– Ishika Agrawal (firstname.lastname@example.org)
The way businesses are done, has evolved with the evolution of technology. Now-a-days, business transactions and business contracts are mostly executed electronically in order to save time and expenses. However, this also raises concerns on enforceability of e-agreements in courts and the stamp duty implications on such agreements. In this article, we have tried to broadly discuss the acceptance of e- agreements as evidence in courts and the stamp duty implications on such agreements.
II. Whether E-agreement is to be stamped?
In India, stamp duty is levied under Indian Stamp Act, 1899 (“Stamp Act”) as well as various legislation enacted by different States in India for the levy of stamp duty. Every instrument under which rights are created or transferred needs to be stamped under the specific stamp duty legislation. There is no specific provision in the Stamp Act that specifically deals with electronic records and/or the stamp duty payable on execution thereof.
Section 3 of Stamp Act is the charging section which provides for the levy of stamp duty on specified instruments upon their execution. Relevant provision of section 3 is reproduced below:
3. Instruments chargeable with duty- Subject to the provisions of this Act and the exemptions contained in Schedule I, the following instruments shall be chargeable with duty of the amount indicated in that Schedule as the proper duty therefore respectively, that is to say—
(a) every instrument mentioned in that Schedule which, not having been previously executed by any person, is executed in India on or after the first day of July, 1899;
(b) every bill of exchange payable otherwise than on demand or promissory note drawn or made out of India on or after that day and accepted or paid, or presented for acceptance or payment, or endorsed, transferred or otherwise negotiated, in India; and
(c) every instrument (other than a bill of exchange, or promissory note) mentioned in that Schedule, which, not having been previously executed by any person, is executed out of India on or after that day, relates to any property situate, or to any matter or thing done or to be done, in India and is received in India.
As per the above provision, broadly, two things are required for chargeability of stamp duty:
- There must be an instrument as mentioned in the schedule I of Stamp Act.
- The instrument must be executed.
What is Instrument?
The word ‘instrument’ is defined in section 2(14) of Stamp Act. There has been certain ambiguousness in the interpretation of definition of Instrument. Recent amendments have been made in the Stamp Act by Finance Act, 2019 which will come in force from 1st April, 2020.
Prior to the amendment, section 2(14) read as:
2(14) “Instrument includes every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded”.
However, after the amendment, the scope of the definition given in section 2(14) has been widened by the inclusion of clause (b) and clause (c) which states that:
(14) “instrument” includes—
(a) every document, by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded;
(b) a document, electronic or otherwise, created for a transaction in a stock exchange or depository by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded; and
(c) any other document mentioned in Schedule I,
but does not include such instruments as may be specified by the Government, by notification in the Official Gazette;
The aforesaid amendment is only with respect to the electronic document created for a transaction in a stock exchange or depository, but (a) of the aforesaid section is unaltered. Therefore, it may appear that the term “document” in clause (a) does not include electronic documents – however, such interpretation will not be in spirit of law. The Information Technology Act has already accorded legal recognition to electronic records. Therefore, the word “document” shall be read so as to include electronic documents as well.
Apart from the Indian Stamp Act, many states have their own legislation w.r.t. stamp duty. Majority of state specific stamp duty laws also do not specifically include electronic records within their ambit, however, some state stamp duty laws do refer to electronic records. For instance, Section 2(l) of the Maharashtra Stamp Act, 1958  defining instrument, specifically refers to electronic records. It states that:
“instrument includes every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded, but does not include a bill of exchange, cheque, promissory note, bill of lading, letter of credit, policy of insurance, transfer of share, debenture, proxy and receipt;
Explanation. – The term “document” also includes any electronic record as defined in clause (t) of sub-section (1) of section 2 of the Information Technology Act, 2000.”
This makes clear that, Maharashtra Stamp Act imposes stamp duty on electronic agreements as well. This justifies that even electronic agreements come under the scope of Stamp Act, thus need to be stamped.
What is execution?
Section 2(12) of Stamp Act defines the terms “executed” and “execution”, which is also widened by the recent amendment to take into account, attribution of electronic records. It states that:
“2(12). “Executed and execution”- executed and execution used with reference to instruments, mean signed and signature” and includes attribution of electronic record within the meaning of section 11 of the Information Technology Act, 2000.”
Thus the execution means putting signature on the instrument by the party to the agreement. Attribution of electronic record will also be treated as execution. It can be concluded from the above definition that, the specific instrument would attract payment of stamp duty upon their execution i.e. when it is signed or bears a signature, even if the execution takes place electronically.
III. Time and Manner of Stamping
As discussed, an e-agreement is required to be stamped according to State specific stamp laws. Section 3 of the Indian Stamp Act and the stamp legislation of several other States in India specify that an instrument to be chargeable with stamp duty must be “executed”.
Section 17 of Stamp Act stipulates when an instrument has to be stamped. It states that:
17. Instruments executed in India- All instruments chargeable with duty and executed by any person in India shall be stamped before or at the time of execution.
Thus, the stamp duty is to be paid before or at the time of executing the e- agreement and cannot be paid after execution.
However, one may also refer to section 17 of the Maharashtra Stamp Act which allow payment of stamp duty on the next working day following the day of execution.
There are some of the e-agreements such as click wrap agreements where execution does not takes place by the customer. Click-wrap agreements are the agreements where the customer accepts the terms and conditions of the contract by clicking on “OK” or “I agree” or such other similar terms. In case of such e-agreements, while the agreement can be said to be executed by the originator (by way of attribution), there is no signature of the customer which means such agreement does not get executed. Since, execution does not takes place, such agreements need not be stamped. However, another view can be derived that in such click wrap agreements there is acknowledgement of receipt of the electronic record by the customer. Such “acknowledgment” of receipt of electronic record u/s 12 of IT Act may be treated as deemed “execution”  by the customer. However, there are no clear provisions in the Stamp Act dealing with eligibility of stamp duty to click-wrap agreements.
As regards the manner of stamping, same can be done in three ways:-
- E-stamping: Some states like Maharashtra provides specific provisions for e-stamping. In such case, both the party can digitally sign the document and get it stamped electronically on the same day. For instance, Maharashtra E-Registration and E-Filing Rules, 2013 facilitates online payment of stamp duty and registration fees. Rule 10 of the said rules states that:
Rule 10. For online registration, Stamp duty and registration fees shall be paid online to Government of Maharashtra through Government Receipt Accounting System (GRAS) (Virtual Treasury) by electronic transfer of funds or any other mode of payment prescribed by the Government.
Further, as per Rule 3 of The Maharashtra ePayment of Stamp Duty and Refund Rules 2014, the stamp duty required to be paid under the act, may be paid online into the Virtual Treasury through Government Revenue and Accounting System (GRAS).
- Franking: There is also the concept of franking in some of the states, in which case, document may be printed and stamped by the way of franking before the parties have affixed their signature. For instance, in case of Maharashtra Stamp Act, 1958, section 2(k) which defines “Impressed stamp” also includes impression by franking machine.
- Physical Stamping: Where the facility of e-stamping or franking is not available, a print of the e-agreement may be taken and the same may then be adequately stamped with adhesive stamps or impressed stamps before or on the date of execution by the parties as per section 10 of Indian Stamp Act.
However, the liability to pay stamp duty will be upon either of the party to contract as per the agreement entered between them. In the absence of any such agreement, liability to pay stamp duty shall be upon such person as may be determined under section 29 of the Indian Stamp Act.
IV. Consequences of Non- stamping
Non-payment of stamp duty in respect of documents would attract similar consequences for both physical instruments as well as electronic instruments, unless specific consequences have been prescribed for electronically executed instruments under the respective stamp duty laws.
Inadmissibility as an evidence:
In terms of the Indian Stamp Act and most State stamp duty laws, instruments which are chargeable with stamp duty are inadmissible as evidence in case appropriate stamp duty has not been paid. Section 35 of Indian Stamp Act deals with the consequences of non-stamping of documents. It states that:
- Instruments not duly stamped inadmissible in evidence, etc.-No instrument chargeable with duty shall be admitted in evidence for any purpose by any person having by law or consent of parties authority to receive evidence, or shall be acted upon, registered or authenticated by any such person or by any public officer, unless such instrument is duly stamped.
However, the inappropriately stamped instruments may be admissible as evidence upon payment of applicable duty, along with prescribed penalty.
Every person who executes or signs, otherwise than as a witness, any instruments which is not duly stamped but the same was chargeable with stamp duty, can be held liable for monetary fines. In case of an intentional evasion of stamp duty, criminal liability can also be imposed.
When all the applicable laws are taken and interpreted in conjunction with one another, it can be understood that, e-agreements being a valid agreements are also liable for stamp duty on execution. However, the same levy will be as per the respective State laws. Where the State legislation provides for the facility of e-stamping, the same shall be availed in order to move towards the goal of paperless economy. Whereas, some States are yet to recognize the importance and validity of e-agreements and e-stamping. It is looked forward on the part of state as well as central government to make specific provisions for e-agreements and e-stamping in order to save time and money and to provide an ease for doing business.
Our write-up on the legal validity of e-agreements can be viewed here.
 The Central Government and the State Government (s) have been empowered under the Union List and the State list (respectively) to levy stamp duty on instruments specified therein.
 The amendment was brought by the Finance Act, 2019, which by Notification of Ministry of Finance dated 8th January, 2020 are to be effective from the 1st day of April, 2020”
 Section 11 of the IT Act provides for attribution of electronic record as follows –
“11. Attribution of electronic records.–An electronic record shall be attributed to the originator–
(a) if it was sent by the originator himself;
(b) by a person who had the authority to act on behalf of the originator in respect of that electronic record; or
(c) by an information system programmed by or on behalf of the originator to operate automatically.”
 For instance, Article 7 of the UNCITRAL Model Law on E-Commerce states that where the law requires a signature of a person, that requirement is met in relation to a data message if a method is used to identify that person and to indicate that person’s approval of the information contained in the data message; and that method is as reliable as was appropriate for the purpose for which the data message was generated or communicated, in the light of all the circumstances, including any relevant agreement. This way of putting “signature” is not explicitly recognized in relevant Acts, however, the Courts may take a liberal view in this regard.
-Vinod Kothari (email@example.com)
Marketplace lending, P2P lending, or Fintech credit, has been growing fast in many countries, including the USA. It is estimated to have reached about $ 24 billion in 2019 in the USA.
However, there are some interesting legal issues that seem to be arising. The issues seem to be emanating from the fact that P2P platforms essentially do pairing of borrowers and lenders. In the US practice, it is also commonplace to find an intermediary bank that houses the loans for a few days, before the loan is taken up by the “peer” or crowd-sourced lender.
USA, like many other countries, has usury laws. However, usury laws are not applicable in case of banks. This comes from sec 85 of National Bank Act, and sec. 27 (a) of the Federal Deposit Insurance Act.
In P2P structure, the loan on the platform may first have been originated by a bank, and then assigned to the buyer. If the loan carries an interest rate, which is substantially high, and such high interest rate loan is taken by the “peer lender”, will it be in breach of the usury laws, assuming the rate of interest is excessive?
One of the examples of recent legal issues in this regard is Rent-Rite Superkegs West, Ltd., v. World Business Lenders, LLC, 2019 WL 2179688. In this case, a loan of $ 50000 was made to a corporation by a local bank, at an interest rate of 120.86% pa. The loan-note was subsequently assigned to a finance company. Upon bankruptcy of the borrower, the bankruptcy court refused to declare the loan as usurious, based on a time-tested doctrine that has been prevailing in US courts over the years – called valid-when-granted doctrine.
The valid-when-granted doctrine holds that if a loan is valid when it is originally granted, it cannot become invalid because of subsequent assignment. Several rulings in the past have supported this doctrine: e.g., Munn v. Comm’n Co., 15 Johns. 44, 55 (N.Y. Sup. Ct. 1818); Tuttle v. Clark, 4 Conn. 153, 157 (1822); Knights v. Putnam, 20 Mass. (3 Pick.) 184, 185 (1825)
However, there is a ruling that stands out, which is 2015 ruling of the Second Circuit court in Madden v. Midland Funding, LLC (786 F.3d 246). In Madden, there was an assignment of a credit card debt to a non-banking entity, who charged interest higher than permitted by state law. The court held that the relaxation from interest rate restrictions applicable to the originating bank could not be claimed by the non-banking assignee.
The ruling in Madden was deployed in a recent [June 2019] class action suit against JP Morgan Chase/Capital One entities, where the plaintiffs, representing credit card holders, allege that buyers of the credit card receivables (under credit card receivables securitization) cannot charge interest higher than permitted in case of non-banking entities. Plaintiffs have relied upon the “true sale” nature of the transaction, and contend that once the receivables are sold, it is the assignee who needs to be answerable to the restrictions on rate of interest.
While these recent suits pose new challenges to consumer loan securitization as well as marketplace lending, it is felt that much depends on the entity that may be regarded as “true lender”. True lender is that the entity that took the position of predominant economic interest in the loan at the time of origination. Consider, however, the following situations:
- In a marketplace lending structure, a bank is providing a warehousing facility. The platform disburses the loan first from the bank’s facility, but soon goes to distribute the loan to the peer lenders. The bank exits as soon as the loan is taken by the peer lenders. Will it be possible to argue that the loan should be eligible for usurious loan carve-out applicable to a bank?
- Similarly, assume there is a co-lending structure, where a bank takes a portion of the loan, but a predominant portion is taken by a non-banking lender. Can the co-lenders contend to be out of the purview of interest rate limitations?
- Assume that a bank originates the loan, and by design, immediately after origination, assigns the loan to a non-banking entity. The assignee gets a fixed, reasonable rate of return, while the spread with the assignee’s return and the actual high interest rate paid by the borrower is swept by the originating bank.
Identity of the true lender becomes an intrigue in cases like this.
Securitization transactions stand on a different footing as compared to P2P programs. In case of securitization, the loan is originated with no explicit understanding that it will be securitized. There are customary seasoning and holding requirements when the loan is incubated on the balance sheet of the originator. At the time of securitization, whether the loan will get included in the securitization pool depends on whether the loan qualifies to be securitized, based on the selection criteria.
However, in case of most P2P programs, the intent of the platform is evidently to distribute the loan to peer-lenders. The facility from the bank is, at best, a bridging facility, to make it convenient for the platform to complete the disbursement without having to wait for the peer-lenders to take the portions of the loan.
US regulators are trying to nip the controversy, by a rule that Interest on a loan that is permissible under 12 U.S.C. 85 shall not be affected by the sale, assignment, or other transfer of the loan. This is coming from a proposed rule by FDIC /OCC in November, 2019.
However, the concerns about the true lender may still continue to engage judicial attention.
Usurious lending laws in other countries
Usurious lending, also known as extortionate credit, is recognised by responsible lending laws as well as insolvency/bankruptcy laws. In the context of consumer protection laws, usurious loans are not regarded as enforceable. In case of insolvency/bankruptcy, the insolvency professional has the right to seek avoidance of a usurious or extortionate credit transaction.
In either case, there are typically carve-outs for regulated financial sector entities. The underlying rationale is that the fairness of lending contracts may be ensured by respective financial sector regulator, who may be imposing fair lending standards, disclosure of true rate of interest, etc. Therefore, judicial intervention may not be required in such cases. However, the issue once again would be – is it justifiable that the carve-out available to regulated financial entities should be available to a P2P lender, where it is predesigned that the loan will get transferred out of the books of the originating financial sector entity?
P2P lending or fintech credit is the fastest growing part of non-banking financial intermediation, sometimes known as shadow banking. A lot of regulatory framework is designed keeping a tightly-regulated bank in mind. However, P2P is itself a case of moving out of banking regulation. Banking laws and regulations cannot be supplanted and applied in case of P2P lending.
We have been engaged in research in the P2P segment. Our report on P2P market in India describes the basics of P2P lending structures in India and demonstrates development of P2P market in India.
Our other write-ups on P2P lending may also be referred:
Aiming to curb the situation of the current liquidity crisis in the NBFCs sector of the country, the Reserve Bank of India (RBI), once again, in a gap of 6 months has extended the relaxation to NBFCs with regards to the Minimum Holding Period (MHP) requirements originating on NBFCs.
As a quick recollection of the dispensations provided to the NBFCs vide the circular DNBR (PD)CC.No.95/03.10.001/2018-19 dated November 29, 2018 on “Relaxation on the guidelines to NBFCs on securitisation transactions”, the following were the key takeaways of the relaxations as covered in our previous write-up (please click here).
|Loans assigned between 31St December, 2019- 30th June, 2020||Loans assigned after 30th June, 2020|
|MHP requirements for loans with original maturity less than 5 years||Loans upto 2 years maturity – 3 months
Loans between 2-5 years – 6 months
|Loans upto 2 years maturity – 3 months
Loans between 2-5 years – 6 months
|MHP requirements for loans with original maturity of more than 5 years||Repayments of atleast 6 monthly instalments or two quarterly instalments (as applicable)
If revised MRR requirements fulfilled – 6 months
If revised MRR requirements fulfilled – 12 months
|Repayments of atleast 12 monthly installments or four quarterly instalments (as applicable)|
|MRR requirements for loans with original maturity of less than 5 years||Loans with original maturity upto 2 years – 5%
Loans with original maturity more than 2 years -10%
|Loans with original maturity upto 2 years – 5%
Loans with original maturity more than 2 years -10%
Bullet repayment loans / receivables- 10%
|MRR requirements for loans with original maturity of more than 5 years||If benefit of MHP requirements availed – 20%
If benefit of MHP requirements not availed – 10%
|Loans with original maturity more than 2 years – 10%
Bullet repayment loans / receivables- 10%
The Reserve Bank of India (RBI) has vide its notification dated December 24, 2019, introduced a new kind of semi-closed Prepaid Instrument (PPI) which can only be loaded from a bank account and used for purchase of goods and services and not for funds transfer. This PPI has been introduced in furtherance of Statement on Developmental and Regulatory Policies issued by the RBI. The following write-up intends to provide a brief understanding of the features of this instrument and carry out a comparative analysis of features of existing kinds of PPIs and the newly introduced PPI.
The features of the newly introduced PPIs has to be clearly communicated to the PPI holder by SMS / e-mail / post or by any other means at the time of issuance of the PPI / before the first loading of funds. Following shall be the features of the newly introduced PPI:
- Issuer can be banks or non-banks.
- The PPI shall be issued on obtaining minimum details, which shall include a mobile number verified with One Time Pin (OTP) and a self-declaration of name and unique identity / identification number of any ‘mandatory document’ or ‘officially valid document’ (OVD) listed in the KYC Direction.
- The new PPI shall not require the issuer to carry out the Customer Due Diligence (CDD) process, as provided in the Master Direction – Know Your Customer (KYC) Direction (‘KYC Directions).
- The amount loaded in such PPIs during any month shall not exceed ₹ 10,000 and the total amount loaded during the financial year shall not exceed ₹ 1,20,000.
- The amount outstanding at any point of time in such PPIs shall not exceed ₹ 10,000.
- Issued as a card or in electronic form.
- The PPIs shall be reloadable in nature. Reloading shall be from a bank account only.
- Shall be used only for purchase of goods and services and not for funds transfer.
- Holder shall have an option to close the PPI at any time and the outstanding balance on the date of closure shall be allowed to be transferred ‘back to source.’
The Master Direction on Issuance and Operation of Prepaid Payment Instruments contain provisions for two other kinds of semi-closed PPIs having transaction limit of ₹10,000. The features of these PPIs seem largely similar. However, there are certain differences as shown in the following table:
|Basis||PPIs upto ₹ 10,000/- by accepting minimum details of the PPI holder
|PPIs upto ₹ 1,00,000/- after completing KYC of the PPI holder
|PPIs upto ₹ 10,000/- with loading only from bank account
|Issuer||Banks and non-banks||Banks and non-banks||Banks and non-banks|
|PPI holder identification procedure||Based on minimum details (mobile number verified with One Time Pin (OTP) and self-declaration of name and unique identification number of any of the officially valid document (OVD) as per PML Rules 2005)||KYC procedure as provided in KYC Directions||Based on minimum details (mobile number verified with One Time Pin (OTP) and a self-declaration of name and unique identity / identification number of any ‘mandatory document’ or OVD as per KYC Directions|
|Reloading||Allowed||Allowed||Allowed (only from a bank account)|
|Form||Electronic||Electronic||Card or electronic|
|Limit on outstanding balance||₹ 10,000||₹ 1,00,000||₹ 10,000|
|Limit on reloading||₹ 10,000 per month and ₹ 1,00,000 in the entire financial year||Within the overall PPI limit||₹ 10,000 per month and ₹ 1,20,000 during a financial year|
|Transaction limits||₹ 10,000 per month||₹ 1,00,000 per month in case of pre-registered beneficiaries and ₹ 10,000 per month in all other cases||₹ 10,000 per month|
|Utilisation of amount||Purchase of goods and services||Purchase of goods and services and transfer to his bank account or ‘back to source’||Purchase of goods and services|
|Conversion||Compulsorily be converted into Type 2 PPIs (KYC compliant) within 24 months from the date of issue||No provisions for conversion||Type 1 PPIs maybe converted to Type 3, if desired by the holder|
|Restriction on issuance to single person||Cannot be issued to same person using the same mobile number and same minimum details more than once||No such provision||No such provision|
|Closure of PPI||Holder to have option to close and transfer the outstanding balance to his bank account or ‘back to source’||Holder to have option to close and transfer the outstanding balance to his bank account or ‘back to source’ or to other PPIs of the holder||Holder to have option to close and transfer the outstanding balance ‘back to source’ (i.e. the bank account of the holder only)|
|Pre-registered Beneficiary||Facility not available||Facility available||Facility not available|
THE UPPER HAND
Based on the aforesaid comparative analysis, it is clear that for issuance of the newly introduced PPI or the Type 3 PPI, the issuer is not required to undertake the CDD process as provided in the KYC Directions. Only authentication through mobile number and OTP supplemented with a self-declaration regarding of details provided in the OVD shall suffice. This implies that the issuer shall not be required to “Originally See and Verify” the KYC documents submitted by the customer. This would result into digitisation of the entire transaction process and cost efficiency for the issuer.
Compared to the other 2 kinds of PPIs, one which requires carrying out of the KYC process prescribed in the KYC Directions and the other, which can be issued without carrying out the prescribed KYC process but has to be converted into Type 2 PPI within 24 months, this new PPI can be a good shot aiming at ease of business and digital payments upto a certain transaction limit.
The newly issued PPI will ensure seamless flow of the transaction. As compared to other PPIs, it will be easier to obtain such PPIs. Further, the limitations such as reloading only from the bank account, restriction of transfer of money from PPI etc. are some factors that shall regulate the usage of such PPIs. These may, however, pull back their acceptance in the digital payments space.
 “officially valid document” means the passport, the driving licence, the Permanent Account Number (PAN) Card, the Voter’s Identity Card issued by the Election Commission of India or any other document as may be required by the banking company, or financial institution or intermediary
 Permanent Account Number (PAN)
 “Officially Valid Document” (OVD) means the passport, the driving licence, proof of possession of Aadhaar number, the Voter’s Identity Card issued by the Election Commission of India, job card issued by NREGA duly signed by an officer of the State Government and letter issued by the National Population Register containing details of name and address.
Our other write-ups relating to PPIs can be viewed here:
Our other resources can be referred to here:
Team, Vinod Kothari Consultants Pvt. Ltd.
The RBI on November 08, 2019 revised the limits relating to the qualifying assets criteria, giving a much needed boost to Micro-Finance Institutions. The change in limits comes pursuant to the Statement on Developmental and Regulatory Policies issued as part of the Monetary Policy Statement dated 04 October, 2019.
A detailed regulatory framework for MFI’s was put into place in December, 2011 based on the recommendations of a Sub-Committee of the Central Board of the Reserve Bank. The regulatory framework prescribes that an NBFC MFI means a non-deposit taking NBFC that fulfils the following conditions:
- Minimum Net Owned Funds of Rs. 5 Crore.
- Not less than 85% of its net assets are in the nature of qualifying assets.
Thus meeting the qualifying assets criteria is crucial to be classified as an NBFC-MFI. The income and loan limits to classify an exposure as an eligible asset were last revised in 2015.
In light of the above and taking into consideration the important role played by MFIs in delivering credit to those in the bottom of the economic pyramid and to enable them to play their assigned role in a growing economy, it was decided to increase and review the limits.
Revised Qualifying assets criteria
The changes are highlighted in the table below:
|Qualifying Assets Criteria|
|Erstwhile Criteria||Revised Criteria|
|Qualifying assets shall mean a loan which satisfies the following criteria:|
|i. Loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding ₹ 1,00,000 or urban and semi-urban household income not exceeding ₹ 1,60,000;||i. Loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding ₹ 1,25,000 or urban and semi-urban household income not exceeding ₹ 2,00,000;|
|ii. Loan amount does not exceed ₹ 60,000 in the first cycle and ₹ 1,00,000 in subsequent cycles;||ii. Loan amount does not exceed ₹ 75,000 in the first cycle and ₹ 1,25,000 in subsequent cycles;|
|iii. Total indebtedness of the borrower does not exceed ₹ 1,00,000;||iii. Total indebtedness of the borrower does not exceed ₹ 1,25,000;|
|Note: All other terms and conditions specified under the master directions shall remain unchanged.|
The Statement on Developmental and Regulatory Policies called for revisions in the household income and loan limits only. The notification of the RBI additionally, in light of the change in total indebtedness of the borrower, felt it necessary to also increase the limits on disbursal of loans.
The revised limits are effective from the date of the circular, i. e. November 08, 2019.
Links of related articles:
-By Anita Baid
Regulators and stakeholders have been seeking a review of Core Investment Companies (CIC) guidelines ever since defaults by Infrastructure Leasing and Financial Services Ltd (IL&FS), a large systemically important CIC. In August 2019, there were 63 CICs registered with the Reserve Bank of India (RBI). As on 31 March, 2019, the total asset size of the CICs was ₹2.63 trillion and they had approximately ₹87,048 crore of borrowings. The top five CICs consist of around 60% of the asset size and 69% borrowings of all the CICs taken together. The borrowing mix consists of debentures (55%), commercial papers (CPs) (16%), financial institutions (FIs) other corporates (16%) and bank borrowings (13%).
Considering the need of the hour, RBI had constituted a Working Group (WG) to Review Regulatory and Supervisory Framework for CICs, on July 03, 2019. The WG has submitted its report on November 06, 2019 seeking comments of stakeholders and members of the public.
Below is an analysis of the key recommendations and measures suggested by the WG to mitigate the related risks for the CICs:
|Existing Provision & drawbacks||Recommendation||Our Analysis|
|Complex Group Structure|
|Section 186 (1) of Companies Act, 2013, which restricts the Group Structure to a maximum of two layers, is not applicable to NBFCs
|The number of layers of CICs in a group should not exceed two, as in case of other companies under the Companies Act, which, inter alia, would facilitate simplification and transparency of group structures.
As such, any CIC within a group shall not make investment through more than a total of two layers of CICs, including itself.
For complying with this recommendation, RBI may give adequate time of say, two years, to the existing groups having CICs at multiple levels.
|A single group may have further sub-division based on internal family arrangements- there is no restriction on horizontal expansion as such.
Further, the definition of the group must be clarified for the purpose of determining the restriction- whether definition of Group as provided under Companies Act 1956 (referred in the RBI Act) or under the Master Directions for CICs would be applicable.
To comply with the proposed recommendations, the timelines as well as suggested measures must also be recommended.
|Multiple Gearing and Excessive Leveraging|
|Presently there is no restriction on the number of CICs that can exist in a group. Further, there is no
requirement of capital knock
off with respect to investments in other CICs. As a result, the step down CICs can use the capital for multiple leveraging. The effective leverage ratio can thus be higher than that allowed for regular NBFCs.
|For Adjusted Net Worth (ANW) calculation, any capital contribution of the CIC to another step-down CIC (directly or indirectly) shall be deducted over and above the 10% of owned funds as applicable to other NBFCs.
Furthe, step-down CICs may not be permitted to invest in any other CIC.
Existing CICs may be given a glide path of 2 years to comply with this recommendation.
|Certain business groups developed an element of multiple gearing as funds could be raised by the CICs and as well as by the step down CICs and the other group companies independently. At the Group level, it therefore led to over-leveraging in certain cases.
A graded approach, based on the asset size of the CICs, must have been adopted in respect of leverage, instead of a uniform restriction for all.
|Build-up of high leverage and other risks at group level|
|There is no requirement to have in place any group level committee to articulate the risk appetite and identify the risks (including excessive leverage) at the Group level||Every conglomerate having a CIC should have a Group Risk Management Committee (GRMC) which, inter alia, should be entrusted with the responsibilities of
(a) identifying, monitoring and mitigating risks at the group level
(b) periodically reviewing the risk management frameworks within the group and
(c) articulating the leverage of the Group and monitoring the same.
Requirements with respect to constitution of the Committee (minimum number of independent directors, Chairperson to be independent director etc.), minimum number of meetings, quorum, etc. may be specified by the Reserve Bank through appropriate regulation.
|There is no particular asset size specified. Appropriately, the requirement should extend to larger conglomerates.
|Currently, Corporate Governance guidelines are not explicitly made applicable to CICs||i. At least one third of the Board should comprise of independent members if chairperson of the CIC is non-executive, otherwise at least half of the Board should comprise of independent members, in line with the stipulations in respect of listed entities. Further, to ensure independence of such directors, RBI may articulate appropriate requirements like fixing the tenure, non-beneficial relationship prior to appointment, during the period of engagement and after completion of tenure, making removal of independent directors subject to approval of RBI etc.
ii. There should be an Audit Committee of the Board (ACB) to be chaired by an Independent Director (ID). The ACB should meet at least once a quarter. The ACB should inter-alia be mandated to have an oversight of CIC’s financial reporting process, policies and the disclosure of its financial information including the annual financial statements, review of all related party transactions which are materially significant (5% or more of its total assets), evaluation of internal financial controls and risk management systems, all aspects relating to internal and statutory auditors, whistle-blower mechanism etc. In addition, the audit committee of the CIC may also be required to review (i) the financial statements of subsidiaries, in particular, the investments made by such subsidiaries and (ii) the utilization of loans and/ or advances from/investment by CIC in any group entity exceeding rupees 100 crore or 10% of the asset size of the group entity whichever is lower.
iii. A Nomination and Remuneration Committee (NRC) at the Board level should be constituted which would be responsible for policies relating to nomination (including fit and proper criteria) and remuneration of all Directors and Key Management Personnel (KMP) including formulation of detailed criteria for independence of a director, appointment and removal of director etc.
iv. All CICs should prepare consolidated financial statements (CFS) of all group companies (in which CICs have investment exposure). CIC may be provided with a glide path of two years for preparing CFS. In order to strengthen governance at group level, if the auditor of the CIC is not the same as that of its group entities, the statutory auditor of CIC may be required to undertake a limited review of the audit of all the entities/ companies whose accounts are to be consolidated with the listed entity.
v. All CICs registered with RBI should be subjected to internal audit.
vi. While there is a need for the CIC’s representative to be on the boards of its subsidiaries / associates etc., as necessary, there is also a scope of conflict of interest in such situations. It is therefore recommended that a nominee of the CIC who is not an employee / executive director of the CIC may be appointed in the Board of the downstream unlisted entities by the respective CIC, where required.
|The extent of applicability of NBFC-ND-SI regulations is not clear. The FAQs issued by RBI on CICs (Q12), state that CICs-ND-SI are not exempt from the Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015 and are only exempt from norms regarding submission of Statutory Auditor Certificate regarding continuance of business as NBFC, capital adequacy and concentration of credit / investments norms.
Further, no asset size has been prescribed – can be prescribed on “group basis”. That is, if group CICs together exceed a certain threshold, all CICs in the group should follow corporate governance guidelines, including the requirement for CFS.
Most of the CICs are private limited companies operating within a group, having an independent director on the board may not be favorable.
Further, carrying out and internal audit and preparing consolidated financials would enable the RBI to monitor even unregulated entities in the Group.
Currently, the requirement of
However, if the recommendation
|Review of Exempt Category and Registration|
|Currently there is a threshold of ₹ 100 crore asset size and access to public funds for registration as CIC||
||Since the category of ‘exempted CICs; were not monitored, there was no means to detect when a CIC has reached the threshold requiring registration.
This remains to be a concern.
|Enhancing off-site surveillance and on-site supervision over CICs|
|There is no prescription for submission of off-site returns or Statutory Auditors Certificate (SAC) for CICs||Offsite returns may be designed by the RBI and prescribed for the CICs on the lines of other NBFCs. These returns may inter alia include periodic reporting (e.g. six monthly) of disclosures relating to leverage at the CIC and group level.
A CIC may also be required to disclose to RBI all events or information with respect to its subsidiaries which are material for the CIC.
Annual submission of Statutory Auditors Certificates may also be mandated. Onsite inspection of the CICs may be conducted periodically.
|The reporting requirements may help in monitoring the activities of the CICs and developing a database on the structures of the conglomerates, of which, the CIC is a part. This may assist in identification of unregulated entities in the group.
Our other related write-ups:
Our write-ups relating to NBFCs can be viewed here: http://vinodkothari.com/nbfcs/