Summary: This blog examines the compounding framework under the Compounding Rules and Directions, as amended in April 2025, with a particular focus on non-reporting contraventions under FEMA. It argues that the RBI’s increasingly facilitative approach to compounding has made it the most commercially sensible route for entities seeking to regularise historical non-compliances under FEMA and India’s FDI policy.
Introduction
The enforcement of foreign exchange compliance has noticeably intensified in recent years, with investigations rising from 2,631 in FY 2024-2025 to 4,308 in FY 2025-2026.[1] Correspondingly compounding orders have remained steady: 761 in 2023, 728 in 2024, 649 in 2025, and 236 as of May 2026.
The compounding process under the Foreign Exchange (Compounding Proceedings) Rules, 2024 (“Compounding Rules”), and the Directions on Compounding of Contraventions under FEMA, 1999 (“Directions”)[2], permits individuals and entities to apply for compounding of contraventions under the Foreign Exchange Management Act, 1999 (“FEMA”), either before or after the issuance of a show cause notice, provided no penalty order has been passed. This procedural flexibility keeps the compounding route open throughout the enforcement lifecycle, allowing voluntary resolution even after regulatory scrutiny has commenced. For instance, on June 17, 2026, the Regulator closed its investigation into FDI policy violations by a healthcare company (“Healthcare Company”), following compounding of contraventions. Two of the four alleged contraventions pertained to: (i) receipt of FDI in a prohibited sector (retail trading); and (ii) breach of the overall sectoral cap of 51% (the foreign shareholding limit for multi-brand retail trading (MBRT)).[3]
Notably, the regulator has actively encouraged entities to avail of the compounding mechanism to rectify non-compliance, having issued 130 ‘no-objection certificates’/ ‘NOCs’, permitting the RBI to compound offences under regulator investigation.[4] This reflects a broader institutional preference for resolution over adjudication.[5] The trend is likely to further pick up pace, as the regulator has taken proactive steps to expedite compounding-related applications. In 2025, the Regulator nominated the Special Director (Adjudication) as Nodal Officer for communicating NOCs to the RBI.[6]
The Compounding Gateway: What Gets Through and What Doesn’t
Section 15(1) of FEMA empowers the RBI and, in limited circumstances, the Directorate of Enforcement (in respect of offences relating to unauthorised dealing in foreign exchange), to compound certain contraventions under FEMA and any rules, regulations, notifications, or orders issued thereunder.[7]
Compounding is generally available for both reporting contraventions and non-reporting contraventions under FEMA, save and except where the contravention pertains to the following: [8]
- the amount involved is unquantifiable;
- the contravention relates to assets held outside India in contravention of Section 4 of the FEMA;
- the contravention involves money laundering, terror financing or affecting the sovereignty and integrity of the nation;
- an adjudication order already passed; or
- the matter has been referred to or is under investigation by the Directorate of Enforcement; or
- Where similar contravention was compounded within the preceding three years[9].
Reporting Contraventions
Reporting contraventions refer to procedural failures where the underlying transaction is permissible, but the prescribed form was either not submitted or submitted after the designated deadline. Examples include Form FC-GPR (receipt of FDI), Form ECB or ECB-2 (external commercial borrowings), and Annual Performance Reports for overseas investments, among others.
Other than Reporting Contraventions
Non-reporting or substantive contraventions are different. The question is not when the RBI was informed, but whether the transaction itself was structured or executed in accordance with FEMA’s substantive requirements. Common examples are violations of pricing guidelines, foreign direct investment (“FDI”) in contravention of FDI policy, overseas direct investment made without satisfying the eligibility conditions, downstream investments by FDI recipient entities that do not comply with the indirect foreign investment framework.
The regulatory environment for business models such as retail, e-commerce, and technology has shifted over the past decade. FDI arrangements previously considered compliant may now attract scrutiny under a different regulatory lens, particularly if recipient wholesale entities are alleged to be operating retail businesses.
In a compounding order passed in 2018, the RBI considered a company engaged in single-brand product retail trading (SBRT), which had received FDI in excess of the 49% sectoral cap on seven occasions without obtaining the requisite government approval under Schedule I to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (“TISPRO 2000”). Despite a contravention amounting to approximately INR 25.74 crore, the RBI compounded the matter for approximately INR 16 lakhs, taking a lenient view, given the applicant’s admission that the contravention was inadvertent.[10]
In another compounding order passed in 2017, the RBI considered a case involving a company engaged in the sourcing of automotive components and supply chain management. Over a period of approximately two years and ten months, the company made sales to its group company in excess of the 25% ceiling prescribed under the FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, for wholesale trading entities undertaking sales to group companies. During personal hearing, the applicant submitted that the breach had occurred inadvertently due to lack of awareness of the applicable regulatory requirements. Notwithstanding a contravention amount of approximately INR 43 lakhs and the possibility of an adjudication penalty under Section 13(1) of FEMA of up to three times that amount, and a further penalty of up to INR 5,000 per day after the first day during which such contravention continues, the RBI compounded the contravention for INR 76,121, expressly adopting a lenient approach in view of the facts and circumstances of the case.[11]
Similarly, in the Healthcare Company case, where the contravention related to the receipt of FDI in breach of the applicable sectoral caps, the amount involved was approximately INR 2,400 crore. However, the contravention was compounded upon payment of approximately INR 17 crore, along with approximately INR 18 lakh by each of the five directors.
These cases demonstrate that compounding can serve as a commercially prudent mechanism for companies seeking to mitigate potential financial exposure arising from FEMA non-compliances. This is particularly relevant given that in adjudication proceedings, penalties may extend to as much as three times the amount involved in the contravention, along with a further penalty of up to INR 5,000 per day after the first day during which such contravention continues.
The regulator’s stance on non-reporting contraventions under FEMA appears to be to prioritise resolution over punitive enforcement, especially in cases where such contraventions arise from inadvertence and not deliberate evasion.
Certainty in RBI Compounding Process
Procedurally, the Directions require the compounding authority to pass an order not later than 180 days from the date of receipt of a completed application.[12] This statutory timeline renders the process time-bound, enabling entities to achieve certainty of closure within a defined period. This approach reduces the likelihood of adverse audit observations that could result from prolonged, unresolved regulatory proceedings. Upon payment of the compounding amount, Section 15(2) of FEMA also provides that no proceeding or further proceeding shall be initiated or continued against the applicant in respect of the compounded contravention.[13] This finality, not subject to appeal and not contingent on further regulatory discretion, differentiates compounding from adjudication.
The compounding framework also provides predictability, as the Directions enable companies to reasonably estimate the likely compounding amount even before filing an application.
Further, on April 24, 2025, the RBI introduced an important relaxation for residual contraventions (other than reporting-related contraventions). Subject to the compounding authority’s satisfaction, considering factors such as the nature of the contravention, exceptional circumstances, and wider public interest, the compounding amount may be capped at INR 2 lakh. Prior to this change, there was no comparable upper limit, creating uncertainty regarding potential financial exposure.
This relaxation reflects a more pragmatic and proportionate regulatory approach, ensuring that minor, inadvertent, or first-time contraventions are not subjected to disproportionate penalties, and affording the regulator flexibility to consider the impact, gravity, and intent underlying a contravention.
Conclusion
The RBI’s approach to compounding has generally been facilitative rather than restrictive, dispelling the perception that compounding is a taboo or an admission of regulatory wrongdoing. This is further reflected in its decision to restrict public disclosure to the contravener’s identity, the nature of the contravention, and the compounding amount imposed, instead of publishing detailed orders containing applicants’ financial and business information.
This shift removes a significant deterrent that may have previously discouraged entities from voluntarily availing themselves of the compounding mechanism.
The cost of non-compliance continues to escalate for companies with unresolved FEMA exposures: potential penalty exposure increases with time, the compounding amount rises with the duration of the contravention, and compliance-related restrictions may persist until the matter is formally resolved. A proactive and well-prepared compounding application can convert an ongoing regulatory exposure into a settled matter, providing certainty and enabling businesses to move forward.
For further information, please contact:
Bharath Reddy, Cyril Amarchand Mangaldas
bharath.reddy@cyrilshroff.com
[1]Refer Page No. 16 of the performance report (accessible here).
[2]Reserve Bank of India, Master Directions – Compounding of Contraventions under FEMA, 1999, dated April 22, 2025 (Updated as on April 24, 2025) (accessible here).
[3]RBI order dated June 17, 2026 (accessible here).
[4]Refer Page No. 17 of the performance report (accessible here).
[5]Refer to the news report published by Livemint (accessible here).
[6]Refer Page No. 17 of the performance report (accessible here).
[7] Section 15(1) read with Section 3(1)(a) of FEMA.
[8] Rule 9 of Compounding Rules.
[9] Rule 4(2) of Compounding Rules
[10] The order dated March 20, 2018 issued by RBI (accessible here).
[11] The order dated June 21, 2017 issued by RBI (accessible here).
[12] Paragraph 6.1 of Compounding Directions.
[13] Section 15(2), FEMA.
