Finance | October – December 2024

Regulatory Updates

Implementation of Credit Information Reporting Mechanism after cancellation of licence or Certificate of Registration

On 10 October 2024, the Reserve Bank of India (“RBI“) issued a circular addressing the credit information reporting mechanism for entities whose license or Certificate of Registration (“CoR“) has been cancelled. Under the Credit Information Companies (Regulation) Act, 2005 (“CICRA“), only Credit Institutions (“CIs“) can provide credit information to Credit Information Companies (“CICs“). Once a CI’s license or CoR is cancelled by the RBI, it can no longer be considered a CI, and its credit information will not be accepted by CICs, even if borrowers continue to make payments. This results in repayment history of borrowers of these entities not being updated even if these borrowers continue to repay/ clear their dues.

To address this, the RBI has mandated that CIs, whose licence or CoR has been cancelled, continue to report credit information for borrowers on-boarded before the cancellation, until the earlier of completion of loan lifecycle or winding up of the CI. They will retain access to Credit Information Reports (“CIR“) for these borrowers. Additionally, CICs must tag these institutions as “License Cancelled Entities” in the CIR and are prohibited from charging annual or membership fees. These provisions, applicable to entities whose licenses were cancelled before the circular as well, must be implemented within six months.

Due diligence in relation to non-resident guarantees availed by persons resident in India

RBI has come across instances of guarantees (including standby letters of credit and / or performance guarantees) issued by persons resident outside India, favouring persons resident in India, which are not permitted under the extant FEMA regulations.

RBI vide circular dated 4 October 2024 has advised AD Category-I banks to ensure that guarantee contracts advised by them to, or on behalf of, their resident constituents are in accordance with the FEMA regulations and the contents of this circular may be brought to the notice of AD Category-1 banks constituents.

Amendments to the Scale-Based Regulations for NBFCs

RBI has amended the Master Direction – (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 (“Scale-Based Directions“) on 10 October 2024.

The amendments incorporate the directions of RBI issued vide the circulars dated 19 December 2023 and 27 March 2024, to regulated entities, regarding investments in alternative investment funds. Further, the Scale-Based Directions now require non-banking financial companies to comply with key facts statement for loans & advances. With effect from 1 January 2025, credit information companies (“CICs“) and credit institutions (“CIs“) are required to keep the credit information collected/maintained by them updated regularly on a fortnightly basis or at such shorter intervals as mutually agreed upon between the CI and the CIC.

Amendments to the regulatory framework for Core Investment Companies

RBI has revised the Master Direction – Core Investment Companies (Reserve Bank) Directions, 2016 (“CIC Master Directions“) on 11 October 2024.

The CIC Master Directions have been revised to provide for the regulatory structure for NBFCs now comprising of four layers – base layer, middle layer, upper layer and top layer, wherein core investment companies (“CICs“) shall only be included in middle layer or the upper layer. Regulatory instructions applicable to middle layer of CICs shall automatically be applicable to CICs residing in higher layers, unless stated otherwise. These amendments incorporate the requirements of the Scale-based Regulations into the CIC Master Directions, clarifying their applicability to CICs.

In addition, compliance with Internal Capital Adequacy Assessment Process (ICAAP) as prescribed by RBI, clarifications regarding investment by CICs in alternative investment funds (pursuant to the circulars issued by the RBI on 19 December 2023 and 27 March 2024, to regulated entities), and guidelines on compensation on key managerial personnel and senior management of CICs, have been introduced.

Introduction of liquidity window facility for investors in listed debt securities

To address the issue of liquidity for investors and facilitate a wider investor base in the corporate bond market, SEBI vide circular dated 16 October 2024 introduced guidelines for a liquidity window facility (“LWF“) which allows investors holding listed debt securities to sell them back to the issuer using a put option on pre-specific dates or intervals.

The LWF is optional and can be provided by issuers only for prospective issuances of debt securities that are to be listed either through a public issue process or via private placement, starting from 1 November 2024.

Some of the key features and conditions governing the LWF are as follows:

Authorizations and guardrails such as prior approval of the board of Directors of the Issuers for the LWF and the implementation and outcome of LWF to be monitored by the Stakeholders Relationship Committee, where applicable.

Issuer shall provide LWF one year after the date of the issuance of the debt securities and reissuances shall not be permitted under the international securities identification numbers (ISINs) in which LWF was offered, further, these ISINs will be exempt from the ISIN limit count for debt securities.

Issuers can specify whether the LWF will be available to all investors or to only retail investors.

A minimum 10% of the total issue size of debt securities by number, will be eligible for exercise of the put option and the issuer may also set sub-limits of put options that may be exercised in each liquidity window, which if exceeded, the acceptance of put option from investors will be on a proportionate basis.

The issuer will designate a stock exchange for operating the LWF, where the liquidity window will be kept open for 3 working days.

Debt securities will be valued on ‘T-1’ day, where T is the first day of liquidity window. Amounts payable to the investor shall not be at a discount of more than 100 basis points on the valuation arrived plus accrued interest. The payments are to be made to investors within one working day of the window closing and the settlement process will be completed on ‘T+4’ day.

Mitigation of Greenwashing risk in ESG labelled debt securities in the IFSC

International Financial Services Centres Authority (“IFSCA”), vide circular dated 21 November 2024, has outlined principles to mitigate the risk of greenwashing in ESG-labelled debt securities within the International Financial Services Centre (“IFSC”). IFSCA emphasised on the increasing concern of ‘Greenwashing’, a deceptive practice where issuers make unsubstantiated, false, misleading or exaggerated claims about the sustainability benefits of their projects.

The above circular inter alia sets out the following principles for the issuers of ESG-labelled debt securities:

Issuers should not use terms like “Green,” “Social,” “Sustainability,” “Sustainability-linked,” or similar labels unless aligned with a framework recognized by IFSCA. The offer document and marketing materials must clearly explain the alignment with the chosen framework and the specific environmental or social objectives.

The offer document must include a statement on ESG objectives, details of evaluation and selection process, proposed use of proceeds, and systems for tracking the deployment of proceeds in accordance with the IFSCA (Listing) Regulations, 2024. Disclosures should avoid generic statements and enable investors to fully understand investment screening criteria.

Issuers shall outline procedures to ensure funds are directed solely for the projects with disclosure of internal controls. A detailed allocation plan should be disclosed, along with the environmental impact of temporary investments made with unallocated proceeds.

Issuers must quantify the negative externalities of ESG debt utilization, such as residual environmental impacts or potential risks linked to financed projects. They must disclose any limitations or trade-offs in the environmental benefits and provide comprehensive, verifiable environmental data.

Issuers must continuously monitor and disclose the environmental impact of financed projects, including metrics for reducing adverse impacts and progress towards sustainability goals. Disclosures should include a list of projects, amounts allocated, expected impacts, and, where feasible, quantitative performance measures of the ESG impact.

Stock exchanges in IFSC will monitor initial and ongoing disclosures and if warranted, they will seek clarifications from issuers. Any potential or actual cases of greenwashing will be analysed and brought to the attention of IFSCA requiring appropriate action under the regulatory framework.

Submission of information to Credit Information Companies (CICs) by Asset Reconstruction Companies

RBI vide circular dated 25 November 2010 on ‘Submission of information to Credit Information Companies’, asset reconstruction companies (“ARC(s)“) had been advised to become a member of at least one CIC. To align these guidelines with the guidelines applicable to banks and NBFCs and with a view to maintain a track of borrowers’ credit history after transfer of loans by banks and NBFCs to ARCs, these guidelines have been revised by notification dated 10 October 2024.

ARCs shall become members of all CICs and submit the requisite data to CICs as per the Uniform Credit Reporting Format prescribed by RBI. ARCs shall keep the information collected/ maintained by them, updated regularly on a fortnightly basis or at such shorter intervals as mutually agreed between the ARC and the CIC.

ARCs shall rectify the rejected data received from CICs and upload the same with the CICs within 7 days of receipt of such data. ARCs shall have a standard operating procedure in place for CIC related matters which shall, inter alia, include best practices such as provision of requisite customer information by ARCs to CICs, regular updation of records submitted by ARCs to CICs, appointment of nodal officers for dealing with CICs and giving top priority to customer grievance redressal especially in respect of complaints relating to updation/ alteration of credit information.

ARCs should abide by the period stipulated under the Credit Information Companies (Regulation) Act, 2005 and the rules and regulations framed thereunder in respect of updation, alteration of credit information, resolving disputes, etc.

These guidelines are applicable to all ARCs which are required to put in place systems and processes to ensure compliance with these guidelines latest by 1 January 2025.

Reduction in the Cash Reserve Ratio by the RBI

RBI, vide a notification dated 6 December 2024, has decided to reduce the Cash Reserve Ratio (“CRR“) for all banks. The CRR shall be reduced by 50 basis points. This reduction will occur in two equal tranches of 25 basis points each, bringing the CRR to 4.0% of net demand and time liabilities (“NDTL“). Consequently, banks will be required to maintain the CRR at 4.25% of their NDTL from the reporting fortnight commencing 14 December 2024, and at 4.00% of their NDTL from the reporting fortnight commencing 28 December 2024.

Classification of Corporate Debt Market Development Fund (CDMDF) as Category I AIF

SEBI, vide circular dated 13 December 2024, provided clarity regarding the classification of the Corporate Debt Market Development Fund (“CDMDF”). The CDMDF has been established under Chapter III-C SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) to act as a backstop facility for the purchase of investment-grade corporate debt securities. Its primary objective is to instil confidence among participants in the corporate debt market during times of financial stress and to enhance secondary market liquidity. While Chapter III-C of the AIF Regulations provides a separate framework for CDMDF, its broader economic purpose aligns with the development of the corporate bond market and its role as a Backstop Facility during periods of market distress. SEBI has clarified that the fund is classified as a Category I AIF under the AIF Regulations. The classification provides much-needed clarity to stakeholders and reinforces the role of CDMDF as a significant institutional mechanism for corporate debt market development.

UPI access for Prepaid Payment Instruments through third-party applications

On 27 December 2024, RBI issued a circular under the Payment and Settlement Systems Act, 2007 enabling prepaid payment instruments (“PPIs“) holders to make unified payments interface (“UPI“) payments through third-party applications. Previously, UPI payments from / to PPIs could only be made using the PPI issuer’s mobile application. This new policy allows full Know Your Customer (“KYC“) PPIs to be linked to third-party UPI applications, allowing PPI holders to make or receive payments through these apps.

The circular mandates that PPIs be linked to their issuer’s UPI handle and authenticated using existing PPI credentials. Additionally, PPIs can be discovered on third-party UPI apps and linked to the app’s Payment Service Provider (“PSP“) handle. UPI transactions from third-party apps will be authenticated using UPI credentials. This update aligns with the amended Master Directions on PPIs and aims to expand UPI access for PPI holders, enhancing payment flexibility.

Allowing subscription to Non-Convertible Securities during trading window closure period

As per Clause 4(3)(b) of Schedule B, read with Regulation 9(1) of the SEBI (Prohibition of Insider Trading) Regulations, 2015, the trading window restrictions do not apply to certain transactions like warrant or debenture conversions, rights issues, further public issues, preferential allotments, buy-back offers, open offers, or delisting offers. On 30 December 2024, SEBI issued a circular allowing subscription to the issue of non-convertible securities during the trading window closure period, in addition to previously specified transactions.

The circular takes effect immediately, issued under SEBI’s powers to protect investors and regulate the securities market.

Case Summaries

Supreme Court orders liquidation of Jet Airways & advances reform in the Insolvency & Bankruptcy Code

In the matter of State Bank of India and Ors. vs. The Consortium of Mr. Murari Lal Jalan and Mr. Florian Fritsch and Anr., the 3-judge bench of the Hon’ble Supreme Court ordered the liquidation of Jet Airways. Additionally, the Court highlighted certain shortcomings in the Insolvency & Bankruptcy Code, 2016 (“Code”) and made significant recommendations. It suggested that the committee of creditors must record reasons for approving or rejecting a resolution plan to ensure clarity for the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT). It suggested that an oversight committee should be established for better enforcement of IBBI guidelines. It emphasized that NCLTs should document the next steps for implementation of the resolution plan to ensure timely execution. It also directed NCLTs and NCLAT to adjudicate matters promptly, adhering to timelines and addressing urgent listings. The Court raised concerns about the infrastructure of NCLTs and NCLAT, calling for the appointment of more members to address case backlogs. Additionally, it warned against the practice of NCLTs and NCLAT granting relaxations to resolution applicants from the requirement of strict compliance with resolution plans (including timelines), urging tribunals not to exercise their judicial discretion in a way which makes the Code lose its effectiveness.

For more information contact:

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

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