Is there any punishment for forex trading in India? To answer this question in a word, no, there is no punishment if you trade forex in India. However, India has plenty of regulatory restrictions when it comes to trading, and you need to follow them if you do not want to face legal consequences. As the regulatory bodies, the RBI and SBI aim to protect the value of INR. Some trading activities can weaken the strength of INR and this is the reason why those activities are not allowed in this country.
On another note, it is a punishable offence to misuse USD from the reserve fund of the RBI. You must already know that you need to open a trading account with a broker and fund the account with a minimum deposit to start trading. Now, assume that you are depositing the account with USD from your Indian bank account that holds INR only. In this case, the RBI needs to pay the USD on your behalf. It is our responsibility to save our foreign reserves and doing anything that does not align with it can result in punishments by the law. Let’s discuss in detail what you can and cannot do in trading if you are based in India.
The Foreign Exchange Management Act (FEMA)
Earlier, there were no rules and regulations for forex trading in India. However, the consequences were grave. Within only a few years, the forex reserves in India fell. To deal with this situation, the Foreign Exchange Regulation Act came into existence. However, it could not restrict unethical trading activities successfully; thus, it was replaced by the FEMA act.
Several authorities including the foreign exchange department of the RBI have governed the enforcement of the FEMA act. The goals of this act are regulating and facilitating external trade and payments and develop the forex market while maintaining order. According to the FEMA act –
- No Indian trader is allowed to engage in any transaction of foreign security or foreign exchange with any unauthorised entity.
- You cannot make any payment to or for the credit of any person that resides outside India. The rule is the same when it comes to receiving payments as well.
- A trader based in India is prohibited to enter any financial transaction within India considering acquiring any asset outside the country.
Punishments for Forex Traders for Breaking the Rules of the FEMA ACT
All traders residing in India are obliged to follow the rules of the FEMA act or the law of India can punish them.
- If any person does not follow any of the rules enforced by the RBI, they are liable to be punished. They can be given a penalty of up to three times the amount involved in the illegal activity if the amount is calculable.
- In situations where the sum cannot be calculated, the amount can be up to 2 lakhs.
- If the trader resumes the contravention, they can be fined Rs. 5000 for every day they continue it.
- The central Government of India can also confiscate any forex exchange holdings of the traders that violate the FEMA act.
Legal Indian Exchanges for Trading
You can carry out all currency trading on the national stock exchanges of India. Trading through any foreign exchange is punishable. There are eight exchanges in India. The three main exchanges among them you can trade on are:
- National Stock Exchange of India (NSE)
Established in 1992 in Mumbai, NSE is one of the leading stock exchanges in India owned by the government. It is under the ownership of several banks, insurance companies, and financial institutions. It is the first dematerialised electronic exchange in India. As of May 2021, the market cap of NSE is $3.1 trillion. There are 1952 listings on the exchange. To know more about NSE, click here.
- Bombay Stock Exchange (BSE)
Founded in 1875 in Mumbai, BSE is the oldest stock exchange of not only India but also entire Asia. It is also the ninth largest stock exchange that has an overall market cap of more than ₹218,730 billion, which equivalents to $3.1 trillion. This is what the market cap of the exchange is in May 2021. The number of listings on BSE is 5439. Click here to know more about the Bombay Stock Exchange.
- Metropolitan Stock Exchange (MSE)
MSE is another stock exchange owned by the Indian government and the ministry of finance. Founded in 2008, the exchange offers futures contracts on USDINR, EURINR, GBPINR, JPYINR, and IRF. Metropolitan Stock Exchange is acknowledged by SEBI under section 4 of Securities Contracts Act, 1956. Click here to know more about MSE.
Authorised Brokers to Trade in India
Like exchanges, you also have to open your trading account on an authorised broker only. There are several offshore brokers that offer their services to Indian clients. However, they do not care about Indian rules. So, you cannot trust them. Offshore brokers facilitating spot forex exchange exist outside the jurisdiction of India. Since they are not regulated by the SEBI, you cannot trade on them as an Indian trader or your trade will be considered illegal. To avoid legal complications, stick to brokers that are approved by the SEBI, such as –
- Alpari: Alpari allows its traders to invest in the accounts of professional traders. The broker also offers a PAMM account. You can use this account to select from different managers to make an investment on your behalf. Click here to visit Alpari.
- Zerodha: Founded in 2010 and headquartered in Bangalore, Zerodha has offices in several cities in India. The financial services company offers trading on currencies, commodities, bonds, and mutual funds. You can also trade in futures and options, commodity derivatives, currency derivatives, stocks and IPOs, bonds and government securities. Click here to start trading with Zerodha.
- FP Markets: Apart from forex trading, FP Markets also offers dealing with 19 global indices and commodities including gold, silver, and oil. The broker offers access to global markets 24 hours a day and 5 days a week to its clients. Since it uses an NY4 server, trades are executed at high speed. Traders are also provided with consistent low spreads. Start trading with FP Markets by clicking here.
- FBS: FBS is another forex broker regulated by the SEBI where you can trade forex, stocks, CFDs, and metals. The broker offers a low-risk cent account for beginners. A great benefit of trading with FBS is that this broker supports several payment methods that accepted across the world. The trading platform allows trading at low spreads so clients can minimise their losses. Click here to sign up with FBS.
These brokers can further link the traders with one of the three national stock exchanges.
Legal Currencies for Forex Trading in India
Another thing that you need to keep in mind to avoid punishments is that there are only seven currency pairs that you can trade in India. Four pairs were introduced by the FEMA act and they were also listed by the RBI. These pairs are USDINR, GBPINR, EURINR, and JPYINR. However, in 2015, the RBI added three cross currency pairs to the list. They are EURUSD, GBPUSD, and USDJPY. So, if you want to trade forex in India, make sure that your trade is undertaken through these pairs only.
Conclusion
Trading laws in India sure are strict and not following them means that you will get punished. However, the rules are made with only the best interests of this country and its people in mind. The world of trading is a complex and risky field after all, and you must be cautious. By following the regulations and sticking to authorised brokers, you can protect your funds.