India has an elaborate foreign exchange control laws which usually gets triggered upon any inflow or outflow of foreign exchange. Foreign investors and residents alike often face difficulty in complying with such elaborate foreign exchange regulatory framework and in some cases end up unintentionally or unknowingly breaching some provision(s) of the foreign exchange control laws. Foreign Exchange Management Act, 1999 read along with the rules and regulation framed under it (collectively referred as the “Act”) is the parent legislation for the foreign exchange control regulatory framework in India and it also provides for a mechanism of compounding i.e. a voluntary process to settle admitted contraventions under the Act.
Contravention means a breach of the provisions of the Act and rules, regulations, notification, orders, directions, circulars issued under the Act or violation of any condition subject to which an authorization is issued by the Reserve Bank of India (“RBI”). The contraventions, prima facie, involving money laundering, national and security concerns involving serious infringement of the regulatory framework, etc., are sensitive contraventions under the Act.
Section 42 of the Act deals with contravention of the provisions of the Act by the companies. It provides that where a person committing a contravention of any of the provisions of this Act or of any rule, direction or order made there under is a company, every person who, at the time the contravention was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company (“company” means anybody corporate and includes a firm or other association of individuals) as well as the company, shall be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly.
The Section 42 of the Act further state that where a contravention of any of the provisions of this Act has been committed by a company and it is proved that the contravention has taken place with the consent or connivance of, or is attributable to any neglect on the part of, any director(“director”, in relation to a firm, means a partner in the firm), manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly.
The Act provides for the penalty in the event of contravention of the provisions of the Act under Section 13 of the Act. It states that a person (which also includes company, body corporate, etc.) who contravenes the provisions of the Act may be liable for a penalty of up to three times the sum involved in such contravention where the amount is quantifiable or up to INR 200,000, where the amount is not quantifiable and where the contravention is a continuing one, further penalty which may extend to INR 5,000 for every day after the first day during which the contravention continues.
The term ‘compounding’ has not been defined in the Act. Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and seeking redressal. As per Black’s Law Dictionary, ‘compounding’ means to settle a matter by a money payment, in lieu of other liability. In short compounding of an offence is a settlement mechanism, by which, one is given option to pay money in lieu of prosecution, thereby avoiding a prolonged litigation. Section 15 of the Act read along with the Foreign Exchange (Compounding Proceedings) Rules, 2000 (“Compounding Rules”) permits and provide the procedure for compounding of contraventions of the Act and empowers the Compounding Authority (“CA”) to compound any contravention in terms of Section 13 of the Act.
Section 13 of the Act read along with the rule 4 of the Compounding Rules empowers RBI to compound any contraventions as defined under section 13 of the Act, except the contravention under Section 3(a) (i.e. hawala transaction), for a specified sum after offering an opportunity of personal hearing to the contravener. It is a voluntary process in which an individual or a corporate seeks compounding of an admitted contravention.
Section 13 of the Act read along with rule 5 of the Compounding Rules empowers the Enforcement Directorate to compound contravention of Section 3(a) (i.e. hawala transaction) of the Act, for a specified sum after offering an opportunity of personal hearing to the contravener.
When a person is made aware of the contravention of the provisions of the Act by the RBI or any other statutory authority or the auditors or by any other means, she/he may file an application in the prescribed format along with the prescribed fee to RBI for compounding the contravention. One can also make an application to RBI for compounding, suo moto, on becoming aware of the contravention. However it is important to note that, no contravention shall be compounded unless the amount involved in such contravention is quantifiable.
On receipt of the application for compounding, the RBIwill examine the application based on the documents and submissions made in the application and assess whether contravention is quantifiable or not and, if so, the amount of contravention. While examining the nature of contravention RBI needs to keep in view, inter alia, the following indicative points:
Following are the contraventions which cannot be compounded under the Act:
The purpose to bring this Act was to simplify the foreign exchange regulatory regime in India and to facilitate external trade and payments and maintenance of foreign exchange. However, over a course of time, due to numerous procedural and filing requirements that have been introduced under the Act by way of executive rule making has made the filling requirements under the Act more complicated instead of simplifying thesame. Because of the complicated procedural and filing requirements, many breaches occur which are merely technical in nature, and most of them do not involve a malafide intent or deliberate default.Looking at this scenario maybe it’s time for RBI to re-consider the need of complicated procedural and filing requirements under the Act. Simplifying such requirements and doing away with the non-critical ones will go a long way towards clearing the regulatory maze and the ease of doing business in India
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