Amendment To Compounding Rules
Brief Background:
Under Section 15 of the Foreign Exchange Management Act, 1999 (“FEMA”), the compounding mechanism enables individuals and companies to voluntarily acknowledge breaches of FEMA provisions and settle them by paying a penalty, thereby avoiding protracted enforcement proceedings. Building on the earlier analysis of the Foreign Exchange (Compounding Proceedings) Rules, 2024 (“Compounding Rules”), along with the Master Directions on Compounding of Contraventions under FEMA (“Compounding Directions”), this piece reviews the most recent amendments to the compounding framework. The Reserve Bank of India (“RBI”) introduced these changes via A.P. (DIR Series) Circulars dated April 22, 2025, and April 24, 2025 (“April Amendments”).
Key Amendments introduced:
Introduction of a cap on maximum compounding amount
Through the April Amendments, the RBI introduced paragraph 5.4.II.vi in the Compounding Directions, capping the compounding amount at INR 2,00,000 per contravention for miscellaneous non-reporting violations listed in Row 5 of the ‘Guidance note on computation matrix’. This cap applies, subject to factors like the nature of contravention, exceptional circumstances, case-specific facts, and public interest. Previously, amounts for these non-reporting contraventions under FEMA lacked any upper limit, following a formula of ‘INR 50,000 fixed plus a percentage of the contravened amount’, which created ambiguity as authorities had no explicit ceiling to follow.
Deletion of paragraph 5.4.ii.v – fresh applications without linking to previous compounding order
The RBI deleted paragraph 5.4.II.v of the Compounding Directions. Previously, this clause automatically increased compounding amounts by 50% for applicants who had received an earlier compounding order for the same contravention but failed to pay the stipulated amount before re-applying. This deletion now decouples fresh compounding applications from prior ones concerning the same subject matter, eliminating any enhanced penalty for previous non-payment of the compounding amount under FEMA.
New procedural requirements for payment submission
Through the April Amendments, the RBI modified Part B of Annexure I to the Compounding Directions. Following payment of the compounding application fee or amount, applicants must now email the RBI additional details, including:
- mobile number;
- specific RBI office where payment was made; and
- payment mode details. The enhanced requirements improve payment tracking, expedite record updates, and streamline overall compounding administration.
Our Thoughts:
The amendments to compounding regulations deliver tangible economic benefits by capping or rationalizing amounts for minor and procedural contraventions, alleviating fears of disproportionate penalties and fostering ease of doing business, while clearer differentiation between penalties and compounding amounts enhances taxpayer predictability in deciding whether to pursue regularization. On the behavioral front, the predictable framework incentivizes early voluntary compounding over protracted litigation, elevating overall compliance culture, yet maintains robust deterrence by keeping serious or willful breaches non-compoundable or subject to stringent scrutiny.
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