FEMA Compunding

COMPOUNDING OF CONTRAVENTIONS: FEMA, 1999.
Shilpa
&Bhadoria Sushil
Simoliya
‘Compounding of contraventions’ can be understood as a lay man to be a method to compromise

or
settle the matter either before or after adjudication, but certainly before enforcement of the
order of
the court. There are various advantages of compounding under any legislation, if it is done
before
the trial by the court, wherein either of the parties to the dispute which is at fault willingly agrees
to
its fault and a compromise is done between both the parties without the matter being adjudicated
by
the court. Compounding saves the parties from the hassle of spending a lot of money, time
and
energy in lengthy legal proceedings. In a country like India where there are thousands of
cases
pending in the court ‘compounding’ is a good way of settling disputes or
matters.
Background:
Scenario when FERA was :
enacted
A quarter Century ago, FERA was enacted in 1973 when scenario called for a strict and
rigid
regulatory
regime.
* Foreign exchange was
scarce.
* There were instances of misuse of foreign
exchange.
* India’s foreign trade was not substantial compared to what it is today, it was very limited.
The
process of globalization had not yet
started.
In such scenario, there was apprehension that regulations would be circumvented by
unscrupulous
persons. Such apprehension led to enactment of Foreign Exchange Regulation Act, 1973 as
a
comprehensive piece of legislation. Foreign Exchange Regulation Act, 1973 was
administered
ruthlessly by overzealous officers of 1
Enforcement.
There is a German word called eit- which, it can broadly be translated as the ‘spirit of
z geist time’.
Nothing better describes the evolution of foreign exchange regulation in India. Soon
after
independence, a complex web of controls imposed for all external transactions through a
legislation
LL.M 'Corporate Laws', NALSAR,University of Law, Shameerpet, RR District, Hyderabad,.Pin: 500087Ph:

9951349849, Email: shilpabhadoria@gmail.com,sushilsimoliya@gmail.com
1 st
Dilip K. Sheth, TREATISE ON FEMA (Law and Practice), Vol. 1,1 edn. 2002, p. 3.
1
i.e., Foreign Exchange Regulation Act (FERA), 2 The original 1947 version of FERA,
1947. enacted
under the Defense of India Rules, 1939 and wartime shortage of foreign Exchange, was meant to
be
temporary. In 1957, when planned economic development failed to eliminate such shortages,
FERA
permanently entered the statute book. The Foreign Exchange Regulation Act, 1947 was far
less
draconian than its 1973 incarnation. Foreign Exchange Regulation Act, 1973, consisted of
more
rigorous framework of 3 Severe restrictions on current account transactions had
control. continued
till mid-1990s when relaxations were made in the operations of the FERA. The control
framework
was essentially transaction based in terms of which all transactions in foreign exchange
including
those between residents and non-residents were prohibited, unless specifically 4
permitted.
Unlike other laws where everything is permitted unless specifically prohibited, under
Foreign
Exchange Regulation Act, 1973 nothing was permitted unless specifically permitted. Hence
the
tenor and tone of the Act was very drastic. It provided for imprisonment of even a very
minor
offence. Under Foreign Exchange Regulation Act, 1973, a person was presumed guilty unless
he
proved himself innocent whereas under other laws, a person is presumed innocent unless he
is
proven guilty. 5
Scenario 25 years
later:
After passage of 25 years, however the entire Scenario which prevailed in 1973 underwent
a
change.
*Internal economic controls had been progressively
relaxed.
*Externally, the process of globalization had gained
momentum.
*India’s foreign trade had substantially increased. Its economy and market had
become
substantially stronger and
vibrant.
Time had thus come to take serious re look at Foreign Exchange Regulation Act,
1973.
The government of India took a step towards liberalization by announcing the New
Industrial
Policy in 1991 to remove obstacles in the inward flow of foreign exchange. Steps were taken
to
rationalize Foreign Exchange Regulation Act, 1973. While it was necessary to continue to
regulate
activities of foreign companies or branches of such companies and foreign citizens in India,
special
restrictions in respect of the companies registered in India were considered no longer
necessary,
2 Shyamala Gopinath, “Foreign exchange regulatory regimes in India- from control to management”,
www.bis.org/review/r050217h.pdf (Februray 8th , 2007).
3 Supra n.1, p.2.
4 Supra n. 2.
5
http://en.wikipedia.org/wiki/Foreign_Exchange_Management_Act , (March 3 rd , 2007).
2
and the regulations on foreign investment needed simplification to attract greater flow of
foreign
capital and investment. It was considered necessary to empower Reserve Bank to impose
penalties
on authorized dealers for their lapses with a view to achieve effective monitoring and
ensuring
compliance of its directions. The government had already indicated its intention in this respect
by
issuing notifications through the Reserve Bank in exercise of its powers under Foreign
Exchange
Regulation Act, 1973 6 . Along with the said principal objective, a number of other objectives
were
also taken into account while overhauling Foreign Exchange Regulation Act, 1973. What was
done
so far through notifications however had left a lurking apprehension in the minds of the
foreign
investors, particularly from Japan. Their apprehension was that the piecemeal relaxation in
Foreign
Exchange Regulation Act, 1973 through notifications may not have the same legal force as
the
amendment to Foreign Exchange Regulation Act, 1973 itself. To dispel such
apprehension
expressed by the circumspect foreign investors, the Government eventually decided that
Foreign
Exchange Regulation Act, 1973 be formally amended so as to give legal shape to the changes,
most
of which were already made in FERA, 1973 through the notifications issued by the Reserve
Bank
since the advert of New Industrial Policy in July, 1991. The FERA (Amendment) Bill was
slated
for discussion in the winter session of Parliament. However, the Ayodhaya muddle did not
allow
the introduction of the Bill. The Government, indeed, meant business and, therefore, it preferred
not
to wait till the next session of Parliament for passing the FERA (Amendment) Bill. Accordingly
an
Ordinance was promulgated on th January, 1998 by the President, Dr. Shankar Dayal Sharma.
8 The
amendment to various provisions of FERA, 1973 came into effect immediately on the
promulgation
of the Ordinance. Eventually in the Budget session of Parliament in March, 1993, the
FERA
Amendment Bill (which could not be taken up for consideration in the earlier parliament
session)
was introduced and passed by both the houses on March 24, 1993. This is how the
Foreign
Exchange Regulation Act (Amendment) Act, 1993 was enacted with the provisions which
were
substantially similar to those of the 7
Ordinances.
Foreign Exchange Regulation Act 1973, was enacted at a time when there was dearth of
foreign
exchange in India and the main aim behind the enactment was to restrict the outflow of
foreign
exchange from India. As a result it was made very stringent. With the growth of Foreign trade
and
commerce the foreign exchange reserve (FOREX) position of our country improved
considerably.
The provisions of Foreign Exchange Regulation Act, 1973 were becoming draconian,
unrealistic
6 Section 73(3), Foreign Exchange Regulation Act, 1973.
7
Supra n. 1, pp. 5-6.
3
and anachronistic. This was accepted by the authorities and Foreign Exchange Management
Act,
1999 was enacted. The objective of Foreign Exchange Management Act, 1999, was to
consolidate
and amend the Law relating to foreign exchange and a major amendment that was made to
the
relief of the trading community was inclusion of provisions for Compounding of
‘ Contraventions’
of the Act. The effect of this has been that there shall not be any
prosecution
It is important to note here that ‘Compounding’ in this Seminar Paper refers particularly
to
‘Compounding of ’. Indian law has incorporated the provisions for
Contraventions “Compounding’,
important among them are: Criminal Procedure Code, 8 , Companies Act, 1956, Foreign
1974
Exchange Management Act, 1999 etc. In this Seminar Paper I have concentrated particularly on
the
‘Compounding of Contraventions under FEMA, 1999’ and a reference has also been made to
the
compounding of contraventions under Companies Act, 1956. In the end a comparison has
been
done of ‘Compounding’ under Foreign Exchange Management Act, 1999 and that
under
Companies Act, 1956.
The contents of this Seminar Paper are briefly discussed under the heading Research
scheme.
FERA to FEMA
Foreign Exchange Management Act, 1999 is an Act to consolidate and amend the law relating
to
foreign exchange with the objective of facilitating external trade and payments and for
promoting
the orderly development and maintenance of foreign exchange market in India. The law relating
to
exchange control in India has undergone a substantial change in scope, content and approach by
the
substitution of the Foreign Exchange Regulation Act, 1973 ( FERA ) by the Foreign
Exchange
Management Act, 1999 ( FEMA ), which was passed in winter session of the Parliament in
1999.
The bill was introduced in the 13th Lok Sabha on 25th Oct'99. The presidential Assent
was
received on 6th Jan 2000. Finally the Foreign Exchange Management Act, 1999, came
into
operation w.e.f. 1st June 2000.The most noticeable aspect of Foreign Exchange Management
Act,
1999, is that there is no imprisonment prescribed for contraventions of the law, not even as
an
alternative punishment and for the blatant and deliberate of 9 Foreign Exchange
violations.
Regulation Act, 1973, had a controversial 27 year stint during which many bosses of the
Indian
Corporate world found themselves at the mercy of the Enforcement Directorate (E.D.). Any
offense
under Foreign Exchange Regulation Act, 1973, was a criminal offence liable to
imprisonment,
8 Section320, Code of Criminal Procedure, 1974.
9http://www.welcome-nri.com/info/project/femaact1.htm (March 5th, 2007).
4
whereas Foreign Exchange Management Act, 1999, seeks to make offenses relating to
foreign
exchange civil 10
offenses.
The provisions of Foreign Exchange Management Act displays so much change that one
could
almost de link Foreign Exchange Management Act, 1999, from Foreign Exchange Regulation
Act,
1973 and concludes that Foreign Exchange Management Act, 1999 is a new law altogether
which
needs an independent reading and interpretation divorced from the earlier law and
decisions
rendered there 11
under.
The approach has sifted from that of conservation of foreign exchange to one of facilitating
trade
and payments, as well as developing orderly foreign market. This definitive shift in the
objectives
of foreign exchange management could be seen in the preamble to the new 12
legislation.
Important aspects of transition were: Capital account convertibility, timeframe for
convertibility,
the recommendations of Tarapore Committee and symptoms of the currency crisis. For a
clear
perception of implications of the transition from FERA, 1973 to Foreign Exchange
Management
Act, 1999, these aspects should be 13
reviewed.
Foreign Exchange Management Act, 1999, which has replaced Foreign Exchange Regulation
Act,
1973, had become the need of the hour since Foreign Exchange Regulation Act, 1973 had
become
incompatible with the pro-liberalization policies of the Government of India. Foreign
Exchange
Management Act, 1999, has brought a new management regime of Foreign Exchange
consistent
with the emerging frame work of the World Trade Organization (WTO). It is another matter
that
enactment of Foreign Exchange Management Act, 1999, also brought with it Prevention of
Money
Laundering Act, 2002 which came into effect recently from 1st July, 2005 and the heat of which
is
yet to be felt as “Enforcement Directorate” would be investigating the cases under Prevention
of
Money Laundering Act, 2002, too. 14
1.1 Objectives of FEMA, :
1999
The objectives of the Foreign Exchange Management Act, 1999 have been to consolidate
and
amend the law relating to foreign exchange with the following
objective:
(a) facilitating external trade and payments;
and
10 Supra n. 5.
11 Supra n. 9.
12 Rama Devi R. Iyer, “Compounding of contraventions under Foreign Exchange Management Act, 1999
(FEMA)”,[2006] 72 SCL…(ST.), p. 126.
13 Supra. n. 1, p. 6.
14
Supra n. 5.
5
(b) for promoting the orderly development and maintenance of foreign exchange market
in
India.15
1.2 Objectives of FERA,
1973:
As against Foreign Exchange Regulation Act, 1973, was consolidating and amending the
law
relating to certain payments and dealings in foreign exchange and securities, transactions
indirectly
affecting foreign exchange, import and export of currency for the following
purposes:
(a) Conservation of the foreign exchange resources of the country;
and
(b) Proper utilization of the foreign exchange resources of the country in the interest of
the
economic development of the 16
country.
In Foreign Exchange Management Act, 1999, only the specified acts relating to foreign
exchange
are regulated, while in FERA, 1973 anything and everything that has to do with foreign
exchange
was controlled. Also the aim of Foreign Exchange Management Act, 1999, is facilitating trade
as
against that of FERA, which was to prevent 17
misuse.
Foreign Exchange Management Act, 1999, differs from Foreign Exchange Regulation Act, 1973
in
two aspects. First, in virtually a reverse transition to 1947, criminal remedies have been
scrapped
and replaced with civil remedies. Second, Foreign Exchange Management Act, 1999,
recognizes
that foreign exchange is no longer a scarce resource requiring its optimal utilization,
thus
facilitating current account convertibility and eventual transition to the capital
account
convertibility. However, since Foreign Exchange Management Act, 1999, is an
enabling
legislation, the degree of actual liberalism can be judged only from the tenor of the regulations
and
rules which have been 18
notified.
Foreign Exchange Management Act, 1999, provided de status to the shift in the policies
a jure with
regard to, external sector reforms that began in 1990-91. Further, under Foreign
Exchange
Regulation Act, 1973, the accused had to prove his innocence, while under Foreign
Exchange
Management Act, 1999, the prosecution has to prove the guilt of the accused person. Further,
under
Foreign Exchange Management Act, 1999, monetary penalty is provided for contraventions
and
only non-payment/delayed payments attract 19
imprisonment.
15
Supra n. 1, p. 16.
16 Ibid.
17 Chinubhai R. Shah and Ms. Komal Parikh, “FERA To FEMA: A Journey from forbidden lands to semi-open
patures”, [2000] Vol. 30 No.5, ICSI Executive Chartered Secretary, p. 590.
18 Supra n.1, p. 16.
19
Supra n. 12, p. 126
6
Contraventions of Foreign Exchange Management Act, 1999, provisions are dealt with under
civil
law procedures, for which separate administrative procedure and mechanism in the form
of
Compounding Rules, Adjudicating Authority, Special Director (Appeals) and Appellate
Tribunals
have been
established. Another significant change has been that for each process of law, a time frame
has
been provided in the Act. For example, the process of compounding is required to be
completed
within 180 days. 20
Under FERA, 1973, all violations were subject to separate investigation and adjudication of
the
Directorate of Enforcement. However, the Foreign Exchange Management Act, 1999, provides
for
an opportunity for seeking compounding of contraventions. It is pertinent to note that application
of
law requires that discretionary powers have to be used in a just, fair and reasonable manner and
this
is expected on the part of the Compounding Authorities while following the provisions of
the
Foreign Exchange Management Act, 1999, and Rules framed 21
thereunder.
The following can be made out from analyzing the definition part of Foreign Exchange
Regulation
Act, 1973, & Foreign Exchange Management Act,
1999:
1) Authorized dealers and money changers have been clubbed together under the definition
of
‘Authorized person’. In addition, it also includes a “offshore banking
unit’.
2) Definitions of capital account transaction and current account transaction have been
inserted
keeping in mind the possibility of introduction of capital account
convertibility.
3) Definitions of export and import on similar lines as The Customs Act, 1962 have
been
inserted
.
4) Definition of ‘person’ has been inserted and definition of ‘person resident in India’ has
been
aligned with the Income tax Act, 1961. This has probably been done considering the
difficulties
arising due to different definitions and different interpretations. All non-resident accounts with
the
banks were on the basis of the definition in Foreign Exchange Regulation Act, 1973.
Now,
according to the Foreign Exchange Management Act, 1999, definition, very few of them will
be
non-resident accounts. However, the EXIM policy definition still remains
different.
5) Definition of the term ‘service’ similar to COPRA, 1986 has been inserted. This is
done
keeping in mind the export services and infotech 22
sectors.
20 Ibid, p. 126-127.
21 Supra n. 17, p. 127.
22
Ibid, p. 591.
7
1.3 Scope and
Applicability:
FERA, 1973, applied to-
(a) All citizens, outside
India.
(b) Branches and agencies, outside
India.
- of the companies/bodies corporate registered incorporated in
India.
Now, FEMA, 1999 applies to 23 :
(a) All branches, offices and agencies outside
India
-owned/ controlled by a person resident in India
and
(b) Any FEMA, 1999 contravention committed outside
India
-by any person to whom FEMA, 1999 applies.
FEMA, 1999 applies to the whole of India and hence, any transaction which takes place in
India
will be subject to the governance of FEMA, 1999. Thus, any transaction undertaken by
non-
resident in India would need compliance of FEMA,
1999.
FEMA, 1999 also applies to the branches, offices and agencies outside India owned or
controlled
by a person resident in
India.
The question whether FEMA, 1999 would apply to the transactions of a resident individual
which
took place outside India. There are several provisions, which restrict a resident from
certain
transactions outside India, such as, acquisition of immovable property. Though the branches, etc.
of
residents himself can carry out transactions abroad which are otherwise not permitted to him
in
India. However, the word “also” in section 1(3) seems to suggest that the transactions of a
resident
person outside India would be subject to FEMA, 24
1999.
1.4 Regulation and management of foreign
exchange:
This is the most significant part of Foreign Exchange Management Act, 1999. All the core
sections
are contained in this part. It deals with the dealing in foreign exchange, current and capital
account
transactions, export, realization and reparation of foreign exchange
&
exemption in certain 25
cases.
Provision of Foreign Exchange Management Act, 1999, on dealing in foreign 26 provides
exchange
that no person shall without the general or special permission of Reserve Bank of India, deal in
or
transfer foreign exchange or foreign security to any person other than an authorized person,
make
23 Section 1(3), Foreign Exchange Management Act, 1999.
24 Supra n. 1, p. 17.
25 Supra n. 17, p. 591.
26
Section 3, Foreign Exchange Management Act, 1999.
8
payment outside India or receive payment in any manner otherwise through an authorized
person
on behalf of person resident outside India or enter into financial transaction in relation
to
acquisition of assets outside India. FEMA, 1999 has also incorporated the explanation to
section
9(1)(b) of the erstwhile FERA, 1973 by covering the possibility of an Indian receiving the
payment
on behalf of a person resident outside India. In such case the person shall be deemed to
have
received such payment otherwise through an authorized person. This is retention of explanation
to
section 991) (b) of the erstwhile FERA, 1973. This provision means that if Mr. ‘X’ , an
Indian
claims to have received an amount of USD
1,000
Or INR 1,000 ( both foreign and/or domestic currencies) on behalf of Mr’Y’ a non resident
through
Mr. ‘Z’, an authorized person, there should be present an actual inward remittance of USD 1,00
or
INR 1,000 to back the transaction. Otherwise, it smells collusion between the authorised person
and
the resident 27
Indian.
The provision of FEMA, 1999, dealing with export goods and 28 appears highly
services simplified
compared to similar provision of FERA, 29 It requires the exporter to furnish to the
1973, Reserve
bank of India correct particulars including the export value of the goods/payment for services,
and
where it is not ascertainable, value which the exporter expects to receive, other information as
the
Reserve Bank of India may require. While similar provision of the erstwhile FERA, 1973
attached
a lot of anti under invoicing conditions to export and cover as many deeming provisions on the
part
of both the Reserve Bank of India and the exporter and even then, it did not cover 30 .
services
1.5 Contraventions and
Penalties:
Under this chapter, penalty for any kind of contravention has been specified as thrice the
amount
involved, where it is quantifiable, and otherwise, up to Rs 2lakhs + Rs. 5000 per day for
continuing
contravention. The provision is in total contrast to the provision of the erstwhile FERA, 1973
which
provided for imprisonment and no limit on 31 . Also, one question which arises here is
fine that
where the alleged person is an authorized person, whether this fine will be in addition to the
one
under section 11(3), of FEMA, 1999.
However, if the person does not pay the fine within 90 days from the date of notice, then
after
formalities of show cause notice and personal hearing, he can be subjected to civil detention. If
he
27 Supra n. 17, p. 591
28 Section 7, Foreign Exchange Management Act, 1999.
29 Section 18, Foreign Exchange Regulation Act, 1973.

31
Section 56, Foreign Exchange Regulation Act, 1973.
9
does not respond to the notice their can be warrant of arrest. The civil detention is on the
following
lines where the amount involved exceeds there can be warrant of arrest. The civil detention is
on
the following lines where the amount involved exceeds Rs. 1 crore, detention for three
years.
Otherwise, six months. However, it is clearly civil detention and not 32
imprisonment.
This is a major diversion from FERA, 1973 which contained provisions that would lead
to
imprisonment even in trivial cases. Perhaps the government is of the opinion that there should
be
pecuniary punishment for economic offences, where that punishment is not complied with,
then,
civil detention and if that is also not complied with, then a warrant of
arrest.
1.6 Adjudication and Appeals:
The following are the provisions which differ from FERA, 1973 and are incorporated in
FEMA,
1999:
1.The Appellate Tribunal for Foreign Exchange has been granted powers to hear appeals against
the
orders of both the adjudicating authorities as also the Special Director 33 . There is no
(Appeals)
provision like other laws which requires following the hierarchy or qualification of a case as fit
for
hearing by the appellate tribunal. This means the aggrieved person can choose to appeal directly
to
the appellate tribunal against the order of the adjudicating authorities. The objective behind
the
introduction of an intermediary authority like the Special Director (Appeals) is not
clear.
2.The Chairperson of the Appellate Tribunal is empowered to transfer cases from one bench
to
another, but only on the application of any of the parties and after notice to 34
them.
3.Civil court will not have any jurisdiction to entertain any suit or proceeding which
an
Adjudicating authority, Special Director (Appeals) or the Appellate tribunal are empowered
to
determine under this 35
act.
1.7 Directorate of 36 :
Enforcement
This chapter envisages the appointment of all officers included under the erstwhile FERA, 37 .
1973
The powers of search and seizure conferred by FEMA, 38 are limited only to
1999 contraventions
mentioned in FEMA, 1999 39 . Also, many other strict provisions relating to searches and
seizures,
32 Section 14, Foreign exchange Management Act, 1999.

34
35 Section 34, Foreign Exchange Management Act, 1999
36 Chapter IV, Sections 36-38, Foreign Exchange Management Act, 1999

39
section 13, Foreign Exchange management Act, 1999.
10
which were similar to Customs Act, 1962 have been withdrawn. This will relieve the industry,
trade
and commerce from the autocracy of the office of Director of Enforcement, which had been
alleged
to be the dwelling place of corruption due to unlimited powers granted to 40
it.
1.8
Miscellaneous:
The not so normal provision in this area is that any right, obligation, liability, proceeding or
appeal
arising in relation to 41 will not abate with the death or insolvency of the person, but will
penalty be
shifted to the legal representative, official receiver or official assignee. But the terms “winding
up”
or “liquidation” and “official liquidator” are nowhere to be found although the term
“person”
includes a 42
Company.
In totality, following can be made
out:
1. FEMA, 1999 is much smaller enactment- 49 sections, as against 81 sections of
FERA,
1973.
2. The theme of FERA, 1973 was : ‘everything that is specified is under control’. While
the
theme of FEMA, 1999, is: ‘everything other than what is expressly covered is
not
controlled’. Thus there is a lot of
deregulation.
3. In many process of simplification, many of the “laid downs” of the erstwhile FERA,
1973
have been
withdrawn.
4. Many provisions of FERA, 1973 like the ones relating to blocked accounts, Indians
taking
up employment abroad, employment of foreign technicians in India, contract in evasion
of
the act, vexatious search, culpable mental state etc. have no appearance in FEMA, 43
1999.
MEANING OF ‘CONTRAVENTION’ AND ‘COMPOUNDING’:

IN
CONTEXT WITH FEMA
‘Contravention’ means a breach of regulatory requirement. Under the Foreign
Exchange
Management Act, 1999, Chapter IV provides for the Contraventions and Penalties, and for
the
procedure to be followed. It provides penal consequences for the following 44 :
persons
1. The person who contravenes any provision of the Act, or any rule, regulation,
notification,
direction or orders issued in exercise of the powers under this
Act;
40 Foreign Exchange Management Manual, 2007.
42 Supra n. 17, p. 591.
43 Ibid, p. 592.
44
11
2. The person who contravenes any condition subject to which an authorization is issued
by
the Reserve Bank upon the adjudication as provided in the
Act.
Indeed, the penal 45 ensue only upon adjudication as provided in the
consequences Act.
The term ‘compounding’ has not been defined either in the Foreign Exchange Management
Act,
1999 or the rules issued there under. However, inference can be drawn from the definition given
in
the Companies Act, 1956. It defines ‘compounding’ as
under:
‘Any offence punishable under the Act (whether committed by the company or
any
officer thereof), not being an offence punishable with imprisonment only or
with
imprisonment and also with fine may, either before or after the institution of
any
prosecution, be
compounded’.
Accordingly reference may be made to the following dictionary meanings to understanding
its
connotation.
Black’s Law 46 “Compound”- “To settle (a matter, esp. a debt) by a
Dictionary money
payment, in lieu of other liability; to adjust by agreement; to agree for consideration not
to
prosecute (a
crime).”
Stroud’s Judicial 47
Dictionary
To “Compound” a debt is to abate a part on receiving the Haskin v. Newcom 48 , If there
residue s b is
a binding arrangement for discharge of the debt from which neither party can recede and
with
which the creditor is satisfied, it is compounding, though something still remains to be done Pe
( r
Patterson, J. v.Rhode 49 ).
Pennell s
Lex Lexicon by P. Ramanatha 50
Aiyer
“Compound” Settle by mutual concession: to ‘compound’ a debt is to abate a part on
receiving
the
residue:
1) To forbear from prosecution for consideration or any profit 51 ;
motive
2) To settle with a 52 .
creditor
45 Ibid.
46 Bryan A. garner et al., (eds.), BLACK’S LAW DICTIONARY, 6th edn., 5th Rep. 2002, p. 280.
47 th
J.S. James (ed.), Stroud’s Judicial Dictionary, Vol. 1, 5 edn. 1994.
48 2 Johns, 408.
49 9 Q.B. 129.
50 P. Ramanatha Aiyer, LEX LEXICON, 2nd edn. (Rep.) 2001.
51 Section 320, Criminal Procedure Code, 1973.

52
Section 279(2), Income-tax Act, 1962.
12
The provisions under FEMA, 1999 for compounding 53 and Rules
made there under may now
54
be
read and understood in the background of the above-mentioned connotation of
“compounding”.
Compounding of contraventions allows the contravener to settle an offence through imposition of
a
monetary penalty without going in for litigation after the contravener acknowledges
having
committed the contravention. Compounding is a summary procedure, which can be used
effectively
for saving the time of adjudicators, investigating officers and 55
citizens.
Under FERA, 1973 their was no provision for compounding. Under of the FEMA, 1999 56 for the
first time in law of foreign exchange the provision of compounding of contraventions

was
incorporated. Section 15 of the act deals with compounding of all contraventions under section
13
of the FEMA, 1999. 57
The concept of compounding in Foreign Exchange Management Act, 1999, is a
distinguishing
feature from the perspective of corporates as well. In order to operationalise this aspect of
the
Foreign Exchange Management Act, 1999, and with a view to provide comfort to the citizens
and
the corporate community by minimizing transaction costs, while taking severe view of the will
full
malafide and fraudulent transactions as per latest 58 the Govt. has in consultation with
circular RBI
reviewed the procedures for compounding of contravention under Foreign Exchange
Management
Act, 1999, and the responsibilities of administering compounding of contravention cases under
the
Foreign Exchange Management Act, 1999, were vested with the Reserve Bank, with exception
of
clause (a) of section 3 of the Foreign Exchange Management Act, 1999, which deals with
‘hawala’
transactions. The reserve Bank issued contravention under Foreign Exchange Management
Act,
1999. Contraventions under section 3 (a) of the Act are dealt with by the
Enforcement59
Directorate Under Foreign Exchange Management Act, 1999, compounding of
. contravention
allows the contravener to settle an offence through imposition of a monetary penalty without
going
in for litigation after the admission of the contravention by such contravener. The RBI has
issued
instructions to those authorized dealers for compounding contraventions who are
operationalising
the revised
procedures.

54
The Foreign Exchange (Compounding Proceedings) Rules, 2000.
55 Supra n. 12, p. 127
57 Supra n. 1, p. 72.
58 AP (DIR Series) Circular 31 dated 01.02.2005.

59
Supra n. 12, p.127.
13
Once a contravention has been compounded by compounding authority no proceeding can
be
further initiated against the 60 A proper procedure for compounding has been
contravener. laid
which shall be discussed in later in this seminar
paper.
2.1 Manner of
interpretation:
Various terms related to compounding have been defined in under The Foreign
Exchange
(Compounding Proceedings) Rules, 2000 61 .
The words and expressions used and not defined in the 62 but defined in the FEMA, 1999
Rules
shall have the same meanings respectively assigned to them in the FEMA,
1999.
CONTRAVENTIONS’ AND ‘PENALTIES’ UNDER FEMA, 1999

Rules made under section 15 of FEMA, 63 and section 15, FEMA 1999 itself deal
1999, with
compounding of contraventions which are provided under FEMA, 64 . In this chapter, I
1999 shall
discuss the contraventions for which penalty is imposed and which are then
compounded.
Under FEMA, 1999 contraventions are dealt as a civil offence. It empowers the
adjudicating
authority to impose penalty for three types of 65 First one is penalty for
contraventions. the
contraventions of the provisions of the Act i.e. the FEMA, 1999. Secondly the contravention of
any
rule regulation, notification direction or order made under FEMA, 1999 is also punishable.
Finally,
the contravention of any condition subject to which an authorization is issued by the Reserve
Bank
is also 66
punishable.
It is to be noted here that liability for penalty is for contravention by a 67 Also the
“person”. liability
crystallizes only upon adjudication. Penalty cannot exceed thrice the sum involved in
the
contravention where sum involved is quantifiable or up to two lakh rupees where it is
otherwise.
60
http://www.worldtaxservice.in/fem.htm , (2 nd February, 2007).
61 Rule 2, The Foreign Exchange (Compounding Proceedings) Rules, 2000.
62 The Foreign Exchange (Compounding Proceedings) Rules, 2000.
63 Foreign Exchange (Compounding Proceeding) Rules, 2000.

66 Ibid.
67
Section 2(u), Foreign Exchange Management Act, 1999.
14
Where such contravention is continuing it may penalty may extend to five thousand rupees for
each
day.
The FEMA, 1999 also provides for confiscation of currency, security, money or any other
property
in respect of which the contravention has taken place. This is in addition to 68
penalty.
Factors determining quantum of
penalty:
1) Quantifiability of sum involved in
contravention.
2) Frequency of the alleged act leading to contravention- whether “onetime” or 69
“continuing”.
3.1 Implication of enactment of FEMA,
1999:
FERA 1973 is 70 However, all offences committed under the repealed FERA, 1973
repealed. shall
continue to be governed by the provisions of repealed FERA,1973 as if it were not 71 It
repealed. has
been held in T.S Balaiah v. T.A. Rangachari 72 that a person who has committed a
contravention
under the repealed law cannot claim to be proceeded against only under the provisions of
repealed
law. Same decision was followed Tiwari kanhaiya v. CI 73 The possible controversy is
in lal T now
settled due to the express language of FEMA, 1999, which provides that after expiry of two
years
from the date of commencement of FEMA, 1999, no court shall take cognizance of a
contravention
under section 53 of the repealed FERA, 74 Although before the expiry of the said period
1973. of
two years all offences committed under the repealed Act shall continue to be governed by the
old
act i.e. FERA, 1973 as if it was not 75
repealed.
3.2 Constitutional validity of penal
provisions:
1) Classification of offenders reasonable: The classification of offences into two 76 one
types
which was to be dealt with departmentally and other which was to be tried by criminal
court
is reasonable and not violative of Art 14 of Constitution of India. Supreme court
in
Superintendent & Remembrancer of Legal v. Girish Kumar 77 held that
Affairs Navlakha the
departmental adjudication in the first instance and criminal trial only for contravention
of
certain provisions did not violate Art 14 of the Constitution of
India.

69 Supra n. 1, pp. 60-61.

72
AIR 1969 SC 741.
73 (1975) (4 SCC 101).
75 Section 49(4), Foreign Exchange Management Act, 1999
76 Section 13, Foreign Exchange Management Act, 1999

77
AIR 1975 SC 1030.
15
2) The constitutional validity of section 13 of FEMA, 1999 cannot be challenge on the
ground
that it is governed by a procedure different from that prescribed by the Code of
Criminal
Procedure, 1953. Supreme Court Shanti Prasad v. Director of 78 that
in Jain enforcement a
law which prescribes a special procedure for investigation of breaches of foreign
exchange
regulation will not be hit by Article 14 of the Constitution of India as it is based
on
classification which has a just and reasonable relation to the object of the
legislation.
3.3 Mens Rea- whether essential
ingredient:
It is clear from FEMA, 79 that companies are liable for offences under FEMA, 1999.
1999 In
FEMA, 1999, there is no provision corresponding to section 59 of FERA, 1973 which provided
for
presumption of culpable mental state. A view may, however, be expressed that on
careful
consideration of the various contraventions under FEMA, 1999, it would appear that the
certain
sections may require mens rea e.g. section 14 which imposes civil imprisonment for non
payment 80
of penalty.
3.4 Nature of penalty
proceedings:
The proceedings under FEMA 1999, is a proceeding against the contravener and is applicable
81
to
any person who contravenes any provision of the Act, rules, regulations,
etc.
In substance, it is a proceeding against a person for the purpose of penalizing him for
contravention
of the provision of the Act and the same is available when the contravener is known. The
Supreme
Court in Shewpujanrai v. Collector of 82 held that in case where the
Indrasanrai customs Customs
authorities can proceed only against the goods, there can be no question of applying the
penal
section to a
person.
• Penalty proceedings not criminal in nature: Supreme court held D v. MCt
in E M
Corporation Pvt. 83 that the penalty imposed under Foreign Exchange management
Ltd. Act,
1973 was for breach of a civil obligation and was not a sentence. It was observed that
the
enforcement officers were expected to function as adjudicators and not as judges in
criminal
courts. Accordingly it was held that the nature of penalty proceedings was adjudicatory
and
not
criminal.
78
AIR 1962 SC 1764.
80 Supra n. 1, p. 667.
81 Section 13 (1), Foreign Exchange Management Act, 1999.
82 AIR 1958 SC 845.

83
(1997) 88 CC 449 (SC): (1996) 2 SCC 471.
16
• Penalty cannot be based on guess work, conjecture or surmise: In penal provisions,
the
degree of proof that is required is that which is required in a criminal case. This was held
by
Madras High Court Union of India v. Marcel .84
in Nevens
• The powers of the Enforcement officers is Quasi 85
Hence liability to penalty
judicial does
not arise merely on default being proved, this proposition is forfeited by the ratio
of
Supreme Court decision Hindustan Steel v. State of 86
in Ltd. Orissa
• Doctrine of Double Jeopardy: Double punishment in form of imposition of 87 as
penalty well
as imprisonment for non payment of penalty would not amount to double jeopardy and
thus
protection is not available under the Constitution of 88 . In Leo Rey v. State
India 89 Frey of
Punjab , the Supreme Court held that the proceedings before Sea Customs
Authorities
under section 168 [ Adjudication under section 16 of Foreign Exchange Management
Act,
1999] were not prosecution within the meaning of Article 20 (2) of the Constitution.
Unless
all three essential conditions laid down in clause (2) of Art. 20, viz. prosecution in
court,
punishment and same offence are fulfilled, the protection is not available. The
prohibition
against double jeopardy would not be available if any of these three elements does not
exist.
• Period of limitation for imposing penalty: An important question concerning the
imposition
of penalty is there a any bar or limitation under the Act as regards the imposition of
penalty?
This question was answered N. Shaik Mohammed v. Directorate of 90 , in this
in Enforcement
case, the Foreign Exchange Regulation Board held that, Foreign Exchange Regulation
Act,
1973, does not prescribe any period of limitation for imposition of penalty for
contravention
of the provisions of the Act. It was further held that Chapter XXVI of the Code of
Criminal
Procedure, 1973, which prescribes the period of limitation for taking cognizance of
offences
also does not apply to the cases falling under Foreign Exchange Regulation Act, 1973,
by
virtue of Economic offences (Inapplicability of Limitation) Act, 1974, section 2 thereof.
A
reference to section 16 (6) of Foreign Exchange Management Act, 1999, shows that the
one
year mentioned therein for disposal of complaint is only recommendatory not 91
mandatory.
84 (1978) MLJ 122 (Mad).

86
(1972) 38 ITR 26(SC).
88 Article 20(2), Constitution of India.
89 AIR 1959 SC 375.
90 (1993) 66 Taxman 522 (FERAB).(FERA Board)

91
Supra n.1, p. 668-671.
17
Supreme Court’s observation Hindustan steel v. State of 92 was as
in Ltd. Orissa follows:
An order imposing penalty for failure could not be considered statutory is the
result
of a quasi criminal proceeding, and penalty will not ordinarily be imposed unless
the
party obliged, either acted deliberately in defiance of law or was guilty of
conduct
contumacious or dishonest, or acts in conscious disregard of its obligation.
Penalty
will not be imposed merely because it is lawful to do so. Whether penalty should
be
imposed for failure to perform a statutory obligation is a matter of discretion of
the
authority to be exercised judicially and on consideration of relevant
circumstances.
Even if a minimum penalty is prescribed, the authority competent to impose
the
penalty will be justified in refusing to impose penalty, when there is a technical
or
venial breach of the provisions of the Act or where the breach flows from a
bonafide
belief that the offender is not liable to act in the manner prescribed by the
statute.”
PROVISIONS OF
COMPOUNDING
Within the framework of the FEMA, 1999, in exercise of the powers conferred by section 46
read
with sub-section (1) of section 15 of the Foreign Exchange Management Act, 1999 (42 of 1999)
the
Central Government made the FEMA (Compounding of proceedings) Rules, 2000 (Rules),
vide
Notification No. G.S.R. 383(E), dated May 3, 2000 was issued, which was amended vide
G.S.R.
No. 443(E), dated 2 nd November, 2002 and G.S.R. No. 609(E), dated September 13, 2004. 93
The compounding of any contravention under section 13, may be made in the manner provided
in
the 94 made under section 15. In terms of the said Rules, the compounding of
Rules contraventions
has been administratively divided in
classes:
Compounding by the Reserve Bank of
India.
Compounding by Enforcement 95
Directorate.
Contraventions of FEMA which can’t be :
compounded
The compounding provisions in section 15 and the Rules made there under are not available
in
respect of all the contraventions under section 13. Thus, the following contraventions cannot
be
compounded:
A contravention in respect of which an appeal has been filed under section 17 or section 19
of
FEMA.96
The contravention the amount involved in which is not 97
quantifiable.
92 (1972) 83 ITR 26 (SC).

93 http://www.eximkey.com/contents/showpage1.asp ( 24th Feb, 2007).
94 Foreign Exchange (Compounding Proceeding) Rules, 2000.
95 Supra n. 1, p. 725.
96
Rule 11, Foreign Exchange (Compounding Proceeding) Rules, 2000.
18
The contravention committed within a period of three years from the date on which a
similar
contravention committed by him was 98
compounded.
In Explanation to Rule 4(2) and Rule 5(2), it has been clarified that for the purpose of the
said
Rules, any second subsequent contravention committed after the expiry of three years from the
date
on which previous contravention was compounded shall be deemed to be a first 99
contravention.
A contravention has been finally adjudicated and disposed of by the Adjudicating
Authority.
Contraventions related to any transaction without proper approval or permission from
the
concerned Government or any Statutory Authority, as the case may be, under the relevant
laws/
regulations as envisaged under the FEMA, 1999, unless the requisite approval is obtained from
the
concerned 100
authorities.
Time Limit for 101 :
Compounding
Any person committing a contravention under Section 13 may make an application to
the
compounding authority. Such a contravention is required to be compounded with in 180 days
of
receipt of application by the Director of 102
Enforcement.
Authorities for
compounding: 103
Compounding Authority means the person authorized by the Central Government under the .
Act
The authorities
are:
Reserve Bank of – Certain officers of the RBI are authorized by the central government
India in
this behalf to compound the contraventions under all sections of FEMA,1999, except section
3(a)
of the
Act.
Enforcement - Certain officers of the Enforcement Directorate are authorized
Directorate to
conduct an adjudication proceedings in all cases and compounding proceedings in some
cases.
Appellate Tribunal / Special Director - In case the party feels aggrieved by the
(Appeals) orders
of the adjudicating authority, the party can prefer an appeal before Appellate Tribunal /
Special
Director (Appeal), Foreign
Exchange.
High - Another appeal lies to the High Court, against the order of the order of
Court the
Appellate Tribunal, however, only in the matters involving question/points of
law.
97 Proviso to Rule 4 (1) and Proviso to Rule 5 (1), Foreign Exchange (Compounding Proceeding) Rules, 2000.
98
Rule 4(2) and Rule 5(2), Foreign Exchange (Compounding Proceeding) Rules, 2000.
99 Ibid , p. 727.
100 Supra n. 12, p. 128.
102 Supra n. 1, p.727.

103
Section 15 (1), Foreign Exchange Management Act, 1999
19
(i) provides "Compounding Authority" 104
means:
(a) An officer of the Enforcement Directorate not below the rank of Deputy Director or
Deputy
Legal Adviser
(DLA).
(b) An officer of the Reserve Bank of India not below the rank of the Assistant
General 105
Manager
.
Effect of 106 : Where a contravention has been compounded under section 15(1)
compounding by
the Compounding Authority, no proceeding shall be initiated or further proceeding be
continued
against the person committing the contravention in respect of the contravention so 107
compounded.
Where any contravention is compounded before its adjudication under section 16, no inquiry
shall
be held for adjudication of such contravention against the person in relation to whom
the
contravention is so 108
compounded.
A question that arises here is that whether a contravention under FERA, 1973, be compounded
or
adjudicated under FEMA, 1999. The answer lies in Section 49(3) of the FEMA, 1999. Which
states
that no court shall take cognizance of an offence under the repealed Act and no adjudicating
officer
shall take notice of any contravention under Section 51 of the repealed Act after the expiry
of
period of 2 years from the date of commencement of FEMA, 109 A cut off period of two
1999. years
had been stipulated for the transition from FERA, 1973, to FEMA, 1999, which means the cases
in
which proceedings had already begun under FERA, 1973, would continue to be governed by
it,
including those which were begun between June 1, 2000 and May 31, 2002. All such cases
were
required to be disposed off within the period of two years from the date of enforcement of
FEMA,
1999, after which time they would be invalid under the FERA, 1973. However, a question arises
as
to the cases which were irregular under the FERA, 1973 and continued to be irregular under
the
FEMA, 1999, as well, for the purpose of compounding. Since the irregularity persisted under
the
FEMA, 1999, as well, the option for compounding could be exercised as the law only states that
the
irregularity cannot be recognized under the FERA, 1973, and there is no express prohibition
for
dealing with the irregularity under FEMA, 110
1999.
104 Rule 3 (1), Foreign Exchange (Compounding Proceeding) Rules, 2000.

105
Supra n. 93. ( February 25th, 2007).
107 Supra n. 12, p. 128.
108 Rule 6, Foreign Exchange (Compounding Proceeding) Rules, 2000.

110
Supra n. 12, p.128
20
4.1 Compounding By Enforcement
Directorate:
Every officer of the Directorate of Enforcement shall exercise the powers to compound
any
contraventions subject to directions, control and supervision of the Director of
Enforcement.
Rule 5 of Foreign Exchange (Compounding Proceedings) Rules, 2000, deals with the power
of
Enforcement directorate to compound 111
contraventions.
Contraventions qualifying for such The contraventions which may
compounding: be
compounded by the Officers of Enforcement Directorate are the contraventions of sections
other
than section 7 or section 8 or section 9 or the third Schedule to the Foreign Exchange
Management
(Current Account Transactions) Rules, 2000, Notified vide GSR No. 381(E) dated rd May 2000. 112
3
Jurisdiction of Officers of Enforcement Depending on the amount involved in
Directorate:
contravention, the jurisdiction of Officers of Enforcement Directorate has been fixed by Rule
5(1).
The jurisdiction of officers authorized to deal with the contraventions as specified is as 113 :
under
(a) in case where the sum involved in such contravention is five lakh rupees or below, by
the
Deputy Director of the Directorate of
Enforcement;
(b) in case where the sum involved in such contravention is more than rupees five lakh but less
than
rupees ten lakh, by Additional Director of the Directorate of
Enforcement;
(c) in case where the sum involved in the contravention is rupees ten lakh or more but less
than
fifty lakh rupees, by the Special Director of the Directorate of
Enforcement;
(d) in case where the sum involved in the contravention is rupees fifty lakh or more but less
than
one crore rupees, by the Special Director with Deputy Legal advisor of the Directorate
of
Enforcement
;
(e) In case the sum involved in such contravention is one crore rupees or more, by the Director
of
Enforcement with Special Director of the Enforcement
Directorate.
Application form and Every application for the compounding any contravention by
Fees: the
Enforcement Directorate under this rule shall be made in the form prescribed to the Director,
the
111 Supra n. 1, p. 726.

112 Ibid , p. 726.
113
Rule 5, Foreign Exchange (Compounding Proceedings) Rules, 2000
21
Directorate of Enforcement, New Delhi, along with fee of Rs. 5,000 by demand draft in favor
of
Compounding Authority. 114
4.2 Compounding by Reserve Bank of India:
The power of the Reserve Bank to compound 115 is as
contraventions follows:
Contraventions qualifying for such : The contraventions which were
compounding compoundable
by the officers of the Reserve bank were the contraventions of the provisions of Export
of
goods and 116 or Realization and reparation of foreign 117 or Exemption from
services exchange
realization and reparation of foreign exchange in certain 118 , or the Third Schedule to
cases the
Foreign Exchange Management (Current account Transactions) Rules, 119
2000.
The provisions of section 15 of FEMA, 1999 permit compounding of contraventions and
empower
the Compounding Authority to compound any contravention as defined under section 13 of the
Act
on application made by the person committing such contravention either
before
With a view to provide comfort to citizens and corporate community by minimizing
transaction
costs, while taking sever view of willful malafide transactions it has been decided to put in
place
the procedures for compounding of contravention under FEMA, 1999. The government of
India
has, therefore in consultation with Reserve bank of India responsibilities of
administering
compounding of cases with Reserve Bank, except under section 3 (a) of FEMA,
1999.
Accordingly the government has amended the Foreign Exchange (Compounding
Proceedings)120
Rules, 2000 As a result of the amendment, the compounding powers of Reserve Bank
and
Directorate of Enforcement respectively, have been modified as
under :
(a) Reserve bank has been empowered to compound the contraventions of all sections
of
FEMA, 1999 except clause (a) of section 3 of the Foreign Exchange Management
Act,
1999.
(b) Directorate of Enforcement would continue to exercise powers of compounding
under
clause (a) of section 3 of FEMA, 1999 (dealing essentially with Hawala 121
transactions).
114 Rule 5 (4), Foreign Exchange (Compounding Proceedings) Rules, 2000.

115 Rule 4, Foreign Exchange (Compounding Proceedings) Rules, 2000.
116
119 Supra n. 1, p. 725.
120 A.P. (DIR SERIES) CIRCULAR NO. 31, Dated 1-2-2005, issued by Foreign Exchange Department, RBI.
121
[2005] 57 SCL, pp. 407-408.
22
Jurisdiction of the Reserve Bank’s : Depending on the amount involved in the
officers
contravention the jurisdiction of the Officers of the Reserve bank has been fixed. Every
officer
of RBI shall exercise the powers to compound any contravention subject to the
direction,
control and supervision of the Governor of Reserve Bank of 122
India.
The officers within the RBI who deal with the contravention as 123
under:
(a) in case where the sum involved in such contravention is five lakh rupees or below, by
the
Assistant General Manager of the Reserve Bank of
India;
(b)in case where the sum involved in such contraventions more than rupees five lakh but less
than
rupees twenty lakh, by the Deputy General Manager of the Reserve bank of
India;
(c) In case where the sum involved in the contraventions is rupees twenty lakh or more, but
less
than rupees fifty lakh, by the General Manager of the Reserve bank of
India;
(d) In case the sum involved in such contravention is rupees fifty lakh or more, by the
Chief
General Manager of the Reserve Bank of
India;
Application form and : Every application for compounding any contravention under this
fees rule
shall be made in the prescribed 124 to Reserve Bank of India [Cell for effective
Form implementation
of the FEMA (CEFA)], Foreign Exchange Control Department, th floor, Central office
11 Building,
S.B. Singh Road, Fort, Mumbai- 400 001, along with, along with a fee of Rs. 5,000 by demand
draft in favour of compounding 125 The application must be accompanied by a fee of
authority. Rs.
5,000/- by demand draft in favour of the appropriate 126
authority.
PROCEDURE OF COMPOUNDING AND RELATED ISSUES

Foreign Exchange (Compounding Proceedings) Rules 2000, as amended from time to time
would
be the basic framework for Compounding process. The process for compounding is
explained
hereunder. The following procedure for compounding is in accordance with the
latest
amendmen 127 notification issued by Foreign Exchange Department, Reserve Bank of
t India.
122 Rule 4(1) of the Foreign Exchange (Compounding Proceedings) Rules, 2000.
123 Ibid.
124 Appended to the Foreign Exchange (Compounding Proceedings) Rules, 2000.
125 Supra n. 12, p. 130.

127
Annex.-I, A.P. DIR SERIES CIRCULAR NO. 31, Dated 1-2-2005.
23
(a) The compounding process is subject to the direction, control and supervision of the Governor
of
the Reserve Bank of 128 .
India
(b) An application for compounding of a contravention under the FEMA, 1999 (i.e. w.e.f. June
1,
2000) is required to be submitted to the Compounding Authority (CA), on becoming aware of
a
contravention under the FEMA,1999, either through a memorandum suo Application
or moto. for
compounding can be made even in cases which are under adjudication process and have not
been
disposed 129
off.
(c) Application for compounding any contravention in the prescribed form, together with a copy
of
the memorandum, wherever applicable, with the prescribed fee [ at present Rs.5,000] is required
to
be submitted with relevant facts and supporting documents to the Compounding 130
Authority.
(d) For the purpose of compounding, the Compounding Authority is 131 to call for
authorized any
information, record or any other documents relevant to compounding proceedings.
The
Compounding Authority is required to afford an opportunity of being heard to all the concerned
as
expeditiously as possible as and not later than 180 days from the date the 132 Only
application.
thereafter, the Compounding Authority shall pass the order of 133
compounding.
(e) On receipt of the application for compounding, the proceedings are required to be
concluded
and order is required to be issued by the Compounding Authority within 180 days from the date
of
the receipt of the application for compounding. This time –limit is reckoned from the date of
receipt
of the application for compounding. This time-limit is reckoned from the date of receipt of
the
application for compounding to the date of issue of compounding order. The
compounding
authority may call for any information, record or any other documents relevant to the
compounding
proceedings and will hold the 134
proceedings.
(f) Where additional information /document is called for, such additional information /document
is
required to be submitted within 30 days or such additional period as may be
given
(g) By the Compounding Authority from the date of the said letter. In case, the contravener fails
to
submit the additional information / documents called for within the specified period, the
application
for compounding will be liable for
rejection.
129
Supra n. 12, pp. 130-131.
130 Ibid.
131 Rule 8(1), Foreign Exchange (Compounding Proceedings) Rules, 2000.
132 Rule 8(2), Foreign Exchange (Compounding Proceedings) Rules, 2000.
133 Supra n. 1, p. 727.

134
http://www.rashminsanghvi.com (12 t h Feb, 2007).
24
(h) The Compounding Authority shall consider the application and take an appropriate decision
in
the matter. The Compounding Authority shall pass an order of compounding after affording
the
contravener and other concerned an opportunity of being heard. The compounding order
shall
specify the provisions of the Act or of the rules, directions, requisitions or orders made there
under
in respect of which contravention has taken place, along with details of alleged 135
contravention.
(i) Application for compounding any contravention may be filed with the CA i.e.
Compounding
Authority, including those which are under adjudication process and have not been disposed
off.
No contravention would be compounded which has been finally adjudicated and disposed off
by
the Adjudication
Authority.
(j) Cases of contravention having money- laundering, national and security concern
involving
serious infringements of the regulatory framework including cases where application
for
compounding has not been filed within the period stipulated in the memorandum issued by
the
Reserve Bank may be referred to Directorate of Enforcement for further investigation
and
necessary action under section 37 of the Act or to the Anti Money Laundering Authority
instituted
under Prevention of Money Laundering Act, 2002 or to any other agencies as deemed 136
fit.
(k) Contraventions related to any transaction without proper approval or permission from
the
concerned government or any Statutory Authority as the case may be under the
relevant
laws/regulations as envisaged under FEMA,1999, would not be compounded unless
required
approval is obtained from the concerned 137
authority.
5.1 Nature of power to compound:

It was held Ganga Sagar v. Empro 138 that power of compounding contraventions must
in r be
exercised to meet the ends of justice and not to extort money from the
contravener.
5.2 Contents of order of
compounding:
The desiderat of order of the Compounding Authority as spelt out in Rule 12 as
a follows:
135 Supra n. 11, p. 131.

136 [2005] 57 SCL, pp. 408-410.
137 http://www.rashminsanghvi.com/ap_31_2005.pdf (5th Feb, 2007).
138
(1929) 4 ITC 197 (All).
25
(1) Every order shall specify the provisions of the Act or the rules, directions, requisitions
or
orders made there under in respect of which contravention has taken place along with
the
details of the alleged
contravention.
(2) Every such order shall be dated and signed by the compounding authority under his 139
seal.
5.3 Compounding Authority to Notify Adjudicating :
Authority
Where the compounding of any contravention made after making a complaint under section
16(3),
such compounding shall be brought by the Compounding Authority in writing to the notice of
the
Adjudicating Authority. It is also provided that upon such notice of compounding being given,
the
person in relation to whom the contravention is compounded shall be 140
discharged.
Compounding Amount:
Under Foreign Exchange (Compounding Proceedings) Rules, 2000 following aspects are
dealt
with:
Payment of 141 -
Amount
Where a contravention has been compounded under rule 8(2). The sum involved in
such
contravention shall be deposited within fifteen days from the date of the order of compounding
of
such contravention by the demand draft in favour of Compounding 142
Authority.
Failure to 143 -
pay
In case a person fails to pay the sum compounded within the time specified in accordance with
Rule
9 of Foreign Exchange (Compounding Proceedings) Rules, 2000, he shall be deemed to have
never
made an application for compounding of any contravention under rules and provisions of the
Act
for contravention shall apply to 144
him.
Refund of the amount
paid-
In section 15 or the Rules made there under, there is no mention of a situation where, after
making
payment of the compounding amount, the person realizes that he had not committed
the
contravention. In such a situation, can he claim refund of the compounding amount pad by
him?
There appears to be no answer to the aforesaid question since until now, there was no provision
for
compounding in the law of foreign exchange. However, a reference may be made to the ratio
of
139
Supra n. 1, p. 728.
142 Ibid , p. 728.
143 Rule 10, Foreign Exchange (Compounding Proceedings) Rules, 2000

144
Supra n. 12, p. 131.
26
Supreme Court decision Shamrao Bhagwanrao Deshmukh v. Dominion of .145 In this
in India
decision it was held that having paid compounding amount, its refund cannot be claimed on
the
ground that the contravention was, in fact, not 146
committed.
5.4 Copy of the Order 147 :
One copy of the Order of the Compounding Authority under Rule 8(2) of Foreign
Exchange
(Compounding Proceedings) Rules, 2000, shall be supplied to the applicant and
Adjudicating
Authority, as the case may
be.
5.5 Repetitive
Contraventions:
• A contravention committed by any person within a period of three years from the date on
which
a similar contravention committed by him under the compounding rules, maybe referred to
the
Directorate of 148
Enforcement.
• In case the second or subsequent contravention is committed after the expiry of a period of
three
years from the date of contravention which was previously compounded, it shall be deemed to
be
a first 149
contravention.
This provision is broadly based on existing provision concerned in sub section (2) of
section
621A of the Companies Act, 1956. Since offences under the FEMA, 1999 are only civil
offences,
which attract financial penalties, it was apparently felt that there is no harm if comparatively
less
serious offences are compounded by asking the offender to pay a certain
amount.
• Where any compounding penalty is imposed in cases where compounding proceedings
take
place, there is no procedure for determining and imposition of compounding penalty in the
Act,
or in the
Rules.
Unlike normal adjudication proceeding provided under the Act, where there is chance for party
to
deny the charge and the case has to b decided based on evidence available, here in
compounding,
the party admits the guilt straightaway and comes forward to get his offence/
contravention
compounded. Hence it may not be possible to fix any procedure for determination and
imposition
of compounding penalty. Since compounding is in nature of a compromise, penalty
would
145 (1955) 27 ITR 30 (SC).

146 Supra n. 1, p. 728.
148 section 37, Foreign Exchange Management Act, 1999.

149
http://www.banknetindia.com/banking/fema05.htm (2nd Feb, 2007).
27
generally speaking, be less in adjudicating proceedings where guilt is proved as a result
of
evidence 150
.
5.6 Money laundering:
Money laundering is the process of cleaning dirty money with the objective of hiding its source
and
enabling it to be used later in a legal form. This process creates a web to hide the origin/true
nature
of these funds. Prior to the enactment of the Prevention of Money Laundering Act, 2002 this
crime
was covered under the violation of foreign exchange rules under the Foreign Exchange
Regulation
Act (FERA), 1973 and later under the Foreign Exchange Management Act (FEMA), 151
1999.
Prevention of Money Laundering Act, 2002 has defined Money Laundering as
under:
Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party
or
is actually involved in any process or activity or connected with the proceeds of crime
and
projecting it as untainted property shall be guilty of offence of money
laundering.
It is pertinent to note that cases of contravention, i.e., money laundering, national and
security
concern, involving serious infringements of the regulatory framework, including cases
where
application for compounding has not been filed within the stipulated period in the
memorandum
issued by the Reserve Bank may be referred to the Directorate of Enforcement for
further
investigation and necessary action under section 37 of the Act or to the Anti Money
Laundering
Authority instituted under the Prevention of Money laundering Act, 2002 or to any other
agencies 152
deemed
fit.
5.7 Compounding and Adjudication:

Compounding and Adjudication is explained as
under:
Where any contravention is compounded before the adjudication of any contravention
under
section 16, no inquiry shall be held for adjudication of such contravention in relation to
such
contravention against the person in relation to whom the contravention is so
compounded.
Where the compounding of any contravention is made after making of a compliant
under
sub-section (3) of section 16, such compounding shall be brought by the authority
specified
in rule 4 or rule 5 in writing, to the notice of the Adjudicating Authority and on such
notice
150 Supra n. 12, p. 131.

151 http://www.unafei.or.jp/english/pdf/PDF_rms/no67/17_India_p209-p215.pdf (April 5th, 2007).
152
Supra n. 12, p. 132.
28
of the compounding of the contravention being given, the person in relation to whom
the
contravention is so compounded shall be
discharged.
A contravention which has been finally adjudicated and disposed of by the
Adjudicating
Authority cannot be compounded.
It is further relevant to mention here that the Foreign Exchange Management Act,1999,
the
Adjudicating Authorities are having higher powers to adjudicate the FEMA cases and such
powers
have been reduced considerably for officers of that rank while compounding the FEMA cases
to
minimize arbitrariness. The following tabular statement would make the position
clear:
Adjudicating Compounding Powers

Powers
(i) Deputy directors is empowered
to
adjudicate cases up to an amount of Rs Deputy Director is empowered to
75 compound
lakhs. contraventions up to Rs.
5lakhs.
(ii) Additional Director is empowered
to
adjudicate cases of an amount Additional Director is empowered
between to
Rs.75 lakhs to 1 compound contraventions of an
crore. amount
(iii) Special director is empowered between Rs. 5 lakhs and 10
to lakhs.
adjudicate cases of an amount more Special Director is empowered to
than compound
one contraventions of an amount between Rs.
crore. 10
lakhs and 50 lakhs.
In the FEMA, 1999, contraventions of an amount between Rs. 50 lakhs and one crore
and
contraventions of an amount of Rs. 1 crore or more shall be compounded by a Bench consisting
of
Special Director with Deputy Legal Advisor and director with Special Director, respectively.
These
safeguards have been provided under rule 5 of the Foreign Exchange Compounding
Proceedings
Rules, 2000 itself to reduce a arbitrariness and to have just and fair orders. The Director
of
enforcement by an administrative order may assign cases to the compounding authorities from
time
to time, in order to check abuse of power and to ensure uniformity of approach for this 153
purpose.
5.8 Factors for Deciding Compounding /
Adjudication:
153
Supra n. 12, p. 133.
29
The factors for deciding Compounding / Adjudication
are:
(a) Quantum involved in the contravention. In case the quantum involved is within the
limits
specified for compounding, compounding is
advisable.
(b) Compounding is quick and hassle free disposal of cases involving
contravention(s).
(c) Compounding of contraventions amounts to admission of guilt. In case the party
concerned
feels that it has not committed the contravention, compounding is not
advisable.
(d) This is a practical decision to be taken, based on the facts and circumstances of each 154
case.
COMPOUNDING UNDER COMPANIES ACT, 1956

Laws are regulatory mechanism intended to ensure that the activities, be it economic, or social,
are
carried out in an ordinary manner for the benefit of the country and its people. Non compliance
of
law by any segment of society will have deleterious effect, particularly in case of
economic
legislations like The Companies Act, 1956, FEMA, 1999, Income Tax Act, 1961. In order to
check
such tendencies, penal provisions form an integral part of any statute and they are administered
by
courts, tribunals, 155
etc.
Corporates are run by humans. ‘To err is human’, as the saying goes by, committing
mistakes
inadvertently by the corporates is 156 A company under Companies Act, 1965, is
unavoidable. a
legal person, having separate and independent existence than its shareholders. It acts through
its
Board of Directors, who individually and collectively hold the position of trust and have
fiduciary
duties towards the company, the shareholders and others. In view of the important position held
by
the directors, they are responsible in case of violation / contravention of laws. The directors
and
other persons, who would be held responsible in such circumstances, have been defined as
‘officer
in 157 The definition of the term ‘officer who is in 158 in was revised so as
default’. default’ to
dispense with the element mens and include all officers of the company enumerated in
of rea that
section, in the expression ‘officer who is in 159
default’.
154 Ibid , p. 134.

155 D.K Prahlad Rao, “Offences, prosecution and Penalties under Companies Act Emerging Trends”, [2006] Vol.3, No.
6, ICSI Executive Chartered Secretary, p. 528.
156 N. Sridharan, “Compounding of Offences under Comapanies Act, 1956”, [2004] 51SCL…(MAG.).p.153.
157 Section 5, Companies Act, 1956
158 Ibid.
159 P.Y. Padhye, “Compounding of offences under the Companies Act”, [1998] Vol. 28, No. 4, ICSI Executive
Chartered Secretary, p. 302
30
Where the authorities proceed against the erring companies for the violations of The
Companies
Act, 1956 the available choice to the company/officers in default, are
two:
1) Fight the case in the Economic offences court;
or
2) To get the offences compounded under section 621A of the Companies Act,
1956.
Fighting in the Economic Offences Court can be expensive and time consuming and, hence,
the
offenders would be forced to resort to the only left over option of admitting guilt by paying
the
penalty under ‘compounding of 160
offences’.
The provisions regarding compounding of offences under Companies Act, 1956, are a
relatively
recent addition effected vide the insertion of the Companies (Amendment) Act, 1988.
These
provisions came into force with effect from st May, 1991. It is to be noted that Clause 58 of
31 the
Companies Amendment Bill, 1987, did not throw much light on the rationale in respect of
the
provision for compounding. 161
6.1 Meaning of Compounding of
offences:
The simple meaning of ‘compounding of offence’ is the offence which could be settled by
mutual
agreement on payment of fine. It means pleading guilty and accepting the fine/ penalty.
Basically,
there are three kinds of 162 :
offences
1. Compoundable offences punishable with
fine.
2. Compoundable offences punishable with imprisonment or fine or
both.
3. Offences not compoundable but punishable with imprisonment only or with imprisonment
with
fine.
The Act provides penalty for all violations. In case any penalty or punishment is not provided
for
any violation by default penalty provided to the defaulting companies and officers shall be
Rs.
5,000 and Rs. 500 for each day of continuing 163
default.
1) The Offences punishable with ‘fine’ are compoundable by the Central
Government.
2) Offences punishable with ‘fine’ or imprisonment or ‘both’ are compoundable with
the
permission of the
court.
3) Offences punishable with ‘imprisonment only’ or ‘imprisonment and also fine’ cannot
be
compounded. 164
160 Supra n. 156, p.153.

161 Supra n. 159, p.302.
162 Section 621 A, Companies Act, 1956.
163 Section 629 A, Companies Act, 1956.

164
Section 621 A , Companies Act, 1956.
31
However, the Central 165 clarified that all the offences other than the offences
Government involving
compulsory imprisonment are compoundable by Regional Director up to maximum fine of
Rs.
50,000 and by CLB, where the maximum amount of fine is exceeding Rs. 166 The question
50,000.
for determination of jurisdiction as between the two aforesaid compounding authorities may
pose a
problem where the offence to be compounded is a ‘continuing offence’. In such cases the
stipulated
penalty is not fixed sum of fine payable once and for all but consists of per diem fine or a
initial
fine with further fine for every day default thereafter. In this context it is submitted that so long
as
the fine for the initial commissioning does not exceed Rs. 5000, it will be within the power of
the
Regional Director to compound the offence and there by continuing a fresh offence. Supreme
Court
in State Biha v. Deokaran 167 observed that , on every occasion when such
of r Nenshi disobedience
or non compliance occurs, there is an offence committed. Also a fresh period of limitation begins
to
run, in the case of continuing offence, at every moment of time during which the
offence 168
continue . The problem of determining the jurisdiction of a Compounding Authority as also
s the
quantum of the composition fee, may arise in the case of an offence, in respect of which
the
relevant penal provision of the Act does not stipulate a specific amount of fine [e.g., section
538(1),
Companies Act, 1956]. It is submitted that in such a case, compounding of the offence
may
appropriately be done by the Company Law Board. A chart showing offences 169 is
compoundable
given in Figure No. 1 for clear
understanding.
6.2 Salient
features:
The salient features relating to compounding of an offence are given
below:
1. An offence punishable with compulsory imprisonment or with imprisonment and also fine is
not
compoundable. Few sections specifically provide for such
offences.
2. Offences which are punishable with fine or imprisonment or both are, however,
compoundable
only with the permission of the court in accordance with the provisions of the Companies
Act, 170
1956.
3. An application for compounding is to be made by the delinquent company either before or
after
the institution of the
prosecution.
165 Circular No. 5 of 1993 dated April 28, 1993.

166 Supra n. 156, p.153.
167 AIR 1973, SC 908.
168
Section 472, code of Criminal Procedure, 1973.
169 Section 621 A, Companies Act, 1956
170 th
Avtar Singh, COMPANY LAW, 14 edn., 2004, p.691.
32
4. The corresponding amount shall not, in any case, exceed the maximum amount of fine
prescribed
for the offence in the
Act.
5. When a particular offence is so compounded, no prosecution shall be filed thereafter in
relation
to such
offence.
6. In case prosecution is pending before the Court, it is open to the company and officers in
default
being prosecuted to make an application for compounding and after the offence is so
compounded,
the court shall discharge the company/ its officers, as the case may
be.
7. Compounding of an offence does not amount to conviction by court of law and the
prohibition
relating to eligibility for appointment as a director or manager of a company, does not 171
apply.
8. A similar offence committed subsequent to the date of the compounding of first offence,
cannot
be compounded within a period of three years from that date. However if the offence is
repeated
three years thereafter it shall be compounded as if it was never committed before that 172
instance.
9. In case of the company, the composition fee shall be paid from its funds. Directors/ officers
in
default shall pay the composition fee from their personal
funds.
10. If any officer or employee of the company fails to comply with the order of CLB or
Regional
Director, he shall be punishable with imprisonment that can extend to 6 months or fine
not
exceeding Rs. 50,000 or with both. 173
6.3 Offences not
compoundable:
The following are ‘offences not compoundable’ {punishable with imprisonment only or
with
imprisonment and also fine} which can be tried only in the
court.
1) Omission to make repayment of deposit or acceptance of 174
deposit.
2) Acceptance of deposit in excess of prescribed limits or in contravention of manner or
condition 175
prescribe or in 176 .177
d contravention
3) Failure to comply with the order of Company Law 178
Board
4) Failure to comply with provisions of section 58 179
AA.
5) Personation for acquisition etc, of 180
shares.
171 Schedule XIII, Part I, Companies Act, 1956.
172 Supra n. 170.
173 Supra n. 156, pp.155-156
174
Section 58 A(5)(b), Companies Act, 1956.
175 Section 58 A (1), Companies Act, 1956.
177 Section 58A(6)(b), Companies Act, 1956

179
Section 58 AA (9), Companies Act, 1956.
33
6) Failure to make payment within 6 months from the expiry of the th day. 181
8
7) Failure to comply with section 182
80A.
8) Contravention of section 108 B or 108 D. 183
9) Personation of share 184
holder.
10) Default in complying with the order of the Company Law 185
Board.
11) Declaration by trustee as stated in section 153(3) 186
(b).
12) Failure to comply with section 187
209A.
13) Not distributing dividend within 30 188
days.
14) Contravention of section 189
269(10).
15) Political contributions made contrary to section 190
293A.
16) False statements as mentioned in section 191
628.
17) False evidence given as stated in section 192
629.
It is to be noted here only offences under Companies Act, 1956 can be compounded under
section
621A of Companies Act, 1956. In Rabindra cas 193 it was held by Supreme Court
Chamaria’ e that
cases under section 633 can be compounded under Companies Act, 1956. Thus the provision of
this
section cannot be invoked in respect offences under the other Acts like the Employees’
Provident
Fund & Misc. Provisions Act, 1952, or Employees’ State Insurance Act, 194
1948.
The expression ‘whether committed by a company or any officer thereof’ in parenthesis in
sub
section (1) of section 621A of the companies Act, 1956, is indicative of the legislative intent
to
exclude offences under the Act committed by persons other than a company or its officers from
the

181 Section 73(2B), Companies Act, 1956.
182 Section 80A (3)(b), Companies Act, 1956.
183 Section 108-I (4) (a), Companies Act, 1956.

184
Section 116, Companies Act, 1956.
185 Section 117C (5), Companies Act, 1956.
186 Section 153 (3)(b), Companies Act, 1956.
187 Section 209A (8), Companies Act, 1956.
188 Section 207, Companies Act, 1956.
189 Section 269(11), Companies Act, 1956.

190
Section 293 A (5) (b), Companies Act, 1956.
193 1991(2) SCALE 1021.
194 Supra n. 159, p. 302.
34
scope of compounding provisions. Thus offences committed by other persons like 195 ,
trustees 196
liquidator , 197 , etc shall not be
s contributories compoundable.
It may be noted that the liability of the directors/officers in default does not cease to exits
even
when they cease to be directors/officers of the company, that is, the directors/officers in
default
shall be held liable for the consequences of the action taken by them, when holding the
office.
Certainly when they receive a show cause notice from the ROC i.e. Registrar of Companies for
the
offence committed when they were holding the office of director, it will be rude shock to them
and
they have to opt for compounding of the offence in lieu of going to the 198
Court.
Department of Company Affairs has clarified vide its Press Release March 8, 2002 that an
offence
committed by a director of a company under liquidation is compoundable under section 621 A
and
compounding will not be permissible against the company in view of provisions of section 446
of
the
Act.
Offences punishable with imprisonment or both imprisonment or fine, can be compounded
only
with the permission of the court and in accordance with the procedure laid down in the
Criminal
Procedure Code, 1973 for compounding of 199
offences.
6.4 Procedure for Compounding of
offence:
A company may commit the offence knowingly or unknowingly. If the ROC is of the opinion
that
an offence has been committed, he may issue a show cause notice to the directors/officers of
the
company in default as to why action should not be taken for the contravention of the provisions
of
the Companies Act, 1956. Under such circumstances, the company may have to resort to
the
compounding of offence applying to the ROC. A company in default can itself on
apprehension
that a default has been made may make an application to the 200 for compounding to avoid
ROC
prosecution 201
.
The procedure for compounding of offence is as 202 :
follows
• If the company is going for compounding of offence, then a resolution has to be passed by
the
board of directors authorizing a person to apply the ROC for compounding of offences.
The
195 Section 153(3)(a), Companies Act, 1956.

196 Section 481(3)(a), Companies Act, 1956.
197
Section 539, Companies Act, 1956.
198 Supra n. 156, p. 157.
199 Supran. 159, p. 304.
200 Section 621A(4)(a), Companies Act, 1956.
201 Supra n. 156, p. 159.

202
Supra n. 159, p. 305.
35
company may authorize its director or company secretary to appear before the bench on its
behalf
and a power of attorney may be issued for this
purpose.
• An application on plain paper, in duplicate, has to be made to the concerned ROC
specifying
the nature of offence, date, period during which the offence was committed or continued,
the
names and addresses of the person committing offence and praying
guilt.
• No fee is required to be paid for the
application.
• The concerned regional director will forward this application together with his comments
thereon
to the CLB i.e. Company Law Board or Regional Director of the concerned region within
whose
jurisdiction; the registered office of the company is situated, as the case may be, within 30 days
of
the receipt of 203
application.
• On scrutiny of the application, a notice of hearing thereby is issued by the Regional Bench of
the
CLB.
• On receipt of the notice, the authorized representative of the company will have to appear for
the
hearing and explain reasons for committing the offence. The compounding of the offence
should
be prayed for. The regional director/ CLB is required to follow the rules of natural justice in
this
regard by giving an opportunity of hearing to the 204
accused.
• Where the maximum amount of the fine does not exceed Rs. 50, 000 aforesaid application
shall
be made to the regional director of the concerned region where the registered office of
the
company is situated and if the maximum amount of fine exceeds Rs. 50,000, application has to
be
made to the CLB.
• Ensure that offence for which application for compounding is made is not an offence
punishable
with imprisonment or with fine and
imprisonment.
• On obtaining ‘Order ‘ from the concerned authority, follow the directions given in the order
and
make the payment fixed for compounding the offence, by way of demand draft in favour of
‘pay
and Accounts Office’ Department of Company Affairs, New Delhi/ Calcutta/Mumbai/Chennai,
as
the case may
be.
• On offence being compounded, intimation thereof shall be given by the delinquent company
to
the ROC within 7 days from the date on which the offence is
compounded.
203 Regulation 40 (As amended in 1992) of the CLB Regulations, 1991.

204
Supra n. 159, p. 157.
36
• The payment of composition money has the effect of erasing out the offence against
the
concerned party. It is a bar to proceed any further with the intended or actual 205
prosecution.
Where the offence is compounded and no prosecution thereof is pending in the court,
no
prosecution will lie for the said offence in any Court either by the Registrar or any share holder
or
any other person authorized by the Central Government against the offender in relation to
whom
the offence is compounded. In respect of other offences, the prosecution could however,
lie
before the
court.
Where the offence compounded is in respect of an offence for which the prosecution is
pending
before the court, the trial court will be intimated in writing by the ROC about the compounding
of
the alleged offence and thereafter, the accused person shall stand discharged. No permission
of
the Court is necessary in respect of compounding of offence by the regional director of the
CLB,
as the case may be, even though the said matter is before the court; all that is required
is
intimation to that effect to the
Court.
The power of the compounding of the offence is discretionary and it is open to the company
or
officers in default not to move for composition of the offence complained of and which
is
pending in a Court of Law and, instead, claim to be tried by the Court. However, if the
company
or officers in default opts to seek composition and the concerned authorities, i.e.,
regional
director/CLB as the case may be, is agreeable, then the complainant cannot enforce the
remedy
through the Court. 206 Figure No. 2 illustrates the procedure for compounding provided under
the
It may be noted that, in view of the National Company Law Tribunal (NCLT) being
formed
pursuant to the Companies (Amendment) Act, 2002, the powers of the CLB would be exercised
by
NCLT.207
6.5 How to restrict or avoid the compounding of
offences:
No company shall be allowed to take shelter under the compounding of offences by continuing
the
offence negligently only on the assumption that it could be compounded by paying a
nominal
amount. The following are certain steps for restricting or avoiding the compounding of
offence:
1. Stricter compliance of the provisions by imposing huge penalty on the offenders by
the
company.
205 Supra n. 156, p. 158.

206 Supra n. 159, p. 305.
207
Supra n. 156, p. 159.
37
2. Constant review of the compliance of provisions through Periodical Internal Audit
or
Secretarial
Audit.
3. The representative Personnel (Head of the Departments) should be held responsible
for
committing the offence pertaining to their respective
departments.
4. When a company is Board managed, the Board has to specify the names of the directors to
be
held liable for offences and this enables minimum number of directors to be liable
for
compounding of
offences.
5. Where a director resigns or ceases to be a director of the company, he should ensure that
Form
No. 32 for change of directorship has been filed with the ROC and obtain a copy of the
same
for his records. This will avoid receipt of notice from the ROC for the offences committed
by
the company after he ceases to be a 208
director.
6.6 Acts done honestly and
reasonably:
Ignorance of law cannot be pleaded as an excuse for the default committed, whether intentional
or
unintentional. In accordance with section 633 of the Companies Act, 1956, officers in default
can
plead ‘guilt’ by admitting that the act had been done honestly and diligently but due to
negligence,
it ended up as an offence and if the court is of the opinion to believe the reasons for offence to
be
genuine, then it may acquit the 209
offender.
In the Conclusion of this chapter we may observe that the penalties are levied according to
the
nature of an offence. The compounding of offences only reduces the quantum of punishment for
the
offences committed by the company/officers in default. If the offences were of minor nature,
then
such compounding is acceptable. But if the offences committed were of serious, compounding
as
such by mere payment of fine is not enough. It requires a stricter punishment that shall ensure
that
the offence would not be committed
again.
Only a couple of years back, i.e., in the year 2000, the penalties were enhanced to ten times of
the
existing amounts then. Recently, a committee constituted by Department of Company
Affairs
(DCA) chaired by Mr. Shardul Shroff had classified the offences under three heads like
minor,
major and serious. As per the recommendations of the Committee, the penalty would be based
on
effective capital. This means the penal amount will be increased enormously in
future.
The very purpose of awarding a punishment or penalty for an offence committed under any law
is
to deter the offender from repeating the same. In view of this, the companies and its officers
should
208 Ibid, p. 160.
209
Ibid, p. 128.
38
strive for 100 percent compliance with rules and regulations under the provisions of the Act.
What
is required is a mindset to comply with the law, strictly and honestly, which would result
in
avoidance of compounding offences entirely and thereby saving of penalty expenses for
the
company. This would lead to a delightful situation of offence free corporate 210
world.
DIFFERENCE BETWEEN COMPOUNDING UNDER FEMA, 1999 AND

COMPANIES ACT, 1956
The difference between compounding under FEMA, 1999 and Companies Act, 1956 is
explained
hereunder
:
Particulars FEMA,1999 Companies
Act,1956
The Foreign Exchange The Companies Act, 1956
states
Legal Management Act, 1999 the mode of compounding, as
Framework defines
the framework and well as the authority
the and
contraventions which can procedure
be thereto.
compounded while the
procedure and details
thereto
are specified in the
rules.
Offences that can All offences can Offences attracting
be be punishment
compounded compounded. of imprisonment only
or
imprisonment and also
fine
cannot be compounded,
except
with the permission of the
court.
In case of transactions The Company law Board
under is
Compounding Authority section 3(a) of the Act, empowered to compound
an
officer of the offences punishable with
Enforcement fine
Directorate, not below the and Regional Director
rank is
of Deputy Director or authorized in respect of fine
Deputy up
Legal Adviser (DLA). In to Rs. 5,000 offences
all punishable
other cases, an officer of with imprisonment or fine
the or
210
Ibid, p. 158.
39
Reserve Bank of India, with both can be compounded
not
below the rank of the only with the permission of
Assistant the
General court.
Manager.
It is important to note that compounding is very important part of both the acts and in the interest
of
all however, compounding is more important for the business or trading class and hence a must
for
the offences which are economic in nature, as it relives them of trouble of going through
the
lengthy legal procedures. This explains the reason for the difference of scope of
compounding
provisions with respect to both the aforesaid
legislations.
CONCLUSION
In this Seminar paper an effort has been made to analyze and describe the procedure
of
Compounding of Contraventions under FEMA, 1999. The seminar paper has been designed in
such
a way as to first understand the background of FEMA, 1999 in light of the fact that a
similar
legislation FERA, 1973 existed before FEMA, 1999 and their were certain shortcomings of
FERA,
1973 which ultimately paved way for FEMA, 1999. FERA, 1973 proved to be a hindrance in
many
ways as it was too stringent and talked of regulation were as FEMA, 1999 comprised of
provisions
which would lead to only management of foreign exchange. Also the government policy
of
liberalization lead to further pushing of FEMA, 1999. Then in this seminar paper I have
discussed
the difference between FEMA, 1999 and FEMA, 1999 and in it a comparison has been made of
the
provisions of FERA, 1973 and FEMA in order to get a better understanding of both the Acts. In
this
seminar paper an effort has been made to focus on the advantages of compounding
provisions
under FEMA, 1999 and also under Companies Act, 1956, also an effort has been made to
describe
the procedure of compounding followed under both the Acts and in the end a comparison has
been
made of the provisions of compounding under the Companies Act, 1956 and the provisions
of
FEMA, 1999. The main object of this seminar paper is not only to understand the
procedure
followed for compounding under FEMA, 1999 but also trace the reasons for the inclusion of
these
provisions in the new Act, as we all know that the earlier Act i.e. the FERA, 1973 did not
contain
any provisions for compounding or for that matter any similar
provisions.
40
It is thus important for us to understand the advantages of inclusion of provisions for
compounding
under FEMA, 1999.
The advantages of compounding are
that:
It reduces the burden of litigation of the courts and the parties
involved.
Reduces the cost of
litigation.
Facilitates foreign exchange transaction and thereby facilitates
trade.
In a country like India where the judicial system is subjected to the criticism of not
being
efficient due to the number of cases pending in our courts it shall help in making the
system
more
efficient.
It saves time and
energy.
It promotes globalization of business and thus
harmonization.
Compounding of economic offences avoids unwarranted exploitation or harassment
of
offenders. Unlike as was earlier done under FERA,
1973.
The inclusion of provision on compounding under FEMA, 1999 has the effect of
reducing
the draconian effect of FERA, 1973 to a very large extent and thus enhances the
Foreign
Exchange Reserve or FOREX reserve of our
country.
The softening of provisions on penalties and contraventions lead to an upswing in
foreign
investment in India thus enhancing trade and commerce which in turn benefits the
citizens
of India.
The procedure for compounding as laid down under Foreign Exchange Management Act, 1999
and
Foreign Exchange (Compounding Proceedings) Rules, 2000 made under section 15 is explained
in
detail in this seminar paper. Though there are advantages of incorporation of
compounding
provisions there are certain disadvantages also. Though the point to be remembered
while
analyzing the disadvantages of compounding provisions of FEMA, 1999 is that when we
compare
the advantages with disadvantages of the same we can clearly see that the advantages outweigh
the
disadvantages
.
Suggestions Draconian FERA, 1973 is a matter of past. It is, however, hoped that
: while
implementing FEMA, 1999, the Central Government and the Reserve Bank do not place the
same
level of restrictions by Rules, Notifications, etc. Only such healthy attitude would let the spirit
of
FEMA prevail in terms of liberalization. However, it is suggested that the power of Reserve
Bank
to and the Central government to should be judiciously exercised to the effect that the provisions
of
41
compounding included in FEMA, 1999 should not be rendered dormant by passing of a
Rule,
Notification or Regulation under the Act as it would have the effect of taking us back into the
harsh
times of
history.
FERA, 1973 represented a warped mindset on social and economic offences. Replacement
of
FERA, 1973 alone may not change this mindset since there are about 40 other statutes on
socio-
economic offences that reflect the non compoundability syndrome. Nevertheless the end of
FERA,
1973 and introduction of compounding provisions in FEMA, 1999 signifies an event that has
been
unanimously
welcomed.
Figure No. 1:
Offences Compoundable
under section 621 A of the
Compoundable by the Compoundable with the

Central permission of the court. Now
compoundable by the
Government. Regional Director/Company
Fine. Imprisonment or
fine or both .
42
Application for Application for

compounding. Compounding.
Figure No. 2:
Procedure for compounding of offences under Section
621A(4)
Compounding of offences by the central
government under Section 621A of the
Before filing prosecution. After Filing

prosecution.
43
Application to
ROC.
Regional director (fine up Company law Board (fine above

Rs. to
50,000). Rs.50,000).
Hearing of the parties.
Speaking order by regional director or company

Law Board.
Payment to be made either by the company director

or officer as per the directions.
To file with ROC, a copy of the order.
44
BIBLIOGRAPH
Y
B. N. Gururaj, COMMENTARIES ON FEMA MONEY LAUNDERING ACT AND COFEPOSA,
1st edn. 2005, Wadhwa and Company, New Delhi.
th
Bryan A. garner et al., (eds.), BLACK’S LAW DICTIONARY, edn., 5 th Rep., 2002, WEST
PUBLISHING
6 CO., United States of
America.
Chinubhai R. Shah and Ms. Komal Parikh, “FERA To FEMA: A Journey from forbidden lands
to
semi-open patures”, [2000] Vol. 30 No.5, ICSI Chartered Secretary, The Institute of
Company
Secretaries of India, New
Delhi.
D.K Prahlad Rao, “Offences, prosecution and Penalties under Companies Act Emerging
Trends”,
[2006] Vol.3, No. 6, ICSI Chartered Secretary, The Institute of Company Secretaries of India,
New
Delhi.
D. T. Khilnani, FEMA READY REACKONER, 7 th edn. 2004, Snow White Publications Pvt. Ltd.,
Mumbai.
Dilip K. Sheth, TREATISE ON FEMA (Law and Practice), Vol. st edn. 2002, Snow White
1,1
Publications Pvt. Ltd.,
Mumbai.
FOREIGN EXCHANGE MANUAL WITH FEMA PRACTICE MANUAL, 2006, Taxmann Allied
Services(P.) Ltd., New
Delhi.
J.S. James(ed.), Stroud’s Judicial Dictionary, Vol. 1, 5th edn. 1994, Sweet and Maxwell,
London.
N. Sridharan, “Compounding of Offences under Companies Act, 1956”, [2004] 51 SCL…
(MAG.),
Taxmann Allied Services Pvt. Ltd., New
Delhi.
P.Y. Padhye, “Compounding of offences under the Companies Act”, [1998] Vol. 28, No. 4,
ICSI
Chartered Secretary, The Institute of Company Secretaries of India, New
Delhi.
Rama Devi R. Iyer, “Compounding of contraventions under Foreign Exchange Management
Act,
1999 (FEMA)”, [2006] 72 SCL…(ST.), Taxmann Allied Services(P.)LTD., New
Delhi.
Ratanlal Ranchhoddas and Dhirajlal Keshavlal Thakore, THE CODE OF
CRIMINAL
PROCEDURE, 17 th edn. 2004, Wadhwa and Company, Nagpur.
Y.V. Chandrachud et al., (rev.), D. D. Basu, SHORTER CONSTITUTION OF INDIA, th edn.

13
2001, Wadhwa and Company, Nagpur.
45
Webliography
Shyamala Gopinath, “Foreign exchange regulatory regimes in India- from control to

management”,
www.bis.org/review/r050217h.pd .
f
http://en.wikipedia.org/wiki/Foreign_Exchange_Management_A .
ct
http://www.welcome-
nri.com/info/project/femaact1.htm.
http://www.worldtaxservice.in/fem.htm .
http://www.eximkey.com/contents/showpage1.as .
p
http://www.rashminsanghvi.co
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http://www.rashminsanghvi.com/ap_31_2005.pd
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http://www.unafei.or.jp/english/pdf/PDF_rms/no67/17_India_p209-
p215.pdf
46
TABLE OF CASES.
Bihar v. Deokaran Nenshi ……………………………………………………..

……….33
DE v. MCt M Corporation Pvt. Ltd ……………………………………….
…………...17
Ganga Sagar v. Empror ……………………………………………………..…….
…….27
Haskins v. …………………………………………………….…………..
Newcomb 13
Hindustan Steel Ltd. v. State of ……………………………………………18,
Orissa 17.
Leo Rey Frey v. State of Punjab ……………………………………………………..…
18
N. Shaik Mohammed v. Directorate of …………………………….
Enforcement …..18
Per Patterson, J. Pennell v. ……………………………………………………
Rhodes 13
Rabindra Chamaria’ …………………………………………………………..
case ….36
Superintendent & Remembrancer of Legal Affairs v. Girish Kumar …..16
Navlakha
Shanti Prasad Jain v. Director of ………………………………..
enforcement ……..16
Shamrao Bhagwanrao Deshmukh v. Dominion of India …………………………….28
.
Shewpujanrai Indrasanrai v. Collector of …………………………………..1
customs 7
T.S Balaiah v. T.A. Rangachari …..…………………………………………..
………..16
Tiwari kanhaiya lal vs. CIT ……………………………………………………...
…….16
Union of India v. Marcel ………………………………………………………
Nevens 17
LIST OF ABBREVIATIONS
AIR All India Reporter

All. Allahabad High Court.
Annex. Annexure.
Art. ‘Article’, e.g. Article 21.
C.A. Compounding Authority.
CC Company Cases.
C.I.T Commissioner of Income Tax.
CLB Company Law Board.
Co. Company.
COPRA Consumer Protection Act.
DCA Department of Company Affairs.
DLA Deputy legal Advisor.
47
E.D. Enforcement Directorate.
Ed. (s) ‘Editor (s) or edited’ (e.g., Kane,
P.V.,ed.).
Edn. Edition.
E.G. ‘Exempli gratia’, for example.
Et al. ‘et alia’, and others (used to refer to coauthor when there
are
three or
more)
EXIM Export import (policy).
FEMA Foreign Exchange Management Act.
FERA Foreign Exchange Regulation Act.
FERAB FERA Board.
FOREX Foreign exchange reserve.
HC High Court.
Ibid ‘ibidem’; in the same place or work –used when two or
more
successive footnotes refer to the same work; if reference is
to
different page (s), page No. (s) are
indicated.
ICSI Institute of Company Secretaries of
India.
ITR Income Tax Reporter.
MLJ Madras Law Journal.
Mad. Madras High Court.
MAG. Magzine.
n. Footnote number.
NCLT National Company Law Tribunal.
No. Number.
p. Page number.
pp. Page numbers.
RBI Reserve Bank of India.
Rep. Reprint.
Rev. Revised.
ROC Registrar of Companies.
SC Supreme Court
SCALE Supreme Court Almanac.
SCC Supreme Court Cases.
SCL SEBI and Corporate Laws.
SEBI Securities Exchange Board of India.
ST. Statutes.
Supra. ‘above’; used to refer to text already
cited.
v. versus, against.
vide ‘see’
viz. like.
Vol. Volume.
W.T.O. World Trade Organization.
48

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COMPOUNDING OF CONTRAVENTIONS: FEMA, 1999.

‘Compounding of contraventions’ can be understood as a lay man to be a method to compromise

LL.M 'Corporate Laws', NALSAR,University of Law, Shameerpet, RR District, Hyderabad,.Pin: 500087Ph:

30 Section 18, Foreign Exchange Regulation Act, 1973.

32 Section 14, Foreign exchange Management Act, 1999.

36 Chapter IV, Sections 36-38, Foreign Exchange Management Act, 1999

37 Section 3, Foreign Exchange Regulation Act, 1973.

38 Section 37, Foreign Exchange Management Act, 1999.

MEANING OF ‘CONTRAVENTION’ AND ‘COMPOUNDING’:

50 P. Ramanatha Aiyer, LEX LEXICON, 2nd edn. (Rep.) 2001.

51 Section 320, Criminal Procedure Code, 1973.

first time in law of foreign exchange the provision of compounding of contraventions

53 Section 15, Foreign Exchange Management Act, 1999.

56 Section 15, Foreign Exchange Management Act, 1999.

58 AP (DIR Series) Circular 31 dated 01.02.2005.

CONTRAVENTIONS’ AND ‘PENALTIES’ UNDER FEMA, 1999

62 The Foreign Exchange (Compounding Proceedings) Rules, 2000.

63 Foreign Exchange (Compounding Proceeding) Rules, 2000.

68 Section 13(2), Foreign Exchange Management Act, 1999.

71 Section 49(4), Foreign Exchange Management Act, 1999.

74 Section 49(3), Foreign Exchange Management Act, 1999.

75 Section 49(4), Foreign Exchange Management Act, 1999

76 Section 13, Foreign Exchange Management Act, 1999

81 Section 13 (1), Foreign Exchange Management Act, 1999.

82 AIR 1958 SC 845.

84 (1978) MLJ 122 (Mad).

88 Article 20(2), Constitution of India.

89 AIR 1959 SC 375.

90 (1993) 66 Taxman 522 (FERAB).(FERA Board)

92 (1972) 83 ITR 26 (SC).

100 Supra n. 12, p. 128.

101 Section 15, Foreign Exchange Management Act, 1999.

102 Supra n. 1, p.727.

104 Rule 3 (1), Foreign Exchange (Compounding Proceeding) Rules, 2000.

107 Supra n. 12, p. 128.

108 Rule 6, Foreign Exchange (Compounding Proceeding) Rules, 2000.

109 Section 49(3), Foreign Exchange Management Act, 1999.

111 Supra n. 1, p. 726.

114 Rule 5 (4), Foreign Exchange (Compounding Proceedings) Rules, 2000.

118 Section 9, Foreign Exchange Management Act, 1999.

119 Supra n. 1, p. 725.

PROCEDURE OF COMPOUNDING AND RELATED ISSUES

126 Rule 4 (4), Foreign Exchange (Compounding Proceedings) Rules, 2000.

131 Rule 8(1), Foreign Exchange (Compounding Proceedings) Rules, 2000.

132 Rule 8(2), Foreign Exchange (Compounding Proceedings) Rules, 2000.

133 Supra n. 1, p. 727.

5.1 Nature of power to compound:

135 Supra n. 11, p. 131.

142 Ibid , p. 728.

143 Rule 10, Foreign Exchange (Compounding Proceedings) Rules, 2000

145 (1955) 27 ITR 30 (SC).

148 section 37, Foreign Exchange Management Act, 1999.

5.7 Compounding and Adjudication:

150 Supra n. 12, p. 131.

Adjudicating Compounding Powers

COMPOUNDING UNDER COMPANIES ACT, 1956

154 Ibid , p. 134.

157 Section 5, Companies Act, 1956

Chartered Secretary, p. 302

160 Supra n. 156, p.153.

163 Section 629 A, Companies Act, 1956.

165 Circular No. 5 of 1993 dated April 28, 1993.