Reserve Bank of India (RBI) seeks to rationalise Licensing Framework for Authorised Persons (APs) under FEMA

The RBI has recently issued a draft licensing framework for APs under the Foreign Exchange Management Act, 1999 (FEMA). This initiative aims to reassess the authorization framework which was last reviewed by the RBI in March 2006. The review is prompted by the widespread availability of banking services to the public, and the RBI seeks to explore alternative models to facilitate foreign exchange-related services.
 
According to FEMA Regulations, the RBI may authorize any person, upon application, as an “Authorized Person” to deal in foreign exchange or in foreign securities, as Authorised Dealers (Ads) or in any other capacity deemed appropriate by the RBI. Only APs are permitted to engage in the transfer or dealing of foreign exchange or foreign securities.
 
Notably, a significant portion of forex transactions is now being facilitated through APs without direct involvement from the RBI. Hence, RBI has now proposed to introduce a new category of money changers. These entities would engage in money-changing activities through an agency model by becoming Forex Correspondents (FxCs) of Category-I and Category-II Authorized Dealers. The aim is to broaden the accessibility of foreign exchange services. As part of this initiative, a Forex Correspondent Scheme (FCS) is suggested, following a principal-agency model, where AD Cat-I or AD Cat-II would act as the principal for FxCs. Importantly, these FxCs would not be required to obtain separate authorization from the RBI.
 
Presently, the authorisation for entities operating as AD Cat-II is granted initially for a period of one year, with subsequent renewal for a period between 1 to 5 years. To reduce regulatory burden and improve business ease, it is proposed to renew existing AD Cat-II authorizations on a perpetual basis, subject to meeting revised eligibility criteria stipulated in the new framework. Further, in a move to broaden business scope and foster innovation and competition for an improved consumer experience, AD Cat-II entities are proposed to be allowed to additionally facilitate trade-related transactions up to ₹15 lakh per transaction.
 
Given the accelerated universal reach of financial services due to various financial inclusion initiatives, increased integration of the Indian economy with the global economy, digitization of payment systems, evolving institutional structure, etc., over the last two decades, the RBI seeks to revisit the existing authorization framework under FEMA. The objective is to further enhance the ease of foreign exchange transactions for users while concurrently strengthening the regulatory oversight/framework governing APs.
 
A copy of the RBI draft is enclosed herewith and available on the RBI website.
 
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