In India, remittances are allowed to be sent to foreign countries. Such remittances are called outward remittances. Similarly, remittances are also allowed to be received by a company or entity set up in India. Remittances which are received in India are called as inward remittances. The Reserve Bank of India (RBI) is the main regulatory authority dealing with foreign exchange transactions within the country.
Persons who are living outside India are required to send funds to India on a very frequent basis for their family maintenance. Therefore, Money Transfer Service Scheme (MTSS) is formed to make the process of inward remittance for individuals easy.
Here is a detailed discussion of Money Transfer Service Scheme:
1. What is a Money Transfer Service Scheme
- The Government of India (GOI) has brought out the Foreign Exchange Management Act, 1999 (FEMA 1999) to regulate foreign exchange transactions within the country.
- Under specific regulations, the RBI permits inward remittances through a scheme known as the Money Transfer Service Scheme (MTSS).
- Money Transfer Service Scheme (MTSS) is a quick and easy way of transferring personal remittances from abroad to beneficiaries in India. This scheme can be used for personal remittances into India such as remittances towards family maintenance and remittances favoring foreign tourists visiting India.
- No outward remittance from India is permissible under MTSS.
- Under this scheme, money transfer is made through reputed money transfer companies based out in abroad, known as Overseas Principal, and transfer is made to agents appointed in India, known as Indian agents.
- Under MTSS Scheme, the remitters and the beneficiaries are individuals only.
- Further, Indian agents are not allowed to remit funds outside India to Overseas Principals.
- The RBI provides circulars and guidelines from time to time on the operation of money transfer service schemes in India.
2. Master Direction on Money Transfer Service Scheme
- In 2017, the RBI issued the Master Direction (MD) on Money Transfer Service Scheme vide documents No. RBI/FED/2016-17/52, FED Master Direction No.1/2016-17 dated 22nd February 22, 2017.
- The master direction acts as a guideline for agents under the money transfer service scheme. Authorised Persons/ Authorised Dealers (AP/AD) are allowed to act as agents under the money transfer service scheme.
3. Modus Operandi under Money Transfer Service Scheme
- The RBI created a systematic process for the money transfer service scheme.
- Under this scheme there are tie-ups/ collaborations between overseas principals and agents in India.
- Overseas principals are money transfer companies established abroad for remitting money to India.
- Agents are authorized banks who disburse the funds to beneficiaries in India. Therefore in the MTSS scheme, there are Four parties involved, the Principal (Overseas Principal), the Agent (Authorised Bank), Remitter and Beneficiaries.
- Funds are transferred by Remitter to India through Overseas Principal, who in turn transfer the funds to Authorised Dealer in India. Authorised dealer transfer the funds to the beneficiary in India.
- The remittance is done at the current exchange rates as per the requirements.
- Under the money transfer service scheme, the outward remittance by an agent to the overseas principal is not permitted.
- Usually, MTSS are companies and beneficiaries are normally individuals.
4. Indian Agents/ Authorised Dealers
4.1 Who is appointed as Indian Agents
- As per Section 10(1) of Foreign Exchange Management Act, 1999, Reserve Bank of India has power to appoint any person as Indian Agent for MTSS, also known as Authorised Dealer.
- No person can handle the business of cross-border money transfer to India in any capacity unless specifically permitted to do so by the Reserve Bank.
- Authorised Dealers are defined under the FEMA act and include banks that deal with foreign exchange on a regular basis on behalf of the customer. However, authorized dealers have to act within the guidelines and rules brought out by the RBI from time to time on money transfer.
4.2 Framework for Indian Agents under the Scheme
- For becoming an agent, the applicant can be filed by any of the following:
- Authorised Dealer Category – I Bank;
- Authorised Dealer Category – II Bank;
- Full Fledged Money Changer (FFMC); or
- Scheduled Commercial Bank
- Further, the applicant must have a minimum net worth or net owned funds of Rs. 50 Lakhs.
- For the above computing net owned funds, owned funds means (Paid-up Equity Capital + Free reserves + Credit balance in Profit & Loss A/c) minus (Accumulated balance of loss, Deferred revenue expenditure and Other intangible assets)
- Net Owned funds means owned funds minus the amount of investments in shares of its subsidiaries, companies in the same group, all (other) non-banking financial companies as also the book value of debentures, bonds, outstanding loans and advances made to and deposits with its subsidiaries and companies in the same group in excess of 10 percent of the Owned funds.
4.3 Process of making an application to become Indian Agent
Application to appoint as Indian agent may be made to the respective regional office of the Foreign Exchange Department of the Reserve Bank of India, under whose jurisdiction the registered office of the applicant falls alongwith following documents:
- Declaration that no criminal proceeds are against the applicant by the Directorate of Enforcement (DoE), Directorate of Revenue and the Directorate of Intelligence. Apart from this, no proceedings must be enforced against any of the directors of the applicant.
- A declaration has to be submitted by the entity that the proper framework for Know your Customer (KYC), Anti-money laundering norms, Combating of Financing Terrorism and regulatory requirements have been followed by the company. These requirements have to be in accordance with the norms related to the RBI.
- Information and details of the overseas principal with which the MTSS transaction is being conducted.
- Scheme of operation by the overseas principal.
- Full information on the address of the entities present in India and the address of all the branches where MTSS will be conducted by the applicant.
- Information on the estimated volume of transactions that is conducted by the entity.
- Audited Balance sheet and profit and loss of the entity for the last 2 years, if available.
- A certificate from Statutory Auditors regarding the position of the Net Owned Funds as on the date of application
- Memorandum of Association and Articles of association. The object clause of the business must state that the applicant is into the business of conducting money transfer operations.
- Confidentiality report of the applicant. Two copies of the report must be provided by the applicant’s banker.
- Information related to any sister concern or associate concern with the MTSS.
- Board resolution by the company for the purposes of carrying out the money transfer service scheme.
- A letter from the proposed Overseas Principal, agreeing to enter into tie up with the applicant and also to provide necessary collateral.
4.4 What are the other requirements for starting an MTSS
- For setting up an Indian Agent, collateral equivalent to 3 days average drawing or USD 50,000, whichever is more, should be kept by the overseas principal in favor of the Indian Agent with a designated bank in India.
- The minimum amount that has to be kept as foreign currency deposit is USD 50,000 and the rest of the amount has to be kept as a bank guarantee.
- The adequacy of collateral should be reviewed by Indian Agents at quarterly intervals on the basis of remittances received during the past three months.
- Only personnel remittances have to be made for the maintenance of family and for the purpose of foreign tourists visit to India.
- Donations or contributions towards trusts and purchase of property are not allowed through the money transfer service scheme. This can happen through normal banking channels.
- For an individual, an amount up to USD 2500 is allowed to be remitted.
- For individuals present in India an amount of Rs. 50,000/- may be paid in cash to beneficiaries in India. Any amount exceeding INR 50,000 can be paid through means of a demand draft or an account payee cheque.
- However, For a foreign tourist beneficiary, a higher amount can be disbursed in cash.
- Information and details related to the transactions have to be maintained for inspection by the inspectors and auditors.
- An individual can receive only 30 remittances under this scheme during a calendar year.
4.5 Decision-making by the RBI for Appointing Indian Agent
- The decision for granting an application would be dependent on a variety of factors.
- The RBI would consider the application on a case-to-case basis.
- One of the criteria is whether the Indian agents have the strength and efficiency to handle operations under the money transfer service scheme.
- The standards which have to be followed and maintained while conducting MTSS transactions must be under the best practices followed internationally and domestically.
- Once the application is granted, the Indian agent must commence operations within 6 months of granting the certificate. This must also be intimated to the regional office of the concerned RBI department.
5. Overseas Principal
5.1 Rules related to operation of overseas principals
Overseas Principals with adequate volume of business, track record and outreach will only be considered under the scheme. Further, primary objective of operating MTSS is to facilitate cheaper and more efficient means of receipt of remittances, operators with limited outreach in terms of branch network in the country and localized operations overseas will not be entertained.
5.2 Application for approval of Overseas Principals
The following documents are required to be submitted by Indian agents for overseas principals :
- Overseas principals must get consent from the Department of Payment and Settlement Systems, Reserve Bank of India under the provisions of the Payment and Settlement Systems Act (PSS Act), 2007. This is required for the operation of international payment systems. Background checks will be carried out by RBI with help of Government of India.
- The overseas principal must be registered with the respective authority. It must be licensed by the Central Bank or a regulatory finance agency in the foreign country for the purpose of carrying out money transactions. The country of registration of the Overseas Principal should be AML (Anti-Money Laundering) compliant.
- Net worth of the overseas principal must be USD 1 Million. This net worth requirement must be according to the last audited balance sheet. However, the RBI will relax this requirement, if the overseas principal is established in a Financial Action Task Force Country (FATF) and are supervised by the Central bank or Financial regulatory authority.
- The track record of the overseas principal must be proper for conducting money transactions in well-regulated market.
- The arrangement or transactions between the entities must be for increased access to money transfer facility.
- As per the international credit rating system, the overseas principal must have good rating.
- The Overseas Principal should be registered with the overseas trade / Industry bodies
- A confidential report must be submitted from atleast 2 of its bankers.
- A report from the chartered accountant must be submitted regarding precautions and steps taken to comply with anti-money laundering regulations in India.
- The responsibility of the activities of the agents and sub-agents in India are under the overseas principal.
- Overseas principal is required to maintain records of all payouts in India including name of beneficiaries. All records must be made accessible on demand to the Reserve Bank or other agencies of the Government of India, viz., Ministry of Finance, Ministry of Home Affairs, FIU-IND, etc. Full details of the remitters and the beneficiaries should be provided by the Overseas Principals if called for.
6.1 Appointment of Sub-agent
- To expand their operations widely, Indian Agents can appoint sub-agents for the purpose of undertaking money transfer business.
- A Sub Agent should have a place of business, and whose bonafides are acceptable to the Indian Agent.
- Indian Agents can decide tenure and fee through mutual agreement with the Sub Agent.
- The audit and on-site inspection of premises and records of the Sub Agents by the Indian Agent to be conducted at least once in a month and in a year respectively.
6.2 Documents to be submitted for appointment of sub-agent by Indian agent
- Indian Agents is required to submit information related to the sub-agent on quarterly basis in prescribed format.
- Information should be submitted within 15 days from the end of the quarter during which sub-agent is appointed to the respective regional offices of the Foreign Exchange Department of the Reserve Bank under whose jurisdiction the registered office of the Indian Agent falls/
- In case of any objection by the MHA (Ministry of Home Affairs), the Sub Agency arrangement concerned should be terminated immediately.
6.3 Due Diligence of Sub-Agent
- The Indian agents have to make sure that sub-agents comply with the standards of MTSS.
- Indian agent and Overseas Principal have to check following points while conducting due diligence of sub-agent :
- Existing business activities of the Sub Agent/ its position in area.
- Shop & Establishment or any other applicable municipal certification in favour of the Sub Agent.
- Verification of physical existence of location of the Sub Agent.
- Conduct certificate of the Sub Agent from the local police authorities (certified copy of Memorandum and Articles of Association and Certificate of Incorporation in respect of incorporated entities). Although, it not mandatory to obtain certificate from the local police authorities. However, Indian Agents must take due care to avoid appointing individuals or entities who have any proceedings pending against them by any law enforcing agencies.
- Declaration regarding past criminal cases initiated or pending against the Sub Agent or its directors or partners.
- PAN Card of the Sub Agents and its directors/ partners.
- Photographs of the directors/ partners and the key persons of the Sub Agent.
- An Indian agent is required to carry out such checks on a regular basis, at least once in a year.
- The Indian Agents should obtain from the Sub Agents proper documentary evidence confirming the location of the Sub Agents in addition to personal visits to the site.