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Compounding process under Foreign Exchange Management Act (FEMA), 1999

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Compounding Process under FEMA

Compounding process under Foreign Exchange Management Act (FEMA), 1999

Author: Nikita Pathak
Email id: nikita@simplybiz.in

Section 15 of the Foreign Exchange Management Act (FEMA), 1999 empowers Reserve Bank of India (RBI) to compound the contraventions under the Act. Compounding is a mechanism provided by RBI in order to pardon the company for contravention of provisions under FEMA Regulations/ Rules/ Master Directions/ Circulars/ Notification committed by it. At any point of time if the Individual/Company becomes aware of a non-compliance, a suo-moto action can be opted for compounding process.

As per the Foreign Exchange Management Act, 1999 (Act), Foreign Exchange (Compounding Proceedings) Rules, 2000 (the Rules), Master Direction- Compounding of Contraventions under FEMA, 1999 (Master Direction) the below mentioned is the process for Compounding of Contraventions.

Application for Compounding:

  1. As per the Rules, an application for compounding is made either on receipt of a memorandum from Reserve Bank of India (RBI) or suo moto being made on becoming aware of the contravention.
  2. All applications for compounding may be submitted together with the prescribed fee of Rs.5000/- by way of a demand draft in favour of the respective regional office/sub offices or FED Co Cell, New Delhi or CEFA, Mumbai (Cell for effective implementation of FEMA(CEFA)) depending upon the nature of the contraventions under the prescribed regulations as mentioned below:
Compounding Process under FEMA
    1. Regional offices/Sub-offices
      Regulations related to Foreign Direct Investment and Overseas Direct Investment under Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 and FEM (Mode of Payment and Reporting of Non-Debt Instruments) Regulations 2019 and rules under FEM (Non –Debt Instruments) Rules, 2019.
    2. FED CO, cell, New Delhi
      Work related to Liaison/ Branch/ Project office(LO/ BO/ PO) division, Non Resident Foreign Account Division (NRFAD) and Immovable Property (IP) Division.
    3. CEFA (cell for effective implementation of FEMA(CEFA)), Mumbai
      All other contraventions, applications may continue to be submitted to CEFA, Mumbai.

     3. Along with the application in the prescribed format (Annex I), the applicant may also furnish the details as per

    1. Annex-II – details relating to Foreign Direct Investment, External Commercial Borrowings, Overseas Direct Investment and Branch Office / Liaison Office, as applicable, a copy of the Memorandum of Association and latest audited balance sheet.
    2. Annex III Undertaking as per the annexure that they are not under any enquiry/investigation/adjudication by Directorate of Enforcement, as on the date of the application and to inform to the Compounding Authority/RBI immediately, if any enquiry/investigation/adjudication proceedings are initiated against the applicant after the date of filing the compounding application.
    3. Annex IV ECS mandate and details of their bank account to credit the received application amount in case the application is incomplete.

Procedure for Compounding:

  1. On receipt of the application for compounding, the compounding order shall be issued by the Compounding Authority within 180 days from the date of the receipt of the application (The time limit for this purpose would be reckoned from the date of receipt of the completed application for compounding by the Reserve Bank.)
  2. The Reserve Bank shall examine the application based on the documents and submissions and assess whether contravention is quantifiable and, if so, the amount of contravention.
  3. Whenever a contravention is identified by the Reserve Bank or brought to its notice by the entity involved in contravention, the Bank shall examine:
    1. whether it is material and, hence is required to be compounded for which the necessary compounding procedure has to be followed or
    2. whether the issues involved are sensitive / serious in nature and, may refer to the Directorate of Enforcement (DOE).
  4.  The Compounding Authority may call for any information, record or any other documents relevant to the compounding proceedings. In case the contravener fails to submit the additional information/documents called for within the specified period, the application for compounding will be returned.
  5. The following factors, which are only indicative, may be taken into consideration for the purpose of passing compounding order and adjudging the quantum of sum on payment of which contravention shall be compounded:
    1. the amount of gain of unfair advantage, wherever quantifiable, made as a result of the contravention;
    2. the amount of loss caused to any authority/ agency/ exchequer as a result of the contravention;
    3. economic benefits accruing to the contravener from delayed compliance or compliance avoided;
    4. the repetitive nature of the contravention, the track record and/or history of non-compliance of the contravener;
    5. contravener’s conduct in undertaking the transaction and in disclosure of full facts in the application and submissions made during the personal hearing; and any other factor as considered relevant and appropriate.

Amount involved in Contravention:

As per provisions of section 13 of FEMA the amount imposed can be up to three times the amount involved in the contravention. However, the amount imposed is calculated based on guidance note matrix provided below.

Type of contravention

Existing Formula

1] Reporting Contraventions

A) FEMA 20

Para 9(1)(A), 9(1)(B), part B of FC(GPR), FCTRS (Reg. 10) and taking on record FCTRS (Reg. 4)

B) FEMA 3

Non submission of ECB statements

C) FEMA 120

Non reporting/delay in reporting of acquisition/setup of subsidiaries/step down subsidiaries /changes in the shareholding pattern

D) Any other reporting contraventions (except those in Row 2 below)

Fixed amount : Rs10000/- (applied once for each contravention in a compounding application) +

Variable amount as under:
Up to 10 lakhs:                                                         1000 per year
Above Rs.10 lakhs & below Rs. 40 lakhs:               2500 per year
Rs.40 lakhs or more and below Rs. 100 lakhs:       7000 per year
Rs.1-10 crore :                                                       50000 per year
Rs.10 -100 Crore :                                                   100000 per year
Above Rs.100 Crore :                                               200000 per year

E) Reporting contraventions by LO/BO/PO

As above, subject to ceiling of Rs.2 lakhs. In case of Project Office, the amount imposed shall be calculated on 10% of total project cost.

2] AAC/ APR/ FLAR/ Share certificate delays

In case of non-submission/ delayed submission of APR/ share certificates (FEMA 120) or AAC (FEMA 22) or FCGPR (B) 4or FLA Returns – FEMA 20 / FEMA 20 (R) / FEMA 120/FEMA 395

Rs.10000/- per AAC/APR/FCGPR (B)5/FLA Return delayed.

Delayed receipt of share certificate – Rs.10000/- per year, the total amount being subject to ceiling of 300% of the amount invested.

3]
A] Allotment/Refunds

Para 8 of FEMA 20/2000-RB (non-allotment of shares or allotment/ refund after the stipulated 180 days)

B] LO/BO/PO
(Other than reporting contraventions)

Rs.30000/- + given percentage:
1st year   : 0.30%
1-2 years : 0.35%
2-3 years : 0.40%
3-4 years : 0.45%
4-5 years : 0.50%
>5 years : 0.75%
(For project offices the amount of contravention shall be deemed to be 10% of the cost of project).

4] All other contraventions, – including all contraventions of FEMA20(R)/2017/NDIR, 2019/FEMA 395/ 2019/, except contraventions pertaining to FLA returns and corporate guarantees

Rs.50000/- + given percentage:
1st year : 0.50%
1-2 years : 0.55%
2-3 years : 0.60%
3-4 years : 0.65%
4-5 years : 0.70%
>5 years : 0.75%

5] Issue of Corporate Guarantees without UIN/ without permission wherever required /open ended guarantees or any other contravention related to issue of Corporate Guarantees.

Rs.500000/- + given percentage:
1st year : 0.050%
1-2 years : 0.055%
2-3 years : 0.060%
3-4 years : 0.065%
4-5 years : 0.070%
>5 years : 0.075% In case the contravention includes issue of guarantees for raising loans which are invested back into India, the amount imposed may be trebled.

*The contraventions of FEMA 20 existing and continuing as on November 07, 2017 (i.e. the starting date of contraventions prior to November 07, 2017) will be compounded as per 1(A) above.

Note:- The actual amount imposed may sometimes vary, depending on the circumstances of the case taking into account the factors indicated in the foregoing paragraph

Payment of the amount for which contravention is compounded:

Payment of the amount for which contravention is compounded is to be paid within 15 days from the date of the order of compounding of such contravention.
In case of failure to pay the sum compounded within the time specified it shall be deemed that the application was never made under these Rules.
On realization of the sum for which contravention is compounded, a certificate in this regard shall be issued by the Reserve Bank subject to the specified conditions, if any, in the order.

If you are looking for any support with regard to compliances under FEMA or for compounding related issues, please reach out to our product head at vaishali@simplybiz.in or simplycorp@simplybiz.in . We will be happy to help you.

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