I’ve written quite a few posts on applicability of FEMA in transactions by residents as well as non-residents (Read: Posts on FEMA). One question that crops up in mind of a few clients that I’ve worked with who by ignorance of FEMA, stepped on the wrong side of FEMA law and now want to know the penalty provisions and is there any way they can regularise the violation and come clean.
Answer is YES.
Unlike the erstwhile FERA law which was a criminal law, FEMA is a civil law and offers compounding procedure for regularising any contravention. Today, we will discuss the penalty and compounding provisions of FEMA which you can use to come clean on your FEMA violations.
Penalty under FEMA
Section 13 of FEMA provides for penalty. It says that ANY person who contravenes ANY provision of Act, Regulation, Notification etc. will be penalised as follows:
- Where the offence is quantifiable: Upto 3 times the sum involved
- Where the offence is not quantifiable: Upto INR 2 lacs
If we analyse this definition, the penalty is applicable to ANY person – so whether you are a resident under FEMA or a non-resident, if you have committed a violation, you will have to suffer a penalty.
Also read: NRI Definition: FEMA Act VS Income Tax Act
Section 13 (1A), (1B), (IC) and (ID) are new provisions inserted via Finance Act, 2015 – these provisions say that if you’ve acquired foreign exchange, foreign security or immovable property situated outside India in contravention to the FEMA law AND the value of those assets exceed INR 1 CR, following consequences will follow:
- Penalty of upto 3 times the amount involved
- Equivalent value of property in India will be liable to confiscation.
- Prosecution upto 5 years
- Foreign exchange holdings outside India can be ordered to be brought back to India or retained outside India in accordance with Govt. directions
Note that the definition of property includes any proceeds of the property which is subject matter of the Act.
Now, if we read this provision along with Section 37A, it is by all means a draconian provision whereby the Authorised Officer can, only on the basis of a suspicion, is authorised to confiscate the equivalent portion of Indian assets & without allowing the owner of the property to explain his case before the officer.
Common examples of FEMA violations
Some of the common examples of FEMA violations you should note (and ensure you haven’t made thoseJ:
- NRI buying agricultural property in India
- Person becoming non-resident and still carrying his Indian resident savings accounts
- Person becoming resident and still carrying on with his non-resident accounts
- Resident carrying out a capital account transaction which is not expressly allowed in Schedule I of FEM (Permissible Capital Account Transactions) Regulations, 2000
- Non-Resident carrying out a capital account transaction which is not expressly allowed in Schedule II of FEM (Permissible Capital Account Transactions) Regulations, 2000
- Resident dealing in foreign currency (purchase/sale) via a person other than an authorised dealer bank in India – note that purchase/sale of foreign currency in grey market which started happening especially after demonetisation is a serious offence under FEMA
- Person sending/receiving foreign currency to/from India other than through an authorised dealer – in other words, taking the hawala route – serious offence under FEMA
- Resident breaching the permissible LRS limit in sending money out of India by sending money through different banks
- Person sending money outside India other than bank route and creating assets outside India
- Resident and NRI entering into a loan transaction without fulfilling conditions mentioned in relevant FEMA regulations
- Transfer of shares between a resident and non-resident without mandatory reporting to RBI
Compounding provision under FEMA
Section 15 of FEMA says that ANY violation of FEMA can be compounded whereby person who has made a violation can voluntarily come forward, disclose the details of violation and pay a nominal fee (instead of 3 times penalty), and regularise the transaction.
Applicable regulations on compounding under FEMA are as follows:
- Foreign Exchange (Compounding of Proceedings) Rules, 2000
- Master Direction on Compounding of Contraventions under FEMA, 1999
So, you can make an application to RBI in specified format with a fee and RBI will decide on it, and release a compounding order where you’re asked to pay a compounding fee and once you pay the fee, the transaction is regularised and RBI will not take any further action.
Offences CANNOT be compounded
Note that this facility is not available for the following offences:
- Offence u/s 3 of the Act – dealing in foreign exchange other than by an authorised dealer – note that here, the option of compounding exists but the power to compound the offence rests with the Enforcement Directorate and not RBI.
- Offence by same person where an earlier offence of the same nature has been compounded within past 3 years
- For transactions which require approval of other authority, the said approval is not obtained
- Applicant has pending case against the CBI, etc.
- Where the applicant does not pay the compounding fee mentioned in the order – in such a case, it is assumed that no application has been filed
Jurisdiction of compounding authority
The jurisdiction of the authority to compound offence has been delegated depending upon the type of offence to following authorities:
- Regional Offices of RBI
- FED CO Cell New Delhi
- Exchange Control Cell at Mumbai
Regional Offices deal with mostly corporate contraventions.
Contravention relating to immovable property within or outside India, or those falling under FEM (Deposit) Regulations fall with the jurisdiction of FED CO Cell New Delhi – for contact details, check this link
For all other contraventions, you need to approach Foreign Exchange Department at Mumbai – check this link
Process of filing a compounding application
- Prescribed format of application is given in the Rules
- Application has to be supported by a DD in favour of “Reserve Bank of India” and payable at concerned city of the department as per applicable jurisdiction
- On receipt of application, RBI will examine the application on various angles especially the unfair advantage/economic benefit to the applicant
- There is a guidance note given in FEMA rules for imposition of compounding fee. So, if say NRI purchased agricultural property in India for INR 1 crore 10 years back, the applicable compounding fee payable comes to roughly INR 1.25 lacs.
- Applicant will be given opportunity of being heard before passing the order. He can appear himself or through a CA. RBI encourages applicant to appear himself.
- Compounding order will be issued within 180 days from receipt of completed application. One copy of the order will be supplied to the applicant. It will also be hosted on the RBI website here – you should also pick up a sample order and read it to get a clear picture of the contravention and how the process works
Important points on compounding process
W.r.t. compounding application for serious offences, money laundering etc., RBI will refer it to Enforcement Directorate (ED)
If you highlight the contravention to RBI other than by way of a compounding application RBI will decide as follows:
- Minor/technical violation – issue of cautionary advice/warning
- Material offence – advise to file compounding application
- Sensitive/serious offence – Refer to ED
Important to note that once you’ve filed a compounding application to RBI admitting the contravention, you cannot withdraw it and compounding proceeding will be initiated.
Some pointers on how resident/NRIs should compound FEMA contraventions
- If you are a resident/NRI and suspect that you’ve made a contravention to FEMA regulations, it is a wise idea to first discuss the facts with a CA who is well versed with practical aspects of FEMA.
- If one comes to a conclusion that it is a contravention, it is a wise idea in my view not to straightaway file a compounding application but file a simple letter admitting the contravention and requesting a lenient view of RBI. In such a situation, I believe honesty is the best policy and it is best to disclose all pertinent facts in a correct manner rather than hiding from RBI.
- Wait for RBI’s response.
- RBI can give a warning letter and that’s great. Matter sorted out.
- However, if RBI says that you have to go for compounding, then you can ask your CA to draft the compounding application in prescribed format and file it to concerned office of RBI as per the applicable jurisdiction.
- Although you can send your CA for the hearing, I highly advise that you should personally attend the hearing as that can give an indication to RBI that you are upfront and have nothing to hide. In case you are an NRI, then it depends on materiality of the offence.
- If you live abroad & cannot come to India as on date of hearing, then you can request order to be released without your presence or you can send your CA to appear on your behalf. While doing so, you should give your CA a signed authority letter to represent you in front of RBI.
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