Compounding of Contraventions under the FEMA, 1999 in India

Satish Agarwal : +919811081957      satishagarwal307@yahoo.com

1.   Contraventions and Penalties

(i)   Type of the Contraventions under the Section 13 of the FEMA, 1999

(a)  Under all provisions of the FEMA, 1999 except under the Section 3(a)  

(b) Or under all rules, regulations, notifications, directions, orders or conditions of the FEMA,

1999.  

(c) These contraventions are liable for penalty and compounding where these are material in nature. However persecution is not permitted against the contravention under the Section 13. 

(d) RBI is also permitted to refer to DOE for taking necessary action where contravener is failed  to  pay  penalty  within  15  days  from  the  date  of  conclusion  of  compounding proceedings beside the contraventions are under the section 13 of the FEMA, 1999  

(ii) Type of the Contraventions under the Section 3(a) of the FEMA, 1999

(a)  Where  contravener  is  engaged  in  hawala  transaction,  money  laundering,  national  and

security concerns or involving in serious infringement of regulatory frame work etc.

(b) Compounding is not permitted by the RBI where the contraventions are under the section 3(a) of the FEMA, 1999. These matters are to be referred by the RBI to the Director of Enforcement (DOE). Hence DOE is permitted to deal against these contraventions  where  penalty  and/or  prosecution  or  both  may  be  levied  through  Adjudicating Authority for Adjudication (court of DOE)

(iii) Maximum Quantum of the Penalties

(a)  Maximum  penalty  is  300%  on  sum  as  involved  in  contravention  where  amount  is

quantifiable 

(b) Or  maximum  penalty  of  Rs.  2  lac  where  sum  as  involved  in  the  contravention  is  not          

quantifiable

(c)  And  also  additional  maximum  penalty  is  5  thousand  per  day  till  contravention  is

continued 

(iv)  Minimum (Actual) quantum of the penalties

RBI has prescribed fixed plus variable amount of penalties for the compoundings which are normally applied by the RBI. However minimum (actual) amount of penalty may be higher as depend on the case and circumstances.

2.    Compounding against the Contraventions

(i)   Power of the Compounding under the  Section 15

Any  contravention  as  specified  under the section  13  is to  be compounded  by  the  RBI  within

180 days from the date of receipt of application from the contravener.

(ii)  Process of the Compounding

(a)  Compounding is process of voluntarily admitting a contravention by the contravener

Satish Agarwal : +919811081957                              satishagarwal307@yahoo.com

(b) And  also  pleading  guilty  and  seeking  redressal  (both)  to  avoid  levy  of  maximum

penalty

(iii)  Role of the RBI in Compounding

(a) CEFA (Cell for Effective Implementation of the FEMA, 1999) is working in Foreign Exchange Department of the RBI at Central Office, Mumbai who is controlling the matters relating to all compoundings.

(b) All Regional offices and FED CO CELL, New Delhi both are independently delegated to deal with the compounding applications for technical and material in nature of the contraventions.

(c)  CEFA is also to deal with the compounding applications which are not delegated to the

Regional offices and to FED CO CELL, New Delhi

(v)   Application for the Compounding

(a)   Application  for  compounding is  to  be  submitted  to  the  RBI  through  its  respective Regional office  or FED CO CELL, New Delhi against contravention committed under the section 13 and 3(a) (both) of the FEMA, 1999

(b)   Application for compounding as submitted to the RBI is to be referred to the DOE against the contraventions as  committed  under the section 3(a) of the FEMA, 1999 for levy of penalty or/and prosecution or both through Adjudicating Authority for Adjudication.

3.   Transparency in Process of the Compounding

(i) Public Disclosure of the Compounding Orders

All compounding orders as passed by the RBI w.e.f June 01, 2016 are available for viewing on www.rbi.org.in on monthly basis

(ii) Public Disclosure of the guidelines for an amount is to be levy as penalty

(a)    Maximum amount of penalty is 300% on sum involved in the contravention

(b)  However minimum (actual) amount of penalty is based on the guidance note as is available on www.rbi.org.in

(c)   Minimum (actual) amount of penalty is varied as depend on the guidance note and also depend on the circumstances of each case individually like Corona – 2019 etc.

(d)    Normally minimum (actual) amount of penalty is based on the minimum fixed amount plus variable amount vide RBI Circular No. 73, dated May 26, 2016

4.   Powers of the ‘officer’ of Regional office of the RBI for Compounding

¡ Where Contravention is Quantifiable

(i)    AGM of the RBI is permitted to compound where an amount of contravention is maximum

10 Lac

(ii)    DGM of the RBI is permitted to compound where an amount of contravention is up to 40 Lac

(iii)  GM of the RBI is permitted to compound where an amount of contravention is up to 100 Lac

      (iv)   CGM of the RBI is permitted to compound where an amount of contravention is minimum

100 Lac

(v)    No Compounding is permitted by AGM, DGM, GM or CGM where contravention is not Quantifiable. Hence FED Co CELL, New Delhi is permitted where contravention is not quantifiable

5.   Powers of  the Regional office of the RBI for Compounding

¡ Where Contravention is Quantifiable

(i)    For delay in reporting against inward remittance received for the issue of shares

(ii)   For delay in filing of form FC‐GPR after the issue of shares

(iii) For delay in filing of Annual Return for the Foreign Liabilities and Assets (FLAs)

(iv)  For delay in issue of shares or refund against the share application money received beyond

180 days from the date of receipt.

(v)   For violation of pricing guidelines against issue of shares

(vi)  For issue of ineligible instruments like

(a) ‘Non’ convertible debentures

(b) ‘Partly’ paid shares,

(c)  Shares with optionality clause etc.

(vii) For issue of shares without approval of the RBI or FIPB /Govt. wherever is required.

(viii)   For delay in submission of form FC‐TRS against transfer of the shares from a resident to non resident.

(ix)   For delay in submission of form FC‐TRS against transfer of the shares from a non resident to resident.

(x)     For taking on record a transfer of shares without having a certified form FC‐TRS

(xi)    For delay in reporting to the Secretariat for Industrial Assistance, DIPP for a downstream investment by an Indian entity in another Indian entity which are known as an indirect foreign investments (FIs).

(xii)  (a) For delay in reporting against receipt of consideration or subscription money for the capital contribution in company or in LLP

(b) Or for delay in reporting against receipt for disinvestment or transfer of capital

Contribution from a resident to non‐resident and also vice versa

(xiii) For delay in  reporting against gift of  the capital instruments from a  resident to  non‐

resident without approval of the RBI

6.   Powers of the FED CO Cell of the RBI at New Delhi for the Compoundings

(i)  For the FEMA contraventions relating to the acquisition and transfer of the immovable property as located outside India by the contravener

(ii)   For  the  FEMA  contraventions  relating  to  the  acquisition  and  transfer  of  immovable property as located in India by the contravener

(iii) For the contraventions relating to an establishment in India like: (a)   Branch Office (BO) of the foreign entity in India

(b)   Liaison Office (LO) of the foreign entity in India

(c)   Project Office (PO) of the foreign entity in India

(iv)  For  the  contraventions  falling  under  Foreign  Exchange  Management  (Deposit)  Regulations, 2000

(v)   For the contraventions where amount involved is not quantifiable

(vi)   Hence these abovementioned powers are not delegated to the Regional offices of the RBI

7.   Powers of the CEFA, of the RBI at Fort Mumbai for the Compoundings

¡ CEFA, Mumbai has power for the compoundings against the contraventions those are not permitted by the Regional offices or FED CO Cell, New Delhi.

8.   Monetary limit for the Compounding

(i)   No maximum monetary limit is fixed for the compounding

(a)   By the CGM of the Regional Offices (b)   By the FED CO Cell at NeDelhi (c)    By the CEFA at Fort Mumbai

(ii)  However following Regional Offices are having limited power of the compounding like

(a)   Kochi

(b)   And also Panaji (both) are permitted to compound where contravention is below 100Lac only

(iii) Regional offices at Mumbai and at Thiruvananthapuram are permitted to compound the contraventions of Panaji and Kochi respectively where amount of contravention is minimum 100 Lac

9.   Application for the Compounding

(i)  Application for the compounding may be submitted suo‐moto by the contravener

(ii) Or after receipt of notice by the contravener from the RBI or FIPB/Govt. or any other statutory authority.

(iii) Or after receipt of information by the contravener from the statutory auditors

10.  Format for Application against the Compounding

(i)  Format for application is available in the Foreign Exchange ( Compounding Proceedings) Rules, 2000

(ii) Or     same     form     may     be     downloaded     from     the     RBI’s     website     by     clicking www.rbi.org.in/script/BS‐ Ap circulars display aspx

11. Fee Against the Application for Compounding

(i)   Application in prescribed format along with necessary documents is to be submitted to the respective office of the RBI where compounding application is to be filed at

(a) Respective Regional Office (b) or FED Co CELL, New Delhi (c) or CEFA, Fort Mumbai

(ii)   And also demand draft (DD) for 5 thousand as drawn in favor of the RBI is be sent along with application for the compounding process purpose

12.  Information’s/Details for the Compounding

(i)   General Information’s for the Contraventions

(a)      ¡  Relating  to  Foreign  Direct  Investments  (FDIs),  External  Commercial  Borrowings

(ECBs) or Overseas Direct Investments (ODIs)

¡ Relating to Branch Office (BO) in India

¡ Relating to Liaison Office (LO) in India

¡ Relating to Project Office (PO) in India

(b)     Undertaking is to be submitted that no investigation is pending before any

Agency i.e. DOE or CBI etc.

(c)      Copy of Memorandum and Article of Association of the Indian company, if any is to be submitted

(d)     Copy of latest audited balance sheet of the Indian company is to be submitted

(e)      Information about enquiry, investigation or adjudication proceedings if any initiated against the applicant after date of filing the compounding application but before issue of compounding order

(f)      Applicant is also required to inform to the compounding authority about the change in address, contact details, if any during pendency of proceeding of the compounding.

(ii)  Specific Information’s for the FDIs

(a)   Name of Applicant

(b)   Date of Incorporation of the Indian company (c)   Nature of the Activities of the Indian company (d)   Brief particulars of the foreign investors

(e)   Details of the foreign inward remittances

(f)    Latest audited Balance sheet of the Indian company

(g)   Nature and reason of the contravention

(iii)  Specific Information’s for the ECBs

(a)   Name of Applicant

(b)   Date of Incorporation of the Indian company

(c)   Nature of the Activities of the Indian company

(d)   Brief particulars of the foreign lenders of the Indian company

Satish Agarwal : +919811081957                              satishagarwal307@yahoo.com

(e)   Shareholding of lender at time of signing of loan agreement

(f)    Date of Loan agreement

(g)   Amount in the foreign currency and in Indian rupee

(h)   Rate of Interest

(i)     Period of loan

(j)     Particulars of Repayment

(k)   Details of drawdown

(l)     Details of Utilization of ECB

(m) Nature and Reason of contravention

(iv)  Specific Information’s for the ODIs

(a)   Name of Applicant

(b)   Date of Incorporation of the Indian company (c)   Nature of the Activities of the Indian company (d)   Name of Overseas entity

(e)   Date of Incorporation of overseas entity

(f)    Nature of activities of overseas entity

(g)   Nature of entity i.e. WOS or JV (h)   Details of remittance sent

(i)     Date of remittance

(j)     Amount in the foreign currency and in Indian rupee

(k)   Details of other ‘financial’ commitments (l)        Detail of UIN as applied and received (m) Date of receipt of share certificate

(n)   Approval of other regulator, if any needed

(o)   Details of the APRs submitted

(p)   Nature and reason of the contraventions

(q)   All relevant supporting documents are to be submitted

(v)  Specific Information’s for the BO or LO

(a)   Name of Applicant

(b)   Date of Incorporation in India

(c)   Date of approval for opening of LO or BO (d) Validity period of approval

(d)   Nature of the Activities

(e)   Income and Expenditure of LO or BO

(f)    Date of submission of Annual Activity Certificate (AAC) (g)   Nature and reason of contravention

(h)   All relevant supporting documents are to be submitted

13.  Pre‐Requisite for the Compounding Process

(i)   (a)   No   ‘new’   compounding  is   permitted  where   similar   contravention  is   already compounded with in an immediate period of 3(three) years

 (b)   Hence new compounding is permitted for similar contravention ‘after’ expiry of the

3(three) years

(ii)   No compounding is permitted without regularization of the contravention from the RBI, Govt./ FIPB or any statutory authority before compounding order is to be passed

(iii) No  compounding  is  permitted  where  contravention  involve  any  money  laundering

activity as defined under the Section 3(a) of the FEMA, 1999

(iv) No compounding is permitted where contravention involve any national and security concerns involving serious infringement of regulatory frame work etc. as defined under the Section 3(a) of the FEMA, 1999

(v)  No compounding is permitted against sensitive or serious nature of contravention as defined under the Section 3(a) of the FEMA, 1999

(vi)  No compounding is permitted where appeal is pending before appellate authority  against order of the Authority for Adjudication

14.  Process for Approval against compounding by the RBI

(i)      The RBI is required to verify that the details and documents are prima‐facie in order

(ii)     (a) The RBI is permitted to return the application where details are not completed

(b) Or where contravention is not admitted/accepted

(iii)   The RBI is required to examine and to decide the nature of contravention like

(a)   Technical

(b)   Material

(c)   Sensitive or serious in nature

(iv)    Technical in Nature

(a)   The RBI is required to issue cautionary advice where contravention is technical in nature.

(b)   Hence compounding is not required where contravention is technical in nature

(c)   Therefore no penalty is to be levied on the contravener.

(v)     Material in Nature

(a)   The RBI is required to compound by imposing a minimum penalty

(b)   And also the RBI has discretion to give an opportunity to contravener to personally appear before compounding authority for personal hearing where contravention is material in nature. Hence compounding is required where contravention is material in nature.

(c)   Therefore penalty is to be levied on the contravener. However prosecution is not permitted against the contravener

(vi)    Sensitive or Serious in Nature

(a)  The RBI is required to refer to DOE where contravention is sensitive or serious in nature.

(b) Hence the RBI is not permitted for Compounding where contravention is sensitive or serious in nature.

(c) DOE is to decide the quantum of penalty or/and prosecution or both independently without any intervention on the RBI through Adjudicating Authority for Adjudication.

15.   Classification of the nature of Contravention

(i)       The RBI is permitted to decide based on the merits as technical, material or sensitive/

serious in nature

(ii)     Contravener is not permitted to decide himself based on any kind of ‘external’ advice as technical, material or sensitive / serious in nature

(iii)     Hence  contravener  is  required  to  submit  an  application  directly  to  the  RBI  for compounding where contravention is happened without any delay. Contravener is not required to submit an application directly to DOE where contravention is although sensitive or serious in nature. Hence RBI will refer to DOE.

16.   Personal Hearing before an Authority

(i)       The RBI is not mandatory required to allow for personal hearing.

(ii)     However  the  RBI  is  required  to  give  an  opportunity  to  the  contravener  to  submit

additional facts and documents.

17.   Personal Hearing through an Authorized Representative (AR)

(i)      AR is permitted to attend personal hearing based on the proper written authority of the contravener

(ii)     However contravener to ensure that AR is conversant with the nature of contravention and facts of the related matter

18.   Completion of the Compounding Process and Appeal

(i)      Compounding  authority  RBI   is   required  to   issue   an   order   indicating  detail   of contravention and section of the FEMA, 1999 as contravened

(ii)     Amount of minimum fixed plus variable penalty is to be written in the compounding order

(iii)   Compounding process is to be treated as complete where payment of penalty is made by the contravener within 15 days from the date of order through demand draft in favor of RBI

(iv)    The RBI is required to issue a certificate for completion of the compounding process where penalty is paid by the contravener

(v)     No second adjudication is permitted by the RBI.

(vi)    No  separate  proceeding  is  to  be  initiated  or  continued  against  contravener  where contravention is already compounded and also penalty is paid by the contravener.

(vii)  No appeal is permitted against order of compounding as compounding process is based on the ‘voluntary’ admission and disclosure