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Compounding Process of Defaults under FEMA 1999
08 Jul 2015

The Foreign Exchange Management Act, 1999 was enacted by the parliament to amend and consolidate the law relating to foreign exchange with an aim to facilitate external trade and payments and for promoting the maintenance and development of foreign exchange market in India. This Act extends to whole of India. Contravention is defined in section 13 sub-section (1) of FEMA Act, 1999. The Reserve Bank is empowered to compound any contraventions of this Act except the contravention in clauses (a) Section 3. Compounding refers to the process of admitting the contravention voluntarily and seeking redressal. The provisions of section 15 of FEMA Act, 1999 permit compounding of any contravention as defined under section 13 of the Act on an application made by any person committing such contravention.

Section 46 states that Central Government may by notification make any rules to carryout the provisions of this Act. Central Government issued rules in exercise of the power conferred by section 46 read with Section 15(1) of FEMA Act, 1999 and these rules may be called “Foreign Exchange (Compounding) Rules 2000”. 

Process of Compounding

1.Any individual/entity on being advised or becoming aware of the contravention under FEMA 1999, an application for compounding of contravention may be submitted to Compounding Authority.Along with the application as prescribed under Foreign Exchange (Compounding Proceedings) Rules 2000, the applicant may also furnish the details relating to Foreign Direct Investment, Overseas Direct Investment, External Commercial Borrowings and Branch Office / Liaison Office. In order to complete the compounding process within the time frame, a copy of the Memorandum of Association and latest audited balance sheet along with an undertaking that the applicant is not under investigation of any agency such as Directorate of Enforcement (DOE), CBI etc. should be attached.

2. Applications for compounding of contraventions 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 Mumbai may be submitted to: The Compounding Authority, [Cell for Effective implementation of FEMA (CEFA)], Foreign Exchange Department, 5th floor, Amar Building, Sir P.M. Road, Fort, Mumbai- 400001.

3. Section 15 of the FEMA Act 1999 enable to compound contraventions. On receiving the application for compounding, the proceedings would be completed and an order will be issued by the Compounding Authority within 180 days from the date of the receipt of such application for compounding. The time limit for this purpose would be calculated from the date of receipt of the completed application for compounding by the Reserve Bank. The application once made cannot be withdrawn. [Section 15(1)read with Rule 8]

4. The Compounding Authority may call for any additional information, record or any other document relevant to the compounding proceedings. Such documents/ additional information are required to be submitted within the period as specified by the Compounding Authority and if such documents/ information are not submitted within the prescribed time then the application may be rejected.

5. Whenever contravention is identified by the Reserve Bank or brought to its notice by the entity/Individual involved in contravention by way of a reference other than through the prescribed application for compounding, the nature of contravention is ascertained keeping in view the following points:

I)      Whether the issues involved are sensitive / serious in nature and, therefore, need to be referred to the Directorate of Enforcement (DOE);

II)        Whether a contravention is technical and/or minor in nature and, as such, can be dealt with by way of an administrative/ cautionary advice or

III)     Whether it is material and, hence, is required to be compounded for which the necessary compounding procedure has to be followed.

6. Once a compounding application is filed by the concerned entity on its own motion admitting the contravention the same will not be considered as technical or minor in nature and the compounding process will be initiated as per section 15 (1) of Foreign Exchange Management Act, 1999 read with Rule 9 of Foreign Exchange (Compounding Proceedings) Rules, 2000.

7.The sum for which the contravention is compounded as specified in the order of compounding is payable by way of a demand draft in favour of the Compounding Authority within fifteen days from the date of the order of compounding of such contravention. The demand draft has to be deposited in the manner  as directed in the compounding order. [Rule 9 of Foreign Exchange (Compounding Proceedings) Rules, 2000]

8. In case a person fails to pay the sum compounded in accordance with the rule 9 within the time specified in that rule, he shall be deemed to have never made an application for compounding of any contravention under these rules and the provisions of the Act for contravention shall apply to him. [Rule 10 of Foreign Exchange (Compounding Proceedings) Rules, 2000]

9. Compounding application is disposed by issue of the Compounding Order specifying the provisions of FEMA, 1999 or any rule, regulation in respect of which contravention has taken place.

10. If there is a sufficient cause for further investigation the Reserve Bank may refer the matter to the Directorate of Enforcement for further investigation and necessary action under FEMA, 1999.

Compounding Order

11. The applicant is provided with an opportunity of personal hearing for further submission of documents in support of the application within a specified time period. The contravening person or its authorized representative fails to appear in person or make any submissions before the Compounding Authority for personal hearing; the Compounding Authority will proceed with the processing of the compounding application on the basis of information and documents available in the application for compounding.

12. The Compounding Authority will pass a compounding order on the basis of the statements made in the application as well as other documents and submissions made in this context by the contravening during the personal hearings, if any.

13. Every order shall specify the provisions of the Act or of the rules or orders made there under in respect of which the contravention has taken place along with details of the alleged contravention. [Rule 12 (1) of Foreign Exchange (Compounding Proceedings) Rules, 2000]

14. Every such order issued by Compounding Authority should be dated and signed by him under his seal.[Rule 12(2) of Foreign Exchange (Compounding Proceedings) Rules, 2000]

Pre-requisites for Compounding Process

15. If a person commits any contravention within a period of 3 years from the date on which similar contravention committed by him was compounded under the Compounding Rules, then such contraventions would not be compounded. Such contravention would be dealt with under relevant provisions of the FEMA Act, 1999 for contravention.

16. Any second or subsequent contravention committed after the expiry of a period of 3 years from the date on which the contravention was previously compounded shall be deemed to be a first contravention.

17. Where proper approvals or permission for Contraventions relating to any transaction from the Government or statutory authority concerned, have not been obtained, such contraventions would not be compounded unless the required approvals are obtained from the authorities concerned.

18. In case the application has to be returned for any reason, the application fees of Rs.5000/-received along with the application is also returned. To facilitate the refund of compounding fees in such cases, the amount is credited to the applicant’s account through NEFT. The applicants are advised to furnish their mandatory details of their bank account as per Annex III along with the application in the prescribed format and other documents which is required to be submitted.

19. Cases of contravention,such as, those having a money laundering angle, national security concern and /or involving serious infringements of the regulatory framework or where the contravening person fails to pay the sum for which contravention was compounded within the specified time period in terms of the compounding order, shall be referred to the Directorate of Enforcement for further investigation and necessary action under FEMA, 1999.

20. Penalties (Section 13)

1.     If any person contravenes any provision, rule, regulation, notification or order issued in exercise of the power under FEMA Act, 1999 then he shall upon adjudication be liable to penalty upto three times the sum involved in such contravention where the amount is quantifiable, or up to two lakh rupees where the amount is not quantifiable, and if such contravention is a continuing one, then there is  further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues.

2.     It is upon discretion of the Adjudicating Authority adjudging any contravention under section 13(1) to impose in addition to any penalty for such contravention and direct that any currency, security or any other money or property in respect of which the contravention has taken place shall be confiscated by the Central Government and further direct that the foreign exchange holdings, if any, of the persons committing the contraventions or any part thereof, shall be brought back into India or shall be retained outside India in accordance with the directions made in this behalf.

Delegation of Power

All applications for compounding whether on the advice of the concerned Regional Office or on its own motion, relating to the contraventions mentioned below and up to the amount of contravention stated herein may be submitted by the companies/individuals falling under the jurisdiction of the aforesaid Regional Offices directly to the concerned Regional Office of Foreign Exchange Department, Reserve Bank, 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.

Power of Reserve Bank to Compound Contravention [Rule 4 of Foreign Exchange (Compounding Proceedings) Rules, 2000]

If any person contravenes any provision of Foreign Exchange Management Act, 1999 except clause (a) of section 3 of this Act

Every officer mentioned herein shall exercise the powers to compound any contravention subject to the direction,control and supervision of the Governor of the Reserve Bank of India.

Every application for compounding any contravention under this rule shall be made in Form to the Reserve Bank of India, Exchange Control Department, Central Office, Mumbai along with a fee of Rs. 5000/- by Demand Draft in favour of compounding authority.

 

Sl. No.

Sum Involved in Contravention

Authority to Compound

1

Ten lakhs rupees or below

The Assistant General Manager of the Reserve Bank of India

2

Rupees ten lakhs or more but less than rupees forty lakhs

The Deputy General Manager of Reserve Bank of India

3

Rupees forty lakhs or more but less than rupees hundred lakhs

The General Manager of Reserve Bank of India

4

Rupees one hundred lakhs or more

The Chief General Manager of the Reserve Bank of India

 

Power of Enforcement Directorate to compound contraventions [Rule 5 of Foreign Exchange (Compounding Proceedings) Rules, 2000]

If any person contravenes any provision of section 3(a) of FEMA Act, 1999

Every officer of the Directorate of Enforcement mentioned herein shall exercise the powers to compound any contravention subject to the direction, control and supervision of the Director of Enforcement.

Every application for compounding any contravention under this rule shall be made in Form to the Director,Directorate of Enforcement, New Delhi, along with a fee of Rs.5000/- by DD in favour of the Compounding Authority.

 

Sl. No.

Sum Involved in Contravention

Authority to Compound

1

Five lakhs rupees or below

The Deputy Director of the Directorate of Enforcement

2

Rupees five lakhs or more but less than rupees ten lakhs

The Additional Director of the Directorate of Enforcement

3

Rupees ten lakhs or more but less than rupees fifty lakhs

The Special Director of the Directorate of Enforcement

4

Rupees fifty lakhs or more but less than rupees one crore

The Special Director with Deputy Legal Adviser of the Directorate of Enforcement

5

One crore rupees or more,

The Director of Enforcement with Special Director of the Enforcement Directorate

Nature of contraventions entitled for compounding:

Sl. No.

FEMA Regulations

Contraventions

1

Paragraph 9(1)(A) of Schedule I to FEMA 20/2000-RB dated May 3, 2000

Delay in reporting of inward remittance received for issue of shares.

2

Paragraph 9(1)(B) of Schedule I to FEMA 20/2000-RB dated May 3, 2000

Delay in filing of form FC (GPR) after issue of shares.

3

Paragraph 8 of Schedule I to FEMA 20/2000-RB dated May 3, 2000

Delay in issue of shares/refund of share application money beyond 180 days, mode of receipt of funds, etc.

4

Paragraph 5 of Schedule I to FEMA 20/2000-RB dated May 3, 2000

Violation of pricing guidelines for issue of shares.

5

Regulation 2(ii) read with Regulation  5(1) of FEMA 20/2000-RB dated May 3, 2000

Issue of ineligible instruments such as non-convertible debentures, partly paid shares, shares with optionality clause, etc.

6

Paragraph 2 or 3 of Schedule I to FEMA 20/2000-RB dated May 3, 2000

Issue of shares without approval of RBI or FIPB respectively, wherever required.

Summary:

The inadvertent mistakes or violations of FEMA should be rectified by compounding the defaults at the earliest. While deciding on the compounding fees amount,the competent authorities take into consideration, the first move by the applicant himself or first move by RBI to issue show cause notice.

For any clarification or support please ask to Mr. Hemant Paliwal, Practicing Company Secretary, at: hemant@hpacs.com

Kumar Vineet

HPACS  Team