The Reserve Bank of India (RBI) has announced a major compliance relief for minor violations under the Foreign Exchange Management Act (FEMA). Through its Master Direction on Compounding (22 April 2025) and Companion Circular (24 April 2025), RBI has allowed a ₹2 lakh cap on penalties for certain low-risk contraventions—commonly referred to as “residual category” violations.
What Are Residual Category Contraventions?
Residual category contraventions are minor, technical, or procedural FEMA violations that:
- Are not explicitly listed in the RBI’s standard compounding schedules
- Occur due to oversight, not malafide intent
- Do not result in monetary loss to the government or unfair gain
- Are non-repetitive and non-substantive
- Are typically delayed filings or missed reporting obligations
When does the ₹2 Lakh Cap Apply?
The ₹2 lakh penalty cap can be invoked at the discretion of the Compounding Authority, only if the following conditions are met:
- The contravention is non-material and technical
- It is a one-time or isolated lapse
- There is no willful default or fraud
- The party has voluntarily come forward and taken corrective action
- There is no investigation pending with the Enforcement Directorate (ED)
- The matter does not fall under Section 3(a) of FEMA
Visual Table: Understanding Residual Category Violations
Type of Contravention | Real-Life Example | What Went Wrong? | Why It May Qualify for ₹2 Lakh Cap |
LRS Limit Breach | Resident sends USD 275,000 abroad in one year | Exceeded permissible limit | Technical error, no major loss, non-repetitive |
Delay in Repatriation | Indian co. sells foreign JV but delays bringing back money | Missed deadline for repatriation | Procedural, no mala fide intent |
Export Advance Not Utilized | Exporter receives advance, doesn’t ship or refund in 1 year | Breach of export obligation | One-time error, often due to logistic delays |
Export Proceeds Not Realized | Export made, but payment not received in permitted 9 months without obtaining extension. | Delay in realization | No undue benefit, can be explained |
Gifting of Shares | Resident gifts shares to NRI without obtaining RBI prior approval | Missed approval step | Voluntary, family transfer – not commercial |
FDI Without Approval | FDI received in a restricted sector, without prior approval | Regulatory oversight | Can be regularized if within sector limits |
ECB End-Use Violation | ECB loan used for working capital instead of project | Misuse of funds | May qualify if unintentional and corrected |
Buying Property Abroad | Resident bought property without following LRS conditions | No RBI approval taken | May be condoned if not repeated and funds declared |
What Is Not Covered?
- Matters under ED adjudication
- Serious violations or repeat offenses
- Cases involving illegal foreign exchange dealings under Section 3(a)
Why It Matters?
This move by RBI provides the following benefits:
- Reduces cost of compliance for minor errors
- Encourages voluntary disclosure of old issues
- Simplifies regulatory clean-up during M&A, fundraising or audits
- Streamlines compliance via RBI’s PRAVAAH online platform
What Companies Should Do
- Audit past FEMA compliance – check for missed or delayed filings
- Assess eligibility – does the error fall in the residual category?
- Gather evidence – show it was a one-time error, already corrected
- Apply for compounding – mention ₹2 lakh cap in application
Conclusion
RBI’s ₹2 lakh penalty cap for residual FEMA violations reflects a progressive shift—recognizing the difference between serious non-compliance and innocent procedural errors. If you’ve had small FEMA oversights in the past, now is the time to proactively fix them under this simplified regime.
Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement.
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