RBI Sole Authority to Compound Eligible FEMA Contraventions, ED Clarifies

The Enforcement Directorate (ED) has clarified that the Foreign Exchange Management Act, 1999 (FEMA) is primarily a civil law designed to regulate foreign exchange transactions and encourage compliance.

Under Section 15 of FEMA, eligible contraventions may be compounded to facilitate voluntary compliance, limit prolonged litigation and ensure the timely resolution of cases. However, the compounding mechanism does not extend to matters involving serious allegations such as money laundering, terror financing or activities affecting India’s sovereignty and integrity.

The ED stated that the Reserve Bank of India (RBI) is the competent authority for compounding eligible FEMA contraventions. The Directorate’s role includes investigating suspected FEMA violations and issuing a no-objection certificate to the RBI wherever required for processing a compounding application.

The RBI has prescribed a formal framework for determining compounding amounts. Relevant factors include the nature and severity of the violation, its duration and the monetary value involved.

According to the ED, once an eligible contravention is compounded by the RBI, the related investigation or proceedings are discontinued and the matter is formally closed. The agency also publishes information on significant case closures to make parties facing similar pending matters aware of the option to apply to the RBI for compounding, subject to eligibility.

The clarification followed the closure of a FEMA matter involving Apothecon Pharmaceuticals. The RBI reportedly compounded the company’s contraventions after payment of ₹40 lakh. The violations included delays in reporting foreign inward remittances and the issuance of equity instruments without the required government approval. CA Sansaar