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Finance | January – March 2024

Regulatory Updates

Review of the NBFC credit/ investment concentration norms

In order to ensure uniformity and consistency in computation of concentration norms among Non- Banking Financial Companies (“NBFC“), the Reserve Bank of India has, vide, notification dated 15 January 2024, carried out a review of the extant concentration norms. The key points highlighted are as follows:

  • NBFC – Middle Layer – Computation of exposures: RBI has now permitted the exposures of NBFC- Middle Layer to be offset with the following credit risk transfer instruments: (a) Cash margin/ caution money/ security deposit held as collateral on behalf of the borrower against the advances for which right to set off is available; (b) Central Government guaranteed claims which attract zero per cent risk weight for capital computation; (c) State Government guaranteed claims which attract twenty per cent risk weight for capital computation; and (d) Guarantees issued under the Credit Guarantee Schemes of Credit Guarantee Fund Trust for Micro and Small Enterprises, Credit Risk Guarantee Fund Trust for Low Income Housing and individual schemes under National Credit Guarantee Trustee Company Ltd. Provided that to be eligible as a credit risk transfer instrument, guarantees shall be direct, explicit, irrevocable and unconditional.
  • NBFC- Middle Layer – Exempted exposures: In addition to the exposures already exempted, the exposures listed below shall also be exempt: (a) Exposure to the Government of India (“GOI“) and State Governments which are eligible for zero percent risk weight under capital regulations applicable to NBFCs; and (b) Exposure where the principal and interest are fully guaranteed by the GOI.
  • NBFC- Base Layer: NBFC- Base Layer shall have in place an internal board approved policy for credit/ investment concentration limits for both single borrower/ party and single group of borrowers/ parties. Additionally, computation of exposure shall be on similar lines as that for NBFC- Middle Layer.
  • NBFC- Upper Layer: It has been clarified that, to be eligible as a credit risk transfer instrument, guarantees shall be direct, explicit, irrevocable and unconditional.

Revised instructions on inoperative accounts/ unclaimed deposits

The Reserve Bank of India, vide notification dated 1 January 2024, has, (i) as a measure to assist the account holders and with a view to consolidate and rationalise the extant instructions on inoperative accounts; and (ii) compliment the ongoing efforts to reduce the quantum of unclaimed deposits in the banking system and return such deposits to their rightful claimants, issued comprehensive guidelines on the measures to be put in place by the banks covering various aspects, including but not limited to, classifying accounts and deposits as inoperative accounts and unclaimed deposits, periodic review of such accounts and deposits, measures to prevent fraud in such accounts/ deposits, grievance redressal mechanism for expeditious resolution of complaints, etc.

Increase in ceiling of fixed remuneration of non-executive directors in private banks

With effect from 9 February 2024, the ceiling in respect of remuneration of non-executive directors has been revised from INR 2 million per annum to INR 3 million per annum. This revised ceiling is applicable to all the private sector banks including small finance banks and payment banks and the wholly owned subsidiaries of foreign banks. This step was taken with the view of recognizing pivotal role of non-executive directors and aiming to attract qualified individuals to board positions in banks. As was the position before the notification, the private sector banks still must seek regulatory approval regarding remuneration to part-time chairman as per the Banking Regulation Act, 1949. Annual financial statements of banks must disclose the remuneration paid to the director, at least, on an annual basis.

Clarifications regarding investments in AIFs by Regulated Entities

On 27 March 2024, RBI has issued clarification in relation to investment by Commercial Banks, Non-Banking Financial Companies, Co-operative Banks, and All-India Financial Companies (collectively “REs”) in Alternative Investment Funds (“AIFs”) in respect of its earlier circular dated 19 December 2023. REs are prohibited to make investments in any schemes of AIFs which has downstream investment directly or indirectly in a debtor company to which RE has or previously had a loan or investment exposure anytime during the preceding 12 months.

It has been clarified that downstream investment excludes investment in equity shares of the debtor company but shall include all other investments, including investment in hybrid instruments. Further, 100% provisioning of investments shall be required only to the extent of investment by the RE in the AIF scheme which is further invested by the AIF in the debtor company, and not the entire investment of RE in the AIF scheme. Investment by REs in the subordinated units of any AIF scheme with a ‘priority distribution model’ shall be subject to full deduction from RE’s capital funds only if the AIF does not have any downstream investment in a debtor company of the RE. It is further clarified that the investments by REs in AIFs through intermediaries such as fund of funds or mutual funds is not prohibited.

Omnibus framework for recognising SROs for REs

In view of the potential role of Self-Regulatory Organisations in strengthening compliance culture among their members and also providing a consultative platform for policy making, RBI has issued omnibus framework for recognising self-regulatory organisations (“SROs”) for Regulated Entities (“REs”) of the RBI. The framework lays down broad objectives, functions, eligibility criteria and governance standards, which will be common for all SROs, irrespective of the sector along with broad membership criteria to be followed by the SROs for grant of recognition by the RBI. The SRO is expected to adhere to a set of overarching objectives for betterment of the sector they represent, foster advancement and address critical industry concerns within the broader financial system. SRO shall frame a code of conduct to be followed by its members and monitor adherence to the code as well as compliance with the regulatory instructions by its members. The SRO shall keep the RBI regularly informed of the developments in the sector. It shall also promptly inform the RBI about any violation by its member of the provision of the acts or the rules/ guidelines/ regulations/ directions issued by the RBI, that comes to its notice and act as a bridge between the REs and the RBI.

Amendment to the master direction on prepaid payment instruments

The RBI has, on 23 February 2024, vide amendment to the Master Direction on Prepaid Payment Instruments decided to permit authorised banks and non-bank pre-paid instrument (“PPI“) issuers to issue PPIs for making payments across various public transport systems such as metro, buses, rail & waterways, tolls and parking. Some of the features of these PPIs are as follows: (a) The PPIs are reloadable in nature; (b) The PPIs can be issued without know- your customer verification of the holders; (c) The amount outstanding in such PPIs shall not exceed INR 3,000; (d) The PPIs will have perpetual validity; and (e) No cash withdrawal, refund or fund transfer will be permitted in such PPIs.

Master Direction on Commercial Paper and Non-convertible Debentures of original or initial maturity up to one year

On 3 January 2024, RBI issued the Master Directions (Commercial Paper and Non-Convertible Debentures of Original or Initial Maturity up to One Year) 2024 (“Master Directions”). The Master Directions shall come into effect from 1 April 2024, and they shall supersede the Master Direction on Money Market Instruments: Call/Notice Money Market, Commercial Paper, Certificates of Deposit and Non-Convertible Debentures (original maturity up to one year), 2016 and the Reserve Bank Commercial Paper Directions, 2017.

Under the Master Directions, commercial paper(s) (“CPs”) is defined as an unsecured money market instrument issued in the form of a promissory note. Additionally, non-convertible debenture(s) (“NCDs”) refers to a secured money market instrument with an original or initial maturity up to one year. CPs and NCDs can only be issued by such entities who have not defaulted on any of their fund-based facilities availed from banks, NBFCs, and All India Financial Institutions (“AIFIs“). In addition to companies, they can also be issued by AIFIs, Infrastructure Investment Trusts (“InvITs“), Real Estate Investment Trusts (“REITs“), and any other body corporate statutorily permitted to incur debt or issue debt instruments in India with minimum net-worth of INR 1 billion.

The Master Directions have also laid down the conditions around eligibility of investors, allowing all residents, and non-residents who are permitted to invest in CPs and NCDs under the Foreign Exchange Management Act, 1999, to invest in such instruments. However, no person is permitted to invest in such instruments issued by a related party. CPs and NCDs shall be issued in a dematerialised form, and they shall be issued in minimum denomination of INR 5 lakh and in multiples of INR 5 lakh thereafter. The tenor of a CP shall not be less than seven days or more than one year and of an NCD shall not be less than ninety days or more than one year. Furthermore, instruments cannot be issued with an attached call or put option.

The issuance of such instruments continues to have credit rating requirements. Further, an updated set of disclosures is required to be made at the time of issuance and reporting requirements have also been prescribed. The RBI has also prescribed a timeline of 4 days for completion of funding and issuance of such instruments, to be calculated from the date on which the trade details, including price/rate are agreed by the issuer and the investor(s). Furthermore, an Issuing and Paying Agent is now required to be appointed for each issue of NCDs or CPs. Similarly, each NCD issuance is required to have a debenture trustee in line with the requirement of debenture trustee for issuance of secured NCDs.

The total subscription by all individuals in any primary issuance of NCDs and CPs is restricted to 25% of the total amount issued. The Master Directions now permit the trading of such instruments on recognised stock exchanges (as approved by RBI) in addition to trading on Over-the-Counter markets.

Earlier, in case of non-bank entities (including corporates) providing guarantees for credit enhancement of NCDs and CPs issued by a group entity, the guarantor was required to have a credit rating at least one notch higher than the issuer. This requirement has now been removed under the Master Directions. Additionally, NCDs have now been brought to par with CPs in the terms of the consequence of repayment defaults. Issuers are restricted from accessing the market of the relevant instrument for 6 months from the date of such default. Further, the Master Directions now require all default details to be publicly disseminated on F-TRAC platform and on the website of the issuer.

Amendment to the Master Direction – Credit Card and Debit Card – Issuance and Conduct Directions, 2022

On 7 March 2024, the RBI issued the amendment to the Master Direction – Credit Card and Debit Card – Issuance and Conduct Directions, 2022 (“Amended Directions“). This amendment applies to all banks and NBFCs issuing credit cards, with the goal of enhancing regulations governing credit card issuance and conduct in India. The key objectives to the amendment include improving customer control, increasing transparency, simplifying procedures, and enhancing data protection measures.

Under the Amended Directions, card issuers shall be required to establish effective mechanisms for monitoring the end use of funds. Additionally, it has been provided that the card issuers shall not share card data (including transaction data) of the cardholders with the outsourcing partners unless sharing of such data is essential to discharge the functions assigned to the latter. In case of sharing of any data as stated above, explicit consent from the cardholder shall be obtained. It shall also be ensured that the storage and the ownership of card data remains with the card-issuer. Additionally, it has also been provided that card issuers shall not issue unsolicited credit cards and they will be required to seek prior approval from the customer before issuing a card. 

With respect to co-branding arrangements, it has been provided that the data in relation to co-branded card transactions shall be displayed on the co-branding partner’s platform with the proper security measures in place. Additionally, co-branded partners shall not have access to customer data as it will be transmitted in encrypted form by the card issuer.

Arrangements with Card Networks for issue of Credit Cards

On 6 March 2024, the RBI issued a notification which instructed credit card providers to offer customers the choice of selecting from various card networks, prohibiting them from engaging in exclusive agreements with any single network for issuing credit cards. Card issuers and card networks shall ensure that the above requirements are met with respect to fresh agreements executed with new customers and existing agreements at the time of amendment or renewal.

Master Direction – Reserve Bank of India (Bharat Bill Payment System) Directions, 2024

On 29 February 2024, the Master Directions on Bharat Bill Payment Systems (“BBPS Master Directions“) were issued by the RBI, allowing non-bank payment aggregators (“non-bank PAs“) to function as operating units inside the system. These updated guidelines, which shall take effect on 1 April 2024, supersede the previous BBPS-related guidelines.

Bharat Bill Payment System (BBPS) is an integrated bill payment platform that facilitates bill collection and payment via a variety of channels, such as bank branches and mobile apps.

In addition to non-bank PAs, participating banks in the BBPS include all scheduled commercial banks, state and district central cooperative banks, regional rural and urban cooperative banks, and other currently operating entities authorized as Bharat Bill Payment Operating Units (“BBPOUs“).

Under the BBPS Master Direction, the Bharat Bill Pay Central Unit (“BBPCU“) shall be responsible for guaranteeing the settlement of all transactions processed through NPCI Bharat Bill Limited (NBBL). It mandates that every transaction must have a BBPS reference number from the moment payment is initiated, prohibiting any funds from passing through a third-party service provider, and establish a mechanism for resolving consumer disputes.

Additionally, the Biller Operating Unit (“BOU“) is tasked with onboarding billers to the BBPS, and for ensuring that merchants adhere to due diligence requirements during the on-boarding process. On the other hand, Customer Operating Units (“COUs“) are responsible for providing customers with digital or physical interfaces, either directly or through agent institutions. The roles and responsibilities of BBPCU, BOUs and COUs are fairly similar to their respective roles under the erstwhile regime.

Under the BBPS Master Directions, non-bank BBPOU shall be required to open an escrow account with a scheduled commercial bank exclusively for BBPS transactions. Additionally, settlement must be carried out only through a single escrow account for all transactions instead of a nodal settlement account.  Thus, transactions such as the credit of funds collected from the customers/debit of funds due to billers, debit towards settlement of BBPS transactions, credit/debit of failed/disputed transactions, recovery of charges/commissions pertaining to bill payment transactions must be routed through the escrow account of COUs and BOUs.

Appointment/re-appointment of Director, MD or CEO in Asset Reconstruction Companies

As per section 3(6) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the guidelines attached to the RBI circular dated 11 October 2022, Asset Reconstruction Companies (“ARCs“) are required to obtain prior approval of the RBI for the appointment or re-appointment of any director, MD or CEO. Pursuant to this, the RBI on 27 February 2024, released a notification which prescribes the formats for furnishing the requisite information about the candidate along with an indicative list of documents to be submitted with the application. Further, ARCs are advised to submit complete applications along with duly signed annexures within 90 days before a vacancy arises or the proposed date of appointment or re-appointment. Also, the RBI may call for additional information/documents for processing the application, if required.

For more information contact:

Jhinook Roy
Practice Head – Finance

VERSED by Veritas Legal intends to provide the readers with an overview of some of the noteworthy legal developments for education / information purposes only. This newsletter should not be construed or relied on as legal advice, or to create a lawyer-client relationship. Readers should reach out to us for any specific factual or legal questions or clarifications; and are encouraged to seek legal advice before acting on any information provided herein. The enclosed information is available in the public domain and shall not be construed as dissemination of any confidential information.

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