Company Secretarial

June 2025

Index

Amendments to Directions - Compounding of Contraventions under FEMA, 1999: A Cap on Penalty in Select Cases

The Reserve Bank of India (RBI), through A.P. (DIR Series) Circular No. 17/2024-25 dated October 1, 2024 and subsequent Master Directions on Compounding of Contraventions under FEMA, 1999 dated April 22, 2025, has introduced a noteworthy amendment aimed at making the compounding process more rational and equitable. This amendment specifically introduces a cap of ₹2,00,000 per contravention under certain conditions, significantly impacting the way minor or technical violations under FEMA are treated.

Background: Compounding Under FEMA

The Foreign Exchange Management Act (FEMA), 1999, provides for compounding as a voluntary mechanism where individuals/entities can admit to contraventions and regularize them by paying a monetary penalty, thereby avoiding prosecution and lengthy legal proceedings.

The Reserve Bank of India is empowered under Section 15 of the Foreign Exchange Management Act (FEMA), 1999, to compound certain contraventions and it periodically issues directions and updates to streamline this process.

AD Category-I Banks

Authorized Dealer (AD) Category-I banks are banks in India authorized by the Reserve Bank of India (RBI) to deal in foreign exchange transactions under the Foreign Exchange Management Act (FEMA), 1999.

Key Features of AD Category- I Banks-
- Authorization- These banks are granted by the RBI under Section 10 of FEMA, 1999.
- Eligibility Criteria- The AD Category – I bank includes such scheduled commercial banks such as SBI, ICICI, HDFC, etc.
- Role- The role of the AD Category – I bank includes facilitating all types of foreign exchange transactions- inward/ outward remittances, trade payments, investments etc.

Prior Framework (Before the April 2025 Amendment)

The previous Master Directions on compounding (last major update in 2020) included:

A calculation matrix is used to determine the compounding amount based on the nature, duration and gravity of contravention.
Row 5 of the matrix generally covered technical, procedural and reporting contraventions (Exa. delays in filing forms like FC-GPR, FC-TRS, FLA etc.).
There was no explicit cap on the compounding amount, even for minor contraventions, although the amount imposed was usually on the lower side for technical lapses.
The compounding authority had discretion, but there was no formal provision to reduce penalties in the public interest or due to exceptional circumstances.

The Amendment: What Has Changed?

New Provision has been inserted (Para 5.4. II.vi)
“Subject to satisfaction of the compounding authority, based on the nature of contravention, exceptional circumstances/ facts involved in the case and in wider public interest, the maximum compounding amount imposed may be capped at ₹2,00,000 per contravention of each regulation/ rule applied in a compounding application with respect to contraventions under Row 5 of the computation matrix.”

Key Highlights of the Amendment

Applicability Limited to Row 5 Contraventions
The cap applies only to contraventions listed under Row 5, which typically involve:
Delays in submission of statutory filings (for Exa. FLA, FC-GPR, FC-TRS)
Procedural lapses that do not involve actual foreign exchange loss or violation of substantive provisions.
Cap of Rs. 2,00,000 per regulation/ rule
Each contravention related to a rule or regulation (for Exa, delayed filing under Regulation 6 of FEMA 20(R)) may be capped at ₹2 lakh, regardless of the calculated amount under the matrix.
Discretion of Compounding Authority
The cap is not automatic; it may be applied only if the authority is satisfied based on:
Nature of contravention (minor or technical)
Exceptional facts (for Exa. genuine error, compliance burden)
Broader public interest (for Exa. support for MSMEs/ Startups)
Legal Backing
This amendment is issued under Section 10(4) and 11(1) of the Foreign Exchange Management Act (FEMA), 1999, reinforcing the RBI’s supervisory authority and legal framework for such procedural relaxations.

Significance of the Amendment

Ease of Doing Business
This move is particularly beneficial for small businesses, startups and new investors who may unintentionally delay compliance. The provision:

- Prevents excessive financial burden for minor contraventions.
- Promotes voluntary compliance by making penalties more proportionate.

Reduces Litigation Risk
A clear cap encourages entities to opt for compounding instead of waiting for enforcement actions. This also reduces administrative and judicial burden.

Formal Recognition of Discretionary Relief
Previously, although the RBI could impose a lower penalty, there was no formal clause enabling such a cap. This amendment institutionalizes that flexibility.

Supports Regulatory Intent Over Rigid Enforcement
The amendment signals the RBI’s intent to distinguish between substantive violations (e.g., illegal remittances or FDI violations) and procedural lapses, ensuring enforcement aligns with regulatory intent.

Example Scenario (Before vs After)

Scenario	Earlier	Post-Amendment
Delay in filing Form FC-GPR for ₹10 crore FDI	The compounding amount could be ₹4–5 lakh based on the calculation matrix	May be capped at ₹2,00,000, if the authority considers it a minor procedural delay and in the public interest

Comparison with Previous Amendments and Framework

Aspect	Earlier Provisions (pre-2025)	Current Amendment (April 2025)	Significance
Penalty Calculation	Based on a matrix (gravity, duration, amount involved)	Same matrix, but now with a cap option for Row 5	Reduces the burden for minor breaches
Capping Mechanism	No formal cap; penalty as per the matrix	₹2 lakh cap per contravention under discretion	More predictable and affordable for applicants
Discretionary Relief	No explicit clause for public interest or exceptional cases	A clear basis for discretion is now included	Transparency in compounding decisions
Ease of Doing Business	Penal structure could be disproportionate to the default	A reasonable penalty promotes ease of compliance	Boosts investment confidence
Scope of Delegation	RBI regional offices had defined authority, updated over time	Broader delegation + online processing (as of 2024)	Complements recent digital reforms
Timeline for Disposal	Originally 180 days; amended to 120 days (2024)	No change, but aligned with the efficiency drive	Faster resolution of cases

Conclusion

The amendment as on 22^nd April 2025 to FEMA’s compounding directions marks a progressive shift in the RBI’s regulatory approach, moving from a strict penal regime to a more calibrated and facilitative one. By capping penalties for low-risk, technical contraventions in exceptional cases, the RBI provides relief especially to compliant entities with genuine intent. It is now essential for businesses, professionals and Authorized Dealer (AD) banks to revisit their compliance and advisory frameworks, considering this update.