{"id":568,"date":"2025-07-14T18:09:34","date_gmt":"2025-07-14T12:39:34","guid":{"rendered":"https:\/\/navinlaw.in\/blog\/?p=568"},"modified":"2025-07-14T18:09:35","modified_gmt":"2025-07-14T12:39:35","slug":"amendment-to-fema-compounding-provisions-move-towards-regulatory-leniency","status":"publish","type":"post","link":"https:\/\/navinlaw.in\/blog\/amendment-to-fema-compounding-provisions-move-towards-regulatory-leniency\/","title":{"rendered":"Amendment to FEMA compounding provisions: Move towards regulatory leniency"},"content":{"rendered":"\n

The advent of the 1991 economic reforms marked the beginning of globalization in the Indian economy, leading to the influx of numerous multinational companies. This surge in foreign transactions necessitated a structured legal framework, culminating in the enactment of the Foreign Exchange Management Act (FEMA), 1999<\/strong>.<\/strong> The Act aimed to facilitate external trade and payments and promote the orderly development and maintenance of India’s foreign exchange market.<\/p>\n\n\n\n

Under Section 3 of FEMA, the Reserve Bank of India (RBI)<\/strong> has been designated as the principal regulator to oversee foreign exchange matters not specifically governed by the Act. In a significant policy shift, the RBI\u2014via Master Direction No. 04\/2025-26 (Circular No. RBI\/FED\/2025-26\/135)<\/strong>has introduced a more lenient approach to penalizing certain contraventions under FEMA. The update caps the compounding penalty<\/strong> at a <\/strong>maximum of INR 2 lakh<\/strong>, replacing the earlier range of 0.30% to 0.75%<\/strong> of the violation amount.<\/p>\n\n\n\n

This policy update aligns with previous regulatory communications, including A.P. (DIR Series) Circular No. 17\/2024-25 dated October 1, 2024<\/strong>, and Master Directions issued on April 22, 2025<\/strong>. The amendment is codified through a newly added clause (Para 5.4.II.vi.)<\/strong>,<\/strong> which empowers the Compounding Authority to cap the penalty at INR 200,000 per contravention<\/strong>, subject to:The nature of the contravention,Exceptional circumstances or facts involved andBroader public interest considerations.<\/p>\n\n\n\n

This cap applies specifically to Clause 5<\/strong> of the Penalty Computation Matrix<\/strong>, which pertains to non-reporting contraventions<\/strong> such as:Annual Return on Foreign Liabilities and Assets (FLA), Annual Performance Reports (APR), Form FC-GPR\/FC-TRS filings, External Commercial Borrowing (ECB) returns, Overseas Direct Investment (ODI) reporting etc.<\/p>\n\n\n\n

Additionally, the amendment provides relief in cases involving contraventions such asNon-reinvestment of Liberalised Remittance Scheme (LRS) proceeds within 180 days (FEMA 9(R)\/2015-RB, Regulation 7), Failure to export goods\/services within one year of advance receipt (FEMA 23(R)\/2015-RB, Regulation 15), Gifting of high-value shares without RBI approval.<\/p>\n\n\n\n

However, exclusions under Rule 4(2)<\/strong> and Rule 9 of the 2024 Rules<\/strong> will still apply. The RBI has also issued instructions to Authorized Dealer Category-I Banks and other Authorized Banks<\/strong> to incorporate and act upon these new guidelines. By standardizing and capping the maximum penalty, the new policy offers relief to individuals and companies engaged in high-value transactions, thereby encouraging greater voluntary compliances<\/strong>. The RBI’s progressive approach signals a significant step towards transforming India’s global image from a red-tape-heavy regime to a business-friendly, investment-attractive<\/strong> environment.<\/p>\n\n\n\n

Ashish Shukla<\/p>\n\n\n\n

Associate<\/p>\n\n\n\n

Law Offices of Navin Kumar<\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

The advent of the 1991 economic reforms marked the beginning of globalization in the Indian economy, leading to the influx of numerous multinational companies. This surge in foreign transactions necessitated a structured legal framework, culminating in the enactment of the Foreign Exchange Management Act (FEMA), 1999. The Act aimed to facilitate external trade and payments […]<\/p>\n","protected":false},"author":1,"featured_media":569,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1],"tags":[17,19],"_links":{"self":[{"href":"https:\/\/navinlaw.in\/blog\/wp-json\/wp\/v2\/posts\/568"}],"collection":[{"href":"https:\/\/navinlaw.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/navinlaw.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/navinlaw.in\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/navinlaw.in\/blog\/wp-json\/wp\/v2\/comments?post=568"}],"version-history":[{"count":1,"href":"https:\/\/navinlaw.in\/blog\/wp-json\/wp\/v2\/posts\/568\/revisions"}],"predecessor-version":[{"id":570,"href":"https:\/\/navinlaw.in\/blog\/wp-json\/wp\/v2\/posts\/568\/revisions\/570"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/navinlaw.in\/blog\/wp-json\/wp\/v2\/media\/569"}],"wp:attachment":[{"href":"https:\/\/navinlaw.in\/blog\/wp-json\/wp\/v2\/media?parent=568"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/navinlaw.in\/blog\/wp-json\/wp\/v2\/categories?post=568"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/navinlaw.in\/blog\/wp-json\/wp\/v2\/tags?post=568"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}