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