COMPOUNDING OF CONTRAVENTION UNDER FEMA -PARA 10 OF SCHEDULE II OF FEMA (DEPOSIT) RULES, 2000

[Mr. M. GOVINDARAJAN]

Compounding of contravention

Section 15(1) of the Foreign Exchange Management Act, 1999 provides that any contravention is made by him against any of the provisions of the Act and the rules made there under may file an application for compounding.  Within 180 days from the date of receipt of the application, the authorized officers of Department of Enforcement (‘EoE’ for short) and the officers of the Reserve Bank of India (‘RBI’ for short) may compound the contravention.

Para 10 of Schedule 2 of deposit Regulations

Foreign  Exchange Management (Deposit) Regulations, 2000, (‘Regulation’ for short) was notified vide No. FEMA 5/2000-RB, dated 03.05.2020.  Para 10 provides that when an account holder becomes a person resident in India, deposits may be allowed to continue till maturity at the contracted rate of interest, if so desired by him. However, except the provisions relating to rate of interest and reserve requirements as applicable to FCNR (B) deposits, for all other purposes such deposits shall be treated as resident deposits from the date of return of the accountholder to India. Authorized dealers should convert the FCNR(B) deposits on maturity into resident rupee deposit accounts or RFC account (if the depositor is eligible to open RFC account), at the option of the accountholder and interest on the new deposit (rupee account or RFC account) shall be payable at the relevant rates applicable for such deposits.

The contravention of the above said para 10 may be compounded on an application filed by the applicant concerned before the Authority.

In re ‘Rakesh Kumar, New Delhi’ - CA No. 107/2019 - Before Chief General Manager, decided on 10.01.2020, the applicant, in this case, worked in Indian Foreign Services.  He retired from services on 30.09.2008.  During his tenure out of India the applicant had made various deposits under FCNR (B) account.  He returned to India during 1995.  He continued to renew the fixed deposits under FCNR (B) account even though his residential status is changed. 

The above act is alleged as contravention of Para 10 of Schedule 2 to the Foreign Exchange Management (Deposit) Regulations, 2000, (‘Regulation’ for short) notified vide No. FEMA 5/2000-RB, dated 03.05.2020. 

The applicant approached RBI in this regard on 24.08.2017.  The applicant filed an application for compounding of contravention under Para 10 of Schedule 2 to Regulation.  In the application the applicant mentioned that-

• The continuation of FCNR fixed deposit has been flagged by DoE on reference from Central Bureau of Investigation.
• The applicant was issued a Show Cause Notice issued by DoE.
• The particulars given by the applicant in the application are true and correct to the best of his knowledge and belief.
• The applicant is under adjudication by DoE.

RBI sought comments on the compounding application filed by the applicant from DoE.  The DoE has informed vide their letter dated 27.02.2018 that necessary action as per law may be taken by the RBI in the matter in respect of compounding application by the applicant.  The applicant has not filed any appeal under section 17 or section 19 of Act.

The total amount of fixed deposits held by the applicant is Rs.4.35 crore which has been considered as contravention.  The applicant earned interest to the tune of Rs.1.60 crore on these deposits.  If the status of FCNR (B) account has been changed to the rupee account, the applicant would have earned interest to the tune of Rs.61.99 lakhs which is subject to income tax @ 30% amounting to Rs.18.60 lakhs.  The net interest that can be earned by the applicant is Rs.43.39 lakhs.   The net interest that the applicant would have earned is Rs.1.17 crores.  This amount has to be taken as undue gain.

The contravention has been regularized on 08.04.2019.  The first deposit was made on 06.04.1995.  Therefore the contravention took from 06.04.1995 to 08.04.2019 i.e., 24 years and 2 days.  The amount and period of contravention are as below-

• Amount - Rs.4,53,15,444/-;
• Undue gain - Rs.1,16,58,220/-;
• Period - 24 years 2 days from 06.04.1995 to 08.04.2019.

The Authority gave an opportunity to the applicant on 08.11.2019.  Vide email dated 31.10.2019 the applicant was asked to submit further points and producing documents, if any, in support of the application. The application for compounding was decided on the basis of the averments/submission made in the application as well as other documents and also submissions made in this context by the applicant during the personal hearing.

The Authority has given his careful consideration to the documents on record and submission made by the applicant.  The Authority held that that the applicant has contravened Para 10 of Schedule 2 to Notification No. FEMA.5/2000-RB dated May 3, 2000.  The Authority observed that In terms of Section 13 of Act, any person contravening, inter alia any provision of the Act or any condition subject to which an authorization is issued by the RBI, shall be liable to a penalty up to thrice the sum involved in such contravention upon adjudication.

Considering the submissions made by the applicant and the entire facts and circumstances of the case, the Authority considered that payment of an amount of Rs.1,20,48,086/- will meet the ends of justice in the circumstances of this case.  Accordingly the Authority compounded the admitted contravention under Para 10 of Schedule 2 to Notification No. FEMA.5/2000-RB dated May 3, 2000, in terms of the Foreign Exchange (Compounding Proceedings) Rules, 2000 on payment of an amount of Rs. 1,20,48,086/- within 15 days from the date of the order.  If the applicant fails to pay the said amount Rule 10 of the Foreign Exchange (Compounding Proceedings) Rules, 2000 dated May 03, 2000 shall apply, which provides that he shall be deemed to have never made an application for compounding of any contravention under these rules and the provisions of the Act for contravention shall apply to him.