RBI: Unauthorized forex trading platforms: A discussion

Reserve Bank of India, the premier regulatory body has cautioned the common public about unauthorized Electronic Trading Platforms (ETPs) offering forex trading facilities to Indian residents, including on social media platforms, search engines, Over the Top (OTT) platforms, gaming apps and the like. Nothing unusual until one hears of Rs Crores of capital, exorbitant interest charges and in many cases loss of total privacy to hundreds of unknown entities, in this case Chinese apps or in other cases specialist crooks from Nigeria or other countries.

Let us first learn the instructions or advice given by RBI and analyze the situation at the end.

Let me reproduce below the main lessons communicated by RBI in quotes:

“It is clarified that resident persons can undertake forex transactions only with authorized persons and for permitted purposes, in terms of the Foreign Exchange Management Act, 1999 (FEMA). While permitted forex transactions can be executed electronically, they should be undertaken only on ETPs authorized for the purpose by the RBI or on recognized stock exchanges (National Stock Exchange of India Ltd., BSE Ltd. and Metropolitan Stock Exchange of India Ltd.) as per the terms and conditions specified by the RBI from time to time. It is also clarified that remittances for margins to overseas exchanges / overseas counterparties are not permitted under the Liberalized Remittance Scheme (LRS) framed under the FEMA.”

How to understand these lofty ideals in a simpleton’s terms?

Can I take a loan offer available in seconds from unknown platforms, sweetened voices from sources like even Bajaj finance, SBI, or PNB frequently when I immediately want finance or give all my personal details on phone?

I would narrate the questions and answers given by RBI and offer my considered opinions arose out of 5 decades of banking association.

Website of RBI with main source is reproduced below:

Unauthorised forex trading platforms – Advisory and FAQs

Questions and Answers

“Disclaimer: These FAQs are for general guidance purpose only. In case of any inconsistency(ies) between FAQs and FEMA, 1999 and Rules/Regulations/Directions/Permissions issued thereunder, the latter shall prevail.”

Naturally, one may be guided accordingly. (Like a hand book to get minimum information, the following has been compiled. I add my observations when needed.

1. Can a resident person undertake forex transaction?

Answer:

Yes, you can undertake the transactions provided these are undertaken with authorized persons and for permitted actions as per Foreign Exchange Management Act, 1999 (FEMA). If you are found dealing with unauthorized persons and unapproved actions, you are eligible for penal action under this act, presuming yourself as a resident in India.

2. Who is an authorized person? It is not an unexpected question, naturally.

Obviously, RBI authorizes a person like an entity to deal in forex.

Like what?

An authorized dealer, say, all public sector banks, all leading private sector banks, approved money exchanger who is even recommended by banks, or approved by RBI under sub-section (1) of section 10 of FEMA. I shall definitely reproduce list of approved persons at the end of this article.

3. Can a resident person, like yourselves, undertake forex transactions on internet / electronic trading portals?

Why not provided Permitted forex transactions are executed on electronic trading platforms (ETPs) authorized by the Reserve Bank of India (RBI) or on recognized stock exchanges like NSE (National Stock Exchange of India Ltd, BSE Ltd. (BSE) and Metropolitan Stock Exchange of India Ltd. (MSE)).

You may ask those ETPs to reproduce the certificates issued by RBI. Yes, one telephone operator from Nigeria telephonically enquired my email address and other details. I just informed that I am lodging a police complaint. He just ran away.

4. What is an Electronic Trading Platform (ETP)? Do they require authorization from RBI to operate in India? 

Electronic Trading Platform (ETP) means any electronic system, other than a recognized stock exchange, on which transactions in eligible instruments like securities, money market instruments, foreign exchange instruments, derivatives, etc. take place.

Any ETP takes necessary permission from RBI in terms of the electronic trading flatforms RBI directions, 2018.

The violators are punishable under FEMA ,1999 and PML Act, 2002.

5. Can a resident individual remit margin overseas under Liberalized Remittance Scheme (LRS) for undertaking online forex trading?

Remittances under LRS can be made only for permissible current and capital account transactions.

6. Can one resident person lodge complaint against unauthorized OTPs?

Complaints regarding unauthorized ETPs for forex transaction may be filed on the National Cyber Crime Reporting Portal (https://cybercrime.gov.in). This portal is an initiative of Government of India to help victims/complainants from cyber related crimes.

State government do give priorities to handle cyber crimes by training the police.

Yes, you may also lodge complaints with Enforcement Directorate ([email protected]) and respective police authorities of States/UTs.

Contrary to expectations, banks have failed to provide safety to their clients in India as compared to USA/other advanced countries.

7. What are the permitted purposes for undertaking forex cash, tom and spot transactions?

Forex cash, tom and spot transactions are undertaken for the purpose of buying/selling foreign exchange for permitted current/capital account transactions.

I could feel one’s reaction to ask what is current/capital account transaction even though in any commercial bank, it is a routine transaction.

You should refer to the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000 for permitted capital account transactions. But any commercial bank with foreign exchange business operations will explain.

8. Current account transaction under foreign exchange is explained as under by RBI:

i. Payments connected to foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business. Opening of L/C, guarantees(Notorious Nirav Modi comes to one’s mind)

ii. Payments due as interest on loans and as net income from investments, remittances for living expenses of parents, spouse and children residing abroad; and

iii. Expenses in connection with foreign travel, education and medical care of parents, spouse and children. Yes, your child studies in USA/UK or in Australia. You take medical insurance for travel abroad. Payment of professional fees like CA, Doctors or Advocates related ones.

9. What are the permitted purposes for undertaking forex derivative transactions (over the counter (OTC) and exchange traded)?

Having worked in foreign exchange business of a leading nationalized bank as a back office senior manager, any dealer in a bank buys/sells foreign currency either in trade or in retail undertake derivative transaction. Do you know that any sensible bank trader in FE business is expected to cover the risk by instant operation of coverage of risk.

Permitted purpose depends on the currency pair viz. Foreign Currency – Indian Rupee (FCY-INR) and Foreign Currency – Foreign Currency (FCY-FCY). I do not intend to give too complex examples to confuse any reader of this article.

 10. Some technical knowledge which rarely affects you or myself as a retail user of foreign exchange. However, just for the fun of learning.

Quoted directly from the RBI guidelines. Actual language is used.

“OTC derivatives

• For retail users
  • Foreign Exchange Forward
  • Foreign Exchange Swap
  • Currency Swap
  • Purchase of Call and Put Options
  • Purchase of Call and Put Spreads
• For non-retail users: Any foreign exchange derivative contract, including covered options, which the Authorized Dealer can price and value independently and is approved by the board of the Authorized Dealer, provided that the potential loss from the derivative transaction to the user, in any scenario, does not exceed the loss that the user would face if he had left the position unhedged.
• Exchange traded derivatives
• Foreign Exchange Future
• Foreign Exchange Option

No explanation for future, option, swap etc.

11. An interesting explanation follows. This question may be asked even by your grandparents.

Who are retail and non-retail users?

Regulated financial entities, other entities with a minimum net worth of Rs.500 crore and non-residents (other than individuals) are classified as non-retail users. All other types of users are classified as retail users. Yes, yourselves or mine fall under the later category. Unfortunately, my net worth is not Rs. 500 Crores.

Conclusion

With the profusion of thousands of Chinese products enabling instant cash disbursements to eagerly waiting Indian customers who have been delayed enormously by Indian/foreign banks in credit operations, the instant cheating of Re. Thousands of Crores siphoned off, caught the eyes of the regulatory authority/all types of governments or law regulating authorities like police, CBI, or ED.

This guideline for a commoner by RBI is nothing unusual since RBI is the harbinger of foreign exchange, previously very harsh and now, a bit kinder in allowing foreign exchange operations. Credit card frauds by foreigners on online/offline opened up the eyes of these august bodies.

Intentionally, I have blackened the most important information on cyber frauds on how to lodge complaints and to whom.

Any one should know this in finger tips.

Also, never be tempted by unusual or absurd returns on deposits or immediate loans from heaven to satisfy your instant greed. All roads in this direction lead to instant disaster or financial ruin.

List of ETPs.

< https://www.bloomberg.com/professional/product/bloomberg-tradebook-singapore>

Also

[email protected]

One gets detailed information from the following web site.

 <https://rbi.org.in/scripts/bs_viewcontent.aspx?Id=4080>

Disclaimer: The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting because of the above write up. The possibility of other views on the subject matter cannot be ruled out. By use of the said information, you agree that Author/Tax Guru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors, or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional