Compounding signifies an admission of guilt, whether voluntarily, upon receiving a notice of default, or after the initiation of prosecution. It is essentially a compromise or settlement between the regulatory authority

Compounding - A Necessity Compounding of an offence is an opportunity given in the Corporate laws, to the Companies to make good the non-compliance committed by them. The legislative construct is expected to provide for the guiding legal provisions and also allow a scope to rectify mistakes if any, committed inadvertently. Accordingly, it was considered necessary (also by the Rajinder Sachar Committee) that there is greater need of flexibility in the administration of the Corporate Laws, particularly its penal provisions not only because large number of defaults are of technical nature but also because they arise out of ignorance of the lengthy and bewildering complexity of the legal provisions. Therefore, the concept of compounding of offences was incorporated as a measure to avoid the long drawn process of prosecution, which would save both cost and time in exchange of payment of penalty. What is Compounding? Compounding is not defined in Companies Act or FEMA or SEBI Laws. On perusal of various legal provisions relating compounding, it can be noted that compounding is an admission of guilt either voluntarily or on receipt of notice of default or initiation of prosecution. The defaulters agree to pay penalty which may be ordered by the Compounding Authority to be paid. As per the Black's Law Dictionary, to "Compound" mean "to settle a matter by a money payment, in lieu of other liability." As per this definition, Compounding is akin to a Settlement Mechanism, a settlement by paying the penalty in lieu of facing the prosecution for the offence committed. Compounding is essentially a compromise or arrangement between administrator or the enactment and person committing an offence. Benefits of Compounding: Buy peace of mind. Generally, compounding amount is not to be treated as fine. Speedy disposal of offences and justice Judiciary can devote more time and concentrate on serious cases No need to appear before prosecution authorities. It provides comfort to individuals and corporates and persons connected with it. Amount paid as compounding fee under law for can be claimed as a tax deduction under the Income Tax Act while a penalty paid for contravention is not eligible for deduction.