Foreign Exchange Management Act 1999: Banks as Authorised Persons

No rupee leaves India and no foreign currency enters it except through a bank. That is not a description of convenience but of law: the Foreign Exchange Management Act, 1999 makes it unlawful to deal in foreign exchange except through an authorised person, and the authorised persons that matter are the banks. Every export bill, every student's fee remittance, every investment in and out of the country passes across a bank's counter, with the bank acting as the first line of the regulatory system. For the bank the Act is therefore not a special subject. It is part of the ordinary law of the counter.

1. From regulation to management

The Act of 1999 replaced the Foreign Exchange Regulation Act, 1973, with effect from 1 June 2000, and the change of one word in the title carried the whole policy. The older Act assumed scarce foreign exchange that had to be rationed, and it enforced the rationing through the criminal law. The new Act assumes an economy that earns its exchange, and manages rather than forbids. Contraventions became civil, the burden shifted to the ordinary standard, and compounding became the normal end of a breach.

Figure 1: What changed in 1999

2. The central prohibitions

Clause (c) and clause (d) are the anti hawala provisions: receiving money in India against value delivered abroad, outside the banking channel, is precisely what they forbid. Section 4 adds that no resident shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or immovable property outside India, save as provided, and Section 8 obliges a resident to take reasonable steps to realise and repatriate foreign exchange due to him.

3. Current account and capital account

The Act's architecture rests on one distinction. A capital account transaction, under Section 2(e), is one that alters the assets or liabilities outside India of a resident, or the assets or liabilities in India of a non resident. Everything else is a current account transaction under Section 2(j), which expressly includes payments in the course of foreign trade, interest and income, remittances for living expenses of family abroad, and expenses of travel, education and medical care.

Figure 2: The two accounts, and their opposite defaults

• Section 5: a person may sell or draw foreign exchange for a current account transaction, subject to reasonable restrictions the Central Government may prescribe. The Current Account Transactions Rules, 2000 carry three schedules: transactions prohibited outright, such as remittances out of lottery winnings and for the purchase of lottery tickets or sweepstakes; transactions needing Central Government approval; and transactions needing Reserve Bank approval beyond monetary limits, most of which are now subsumed in the remittance scheme.
• Section 6: capital account transactions are permitted only within the classes, limits and conditions laid down, by the Reserve Bank for debt instruments and by the Central Government for non-debt instruments since the amendment made by the Finance Act, 2015 took effect in October 2019, which is how foreign direct investment policy came to be made by the Government through rules.
• The practical test at the counter: a remittance that leaves the sender's wealth where it was, paying for goods, services or maintenance, is current; one that creates an asset abroad, a deposit, a share, a house, is capital.

4. Authorised persons: the bank as gatekeeper

Section 10 empowers the Reserve Bank to authorise any person as an authorised person, to deal in foreign exchange or foreign securities, as an authorised dealer, money changer or off-shore banking unit or in any other manner. The authorisation is in writing, may be conditioned, and may be revoked in the public interest or for failure to comply.

Figure 3: The ladder of authorised persons

• Before releasing foreign exchange, the authorised person must require a declaration that the transaction will not contravene the Act, and where the person refuses or gives unsatisfactory compliance, the authorised person shall refuse the transaction and, where it has reason to believe a contravention is contemplated, report the matter to the Reserve Bank. The bank's clerk is, by statute, the first regulator.
• Section 11 lets the Reserve Bank give directions to authorised persons and inspect them, with a penalty for contravening a direction of up to ₹10,000, and ₹2,000 a day for a continuing contravention.
• Section 13 fixes the penalty for contravening the Act: up to thrice the sum involved where quantifiable, up to ₹2 lakh where not, and ₹5,000 a day for a continuing contravention, adjudicated under Section 16 with appeals to the Special Director and the Appellate Tribunal and, on a question of law, to the High Court.
• Section 15 permits compounding of contraventions, by the Reserve Bank for most cases, on an application, within 180 days, and a compounded contravention cannot be proceeded with further.

5. The liberalised remittance scheme

The scheme is the capital account made simple for individuals. Under it a resident individual may remit up to USD 250,000 in a financial year for any permissible current or capital account transaction or a combination: education, travel, medical treatment, maintenance of relatives, gifts, investment in shares and property abroad, and deposits. The limit has stood at that figure since 2015.

• The scheme is for individuals only, including minors through guardians. Remittances may be consolidated among close family members, but for capital account transactions such as buying property only where each remitting member is a co-owner.
• Remittances for the prohibited purposes in Schedule I of the Rules of 2000, such as lottery tickets, remain barred, as do the purposes the scheme itself excludes, such as margins or margin calls on overseas exchanges, and remittances to jurisdictions identified as non cooperative.
• The bank must obtain the remitter's permanent account number, and the remittance is reported through the authorised dealer.
• Tax collected at source applies to remittances under the scheme beyond a threshold, ₹10 lakh in a financial year since April 2025, with education financed by a specified loan exempt and concessional treatment for education and medical remittances; the rates have been revised by successive Finance Acts, so the current schedule should always be checked at the counter.

6. The accounts of non residents

The deposit regulations under the Act permit three principal accounts, and the differences between them are standing examination material.

The three accounts answer three different situations, and the way to keep them apart is to ask two questions about the money: where was it earned, and in what currency does the depositor want to keep it. Earnings from abroad brought into rupees go to the external account; earnings arising in India, which a non resident cannot freely take out, sit in the ordinary account; and earnings from abroad that the depositor does not want converted at all go into the foreign currency deposit, where the bank, not the customer, carries the movement of the exchange rate.

7. Quick Revision

1. The capital account test is whether assets or liabilities across the border are altered.
2. Non-debt capital account rules are made by the Central Government since 2019; debt remains with the Reserve Bank.
3. The authorised dealer's duty to refuse and report makes the bank the first regulator.
4. Realisation and repatriation of export proceeds is a statutory duty under Section 8.
5. Penalties are civil, adjudicated, appealable and compoundable.

8. Frequently Asked Questions

Why is hawala illegal if the customer's purpose is innocent?

Because the offence is the channel, not the purpose. Section 3 forbids making a payment to or for a non resident, or receiving one on a non resident's behalf, otherwise than through an authorised person. A hawala transfer settles value across the border by matching payments inside two countries, so no exchange crosses any regulated counter, no record exists, and the system that monitors the external account of the country is blinded. The innocence of one customer's purpose cannot be separated from the channel's capacity to move anyone's money, which is why the contravention is complete without any further wrong.

Is buying a house abroad a current or a capital account transaction?

Capital, squarely: it creates an asset outside India in the hands of a resident, which is the definition in Section 2(e). It is nonetheless lawful within the liberalised remittance scheme, because the scheme permits capital account transactions by resident individuals up to the annual ceiling of USD 250,000, and property purchase is a permitted purpose. A purchase beyond the ceiling needs the Reserve Bank's approval, and clubbing the limits of family members works only if each remitter becomes a co-owner in proportion to his remittance.

What exactly must the bank do before remitting?

Four things, and they are statutory rather than procedural. Identify the customer under the know your customer framework; obtain the declaration under Section 10(5) that the transaction does not contravene the Act; satisfy itself of the purpose and its classification, current or capital, permitted or restricted, within scheme limits or beyond them; and where the customer refuses the declaration or the bank has reason to believe a contravention is designed, refuse the transaction and report to the Reserve Bank. A bank that remits without these answers for the contravention itself under Section 11 and under the Act's penalty provisions.

What happens to a person who breaches the Act today?

An adjudication, not a prosecution. The Directorate of Enforcement investigates, an adjudicating authority hears the matter, and the penalty under Section 13 can reach thrice the sum involved, with appeals to the Appellate Tribunal and the High Court. Most matters end earlier, in compounding under Section 15: the contravener applies, the Reserve Bank quantifies the contravention on its published guidance, the sum is paid, and the matter closes within 180 days. The criminal edge survives only at the margin, where a penalty is not paid, and in the parallel statutes, since a hawala arrangement will often also engage the money laundering law.

Can a resident keep foreign currency he brought back from a trip?

Within limits, yes. A resident may retain foreign currency notes and traveller's instruments up to the small ceiling the regulations permit, currently USD 2,000 or its equivalent in currency notes and traveller's cheques, and must surrender the rest to an authorised person within the prescribed period of return. A resident who earns foreign exchange, an exporter or a professional billing abroad, may instead hold it in an exchange earners' foreign currency account, which keeps a permitted share of the earnings in foreign currency with an authorised dealer and spares the cost of converting out and back. Holding beyond these routes runs into Section 4, which is why the question is asked at every counter when currency is tendered long after a journey.

9. Related Topics and Provisions

• Opening of accounts and Know Your Customer requirements
• The Prevention of Money-Laundering Act, 2002 and the obligations of banks
• Documentary credits and the financing of foreign trade
• Special types of customer, including non residents
• The Export-Import Bank and the financing of exports