Delayed Export Proceeds, an Over-Limit Remittance and Compounding
Arka Exports Private Limited, Pune, exported engineering goods to a buyer in Hamburg in March 2024 for USD 4,80,000. The buyer sought credit terms and the proceeds were credited to the company's account only in February 2025. The company's authorised dealer had granted no extension. Separately, in July 2024, its managing director, Mr. Kelkar, remitted USD 2,80,000 from his personal savings to his son in Canada for the purchase of an apartment, relying on the Liberalised Remittance Scheme without approaching any bank for prior approval; he had already remitted USD 40,000 in the same financial year for a family holiday. In December 2024 the company also received USD 60,000 from a Kenyan buyer as an advance against an export order that has not yet been shipped, and that money has been used to pay local suppliers. A show-cause notice has been issued to the company and to Mr. Kelkar, and both wish to apply for compounding.
1. Has Arka Exports contravened FEMA in respect of the Hamburg shipment? Explain the realisation requirement and the correct course the company should have followed.
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The obligation. Section 7 of FEMA read with the Foreign Exchange Management (Export of Goods and Services) Regulations, 2015 requires the full export value of goods or services to be realised and repatriated to India within nine months from the date of export. The period may be extended by the authorised dealer only on the grounds, and to the extent, permitted by the RBI's directions; write-off of unrealised value is also permitted only within prescribed limits and with the AD bank's approval.
Application. The March 2024 shipment remained unrealised until February 2025, roughly eleven months later, and the AD bank had granted no extension. That is a contravention. The company's failure was procedural and avoidable: it should have applied for an extension to its AD bank well before the nine-month period expired, and the AD bank's decision should have been recorded in the exporter's documents.
The Kenyan advance. An advance against exports is not a prohibited receipt, but it must be applied to the stipulated export within the period allowed by the RBI's directions and must be refunded if the shipment does not take place. Using it to fund domestic costs while the shipment lags, without informing the AD bank, creates a second exposure; the company should either ship within the permitted window or seek the bank's approval for a refund or extension.
Remedy. The company should regularise the realisation, obtain a retrospective extension if the AD bank is satisfied that the delay was beyond its control, and then seek compounding of the residual contravention rather than wait for adjudication.
2. Is Mr. Kelkar in breach in respect of his personal remittances? Explain the limit and why the purpose of the remittance does not save him.
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The scheme. The Liberalised Remittance Scheme is a facility under the current account framework read with FEMA, permitting a resident individual to remit up to USD 2,50,000 in a financial year for permitted purposes, including acquisition of immovable property abroad, through an authorised dealer, on a declaration and with the prescribed reporting.
The arithmetic. In financial year 2024-25 Mr. Kelkar remitted USD 40,000 for a holiday and USD 2,80,000 for the apartment - USD 3,20,000 in all. The excess over the scheme limit is USD 70,000. The limit is per person per financial year and is cumulative across all purposes, so the earlier holiday remittance counts.
Why the purpose is irrelevant. Buying an apartment abroad is a permitted purpose, and remitting funds to a non-resident son is not in itself prohibited. But the scheme operates as a ceiling, not a menu: a permitted purpose does not permit a remittance beyond USD 2,50,000. Anything above that requires prior approval of the Reserve Bank, and no AD bank could lawfully process the excess without it.
Consequence. The excess remittance is a contravention, and the bank which processed it faces its own exposure if the declaration was inaccurate. Mr. Kelkar cannot rely on the fact that the entire remittance went through banking channels - the channel is not a substitute for the ceiling.
3. How should the company and Mr. Kelkar approach compounding, and what is the maximum penalty they face?
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Penalty exposure. Section 13(1) imposes a penalty not exceeding three times the sum involved where the amount is quantifiable, up to ₹2 lakh where it is not quantifiable, and a further ₹5,000 for every day of a continuing contravention. For Arka Exports the sum involved is the export value unrealised beyond nine months; for Mr. Kelkar it is the USD 70,000 excess.
Who is liable. Mr. Kelkar is liable personally for his own remittance. For the company's contravention, section 42 of FEMA deems every person who was in charge of and responsible to the company for the conduct of its business at the time of the contravention to be guilty along with the company, subject to the statutory defences of due diligence or of having acted without knowledge. Mr. Kelkar's position as managing director therefore carries direct exposure.
Compounding. Section 15 allows any person committing a contravention to apply for compounding, and the compounding authority must pass its order within 180 days of receipt of the application. The compounding amount cannot exceed the penalty imposable under section 13, and the order is published. Compounding is discretionary, is generally considered on the basis of the RBI's internal matrix, and is not available as of right, particularly for repeat or serious contraventions.
Practical course. Apply before adjudication is complete, quantify the sum involved with exchange-rate evidence, disclose the Kenyan advance separately, and regularise the realisation through the AD bank. A second contravention of the same kind within a short interval will be treated as an aggravating circumstance.