Appointment of debenture trustee’s nominee on boards/governing bodies of non-company issuers
Regulation 23(6) of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations 2021 (“NCS Regulations”), obligates an issuer which is a company under the Companies Act, 2013 to ensure that its articles of association require its board of directors to appoint the person nominated by the debenture trustee as a director in terms of Regulation 15(1)(e) of SEBI (Debenture Trustees) Regulations, 1993 (“DT Regulations”).
Given that similar provisions did not exist for issuers which are not companies, SEBI issued a circular on 4 July 2023 obligating issuers which are not companies, to submit an undertaking to their debenture trustee that in case of occurrence of events listed in Regulation 15(1)(e) of DT Regulations, a non-executive or independent director or trustee or member of its governing body shall be designated as nominee director for the purposes of Regulation 23(6) of NCS Regulations, in consultation with the debenture trustee(s).
These changes are also reflected in the Master Circular for Debenture Trustees dated 31 March 2023 (updated as of 6 July 2023) and the Master Circular for issue and listing of Non-convertible Securities, Securitised Debt Instruments, Security Receipts, Municipal Debt Securities and Commercial Paper, dated 19 August 2021 (updated as of 7 July 2023).
Further, it has been clarified that in relation to InvITs and REITs, the requirement shall be provided in the articles of association of their investment managers/managers.
New disclosure requirements for issuance of listed non-convertible securities
On 6 July 2023, SEBI notified the SEBI (Issue and Listing of Non-Convertible Securities) (Second Amendment) Regulations, 2023 (“NCS Amendment Regulations”) to amend the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021. The key aspects of the amendments are as follows:
- The concepts of General Information Document (“GID”) and Key Information Document (“KID”) have been introduced vide Regulation 50A of Chapter VA, which are to be filed by a listed entity seeking to list their non-convertible securities on any recognized stock exchange to reduce the paperwork earlier required to be filed by listed entities.
- The GID shall serve as the comprehensive document through which listed entities shall be required to make prescribed disclosures. During the validity period of a GID (one year of first offer thereunder), if the listed entity wishes to issue subsequent or second offers of non-convertible securities, it shall only be required to issue a KID.
- The disclosure requirements introduced under Regulation 50A shall be applicable on a ‘comply or explain’ basis until 31 March 2024 and on a mandatory basis thereafter.
- The NCS Amendment Regulations have replaced Schedule I (Disclosures for Public Issue of Debt Securities and Non-Convertible Redeemable Preference Shares) and Schedule II (Disclosures for Private Placement of Non-Convertible Securities) of the NCS Regulations with a single Schedule I (Disclosures for Issue of Securities) which seeks to create a common disclosure form for both public and private issuances.
LEI disclosure to Designated Depository Participant mandatory for non-individual FPIs
Presently, Foreign Portfolio Investors (“FPIs”) are required to provide details in relation to Legal Entity Identifier (“LEI”) in the common application form, used for registration, Know Your Customer (“KYC”), and account opening of FPIs to their Designated Depository Participant (“DDP”) on a voluntary basis.
SEBI vide its circular dated 27 July 2023, has mandated for all non-individual FPIs to disclose LEI details to their DDP. All existing FPIs are mandated to do so within 180 days from the date of this circular, failing which their account shall be blocked for further purchase until the LEI is provided to the DDP.
Additionally, FPIs are required to ensure that their LEI is active at all times. Any FPI whose LEI has lapsed/expired will also be blocked from purchasing in the securities market until the LEI code is renewed.
Requirement of Incremental CRR and its discontinuance
As per section 42(1) of the Reserve Bank of India Act, 1934 (“RBI Act”), all Scheduled Banks are required to maintain with the Reserve Bank of India a cash reserve ratio (“CRR”) of 4.5% of Net Demand and Time Liabilities (“NDTL”).
RBI vide the notification dated 10 August 2023, directed all Scheduled Banks, to maintain with the RBI, effective from 12 August 2023, an incremental CRR of 10% on the increase in NDTL between 19 May 2023 and 28 July 2023.
By a notification dated 8 September 2023, the RBI decided to discontinue the incremental CRR in a phased manner and by 7 October 2023, the incremental CRR will be nil.
Revised Regulatory Framework for Infrastructure Debt Fund-NBFCs
RBI issued a circular dated 18 August 2023, introducing an updated regulatory framework for Infrastructure Debt Fund-Non-Banking Financial Companies (“IDF-NBFCs”). Some key provisions of the revised regulatory framework are highlighted below:
- An IDF-NBFC is now, in addition to being able to refinance operational projects that have completed at least one year of satisfactory commercial operations, also permitted to finance Toll Operate Transfer (“TOT“) projects as the direct lender.
- IDF-NBFCs are obligated to maintain a minimum net owned fund of INR 300 million and a capital-to-risk weighted assets ratio of at least 15%, with a minimum tier 1 capital of 10%.
- In addition to bonds, IDF-NBFCs can raise funds through external commercial borrowings (except from foreign branches of Indian banks) with a minimum tenor of five years.
- Exposure limits for IDF-NBFCs are set at 30% of their tier 1 capital for a single borrower/party and 50% of their tier 1 capital for a single group of borrowers/parties.
- The earlier requirement of sponsorship of an IDF-NBFC by a bank or an NBFC-Infrastructure Finance Company (“NBFC-IFC”) has now been withdrawn. Shareholders of IDF-NBFCs shall be subjected to scrutiny as applicable to other NBFCs, including NBFC-IFCs.
- The earlier requirement of entering into a tripartite agreement with the concessionaire and project authority for investments in the public private partnership infrastructure projects, has been made optional.
- All other regulatory norms including income recognition, asset classification and provisioning norms as applicable to NBFC-IFCs shall be applicable to IDF-NBFCs.
- NBFCs will now be eligible to sponsor Infrastructure Debt Fund-Mutual Funds (IDF-MFs) with prior approval of the RBI subject to the conditions stipulated under the revised regulatory framework.
Fair Lending Practice – Penal charges in Loan accounts
By a circular dated 18 August 2023, RBI has issued instructions to all Commercial Banks, Primary (Urban) Co-operative Banks, Non-banking Financial Companies and All India Financial Institutions (collectively, “REs”) to adopt the following for charging penal interests, or charges on loans:
- Penalty charged for non-compliance with the loan contract shall be treated as ‘penal charges’ and not ‘penal interest’. Penal charges will not be capitalised. RE shall not introduce any additional component to the rate of interest.
- REs shall formulate a board approved policy on penal charges or similar charges on loans. Penal charges in loans sanctioned to individual borrowers, for purposes other than business shall not be higher than the penal charges applicable to non-individual borrowers.
- REs to clearly disclose the quantum and reason for penal charges and display the same on REs’ website under ‘Interest rates and Service Charges’.
- These instructions shall come into effect from 1 January 2024. REs may carry out appropriate revisions in their policy framework and ensure implementation of the instructions in respect of all the fresh loans availed/ renewed from the effective date. In the case of existing loans, the switchover to the new penal charges regime shall be ensured on the next review or renewal date or six months from the effective date of these instructions, whichever is earlier.
Mandatory listing of subsequent issuances of NCDs and new voluntary delisting provisions
SEBI has notified the SEBI (Listing Obligations and Disclosure Requirements) (Third Amendment) Regulations, 2023 on 23 August 2023 and SEBI (Listing Obligations and Disclosure Requirements) (Fourth Amendment) Regulations, 2023 on 19 September 2023. The key aspects of these amendments are:
- Listing of subsequent issuances of NCDs: A listed entity, whose non-convertible debt securities (“NCDs”) are listed, shall list all NCDs proposed to be issued on or after 1 January 2024 on the stock exchanges. A listed entity whose subsequent issues of unlisted NCDs made on or before 31 December 2023 are outstanding on the said date, may list such securities. A listed entity proposing to list the NCDs on the stock exchanges on or after 1 January 2024 shall list all outstanding unlisted NCDs previously issued on or after such date within 3 months of listing of the proposed NCDs. However, these requirements do not apply to (a) bonds issued under Section 54EC of the Income Tax Act, 1961; (b) NCDs issued pursuant to an agreement between the listed entity and multilateral institutions; (c) NCDs issued pursuant to an order of any court, tribunal, or regulatory requirement stipulated by SEBI, RBI, Insurance Regulatory and Development Authority of India or Pension Fund and Regulatory Development Authority.
- Voluntary delisting of non-convertible securities: Provisions for voluntary delisting of all listed NCDs or non-convertible redeemable preference shares (collectively “NCS”) have been introduced. Exceptions include (a) listed entity with outstanding listed NCS issued by way of public issue; (b) listed entity with more than 200 security holders excluding qualified institutional buyers; (c) NCS delisted by stock exchange due to penalties or other regulatory actions; (d) NCS delisted pursuant to the redemption of such securities; and (e) NCS delisted pursuant to resolution plan of the Insolvency and Bankruptcy Code, 2016. The amendment also introduces the process and considerations for such de-listing.
Amendments in the regulatory framework for NBFCs regarding penal charges and interest rates
In addition to the changes brought to the regulatory framework for Infrastructure Debt Fund – Non-Banking Financial Companies as set out above, the RBI has also amended the Master Direction – Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016, the Master Direction – Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 and the Master Direction – Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021, on 29 August 2023, in respect of penal charges and interest rates.
- Penal charges in Loan account: Same as the instructions issued under circular dated 18 August 2023, regarding fair lending practice – penal charges in loan accounts.
- Reset of Floating interest rate on EMI based personal loans: A policy framework is to be put in place by an NBFC for: (a) Clear communication to the borrowers about the impact of change in benchmark interest rate on loan leading to change in EMI and/or tenor or both. (b) Borrower’s option to switch over to fixed rate at the time of interest reset. (c) Borrower’s option for enhancement in EMI or elongation of tenor, or a combination of both; and to prepay, in part or fully, at any point during the tenor of the loan. (d) Transparent disclosure by NBFC of all cost incidental to above options in the sanction letter and at the time of revision of charges. (e) Extension by NBFC of instructions related to EMI and equated instalment-based loans of different periodicity, to existing loans by 31 December 2023.
Additional anti-money laundering measures specified by IFSCA
International Financial Services Centres Authority (“IFSCA“) via a circular dated 31 August 2023 has specified additional anti-money laundering measures under the IFSCA (Anti Money Laundering, Counter-Terrorist Financing and Know Your Customer) Guidelines, 2022 to be complied with by regulated entities:
- The requirement of including information relating to cross-border wire transfers by a bank (as an ordering institution) which was earlier applicable to cross-border wire transfers exceeding USD 1,000, now applies to cross-border wire transfers equal to USD 1,000. Further, the threshold for banks to include information of cross-border transfers bundled in a batch file which was USD 1,000 has now been removed.
- A bank acting as an intermediary institution is required to take reasonable measures consistent with straight through processing, to identify cross-border wire transfers that lack the required information as per the guidelines.
New format of Abridged Prospectus for public issues of non-convertible securities
SEBI vide its circular dated 4 September 2023 revised the format of abridged prospectus required to be filed by an issuer at the time of listing non-convertible securities, to simplify and provide greater clarity and consistency in the disclosures across various documents.
As per the revised format, the issuer/ merchant banker shall:
- disclose requisite details including type of instrument, base size, face value etc. on the front page of the abridged prospectus.
- insert a Quick Response (QR) code on the last page of the abridged prospectus.
- ensure that qualitative statements in the abridged prospectus shall be substantiated with quantitative factors.
- on their website: (a) publish instructions to investors for completing the application form as specified and (b) make available a copy of the abridged prospectus.
Revised Master Directions on Classification, Valuation, and Operation of Investment Portfolio of Commercial Banks
On 12 September 2023, the RBI issued a revised Master Directions on Classification, Valuation and Operation of Investment Portfolio of Commercial Banks, 2023 (“Directions”). The revised Directions will be applicable from 1 April 2024 to all Commercial Banks excluding Regional Rural Banks. The Directions include principle-based classification of investment portfolio, inclusion of non-statutory liquidity ratio securities in held to maturity securities subject to fulfilment of certain conditions, and symmetric recognition of gains and losses.
The Directions have also provided specific accounting treatment for transition from the erstwhile framework to the revised framework for smooth implementation.
New Prudential Regulations for All India Financial Institutions
RBI has notified the Reserve Bank of India (Prudential Regulations on Basel III Capital Framework, Exposure Norms, Significant Investments, Classification, Valuation and Operation of Investment Portfolio Norms and Resource Raising Norms for All India Financial Institutions) Directions, 2023 (“Directions“), which shall come into effect from 1 April 2024. These are applicable to All-India Financial Institutions (AIFIs) governed by RBI such as the Export-Import Bank of India (EXIM Bank), the National Bank for Agriculture and Rural Development (NABARD), the National Bank for Financing Infrastructure and Development (NaBFID), the National Housing Bank (NHB) and the Small Industries Development Bank of India (SIDBI).
The Directions seek to consolidate older guidelines which governed exposure norms, classification, valuation, and operation of investment portfolios. Amongst others, these include the responsibility of the AIFIs for implementation of the three pillars of the Basel III Regulation System, provisions on ‘Central Counterparty’, and ‘Counter-party Credit Risk’.
NCLT rejects inter-se ranking of charges amongst secured financial creditors
Pursuant to separate applications filed under section 60(5) of the Insolvency and Bankruptcy Code, 2016 (“IBC“) by PTC India Financial Services Ltd and Indo Unique Flame Limited, in State Bank of India v. Varam Bioenergy Private Limited (corporate debtor), the NCLT observed that Section 53(1) of IBC does not recognize any pre-CIRP (corporate insolvency resolution process) inter-se ranking of charges among the financial creditors of a corporate debtor, for the distribution of sale proceeds during liquidation.
It was further observed that Section 53(2) of IBC clarifies that any contractual arrangement between the recipients under Section 53(1) with equal ranking, which disrupts the order of priority thereunder, must be disregarded.
Further, Section 53(1) of IBC very clearly defines the classes and the order of the waterfall mechanism without any scope for adding any other sub-classes. Consequently, the NCLT directed the liquidator to re-calculate and redistribute the sale proceeds to all the secured financial creditors of the corporate debtor by putting them on the same pedestal irrespective of the priority of their charge on the assets of the corporate debtor.
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