Written by Nitin Pradhan & Priyanshu Chouhan.

INTRODUCTION
In a strategic step, aiming to ease compliance, the Reserve Bank of India (“RBI”) has issued circulars on April 22, 2025 and on April 24, 2025, introducing key updates under the Foreign Exchange Management Act, 1999 (“FEMA”) framework. Under FEMA, compounding refers to the process by which individuals or entities can voluntarily disclose a violation of FEMA provisions and seek rectification by paying a monetary penalty, instead of undergoing long-term legal proceedings. The significant changes revised by RBI under FEMA are a part of the plan to improve the ease of doing business in India and to reduce and balance the procedural and operational challenges faced by entities or companies mostly involved with cross-border transactions.  By making the process streamlined, more transparent, and easier to assess, RBI has moved to shift from a strict enforcement model to a more supportive and compliance-oriented regulatory environment.

This reform is significant for several factors. Firstly, it eases the process for entities to resolve minor or unintentional violations of FEMA provisions without lengthy legal proceedings. Secondly, the revisions bring clarity to the timelines and procedures involved in the compounding process, making it more certain for applicants, which includes shortened processing times, decentralisation of powers to regional offices, and greater digital integration, allowing smoother and quicker resolution of cases. Lastly, the RBI has also encouraged voluntary disclosures by assuring leniency in those cases where contraventions are self-reported, signalling a more trust-based regulatory mechanism.

In this case, the authors attempt to reflect over the recent developments that have been put across by the RBI, and evaluate the rationale that underlies this policy change and how the same affects other parties involved in cross-border transactions.

KEY REVISIONS BY RBI

In the strife for encouragement of the local currency in international trade and commerce, the RBI, collaborating with the Union Government, uses Indian Rupees for cross-border transactions. In the series of amendments, the Union and RBI have changed the FEMA Guidelines. The amendments have been made for the ease of the transaction of money and for the ease of the users, as it has been for decades that the applicants of the transaction have faced difficulties in transactional delays and submitting penalties due to finding the authorised office of the RBI and/or a daily cause that attracts a penalty on the applicants. Not merely for the purpose of ease, however, the natal guidelines were added for the objectives of avoiding unwanted penalty provisions to reconcile the relationship between the RBI and persons concerned.

The FEMA revisions have ameliorated the provision by deletion of paragraph 5.4.II.v. of the A.P. (DIR Series) Circular No. 17/2024-25 dated April 22, 2025. By replacing the physical visit of the applicant for opening a special Non-Resident Rupee Holder Account (“SNRA”) and Special Rupee Vostro Account (“SRVA”), the applicant has to follow up with an email to the concerned office of the RBI for the application. As per the previous guidelines, there is a 50% increase in the penalties for the applicants against whom a compounding order has been passed, where the applicant has failed to pay the compounding amount and has reapplied for compounding. However, the change in the guidelines has introduced another approach to treating the reapplication as a separate application. Because of the change in policy, the penalties have been removed by the institution effectively, and it has addressed this with an appreciable solution.

The RBI enabled the dealer banks, upon authorisation, to open INR Accounts for Persons Resident Outside India (“PROI”) for ease in current and capital account transactions. PROIs who have INR money accounts, such as SVRA or SNRA, were not allowed to make, receive, or send transactions to others for legal purposes. For the PROI exporters, they are permitted to open a Foreign Currency Account (“FCA”) to manage the transactions by using the funds. With the amendments, the RBI has removed the cap of 7 years of tenure on the SNRA. Subsequently, the account may pursue its business perpetually.

The amendments have broadly attempted to provide procedural amendments for businesses and traders. Persons Resident Outside India (“PROI”) are no longer required to visit the relevant office of the RBI, but must carry on with the email process, which makes it easier and faster. Punitive measures were removed in order to preserve time and office procedures, which does not conclusively save the time of the applicant but also saves the time of the office.

LEGAL AND POLICY RATIONALE (BRIEF ANALYSIS)

For many years, the most shared grievance by the businesses that were involved in foreign exchange was that the compounding system of FEMA was slow, unpredictable, and usually more severe than the error itself. Even minor setbacks, such as a failure to submit Form FC-GPR (on which they report foreign investments), may result in high fines. Cases have been recorded when companies have been fined lakhs of rupees merely for missing deadlines by a few days – mistakes that are rather clerical than intentional. For instance, a company was fined ₹1.5 lakh plus interest for operating a regular savings account for two years after moving abroad. Similarly, another entity faced a ₹25 lakh penalty and a threat of property confiscation for purchasing agricultural land without proper approvals. These cases highlight how minor clerical errors or oversights can lead to substantial financial penalties, deterring voluntary disclosures and fostering a culture of fear among compliance officers.

The RBI’s revised framework is supposed to transform that perception. By establishing precise deadlines for the disposal of cases and decentralising authority to regional offices, the RBI ensures that decisions are made closer to the entities concerned, reducing bureaucratic delays. This decentralisation also allows regional offices to apply penalty limits proportionate to the severity of technical violations, rather than imposing uniform, potentially excessive fines from a central authority. To give an example, with the new rules, delays in the reporting of routine filings such as FC-GPR or FC-TRS may now be doubled with regional limitation of the penalties, which makes the resolution much quicker and cost-effective.

On the legal and policy levels, this change is part of a bigger trend in India, the trend in abandoning the idea of criminalising economic slip-ups and prioritising compliance. Such practices have been undertaken according to the Companies (Amendment) Act, 2020, under which some offences were decriminalised, and under which SEBI operates in its settlement regulations. Regulators are also putting more signals that they are now trying to get businesses off-road and not punish them too hard for small errors.

The FEMA reforms, in that regard, are not merely a change of procedures, but a shift in thinking. The law is starting to appreciate the fact that unintentional errors do occur and that regulation should be aimed at helping businesses to rectify the errors as soon as possible, openly and justly, without subjecting them to protracted litigation.

IMPLICATIONS FOR STAKEHOLDERS

There are ample implications that could be seen for the stakeholders in the market. The revision has provided relief for PROIs, who are the direct beneficiaries of the policy change, especially when it comes to cross-border transactions through the ease of access to banks, which are able to transact in foreign currency. Authorised Dealer banks experience significant operational advantages through the expanded SNRR account framework. The ability to open and maintain these accounts at overseas branches creates new revenue streams while reducing the compliance burden associated with cross-border transaction monitoring.

The cap of INR 2,00,000 maximum compounding fee under the RBI’s FEMA compounding framework applies to contraventions, including receiving investment from ineligible foreign investors, violating end-use restrictions for foreign exchange, and making unauthorised payments to non-residents. This “fresh start” approach, where reapplications shall be treated as new applications, encourages entities to rectify violations through proper compounding procedures rather than avoiding the system altogether. The policy change recognises that businesses may face genuine financial difficulties that prevent timely compliance, and provides mechanisms for resolution without permanent penalty enhancement.

To sum up, the RBI has set a strong legal framework, which is fundamentally aiding the Indian currency to be strong due to its uninterrupted flow across the globe. The new policy has made a remarkable impact on the economic infrastructure, with the SNRR framework playing a major role in the foreign exchange regulation.

CONCLUSION 

The new compounding framework recently updated by RBI through FEMA reflects a reassessment of the way in which regulations balance between compliance enforcement and business enablement. The previous system was tedious and excessively strict, even in the instance of minor or technical defaults. Giving timelines, powers to regional offices, and imposing penalties up to INR 2,00,000 on some violations has resulted in the RBI today encouraging proportionality and transparency. Paragraph 5.4.II.v of the circular issued by RBI on October 01, 2024, which is used to increase penalties by 50% on re-applications, emphasises punishment rather than inducing actual compliance and voluntary disclosure.

Secondly, the widening and easing of Special Non-Resident Rupee (SNRR) Accounts for long-term tenure will enhance the use of the rupee in international trade and reduce the operational costs involved whenever authorised dealer banks and businesses trade internationally. Combining the provisions, it becomes evident that India has the desire to create its regulatory climate in line with the international ease of doing business and investor confidence models. To stakeholders, there will be great effects: reduced delays, compliance costs and increased trust by the regulators.

Lastly, FEMA reforms by the RBI have developed a system that is more predictable and helps India realise its main objective of having a transparent, investor-friendly, and globally competitive ecosystem.