Introduction:
- The Foreign Exchange Management Act, 1999 (“FEMA”), prohibits dealing in foreign exchange, other than as an ‘Authorised Person’ (“AP”). Currently, there are 4 (four) categories of APs,
- Authorised Dealer (“AD”) Category I (“AD Cat I Bank”): only available for banking entities, allows widest scope of activities, including all capital[1] and current[2] account transactions.
- AD Category II (“AD Cat II”): available to banks other than scheduled commercial banks, upgraded full-fledged money changers (“FFMCs”) and non-banking financial companies (“NBFC”) – Investment and Credit Companies (“NBFC-ICC”). Specified non-trade related current account transactions and FFMC activities are allowed.
- AD Category III (“AD Cat III”): select institutions permitted to undertake transactions incidental to the foreign exchange activities undertaken by such institutions.
- FFMC: available for all entities. Purchase and sale of foreign exchange for private and business visits abroad is allowed.
- Other than the licenses mentioned above, the Reserve Bank of India (“RBI”) has also provided for certain additional green channels to facilitate cross-border transactions. These include:
- Money Transfer Service Scheme (“MTSS”): Permits personal inward remittances through ‘Overseas Principal’ and ‘Indian Agent’ model.
- Rupee Drawing Arrangement (“RDA”): Permits inward remittances by allowing ‘Non-Resident Exchange Houses’ to open Vostro accounts with AD Cat I Bank. Personal remittances and trade remittances up to INR 15,00,000 (~USD 18,000) are permitted[3].
- Remittance Service Provider (“RSP”) in Tie-up with AD Cat I: This route allows outward remittances for personal purposes and trade remittances up to USD 2000[4].
- Online Payment Gateway Service Providers (“OPGSP”): Permits facilitation of import/ export transactions for goods/ services. There is a limit of USD 2000 and USD 10000 for import and export transactions, respectively[5]. Entities providing RDA, RSP, OPGSP services are not licensed directly. They are supervised indirectly through AD Cat I Banks.
- OPGSPs have now been brought under the direct regulation of RBI, through introduction of a new licensing regime for entities facilitating transactions for import and export of goods and services, with such entities now requiring a license as ‘Payment Aggregator Cross-Border’ (“Cross-Border PA”)[6].
- In line with ongoing liberalisation under FEMA, citing increasing integration of the Indian economy with the global economy, digitisation of payment systems, evolving institutional structure, etc.[7], RBI has published Draft Licensing Framework for Authorised Persons (APs) under FEMA, on December 26, 2023 (“Draft AP Framework”), for public comments and feedback. The last date for submitting feedback is January 31, 2024.
Key Features
- Introduction of Forex Correspondents (“FxCs”):
- FxCs will be allowed to conduct foreign exchange business as an agent of AD Cat I Bank/ AD Cat II[8]. FxCs do not require RBI authorisation and can have only one arrangement at a time with principal AD[9].
- Permissible Activities:
- distribution of forex cards;
- purchase/ sale of foreign currency notes/ traveller’s cheques for foreign private and business travel; and
- may be appointed as sub-agent of principal AD Cat I/ AD Cat II under MTSS[10].
- Eligibility: (i) existing FFMC; (ii) AD Cat II (after surrender/ lapse of license); (iii) NBFC; (iv) bank; and (v) a company, as defined in Companies Act, 2013[11]. Transactions facilitated by FxCs are proposed to be on the books of the principal AD[12].
- Principal AD Cat I Bank/ AD Cat II Banks are required to have Board approved policies for engaging with FxCs. An alternative has been proposed, wherein the Foreign Exchange Dealers Association of India may provide a standard eligibility criteria for engaging FxCs[13].
- Revised Eligibility Criteria and Scope of Activities:
- AD Cat I Bank: All banks including foreign banks. No change in scope of activities[14].
- AD Cat II:
- All banks, NBFC-ICC, existing FFMCs or AD Cat III, having an average annual forex turnover of INR 50 crore for the last 2 (two) financial years.
- Permitted to facilitate all current account transactions, except gift and maintenance of relatives. Threshold of INR 15,00,000 (~USD 18,000) for trade transactions[15].
- Permitted to issue prepaid forex cards to Indian residents, settlement in respect of such cards to be undertaken through AD Cat I Bank.
- AD Cat III:
- Select institutions permitted to undertake transactions incidental to the foreign exchange activities undertaken by such institutions[16].
- An entity facilitating current account transactions only in tie-up with AD Cat I Bank, but otherwise not dealing in foreign exchange. These include:
- RSP (as mentioned in Paragraph 2 of Introduction above), only outward remittances towards current account transactions other than trade, gift and maintenance of relatives[1]; and
- an entity desirous of offering innovative products and services relating to cross-border trade and remittances[18]. Such entities can only facilitate fund transfer from one bank account to another bank account. (See Paragraph 4 of Considerations below)
- Net-worth Criterion: INR 2 crore (~USD 240,000) for AD Cat III and INR 10 crore (~USD 1.2 million) for AD Cat II[1].
- Authorisation Process:
- Application will be considered basis recommendation of an internal Empowered Committee[20].
- RBI will first issue a temporary authorisation for fresh applications[21].
- Perpetual license now proposed to be available for AD Cat II[22].
- Cooling period introduced for application as an AP, i.e. if any entity/ entity’s:
- authorisation has been revoked;
- has voluntarily surrendered its authorisation;
- application for AP was rejected; and
- promoters have significant influence in any of the aforementioned entities. applications by such entities will not be considered by the RBI for a period of 3 (three) years from the date of voluntary surrender, revocation or rejection, as the case may be[23].
- Change of Control: Any change in control of an AP will require prior approval of the RBI.
- Transition Provisions: The FFMC regime will cease to exist, with following transitioning provisions[24],
| Sr. No. | Entity | Transition Provisions |
| 1. | FFMC having annual forex turnover of INR 50 crore (~USD 6 million) or more for the last 2 (two) financial year | Either upgrade to AD Cat II or voluntarily convert to FxC |
| 2. | FFMC other than at #1 | Convert to FxC |
| 3. | AD Cat II* having annual forex turnover of INR 50 crore (~USD 6 million) or more for the last 2 (two) financial year | Either obtain a permanent AD cat II authorisation or voluntarily convert to FxC |
| 4. | AD Cat II other than #3 above | Convert to FxC |
* Transition Provisions are not applicable to bank and NBFC-ICC AD Cat II.
Considerations:
- AD Cat II Trade Transactions Threshold: The proposed threshold for trade transactions facilitated by AD Cat II (i.e., INR 15,00,000, approx. USD 18,000) may be brought on par with Cross Border PA threshold, i.e. INR 25,00,000 (~USD 30,000).
- RDA:
- While RSPs/ MTSS providers/ OPGSPs have been explicitly covered (under the Draft AP Framework and Cross-Border PA regulations), there are no provisions vis-a-vis RDA.
- RDA permits facilitation of inward remittance services for personal remittances and trade transactions up to INR 15,00,000 (~USD 18,000), akin to the proposed scope of activities for AD Cat II.
- An inclusion regarding continuance of the RDA route may provide additional clarity to industry players.
- Further, the trade transaction value threshold may be brought on par with Cross Border PA threshold, i.e. INR 25,00,000 (~USD 30,000).
- Trade Transactions by RSPs:
- RSPs are currently allowed to facilitate outward remittances for trade transactions up to USD 2000, which is proposed to be removed from the scope of activities of RSPs.
- As RSPs already provide trade remittance services to customers, the RBI may consider allowing continuity in this regard, and raise the USD 2,000 threshold, in line with other liberalisation measures.
- Funds Transfer restriction on AD Cat III:
- It has been proposed that AD Cat III entities may only facilitate funds transfer from one bank account to another bank account.
- The RBI may consider providing a few illustrative examples of such remittances, to further clarify the intent behind this stipulation.
- AD Cat III – Innovative Offerings Eligibility Criteria:
- The RBI has proposed that entities developing innovative products for cross-border payments may apply for authorisation as AD Cat III.
- However, no subjective/ qualitative criteria has been proposed. Given that the RBI’s intention is to retain flexibility for such authorisation, an indicative criteria, such as for regulatory sandbox may benefit entities looking to develop such offerings.
[1] Per Section 2(e) of FEMA, “capital account transaction means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India.”
[2] Per Section 2(j) of FEMA, “current account transaction means a transaction other than a capital account transaction.”
[3] Paragraph 3(a), Master Direction – Opening and Maintenance of Rupee/Foreign Currency Vostro Accounts of Non-resident Exchange Houses, dated January 1, 2016.
[4] Paragraph 10(5), Master Direction – Miscellaneous, dated January 1, 2016.
[5] Paragraphs 3(i) and 4(i), RBI guidelines titled ‘Processing and settlement of import and export related payments facilitated by Online Payment Gateway Service Providers’, dated September 24, 2015.
[6] RBI Press Release titled ‘RBI issues circular on Regulation of Payment Aggregator – Cross Border (PA – Cross Border)’, dated October 31, 2023 (here).
[7] RBI Press Release titled ‘Rationalisation of Licensing Framework for Authorised Persons (APs) under Foreign Exchange Management Act (FEMA), 1999’, dated December 26, 2023 (here)
[8] Section III, Paragraph 1, Draft AP Framework
[9] Section IV, Paragraph 3(ii), Draft AP Framework
[10] Section IV, Paragraph 1, Draft AP Framework
[11] Ibid.
[12] Section IV, Draft AP Framework
[13] Section IV, Paragraph 2, Draft AP Framework
[14] Section V, Draft AP Framework
[15] Ibid.
[16] Ibid.
[17] Ibid.
[18] Ibid.
[19] Section VI, Paragraph 2, Draft AP Framework
[20] Section VII, Paragraph 2, Draft AP Framework
[21] Section VII, Paragraph 3, Draft AP Framework
[22] Section III, Paragraph 2, Draft AP Framework
[23] Section VIII, Paragraph 1, Draft AP Framework
[24] Section III, Paragraph 3(2), Draft AP Framework
