Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and seeking redressal. The Reserve Bank is empowered to compound contraventions under Foreign Exchange Management Act, 1999. In this webinar, we shall understand the provisions of FEMA Act and its regulations relating to Compounding of Offences
3. Legends used in the Presentation
BO Branch Office
CEFA Cell for Effective Implementation of FEMA
CG Central Government
DIPP Department of Industrial Policy and Promotion
DOE Directorate of Enforcement
FEMA Foreign Exchange Management Act,1999
FLA Foreign Liabilities and Assets
HUF Hindu Undivided Family
IP Immovable Property
LO Liaison Office
NRFD Non Resident Foreign Account Division
PO Project Office
RBI Reserve Bank of India
RO Regional Offices
4. Presentation Schema
Introduction Penalty
Enforcement of
the Orders of
Adjudicating
Authority
Power to Recover
Arrears of Penalty
Power to
Compound
Contravention
Power to
Compound by RBI
Delegation of
Powers to
Regional Offices
Authorisation to
Compound
Application for
Compounding
Format of
Application
Additional Details
with Application
Pre-requisite for
Compounding
Process
Scope and
Procedure for
Compounding
Issue of the
Compounding
Order
Payment of the
Amount for which
Contravention is
Compounded
Guidance on
Computation of
Amount Imposed
Directions to the
Authorised
Dealers
Reporting
requirements
5. Introduction
By admitting the contraventions, the erring entity can save on the transaction costs as it would get away
by paying a smaller penalty levied by RBI
FEMA empowers the Reserve Bank to compound any contravention except on certain situation
Compounding of contraventions refers to the process where the individual or the corporate entity can
admit the contravention and seek redress from the RBI, restricted to a specific sum
The compounding of contraventions is a voluntary process by which an applicant can seek compounding
of an admitted contravention of any provision of FEMA
7. Penalties – Sec 13
If any person contravenes any provision of FEMA, 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
authorisation is issued by the RBI
Thrice the sum involved in contravention,
if amount is quantifiable
Rs. 2 lakhs, if not quantifiable
If continuing, further penalty up-to Rs.
5,000 per day after first day
If any person is found to have acquired any foreign
exchange, foreign security or immovable property, situated
outside India, of the aggregate value exceeding Rs. 1 Crore
or more
Thrice the sum involved in contravention
Confiscation of the value equivalent situated in India, of the
foreign exchange, foreign security or immovable property
Imprisonment for a term which may extend to 5 years and with fine
-Adjudicating Authority can direct that any currency, security or any other money or property in respect of which the
contravention has taken place shall be confiscated to the CG and
-Further direct that the foreign exchange holdings shall be brought back into India or shall be retained outside India
Property includes
-Deposits in a bank, where the said property is converted into such deposits;
-Indian currency, where the said property is converted into that currency; and
-Any other property which has resulted out of the conversion of that property
Adjudicating Authority may initiate prosecution
8. Enforcement of the Orders of Adjudicating Authority – Sec 14
However, he shall be released if he pays the amount mentioned in warrant and dues of the arresting officer
Arrested person shall be produced before the adjudicating authority within 24 hours (excluding the time of travel)
A warrant for arrest may be executed in the jurisdiction of any other adjudicating authority that the defaulter may for the time being be found
No appearance pursuant to notice - arrest warrant shall be issued
Warrant for arrest can be issued regardless of time limit if the defaulter is likely to abscond or leave the local limits of the adjudicating authority
Arrest shall be made without the notice if the defaulter
has dishonestly concealed or transferred any of his property has the means to pay the penalty and refuses or neglects to pay the same
Arrest and Detention shall not be made unless notice is served on defaulter (karta in case of HUF) to appear and show cause for action not to
be taken
Any person failing to make full payment of the aforesaid penalty within 90 days from date of issue of notice - Liable for civil imprisonment
9. Contd.
A detention order may be executed at any place in India in the manner provided for the execution of warrant of arrest
under the Code of Criminal Procedure, 1973
Merely due to release from Detention, the liability for the arrears shall not be discharged. However, the person shall
not be liable to be arrested under the certificate in execution of which he was detained
Defaulter shall be released from detention if the dues are paid
On conclusion of inquiry, the Adjudicating authority may order for detention of the person in Civil prison
Where certificate of demand exceeds Rs 1 crore – Up to 3 years In any other case – Up to 6 months
If inquiry is pending, defaulter may be detained in custody or released on deposit of a security
When the defaulter appears pursuant to notice, opportunity of being heard shall be provided
10. Power to Recover Arrears of Penalty – Sec 14A
Adjudicating Authority may, by order in writing,
Authorise an officer of Enforcement not below the rank of Assistant Director
To recover any arrears of penalty
Within the period of 90 days from the date on which the notice for payment of such
penalty is served on him
The officer appointed shall posses the same powers of Income tax Authority in relation
to recovery of tax and recovery of arrears of penalty
11. Power to Compound Contravention – Sec 15
- On an application made by the person committing such contravention, any contravention may
-Be compounded within 180 days from the date of receipt of application by the Director of
Enforcement or such other officers of the Directorate of Enforcement and Officers of the
Reserve Bank as may be authorised in this behalf by the CG
When compounded, no proceeding or further proceeding shall be initiated or continued
against the person who has contravened
14. Power to Compound by RBI
RBI has the power to compound, If any person contravenes any provisions of FEMA except of Sec 3(a)
In case where the sum involved in such contravention is
Rs. 10 lakhs or below, by the Assistant General Manager
of RBI
In case where the sum involved in such contravention is
more than Rs. 10 lakhs but less than Rs. 40 lakhs, by the
Deputy General Manager of RBI
In case where the sum involved in the contravention is
Rs. 40 lakhs or more but less than Rs. 100 lakhs by the
General Manager of RBI
In case the sum involved in such contravention is Rs. 100
lakhs or more, by the Chief General Manager of the RBI
No person shall deal in or transfer any foreign
exchange or foreign security to any person not
being an authorised person
Dealing in foreign exchange – Sec 3(a)
Such Officers shall exercise the powers to compound any contravention subject
to the direction, control and supervision of the Governor of the RBI
15. Delegation of Powers to Regional Offices
Delay in submission of form FC-TRS on transfer of shares from Resident to Non-Resident or from Non-resident to Resident
Issue of shares without approval of RBI or Government, wherever required
Issue of ineligible capital instruments such as partly paid shares, shares with optionality clause, etc.
Violation of pricing guidelines for issue/transfer of shares
Delay in issue of shares/refund of share application money beyond 60 days, mode of receipt of funds
Delay in filing the Annual Return on Foreign Liabilities and Assets (FLA)
Delay in filing Form FC(GPR) after issue of shares
Delay in reporting inward remittance received for issue of shares
The compounding powers have been delegated to the Regional Offices of the
Reserve Bank of India to compound the following contraventions:
16. Contd.
Gift of capital instruments by a person resident in India to a person resident outside India without prior approval of the RBI
-Delay in reporting receipt of amount of consideration for capital contribution and acquisition of profit shares by LLPs/
-Delay in reporting disinvestment/transfer of capital contribution or profit share between a resident and a non-resident (or vice-
versa) in case of LLPs
Delay in reporting the downstream investment made by an Indian entity or an investment vehicle in another Indian entity to
Secretariat for Industrial Assistance, Department of Industrial Policy and Promotion (DIPP)
Receiving investment in India from non-resident or taking on record transfer of shares by investee company
-The powers to compound the contraventions have been delegated to all Regional Offices (RO) (except Kochi
and Panaji) without any limit on the amount of contravention
-Kochi and Panaji RO can compound the contraventions below Rs. 100 lakhs
-The contraventions for amounts of Rs. 100 lakhs or more under the jurisdiction of Panaji and Kochi RO is
delegated to Mumbai RO and Thiruvananthapuram RO respectively
17. Authorisation to Compound the Contraventions by
Foreign Exchange Department – Central Office (FED CO)
Cell, New Delhi
Liaison/ Branch/ Project office(LO/ BO/ PO) division, Non Resident Foreign Account Division (NRFAD) and Immovable
Property (IP) Division has been transferred to FED, CO Cell, New Delhi with effect from July 15, 2014
Contraventions relating to acquisition and transfer of immovable property outside India
Contraventions relating to acquisition and transfer of immovable property in India
Contraventions relating to establishment in India of BO, LO or PO
Contraventions falling under Foreign Exchange Management (Deposit) Regulations, 2000
The following are the situations where FED, CO Cell can intervene
For contravention other than the above stated items, applications shall be submitted to Cell for Effective Implementation of FEMA (CEFA)
19. Application for Compounding
All applications for compounding may be submitted together with the prescribed fee of Rs.5000/- by way of a
demand draft drawn in favour of “Reserve Bank of India” and
payable at the concerned Regional Office or
Mumbai for cases submitted to the Compounding Authority, Cell for Effective implementation of FEMA (CEFA)
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
Rs.5000/- received along with the application will be returned
21. Additional Details with Application
Along with the application in the prescribed format, the applicant may also furnish:
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
An undertaking 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
PAN and activity as per National Industrial Classification (NIC) Code
Intimation in case of change of address/contact details during the pendency of compounding application
Applicant shall 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
22. Pre-requisite for Compounding Process
In respect of a contravention committed by any person within a period of 3 years from the date on which a similar
contravention committed by him was erstwhile compounded, such contraventions would not be compounded and relevant
provisions of the FEMA shall apply
Contraventions would not be compounded unless proper approvals or permission from the Government or any statutory
authority concerned has been obtained
Contravention suspected in respect to 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, shall be referred to the Directorate of
Enforcement (DOE) for further investigation
In case where adjudication has been done by the DOE and an appeal has been filed under Sec 17 or Sec 19 of FEMA, no
contravention can be compounded (undertaking is required from applicant that no appeal is being preferred)
Appeal to Special Director (Appeals) – Sec 17
Any person aggrieved by an order made by the Adjudicating Authority, being an Assistant Director of Enforcement or a Deputy
Director of Enforcement, may prefer an appeal to the Special Director (Appeals)
Any person may prefer an appeal for order passed by AA or Special Director (Appeals) to the Appellate Tribunal
Appeal to Appellate Tribunal – Sec 19
23. Contd.
Whenever a contravention is identified by the RBI or brought to its notice by the entity involved in contravention by
way of a reference other than through the prescribed application for compounding, it 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 is required to be compounded for which the necessary
compounding procedure has to be followed
Whether the issues involved are sensitive / serious in nature and need to be referred to
the DOE
If the Enforcement Directorate suspects of money laundering, terror financing or affecting sovereignty and integrity
of the nation, the Compounding Authority shall shall remit the case to the appropriate Adjudicating Authority
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
25. Scope and Procedure for Compounding
On receipt of the application for compounding, the RBI 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
Any other factor as considered relevant and appropriate
26. Issue of the Compounding Order
- The Compounding Authority shall pass an order of compounding after affording an opportunity of
being heard
- Not later than 180 days from the date of application
- time limit for this purpose would be reckoned from the date of receipt of the completed application
The Compounding Order shall specify the provisions of the FEMA or any rule, regulation, notification,
direction or order issued in exercise of the powers under FEMA in respect of which contravention has
taken place along with details of the contravention
One copy of the compounding order shall be supplied to the applicant (the contravener) and also to the
Adjudicating Authority if necessary
Compounding orders passed shall be displayed on the RBI website
• 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
27. 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 favour of the “Reserve Bank of India” within 15 days from the date of the order of
compounding of such contravention
Contravener, after a compounding order is passed, cannot seek to withdraw the order or request review or hold
void
In case of failure to pay the sum compounded within the time specified, it shall be deemed that the contravener
had never made an application for compounding of any contravention
In respect of the contraventions of the FEMA, which are not compounded by the Compounding Authority, other
relevant provisions of FEMA shall apply accordingly
On realization of the sum for which contravention is compounded a certificate shall be issued by the RBI
28. Guidance on Computation of Amount Imposed
• As per Sec 13, the amount imposed can be up to three times the amount involved in the contravention.
• However, the amount imposed is calculated based on the following guidance.
• 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
Type of contravention Amount
Reporting Contraventions
- FEM (Transfer or Issue of Security by a Person
Resident Outside India) Regulations, 2017
- Foreign Exchange Management ( Borrowing or
lending in foreign exchange) Regulations, 2000
- F. E.M. (Transfer or Issue of Any Foreign Security)
(Amendment) Regulations, 2004
Fixed amount : Rs10000/- (applied once for each contravention in a
compounding application) +
Variable amount as under:
• Up to 10 lakhs: 1000 per year
• Above Rs.10 lakhs & below Rs. 40 lakhs: 2500 per year
• Rs.40 lakhs or more and below Rs. 100 lakhs: 7000 per year
• Rs.1-10 crore: 50000 per year
• Rs.10 -100 Crore: 100000 per year
• Above Rs.100 Crore: 200000 per year
Reporting contraventions by Liasion Office/ Branch
Office / Project Office
Same as above, subject to ceiling of Rs.2 lakhs.
In case of Project Office, the amount imposed shall be calculated on 10% of
total project cost
Annual Activity Certificate / Annual Performance
Reports / delays in issue of Share certificate
• Rs.10000/- per AAC/APR/FCGPR (B)4/FLA Return delayed.
• Delayed receipt of share certificate – Rs.10000/- per year, the total
amount being subject to ceiling of 300% of the amount invested
30. Contd.
Type of contravention Amount
• Allotment/Refunds
(non-allotment of shares or
allotment/ refund after the
stipulated 180 days)
• Liasion / Branch / Project
Office
(Other than reporting
contraventions)
Rs.30000/- + given percentage of amount of contravention:
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 is deemed to be 10% of the cost of project).
All other contraventions except
Corporate Guarantees
Rs.50000/- + given percentage of amount of contravention:
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 Unique Identification
Number/ without permission
wherever required /open
ended guarantees or any other
contravention related to issue
of Corporate Guarantees
Rs.500000/- + given percentage of amount of contravention:
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 (3 times more)
31. Guidance on Computation - Other Provisions
The amount imposed should not exceed 300% of the amount of contravention
In case the amount of contravention is less than Rs. 1 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
• 10% p.a. in respect of all other contraventions.
In cases where it is established that the contravenor has made undue gains, such amount shall be added 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%.
For calculating amount in respect of reporting contraventions, the period of contravention may be considered
proportionately (round off to next higher month/12 * amount for 1 year) – excluding Sundays and holidays
33. Directions to Authorised Dealers
RBI can direct any authorized person to furnish such information, in such manner, as it deems fit to ensure
necessary compliance
Accordingly, RBI has entrusted to the Authorised Dealers the responsibility of complying with the rules/ regulations
for the foreign exchange transactions and reporting the same as per the directions issued
Authorised Dealers have shall take necessary steps to ensure that checks and balances are incorporated in their
systems
If the Authorised person contravenes any direction provided by RBI or fails to file any return, RBI can levy a penalty
34. Reporting Requirements
The following needs to be provided/reported:
Application form
The details of irregularities whether relating to Foreign Direct Investment, External Commercial
Borrowings, Overseas Direct Investment and Branch Office/ Liaison Office
Undertaking that the applicant is not under investigation of any agency such as CBI in order to complete
the compounding process within the time frame
Details of the applicant’s bank account
