Finance | April – June 2023

Regulatory Updates

RBI Framework for Acceptance of Green Deposits

The RBI has introduced guidelines on 11 April 2023 (effective from 1 June 2023) to encourage regulated entities (viz., scheduled commercial banks excluding regional rural banks, local area banks and payments banks and all registered deposit taking non-banking financial companies including housing finance companies) (“REs”) to offer green deposits to help augment the flow of credit to green activities/projects and to protect depositors’ interest.

‘Green deposit’ as per these guidelines, means an INR denominated interest-bearing cumulative/non-cumulative deposit, received by the RE for a fixed period, and the proceeds of which are earmarked for being allocated towards ‘green finance’. Lending to and/or investing in specific sectors identified under the guidelines (such as renewable energy, energy efficiency and clean transportation) have been considered as ‘green finance’ until finalisation of an official Indian green taxonomy. Some key features of the framework are as follows:

The tenor, size, interest rate and other terms and conditions (as applicable to the REs) in the Master Direction – Reserve Bank of India (Interest Rate on Deposits) Directions, 2016 dated 3 March 2016, Master Direction – Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016 dated 25 August 2016 and Master Direction – Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021 dated 17 February 2021, as amended from time to time, shall apply to green deposits mutatis mutandis;

Adoption by the REs of board-approved policy on green deposits covering details of issuance and allocation and board-approved Financing Framework covering eligible activities/projects, process for project evaluation, reporting, third-party verification/assurance etc. The policy and framework are required to be published on the website of the REs;

Annual third-party verification/ assurance with respect to allocation of funds and impact assessment by REs basis impact indicators with the help of external firms;

Review report to be placed before an RE’s board within 3 months of end of financial year, with details of amounts raised, list of green activities/projects with amounts allocated to them, third-party verification/ assurance report and impact assessment report; and

Disclosures by REs in financial statements regarding portfolio-level use of green deposits as per format.

Draft Circular on Fair Lending Practices – Penal Charges in Loan Accounts

The RBI has released a draft circular dated 12 April 2023, with directions to ensure penal interest imposed by regulated entities (“REs”) is fair and not used as a revenue enhancement tool. However, credit cards under product specific directions would be exempted from such directions.

Some of the key instructions include the following: (a) REs shall not introduce any additional component to rate of interest; (b) Penalty charged for default/non-compliance with loan agreements shall be treated as ‘penal charges’ and not ‘penal interest’; (c) Capitalisation of penal charges accrued has been disallowed. However, change in credit risk premium included in rate of interest as per contracted terms based on change in the borrower’s credit risk profile is permissible; (d) Quantum of penal charges should be proportional to defaults beyond a threshold (determined by REs in a non-discriminatory manner); (e) Clear disclosure by REs to customers on penal charges in addition to publication on their website; and (f) REs shall have a Board approved policy on penal charges or similar charges on loans.

LEI requirement for listed non-convertible securities, securitized debt instruments and security receipts

SEBI vide its circular dated 3 May 2023 has mandated issuers who have listed and/or propose to list non-convertible securities, securitized debt instruments and security receipts (“Listed Instruments”) to obtain and report the legal entity identifier (“LEI”) code. The requirements are summarized below:

Issuer having any outstanding Listed Instruments as on 31 August 2023 – LEI code to be reported or obtained and reported on or before 1 September 2023.

Issuers proposing to issue and list any Listed Instruments on or after 1 September 2023 – LEI code to be reported at the time of allotment of International Securities Identification Numbering (ISIN).

The reporting database for non-convertible securities is the centralized database of corporate bonds and for securitized debt instruments and security receipts is the depositories.

Amendment to the Master Direction on KYC – Instructions on Wire Transfer

The RBI has amended the Master Direction on know your customer (“KYC”) requirements on 4 May 2023, introducing the requirement of accompaniment of: (a) cross-border wire transfers; (b) domestic wire transfers where the originator is an account holder of the ordering regulated entity (“RE”); and (c) domestic wire transfers of INR 50,000 and above where the originator is not an account holder of the ordering RE, with specified originator and beneficiary information. Transfers between financial institutions and certain transactions carried out using credit cards, debit cards and prepaid payment instruments are exempted.

The amendment also imposes obligations on originator, intermediary and beneficiary REs, and Money Transfer Service Schemes providers, including in respect of wire transfers having the required originator and beneficiary information, taking reasonable measures to identify transfers lacking required originator/beneficiary information and reporting suspicious transactions. In addition to such requirements, REs have further obligation with respect to unregulated entities, name screening and record management requirements.

Additional disclosure requirements for Issuers of transition bonds

SEBI has, vide its circular dated 4 May 2023, notified with immediate effect, additional disclosure requirements for issuers of transition bonds to facilitate transparency and informed decision making amongst investors. Transition bonds are a category of green debt securities under the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 which comprise of funds raised for transitioning to a more sustainable form of operations.

Under the circular, an issuer desirous of issuing transition bonds is required to make additional disclosures such as: (a) Use of a denotation ‘GB-T’ in the offer document, on the cover page and in type of instrument field in the term sheet; (b) Disclosure of transition plan in the offer document, containing details of interim targets/milestones of emission reduction along with an indicative timeline for achieving the targets, brief of the project implementation strategy, details of usage of technology for project implementation and mechanism to oversee utilization of funds etc; (c) Disclosure in the centralized database for corporate bonds/debentures by filling the denotation, i.e., GB-T under ‘Type of Instrument’; (d) Disclosure to stock exchanges, of revision in the transition plan with explanation; and (e) Disclosure of transition plan and progress in the annual report of issuer.

Cessation of US Dollar LIBOR and MIFOR

RBI vide its notification dated 12 May 2023 notified banks and financial institutions to implement systems for a complete transition from London Interbank Offered Rate (“LIBOR”) with effect from 1 July 2023. Read with the notification dated 8 July 2021, RBI has announced that after 30 June 2023, the remaining five US dollar LIBOR settings and the LIBOR reliant – Mumbai Interbank Forward Outright Rate (“MIFOR”) benchmark, will no longer be published. Synthetic LIBOR settings may continue to be published temporarily but cannot be used in new financial contracts.

Banks and financial institutions have been advised not to enter into new transactions using US dollar LIBOR or MIFOR and to promptly insert fallback clauses in remaining legacy contracts referencing LIBOR/MIFOR. Going forward, widely accepted alternative reference rates should be adopted by institutions.

RBI Framework for Compromise Settlement and Technical Write-offs

RBI, vide circular dated 8 June 2023 to all regulated entities (“REs”), has issued a comprehensive unified framework governing compromise settlements and technical write-offs (“Settlement Framework”). The Settlement Framework is applicable to all REs to which the circular is addressed and is without prejudice to the Prudential Framework for Resolution of Stressed Assets dated 7 June 2019 (“June 7 Circular”) or any other guidelines applicable to the REs on resolution of stressed assets.

The Settlement Framework inter alia sets out the following requirements:

REs should have board approved policies on compromise settlements and technical write-offs, which need to lay down the process to be followed, with specific guidance on the necessary conditions precedent such as minimum ageing, deterioration in collateral value etc.

Board approved policies to cover delegation powers for sanction of compromise settlements and technical write-offs.

There shall be a reporting mechanism to the next higher authority, at least on quarterly basis, for compromise settlements and technical write offs approved by a particular authority. Approval by an MD & CEO / board level committee, should be reported to the board.

Compromise settlements where the time for payment of settlement amount exceeds 3 months will be considered as restructuring under the June 7 Circular.

Except farm credits exposures, REs will have a cooling period of at least 12 months before assuming fresh exposures to borrowers subject to compromise settlement. Cooling period for technical write-offs will be as per board approved policies.

REs may undertake compromise settlements or technical write-offs in respect of wilful defaulter / fraud accounts without prejudice to the criminal proceeding underway against such debtors.

Mandatory issuance of units of AIFs in dematerialized form

SEBI has issued a circular on 21 June 2023 stipulating specific requirements in connection with dematerialization of units of alternative investment funds (“AIFs”). This is pursuant to the SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2023, notified on 15 June 2023, which introduced the requirement of issuance of units by AIFs in dematerialized form subject to conditions specified by SEBI from time to time. The timelines for dematerialization are as follows:

Schemes of AIFs with corpus ≥ INR 5 billion: Dematerialization of all the units issued latest by 31 October 2023 and issuance of units shall be only in dematerialized form from 1 November 2023 onwards.

Schemes of AIFs with corpus < INR 5 billion: Dematerialization of all the units issued latest by 30 April 2024 and issuance of units only in dematerialized form from 1 May 2024 onwards.

Key outcomes of SEBI’s board meeting dated 28 June 2023

In its recent board meeting on 28 June 2023, SEBI approved key decisions to strengthen the securities market and improve investor experience, including the following:

Listing of subsequent issue of non-convertible debt securities: SEBI has approved the amendment to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, requiring listed entities with outstanding listed non-convertible debentures (“NCDs”) as of 31 December 2023 to list subsequent issuances of NCDs at the stock exchange(s), starting from 1 January 2024, with certain exceptions.

Voluntary listing of unlisted NCDs: An entity with listed debt securities but having unlisted NCDs outstanding on 31 December 2023 can list them voluntarily.

Voluntary delisting of non-convertible debt securities: Entities can delist listed debt securities, subject to certain requirements including approval from all holders of debt securities, suitable disclosures to stock exchanges etc. Entities having privately placed, listed debt securities with less than 200 security holders can opt for such delisting.

Strengthening SEBI Complaint Redress System (SCORES): SEBI approved the proposal to revamp SCORES by: (a) reducing timelines for complaint resolution, introducing auto-routing of complaints to concerned regulated entities and auto-escalation for non-adherence to prescribed timelines; (b) recognising designated bodies for monitoring and handling of investor grievances against the respective regulated entities; (c) providing two levels of review (first review by the designated body and then by SEBI); (d) linking SCORES with the Online Dispute resolution platform; and (e) creation of new portal for market intelligence inputs.

For more information contact:

Jhinook Roy
Practice Head – Finance
jhinook.roy@veritaslegal.in

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