The future of Loan-loaded Prepaid Payment Instruments

/0 Comments/in , , , /by

Financial Services Division | finserv@vinodkothari.com

The latest communication from the Reserve Bank of India (‘RBI’), barring issuers of prepaid payment instruments (PPIs) from having the same loaded by credit lines, has created a substantial flutter in the financial sector, particularly among the Fintech lenders. Based on the feedback received from market participants it seems that the RBI has been trying to remove any regulatory arbitrage that a non-bank PPI issuer may have as compared to a bank. Considering the gravity of the matter even the Payment Council of India has approached the Government of India to intervene in this matter[1]. There are reports[2] that many of the issuers of PPIs have reportedly stopped issuing PPIs post receiving the RBI circular.

The trigger for all this is a June 20, 2022 communication from the RBI, addressed to certain NBFCs and Fintech lenders, who have been extending credit facilities for loading prepaid cards, stating that prepaid payment instruments (PPIs) must not be loaded through credit lines. The aforesaid communication has raised questions on the existing business model of several fintech entities and threatens their existence. The relevant extract of the said communication states that:

“A reference is invited to the provisions contained in the paragraph 7.5 of the Master Direction on PPI (PPI-MD) dated August 27, 2021 (updated as on November 12, 2021) – “PPIs shall be permitted to be loaded /reloaded by cash debit to a bank account, credit and debit cards, PPIs (as permitted from time to time) and other payment instruments issued by regulated entities in India and shall be in INR only”

The PPI-MD does not permit loading of PPIs from credit lines. Such practices, if followed, should be stopped immediately. Any non-compliance in this regard may attract penal action under provisions contained in the Payment and Settlement Systems Act, 2007”

Read more →

Pledge as transfer: Several SEBI Regulations may require review post SC Ruling

/0 Comments/in , , /by

– Vinita Nair | Senior Partner, Vinod Kothari & Co. | corplaw@vinodkothari.com

Hon’ble Supreme Court, in the matter of PTC India Financial Services Limited v. Venkateshwar Kari and Another (‘PTC India ruling’), brought out a very important distinction between the meaning of ‘beneficial owner’ under the Depository law, and the right of the pledgee/ pawnee/ security interest holder) to cause the sale of goods pledged by pledgor/ pawnor in terms of the rights arising under the pledge[1]. The PTC India ruling inter-alia holds that “beneficial ownership” in the context of the Depositories Act should not be confused with beneficial ownership in law. Getting registered as a “beneficial owner” in terms of Section 10 of Depositories Act, 1996 read with Regulation 58 (8) of the SEBI (Depositories and the Participants) Regulations, 1996[2] (‘Depository law’) does not amount to any transfer of title to the pawnee – it is merely a procedural precondition to sale by the pawnee. It further stipulates that there is no concept of ‘sale to self’ by the pledgee and that the pledgee is bound by the two options provided under Section 176 of the Indian Contract Act, 1872 (‘ICA, 1872’), viz., right to bring a suit against the pawnor and retain the goods pledged as collateral security, or sell the thing pledged on giving reasonable notice to the pawnor and sue for the balance, if any. This ruling triggers the need to review current practice followed by companies and also validity of orders pronounced by Securities Appellate Tribunal (‘SAT’) and SEBI from time to time w.r.t. pledge.

The Apex Court referred to the decision of Securities Appellate Tribunal (‘SAT’) in the matter of Liquid Holdings Private Limited v. The Securities Exchange Board of India[3] where SAT held that the banks being recorded as beneficial owners of the shares pursuant to invocation of pledge became the members of the target company and subsequent transfer of the said shares by the banks back to the appellants resulted in purchase by the appellants attracting the open offer obligations under SEBI (Substantial Acquisition and Takeovers) Regulations, 1997 [Repealed by SEBI (Substantial Acquisition and Takeovers) Regulations, 2011] (‘Takeover Code’). The Apex Court observed that SEBI should examine the provisions of Depository law and the Takeover Code to avoid discord or ambiguity resulting in  instability or confusion especially on applicability of Takeover Code when the pawnee exercises his right to be recorded as a ‘beneficial owner’, while reserving his right to sell the pledge. Additionally, in the author’s view, there is an equal need to examine the applicability of SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’) in the context of pledges[4], for reasons discussed in the latter part of this article.

Read more →

Broken Pledge? Apex Court reviews the law on pledges

/3 Comments/in , , , , /by

By Vinod Kothari, Managing Partner, Sikha Bansal, Partner and Shraddha Shivani, Executive | corplaw@vinodkothari.com

The Supreme Court ruling in  PTC India Financial Services Limited v. Venkateshwar Kari and Another is significant in many ways – not that it categorically rewrites the law of pledges which is settled with 150 years of the statute[1] and even longer history of rulings, but it surely refreshes one of the predicaments of a pledge. Importantly, since most of the pledges of securities currently are in the dematerialised format, it brings out a very important distinction between the meaning of ‘beneficial owner’ under the Depository law, and the right of the pledgee (a.k.a. pawnee or security interest holder) to cause the sale in terms of the rights arising under the pledge. Also, very importantly, the SC dwells upon the essential principle of equity of redemption in pledges and renders void any provision in the pledge agreement which allows the pledgee to make a sale of the pledged article without notice to the pledgor, or to forfeit the pledged article and convert the same as pledgee’s own property. There are also observations in the ruling that seem to give an indefinite time to the pledgee for the sale of the pledged property – this is a point that this article discusses at some length.

Read more →

Law of pledges in India

/0 Comments/in /by

– Vrinda Bagaria | corplaw@vinodkothari.com

This article seeks to broadly explain the principle of a pledge and deals primarily with use of ‘pledge’ as a mode of creation of security on shares of a company to secure liabilities of the company.

  1. PLEDGE – MEANING
  • Definition

A ‘pawn’ or a ‘pledge’ is a bailment of personal property as a security for some debt or engagement. Under the Indian Contract Act, 1872[1] (“Contract Act”), pledge has been defined as:

“the bailment of goods as security for the payment of a debt or performance of a promise is called pledge”.

Further, the definition of bailment as provided in Section 148 of the Contract Act reads as:

“the delivery of goods by one person to another for some purpose upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them”.

Thus, a pledge constitutes the delivery of goods by the pawnor to the pawnee as a security under a contractual obligation that the goods shall be returned or disposed off as per pawnor’s direction on the debt being discharged or the fulfilment of the obligation.

Read more →

Exploring Core Financial Services Solution for NBFCs

/0 Comments/in , , , /by

Applicability, Features, Modules & Challenges

– Subhojit Shome, Executive and Parth Ved, Executive | finserv@vinodkothari.com

Background

As a part of the overhaul for the NBFC Sector, the Reserve Bank of India (‘RBI’) had, on October 22, 2021, introduced the Scale Based Regulations (SBR): ‘A Revised Regulatory Framework for NBFCs’. Upon application of SBR, NBFCs will now be divided into four major categories starting from base layer, followed by middle and upper layers and a top layer. The categories can be briefly summarised through the below chart (visit https://vinodkothari.com/sbr/ to read our write-ups on SBR and related topics).

Overview of the Scalar Approach for Classifying NBFCs

Through SBR, various governance guidelines have been newly introduced while the existing guidelines have been modified to keep up with the current market practices. One of the requirements is the introduction of Core Financial Services Solution (CFSS) for NBFCs vide RBI circular dated February 23, 2022 (‘CFSS Circular’).

In this article, we discuss the applicability of CFSS on NBFCs, explore the current core banking systems of banks, highlight the necessary modules which can be adopted by NBFCs along with the issues that may arise during implementation.

Read more →

Investments from neighbouring countries under stringent scan of GoI

/0 Comments/in , , , /by

– Prapti Kanakia | corplaw@vinodkothari.com

Recently, the Ministry of Corporate Affairs (MCA) has implemented a series of amendments which relates to investments in India by foreign nationals or entities incorporated in a country which shares a land border with India. These amendments are in tandem with the amendment made by the Department for Promotion of Industry and Internal Trade (DPIIT) in FDI Policy and by the Ministry of Finance, Department of Economic Affairs, in FEM (Non Debt Instruments) Rules, 2019 (NDI Rules).

DPIIT amended the FDI policy vide press note no. 3 dated 17 April, 2020 to curb the hostile takeovers of Indian Companies by nationals/entities of neighbouring countries.  Erstwhile, only a citizen of Bangladesh & Pakistan or an entity incorporated in Bangladesh & Pakistan were required to take government approval for investing in India. Pursuant to amendment, any entity incorporated in a country, citizen or beneficial owner of a country, which shares land border with India, needs to obtain government approval for investing in the equity instrument of the Indian Company. Thus, nationals/entities from Pakistan, Afghanistan, China, Bhutan, Nepal, Myanmar and Bangladesh can invest in India only under approval route.

Read more →

Samagrata May – 2022

/0 Comments/in , /by

FAQs on Large Exposures Framework (‘LEF’) for NBFCs under Scale Based Regulatory Framework

/0 Comments/in , , , /by

Financial Services Division | (finserv@vinodkothari.com)

1. Applicability –

1.1. What is the intent behind the LEF?

Response: Regulation and control of “large exposures” is a part of financial sector regulations globally to control concentration of exposures (thus, risks) to a few individuals/entities/groups. The Basel Committee of Banking Standards has been having recommendatory pieces on this topic since 1991, if not earlier.  The Basel standard subsequently became a part of the Basel capital adequacy framework. 

There is a large exposures framework in case of banks as well. 

The intent behind the large exposure framework, which essentially limits the exposures to a single entity or group or group of economically interdependent entities is to strengthen the capital regulations. Capital regulations prescribe minimum capital in case of financial entities. The adequacy of capital is obviously connected with the risks on the asset side – hence, if the assets represent exposure in a single borrower or economically connected group of borrowers, a credit event with respect to such borrower may deplete the adequacy of capital very quickly.  Hence, regulators limit the exposure to a single entity or a group.

There might be other forms of credit concentrations – for example, sectoral or geographical concentrations – these are not captured by the Framework.

Read more →

Differential Standard Asset Provisioning for NBFC-UL

/0 Comments/in , , , /by

-RBI issues new guidelines on provisioning for standard assets

-Kumari Kirti | finserv@vinodkothari.com

The function of NBFCs as a supplemental route of credit intermediation alongside banks and its contribution to supporting real economic activity are well known. Within the financial sector, the NBFCs have grown significantly in terms of scale, complexity, and interconnectedness over time. Many companies have expanded to the point where they are systemically significant, necessitating the alignment of the regulatory framework for NBFCs in light of their shifting risk profile.

To address the same, RBI vide its circular dated October 22, 2021[1] has introduced Scale Based Regulation (SBR) for all NBFCs and has classified NBFCs in four layers- Base, Middle, Upper and Top layer.

Read more →