A pvt limited company failed to issue shares to its foreign investors within 180 days from receiving of money and its been almost four years of receiving of money.
Now the company wants to refund the money.
want to know: 1)whether the company is liable to pay the panelty. If yes, how much and to whom 2) How to inform RBI regarding the contavention 3) How to compound the offence
20 July 2025
Here’s a detailed response on refund of application money to foreign investors when shares are not issued within 180 days:
1) Liability to pay penalty: Under Foreign Exchange Management Act (FEMA), 1999, and specifically under Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (FEMA 20), the company is required to issue shares within 180 days of receiving the foreign investment money. Failure to comply attracts penalties under Section 13 of FEMA, which can be: Up to three times the sum involved in contravention or Up to Rs. 2 lakh or both. Penalty is levied by the Adjudicating Authority (designated by RBI). 2) How to inform RBI about contravention: The company or the Authorized Dealer (bank) should report the delay/contravention to the Regional Office of the Reserve Bank of India (RBI) concerned. File a voluntary disclosure or show cause notice reply explaining the reasons for delay and the steps taken for refund. Report the details through prescribed forms such as FC-GPR and/or Advance Reporting Form (ARF) if applicable. 3) How to compound the offence: Compounding is the process of settling the violation by paying a compounding fee. The company can apply for compounding of contravention under FEMA rules by filing an application with the Adjudicating Authority or Regional Office of RBI. The compounding fee is generally a percentage of the amount involved or a fixed sum depending on the case. Early voluntary disclosure can reduce the compounding fee or penalty. 4) How to protect the company from penalty / minimize penalty: Voluntary disclosure: Inform RBI proactively about the delay and the steps taken for refund. Refund immediately: Refund the application money to the foreign investor without further delay, following FEMA and FEMA 20 regulations. Provide documentary proof: Keep records of communication with the investor and refund transaction. Apply for compounding: File application for compounding to avoid harsher penalty. Legal counsel: Engage legal/foreign exchange compliance expert for preparing submissions to RBI and Adjudicating Authority.
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