CCL Regulatory Update: India Edition - January 2017
India Publications, Written by Meenakshi Iyer
12/02/2017

1.0 RBI REGULATORY UPDATES & DEVELOPMENTS

1.1 NOTIFICATIONS
1.1.1 Notification to AD Banks

1.2 PRESS RELEASES
1.2.1 RBI Releases ‘Quarterly BSR-1: Outstanding Credit of Scheduled Commercial Banks for September 2016
1.2.2 Nine NBFCs Surrender their Certificate of Registration
1.2.3 RBI Cancels Certificate of Eight NBFCs

2.0 SEBI REGULATORY UPDATES & DEVELOPMENTS

2.1 CIRCULARS
2.1.1 Credit of Proceeds Due to Write Off of Securities held by FPIs/Deemed FPIs.
2.1.2 Guidelines for Participation/Functioning of Eligible Foreign Investors (EFIs) and FPIs in International Financial Services Centre (IFSC)
2.1.3 Guidance Note on Board Evaluation
2.1.4 Exclusively Listed Companies (ELCs) of De-recognized/Non-operational/Exited Stock Exchanges Placed in the Dissemination Board (DB)
2.1.5 Criteria for Eligibility, Retention and Re-Introduction of Derivative Contracts on Commodities

2.2 REGULATIONS
2.2.1 SEBI (Portfolio Managers) (Amendment) Regulations, 2016
2.2.2 SEBI (Alternative Investment Funds) (Amendment) Regulations, 2016
2.2.3 SEBI (Listing Obligations and Disclosure Requirements) (Third Amendment) Regulations, 2016
2.2.4 SEBI (Foreign Portfolio Investors) (Amendment) Regulations, 2017
2.2.5 Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) (Amendment) Regulations, 2017

2.3 PRESS RELEASE
2.3.1 SEBI Board Meeting

3.0 INDIA MARKET UPDATES

3.1 RBI Imposes Penalty on Lakshmi Vilas Bank
3.2 Government Considering Separate Regulator for Electronic Payments
3.3 SEBI Cautions Investors Against Unauthorised Fundraising

1.0 RBI REGULATORY UPDATES & DEVELOPMENTS

1.1 Notifications

1.1.1 Notification to AD Banks
• Evidence of Import under Import Data Processing and Monitoring System (IDPMS)
As per the extant procedure, Bill of Entry (BoE) data is received in IDPMS from Customs Department for Electronic Data Interchange (EDI) ports and from NSDL for SEZ on a daily basis. BoE data for non-EDI ports is entered by the AD Category – I bank of the importer on receipt of BoE (importer’s copy) and then the bank uploads the data in IDPMS through “Manual BOE reporting” process. In order to enhance ease of doing business and reduce transaction costs, it has been decided to discontinue submission of hardcopy of Evidence of Import documents, i.e. BoE, with effect from 1st December 2016, as it is available in IDPMS. The banks are now required to follow the revised procedures as set out in the circular.
https://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=10824

• Prohibition on Indian Party from making direct investment in countries identified by the Financial Action Task Force (FATF) as “Non Co-operative countries and territories”
Henceforth, Indian Parties have been prohibited from making direct investment in an overseas entity (set up or acquired abroad directly as JV/ WOS or indirectly as step down subsidiary) located in the countries identified by the FATF as “non co-operative countries and territories” as per list available on FATF website, www.fatf-gafi.org or as notified by the Reserve Bank of India from time to time.
https://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=10839

1.2 Press Releases

1.2.1 RBI Releases ‘Quarterly BSR-1: Outstanding Credit of Scheduled Commercial Banks for September 2016
On 5th January 2017, RBI released the web publication ‘Quarterly BSR-1: Outstanding Credit of Scheduled Commercial Banks (SCBs), September 2016’. The BSR-1 survey aims to get information regarding spatial distribution of bank credit as per occupation/activity and the organisational sector of the borrower, type of account and interest rate. Such information is aggregated at the bank group, population group and state level using locational parameters of the reporting bank offices. Highlights of the report are as follows:

  • Share of credit to agriculture sector in total bank credit increased marginally to 12.1 per cent in September 2016 from 11.9 per cent in June 2016.
  • Share of credit to industry reduced to 40.1 per cent in September 2016 from 40.7 per cent in June 2016.
  • The share of housing loans and vehicle loans in total credit of SCBs increased marginally to 10.6 per cent and 2.1 per cent, respectively in September 2016 from 10.4 per cent and 2.0 per cent, respectively in June 2016.
  • The contribution of the large credit accounts (with credit limit above rupees 250 million) declined further to 44.8 per cent in September 2016 from 46 per cent in June 2016.
  • The Weighted Average Lending Rate (WALR) came down marginally to 11.26 per cent in September 2016 from 11.28 per cent in June 2016.

1.2.2 Nine NBFCs Surrender their Certificate of Registration
Nine 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.

1.2.3 RBI Cancels Certificate of Eight NBFCs
RBI has cancelled the certificate of registration of Eight 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.


2.0 SEBI REGULATORY UPDATES & DEVELOPMENTS

2.1 Circulars

2.1.1 Credit of Proceeds Due to Write Off of Securities Held by FPIs/Deemed FPIs.
On 2nd January 2017, SEBI introduced a partial modification to its circular dated 15th May 2002 with regard to credit of proceeds due to write-off of securities held by Foreign Portfolio Investors (FPIs)/deemed Foreign Portfolio Investors. In terms of the amendments, in case a custodian is unable to deliver the securities or ascertain the claimant for the securities that are received subsequent to write off due to any unforeseen circumstances, the sale of these securities through stock exchange and proceeds thereof, net of expenses, would be credited to the Investors Protection and Education Fund (IPEF) of SEBI not later than seven days from the date of receipt thereof.
In case of receipt of corporate benefits in the form of securities arising out of shares written off, the same would be reported to SEBI. Corporate benefits received in the form of cash such as dividend would be credited to the IPEF of SEBI not later than seven days from the date of receipt of the same.

2.1.2 Guidelines for Participation/Functioning of Eligible Foreign Investors (EFIs) and FPIs in International Financial Services Centre (IFSC)
Earlier in March 2015, SEBI had issued its IFSC Guidelines, 2015. In partial modification to the IFSC Guidelines, the following measures have been introduced for participation of Eligible Foreign Investors (EFI) in IFSCs.

  • SEBI registered FPIs proposing to operate in IFSC would be permitted to do so without undergoing any additional documentation process and/or prior approval process.
  • A trading member of the recognised stock exchange in IFSC may rely upon the due diligence process already carried out by a SEBI registered intermediary during the course of registration and account opening process in India.
  • With regard to an EFI which is not registered with SEBI as an FPI but is desirous of operating in IFSC, the trading member of the recognised bourse in IFSC can rely upon the due diligence carried out by a bank, which is permitted by RBI to operate in IFSC, during the account opening process.
  • FPIs, who operate in the Indian securities market and wish to operate in the IFSC, will be required to ensure clear segregation of funds and securities. Custodians will have to monitor compliance with this provision for their respective FPI clients.

2.1.3 Guidance Note on Board Evaluation
The Companies Act, 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR”) contain broad provisions on Board Evaluation, i.e., evaluation of the performance of the Board, its committees and individual directors. In order to provide guidance to listed companies, SEBI has come out with a detailed guidance note on the subject, covering the following broad aspects:

  • Role of Nomination and Remuneration Committee
  • Role of Independent Directors
  • Disclosure Requirements
  • Process and criteria for evaluation.

2.1.4 Exclusively Listed Companies (ELCs) of De-recognized/Non-operational/+Exited Stock Exchanges Placed in the Dissemination Board (DB)
A period of three months was provided by SEBI to the ELCs on the DB to submit an action plan to the designated stock exchanges to list or to provide exit to shareholders. The time limit for submission of the action plan has now been extended till 31st March 2017.

2.1.5 Criteria for Eligibility, Retention and Re-Introduction of Derivative Contracts on Commodities
SEBI has stipulated that the following criteria for eligibility, retention and reintroduction of derivative contracts on commodities would be adhered to by all National Commodity Derivatives Exchanges.

  • Issues such as size of market, standardisation of commodity, durability or storability, geographical coverage, ease of doing business in correlation with international markets, etc., should be examined according to the parameters laid down by SEBI in its circular dated 20th January 2017.
  • For any commodity to continue to be eligible for futures trading on a commodity exchange, it should have an annual turnover of over INR 500 crore across all national commodity derivatives exchanges in at least one of the last three financial years.
  • Once a commodity becomes ineligible for derivatives trading, the exchanges would not reconsider such commodity for relaunching of contract for a minimum period of one year.
  • Further, a commodity, which is discontinued or suspended by an exchange on its platform, would not be reconsidered by the concerned exchange for relaunching of derivatives contract at least for a minimum period of one year.

2.2 Regulation

2.2.1 SEBI (Portfolio Managers) (Amendment) Regulations, 2016
SEBI has amended its Portfolio Managers Regulations, 1993 to provide an enabling framework for registration of fund managers desirous of providing their services to overseas funds. One of the requirements for a fund manager to become an ‘Eligible Fund Manager’ is to be registered with SEBI under the specified regulations.

  • A separate Chapter II-A has been introduced for ‘Eligible Fund Managers’, permitting existing portfolio managers as well as new applicants, compliant with requirements specified under Section 9A of Income Tax Act, 1961, to act as ‘Eligible Fund Managers’.
  • Existing portfolio managers who want to provide fund management services to overseas funds, if compliant with the requirements, may pursue this activity on intimation and submission of declarations to SEBI.
  • A new applicant wishing to provide fund management services to overseas funds, would need to seek registration with SEBI.
  • The obligations and responsibilities of such fund managers have been defined in the Regulations.

2.2.2 SEBI (Alternative Investment Funds) (Amendment) Regulations, 2016
On 4th January 2017, SEBI amended its Alternative Investment Funds Regulations, 2012. The key highlights are as stated below:

  • No scheme of an angel fund would be permitted to have more than two hundred angel investors.
  • Angel funds can invest in venture capital undertakings, which comply with the criteria regarding the age of the venture capital undertaking / start-ups, issued by the Department of Industrial Policy and Promotion under the Ministry of Commerce and Industry, Government of India.
  • The minimum tenure of angel funds’ investments in start-ups has been lowered from three years to one year. The minimum size of an investment has also been lowered to INR 25 lacs from INR 50 lacs.
  • An angel fund may also invest in the securities of companies incorporated outside India, subject to such conditions or guidelines that may be stipulated or issued by RBI and SEBI from time to time.

2.2.3 SEBI (Listing Obligations and Disclosure Requirements) (Third Amendment) Regulations, 2016
On 4th January 2017, SEBI notified the third amendment to its Listing Obligations and Disclosure Requirements Regulations, 2015, introducing the following key changes:

  • No employee including a key managerial personnel or director or promoter of a listed entity will enter into any agreement for himself or on behalf of any other person, with any shareholder or any other third party with regard to compensation or profit sharing in connection with dealings in the securities of such listed entity, unless prior approval for the same has been obtained from the Board of Directors as well as public shareholders by way of an ordinary resolution.
  • Listed companies, where such agreements have been entered into over the last three years, would be required to disclose these arrangements to the stock exchanges for public dissemination.
  • Existing agreements entered into previously (which continue to be valid) would also be disclosed to the stock exchanges and approval would need to be obtained from public shareholders by simple majority in the upcoming shareholders' meetings.
  • Interested persons involved in the transactions should abstain from voting on such resolutions.

2.2.4 SEBI (Foreign Portfolio Investors) (Amendment) Regulations, 2017
On 12th January 2017, SEBI revised its Foreign Portfolio Investors Regulations, 2014, permitting FPIs to invest in shares, debentures and warrants of companies, listed or to be listed on a recognized stock exchange in India through primary and secondary markets. Transactions by Category I and II foreign portfolio investors, in corporate bonds, as may be specified by SEBI and transactions by FPIs on the electronic book provider platform of recognized stock exchanges would be exempted from the requirement of being undertaken through stock brokers registered with SEBI.

2.2.5 Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) (Amendment) Regulations, 2017
The limit of shareholding of foreign entities like stock exchanges, depositories, banking companies, insurance companies and commodity derivatives exchanges in Indian stock exchanges has been increased to fifteen percent, from the present five percent. Now, these entities may acquire or hold, either directly or indirectly, either individually or together with persons acting in concert, up to 15 percent of the paid-up equity share capital of a recognised stock exchange.

2.3 Press Release

2.3.1 SEBI Board Meeting
Key decisions taken at the SEBI Board Meeting held on 14th January 2017, are highlighted below:
• Reduction of Fees payable by brokers by 25% and Calibration of other fees:
a. The turnover fee levied on stock brokers has been reduced by 25% to INR15/- per crore of turnover from the current INR 20/- per crore of turnover for the next three financial years.
b. Fees payable for buy back of securities would now be aligned with the fees payable for an open offer. The fee to be charged for open offer/takeover has been increased from INR 3 lakh to INR 5 lakh.
c. Filing fees for draft scheme of arrangement and processing fee for application seeking relaxation under Regulation 113 of SEBI (Issue of Capital and Disclosure Requirements) Regulations, have been introduced.
• Review of advertisement guidelines for Mutual Funds:
a. The performance of mutual fund schemes would be advertised in terms of CAGR for the past one year, three years, five years and since inception.
b. Besides, performance advertisement of mutual fund schemes should provide information based on the last day of month-end, preceding the date of advertisement, instead of the current requirement of publishing such data based on the last day of the preceding quarter-end.
c. Performance of other schemes managed by the fund manager should be disclosed in a summarized manner. Mutual funds may provide an exact link to such summarized information.
d. For the purpose of increasing awareness of Mutual Funds as a financial product category, celebrity endorsements of Mutual Funds may be allowed at an industry level. Prior approval of SEBI would be required for issuance of such advertisements which feature celebrities.
• Investment by Mutual Funds in Hybrid Instruments: The SEBI board has classified Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) as hybrid instruments. In light of this, the SEBI board has stipulated the following:
a. No mutual fund scheme can invest more than 5% of its net asset value into the units of a single issuer of REITs or InvITs.
b. Further, no mutual fund under all its schemes should own more than 10% of the units issued by a single issuer of REITs or InvITs.
c. These investment restrictions will be applicable to all fresh investments by all schemes or an existing scheme.
• Regulatory Framework on Schemes of Arrangements – Mergers and Demergers: To revise and streamline the regulatory framework governing schemes of arrangement, SEBI has approved the following:
a. The unlisted company would have to comply with the requirement of disclosure of material information, as specified in the format for abridged prospectus, in order to improve the disclosure standards.
b. The holding of pre-scheme public shareholders of the listed entity, as well as that of Qualified Institutional Buyers (QIBs) of the unlisted company, should not be less than 25% in the merged entity, as per the revised norms.
c. An unlisted company can be merged with a listed one only if it is listed on a stock exchange having nationwide trading terminals.
d. In order to prevent issue of shares to select group of shareholders instead of all shareholders pursuant to the scheme, the pricing formula, as specified in the ICDR Regulations, would have to be followed.
e. Schemes involving merger of an unlisted company resulting in reduction in the voting share of pre-scheme public shareholders by over 5% of total capital of merged entity can be approved through e-voting of public shareholders.
f. This facility can be used for schemes involving transfer of whole or substantially the whole of the undertaking of a listed company provided consideration for such transfer is not in the form of listed equity shares.
g. Further, schemes involving merger of an unlisted subsidiary with a listed holding company, where the shares of the unlisted subsidiary have been acquired by the holding company directly or indirectly from the promoters/promoter group, can also be subject to e-voting.
h. Companies would be required to submit a compliance report confirming compliance with the circular and Accounting Standards, duly certified by Company Secretary, CFO and Managing Director.
• SEBI (Issue and listing of Debt Securities by Municipalities) Regulations, 2015: In order to facilitate issuance of debt securities under these regulations by entities other than Corporate Municipal Entity (CME), SEBI Board has stipulated that Municipalities making a public issue of debt securities under these regulations should have surplus as per their Income and Expenditure Statement, in any of the three immediately preceding financial years or meet any other financial criteria, as specified by SEBI from time to time.


3.0 INDIA MARKET UPDATES

3.1 RBI Imposes Penalty on Lakshmi Vilas Bank
RBI has imposed a penalty of INR 3 crore on Lakshmi Vilas Bank for contravention of instructions on opening and operation of current accounts, extending bill discounting facilities to non-constituents and walk-in customers, and non-adherence to KYC norms.

3.2 Government Considering Separate Regulator for Electronic Payments
The Government of India is considering setting up a separate regulator for enabling electronic payment systems in the country, which would also regulate transaction charges. The Ratan Watal committee has suggested that the government may consider putting in place a regulatory system for such payments, which is independent from the function of central banking. The electronic payment does not entail exchange of physical cash and it does not involve deposit taking or credit offtake or servicing of loans/deposits.

3.3 SEBI Cautions Investors against Unauthorised Fundraising
SEBI has cautioned investors and the general public against dealing with any of the 256 companies which have been found to be indulging in illegal money raising activities. SEBI has taken several prohibitory actions against these 256 firms. It has also cautioned investors against unlisted firms issuing securities without complying with the regulatory norms. Investors have been advised to ensure that the companies seeking to raise funds have filed offer documents or applications with the stock exchanges for listing.

Meenakshi Iyer

Director, Consultancy
Mumbai