FEMA Compounding Rules 2024
The Government of India in September 2024 notified the Foreign Exchange (Compounding Proceedings) Rules, 2024 in supersession of the erstwhile Foreign Exchange (Compounding Proceedings) Rules, 2000.
If a person violates any provision of the Foreign Exchange Management Act, 1999 (FEMA) or any rule, regulation, notification, direction, or order issued under the act, they have the option, under Section 15 of FEMA, to apply for the compounding of the contravention. However, this does not apply to violations under Section 3(a) of FEMA (which involves contraventions related to suspected money laundering, terrorist financing, etc.). The application for compounding is a voluntary action by the individual, who acknowledges the contravention and seeks resolution by paying a monetary penalty. The compounding authority will review the application, provide an opportunity for a personal hearing, and then determine the penalty.
Key Changes and Implications
The gist of proposed amendments are discussed below:
Change in monetary limits:
- In a case, where the sum involved in such contravention does not exceed INR 6 million, an officer not below the rank of the Assistant General Manager of the Reserve Bank;
- In a case, where the sum involved in such contravention does not exceed INR 25 million, an officer not below the rank of the Deputy General Manager of the Reserve Bank;
- In a case, where the sum involved in such contravention does not exceed INR 50 million, an officer not below the rank of the General Manager of the Reserve Bank; and
- In a case, where the sum involved in such contravention is above INR 50 million, an officer not below the rank of the Chief General Manager of the Reserve Bank.
The revised rules have increased the limits of the sum involved in contravention for each of the officers of the RBI for handling compounding matters.
Hence, this will reduce the burden and dependency on higher officers of RBI for compounding matters. This will also reduce the time required for compounding.
Increase in compounding application fees:
The amendment rules have increased the application fees from INR 5,000 to INR 10,000 (plus applicable GST)
Online payment process:
The application fees and compounding amount can be paid by demand draft or NEFT, or RTGS, or such other permissible electronic or online modes of payment in favor of the compounding authority. Earlier, such an amount was accepted only in form of a demand draft.
Non-compoundable cases:
No contravention shall be compounded:
- where the amount involved is not quantifiable; or
- where the provisions of Section 37A of the FEMA are applicable; or
- where the Directorate of Enforcement is of the view that the proceeding relates to a serious contravention suspected of money laundering, terror financing or affecting the 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; or
- where the Adjudicating Authority has already passed an order imposing a penalty under Section 13 of the act; or
- where the compounding authority is of the view that the contravention involved requires further investigation by the Directorate of Enforcement to ascertain the amount of contravention under Section 13 of the act.
Pending proceedings:
Any compounding application pending before the compounding authority, on the date of commencement of these rules, shall be governed by the provisions of the Foreign Exchange (Compounding Proceedings) Rules, 2000 superseded herein.
Discontinuation of adjudication:
New Rules clarify that in respect of contravention which is already compounded prior to adjudication of such contravention under Section 16 of FEMA, no inquiry or further inquiry can be initiated or continued against the person. There was always a bar on holding or initiating an inquiry for adjudication of contravention which has been successfully compounded however, this revised provision clarifies also to discontinue any existing inquiries by the adjudicating authority.
Powers of Compounding Authority:
In addition to the powers granted to the compounding authority under the previous rules to request further information, records, or documents, the new rules also empower the authority to require the applicant to take necessary actions related to the transactions involved in the contravention. As part of the process, compounding of the contravention is permitted only after all administrative actions are completed, such as obtaining the necessary approvals from the Government or RBI, finalizing pending filings, unwinding transactions, etc. The compounding authority is now authorized to mandate the completion of any other actions required to compound the contravention, without needing to return the application, while ensuring that the process is completed within the prescribed timeline.
These recently introduced changes undoubtedly simplify the existing FEMA compounding process. The provision of multiple payment options aligns with current trends, offering greater flexibility. Increasing monetary thresholds for handling compounding matters and discontinuing pending adjudication actions for compounded cases should help improve the efficiency of compounding officers, ensuring quicker resolution of cases. Additionally, the revision of reporting formats and clarifications on matters such as the treatment of currently pending applications is a positive step.