Finance | July – September 2024

Regulatory Updates

Reduction in denomination of debt securities and non-convertible redeemable preference shares

SEBI has, vide circular dated 3 July 2024, amended Chapter V (Denomination of issuance and trading of non-convertible securities) of the Master Circular for Issue and Listing of Non-convertible Securities, Securitised Debt Instruments, Security Receipts, Municipal Debt Securities and Commercial Paper dated 22 May 2024 (“NCS Master Circular”), lowering the minimum ticket size of investments in these securities. The amendments are applicable to all issues of debt securities and non-convertible redeemable preference shares on private placement basis, proposed to be listed from 3 July 2024.

Debt securities or non-convertible redeemable preference shares on a private placement basis can now be issued at a face value of INR 10,000, subject to the certain conditions, such as:

• The issuer must appoint at least one merchant banker, with roles and responsibilities similar to those for a public issue.

• The debt security or non-convertible redeemable preference share must be interest/dividend bearing security paying coupon/dividend at regular intervals with a fixed maturity without any structured obligations.

Further, credit enhancements such as guaranteed bonds, partially guaranteed bonds, standby letter of credit backed securities, will be permitted for such securities.

The circular also provides that for shelf placement memorandum or general information documents (GID) which is valid as on the effective date of the circular, the issuer may raise funds through tranche placement memorandum or key information document (KID) at a face value of INR 10,000, provided at least one merchant banker is appointed to carry out due diligence in respect of such issuances.

Clause 2.3 of Chapter V of the NCS Master Circular, has also been modified to provide that all trading lot of listed debt securities / non-convertible redeemable preference share issued on private placement basis, which are traded on a stock exchange or over the counter will always be equal to the face value.

RBI Directions on Fraud Risk Management in Commercial Banks (including Regional Rural Banks) and All India Financial Institutions

RBI has issued Master Directions on Fraud Risk Management in Commercial Banks (including Regional Rural Banks) and All India Financial Institutions, dated 15 July 2024 (“FRM in CBs and AIFIs – Master Directions“), which supersede the ‘Master Circular on Frauds – Classification and Reporting by commercial banks and select FIs’ dated 1 July 2016.

Key provisions of the FRM in CBs and AIFIs – Master Directions are as follows:

Requirement of a board approved policy on fraud risk management providing roles and responsibilities of board / senior management of banks and institutions.

Such policy shall be reviewed by the board at least once in 3 years, or as more frequently prescribed by the board.

Banks and financial institutions shall constitute a committee of board known as ‘Special Committee of the Board for Monitoring and Follow-Up of cases of Frauds’ to oversee the effectiveness of fraud risk management by such entity.

Banks and financial institutions are required to have a framework for Early Warning Signals (EWS) and Red Flagging of Accounts (RFA) under an overall fraud risk management policy approved by their board of directors.

The FRM in CBs and AIFIs – Master Directions also require the Cooperative Banks to put in place a transparent mechanism to ensure that whistle blower complaints on possible fraud cases / suspicious activities in account(s) are examined and concluded appropriately under their whistle blower policy.

Further, banks and financial institutions are required to monitor activities in credit facility / loan account / other banking transactions and remain alert on activities which could potentially turn out to be fraudulent. In cases there is a suspicion of fraudulent activity in case of credit facility / loan account (i.e. a red flag account), banks and financial institutions shall use an external / internal audit for further investigation. The loan agreement with borrowers are required to contain clauses for conduct of such audit at the behest of lender(s). Where such audit report remains inconclusive or is delayed due to non-cooperation by the borrower, banks / financial institutions shall conclude on status of the account as a fraud or otherwise basis material available.

Persons or entities classified as fraud along with their associated entities and persons, shall be debarred from raising funds and / or seeking additional credit facilities from financial entities regulated by RBI, for a period of 5 years from the date of full repayment of the defrauded amount / settlement amount agreed upon in case of a compromise settlement.

The FRM in CBs and AIFIs – Master Directions also provide for a reporting mechanism for reporting offences to different authorities such as the law enforcement agencies, RBI, etc.

Note that similar directions have been issued for cooperative banks on 15 July 2024.

RBI Directions on Fraud Risk Management in Non-Banking Financial Companies

The RBI has issued Master Directions on Fraud Risk Management in Non-Banking Financial Companies (“NBFCs“) dated 15 July 2024 (“FRM in NBFCs – Master Directions“), superseding the earlier ‘Master Directions on Monitoring of Frauds in NBFCs’ dated 29 September 2016. These Master Directions apply to all NBFCs (including housing finance companies) in the upper layer, middle layer and base layer (with asset size of INR 5 billion and above).

NBFCs are required to establish a framework to identify early warning signals and monitor the same. NBFCs are also required to conduct an audit of suspicious activities and conduct audit through external or internal auditors for further investigation, in accordance with their approved policy.

NBFCs are required to report any fraudulent activity within 14 days to the RBI. Persons or entities classified and reported as fraud by NBFCs and also entities and persons associated with such entities, shall be debarred from raising of funds and / or seeking additional credit facilities from financial entities regulated by RBI, for a period of 5 years from the date of full repayment of the defrauded amount or settlement amount agreed upon in case of a compromise settlement.

RBI has also provided for having effective mechanisms in place to ensure that whistle blower complaints are addressed properly and encourages NBFCs to adopt a board approved policy for fraud risk management. The FRM in NBFCs – Master Directions also provide for establishment of a special board committee to oversee the effectiveness of fraud risk management in NBFCs.

RBI Circular on the revised Domestic Money Transfer Framework

The RBI has, vide notification dated 24 July 2024, revised the framework in relation to Domestic Money Transfer (“DMT”) with effect from 1 November 2024. The key amendments under the updated framework are:

Cash Pay-out Service: The remitting bank should obtain and keep a record of the name and address of the beneficiary.

Cash Pay-in Service: Remitting banks / Business Correspondents (“BCs“) should register the remitter based on a verified cell phone number and a self-certified Officially Valid Document (OVD) in accordance with the RBI’s ‘Master Direction – Know Your Customer (KYC) Direction, 2016’. Every transaction by a remitter is required to be validated by an additional factor of authentication. Further, the remitter bank is required to include remitter details as part of the IMPS / NEFT transaction message and the transaction message shall include an identifier to identify the fund transfer as a cash-based remittance.

The guidelines on card-to-card transfer are excluded from the purview of the DMT framework and shall be governed under the guidelines issued or approval granted for such instruments.

Revised Ceiling limit for Urban Cooperative Banks – Finance against Shares and Debentures

The RBI has, vide notification dated 25 July 2024, revised the ceiling of bank finance against the security of shares and debentures for Primary (Urban) Co-operative Banks (“UCBs“), with effect from 1 January 2025. Under the erstwhile provisions, the aggregate of all loans against the security of shares and debentures were required to be within the overall ceiling of 20% of the owned funds for the UCBs. However, after the notification being effective, the ceiling of 20% would be linked to Tier 1 capital of the concerned bank, as on 31 March of the previous financial year.

RBI’s Circular on Prudential Treatment of Bad and Doubtful Debt Reserve by Co-operative Banks

The RBI has, vide notification dated 2 August 2024, issued revised instructions for bringing uniformity in the treatment of Bad and Doubtful Debt Reserve (“BDDR“) for prudential purposes by co-operative banks. Under these instructions, with effect from FY 2024-25, all provisions as per Income Recognition, Asset Classification and Provisioning (IRACP) norms, whether accounted for under the head ‘BDDR’ or any other head of account, shall be charged as an expense to the Profit and Loss (P&L) account in the accounting period in which they are recognised.

After charging all applicable provisions as per IRACP norms and other extant regulations to the P&L account, co-operative banks may make any appropriations of net profits below the line to BDDR, if required as per the applicable statutes or otherwise.

Amendments to the Non-Banking Financial Company – P2P Lending Directions

The RBI has, vide its notification dated 16 August 2024, issued amendments (“Amendment Directions“) to the Master Direction for Non-Banking Financial Company – Peer to Peer Lending Platform (NBFC-P2P Lending Platform) Directions, 2017 (“2017 Directions“). The NBFC-P2P Lending Platform acts as an intermediary providing online marketplace / platform to the participants involved in peer-to-peer lending. The 2017 Directions aimed to regulate the functioning of NBFC-P2P Lending Platforms, imposing restrictions to protect lenders and borrowers.

However, it was observed that some of NBFC-P2P Lending Platforms had adopted certain practices (such as improper fund transfer mechanisms, misleading promotions, unauthorized deposit taking) which were violative of the 2017 Directions.

The RBI has issued the Amendment Directions to address these violations, with some key changes as follows:

Credit Risk: NBFC-P2P shall not bear any credit risk, directly or indirectly arising out of transactions carried out on its platform, with the lenders bearing all risk of loss of principal and interest. These platforms are now required to disclose to lenders that the lenders must bear all credit risks. Additionally, these platforms are restricted from cross-selling insurance products that function as credit enhancements/guarantee.

Clarification on Escrow Accounts: Funds managed through escrow accounts on NBFC-P2P Platforms are required to be now remitted within 1 business day of receipt (T+1) in the escrow account.

Lender/borrower matching as pre-condition: No loan shall now be disbursed, unless the lenders and borrowers have been matched/mapped as per NBFC-P2P’s board approved policy, in addition to the existing requirement of all concerned participants having signed the loan contract.

Enhanced Disclosure Requirements: Apart from public disclosure of portfolio performance and NPAs, the NBPC-P2P Platforms are now required to disclose losses borne by the lenders on principal and interest.

Restriction on use of lender funds: An NBFC-P2P shall not deploy lenders’ funds in any manner other than as specified in the 2017 Directions, as amended.

Disclosure of fee charged: NBFC-P2P is required to disclose fee to be charged (as a fixed amount / proportion of principal amount) at the time of lending itself.

The modifications to the Master Directions take effect immediately, except for the modification to the ‘T+1’ criteria for escrow funds which will take effect 90 days after the notification.

New Regulations for listing of Debt Securities on recognised stock exchanges in IFSCs

The International Financial Services Centres Authority (“IFSCA“) has, vide notification dated 20 August 2024, notified the IFSCA (Listing) Regulations, 2024 (“Listing Regulations”), establishing the rules for listing of specified securities, debt securities, depository receipts and other permitted financial products on recognised stock exchanges in the International Financial Services Centres in India (“IFSCs“).

The securities and other permitted financial products listed or proposed to be listed on a recognised stock exchange shall be freely transferable and held in dematerialised form.

The Listing Regulations also provide for general eligibility criteria of an issuer to list its securities or any other permitted financial product, being: (a) the issuer is incorporated or set up either in an IFSC or in India or in a foreign jurisdiction, in accordance with laws of its home jurisdiction; (b) the issuer operates in conformity with its constitution; and (c) the issuer is eligible to issue such securities or other financial products, proposed to be listed on the recognised stock exchange, in conformity with laws of its home jurisdiction.

The Listing Regulations inter alia provide for public offer of specified securities (initial public offer and follow-on public offer), listing of specified securities without public offer, listing of specified securities already listed in other jurisdiction, listing of special purpose acquisition companies (SPAC), rights issue, preferential issue and qualified institutional placement, listing of depository receipts and listing of debt securities. For many of these listings, IFSCA will prescribe further norms.

One of the key requirements under the Listing Regulations for issuers of debt securities is that they must obtain a credit rating from an agency registered with either IFSCA or a foreign jurisdiction’s regulator.

Reduction in timelines for listing of debt securities and non- convertible redeemable preference shares for public issues

SEBI has, vide circular dated 26 September 2024 (“Circular“), reduced the timeline for listing of debt securities and non-convertible redeemable preference shares for public issues, from T+6 working days to T+3 working days.

Additionally, the listing timeline of T+3 working days has been introduced as an option to issuers for a period of 1 year and on a permanent basis thereafter. Therefore, during the period of voluntary applicability of the listing timeline of T+3 working days, Regulation 37 (2) of SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (requiring issuers to refund the application moneys in an event of failure to list securities within specified timelines) shall become applicable only after T+6 working days, even in cases where the issuer has chosen T+3 working days as the listing timeline but fails to meet the same. The provisions of the Circular shall be applicable: (a) on a voluntary basis to public issues opening on or after 1 November 2024; and (b) mandatorily for public issues opening on or after 1 November 2025.

For more information contact:

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

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