application money.

The manner in which a contravention shall be dealt shall depend on its nature.

What are the classification of a Contravention?

Whether contravention under the Foreign Exchange Management Act (FEMA) is to be treated as technical and/ or minor or serious would be decided by the Reserve Bank on the merits of the case. The application will be disposed of keeping in view the procedure notified in this regard. Persons who have contravened the provisions of FEMA should not take upon themselves suo moto, or on the basis of external advice to decide whether a particular contravention is technical or minor in nature.

Nature of Contraventions:

Technical or minor in nature: Can be dealt with by way of an administrative/ cautionary advice.

Material:  Necessary compounding procedure has to be followed

Sensitive or Serious: Referred to the Directorate of Enforcement (DOE).

Pre- requisites for compounding process:

  • No similar contravention committed by the applicant within a period of three previous years. 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 where proper approvals or permission from the Government or any statutory authority is required, they shall not be compounded unless the required approvals are obtained from the concerned authorities.

  • In case where adjudication has been done by the Directorate of Enforcement and an appeal has been filed under section 17 or section 19 of FEMA, 1999, no contravention can be compounded in terms of Rule 11 of Foreign Exchange (Compounding Proceedings) Rules, 2000.

Brief Process for Compounding:

(The total time taken for disposal of compounding cases shall be 180 days)

  • Receipt of application
  • Receipt of fees
  • Examination by RBI and call for additional documents, if required
  • Opportunity for personal hearing
  • Passing compounding order
  • Payment of compounding amount
  • Issuance of certificate of payment of penalty
  • Payment of penalty within 15 days from the date of order (Non-payment shall be deemed as if the said compounding application was never received)

(Application fees shall be refunded in cases where the application is returned by the RBI on grounds of non- receipt of approvals, etc.)

What is the fees payable with the compounding application?

The application in the prescribed format along with necessary documents and a demand draft for Rs. 5000/- (Rupees five thousand only) drawn in favour of the “Reserve Bank of India” should be sent to the Reserve Bank of India.

Case Laws?

RBI seems to take a lenient view in the cases pertaining to the delay in reporting. Although the RBI conferred with the power under section 15(1) f Foreign Exchange Management Act, 1999, to impose a penalty up to three times of the amount involved, there has been rare case evidencing such heavy penalty.Some of the case laws have been cited below:

S. No.

Particulars

Regulation Contravened

Contravention

Penalty

1. JBM MA Automotive Private Limited
  • Para 8 of Schedule I to Notification No. FEMA 20/2000- RB

  • There was a delay of 10 months in reporting since the first inward remittance.

  • The shares were not issued to the person resident outside India within 180 days from the date of receipt of the inward remittance/share application not refunded to the person resident outside India within 180 days from the date of receipt of the inward remittance amounting Rs. 30, 44, 96,000/-

The RBI compounded the offence with a total amount of penalty of Rs.11, 79,360/- (Eleven Lakh Seventy Nine Thousand Three Hundred and Sixty).

2. M/S Xiaomi Communications And Logistics India Private Limited
  • Para 9(1)(A) , 8 and 9(1)(B) respectively, of Schedule I to Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 notified, vide Notification No. FEMA 20/2000-RB dated May 03, 2000 and as amended from time to time (hereinafter referred to as Notification No. FEMA 20/2000-RB)

  • There was a delay in reporting receipt of foreign inward remittances towards subscription to equity.

  • There was a delay in submission of form FC-GPR to the Reserve Bank of India after issue of shares to a person resident outside India.

  • The contravention relates to an amount of Rs.2, 99, 99,000.00.

The RBI compounded the offence with a total amount of penalty of Rs.2, 15,350 (Two Lakh Fifteen Thousand Three Hundred and Fifty.

3. Eastman Industries Limited
  • Regulation 13, 15(i) and 15(iii) of FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000.

  • The delay in reporting was for a period of approximately 6 years.

  • Non-Reporting of setting up of Step-down subsidiary within stipulated time period.

  • Non- Receipt of share certificate within stipulated time period.

  • Non-submission of Annual Performance Report (APR) under stipulated time period.

The matter was compounded by the RBI with a penalty of Rs.2,20,000/- (Two Lakh Twenty Thousand).

2 thoughts on “Procedural Aspects of Compounding under FEMA

    1. RBI upon scrutiny of the compounding application received arrives at a compounding amount to be imposed on the basis of the nature and gravity of the contravention incurred. RBI has provided a guidance note in its Master Directions on compounding (https://m.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10190#9) wherein it has stipulated the formulae for calculation of compounding amount for certain common FEMA Contraventions.
      However, the actual amount imposed by RBI may vary from case to case.

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