Contravention: Breach of provisions and norms under FEMA

What is the nature of these contraventions and how far can the central bank go?

The applications for compounding contraventions are categorised into technical, material or sensitive by the Reserve Bank of India. The contravention involving money laundering, national and security concerns involving serious infringement of the regulatory framework, etc., are sensitive contraventions. RBI has no power to compound cases which are sensitive in nature. Such cases will then have to be directed to the Directorate of Enforcement. If technical, the applicant is issued a cautionary advice.

How does compounding of contraventions help?

When the contravention is material in nature, the individual or the corporate entity is given an opportunity for a personal hearing by the compounding authority, which is optional. By admitting the contraventions, the erring entity can save on the transaction costs as it would get away by paying a smaller penalty levied by RBI. In not doing so, the individual remains exposed to the action that can be taken by the central bank under FEMA. The penalty after compounding the contravention, though much reduced, can be up to thrice the sum involved, in cases where the amount if quantifiable and it can be up to 2 lakh in cases, where it is not quantifiable and for a continuing contravention, RBI charges 5,000 each day, till the resolution of the case.

All these matters related to compounding are handled by the Cell for effective implementation of FEMA (CEFA), which has to be kept informed about matters of compounding at all times.

What is the fee to be paid for applying for compounding and how long do the cases last?

The individuals are required to furnish all the details of the contravention along with the application form which costs 5,000. The person, in his application, is also required to mention if the case is under the investigation of the Directorate of Enforcement or under the Prevention of Money Laundering Act (2002).

The contravention penalty has to be paid up within 15 days of the compounding order being signed. If the erring individual fails to pay the penalty within three days, it is treated as if the individual never applied for compounding contravention, thus he would be liable for the legal action under FEMA (1999). The compounding process is normally completed within 180 days of the receipt of compounding application.