Fair Lending: RBI bars several practices

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Lenders asked to mend ways immediately

Team Finserv | finserv@vinodkothari.com

Introduction

If fairness lies in the eyes of the beholder, the RBI’s eye is getting increasingly customer-centric. This fiscal year, the RBI has issued circulars aimed at fostering fairness and transparency in lending practices; these come at the backdrop of circulars last year on penal interest, adjustable rates of interest, release of security interests, strengthening customer service by Credit Information Companies and Credit Institutions, and establishing a framework for compensating customers for delayed updation or rectification of credit information. Recently on April 15, 2024, the RBI introduced a circular on Key Facts Statement (KFS) for Loans & Advances, with the goal of enhancing transparency and reducing information asymmetry regarding financial products offered by various regulated entities. This initiative aims to empower borrowers to make well-informed financial decisions. 

A new Circular, dated 29th April 2024 Fair Practices Code for Lenders – Charging of Interest comes down on some of the practices related to computation of rates of interest by lenders. . This Circular is all about stopping lenders from doing things that aren’t fair when it comes to charging interest. 

Applicability

The Circular applies to a wide range of financial institutions including Banks, Co-operative Banks, NBFCs, and HFCs. It is worth noting that this Circular comes into effect immediately upon its issuance.

Practices observedRegulatory stipulation
Lenders charge interest from the date of execution of the loan, or the date of sanction, even though disbursement has not taken place as yetInterest may be charged only from the date of disbursement
Interest is charged from a particular date, even though it is clear that the cheque was handed over to the borrower several days after the said dateInterest may be charged from the date when the cheque is handed over to the borrower
In some cases, one or more EMIs were received in advance; however, the interest was computed on the loan amount, without considering the advance paymentInterest shall be charged after netting off the advance EMI from the disbursement amount

Our analysis:

  • Loan agreement in place, but disbursement has not happened:
    • If the lender has sanctioned a loan, but the disbursement has not happened, can the lender charge a commitment charge for the period upto disbursement?
      • In our view, the sanction amounts to a committed lending. Committed lending has liquidity implications for the lender, and also eats up regulatory capital. Therefore, it is quite okay for a lender to start charging commitment charge from the date of sanction till the date of disbursement, provided the same is clear in the KFS/terms of the loan.
    • If the disbursement does not happen for a particular period of time, can the lender revoke the sanction?
      • Yes, if the same is clear in the terms of the loan
  • Interest to commence from the date of the disbursement:
    • What is the meaning of the date of disbursement? The funds actually leaving the bank account of the lender, or the cheque handed over?
      • Usually, handing over of a cheque is a common mode of making payments (unless the payments are being made in online mode – see below). Therefore, if there is an evidence of the cheque being handed over, the lender accounts for the disbursement from that date. If the cheque is not encashed, it appears as a reconciliation item. In our view it is okay to relate the date of handing over a cheque to the date of disbursement (assuming the cheque is good for immediate banking; it is not post-dated and subsequently does not bounce).
    • The RBI expects lenders to move to online modes of disbursement. What are the online modes of disbursement that are acceptable?
      • Disbursement through UPI
      • Disbursement to the bank account
      • Electronic Clearing System
      • Lender cannot transfer to a PPI wallet
  • Advance EMIs to be considered while computing interest:
    • Advance EMIs should be captured while computing EMIs. If the EMIs are being collected in “advance” mode, rather than arrears, standard worksheet formulae (PMT) allows for advance EMIs to be considered. There is no further need to net off the advance EMI from the disbursement. For computing amortisation, the interest will be computed on the loan amount, minus the EMI
    • Does the advance EMI also have an interest component?
      • Yes. EMIs is an equated amount, payable through the term of the loan. Each EMI consists of interest and principal. The only difference is that while computing the EMIs, the disbursement was taken as net of the first EMI. That is to say, there is an interest component in the first EMI, but the interest is on the amount remaining after the first EMI. 

Applicability date and scope

  • The circular as above is immediately applicable. Does it apply to existing loans too?
    • Each of the practices referred to above are treated by the regulator as unfair. It is not as if these were fair all this while and become unfair from a particular date. In fact, the Circular also says that the regulator during supervisory inspections has directed lenders to refund the excess interest if collected. Therefore, in our view, each of the above stipulations are applicable on all loans.
  • Is the circular applicable only on “retail loans” as covered by Key Facts Statement (KFS) for Loans & Advances circular, or does it apply to all loans?
    • Coming from basic considerations of fairness, in our view, the Circular is applicable to all loans.

Actionables 

  • REs to check whether the interest is being calculated from the date of actual disbursement rather than from the date of sanction of loan.
  • REs to review their modes of disbursal of loans and to use online account transfers in lieu of cheques. In cases where loan is disbursed through cheques, we recommend REs take an acknowledgement when the cheque is handed over to the borrower
  • REs to check whether they have received any intimation from RBI regarding the refund of any excess interest charged.

Related articles

  1. The Key to Loan Transparency : RBI frames KFS norms for all retail and MSME loans
  2. FAQs on Digital Lending Regulations 
  3. FAQs on Penal Charges in Loan Accounts 
  4. RBI streamlines floating rate reset for EMI-based personal loans

Felicitation Meet and Panel Discussion on Corporate Governance – from 1988 to Now

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SEBI proposals to ease trading plans by company insiders

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-Consultation paper proposes to rationalise the existing framework under insider trading

Anushka Vohra | Senior Manager

corplaw@vinodkothari.com

Background

The concept of trading plan was introduced for the first time in the SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’). The rationale for introducing the same, as indicated in the Report of the High Level Committee constituted for the purpose of reviewing the erstwhile 1992 Regulations, chaired by Mr. N.K. Sodhi, was  that there may be certain persons in a company who may perpetually be in possession of UPSI, which would render them incapable of trading in securities throughout the year. The concept of trading plan would enable compliant trading by insiders without compromising the prohibitions imposed in the PIT Regulations. 

Trading plan means a plan framed by an insider (and not just a designated person) for trades to be executed at a future date. Trading plan is particularly suitable for those persons within the organization, who may by way of their position, seniority or any other reason, be in possession of UPSI at all times. Since, the PIT Regulations prohibit trading when in possession of UPSI, trading plans are an exemption to such prohibition.  In order to ensure that the insiders while formulating the trading plan do not have possession to UPSI, cooling-off period of 6 months has been prescribed in the PIT Regulations. As per Reg. 5(1) of the PIT Regulations, the trading plan has to be presented before the compliance officer of the company for approval. As per sub-regulation (3), the compliance officer has to review the trading plan and assess for any violation of the PIT Regulations. If at the time of formulation of trading plan, there was no UPSI or later on a new UPSI was generated, then the trading can be carried out as per the trading plan, even if the new UPSI has not been made generally available.

When the trades are executed as per trading plan, certain provisions of the PIT Regulations are exempted viz. trading window restrictions, pre-clearance of trades and contra trade restrictions.

SEBI has issued a Consultation Paper on November 24, 2023 for inviting public comments on the recommendations of the Working Group (‘Report’) to review provisions related to trading plans.

This article discusses the proposed amendments to the framework of the trading plan as mentioned in the Consultation Paper.

Challenges in the present framework

The Report discusses that during the last 5 years only 30 trading plans have been submitted annually by the insiders, which indicates that the trading plans are not very popular. 

The year wise data on trading plans as mentioned in the Report is given below:

The data w.r.t. number of listed companies and DPs during FY 2022-23 is also given below:

The above clearly shows that during FY 2022-23, the number of designated persons among the listed companies was around 2,56,878 and there were only infinitesimal trading plan received by the exchange(s). 

Further, the five features of the trading plan as highlighted in the Report are as under:

(i) can be executed only after 6 (six) months from its public disclosure; 

(ii) are required to cover a period of at least 12 (twelve) months; 

(iii) must be disclosed to the stock exchanges prior to its implementation (i.e., actual trading); 

(iv) are irrevocable; and 

(v) cannot be deviated from, once publicly disclosed.

As evident from above, while the concept has been into existence since 2015, trading plans have not been very popular owing to certain restrictive conditions viz. mandatory execution of the same even if the market prices are unfavorable for an insider, inability to trade for a reasonable period around the declaration of financial results and mandatory cooling off period of 6 months etc.

Proposed amendments

  1. Cooling-off period

Cooling-off period means gap between the formulation and public disclosure of the plan  and actual execution of the plan. Reg. 5(2) of the PIT Regulations presently provides a cooling-off period for 6 months as the  period of 6 months was considered reasonable for the UPSI that may be in the possession of the insider while formulating the trading plan to become generally available or any new UPSI to come into existence.

This period is proposed to be reduced to 4 months. The Report states that as per the current requirement, the insiders have to plan their trade 6 months ahead which may not be favorable, considering the volatility in the markets. It was proposed to either reduce the period or to do away with it. 

The Report classifies UPSI into two types; short-term UPSI and long-term UPSI to ascertain the time within which the UPSI is expected to become generally available.

The Report further highlights that in case of short-term UPSI, a period of 4 months would be sufficiently long for it to become generally available. 

In case of long-term UPSI, the Report refers back to proviso to Reg. 5(4) according to which the insider cannot execute the trading plan if the UPSI does not become generally available. 

The Report also gives reference to the cooling-off period for trading plans in the US, where SEC introduced the cooling-off period only in December 2022.

  1. Minimum coverage period

Reg.5(2)(iii) states that a trading plan shall entail trading for not less than 12 months. A period of 12 months was specified to avoid frequent announcements of trading plans. This again provides a very long period for insider to execute their trading. This period is proposed to be reduced to 2 months.

  1. Black-out period

As per Reg 5(2)(ii), trading plan cannot entail trades for the period between the twentieth trading day prior to the last day of any financial period for which results are required to be announced by the issuer of the securities and the second trading day after the disclosure of such financial results. This period is known as the black-out period. 

The Report states that this period forms a significant part of the year, considering 4 quarters and hence it is proposed to omit the same.

The Report also discusses the potential concerns that may arise on removing the black-out period. The Working Group noted that the same is addressed by the cooling-off period and non alteration of plan once approved and disclosed.

  1. Price limit

As per Reg. 5(2)(v) of the PIT Regulations, the insider can set out either the value of trades to be effected and the number of securities to be traded along with the nature of the trade, intervals at, or dates on which such trades shall be effected.

The Working Group noted that there was no price limit that the insider could mention. The Report recommends a price limit of 20%, up or down of the closing price on the date of submission of the trading plan. 

  1. Irrevocability

As per Reg. 5(4), the trading plan once approved shall be irrevocable and the insider will have to mandatorily implement the plan without any deviation from it. This puts the insider in a disadvantageous position as he has to execute the trades (buy / sell) even when the price is not favorable.

As per the proposed amendment, where the price of the security is outside the price limit set by the insider, the trade shall not be executed. The plan will be irrevocable only where no price limit is opted for.

  1. Exemption from contra-trade restrictions

As per Reg. 5(3) of the PIT Regulations, restrictions on contra trade are not applicable on trades carried out in accordance with an approved trading plan. 

The Working Group deliberated that it is difficult to envisage a reasonable and genuine need for any insider to plan two opposite trades with a gap of less than 6 months. The Report states that the insider may misuse the exemption for undertaking a contra position. Therefore, the exemption is proposed to be omitted. 

  1. Disclosure of trading plan: timeline & content

As per Reg. 5(5), upon approval of the trading plan, the compliance officer has to notify the plan to the stock exchange(s). However, presently there is no specific timeline indicated. The Working Group recommends disclosure within 2 trading days of the approval of the plan. Further, it recommends disclosure of the price limit as well.

While the format of the trading plan will be rolled out basis discussion with the market participants, the Consultation Paper, basis the recommendations of the Working Group on protecting the privacy of the insiders by masking the personal details, discussed three alternatives of disclosure, as under:

It was discussed that disclosing personal details of the insiders publicly may raise privacy and safety concerns for senior management and insiders and not disclosing personal details to the stock exchange(s) would lead to misuse / abuse of trading plans by other insiders. That is, a trading plan submitted by one person may instead be used by someone else.

Having discussed the above, the Consultation Paper suggests alternative 3 i.e. making two separate disclosures of the trading plan; (i) full (confidential) disclosure to the stock exchange and (ii) disclosure without personal details to the public through stock exchange. Further, these separate disclosures may have a unique identifier for reconciliation purposes.

Concluding remarks

The proposed amendments indicate a welcome change as it attempts to plug the gaps prevalent in the erstwhile framework and offers flexibility to the insiders. At the same time, the Compliance officer will have to remain mindful of any scope for potential abuse by the insiders, while approving the same.One will have to await the actual amendment, basis the receipt of public comments, to ascertain if trading plans are all set to become popular and more frequent.

Our resources on the topic:

  1. SEBI Consultation Paper (CP) to ease trading plans by company insiders

Link to our PIT resource centre: https://vinodkothari.com/prohibition-of-insider-trading-resource-centre/

Reintroduction of the Data Protection Bill: Analysing the Implications for FinTech

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– Financial Services Division (finserv@vinodkothari.com)

Background

The Ministry of Electronics and Information Technology (MeitY) introduced the revised draft of the Digital Personal Data Protection Bill, 2022[1] (‘Bill’) on November 18, 2022 for public comments. The Bill is intended to be technology and sector-agnostic and hence, shall serve as a broad guide for digital data protection across all sectors. It is expected that sector-specific regulators shall develop regulations based on the legislation passed based on the said Bill.

In this write-up, we intend to cover the broad prescriptions of the said draft Bill and their impact on the fintech industry.

Read more →

Half day Workshop on Share Based Employee Benefits: Law, regulations and intricacies

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TReDS Master Directions issued by RBI

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  • Harshita Malik | finserv@vinodkothari.com

RBI has issued the Reserve Bank of India (Trade Receivables Discounting System) Directions, 2026 (‘Final Directions’), replacing the draft Trade Receivables Discounting System (TReDS) directions (‘Draft Directions’) published earlier (read our article on the draft here). The Final Directions make a number of substantive changes from the Draft Directions and consolidate several operational and supervisory requirements by cross-referencing the Master Directions on Authorisation to operate a Payment System (‘PSO Authorisation Directions’). 

Highlights:

  • Net-worth compliance: Prescribed minimum limit of ₹25 crore, deadline being 31st March 2028 for existing entities;
  • Credit Guarantee: Financiers may now avail credit guarantee cover from any credit guarantee fund trust notified by the Government of India (earlier draft limited cover to NCGTC);
  • Platform Functions: ‘Bidding’ added as a formally recognised core platform function alongside uploading, accepting, discounting and settlement;
  • Discounting Process: Three operational obligations for discounting: 

(i) transparent multi-financier competitive bidding; (this is similar to multi-lending platform in case of digital lending)

(ii) intimation to the working capital/CC account banks of the buyer and seller; and 

(iii) formal service of a notice of assignment to the buyer in favour of the financier;

  • Governance Chapter: Deletion of the standalone governance/fit-and-proper chapter proposed in the draft; presumably now guided by the like provisions in the PSO Authorisation Directions;
  • MSME Validation: Platforms must implement validation mechanisms to ensure that sellers uploading invoices or bills of exchange are bona fide MSMEs; While the draft recommended a simplified process for onboarding of MSMEs, the Final Directions requires a validation mechanism to ensure that seller is MSME;   
  • Linkage to PSO Authorisation Directions: Several application and authorisation procedures are cross-referenced to the PSO Authorisation Directions;
  • IS & Cyber Security Audit: IS audit and cyber security audit requirements have been aligned with RBI guidance referenced in DPSS.CO.OD.No.1325/06.11.001/2019-20 dated January 10, 2020 (scope and coverage to follow that letter).

Background:

TReDS is a technology-enabled platform for financing trade receivables through multiple financiers. The Draft Directions issued earlier set out proposed regulatory, governance and operational requirements. The Final Directions refine those proposals, streamline supervisory overlaps by cross-referencing existing PSO Authorisation Directions, and add operational safeguards to strengthen transparency and MSME protection.

Discounting Process:

The platform shall facilitate the discounting of factoring units by way of receiving bids from multiple financiers in a transparent manner, resulting in flow of funds to the sellers, providing intimation to banks holding working capital / cash credit accounts of buyer and seller, serving of notice of assignment to buyer in favour of financier, with final payment being made by the buyer to the financier on due date. Since financing a transaction on TReDS will result in assignment of receivables in favour of the financier, the platform shall file the said assignment with the central registry (CERSAI), as provided under Registration of Assignment of Receivables (Reserve Bank) Regulations, 2022 dated January 14, 2022 (as amended from time to time).

Changes at a Glance:

BasisErstwhile Guidelines/CircularsDraft DirectionsFinal Directions
Definition of TReDSScheme for setting up and operating the institutional mechanism for facilitating the financing of trade receivables of MSMEs from corporate and other buyers, including Government Departments and Public Sector Undertakings (PSUs), through multiple financiersA system for facilitating financing of trade receivables. It is a technology platform on a digital or electronic network for facilitating factoring of trade receivables through multiple financiersA technology platform on a digital or electronic network for facilitating factoring of trade receivables through multiple financiers. Although the definition has changed from the erstwhile guidelines, the substance remains the same.
Application MechanismApplication format same as for any non-bank entity to seek authorisation under the PSS ActPRAVAAH portal, Form A of Appendix 1 of these directionsSubsumed into the consolidated PSO Authorisation Master Direction. Application through the PRAVAAH portal.
Capital Requirement₹25 crore paid-up equity capital₹25 crore Net Worth₹25 crore Net Worth
Governance / Fit-and-ProperSpecified fit and proper criteria for entities and their promoter/promoter group- sound credentials and integrity, financial soundness and track record of at least 5 years in running the businessSpecified fit and proper criteria for directors- fairness and integrity, conviction, insolvency debarment, unsound mind, financially unsoundNo such requirement prescribed under the Final Directions, since such aspects are covered under the PSO Authorisation Directions
Net-worth Compliance Deadline Paid-up equity capital to be maintained from the inception itself31st March 2027- for existing entities authorised to operate TReDS31st March 2028- for existing entities authorised to operate TReDS
Participants on TReDS PlatformSeller, Buyer, Financier, and Insurance CompaniesSellers, Buyers, Financiers, Insurance Companies, NCGTCSellers, Buyers, Financiers, Insurance Companies, Credit Guarantee Fund Trust notified by Government of India (not restricted to NCGTC)
Platform ActivitiesUploading, accepting, discounting, bidding, trading and settlementUploading, accepting, discounting and settlement of factoring unitsUploading, accepting, bidding, discounting and settlement of factoring units
MSME Eligibility VerificationRequired as part of the KYC processValidation mechanisms required to be put in place to ensure that the seller uploading invoices/bills of exchange is an MSMEValidation mechanisms to ensure that the seller is an MSME, and funds due to the seller are credited in the seller’s bank account only.
Discounting ProcessFacilitate the discounting of the factoring units by the financiers resulting in flow of funds to the MSME with final payment of the factoring unit being made by the buyer to the financier on due date.Facilitate the discounting of factoring units by the financiers, resulting in flow of funds to the sellers, with final payment of the factoring unit being made by the buyer to the financier on due date2 new operational obligations added: (i) intimation to working capital/CC account banks of buyer and seller; (ii) formal serving of notice of assignment to buyer in favour of the financier
Credit GuaranteeCredit insurance available, no mention of credit guaranteeOnly through NCGTCCan be provided by any credit guarantee fund trust set up by Government of India
IS Audit& Cyber Security AuditNo such mandatory requirementConducted by CERT-In empanelled auditorsScope and coverage shall be as per the RBI’s Letter DPSS.CO.OD.No.1325/06.11.001/2019-20 dated January 10, 2020
Reporting RequirementsNo such requirement.Annually (by 30 Sept): submit audited net-worth certificate and IS/Cyber Security Audit report. Monthly (by 7th): submit TReDS statistics. (Format: Appendix 1)Event-based: report any change in Board along with director declaration/undertaking. (Format: Appendix 2)Remains unchanged from the draft.
Settlement ProcessTReDS will generate the payment obligations of all financiers in respect of all factoring units financed on a given date, on T+2 basis.TReDS to ensure efficient and seamless settlement of transactions amongst the participantsRemains unchanged from the draft
KYC KYC of both the buyer and the MSME seller is requiredKYC of the buyer is required. Validation mechanism that the seller is an MSME to be put in place.Remains unchanged from the draft

Closing Remarks

The Final Directions strengthen operational transparency, broaden access to government-backed credit guarantees, and place explicit obligations on platforms to verify MSME eligibility and formalise discounting workflows. By folding several requirements into the PSO Authorisation Directions, the RBI has aimed to streamline authorisation and oversight while emphasising operational controls that protect MSMEs and financiers.

Avoid Turning Your Referral Partner into a DSA/LSP

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Simrat Singh | Finserv@vinodkothari.com

RBI regulatory framework for banks and NBFCs recognise entities such as LSPs and DSAs, but do not define the term “referral partner”. Consequently, several lenders engage referral partners under agreements that merely replicate the DSA arrangement with a change in the nomenclature but without altering its substance. This is a risky approach. Courts have held that the existence of an agency relationship depends on the rights created between the parties, not on the title of the agreement. Therefore, if a referral partner agreement authorises the intermediary to represent the lender or perform functions ordinarily discharged by a DSA or outsourced agent, the intermediary may be regarded as a DSA irrespective of its contractual designation. Accordingly, while drafting a referral partner agreement, equal attention must be paid not just to the scope of what can be done but also  what the agreement does not permit. To understand the difference between a LSP, Referral partner and DSA, may refer to our resource Referral or Representation? The Fine Line Between LSP, DSA and Referral Partner.

Set out below are contractual provisions that should be avoided in an agreement with a referral partner.

  1. Do not confer authority to make commitments: Such authority is inconsistent with a mere referral arrangement and indicates an agency relationship. The agreement should not permit the referral partner to:
    1. assure loan sanction;
    2. quote specific interest rates since that is a function of borrower risk and lender’s credit evaluation and interest rate model;
    3. commit timelines for approval or disbursement; or
    4. make any representation which is binding on the lender
  2. Do not permit the referral partner to hold itself out as representing the lender: A referral partner should not portray itself as the lender’s representative or create the impression that it is authorised to act on the lender’s behalf. Accordingly, the agreement should prohibit the intermediary from describing itself as the lender’s agent or representative, using the lender’s name or branding in a manner that suggests an affiliation beyond a referral arrangement, or making any statement or representation that could lead customers to believe that it has authority to act for or bind the lender. 
  3. Do not permit collection or processing of loan applications and loan repayments: These functions form part of customer acquisition, onboarding and servicing, which are characteristics of DSAs or LSPs. A referral partner should not collect or verify KYC documents and/or scrutinise applications and collect customer information/documents in any manner. Further, activities such as identity verification, obtaining customer consents, conducting due diligence or facilitating KYC should remain with the lender or its authorised service providers. A referral partner should not participate in the lending process beyond introducing the customer.
  4. Keep performance obligations limited to referrals: The referral partner should not be evaluated based on portfolio quality; recovery performance; or loan servicing metrics. Performance obligations should relate only to successfully introducing prospective customers. 
  5. No compensation linked to lending functions or loan performance: A success-based referral fee, by itself, does not create an agency relationship. However, the consideration should not be linked to underwriting, servicing, collections, portfolio performance, recoveries or any other lending function. The agreement should make it clear that the referral fee is payable solely for successful referrals and not for performing any activity connected with the lending process.
  6. Do not authorise communication of lending decisions/negotiation: All customer communications should originate directly from the lender. The referral partner should not communicate sanction or rejection of applications; loan terms; deficiencies in documentation; repayment schedules; or disbursement confirmation. Further, negotiation on behalf of the lender is a strong indicator of representation/agency. The agreement should not authorise the intermediary to negotiate pricing; tenure; collateral requirements; repayment schedules; or restructuring terms.
  7. Do not assign post-disbursement responsibilities: Its role should ordinarily cease once the customer has been introduced. The referral partner should not undertake collections; recovery; repayment follow-ups; customer grievance handling; restructuring assistance; or foreclosure processing.
  8. Avoid clauses indicating exclusive representation: Clauses requiring the intermediary to exclusively promote the lender’s products or act as its sales representative reinforce the impression that the intermediary is representing the lender rather than merely referring customers.
  9. Avoid excessive operational control: Compliance obligations may be imposed, but they should not amount to day-to-day supervision. Operational control is a recognised indicator of agency. Accordingly, the agreement should avoid prescribing detailed supervision clauses or detailed operational instructions unrelated to regulatory compliance.
  10. Include non-agency provisions: The agreement should expressly provide that:
    1. the referral partner is an independent contractor;
    2. the relationship between the parties is on a principal-to-principal basis;
    3. it has no authority to represent or bind the lender;
    4. the referral partner shall not collect, process, or handle customer documents, KYC records, or sensitive customer information;
    5. all lending decisions are taken exclusively by the lender;
  11. Avoid agency terminology: Last but not the least, expressions such as authorised representative; sales representative; marketing representative; branch; agent; or authorised person should be avoided throughout the agreement because the language used often reflects the intended legal relationship.

SEBI’s New Advertisement Code: Dil Khol Ke Advertise Kar?

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– Prerna Roy | corplaw@vinodkothari.com

Advertisement of products and services is one of the key requirements of any business, including for capital markets intermediaries such as Stock Brokers, OBPPs, Research Analysts, Mutual Funds and Asset Management Companies etc. If a business does not advertise, prospective customers may never become aware of its products and services. At the same time, given the complexity of the products and services offered by these market participants, and the risks it exposes the retail customers to, these advertisement and marketing materials are regulated by SEBI.  In this context, these SEBI-regulated entities are presently being governed by separate advertisement frameworks, resulting in a fragmented regulatory framework and differing compliance requirements. Further, strict compliance requirements attract in the form of prior approval requirements for all communications issued by these entities currently. 

With the objective of promoting ease of doing business, regulatory consistency, consolidation of frameworks while continuing to focus on investor protection, SEBI has issued a consultation paper on the Common Advertisement Code for Specified SEBI-Regulated Entities. Through the proposed Code, SEBI seeks to ease the process of advertising by SEBI-regulated intermediaries by removing prior approval requirements and introducing a common framework, while continuing to maintain accountability, transparency and investor protection.

Read more: SEBI’s New Advertisement Code: Dil Khol Ke Advertise Kar?

Key Proposals 

  1. Permitting Celebrity endorsements 

Presently, the regulatory framework generally prohibits celebrity endorsements by SEBI-regulated entities, except in case of MFs and AMCs, where the same is permitted at the industry level, subject to prior approval from SEBI (Para 11.9.5 of the SEBI Master Circular for Mutual Funds).

The proposed Code seeks to permit celebrity endorsements for all specified SEBI-regulated entities, subject to prior approval from SEBI or the relevant supervisory body. Such approval would be required for celebrity endorsements at the brand/entity level.

The Code identifies the following supervisory bodies for this purpose:

  • Stock Exchanges – Stock Brokers, including Online Bond Platform Providers;
  • Depositories – Depository Participants;
  • Investment Advisers Administration and Supervisory Body (IAASB) – Investment Advisers;
  • Research Analysts Administration and Supervisory Body (RAASB) – Research Analysts;
  • Association of Mutual Funds in India (AMFI) – Mutual Funds and Asset Management Companies; and
  • Association of Portfolio Managers in India (APMI) – Portfolio Managers.
  1. Clarifying the scope of Advertisement 

Presently, there is no distinction between advertisements containing promotional content and general financial literacy content. As a result, even financial literacy content is required to comply with the regulatory framework governing advertisements.

The proposed Code seeks to distinguish between advertisements and non-advertisement communications by providing an illustrative list of communications that would not constitute advertisements. These include, inter alia, reports shared with existing clients, product/service information, regulatory communications, responses to client queries, basic factual information about the regulated entity, and non-promotional product demonstrations.

Thus, no approval/ reporting requirements would apply to communications that are purely educational or investor-awareness oriented and do not contain any promotional content relating to the products or services of a regulated entity, as such communications fall outside the scope of the proposed Code.

  1. Replacing Prior approval requirements by post advertisement reporting

Presently, the regulatory framework requires regulated entities to obtain prior approval from SEBI or the relevant supervisory body before issuing any advertisement. The proposed Code seeks to replace this requirement with a post-advertisement reporting framework, under which advertisements must be reported promptly and, in any event, no later than 24 hours from their issuance to SEBI/ relevant supervisory body.

  1. Permitting Rankings and rating in advertisements 

Presently, there is a complete prohibition on the use of ratings or rankings in advertisements depicting performance.

The proposed Code seeks to permit specified regulated entities to use ratings/rankings in advertisements, provided such ratings/rankings are assigned by a Past Risk and Return Verification Agency (PaRRVA).

Notably, any entity recognised as a PaRRVA shall, in consultation with SEBI and industry bodies, develop a methodology for rating/ranking specified regulated entities. Such ratings/rankings must disclose their methodology, clarify that they are only one factor for investor consideration, and be based on a study or survey covering all relevant market participants to ensure objectivity and comparability.

  1. Prohibition on usage of dark patterns

Presently, none of the existing frameworks expressly prohibit the use of dark patterns, such as false urgency, subscription traps, or forced actions.

The proposed Code seeks to expressly prohibit the use of dark patterns specified in Annexure I to the Guidelines for Prevention and Regulation of Dark Patterns, 2023, issued by the Central Consumer Protection Authority.

Recent amendments issued by the RBI also focus on prohibiting use of dark patterns and mis-selling by RBI regulated entities such as banks and NBFCs. Read our article on the same here

  1. Abbreviated Disclosures for Short-Format Messaging allowed

Presently, mandatory disclosure requirements apply to all forms of advertisements. These disclosures, including disclaimers thereto, are lengthy in nature and take up a lot of space. The proposed Code seeks to relax this requirement for short-format communications such as SMS and push notifications. Where space constraints do not permit inclusion of the prescribed details and disclaimers, a hyperlink to such information on the regulated entity’s official website may be provided. The website, in turn, shall contain the detailed disclosures as required (refer Para 7(4) of the proposed Code). 

Conclusion

This is a significant move by SEBI and is expected to promote ease of doing business while addressing the multiplicity of regulatory frameworks that often leave regulated entities wondering, “kya karen kya na karen, yeh kaisi mushkil haye.” By introducing a common and harmonised advertisement framework, SEBI seeks to bring greater clarity, consistency and regulatory certainty. Overall, the Consultation Paper is a welcome step in the present-day scenario.

NBFC-UL Classification Approach Revised by RBI

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  • Harshita Malik | finserv@vinodkothari.com

Background

RBI, vide its Press Release dated April 10, 2026, had issued draft Amendment Directions (read our article on the draft here) proposing changes to the methodology for identification of NBFC-Upper Layer (NBFC-UL) and the inclusion of Government-owned NBFCs in the Upper Layer. Following the consultation period, the RBI has finalised these proposals vide its Press Release dated June 24, 2026, effective immediately. The amendment package comprises four directions:

  1. SBR 2nd Amendment Directions: revises the UL identification framework under the Scale Based Regulation architecture;
  2. CRM 3rd Amendment Directions: extends concentration norms to Govt.-owned NBFCs and introduces the State Government guarantee provision;
  3. Governance Amendment Directions: exempts Govt.-owned NBFC-ULs from mandatory listing and pre-listing disclosures; and
  4. Financial Statements 2nd Amendment Directions: aligns the financial statements framework with the revised UL classification.

Revised Norms of Classification and Compliance

  1. Annual Classification/Identification Process:
    RBI will continue to conduct an annual identification exercise for classifying NBFCs in the Upper Layer. Compliance obligations attach from the date the RBI notifies the NBFC-UL list, not from the date an entity crosses the asset threshold independently.  
  2. Revised Criteria for UL-Classification:
    The current two-step approach (top ten by asset size and parametric scoring) will be replaced by a simple, absolute asset size criterion.
An NBFC with standalone audited assets of ₹1,00,000 crore or more (as per the latest audited balance sheet) shall be classified in the Upper Layer.

Key features of the revised criterion are: 

  1. Standalone basis: asset size test applies to the standalone balance sheet of the NBFC, not consolidated group assets.
  2. Periodic review: ₹1,00,000 crore threshold will be reviewed every 3 years, more stringent than the 5-year cycle proposed in the draft, ensuring the threshold remains calibrated to market evolution.
  3. Bright-line simplicity: subjective scoring element is eliminated entirely, reducing regulatory uncertainty for entities near the boundary.
  4. Category-agnostic: UL list may include NBFC-ICCs, HFCs, CICs, deposit-taking NBFCs, and Government NBFCs; the type of NBFC is not a pre-condition.
  5. Inclusion of Government-owned NBFCs:
    Eligible Government-owned NBFCs that breach the ₹1,00,000 crore threshold will now be included in the NBFC-UL list for the first time. Previously, these entities were placed only in the Base or Middle Layer. However, Government-owned NBFC-ULs are exempt from two obligations:
    1. Mandatory listing within three years of notification (proviso to Para 43 of the Governance Directions); and
    2. Pre-listing disclosures (proviso to Para 23 of the Financial Statements Directions).

All other Upper Layer norms, including CET-1 capital, leverage, large exposures, governance, and provisioning requirements, apply in full.

  1. No exemption to Government Owned NBFCs from Concentration Norms:
    Government-owned NBFCs will henceforth be subject to the concentration norms applicable to their respective layer. The earlier blanket exemption has been withdrawn. The transition is handled as follows:
    1. Existing exposures that currently breach prudential limits are grandfathered and may continue until maturity, but no fresh exposure to such obligors is permitted.
    2. Additional exposure beyond prudential limits is permissible only if fully covered by eligible credit risk transfer instruments, resulting in zero net incremental exposure for Middle Layer and Upper Layer NBFCs.
  2. Provision for Credit Risk Transfer:
    All NBFC-ULs may now use State Government guarantees to offset credit exposures without any portfolio-level cap. The regulatory treatment of the exposure so transferred is:
    1. The exposure is recognised on the State Government (rather than the borrower);
    2. The exposure is exempt from prudential exposure limits; and
    3. 20% risk weight applies for capital computation purposes.
  3. Higher permissible exposure limit on connected counterparties for IFCs in Upper Layer:
    NBFC-Infrastructure Finance Companies (‘NBFC-IFCs’) benefit from a specific carve-out: while the general rule caps exposure to a group of connected counterparties at 25% of the eligible capital base, NBFC-IFCs in the Upper Layer are permitted to go up to 45% of the eligible capital base (a 20 percentage-point premium) under the proviso to Para 35 of the Concentration Risk Management Directions. This reflects the inherently concentrated and long-tenor nature of infrastructure financing.  
  4. NBFCs in the Banking Group to comply with existing provisions:
    NBFCs that are part of a banking group do not follow the SBR layer-based identification process for UL compliance. Instead, they shall continue to adhere to the applicable provisions for Upper Layer NBFCs, as per the RBI (Commercial Banks – Undertaking of Financial Services) Directions, 2025, for NBFCs under the banking group and carrying out lending activities. Our article on compliances to be followed by such NBFCs in the banking group can be seen here.

Regulatory Implications for Newly Classified NBFCs-UL

Classification as an NBFC-UL triggers a comprehensive set of enhanced regulatory requirements. Entities crossing the ₹1,00,000 crore threshold for the first time should anticipate the following:

Compliance AreaRequirement for NBFC-ULTrigger/Notes
CET-1 CapitalMinimum 9% of Risk-Weighted AssetsBinding where growth is aggressive
Leverage RatioMaintained alongside CRAR; special attention for derivative-heavy entitiesCurrently less acute as most NBFCs in India are not active in derivatives
Large Exposures FrameworkSingle-party cap: 20% of Tier 1 capital; Group cap: 25% (NBFC-IFC: 45%)Economic-interdependence test determines group risk
Standard Asset ProvisioningDifferential provisioning by asset classHigher than ML/BL requirements
Mandatory ListingWithin 3 years of notification as ULExempt for Govt.-owned NBFC-ULs
GovernanceEnhanced governance- board composition and listing requirementsApplicable under Chapter-V of the Governance Directions 2025

Closing Remarks

The shift from a hybrid scoring methodology to a single asset-size threshold is a significant moment in India’s NBFC regulatory architecture. The old framework, elegant in theory but notoriously opaque in application, left entities in a state of perpetual uncertainty about whether their exposure profile, liability structure, or interconnectedness would tip them over the UL line in any given year. The replacement with a bright-line rule removes that ambiguity.

That clarity, however, comes with a structural trade-off: the parametric approach was designed to capture systemic importance beyond sheer size: interconnectedness, leverage complexity, and liability fragility. A purely asset-based threshold is a blunter instrument. An NBFC with ₹1,05,000 crore in assets but a conservative, government-securities-heavy balance sheet will face the same UL compliance burden as one of equal size with complex wholesale funding and concentrated sector exposures.

The inclusion of Government-owned NBFCs is the more substantive policy shift. Large public-sector financial institutions, several of which have historically operated outside the SBR scrutiny framework, will now be subject to CET-1 discipline, large exposure limits, and differential provisioning. The listing exemption softens the reputational-governance dimension but does not dilute the prudential obligations.

The three-year review cycle (tightened from the draft’s five years) signals that the RBI is alive to the possibility that India’s NBFC sector may grow in ways that make ₹1,00,000 crore a less meaningful threshold over time. Market participants should treat this as a dynamic floor, not a permanent bright line.

Finally, the State Government guarantee provision, extending a zero-cap credit risk transfer tool to all NBFC-ULs, is a quiet but important liquidity-facilitation measure, especially relevant for NBFCs with significant exposure to state-owned utilities and infrastructure projects.

Ease of doing business to enhancing oversight: Proposed reforms by IRDAI in the Corporate Agent Regulations

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– Khewan Sonchhatra, Executive | corplaw@vinodkothari.com

Several amendments were introduced to the Insurance Act, 1938, the Life Insurance Corporation Act, 1956, and the Insurance Regulatory and Development Authority Act, 1999 through the Sabki Bima Sabki Suraksha Act, 2025. These amendments primarily aim to liberalise foreign investment norms, reduce capital requirements, strengthen regulatory oversight of market participants, and enhance measures for the protection of policyholders’ interests[1].

Now, IRDAI has issued a consultation paper proposing amendments to the regulations governing insurance intermediaries. The CP aims at several objectives including  simplifying regulatory requirements, promoting ease of doing business, strengthening accountability and transparency, and enhance policyholder protection.

Key proposals are:

1. Shift from recurring renewals to perpetual registration framework

The following amendments call for substitution of the current framework involving a 3-year renewal exercise by a perpetual registration framework involving payment of an annual fee:

Regulation Existing Provision Proposed Amendment
Regulation 10 – Validity of Registration A Certificate of Registration was valid for a period of three years and required renewal before expiry Registration will remain valid indefinitely, subject to payment of annual fees and unless surrendered, suspended or cancelled by the Authority.
Regulation 11 – Procedure for Issuance of Fresh Certificate to Existing Corporate Agents Regulation 11 dealt with the renewal of registration by Corporate Agents upon expiry of the three-year registration period. Renewal applications were required to be filed before expiry along with the prescribed renewal fee. The entire regulation is substituted. Existing Corporate Agents will now apply for a fresh certificate of registration before expiry of their current certificate and pay the applicable annual fee. Once granted, the fresh certificate will operate under the perpetual registration regime.It means that all the existing corporate agents have to compulsorily apply for fresh registration to get covered under the new perpetual regime.

VKCo comment: Given that existing corporate agents are validly registered, there may not be a need for a provision requiring fresh registration. A simple transitional provision requiring payment of annual fee once the renewal period is over, would have sufficed.
Regulation 12 – Registration not granted The regulation contained references to refusal of registration as well as refusal of renewal of registration. References to “renewal” and “renew” are omitted
Regulation 13 – Effect of Refusal The regulation referred to refusal of registration as well as refusal of renewal of registration. The words “of a renewal thereof” are omitted.
Regulation 4(3)  Application fee Rs. 10000 at the time of application and Rs. 25000 upon  communication of grant of registration by the authorityand  Rs. 25000 for renewal of Registration. Rs. 10000 at the time of applicationand  further payment of annual fee on a yearly basis as per Schedule VI.

2. Simplification of Regulatory Processes and Reduction of Compliance Burden

Regulation 7(3)(c),(d), (e) Formalities relating to specified persons of corporate agents Every Specified Person engaged by a Corporate Agent was required to obtain an IRDAI-issued certificate, valid for 3 years, before soliciting and procuring insurance business. The regulations also prescribed the process for issuance, transfer (switching between Corporate Agents) and migration of such certificates. Clauses (c), (d) and (e) are proposed to be omitted.

These requirements are proposed to be omitted.
Regulation 22(5) – Certificate Number Requirement Corporate Agents shall  disclose details of Specified Persons along with their IRDAI-issued certificate numbers while reporting office and personnel details to the Authority. The words “along with their certificate number issued by the Authority” are omitted.

The amendment removes the requirement to furnish the certificate numbers of Specified Persons to IRDAI, thereby simplifying reporting obligations and reducing procedural compliance

3. Strengthening accountability and oversight of Specified Personnel, Point of Sales Personnel and Authorised Verifier

Regulation 14(v) –  Number of Specified Persons[2] The Corporate Agent was required to solicit and procure a reasonable number of insurance policies commensurate with its resources and the number of Specified Persons employed by it. The requirement was assessed at the entity level Each branch office must employ Specified Persons commensurate with the volume of business handled by that branch, including members enrolled under group policies. Further, every branch must have at least one Specified Person.
Regulation 14(vi) – Policy-wise Tagging of Sales Personnel The existing Regulation requires the Corporate Agent to maintain records in the format specified by IRDAI containing policy-wise and specified person-wise details, wherein every policy solicited by the Corporate Agent is tagged to the concerned Specified Person. The Corporate Agent is also required to provide access to such records to IRDAI. Changes:● Expansion of coverage from only specified person to specified person or POSPs[3].

● Mandatory capture of Aadhar/Pan details of the salesperson.

● Record the salesperson details in the policy document

● Traceability of the individual responsible for the sale
Regulation 14(x) – Periodic Training Requirement (INSERTION) Specified Persons were required to undergo prescribed training before being permitted to solicit insurance business. However, there was no mandatory recurring training requirement after registration. The Principal Officer and Specified Persons must complete at least 25 hours of theoretical and practical training from an approved institution every three years.
Regulation 14(xi) – Power to Impose Business Restrictions(INSERTION) The regulations did not expressly empower IRDAI to impose business-specific conditions, restrictions or limits after grant of registration. IRDAI may, in the interest of policyholders and orderly growth of insurance business, impose conditions, restrictions or limits on the business of a Corporate Agent either at the time of registration or subsequently.
Regulation 19(1) – Professional Indemnity Insurance A newly registered Corporate Agent could be granted up to 12 months from the date of registration to obtain and submit the professional indemnity insurance[4] policy. Every Corporate Agent shall have the professional indemnity insurance policy from its inception.
Regulation 25(4) – Qualification of Authorised Verifiers (INSERTION) The regulations prescribed requirements relating to Authorised Verifiers but did not specifically provide a separate provision requiring a pre-recruitment test and practical training in the manner now proposed A new sub-regulation is inserted requiring Authorised Verifiers to:● Pass a pre-recruitment examination conducted by an examination body nominated by IRDAI; and

● Complete practical training from an IRDAI-approved training institution

4. Enhanced disclosure and transparency requirements

Regulation 17 – Nomenclature of Corporate Agents and Associations The regulations did not mandate the use of the words “Insurance” or “Assurance” in the name of Corporate Agents or their association. Where the principal business of the entity is insurance intermediation as a Corporate Agent, the name must contain the word “Insurance” or “Assurance”. Similar requirements are introduced for associations of Corporate Agents.
Regulation 26(2) – Threshold for Enhanced Reporting  The corporate agent shall be responsible for all the acts and omissions of its principal officer, specified persons and other employees including violation of code of conduct specified under these regulations and liable to a penalty which may extend to one crore rupees under the provisions of Sec. 102 or the Ac The threshold is increased from ₹1 crore to ₹10 crore.
Regulation 31(2) – Disclosure of Insurance Intermediation Revenue Corporate Agents whose principal business was other than insurance intermediation were required to maintain segment-wise reporting capturing revenues from insurance intermediation and other income received from insurers.  Corporate Agents are now required to disclose revenues from insurance intermediation and other income/receipts from insurers through a separate schedule forming part of their financial statements and submit audited financial statements along with the auditor’s report to IRDAI by 30 September every year.
Regulation 31(4) – Disclosure by Large Corporate Agents (INSERTION) The regulations did not specifically require Corporate Agents to disclose commission earned, related party transactions, profits or dividend repatriation based on a commission threshold. A Corporate Agent earning more than ₹10 crore commission in a financial year must annually disclose:● Commission earned;

● Related Party Transactions (RPTs);

● Profits; and

● Dividend repatriated.

These disclosures must be submitted to IRDAI and also published on the Corporate Agent’s website.

VKCo comment: No particular format of the aforesaid disclosures has been provided.
Schedule AA – Undertaking for Foreign-Owned Corporate Agents Required the insurance intermediary to:● Obtain prior IRDAI approval for dividend repatriation;

● Restrict payments to related parties to 10% of total expenses;

● Maintain specified Indian-residency requirements for leadership, directors and KMPs; and

● Bring in technological and managerial expertise.

 Requires the insurance intermediary to:● Submit quarterly details of related party transactions (RPTs) and annual audited financial statements to IRDAI;

● Place such disclosures on its website; and

● Ensure all RPTs are supported by proper agreements, approvals and documentation and comply with applicable laws

5. Introduction of a proportionate annual fee and regulatory supervision framework

Regulation 4(3) Application fee Rs. 10000 at the time of application and Rs. 25000 upon  communication of grant of registration by the authorityand  Rs. 25000 for renewal of Registration. Rs. 10000 at the time of application and  further payment of annual fee as specified within 15 days of the of communication of grant of registration
Schedule V Clause III – Suspension or Cancellation without Notice (INSERTION) The regulations permitted suspension or cancellation of registration in specified circumstances such as fraud, misconduct or other regulatory violations. However, there was no specific provision for suspension solely on account of non-payment of annual fees because the framework was based on registration and renewal. A new provision is inserted under which registration shall be suspended without notice if the Corporate Agent fails to pay the annual fee within the prescribed timeline. The Corporate Agent may seek revocation of suspension by paying the annual fee together with an additional penalty of 10% within three months from the date of suspension.
Schedule VI – Introduction of Annual Fee Framework(INSERTION) Corporate Agents were required to pay registration fees and renewal fees at prescribed intervals under the existing three-year registration framework. A completely new annual fee regime is introduced. Every Corporate Agent must pay an annual fee equal to the higher of:● ₹10,000; or

● 1/25th of 1% (0.04%) of commission and other receipts received from insurers during the preceding financial year.

Late payment attracts penalties and continued non-payment may result in suspension or cancellation of registration.

[1] https://vinodkothari.com/2025/12/major-amendments-in-insurance-act-2025/

[2] Specified Person means an employee of a Corporate Agent who is responsible for soliciting and procuring insurance business on behalf of a corporate agent and shall have fulfilled the requirements of qualification, training and passing of examination as specified in these regulations. A Specified Person is the employee or representative of a Corporate Agent who actually sells insurance policies to customers

[3] Point of Sales Person (POSP) means an individual who has the prescribed qualifications, has completed the required training and examination, and is authorized to solicit and market only those insurance products specified by IRDAI. As defined in reg 14(vi)

[4] Professional Indemnity Insurance (PII) is an insurance policy that protects an intermediary against financial losses arising from errors, omissions, negligence, misrepresentation or professional mistakes committed while rendering professional services.

RBI’s Draft Model Risk Management Guidelines, 2026; What NBFCs using AI/ML Need to Know

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RBI has published a draft “Guidance on Regulatory Principles for Model Risk Management, 2026” for public consultation and it’s the first time AI/ML models used in credit underwriting, customer interaction and other business processes get a dedicated regulatory lens, applicable across the full spectrum of REs, including NBFC-BL, ML, UL and TL.

Here’s what stood out for NBFCs deploying AI/ML:

𝟏. 𝐈𝐭’𝐬 𝐧𝐨𝐭 𝐣𝐮𝐬𝐭 𝐚𝐛𝐨𝐮𝐭 “𝐀𝐈” — 𝐬𝐜𝐨𝐩𝐞 𝐢𝐬 𝐰𝐢𝐝𝐞 A “model” now covers any system — including spreadsheet-based tools — that takes inputs, applies processing logic, and produces outputs materially affecting decisions, irrespective of whether the RE itself labels it a “model.” A loan pricing calculator that drives lending rates qualifies. Many NBFCs may discover they’re running more “models” than they thought.

𝟐. 𝐀𝐜𝐜𝐨𝐮𝐧𝐭𝐚𝐛𝐢𝐥𝐢𝐭𝐲 𝐬𝐭𝐚𝐲𝐬 𝐰𝐢𝐭𝐡 𝐭𝐡𝐞 𝐍𝐁𝐅𝐂 — 𝐞𝐯𝐞𝐧 𝐟𝐨𝐫 𝐭𝐡𝐢𝐫𝐝-𝐩𝐚𝐫𝐭𝐲/𝐯𝐞𝐧𝐝𝐨𝐫 𝐀𝐈 Many NBFCs lean on fintech/vendor-provided AI for underwriting or collections scoring. The draft makes clear: outsourcing the model doesn’t outsource the risk. Independent validation by the RE is mandatory regardless of any certification the vendor provides, plus enhanced RMCB oversight irrespective of risk tier, and contractual rights to technical documentation and audit access.

𝟑. 𝐄𝐱𝐩𝐥𝐚𝐢𝐧𝐚𝐛𝐢𝐥𝐢𝐭𝐲 𝐟𝐨𝐫 𝐦𝐚𝐭𝐞𝐫𝐢𝐚𝐥 𝐝𝐞𝐜𝐢𝐬𝐢𝐨𝐧𝐬 Credit underwriting models fall squarely in “material decision-making” territory — meaning higher explainability thresholds apply. If a model (e.g., a black-box ML scorecard) can’t fully explain itself, NBFCs must compensate with enhanced validation, output verification, frequent monitoring and usage restrictions.

𝟒. 𝐁𝐢𝐚𝐬 𝐚𝐧𝐝 𝐟𝐚𝐢𝐫𝐧𝐞𝐬𝐬 𝐭𝐞𝐬𝐭𝐢𝐧𝐠 𝐛𝐞𝐜𝐨𝐦𝐞𝐬 𝐞𝐱𝐩𝐥𝐢𝐜𝐢𝐭 NBFCs must proactively identify risks of discriminatory outputs — especially unfair treatment of customer groups in credit decisions — run fairness assessments, and recalibrate or redesign where needed.

𝟓. 𝐂𝐡𝐚𝐭𝐛𝐨𝐭𝐬, 𝐯𝐨𝐢𝐜𝐞 𝐛𝐨𝐭𝐬 & 𝐠𝐞𝐧𝐀𝐈 𝐜𝐮𝐬𝐭𝐨𝐦𝐞𝐫 𝐢𝐧𝐭𝐞𝐫𝐟𝐚𝐜𝐞𝐬 𝐠𝐞𝐭 𝐬𝐩𝐞𝐜𝐢𝐟𝐢𝐜 𝐠𝐮𝐚𝐫𝐝𝐫𝐚𝐢𝐥𝐬 For any AI model interfacing with customers, NBFCs must:

  • Disclose to customers that they’re interacting with an AI/ML system, with its limitations;
  • Provide an option to switch to a human when requested;
  • Guard against hallucinations via system-level controls (critical for generative AI);
  • Build in protections against prompt injection, adversarial inputs and anomalous usage;
  • Run structured “red-teaming” / challenge testing on such models

𝟔. 𝐇𝐮𝐦𝐚𝐧 𝐨𝐯𝐞𝐫𝐬𝐢𝐠𝐡𝐭 𝐢𝐬 𝐧𝐨𝐧-𝐧𝐞𝐠𝐨𝐭𝐢𝐚𝐛𝐥𝐞 Human-in-the-loop/on-the-loop arrangements, kill-switch/override mechanisms, and periodic human review of AI-driven decisions are mandated — with explicit attention to “automation bias” and decision fatigue among reviewing staff.

𝟕. 𝐆𝐨𝐯𝐞𝐫𝐧𝐚𝐧𝐜𝐞 𝐧𝐞𝐞𝐝𝐬 𝐭𝐨 𝐠𝐨 𝐭𝐨 𝐁𝐨𝐚𝐫𝐝 𝐥𝐞𝐯𝐞𝐥 A Board-approved Model Risk Management Framework covering AI/ML models is mandatory, with high-risk models requiring Risk Management Committee of the Board (RMCB) approval, risk-based tiering, a living model inventory, and decommissioned models retained for 10+ years.

𝐓𝐡𝐞 𝐭𝐚𝐤𝐞𝐚𝐰𝐚𝐲 𝐟𝐨𝐫 𝐍𝐁𝐅𝐂𝐬: this is currently in draft/consultation stage and will eventually replace Chapter 3 (Credit Risk Models) of RBI’s 2002 Guidance Note on Credit Risk Management. NBFCs using AI/ML for credit underwriting, collections, or customer-facing chat/voice interfaces should start mapping their existing models against this framework now — inventory, validation independence, explainability thresholds, and human oversight will likely demand real governance uplift, not just policy paperwork.

FAQs on Advertising, Marketing and Sale of Financial Products and Services, agency and referral activities: Commercial Banks

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– Team Finserv | finserv@vinodkothari.com

In order to regulate mis-selling concerns for both products/ services of regulated entities and third-parties by a regulated entity, amendments have been issued  ‘Advertising, Marketing and Sale of Financial Products and Services by Regulated Entities’, via two sets of amendment directions for Commercial Banks: 

See our other resources on the subject: 

  • Detailed write up on the Amendment Directions here.
  • Youtube video here. 
  • FAQs on Advertising, Marketing and Sale of Financial Products and Services, and agency activities: NBFCs here.
  • The Brochure for a half day workshop on June 26, 2025 (Physical-Bengaluru) where we will be discussing the Amendment Directions in detail can be accessed through here.
Commercial Banks-FAQs on AdvertisingDownload

Policy Updates from SEBI: June Meeting Highlights

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– Abhishek Namdev, Assistant Manager and Srihari G.S., Executive | corplaw@vinodkothari.com

The 19th June board meeting of SEBI witnessed significant decisions for capital markets, including, inter-alia, simplification of the securities transmission framework, reintroduction of open market buy-back through stock exchanges, the GARUDA mechanism for faster processing of AIF placement memoranda, amendments to the SDI Regulations aligning with RBI’s securitisation framework, and changes to the framework governing municipal debt securities, etc. While the changes in the text of respective regulations are awaited, we present our brief understanding of the various approved amendments.

  1. Simplification of transmission of securities (see Consultation Paper here)
  • Quick Transmission Processing (QTP) for small-value claims –
In case of physical holdingsUp to Rs. 10,000
In case of demat holdingsUp to Rs. 30,000
  • Limits for simplified documentation doubled: Rs. 5L to Rs. 10L (physical), Rs. 15L to Rs. 30L (demat).
  • Relaxations pertaining to documentation:
    • Requirement of submission of PAN is removed.
    • The Probate of Will has been done away with.
    • Combined  affidavit-cum-NOC is permitted.
    • A copy of death certificate with QR Code has been introduced as an eligible document.
    • Verification from overseas branches of Indian banks – for death certificates issued in foreign jurisdictions
  • Rationale –  Aimed at reducing cost and procedural hardship for claimants by providing PAN and probate relaxations and alignment with recent succession law amendments.
  1. Re-introduction of Open Market Buy back through Stock Exchanges and Review of the SEBI (Buy- back of Securities) Regulations, 2018 (see detailed write-up here.)
  • Open market buy-back through SE route for buy-back to be effective from August 01, 2026
Before AmendmentAfter Amendment
Tender offer routeTender offer route
Open market route through reverse book buildingOpen market route through reverse book building
NAOpen market  buy -back  through  stock  exchange
  • Dissemination of information about buy-back to be made by way of electronic means in addition to Public announcement through newspaper advertisements.
  • Buy-back through such route be completed within 66 working days from the opening of buy-back with at least 40% of funds earmarked shall be utilized during the first half of buy-back period.
  • It  will  be  treated as  normal  trading transaction(separate trading window is not required).
  • Shares or securities under buy – backremain frozen at ISIN level during buy-back period for promoter(s) or his/their  associates (except for tendering shares in buyback offer).
  • Explicit clarification to comply with minimum public shareholding requirement post buyback           
  • Intervals between two buy-backs aligned as per Companies Act, 2013 (1 year as per proviso to section 68(2)(g)).
  • Appointment of a merchant banker is made discretionary. Accordingly, its activities can be assigned to:
    • Company,
    • Compliance Officer,
    • Statutory Auditor,
    • Secretarial Auditor, and
    • Stock Exchange

Rationale: The aforesaid amendment is driven by the revision in taxation framework, with the objective of offering an additional, flexible buy-back route, reducing procedural complexity, alignment with the Companies Act, 2013 and strengthening investor protection. Discretionary Merchant Banker appointment reduces cost, with duties reallocated to existing compliance/audit functionaries.

  1. Easing entry for AIFs: AIF   Rollout    Upon    Document    Acknowledgement (GARUDA)  Mechanism  for  Processing  of  Placement  Memorandum  of AIFs  filed  with  SEBI (see Consultation Paper here)
  • Timeline for launch of new schemes with SEBI by AIFs has been reduced from 30 days to 10 working days for AIFs
    • For  large value funds, accredited investor (‘AI’) only schemes and Angel Funds, filing of PPM exempt in view of the sophisticated investor class involved.
  1. Aligning issue of Securitised Debt Instruments (SDIs) with RBI Directions on securitisation (see Consultation Paper here)
  • Permitting    single-asset    securitisation    transactions    by    RBI-regulated entities
    • Omitting the condition of single-obligor concentration limit of 25% of the asset pool for RBI-regulated entities
  • Shifting of disclosure and reporting obligations from originator to servicer to align with current marker practice.
  • Trustees associated with  the  RBI-regulated originator to be limited to maximum of 1 representative
    • In other cases, cannot constitute  more  than one-half of the Board of   Trustees  of   the SPDE.
  • Clarification that the prohibition on acquisition of debt/ receivables by SPDE is if:
    • the originator is part of the   same   group   as that  of  the trustee or the originator is under the same control as that of the trustee
  • SEBI to  appoint  a  new  trustee  while  suspending/ cancelling the registration of an old trustee
    • Existing provisions required winding up of schemes of SPDE upon suspension/ cancellation of trustee’s registration
  • Rationale for amendment: To align provisions of SDI Regulations in relation to securitisation transactions originated by Regulated Entities (REs) of RBI with the RBI regulatory framework.
  1. Furthering development of municipal bond market: Amendments  to  SEBI  (Issue  and  Listing  of  Municipal  Debt  Securities) Regulations, 2015 (‘ILMDS Regulations’) (see Consultation Paper here)
  • Permitting municipalities to raise funds for re-financing of existing debt  of  specific  project(s) subject to appropriate disclosures
  • Disclosure requirements and operational aspects specified for raising of funds through a pooled finance vehicle. Clause (l) of Regulation 2(1) contains enabling provisions for raising of funds through such vehicle.
  • Encourage  retail  participation through
    • Permitting Electronic modes  for  making  advertisements  for public issues.
    • Permitting offer incentives in the form of  additional  interest  or   a  discount  to  the issue  price   to  certain categories  of  investors,  namely  senior  citizens, women, serving and retired defence personnel, widows and widowers of defence personnel, retail individual investors.
    • Permitting face value/trading lot for Municipal debt securities issued on private placement basis at Rs. 1 lac or lower value of Rs. 10,000/- with fixed maturity and without any structured obligations
  • Extension in timeline for post-issue listing compliances:
    • submission of quarterly financial results within 60 days from end of FY (previously 45 days) Audit annual financial results within  90 days from end of FY (previously 60 days)
  • Rationale: The amendments are intended to develop the municipal bond market and to encourage retail participation while maintaining appropriate investor protection safeguards.

FAQs on Advertising, Marketing and Sale of Financial Products and Services, and agency activities: NBFCs

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– Team Finserv | finserv@vinodkothari.com

In order to regulate mis-selling concerns for both products/ services of regulated entities and third-parties by a regulated entity, amendments have been issued  ‘Advertising, Marketing and Sale of Financial Products and Services by Regulated Entities’, via two sets of amendment directions for NBFCs: 

  1. Reserve Bank of India (Non-Banking Financial Companies – Responsible Business Conduct) Second Amendment Directions, 2026 (‘RBC Amendment Directions’/’Amendment Directions’) 
  2. Reserve Bank of India (Non-Banking Financial Companies – Undertaking of Financial Services) Second Amendment Directions, 2026 (‘UFS Amendment Directions’)

(Refer to our detailed write up on the Amendment Directions here, our youtube video here. Further we are also hosting a half day workshop on June 26, 2025 (Physical-Bengaluru) where we will be discussing the Amendment Directions in details. The Brochure for the workshop can be accessed through here)

Refer to our FAQs on the Amendment Directions and the UFS Amendment Directions below

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