The Foreign Exchange Management Act, 1999 (FEMA) governs all transactions involving foreign exchange in India, regardless of whether they are domestic or international. It mandates compliance with its provisions, and any contravention may attract penal consequences. Contravention means breaking or violating any rules or conditions under the Foreign Exchange Management Act (FEMA), 1999, or any regulations, circulars, or orders made under it. Compounding refers to the process by which the RBI allows a person or entity to voluntary admit a contravention and pay a monetary penalty to resolve the matter legally and expeditiously, thus avoiding litigation and prosecution.
Compounding is a voluntary and time-saving process that helps avoid long legal proceedings and reduce costs. Anyone, whether an individual or a company – who has violated FEMA rules can apply to RBI for compounding.
When to apply for compounding: When a person is made aware of the contravention of the provisions of FEMA, 1999 by the RBI or any other statutory authority or the auditors or by any other means. This can be done voluntarily or after receiving a notice of contravention (Memorandum) from the RBI.
Application for compounding
1. Submit application physically or through PRAVAAH portal either suo moto or based on a Memorandum of Contraventions issued by the RBI.
2. Application fee is INR 10,000 + 18% GST which can be paid by demand draft or online mode. Payment confirmation needs to intimated to RBI within 2 hours in particular format through email.
3. If application is incomplete or fees not paid, then application may be returned back and fees paid initially will not be refunded. However, in case such applications are re-submitted, then the application fee need not be paid again.
4. Intimate to RBI, if there is any change in the contact details/address of applicant during the pendency of the compounding application.
Pre-requisite for Compounding Process
• A company must ensure that it does not repeat the same contravention within 3 years from the date of the previous compounding.
• If the contravention involves activities that require prior approval from regulatory authorities, such approvals must be obtained before submitting the compounding application.
• In cases involving serious violations such as money laundering, terror financing, or matters affecting national security, and where the contravener fails to pay the compounding amount within the specified timeline, the case may be referred to the Directorate of Enforcement for further investigation.
Procedure for compounding
1. RBI will review the compounding application and may ask for more documents and information from the applicant and which needs to be submitted within specified time as mentioned by the RBI.
2. In case, additional information not submitted, the application for compounding shall be liable to be returned.
3. RBI guidelines has provided the compounding matrix, however, the actual compounding amount payable may sometimes vary, depending on the circumstances of the case.
Note: The compounding amount payable shall not exceed 300% of the sum involved in contravention.
Issue of the Compounding Order
1. The RBI will issue the compounding order as quickly as possible, and in any case, within 180 days from the date the complete application is received by the RBI. Before doing so, the applicant will be given a chance to be heard. The decision will be based on the details given in the application and any documents or explanations shared during the hearing.
2. If you choose to go for a personal hearing, the RBI encourages you to attend it yourself – either in person or virtually- rather than sending a lawyer or consultant.
3. Whether you attend the hearing or not will not affect the penalty amount decided in the compounding order.
4. If you don’t ask for a hearing, or if you miss the scheduled hearing, the RBI may pass the order based on the documents and information already available.
Compounded amount payable
1. Once the RBI issues the compounding order, the amount mentioned in it must be paid within 15 days through demand draft or online mode.
2. After making the payment, intimate to RBI within 2 hours of payment as per specified the format provided by RBI in guidelines.
3. Once the compounding order is passed, the applicant cannot ask to cancel or withdraw it, claim it is invalid or request a review of the order.
4. If the person fails to pay the compounding amount within the given time, it will be assumed that they never applied for compounding.
5. If the RBI decides not to compound a contravention, the regular legal provisions under FEMA will apply to that person.
6. After the payment is received by the RBI, a compounding certificate will be issued, provided all conditions in the order are met.
Why Opt for Compounding?
• Avoid litigation and prosecution;
• Timely resolution of non-compliances;
• Improves compliance history and reputation;
• Ensures eligibility for future foreign investment and banking transactions.
At S.K. Patodia & Associates LLP, we assist clients in:
• Identifying contraventions under FEMA;
• Preparing and filing Compounding Applications;
• Representing before RBI and related authorities;
• Drafting responses to RBI queries;
• Ensuring post-compounding compliance.
