What changed
RBI clarified that if a contravention is identified by the Bank or reported by the entity outside the formal compounding process, RBI retains discretion to classify it as technical/minor, material, or serious. However, once the entity files a suo moto compounding application admitting the contravention, RBI cannot treat it as technical or minor—compounding proceedings become mandatory.
What it means for you
Banks and their customers lose the chance for a lighter administrative resolution once they voluntarily file a compounding application. This increases the compliance burden and potential penalties for entities that self-report without first assessing whether the contravention could be resolved as technical/minor. AD Category-I banks must advise customers to carefully evaluate before filing suo moto.
What you must do
- Advise customers that a suo moto compounding application waives the possibility of a technical/minor classification.
- Train compliance teams to distinguish between technical/minor contraventions and those requiring formal compounding.
- Update internal advisory materials to reflect the July 31, 2012 circular's stance on suo moto applications.
- Ensure customers consult with AD banks before submitting a compounding application to avoid unintended escalation.
Who it affects
All AD Category-I banks, Entities dealing in foreign exchange under FEMA, Compliance officers handling FEMA contraventions
Can RBI still treat a contravention as technical if we file a compounding application later?
No. Once a suo moto compounding application is filed admitting the contravention, RBI will not consider it technical or minor. The compounding process under Section 15(1) of FEMA must be followed.
What happens if RBI identifies a contravention before we file anything?
RBI will decide whether it is technical/minor (administrative advice), material (compounding), or serious (referral to Enforcement Directorate). You can still get a lighter resolution if it qualifies as technical.
Does this circular change the compounding rules?
No, it clarifies the existing position from the 2010 circular and press release. The key change is that a suo moto application locks out the technical/minor route.