# Regulation and Management of Foreign Exchange — General Prohibitions and the CAAT/CUAT Split

## General Prohibitions on a Person

A person shall not:

1. Deal in foreign exchange or foreign security with any person other than an authorised person.

2. Receive payment from (or on behalf of) a PROI otherwise than through an authorised person.

3. Make payment to (or for the credit of) a PROI except as permissible under Sections 5 and 6.

4. Enter into a financial transaction in India (hawala transaction) as consideration to acquire/create an asset outside India.

### Who is an "Authorised Person"?

An authorised person includes:

Authorised Dealer (AD)
Money Changer
Off-Shore Banking Unit
Any other person authorised to deal in foreign exchange/foreign securities.

## The Two-Bucket Classification

All transactions in foreign exchange, foreign security, or IPOI fall into one of two buckets:

### A. Capital Account Transaction (CAAT) — Section 6

A transaction that alters assets or liabilities:

Outside India of a PRII, OR
In India of a PROI.

Examples: Loan from outside India, overseas investment in foreign security, purchase of IPOI.

Default Rule: Prohibited unless permitted.

### B. Current Account Transaction (CUAT) — Section 5

Any transaction other than a CAAT, including:

Payments connected with foreign trade, short-term banking and credit facilities in the ordinary course of business.
Interest on loans and income from investments.
Remittance for living expenses of parents, spouse or children living abroad.
Expenses for foreign travel, education, medical care of close relatives, etc.

Default Rule: Freely permitted unless prohibited.

## Memory Tool — The Flip Rule

Bucket	Touches assets/liabilities?	Default
CAAT	Yes — alters balance sheet	Prohibited unless permitted
CUAT	No — income / expense / day-to-day	Permitted unless prohibited

> CAAT and CUAT are mirror opposites in their default treatment.

## Sub-classification under Each Bucket

CUAT is regulated by 3 Schedules under the FEM (Current Account Transactions) Rules, 2000:
Schedule I — Prohibited.
Schedule II — Prior approval of Central Government required.
Schedule III — Freely permitted up to specified limit; above that, RBI approval.
CAAT is regulated by the FEM (Permissible Capital Account Transactions) Regulations, 2000:
Schedule I — Permissible CAAT for PRII.
Schedule II — Permissible CAAT for PROI.

### Power to Regulate CAAT

Non-debt instruments → Central Government
Debt instruments → Reserve Bank of India (RBI)

Worked example

### Example 1

Example 1 — CAAT or CUAT? PRII pays interest on a loan it took from a foreign bank. Answer: The interest payment itself is a CUAT (income/expense flow). Repayment of the loan principal — which reduces the liability — is a CAAT.

### Example 2

Example 2 — Hawala: A person hands over INR to a hawala operator in India in exchange for the operator's associate paying out USD in Dubai to create a foreign asset. Answer: This is expressly prohibited — entering a financial transaction in India as consideration to acquire/create an asset outside India.

### Example 3

Example 3 — Default rule: A new type of CAAT not yet listed in the Regulations is proposed. Answer: It is prohibited, because the default for CAAT is "prohibited unless permitted."

### Example 4

Example 4 — Default rule: A new CUAT not specifically mentioned in Schedules I/II/III. Answer: It is freely permitted, because the default for CUAT is "permitted unless prohibited."

⚠️ Common exam mistakes

Swapping the default rules — CAAT is prohibited unless permitted; CUAT is permitted unless prohibited.
Classifying loan principal repayment as a CUAT — it alters a liability, so it is a CAAT.
Treating all interest payments as CAAT — interest is income/expense, hence a CUAT.
Forgetting that hawala transactions are expressly prohibited even if the underlying objective seems innocuous.
Believing RBI alone regulates all CAATs — debt instruments are with RBI, but non-debt instruments are with the Central Government.
Dealing in forex with an unauthorised person assuming small amounts are exempt — every dealing must be via an authorised person.

Reference: Sections 3, 5 and 6 — FEMA, 1999

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Regulation & Management of Foreign Exchange — General Prohibitions and Classification

Worked example

⚠️ Common exam mistakes