Introduction
Keeping up with the advancements in the digital payments industry and the Indian government’s initiative to promote ease of doing business, the Ministry of Finance, in consultation with the Reserve Bank of India (“RBI”), notified the Foreign Exchange (Compounding Proceedings) Rules, 2024 (“Compounding Rules”), on September 12, 2024, in supersession of the erstwhile Foreign Exchange (Compounding Proceedings) Rules, 2000 (“Erstwhile Compounding Rules”). The Compounding Rules were followed by Direction on Compounding of Contravention under the Foreign Exchange Management Act, 1999 (“FEMA”), which was notified by the RBI on October 01, 2024 (“Compounding Directions”).
The Compounding Rules came into effect from the date of publication in the official gazette, i.e., September 12, 2024. Any pending compounding application with the compounding authority would continue to be governed by the Erstwhile Compounding Rules. With an aim to enhance compliance and facilitate quicker resolution of mainly technical or administrative issues, the Compounding Rules and Compounding Directions streamline the filing process of compounding applications, introduce digital payment options for application fees and compounding amounts, provide clearer descriptions of contraventions and revision of fees based on the nature of the violation.
Compounding under FEMA
For the uninitiated, compounding is the process by which an individual or a corporate entity voluntarily admits to breaching FEMA provisions, pleads guilty and seeks redressal under the Compounding Rules from the compounding authority. Regularising and/ or rectifying past non-compliance is a pre-requisite to proceed with compounding. Compounding of contraventions provides a transparent, time-bound disposal of the acknowledged breach. Whenever a person contravenes any provision of FEMA or any rule, regulation, notification, direction or order issued under FEMA, it has the option to apply for compounding of the contravention, either suo moto or based on a Memorandum of Contraventions issued by the RBI[1]. The contraventions can range from non-filing of statutory forms to not procuring prior approval required for a cross border transaction.
Before filing the compounding application, the applicant should ensure that they have not compounded any contravention in the immediately preceding three years. Once a contravention is compounded, any subsequent offence after a period of three years is deemed as the first contravention[2]. Further, no compounding can be done through the RBI, when the amount of contravention is not quantifiable or if the contravention relates to certain sensitive contraventions provided under Section 3(a) of FEMA (i.e., suspected money laundering, terror financing or affecting the sovereignty and integrity of the nation)[3]. Such pre-requisites help the RBI in ensuring that the compounding process is not abused or misused as a means of getting away with any major regulatory violations.
Thus, companies and regulators view the FEMA compounding mechanism as a crucial tool to resolve foreign exchange violations without lengthy proceedings, especially in cases of inadvertent non-compliances or delays[4]. Once a contravention has been successfully compounded and the compounding order has been complied with, no further proceeding can be initiated or continued in respect of such contravention.
Compounding officer and relevant factors
Under the Compounding Rules, the compounding authority can be from the RBI or the Directorate of Enforcement (“ED”). In the RBI, an officer not below the rank of an Assistant General Manager of the Reserve Bank acts as the compounding authority, while in the ED, an officer not below the rank of a Deputy Director of the Directorate of Enforcement acts as the compounding authority.
While assessing the application, the compounding authority considers certain factors like undue gains resulting from the contravention, loss caused to the authority, nature of the contravention and track record of the applicant and their conduct while undertaking the transaction to pass the compounding order[5]. Such an order is required to be passed within 180 days of making the compounding application. The maximum compounding amount can be up to three times the sum involved in the contravention, with further penalty of up to Rs 5,000 per day after the first day during which such contravention is continuing[6].
Compounding Rules and Compounding Directions: What has Changed?
The Compounding Rules and Compounding Directions introduce procedural changes in the pre-existing compounding process. To compound a contravention, while earlier only physical applications were submitted, now the applicant can submit an application to the compounding authority, physically or on the PRAVAAH portal of the RBI, along with the prescribed fee[7]. The prescribed fee to be paid while filing the compounding application has been increased from INR 5,000 to INR 10,000, along with the introduction of electronic or online modes of payment. The online payment option has also been enabled for paying the compounding penalty (within 15 days of receiving the compounding order). Under the Erstwhile Compounding Rules, payment of application filing fee and compounding penalty could only be paid by demand draft.
Further, under the Erstwhile Compounding Rules, the compounding authority had the power to call for any information, record or any other documents related to the contravention. Under the Compounding Rules, the compounding authority has been empowered to ask the applicant to take any necessary actions with respect to the transactions involved in the contravention[8].
The proviso related to non-compoundable contraventions under Rule 8 of the Erstwhile Compounding Rules has been expanded and shifted to a new Rule 9 in the Compounding Rules. These include matters where the amount is not quantifiable, where the acquisition of any foreign exchange, foreign security or immovable property held outside India has been done in violation of FEMA[9], or where the ED is of the view that the nature of the contravention is serious, with suspicions of money laundering, terror financing, etc., or where the adjudicating authority has passed an order imposing penalty under FEMA or where the compounding authority is of the view that further investigation by the ED is required to ascertain the amount under Section 13.
A key change introduced in the Compounding Rules is the revision of monetary limit for ascertaining a compounding authority, based on his or her rank, based on the sums involved in the contravention. A brief snapshot is provided in the table below:
| Monetary limit based on sum involved in contravention increased | ||
| Rank of RBI Officer | Sum involved in contravention [in INR] | |
| Erstwhile Compounding Rules | Compounding Rules | |
| Assistant General Manager | <= 10 L | <= 60L |
| Deputy General Manager | >10 L and <40L | <= 2.5 Cr |
| General Manager | >= 40L and 1 Cr | <= 5 Cr |
| Chief General Manager | > 1 Cr | > 5 Cr |
Concluding remarks
The revamping of the foreign exchange regulatory landscape is expected to expedite and streamline the compounding process with increased efficiency[10]. While the Compounding Rules and Compounding Directions address aspects to expedite the overall compounding process, the regulator may still need to further streamline the same to fully realise the objective with which these amendments were brought about. According to us, some of them are:
- The 180 days’ timeline for disposing the compounding application by the compounding authority has been retained in the Compounding Rules. This timeline can be further reduced to expedite the resolution of contravention under FEMA through the compounding process. This can especially be done for administrative and/ or technical matters/ lapses. Accordingly, setting up a department that categorises the applications received as per the nature of contraventions as a first step, would be a great way to sieve out the simpler cases within short timelines.
- Under the Compounding Rules, although an option has been provided to file the compounding application through the online portal, the same has not been made mandatory. This leaves room for ambiguity and multiplicity of processes, which can continue to confuse applicants, and as a result is not effective in expediting the compounding process at an overall scale. The DPIIT in its recently updated SOP,[11] has mandated online filing of FDI related proposals and while, even there, at times, parties are being requested for physical copies, it has left no room open for parties to choose their mode of application, thus, creating a single application portal.
- Under the Compounding Rules, there is a cooling-off of three years from the date on which a ‘similar contravention’ has been compounded for compounding subsequent contraventions under the Compounding Rules. An objective methodology to determine ‘similar contravention’ should be set out to avoid any future open ended interpretation and to ensure that contraventions do not go undetected and slip through the cracks just because some party was under the assumption that a certain contravention was a ‘similar contravention’, when it was not the case.
Astha Grover, Associate assisted the authors with the blog.
For further information, please contact:
Sreetama Senr, Partner, Cyril Amarchand Mangaldas
sreetama.sen@cyrilshroff.com
[1] Reserve Bank of India, “FAQs on Compounding of Contraventions under FEMA, 1999,” (Available at: Reserve Bank of India (rbi.org.in)).
“Q.3 When should one apply for compounding?
Answer: When a person is made aware of the contravention of the provisions of FEMA, 1999 by the Reserve Bank or any other statutory authority or the auditors or by any other means, such person may apply for compounding either suo moto or based on a Memorandum of Contraventions issued by the Reserve Bank.”
[2] Compounding Rules, rule 4(2) and rule 5(2).
[3] Compounding Rules, rule 5; Any contravention related to section 3(a) of FEMA is dealt by Directorate of Enforcement.
[4] FEMA, section 15.
[5] Direction 5.3, Direction on Compounding of Contravention under FEMA, 1999 (“Compounding Directions”) on October 01, 2024.
[6] FEMA, section 15 and Compounding Directions, para 5.4.
[7] Compounding Directions, para 3.1.
[8] Compounding Rules, rules 8(1).
[9] FEMA, section 37A.
[10] The Economic Times, “Compounding rules eased to speed up FEMA cases,” September 13, 2024 (Available at: FEMA: Compounding rules eased to speed up FEMA cases – The Economic Times (indiatimes.com)).
[11] Standard Operating Procedure (SOP) dated August 17, 2023 issued by Department for Promotion of Industry and Internal Trade (DPIIT).
