The Foreign Exchange Management Act, 1999 (FEMA, 1999) empowers the Reserve Bank of India (RBI) to compound certain contraventions under Section 15, except those falling under Section 3(a). This allows individuals or entities who have violated FEMA regulations to apply for compounding, which can mitigate penalties and reduce the compliance burden.
The Foreign Exchange (Compounding Proceedings) Rules, 2024, introduced by the Government of India via Notification G.S.R. 566(E) dated September 12, 2024, supersedes the previous rules of 2000. This notification aligns with the updated framework for compounding contraventions under FEMA, 1999.
RBI, under Section 11(2) of FEMA, can direct any authorized person, particularly Authorized Dealers (AD Category – I banks), to furnish information to ensure compliance with foreign exchange laws. If these authorized entities fail to comply with FEMA provisions or RBI directives, penalties can be imposed under Section 11(3).
Compounding Procedure:
- Application Process:
Any contravention under Section 13 (except those under Section 3(a)) can be compounded within 180 days of receiving the application. Applications can be submitted physically or through the RBI’s PRAVAAH Portal. A non-refundable fee of ₹10,000 plus GST (18%) is required, with payments made via demand draft or electronic transfer. - Compounding Authority:
Applications are reviewed by RBI’s compounding authorities at regional offices for cases related to Liaison/Branch/Project Offices, Non-Resident Foreign Accounts (NRFAD), and immovable property. For other contraventions, applications are submitted to the RBI’s Cell for Effective Implementation of FEMA (CEFA) in Mumbai. - Factors Considered:
When determining penalties, the RBI takes into account factors such as the extent of undue gains from contraventions, the amount of loss to authorities, the contravener’s track record, and repetitive non-compliance. Penalties can be up to thrice the sum involved in the contravention or ₹2 lakhs if unquantifiable. - Non-Eligible Cases:
Certain cases, such as those involving repeat contraventions within three years, money laundering, terror financing, or those impacting national sovereignty, are not eligible for compounding. Such cases are referred to the Directorate of Enforcement (DoE) for further investigation. - Completion of Process:
Once compounded, the contravener must pay the amount within 15 days. Failure to pay within the stipulated time nullifies the compounding process. Compounded contraventions and their details are published on the RBI website, ensuring transparency.
This process allows easier resolution of violations under FEMA, encouraging voluntary compliance while maintaining legal enforcement.
