Understanding the Compounding of Contraventions under FEMA, 1999

[YAGAY andSUN]

The Foreign Exchange Management Act (FEMA), 1999, regulates foreign exchange transactions in India. Occasionally, individuals or entities may inadvertently violate its provisions. To address such breaches, FEMA provides a mechanism known as 'compounding,' allowing contraveners to voluntarily admit their violations and seek redressal.

What is a Contravention and Compounding?

• Contravention: A contravention refers to a breach of any provision of FEMA, 1999, including its rules, regulations, notifications, orders, directions, or circulars issued thereunder.
• Compounding: Compounding is a voluntary process where an individual or entity admits to the contravention, pleads guilty, and seeks redressal. The Reserve Bank of India (RBI) is empowered to compound such contraventions, except those under Section 3(a) of FEMA, 1999.

Who Can Apply for Compounding?

Any person who has contravened provisions of FEMA, 1999 (except Section 3(a)) or violated any related rules, regulations, notifications, directions, or orders can apply for compounding to the RBI. Violations under Section 3(a) should be addressed to the Directorate of Enforcement (DoE).

When to Apply for Compounding?

An application for compounding can be submitted when a person becomes aware of the contravention, either through notification by the RBI, other statutory authorities, auditors, or any other means. The application can be made voluntarily (suo moto) or in response to a Memorandum of Contraventions issued by the RBI.

Procedure for Applying for Compounding:

1. Application Submission: Submit the compounding application form, either physically or through the RBI's PRAVAAH Portal, along with the necessary documents as specified in Annexures I, II, and III of the RBI's Directions on Compounding of Contraventions under FEMA, 1999.
2. Application Fee: A non-refundable fee of ₹10,000 (plus applicable GST) must accompany the application. This can be paid via demand draft favoring the "Reserve Bank of India" or through electronic modes like NEFT. Details for electronic payments are provided in Annexure I of the RBI's Directions.

Details Required in the Application Form:

• Applicant's contact details, including name, telephone/mobile number, and email ID.
• Relevant facts and supporting documents related to the contravention.
• An undertaking stating that the applicant is not under investigation by the DoE.
• A cancelled cheque and a copy of the Memorandum of Association (for corporate applicants).

Where to Apply for Compounding:

Applications should be submitted to the RBI, following the guidelines provided in paragraphs 2.1 to 2.4 of the Directions on Compounding of Contraventions under FEMA, 1999.

Mandatory Approvals Before Applying:

Before applying for compounding, ensure that all necessary approvals have been obtained, and compliances completed. Compounding can only proceed after all administrative actions are finalized, including obtaining post-facto approvals or unwinding non-permissible transactions. Relevant documents should be enclosed with the application.

Sensitive Contraventions:

Contraventions suspected of involving money laundering, terror financing, or affecting the nation's sovereignty and integrity are categorized as sensitive. Such cases are not eligible for compounding by the RBI.

Personal Hearing:

Attending a personal hearing is optional. If chosen, it can be conducted physically or virtually. Opting out does not affect the compounding process, as decisions are based on submitted documents.

Authorization for Personal Hearing:

Applicants may authorize another person to attend the personal hearing on their behalf, provided a written authorization is submitted. The representative should be well-acquainted with the contravention details. The RBI encourages direct appearance by applicants to streamline the process.

Conclusion of the Compounding Process:

The process concludes with the issuance of a certificate by the RBI upon payment of the compounding amount, indicating compliance with the Compounding Authority's order.

Non-Payment Consequences:

Failure to pay the compounding amount within 15 days renders the application void. Consequently, the contravener may face proceedings under FEMA, 1999, and the case may be referred to the DoE for necessary action.

Appeal Against Compounding Order:

Since compounding is a voluntary process, there is no provision for appealing the Compounding Authority's order or requesting a reduction in the imposed amount or an extension for payment.

Timeframe for Compounding Process:

The RBI aims to complete the compounding process within 180 days from receiving a complete application.

For comprehensive details, refer to the RBI's official FAQs on Compounding of Contraventions under FEMA, 1999.