FEMA and Authorised Dealers

Today's article we will discuss around FEMA and Authorised Dealers (also known as ADs). What is the meaning of Authorised Dealers? What are their roles and responsibilities? What are the different categories of ADs? and so on and so forth.

In Foreign Exchange Management Act, 1999 (“FEMA”) most of the roles and responsibilities are assigned to Authorised Dealers(“AD”). These Authorised Dealers play a huge role under FEMA. They are entrusted with various duties and important roles that contribute to the safer and better implementation of the rules laid down under the Act. In this article you will get an elaborate insight about Authorised Dealer and their various roles and responsibilities. For any query, help or feedback regarding this article and how this impacts arbitrage, you may get in touch with our team here - Appointment with CA. Please note the all consultations with the CAs are Paid consultations.

1. What is the meaning of “Authorised Person”

• As per Section 2(c) of FEMA, “Authorised person” means an authorized dealer, money changer, offshore banking unit, or any other person which is authorized under Section 10(1) of FEMA to deal in foreign exchange or foreign securities.
• As per Section 10(1) of FEMA, the Reserve Bank of India (“RBI”), on an application made to it, may authorize any person to deal in foreign exchange or in foreign securities. 
• “Authorised Dealer” means a person authorized as an authorized dealer under Section 10(1) of the FEMA Act. RBI can authorize banking as well as non-banking entities as authorized dealers.

2. What are the roles and responsibilities of the “Authorised Person” notified under FEMA

• As per Section 10 of FEMA, an authorized person shall comply with all the directions or orders of the RBI while dealing in foreign exchange or foreign security.
• An authorized person shall not engage in any transaction involving any foreign exchange or foreign security which is not in conformity with the terms of his authorization except with the prior permission of the Reserve Bank.
• In case of undertaking any transaction in foreign exchange on behalf of any person, an authorized person shall ask such person to make a declaration and provide information to ensure that the transaction does not contravene any provisions of FEMA.
• If such a person fails to provide such information then the authorized person shall refuse in writing to undertake the transaction. Further, where such contravention or evasion is contemplated by the person then the authorized person shall report the matter to the RBI.

3. What are the different types of Authorised Dealers (AD) appointed by RBI

With a view to providing adequate foreign exchange facilities to common persons and ensuring efficient customer service through competition, RBI currently issues authorization under Section 10(1) of FEMA to the following four categories of Authorised Dealers:

3.1 Authorized Dealers Category – I (ADs – I)

Only banks are authorized as under Category-1. According to the RBI’s most recent circular, there are around 110 firms that qualify for the Authorized Dealers category – I. It contains all types of commercial banks functioning in India, including nationalized, scheduled, private, and foreign commercial banks. These segments of banks are allowed to deal in all types of foreign exchange transactions related to current and capital account transactions according to the norms and procedures laid down by RBI.

3.2 Authorized Dealers Category – II (ADs –II)

RBI authorizes selected entities under Category II and these entities are permitted to carry out specific activities. AD Category II are permitted to carry out:

1. specified non-trade-related current account transactions, 
2. all such activities which are permitted to Full Fledged Money Changers and 
3. any other activity as decided by the Reserve Bank.

Entities which are generally authorized under Category II are Upgraded FFMCs, Coop Banks, Regional Rural Banks (RRBs), and others.

3.3 Authorized Dealers Category -III (ADs –II)

RBI authorizes Financial and other institutions as Authorised Dealers Category-III to carry out specific foreign exchange transactions incidental to their business/activities. The third category of authorized dealers operates with the goal of promoting international trade by providing them with enough foreign currency availability in accordance with the provisions of Section 10 of the FEMA Act 1999. Financial institutions such as IFCI, SIDBI EXIM Bank, and numerous Factor Agencies are among the prominent players.

3.4 Full-Fledged money Changers (FFMCs)

It is a novel component of Indian foreign exchange market regulation. Under this category, RBI selects registered companies as Full Fledge Money Changers to undertake the purchase and sale of foreign exchange for specified purposes only. It might have been any financial entity other than commercial banks that met the RBI’s standards and criteria. FFMCs are allowed to buy and sell foreign exchange from both residents and non-residents visiting India. The main objective of the enactment of FFMCs is to provide easy access to foreign exchange transactions to the common masses. Entities appointed as FFMCs are Dept. of Posts, Urban Co-op. Banks and Other FFMCs.

4. Roles and Duties of Authorised Dealers

As per RBI/FED/2015-16/17 FED Master Direction No.3/2015-16 dated 1st January 2016, the following operational instructions are provided to authorized dealers:

4.1 Purchase of Foreign Currency From the Public

• Authorized Persons may freely purchase foreign currency notes, coins, and traveler cheques from residents as well as non-residents. Where the foreign currency was brought in by declaring on the Currency Declaration Form (Form CDF) then AD should ask to produce such CDF. 
• Payment for the purchase of foreign currency can be made in cash to resident customers and non-resident customers up to only USD 1,000 or USD 3000 its equivalent per transaction respectively.
• Indian Rupees may be sold to foreign tourists/visitors against International Credit Cards/International Debit Cards and take prompt steps to obtain reimbursement through normal banking channels.
• Payment for the purchase of foreign currency to resident customers can be made in cash / by way of account payee cheque/demand draft/ loading in INR debit cards/electronic funds transfer through banking channel, as per prescribed limits.

4.2 Sale of foreign exchange

Authorized Dealers are responsible for the sale of foreign exchange for the following purposes:

1. Private Visits: Authorised Persons may sell foreign exchange up to the prescribed ceiling during a financial year to persons resident in India for undertaking one or more private visits to any country abroad (except Nepal and Bhutan).
2. Business visits: Foreign currency may be sold to persons resident in India for undertaking business travel or for attending a conference or specialized training or for maintenance expenses of a patient going abroad for medical treatment or check-up abroad or for accompanying as an attendant to a patient going abroad for medical treatment/check-up up to the limits specified in Schedule III to FEMA (Current Account Transactions) Rules, 2000.
3. Forex Prepaid Cards: Authorised Dealers Category II may issue forex pre-paid cards to residents traveling on private/business visits abroad, subject to KYC/AML/CFT requirements. However, the settlement in respect of forex pre-paid cards may be effected through AD Category-I banks.

4.3 Issuance of Encashment Certificate

Authorized Persons may issue certificates of encashment when asked for in cases of purchases of foreign currency notes, coins, and traveler’s cheques from residents as well as non-residents. These certificates bearing authorized signatures should be issued on the letterhead of the money changer and proper records should be maintained.

4.4 Purchases from other FFMCs and Authorised Dealers (ADs)

An FFMC/ non-bank AD Category II may purchase from other FFMCs and Authorised Dealers (ADs) any foreign currency notes, coins, and encashed traveler’s cheques tendered in the normal course of business. Consideration for such purchase should be paid only by way of crossed account payee cheque/demand draft/banker’s cheque/pay order/electronic funds transfer through banking channel.

4.5 Sales against Reconversion of Indian Currency

Any Indian currency held by a non-resident as unspent at the time of departure may be converted into Foreign Currency by an authorized person subject to the production of a valid Encashment Certificate.

4.6  Cash Memo

Authorized Persons shall issue a cash memo on its letterhead to travelers to whom the foreign currency is sold by them. The cash memo may be required for production to emigration authorities while leaving the country.

4.7. Rates of Exchange

Authorized Persons may put through transactions relating to foreign currency notes and travelers’ cheques at rates of exchange determined by market conditions and in alignment with the ongoing market rates.

4.8 Foreign Currency Balances

• An FFMC/non-bank AD Category-II should keep balances in foreign currencies at reasonable levels and avoid the buildup of idle balances with a view to speculating on currency movements.
• The transactions between authorized dealers and FFMCs should be settled by way of account payee crossed cheques/demand drafts/electronic funds transfer through the banking channel. Under no circumstances should a settlement be made in cash.

4.9 Replenishment of Foreign currency Balances

• FFMCs/non-bank ADs Category II may obtain their normal business requirements of foreign currency notes from other FFMCs and Authorised Dealers (ADs). Payment against such acquisition can be made in rupees by way of account payee crossed cheque/demand draft/electronic funds transfer through banking channel.
• Where FFMCs/ non-bank ADs Category II are unable to replenish their stock in this manner, they may make an application to the Regional Office concerned of the Reserve Bank through an AD Category-I for permission to import foreign currency into India. The import should take place through the designated AD Category-I through whom the application is made.

4.10 Export / Disposal of surplus Foreign Currency Notes / Travellers’ Cheques

• FFMCs/non-bank ADs Category II may export surplus foreign currency notes/encashed travelers’ cheques to an overseas bank through designated AD Category – I in foreign exchange for the realization of their value through the latter. 
• FFMCs may also export surplus foreign currency to private money changers abroad subject to the condition that either the realizable value is credited in advance to the AD Category – I bank Nostro account or a guarantee is issued by an international bank of repute covering the full value of the foreign currency notes/coins to be exported.