A Comprehensive Guide To RBI’s Master Directions On Compounding (2025)

The RBI has given new Master Directions on Compounding of Contraventions under FEMA, 1999. The Master Directions issued on April 22, 2025, and revised as of April 24, 2025, replace the erstwhile Master Direction dated May 24, 2022.^[1] They brings together the existing instructions and integrates the design provided by the Foreign Exchange (Compounding Proceedings) Rules, 2024, notified by the Government of India on September 12, 2024. The primary aim of the Master Directions is to provide thorough guidelines regarding the compounding contraventions’ process as understood under FEMA, 1999.

Important Provisions

Scope and Applicability

A “contravention” under FEMA, 1999, as it is defined under Section 13 of the Act, would mean any breach of the provisions of the Act or of any rule, regulation, notification, direction, or order made in the exercise of the powers under FEMA. It is noteworthy that contraventions under Section 3(a) of FEMA, 1999, relating to dealing in or remittance of foreign exchange without general or special permission are specifically kept out of the ambit of compounding by the Reserve Bank of India.

The RBI is empowered to compound contraventions on the basis of applications made by individuals or entities who have committed such contraventions. In this regard, Authorised Dealer (“AD”) Category – I Banks and Authorised Banks are required to put in place and maintain effective internal systems and controls with regard to foreign exchange transactions.

These steps are important to achieve compliance with FEMA, 1999, and thus reduce the incidence of contraventions arising due to their activities. Moreover, it is emphasized again that Section 11(3) of FEMA, 1999, authorises the RBI to impose penalties upon authorised persons for contravening any directions issued by the RBI under the Act or for default in filing any returns as instructed.

Jurisdiction: Determining the Appropriate RBI Office

RBI Regional Offices handle compounding for specific FEMA regulations related to Foreign Direct Investment (“FDI”), External Commercial Borrowings (“ECB”), Overseas Direct Investment (“ODI”), and Branch Office (“BO”)/Liaison Office (“LO”). The FED, CO Cell (New Delhi) addresses contraventions concerning LO, BO, Project Office (“PO”), Non-Resident Foreign Account (“NRFAD”), and Immovable Property. For foreign investment contraventions, applications go to the Regional Office overseeing the investee company’s registered office. All other contraventions are submitted to CEFA (Mumbai).

The Compounding Process

Applications are submitted physically or via the PRAVAAH Portal, either suo moto or following an RBI Memorandum of Contraventions. Failure to opt for compounding after receiving a Memorandum invokes standard FEMA provisions. A non-refundable fee of ₹10,000/- (plus GST) is payable via demand draft, NEFT, or online modes, with immediate email intimation of payment required. The application follows a prescribed format (Compounding Rules, 2024) and needs contact details, Annexure II (if applicable), MOA (if available), and a DoE undertaking (Annexure III). Incomplete applications, those with pending administrative action, or unpaid fees are returned (fee is non-refundable). Applicants must update any changes in contact details. For rectifiable incomplete applications, the date of receiving complete information is the application date.

Cases Not Eligible for Compounding

Contraventions within three years of a previously compounded similar contravention are ineligible. “Administrative action” (corrective measures to comply with FEMA) must be completed before processing. Serious contraventions (money laundering, terror financing, affecting national sovereignty, failure to pay compounded amount) are referred to the DoE. Rule 9 of the Compounding Rules, 2024, also excludes cases with non-quantifiable amounts, those under Section 37A of FEMA, cases with existing Adjudicating Authority orders, or serious contraventions deemed so by the Directorate of Enforcement (“DoE”). Contraventions of Section 3(a) of FEMA are not compoundable by the RBI. The RBI assesses identified contraventions for compoundability or referral to the DoE.

Determining the Compounding Amount

The determination of the compounding amount takes into account several factors, including any undue gains derived from the contravention, loss caused to any authority, the repetitive nature of the violation, the applicant’s conduct, and other pertinent considerations. The Reserve Bank provides a “Guidance Note on Computation Matrix” which outlines the general basis for calculating this amount. Typically, the computation involves a fixed component combined with a variable component that depends on the amount involved in the contravention and the duration of the non-compliance. It is important to note overarching provisos, such as a maximum compounding amount not exceeding 300% of the contravened sum, and specific considerations for contraventions involving smaller amounts or particular scenarios like delays in share allotment.  

The Compounding Order and Payment

Following due process, which may include a personal or virtual hearing, the Reserve Bank of India will issue a compounding order specifying the contravention and the determined compounding amount. The applicant is required to remit this amount within 15 days from the date of the order through a demand draft or permissible electronic modes. It is crucial to understand that the compounding order issued by the RBI is final and not subject to withdrawal or review.  

Conclusion

A thorough understanding of these updated Master Directions is essential for individuals and entities engaged in foreign exchange transactions to ensure adherence to FEMA regulations. The compounding process aims to provide a mechanism for resolving certain contraventions efficiently, thereby reducing the compliance burden in applicable cases.

^[1] https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12839&Mode=0.