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Consequences of non-compliance under FEMA Act, 1999

May 18, 2020

FEMA Act, 1999: The Foreign Exchange Management Act, 1999 (FEMA) is an Act of the Parliament of India "to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India".

It was passed in the winter session of Parliament in 1999, replacing the Foreign Exchange Regulation Act (FERA). This act makes offences related to foreign exchange civil offenses. It extends to the whole of India, replacing FERA, which had become incompatible with the pro-liberalization policies of the Government of India.

A. Consequences of Non-Compliance of FEMA Act, 1999:

Non-compliance of provisions under FEMA Act, 1999 (‘Act’) and rules and regulations made thereunder would attract penal provisions.

Penalty: As per Section 13 of the Act, if any person contravenes any provision of this Act, 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 as mentioned below:

  1. Where such amount is quantifiable: It is thrice the sum involved in such contravention.
  2. Where the amount is not quantifiable: Upto Rs. 2, 00, 000 (two lakh rupees).

And where such contravention is a continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues.

As per the master direction: https://m.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10190

B. Remedy for Non-Compliance of FEMA provisions:

Contraventions of any provision of FEMA Act, 1999 under Section 13, can be compounded under Section 15 of FEMA Act, 1999 and in the manner as provided in Foreign Exchange (Compounding Proceedings) Rules, 2000 and Master circular on the compounding of contraventions under FEMA Act, 1999 issued by Reserve Bank of India (RBI) from time to time.

C. Compounding of offence under FEMA:

It refers to the process of voluntarily admitting the contravention, pleading guilty, and seeking redressal. The Reserve Bank of India is empowered to compound any contraventions as defined under Section 13 of FEMA, Act, 1999 except the contravention under Section 3(a) ibid, for a specified sum after offering an opportunity of personal hearing to the contravener.

It is a voluntary process in which an individual or a corporate seeks compounding of an admitted contravention. It provides comfort to any person who contravenes any provisions of FEMA Act, 1999 [except section 3(a) of the Act] by minimizing transaction costs. Willful, malafide, and fraudulent transactions are, however, viewed seriously, which will not be compounded by the Reserve Bank.

D. Who can apply for compounding under FEMA and when is it required?

Any person who contravenes any provision of the FEMA Act, 1999 [except section 3(a)] 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. If a person is made aware of the contravention of the provisions of FEMA Act, 1999 by the Reserve Bank, or any other statutory authority or the auditors or by any other means, she/he is required to go for compounding of offence.

E. Compounding of offences and their delegated authorities:

1. Directorate of Enforcement: Contraventions under Section 3(a) of FEMA Act, 1999 can be compounded by the Directorate of Enforcement (dealing essentially with Hawala Transactions).

2. Officers of Reserve Bank of India: If any person contravenes any provisions of Foreign Exchange Management Act, 1999(42 of 1999) except clause (a) of Section 3 of that Act, then the same will be compounded in the following manner:

S. No. Sum Involved in Contravention Officer of Reserve Bank of India
1. Less than or equal to Rs. 10 lacs Assistant General Manager
2. More than Rs. 10 lacs but less than Rs. 40 lacs Deputy General Manager
3. More than or equal to Rs. 40 lacs but less than Rs. 100 lacs General Manager
4. More than or equal to Rs. 100 lacs Chief General Manager

3. Regional Offices of Foreign Exchange Department (FED),            Reserve Bank: The powers to compound the following contraventions of FEMA 20/2000-RB dated May 3, 2000, as then applicable have been vested with the Regional Offices of Foreign Exchange Department (FED), Reserve Bank:

FEMA Regulation Brief Description of Contravention
Regulation 13.1(1) Delay in reporting inward remittance received for the issue of shares.
Regulation 13.1(2) Delay in filing form FC(GPR) after the issue of shares.
Regulation 13.1(3) Delay in filing the Annual Return on Foreign Liabilities and Assets (FLA).
Paragraph 2 of Schedule I Delay in issue of shares/refund of share application money beyond 60 days, mode of receipt of funds, etc.
Regulation 11 Violation of pricing guidelines for issue/transfer of shares.
Regulation 2(v) read with Regulation 5 Issue of ineligible instruments
Regulation 16.B Issue of shares without the approval of RBI or Government, wherever required.
Regulation 13.1(4) Delay in submission of form FC-TRS on the transfer of shares from Resident to Non-Resident.
Regulation 4 Receiving investment in India from non-resident or taking on record transfer of shares by the investee company.

 F.   Procedure for Compounding of Offence under FEMA:

  • An application to the Compounding Authority needs to be submitted along with the demand draft of Rs. 5000/- drawn in favour of the “Reserve Bank of India” along with the required documents should be sent to RBI.
  • Compounding application shall be as per the format prescribed in Annexure-II of the Foreign Exchange (Compounding Proceedings) Rules, 2000.
  • The application shall contain all the details in case of contravention relating to Foreign Direct Investment, External Commercial Borrowings, Overseas Direct Investment, and Branch Office/Liaison Office, the applicants are required to furnish details as per Annexure III of the Foreign Exchange (Compounding Proceedings) Rules, 2000.
  • An undertaking that the applicant is not under any investigation by any agency such as DoE, CBI, etc.
  • Copy of Memorandum of Association.
  • Latest Audited Financial Statements.
  • The application will be compounded on the basis of documents and submission made.
  • The Compounding Authority may call for further information, record, or other document.
  • In case the person fails to submit the additional information called within the specified period, the application is liable for rejection.
  • Disposal of compounding application shall be made by the issue of compounding order; however, where there is a sufficient cause for further investigation, the RBI may refer the matter to Directorate of Enforcement.

G.     Calculation of compounding amount under FEMA Act, 1999:

  1. The guidance structure for calculating the amount to be imposed on compounding is as below:
Type of contravention Formula
1] Reporting Contraventions
A) FEMA 20
Para 9(1)(A), 9(1)(B), FCTRS (Reg. 10) and taking on record FCTRS (Reg. 4)B) FEMA 3Non-submission of ECB statements

C) FEMA 120
Second/subsequent remittance without obtaining of UIN will be covered under Item 5 below).

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 Item 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
Rs.10-40 lakhs:                2500 per year
Rs.40-100 lakhs:              7000 per year
Rs.1-10 Crore:            50000 per yearRs.10 -100 Crore:        100000 per yearAbove Rs.100 Crore:   200000 per year

E) Reporting contraventions by LO/BO/PO As above, subject to a ceiling of Rs.2 lakhs.

In the case of Project Office, the amount of contravention shall be @10% of the total project cost.

 
2] AAC/ APR/ Share certificate delays

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

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

Delayed receipt of share certificate – Rs.10000/- per year, the total amount being subject to a 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 the project).
 
4] All other contraventions except Corporate Guarantees but including all contraventions of FEMA 20(R)/2017-RB dated November 07, 2017, other than FLA Returns 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 the 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 the issue of guarantees for raising loans which are invested back into India, the amount imposed may be trebled.

 

2.  Above amounts are presently subject to the following proviso - The amount imposed should not exceed 300% of the amount of contravention. In case the amount of contravention is less than Rs. One lakh, the total amount imposed should not be more than amount of simple interest @5% p.a. calculated on the amount of contravention and for the period of the contravention in case of reporting contraventions and @10% p.a. in respect of all other contraventions.

3. In case of paragraph 8 of Schedule I to FEMA 20/2000 RB contraventions, the amount imposed will be further graded as under:

a)     If the shares are allotted after 180 days without the prior approval of Reserve Bank, 1.25 times the amount calculated as per table above (subject to provisos at (i) & (ii) above).

b)     If the shares are not allotted and the amount is refunded after 180 days with the Bank’s permission: 1.50 times the amount calculated as per table above (subject to provisos at (i) & (ii) above).

c)     If the shares are not allotted and the amount is refunded after 180 days without the Bank’s permission: 1.75 times the amount calculated as per table above (subject to provisos at (i) & (ii) above).

4. In cases where it is established that the contravenor has made undue gains, the amount thereof may be neutralized to a reasonable extent by adding the same to the compounding amount calculated as per chart.

5. If a party who has been compounded earlier applies for compounding again for similar contravention, the amount calculated as above may be enhanced by 50%.

For calculating amount in respect of reporting contraventions under para I.1 above, the period of contravention may be considered proportionately {(approx. rounded off to next higher month ÷ 12) X amount for 1 year}. The total no. of days does not exclude Sundays/holidays.

H. Time period of paying the Compounding amount: 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 is payable at the Regional office which has issued the compounding order and at Mumbai if the order is issued by CEFA [Cell for Effective implementation of FEMA], Mumbai. In case of 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 RBI. Such cases will be referred to the Directorate of Enforcement for necessary action.

For more details click on below links:

https://m.rbi.org.in/Scripts/FAQView.aspx?Id=80

https://m.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10190

https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11161&Mode=0

Disclaimer:

The entire contents of this document have been developed based on relevant information and are purely for private circulation. Though the authors have made utmost efforts to provide authentic information, however, the authors expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and consequences of anything done or omitted to be done by any such person in reliance upon the contents of this document.

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