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Insight On Compounding of Contraventions under FEMA, 1999

February 2, 2013

[Compounding of contraventions of FEMA involving (i) delay in reporting of inward remittance, (ii) delay in filing of form FC-GPR after allotment of shares and (iii) delay in issue of shares beyond 180 days (viz. paragraphs 9(1)(A), 9(1)(B) and 8, respectively, of the Schedule I to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000]

Meaning of Contravention:

Contravention is a breach of the provisions of the Foreign Exchange Management Act (FEMA), 1999 and rules/ regulations/ notification/ orders/ directions/ circulars issued thereunder.

Meaning of Compounding:

Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and seeking redressal.

Who, When and to Whom, one should apply for Compounding:

Any person who contravenes any provision of the 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, can apply for compounding to the Reserve Bank. An application for compounding can be made to Reserve Bank, when one is made aware of the contravention of the provisions of FEMA, 1999 by the Reserve Bank or any other statutory authority or the auditors or by any other means or suo moto, on becoming aware of the contravention.

Regional Offices of the Reserve Bank of India as mentioned below are authorised to compound the contraventions of FEMA involving the following delays viz. paragraphs 9(1)(A), 9(1)(B) and 8, respectively, of the Schedule I to FEMA 20/2000-RB dated May 3, 2000.

  1. delay in reporting of inward remittance,
  2. delay in filing of form FC-GPR after allotment of shares and
  3. delay in issue of shares beyond 180 days
    • Under para 9(1) (A) and 9(1) (B) of Schedule I to FEMA 20/2000-RB dated May 3, 2000.

Bhopal, Bhubaneshwar, Chandigarh, Guwahati, Jaipur, Jammu, Kanpur, Kochi, Patna and Panaji for amount of contravention below Rupees One hundred lakh only (Rs.1,00,00,000 /-).

  • Under para 9 (1) (A), 9 (1) (B) and 8 of Schedule I to FEMA 20/2000-RB dated May 3, 2000.

Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, Mumbai and New Delhi for amount of contravention without any limit.

All compounding applications made towards contraventions as aforesaid whether suo-moto or on the advice of the Reserve Bank, the Company can directly submit the application to the Regional Offices under whose jurisdiction it falls.

Compounding Process:

The Reserve Bank of India has prescribed rules named Foreign Exchange (Compounding Proceedings) Rules, 2000 wherein the details and particulars of authorities having jurisdiction over the compounding process and other related informations are provided.

    1. Obtaining requisite approvals and compliances

An application for compounding of offence under FEMA be made to Reserve Bank only after rectifying the records i.e, requisite approvals have been obtained, the related compliances should be completed or the required documents are submitted etc, as the Reserve Bank shall not entertain any application for compounding which is incomplete in any respect.

    1. 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) along with the prescribed fees (demand draft for Rs. 5000/- drawn in favour of the “Reserve Bank of India”) and other relevant documents.. The Reserve Bank after receipt of the compounding application makes a scrutiny of the application to verify whether the required details and documents furnished by the applicant are prima-facie in order.

Whenever a contravention is identified by the Reserve Bank or brought to its notice by the entity involved in contravention by way of a reference other than through the prescribed application for compounding, the Bank will continue to decide

      1. whether a contravention is technical and/or minor in nature and, as such, can be dealt with by way of an administrative/ cautionary advice;
      2. whether it is material and, hence, is required to be compounded for which the necessary compounding procedure has to be followed or
      3. whether the issues involved are sensitive/serious in nature and, therefore, need to be referred to the Directorate of Enforcement (DOE).

However, once a compounding application is filed by the concerned entity suo moto, admitting the contravention, the same will not be considered as ‘technical’ or ‘minor’ in nature and the compounding process shall be initiated in terms of section 15 (1) of Foreign Exchange Management Act, 1999 read with Rule 9 of Foreign Exchange (Compounding Proceedings) Rules, 2000.

    1. Examination of the application

After examining of the application an opportunity to the contravener to appear before the “Compounding Authority (CA)” for a personal hearing will be given. It is not mandatory to attend the personal hearing. In case a person opts not to attend the personal hearing he may indicate his preference in writing. The application would be disposed of on the basis of documents submitted to the Compounding Authority.

    1. Contravention within a period of 3 years

In respect of a contravention committed by any person within a period of three years from the date on which a similar contravention committed by him was compounded under the Compounding Rules, such contraventions would not be compounded. Such contravention would be dealt with under relevant provisions of the FEMA, 1999 for contravention. Any second or subsequent contravention committed after the expiry of a period of three years from the date on which the contravention was previously compounded shall be deemed to be a first contravention.

    1. Compounding Order and Post- compounding Procedure

The Compounding Authority passes 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 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 the Regional office which has issued the compounding order. The contravention is compounded by payment of the penalty imposed.

    1. Compounding Certificate

After the payment of penalty, a certificate shall be issued by the Reserve Bank indicating that the applicant has complied with the order passed by the Compounding Authority. However, if the payment of the penalty is not made within 15 days from the date 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.

    1. Time Frame

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

    1. Appeal against the order of Compounding Authority

An appeal cannot be initiated against the order of the Reserve Bank as the Compounding process is voluntary in nature.

For further insight over the provisions relating to Compounding of Contraventions viz. paragraphs 9(1)(A), 9(1)(B) and 8, respectively, of the Schedule I to FEMA 20/2000-RB dated May 3, 2000, one can visit Master Circular on Compounding of Contraventions under FEMA, 1999.

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