FEMA (COMPOUNDING PROCEEDINGS) RULES, 2000

[Mr. M. GOVINDARAJAN]

Rules

In exercise of the powers conferred by section 46 read with sub-section (1) of section 15 of the Foreign Exchange Management Act, 1999) the Central Government made the  rules relating to compounding contraventions under chapter IV of the said Act, namely ‘ the Foreign Exchange Management (Compounding Proceedings) Rules, 2000’ vide Notification No. 383(E), dated 03.05.2000.  These Rules came into effect from 01.06.2000.

Contravention

Contravention is a breach of the provisions of the Foreign Exchange Management Act (FEMA), 1999 and rules/ regulations/ notification/ orders/ directions/ circulars issued there under.

Sensitive contravention

Cases of contravention, such as, those having serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation are sensitive contraventions.

Compounding

Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and seeking redressal. 

Compounding Authority

Rule 3 defines the expression ‘compounding authority’ as the persons authorized by the Central Government under sub-section (1) of section 15 of the Act, namely-

• an officer of the Enforcement Directorate not below the rank of Deputy Director or Deputy Legal Adviser, (DLA).
• An officer of the Reserve Bank of India not below the rank of the Assistant General Manager.

Power of Reserve Bank to compound

The Reserve Bank is empowered to compound any contraventions as defined under section 13 of FEMA, 1999 except the contravention under section 3(a), for a specified sum after offering an opportunity of personal hearing to the contravener. It is a voluntary process in which an individual or a corporate seeks compounding of an admitted contravention. It provides comfort to any person who contravenes any provisions of FEMA, 1999 [except section 3(a) of the Act] by minimizing transaction costs. Willful, malafide and fraudulent transactions are, however, viewed seriously, which will not be compounded by the Reserve Bank. Further, in terms of the proviso to rule 8 (2) of Foreign Exchange (Compounding Proceedings) Rules, 2000 inserted vide GOI notification dated February 20, 2017, if the Enforcement Directorate is of the view that the compounding proceeding relates to a serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation, such cases will not be compounded by the Reserve Bank.

Rule 4(1) provides that If any person contravenes any provisions of the Foreign Exchange Management Act, 1999  except clause (a) of Section 3 of that Act:-

• in case where the sum involved in such contravention is ten lakhs rupees or below, by the Assistant General Manager of the Reserve Bank of India ;
•  in case where the sum involved in such contravention is more than rupees ten lakhs but less than rupees forty lakhs, by the Deputy General Manager of Reserve Bank of India ;
•  in case where the sum involved in the contravention is rupees forty lakhs or more but less than rupees ¹[hundred lakhs] by the General Manager of Reserve Bank of India
• in case the sum involved in such contravention is rupees one hundred lakhs or more, by the Chief General Manager of the Reserve Bank of India

No contravention shall be compounded unless the amount involved in such contravention is quantifiable.

Delegation of Powers to Regional Offices

As a measure of customer service and in order to facilitate the operational convenience, compounding powers were delegated to the Regional Offices of the Reserve Bank of India to compound the following contraventions-

Sl. No.	FEMA REGULATION	CONTRAVENTION
1	Paragraph 9(1)(A) of Schedule I	Delay in reporting inward remittance received for issue of shares.
2	Paragraph 9(1)(B) of Schedule I	Delay in filing form FC(GPR) after issue of shares.
3	Paragraph 9(2) of Schedule I	Delay in filing the Annual Return in respect of the Foreign Liabilities and Assets (FLAR).
4	Paragraph 8 of Schedule I	Delay in issue of shares/refund of share application money beyond 180 days, mode of receipt of funds, etc.
5	Paragraph 5 of Schedule I	Violation of pricing guidelines for issue of shares.
6	Regulation 2(ii) read with Regulation 5(1)	Issue of ineligible instruments such as non-convertible debentures, partly paid shares, shares with optionality clause, etc.
7	Paragraph 2 or 3 of Schedule I	Issue of shares without approval of RBI or FIPB respectively, wherever required.
8	Regulation 10A (b)(i) read with paragraph 10	Delay in submission of form FC-TRS on transfer of shares from Resident to Non-Resident.
9	Regulation 10B (2) read with paragraph 10	Delay in submission of form FC-TRS on transfer of shares from Non-Resident to Resident.
10	Regulation 4	Taking on record transfer of shares by investee company.

The compounding powers have been delegated to the Regional Offices of the Reserve Bank of India to compound the following contraventions of FEMA 20(R)/ 2017-RB:

Sl. No.	FEMA Regulation	Brief Description of contravention
1	Regulation 13.1(1)	Delay in reporting inward remittance received for issue of shares.
2	Regulation 13.1(2)	Delay in filing form FC(GPR) after issue of shares.
3	Regulation 13.1(3)	Delay in filing the Annual Return on Foreign Liabilities and Assets (FLA).
4	Paragraph 2 of Schedule I	Delay in issue of shares/refund of share application money beyond 60 days, mode of receipt of funds, etc.
5	Regulation 11	Violation of pricing guidelines for issue/transfer of shares.
6	Regulation 2(v) read with Regulation 5	Issue of ineligible instruments
7	Regulation 16.B	Issue of shares without approval of RBI or Government, wherever required.
8	Regulation 13.1(4)	Delay in submission of form FC-TRS on transfer of shares from Resident to Non-Resident or from Non-resident to Resident.
9	Regulation 4	Receiving investment in India from non-resident or taking on record transfer of shares by investee company.

Authorization to compound the contraventions by FED CO Cell, New Delhi

  the officers attached to the FED, CO, Cell at New Delhi office are now authorized to compound the contraventions as under:

Sl.No.	Notification	Brief description of contravention
1	FEMA 7/2000-RB, dated 03.05.2000	Contraventions relating to acquisition and transfer of immovable property outside India
2	FEMA 21/2000-RB, dated 03.05.2000	Contraventions relating to acquisition and transfer of immovable property in India
3	FEMA 22/2000-RB, dated 03.05.2000	Contraventions relating to establishment in India of Branch office, Liaison Office or Project office
4	FEMA 5/2000-RB,dated 03.05.2000	Contraventions falling under Foreign Exchange Management (Deposit) Regulations, 2000

The powers to compound the contraventions at Paragraph 3 and Paragraph 4 above have been delegated to all Regional Offices (except Kochi and Panaji) and FED, CO Cell, New Delhi respectively without any limit on the amount of contravention. Kochi and Panaji Regional offices can compound the contraventions at paragraph 3 for amount of    contravention below Rupees one hundred lakh (Rs.1,00,00,000/-). The contraventions of Rupees one hundred lakh (Rs.1,00,00,000/-) or more under the jurisdiction of Panaji and Kochi Regional Offices and all other contraventions of FEMA will continue to be compounded at Cell for Effective Implementation of FEMA (CEFA), Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai, as hitherto.

Accordingly, applications for compounding related to the above contraventions may be submitted to the respective Regional Offices under whose jurisdiction they fall or to FED, CO Cell, New Delhi, as applicable. For all other contraventions, applications may continue to be submitted to CEFA, Foreign Exchange Department, Reserve Bank of India, 5th floor, Amar Building, Sir P.M.Road, Fort, Mumbai 400001.

Who can apply for compounding?

Any person who contravenes any provision of the FEMA, 1999 [except section 3(a)] or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act or contravenes any condition subject to which an authorization is issued by the Reserve Bank, can apply for compounding to the Reserve Bank. Applications seeking compounding of contraventions under section 3(a) of FEMA, 1999 may be submitted to the Directorate of Enforcement.  

Time for compounding

When a person is made aware of the contravention of the provisions of FEMA, 1999 by the Reserve Bank or any other statutory authority or the auditors or by any other means, she/he may apply for compounding. One can also make an application for compounding, suo moto, on becoming aware of the contravention.

Application for compounding

• All applications for compounding may be submitted together with the prescribed fee of ₹ 5000/- by way of a demand draft drawn in favour of “Reserve Bank of India” and payable at the concerned Regional Office and by way of a demand draft drawn in favour of “Reserve Bank of India” and payable at Mumbai for cases submitted to the Compounding Authority.
• The format of the application is appended to the Foreign Exchange (Compounding Proceedings) Rules, 2000.
• Along with the application in the prescribed format, the applicant may also furnish the details relating to Foreign Direct Investment, External Commercial Borrowings, Overseas Direct Investment and Branch Office / Liaison Office, as applicable, a copy of the Memorandum of Association and latest audited balance sheet along with an undertaking as per at they are not under any enquiry/investigation/adjudication by any agency such as Directorate of Enforcement, CBI etc as on the date of the application and to inform to the Compounding Authority/RBI immediately, in writing, if any enquiry/investigation/adjudication proceedings are initiated by any agency 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.
• In case the application has to be returned where required approvals are not obtained from the authorities concerned or in case of incomplete application for any other reason, the application fees of ₹ 5000/-, received along with the application will be returned by crediting the same to the applicant’s account through NEFT as per the ECS mandate and details of their bank account as per furnished along with the application. The Annexes relating to Foreign Direct Investment, External Commercial Borrowings, Overseas Direct Investment and Branch Office / Liaison Office, as given in , have also been modified to include the details of income-tax PAN and the activity as per NIC codes – 1987 in terms of . The application will be treated as incomplete without these details.
• The applicants are also advised to bring to the notice of the compounding authority change, if any, in the address/ contact details of the applicant during the pendency of the compounding application with Reserve Bank.

Pre-requisite for Compounding Process

• In respect of a contravention committed by any person within a period of three years from the date on which a similar contravention committed by him was compounded under the Compounding Rules, such contraventions would not be compounded and relevant provisions of the FEMA, 1999 shall apply. Any second or subsequent contravention committed after the expiry of a period of three years from the date on which the contravention was previously compounded shall be deemed to be a first contravention.
• Contraventions relating to any transaction where proper approvals or permission from the Government or any statutory authority concerned, as the case may be, have not been obtained, such contraventions would not be compounded unless the required approvals are obtained from the concerned authorities.
• Cases of contravention, such as, those having serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation or where the contravener fails to pay the sum for which contravention was compounded within the specified period in terms of the compounding order, shall be referred to the Directorate of Enforcement for further investigation and necessary action under FEMA, 1999 or to the authority instituted for implementation of the Prevention of Money Laundering Act 2002, or to any other agencies, for necessary action as deemed fit
• In case where adjudication has been done by the Directorate of Enforcement and an appeal has been filed under section 17 or section 19 of FEMA, 1999, no contravention can be compounded in terms of Rule 11 of Foreign Exchange (Compounding Proceedings) Rules, 2000. The applicant shall confirm in the undertaking required to be furnished along with the compounding application that they have not filed any appeal under section 17 or section 19 of FEMA, 1999.
• In this connection, it is clarified that whenever a contravention is identified by the Reserve Bank or brought to its notice by the entity involved in contravention by way of a reference other than through the prescribed application for compounding, the Bank will continue to decide-

• whether a contravention is technical and/or minor in nature and, as such, can be dealt with by way of an administrative/ cautionary advice;
• whether it is material and, hence, is required to be compounded for which the necessary compounding procedure has to be followed or
• whether the issues involved are sensitive / serious in nature and, therefore, need to be referred to the Directorate of Enforcement (DOE). However, once a compounding application is filed by the concerned entity suo moto, admitting the contravention, the same will not be considered as ‘technical’ or ‘minor’ in nature and the compounding process shall be initiated in terms of section 15 (1) of Foreign Exchange Management Act, 1999 read with Rule 9 of Foreign Exchange (Compounding Proceedings) Rules, 2000.

•  In terms of the proviso to rule 8 (2) of Foreign Exchange (Compounding Proceedings) Rules, 2000 inserted vide GOI notification dated February 20, 2017, if the Enforcement Directorate is of the view that the compounding proceeding relates to a serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation, the Compounding Authority shall not proceed with the matter and shall remit the case to the appropriate Adjudicating Authority for adjudicating contravention under section 13.

 Procedure for compounding

• On receipt of the application for compounding, the Reserve Bank shall examine the application based on the documents and submissions made in the application and assess whether contravention is quantifiable and, if so, the amount of contravention.
• The Compounding Authority may call for any information, record or any other documents relevant to the compounding proceedings. In case the contravener fails to submit the additional information/documents called for within the specified period, the application for compounding will be liable for rejection.
• The following factors, which are only indicative, may be taken into consideration for the purpose of passing compounding order and adjudging the quantum of sum on payment of which contravention shall be compounded:

• the amount of gain of unfair advantage, wherever quantifiable, made as a result of the contravention;
•  the amount of loss caused to any authority/ agency/ exchequer as a result of the contravention;
• economic benefits accruing to the contravener from delayed compliance or compliance avoided;
• the repetitive nature of the contravention, the track record and/or history of non-compliance of the contravener;
• contravener’s conduct in undertaking the transaction and in disclosure of full facts in the application and submissions made during the personal hearing; and any other factor as considered relevant and appropriate.

Calculation of penalty

• As per provisions of section 13 of FEMA the amount imposed can be up to three times the amount involved in the contravention. However, the amount imposed is calculated based on guidance note given below. It may, however, be noted that the guidance note is meant only for the purpose of broadly indicating the basis on which the amount to be imposed is derived by the compounding authorities in Reserve Bank of India. The actual amount imposed may sometimes vary, depending on the circumstances of the case taking into account the factors indicated in the foregoing paragraph.

• Guidance Note on Computation Matrix

Type of contravention	Existing Formula
1] Reporting Contraventions A) FEMA 20 Para 9(1)(A), 9(1)(B), part B of FC(GPR), FCTRS (Reg. 10) and taking on record FCTRS (Reg. 4) B) FEMA 3 Non submission of ECB statements C) FEMA 120 Non reporting/delay in reporting of acquisition/setup of subsidiaries/step down subsidiaries /changes in the shareholding pattern D) Any other reporting contraventions (except those in Row 2 below)	Fixed amount : ₹ 10000/- (applied once for each contravention in a compounding application) +  Variable amount as under: Up to  ₹ 10 lakhs: 1000 per year Above ₹ 10 lakhs & below ₹ 40 lakhs: 2500 per year Rs.40 lakhs or more and below ₹ 100 lakhs: 7000 per year   Rs.1-10 crore 50000 per year ₹ 10 -100 Crore : 100000 per year Above ₹ 100 Crore :   200000 per year
E) Reporting contraventions by LO/BO/PO	As above, subject to ceiling of ₹ 2 lakhs. In case of Project Office, the amount imposed shall be calculated on 10% of total project cost.
2] AAC/ APR/ Share certificate delays In case of non-submission/ delayed submission of APR/ share certificates (FEMA 120) or AAC (FEMA 22) or FCGPR (B) 3or FLA Returns (FEMA 20) or FLA Returns (FEMA 20 (R))	Rs.10000/- per AAC/APR/FCGPR (B)4/FLA Return delayed. Delayed receipt of share certificate – ₹ 10000/- per year, the total amount being subject to ceiling of 300% of the amount invested.
3]  A] Allotment/Refunds Para 8 of FEMA 20/2000-RB (non-allotment of shares or allotment/ refund after the stipulated 180 days) B] LO/BO/PO  (Other than reporting contraventions)	Rs.30000/- + given percentage: 1st year   : 0.30% 1-2 years : 0.35% 2-3 years : 0.40% 3-4 years : 0.45% 4-5 years : 0.50% >5 years : 0.75% (For project offices the amount of contravention shall be deemed to be 10% of the cost of project).
4] All other contraventions except Corporate Guarantees but including all contraventions of FEMA 20(R)/2017-RB dated November 07, 2017 other than FLA Returns	Rs.50000/- + given percentage: 1st year : 0.50% 1-2 years : 0.55% 2-3 years : 0.60% 3-4 years : 0.65% 4-5 years : 0.70% >5 years : 0.75%
] Issue of Corporate Guarantees without UIN/ without permission wherever required /open ended guarantees or any other contravention related to issue of Corporate Guarantees.	Rs.500000/- + given percentage: 1st year : 0.050% 1-2 years : 0.055% 2-3 years : 0.060% 3-4 years : 0.065% 4-5 years : 0.070% >5 years : 0.075% In case the contravention includes issue of guarantees for raising loans which are invested back into India, the amount imposed may be trebled.

*The contraventions of FEMA 20 existing and continuing as on November 07, 2017 (i.e. the starting date of contraventions prior to November 07, 2017) will be compounded as per 1(A) above.

• The above amounts are presently subject to the following provisos, viz.

• the amount imposed should not exceed 300% of the amount of contravention
• In case the amount of contravention is less than Rs. One lakh, the total amount imposed should not be more than amount of simple interest @5% p.a. calculated on the amount of contravention and for the period of the contravention in case of reporting contraventions and @10% p.a. in respect of all other contraventions.
• In case of paragraph 8 of Schedule I to FEMA 20/2000 RB contraventions, the amount imposed will be further graded as under:

• If the shares are allotted after 180 days without the prior approval of Reserve Bank, 1.25 times the amount calculated as per table above (subject to provisos at (i) & (ii) above).
• If the shares are not allotted and the amount is refunded after 180 days with the Bank’s permission: 1.50 times the amount calculated as per table above (subject to provisos at (i) & (ii) above).
• If the shares are not allotted andthe amount is refunded after 180 days without the Bank’s permission: 1.75 times the amount calculated as per table above (subject to provisos at (i) & (ii) above).

• In cases where it is established that the contravenor has made undue gains, the amount thereof may be neutralized to a reasonable extent by adding the same to the compounding amount calculated as per chart.
• If a party who has been compounded earlier applies for compounding again for similar contravention, the amount calculated as above may be enhanced by 50%.

• or calculating amount in respect of reporting contraventions under para I.1 above, the period of contravention may be considered proportionately {(approx. rounded off to next higher month ÷ 12) X amount for 1 year}. The total no. of days does not exclude Sundays/holidays.

Issue of the Compounding Order

• The Compounding Authority shall pass an order of compounding after affording an opportunity of being heard to all the concerned as expeditiously as possible as and not later than 180 days from the date of application on the basis of the averments made in the application as well as other documents and submissions made in this context by the contravener during the personal hearings.
• The time limit for this purpose would be reckoned from the date of receipt of the completed application for compounding by the Reserve Bank.
• If the applicant opts for appearing for the personal hearing, the Reserve Bank would encourage the applicant to appear directly for it rather than being represented / accompanied by legal experts / consultants, as compounding is only for admitted contraventions. Appearing for or opting out of personal hearing does not have any bearing whatsoever on the amount imposed in the compounding order. If the authorized representative of the applicant is unavailable for the personal hearing, the Compounding Authority may pass the order based on available information/ documents.
• The Compounding Order shall specify the provisions of the FEMA, 1999 or any rule, regulation, notification, direction or order issued in exercise of the powers under FEMA, 1999 in respect of which contravention has taken place along with details of the contravention.
•  One copy of the compounding order issued under sub rule (2) of Rule 8 of Foreign Exchange (Compounding Proceedings) Rules, 2000 shall be supplied to the applicant (the contravener) and also to the Adjudicating Authority, where the compounding of any contravention is made after making of a complaint under sub-section (3) of section 16 of the FEMA, as the case may be.
• To ensure more transparency and greater disclosure, it has been decided to host the compounding orders passed on or after June 1, 2016 on the Bank’s website (). The data on the website will be updated at monthly intervals in the following format:

Sr. No.

Name of Applicant

Amount imposed under the compounding order

Whether the amount imposed has been paid

Download order

Payment of the amount for which contravention is compounded

• The sum for which the contravention is compounded as specified in the order of compounding shall be paid by way of demand draft in favor of the “Reserve Bank of India” within 15 days from the date of the order of compounding of such contravention. The manner in which the demand draft has to be drawn and deposited shall be indicated in the compounding order.
• The provisions of the Rules do not confer any right to the contravener, after a compounding order is passed, to seek to withdraw the order or to hold that the compounding order is void or request review of the order passed by the Compounding Authority.
• In case of failure to pay the sum compounded within the time specified in the compounding order and the Foreign Exchange (Compounding Proceedings) Rules, 2000, it shall be deemed that the contravener had never made an application for compounding of any contravention under these Rules.
•  In respect of the contraventions of the FEMA, 1999 which are not compounded by the Compounding Authority, other relevant provisions of FEMA, 1999 dealing with contraventions shall apply accordingly.
• On realization of the sum for which contravention is compounded a certificate in this regard shall be issued by the Reserve Bank subject to the specified conditions, if any, in the order.

 Directions to Authorized Dealers

• In terms of Section 11 (2) of FEMA, 1999, the Reserve Bank may, for the purpose of ensuring the compliance with the provisions of the Act or of any rule, regulation, notification, direction or order made there under, direct any authorized person to furnish such information, in such manner, as it deems fit. Accordingly, RBI has entrusted to the Authorised Dealers (ADs) the responsibility of complying with the prescribed rules/ regulations for the foreign exchange transactions and reporting the same as per the directions issued from time to time. Authorized Dealers have, therefore, advised to take necessary steps to ensure that checks and balances are incorporated in systems relating to dealing with and reporting of foreign exchange transactions so that contraventions of provisions of FEMA, 1999 attributable to the Authorized Dealers do not occur.
• In this connection, it is reiterated that in terms of Section 11(3) of FEMA, 1999, the Reserve Bank may impose on the authorized person a penalty for contravening any direction given by the Reserve Bank under this Act or failing to file any return as directed by the Reserve Bank.

Payment of penalty

The amount should be paid within 15 days from the date of the order by way of a demand draft drawn on "Reserve Bank of India" and payable at the Regional office which has issued the compounding order and at Mumbai if the order is issued by CEFA, Mumbai.

 In case of non-payment of the amount indicated in the compounding order within 15 days of the order, it will be treated as if the applicant has not made any compounding application to the Reserve Bank and the other provisions of FEMA, 1999 regarding contraventions will apply. Such cases will be referred to the Directorate of Enforcement for necessary action.

Final disposal of compounding application

On realization of the sum for which contravention is compounded, a certificate shall be issued by the Reserve Bank indicating that the applicant has complied with the order passed by the Compounding Authority.

There cannot be a second adjudication by any authority on the contravention compounded. In terms of FEMA, 1999, where a contravention has been compounded, no proceeding or further proceeding, as the case may be, can be initiated or continued, as the case may be, against the person committing such contravention under that section, in respect of the contravention compounded.

The compounding process is completed within 180 days from the date of receipt of the application complete in all aspects, by the Reserve Bank.

Appeal

 As compounding is based on voluntary admissions and disclosures, there is no provision under the Compounding Rules for an appeal against the order of the Compounding Authority or for a request for reduction of amount compounded or extension of period for payment of the amount imposed.