Penalties for non-compliance with directions issued by the Reserve Bank of India encompass monetary sanctions, adjudication, and appellate remedies under the Banking Regulation Act, 1949, the RBI Act, 1934, and the Foreign Exchange Management Act, 1999, depending on the regulated entity and contravention type. In practice, RBI imposes calibrated penalties for supervisory non-compliance, while contraventions under FEMA follow a formal adjudication and appeal pipeline led by the Enforcement Directorate and designated Adjudicating Authorities.
Legal basis
RBI enforces compliance primarily through powers under Section 35A and Section 47A read with Section 46 of the Banking Regulation Act, 1949, allowing monetary penalties for non-compliance with directions and regulatory instructions. The RBI Act, 1934 contains penalty and cognizance provisions in Chapter IIIB for certain categories of regulated entities (e.g., NBFCs), including sections on penalties and cognizance of offences. For foreign exchange contraventions (including breach of RBI directions under FEMA), liability and adjudication arise under FEMA Sections 13, 15, 37 and the FEMA Adjudication Proceedings and Appeal Rules, 2000.
What counts as non-compliance
Non-compliance includes breaches of RBI directions on prudential norms, fraud reporting, KYC/AML requirements, balance-sheet integrity, guarantees/co-acceptances, and other supervisory instructions identified during inspections or offsite surveillance. Press orders routinely clarify that such penalties address regulatory deficiencies and do not adjudicate individual customer transactions or contractual validity.
Offences and cognizance
Under the RBI Act, 1934, specified breaches by certain entities (e.g., NBFCs under Chapter IIIB) can constitute offences with penalty provisions and cognizance mechanisms embedded in the statute. Under FEMA, contraventions of the Act, rules, regulations, notifications, directions, or conditions of authorization attract adjudicated penalties under Section 13, with investigative powers vested in the Enforcement Directorate under Section 37.
Penalty framework
- Banking entities: Monetary penalties are imposed by RBI orders citing Section 47A(1)(c) read with Section 46(4)(i) and Section 51(1) of the Banking Regulation Act, calibrated to the gravity of supervisory non-compliance. Public penalty orders show cause, representation, and personal hearing precede the order, reflecting due process in supervisory enforcement.
- FEMA contraventions: The Adjudicating Authority may impose penalties up to statutorily prescribed limits under Section 13, with scope to confiscate involved currency/securities and require repatriation; non-payment within 90 days can lead to civil imprisonment. The quantum is guided by factors like unfair gain and loss caused, as reflected in contemporary practice and guidance documents.
Cognizance and prosecution
The RBI Act provides for cognizance of offences under specified provisions, enabling prosecution as per statutory design where applicable. Under FEMA, proceedings are civil-adjudicatory rather than criminal, initiated through ED investigation and complaint to the Adjudicating Authority, which then issues notice, conducts inquiry, and passes a reasoned order.
Adjudicating authority
For FEMA matters, the Adjudicating Authority conducts the inquiry under the FEMA Adjudication Rules, considering evidence and submissions before imposing penalty and/or confiscation orders. Proceedings are initiated on an ED complaint post-investigation under Section 37 and follow principles of natural justice rather than strict CPC procedure.
Appeals against penalty
- FEMA pathway: Appeals lie within 45 days to the Special Director (Appeals) when the Adjudicating Authority is of Assistant/Deputy Director rank, or to the Appellate Tribunal otherwise; further appeals on questions of law lie to the High Court within 60 days, with limited condonation possible. The appellate forums may waive pre-deposit on undue hardship grounds while safeguarding penalty realization, and endeavor to dispose appeals within 180 days with recorded reasons for delay.
- Banking Regulation Act pathway: RBI supervisory penalty orders are administrative; while entities can seek judicial review, there is no dedicated statutory appellate body against RBI’s administrative penalty orders, a point often discussed in policy analysis.
Compounding of offences
Under FEMA Section 15, contraventions can be compounded by RBI or ED-authorized officers within 180 days of application, subject to statutory conditions and stage of proceedings. Courts have noted that compounding is generally contemplated prior to conclusion of adjudication; post-adjudication compounding requests are typically not maintainable and the remedy shifts to appeal or payment, as reflected in recent cases and practice notes.
Practical enforcement examples
Recent RBI press communications illustrate penalties on banks for non-compliance with directions on fraud reporting, KYC, and balance sheet presentation, imposed after inspection, show cause, reply, and personal hearing. News updates frequently report calibrated penalties across banks for varied regulatory violations, underlining RBI’s ongoing supervisory enforcement.
Governance takeaways
- Establish robust compliance programs to track and implement RBI directions across prudential, conduct, and financial integrity domains.
- For FEMA-covered activities, maintain documentation and timely filings; in case of suspected contravention, evaluate compounding feasibility early to mitigate exposure.
- Prepare for adjudication with complete responses and evidence; preserve appellate rights and assess pre-deposit strategies where applicable.
