RBI introduces revisions to the compounding direction

a.                 

Alignment with the NDI regime: Prior to the RBI Circular, the Compounding Direction inter alia dealt with contraventions of the provisions under Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations notified in 2000 and 2017 (FEMA 20). Since the FEMA 20 regime has been superseded by the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 dated 17 October 2019 (NDI Rules) and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 dated 17 October 2019 (MPR Regulations), there was uncertainty over the manner in which the compounding process would apply to the contraventions under this new regime. The RBI Circular has resolved this uncertainty and identified specific instances of contraventions under the NDI Rules and the MPR Regulations, where the power to compound will be delegated to the regional offices of the RBI. The details are as follows:

b.                 

Classification of contraventions: Prior to the RBI Circular, the RBI on becoming aware of any contravention would classify such contraventions under specified heads and deal with them in the manner set out below:

(i)

Technical/ minor: By issuing an administrative/ cautionary advice;

(ii)

Material: By requiring compounding of such offences following the compounding procedure; and

(iii)

Sensitive/ serious: By referring these contraventions to the Directorate of Enforcement.

For completeness, in cases where a compounding application admitting a contravention was filed, such contraventions would not be considered technical or minor.

The RBI Circular has done away with classifying a contravention as ‘technical’ or ‘minor’. All technical / minor contraventions will now be regularized by imposing minimal compounding amount as per the compounding matrix provided in the Compounding Direction. This move allows for greater transparency regarding the regulator’s decision-making process.

c.

Disclosure of compounding orders: In 2016, the RBI had decided to publicly disclose the compounding orders issued by it on its website, with a view to increasing transparency. Pursuant to the RBI Circular, the RBI has now decided to disclose summary information (instead of uploading compounding orders) for all orders passed on or after 1 March 2020. The information disclosed will still include details of the applicant, nature of contravention, and the amount imposed for compounding the contravention. This will address confidentiality concerns of certain applicants and, at the same time, continue to provide transparency to the approach adopted by the RBI for specific violations.