Compounding Under FEMA

I. INTRODUCTION:

As per the Black’s Law Dictionary, to “Compound” means “to settle a matter by a money payment, in lieu of other liability.” This meaning clearly defines the concept of Compounding as a mechanism that provides the offender an opportunity to avoid prosecution from the offence committed by him after paying off monitory payment.

II. BASIC CONCEPTS:

1. Under Foreign Exchange Management Act, 1999 (FEMA), the provisions of section 15, permits compounding of contraventions and empowers the Reserve Bank of India (RBI) to compound any contravention as defined under section 13 of the FEMA, except contraventions under section 3 (a) of FEMA, on an application made by the person committing such contravention.
2. Whereas, in exercise of the powers conferred by section 46 read with sub-section (1) of section 15 of FEMA, the Central Government had made the Foreign Exchange (Compounding Proceedings) Rules, 2000 relating to compounding contraventions under chapter IV of FEMA which were effective from 03.05.2000.

III. POWER TO COMPOUND:

If any person contravenes any provisions of FEMA except clause (a) of Section 3 of that Act then the following authorities under RBI shall have power to entertain the Compounding application on the basis of monetary limits, which are as follows:

S. No.	Monetary Limit	Manager of RBI
1	Rs. Ten Lakhs or less	Assistant General Manager
2	Rs. Ten Lakhs or more but less than Rs. Forty Lakhs	Deputy General Manager
3	Rs. Fourty Lakhs or more but less than Rs. Hundred Lakhs	General Manager
4	Rs. One Hundred Lakhs or more	Chief General Manager

 

IV. DELEGATION OF POWERS TO REGIONAL OFFICES:

As a measure of customer service and in order to facilitate the operational convenience, compounding powers have been delegated to the Regional Offices of the Reserve Bank of India to compound the following contraventions of FEMA, 1999.

1. Delay in reporting inward remittance received for issue of shares.
2. Delay in filing form FC-GPR after issue of shares.
3. Delay in issue of shares/refund of share application money beyond 180 days, mode of receipt of funds, etc.
4. Violation of pricing guidelines for issue of shares.
5. Issue of ineligible instruments such as non-convertible debentures, partly paid shares, shares with optionality clause, etc.
6. Issue of shares without approval of RBI or FIPB respectively, wherever required.
7. Delay in submission of form FC-TRS on transfer of shares from Resident to Non-Resident.
8. Delay in submission of form FC-TRS on transfer of shares from Non-Resident to Resident
9. Taking on record transfer of shares by Investee Company, in the absence of certified form FC-TRS.

V. PRE-REQUISITE FOR COMPOUNDING PROCESS:

Following are pre-requisites those needs to be consider before applying for Compounding applying with RBI:

1. No compounding of similar offence can be done upto three years from the date on which a similar contravention was compounded by the applicant. However, 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.
2. 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.
3. Cases of contravention, such as, those having a money laundering angle, national security concerns and/or involving serious infringements of the regulatory framework or where the contravener fails to pay the sum for which contravention was compounded within the specified period in terms of the compounding order, then such offence shall not be dealt by RBI rather be referred to the Directorate of Enforcement for further investigation.

VI. PROCEDURE OF COMPOUNDING:

1. All applications in the prescribed format and other mentioned documents for compounding to be submitted along with the prescribed fee by way of a demand draft drawn in favour of “Reserve Bank of India” and payable at the concerned office.
2. 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.
3. In case the application has to be returned where required approvals are not obtained from the authorities concerned or in case of incomplete application or for any other reason, the application fees as received along with the application documents will be returned.
4. Then after entertaining the Compounding application will be disposed off by the authority within prescribed time.

VII. QUANTITY OF PENALTY:

The RBI is guided by the provisions of section 13 of FEMA, whereby it is said that the amount imposed can be up to three times the amount involved in the contravention. However, the amount imposed is calculated on the basis of guidance note which is given in circular A.P. (DIR Series) Circular No. 73 dated May 26, 2016 and which is also available on the RBI’s website for information of general public. However, the guidance note is only for the purpose of indicating the basis on which the amount to be imposed is derived by the compounding authorities. The actual amount imposed may sometimes vary, depending on the circumstances of the case taking into account the factors:

1. the amount of gain of unfair advantage, wherever quantifiable, made as a result of the contravention;
2. the amount of loss caused to any authority/ agency/ exchequer as a result of the contravention;
3. economic benefits accruing to the contravener from delayed compliance or compliance avoided;
4. the repetitive nature of the contravention, the track record and/or history of non-compliance of the contravener;
5. 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.

VIII. RECENT DEVELOPMENT:

1. Public disclosure of Compounding Orders:For disseminating the information pertaining to compounding orders, it has been decided to host the compounding orders passed on or after June 1, 2016 on the Bank’s website (www.rbi.org.in). The data on the website will be updated at monthly intervals.
2. Public disclosure of guidelines on the amount imposed during compounding:Now it has been decided to put the guidance note on the Bank’s website for information of general public, which has already been discussed earlier.