India Inc relieved as RBI changes approach towards foregin currency regulations
6 Jul 2010, 0204 hrs IST,Sugata Ghosh,ET Bureau
MUMBAI: Even a few months ago, businessmen and corporate honchos shuddered to visit Mint Street whenever they found themselves on the wrong side of foreign currency regulations. Frosty conversations with hard-nosed officials of RBI inevitably ended with grim penalties — at times stiff enough to cripple business for some time. Not any longer.
Suddenly, something has dramatically changed. The same officials are more willing to listen and quick to forgive the violations as ‘technical’ errors. What’s more interesting is the drop in the amount of fines. Earlier, these could be anything from Rs 20 lakh to as high as Rs 3 crore, today the figures have plummeted to Rs 25,000-40,000.
Companies and businesses have to fork out penalties for either misuse of foreign currency or failure to report cross-border transactions to the central bank. For instance, a local entity receiving foreign investment has to inform RBI within 30 days of obtaining the money; a firm allotting stock to foreign investors has to report within a month of the allotment; or, a company raising foreign loans or external commercial borrowing) cannot use the money till RBI gives it the loan registration number.
The Foreign Exchange Management Act (Fema), 1999, which replaced the draconian Fera, allows individuals and companies to approach RBI to resolve the matter against payment of penalty. The bank uses its compounding powers, under the law, to fix the penalty which can be three times the amount involved in the contravention.
“The most high profile case in recent times was the penalty imposed against some of the ADAG group companies. Here the fine amount was high and the case attracted a lot of media attention. There may not be any change in this particular case and RBI is still likely to transfer the case to the Enforcement Directorate, which is done if a party does not pay the penalty within 15 days of the order. But what’s important is that several other companies, big as well as medium sized, have resolved penalties at significantly lower amounts,” said a senior advisor on currency regulations.
One of the country’s biggest jewellery firms has settled its dispute under the compounding process by paying a penalty of Rs 25 lakh against Rs 2 crore that was initially feared.
According to another city-based lawyer specialising in Fema matters, in the past three months, more than 10 companies have resolved various contraventions by paying a penalty of Rs 25,000 to Rs 30,000.
“Earlier they would have had to pay lakhs for similar violations. It’s a big relief to countless businessmen. RBI is now willing to hear their part of the story...many of these offences are purely technical and small firms are often unaware of the regulations. In some of the recent cases, RBI has fully condoned the mistakes and has even returned the Rs 5,000 that parties deposit while filing the form to begin the compounding process,” he said.
Significantly, RBI has put in place an updated procedure for compounding of contraventions under Fema on the basis of observations made over the last few years and experience gained in dealing with compounding applications.
“We can already sense that the new system is more transparent and distinctly more business friendly... Just to recall, RBI was not imposing the penalties in the first few years after Fema came in,” said the CFO of an export house. While Fema became effective from June 1, 2000, the compounding exercise, which did not exist under Fera, started after February 2005 when detailed rules issued.
Between 2000 and early 2005, RBI had largely condoned the violations that came up. But over the years, companies and professionals started complaining about the high penalties that the central bank was imposing. It culminated last year with a formal representation to RBI by a team of senior chartered accountants and tax professionals who pointed out how high fines were impacting business.
The latest change in RBI’s stance is another big step toward changing foreign exchange regulations that began a decade ago with the demise of Fera.
6 Jul 2010, 0204 hrs IST,Sugata Ghosh,ET Bureau
MUMBAI: Even a few months ago, businessmen and corporate honchos shuddered to visit Mint Street whenever they found themselves on the wrong side of foreign currency regulations. Frosty conversations with hard-nosed officials of RBI inevitably ended with grim penalties — at times stiff enough to cripple business for some time. Not any longer.
Suddenly, something has dramatically changed. The same officials are more willing to listen and quick to forgive the violations as ‘technical’ errors. What’s more interesting is the drop in the amount of fines. Earlier, these could be anything from Rs 20 lakh to as high as Rs 3 crore, today the figures have plummeted to Rs 25,000-40,000.
Companies and businesses have to fork out penalties for either misuse of foreign currency or failure to report cross-border transactions to the central bank. For instance, a local entity receiving foreign investment has to inform RBI within 30 days of obtaining the money; a firm allotting stock to foreign investors has to report within a month of the allotment; or, a company raising foreign loans or external commercial borrowing) cannot use the money till RBI gives it the loan registration number.
The Foreign Exchange Management Act (Fema), 1999, which replaced the draconian Fera, allows individuals and companies to approach RBI to resolve the matter against payment of penalty. The bank uses its compounding powers, under the law, to fix the penalty which can be three times the amount involved in the contravention.
“The most high profile case in recent times was the penalty imposed against some of the ADAG group companies. Here the fine amount was high and the case attracted a lot of media attention. There may not be any change in this particular case and RBI is still likely to transfer the case to the Enforcement Directorate, which is done if a party does not pay the penalty within 15 days of the order. But what’s important is that several other companies, big as well as medium sized, have resolved penalties at significantly lower amounts,” said a senior advisor on currency regulations.
One of the country’s biggest jewellery firms has settled its dispute under the compounding process by paying a penalty of Rs 25 lakh against Rs 2 crore that was initially feared.
According to another city-based lawyer specialising in Fema matters, in the past three months, more than 10 companies have resolved various contraventions by paying a penalty of Rs 25,000 to Rs 30,000.
“Earlier they would have had to pay lakhs for similar violations. It’s a big relief to countless businessmen. RBI is now willing to hear their part of the story...many of these offences are purely technical and small firms are often unaware of the regulations. In some of the recent cases, RBI has fully condoned the mistakes and has even returned the Rs 5,000 that parties deposit while filing the form to begin the compounding process,” he said.
Significantly, RBI has put in place an updated procedure for compounding of contraventions under Fema on the basis of observations made over the last few years and experience gained in dealing with compounding applications.
“We can already sense that the new system is more transparent and distinctly more business friendly... Just to recall, RBI was not imposing the penalties in the first few years after Fema came in,” said the CFO of an export house. While Fema became effective from June 1, 2000, the compounding exercise, which did not exist under Fera, started after February 2005 when detailed rules issued.
Between 2000 and early 2005, RBI had largely condoned the violations that came up. But over the years, companies and professionals started complaining about the high penalties that the central bank was imposing. It culminated last year with a formal representation to RBI by a team of senior chartered accountants and tax professionals who pointed out how high fines were impacting business.
The latest change in RBI’s stance is another big step toward changing foreign exchange regulations that began a decade ago with the demise of Fera.