Post-Adjudication Compounding Rejected: Calcutta High Court Clarifies Scope Under FEMA

Introduction

In Sanjay Jhunjhunwala v. Reserve Bank of India[i], the Calcutta High Court adjudicated upon an important question pertaining to the Foreign Exchange Management Act, 1999 (‘FEMA’) and the Foreign Exchange (Compounding Proceedings) Rules, 2000 (‘Rules’), to determine whether a contravener under FEMA, having participated in the adjudication and accepted the resulting penalty order, could subsequently apply for compounding of the same offence. Sanjay Jhunjhunwala ('Petitioner') had sought to invoke the compounding mechanism under r. 4 after the adjudication process had concluded, prompting a rejection from the Reserve Bank of India (‘RBI’). The Court decisively held that compounding must precede adjudication and cannot be used to circumvent penalty enforcement.

Brief Facts

• The Petitioner was found to have contravened certain FEMA provisions in relation to lending or borrowing in foreign exchange between 2011 and 2013.

• Consequently, the Enforcement Directorate (‘ED’) had proceeded to issue a show-cause notice in November 2022.

• Initially, the Petitioner had filed a compounding application in January 2023, which was subsequently returned by the RBI in January 2024 due to a lack of clarity and details. However, he was given an opportunity to reapply, which he did not avail. Subsequently, the Petitioner participated in the adjudication proceedings, which culminated in levying a penalty of Rs . 10 crores on the Petitioner vide order dated. 28.03.2024.

• After the levy of such a penalty, the Petitioner attempted to revive his compounding plea by filing a fresh application under r.  4 of the Rules, which the RBI rejected in September 2024, citing that the adjudication proceedings had already been concluded. A demand notice for a penalty followed.

• The Petitioner, without preferring an appeal, challenged the aforesaid rejection and the demand notice through the present writ petition.

Held

• The High Court dismissed the petition and upheld the RBI’s decision, rejecting the compounding application. The Court reasoned that the remedy of compounding is designed as a pre-adjudication mechanism to enable speedy, negotiated resolution of regulatory violations. However, by voluntarily participating in adjudication proceedings and thereafter not pursuing the compounding application when the Petitioner was first invited to refile the same, he had effectively chosen to proceed with adjudication.

• The High Court held that allowing compounding after adjudication would defeat the very object of such a mechanism, which is to avoid the rigour and delay of full proceedings. It emphasized that the compounding authority does not have the jurisdiction to overrule or nullify an adjudication order. Accepting a post-adjudication compounding plea would lead to an anomalous situation of conflicting orders on the same contravention, one from the adjudicating authority and the other from the compounding authority, which is impermissible in law.

• Furthermore, the Court noted that while the RBI’s Master Directions allow for compounding during the pendency of adjudication, there is no legal basis for such relief after the adjudication has been completed as per the process of law. The act of the Petitioner, who had neither filed an appeal nor deposited the penalty, was thus seen as a deliberate attempt made by him to delay compliance under the guise of compounding.

Our Analysis

This judgment reaffirms the statutory framework and procedural discipline governing compounding under FEMA. In the present decision, the High Court decisively clarified that compounding is not a fallback remedy to be pursued after adverse adjudication, but a settlement mechanism intended to avoid adjudication altogether.

The Court’s approach is rooted in sound legal reasoning and statutory interpretation. It correctly recognized that the compounding process under r. 4 of the Rules ought to be completed before the conclusion of adjudication proceedings under the Act. Once an adjudication order has been passed and a party is found guilty, permitting compounding would result in legal uncertainty, duplication of decisions, and dilution of the deterrent purpose of penalty provisions under FEMA.

The ruling also reinforces a crucial procedural principle, i.e., election of remedies. By voluntarily participating in the adjudication process after his initial compounding application was returned for lack of details, the Petitioner effectively and rather voluntarily abandoned his opportunity to settle. To reinitiate compounding after receiving an unfavourable adjudication outcome was, in the Court’s words, an attempt to “test the waters.” Such strategic litigation was firmly rejected, and rightly so, in the interest of preserving finality in quasi-judicial decisions.

Further, the Court’s reasoning aligns with the RBI’s Master Directions and Circulars, which permit compounding only while adjudication is pending. Notably, the Petitioner did not cite any precedent or statutory provision to support the view that compounding is possible after final adjudication. Accepting such an argument would have opened the door to indefinite delays in enforcement, undermining the credibility of regulatory proceedings.

This case also illustrates the judiciary’s reluctance to permit litigants to manipulate procedural safeguards to escape statutory liability. By reiterating that only one binding order can exist on the same facts, the Court protected the adjudicatory framework from redundancy. The potential for conflicting orders, one from the adjudicating authority and another from the compounding authority, was decisively avoided.

In conclusion, this ruling is a strong judicial endorsement of procedural integrity under FEMA. It sends a clear message to contraveners and legal advisors that compounding is a limited statutory concession, not an instrument to delay or override adverse adjudication. Timely and complete invocation of compounding is essential. Once a party elects to undergo adjudication, it must face the consequences. The judgment thus reinforces the object of FEMA: the efficient regulation of foreign exchange transactions, backed by credible and enforceable penalties. Going forward, this precedent will act as a guardrail to ensure that the compounding process remains a mechanism of settlement, not an escape route post-liability.

End Note

[i] 2025 SCC OnLine Cal 2816.

Authored by Pranav Dabas, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.