Of the Foreign Exchange explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Compounding is a way out of adjudication, but only for some contraventions. Rule 9 lists five cases in which no contravention shall be compounded. Rules 6 and 7 say what compounding does to a pending or begun adjudication: it stops further inquiry, and after a complaint it discharges the person. This article reads rule 9 first, then rules 6 and 7. Our FEMA compounding team can test a case against rule 9 before you file.
Under rule 9 of the Foreign Exchange (Compounding Proceedings) Rules, 2024 (as notified on 12 September 2024), no contravention is compounded where the amount is not quantifiable, where section 37A of the Act applies, where the Directorate of Enforcement sees a serious contravention suspected of money-laundering, terror financing or affecting the sovereignty and integrity of the nation, where a penalty under section 13 has already been imposed, or where further investigation is needed to ascertain the amount. Rule 6 stops adjudication once a contravention is compounded, and rule 7 discharges the person if the compounding follows a complaint.
Which text is being explained
The Rules are G.S.R. 566(E) dated 12th September, 2024, made by the Central Government under clause (b) of sub-section (2) of section 46 read with sub-section (1) of section 15 of the Foreign Exchange Management Act, 1999. See our articles on section 15, power to compound and section 46. Later amendments should be checked on the Gazette site.
Rule 9: five cases where compounding is not available
Rule 9 is headed "Contraventions not to be compounded in certain cases" and reads: "No contravention shall be compounded," in five situations.
| Clause | Situation | What it means in practice |
|---|---|---|
| (a) | Where the amount involved is not quantifiable | The authorities need a figure to place the case in a slab under rule 4 or 5; if the amount cannot be fixed, compounding is closed |
| (b) | Where the provisions of section 37A of the Act are applicable | Section 37A deals with seizure of equivalent assets for holdings abroad in contravention of section 4; see our article on section 37A |
| (c) | Where the Directorate of Enforcement is of the view that the proceeding relates to a serious contravention suspected of money-laundering, terror financing or affecting the sovereignty and integrity of the nation | The compounding authority shall not proceed with the matter and shall remit the case to the appropriate Adjudicating Authority for adjudicating the contravention under section 13 |
| (d) | Where the Adjudicating Authority has already passed an order imposing penalty under section 13 of the Act | The case has already been decided; the penalty route has been taken |
| (e) | Where the compounding authority is of the view that the contravention requires further investigation by the Directorate of Enforcement to ascertain the amount of contravention under section 13 | The amount is not yet established |
The right-hand column states what the text implies in plain words. Only the text itself binds. Clause (c) is the only clause that names the next step: the case goes to the appropriate Adjudicating Authority, which adjudicates under section 13. For section 13 and its penalties, read our article on contravention and penalties under section 13.
Clause (c) is worth a second look. It turns on the view of the Directorate of Enforcement. The Rules do not give a test for what is "serious", nor a mechanism to challenge the view. It is the Directorate's view that stops the matter.
Rule 6: discontinuation of adjudication
Rule 6 says that where any contravention is compounded before the adjudication of that contravention under section 16, no inquiry or further inquiry shall be initiated or continued for adjudication of the contravention against the person in relation to whom it is compounded. So, compounding before adjudication ends the adjudication track for that contravention and that person. See our article on adjudication under section 16.
Rule 7: discharge after a complaint
Rule 7 deals with the case where compounding is made after the making of a complaint under sub-section (3) of section 16. Such compounding shall be brought by the compounding authority specified in rule 4 or rule 5, in writing, to the notice of the Adjudicating Authority, and on such notice the person in relation to whom the contravention is so compounded shall be discharged.
Notice the duty falls on the compounding authority, not on the applicant: it must inform the Adjudicating Authority in writing. The discharge takes effect on that notice.
How the three rules fit together
Think of a timeline. Before any adjudication begins, a compounded contravention is closed (rule 6). After a complaint, a compounded contravention is brought to the notice of the Adjudicating Authority and the person is discharged (rule 7). Where a penalty has been imposed under section 13, compounding is no longer available (rule 9(d)). The difference between the two routes is explained in our guide on compounding versus adjudication.
Example
Orchid Marine Pvt Ltd has made a late filing involving an amount of ₹40,00,000. Its adviser first checks rule 9. The amount is quantifiable; section 37A is not in play; there is no suspicion of money-laundering; no section 13 penalty has been imposed; no further investigation is needed to ascertain the amount. None of clauses (a) to (e) bars compounding, and the application can go to the right authority under rule 4 or rule 5.
Now take a different company, Pelican Ltd, whose matter the Directorate views as a serious contravention suspected of money-laundering. Under rule 9(c) the compounding authority does not proceed and remits the case to the appropriate Adjudicating Authority.
Finally, Quartz Ltd applies after a complaint under section 16(3). If the contravention is compounded, the compounding authority informs the Adjudicating Authority in writing and Quartz Ltd is discharged under rule 7.
Common mistakes
- Assuming compounding is always available as long as a fee is paid. Rule 9 closes five cases.
- Forgetting that an adjudicating order imposing penalty under section 13 shuts compounding for that contravention (rule 9(d)).
- Believing the applicant must inform the Adjudicating Authority after a complaint. Rule 7 puts the duty on the compounding authority.
- Not quantifying the amount. Rule 9(a) turns on it, and the slab under rules 4 and 5 depends on it.
Need help deciding between compounding and adjudication?
Whether a contravention is eligible, and which route is better for your facts, is a judgment that should be made before you approach any authority. Our FEMA compounding team can test the facts against rule 9 and tell you what to expect.
Key takeaways
- Rule 9 lists five cases where no contravention is compounded.
- Clause (c) sends serious cases to the Adjudicating Authority under section 13.
- Rule 6 ends further inquiry for a contravention compounded before adjudication under section 16.
- Rule 7 requires written notice to the Adjudicating Authority and discharges the person on that notice.
- Section 37A cases are outside compounding altogether.
Read next
- Compounding procedure, time limit and payment: rules 8 and 10 to 14
- Compounding by the Directorate of Enforcement: rule 5
- Compounding vs adjudication of offences
- Adjudication under FEMA: section 16
- Section 37A of FEMA: seizure of equivalent assets
Disclaimer: Based on the rules, regulations and Reserve Bank Master Directions under the Foreign Exchange Management Act, 1999 that this article names, each in the version and up to the date stated in the article, as consulted on 2 October 2026. Some texts are third-party copies or older prints and are identified as such. Limits, forms and time limits change by amendment and circular; later changes should be checked on the Reserve Bank and Gazette sites. This article is general information, not legal advice; check the official text before acting.