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COMPOUNDING OF OFFENSES UNDER FEMA

COMPOUNDING OF OFFENSES UNDER FEMA . Formalities , Procedures and Caution to be taken for avoiding any offences . Compounding of Offenses under FEMA.

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COMPOUNDING OF OFFENSES UNDER FEMA

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  1. COMPOUNDING OF OFFENSES UNDER FEMA Formalities , Procedures and Caution to be taken for avoiding any offences

  2. Compounding of Offenses under FEMA • Under Section 13(1) of the FEMA, 1999,the compounding of contraventions under Foreign Exchange Management Act (FEMA), 1999 and an applicant can seek compounding of an admitted contravention of any provision of FEMA, 1999 and this is a voluntary process . • As per Section 15 of FEMA, 1999 , compounding of contraventions can be made and the Compounding Authority is empowered to compound any contravention as defined under Section 13 of the Act based on an application made by the person/ corporate committing such contravention • Compounding application can be made either before or after the institution of adjudication proceedings.

  3. ARE ALL Offenses can be Compounded • SECTION 3 - Prohibits dealings in foreign exchange except through an authorised person. This section states that no person can, without general or special permission of the RBI can deal in forex transactions either in India or out of India directly without through an authorised dealer- • Any Forex transactions not through an authorised dealer / person • Entering into Hawala transaction in abroad • Receiving money into India through other than Authorised dealer- Hawala transaction • Creation or transfer of a right to acquire any asset outside India by any person in India

  4. Quantum of Penalty under FEMA • The infringer shall, upon adjudication under FEMA, be liable to a penalty up to thrice the sum involved in such contravention where the amount is quantifiable or up to Rupees Two lacs, where the amount is not quantifiable and where the contravention is a continuing one, further penalty which may extend to Rupees Five thousand for every day after the first day during which the contravention continues. • Under sub-section (1) of section 13 (2) , authorities are empowered to levy additional penalty and even order confiscation if necessary .

  5. Application for Compounding • An application for compounding of a contravention under FEMA, 1999 may be submitted to the Reserve Bank on being advised of a contravention under FEMA, 1999 either through a memorandum or suomoto being made or becoming aware of the contravention. • The format of the application is appended to the Foreign Exchange (Compounding Proceedings) Rules • A compounding order shall be issued by the Compounding Authority within 180 days from the date of the receipt of the application for compounding.

  6. FEMA COMPOUNDING PROCEEDINGS Rules 2000- RBI Power • Power of RBI to compound the Offences • If amount is Rs 10 lacs or less , AGM of RBI • If amount is more than Rs 10 lacs but less than Rs 40 lacs , DGM • If amount of is more than Rs 40 lacs but less than 100 lacs , GM • For more than Rs 100 lacs , Chief General Manager will have authority

  7. The Power of Enforcement Directorate to compound contraventions • In case , where the sum is involved is Rs 5 lacs or less , Deputy Director of Enforcement • More than Rs 5 lacs but less than Rs 10 lacs , Additional Director of the Directorate of Enforcement • More than Rs 10 lacs but less than Rs 50 lacs , Special Director of Director of Enforcement • More than Rs 50 lacs but less than I Crore , Special Director with Deputy Legal Adviser • Where sum involved is more than Rs 1 Crore , Director of Enforcement with Special Director

  8. Time-limit to pay the fines under FEMA • Any fines levied shall have to paid to the compounding authorities within 15 days from the date of the order of compounding. • If fine is not paid , it shall be construed that there has never made an application for compounding by the applicant. • If an appeal against the order has been made under section 17 or 19 of the Act , then no contravention shall be compounded till the appeal is disposed.

  9. Analysis of Types of Contravention • The Reserve Bank shall examine the nature of contravention keeping in view, inter alia, the following indicative points: • Whether the contravention is technical and/or minor in nature and needs only an administrative cautionary advice; • Whether the contravention is serious and warrants compounding of the contravention; and • Whether the contravention, prima facie, involves money-laundering, national and security concerns involving serious infringements of the regulatory framework. • Serious offences will be referred to the Directorate of Enforcement (DoE) for further investigation

  10. Is Personal Appearance is Compulsory before Compounding Authority under FEMA ? • Rule 8(2) of Foreign Exchange (Compounding Proceedings) Rules, 2000 states that the compounding authority shall pass an order of compounding after affording an opportunity of being heard to all the concerned as expeditiously as possible and not later than 180 days from the date of application. • Many applicants interpret this provision / facility to mean that personal hearing is compulsory and that consultants / advocates must represent them in the personal hearing before the compounding authority.

  11. Contents of Application form for compounding • Name • Full Address • Name of the adjudicating Authority before whom the case is pending • Nature of Contravention • Brief Facts of the Case • Details of Fee for application of compounding • Any other info which is relevant to the application

  12. Compounding Application for FDI • Name of applicant , date of incorporation , nature of activities, Brief particulars of the foreign investor , details of foreign inward remittances received by Applicant Company from the date of incorporation till date. • Table A– Details of FDI received , date of reporting to RBI, Delay if any • Table B-Details of the foreign investor ,date of allotment, date of reporting to RBI, Delay if any • Table C- Details of excess share application money • Table D – Details of Authorised Capital

  13. Compounding Application for ECB • Name of the applicant ,Date of Incorporation , details of the activity , brief particulars about the foreign lender, Is the lender is a eligible lender , is the lender is an equity holder and what is the level of holding at the time of loan agreement. • Details of ECB - Date of loan agreement , Loan amount in Foreign currency and Indian Rupees, Rate of Interest, Period of loan, repayment particulars & Details of draw down • Details of LRN number , details of ECB 2 returns submitted Details of utilization of ECB , nature of contravention and reasons for contravention

  14. Compounding Application for ODI • Name of the applicant, Date of incorporation , Nature of activities undertaken , name of the overseas entity • Date of incorporation of overseas entity , nature of activities of overseas entity ,nature of entity WOS/JV, Details of remittance sent , amount in FCY and in INR • Details of other financial commitment , details of UIN applied and received , details of receipt of share certificate , approval if any required , details of APR submitted ,nature of contravention and all supporting documents

  15. Compounding Application for Branch office / Liaison office • Name of the applicant , date of incorporation , date of approval for opening of LO/Branch office, Validity period of approval • Nature of activities undertaken , income and expenditure of the LO/BO • Dates of submission of Annual Activity Certificates • Nature of Contraventions and reasons for the contravention and all supporting documents

  16. Is Personal Appearance is Compulsory before Compounding Authority under FEMA ? • No . It is is optional and the applicant can choose not to appear for RBI compounding Authority. • The applicant may enclose full information relating to the case as prescribed in AP (Dir series) Circular Nos. 56 and 57 dated June 28, 2010 and December 13, 2011, respectively, with the application or thereafter and may exercise his discretion with regard to appearing for hearing. • If applicant opts for appearing for the personal hearing, then it would encourage the applicant to appear directly for it rather than being represented by legal experts, as compounding is only for admitted contraventions

  17. Is Personal Appearance is Compulsory before Compounding Authority under FEMA ? • To appear for or opting out of personal hearing does not have any bearing whatsoever on the amount of penalty involved in the compounding order.

  18. Common Types of Reporting Errors under FEMA • Draw down of External Commercial Borrowing (ECB) without obtaining Loan Registration Number (LRN) [Regulations 3 and 6 of FEMA 3/2000]; • Allowing draw down of ECB under the automatic route from unrecognised lender, to ineligible borrower, for non-permitted end uses, etc. [Regulations 3 and 6 of FEMA 3/2000]; • Non-filing of form ODI for obtaining UIN before making the second remittance to overseas WOS/JV for Overseas Direct Investment (ODI) [Regulation 6(2)(vi) of FEMA 120/2004]; • Non-submission of Annual Performance Reports (APRs) / copies of Share Certificates to the AD (and non-reporting thereof by the AD to Reserve Bank) in respect of overseas investments [Regulation 15 of FEMA 120/2004];

  19. Common Types of Reporting Errors under FEMA • Delay in submission of the Advance Reporting Format in respect of Foreign Direct Investment (FDI) to the concerned Regional Office of the Reserve Bank [paragraph 9 (1) (A) of Schedule I to FEMA 20/2000]; • Delay in filing of details after issue of eligible instruments under FDI within 30 days in form FC-GPR to the concerned Regional Office of the Reserve Bank [paragraph 9 (1) (B) of Schedule I to FEMA 20/2000]; • Delay in filing of details pertaining to transfer of shares for FDI transactions in form FC-TRS by resident individual/companies [Regulation 10 (A) (b) of FEMA 20/2000]; etc.

  20. Statistical Data on Compounding of Offences under FEMA • From the data on compounding cases received by Reserve Bank, it is observed that more than 70% of the total cases pertain to FDI within which about 72% relate to delay in advance reporting/ submission of FCGPR. In the case of ECB, 24% of the cases received relate to drawdown without obtaining LRN. Similarly, 66% of the ODI cases relate to non-reporting of overseas investments online.

  21. Simple Reporting failure may make you to pay hefty fines • According to Chartered Accountant’s Association, Mumbai, in one case, an OCB invested in India rupees 8.5 crores (approximately) with the prior approval of FIPB. The OCB wanted to set up a power plant in Chhattisgarh. There was a condition of local participation up to 40per cent. For four years they ran from pillar to post for several Government permissions.Neither they got Government permission nor could they find a local investor. Ultimately, they were frustrated and gave up the project. Hence they transferred the funds to a sister company where the OCB already had some investments. The Company delayed in filing intimation. The Company could not allot shares to OCB as it could not locate a local investor which was a pre-condition of FIPB approval. In the meanwhile, RBI issued Circular No. 20 dated 14.12.2007 prohibiting allotment of shares beyond 180 days of receipt of funds.For these offenses, RBI imposed a Compounding sum of more than Rs. 3 crores! Company admits the violations of non-intimation, non-filing of forms; and step down investment. Still, such a stiff penalty for all procedural violations where there is no foreign exchange loss and nothing illegal or immoral!!!

  22. Delay in Reporting Failures in FDI-Compounding now delegated to Regional RBI. • RBI vide its APDIR Circular No.57 dated December 13, 2011 decided to delegate the powers to the Regional Offices of the Reserve Bank of India to compound the contraventions of FEMA involving; • delay in reporting of inward remittance· delay in filing of form FC-GPR after allotment of shares and · delay in issue of shares beyond 180 days • All other applications (for violations of substantial provisions, ECB norms, etc) may be submitted to the Compounding Authority, Cell for Effective implementation of FEMA (CEFA), Foreign Exchange Department, The Reserve Bank of India, Mumbai.

  23. Caution to ECB Takers/ Availers • A borrower is required to keep ECB funds parked abroad till the actual requirement in India. • A borrower cannot utilize the funds for any other purpose as there is end use restrictions for ECB. • However, Reliance Infrastructure now Reliance Energy has parked its foreign loan proceeds worth $300 million with its mutual fund in India for 315 days, and then repatriated the money abroad to a joint venture company. These actions, according to an RBI , violated various provisions of the Foreign Exchange Management Act (FEMA). • Reliance had not applied for prior approval of RBI as it contravened the end use restrictions and also it repatriated the ECB funds for investments in its overseas joint venture without prior approval of RBI. • Reliance Energy was asked to pay a fine of Rs 124.68 crores

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