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The new PSL Master Direction and its Impact on NBFCs

-Siddharth Goel (finserv@vinodkothari.com)

Introduction

The Reserve Bank of India (RBI) issued Master Directions-Priority Sector Lending (PSL) Targets and Classification on September 4, 2020 (‘Master Directions’).[1] The Master Directions consolidates various circulars and guidelines issued by RBI with respect to PSL.

The changes made in the Master Directions primarily deal with targets and sub-targets for classification of loans as priority sector loans. Further there are some addition of new sectors in Eligible categories, along with increase in lending limit of some of the existing eligible categories for priority sector lending.

Our detailed write-up on the topic can be viewed here.

Changes in priority sector norms do not have a direct impact on the NBFCs, but they have an indirect impact. Banks are allowed to acquire loans under Direct Assignment arrangements or invest in pass through certificates backed by loans which qualify the definition of PSL, in order to meet the prescribed targets. Mostly, the banks acquire these receivables from NBFCs who does the origination of the loans. Additionally, banks also engage in co-lending arrangements with NBFCs to originate PSLs. Therefore, it is worthwhile to examine the impact of these changes on NBFCs.

Co-origination of loans by Banks for lending to Priority Sector

RBI through its vide notification RBI/2018-19/49 dated September 21, 2018 issued guidelines on Co-origination of loans by Commercial Banks and NBFC-ND-SI (“Co-origination Guidelines”).[2] These guidelines excluded Regional Rural Banks (RRBs) and Small Finance Banks (SFBs). Essentially, the banks could claim priority sector status in respect of its share of credit while engaging in the co-origination arrangement with NBFC under the Co-origination Guidelines. Provided, the priority sector assets on the bank’s books should at all times be without recourse to the NBFC.

It is pertinent to note that the PSL Master Directions under its para 25 covers Co-origination of loans by Banks and NBFC-ND-SI. The Master Direction specifically excludes, RRBs SFBs and Urban Co-Operative Banks (UCBs) and Local Area Banks (LABs) under the above para. Moreover, the Master Directions under the said para, specifically stipulates that detailed guidelines in this regard are to be governed as provided under Co-origination Guidelines dated September 21, 2018. Hence there are no changes intended to be introduced vis-a-vis Master Direction, to the co-origination of loans by banks and NBFCs.

PSL- Lending by Banks to NBFCs for On-Lending

In the earlier regime, after the review of Priority sector lending by banks to NBFC for On-Lending notification dated August 13, 2019[3], RBI through its notification dated March 23, 2020,[4] extend the priority sector classification for bank loans to NBFCs for on-lending for the FY 2020-21. Further, existing loans disbursed under the on-lending model continued to be classified under Priority Sector till the date of repayment/maturity. The extension notification also stipulated an overall capping limit for calculating bank’s total priority sector lending as produced herein below;

“3. Bank credit to registered NBFCs (other than MFIs) and HFCs for on-lending will be allowed up to an overall limit of five percent of individual bank’s total priority sector lending. Further, banks shall compute the eligible portfolio under on-lending mechanism by averaging across four quarters, to determine adherence to the prescribed cap.”

Para 22 of the Master Directions governs Bank loans to registered NBFCs (other than MFIs). It is highlighted that there is no change in sub-category for On-lending by NBFC, and limits also remain unchanged. The above para in the Master Direction, clearly stipulates that on-lending will be eligible for classification as priority sector under respective categories which is subject to the following conditions:

(i) Agriculture: On-lending by NBFCs for ‘Term lending’ component under Agriculture will be allowed up to ₹ 10 lakh per borrower.

(ii) Micro & Small enterprises: On-lending by NBFC will be allowed up to ₹ 20 lakh per borrower.

The above dispensation is valid up to March 31, 2021 and will be reviewed thereafter. However, loans disbursed under the on-lending model will continue to be classified under Priority Sector till the date of repayment/maturity. Caping of overall limit of Bank Credit to 5 percent has been prescribed under para 24 of the Master Directions.

Investments by Banks in Securitised Assets & Direct Assignment

Investments by banks in securitised assets or assignment/outright purchase of a pool of assets, representing loans by banks and financial institutions to various categories of priority sector, except ‘others’ category, are eligible for classification under respective categories of priority sector depending on the underlying assets. However, earlier the requirement was that the interest rate charged to the ultimate borrower in securitised assets and in case of transfer of assets through direct assignment, shall be capped at Base Rate of the investing bank plus 8 percent per annum.

Therefore, investments by banks, in securitised assets and purchase of assets originated by NBFCs in eligible sectors had to comply with above capping in order to qualify as eligible for PSL. To encourage MSME lending in smaller areas where cost of intermediation is high for the smaller NBFCs, the UK Sinha committee in its report has proposed the cap at Base Rate of the investing bank plus 12% per annum initially and periodical review thereafter. The intent of the recommendation stood on the grounds that price caps are not applicable to banks when they originate directly through branches.

Accordingly, such capping limit has been relaxed and as per the as per the revised requirement the all-inclusive interest charged to the ultimate borrower by the originating entity should not exceed the External Benchmark Lending Rate (EBLR)/ MCLR of the investing bank plus appropriate spread which will be communicated separately. It is expected that the RBI shall be separately communicating the limits to the banks.

The aforesaid relaxation in the interest rate capping would widen the eligibility of loans originated by the NBFCs for securitisation and direct assignment to banks, for meeting the PSL requirement.

Adjustments for weights in PSL Achievement

To address the regional disparities in flow of credit at the district level, currently districts have been ranked on the basis of per capita credit flow. Higher weight (125%) is assigned to the incremental priority sector credit in districts with low per capita credit flow. Similarly, lower weight (90%) has been assigned to incremental PSL in districts with comparatively higher credit flow. The higher PSL credit (125 %) districts are specified in ANNEX-I A and districts with comparatively low PSL credit (90%) are specified in ANNEX-IB of the Master direction. Districts not mentioned in either of the Annex will be having weightage of 100%. PSL incremental credit shall be applicable from F.Y. 2021-2022 onwards.

Thus, for the purpose of above incentives, banks will get incremental PSL credit, if they invest as following:

  • Investment in securitsed assets/direct assignment/outright purchase, of loans originated by NBFCs from high priority districts. The entire investment in PTCs made by the banks, the proportion which is represented by those as priority districts will be weighted at 125% and low priority districts at 90% and others at 100%.
  • On-lending by Banks to NBFCs, wherein NBFCs are further lending in districts with high priority.
  • Incremental credit incentive will be available to Banks, on proportion of their share of loans, to district with high priority under Co-Origination model.

Impact of new Master Directions on NBFCs

The new Master Direction does not seem to impact legal relationship between banks and NBFCs in respect to co-origination of loans and co-lending materially, since all the regulations are similar to the earlier PSL regime. However, the incentives introduced by way of incremental PSL credit to Banks will channel the credit to districts with low credit penetration. Therefore, banks will be benefitted by dealing with NBFCs having portfolio of loans (eligible for PSL) and presence in districts with lower credit penetration.

Further, change in capping, of investments by Banks in securitised assets and direct assignment/ outright purchase of loans, originated by NBFCs is intended to cover loans originated with higher spreads. Further lending to new sub sectors introduced through Master Direction, would also qualify towards PSL target investments by Banks.

The indicative list of new sub-sectors and sub-sectors with enhanced credit limit is reproduced herein below for ready reference.

Agriculture Lending Including Farm Credit (Allied Activities), lending for Agriculture Infrastructure and Ancillary Activities. ·        Inclusion of loans to farmers for installation of stand-alone Solar Agriculture Pumps and for solarisation of grid connected Agriculture Pumps.

·        Inclusion of loans to farmers for installation of solar power plants on barren/fallow land or in stilt fashion on agriculture land owned by farmer

·        Inclusion of loans up to ₹50 crore to Start-ups, as per definition of Ministry of Commerce and Industry, Govt. of India that are engaged in agriculture and allied services.

·        Inclusion of loans up to ₹2 lakh to individuals solely engaged in Allied activities without any accompanying land holding criteria. This change is in line with recommendation by M.K. Jain Committee7.

·        Inclusion of loans for construction of oil extraction/ processing units for production of bio-fuels, their storage and distribution infrastructure along with loans to entrepreneurs for setting up Compressed Bio Gas (CBG) plants.

·        Laying of Indicative list conveying permissible activities under Food Processing Sector as recommended by Ministry of Food Processing Industries.

·        A credit limit of ₹5 crore per borrowing entity has been specified for Farmers Producers Organisations (FPOs)/Farmers Producers Companies (FPCs) undertaking farming with assured marketing of their produce at a pre-determined price. This inclusion is as per the M.K Jain Committee Recommendations8.

 

Other Finance to MSMEs In line with the series of benefits being extended to MSMEs, loans up to ₹50 crore to Start-ups, as per definition of Ministry of Commerce and Industry, Govt. of India that confirm to the definition of MSME has been included under the PSL catergory. (On the basis of recommendations by UK Sinha Committee, to financially incentivise the startups in India)

 

 

Housing Loans

 

·        Increase in Loans up to ₹ 10 lakh (earlier ₹ 5 lakh) in metropolitan centres and up to ₹6 lakh (earlier 2 ₹ Lakh) in other centres for repairs to damaged dwelling units.

·        Bank loans to governmental agency for construction of dwelling units or for slum clearance and rehabilitation of slum dwellers subject to dwelling units with carpet area of not more than 60 square meters. Under the earlier regime, it was based on cost of dwelling unit which was ₹ 10 lakh per unit.

·        Inclusion of bank loans for affordable housing projects using at least 50% of FAR/FSI (Floor Area Ratio/ Floor Space Index) for dwelling units with carpet area of not more than 60 sq.m.

 

Social Infrastructure

 

Inclusion of loans up to a limit of ₹ 10 crore per borrower for building health care facilities including under ‘Ayushman Bharat’ in Tier II to Tier VI centres. This is in addition to the existing limit of ₹5 crore per borrower for setting up schools, drinking water facilities and sanitation facilities including construction/ refurbishment of household toilets and water improvements at household level, etc.

 

Renewable Energy Increase in loan limit to ₹ 30 Crore for purposes like solar based power generators, biomass-based power generators, wind mills, micro-hydel plants and for non-conventional energy based public utilities etc. This is to boost renewable energy sector, the earlier limit was up to ₹ 15 Crore.

 

 

[1]https://rbidocs.rbi.org.in/rdocs/notification/PDFs/MDPSL803EE903174E4C85AFA14C335A5B0909.PDF

[2] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT49BAA4688D36A64EAF8DB0BFD99C6FC54C.PDF

[3] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11659&Mode=0

[4] https://www.rbi.org.in/scripts/FS_Notification.aspx?Id=11828&fn=2754&Mode=0

 

Our related write-ups

 

 

PSL guidelines reviewed for wider credit penetration

By Siddarth Goel (finserv@vinodkothari.com)

Introduction

The Reserve Bank of India (RBI) issued Master Directions-Priority Sector Lending (PSL) Targets and Classification on September 4, 2020 (‘Master Directions’)[1]. The Master Directions are in the nature of a consolidating piece, of various circulars and guidelines issued by RBI in regard to PSL. The objective of Master Directions is to harmonise instructions guidelines for Commercial Banks[2], Small Finance Banks (“SFB”)[3], Regional Rural Banks (“RRBs”)[4], Urban Co-Operative Banks (“UCBs”)[5] and Local Area Banks (“LABs”) for PSL targets and classification under single universe.

The objective of Master Directions is to consolidate all the concerning circulars to PSL under one master direction. However, certain changes have been introduced under the Master Directions in line with the recommendations of Expert Committee on Micro, Small and Medium Enterprises (Chairman: Shri U.K. Sinha) and the ‘Internal Working Group to Review Agriculture Credit’ (Chairman: Shri M. K. Jain).

This write up endeavors to highlight major changes which has been implemented through the said Master Direction that were not forming part of the erstwhile notifications or guidelines in this regard.

Changes in Targets / Sub-targets Classification for Priority Sector

The targets and sub-targets set under priority sector lending is computed on the percentage basis of Adjusted Net Bank Credit (ANBC)/ Credit Equivalent of Off-Balance Sheet Exposures (CEOBE). The Master Directions, has increased the total priority sector lending target for Urban Co-Operative Banks, which is to be achieved through milestones-based targets in a phased manner. Further there has been increase in targets for advances to weaker sections and Small Farmer Margins (SMF) in the agriculture sector. The table below summarises the changes along with timelines for complying with Targets/Sub-targets for PSL.

Categories Domestic Commercial Banks Small Finance Banks RRB Urban Co-Operative Bank#
Total Priority Sector No change No Change No Change Increased in total priority sector target from 40 % to 75% of ANBC or CEOBE whichever is higher.
Advances to Weaker Sections Target * Increased to 12% of ANBC or CEOBE, whichever is higher.

[earlier target was 10%]

Increased to 12% of ANBC or CEOBE, whichever is higher.

[earlier target was 10%]

No Change Increased to 12% of ANBC or CEOBE, whichever is higher.

[earlier target was 10%] 

Agriculture Target * -No Change Small Marginal Farmers (SMF) target increased to 10% of the 18% of ANBC or CEOBE, whichever is higher.

[earlier it was 8 % of 18%] 

Small Marginal Farmers (SMF) target Increased to 10% of 18% of ANBC or CEOBE, whichever is higher.

[earlier it was 8% of 18%]

No Target
Micro Enterprises No Change No Change No Change No Change

# Target of total priority sector to be achieved in phased manner by Co-operative Banks as below.

Existing Target March 31, 2021 March 31, 2022 March 31, 2023 March 31, 2024
40% 45% 50% 60% 75%

 

* Phased manner for achieving Small Marginal Farmers and Weaker Section Targets as below.

Financial Year SMF Weaker Section Target
2020-2021 8% 10%
2021-2022 9% 11%
2022-2023 9.5% 11.5%
2023-2024 10% 12%

Inclusion of Weights in PSL Achievement

From the UK Sinha committee recommendations,[6] in order to address regional disparities in flow of credit to district levels. Adjusted Priority Sector Lending mechanism has been implemented under the new regime, to incentivise flow of credit to underserved districts. There will be no change in the underlying sectors eligible for PSL, however an additional weightage has been given to lending to the more underserved districts. From financial year 2021-2022 onwards weights would be assigned to incremental priority sector credit as follows:

  • Higher weight (125%) would be assigned to the districts where credit flow is comparatively lower, that is per capita PSL less than ₹ 6,000.
  • Lower weight (90%) would be assigned to the districts where credit flow is comparatively higher, that is per capita PSL is greater than ₹ 25,000.

RRBS, Urban Co-operative Banks and Local Area Banks and Foreign Banks have been kept out for the purpose of calculation of PSL weights, due to their limited presence.

Inclusions in Eligible Categories

Along with the inclusion of fresh categories eligible for finance under priority sector there has been some enhancement in the credit limit of the existing categories as well. Some of the changes are as follows-

Agriculture Lending Including Farm Credit (Allied Activities), lending for Agriculture Infrastructure and Ancillary Activities.
  • Inclusion of loans to farmers for installation of stand-alone Solar Agriculture Pumps and for solarisation of grid connected Agriculture Pumps.
  • Inclusion of loans to farmers for installation of solar power plants on barren/fallow land or in stilt fashion on agriculture land owned by farmer
  • Inclusion of loans up to ₹50 crore to Start-ups, as per definition of Ministry of Commerce and Industry, Govt. of India that are engaged in agriculture and allied services.
  • Inclusion of loans up to ₹2 lakh to individuals solely engaged in Allied activities without any accompanying land holding criteria. This change is in line with recommendation by M.K. Jain Committee[7].
  • Inclusion of loans for construction of oil extraction/ processing units for production of bio-fuels, their storage and distribution infrastructure along with loans to entrepreneurs for setting up Compressed Bio Gas (CBG) plants.
  • Laying of Indicative list conveying permissible activities under Food Processing Sector as recommended by Ministry of Food Processing Industries.
  • A credit limit of ₹5 crore per borrowing entity has been specified for Farmers Producers Organisations (FPOs)/Farmers Producers Companies (FPCs) undertaking farming with assured marketing of their produce at a pre-determined price. This inclusion is as per the M.K Jain Committee Recommendations[8].
Other Finance to MSMEs In line with the series of benefits being extended to MSMEs, loans up to ₹50 crore to Start-ups, as per definition of Ministry of Commerce and Industry, Govt. of India that confirm to the definition of MSME has been included under the PSL catergory. (On the basis of recommendations by UK Sinha Committee, to financially incentivise the startups in India)
Housing Loans

 

  • Increase in Loans up to ₹ 10 lakh (earlier ₹ 5 lakh) in metropolitan centres and up to ₹6 lakh (earlier 2 ₹ Lakh) in other centres for repairs to damaged dwelling units.
  • Bank loans to governmental agency for construction of dwelling units or for slum clearance and rehabilitation of slum dwellers subject to dwelling units with carpet area of not more than 60 square meters. Under the earlier regime, it was based on cost of dwelling unit which was ₹ 10 lakh per unit.
  • Inclusion of bank loans for affordable housing projects using at least 50% of FAR/FSI (Floor Area Ratio/ Floor Space Index) for dwelling units with carpet area of not more than 60 sq.m.
Social Infrastructure

 

Inclusion of loans up to a limit of ₹ 10 crore per borrower for building health care facilities including under ‘Ayushman Bharat’ in Tier II to Tier VI centres. This is in addition to the existing limit of ₹5 crore per borrower for setting up schools, drinking water facilities and sanitation facilities including construction/ refurbishment of household toilets and water improvements at household level, etc.
Renewable Energy Increase in loan limit to ₹ 30 Crore for purposes like solar based power generators, biomass-based power generators, wind mills, micro-hydel plants and for non-conventional energy based public utilities etc. This is to boost renewable energy sector, the earlier limit was up to ₹ 15 Crore.
Others

 

Inclusion of loans for meeting local needs such as construction or repair of house, construction of toilets not exceeding ₹2 lakh provided directly by banks to SHG/JLG for activities other than agriculture or MSME.

Investments by Banks in Securitised Assets & Direct Assignment

Earlier the interest rate charged to the ultimate borrower was capped at Base Rate of the investing bank plus 8 percent per annum. Post UK Sinha Committee recommendation,[9] the all-inclusive interest charged to the ultimate borrower by the originating entity should not exceed the External Benchmark Lending Rate (EBLR)/ MCLR of the investing bank plus appropriate spread which will be communicated separately.

The intent of the recommendation stood on the grounds that price caps are not applicable to banks when they originate directly through branches. Therefore, to encourage MSME lending in smaller areas where cost of intermediation is high by the smaller NBFCs, the committee proposed the cap at Base Rate of the investing bank plus 12% per annum initially and periodical review thereafter.

Conclusion

The Master Direction aids in compilation and provides easy understandability of all the guidelines at one place. The two committee reports recommendations have aided in recognising important sub-sectors of economy which were not covered under earlier regimes. Loans to starts-ups in agriculture and allied activities, loans to healthcare, sanitation along with impetus on renewable energy will not only bolster flow of credit in these sectors but also aimed at improving socio-economic conditions in the country. The introduction of incentive on incremental PSL by ranking of districts on basis of per capita credit flow could be an enabler for the deeper penetration of credit in rural economy. Therefore, the new Master Direction is a welcome move and will help in achieving better channeling of credit in the desired sectors of the economy.

[1] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/MDPSL803EE903174E4C85AFA14C335A5B0909.PDF

[2] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/33MD08B3F0CC0F8C4CE6B844B87F7F990FB6.PDF

[3] https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11644&Mode=0

[4] https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11604&Mode=0

[5] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11274&Mode=0

[6] Para 9.24, Report of the Expert Committee on Micro, Small and Medium Enterprises, (UK Sinha Committee) https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=924

[7] Para 1.7.6, Report of the Internal Working Group to Review Agricultural Credit, ( M. K Jain Committee) https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=942#CP28

[8] Para 2.7.5, Report of the Internal Working Group to Review Agricultural Credit, ( M. K Jain Committee) https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=942#CP28

[9] Para 9.24, Report of the Expert Committee on Micro, Small and Medium Enterprises, (UK Sinha Committee) https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=924

RBI lessons ARCs on fairness

A discussion on the fair practice code issued for ARCs

-Sikha Bansal and Kanakprabha Jethani

Introduction

Asset Reconstruction Companies (ARCs) are companies specializing in the business on acquiring non-performing assets and stressed assets of the banks and financial institutions and reconstructing them.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) accords the status of ‘financial institutions’ and ‘secured creditor’ to ARCs, such that an ARC acquiring bad loans is also able to exercise same rights and powers as the originator of the loan would have. This is explicitly stated in section 5 of SARFAESI.

Now, as they say, with great power, comes great responsibility; since, the business of ARCs involves frequent dealing with borrowers of loans, they must be guided by principles of fairness in their dealings with borrowers. Earlier, there were no guidelines with respect to fair practices of ARCs. However, after a gap of almost 20 years from the time the law was enacted, the Reserve Bank of India (RBI) through a notification dated 16.07.2020[1], issued a Fair Practices Code (FPC) for ARCs. It is noteworthy that in this span of 20 years, around 28 ARCs have been registered in India[2] and have an AUM of USD 14,583 million[3]. Further, the role and involvement of ARCs have increased multifold with IBC proceedings.

The FPC seeks to ensure fairness as well as transparency in the operations of ARCs, and calls upon the ARCs to put in place board approved FPC, grievance redressal mechanisms, code of conduct for recovery agents, etc. However, what is more important is that the FPC sets out principles for ARCs for sale and purchase of assets, as discussed below.

Acquisition of assets: follow arm’s length principle

While acquiring any asset, an ARC should maintain transparency and follow arms’ length principle and shall ensure there is no discrimination between sellers in the process of acquisition.

Notably, RBI has already prohibited ARCs to have bilateral acquisitions (that is, one to one transactions) from certain connected entities, e.g. sponsor banks/FIs, and group entities[4], irrespective of the consideration involved. However, auction purchases are allowed provided the auction is transparent, is on arms’ length and price is determined by market forces. This essentially entails that the auctions should be widely publicised, be open to all interested parties and be transparent in terms of bids submitted.

Sale of assets: be transparent

ARC should enable the participation of as many prospective buyers they can, so that actual market value can be determined of any asset. For that, the invitation shall be made public. The extant guidelines for conduct of ARCs[5] also require sale of assets through public auction only. Thus, this is just a reiteration of the existing guidelines.

Further, while finalising the terms and condition for sale of underlying assets, the ARCs shall consult the investors of security receipts (SRs).

Besides, a crucial provision in the FPC is the reference to section 29A of the Insolvency and Bankruptcy Code, 2016 (IBC), as discussed below.

The ‘spirit’ of section 29A

FPC mentions that the “spirit” of section 29A of IBC may be followed while dealing with prospective buyers”.

The reference to section 29A, most predictably, comes in the wake of rising involvement of ARCs in insolvency proceedings, either as sole or joint resolution applicants. Section 29A provides a list of persons who shall not be eligible to be a resolution applicant or a buyer of assets in case of a liquidation sale. The intent here seems to bar persons such as undischarged insolvents, wilful defaulters, a person whose accounts are classified as NPA, etc. from buying the assets. One concern with regard to section 29A is possible use of ARCs as devices to camouflage ineligible persons. Therefore, it is a logical and a positive step to add this restriction as a component of FPC for ARCs.

It is relevant to note that courts have held that the disability under section 29A is to be considered even where the sales are made by a secured creditor outside liquidation[6]. Say, what if the secured creditor assigns his rights and interest to an ARC? Will an ARC be debarred from selling the assets to a person hit by section 29A?

The issue has to be examined under two circumstances – first, where the borrower has been under insolvency proceedings of IBC and in case of liquidation, the secured creditor stands out of liquidation proceedings to sell the asset, and second, where there are no preceding IBC proceedings.

Considering the extant precedents surrounding section 29A, it can be contended that the contagion of section 29A might also hamper the freehand of ARCs in selling the assets whether or not the assets have been through IBC proceedings or not. However, one may note that the extant guidelines, on the contrary, permit the defaulting promoters to buy-back the assets from ARCs, provided the settlement is considered beneficial in certain respects[7].

Hence, ARCs would be required to take a balanced view on determining whether the sale is to be made to a prospective buyer or not. Notably, FPC does not impose section 29A, per se, on sales by ARCs, but advises the ARCs to follow the spirit of section 29A. The intent of section 29A has been to ensure that among others, persons responsible for insolvency of the corporate debtor do not participate in the resolution process[8].

Therefore, it may be contended that in case the assets are in or have passed through IBC proceedings, the provisions of section 29A will apply strictly, and in other cases, the ARCs should endeavour to abide by the intent of section 29A. The stance of the regulator may become clearer in due course of time.

Action points for ARCs

The following are actionables on the part of ARCs. We are of the view that, since the notification does not provide for any specific date of applicability, the same shall be immediately applicable. Hence, the FPC, incorporating the following, shall be formulated within reasonable time and may be adopted in the next board meeting.

Particulars Actionables
Measures to prevent harassment by recovery agents ·  Ensure that the staff and recovery agents are adequately trained to deal with customers and to handle their responsibilities with care and sensitivity, particularly in respect of aspects such as hours of calling, privacy of customer information

·  Adoption of code of conduct (as discussed above)

·  Ensure that the recovery agents and the staff of ARCs observe strict customer confidentiality.

·  Ensure that recovery agents do not induce adoption of uncivilized, unlawful and questionable behaviour or recovery process.

Charging of fees Put in place a board approved policy on management fee, expenses and incentives, if any, claimed from trusts under their management.
Outsourcing Put in place an outsourcing policy, approved by the Board, which incorporates, criteria for selection of activities to be outsourced as well as service providers, delegation of authority depending on risks and materiality and systems to monitor and review the operations of these activities/ service providers.
Grievance Redressal ·  Constitute a Grievance Redressal machinery which deals with the issue relating to services provided by the outsourced agency and recovery agents, if any.

·  Mention the name and contact number of designated grievance redressal officer of the ARC in communications with the borrowers.

Conclusion

As regards acquisition and realisation of assets, the extant directions provide for framing of acquisition policies and realisation plans. Further, as discussed, RBI from time to time, had been issuing directives regulating the sales by ARCs. The FPC, incorporating the provisions of section 29A, can be said to be an additional step in the same direction.

Insofar as conduct towards borrowers is concerned, before issue of the FPC for ARCs, there were no separate guidelines. However, this should not imply that ARCs were not required to act as such. As a matter of practice, the conduct of ARCs towards the borrowers should be guided by the behavioural principles and principles of fairness and equity.

The banks/financial institutions are anyway under the directions of RBI[9] to be fair in all respects in dealing with the borrowers. Therefore, it could not be said that an ARC which purchases loans from the banks/financial institutions could have all the powers of a secured lender but not the responsibilities. In the authors’ view, the responsibility to act fairly is tagged along with the right to enforce security. However, the FPC as issued now, concretises the concept of ‘fair practice’ for ARCs, and is a step in the right direction. With the FPC coming into force, practices of ARCs, which were earlier based on the market practice and varied largely, shall be unified.

[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11937&Mode=0

[2] List of ARCs on the website of the RBI (As in February 2020)

[3] https://www2.deloitte.com/content/dam/Deloitte/in/Documents/tax/in-tax-asset-reconstruction-companies-tax-regulatory-framework-noexp.pdf

[4] https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11749&Mod e=0

[5] https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9901

[6] NCLAT ruling- https://nclat.nic.in/Useradmin/upload/20572042075dd3e35176572.pdf

[7] See para 5 of the ARC Guidelines

[8] Swiss Ribbons Pvt. Ltd. vs Union Of India (https://indiankanoon.org/doc/17372683/)

[9] Guidelines on Fair Practices for lenders- https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=3315&Mode=0 and;

Fair Practice Code for NBFCs- https://rbidocs.rbi.org.in/rdocs/notification/PDFs/45MD01092016B52D6E12D49F411DB63F67F2344A4E09.PDF

Intricacies of the Draft Framework on Sale of Loans

-Kanakprabha Jethani (kanak@vinodkothari.com)

Background

The draft framework for ‘Sale of Loan Exposures’[1] (‘Draft’) issued by the Reserve Bank of India (RBI) recently provides a detailed framework for sale of all kinds of loan exposures viz. standard, stressed and NPLs. The RBI invited comments and suggestions from the stakeholders on the Draft and has raised a few specific questions for discussion in the Draft.

Presently, there are two separate guidelines, one for sale of standard assets (Direct Assignment guidelines) and one for sale of stressed assets and NPLs (Master Circular on Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances[2])

While we have already prepared a comparative[3] and a detailed analysis[4] for sale of standard loans, we hereby provide an analysis of guidelines relating to sale of stressed assets and NPLs.

Understanding the Existing Framework

The existing framework for sale of loan exposures is posed in bits and pieces. The framework may broadly be understood in the following manner:

For sale of standard loans (this includes assets falling between 0-90 DPD) Guidelines on Transactions Involving Transfer of Assets through Direct Assignment (DA) of Cash Flows and the Underlying Securities- Provided in the Master Directions for NBFCs[5]
For Sale of stressed loans (this includes NPAs, SMA-2 and standard assets under consortium, 75% of which has been classified as NPA by other lenders and 75% of lenders by value agree to the sale to ARCs) ·        Para 6 of Master Circular – Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances

·        Notification issued by the RBI on Prudential Framework for Resolution of Stressed Assets[6]

·        Notification issued by the RBI on Guidelines on Sale of Stressed Assets by Banks[7]

For Sale of NPLs (this includes assets falling in the 90+DPD bucket) ·        Para 7 of Master Circular – Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances

·        Notification issued by the RBI on Guidelines on Sale of Stressed Assets by Banks

What does the Draft behold?

The Draft proposes a consolidated framework to govern sale of loan exposures and is a combination of certain existing guidelines and some newly introduced ones. Let us delve into key changes introduced in the Draft one by one.

Applicability

Seller

While the existing guidelines were specifically applicable to NBFCs, banks and other financial institutions, the applicability of the Draft is extended to SFBs and All India Financial Institutions (AIFIs) such as NABARD, NHB, SIDBI, EXIM Bank etc.

Purchaser

The existing guidelines were applicable to sale of loans by a financial entity to another. However, this did not prohibit sale of loans to non-financial entities. The only difference was that the rights under SARFAESI and other laws were impacted.

The Draft guidelines specifically state that the sale of sale of loans may be made by the entities mentioned above as sellers to any regulated entity, which is allowed by its statutory or regulatory framework to buy such loans.

Hence, any sale of loans, to entities whose regulatory/statutory framework does not allow such purchase, cannot be done. Further, sale of loan to entities whose regulatory/statutory framework allows such purchase, irrespective of whether such entity is a financial entity or not, shall be governed by the provisions of the Draft.

Nature of Assets

The Draft directions contain separate provisions for sale of standard assets, sale of stressed assets to ARCs and sale of NPAs. Under the existing framework, an asset was said to be standard, till it is classified as NPA i.e. after 90 DPD. The Draft defines stressed assets to include NPAs as well as SMA accounts. Thus, any 0+ DPD account becomes a stressed asset. Due to this, the provisions relating to sale of standard assets, which are broadly in line with the guidelines on DA, shall not apply on assets falling between 1 to 90 DPD.

Since the classification of the asset is strictly based on the number of days past due, it may raise various practical difficulties. For example, if the due date for repayment of a loan installment is January 1, 2020 and there is a grace period of 10 days. The loan is classified as SMA-0 on February 1, 2020 (irrespective of the fact that it is not even 30 days past the grace period) and now, the sale of such loan shall be as per the guidelines for sale of stressed assets.

Recourse against the Transferor/Originator

Under the existing guidelines, the sale to ARCs was allowed on a ‘with’ or ‘without’ recourse basis and sale of NPAs to parties other than ARCs was allowed on a non-recourse basis only. The Draft clearly states that any sale of loans shall be on a ‘without recourse’ basis only. While there will be no impact on sale of standard assets and sale NPAs to parties other than ARCs, the transactions of sale of stressed assets to ARCs shall certainly be affected.

Treatment of loans given for on-lending

The Draft contains specific provisions with respect to the loans that were granted by the originator for on-lending. Para 51 of the Draft states that “Lenders may also purchase stressed assets from other lenders even if such assets had been created out of funds lent by the transferee to the transferor subject to all the conditions specified in these directions.”

Let us take an example to understand this:

A is an NBFC, which has given out a loan amounting to Rs. 100 @ 5% p.a. to B, which is another NBFC. Now B, gives out loans of Rs. 20 each @ 7% p.a. to 5 individuals.

Now, A can purchase these 5 loans from B, when they become stressed i.e. 0+ DPD. Here, it is clearly visible that the risk undertaken by B has no risk at all. The funds for lending have been provided by A. B keeps the assets in its books only till they are standard. As soon as assets turn SMA-0, B will remove them from its books sell them off to A. Additionally, till the time assets were standard, B earned a spread of 2%.

Manner of Transfer

The Draft defines transfer as- “transfer” means a transfer of economic interest in loan exposures in the manner prescribed in these directions, and includes loan participations and transactions in which the loan exposure remains on the books of the transferor even after the said transaction.

Para 9 contradicts the definition, requiring a legal separation of the asset from the books of the transferor. Tis issue has been discussed at length in our write-up titled “Originated to transfer- new RBI regime on loan sales permits risk transfers.[8]

The Draft further specifies that the sale/transfer of loans may be done by way of assignment or novation. Presently, most of such transactions are effected through assignment only. The loan agreement usually contains a clause whereby the borrowers gives consent to the lender to sell the loan to a third party. In case such a clause is not there in the loan agreement, the sale of loan would require consent of all the parties to the agreement, including the borrower.  In this case, the transfer of loans will have to be effected through novation of the agreement.

The Draft simply clarifies that transfer may be done through either of the modes. We do not see any practical implication as such.

Asset Classification

The asset classification criteria has been divided into 2 categories:

  • If the transferee has existing exposure to the same borrower: The asset classification shall be the same as that of the existing exposure in books of the transferee
  • If the transferee does not have an existing exposure to the same borrower: The asset acquired shall be classified as standard and thereafter the classification shall be determined based on the record of recovery

If the existing exposure is not standard in the books, the asset classification of the acquired asset shall also be as per the existing exposure. This seems to be derived from the asset classification practices followed earlier to determine stress in the assets i.e. if the borrower is defaulting in one of the exposures, it is likely to delay/default in repayment of other exposures as well.

However, this shall increase the provisioning requirements for the transferee and thus, may be a demotivating factor for sale of stressed assets.

MHP requirements

The Draft extends MHP requirements to ARCs as well. The business of ARCs includes frequent selling and buying of loans and portfolios. Putting a holding requirement of 12 months may slow down the business.

On the other hand, this may ensure that ARCs put better recovery efforts, before selling the loans to other entities.

Reporting Requirements

The existing guidelines did not lay the responsibility of reporting to CIC on any of the parties. Thus, the same was determines by the agreement between the parties. Usually, in case of sale to ARCs, the reporting is done by the ARCs and in case of sale to banks/FIs, the reporting is done by the originator only (since originator usually acts as a servicer).

The Draft specifically lays the responsibility of reporting on the transferee. Reasonably, the servicer of the loans has entire information of the servicing of the loan, repayment patterns etc. and thus, is the most suitable party to do the reporting. Let us examine a few cases with regard to reporting:

Transferee Servicer Reporting Obligation on Remarks
ARC ARC ARC Since the ARC is servicing the loan, it shall be able to properly report the details to CICs
Bank/FI Originator Bank/FI The Bank/FI will have to obtain the servicing details from the originator and then report the same to CICs
Bank/FI Bank/FI Bank/FI Since the bank/FI is servicing the loan, it shall be able to properly report the details to CICs

Hence, the reporting obligation may be placed on the servicer or may be kept open for the parties to decide.

Realisation

The existing guidelines relating to sale of NPAs required the transferor to work out the NPV of the estimated cash flows associated with the realisable value of the assets net of the cost of realisation. At least 10% of the estimated cash flows should be realized in the first year and at least 5% in each half year thereafter, subject to full recovery within three years.

The above requirement is not there in the Draft, the reason for which is unknown.

The Draft provides that in case of sale to ARCs, if the ARC is not able to redeem the SRs/PTCs by the end of resolution period (obviously due to inadequate servicing of the loans) the liability against the same should be written off as loss.

Takeover of standard assets

The Draft allows all the regulated entities, other than the transferor, to take over the assets from ARCs, once they turn standard on successful implementation of resolution plan. Earlier only ARCs were allowed to buy assets from other ARCs. This is a welcome move as it will enable other financial entities to buy assets from ARCs.

Conclusion

The Draft has come with some interesting proposals and the RBI is yet to receive comments on the same from the industry. The representations from the industry and the response of the RBI on the same will formulate the new regime for securitisation.

 

Our other write-ups may be referred here:

http://vinodkothari.com/2020/06/draft-guidelines-on-securitisation-sale-of-loans-with-respect-to-rmbs-transactions/

http://vinodkothari.com/2020/06/presentation-on-draft-directions-on-securitisation-of-standard-assets/

http://vinodkothari.com/2020/06/presentation-on-draft-directions-on-sale-of-loans/

http://vinodkothari.com/2020/06/inherent-inconsistencies-in-quantitative-conditions-for-capital-relief/

http://vinodkothari.com/2020/06/comparison-of-the-draft-securitisation-framework-with-existing-guidelines-and-committee-recommendations/

http://vinodkothari.com/2020/06/originated-to-transfer-new-rbi-regime-on-loan-sales-permits-risk-transfers/

http://vinodkothari.com/2020/06/new-regime-for-securitisation-and-sale-of-financial-assets/

 

[1] https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=957

[2] https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9908#7

[3] http://vinodkothari.com/2020/06/originated-to-transfer-new-rbi-regime-on-loan-sales-permits-risk-transfers/

[4] http://vinodkothari.com/2020/06/comparison-on-draft-framework-for-sale-of-loans-with-existing-guidelines-and-task-force-recommendations/

[5]https://rbidocs.rbi.org.in/rdocs/notification/PDFs/45MD01092016B52D6E12D49F411DB63F67F2344A4E09.PDF

[6] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11580&Mode=0

[7] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10588&Mode=0

[8] http://vinodkothari.com/2020/06/originated-to-transfer-new-rbi-regime-on-loan-sales-permits-risk-transfers/

Special Liquidity Scheme – providing short term liquidity relief for NBFCs

Timothy Lopes | Senior Executive

Vinod Kothari Consultants

finserv@vinodkothari.com

In light of the disruption caused by the pandemic, the Government of India announced a Rs. 20 lakh crores economic stimulus package. The first of the several reforms were announced on 13th May, 2020 which announced the Emergency Credit Line, the partial credit guarantee scheme 2.0 (PCG 2.0), TLTRO 2.0 and much more.

The PCG 2.0 scheme permitted banks to purchase CPs and bonds issued by NBFCs/MFIs/HFCs. These purchases were then guaranteed by the Government of India up to 20% of the first loss. For more details of the scheme see our write up here.

The announcement also proposed launching a Rs. 30,000 crores “Special Liquidity Scheme” for NBFCs/HFCs including MFIs. The Cabinet approved this scheme on 20th May, 2020[1].

On 1st July, 2020, RBI has released the details of the Special Liquidity Scheme[2]. The scheme is intended to avoid potential systemic risk to the financial sector. The scheme seems to be a short term relief for NBFCs acting as a bail-out package for near term maturity debt instruments. The scheme is intended to supplement the existing measures already introduced by the Government.

The scheme will provide liquidity to eligible NBFCs defined in the notification which is similar to the eligibility criteria specified under the PCG 2.0 scheme. The Government will implement the scheme through SBICAP which is a subsidiary of SBI. SBICAP has set up a SPV called SLS Trust to manage the operations. More details about the trust can be found on the website of SBICAP[3].

Under the scheme, the SPV will purchase the short-term papers from eligible NBFCs/HFCs.  RBI will provide liquidity to the Trust depending on actual purchases by the Trust. The utilisation of proceeds from the scheme will be only towards the sole purpose of extinguishing existing liabilities.

Eligible instruments

Instruments eligible for the scheme are relatively short term. The scheme specifies that CPs and NCDs with a residual maturity of not more than three months (90 days) and rated as investment grade will be eligible instruments. These dates, however, may be extended by Government of India. The SPV would invest in securities either from the primary market or secondary market subject to the conditions mentioned in the Scheme.

The actual investment decisions will be taken by the Investment Committee of the SPV.

Validity of the Scheme

The scheme is available only up to 30th September, 2020 as the SPV will cease to make purchases thereafter and would recover all the dues by 31st December, 2021 or any other date subsequently modified.

Investment by the SPV

The SPV set up under the scheme comprises of an investment committee. The investment committee will decide the amount to be invested in a particular NBFC/HFC. The FAQs available on the website of SBICAPs specifies that the Trust shall invest not more than Rs. 2000 crores on any one NBFC/HFC subject to them meeting conditions specified in the scheme. The Trust may have allocation up to 30% to NBFCs/HFCs with asset size of Rs. 1000 crores or less.

Rate of Return and collateral

Rate of Return (RoR) and other specifics under the scheme will likely be based on mutual negotiation between the NBFCs and the trust. According to the FAQs, the yield on securities invested by SPV shall be decided by the Investment Committee subject to the provisions of the scheme.

The Trust may also require an appropriate level of collateral from the NBFCs/ HFCs as specified under the FAQs.

Conclusion

The scheme is a welcome move likely to provide sufficient liquidity to the NBFC sector for the near term and act as a bail-out package for their short term liabilities.

The press release dated 20th May, 2020, approving the Special Liquidity Scheme states that “Unlike the Partial Credit Guarantee Scheme which involves multiple bilateral deals between various public sector banks and NBFCs, requires NBFCs to liquidate their current asset portfolio and involves flow of funds from public sector banks, the proposed scheme would be a one-stop arrangement between the SPV and the NBFCs without having to liquidate their current asset portfolio. The scheme would also act as an enabler for the NBFC to get investment grade or better rating for bonds issued. The scheme is likely to be easier to operate and also augment the flow of funds from the non-bank sector.”

Our related write ups may be viewed below –

http://vinodkothari.com/2020/05/pcg-scheme-2-0-for-nbfc-pooled-assets-bonds-and-commercial-paper/

http://vinodkothari.com/2020/05/guaranteed-emergency-line-of-credit-understanding-and-faqs/

http://vinodkothari.com/2020/05/self-dependent-india-measures-concerning-the-financial-sector/

http://vinodkothari.com/2020/04/would-the-doses-of-tltro-really-nurse-the-financial-sector/

[1] https://pib.gov.in/PressReleasePage.aspx?PRID=1625310

[2] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11925&Mode=0

[3] https://www.sbicaps.com/index.php/sls-trust/

RBI guidelines on governance in commercial banks

Vinita Nair | Senior Partner

Vinod Kothari & Company

vinita@vinodkothari.com

RBI amends mode of payment and remittance norms for units of Investment vehicles

Permits FPIs and FVCIs to use Special Non-Resident Rupee (SNRR) account 

CS Burhanuddin Dohadwala| Manager, Aanchal Kaur Nagpal| Executive

corplaw@vinodkothari.com

The Reserve Bank of India (‘RBI’) vide notification dated October 17, 2019 had  notified the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt instrument) Regulations, 2019[1] (‘the Regulations’) governing the mode of payment and reporting of non-debt instruments consequent to the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019[2] framed by the Ministry of Finance, Central Government.

RBI has recently vide its notification dated June 15, 2020 notified Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) (Amendment) Regulations, 2020[3] amending Reg. 3.1 dealing with Mode of Payment and Remittance of sale proceeds in case of investment in investment vehicles.

Let us discuss few terms to understand the recent amendments to the Regulations.

Investment Vehicles under FEMA:

According to FEMA (Non-Debt Instruments) Rules, 2019, investment vehicles mean:

Different types of account available under FEMA (Deposit) Regulations, 2016[1] (‘Deposit Regulations’)

The following are the major accounts that can be opened in India by a non-resident:

Particulars Eligible Person
Non-Resident (External) Rupee Account Scheme-NRE Account

Non-resident Indians (NRIs) and Person of Indian Origin (PIOs)

Foreign currency (Non-Resident) account (Banks) scheme – FCNR (B) account
Non-Resident ordinary rupee account scheme-NRO account

Any person resident outside India.

Special Non-Resident Rupee Account – SNRR account

Any person resident outside India.

A significant advantage of SNRR over NRO is that the former is a repatriable account while the latter is non-repatriable.

What is Special Non-Resident Rupee (‘SNRR’) Account?

Any person resident outside India, having a business interest in India, may open SNRR account with an authorised dealer for the purpose of putting through bona fide transactions in rupees. The  business  interest,  apart  from  generic  business  interest,  shall  include the  following INR transactions, namely:-

  • Investments made  in  India  in  accordance  with  Foreign  Exchange  Management  (Non-debt Instruments)  Rules,  2019  dated  October  17,  2019  and  Foreign  Exchange  Management  (Debt  Instruments)
  • Import of  goods  and  services  in  accordance  with  Section  5  of  the  Foreign  Exchange  Management  Act  1999 Regulations,   2019;
  • Export of  goods  and  services  in  accordance  with  Section  7  of  the  Foreign  Exchange  Management  Act  1999;
  • Trade credit   transactions   and   lending   under   External   Commercial   Borrowings   (ECB)   framework;
  • Business related  transactions  outside  International  Financial  Service  Centre  (IFSC)  by  IFSC  units  at  GIFT  city  like  administrative  expenses  in  INR  outside  IFSC,  INR  amount  from  sale  of  scrap,  government  incentives  in  INR,  etc;

Rationale behind the amendment:

Position under Master Direction – Foreign Investment in India by RBI

According to Annex 8 of Master Direction – Foreign Investment in India by RBI, investment made by a PROI was permitted with effect from 13th September, 2016. The provisions specify that the amount of consideration of the units of an investment vehicle should be paid out of funds held in NRE or FCNR(B) account maintained in accordance with the Deposit Regulations as one of the modes of payment.

Further it also specifies that the sale/ maturity proceeds of the units may be remitted outside India or credited to the NRE or FCNR(B) account of the person concerned.

Position under the erstwhile provisions of the Regulations

Schedule II of the Regulations (Investments by FPIs) stated earlier that of units of investment vehicles other than domestic mutual fund may be remitted outside India.

However, balances in SNRR account were permitted to be used for making investment only in units of domestic mutual fund and not in Investment Vehicles.

As discussed above, the NRO account is a non-repatriable account while the SNRR account is a repatriable account. Due to the above provisions, investment in Investment Vehicles could not be transferred to the SNRR account for repatriation resulting in ambiguity.

Owing to the above and to increase the inflow of foreign investment, the Government has amended the said provision and allowed FPIs & FVCI to invest in listed or to be listed units of Investment vehicle.

Brief comparison of the pre and post amendment is covered in our Annexure I.

Annexure-I

Comparison of the pre and post amendment

Schedule Post amendment Prior to amendment Remarks
Schedule II w.r.t Investments by Foreign Portfolio Investors A.     Mode of payment

1.       The  amount  of  consideration  shall  be  paid  as  inward  remittance  from  abroad through banking channels or out of funds held in a foreign currency account and/ or a Special Non-Resident Rupee (SNRR) account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.

 

2.       Unless otherwise  specified in these regulations or the  relevant Schedules, the foreign  currency  account  and  SNRR  account  shall  be  used  only  and  exclusively for transactions under this Schedule.

 

 

 

A.     Mode of payment

1.       The amount of consideration shall be paid as inward remittance from abroad through banking channels or out of funds held in a foreign currency account and/ or a Special Non-Resident Rupee (SNRR) account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.

Provided balances in SNRR account shall not be used for making investment in units of Investment Vehicles other than the units of domestic mutual fund.

2.       The foreign currency account and SNRR account shall be used only and exclusively for transactions under this Schedule.

 

 

The erstwhile provisions restricted use of SNRR account balance for making investments in investment vehicles other than mutual funds.

As a result FPIs could not use their SNRR account and had to resort to other types of accounts for investment in investment vehicles such as REITs, and InViTs. The recent amendment has removed this restriction.

The amendment has been made to provide for the amendment made in Schedule VIII dealing with Investment     by     a     person resident outside India in an Investment Vehicle.

B.     Remittance of sale proceeds

The sale proceeds (net of taxes) of equity instruments and units of REITs, InViTs and domestic mutual fund may be remitted outside India or credited to the foreign currency account or a SNRR account of the FPI.

B.     Remittance of sale proceeds

The sale proceeds (net of taxes) of equity instruments and units of domestic mutual fund may be remitted outside India or credited to the foreign currency account or a SNRR account of the FPI.

The sale proceeds (net of taxes) of units of investment vehicles other than domestic mutual fund may be remitted outside India.

To align with the amendment made in Schedule VIII dealing with Investment     by     a     person resident outside India in an Investment Vehicle.
Schedule VII w.r.t Investment by a Foreign Venture Capital Investor (FVCI) For Para A(2):

Unless otherwise specified in these regulations or the relevant Schedules, the foreign currency account and SNRR account shall be used only and exclusively for transactions under this Schedule.

For Para A(2):

The foreign currency account and SNRR account shall be used only and exclusively for transactions under this Schedule.

 

The insertion has been made to align with the amendments proposed in Schedule VIII dealing with Investment     by     a     person resident outside India in an Investment Vehicle.

Schedule VIII w.r.t Investment     by     a     person resident  outside  India  in  an Investment Vehicle A.     Mode of payment:

The  amount  of  consideration  shall  be  paid  as  inward  remittance  from  abroad through  banking  channels  or  by  way  of  swap  of  shares  of  a  Special  Purpose Vehicle   or   out   of   funds   held   in   NRE   or   FCNR(B)   account   maintained   in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.

Further,  for  an  FPI  or  FVCI,  amount  of  consideration  may  be  paid  out  of  their SNRR  account  for  trading  in  units  of  Investment  Vehicle  listed  or  to  be  listed (primary issuance) on the stock exchanges in India.

A.     Mode of payment:

The amount of consideration shall be paid as inward remittance from abroad through banking channels or by way of swap of shares of a Special Purpose Vehicle or out of funds held in NRE or FCNR(B) account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.

 

Further, it is clarified that the SNRR account may be used for trading in units of listed as well as to be listed units of investment vehicles and the sale/ maturity proceeds can be credited to the said account.

B.     Remittance of Sale/maturity proceeds:

The  sale/  maturity  proceeds  (net  of  taxes)  of  the  units  may  be  remitted  outside India or may be credited to the NRE or FCNR(B) or SNRR account, as applicable of the person concerned.

B.     Remittance of sale/maturity proceeds

The sale/maturity proceeds (net of taxes) of the units may be remitted outside India or may be credited to the NRE or FCNR(B) account of the person concerned.

 

 

Link to our other articles:

Introduction to FEMA (NDI) Rules, 2019 and recent amendments:

http://vinodkothari.com/2020/04/introduction-to-fema-ndi-rules-2019-and-recent-amendments/

RBI rationalises operation of Special Non-Resident Rupee A/c:

http://vinodkothari.com/wp-content/uploads/2019/11/RBI-rationalises-operation-of-SNRR-Account.pdf

 

[1] http://vinodkothari.com/wp-content/uploads/2019/11/RBI-rationalises-operation-of-SNRR-Account.pdf

[1] http://egazette.nic.in/WriteReadData/2019/213318.pdf

[2] http://egazette.nic.in/WriteReadData/2019/213332.pdf

[3] http://egazette.nic.in/WriteReadData/2020/220016.pdf

Webinar on RBI discussion paper on Governance in Commercial Banks in India

Date: 22nd June, 2020 at 05:00 pm, India time. Will run for about 90 mins.

Speaker: FCS Vinita Nair, Senior Partner, Vinod Kothari & Company

Background:

Effective Corporate Governance practices at banks plays a significant role in the banking sector and the economy as a whole. The banking industry in India witnessed governance failures in the past which seems to have triggered the need for the regulator to re-look at the governance guidelines for commercial banks in India.

RBI on 11th June, 2020 issued a discussion paper on the guidelines for Governance in Commercial Banks in India.

Scope of the webinar:

We intend to discuss the proposals put forth in the discussion paper in this webinar (expected duration around 90 mins) and comparing the proposed requirements with the existing ones.

  • Scope and applicability;
  • Overall responsibilities of the Board of Directors;
  • Duties of director;
  • Understanding and managing Conflict of Interest for banks;
  • Structure, composition and role of Board Committees;
  • Risk Governance Framework – The three lines of defence;
  • Separation of ownership from Management;
  • Whistle-blower mechanism.

Where:

On the internet, via Google Meet / Zoom Meeting

Please note that the webinar has a maximum capacity of 50, including the host, and entry is on first-come-first-enter basis.

Whether interactive:

Yes. Participants may post queries, either in advance or at the time of webinar. Participants may, based on feasibility, also be allowed to speak.

For registration:

Kindly mail with relevant details on – shaifali@vinodkothari.com.

Knowledge Resources:

  1. RBI Discussion paper on Governance in Commercial Banks in India
  2. Report of the Basel Committee on Banking Supervision
  3. RBI circular on Calendar of Reviews – Audit Committee of the Board of Directors
  4. Recommendations of the Banks Board Bureau