Authorised Persons (Sections 10 to 12)

Every foreign-exchange transaction that an ordinary resident lawfully enters — buying dollars for a holiday, remitting fees to a foreign university, receiving inward FDI — passes through an intermediary the statute calls an authorised person. Sections 10 to 12 of the Foreign Exchange Management Act, 1999 build the entire apparatus of this intermediation: Section 10 creates the licence and its conditions, Section 11 arms the Reserve Bank with the power to direct and to fine, and Section 12 gives the regulator a window into the books. Read together, these three sections convert the soft, facilitative philosophy of FEMA into a hard supervisory grid. This chapter unpacks each sub-section, traces the obligations cast on authorised persons, and grounds the discussion in verified Supreme Court authority on civil liability, corporate prosecution and the binding force of Reserve Bank permission.

Where Sections 10 to 12 sit in the scheme of FEMA

The Foreign Exchange Management Act, 1999 replaced the draconian, criminalising Foreign Exchange Regulation Act, 1973 with a regime built on management rather than prohibition. As traced in our note on the FERA-to-FEMA transition, the shift was from “everything is forbidden unless permitted” to “everything is permitted unless restricted.” But a liberalised regime still needs gatekeepers, and Chapter III of the Act — Sections 10, 11 and 12 — supplies them.

Section 3 of the Act prohibits any person from dealing in or transferring foreign exchange except through an authorised person, and Section 8 obliges residents to repatriate and surrender foreign exchange. Those prohibitions would be unworkable without a licensed channel through which lawful dealings flow. Sections 10 to 12 are that channel. Section 10 is the gateway — it tells us who may deal, on what terms, and how the licence is lost. Section 11 is the steering wheel — it lets the Reserve Bank direct authorised persons and penalise disobedience. Section 12 is the audit lens — it permits inspection of the authorised person's business. The architecture mirrors the wider design of regulation of foreign exchange dealings under Sections 3 to 9, where the authorised person is the recurring conduit.

Who is an “authorised person”? The Section 2(c) definition

Although the operative provisions are in Sections 10 to 12, the term itself is defined in Section 2(c) of the Act. An authorised person means an authorised dealer, money changer, off-shore banking unit or any other person for the time being authorised under sub-section (1) of Section 10 to deal in foreign exchange or foreign securities. The definition is deliberately open-ended — “any other person … in any manner” — so that the Reserve Bank can create new categories as markets evolve, without the Act needing amendment each time.

In practice the Reserve Bank has carved authorised persons into tiers: Authorised Dealer Category-I (banks that may handle the full range of current and capital account transactions), Category-II (selected co-operative and regional rural banks and other entities permitted a limited menu of non-trade current account transactions), Category-III (select financial institutions for specified transactions), Full-Fledged Money Changers (entities permitted to buy and sell foreign currency notes, coins and travellers' cheques) and off-shore banking units. The categorisation flows from the Reserve Bank's powers under Section 10(1) and is administered through regulations and master directions. For a fuller treatment of the foundational vocabulary, see our note on definitions under FEMA.

Section 10(1) and 10(2): the licence and its conditions

Section 10(1) is the enabling clause. It provides that the Reserve Bank may, on an application made to it, authorise any person to be known as an authorised person to deal in foreign exchange or foreign securities, as an authorised dealer, money changer or off-shore banking unit, or in any other manner as it deems fit. Two features deserve emphasis. First, authorisation is discretionary — the word is “may,” not “shall” — so there is no right to be made an authorised person; an applicant who meets eligibility norms has, at best, a legitimate expectation of fair consideration. Second, the power is the Reserve Bank's alone, reinforcing its position as the apex foreign-exchange regulator.

Section 10(2) requires that an authorisation under sub-section (1) be in writing and be subject to the conditions laid down therein. The written instrument is therefore the source of the authorised person's powers and the measure of their limits: an authorised dealer who exceeds the scope of its licence — say, by undertaking a capital account transaction it was never authorised to handle — acts outside Section 10 altogether and exposes itself to action. The conditional nature of the licence is the hinge on which the revocation power in Section 10(3) and 10(4) turns.

Revocation under Section 10(3) and 10(4): public interest and breach

The Act supplies two distinct routes to revocation. Section 10(3) allows the Reserve Bank to revoke an authorisation at any time if it is satisfied that it is in the public interest to do so, or that the authorised person has failed to comply with the conditions subject to which the authorisation was granted, or has contravened any provision of the Act, rule, regulation, notification, direction or order made thereunder. Section 10(4) is the audi alteram partem safeguard: no authorisation shall be revoked on the ground of non-compliance with conditions or contravention unless the authorised person has been given a reasonable opportunity of making a representation in the matter.

The structure is significant for exam answers. Revocation in the public interest under the first limb of Section 10(3) is not, on the statute's face, hedged by the mandatory hearing in Section 10(4) — the proviso for a representation attaches specifically to revocation grounded on breach or contravention. In practice, however, the constitutional command of natural justice under Article 14 and the law laid down in Maneka Gandhi v. Union of India would ordinarily require a hearing even where the statute is silent, because revocation visits serious civil consequences on a licensee. The safe position for an aspirant is to state the statutory distinction and then add that fairness will usually demand a hearing regardless.

Section 10(5): the due-diligence duty of the authorised person

Section 10(5) casts the most important operational obligation. Before undertaking any transaction in foreign exchange on behalf of any person, the authorised person must require that person to make such declaration and to give such information as will reasonably satisfy the authorised person that the transaction will not involve, and is not designed for the purpose of, any contravention or evasion of the provisions of the Act or of any rule, regulation, notification, direction or order made thereunder. Where the customer refuses to comply with such a requirement, or makes only unsatisfactory compliance, the authorised person shall refuse in writing to undertake the transaction.

This converts the authorised person into a front-line compliance officer for the State. The duty is one of reasonable satisfaction — the standard is not strict insurance against every illegality but honest, diligent scrutiny of declarations. It is this provision that underlies the familiar Form A1/A2 declarations and the “purpose code” discipline that any resident remitting money abroad will recognise. The obligation dovetails with the controls on current account transactions under Section 5, because it is the authorised person who polices whether a remittance falls within a permitted current account purpose or strays into restricted territory.

Section 10(6): the duty to report a suspected contravention

Section 10(6) completes the gatekeeping chain. If, on the customer's refusal or unsatisfactory compliance under sub-section (5), the authorised person has reason to believe that any contravention or evasion is contemplated by that person, the authorised person shall report the matter to the Reserve Bank. The provision is the statutory ancestor of the modern suspicious-transaction reporting culture: a refusal to transact is not enough where the refusal is itself a flag of attempted illegality; the authorised person must escalate.

Read together, Sections 10(5) and 10(6) impose a graduated duty — first verify, then refuse if not satisfied, then report if illegality is suspected. The breach of these duties is itself a contravention attracting penalty under Section 13 and, where directions have been given, under Section 11(3). The authorised person is thus simultaneously a service provider to its customer and a deputised arm of the regulator, a dual role that the Supreme Court has repeatedly recognised when construing the obligations of banks dealing in foreign exchange.

Civil obligation, not crime: Director of Enforcement v. MCTM Corporation

The character of liability for breach of foreign-exchange obligations — including the obligations of authorised persons — was authoritatively settled in Director of Enforcement v. MCTM Corporation (P) Ltd., reported at (1996) 2 SCC 471 (also AIR 1996 SC 1100). The Supreme Court held that contravention of the foreign-exchange law attracts a penalty for breach of a civil obligation, and that it is not necessary to establish a guilty mind or mens rea as in a criminal prosecution. The adjudication proceedings, the Court explained, are adjudicatory and civil in nature; the adjudicating officer imposes a penalty for breach of a civil obligation laid down under the Act, not a sentence for the commission of a crime.

Although MCTM Corporation arose under the predecessor Foreign Exchange Regulation Act, its reasoning carries directly into FEMA, whose scheme is even more emphatically civil and management-oriented. For authorised persons this is consequential: an authorised person who, in breach of Section 10(5), undertakes a transaction without obtaining the requisite declaration cannot defend the resulting penalty by pleading absence of dishonest intent. The breach of the statutory duty is enough. This civil-penalty character also explains why proceedings against authorised persons proceed by way of adjudication under Section 13 rather than criminal trial.

Section 11(1) and 11(2): the Reserve Bank's power to direct and to call for information

Section 11 is the command channel between regulator and intermediary. Section 11(1) empowers the Reserve Bank, for the purpose of securing compliance with the Act and the rules, regulations, notifications and directions made under it, to give to authorised persons any direction in regard to the making of payment or the doing of, or desisting from, any act relating to foreign exchange or foreign security. Section 11(2) is narrower and information-focused: the Reserve Bank may direct any authorised person to furnish such information, in such manner, as it deems fit, for the purpose of ensuring compliance.

The breadth of Section 11(1) is the engine behind the Reserve Bank's vast body of A.P. (DIR Series) circulars and master directions. These instruments — on liberalised remittance, on money-changing activities, on export and import of currency — derive their binding force on authorised persons from Section 11. Crucially, a direction under Section 11 binds only authorised persons; it is not, by itself, subordinate legislation binding the world at large. That is why the careful analyst distinguishes a regulation made under Section 47 (which binds everyone) from a direction under Section 11 (which binds the intermediary). The general supervisory primacy of the Reserve Bank over the institutions it regulates was affirmed long ago in Joseph Kuruvilla Vellukunnel v. Reserve Bank of India, AIR 1962 SC 1371, where the Court upheld the wide statutory powers Parliament had conferred on the central bank and its accountability to the public interest.

Section 11(3): penalty for disobedient authorised persons

Section 11(3) gives the directing power teeth. Where an authorised person contravenes any direction given by the Reserve Bank under the Act, or fails to file any return as directed by the Reserve Bank, the Reserve Bank may, after giving the authorised person a reasonable opportunity of being heard, impose a penalty which may extend to ten thousand rupees and, in the case of a continuing contravention, an additional penalty which may extend to two thousand rupees for every day during which the contravention continues.

Two points are worth flagging for exams. First, the Section 11(3) penalty is the Reserve Bank's own disciplinary power over its licensees, distinct from the adjudicating-authority penalty under Section 13 (which can reach up to thrice the sum involved where quantifiable, or up to two lakh rupees otherwise). An authorised person who breaches a Section 11 direction can therefore face both a Section 11(3) penalty from the Reserve Bank and, where the conduct also contravenes the Act, a Section 13 adjudication. Second, the “reasonable opportunity of being heard” in Section 11(3) is a statutory codification of natural justice, mirroring the safeguard in Section 10(4) on revocation. The civil-penalty logic of MCTM Corporation applies here too: no mens rea need be shown for a Section 11(3) penalty.

Section 12: the Reserve Bank's power to inspect

Section 12 supplies the audit lens. Section 12(1) provides that the Reserve Bank may, at any time, cause an inspection to be made by any officer specially authorised in writing of the business of any authorised person, as may appear necessary or expedient for the purpose of (a) verifying the correctness of any statement, information or particulars furnished to the Reserve Bank; (b) obtaining any information or particulars which the authorised person has failed to furnish on being called upon to do so; or (c) securing compliance with the provisions of the Act or the rules, regulations, directions or orders made thereunder.

Section 12(2) casts a correlative duty: it shall be the duty of every authorised person, and where the authorised person is a company or firm, of every director, partner or other officer of that company or firm, to produce to the inspecting officer such books, accounts and other documents in his custody or power and to furnish any statement or information relating to the affairs of the authorised person as the officer may require, within such time and in such manner as the officer may direct. The inspection power is preventive and supervisory rather than penal; it is the means by which the Reserve Bank verifies whether the gatekeeping duties of Section 10(5) and 10(6) and the directions under Section 11 are actually being honoured at the counter.

Directors and officers: corporate liability of authorised persons

Most authorised persons are banks and companies, so the question of who answers for a contravention is practically central. Section 12(2) already names directors, partners and officers as duty-bearers for inspection. On prosecution and penalty, the leading authority is Standard Chartered Bank v. Directorate of Enforcement, (2005) 4 SCC 530 (also AIR 2005 SC 2622). A Constitution Bench, by majority, held that a company is not immune from prosecution merely because the punishment prescribed includes mandatory imprisonment; since a company cannot be imprisoned, the court may impose the fine that the provision also prescribes. The decision dismantled the argument that corporate bodies escape liability where the penal clause speaks of imprisonment-and-fine.

For authorised persons the lesson is that a bank or money-changing company cannot shelter behind its corporate form to avoid foreign-exchange liability; the entity itself is answerable, and its directors and officers carry the statutory duties of production and disclosure under Section 12(2). When read alongside the civil-obligation principle in MCTM Corporation, the position is stark: the corporate authorised person bears liability without proof of a guilty mind, and its officers cannot disclaim the inspection and reporting duties the statute fastens on them personally.

The reach of Reserve Bank permission: LIC v. Escorts

The authorised-person framework operates inside a larger truth about FEMA: lawful foreign-exchange dealings frequently turn on Reserve Bank permission, and that permission, once validly granted, governs the rights of third parties. The classic illustration is Life Insurance Corporation of India v. Escorts Ltd., (1986) 1 SCC 264 (also AIR 1986 SC 1370). Although decided under the Foreign Exchange Regulation Act, the Supreme Court's reasoning is instructive: once the Reserve Bank had granted permission for the acquisition of shares by non-resident investors, a company could not refuse to register the transfer on the plea that the permission ought not to have been granted. The validity of the regulator's permission was not for the private party to second-guess.

The principle resonates through the authorised-person regime. When an authorised dealer processes an inward investment or a remittance backed by Reserve Bank permission or general permission under the regulations, third parties dealing with that transaction cannot collaterally attack the regulator's clearance. This stabilises commercial expectations and underscores why the authorised person's role — verifying that a transaction is permitted before executing it under Section 10(5) — is so load-bearing. The same logic informs the controls on capital account transactions under Section 6, where Reserve Bank permission is often the very thing the authorised person must confirm.

Transition and enforcement continuity under Section 49

Because Sections 10 to 12 descend from a FERA lineage, the continuity of enforcement across the repeal matters. In First Global Stockbroking (P) Ltd. v. Anil Rishiraj, 2023 SCC OnLine SC 1199, the Supreme Court held that an Enforcement Officer appointed under the repealed FERA remained competent to file a complaint for FERA offences during the two-year sunset window preserved by Section 49(3) of FEMA. The Court refused to read the transitional provision so as to render the enforcement machinery otiose during the changeover.

For our purposes the case confirms that the duties and liabilities of authorised persons did not evaporate on FERA's repeal; conduct during the sunset period remained actionable, and the supervisory architecture carried over seamlessly into FEMA's Sections 10 to 12. The decision is a useful citation whenever an answer needs to address the temporal scope of FEMA enforcement or the survival of pre-2000 contraventions. For the broader story of how obligations on holders of foreign exchange survived the transition, see our note on holding of foreign exchange.

Exam strategy: how to write Sections 10 to 12

In judiciary and CLAT-PG answers, marks accrue to candidates who present Sections 10 to 12 as an integrated supervisory cycle rather than three isolated provisions. The recommended structure is: (1) define the authorised person via Section 2(c); (2) explain authorisation and conditions under Section 10(1)-(2); (3) set out revocation under Section 10(3)-(4), flagging the natural-justice safeguard; (4) describe the gatekeeping duties under Section 10(5)-(6); (5) move to the Reserve Bank's power to direct and penalise under Section 11; and (6) close with the inspection power under Section 12.

Reinforce the prose with the four verified authorities: MCTM Corporation for the civil-obligation, no-mens rea principle; Standard Chartered Bank for corporate liability; LIC v. Escorts for the conclusiveness of Reserve Bank permission; and First Global Stockbroking for enforcement continuity across the FERA-FEMA transition. A high-scoring answer will end by tying the sections back to the Act's purpose — facilitating external trade and payments while orderly developing the foreign-exchange market — and to the central place of the authorised person in our note on the FEMA notes hub.