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Compounding in FEMA

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A presentation to give an overview of the process of compounding of offences and contraventions under Foreign Exchange Management Act in India

A presentation to give an overview of the process of compounding of offences and contraventions under Foreign Exchange Management Act in India

Published in: Business, Economy & Finance

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  • 1. Compounding of Non-Compliances under FEMA CA. VIJAY GOEL VIJAY@VKGC.COM +919810129835
  • 2. FEMA compliances- A tight rope walk 49 sections 5 sets of Rules 22 sets of Regulations Circulars Notifications Directions Orders Conditions
  • 3. Despite best possible care, contraventions do happen…….. Delayed or non-filing of Annexure II (Intimation on receipt of share application/capital money). Delayed or non-filing of FC-GPR form for allotment of share capital to non- resident. Delayed or non-filing of Annual Return of Assets and Liabilities. Delayed or non-filing of Softex Form. Delayed or non-filing of ODI Form. Delayed or non-filing of Annual Activity Report for Liaison Office or Branch Office. Delayed or non-filing of Form IPI Establishment of Branch without permission Advance against export order received remaining outstanding for longer period. Transfer of shares between residents and non-residents without filing of FC-TRS Form.
  • 4. No condonation mechanism We may have valid and genuine reasons for such innocuous contraventions. But FEMA does not provide for condonation by the Authorities.
  • 5. Implication in that case….. Provision in law What does it provide for? Chapter IV of FEMA deals with  Penalty can be levied upto contraventions and penalties- 300% of the amount involved, if quantifiable. Sec 13: Penalties  If not quantifiable, penalty Sec 14: Enforcement of the upto Rs 2 lac may be levied. orders of Adjudicating  If contravention is a continuing Authority one, additionally Rs 5000 per Sec 15: Power to compound day on continuation may be contravention. levied.
  • 6. Penalty Process Penalty can be levied only on Adjudication of contravention, by the Adjudicating Authority. A long drawn process requiring filing of complaint, issue of notice, submission of replies, follow of judicial procedure, exercise of judicial powers, inquiry, hearings, and not so early an order. Then, possibility of going in appeals. Involves cost in terms of money, time and energies. Till the final disposal of the adjudication, a sword is hanging on head.
  • 7. Alternative available by way of compounding Sec 15 of FEMA provides for compounding. Accordingly, any contravention under section 13 can be compounded. Compounding means, to compromise or settle while agreeing to the contravention, and paying the required fine. An alternative to litigation. In various laws such provisions are there. For example, under sec. 621A in Companies Act, 1956, under sec. 24A of SEBI Act 1995, under sec. 320 of Code of Civil Procedures. Most common instance of compounding is when you are caught jumping a red light and pay against a challan under sec 200 of the Motor Vehicles Act.
  • 8. Compounding landscape…… Sec 15 The Foreign Exchange (Compounding Proceedings) Rules, 2000. Master Circular by RBI dated July 2011.
  • 9. Sec 15 Any contravention under sec 13. Application by person committing contravention. Within 180 days of the receipt of application. Directorate of Enforcement and RBI. Once compounded, no further proceedings to initiate or continue.
  • 10. Stages for compounding and effect Before Adjudication After Adjudication Suo moto, or on a  Situation where complaint memorandum by RBI or has been made. other Authorities.  In such case, on No inquiry to be held for compounding, it will be adjudication in relation to brought to the notice of the such contravention Adjudicating Authority.  Discharged.
  • 11. Compounding Process Without adjudication In adjudication Suo moto or on a Memorandum by  Complaint by an Authorised Officer, to the authorities. RBI generally advises the Adjudicating Authority. the concerned persons to opt for  Inquiry by the Adjudicating Authority. compounding as and when such  Either during the adjudication process or contraventions come to its notice. after the adjudication, application can Application to Compounding be filed before the Compounding Authority in the prescribed form along Authority in the prescribed form along with fee. with fee. Hearing  Hearing, Compounding order, payment as per order and certificate by Compounding order Compounding Authority. Payment as per compounding order Certificate by Compounding Authority.
  • 12. The Foreign Exchange (Compounding Proceedings) Rules, 2000. Jurisdiction Compounding by ED Compounding by RBI For contravention under sec 3(a)- (cases of  For contraventions other than under hawala transactions) sec 3(a) Jurisdiction based on amount involved-  Jurisdiction based on amounta) Upto Rs 5 lac……Deputy Director involved-b) Above 5 lac but less than Rs 10 lac….Additional Director a) Rs 10 lac or below…..Assistant General Manager.c) 10 lac or more but less than Rs 50 lac…Special Director b) Above Rs 10 lac but less than Rs 40 lac…..Deputy General Manager.d) 50 lac or more but less than Rs 1 crore…Special Director with Deputy Legal c) Rs 40 lac or more but less than Rs 100 lac………General Manager Advisor d) Rs 100 lac and above….Chief Generale) One crore or more……Director of Enforcement Manager. with Special Director
  • 13. Where to file the application for compounding? For ED cases For RBI cases Director The Compounding Authority, Directorate of Enforcement [Cell for Effective implementation New Delhi. of FEMA (CEFA)], Foreign Exchange Department, Application fee of Rs 5000 by DD 5th floor, Amar Building, in favour of the Compounding Sir P.M. Road, Authority. Fort, Mumbai- 400001.  Application fee of Rs 5000 by DD in favour of Compounding Authority.
  • 14. RBI’s Master Circular No.8 /2011-12 dated July 01, 2011 RBI for its own set of compounding cases, has given guidance on compounding process in the Master Circular. Key features are……….
  • 15. Master Circular- Key features (contd.) RBI to assess whether  Similar contravention within 3 years of contravention is compoundable, compounding, not compoundable. and if so quantifiable.  Contravention not to be compounded unless the required approvals are Nature of contravention to be obtained from the concerned ascertained on the following- authorities. a) technical and /or minor,  Contraventions having a money requiring cautionary advice. laundering angle, national security b)Serious, warranting concern and/or involving serious infringement of the regulatory compounding. framework, or where the contravener c) Involves money laundering, fails to pay the compounding amount, national and security concerns to be referred to Directorate of involving serious infringement of Enforcement for investigation/action. the regulatory framework.
  • 16. Master Circular- Key features (contd.) Factors to be considered for d) the repetitive nature of the passing compounding order- contravention, the track record and/or history of non-compliance a) the amount of gain of unfair of the contravener. advantage, where quantifiable, made as a result of contravention. e) contravener’s conduct in undertaking the transaction and b) the amount of loss caused to disclosure of full facts in the any authority/agency/exchequer application and submissions made as a result of contravention. during the personal hearing. c) economic benefit accruing to f) any other factor considered the contravener from delayed relevant and appropriate. compliance or compliance avoided.
  • 17. What, if you do not pay as per Compounding Order? Compounding Order becomes void. Complaint to ED/Adjudicating Authority. Enquiry and adjudication of contravention. Penalty Order Can opt for Appeal to Special Director Appellate order Enforcement of order
  • 18. FORM (To be filled in duplicate and shall be accompanied by certified copy of the Memorandum issued)S No Particulars Particulars of the Applicant1 Name of the applicant2 Full Address of the Applicant (Including Phone and Fax No. And Email id)3 Whether the applicant is resident in India or resident outside India.4 Name of the Adjudicating Authority before whom the case is pending.5 Nature of the Contravention [according to sub-section (1) of Section 13]6 Brief Facts of the case7 Details of fee for application of Compounding8 Any other information relevant to the case.
  • 19. Form (contd.) I/we declare that the particulars given above are true and correct to the best of my knowledge and belief and that I/we am/are willing to accept any directions/order of the Compounding Authority in connection with compounding of my/our case. Dated…… Signature…….
  • 20. Practice Tips Application Form to be duly filled in. Updated email / fax to be mentioned – changes to be promptly notified as correspondence is primarily through these means Specific reference to Act, Rules, Regulations, etc. to be incorporated Admit the contraventions Prayer for nil penalty and only an administrative cautionary notice
  • 21. Practice Tips (contd.) Attach an annexure / write-up to the Form giving out: a) Detailed background about activities of the applicant b) Circumstances surrounding the contraventions c) Emphasize that contravention are not repetitive or wilful – provide details of other compliances / filings in time d) Emphasis of filings on discussions / guidance from Authorized Dealer / Banker (their clarification letter or that of recommendations, etc) e) Emphasize if contraventions have happened only at a particular phase e.g. start-up, key employees left, etc. and not otherwise. f) Remedial actions taken e.g. appointment of consultants, lawyer, legal head, etc. g) Provide annexure / supporting documents e.g. FIPB approval, Audited Financials. h) Statements, Letters and Correspondence with RBI, etc.
  • 22. Practice Tips (contd.)At hearing stage: Director / senior officer from company to accompany Authorized Representative (A/R) Explanation / background about company to be given by company representative Averment by the company representative Factual and legal submissions by A/R Produce evidence / documents of compliances, developments and approvals obtained post filing of application File additional written submissions / details based on requirements / discussion in the hearing
  • 23. Practice Tips (contd.)Order Stage Compare application with order with respect to sections / statute and nature of contraventions Ensure all arguments are properly captured Patent or apparent Mistakes in facts / numbers File letter with the RBI for reference and record Ensure payment within 15 days of Order date if agree with the Order May not agree with the Order, no payment and await further developments.
  • 24. Questions?
  • 25. Thank you CA VIJAY GOEL+91 98 101 29835 vijay@vkgc.com