Compounding Offences and Penalties: Types and Benefits

Discover compounding offences and penalties under FEMA. In this article, we cover everything from non-compliance issues to best practices for individuals and entities, in order to help you adhere to regulatory frameworks within the Foreign Exchange Management Act.

The Foreign Exchange Management Act (FEMA) governs foreign exchange transactions in India, ensuring compliance with regulations to maintain the stability of the country’s financial system. Compounding offences and penalties play a crucial role in FEMA enforcement, allowing individuals and entities to rectify breaches of regulations by paying a monetary penalty. Understanding the nuances of compounding offences and penalties under FEMA is essential for investors and businesses to navigate the regulatory landscape effectively.

Understanding Compounding Offences and Penalties:

Compounding offences under FEMA involve the process of regularizing contraventions of FEMA regulations by paying a monetary penalty to the Reserve Bank of India (RBI). The penalties imposed are calculated based on the nature and severity of the violation, with specific formulas provided for different types of contraventions.

Benefits of Compounding 

Compounding offences under the Foreign Exchange Management Act (FEMA) offer several benefits to individuals and entities involved in foreign exchange transactions. Here’s an expanded look at the advantages of opting for compounding:

1. Voluntary Process:

• Compounding is a voluntary process, allowing offenders to proactively rectify their contraventions of FEMA regulations by approaching the Reserve Bank of India (RBI) for compounding.

2. Comforts Citizens and Corporate Community:

• The availability of compounding provides reassurance to citizens and the corporate community, as it offers a structured mechanism for resolving unintentional breaches of FEMA regulations without facing severe legal consequences.

3. Personal Hearing Not Mandatory:

• Unlike formal legal proceedings, compounding does not necessarily require a personal hearing, streamlining the process and reducing the burden on the offender.

4. Minimizes Transaction Costs:

• By opting for compounding, individuals and businesses can minimize transaction costs associated with legal proceedings, including court fees, legal representation fees, and other expenses.

5. Time-Bound Disposal (Within 180 Days):

• Compounding ensures a time-bound disposal of contraventions, with the RBI required to process and dispose of compounding applications within 180 days of receipt, promoting efficiency and timely resolution.

6. Adapts to Changing Dynamics of the Economy:

• The flexibility of compounding allows for adaptation to the changing dynamics of the economy and regulatory landscape, ensuring that the regulatory framework remains relevant and effective.

7. Simple and Hassle-Free Procedure:

• Compounding offers a simple and hassle-free procedure for offenders to rectify their contraventions, with clear guidelines and processes outlined by the RBI for submitting compounding applications.

8. No Initiation or Continuation of Further Proceedings:

• Upon successful compounding of the offence, there is no initiation or continuation of further legal proceedings against the offender, providing closure to the regulatory matter.

9. Transparent Process:

• The compounding process is transparent, with clear criteria for eligibility and penalty calculation provided by the RBI, ensuring fairness and accountability in the resolution of contraventions.

10. Saves Time and Energy:

• Compounding saves time and energy for both the regulator and the offender by consolidating the resolution process into one application, one hearing, and one order for one notification, minimizing administrative burdens and delays.

Types of Contraventions and Corresponding Penalties:

1. Reporting Contraventions: Offences related to non-reporting or delayed reporting, such as those outlined in FEMA 20, FEMA 3, and FEMA 120, incur penalties based on a fixed amount plus variable charges calculated annually. The penalty amount is subject to a ceiling specified by the RBI.
2. Delayed Submission of Documents: Contraventions involving delays in submitting documents like Annual Performance Reports (APR), share certificates, or Foreign Collaboration General Permission Route (FCGPR) returns attract a fixed penalty per delayed submission, subject to a maximum cap.
3. Allotment/Refunds: Offences related to non-allotment of shares or delayed refunds are penalized based on a fixed amount plus a percentage determined according to the duration of the contravention.
4. All Other Contraventions: Various other contraventions of FEMA regulations, excluding those pertaining to Foreign Liabilities and Assets (FLA) returns and corporate guarantees, are penalized based on a fixed amount plus a percentage calculated annually.
5. Corporate Guarantees: Contraventions related to the issuance of corporate guarantees without the necessary permissions are subject to a fixed penalty plus a percentage based on the duration of the contravention. In cases where the contravention involves raising loans reinvested in India, the penalty amount may be trebled.

Additional Provisions and Considerations:

• The total penalty imposed should not exceed 300% of the amount of contravention.
• For contraventions involving amounts less than Rs. One lakh, the penalty is capped at the amount of simple interest calculated at 5% per annum.
• Penalties for transfer or issuance of securities by a person resident outside India are further graded based on specific circumstances.

Understanding Compounding Orders:

In a move towards transparency, the Reserve Bank of India (RBI) announced via A.P. (Dir Series) Circular No. 73 dated 26/05/2016, its decision to publicly disclose compounding orders. As of now, a total of 4540 orders have been made available on the RBI website. These orders serve as succinct documents, detailing the circumstances, highlighting the violated provision, and specifying the compounding fee imposed. It’s important to note that compounding orders do not establish legal precedence but offer significant guidance value. Analyzing these orders provides crucial insights into how the RBI interprets and applies FEMA provisions and related notifications, thereby offering valuable interpretive principles.

Total Compounding Orders Issued by RBI:

The table below presents a breakdown of the total compounding orders issued by the RBI:

Amount imposed under Compounding (in INR)	No. of Cases	%
Rs. 1 – Rs. 1 Lacs	2623	58%
Rs. 1 Lacs – Rs. 10 Lacs	1486	33%
Rs. 10 Lacs – Rs. 1 Cr	374	8%
Rs. 1 Cr and above	57	1%
Total	4540	100%

Conclusion:

Compounding offences and penalties under FEMA provide a mechanism for individuals and entities to rectify breaches of foreign exchange regulations and ensure compliance with FEMA guidelines.

By understanding the various types of contraventions and corresponding penalty structures outlined by the RBI, investors and businesses can navigate the regulatory framework effectively, mitigate legal risks, and maintain their reputation as responsible participants in India’s financial ecosystem.

For assistance, in understanding the nuances of compounding under FEMA, get in touch with th experts at Vakilsearch right away!