India has laid down a comprehensive foreign control regulatory framework aimed at overseeing the movement of foreign exchange via mandating compliance with the provisions. Nonetheless, both Indian residents and foreign investors frequently encounter challenges in abiding by these provisions, occasionally leading to violations of the law.
As opposed to Foreign Exchange Regulation Act 1947, which treated the violations as criminal offenses subject to penalty and imprisonment, the Foreign Exchange Management Act 1999 (‘FEM Act’) doesn’t provide for imprisonment as a penal provision, and violations are subject to monetary punishments.
The FEM Act also provides for necessary mechanisms to regularize the contravention in the form of compounding and payment of late submission fees.
Regularization of Contraventions
The Act’s framework offers 2 avenues for regularization, namely Late Submission Fees (LSF) or compounding of non-compliances.
The opportunity for regularization by way of LSF has been granted only for the reporting contraventions committed within the period of 3- years from the due date, although in some instances, we have observed that the AD Bank/ Reserve Bank of India has exercised the discretion to grant LSF for the reporting delay exceeding 3 years. The introduction of LSF has proven advantageous, as the process of regularization concludes within a period of 30 days, provided all instructions are adhered to.
All contraventions where LSF can’t be levied can be regularized through the compounding process only.
Compounding of Contraventions
Compounding of contravention can be undertaken either on a suo-moto basis or on the receipt of necessary instructions from the RBI. Anyone desirous of getting a contravention compounded needs to make a necessary application to RBI along with a fee of INR 5000.
Where contraventions are identified through internal due diligence, the organization may decide to file an application suo-moto, if the matter is compoundable. Though there are no legal provisions supporting this, but it is generally believed that suo-moto matters are treated in a more applicant-friendly manner. With respect to the compounding instructions, these instructions are mostly issued as and when a reporting is undertaken with RBI that is beyond 3 years from the due date or where some inspection is undertaken, and contraventions are observed during the same. In case compounding instructions are received, it is advisable to get the contravention compounded. In the case of certain filings, the compliance will only be deemed to be complete when the matter is compounded.
Key things to be kept in mind for Compounding
It is essential to emphasize that meeting all compliance requirements and rectifying the defaults are prerequisites to table a compounding application to the RBI. Further, in cases related to FDI/ODI, RBI looks into past transactions to ascertain whether, apart from the matter for which compounding application, there are other contraventions that need to be compounded. So, the applicant needs to do proper due diligence before submitting the application.
RBI has also decentralized the authority to compound contraventions to its different departments and regional offices, it is crucial to identify the appropriate authority before applying. Incorrect filing may lead to the return of the application.
Following matters can’t be compounded:
- Money Laundering Transactions (Cases involving money laundering, terror financing, or affecting the sovereignty and integrity of the nation are referred to the Enforcement of Directorate)
- Matters under prosecution/ appeal
- Matters compounded within 3 years
- Non-regularized transactions
Computation of LSF and Compounding Penalty
To enhance transparency, RBI has specified a comprehensive matrix that allows contraveners to calculate a provisional amount of LSF/ compounding fees that may be levied by RBI. Hence, based on the type of contravention, individuals or organizations can estimate the financial consequences of the contravention committed. To illustrate this, let’s look at an example below-
ABC Limited issued and allotted 10,000 equity shares at INR 10 to a non-resident investor, however, compliance with the reporting requirement was not done.
Using the matrix issued by RBI, the tentative amount of financial implication for a contravention persisting over 1 year and 10 years is calculated below-
|
Period of Contravention |
1 year |
10 years |
|
Financial Implication |
LSF |
Compounding Penalty |
|
Matrix |
INR 7,500+(0.025%*Amount involved*number of years) |
INR 10,000+ 1,000 per year |
|
Amount Levied |
INR 7,502.5 |
INR 20,000 |
Further, the contravener shall pay the fees/ penalty levied within the stipulated time period. In case of any failure, the application submitted will be deemed as if it was never submitted.
Once the penalty is duly settled, a certificate confirming the completion of the process is issued by the RBI subject to the specified conditions, if any, in the order.
With provisions related to compounding and LSF, RBI has facilitated ease of doing business even when you are on wrong side of the law. Organizations, instead of waiting for compounding instructions, shall suo-moto strive to get their contraventions regularized by way of compounding. It is also important to undertake a timely review of compliances under the FEM Act, so that timely corrective actions can be undertaken and an approach towards a better compliance regime can be adopted.
If you wish to find out how we can help you in regularizing your contraventions, feel free to reach out to us at info@indiacp.com.
