COMPOUNDING OF OFFENCES UNDER FEMA, 1999 – CHECKLIST & PROCEDURE

Contraventions under FEMA

The compounding of contraventions under Foreign Exchange Management Act (FEMA), 1999 is a voluntary process by which an applicant can seek compounding of an admitted contravention of any provision of FEMA, 1999 under Section 13(1) of the FEMA, 1999

For offenses Foreign Exchange (Compounding Proceedings) Rules, 2000 have been framed and published by the Government of India empowering the Reserve Bank to compound contraventions under FEMA, 1999.

The provisions of Section 15 of FEMA, 1999 permit the compounding of contraventions and empower the Compounding Authority to compound any contravention as defined under Section 13 of the Act on an application made by the person committing such contravention either before or after the institution of adjudication proceedings.

The Government of India has, in consultation with the Reserve Bank placed the responsibility of administering compounding of contraventions with the Reserve Bank, except contraventions under Section 3(a) of FEMA, 1999.

Accordingly, the procedure for compounding of contraventions under FEMA, 1999 has been framed with a view to providing comfort to the citizens and corporate community by minimizing transaction costs, while taking a severe view of willful, malafide, and fraudulent transactions.

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CONSEQUENCES OF NON-COMPLIANCE OF FEMA PROVISIONS:

Non-compliance of FEMA provisions and rules and regulations made thereunder would attract penal consequences.

As per section 13(1), Chapter IV of FEMA, 1999, If any person contravenes any provision of FEMA, 1999, or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorization is issued by the Reserve Bank.

He shall upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention where the amount is quantifiable or up to Rupees Two lakh, where the amount is not quantifiable and where the contravention is a continuing one, a further penalty which may extend to Rupees Five thousand for every day after the first day during which the contravention continues.

The provision for the penalty has been provided under Section 13(1) of FEMA, 1999 which is reiterated below:

“If any person contravenes any provision of FEMA, 1999, or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorization is issued by the Reserve Bank.

He shall upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention where the amount is quantifiable or up to Rupees two lakh, where the amount is not quantifiable and where the contravention is a continuing one, the further penalty which may extend to Rupees five thousand for every day after the first day during which the contravention continues”.

Further section 13 (2) of FEMA, 1999 provides for the following:

“Any Adjudicating Authority adjudging any contravention under subsection (1), may if he thinks fit in addition to any penalty which he may impose for such contravention direct that any currency, security or any other money or property in respect of which the contravention has taken place shall be confiscated to the Central Government and further direct that the foreign exchange holdings if any of the persons committing the contraventions or any part thereof, shall be brought back into India or shall be retained outside India in accordance with the directions made in this behalf”

REMEDY FOR NON-COMPLIANCE/ COMPOUNDING:

The contraventions of any provision of Foreign Exchange Management Act (FEMA), 1999 under Section 13 of FEMA, 1999 can be compounded under Section 15 of the FEMA, 1999 and in the manner as provided in Foreign Exchange (Compounding Proceedings) Rules, 2000.

Master Circular on Compounding of Contraventions under FEMA, 1999 issued by the RBI from time to time. The compounding of contraventions under the Foreign Exchange Management Act (FEMA), 1999 is a voluntary process by which an applicant can seek compounding of an admitted contravention of any provision of FEMA, 1999.

COMPOUNDING PROCESS UNDER FEMA

(i)  Obtaining requisite approvals and compliances:

At the outset, all requisite approvals should be obtained and all compliances should be made before seeking compounding of contravention under FEMA, 1999.

Compounding can be done only after rectifying the records by way of obtaining post-facto approvals or unwinding the transactions in cases where such transactions are not permissible under FEMA, 1999.

(ii)  Filing of application along with requisite documents:

A duly completed application, in duplicate, for compounding of a contravention under FEMA, 1999 may be submitted to the Compounding Authority (CA) on being advised of a contravention under FEMA, 1999, either through a memorandum or suo moto on being made or on becoming aware of the contravention.

The format “Form” of the application is appended to the Foreign Exchange (Compounding Proceedings) Rules, 2000 (Annexure-I) along with a demand draft of Rs.5000/-  towards the application fee in favor of “Reserve Bank of India”.

Payable at the center where the application shall be processed/was processed and the compounding order was issued.

Further, the applicant must indicate the following information about the authorized person of the entity who would be handling the complete process of the compounding:

1. Name and Designation of the authorized
2. the person for the contravener

• Telephone/Fax/Email of the authorized person

(iii)  Submission of application:

The application may be submitted may be submitted to the Chief General Manager, CEFA, Reserve Bank of India, 5th floor, Amar Building, Sir P.M. Road, Mumbai 400 001

Can be sent to the Compounding Authority, [Cell for Effective implementation of FEMA (CEFA)], Foreign Exchange Department, 3rd floor, Amar Building, Sir P.M. Road, Fort, Mumbai- 400001 or as advised in the memorandum issued by the office of the Reserve Bank.

(iv)  Examination of the application:
The Reserve Bank makes a scrutiny of the application and will examine and decide if the contravention is technical, material or sensitive in nature.

If technical, the applicant will be issued cautionary advice. If the contravention is material, it will be compounded by imposing a penalty after giving an opportunity to the contravener to appear before the compounding authority for a personal hearing.

If the contravention is sensitive in nature requiring further investigations, the same would be referred to the Directorate of Enforcement (DoE) for further investigation/ action.

After getting the hearing notice, the contravener or any authorized person on his behalf may appear before the compounding authority to make his submissions.

However, it is not mandatory to attend the personal hearing.  In case of any difficulty, the applicant may give in writing to the Compounding Authority, his consent to proceed with the disposal of the application based on the documents submitted with the application expressing his inability to appear in person.

(v) Compounding Order:

The Compounding Authority may pass an order indicating details of the contravention and the provisions of FEMA, 1999 that have been contravened.

The sum payable for compounding the contravention is indicated in the compounding order. The contravention is compounded by payment of the penalty imposed.

(vi) Post-compounding Procedure:

The amount should be paid within 15 days from the date of the order by way of a demand draft drawn on “Reserve Bank of India” and payable at Mumbai.

(vii) Compounding Certificate:

On realization of the sum for which contravention is compounded, a certificate shall be issued by the Reserve Bank indicating that the applicant has complied with the order passed by the Compounding Authority.

Non-payment of the amount indicated in the compounding order within 15 days of the order, it will be treated as if the applicant has not made any compounding application to the Reserve Bank, and the other provisions of FEMA, 1999 regarding contraventions will apply.

Such cases will be referred to the Directorate of Enforcement for necessary action.

Once a contravention has been compounded, no proceeding or further proceeding, as the case may be, can be initiated or continued, as the case may be, against the person committing such contravention under that section, in respect of the contravention compounded.

As compounding is based on voluntary admissions and disclosures, there cannot be an appeal against the order of the Compounding Authority.

(viii)  Time Frame:

This process is normally completed within 180 days from the date of receipt of the application complete in all aspects, by the Reserve Bank.

Compounding of Contraventions under the FEMA, 1999 in India. Most of the contraventions under FEMA, 1999 except sensitive or serious can be compounded without levying a maximum penalty @300%.

However, the Director of Enforcement (DOE) is permitted to initiate persecution where imprisonment of a maximum of 7 years can be imposed against sensitive or serious contravention.

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