FEMA Compounding Case: How We Resolved a ₹8.5 Crore Violation in 4 Months

Background

A Bengaluru-based B2B SaaS company had raised two rounds of angel funding totaling USD 2 million (approximately ₹8.5 crore at the time) between 2021 and 2022. The investors were a mix of NRIs and foreign-incorporated entities. The company's founders were first-generation entrepreneurs without prior fundraising experience, and their lawyer at the time was a general-purpose commercial attorney without FEMA expertise.

The FC-GPR filings with the RBI — mandatory within 30 days of each share allotment — were never made.

The violation was entirely unintentional. No one in the company knew FC-GPR existed.

Discovery

In 2024, the company's prospective Series B lead investor (a Singapore-based VC) engaged an Indian law firm for due diligence. During the DD review of the cap table and FIRMS portal records, the absence of FC-GPR filings was discovered.

The VC's term sheet included a "clean FEMA compliance" condition precedent for closing. Without resolving the violation, the ₹28 crore Series B would not close.

The founders engaged Cogent to handle the FEMA compounding process — with a hard deadline from the VC of 4 months.

Analysis: Severity of the Violation

Under Section 13 of FEMA, a violation is compoundable (can be settled by paying a penalty) if it falls below the threshold for enforcement action by the Enforcement Directorate.

Contravention amount: ₹8.5 crore (the total FDI received without FC-GPR)

Applicable penalty range: Under RBI's compounding calculation guidelines, the penalty formula considers:

• Duration of default (2 years)
• Amount of contravention
• Number of instances
• Whether the company is a first-time offender
• Cooperation with authorities (voluntary vs detected)

The Compounding Process

Step 1: Preparation of Compounding Application (2 weeks)

The compounding application to the RBI's Compounding and Technical Help Desk (CTHD) in Mumbai must include:

• Full factual matrix (what happened, why, when, amount)
• Chronology of shares allotted and consideration received
• Board resolutions, share certificates, bank remittance confirmations
• CA-certified computation of the violation amount
• Undertaking that there are no other pending FEMA violations
• Prayer for compounding with reasoning

We prepared a 40-page application with supporting schedules, emphasising:

1. No intent to violate — technical oversight by a non-specialist lawyer
2. No benefit derived from the violation — funds were used for normal business operations
3. Prompt voluntary filing upon discovery
4. No adverse impact on national economy or investor

Step 2: RBI Acknowledgement and Query Response (1 month)

The CTHD acknowledged the application within 15 days and issued a query letter asking for:

• Additional details on the basis of FMV computation at each allotment
• Merchant banker valuation reports (which the 2021-22 filings had — we dug them out)
• Confirmation that no transfer of shares had occurred without FC-TRS

We responded within 10 days with all documents.

Step 3: Compounding Order (Month 3)

The Regional CTHD office issued a notice of hearing, which was attended by our senior FEMA partner and the company's CFO. The hearing lasted 90 minutes. We made oral submissions on the company's compliance intent and the inadvertent nature of the violation.

The Compounding Authority issued the order within 3 weeks of the hearing.

Compounding order: ₹36 lakh (approximately 0.42% of the contravention amount + ₹5,000 application fee)

Step 4: Payment and FC-GPR Filing (Month 4)

Within 15 days of the order, the company:

1. Paid ₹36 lakh compounding fee via RTGS to RBI
2. Filed both FC-GPR entries on the FIRMS portal with the original allotment dates (the portal accepts backdated filings once a compounding order is in place)
3. Obtained RBI acknowledgements of the FC-GPR filings

The compounding order, payment receipt, and FIRMS acknowledgements were shared with the VC's legal team.

Outcome

Lessons for Startups

Before closing any foreign investment:

1. Engage a FEMA-specialist lawyer (not a general corporate lawyer) for the term sheet review
2. File FC-GPR within 30 days of every allotment — set a calendar reminder on the day of allotment
3. File FLA return every July for all years in which foreign investment was outstanding
4. For convertible instruments, understand the FC-GPR filing timeline (conversion vs subscription)

If you discover a historic violation:

• Do NOT ignore it hoping it will never surface (it surfaces in every M&A or fundraise DD)
• File compounding voluntarily — penalties are significantly lower than detected violations
• The RBI compounding process, while formal, is designed for regularisation of unintentional violations