Introduction

In April 2025, the Reserve Bank of India (“RBI”) introduced certain key changes to the compounding framework under the Foreign Exchange Management Act, 1999 (“FEMA”) through circulars issued on April 22, 2025 and April 24, 2025 (collectively, the “Amendments”). Under FEMA, compounding refers to a voluntary mechanism enabling persons to admit contraventions and seek resolution for non-compliances. The RBI examines eligible applications in accordance with the Foreign Exchange (Compounding Proceedings) Rules, 2024 along with guidelines for compounding of contraventions under FEMA, 1999 dated October 01, 2024 (“Compounding Guidelines”).  These recent Amendments indicate a broader shift towards a more business-friendly and pragmatic compliance framework while ensuring adherence to the applicable FEMA provisions.

Key Amendments

1. Cap on Non-Reporting Contraventions

A new Paragraph 5.4.II.vi has been added to the Compounding Guidelines introducing a discretionary cap of INR 2,00,000 (Indian Rupees Two Lakhs) per rule or regulation contravened in relation to ‘other non-reporting violations’ under row 5 of the computation matrix provided in the Compounding Guidelines. These include contraventions in the nature of receiving investment from ineligible foreign investors, violating end-use restrictions for foreign exchange, making payments to non-residents without required approvals. As per the Amendments, this cap may be granted by the compounding authority, at its discretion, based on the nature of contravention, exceptional circumstances/ facts involved in case, and in wider public interest. 

2. Fresh Start Policy

Paragraph 5.4.II.v of the Compounding Guidelines has now been removed. This provision previously required a 50% (Fifty percent) penalty increase for applicants against whom a compounding order had been passed earlier, where the applicant failed to pay the compounding amount and reapplied for compounding (“Reapplications”). As a result of the Amendments, each Reapplication will now be considered separately, without any automatic increase in penalties, providing welcome relief to applicants especially in cases of oversight and inadvertent delays.

3. Enhanced Payment Tracking System

The RBI has updated its email format to include more detailed information whereby applicants must now also provide their mobile number, the specific RBI office where payment was made, and the method of application submission (PRAVAAH or physical). This has been done with the endeavor to streamline communications, improve processing timelines and help resolve common payment reconciliation issues, such as payments sent to the wrong office or delays between fee payment and application submission.

Conclusion

The Amendments reflect RBI’s progressive approach to how regulatory compliance is handled, acknowledging intent and distinguishing against evasion. By reducing repeat penalties, capping fines for non-reporting, and streamlining processes, the RBI has moved towards a more facilitative compliance mechanism, while still maintaining oversight.

These changes also align with India’s larger policy push toward transparency, and ease of doing business. For businesses, the revised framework encourages proactive self-reporting, strengthens procedural clarity, and enhances confidence in the compounding mechanism as a viable route for resolving non-compliances.

This update has been contributed by Ashwin Krishnan (Partner) and Aditya Maheshwari (Associate).

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