Regulatory Update: New Compounding Rules under FEMA
On 12 September 2024, the Department of Economic Affairs, Ministry of Finance has notified the Foreign Exchange (Compounding Proceeding) Rules, 2024 (New Rules) with a view to streamline and simplify the processing of compounding applications. The New Rules will supersede the existing Foreign Exchange (Compounding Proceeding) Rules, 2000 (Existing Rules). In this update, we discuss the key changes introduced by the New Rules.
Compounding Authorities
The New Rules have revised the monetary limits for compounding authorities of the Reserve Bank of India (RBI) to compound contraventions under any provision of the Foreign Exchange Management Act, 1999 (FEMA), except section 3(a) of the FEMA. The previous and revised monetary limits are as follows:
| Compounding Authority | Earlier monetary limit of sum involved in contravention | Revised monetary limit of sum involved in contravention |
| Assistant General Manager | Up to INR 10 lacs | Up to INR 60 lacs |
| Deputy General Manager | INR 10 lacs to INR 40 lacs | Up to INR 2.5 crore |
| General Manager | INR 40 lacs to INR 1 crore | Up to INR 5 crore |
| Chief General Manager | INR 1 crore or more | INR 5 crore or more |
Application Fee
Earlier, the fee payable for submitting the form for compounding to RBI was INR 5,000, which has now been increased to INR 10,000 plus GST as applicable. The New Rules also provide for online modes of payment for the application fees, which under the Existing Rules could only be paid by a demand draft.
Non-compoundable Offences
The Existing Rules provided that a compounding authority cannot compound certain contraventions involving money laundering, terror financing or affecting the sovereignty and integrity of India. Additionally, in terms of rule 11 of the Existing Rules, contraventions for which an appeal is filed before the relevant authorities under FEMA were not compoundable.
Under the New Rules, compounding is permitted for contraventions for which an appeal is filed. Moreover, instances where compounding is not allowed have been elaborated under rule 9 of the New Rules:
- contraventions where the amount involved is not quantifiable;
- contraventions where the provisions of section 37A of FEMA are applicable, which relates to seizure of equivalent value in cases where foreign exchange, foreign security or immovable property outside India is held in contravention of FEMA;
- serious contraventions of money-laundering, terror financing or affecting the sovereignty and integrity of India;
- contraventions where a penalty under FEMA has already been imposed by the relevant adjudicating authority; and
- contraventions which in the view of the compounding authority require further investigation by the Directorate of Enforcement.
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