RBI Notifies FEMA (Authorised Persons) Regulations 2026: Restructuring the Forex Dealer Framework in India

Kaustav Chowdhury
2 days ago
9 min read

Introduction

The Reserve Bank of India, through a notification dated April 30, 2026, has issued the FEMA (Authorised Persons) Regulations 2026, marking the most comprehensive overhaul of the authorised dealer and money changer licensing architecture under the Foreign Exchange Management Act, 1999. Issued under Section 10 and Section 47 of FEMA, these regulations replace the earlier framework governing authorised persons who deal in foreign exchange, introducing a modernised, tiered structure that aligns with contemporary market realities and the evolving needs of India's forex ecosystem.

India's foreign exchange management framework has undergone significant evolution over the past two decades. The earlier regulatory structure had become increasingly fragmented, with multiple circulars, directions, and ad hoc modifications creating complexity for market participants. The 2026 regulations consolidate and simplify this architecture, introducing clearer categorisations, stricter eligibility thresholds, and a formalised transition pathway for legacy arrangements.

This notification arrives at a time when India's broader regulatory landscape is witnessing rapid modernisation. The RBI has also proposed the new FEMA Foreign Investment Rules 2026 to replace the existing NDI Rules, signalling a coordinated effort to update the entire foreign exchange regulatory ecosystem. The Authorised Persons Regulations 2026 form a critical pillar of this initiative, restructuring how entities are licensed to deal in foreign exchange across the country.

The New Classification Framework for Authorised Persons

At the core of the 2026 regulations lies a restructured classification system for authorised persons. The new framework establishes four distinct categories, each with defined eligibility criteria, operational scope, and compliance obligations. This represents a departure from the earlier, less granular approach that often blurred the lines between different types of forex dealers.

The four categories are: AD Category-I, AD Category-II, AD Category-III, and Full Fledged Money Changers (FFMCs). Each category serves a specific segment of the forex market, from large-scale banking operations handling complex capital account transactions to smaller entities focused on money changing services. The tiered structure ensures that regulatory requirements are proportionate to the scale and risk profile of the entity's forex operations.

This classification framework achieves two parallel objectives. First, it strengthens regulatory oversight by ensuring that only entities meeting prescribed thresholds of financial strength and operational experience can undertake higher-risk forex activities. Second, it expands market access by creating dedicated categories for innovation-driven participants, who now have a clear regulatory pathway through the AD Category-III designation.

AD Category-I: Scope and Eligibility

AD Category-I authorisation is reserved exclusively for banks licensed by the RBI. This category carries the widest operational scope under the new regulations, permitting authorised entities to undertake any current account transaction and any capital account transaction that is permissible under FEMA and its associated rules and regulations.

For entities involved in cross-border investment flows, the AD Category-I framework is particularly significant. These banks serve as the primary intermediaries for foreign direct investment reporting, including the filing of Form FC-GPR after receiving foreign investment. They also facilitate the establishment and operation of branch offices and liaison offices in India under FEMA, processing applications and ensuring compliance with RBI conditions.

The retention of exclusive bank-only access for Category-I reflects the RBI's assessment that full-spectrum forex operations require the institutional infrastructure and supervisory architecture that licensed banks possess. The regulations provide a cleaner statutory foundation for existing AD Category-I functions, removing ambiguities that had accumulated through incremental regulatory modifications.

AD Category-II: Expanded Access with Net Worth Thresholds

AD Category-II represents one of the more significant innovations in the 2026 regulations. This category is open to three types of entities: banks licensed by the RBI, non-banking financial companies (NBFCs) registered with the RBI, and Full Fledged Money Changers or Forex Correspondents (FxCs) that meet specific operational and financial thresholds.

For FFMCs and Forex Correspondents seeking AD Category-II authorisation, the regulations prescribe two key eligibility conditions:

The entity must have been operational for at least two years as on the date of application.
The entity must demonstrate an average annual forex turnover of not less than Rs. 50 crore during the preceding two financial years.
All AD Category-II applicants must maintain a minimum net worth of Rs. 10 crore.

The operational scope of AD Category-II entities, while narrower than Category-I, is substantially broader than what was available to non-bank forex dealers under the previous framework. The specific transactions that AD Category-II entities may undertake will be determined by the RBI through separate directions, but the regulatory intent is to permit a meaningful range of current account transactions beyond basic money changing.

This category creates an upgrade pathway for established FFMCs and Forex Correspondents that have built scale in the market. The net worth threshold of Rs. 10 crore provides a financial stability safeguard, reducing the risk of under-capitalised entities undertaking forex operations beyond their capacity.

AD Category-III: The Innovation-Enabling Category

Perhaps the most forward-looking element of the 2026 regulations is the creation of AD Category-III. This category serves as an innovation-enabling pathway, designed to accommodate two distinct types of entities.

The first group comprises entities that deal in foreign exchange incidental to their primary business activities. These might include technology companies, export-oriented manufacturers, or service providers whose core operations naturally involve cross-border payment flows. The regulations now permit them to seek direct authorisation rather than routing all forex transactions through external intermediaries.

The second group consists of entities that intend to offer novel products and services involving foreign exchange dealings. This provision acknowledges the growing intersection of fintech innovation and forex services, creating regulatory space for new business models. Cross-border payment platforms, digital remittance solutions, and forex-embedded financial products all stand to benefit from this dedicated category.

The minimum net worth requirement for AD Category-III is set at Rs. 2 crore, significantly lower than the Rs. 10 crore threshold for Category-II. This calibrated approach reflects the typically smaller scale of Category-III operations while still ensuring a baseline of financial stability. The specific scope of permissible activities for AD Category-III entities will be outlined through separate RBI directions, allowing the central bank to tailor permissions to the nature of each applicant's business and to expand the scope gradually as the category matures.

Full Fledged Money Changers: Transition and Phase-Out

The treatment of Full Fledged Money Changers under the 2026 regulations signals a significant policy shift. While FFMCs continue to exist as a separate class of authorised persons, the regulations establish a clear trajectory toward their gradual phase-out as a standalone licensing category.

Under the new framework, no fresh FFMC licences will generally be granted by the RBI. The only exception applies to applications that were already under processing when the regulations came into force on April 30, 2026. This effectively closes the entry door for new standalone money changers, directing future applicants toward the AD Category-II or AD Category-III pathways instead.

Existing FFMCs are provided with a two-year transition window, extending up to April 30, 2028. During this period, current FFMC licence holders must either upgrade their authorisation to an appropriate AD category (provided they meet the relevant eligibility criteria) or restructure their operations in line with the new regulatory framework. This transition is not merely administrative; it requires FFMCs to evaluate their capital adequacy, operational capabilities, and strategic direction in light of the new requirements. Entities contemplating a slump sale or business transfer to restructure operations during this transition should factor in the regulatory timelines and the need to secure fresh authorisation post-restructuring.

The Forex Correspondent Scheme

One of the most operationally significant elements of the 2026 regulations is the creation of a detailed Forex Correspondent Scheme. Under this scheme, AD Category-I and AD Category-II entities may appoint Forex Correspondents (FxCs) under a principal-agent model to carry out money changing activities on their behalf. This replaces the earlier franchisee model that had been in use across the industry, providing a more structured and accountable framework for the distribution of forex services.

Under the previous arrangement, authorised dealers could appoint franchisees to conduct money changing operations, but the regulatory framework governing these relationships was less structured and lacked the detailed obligations and accountability mechanisms that the new scheme introduces. Key features of the Forex Correspondent Scheme include:

A formalised principal-agent relationship with clearly defined responsibilities and liabilities for both parties.
Compliance obligations flowing from the principal AD entity to the appointed Forex Correspondent, ensuring end-to-end regulatory coverage.
Prescribed eligibility conditions for entities seeking appointment as Forex Correspondents.
Ongoing supervisory requirements for the appointing AD entity, including periodic reviews and compliance audits of its Forex Correspondents.

This structured approach to the distribution of forex services is expected to improve service delivery in underserved areas while maintaining regulatory standards. Entities considering the operational restructuring required to comply with the new scheme may also need to review their corporate governance frameworks, including adherence to board meeting requirements under Secretarial Standard SS-1, to ensure that internal oversight mechanisms align with the new regulatory expectations. Board approvals will likely be required for entering into principal-agent arrangements under the Forex Correspondent Scheme.

Transition Timeline and Franchisee Model Discontinuation

The 2026 regulations provide a carefully structured transition timeline to ensure that existing market arrangements are wound down in an orderly manner. The most critical timeline element concerns the discontinuation of the franchisee model. All franchisee arrangements that were valid as on the date the regulations came into force must be discontinued within two years, setting a final deadline of April 30, 2028. This two-year window is designed to allow existing franchisees and their principal authorised dealers sufficient time to restructure their relationships without causing disruption to forex service delivery.

Importantly, the regulations explicitly permit existing franchisees to be appointed as Forex Correspondents after the discontinuation of the franchisee arrangement, subject to prescribed conditions. This means that operational relationships between principals and their distribution partners need not be entirely disrupted; rather, they must be reformulated within the new principal-agent framework of the Forex Correspondent Scheme.

The transition timeline aligns with the broader regulatory modernisation efforts underway in India. Just as the proposed FEMA Foreign Investment Rules 2026 aim to replace the NDI Rules with a more contemporary framework, the Authorised Persons Regulations 2026 are phasing out legacy structures in favour of a modernised architecture. Market participants should also be aware of related compliance developments, including the expanded adjudication powers granted to the ROC under Section 454, which signal a broader trend toward stricter enforcement across regulatory domains.

Digital Integration and Compliance Modernisation

The 2026 regulations place significant emphasis on the digital integration of licensing and compliance processes. While the specific technological requirements will be detailed through separate RBI directions, the regulatory framework itself contemplates a modernised approach to authorisation, renewal, and ongoing compliance reporting. Key elements of the digital integration agenda include:

Simplified and digitised authorisation and renewal processes, reducing paperwork and processing delays.
Digital submission of applications, compliance reports, and periodic returns by authorised persons.
Enhanced data-sharing protocols between authorised persons and the RBI for real-time supervisory oversight.
A formalised appeal mechanism against RBI decisions relating to authorisation, providing affected entities with a structured pathway to challenge adverse regulatory actions.

This digital-first approach mirrors similar initiatives across India's regulatory landscape, including the establishment of the Data Protection Board under the DPDP Act 2023, which reflects a broader governmental commitment to technology-driven governance and enforcement. For entities operating across multiple regulatory domains, the digital integration of FEMA licensing processes is expected to reduce compliance burden and improve processing timelines significantly.

The introduction of a formalised appeal mechanism is a particularly noteworthy procedural improvement, providing due process safeguards that bring the authorised person licensing framework in line with broader administrative law principles.

Practical Implications for Market Participants

The FEMA (Authorised Persons) Regulations 2026 carry significant practical implications for a wide range of market participants, from large banks to small forex service providers.

For banks currently holding AD Category-I authorisation, the immediate impact is largely structural rather than operational. The new regulations provide a cleaner statutory foundation for their existing forex operations. Banks should, however, review their franchisee arrangements and begin planning the transition to the Forex Correspondent model well before the April 2028 deadline.

For NBFCs and established FFMCs, the regulations open meaningful new opportunities. The AD Category-II pathway, with its Rs. 10 crore net worth threshold and two-year operational track record requirement, provides a genuine upgrade path for entities that have built scale in the forex market. Companies preparing for such transitions should ensure their corporate documentation is in order, including the proper appointment of directors with valid DIN numbers as required under the Companies Act, as regulatory applications will require demonstrable corporate governance standards.

For fintech companies and innovation-driven entities, AD Category-III represents an entirely new avenue for regulated forex participation. The lower net worth threshold of Rs. 2 crore and the explicit recognition of novel products and services make this category particularly relevant for the growing fintech sector.

Foreign entities establishing operations in India, whether through branch offices or liaison offices under FEMA, should also take note of the restructured authorised person framework, as it directly affects the banking channels available for their forex transactions and the range of intermediaries through which they can access forex services.

The regulatory changes also intersect with broader capital markets developments. The recent SEBI FVCI Amendment Regulations 2026, for instance, reflect a parallel trend of regulatory modernisation across India's financial sector. Similarly, the Advocates Amendment Bill 2026 signals evolving regulatory approaches that may affect how legal and financial advisory services are structured around cross-border transactions.

Conclusion

The FEMA (Authorised Persons) Regulations 2026 represent a landmark restructuring of India's forex dealer licensing architecture. By introducing a clear, tiered classification system, establishing stricter eligibility thresholds, and creating structured transition pathways for legacy arrangements, the RBI has laid the foundation for a more organised, accessible, and resilient forex services ecosystem. The replacement of the franchisee model with the Forex Correspondent Scheme, combined with the phase-out of standalone FFMC licensing, reflects a deliberate shift toward consolidation of the forex services sector.

The two-year transition window ending April 30, 2028 provides market participants with adequate time to restructure their operations, but early planning is advisable given the complexity of the changes involved. Entities currently operating as FFMCs or under franchisee arrangements should begin evaluating their upgrade options and compliance requirements without delay. For fintech companies and innovation-driven entities, the AD Category-III pathway offers a new and compelling opportunity to participate in the regulated forex market.

As India's foreign exchange management framework continues to evolve through coordinated regulatory reforms, the Authorised Persons Regulations 2026 will serve as a foundational element of the modernised regulatory architecture, shaping how forex services are delivered, supervised, and regulated across the country for years to come. Market participants, legal advisors, and compliance professionals should study the new framework carefully and develop comprehensive transition plans aligned with the prescribed timelines.