COMPOUNDING OF OFFENCES UNDER FOREIGN EXCHANGE MANAGEMENT ACT 1999

Compounding of offences

Compounding of offence means “making good the loss suffered by a victim”.

The statutes bar the offences which are very serious in nature from being compounded. Only offences that are simple in nature and a compromise can be made between the parties will come under the purview of compounding.

Why do we go for compounding?

Contravention of law and Non compliance leads to penalties and prosecution and to save ourselves from punishment we go for compounding.

Compounding is a boon under our statute to save the offender from prosecution and other legal penalties.

Compounding of offences under FEMA, 1999

The objective behind the formulation of FEMA 1999 replacing FERA 1974 was to boost foreign trade and investment into India. The contravention under FERA was treated as Criminal offence punishable as per Criminal Procedure code, 1973. But the offences under FEMA is considered only to be civil punishable with monetary penalty.

Penalty (Section 13)

“On adjudication, if it is proved the a person has contravened  the provisions of Foreign Exchange Management Act, 1999 and the rules, regulations, notifications made there under shall be liable to a penalty of thrice the sum involved in the contravention, where the amount is quantifiable or upto rupees two lacs where the amount is not quantifiable . And in case of continuing offence with a further penalty which may extend up to Rs. 5000 every day during which the default continues.

In addition to the above, the adjudicating authority may direct that any currency, security or other money or property shall be confiscated.”

The provision for penalty under FEMA 1999 makes it clear that the contravention leads to payment of huge sum of money, rendering it difficult for the offender to revive his business or make good the monetary loss.

Section 15 deals with the power to compound contravention. It states that any contravention under Section 13 may be compounded within 180 days of submitting an application to the Directorate of Enforcement or its officers and officers of the RBI as may be prescribed.

Once an offence has been compounded, no further proceeding shall be initiated or continued against the offender in respect of the compounded contravention.

From the above it is clear that the compounding of contravention is a Voluntary process on the part of the person committing such contravention. i.e., the Offender can proceed to be adjudged and pay the necessary penalties or he can compound his offences.

When application for compounding can be made?

• ·         On being advised of a contravention under FEMA 1999
• ·         Either through Memorandum
• ·         Suo moto
• ·         On becoming aware of the contravention

The Foreign Exchange (compounding proceeding) rules, 2000

The RBI has been empowered to compound contraventions under FEMA 1999 with  a view to provide comfort to individuals and corporate community by minimizing transaction costs, while taking severe view of willful, malafide and fraudulent transactions.

The transactions that can be compounded with Reserve Bank of India are,

1. 1.       Delay in reporting of Inward Remittance
2. 2.       Delay in filing of Form FC-GPR after allotment of shares
3. 3.       Delay in issue of shares beyond 180 days

Under Rule 4 the power of RBI to compound the contraventions have been prescribed with regard to the sum involved in such contravention and no contravention shall be compounded unless the amount involved in the contravention is quantifiable.

Amount involved	Compounding Authority
Upto Rs. 10 lacs	Assistant General Manager of RBI
Rs. 10Lacs  -Rs. 40 lacs	Deputy General Manager of RBI
Rs. 40 lacs –Rs. 100 lacs	General Manager of RBI
More than Rs. 100 lacs	Chief General Manager of RBI

The above provision shall not apply to a contravention committed by any person within a period of 3 years from the compounding of contravention committed under these rules.

The application for compounding must be submitted to the Reserve Bank of India, Exchange control department, Central office, Mumbai, along with a fee or Rs. 5000/- by Demand Draft in favor of the Compounding Authority.

The following are the powers of Enforcement Directorate to compound contravention:

The Directorate of Enforcement (DOE) is entrusted with compounding of contraventions under Section 3(a) of FEMA 1999 (dealing with Hawala and Money Laundering transactions).

Amount involved	Compounding Authority
Upto Rs. 5 lacs	Deputy Director of DOE
Rs. 5 Lacs - Rs. 10lacs	Additional Director of DOE
Rs. 10lacs – Rs. 50lacs	Special director of DOE
Rs.50lacs- Rs.1crore	Special director + Deputy Legal Adviser of DOE
Rs.1crore and above	Director +Special director of DOE

No contravention shall be compounded unless the amount involved in such contravention is quantifiable.

The above provision shall not apply to a contravention committed by any person within a period of 3 years from the compounding of contravention committed under these rules.

The application for compounding must be submitted to the Director, Directorate of Enforcement, New Delhi along with a fee of Rs. 5000 /- by Demand Draft in favor of the Compounding Authority.

Where a contravention has been compounded before the Adjudication of the contravention, No inquiry shall be held for adjudicating (judging) such contravention against the person.

A compounding which has been made after the making of a complaint by the RBI or DOE, then such compounding must be brought to the notice of Adjudicating Authority.

Within 180 days from the date of receiving an application for compounding, the Compounding Authority should pass an order after giving the parties an opportunity of being heard.

Issuing compounding order

The Reserve Bank reserves the right to classify the contraventions as technical or minor in nature, or whether it is serious in nature or does it involve money laundering and other national security concerns, the contravener nor others have any right to classify any contravention as technical Suo Moto.

The compounding application is disposed of by issuing a compounding order specifying the relevant provisions of FEMA 1999 or rules, regulation, notification.

An opportunity for personal hearing is given to the applicant for further submission of documents in person in support of the compounding application within a specified period. The contravener or its authorized representative can choose not to appear in person or make any submissions before the CA for personal hearing.

The compounding authority will make an order based on the representations made by the applicant. When contravention is made after the complaint made under Section 16(3) the order will be provided to the contravener and also to the Adjudicating authority.

Post compounding order:

Within 15 days of receiving the compounding order, the sum payable for the contravention must be paid by way of a demand draft in favor of “Reserve Bank of India”. On receipt of the contravened amount, the RBI issues a certificate

.

The contravener does not have any right to seek the withdrawal of the order or to hold the compounding order as void or request the review of the order made by the Compounding Authority.

Failure to pay the sum compounded within the specified time, then it would be deemed that the contravener has never made an application for compounding.  

Other provisions:

When a similar contravention has been committed by any person within a period of 3 years from the date of compounding a contravention, such subsequent contravention will not be compounded. They would be dealt under the relevant provisions of FEMA 1999.

Where the approval or permission of certain government authority is needed and has not been obtained, such contraventions would not be compounded unless the requisite approvals are obtained.

Thus, the offences under FEMA 1999, can be compounded with Directorate of Enforcement(in case of money laundering transactions) or with Reserve Bank of India (in any other case).

DECLARATION OF DIVIDEND

"Nothing comes free of cost and No Investment is a Charity". 

Every investor deploys his money in hope of receiving some return. In the context of a Company form of organisation, the Investment may be in the form of Owner's money(Share Capital) or Loan Capital (Borrowings in the form of debentures etc.,).

The return for loan capital is by way of Interest and the return for share capital is by way of Dividend. To repay principal along with interest is an obligation of the borrower company. But, the law doesn't confer any obligation for payment of dividend. 

"Even Shareholder's part with their money, they too invest for the growth of the company, they too have a legitimate claim in the profit of the company. But why dividend is not compulsory and why dividend payment is a management decision? "

It is the risk factor, which is borne by the shareholders. In simple terms, let us take the case of a sole proprietorship. In this the owner of the business invests his entire money, carries the whole RISKS of his business.

Similarly, in case of company, shareholders are called the owners, as they take the risk inherit in the business. What risk is that? The investment of shareholders are not backed by security on the properties of the company. 

Unlike loan providers, who generally give their money on the basis of a security on any asset of the company, the shareholders do not enjoy such security.

What is dividend?

From the simple discussion above, it is clear that the dividend payment is the return for the investment made by shareholders.

Dividend is paid out of After tax profits of the company. i.e., profits remaining after payment of corporate tax. (Net profit after tax)

This dividend may be fixed dividend(fixed amount say Rs. 10/ share or fixed rate say 5% of profit) or fluctuating dividend (based on the needs of the company for retaining some amount of profit)

Retained earnings : - Retained earnings or reserves or surplus of profits are a portion of the profit after tax not distributed as dividend and is set apart as reserves for present or future need of the business. 

Provisions under Companies Act, 1956:

• No dividend should be paid or declared for any financial year except out of the profits of the company, for that year arrived at after providing for depreciation as mentioned under Sections 349 & 350.
• Dividend includes interim dividend and all the provisions relating to dividend applies to interim dividend.(Interim dividend is the dividend paid in between two AGMs )
• No dividend shall be paid except in cash, with the exception of fully paid Bonus Shares.
• In the Annual General Meeting declaration of  Dividend is proposed by the Board of directors and shareholders approve the dividend after deliberations and discussions.
• Interim dividend is declared by the management and is approved in the board meeting.
•  The entire dividend amount must be deposited in a separate bank account within 5 days of declaration of dividend. 
• Dividend once declared, must be paid within 30 days of declaration. If the payment has not been made or unclaimed within 30 days, then seven days after the expiry of said 30 days, the entire amount of dividend remaining unpaid or unclaimed  shall be transferred to a Special Dividend account called "Unpaid divided account of  -------company ltd/private ltd"
• When company proposes to declare dividend at times of inadequate profits and from the accumulated profits , then the company should follow the Companies (Declaration of dividend out of Reserves) Rules, 1975.
• The dividend which remains unclaimed in the "Unpaid divided account of  -------company ltd/private ltd"  for a period of seven years should be transferred on the expiry of seven years to Investor Education and Protection Fund established under Section 205C.
• Dividend should be paid only to the registered shareholders or to their orders or to their bankers

In case of shares pending for registration of transfer, the dividend in respect of such shares must be kept in a separate bank account ("Unpaid divided account ")  or as declared by the transfer-or in the transfer instrument.

The offer of rights shares or bonus shares must be kept in abeyance in relation to such shares pending for registration.

Constraints in the payment of dividend:

1. Dividend decision is based on the financial needs of the management. 
2. If the investment opportunity for the company is more and the company wants to reinvest its earnings , then it will not declare dividend or distribute a very small amount of earnings.
3. If the Company doesn't have enough opportunity to invest its earnings, then the management would be willing to declare dividend liberally.
4. The Loan agreement or arrangement made by the company may, impose restrictions on the payment of dividend.
5. If the company's financial obligations are more, then the feasibility of declaring dividend is less.

Dividend, though a management decision to declare or not to declare, is ultimately a legitimate claim of  a shareholder as an investor. Dividend has an impact in the pricing of the shares of the company. It is a price sensitive information in the context of the Listed securities as it will result in increase or decrease in share prices. 

PROVISION OF LOAN BY A COMPANY TO AN INDIAN COMPANY

Company is an ARTIFICIAL PERSON created by law and can acquire and hold property on its own.
It can sue and be sued under the law.
(i.e., it can initiate legal proceedings against others and legal proceedings can be initiated against the company)In the same way it will have power to borrow and to give loan to others.

By whom the company functions/ who executes the contracts on behalf of the company?The day to day activities of the company are taken care by the Board of Directors of the company

What powers does the board of directors have?The powers and functions of the board of directors are given in the Companies Act, 1956, Memorandum and Articles of Association of the company.

How does the board of directors execute these powers?The board of directors enjoys the powers mentioned in the Companies act, MOA, AOA through the resolutions passed at the board meeting.

Lending by a company:

As we saw above, the company can lend money to others, be it a body corporate or any other form of  entity.The provisions relating to lending by a company is contained in section 292 and section 372A.

Section 292:

The provisions relating to section 292 is applicable to all companies. It talks about the powers of the board of directors to be exercised only at a meeting. It authorizes the board to perform certain activities on behalf of the company. 
The provisions of this section can be performed by the board or can be delegated to a committee of the board, delegated to any officer of the company. 
The following are the powers to be exercised by the board only at a meeting.

• The power to make calls on shareholders in respect of money unpaid on their shares;
• The power to authorise the buy-back referred to in the first proviso to clause (b) of sub-section (2) of section 77A;
• The power to issue debentures;
• The power to borrow moneys otherwise than on debentures;
• The power to invest the funds of the company; 
• The power to make loans :

Sub section (1)(e):

This sub section gives power to the board to make loans on behalf of the company. 

Subsection (4) requires that the board resolution delegating the power to specify the total amount upto which loans may be made by the delegatee, the purpose and the maximum amount which may be made for each such purpose.

Section 372A:
The provisions of this section are exclusively for provision of loans and investments to be made in another body corporate.

This section is applicable for a public company and is inapplicable for a  private company which is not a subsidiary of public company.

The following transactions are regulated by this section:

1. Providing Loan to Any Body Corporate
2. Acquiring the securities of any other body corporate.
3. Giving any guarantee or providing any security to:

A person who gives a loan to anybody corporate; or
A body corporate which gives a loan to any other person.

Approvals required under Section 372A:   

Board approval:

• The company can provide loan/ give guarantee/ acquire securities of another body corporate by passing a unanimous Board Resolution at a duly convened Board Meeting and not through Circular Resolution.
• The company can provide loan within the ceiling limit mentioned in this section simply by passing a Unanimous Board Resolution. The Ceiling limit is 

60% of the aggregate of paid-up share capital and free reserves of the company or
100% of free reserves of the company.

 Shareholders approval:

• If the aggregate loan exceeds ceiling limit mentioned above then the company must pass a special resolution of the members of the company in the following manner:
• Unlisted Public Company: at duly convened General Meeting.
• Listed Public Company: only by way of Postal Ballot. (as per Companies passing of resolution by postal ballot, 2011)

Notice to be issued for the shareholders meeting:

1. The specific limits upto which loans or guarantee can be given
2. The particulars of other body corporate in which investment is proposed to be made or loan, guarantee, or security is proposed to be given.
3. Purpose of making loan, investment, guarantee, or security.
4. Specific sources of funding.
5. Other relevant details. 

Financial Institutions approval:

1. If the company has taken any term loan from a Public Financial Institution, then it must obtain the approval of the institution.
2. Such an approval of financial institution is not required if the company provides loan within the specified limit and there is no default in repaying the interest or repayment of installment amount.

Restrictions:

—  Any public company which has defaulted in repaying the public deposits under Section 58A if the default still continues.  Only after the default is made good the company can provide loan to another body corporate.

The rate of interest chargeable on any inter-corporate loan shall not be less than the prevailing bank rate. ‘Bank rate' means the rate at which RBI lends money to commercial banks.

Exemption:

1. This section is not applicable for any investment/ loan /guarantee provided by a holding company to its subsidiary company.
2. Investments made in Rights shares. (i.e, further shares issued to the holding company by the subsidiary company)
3. Loan/guarantee/security provided by a banking company, insurance company, Housing finance company in the ordinary course of business or whose business is acquisition of share and debentures of other companies .

Non-compliance of the provisions of Section 372A:

1. The Company and every Officer in default shall be punishable with imprisonment  upto 2 years, or with fine upto Rs.50,000. Where repayments of loans have been made in full, imprisonment shall not be imposed, and where part payments are made, imprisonment shall be proportionately reduced.
2. All persons who are knowingly parties to any contravention shall be liable jointly and severally to the Company for

a. Repayment of the loan, orb. Making good the sum which the Company may have been called upon to pay on account of the guarantee given or the securities provided by such Company.

Maintenance of register under Section 372A(5)

A register showing following particulars of the transaction must be entered within 7 days of making investment:

a. Name of the Body Corporate.

b. Amount, terms and purpose of the investment / loan / security / guarantee.

c. Date on which the investment / loan has been made, and

d. Date on which the guarantee has been given or security has been provided in connection with a loan.

   The Company and every Officer in default shall be punishable with fine upto Rs.5, 000 and with a further fine upto Rs.500 for every day after the first day during which the default continues.

These are the provisions relating to Provision of loan by a company as per the provisions of Companies Act, 1956.

COMPANY MEETINGS

What is the purpose of meetings?

The very purpose of conducting meetings is to discuss about a particular issue and pass resolution that a task would be carried out.

In the Company form of organization, the members are the Investors who have invested their money in order to obtain a return. Being owners of the company, the members have a right to be informed about the activities of the company.

The statute (Companies Act, 1956) has mandated to get the approval of the members in certain vital issues of the company. For such a purpose, Member’s meetings are conducted.

Kinds of meetings as per Company Law

Board meeting:

The provisions relating to meetings of the directors are given under Section 285 to 290. The board should meet atleast once in every 3 months and 4 such meetings must be held in every year. The Board meeting can be conducted on any day and on any place as per the convenience of the Board.

Procedure:

• Notice of the Board meeting along with the Agenda must be given to directors who are present in India.
• The quorum for the board meeting is 1/3^rd of the board of directors or 2 directors whichever is higher. Interested directors should not be counted for the purpose of quorum. (Interested Director means a director who is in any way related to the contract or arrangement to be entered by the company in that meeting. i.e., who will be benefitted directly or indirectly through such arrangement)
• Board resolutions are of two types. Simple majority resolution (51% favoring the resolution). Unanimous resolution (100% favoring the resolution).

Circular resolution:

The board of directors can pass resolutions without convening physical meetings. In such case circular resolutions can be passed. For the purpose of passing circular resolution, the copy of the resolution must be forwarded to the directors and their approval is received.

The act restricts the passing of circular resolutions in certain circumstances as mentioned in Section 292 and for other important business.

[1]Video conference Board Meeting:

When it is not possible for the directors to attend the meeting physically, the same can be conducted through video conference.

 General meeting:

General meeting refers to Meeting of Shareholders or Creditors or any class of them.

Types of General Meetings

Statutory Meeting: 

It is the first meeting of members to be conducted within a period of one to six months from the date of commencement of business of a public company with or without share capital.

The board of the company should forward a Statutory Report to the members of the company before 21 days of the meeting. The Report should set out all details relating to 

• shares alloted, amount of cash received by the company, 
• an abstract of receipts and payments made by the company,
•  Names ,address and other details relating to directors and other officers and auditors of the company.
• particulars of any contract, which requires approval of the members.

Annual General Meeting:

The Annual General Meeting of a company is convened to get the members /investors know about the progress made by the company. It is an opportunity to know how their invested funds have been utilized by the company.

The Annual General Meeting (AGM) of a company must be held within 6 months from end of the financial year. The first AGM of a company must be held within 18 months of incorporation or 9 months from the closure of the Annual accounts whichever is earlier. The Annual General Meeting of the company must be conducted during the business hours and can be conducted on any day other than a  public holiday.

Procedure:

• Notice of the meeting must be sent to the members 21 days before the annual general meeting.
• The notice should specify the business to be conducted and discussed at the meeting. The venue, date and timings of the meeting must be specified clearly. 
• Ordinary Business: Adoption of Annual accounts, Declaration of Dividend, Appointment of director in place of those retiring, Appointment and fixation of remuneration of auditors. 
• All other transactions to be discussed are special business. Special business requires a statement setting out the materiel facts to be annexed to the notice of the meeting.
• The Articles of the company may specify the quorum for the general meetings. If nothing is mentioned in the AOA, the Quorum for the meeting must be 5 members personally present in case of a public company and 2 members in case of any other company.

Extra-ordinary General Meeting:
A general meeting which is conducted in between two annual general meetings in called EGM. These are conducted, because the matter to be discussed is of utmost vital and it cannot be postponed till next AGM. The issues requiring approval of the members are discussed in the EGM.

The EGM can be conducted by the board of directors, on the requisition of members. The number of members to call for requisition must constitute atleast 1/10th of such of the paid up capital carrying voting right with regard to the matter to be discussed (company with share capital) or 1/10th of the total voting power of all the members having a right to vote on the matter (Company without Share capital)

The board should call the meeting within 21 days of receiving valid requisition.
If the board did not call such meeting within 21 days as aforesaid, the requisitionists themselves conduct such meeting within 45 days of submitting the requisition.

[2]Meetings under Section 391-394:

The provisions under section 391-394 is relating to the Merger and Amalgamation of companies. This meeting is conducted as per the provisions of the above mentioned sections along with Companies Court Rules, 1959 Rule 67-87.

Provisions:

• The Company or Companies proposing to enter into a compromise or arrangement or enter into a Merger or amalgamation must submit a petition to the concerned High Court where the registered office of the company is situated along with the proposed Scheme of arrangement or amalgamation. 
• The court issues an order to convene the meeting of the members and creditors to get their approval as provided under the act.
• The resolution for this purpose must be passed by majority of members, holding 3/4th of the share capital of the company, present either by person or proxy.
• The result of the meeting will be submitted in the High court and by way of a petition the court passes the order of amalgamation. 

What are the various types of resolutions under Companies Act?

Ordinary resolution (OR):

When a motion has been approved by more than 50% of the members present at the meeting, it is called ordinary resolution.

Special Resolution (SR):

when a motion is required to be approved by 75% of the members present at the meeting, it is called Special   resolution.

Special majority resolution:

The resolution which is passed as per Section 391-394, where approval is to be granted by more than 50% of the members present at the meeting, holding 75% of the share capital of the company, either by person or through proxy.

These are the provisions relating to convening of meetings as per the provisions of existing Companies Act, 1956. 

------------------------------------------------------------------------------------------------------------

---

[1] Refer MCA circular No.28  dated 20^th May 2011 for detailed procedure
[2] Refer Companies Act, 1956 Sections 390 to 396A for detailed provisions

Kindly note: This note has been prepared solely for the simple understanding of the Students. I request them to refer the necessary rules and/or sections of the act for detailed provisions.