Foreign Exchange Management Act (FEMA) stipulates that all foreign exchange transactions are required to be routed only through the entities that are licenced by the Reserve Bank to undertake such transactions. Such entities are defined as Authorised persons in Section 10 of the Act. Under current dispensation, such authorised person may be :

a. A Commercial bank (AD), or

b. A Money changer (FFMC), or

c. Any financial institution authorised for limited kind of transactions, depending on their activity, or

2. With the progressive liberalisation in foreign exchange related transactions common person can now undertake variety of current account transactions without approaching the Reserve Bank. A large segment of population is increasingly getting connected with forex transactions of an expanding nature on individual accounts. Taking into account the day-to- day needs of (a) common persons for undertaking various transactions, (b) tourists for better encashment services and (c) requests received from existing FFMCs there is a felt need for widening and rationalizing the intermediate tier of authorized persons which is licenced to undertake foreign exchange transactions to meet the day-to-day needs. These would cater to tourists for encashment and common persons for release of foreign exchange for medical treatment, education, employment, travel related transactions and in general a large variety of current account transactions that are not trade transactions. Therefore, with a view to liberalising and rationalising the scope of activities currently undertaken by the authorized persons an internal Group consisting of Shri H. Battacharya, CGM-I-C, DEIO, Shri G. Padmanabhan, CGM-I-C, DIT and Shri Vinay Baijal, CGM, FED was constituted to study the related issues and make recommendations keeping in view the need for enhanced as well as wider access and accompanying safeguards, especially reporting requirements.

The observations and recommendations of the Group are detailed in following paragraphs.

3.1 Section 10 (1) of FEMA enables Reserve Bank to authorise any person to be known as Authorised Person (AP), to deal in foreign exchange or foreign securities, as an Authorised Dealer (AD), Money Changer (MC) or Offshore Banking Unit (OBU) or in any other manner as it deems fit. The Bank has therefore wide discretion to authorise a person as AD or MC or OBU or in any other manner, and all such persons would be known as 'authorised person.' Within the broad categories of AD or MC or OBU, it may be permissible to have sub-categories. There should however be clear eligibility norms for the classification and the norms should have nexus with the object of classification.

3.2 The authorization is subject to the conditions laid down therein. The conditions may be for the purpose of ensuring continued eligibility for conducting the authorised business, and/or relatable to the conduct of business. While there may be standard conditions uniformly applicable to all APs or applicable to APs in a category/sub-category, there may also be special conditions applicable in a particular case on the facts thereof.

4.1 The Reserve Bank has currently authorized 976 entities as authorised persons in following categories :

4.2 Details of the various activities that each of these categories can undertake are given in Annex - I.

5.1 The Reserve Bank has been receiving representations from existing Full Fledged Money Changers (FFMCs) requesting to expand the scope of the foreign exchange transactions that they are permitted to undertake. These requests were revisited by the Group in the light of on going liberalisation in foreign exchange transactions, convenience of the tourists, improved technology and with an object to rationalize the institutional structure and expand the number of entities eligible to undertake foreign exchange transactions, while ensuring appropriate safeguards against misuse.

5.2 In the light of the above, the Group had detailed discussions on the transactions that various entities are permitted to undertake and also the growing need of the common person and tourist for foreign exchange transactions in the light of progressive liberalization over the last 15 years as well as globalization of the Indian economy. The Group feels that there is a distinct growing demand to undertake current account foreign exchange transactions that are not related to trade but are required to meet miscellaneous needs of common person like fees and maintenance expenses of students, foreign exchange for medical treatment etc.

6.1 With a view to providing adequate foreign exchange facilities to common persons the Group, observes that for efficient customer service through competition there is a need to widen the scope of activities which the Authorised persons are eligible to undertake and also to increase the number of entities that are eligible to sell foreign exchange to public for their day-to-day current account transactions. The Group, therefore, recommends that Reserve Bank may consider granting licences to certain entities to undertake some more transactions, in addition to what FFMCs are currently permitted, by authorizing them to undertake certain non-trade related current account transactions. Such entities may be called Restricted Authorised Dealers (Restricted ADs).

6.2 Proposed Classification of Entities

6.3 The Group recommends that RADs-Category II may be permitted to release foreign exchange for the following transactions:

a. Private Visits,

b. Remittance by tour operators / travel agents to overseas agents / principals / hotels,

c. Business Travel,

d. Fee for participation in global conferences and specialized training,

e. Remittance for participation in international events / competitions (towards training, sponsorship and prize money).

f. Film shooting,

g. Medical Treatment abroad,

h. Disbursement of crew wages,

i. Overseas Education,

j. Remittance under educational tie up arrangements with universities abroad,

k. Remittance towards fees for examinations held in India and abroad and additional score sheets for GRE, TOEFL etc.,

l. Employment and processing, assessment fees for overseas job applications,

m. Emigration and Emigration Consultancy Fees,

n. Skills / credential assessment fees for intending migrants,

o. Visa fees,
p. Processing fees for registration of documents as required by the Portuguese / other Governments,
q. Registration / Subscription / Membership fees to International Organizations,

6.4 It will be observed that the recommendations imply that the entities proposed to be licensed as RAD-Category II may be permitted to undertake the transactions that involve conversion of one currency into other on the basis of a simple declaration from the applicant and/or on production of appropriate document. Such transactions may not necessarily require opening and maintaining foreign currency denominated (NOSTRO) account with a bank outside India. However, the Group recommends that to facilitate issuance of foreign currency draft etc. for such transactions the RAD-Category II may be allowed enter into an arrangement with banks authorised to deal in foreign exchange in India.

The Group has deliberated in detail the current dispensation available to various categories of authorized persons and in the light of regulatory framework under which each category of institutions is functioning the issue of granting them licence as a Restricted AD has been considered. The eligibility criteria should primarily depend on strong financials, good governance, regulatory / prudential comfort and adequate control mechanism. The Group recommends that the following category of institutions could be considered for the purpose.

Currently, a company with minimum capital of Rs.25 lakhs for a single branch and Rs.50 lakhs for multi-branch is eligible to apply for a licence of FFMC for consideration by the Reserve Bank. The Group recommends that the Reserve Bank may consider granting RAD-Category II licence to the existing, well functioning FFMCs, with strong financials, that demonstrate good governance while providing regulatory/ prudential comfort. Ilustratively, the criteria for upgradation of existing FFMC to RAD-Category II may include net owned funds Rs 10 crores; satisfactory functioning as FFMC for at least two years and credit report from their bankers.

7.2.1 No new Authorised Dealer/FFMC license is being currently granted to any Cooperative Bank. Although, fresh FFMC licences are not being issued to UCBs, the existing licences are being renewed under the same conditions.

7.2.3 The Group would like to emphasize that the licence to deal in foreign exchange in capacity other than Authorised Dealers is different insofar as these entities are not permitted to undertake any open position risk. The activities permitted under these licences only allow conversion from one currency to other currency. Therefore, a beginning can be made by granting them licence as RAD-Category II.

7.3.3 To ensure active involvement of the sponsor banks the Group recommends that the Reserve Bank may consider requests provided it is recommended by the sponsor bank to grant RAD Category –II licence to RRBs on case by case basis. Since the supervision of the RRBs is entrusted to NABARD the Reserve Bank may consider taking into account the recommendations of the NABARD also before taking a decision on the application for grant of RAD-Category II licence.

7.3.4 Before granting licence, the Bank may also consider obtaining an undertaking from the sponsor bank of the RRB that it would impart training to the staff of the RRB to ensure that they are able to discharge their responsibility as RAD-Category II.

Proposed structure of the authorized persons would be as follows:

10. Transitional Arrangements

The Group notes that in adopting the proposed structure it is unlikely that it may result in limiting the present activities of any of the licenced entities. However, in the event that there is any entity which considers the proposed structure restrictive as compared to the current dispensation , the Group recommends that such entity may be granted special dispensation, on case by case basis, with a view to continuing their present status, as appropriate. However, Group is of the view that all such special permission may be granted subject to annual review.

11. Reporting Requirement

11.1 In case of Authorised Dealers, RADs-Category I and FFMCs the existing reporting requirements may continue.

11.2 It is recommended that the RADs-Category II may be required to submit a monthly statement of all transactions (category wise) where the amount exceeds a prescribed cut-off value, say USD 5,000 per transaction initially, so that a review could be made of the threshold in six months and a firmer threshold may arrived at.

12.1 The existing arrangement of inspection/audit of Authorised Dealers and RADs-Category I will continue.

12.2 As regards the FFMCs as has been decided that an auditor’s certificate confirming the compliance with the Rules/Regulations/ Directions will be adequate. However, the Reserve Bank may reserve the right to inspect when considered necessary.

12.3 For RADs-Category II also the prescription as provided for FFMCs ( para. 12.2) may be made applicable. However, the Group recommends that the Reserve Bank may require a special audit of the RADs-Category II depending on the nature of the transactions by an auditor from the approved list of the RBI/ICAI.

13.1 The existing arrangement of KYC and Anti Money Laundering norms for Authorised Dealers may continue.

13.2 KYC and Anti Money Laundering norms are being prescribed separately for FFMCs. These may be made applicable to RADs-Category II also.

14. Miscellaneous

The Group recommends that to begin with all RAD-Category II licences may be issued only for ONE year subject to renewal.

November 29, 2005
Mumbai.