Introduction
The compounding mechanism under Section 15[1] of the Foreign Exchange Management Act, 1999 (“FEMA”), allows individuals and companies to voluntarily admit breach of FEMA provisions and pay a penalty to regularise their contraventions without undergoing lengthy enforcement actions. In continuation of our earlier analysis of the Foreign Exchange (Compounding Proceedings) Rules, 2024[2] (“Compounding Rules”), read with Master Directions on Compounding of Contravention under the FEMA[3] (“Compounding Directions”), notified last year, we now examine the latest amendments to the compounding mechanism under the Compounding Directions. The Reserve Bank of India (“RBI”), through A.P. (DIR Series) Circulars notified on April 22, 2025, and April 24, 2025[4] (“April Amendments”), respectively has further amended the Compounding Directions. These amendments were preceded by a press release dated April 11, 2025[5], where the RBI mandated all banks, financial companies, and other regulated entities to submit their regulatory authorisations/ licenses/ approvals exclusively through the PRAVAAH online portal on and from May 1, 2025, onwards.
This blog examines the key changes of the April Amendments, their intended and unintended impact on stakeholders, and need, if any, for further tightening the regulatory framework for compounding processes under FEMA.
Key amendments and their impact on compounding mechanism:
Introduction of a cap on maximum compounding amount
The RBI, through the April Amendments, inserted paragraph 5.4.II.vi[6] in the Compounding Directions, which caps the compounding amount for miscellaneous non-reporting contraventions, as specified in Row 5 of the ‘Guidance note on computation matrix’[7], to INR 2,00,000 (approx. USD 2,336) for each contravention of regulation/ rule under FEMA. The applicability of cap for the aforesaid contraventions is subject to considerations, such as nature of contravention, exceptional circumstances/ facts involved in a case, and public interest.
Prior to this insertion, the compounding amount for miscellaneous non-reporting contraventions under FEMA was not capped. It stated, ‘fixed amount of INR 50,000 plus a percentage of amount under contravention’ and was silent on any upper limit that the compounding authority should be guided by. This left room for ambiguity and uncertainty. However, as mentioned above, the cap on compounding amount continues to be subject to broad concepts like ‘exceptional circumstances’ and ‘public interest’, where the compounding authorities may interpret these terms differently, based on facts and circumstances in each compounding application and accordingly levy a compounding amount beyond the cap in some cases. Having said that, the amendment somewhat narrows the scope of use of such varied interpretation to a certain extent, where not every application’s outcome is uncertain, but only some exceptional ones, in the following manner:
- Certainty for minor contraventions: Capping the compounding amount for miscellaneous reporting matters under Row 5 at INR 2,00,000 (approx. USD 2,336) under FEMA provides clarity to companies and individuals for minor contraventions under FEMA. A fixed cap provides certainty of financial exposure, making it easier for parties to self-assess potential liabilities, and encourages them to opt for voluntary compounding.
- Lower costs, faster resolutions: The imposition of lower penalties, particularly for minor or technical contraventions, is expected to facilitate quicker payments and expedite the resolution of compounding cases. This, in turn, is likely to ease the administrative burden on the RBI.
- Fairer treatment for minor offences: A capped compounding amount of INR 2,00,000 (approx. USD 2,336) ensures that minor, inadvertent, technical, or first-time offences are treated proportionately, and that applicants are not punished excessively for low-impact or inadvertent breaches. This amendment indicates that regulators are now considering the impact and intention behind violations, instead of using a rigid ‘one-size-fits-all’ approach.
Deletion of paragraph 5.4.ii.v – fresh applications without linking to previous compounding order
The RBI, through the April Amendments, deleted paragraph 5.4.II.v[8] of the Compounding Directions. Previously, this provision imposed an automatic 50% enhancement on the compounding amounts of applicants against whom a compounding order had been passed earlier, and the applicant had failed to pay the compounding amount as mentioned in such order and subsequently re-applied for compounding of contravention relating to the same contravention.
With this deletion, each compounding application is now de-linked from previous applications on the same subject matter, with no enhanced compounding amount for non-payment of compounding amount for the same contravention under FEMA previously. However, the above deletion does not dilute the bar provided under the Compounding Rules for filing the compounding application, wherein before filing the compounding application, the applicant should ensure that they have not compounded any contravention in the immediately preceding three years in terms of the Compounding Rules. Once a contravention is compounded, any subsequent offence after a period of three years is deemed as the first contravention.[9]
The deletion of paragraph 5.4.II.v of the Compounding Directions, ensures that applicants are not unduly penalised for previous non-payment of the compounding amount for the same contravention under FEMA, if it was due to genuine error, financial hardship, or procedural misunderstandings.
However, due to this deletion, applicants might deliberately delay or avoid paying the initial compounding amount, knowing that if they re-apply, they will not face any extra financial burden linked to earlier defaults.
New procedural requirements for payment submission
The RBI, through the April Amendments, has amended Part B of Annexure I to the Compounding Directions[10]. It now requires the following additional details to be provided to the RBI through an email, after payment of compounding application fee/ compounding amount:
- Mobile number
- Specific RBI office where payment was made
- Payment mode details
This amendment aims to address difficulties in reconciling the amounts received and prevent delays in processing applications. The updated requirements facilitate better tracking of payments and ensure prompt updating of records, supporting more efficient administration of the compounding process.
Clarification pertaining to penalty amount and compounding amount
The April Amendments have further clarified the difference between penalty amount and compounding amount under paragraph 5.4[11] of the Compounding Directions for greater transparency and consistency in enforcement of compounding orders by compounding authorities. It is noted that the penalty amount is the maximum penalty that can be imposed for contravention of FEMA under Section 13 of FEMA[12], while compounding amount is the penalty that is imposed by the compounding authorities after filing of compounding application.
Concluding remarks
Clearer guidelines needed: TheRBI should consider issuing supplementary guidelines or FAQs to define the term ‘exceptional circumstances’ and ‘public interest’ used for determining the compounding amount for miscellaneous non-reporting contraventions provided in Row 5 of the ‘Guidance note on computation matrix’. Publicly available guidance would not only help compounding officers, but also allow applicants to present their case in a better manner, ultimately resulting in a more efficient and beneficial process. Moreover, the RBI should also consider releasing periodic reviews of compounding matters on quarterly or semi-annual basis. This would be helpful in strengthening the compounding regime and removing outcome unpredictability.
Striking a balance between ease and enforcement: The April Amendments pose certain risks that warrant careful consideration. The removal of enhanced penalties for repeated applications might encourage intentional non-compliance. Also, large companies may view the fixed cap on compounding amount as a mere ‘settlement fee’ and could be incentivised to risk contravention, rather than complying with regulations in the first place.
Nonetheless, the recent amendments to the Compounding Directions are a welcome step towards simplifying the compounding process under FEMA. The changes aim to promote voluntary compounding of offences, save administrative resources, and align with the government’s broader push towards ease of doing business.
[1] FEMA, section 15.
[2] Foreign Exchange (Compounding Proceedings) Rules, 2024 (“Compounding Rules”).
[3] Directions on Compounding of Contravention under FEMA, 1999 (“Compounding Directions”) on October 01, 2024 (updated as on April 24, 2025) (Available at: Directions on Compounding of Contraventions under FEMA, 1999).
[4] A.P. (DIR Series) Circular. No 02/2025-26 dated April 22, 2025 and A.P. (DIR Series) Circular. No 04/2025-26 dated April 24, 2025 issued by Reserve Bank of India (“April Amendments”) (Available at: A.P. (DIR Series) Circular. No 02/2025-26 and A.P. (DIR Series) Circular. No 04/2025-26).
[5] Press Release: 2025-2026/96 dated April 11, 2025 issued by Reserve Bank of India (Available at: Press Release dated April 11, 2025).
[6] Compounding Directions, para 5.4.II.vi.
[7] Compounding Directions, row 5 of para 5.4.I.
[8] Compounding Directions, para 5.4.II.v.
[9] Compounding Rules, rule 4(2) and rule 5(2).
[10] Compounding Directions, Part B of Annexure I.
[11] Compounding Directions, para 5.4.
[12] FEMA, section 13(1): If any person contravenes any provision of FEMA, or any rule, regulation, notification, direction or order issued in exercise of the powers under FEMA, or contravenes any condition subject to which an authorization is issued by the Reserve Bank, he shall, upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention where the amount is quantifiable, or up to INR 2,00,000 where the amount is not directly 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.