Trading on overseas online forex platforms illegal, punishable under FEMA

In India, you can only bet on currency derivatives via a stock exchange broker

It’s hard to miss the advertisements of forex platforms on social media. One claims that traders can make a profit of $100 in half an hour. Another promises risk-free winning strategies. Then, there are click baits that read: “Convert $100 into $1,000”. These platforms also allow users to trade with margin money as high as 1:100, that is, if you bet $10, you can trade for $1,000.
 
These are not necessarily fraudulent websites. A few of them are popular globally. But it’s illegal for Indians to trade on them. “The popular ones are binary options trading platforms, which are illegal in many parts of the world,” says Nithin Kamath, founder and CEO, Zerodha. In binary trading, typically, the contract is sold by the platform to the user. The platform gains if the trader loses. This is contrary to stock exchange trades, which are between two parties, and the exchange only facilitates them.
 
Online forex platforms also provide high leverage that allow a person to trade more. Even if the trader closes the account and is unable to pay back the money, the platform still stands to gain as it doesn’t have to settle the trades with any third party.
 
In India, the Reserve Bank of India (RBI) doesn’t permit such trades, and they are punishable under the Foreign Exchange Management Act (FEMA). “Under the RBI’s liberalised remittance scheme, a resident does have the option to remit up to $250,000 in a year. But such funds cannot be used for speculative purposes, or to provide margin money for trading of any kind. An individual may invest directly in a stock but cannot trade in futures and options,” says Sajal Gupta, head-forex and rates, Edelweiss Securities.
 

Forex trading is the biggest market by volume in developed countries, much bigger than for other asset classes such as equities and bonds. In India, however, the forex market is nascent and has restrictions. Indian residents are allowed to trade only in currency derivatives on stock exchanges, which started in 2008-09. Explains Gaurang Somaiya, forex and bullion analyst at Motilal Oswal Financial Services: “At present, they are available in four currency pairs - US Dollars (USD), Euro (EUR), Great Britain Pound (GBP) and Japanese Yen (JPY). All of these are paired with the Indian rupee. Cross currency futures and options contracts are available only for EUR-USD, GBP-USD and USD-JPY.” The Securities and Exchange Board of India (Sebi) also restricts the exposure of each client to each currency pair.
 
To trade in currency derivatives, a person needs to register with a stock broker. He can then use his trading account to bet on currency derivatives. On social media, you may see platforms claiming that they are registered with Sebi. But that’s not true as such platforms are not legal in India. Be wary of such claims.
 
There have also been several forex-related scams. Fraudsters lure individuals with the promise of high returns to their platforms. Initially, the trader wins small amounts and starts trusting the platform. A few days later, the platform shuts down and there is no way to recover the money.