The Reserve Bank of India (“RBI”) has recently proposed a comprehensive review of the authorization framework for Authorized Persons (“APs”) under the Foreign Exchange Management Act (“FEMA”) to adapt to the evolving dynamics of the Indian economy. The proposed changes aim to enhance operational efficiency, facilitate foreign exchange transactions for various users, and ensure robust regulatory oversight. The current framework, last reviewed in March 2006, is undergoing this revision in light of advancements such as progressive liberalization, increased global integration, digitization of payment systems, and changes in the institutional structure.
Objectives of the Draft Framework
The draft framework outlines the RBI's objectives, primarily focusing on achieving operational efficiency in delivering foreign exchange services to the public, tourists, and businesses. The key goals include simplifying the licensing framework for money changers and exploring alternative models to meet the emerging needs of the growing Indian economy. The proposed changes also consider the widespread availability of banking services, advancements in digital payment systems, and the need to align with the current economic landscape.
Thematic Changes in the Draft Framework
The draft introduces a novel category of money changers, termed Forex Correspondents (“FxCs”), who can conduct money-changing business through an agency model. FxCs, affiliated with AD Category-I or AD Category-II entities, will not be required to seek separate authorization from the RBI, streamlining the process for their involvement in foreign exchange-related services.
To reduce regulatory burdens and enhance ease of doing business, the RBI proposes granting perpetual authorization to AD Category-II entities. This marks a departure from the current periodic renewal requirement, providing greater stability and continuity for these entities.
The draft mandates the up-gradation of existing entities, including Full-Fledged Money Changers (“FFMCs”) and AD Category-IIs, based on specified criteria. This move ensures that entities with a substantial forex turnover comply with the revised eligibility criteria, aligning with the changing economic landscape.
Categorization of Authorized Persons (APs)
The proposed framework categorizes APs into three groups:
1. AD Category-I
Banks, including foreign banks operating in India, meeting the criteria laid down by the RBI's Department of Regulations. No significant changes are proposed for AD Category-I entities, and they continue to handle all current and capital account transactions permissible under FEMA.
2. AD Category-II
This category includes banks, foreign banks, or non-deposit taking systematically important NBFC-ICC entities. Additionally, existing FFMCs or AD Category-IIs with a satisfactory track record and a minimum average annual forex turnover of INR 50 crore for the last two financial years are eligible. AD Category-II entities can engage in various current account transactions and facilitate trade-related transactions up to a value of ₹15 lakh per transaction. They can also issue forex prepaid cards to residents traveling abroad.
3. AD Category-III
This category encompasses select institutions permitted to undertake forex transactions incidental to their activities. This includes entities like Remittance Service Providers (“RSPs”) and those offering innovative cross-border trade/remittance products.
Eligibility Criteria and Authorization Process
The draft framework outlines specific eligibility criteria for entities seeking authorization as AD Category-II or AD Category-III. Key requirements include governance standards, net worth criteria, place of business, and commencement of operations. Applicants must be companies incorporated in India, maintain a minimum positive net worth, and adhere to prescribed governance and operational guidelines. The authorization process involves initial screening, assessment, and the provision of temporary authorization for greenfield applications.
Forex Correspondent Scheme (FCS)
The FCS proposed by the RBI is based on a principal-agency model, where AD Category-I or AD Category-II entities act as principals for FxCs. FxCs, which can include existing FFMCs, NBFCs, or banks, are permitted to engage in activities such as purchasing foreign currency notes, selling foreign currency for travel purposes, and distributing forex prepaid cards. The obligations of both FxCs and principal ADs are clearly defined to ensure accountability and regulatory compliance.
Our Take
In total, the RBI's draft framework for the authorization of APs under FEMA represents a significant step toward adapting to the changing dynamics of the Indian economy. The proposed changes aim to strike a balance between operational efficiency and robust regulatory oversight. Stakeholders are invited to provide feedback on the draft framework until January 31, 2024. Following this feedback period, the RBI is expected to review and issue a revised framework, further shaping the landscape of foreign exchange services in India.
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