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Unlocking Working Capital: An Overview of Supply Chain Finance
-Dayita Kanodia, Executive | finserv@vinodkothari.com
The best way to reduce your supply chain inventory is to sell it.” Dilbert.
Background
A supply chain is a complex network of organizations, people, activities, information, and resources involved in the creation and distribution of a product or service from its initial sourcing of raw materials to the delivery of the final product to the end customer. The supply chain of a business can vary significantly depending on the industry, size of the company, and the specific products or services it offers.
Financing the supply chain is a critical aspect of supply chain management and is essential for ensuring the smooth flow of goods and services.
This article discusses the model of supply chain finance and how it helps in improving the health of the supply chain.
Read more →Security Interest: Meaning, forms, registration, enforcement, and effects of non-registration
-Team Vinod Kothari and Company | resolution@vinodkothari.com
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RBI Framework for Green Deposits
– Team Finserv | finserv@vinodkothari.com
Climate change is clearly one of the most pertinent regulatory themes in recent times, as the move to sustainable business practices and energy efficient technologies need massive funding. The availability of finance for move to sustainability has an important role to play in mitigating climate change. To this effect, RBI also conducted a survey in January 2022 to assess the status of climate risk and sustainable finance in leading scheduled commercial banks, and observed a need for concerted effort and further action in this regard. Following the same, RBI conducted a discussion, and released a press release indicating its intention to release a framework for acceptance of green deposits in India. On 11th April, 2023, RBI released the Framework for Acceptance of Green Deposits (“Framework”) for banks and deposit-taking NBFCs/HFCs, to be applicable from 1st June, 2023.
| Our video lecture on the topic is available here: https://youtu.be/7rRhVYR-zT0 |
As the green deposits formally mark its presence in the Indian financial markets, one may be inquisitive on various aspects related to it. We have tried to analyze and put our views on the same in this write-up.
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Private sector banks to continuously monitor major shareholders
RBI Directions, 2023 require banks to have a mechanism to detect violation w.r.t. RBI prior approval and ‘fit and proper’ status
– Vinita Nair, Senior Partner | corplaw@vinodkothari.com
Given their systemic significance, ensuring that ownership of banks neither gets concentrated, nor falls into wrong hands, has always been important. Therefore, acquisition of shares or voting rights (‘S/VR’) is strictly regulated by Section 12B of Banking Regulation Act, 1949 (‘BR Act’), supplemented by RBI Directions issued from time to time. In the case of public sector banks, there is a ceiling of 10% of the total voting rights for shareholders other than the Central Government.
Section 12B of BR Act prescribes the requirement of prior approval of RBI in case of a person intending to become a “major shareholder”, that is, a holder with 5% of the S/VR in a banking company. The requirement is applicable where a person acquires or agrees to acquire S/VR, which could be (a) either directly or indirectly, and (b) whether alone, or by acting in concert with any other person. Hence, there is a need to do both horizontal aggregation [that is, relatives[1] and persons acting in concert (PAC)[2]], as well as vertical aggregation (that is, indirect acquisition through controlled entities or “associated enterprises[3]”.
This article discusses the possible pain points likely to be faced by the banks, other requirements under the new regime and actionable arising therefrom.
Read more →PML Act and Rules: Recent changes may have new compliance requirements
-Team Finserv | finserv@vinodkothari.com
Background
Financial sector entities have to follow PMLA and related rules, including by way of KYC Directions. The Finance Ministry came up with various amendments pertaining to the Prevention of Money-Laundering Act, 2002 (“PML Act”) and the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 (‘PML Rules’). The amendments pertain to revised thresholds for ascertainment of beneficial ownership (25% to 10%), implementation of group wide policies for compliance with provisions of Chapter IV, expanding the obligations under PMLA to service providers of virtual digital assets, etc.
Effective date and applicability:
The amendment shall be effective from the same date, i.e. March 07, 2023. It may be noted that the Master Direction – Know Your Customer (KYC) Direction, 2016 (‘KYC Directions’) are issued and updated by the regulator based on the amendment in PML Act and PML Rules. However, the Regulated Entities (RE) are required to ensure compliance with the provisions of PML Act and PML Rules, as amended from time to time. Hence, necessary steps must be taken based on the amendments.
Whether applicable to existing or new customers?
Customer Due Diligence (as required under the PML Act and Rules) is required to be undertaken at the time of commencement of a financial transaction or account-based relationship with the customer. Accordingly, necessary steps must be taken by the RE to ensure compliance with the Amendment Rules for all new customers or new financial transactions undertaken with existing customers after March 07, 2023. However, it is also pertinent to note rule 9(12) of the PML Rules which requires reporting entities to exercise continuous due diligence with respect to the business relationship with every clients.
Read more →Liquidity stress testing for NBFCs
– Vinod Kothari
Stress testing is a part of risk management process. Stress testing envisages those plausible, however, low frequency events, which may occur and disrupt the operations. In the context of a financial intermediary – stress may be seen either in the solvency (that is, capital is not sufficient to absorb the risks or losses), or liquidity (that is, the bank is perfectly solvent, and yet, does not have enough liquidity to discharge immediate liability).
The need for stress testing comes from para 15A (para 15 for non-systemically important NBFCs) read with Annex II of the Master Directions for NBFCs[1] which provide as follows:
Read more →The Dos and Don’ts of Penal Charges
RBI to release guidelines on penal charges
– Tejasvi Thakkar, Executive | finserv@vinodkothari.com
Introduction
The Reserve Bank of India (‘RBI’) announced various policy measures in its Statement on Developmental and Regulatory Policies dated February 08, 2023, which includes introduction of guidelines for regulating the penal charges levied by financial institutions in case of delay or default in repayment of loans or where there is a non-compliance of ‘material’ terms and conditions. RBI observed that some of the financial institutions were levying unreasonable penal charges. It has time and again been RBI’s concern that financial institutions levy excessive charges under the garb of different names such as penal charges, penal interests, legal charges, notice charges, levy charges etc. A large number of customer grievances with respect to excessive penal charges and divergent practices have influenced the regulator to think on these lines.
Read more →National financial information repository: One more or one for all?
– Lovish Jain, Executive | lovish@vinodkothari.com
Some days ago, Mr. Vinod Kothari had commented on a LinkedIn post :
“Do we realise how many places does a lender (NBFC, Bank) register information about a loan? There are 4 credit information companies (such as CIBIL) where the credit data, including performance history, is uploaded. If the exposure is Rs 5 crores or above, in the aggregate over the banking system, information goes on CRILC too.
RBI has recently written to NBFCs reminding them of the obligation to register details with NeSL, an information utility under IBC, irrespective of whether the provisions of Code apply (for example in case of individuals), or whether the lender in question is at all contemplating resorting to IBC as a remedy (for example, consumer loans).
If the loan is a secured loan, the details need to be filed with CERSAI. If the secured loan borrower is a company, details need to be filed with RoC too. If the security interest is on immovable property, one needs to file particulars with land registry. If the security interest is on motor vehicles, the hypothecation is registered with Vahan portal too.
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