Compounding after Adjudication is Impermissible under FEMA: Calcutta High Court Declines Post-Adjudication Compounding Plea

The very object of compounding will be frustrated if prayer for compounding is made after the adjudication process is concluded — Calcutta High Court clarifying that once an adjudication order is passed under the Foreign Exchange Management Act, 1999 (FEMA), the contravener cannot subsequently seek compounding of the offence. The Court held that permitting post-adjudication compounding would defeat the legislative scheme of FEMA and undermine the purpose of its penalty and enforcement mechanism. 
 
The petitioner, Sanjay Jhunjhunwala, was found guilty of contravening FEMA provisions, particularly relating to borrowing or lending in foreign exchange without the requisite permission. The adjudicating authority imposed a penalty of Rs. 10 crore on March 28, 2024. Initially, the petitioner had filed a compounding application on January 20, 2023, but it was returned due to lack of clarity. Instead of filing a fresh compounding application at that stage, the petitioner proceeded with the adjudication process. After the adjudication concluded with an adverse order, the petitioner sought to invoke the compounding route once again, which was rejected by the RBI. This rejection and the subsequent demand notice were challenged through the present writ petition. 
 
The sole issue before the Court was whether a person who has accepted an adjudication order under FEMA without preferring an appeal can later apply for compounding of the offence. 
 
The Court noted that under FEMA and the Foreign Exchange (Compounding Proceedings) Rules, 2000, compounding is a mechanism to avoid protracted adjudication and is available prior to or during but not after the adjudication process. 
 
Justice Sinha observed: The very object of compounding an offence will be frustrated if prayer for compounding is made after the adjudication process is concluded.” 
 
Referring to Rule 6 of the Compounding Rules, the Court clarified that:  “Where any contravention is compounded before the adjudication of any contravention under Section 16, no inquiry shall be held for adjudication of such contravention.” 
 
Hence, the compounding option ceases to exist once adjudication is completed. 
 
The Court highlighted that compounding is intended to “get the issue settled without the parties going for regular trial/adjudication upon payment of compensation or fine.” However, the petitioner here tried to invoke compounding only after the adjudication order went against him. 
 
In a telling remark, the Court commented: “It appears that the petitioner simply tried to test the waters and see as to whether the adjudication order comes in his favour or not. After the adjudication order went against him and penalty amount has been quantified, the petitioner seeks to proceed with the compounding.” 

The Court emphasized that permitting post-adjudication compounding would result in dual orders — one from the adjudicating authority and another from the compounding authority — which is legally untenable: “In respect of a contravention, two orders cannot survive at the same time.” 
 
 
Rejecting the petitioner’s argument that Rule 11 bars compounding only when an appeal is filed, Justice Sinha held: “The petitioner took the risk and did not proceed with his application for compounding prior to conclusion of the adjudication proceeding… After the adjudication is complete and offence has been established, the contravener would be bound to comply with the direction passed by the adjudicating authority.” 

The Court ultimately dismissed the writ petition and vacated the interim relief. 
The judgment settles a crucial point under FEMA that compounding cannot be availed as a post-adjudication strategy. The decision is consistent with the object of FEMA to ensure that penalty proceedings are conducted in a timebound and effective manner. 
 As the Court firmly stated: “The Act will be rendered completely toothless… Tendency to circumvent the law will increase.” 
 This judgment will likely serve as a precedent against delayed attempts at compounding once adjudication under FEMA has reached finality. 
 
 Date of Decision: 01 April 2025