Short answer: A FEMA show cause notice starts civil adjudication, usually by an ED officer acting as Adjudicating Authority, and can end in a penalty of up to three times the sum involved. Reply on facts and documents, and ask for a personal hearing. Compounding under Section 15 is a separate route: you admit the contravention and pay a compounding amount fixed by the RBI, but it is not available for every contravention, for example where a penalty has already been imposed.
Penalty and adjudication
Under Section 13(1) of the Foreign Exchange Management Act, 1999 (FEMA), a contravention of the Act, rules, regulations, directions or RBI conditions makes a person liable, on adjudication, to a penalty of up to thrice the sum involved where it is quantifiable, or up to two lakh rupees where it is not, plus up to five thousand rupees a day for a continuing contravention. FEMA contraventions are civil, but Section 14 allows civil imprisonment if a penalty is not paid within 90 days of notice.
Under Section 16, Adjudicating Authorities appointed by the Central Government hold an enquiry only on a written complaint by an authorised officer, and must give a reasonable opportunity of being heard. Section 16(6) asks them to endeavour to dispose of a complaint within one year.
Replying to the notice
A good reply identifies each transaction alleged, the regulation said to be breached, and the documents showing compliance or delayed compliance: bank certificates, filings, valuation reports and approvals. Where the case rests on seized material or on a seizure under Section 37A, the outcome of the seizure proceedings matters. On 1 April 2026, in J. Sri Nisha v. The Special Director, Justice Vikram Nath and Justice Sandeep Mehta set aside a FEMA adjudication that had ignored a Competent Authority’s refusal to confirm a seizure, and said that writ petitions against show cause notices, though generally discouraged, are maintainable in exceptional cases such as lack of jurisdiction or absence of foundational facts.
Appeals
Orders of Assistant and Deputy Directors acting as Adjudicating Authorities go to the Special Director (Appeals) under Section 17; other orders, and orders of the Special Director (Appeals), can be appealed to the Appellate Tribunal under Section 19 within 45 days. An appellant against a penalty must deposit it while filing, but the Tribunal may waive the deposit for undue hardship, on conditions. A further appeal on a question of law lies to the High Court under Section 35 within 60 days.
Compounding with the RBI
Section 15 allows any contravention under Section 13 to be compounded on the contravener’s application, within 180 days of the application, and Section 15(2) bars further proceedings once it is compounded. The procedure is in the Foreign Exchange (Compounding Proceedings) Rules, 2024, notified on 12 September 2024, and the RBI’s Master Direction of 22 April 2025. The RBI compounds most contraventions, while those under Section 3(a), dealing in foreign exchange with an unauthorised person, go to the Directorate of Enforcement. The fee is Rs 10,000 plus GST, and the compounding amount must be paid within 15 days of the order.
Compounding is excluded, among other cases, where the amount is not quantifiable, where Section 37A applies, where an Adjudicating Authority has already imposed a penalty, in serious matters such as suspected money laundering, and for a similar contravention within three years of a previous compounding. On 23 October 2026, the RBI delegated compounding of overseas investment and contraventions relating to borrowing, lending and guarantees to select Regional Offices.
Related questions
Can I compound after receiving an ED show cause notice?
Check eligibility carefully. The RBI Directions bar compounding once a penalty has been imposed and require the applicant to disclose the status of any ED enquiry, investigation or adjudication. Matters treated as serious are not compounded by the RBI. Advice on timing is important.
Does compounding mean admitting guilt?
Compounding is only for admitted contraventions, based on voluntary disclosure. It is a civil settlement under FEMA; no appeal lies against the compounding order, and the process ends with an RBI certificate once the amount is paid.
How long does compounding take?
The rules require the compounding order to be passed within 180 days of receipt of a complete application. Incomplete applications are returned, so all pending approvals and filings should be completed first.
Can FEMA contraventions lead to arrest?
FEMA contraventions are civil and there is no power of arrest for them as such. Civil imprisonment under Section 14 can follow non-payment of a penalty, and the same facts may separately attract other laws if a criminal offence is alleged.
Practical points
- Do not ignore a Memorandum of Contraventions or show cause notice; note the reply date.
- Reconstruct the transaction file before replying: remittance records, filings and approvals.
- Compare compounding cost against defending on merits before choosing a route.
- Check which RBI office has jurisdiction under the October 2026 delegation.
Sources: FEMA, 1999 (Indian Kanoon); RBI Master Direction on Compounding, 22 Apr 2025; RBI A.P. (DIR Series) Circular No. 28, 23 Oct 2026; Juris Hour, 3 Apr 2026.
For a confidential discussion on FEMA matters, see FEMA and Cross-Border Matters.
General legal information only; not legal advice or solicitation.
