Forex Trading in India and SEBI Forex Brokers
The whole idea of Forex trading in India is comparatively new. So much so that many potential new Forex investors are a little confused about the legality of this type of investment. The official ruling from the Royal Bank of India is that trading foreign currencies online is not allowed. Yes, you are going to find a number of offshore Forex brokers offering you their services, but participating in this form of Forex trading is a non-bailable offense.
But don’t be disheartened if you’re looking for Forex brokers in India because there is a way for you to participate without having to worry about a jail sentence. It is by trading in currency derivatives, and only through a recognized stock exchange, according to the Securities Contract (Regulation) Act 1956.
In India, the regulation of the financial industry is undertaken by a number of regulators. Those of you looking to trade in Forex should be looking for SEBI regulated brokers.
An introduction to SEBI and its role
SEBI stands for the Securities and Exchange Board of India, and this is the body responsible for the Forex trading industry. It was established in 1992, following the passing of the SEBI Act, and is the main regulator for stock exchanges in India. But SEBI has a number of other roles including:
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- The protection of investor interests and making sure their investments are safe
- Reducing malpractice and financial fraud with a careful balance of self-regulation and statutory requirements
- The development of a code of conduct for financial intermediaries, for example, underwriters and SEBI Forex brokers
- The promotion and regulation of the Indian securities market
It doesn’t matter whether the broker is offshore or domestic. It still has to abide by the rules of SEBI. Originally, SEBI had no statutory powers but this was changed following a Securities and Exchange Board of India Act 1992 amendment. Statutory powers were added and it also became the regulator of capital markets following a new governmental resolution.
SEBI is a very powerful organization and responds to the requirements of market intermediaries, the issuers of securities and individual investors. It functions as a quasi-legislative, quasi-judicial and quasi-executive body. Its executive functions include the conducting of investigations and issuing enforcements. As a quasi-judicial body it passes orders and ruling. Legislatively, its powers include the drafting of regulations.
A closer look at the functions of SEBI
There are three main functions which SEBI has to take care of.
SEBI draws up rules and regulations and also produces a code of conduct for regulated intermediaries in India to follow. It brings regulated entities together under regulatory bounds and places restriction on private placement. SEBI is also responsible for registering and regulating Indian stockbrokers, sub-brokers and merchant bankers, and the work of mutual funds. Further responsibilities include the regulation of company takeovers, making inquiries and audits of the stock exchange.
SEBI checks for price-rigging, something which is prohibited because it can lead to investors being defrauded or cheated. Insider trading is also prohibited and SEBI has a reputation for being very harsh on offenders. The ultimate protective function is to prevent unfair and fraudulent trade practices.
As far as development functions go, SEBI trains securities market intermediaries. It has a very flexible approach to market development and one of the ways this is apparent is that it allows internet trading through regulated stock brokers and underwriting is optional.
What are the Forex trading procedures and rules in India?
You now have a basic understanding of the current situation for those looking for Forex brokers in India. Time to take a look at some of the procedures and rules governing this type of investment.
There are a number of organizations in India who have worked together to develop and set up a regulatory framework for derivative trading. These include SEBI, the Royal Bank of India, with the Foreign Exchange Management Act providing the legal guidelines.
It has been possible for traders in India to trade in currency derivatives since 2008. Trading has to take place through one of three stock exchanges which are the National Stock Exchange (NSE), MCX-SX and the United Stock Exchange (USE). At first, the number of currency pairs available for trading was extremely limited. In fact, there was only one, the INR/USD currency pair. The choice was widened when GBP, EUR, and JPY (Japanese Yen) were added. And there have been even more improvements being added with EUR/USD, GBP/USD and USD/JPY currency pairs being added more recently.
Margin is used for trading currency derivatives requiring a deposit to be made with the exchange via a chosen intermediary. Contract settlements are always in cash and in Indian Rupees. The choice of futures cycles ranges from one to twelve months. Futures lot sizes are 1000 per unit. Except for the JPY/INR currency pair which is 100,000 units.
SEBI has developed a web-based system for the reporting of grievances
Clients of SEBI regulated brokers are able to use a system developed by SEBI known as SCORES (SEBI Complaints Redress System). It can be used for registering and tracking complaints from investors of SEBI registered firms. Before an investor registers a complaint it is their responsibility to try and settle it directly with the financial services provider. Should you be unable to reach a mutually satisfactory conclusion the complaint can be lodged with SCORES.
SEBI does not have as many powers as a number of well-known regulatory bodies, in that it is unable to act as judge or arbitrator and make the company resolve the complaint. It can, however, continue to monitor the situation and remind the company the issue is still outstanding, hold meetings with the relevant parties and issue pre-enforcement letters. There are a number of different laws which deal with investor right and remedies. Should SEBI be unable to help resolve the situation it will be a matter of approaching the courts, consumer courts, or arbitration. The remedies should, however, be considered as a last resort because they can be very costly and time-consuming.