SEEKING COMPOUNDING OF OFFENCE UNDER ‘FEMA’ AFTER CONCLUSION OF ADJUDICATION PROCEEDING – ALLOWED?

[DR.MARIAPPAN GOVINDARAJAN]

Compounding of offences

In terms of the Foreign Exchange (Compounding Proceedings) Rules, 2000, effective from June 1, 2000, RBI is empowered to compound all the contraventions of Foreign Exchange Management Act, 1999 (‘Act’ for short) except Section 3(a).  The idea of compounding an offence is to get the issue settled without the parties going for regular trial/adjudication upon payment of compensation or fine, as applicable. This process gives comfort to individuals and corporate community by minimizing transaction costs, while taking severe view of wilful, mala fide and fraudulent transactions.  By compounding of the offences, the usual lengthy process of adjudicating the offence can be avoided and valuable time can be saved.

Compounding cannot be claimed as a matter of right but it is always subject to the legal provisions. Once the offender/contravener agrees to avail the benefit of compounding, the same implies that the party is agreeable for a settlement and there is no requirement of the issue being taken up for adjudication. 

Application

The application for compounding contravention may be filed with the compounding authority, including those which are under adjudication process and have not been disposed of. No contravention would be compounded which has been finally adjudicated and disposed of by the adjudicating authority. 

Along with the application in the prescribed format, the applicant may also furnish the required details.  The applicant is required to submit an undertaking that they are not under any enquiry/ investigation/ adjudication by Directorate of Enforcement, as on the date of the application.  The applicant is to inform to the compounding authority/ RBI immediately, in writing, if any enquiry/ investigation/ adjudication proceedings are initiated by the Directorate of Enforcement against the applicant after the date of filing the compounding application, but on or before the date of issuance of the compounding order to enable the bank to complete the compounding process within the time frame.

 If an application for compounding is not submitted in the prescribed format or is found incomplete due to the absence of any mandatory details, declarations, documents or the directives as prescribed, the application will not be taken up for processing and shall be liable to be returned to the applicant.

Case law

In SANJAY JHUNJHUNWALA VERSUS RESERVE BANK OF INDIA & ORS. - 2025 (4) TMI 113 - CALCUTTA HIGH COURT, the petitioner contravened certain provisions of the Act. The petitioner filed an application for compounding of the offences committed by him under the Act.  Later he withdrew the petition and proceeded for adjudication of the case.  An adjudication order was passed by the Adjudicating Authority.  Penalty of Rs.10 crores was also imposed on the petitioner by the Adjudicating Authority on 27.03.2024.  The petitioner did not file any appeal against this order.  Instead, he filed an application on 06.05.2024 for compounding of the offences under Rule 4 of Foreign Exchange (Compounding of Offences) Rules, 2000 (‘Rules’ for short) before Reserve Bank of India (‘RBI’ for short).  RBI returned the said application on the ground that since the Adjudication order was passed by the Adjudicating Authority, the compounding application cannot be entertained. 

Subsequently, the Assistant Director (PRC) issued demand notice to the petitioner for the recovery of the said amount.  Against this order and adjudication order the petitioner filed the present writ petition before the High Court.  The petitioner contended that he may be allowed to avail the benefit of compounding at this stage. The petitioner further contended that he ought to be permitted to avail the benefit of compounding the offence as adjudicated by the adjudicating authority. The petitioner is not aggrieved by the order passed by the adjudicating authority and hence, did not choose to prefer appeal against the said order.  The compounding application stood rejected and returned as not maintainable. 

The respondent contended that compounding of offence is permissible prior to passing the order of adjudication. Once the order of adjudication is passed and the adjudication proceeding is concluded, there is no scope for entertaining the application for compounding of the offences.  After the adjudication order is passed, the contravener may prefer an appeal challenging the same, if aggrieved, or else pay the penalty that has been imposed.

The High Court considered the submissions of both the parties.  The High Court considered that it has to decide the question as to whether a contravener can be permitted to avail the benefit of compounding the contravention after an order of adjudication has been passed by the competent authority.  The High Court observed that the adjudicating authority found that the petitioner contravened provision of Regulation 3.  The subject transactions took place between February 2011 and February, 2013. Show cause notice was issued by the adjudicating authority being the Special Director (Enforcement Directorate) on 18.11.2022.  The petitioner filed the application for compounding of offences on 20.01.2023.  The said application was rejected by RBI on 08.01.2024. 

The High Court observed that the petitioner first wanted to know whether the Adjudication Order would be in favour or not.  Only after the adjudication order was passed and penalty was imposed, he chose to file the compounding application despite the fact compounding could not be done once an adjudication order was passed. The intention of the petitioner is not to pay the penalty that has been imposed and delay the proceeding for an indefinite period on the plea of compounding. After the offence of the petitioner has been adjudicated and penalty imposed, the petitioner would be bound to pay the amount of penalty quantified.

The High Court further observed that if the compounding application is permitted it would require the entire issue to be reopened all over again. The same will frustrate the whole adjudication rendering the adjudication proceeding nugatory and the entire time period consumed in the process of adjudication gets wasted. It is only for the purpose of avoiding the rigmarole of the adjudication process that the provision for compounding has been incorporated in the Act. The moment the contravener foregoes the benefit of compounding the offence, the next step forward is to reach the adjudication proceeding to its finality.

If the petition for compounding is allowed then there would be two orders.  One is the adjudication order and the other is the compounding order.  In respect of a contravention two orders cannot survive at the same time.  The compounding authority does not have the determination or the jurisdiction to cancel/overrule or set at naught the order passed by the adjudicating authority.  If the interpretation of the petitioner, if accepted, will lead to an uncertain situation and reaching finality to the proceeding will be a never-ending process.

The Court is of the opinion that the application made by the petitioner seeking compounding of the offence on conclusion of the adjudication proceeding cannot be allowed and the authority rightly rejected the application filed by the petitioner.  Therefore, the High Court dismissed the writ petition.