POWERS TO COMPOUND OFFENCES UNDER FEMA

[Prasanna CP]

 FEMA facilitates external trades, receipts and payments and orderly development and maintenance of foreign exchange in India. Any non-compliance (under Foreign Exchange Management Act 1999, rules, regulations, notifications, orders, circulars, directions) will result in penalty or penalty with imprisonment. Compounding refers to the process of voluntary acceptance and seeking redressal for contraventions and provides a settlement mechanism through which penalty is paid in lieu of prosecution. Compounding avoids a long drawn process of prosecution and helps to minimize both time and cost in exchange of penalty payment. Further, enables the person in default to make honourable discharge of his liability.

When a person is made aware of contraventions under FEMA, may apply for compounding of offences. Suo moto, application for compounding is also possible. Offences under FEMA (other than the contraventions under section 3(a) of the act) can be compounded by RBI and Enforcement Directorate in certain cases based on the classification of contraventions committed. However, non-quantifiable contraventions cannot be compounded.

Now comes the question, as to where should one apply for compounding?

Compounding of contraventions under section 3(a) (Hawala transactions) and those contraventions which is considered to be serious, willful with malafide intentions, shall be compounded by Enforcement Directorate other contraventions shall be compounded by RBI. Further RBI would classify the contraventions as technical and/or minor or serious, based on the merits of the case and the application will be disposed of keeping in view the procedure notified in this regards.

S. No	Compounding by RBI		Compounding by Enforcement directorate
	Sum involved	Officer empowered	Sum involved	Officer empowered
1	10 lakhs or below	Assistant General Manager	5 lakhs or below	Deputy director
2	More than 10 lakhs but less than 40 lakhs	Deputy General manager	More than 5 lakhs but less than 10 lakhs	Additional director
3	40 lakhs or more but less than 100 lakhs	General manager	10 lakhs or more but less than 50 lakhs	Special director
4	100 lakhs or  more	Chief General manager	50 lakhs or more but less than 1 crore	Special director with deputy legal advisor
5	RBI (compounding authority) shall exercise powers to compound any contravention subject to the direction, control and supervision of the Governor of RBI.	Every officer specified under sub rule (1) of rule 4 of RBI compounding authority	1 crore or more	Director of enforcement with special director.

All compounding applications shall be submitted in the format as per Foreign exchange (compounding proceedings) rules, 2000 along with prescribed fee and mode of payment as follows:

S. No	Compounding authority	Prescribed fee	Mode of payment	In favour of	Payable at
1	RBI Regional offices	5000/-	Demand Draft	Reserve Bank of India	Concerned regional office
2	CEFA Foreign Exchange department	5000/-	Demand Draft	Reserve Bank of India	Mumbai

Delegation of compounding power by RBI:

With reference to the FED Master Direction No. 4/2015-16 updated on December 22,2017: Compounding powers in relation to following contraventions were delegated to regional offices of RBI (except Kochi and Panaji) without any limit on the amount of contraventions in order to provide operational convenience.

S. No	Contraventions	Regulations and Notifications
1	Reporting: Foreign inward remittance in Advance Remittance form- beyond 30days from the date of receipt of the amount of consideration received. Regulation 13.1 to FEMA 20(R)/2017. Details of issue in form FC-GPR - beyond 30 days from the date of issue of shares or convertible debentures or warrants Regulation 13.2 to FEMA 20(R)/2017.	An Indian company issuing shares or debentures or warrants in accordance with these regulations shall submit certain reports through AD bank to the regional office of RBI.
2.	Reporting (FLAR) beyond 15th day of July of each year. Year-April to March	All Indian companies which have received Foreign Direct Investment in the previous year including the current year shall submit to RBI – Annual Return on Foreign Liabilities and assets (FLA). Regulation 13.1(3) to FEMA 20(R)/2017.
3.	Delay in issue of shares and refund of share application money beyond 60 days from the date of inward remittance. Inward remittance through other modes of payment by the person resident outside India.	Inward remittance for shares or convertible debentures or warrants issued by the Indian company shall be through: Normal banking channels NRE/FCNR(B) account of the person maintained with authorized dealer/banker Escrow account (in rupees) maintained with AD as per FEM(deposit)Regulations,2016. Further if the shares or convertible debentures or warrants are not issued within 60 days from the date of receipt of each call payment shall be refunded. Paragraph 2 of schedule I to FEMA 20(R)/2017.
4.	Violation of pricing guidelines for issue of shares.	Price of shares issued/transfer to person resident outside India shall not be less than: Price in accordance with relevant SEBI guidelines (if shares listed in any recognized stock exchange in India). And as per SEBI (Delisting of Equity shares) regulations, 2009(if the company is going through delisting process). Valuation done as per internationally accepted pricing methodology for valuation of shares on arm’s length basis (if shares listed in any recognized stock exchange in India). Regulation 11 to FEMA 20(R)/2017.
5.	Issue of ineligible instruments other than those covered under capital (as per regulation2(v) i.e., non-convertible debentures, partly paid shares, etc.	A person resident outside India (other than citizen of Bangladesh or Pakistan) or an entity incorporated outside India (other than an entity in Bangladesh or Pakistan) may invest in capital) of an Indian company subject to terms and conditions under schedule I. Regulation 2(v) read with regulation 5 to FEMA 20(R)/2017.
6.	Issues of shares beyond the limits prescribed, and issue of shares without approval of RBI and Govt. of India wherever required.	An Indian company, not engaged in any activity/sector mentioned in Annex A to the schedule 1 may issue shares or convertible debentures or warrants to a person resident outside India subject the limits prescribed in Annex B in accordance with the entry routes specified and foreign direct investment policy notified. Regulation 16.B to FEMA 20(R)/2017.
7.	Submission of Form FC-TRS beyond 60 days of receipt of consideration.	In case of transfer of shares or convertible debentures or warrants of an Indian company by way of sale from a person resident in India to a person resident outside India or vice versa, the transferor/transferee (whoever resident in India) shall submit a report in Form FC-TRS to authorized dealer within 60 days of receipt of consideration. Regulation 13.1(4) to FEMA 20(R)/2017.
8.	Receiving investment in India from non-resident or taking record transfer of shares by investee company.	Otherwise provided in the act or regulations, an Indian company shall not issue any security to a person resident outside India or shall not record in its books any transfer of security from or to such person. Regulation 4 to FEMA20(R)/2017.

Note:

1. As per Notification FEMA 20(R)/2017-RB dated November 07,2017 Regulation 13.2 any delays in reporting, the person/entity responsible for such reporting shall be liable for payment of late submission fee as may be decided by RBI, in consultation with the central government and compounding becomes irrelevant to that extent.
2. Kochi and Panaji regional offices can compound offences below one hundred lakhs.
3. The offences amounting to one hundred lakhs or more under the jurisdiction of Panaji and Kochi regional offices and all other offences (other than those covered above) shall be compounded at Cell for effective implementation of FEMA(CEFA) FED, RBI, Mumbai.

Authorisation to compound the contraventions by FED CO Cell:

The Duties of Foreign Investment divisions(FID) Non Resident Foreign Account Division(NRFAD) Immovable Property Division (IP)

Transferred to

Foreign Exchange Department CO, cell, New Delhi. Are now authorized to compound the following contraventions in relation to: FEMA 5/2000: Foreign Exchange Management (Deposit)Regulations 2000 FEMA 7/2000: Acquisition and transfer of immovable property outside India FEMA 21/2000: Acquisition and transfer of immovable property in India FEMA 22/2000: Establishment in India of Branch office, Liaison office or Project office.

Generally entire compounding process shall be completed within 180days from the date of receipt of application.