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Compounding of Non-Compliancesunder FEMA

FEMA compliances- A tight rope walk

49 sections5 sets of Rules22 sets of RegulationsCircularsNotificationsDirectionsOrdersConditions

Despite best possible care, contraventions do happen……..

Delayed or non-filing of Annexure II (Intimation on receipt of share application/capital money).

Delayed or non-filing of FC-GPR form for allotment of share capital to non-resident.

Delayed or non-filing of Annual Return of Assets and Liabilities. Delayed or non-filing of Softex Form. Delayed or non-filing of ODI Form. Delayed or non-filing of Annual Activity Report for Liaison Office or Branch Office. Delayed or non-filing of Form IPI Establishment of Branch without permission Advance against export order received remaining outstanding for longer period. Transfer of shares between residents and non-residents without filing of FC-TRS

Form.

No condonation mechanism

We may have valid and genuine reasons for such innocuous contraventions.

But FEMA does not provide for condonation by the Authorities.

Provision in lawWhat does it provide

for?

Chapter IV of FEMA deals with contraventions and penalties-

Sec 13: PenaltiesSec 14: Enforcement of the

orders of Adjudicating Authority

Sec 15: Power to compound contravention.

Penalty can be levied upto 300% of the amount involved, if quantifiable.

If not quantifiable, penalty upto Rs 2 lac may be levied.

If contravention is a continuing one, additionally Rs 5000 per day on continuation may be levied.

Implication in that case…..

Penalty Process

Penalty can be levied only on Adjudication of contravention, by the Adjudicating Authority.

A long drawn process requiring filing of complaint, issue of notice, submission of replies, follow of judicial procedure, exercise of judicial powers, inquiry, hearings, and not so early an order. Then, possibility of going in appeals.

Involves cost in terms of money, time and energies.

Till the final disposal of the adjudication, a sword is hanging on head.

Alternative available by way of compounding

Sec 15 of FEMA provides for compounding. Accordingly, any contravention under section 13 can be compounded.

Compounding means, to compromise or settle while agreeing to the contravention, and paying the required fine. An alternative to litigation.

In various laws such provisions are there. For example, under sec. 621A in Companies Act, 1956, under sec. 24A of SEBI Act 1995, under sec. 320 of Code of Civil Procedures. Most common instance of compounding is when you are caught jumping a red light and pay against a challan under sec 200 of the Motor Vehicles Act.

Compounding landscape……

Sec 15

The Foreign Exchange (Compounding Proceedings) Rules, 2000.

Master Circular by RBI dated July 2011.

Sec 15

Any contravention under sec 13.

Application by person committing contravention.

Within 180 days of the receipt of application.

Directorate of Enforcement and RBI.

Once compounded, no further proceedings to initiate or continue.

Before Adjudication After Adjudication

Suo moto, or on a memorandum by RBI or other Authorities.

No inquiry to be held for adjudication in relation to such contravention

Situation where complaint has been made.

In such case, on compounding, it will be brought to the notice of the Adjudicating Authority.

Discharged.

Stages for compounding and effect

Without adjudication In adjudication

Suo moto or on a Memorandum by the authorities. RBI generally advises the concerned persons to opt for compounding as and when such contraventions come to its notice.

Application to Compounding Authority in the prescribed form along with fee.

Hearing Compounding order Payment as per compounding order Certificate by Compounding Authority.

Complaint by an Authorised Officer, to the Adjudicating Authority.

Inquiry by the Adjudicating Authority. Either during the adjudication process

or after the adjudication, application can be filed before the Compounding Authority in the prescribed form along with fee.

Hearing, Compounding order, payment as per order and certificate by Compounding Authority.

Compounding Process

Compounding by ED Compounding by RBI

For contravention under sec 3(a)- (cases of hawala transactions)

Jurisdiction based on amount involved-a) Upto Rs 5 lac……Deputy Directorb) Above 5 lac but less than Rs 10

lac….Additional Directorc) 10 lac or more but less than Rs 50 lac…Special

Directord) 50 lac or more but less than Rs 1 crore…

Special Director with Deputy Legal Advisore) One crore or more……Director of Enforcement

with Special Director

For contraventions other than under sec 3(a)

Jurisdiction based on amount involved-

a) Rs 10 lac or below…..Assistant General Manager.

b) Above Rs 10 lac but less than Rs 40 lac…..Deputy General Manager.

c) Rs 40 lac or more but less than Rs 100 lac………General Manager

d) Rs 100 lac and above….Chief General Manager.

The Foreign Exchange (Compounding Proceedings) Rules, 2000.Jurisdiction

For ED cases For RBI cases

DirectorDirectorate of EnforcementNew Delhi.

Application fee of Rs 5000 by DD in favour of the Compounding Authority.

The Compounding Authority, [Cell for Effective implementation of FEMA (CEFA)], Foreign Exchange Department, 5th floor, Amar Building, Sir P.M. Road, Fort, Mumbai- 400001.

Application fee of Rs 5000 by DD in favour of Compounding Authority.

Where to file the application for compounding?

RBI’s Master Circular No.8 /2011-12 dated July 01, 2011

RBI for its own set of compounding cases, has given guidance on compounding process in the Master Circular.

Key features are……….

Master Circular- Key features (contd.)

RBI to assess whether contravention is compoundable, and if so quantifiable.

Nature of contravention to be ascertained on the following-

a) technical and /or minor, requiring cautionary advice.b)Serious, warranting compounding.c) Involves money laundering, national and security concerns involving serious infringement of the regulatory framework.

Similar contravention within 3 years of compounding, not compoundable.

Contravention not to be compounded unless the required approvals are obtained from the concerned authorities.

Contraventions having a money laundering angle, national security concern and/or involving serious infringement of the regulatory framework, or where the contravener fails to pay the compounding amount, to be referred to Directorate of Enforcement for investigation/action.

Master Circular- Key features (contd.)

Factors to be considered for passing compounding order-

a) the amount of gain of unfair advantage, where quantifiable, made as a result of contravention.

b) the amount of loss caused to any authority/agency/exchequer as a result of contravention.

c) economic benefit accruing to the contravener from delayed compliance or compliance avoided.

d) the repetitive nature of the contravention, the track record and/or history of non-compliance of the contravener.

e) contravener’s conduct in undertaking the transaction and disclosure of full facts in the application and submissions made during the personal hearing.

f) any other factor considered relevant and appropriate.

What, if you do not pay as per Compounding Order?

Compounding Order becomes void.Complaint to ED/Adjudicating Authority.Enquiry and adjudication of contravention.Penalty OrderCan opt for Appeal to Special DirectorAppellate orderEnforcement of order

FORM(To be filled in duplicate and shall be accompanied by

certified copy of the Memorandum issued)

S No Particulars Particulars of the Applicant1 Name of the applicant

2 Full Address of the Applicant (Including Phone and Fax No. And Email id)

3 Whether the applicant is resident in India or resident outside India.

4 Name of the Adjudicating Authority before whom the case is pending.

5 Nature of the Contravention [according to sub-section (1) of Section 13]

6 Brief Facts of the case

7 Details of fee for application of Compounding

8 Any other information relevant to the case.

Form (contd.)

I/we declare that the particulars given above are true and correct to the best of my knowledge and belief and that I/we am/are willing to accept any directions/order of the Compounding Authority in connection with compounding of my/our case.

Dated…… Signature…….

Practice Tips

Application Form to be duly filled in.Updated email / fax to be mentioned – changes to be

promptly notified as correspondence is primarily through these means

Specific reference to Act, Rules, Regulations, etc. to be incorporated

Admit the contraventionsPrayer for nil penalty and only an administrative

cautionary notice

Practice Tips (contd.)

Attach an annexure / write-up to the Form giving out:a) Detailed background about activities of the applicant

b) Circumstances surrounding the contraventions c) Emphasize that contravention are not repetitive or wilful – provide details of other compliances / filings in time d) Emphasis of filings on discussions / guidance from Authorized Dealer / Banker (their clarification letter or that of recommendations, etc)e) Emphasize if contraventions have happened only at a particular phase e.g. start-up, key employees left, etc. and not otherwise.f) Remedial actions taken e.g. appointment of consultants, lawyer, legal head, etc.g) Provide annexure / supporting documents e.g. FIPB approval, Audited Financials.h) Statements, Letters and Correspondence with RBI, etc.

Practice Tips (contd.)

At hearing stage:Director / senior officer from company to accompany Authorized

Representative (A/R)Explanation / background about company to be given by company

representativeAverment by the company representativeFactual and legal submissions by A/RProduce evidence / documents of compliances, developments and

approvals obtained post filing of applicationFile additional written submissions / details based on requirements /

discussion in the hearing

Practice Tips (contd.)

Order StageCompare application with order with respect to sections /

statute and nature of contraventionsEnsure all arguments are properly capturedPatent or apparent Mistakes in facts / numbersFile letter with the RBI for reference and recordEnsure payment within 15 days of Order date if

agree with the OrderMay not agree with the Order, no payment and await further

developments.

Questions?

CA VIJAY GOEL+91 98 101 29835

vi jay@vkgc .com

Thank you