The Act FEMA (Foreign Exchange Management Act), 1999 in India has been enacted for effective management of transactions with respect to external trade and foreign payments. It was bought forward with the intent of orderly working of foreign exchange markets, compliances of their procedures/formalities and handling of related offenses.
With growing offenses by entities and mismanagement of their legal proceedings, RBI introduced the concept of compounding of offenses under the Act, FEMA. While the act majorly stresses for imposing the monetary penalties than legal prosecutions, the only issues lie with the compounding of offenses which include both imprisonment and fine and which exceeds the limit of the applicability of compoundable provisions in nature.
Sections governing offenses and their compounding under FEMA
- Section 13: This section imposes a penalty up to thrice the amount to be charged on the person in case of any contraventions of the provisions of the act or any directions issued by RBI for FEM (Foreign Exchange Management).
- Section 14: This section defines the civil penalties, imprisonment rules and the adjudicating authority for dealing with contraventions of the provisions of the act by any person.
- Section 15: The section specifies for compounding of all such offenses, for which a penalty has been prescribed in Section 13.
Compoundable offenses in FEMA
Reserve Bank of India (“RBI”) with specific mentions to breach or contravention of the provisions has issued directions for compounding of about all sections of the act except the Section 3(a) which needs confirmation of the Directorate of Enforcement (DE).
Some specified compoundable offenses under the jurisdiction of RBI include :
- Offenses Compoundable with approved assistance of respective officer of RBI based on the sum involved in contravention :
- Up to 10 lakh – Assistant General Officer
- More than 10 lakh but less than 40 lakh – Deputy General Manager
- More than 40 lakh up to 100 lakh – General Manager
- More than 100 lakhs – Chief General Manager
- Compoundable by regional offices of RBI, for offenses related to :
- Delay in reporting or non-reporting of inward remittance.
- Delay in filing returns and other forms.
- Violation of pricing guidelines for transfer or issue of shares
- Issue of ineligible instruments
- Un-accounted transactions etc.
- Compoundable by Central office of RBI, for offenses related to:
- Contravention of provisions related to acquisition and transfer of immovable property inside or outside India.
- Contravention related to establishments and provisions falling under subsidiary acts and laws of FEMA (like – Foreign Exchange Management (Deposit) Regulations, 2000, etc).
Procedure for Compounding
For compounding of offenses, the first and foremost thing is to get the approval of the required authority and for that following needs to be followed:
- An application (as per the format prescribed in Annexure II of Foreign Exchange (Compounding Proceedings) Rules, 2000) along with the required amount (Rs 5,000 as defined or as timely prescribed by RBI is to be submitted.
Additionally, the following needs also to be enclosed:
– Details of application specifying contravention section, borrowing details, liaison office details and other details as per compounding rules.
– Copy of MOA (Memorandum of Association ).
– Latest Audited Balance Sheet.
– Undertaking or a declaration that the person/entity is not under any special investigation by CBI, DoE, etc.
- The compounding authority shall call for submission of further documents or details for proceedings of the case.
- The compounding authority than on the basis of facts and additional information shall accept or reject the application.
- Compounding shall close by issuing of the compounding order by the competent authority.
Things to Know
- The application so received shall have to be disposed of by the authority of RBI within 180 days of receipt of application.
- Penalty for final closure of compoundable offense shall range from Rs 10,000 to even Rs 5 lakh depending on the severity of the issue.
- The contravention penalty by the defaulting entity/individual shall have to be paid within 15 days of the issue of the said order.
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