Compounding of Contraventions Under FEMA

INTRODUCTION:

There are various laws in India and amended time to time for the benefits of stakeholders. As a result most of the people by mistake contravene various provisions of law. So Government has provided compounding of offence under FEMA to make default good. A person suo-moto accepts its contravention and apply for compounding of offence.

DELEGATION OF POWER TO COMPOUND BY RESERVE BANK

If any person contravenes any provisions of Foreign Exchange Management Act, 1999 except clause (a) of Section 3 of that Act,

CONTRAVENTION FOR WHICH POWER DELEGATED TO REGIONAL OFFICES

Following Contravention are compounded by Regional Offices:

• Delay in reporting inward remittance received for issue of shares.

• Delay in filing form FC (GPR) after issue of shares.

• Delay in filing the Annual Return in respect of the Foreign Liabilities and Assets (FLAR).

• Delay in issue of shares/refund of share application money beyond 180 days, mode of receipt of funds, etc.

• Violation of pricing guidelines for issue of shares.

• Issue of ineligible instruments such as non-convertible debentures, partly paid shares, shares with optionality clause, etc.

• Issue of shares without approval of RBI or FIPB respectively, wherever required.

• Delay in submission of form FC-TRS on transfer of shares from Resident to Non-Resident.

• Delay in submission of form FC-TRS on transfer of shares from Non-Resident to Resident.

• Taking on record transfer of shares by Investee Company.

• Delay in reporting the downstream investment made by an Indian entity or an investment vehicle in another Indian entity (which is considered as indirect foreign investment for the investee Indian entity in terms of these regulations), to Secretariat for Industrial Assistance, DIPP.

• Delay in reporting receipt of amount of consideration for capital contribution and acquisition of profit shares by Limited Liability Partnerships (LLPs)/ delay in reporting disinvestment/transfer of capital contribution or profit share between a resident and a non-resident (or vice-versa) in case of LLPs.

• Gift of capital instruments by a person resident in India to a person resident outside India without seeking prior approval of the Reserve Bank of India.

Kochi and Panaji Regional offices can compound the abovementioned contraventions for amount of contravention below Rupees one hundred lakh (Rs.1,00,00,000). The contraventions for amounts of Rupees one hundred lakh (Rs. 1,00,00,000/-) or more under the jurisdiction of Panaji and Kochi Regional Offices with respect to all the delegated powers shall henceforth be compounded at Mumbai RO and Thiruvananthapuram RO respectively.

AUTHORISATION TO COMPOUND THE CONTRAVENTIONS BY FED CO CELL

Following Contravention are compounded by FED CO Cell

> Contraventions relating to acquisition and transfer of immovable property outside India

> Contraventions relating to acquisition and transfer of immovable property in India

> Contraventions relating to establishment in India of Branch office, Liaison Office or Project office

> Contraventions falling under Foreign Exchange Management (Deposit) Regulations, 2000

The powers to compound the abovementioned contraventions have been delegated to FED, CO Cell, New Delhi without any limit on the amount of contravention.

PROCUDURE OF COMPOUNDING

Application shall be submitted to authority along with fees of Rs. 5,000 by way of demand draft along with following documents:

√ Application in the prescribed format and furnished the details as per Annex-II relating to Foreign Direct Investment, External Commercial Borrowings, Overseas Direct Investment and Branch Office / Liaison Office

√ a copy of the Memorandum of Association

√ latest audited balance sheet

√ undertaking as per Annex III that they are not under any enquiry/investigation/adjudication by any agency such as Directorate of Enforcement, CBI etc as on the date of the application

√ On receipt of the application for compounding, the Reserve Bank shall examine the application based on the documents and submissions made in the application and assess whether contravention is quantifiable

√ The Compounding Authority may call for any information, record or any other documents relevant to the compounding proceedings.

√ If fails to submit the additional information/documents within time period, the application for compounding will be liable for rejection.

PRE CONDITION FOR COMPOUNDING PROCESS

• Any applicant committed similar contravention within 3 years from earlier contravention shall not be compounded under the Compounding Rules and relevant provisions of the FEMA, 1999. After the expiry of a period of three years from the date on which the contravention was previously compounded shall be deemed to be a first contravention.

• In case applicant has done any transaction without proper approval from concern authority, in that case such approval shall be obtained before applying for compounding.

• Cases of contravention, such as, those having serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation or where the contravener fails to pay the sum for which contravention was compounded within the specified period in terms of the compounding order, shall be referred to the Directorate of Enforcement for further investigation and necessary action under FEMA, 1999 or to the authority instituted for implementation of the Prevention of Money Laundering Act 2002, or to any other agencies.

• In case where adjudication has been done by the Directorate of Enforcement and an appeal has been filed under section 17 or section 19 of FEMA, 1999, no contravention can be compounded in terms of Rule 11 of Foreign Exchange (Compounding Proceedings) Rules, 2000.

The applicant shall confirm in the undertaking required to be furnished as per Annex III along with the compounding application that they have not filed any appeal under section 17 or section 19 of FEMA, 1999.

• If contravention is identified by the Reserve Bank or brought to its notice by the entity involved in contravention by way of a reference other than through the prescribed application for compounding, the Bank will continue to decide

  • whether a contravention is technical and/or minor in nature and, as such, can be dealt with by way of an administrative/ cautionary advice;

  • whether it is material and, hence, is required to be compounded for which the necessary compounding procedure has to be followed or

  • whether the issues involved are sensitive / serious in nature and, therefore, need to be referred to the Directorate of Enforcement (DOE).

• In terms of the proviso to rule 8 (2) of Foreign Exchange (Compounding Proceedings) Rules, 2000inserted vide GOI notification dated February 20, 2017, if the Enforcement Directorate is of the view that the compounding proceeding relates to a serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation, the Compounding Authority shall not proceed with the matter and shall remit the case to the appropriate Adjudicating Authority for adjudicating contravention under section 13.

COMPUTATION OF PENALTY

The guidance note for calculating the amount to be imposed is as below:

The above amounts are subject to the following provisions:

• 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. and @10% p.a. in respect of all other contraventions

• In case of paragraph 8 of Schedule I to FEMA 20/2000 RB contraventions, the amount imposed as follows:

  • If the shares are allotted after 180 days without the prior approval of Reserve Bank, 1.25 times the amount

  • If the shares are not allotted and the amount is refunded after 180 days with the Bank’s permission: 1.50 times the amount

  • If the shares are not allotted and the amount is refunded after 180 days without the Bank’s permission: 1.75 times the amount

TIME LINE FOR COMPOUNDING ORDER

The Compounding Authority shall dispose off the matter within 180 days from the date of application.

 TIME LINE FOR PAYMENT OF COMPOUNDING PENALTY

The sum for which the contravention is compounded shall be paid within 15 days from the date of the order of compounding of such contravention.

In case of failure to pay the sum compounded within the time, it shall be deemed that the contravener had never made an application for compounding of any contravention.