- Priority Sector Lending – Targets and Classification
After undertaking a review of the priority sector lending profile of the foreign banks, RBI has decided that the sub-target of 8% of Adjusted Net Bank Credit (ANBC) or Credit Equivalent Amount of Off-Balance Sheet Exposure (CEOBE), whichever is higher, shall become applicable to foreign banks with 20 branches and above, for lending to small and marginal farmers from FY 2018-19. Further, the sub-target of 7.50% of ANBC or CEOBE, whichever is higher, for bank lending to the Micro Enterprises shall also become applicable for the foreign banks with 20 branches and above from FY 2018-19.
Additionally, RBI has decided to remove the present applicable loan limit of INR 5 crore and INR 10 crore per borrower to Micro/Small and Medium Enterprises (MSMEs) respectively for classification under priority sector. Accordingly, all bank loans to MSMEs, engaged in providing or rendering of services, as defined in terms of investment in equipment under MSMED Act, 2006, shall qualify under priority sector without any credit cap.
- Hedging of Commodity Price Risk and Freight Risk in Overseas Markets (Reserve Bank) Directions
During January 2018, RBI issued draft directions for hedging of commodity price risk and freight risk. RBI has now finalised the Hedging of Commodity Price Risk and Freight Risk in Overseas Markets (Reserve Bank) Directions, 2018. The revised direction has come into effect from 1st April 2018.
Specific approval from RBI given under the approval route based on the previous set of guidelines, means that residents hedging their commodity price and freight risks would be permitted to continue hedging under the said approval till 30th June 2018 or the last date specified in the approval, whichever is earlier.
- Discontinuance of LoUs and LoCs for Trade Credits
On a review, RBI has decided to discontinue the practice of issuance of Letters of Undertaking (LoUs)/Letters of Comfort (LoCs) for Trade Credits for imports into India by AD Category –I banks with immediate effect.
Letters of Credit and Bank Guarantees for Trade Credits for imports into India may continue to be issued, subject to compliance with the provisions contained in Master Circular on Guarantees and Co-acceptances dated 1st July 2015, as amended from time to time.
AD Category-I banks are required to bring the aforesaid instructions to the notice of their constituents and customers.
- Separate limit of IRFs for FPIs
The Foreign Portfolio Investment (FPI) limits in Government Securities have been enhanced and have been highlighted in para 2.1.1 of the SEBI circular below.
Twelve NBFCs have surrendered the Certificates of Registration granted to them by RBI. RBI, in turn, has cancelled these Certificates of Registration. 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.
Following RBI’s cancellation of registration certificate of M/s Lofty Securities Private Limited, the company 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 has partially modified its circulars dated 5th December 2013 and 12th June 2015, wherein it has decided to allocate a separate limit of INR 5,000 crore to Foreign Portfolio Investors (FPIs) for taking long position in Interest Rate Futures (IRFs). The limit will be calculated as below:
- For each interest rate futures instrument, position of FPIs with a net long position will be aggregated. FPIs with a net short position in the instrument will not be reckoned.
- No FPI can acquire net long position in excess of INR 1,800 crore at any point of time.
SEBI has directed stock exchanges to put in place necessary mechanisms for monitoring and enforcing limits of FPIs in IRFs.
SEBI has issued clarifications with respect to investment by certain category II FPIs (see circular dated 13th March 2018), as below.
- Collective Investment Vehicles of private or merchant banks investing on behalf of clients would have to ensure the following:
- The client/investor or their Beneficial Owner (BO) should not be a Resident Indian or NRI or an Overseas Citizen of India and should not be resident in a country identified in the public statement of the Financial Action Task Force (FATF).
- The client/investor should also have fulfilled Know Your Client (KYC) norms. The Beneficial Owner of the client/investor should be identified in accordance with the Prevention of Money Laundering (Maintenance of Records) Rules, 2005.
- The client/investor should not have opaque structures or Bearer share structure.
- The collective investment vehicle of the bank should be broad-based with more than 20 investors and with no investor having over 49% stake.
- Investment in India by insurance/re-insurance companies must be maintained as an undivided common portfolio. Segregated portfolio or investor/policy-holder level investment structure would not be permitted.
- Asset Management Companies (AMCs), investment managers, advisers, portfolio managers, broker-dealer and swap-dealer under Category II, are permitted to invest their proprietary funds.
After receiving representations from the National Commodity Derivative Exchanges (NCDEs), SEBI has clarified that in order to discourage delayed filing by members, the additional fees payable by members who file their claim beyond the prescribed time-lines shall be non-refundable even if the arbitration award goes in favour of the member.
This is effective from 14th March 2018.
SEBI has modified the provisions of its circular on the aforesaid subject, as below:
- Domestic clients and FPIs may take long or short positions without having to establish existence of underlying exposure, up to a single limit of USD 100 million equivalent, across all currency pairs involving INR put together, and combined across all the stock exchanges.
- FPIs would need to ensure that their short positions at all exchanges across all contracts in FCY-INR pairs do not exceed USD 100 million.
- In case an FPI breaches the short position limit, exchanges will have to restrict such FPIs from increasing their existing short positions or creating new short positions in the currency pair till such time the FPI complies with the requirement.
- FPIs shall be required to have an underlying exposure in Indian debt or equity securities, including units of equity/debt mutual funds to take long positions in excess of USD 100 million in all contracts in FCY-INR pairs.
- Domestic clients may take positions in excess of USD 100 million in all contracts in FCY-INR pairs, subject to the conditions specified by RBI (see RBI circular dated 20th June 2014 and 31st March 2015).
The onus of complying with the provisions of the RBI circular would rest with the client or FPI as applicable (see RBI circular dated 26th February 2018). In case of any contravention, the participant shall be liable to any action that may be warranted as per the provisions of Foreign Exchange Management Act (FEMA), 1999. These limits would be monitored by stock exchanges and clearing corporations, and any breaches would need to be reported to the RBI.
In the past, SEBI had prescribed norms for providing margin benefit on spread positions in commodity futures contracts. The following changes have been introduced (see SEBI circular dated 20th March 2018):
- Exchanges may provide spread benefit in initial margin across futures contracts in a commodity complex provided the following conditions are met:
- Minimum coefficient of correlation between futures prices of the two commodities is 0.90.
- Back-testing for adequacy of spread margin to cover Mark-To-Market (MTM) has been carried out for a minimum period of one year.
- The initial margin after spread benefit should be able to cover MTM margin at least 99% of the days, according to back-testing.
- The maximum benefit in initial margins on spread positions is restricted to 50%.
- No benefit in extreme loss margin shall be provided for spread positions.
- Exchanges are free to charge higher margins, depending upon their risk perception. Margin benefit on spread positions shall be entirely withdrawn latest by the start of tender period or the start of the expiry day, whichever is earlier.
- To be eligible for initial margin benefit, each individual contract in the spread should be from amongst the first three expiring contracts in the two commodities only.
- Exchanges would be required to continuously monitor dynamics of the commodities for appropriate future course of action.
The provisions of this circular will be effective from 1st July 2018.
SEBI has prescribed certain risk management norms for commodity derivatives (Please see SEBI Circular dated 21st March 2018).
- Members of clearing corporations in commodity derivatives segments would have to maintain a minimum liquid net worth of at least INR 50 lakh at all points of time and would not have any Base Minimum Capital (BMC) requirement.
- SEBI issued a circular dated 15th July 2016 on acceptance of Fixed Deposit Receipts (FDRs) by clearing corporations. Commodity derivatives exchanges would be required to comply with the provisions of that circular within three months from 21st March 2018. Thus, trading/clearing members of commodity derivatives exchanges, who have deposited their own FDRs or FDRs of associate banks, would be required to replace such collateral with other eligible collateral as per extant norms, within a period of three months.
- Commodity derivatives exchanges would be required to comply with provisions of SEBI’s circular dated 8th January 2018 pertaining to margin provisions for intra-day crystallised losses, within three months from 21st March 2018.
In 2015, SEBI informed all intermediaries regarding due diligence and reporting requirements to be complied under the Income Tax Rules and guidance note on Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standards (CRS).
As per the Rules, Reporting Financial Institutions (RFIs) have been advised to take necessary steps to ensure compliance with requirements for carrying out the necessary due-diligence and reporting for FPIs, which are as below:
- Valid self-certifications, FATCA, and CRS declaration forms with documentary evidence to be obtained as part of the account opening documentation in relation to FATCA or CRS.
- Custodians are required to carry out due diligence on the accounts held by Global Custodian (GC) end-clients. However, for carrying out due diligence, the Custodian may rely on the FATCA or CRS documentation done by GC for the account holders including self-certification.
- The obligations for due diligence and reporting remain with the Custodian who should also be able to access all documents in relation to an account holder.
- FPIs would have to create a system to capture and validate the information collected through valid FATCA or CRS declaration forms.
- A framework would need to be developed for carrying out due diligence procedures and for maintaining reporting information and also develop a system of audit.
RFIs are required to certify to SEBI on an annual basis regarding their compliance with various provisions of the Income Tax rules relating to FATCA. The certificate would be a part of the audit report on internal controls submitted to SEBI annually.
Designated Depository Participant (DDP) should grant registration to FPI only after obtaining valid self-certification, FATCA or CRS declaration forms. DDPs shall submit a certificate in respect of new registration granted during every month at the end of the month to the effect that all due–diligence procedures, including obtaining of valid self-certification/FATCA/CRS declaration, have been followed before granting the said registration to FPI.
In April 2014, SEBI prescribed revised guidelines on Liquidity Enhancement Schemes (LES) in Equity Cash and Equity Derivatives segments (see circular dated 23rd April 2014). SEBI has stipulated certain additional requirements in respect of the same (see circular dated 26th March 2018), as below:
- Any commodity that is classified as a sensitive commodity by the exchange would not be eligible for LES.
- A commodity derivative product is considered to be liquid on the basis of average daily turnover. In the case of agriculture and agri-processed commodities, the threshold is INR 200 crore while it is INR 1,000 crore for non-agricultural commodities.
- Unless the LES is launched by the exchange where the particular commodity derivative product is already trading, no other bourse can have such a scheme for that specific product.
- The schemes which incentivise brokers based on activation of new UCC (Unique Client Codes), number of trades, or open interest will not be permissible under the LES.
SEBI has directed exchanges to put in place a mechanism to ensure that the LES does not create artificial volumes, does not take away liquidity form the market, is not manipulative in nature and will not lead to mis-selling of the product in the market.
The aforesaid provisions have come into effect from 26th March 2018.
SEBI has now issued certain clarifications on the captioned subject through its circular (see circular dated 28th March 2018), as stated below:
- A maximum of 12 International Securities Identification Number (ISINs) maturing per financial year is permitted only for plain vanilla debt securities. Within the limit of 12, an entity can issue both secured and unsecured non-convertible debentures while no separate category of ISINs has been provided to them.
- In case of debt securities, where call and/or put option is exercised, the issuer may issue additional debt securities for the balance period, i.e., the remaining period of maturity of earlier debt securities.
- However, the additional issue shall be subject to the condition that the aggregate count of outstanding ISINs maturing in the financial year in which the original issue of debt securities (bearing call and/or put option) is due for expiring, shall not exceed the prescribed limit of ISINs.
- An issuer is allowed a maximum of 17 ISINs maturing per financial year. For all the debt securities issued in 2017-18 on or after 1st July 2017, all the ISINs corresponding to these issues, maturing in any financial year, will adhere to the limit of 12/5 ISINs.
- In case of conversion of partly paid debt securities to fully paid debt securities, such conversion will not be counted as an additional ISIN.
- Bonds issued by banks to raise resources for lending to long term infrastructure sub-sectors and affordable housing, which have a minimum maturity of seven years are exempted as per SEBI’s circular of June 2017. A similar exemption would be available to All India Term Lending and Refinancing Institutions (AITLRI), as notified by RBI, and Infrastructure Debt Funds registered as NBFCs, subject to them issuing debt securities with minimum maturity of five years.
- No exemption from the applicability of ISIN circular would be available to any issuer for debt securities issued on or after 1st July 2020.
- While making an issue of debt securities, the issuer would have to disclose upfront in the Information Memorandum/Disclosure Document that further issuances may be made under the same ISIN. If such a disclosure is not made by the issuer then compliance would have to be made under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
- A statement would need to be submitted to the stock exchanges on a half yearly basis, latest by 15th April and 15th October of each financial year.
These provisions have come into effect from 28th March 2018.
Key highlights of the decisions taken at the SEBI Board meeting held on 28th March 2018 are as below:
- The Board considered the Kotak Committee recommendations and the public comments thereon and decided to accept several recommendations of the Committee without any modifications, such as:
- Reduction in the maximum number of listed entity directorships from 10 to 8 by 1st April 2019 and to 7 by 1st April 2020.
- Expanding the eligibility criteria for independent directors
- Enhanced role of the Audit Committee, Nomination and Remuneration Committee and Risk Management Committee
- Disclosure of utilisation of funds from QIP/preferential issue
- Disclosures of auditor credentials, audit fee, reasons for resignation of auditors, etc.
- Disclosure of expertise/skills of directors, etc.
- The Board also accepted several recommendations with modifications, such as:
- Minimum 6 directors in the top 1000 listed entities by market capitalisation by 1st April 2019 and in the top 2000 listed entities, by 1st April 2020.
- At least one woman independent director in the top 500 listed entities by market capitalisation by 1st April 2019 and in the top 1000 listed entities, by 1st April 2020
- Separation of CEO/MD and Chairperson to be initially made applicable to the top 500 listed entities by market capitalisation.
- Measures for Strengthening Algorithmic Trading Framework:
- After deliberations, the SEBI Board approved the following proposals for strengthening the Algorithmic Trading Framework:
- In order to reduce the cost for trading members wishing to operate from the colocation facility, Stock Exchanges will introduce Shared Colocation Services.
- Stock Exchanges to provide Tick-by-Tick Data feed (TBT Feed) to all the trading members, free of charge, subject to trading members creating the necessary infrastructure for receiving and processing it.
- In order to establish an audit trail and to ensure better surveillance of Algo trading, Stock Exchanges would allot a unique identifier to each algorithm approved.
- Rationalising and Strengthening the framework of Equity Derivatives Market:
- The SEBI Board approved the following measures to strengthen the Equity Derivatives Market.
- To facilitate greater alignment of the cash and derivative market, physical settlement for all stock derivatives would be carried out in a phased and calibrated manner.
- It is proposed to update and strengthen the existing entry criteria for introduction of stocks into the derivative segment in line with the increase in market capitalisation.
- A framework has been approved to reflect global initiatives on product suitability. Individual investors may freely take exposure in the market (cash and derivatives) up to a computed exposure based on their disclosed income as per their Income Tax Return over a period of time, for exposure beyond the computed exposure, the intermediary would be required to undertake rigorous due diligence and obtain appropriate documentation from the investor.
- Proposal for amendment of the regulatory provision permitting charging of additional expenses of up to 0.20% of the daily net assets of Mutual Fund Schemes:
With regard to Mutual Funds, the SEBI Board has approved the proposal to reduce the maximum additional expense permitted to be charged to a mutual fund scheme from 20 bps to 5 bps.
- Amendments to the SEBI (Alternative Investment Funds) Regulations, 2012 regarding Angel Funds:
- With respect to Angel Funds, the SEBI Board has approved the following amendments to SEBI (Alternative Investment Funds) Regulations, 2012:
- Maximum investment amount in venture capital undertakings by an angel fund in any venture capital undertaking will be increased from five crore rupees to ten crore rupees.
- The requirement of minimum corpus of an angel fund will be reduced from ten crore rupees to five crore rupees.
- Maximum period for accepting funds from angel investors will be increased from three years to five years.
- Revised Framework for non-compliance of the Listing Regulations:
- The Board has decided to revise the existing enforcement framework for non-compliance with the listing regulations by listed companies. The revised framework is expected to promote a better compliance culture apart from putting in place an appropriate system for effective enforcement. Key features of the revised framework are as below:
- Non-compliance with the requirements pertaining to composition of the listed company’s Board and its committees, etc., will lead to imposition of fines by stock exchanges.
- Stock Exchanges will be empowered to freeze the shareholding of the promoter and promoter group in such non-compliant entity as well as their shareholding in other securities.
- Distribution of cash benefits by listed companies through Depositories:
The Board has decided to include the option of distribution of cash benefits like dividends through Depositories, in addition to the present system of distribution directly by the listed companies or through their Registrar to an issue and/or Share Transfer Agents.
- Amendment to Regulation 40 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 for mandating transfer of securities only in demit form:
The Board revised the provisions relating to transfer of listed securities and has decided that unless the securities are held in the dematerialised form with a depository, requests for effecting transfer of listed securities would not be processed.
RBI has imposed monetary penalty on the following banks for non-compliance with the directions issued.
- A monetary penalty of INR 20 million has been imposed on Indian Overseas Bank for non-compliance with the directions issued on Know Your Customer (KYC) norms.
- Axis Bank Limited has been fined with a monetary penalty of INR 30 million for non-compliance with the directions on Income Recognition and Asset Classification (IRAC) norms.
- State Bank of India has been penalised with a monetary penalty of INR 4 million for non-compliance with the directions issued on Detection and Impounding of Counterfeit Notes.
- Equitas Small Finance Bank Limited has been penalised with a monetary penalty of INR 1 million for non-compliance with one of the licensing conditions stipulated by RBI
- A penalty of INR 50 million has been imposed on Airtel Payments Bank for contravening the Operating Guidelines for Payments Banks and directions issued by RBI on Know Your Customer (KYC) norms.
- A monetary penalty of INR 589 million has been imposed on ICICI Bank for non-compliance with directions issued by RBI on direct sale of securities from its HTM portfolio and specified disclosure.
The Government of India has directed non-compliant NBFCs to comply with the requirements under the Prevention of Money Laundering Act (PMLA). It is mandatory for NBFCs to verify the identity of clients, maintain records and furnish information to Financial Intelligence Unit-India (FIU-IND), for which they need to register themselves and their Principal Officers with the unit through its online portal.
All NBFCs which have failed to comply with any of the requirements are now required to register their Reporting Entity (RE), Principal Officer (PO) and Designated Director with FIU-IND. FIU-IND has published the list of such non-compliant NBFCs. The list would be revised on a monthly basis and the names of NBFCs would be deleted once their registration process is complete.