Compounding of contraventions under FEMA

By Shardul Thacker, Mulla & Mulla & Craigie Blunt & Caroe

The compounding of contraventions under the Foreign Exchange Management Act, 1999, (FEMA) is a voluntary process available to the citizens of India. Under section 13(1) of FEMA, an applicant can seek compounding of an admitted contravention of any provision of the act.

Shardul Thacker Partner Mulla & Mulla & Craigie Blunt & Caroe
Shardul Thacker
Mulla & Mulla & Craigie Blunt & Caroe

The law

If any person contravenes any provision of FEMA, or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this act, or contravenes any condition subject to which an authorization is issued by the Reserve Bank of India (RBI), he shall, upon adjudication, be liable to a) a penalty up to three times the sum involved in such contravention where the amount is quantifiable or b) up to ₹200,000 where the amount is not quantifiable. Where the contravention is a continuing one, a further penalty may be levied. According to section 13(1) chapter IV of FEMA, this may extend to ₹5,000 for every day after the first day during which the contravention continues.

Foreign Exchange (Compounding Proceedings) Rules, 2000, published by the Government of India, empower the RBI to compound contraventions under FEMA. The provisions of section 15 of FEMA permit compounding of contraventions. They empower the compounding authority (CA) to compound any contravention as defined under section 13 of the act on an application made by the person committing such contravention, either before or after the institution of adjudication proceedings.

The government has placed the responsibilities of administering compounding of cases with the RBI, except under section 3(a) of FEMA. Accordingly, the procedure for compounding of contraventions under FEMA has been framed with a view to provide comfort to the citizens and corporate community by minimizing transaction costs, while taking severe view of willful, mala fide and fraudulent transactions.

Compounding powers

The compounding powers of the RBI and the Directorate of Enforcement (DoE), respectively, are:

• RBI has been empowered to compound the contraventions of all sections of FEMA, except clause (a) of section 3 of the act.

• DoE would exercise powers of compounding under clause (a) of section 3 of FEMA (dealing essentially with hawala or informal transfers that bypass legal channels).

For effective implementation of the compounding process under FEMA, the RBI has framed the procedure for compounding of contravention. Once the contravention has been compounded by the CA, no proceeding or further proceeding will be initiated or continued, as the case may be, against the contravener.

Manner of compounding

The CA will exercise jurisdiction in respect of the contraventions allegedly committed in relation to any of the provisions of the FEMA, or any rule, regulation, notification, direction or order issued in exercise of the powers under FEMA.

The CA will form an opinion on the basis of the application, together with the documents submitted and on the basis of submissions made during the personal hearing on the nature of the contravention.

The application for compounding will be disposed of on merits, upon consideration of the records and submissions and at the absolute discretion of the CA. The following factors, which are only indicative, may be taken into consideration for the purpose of passing the compounding order and for arriving at the quantum of sum on payment of which contravention shall be compounded:

• the amount of gain of unfair advantage, wherever quantifiable, made as a result of the contravention;

• the amount of loss caused to any authority, agency, exchequer, as a result of the contravention;

• economic benefits accruing to the contravener from delayed compliance or compliance avoided;

• the repetitive nature of the contravention, the track record and or history of non-compliance of the contravener;

• contravener’s conduct in undertaking the transaction and disclosure of full facts in the application and submissions made during the personal hearing; and

• any other factor considered relevant and appropriate.

The compounding order

The applicant is given an opportunity to make further submission of documents in person in support of the application within a specified period. If the contravener or its authorized representative fails to appear in person or make any submissions before the CA for the personal hearing, the CA may proceed with the processing of the compounding application on the basis of information and documents available in the application for compounding. The CA will pass a compounding order on the basis of the arguments made in the application as well as other documents and submissions made in this context by the contravener during personal hearings, if any.

Shardul Thacker is a partner with Mulla & Mulla & Craigie Blunt & Caroe in Mumbai.


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