Pursuant to the commitments made during the announcement of the Union Budget 2024-25, the Department of Economic Affairs of the Ministry of Finance, notified the Foreign Exchange (Compounding Proceedings) Rules, 2024 on September 12, 2024 ("Rules") pursuant to Section 46 of the Foreign Exchange Management Act, 1999 ("Act"). The aforementioned Rules were notified in consultation with the Reserve Bank of India ("RBI"), with the intention to streamline and rationalize the extant framework and facilitate the ease of doing business in India.
The Rules focus on expediting and streamlining the processing of compounding applications, the introduction of digital payment options for application fees and compounding amounts, and on the simplification of the provisions to eliminate ambiguity.
Some of the key changes brought into force by the Rules have been discussed below:
- Compounding Authority: The Rules stipulate that for the purposes of the Rules: (i) the Director of Enforcement; or (ii) an officer of the Directorate of Enforcement not below the rank of Deputy Director or Deputy Legal Adviser; or (iii) an officer of the RBI not below the rank of the Assistant General Manager, shall be the 'compounding authority'.
- Compounding Authorities for Various Contraventions of
the Act: With the exception of contraventions of Section
3(a) of the Act; the compounding of any contravention of the Act
shall be carried out by the officers stipulated hereinbelow:
- An officer not below the rank of Assistant General Manager of the RBI, for contraventions of up to Rs. 60,00,000/- (Rupees Sixty Lakhs Only);
- An officer not below the rank of Deputy General Manager of the RBI, for contraventions of up to Rs. 2,50,00,000/- (Rupees Two Crores and Fifty Lakhs Only);
- An officer not below the rank of General Manager of the RBI, for contraventions of up to Rs. 5,00,00,000/- (Rupees Five Crores Only); and
- An officer not below the rank of Chief General Manager of the RBI, for contraventions exceeding Rs. 5,00,00,000/- (Rupees Five Crores Only).
- Compounding Authorities for Contraventions of Section
3(a): In the event of contraventions of Section 3(a) of
the Act, the compounding shall be carried out by the officers of
the Directorate of Enforcement ("ED")
stipulated hereinbelow:
- The Deputy Director of the ED for contraventions of up to Rs. 5,00,000/- (Rupees Five Lakhs Only);
- The Additional Director of the ED for contraventions of more than Rs. 5,00,000/- (Rupees Five Lakhs Only) but less than Rs. 10,00,000/- (Rupees Ten Lakhs Only);
- The Special Director of the ED for contraventions of at least Rs. 10,00,000/- (Rupees Ten Lakhs Only) but less than Rs. 50,00,000/- (Rupees Fifty Lakhs Only);
- The Special Director along with the Deputy Legal Adviser of the ED for contraventions of at least Rs. 50,00,000/- (Rupees Fifty Lakhs Only) but less than Rs. 1,00,00,000/- (Rupees One Crore Only); and
- The Director of the ED along with the Special Director of the ED, for contraventions of at least Rs. 1,00,00,000/- (Rupees One Crore Only).
- Simplification of the Payment Process: Every application for compounding any contravention must now be made in the prescribed form to the RBI/ED, along with the applicable fee, by demand draft, or National Electronic Fund Transfer (NEFT), or other permissible electronic or online modes of payment, in favour of the compounding authority.
- Contraventions which are not compoundable: The Rules specifically list out contraventions which may not be compounded, including contraventions where: (a) the amount involved is not quantifiable; (b) Section 37A of the Act (i.e., special provisions relating to assets held outside India) is applicable; (c) the ED is of the view that the contravention involves serious offenses (and the specific process for this has been put into motion); (d) the Adjudicating Authority has already passed an order imposing penalty under Section 13 of the Act; or (e) the compounding authority is of the view that contravention requires further investigation.
- Consequences of Failure to Pay Compounded Sum: The Rules stipulate that in the event a person fails to pay the sum compounded thereunder, such person shall be deemed to have never made an application for compounding of any contravention under the Rules, and the provisions of the Act for contravention shall apply to such person.
- Continuation of Pending Proceedings: The compounding applications which are pending before the compounding authority at the time the Rules came into effect would continue to be governed by the provisions of the Foreign Exchange (Compounding Proceedings) Rules, 2000; and these prior rules, despite being superseded by the Rules, would apply to such cases.
The law governing foreign exchange is the factor which most directly correlates with the ease of doing business in India. In light of the expansive procedural requirements which apply in the event the Act is triggered, the governmental machinery is constantly strained to ensure that the requirements are met and to resolve circumstances where the requirements are not met. Given that the procedural requirements vary in impact, quantum, etc., the phased approach put into motion by the Rules will likely result in greater compartmentalisation of the redressal of compounding applications and incentivise adherence from the entities at the very outset.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.