Resident persons are permitted to undertake forex transactions only with authorised persons and for permitted purposes, in terms of the Foreign Exchange Management Act, 1999 (FEMA).
Resident persons undertaking forex transactions with unauthorised persons and for purposes other than those permitted under FEMA shall render themselves liable for penal action under the Act.
Forex transactions in India are governed by the Foreign Exchange Management Act, 1999 (FEMA), ensuring that such activities are conducted in a regulated manner. Below is a comprehensive guide to forex transactions, including the roles of authorised persons, permitted platforms, and the types of transactions allowed.
Forex Transactions for Resident Persons
Resident persons in India are allowed to undertake forex transactions only with authorised persons and for permitted purposes under FEMA. Any forex dealings with unauthorised entities or for unapproved purposes may result in penal action.
Who are Authorised Persons?
An authorised person is an entity authorised by the Reserve Bank of India (RBI) to deal in forex. These entities include authorised dealers, money changers, offshore banking units, or any other persons authorised under Section 10(1) of FEMA. The list of authorised persons is available on the RBI’s website.
Forex Transactions via Electronic Platforms
Permitted forex transactions can be executed electronically only on Electronic Trading Platforms (ETPs) authorised by RBI or on recognised stock exchanges such as:
- National Stock Exchange of India Ltd. (NSE)
- BSE Ltd. (BSE)
- Metropolitan Stock Exchange of India Ltd. (MSE)
Resident persons engaging in forex transactions on unauthorised ETPs may face penal consequences.
Electronic Trading Platforms (ETPs) and Their Authorisation
An ETP is an electronic system, apart from recognised stock exchanges, where transactions in eligible instruments like securities, forex, and derivatives occur. No entity can operate an ETP in India without prior authorisation from RBI under The Electronic Trading Platforms (Reserve Bank) Directions, 2018.
Resident persons operating unauthorised ETPs or effecting payments outside India without proper authorisation will be liable for legal action under FEMA and other relevant laws.
Identifying Unauthorised Forex Entities and ETPs
RBI publishes an Alert List of entities that are not authorised to deal in forex or operate ETPs. This list also includes platforms and websites promoting unauthorised forex transactions. However, an entity’s absence from the Alert List does not automatically imply its authorisation.
Remittance of Margin Overseas for Online Forex Trading
Resident individuals cannot remit funds overseas under the Liberalised Remittance Scheme (LRS) for online forex trading. LRS only permits remittances for legally permissible current and capital account transactions, excluding margin calls and speculative trading.
Filing Complaints Against Unauthorised ETPs
Complaints regarding unauthorised ETPs can be filed on the National Cyber Crime Reporting Portal (https://cybercrime.gov.in), the Enforcement Directorate (ed-del-rev@nic.in), or with local police authorities.
Permitted Forex Transactions
1. Forex Cash, Tom, and Spot Transactions: These transactions are allowed for foreign exchange purchases/sales related to permitted current and capital account transactions.
2. Capital Account Transactions: Capital account transactions involve the alteration of assets or liabilities outside India for residents and vice versa. The Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000, outline permitted capital account transactions.
3. Current Account Transactions: Current account transactions include:
- Payments for foreign trade, business services, and short-term credit facilities.
- Interest payments on loans and net income remittances.
- Living expenses for family members abroad, foreign travel, education, and medical care.
The Foreign Exchange Management (Current Account Transactions) Rules, 2000, specify permissible current account transactions.
Forex Derivative Transactions
Forex derivative transactions can be undertaken for hedging exchange rate risks. The permitted transactions include:
- Foreign Currency – Indian Rupee (FCY-INR) derivatives: Used for exchange rate risk hedging.
- Foreign Currency – Foreign Currency (FCY-FCY) derivatives: No specific restrictions on usage.
Types of Forex Derivatives
1. Over-the-Counter (OTC) Derivatives:
- Retail users: Forex forward contracts, swaps, currency swaps, call and put options.
- Non-retail users: All permitted retail products plus covered options and structured derivatives (excluding leveraged derivatives).
2. Exchange-Traded Derivatives:
- Foreign exchange futures.
- Foreign exchange options.
Retail vs. Non-Retail Users
- Retail users: Individuals and entities not meeting the criteria for non-retail classification.
- Non-retail users: Regulated financial entities, organisations with a minimum net worth of Rs. 500 crore or turnover of Rs. 1,000 crore, and non-residents (excluding individuals).
OTC vs. Exchange-Traded Forex Derivatives
- Exchange-Traded Forex Derivatives: Traded on recognised stock exchanges.
- OTC Forex Derivatives: Include transactions conducted on authorised ETPs and other direct trading mechanisms.
Conclusion
Forex transactions in India are subject to strict regulatory oversight under FEMA to ensure transparency and prevent illicit activities. Residents must engage only with authorised persons and platforms, adhere to permitted purposes, and avoid transactions on unauthorised ETPs to comply with legal requirements.
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