Guidelines for Compounding of Contraventions under FEMA, 1999”, based on the latest updates (Compounding Rules, 2024)

[YAGAY andSUN]

🔹 What is Compounding under FEMA?

Compounding is a process where a person/entity that has violated FEMA provisions can voluntarily admit the contravention, pay a fee (called the compounding amount), and settle the matter without undergoing lengthy legal proceedings.

🔹 Legal Authority

• Governed by Section 15 of FEMA, 1999.

• Detailed in the Foreign Exchange (Compounding Proceedings) Rules, 2024.

🔹 Who can compound?

The Reserve Bank of India (RBI) is empowered to compound certain types of FEMA violations—especially related to:

• Foreign Direct Investment (FDI)

• Overseas Direct Investment (ODI)

• External Commercial Borrowings (ECBs)

• Liaison/Branch Offices

🔹 What kinds of violations can be compounded?

Only violations that are:

• Not involving money laundering, terror financing, or national security

• Not under Section 3(a) of FEMA (dealing with illegal forex dealings)

• Not already adjudicated or penalized

• Not repeated within 3 years of a similar past contravention

🔹 How to Apply for Compounding?

• Submit application physically or via PRAVAAH portal

• Pay a fee of ₹10,000 + GST

• Provide required documents like:

  • Details of the transaction (Annexure II)

  • Undertaking regarding investigation status (Annexure III)

  • Proof of fee payment

• Applications go to:

  • RBI Regional Office (based on company location)

  • FED Cell, New Delhi (for LO/BO/PO, immovable property cases)

  • CEFA Cell, Mumbai (other cases)

🔹 When Compounding is Not Allowed

• Similar contravention already compounded in last 3 years

• Investigation/adjudication not completed

• Serious offenses (money laundering, terror links, sovereignty issues)

• Amounts involved are not quantifiable

• Violations under Section 3(a)

🔹 Compounding Process

1. RBI reviews the application and documents.

2. May call for further info or a personal hearing (optional).

3. Factors considered for penalty:

   • Unfair gains made

   • Government losses

   • Nature of the violation

   • Intent and history of the violator

4. Penalty = Fixed + Variable depending on type, amount, and duration of violation (details given in a compounding matrix).

🔹 Payment of Compounding Amount

• Pay within 15 days of receiving the compounding order.

• Mode: Demand Draft / NEFT / RTGS / Online

• No withdrawal or appeal after payment.

• A certificate is issued upon successful payment.

🔹 Examples of Compounding Amounts (as per matrix)

Type of Contravention	Example Fine
Delayed FDI Reporting	₹10,000 fixed + ₹1,000 per year (if < ₹10L)
Non-allotment of shares after FDI	0.3–0.75% of amount involved
Delay in filing Annual Return (APR, FLA)	₹10,000 per return/year
Guarantee without approval	Fixed ₹5L + 0.05–0.075% of amount

🔹 Important Timelines

• 180 days: RBI must issue compounding order within this from receipt of application.

• 15 days: To pay the compounded amount.

• Application may be returned if incomplete or fee unpaid.

🔹 Final Notes

• Compounding is voluntary.

• It is meant to reduce litigation, promote compliance, and ease of doing business.

• Serious violations are still dealt with under criminal or adjudication procedures.