On September 12, 2024, the Ministry of Finance issued the Foreign Exchange (Compounding Proceedings) Rules, 2024 (“2024 Rules”). The 2024 Rules supersede the Foreign Exchange (Compounding Proceedings) Rules, 2000 (“2000 Rules”) and have been introduced as part of a broader initiative to streamline and rationalize existing rules and regulations to further facilitate ease of doing business.

Background

The emphasis has been 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 of compounding. The Master Directions on Compounding of Contraventions (“Master Directions”) are yet to be updated to reflect the changes introduced by the 2024 Rules.

Key Aspects and Implications

• Compounding Authorities: According to Rule 3 of the 2024 Rules, the Director of Enforcement (ED) or (a) an officer of the ED not below the rank of Deputy Director or Deputy Legal Adviser’ or (b) an officer of the Reserve Bank of India (RBI) not below the rank of the Assistant General Manager, as authorized by the Central Government will be the compounding authority for the purposes of the 2024 Rules.

• Compounding authority of RBI: The 2024 Rules have extended the monetary thresholds of the amount involved in a contravention which RBI is empowered to compound. For an Assistant General Manager, the permissible limit has risen from less than INR 10 Lakh to less than INR 60 Lakh. Similarly, the Deputy General Manager’s limit has expanded significantly, from between INR 10 Lakh and INR 40 Lakh to under INR 2.5 Crore. The limit for a General Manager has also increased, moving from a range of INR 40 Lakh to INR 100 Lakh to less than INR 5 Crore. For the Chief General Manager, the threshold has been elevated from more than INR 100 Lakh to over INR 5 Crore.

• Compounding authority of ED: If any person deals in or transfers any foreign exchange or foreign security to any authorized person in contravention of Section 3(a) of the Foreign Exchange Management Act, 1999, as amended (“Act”), such contravention should be compounded by the officials of ED, which will at all times be subject to the direction, control and supervision of the Director of Enforcement. For a Deputy Director, the permissible limit is less than INR 5 Lakhs. An Additional Director has a limit ranging from more than INR 5 Lakhs to less than INR 10 Lakhs. The limit for a Special Director fall between more than INR 10 Lakhs and less than INR 50 Lakhs. For a Special Director in conjunction with the Deputy Legal Adviser, the limit is set between more than INR 50 Lakhs and less than INR 1 Crore. Finally, the combined authority of the Director of Enforcement and the Special Director allows for limits exceeding INR 1 Crore.

No revisions have been made to the monetary limits under the 2024 Rules.

• Digital payments: Under the 2000 Rules, the fee for compounding applications was required to be paid through a demand draft. The 2024 Rules allow this payment to be made digitally through NEFT and RTGS in addition to a demand draft. This will simplify the process of making payments by persons opting for compounding. Further, the 2024 Rules prescribe a fee of INR 10,000 (Indian Rupees Ten Thousand only) excluding applicable goods and services tax for filing a compounding application, which was earlier INR 5,000 (Indian Rupees Five Thousand only) under the 2000 Rules.

• Limitation: The 2024 Rules will not apply to any contravention committed by a person within 3 (three) years of a similar contravention that was previously compounded under the 2024 Rules. Any contravention occurring more than 3 (three) years after a previous compounding will be considered a first-time contravention. These limitations were also included in the 2000 Rules.

• Compounding Procedure: The compounding authority may request additional information, records, or documents relevant to the compounding proceeding beyond what is provided in the prescribed Form. If necessary, the authority may also require the applicant to take specific actions related to the transactions involved in the contravention. Upon receiving a complete application in the prescribed Form at the RBI or the ED, as the case may be, the compounding authority will provide the applicant with an opportunity to be heard. The authority must issue a compounding order as swiftly as possible, but no later than 180 (one hundred eighty) days from the receipt of the application. The sum specified in the compounding order must be paid within 15 (fifteen) days from the date of the order. Payment should be made via demand draft, National Electronic Funds Transfer (NEFT), Real Time Gross Settlement (RTGS), or any other permissible electronic or online method, in favor of the compounding authority. If the applicant fails to pay the compounded sum within the specified timeframe, it will be considered that no application for compounding was made. Consequently, the provisions of the Act for the contravention will be applied as if no compounding application had been submitted. While the 2000 Rules had similar provisions for the compounding procedure, the 2024 Rules have introduced digital payments of the compounding orders.

• Exceptions: Under the 2024 Rules, a contravention cannot be compounded under the following circumstances:

(a) If the amount involved cannot be quantified.
(b) If the provisions of Section 37A of the Act are applicable.
(c) If the ED determines that the contravention involves serious issues such as money laundering, terrorism financing, or threats to national sovereignty and integrity. In such cases, the compounding authority will not proceed and will refer the matter to the appropriate adjudicating authority for adjudication under Section 13 of the Act.
(d) If the adjudicating authority has already issued a penalty order under Section 13 of the Act.
(e) If the compounding authority believes that the contravention requires further investigation by the ED to determine its extent under Section 13 of the Act.

While the 2000 Rules had a similar provision, the 2024 Rules provide for a more detailed list of such contraventions. The contraventions under sub-clauses (b) and (e) had been up till now identified as non-compoundable only under the Master Direction and not the 2000 Rules.

• Continuation of pending proceedings: Any compounding applications which are pending before the compounding authority, as on the date of commencement of the 2024 Rules will continue to be governed by the provisions of the 2000 Rules. Therefore, the extended jurisdiction of RBI officers and benefit of digital payments will be available only to fresh compounding applications filed after the enforcement of the 2024 Rules.