Compounding Procedures for Form FC-GPR Violations under FEMA

Compounding Procedures for Form FC-GPR Violations under FEMA. Businesses often run into legal issues not out of intentional wrongdoing, but mere oversight in compliance. The Foreign Exchange Management Act mandates that a business furnish details of foreign investment to authorities in India, such as the RBI. Amidst the mayhem of share allotment to foreign investors, a business may fail to file Form FC-GPR in time, inevitably leading to a notice commencing legal proceedings. In this post, Compliance Calendar highlights the basics of compounding procedures, the necessary steps for availing it and the advantages offered by availing compounding for Form FC-GPR violations under FEMA.
Form FC-GPR - A legal requisite after availing investment in shares from foreign sources
The Foreign Exchange Management Act is a regulatory law in India that oversees the foreign funding to and from India, and includes individuals as well as businesses in its ambit. The Schedule 1 of FEMA delineates conditions for the receipt of foreign investment by companies in India. The Form FC-GPR, which stands for Foreign Currency Gross Provisional Return is to be filed by all entities that allot shares (including equity, convertible preference shares and convertible debentures) to foreign investors.
Eligibility to issue shares to foreign investors:

An Indian company may issue its rupee-denominated shares to a person resident outside India being a depository for the purpose of issuing Global Depository Receipts or American Depository Receipts.

Businesses operating in certain restricted sectors may require prior approval of the Secretariat for Industrial Assistance or, as the case may be, of the Foreign Investment Promotion Board of the Government of India.

A trading company incorporated in India may issue shares or convertible debentures to the extent of 51 per cent of its capital, to persons resident outside India.

A company which is a small scale industrial unit, may issue shares or convertible debentures to foreign investors to the extent of 24% of its paid-up capital.

Entities located in Export Processing Zone, Software Technology Park, Electronic Hardware Technology Park may offer shares in excess of 24% of paid up capital, subject to ceiling limits provided in Annexure B to the Schedule 1 of the FEMA.

The basic requisites to be fulfilled for filing the Form FC-GPR are as follows:

The company should file the Form FC-GPR to the RBI within 30 days from the date of issue of securities.

The compliance has to be done using the Single Master Form of RBI at the FIRMS portal.

Here, investment details such as entry route (Government or Automatic), sectoral FDI cap applicable, date and nature of issue of shares, details of foreign investors and their shareholding pattern have to be furnished.

The issue price of the shares offered to foreign investors should not be less than price determined as per SEBI guidelines for a listed company, or fair valuation of shares done by a chartered accountant.

Securities must be allotted within 60 days of the date of receipt of application The Return of Allotment in Form PAS-3 must be filed within 30 days from the date of allotment.

Documents Required for filing Form FC-GPR
In order to avoid any delay in filing the form, a business must keep the following documents ready:

Copy of FIRC (Foreign Inward Remittance Certificate).
Copy of KYC (Know Your Customer) report of the remitter.
Declaration by authorized representative of the Indian Company as per format provided in SMF- user manual.
CS Certificate as per format given in the RBI user manual stating that all requirements have been complied with.
Valuation Report by Chartered Accountant/Merchant Banker indicating the manner of arriving at the price of the capital instruments issued to the person resident outside India.
Copy of FIPB approval (if required)
Board Resolution for the allotment of securities along with the List of Allottes.
Letter of Debit Authorization
Declaration for conversion of CCPS
Pricing guidelines declaration
Reason for any delay in submission, if required

Penalty for non-compliance or non furnishing of Form FC-GPR
In case of delay beyond the prescribed time period shall be liable to penalty of 1% of the total amount of investment subject minimum of Rs. 5,000 and Maximum of Rs/. 5,00,000 per month or part for 1st six months of delay and twice that rate thereafter, to be paid online into a designated account in RBI.
Why should you consider compounding under FEMA?
Compounding under the Foreign Exchange Management Act (FEMA) refers to a process by which an individual or entity can voluntarily admit to a contravention of FEMA provisions and seek to settle the matter by paying a reduced penalty.
 
Compounding is available for certain contraventions of FEMA provisions, such as non-compliance with foreign exchange regulations, violation of limits on foreign investment, failure to repatriate foreign exchange, or other offenses related to non-reporting of mandatory transactions. It allows for the resolution of non-compliance cases without undergoing legal process, which can be expensive, lengthy and may also negatively impact your business.
Some of the key advantages of opting for compounding are:

The resolution is voluntary: Compounding provides an opportunity for a business availing foreign funding, to voluntarily admit to their contravention before the and seek resolution without undergoing lengthy legal proceedings. It allows them to take proactive measures to rectify the non-compliance and avoid potential legal consequences.

Minimises transaction and litigation costs: By opting for compounding, individuals or entities can avoid the costs, time, and complexities associated with legal proceedings. Compounding enables them to settle the matter by paying a monetary penalty, thereby resolving the contravention without going through the courts.

Reduces applicable penalty: The penal process under FEMA Rules allows for the imposition of a monetary penalty (which can go upto INR 5 lacs per month). However with compounding procedures and the formulae applicable to each case, this penalty can be significantly minimized.

Confidentiality: Compounding proceedings are generally treated as confidential. This means that the details of the contravention, settlement terms, and penalty amount are not made public and hence protects the reputation and privacy of the company involved in the contravention.

Quicker Resolution: Compounding procedure by the RBI is completed within a maximum period of 180 days. Hence, this resolution compared to legal proceedings is faster.

Regulatory Compliance: Compounding provides an opportunity for individuals or entities to demonstrate their commitment to regulatory compliance to the RBI. By voluntarily admitting to the contravention and seeking resolution, it shows willingness to rectify genuine oversight and adhere to the provisions of FEMA, thereby fostering a positive relationship with the regulatory authorities.

Compounding Authority under FEMA
The Reserve Bank of India (RBI) is the designated authority responsible for compounding offenses under FEMA. An Officer of the RBI under Rule 4 of the Compounding Rules has the power to accept a compounding application and impose a monetary penalty without initiating legal proceedings.
Compounding offense of delay in Filing Form FC-GPR
The delay in filing Form FC-GPR can be compounded by the Regional Offices of the RBI. The Regulation 13.1(2) of the FEMA Regulations specifies the offense involved in delayed filing/non-filing of the Form FC-GPR.
The process of compounding involves the following steps: When should one apply for compounding?
Ideally, as soon as one becomes aware of the contravention, whether from a statutory/official source or otherwise. The FEMA provisions allow a person to make an application for compounding suo-moto, or upon receipt of official communication in this regard.
 
Filing of compounding application: A compounding application needs to be prepared and submitted to the Regional Office of the RBI, which has jurisdiction over the case. The application should include details of the contravention, the amount involved, and any other relevant information.
 
Application fee: Applications for contravention must be accompanied by a fee of INR 5000 (subject to change) by way of a Demand Draft, drawn in favour of the RBI and payable at the concerned regional office.
 
Compounding Application Format details: As per the format for compounding application prescribed in Annexure II of the Foreign Exchange (Compounding Proceedings) Rules, 2000, the following details are required to be submitted:

Date of incorporation

Income-tax PAN

Nature of activities undertaken

Brief particulars about the foreign investor

Details of foreign inward remittances received by Applicant Company from date of incorporation till date

Date of reporting to RBI and delay

Details of investors, date of allotment, number of shared allotted

Authorized capital details

Copies of FIRC with date stamp receipt at RBI

Copies of FC-GPR with date stamp of receipt at RBI

Table C – letter seeking refund/ allotment of shares- approval letter from RBI A2 form

Copies of Balance Sheet during the period of receipt of share application money and allotment of shares

Nature of contravention and reasons for the contravention

Copy of Memorandum of Association

Latest Audited Balance Sheet along with an undertaking as per Annex III that they are not under any enquiry/ investigation/ adjudication by any agency like Directorate of Enforcement, CBI as on the date of application.

Scrutiny and processing: The Compounding authority scrutinizes the compounding application and may seek additional information or documents, if required. In case these are not submitted within reasonable time, the application may be rejected. It's important to note that not all contraventions are eligible for compounding, and the RBI has the discretion to reject a compounding application if it considers the contravention to be of a serious nature or if the applicant has a history of non-compliance.
 
Personal Hearing: A question we often get asked by our clients at Compliance Calendar is whether they need to be present at the hearing. While RBI encourages the applicant to appear, it is not a mandatory requirement. Any other person conversant with the case may be authorized to attend the personal hearing on his/her behalf.
It helps the applicant to be respectful to the authority, plead ignorance and admit the honest oversight in committing the contravention.
Determination of the amount payable on compounding

The FEMA Rules provide for a basis of calculation of the amount payable on compounding the offense. This is only a basic guideline, and based on facts of the case and the circumstances shown on record, authorities are free to revise this amount.

The amount payable includes a fixed amount of INR 10000/- (applied once for each contravention in a compounding application).

Additionally, a variable amount is payable as under:

Upto 10 lakhs: 1000 per year

10-40 lakhs: 2500 per year

40-100 lakhs: 7000 per year

1-10 crore : 50000 per year

10 -100 Crore : 100000 per year

Above 100 Crore : 200000 per year

This is also subject to a general qualifier that the amount determined cannot exceed the 300% (or three times) of the amount of contravention. Moreover, in case the amount of contravention is less than INR 1 lac, the total amount imposed should not be more than the amount of simple interest @5% p.a. calculated on the amount of contravention and for the period of the contravention in case of reporting contraventions.

Settlement procedure: Once the application is accepted and hearing begins, it may take upto five months for the final disposal. If RBI’s Compounding Authorities find the compounding application acceptable, it may decide to compound the contravention.
Factors considered by the adjudicating authority in compounding offense
The Adjudicating Authority considers a multiplicity of factors before finalizing a case for compounding. This involves weighing the following parameters:

The quantum and the amount of gain of unfair advantage, wherever quantifiable, made as a result of the contravention.

The amount of loss caused to any authority/ agency/ exchequer as a result of the contravention.

The economic benefits accruing to the contravener from delayed compliance or compliance avoided.

The repetitive nature of the contravention, the track record and/or history of non-compliance of the contravener.

The contravener’s conduct in undertaking the transaction and in disclosure of full facts in the application and submissions made during the personal hearing; and any other factor as considered relevant and appropriate.

Final stage of the case: Once the penalty is paid, the case is considered closed, and no further legal proceedings will be initiated against the applicant for that particular contravention.
Prerequisites to know before undertaking compounding

If a compounding procedure has been completed, a similar contravention cannot be compounded for a period of three years.

If the amount mentioned in the Compounding Order is not paid within 15 days from the date of the compounding order, it is deemed that the applicant has opted out of the compounding process.

The decision to opt for compounding should be made after carefully considering the merits of the case. Connect with our legal experts at Compliance Calendar, who can help your business in assessing the potential benefits and implications of choosing compounding as a resolution mechanism for FEMA contraventions.
Frequently asked questions
What is the average time taken for compounding the offense under FEMA?
The Compounding Authority shall pass an order of compounding by giving an opportunity to the applicant to be heard, within 180 days of the date of application.
What happens if my application is rejected for compounding?
In cases of incomplete application, or where requisite details, approvals are not submitted or are incorrect , the application fee of ?5000 is returned by crediting the same to the applicant’s account via NEFT. A fresh application should be drafted with the correct particulars.
How would I know whether the compounding procedure is complete?
After the amount of compounding payable has been paid within 15 days from the date of compounding order, a certificate in this regard is issued by the RBI. A copy of the compounding order is also served on the Adjudicating Authority as well as the applicant. No prosecution can be initiated against the applicant after the certification is received.
Can I appeal the order of the compounding authority?
No, the nature of the orders of compounding authority is treated differently from regular appealable orders, since the former is based on voluntary admission of the offense. Neither the amount, nor the order can be appealed in any fora.

Compounding Procedures for Form FC-GPR Violations under FEMA

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