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