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A DESCRIPTIVE

STUDY ON THE

CONTRAVENTION

AND

ADJUDICATION

UNDER

FEMA
Author: Yashveer Singh Yadav, Semester IX, Hidayatullah National Law University, Raipur.
INTRODUCTION
The Parliament had enacted the Foreign Exchange Management Act, 1999 (FEMA) to
replace the Foreign Exchange Regulation Act, 1973. FEMA came into force on the 1st day of
June, 2000.
Exchange Control in India dates back to 1939 when for the first time it was introduced as a
war measure under the Defense of India Rules. During the World War II September 1939,
there was a shortage of foreign exchange resources. A system of exchange control was first
time introduced through a series of rules under the Defense of India Act, 1939 on temporary
basis.
The foreign crisis persisted for a long time and finally it got enacted in the statute under the
title Foreign Exchange Regulation Act, 1947. This was meant to last for 10 years.
However, 10 years of economic development did not ease the foreign exchange constraint, it
only made things worse. Thus, FERA permanently entered the statue book in 1957.
Subsequently, this Act was replaced by the Foreign Exchange Regulation Act, 1973 (FERA,
1973), which came into force with effect from January 1, 1974. In 1974, FERA was
completely overhauled with all offences being considered as criminal offences with mens rea.
The Enforcement Directorate could arrest any person without even arrest warrant.
In the 1990s, consistent with the general philosophy of economic reforms a sea change
relating to the broad approach to reform in the external sector took place. In 1991 government
of India initiated the policy of economic liberalization. Foreign investments in many sectors
were permitted. This resulted in increased flow of foreign exchange in India and foreign
exchange reserves increased substantially.
In 1997, the Tarapore Committee on Capital Account Convertibility (CAC), constituted by
the Reserve Bank, had indicated the preconditions for Capital Account Convertibility.
The three crucial preconditions were fiscal consolidation, a mandated inflation target and,
strengthening of the financial system. The Tarapore Committee had also recommended
change in the legislative framework governing foreign exchange transactions.

A Bill based on the recommendations of the Task Force, was introduced in the Lok Sabha on
4 August, 98. The Bill was referred to the standing committee on Finance which submitted its
report to the House on 23 December98 with suggestion and modifications. The 12th Lok
Sabha was dissolved before any decision could be taken on the bill. The Bill subsequently
lapsed. The bill was again introduced in the 13th Lok Sabha on 25th Oct99 and was passed
in the winter session of Parliament in 1999. The Presidential Assent was received on 29th
December, 1999. Finally FEMA came into operation on 1st June 2000.
Accordingly, the Foreign Exchange Regulation Act (FERA) was repealed and replaced by the
new Foreign Exchange Management Act (FEMA) with effect from June 2000. The
philosophical approach was shifted from that of conservation of foreign exchange to one of
facilitating trade and payments as well as developing orderly foreign exchange market.
Contravention and Penalties
Chapter IV of the Act containing Sections 13 to 15 deals with contravention and penalties.
Section 13 deals with penalties, Section 14 provides for enforcement of the orders of
Adjudicating Authority and Section 15 deals with compounding of contraventions.
Section 13 provides that if any person contravenes any provision of this Act, or contravenes
any rule, regulation, notification, direction or directions issued under the Act, or contravenes
any condition subject to which an authorization is issued by the Reserve Bank, he shall upon
the upon adjudication be liable for a penalty thrice the sum involved in such contravention
where such amount is quantifiable , or up to two lakh rupees where the amount is not
quantifiable, and where such contravention is a continuing one, further penalty may extend to
five thousand rupees for every day .
In addition to the powers to impose penalty, the Adjudicating Authority, adjudging any
contravention is empowered to confiscate to the Government of India any currency, security
or any other money or property in respect of which the contravention has taken place and
may further direct that the foreign exchange holdings if any, of the persons committing the
contravention shall be brought back either to India or retained outside India, in accordance
with the directions.
The property for the above mentioned includes
a. Deposits in a bank, where the said property is converted into such deposits.
b. Indian currency, where the said property is converted into that currency
c. Any other property which has resulted out of the conversion of that property.

Enforcement of the Orders of Adjudicating Authority


In terms of Section 14 of the Act, if any person fails to make full payment of the penalty
imposed within a period of ninety days from the date on which the notice of payment of such
penalty is served on him, he shall be liable for civil imprisonment. However, no order of
arrest and detention in civil imprisonment should be made unless the Adjudicating Authority
issue show cause notice to defaulter as to why he should not be committed to civil
imprisonment and unless the Adjudicating Authority, for reasons in writing, is satisfied that
the defaulter has transferred, concealed or removed any part of his property or he has refused
to pay the penalty despite the fact he had means to pay the arrears.
The defaulter may be issued by the Adjudicating Authority a warrant of arrest, on its
satisfaction by affidavit or otherwise, that the defaulter is likely to abscond or leave the local
limit of its jurisdiction. A warrant issued by one Adjudicating Authority may also be executed
by any other Adjudicating Authority within whose jurisdiction the defaulter is found, and the
person so arrested shall be brought before the Adjudicating Authority issuing warrant within
24 hours of arrest, excluding however the time taken in journey.
On arrest, if the defaulter pays the amount entered in the warrant as due and the cost of arrest
to the arresting officer, such officer is under obligation to release him at once.
The Act gives an opportunity to make an appeal to Appellate Tribunal within forty five days
from the date on which a copy of the order made by the Adjudicating Authority or the Special
Director (Appeals) is received by the aggrieved person. This period of forty-five days for
filing the appeal may be relaxed by the Appellate Tribunal if it is satisfied that there was
sufficient cause for not filing the appeal in time.
Section 15 empowers the Directorate of Enforcement or Officers of the Directorate of
Enforcement and of the Reserve Bank to compound the offences. This section provides that
contravention under Section 13 may be compounded within 180 days from the date of receipt
of application. Sub-section (2) provides that where the contravention has been compounded,
the accused person is relieved from further proceedings for the contravention.
Foreign Exchange (Compounding Proceedings) Rules, 2000 deals with procedure for
compounding of contravention of the provisions of the Act. Rule 3 defines the Compounding
Authority as to mean the persons authorized by the Central Government under Sub-section
(1) of Section 15 of the Act namely:

(a) an officer of the Enforcement Directorate not below the rank of Deputy Director or
Deputy Legal Advisor (DLA).
(b) an officer of the Reserve Bank of India not below the rank of the Assistant General
Manager.
Powers of Reserve Bank to Compound Contravention
Rule 4 empowers the RBI to compound only quantifiable contravention committed by any
person of the provisions of Section 7 or Section 8 or Section 9, or Third Schedule to the
Foreign Exchange Management (Current Account Transactions) Rules, 2000 in the following
manner:
(a) where the sum involved in such contravention is ten lakhs rupees or below, by the
Assistant General Manager of the Reserve Bank of India;
(b) where the sum involved in such contravention is more than rupees ten lakhs but less than
rupees forty lakhs by the Deputy General Manager of Reserve Bank of India;
(c) where the sum involved in the contravention is rupees forty lakhs or more but less than
rupees one hundred lakhs by the General Manager of Reserve Bank of India; and
(d) the sum involved in such contravention is rupees one hundred lakhs or more, by the Chief
General Manager of the Reserve Bank of India.
Powers of Enforcement Directorate to Compound Contravention
Rule 5 specifies the cases in which only quantifiable contraventions of the provisions of the
Act [other than Section 7 or Section 8 or Section 9 or Third Schedule to the Foreign
Exchange (Current Account Transactions) Rules, 2000] can be compounded by the
Enforcement Directorate. These include:
(a) where the sum involved in such contravention is five lakhs rupees or below, by the
Deputy Director of the Directorate of Enforcement;
(b) where the sum involved in such contravention is more than rupees five lakhs but less than
rupees ten lakhs by the Additional Director of the Directorate of Enforcement;
(c) where the sum involved in the contravention is rupees ten lakhs or more but less than
rupees fifty lakhs by the Special Director of the Directorate of Enforcement;

(d) where the sum involved in the contravention is rupees fifty lakhs or more, but less than
rupees one crore by Special Director with Deputy Legal Advisor of the Directorate of
Enforcement;
(e) where the sum involved in such contravention is one crore rupees or more, by the Director
of Enforcement with Special Director of the Enforcement Directorate.
The benefit of above provisions shall not be available in case a contravention committed by
any person within a period of three years from the date on which a similar contravention
committed by him was compounded under these rules. However, any second or subsequent
contravention committed after the expiry of a period of three years from the date on which
the contravention was previously compounded shall be deemed to be a first contravention.
Where any contravention is compounded before the adjudication of any contravention under
Section 16, no inquiry shall be held for adjudication of such contravention in relation to such
contravention against the person in relation to whom the contravention is so compounded. In
case the compounding of any contravention is made after making of a complaint under Subsection (3) of Section 16, such compounding shall be brought by the authority specified in
Rule 4 or Rule 5 in writing, to the notice of the Adjudicating Authority and on such notice of
the compounding of the contravention being given, the person in relation to whom the
contravention is so compounded shall be discharged.
Payment of Compounded Amount
Rule 9 deals with payment of amount compounded. Where a contravention has been
compounded in terms of Rule 8(2) the sum involved in such contravention shall be deposited
within fifteen days from the date of the order of compounding of such contravention by
demand draft in favour of the Compounding Authority. In case a person fails to pay the sum
compounded within the specified time, he shall be deemed to have never made an application
for compounding of any contravention and the provisions of the Act for contravention shall
apply to him.
However, no contravention shall be compounded if an appeal has been filed with the Special
Director (Appeals) under Section 17 or with Appellate Tribunal under Section 19. Every
order of compounding the contravention shall specify the provisions of the Act or the rules,
directions, requisitions or orders made thereunder in respect of which contravention has taken

place along with details of the alleged contravention and a copy thereof shall be supplied to
the applicant and the Adjudicating Authority as the case may be.

ADJUDICATION AND APPEAL


The Chapter V under the FEMA Act containing Sections 16-35 deal with the adjudication and
appeal.
Appointment of Adjudicating Authority
Section 16 empowers the Central Government to appoint by notification in the Official
Gazette as many Adjudicating Authorities as it may think fit for holding enquiries under
Section 13. The Central Government is, however under obligation to specify the jurisdiction
of the Adjudicating Authority. The Adjudicating Authority has been empowered to hold any
enquiry on a complaint made in writing by an officer authorized by a general or special order
by the Central Government.
In case, a complaint has been made in respect of a person alleged to have committed the
contravention, such person shall be given a reasonable opportunity of being heard before
imposing any penalty under Section 13. The Adjudicating Authority has discretion to demand
from the persons against whom a complaint is made a bond or guarantee for any such amount
as he thinks fit, if he is of the opinion that such persons likely to abscond or evade the
payment of penalty, if imposed.
Appeal to Special Director (Appeals)
Section 17 of the Act provides for appointment of one or more Special Directors (Appeals) to
hear appeals against the orders of the Adjudicating Authorities. In this context, the Central
Government has been empowered to appoint by notification Special Directors (Appeals)
specifying their jurisdiction over matters and places.
An appeal to the Special Director (Appeals) may be made against the orders of the Assistant
Director or Deputy Director of enforcement, acting as Adjudicating Authority. The appeal
against the order of Adjudicating Authority shall be made in the prescribed form along with
requisite fee, within forty five days from the date of the receipt of the order by aggrieved
person. The Special Director (Appeals) has however, been empowered to entertain appeal
after the expiry of the said period of forty five days.

Establishment of Appellate Tribunal


Under Section 18, the Central Government is empowered to establish an Appellate Tribunal,
by a notification in the Official Gazette, to hear appeals against the orders of Adjudication
Authorities and Special Director (Appeals). The Central Government or any person aggrieved
by the orders of Adjudicating Authority or Special Director (Appeals) may prefer an appeal to
the Appellate Tribunal under Section 19 of the Act.
Section 20 of the Act empowers the Central Government to appoint a Chairperson and as
many members as it may deem fit to the Appellate Tribunal. The jurisdiction of the Appellate
Tribunal may be exercised by benches. A bench may be constituted by the Chairperson with
one or more member as the Chairperson deem fit. The Chairperson can also transfer member
of one bench to another bench. The Appellate Tribunal shall sit ordinarily at New Delhi for
hearing. The Central Government however may, in consultation with the Chairperson, notify
the sitting of the Tribunal elsewhere as it may deem fit. A person who is or has been or is
qualified to be a judge of a High Court shall be eligible for the appointment as chairperson of
Appellate Tribunal.
A person who is or has been or is eligible to be a district judge shall be eligible for
appointment as a member of Appellate Tribunal. A member of the Indian Legal Service and
holding the post in Grade I of that Services or the member of Indian Revenue Service and
holding the post equivalent to a Joint Secretary to the Government of India, shall be eligible
to be appointed as Special Director (Appeals).
The Chairperson and Members will hold office for a period of 5 years from the date of
assuming office. However, no chairperson or member shall hold office on attaining the age of
65 years and 62 years respectively.
Appeal to High Court
A right to appeal to High Court lies with the appellant who is aggrieved by the decision of the
Tribunal. Such appeal must be filed within 60 days from the date of communication of the
decision or order of the Tribunal. The appeal to the High Court can be made on any question
of law arising out of such order. A relaxation for a maximum period of sixty days for making
an appeal may be granted by the High Court, if it is satisfied that the appellant was prevented
by sufficient cause from filing the appeal within the specified period.

CONCLUSION
The research paper deals with the contravention and penalties of the FEMA Act.
Contravention is a breach of the provisions of the Foreign Exchange Management Act
(FEMA), 1999. Compounding refers to the process of voluntarily admitting the
contravention, pleading guilty and seeking redressal. Contravention is the breach of
provisions and norms under the Foreign Exchange Management Act, or FEMA 1999.
Compounding of contraventions refers to the process where the individual or the corporate
entity can admit the contravention and seek redress from the Reserve Bank, restricted to a
specific sum.
It is a voluntary process in which an individual or a corporate seeks compounding of an
admitted contravention. It provides comfort to any person who contravenes any provisions of
FEMA, 1999 by minimizing transaction costs.
Any person who contravenes any provision of the FEMA, 1999 or contravenes any rule,
regulation, notification, direction or order issued in exercise of the powers under this Act or
contravenes any condition subject to which an authorization is issued by the Reserve Bank,
can apply for compounding to the Reserve Bank. Applications seeking compounding of
contraventions under section 3(a) of FEMA, 1999 may be submitted to the Directorate of
Enforcement.
When a person is made aware of the contravention of the provisions of FEMA, 1999 by the
Reserve Bank or the Foreign Investment Promotion Board (FIPB) or any other statutory
authority or the auditors or by any other means, she/he may apply for compounding. One can
also make an application for compounding, suo moto, on becoming aware of the
contravention.