April 6, 2021

Authorized Dealer under FEMA

Although the Reserve Bank of India is entrusted with great responsibilities under FEMA but when it comes to foreign exchange, the RBI cannot forward all transactions on its own. This is why RBI delegates these powers to ¨authorised dealer¨ or to any other authorised dealer under FEMA.

1. Who is an authorised dealer under FEMA?

An authorised dealer can be understood as an entity or individual who has been given the authority for the conversion of the foreign exchange. Section 2(c) of the Act defines an ¨authorised dealer¨ as an authorised dealer, money changer, off-shore banking unit or any other person for the time being authorised under sub-section (1) of Section 10 of the Act to deal in foreign exchange or foreign securities.

This can be understood with the help of an example- if an Indian resident wishes to visit Japan and requires their currency, which is Japanese Yen. In such a situation for the exchange he/she/they will only go to the authorised dealer or if a person residing abroad wants to visit India and requires Indian Rupee, then in similar manner- he/she/they will have to approach an authorised dealer for the foreign exchange.

2. Authorised dealer under Section 10 of FEMA

An authorised dealer mentioned under Section 2(c) of the Act are authorised under Section 10 of the Act to deal in foreign exchange and foreign securities. Here´s a brief of Section 10 of the Act and an authorised dealer:

Reserve Bank may, on an application made to it on this behalf, authorise any person to deal in foreign exchange or in foreign securities, as an authorised dealer, money changer or off-shore banking unit or in any other manner as it deems fit.

Authorisation under this Section should be in writing and should be subjected to the regulations mentioned therein.

Any authorised dealer made, the reserve bank at any time can revoke such person if it is satisfied that-

It is in the public interest to do so; or
An authorised dealer has failed to comply with the conditions on the grounds for which the authorisation was granted; or
the authorised dealer has violated any of the provisions, rules, regulations mentioned in this Act.

The Reserve Bank may order an authorised dealer to comply with a general or special direction to deal with the foreign exchange or foreign securities. Also, if there is any transaction which involves any foreign exchange or foreign currency, which is not in compliance with the terms of these provisions, then an authorised dealer without any prior permission from the RBI cannot engage in any type of transaction.

Before undertaking any transaction in foreign exchange on behalf of any person, an authorised dealer shall require the declaration or information of the person to ensure that the transaction is not designed for the purpose of contravention of this Act and its rules or regulations. In case the person refuses to undertake the declaration, then the authorised dealer shall refuse in writing to undertake the transaction and can also report the matter to the RBI.

Other than the authorised dealer, if any other person acquires or purchases the foreign exchange and uses it for any other purpose, which is not permissible under the provisions of FEMA, or does not surrender within a specified period of time to the authorised dealer, he/she shall be considered to have committed an offence under the Act.

3. Categories of authorised dealers under FEMA

The Reserve Bank of India on an application may authorise any person to deal in foreign exchange or in foreign securities. Therefore, an authorised dealer is governed under Section 10 of the act, which states following 4 types of persons as an authorised dealer:

3.1 Authorised Dealer- Category I

An authorised dealer under Category I includes entities like State Banks, Commercial Banks, Co-op and Urban Co-op Banks. From time to time, they are permitted to follow RBI issued directions for all their capital accounts and current account transactions.

3.2 Authorised Dealer- Category II

An authorised dealer under Category II is different from the ones in Category I. This category is inclusive of Coop Banks, Upgraded FFMCs, and Regional Rural Banks among other such entities. These entities are permitted certain non-trade related transactions from their current account, but when it comes to FFMCs, all activities are permitted. These said activities include:

Business or private visits abroad
Remittances of tour operators
Remittance of international exam fees such as the GRE, TOEFL, and more
Participation in specialized training, global conferences, and international events
Overseas education
Any medical treatment that is to be carried out abroad due to lack of availability of treatment and amenities in the country.
Overseas employment or job applications
Any fees or payments of registering one´s documents
Emigration overseas and the consultancy fees for the same
Fees for one´s international visa
Fees for any international organizations

3.3 Authorised Dealer- Category III

Under Category II only entities such as some selective financial institutions and others as an authorised dealer under FEMA. All transactions that are incidental to foreign exchange are permitted to these entities by the Reserve Bank of India.

3.4 Full-Fledged Money Changers (FFMC)

The final category of authorised dealers under FEMA includes entities like Full-Fledged Money Changers. FFMCs include Urban Cooperative Banks, the department of post, and other full-fledged money changers. While laying down the permissible activities under Category IV, as per the regulation of RBI, such entities can purchase foreign exchange securities for business visits abroad or for private purposes.

Categories	Entities	Permitted Activities
Category I	Commercial Banks, State Co-op Banks, Urban Co-op Banks	All current and capital account transactions as per RBI directions issued from time to time
Category II	Coop Banks, Upgraded FFMCs, Regional Rural Banks, and others	Specified non-trade related current account transactions and all activities permitted to FFMC
Category III	Selected financial and other institutions	Transactions incidental to the foreign exchange
Full-Fledged Money Changers (FFMCs)	Urban Cooperative Banks, the department of post, and other full-fledged money changers	Purchase of foreign exchange and sale for private and business visits abroad

4. How to become an authorised dealer under FEMA?

As established earlier, authorised dealers have the jurisdiction from the Reserve Bank of India to deal in foreign exchange and foreign security of the country. In order to become an authorised dealer under FEMA, one has to submit the necessary applications along with all the relevant required documents to the Reserve Bank of India.

After due evaluation, if you are approved as an authorised dealer under FEMA, it is important to keep in mind that it does not grant you a free hand in foreign exchange. You will be required to furnish any documents of your transaction to the RBI, depending on the Category of authorised dealer near you fall under and as and when they request these documents from you.

Conclusion

An authorised dealer under FEMA is an authorised dealer, money changer, off-shore banking unit or any other person for the time being authorised under sub-section (1) of Section 10 of the Act to deal in foreign exchange or foreign securities. There are mainly 4 categories of authorised dealers under FEMA and for an individual to become an authorised dealer one has to submit the necessary applications along with all the relevant required documents to the Reserve Bank of India.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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