FEMA Compounding Rules 2024: Key Amendments and Non-Compoundable Offences

Introduction  

The Ministry of Finance (Department of Economic Affairs) vide notification G.S.R. 566(E) dated 12.09.2024, issued a new set of rules governing compounding proceedings under the Foreign Exchange Management Act, 1999 (‘FEMA’), replacing the earlier Foreign Exchange (Compounding Proceedings) Rules, 2000 (‘FEMA-Rules 2000’). The Foreign Exchange (Compounding Proceedings) Rules, 2024 (‘FEMA-Rules 2024’) aim to streamline the process of compounding violations under FEMA while introducing stricter guidelines for serious contraventions. A major development in these new rules is the introduction of r. 9, which provides a clear list of non-compoundable contraventions, which was absent in the previous regime. This update provides an overview of the key changes, their implications, and the impact on entities and individuals dealing with foreign exchange violations.

Additionally, the revised framework designates specific Reserve Bank of India (‘RBI’) and Directorate of Enforcement (‘ED’) officers to handle different categories of contraventions, with varying levels of penalties depending on the financial magnitude of the violation. This tiered approach ensures that the severity of the violation corresponds to the authority handling it. The notification also clarifies that no new inquiries will be initiated for violations that have already been compounded, reinforcing procedural efficiency and transparency in the process.

Key Amendments

In the exercise of the powers conferred under s. 46(2)(b) read with s. 15(1) of the FEMA, and in supersession of the FEMA-Rules 2000, the Central Government has introduced the FEMA-Rules 2024, effective immediately from the date of their publication in the official gazette. The highlights of the FEMA-Rules 2024, along with the key amendments, are as follows:

1. Introduction of Digital Payment Options: The FEMA-Rules 2024 now allows the payment of compounding fees through electronic modes, including National Electronic Fund Transfer (NEFT) and Real-Time Gross Settlement (RTGS), along with demand drafts.

2. New Limits for Compounding by RBI Officers: Contraventions, excluding those related to clause (a) of s. 3 of the FEMA may be compounded by different RBI officers depending on the monetary value of the contravention as given below:

1. New Limits for Compounding by the officers of the ED: For contraventions under clause (a) of s. 3 of the FEMA, the authority rests with the ED, with varying officials designated based on the quantum involved as given below:

1. Timeframe for Resolution: The FEMA-Rules 2024 mandates that all applications for compounding be resolved within 180 days from the date of submission.

2. Discontinuation of Adjudication upon Compounding: The FEMA-Rules 2024 clarify that if a contravention is compounded before adjudication under s. 16 of the FEMA, no further inquiry or adjudication shall proceed for that contravention.

3. Discharge upon Compounding: Once a contravention is compounded and the compounding authority notifies the Adjudicating Authority, the person concerned is discharged from further legal proceedings.

4. Introduction of R. 9 – Non-Compoundable Offences: A key change in the FEMA-Rules 2024 is the introduction of r. 9, which lists contraventions that cannot be compounded. This is a significant addition, as the FEMA-Rules 2000 did not include such a list. As per the FEMA-Rules 2024, non-compoundable offences include:

·  Cases where the amount involved is not quantifiable.

·  Cases to which s. 37A of the FEMA applies (relating to the seizure and detention of foreign exchange or property).

· Offences involving suspected money laundering, terror financing, or threats to national sovereignty and integrity.

·  Cases where the ED believes further investigation is necessary to ascertain the amount involved.

·  Cases where the Adjudicating Authority has already imposed a penalty under s. 13 of the FEMA.

Our Analysis

The FEMA-Rules 2024 signify a more structured and transparent approach to addressing foreign exchange violations under FEMA. The introduction of r. 9, which specifies non-compoundable contraventions, marks a crucial shift from the earlier framework, providing clear boundaries for what cannot be resolved through compounding. This change, combined with the tiered designation of officers from the RBI and the ED based on the financial magnitude of violations, ensures that penalties are proportionate to the severity of the contravention.

Further, eliminating further inquiries into already-compounded violations strengthens procedural efficiency and clarity, signalling a move towards greater regulatory certainty.

Authored by Onam Singhal, Chartered Accountant at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.