Representation on Compounding Amounts

Respected Sir,

Representation on Compounding Amounts
 
We, the above mentioned professional Institutions submit following joint representation for your kind consideration and necessary action. Kindly grant an interview where we can have a dialogue to understand and explain the views of both sides.

Let us submit in the beginning that we have the highest regards for RBI as one of the finest institutions in India, an institution which has saved Indian economy from the Asian & the Global crises in 1997 & 2008-09; and granted a stability to Indian economy. Rest of the world is still craving for stability.

Present grievance is about Compounding Process which we believe, is an aberration and something that can be sorted out by mutual discussions.

Executive summary

    Grievance :

    Compounding Authority of RBI is charging high amounts — millions of rupees as ‘Compounding Sum’ for procedural & technical violations of FEMA (Paragraph 4 on pages 4 & 5). Focus of our present representation is on high amounts  charged for compounding. Everything else is in support of this one submission.

    In this representation we are focusing on innocent procedural mistakes on the part of investors etc. We are not representing people who violate the law deliberately for financial gains.

    We have submitted 1 to 10 issues (ten paragraphs) and given (a) to (d) — four illustrations in the detailed submissions.

    Reliefs requested :

    We make humble requests for the removal of anomalies in the Compounding Process. Reliefs are explained in details in the relevant paragraphs after explaining the grievance. The same are stated below in brief.

    Transitional reliefs :

        1. Please give an amnesty for all procedural and ignorant violations of FEMA occurred so far (till the date of RBI announcement) provided the concerned people file necessary forms by 31st March, 2010.

        2. Please give wide publicity to the provisions of FEMA and the need for compliance. Bank officers and professionals also need to understand the provisions in the same manner as RBI requires. We are prepared to hold joint conferences in different parts of India; write articles in our journals and inform profession as well as the investors. Even Indian embassies abroad can be intimated about procedures for NRI and Foreign investments.

    Long term requests :

    3. Compounding process is a process of mercy where the applicant comes to RBI with folded hands and confesses his mistakes. This may be treated on compassionate grounds rather than in a strict legal manner as in the case of penalties. The applicants may be given an opportunity to rectify their mistakes. (Paragraphs 4, 5 and 6 on pages 4 to 6)

    For procedural violations, Compounding Sum may not be more than Rs.2,00,000.

    4. Procedure for Post Facto Approvals and Condonation without penalties may be reintroduced in appropriate cases. (Paragraph 3 on page 3.)

    5. Compounding sums may please be levied commensurate to the gravity of the offence and not to the amount of investment. (Paragraph 4 on pages 4 and 5.)

    6. Please provide relief by removing anomalies in the Compounding Procedures. (Paragraphs 5 to 8, pages 5 to 7.)

    7. No action may please be taken by RBI, five years after a procedural violation occurred. Reasonable time limit should be provided for penal action. (Paragraph 9 on page 7.)

    8. We humbly submit that proper Appellate and Review/Rectification Process should be provided for Compounding matters. Until an Appellate/review procedure is provided, Compounding Amounts should be restrained. (Paragraph 10 on page 7.)

    Summary completed

    1. Compounding amounts :

        Compounding process was introduced to provide

        people a chance to regularise their FEMA violations by payment of token penalty. In the beginning, the process was found to be satisfactorily working. However for the past two years, the Compounding Authority under Foreign Exchange Department has been imposing very high ‘Compounding Sums’ even in cases of procedural violations which cannot be called ‘wilful, malafide or fraudulent’.

    2. Penalty when justified :

If a law exists on the statute books, primarily it has to be complied with. Hence, we do acknowledge that penalty and deterrent action are necessary where non-compliance with law can have serious consequences. However, some part of the law is procedural. In such cases, stiff penalties for procedural lapses may be out of place.

3.  Purpose of compounding:

Harsh penalties are meant only when the person continues offences after being put on notice. At RBI, a business transaction is considered as a series of transactions. Hence RBI can say that first two steps in the series are ignored and for the third onwards, Compounding Sum is charged.

For illustration, an NRI has given a rupee loan to his resident brother in India. The loan is for five years. This is a violation of FEMA provisions. Both the brothers are ignorant of FEMA provisions. Loan amounts are given as and when funds are required and repaid as and when funds are not required. RBI considers this as several offences. However, for the parties concerned, this is only one violation of one brother giving a loan to another brother. This may be treated as one violation and compounding process may be taken up accordingly. Ideally, such transactions should not be punished. Mere warning to avoid repetition in future would be adequate.

For the past several decades, and even under the strict FERA, RBI has, in appropriate cases, granted Post Facto Approvals and Condonations. Now, under FEMA, it seems, RBI has taken a view that it cannot condone any violation and it cannot give any post facto approval. This is directly contrary to the trend of liberalisation so strongly followed by RBI and Finance Ministry.

We submit that this position may be reviewed. this penalty to recover ‘unjust profits’ that the in-Let RBI lay down the policy. Wherever RBI considers it appropriate, the condonation and post facto approval policy should be reintroduced.

4. Amount    of penalty    and  investment:

A penalty has to be primarily commensurate with the type and intensity of the offence concerned; not with the amount involved. In the case of Compounding, this principle is even more relevant. Compounding Authority’s linking of Compounding Amounts with investment amounts is unjustified. Further, the Authority presumes likely profits earned by violation, ignores the fact that no profits have been earned; and then imposes high Compounding Amounts.

Illustration of one Compounding Order: In one case, an OCB invested in India rupees 8.5 crores (approximately) with the prior approval of FIPB. The aCB wanted to set up a power plant in Chhatisgarh. There was a condition of local participation up to 40%. For four years they ran from pillar to post for several Government permissions. Neither they got Government permission nor could they find a local investor. Ultimately, they were frustrated and gave up the project. Hence they transferred the funds to a sister company where the aCB already had some investments. The Company delayed in filing intimation. The Company could not allot shares to aCB as it could not locate a local investor which was a pre-condition of FIPB approval. In the meanwhile, RBI issued Circular No. 20 dated 14-12-2007 prohibiting allotment of shares beyond 180 days of receipt of funds.

For these offences, RBI imposed a Compounding sum of more than Rs.3 crores ! Company admits the violations of non-intimation, non-filing of forms; and step down investment. Still, such a stiff penalty for all procedural violations where there is no foreign exchange loss and nothing illegal or immoral! ! !

Although Indian Investing Company earns a meager sum of Rs. Five lakhs at the time of liquidation of downstream investments, RBI presumed ‘opportunity cost of funding’ that it ‘saved’ by violation of the law and imposed this penalty to recover ‘unjust profits’ that the investor had made! ! !

The applicant believed that if he did not pay up the Compounding Amount, the file would go to Enforcement Directorate. Purely out of fear, the Indian Company paid up full amount.

This is a serious case of injustice. (i) For such technical violations, imposing a penalty of Rs.3 crores is injustice. (ii) When a party voluntarily submits full information and confesses his mistakes; this confession cannot be given to En-forcement Directorate. If RBI considers appropriate, it can always intimate ED that the person has not filed FC – GPR form and made a step down investment without permission (or whatever may be the violation). Then leave it to ED to take its own course. (c) Another illustration: An NRI has invested funds in India. He divides the investment into equity and non-convertible debentures. Party is unaware that in India, under FEMA, non-convertible debentures are not permitted.

Applicant has admitted that there is an unintended violation of FEMA provisions. RBI calculates some gains made by the Company and charges a Compounding Sum in millions of rupees based on the imagined gains. Our submission is, it is the investor’s own funds and own company. Where is the question of his making any gains from himself! Such calculations are contrary to natural justice. Ideally, RBI should give an opportunity to the Indian Company and the investor to change the debentures into compulsorily convertible debentures. If the parties comply with the law, serve a notice and leave them; or levy a token penalty.

5. Purpose  of the Forms-important statistics:

Many cases where Compounding Amounts have . been charged pertain to non-filing of form FC – GPR by the investors. We understand that these forms give investment data based on which RBI formulates its policies. If the forms are not filed in time, the policy decisions are affected.

We agree with the importance of filing of all necessary forms. However, under the current circumstances, (with our Foreign exchange reserves being more than $ 280 billions) RBI may decide an amount which really does not matter. For example, an investment of $ 1,00,000 by an NRI under automatic route. Does it really affect RBI policy matters! If not; a violation of this kind may either be pardoned totally or the Compounding Amount may be restricted to an upper limit of Rs.2,00,000 (or such other limit as may be considered appropriate by RBI).

These are illustrations. We submit that in all cases of inconsequential procedural violations or apparent ignorance of law that do not affect the flow or intended direction of foreign exchange, the parties should be given an opportunity to rectify their mistakes. Compounding process is primarily to set the matter right; to deter future violations and not to punish the investors.

6. International ways  of investment:

When an authority assumes power to impose penalties, it may be aware of the manner of international investments. Following summary of an order by Compounding Authority shows that the authority ignored the manner of international investment activity. Order dated 6th January, 2009.

d) Summary  of illustration:   “An NRI couple husband and wife promoted a company in India and personally became the shareholders. They also floated a wholly owned company in Mauritius. The Indian company decided to take an ECB. It is permitted on ‘automatic basis’ from the shareholder. However, instead of taking loan from the individual shareholders, the Indian company took the ECB of USD 2.3 millions from the Mauritian company which was owned by the same individuals.”

“This is a perfectly normal behaviour in the international investment market. For the NRIs, investment in personal name or through their own offshore company is the same. Still, RBI objected to it on technical ground that the Mauritius Company is not the shareholder/ collaborator. Parties concerned apologised and assigned the ECB from Mauritian company to the shareholders. (Facts are summarised here. Full details can be given if required.) Compounding Authority did not accept the apology, ignored the substance of the investment and imposed a Compounding Sum of Rs.45 lakhs.”
 
This amounts to ignoring the substance of the matter and imposing punishment on technical grounds for an offence which does no harm to anyone. It is RBI’s prerogative to insist that the shareholder should be exactly the same and not substantially the same. However, if a legitimate party is prepared to amend the situation, what purpose is served by imposing high Compounding Sums and refusing the party any amendments ! We repeat our submission that the investors should be given opportunity to rectify their procedural mistakes.

7. Compounding Orders should close the issue:

At present, when a compounding order is passed, the matter is not automatically resolved. For example, a Company had not filed FC-GPR form in time. For the compounding application, the Company would have submitted all the details. Assume that RBI compounds the offence for a sum and the party pays the sum. Does it mean that the investment is taken on record and the Company does not have to file any further form! The party still has to go to the relevant office of RBI and seek permission.

We humbly request that the Compounding order itself should further state that the forms are taken on record and the concerned party can continue its business normally; or as directed by RBI in its order. Let there be one complete order instead of making the party go from one office to another and waiting for final clearances.

8. Time  limit for payment:

When a Compounding Sum of Rs.3 crores is charged and the party is expected to pay the same in 15 days, it is harsh. Probably, the law provided for 15 days time considering that the Compounding Sum will be token amounts.

We submit that where a Compounding sum of more than Rs.2,00, 000 is charged, reasonable time should be allowed to the party. Necessary amendments in rules and law may be moved.

9. Time limit for commencing penal procedure:

Almost all regulatory laws provide for a time limit beyond which, penal procedures cannot be commenced. Once the limit is crossed, past violations cannot be called up for scrutiny and cannot be penalised. No time limit was provided under FERA. However, under FEMA, under the current circumstances, it would be fair to provide definite time limit. Beyond the time limit, a person who has committed FEMA violations may not be called up for explanations.

We submit that a time limit of five years should be provided for procedural violations under FEMA. RBI may please consider an appropriate time limit and announce the same.

10. Rectification and  appellate procedures:

Compounding Authority is a semi-judicial authority. It may function according to the principles of natural justice. It is an accepted judicial principle that – ‘anyone can make errors’. If a Compounding order is erroneous, it needs revision or rectification. No such procedure is provided so far.

It is probable that while one authority may take one view, another authority may have another view. For penal decisions, appellate procedures are a necessity of democratic justice. Internal review of RBI actions without an opportunity for hearing to the aggrieved party is not a transparent process of justice.

With the best of our efforts, so far, we have not been able to convince the Compounding Authority that (i) charging millions; and (ii) linking penalty with the amount of investment under Compounding Procedures – is injustice. Probably, only an Appellate Authority can provide justice.

We humbly submit that proper appellate as well as rectification procedures should be provided. However, if it is decided that the Compounding Amounts may be less than Rs.2,00,000 for all procedural and ignorant violations; then no appellate procedures are necessary. Though, even then, rectification opportunities may be provided for.

In conclusion we very humbly submit that Compounding Process may be more just and fair; less harsh on innocent violations. Appellate and Rectification procedures may please be provided.

For the past violations of procedural nature, an Amnesty may be granted if the concerned persons file necessary forms within the prescribed time.

We understand that some liberalisations may not be within the jurisdiction of RBI to make. Whatever can be done and is acceptable to RBI may be liberalised at an early date. For the rest, procedures may be started to request appropriate authorities to amend the law.
 
We humbly reuest  you  to kidly  grant  us an appointment for discussion.

Wit best regards,

For Bombay Chartered Accountants’ Society
Mr. Ameet Patel | President

For The Chamber of Tax Consultants
Mr. K. Gopal | President