Money Transfer Service Scheme under FEMA

Varun Hariharan

11 Jun, 2020

Overview of Money Transfer Service Scheme

In India, remittances are allowed to be sent to foreign countries. Such remittances are called outward remittances. Remittances are also allowed to be received by a company or entity set up in India. Remittances which are received in India are called as inward remittances. The Reserve Bank of India (RBI) is the main regulatory authority dealing with foreign exchange transactions within the country.

The Government of India (GOI) has brought out the Foreign Exchange Management Act, 1999 (FEMA 1999) to regulate foreign exchange transactions within the country. Under specific regulations, the RBI permits inward remittances through a scheme known as the Money Transfer Service Scheme (MTSS). In this scheme, remittances are allowed to be transferred to India for beneficiaries.

Therefore, the Money Transfer Service Scheme is a system under which an institution or company outside India transfers money for the use of beneficiaries within India. The RBI under section 10(1)^[1] of the FEMA Act allows certain agents to act under the money transfer service scheme. The RBI provides circulars and guidelines from time to time on the operation of money transfer service scheme in India.

Master Direction on Money Transfer Service Scheme

In 2017, the RBI came out with the Master Direction (MD) on Money Transfer Service Scheme. The master direction acts as a guideline for agents under the money transfer service scheme. Authorised Persons/ Authorised Dealers (AP/AD) are allowed to act as agents under the money transfer service scheme.

Authorised Dealers are defined under the FEMA act and include banks that deal with foreign exchange on a regular basis on behalf of the customer. According to the MD, authorized persons are allowed to transfer money under this scheme. However, authorized dealers have to act within the guidelines and rules brought out by the RBI from time to time on money transfer.

Under the money transfer service scheme, only inward remittance is allowed. Transfer of money from a foreign country is only allowed under this scheme.

The following conditions required to be maintained under the money transfer service scheme:

• Remittance transferred must be an inward remittance under this scheme. No outward remittance is permitted under this scheme.
• Remittance must be used for maintaining family.
• Remittances can also be used for foreign tourists visiting India.

Operation of Money Transfer Service Scheme

The RBI created a systematic process for money transfer service scheme. Under this scheme there are tie ups/ collaborations between overseas principals and agents in India. Overseas principals are money transfer companies established abroad for remitting money to India. Agents are authorised banks who disburse the funds to beneficiaries in India. Therefore in the MTSS scheme, there are three parties: the Principal (Overseas Principal), the Agent (Authorised Bank) and Beneficiaries. The remittance is done at the current exchange rates as per the requirements. 

Under the money transfer service scheme, the outward remittance by an agent to the overseas principal is not permitted. Only inward remittance is allowed by the RBI. Usually, MTSS are companies and beneficiaries are normally individuals.

Statutory Framework for MTSS

The RBI is the main authority that governs transactions related to money transfer service scheme. The law related to MTSS is the foreign exchange management act. No entity or individual can handle cross border transactions related to MTSS without the explicit permission of the RBI. An overseas principal is a company that has a money transfer business. These companies have tie ups with agents which are authorised banks.

Framework for Indian Agents under the Scheme

For becoming an agent, the applicant should be either one of the following:

Apart from this, the applicant must have a minimum net worth or net owned funds of Rs. 50 Lakhs. For the above purpose, net owned funds means the amount of funds present with the entity minus the investment amount in shares of its subsidiaries or associate companies.

Process of making an application for MTSS

• The applicant has to make an application to the foreign exchange department (FED) RBI.
• With the application, the applicant has to provide the following documents:
  • Declaration that no criminal proceeds are against the applicant by the Directorate of Enforcement (DoE), Directorate of Revenue and the Directorate of Intelligence. Apart from this, no proceedings must be enforced against any of the directors of the applicant.
  • A declaration has to be submitted by the entity that proper framework for Know your Customer (KYC), Anti-money laundering norms, Combating of Financing Terrorism and regulatory requirements have been followed by the company. These requirements have to be in accordance to the norms related to the RBI.
  • Information and details of the overseas principal with which the MTSS transaction is being conducted.
  • Scheme of operation by the overseas principal.
  • Full information on the address of the entities present in India and the address of the MTSS which will be conducted by the applicant.
  • Information on the volume of transactions that is conducted by the entity.
  • Audited Balance sheet and profit and loss of the entity.
  • Memorandum of Association and Articles of association. The objects clause of the business must state that the applicant is into the business of conducting money transfer operations.
  • Confidentiality report of the applicant. Two copies of the report must be provided by the applicant’s banker.
  • Information related to any sister concern or associate concern with the MTSS.
  • Board resolution by the company for the purposes of carrying out the money transfer service scheme.
  • Agreement of tie up from the overseas principal with the agent.

What are the other requirements for starting a MTSS?

For setting up MTSS, three day collateral or an amount up to USD 50,000 whichever is more should be kept by the overseas principal for the agent.  This must be kept with the designated bank in India. The minimum amount that has to be kept as foreign currency is USD 50,000 and the rest of the amount has to keep as a bank guarantee.

Only personnel remittances have to be made for maintenance of family and for the purpose of foreign tourists visit to India. Donations or contributions towards trusts and purchase of property are not allowed through the money transfer service scheme. This can happen through normal banking channels.

For an individual, an amount up to USD 2500 is allowed to be remitted. For individuals present in India an amount of Rs. 50,000/- may be paid. If the amount of investment is higher than this, then it can be paid through means of a demand draft or an account payee cheque. Apart from this, the amount if more than Rs.50000/- can be credited to the beneficiary bank directly.

For a foreign tourist beneficiary, a higher amount of remittance is allowed. Information and details related to the transactions have to be maintained for inspection by the inspectors and auditors. In a financial year only 30 remittances can be made for the money transfer service scheme.

Decision making by the RBI

The decision for granting an application would be dependent on variety of factors. The RBI would consider the application on a case to case basis. One of the criteria is whether the Indian agents have the strength and efficiency to handle operations under the money transfer service scheme. The standards which have to be followed and maintained while conducting MTSS transactions must be under the best practices followed internationally and domestically.

Once the application is granted, the Indian agent must commence operations within 6 months of granting the certificate. This must also be intimated to the regional office of the concerned RBI department.

Rules related to operation of overseas principals

There are several rules related to overseas principals. Principals with good track record would only be considered under this scheme. The RBI will consider overseas principals that conduct transactions in a cheap and efficient manner.

The following documents are required to be submitted by Indian agents for overseas principals:

• Overseas principals must get consent from the Department of Payment and Settlement Systems, Reserve Bank of India under the provisions of the Payment and Settlement Systems Act (PSS Act), 2007. This is required for the operation of international payment systems. Backgrounds checks will be carried out by the Government of India.
• The overseas principal must be registered with the respective authority. It must be licensed by the Central Bank or a regulatory finance agency in the foreign country for the purpose of carrying out money transactions.
• Net worth of the overseas principal must be USD 1 Million. This net worth requirement must be according to the last audited balance sheet. However, the RBI will relax this requirement, if the overseas principal is established in a Financial Action Task Force Country (FATF). Their business requirement must be overlooked by the Central bank.
• The track record of the overseas principal must be proper for conducting money transactions.
• The arrangement or transactions between the entities must be for increased access to transfer of money.
• As per the international credit rating system, the overseas principal must have good rating.
• A confidential report must be submitted by the principal. Two copies of the report must be submitted by the overseas principal banker.
• A report from the overseas principal chartered accountant must be submitted regarding precautions and steps taken to comply with anti money laundering regulations in India.
• The responsibility of the activities of the agents and sub agents in India are under the overseas principal.

Appointment of Sub Agents under the MTSS

Under the system of MTSS sub agents can be appointed by agents to carry out the work for an agent. Agents appoint sub agents for the purpose of carrying out the business of money transferring.

The sub agent must be a company registered in a particular area carrying out the business of sub agency. The tenor or service agreement must be decided between the agent and the sub agent.

An Indian agent is required to submit a copy quarterly report according to the prescribed format. The information must be pertaining to the appointment of sub agents by the agents. This must be submitted within 15 days from the end of the quarter.

Information should be submitted to the respective regional office of the Foreign Exchange Department of the RBI. For onward submission, the information has to be submitted to the Ministry of Home Affairs (MHA), Government of India (GOI) through the Ministry of Finance.

The agents have to make sure that sub agents comply with the standards of MTSS. Indian agents must take full responsibility on the appointment of sub agents.

The following checks have to be carried out before appointing a sub agent:

• Business activities that are carried out by the Subagent in the locality
• Any form of municipal certification with respect to the sub-agent.
• Conducting verification for the sub-agent.
• Certificate of conduct of the sub-agent with the respective police authority.

Auditing carried out by Agents

Indian Agents would require conducting regular audit and due diligence regarding the operations of a sub agent. Agents are solely responsible for the activities of the sub agent. Apart from this agents have to make sure that Anti money Laundering Compliance is carried out with respect to the operation of the sub agent.

Overseas principals are required to provide audited balance sheet along with the net worth certificate to the concerned regional office and the department of payment and settlement systems. Similarly agents are also required to submit audited balance sheet with the respective authorities.

Conclusion

Also, read: FEMA Guidelines: Inward Remittance