RBI Update – Directions – Compounding of Contraventions under FEMA, 1999

Section 15 of the FEMA, 1999, any contravention under section 13 of FEMA 1999 {except that of Section 3(a) of the Act} may, on an application made by the person committing such contravention (hereafter referred as ‘applicant’), be compounded within one hundred and eighty days from the date of receipt of such application, by the officers of the Reserve Bank, as prescribed in Rule 4 of the Compounding Rules, 2024.
Section 13(1) of the Act, if any person contravenes any provision of FEMA, 1999, or 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 lakhs where the amount is not directly quantifiable, and where the contravention is a continuing one, further penalty which may extend to Rupees Five thousand for every day after the first day during which the contravention continues.

Certain cases not eligible for compounding

In respect of a contravention committed by any person (applicant) within a period of three years from the date on which a similar contravention was committed and the same was compounded, such contraventions shall not be compounded, and the relevant provisions of the Act shall apply. Any contravention committed after the expiry of a period of three years from the date on which a similar contravention was previously compounded shall be deemed to be a first contravention.

No compounding application shall be processed unless the requisite administrative action is completed by the applicant.

Explanation: Administrative action shall mean such action as may be necessary with respect to the transactions involved in such contravention (as per Rule 8(1) of the Compounding Rules, 2024) and shall include such corrective action that shall be undertaken by the applicant to bring the transaction involved in contravention in compliance with applicable provisions of FEMA. An indicative (but not exhaustive) list of such administrative actions include:

(i) Obtaining requisite approvals/ permissions from the Government or Reserve Bank or any other statutory authority concerned, as case may be;

(ii) Unwinding/ reversing the transaction;

(iii) Repatriating the receivables due;

(iv) Compliance with pricing guidelines or submission of valuation certificate;

(v) Compliance with reporting requirements;

(vi) any other such corrective action as may be required

Contraventions of serious nature viz. transactions suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation or where the contravener fails to pay the sum for which contravention was compounded within the specified period in terms of the compounding order, shall be referred to the DoE for further investigation and necessary action under the Act.

 Further, in terms of the Rule 9 of Compounding Rules, 2024, transactions, in which amount involved is not quantifiable or, attracting provisions of Section 37A of the Act or, where the Adjudicating Authority has already passed an order imposing penalty under section 13 of the Act or where the DoE is of the view that the compounding proceeding relates to a serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation, contraventions of such transactions shall not be eligible for compounding by the Reserve Bank.

 Also, in terms of Rule 4(1) of Compounding Rules, 2024, transactions involving contravention of Section 3(a) of the Act shall not be eligible for compounding by the Reserve Bank.

 It is clarified that whenever a contravention is identified by the Reserve Bank or brought to its notice by the person involved in contravention, the Reserve Bank shall examine whether:

1. such contravention(s) may be compounded, and necessary compounding procedure must be followed or
2. the issues involved are sensitive / serious in nature and, therefore, need to be referred to the DoE for adjudication or further investigation.

Link – https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12736&Mode=0