- Notification to Scheduled Commercial Banks
- Notification to AD Banks
- Notification to Member Banks Participating in NEFT
- Notification to All Eligible Participants in the OTC Derivatives Markets
- Notification to Payments Banks
Notification to Scheduled Commercial Banks
• Timelines for Stressed Assets Resolution
RBI, in its First Bi-monthly Monetary Policy Statement, 2017-18 of 5th May 2017, has prescribed the Framework for Revitalising Distressed Assets in the Economy aimed at early identification of stressed assets and timely implementation of a Corrective Action Plan (CAP) to preserve the economic value of stressed assets.
In order to ensure that the CAP is finalised and formulated in a timely manner, the Framework specifies various timelines within which lenders have to decide and implement the CAP. To expedite decision making, it has been stipulated that decisions agreed upon by a minimum of 60 percent of creditors by value, and 50 percent of creditors by number in the Joint Lenders Forum (JLF) would be considered as the basis for deciding the CAP. This will be binding on all lenders, subject to the exit option available in the Framework.
• Minimum qualifications and experience for CFO and CTO
Banks have been advised to take note of the qualification and experience levels of the CFO and CTO, as per the minimum requirements stipulated by RBI, while inviting application for these positions. Banks may, however, prescribe additional qualification and experience as they deem fit, taking into account the risk profile, size and scale of operation.
• Partial Credit Enhancement to Corporate Bonds
RBI has decided that, to be eligible for Partial Credit Enhancement (PCE) from banks, corporate bonds shall be rated by a minimum of two external credit rating agencies at all times. The rating reports, both initial and subsequent, shall disclose both standalone credit rating as well as the enhanced credit rating.
• Rationalisation of Branch Authorisation Policy- Revision of Guidelines
RBI has issued detailed final guidelines on Banking Outlets through its circular dated 18th May 2017, which shall be operational with immediate effect.
• Continuation of Interest Subvention Scheme for short-term crop loans on interim basis during the year 2017-18
As in interim measure, and until further instructions are issued, the Government of India (GoI), has decided to implement the Interest Subvention Scheme for the year 2017-18 on the terms and conditions approved for the Scheme for 2016-17. All banks have been advised to take note and implement the Interest Subvention Scheme for 2017-18 accordingly.
• Individual Housing Loans: Rationalisation of Risk-Weights and LTV Ratios
Reserve Bank has decided that, as a countercyclical measure, the Loans to Value (LTV) ratios, risk weights, and standard asset provisioning rate for individual housing loans sanctioned on or after 7th June 2017 would be as under:
|Outstanding loan||LTV ratio (%)||Risk Weight (%)||Standard Asset Provision (%)|
|Up to INR.30 lakh||
> 80 and < 90
|Above INR.30 lakh and up to INR.75 lakh||> 80||35|
|Above INR 75 lakh||< 75||50|
• Section 24 and Section 56 of the Banking Regulation Act, 1949 – Maintenance of SLR
As announced in the Second Bi-Monthly Monetary Policy Statement 2017-18 of the Reserve Bank of India (dated 7th June 2017) it has been decided to reduce the Statutory Liquidity Ratio (SLR) of commercial banks, primary co-operative banks, state co-operative banks and central co-operative banks from 20.5 per cent of their Net Demand and Time Liabilities (NDTL) to 20.00 per cent from the fortnight commencing 24th June 2017.
• Prudential Guidelines on Capital Adequacy and Market Discipline-New Capital Adequacy Framework (NCAF) Eligible Credit Rating Agencies INFOMERICS Valuation and Rating Pvt Ltd. (INFOMERICS)
Six domestic credit rating agencies - CARE, CRISIL, FITCH India, ICRA, Brickwork Ratings and SMERA - have been accredited for the purpose of risk weighting the banks' claims for capital adequacy purposes. The long term and short term ratings issued by these domestic credit rating agencies have been mapped to the appropriate risk weights applicable as per the Standardised Approach under the Basel II Framework.
It has been decided that banks may also use the ratings of the INFOMERICS Valuation and Rating Pvt Ltd. (INFOMERICS) for the purpose of risk weighting their claims for capital adequacy purposes, in addition to the existing six domestic credit rating agencies. The rating-risk weight mapping for the long term and short term ratings assigned by INFOMERICS will be the same as in case of other rating agencies.
• Recording of Details of Transactions in Passbook/Statement of Account
In the interest of better customer service, it has been decided that banks shall, as a minimum, provide the relevant details in respect of entries in the accounts as indicated in the Annex of RBI’s Circular dated 22nd June 2017. The list of the transactions mentioned in the Annex is indicative and not exhaustive.
Notification to Member Banks Participating in NEFT
• NEFT System – Settlement at Half-Hourly Intervals
The National Electronic Fund Transfer (NEFT) System presently settles the fund transfer requests of the participating banks on net basis at hourly intervals from 8:00 am to 7:00 pm on all working days. RBI has decided to introduce 11 additional settlement batches during the day (at 8.30 am, 9.30 am, 10.30 am ……… 5.30 pm and 6.30 pm), taking the total number of half hourly settlement batches during the day to 23. The participating banks have been advised to carry out the required changes in their system to initiate the NEFT transaction for half hourly settlement as above, and also to accept and credit the inward NEFT transaction on half hourly basis.
Notification to AD Banks
• Issuance of Rupees denominated bonds overseas
It has been decided by Reserve Bank that any proposal of borrowing by eligible Indian entities by issuance of Rupee denominated bonds overseas (Masala Bonds) will be examined at the Foreign Exchange Department, Central Office, Mumbai. Further, it has also been decided to revise the provisions in respect of the maturity period, all-in-cost ceiling and recognised lenders (investors) of Masala Bonds as below:
Maturity period: Minimum original maturity period for Masala Bonds raised up to USD 50 million equivalent in INR per financial year should be 3 years. Bonds raised above USD 50 million equivalent in INR per financial year should be 5 years.
All-in-cost ceiling: The all-in-cost ceiling for such bonds will be 300 basis points over the prevailing yield of the Government of India securities of corresponding maturity.
Recognised investors: Entities permitted as investors under the provisions of paragraph 3.3.3 of the Master Direction would be eligible but they should not be related parties within the meaning as given in Ind-AS 24.
Notification to All Eligible Participants in the OTC Derivatives Markets
• Introduction of LEI for OTC Derivatives Markets
The Legal Entity Identifier (LEI) code is a 20 – character unique identity code assigned to entities, which are parties to a financial transaction. It has been decided by RBI to implement the LEI system for all participants in the Over-the-Counter (OTC) markets for Rupee Interest Rate derivatives, foreign currency derivatives and credit derivatives in India, in a phased manner. Entities without an LEI code would not be eligible to participate in the OTC derivative markets, after the date specified in the schedule. Entities can obtain LEI from any of the Local Operating Units (LOUs) accredited by the Global Legal Entity Identifier Foundation (GLEIF), the entity tasked to support the implementation and use of the LEI.
In India, LEI code may be obtained from Legal Entity Identifier India Ltd. (LEIL), which has been recognised by RBI. After obtaining LEI code, entities should ensure that they are renewed as per GLEIF guidelines. Lapsed LEIs will not be deemed valid for Trade Repository (TR) reporting. These directions are issued under Section 45(W) of the RBI Act, 1943.
Notification to Payments Banks
• Limits on balances in customer accounts with payments banks – sweep out arrangements with other banks
Based on the comments/proposals received from the payments banks, and keeping in view the financial inclusion objective of the payments bank model, RBI has brought out following instructions, which are to be adhered to:
a. Payment Banks are permitted to act as Business Correspondents (BCs) of other banks, under the BC arrangement and with prior specific or general consent of the customer.
b. At any time, Payment Banks do not have rights to operate or have real-time access to the funds available in the account of the customer at any other bank, including the transferee bank. However, as a BC of a bank, it may facilitate withdrawals and transfers by the customer from their account with the bank of which it is the BC.
c. Payment Banks cannot initiate any debit transactions in the customer’s account, held with another bank, under a power of attorney or general consent of the customer.
d. A Payment Bank can neither arrange nor avail of intraday funding facilities for its customers, based on the balances available in the customer’s account with any other bank, or otherwise.
e. Payment Banks are required to closely monitor the accounts of their customers, to identify and report suspicious transactions, when the deposit / transaction volumes are not commensurate with the customer’s profile.
- BBPS– Extension of Timeline
- Action Plan to Implement the Banking Regulation (Amendment) Ordinance, 2017
- RBI Clarification on Banks under PCA
- Statement on Development and Regulatory Policies, Reserve Bank of India
- RBI Executes Letter of Cooperation on “Supervisory Cooperation and Exchange of Supervisory Information” with the Czech National Bank, Czech Republic
- RBI Identifies Accounts for Reference by Banks Under the IBC
- RBI Amended Banking Ombudsman Scheme: Includes Complaints Relating to Misselling and Mobile/Electronics Banking
- Second Bi-monthly Monetary Policy Statement, 2017-18 Resolution of MPC, Reserve Bank of India
BBPS – Extension of Timeline
On 9th May 2017 Reserve Bank of India has decided to extend the last date, from 31st May 2017 to 31st December 2017 for entities undertaking billing business under the current scope of Bharat Bill Payment System (BBPS), to either become an agent of an authorised Bharat Bill Payments Operating Unit (BBPOU) or exit the business of bill payments. This time-line is applicable to the entities, whose application for BBPOU has been returned by RBI, or which were granted extension of time by RBI but were not able to achieve and report the required net worth.
Action Plan to Implement the Banking Regulation (Amendment) Ordinance, 2017
On 22nd May 2017, Reserve Bank of India outlined the steps taken and those currently under discussion following the announcement of the Banking Regulation (BR) Amendment ordinance, 2017
The amendments to the BR Act 1949, introduced through the Ordinance, and the notification issued thereafter by the Central Government, empower RBI to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016.
It also enables the Reserve Bank to issue directions with respect to stressed assets and specify one or more authorities or committees with such members as it may appoint or approve for appointment to advise banking companies on resolution of stressed assets.
It has been decided to reconstitute the Oversight Committee (OC) under the aegis of the Reserve Bank and also enlarge it to include more Members so that the OC can constitute requisite benches to deal with the volume of cases referred to it.
RBI Clarification on Banks Under PCA
On 5th June 2017, RBI has clarified that the Prompt Corrective Action (PCA) framework is not intended to constrain normal operations of the banks for the general public. The PCA framework is intended to encourage banks to eschew certain riskier activities and focus on conserving capital so that their balance sheets can become stronger.
Statement on Development and Regulatory Policies, Reserve Bank of India
As per the Existing roadmap, commercial banks have to reach the minimum Liquidity Coverage Ratio (LCR) of 100 percent on 1st January 2019. Government securities held by banks in excess of the minimum Statutory Liquidity Ratio (SLR) requirement Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) and Marginal Standing Facility (MSF) are included in the stock of High Quality Liquid Assets (HQLAs).
In order to give greater flexibility to banks to comply with the LCR requirement in an efficient manner, it has been decided by RBI to reduce the SLR from 20.5 per cent of Net Demand and Time Liability (NDTL) to 20.0 per cent of NDTL with effect from the fortnight beginning 24th June 2017
Since currently the SLR requirement is uniform across banks, Primary Cooperative Banks, State and Central Cooperative Banks shall also maintain SLR at 20.0 per cent of NDTL with effect from the fortnight beginning 24th June 2017.
RBI Executes Letter of Cooperation on “Supervisory Cooperation and Exchange of Supervisory Information” with the Czech National Bank, Czech Republic
The Reserve Bank of India executed a Letter of Corporation (LoC) on “Supervisory Corporation and Exchange of Supervisory Information” with the Czech National Bank, Czech Republic on 13th June 2017.
The Reserve Bank has established a Memorandum of Understanding, Letter of Cooperation and Statement of Cooperation with supervisors of many countries to promote greater cooperation and share supervisory information. With this, RBI has signed 40 such MoUs, two Letters of Cooperation and one Statement of Cooperation.
RBI Identifies Accounts for Reference by Banks Under the Insolvency and Bankruptcy Code
An Internal Advisory Committee (IAC) was constituted and it held its first meeting on 12th June 2017. The IAC, in the meeting, agreed to focus on large stressed accounts at this stage and accordingly took up for consideration the accounts which were classified partly or wholly as non-performing from amongst the top 500 exposures in the banking system. The IAC noted that under the recommended criterion, 12 accounts totalling about 25 per cent of the current gross Non –Performing Assets (NPAs) of the banking system would qualify for immediate reference under the Insolvency and Bankruptcy Code. As regards the other non-performing accounts, which do not qualify under the above criteria, the IAC Recommended that the banks should finalise a resolution plan within six months.
RBI Amended Banking Ombudsman Scheme: Includes Complaints Relating to Misselling and Mobile/Electronics Banking
On 23th June 2017, the Reserve Bank of India has widened the Scope of its Banking Ombudsmen Scheme 2006, to include, for example, deficiencies arising out of sale of insurance/mutual fund/other third party investment products by banks.
Under the amended Scheme, a customer would also be able to lodge a complaint against the bank for its non-adherence to RBI instructions with regard to Mobile Banking/Electronic Banking services in India.
Second Bi-monthly Monetary Policy Statement, 2017-18 Resolution of the MPC, Reserve Bank of India
On the basis of an assessment of the current and evolving macroeconomics situation at its meeting held on 7th June 2017, the Monetary Policy Committee (MPC) decided to:
Keep the policy repo rate under the Liquidity Adjustment Facility (LAF) unchanged at 6.25 per cent.
Consequently, the reverse repo rate under the LAF remains at 6.0 per cent, and the Marginal Standing Facility (MSF) rate and the Bank Rate at 6.50 per cent.
- Online Registration Mechanism for Securities Market Intermediaries
- IAF and Use of E-wallet for Investment in Mutual Funds
- Position Limits for Cross-Currency Futures and Options Contracts (not involving Indian Rupee) on Exchanges in IFSC
- SEBI (IFSC) Guidelines, 2015-Permissible Investments by Portfolio Managers, Alternate Investment Funds and Mutual Funds Operating in IFSC
- Listing of NCRP/NCDs Through a Scheme of Arrangement
- Disclosure Requirements for Issuance and Listing of Green Debt Securities
- Online Registration Mechanism for Mutual Funds
- Options on Commodity Futures - Product Design and Risk Management Framework
- Comprehensive Review of Margin Trading Facility
- Recording of NDU in the Depository System
- Non-Compliance with Certain Provisions of SEBI ICDR Regulations, 2009
- Interest and Dividend Information Reporting in Case of Custodial Accounts - Rule 114G (1) (e) of the Income Tax Rules,1962
- Participation of Category III AIFs in the Commodity Derivatives Market
- Clarification to Enhanced Supervision Circular
- Review of OFS of Shares through Stock Exchange Mechanism
- Participation of NRIs in the ETCD Segment
- Specifications Related to ISINs for Debt Securities Issued under the SEBI (Issue and Listing of Debt Securities) Regulations, 2008
- Monitoring and Review of Ratings by CRAs
- Clarification on monitoring of Interest/Principal Repayment and Sharing of such Information with Credit Rating Agencies by Debenture Trustees
- Acceptance of e-PAN Card for KYC Purpose
Online Registration Mechanism for Securities Market Intermediaries
SEBI has decided to operationalize its Intermediary portal, so that intermediaries can submit all the registration applications online (see circular 2nd May 2017). The portal would include online applications for registration, processing of applications, grant of final registration, applications for surrender/cancellation, submission of periodical reports, and requests for change of name/address/other details.
The portal has been operationalised for eight categories of market intermediaries, which include stock brokers, sub-brokers, merchant bankers, underwriters, registrars to issue and share transfer agents, debenture trustees, bankers to an issue and credit rating agencies.
IAF and Use of E-wallet for Investment in Mutual Funds
Internet Access Facility (IAF) facilitates credit of redemption proceeds in the bank account of the investor on the same day of redemption request. SEBI has prescribed certain conditions to be adhered to by MFs /Asset Management Companies (AMCs) while offering IAF to investors, as stated below:
• Instant online access facility would be allowed to resident individual investors.
• MFs/ AMCs can offer IAF only in Liquid schemes of the MF.
• The monetary limit would be up to INR 50,000 or 90 % of latest value, whichever is lower.
• For providing such facility AMCs would not be allowed to borrow.
• Liquidity is to be provided out of the available funds from the scheme and AMCs would need to put in place a mechanism to meet the liquidity demands.
• AMCs would have to make appropriate disclosures in the scheme related documents about IAF and ensure that no mis-selling is done on the pretext of instant availability of funds to the investors.
• Appropriate disclosures would be made to the investors mentioning the scenarios under which IAF may be suspended and that IAF request would be processed as a normal redemption request in such circumstances.
• IAF would be offered only after obtaining approvals from the AMC Board and the Trustees and adequate safeguards would be kept in place in the system to implement this facility.
SEBI has permitted MFs/AMCs to accept investment from investors through e-wallets (Prepaid Payment Instruments (PPIs)) subject to the following:
• MFs/AMCs would have to ensure that extant regulations such as cut-off timings, time stamping etc., are complied with for investment in MFs using e-wallets.
• For facilitating payment from e-wallets to MF schemes, MFs/AMCs would have to enter into an agreement/arrangement with issuers of PPIs.
• Redemption proceeds should be made only to the bank account of the investor/ unit holder as specified by SEBI.
• The limit of INR 50,000 would be an umbrella limit for investment by an investor through e-wallet and/or cash, per mutual fund, per financial year.
• MFs/AMCs would need to ensure that only amounts loaded into e-wallet through cash or debit card or net banking, can be used for subscription to MF schemes. In addition, MFs/AMCs would be required to ensure that the amount loaded into e-wallet through credit card, cash back, promotional scheme etc. would not be allowed for subscription to MF schemes.
• MFs/AMCs would also have to comply with the requirement of no third-party payment norm for investment made using e-wallets.
The provisions of this circular came into effect from 8th May 2017.
Position Limits for Cross-Currency Futures and Options Contracts (not involving Indian Rupee) on Exchanges in IFSC
The SEBI International Financial Services Centres (IFSC), Guidelines, 2015 came into force on 1st April 2015, wherein currency derivatives were specified as permissible securities in which dealing may be permitted by stock exchanges in IFSC.
SEBI has prescribed the position limits (per currency pair per stock exchange) for cross-currency futures and options contracts (not involving Indian Rupee) for eligible market participants.
• Trading Members (positions on proprietary basis as well as clients’ position)
- Gross open position across all contracts not to exceed 15% of the total open interest or USD 1 billion equivalent, whichever is higher
• Institutional Investors
- Gross open position across all contracts not to exceed 15% of the total open interest or USD 1 billion equivalent, whichever is higher
• Eligible Foreign Investors
- Gross open position across all contracts not to exceed 15% of the total open interest or USD 1 billion equivalent, whichever is higher
• Other Clients
- Gross open position across all contracts not to exceed 6% of the total open interest or USD 100 million equivalent, whichever is higher
SEBI (IFSC) Guidelines, 2015-Permissible Investments by Portfolio Managers, Alternate Investment Funds and Mutual Funds Operating in IFSC
On 23rd May 2017, SEBI amended certain provisions of the IFSC Guidelines, 2015, as below:
• A portfolio manager or any alternative investment fund or mutual fund operating in IFSC would be permitted to invest in securities listed in IFSC, securities issued by companies incorporated in IFSC, securities issued by companies incorporated in India, or companies belonging to foreign jurisdictions, subject to conditions or guidelines that may be stipulated or issued by the Reserve Bank of India and Government of India from time to time.
• Such portfolio manager, alternative investment fund or mutual fund would invest in India through the foreign portfolio investor route.
Listing of NCRPS/ NCDs Through a Scheme of Arrangement
Earlier in March 2017, SEBI had streamlined the regulatory framework for scheme of arrangement, such as mergers and acquisitions by listed firms, to check any possible bypassing of norms and prevent companies from seeking direct approval of the National Company Law Tribunal (NCLT).
In its circular dated 26th May 2017, SEBI prescribed a new framework for listing of Non-Convertible Redeemable Preference Shares (NCRPS) and Non-Convertible Debentures (NCDs) following Mergers and Acquisitions (M&As). The key highlights of the framework are as below:
• A listed company may seek listing of NCRPS/NCDs issued pursuant to a scheme of arrangement only in cases where the listed firm is a part of such scheme and such securities are issued to the holders of specified securities of such listed entity.
• Only the NCRPS/NCDs issued to the holders of listed specified securities, in the scheme of arrangement, would be eligible for seeking listing. However, if the same series of securities are also allotted to other investors (other than the allotment done to the holders of listed specified securities as per the scheme of arrangement) then such securities would not be eligible for listing.
• The minimum tenure of the NCRPS/NCDs would be one year. Details of face value and price, terms of payment of dividends/coupon including frequency, credit rating, maturity, details about terms of redemption, amount, date, and early redemption scenarios need to be disclosed in the draft scheme of arrangement.
Disclosure Requirements for Issuance and Listing of Green Debt Securities
SEBI introduced a new term “Green Debt Securities”, (see circular dated 30th May 2017) and prescribed requirements that need to be adhered to for both public and private issuing and listing of Green Debt Securities. These are in addition to the requirements stipulated in the SEBI (Issue and Listing of Debt Securities) Regulations, 2008.
A Debt Security would be considered as “Green” or “Green Debt Securities”, if the funds raised through issuance of the debt securities are to be utilised for project(s) and/or asset(s) falling under any of the broad categories as specified by SEBI, such as renewable and sustainable energy, clean transportation, sustainable water management, climate change adaptation, etc.
• Disclosures in Offer Document/Disclosure Document and other requirements: Following disclosures would be required to be made by the issuer in the offer/ disclosure document:
a. A statement on environmental objectives of the issue and brief details of the decision-making process/criteria followed by the issuer and proposed environmental sustainability objectives.
b. Details of the systems/procedures to be employed for tracking the deployment of the proceeds of the issue.
c. Details of the project(s) and/or asset(s)or areas where the issuer, proposes to utilise the proceeds of the issue
• Continuous disclosure requirements: The following disclosures would need to be made, along with annual report and financial results:
a. Details of utilisation of the proceeds of the issue and that of unutilised proceeds.
b. List of project(s) and/or asset(s) to which proceeds of the Green Debt Securities have been allocated/invested including a brief description of such project(s) and/or asset(s)and the amounts disbursed.
c. Qualitative performance indicators and, where feasible, quantitative performance measures of the environmental impact of the project(s) and/or asset(s).
d. Methods and the key underlying assumptions used in preparation of the performance indicators and metrics.
Online Registration Mechanism for Mutual Funds
SEBI has decided to operationalise its Intermediary Portal (https://siportal.sebi.gov.in) for entities to submit registration of mutual fund applications online. This Portal would include online applications for registration, processing of applications, the granting of in-principle approval and the granting of final registration etc. This would come into operation with effect from 1st June 2017.
Options on Commodity Futures - Product Design and Risk Management Framework
SEBI has issued additional guidelines with respect to product design and risk management framework, to be adopted for trading in options on commodity futures (see circular 13th June 2017). SEBI has prescribed the eligibility criteria for selection of underlying Commodity Futures for Options. Only those commodity futures that satisfy the criteria specified below would be permitted for trading on a commodity derivatives exchange:
• Options could be launched on futures’ contracts of only those commodities that are among the top five in terms of total trading turnover value for the previous twelve months.
• The average daily turnover of underlying futures’ contracts of such a commodity in the past year should be at least INR 200 crore for agricultural and agri-processed commodities, and INR 1,000 crore for other commodities.
On an initial basis, exchanges would be allowed to launch options on futures of only one commodity that meets the criteria prescribed above. Commodity derivatives exchanges willing to start trading in options contracts would have to take prior approval of SEBI for launching such contracts.
Comprehensive Review of Margin Trading Facility
SEBI has revised the framework on Margin Trading Facility in order to enable greater participation (see circular 13th June 2017). The details of the framework are:
• Equity Shares that are classified as 'Group I’ security is eligible for margin trading facility.
• The initial margin would be based on Value at Risk (VaR) plus three times of applicable Extreme Loss Margin (ELM) for Group I stocks in the F&O Segment. Besides, for Group I stocks other than F&O stocks, the initial margin would be VaR in addition to five times of applicable ELM.
• The initial margin, payable by the client to the broker, should be in the form of cash or cash equivalent or Group I equity shares.
• Only corporate brokers with net worth of at least INR 3 crore would be eligible for providing Margin Trading Facility to their clients.
• The stocks deposited as collateral with the stock broker for availing margin trading facility (collaterals) and the stocks purchased under the margin trading facility (funded stocks), would be identified separately and no co-mingling would be permitted for the purpose of computing the funding amount.
• The stock exchanges will have to frame a ‘Rights and Obligations’ document for brokers and clients on Margin Trading Facility.
• Brokers will have to maintain separate client-wise ledgers for funds and securities of clients availing of margin trading facility.
• Any disputes arising between the client and the stock broker in connection with the margin trading facility would have the same treatment as normal trades and would be covered under the investor grievance redressal mechanism and the arbitration mechanism of the stock exchange.
• For providing Margin Trading Facility, a broker may use his own funds or borrow from Scheduled Commercial Banks or Non-Banking Financial Companies (NBFCs) regulated by RBI. A broker is prohibited to borrow funds from any other source.
• Brokers would not use the funds of any client for providing the facility to another client, even if the same is authorised by the first client.
• At any point of time, the total indebtedness of a broker cannot not exceed five times of his net worth. The total exposure of the broker towards Margin Trading Facility would not exceed the borrowed funds and 50% of his net worth. Brokers have to ensure that the exposure to a single client does not exceed 10% of the total exposure of the broker.
Recording of NDU in the Depository System
SEBI has observed that some shareholders, primarily promoters, enter into non-disposal agreements/non-disposal undertaking (NDU) while borrowing funds from various lenders. NDUs are typically undertakings given by a shareholder not to transfer or otherwise alienate the securities and are in the nature of negative lien given in favour of another party, usually a lender.
In order to enable the shareholders to record the NDUs in the depository system, SEBI has decided to permit the depositories to offer a system for capturing and recording the NDUs. The depository participants would not facilitate or be a party to any NDU outside the depository system.
Non-Compliance with Certain Provisions of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“ICDR Regulations”)
The fines that would be imposed by Stock Exchanges on companies for non-compliance with certain provisions of the SEBI (ICDR) Regulations have been specified by SEBI in its circular dated 15th June 2017.
The violations listed are:
• Delay in completion of bonus issue,
• Companies not allotting the shares on conversion of convertible securities within 18 months and
• The issuer not approaching the exchange for listing of equity shares within 20 days from date of allotment.
In case of such violations, stock exchanges would impose a fine of INR 20,000 per day of non-compliance till the date of compliance. If non-compliance continues for more than 15 days, an additional fine of 0.01 % of paid up capital of the entity or INR 1 crore, whichever is less would be imposed.
If any non-compliant listed entity fails to pay the fine, the recognised Stock Exchange may initiate appropriate enforcement action, including prosecution. The amount of fine would be credited to the investor protection fund of the respective exchange.
Interest and Dividend Information Reporting in Case of Custodial Accounts-Rule 114G(1)(e) of the Income Tax Rules,1962
SEBI has directed depositories to make necessary arrangements for reporting of dividend and interest payments in customer accounts for the implementation of Multilateral Competent Authority Agreement and the Foreign Account Tax Compliance Act (FATCA) (see circular 15th June 2017.
Participation of Category III AIFs in the Commodity Derivatives Market
SEBI has permitted Category-III Alternative Investment Funds (AIFs) to participate in the commodity derivatives market, subject to the following conditions:
• Category III AIFs would participate in all commodity derivatives products that are being traded on the commodity derivatives exchanges as ‘clients’ and would be subject to SEBI rules, regulations and instructions.
• They cannot invest more than ten percent of the investable funds in one underlying commodity. The AIFs may leverage or borrow, subject to consent from the investors in the fund and subject to a maximum limit, as specified by SEBI from time to time.
• AIFs would be required to make disclosures in the private placement memorandum issued to the investors about investment in commodity derivatives. Consent of existing investor(s) would be taken by AIFs if they intend to invest in commodity derivatives and an exit opportunity should be provided to dissenting investor(s).
• AIFs would need to comply with RBI notifications and guidelines issued under FEMA 1999, if applicable.
• AIFs would be subject to the reporting requirements, as specified by SEBI
• The participation of Category III AIF in the commodity derivatives market would be subject to the compliance of the provisions of SEBI (Alternative Investment Funds) Regulations, 2012 and its respective circulars.
The aforementioned provisions came into effect from 21st June 2017.
Clarification to Enhanced Supervision Circular
SEBI has relaxed certain disclosure requirements for stock brokers and depository participants under the enhanced supervision guidelines (see circular 22nd June 2017). The requirements were introduced by SEBI in September 2016, and became effective from 1st April 2017.
• Stock brokers would, henceforth, not be required to provide details of bank accounts holding their own funds to the exchanges. The same would be applicable to demat accounts having the stock brokers’ own securities.
• A stock broker that is also a bank may be required to report with respect to only those bank accounts that are used for its stock broking activities.
• A broker is entitled to have a lien on the client's securities to the extent of the client's indebtedness to the stock broker and the stock broker may pledge those securities. Pledging of such securities is permitted, if the same is done through the depository system in compliance with SEBI norms.
• Brokers would have to ensure that they would not grant further exposure to the clients when debit balances arise out of the client's failure to pay the required amount and such debit balances continue beyond the fifth trading day, as reckoned from the date of “pay-in". This clause would be effective from 1st August 2017.
• Till 31st March 2018, stock brokers would have to submit the data as on the last trading day of every month to the stock exchanges on or before the next trading day. Thereafter, the uploading of that data by the stock broker to the stock exchanges shall be on weekly basis.
• As of now, provisions of this circular are not applicable to Regional Commodity Exchanges.
Review of OFS of Shares through Stock Exchange Mechanism
SEBI had issued detailed guidelines on Offer for Sale (OFS) of Shares through the stock exchange mechanism. SEBI has decided to further streamline the process of OFS, with a view to encourage greater participation by employees. The existing provision with respect to restriction on sale of shares by promoter’s post OFS is modified as below:
• Promoters of eligible companies would be permitted to sell shares within a period of 2 (two) weeks from the OFS transaction to the employees of such companies.
• At the discretion of the promoters, such shares can be offered to employees at the price discovered in the said OFS transaction or at a discount to the price covered in the said OFS transaction.
• Necessary disclosures would be made by promoters in their OFS notice to the stock exchange including number of shares offered to employees and discount offered, if any, by promoters.
Participation of NRIs in the ETCD segment
During February 2017, RBI had permitted Non-Resident Indians (NRIs) to participate in the exchange traded currency derivatives market (ETCD) to hedge the currency risk arising out of their investments in India under FEMA, 1999. Subject to the terms and conditions laid down in the RBI circulars dated 2nd February 2017 and 28th June 2017, NRIs are now permitted to trade in the currency derivatives segment of stock exchanges.
Based on the following conditions, NRIs would be able to take a position in the currency derivatives segment of a recognised stock exchange:
• NRIs would need to designate an Authorised Dealer Category-I bank who is also a clearing member of the stock exchange/clearing corporation for the purpose of monitoring and reporting their combined positions in the OTC and ETCD segments.
• NRIs may take positions in the currency futures/exchange traded options market to hedge the currency risk on the market value of their permissible Rupee investments in debt and equity and dividend due and balances held in Non-Resident External (NRE) accounts.
• To enable monitoring of positions of NRIs, exchange/clearing corporation would have to provide details of all transactions of the NRIs to the designated bank.
• The Gross open position across all contracts would not exceed 6% of the total open interest or USD 10 million /EUR 5 million/GBP 5 million /JPY 200 million, whichever is higher, for NRIs.
Specifications Related to ISINs for Debt Securities Issued Under the SEBI (Issue and Listing of Debt Securities) Regulations, 2008
SEBI has prescribed a new framework with respect private placement of debt securities (see circular 30th June 2017). The key highlights of this framework are:
• Under the new framework, an issuer will be permitted a maximum of 17 International Securities Identification Numbers (ISINs) maturing per financial year.
• A maximum of 12 ISINs maturing per financial year will be allowed 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 will be provided to them.
• An entity can issue up to 5 ISINs every financial year for structured debt instruments of a particular category.
• These restrictions will not be applicable to debt instruments that are used for raising regulatory capital and affordable housing as well as capital gains tax bonds.
• The issuer can, as a one-time exercise, make a choice of having bullet maturity payment or make staggered payment of the maturity proceeds within a particular financial year.
• The issuer would have a time period of six months to make an enabling provision in its Articles of Association to carry out consolidation and re-issuance of debt securities.
Monitoring and Review of Ratings by (CRAs)
To ensure prompt and accurate rating action, SEBI has issued clarifications with respect to monitoring mechanism, disclosure norms and timelines applicable to Credit Rating Agencies (CRAs) (see circular 30th June 2017). The highlights of the circular are as follows:
• CRAs have been advised to track the servicing of debt obligations for each instrument rated by them, ISIN wise, and look for potential deterioration in financials, which might lead to defaults/delays, particularly before/around the due date(s) for servicing of debt obligation.
• CRAs would have to monitor the exchange’s website for disclosures made by the issuer.
• CRAs would need to carry out a review of the ratings upon the occurrence of or announcement/news of material events including financial results, any significant decline in share/bond prices of the issuer or group companies, any attachment or prohibitory orders against the company.
• At the end of each month, rating agencies would have to seek a No Default Statement from the issuer.
• The disclosure report prepared by CRAs would need to include key financial indicators and ratios for the issuer for the last and current financial year, in tabular form, as well as any other significant information relevant to the issuer and its sector. CRAs would have to make disclosures in case of considerable delay in providing information by the issuer.
• CRAs have been prohibited from giving indicative ratings without having a written agreement in place. In case such indicative ratings are provided by the CRA, it would be considered as aiding and abetting the Issuer in suppression of material information.
Clarification on monitoring of Interest/Principal Repayment and Sharing of such Information with Credit Rating Agencies by Debenture Trustees
Under the SEBI (Debenture Trustee) Regulations, 1993, Debenture Trustees are required to monitor timely payment of interest/principal by the issuer companies to the debenture holders. Further, they are also required to share information available with them regarding client companies with registered (CRAs). SEBI, through its circular dated 30th June 2017, has directed Debenture Trustees to have in place adequate systems to ascertain the status of payment of interest/ principal by issuer companies on due dates in a timely manner and efficiently share such information with the CRAs.
Acceptance of e-PAN Card for KYC Purpose
SEBI has clarified that e-PAN issued by the Central Board of Direct Taxes (CBDT) can be produced by Foreign Portfolio Investors for KYC compliance.
- Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) (Third Amendment) Regulations, 2017
- SEBI (Foreign Portfolio Investors) (Third Amendment) Regulations, 2017
- SEBI (Issue of Capital and Disclosure Requirements) (Second Amendment) Regulations, 2017
Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) (Third Amendment) Regulations, 2017
On 29th May 2017, SEBI introduced certain amendments to its Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulation 2012. Henceforth, commodity derivatives exchange would be defined as a recognized stock exchange, which assists, regulates or controls the business of buying, selling or dealing in commodity derivatives and option in securities with the prior approval of SEBI. National commodity derivatives exchange would mean a commodity derivatives exchange that is demutualised, has an electronic trading platform and is permitted to assist, regulate or control the business of buying, selling or dealing in commodity derivatives and option in securities with the prior approval of the SEBI.
SEBI (Foreign Portfolio Investors) (Third Amendment) Regulations, 2017
In terms of an amendment introduced to the SEBI (Foreign Portfolio Investors) on 29th May 2017, Offshore Derivative Instruments cannot be issued to or transferred to persons, who are resident Indians or non-resident Indians, and to entities that are beneficially owned by resident Indians or non-resident Indians.
SEBI (Issue of Capital and Disclosure Requirements) (Second Amendment) Regulations, 2017
On 31st May 2017, SEBI notified an amendment to its Issue of Capital and Disclosure Requirements Regulations, 2009. Key highlights of the amendment are:
• Henceforth, systemically important non-banking financial companies would also fall under the purview of “Qualified Institutional Buyers”. The term “systemically important non-banking financial company” has been defined as a non-banking financial company registered with RBI and having a net-worth of more than five hundred crore rupees as per the last audited financial statements.
• In case the issue size, excluding the size of offer for sale by selling shareholders, exceeds one hundred crore rupees, then the use of proceeds of the issue would need to be monitored by a public financial institution or by one of the scheduled commercial banks named in the offer document as bankers of the issuer. However, the condition specified herein would not be applicable to an issue of specified securities made by a bank or public financial institution or an insurance company.
• On a quarterly basis, the monitoring agency would have to submit its report to the issuer in the format specified in Schedule IX of the said regulation, till at least ninety five percent of the proceeds of the issue, excluding the proceeds under offer for sale and amount raised for general corporate purposes, have been utilized.
• The Board of Directors and the management of the company would have to provide their comments on the findings of the monitoring agency.
• The issuer is precluded from making a preferential issue of specified securities to any person, who has sold any equity shares of the issuer during the six months preceding the relevant date
• The provisions pertaining to conditions for preferential issue and lock-in of specified securities will not be applicable to a preferential issue of specified securities, where the proposed allottee is a Mutual Fund registered with SEBI or an Insurance Company registered with Insurance Regulatory and Development Authority of India or a Scheduled Bank listed under the Second Schedule of the Reserve Bank of India Act, 1934 or a Public Financial Institution as defined in the Companies Act, 2013.
- SEBI Board Meeting
SEBI Board Meeting
On 21st June 2017, SEBI held its Board Meeting in Mumbai. Highlights of the meeting are as below:
• Restructuring in stressed companies: With a view to facilitate turnaround of listed companies in distress, SEBI Board has decided to extend the relaxations to the new investors acquiring shares in distressed companies, pursuant to such restructuring schemes. However, such relaxations shall be subject to certain conditions like approval by the shareholders of the companies by special resolution and lock-in of their shareholding for a minimum period of three years. Further, it has also been decided to extend the said relaxations to the lenders under other restructuring schemes undertaken in accordance with guidelines of RBI.
• Resolution plans approved under the Insolvency and Bankruptcy Code, 2016: The Board has also approved the proposal to provide exemption from open offer obligations, under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, for acquisitions pursuant to resolution plans approved by National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code, 2016.
• Extension of Lock-in-relaxation to Category II Alternative Investment Funds (AIF): Presently, in case of an IPO, there are relaxed rules for lock-in provisions for Category I AIFs. The Board approved the proposal for extending such relaxation to Category II AIFs also. This would bring about uniformity, ease of doing business and expand the investor base available for capital raising.
• Consultation Paper on easing of access norms for Foreign Portfolio Investors (FPIs): SEBI proposes to carry out appropriate amendments to the Foreign Portfolio Investors Regulations, 2014 to further ease the access norms for investments by FPIs in Indian securities market.
Some of the proposed changes are as follows:
a. Expansion of eligible jurisdictions for grant of FPI registration to Category I FPIs by including countries which have diplomatic relations with India.
b. Simplification of broad based requirements.
c. Rationalisation of fit and proper criteria.
d. Permitting FPIs operating under the Multiple Investment Managers (MIM) structure and holding FVCI registration to appoint multiple custodians.
SEBI has initiated the public consultation process before implementing the aforesaid proposed changes.
- SEBI Sets Up Panel on Strengthening Cyber Security
- RBI Identifies Twelve Large NPA Accounts
- SEBI Eases Restrictions on Nineteen Entities
SEBI Sets Up Panel on Strengthening Cyber Security
To safeguard the capital markets from cyber attacks, SEBI has set up a high-level panel on cyber security. The panel will oversee and provide overall guidance on cyber security initiatives to SEBI and the capital markets.
Apart from this, it will advise SEBI in developing and maintaining cyber security and cyber resilience requirements, which would be in line with global practices and industry standards.
RBI Identifies Twelve Large NPA Accounts
On 12th June 2017, RBI identified twelve (NPA) accounts - each with an exposure of greater than INR 5,000 crore. These 12 accounts are reported to account for 25 per cent of the banking sector's bad loans.
The Government of India has given powers to RBI to direct lenders to initiate bankruptcy proceedings against those with loan defaults. The process is being carried out under the IBC 2016.
SEBI Eases Restrictions on Nineteen Entities
SEBI has relaxed restrictions on nineteen entities against whom it had taken action for alleged misuse of the stock market for tax evasion and suspected money-laundering activities. These entities are now permitted to deal in government securities and invest in Exchange-Traded Funds (ETF). In addition, they can enter into delivery-based transactions in the cash segment and subscribe to mutual funds as well as being able to tender shares lying in their demat account in any open offer/delisting under the relevant SEBI Regulations.