A Guide to Compounding Contraventions before the Enforcement Directorate

Pranav Singla

Introduction

The Foreign Exchange Management Act, 1999 (FEMA) plays a crucial role in regulating foreign exchange transactions in India. However, there may be instances when individuals or entities inadvertently or negligently contravene the provisions of FEMA. In such cases, seeking compounding of contraventions before the Enforcement Directorate (ED) can provide an opportunity to rectify the mistake and avoid severe penalties. This article aims to guide individuals and businesses on how to tackle FEMA compounding contraventions before the ED effectively.

Understanding FEMA Contraventions

Before diving into the compounding process, it is important to identify the contravention that occurred. Familiarize yourself with the provisions of FEMA and ascertain the nature and extent of the violation. This will help in assessing potential penalties and consequences associated with the contravention.

Seek Professional Guidance

Given the complexity of FEMA and its implications, it is advisable to seek professional assistance. Engage a legal professional or a qualified chartered accountant with expertise in FEMA and foreign exchange regulations. They can provide valuable guidance, help you understand the nuances of the compounding process, and ensure compliance with relevant regulations.

Prepare a Compounding Application

A well-drafted compounding application is essential to present your case effectively. Include the following key elements in your application:

  1. Detailed Facts: Provide a comprehensive account of the facts and circumstances surrounding the contravention. Include relevant dates, transactions, and parties involved.
  2. Specify FEMA Provisions Violated: Clearly state the specific provisions of FEMA that have been contravened. This demonstrates your awareness of the violation and shows a commitment to rectify it.
  3. Quantify the Contravention: Specify the monetary value or any other quantifiable aspect associated with the contravention. This helps in assessing the seriousness of the violation and determining the appropriate compounding fees.
  4. Reasons for Contravention: Provide a clear and honest explanation of why the contravention occurred. Highlight any mitigating factors or unintentional errors that contributed to the violation.
  5. Steps Taken for Rectification: Outline the actions taken to rectify the contravention promptly. This demonstrates your commitment to compliance and rectification of the mistake.
  6. Supporting Documents: Include all relevant documents, such as transaction records, contracts, correspondence, or any other evidence that supports your case. Make sure to provide documents requested by the ED.

Payment of Compounding Fees

Compounding fees must be paid along with the compounding application. The fees are determined based on the nature and severity of the contravention. It is crucial to ensure that the correct fees are paid as per the FEMA compounding guidelines. Failure to pay the appropriate fees can result in the rejection of the compounding application.

Follow-Up and Cooperation

After submitting the compounding application, actively cooperate with the ED throughout the process. Respond promptly to any queries or requests for additional information from the authorities. If required, attend hearings or meetings as scheduled. Maintaining open communication and demonstrating a cooperative attitude will positively impact the outcome of the compounding process.

Obtain the Compounding Order

If the ED accepts the compounding application, they will issue a compounding order. This order will specify the terms and conditions of the compounding. It is vital to carefully review and comply with the terms outlined in the order to avoid further legal consequences.

Conclusion

Tackling FEMA contraventions through compounding before the Enforcement Directorate is a crucial step towards rectifying mistakes and ensuring compliance. By following the outlined steps in this article, individuals and businesses can effectively navigate the compounding process. Remember to seek professional guidance, prepare a comprehensive compounding application, pay the prescribed fees, cooperate with the authorities, and comply with the terms of the compounding order. By doing so, you can address the contravention under FEMA and mitigate potential penalties while striving for regulatory compliance in foreign exchange transactions.

Liberalised Remittance Scheme

Pranav Singla

The Liberalised Remittance Scheme (LRS) is a scheme introduced by the Reserve Bank of India (RBI) in 2004. The scheme allows resident individuals to remit up to USD 2,50,000 per financial year (April-March) for any permitted current or capital account transaction or a combination of both. The scheme is not available to corporates, partnership firms, HUF, trusts, etc.

The LRS limit has been revised in stages consistent with prevailing macro and micro economic conditions.

From, till date, the LRS limit has been revised multiple times.

Date of revision of limitLIMIT (USD)
February 4, 200425,000
December 20, 200650,000
May 8, 20071,00,000
September 26, 20072,00,000
August 14, 201375,000
June 3, 20141,25,000
May 26, 20152,50,000

The LRS is available to all resident individuals, including minors. In the case of a remitter being a minor, the Form A2 must be countersigned by the minor’s natural guardian. Remittances under the scheme can be consolidated in respect of family members subject to individual family members complying with its terms and conditions. However, clubbing is not permitted by other family members for capital account transactions such as opening a bank account/investment if they are not the co-owners/co-partners of the overseas bank account/investment.

Remittances for the purchase of property shall be in accordance with the provisions under paragraph 6(ii). Further, a resident cannot gift to another resident, in foreign currency, for the credit of the latter’s foreign currency account held abroad under LRS.

All other transactions that are otherwise not permissible under the Foreign Exchange Management Act (FEMA) and those in the nature of remittance for margins or margin calls to overseas exchanges/overseas counterparty are not allowed under the scheme.

The permissible capital account transactions by an individual under LRS are opening a foreign currency account abroad with a bank; acquisition of immovable property abroad; Overseas Direct Investment (ODI) and Overseas Portfolio Investment (OPI), in accordance with the provisions contained in Foreign Exchange Management (Overseas Investment) Rules, 2022, Foreign Exchange Management (Overseas Investment) Regulations, 2022 and Foreign Exchange Management (Overseas Investment) Directions, 2022; and extending loans including loans in Indian Rupees to Non-resident Indians (NRIs) who are relatives as defined in Companies Act, 2013.

The limit of USD 2,50,000 per financial year (FY) under the scheme also includes/subsumes remittances for current account transactions available to resident individuals under Para 1 of Schedule III to Foreign Exchange Management (Current Account Transactions) Amendment Rules, 2015 dated May 26, 2015. Release of foreign exchange exceeding USD 2,50,000 requires prior permission from the Reserve Bank of India.

For private visits abroad, other than to Nepal and Bhutan, any resident individual can obtain foreign exchange up to an aggregate amount of USD 2,50,000 from an Authorised Dealer or FFMC in any one financial year irrespective of the number of visits undertaken during the year. Further, all tour-related expenses including cost of rail/road/water transportation; cost of Euro Rail; passes/tickets, etc. outside India; and overseas hotel/lodging expenses shall be subsumed under the LRS limit. The tour operator can collect this amount either in Indian rupees or in foreign currency from the resident traveller.

Any resident individual may remit up-to USD 2,50,000 in one FY as a gift to a person residing outside India or as a donation to an organization outside India. A person going abroad for employment can draw foreign exchange up to USD 2,50,000 per FY from any Authorised Dealer in India. A person wanting to emigrate can draw foreign exchange from AD Category I bank and AD Category II up to the amount prescribed by the country of emigration or USD 250,000. Remittance of any amount of foreign exchange outside India in excess of this limit may be allowed only towards meeting incidental expenses in the country of immigration and not for earning points or credits to become eligible for immigration by way of overseas investments in government bonds; land; commercial enterprise; etc.