Simplified, Fair, And Forward-Looking: RBI's Revamp Of FEMA Compounding Guidelines

1. INTRODUCTION

For those of you who are not well versed with this, compounding under forex laws in India refers to the process of voluntarily admitting the contravention, pleading guilty and seeking redressal for non-compliances. The Reserve Bank of India ("RBI") is empowered to compound any contravention as defined under Section 13 of Foreign Exchange Management Act, 1999 ("FEMA") except certain contraventions specified under FEMA, for a specified sum after offering an opportunity of personal hearing to the contravener. It is a voluntary process in which an individual or a corporate seeks compounding of an admitted contravention. Compounding under FEMA is governed by the Foreign Exchange (Compounding Proceedings) Rules, 2024 ("Compounding Rules"). In furtherance of the Compounding Rules, the RBI issued guidelines for compounding of contraventions under FEMA, 1999 dated October 01, 2024 ("Compounding Guidelines¹") to lay down the procedure around compounding.

In a significant move to streamline foreign exchange compliance, the RBI has introduced 3 (three) business-friendly amendments to the Compounding Guidelines through circulars dated April 22, 2025² and April 24, 2025³. These changes aim to reduce penalties, simplify processes, and improve efficiency for businesses dealing with foreign exchange transactions

2. KEY RELIEF MEASURES AT A GLANCE:

1. resh Start Policy: The RBI has removed the 50% (fifty percent) penalty escalation for reapplications, treating each application as new regardless of previous payment failures by removing Paragraph 5.4.II.v of the Compounding Guidelines. This paragraph previously stated that if an applicant had not paid the compounding penalty as ordered and reapplied for compounding for the same transaction, the penalty would be enhanced by 50% (fifty percent), subject to a maximum cap of 300% (three hundred percent). Thus, now if you previously failed to pay a compounding penalty and need to reapply, you won't face the earlier punitive increase.
2. INR 2 Lakh Penalty Cap for Non-Reporting Violations: Introduction of Paragraph 5.4.II.vi in the Compounding Guidelines, creates a new discretionary ceiling limiting penalties to INR 2,00,000 (Indian Rupees Two Lakhs) for "non-reporting violations⁴". The cap applies based on the compounding authority's assessment of the nature of contravention, exceptional circumstances, and public interest considerations. This provides significant relief particularly for technical violations that previously could have attracted penalties up to 3 (three) times the amount involved.
3. Streamlined Payment Tracking: Prior to the amendment of Compounding Guidelines, the applicants were required to send an email (as per the format in Part B of Annexure I of the Compounding Guidelines) to the concerned Reserve Bank office to reconcile the application fee or compounding amount paid electronically against the submitted application. It was observed that, in some cases, applicants made payments to the incorrect RBI office and delayed submission of the compounding application after paying the application fee. To address payment reconciliation issues, the RBI has introduced an enhanced email format requiring additional details. This change tackles the common problems of payments made to incorrect RBI offices and delays between fee payment and application submission.
   
   The applicant is now required to give following additional information as part of Part B of Annexure I of Compounding Guidelines:
   1. mobile number of the applicant/ authorized representative;
   2. office of the Reserve Bank (i.e., Central Office, Regional Office or FED CO Cell) to which the payment was made; and
   3. mode of submission of application (through PRAVAAH/ Physical).

3. INDUSLAW VIEW: A MORE BALANCED COMPLIANCE LANDSCAPE

The recent amendments signal a marked evolution in RBI's regulatory philosophy—one that acknowledges intent, promotes compliance, and distinguishes genuine oversight from wilful evasion. By easing the reapplication penalty, capping fines for non-reporting contraventions, and improving process efficiency, the RBI has reshaped FEMA compounding into a more facilitative and predictable mechanism.

These changes not only enhance trust in the compounding process but also incentivise timely self-disclosure—an essential trait in today's cross-border business environment. The INR 2,00,000 (Indian Rupees Two Lakhs) cap, in particular, is a welcome relief for companies burdened by procedural lapses, offering clarity and control over penalty exposure.

For businesses, this is an opportune moment to review legacy gaps, clear the slate, and implement robust compliance protocols. The new email format for payment reconciliation may seem minor, but it reflects the RBI's growing focus on process integrity and traceability.

In our view, this is a practical and forward-looking reform—one that balances enforcement with empathy. It's also a reminder that regulatory compliance in India is increasingly moving towards transparency, fairness, and ease of doing business—without compromising on accountability.

Footnotes

1. Master Directions - Compounding of Contraventions under FEMA, 1999, Master Direction No.04/2025-26 dated April 22, 2025, issued by the RBI.

2. Amendments to Directions - Compounding of Contraventions under FEMA, 1999, Circular No 02/2025-26 dated April 22, 2025, issued by the RBI.

3. Amendments to Directions - Compounding of Contraventions under FEMA, 1999, Circular No 04/2025-26 dated April 24, 2025, issued by the RBI.

4. As per master directions dated April 22, 2025, for all other non-reporting contraventions, a fixed penalty of INR 50,000 (Indian Rupees Fifty Thousand) per regulation/rule contravened shall be levied. In addition, a variable amount shall be imposed based on the duration of the contravention as a percentage of the amount under contravention, ranging from 0.50% (zero point five zero percent) to 0.75% (zero point seven five percent) depending on the number of years of delay