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    Copmpounding Of Offences By RBI-Under Foreign Exchange Management Act,1999

    Foreign Exchange Management Act, 1999 (hereinafter referred to as “FEMA”) which has replaced the erstwhile the Foreign Exchange Regulation Act, 1973 is a big leap in the management of Foreign Exchange Reserves of the Country. The erstwhile regime of approvals has been replaced with automatic approvals and principle of management by exception.

     

    Since the law is of Economic Legislation and any violation/ non-compliance of the law effects the country as a whole, such non-compliances invites hefty penalties and the offender is liable for monetary Penalties. In order to give the opportunity to the offender to rectify the offence, FEMA has provisions to opt for Compounding of Offences.

     

    In this article an attempt is made to dwell upon the concept of Compounding of Offences under FEMA.

     

    Penalties under FEMA

     

    As per Section 13 of FEMA, the following are the penalties for offences under FEMA

     

    1. Where the amount involved in the offence is quantifiable, 3 times of the amount involved

     

    1. Where the amount involved in the offence is not quantifiable, Upto Rs. 2,00,000/-

     

    In case where the offence is continuing one, an additional penalty upto Rs. 5,000/- per day of continuing default/ offence.

     

    In addition to the monetary penalty, the subject property of the offence, can also be confiscated by the Government

     

    What is Compoundable Offence:

     

    A criminal act in which a person agrees not to report the occurrence of a crime or not to prosecute a criminal offender in exchange for money or other consideration.

     

    The purpose of Compounding of offences under FEMA is to minimize the transaction costs, while taking severe view of malafide, wilful and fraudulent transactions.

     

    Compounding of Offences by RBI

     

    As per Section 15 of the FEMA read with Foreign Exchange Management (Compounding Proceedings) Rules, 2000 read with Master Direction No. 4/2015-16, dated January 1, 2016 (updated from time to time), RBI can compound the following nature and types of offences

     

    1. Matters covered under Section 6, 7, 8 & 9 of FEMA

     

    1. Matters covered under FEM (Current Account Transactions) Rules, 2000 except the offences covered under Section 3(a) of FEMA

     

     

    Compounding Authorities of RBI

     

    The following is the authorisation matrix of RBI officers for compounding of Offences

     

    Rank of the Officer

     

    Sum Involved of the Offence (INR)

     

     

    Assistance General Manager

    < 1 Million

     

     

     

    Deputy General Manager

    >=

    1 Million and < 4 Million

     

     

     

    General Manager

    >=

    4 Million and < 10 Million

     

     

    Chief General Manager

    >= 10 Million

     

     

     

     

    Provided that no contravention shall be compounded unless the amount involved in such offence is Quantifiable.

     

    Delegation of powers to Regional Offices of RBI

     

    RBI has delegated the powers of compounding to the officers of Regional Offices, if the nature of offence is covered under the below table:

     

    FEMA Regulation

    Brief Description of Contravention

     

     

    Paragraph 9(1)(A) of Schedule I to FEMA 20/2000-

    Delay in reporting inward remittance received for

    RB dated May 3, 2000

    issue of shares. (ARF)

     

     

    Paragraph 9(1)(B) of Schedule I to FEMA 20/2000-

    Delay in filing form FC-GPR after issue of shares.

    RB dated May 3, 2000

     

    Paragraph 8 of Schedule I to FEMA 20/2000-RB

    Delay  in  issue  of  shares/refund  of  share

    dated May 3, 2000

    application money beyond 180 days, mode of

     

    receipt of funds, etc.

     

     

    Paragraph 5 of Schedule I to FEMA 20/2000-RB

    Violation of pricing guidelines for issue of shares.

    dated May 3, 2000

     

     

     

    Regulation 2(ii) read with Regulation 5(1) of FEMA

    Issue of ineligible instruments such as non-

    20/2000-RB dated May 3, 2000

    convertible debentures, partly paid shares, shares

     

    with optionality clause, etc.

     

     

    Paragraph 2 or 3 of Schedule I to FEMA 20/2000-

    Issue of shares without approval of RBI or FIPB

    RB dated May 3, 2000

    respectively, wherever required.

     

     

    Regulation 10A (b)(i) read with paragraph 10 of

    Delay in submission of form FC-TRS on transfer of

    Schedule I to FEMA 20/2000-RB dated May 3,

    shares from Resident to Non- Resident.

    2000

     

    Regulation 10B (2) read with paragraph 10 of

    Delay in submission of form FC-TRS on transfer of

    Schedule I to FEMA 20/2000-RB dated May 3,

    shares from Non-Resident to Resident.

    2000

     

    Regulation 4 of FEMA 20/2000-RB dated May 3,

    Taking on record transfer of shares by investee

    2000

    company, in the absence of certified from FC-TRS.

     

     

     

     

    The powers to compound the contraventions above have been delegated to all Regional Offices (except Kochi and Panaji) and FED, CO Cell, New Delhi respectively without any limit on the amount of contravention. Kochi and Panaji Regional offices can compound the contraventions for amount of contravention below Rupees Ten Million. The contraventions of Rupees Ten Million or more under the jurisdiction of Panaji and Kochi Regional Offices and all other contraventions of FEMA will continue to be compounded at Cell for Effective Implementation of FEMA (CEFA), Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai, as hitherto.

     

    The compounding proceeding may be initiated in any of the following manner:

     

    1. Based on the Memo issued by the Authorised Dealer (Bank)

     

    1. Based on the Memo issued by the RBI
    2. suo motoby the applicant itself

     

    The application need to be made in prescribed format along with prescribed fee of Rs. 5,000/- to the respective Compounding Authority.

     

    The compounding application need to be disposed off by the Compounding Authority within 180 days of its receipt. If the applicant desires the RBI gives the opportunity of being heard.

     

    No subsequent compounding application can be made for next three years from the date of disposal of previous application, related to same offence.

     

    Authors Comments

     

    The real benefit of compounding is that it gets rid of being chased/adjudicated by the regulatory authorities, gives peace of mind, reduction of monetary penalties etc.Also the offence stands cured from the date of its inception, as if no offence is taken place.

     

    The amount paid under compounding proceedings is treated as Feesand is allowable business expenditure u/s 37 of Income Tax Act, 1961, whereas the amount paid under regular adjudication proceedings is treated as Penalty and is ineligible business expenditure.

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