Compounding of Contraventions under the Foreign Exchange Management Act,1999

Introduction

Contravention is a breach or non-compliance of the provisions of Foreign Exchange Management Act (“Act”), 1999, and the rules, regulations, notifications, orders or circulars or directions made thereunder. The Reserve Bank of India (“RBI”) has been empowered by the Act to compound offences, and any contravention under Section 13 of the Act can be compounded within one hundred and eighty days (180) from the date of receipt of application by the officers of the RBI. Any person who contravenes the provisions of the Act upon adjudication, is liable to pay –

1. Thrice the sum involved in such contravention where the amount is quantifiable, or;
2. Rupees Two Lakhs, where the amount is not directly quantifiable;

and where the contravention is of a continuing nature, a further penalty of Rupees Five Thousand for every day after the first day during which the contravention continues. Further, Section 15 of the Act, provides for Compounding of Contravention whereby the contravener voluntarily admits contravention, pleads guilty and seeks redressal through an application.

Compounding of Contraventions is done by certain entities, wherein the sum involved is as follows:-

1. Ten Lakh Rupees or below, by the Assistant General Manager of the RBI;
2. Equal to or exceeding Ten Lakhs but below Forty Lakhs, by the Deputy General Manager of the RBI;
3. Equal to or exceeding Forty Lakhs but below Hundred Lakhs (One Crore), by the General Manager of the RBI;
4. Equal to or exceeding a Hundred Lakhs (One Crore), by the Chief General Manager of the RBI

Prerequisites for Compounding of Contraventions

1. For a period of three years from the date of compounding of contravention, no contraventions of a similar kind can be compounded. Post such duration, if a contravention similar to the previous nature occurs, the same shall be compounded as if it were the first contravention.
2. For the contraventions to be compounded for transactions where prior approval of statutory authorities/Government is required to be obtained, and such approval has not been obtained, the compounding of such contravention shall not occur for such a period until the requisite approval(s) is obtained.
3. In event the contravener has failed to pay the sum of contravention for compounding within the specified time limit or has serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation, the case is adequately required to be referred to the Directorate of Enforcement for further investigation. Any necessary action under the Act or any authority under the Prevention of Money Laundering Act or other agencies can also take the requisite actions as may be deemed fit.
4. In cases where the adjudication is done by the Directorate of Enforcement and appeals have been made under the Section 17 or Section 19 of FEMA, no compounding of contravention is allowed under Rule 11 of the Foreign Exchange (Compounding Proceedings) Rules, 2000 (‘Rules’). The contravener has to specifically state in the manner prescribed in Annexure III along with the compounding application that he has not filed any such appeals
5. Where any contravention that is identified by the RBI or has been brought forward by the contravener itself, the Bank has to confirm the following –

1. Whether it is material and it is required to be compounded and if the necessary procedure has been followed.
2. Whether the contravention is of a sensitive nature and if the same has to be informed to the Directorate of Enforcement

Application for Compounding

An application for Compounding along with necessary documents and a demand draft for Rs. 5000/- (Rupees five thousand only) drawn in favor of the “Reserve Bank of India” in the prescribed format shall be sent to the RBI. The Application must contain pertinent details such as, contact details, name of the applicant, the authorized official or representative of the applicant and email ID. In Addition to the Application, the applicant must also furnish details in the format of Annex II of the Rules relating to Foreign Direct Investment, External Commercial Borrowings, Overseas Direct Investment and Branch Office / Liaison Office, as applicable, along with the Memorandum of Association of the company. Also the latest audited balance sheet along with an undertaking as per Annex-III of the Rules must be attached stating that the applicant is not under any enquiry or investigation by any agency such as the Directorate of Enforcement etc., as on the date of such application.

Where the applicant has not provided adequate details or where the required approvals have not been obtained, the application so received by the RBI along with the application fees of INR 5000 shall be returned and refunded by way of crediting the amount to the applicant’s account through NEFT as per the ECS mandate and details of their bank account per Annex-IV of the Rules furnished along with the application.

Factors for Compounding of Contravention

The RBI may take into account the following indicative factors, for the purpose of passing of the compounding order and adjudging the quantum of contravention that is to be compounded –

1. The amount of gain or unfair advantage made out of the contravention (wherever quantifiable);
2. The amount of loss caused to any authority / exchequer / public at large as a result of the contravention;
3. The benefits accruing to the contravener that of an economic nature due to the delayed compliance or non-compliance thereof;
4. The track record and/or the history of the contravener, the repetitive nature of the contravention;
5. Contravener’s conduct in providing details of a transaction or providing disclosure in the application or in the submissions made during the hearing;
6. Any other factors that are considered to be relevant and appropriate;
7. Any other factors that are considered to be relevant and appropriate.

Procedure for Compounding

On receipt of the compounding application, the RBI on the basis of the documents and submission made in the application, examine the details and also assess if the contravention is quantifiable and the amount of such contravention. In case, the Authority requires any further information, it can call for such information from the applicant. If the applicant fails to oblige and provide the said information, the compounding application is liable to be returned.

The following guidance note provides the formula for arriving at the amount of contravention. The purpose of the guidance note is to broadly indicate the basis on which the contravention amount is to be determined. The actual amount may however, vary sometimes, depending on the circumstances and taking into account the factors for compounding of contravention indicated in the foregoing paragraph

*For a more in depth and detailed guideline on the computation of compounding amount, access the Master Direction here

Issue of the Compounding Order

The Compounding Authority shall pass an order of compounding after affording an opportunity of being heard to all the parties concerned, and shall pass the order as expeditiously as possible, and not later than 180 days from the date of receipt of the completed application by the RBI. The RBI also encourages the applicant to be present for the personal hearing directly, and not be represented / accompanied by legal experts / consultants, as the compounding is done only for the admitted contraventions.

The Compounding order shall also mention the provisions of Act or the rules, regulations, orders or notifications in respect to which the contravention has taken place along with the details of such contravention. The copy of the order shall be given to the contravener (the applicant) and also to the Adjudicating Authority in case a complaint has been made in writing, as per sub-section (3) of Section 16 of Act

The summary of the compounding orders will be published on the website of RBI, for all the orders passed on or after 1 March 2020 [as per the AP (DIR Series) Circular No.06 dated 17 November 2020] along with the details such as, name of Applicant, details of compounding, date of issue of compounding order, amount imposed for the contraventions, etc.

Post Compounding Procedure

The amount for which the contravention is compounded as specified in the order of compounding, is payable by way of a demand draft in favor of the “Reserve Bank of India” within 15 days from the date of the order of compounding such contravention. On receipt of the demand draft for the compounding of contravention, a certificate is issued by the RBI to the specified conditions, if any.

After the compounding order is passed, the contravener cannot and has no right to seek withdrawal of the order or to hold that the compounding order is void or request review of the order passed by the Authority. In case of failure of payment within the stipulated period, it shall be so deemed that the contravener had never made an application for compounding of contravention.