Section 15 of the Foreign Exchange Management Act, 1999 (‘FEMA’) empowers the RBI to compound any offence that falls within the purview of Section 13 of FEMA (which specifies the penalties for contraventions under FEMA) except contraventions under Section 3(a) of FEMA (which states that no person is allowed to deal in or transfer any foreign exchange or foreign security to any person not being an authorised person). Such compounding may be done on an application so made by the person making such contravention. The Government had, by way of a Notification dated September 12, 2024, notified the Foreign Exchange (Compounding Proceedings) Rules, 2024 in supersession of Foreign Exchange (Compounding Proceedings) Rules, 2000. Subsequently, on October 1, 2024, the RBI has, also issued directions for compounding of contraventions under FEMA (‘Directions’).

The key provisions of the Directions, inter alia, are set out below:

i.    an applicant may submit a compounding application in the prescribed format, along with the relevant documents, physically or through PRAVAAH Portal of the RBI, along with the prescribed fee of INR 10,000 (approx. USD 120). In addition to the compounding application, the applicant must also be required to furnish the details as per Annex-II of the Directions relating to FDI, external commercial borrowings, overseas direct investment etc.;

ii.   no compounding application would be processed unless the requisite administrative action is completed by the applicant. ‘Administrative action’ means such action as may be necessary with respect to the transactions involved in such contravention and includes such corrective action that should be undertaken by the applicant to bring the transaction involved in contravention in compliance with applicable provisions of FEMA; and

iii.  penalties are capped at 300% of the contravened sum. For violations involving amounts less than INR 1,00,000 (approx. USD 1200), penalties are limited to five percent simple interest per year for reporting violations and 10% for others. Delays in share allotments incur graded penalties (1.25x to 1.75x of the penalty calculated as per the Directions). Repeated contraventions may incur a penalty increase of 50% over the previous amount. Once the compounding Order is passed, the contravener cannot withdraw, invalidate, or request a review of the Order.