Section 3 — Restrictions on Dealing in Foreign Exchange
# Section 3 — Dealing in Foreign Exchange
Section 3 is the first gate of FEMA. It controls who can deal in foreign exchange, with whom, and the routing of payments to/from Non-Residents. The policy: forex dealings must flow through the authorised banking channel unless RBI permits otherwise.
## The four prohibitions
No person shall, except with general or special RBI permission:
Sub-section
Restriction
Plain-English
Sec. 3(a)
Deal in or transfer forex/foreign security to a person other than an Authorised Person
Buy/sell forex only through an AD bank/money changer
Sec. 3(b)
Make any payment to / for the credit of a PROI
No payments to PROI outside permitted channels
Sec. 3(c)
Receive any payment otherwise than through an Authorised Person from / on behalf of a PROI
Inward remittances must route via AD
Sec. 3(d)
Enter into a financial transaction (BoE/PN) in India as consideration for acquisition / creation of any asset outside India
No INR-only deal in India that effectively alters assets/liabilities abroad
## Reading Sec. 3(d) carefully
Sec. 3(d) is the anti-avoidance provision. Example: if Mr. P pays ₹1 crore to Mr. Q in India, and Mr. Q's relative abroad transfers USD-denominated property to Mr. P abroad — no forex crosses borders but assets outside India are altered. This is prohibited without RBI approval.
## Who is an Authorised Person?
An Authorised Person includes:
Authorised Dealer (AD banks)
Money changer
Off-shore banking unit
Any other person authorised under Sec. 10
All forex dealings must route through these channels.
Worked example
### Example 1
Example 1 — Buying USD from a friend
Mr. A buys US $5,000 in cash from his neighbour with surplus dollars.
Answer: Violates Sec. 3(a) — forex can be acquired only from an Authorised Person.
### Example 2
Example 2 — Receiving export proceeds privately
A US buyer asks his India-based cousin to pay an Indian exporter in INR locally in lieu of export proceeds.
Answer: Violates Sec. 3(b)/(c) and 3(d). Export proceeds must come through an AD as forex.
### Example 3
Example 3 — Structured asset swap
Mr. K, PRI, pays ₹50 lakh to a Mumbai friend. The friend's brother in Singapore transfers ownership of a Singapore apartment to Mr. K.
Answer: No forex flows, but K's assets outside India increase → hit by Sec. 3(d). Requires RBI approval.
⚠️ Common exam mistakes
Thinking Sec. 3 applies only to outward remittances — it equally restricts receipts (Sec. 3(c)).
Assuming small-value or cash forex deals are outside Sec. 3 — there is no de minimis.
Missing Sec. 3(d) when the transaction is in INR within India but affects assets abroad.
Bare-Act text Section 3 · FEMA, 1999 · click to expand
Save as otherwise provided in this Act, rules or regulations made thereunder, or with the general or special permission of the Reserve Bank, no person shall — (a) deal in or transfer any foreign exchange or foreign security to any person not being an authorised person; (b) make any payment to or for the credit of any person resident outside India in any manner; (c) receive otherwise through an authorised person, any payment by order or on behalf of any person resident outside India in any manner; (d) enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person.