Regulated deposit takers: Whether need to intimate under BUDS?

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Timothy Lopes, Executive, Vinod Kothari & Company

finserv@vinodkothari.com, corplaw@vinodkothari.com

Almost a year after the Banning of Unregulated Deposits Schemes Act, 2019[1] (BUDS Act/ Act) came into force, the Ministry of Finance has, vide notification dated 12th February, 2020, notified The Banning of Unregulated Deposits Schemes Rules, 2020[2] (BUDS Rules/ Rules).

The BUDS Act, was enacted with the intent to curb all unregulated deposits schemes being run by fraudulent means such as ponzi schemes. On the other hand, the BUDS Act lists out regulated deposit schemes, which are essentially regulated by MCA, SEBI, RBI, etc., such as collective investment schemes, alternative investment funds, portfolio management services, employee benefit schemes, mutual fund schemes, etc. regulated by SEBI; deposits accepted by NBFCs, etc. as regulated by RBI, insurance contracts regulated by IRDAI; schemes or arrangements made or offered by co-operative societies, chit funds, etc. regulated by the relevant State Government or Union Territory Government; housing finance companies regulated by the NHB; pension funds regulated by the PFRDA; pension schemes or insurance schemes framed under the Employees’ Provident Fund Miscellaneous Provisions Act, 1952; Deposits accepted or permitted under the provisions of Chapter V of the Companies Act, 2013 regulated by MCA.

The definition of deposit taker and meaning of deposit along with exclusions from the meaning, is specified under the Act. We have analysed the definitions in our related articles and write ups on the subject[3].

Designated authority

As a part of regulation, the law provides for collation of information pertaining to deposit takers.

As per Section 9 of the Act, the Central Government has the power to designate an authority (existing or already constituted)[4] which shall create, maintain and operate an ‘online database’ for information on ‘deposit takers’ operating in India. The Rules empower the designated authority to require any regulator or any competent authority (appointed under section 7 of the Act) or any other entity/person to submit to it any information in its possession relating to deposit takers in India. However, the authority is yet to be designated, inspite of the fact that the Rules have already come into force on 12th February, 2020.

Requirement of intimation by deposit-takers

As per section 10 of the Act, every deposit taker commencing its business after the commencement of the Act, is required to intimate the authority about its business in the form and manner to be prescribed. As per rule 7 of the Rules, the intimation is to be sent within a period of 30 days from the date of commencement of business.

A relevant question here, might be whether regulated deposit takers (say, AIFs, CISs, NBFC-D, etc.) will also be required to give intimation to the designated authority of commencement of business.

Note that the explanation to section 10 reads as under –

“Explanation.—For the removal of doubts, it is hereby clarified that—

  • the requirement of intimation under sub-section (1) is applicable to deposit takers accepting or soliciting deposits as defined in clause (4) of section 2; and
  • the requirement of intimation under sub-section (1) applies to a company, if the company accepts the deposits under Chapter V of the Companies Act, 2013.”

Clearly, explanation (a) above makes reference to definition of deposit under section 2(4) of the BUDS Act, to determine whether the deposit taker will be required to give intimation. Note that as per the definition of deposit under section 2(4), there is no explicit exclusion with respect to regulated deposit schemes. In fact, the explanation to clause 2(4) says that with respect to NBFCs, ‘deposit’ shall be interpreted in terms of RBI Act. Hence, it can be contended that all deposit takers undertaking regulated deposit scheme shall be required to send intimations to the designated authority.

However, explanation (b) includes companies accepting deposits under the Companies Act, which is a regulated deposit scheme under the BUDS Act [entry 9 of the First Schedule], as deposit taker which shall give an intimation under BUDS Act. Therefore, it can be argued that because of this explicit inclusion of one particular regulated deposit taking entity, all other regulated deposit takers will stand exempted from the requirement of giving intimations.

The foregoing indicates that the provisions are vague insofar the regulated deposit schemes are concerned. The discussion below seeks to find an answer.

The BUDS Bill, 2015 and Report of IMG

Clause 10 of the BUDS Bill, 2015 is the same as section 10 of the BUDS Act.

State Bank of India, in their submission to the Standing Committee on Finance[5] have opined on the provisions relating to Central Database, as there in the Bill, as under –

“The scope of the centralized database has been kept very wide and vague and it needs to have a list of all the companies which have been found in violation of the Bill and it should also maintain a list of all Government approved schemes.”

In case the requirement extends to all regulated deposit-takers there will be a tedious and added compliance burden on genuine business entities who are under the purview of regulators which already possess their data.

Further, it is highly unlikely that unregulated deposit takers will file an intimation to the authority. This was also the rationale given in the Report of the Inter-Ministerial Group (IMG) on the BUDS Bill, 2015[6].

The IMG stated about intimation requirement as under –

“Intimation of business by a Deposit Taking Establishment –

The intent of this provision is to prescribe an intimation requirement which will be applicable to all Deposit-taking Establishments. While it is unlikely that establishments operating Unregulated Deposit Schemes will comply with the said intimation requirements, compliance by Regulated Deposit Schemes may enable the State Government to detect deposit schemes which are operating without any registration. xxx”

Conclusion

In light of the discussions above, there seems to be a lack of sufficient clarity on the issue. However, it can be contended on the strength of explanation (b), that the explicit inclusion of companies accepting deposits under Companies Act, will lead to presumption that the law does not require other regulated deposit-takers to give intimation.

Further, the intention of the BUDS Act was not to cover regulated deposit takers at all. Imposing intimation requirements over regulated deposit takers would be unreasonable and counterproductive and should be meant to cover only unregulated deposit takers.

Ideally, the authority should request for the data from the Regulators which have a ready database at hand, rather than place a burden on each regulated deposit taking entity to intimate the authority.

There is a need for clarity on the provisions laid down in the Rules with respect to the online database. It would be unreasonably tedious to place an intimation burden on all deposit takers. The intent behind creating the database to detect unregulated deposit schemes should be effectively implemented rather than adding a burden of compliance to regulated entities carrying out genuine deposit taking activity. Further, the intent behind the creation of a Central Database of deposit takers is for early detection of unregulated deposit schemes. It seems as though the scope of the central database has been kept wide, as to how the database will detect unregulated deposit taking activity is yet to be seen.

 

[1] http://egazette.nic.in/WriteReadData/2019/209476.pdf

[2] http://egazette.nic.in/WriteReadData/2020/216125.pdf

[3] Readers may refer: http://vinodkothari.com/2019/02/presentation-on-banning-of-unregulated-deposit-schemes/

http://vinodkothari.com/2019/02/menace-of-illicit-deposit-schemes-pinned-down/

https://www.moneylife.in/article/a-nip-in-the-bud-ordinance-bans-unregulated-deposits/56428.html

https://www.moneylife.in/article/banning-unregulated-deposits-schemes-big-concern-for-small-businesses/56448.html

[4] Yet to be designated by the Central Government

[5] https://www.prsindia.org/sites/default/files/bill_files/SCR-The%20Banning%20of%20Unregulated%20Deposit%20Schemes%20Bill%2C%202018.pdf

[6] https://financialservices.gov.in/sites/default/files/Public%20Comments%20on%20the%20Report%20of%20the%20Inter-Ministerial%20Group%20on%20Deposit%20Taking_0.pdf

VIDEOCON RULING: SETTING A BENCHMARK FOR GROUP INSOLVENCY

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Richa Saraf

(richa@vinodkothari.com)

It is common business practice for group entities to regularly engage in related party transactions such as cross collateralisation, guarantee comforts, tunnelling or significant influence arrangements. While such structures largely respect the separate legal status of the group companies, practice suggests such inter-linkages in business, operations and management often raise significant challenges when any one or more entity in the group become insolvent[1]. In such cases, for maximisation of value to the stakeholders and to enhance the prospects of resolution, creditors may seek for substantive consolidation.

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The ‘net concentrate’ of ‘preference- Key takeaways from the SC ruling regarding preferential transactions

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-Sikha Bansal

(resolution@vinodkothari.com)

The Hon’ble Supreme Court’s ruling in Jaypee [Civil Appeal Nos. 8512-8527 of 2019] stands as a landmark for two reasons – first, it deals with an otherwise unexplored periphery of vulnerable transactions in the context of insolvency, and secondly, it will have far-reaching impacts on how secured transactions are structured and the manner in which the lenders lend.

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EASE OF RECOVERY FOR NBFCS?

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–  Ministry of Finance relaxes the criteria for NBFCs to be eligible for enforcing security interest under SARFAESI

-Richa Saraf (richa@vinodkothari.com)

 

The Ministry of Finance has, vide notification[1] dated 24.02.2020 (“Notification”), specified that non- banking financial companies (NBFCs), having assets worth Rs. 100 crore and above, shall be entitled for enforcement of security interest in secured debts of Rs. 50 lakhs and above, as financial institutions for the purposes of the said Act.

BACKGROUND:

RBI has, in its Financial Stability Report (FSR)[2], reported that the gross NPA ratio of the NBFC sector has increased from 6.1% as at end-March 2019 to 6.3% as at end September 2019, and has projected a further increase in NPAs till September 2020. The FSR further states that as at end September 2019, the CRAR of the NBFC sector stood at 19.5% (which is lower than 20% as at end-March 2019).

To ensure quicker recovery of dues and maintenance of liquidity, the Finance Minister had, in the Budget Speech, announced that the limit for NBFCs to be eligible for debt recovery under the SARFAESI is proposed to be reduced from Rs. 500 crores to asset size of Rs. 100 crores or loan size from existing Rs. 1 crore to Rs. 50 lakhs[3]. The Notification has been brought as a fall out of the Budget.

Our budget booklet can be accessed from the link below:

http://vinodkothari.com/wp-content/uploads/2020/02/Budget-Booklet-2020.pdf

ELIGIBILITY FOR INITIATING ACTION UNDER SARFAESI

To determine the test for eligible NBFCs, it is first pertinent to understand the terms used in the Notification.

The Notification provides that NBFCs shall be entitled for enforcement of security interest in “secured debts”. Now, the term “secured debt” has been defined under Section 2(ze) of SARFAESI to mean a debt which is secured by any security interest, and “debt” has been defined under Section 2(ha) as follows:

(ha) “debt” shall have the meaning assigned to it in clause (g) of section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) and includes-

(i) unpaid portion of the purchase price of any tangible asset given on hire or financial lease or conditional sale or under any other contract;

(ii) any right, title or interest on any intangible asset or licence or assignment of such intangible asset, which secures the obligation to pay any unpaid portion of the purchase price of such intangible asset or an obligation incurred or credit otherwise extended to enable any borrower to acquire the intangible asset or obtain licence of such asset.

Further, Section 2(g) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, provides that the term “debt” means “any liability (inclusive of interest) which is claimed as due from any person by a bank or a financial institution or by a consortium of banks or financial institutions during the course of any business activity undertaken by the bank or the financial institution or the consortium under any law for the time being in force, in cash or otherwise, whether secured or unsecured, or assigned, or whether payable under a decree or order of any civil court or any arbitration award or otherwise or under a mortgage and subsisting on, and legally recoverable on, the date of the application and includes any liability towards debt securities which remains unpaid in full or part after notice of ninety days served upon the borrower by the debenture trustee or any other authority in whose favour security interest is created for the benefit of holders of debt securities.”

Therefore, NBFCs having asset size of Rs. 100 crores and above as per their last audited balance sheet will have the right to proceed under SARFAESI if:

  • The debt (including principal and interest) amounts to Rs. 50 lakhs or more; and
  • The debt is secured by way of security interest[4].

EFFECT OF NOTIFICATION:

An article of Economic Times[5] dated 07.02.2020 states that:

“Not many non-bank lenders are expected to use the SARFAESI Act provisions to recover debt despite the Union budget making this route accessible to more such lenders due to time-consuming administrative hurdles as well as high loan ticket limit.”

As one may understand, SARFAESI is one of the many recourses available to the NBFCs, and with the commencement of the Insolvency and Bankruptcy Code, the NBFCs are either arriving at a compromise with the debtors or expecting recovery through insolvency/ liquidation proceedings of the debtor. The primary reasons are as follows:

  • SARFAESI provisions will apply only when there is a security interest;
  • NBFCs usually provide small ticket loans to a large number of borrowers, but even though their aggregate exposure, on which borrowers have defaulted, is substantially high, they will not able to find recourse under SARFAESI;
  • For using the SARFAESI option, the lender will have to wait for 90 days’ time for the debt to turn NPA. Then there is a mandatory 60 days’ notice before any repossession action and a mandatory 30 days’ time before sale. Also, the debtor may file an appeal before Debt Recovery Tribunal, and the lengthy court procedures further delay the recovery.

While the notification seems to include a larger chunk of NBFCs under SARFAESI, a significant question that arises here is whether NBFCs will actually utilise the SARFAESI route for recovery?

 

[1] http://egazette.nic.in/WriteReadData/2020/216392.pdf

[2] https://m.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=952

[3] https://www.indiabudget.gov.in/doc/Budget_Speech.pdf

[4] Section 2(zf) “security interest” means right, title or interest of any kind, other than those specified in section 31, upon property created in favour of any secured creditor and includes-

(i) any mortgage, charge, hypothecation, assignment or any right, title or interest of any kind, on tangible asset, retained by the secured creditor as an owner of the property, given on hire or financial lease or conditional sale or under any other contract which secures the obligation to pay any unpaid portion of the purchase price of the asset or an obligation incurred or credit provided to enable the borrower to acquire the tangible asset; or

(ii) such right, title or interest in any intangible asset or assignment or licence of such intangible asset which secures the obligation to pay any unpaid portion of the purchase price of the intangible asset or the obligation incurred or any credit provided to enable the borrower to acquire the intangible asset or licence of intangible asset.

[5] https://economictimes.indiatimes.com/industry/banking/finance/banking/not-many-nbfcs-may-use-sarfaesi-act-to-recover-loan/articleshow/74012648.cms

SEBI introduces enhanced disclosure and standardized reporting for AIFs

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Timothy Lopes, Executive, Vinod Kothari Consultants Pvt. Ltd.

finserv@vinodkothari.com

SEBI has vide circular dated 5th February, 2020[1] introduced a standard Private Placement Memorandum (PPM) and mandatory performance bench-marking for Alternative Investment Funds (AIF). The move is part of SEBI’s initiative to streamline disclosure standards in the growing AIF space. The changes are made based on the recommendations of the SEBI Consultation Paper[2] on ‘Introduction of Performance Bench-marking’ and ‘Standardization of Private Placement Memorandum for AIFs’.

Template for Private Placement Memorandum (PPM)

The SEBI (AIF) Regulations, 2012 specified broad areas of disclosures required to be made in the PPM. This led to a significant variation in the manner in which various clauses, explanations and illustrations are incorporated in the PPMs. Hence, this led to concerns that the investors receive a PPM which provides information in a manner which is too complex to easily comprehend or with too little information on important aspects of the AIF, e.g. potential conflicts of interests, risk factors specific to AIF or its investment strategy, etc.

Thus, SEBI has mandated a template[3] for the PPM providing certain minimum level of information in a simple and comparable format. The template for PPM consists of two parts –

Part A – Section for minimum disclosures, which includes the following –

  • Executive Summary –

This lays down the summary of the parties and terms of the transaction. In effect, it is a summary term sheet of the PPM, laying down essential features of the transaction.

  • Market opportunity / Indian Economy / Industry Outlook;

The theme of this section includes a general economic background followed by investment outlook and sector/ industry outlook. This section may include any additional information as well which may be relevant. An illustrative list of additional items which may be included has been specified in the template.

  • Investment Objective, Strategy and Process;

A tabular representation of the investment areas and strategy to be employed is laid down in under this head. Further, a flow chart depicting the investment decision making process and detailed description of the same is required to be specified. This will give investors a comprehensive idea of the ultimate investment objective and strategy.

  • Fund/Scheme Structure;

A diagrammatic structure of the Fund/ Scheme which discloses all the key constituents and a brief description of the activities of the Fund/ Scheme.

The diagrammatic representation shall specify, for instance, the sponsor, trustee, manager, custodian, investment advisor, offshore feeder, etc. 

  • Governance Structure; 

To enhance the governance disclosures to investors and ensure transparency this section mandates disclosures of all details of each person involved in the Fund/ Scheme structure, including details about the investment team, advisory committees, operating partners, etc.

  • Track Record of the Manager;

The track record of the Fund Manager is of great significance since investors would like to know the skill, experience and competence of the Manager before making an investment.

The template mandates disclosures about the manager including explicit disclosure of whether he is a first time manager or experienced manager.

  • Principal terms of the Fund/ Scheme;

Explicit disclosures about the principal terms such as minimum investment commitment, size of the scheme, target investors, expenses, fees and other charges, etc. are required to be disclosed as per the template.

Major terms and disclosures are covered under this section. 

  • Principles of Portfolio Valuation;

This section would broadly lay down the principles that will be used by the Manager for valuation of the portfolio company.

The investors would get a fair idea of the manner in which valuation of the portfolio would be undertaken, in this section.

  • Conflicts of interest;

All present and potential conflicts of interests that the manager would envisage during the operation of the Fund/ Scheme at various levels are to be disclosed under this section.

This would enable investors to factor in the conflicts of interests existing or which may arise in the future of the fund and make an informed decision.

  • Risk Factors;

All risk factors that investors should take into account such as specific risks of the portfolio investment or the fund structure are required to be disclosed in the PPM.

These risks would include operational risks, tax risks, regulatory risks, etc. among other risk factors. 

  • Legal, Regulatory, and Tax Consideration;

This section shall include standard language for legal, regulatory and tax considerations as applicable to the Fund/Scheme, including the SEBI (AIF) Regulations, 2012, Takeover Regulations, Insider Trading Regulations, Anti-Money Laundering, Companies Act, 2013. Taxation aspects of the fund are also to be disclosed.

  • Illustration of fees, expenses and other charges;

A tabular representation of the fees and other charges along with the expenses of the Fund are required to be disclosed for transparency of investors and no hidden charges. 

  • Distribution Waterfall;

The payment waterfall to different classes of investors is required to be disclosed in detail.

  • Disciplinary History.

Any prior disciplinary action taken against the sponsor, manager, etc. will be required to be disclosed for better informed decision making of investors.

Part B – Supplementary section to allow full flexibility to the Fund in order to provide any additional information, which it deems fit.

The template requires enhanced disclosures mandatorily required to be made by the AIF, such as risk factors, investment strategy, conflicts of interest and several other areas that may affect the interest of the investors of AIFs.

This will standardize disclosures across the AIF space and increase simplicity of information to investors in a standard reporting format. Enhancing disclosure requirements will increase investor understanding about AIF schemes.

Further there is a mandatory requirement to carry out an annual audit of the compliance of the PPM by either an internal or external auditor/ legal professional. The findings arising out of the audit are required to be communicated to the Trustee or Board or Designated Partners of the AI, Board of the Manager and SEBI.

Exemption has been provided from the above PPM and audit requirements to the following classes of funds:

  1. Angel Funds as defined in SEBI (Alternative Investment Funds), Regulations 2012.
  2. AIFs/Schemes in which each investor commits to a minimum capital contribution of Rs. 70 crores (USD 10 million or equivalent, in case of capital commitment in non-INR currency) and also provides a waiver to the fund from the requirement of PPM in the SEBI prescribed template and annual audit of terms of PPM, in the manner provided at Annexure 3 of the SEBI Circular.

These requirements are however applicable from 01st March, 2020.

Bench-marking for disclosure of performance

Considering that investments by AIFs have grown at a rate of 75% year on year in the past two years, a need was felt to introduce disclosures by AIFs indicating returns on their investments. Prior to the SEBI circular there was no disclosure requirement for AIFs on their investment performance.

There was no bench-marking of returns disclosed by AIFs to their prospective or existing investors. However, returns generated on investment is one of the most important factors taken into consideration by potential investors and is also important for existing investors in order to be informed about the performance of their investment in comparison to a benchmark.

Therefore, it is felt that there is a need to provide a framework to bench-marking the performance of AIFs to be available for the investors and to minimize potential misselling.

In this regard SEBI has introduced the following –

  1. Mandatory bench-marking of the performance of AIFs (including Venture Capital Funds) and the AIF industry.
  2. A framework for facilitating the use of data collected by Bench-marking Agencies to provide customized performance reports.

The new bench-marking framework prescribes that each AIF must enter into an agreement with a Bench-marking Agency (notified by an AIF association representing at least 51% of the number of AIFs) for carrying out the bench-marking process.

The agreement between the Bench-marking Agencies and AIFs shall cover the mode and manner of data reporting, specific data that needs to be reported, terms including confidentiality in the manner in which the data received by the Bench-marking Agencies may be used, etc.

Reporting to the Bench marking Agency –

AIFs are required to report all the necessary information including scheme-wise valuation and cash flow data to the Bench-marking Agencies in a timely manner for all schemes which have completed at least one year from the date of ‘First Close’. The form and format of reporting shall be mutually decided by the Association and the Benchmarking Agencies.

If an applicant claims a track-record on the basis of India performance of funds incorporated overseas, it shall also provide the data of the investments of the said funds in Indian companies to the Benchmarking Agencies, when they seek registration as AIF.

PPM and Marketing material –

In case past performance of the AIF is mentioned in the PPM or any marketing material the performance versus benchmark report provided by the benchmarking agencies for such AIF/Scheme is also required to be provided.

Operational Guidelines for the benchmarking criteria is placed in Annexure 4 to the SEBI Circular.

Further there is an exemption from the above requirements to Angel Funds registered under sub-category of Venture Capital Fund under Category-1 AIF.

Conclusion

These changes are likely to bring about higher disclosure and transparency in the AIF space, especially for existing as well as potential investors of AIFs. Standardization of PPM will eliminate any variance from the manner of disclosures made by various AIFs.

Links to related write ups –

http://vinodkothari.com/2018/03/can-aif-grant-loans/

http://vinodkothari.com/wp-content/uploads/2018/03/PPT-on-financial-and-capital-markets_27-02-18_final.pdf

http://vinodkothari.com/aifart/

[1] https://www.sebi.gov.in/legal/circulars/feb-2020/disclosure-standards-for-alternative-investment-funds-aifs-_45919.html

[2] https://www.sebi.gov.in/reports-and-statistics/reports/dec-2019/consultation-paper-on-introduction-of-performance-benchmarking-and-standardization-of-private-placement-memorandum-for-alternative-investment-funds_45215.html

[3] https://www.sebi.gov.in/sebi_data/commondocs/feb-2020/an_1_p.pdf

NBFC Allied Activities: Corporate Insurance Agency and Mutual Fund Distribution

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– Harshil Matalia, Executive, Vinod Kothari Consultants Pvt Ltd

finserv@vinodkothari.com

Introduction

Non-Banking Financial Companies (NBFCs) are companies that are principally engaged in financial activities. Financial activities include the activities that result into creation of financial assets in the books of the company or generation of financial income for the company undertaking such activity. NBFCs can engage in non-financial activities as well, as long as such non-financial activity doesn’t become the principal business of such NBFC.[1]

Apart from the financial activities, there are certain other allied activities that NBFCs are allowed to do, subject to certain guidelines prescribed by the Reserve Bank of India (RBI). The RBI Master Directions[2] for NBFCs permit an NBFC to undertake following allied activities:

  1. Insurance Business
  2. Issue of Credit cards
  3. Issue of Co-branded Credit cards
  4. Distribution of Mutual Fund Products.

This article intends to give a brief introduction to Insurance Business and Mutual Fund Distribution activities along with the associated guidelines. With regards to the issue of credit cards, the same is covered under separate article.[3]

Corporate Agent

Overview

According to Section 2(f) of IRDAI (Registration of Corporate Agents) Regulations, 2015[4]  (‘the Regulations’), “Corporate Agent” means any applicant who holds a valid certificate of registration issued by the IRDAI under these regulations for solicitation and servicing of insurance business for any of the specified category of life, general and health.

As per Chapter IV of the Insurance Laws (Amendment) Act, 2015[5], the definition of intermediary or insurance intermediary as specified under Section 2(1)(f) of IRDA Act, 1999 was amended and pursuant to such amendment, ‘Corporate Agent’ had been included in the definition. Therefore, Corporate Agents is considered as an Insurance Intermediary under IRDA Regulations.

Registration requirement

In compliance with Regulation 4(4) of the regulations, NBFC being registered with RBI, is required to obtain NOC from RBI before filing application of becoming Corporate Agent. On receiving NOC, the applicant can ascertain the eligibility norms and directly apply for registration as Corporate Agent with IRDA under any one of the following categories and under each category the company can have an arrangement with a maximum of three insurers to solicit, procure and service their insurance products.

  • Corporate Agent (Life)
  • Corporate Agent (General);
  • Corporate Agent (Health)
  • Corporate Agent (Composite)

Corporate Agent can hold a valid certificate to act as an agent of either life insurers or health insurers or general insurers or combination of any two or all of three in case of composite category.

Corporate Agent is required to appoint a principal officer exclusively for supervising the activities of the Corporate Agent. All the employees of the Corporate Agent who are   proposed to be engaged in soliciting and procuring insurance business are known as ‘specified persons’ and such specified persons and principal officer are required to  fulfil the requirements of qualification, training, passing of examination as specified in the regulations by IRDA from time to time.

RBI guidelines on Corporate Agents activity

NBFC can undertake the insurance agency business without taking approval of RBI by merely complying with following conditions:

  1. An NBFC should not force its customers to purchase insurance products of any specific company of whose assets are financed by such NBFCs.
  2. The publicity material distributed by the NBFC should clarify that participation by the customers in insurance products is on a voluntary basis.
  3. The premium payment cannot be routed  through the NBFC.
  4. Any  risk involved in Insurance business cannot be transferred to NBFC business.

Requirements under FEMA

Para F.8 of Schedule I to Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules) provides as under:

F.8 Insurance
Sl. No Sector/ Activity Sectoral Cap Entry Route
F.8.1 a)      Insurance Company

b)      Insurance Brokers

c)      Third Party Administrators

d)     Surveyors and Loss Assessors

e)      Other Insurance Intermediaries appointed under the provisions of Insurance Regulatory and Development Authority Act, 1999 (41 of 1999).

  49% Automatic
F.8.2 Other Conditions

(a)    Foreign investment in this sector shall be subject to compliance with the provisions of the Insurance Act, 1938 and subject to necessary license or approval from the Insurance Regulatory and Development Authority of India for undertaking insurance and related activities.

 

(c) Where an entity like a bank, whose primary business is outside the insurance area, is allowed by the Insurance Regulatory and Development Authority of India to function as an insurance intermediary, the foreign equity investment caps applicable in that sector shall continue to apply, subject to the condition that the revenues of such entities from their primary (i.e., non-insurance related) business must remain above 50 percent of their total revenues in any financial year.

Accordingly, the NBFC shall additionally comply with IRDA guidelines in relation to extent and conditions for foreign investment in Indian Insurance Companies.

Mutual Fund Distribution

Overview

Mutual Fund Distributor (MFD) facilitates buying and selling of mutual fund units by investors. MFDs act as a link between MFs and investors. They help investors by guiding them to carry out investment transactions and also provide relevant information related to performance of their investment. They earn upfront commission from empanelled asset management companies for bringing investors into the mutual fund schemes.

Association of Mutual Funds in India (AMFI) is a nodal association of mutual funds across India. It is non-profit organisation established with the purpose of developing Indian Mutual Fund industry. It provides useful knowledge and insights regarding mutual funds and investments. Any person who wants to become a MFD should approach AMFI for registration.

Registration requirement

The applicant for MFD must comply with procedural guidelines[6] provided by AMFI. The applicant must obtain AMFI Registration Number (ARN) and its employees that would be engaged in selling and distribution of mutual fund units are required to pass requisite NISM certification and obtain Employee Unique Identification Number (EUIN) from AMFI.

RBI guidelines on MFD activity

In order to become an MFD, an NBFC must comply with the RBI directions along with AMFI procedural guidelines. As per RBI Master Directions[7], NBFCs are required to adhere to the following:

  1. Compliance with SEBI guidelines / regulations, including its code of conduct, if any;
  2. Abstain from forcing its customers to trade in specific mutual fund product sponsored by it;
  3. Clarify in the publicity material distributed by the NBFC that participation by the customers in MF products is on a voluntary basis.
  4.  Act as a link between customer and MF by forwarding application for purchase or sale of units and payment instruments.
  5. Abstain from acquiring units of MFs from the secondary market for sale to its customers and from buying back MF units from its customers;
  6. Ensure distinction between its own investment and investment of customer in cases where NBFC is holding custody of units on behalf of customer.
  7. Frame a Board approved policy regarding undertaking MF distribution and adhere to Know Your Customer (KYC) Guidelines.

Requirements under FEMA

As per Para F.10.1 of Schedule I to NDI Rules, ‘Other Financial Service’ means financial services activities regulated by financial sector regulators, viz., Reserve Bank, Securities and Exchange Board of India, Insurance Regulatory and Development Authority, Pension Fund Regulatory and Development Authority, National Housing Bank or any other financial sector regulator as may be notified by the Government of India. Foreign investment in ‘Other Financial Services’ activities is subject to conditionalities, including minimum capitalization norms, as specified by the concerned Regulator/Government Agency.

‘Other Financial Services’ activities need to be regulated by one of the Financial Sector Regulators. In all such financial services activity which are not regulated by any Financial Sector Regulator or where only part of the financial services activity is regulated or where there is doubt regarding the regulatory oversight, foreign investment up to 100 percent will be allowed under Government approval route subject to conditions including minimum capitalization requirement, as may be decided by the Government.

Conclusion

While RBI has permitted NBFCs to undertake several allied acitivites, there is a need to comply with the specific guidelines provided in relation to each of the activity as well as RBI specific directions/ conditions in this regard.

 

[1] Our presentation that deals with principal business criteria- http://vinodkothari.com/wp-content/uploads/2018/09/Non-Banking-Financial-Companies-An-Overview.pdf

[2] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/MD44NSIND2E910DD1FBBB471D8CB2E6F4F424F8FF.PDF

[3] http://vinodkothari.com/2018/07/credit-cards-and-emi-cards-from-an-nbfc-viewpoint/

[4] http://dhc.co.in/uploadedfile/1/2/-1/IRDAI%20(Registration%20of%20Corporate%20Agents)%20Regulations%202015.pdf

 

[5]https://financialservices.gov.in/sites/default/files/The%20Insuance%20Laws%20%28Amendment%29%20Act%202015_0.pdf

 

[6] https://www.amfiindia.com/distributor-corner/become-mutual-fund-distributor

[7] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/MD44NSIND2E910DD1FBBB471D8CB2E6F4F424F8FF.PDF

SEBI brings in revised norms for Portfolio Managers

/0 Comments/in , , /by

Timothy Lopes, Senior Executive

Harshil Matalia, Assistant Manager

finserv@vinodkothari.com

corplaw@vinodkothari.com

Updated as on 27th August, 2020

The securities market regulator has recently introduced the new SEBI (Portfolio Managers) Regulations, 2020 (PMS Regulations), bringing in several changes to the Portfolio Management industry, including doubling the ticket size for investments and increasing the net-worth requirement of Portfolio Managers.

The Portfolio Management Services (PMS) industry has witnessed substantial growth in its Assets Under Management (AUM) in the last 5 years as shown in the data below. There has also been a substantial increase in the number of clients, indicating that the PMS industry plays a significant role in managing funds of High Net-worth Individuals.

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