The Reserve Bank of India (RBI), in alignment with the recently notified Foreign Exchange (Compounding Proceedings) Rules, 2024, has issued the Master Direction – Compounding of Contraventions under FEMA, 1999, vide notification no. RBI/FED/2025-26/135 dated April 22, 2025, and further amended the same via A.P. (DIR Series) Circular No. 04/2025-26 dated April 24, 2025.
The updated Master Direction consolidates and clarifies the compounding procedures under the Foreign Exchange Management Act, 1999 (FEMA), and harmonizes them with the revised 2024 Rules. A detailed summary of the key procedural and substantive changes can be found in our note on the Foreign Exchange (Compounding Proceedings) Rules, 2024 at https://rbi.org.in
One of the key features of the revised Master Direction is the introduction of a refined Compounding Matrix, designed to provide greater transparency and predictability for applicants. This matrix outlines indicative penalty amounts, thereby reducing ambiguity and promoting voluntary compliance and prompt resolution of inadvertent contraventions.
While the broad penalty framework remains consistent with the earlier directions, the RBI has introduced two notable enhancements:
- Alignment with FDI Regulations and NDI Rules
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The updated matrix now clearly aligns the penalty framework with the FDI Regulations, 2017 and the subsequent NDI Rules and Regulations, 2019. This streamlining enhances legal clarity and reduces the scope for interpretational inconsistencies.
- Cap on Penalties in Specific Cases
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In a welcome move, the RBI has empowered the compounding authority, based on its discretion and satisfaction—including factors such as the nature of the contravention, exceptional circumstances, and broader public interest—to cap the maximum compounding amount at INR 2,00,000 per contravention (per applicable regulation/rule) for contraventions categorized under 'All other non-reporting contraventions' in the revised computation matrix.
These amendments reflect the regulator's intention to promote a more facilitative and less punitive approach to compliance under FEMA, particularly in cases of technical or procedural lapses.
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