- Priority Sector Lending – Targets and Classification
RBI has enhanced the housing loan limits for eligibility under priority sector lending. Accordingly, housing loans granted by Regional Rural Banks (RRBs) and Small Finance Banks (SFBs) to individuals up to INR 35 lakh in metropolitan centres (with population of ten lakh and above) and INR 25 lakh in other centres, will be eligible for classification under Priority Sector Lending.
To be eligible for the above housing loans, the overall cost of the dwelling unit in the metropolitan centres and at other centres should not exceed INR 45 lakh and INR 30 lakh, respectively.
The existing family income limit for the purpose of construction of houses exclusively for Economically Weaker Section (EWS) and Low-Income Groups (LIG) has also been revised from INR 2 lakh per annum to INR 3 lakh per annum for EWS and INR 6 lakh per annum for LIG.
- Disclosure on Exposure to ILFS
RBI had advised all Scheduled Commercial Banks and Indian Financial Institutions in April 2019 that the accounts of ‘Infrastructure Leasing & Financial Services Limited’ (ILFS) or its group entities would not be declared as Non-Performing Assets (NPA) without the prior permission of the National Company Law Appellate Tribunal. This instruction stands withdrawn.
- Appointment of CRO for NBFCs
RBI has advised all Non-Banking Financial Companies (NBFCs) with an asset size of more than INR 50 billion to appoint a Chief Risk Officer (CRO) with a clearly specified role and well-defined responsibilities. The CRO is required to function independently to ensure the highest standards of risk management.
The CRO shall be a senior official in the hierarchy of an NBFC and shall possess adequate professional qualifications and experience in risk management. The Board shall appoint the CRO for a fixed tenure and would also be required to put in place policies to safeguard the independence of the CRO. In this regard, the CRO would have direct reporting lines to the Managing Director (MD), Chief Executive Officer (CEO), and the Risk Management Committee (RMC) of the Board. The CRO should be actively associated with the processes of identification, measurement and mitigation of risks. All credit products (retail or wholesale) shall be vetted by the CRO from the angle of inherent and control risks and the CRO’s role in deciding credit proposals would be limited to that of being an advisor.
- Relaxation on the Guidelines to NBFCs on Securitisation Transactions
In November 2018, RBI had permitted NBFCs to securitise loans of over five-year maturity after holding them for six months on their books as against the period of at least one year that was prescribed earlier, subject to prudential requirements. This dispensation, which was valid till May, 2019, has been extended till December 31, 2019.
- VRR for FPI Investment in Debt
RBI has revised its instructions on Voluntary Retention Route (VRR) for Foreign Portfolio Investors (FPIs) as below:
- A separate category called VRR-Combined has been introduced.
- The requirement to invest at least 25% of the Committed Portfolio Size within one month of allotment has been discontinued.
- FPIs have now been provided with an additional option at the end of the retention period, allowing them to continue to hold their investment until the date of maturity or the date of sale, whichever is earlier.
- Amendment to the Master Direction on KYC
The Government of India has notified amendments to the Prevention of Money Laundering Act, 2002 and associated rules. A rule on “Aadhaar and other Laws (Amendment) 2019” has also been introduced and consequently, RBI has introduced certain changes to its Know Your Customer (KYC) Guidelines.
Banks have now been allowed to carry out Aadhaar authentication or offline verification of an individual who voluntarily uses their Aadhaar number for identification purposes. Proof of possession of `Aadhaar number’ has been added to the list of Officially Valid Documents (OVDs).
During May 2019, 7 NBFCs surrendered their Certificates of Registration to RBI, who, in turn, cancelled the registration certificates of a further 36 NBFCs. None of these companies can 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.
In accordance with the provisions of Regulation 21(1) (p) of SEBI (Foreign Portfolio Investors) Regulations, 2014, FPIs are now permitted to invest in municipal bonds (See circular dated May 8, 2019).
SEBI has laid out procedures for reporting for Artificial Intelligence (“AI”) and Machine Learning (“ML”) applications and systems, offered and used by mutual funds. Any set of applications or programs that are offered to investors or used internally by mutual funds to facilitate investing and trading or to disseminate investments strategies and advice, or to carry out compliance activities, would come within the purview of AI and ML. The technologies that are considered to be categorised as AI and ML technologies are listed in an annex to the circular (See circular dated May 9, 2019). All registered mutual funds offering or using AI and ML applications, or systems will have to file the AI and ML reporting form and also submit details on a quarterly basis within 15 days of the expiry of the quarter to the Association of Mutual Funds of India (AMFI), with effect from the quarter ending June 2019. AMFI will then consolidate the information and submit the same to SEBI.
SEBI has proposed a framework, called ‘Innovation Sandbox’, which would permit financial technology (FinTech) firms to access market data to create innovative solutions for capital markets. FinTech firms and entities not regulated by SEBI including individuals (participants or applicants), may use information which is not normally readily available
to them - such as trading and holding data - to enable them to thoroughly test their innovations before going live. (See circular dated May 20, 2019). Key highlights of the circular are as below:
- Entities meeting SEBI’s eligibility criteria will have access to anonymous, historical data from exchanges, depositories and mutual funds.
- The datasets would include – KYC, order and trade logs, and mutual fund transaction data.
- The use of datasets will be governed by comprehensive confidentiality agreements clearly specifying that the datasets cannot be sold, sublet, or shared in any manner with any other entities.
- A governing body comprising representatives from the stock exchanges, depositories and Qualified Registrar and Share Transfer Agent (RTAs) will oversee the project.
- Market Infrastructure Institutions and RTAs would be required to form a steering committee within 15 days to develop operational guidelines for the sandbox. The steering committee would also be responsible for registering or onboarding the applicant, post approval of the application, and monitoring the participant throughout the lifecycle of the project.
SEBI has decided to permit mutual funds to participate in Exchange Traded Commodity Derivatives (ETCDs), subject to the following conditions (See circular dated May 21, 2019).
- Mutual funds would be permitted to participate in ETCDs in India, except in commodity derivatives which are classified as ‘Sensitive Commodities’.
- Mutual funds are permitted to participate in ETCDs through Hybrid schemes and Gold ETFs.
- ETCDs which have gold as the underlying commodity, shall also be considered as ‘gold related instrument’ for Gold Exchange Traded Funds (Gold ETFs).
- No mutual fund scheme shall invest in physical goods except in ‘gold’ through Gold ETFs.
- As mutual fund schemes participating in ETCDs may hold the underlying goods in case of physical settlement of contracts, such goods shall be disposed of from the books of the scheme at the earliest opportunity, but not exceeding 30 days from the date of holding of the physical goods.
- The Asset Management Companies (AMCs) would have to appoint a dedicated fund manager with relevant skills and experience in commodity derivatives market.
- An investment policy for participation in ETCDs approved by the Board of the AMC and the Board of Trustees would have to be put in place, as would valuation policies for valuation of commodity derivatives and the underlying goods arising from the physical settlement of contracts.
- Mutual fund schemes may participate in the ETCDs as ‘clients’ and shall be subject to all the rules, regulations and instructions issued by SEBI and the Exchanges. The position limits at mutual fund level would be as applicable to ‘Trading Members’.
- AMCs shall not on-board FPIs in schemes investing in ETCDs until FPIs are permitted to participate in ETCDs.
- Participation of mutual funds in ETCDs shall be subject to prescribed investment limits.
- The AMC would need to ensure that the Net Asset Values (NAVs) of the mutual fund schemes investing in ETCDs are updated daily on their website. The total exposure to ETCDs shall be disclosed as a line item in the Monthly Cumulative Report (MCR) submitted by mutual funds.
Portfolio Managers are now permitted to participate in ETCDs on behalf of their clients, subject to compliance with the SEBI (Portfolio Managers) Regulations, 1993 and applicable rules (See circular dated May 22, 2019). The key provisions are as below:
- A SEBI registered custodian would have to be appointed before dealing in ETCDs.
- Portfolio Managers would be required to provide adequate disclosures in the Disclosure Document as well as in the agreement with the client, pertaining to their participation in the ETCDs and should include risk factors, margin requirements, position limits, prior experience of the Portfolio Manager in ETCDs, valuation of goods etc.
- When dealing in commodity derivatives leads to delivery of physical goods, the Portfolio Manager may be in possession of the physical commodity. In such cases, the goods need to be disposed of at the earliest opportunity, within the timelines as agreed upon between the client and the Portfolio Manager. The responsibility of liquidating the physical goods shall lie with the Portfolio Manager.
- FPIs should not be onboarded as clients until such time as they are permitted to participate in ETCDs.
- Periodic reports would need to be provided by the portfolio managers to the clients regarding their exposure in ETCDs. The exposure in ETCDs should be disclosed under the heading of ‘Commodity Derivatives’ in the monthly reports submitted to SEBI.
SEBI has laid down a framework for the process of accreditation of investors for the purpose of the Innovators Growth Platform (“Framework”). For the specific purpose of Innovators Growth Platform (“IGP”), accredited investors have been defined as investors whose holding in the issuer company is eligible for the computation of at least 25% of the pre-issue capital in accordance with the SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”). (See circular dated May 22, 2019). The key provisions of the framework are as below:
- Any individual with a total gross income of INR 50 lakhs annually and who has a minimum liquid net worth of INR 5 crores or any corporate body with a net worth of INR. 25 crores would be eligible for being considered as an accredited investor.
- An investor having a Demat account with a Depository has to make an application to the Stock Exchanges or Depositories in the manner prescribed. The Stock Exchanges and Depositories are allowed to use the service of Brokers and Depository participants respectively. (The documentation required for accreditation is provided in an annex to the circular.)
- Once an investor is accredited, the accreditation shall be valid for a period of three years from the date of issue. However, if changes to the financial status renders the investor ineligible before the expiry of three years, they would be under an obligation to inform the Stock Exchange or depository of such ineligibility.
- When a company applies for listing on IGP, the merchant bankers are required to ensure due diligence with regard to the eligibility of accredited investors and would also need to ensure that the holding of such investors in the company is in accordance with Regulation 283(1) of the SEBI (ICDR) Regulations.
SEBI has introduced amendments to the existing regulatory framework governing Debenture Trustees (DTs) and the following guidelines have been issued (See circular dated May 27, 2019):
- DTs would be required to disclose the nature of compensation arrangements with its clients on their websites, including the minimum fee to be charged and factors for determining the same. DTs would need to display on their website the International Securities Identification Number (ISIN) and details of interest and redemption due to the debenture holders in respect of all issues during a financial year, within 5 working days of the start of financial year.
- DTs shall also update the status of payments against such issuers not later than 1 day from the due date.
- RTA and Issuers would have to forward the details of debenture holders to the DT at the time of allotment and thereafter by the seventh working day of every next month.
- In privately placed issues, additional covenants are required to be included as part of the Issue Details in the summary term sheet, as per the agreement between the issuer and investor.
The SEBI (Listing Obligations and Disclosure Requirements) Regulations were amended by a notification dated 7th May 2019. The changes introduced are as below:
- Entities which have listed their equity shares and debt securities are required to furnish a copy of the financial results to the DTs on the same day when such financial information is submitted to stock exchanges.
- Within seven working days of submitting the above information, the listed entity shall submit to the stock exchanges a certificate signed by DT that it has taken note of the contents.
Amendments have been introduced to the SEBI (Alternative Investment Funds) Regulations through a notification dated 10th May 2019 detailing which Category III Alternative Investment Funds (AIFs) have been permitted to deal in goods received in delivery against physical settlement of commodity derivatives. The custodian appointed by the Category III AIF would be required to keep the custody of securities and goods received in delivery against physical settlement of commodity derivatives.
Amendments have been introduced to SEBI (Issue and Listing of Debt Securities) by a notification dated 7th May 2019. In cases where an issuer fails to execute the trust deed within the period specified, without prejudice to any liability arising on account of violation of the provisions of the Regulations, the issuer would also have to pay interest of at least 2% per annum to the debenture holder, over and above the agreed coupon rate, till the execution of the trust deed.
SEBI has amended its DT regulations (notification dated 7th May 2019). A DT would be required to meet the minimum capital adequacy requirement of INR 10 crores and any DT holding a certificate of registration as on 7th May 2019 is required to comply with the aforementioned net worth requirement within a period of 3 years.
With respect to duties of the DT regarding meeting of debenture holders, the DT may seek the consent of debenture holders through e-voting, wherever applicable. Further, the requirement of convening a meeting of debenture holders in case of a default in payment obligation by the issuer shall not be applicable in case of debentures issued by way of public issue.
SEBI has imposed the following fines:
- a penalty of INR 30 lakhs on six entities for fraudulent trading in the shares of Pankaj Piyush Trade and Investments Ltd.
- a penalty of INR 60 lakhs on twelve entities for indulging in fraudulent trading in the scrip of Tilak Finance.
- a fine of INR 1 lakh on M/s Choice Equity Broking for misuse of client’s funds for meeting liabilities of other clients.
- a fine of INR 24 lakhs on M/s Amtex Auto for failure to disclose invocation of pledge of shares to the stock exchanges, as required under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations and Insider Trading norms.
- a fine of INR 39 lakhs on five entities for indulging in fraudulent trades in the illiquid stock options segment of the Bombay Stock Exchange (BSE).
- a fine of INR 2 lakhs on IFCI Financial Services, a depository participant of National Securities Depositories Ltd. and Central Depositories Securities Ltd., as it failed to comply with the power of attorney guidelines.
- a fine of INR 1 crore on M/s En Aromatic & Petro Chemicals for indulging in illegal fund raising and failing to comply with the public issue norms.
- a fine of over INR 1 crore on Basil International Ltd and its three directors for not complying with earlier orders to refund money that was pooled from investors.
SEBI has taken action against M/s Ritman Infra Limited and 6 of its officials for violating the Listing Obligations and Disclosure Requirement norms. The Company has been restrained from accessing the securities markets. Five directors of the Company and its chief financial officer have also been barred from the securities market and prohibited from buying, selling or dealing in securities in any manner.
SEBI has ordered impounding of alleged unlawful gains of INR 87 lakhs made by Indiabulls Ventures's former non-executive director and her husband in an insider-trading case.
SEBI has issued ‘show cause’ notices to HDFC Mutual Fund and Kotak Mutual Fund for alleged defaults on Fixed Maturity Plan payments, which are in violation of mutual fund regulations and investor protection norms.
SEBI is looking at allegations made by a whistle-blower that ICRA, a Credit Rating Agency, has been influenced to assign an “AAA” rating to Infrastructure Leasing and Financial Services Limited (IL&FS). Adjudication proceedings have been initiated by SEBI in the matter.
IL&FS Financial Services, a group company of IL&FS, defaulted in payment obligations in respect of bank loans and inter-corporate deposits, triggering panic in the financial markets. In the wake of this crisis, SEBI and RBI have been tasked with reassessing the working of credit rating agencies, which have been accused of failing to monitor IL&FS’s liquidity situation closely. SEBI and RBI are assessing proposals that would mandate debt issuers to seek dual ratings and select rating agencies through a transparent bidding process.
RBI has imposed a monetary penalty of INR 29.67 lakhs and INR 10.12 lakhs on Western Union Financial Services Inc., USA and Money Gram Payment Systems Inc., USA respectively for non-compliance with regulatory guidelines issued by RBI.
RBI has imposed a penalty on the following five Prepaid Payment Instrument (PPI) Issuers for non-compliance with regulatory guidelines.
Name of the PPI Issuer
Amount of Penalty
(in INR lakh)
My Mobile Payments Limited
Phonepe Private Limited
Y-Cash Software Solutions Private Limited
Vodafone m-pesa Limited
GI Technology Private Limited
RBI has imposed a penalty of INR 100 lakhs on The Nainital Bank Limited for its failure to fully automate its Non-Performing Asset (NPA) identification process despite a specific direction issued by RBI in this regard.