RBI Regulatory Updates & Developments

Interest Equalisation Scheme on Pre and Post Shipment Rupee Export Credit
The Government of India has decided to include merchant exporters in the ongoing Interest Equalisation Scheme for Pre and Post Shipment Rupee Export Credit and allow them interest equalisation at the rate of 3% on credit for export of products covered under 416 tariff lines identified under the Scheme. This came into effect on 2nd January 2019.

Basel III Capital Regulations – Review of Transitional Arrangements
Reserve Bank has deferred the implementation of the last tranche of 0.625% of Capital Conservation Buffer (CCB) from 31st March 2019 to 31st March 2020. Accordingly, minimum capital conservation ratios in para 15.2.2 of Part D ‘Capital Conservation Buffer Framework’ as applicable from 31st March 2018 will also apply from 31st March 2019 till the CCB attains the level of 2.5% on 31st March 2020.

Further, the pre-specified trigger for loss absorption through conversion or write-down of Additional Tier 1 instruments (perpetual Non-cumulative preference shares (PNCPS) and PDI) shall remain at 5.5% of Risk Weighted Assets (RWAs) and will rise to 6.125% of RWAs on 31st March 2020.

External Commercial Borrowing (ECB) Policy – New ECB Framework
Reserve Bank has issued a revised External Commercial Borrowing (ECB) Framework, which has been set out in the annex to the circular.
The salient features of the new framework are:

  1. Merging of Tracks: - Merging of Tracks I and II as “Foreign Currency denominated ECB” and merging of Track III and Rupee Denominated Bonds framework as “Rupee Denominated ECB”.
  2. Eligible Borrowers: This has been expanded to include all entities eligible to receive Foreign Direct Investment (FDI). Additionally, the following organisations can also borrow under this framework:
    • Port Trusts
    • Units in SEZ, SIDBI, EXIM Bank
    • registered entities engaged in micro-finance activities
    • registered not for profit companies
    • registered societies, trusts and cooperatives
    • Non-government organisations.
  3. Recognised Lender: The lender should be a resident of a Financial Action Task Force (FATF) or International Organisation of Securities Commission (IOSCO) compliant country. Multilateral and Regional Financial Institutions, Individuals and Foreign branches or subsidiaries of Indian banks can also be lenders..
  4. Minimum Average Maturity Period (MAMP): MAMP will be 3 years for all ECBs. However, for ECB raised from foreign equity holders and utilised for specific purposes, the MAMP would be 5 years. Similarly, for ECB up to USD 50 million per financial year raised by the manufacturing sector - which has been given a special dispensation - the MAMP would be 1 year.
  5. Late Submission Fee (LSF) for delay in reporting: Any borrower who is otherwise in compliance with the ECB guidelines, except for a delay in reporting drawdown of ECB proceeds before obtaining a Loan Registration Number (LRN) or Form ECB 2 returns, can regularise the delay by payment of LSF as per the laid down procedure.

ECBs up to USD 750 million or equivalent per financial year, which otherwise are in compliance with the parameters and other terms and conditions set out in the new ECB framework, will be permitted under the automatic route will not require prior approval of the Reserve Bank. The designated AD Category I bank, while considering the ECB proposal, is expected to ensure compliance with applicable ECB guidelines by their constituents.

Customer Protection – Limiting Liability of Customers in Unauthorised Electronic Payment Transaction in Prepaid Payment Instruments Issued by Authorised Non-Banks
A framework for ‘Risk Management’ and ‘Customer Protection’ has already been laid down in paragraphs 15 and 16 of Master Direction on Issuance and Operation of Prepaid Payment Instruments (PPI MD) (https://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=11446) with a view to further strengthening customer protection for PPIs which are issued by entities other than banks, the criteria for determining the customers’ liability in unauthorised electronic payment transactions resulting in debit to their PPIs have been reviewed as below:

  1. Applicability
    The provisions of these directions will be applicable to all authorised non-bank PPI issuers (referred to as ‘PPI issuer’ hereafter). Categories of electronic payment transactions have been divided into two categories:
    • Remote or online payment transactions (transactions that do not require physical PPIs to be presented at the point of transactions e.g. wallets, card not present (CNP) transactions, etc.).
    • Face-to-face or proximity payment transactions (transactions which do require the physical PPIs, such as cards or mobile phones to be present at the point of transactions
  2. Reporting of unauthorised payment transactions by customers to PPI issuers
    • For electronic payment transactions, PPI issuers shall ensure that their customers mandatorily register for SMS alerts and, wherever available, also register for e-mail alerts.
    • The SMS alert and email alert (wherever registered) for any payment transaction in the account shall mandatorily be sent to the customers. The transaction alert should have a contact number and may additionally have an e-mail id to which a customer can report unauthorised transactions or notify the objection.
    • Customers shall be advised to notify the PPI issuer of any unauthorised electronic payment transaction at the earliest. They shall also be informed that longer the time taken to notify the PPI issuer, the higher the risk of loss to the PPI issuer and the customer.
    • To facilitate this, PPI issuers shall provide customers with 24/7 access via website, SMS, e-mail, or a dedicated toll-free helpline for reporting unauthorised transactions, loss or theft of the PPI that have taken place.
    • Further, a direct link for lodging complaints, with a specific option to report unauthorised electronic payment transactions shall be provided by PPI issuers on a mobile app or home page of their website or any other evolving acceptance mode.
    • Once established, the loss or fraud reporting system shall also ensure that immediate response (including auto response) is sent to the customers, acknowledging the complaint along with the registered complaint number. The communication systems used by PPI issuers to send alerts and receive their responses shall record the time and date of delivery of the message and receipt of customer’s response, if any. On receipt of a report of an unauthorised payment transaction from the customer, PPI issuers shall take immediate action to prevent further unauthorised payment transactions in the PPI.

Micro, Small and Medium Enterprise (MSME) Sector – Restructuring of Advances
In order to facilitate meaningful restructuring of MSME accounts (as defined in the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006) that have become stressed, it has been decided to permit a one-time restructuring of existing loans to MSMEs classified as ‘standard’, without a downgrade in the asset classification, subject to the following conditions:

  1. The aggregate exposure, including non-fund based facilities, of banks and NBFCs to the borrower must not exceed ₹250 million as on 1st January 2019.
  2. The borrower’s account is in default but is a ‘standard asset’ as on 1st January 2019, and continues to be classified as a ‘standard asset’ till the date of implementation of the restructuring.
  3. The borrowing entity is GST-registered on the date of implementation of the restructuring. However, this condition will not apply to MSMEs that are exempt from GST-registration.
  4. The restructuring of the borrower account is implemented on or before 31st March 2020. A restructuring would be treated as implemented if the following conditions are met:
    • All related documentation, including execution of necessary agreements between lenders and borrowers and creation of security charge are completed by all the lenders
    • The new capital structure and changes in the terms and conditions of the existing loans are duly reflected in the books of all the lenders and the borrower.
  5. A provision of 5% in addition to the provisions already held, would need to be made in respect of accounts restructured under these instructions. Banks will, however, have the option of reversing such provisions at the end of the specified period, subject to the account demonstrating satisfactory performance during the specified period, as prescribed.
  6. Post-restructuring, NPA classification of these accounts shall be as per the extant Income Recognition and Asset Classification (IRAC) norms.
  7. Banks and NBFCs shall make appropriate disclosures in their financial statements, under ‘Notes on Accounts’, relating to the MSME accounts restructured under these instructions in the prescribed format.
  8. All other instructions applicable to restructuring of loans to MSME borrowers shall continue to be applicable.

Banks and NBFCs desirous of adopting this scheme would be required to put in place a Board approved policy on restructuring of MSME advances under these instructions, within a month from the date of this circular. The policy shall include framework for viability assessment of the stressed accounts and regular monitoring of the restructured accounts.

Press Releases

During January 2019, 9 NBFCs surrendered their Certificates of Registration to RBI who consequently cancelled them. RBI also cancelled the registration certificates of a further 141 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 has prescribed reporting norms in respect of Artificial Intelligence (AI) and Machine Learning (ML) applications and systems offered and used by market intermediaries (see circular dated 4th January 2019)
Any set of application and systems that are:

  • offered to investors (individuals and institutions) by market intermediaries to facilitate investing and trading
  • used to disseminate investment strategies and advice
  • used to carry out compliance operations or activities

where AI or ML has been portrayed as a part of the public product offering or under usage for compliance or management purposes, has been included in the scope of the circular. Fin-Tech and Reg-Tech initiatives undertaken by market participants, that involve AI and ML, would also be covered under this circular.

All registered Stock Brokers and Depository Participants offering or using applications or systems, as defined above, are required to comply with the reporting requirements prescribed by SEBI.

In terms of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2018, a succession certificate, probate of will, will, letter of administration, or court decree, which may be applicable in terms of the Indian Succession Act, 1925, has been prescribed as a documentary requirement for transmission of securities held in physical mode. However, transmission of securities held in dematerialised mode was governed by the laws of the depositories. It has now been decided that transmission of securities held in dematerialised mode will also be dealt with in line with the aforementioned SEBI Regulations 2018. (see circular dated 4th January 2019).


SEBI has prescribed the following certain norms for portfolio concentration in ETFs and Index Funds (see circular dated 10th January 2019):

  • The index shall have a minimum of 10 stocks as its constituents.
  • For a sectoral or thematic index, no single stock would have more than 35% weight in the index.
  • For other than sectoral or thematic indices, no single stock would have more than 25% weight in the index.
  • The weightage of the top three constituents of the index cumulatively shall not be more than 65% of the Index.
  • The individual constituent of the index would need to have a trading frequency greater than or equal to 80% and an average impact cost of 1% or less over previous six months.

Thus, any ETF or Index Fund that seeks to replicate a particular index would be required to ensure that such index complies with the aforesaid norms, which would also be applicable to all ETFs and Index Funds tracking equity indices.
The issuers of all the existing Equity ETFs and Index Funds are required to ensure adherence to the new norms within a period of three months from the date of issuance of the circular.

In cases where SEBI has issued final observations on the Scheme Information Document, but which have not yet been launched, the compliance status vis-à-vis these norms would need to be submitted to SEBI before launching such ETFs or Index Funds.

SEBI has issued a framework on cyber security and cyber resilience, which is to be complied with by Mutual Funds. The guidelines will be effective from 1st April 2019 and the key stipulations are as below:

  • Mutual Funds would need to formulate a cybersecurity and cyber resilience policy document adhering to the required framework.
  • The policy document needs to be approved by the board of the Asset Management Company (AMC) and the trustees. However, in case of deviations from the suggested framework, reasons for such deviations would have to be laid down in the policy document, which would itself need to be reviewed by the Board at least once annually.
  • The AMC should designate a senior official as the Chief Information Security Officer (CISO) who would be responsible for the establishment and implementation of processes and procedures as per the cyber security and resilience policy approved by the Board of the AMC.
  • A Technology Committee comprising experts proficient in technology would need to be constituted by the Board of the AMC and would be required to meet on a on a quarterly basis review the implementation of the cyber security and cyber resilience policy.
  • A reporting procedure would need to be established to facilitate communication to the CISO or senior management in a timely manner, of any unusual activities and events.
  • The AMCs should define responsibilities of its employees, outsourced staff, and employees of vendors, members or participants and other entities, who may have access or use systems or networks of the Mutual Funds or the AMCs, towards ensuring the goal of cyber security.
  • No person by virtue of rank or position should have any intrinsic right to access confidential data, applications, system resources or facilities.
  • Quarterly reports would need to be submitted to SEBI in a soft copy and should contain information on cyber-attacks and threats experienced by Mutual Funds or AMCs. They should indicate the measures taken to mitigate vulnerabilities, threats and attacks as that may be useful for other AMCs or Mutual Funds.

SEBI will be implementing a uniform membership structure for equity derivatives and cash segments from 1st April 2019 (See circular dated 11th January 2019). In order to implement a uniform membership structure across equity cash and derivatives segments, SEBI has stipulated the following:

  • The membership structure as a Trading Member (TM), Self-clearing Member (SCM), Clearing Member (CM) and Professional Clearing Member (PCM) as prevalent in equity derivatives segment would be implemented in cash segment with effect from 1st April 2019.
  • The existing stock brokers in cash segment of a Stock Exchange who are already registered as SCM or CM in derivatives segment would automatically have the same status in the cash segment, with effect from 1st April 2019.
  • The existing stock brokers in cash segment of a Stock Exchange who are not registered as SCM or CM in the derivatives segment can act in the same capacity in the cash segment with effect from 1st April 2019. However, they would be required to meet the prescribed net worth requirement as applicable to SCM or CM in the equity derivatives segment on or before 30th September 2019. Stock brokers, who fail to meet this condition, would have to tie up with a CM or a PCM for clearing and settlement of their trades on or before 30th September 2019.
  • The existing PCMs in the derivatives segment shall become PCMs in cash segment with effect from 1st April 2019. However, the existing Custodian Clearing Member in cash segment shall continue to act as Custodian Clearing Member in the cash segment only.

SEBI has introduced certain changes to the guidelines for public issues of REITs and InVITs, as below (see circular dated 15th January 2019, REITs / InVITs)

  • REITs and InVITs can accept only Applications Supported by Blocked Amount (ASBA).
  • The Manager, on behalf of the REIT or InVIT, will announce the floor price or the price band at least 2 working days before the opening of the bid in case of an initial public offer.
  • The Trusts may extend the bidding period for a minimum of three working days in case of force majeure circumstances. However, the extension should not exceed the 30-day bidding period.
  • An investor, intending to subscribe to a public issue, would need to submit a complete bid-cum-application form either to self-certified syndicate banks with whom the bank account to be blocked is maintained or to any of the following intermediaries:
    • A syndicate member (or a sub-syndicate member)
    •  A stock broker registered with a recognised Stock Exchange
    • A depository participant
    • A registrar to an issue and share transfer agent
  • Intermediaries accepting the application forms would be responsible for uploading the bid along with the relevant details in the application form on the electronic bidding system of the Stock Exchanges.
  • Stock Exchanges would be required to provide a transparent electronic bidding facility and validate the electronic bid details with the depository’s records by the end of each bidding day.

Mutual Fund schemes are permitted to undertake transactions in the equity derivatives in accordance with the exposure limits specified in the SEBI circular dated 18th August 2010. One of the stipulations in the said circular is that Mutual Funds shall not write options or purchase instruments with embedded written options. SEBI has decided to permit mutual funds to write call options under a covered call strategy as prescribed below (see circular dated 16th January 2019).

Mutual Fund schemes (except Index Funds and ETFs) may write call options only under a covered call strategy for constituent stocks of NIFTY 50 and BSE SENSEX subject to the following conditions:

  • The total notional value (taking into account the strike price as well as premium value) of call options written by a scheme shall not exceed 15% of the total market value of equity shares held in that scheme.
    The total number of shares underlying the call options written shall not exceed 30% of the unencumbered shares of a particular company held in the scheme.
  • In no case shall a scheme write a call option without holding the underlying equity shares. A call option can be written only on shares which are not hedged using other derivative contracts.
  • The total gross exposure related to option premium paid and received must not exceed 20% of the net assets of the scheme.
  • The call option written shall be marked to market daily and the respective gains or losses factored into the daily NAV of the respective scheme(s) until the position is closed or expired.

The format of the MCR to be submitted by AMCs has been revised (see circular dated 22nd January 2019). From April 2019 onwards, AMCs would be required to submit the MCR to SEBI in the revised format by the 3rd working day of each month.

A Mutual Fund scheme is permitted to invest a certain percentage of its Assets under Management (AUM) in schemes of the same Mutual Fund or other Mutual Funds. It has been clarified that the investing scheme shall exclude the same while reporting the data on AUM in the MCR.

Press Releases

India International Clearing Corporation (IFSC) Limited and NSE IFSC Clearing Corporation Limited are functioning as Central Counterparties (CCPs) in the Gujarat International Finance Tec-City, an International Financial Services Centre (GIFT-IFSC).

These clearing corporations have qualified as QCCPs in view of the fact that these are regulated by SEBI under SEBI Act 1992, Securities Contract (Regulation) Act, 1956 (SCRA) and Rules, Regulations and Guidelines. These clearing corporations are also subjected, on an on-going basis, to rules and regulations that are consistent with the Principles for Financial Market Infrastructures (PFMIs) issued by the Committee on Payments and Market Infrastructures (CPMI) and International Organisation of Securities Commissions (IOSCO).

India Market Updates

SEBI has imposed a fine of INR 34 lakhs on 10 entities for fraudulent trading in the shares of Mindvision Capital. SEBI had conducted an investigation in trading activities of the Company between June 2009 and February 2010 during which it was observed that the entities were connected to each other and were executing circular trading in the scrip of the Company, resulting in creation of an artificial volume.

A penalty of INR 55 lakhs was imposed by SEBI on 9 entities for fraudulent and manipulative trading in the illiquid stock options segment of Bombay Stock Exchange (BSE). SEBI conducted an investigation into the trading activity in illiquid stock options on BSE from April 2014 to September 2015 after observing large scale reversal of trades in the Stock Exchange’s stock options segment. It was observed that the entities had partaken in reversal trades, which were manipulative and fraudulent in nature, thereby violating the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations.

SEBI is considering tightening of norms for liquid funds, which are one of the most popular mutual fund products for institutional investors. The proposals being considered by SEBI include minimum investments in short-term government bonds and stricter valuation norms. SEBI may also ask liquid funds to “mark to market” bonds with maturity above 30 days.

SEBI is working on new data privacy norms for Foreign Portfolio Investors (FPIs). Category I FPIs, comprising sovereign wealth funds, are exempted from the new KYC requirements and SEBI is now contemplating the extension of this provision to Category II FPIs as well, if they satisfy a few eligibility conditions.  A working committee has been set up, which would be taking feedback from FPIs and custodians regarding the proposal.

SEBI has imposed the following fines:

  1. INR 1 crore to a former promoter of DSQ Software for failing to comply with its directions passed more than 14 years ago. The former promoter had failed to buy back 1.30 crore shares as directed by SEBI, which had found him guilty of fraudulent trading in 2004.
  2. INR 1 crore to the Bank of Maharashtra for non-compliance with its directions on KYC norms and Frauds-Classification and Reporting.

RBI has fined the following:

  1. INR 3 crores on Citibank NA (India) for deficiencies in compliance with the RBI instructions on ‘Fit and Proper’ criteria for directors of banks.
  2. INR 1 crore on Bajaj Finance, a Non-Banking Financial Company, for deficiencies in regulatory compliance. The penalty has been imposed for violation of RBI’s Master Directions on Fair Practices Code for lending.
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