The Reserve Bank of India (RBI) has recently issued Circular No. 02 for the year 2024-25, addressing concerns regarding unauthorised foreign exchange (forex) transactions. This article delves into the details of the circular, highlighting the challenges posed by unauthorised forex trading and the measures recommended by the RBI to combat it effectively.
Detailed Analysis
1. Nature of Unauthorised Forex Transactions: The circular outlines instances where unauthorised entities offer forex trading facilities to Indian residents, promising unrealistic returns. These entities often engage local agents to open accounts across various bank branches for collecting funds towards margin, charges, etc. Such transactions frequently do not align with the stated purpose, raising concerns about their legitimacy.
2. Regulatory Framework: The RBI underscores various regulations under the Foreign Exchange Management Act (FEMA), 1999, and related directives. It prohibits dealing in forex without authorization, emphasizes trading only through recognized channels, and mandates prior authorization for operating Electronic Trading Platforms (ETPs).
3. Previous Cautions and Alerts: The circular references past press releases cautioning against unauthorised forex trading platforms and the ‘Alert List’ containing names of entities unauthorized for forex dealings. This highlights the ongoing efforts by the RBI to curb such activities and protect investors.
4. Vigilance and Reporting: Recognizing the need for heightened vigilance, the RBI advises Authorized Dealer Category-I (AD Cat-I) banks to report suspicious accounts facilitating unauthorised forex trading to the Directorate of Enforcement, Government of India. This collaborative approach aims to deter illicit activities and safeguard the integrity of the financial system.
5. Customer Awareness and Education: AD Cat-I banks are urged to raise awareness among their constituents regarding the risks associated with unauthorised forex trading. They are encouraged to promote dealings only with authorized entities and disseminate information about authorized ETPs, the ‘Alert List,’ and relevant press releases issued by the RBI.
Conclusion
The RBI’s circular serves as a timely reminder of the risks posed by unauthorised forex trading and the importance of regulatory compliance. By reinforcing regulatory measures, promoting vigilance among banks, and enhancing customer awareness, the RBI aims to mitigate the proliferation of illicit forex activities and foster a secure trading environment. Adherence to the guidelines outlined in the circular is crucial for maintaining the integrity of India’s financial system and protecting the interests of investors.
Reserve Bank of India
RBI/2024-25/25
A.P. (DIR Series) Circular No.02
April 24, 2024
To,
The Authorised Dealer Category – I Banks
Madam / Sir,
Unauthorised foreign exchange transactions
The Reserve Bank of India (RBI) has come across instances of unauthorised entities offering foreign exchange (forex) trading facilities to Indian residents with promises of disproportionate/exorbitant returns. On investigation, it has been observed that to facilitate unauthorised forex trading, these entities have taken recourse to engaging local agents who open accounts at different bank branches for collecting money towards margin, investment, charges, etc. These accounts are opened in the name of individuals, proprietary concerns, trading firms etc. and the transactions in such accounts are not found to be commensurate with the stated purpose for opening the account in several cases. It is also observed that these entities are providing options to residents to remit/deposit funds in Rupees for undertaking unauthorised forex transactions using domestic payment systems like online transfers, payment gateways, etc.
2. In this context, attention of Authorised Dealer Category-I (AD Cat-I) banks is invited to:
a. Section 3 (a) of the Foreign Exchange Management Act (FEMA), 1999, in terms of which, no person shall deal in or transfer any foreign exchange or foreign security to any person not being an ‘Authorised Person’, unless under general or special permission of the Reserve Bank;
b. Regulation 4 read with Schedule I of the Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000 (Notification No. FEMA 25/2000-RB dated May 3, 2000), as amended from time to time, in terms of which, a person, whether resident in India or resident outside India, may enter into a foreign exchange derivative contract with an authorised dealer or on recognised exchanges, only;
c. Para 3 (1) of the Electronic Trading Platforms (Reserve Bank) Directions, 2018 dated October 05, 2108, in terms of which, no entity shall operate an Electronic Trading Platform (ETP) without obtaining prior authorisation of the Reserve Bank;
d. Press releases dated February 03, 2022, September 07, 2022 and February 10, 2023 issued by the Reserve Bank, cautioning against unauthorised forex trading platforms; and
c. ‘Alert List’ issued by the Reserve Bank containing names of entities which are neither authorised to deal in forex under FEMA, 1999 nor authorised to operate ETP for forex transactions under the Electronic Trading Platforms (Reserve Bank) Directions, 2018.
3. There is a need for greater vigilance to prevent the misuse of banking channels in facilitating unauthorised forex trading. AD Cat-I banks are, therefore, advised to be more vigilant and exercise greater caution in this regard. As and when AD Cat-I banks come across an account being used to facilitate unauthorised forex trading, they shall report the same to the Directorate of Enforcement, Government of India, for further action, as deemed fit.
4. AD Cat-I banks may bring the contents of this circular to the notice of their constituents and customers concerned. AD Cat-I banks may advise their customers to deal in forex only with ‘Authorised Persons’ and on ‘authorised ETPs’ and give wide publicity to the list of ‘Authorised Persons’ and the list of ‘authorised ETPs’ available on the RBI website. AD Cat-I banks are also advised to give publicity to the ‘Alert List’ and Press Releases issued by the RBI in this regard.
5. The directions contained in this circular have been issued under sections 10(4) and 11 (1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law.
Yours faithfully,
(Dimple Bhandia)
Chief General Manager
