All you need to know about Money Changing Activities

Varun Hariharan

17 Oct, 2020

Money Changing Activities is a process in which an institution transforms physical or electronic currency into another country’s currency. Different institutions undertake the business of money changing activities in India. However, an institution must register with the authorities to carry out money changing activities in India.

Regulation of Money Changing Activities

The government brought out the FERA in the year 1973, which regulated the operation of foreign exchange in the country. This regulation was stringent when it came to matters involving foreign investment in the country. The government successfully brought out the Foreign Exchange Management Act, 1999 (FEMA) to overcome all the issues and obstacles brought out by the FERA. The Reserve Bank of India authorises specific institutions to carry out activities and transactions under the FEMA.

Section 10 and 11 of the FEMA provides that the RBI appoints specific institutions known as authorised dealers or authorised banks to carry out transactions related to foreign exchange. These authorised banks are normal institutions that carry out a different form of transactions and also any forms of money changing activities^[1].

Under section 10(1) of the Foreign Exchange Management Act, the RBI provides specific authority to authorised dealers to carry out transactions involving FEMA. Apart from this, money changing activities can also be carried out by various authorised dealers.

The RBI brought out the master direction on money changing activities RBI/FED/2015-16/17 FED Master Direction No.3/2015-16 which has been updated in the year 2019. This master direction addresses issues such as the form of money changing activities which are permissible by different ways of institutions. Different institutions can carry out money changing activities in India.

Which Institutions are authorised to carry out Money Changing Activities in India?

As per the guidelines and directions issued by the RBI, any institution which is permitted by an authority to carry out money changing activities can carry out the process.

The following institutions are authorised to carry out money changing activities in India:

• Any bank which is permitted to carry out transactions under the guidance of RBI. These banks would be considered under Category-I, which are classified as authorised banks. All forms of current account, as well as capital account transactions, can be carried out by these institutions from time to time.
• Any other institution or entity which is categorised under Category-II which include any form of the non-banking entity. All these entities can carry out any form of non-trade related current account transactions which are permitted under the guidelines of the RBI. All institutions under this category will also include FFMC or Full Fledged Money Changers. Any other institution can carry out permitted activities as per the guidelines under the RBI.
• Specific financial institutions which are categorised as Category-III. These institutions include institutions which carry out forex related and money changing activities.
• Any form of a registered company, registered under the Companies Act, 2013 or previous company law 1956, which is permitted to carry out activities involving money changing activities. These institutions are specifically formed to carry out money changing activities in India. Foreign exchange obtained from these companies can be used for tourism and private business purposes.

What are the objectives of a business carrying out money changing activities?

Any business carrying out activities which involve money changing activities would have the following objectives:

• To ensure that the currency is genuine.
• To assist individuals and tourists in carrying out the process of money changing seamlessly and smoothly.
• To ensure that foreigners and NRI’s have access to finance and other forms of foreign currency.
• To ensure that the standards of money changing business are maintained as per the requirements of law.
• To adhere to the guidelines issued by the RBI from time to time.
• To ensure, proper standards are maintained when it comes to reporting.

Apart from this, a money changer: be it an authorised bank category-I or an FFMC would ensure that the principles of anti-money laundering and counter-terrorist financing are adhered by the company. Hence, the business carrying out any form of money changing activities have to adhere that the principles of anti-money laundering are followed.

Is there any form of licence to carry out the business of money changing activities?

For carrying out the money-changing business, the applicant must fill all the information and provide the documents to the RBI. As per the rules of the RBI, all money changers who are authorised under section 10 of the FEMA are required to have a specific licence for carrying out the activities of a money changer. Without a license, the activities of a money-changing business cannot be carried out.

The RBI and other authorities would penalise any institution or individual who is carrying out money changing activities without a license.

Any individual or company which is registered under the Companies Act, 2013 or the previous company law is permitted to carry out the business of money changing activities in India.  The applicant will have to satisfy the minimum eligibility criteria for carrying out money changing activities in India.

The following minimum eligibility criteria would apply to the applicant:

• The applicant must have a registered office to carry out the money changing activities business.
• Apart from this, the applicant must have the minimum capital requirement or the net worth requirement for carrying out the business of a money changer.
• The applicant must be registered under the Companies Act, 2013 or the Previous Company Law 1956 to be considered to be eligible for applying for money changers business.
• Apart from this the minimum net owned fund which is owned by the money changers business must be about more than Rs. 25 Lakhs.
• If the applicant wants to start an FFMC or money changing activity business just at one branch, then the minimum net owned fund which is payable by the applicant must be Rs. 25 lakhs. However, if the applicant wants to start an FFMC business at many branches, then the applicant must have a minimum net owned fund of Rs. 50 Lakhs.

The applicant should satisfy the above eligibility criteria for carrying out a business involving money changing activities in India.

What is the Procedure of Filing an Application to Establish a Business of Money Changer?

An applicant must carry out the following procedure to start the business of a money changer in India:

1. Firstly the applicant has to satisfy the minimum eligibility criteria of starting a business of a money changer. The following eligibility criteria should be satisfied by the applicant:
2. Ensure that the minimum net owned fund of the applicant meets the required amount, i.e. Rs 25 lakhs for a single branch of a money-changing business and Rs 50 lakhs for multiple branches of money changing business.
3. Ensure that the entity is registered under the Companies Act, 2013 or the Previous company law, 1956
4. Ensure that compliance is met as per the guidelines issued by the RBI and authorised banks for money changing activities.
5. The applicant has to submit information in the prescribed form, i.e.  Form appended to the Master Direction on Money Changing Activities.
6. Along with this, the applicant has to ensure that minimum net owned fund requirements are calculated as per the required amount.
7. When this is complete, the applicant must submit the documents along with the application to the prescribed authority.

How are net owned funds measured?

There is a specific formula to calculate the minimum amount of net owned funds by the applicant.

The following formula is considered when calculating the amount of net owned funds:

The applicant may have their funds or a mixture of the fund. Therefore net owned funds are equal to- Owned Funds plus any other Investment.

Owned Funds- This can include the amount of paid-up Equity Capital which is owned by the company.  Added to this is any amount of free reserves which are owned by the company. With the amount of paid-up equity capital and free reserved, which is owned by the company, any form of credit balance is also included. To this, the following is subtracted, any form of accumulated balance of loss or any other form of deferred revenue which is not considered by the company.

NEF or Net Owned Funds- Any amount of owned funds minus the investments in the shares of any other companies. These would also include investment in any form of Group Company and also any form of NBFC.

Hence to understand and calculate the amount of net owned funds earned by the company, it is important to estimate the amount of owned funds owned by the company. After this figure is reached, the amount of net owned funds can be calculated by subtracting the net owned funds of the company from the investments made by the company in shares, or any other companies or banking companies or NBFCs.

What will happen after the money changing activities business receives its licence?

Once the business carrying out different forms of money changing services, receives its licence from the respective authority, the business of money changing can be carried out.

However, the respective authority will put a condition that the business of a money changer can only commence after more than six months.

This would be six months from the date of issuance of the money changing the license.

To have business premises, a copy of the Shops and Establishments receipts such as the rent receipts or the electricity paid monthly has to be kept as evidence that the business premises of the applicant are registered. These documents have to be submitted to the RBI before commencing the business activities.

Can the money changing license be renewed?

The RBI has the power to renew the business carrying out money changing activities from time to time. The authorised bank or dealer which is categorised under Category II (Authorised Dealer) or the FFMC has to make an application for the renewal of money changing activities license.

This application has to be submitted to the relevant authority, two months before the expiry of such license.

When this is submitted the unrenewed application will continue to run on the existing license till the date of receiving the new license or till the application rejects the renewal of the license.

Under no circumstance, will an application be made after the expiry of the two months for making an application.

Can my application for the FFMC license or business of money changing activities be rejected?

The RBI has several grounds for revoking or rejecting license for the FFMC. As long as your business has satisfied the required eligibility criteria, the license will not be rejected or revoked by the RBI.

However, the following reasons may be used by the RBI to revoke the FFMC licence:

• If the RBI feels that the rejection of the application must be considered in the public interest.
• If there are specific conditions imposed by the RBI and the authorised dealer or the FFMC fails to adhere to the conditions imposed by the RBI.
• If the directors or shareholders of the FFMC are criminally convicted or insolvent.
• The FFMC or the money-changing business must ensure the requirements of due diligence have been complied with by the FFMC or the business carrying out money changing activities.

Conclusion

Read our article:FFMC License: Business Regulations by RBI