Sensitization of Authorized Dealers – Directions by the Reserve Bank of India

By Nitesh Tiwari, Associate 

The Reserve Bank of India (“RBI”) has been empowered to compound offences defined in Section 13 of the Foreign Exchange Management Act, 1999 (“FEMA”). Compounding of offences under the FEMA refers to the process of voluntarily admitting the contravention, pleading guilty and seeking redressal.

While compounding of offences it has been brought to the notice of the RBI that several of the offences under the FEMA that are committed by corporates and persons are due to lapse on the part of Authorized Dealers (“ADs”). In the pursuance of the same, the RBI has issued a directive through its circular dated January 17, 2013 being circular number RBI/2012-13/383
A.P. (DIR Series) Circular No. 76 (the “Circular”) to all category ADs to ensure due compliance to the provisions of FEMA and the rules and regulations made there under.

The Circular makes reference to Section 11 (3) of FEMA under which the RBI for the purpose of ensuring such compliance by the ADs and/or any authorized persons can directing the ADs and/or authorized persons to furnish all necessary information. The said Circular lists the contraventions that are dealt with by the RBI in the context of the above. The list includes – drawing down of External Commercial Borrowing (“ECB”) without obtaining Loan Registration Number (“LRN”); allowing draw down of ECB under the automatic route from 
unrecognized lender, to ineligible borrower, for non-permitted end uses; non-filing of Form ODI for obtaining Unique Identification Number (“UIN”) before making the second remittance to overseas wholly owned subsidiaries and joint ventures for Overseas Direct Investment (“ODI”); non-submission of Annual Performance Reports (“APRs”) or copies of share certificates to the ADs (and non-reporting thereof by the AD to RBI) in respect of overseas investments, delay in submission of the Advance Reporting Format (“ARF”) in respect of Foreign Direct Investment (“FDI”) to the concerned regional office of the RBI and so on. The Circular further briefly sets out the statistics of the offences committed with respect to the category of transaction as under: 

  • 72 % of the total cases relate to FDI;
  • 24 % of the total ECB cases relate to draw down without obtaining LRN;
  • 66% of the ODI cases relate to non-reporting of overseas investments online.

The Circular highlights the importance of the functions of ADs in prohibiting contravention of aforementioned offences. The Circular further explains the importance of having foreign transaction information for the purposes maintaining Balance of Payments. Therefore, in the light of the above, the Circular intends to sensitize ADs by directing them to strictly comply with and ensure compliance of all the provisions of FEMA and rules and regulations made thereunder. 

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