Meaning And Objective:
Compounding is a remedy under which a contravener has an opportunity to settle a contravention committed by him after paying off penalty without going in for litigation after the contravener acknowledges voluntarily having committed the contravention. The objective of the compounding of contravention is to provide the comfort to the citizens and Corporate Community and to save them from prosecutions. By voluntarily admitting to contravention, any contravener can also save the transaction costs, as it would get away by paying a smaller penalty levied by Reserve Bank of India (RBI). However, any willful, malafide and fraudulent transaction is not compoundable by RBI.
Legal Provisions Under FEMA:
Contravention is the breach of the provisions and norms under Foreign Exchange Management Act (FEMA). FEMA permits the compounding of contraventions and empowers RBI to compound the contravention of any of the provision of FEMA except those which can only be compounded by Directorate of Enforcement (dealing essentially with Hawala Transactions).
Power To Compound:
Delegation of powers to Regional Offices:
As a measure of customer service and in order to facilitate the operational convenience and functioning, compounding powers have been delegated to the Regional Offices of RBI. The following are some of the contraventions that can be compounded by the Regional Offices of RBI:
- Delay in reporting inward remittance received for issue of shares;
- Delay in filing form FC(GPR) after issue of shares;
- Delay in filing the Annual Return on Foreign Liabilities and Assets (FLA);
- Delay in issue of shares/refund of share application money beyond 60 days, mode of receipt of funds etc.;
- Violation of pricing guidelines for issue/transfer of shares;
- Issue of ineligible instruments;
- Issue of shares without approval of RBI or Government, wherever required;
- Delay in submission of form FC-TRS on transfer of shares from Resident to Non-Resident;
- Receiving investment in India from non-resident or taking on record transfer of shares by investee company;
- Delay in reporting the downstream investment made by an Indian entity or an investment vehicle in another Indian entity;
- 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;
- 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.
Delegation of powers to FED CO Cell:
The officers attached to the FED, CO Cell at New Delhi office are authorized to compound the following contraventions:
- Acquisition and transfer of immovable property in or outside India;
- Establishment in India of Branch office, Liaison Office or project office;
- Contraventions falling under Foreign Exchange Management (Deposit) Regulations.
It is important to note that where a contravention has already been compounded, there can’t be any initiation or continuation of proceedings in respect of the contravention so compounded.
Quantum Of Penalty:
The maximum amount of penalty which can be imposed during the compounding process are defined under FEMA. They are:
- up to thrice the sum involved in contravention, where the amount is quantifiable; or
- up to Rupees Two lakh, if amount is not directly quantifiable; and
- Where the contravention is a continuing in nature, the penalty may extend to Rs. 5000/- for every day after the first day during which the contravention continues.
Time Limit For The Payment Of Compounding Penalty:
The contravention penalty should be paid within 15 days from the date of the order. In case of non-payment of the amount indicated in the compounding order within 15 days of the order, it will be treated as if the applicant has not made any compounding application to RBI. Such cases will be referred to the Directorate of Enforcement for necessary action.
Pre-Requisite For Compounding Process:
Following are pre-requisites those need to be considered before applying for Compounding with RBI:
- A contravention compounded within previous 3 (three) years can’t be compounded again. However, any subsequent contravention committed after the expiry of 3 (three) years from the date on which the contravention was previously compounded shall be deemed to be a first contravention.
- Any contravention made in a transaction where prior approval/ permission from the Government/ statutory authority is required and have not been obtained, then such contraventions will not be compounded unless the required approvals are obtained from the concerned authorities.
- Contraventions which are sensitive and serious in nature involving money laundering, terror financing or affecting sovereignty and integrity of the nation or cases where the contravener failed to pay the sum for which contravention was compounded within the specified period in terms of the compounding order; such offences shall be referred to the Directorate of Enforcement for further investigation.
- Cases where adjudication has been done by the Directorate of Enforcement and an appeal has been filed before the Special Director or Appellate Tribunal.
Process Of Compounding:
- An application in the prescribed format and alongwith other required documents for compounding shall be submitted alongwith demand draft of Rs. 5000/- drawn in favor of “Reserve Bank of India” and payable at the concerned office.
- On receipt of the application for compounding, the RBI shall examine the application based on the documents and submissions made in the application and assess whether contravention is quantifiable and, if so, the amount of contravention.
- The RBI may call for further information, records or other documents. In case the contravener fails to submit the additional information called within the specified period, the application shall be liable for rejection.
- In case the application has to be returned where required approvals are not obtained from the authorities concerned or in case of incomplete application or for any other reason, the application fees of Rs. 5,000/- as received along with the application documents will be returned by crediting the same directly to the applicant’s account through NEFT.
- Where compounding application is completed in all aspect, the Compounding order shall be passed within 180 days from the date of application. However, where there is a sufficient cause for further investigation, the RBI may refer the matter to Directorate of Enforcement.