- Marginal Standing Facility
The Monetary Policy Committee (MPC) of Reserve Bank of India (RBI) has decided to increase the policy Repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points from 6.25 per cent to 6.50 per cent with effect from 1st August 2018. Consequent to the change in the Repo rate, the Marginal Standing Facility (MSF) rate stands adjusted to 6.75 per cent with effect from 1st August 2018.
- Liquidity Adjustment Facility – Repo and Reserve Repo Rates
The MPC has decided to increase the policy Repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points from 6.25 per cent to 6.50 per cent with effect from 1st August 2018 and accordingly, the Reverse Repo rate under the LAF stands adjusted to 6.25 per cent with effect from 1st August 2018.
- Co-origination of Loans by Banks and NBFCs for Lending to Priority Sector
Reserve Bank of India has advised all Scheduled Commercial Banks (excluding Regional Rural Banks and Small Finance Banks) that they may engage with NBFC-ND-SIs (hereinafter referred to as NBFCs) to co-originate loans for the creation of priority sector assets. The arrangement should entail joint contribution of credit at the facility level, by both lenders. It should also involve sharing of risks and rewards between the bank and the NBFC for ensuring appropriate alignment of respective business objectives, as per the mutually decided agreement between the bank and the NBFC, such as, for example, covering the essential features as indicated in Annex 1.
While engaging in co-origination arrangements, the Bank/NBFC is required to adhere to current guidelines on outsourcing of financial services. Accordingly, although the NBFC is expected to source loans, as per the mutually agreed parameters between the bank and the NBFC, the Bank shall not outsource its part of credit sanction component to the NBFC.
- Basel III Framework on Liquidity Coverage Ratio (LCR), Liquidity Risk Monitoring Tools and LCR Disclosure Standards
The Reserve Bank of India has decided to permit banks to reckon Government securities held by them up to another 2 per cent of their Net Demand and Time Liabilities (NDTL), under Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) within the mandatory SLR requirement, as Level 1 High Quality Liquid Assets (HQLA) for the purpose of computing their Liquidity Coverage Ratio (LCR). These provisions take effect from 1st October 2018. Consequently, the carve-out from SLR, under FALLCR will now be 13 per cent, taking the total carve out from SLR available to banks to 15 per cent of their NDTL.
For the purpose of LCR, banks shall continue to value such government securities reckoned as HQLA at an amount not greater than their current market value (irrespective of the category under which the security is held i.e., Held to Maturity (HTM), Available for Sale (AFS) or Held for Trading (HFT).
- Change in Bank Rate
As announced by RBI in its Third Bi-Monthly Monetary Policy Statement 2018-19, the Bank Rate Stands adjusted by 25 basis points from 6.50 per cent to 6.75 per cent with effect from 1st August 2018.
All penal interest rates on shortfall in reserve requirements, which are specifically linked to the Bank Rate, stand revised as indicated in the Annex to the circular.
- Maintenance of CRR/SLR on Foreign Currency Assets/Liabilities– Reference Rate for INR/USD and Exchange Rate of Other Major Currencies
Previously, RBI had advised banks to be guided by the reference rate announced on its website for converting foreign assets/deposits into INR for reporting in Form ‘A’ Return with regard to Maintenance of Cash Reserve Ratio (CRR) on FCNR (B) Scheme (see RBI circular dated 29th June 2012). However, from 10th July 2018 onwards, Financial Benchmarks India Private Limited (FBIL) took over the process of computing and disseminating the reference rate for INR/USD and exchange rates for the other major currencies.
RBI has now advised banks to use the conversion rate announced by FBIL for the purpose of converting foreign assets/liabilities for reporting in Form ‘A’ return and Form VIII return. This change came into effect from the reporting fortnight ending 20th July 2018.
As regards conversion of assets/liabilities in other currencies, for which reference rate is not available from FBIL, banks may continue to use the New York closing rate pertaining to the day end of the Reporting Friday, for converting such currencies into USD. Banks may use the reference rate of FBIL for USD/INR of the same day for conversion into INR.
- Amendments to Reserve Bank of India (Note Refund) Rules, 2009
Reserve Bank of India has made amendments to the Reserve Bank of India (Note Refund) Rules, 2009 to enable the public to exchange mutilated notes in Mahatma Gandhi (New) series at bank branches and RBI offices. These notes are smaller in size as compared to the earlier series. The Reserve Bank of India (Note Refund) Amendment Rules, 2018 have since been notified in the Gazette of India on 06th September 2018. These rules have come into force with immediate effect.
- External Commercial Borrowing (ECB) Policy – Liberalisation
The Reserve Bank of India has decided - in consultation with the Government of India - to liberalise some aspects of the ECB policy, including the policy on rupee denominated bonds as indicated below:
- ECBs by companies in manufacturing sector: As per current norms, ECBs up to USD 50 million or its equivalent can be raised by eligible borrowers with minimum average maturity period of 3 years. It has been decided to allow eligible ECB borrowers who are into the manufacturing sector to raise ECBs up to USD 50 million or its equivalent with minimum average maturity period of 1 year.
- Underwriting and market making by Indian banks for Rupee denominated bonds (RDB) issued overseas: Currently, Indian banks, subject to applicable prudential norms, can act as arrangers and underwriters for RDBs issued overseas and in case of underwriting an issue, their holding cannot be more than 5 per cent of the issue size after 6 months of issue. It has now been decided by RBI to permit Indian banks to participate as arrangers/underwriters/market makers/traders in RDBs issued overseas, subject to applicable prudential norms.
- Voluntary Transition of Primary (Urban) Co-operative Banks (UCBs) into Small Finance Banks (SFBs)
The Reserve Bank of India has issued guidelines to all Primary (Urban) Co-operative Banks for voluntary transition of eligible UCBs into Small Finance Banks.
The UCBs which are eligible as per the guidelines and wishing to make the transition into Small Finance Banks voluntarily, may forward their applications to RBI.
During the month of August 2018, Eighteen NBFCs surrendered their Certificates of Registration to RBI who, consequently, cancelled them. 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 certificates of 397 NBFCs, these companies cannot now undertake the business of a Non-Banking Financial Institution, as laid down under clause (a) of Section 45-I of the Reserve Bank of India Act, 1934.
During a board meeting held in June 2018, SEBI decided to discontinue with the category of Sub-Broker as a market intermediary and has stipulated the following (see SEBI Circular dated 3rd August 2018):
- No fresh registration would be granted to any person as a Sub-Broker and any pending applications for registration as a Sub-Broker will be returned to the concerned stock exchanges for onward transmission to the applicant.
- Registered Sub-Brokers who wish to migrate to act as an Authorised Person and/or Trading Member, will have time till 31st March 2019. Sub-Brokers who do not choose to migrate to act as an Authorised Person and/or Trading Member, would be deemed to have surrendered their registration with SEBI as Sub-Broker, with effect from 31st March 2019.
- The certificate of registration granted to the Sub-Brokers by SEBI would stand withdrawn upon subsequent migration or deemed surrender of registration.
Qualified Registrars to an Issue and Share Transfer Agents (QRTAs) have been advised to formulate and implement a comprehensive policy framework that is approved by their Board of Directors, which shall include the following aspects (see circular dated 10th August 2018):
- Risk Management Policy:
The QRTAs have been advised to establish a well-documented risk management policy which would include a comprehensive view of the risks that they are exposed to. QRTAs would need to list all relevant risks and put in place systems, policies and procedures to identify, assess, monitor and manage the risks and ensure accountability for risk decisions.
- Business Continuity Plan:
QRTAs would be required to maintain a Business Continuity Plan and ensure that there is no adverse impact on investor servicing in view of any data loss. The effectiveness of a BCP has to be tested periodically and the gap between two tests should not be more than twelve months.
- Manner of keeping records:
Integrity of the automatic data processing systems needs to be maintained at all times. QRTAs would need to maintain accurate records for investor servicing and take all precautions necessary to ensure that the records are not lost, destroyed
- Data Access and Data Protection Policy and Integrity of Operations:
QRTAs would be required to have written agreements, confidentiality contracts, security protocols and other relevant procedures to ensure that data integrity is maintained while facilitating electronic access. They would need to lay down minimum standards to protect investor data and maintain information security.
- Scalable Infrastructure:
The Board of Directors of QRTAs would be required to approve a framework for upgrading the infrastructure from time to time to ensure smooth functioning and scalability of services.
- Board of Directors/Committees:
QRTAs would need to have Board Committees, including an Audit Committee, Nomination and Remuneration Committee and an IT Strategy Committee. The Board of the QRTAs would have the responsibility of monitoring and ensuring investor data protection.
- Investor Service Standards:
QRTAs, which service Mutual Fund (MF) investors, would need to have Investor Service Centres in at least 100 cities based on investor population pertaining to the MF clients they service. Online capabilities for redressal of investor queries and complaints need to be ensured.
QRTAs would need to submit a compliance report on the enhanced reporting norms, duly reviewed by their Board of Directors, within 60 days of expiry of each calendar quarter.
With a view to make the existing process of issuance of debt securities more effective, it has been decided to reduce the time taken for listing after the closure of the issue to 6 working days as against the present requirement of 12 working days (see SEBI Circular dated 16th August 2018)
- Investors applying in a public issue would be required to mandatorily use the Application Supported by Blocked Amount (ASBA) facility for making payment.
- Investors would be required to submit a completed bid-cum-application form to Self-Certified Syndicate Banks (SCSBs) or to specified intermediaries.
- The SCSBs or the specified intermediaries would need to give an acknowledgement to the investor and capture and upload details in the electronic bidding system.
- Stock Exchanges shall validate the electronic bid details with the depository’s records and shall also develop systems to facilitate the investors to view the status of their applications and allotments.
The provisions of the circular would be applicable for all public issues of debt securities, non-convertible redeemable preference shares and securitised debt instruments.
- With a view to easing the process of issuance of securities on the Electronic Book Platform (EBP), certain additional facilities have been introduced (See SEBI Circular dated 16th August 2018)
- In addition to the current system of open bidding, closed bidding on the EBP platform would also be allowed, subject to the issuer disclosing the mode of bidding in the Private Placement Memorandum (PPM)/Information Memorandum (IM). Under closed bidding, there would be no real time dissemination of bids on the EBP Platform.
- An issuer would be permitted to choose either uniform yield or multiple yield allotment, provided the same is disclosed in the PPM/IM.
- Investors are now permitted to place multiple bids in an issue.
- Allotment to the bidders shall be done first on “yield priority” basis. However, where two or more bids are at the same yield, the allotment shall be done on “time-priority” basis.
- In addition to the current process of pay-in of funds through clearing corporation of Stock Exchanges, the pay-in of funds towards an issue on EBP would also be permitted through the escrow bank of an issuer.
- In addition to Stock Exchanges, Depositories would also be permitted to act as an electronic book provider.
SEBI has prescribed Know Your Client Requirements for Foreign Portfolio Investors (FPIs) (see our Regulatory Update for the month of April for details). The timelines prescribed therein have been extended to 31st December 2018 (see circular dated 21st August 2018).
Additionally, the following norms have been introduced by SEBI in respect of KYC requirements for Foreign Portfolio Investors (FPIs) (See SEBI Circular dated 21st September 2018)
- Identification and verification of Beneficial Owner (BO) – For Category II & III FPIs
- FPIs are required to maintain a list of BOs and should provide such a list as per the Annexure to the circular. BOs of FPIs having General Partner/Limited Partnership structure shall be identified on ownership or entitlement basis and control basis.
- In respect of FPIs coming from “high risk jurisdictions”, the intermediaries may apply the lower materiality threshold of 10% for identification of BO and also ensure that KYC documentation as applicable for Category III FPIs are in place.
- The materiality threshold to identify the BO should be first applied at the level of the FPI and then it shall be applied to identify the BO of the intermediate shareholder/owner entity.
- No foreign company shall be entitled to exemption under Rule 9(3) (f) of PMLA Rules.
- In case of companies/trusts represented by service providers like lawyers/accountants, FPIs should provide information of the real owners/effective controllers of those companies/trusts.
- Offshore Derivative Instrument (ODI) issuing FPIs would be required to identify and verify the BOs in the subscriber entities, as per these guidelines.
- Periodic KYC review - FPIs shall be subject to KYC review as and when there is any change in material information/disclosure. The KYC review (including change in BOs /their holdings) should be done based on the risk categorisation of FPIs.
- KYC Documentation for Category III FPIs - Audited Annual financial statement or a certificate from auditor certifying net worth may be obtained from Category III FPIs. In case of new funds/ companies/ family offices, the audited financial statement of promoter would be required to be obtained. Further, prospectus and information memorandum are acceptable in lieu of an official constitutive document
- Exempted documents to be provided during investigations/enquiry - Previously, SEBI had exempted FPIs from furnishing certain supporting KYC documents depending on the risk involved. In respect of exempted documents, FPIs concerned would be required to submit an undertaking to the Designated Depository Participant (DDP)/Custodians that, upon demand by Regulators/ Law Enforcement Agencies, the relevant documents would now need to be provided.
- Data Security - The KYC Registration Agencies (KRAs) shall lock personal information provided with regard to BO including that relating to the Senior Managing Official (SMO) of the FPI. Such information should be made available to intermediaries only on a ‘need to know basis’ using an appropriate authentication method.
- Period for maintenance of records - The Custodian would be required to maintain the KYC records in original for a minimum period of five years from the date of cessation of the transactions with the said FPI. In case any litigation is pending, these records should be maintained till the completion of the proceedings.
SEBI has stipulated that requests by an issuer for review of the ratings provided to its instruments, shall be reviewed by a rating committee of the Credit Rating Agency (CRA). The committee shall consist of a majority of members who are different from those in the CRA’s Rating Committee which assigned the earlier rating, and at least one - third of members would need to be independent (see circular dated 19th September 2018)
SEBI has advised that there will be a separate set of norms for determining conditions where Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) and Resident Indians (RIs) are constituents of FPIs (See Circular dated 21st September 2018)
- NRIs/OCIs/Resident Indians (RIs) shall be allowed to be constituents of FPIs subject to the following conditions: -
- Contributions by a single NRI/OCI/RI including those of NRI/OCI/RI controlled Investment Manager should be below 25% and in aggregate should be below 50% of the corpus of the FPI. Resident Indian’s contribution would need to be made through the Liberalised Remittance Scheme (LRS) approved by Reserve Bank of India in global funds, whose Indian exposure is less than 50%.
- NRI/OCI/ RI should not be in control of FPI.
These restrictions with regard to eligibility conditions will not be applicable to FPIs investing only in mutual funds in India.
- FPIs can be controlled by investment managers (IMs) which are controlled and/or owned by NRI/ OCI/RI if following conditions are satisfied: -
- The IM is appropriately regulated in its home jurisdiction and registers itself with SEBI as a Non-investing FPI or
- The IM is incorporated or set up under Indian laws and is appropriately registered with SEBI.
- A non- investing FPI may be directly or indirectly fully owned and/ or controlled by a NRI/ OCI/RI.
- The restriction that NRI/ OCI/ RI should not be in control of the FPI shall not apply to FPIs which are ‘offshore funds’ for which no-objection certificate has been provided by SEBI in terms of SEBI (Mutual Funds) Regulations, 1996.
- Existing FPIs and new applicants would be given a time period of two years from the date of coming into force of the amended regulations or from the date of registration, whichever is later.
SEBI has clarified that all the norms issued for Commodity Derivatives Exchanges till date would be applicable to Commodity Derivatives Segments of Recognised Stock Exchanges/Recognised Clearing Corporations to the extent applicable. (See Circular dated 28th September 2018)
SEBI has reviewed the current norms for buy-back of securities and the revised SEBI (Buy-Back of Securities) Regulations, 2018 were notified on 11th September 2018
The key changes that have been introduced are as below:
- Buy-back period has been defined as the time between the date of authorisation for buy-back by a Company’s Board of Directors and the date on which the payment is made to shareholders who have accepted the offer
- A Company would not be permitted to authorise any buy-back (whether by way of tender offer or from open market or odd lot) unless the buy-back is authorised by the company’s articles and a special resolution has been passed at a general meeting of the company authorising the buy-back.
- A Company which has been authorised by a special resolution or a resolution passed by the board of directors shall make a public announcement within two working days from the date of declaration of results of the postal ballot for special resolution/board of directors’ resolution.
- A Company can undertake buy-back of shares out of its free reserves and securities premium account, among others. Explanation for “Free Reserves” has been revised to be in line with the provisions of the Companies Act, 2013
- The maximum limit of any buy-back of shares and specified securities (which includes employees’ stock option or other notified securities) shall be twenty-five per cent or less of the aggregate of paid-up capital and free reserves of the company.
- The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back shall not be more than twice the paid-up capital and free reserves.
- All shares or other specified securities for buy-back shall be fully paid-up.
SEBI has revised the Issue of Capital and Disclosure Requirements (ICDR) Regulations, through its notification dated 11th September 2018. Key amendments are as below:
- Rights Issue
- The threshold of the minimum size below which the draft letter of offer is not required to be filed with SEBI has been increased from INR 50 lakhs to INR 10 crores.
- The limit for Roll over of non-convertible portion of partly convertible debentures has been increased to INR 10 crores.
- For issues eligible under “Fast track” mode, the requirement of filing a draft Letter of Offer has been done away with.
- Only the public shareholding needs to be underwritten. Underwriting would not be required in respect of entitlement of promoters and promoter group.
- Qualified Institutional Placements (QIP)
- An entity will be eligible to make a QIP if any of its promoters or directors is not a fugitive economic offender.
- No shareholder resolution would be required in case the QIP is made to meet the minimum public shareholding requirement as per the Securities Contracts (Regulation) Rules, 1957.
- Qualified Institutional Buyers have been defined to mean entities where:
- any of them controls directly or indirectly not less than 15% of the voting rights in the other,
- any of them directly or indirectly exercise control over the other,
- There is a common director, excluding nominee and independent directors amongst the investor, its subsidiary or holding company and any other investor.
- Preferential Issue
- An entity will be eligible to make a preferential issue, if any of its promoters or directors is not a fugitive economic offender.
- The price for a preferential issue shall be subject to appropriate adjustments if the issuer makes an issue of equity shares after completion of a demerger wherein the securities of the demerged entity are listed on a stock exchange.
Provisions governing preferential issues would not be applicable to QIP and preferential issues made pursuant to a scheme approved under Section 230-234 by the Central Government.
SEBI has indicated that it would put in place a revised settlement mechanism that bars wilful defaulters and fugitive economic offenders from settling proceedings. The offenders would also not be allowed to make open offers.
India's leading infrastructure finance company, Infrastructure Leasing & Financial Services (IL&FS), has defaulted on payments to lenders triggering panic in the markets. IL&FS Financial Services, a group company, has reportedly defaulted in payment obligations of bank loans (including interest), term loan and short-term deposits and failed to meet the commercial paper redemption obligations. Consequent to the defaults, rating agency, ICRA, downgraded the ratings of its short-term and long-term borrowing programme.
The government moved the National Company Law Tribunal (NCLT) to supersede the IL&FS board and change the company management. The board was suspended, and a new six-member board led by Mr. Uday Kotak has been constituted. It has been reported that the Ministry of Corporate Affairs (MCA) is working on a comprehensive report that will spell out the details of the actual status of facts relating to IL&FS. It is expected that NCLT will next hear the matter on 31st October.