Spice Route Legal
Introduction
This note is in furtherance to our first article on the changes proposed under the “Draft Licensing Framework for Authorised Persons (APs) under FEMA” (“Draft Framework”) issued by the Reserve Bank of India (“RBI”). While the first part focused on the “Forex Correspondents” scheme and the transition requirements under the Draft Framework, this article focuses on changes proposed to the regulatory framework that governs Authorised Dealer Category – I (“AD Cat – I”), Authorised Dealer Category – II (“AD Cat – II”) and Authorised Dealer Category – III (“AD Cat –III”) (collectively, “Authorised Dealers”).
With respect to Authorised Dealers, the Draft Framework introduces an updated licensing regime, imposes stricter compliance requirements, liberalises the scope of activities, and rationalises the cap on the purchase and sale of foreign currency notes and coins via cash.
Overview of The Proposed Changes
While the scope of activities of an Authorised Dealer Category – I (“AD Cat – I”) remain unchanged, the Draft Framework proposes to expand the scope of activities of Authorised Dealer Category – II (“AD Cat – II”) and Authorised Dealer Category – III (“AD Cat – III”) in the following manner:
-
AD Cat – II licence: Earlier, entities with an AD Cat – II licence
could only carry out specified non-trade related current account
transactions1, purchase foreign exchange from non-residents visiting
India and residents, sell foreign exchange for private and business
travel purposes only, and issue forex prepaid cards to residents
undertaking foreign travel2.
The Draft Framework proposes to permit entities with an AD Cat – II licence to carry out any current account transactions (except gift or maintenance of relatives) and trade-related transactions as well now. -
AD Cat – III licence: Presently, only those entities that need to
undertake foreign exchange transactions incidental to their primary
business activities are provided with an AD Cat – III llicence3. The
Draft Framework proposes to provide an AD Cat – III licence to those
entities as well that facilitate current account transactions in tie
up with an AD Cat – I.
Further, it must be noted that remittance service providers (“RSPs”) licensed by foreign regulators that operate in India under para 10 of RBI’s Master Direction - Miscellaneous are categorised as an AD Cat – III under the Draft Framework. Interestingly, it appears that the RBI intends to remove trade transactions from the scope of services provided by such RSPs.
The Draft Framework also proposes to revise the manner in which an AD Cat – I and an AD Cat – II can act as an agent under the Money Transfer Service Scheme (“MTSS”). Presently, an entity requires prior approval from the RBI for every tie-up arrangement with an Overseas Principal under the MTSS4. Under the Draft Framework, it appears that entities that operate as an AD Cat – I or an AD Cat – II need not obtain prior approval from the RBI to function as an agent under the MTSS, and only need to report the tie-up arrangement with the Overseas Principal to RBI within 30 (Thirty) days of entering the arrangement.
Eligibility Criteria
It appears that the RBI intends to expand the regulatory regime to make it more inclusive. To enable such inclusion, it proposes the following:
1) AD Cat – I: Presently, only certain banks5 are eligible to act as an AD Cat - I. The Draft Framework proposes to include all banks, including foreign banks, as entities eligible to apply for an AD Cat – I licence.
2) AD Cat – II: Presently, only certain banks6, Full Fledged Money Changers (“FFMCs”) and Investment and Credit Companies (“NDSI-NBFC-ICC”) are eligible to apply for an AD Cat – II licence. The RBI proposes to expand the eligibility criteria to include all banks, Forex Correspondents and existing AD Cat – III entities. The RBI proposes to expand the eligibility criteria to include all banks, Forex Correspondents and existing AD Cat – III entities.
Under the existing framework, unregulated Indian companies are also eligible to apply for an AD Cat – II licence7.
It is unclear whether the Draft Framework proposes to restrict the AD Cat – II route for unregulated companies who intend to venture into forex business, and allow entry of such companies into the forex business only through the Forex Correspondents route.
3) AD Cat – III: Presently, the RBI has issued AD Cat – III licences to select institutions which undertake specific foreign exchange transactions incidental to their primary business activities, such as Exim Bank, NBFC – Factors and Standalone Primary Dealers.
As per the Draft Framework, any entity that facilitates current account transactions in partnership with AD Cat – I entities, will have to procure an AD Cat – III licence. This would include RSPs as well. Existing RSPs would have to apply for an authorisation as an AD Cat – III within 1 (One) year from the date the revised framework is enforced.
The AD Cat – III licence is also open to any other entity that is desirous of offering innovative products and services in the cross border trade, payments and remittances sector.
The Draft Framework does not specify the eligibility criteria for (a) an AD Cat – I licence; and (b) banks and NDSI-NBFC-ICCs that intend to obtain an AD Cat – II licence. The eligibility criteria for such entities would be prescribed by RBI’s Department of Regulation. Other entities (except banks and NDSI-NBFC-ICCs) that intend to register as an AD Cat – II or an AD Cat – III would need to satisfy the following eligibility criteria:
- The applicant must be a ‘company’ as defined under the Companies Act, 2013;
- The memorandum of association of the applicant shall include the foreign exchange-related activity for which the authorisation is sought;
- In the event the applicant or its parent entity is under investigation by the Directorate of Enforcement (“DoE”), the application to the RBI shall be accompanied with a no-objection certificate obtained from DoE, which is dated not earlier than 30 (Thirty) days prior to the date of application; and
- The applicant shall comply with the following ‘fit and proper criteria’:
(i) undertake due diligence to determine the suitability of appointment of a person as key managerial personnel (“KMP”)8, based upon qualification, sufficient experience in the financial services industry, track record and integrity;9
(ii) submit a ‘Declaration and Undertaking’ by every KMP along with its application for authorisation in the prescribed format;
(iii) constitute a nomination committee to scrutinise the declarations submitted by the KMP;
(iv) obtain an annual declaration on the changes in the information provided by a KMP; and
(v) any change of KMP during the year, along with a confirmation of compliance with fit and proper criteria, shall be reported to the regional office of the RBI, Foreign Exchange Department within 30 days.
Similar to other licences, the RBI would consider the following parameters as well while evaluating the grant of an authorisation:
- track record and financial condition of the applicant, its holding company or related corporations, where applicable;
- business plan and model, including AML/CFT policies, customer service and procedures; and
- whether the public interest will be served by granting an authorisation.
The eligibility criteria and considerations listed above are not exhaustive. The RBI can exercise significant discretion with respect to an application and may take into account other relevant factors as deemed necessary.
Net-Worth Criteria
The Draft Framework proposes to prescribe INR 10 (Ten) Crores as the net worth criteria for an AD Cat – II licence, and INR 2 (Two) Crores as the net worth criteria for an AD Cat – III licence.
It must be noted that the net-worth requirement for an AD Cat – II authorisation is in addition to the forex turnover requirement of INR 50 crore in the last 2 financial years for an entity that is a Forex Correspondent or an existing FFMC or an existing AD Cat – III.
Transaction
Limits
The Draft Framework aims to revise foreign exchange transaction limits in the following manner:
01
Trade transactions
Allow AD Cat – II licensees to facilitate trade-related transactions up to INR 15 (Fifteen) Lakh per transaction.
02
Outward remittances through RSPs
Increase the limit for outward remittances via RSPs from USD 5000 per transaction to INR 25 (Twenty-five) Lakh per transaction for current account transactions other than trade, gift and maintenance of relatives.
03
Encashment of foreign
currency
Reduce the existing limit of USD 1000 for residents (and USD 3000 for foreign visitors/NRIs) for encashment of foreign currency to INR 50,000 per person. Payments beyond this limit will have to be made through banking channels/prepaid instruments.
04
Sale of foreign currency by Authorised Persons and Forex Correspondents against receipt of INR
- Present limits:
Presently, the limits on sale of foreign notes and coins to travellers going abroad is country-specific, with a cap of USD 3000 for a majority of the countries. For certain countries, the RBI permits release of full exchange. - Proposed limits:
The Draft Framework intends to put a general cap of INR 4 Lakhs per foreign trip on the sale of foreign currency notes and coins to a traveller going abroad, irrespective of the country of visit. Beyond the cap of INR 4 Lakhs, foreign exchange will be sold in non-cash forms. Additionally, Authorised Persons and Forex Correspondents are required to receive sums exceeding INR 50,000 for sale of any foreign currency through banking channel/ prepaid instruments, and not cash.
Interestingly, the Draft Framework appears to do away with the limit prescribed for encashment of unutilised INR cash to foreign currency, provided the non-resident/foreign visitor submits necessary evidence/encashment certificate/ATM receipts to be verified with the original card.
Conclusion
The Draft Framework proposes to significantly liberalise the licensing regime for Authorised Dealers, despite imposing strict compliance requirements. It is welcoming to see that the RBI has opened up the AD Cat – II and AD Cat - III licences to a wider set of activities and entities. Additionally, given the changes proposed to foreign exchange transaction limits, it is apparent that the RBI intends to reduce cash-based forex transactions and promote digital payments.
Footnotes
1. AD Cat – II are authorised to undertake the following non-trade related current account transactions: (a) Private Visits, (b) Remittance by tour operators / travel agents to overseas agents / principals / hotels, (c) Business Travel, (d) Fee for participation in global conferences and specialized training, (e) Remittance for participation in international events / competitions (towards training, sponsorship and prize money), (f) Film shooting, (g) Medical Treatment abroad, (h) Disbursement of crew wages, (i) Overseas Education, (j) Remittance under educational tie up arrangements with universities abroad, (k) Remittance towards fees for examinations held in India and abroad and additional score sheets for GRE, TOEFL etc., (l) Employment and processing, assessment fees for overseas job applications, (m) Emigration and Emigration Consultancy Fees, (n) Skills / credential assessment fees for intending migrants, (o) Visa fees, (p) Processing fees for registration of documents as required by the Portuguese / other Governments, and (q) Registration / Subscription / Membership fees to International Organizations.
2. Permitted via RBI A. P. (DIR Series) Circular No. 104 dated April 04, 2012. The settlement in respect of such cards is made through an Authorised Dealer Category – I.
3. For instance, provision of finance for overseas investment to Indian companies by Exim Bank, factoring services by NBFC-Factors, and forex activities by standalone primary dealers. The RBI has authorised 13 (Thirteen) entities as Authorised Dealer Category – III till date.
4. Para 3, RBI Master Direction – Money Transfer Service Scheme (MTSS) dated February 22, 2017.
5. Commercial Banks, State Co-Operative Banks, Urban Co-Operative Banks and Small Finance Banks.
6. Small Finance Banks, Payments Banks, Urban Co-Operative Banks and Regional Rural Banks.
7. Para 4(b)(iv), RBI circular on Authorised Persons- Categorisation dated March 06, 2006.
8. The expression ‘key managerial personnel’ shall have the same meaning as assigned to it under section 2(51) of the Companies Act, 2013
9. For assessing integrity and suitability, the applicant may consider factors like criminal record, ‘No Objection Certificate (NOC)’ from DoE in case KMP is under investigation, financial position, civil action initiated against such person to recover personal debts, refusal of admission to or expulsion from professional bodies, sanctions imposed by regulators or similar bodies, convicted by a court for any economic offence, disqualifications under section 164 of the Companies Act, 2013 or any other questionable conduct
