New Rules Streamline Foreign Exchange Compounding Proceedings

The Ministry of Finance, Department of Economic Affairs, issued a significant notification on September 12, 2024, introducing the Foreign Exchange (Compounding Proceedings) Rules, 2024. These new rules, published as G.S.R. 566 (E) in the Official Gazette, supersede the earlier Foreign Exchange (Compounding Proceedings) Rules, 2000. The Central Government enacted these rules by exercising powers conferred under sub-section (1) of section 15 read with clause (b) of sub-section (2) of section 46 of the Foreign Exchange Management Act, 1999 (FEMA). The new framework aims to provide a more structured and efficient mechanism for compounding contraventions under FEMA, with the rules coming into force on the date of their publication.

The 2024 Rules define key terms such as "Act" (referring to FEMA, 1999), "authorised officer," "applicant," and "compounding order," among others. They establish specific compounding authorities within both the Reserve Bank of India (RBI) and the Directorate of Enforcement (ED), delineating their powers based on the monetary sum involved in the contravention. For contraventions other than those under clause (a) of section 3 of FEMA, RBI officers ranging from Assistant General Manager to Chief General Manager are authorised to compound cases involving sums up to sixty lakh rupees, two and a half crore rupees, five crore rupees, and above five crore rupees, respectively. For contraventions of clause (a) of section 3, ED officers from Deputy Director to the Director of Enforcement, sometimes in conjunction with a Deputy Legal Adviser, are empowered to compound cases based on varying monetary thresholds, starting from five lakh rupees and extending to one crore rupees or more. A notable provision introduces a three-year bar, stipulating that a similar contravention committed within three years of a previously compounded one cannot be compounded again, though a contravention after this period is deemed a first contravention. Applications for compounding must be made in the prescribed Form, accompanied by a fee of ten thousand rupees plus Goods and Services Tax (GST), payable to the compounding authority. The rules also specify that if a contravention is compounded before adjudication under section 16 of FEMA, no further inquiry for adjudication will be initiated or continued. Furthermore, if compounding occurs after a complaint is made under sub-section (3) of section 16, the person concerned shall be discharged upon notice to the Adjudicating Authority. The compounding authority is mandated to pass an order as expeditiously as possible, but not later than one hundred and eighty days from the application receipt.

The legislative intent behind the Foreign Exchange (Compounding Proceedings) Rules, 2024, is to enhance clarity, efficiency, and accountability in the process of settling contraventions under FEMA. The earlier legal position, governed by the 2000 Rules, lacked some of the granular detail and specific exclusions now introduced. The new rules address statutory gaps by explicitly outlining scenarios where contraventions cannot be compounded, such as when the amount involved is not quantifiable, when provisions of section 37A of the Act are applicable, or crucially, when the Directorate of Enforcement suspects serious contraventions like money-laundering, terror financing, or activities affecting national sovereignty and integrity. In such cases, the compounding authority is directed to remit the case to the appropriate Adjudicating Authority for formal adjudication under section 13 of FEMA. The legislation provided: “where the Directorate of Enforcement is of the view that the proceeding relates to a serious contravention suspected of money-laundering, terror financing or affecting the sovereignty and integrity of the nation, the compounding authority shall not proceed with the matter and shall remit the case to the appropriate Adjudicating Authority for adjudicating contravention under section 13.” This provision underscores a policy rationale to prevent the compounding mechanism from being used for grave offenses, ensuring that such matters are subjected to full adjudicatory scrutiny. The rules also introduce clear enforcement mechanisms and timelines, requiring the payment of the compounded sum within fifteen days of the compounding order. Failure to adhere to this timeline results in the application being deemed never made, and the provisions of FEMA for contravention would then apply. The new rules thus aim to provide a robust and transparent framework for managing foreign exchange contraventions, while also ensuring that serious offenses are appropriately escalated for adjudication.

Keywords: FEMA, Foreign Exchange, Compounding, RBI, Directorate of Enforcement, Rules, 2024, Economic Affairs, India, Notification

Geo Tags: India District: Not Applicable