The Reserve Bank of India (RBI) has recently announced a significant amendment to the Master Directions on Compounding of Contraventions under FEMA, 1999. This amendment, issued via circular on April 22, 2025, provides relief to businesses and individuals by capping the maximum penalty amount at INR 2,00,000 for specific types of FEMA contraventions. This move is expected to encourage voluntary compliance, reduce the burden of penalties in exceptional cases, and bring procedural uniformity in the compounding process.
Background
The RBI, as the regulator under the Foreign Exchange Management Act, 1999 (FEMA), provides a mechanism for compounding contraventions (i.e., settling FEMA-related violations without litigation). The compounding framework is governed by:
- A.P. (DIR Series) Circular No. 17/2024-25 dated October 1, 2024.
- Master Directions on Compounding of Contraventions under FEMA, 1999, updated on April 22, 2025.
These directions specify the procedure and penalty computation matrix for contraventions under FEMA.
Key Amendment – Capping of Compounding Penalty
As per the latest amendment, a new clause (Para 5.4.II.vi) has been inserted in the Master Directions:
“Subject to satisfaction of the compounding authority, based on the nature of contravention, exceptional circumstances/ facts involved in the case, and in wider public interest, the maximum compounding amount imposed may be capped at INR 2,00,000/- for contravention of each regulation/ rule (applied in a compounding application) with respect to contraventions under row 5 of the above computation matrix.”
What is Row 5 of the Computation Matrix?
Row 5 of the penalty computation matrix refers to “any other reporting contraventions” not specifically listed elsewhere in the matrix. This typically covers delayed or non-filing of various forms and reports under FEMA regulations, such as:
- FLA Returns
- Annual Performance Reports (APR)
- Form FC-GPR/FC-TRS filings
- External Commercial Borrowings (ECB) returns
- ODI reporting
These are generally procedural lapses, and the RBI’s move to cap penalties in exceptional cases reflects a balanced approach toward compliance.
Conclusion
The RBI’s decision to cap the maximum compounding penalty at INR 2,00,000 for specific reporting contraventions reflects a pro-business approach, focusing on encouraging voluntary compliance and ease of doing business. It offers relief to companies and individuals who may have committed minor procedural lapses, allowing them to regularize such contraventions without facing exorbitant penalties.
Businesses engaged in cross-border transactions, including foreign investments, external borrowings, and ODI transactions, are advised to review their compliance status regularly and take timely corrective action if any FEMA-related contraventions have occurred.
