INTRODUCTION
On September 12, 2024, the Department of Economic Affairs, Ministry of Finance notified the Foreign Exchange (Compounding Proceedings) Rules, 2024 ("Compounding Rules"), in supersession of the Foreign Exchange (Compounding Proceedings) Rules, 2000. Subsequent to the notification of the Compounding Rules, the Reserve Bank of India ("RBI") notified the new directions on the compounding of contraventions ("Compounding Directions") under Foreign Exchange Management Act, 1999 ("FEMA"), vide a notification dated October 1, 2024.
Through the new Compounding Directions, the RBI has introduced several steps towards procedural and operational convenience. Notably, the Compounding Directions provide for: (i) bifurcation between contraventions to be compounded at the regional and the national office; (ii) an online portal for the filing of the application for compounding of contraventions; (iii) the procedure to be followed and factors to be considered by the Compounding Authority; and (iv) a timeline for the issuance of the compounding order.
COMPOUNDING AT THE REGIONAL OFFICES AND THE NEW DELHI OFFICE
In the interest of operational convenience, the Compounding Directions provide for bifurcation between the contraventions that are to be compounded by compounding authorities of the RBI at the regional offices ("Regional Offices") and the contraventions that are to be compounded at the New Delhi office ("Central Office"). The compounding of contraventions of the provisions of (i) the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 and 2017, (ii) the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, and (iii) the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 are to be compounded at the Regional Offices. On the other hand, the contraventions of rules and / or regulations pertaining to liaison / branch / project office, Non-Resident Foreign Account (NRFAD), and immovable property are to be compounded by the RBI compounding authorities attached to the FED, CO Cell at the Central Office.
INTRODUCTION OF THE PRAVAAH PORTAL
In a shift towards procedural ease, the Compounding Directions also provide for an online portal called the 'PRAVAAH' portal, for the filing of compounding applications by applicants. Such filing may either be carried out suo moto, or pursuant to the issuance of a memorandum of contraventions by the RBI. An applicant may submit the compounding application along with the relevant documents physically or through the PRAVAAH portal, by submitting a fee of Rs. 10,000/- (Rupees Ten Thousand Only) by way of a demand draft in favour of the RBI, NEFT or any other permissible electronic / online modes of payment. It is imperative to note that as per the Compounding Directions, intimation of payment of application fee to the respective Regional Office, CO Cell, or the Central Office, must be made as soon as possible but not later than 2 (two) hours from time of payment, through an email as per the template provided in the Compounding Directions. Further, it is also important to note that a compounding application would not be accepted by the RBI, unless: (i) the contravention is eligible for compounding under the FEMA and the Compounding Rules; (ii) the application is complete; (iii) any pending administrative action required in respect of the contravention has been undertaken; and (iv) the compounding application in not made within a period of 3 (three) years from the date on which a similar contravention was committed and subsequently compounded.
PROCEDURE FOR COMPOUNDING
The Compounding Directions also clarify the procedure to be followed by the RBI for the compounding of contraventions. Upon the receipt of an application, the RBI shall examine the application based on the documents and submissions made in the application, assess whether contravention can be compounded, and, if so, determine the sum involved in the contravention. Pursuant to such assessment, the compounding authority may call for any information, or any other documents relevant to the compounding proceedings. In the event that the applicant fails to submit the additional information / documents within the specified period, the application for compounding shall be returned.
The Compounding Directions also provide a guidance note, basis which, the compounding amount due by the applicant is determined. The guidance note specifies the compounding amount that may be imposed for different contraventions, along with an indicative list of the factors that may be considered by the compounding authority in determining compounding amount to be paid by the applicant. The factors, as provided in the Compounding Directions, are as follows:
i. any undue gains i.e., the amount of gain of unfair advantage,
wherever quantifiable, made as a result of the contravention (or)
economic benefits accruing to the applicant from delaying
compliance or avoiding compliances;
ii. the amount of loss caused to any authority/ exchequer as a
result of the contravention;
iii. the repetitive nature of the contravention, the track record
and/or history of non- compliance of the applicant;
iv. the applicant's conduct in undertaking the transaction and
in disclosure of full facts in the application and submissions made
during the personal hearing; and any other factor as considered
relevant and appropriate.
It is important to note however that both, the guidance note and the above mentioned factors, are only meant for indicating the basis on which the compounding authority may make its assessment of the compounding amount and the actual amount that may be imposed by the Compounding Authority can be up to 3 (three) times the total amount of contravention under the provisions of section 13 of FEMA.
ISSUANCE OF THE COMPOUNIDNG ORDER
To ensure the expeditious disposal of compounding applications, the Compounding Directions provide that the compounding order in respect of a compounding application must be rendered after providing the applicant a reasonable opportunity to be heard. Such compounding order is to be issued on the basis of the averments made in the application as well as other documents and submissions made by the applicant during the personal hearings, within 180 (one hundred and eighty) days from the receipt of the compounding application.
It is further provided that when an applicant opts for a hearing, the RBI would encourage the applicant to appear personally and not be represented by legal experts and / or consultants, given the voluntary nature of the process. Further, the applicant's appearance at or opting out of the personal hearing would not have any bearing whatsoever on the compounding amount that may be specified in the compounding order. Lastly, the Compounding Directions also provide that when a compounding order is issued, a copy of the order must be provided to the applicant and the order must state the details of the contravention and the provisions of the FEMA and any rule, regulation, notification, direction, or order in respect of which the contravention has taken place.
CONCLUSION
The notification of the new Compounding Rules on September 12, 2024, had made the Ministry of Finance's intention of streamlining and simplifying the existing framework clear. Now, the RBI's notification of the new Compounding Directions represents another step taken in the same direction. With the introduction of the new portal, the bifurcation of the compounding process, and the establishment of a timebound process guided by clear procedural guidelines, the emphasis of the new directions has been on enhancing the procedural efficiency and operational ease in the process of compounding of contraventions.
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