Securitisation: Indian market grows amidst global volume contraction

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Timothy Lopes, Manager

finserv@vinodkothari.com

Global Securitisation Volumes, 2022

The global securitisation market in 2022[1] saw a decline in volumes as compared to record issuance volumes seen in the year 2021. The decline was mainly driven by 24% year-on-year decline in volumes in the United States, obviously because of inflation, general economic conditions and low level of business confidence,  coupled with supply chain disruptions and uncertainty caused by the Russia-Ukraine conflict[2].

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Penal charges not a cash-cow for lenders

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RBI issues draft guidelines on fair lending practices for penal charges

– Aanchal Kaur Nagpal, Manager and Dayita Kanodia, Executive | finserv@vinodkothari.com

Introduction

Levying of penal interest/ charges is a punitive measure adopted by lenders on borrowers defaulting in making repayments and/ or breaching any terms and conditions mutually agreed in the loan agreement. The Reserve Bank of India also allows lenders to charge such rates as long as the same are communicated to the borrower and are in accordance with the Board approved policy framed in this behalf.

However, lenders, cashing in on such autonomy and flexibility, have adopted varied practices which are often prejudicial to the borrower. These include charging exorbitant rates, capitalisation of penal charges, charging of penal interest on the loan amount and not the defaulted portion etc.

The RBI, in its Statement on Developmental and Regulatory Policies dated February 08, 2023[1], announced policy measures for introduction of guidelines for regulating the penal charges levied by financial institutions[2]. Pursuant to the same, RBI, on April 12, 2023 has issued a draft circular on Fair Lending Practice – Penal Charges in Loan Accounts (‘Draft Circular’) to persuade lenders to use penal charges for their true compensatory nature and not as a revenue enhancement tool. 

While the Draft Circular comes with good intentions, there are certain provisions that may seem ambiguous and contradictory, and the final guidelines would need to provide sufficient clarity to achieve the desired execution.

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RBI regulates outsourcing of IT Services by financial entities

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-Anirudh Grover, Executive | finserv@vinodkothari.com

1. Introduction

With the penetration of the internet in India, newer and more efficient technologies are being built and these dynamic technologies are being leveraged by various sectors of the economy, and the financial sector is one of them. Financial institutions have extensively been outsourcing their IT services requirements to third parties in order to get easier access to newer technologies. In this process of availing the services of a third party, financial institutions expose themselves to significant financial, operational, and reputational risk as the Reserve Bank of India has pointed out.

Accordingly, the RBI in the year 2022 had in its Statement on Developmental and Regulatory Policies proposed to issue draft directions on outsourcing of IT services since the existing Directions on Managing Risks and Code in Outsourcing of Financial Services (‘Guidelines on Outsourcing of Financial Services’) as provided for in the Master Direction- Non Banking Financial Company- Systemically Important Non Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 (Updated as on December 29, 2022) (‘SI Directions’)  specifically excluded IT services from its ambit. Following which on June 23, 2022 the RBI issued Draft Master Direction on Outsourcing of IT Services (‘Draft IT Outsourcing Directions’) for public comments. We had briefly in our previous write up discussed the introduction of the Draft IT Outsourcing Directions. 

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RBI Framework for Green Deposits

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– Team Finserv | finserv@vinodkothari.com

Climate change is clearly one of the most pertinent regulatory themes in recent times, as the move to sustainable business practices and energy efficient technologies need massive funding.  The availability of finance for move to sustainability has an important role to play in mitigating climate change. To this effect, RBI also conducted a survey in January 2022 to assess the status of climate risk and sustainable finance in leading scheduled commercial banks, and observed a need for concerted effort and further action in this regard. Following the same, RBI conducted a discussion, and released a press release indicating its intention to release a framework for acceptance of green deposits in India. On 11th April, 2023, RBI released the Framework for Acceptance of Green Deposits (“Framework”) for banks and deposit-taking NBFCs/HFCs, to be applicable from 1st June, 2023.

Our video lecture on the topic is available here: https://youtu.be/7rRhVYR-zT0

As the green deposits formally mark its presence in the Indian financial markets, one may be inquisitive on various aspects related to it. We have tried to analyze and put our views on the same in this write-up.

The Green Deposit Framework
Banks and deposit-taking NBFCs/HFCs may raise green deposits, in accordance with the Framework, from 1st June, 2023
Money raised by Green deposits to be deployed only for “green finance”; India’s taxonomy for the same to be developed. In the meantime, a list of eligible green activities/ projects has been announced, in line with SEBI’s definition of green bonds under NCS Regulations
Third party assessment/verification of use of proceeds mandatory
Impact assessment to be optional for FY 23-24, and mandatory from FY 24-25
Disclosure of green deposits and utilization in the annual financial statements
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A Critical Analysis on Corporate Guarantees under Service Tax and GST

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Dayita Kanodia, Executive | finserv@vinodkothari.com

“The Supreme Court’s only armour is the cloak of public trust; its sole ammunition, the collective hopes of our society.” – Irving R. Kaufman

Background

The Supreme Court has ruled that service tax will not be levied on corporate guarantees by a parent company to its subsidiaries where there is no consideration involved.

This article discusses the impact of this ruling on companies which issue corporate guarantees without consideration.

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Regulating ESG Rating Providers in India

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– SEBI approves regulations for ERPs through amendments to CRA Regulations

– Payal Agarwal, Deputy Manager (payal@vinodkothari.com)

As ESG and climate change concerns assume global priority, there is a growing interest among businesses to claim their offerings, products or structures to be green.  This  growing interest of a variety of stakeholders has led to the emergence of ESG Rating Providers (“ERPs”) for ranking an entity’s ESG profile, providing “green” or other coloured labels, or giving other affirmations as sustainability or sustainable-linkage. Unlike credit ratings, ESG ratings are currently not within the direct domain of securities regulators; however, to the extent ESG ratings relate to securities offerings or financial products, the securities regulators claim to have jurisdiction., he International Organization of Securities Commissions (“IOSCO”) has been working towards evolving recommendatory standards. IOSCO published its final report on Environmental, Social and Governance (ESG) Ratings and Data Products Providers (“IOSCO Consultation Report”) in November, 2021.

Following the same, SEBI released a consultation paper on Environmental, Social and Governance (ESG) Rating Providers for Securities Markets (“ERPs Consultation Paper”) on 24th January, 2022, and on the basis of the public consultation as well as global regulatory developments, had proposed a draft regulatory framework for ERPs (“Draft ERP Framework”) on 22nd February, 2023. Recently, on 29th March, 2023, SEBI has approved to bring a regulatory framework for ERPs in India, by inserting a new chapter to the existing SEBI (Credit Rating Agencies) Regulations, 1999 (“CRA Regulations”).

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Corporate succession events: Treatment of unspent or overspent CSR obligations

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CS Aisha Begum Ansari, Manager & Payal Agarwal, Deputy Manager | corplaw@vinodkothari.com

Background

The identity of a corporate entity may undergo various restructurings, either in the form of merger, demerger, sale of one or more divisions or undertakings. conversion of a company into LLP etc. Let us, for the sake of convenience, call them a “corporate succession” event, implying a situation where a corporate entity is succeeded by another entity, or its business, operations or undertaking shifts to another entity.  In some cases, say, amalgamation, the erstwhile corporate entity gets dissolved. In case of a demerger, the transferor entity continues. In case of conversion into LLP or vice versa, a company gets transformed into an LLP or other way round.

Usually, in corporate succession events, the assets and liabilities forming part of an undertaking are shifted to another undertaking, say, the successor entity.  The assets and liabilities that are comprised in an undertaking are mostly defined to include all liabilities existing on pertaining to a certain date, let us call it “appointed date”.

One of the perplexing aspects of this process of transfer of assets and liabilities may be the treatment of the unspent CSR obligations, or excess spending,  by the corporate entity which is undergoing a change in its identity. The question becomes increasingly significant in the present day regulatory environment due to the shift in CSR from COPEX (Comply or Explain) to COPP (Comply or Pay Penalty).

In the present write-up, we discuss the treatment of CSR obligations as a result of the following actions resulting into a change in the identity of a corporate –

  1. Merger
  2. Demerger
  3. Sale of a division/ undertaking (“Slump sale”)
  4. Conversion of a company into LLP
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A sigh of relief for the HVDLEs, not shy from compliance

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Extension of “comply or explain” period in respect of corporate governance norms

– Nitu Poddar | corplaw@vinodkothari.com

SEBI in its board meeting dated March 29, 2023 decided to extend the timeline for “comply or explain” period for the High Value Debt Listed Entity (HVDLE) for compliance of corporate governance norms (i.e. regulation 16 to 27 of LODR Regulations) till March 31, 2024. A HVDLE is a company having listed debt and an outstanding value of such listed debt of Rupees 500 crore and above. It is to be noted that the HVDLEs were given a timeline of two financial years[1] (FY 21-22 and 22-23) to comply with the corporate governance norms or explain the reason for non-compliance in the quarterly corporate governance report to be filed with the stock exchange(s). Given this extension of mandatory compliance of the said norms – can the HVDLEs just sit back and relax till March 31, 2024? No, they will still have to endeavor to comply. Any short compliance requires reporting to the exchanges on a quarterly basis.

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Bond market needs a friend, not parent

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Policies seem to be working at cross-purposes

Vinita Nair, Senior Partner | corplaw@vinodkothari.com

The need to promote bond markets is almost cliched, and does not require elaboration. However, when one observes the regulatory and fiscal developments concerning bond markets in recent times, one wonders whether there is a clear and unified sense of direction. The role of policymaker may be supporting, reformative, protective, promotional, etc. Sometimes, protective regulation may also be intended to play a promotional role – for example, if investors’ interest is better protected, it may promote investor confidence and hence, appetite. However, it is hard to see a clear theme in the spate of changes concerning bond markets in the recent past.

Fiscal measures:

As regards fiscal measures, there are several changes in the Budget 2023 that may be directly or indirectly affecting the bond markets. The Budget saw market-linked debentures[1], a bit controversial development, as a case of fiscal arbitrage, and killed the same, resulting in the death of the instrument. The exemption from  withholding tax exemption in case of listed bonds was taken away – which will be difficult to understand as the theoretical justification for withholding tax is the possibility of tax leakage in case of destination-based tax. The case for the leakage is difficult to make, as listed bonds are issued in demat format, and hence, all transactions take place through regular banking channels. If the intent of policymakers was to promote retail investment in bonds, this is certainly antithetical to that objective.

Another fiscal change, which may have a long-term negative impact, is the denial of long-term capital gain treatment to investment in debt mutual funds[2]. Debt mutual funds were also responsible for the demand-side of corporate bonds. Mutual fund’s share in the outstanding corporate bonds as at the end of FY 2022 stood at 15.85%[3]

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Entering in FY 23-24: Regulatory review of corporate law developments

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– Payal Agarwal, Deputy Manager (payal@vinodkothari.com)

As the new financial year 23-24 commences, we look back at where we stand at the end of FY 22-23, in terms of the regulatory developments. While there has been no substantial traffic in terms of regulatory developments to the Companies Act, the migration of various forms in MCA’s V3 portal proved to be (and still continues to be so in some cases) a turmoil, with a standstill in the fundraising process, and other practical difficulties, even resulting in levy of additional fines. 

There has been significant traction on the part of SEBI too. While Structured Digital Database (SDD) remained the buzzword for the listed entities with the stock exchanges requiring them to submit quarterly compliance certificates, the stress for proper controls on insider trading remained the focal point. Having stiffed the nerves of the Compliance Officers in the listed entities through the quarterly compliance certificates, the same has been finally absorbed in the annual secretarial compliance reports under the Listing Regulations.

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