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Pankaj Tyagi
| Updated: 23 Jun, 2021 | Category: FEMA

A Complete Briefing on Compounding of Offenses under FEMA

Compounding of Offenses under FEMA

With the array of laws and ever-evolving corporate milieu, the individual often ends up violating the various provisions under the law. Hence, the Indian Government has introduced the compounding of offenses under FEMA which allows person to voluntarily accept the violation & apply for compounding of offenses to achieve redressal of the same without encountering the tedious process of litigation. In this write-up, we will reveal every detail regarding the compounding of offenses under FEMA.

The primary provisions regulating the compounding are listed below:

Laws that regulates compounding of offenses under FEMA

The given laws encompass the compounding of offenses under FEMA:

  • Section 13 of FEMA talks about the penalties regarding violations that are compounded.
  • Section 14 of FEMA Enforcement of the order of adjudication Authority.
  • Section 15 of FEMA 1999 talks about the powers to compound violations and enables the Compounding Authority to compound the violations.
  • Master Direction – Reporting under FEMA,1999 (Updated as of April 04, 2019)
  • Master Direction- Compounding of violations under FEMA, 1999 (Updated as of April 04, 2019)
  • Foreign Exchange (Compounding Proceedings) Rules, 2000 (the Rules) as subject to periodic amendments, underpin the fundamental framework for the compounding process.

Read our article:A Complete Overview on NBFC Compliance under FEMA

Contraventions

Contraventions denote the violations of norms of

  • Foreign Exchange and Management Act, 1999
  • Norms cited under FEMA
  • Notification, regulations, directions are issued under FEMA.

Offences Eligible for Compounding (Delegation of Power)

Reserve bank reserves the rights of compounding all the sections under FEMA except Section 3(a), which can be compounded by DoE, i.e. Directorate of Enforcement.

If any individual breaches any norms of FEMA, 1999 (42 of 1999) except clause (a) of Section 3, then the same shall be compounded as manifested below:

S.NO. Amount involved in the Violation (INR) Eligible  RBI personal
1. Less than or equal to 10 lakhs Assistant General Manager
2. <10 lakhs>40 Lakhs Deputy General Manager
3. More than or equivalent to 40 lakhs  but less than 100 lakhs General Manager
4. More than or equivalent to 100 lakhs  Chief General Manager

Offences that can be compounded by Reserve Bank’s regional offices

Here are the offenses are can be subjected to compounding for Reserve Bank’s regional offices

  • Delay w.r.t reporting inward remittance got for the issue of shares.
  • Delay w.r.t filing form, viz FC(GPR) after issuing of shares.
  • Delay w.r.t filing the yearly return on Foreign Liabilities and Assets (aka FLA).
  • Delay w.r.t issue of shares/refund of share application money beyond sixty days, mode relating to the receipt of funds, etc.
  • Contravention of pricing norms relating to issue/transfer of shares.
  • Issue of ineligible instruments.
  • Issue of shares without the prior consent of Reserve Bank of India or Government, wherever required.
  • Delay w.r.t submission of the form, viz FC-TRS relating to the transfer of shares from Resident to Non-Resident.
  • Getting funds in India via foreign nationals or taking on shares’ record transfer by investee firm.

Offences that can be compounded by Reserve Bank’s central office

Here are the offenses eligible for compounding by Reserve Bank’s central office

  • Contraventions w.r.t acquisition & transfer of immovable property outside India
  • Contraventions w.r.t to acquisition & transfer of immovable property in India
  • Contraventions w.r.t to the establishment in India of Branch office, project office or Liaison office
  • Contraventions that comes under Foreign Exchange Management (Deposit) Regulations, 2000

Process relating to Compounding

i. An application needs to be furnished before the compounding authority along with the DD of INR 5000/- along with the following:

  • Compounding application: As per the format cited in Annexure-II under the Foreign Exchange (Compounding Proceedings) Rules, 2000.
  • Application’s details: In case of violation regarding the FDI, Commercial borrowing, branch office/liaison office, the applicants should submit details in view of Annexure III under the Foreign Exchange (Compounding Proceedings) Rules, 2000.
  • Undertaking: An undertaking declaring that the applicant doesn’t encounter any scrutiny from agencies like DoE and CBI in the past.
  • Copy of MOA.
  • Latest Audited Balance Sheet

ii. The application will be subjected to compounding based on documents & submission made.  

iii. The compounding authority may intimate the applicant for further information, record, or other documents.

iv. In case the defaulter fails to give the requested information called within the predetermined timeline, the application may confront rejection.

v. Disposal of compounding application will be made via issuance of compounding order, but where there is a reasonable ground for further scrutiny, the Reserve bank may forward the matter to DoE.

Time Limit for Completion

The application for compounding filed with the RBI[1] for compounding of contravention is required to be disposed off by RBI within 180 days of the receipt of the application.

Penalties exist under Compounding

The computing framework for estimating the amount to be levied on compounding is shown in the table below:

Form of contravention Formula for the computation of compounding
1] Reporting Contraventions
A) FEMA 20
Para 9(1)(A), 9(1)(B), FCTRS (Reg. 10) & taking on record FCTRS (Reg. 4)B) FEMA 3
Non submission relating to ECB statements C) FEMA 120
Second/subsequent remittance without availing  of UIN shall be encompassed under Item 5 below). Non-reporting/delay pertaining to acquisition’s reporting / subsidiaries’ set up/step down subsidiaries /ratification in the shareholding pattern D) Any other reporting contravention (other than listed in Item 2 below)
Fixed amount : INR 10000/- (applied once for each contravention in a compounding application) + Variable amount as under:
Upto 10 lakhs: 1000 per year
INR10-40 lakhs: 2500 per year
INR40-100 lakhs: 7000 per year
INR1-10 crore : 50000 per year
INR10 -100 Crore : 100000 per year
Above INR100 Crore : 200000 per year
E) Reporting contraventions by BO/LO/PO As above, expose to ceiling worth INR2 lakhs. In case of Project Office, the contravention’s amount shall be @10% of total project cost.
2] APR/ AAC/ Share certificate delays
In case of deferred/ non-submission submission of APR/ share certificates (FEMA 120) or FCGPR (B) Returns (FEMA 20) or AAC (FEMA 22) or FLA Returns (FEMA 20 (R))
INR10000/- per APR/AAC/FCGPR (B) Return delayed. Deferred receipt related to share certificate – INR .10000/year, the total amount being subject to 300% of ceiling of the amount invested.
3]
A] Allotment/Refunds
Para 8 under FEMA 20/2000-RB (non-allotment of shares or allotment/ refund post stipulated 180 days)B] LO/BO/PO
(Other than reporting contraventions)
INR30000/- + 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 contravention’s amount shall be considered to be 10% of the project’s cost).
4] All other contraventions apart from Corporate Guarantees but covering  all contraventions of FEMA 20(R)/2017-RB, dated Nov 07, 2017 other than FLA Returns INR50000/- + 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%
5] Issue of Corporate Guarantees in absence of UIN/ permission wherever required /open ended guarantees or any other violation regarding the issue of Corporate Guarantees. INR500000/- + 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 covers  issue of guarantees for availing loans which are invested back into India, the amount levied may be trebled.

Time span for the Payment of Penalty for Compounding

The defaulter needs to pay the contravention penalty within 15 days from the date of order. Any non-conformity to such a requirement will compel the Reserve Bank of India to forward the case to the Directorate of Enforcement (aka DoE) for necessary action.

In case you want further clarification on the topic, i.e. compounding of offenses under FEMA, then ping us by dropping the queries in the comment box.

Read our article:FEMA Compliance Checklist for Startups from FDI standpoint

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Pankaj Tyagi

Pankaj has a diverse experience of writing research papers, blog, and articles during his college time. Earlier, he was working as a tax consultant in a financial firm, but his interest in writing drives him to pursue a career in the writing field.

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