RBI Issues Directions on Compounding of Contraventions under FEMA, 1999

The Foreign Exchange Management Act, 1999 (FEMA, 1999), regulates foreign exchange transactions in India, and its provisions aim to ensure compliance with the country’s foreign exchange laws. Section 15 of FEMA, 1999, specifically enables the compounding of contraventions and empowers the Reserve Bank of India (RBI) to handle such matters, except those falling under Section 3(a). The Government of India, through Notification G.S.R. 566(E) dated September 12, 2024, has introduced new guidelines under the Foreign Exchange (Compounding Proceedings) Rules, 2024, which replace the earlier rules of 2000.

• Revised Directions and Compliance Obligations: The RBI has reviewed and updated the directions related to the compounding of contraventions. Authorized Dealers (AD) and Category I banks are advised to update their systems to ensure compliance with FEMA, 1999. These institutions must ensure that internal checks are in place to prevent violations attributed to them. As per Section 11(3) of FEMA, 1999, the RBI may impose penalties on any authorized person who fails to comply with directives or filing requirements.
• Compounding Provisions under Section 15: As per Section 15 of FEMA, 1999, individuals or entities committing contraventions under Section 13 (except under Section 3(a)) may apply for compounding within 180 days from the date of the contravention. The RBI’s officers, as prescribed in Rule 4 of the Foreign Exchange (Compounding Proceedings) Rules, 2024, will process these applications. The primary aim of this provision is to reduce the compliance burden and associated costs.
• Penalties for Contraventions: Section 13(1) of FEMA, 1999, stipulates that individuals or entities violating any provision may be liable for a penalty up to three times the amount involved or a maximum of ₹2 lakhs if the amount is unquantifiable. Additionally, for continuous contraventions, there may be further penalties of ₹5,000 for each day the contravention continues.
• Compounding Application Process: Applicants can submit their compounding applications physically or through the RBI’s PRAVAAH portal, accompanied by a fee of ₹10,000 plus applicable GST. Details of payment must be shared promptly with the relevant RBI office. The compounding application should include all necessary documents, including Foreign Direct Investment (FDI) details, if applicable, and an undertaking regarding any ongoing enforcement or adjudication actions.
• Ineligible Cases for Compounding: Certain cases are excluded from the compounding process. These include repeated contraventions committed within three years, contraventions related to money laundering or terrorism financing, and violations under Section 3(a) of FEMA, 1999. Contraventions involving unquantifiable sums or subject to enforcement actions will also not be eligible for compounding. Such cases may be referred to the Directorate of Enforcement (DoE) for investigation.
• Compounding Procedure: Upon receiving an application, the RBI will assess the contravention, the sum involved, and whether the matter is eligible for compounding. If any additional documents are required, applicants will need to submit them within a specified timeframe. Factors such as the economic impact of the contravention and any undue gains will be considered when determining the compounding amount.
• Issue of the Compounding Order: The RBI will issue a compounding order within 180 days of receiving a complete application. Applicants may request a personal hearing, although it is not mandatory. Once the compounding amount is determined, it must be paid within 15 days of the order. Failure to do so will result in the cancellation of the compounding application, and regular contravention penalties under FEMA, 1999, will apply.

The introduction of the Foreign Exchange (Compounding Proceedings) Rules, 2024 marks a significant update in the regulatory framework for foreign exchange transactions in India. These rules aim to streamline the compounding process, reduce compliance burdens, and ensure that violations are addressed efficiently. Entities and individuals dealing with foreign exchange must ensure timely compliance to avoid penalties and other legal consequences.