In this blog post, Rahul Ranjan, a Third Year student studying at Vinoba Bhave University, Hazaribagh, Jharkhand and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes authorized dealers for handling foreign exchange.

Introduction

Foreign Exchange Reserve is generally referred to the money or other any assets next to money held by Central Bank or similar monetary authority. The foreign exchange reserve is comprised of various monetary products ranging from foreign banknote, foreign bank deposits, and foreign treasury bills to short & long term foreign government securities. However, in common usage, it includes the gold reserves, SDRs (Special Drawing Rights), International Monetary Fund (IMF) reserve Fund.

In India, RBI is the supreme regulator of Foreign exchange Transaction with the provision & regulation laid under the Foreign Exchange Management Act 1999 i.e., FEMA Act 1999.RBI Act & FEMA Act  incorporates the legal provision for governing the foreign exchange market & reserve .The FEMA Act , an Act of Parliament, enacted with the aim to consolidate & amend the law relating to foreign exchange with the objective of facilitating external trade & promoting the orderly development and maintenance of foreign exchange market in India.

The liberalization of Indian economy results in an increase in volume of transaction of foreign exchange. In the fast changing era of globalization, the Foreign Direct Investment (FDI) & Portfolio Investment became important instruments of foreign exchange.

Authorized Dealer – Concept & Its Utilities

The term authorized dealer refers to any type of financial institutions who has received authorization from the RBI as a dealer to involve in trading of foreign currencies. The transaction of the authorized dealer should have been conducted in pursuance of a legal mode and under the framework established by law. Authorized dealers are nothing else but the market pronounced name of AMC i.e., Authorized Money Changer. As per master circular no. 10/2013-14 of RBI dated 01st July 2013 it describes that the AMC/ADs are entities, authorized by the Reserve Bank under section 10of the Foreign exchange Management Act 1999. In addition to Authorized Dealers category-I Banks (AD Category –I Banks) and Authorized Dealer Category – II (Ads category- II), Full Fledged Money Changers (FFMCs) are authorized by Reserve Bank to deal in Foreign exchange for specified purposes, to widen the access of foreign exchange facilities to residents and tourists while ensuring efficient customer service through competition.

Categories of Authorized Dealers in India

SI NO.	Category of ADs	Qualifying Entities	Activities/Functions
1	Authorized Dealers Category – I (ADs- I )	All Commercial Banks And Scheduled banks registered Under RBI Act. Urban Co-operative Banks (To some prescribed extent).	It deals in all type of current ant capital account transaction according to the norms and procedure laid down by RBI.
2	Authorized Dealers Category – II (ADs- II )	Upgraded Full Fledged Money Changer and another new inclusion like Department Of Post and various type of NBFCs  who are operated in open market	It deals in transaction of foreign exchange which is non-trade in characteristics.
3	Authorized Dealers Category – III (ADs- II )	Financial Institutions, EXIM Bank, SIDBI, IFCI, Clearing corporation of India and Various Factoring Agents.	It deals with the activities which are incidental to financing of international trade related activities undertaken by these institutions.
4	Full Fledged money Changer  (FFMCs)	It can any entities who are related with the finance sector including NBFCs, Department of Post etc.,	FFMCs are authorized to purchase foreign exchange from resident and non-resident visiting India and to sell Foreign Exchange for certain approved purposes.

Brief Explanation Of Different Category of Investor’s

1.    Authorized Dealers Category – I (ADs – I)

As per the latest circular Issued by the RBI, there are around 110 entities who are qualified under the segment of Authorized Dealers category – I. It includes all type of Commercial Banks irrespective of Nationalized Banks, Scheduled Banks, Private Banks and Foreign Commercial Banks operating in India. These segments of banks allowed to deals in all type of foreign exchange transaction related to current and capital account transaction according to the norms and procedure laid down by RBI.

2.     Authorized Dealers Category – II (ADs –II)

The second category of authorized dealer operates under the restrictive environment for the implementation of some specified purposes prescribed by RBI. It includes the Upgraded Full Fledged Money Changer and another new inclusion like Department Of Post and various types of NBFCs who are operated in open markets. As per RBI the detailed of dealers classified under this category are considered as per region basis. At present, there are 11 region in India which under this category.

3.    Authorized Dealers Category -III (ADs –II)

The third category of authorized dealer operates with the purpose to boost the international trade by proving them adequate availability foreign currency for promotion of international trade as per the norms lay down in section 10 of the FEMA Act 1999. It includes the major player of financial institutions like IFCI, SIDBI EXIM Bank and various Factor Agencies.

4.    Full-Fledged money Change (FFMCs)

It is the new aspect of regulation of Indian Foreign Exchange markets. It may be any financial entity other than Commercial Banks who qualified the norms and criteria laid down by RBI. FFMCs are authorized to purchase foreign exchange from resident and non-resident visiting India and to sell Foreign Exchange for certain approved purposes. The main objective of the enactment of FFMCs is to provide easy access to foreign exchange transaction to common masses.

Eligibility Criteria for FFMCs to Obtain Authorization from RBI:-

(i)            The Applicant has to be company registered under the Companies Act 1956 or 2013,

(ii)           The minimum Net Owned Funds (NOF) required for consideration as FFMC are as follows:

Note: The net-owned funds of applicants, other than banks, should be calculated as per the following.

(a)  Owned Funds:  (Paid-up Capital + Free Reserves + Credit balance in Profit & Loss A/c) minus (Accumulated balance of loss, Deferred revenue expenditure and Other Intangible Assets).

(b)  Net Owned Funds: Owned funds minus the amount of investments in share of its subsidiaries,  companies in the same group, all (other) nom-banking financial companies as also the book value of debenture, bonds, outstanding loans and advances made to and deposit with its subsidiaries and companies in the same group in excess of 10 percent of the Owned funds.

Various Forms to be filled up by Different Category of Authorized Dealers

(i)FORM RMC-F: Applicable for selection/Appointment of Franchisee

(ii) FLM-1: Daily Summary and Balance Book (Foreign Currency Notes/coins)

(iii)          FLM-2:  Daily Summary and Balance Book (Traveller’s Cheques)

(iv)         FLM-3: Register of Purchase of foreign Exchange from the Public

(v)          FLM- 4: Register of Purchase of foreign currency notes/coins from Authorized dealers and authorized money changers,

(vi)         FLM- 5: Register of sales of foreign currencies to the Public

(vii)        FLM -6: Register of Sales of foreign currency notes /coins to Authorized dealers/Full Fledged money Changers/ Overseas banks.

(viii)       FLM-7: Register of travellers cheques surrendered to authorized dealers/ authorized money changers/exported

(ix)         FLM- 8 (For FFMCs& AD- II) :- Summary details of purchase and sales of foreign currency notes during the month of ____________of 20_____

Foreign Exchange Dealer’s Association  of India (FEDAI)

FEDAI was set up in 1958 as an association of banks dealing in foreign exchange in India (classified as Authorized Dealer- ADs), as a self-regulatory body and is incorporated under section 25 of the Companies act 1956. The main objectives of its establishment were to frame the rules and guidelines to conducts of foreign exchange business among the member’s banks and with the public in general. FDAI has to liaison with RBI for reform and development of forex-market. It is on the part of FEDAI to announce the daily and periodical rates to member banks. Along with regulatory or advisory aspects, FEDAI also maximize the benefits derived from synergies of members bank through innovation in area like new customized products, bench marking against international standards on accounting, market practices, risk management system, etc.

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References: –

www.rbi.org.in

Study material of NUJS Diploma Course

Master circular No. 10/2013-14 dated 01st July 2013 issued by RBI