Amendments in the FEMA, 1999
RBI Updates January 2024
1. Liberalized Remittance Scheme (LRS) for Resident Individuals- Discontinuation of Reporting of monthly return
- Vide: RBI/2024-25/74 A.P. (DIR Series) Circular No. 16
- Dated: September 06, 2024
The circular provides a clear directive to AD Category-I banks regarding the revised reporting requirements for LRS transactions and the discontinuation of the monthly return submission.
Discontinuation of Monthly Return Reporting:
- The requirement for AD Category-I banks to submit a monthly return on LRS transactions has been discontinued. Accordingly, from the reporting month of September 2024, AD Category-I banks shall not submit LRS monthly returns.
New Reporting Requirements:
- AD Category-I banks are now required to submit transaction-wise information under LRS through daily returns on CIMS (Centralized Information Management System).
- These daily returns (CIMS return code: R010) should be uploaded at the close of business of the next working day on CIMS.
- In cases where no data is to be provided, banks should upload a ‘NIL’ report.
Legal Framework:
- The circular is issued under Sections 10 (4) and 11 (1) of the Foreign Exchange Management Act, 1999.
- It does not affect any permissions or approvals required under other applicable laws
- The Master Direction – Reporting under the Foreign Exchange Management Act, 1999 will be updated to reflect these changes.
Link:
https://website.rbi.org.in/documents/87730/39710850/NOT74202425.pdf
2. Significant Amendments Under The Foreign Exchange (Compounding Proceedings), Rules
On 12th September 2024, the Ministry of Finance notified the Foreign Exchange (Compounding Proceedings) Rules, 2024, and the provisions came into effect On 12th September 2024.
The Finance Ministry of India altered the compounding process by introducing the Foreign Exchange (Compounding Proceedings) Rules, 2024, and made significant amendments to the laws, such as raising the monetary maximum for settling disputes by RBI officials, permitting online payments, and so on.
Contravention
Under the Foreign Exchange Management Act (FEMA), 1999, when a person using foreign exchange does not comply with the provisions of “FEMA” he commits a contravention. Contravention means non-compliance of provisions of the act and it includes rules/ regulations/notifications/ orders/ directions/ circulars issued under the act
Compounding
- The term compounding is a voluntary act through which a person admits to such contravention and seeks redressal for the same. The Reserve Bank is empowered to compound any contravention as defined under section 13 of FEMA, 1999 except the contravention under section 3(a).
- Therefore, under this process, a person committing a contravention will file an application to the compounding authority (defined under rule 3 of the FEMA rules) voluntarily accepting the contravention, and to be excused, the contravener must pay the penalty assessed by the RBI and will be given the opportunity of personal hearing.
Key Points of the Amendments in the Foreign Exchange (Compounding Proceedings) Rules, 2024 :
1. Compounding Authority
The following can be the Compounding Authority of RBI to compound various contraventions under these rules:
- The Director of Enforcement
- An Officer of the Directorate of Enforcement not below the rank of Deputy Director or Deputy Legal Adviser.
- An Officer of the Reserve Bank not below the rank of the Assistant General Manager.
2. Compounding Authorities of the Reserve Bank to compound various contraventions:
Where the amount involved in contravention (other than a contravention of clause (a) of section 3):
- Does not exceed Rupees60 lakh – Officer not below the rank of Assistant General Manager of RBI.
- Does not exceed Rupees2 and a half crore – Officer not below the rank of Deputy General Manager of RBI.
- Does not exceed Rupees5 crore – Officer not below the rank of General Manager of RBI.
- Above Rupees5 crore – Officer not below the rank of Chief General Manager of RBI.
3. Compounding Authorities of the Reserve Bank to compound various contraventions:
Where the amount involved in contravention is covered under clause (a) of section 3:
- Rupees5 lakh or below– Deputy Director of the Directorate of Enforcement
- More than Rupees 5 lakh but less than Rupees 10 lakh– Additional Director of the Directorate of Enforcement
- More than Rupees 10 lakh but less than Rupees 1 crore– Special Director of the Directorate of Enforcement
- More than Rupees 50 lakh but less than Rupees 1 crore– Special Director along with Deputy Legal Adviser of the Directorate of Enforcement
- More than Rupees 1 crore – Director of Enforcement along with Special Director of the Directorate of Enforcement
Contravention within 3 Years
The above matrix shall not apply to 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.
Second or Subsequent Contravention
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.
4. Contraventions not to be compounded in certain cases (Exceptions to Compounding)
These are situations when the contraventions cannot be compounded:
- Where the amount involved is not quantifiable.
- where the provisions of section 37A of the Act are applicable; or
- Where the Directorate of Enforcement is of the view that the proceeding relates to a serious contravention suspected of money laundering, terror financing, or affecting the sovereignty and integrity of the nation. (In such cases the matter has to be referred to the competent Adjudicating Authority for formal adjudication as provided in section 13 of the Act).
- where the Adjudicating Authority has already passed an order imposing a penalty under section 13 of the Act. (This is to do away with the problem of duplicity of prosecution and ensures that court determinations are conclusive)
- Where the compounding authority believes the contravention involved requires further investigation by the Directorate of Enforcement to ascertain the amount of contravention. (This helps in better analysis of the complex cases)
5. Application Fees For Filing The Application For Compounding of Contravention
The fees for filing the application forms under Rules 4 and 5 have also been enhanced from Rs. 5000 Rs. to Rs. 10000 + GST by way of demand draft, National Electronic Fund Transfer (NEFT), or other permissible electronic or online modes of payment, in favor of the compounding authority.
6. Changes In Payment Methods
The prior norm was that the payment was to be made by demand draft in favor of the compounding authority. On the compounding order, the payment period was set at fifteen days.
The new rule expands the payment options still more while keeping the same fifteen-day payment period intact, however, it permits payment to be made not only by demand draft but through National Electronic Fund Transfer (NEFT), Real Time Gross Transfer (RTGS) and any other electronic or on-line mode of payment as per the approved methods by Bank.
7. Discontinuation of adjudication:In case any contravention is compounded before the adjudication of such contravention, no inquiry will be initiated or continued.
8. Continuation of pending proceedings: Any compounding application pending, on 12-9-2024, will be governed by the provisions of Foreign Exchange (Compounding Proceedings) Rules, 2000. The modified rules shall not be applied retrospectively, i.e. pending cases shall be governed by the old rules.
IMPORTANT PRESS RELEASES
1. RBI approves the voluntary amalgamation of The Rajapur Sahakari Bank Ltd., Mumbai (Maharashtra) with The Malad Sahakari Bank Ltd., Mumbai (Maharashtra)
- Vide: Press Release: 2024-2025/1142
- Dated: September 20, 2024
The Scheme will come into force with effect from September 23, 2024. The branches of The Rajapur Sahakari Bank Ltd., Mumbai (Maharashtra) will function as branches of The Malad Sahakari Bank Ltd., Mumbai (Maharashtra) with effect from September 23, 2024.
Link:
https://website.rbi.org.in/documents/87730/39710918/PR1142202425.pdf
2. 13 NBFCs surrender their Certificate of Registration to RBI
- Vide: Press Release: 2024-2025/1095
- Dated: September 13, 2024
Link:
https://website.rbi.org.in/documents/87730/39710918/PR1095202425.pdf
3. RBI cancels Certificate of Registration of Four NBFCs
- Vide: Press Release: 2024-2025/1096
- Dated: September 13, 2024
Link:
https://website.rbi.org.in/documents/87730/39710918/PR109620242025.pdf
IMPORTANT PRESS RELEASES ON PENALTY LEVIED BY RBI
a) Reserve Bank of India imposes monetary penalty on Godrej Housing Finance Limited
- RBI imposed a monetary penalty of ₹5,00,000/-
- Non-compliance with ‘Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021’ issued by RBI.
Reason:
The company failed to obtain two independent valuation reports before sanctioning certain loans of ₹75 lakh and above.
Link:
https://website.rbi.org.in/documents/87730/39710918/PR105920242025.pdf
b) Reserve Bank of India imposes monetary penalty on Urban Development Corporation Limited
- RBI imposed a monetary penalty of ₹3,50,000/-
- non-compliance with certain provisions of the ‘Reserve Bank of India (Know Your Customer (KYC)) Direction, 2016’ and ‘Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021’ issued by RBI.
Reason:
(i) failed to undertake risk categorization of its customers during the financial year 2021-22 and did not put in place a system for periodic review of risk categorization of accounts; and
(ii) did not create a floating charge on the assets invested by it in terms of Section 29B of the NHB Act, in favor of its depositors and registered the same with the Registrar of Companies.
Link:
https://website.rbi.org.in/documents/87730/39710918/PR1056.pdf
c) Reserve Bank of India imposes monetary penalty on Aadhar Housing Finance Limited
- RBI imposed a monetary penalty of ₹5,00,000/-
- Non-compliance with certain provisions of the ‘Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021’, issued by RBI.
Reason:
The company charged interest on loans for a period prior to the date of actual disbursement of loan/issuance of the cheque to certain borrowers in contravention of RBI directions on the ‘Fair Practices Code’.
Link:
https://website.rbi.org.in/documents/87730/39710918/PR1057AadharHousingFinanceLimited.pdf
d) Reserve Bank of India imposes monetary penalty on HDFC Bank Limited
- RBI imposed a monetary penalty of ₹1,00,00,000/- (Rupees One crore only)
- Non-compliance with certain directions issued by RBI on ‘Interest Rate on Deposits’, ‘Recovery Agents engaged by Banks’ and ‘Customer Service in Banks’ read with the BCSBI Code and ‘Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by banks’.
Reason:
- Gave gifts (in the form of paying a first-year premium for the complimentary life insurance cover) costing more than ₹250 to the depositors at the time of accepting certain deposits;
- Opened certain savings deposit accounts in the name of ineligible entities; and
- Failed to ensure that customers were not contacted after 7 pm and before 7 am.
Link:
https://website.rbi.org.in/documents/87730/39710918/PR1075.pdf
e) Reserve Bank of India imposes monetary penalty on Axis Bank Limited
- RBI imposed a monetary penalty of ₹1,91,00,000/- (Rupees One crore and ninety-one lakh only)
- Non-compliance with certain directions issued by RBI on ‘Interest Rate on Deposits’, ‘Know Your Customer (KYC)’, and ‘Credit Flow to Agriculture- Collateral free agricultural loans’.
Reason:
- The bank opened certain savings deposit accounts in the name of ineligible entities;
- The bank had allotted multiple customer identification code to certain customers instead of a Unique Customer Identification Code (UCIC) for each customer;
- The bank had obtained collateral security for agricultural loans upto ₹1.60 lakh in certain cases; and
- A wholly owned subsidiary of the bank undertook the business of a technology service provider, which is not a permissible business that can be undertaken by a banking company under Section 6 of the BR Act.
Link:
https://website.rbi.org.in/documents/87730/39710918/PR1078.pdf
f) Reserve Bank of India imposes monetary penalty on BNP Paribas
- RBI imposed a monetary penalty of ₹31,80,000/-
- Non-compliance with certain directions issued by RBI ‘on ‘Interest Rate on Advances’.
Reason:
The bank failed to adopt uniform external benchmarks within the same loan category in respect of certain loans.
Link:
https://website.rbi.org.in/documents/87730/39710918/PR1104.pdf
g) Reserve Bank of India imposes monetary penalty on SMFG India Credit Company Limited
- RBI imposed a monetary penalty of ₹23,10,000/-
- Non-compliance with certain directions issued by RBI on ‘‘Master Direction – Information Technology Framework for the NBFC Sector.”
Reason:
- did not ensure that the contract between the company and its outsourced vendors contained the provision with respect to monitoring and oversight,
- did not conduct IS Audit for Network and Security Solutions since its inception, and
- did not ensure adequate storage/retention of audit logs of the email gateway and analyze or take action on a critical alert generated from the Endpoint Detection & Response solution for malware detection from an infected server.
Link:
https://website.rbi.org.in/documents/87730/39710918/PRSMFG202425.pdf
h) Reserve Bank of India imposes monetary penalty on Muthoot Vehicle & Asset Finance Limited
- RBI imposed a monetary penalty of ₹7,90,000/-
- Non-compliance with certain directions issued by RBI on ‘Liquidity Risk Management Framework for Non-Banking Financial Companies and Core Investment Companies’ and ‘Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.
Reason:
- did not disclose the information on the Liquidity Coverage Ratio on its website;
- did not submit data with respect to its gold loan customers to the four Credit Information Companies; and
- did not convey in writing the amount of loan sanctioned along with the terms and conditions, in the vernacular language as understood by the vehicle loan borrowers, by means of a sanction letter or otherwise.
Link:
https://website.rbi.org.in/documents/87730/39710918/PR1109.pdf
i) Reserve Bank of India imposes monetary penalty on Hewlett Packard Financial Services (India) Private Limited
- RBI imposed a monetary penalty of ₹10,40,000/-
- Non-compliance with certain directions issued by RBI on [Know Your Customer (KYC)] Directions, 2016’, ‘Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016’ and ‘Master Direction – Information Technology Framework for the NBFC Sector’
Reason:
The company failed to:
- put in place a system of periodic review of risk categorization of accounts
- disclose and explicitly communicate the rate of interest and the approach for gradations of risk and rationale for charging different rates of interest to different categories of borrowers in the loan application form and in the sanction letter; and
- form an IT Strategy Committee and an IT Steering Committee.
Link:
https://website.rbi.org.in/documents/87730/39710918/PR1108.pdf
j) Reserve Bank of India imposes monetary penalty on UCO Bank
- RBI imposed a monetary penalty of ₹2,68,30,000
- Non-compliance with certain directions issued by RBI on ‘Interest Rate on Advances’, ‘Opening of Current Accounts by Banks – Need for Discipline’, ‘Interest Rate on Deposits’ and ‘Frauds classification and reporting by commercial banks and select FIs’.
Reason:
The Bank failed to:
- failed to benchmark floating rate personal/ retail loans and loans to MSME to an external benchmark;
- opened certain current accounts of non-constituent borrowers, whose exposure to the banking system was ₹5 crore or more;
- opened certain savings deposit accounts in the name of ineligible entities;
- marked lien against certain NRE savings deposits;
- failed to transfer unclaimed balances in certain fixed deposits, which remained unclaimed for a period of more than ten years, to Depositors Education and Awareness Fund, within a period of three months from the expiry of the said period of ten years; and
- failed to report certain cases of fraud to law enforcement agencies.
Link:
https://website.rbi.org.in/documents/87730/39710918/PR101120242025.pdf
k) Reserve Bank of India imposes monetary penalty on The Surat People’s Co-operative Bank Limited, Surat
- RBI imposed a monetary penalty of ₹61,60,000 (Rupees Sixty one lakh and sixty thousand only)
- Non-compliance with certain directions issued by RBI on ‘‘Income Recognition, Asset Classification, Provisioning and Other Related Matters’, ‘Loans and advances to directors and their relatives, and firms/concerns in which they are interested’, ‘Maintenance of Deposit Accounts’ and ‘Customer Service’.
Reason:
The Bank failed to:
- not classified loan accounts of certain borrowers as non-performing assets;
- sanctioned/renewed certain director-related loans;
- levied and recovered penal charges from certain inoperative savings bank/current accounts for non-maintenance of minimum balances in those accounts; and
- levied charges on certain customers for sending SMS alerts despite not having mobile numbers of such customers on record.
Link:
https://website.rbi.org.in/documents/87730/39710918/PR1167.pdf