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


 

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.
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.

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