Significant Amendments Under The Foreign Exchange (Compounding Proceedings), Rules

The term compounding is a voluntary act through which a person admits to such contravention and seeks redressal for the same. The Reserve Bank is empowered to compound any contravention as defined under section 13 of FEMA, 1999 except the contravention under section 3(a).^[2] Therefore, under this process a person committing a contravention will file an application to the compounding authority (defined under rule 3 of the FEMA rules) voluntarily accepting the contravention and to be excused , the contravenor must pay the penalty assessed by the RBI and will be given the opportunity of personal hearing.^[3] The crime must be compounded within 180 days of the application.

Moreover, according to the Foreign Exchange (Compounding Proceedings) Rules, 2000^[4], rule 8(2), which was inserted according to a GOI notification dated February 20, 2017, if the Directorate of Enforcement (DoE) considers the compounding procedure relates to a significant infraction suspected of money laundering, terror financing, or compromising the nation's sovereignty and integrity the Reserve Bank will not compound the case. In addition to this, instances involving specific provisions under section 37(A) of the FEMA, 1999 - related to assets held outside India in violation of section 4, will be ineligible for compounding by the Reserve Bank. ^[5]

A person can apply for compounding when authorization has been provided by the Reserve Bank or any other statutory authority or auditors, or he can apply for compounding on his own initiative after he becomes aware of the violation. All laws relating to compounding have been amended in the RBI master direction on compounding of contraventions under FEMA 1999. The procedure of compounding can also be handled by the ED, allowing the contravenor to approach anybody, including RBI or ED. The compounding of the contravention was drafted to empower the RBI with the purpose of providing comfort to individuals and corporate world by lowering transaction costs and thoroughly reviewing any deliberate, malafide, or fraudulent transactions that the Reserve Bank would not compound.

The Finance Ministry of India altered the compounding process introduced Foreign Exchange (Compounding Proceedings) Rules, 2024 on 12^th September and made significant amendments to the laws, such as raising the monetary maximum for settling disputes by RBI officials, permitting online payments, and so on.

Recent Changes Introduced Under FEMA

The new rules that regulate the ability of the Reserve Bank to compound contraventions as per Rule 4^[6] of the newly notified rules 2024 under FEMA are as follows and compared to the previous rules bring into perspective the following changes. These changes look as if are aimed at streamlining processes, addressing higher value cases and revising work-related procedures. Among the key changes, it is necessary to note the growth of the monetary limits for each level of the authority. The new rule allows the lower-level officer to handle more volume and or address higher value contraventions. For instance, an “Assistant General Manager” was having the authority to compound cases up to 10 lakhs prior to the audit amendment but now the Assistant General Manager can compound cases up to rupees sixty lakhs only. This change is to clear bottlenecks suspected to have delayed processing of more cases at lower levels of authority. The hierarchy of the authority level is same with four classes starting from Assistant General Manager and culminating to Chief General Manager. However, the new rule does not cover directive breaks of clause (a) of Section 3 of the Act which used to be included in the old rules. In so doing, this change limits the spectrum of violations that such authorities can aggregate. The most radical change of the previous version is the omission of the stipulation that the amount contravened should be quantifiable.

The compounding application shall be handled as per the below-given matrix:

RESERVE BANK OF INDIA
Rank of Officer	Amount of Offence*
Not below the rank of the Assistant General Manager	Not exceeding Rs. 60 lakhs.
Not below the rank of Deputy General Manager	Not exceeding Rs. 2.5 crores.
Not below the rank of General Manager	Not exceeding Rs. 5 crores.
Not below the rank of the Chief General Manager	Exceeding 5 crores.

*the monetary limits have been raised.

The previous principle was that no contravention maybe compounded unless that amount is capable of being measured. However, new regulation removed this condition making it easier to deal with contraventions where the amount of penalty may not easily assessed. The above new rule makes compounding application simple and easy to adhere to. It now defines that the business should now be made to the Foreign Exchange Department and not the Exchange Control Department as was stated in the old rule. The penalty has been increased from Rs 5000 to Rs 10000 with the GST included there under.

When Contravention Can Not Be Done

The new rule then defines the situations when the contravention cannot be compounded. Five situations that bar compounding of contraventions are provided for by the rule. Firstly, compounding is not allowed where it is impossible to put a figure to the amount of the contravention. This helps to avoid cases where the person who has been accused had his or her financial status affected in small components, which cannot be compounded. Secondly, compounding is also not allowed where section 37A of the Act apply. Thirdly, if the case is filled by the Directorate of Enforcement, compounding is not allowed if they feel that the case contains main violations such as money laundering, terror funding, or the nation's sovereignty and its integrity. In such cases the matter has to be referred to the competent Adjudicating Authority for formal adjudication as provided in section 13 of the Act. Fourthly, compounding is not allowed if the Adjudicating Authority has already passed a penalty under Sect. 13 of the Act. This do away with the problem of duplicity of prosecution and ensures that court determinations are conclusive. Finally, if the compounding authority feels that the contravention warrants further investigation by the Directorate of Enforcement with regard to the degree of breach under Section 13, compounding is not possible. This helps in doing a better analysis of the hard cases. This rule was established in order to safeguard the interest of the public so that serious offences must be investigated and prosecuted not by compounding. It lays down the legal principles which authorities need to follow as to when compounding can be allowed and when the case should be referred for trial.

Changes In Payement Methods

The prior norm the payment was to be made by demand draft in favour of the compounding authority. On the compounding order, the payment period was set at fifteen days. The new rule expands the payment options still more while keeping the same fifteen days payment period intact. The new rule^[7] also permits payment to be made not only by demand draft but through National Electronic Fund Transfer (NEFT), Real Time Gross Transfer (RTGS) and any other electronic or on-line mode of payment as per the approved methods by Bank.

The changes recently made to the FEMA compounding regulations show how much India is determined in simplifying the business and investment environment. Some of the modifications are such as variety in the options in the payment systems going informed, raised monetary thresholds for accumulation, and the ease of the application processes. These enhancements which are in cooperation with the Reserve Bank of India are aimed at updating the regulation workflows, enhancing their performance, and making the compliance less complicated. The behaviour of the government in addressing change of business needs is seen through decentralisation of power across all levels and incorporation of technological aspects. This implies that these reforms will provoke increased speeding up of case settlement, reduced regulation cost, and better conditions to both resident and overseas investors; all of which may propel India's economic growth and investment appeal.

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