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OFFENCES,CONTRAVENTIONANDCOMPOUNDINGOFOFFENCESUNDERFOREIGNEXCHANGEMANAGEMENTACT,1999
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OFFENCES,CONTRAVENTIONANDCOMPOUNDINGOFOFFENCESUNDERFOREIGN
EXCHANGEMANAGEMENTACT,1999

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OFFENCES,CONTRAVENTIONANDCOMPOUNDINGOFOFFENCESUNDERFOREIGNEXCHANGE
MANAGEMENTACT,1999

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By:Mr.M.GOVINDARAJAN Featured
Highlights/Annotations
January13,2014
SMS
EventCalendar
Contents
Introduction

ShortNotes
Forum

DiscussionForum
TheobjectiveofForeignExchangeManagementAct,1999(Actforshort)istofacilitateexternaltradeand
Articles
paymentsandmaintenanceofforeignexchangeinIndia.ItshouldbenotedthatFEMAisnotarevenuelaw.
ExpertsForum
CompoundingofoffencesisallowedinthisAct.ThecompoundingofthecontraventionunderFEMAwas
implementedbytheReserveBankofIndia(RBI)byputtinginplacethesimplifiedproceduresforcompoundingwith
ExpertsArticles
effectfrom1.2.2005withthefollowingviewsenshriningthemottoofenhancingtransparencyandeffectsmooth
MoreOptions
implementationofthecompoundingprocess:
Minimizationoftransactioncostsand
Takingaseriousviewofthewillful,malafideandfraudulenttransactions.

ComputeIncomeTax
OnlineTax/Return
ImportantLinks

Thecompoundingproceedingshavetheintentionofdeterringpeoplefrommakingrepetitivelapses.
Offence
ContraventionofFERAwasconsideredascriminaloffence,whereascontraventionofFEMAisconsideredascivil
offence.IntheActthereisnoprovisionastooffencecommittedbyaperson.
Contravention

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ContraventionisabreachoftheprovisionsoftheForeignExchangeManagementAct,1999(Actforshort)and
rules/regulations/notification/orders/directions/circularsissuedthereunder.Thecontraventions,primafacie,
involvingmoneylaundering,nationalandsecurityconcernsinvolvingseriousinfringementoftheregulatory
framework,etc.,aresensitivecontraventions.
Contraventionsthatoccur
Thecontraventionsdohappendespitethebesteffortstaken.Thefollowingaresomeofthecontraventionsdespite
thebesteffortstaken:
DelayedornonfilingofAnnexureII(intimationonreceiptofshareapplication/capitalmoney)
DelayedornonfilingofFGGPRformforallotmentofsharecapitaltononresident
DelayedornonfilingofAnnualReturnsofAssetsandLiabilities
Delayedornonfilingofsoftexform
DelayedornonfilingofODIform
DelayedornonfilingofAnnualActivityReportforliaisonofficeorbranchoffice
DelayedornonfilingofFormIPI
Establishmentofbranchwithoutpermission
Advanceagainstexportorderreceivedremainingoutstandingforlongerperiod
TransferofsharesbetweenresidentsandnonresidentswithoutfilingFCTRSform.
Thoughwehavevalidreasonsforsuchcontraventions,thereisnoprovisionforcondoningthesamebythe
AuthoritiesprovidedintheAct.

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Contraventionbycompanies
Section42oftheActdealswithcontraventionoftheprovisionsoftheActbythecompanies.Section42(1)ofthe
ActprovidesthatwhereapersoncommittingacontraventionofanyoftheprovisionsofthisActorofanyrule,
directionorordermadethereunderisacompany,everypersonwho,atthetimethecontraventionwascommitted,
wasinchargeof,andwasresponsibleto,thecompanyfortheconductofthebusinessofthecompany("company"
meansanybodycorporateandincludesafirmorotherassociationofindividuals)aswellasthecompany,shallbe
deemedtobeguiltyofthecontraventionandshallbeliabletobeproceededagainstandpunishedaccordingly.
Nothingcontainedinthissubsectionshallrenderanysuchpersonliabletopunishmentifheprovesthatthe
contraventiontookplacewithouthisknowledgeorthatheexercisedduediligencetopreventsuchcontravention.
Section42(2)providesthatnotwithstandinganythingcontainedinsubsection(1),whereacontraventionofanyof
theprovisionsofthisActorofanyrule,directionorordermadethereunderhasbeencommittedbyacompany
anditisprovedthatthecontraventionhastakenplacewiththeconsentorconnivanceof,orisattributabletoany
neglectonthepartof,anydirector("director",inrelationtoafirm,meansapartnerinthefirm),manager,secretary
orotherofficerofthecompany,suchdirector,manager,secretaryorotherofficershallalsobedeemedtobeguilty
ofthecontraventionandshallbeliabletobeproceededagainstandpunishedaccordingly.
Penalties
Section13oftheActprovidespenaltiesforcontraventionoftheprovisionsoftheAct.Section13(1)providesthat
ifanypersoncontravenesanyprovisionofthisAct,orcontravenesanyrule,regulation,notification,directionor
orderissuedinexerciseofthepowersunderthisAct,orcontravenesanyconditionsubjecttowhichan
authorizationisissuedbytheReserveBank,heshall,uponadjudication,beliabletoapenaltyuptothricethesum
involvedinsuchcontraventionwheresuchamountisquantifiable,oruptotwolakhrupeeswheretheamountisnot
quantifiable,andwheresuchcontraventionisacontinuingone,furtherpenaltywhichmayextendtofivethousand
rupeesforeverydayafterthefirstdayduringwhichthecontraventioncontinues.
Section2(u)oftheActdefinesthetermpersonwhichincludes
Anindividual
AHinduUndividedFamily
ACompany
Afirm
Anassociationofpersonsorabodyofindividuals,whetherincorporatedornot
Everyartificialjuridicalperson,notfallingwithinanyoftheabove.
Section13(2)providesthatanyAdjudicatingAuthorityadjudginganycontraventionundersubsection(1),may,if
hethinksfitinadditiontoanypenaltywhichhemayimposeforsuchcontraventiondirectthatanycurrency,security
oranyothermoneyorpropertyinrespectofwhichthecontraventionhastakenplaceshallbeconfiscatedtothe
CentralGovernmentandfurtherdirectthattheforeignexchangeholdings,ifanyofthepersonscommittingthe
contraventionsoranypartthereof,shallbebroughtbackintoIndiaorshallberetainedoutsideIndiainaccordance
withthedirectionsmadeinthisbehalf.Forthepurposesofthissubsection,"property"inrespectofwhich
contraventionhastakenplace,shallinclude
Depositsinabank,wherethesaidpropertyisconvertedintosuchdeposits
Indiancompany,wherethesaidpropertyisconvertedintothatcurrencyand
Anyotherpropertywhichhasresultedoutoftheconversionofthatproperty.
Compounding
ThetermcompoundinghasnotbeendefinedeitherintheForeignExchangeManagementAct,1999ortherules
issuedthereunder.Compoundingreferstotheprocessofvoluntarilyadmittingthecontravention,pleadingguilty
andseekingredressal.AsperBlocksLawDictionary,compoundmeanstosettleamatterbyamoneypayment,
inlieuofotherliability.Inshortcompoundingofanoffenceisasettlementmechanism,bywhich,oneisgiven
optiontopaymoneyinlieuofprosecution,therebyavoidingaprolongedlitigation.Onlythosecontraventionsthat
donotattractimprisonmentasamandatorypenaltyarecompoundable.Inotherwords,offencesthatare
specificallypunishablewithimprisonmentonlyorimprisonmentandfinearenotcompoundable.Further,ifthe
amountinvolvedinthecontraventionisnotquantifiable,thenthecontraventionshallnotbecompounded.
Section15oftheActprovidesforcompoundingofoffences.Section15(1)providesthatanycontraventionunder
section13may,onanapplicationmadebythepersoncommittingsuchcontravention,becompoundedwithinone
hundredandeightydaysfromthedateofreceiptofapplicationbytheDirectorofEnforcementorsuchother
officersoftheDirectorateofEnforcementandOfficersoftheReserveBankasmaybeauthorizedinthisbehalfby
theCentralGovernmentinsuchmannerasmaybeprescribed.
Section15(2)providesthatwhereacontraventionhasbeencompoundedundersubsection(1),noproceedingor
furtherproceeding,asthecasemaybe,shallbeinitiatedorcontinued,asthecasemaybe,againsttheperson
committingsuchcontraventionunderthatsection,inrespectofthecontraventionsocompounded.
WhethercontraventionundertheForeignExchangeManagementAct(FEMA)istobetreatedastechnicaland/or
minororseriouswouldbedecidedbytheReserveBankonthemeritsofthecase.Theapplicationwillbedisposed

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ofkeepinginviewtheprocedurenotifiedinthisregard.PersonswhohavecontravenedtheprovisionsofFEMA
shouldnottakeuponthemselvessuomoto,oronthebasisofexternaladvicetodecidewhetheraparticular
contraventionistechnicalorminorinnatureand,hence,nocompoundingapplicationneedbesubmittedtothe
ReserveBank.Ifsuchapplicationsforcompoundingarenotmade,thepersonconcernedshallexpose
himself/herselftosuchactionundertheprovisionsofFEMAastheauthoritiesmaydeemappropriate.Thepersons
concernedshould,therefore,intheirowninterestsubmittheirapplicationsforcompoundingofcontraventionunder
FEMAtotheReserveBankattheearliestopportunity.
PowersofRBItocompound
TheReserveBankisempoweredtocompoundanycontraventionsasdefinedundersection13ofFEMA,1999
exceptthecontraventionundersection3(a)ibid,foraspecifiedsumafterofferinganopportunityofpersonal
hearingtothecontravener.Itisavoluntaryprocessinwhichanindividualoracorporateseekscompoundingofan
admittedcontravention.ItprovidescomforttoanypersonwhocontravenesanyprovisionsofFEMA,1999[except
section3(a)oftheAct]byminimizingtransactioncosts.Willful,malafideandfraudulenttransactionsare,however,
viewedseriously,whichwillnotbecompoundedbytheReserveBank.
Authoritytocompound
Rule4ForeignExchange(CompoundingProceedings)Rules,2000(Ruleforshort)givespowerstothefollowing
officersofRBIaccordingtomonetarylimitincontraventionofanyoftheprovisionsoftheActexceptSec.3(a)ofthe
Act:
WherethesuminvolvedincontraventionisRs.10lakhsorbelowAssistantGeneralManager
WherethesuminvolvedincontraventionisRs.10lakhsormorebutbelowRs.40lakhsDeputyGeneral
Manager
WherethesuminvolvedincontraventionisRs.40lakhsormorebutbelowRe.1croreGeneralManager
WherethesuminvolvedincontraventionisRe.1croreormoreChiefGeneralManager
Everyofficershallexercisethepowerssubjecttothedirector,controlandsupervisionoftheGovernorofRBI.
Rule5givespowerstothefollowingofficersofEnforcementDirectorateaccordingtomonetarylimitin
contraventionoftheprovisionsofSec.3(a)oftheAct:
WherethesuminvolvedincontraventionisRs.5lakhsorbelowDeputyDirector
WherethesuminvolvedincontraventionisRs.5lakhsormorebutbelowRs.10lakhsAdditionalDirector
WherethesuminvolvedincontraventionisRs.10lakhsormorebutlessthanRs.50lakhsSpecialDirector
WherethesuminvolvedincontraventionisRs.50lakhsormorebutbelowRe.1croreSpecialDirectorwith
DeputyLegalAdvisor
WherethesuminvolvedincontraventionisRe.1croreormoreDirectorwithSpecialDirector
Everyofficershallexercisethepowerssubjecttothedirector,controlandsupervisionoftheDirectorof
Enforcement.
InM/s.BrentfieldTravelsCo.Pvt.Ltd.,VersusTheReserveBankofIndia&Anr.2011(9)TMI428
BOMBAYHIGHCOURT,itwasheldthatthepowertocompoundhastobeexercisedjudiciouslyhavingregardto
theconsiderationswhichhavebeensetoutinthestatuteandinthecircularissuedbytheReserveBankofIndia.
Thereisnoabsoluterighttoclaimacompoundingofcontraventions.Anapplicationforcompoundinginfactdoes
postulatethatabreachhastakenplace.ItisfortheCompetentAuthoritytodecideastowhetherthecontravention
isofatechnicalnatureorwhetheritisofasensitivenatureinvolvingbroaderissuesofnationalsecurityormoney
launderingoraseriousinfringementoftheregulatoryframeworkinwhichcaseacompoundingcannotbeallowed.
Infact,eventhisisnotanexhaustivelistoffactorssincethefactsofeachcasewillhavetobeconsideredbythe
CompetentAuthoritywhenitdecideswhethertheapplicationforcompoundingshouldbegranted.Thereisapublic
interestelementintheenactmentofregulatorystatutessuchastheFEMA.Whethercompoundingofabreach
wouldcompromisethepublicinterestinvolvedintheenforcementoflawhastobeconsideredinthefactsofeach
case.
Procedure
WhenapersonismadeawareofthecontraventionoftheprovisionsofFEMA,1999bytheReserveBankorthe
ForeignInvestmentPromotionBoard(FIPB)oranyotherstatutoryauthorityortheauditorsorbyanyothermeans,
she/hemayapplyforcompounding.Onecanalsomakeanapplicationforcompounding,suomoto,onbecoming
awareofthecontravention.
Nocontraventionshallbecompoundedunlesstheamountinvolvedinsuchcontraventionisquantifiable.Furtherit
shallnotbeapplicabletoacontraventioncommittedbyanypersonwithinaperiodofthreeyearsfromthedateon
whichasimilarcontraventioncommittedbyhimwascompoundedundertheseRules.Anysecondorsubsequent
contraventioncommittedaftertheexpiryofthreeyearsfromthedateonwhichasimilarcontraventionwas
previouslycompoundedshallbedeemedtobeafirstcontravention.
Nocontraventionshallbecompoundedifanappealisfiled.IfthepetitionerdoesnotfileanAppealunderSection
17/19oftheAct,thepetitionerswilllooseitsrightofappeal.Ifthepetitionersfileanappealtheywillloosetheright

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tohavetheirapplicationforcompoundingconsideredasheldbyBombayHighCourtinM/sKRISHIRAJTRADING
LTD&ORSVERSUSUNIONOFINDIA&ORS2013(10)TMI1006BOMBAYHIGHCOURT.
EveryapplicationforcompoundinganycontraventionunderSection3(a)oftheActandotherthanSection
3(a)oftheActshallbemadeintheFormtoDirector,DirectorateofEnforcementandReserveBankofIndia,
ExchangeControlDepartment,CentralOffice,MumbairespectivelywithafeeofRs.5,000/drawninfavorof
thecompoundingauthority
ContraventionsrelatingtoanytransactionwhereproperapprovalsorpermissionfromtheGovernmentor
anystatutoryauthorityconcerned,asthecasemaybe,havenotbeenobtained,suchcontraventionswould
notbecompoundedunlesstherequiredapprovalsareobtainedfromtheconcernedauthorities
Onreceiptoftheapplicationforcompounding,theReserveBankshallexaminetheapplicationandassessee
whethercontraventionisquantifiableandifsotheamountofcontravention
TheReserveBankshallexaminethenatureofcontraventionkeepinginview,interalia,thefollowing
indicativepoints:
Whetherthecontraventionistechnicaland/orminorinnatureandneedsonlyanadministrative
cautionaryadvice
Whetherthecontraventionisseriousandwarrantscompoundingofthecontraventionand
Whetherthecontravention,primafacie,involvesmoneylaundering,nationalandsecurityconcerns
involvingseriousinfringementsoftheregulatoryframework.
If,beforedisposaloftheapplicationtheRBIfindsthatthereissufficientcauseforfurtherinvestigation,itmay
recommendthemattertotheDirectorateofEnforcementforfurtherinvestigationandnecessaryactionunder
theActbythemortotheAntiMoneyLaunderingAuthorityinstitutedunderthePreventionofMoney
LaunderingAct,2002ortoanyotheragencies,asdeemedfit.Sincethecompoundingapplicationwillhave
tobedisposedwithin180days,theapplicationwillbedisposedbyreturningtheapplicationtotheapplicant
inviewofsuchinvestigationrequiredtobeconducted
TheCompoundingAuthoritymaycallforanyinformation,recordoranyotherdocumentsrelevanttothe
compoundingproceedings.Incasethecontravenerfailstosubmittheadditionalinformation/documents
calledforwithinthespecifiedperiod,theapplicationforcompoundingwillbeliableforrejection
Theapplicationforcompoundingshallbeprocessedfurtheranddisposedofonmeritsuponconsiderationof
therecordsandsubmissionsandattheabsolutediscretionoftheCompoundingAuthority.Thefollowing
factors,whichareonlyindicative,maybetakenintoconsiderationforthepurposeofpassingcompounding
orderandadjudgingthequantumofsumonpaymentofwhichcontraventionshallbecompounded:
Theamountofgainofunfairadvantage,whereverquantifiable,madeasaresultofthecontravention
Theamountoflosscausedtoanyauthority/agency/exchequerasaresultofthecontravention
Economicbenefitsaccruingtothecontravenerfromdelayedcomplianceorcomplianceavoided
Therepetitivenatureofthecontravention,thetrackrecordand/orhistoryofnoncomplianceofthe
contravener
Contravenersconductinundertakingthetransactionandindisclosureoffullfactsintheapplication
andsubmissionsmadeduringthepersonalhearingand
Anyotherfactorasconsideredrelevantandappropriate
Itisnotmandatorytoattendthepersonhearing.Incaseapersonoptsnottoattendthepersonalhearinghe
mayindicatehispreferenceinwriting.Theapplicationwouldbedisposedofonthebasisofdocuments
submittedtotheCompoundingAuthority
Anotherpersonmaybeauthorizedbytheapplicanttoattendthepersonalhearingonhisbehalfbutonlywith
properwrittenauthority.Ithastobeensuredthatthepersonappearingonbehalfoftheapplicantis
conversantwiththenatureofcontraventionandtherelatedmatters
TheCompoundingAuthorityshallpassanorderofcompoundingafteraffordinganopportunityofbeing
heardtoallconcernedasexpeditiouslyaspossibleasandnotlaterthan180daysfromthedateof
application.
EveryordershallspecifytheprovisionsoftheActoroftherules,directions,requisitionsorordersmade
thereunderinrespectofwhichcontraventionhastakenplacealongwithdetailsoftheallegedcontravention
EverysuchordershallbedatedandsignedbytheCompoundingAuthorityunderhisseal
OnecopyoftheordershallbesuppliedtotheapplicantandtheAdjudicatingAuthority,asthecasemaybe
Thesumforwhichthecontraventioniscompoundedasspecifiedintheorderofcompoundingshallbepaid
bydemanddraftinfavoroftheCompoundingAuthoritywithin15daysfromthedateoftheorderof
compoundingofsuchcontravention
TheprovisionsoftheRulesdonotconferanyrighttothecontravener,afteracompoundingorderispassed,
toseektowithdrawtheorderortoholdthatthecompoundingorderisvoidorrequestreviewoftheorder
passedbytheCompoundingAuthority
Ifapersonfailstopaythesumcompoundedwithinthetimespecifiedheshallbedeemedtohavenever
madeanapplicationforcompoundingofanycontraventionundertheserulesandtheprovisionsoftheAct
forcontravention.SuchcaseswillbereferredtotheDirectorateofEnforcementfornecessaryaction.
Onrealizationofthesumforwhichcontraventioniscompoundedacertificateinthisregardshallbeissued
bytheRBIsubjecttothespecifiedconditions,ifany,intheorder.
Appealagainstorder

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Ascompoundingisbasedonvoluntaryadmissionsanddisclosures,therecannotbeanappealagainsttheorderof
theCompoundingAuthority.
Authorizeddealer
InitscircularNo.76/17.1.2013RBIobservedthatduringthecompoundingprocess,onanumberofoccasions,it
hasbeenbroughttoournoticebytheapplicantsthatthecontraventionsoftheprovisionsofFEMAbycorporates
andindividualsareduetotheactsofomissionandcommissionoftheAuthorizedDealersandsomeofthe
applicantshavealsoproduceddocumentaryevidenceinsupportoftheirclaim.
AllthetransactionsinvolvingForeignDirectInvestment(FDI),ExternalCommercialBorrowing(ECB)andOutward
ForeignDirectInvestment(ODI)areimportantcomponentsofourBalanceofPaymentsstatisticswhicharebeing
compiledandpublishedonaquarterlybasis.Anydelayinreportingaffectstheintegrityofdataandconsequently
thequalityofpolicydecisionsrelatingtocapitalflowsintoandoutofthecountry.AuthorizedDealersare,therefore,
advisedbyRBItotakenecessarystepstoensurethatchecksandbalancesareincorporatedinsystemsrelatingto
dealingwithandreportingofforeignexchangetransactionssothatcontraventionsofprovisionsofFEMA,1999
attributabletotheAuthorizedDealersdonotoccur.
CONCLUSION
FromthedataoncompoundingcasesreceivedbyReserveBank,itisobservedthatmorethan70%ofthetotal
casespertaintoFDIwithinwhichabout72%relatetodelayinadvancereporting/submissionofFCGPR.Inthecase
ofECB,24%ofthecasesreceivedrelatetodrawdownwithoutobtainingLRN.Similarly,66%oftheODIcases
relatetononreportingofoverseasinvestmentsonline.AuthorizedDealershaveanimportantroletoplayin
avoidanceofsuchcontraventionsandaccordingly,thedealingofficialsinthebanksneedtobesensitizedand
trainedtodischargethisfunctionefficiently.

By:Mr.M.GOVINDARAJANJanuary13,2014

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