The Department of Economic Affairs, Ministry of Finance (MoF) has notified the Foreign Exchange (Compounding Proceedings) Rules, 2024 (New Compounding Rules) under the Foreign Exchange Management Act, 1999 (FEMA) on September 12, 2024. The New Compounding Rules supersede the existing Foreign Exchange (Compounding Proceedings) Rules, 2000 (Old Compounding Rules). However, any compounding applications pending before the compounding authority on the date of commencement of the New Compounding Rules will continue to be governed by the Old Compounding Rules. The New Compounding Rules shall come into force with effect from the date of their publication in the Official Gazette i.e., September 12, 2024.

 

The New Compounding Rules have been notified by the MoF as part of a broader initiative to streamline and rationalize existing rules and regulations to further facilitate ease of doing business, with emphasis on enabling provisions to expedite and streamline the processing of compounding applications, introduction of digital payment options for application fees and compounding amounts, and a focus on simplification and rationalization of the provisions to eliminate ambiguity and clarify the process.

 

The key changes introduced under the New Compounding Rules in comparison to the Old Compounding Rules include the following major aspects:

 

  • Change in Monetary Thresholds: In terms of procedure, the New Compounding Rules have increased the monetary thresholds considered to determine the minimum rank of an RBI officer that is authorized to compound the contravention.
  • Powers of the Compounding Authority: The Old Compounding Rules authorised the compounding authority (i.e., RBI or the Directorate of Enforcement (ED)) to direct the applicant to provide any other information/document relevant to the compounding proceeding. This position has been retained in the New Compounding Rules. However, in addition to the foregoing, the New Compounding Rules also empower the compounding authority to “if necessary, require the applicant to take such action as may be necessary with respect transactions involved in the contravention”.
  • Cases Where the Contravention is not Compoundable: The New Compounding Rules have introduced a specific rule that provides the cases in which the contravention is not compoundable. In this regard, the New Compounding Rules have also specified two new cases where the contravention will not be compoundable, which are as follows: (i) where the relevant adjudicating authority has already passed an order imposing penalty under Section 13 of FEMA; and (ii) where the compounding authority is of the view that the contravention involved requires further investigation by the ED to ascertain the amount of contravention under Section 13 of FEMA.

 

Additionally, it is important to note that the Old Compounding Rules provided that no contravention shall be compounded if an appeal has been filed under Section 17 or Section 19 of FEMA. However, no similar provision has been provided under the New Compounding Rules.

 

Additionally, under the New Compounding Rules, it has been explicitly clarified that where the provisions of Section 37A of FEMA are applicable (i.e., contravention is with respect to assets held outside India), the contravention will not be compoundable. This position was already provided under Section 37A itself, and the same has merely been clarified under the New Compounding Rules. Further,

 

  • Compounding Application Form: The compounding application form under the New Compounding Rules has integrated various annexures required under the Old Compounding Rules under one single form to simplify the compounding process. Additionally, the compounding application form now requires the applicant to specifically provide inter alia the following details: (i) whether any notices have been issued against the applicant under Rule 4 of the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000; (ii) relevant regulatory provisions with respect to the contravention; and (iii) whether any compounding orders have been passed against any applications previously submitted by the applicant.

 

For more details, kindly refer to the gazette notification published by the MoF, available by clicking on this link.

Authors & Contributors

Partner(s):

Vaibhav Kakkar

Snigdhaneel Satpathy

Sahil Arora

 

 

Associate(s):

Keshav Pareek

Ishaan Gupta