Formalities, Procedures and Caution to be taken for avoiding
any offences COMPOUNDING OF OFFENSES UNDER FEMA
Slide 2
Compounding of Offenses under FEMA Under Section 13(1) of the
FEMA, 1999,the compounding of contraventions under Foreign Exchange
Management Act (FEMA), 1999 and an applicant can seek compounding
of an admitted contravention of any provision of FEMA, 1999 and
this is a voluntary process. As per Section 15 of FEMA, 1999,
compounding of contraventions can be made and the Compounding
Authority is empowered to compound any contravention as defined
under Section 13 of the Act based on an application made by the
person/ corporate committing such contravention Compounding
application can be made either before or after the institution of
adjudication proceedings.
Slide 3
ARE ALL Offenses can be Compounded SECTION 3 - Prohibits
dealings in foreign exchange except through an authorised person.
This section states that no person can, without general or special
permission of the RBI can deal in forex transactions either in
India or out of India directly without through an authorised
dealer- Any Forex transactions not through an authorised dealer /
person Entering into Hawala transaction in abroad Receiving money
into India through other than Authorised dealer- Hawala transaction
Creation or transfer of a right to acquire any asset outside India
by any person in India
Slide 4
Quantum of Penalty under FEMA The infringer shall, upon
adjudication under FEMA, be liable to a penalty up to thrice the
sum involved in such contravention where the amount is quantifiable
or up to Rupees Two lacs, where the amount is not quantifiable and
where the contravention is a continuing one, further penalty which
may extend to Rupees Five thousand for every day after the first
day during which the contravention continues. Under sub-section (1)
of section 13 (2), authorities are empowered to levy additional
penalty and even order confiscation if necessary.
Slide 5
Application for Compounding An application for compounding of a
contravention under FEMA, 1999 may be submitted to the Reserve Bank
on being advised of a contravention under FEMA, 1999 either through
a memorandum or suo moto being made or becoming aware of the
contravention. The format of the application is appended to the
Foreign Exchange (Compounding Proceedings) Rules A compounding
order shall be issued by the Compounding Authority within 180 days
from the date of the receipt of the application for
compounding.
Slide 6
FEMA COMPOUNDING PROCEEDINGS Rules 2000- RBI Power Power of RBI
to compound the Offences If amount is Rs 10 lacs or less, AGM of
RBI If amount is more than Rs 10 lacs but less than Rs 40 lacs, DGM
If amount of is more than Rs 40 lacs but less than 100 lacs, GM For
more than Rs 100 lacs, Chief General Manager will have
authority
Slide 7
The Power of Enforcement Directorate to compound contraventions
In case, where the sum is involved is Rs 5 lacs or less, Deputy
Director of Enforcement More than Rs 5 lacs but less than Rs 10
lacs, Additional Director of the Directorate of Enforcement More
than Rs 10 lacs but less than Rs 50 lacs, Special Director of
Director of Enforcement More than Rs 50 lacs but less than I Crore,
Special Director with Deputy Legal Adviser Where sum involved is
more than Rs 1 Crore, Director of Enforcement with Special
Director
Slide 8
Time-limit to pay the fines under FEMA Any fines levied shall
have to paid to the compounding authorities within 15 days from the
date of the order of compounding. If fine is not paid, it shall be
construed that there has never made an application for compounding
by the applicant. If an appeal against the order has been made
under section 17 or 19 of the Act, then no contravention shall be
compounded till the appeal is disposed.
Slide 9
Analysis of Types of Contravention The Reserve Bank shall
examine the nature of contravention keeping in view, inter alia,
the following indicative points: Whether the contravention is
technical and/or minor in nature and needs only an administrative
cautionary advice; Whether the contravention is serious and
warrants compounding of the contravention; and Whether the
contravention, prima facie, involves money- laundering, national
and security concerns involving serious infringements of the
regulatory framework. Serious offences will be referred to the
Directorate of Enforcement (DoE) for further investigation
Slide 10
Is Personal Appearance is Compulsory before Compounding
Authority under FEMA ? Rule 8(2) of Foreign Exchange (Compounding
Proceedings) Rules, 2000 states that the compounding authority
shall pass an order of compounding after affording an opportunity
of being heard to all the concerned as expeditiously as possible
and not later than 180 days from the date of application. Many
applicants interpret this provision / facility to mean that
personal hearing is compulsory and that consultants / advocates
must represent them in the personal hearing before the compounding
authority.
Slide 11
Contents of Application form for compounding Name Full Address
Name of the adjudicating Authority before whom the case is pending
Nature of Contravention Brief Facts of the Case Details of Fee for
application of compounding Any other info which is relevant to the
application
Slide 12
Compounding Application for FDI Name of applicant, date of
incorporation, nature of activities, Brief particulars of the
foreign investor, details of foreign inward remittances received by
Applicant Company from the date of incorporation till date. Table A
Details of FDI received, date of reporting to RBI, Delay if any
Table B-Details of the foreign investor,date of allotment, date of
reporting to RBI, Delay if any Table C- Details of excess share
application money Table D Details of Authorised Capital
Slide 13
Compounding Application for ECB Name of the applicant,Date of
Incorporation, details of the activity, brief particulars about the
foreign lender, Is the lender is a eligible lender, is the lender
is an equity holder and what is the level of holding at the time of
loan agreement. Details of ECB - Date of loan agreement, Loan
amount in Foreign currency and Indian Rupees, Rate of Interest,
Period of loan, repayment particulars & Details of draw down
Details of LRN number, details of ECB 2 returns submitted Details
of utilization of ECB, nature of contravention and reasons for
contravention
Slide 14
Compounding Application for ODI Name of the applicant, Date of
incorporation, Nature of activities undertaken, name of the
overseas entity Date of incorporation of overseas entity, nature of
activities of overseas entity,nature of entity WOS/JV, Details of
remittance sent, amount in FCY and in INR Details of other
financial commitment, details of UIN applied and received, details
of receipt of share certificate, approval if any required, details
of APR submitted,nature of contravention and all supporting
documents
Slide 15
Compounding Application for Branch office / Liaison office Name
of the applicant, date of incorporation, date of approval for
opening of LO/Branch office, Validity period of approval Nature of
activities undertaken, income and expenditure of the LO/BO Dates of
submission of Annual Activity Certificates Nature of Contraventions
and reasons for the contravention and all supporting documents
Slide 16
Is Personal Appearance is Compulsory before Compounding
Authority under FEMA ? No. It is is optional and the applicant can
choose not to appear for RBI compounding Authority. The applicant
may enclose full information relating to the case as prescribed in
AP (Dir series) Circular Nos. 56 and 57 dated June 28, 2010 and
December 13, 2011, respectively, with the application or thereafter
and may exercise his discretion with regard to appearing for
hearing.AP (Dir series) Circular Nos. 5657 If applicant opts for
appearing for the personal hearing, then it would encourage the
applicant to appear directly for it rather than being represented
by legal experts, as compounding is only for admitted
contraventions
Slide 17
Is Personal Appearance is Compulsory before Compounding
Authority under FEMA ? To appear for or opting out of personal
hearing does not have any bearing whatsoever on the amount of
penalty involved in the compounding order.
Slide 18
Common Types of Reporting Errors under FEMA Draw down of
External Commercial Borrowing (ECB) without obtaining Loan
Registration Number (LRN) [Regulations 3 and 6 of FEMA 3/2000];
Allowing draw down of ECB under the automatic route from
unrecognised lender, to ineligible borrower, for non- permitted end
uses, etc. [Regulations 3 and 6 of FEMA 3/2000]; Non-filing of form
ODI for obtaining UIN before making the second remittance to
overseas WOS/JV for Overseas Direct Investment (ODI) [Regulation
6(2)(vi) of FEMA 120/2004]; Non-submission of Annual Performance
Reports (APRs) / copies of Share Certificates to the AD (and
non-reporting thereof by the AD to Reserve Bank) in respect of
overseas investments [Regulation 15 of FEMA 120/2004];
Slide 19
Common Types of Reporting Errors under FEMA Delay in submission
of the Advance Reporting Format in respect of Foreign Direct
Investment (FDI) to the concerned Regional Office of the Reserve
Bank [paragraph 9 (1) (A) of Schedule I to FEMA 20/2000]; Delay in
filing of details after issue of eligible instruments under FDI
within 30 days in form FC-GPR to the concerned Regional Office of
the Reserve Bank [paragraph 9 (1) (B) of Schedule I to FEMA
20/2000]; Delay in filing of details pertaining to transfer of
shares for FDI transactions in form FC-TRS by resident
individual/companies [Regulation 10 (A) (b) of FEMA 20/2000];
etc.
Slide 20
Statistical Data on Compounding of Offences under FEMA From the
data on compounding cases received by Reserve Bank, it is observed
that more than 70% of the total cases pertain to FDI within which
about 72% relate to delay in advance reporting/ submission of
FCGPR. In the case of ECB, 24% of the cases received relate to
drawdown without obtaining LRN. Similarly, 66% of the ODI cases
relate to non-reporting of overseas investments online.
Slide 21
Simple Reporting failure may make you to pay hefty fines
According to Chartered Accountants Association, Mumbai, in one
case, an OCB invested in India rupees 8.5 crores (approximately)
with the prior approval of FIPB. The OCB wanted to set up a power
plant in Chhattisgarh. There was a condition of local participation
up to 40per cent. For four years they ran from pillar to post for
several Government permissions. Neither they got Government
permission nor could they find a local investor. Ultimately, they
were frustrated and gave up the project. Hence they transferred the
funds to a sister company where the OCB already had some
investments. The Company delayed in filing intimation. The Company
could not allot shares to OCB as it could not locate a local
investor which was a pre- condition of FIPB approval. In the
meanwhile, RBI issued Circular No. 20 dated 14.12.2007 prohibiting
allotment of shares beyond 180 days of receipt of funds. For these
offenses, RBI imposed a Compounding sum of more than Rs. 3 crores!
Company admits the violations of non-intimation, non-filing of
forms; and step down investment. Still, such a stiff penalty for
all procedural violations where there is no foreign exchange loss
and nothing illegal or immoral!!!
Slide 22
Delay in Reporting Failures in FDI-Compounding now delegated to
Regional RBI. RBI vide its APDIR Circular No.57 dated December 13,
2011 decided to delegate the powers to the Regional Offices of the
Reserve Bank of India to compound the contraventions of FEMA
involving; delay in reporting of inward remittance delay in filing
of form FC-GPR after allotment of shares and delay in issue of
shares beyond 180 days All other applications (for violations of
substantial provisions, ECB norms, etc) may be submitted to the
Compounding Authority, Cell for Effective implementation of FEMA
(CEFA), Foreign Exchange Department, The Reserve Bank of India,
Mumbai.
Slide 23
Caution to ECB Takers/ Availers A borrower is required to keep
ECB funds parked abroad till the actual requirement in India. A
borrower cannot utilize the funds for any other purpose as there is
end use restrictions for ECB. However, Reliance Infrastructure now
Reliance Energy has parked its foreign loan proceeds worth $300
million with its mutual fund in India for 315 days, and then
repatriated the money abroad to a joint venture company. These
actions, according to an RBI, violated various provisions of the
Foreign Exchange Management Act (FEMA). Reliance had not applied
for prior approval of RBI as it contravened the end use
restrictions and also it repatriated the ECB funds for investments
in its overseas joint venture without prior approval of RBI.
Reliance Energy was asked to pay a fine of Rs 124.68 crores