Compounding Contraventions

In one line

Compounding is the settlement mechanism that lets a person who has contravened FEMA close the matter by paying a sum, instead of being adjudicated and penalised. Section 15(1) permits any contravention under section 13 to be compounded on the application of the contravener, within one hundred and eighty days of receipt of the application, by the Directorate of Enforcement or by authorised officers of the Reserve Bank; and section 15(2) provides that once compounded, no proceeding or further proceeding shall be initiated or continued in respect of the contravention so compounded.

Why FEMA has a settlement route at all

Because the Act manages rather than punishes. Most FEMA contraventions are procedural: a report filed late, an allotment made before the money was reported, a share transfer priced without the valuation the Rules require. The conduct is a breach of a regulatory obligation, not a fraud, and it is usually admitted. Running each one through a full adjudication under section 16 would occupy the Adjudicating Authorities for years and produce nothing that a payment could not produce faster.

Compounding is therefore the ordinary route and adjudication is the exception. In practice a person who discovers a breach approaches the Reserve Bank, regularises the transaction, applies to compound, pays the sum fixed and receives a certificate. That is what a FEMA breach usually looks like, and a student who describes only section 13 and section 16 has described the machinery that is rarely used.

And it is why FEMA breaches are described as curable. This is not merely administrative convenience; it is the feature on which the Supreme Court rested a significant conclusion of private international law.

Facts. In Vijay Karia v. Prysmian Cavi e Sistemi SRL, (2020) 11 SCC 1, an Italian cable manufacturer and its Indian joint venture partners fell out, and the London Court of International Arbitration made awards directing the Indian shareholders to sell their shares to the foreign party at a discount to fair market value. Enforcement of the foreign award was resisted in India under section 48 of the Arbitration and Conciliation Act 1996, on the ground that a sale of shares to a non-resident at a discounted price offends the pricing norms of the exchange control law and is therefore contrary to the public policy of India.

Held. Enforcement was allowed. A contravention of FEMA is not a breach of the fundamental policy of Indian law, because FEMA, unlike FERA, treats a violation as remediable and compoundable: permission can be sought, the transaction can be regularised, and the Reserve Bank can condone. A rectifiable breach of the exchange control regime cannot render a foreign award unenforceable on public policy grounds.