Compounding of Contraventions

1. Compounding of Contraventions Mr. Ashish Foreign Exchange Department RBI, Ahmedabad

2. FEMA - 1999 Preamble To consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India

3. Meaning • Meaning of the word ‘compound’ or ‘compounding’ not defined in the Act or in the Rules. • The expression ‘Compounding’ has been explained in Law Lexicon as “arranging, coming to terms; condone for money • The Black’s Law Dictionary (6th Edition) defines ‘compound’ as : “to compromise; to effect a composition with a creditor; to obtain discharge from a debt by the payment of a smaller sum..”

4. Legal basis • Section 15 of FEMA 1999 covers powers to compound contraventions and empowers the Compounding Authority to compound the contraventions. • Section 13 of FEMA covers penalties in respect contraventions which are compounded

5. Compounding Rules, 2000 • The Government of India has, in consultation with the Reserve Bank placed the responsibilities of administering compounding of cases with the Reserve Bank, except under Section 3(a) of FEMA, 1999. • Accordingly, the Government notified Compounding Rules, 2000 vide Notification No. G.S.R.383(E) dated 3rd May 2000.

6. The Need • The objective of FEMA • Need of the times • Changing dynamics of our economy • Provide comfort to the business community by minimising transaction costs, while taking serious view of malafide, fraudulent transactions.

7. Compounding - A Voluntary Process • Compounding refers to admitting a contravention, pleading guilty and seeking remedy • Any contravention, on an application made by the person committing such contravention, be compounded within 180 days [Sec. 15(1) of FEMA, 1999] • Contravention is admitted • Application is made seeking compounding

8. Process • Cell for Effective Implementation of FEMA (CEFA) has been set up at Foreign Exchange Department, Central Office, Mumbai for carrying out compounding proceedings. • The Regional Offices were given the powers to compound certain cases. • An application for compounding of a contravention to be submitted to the Compounding Authority either on being advised of a contravention through a memorandum or suomoto on being made or becoming aware of the contravention.

9. Process • Application, along with fee and documents to be submitted to The Compounding Authority, Central Office or the Regional Office concerned depending on the amount / contravention. • The application fee shall be paid by a DD in favour of the “Reserve Bank of India” and payable at Mumbai or the Regional Office location.

10. Process • The proceedings would be concluded and order issued by the Compounding Authority within 180 days from the date of receipt of the application for compounding. • This time limit would be from the date of receipt of application for compounding to the date of issue of compounding order. • The Compounding Authority may call for any information, record or any other documents relevant to the compounding proceedings.

11. Process • Such additional information where ever called for shall be submitted within the period as specified by the CA. • In case the contravener fails to submit the additional information called for within specified period, the application for compounding will be liable for rejection.

12. Process Contraventions relating to any transaction under FEMA but requiring approval or permission from the Government Department concerned or any Statutory Authority as the case may be, would not be compounded UNLESS the required approval is obtained from the authorities concerned.

13. Compounding Order • The Compounding Authority shall pass an order after affording the contravener an opportunity of being heard. • In the compounding order the provisions of the Act, Rules, Directions etc. under which the contravention has taken place along with the details of the alleged contravention are specified.

14. What are Contraventions? Contravention may be of the following • Provisions of the Act • Rules made under the Act • Regulations • Notifications • Direction or order issued in exercise of the powers under the Act.

15. Generally Committed ContraventionsOverseas Direct Investment • Non submission of form ODI after investment and UIN not allotted • Not a permitted method of funding • Not obtaining share certificate within stipulated time period from the date of remittance • Non-submission of Annual Performance Reports (APR) every year

16. Generally Committed ContraventionsExternal Commercial Borrowing • Borrower not an eligible borrower • Lender not a recognised lender • Minimum maturity period not adhered to • Breach of all in cost ceiling • End use not a permitted one • Loan Registration Number not obtained

17. Generally Committed ContraventionsForeign Direct Investment • Not reporting of inward remittance within 30 days • Not allotting equity instruments or not refunding the amount within 180 days • Not submitting form FC-GPR within 30 days from the date of allotment • Non submission of form FCTRS on transfer of shares • Issue of instruments other than equity shares, fully or mandatorily convertible preference shares as prescribed

18. Contravention And Penalties 13(1) of FEMA 1999 Penalties-Quantum of penalty • Compounding may be subject to a penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or • up to Rs 2 Lakhs where the amount is not quantifiable, and • where such contravention is a continuing one, further penalty which may extend to Rs 5000/-for every day after the first day during which the contravention continues.

19. Powers of the Regional Offices Need : Facilitate customer Service operational convenience The contraventions that can be compounded at RO • Delay in reporting of inward remittance • Delay in filing of Form FCGPR after allotment of shares • Delay in issue of shares after 180 days viz. paragraphs 9(1)(A), 9(1)(B) and 8, respectively, of the Schedule I to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, notified vide Notification No. FEMA.20/2000-RB dated 3rd May 2000 and as amended from time to time :

20. Powers of the Regional Offices (Contd……) • Paragraphs 9 (1) (A) and 9 (1) (B) of Schedule I to FEMA 20/2000-RB dated May 3, 2000 Bhopal, Bhubaneshwar, Chandigarh, Guwahati, Jaipur, Jammu, Kanpur, Kochi, Patna and Panaji for amount of contravention below Rupees One hundred lakh only (Rs. 1,00,00,000 /-) • Paragraphs 9 (1) (A), 9 (1) (B) and 8 of Schedule I to FEMA 20/2000-RB dated May 3, 2000 Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, Mumbai and New Delhi for amount of contravention without any limit.

21. Advantages of Compounding • It is a voluntary process • Compounding makes one clean of the past mistakes and look forward to the future • After compounding, the contravener is absolved of the contravention and can concentrate on the business opportunities • It saves time and energy One application – One hearing – One order. • The existence of such facility provides comfort while undertaking global transactions since FEMA facilitates compounding of any contraventions which are not malafide

22. Statistical Facts • 70% cases pertain to FDI (72% relate to delay in advance reporting / submission of FCGPR/ • 24 % of the cases received to relate not obtaining LRN under ECB • 66 % of ODI cases relate to non reporting of overseas investments online

23. Thank You Reserve Bank of India Foreign Exchange Department Ahmedabad Regional Office