In terms of the Foreign Exchange Management Act, 1999 (“FEMA”), ‘authorised person’ (“AP”) registered with the Reserve Bank of India (“RBI”) are permitted to deal in or transfer any foreign exchange or foreign security. APs inter alia include authorised dealer category I banks (“AD-I”), authorised dealers category II (“AD-II”) and category III (“AD-III”) and full-fledged money changers (“FFMCs”).

The RBI vide its ‘Statement on Developmental and Regulatory Policies’ dated June 8, 2023, had indicated a review of existing authorization framework for APs (which was previously reviewed in 2006) and pursuant thereto, RBI has, on December 26, 2023, released a draft of the revised authorization framework (“Draft Framework”).

A.    Scope of the Draft Framework

 The Draft Framework primarily focuses on (i) rationalising the authorisation framework for money changers; (ii) improving the scope of services offered by AD-II; and (iii) reviewing the regulatory framework for APs.

B.    Key Thematic Changes to the Existing Framework

 Some of the key thematic changes proposed in the Draft Framework are as follows:^[1]

1. Foreign Correspondents: The Draft Framework has introduced a new category of money changers who may conduct money changing business through an agency model by becoming ‘forex correspondents’ (“FxC”) of AD-I/ AD-II. FxCs will not require RBI authorisations.
2. Perpetual Authorisation: AD-IIs can be granted perpetual authorisations (as opposed to present periodic renewal requirement), subject to meeting the prescribed eligibility criteria (refer to #B.5 below).
3. Mandatory Upgradation: All existing AD-IIs/ FFMCs must mandatorily upgrade as follows:

4.    Categorisation of APs: The following categorizations of the APs have been proposed:

5. Eligibility Criteria: An applicant (other than a bank or NDSI-NBFC-ICC) seeking authorisation as an AD-II or fresh authorisation as AD-III (other than select institutions permitted to undertake forex transactions incidental to their activities) must meet the following criteria:

    

   (a) Governance Requirements: The requirements inter-alia include:

• Must be a company incorporated in India and its charter documents should include the foreign exchange related activity for which authorization is sought;
• Any change in control (including through M&A activity ) will require prior RBI approval;
• Must meet the prescribed ‘fit and proper criteria’ and submit ‘Declaration and Undertaking’ from every key managerial personnel as a part of the application; and

• If the applicant or its parent entity is under investigation by Directorate of Enforcement (“DoE”), the application to the RBI should be accompanied with an ‘NOC’ from the DoE with application being made within 30 days of receiving the NOC.

(b) Net Worth Requirements: Minimum positive net worth of INR 10 crores (~USD 1.2 million) for AD-II and INR 2 crores (~USD 240,000) for AD-III, as per its latest audited balance sheet – to be maintained at the time of application and continuously going forward.

(c) Place of Business and Commencement of Operations: Place of business will require RBI approval and any change in the place of business will also require prior RBI approval. Business must commence within 6 months of receiving the approval.

(d) Other relevant factors: While considering the application, the RBI may, inter-alia, take into consideration factors such as (i) track record and financial condition of the applicant (including its holding company or related corporations, wherever applicable); (ii) business plan and model including anti-money laundering and combating financial terrorism policies, customer service and procedures; and (iii) whether public interest will be served by granting an authorisation.

6. Authorisation Process: The application for seeking authorization should be made in the prescribed form along with the relevant documents. The authorization process will include initial screening, assessment of application and provision of temporary authorisation (for greenfield applications).
7. Revocation and Cooling Period: In case the RBI revokes the authorisation (other than for not meeting the net worth criteria) or surrender or rejection of the application, the entity will be subject to a cooling off period of 3 years.
8. KYC/ AML/ CFT: RBI’s KYC norms will have to be complied by both APs and their FxCs.
9. RBI Inspection: RBI has a right to conduct inspection/ special audit of the APs or their FxCs, covering their forex business, either itself or through an RBI approved auditor.

C. Forex Correspondent Scheme

 The Scheme will be based on a principal-agency model where AD-I or AD-II will act as principals for FxCs. All transactions carried out by FxCs on behalf of AD-I or AD-II will be reflected in the principal’s books. Key aspects include:

1. Eligible Entities: Subject to the criteria under the board approved policy of the relevant principal, following entities can function as FxCs – (i) existing FFMC/ AD-II on surrender/ expiry of its authorisation; (ii) NBFCs or banks after obtaining DOR permission; and (iii) any company as defined under the (Indian) Companies Act, 2013.
2. Permitted Activities: FxCs will be permitted to inter-alia: (i) purchase foreign currency notes/ travellers’ cheques and sell foreign currency notes /travellers’ cheques for foreign private and business travel; (ii) distribute forex prepaid cards per the terms stipulated by the principal AD-I/ AD-II and (iii) be appointed as the sub-agent under the MTSS.
3. Obligations of FxCs: FxCs can have principal-agent relationship with only 1 principal AD-I/ AD-II.
4. Obligations of the principal AD: These inter-alia include: (i) issuing necessary permissions under the agreement to each outlet of the FxC; (ii) the agreement with FxC shall inter-alia include the tenor of the agreement, authorised places of business of the FxC, permissible activities, commission or fee of the exchange services, suitable limit on cash holding limits and the duration for which the record of transactions needs to be maintained; (iii) complying with RBI’s outsourcing guidelines, as applicable; (iv) being responsible to the customer for acts of omission and commission of its FxC; (v) being responsible for relevant reporting obligations for transactions undertaken by its FxC including those under the liberalised remittance scheme (LRS); (vi) providing information regarding FxC on its website and the AP Connect portal; (vii) ensuring the preservation, protection, security, and confidentiality of customer information in the custody or possession of its FxC under the agency agreement.

D.    Concluding Remarks

The Draft Framework is presently open for stakeholder feedback until January 31, 2024, and based on the feedback received, the RBI is likely to review and issue the revised framework for authorization under FEMA.

Endnotes:

[1] AZB Note: For para #B.1, #B.2 and #B.3, AD-II does not include AD-II banks and Non-Banking Financial Company – Investment and Credit Company (“NBFC-ICC”).

[2] AZB Note: ‘Annual forex turnover’ means the aggregate of foreign currency notes, coins and travellers’ cheques purchased from or sold to public including those purchased from or sold to public by its agents/ franchisees during the financial year. The value of remittances facilitated are also to be included for computation of forex turnover. The turnover figures of FY 20-21 and FY 21-22 may be excluded for the purpose of computing the average turnover.

[3] AZB Note: Only outward remittances towards current account transactions other than trade, gift and maintenance of relatives abroad not exceeding INR 25 lakh (approx. USD 30,000) per transaction where the bona fide of the transaction is clearly and distinctly verifiable through the underlying documents shall be permissible under this arrangement. An existing RSP shall seek authorisation as above within a period of 1 year from the date when the revised framework comes into force.