Compounding under FEMA is a process to voluntarily regularize contraventions of FEMA provisions by paying a monetary penalty to the Reserve Bank of India (RBI). It is not a criminal proceeding and helps avoid prosecution.

🧾 When Is Compounding Required?

If a company has:

• Received foreign investment (via NRE account) without following FDI norms,
• Failed to file Form FC-GPR within 30 days of share allotment,
• Did not route funds through a proper private placement process,
• Violated pricing, sectoral cap, or reporting requirements,

…then compounding is necessary.

✅ Common Contraventions under FEMA for FDI

1. Late filing of FC-GPR.
2. Non-reporting of inward remittance (Advance Remittance Form – ARF, if applicable).
3. Issue of shares without compliance to pricing guidelines.
4. Receiving investment in a non-permitted sector.
5. Non-compliance with Know Your Customer (KYC) norms.

📄 Compounding Process (Step-by-Step)

Step 1: Identify Contravention

• Confirm the FEMA violation (e.g., delayed FC-GPR, non-compliance with sectoral cap, etc.).

Step 2: Rectify the Contravention

• File the pending forms on FIRMS Portal (e.g., FC-GPR) with appropriate documents.
• Get valuation report, board resolution, KYC, etc.
• Ensure proper share allotment is completed as per law.

Step 3: File Compounding Application to RBI

Format:

• Application addressed to The Compounding Authority, RBI.
• Covering letter from the entity.
• Form detailing:
  • Nature of contravention.
  • Reason for delay/violation.
  • Steps taken to rectify.
  • Documents supporting the corrective action.

Step 4: Pay Fees

• Application fees: ₹5,000 (via DD or NEFT as per RBI instructions).

Step 5: RBI Review and Order

• RBI may ask for clarifications.
• RBI will issue Compounding Order with penalty amount.
• Penalty must be paid within 15 days of receipt of the order.

📌 Documents Required

• FC-GPR copy (filed post-violation).
• FIRC and KYC from AD bank.
• Valuation certificate.
• MOA/AOA of company.
• Board and shareholders’ resolutions.
• Proof of share allotment.
• Bank statements showing remittance.
• Private placement documents (if applicable).
• Reason for delay or violation.

💸 Penalty Amount

• Penalties are discretionary but typically:
  • ₹10,000 – ₹5,00,000 for late FC-GPR filings (based on delay duration).
  • More serious violations (like investment in a prohibited sector) can invite higher penalties.

RBI may also consider:

• Voluntariness of disclosure.
• Nature and gravity of contravention.
• Whether the violation was technical or substantive.

🛡️ Important Tips

• Always voluntarily report before RBI detects the contravention.
• Rectify the procedural lapses before filing the compounding application.
• Engage a professional CA or CS for preparation and filing.
• Maintain a complete record of all documents and correspondence.

Would you like a draft compounding application format or assistance in preparing the covering letter and declaration?