New compounding norms to ease settlement of minor FEMA offences, help avoid ED action

Govt issued new Fema compounding rules last week

The entities that are facing notices under the Foreign Exchange Management Act (FEMA) for minor violations will now find it easier to settle cases and avoid action by the Enforcement Directorate (ED), thanks to the government's recent changes to compounding rules.

The new rules, issued by way of a notification on Thursday, significantly raise the thresholds for compounding non-serious FEMA violations, allowing more cases to be resolved through fines, instead of enforcement action. The process of filing has also been streamlined with the introduction of a single form and an option for online payment.

Compounding is the process of voluntarily admitting a violation, pleading guilty, and seeking resolution by paying a fine. If a violation is not compounded, the ED may initiate enforcement action. The updated rules, which come after a decade, are expected to make resolving such issues faster and more efficient.

"Updating compounding rules after a decade and revising limits will enable faster resolution. Some ambiguities regarding references to the ED and matters that cannot be compounded have also been clarified," said Neha Aggarwal, partner, Regulatory Services at Deloitte.

Despite the updated rules, the Reserve Bank of India (RBI) still has the discretion over whether to compound a violation. If the transgressions are deemed serious, the regulator has the authority to reject compounding applications, according to experts.

Under the new rules, the entities facing FEMA notices can file compounding applications with the RBI for most violations. Previously, the assistant general manager of the RBI could only compound violations involving amounts below Rs 10 lakh. The cap has now been raised to Rs 60 lakh.

Similarly, the threshold for the deputy general manager has been raised from Rs 40 lakh to Rs 2.5 crore, and the general manager can now settle cases involving violations of up to Rs 5 crore, compared to the previous limit of Rs 1 crore.

“The monetary limits of the contraventions for compounding by RBI officials of various ranks have been increased significantly. The new rules also allow online payments for both the application fees and the fines to be paid. The changes are clearly intended to improve the efficiency and ease of investing and doing business in India,” said Nazneen Ichhaporia, partner at ANB Legal.

The government first introduced compounding rules under FEMA in 2000, which have now been updated. Most FEMA violations typically involve breaches of Foreign Direct Investment (FDI) or Overseas Direct Investment (ODI) rules. The FDI rules regulate foreign investors bringing capital into India, while ODI rules allow the Indian entities to send money to foreign jurisdictions. Other transactions covered by FEMA include external commercial borrowing and loans extended by Indian companies to foreign subsidiaries.

“The increase in the pecuniary threshold for compounding of offences aligns with the government’s objective of easing the business environment. With the threshold now being increased for non-serious offences, issues such as miscalculations or inadvertent filing delays can be easily adjudicated without burdening the authorities, thus enabling the regulator to simplify and modernise the cross-border transactional compliance framework in India,” said Akshat Pande, managing partner at Alpha Partners.

Experts note that cases involving valuation and the filing of due diligence forms with the RBI during the FDI and ODI transactions are areas where entities often make errors. While the RBI does not publish consolidated data on compounding cases, an analysis of 4,540 compounding orders by Taxmann revealed that 77 percent of cases pertained to breaches of FDI norms, while another 15 percent involved ODI rules. Around 2 percent of the orders concerned external commercial borrowing, and 1 percent dealt with the purchase or sale of immovable property.

“This can be an effective change where the focus is more on significant breaches rather than minor procedural errors.  This will also help in resolving low value violations.” said Alay Razvi, Partner, Accord Juris