The Reserve Bank of India (‘RBI’) issued a notification dated September 30, 2024[1] raising concerns on the irregular practices observed in the grant of loans against pledge of gold ornaments and jewellery.
The RBI’s comprehensive review has unveiled notable deficiencies, including lapses in due diligence process, credit appraisals, ineffective monitoring of loan-to-value (LTV) ratios, a lack of transparency in the auctioning of jewellery upon default and so on. This notification compels all commercial banks, primary co-operative banks, and non-banking financial companies to undertake a meticulous evaluation of their existing gold lending processes and rectify identified gaps or shortcomings.
The Indian securitisation market has been without banks as originators for nearly 17 years, until HDFC Bank[1] launched a landmark transaction that may signal their potential return. Prior to the Global Financial Crisis, which raised significant questions about the viability of securitization as a financial product, banks like ICICI Bank were actively involved in the market, with ICICI’s last reported transaction occurring in 2007[2].
It is notable that erstwhile HDFC Limited, prior to its merger into the Bank, was the largest single originator of home loan securitisations; however, the present transaction is not home loans.
After the GFC, banks shifted from being originators to becoming investors in securitised assets. To meet the priority sector lending targets, banks started investing heavily in the securitisation market, be it in pass-through certificates or through acquisition of loan pools. This was a stark contrast to the situation elsewhere in the world, where the issuances are primarily made by banks.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Abhirup Ghoshhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngAbhirup Ghosh2024-09-30 19:13:382024-09-30 19:13:38Indian securitisation enters a new phase: Banks originate with a bang
Banks and Non Banking Financial Companies (‘NBFCs’) have been receiving notices from statutory authorities stating the occurrence of evasion of goods and services tax (‘GST’) in respect of co-lending arrangements. At present, the GST laws do not address the implications of GST on co-lending transactions. In response to the investigations carried out Central Board of Indirect Taxes and Customs (‘CBIC’) on various banks and financial institutions, industry participants had requested for clarification on the matter in 2023 on whether GST is applicable on colending transactions. However, the issue still remains unaddressed.
While multiple theories go around in the market on the subject, this article aims to discuss the theories and examine them in light of applicable laws.
The issue
It is common knowledge that, for GST to be applicable, there needs to be a supply of goods or services. Therefore, the primary question to be answered here is whether the originating or servicing co-lender (‘OC’) provides any services to the arrangement? Can it be argued that the OC who is retaining a higher proportion of interest as compared to its proportion of funding of the principal amount of loan is actually providing services to the arrangement, and therefore, should be paying GST on the services to the other lenders?
The analysis
It is crucial to understand the nature of the relationship between the lenders involved. A co-lending arrangement is essentially a collaborative partnership between two lenders. To the extent two lenders agree to originate and partake in lending jointly, it is a limited purpose partnership or a joint venture. To the extent the two co-lenders extend a lending facility, the relation between the two of them together on one side, and the borrower on the other, amounts to a loan agreement. However, as there are two lenders together on the lender side, the borrower makes promises to two of them together, and therefore, the rights of any one of them is governed by the law relating to “joint promisees”. Given this framework, co-lending arrangements cannot simply be viewed as service agreements between the parties involved. Instead, they represent a distinct legal relationship characterized by shared responsibilities, rights, and risks associated with the lending process.
Does it qualify as a Supply?
The interest rates expected by the two co-lenders may vary due to the differing roles they play in the co-lending arrangement. It may be agreed that the funding co-lender receives a specific percentage of the interest charged to the borrower, while any excess interest earned beyond this hurdle rate shall be retained by the OC. Since the OC is performing services in the co-lending arrangement, would this excess spread be considered as consideration for supply of service under GST laws?
As discussed earlier, co-lending is inherently a partnership between two entities where each party’s contributions, functions, and responsibilities can vary. This results in a differential sharing of both risks and rewards, which means that the income earned from the loan may not necessarily be distributed in the same ratio as the principal loan amount.
The sharing of interest in co-lending arrangements is typically determined by each co-lender’s involvement in managing the loan’s overall risk—covering both pre and post-disbursement activities. Consequently, the excess interest earned by one co-lender over another is not reflective of a supply of a service provided by one entity to the other. Instead, this excess interest is merely a differential income that retains its original characteristic as interest income.
In a co-lending arrangement, the co-lenders split their mutual roles i.e the co-lender performs various services pursuant to the co-lending arrangement, the same cannot be constituted as a separate supply provided to the other co-lender. For example if the borrower interface is being done by OC, it would be wrong to regard the OC as an agent for the Funding Co-lender. Both of them are acting for their mutual arrangement, sharing their responsibilities as agreed. Neither is providing any service to the other. The co-lenders are effectively splitting the functionalities to the best of their capacity and expertise under their co-lending arrangement, which does not tantamount to any additional services being provided by one co-lender to the other.
This view can be further strengthened by the ITAT ruling of May 7, 2024 which confirmed that the excess interest allowed to be retained with the NBFC was not a consideration for rendering professional/ technical services by the transferor NBFC to the transferee bank and neither would it fall within the ambit of commission or brokerage.
ITAT examined some major points for characterisation of the excess interest spread retained by the NBFC analyzing mainly:
Excess interest retained not in the nature of professional/technical fees
The ruling examined whether the retained interest could be classified as fees for professional or technical services under Section 194J. The ITAT noted that while the NBFC had a service agreement with the bank, wherein it was responsible for managing and collecting payments, the agreed-upon service fee of Rs. 1 lakh was clearly defined and separate from the excess interest. The court dismissed the revenue department’s argument that the service fee of Rs 1 lakh was inadequate and the excess interest be considered as fee for rendering the services by the transferor NBFC, stating that the NBFC’s role was not as an agent acting on behalf of the bank.
Excess interest retained not in the nature of commission or brokerage
The ITAT ruling clarified that the excess interest retained by the NBFC does not qualify as commission or brokerage under Section 194H of the Income Tax Act. The tribunal determined that the loans originated by the NBFC were not on behalf of the bank, but rather as independent transactions governed by a separate service agreement. This agreement stipulated distinct service fees for the NBFC’s management of the loans, emphasizing that the NBFC was not acting as an agent for the bank.
By making this distinction, the ITAT characterized the excess spread as a financial outcome of the contractual arrangement rather than a commission for services rendered. Consequently, the tribunal concluded that there was no obligation to deduct TDS on the excess interest retained by the NBFC, reinforcing the understanding that such retained interest is not subject to typical taxation associated with agent-like relationships. You may refer to our article on the ruling here.
Conclusion
Therefore, taking into consideration the structure of the co-lending arrangement it can be concluded that the differential or higher interest rate retained by the OC shall not be treated as consideration for performing the agreed-upon role between the co-lenders. The recent ITAT ruling provides crucial clarity regarding the treatment of excess spreads in co-lending arrangements, affirming that such retained interest does not constitute a supply of services or a fees for professional services, commission, or brokerage. By highlighting the distinct nature of the contractual relationship between co-lenders, the ruling reinforces the idea that excess interest is a product of shared risk and reward rather than compensation for services rendered. Consequently, applying GST to a transaction that does not constitute a service would be inappropriate and misaligned with the tax framework.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2024-09-27 10:29:052024-09-27 11:05:00Co-Lending and GST: Does the relationship between co-lenders constitute a supply that may be subject to GST?
The trust and fairness in a lender-borrower relationship is one of the most fundamental drivers of financial regulation, and ensuring this trust and fairness in lender-borrower relationships is crucial for the growth and stability of the financial sector. NBFCs doing lending business are likely very conversant with the obligations captured in the RBI regulation on fair lending practices that details the general principles on adequate disclosure of the terms and conditions of a loan, and the adoption of non-coercive recovery methods. However, they may be unaware of the rights and obligations under the Consumer Protection Act, 2019 (‘CP Act’) which inter alia deals with “Unfair Contracts”. Interestingly, the CP Act defines a contract to be unfair if such contract significantly undermines consumer rights including clauses that restrict prepayment or contains clauses towards unilateral termination of agreements etc. These terms, which are also covered under the RBI’s Fair Practice Code, highlight a convergence in regulatory and statutory protections for borrowers.
In this article, we explore the rights of a borrower and the obligations of a lender under the CP Act and highlights the extant obligations under the Fair Practices Code, and other RBI regulations, and in doing so also explore the emerging convergence in these regulations concerning consumer protection norms.
Meaning of Unfair Contract and its impact
Section 2(46) of the CP Act, defines an “unfair contract” as follows-
(46) “unfair contract” means a contract between a manufacturer or trader or service provider on one hand, and a consumer on the other, having such terms which cause significant change in the rights of such consumer, including the following, namely:
(i) requiring manifestly excessive security deposits to be given by a consumer for the performance of contractual obligations; or
(ii) imposing any penalty on the consumer, for the breach of contract thereof which is wholly disproportionate to the loss occurred due to such breach to the other party to the contract; or
(iii) refusing to accept early repayment of debts on payment of applicable penalty; or
(iv) entitling a party to the contract to terminate such contract unilaterally, without reasonable cause; or
(v) permitting or has the effect of permitting one party to assign the contract to the detriment of the other party who is a consumer, without his consent; or
(vi) imposing on the consumer any unreasonable charge, obligation or condition which puts such consumer to disadvantage;
Based on the aforesaid definition, from the perspective of lenders, unfair contracts would include any agreement that significantly undermines consumer rights. Examples of unfair terms include:
Preventing early prepayment of debt, even with payment of applicable penalties;
Allowing the lender to unilaterally terminate the agreement without reasonable cause;
Assigning the contract to another party in a manner detrimental to the consumer, without their consent;
Imposing unreasonable charges, obligations, or conditions that disadvantage the consumer.
It is important to note that the aforesaid list is not exhaustive. Beyond these provisions, the RBI Fair Practice Code also identifies practices that can render contracts unfair, including:
Charging excessive interest rates.
Imposing interest during undisbursed loan periods.
Enforcing unreasonable lock-in periods in loan agreements or sanction letters, etc.
The CP Act permits the classification of any contract that results in an unreasonable bargain as unfair, and subject to review by consumer courts such as the State Commission (Section 47(iii)) and the National Commission (Section 58(ii)). Additionally, Sections 49(2) and 59(2) state that if a contract term is deemed unfair by these commissions, it can be declared null and void.
Further, via the principle of the doctrine of restitution, as outlined in Section 65 of the Indian Contract Act, 1872 if any part of a contract is declared void, the benefits received by any party must be returned or compensated to the party from whom they were obtained.
Under the CP Act, an unfair contract exists where there is a manufacturer, trader, or service provider on one side, and a consumer on the other. Therefore, to assess the “unfair contract” aspect in loan contracts, a key consideration will be whether the borrower is a “consumer” as denoted thereunder.
Determination of ‘Consumer’ under the CP Act
Section 2(7)(ii) of the CP Act in respect of loans defines consumer as any person who has availed services for a consideration which has been paid or promised or partly paid by such person and partly promised, however, does not include any person who has availed of such service for any commercial purposes. Hence, in the context of loans, borrowers who have availed of loans for “commercial purposes” would not qualify as consumers under CP Act. As the law currently stands, any person who obtains loans for his personal use would still fall under the definition of the term “consumer”. However, there might be debates on whether a person availing business loans would fall under the ambit of the CP Act. The term “commercial purposes” per se has not been defined under the CP Act and thus, has been subject to judicial interpretation.
We now proceed to analyse the current standing of the law in relation to business loans as well as retail loans and understand what qualifies as a service being taken for “commercial purpose”.
Are retail and commercial borrowers recognized as ‘consumers’
The definition of a “consumer” under S.2(7) of the CP Act includes any person who buys a good or hires a service for consideration paid or under any system of deferred payment.
This would also cover in its ambit borrowers because in the context of Banks, the Supreme Court has held that persons who avail of any banking services is a consumer under the Consumer Protection Act1.
Additionally, as the National Consumer Disputes Redressal Forum, and the State Consumer Disputes Redressal Forum pass reasoned orders on the interests of borrowers obtaining facilities from NBFC, persons obtaining non-banking financial services shall also fall under the definition of “consumer”.
Hence, borrowers of retail loans would be recognized as consumers. However, the definition of a “consumer” under S.2(7) of the CP Act does not cover persons who have obtained goods, or availed services for a commercial purpose.
A commercial purpose includes business-to-business transactions between entities where there is a direct nexus with profit-generating activities. “Commercial” denotes activities pertaining to commerce, and connected with/engaged in commerce having profit as a main aim. Where there is ambiguity, it may be seen whether the dominant intent/purpose of the transaction was to facilitate some kind of profit generation for the purchaser / their beneficiary2. Such activities or contracts would be out of the scope of the Consumer Protection Act3.
As regards loans, where a loan is obtained for a commercial purpose, the person who obtained such a loan does not come under the category of “consumer”4.
A. Overdraft facility
In Shrikant G. Mantri vs Punjab National Bank5, the appellant took an overdraft facility to expand his business profits, and subsequently from time to time the overdraft facility was enhanced so as to further expand his business and increase his profits. The Supreme Court held that the relationship between the appellant and the respondent is purely a “business to business” relationship. As such, the transactions would clearly come within the ambit of ‘commercial purpose’ and accordingly the appellant is not a consumer under the Act.
B. Working Capital Loans
In the case of Standard Chartered Bank & Anr. v Mankumar Kundliya6, one Mankumar Kundliya was the sole proprietor of the proprietorship firm M/s Sahil Distributors, who had obtained working capital facility from the bank. The issue before the National Commission was on deciding whether the respondent was a “consumer” under the Act. The court negating the contention held that the working capital loan facility obtained by the respondent “cannot be said to be for earning livelihood of the Respondent, and the same are inherently commercial in nature and the relationship between the parties is purely “Business to Business” in nature. Further, the Appellant also has independent commercial interests. Therefore, the transactions are essentially for ‘Commercial Purpose’ and the case does not fall under the exceptions to the term ‘Commercial Purpose’ carved out in the definition of the term ‘Consumer’ under the statute.”
C. Self Employment
Loans obtained for the purpose of self-employment may be considered business loans from the perspective of the lender, but the CP Act views such borrowers as “consumers”7.
Would retail and commercial borrowers come under the ambit of “unfair contract” as per CP Act
As mentioned above, an unfair contract refers to a contract with a manufacturer, or trader, or service provider on one hand, and a consumer on the other having such terms as which would cause significant change in the rights of the consumer.
Loan contracts are contracts that may be tested against this definition, and the definition of an unfair contract in the CP Act is an “inclusive definition”, i.e. it is not exhaustive. It can cover emerging industry practices not specifically captured in any legislation. The CP Act is to be construed in favour of the “Consumer” as it is a “social benefit oriented legislation”8, and lending entities would be well advised to review their restrictive covenants and terms against this definition, specifically in case of retail borrowers.
Since an unfair contract requires one of the parties of the contract to be a “consumer”, it would not include commercial loan contracts where the parties would not be “consumers” under the Act, save and except in circumstances where such loans have been obtained by the borrower for purposes of self-employment. Consequently, remedies through the State Consumer Commission or the National Consumer Commission under Sections 47 and 58 of the Act respectively are not available. Therefore, recourse to these commissions is not an option for addressing issues related to unfair contracts in this context.
However, if terms of the contract are unfair, businesses can seek remedies through the Commercial Courts Act, 2015. According to Section 2(c)(i) of the Commercial Courts Act, such unfair contracts may form subject matter of a “commercial dispute”. As a result, businesses can still address these issues through the commercial courts, subject to the dispute meeting the quantum of “specified value” as provided under 2(c)(i) of the Commercial Courts Act. Alternatively, the business which has availed business loans will also have other common law remedies, and may file a suit before a court of appropriate jurisdiction to declare the terms of the Contract as unfair and void.
Common/ prevalent terms and covenants that qualify as ‘unfair’
The following terms have specifically been held to be an “unfair contract” or unfair trade practice by the Consumer Disputes Redressal Commissions with regards to lenders regulated by RBI:
Excessive Penal Interest/Charge: Charging of excessive penalty/penal interest (in 2021), holding that incorporating such excessive terms into the loan agreement amounted to an unfair trade practice9.
Ceiling on interest rate: Even where RBI does not prescribe an upper limit for NBFC on rate of interest to be charged, the same can still be considered an unfair contract/unfair trade practice by the consumer courts10.
Enhancement of interest without borrower consent: Enhancing of interest rate without obtaining written consent of the borrower. Additionally, where clauses of the loan agreement are not in conformity with RBI guidelines, the agreement itself becomes voidable being against the law of the land11.
Repossession Clause: Forcible seizure of a vehicle particularly where no prior notice is given before seizing the vehicle, nor any opportunity given to pay dues constitutes an unfair trade practice, and a deficiency in service. The Supreme Court has in this context also held that any action for recovery in these cases may be struck down12.
In addition, the covenants demanding instant repayment of loan facilities by the Lender without the occurrence of any default may also be construed as an unfair contract and draw the remedies/penalties as has been provided below.
Though remedies under the CPA may not be available in case of business loans, however, clauses as has been discussed under consumer loans may also form an unfair contract even in cases of business loans in case the same are present in the terms of the loan agreement with the business entity.
Remedies/ Penalties under the CP Act
The terms of the contract may be declared null and void (by the National Commission and State Commission (S.59 and S.49 of the Act), and the District/State/National Commissions may issue orders to the opposite party directing them to discontinue the unfair practices.
However, penal measures are not present towards business loans considering that persons availing business loans are not included within the ambit of the CP Act.
However, while the ambit of “Unfair Contract” under the CP Act is broader in its coverage, the Fair Practice Code of the RBI generally applies to retail loans as well as business loans, save and except to the circumstances where certain paras in the Fair Practice Code are explicitly made applicable on loans provided to individuals. Accordingly, the persons who have availed retail loans as well as persons who have availed business loans can raise their grievances with the RBI ombudsman in circumstances where the grievances have not been addressed by the lender to the satisfaction of the borrower.
Key Takeaways
Lenders
Borrowers
Consumer Definition: Retail Loans: Borrowers are recognized as consumers under the CP Act.
Business Loans: Borrowers are not considered consumers if the loans are for commercial purposes.
Consumer Protection: Retail Loans: As a consumer, borrowers are protected under the CP Act, which includes rights against unfair contract terms and practices.
Business Loans: Loans obtained for commercial purposes do not fall under the CP Act.
Unfair Contracts: Retail Loans: Lenders must ensure that contract terms do not qualify as unfair under the CP Act to avoid legal challenges.
Business Loans: While the provisions relating to “unfair contract” as provided under the CP Act may not apply, lenders should be aware that such contracts could still be challenged under other legal frameworks.
Unfair Contract Terms: Retail Loans: Borrower can challenge unfair contract terms such as restrictions on prepayment, unreasonable lock-in periods, and excessive interest rates under the CP Act.
Business Loans: Although remedies under the CP Act might not apply, the borrower can seek redress through other legal means if unfair practices are present.
Common Unfair Terms:Lenders should avoid terms that restrict prepayment, impose unreasonable lock-in periods, charge foreclosure fees, or apply excessive interest rates. Even though the CP Act might not apply to business loans, similar terms can affect borrower satisfaction and lead to disputes.
Grievance Redressal: Retail Loans: Utilise the mechanisms for redressal, including filing complaints with the National or State Consumer Disputes Redressal Forums.
Business Loans: Address grievances through the Commercial Courts Act, 2015, or common law remedies if contract terms are deemed unfair.
Remedies and Compliance: Retail loans: Lenders should be prepared to modify or eliminate unfair terms to comply with the requirements of the CP Act and avoid regulatory as well as statutory action.
Business loans: Lenders should understand that while remedies under the CP Act might not be available, there are still other legal avenues for addressing unfair practices.
Fair Practice Code:Both retail and business loan borrowers can escalate unresolved grievances to the RBI ombudsman under the Fair Practice Code.
Fair Practice Code:Ensure compliance with the RBI’s Fair Practice Code for both retail and business loans. Complaints can be escalated to the RBI ombudsman if unresolved satisfactorily.
Conclusion
In navigating the complex landscape of borrower rights and lender obligations under a financial transaction, the CP Act, and the RBI’s Fair Practices Code play pivotal roles. The CP Act safeguards borrowers by addressing “unfair contracts,” including terms that restrict prepayment or impose excessive penalties. While these robust protections are available for retail loans, they do not extend to business loans intended for commercial purposes. However, borrowers of business loans are still covered under the Fair Practices Code, which ensures fair treatment and provides a grievance redressal mechanism through the RBI ombudsman.
We recommend that Lenders be vigilant in crafting fair contract terms to avoid legal disputes, and ensure compliance with both regulatory and statutory frameworks. For retail loan borrowers, avenues for challenging unfair practices are clear and accessible. For business loan borrowers, while direct remedies under the CP Act may not apply, alternative legal channels are available. Ultimately, understanding and adhering to these regulations is crucial for maintaining trust and fairness in lender-borrower relationships which constitutes the bedrock of the financial services sector.
Citicorp.Maruti Finance Ltd vs S.Vijayalaxmi on 14 November, 2011 AIR 2012 Supreme Court 509 ↩︎
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The concept of a marketplace, i.e a platform where buyers and sellers meet, appears to have existed since antiquity and is one of the defining features of evolved commerce in any particular civilization (e.g the Middle Eastern and Persian ‘Bazaar’, the Ancient Greek ‘Agora’, the Silk Road, ‘Mandis’ in India, etc.). Marketplaces have evolved from being platforms of meetings where the confluence of trade occurs (such as a venue), to persons or entities actively providing a platform for such exchange and obtaining consideration for the intermediation provided. As they are rooted in the fabric of our culture, it is natural that these models will continue to appear and replicate themselves across different mediums (i.e. Physical, Online), and different sectors (such as platforms for financial services and lending, sales of second-hand goods, fashion and cosmetics, legal services, and even tuition).
The ambit of regulation here is usually to the extent of intermediation and facilitation provided, however drawing this line can become challenging for regulators when under the garb of intermediation entities begin to operate as agents, or as sellers without discharging the commensurate compliance burden. This piece addresses such a regulatory concern in digital lending marketplaces, where there is an emergence of entities using the marketplace model to offer services/features that mimic the role of an agent, or a vendor.
Online Marketplaces and Agency
Under S.3(g) of the E-Commerce Rules 2020, a “Marketplace e-commerce entity” is an entity that provides an information technology platform on a digital or an electronic network to facilitate transactions between buyers and sellers. The DIPP Press note 2/2018 differentiates between a marketplace mode of e-commerce and an inventory model of e-commerce, where a marketplace model is characterized by its providing of a platform to facilitate the transactions, as opposed to an “inventory model” where there is ownership exercised over the goods and services. At the risk of oversimplifying, it can also be stated that Marketplaces under the IT Act are also “intermediaries”, and a “pure marketplace” would be one that is limited to the function of facilitation and intermediation. The precise scope of facilitation and intermediation are covered in sectoral regulations, where the regulator considers what degree of facilitation will cross this threshold (for example under the DIPP Press Note, and the Digital Lending Guidelines)
Marketplace entities, to the extent that they are facilitating a transaction between the two parties, are not vendors/sellers. Marketplace entities are not agents either. In law, an agent is a person employed to do any act for another, or to represent another in dealings with a third person. For one to be considered the agent of another, the terms of agency don’t need to be expressly stated in a contract, so long as the general terms constituting the agency relationship are consented to, i.e. the parties have agreed to what amounts in law to such a relationship. The key features of a principal-agent relationship viz. the liability of a principal for acts of the agent in the course of the contract, the power to bind the principal to contracts, make representations on behalf of the principal, etc. are not found in a marketplace model. A marketplace cannot represent, negotiate, or make dealings on behalf of the seller. Similarly, the seller cannot be held liable for the actions of a marketplace in the course of its representation.
Because determining agency is a question of substance over form, Lending Service Providers are categorized as Agents (insofar as their dealings with third parties on behalf of the Regulated Entity are concerned) because the scope of their activities would include customer acquisition, acquisition support, underwriting support and servicing. Undertaking such functions on behalf of a lender/seller and actively promoting them in their dealings with a third party constitutes an agency, and this “triangular relationship” is one of the principal features of an agency contract. Therefore, LSPs are regulated to the extent of their agency, and the compliance burden is placed on the REs contracting with them.
But, there is an emerging class of marketplace lending entities, facilitating lending by offering a platform and algorithms matching the needs of the Borrower with the Lender/Regulated Entity, that purport to offer services not requiring them to register or comply with the RBI Regulation. Insofar as these services, are within the domain of facilitation and intermediation, and do not include promoting or representing a particular lender to borrowers, taking variable returns, offering any kind of credit risk mitigation/guarantees, or assurances for minimum returns/recovery of monies they would stay within the ambit of the marketplace model. Such services in relation to the marketplace entity’s dealing with the customer will be an extension of the principal-agent relationship with the regulated entity, and insofar as they concern dealings with the principal/regulated entity themselves (such as offering guarantees) is akin to the role played by a del credere agent. Intermediaries do not take a “skin in the game” with respect to the sellers, it is very uncharacteristic of their function which is fundamentally premised on neutrality.
Conclusion
In the digital lending space, entities that wish to operate using a marketplace business model would necessarily need to operate like a marketplace by limiting the extent of their services to providing intermediation, and facilitation, which can be matching the needs of the borrowers and the lenders through an algorithmic service, and offering a platform for the transaction. However, they cannot offer any kind of credit risk mitigation/guarantees or assurance for minimum returns/recovery of monies because those services take them outside the scope of a marketplace. Consider financial services on ONDC, which operating in the marketplace model is not an LSP, because the scope of its function is limited to providing a “technology that facilitates discoverability and interaction of the lender apps registered on the network with those of the LSP (Buyer App)” (more on this here). These entities may not actively promote the products of an entity either, and in the traditional lending marketplace, entities such as Business Correspondents that provide this function are considered agents. Where such services are offered, continuing to call oneself a marketplace is not the panacea to compliance.
Department of Industrial Policy & Promotion, Press Note No. 2 (2018 Series).
Information Technology Act, 2000, S.2(1)(w)
Kunal Bahl and Ors. vs. State of Karnataka (07.01.2021 – KARHC) : MANU/KA/0010/2021.
The Indian Contract Act, 1872, S.182.
Life Insurance Corporation and Ors. vs. Rajiv Kumar Bhasker (28.07.2005 – SC) : MANU/SC/0441/2005
Guidelines on Digital Lending
Bharti Cellular Limited vs. Assistant Commissioner of Income Tax, Circle 57, Kolkata and Ors. (28.02.2024 – SC) : MANU/SC/0144/2024.
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– Vinod Kothari and Payal Agarwal | corplaw@vinodkothari.com
A recent UNCTAD Report[1] highlights the financing gap in sustainable development – citing the need for around $4 trillion additional investment annually for developing countries. India is no exception, in fact, various studies[2] suggest the high sustainable finance gap in the country. As the need for sustainable finance continues to grow, so does the regulator’s vigilance towards providing a definite regulatory framework around the same. In this context, SEBI has released a Consultation Paper on expanding the scope of Sustainable Finance framework in the Indian securities market[3].
The Consultation Paper proposes to expand the current regulatory framework around green debt securities[4], by including other forms of sustainable or thematic bonds[5]; to be covered by a broader expression “ESG Debt Securities”. The Paper also proposes to introduce a framework for Sustainable Securitised Debt Instruments (SDIs). In this write-up, we briefly discuss the concept of green and sustainable securitisation, and give our recommendations for the suggested framework for Green and Sustainable Securitisation in India.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Payal Agarwalhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngPayal Agarwal2024-09-04 15:56:522024-09-04 18:59:59Sustainable Securitisation - the next in filling sustainable finance gap in India
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Following the success of our recent workshop in Mumbai and Bengaluru, we are delighted to announce our upcoming 2-day refresher course on RBI regulations for NBFCs in Delhi!
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