In this comprehensive guide, we dwell into guidelines and compliance requirements, for their business evaluating the impact of compounding for effectively navigating regulatory frameworks set by the Reserve Bank of India.

The Reserve Bank of India (RBI) plays a pivotal role in regulating foreign exchange transactions in India through the Foreign Exchange Management Act (FEMA), 1999. Adherence to RBI compliance and guidelines with FEMA regulations are paramount for individuals and entities engaged in foreign exchange transactions. This article delves into the scope, procedures, and prerequisites outlined by the RBI for compounding process contraventions under FEMA, providing a comprehensive understanding of regulatory compliance in the realm of foreign exchange management.

Scope and Manner of Compounding:

The RBI exercises jurisdiction over contraventions committed in relation to any provisions of FEMA, 1999, or any rules, regulations, notifications, directions, or orders issued under FEMA. Compounding applications are disposed of on merits, considering records, submissions, and at the discretion of the Compounding Authority (CA). Factors such as gain of unfair advantage, loss caused, economic benefits, repetitive nature of contravention, contravener’s conduct, and other relevant factors are considered for passing the compounding order and determining the quantum of the sum for compounding.

Contraventions under FEMA, 1999:

• Overseas Direct Investment (ODI):

1. Failure to submit Form ODI post-investment without an allotted UIN.
2. Utilization of non-permitted funding methods.
3. Delay in obtaining share certificates within the stipulated time period from the date of remittance.
4. Non-submission of Annual Performance Reports (APR) annually.

• External Commercial Borrowing (ECB):

1. Borrowing by ineligible entities.
2. Lender not recognized.
3. Non-adherence to the minimum maturity period.
4. Breach of the all-in-cost ceiling.
5. Misuse of funds for purposes not permitted.
6. Failure to obtain Loan Registration Number (LRN).

• Foreign Direct Investment (FDI):

1. Failure to report inward remittances within 30 days.
2. Failure to allot equity instruments or refund the amount within 180 days.
3. Non-submission of Form FCGPR within 30 days from the date of allotment.
4. Failure to submit Form FCTRS upon the transfer of shares.
5. Issuance of instruments other than equity shares, fully or optionally convertible preference shares (CCPS) as prescribed.

• Sensitive Contraventions:

Cases involving serious contraventions suspected of money laundering, terror financing, or affecting sovereignty and integrity of the nation are categorized as sensitive contraventions.

Prerequisites for the Compounding Process:

• The company must not commit similar contraventions within a 3-year period of compounding.
• Compoundable contraventions requiring approvals from authorities must obtain necessary permissions before applying for compounding.
• Suspected serious contraventions trigger referral to the Directorate of Enforcement for further investigation if the contravener fails to pay the compounding penalty within the stipulated period.
• Contraventions undergoing adjudication by the Directorate of Enforcement and under appeal according to sections 17 or 19 of FEMA, 1999, are non-compoundable.

Documentation Requirements for Compounding under FEMA:

1. Compounding Application:

• Applicants must submit a compounding application in the format prescribed by the Reserve Bank of India (RBI) at the time of application. The format may vary based on updates or changes made by the RBI.

2. Prescribed Fee:

• Along with the compounding application, applicants are required to pay a prescribed fee of Rs. 5,000/- by way of a demand draft drawn in favor of the “Reserve Bank of India.” This fee covers the administrative costs associated with processing the compounding request.

3. Additional Details:

• Applicants must provide additional details as per the annexes related to Foreign Direct Investment (FDI), External Commercial Borrowings (ECB), Overseas Direct Investment, and Branch Office/Liaison Office, as applicable to their specific case. These annexes ensure that all relevant information regarding the contravention is properly documented and considered during the compounding process.

4. Undertaking:

• Applicants must include an undertaking stating that they are not under investigation by any agency such as the Directorate of Enforcement (DoE), Central Bureau of Investigation (CBI), etc. While no specific format is specified for this undertaking, it is a critical component to affirm RBI compliance and eligibility for compounding.

5. ECS Mandate Form:

• A duly filled ECS (Electronic Clearing System) mandate form must be submitted along with the compounding application. This form authorizes the RBI to process the compounding fee payment electronically from the applicant’s designated bank account.

6. Copies of Memorandum of Association (MoA) and Audited Balance Sheet:

• Applicants must provide copies of the Memorandum of Association (MoA) and the latest Audited Balance Sheet (BS) of the company at the time of applying for compounding. These documents serve to verify the legal and financial standing of the applicant entity.

7. Contact Details:

• The compounding application should contain the contact details of the applicant, including the name, mobile number, and email address. Providing accurate contact information ensures effective communication between the RBI and the applicant throughout the compounding process.

Factors Considered in Compounding Orders:

1. Amount of Gain/Unfair Advantage:

• The compounding order takes into account the amount of gain or unfair advantage accrued to the contravener as a result of the contravention, particularly where quantifiable.

2. Loss Caused:

• Any loss caused to the authority, agency, or exchequer due to the contravention is considered in determining the appropriate compounding order.

3. Economic Benefit:

• The economic benefit derived by the contravener due to the delayed nature of RBI compliance or avoidance of such compliance is evaluated as part of the compounding process.

4. Repetitive Nature:

• The repetitive nature of the contravention, along with the contravener’s track record and history of non-compliance, is taken into consideration.

5. Contravener’s Conduct:

• The conduct of the contravener, including their actions while undertaking the transaction and the completeness of disclosure in the compounding application, is assessed during the compounding process.

6. Submission during Personal Hearing:

• Any submissions made by the contravener during the personal hearing, if applicable, are considered in determining the compounding order.

7. Other Relevant Factors:

• Any other factor deemed relevant or appropriate by the RBI may also influence the compounding order, ensuring that all aspects of the contravention are thoroughly examined before a decision is made.

Conclusion:

RBI Compliance with guidelines and adherence to FEMA regulations are essential for individuals and entities engaged in foreign exchange transactions in India. The compounding mechanism provided by the RBI offers a structured approach for rectifying contraventions, ensuring transparency and accountability in the regulatory framework. 

By understanding the scope, procedures, and prerequisites outlined by the compliance, stakeholders can navigate the complexities of foreign exchange management with confidence and integrity.