• By ADMIN
• Posted 28 May, 2025
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Compounding of FEMA Contraventions – A Practical Route to Compliance

India’s foreign exchange laws are intricate, and it’s not uncommon for businesses, NRIs, or professionals to unintentionally violate a rule or miss a deadline. Fortunately, the Reserve Bank of India (RBI) provides a structured and transparent mechanism to regularize such contraventions through a process called compounding.

Let’s understand what it is and how you can benefit from it.

✅ What is FEMA Compounding?

Compounding is a voluntary mechanism under Section 15 of the Foreign Exchange Management Act, 1999 (FEMA), which allows individuals or companies to admit and regularize contraventions by paying a monetary penalty.

In October 2024, the Government notified Foreign Exchange (Compounding Proceedings) Rules, 2024, streamlining the process and clearly defining eligibility, procedure, penalty computation, and exclusions.

⚠️ Common FEMA Contraventions That Can Be Compounded

Some of the most frequent issues that we assist with include:

• Delayed filing of FCGPR, FLA, or APR

• Non-allotment/refund of share application money within timelines

• Overseas Direct Investment (ODI) without submission of share certificates or Annual Performance Reports

• External Commercial Borrowings (ECB) without proper reporting

• Improper operation of Branch/Liaison/Project offices

• Non-compliance with pricing or sectoral caps on foreign investment

🧾 Who Can Apply and What is the Process?

Any individual or entity that has committed a FEMA contravention (except those falling under serious violations like money laundering or terror financing) can file an application.

The process includes:

1. Filing an application with RBI (physically or through the PRAVAAH Portal).

2. Paying a nominal application fee of ₹10,000 + GST.

3. Submitting necessary documents like FIRC, FCGPR, MOA, shareholding details, and an undertaking.

4. Personal hearing (optional) with the RBI.

5. Receiving a compounding order within 180 days.

6. Paying the penalty (as determined) within 15 days.

💰 How Are Penalties Calculated?

The new rules bring clarity through a guidance matrix. The penalty is calculated using:

• Fixed and variable components depending on type and duration of contravention

• Amount involved in the transaction

• Nature of contravention (reporting delay vs. non-reporting, or structural issues)

• Undue gains or loss to the exchequer

For example:

• A reporting delay may attract as little as ₹1,000–₹10,000 per year.

• A share allotment delay beyond 180 days without RBI permission could attract up to 1.75x the base penalty.

Additionally, repeat contraventions within 3 years are not eligible for compounding.

⛔ What Cannot Be Compounded?

Certain contraventions are not eligible for compounding:

• Those under Section 3(a) (dealing in foreign exchange without authorization)

• Cases already under DoE investigation

• Transactions involving money laundering, terror financing, or national security concerns

• Where an adjudicating order has already been passed

🧭 Why Choose Us?

We provide end-to-end FEMA advisory and compounding services, including:

• Contravention analysis

• Filing applications with RBI and follow-up

• Drafting supporting documents, undertakings, and correspondence

• Advisory on administrative correction (valuation, refund, reporting)

• Post-compounding compliance and representation

We assist clients across India and globally, including startups, listed companies, NRIs, and family offices.