On 17 November 2020 the Reserve Bank of India (RBI) issued an RBI circular on revising compounding direction. Know how RBI compounding orders focus on aligning with the latest applicable laws in less than 5 minutes.
According to the RBI compounding orders, any violation of the rules, principles, guidelines, notice, orders, given by the RBI can be compounded. Compounding Direction is the process of consciously accepting the violation , confessing the same, and accepting a redressal.
RBI Introduces Revisions to the Compounding Direction: What Is Compounding by the RBI?
The Reserve Bank can compound any violation under the Foreign Exchange Management Act, under Section 13 of the Act, excluding the violation referenced under Sub-section 3(a). It compounds the violations for a penalty after providing a chance for the individual to express his point of view to the board members.
The Foreign Exchange (Compounding Proceedings) Rules, 2000, and the Reserve Bank of India’s (RBI) Master Direction on Compounding of Contraventions under Foreign Exchange Management Act, 1999 dated 1 January 2016 (Compounding Direction) manages the compounding of violations under the Foreign Exchange Management Act, 1999.
On 17 November 2020, the RBI issued a circular focusing on the following aspects
- Altering the compounding direction
- Focusing on the alignment of inter alia with the most recent rules and regulations
- Simplifying the overall regulating framework
- Improving the administrative system efficacy
- Easily manage the information in the public area.
NDI Regime Alignment
Before the RBI compounding orders, the compounding direction managed violations of the rules under Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations in 2000 and 2017.
There was an issue over how the compounding system would apply to the violations under this new system. The vulnerability arises since the FEMA 2000 has been replaced by the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 dated 17 October 2019 (NDI Rules) and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 dated 17 October 2019 (MPR Regulations).
The RBI circular has clearly resolved the issues and demonstrated it with suitable examples of violation under the NDI rules and the MPR regulations. This clearly denotes that the efficiency and rights to compounding direction will be limited to the regional office of the RBI. The NDI rules and MPR regulations are displayed below.
Violation Classification
Before passing the RBI circular, the RBI deals with any form of violations by categorising them under different sections and resolving them.
- Technical/minor: This violation is small and is usually dealt by issuing an administrative or cautionary advice
- Material: The compounding system was followed for conducting the process for such violations
- Sensitive/ Serious: This is a major issue which is compounded by referring to the directorate of enforcement.
In certain scenarios when a compounding application is submitted admitting the violation, it is never considered under the technical or minor category.
The classification of violations under technical/minor type has been done away with the RBI compounding orders. All the technical/minor violations are highly regularised with an imposition of a minimal compounding amount. This amount is finalised based on the compounding rules provided in the compounding direction.
This move takes into account more clarity and provides greater transparency, helping the regulating officer to arrive at a decision in a short span of time.
Compounding Order Disclosure
In 2016, the RBI took an initiative to publicly announce the compounding order through its official website. This step was initiated to ensure higher transparency in the process.
According to the RBI circular, all orders passed on or after 1 March 2020 will be published on the website rather than uploading all the compounding requests.
The data published contains details of the applicant, the nature of violation, and the amount fined for compounding direction the violations. This initiative will definitely increase transparency and address issues regarding the confidentiality of applicants.
Who Can Apply for Compounding?
- Any individual or corporation, who violates any law of the Foreign Exchange Management Act, 1999 [except Segment 3(a)]
- Anyone who does not follow or violates any standard, guideline, notice, heading, or request given, may apply for compounding
- The compounding might be applied on suo moto or on being mindful of the violations by RBI, or some other power or by other means
- At the point when an individual realises the violations of Foreign Exchange Management Act, 1999 by the RBI or some other legal power or the examiners or by some other means, one might apply for compounding direction
- One can likewise make an application for compounding, suo moto, on becoming aware of the violations.
Compounding Process
- Initially an application is filed for compounding with essential documents and a fine to the concerned department
- All the documents or files are made from the list provided in the FED Master Direction No. 18/2015-16 titled ‘Master Direction – Reporting under Foreign Exchange Management Act, 1999 dated January 01, 2016 (Updated as on September 18, 2019)
- The Authority offers a chance to conduct an individual hearing, which is discretionary
- The compounding authority passes a request demonstrating the clauses of the violations and the arrangements of Foreign Exchange Management Act, 1999 that have been violated
- The total payable fine amount is calculated for compounding direction the violations as demonstrated in the compounding request
- The violations are compounded by the collecting the penalties
- Compounding requests passed on or after June 1, 2016, are published on the RBI’s official site on a monthly basis.
Fees Involved in Compounding Direction
The application is submitted alongside important documents as mentioned in the website and a demand draft for ₹5000 attached in the name of the RBI. It should be attached while sending the request for compounding.
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