Forex Trading in India – Legal or Illegal – A Critical Analysis

I requested Aalma Edwards(Finanical Blogger) to analyze and present a case study on Forex trading in India and its legality in India. Here is her first guest report over forex trading in india.

In India, Foreign Exchange or Forex trading is not allowed. If someone is found trading Forex instruments on the forex market by the Reserve Bank of India’s representatives, he/she is immediatelycharged of violation of law. Hence it is legally a crime to involve in Forex trading and the chargesof the crime areimprisonmentin jail in this country. Theoffence is considered immense, the prediction of intensity can be deduced from this fact that it has been labeled to be non-bailable.

Evidences of the Issueof illegality of Forex Trading

Thisis a confirmed finding based on a news report published in Indian Times, in April 2011. As per the report the author narrated that the illegal nature of forex trading has been confirmed by five private sector and public sector banks.

Forex Trading and Corporations

The reports issued by the banks on this evidences also said that only corporations are allowed to trade but the conditionality for the corporations is to use only free dollars from their reserves. Free dollars usage means that they are not allowed to convert the Indian currency to dollars and then use those converted dollars for trading. Moreover they are conditioned to stick to a leverage of less than ten times.

Forex Trading and Individual Traders:Reports of RBI

Individualsare strictly forbidden from electronic and internet based foreign trading. The reason being it brings high returns to them but at high charges-the imprisonment charges. The individual traders at India have also been warned by the RBI against the online trading portals which offer these alluring outcomesof high gains but do not reveal to the traders that they are trapping themselves in an illegal activity considered by their state.

RBI also published a circular that reported certain agents who contacted the traders and urged them to invest in forex trading to earn huge profits. In this retrospective many of the individuals became trapped to this illegal dealing. Moreovermost of the trading done trough theseinternet portals had a very huge leverage.

 RBI revelations of additional findings and actionagainst fraudulent agents

An additional finding revealed by the RBI was that the public was asked to pay these marginal payments for the trading transactions through their bank account deposits or debit cards. And then the accounts to which the money was being paid were of the same agent but they were opened in many different banks. Therefore the RBI issued a special instruction to the commercial banks of the country to be very careful in sorting out such accounts.

 RBi clarified that if any such person is caught, then strict action would be taken against him/her under the FEMA, 1999, contraventions. In addition he/she would also be considered liable for violations of the KYC policy and money laundering standards. And all the transactions which have been declared non-permissible under FEMA are also not allowed. These transactions also include any transactions related to foreign currency, remittances marginal trading or exchanges.

RBI Report – Overseas forex trading through electronic / internet trading portals - 17th Nov 2011

RBI Advisory on Overseas Forex Trading through Electronic / Internet Trading Portals - 21st Feb 2011

RBI warns against illegal forex trading on internet

The Reserve Bank of India (RBI) has cautioned Indian investors and banks against illegal overseas foreign exchange trading through internet and electronic trading portals which offer "guaranteed high returns".

"It has been observed that overseas foreign exchange trading has been introduced on a number of internet/electronic trading portals luring the residents with offers of guaranteed high returns based on such forex trading. The advertisements by these internet/online portals exhort people to trade in forex by way of paying the initial investment amount in Indian rupees," the RBI said in a circular.
According to the RBI, some companies have reportedly engaged agents who personally contact people to undertake forex trading/ investment schemes and entice them with promises of disproportionate / exorbitant returns.
"Most of the forex trading through these portals are done on a margining basis with huge leverage or on an investment basis, where the returns are based on forex trading. The public is being asked to make the margin payments for such online forex trading transactions through credit cards/deposits in various accounts maintained with banks in India."
"It is also observed that accounts are being opened in the name of individuals or proprietary concerns at different bank branches for collecting the margin money, investment money, etc," the RBI said.
Banks are advised to exercise due caution and be extra vigilant in respect of such transactions, the RBI warned.
It is clarified that any person resident in India collecting and effectingremitting such payments directlyindirectly outside India would make himself/ herself liable to be proceeded against with for contravention of FEMA, 1999 besides being liable for violation of regulations relating to know your customer (KYC) norms and anti money laundering (AML) standards, it said.
The RBI clarified that "a person resident in India may enter into currency futures or currency options on a stock exchange recognized under section 4 of the Securities Contract (Regulation) Act, 1956, to hedge an exposure to risk or otherwise, subject to such terms and conditions as may be set forth in the directions issued by the RBI from time to time".
A derivative transaction is only permitted based on the presence of an underlying price risk exposure for which purchase and/or sale of foreign exchange is permitted under FEMA, 1999.
Remittances under the Liberalised Remittance Scheme are allowed only in respect of permissible capital or current account transactions or a combination of both.
"All other transactions, which are otherwise not permissible under FEMA, 1999, including the transactions in the nature of remittance for margins or margin calls to overseas exchanges/overseas counterparty, are not allowed under the scheme," the RBI said.

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