RBI Digitizes Compounding Process Under FEMA, 1999

The Reserve Bank of India (RBI) has recently taken significant steps to streamline and digitize the compounding process under the Foreign Exchange Management Act (FEMA), 1999, through its circular dated October 1, 2024 (A.P. (DIR Series) Circular No. 17/2024-25). This initiative follows the Ministry of Finance’s issuance of the Foreign Exchange (Compounding Proceedings) Rules, 2024, which were notified on September 12, 2024. These developments mark a critical shift towards enhancing the ease of doing business and improving regulatory compliance through digital solutions.

Here’s a comprehensive breakdown of the digitized compounding process under FEMA, as per the RBI's guidelines:

1. Pre-requisites for Compounding Eligibility

Before submitting a compounding application, an applicant must first verify their eligibility for compounding. The RBI has outlined specific cases where compounding is not permitted:

• Recent Compounding: If a similar contravention has already been compounded and less than three years have passed since the last compounding, the applicant is ineligible.
• Pending Administrative Actions: Applicants with outstanding administrative actions, such as unresolved regulatory approvals, pending transactions, or unmet reporting obligations, must resolve these before applying for compounding.

Applicants can use the RBI’s official database to verify whether any prior contraventions have been compounded in the last three years.

2. Creating a User Account on the PRAVAAH Portal

A key feature of the RBI's updated process is the introduction of the PRAVAAH Portal for online submission of compounding applications. Applicants must create a user profile on this portal to begin the process. Detailed instructions and FAQs are available on the portal for user guidance.

Although physical submission of applications is still permitted, applicants are encouraged to use the digital route for faster processing and tracking.

3. Payment of Compounding Fees

Previously, compounding fees had to be submitted via demand draft. However, with the updated process, applicants now have the option to pay these fees electronically. The fees are set at ?10,000 plus 18% GST, as per the revised rules. While the demand draft option remains available, the electronic payment option is expected to streamline the process further.

4. Email Notification to RBI Post Payment

After making an online payment of compounding fees, the applicant must inform the RBI via email within two hours of completing the payment to ensure timely processing.

5. Submission of Compounding Application

Once the prerequisites are met, and the fees are paid, the applicant can submit the compounding application and required documents through the PRAVAAH portal. Upon submission, a unique ID is generated, enabling applicants to track the status of their application. Physical submissions are still allowed, but digital submissions are encouraged for faster resolution.

6. RBI Review and Requests for Additional Documentation

After receiving the application, the RBI reviews it and may request additional documents or clarifications. If the application was submitted online, applicants can track these requests via the PRAVAAH portal using the unique ID. In the case of physical submissions, additional document requests will be communicated via email.

7. Confirmation of the Contravention for Compounding

The RBI will identify the specific contravention being compounded. If both the applicant and RBI agree on the nature of the contravention, the applicant may opt for a hearing. Hearings can be conducted either in person or virtually, although applicants can also choose to waive the hearing if no further clarifications are required.

8. Issuance of the Compounding Order

Once all required steps are completed, the RBI will issue a compounding order. For online submissions, the order will be uploaded to the PRAVAAH portal and linked to the unique ID. For physical submissions, the order will be communicated via email.

9. Payment of the Compounding Penalty

Upon receiving the compounding order, applicants must pay any penalty levied within 15 days. The penalty can be paid via demand draft or through electronic modes, with electronic payments requiring email notification to the RBI within two hours of completion.

10. Issuance of Certificate by the RBI

After the penalty payment is processed, the RBI will issue a certificate acknowledging the compounding of the contravention. This certificate confirms that the contravention has been regularized, subject to any conditions outlined in the order.

Significance of the Digitized Process

The digitization of the compounding process, particularly through the PRAVAAH portal, represents a significant move towards enhancing regulatory transparency and operational efficiency. By offering online submission, digital tracking, and electronic fee payments, the RBI aims to:

• Simplify the applicant’s journey by providing an easily accessible, centralized platform.
• Improve transparency in application processing times and progress updates.
• Reduce administrative delays through real-time submission and communication.
• Increase efficiency in regulatory oversight and compliance regularization.

The RBI's efforts to digitize these procedures align with broader initiatives to enhance the ease of doing business in India. This development benefits both applicants, by offering more convenient and transparent processes, and the RBI, by enabling more effective oversight and faster resolution of contraventions.

Contraventions Handled by RBI Regional and Central Offices

The guidelines also clarify which types of contraventions are handled by regional offices and which are managed by the central office. For instance:

• Regional offices handle contraventions under FEMA notifications related to foreign investments, including the FEMA 20/2000-RB and FEMA 20(R)/2017-RB notifications.
• Central office handles more complex issues, such as contraventions related to Liaison/Branch/Project Offices, Non-Resident Foreign Accounts, and Immovable Property regulations.

In conclusion, this new framework, backed by the Ministry of Finance and implemented by the RBI, is a forward-looking move designed to streamline FEMA-related procedures, encourage compliance, and support India's growing digital infrastructure in financial regulation.