#TaxmannPPT | Compounding of Contravention under FEMA | S N & Co.

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What is Compounding?

• Compounding is the admission of a violation of any of the provisions of the FEMA Act of 1999 • It refers to admitting a Contravention, pleading guilty and seeking remedy.

• Or violation of the rules/regulations/notifications/orders/directions, or circulars issued under the Act • The provisions of section 15 of FEMA, 1999 permit compounding of contravention • The offence must be compounded within 180 days of the date of receipt of the application.

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When should one apply for Compounding?

• When a person is made aware of the contravention of the provisions of FEMA, 1999 by • the Reserve Bank or • any other statutory authority or • the auditors or • by any other means, she/he may apply for compounding.

• One can also make an application for compounding, suo moto, on becoming aware of the contravention.

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What are Compounding Orders?

• Vide A.P. (Dir Series) Circular No. 73 dated 26/05/2016, RBI decided to opt for public disclosure of compounding orders.

• Till date, 4540 orders have been hosted on the RBI website.

• Compounding orders are concise, outlining facts, emphasizing the violated provision, and specifying the compounding fee.

• Does not hold any precedence value and only immense guidance value.

• Analyzing compounding orders offers key insights into the RBI's application of FEMA provisions and relevant notifications, providing valuable interpretive principles.

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Total Compounding order passed by RBI Amount imposed under Compounding (in INR)

No. of Cases

%

Rs. 1 – Rs. 1 Lacs

2623

58%

Rs. 1 Lacs – Rs. 10 Lacs

1486

33%

Rs. 10 Lacs – Rs. 1 Cr

374

8%

Rs. 1 Cr and above

57

1%

Total

4540

100%

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Statistical Facts Areas

No. of Cases

%

Foreign Direct Investment (FDI)

1747

77%

Overseas Direct Investment (ODI)

347

15%

Liaison Office/ Branch Office/ Project Office

62

3%

External Commercial Borrowing (ECB)

44

2%

Immovable Property

17

1%

Others

59

3%

Total

2,276

100%

Foreign Direct Investment (FDI)

Overseas Direct Investment (ODI) Liaison Office/ Branch Office/ Project Office

External Commercial Borrowing (ECB) Immovable Property

Others 6

Provisions Regulatory Provisions: • Section 15 of the Foreign Exchange Management Act, 1999 read with Section 13 Governing Provisions: • Foreign Exchange Management (Compounding Proceedings) Rules, 2000, as amended, • Master Direction on Compounding of Contraventions under FEMA, 1999 – No.04/2015-16 dated January 1, 2016, as amended

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Powers to Compound CONTRAVENTION OF SECTION 3(a) OF FEMA,1999

ANY OTHER CONTRAVENTION

Deputy Direction of DoE - Amount involved less than Rs.5 lacs

Assistant General Manager of RBI - Rs.10 Lacs or below

Additional Director of DoE - Rs.5 lacs upto Rs.10 Lacs

Deputy General Manager of RBI - Rs.10 lacs - Rs. 40Lacs

Special Director of DoE - Rs.10 Lacs upto Rs.50 Lacs General Manager of RBI - Rs.40 lacs - Rs.1 Crore

Special Director with Deputy Legal Adviser of DoE - Chief General Manager of RBI - Rs.1 Crore and Rs.50 Lacs upto Rs.1 Crore above Director of Enforcement with Special Director of DoE – Above Rs.1 Crore No Contravention shall be compounded unless the amount involved in such contravention is quantifiable.

Section 3(a) of FEMA, 1999 - deal in or transfer any foreign exchange or foreign security to any person not being an authorised person; 8

Delegation of Powers to Regional Offices/Sub-Offices FEMA 20/2000-RB dated May 3, 2000

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Paragraph 9(1)(A) of Schedule 1

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Paragraph 9(1)(B) of Schedule 1

•

Paragraph 9(2) of Schedule 1

•

Paragraph 8 of Schedule 1

•

Paragraph 5 of Schedule 1

•

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

•

Paragraph 2 or 3 of Schedule 1 (Issue of shares without approval of RBI or Government, wherever required)

•

Regulation 10A (b)(i) read with paragraph 10 of Schedule 1

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Regulation 10B (2) read with paragraph 10 of Schedule 1

•

Regulation 4 (Receiving investment in India from non-resident or taking on record transfer of shares by investee company)

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Regulation 14(6)(ii)(a)

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Paragraphs 7(1) (for the period upto 02.03.2017) and 6(1) (for the period 03.03.2017 to 06.11.2017) of Schedule 9

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Regulation 10(A)(a)

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Delegation of Powers to Regional Offices/Sub-Offices FEMA 20(R)/ 2017-RB dated November 07, 2017 • Regulation 13.1(1) • Regulation 13.1(2) • Regulation 13.1(3) • Paragraph 2 of Schedule 1 • Regulation 11 • Regulation 2(v) read with Regulation 5 • Regulation 16.B (Issue of shares without approval of RBI or Government, wherever required) • Regulation 13.1(4)

• Regulation 4 (Receiving investment in India from non-resident or taking on record transfer of shares by investee company) • Regulation 13.1(11) • Regulations 13.1(7) and 13.1(8) • Regulation 10(5) 10

Delegation of Powers to Regional Offices/Sub-Offices FEM (Non –Debt Instruments) Rules, 2019 dated October 17, 2019 Rule 2(k) read with Rule 5 Definition of equity instruments

Rule 21

Pricing Guidelines

Paragraph 3 (b) of Schedule I (Issue of shares without approval of RBI or Government, wherever required) Rule 4 (Receiving investment in India from non-resident or taking on record transfer of shares by Investee Company) Rule 9(4) and Rule 13(3)

Sectoral Caps for total foreign investment Restriction on receiving investment Transfer of equity instruments by NRI or OCI

FEM (Mode of Payment and Reporting of Non-Debt Instruments) Regulations dated October 17, 2019 (FEMA 395/2019-RB) Regulation 3.1(I)(A) Mode of Payment Regulation 4(1)

Form FC-GPR

Regulation 4(2)

Annual Return on Foreign Liabilities and Assets (FLA)

Regulation 4(3)

Form FC-TRS

Regulation 4(6)

Form LLP(I)

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Contraventions Compounded by FED CO Cell, New Delhi • The officers attached to the FED, CO, Cell at New Delhi office are authorized to compound the contraventions as per details below: FEMA Notifications FEMA 7/2000-RB, dated 3-5-2000 / FEMA 7(R) /2015-RB dated 21-1-2016 FEMA 21/2000-RB, dated 3-5-2000 / FEMA 21(R)/2018RB, dated 26-3-2018 / Chapter IX of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 dated 17-10-2019

Acquisition and transfer of immovable property outside India

FEMA 22/2000-RB, dated 3-5-2000 / FEMA 22(R) /2016RB dated 31-3-2016 FEMA 5/2000-RB, dated 3-5-2000 / FEMA 5(R)/2016-RB dated 1-4-16

Establishment in India of branch or office or other place of business

Acquisition and transfer of immovable property in India

Deposit Regulations

• Amounts Above 1 Crore – Regional Office at Panaji and Kochi will have no jurisdiction.

Mumbai Regional Officer and Thiruvananthapuram Regional Office would compound such contraventions.

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Contravention of Provisions under FEMA, 1999 • Committed Contraventions under ODI

ECB

FDI

• Non submission of form ODI after investment & UIN not allotted • Not a permitted method of Funding • Not obtaining Share certificate within stipulated time period from the date of Remittance • Non Submission of Annual Performance Reports (APR) every year

• Not an eligible borrower • Lender not a recognized lender • Minimum Maturity period not adhere to • Breach of all in cost ceiling • End use not a permitted one • LRN not obtained

• Non reporting of Inward remittance within 30 days • Not allotting equity instrument or refunding the amount within 180 days • Not submitting Form FCGPR within 30 days from the date of allotment • Non Submission of Form FCTRS on transfer of shares • Issue of instrument other than equity shares, fully or CCPS as prescribed 13

Contravention of Provisions under FEMA, 1999 • Committed Contraventions under Sensitive Contraventions

• Cases involving serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation are categorized as sensitive contraventions.

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Benefits of Compounding • It is a voluntary process • Comforts of citizens and corporate community • Personal hearing is not mandatory • Minimizing transaction costs • Time-bound disposal (180 Days) • Changing dynamics of our economy • Simple and hassle - Free procedure • No proceeding or further proceedings initiated or continued • Absolutely transparent

• It saves time and energy One application - One hearing - One order for one notification.

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Pre-requisite for Compounding Process • The company must not make similar contraventions within a 3 year period of compounding.

• Compoundable contraventions requiring approvals from any authorities must obtain necessary permissions before applying for compounding.

• Any suspected serious contraventions such as money laundering, terror financing, or compromising national sovereignty trigger referral to the Directorate of Enforcement for further investigation if the contravener fails to pay the compounding penalty within the stipulated period.

• Contraventions that have undergone adjudication by the Directorate of Enforcement and are under appeal according to sections 17 or 19 of FEMA, 1999, are non compoundable.

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Compounding Process • Submission of application to RBI and not AD bank in the prescribed format.

• Payment of fees - of Rs. 5,000/- by way of DD in favour of RBI • Examination by RBI • Calling for additional documents, if required • Opportunity for personal hearing • Passing compounding order • Payment of penalty • Issuance of certificate of payment of a penalty

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Compounding Process • Separate formats are provided in Annex II for FDI, ECB, ODI & Branch Office / Liaison Office • Format for FDI • Name of the applicant, Date of incorporation, Income-tax PAN, Nature of activities under taken (Please give NIC code – 1987 / 2008), Brief particulars about the foreign investor • Details of foreign inward remittances received by Applicant Company from date of incorporation till date

Table A SI. No.

Name of Remitter

Total Amount (INR)

Date of Receipt

Reported to RBI on*

Delay if any

Total * date of reporting to RBI and not AD

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Compounding Process Table B Name of Investor

Date of allotment Number of Amount for which Date of reporting Delay if of shares shares allotted shares allotted to RBI any

Total * date of reporting to RBI and not AD

Table C SI. No.

Name of Remitter

Total Amount (INR)

Date of Receipt

Excess share application Money

Date of refund of share application Money

Amount in RBI approval forex letter and date

Total * date of reporting to RBI and not AD

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Compounding Process Table D Authorized Capital SI. No.

Date

Authorized Capital

With effect from

Date of Board Meeting

Date of filing with ROC

A=B+C

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Computation of Penalty As per provisions of section 13 of FEMA the amount imposed can be up to three times the amount involved in the contravention. However, the amount imposed is calculated based on guidance note given below.

Type of contravention

Existing Formula

Fixed amount : Rs10000/- (applied once for each contravention in a 1] Reporting Contraventions compounding application) + A) FEMA 20 Para 9(1)(A), 9(1)(B), part B of FC(GPR), FCTRS (Reg. 10) and taking on record FCTRS Variable amount as under: (Reg. 4) Up to 10 lakhs: 1000 per year < Rs.10 lakhs & > Rs. 40 lakhs: 2500 per year B) FEMA 3 Non submission of ECB statements Rs.40 lakhs + and > Rs. 100 lakhs: 7000 per year Rs.1-10 crore : 50000 per year C) FEMA 120 Non reporting/delay in reporting of Rs.10 -100 Crore : 100000 per year acquisition/setup of subsidiaries/step down Above Rs.100 Crore : 200000 per year subsidiaries /changes in the shareholding pattern D) Any other reporting contraventions (except those in Row 2 below) 21

Computation of Penalty Type of contravention

Existing Formula

As above, subject to ceiling of Rs.2 lakhs. In case of Project Office, E) Reporting contraventions by the amount imposed shall be calculated on 10% of total project cost.

LO/BO/PO 2] AAC/ APR/ FLAR/ Share certificate Rs.10000/- per AAC/APR/FCGPR (B)/FLA Return delayed. delays In case of non-submission/ delayed Delayed receipt of share certificate – Rs.10000/- per year, the total submission of APR/ share certificates (FEMA amount being subject to ceiling of 300% of the amount invested.

120) or AAC (FEMA 22) or FCGPR (B) or FLA Returns - FEMA 20 / FEMA 20 (R) / FEMA 120/FEMA 395 Rs.30000/- + given percentage: 3] 1st year : 0.30% A] Allotment/Refunds Para 8 of FEMA 20/2000-RB (non-allotment 1-2 years : 0.35% of shares or allotment/ refund after the 2-3 years : 0.40% stipulated 180 days) 3-4 years : 0.45% 4-5 years : 0.50% B] LO/BO/PO (Other than reporting contraventions) >5 years : 0.75% (For project offices the amount of contravention shall be deemed to 22 be 10% of the cost of project).

Computation of Penalty Type of contravention 4] All other contraventions, – including all contraventions of FEMA20(R)/2017/NDIR, 2019/FEMA 395/ 2019/, except contraventions pertaining to FLA returns and corporate guarantees

Existing Formula

Rs.50000/- + given percentage: 1st year : 0.50% 1-2 years : 0.55% 2-3 years : 0.60% 3-4 years : 0.65% 4-5 years : 0.70% >5 years : 0.75% Rs.500000/- + given percentage: 5] Issue of Corporate 1st year : 0.050% Guarantees without UIN/ without permission wherever required /open ended 1-2 years : 0.055% guarantees or any other contravention 2-3 years : 0.060% related to issue of Corporate Guarantees.

3-4 years : 0.065% 4-5 years : 0.070% >5 years : 0.075% In case the contravention includes issue of guarantees for raising loans which are invested back into India, the amount imposed may be trebled. *The contraventions of FEMA 20 existing and continuing as on November 07, 2017 (i.e. the starting date of 23 contraventions prior to November 07, 2017) will be compounded as per 1(A) above.

Computation of Penalty Additional Provisions • The amount imposed should not exceed 300% of the amount of contravention • In case the amount of contravention is less than Rs. One lakh, the total amount imposed should not be more than amount of simple interest @5% p.a. calculated on the amount of contravention.

• In case of Transfer or issue of security by a person resident outside India, the amount imposed will be further graded as under: Shares Allotted

Times of amount calculated

After 180 Days without prior approval

1.25 Times

Not allotted and amount refunded after 180 days with permission

1.50 Times

Not allotted and amount refunded after 180 days without permission

1.75 Times

• In cases where it is established that the contravener has made undue gains, the amount thereof may be neutralized to a reasonable extent by adding the same to the compounding amount calculated as per chart.

• If a party who has been compounded earlier applies for compounding again for similar contravention, the amount calculated as above may be enhanced by 50%.

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Penalty to Compounding • The amount should be paid within 15 days from the date of the order by way of a demand draft drawn on "Reserve Bank of India" and payable at the Regional office/ Sub-office / Central Office Cell, New Delhi which has issued the compounding order and at Mumbai if the order is issued by CEFA, Central Office, Mumbai • Appeal against the order of the Compounding Authority?

There is no provision under the of FE (Compounding Proceedings) Rules, 2000, for an appeal against the order of the Compounding Authority or for a request for reduction of amount imposed or extension of period for payment of the amount imposed.

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Late Submission Fees (LSF) • The Late Submission Fee (LSF) was introduced for reporting delays in Foreign Investment (FI), External Commercial Borrowings (ECBs) and Overseas Investment related transactions with effect from November 07, 2017, January 16, 2019 and August 22, 2022 respectively. It has now been decided to bring uniformity in imposition of LSF across functions. The following matrix shall be used henceforth for calculation of LSF, wherever applicable: Type of Reporting delays

LSF Amount (INR)

1

Form ODI Part-II/ APR, FCGPR (B), FLA Returns, Form OPI, evidence of investment or any other return which does not capture flows or any other periodical reporting

7500

2

FC-GPR, FCTRS, Form ESOP, Form LLP(I), Form LLP(II), Form CN, Form DI, Form InVi, Form ODI-Part I, Form ODI-Part III, Form FC, Form ECB, Form ECB-2, Revised Form ECB or any other return which captures flows or returns which capture reporting of non-fund transactions or any other transactional reporting

[7500 + (0.025% × A × n)]

Sr. No.

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Late Submission Fees (LSF) • Time Frame: LSF option can be availed till a period of three years from the due date of reporting or submission. Post expiry of the said three years, the contravener will continue to have the ability to apply for compounding procedure as established under FEMA for rectifying the delays in filings.

• The new matrix for calculation of LSF may prove either beneficial or detrimental for a contravener, when compared with the old regime, based on variables such as the amount and the time involved (examples) Contravention Delayed Filing Minimum Maximum Delayed filing of Form ECB-2 for a year (borrowing Rs. 100 Crs)

Compounding

LSF

Rs. 100 (Foreign Investment) Rs. 7,500 or Rs. 5000 (ECB) 300% of the amount involved 100% of amount involved Rs. 50,000

Rs. 2,57,500 27

Major Differences Compounding

Late Submission Fees (LSF)

• Purpose: Compounding is a process by which contraventions of FEMA provisions can be regularized or condoned by the Reserve Bank of India (RBI).

• Purpose: Late submission fees are imposed for delays in submitting required documents or information under FEMA.

• Completion of proceedings: within 180 Days

• Completion of proceedings: Immediate

• Maximum Penalty: 300% of Amount Involved

• Maximum Penalty: 100% of Amount Involved

• Payment within 15 Days of order

• Payment within 30 Days from the issuance of LSF payment advice.

• In case of non payment within 15 days such case shall be referred to DoE

• In case of non payment within 30 days such case shall be considered null and void and any LSF received beyond this period shall not be accepted.

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Documentation Requirement • Compounding application in the format prescribed by RBI From time to time • Along, with the prescribed fee of Rs.5000/- by way of a demand draft drawn in favour of “Reserve Bank of India” • Additional details as per the Annexes- relating to Foreign Direct Investment, External Commercial Borrowings, Overseas Direct Investment and Branch Office / Liaison Office, as applicable • An undertaking that they are not under investigation of any agency such as DoE, CBI, etc- (No Format specified) • Duly filled ECS mandate form • A copy of MoA and latest Audited BS while applying • Application must contain contact details, name of the applicant, Mobile no., and email Id

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Compounding Orders FACTORS TAKEN INTO ACCOUNT WHILE PASSING COMPOUNDING ORDER • Amount of gain/unfair advantage received as a result of contravention (wherever quantifiable) • Amount of loss caused to authority/agency/exchequer due to contravention • Economic benefit to the contravener due to delayed nature of compliance or avoiding such compliance • Repetitive nature of contravention. Track record/History of noncompliance • Contravener’s conduct – while undertaking the transaction/disclosure of full facts in Application. Submission made during personal hearing.

• Any other factor considered relevant/appropriate.

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