Archive / Investment Adviser (Level 1) / Introduction to the Indian Financial Markets

nism-series-xa-fema-ad-category-i-forex-transactions[ INVESTMENT ADVISER (LEVEL 1) ]

Under the Foreign Exchange Management Act, 1999 (FEMA) administered by the RBI, which category of Authorized Dealers (ADs) is fully empowered to conduct all permissible current and capital account transactions?

[ A ]Authorized Dealers Category III (AD Category III - select institutions for specific transactions only).

[ B ]Authorized Dealers Category I (AD Category I - typically commercial banks).[ CORRECT ]

[ C ]Money Changers (Full Fledged Money Changers - FFMCs restricted solely to retail currency conversion).

[ D ]Registered Investment Advisers (RIAs).

Takeaway

Under FEMA, AD Category I entities — typically scheduled commercial banks — are fully empowered to conduct all permissible current and capital account foreign exchange transactions.

Derivation

RBI's Authorized Dealer framework under FEMA tiers foreign-exchange-handling intermediaries by the breadth of transactions they may conduct: AD Category I (mainly commercial banks) holds the broadest mandate, covering both current account transactions (trade, remittances, travel) and capital account transactions (external commercial borrowings, FDI-related flows, overseas investment); AD Category II handles specified non-trade current account transactions only (e.g., upgraded money changers); and AD Category III is limited to specific transactions incidental to the institution's core business. This tiered authorization structure, and specifically which tier holds the full current-plus-capital-account mandate, is what the exam is testing.

Why the others fail

A — Authorized Dealers Category III (AD Category III - select institutions for specific transactions only).

AD Category III institutions are authorized only for specific foreign exchange transactions incidental to their core business.

C — Money Changers (Full Fledged Money Changers - FFMCs restricted solely to retail currency conversion).

Full-Fledged Money Changers are restricted to retail currency conversion transactions only; they do not hold the broad current-and-capital-account transaction authority granted to AD Category I banks.

D — Registered Investment Advisers (RIAs).

Registered Investment Advisers provide investment advisory services under SEBI regulation and hold no FEMA Authorized Dealer status to conduct foreign exchange transactions at all.