CCL Regulatory Update: India Edition - April 2017
India Publications, Written by Meenakshi Iyer
16/05/2017

1.0 RBI REGULATORY UPDATES & DEVELOPMENTS

1.1 NOTIFICATIONS

1.1.1 Notification to Scheduled Commercial Banks
1.1.2 Notification to Registered Asset Reconstruction Companies

1.2 PRESS RELEASES
1.2.1 Statement on Developmental and Regulatory Policies, Reserve Bank of India
1.2.2 RBI Announces Draft Guidelines on Simplified Hedging Facility for Residents and Non-Residents
1.2.3 RBI Signs Memorandum of Understanding (MoU) on “Supervisory Cooperation and Exchange of Supervisory Information” with the Royal Monetary Authority of Bhutan and Bank of Guyana
1.2.4 RBI Cancels Certificate of Four NBFCs
1.2.5 Twenty NBFCs Surrender their Certificate of Registration
1.2.6 RBI Imposes Monetary Penalty on Two Authorised Dealer Banks

2.0 SEBI REGULATORY UPDATES & DEVELOPMENTS

2.1 CIRCULARS

2.1.1 Investments by Foreign Portfolio Investors (FPIs) in Government Securities
2.1.2 Inclusion of “Derivatives on Equity shares”-IFSC
2.1.3 Review of the Framework of Position Limits for Interest Rate Futures Contracts
2.1.4 Acceptance of Central Government Securities by Clearing Corporations towards Core Settlement Guarantee Fund (SGF) Contribution by Clearing Members
2.1.5 SEBI (International Financial Services Centres) Guidelines, 2015 - IFSC Banking Units (IBUs) Acting as Trading Member or Professional Clearing Member on Stock Exchanges/Clearing Corporations in IFSC
2.1.6 Circular on Mutual Funds

2.2 PRESS RELEASE
2.2.1 SEBI Board Meeting

3.0 INDIA MARKET UPDATES

3.1 SEBI Provides Clarity on Insider Trading Norms

1.0 RESERVE BANK OF INDIA REGULATORY UPDATES & DEVELOPMENTS

1.1 Notifications

1.1.1 Notification to Scheduled Commercial Banks
• Liquidity Adjustment Facility – Repo and Reverse Repo Rates
RBI, in its First Bi-monthly Monetary Policy Statement of 6th April 2017, has decided to keep the Repo rate under the Liquidity Adjustment Facility (LAF) unchanged at 6.25 per cent. However, effective from the same date, and consequent upon the narrowing of the LAF corridor, the Reverse Repo rate under the LAF stands adjusted at 6.0 per cent.

• Marginal Standing Facility
RBI, in its First Bi-monthly Monetary Policy Statement, 2017-18 of 6th April 2017, has decided that consequent upon the narrowing of the LAF corridor, the Marginal Standing Facility (MSF) rate stands adjusted at 6.50 per cent.

• Change in Bank Rate
As announced by RBI in its First Bi-Monthly Monetary Policy Statement 2017-18 of 6th April 2017, the Bank Rate stands adjusted by 25 basis points from 6.75 per cent to 6.50 per cent with immediate effect.
All penal interest rates on shortfall in reserve requirements, which are specifically linked to the Bank Rate, stand revised.

• Setting up of IFSC Banking Units (IBUs) – Permissible activities
On 10th April 2017, RBI issued/modified certain directions, (as detailed in the circular) regarding operations of the IFSC Banking Units (IBUs) and financial institutions in IFSCs.

• Revised Prompt Corrective Action (PCA) Framework for Banks
The existing PCA framework for banks has since been revised. It will be effective from 1st April 2017 based on the financials of the banks for the year ended on 31st March 2017. As stated in the circular, the framework would be reviewed after three years.
Also stated in the circular, the PCA framework does not preclude RBI from taking any other action as it deems fit in addition to the corrective actions prescribed in the framework.

• Prudential Guidelines – Banks’ investment in units of REITs and InvITs
RBI has decided to allow banks to participate in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) within the overall ceiling of 20 per cent of their net worth permitted for direct investments in shares, convertible bonds/ debentures, units of equity-oriented mutual funds and exposures to Venture Capital Funds (VCFs) [both registered and unregistered], subject to the conditions laid down in the circular.

• Guidelines on compliance with Accounting Standard (AS) 11 [The Effects of Changes in Foreign Exchange Rates] by banks – Clarification
It was observed that banks have been recognizing gains in profit & loss account from Foreign Currency Translation Reserve (FCTR) on repatriation of accumulated profits / retained earnings from overseas branch (es) by treating the same as partial disposal under AS 11.
It is clarified by RBI that the repatriation of accumulated profits shall not be considered as disposal or partial disposal of interest in non-integral foreign operations as per AS 11 - the Effects of Changes in Foreign Exchange Rates. Accordingly, banks would not be permitted to recognise in the profit and loss account the proportionate exchange gains or losses held in the foreign currency translation reserve on repatriation of profits from overseas operations.

• Additional Provisions for Standard Advances at Higher than the Prescribed Rates
RBI has advised that the existing provisioning rates prescribed by it are the regulatory minimum and banks are encouraged to make provisions at higher rates in respect of advances to stressed sectors of the economy. With a view to ensure that banks have adequate provisions for loans and advances at all times, RBI has advised banks thus:
a. Banks would need to put in place a Board–approved policy for making provisions for standard assets at rates higher than the regulatory minimum, based on evaluation of risk and stress in various sectors.
b. The policy must be reviewed, every quarter to gauge the performance of various sectors of the economy to which the bank has an exposure to evaluate the present and emerging risks and stress therein. The review may include quantitative and qualitative aspects like debt-equity ratio, interest coverage ratio, profit margins, ratings upgrade to downgrade ratio, sectoral non-performing assets/stressed assets, industry performance and outlook, legal/ regulatory issues faced by the sector, etc. The reviews may also include sector specific parameters.
c. As the telecom sector is reporting stressed financial conditions, and as interest coverage ratio for the sector at present is less than one, Board of Directors of the banks have been advised to review the telecom sector by the latest 30th June 2017. They have been advised to consider making provisions for standard assets in this sector at higher rates so that necessary resilience is built in the balance sheets, should the stress reflect on the quality of exposure to the sector at a future date. Besides, banks should also subject the exposure to the sector to closer monitoring.

• Disclosure in the “Notes to Accounts” to the Financial Statements- Divergence in the asset classification and provisioning
In order to ensure greater transparency and promote better discipline with respect to compliance with Income Recognition, Asset Classification and Provisioning (IRACP) norms, it has been decided by RBI that banks shall make suitable disclosures, wherever either (a) the additional provisioning requirements assessed by RBI exceed 15 percent of the published net profits after tax for the reference period or (b) the additional Gross NPAs identified by RBI exceed 15 percent of the published incremental Gross NPAs for the reference period, or both.
The disclosures, as above, shall be made in the Notes to Accounts in the ensuing Annual Financial Statements published immediately following communication of such divergence by RBI to the bank.
Such disclosures may be included under the sub-head Asset Quality (Non-Performing Assets).

• Compliance with Ghosh Committee Recommendations
On a review, it has now been decided that, henceforth, compliance with the Ghosh Committee recommendations need not be reported by banks to the Audit Committee of the Board (ACB). However, banks have been advised to ensure that:
a. Compliance to these recommendations are complete and sustained; and
b. These recommendations are appropriately factored in the internal inspection/audit processes of banks and duly documented in their manual/ instructions, etc.

• Risk Management Systems – Role of the Chief Risk Officer (CRO)
As part of effective risk management, banks are required, inter-alia, to have a system of separation of credit risk management function from the credit sanction process. However, RBI has noted that the banks follow diverse practices in this regard and in order to bring uniformity in approach followed by banks, RBI has issued various guidelines to banks as detailed in the circular.

1.1.2 Notification to Registered Asset Reconstruction Companies
• Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002- Section 3 (1) (b) - Requirement of Net Owned Fund (NOF) for Asset Reconstruction Companies
It has been decided by RBI to raise the minimum Net Owned Funds (NOF) requirement for Asset Reconstruction Companies to INR 100 Crore on an on-going basis with effect from 28th April 2017.
ARCs which are already registered with RBI as on 28th April 2017, and not having the revised minimum NOF as on that date shall achieve a minimum NOF of INR 100 crore latest by 31st March 2019. ARCs are required to submit a certificate from their Statutory Auditors periodically as evidence of compliance thereof.

1.2 Press Releases

1.2.1 Statement on Developmental and Regulatory Policies, Reserve Bank of India
On 6th April 2017, RBI issued the statement containing reviews of the progress made in various developmental and regulatory policy measures announced by it, from time to time as also reviews of new measures taken for further refining the liquidity management framework, strengthening banking regulation and supervision, broadening and deepening financial markets and extending the reach of financial services by enhancing the efficacy of the Payment and Settlement Systems.

1.2.2 RBI Announces Draft Guidelines on Simplified Hedging Facility for Residents and Non-Residents
On 12th April 2017, RBI released draft guidelines on Simplified Hedging Facility for Residents and Non-Residents, which permit dynamic hedging of currency risk and simplifies the procedure involved in booking hedge contracts. To monitor activity under this facility, banks and exchanges will be required to report customer data to the Trade Repository on a regular basis. Comments on the draft guidelines have been invited from banks, market participants and other interested parties.

1.2.3 RBI Signs Memorandum of Understanding (MoU) on “Supervisory Cooperation and Exchange of Supervisory Information” with the Royal Monetary Authority of Bhutan and Bank of Guyana
On 18th and 20th April 2017, RBI signed a Memorandum of Understanding (MoU) on “Supervisory Cooperation and Exchange of Supervisory Information” with the Royal Monetary Authority of Bhutan and Bank of Guyana. The Reserve Bank has entered into Memorandum of Understanding, Letter for Supervisory Co-operation and Statement of Co-operation with supervisors of a few countries to promote greater co-operation and share supervisory information. With this, RBI has signed 40 such MoUs, one Letter for Supervisory Co-operation and one Statement of Co-operation.

1.2.4 RBI Cancels Certificate of Four NBFCs
RBI has cancelled the certificate of registration of four NBFCs in exercise of the powers conferred on it under Section 45-IA (6) of the Reserve Bank of India Act, 1934. Following the cancellation of registration certificates, these companies cannot transact the business of a Non-Banking Financial Institution, as laid down under clause (a) of Section 45-I of the Reserve Bank of India Act, 1934.

1.2.5 Twenty NBFCs Surrender their Certificate of Registration
Twenty NBFCs have surrendered the Certificate of Registration granted to them by RBI. RBI, in turn, has cancelled these Certificates of Registration under the powers conferred on it under Section 45-IA (6) of the Reserve Bank of India Act 1934. These companies cannot transact the business of a Non-Banking Financial Institution, as laid down in clause (a) of Section 45-I of the RBI Act, 1934.

1.2.6 RBI Imposes Monetary Penalty on Two Authorised Dealer Banks
The Reserve Bank of India has imposed monetary penalty on the Hongkong and Shanghai Banking Corporation Ltd. and Kotak Mahindra Bank for violation of Reserve Bank of India instructions on reporting requirements of FEMA 1999.


2.0 SEBI REGULATORY UPDATES

2.1 Circulars

2.1.1 Investments by Foreign Portfolio Investors (FPIs) in Government Securities
Subsequent to the RBI Circular dated 31st March 2017, SEBI has decided to revise the limit for investment by FPIs in Government Securities, for the April – June 2017 quarter, as below:
• Limit for FPIs in central government securities would be enhanced to INR 1,84,901 crore.
• The limit for investment by long-term FPIs (sovereign wealth funds, insurance funds, pension funds and foreign central banks) in government securities would be revised to INR 46,099 crore, from INR 68,000 crore.
• Besides, the limit for investment by all FPIs in State Development Loans (SDL) would be increased to INR 27,000 crore, from the previous INR 21,000 crore.

2.1.2 Inclusion of “Derivatives on Equity shares”-IFSC
Earlier in March 2015, SEBI notified the (International Financial Services Centres) Guidelines, 2015 which came into force on 1st April 2015. Based on the recommendations of the Risk Management Review Committee of SEBI, it has been decided to include Derivatives on equity shares of a company incorporated in India as a permissible security under the SEBI (IFSC) Guidelines, 2015.
The recognized stock exchanges operating in IFSC may permit dealing in ‘Derivatives on equity shares’, subject to prior approval of SEBI. The Market Wide Position Limit (MWPL) for "derivatives on equity shares" will be equal to 10 per cent of the number of shares held by non-promoters in the relevant underlying security (free-float holding).
Further, the MWPL for "derivatives on equity shares" in recognised stock exchanges in IFSCs would be reckoned separately from that in recognised stock exchanges in domestic market.

2.1.3 Review of the Framework of Position Limits for Interest Rate Futures contracts
SEBI, in its circular dated 18th April 2017, provided more clarity on Interest Rate Futures (IRF) as part of easing the trading requirements for investors. In IRF contracts, position limits linked to open interest would be applicable at the time of opening the position. Open positions would not have to be unwound immediately by the market participants in the event of a drop of total open interest in IRF contracts within the respective maturity bucket.
In view of risk management or surveillance concerns with regard to the positions of such market participants, stock exchanges may direct them to bring down their positions to comply with the applicable position limits within a prescribed time period. However, stock exchanges would have the freedom to direct the entities to bring down their open interest positions in IRF contracts after taking into consideration risk management factors.

2.1.4 Acceptance of Central Government Securities by Clearing Corporations towards Core Settlement Guarantee Fund (SGF) Contribution by Clearing Members
Clearing members would be permitted to bring their contribution towards Core Settlement Guarantee Fund, in the form of Central Government Securities, in addition to Cash and Bank Fixed Deposits.

2.1.5 SEBI (International Financial Services Centres) Guidelines, 2015 - IFSC Banking Units (IBUs) Acting as Trading Member or Professional Clearing Member on Stock Exchanges/Clearing Corporations in IFSC
SEBI (IFSC) Guidelines, 2015 states that any recognised entity or entities wanting to operate in IFSC as an intermediary, would have to form a company to provide such financial services relating to securities market, as specified by it.
Based on the representations of RBI and market participants, SEBI has now clarified that IFSC Banking Units (IBUs) set up in IFSC would be permitted to act as Trading Members of an exchange or a Professional Clearing Member of a clearing corporation in IFSC, without forming a separate company, subject to conditions specified by RBI (see circular dated 27th April 2017)

2.1.6 Circular on Mutual Funds
SEBI has issued amendments to the disclosure of executive remuneration with respect to Mutual Funds. With an aim to bring in greater transparency in dealings of Mutual Funds, SEBI has directed Mutual Funds to disclose to investors the remuneration of employees earning equal to or above INR 1 crore in a Financial Year. Mutual Funds would also have to disclose the annual salary of the Chief Executive Officer (CEO), Chief Investment Officer (CIO), Chief Operating Officer (COO) and any other top official and also the ratio of CEO’s remuneration to the median employee salary.
Mutual Funds/Asset Management Companies (AMCs) would have to disclose the name, designation and remuneration drawn by top ten employees in terms of remuneration for that Financial Year. In addition, the name, designation and remuneration of every employee whose total pay package is equal to or more than Rupees one crore and two lakh for that financial year need to be disclosed as well as salary details of part-time employees, who received at least rupees eight lakh and fifty thousand per month during part of the financial year with the company. In addition to this, the total Average Assets Under Management (AAUM), as well as debt and equity AAUM and rate of growth over last three years would have to be disclosed within one month from the end of a financial year.

2.2 Press Release

2.2.1 SEBI Board Meeting
On 26th April 2017, SEBI held its meeting in Mumbai and during the course of the discussion, the following decisions were taken:
• Instant Access Facility (IAF) in Mutual Funds and use of e-wallet for investment in Mutual Funds: SEBI has permitted the use of e-wallet for investments in mutual funds for up to INR 50,000 per financial year. However, it has been clarified that redemptions of such investments can be made only to a bank account of the unit holder. The e-wallet issuers would not offer any incentive such as cashback, directly or indirectly, for investing in mutual fund schemes through them.
Mutual Funds/Asset Management Companies (AMCs) can offer instant access facility (through online mode) of up to INR 50,000 or 90% of folio value, whichever is lower, to resident individual investors in liquid schemes by applying the lower of previous day NAV or prospective NAV. For providing such facility, AMCs would not be allowed to borrow.
This facility can also be used for investment in mutual funds through tie-ups with payments banks provided necessary approvals are taken from RBI.
• Amendments to Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012: To deepen the market and enhance liquidity, SEBI has permitted options trading in commodity derivatives. Detailed guidelines for trading in ‘option’ on commodity derivatives exchanges will be issued by SEBI shortly.
• Inclusion of RBI registered systemically important NBFCs in the category of QIBs: Presently institutions such as banks and insurance companies are categorised as Qualified Institutional Buyers (QIBs) by SEBI. They are eligible for participation in IPOs with specifically earmarked allocations. Accordingly, SEBI has approved the proposal for inclusion of systemically important NBFCs registered with RBI having a net worth of more than INR 500 crore in the category of QIBs. As NBFCs are well regulated entities, classifying such NBFCs under the definition of QIBs will give Issuers access to a larger pool of funds.
• Exemption under SEBI (Issue of Capital and Disclosure Requirements) (ICDR) Regulations, 2009, relating to preferential allotments, to be extended to Scheduled Banks and Financial Institutions: At present, SEBI ICDR Regulations prohibit issuers from making a preferential issue to any person who has sold any equity shares of the issuer during the six months preceding the relevant date.
It has been observed that the Banking sector is exposed to the risk of significantly high Non-Performing Assets (NPA) and the Banks have been advised by RBI to reduce the NPA and to initiate stringent actions to recover the dues from the borrowers.
In order to achieve this objective, the Banks may opt for Corporate Debt Restructuring (CDR) / Strategic Debt Restructuring (SDR) or bilateral restructuring and may have sold equity shares of the borrower (being a listed company) during the preceding six months of the relevant date. Such Banks/Financial Institutions would be permitted to be allottees of the specified securities of the company pursuant to CDR approved scheme under preferential issue route.
• Strengthening the Monitoring of Utilisation of Issue Proceeds: If the issue size of specified securities exceeds INR 500 Cr then it is mandatory to appoint a Monitoring Agency under the SEBI (ICDR) Regulations. To further strengthen the monitoring of issue proceeds raised in IPOs/FPOs/Rights Issues, the SEBI Board has approved certain proposals which are as below:
a. Mandatory appointment of Monitoring Agency where the issue size (excluding offer for sale component) is more than INR 100 crore.
b. Frequency of submission of Monitoring Agency Report enhanced from half-yearly to quarterly intervals.
c. Introduction of maximum timeline of 45 days for submission of Monitoring Agency Report from the end of the quarter in conjunction with the submission of the quarterly results.
d. Mandating the disclosure of the Monitoring Agency Report on Company’s website in addition to submitting it to Stock Exchange(s) for wider dissemination.
e. Introduction of new requirement, i.e., comments of Board of Directors and Management on the findings of the Monitoring Agency.
• Framework for consolidation and re-issuance of debt securities issued under the SEBI (Issue and Listing of Debt Securities) Regulations, 2008: SEBI Board has approved the following proposal with respect to the aforementioned framework.
a. An issuer will be permitted a maximum of 12 International Securities Identification Number (ISINs) maturing per financial year. Within the limit of 12, an entity can issue both secured and unsecured non-convertible debentures while no separate category of ISINs will be provided to them. Further, an entity can issue up to five ISINs every fiscal "for structured debt instruments of a particular category".
b. These restrictions will not be applicable to debt instruments that are used for raising regulatory capital and affordable housing as well as capital gains tax bonds.
c. To resolve the issue of bunching of liabilities, the issuer can, as a one-time exercise, make a choice of having bullet maturity payment or make staggered payment of the maturity proceeds within a particular financial year.
d. Active consolidation, i.e. consolidation of existing outstanding debt securities may be made recommendatory at present, which may be reviewed at a later stage.
e. There would not be any clause prohibiting consolidation and re-issuance in the Articles of Association of the issuer
• Amendment to SEBI (Foreign Portfolio Investor) Regulations, 2014 and SEBI (Debenture Trustee) Regulations, 1993: Resident Indians/NRIs or the entities which are beneficially owned by Resident Indians/NRIs would be prevented from subscribing to Offshore Derivative Instruments.
SEBI Board has approved the amendment of the Debenture Trustee (DT) Regulations in order to streamline its existing provisions with the provisions as mentioned in the Companies Act 2013, Companies (Share Capital and Debentures) Rules, 2014 and other SEBI Regulations, to fortify the existing provisions in the DT Regulations to enable the debenture trustees to perform the task of securing the interest of the investors.
• Integration of broking activities in Equity Markets and Commodity Derivatives Markets under single entity: Previously, a stock broker/clearing member dealing in commodity derivatives was not permitted to deal in other securities or vice versa, except by setting up of a separate entity. SEBI Board has approved a proposal to remove this restriction by amending the Stock Brokers Regulations. SEBI would also recommend to Government of India for amending SCR Rules accordingly.


3.0 INDIA MARKET UPDATES

3.1 SEBI Provides Clarity on Insider Trading Norms
SEBI has issued clarification with respect to certain aspects of Prohibition of Insider Trading (PIT) Regulations. Insider trading regulations would be applicable to all "connected persons" and not just to persons designated by the Board of Directors of a company. Employees and connected persons would be designated on the basis of their functional role and not only on seniority.
In an interpretive letter, SEBI stated that the code of conduct applies to all connected persons and not only to the designated persons.

Meenakshi Iyer

Director, Consultancy
Mumbai