Investment Law in India Explained

Forex and CFD trading is legal in India, but this activity involves several restrictions and limitations. In 1999 the Foreign Exchange Management Act (FEMA) set the country's rules of foreign exchange. It now regulates the activity of forex brokers. The Reserve Bank of India (RBI) regulates the foreign currency flow in the country. Share trading in India's stock market operates under the control of the Securities and Exchange Board (SEBI). The restriction in trading forex is broad. Indian brokers can only offer forex trading using the Rupee as the base or counter currency. To circumvent this issue, some Indian traders will online trade through European or U.S. brokers. 

Limitations

A critical restriction is that all exchange operations must now include an Indian rupee as the base currency or counter currency of a pair that you trade. Because of this restriction, most Indian forex brokers can only offer a very few currency pairs to trade. Before the FEMA regulations passed into law in 1999, India was under a tighter regulatory scenario called FERA. According to that Act, Indian residents were not allowed to own foreign currency. Many Indian customers circumvent the FEMA act. European, U.S., and offshore brokerages accept Indian customers without any restrictions. This online solution has been the path of least resistance for Indian retail traders that want to take advantage of the liquidity.

Indian customers deposit their funds at foreign accounts at their own risk. Indian government and regulators can not be held liable for their funds' safety. While international brokerages can be regulated, and third parties can protect their accounts and funds, this activity comes outside the scope of Indian regulation and legislation.

Foreign Investment Laws

In India, foreign investments law is governed by a comprehensive foreign direct investment (FDI) policy issued annually by the Department of Industrial Policy and Promotion. This policy framework is operationalized by rules, regulations, and circulars issued by India's Central Bank, India's Reserve Bank. Most investment sectors do not require prior approval. Only a few sectors such as insurance, real estate, non-banking financial corporations are regulated. 

Taxes and Anti-Trust

Income tax in India is governed by Central legislation under the Income-tax Act of 1961. India also has transfer pricing rules that apply to related party transactions. As for antitrust, India's Competition Act, 2002 is the principal legislation dealing with antitrust issues. The Act regulates anti-competitive agreements and abuse of a dominant position.

New 2020 Trading Legislation

Indian residents are no longer allowed to fund their international trading accounts via Indian bank transfers. Since October 1st, 2020, Indian banks are also obliged to disable online payments for all the credit cards they issue. This new safety rule complicates the use of credit cards to fund trading accounts. This new regulation has created a movement toward online payment services and electronic wallets such as PayPal and Neteller to deposit funds to their forex accounts with international brokers.

The Bottom Line

The Indian government wants forex and CFD trading to be regulated and restrict the type of activity engaged in by Indian citizens. The Indian government wants Indian consumers to trade forex products with the Rupee as the base or the counter currency. This regulation severely restricts trading activity and liquidity. To circumvent this process, Indian consumers will deposit funds into European and U.S. accounts. To further restrict this activity, Indian banks disabled online payments and credit cards to fund foreign accounts. Indian consumers are now circumventing this restriction by moving to electronic wallets such as PayPal and Neteller. 

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