CCL Regulatory Update: India Edition - February 2017
India Publications, Written by Meenakshi Iyer
13/03/2017

1.0 RBI REGULATORY UPDATES & DEVELOPMENTS

1.1 NOTIFICATIONS
1.1.1 Notifications to NBFC
1.1.2 Notification to AD Banks
1.1.3 Notification to Agency Banks

1.2 PRESS RELEASES
1.2.1 RBI Cautions Users of Virtual Currencies
1.2.2 Statement on Developmental and Regulatory Policies
1.2.3 Ten NBFCs Surrender their Certificate of Registration
1.2.4 RBI Cancels Certificate of Nine NBFCs
1.2.5 RBI Signs MoU on “Supervisory Cooperation and Exchange of Supervisory Information” with the Bank of Zambia
1.2.6 Reserve Bank Establishes an Inter-Disciplinary Standing Committee on Cyber Security


2.0 SEBI REGULATORY UPDATES & DEVELOPMENTS

2.1 CIRCULARS
2.1.1 Integrated Reporting by Listed Entities
2.1.2 Submission of Monthly Reports by Custodians of Securities
2.1.3 Participation in Derivatives Market by Mutual Funds
2.1.4 Prudential Limits in Sector Exposure for Housing Finance Companies (HFCs)
2.1.5 Amendment Pursuant to Comprehensive Review of Investor Grievance Redressal Mechanism
2.1.6 Circular on Mutual Funds

2.2 REGULATIONS
2.2.1 SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2017
2.2.2 SEBI (Issue of Capital and Disclosure Requirements) (ICDR) (Amendment) Regulations, 2017
2.2.3 SEBI (Mutual Funds) (Amendment) Regulations, 2017
2.2.4 SEBI (Depositories and Participants) (Amendment) Regulations, 2017
2.2.5 Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) (Second Amendment) Regulations, 2017
2.2.6 SEBI (Settlement of Administrative and Civil Proceedings) (Amendment) Regulations, 2017
2.2.7 SEBI (Foreign Portfolio Investors) (Second Amendment) Regulations, 2017

1.0 RBI REGULATORY UPDATES & DEVELOPMENTS

1.1 Notifications

1.1.1 Notifications to NBFC
• Review of Guidelines on “Pricing of Credit”
Earlier Non-Banking Financial Companies - Micro Finance Institutions (NBFC-MFIs) were advised by RBI to ensure that the average interest rate on loans during a financial year does not exceed the average borrowing cost during that financial year plus the margin, within the prescribed cap. As the RBI is now publishing the average base rate of banks on a quarterly basis, NBFC-MFIs have been advised to ensure that the average interest rate on loans sanctioned during a quarter does not exceed the average borrowing cost during the preceding quarter plus the margin, within the prescribed cap.
https://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=10846

1.1.2 Notification to AD Banks
• Foreign Exchange Management Act, 1999 (FEMA) Foreign Exchange (Compounding Proceedings) Rules, 2000 (the Rules) - Compounding of Contraventions under FEMA, 1999
In partial modification to Compounding of Contraventions under FEMA, 1999, RBI has decided to delegate further powers to Regional Offices effective from 2nd February 2017 for taking up compounding matters with respect to delay in filing the Annual Return on Foreign Liabilities and Assets (FLA return), by all Indian companies which have received Foreign Direct Investment in the previous year(s) including the current year, except Kochi and Panaji without any limit on the amount of contravention. Kochi and Panaji Regional offices can compound the above contraventions for amount of contravention below Rupees One hundred lakh (INR.1,00,00,000/-) only. The contraventions of Rupees One hundred lakh (INR.1,00,00,000/) or more under the jurisdiction of Kochi and Panaji Regional Offices will continue to be compounded at Central Office as hitherto.
https://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=10847

• Risk Management and Inter-bank Dealings: Permitting Non Resident Indians (NRIs) access to Exchange Traded Currency Derivatives (ETCD) market
Till recently, NRIs were permitted to hedge their Rupee currency risk through Over The Counter (OTC) transactions with AD banks. RBI has now permitted them access to the exchange traded currency derivatives market to hedge the currency risk arising out of their investments in India under FEMA, 1999 subject to the terms and conditions laid down in the circular.
https://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=10849

1.1.3 Notification to Agency Banks
• Reimbursement of Merchant Discount Rate
The Government of India (GoI) has decided to absorb the Merchant Discount Rate (MDR) charges in respect of debit card transactions while making payments to GoI.
In order to operationalise the above, RBI will reimburse banks the MDR on debit cards used for payment of tax and non-tax dues to GoI with effect from 1st January 2017. In addition to this, RBI has advised Agency banks to forward their claim for reimbursement of MDR along with statutory auditor’s certificate, as in the case of agency commission claims, to CAS Nagpur on a quarterly basis.
The claims may be signed by the Officer-in-Charge of the Government Banking Division of the bank and should also certify that MDR charges for transaction amounts up to INR 1.00 lakh have not been collected from the payer. Banks have been advised to make the first such claim by 30th April 2017 for the quarter ending 31st March 2017.
https://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=10860

1.2 Press Releases

1.2.1 RBI Cautions Users of Virtual Currencies
RBI has cautioned the users, holders and traders of Virtual Currencies (VCs), including Bitcoins, about the potential financial, operational, legal, customer protection and security related risks that they are exposing themselves to. RBI has further clarified that it has not given any licence/authorisation to any entity/company to operate such schemes or deal with Bitcoin or any virtual currency. Therefore, any user, holder, investor, trader, etc. dealing with Virtual Currencies will be doing so at their own risk.

1.2.2 Statement on Developmental and Regulatory Policies
For further strengthening the banking structure and enhancing the efficacy of the payment and settlement systems, RBI has issued a Statement that sets out developmental and regulatory policy measures. With a view to developing a sound framework and process for enforcement action, RBI has decided to establish a separate Enforcement Department, which will start functioning from 1st April 2017.

1.2.3 Ten NBFCs Surrender their Certificate of Registration
Ten 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.

1.2.4 RBI Cancels Certificate of Nine NBFCs
RBI has cancelled the certificate of registration of Nine 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 certificate, 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 RBI Signs MoU on “Supervisory Cooperation and Exchange of Supervisory Information” with the Bank of Zambia
On 15th February 2017, RBI signed a Memorandum of Understanding (MoU) on “Supervisory Cooperation and Exchange of Supervisory Information” with the Bank of Zambia. The Reserve Bank has entered 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 36 such MoUs, one Letter for Supervisory Co-operation and one Statement of Co-operation.

1.2.6 Reserve Bank Establishes an Inter-Disciplinary Standing Committee on Cyber Security
Based on the recommendations of the Expert Panel on Cyber Security and Information Technology Examination, RBI had issued guidelines on mandating cyber security preparedness for addressing cyber risks. While banks have taken several steps to strengthen their defences, the diverse and ingenious nature of cyber-attacks necessitates an ongoing review of the cyber security landscape and emerging threats.
Therefore, RBI has constituted an inter-disciplinary Standing Committee on Cyber Security.


2.0 SEBI REGULATORY UPDATES & DEVELOPMENTS

2.1 Circulars

2.1.1 Integrated Reporting by Listed Entities
SEBI, in its circular dated 6th February 2017, has advised the top 500 listed entities to adopt Integrated Reporting on a voluntary basis from the financial year 2017-18. These entities would be required to prepare a Business Responsibility Report (BRR), aimed at providing a concise communication about how an organisation's strategy, governance, performance and prospects create value over time.

2.1.2 Submission of Monthly Reports by Custodians of Securities
SEBI, through its circular dated 14th February 2017, has instructed custodians to submit monthly reports by either the end of the third working day of the succeeding month or the 5th of the succeeding month, whichever is later.

2.1.3 Participation in Derivatives Market by Mutual Funds
In terms of SEBI’s circular dated 4th September 2005, existing schemes of Mutual Funds, whose Scheme Information Documents (SIDs) do not envisage investments in derivatives, are required to obtain a positive consent from majority of the unit holders before commencing investment in derivatives.
It has been decided that the requirement of obtaining a positive consent from majority of unit holders would no longer be applicable for introduction of derivative investments in an existing scheme, whose SIDs do not currently envisage such investments. However, prior to the scheme commencing participation in derivatives, all investors of such schemes would be given an exit option with no exit load for 30 days, as against the exit option to only dissenting unit holders, as mandated earlier.
The provisions of this circular have come into effect from 20th February 2017.

2.1.4 Prudential Limits in Sector Exposure for Housing Finance Companies (HFCs)
In terms of the extant regulations, debt oriented mutual fund schemes need to adhere to a limit of 25% for exposure at the sector level, with an additional exposure not exceeding 10% (over and above the limit of 25%) in financial services sector only to HFCs. It has now been decided to increase the additional exposure limits provided for HFCs in financial services sector from 10% to 15%.
The additional exposure to such securities issued by HFCs should be rated AA and above and these HFCs would need to be registered with the National Housing Bank (NHB). The total investment/ exposure in HFCs should not exceed 25% of the net assets of the scheme. Appropriate disclosures would need to be made in the Scheme Information Document (SID) and Key Information Memorandum (KIM) of the debt schemes. The modification brought out in this circular has come into effect from 22nd February 2017.

2.1.5 Amendment Pursuant to Comprehensive Review of Investor Grievance Redressal Mechanism
To enhance the effectiveness of the grievance redressal mechanism at Market Infrastructure Institutions (MIIs), SEBI has comprehensively reviewed the existing framework in consultation with the Stock Exchanges and Depositories and has decided to revamp the grievance redressal mechanism at Stock Exchanges and Depositories (wherever applicable). Key measures introduced are as below.

  • Stock exchanges and depositories will have to disseminate information about arbitrators such as their brief profile, qualification, areas of experience, number of arbitration matters handled and pre -arbitration experience on their website.
  • The Investor service committee of the stock exchanges/depositories will review the performance of the arbitrators annually and submit the review report to the Board of the exchange/ depositories. Besides, market infrastructure institutions (MIIs), stock exchanges and depositories will have to create a common database of defaulting clients accessible to trading members and depository participants across stock exchanges and depositories.
  • There would be separate panels for arbitration and appellate arbitration.
  • There would be a three-stage fee structure to facilitate faster implementation of award and to discourage delayed filling of arbitrations by trading members.

2.1.6 Circular on Mutual Funds
Any existing scheme intending to invest in units of REITs/InvITs would have to comply with the provisions of SEBI (Mutual Funds) Regulations, 1996. For investment in units of REITs/InvITs by an existing Mutual Fund scheme, unitholders of the scheme would be given a time period of at least 15 days for the purpose of exercising the exit option.

2.2 Regulations

2.2.1 SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2017
In terms of the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2017, a listed entity desirous of undertaking a scheme of arrangement or involved in a scheme of arrangement, would be required to file the draft scheme of arrangement before any Court or Tribunal. Before filing such scheme with any Court or Tribunal, an Observation Letter or No-objection letter has to be obtained from stock exchange.
At the time of seeking approval of the scheme of arrangement, the listed entity would place the Observation letter or No-objection letter before the Court or Tribunal. The listed entity would have to comply with the requirements laid down by SEBI and on sanction, the listed entity will submit the documents, to the stock exchange.
SEBI has exempted draft schemes which solely provide for merger of a wholly owned subsidiary with its holding company from the above requirements, provided that such draft schemes will be filed with the stock exchanges for the purpose of disclosures.

2.2.2 SEBI (Issue of Capital and Disclosure Requirements) (ICDR) (Amendment) Regulations, 2017
In terms of the amendment introduced in the SEBI (ICDR) Regulations, a listed entity or any other person who contravenes any of the provisions of these regulations, would, in addition to the liability for action in terms of the securities laws, be liable for the following actions by the respective stock exchange(s), in the manner specified in the circulars or guidelines issued by SEBI.

  • imposition of fines;
  • suspension of trading;
  • freezing of promoter/promoter group holding of designated securities, as may be applicable, in coordination with depositories;
  • any other action as may be specified by SEBI from time to time.

If the listed entity fails to pay any fine imposed upon it by the recognised stock exchange(s), within the period as specified, the stock exchange may initiate such other action in accordance with law, after giving a notice in writing.

2.2.3 SEBI (Mutual Funds) (Amendment) Regulations, 2017
On 15th February 2017, SEBI amended its Mutual Fund Regulations, 1996, to include provisions relating to investments in Infrastructure Investment Trust (InvIT) and Real Estate Investment Trust (REIT). A mutual fund would be permitted to invest in the units of REITs and InvITs but the investment would be restricted to 10% of units issued by a single issuer of REIT and InvIT.
A mutual fund is permitted to invest only up to 5% of its net asset value in units of a single issuer and the maximum allowed investment by a single fund issuer will be capped at 10%. However, the cap will not be applicable in the case of index fund or sector- or industry-specific scheme pertaining to REIT and InvIT.

2.2.4 SEBI (Depositories and Participants) (Amendment) Regulations, 2017
The amended SEBI (Depositories and Participants) Regulations stipulate that no participant would at any time, hold more than five per cent of the equity capital of the depository, subject to the limits as otherwise prescribed by the Central Government from time to time. The combined holding of all persons resident outside India in the equity share capital of the depository should not exceed, at any time, forty-nine per cent of its total equity share capital.

2.2.5 Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) (Second Amendment) Regulations, 2017
The Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulation have been amended with a provision that shareholding in a recognised clearing corporation would be subject to the limits as otherwise prescribed by the Central Government from time to time. The combined holding of all persons resident outside India in the paid up equity share capital of a recognised clearing corporation would not exceed, at any time, forty-nine per cent of its total paid up equity share capital.

2.2.6 SEBI (Settlement of Administrative and Civil Proceedings) (Amendment) Regulations, 2017
An amendment has been introduced to the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014, on 27th February 2017.

  • Settlement applications that are not filed within the specified time can be considered by a panel of whole time members, if it is satisfied that there was sufficient cause for not filing it within specified time period and it is accompanied with an application for condonation of delay and non-refundable fees. In case the application is filed after sixty days of expiry of specified time period, the settlement amount would be increased with a levy of six percent interest per annum.
  • Settlement applications would be considered in exceptional circumstances, taking into account factors such as lapse of time since the commission of the alleged default and the weight of evidence against the applicant.
  • Re-application of rejected or withdrawn applications in deserving cases, subject to payment of additional fees and interest, has been permitted.

2.2.7 SEBI (Foreign Portfolio Investors) (Second Amendment) Regulations, 2017
FPIs have been permitted to invest in the following securities.

  • Unlisted corporate debt securities in the form of non-convertible debentures (NCDs) or bonds issued by an Indian public or private company, subject to the guidelines issued by the Ministry of Corporate Affairs, Government of India, from time to time and also subject to minimum residual maturity of three years and end use-restriction on investment in real estate business, capital market and purchase of land.
  • Securitised debt instruments, which include any certificate or instrument issued by a Special Purpose Vehicle (SPV) set up for securitisation of asset/s where banks, FIs or NBFCs are originators and/ or any certificate or instrument issued and listed in terms of the SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008
  • Investment by FPIs in securitised debt instruments shall not be subject to the minimum 3-year residual maturity requirement.

Meenakshi Iyer

Director, Consultancy
Mumbai