Unauthorized Foreign Exchange Transactions

A.P. (Dir Series) Circular No. 02 dated April 24, 2024

Reserve Bank of India (RBI) has come across instances of unauthorized entities offering foreign exchange (forex) trading facilities to Indian residents with promises of disproportionate / exorbitant returns. Upon investigation, it has been observed that to facilitate unauthorised forex trading, these entities have taken recourse to engaging local agents who open accounts at different bank branches for collecting money towards margin, investment, charges, etc. These accounts are opened in the name of individuals, proprietary concerns, trading firms etc. and the transactions in such accounts are not found to be commensurate with the stated purpose for opening the account in several cases. It is also observed that these entities are providing options to residents to remit/deposit funds in Rupees for undertaking unauthorised forex transactions using domestic payment systems like online transfers, payment gateways, etc.

In this context RBI has invited attention of AD Category I banks to be more vigilant and exercise greater caution. As and when banks come across an account being used to facilitate unauthorized forex trading they shall report the same to Directorate of Enforcement, Government of India, for further action, as deemed fit.

AD Cat-I banks may advise their customers to deal in forex only with ‘Authorised Persons’ and on ‘authorised ETPs’ and give wide publicity to the list of ‘Authorised Persons’ and the list of ‘authorised ETPs’ available on the RBI website. AD Cat-I banks are also advised to give publicity to the ‘Alert List’ and Press Releases issued by the RBI in this regard.

Amendment to Foreign Exchange Management (Non-Debt Instruments) Rules 2019 (FEM NDI Rules, 2019)

Notification issued by Central Government dated March 14, 2024

An explanation has been added to Rule 2(aq) of FEM NDI Rules 2019 whereby investment in partly paid units is allowed. The explanation reads as under:

For the purposes of this clause, unit shall include unit that has been partly paid up, which is permitted under the regulations framed by the Securities and Exchange Board of India, in consultation with Government of India;

By virtue of this amendment now investment vehicles can issue partly paid units to person resident outside India.

Issuance of partly paid units to persons resident outside India by investment vehicles under Foreign Exchange Management (Non-debt Instruments) Rules, 2019

A.P. (DIR Series) Circular No. 7 dated May 21, 2024

Central Government vide notification dated March 14, 2024 amended FEM NDI Rules 2019 and enabled issuance of partly paid units to persons resident outside India by investment vehicles.

In this regard, it has been decided to regularize the issuances of partly paid units by Alternative Investment Funds to persons resident outside India prior to the said amendment through compounding under Foreign Exchange Management Act, 1999. However, before approaching the Reserve Bank for compounding, AD Category-I banks may ensure that the necessary administrative action, including the reporting of such issuances by Alternative Investment Funds to the Reserve Bank, through Foreign Investment Reporting and Management System (FIRMS) Portal and issuing of conditional acknowledgements for such reporting, is completed.