Compounding under FEMA

In India, the foreign exchange transactions are governed by Foreign Exchange Management Act (FEMA) and rules, regulations, circulars, directions issued under this Act and FDI Policy. Reserve Bank of India is the sectoral regulator.

FEMA is mainly a compliance law and this means that the purpose  of this law is not collection of revenue but ensuring compliance. Contravention of law invites penalty, prosecution and confiscation, which can be mitigated either through litigation or through compounding.

Compounding: Compounding means settling any matter by paying money in place of other liability. It is like compromise. Under FEMA, compounding involves three things: - a) voluntary admitting contravention of foreign exchange laws; (b) pleading guilty; (c) seeking redressal.

Why Compounding? Compounding has some big advantages over the litigation. Some of these are as follows:

1.  It is time bound and the order has to be made within 180 days. Under litigation, it takes years to close the matter.

2.  Penalty is very high, going upto three times of the sum involved. Compounding fee is far less.

3.  The process of compounding is very simple and does not require the personal appearance of contravener.

4.   It helps in regularizing the mistakes and contravention.

Non-Compoundable Matters :-Except the contravention of Section 3 (a) of FEMA, any contravention of FEMA can be compounded. However, there are some non-compounding matters like:

1.  PMLA/ Hawala transactions

2.  Matters under Show Cause Notice

3.  Pending matter under appeal

4.  Identical matter compounded within 3 years

5.  Matters where prior permission of government is required.

Authority for Compounding: RBI through designated officers:

1.  AGM upto INR 10 Lacs

2.  DGM from INR 10 lacs to 40 lacs

3.  GM from INR 40 to 100 lacs

4.  CGM from above INR 100 lacs

Process of Compounding:

1.  Knowledge or awareness of contravention either suo moto or being brought to notice by RBI.

2.  Immediately after, file Application with relevant facts and documents to RBI

3.  Filing fees is INR 5,000/-

On receipt of complete application, RBI examines and decides the nature of contravention and the further steps to be taken. There can be three types of defaults and possible action by RBI:

1.  Technical: RBI issues cautionary advice

2.  Material: RBI imposes penalty

3.  Serious: RBI refers the matter to Enforcement Directorate.

Hearing:

a)  Hearing happens within 3-4 months

b)   RBI allows the party to redraft application

c)   Hearing will be in one sitting. No adjournment is granted.

Order:

1.  Order will be issued with 180 days of receipt of complete application

2.  The contravener will pay the compounding fees within 15 days.

3.  In case of non-payment, whole compounding process lapses.

Appeal:

As the compounding is based on voluntary admissions and disclosures, there is no provision of appeal against compounding order, except through writ. Also, no request for reduction of amount compounded and no request for extension of period of payment of penalty are allowed.

Legal Effect of Compounding Order:

1.  No further penalty or proceedings on issues compounded.

2.  Pending procedure shall be taken on record.

3.  All contravention will stand regularised.

Some famous cases of Compounding: -

1.  Rajasthan Royals case: - As per FEMA, Non-Resident India (NRI) can remit money to a company for issue of shares through normal banking channel or debit to NRE /FCNR (B) Account. In this case, the money came in the individual account of one Mr Manoj Badale and then initial payment was made to BCCI. The company was not incorporated when the money was remitted to India. Against Show Cause Notice, a penalty of INR 100 Crore was imposed by ED.

2.  2G Scam: - In this case, the then sectoral caps were violated by issuing less shares at more value. In this way, the percentage of shareholding was kept within FDI policy but the funds were brought in under Automatic Route. Also, the company did not allot shares within 180 days and did not report to RBI.

To conclude, it is advised to comply with the FEMA laws. In case any contravention happens inadvertently, the contravener should take initiative to report and thereby obtain the benefits of compounding rather than face adverse consequences and litigation.

Author: Abhinarayan Mishra, Advocate

FCA, ACS, LL.B

9910744992

[email protected]

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