RBI Regulatory Updates & Developments

Modification to LEF

RBI issued guidelines in December 2016 to scheduled commercial banks prescribing the limits for a bank’s exposure to a single borrower and a borrower group, at 15% and 40% of capital funds respectively. On consideration of the representations received from stake holders, the following changes have been introduced with respect to Large Exposure Framework (LEF):

  1. Non-centrally cleared derivatives exposures will be outside the purview of exposure limits until April 01, 2020. However,   banks must compute these exposures separately and report to the Department of Banking Regulation, RBI, on a quarterly basis.
  2. For the purpose of reckoning exposure limits under the LEF, an Indian branch of a Foreign Global Systemically Important Bank (G-SIB) will be considered as any other Indian bank and can, accordingly, take exposure up to 25% of its Tier I capital on another non-GSIB in India.
  3. Any interbank exposure of an Indian branch of a foreign G-SIB to its Head Office in a foreign country will be subject to a limit of 20% of its Tier I capital in India.
  4. For the purpose of LEF, the eligible capital base will be the effective amount of Tier 1 capital, as per the last audited balance sheet, fulfilling the criteria defined by RBI in its Master Circular on Basel III – Capital Regulations dated 1st July 2015. However, the infusion of capital under Tier I after the published balance sheet date may also be taken into account for the purpose of LEF. Banks would be required to obtain an external auditor’s certificate on completion of the augmentation of capital and submit the same to RBI (Department of Banking Supervision) before reckoning the additions to capital funds.
  5. For Indian Banks, profits accrued during the year will also be reckoned as Tier I capital for the purpose of LEF, subject to prescribed conditions.
  6. Banks that are in breach of specified interbank limits with other banks or with their Head Offices would not be given additional time to bring their exposures within the prescribed limits.


Basel III Framework on Liquidity Standards – LCR Liquidity Risk Monitoring Tools and LCR Disclosure Standards

RBI has advised all scheduled commercial banks that the assets allowed as Level 1 High Quality Liquid Assets (HQLAs) for the purpose of computing the Liquidity Coverage Ratio (LCR) of banks would include the following:

  1. Government securities in excess of the minimum Statutory Liquidity Ratio (SLR) requirement.
  2. Government securities within the mandatory SLR requirement, to the extent allowed by RBI under:

(i)  Marginal Standing Facility (MSF) - presently 2% of the bank's Net Demand and Time Liabilities.

(ii) Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) - presently 13% of the bank’s Net Demand and Time Liabilities.

Banks have now been permitted to reckon an additional 2% for government securities held by them under FALLCR within the mandatory SLR requirement as Level 1 HQLA, for the purpose of computing LCR, in a phased manner.

For the purpose of LCR, banks would be required to continue to value such government securities reckoned as HQLA at an amount not greater than their current market value (irrespective of the category under which the security is held, i.e. Held to Maturity, Available for Sale or Held for Trading).


Foreign Exchange Management

In consultation with the Government of India, RBI has revised its regulations on the opening of foreign currency accounts in India by persons resident in India. The amendment allows re-insurance and composite insurance brokers registered with the Insurance Regulatory and Development Authority (IRDA) to open and maintain non-interest bearing foreign currency accounts with an Authorised Dealer Bank in India for the purpose of undertaking transactions in the ordinary course of their business.


Investment by FPI in Debt – Review

In order to broaden the access of non–resident investors to debt instruments in India, Foreign Portfolio Investors (FPIs) are now permitted to invest in municipal bonds. FPI investment in municipal bonds would be reckoned within the limits set for FPI investment in State Development Loans (SDLs).


Disclosure in the “Notes to Accounts” to the Financial Statements – Divergence in the Asset Classification and Provisioning

Banks with extant prudential norms are assessed by RBI for compliance on Income Recognition, Asset Classification and Provisioning (IRACP) as part of its supervisory processes. Banks have been advised to disclose divergences relating to RBI norms in their notes to accounts, if either or both of the following conditions are satisfied:

  1. The additional provisioning for Non-Performing Assets (NPAs) assessed by RBI exceeds 10% of the reported profit before provisions and contingencies for the reference period.
  2. The additional Gross NPAs identified by RBI exceed 15% of the published incremental Gross NPAs for the reference period.


Standing Liquidity Facility for Primary Dealers

RBI has reduced the policy repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points to 6% from 6.25% with effect from April 4, 2019.


Change in Bank Rate

RBI has reduced the bank rate by 25 basis points from 6.50% to 6.25% with effect from April 4, 2019. All penalty interest rates on shortfall in reserve requirements, which are specifically linked to the bank rate, also stand revised as indicated in the Annex.


Minimum Standards for a Currency Chest

A committee on currency movement set up by RBI has recommended that banks should be encouraged to open large Currency Chests (CCs) with modern facilities and with a Chest Balance Limit (CBL) of at least INR 10 billion. The following minimum standards have been prescribed for setting up new CCs: 

  1. Banks would need to have an area of at least 1500 sq.ft. for the strong room or vault. For banks situated in hilly or inaccessible places, the area of the strong room or vault would need to be at least 600 sq. ft.
  2. Banks should have a processing capacity of 6,60,000 pieces of banknotes per day. Banks situated in the hilly or inaccessible places would need to have a capacity of 2,10,000 pieces of banknotes per day.
  3. Amenability to adoption of automation and adaptability to implement IT solutions should be ensured.
  4. A CBL of INR 10 billion, subject to ground realities and reasonable restrictions and at the discretion of RBI, should be maintained.
  5. Technical specifications prescribed by RBI would need to be adhered to.


Licensing as Authorised Dealer – Category II

RBI has decided that Systemically Important Non-Deposit taking Investment and Credit Companies would be eligible for an Authorised Dealer- Category II (AD- Cat II) licence, subject to the following conditions:

  1. NBFCs offering such services would need to have a ‘minimum investment grade rating’.
  2. Such NBFCs would be required to put in place a board approved policy on

  (i)  managing risks, including any potential currency risk

  (ii) handling customer grievances arising out of such activities

A monitoring mechanism shall be put in place for such services on a monthly basis as a minimum.


Legal Entity Identifier – Extension of Deadline

Other than individuals, all participants undertaking transactions in the markets regulated by RBI such as Government securities markets, money markets (markets for any instrument with a maturity of one year or less) and non-derivative forex markets (transactions that settle on or before the spot date), are required to obtain Legal Entity Identifier (LEI) codes within specified timelines. The timeline has now been extended by RBI as below



Net Worth of Entities

Current Deadline

Extended Deadline

Phase I

above INR  10000 million

30th April 2019

31st December 2019

Phase II

Between INR 2000 million and INR 10000 million

31st August 2019

31st December 2019


The deadline of 31st March 2020 for Phase III, in respect of entities with net worth below INR 2000 million remains unchanged.


Press Release

During April 2019, 5 NBFCs surrendered their Certificates of Registration to RBI, who, in turn, cancelled the registration certificates of a further 24 NBFCs. All of these companies cannot now undertake 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.

SEBI Regulatory Updates & Developments

SEBI is empowered to attach and sell movable as well as immovable properties of defaulters.  SEBI’s Appointment of Administrator and Procedure for Refunding to the Investors Regulations, 2018 provide for the appointment of an administrator after attachment of such properties. The administrator would be required to oversee the distribution of refunds to investors. Guidelines have been issued by SEBI regarding the selection of insolvency professionals to be appointed as administrators. (See Circular dated April 2, 2019).

The key provisions are as below:

  • The administrator has to be a person registered as an insolvency professional with the Insolvency and Bankruptcy Board of India (IBBI) and empanelled with SEBI.
  • The administrator would be selected from a panel of insolvency professionals prepared by IBBI under the Administrator Regulations.
  • For the duration of the insolvency assignment, the appointed administrator would not permitted to withdraw his consent, surrender his registration to the IBBI Board, or his membership to the Insolvency Professional Agency (IPA).

The administrator is permitted to appoint an independent chartered accountant to verify the details of money raised and payments already made to investors. The remuneration payable to the administrator would need to be in accordance with IBBI's Liquidation Process guidelines. 

In November 2018, SEBI introduced the concept of the Unified Payments Interface (UPI) as a payment mechanism with the Application Supported by Block Amount (ASBA) for applications in public issues by retail individual investors through intermediaries.  The UPI mechanism for retail individual investors through intermediaries was made effective from 1st January 2019 along with the existing process and existing timeline of T+6 days. While this phase was originally planned for a period of three months, it has now been decided to extend the timeline for implementation by a further period of 3 months, i.e., till 30th June 2019.

For full details of the Circular dated April 3 2019 click here

The facility of Basic Services Demat Account (BSDA) with limited services for eligible individuals with the objective of achieving wider financial inclusion and to encourage holding of demat accounts was previously introduced by SEBI. With effect from 1st June 2019, it has been decided to revise the structure of charges for debt securities:

  • No annual maintenance charge will be levied in cases where the value of holdings of debt securities is up to INR 1 lakh. A maximum charge of INR 100 will be levied if the value of holdings of debt securities is between INR 1,00,001 and INR 2,00,000.
  • No annual maintenance charge will be levied in cases where the value of holdings other than debt securities is up to INR 50,000, and a maximum charge of INR 100 shall be levied if the value of holdings other than debt securities is between INR 50,001 and INR 2,00,000.

For full details of the Circular dated April 4 2019, click here

SEBI has issued granular norms on the computation of risk-based capital and net worth requirements for clearing corporations, as detailed below:

  • Every recognised clearing corporation would be required to maintain capital, including retained earnings and reserves, as may be specified by SEBI, to adequately cover counterparty credit risk, business risk, legal, and operational risk.
  • Clearing corporations would need to hold additional capital to cover costs required for an orderly wind-down or recovery of operations.
  • The minimum contribution required to be made by the clearing corporation towards Core Settlement Guarantee Fund  would be considered for computing capital requirements towards credit risk.
  • A clearing corporation should identify, monitor, and manage its general business risk and hold sufficient liquid net assets funded by equity to cover potential general business losses so that it can continue operations and services as a going concern.
  • The capital requirement for business risk would be subject to a minimum of 25% of annual gross operational expenses. The most recent audited information from their annual financial statement should form the basis for the purposes of calculation of gross operational expenses.
  • At all times, a minimum net worth of INR 100 crore or capital as determined under the SEBI regulations, whichever is higher, would need to be maintained.
  • Every clearing corporation would need to submit a net worth certificate signed by its managing director within 15 days from the end of every quarter. The first such submission would be made applicable for the quarter ending June 2019.

For full details of the Circular dated April 10 2019, click here

Clause 5 of SEBI’s ‘International Financial Services Centre (IFSC) Guidelines 2015’, prescribes the net worth requirements for clearing corporations operating in IFSCs. The said clause has been amended as below:

  • Every applicant seeking recognition as a clearing corporation would be required to have a minimum net worth of INR 50 crore in the form of liquid assets.
  • On commencement of operations, every recognised clearing corporation would be required to have a minimum net worth of INR 50 crore or capital in the form of liquid assets.
  • The net worth would need to be enhanced to a minimum of INR 100 crores or capital as determined in accordance with SEBI regulations, over a period of three years from the start of operations.

For full details of the Circular dated April 26 2019, click here

SEBI had introduced the requirement of a systems audit for mutual funds in September 2009, and revised guidelines have now been issued to enhance and standardise the processes required for such audits.  The salient points are as below:

  • The audit of systems and processes should cover the following aspects:
  1. Examination of integration of front office system with the back-office system
  2. Fund accounting system for calculation of net asset value
  3. Financial accounting and reporting system for the Asset Management Companies (AMCs)
  4. Unit-holder administration and servicing systems for customer service
  5. Funds flow process
  6. Processes for meeting regulatory requirements
  7. Prudential investment limits and access rights to systems interface
  • Mutual Funds and AMCs would be required to conduct systems audit on an annual basis by an independent Certified Information Systems Auditor, a Certified Information Securities Manager, or an auditor with equivalent qualifications.
  • Further, AMCs have been advised to form a Technology Committee comprising experts proficient in technology. Such a committee will need to have at least one independent external expert with adequate experience in the area of technology in either the Mutual Fund or the Banking and Financial Services industries. The committee would be responsible for reviewing the cyber security and cyber resilience framework for Mutual Funds and AMCs.
  • On completion of the systems audit, Mutual Funds and AMCs are required to submit a report regarding exceptions observed in the system audit to the technology committee for review in the prescribed format. The committee, after reviewing the report, would be required to place it before the AMC & the Board of Trustees of the Mutual Fund. This report, along with the comments of the Trustees, would need to be passed to SEBI within six months of the closing of the respective financial year. 

For full details of the Circular dated April 11 2019, click here

The SEBI ‘Infrastructure Investment Trusts Regulations, 2014’ (“InvIT Regulations”) and SEBI ‘Real Estate Investment Trusts Regulations, 2014’ (“REIT Regulations”) were amended through notifications dated 22nd April, 2019.  The following changes have been introduced:

  • With a view to opening up the markets to retail investors, the minimum subscription limit for publicly offered InvITs and REITs have been reduced from INR 10 lakhs to INR 1 lakh, and from INR 2 lakhs to INR 50,000 respectively.
  • The trading lot has been defined in terms of number of units. The value of each allotment lot shall not be less than INR 1 lakh for InvITs and INR 50,000 for REITs, where such lot shall consist of 100 units.
  • Allotment to any investor shall be made in the multiples of a lot.
  • In consultation with the publicly offered InvITs and REITs, whose units are listed as on the date of the SEBI Circular, the stock exchanges would determine the number of units in the trading lot for such REITs and InvITs, within a period of 6 months.
  • The limits for aggregate consolidated borrowings and deferred payments, net of cash and cash equivalents, have been increased from 49% of the value of InvIT assets to70%. InvITs, which have a leverage limit of above 49% would be required to make additional disclosures with regard to the following:
  1. Available asset cover
  2. Debt-equity ratio
  3. Debt service coverage ratio
  4. Interest service coverage ratio
  5. Net worth

For full details of the Circular dated April 23 2019, click here


The SEBI Regulations on InvITs have been amended by a notification dated 22nd April 2019. Apart from the changes that have been referred to in para 2.2.7, the following amendments have been introduced:

  • In cases where the trustee or the investment manager of a publicly listed InvIT chooses to convert the InvIT to a privately placed unlisted InvIT, and such request has been approved by unitholders, the investment manager shall apply to SEBI and the stock exchanges for delisting of units of the InvIT. Exit would need to be provided to the dissenting unitholders.
  • If aggregate consolidated borrowings and deferred payments is proposed to be up to 49% of the value of its assets, the InvIT would be required to obtain a credit rating from a credit rating agency registered with SEBI and seek approval from its unitholders.
  • In cases where the same is expected to be above 49%, the InvIT would need to comply with additional conditions, which include obtaining a credit rating of “AAA” or its equivalent, from a SEBI registered credit rating agency, as well as obtaining approval from the unitholders. The InvIT would need to have a track record of at least six distributions on a continuous basis, post listing, in the years preceding the financial year in which the enhanced borrowings are proposed to be made. Further, the funds can be utilised only for acquisition and development of infrastructure projects.
  • A framework has been introduced for private placement of units of InvITs, which are not listed. An InvIT raising funds by way of private placement would need to issue a placement memorandum, which would have the required disclosures as prescribed by SEBI. Such InvITs can raise funds only from institutional investors and body corporates. Foreign investments in InvITs would be subject to guidelines issued by RBI.

The Mutual Fund regulations issued by SEBI were amended by a notification dated 26th April 2019, so that now, Mutual Fund schemes are permitted to invest in exchange traded commodity derivatives, subject to the investment restrictions prescribed by SEBI.

Such Mutual Funds are permitted to hold the underlying goods in case of physical settlement of contracts. A custodian may be appointed to have the custody of the underlying goods. Recurring expenses incurred towards storage and handling of the underlying goods may be charged by the AMC to the concerned scheme. 

India Market Updates

SEBI has imposed a penalty of INR 624.89 crores on the National Stock Exchange (NSE) after it was found to have provided unfair access through their co-location services placed at the site of the exchange to some high frequency traders.  The Exchange has also been asked to pay an interest rate of 12% a year effective from April 2014 to the Investor Protection and Education Fund (IPEF).

It has also been barred from accessing the securities markets directly or indirectly for a period of six months from the date of the SEBI order and has been directed to have a systems audit done at frequent intervals after a thorough appraisal of the technological changes introduced.

Further, SEBI has directed two former MDs & CEOs of NSE to disgorge 25% of the salary drawn for a specified period to the IPEF. Both the former MDs have been prohibited from associating with a listed company or a market infrastructure institution or any other market intermediary for a period of 5 years.

SEBI has ordered an investigation and a forensic audit of 13 trading members of the NSE linked to the co-location scam at the Exchange. This is in addition to the ongoing probe against nine other trading members initiated by SEBI.

SEBI has imposed the following fines:

  • a penalty of INR 1 crore on eleven entities for fraudulent and manipulative trading in the shares of Emed.com Technologies
  • a penalty of INR 50 lakhs on M/s Mangal Mantri Trading, a broking firm, for indulging in fraudulent trade practices in illiquid stock options on the Bombay Stock Exchange (BSE)
  • a penalty of INR 44 lakhs on nine entities for manipulating the share price of a M/s Shree Hanuman Sugar & Industries, a listed company, by placing orders at a price higher than the last traded price
  • a fine of INR 70 lakhs on 14 entities for fraudulent and manipulative trading in the stock options segment on the BSE

SEBI has barred a company based out of Bengaluru, Siyaram Development and Construction, and eight of its directors from the securities markets for a period of four years for illegally raising funds. SEBI has directed the entities to refund the money collected by the company along with 15% interest.

RBI has imposed a monetary penalty of INR 1 lakh on U.P. Postal Primary Co-operative Bank, Lucknow, for shifting its branch without obtaining prior approval from RBI.

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