New Foreign Exchange (Compounding Proceedings) Rules, 2024 Issued, Replacing the 2000 Rules

The Department of Economic Affairs has modified the compounding rules under the Foreign Exchange Management Act, 1999. The new rules, Foreign Exchange (Compounding Proceedings) Rules, 2024 were issued on September 12, 2024, and supersede the erstwhile rules laid out in the year 2000. While most provisions remain the same, the limit provided under Rule 4 of the sub involved to ascertain the compounding authorities for contraventions of the Act, other than under clause (a) of Section 3, has been substantially increased.

An officer not below the rank of Assistant General Manager of the Reserve Bank shall now be the compounding authority in case the sum involved is up to 60 lakhs from the earlier 10 lakhs. More than that, up to 2.5 Crores the matters shall be referred to an officer not below the Deputy General Manager. A General Manager and above ranked officer shall be responsible in matters exceeding that amount till 5 Cr and an officer of the rank of Chief General Manager and above shall be the compounding authority for contravention in case of sum involved above 5 Cr.

Along with the above, the fees for filing the application forms under Rules 4 and 5 have also been enhanced from 5000 Rs. to 10000 Rs. Additionally, a new rule 9 has been introduced moving and expanding the explanation provided under rule 8 earlier on the contraventions not to be compounded in certain cases. These would include matters where the amount is not quantifiable, or where Section 37A is applicable, or where the nature of contravention is serious with suspicion of money laundering, terror financing etc., or where order has already been passed imposing penalty under Section 13 or where further investigation by the Directorate of Enforcement (ED) is required to ascertain the amount under Section 13. The compounded amount may now also be paid through permissible electronic or online mode. The modified rules also remove the provision for not compounding in case appeal has been filed under Section 17 or 19 of the Act.

Finally, the modified rules shall not be applied retrospectively i.e. pending cases shall be governed by the old rules.

The Finance Ministry in its press release has clarified that the provisions have been enabled to expedite and streamline the processing of compounding applications, as well as focusing on simplification and rationalization of the provisions to eliminate ambiguity and clarify the process.

The modifications also clarify the position of ED’s interference in the compounding matters after the Bombay High Court had granted relief to NDTV asking RBI to reconsider its compounding pleas under FEMA setting aside EDs letter to the RBI since it was based on ‘mere suspicion’. While the 2007 proviso allowing EDs interference remains the same, a new Rule 9(e) provides an option for allowing further investigation by the ED to ascertain the amount involved. The Supreme Court recently dismissed ED’s plea against the Bombay High Court order.