Forex agents' industry body seeks Fema clarity on forex correspondent model

Money changers say ambiguity over the principal-agent framework, liability and compliance could delay the rollout of the new forex correspondent category

The move to introduce forex correspondents (FxCs) as a separate category of money changers (MCs) is being held up because of lack of clarity on the principal-agent model on which this is to be based.

 

The All-India Association of Authorized Money Changers and Money Transfer Agents (MCAMTA) has raised the matter with the Reserve Bank of India (RBI).

 

The Foreign Exchange Management Act (Authorised Persons) Regulations, 2026 issued on April 30 this year said that authorised dealers (ADs) in category-I or category-II may appoint an entity or entities as FxCs for money changing business under the ‘principal-agent’ model.

 

The Fema directive followed an RBI draft in December 2023 to allow FxCs – a new category – to become money changers (MCs).

 

A MC is a person or entity whose trade is the exchange of currency or coins; they are a key cog in the travel and tourism market, and facilitate the exchange of nearly $3 billion in physical forex annually. AD-I are banks, while AD-II are firms which specialise in travel, education, and smaller retail remittances.

 

MCAMTA has pointed out that the term “agent” is not define under the regulations and needs to be fleshed out in detail before the change can be executed.

 

“We need the FxCs for the convenience of the customers in remote places," said Bhaskar Rao, managing director of Orient Exchange. "This is a must to prevent proliferation of unofficial channels in forex.”

 

The other sticking points, according to the MCAMTA, are the extent to which the principal - whether AD-I or AD -II -  is responsible for the acts of the agent in general; and specifically in the case of the agent having more than one principal.

 

For example, an FxC may be the agent for many principals and if the latter were to held for illegal or unlawful activities as specified under FEMA, Prevention of Money Laundering Act, 2002 or any other Acts, on which entity should the responsibility rest.

 

“As a MM (market maker), tracking currencies is nearly impossible if the agent serves several principals. Unless these matters are clarified, investigating authorities may hold all ADs responsible based on a presumption of doubt,” said a source.

 

There is also a demand for framing a legal mechanism or framework for an “agent” having two or more “principals” to avoid the risks.

 

Onboarding FxCs calls for far more diligence than for business correspondents in financial inclusion initiatives. Of late, the central bank has been taking a closer look at outsourcing arrangements of its regulated entities. And firms in the money changing business are sensitive to the fact that any shortfall in control standards may also attract the attention of the law enforcement agencies given the nature of trade and related aspects like money laundering and national security.

 

When the RBI draft was released, industry sources were of the view that the stage appears to be set for integrated players: those offering tourism-related services, forex, and cards, such as Thomas Cook or Ebix, which purchased the Centrum Group’s forex business 'Centrum Direct' for Rs 1,300 crore in 2018. Centrum Direct was in the business of overseas remittances, prepaid travel cards, and traveller’s cheques. It had also partnered tuition-fee payment aggregators for processing outward remittances, and claimed to have a 40 per cent market share in this area. It would also have made the business more organised with higher governance standards.

 

A matter of exchange

• The Foreign Exchange Management Act (Authorised Persons) Regulations, 2026 issued on April 30 this year said that ADs in category-I or category-II may appoint an entity or entities as FxCs under the ‘principal-agent’ model
• Onboarding FxCs calls for more diligence than for business correspondents
• The central bank has been scrutinising outsourcing arrangements of regulated entities