RBI Caps FEMA Violation Penalty: A New Era of Simplified Compliance

The Reserve Bank of India (RBI) has issued the FED Master Direction No. 04/2025-26, referenced as RBI/FED/2025-26/135,

In a significant step toward simplifying and easing foreign exchange regulations, the Reserve Bank of India (RBI) has introduced a cap on penalties for contraventions under the Foreign Exchange Management Act, 1999 (FEMA, 1999). The move aims to bring clarity, reduce compliance costs, and promote voluntary disclosures by regulated entities and individuals.

According to the latest update via Master Direction No. 04/2025-26 (circular no. RBI/FED/2025-26/135), the RBI has capped the penalty amount for FEMA violations at ₹2 lakh, a substantial shift from the earlier approach where penalties were a percentage (0.30% to 0.75%) of the amount involved in the contravention.

This reform is in line with the Foreign Exchange (Compounding Proceedings) Rules, 2024, notified by the Government of India on September 12, 2024, replacing the earlier 2000 rules.

Key Violations Covered Under the Cap

Violations eligible for compounding (except those excluded under Rule 4(2) and Rule 9 of the 2024 Rules) now benefit from this capped penalty provision. These include:

• Non-repatriation of Liberalised Remittance Scheme (LRS) proceeds within 180 days
• Exports not completed within one year of advance receipt
• Issuance of high-value shares as gifts without RBI approval

Earlier, such violations could attract steep penalties depending on the amount involved. Now, the penalty is limited to ₹2 lakh per contravention, simplifying the process for businesses and individuals alike.

Legal Basis for Compounding

The compounding process is guided by:

• Section 15 of FEMA, 1999, which allows the Reserve Bank to compound contraventions (excluding those under Section 3(a)) upon application by the violator.
• Section 13(1) which sets out penalties: up to thrice the amount involved if quantifiable or ₹2 lakh if not quantifiable; and ₹5,000 per day for continuing contraventions.
• Section 11(2) and 11(3) empowering RBI to enforce compliance and penalize non-reporting by Authorised Dealers (ADs).

Compounding must be done within 180 days of application as per Rule 4 of the Compounding Rules, 2024

This move signals a proactive, compliance-friendly regime. Businesses and individuals are encouraged to voluntarily report contraventions without fear of harsh penalties. For companies involved in cross-border transactions, this development brings much-needed predictability and cost-efficiency in managing FEMA compliance.

To know more and safeguard from contravention, Connect with Us