Resolution Regime for Systemic Financial Firms: The IBC Way or the Other Way?

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– Sikha Bansal, Partner and Timothy Lopes, Manager | resolution@vinodkothari.com

Every economy has entities that carry with them systemic risk, which is essentially the risk that failure of such entities could result in financial contagion through a sort of domino/cascading effect on the economy. The contagion effect multiplies manifold if such an entity has cross-border operations and linkages. These entities are considered systemically important and are universally termed as being ‘Too Big To Fail’.

Going by the definitions of ‘corporate debtor’ and ‘corporate person’ a ‘Financial Services Provider (FSP)’ is not a Corporate Debtor. An FSP is one which provides ‘financial services’. ‘Financial services’, in turn, has been defined to include a list of services like accepting deposits, offering various services pertaining to financial products. Hence, the entities which provide such a financial service cannot be ‘resolved’ or ‘liquidated’ under IBC, except in case an entity (or a class of such entities) is notified under section 227 by the Central Government. The Central Government has thus notified non-banking financial companies including Housing Finance Companies having asset size of ₹ 500 crore or more as FSPs (Notified NBFCs). The insolvency resolution and liquidation process of FSPs, as notified separately through rules, is different in certain aspects as it needs regulatory involvement at different stages.

In this article, the authors discuss the need for a specific framework for insolvency resolution of systemic financial firms and study whether the present framework for insolvency resolution and liquidation of FSPs is sufficient. The authors also present a view as to how the construct of the definition of ‘FSP’ is quite specific and is different from the popular meaning assigned to typical financial entities engaged in lending activities. As such, notifying all NBFCs (with or without asset thresholds), without any regard to the function or activity being carried out by the NBFC, may not sync with the design and intent of IBC.
The article also explores a global perspective on the coverage and scope of the resolution framework for financial firms.

The article has been published in the IBBI’s Annual Publication titled ‘IBC: Idea, Impressions and Implementation’ and can be accessed on the link here, from page 157 onwards.

Outsourcing (Direct Selling Agent) v. Business Correspondent route

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– Aanchal Kaur Nagpal, Manager (finserv@vinodkothari.com)

If everything’s a priority, then nothing’s a priority. Focusing on core activities while leaving non-core functions sub-contracted to specialized experts has been one of the key modus operandi to achieve efficiency. Banks and other financial institutions are increasingly outsourcing various financial activities ranging from onboarding customers to payment recovery. Since these outsourcing agents perform the activities that a Bank is originally supposed to do, they too, come with a set of regulations from RBI, with Banks being ultimately responsible for activities of their outsourcing agents.

Based on the scope of the outsourcing function and the responsibility dawned upon such agents, RBI identifies two outsourcing modes – Business Correspondence and Direct Selling/Marketing Agents (‘DSA/DMA’), with separate guidelines for each of the two.

In this article, the author has attempted to delve into the differences and commonalities between outsourcing of financial services by Banks to business correspondents and DSAs/DMAs.

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Memorandum of Entry for equitable mortgages: A Mortgage by Conduct?

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– Neha Sinha, Assistant Legal Advisor | Shraddha Shivani, Executive | corplaw@vinodkothari.com

Mortgage is a transfer of an interest in a specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt or the performance of an agreement, which may give rise to a pecuniary liability.

Section 58(f) of the Transfer of Property Act, 1882 (“TP Act”) provides, among other modes, for the creation of mortgage by deposit of title deeds, widely known as equitable mortgage.  Applicable to the notified towns under this provision, when a person delivers to a creditor or his agent documents of title deeds to immoveable property, with an intent to create security, then the transaction is called mortgage by deposit of title deeds.

Legally there is no document needed to create an equitable mortgage. In fact, if there is a document, it will be mortgage by instrument and not mortgage by conduct, and hence, will cease to be an equitable mortgage. The Supreme Court expounded in Rachpal Mahraj v. Bhagwandas Daruka and others[1]–

“…when the debtor deposits with the creditor the title deeds of his property with intent to create a security, the law implies a contract between the parties to create a mortgage, and no registered instrument is required under section 59 as in other forms of mortgage.”

However, in practice, a memorandum accompanies the deposit of title deeds. The lender may execute a Memorandum of Entry (“MoE”) which records the delivery of title documents for the creation of mortgage by the mortgagor to the lender. The purpose of the MoE is most intuitive – the title deeds are valuable documents, and lie with the lender or a trustee for the lender. The MoE serves as a matter of record that the borrower placed these documents of his own free will with the intention to create a charge on his property with the lender/trustee, as also serves as a safeguard if the borrower were to play mischief claiming those very title deeds having been lost.

The borrower may also give an undertaking known as Memorandum of Deposit of Title Deed (“MoDT”) which states that the borrower, at his own free will, has deposited his property’s title document with the lender in order to secure a loan by creating a mortgage.

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SEBI approves amendments: Alternate thresholds for ID Appointment | Online bond trading platform | Scheme of arrangement of NCS-listed entities | Trading in MF units

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– Team Corplaw | corplaw@vinodkothari.com

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Related write-ups:

  1. SEBI proposes to regulate private debt platforms – https://vinodkothari.com/2022/07/sebi-proposes-to-regulate-private-debt-platforms/
  2. SEBI: Insider trading norms should apply to fund managers – https://vinodkothari.com/2022/07/sebi-proposes-to-extend-applicability-of-insider-trading-regulations-to-units-of-mutual-funds/

FAQs on half-yearly disclosure of RPTs to the stock exchanges

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– Team Corplaw | corplaw@vinodkothari.com

Table of Contents
BackgroundDisclosure of RPTs to which listed entity is a party
ApplicabilityDisclosure of RPTs to which the listed entity is not a party
Timeline for disclosureDisclosure by Banks and NBFCs
Format of disclosureApproval and disclosure matrix

Background

SEBI, vide its notification dated November 09, 2021 amended the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) carrying out radical changes in the regulatory framework for the Related Party Transactions (‘RPTs’), including but not limited to the definition of Related Party (‘RP’), RPTs, its approval mechanism and disclosure requirements to the stock exchange. The amended provisions have been effective from April 01, 2022, except for the few provisions which will be applicable w.e.f. April 01, 2023. Information to be placed before the Audit Committee and shareholders (in case of material RPT) and the format of disclosure of RPTs to be filed with the Stock Exchanges (‘SEs’) has been separately prescribed vide SEBI Circular dated November 22, 2021. The circular was also made applicable to High Value Debt Listed Entities (‘HVDLEs’)[1] vide SEBI Circular dated January 7, 2022.

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FAQs on preferential issue of equity shares and convertible securities under SEBI ICDR

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Anushka Vohra, Manager | corplaw@vinodkothari.com

Table of Contents
Governing provisionsAllotment
Issuer and Allottee – eligibilityBoard’s approval
Conditions precedentShareholders’ approval
Relevant Date for determining the priceIn-principle approval
PricingListing approval
Lock-in requirementAnnexure-I
Consideration
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16 NBFCs identified as Upper Layer entities for bank-like compliances

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– Anita Baid, Vice-President, VKCPL | finserv@vinodkothari.com

In line with the guidance given in the Scale Based Regulatory Framework of the RBI[1], the new regulatory framework is effective from October 1, 2022. Just one day before D-day, the RBI on September 30, has kickstarted the new regulatory version for NBFCs by identifying 16 of the 9472 odd NBFCs[2], as NBFCs constituting the Upper Layer. These entities have been asked to migrate to a bank-like regulatory system. The first step upon this identification would be to put in place a Board approved policy for the adoption of the enhanced regulatory framework applicable to NBFC-UL. Further, these entities will prepare a glide path of compliance within three months, i.e. by December 30, 2022 and the glide path itself will have two years of adherence time, i.e. by September 30, 2024.

Our resources on the SBR Framework can be read here- https://vinodkothari.com/sbr/

In-house Training on SBR Framework for NBFC-ML/UL –
https://vinodkothari.com/2022/09/in-house-training-on-sbr-framework-for-nbfc-ml-ul/
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Stressed for reform: RBI proposes stressed assets securitisation and loss provisioning

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– Team Finserv (finserv@vinodkothari.com)

Rating agency Standard and Poor’s recently noted that at least 60 percent of the world’s economies are either into recession already or heading towards the same. The same report notes that 29 of the 33 countries covered by the study have disorderly inflation above the targets set by the respective central banks[1]. OECD’s interim report of September, 2022 says that despite a boost in activity as COVID-19 infections drop worldwide, global growth is projected to remain subdued in the second half of 2022, before slowing further in 2023 to an annual growth of just 2.2%. This is accompanied by inflationary pressures in most countries[2]. India is one of the two countries projected to have a growth rate of more than 6%.

The RBI’s monetary policy, September, 2022, as expected, has announced an interest rate hike of 50 bps in the policy rates.

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Maintenance of security cover for secured debt made transparent by SEBI

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Debenture trustees responsible for monitoring the security cover and covenants effective October 1, 2022

– Vinita Nair, Senior Partner | corplaw@vinodkothari.com

Background

Securities and Exchange Board of India (‘SEBI’) is carrying out radical changes in relation to monitoring the security cover and covenants with respect to listed debt securities. Recently, SEBI amended SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) and SEBI (Debenture Trustees) Regulations, 1993 (‘DT Regulations’) and SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (‘NCS Regulations’) in order to substitute the concept of ‘asset cover’ with ‘security cover’ and accordingly, prescribed the requirement of maintenance and reporting of the security cover in case of listed secured debentures[1].

Monitoring of security cover has always been the key responsibility of the DT and therefore, SEBI in November 2020, had prescribed norms for independent due diligence by DTs for the purpose of creation of security[2] and for periodical monitoring of the security created and enhanced disclosures by DTs[3]. Thereafter, in August, 2021[4] SEBI rolled out the norms for security and covenant monitoring using Distributed Ledger Technology (‘DLT’) and in March, 2022 prescribed operational guidelines for security and covenant monitoring wherein system generated unique identifier (Asset ID) will be generated for each security offered by issuer in order to enable the DTs and Credit Rating Agencies (‘CRAs’) for better tracking[5]. Lastly, on August 4, 2022[6] SEBI issued enhanced guidelines for DTs and listed issuer companies on security creation and initial due diligence which inter-alia provides directions to harmonize the process of creation of security.

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Partial sales, SCC in new avatar and other crucial IBC amendments (Presentation)

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Deliberation by Mr. Vinod Kothari and Ms. Sikha Bansal in the session organized by ICSI-IIP on the topic can be viewed here