FEMA Directions Amended to Enable Compounding of Select Contraventions

In a key step toward aligning procedural clarity with statutory reforms and administrative efficiency, the Reserve Bank of India (RBI) has issued amendments to the existing framework for compounding of contraventions under the Foreign Exchange Management Act, 1999 (FEMA), vide circular bearing Reference No. RBI/FED/2025-26/32 A.P. (DIR Series) Circular No. 04/2025-26 dated April 24, 2025 and links directly to the Master Direction on Compounding of Contraventions under FEMA, 1999, bearing Reference No. RBI/FED/2025-26/135 FED issued on April 22, 2025 (hereinafter referred to as the “Master Direction”). The latest amendment builds upon this by introducing an important flexibility within the compounding procedure.

Amendment Introduced by the Latest Circular

The amendment introduces a new safeguard under Point 5.4.II of the Master Directions. It provides that, in certain exceptional circumstances, the RBI compounding authority may cap the maximum penalty at ₹2 lakh per contravention, even if a higher amount is calculated under the standard matrix. It means that if a case involves exceptional circumstances or unique facts, and if capping the penalty would serve the wider public interest, the RBI can now exercise discretion to limit the compounding amount.

Essentially, this change introduces flexibility into the system, ensuring that small or less serious contraventions are not penalized disproportionately, encouraging voluntary compliance without compromising regulatory discipline.

Importantly, this relaxation applies specifically to contraventions listed under Row 5 of the computation matrix, which typically relates to reporting delays and procedural lapses, rather than substantive violations involving major financial implications.

The RBI’s latest amendment underscores its commitment to a nuanced, proportionate approach to enforcement under FEMA. While the structured matrix remains the primary tool for determining penalties, the introduction of a cap in special cases adds much-needed flexibility without compromising regulatory discipline.