The revised circular on FCAs under the Liberalised Remittance Scheme (LRS) establishes a robust regulatory mechanism for IBUs and resident individuals. It balances operational flexibility with strict compliance requirements to prevent misuse and ensure transparency.

New Delhi (ABC Live): The International Financial Services Centres Authority on 13/12/2024 issued Directions to IBUs for operations of the Foreign Currency Accounts (FCA) of Indian resident individuals under the Liberalised Remittance Scheme (LRS), outlines detailed operational and compliance guidelines for IFSC Banking Units (IBUs).

Direction issued focuses on Foreign Currency Accounts (FCA) opened by resident individuals (RIs) under the Liberalised Remittance Scheme.

ABC Research Team, keeping track on prime minister dream project to make India, the third largest economy of the world critical analysed the above said directions and reports;

Strengths of the Circular

Detailed Framework for FCA Operations

The circular provides a structured regulatory framework that enables resident individuals to Open Foreign Currency Accounts (FCA) in IBUs for receiving remittances under LRS.

Undertake financial activities in IFSCs using these funds, including fixed deposits (with a tenure of less than 180 days) and other financial services/products​.

This enables IBUs to attract deposits under LRS and facilitates diversification of financial investments for resident individuals.

Data-Driven Safeguards

To ensure transparency and avoid misuse of FCAs, the circular incorporates multiple monitoring mechanisms:

Routing of remittances: All onshore LRS remittances must pass through an Authorised Person (AP), ensuring regulatory checks​.

Time-bound Repatriation: Funds unused or uninvested within 180 days must be repatriated to India via APs​.

Declaration Requirements: Resident individuals must provide self-declarations confirming the source of offshore funds and their purpose, ensuring compliance.

Financial Risk Mitigation

The circular implements risk controls aligned with international standards, such as:

Prohibiting remittances to FATF-identified non-cooperative countries and territories.

Ensuring funds are not transferred to individuals/entities flagged for involvement in terrorism​.

This aligns with global AML (Anti-Money Laundering) and CFT (Counter-Terrorist Financing) guidelines, protecting the financial system.

Promoting Digital Enablement

The circular mandates that IBUs enable seamless digital FCA operations via internet and mobile banking platforms. This not only enhances customer experience but also:

Reduces operational inefficiencies.

Ensures easier tracking and reporting of LRS remittances.

Limitations of the Circular

Ambiguity in Monitoring Timelines

While IBUs are instructed to ensure that remittances to the FCA occur “within a reasonable period of time,” the absence of a specific timeframe could lead to operational inconsistencies. For instance:

A defined range (e.g., 30–60 days) would provide clarity and prevent misuse.

Compliance Burden on RIs and IBUs

The circular mandates multiple levels of documentation and declarations, such as:

Verification of LRS remittance returns submitted to APs.

Declarations for remittances from non-Indian sources confirming LRS compliance​.

While this ensures transparency, the operational burden on IBUs and small-value remitters could increase disproportionately.

Repatriation Clause Lacks Flexibility

The circular requires reinvestment or repatriation of funds within 180 days if unused. However, it does not address scenarios like:

Market volatility delaying investments.

Unforeseen personal or economic conditions.

This strict provision could force premature repatriation, disrupting financial planning for resident individuals.

Over-Reliance on Self-Declarations

The circular relies heavily on resident individuals providing self-declarations to confirm the source and purpose of funds. Without independent verification, there remains a risk of:

Misreporting or deliberate non-compliance.

Difficulty in verifying funds remitted from multiple offshore jurisdictions.

Data-Driven Insights and Implications

Operational Flexibility for IBUs

IBUs are allowed to:

Facilitate LRS remittances into FCAs directly from India.

Support financial transactions both within IFSCs and in other foreign jurisdictions​.

This promotes IFSCs as attractive hubs for offshore financial activities.

Key Safeguards to Address Financial Risks

The circular aligns with global FATF standards by prohibiting remittances to:

Non-cooperative countries flagged by FATF.

Entities/persons with terrorist links, as separately notified by RBI.

This enhances India’s regulatory credibility in international markets.

Declared Limits Under LRS

As per current RBI guidelines, resident individuals can remit up to USD 250,000 per financial year under LRS. The circular explicitly ensures that:

Funds remitted for FCA must adhere to this limit.

IBUs report the data on FCA operations to the IFSCA in the prescribed format​.

This reporting requirement increases accountability.

180-Day Clause and Reinvestment Data

The circular introduces a cap of 180 days for reinvestment of unspent or unused foreign exchange in FCAs.

If uninvested, the funds must be repatriated through an Authorised Dealer Bank (AD Bank).

This ensures better control over offshore funds and prevents prolonged misuse.

Recommendations

Introduce Defined Timelines for FCA Remittances

Replace ambiguous terms like “reasonable period” with specific deadlines (e.g., 30–60 days).

This will enhance clarity for IBUs and RIs.

Simplify Compliance for Small Transactions

Introduce a threshold (e.g., USD 10,000) below which documentation requirements for declarations are simplified.

High-value remittances can remain subject to stricter scrutiny.

Flexibility in Repatriation Rules

Introduce conditional exceptions for the 180-day reinvestment clause. For instance:

Market delays.

Pending investment approvals in IFSCs.

Implement Independent Verification Mechanisms

Reduce sole reliance on self-declarations by incorporating automated verification systems.

IBUs can cross-check remittance records through integration with RBI’s reporting database.

Conclusion

The revised circular on FCAs under the Liberalised Remittance Scheme (LRS) establishes a robust regulatory mechanism for IBUs and resident individuals. It balances operational flexibility with strict compliance requirements to prevent misuse and ensure transparency.

Key data-driven features such as FATF alignment, digital enablement, and monitoring mechanisms strengthen India’s international financial standing. However, the circular’s rigid timelines, heavy compliance burden, and reliance on self-reporting warrant further refinement to ensure seamless implementation. By addressing these gaps, the circular can better serve its objectives of facilitating offshore investments, protecting financial systems, and promoting IFSCs as global financial hubs.