RBI Regulatory Updates & Developments
- Rationalisation of MDR for Debit Card Transactions
RBI has decided to rationalise the Merchant Discount Rate (MDR) for debit cards based on the following criteria:
- Categorisation of merchants on the basis of turnover
- Adoption of a differentiated MDR for Quick Response (QR) code based transactions
- Specifying a ceiling on the maximum permissible MDR for both ‘card present’ and ‘card not present’ transactions
Accordingly, the maximum MDR for debit card transactions has been given in the circular. Further, banks shall ensure that the MDR levied on the merchant shall not exceed the cap rates as prescribed in the circular, irrespective of the entity which is deploying the card acceptance infrastructure at the merchant location.
RBI has advised banks to ensure that merchants on-boarded by them do not pass on MDR charges to customers while accepting payments through debit cards. These instructions came into effect from 1st January 2018.
- Submission of Financial Information to Information Utilities
As per the Insolvency and Bankruptcy Code (IBC), 2016, a financial creditor shall submit financial information and information relating to assets in relation to which any security interest has been created, to an Information Utility in such form and manner as may be specified by regulations.
Effective from 1st April 2017, the Insolvency and Bankruptcy Board of India (IBBI) (Information Utilities) Regulations, 2017, has specified the form and manner in which financial creditors are to submit this information to the Information Utility. IBBI has registered National E-Governance Services Limited (NeSL) as the first Information Utility under the IBBI (Information Utilities) Regulations, 2017.
RBI has advised all financial creditors to adhere to the relevant provisions of IBC, 2016 and IBBI (Information Utilities) Regulations, 2017 and to put in place appropriate systems and procedures to ensure compliance with the provisions of the Code and Regulations.
- Investment by FPI in Government Securities Medium Term Framework – Review
The Foreign Portfolio Investment (FPI) limits in Government Securities have been enhanced and have been highlighted in para 2.1.2 of the SEBI circular below.
RBI has cautioned users, holders and traders of Virtual Currencies including Bitcoins regarding the potential economic, financial, operational, legal, customer protection and security related risks associated with dealing with such Virtual Currencies.
RBI has also clarified that it has not given any licence/authorisation to any entity/company to operate such schemes or deal with Bitcoin or any Virtual Currencies.
RBI has released its Statutory Report on Trend and Progress of Banking in India 2016-17. The Report presents the performance and salient policy measures relating to the banking sector during 2016-17 and also provides an analysis of the co-operative banks and non-banking financial institutions. The highlights of the Report are as below:
- Public Sector Banks (PSBs) reported net losses for the second year in a row. Private sector banks posted a muted increase in profits during the year.
- An important development in India in 2016-17 has been the enactment of the IBC in May 2016. Subsequent to the enactment of the IBC, the Banking Regulation Act, 1949 was amended to empower the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution in respect of a default under the provisions of the IBC.
- The Government also announced a large-scale bank recapitalisation plan in October 2017 to reinvigorate PSBs struggling with high levels of stressed advances.
Several policy measures were initiated in the payment and settlement systems to ensure robust and customer friendly payment systems. Master Directions on Pre-paid Payment Instruments (PPIs) were issued.
- The operationalisation of small finance banks and payments banks is expected to provide further impetus to the financial inclusion agenda.
RBI has clarified that the Prompt Corrective Action (PCA) framework is not intended to constrain normal operations of the banks for the general public.
RBI further clarified that, under its supervisory framework, it uses various measures/tools to maintain the sound financial health of banks. PCA framework is one of such supervisory tools, which involves monitoring of certain performance indicators of the banks as an early warning exercise and is initiated once such thresholds relating to capital, asset quality etc. are breached. The objective is to facilitate the banks to take corrective measures including those prescribed by RBI, in a timely manner, in order to restore their financial health.
SEBI Regulatory Updates & Developments
SEBI has partially modified its previous circular dated 6th October 2017, on categorisation and rationalisation of mutual fund schemes (see circular dated 4th December 2017). The major highlights of the circular are as below:
- In order to ensure uniformity in respect of the investment universe for equity schemes, Mutual Funds have been classified into three categories such as large cap, mid cap and small cap, based on market capitalisation of the stock. It has been clarified that the average full market capitalisation of the previous six months would need to be considered for this purpose.
- For medium and medium-to-long term debt funds, the fund manager can now reduce the portfolio duration of the schemes up to one year, if there are adverse interest rate movements. The Asset Management Companies (AMCs) would be required to specify their asset allocation in case of such adverse situations in their offer documents.
- Corporate bond funds are required to have the minimum investment of 80% of their total assets only in AA+ and above rated instruments.
- Credit risk funds are required to have the minimum investment of 65% of their total assets only in AA and below rated corporate bonds (excluding AA+ rated corporate bonds).
- Banking and Public Sector Undertaking (PSU) funds have now been permitted to invest in Municipal Bonds.
SEBI has amended its circular (see circular dated 30th November 2015) prescribing the manner of representation of holding of specified securities. It has now been clarified that the details of the shareholding of the promoters and promoter group, public shareholder and non-public non-promoter shareholder should be accompanied by the Permanent Account Number (PAN). In case of joint holding, PAN of the first holder would be required.
The shareholding of the promoter and promoter group, public shareholder and non-public non-promoter shareholder is to be consolidated on the basis of the PAN and folio number to avoid multiple disclosures of shareholding of the same person.
In consultation with the Government of India, RBI has decided to revise the limits for investment by FPIs from 1st January 2018 for the period January – March 2018. Subsequently, SEBI has issued revised limits for investments, which are as below:
- Limit for FPIs in Central Government securities has been enhanced to INR 191,300 crore from INR 189,700 crore.
- Limit for Long-Term FPIs - Sovereign Wealth Funds (SWFs), Multilateral Agencies, Endowment Funds, Insurance Funds, Pension Funds and Foreign Central Banks - in Central Government securities has been revised to INR 65,100 crore from INR 60,300 crore.
- The debt limit category of State Development Loans (SDL) has been enhanced as below:
a. SDL-General has been enhanced to INR 31,500 crore from INR 30,000 crore.
b. SDL-Long Term has been enhanced to INR 13,600 crore from INR 9,300 crore.
SEBI has prescribed a standard format for applications for exemption under the SEBI Substantial Acquisition of Shares and Takeovers (SAST) Regulations, 2011. The format has been prescribed in Annexure A of SEBI Circular dated 22nd December 2017. The acquirer would be required to file an application with SEBI, supported by a duly sworn affidavit, giving details of the proposed acquisition and the grounds for seeking an exemption.
SEBI has introduced certain amendments to its regulations on Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). The key highlights of the amended regulations are as below:
- Revised definition of strategic investor and valuer: The definition of the term “strategic investor” and “valuer” has been revised, as below for both REITs and InvITs.
a. It has been clarified that the various entities under the definition of “strategic investor” should invest , either jointly or severally, not less than 5% of the total offer size of the REIT, or such amount as may be specified by SEBI from time to time, subject to compliance with the applicable provisions of the Foreign Exchange Management Act, 1999 and the rules or regulations or guidelines made thereunder. ‘Strategic investors’ are considered to be those such as an infrastructure finance company registered with RBI as a Non-Banking Financial Company (NBFC), a Scheduled Commercial Bank, a Multilateral and Bilateral Financial Institution, a Systemically Important Non-Banking Financial Company registered with Reserve Bank of India and an FPI.
b. A valuer would mean any person, who is a registered valuer under the Companies Act, 2013 or as specified by SEBI from time to time.
- Eligibility Criteria: While granting registration, SEBI will examine whether any previous application for grant of certificate made by the REIT/InvIT or the parties to the REIT/InvIT or their directors/members of governing board has been rejected by SEBI and whether any disciplinary action has been taken by SEBI or any other regulatory authority against the REIT/InvIT or the parties to the REIT/InvIT or their directors/members of governing board.
- Issue of units and allotment: If an InvIT raises funds by way of a public issue, then units may be offered for sale to the public if such units have been held by the sellers for a period of at least one year prior to the filing of draft offer document with SEBI.
- Borrowings and deferred payments: An REIT/InvIT, whose units are listed on a recognised stock exchange, would be permitted to issue debt securities in the manner specified by SEBI, provided that such debt securities shall be listed on recognised stock exchange(s).
- Mandatory disclosures in the annual report: Details regarding the monies lent by the REIT/InvIT to the holding company or SPV in which it has an investment in would need to be included in the annual report.
SEBI has amended its Issue and Listing of Debt Securities Regulations, 2008. In terms of the amendment, the term “debt securities” would now be referred to as “non-convertible debt securities” which create or acknowledge indebtedness. This includes debentures, bonds and such other securities of a body corporate or a Trust registered with SEBI as a REIT or InvIT, or any statutory body constituted by virtue of a legislation, whether constituting a charge on the assets of the body corporate or not, but shall exclude bonds issued by Government or such other bodies as may be specified by SEBI, security receipts and securitised debt instruments.
SEBI has amended its regulations on Settlement of Administrative and Civil Proceedings 2014, by including a separate chapter on Summary Settlement Procedure. The key provisions are as below:
- SEBI would issue a notice of settlement calling upon the noticee to file a settlement application in respect of the specified proceeding(s) to be initiated, upon payment of the settlement amount and/ or furnishing an undertaking in respect of other non-monetary terms or compliance with other non-monetary terms.
- SEBI will issue a settlement notice to entities undergoing a probe against violations, such as a delay in making disclosures and filing of returns and reports.
- The entity will need to file a settlement application, in a specified form, along with a non-refundable fee and further remit the settlement amount within 30 days from the date of receipt of the notice of settlement.
- SEBI may grant an extension of a further 15 days for the filing of the settlement application, remittance of the settlement amount and furnishing an undertaking in respect of any of the non-monetary terms.
- If remittance of the settlement amount is not made or any of the non-monetary terms have not been complied with, then SEBI may initiate proceedings against the entity.
On 28th December 2017, SEBI held its Board Meeting in Mumbai and the following key decisions were taken:
- Amendments to the SEBI (CRA) Regulations, 1999: The following changes are proposed to be introduced for Credit Rating Agencies (CRA).
a. The promoter of a CRA will have to maintain a minimum shareholding of 26% in the CRA for a minimum period of three years from the date of grant of registration by SEBI.
b. A foreign CRA incorporated in a Financial Action Task Force (FATF) member jurisdiction and registered under their law only will be eligible to promote a CRA in India.
c. Measures have been proposed for tightening the financial and operational eligibility of the promoters of CRAs.
d. No CRA would, directly or indirectly, hold more than 10% of shareholding and/ or voting rights in another CRA and would not have representation on the board of the other CRA. Prior approval would be needed from SEBI for acquisition of shares or voting rights in a CRA that result in change in control.
e. A shareholder holding 10% or more shares and/ or voting rights in a registered CRA shall not hold 10% or more shares and/ or voting rights, directly or indirectly, in any other CRA.
f. CRAs will be permitted to withdraw the ratings, subject to the CRA having rated the instrument continuously for a stipulated period of time and in the manner as may be specified by SEBI from time to time.
g. Besides, CRAs would be required to segregate their activities other than rating of financial instruments and economic/ financial research to a separate legal entity.
- Additional methods for listed entities to achieve MPS requirements: In order for listed companies to comply with the Minimum Public Shareholding (MPS) requirement, SEBI Board has decided to introduce two additional methods: Qualified Institutions Placement (QIP) and Sale of shares up to 2% held by promoters/promoter group in open market, subject to certain conditions. t. Accordingly, SEBI Board has approved necessary amendments to the SEBI (Issue of Capital and Disclosure Requirements Regulations (ICDR) Regulations, 2009.
- Issuance of refund orders/allotment letters/share certificates through electronic mode under SEBI ICDR Regulations, 2009: The SEBI Board has approved the proposal of inclusion of electronic mode as a valid method of communicating the allotment advice/credit of shares/unblocking of funds in addition to the present methods.
- Norms for Shareholding and Governance in Mutual Funds: The Board has stipulated that any shareholder owning at least 10% stake in an AMC will not be allowed to have 10 % or more stake in another mutual fund.
- Proposed framework for listing of Security Receipts issued by ARCs under SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008: SEBI Board has approved the framework for listing of Security Receipts (SRs), issued by Asset Reconstruction Companies (ARCs), under the SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008 (SDI Regulations) based on the announcement made by the Finance Minister.
- Easing of Norms for FPIs: With regard to FPIs, SEBI Board has decided to ease some rules, including expanding the eligible jurisdictions for registration by including countries with diplomatic tie-ups with India. Besides, SEBI may rationalise “fit and proper” criteria for FPIs as well as simplifying the broad-based requirements for such investors. The moves are aimed at easing direct registration for FPIs and avoiding Participatory notes (P-notes).
- Amendments to the SEBI (InvITs) Regulations, 2014 and SEBI (REITs) Regulations, 2014: The amendment has been notified at point 2.2.1
India Market Updates
On 12th December 2017, RBI imposed monetary penalty of INR 30 million on IndusInd Bank Limited and INR 50 million on Syndicate Bank.
IndusInd Bank was penalised for non-compliance with the directions issued by RBI on Income Recognition and Asset Classification (IRAC) norms as well as contravention of regulatory restrictions pertaining to Non-Fund Based (NFB) facilities. Syndicate Bank was penalised for non-compliance with the directions/ guidelines issued by RBI on cheque purchase/discounting, bill discounting, and Know Your Customer (KYC)/ Anti-Money Laundering (AML) norms.
In order to ensure that banks have systems in place to deal with any threats to payment systems and network security, RBI has been performing focused IT examinations of the banks to evaluate their cyber risk management systems and procedures.
The assessment is factored in the overall risk profile of a bank under risk-based supervision. Certain specific areas such as payment systems and network security are proposed to be subjected to more intensive scrutiny.
The Financial Services Commission (FSC) Mauritius, has opened its representative office in Mumbai.
This move is to further strengthen and deepen its partnership with its Indian counterparts. The Financial Services Commission is the integrated regulator for the Non-Bank Financial Services sector in Mauritius.