Background:
On September 12, 2024, the Ministry of Finance introduced the Foreign Exchange (Compounding Proceedings) Rules, 2024, (“Compounding Rules”) replacing the Foreign Exchange (Compounding Rules), 2000 (“Old Rules”). The term compounding refers to the action where the person / entity accepts that they have contravened the law and are now seeking a redressal for the same. The Compounding Rules aim to streamline foreign exchange contraventions under the Foreign Exchange Management Act, 1999, (“FEMA”), such that lower level officers are entitled to handle higher volume and value of contraventions.
Compounding Authorities:
The Compounding Rules designate specific authorities for compounding, based on the contravention type and the amount involved. For example, the compounding authority for the Director of Enforcement (“DOE”) will be any officer of the DOE, not below the rank of deputy director or deputy legal adviser.
The Compounding Rules further provide that in case of offences under the FEMA, apart from dealing in foreign exchange (section 3(a) of the FEMA), the following are the compounding authorities and the limits:
| S.N. | Limit | Compounding Authority |
|---|---|---|
| 1. | Up to Rs 60 lakh | Assistant General Manager of RBI |
| 2. | Up to Rs 2.5 crore | Deputy General Manager of RBI |
| 3. | Up to Rs 5 crore | General Manager of RBI |
| 4. | Above Rs 5 crore | Chief General Manager of RBI |
The Compounding Rules further provide that in case of offences under the FEMA, under section
3 (a) of FEMA, i.e. dealing in foreign exchange, the following are the compounding authorities and the limits:
| S.N. | Limit | Compounding Authority |
|---|---|---|
| 1. | Up to Rs 5 lakh | Deputy Director of DOE |
| 2. | Rs 5 lakh to Rs 10 lakh | Additional Director of DOE |
| 3 | Rs 10 lakh to Rs 50 lakh | Special Director of DOE |
| 4. | Rs 50 lakh to Rs 1 crore | Special Director along with Deputy Legal of DOE |
| 5. | Above Rs 1 crore | DOE along with Special Director of DOE |
Procedure for Compounding:
The compounding application shall be made to the Foreign Exchange Department, Reserve Bank along with a fee of Rs 10,000 plus goods and services tax in favour of the compounding authority.
Compounding authorities have 180 days to issue an order, during which they may request additional information. If the sum is not paid within 15 days of the order, the applicant is deemed to have never applied for compounding, reopening them to prosecution.
However, any second and consequent contravention committed after the expiry of 3 years from the date of the first compounding of the contravention, will be deemed to be a first contravention.
When Compounding Is Not Permitted:
Compounding is not allowed in cases:
- Where the amount is unquantifiable.
- Involving money laundering, terror financing, or national security.
- Involving Section 37A (foreign assets).
- Already penalized under Section 13 of FEMA.
Impact on Pending Proceedings:
Pending contraventions under investigation will continue under the Old Rules, ensuring continuity for cases in progress.
MHCO Comment:
The Compounding Rules bring much-needed clarity to the FEMA framework. While the structured roles of RBI and Enforcement Directorate officers aim to improve efficiency, the broad authority vested in them could lead to varied interpretations and uneven enforcement. The clear three-year threshold for repeat offenders is a positive deterrent, though the non-compounding scenarios, particularly for subjective cases, may lead to prolonged inquiries and further litigation. How effectively the 180-day timeline for issuing compounding orders is adhered to will also be a critical factor in maintaining the efficiency promised by the new rules.
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