Overview

Section 15 of the Foreign Exchange Management Act, 1999 (“FEMA”) read with Foreign Exchange (Compounding Proceedings) Rules, 2000 deals with regulatory framework concerning compounding of contravention. Now, the Ministry of Finance has vide notification no G.S.R. 566 (E). dated 12/09/2024 notified Foreign Exchange (Compounding Proceedings) Rules, 2024 ("Rules") in supersession of the earlier rules. The primary aim of these Rules is to streamline the compounding process by clearly defining the offenses eligible for compounding and identifying the officers authorized to handle such contraventions. Key changes include streamlined processing of compounding applications, the introduction of digital payment options for fees and penalties, and simplified provisions to remove ambiguities. A summary of the key proposals is discussed hereinafter:

Compounding Authorities

All contraventions under FEMA except those related to clause (a) of section 3 of shall be compounded by RBI. Contraventions related to clause (a) of section 3 shall be compounded by the Director of Enforcement.

Clause (a) of Section 3 prohibits dealing in or transferring any foreign exchange or foreign security to anyone who is not an authorized person.

The compounding application shall be handled as per the below-given matrix:

*the monetary limits have been raised.

No compounding within 3 years:

No offence committed within a period of 3 years from the date on which a similar offence has been compounded shall be entertained under the new rules. After a 3-year period, a second or subsequent contravention will be considered a first contravention.

Non-Compoundable Contraventions

The Rules specify certain contraventions that are not eligible for compounding:

• Where the amount involved is not quantifiable.
• Where the provisions of section 37A (provisions relating to assets held outside India) of the FEMA are applicable.
• When the Enforcement Directorate (ED) considers the contravention to involve serious offenses such as money laundering, terrorism financing, or threats to national sovereignty and integrity.
• Where the Adjudicating Authority has already passed an order imposing penalty under section 13 (Penalties) of the FEMA.
• When the compounding authority believes the contravention requires further investigation by the ED to determine the contravention amount under Section 13 of FEMA.

Discontinuation of Adjudication

Once the contravention is compounded before the adjudication starts, no further inquiry shall be initiated or continued for that contravention against the person involved.

Discharge on compounding of contravention

If the contravention is compounded after the complaint under clause (3) Section 16 of FEMA, such compounding shall be brought to the notice of the relevant adjudicating authorities and on such notice, the person against whom the contravention is so compounded shall be discharged

Clause (3) Section 16 states no Adjudicating Authority shall conduct an inquiry unless a written complaint is filed by an officer authorized by the Central Government

Procedure for Compounding

Upon receiving a complete application in the prescribed form, the compounding authority, shall provide an opportunity to be heard to the applicant, and pass the compounding order within 180 days from the date of receipt of such application.

Additionally, the fee for filing a compounding application has been increased from INR 5,000 to INR 10,000. This fee must be submitted to either the RBI or the Director of Enforcement, as applicable, at the time of filing the application.

Payment of the Compounding Penalty

Digital payment methods such as NEFT/RTGS have been introduced for the payment of compounding penalties, alongside the traditional method of payment via demand draft in favor of the compounding authority.

Payment must be made within 15 days of the compounding order. Failure to pay within this time frame will result in the application being considered void, and the provisions of FEMA will apply to the contravention.

Continuation of pending proceedings

Any compounding applications pending when these Rules are introduced will be governed by the provisions of the Foreign Exchange (Compounding Proceedings) Rules, 2000.

Application Form

A new application form has also been introduced.

The new rules don’t appear to have introduced any drastic changes in the compounding regime. Apart from the introduction of digital payment options and a dealing matrix for handling compounding cases, it seems more like an old wine in a new bottle. What needs to be seen is whether RBI tinkers the compounding fee matrix provided in the Compounding Master Directions.

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