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Key Takeaways

  • FEMA makes sure that foreign trade and payments are in order, as well as that the foreign exchange market in India develops and is maintained in an orderly manner.
  • 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.
  • Any individual other than the authorised dealer who obtains or purchases foreign currency and uses it for any other purpose that is prohibited by FEMA regulations or fails to return it to the authorised dealer within a certain amount of time is deemed to have violated the Act

The Foreign Exchange Management Act, or FEMA, is a piece of legislation that regulates the movement of money into and out of India. The Foreign Exchange Regulations Act, of 1973 has been replaced by the Foreign Exchange Management Act, of 1999 (FEMA), which was passed by the Parliament. 1st June 2000 was the official start of FEMA. On June 1st, 2000, the Foreign Exchange Regulation Act of 1973 was repealed. The Foreign Exchange Management Act, 1999 (42 of 1999), as announced by the Government of India's Ministry of Finance, took effect on that day.

Main Objective of FEMA

FEMA makes sure that foreign trade and payments are in order, as well as that the foreign exchange market in India develops and is maintained in an orderly manner. FEMA deals with every rule pertaining to the steps, formalities, transactions, etc. for foreign exchange transactions in across India.

The transactions relating to the foreign exchange have been classified under FEMA in two main categories,

  1. Current Account Transaction,
  2. Capital Account Transaction.

Authorised dealer under FEMA

The Reserve Bank of India cannot execute all transactions on its own when it comes to foreign exchange. For this reason, the RBI grants its authority to "Authorised Personnel" or any other individual who has been granted authorization by FEMA. The authority to deal with foreign securities and foreign exchanges belongs to these types of employees.

An entity or person that has been given the authority to convert foreign exchange is known as an authorised dealer. An "authorised dealer" is defined in Section 2(c) of the Act as "any person for the time being authorised under sub-section (1) of Section 10 of the Act to deal in foreign exchange or foreign securities," including a money changer, off-shore banking unit, and other individuals.

Example of an authorised dealer; If a person of India wants to go to Japan, they will need to use Japanese Yen as their currency. In this case, they will only go to an authorised dealer for the exchange. Similarly, if a person living overseas wishes to visit India and needs Indian rupees, they must go to an authorised dealer for the foreign exchange.

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.

  • On a request made in this regard, the Reserve Bank may authorise any individual to engage in foreign exchange or foreign security trading as an authorised dealer, money changer, off-shore banking unit, or in any other way that it considers appropriate.
  • 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-
  1. 1. It is in the public interest to do so; or
  2. 2. An authorised dealer has failed to comply with the conditions on the grounds for which the authorisation was granted; or
  3. 3. the authorised dealer has violated any of the provisions, rules, regulations mentioned in this Act.
  • To deal with foreign exchange or foreign securities, the Reserve Bank may issue a general or specific directive to an authorised dealer. Additionally, an authorised dealer is not permitted to conduct any form of transaction without prior approval from the RBI if the transaction includes any foreign exchange or foreign currency and is not compliant with the conditions of the rules.
  • An authorised dealer must obtain the person's declaration or information prior to carrying out any foreign exchange transaction on their behalf in order to confirm that the transaction is not intended to violate this Act's rules or regulations. If the individual declines to make the disclosure, the authorised dealer must decline the transaction in writing and may also report the situation to the RBI.
  • Any individual other than the authorised dealer who obtains or purchases foreign currency and uses it for any other purpose that is prohibited by FEMA regulations or fails to return it to the authorised dealer within a certain amount of time is deemed to have violated the Act.

Categories of authorised dealers under FEMA

Any individual may be given permission by the Reserve Bank of India to deal in foreign exchange or foreign securities upon application. Therefore, Section 10 of the Act governs authorised dealers, who are classified as the following four types of persons:

  • Authorised Dealer- Category I: State banks, commercial banks, cooperative and urban co-op banks are examples of entities that fall under Category I and are authorised dealers. They are occasionally allowed to conduct all of their capital account and current account activities in accordance with instructions provided by the RBI.
  • Authorised Dealer- Category II: A Category II authorised dealer differs from a Category I authorised dealer. Among other similar organisations, this group includes cooperative banks, upgraded FFMCs, and regional rural banks. These entities are allowed to conduct specific non-trade related transactions from their current account;however, all activities are allowed for FFMCs. The activities conducted include:
  1. Business or private visits abroad
  2. Remittances of tour operators
  3. Any fees or payments of registering one´s documents
  4. Emigration overseas and the consultancy fees for the same
  5. Fees for one´s international visa
  6. Fees for any international organizations
  7. Remittance of international exam fees such as the GRE, TOEFL, and more
  8. Participation in specialized training, global conferences, and international events
  9. Overseas education
  10. Any medical treatment that is to be carried out abroad due to lack of availability of treatment and amenities in the country.
  11. Overseas employment or job applications
  • Authorised Dealer- Category III:Only Category II entities fall under this category, including some specific financial institutions and others who are authorised dealers under FEMA. The Reserve Bank of India grants permission to these entities for all transactions related to foreign exchange.
  • Full-Fledged Money Changers (FFMC):Entities like Full-Fledged Money Changers are included in the last category of authorised dealers under FEMA. Urban Cooperative Banks, the department of post, and other full-service money changers are examples of FFMCs. These entities may buy foreign exchange securities for personal or business visits overseas, according to RBI regulations defining the permitted activities under Category IV.

Conclusion

The RBI has given four kinds of employees’ permission to work with foreign securities in accordance with FEMA. These include of financial institutions, state banks, cooperative banks, FFMCs, RRBs, and more.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. In order to join one of the categories of authorised persons, a person or entity must submit the proper application for the same, along with relevant and supporting documentation to the Reserve Bank of India.


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