In a recent and significant ruling, the Hon’ble Calcutta High Court in the case of Sanjay Jhunjhunwala vs. Reserve Bank of India & Ors. (WPA 2065 of 2025) has clarified a critical procedural point under the Foreign Exchange Management Act, 1999 (FEMA) — whether compounding of a contravention is permissible after the adjudication process is concluded.
This judgment not only brings clarity but also acts as a cautionary tale for individuals and entities dealing with FEMA contraventions.
📌 Brief Background
- The Petitioner, Mr. Sanjay Jhunjhunwala, was found to have contravened certain provisions of FEMA.
- An adjudication order was passed by the competent authority on 27th March 2024, imposing a penalty of ₹10 Crores.
- Thereafter, the Petitioner filed a compounding application with the Reserve Bank of India (RBI) on 6th May 2024, which was returned in September 2024 by the RBI, citing that compounding cannot be allowed post-adjudication.
- A demand notice was subsequently issued on 17th January 2025, requiring payment of the penalty or an appeal order.
- The Petitioner did not file an appeal, claiming instead that compounding should still be permitted as he accepted the adjudication order.
⚖️ Legal Contention
The crux of the legal issue was:
“Can a person who accepts an adjudication order and does not prefer an appeal still apply for compounding under FEMA?”
The Petitioner relied on Rule 11 of the FEMA Compounding Rules, which prohibits compounding only when an appeal is filed. He argued that since no appeal was filed, compounding should be allowed.
The RBI, however, stood firm on the ground that compounding must be done before the adjudication concludes — and once an order is passed, the process has reached finality.
🧑⚖️ Court’s Analysis & Findings
The Hon’ble High Court upheld RBI’s position and dismissed the petition, offering the following key observations:
🔹 1. Timing is Crucial:
Compounding is a pre-adjudication remedy meant to avoid lengthy proceedings. It is not meant to be a post-adjudication escape route.
📘 Example:
Imagine you are caught for over-speeding. The traffic officer gives you an option — pay ₹500 and settle it on the spot (compounding), or go to court and contest it (adjudication). If you choose to go to court, and the judge imposes a ₹5,000 fine, you can’t come back and ask for the ₹500 option anymore.
🔹 2. No Two Orders Can Exist Simultaneously:
Once an adjudication order is passed, it becomes binding. Allowing compounding afterward would result in two conflicting orders — which is impermissible under law.
📘 Example:
If a tribunal imposes a penalty and later another authority nullifies it via compounding, it disrupts the legal certainty and creates confusion over which order to enforce.
🔹 3. Compounding Is Not a Right:
The Court clarified that compounding is a discretionary remedy, not a right. It is designed to offer a quicker settlement before the matter escalates to full adjudication.
🔹 4. A Conscious Decision Was Made:
The Petitioner initially applied for compounding, but did not pursue it when given the opportunity. Instead, he allowed the adjudication process to continue, participated in it, and only sought compounding after the penalty was imposed.
The Court noted this as a “test the waters” approach, which cannot be encouraged.
🔹 5. Legislative Intent Must Be Respected:
The FEMA framework is designed to ensure finality and compliance. If offenders are allowed to opt for compounding after adjudication, it would defeat the purpose of having a clear, enforceable penalty system.
📝 Final Verdict
The Court held that compounding cannot be permitted after adjudication has concluded, and the RBI rightly rejected the application.
Only the adjudication order survives and is currently executable.
🔍 Key Takeaways for Professionals & Corporates
- Apply for compounding at the earliest stage — ideally before or during adjudication proceedings.
- Don’t delay in submitting required documents when RBI calls for more details in your initial application.
- Understand that compounding is a settlement mechanism, not an alternative to appeal.
- Post-adjudication compounding is not allowed — no matter how cooperative you are afterward.
🧩 Implications for Compliance Officers & Legal Teams
This case serves as a strong precedent for companies and individuals facing FEMA contraventions. Legal teams should:
✅ Include compounding strategy in early-stage compliance planning
✅ Educate clients that ignoring or delaying compounding can have irreversible consequences
✅ Track RBI circulars, Master Directions, and procedural timelines diligently
📢 Final Thoughts
This judgment is a clear signal from the judiciary: FEMA compliance is not a checkbox exercise. Compounding is an opportunity, not a fallback. Once you forego it or mishandle it, you must face the full consequences of the adjudication process.
The ruling also strengthens the RBI’s stance and adds legal robustness to the compounding framework under FEMA.