Forex Trading in India and SEBI Forex Brokers

SEBI logoThe 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 offence.

Don’t be disheartened if you’re looking for Forex brokers in India, though, 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 recognised 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 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. SEBI also has a number of other roles, including the following:

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 an  amendment to the Securities and Exchange Board of India Act, 1992. Statutory powers were added, and it also became the regulator of capital markets following a new governmental resolution.

SEBI is a very powerful organisation that 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 of enforcements. As a quasi-judicial body it passes orders and rulings. Legislatively, its powers include the drafting of regulations.

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A closer look at the functions of SEBI

There are three main functions that SEBI has to take care of:

Regulatory functions
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 restrictions 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, conducting inquiries, and audits of the stock exchange.

Protective functions
SEBI checks for price-rigging, something that 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.

Developmental functions
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?

Now that you have a basic understanding of the current situation for those looking for Forex brokers in India, it’s time to take a look at some of the procedures and rules governing this type of investment…

There are a number of organisations in India who have worked together to develop and set up a regulatory framework for derivative trading. These include SEBI and 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: 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. There have since been further improvements  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 1 to 12 months. Futures lot sizes are 1,000 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 they 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 other 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 that the issue is still outstanding, hold meetings with the relevant parties, and issue pre-enforcement letters. There are a number of different laws that deal with investor rights and remedies. Should SEBI be unable to help resolve the situation it will be a matter of approaching the courts, consumer courts, or arbitration. These remedies should, however, be considered as a last resort, because they can be very costly and time-consuming.

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