The Reserve Bank of India (‘RBI’) has, by way of Circulars dated April 22, 2025 (‘April 22 Circular’) and April 24, 2025 (‘April 24 Circular’), amended the Directions on Compounding of Contraventions (‘Compounding Directions’) under the Foreign Exchange Management Act, 1999 (‘FEMA’) and issued new Master Directions on Compounding of Contraventions on April 22, 2025 (modified on April 24, 2025). Key changes include:

i.    April 22 Circular:

(a) Paragraph 5.4.II.v of the Compounding Directions has been deleted, which provided that, if an applicant did not pay the compounding amount and reapplied to RBI for compounding of contravention relating to the same transaction, then the compounding amount may be increased by 50% of the earlier amount, subject to an overall cap of 300% of the sum involved in the contravention. This deletion has now detached each compounding application from any previous compounding applications relating to the same transaction;

(b) RBI has also clarified that the new compounding application, even though it might relate to the same contravention, will be considered as a fresh application and the compounding amount payable under the previous Order will not be linked; and

(c) Further, for payment of the compounding fee through electronic means, an applicant must send an e-mail intimation to the RBI within two hours of payment. For RBI to trace payments in a timely manner, applicants are now required to include additional details in the intimation, such as the applicant’s mobile number, concerned RBI office, and application submission mode (PRAVAAH/ physical).

ii.   April 24 Circular:

While the Compounding Directions contained a 300% cap on the compounding amount linked to the sum involved in a contravention, the RBI has now introduced a more liberalised regime through a new Paragraph 5.4.II.vi. RBI will now have the discretion to cap the compounding amount to INR 200,000 (approx. USD 2,400) per contravention, where an application relates to non-reporting contraventions. Previously, the compounding amount for such contraventions comprised of fixed and variable elements without any cap: (i) INR 50,000 (approx. USD 600); and (ii) a sum amounting to 0.5% to 0.75% of the contravention amount (depending on the duration of contravention). In exercising its discretion, however, RBI should satisfy itself of the merits, based on the nature of contravention, exceptional circumstances or facts involved, or otherwise in wider public interest.