- Amendments to Master Direction- Reserve Bank of India (Financial Services provided by Banks) Directions, 2016
- RBI has made certain amendments to the Master Direction on Financial Services provided by Banks, based on the suggestions and queries received from SEBI, banks and other stakeholders. The revised direction states that:
- Banks can no longer hold more than 10% stake in a deposit taking Non-Banking Finance Company (NBFC), with the exception of lenders owning equity in housing finance companies.
- Banks will not be allowed to invest more than 10% of the unit capital of a Real Estate Investment Trust (REIT) or an Infrastructure Investment Trust (InvIT). This would be subject to an overall ceiling of 20% of its net worth permitted for direct investments in shares, convertible bonds/debentures, units of equity-oriented mutual funds and exposures to Alternative Investment Funds (AIFs).
- Banks will not be permitted to hold more than 10% of the paid up capital of a company, not being its subsidiary and engaged in non-financial services or 10% of the bank’s paid up capital and reserves, whichever is lower.
- Banks will be not allowed to hold more than 20% stake through the bank’s subsidiaries, associates or joint ventures or entities directly or indirectly controlled by the bank and Mutual Funds managed by Asset Management Companies (AMCs) controlled by the bank.
- Besides, no bank can offer broking services for the commodity derivatives segment of SEBI recognised stock exchanges except through a separate subsidiary set up for the purpose or one of its existing subsidiaries.
- Priority Sector Lending - Targets and Classification: Lending to non-corporate farmers – System wide average of last three years
In a previous circular issued by RBI, it was communicated system-wide average of the last three years’ achievement with regard to overall direct lending to non-corporate farmers will be notified in due course, and thereafter at the beginning of each year (see circular dated in 16th July 2015). RBI has now notified that the applicable system-wide average figure for computing achievement under priority sector lending for the FY 2017-18 is 11.78%.
- Trade Repository for OTC Foreign Exchange and Interest Rate Derivatives
RBI has now decided to remove the threshold for reporting Foreign Currency (FCY)-INR and FCY-FCY forward trades between AD Category-I banks and their clients w.e.f. 3rd October 2017.
As a one-time measure, in order to update the outstanding balances in the Trade Repository (TR), AD Category-I banks are advised to report the following to the CCIL by 6th October 2017:
- Over-The-Counter (OTC) currency option transactions between AD Category-I banks and their clients undertaken before 2nd April 2013 and outstanding as on 29th September 2017.
- OTC currency option transactions between AD Category-I banks and their clients, with value below USD 1 million and equivalent thereof in other currencies, undertaken in the period 2nd April 2013 – 3rd July 2016 and outstanding as on 29th September 2017.
- Currency forward transactions between AD Category-I banks and their clients, with value below USD 1 million and equivalent thereof in other currencies, and outstanding as on 29th September 2017.
- Investment by FPI in Corporate Debt Securities – Review
Investment by Foreign Portfolio Investors (FPI) in Corporate Debt Securities have been highlighted in para 2.1.9 of the SEBI circular below.
- Issuance of RDBs
In consultation with the Indian Government, RBI has decided to exclude issuances of Rupee Denominated Bonds (RDBs) from the limit for investments by FPIs in corporate bonds with effect from 3rd October 2017 (see circular dated 22nd September 2017).
Consequently, reporting requirements in terms of paragraph 8 (additional email reporting of RDB transactions for onward reporting to depositories) of circular on Authorised Persons have been dispensed (see A.P Dir Series circular No.60 dated 13th April 2016). Reporting of RDBs will continue as per the extant External Commercial Borrowings (ECB) norms.
- Investment by FPI in Government Securities Medium Term Framework
RBI has decided to revise the limits for the next quarter Oct-Dec 2017. The limits for investment by FPIs for the quarter October-December 2017 is increased by INR 80 billion in Central Government Securities and INR 62 billion in State Development Loans. The revised limits are given as below:
|Limits for FPI investment in Government Securities|
|Quarter Ending||Central Government Securities||State Development Loans||Aggregate|
|General||Loan Team||Total||General||Loan Team||Total|
|31st December 2017||1897||603||2500||300||93||393||2893|
The received limits will be effective from 3rd October 2017
In addition to SBI and ICICI Bank, which continue to be classified as Domestic Systemically Important Banks (DSIBs), the Reserve Bank of India has also identified HDFC Bank as a DSIB, under the same bucketing structure as last year.
The Cyber Security Committee constituted by SEBI had recommended that the framework prescribed by SEBI on cyber security and cyber resilience should be made applicable to large Registrar & Transfer Agents (RTAs). Based on the recommendation, it has been clarified by SEBI that the framework prescribed would be applicable only for RTAs servicing more than 2 crore folios, i.e., Qualified RTAs (QRTAs) (see circular dated 8th September 2017).
QRTAs have been directed to take necessary steps to put in place systems by 1st December 2017. The highlights of the framework to be adhered to by the QRTAs are as below:
- A Comprehensive Cyber Security & Cyber Resilience Policy would be required to be formulated. The policy document would need to be reviewed by the Board of Directors of the QRTA on an annual basis.
- A senior official would need to be appointed as the Chief Information Security Officer.
- The Board of Directors would need to constitute a Technology Committee comprising experts in the area of technology.
- Employees and outsourced staff such as employees of vendors or service providers, who may be given authorised access to the QRTA’s critical systems, networks, and other computer resources, should be subject to stringent supervision, monitoring and access restrictions.
- No person by virtue of rank or position should have any intrinsic right to access confidential data, applications, system resources or facilities.
Proper ‘end of life mechanism’ would be required to be adopted to deactivate access privileges of users, who are leaving the organisation or whose access privileges have been withdrawn
SEBI had laid down a detailed framework for the introduction of cross-currency futures and option contracts in the EUR-USD, GBP-USD and USD-JPY currency pairs, and the introduction of currency option contracts in EUR-INR, GBP-INR and JPY-INR currency pairs (see circular dated 9th March 2016). Certain provisions of the aforesaid circular have been modified, as highlighted below:
- Stock brokers (banks as well as non-banks) would have to ensure that all proprietary positions created in FCY-INR pairs are within the revised consolidated limits.
- With respect to bank stock brokers, the single INR limit for proprietary position will be higher of 15% of total open interest across all FCY-INR pairs or up to USD 200 million.
- In the case of non-bank stock brokers, the same will be applicable except for the overall limit being capped at USD 100 million.
- Stock exchanges have been advised to implement a uniform methodology for computing and monitoring proprietary position limits in INR.
- The aforementioned positions limits are in addition to the requirement of monitoring the proprietary position limits prescribed by SEBI earlier (see circular dated 20th June 2014 and 22nd October 2014).
In terms of an amendment to the SEBI (Stock Brokers and Sub-Brokers) Regulations, a stock broker is permitted to deal in commodity derivatives and other securities under a single entity.
Under the single registration mechanism, a one-time certificate of registration as a stock broker/clearing member would be granted by SEBI, and subsequent permissions to act as a stock broker/clearing member of other stock exchanges/clearing corporations, would be granted by the respective stock exchange/clearing corporation after proper due diligence. Stock brokers would have to take prior approval from SEBI only in cases where integration leads to change in control of the stock broker/clearing member.
Further, a client account may be transferred from one stock broker to another stock broker, by taking the express consent of the client through a verifiable mode of communication.
Previously, SEBI had granted an exemption to stock exchanges at International Financial Services Centres (IFSCs) from introducing Liquidity Enhancement Schemes (LES) in the equity derivative and equity cash segments (see circular dated 10th August 2017). It has now been clarified that this exemption would be applicable to all the products traded in an IFSC.
SEBI had issued a framework for Schemes of Arrangement by Listed Entities and relaxation with respect to it (see circular dated 10th March 2017). SEBI has now decided to amend Clause III (A) (1) (b) of the aforementioned circular, in order to align the requirements specified for listing under schemes of arrangements.
In terms of the amendment, at least 25 per cent of the post-scheme paid up share capital of the transferee entity should have been allotted to the public shareholders in the transferor entity.
If an entity fails to comply with the requirements specified by SEBI, it would need to satisfy the conditions stated below:
- The entity concerned should have a valuation in excess of INR 1,600 crore, as per the valuation report.
- The value of post-scheme shareholding of public shareholders of the listed entity in the transferee entity should not be less than INR 400 crore.
- At least 10% of the post-scheme paid up share capital of the transferee entity should comprise shares allotted to the public shareholders of the transferor entity.
- The entity should increase the public shareholding to at least 25% within a period of one year from the date of listing of its securities, and an undertaking to this effect would need to be incorporated in the scheme.
In order to strengthen regulatory provisions against unauthorised trades, and to harmonise the requirements across markets, SEBI has stipulated that all brokers will execute client trades only after keeping evidence of the client placing such order, which could be in any of the following forms:
- Physical record, written and signed by the client,
- Telephone recording,
- Email from authorised email id,
- Log for internet transactions,
- Record of SMS messages,
- Any other legally verifiable record.
In case of a dispute, the burden of proof will be on the broker to produce the above records for the disputed trades. Further, wherever the order instructions are received from clients through the telephone, the stock broker would have to mandatorily use the telephone recording system to record instructions and maintain telephone recordings.
The provision of this circular would be effective from 1st January 2018.
SEBI has permitted FPI to participate in commodity derivatives trading on stock exchanges in the IFSC, subject to the conditions specified below:
- Participation would be limited to derivatives contracts in non-agricultural commodities only.
- Contracts would be cash settled on the settlement price determined on overseas exchanges.
- All the transactions would be denominated in foreign currency only.
The aforesaid provisions are effective from 26th September 2017.
SEBI has now permitted mutual funds to use interest rate futures’ contracts to hedge risks from volatility in interest rates (see circular dated 27th September 2017). The key provisions of the aforesaid circular are as below:
- To reduce interest rate risk in a debt portfolio, mutual funds may hedge the portfolio or part of the portfolio (including one or more securities) on weighted average modified duration basis by using IRFs (interest rate future).
- In case the IRF used for hedging the interest rate risk has a different underlying security than the existing position being hedged, it would result in imperfect hedging.
- Imperfect hedging will be exempted from the gross exposure, up to a maximum of 20 per cent of the net assets of the scheme, provided the following conditions are met:
- Exposure to IRFs is created only for hedging the interest rate risk based on the weighted average modified duration of the bond portfolio or part of the portfolio.
- The correlation between the portfolio and the IRF is at least 0.9 at the time of initiation of hedge. In case of any subsequent deviation from the correlation criteria, the same should be rebalanced within 5 working days and if not rebalanced within the timeline, the derivative positions created for hedging will be considered under the gross exposure. The correlation would be calculated for a period of last 90 days.
- Basic characteristics of the mutual fund scheme should not be affected by hedging the portfolio or part of the portfolio.
- Prior to commencement of imperfect hedging, all unit holders of an existing scheme should be given a time period of at least 30 days to exercise the option to exit at the prevailing net asset value without charging any exit load.
- The risks associated with imperfect hedging will have to be disclosed and explained by suitable numerical examples in the offer documents.
The provisions referred above are effective from 27th September 2017.
Category III Alternative Investment Funds (AIFs) have been permitted to participate in the commodity derivatives market, subject to certain conditions, as below:
- The AIF should not invest more than 10% of the investible funds in one underlying commodity and
- The AIF would have to comply with the reporting requirements, as specified by SEBI.
The reporting formats for Category III AIFs have been revised to include information pertaining to investment in commodity derivatives. The AIFs would need to submit monthly/quarterly reports in the revised format for the period ended 30th September 2017 onwards.
At its Board Meeting in Mumbai, held on 18th September 2017, SEBI approved certain changes to its regulations governing Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trust (REITs). Key changes that were approved are as below:
- REITs and InvITs would be allowed to raise debt capital by issuing debt securities
- The concept of Strategic Investors for REITs would be introduced on similar lines of InvITs
- Single asset REITs would be permitted.
- REITs would be allowed to lend to the underlying Holding Company/Special Purpose Vehicle (SPV)
- Definition of valuer would be amended for both REITs and InvITs
SEBI has decided to have further consultation with the stakeholders on a proposal of allowing REITs to invest at least 50% of the equity share capital or interest in the underlying Holdco/SPVs, and similarly allowing Holdco to invest with at least 50% of the equity share capital or interest in the underlying SPVs.
RBI has included the following 4 banks in its Second Schedule
- Qatar National Bank SAQ,
- Ujjivan Small Finance Bank Limited,
- Emirates NBD Bank (P.J.S.C) and
- Suryoday Small Finance Bank Limited
SEBI has imposed a penalty of INR 2,423 crore on PACL Ltd and its four directors for illegal mobilisation of funds from the public. On investigation, it was found that the four directors and certain other earlier directors of the Company had mobilised funds from the general public via collective investment schemes, without obtaining registration from SEBI.
SEBI has banned 8 entities from the securities market for ten years for misleading investors through fake websites and presenting themselves as registered market intermediaries. The banned entities include Tradefast Securities, Goodtime Securities, Global Securities and Finosys Securities. These entities have been restrained from raising fresh funds from the public for ten years and they have been directed to pay back the money collected within three months along with interest.
SEBI has also directed these entities to provide a full inventory of assets and properties as well as details of the bank accounts, demat accounts and holdings of shares/securities.
SEBI has ordered a forensic audit of three firms - Trinity Tradelink, Info-Drive Software and Edynamics Solutions.
SEBI has advised stock exchanges to appoint independent auditors to conduct a forensic audit of these firms for verification of their credentials and financials.
A fine of INR 9 lacs was levied by SEBI on Mr. Vinay Agrawal, who was the Regional Head and Zonal Head of cluster business banking in the years 2012 & 2013, for violating insider trading regulations.
It was observed that Mr. Agrawal traded in shares valuing over INR 5 lakh four times. According to the Prohibition of Insider Trading Regulations, Mr. Agarwal was required to make disclosures about these transactions to ING and to the stock exchange within two working days from the date of such dealing.