COMPOUNDING OF OFFENSES
UNDER FEMA
Formalities , Procedures and Caution to be
taken for avoiding any offences
Compounding of Offenses under FEMA
 Under Section 13(1) of the FEMA, 1999,the compounding of
contraventions under Foreign Exchange Management Act
(FEMA), 1999 and an applicant can seek compounding of an
admitted contravention of any provision of FEMA, 1999 and
this is a voluntary process .
 As per Section 15 of FEMA, 1999 , compounding of
contraventions can be made and the Compounding Authority
is empowered to compound any contravention as defined
under Section 13 of the Act based on an application made by
the person/ corporate committing such contravention
 Compounding application can be made either before or after
the institution of adjudication proceedings.
ARE ALL Offenses can be Compounded
 SECTION 3 - Prohibits dealings in foreign exchange except
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through an authorised person. This section states that no person
can, without general or special permission of the RBI can deal in
forex transactions either in India or out of India directly without
through an authorised dealerAny Forex transactions not through an authorised dealer / person
Entering into Hawala transaction in abroad
Receiving money into India through other than Authorised dealerHawala transaction
Creation or transfer of a right to acquire any asset outside India by
any person in India
Quantum of Penalty under FEMA
 The infringer shall, upon adjudication under FEMA, be liable
to a penalty up to thrice the sum involved in such
contravention where the amount is quantifiable or up to
Rupees Two lacs, where the amount is not quantifiable and
where the contravention is a continuing one, further penalty
which may extend to Rupees Five thousand for every day
after the first day during which the contravention continues.
 Under sub-section (1) of section 13 (2) , authorities are
empowered to levy additional penalty and even order
confiscation if necessary .
Application for Compounding
 An application for compounding of a contravention under
FEMA, 1999 may be submitted to the Reserve Bank on being
advised of a contravention under FEMA, 1999 either through
a memorandum or suo moto being made or becoming aware
of the contravention.
 The format of the application is appended to the Foreign
Exchange (Compounding Proceedings) Rules
 A compounding order shall be issued by the Compounding
Authority within 180 days from the date of the receipt of the
application for compounding.
FEMA COMPOUNDING PROCEEDINGS
Rules 2000- RBI Power
 Power of RBI to compound the Offences
 If amount is Rs 10 lacs or less , AGM of RBI
 If amount is more than Rs 10 lacs but less than Rs 40 lacs ,
DGM
 If amount of is more than Rs 40 lacs but less than 100 lacs ,
GM
 For more than Rs 100 lacs , Chief General Manager will have
authority
The Power of Enforcement Directorate
to compound contraventions
 In case , where the sum is involved is Rs 5 lacs or less ,
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Deputy Director of Enforcement
More than Rs 5 lacs but less than Rs 10 lacs , Additional
Director of the Directorate of Enforcement
More than Rs 10 lacs but less than Rs 50 lacs , Special
Director of Director of Enforcement
More than Rs 50 lacs but less than I Crore , Special Director
with Deputy Legal Adviser
Where sum involved is more than Rs 1 Crore , Director of
Enforcement with Special Director
Time-limit to pay the fines under FEMA
 Any fines levied shall have to paid to the compounding
authorities within 15 days from the date of the order of
compounding.
 If fine is not paid , it shall be construed that there has never
made an application for compounding by the applicant.
 If an appeal against the order has been made under section 17
or 19 of the Act , then no contravention shall be compounded
till the appeal is disposed.
Analysis of Types of Contravention
 The Reserve Bank shall examine the nature of contravention
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keeping in view, inter alia, the following indicative points:
Whether the contravention is technical and/or minor in
nature and needs only an administrative cautionary advice;
Whether the contravention is serious and warrants
compounding of the contravention; and
Whether the contravention, prima facie, involves moneylaundering, national and security concerns involving serious
infringements of the regulatory framework.
Serious offences will be referred to the Directorate of
Enforcement (DoE) for further investigation
Is Personal Appearance is Compulsory before
Compounding Authority under FEMA ?
 Rule 8(2) of Foreign Exchange (Compounding Proceedings)
Rules, 2000 states that the compounding authority shall pass
an order of compounding after affording an opportunity of
being heard to all the concerned as expeditiously as possible
and not later than 180 days from the date of application.
 Many applicants interpret this provision / facility to mean
that personal hearing is compulsory and that consultants /
advocates must represent them in the personal hearing before
the compounding authority.
Contents of Application form for
compounding
 Name
 Full Address
 Name of the adjudicating Authority before whom the case is
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pending
Nature of Contravention
Brief Facts of the Case
Details of Fee for application of compounding
Any other info which is relevant to the application
Compounding Application for FDI
 Name of applicant , date of incorporation , nature of
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activities, Brief particulars of the foreign investor , details of
foreign inward remittances received by Applicant Company
from the date of incorporation till date.
Table A– Details of FDI received , date of reporting to RBI,
Delay if any
Table B-Details of the foreign investor ,date of allotment,
date of reporting to RBI, Delay if any
Table C- Details of excess share application money
Table D – Details of Authorised Capital
Compounding Application for ECB
 Name of the applicant ,Date of Incorporation , details of the
activity , brief particulars about the foreign lender, Is the
lender is a eligible lender , is the lender is an equity holder
and what is the level of holding at the time of loan
agreement.
 Details of ECB - Date of loan agreement , Loan amount in
Foreign currency and Indian Rupees, Rate of Interest, Period
of loan, repayment particulars & Details of draw down
 Details of LRN number , details of ECB 2 returns submitted
Details of utilization of ECB , nature of contravention and
reasons for contravention
Compounding Application for ODI
 Name of the applicant, Date of incorporation , Nature of
activities undertaken , name of the overseas entity
 Date of incorporation of overseas entity , nature of activities
of overseas entity ,nature of entity WOS/JV, Details of
remittance sent , amount in FCY and in INR
 Details of other financial commitment , details of UIN
applied and received , details of receipt of share certificate ,
approval if any required , details of APR submitted ,nature of
contravention and all supporting documents
Compounding Application for Branch
office / Liaison office
 Name of the applicant , date of incorporation , date of
approval for opening of LO/Branch office, Validity period of
approval
 Nature of activities undertaken , income and expenditure of
the LO/BO
 Dates of submission of Annual Activity Certificates
 Nature of Contraventions and reasons for the contravention
and all supporting documents
Is Personal Appearance is Compulsory before
Compounding Authority under FEMA ?
 No . It is is optional and the applicant can choose not to
appear for RBI compounding Authority.
 The applicant may enclose full information relating to the
case as prescribed in AP (Dir series) Circular Nos. 56 and 57
dated June 28, 2010 and December 13, 2011, respectively,
with the application or thereafter and may exercise his
discretion with regard to appearing for hearing.
 If applicant opts for appearing for the personal hearing, then
it would encourage the applicant to appear directly for it
rather than being represented by legal experts, as
compounding is only for admitted contraventions
Is Personal Appearance is Compulsory before
Compounding Authority under FEMA ?
 To appear for or opting out of personal hearing does not have
any bearing whatsoever on the amount of penalty involved in
the compounding order.
Common Types of Reporting Errors
under FEMA
 Draw down of External Commercial Borrowing (ECB)
without obtaining Loan Registration Number (LRN)
[Regulations 3 and 6 of FEMA 3/2000];
 Allowing draw down of ECB under the automatic route from
unrecognised lender, to ineligible borrower, for nonpermitted end uses, etc. [Regulations 3 and 6 of FEMA
3/2000];
 Non-filing of form ODI for obtaining UIN before making the
second remittance to overseas WOS/JV for Overseas Direct
Investment (ODI) [Regulation 6(2)(vi) of FEMA 120/2004];
 Non-submission of Annual Performance Reports (APRs) /
copies of Share Certificates to the AD (and non-reporting
thereof by the AD to Reserve Bank) in respect of overseas
investments [Regulation 15 of FEMA 120/2004];
Common Types of Reporting Errors
under FEMA
 Delay in submission of the Advance Reporting Format in
respect of Foreign Direct Investment (FDI) to the
concerned Regional Office of the Reserve Bank
[paragraph 9 (1) (A) of Schedule I to FEMA 20/2000];
 Delay in filing of details after issue of eligible
instruments under FDI within 30 days in form FC-GPR to
the concerned Regional Office of the Reserve Bank
[paragraph 9 (1) (B) of Schedule I to FEMA 20/2000];
 Delay in filing of details pertaining to transfer of shares
for FDI transactions in form FC-TRS by resident
individual/companies [Regulation 10 (A) (b) of FEMA
20/2000]; etc.
Statistical Data on Compounding of
Offences under FEMA
 From the data on compounding cases received by Reserve
Bank, it is observed that more than 70% of the total cases
pertain to FDI within which about 72% relate to delay in
advance reporting/ submission of FCGPR. In the case of
ECB, 24% of the cases received relate to drawdown without
obtaining LRN. Similarly, 66% of the ODI cases relate to
non-reporting of overseas investments online.
Simple Reporting failure may make you
to pay hefty fines
 According to Chartered Accountant’s Association, Mumbai, in one case, an
OCB invested in India rupees 8.5 crores (approximately) with the prior
approval of FIPB. The OCB wanted to set up a power plant in Chhattisgarh.
There was a condition of local participation up to 40per cent. For four years
they ran from pillar to post for several Government permissions.
Neither they got Government permission nor could they find a local investor.
Ultimately, they were frustrated and gave up the project. Hence they
transferred the funds to a sister company where the OCB already had some
investments. The Company delayed in filing intimation. The Company could not
allot shares to OCB as it could not locate a local investor which was a precondition of FIPB approval. In the meanwhile, RBI issued Circular No. 20 dated
14.12.2007 prohibiting allotment of shares beyond 180 days of receipt of funds.
For these offenses, RBI imposed a Compounding sum of more than Rs. 3
crores! Company admits the violations of non-intimation, non-filing of forms;
and step down investment. Still, such a stiff penalty for all procedural violations
where there is no foreign exchange loss and nothing illegal or immoral!!!
Delay in Reporting Failures in FDI-Compounding
now delegated to Regional RBI.
 RBI vide its APDIR Circular No.57 dated December 13, 2011
decided to delegate the powers to the Regional Offices of the
Reserve Bank of India to compound the contraventions of FEMA
involving;
 delay in reporting of inward remittance
· delay in filing of form FC-GPR after allotment of shares and
· delay in issue of shares beyond 180 days
 All other applications (for violations of substantial provisions, ECB
norms, etc) may be submitted to the Compounding Authority,
Cell for Effective implementation of FEMA (CEFA), Foreign
Exchange Department, The Reserve Bank of India, Mumbai.
Caution to ECB Takers/ Availers
 A borrower is required to keep ECB funds parked abroad till
the actual requirement in India.
 A borrower cannot utilize the funds for any other purpose as
there is end use restrictions for ECB.
 However, Reliance Infrastructure now Reliance Energy has parked its foreign
loan proceeds worth $300 million with its mutual fund in India for 315 days,
and then repatriated the money abroad to a joint venture company. These
actions, according to an RBI , violated various provisions of the Foreign
Exchange Management Act (FEMA).
 Reliance had not applied for prior approval of RBI as it contravened the end use
restrictions and also it repatriated the ECB funds for investments in its overseas
joint venture without prior approval of RBI.
 Reliance Energy was asked to pay a fine of Rs 124.68 crores