2. 1
3
4
5
6
7
Index
Key statistics on compounding orders
Key regulations for corporates
Consequences of non-compliance
Overview of compounding process
Glossary
Our next webinar series
2
Important web links
4. 4
Key statistics on compounding orders
78%
16%
1%
2%
3%
FDI
ODI
ECB
LO/ BO/ PO
Others
Contraventions compounded in Year 2020 and 2021#
Compounding over last 5 years
# Based on compounding orders available at RBI website as on June 4, 2021
Illustrative list of common contraventions
0
500
1000
1500
2000
2500
3000
3500
592 169
2017
2020
2018
2019
2021#
Number of cases
Amount of penalty levied
506 486 850
3,113 Mn
412 Mn
443 Mn
197 Mn
35 Mn
Delay in issue of shares/
refund of share application
money
Delay/ non submission of
FCTRS, FCGPR and ARFLA
Issue of non permissible/
ineligible instruments
FDI
Delay/ non submission of
APR
Delay in obtaining share
certificate
Non permissible method
of funding
ODI
Delay/ non submission of
ECB 2
Not obtaining LRN
Utilising ECB proceeds for
activities, not permissible
under the regulations
ECB
Delay/ non submission of
AAC
Carrying out impermissible
activities
Delay in seeking approval
for set up
LO/ PO/ BO
Delay in receipt of export proceeds
Delay in shipment against advance
received for export
Setting off export receivables
against imports payables without
prior approval
Delay in payment for import
Export/ Import
Amounts in INR
6. Foreign Direct Investment
Issues
Can consideration for transfer of shares between
Resident and PROI be paid on deferred basis?
Can an Indian Company issue equity instruments
against legitimate dues payable to non-residents?
In case of change of hands of Indian Co shares
between two non-residents, does pricing
guidelines apply?
In a case where there is a failure to bring the
shareholding in line with the extant FDI policy
within the time period given by the Regulators (for
instance, recent digital news media guidelines)
what could be the penal exposure?
What are the common reporting contraventions/
defaults made by Indian companies under the
FDI Regulations?
Investments by PROI in Indian company subject to entry route conditions,
sectoral caps, investment limits and attendant conditions. Most sectors
currently under Automatic route
Equity instruments to be issued within 60 days from date of receipt of funds. If
not, amount to be refunded within 15 days from expiry of 60 days
Indian company can issue ESOP/ sweat equity shares to employees/ directors
who are PROI
PROI holding equity instruments in Indian company can transfer to resident
Indian by way of sale or gift. In case of sale, pricing guidelines to apply
Resident Indian holding equity instruments of Indian company on non-
repatriation basis can transfer to PROI by way of gift with prior approval of RBI,
subject to conditions. Doner and Donee to be relatives
Indian entity receiving downstream investment to also comply with entry route,
sectoral caps, pricing guidelines and other conditions
Downstream investment by LLP controlled by PROI allowed in Indian company
operating in sectors where 100 percent investment is allowed under automatic
route with no performance linked conditions
01
02
03
04
05
06
07
6
$
$
$
$
7. 7
Issues
Can an ODI investment be done at a price
exceeding fair value (as per valuation
certificate) under general permission?
Does Indian Party need to furnish a valuation
certificate while making subsequent remittance
towards additional equity in its own overseas
WOS?
Can loan be granted by an Indian subsidiary to
its foreign parent company without prior
approval?
Is deferred payment allowed in an ODI
transaction?
Is there a reporting requirement for Indian
Party, in case of diversification of activities/ set
up of step-down subsidiary/ alteration in share-
holding pattern in existing JV/ WOS?
Whether swap of shares held by investors
(resident & non-resident) in Indian company for
shares in overseas company require RBI
approval?
Indian party may invest/ undertake FC in overseas entity up to 400 percent of its
net worth (subject to USD 1 billion per FY). Corporate Guarantee to fall within
this limit. Share certificates to be received within 6 months from date of
remittance/ capitalisation
01
Indian Party may extend loan to overseas JV/ WOS in which it has equity
participation. FC without equity participation considered under Approval route
02
All dues receivable from overseas JV/ WOS, to be repatriated to India within 60
days of its falling due or time limit prescribed under FEMA regulations
03
5
Swap of shares - valuation to be done by Category I Merchant Banker registered
with SEBI or Investment Banker/ Merchant Banker outside India registered with
regulatory authority in host country. DPIIT approval required for Approval Route
05
In case of divestment, Indian Party to report within 30 days and repatriate sales
proceeds of investment not later than 90 days
06
APR to be filed by December 31 and ARFLA by July 15
07
Indian Party can capitalise payments due from foreign entity. Capitalisation
beyond prescribed period of realisation requires prior RBI approval
04
Overseas Direct Investment
8. External Commercial Borrowings
8
ECB Regulations govern loans/ borrowings by eligible Indian entities from outside India. Automatic route covers
bank loans, debt securities such as bonds, non-convertible/ optionally convertible preference shares or
debentures, foreign currency convertible bonds, RDBs, finance lease, etc, subject to following conditions:
Can ECBs be converted into equity with
approval from AD Bank? Are there any
underlying conditions?
Can an Indian entity drawdown ECB
before obtaining LRN?
Can delay in reporting of drawdown
before obtaining LRN or in submission of
Form ECB 2 returns be regularised by AD
Banks or does it require compounding?
Can the option of late submission fees be
resorted to more than once?
Whether breach of all-in-cost ceiling of an
ECB is examined on a year-on-year basis
or on average basis for tenure of ECB?
RDBs were specifically governed under
ECB and foreign group companies were
prohibited from subscribing to RDBs of
Indian company. Has this restriction been
relaxed in the new ECB regulations?
Issues
* Benchmark rate means 6 months LIBOR or any other 6 month interbank interest rate applicable to currency of borrowing (in case of FCY denominated
ECB) and prevailing yield of Government of India securities of corresponding maturity (in case of INR denominated ECB)
Eligible borrower: All entities eligible to receive FDI can raise
ECB
01
Recognised Lenders: Lender should be resident of FATF or
IOSCO compliant country
02
MAMP: ECB shall generally have MAMP of 3 years but in case of
specified categories - MAMP ranges from 1 year to 10 year
based on end use of ECB
03
All-in-cost ceiling: Benchmark rate plus 450 bps spread.
Includes rate of interest, fees, charges, guarantee fees, export
credit agency charges, whether paid in foreign currency or INR
04
LRN: Borrowers required to submit duly certified Form ECB to
obtain LRN
05
End use: ECB proceeds cannot be utilized for activities specified
in negative list
06
ECB
Regulations
Reporting: Borrowers to report actual ECB transactions through
Form ECB 2 return through AD Bank on monthly basis
07
9. Liaison office/ Branch office/ Project office in India
Permitted set of activities
LO - representing parent/ group company, promote export
and import, promote technical collaborations between
parent/ group companies and Indian companies and act
as communication channel
BO - activities in which parent company is engaged. May
also export/ import goods, act as buying/ selling agent in
India, etc
PO - execution of projects in India and related activities
Issues
Can LO/ BO/ PO have more than one bank
account in India?
What could be the grounds on which
validity is extended for LO/ PO?
Can LO/ PO continue its operations in India
even after the expiry, where application for
renewal has been placed before expiry of
validity and yet to be disposed/ dealt with?
Can LO/ BO establish additional offices and
undertake additional activities in India? Are
there any approval requirements?
Can LO be converted into BO? If yes, what
are the prescribed conditions and
requirements?
9
Foreign
Company
LO/ BO/ PO can open a bank account in India
through AD Bank
LO/ BO/ PO required to furnish AAC, audited FS
and other supporting documents by 30
September of next FY
Existence of LO and PO only for period approved
by RBI and extendable post approval of RBI
through AD Bank
BO/ PO may repatriate profits (net of applicable
Indian taxes) outside India on production of
requisite documents to AD Bank
1
2
3
4
5
PROI can open LO/ BO/ PO in India without prior RBI
approval. For LO/ BO, UIN to be obtained from RBI
(except banking and insurance companies and setup
of BO in SEZ subject to certain conditions). NR
Applicant to fulfill financial track record.
10. Setting up branch office outside India by an Indian Company or LLP
Issues
Foreign Branch
Indian Company
What activities can such BO
undertake and are there any
restrictions on business operations?
Indian head offices are required to
furnish an audited yearly statement
showing receipts under 'off-site' and
'on-site' contracts undertaken by the
overseas office, expenses and
repatriation thereon, to AD Banks. Is
this compliance generally
observed?
Firm/ Company incorporated in India can open foreign currency
account with banks outside India for funding/ setting up of BO
outside India. Outward remittance can be made to such bank
account for funding normal business operations of BO, subject to
conditions
Export and Foreign currency account regulations prescribe
conditions and monetary thresholds for permissibility of remittances
for meeting initial and recurring expenses of BO set up outside India.
Overseas Branch permitted to conduct normal activities of Indian
entity. Surplus funds to be repatriated into India HQ
Bank account opened needs to be closed and account balances
repatriated to India:
− If overseas BO is not set up within 6 months of opening the
account, or
− Within one month of closure of overseas BO
01
02
03
10
11. Export/ Import of Goods and Services
11
Issues
1
2
3
4
5
6
7
What are conditions for set-off of export receivables and import
payables with same overseas party?
Is setting off a transaction in goods with that of services
permitted?
What is mechanism of centralised settlement arrangement
through which an AD Bank may allow a company to set-off
outstanding export receivables against outstanding import
payables with overseas group/ associate companies either on net
basis or gross basis?
Whether following provisions are applicable to "export of services"
− permissibility of third-party payments
− write-off of unrealised export bills and
− timeline for export where advances received
Is there a requirement of CA certificate in case of export of non-
physical goods, similar to those under import regulations?
What are specific timelines for completion of import where
advance payments have been made?
Can a unit located in DTA raise an invoice on an SEZ unit in
foreign currency?
Can an Indian exporter receive refundable non-interest-bearing
deposit from overseas importer?
Can Indian exporter collect export proceeds in an overseas bank
account?
Export proceeds realisation and repatriation within 9 months from date of export for
both SEZ/ STPI and non SEZ/ STPI units. AD Bank permitted to extend period for
up to 6 months
Shipment of goods within 1 year from the date of receipt of advance
Write off of unrealized export bills subject to prescribed limits and conditions
Setting off export receivables against import payables with overseas group/
associate companies through in-house or outsourced centralised settlement
arrangement allowed
Remittances against imports to be completed within 6 months from date of shipment
Third party payments for export/ import transactions permitted subject to conditions
Import regulations require CA certificate for import of non-physical goods (such as
software, data, drawing, designs)
12. ESOP issued by foreign parent to resident employees of Indian subsidiary
12
Resident employees can subscribe to shares of a foreign group
company under ESOP. Remittance made for this purpose
outside LRS limits
Permission granted to resident person to purchase equity
shares under ESOP offered by foreign company, provided there
is no remittance made from India (Cashless ESOP)
Permission provided to person resident in India to purchase
equity shares offered by a foreign company under ESOP subject
to holding-subsidiary relationship between foreign company and
Indian employer
Shares under ESOP should be offered by foreign group
company globally on 'uniform' basis
Annual return to be furnished in prescribed form for:
− Issuance of ESOP by foreign parent company to the
employees of Indian subsidiary
− Repurchase of shares by foreign parent company
Issues
Where companies have country specific clauses in their ESOP
agreement, does it qualify as "uniform basis"?
Who is obligated to furnish Annual Returns prescribed for
reporting ESOP offered by foreign company to employees of
Indian subsidiary?
Is there a due date prescribed for ESOP reporting?
Can shares of foreign holding company, acquired under ESOP
be sold overseas to a foreign buyer? Is there any requirement
on repatriation of such sales proceeds into India?
Is there any reporting requirement for Cashless ESOP? Can
foreign company charge back difference in price of cashless
ESOP to Indian company?
ESOP Scheme
13. Other Issues
13
Does RBI recognise crypto currency? Can companies accept or make payments in
crypto currency? Is there any reporting requirement for the same? What is RBI's action
plan?
What are the regulations that govern foreign payments
made through personal credit cards issued in India?
Where AD Banks have the authority to regularise delays based
on bona fides of the transaction, can the RBI (or any other
enforcement agencies) still question and penalise such delays?
Can Indian group company receive or make payments on behalf of overseas parent
(say income tax payments in India for foreign group company) or can an Indian
company act as a paying agent of its overseas parent company for collecting and
remitting income-tax refunds of such parent company?
RBI
Can companies currently accept or make payments in crypto currency? Is there
any reporting requirement for the same? Can crypto currency be recognised as a
sovereign currency?
What are the regulations that govern foreign
payments (business related) made through personal
credit cards issued in India?
15. Penal Provisions
15
Contravention of any provision of FEMA or any rules, regulations, notifications,
directions or order issued in exercise of powers thereunder may be penalized by
Adjudicating Authority
Additionally, Adjudicating Authority may direct that any currency, security or any
other money or property in respect of which contravention has taken place to be
confiscated by the Central Government. It may direct persons committing
contraventions to bring back foreign holdings into India or to retain outside India in
accordance with Regulations/ Directions
Up to 3 times the
sum involved in
contravention
where such
amount is
quantifiable
Up to INR 2 lakhs
where the sum
involved is not
quantifiable
For continuing
contravention
penalty may
extend to INR
5,000 for every
day after first
day during which
contravention
continues
Quantifiable Non Quantifiable Continuous
16. Directors' liability under FEMA
16
Every person who oversaw,
and was responsible for
conduct of its business at
the time contravention was
committed, shall be deemed
to be guilty of contravention
and shall be liable to be
proceeded against and
punished accordingly
Where it is proved
contravention has taken place
with consent or connivance of
any director, manager,
secretary, or any other officer,
such officer shall also be
deemed to be guilty of the
contravention
In a decision by Hon'ble SC in the
case of Shailendra Swarup vs Deputy
Director of ED, it has been reaffirmed
that liability of a director depends on
role such director played in managing
the affairs of the company and not
merely by virtue of being a director (or
similar position held) in a company.
For contraventions made by
companies, the main liability is of
such company. Director/ Officer’s
liability is a 'vicarious' liability. Where
the company accepts contravention
and makes an application for
compounding, whether Director/
Officer responsible for affairs of the
company, also required to file a
parallel application for compounding?
Where Director/ Officer is penalised,
can such penalty be paid by the
company or does the penalty remain
a personal liability of such Director/
officer?
1 2
?
Key Considerations
Key provisions
18. Overview of Compounding Process
Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and seeking redressal
RBI is empowered to compound any contravention under FEMA except contravention under Section 3(a) which is in relation to dealing in foreign exchange through
unauthorised person. DoE is empowered to compound contraventions under Section 3(a) of FEMA
Pre-requisites of Compounding
Similar contravention not
compounded within
preceding 3 years
Amount involved in
contravention must be
quantifiable
All necessary
administrative action
completed by way of
obtaining post-facto
approvals or unwinding
non-permissible
transactions
Undertaking by applicant
that no appeal has been
filed on matter of
contravention
NoC from DoE, where
contravention is under
adjudication
Seeking NoC
from DOE
Scrutiny of
Application
Application
Procedure of Compounding
18
Personal
Hearing
Compounding
Order
Application to be made
in prescribed format with
undertaking on whether
applicant is under
enquiry/ investigation of
DoE and other
supporting documents
RBI to examine the
application and seek
additional information/
clarifications from
applicant. RBI may
advise applicant to
redraft application, if
required
If matter is under inquiry/
investigation of DoE, RBI to
seek NoC from DoE. If DoE
has objection, then RBI
may remit case to DoE for
adjudication
Applicant or Authorised
representative may attend.
Optional to request for
personal hearing.
Application could also be
disposed based on
documents submitted
Process to be completed
within 180 days. Penalty
generally levied based on
prescribed compounding
matrix. Penalty to be paid
within 15 days from the date
of order
19. Compounding Matrix
Sl No Type of contravention Existing Formula
1 Reporting Contraventions:
A) FDI: Part B of FC (GPR), FCTRS and taking on
record FCTRS
B) ECB: Non submission of ECB statements
C) ODI: Non reporting/delay in reporting of
acquisition/setup of subsidiaries/step down
subsidiaries /changes in the shareholding pattern
D) Any other reporting contraventions (except those in
Row 2 below)
Fixed amount: INR 10,000 (applied once for each
contravention in a compounding application) +
Amount in INR
E) LO/ BO/ PO: Reporting contravention
Same as above, subject to ceiling of INR 2 lakhs. In case of
PO, amount imposed shall be calculated on 10% of total
project cost
2 Non-submission/ delayed submission of APR or AAC
or FCGPR (B) or FLA Returns
Delay in receipt of share certificate against ODI
INR 10,000 for each delayed submission
INR 10,000 per year, the total amount being subject to ceiling
of 300% of amount invested
3
A) Non-allotment of shares or allotment/ refund after
the stipulated 180 days
B) LO/ BO/ PO (Other than reporting contraventions)
INR 30,000 + given percentage:
1st
year : 0.30%
1-2 years : 0.35%
2-3 years : 0.40%
3-4 years : 0.45%
4-5 years : 0.50%
> 5 years : 0.75%
(For project offices amount of contravention shall be deemed to
be 10% of cost of project)
Sl No Type of contravention Existing Formula
4 All other contraventions
including contraventions of
FDI, except contraventions
pertaining to FLA returns and
corporate guarantees
INR 50,000 + given percentage:
1
st
year : 0.50%
1-2 years: 0.55%
2-3 years: 0.60%
3-4 years: 0.65%
4-5 years: 0.70%
> 5 years: 0.75%
5 Issue of Corporate
Guarantees without Unique
Identification Number/ without
permission or providing open
ended guarantees or any other
contravention related to issue
of Corporate Guarantees
INR 500,000 + given percentage:
1st year : 0.050%
1-2 years : 0.055%
2-3 years : 0.060%
3-4 years : 0.065%
4-5 years : 0.070%
> 5 years : 0.075%
In case contravention includes issue of
guarantees for raising loans which are
invested back into India, the amount
imposed may be trebled.
Amount involved Variable penalty
up to 10 lakhs 1,000 per year
> 10 lakhs & < 40 lakhs 2,500 per year
> 40 lakhs & < 100 lakhs 7,000 per year
> 1 crore & < 10 crore 50,000 per year
> 10 crore & < 100 Crore 100,000 per year
Above 100 Crore 200,000 per year
19
21. Glossary
21
Abbreviation Full Form
AAC Annual Activity Certificate
AD Banks Authorised Dealer Category - I Banks
APR Annual Performance Report
ARFLA Annual Return on Foreign Liabilities and Assets
B2B Business to Business
B2C Business to Customer
BO Branch Office
BPS Basis Points
CA Chartered Accountant
DoE Directorate of Enforcement
DPIIT Department for Promotion of Industry and Internal Trade
DTA Domestic Tariff Area
ECB External Commercial Borrowing
ESOP Employee Stock Option Plan
FATF Financial Action Task Force
FC Financial Commitment
FCGPR Foreign Currency-Gross Provisional Return
FCTRS Foreign Currency-Transfer of Shares
FDI Foreign Direct Investment
FEMA Foreign Exchange Management Act, 1999
FS Financial Statements
Abbreviation Full Form
FY Financial Year
INR Indian Rupee
IOSCO International Organization of Securities Commissions
JV Joint Venture
LIBOR London Interbank Offered Rate
LLP Limited Liability Partnership
LO Liaison Office
LRN Loan Registration Number
LRS Liberalised Remittance Scheme
MAMP Minimum Average Maturity Period
NoC No Objection Certificate
ODI Overseas Direct Investment
PO Project Office
PROI Person Resident Outside India
RBI Reserve Bank of India
RDB Rupee Denominated Bonds
SEBI Securities and Exchange Board of India
SEZ Special Economic Zone
STPI Software Technology Parks of India
US United States
WOS Wholly Owned Subsidiary
22. Important Web Links
22
01
02
03
04
Updated Master Directions and FAQs
https://www.rbi.org.in/Scripts/BS_ViewMasterDirections.aspx?did=335
https://www.rbi.org.in/scripts/FS_FAQs.aspx?fn=5
Non-Debt instrument Rules, 2019 & Mode of Payment and Reporting of Non-Debt Instruments Regulations, 2019 (FDI)
https://egazette.nic.in/WriteReadData/2019/213332.pdf
https://egazette.nic.in/WriteReadData/2020/223577.pdf
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11723&Mode=0
https://dipp.gov.in/sites/default/files/FDI-PolicyCircular-2020-29October2020.pdf
List of compounding orders
https://www.rbi.org.in/scripts/Compoundingorders.aspx
https://rbi.org.in/scripts/SummaryCompoundingorders.aspx
Foreign Exchange Management Act, 1999 and Regulations
https://www.indiacode.nic.in/handle/123456789/1988?sam_handle=123456789/1362
https://rbi.org.in/Scripts/BS_viewfemanewnotification.aspx
23. Our next webinar series
FEMA – Demystifying challenges faced by Individuals
Key consideration
in relation to LRS
ODI by resident
individuals
Key regulatory
challenges for NRIs
and OCIs
Impact due to change
in residential status
of individuals under
FEMA
Types of bank accounts
under FEMA and
permissibility of
transactions
Gifts and
acquisition of
immovable
properties
