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Compounding under FEMA refers to the voluntary process where an individual or entity admits to a breach (contravention) of the provisions of the Foreign Exchange Management Act, 1999, and seeks to resolve it by paying a prescribed sum, thereby avoiding lengthy legal proceedings or harsher penalties.
To apply for compounding of contraventions under FEMA, the following documents are generally required:
1. Application form mentioning the Rule/Regulation/Notification of the contravention and brief facts of the case
2. A detailed report explaining the nature of the contravention, facts, and circumstances.
3. Copies of relevant transaction documents evidencing the breach
4. Certified copies of financial statements or audits during the contravention period
5. Declaration confirming the details provided and ECS mandate
6. Details of Online payment of the compounding fee- Rs 11,800 to the jurisdictional RBI.
7. Undertaking for NIL enquiry from Directorate of enforcement
8. Cancelled cheque
9. Memorandum of Association
The application for compounding is to be made online through the PRAVAAH portal (RBI’s Platform for Regulatory Application, Validation and Authorization) by creating a login ID for the authorised person. Login ID is the mobile number of the authorised person and password is the OTP sent on the mobile number. The application status can be tracked also through this portal. Queries and additional information are also sought through this portal and email communication.

Guidance Note on penalty computation Matrix

Type of contravention Formula
1] Reporting/ submission Contraventions under provisions of

  1. FEMA 20/ FEMA 20(R)/ FEMA 395
  2. FEMA 3/ FEMA 3(R)
  3. FEMA 120/ FEMA 400
  4. Any other reporting contraventions (except those in Row 2 below and of LO/BO/PO)
 Fixed amount: INR 10,000/- (applied once for each regulation/ rule contravened, in a compounding application) plus

Variable amount:

Amount under Contravention (in INR) Compounding amount that may be imposed (in INR)
Less than 10 lakh 1,000 per Year
10 lakhs or more and below 40 lakhs 2,500 per year
40 lakhs or more and below 100 lakhs 7,000 per year
1 crore or more and below 10 crore 50,000 per year
10 crore or more and below 100 Crore 100,000 per year
100 crores and above 200,000 per year
v. Reporting contraventions by Liaison office/Branch office/project office As above, subject to ceiling of INR 2 lakhs. In case of Project Office, the amount imposed shall be calculated on 10% of total project cost.
2] Submission of AAC/ APR/ FLAR/ Share certificate

Non-submission/ delayed submission of

  1. APR/ share certificates (FEMA 120/ FEMA 400) or
  2. AAC (FEMA 22/ FEMA 22(R)) or
  3. FCGPR (B) or FLA Returns – FEMA 20 / FEMA 20 (R) / FEMA 120/ FEMA 395/ FEMA 400
 INR 10,000 per AAC/ APR/ FCGPR (B) / FLA Return delayed.

Delayed/Non receipt of share certificate – INR.10000/- per year, the total amount being subject to ceiling of 300% of the amount invested.
3]
A] Allotment/ Refunds

Non-allotment of shares or allotment/ refund after the stipulated period for Foreign InvestmentB] Contraventions

(Other than the reporting contraventions mentioned in Para 1(v) above) by LO/ BO/ PO

 Fixed Amount: INR 30,000/- (applied once for each regulation/ rule contravened, in a compounding application) plus

Variable amount:

Period of delay/ non submission, as applicable Variable amount that may be imposed as percentage of “amount under contravention”
Less than 1 year 0.30%
1 year and above but less than 2 years 0.35%
2 years and above but less than 3 years 0.40%
3 years and above but less than 4 years 0.45%
4 years and above but less than 5 years 0.50%
5 years or more 0.75%
(For project offices the amount of contravention shall be deemed to be 10% of the cost of project).
4] Any contravention pertaining to issuance of any guarantee (other than reporting contraventions) Fixed Amount: INR 5,00,000/- (applied once for each regulation/ rule contravened, in a compounding application) plus

Variable amount:

Duration of contravention Variable amount that may be imposed as percentage of “amount under contravention”
Less than 1 year 0.050%
1 year and above but less than 2 years 0.055%
2 years and above but less than 3 years 0.060%
3 years and above but less than 4 years 0.065%
4 years and above but less than 5 years 0.070%
5 years or more 0.075%
In case the contravention includes issue of guarantees for raising loans which are invested back into India, the amount imposed may be trebled.
5] All other non-reporting contraventions Fixed Amount: INR 50,000/- (applied once for each regulation/ rule contravened, in a compounding application) plus

Variable amount:

Duration of contravention Variable amount that may be imposed as percentage of “amount under contravention”
Less than 1 year 0.50%
1 year and above but less than 2 years 0.55%
2 years and above but less than 3 years 0.60%
3 years and above but less than 4 years 0.65%
4 years and above but less than 5 years 0.70%
5 years or more 0.75%

As per RBI/FED/24-25/78 A.P. (DIR Series) Circular No. 17/2024-25 dated 1 st October 2024 and Section 13 of FEMA, the penalty that can be levied is thrice the amount involved in case of adjudication and the amount is quantifiable.

According to the latest Master Direction No. 04/2025-26 (circular no. RBI/FED/2025- 26/135), the RBI has capped the penalty amount for FEMA violations at ₹2 lakh. for contraventions categorized under ‘All other non-reporting contraventions’ in the revised computation matrix.

In case the sum involved in contravention is less than Rupees one lakh, the total compounding amount payable shall not be more than amount of simple interest @5% p.a. calculated on the sum involved in contravention and for the period of contravention in case of reporting contraventions and @10% p.a. in respect of all other contraventions.

In case of paragraph 8 of Schedule I to FEMA 20/2000 RB contraventions, the compounding amount payable will be further graded as under:
a. If the shares are allotted after 180 days without the prior approval of Reserve Bank, 1.25 times the amount calculated as per table above (subject to provisos at (i) & (ii) above).
b. If the shares are not allotted and the amount is refunded after 180 days with the Bank’s permission: 1.50 times the amount calculated as per table above (subject to provisos at (i) & (ii) above).
c. If the shares are not allotted and the amount is refunded after 180 days without the Bank’s permission: 1.75 times the amount calculated as per table above (subject to provisos at (i) & (ii) above).
Non-Compoundable offences:
1. Where amount is not quantifiable
2. Cases relating to seizure and detention of foreign exchange or property
3. Money laundering cases
Timeline
Master Circular on Compounding of Contraventions under FEMA (dated October 29, 2025) provides the timeline to conclude the compounding proceedings and issue an order within 180 days from the date of receipt of a complete compounding application.
Compounding enables a company to regularize and close past non-compliances under FEMA by voluntarily admitting the contravention and paying the prescribed compounding amount. Although there is no provision to appeal or request reduction of the amount imposed by the compounding authority, once the order is passed and penalty paid, company is absolved from ongoing liability or prosecution related to
that specific non-compliance.

Akansha Rathi and Associates (ARACS), Company Secretary Firm in Navi Mumbai is engaged into compliance related services. We have a team of experts who not only possess required skills and experience but also have worked in complex business environment and were engaged in providing complex solutions in terms of providing related Compliance services to our clients

 

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