RECENT SIGNIFICANT CHANGES IN THE COMPOUNDING PROCESS UNDER FEMA – Eshwars
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RECENT SIGNIFICANT CHANGES IN THE COMPOUNDING PROCESS UNDER FEMA

Authored by Aneeruth Suresh & K. Ramasubramanian 

Introduction

Compounding is a process to facilitate those who have not complied with the provisions of Foreign Exchange Management Act, 1999 and the rules/ regulations/ notification/ orders/ directions/ circulars issued thereunder (“FEMA”/ “Act”). When the provisions of FEMA are not complied with by the person using foreign exchange, he is committing a contravention. He must have an avenue to rectify the contravention. To facilitate this rectification FEMA prescribes a method for compounding the contravention. Thus, contravention is a breach of the provisions of the FEMA. Compounding refers to the process of voluntarily admitting the Contravention, pleading guilty and seeking redressal. Hence, under this process, the person/entity committing default will file an application to the compounding authority accepting that it has committed the Contravention and such Contravention shall be condoned by paying up the penalty as imposed by RBI after offering an opportunity of personal hearing to the said contravener.

This concept of Compounding has been framed by Government of India empowering the RBI to compound contraventions under FEMA except Section 3(a) of FEMA in the manner provided under Foreign Exchange (Compounding Proceedings) Rules, 2000 as amended from time to time, with an objective to provide comfort to individuals and corporate community by minimizing transaction costs, while taking severe view of willful, malafide and fraudulent transactions, which will not be compounded by RBI. Further, in terms of the proviso to rule 8 (2) of Foreign Exchange (Compounding Proceedings) Rules, 2000 inserted vide GOI notification dated February 20, 2017, if the Enforcement Directorate (ED) is of the view that the compounding proceeding relates to a serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation, such cases will not be compounded by the RBI. All the provisions relating to compounding is updated in the RBI Master Direction-Compounding of Contraventions under FEMA, 1999. The process of compounding can be administered by the ED as well and thereby the contravener can approach any agency i.e., RBI or ED.

Following are few advantages of compounding of offences:

1. Simplified and short cut process to avoid litigation and thereby reduces the burden of judiciary;

2. Multiple offences, if any committed under FEMA can be compounded under one application;

3. No further inquiry/investigation/adjudication/proceeding will be initiated.

This process of compounding has been amended by the RBI and they have brought in significant changes in such process pursuant to the relevant A.P. (DIR Series) Circular, which is a welcome move and we have analysed the relevant A.P. (DIR Series) Circular in detail under this article.

Analysis of the RBI’s A.P. (DIR Series) Circular

With the above backdrop and further as we are all aware that the erstwhile Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (“TISPRO Regulations”) had been superseded by Foreign Exchange Management (Non-Debt Instruments) Rules 2019 (“NDI Rules”) and FEM (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 (“MPR Regulations”), RBI has updated the references of the erstwhile TISPRO Regulations in line with the NDI Rules and MPR Regulations vide the RBI/2020-21/67 A.P. (DIR Series) Circular No. 06 dated November 17, 2020 (“Compounding Circular”) and following are the changes brought in by RBI in the said Compounding Circular:

a. The power to compound contraventions under TISPRO Regulations has been delegated to the Regional Offices/ Sub Offices of the RBI for the enhanced customer service and operational convenience, has now been aligned with corresponding provisions under NDI Rules and MPR Regulations, respectively are as follows:

Compounding of Contraventions under NDI Rules
Rule No. under NDI Rules Brief description of the Rules Corresponding Regulation No. under TISPRO Regulations Brief Particulars of the Contravention
Rule 2(k) read with Rule 5 Permission for making investment by a person resident outside India (Equity Instruments) Regulation No. 5 Issue of ineligible instruments.
Rule 21 Pricing guidelines Regulation No.11 Violation of pricing guidelines for issue/transfer of shares.
Paragraph 3 (b) of Schedule I Sectoral Caps – for total foreign investment Regulation 16.B Issue of shares without approval of RBI or Government respectively, wherever required.
Rule 4 Restriction on receiving investment; Regulation 4 Receiving investment in India from non-resident or taking on record transfer of shares by investee company.
Rule 9(4) Transfer by way of gift to person resident outside India by person resident in India of equity instruments or units of an Indian company on a non- repatriation basis with the prior approval of the Reserve Bank. Regulation 10(5) 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.
Rule 13(3) Transfer by way of gift to person resident outside India by NRI or OCI of equity instruments or units of an Indian company on a non- repatriation basis with the prior approval of the Reserve Bank
Compounding of Contraventions under MPR Regulations
Rule No. under MPR Regulations Brief description of the MPR Regulations Corresponding Regulation No. under TISPRO Regulations Brief Particulars of the Contravention
Regulation 3.1(I)(A) Inward remittance from abroad through banking channels; Regulation 13.1(1) Delay in reporting inward remittance received for issue of shares.
Regulation 4(1) Form Foreign Currency-Gross Provisional Return (FC-GPR); Regulation 13.1(2) Delay in filing form FC (GPR) after issue of shares.
Regulation 4(2) Annual Return on Foreign Liabilities and Assets (FLA); Regulation 13.1(3) Delay in filing the Annual Return on Foreign Liabilities and Assets (FLA).
Regulation 4(3) Form Foreign Currency-Transfer of Shares (FC-TRS); Regulation 13.1(4) Delay in submission of form FC-TRS on transfer of shares from Resident to Non-Resident or from Non-resident to Resident.
Regulation 4(6) Form LLP (I); Regulations 13.1(7) and 13.1(8) 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
Regulation 4(7) Form LLP (II);
Regulation 4(11) Downstream Investment Regulation 13.1(11) Delay in reporting the downstream investment made by an Indian entity or an investment vehicle in another Indian entity (which is considered as indirect foreign investment for the investee Indian entity in terms of these regulations), to Secretariat for Industrial Assistance, DIPP.

b. Discarding the classification of a Contravention as “Technical” contravention:

There are 3 types of contraventions pursuant to relevant circulars issued earlier by RBI:

(i) Technical and/or minor in nature and such nature of contravention can be dealt by RBI by way of an administrative/ cautionary advice;

(ii) Material in nature and that is required to be compounded for which the necessary compounding procedure has to be followed

(iii) Issues of sensitive / serious in nature and need to be referred to the ED.

Prior to this Compounding Circular, contravention of technical nature used to be dealt with by way of an administrative/ cautionary advice and the same is being done away with this Circular i.e., the RBI has decided to discard the classification of a contravention as ‘technical’ and regularize such contraventions by imposing minimal compounding amount as per the compounding matrix as contained in the Master Direction – Compounding of Contraventions under FEMA, 1999 as amended from time to time. In other words, the Reprimand and Condonation of any type of contravention, as a form of punishment in lieu of monetary penalty is totally dispensed with.

c. Public disclosure of compounding order:

Compounding orders issued by RBI can be accessed in its website. RBI has now decided that in respect of the compounding orders passed on or after March 01, 2020, only a summary information of such compounding orders, in lieu of the entire compounding orders, shall be published in the format, as mentioned below, in order to balance between the objectives of ensuring transparency & greater disclosure to the public and respecting confidentiality of the contravener:

No. Name of the Applicant Details of contraventions (provisions of the Act/Regulation/Rules compounded) Date of compounding order Amount imposed

Conclusion

From the foregoing presentation one may conclude that this circular amendment has facilitated

1. Inclusion and alignment of all contraventions resulting out of non-compliance with NDI Rules.

2. The publication of compounding orders passed by RBI will be in an abridged Form respecting the confidentiality of the contravener; and

3. The form of Reprimand and condonation now followed for certain contraventions have been totally dispensed with resulting in levy of monetary penalty for all cases of contraventions.

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