Compounding Application Made under FEMA in Completion of Adjudication Process is not Maintainable: Calcutta HC [Read Order]

In a recent case, the Calcutta High Court has held that Compounding Application made under Foreign Exchange Management Act, 1999 (FEMA) in the Completion of adjudication process is not maintainable.

Sanjay Jhunjhunwala, the petitioner challenged an order passed by a Single Judge on 1st April, 2025, dismissing the Writ Petition filed by the appellant herein. The primary prayer in the Writ Petition was that the writ petitioner be permitted to renew the compounding application made by him, thereby quashing the rejection of the compounding application on 11th September, 2024.

The petitioner utilised the liberalised remittance scheme between February 2011 and 8th February 2013 to remit USD5,99,999 equivalent to (at prevailing exchange rate at the time) Rs. 2.97 crores to the LGT Bank of Singapore. The purpose of such remittance was to invest in international bonds, securities and mutual funds through a foreign currency denominated portfolio investment account. The amount invested by the petitioner was used to earn profit for the LGT Bank from its own portfolio bank. The bank would give short term advances for optimising gains against the pledge of investment held in the appellant’s portfolio account.

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The petitioner, some time in 2015, closed the account with a profit of approximately USD 66,773 equivalent to Rs. 1.24 crores. The petitioner had offered such gains for tax purposes and had paid the tax in 2015 itself. The trouble erupted some time in 2020 when the Enforcement Directorate initiated proceedings on 17th April 2020 by way of complaint of contravention of provisions of the Foreign Exchange Management Act, 1999 (the Act).

Pursuant to the complaint, a show cause notice dated 20th April, 2020 was issued under Section 16 read with Rule 4 of Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000 for contravention of provisions of Sections 3(a), 3(b) and 4 of the Act read with Regulation 3 of the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations 2000, as to why an inquiry should not be initiated against the appellant.

The appellant had given a reply to such show cause notice. In respect of the above, the authorities proceeded to conduct an inquiry. Even as the proceedings were pending, the appellant filed a compounding application on 20th January, 2023. The said application was returned by the authority vide an email dated 8th January, 2024 (Page 138) on the ground that there was lack of clarity and granted liberty to the appellant to approach the concerned authority (External Commercial Borrowing Division-ECDB) with a fresh application.

The Adjudicating Authority held the appellant guilty of borrowing without the permission of the RBI in the form of short term advances and thereby in contravention of Regulation 3 of the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations 2000. The adjudicating authority imposed a penalty of Rupees 10 Crore on the appellant herein, under Section 13(1) of the Act read with the Adjudication Rules.

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A second compounding application was made, admitting in no uncertain terms, the contravention of borrowing without RBI’s permissions and violations of provisions of LRS for trading of foreign exchange for an unauthorised debit of Rs. 30.13 crores. It is this second compounding application which was rejected by the authority, inter alia on the ground that the adjudication process had already been completed and an order had also been passed on 28th March 2024, on account whereof the compounding application could not be entertained.

Section 15(2) of the Act relating to the power to compound contravention, which clearly states that where a contravention has been compounded no proceeding or further proceeding shall be initiated or continued, as the case may be, against the person committing such contravention in respect of the contravention so compounded.

The whole purpose, according to petitioner in compounding is to settle the dispute, without having to wait for an elaborate adjudicatory process. If, therefore, one waits for the adjudication process to be completed and then applies for compounding, the whole purpose of the Act to provide for compounding of offences becomes redundant.

The respondent relied on the form meant for Compounding Application under Rule 4 and 5 of the Foreign Exchange (Compounding Proceeding) Rules 2000. This form mandates in serial no. 4, the disclosure of the name of the adjudicating authority, before whom the case is pending.

Compounding is necessarily to be preceded by a charge of contravention. Contravention is a breach of the provisions of the Act or rules and regulations framed thereunder. Compounding is the process of voluntarily admitting the contravention, pleading guilty and seeking redressal.

It was viewed that once proceedings under Section 13 of the Act are completed, Section 14 comes into play enabling enforcement of the orders passed by the adjudicating authority. Various enforcement measures have been provided depending on the nature and quantum of the contravention. However, for every process of enforcement, the concerned defaulter has to be given a hearing.

Section 15 deals with compounding of a contravention by the concerned person. However, the scheme specifies that once proceedings under Section 13 come to an end, there is no longer a question of compounding, as the entire amount of penalty as adjudicated will have to be paid.

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The purpose of a compounding application, to avoid the time taken for adjudication and appeal from the order of contravention, will be rendered completely nugatory if the compounding is done or permitted to be done post adjudication of the contravention. Undertaking necessarily means that a person makes a promise to do or not to do something in the future. Hence, an undertaking that the appeal has not been or will not be filed by the applicant, as specified in Annex (III), is the sine qua non for a compounding application. The provisions of the Act, the Rules and the Master Circular need to be considered together and not in isolation. A particular clause cannot be taken up and highlighted.

Though reference was made to the Foreign Exchange (Compounding Proceedings) Rules, 2024 and particularly to Rule 9 thereof, which makes it clear in no uncertain terms that contravention shall not be compounded where the adjudicating authority has already passed an order imposing penalty under Section 13 of the Act. However, it was agreed by all parties appearing before us that the same shall not apply to the present case in view of Rule 14 thereof.

The purpose of the compounding mechanism envisaged under the Act is based on utility, that is, for efficient collection of penalties due from errant persons. A division bench of Justice Tapabrata Chakraborty and Justice Reetobroto Kumar Mitra held that compounding application has been made at a stage when the adjudication process has been completed. Thus, the question of admission of guilt of the contravention complained of, by the errant person, the sine qua non for a compounding application, is quite redundant, as he had already been found guilty of the contravention of the provisions of the Act and the Regulations.

The bench held that the second application for compounding affirmed on 6th May 2024 and filed on 10th May, 2024 was rightly rejected by the compounding authority, holding, inter alia, that the adjudication order had already been passed by the adjudicating authority with respect to the contravention applied for in the compounding application.

The court upheld the order of the Single Judge and dismissed the appeal.

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