Articles

Compounding of Contravention under Foreign Exchange Management Act, 1999

By July 17, 2020 No Comments

A. INTRODUCTION:

Contravention is a breach of the provisions of the Foreign Exchange Management Act (FEMA), 1999 and rules/ regulations/ notification/ orders/ directions/ circulars issued thereunder. Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and seeking redressal. The provisions of section 15 of FEMA, 1999 permit compounding of contraventions. The Reserve Bank is empowered to compound any contraventions as defined under section 13 of FEMA, 1999 except contraventions under section 3(a), for a specified sum after offering an opportunity of personal hearing to the contravener.

B. POWERS TO COMPOUND BY RESERVE BANK:

Any contravention shall be compounded only if the amount involved in such contravention is quantifiable. Based on the sum involved in contraventions the following officials of the Reserve Bank of India have the power to compound.

 

S. No Sum Involved in Contravention Officer of RBI
1. 10 Lakhs or below  Assistant General Manager
2. More than 10 Lakhs but less than 40 Lakhs Deputy General Manager
3. 40 Lakhs or more but less than 100 Lakhs General Manager
4. 100 Lakhs or more Chief General Manager

C. OFFENCES THAT CAN BE COMPOUNDED:

1. BY REGIONAL OFFICES:

The Reserve Bank of India has delegated the powers of compounding for the following contraventions to all Regional Offices. Kochi and Panaji Regional offices can compound the contraventions for amount of contravention below Rupees One hundred lakh. The contraventions for amounts of Rupees One hundred lakh 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.

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

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

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

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

e. Violation of pricing guidelines for issue of shares.

f. Issue of ineligible instruments

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

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

i. Taking on record transfer of shares by investee company.

j. 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.

k. 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.

l. 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.

2. BY FED, CO CELL, NEW DELHI:

The Reserve Bank of India has delegated the powers of compounding for the following contraventions to FED, CO, Cell at New Delhi office.

a. Contraventions relating to acquisition and transfer of immovable property outside India.

b. Contraventions relating to acquisition and transfer of immovable property in India.

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

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

D. PRE-REQUISITE FOR COMPOUNDING:

a. A contravention committed by any person within a period of three years from the date on which a similar contravention committed by him was compounded under the Compounding Rules, such contraventions would not be compounded and relevant provisions of the FEMA, 1999 shall apply.

b. Contraventions requiring proper approvals or permission from the Government or any statutory authority concerned are compoundable only after required approvals are obtained from the concerned authorities.

c. 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.

d. 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.

E. PROCEDURE FOR COMPOUNDING:

1. Application for compounding to be submitted to the compounding authority along with demand draft of Rs. 5000/- along with the following:

a. Application in the format prescribed in the Foreign Exchange (Compounding Proceedings) Rules, 2000.

b. Details relating to Foreign Direct Investment, External Commercial Borrowings, Overseas Direct Investment and Branch Office / Liaison Office, as applicable in form Annex- II of the Foreign Exchange (Compounding Proceedings) Rules, 2000.

c. a copy of the Memorandum of Association

d. latest audited balance sheet

e. an undertaking in form Annex- III of the Foreign Exchange (Compounding Proceedings) Rules, 2000 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.

f. ECS mandate and details of bank account of the Applicant as per Annex- III of the Foreign Exchange (Compounding Proceedings) Rules, 2000.

2. The Application is examined based on the documents and submissions made and assess the contravention is quantifiable, and if so, the amount of contravention.

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

4. If the contravener fails to submit the additional information/documents called for within the specified period, the application for compounding will be liable for rejection.

F. PENALTY FOR COMPOUNDING:

The amount imposed is calculated based on guidance note given below:

Type of Contravention Formula
1. Reporting Contraventions

 

a. Delay in reporting Inward Remittance, filing of Form FCGPR, Submission of  Form FC-TRS, Taking on record transfer of shares by investee Company

 

b. Non submission of ECB Statements

 

c. Non reporting/delay in reporting of acquisition/setup of subsidiaries/step down subsidiaries /changes in the shareholding pattern

 

d. Any other reporting contraventions (except those in Row 2 below)

Fixed amount : Rs10000/- (applied once for each contravention in a compounding application) +

 

Variable amount as under:

Upto 10 lakhs: 1000 per year

Above 10 Lakhs & below 40 Lakhs: 2500 per year

40 lakhs or more and below 100 lakhs: 7000 per year

Rs. 1-10 Crore: 50000 per year

Rs. 10-100 Crore: 100000 per year

Above 100 Crore: 200000 per year

Reporting contraventions by LO/BO/PO As above, subject to ceiling of Rs.2 lakhs. In case of Project Office, the amount imposed shall be calculated on 10% of total project cost.
In case of non-submission/ delayed submission of APR/ share certificates or AAC or FCGPR (B) or FLA Returns Rs.10000/- per AAC/APR/FCGPR (B) /FLA Return delayed.

 

Delayed receipt of share certificate – Rs.10000/- per year, the total amount being subject to ceiling of 300% of the amount invested.

non-allotment of shares or allotment/ refund after the stipulated 180 days

 

 LO/BO/PO
(Other than reporting contraventions)

Rs.30000/- + given percentage:
1st year   : 0.30%
1-2 years : 0.35%
2-3 years : 0.40%
3-4 years : 0.45%
4-5 years : 0.50%
>5 years : 0.75%
(For project offices the amount of contravention shall be deemed to be 10% of the cost of project).
 All other contraventions except Corporate Guarantees but including all contraventions of FEMA 20(R)/2017-RB dated November 07, 2017 other than FLA Returns Rs.50000/- + given percentage:
1st year : 0.50%
1-2 years : 0.55%
2-3 years : 0.60%
3-4 years : 0.65%
4-5 years : 0.70%
>5 years : 0.75%
Issue of Corporate Guarantees without UIN/ without permission wherever required /open ended guarantees or any other contravention related to issue of Corporate Guarantees. Rs.500000/- + given percentage:
1st year : 0.050%
1-2 years : 0.055%
2-3 years : 0.060%
3-4 years : 0.065%
4-5 years : 0.070%
>5 years : 0.075% In case the contravention includes issue of guarantees for raising loans which are invested back into India, the amount imposed may be trebled.

G. COMPOUNDING ORDER:

a. The Compounding Authority shall pass an order of compounding after affording an opportunity of being heard to all the concerned.

b. The order to be passed as expeditiously as possible as and not later than 180 days from the date of application on the basis of the averments made in the application as well as other documents and submissions made in this context by the contravener during the personal hearings.

c. The time limit for this purpose would be reckoned from the date of receipt of the completed application for compounding by the Reserve Bank.

H. PAYMENT OF COMPOUNDING PENALTY:

a. The amount to be paid by way of demand draft in favor of the “Reserve Bank of India” within 15 days from the date of the order of compounding of such contravention.

b. After a compounding order is passed, the contravener has no right to seek to withdraw the order or to hold that the compounding order is void or request review of the order passed by the Compounding Authority.

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

d. On realization of the sum for which contravention is compounded a certificate in this regard shall be issued by the Reserve Bank subject to the specified conditions, if any, in the order.

Authors: Prashant Jain, Co-Founder & Partner; Prajakta V. Gokhale, Associate; Nisha Jhawar, Associate.

Disclaimer: The content of this article is intended to provide a general guide to the subject matter. For any queries, the authors can be reached at (i) prashant@samistilegal.in (ii) prajakta@rna-cs.com (iii) nisha@rna-cs.co.in.

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