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RBI warns against illegal forex trading on internet.

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The Reserve Bank of India (RBI) has cautioned Indian investors and banks against illegal overseas foreign exchange trading through internet and electronic trading portals which offer "guaranteed high returns".

"It has been observed that overseas foreign exchange trading has been introduced on a number of internet/electronic trading portals luring the residents with offers of guaranteed high returns based on such forex trading. The advertisements by these internet/online portals exhort people to trade in forex by way of paying the initial investment amount in Indian rupees," the RBI said in a circular.

According to the RBI, some companies have reportedly engaged agents who personally contact people to undertake forex trading/ investment schemes and entice them with promises of disproportionate / exorbitant returns.

"Most of the forex trading through these portals are done on a margining basis with huge leverage or on an investment basis, where the returns are based on forex trading. The public is being asked to make the margin payments for such online forex trading transactions through credit cards/deposits in various accounts maintained with banks in India."

"It is also observed that accounts are being opened in the name of individuals or proprietary concerns at different bank branches for collecting the margin money, investment money, etc," the RBI said.

Banks are advised to exercise due caution and be extra vigilant in respect of such transactions, the RBI warned.

It is clarified that any person resident in India collecting and effectingremitting such payments directlyindirectly outside India would make himself/ herself liable to be proceeded against with for contravention of FEMA, 1999 besides being liable for violation of regulations relating to know your customer (KYC) norms and anti money laundering (AML) standards, it said.

The RBI clarified that "a person resident in India may enter into currency futures or currency options on a stock exchange recognized under section 4 of the Securities Contract (Regulation) Act, 1956, to hedge an exposure to risk or otherwise, subject to such terms and conditions as may be set forth in the directions issued by the RBI from time to time".

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Forex OTC trading has been illegal in India since 2000, when the Foreign Exchange Management Act (FEMA) came into effect, but traders have found ways to circumvent the law and trade financial markets anyway.

According to a couple of official statements made by the Reserve Bank of India (RBI), the country's central banking institution, Indians are formally not allowed to transfer money to a forex trading account with a broker abroad. In addition, local banks are obliged to report account holders who use their credit cards for such purposes to the RBI.

Fortunately, there are some loopholes, allowing residents of India to fund their accounts without being caught - like funding it through a third party. One of the most popular options are e-wallets like Skrill and especially Neteller.

Of course, there are legal ways of trading forex in India - on local exchanges like National Stock Exchange (NSE), Bombay Stock Exchange (BSE) and Metropolitan Stock Exchange (MSEI) and the list of registered brokers for currency derivatives can easily be found on Securities and Exchange Board of India’s (SEBI) website. However, SEBI Forex brokers are allowed to offer only INR based currency pair options for USD, EUR, GBP, and JPY.

Although retail forex trading is illegal in India, this does not bother foreign forex brokers from offering its services there and maintaining offices in the country. Some, like FXTM even accept local deposits for Indian residents.

Forex Brokers in India.

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