Angel Tax on CCPS Issued to Parent Company: ITAT Grants Relief

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– Yuttika Dalmia | finserv@vinodkothari.com

Section 56(2)(viib) of the Income-tax Act, 1961, popularly known as the “Angel Tax” provision, was introduced to prevent the routing of unaccounted money through the issue of shares at a high premium. In an important ruling discussed below, the Delhi ITAT held that this anti-abuse provision should be applied only to transactions that fall within its intended purpose and should not be mechanically invoked in genuine transactions between group companies.

Facts of the case

  • OYO issued CCPS to its holding company Oravel Stays Ltd. following a court-approved demerger of its India hotel business.
  • Oravel’s holding reduced from 100% to 99.6% solely due to the demerger — parent-subsidiary relationship maintained throughout.
  • Shares issued at substantial premium based on DCF valuation report.
  • Capital infused was FEMA-compliant downstream foreign investment.
  • AO alleged shares were issued in excess of FMV and made an addition of ₹3,885.52 crore under Section 56(2)(viib).

Issues Before the Tribunal

  • Whether Section 56(2)(viib) applies to shares issued by a subsidiary to its holding company.
  • Whether AO can reject DCF valuation and substitute NAV method.
  • Whether premium on conversion of CCPS into equity is taxable under Section 56(2)(viib).

AO’s Findings

  • Rejected DCF valuation citing negative net worth, losses and aggressive COVID-era projections.
  • Treated excess consideration over FMV as taxable income under Section 56(2)(viib).

ITAT’s Findings

  • Section 56(2)(viib) being an anti-abuse provision cannot extend to bona fide holding-subsidiary capital infusions absent any money laundering concerns.
  • AO acted beyond jurisdiction by rejecting merchant banker’s DCF report — tax authorities lack expertise to redo such valuations.
  • FEMA-compliant downstream investment cannot be treated as unaccounted money — foundational assumption of Section 56(2)(viib) fails.

Key Takeaways

  • Section 56(2)(viib) must be interpreted purposively — it targets unaccounted money, not genuine intra-group restructurings.
  • AO cannot disregard a registered valuer/merchant banker report without strong and cogent reasons.
  • FEMA compliance creates a strong presumption of genuineness against Angel Tax application.
  • Entire addition of ₹3,885.52 crore deleted by ITAT.

Note: Section 56(2)(viib) of the Income-tax Act, 1961 has been omitted with effect from 1 April 2025 and accordingly is no longer applicable from Assessment Year 2026–27 onwards.

Link to case law: Oyo Hotels And Homes Private … vs Deputy Commissioner Of Income Tax, … on 4 June, 2026

Workshop on RBI Directions on Responsible Business Conduct and Third Party Product Selling

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June 26, 2025 | Physical – Bengaluru
Register: https://docs.google.com/forms/d/e/1FAIpQLSd60tQLR3MTqRfSnst5fvNYTqNvxhrMaLatLe7DSGULP-ASlw/viewform
Half Day Workshop on RBI Directions on Responsible Business Conduct and Third Party Product Selling.pptxDownload

Our resources on Digital Lending:

Resources on Digital Lending

Mahattva Episode 3 – Frank Speak of Financial Markets: Talk with Dr. Frank Fabozzi

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What does the future of finance look like through the eyes of someone who has witnessed its evolution over the last 60 years?

🎙️ In the upcoming episode of Mahattva, Mr. Vinod Kothari will interact with the legendary Frank J. Fabozzi, who is one of the world’s foremost authorities on fixed income and investment management, for a fascinating conversation on the transformation of global financial markets, the rise of fintech, the changing role of financial intermediation, and the ideas that will shape the next era of finance.

From decades of wisdom to tomorrow’s possibilities, this is a discussion you won’t want to miss.

📅 June 19, 2026

🕕 6:00 PM IST

▶️ Streaming on YouTube

Mark your calendars and stay tuned! 🚀

We will be sending a limited number of invitations to participants who register their interest in advance to attend the live Zoom session. The conversation will be livestreamed on YT as well.

Register your interest here: https://docs.google.com/forms/d/e/1FAIpQLSdcaU9LLxVnAxjUnAx6lb2JRCM4eeMFrofPXudmo4t83wqYhg/viewform?usp=dialog 

Control and Assurance Functions for NBFCS- RBI Proposes Consolidation

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  • Harshita Malik | finserv@vinodkothari.com

The RBI issued the Reserve Bank of India (Non-Banking Financial Companies – Governance) Directions, 2025 (‘Governance Directions’) on November 28, 2025, consolidating all governance-related instructions for NBFCs into a single master framework. While the said exercise addressed regulations around Board composition, fit and proper criteria, KMP compensation, and related matters, it left the two core control/assurance functions, namely, compliance and internal audit, governed by separate circulars. The draft Reserve Bank of India (Non-Banking Financial Companies – Governance) Amendment Directions, 2026 (‘Amendment Directions’), issued for public comments, absorbs the CCO Circular and RBIA Circular into the Governance Directions and proposes certain amendments to the risk management framework. 

Effective Date: The Amendment Directions propose an effective date of January 1, 2027, upon formal notification.

The amendments introduced go beyond mere consolidation of existing circulars; they introduce new obligations and structural changes to the governance norms. Key changes are given below, for banks, refer to our article here.

  1. Important concepts defined: The Amendment Directions contain new definitions of key concepts relating to control and assurance functions, including ‘Assurance’, ‘Clawback’, ‘Compliance’, ‘Compliance Culture’, ‘Compliance Function’, ‘Compliance Risk’, ‘Control Functions’, ‘Internal Audit Function’, ‘Internal Audit Plan’, ‘Internal Controls’, ‘Risk Appetite’, ‘Risk Limits’, ‘Risk Management’, and ‘Risk Management Function’.
  2. Common instructions for CRO, CCO and HIA: The Amendment Directions provide a unified set of provisions for the three heads of control and assurance functions, namely, Chief Risk Officer (CRO), Chief Compliance Officer (CCO), and Head of Internal Audit (HIA), covering eligibility, appointment conditions (seniority ≤2 levels below MD & CEO, Board approval, tenure ≥3 years, premature removal requiring Board approval), independence, and reporting lines (functional to Board/ACB; administrative to MD & CEO). Does this mean that the same person can be appointed as the CCO and HIA? Given that the role of the HIA includes oversight on compliance risk, it will be counter-intuitive to have the same person as the head of the compliance function as well as the head of internal audit. Similar instructions have also been introduced for banks.
  3. Relaxation for Base Layer continues and further enhancement- Under the existing framework, the CCO framework was applicable on Middle Layer NBFC and appointment of CRO and RBIA Framework on those with an asset size more than ₹5000 crore, respectively. The said exemption for base layer NBFCs continues and further even includes the requirement of constituting the RMC. 
  4. ₹5,000 crore threshold for mandatory RMC: NBFCs with total assets of ₹5,000 crore or above must constitute a RMC and establish a Risk Management Function headed by a CRO; the RMC is responsible for evaluating overall risks, including liquidity risk, and reporting to the Board. The existing regulations require the RMC to be constituted by all NBFCs irrespective of asset size, and hence, this may be seen as a major relaxation.
  5. Quarterly Board meetings without Senior Management: CCO, CRO, and HIA must meet the Board or ACB at least once every quarter without the presence of Senior Management (including MD/CEO/WTD), and must have direct and unrestricted access to the Board/ACB to communicate concerns without management interference.
  6. Stricter external hiring restrictions: Consultants, advisors, part-time auditors, or individuals who are neither on the NBFC’s payroll nor have a contractual employer-employee relationship with the NBFC shall not be appointed/designated as CRO, CCO, or HIA. The same criteria has been prescribed for banks as well.
  7. Differentiated intimation timelines to RBI/NHB: For CCO and HIA (NBFC-ML and above), appointment/premature transfer/removal/exit/change in tenure must be reported to DoS, RBI/NHB at least five working days in advance, with candidate profile and fit & proper confirmation; for CRO, such intimation must be made within five working days, accompanied by the candidate’s profile.
  8. CRO’s role in credit committee and override mechanism: CRO shall be an invitee to credit sanction/approval committee meetings without voting rights; where risk/exposure is assumed contrary to CRO advice without adequate mitigation, the responsibility rests with the next higher authority in the delegation matrix (except where the Board is the risk-assuming authority), and all such cases must be reported to the Board/RMCB.
  9. Internal audit of Compliance and Risk Management Functions: The Compliance Function and Risk Management Function shall be subject to regular internal audit.
  10. New tenure and audit-cycle mandates for Internal Audit: Staff posted to the Internal Audit Function shall ordinarily have a tenure of at least three years, and all significant activities shall be audited over a defined cycle ordinarily not exceeding three years, with high-risk areas reviewed more frequently.
  11. RBIA adoption and NBFC-BL exemption: All NBFCs shall adopt a Risk-Based Internal Audit (RBIA) approach focusing on higher risk, materiality, systemic relevance, and supervisory concerns as given in Annex I-A of the Amendment Directions; adoption of RBIA is voluntary for NBFC-BL. As per the Companies Act, internal audit is applicable even on private companies having a turnover of ₹ 200 crore rupees or outstanding loans or borrowings exceeding ₹100 crore or more. This means that even Base Layer NBFCs can be subjected to internal audit requirements. However, risk-based internal audit will be applicable only in case of Middle Layer and above entities. RBIA is an audit methodology that focuses on identifying, assessing, and prioritising the most significant risks faced by an organisation, and allocating audit resources accordingly. Unlike traditional compliance-oriented audits, RBIA aligns audit activities with the NBFC’s risk management framework and strategic objectives. Refer to our article on RBIA – here.
  12. Periodic external review for NBFC-UL Risk Management Function: NBFC-UL shall subject its Risk Management Function to periodic external review to benchmark practices and strengthen effectiveness. However, in the case of banks, all three functions- compliance, risk and internal audit are subject to external review.
  13. Formal Risk Exposure Matrix (9-cell grid) & Risk Audit Prioritisation Matrix (Magnitude vs. Frequency): The Amendment Directions introduce two formalised, structured risk assessment and prioritisation tools under the RBIA framework (Annex I‑A).
  14. Assumption of risk exposure contrary to the advice of CRO: If risk is taken contrary to the CRO’s advice without adequate mitigation, the responsibility lies with the next higher authority in the delegation matrix (except when the Board is the risk-assuming authority). All such cases must be reported to the Board/RMC.
  15. Intimation of appointment to RBI/NHB: For CCO and HIA: Report appointment/premature transfer/removal/exit/change in tenure at least 5 working days in advance (pre-event intimation). Intimation to include profile and fit & proper confirmation by the competent authority. Appointment may be communicated to the candidate only after the five-day window, unless a contrary communication is received from RBI/NHB. For CRO: Report appointment/premature transfer/removal/exit/change in tenure within 5 working days (post-event intimation).

For ease of reference, the amendments have been classified into three categories and detailed below:

  1. Changes Common for CCO, CRO and HIA
ProvisionDraft Amendment DirectionsCurrent Directions/Circulars
RankNot more than two levels below MD & CEO (for SPDs: not more than three level; for NBFC-BL: as per policy)CCO shall be not below two levels from CEO; for NBFC-ML, relaxable by one further level
Appointment tenureOrdinarily not less than three years with no explicit relaxation. Premature transfer/removal requires Board approvalBoard permitted to relax the minimum three-year tenure by one year in exceptional cases for CCO.
External HiringExternal hiring permitted, however, consultants, advisors, part-time auditors, or individuals without employer-employee relationship with the NBFC.External hiring permitted, no negative list prescribed
Reporting LineFunctional reporting: Board/ACB; Administrative: MD & CEOReporting by CCO to MD & CEO was the primary option; Board reporting was an alternative.
Quarterly meeting without senior managementMeet Board/ACB quarterly without Senior Management (including the MD / CEO / WTD)CCO and CRO shall meet the Board or ACB at least once a quarter without the presence of the Senior Management (including the MD / CEO / WTD)
Intimation to RBI/NHBFor CCO and HIA:report appointment/premature transfer/removal/exit/change in tenure at least 5 working days in advance (pre-event intimation). Intimation to include profile and fit & proper confirmation by competent authority. Appointment may be communicated to the candidate only after the five-day window, unless a contrary communication is received from RBI/NHB

For CRO:Report appointment/premature transfer/removal/exit/change in tenure within 5 working days (post-event intimation)		Prior intimation was required for appointment of CCO without specifying a minimum period. Intimation to include Detailed profile of candidate, fit and proper certification by MD & CEO confirming the person meets prescribed supervisory requirements and rationale for changes, if applicable.
Internal auditCompliance Function and Risk Management Function shall be subject to regular internal auditNo explicit requirement that Compliance must be audited by IA
  1. Changes Specific to CRO
ProvisionDraft Amendment DirectionsGovernance Directions
Threshold for RMCNBFCs with assets ≥ ₹5,000 croreAll NBFCs
CRO’s role in credit decisionCRO shall be an invitee to the meetings of the credit sanction / approval committee, without any voting rights.CRO shall have voting power and all members shall individually and severally be liable.
Contrary risk adviceAssumption of any risk / exposure, contrary to the advice of the CRO, without incorporating adequate risk mitigation measures, shall rest with the next higher authority in the delegation matrix.No equivalent provision.
Risk Management Function dutiesEnsure NBFC operates within risk appetite; assess risks independently – Implement NBFC-wide risk strategy aligned with Board-approved risk appetite; clear risk limits; allocate parameters – Robust information infrastructure for capital/liquidity, granular monitoring, consolidated reporting – Continuously evaluate exposures vs. limits; challenge business decisions; escalate critical issues to SM/Board/RMCBCRO had similar duties but risk appetite/limits were not defined and escalation mechanism was not explicitly prescribed
External review of Risk Management FunctionNBFC-UL shall subject Risk Management Function to periodic external review to benchmark practices and strengthen effectivenessNo explicit external review requirement for Risk Management Function
  1. Changes in Internal Audit Function – RBIA
ProvisionDraft Amendment DirectionsRBIA Circular
Applicability of CRONBFC-ML and above (mandatory), thus, making it mandatory for ML entities irrespective of asset size; NBFC-BL (voluntary).Deposit-taking NBFCs (all sizes) and non-deposit-taking NBFCs with assets ≥ ₹5,000 crore
Tenure of internal auditorsStaff posted to Internal Audit Function should ordinarily have a tenure of at least three yearsNo specified tenure for internal audit staff
Internal audit cycleAll significant activities audited over a defined cycle ordinarily not exceeding three years; high-risk areas to be reviewed more frequentlyNo specified audit cycle
Structured RBIA FrameworkRisk Exposure Matrix (9-cell grid, inherent risk vs. control risk) and Risk Audit Prioritisation Matrix (magnitude vs. frequency) has been specified.No such formal risk matrix was specified.

Control functions in banks: RBI proposes Consolidation exercise

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  • Payal Agarwal, Partner | corplaw@vinodkothari.com
Draft proposals provide definitional and role clarity, highlighting a comprehensive overhaul of control and assurance functions for banks with unified appointment standards, enhanced Board oversight, and proportional relaxations for specific categories.

Highlights:

  • Standardised definitions;
  • Unified framework for CRO/CCO/HIA;
  • Optional group CRO/CCO;
  • Periodic external review mandated for NBFC-UL;
  • Flexibility on eligibility criteria for CRO/CCO/HIA;
  • Reporting lines clarified;
  • Foreign banks: “Comply or explain” relaxation;
  • Quarterly Board meetings without Senior Management;
  • CRO credit committee role;
  • Dual-hatting ambiguity;
  • Enhancement of compliance function.

Keeping up with the consolidation exercise undertaken by the RBI last year for the circulars pertaining to Department of Regulation (DoR), RBI announced in its 8th April Statement on Developmental and Regulatory Policies the consolidation of its supervisory instructions. Following the same, draft Directions were issued. Further, for consolidation of instructions issued by the RBI on control functions, viz., compliance, risk management and internal audit, RBI has issued draft Governance Directions, on 10th June, 2026. 

Note that, while the press release refers to ‘Harmonisation and Consolidation of Instructions on Control / Assurance Functions’, the draft Directions go beyond a simple consolidation exercise, rather, includes some changes as compared to the existing circulars of DoS and DBS. The key changes for commercial banks have been discussed below. For NBFCs, refer to our article here. 

Key Proposals under Draft Directions

  • Important concepts defined: The draft Directions contains definitions of various relevant concepts in relation to control and assurance functions. 
  • Instructions for CRO, CCO and HIA aligned: The draft Directions provide a common set of instructions, eligibility criteria, appointment conditions, reporting lines etc for each of the three heads of the relevant control and assurance functions, viz., Chief Risk Officer (CRO), Chief Compliance Officer (CCO) and Head of Internal Audit (HIA). 
  • Group level oversight of CRO and CCO: For banks that are part of a group consisting of more than one financial entity, a Group CRO (GCRO) and Group CCO (GCCO) may be appointed for group level risk oversight/ compliance and co-ordination. This is not a mandatory requirement, however, may be adopted as a part of group-level control and  assurance functions. 
  • Periodic external review of control functions: For benchmarking of practices and strengthening effectiveness of the functions, the draft Directions require the risk management function, Quality Assurance and Improvement Program (QAIP) of compliance and internal audit functions to periodic external review. In case of NBFCs, external review is proposed to be mandated for risk management function only, and limited to NBFC-UL entities. 
  • Eligibility conditions to be determined by internal policy: The draft Directions omit conditions on minimum no. of years’ of experience and age limitations for appointment of CRO, CCO and HIA. The September, 2020 circular of RBI on Compliance functions in banks and Role of Chief Compliance Officer (CCO) currently requires the CCO to have an overall experience of at least 15 years (including 5 years in audit function) and an age limit of 55 years. The draft Directions require adequate domain knowledge and relevant experience in the respective fields, commensurate with the size, complexity, and risk profile of the bank and age as prescribed in the internal policy of the bank. 
  • Employer-employee relationship mandatory: The draft Directions clarify that consultants, advisors, part time auditors or individuals who are neither on the rolls of the bank/group entity nor have any contractual employer-employee relationship with the bank/group entity shall not be appointed/designated as CRO, CCO or HIA or Group CRO/CCO.
  • Clarification on reporting lines: The draft Directions makes a distinction between administrative and functional reporting lines, viz., administrative reporting to MD& CEO and functional reporting to board/ board committee. 
  • Comply or explain approach for foreign banks: In case of foreign banks, a relaxation is proposed by making the applicability of the instructions on control and assurance functions on a “comply or explain” basis, thus allowing deviations from the requirements, subject to submission of reasonable explanation for prior approval of DoS, RBI.  

Omission of “dual hatting” restriction: can the same person be appointed as CCO or CRO and HIA? 

The draft Directions seem to have omitted the “dual hatting” restrictions, although it requires each of the three designates to be “independent of business lines, free from conflicts of interests…”. The internal audit function, headed by HIA is required to do independent evaluation of governance, risk management, compliance, internal controls, business lines, support functions, outsourced activities, etc., ensuring assurance across the entire organisation. Hence, it would be counter-intuitive to suggest that the HIA can head the compliance or risk management functions, while being responsible for providing independent assurance on the same. 

Some of our resources on Compliance, Risk Management and Internal Audit functions: 

RBI Clarifies Uniform Asset Classification Under Co-Lending Confined to the Co-Lent Exposure Only

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Simrat Singh | finserv@vinodkothari.com

Background

The Co-Lending Arrangements Directions, 2025 (now subsumed within Para B of the RBI (Non-Banking Financial Companies — Transfer and Distribution of Credit Risk) Directions, 2025) introduced a requirement for uniform borrower-level asset classification across co-lending partners. Paragraph 124 of the Directions provides:

“NBFCs shall apply a borrower-level asset classification for their respective exposures to a borrower under CLA, implying that if either of the REs classifies its exposure to a borrower under CLA as SMA / NPA on account of default in the CLA exposure, the same classification shall be applicable to the exposure of the other RE to the borrower under CLA. NBFCs shall put in place a robust mechanism for sharing relevant information in this regard on a near-real time basis, and in any case latest by end of the next working day. “

The intent of this provision, read alongside RBI’s long-standing IRACP framework, was clear: credit stress is a condition of the borrower, not of a specific loan. Once any co-lender classified its share of the co-lent exposure as SMA or NPA, the other co-lender was required to mirror that classification for its own share.

The Interpretive Question

The phrase “under the CLA” in paragraph 124 gives rise to 2 divergent methods:

  1. Borrower-level classification applies across all exposures of a co-lender to the borrower, including non-co-lent loans, once any default arises in the co-lent exposure; or
  2. The uniform classification obligation is confined to the co-lent exposure itself. A default in the co-lent loan does not compel reclassification of the co-lender’s non-colent loans to the same borrower, nor does a default in an independent loan trigger any obligation under paragraph 124.

We had earlier made a case for interpretation 1 above in our write-up Does Co-lending Make Default a Communicable Disease? keeping in mind the principle of borrower-level asset classification under IRACP norms. However, an RBI clarification received by a regulated entity provides otherwise. 

The RBI Clarification

RBI has clarified that the uniform asset classification requirement under paragraph 124 is limited to the exposure under the co-lending arrangement. It does not extend to independent loans of a co-lender to the same borrower that are outside the CLA.

The implications of this clarification are as follows:

  • Co-lent loan defaults:
    • If Co-Lender 1 classifies its share of the co-lent loan as SMA/NPA, Co-Lender 2 must apply the same classification to its share of that loan. However, Co-Lender 2 is not required, solely on account of the co-lent loan defaulting, to reclassify any separate, independent loan it holds to the same borrower outside the CLA.
  • Standalone loan of Co-Lender 2 defaults i.e. default in an independent loan:
    • A default or downgrade by Co-Lender 2 on a non-CLA loan to the same borrower does not, of itself, trigger any information-sharing obligation or classification consequence for Co-Lender 1 under paragraph 124.

It is, however, also worthwhile to mention that REs continue to remain independently subject to their own borrower-level classification obligations under the IRACP norms. Where a co-lender has knowledge of default in a borrower’s other obligations, its own prudential framework may require appropriate classification of its standalone exposures. Further, with fortnightly CIC reporting coming in effect from July 2026, co-lenders will have near-regular visibility into a borrower’s credit profile across lenders. It would therefore be increasingly difficult for a co-lender to retain a favourable asset classification on a standalone exposure where the borrower’s credit record reflects a default on other loans. 

Impact on Ind AS entities is also worth noting. While the RBI clarification limits the uniform asset classification requirement to the co-lent exposure, entities following Ind AS may still need to evaluate whether a default on the co-lent loan constitutes a Significant Increase in Credit Risk (SICR) for the borrower. The occurrence of default on any material obligation may indicate deterioration in the borrower’s creditworthiness and could be a relevant factor in assessing the staging of other exposures to the same borrower. Accordingly, even though asset classification consequences may not extend beyond the co-lent exposure, the information regarding such default may influence the ECL assessment and provisioning for other loans held by the lender, depending on its ECL framework.

See our other resources of Co-lending here: https://vinodkothari.com/co-lending/

RBI attempts to woo fleeing foreign investors

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– Vinita Nair and Saloni Khant | corplaw@vinodkothari.com

– Updated as on June 20, 2026.

In light of the outflow of $13.7 billion by foreign institutional investors in less than 2 months and the consequent fall in rupee, the RBI governor has issued a press release dated June 5, 2026 introducing various measures to pull in foreign capital such as slashing tax on investment in G-secs, removing restrictions thereon, enabling foreign investment in G-secs with longer tenure, raising investment limits for NRI, OCIs and PROIs in listed equity, concessional forex swap for ECB by PSUs and subsidising hedging cost for FCNR (B) deposits.

Government Securities

  • FPIs, OCIs, and NRIs permitted to invest in 15, 30 and 40 year G-secs under FAR
  • Ease of investment in G-Secs for FPIs under the General Route
    • FPIs can now invest under the general route in government securities without these restrictions w.r.t. Short-term investments limits, Security-wise limit and Concentration limits:
      • Short-term investments limit: Investment in G-secs (maturity up to 1 year) were capped at 30% of the FPI’s total investment in each category.
      • Security-wise limit: Total of investments by FPI and those made through the Special Rupee Vostro Account Route in CG securities were capped at 30% of the security’s outstanding stock.
      • Concentration limit: Investment in G-secs by an FPI (with related FPIs) was capped at 15% and 10% of the prevailing investment limit of long-term and other FPIs respectively.
  • Merging of ‘general’ and ‘long-term’ investment limits by FPI in G-secs

The limits of investment by FPIs in G-Secs, previously bifurcated in ‘general’ and ‘long-term’ investments have now been merged for better flexibility. The erstwhile limits are provided in RBI Circular dated April 6, 2026, now clubbed as:

  • No capital gains tax for foreign investments in G-secs

An ordinance dated June 5, 2026 exempts interest earned as well as capital gains on transfer, sale or exchange of G-secs held by Foreign Institutional Investor or a Bank for International Settlements w.e.f. April 1, 2026.         

These measures are expected to increase returns for FPIs from Indian G-Secs by 15-20%[1].

Listed Equity Investments

ECBs by PSU and OFCBs

  • Government provides concessional forex swap for ECB by PSUs and OFCBs
    • The inherent currency risk of ECBs is hedged using forex swaps. The cost of forex swaps often wipes out the advantage of foreign borrowings. This relief expects an increase in ECBs from the usual $10–12 billion to $15 billion.[2]
    • The framework was notified vide RBI circular dated June 8, 2026.
    • Applicability of swap facility:
      • For ECBs with minimum maturity of 3 years;
      • For undrawn portion of existing ECBs;
      • Not available for ECBs with embedded options or raised for refinancing / repayment of existing ECBs;
      • OFCBs[3] raised by AD Cat-I Banks with minimum maturity of 3 years.
    • Features of swap facility:
      • Facility for ECBs drawdown/ OFCB flows received from June 8 to December 31, 2026 and remains open till January 15, 2027;
      • Facility available in USD only for ECB raised in any currency;
      • Maximum tenure of swap as per maturity schedule of ECB/ OCFB upto maximum 5 years;
      • Swap available at a fixed rate of 1.5 per cent per annum compounded semi-annually; 

FCNR Deposits

  • Government to bear full hedging cost of AD Cat-I Banks for fresh FCNR (B) deposits till September 30, 2026
    • Fresh 3 to 5 year Foreign Currency Non-Resident (Bank) Deposits made by NRIs and PIOs will benefit from this move. Banks may be able to raise up to $40 billion.[4]
    • The RBI Circular dated June 8, 2026 makes the framework immediately effective:
      • Facility for deposits mobilised from June 8 to September 30, 2026 and remains open till October 16, 2026;
      • Banks free to price deposits but overall ceiling as per the RBI’s guidelines. W.e.f. June 17, 2026 to September 30, 2026, RBI withdraws interest rate ceiling on these deposits (previously Overnight Alternative Reference Rate for the respective currency/ Swap plus 350 basis points) including those renewed on maturity. The rationale is to empower banks to pass the benefits of the swap facility to the depositors.
      • Tenor of swap in line with tenor of deposit;
      • Minimum lock-in period of 1 year for deposits, thereafter as per Bank’s policy;
      • Swaps once availed cannot be cancelled;
      • Facility available only once a week for FCNR(B) deposits mobilised in USD in previous week and pending to be covered under facility;
      • Swap facility available in US Dollars only.
  • RBI exempts[5] such FCNR (B) Deposits from CRR and SLR requirements from June 8 to September 30, 2026.
  • Additionally, RBI announced a similar withdrawal w.e.f. June 17, 2026 to September 30, 2026 for ceilings on interest rates for Rupee Deposits of Non-Residents i.e. NRE deposits with a tenor of at least 3 years including deposits renewed on maturity.         

RBI provides liberty to exclude the swap positions under the above facilities related to FCNR (B) deposits, ECBs and OFCBs from the limit of USD 100 million under RBI Circular dated March 27, 2026. Refer to RBI’s FAQs on the swap facilities here.

Reporting of ECBs, OFCBs and FNCR Deposits

  • W.e.f. June 22, 2026, AD Cat-I Banks to report data for ECBs, FCNR Deposits and OFCBs covered under RBI’s swap facility.
  • Reporting to be done on a daily basis by 6 pm.
  • For first reporting on June 22, 2026, data from June 8, 2026 till June 19, 2026 to be submitted.

Realization of export proceeds

  • Timeline for realisation of export proceeds restored back to 9 months from 15 months

On November 13, 2025, the FEM (Export of Goods and Services) Directions were amended to increase the timeline for realisation of export proceeds including those made by specified entities such as SEZ / status holder exporter / EOUs etc. from 9 to 15 months as an EODB measure. [See the brief highlights here.] The latest amendment aims to expedite export receipts.

[1] Source: https://www.thehindubusinessline.com/money-and-banking/govt-sops-to-boost-fpi-returns-from-gsec-by-15-20/article71065897.ece

[2] Source: https://www.business-standard.com/economy/news/psu-ecb-borrowings-may-cross-15-billion-on-rbi-s-concessional-swap-window-126060700598_1.html

[3] Overseas Foreign Currency Borrowings

[4] Source: https://economictimes.indiatimes.com/industry/banking/finance/banking/banks-to-be-told-to-step-up-fcnr-b-deposits/articleshow/131573654.cms?from=mdr#:~:text=Banks%20will%20now%20encourage%20more,attract%20significant%20foreign%20currency%20inflows. 

[5] Hyperlinked to amendment to Directions for Commercial Banks. Similar amendments to CRR and SLR Directions for Regional Rural Banks, Rural Co-operative Banks, Urban Co-operative Banks and Small Finance Banks.

[6] previously Overnight Alternative Reference Rate for the respective currency/ Swap plus 350 basis points

Refer to our other resources:

  1. Resource Centre on FEMA
  2. Resource Centre on ECB
  3. SOP for FDI approval rationalised for Border- Country Investment
  4. Open but Guarded Gates: Relaxations for Border-Country Investments

Disaster, Distress and Resolution: Decoding RBI’s NBFC Relief Framework

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-Jeel Ranavat, Assistant Manager (jeel@vinodkothari.com)

Overview

A natural calamity does not just damage property or disrupt livelihoods — it can instantly push otherwise disciplined borrowers into financial stress. Loan repayments become difficult not because borrowers are unwilling to pay, but because businesses halt, incomes disappear, and economic activity comes to a standstill. Recognising this reality, the RBI has introduced a comprehensive new framework on relief measures in areas affected by natural calamities  (Natural Calamities Directions) for lenders that fundamentally changes how borrower distress arising from calamities is to be handled.

RBI has moved towards a more structured and time-bound relief mechanism — one that focuses not only on faster restructuring and borrower protection, but also on ensuring prudential discipline for lenders. From proactive resolution and protection against sudden NPA downgrades to stricter timelines, additional provisioning norms, and disaster-sensitive credit assessment.

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RBI Proposes Uniform Recovery Norms Across All Lenders

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Revised draft enables device locking facility and removes the restriction taking legal action as first  resort

Tejasvi Thakkar, Simrat Singh and Jeel Ranavat | finserv@vinodkothari.com

Introduction

Pursuant to the RBI’s stated intent in theStatement on Developmental and Regulatory Policies to harmonise the conduct of Regulated Entities in relation to loan recovery, comprehensive draft instructions were initially proposed on May 20, 2026 consolidating and rationalising the existing scattered provisions. The draft has been revised and RBI has proposed Draft – Reserve Bank of India (Non-Banking Financial Companies – Responsible Business Conduct) Amendment Directions, 2026 which introduces several changes to the proposed recovery and conduct framework for NBFCs.

[Changes proposed under the revised draft have been highlighted in red for the ease of reference]

The key changes proposed are introduction of the device locking facility with restrictions, widening of the scope of harsh practices, removing the earlier restriction against initiating legal action as a first resort etc.

The instructions are applicable to all NBFCs, excluding Mortgage Guarantee Companies, Core Investment Companies, NBFC-Account Aggregators, Standalone Primary Dealers, Non-Operating Financial Housing Companies, and NBFCs not having any customer interface. The key requirements of the proposed framework are summarised below:

Key highlights

Policy Requirement

REs shall formulate a separate policy on recovery of loan dues, engagement of recovery agents and taking possession of security, by its own employee or recovery agent. The policy shall, inter-alia, cover:

  • Eligibility and due diligence criteria for engagement of recovery agents.
  • Specified recovery activities permitted to be carried out.
  • Code of Conduct requirements.
  • Performance evaluation standards, inspection and control mechanism.
  • Procedures and penal actions in case of non-compliance by recovery agents.
  • Recovery procedures in case of demise of borrower.
  • Mechanism to identify borrowers facing repayment difficulties and provide guidance on recourse options
  • Incentive structures not inducing harsh recovery practices.
  • Enforcement and possession framework including legal action not to be adopted as the first resort.
  • Triggers for initiation of recovery process.
  • Graded actions as per an escalation matrix for loan recovery.
  • Provision for compensation to the borrowers / guarantors for loss arising on account of recovery related actions of the NBFC or the recovery agencies.

Issue: Whether this can be combined with the policy on Code of Conduct for DSAs/DMAs?

Our view: Since the present requirement specifically deals with recovery conduct, possession and enforcement of security interest, and engagement of recovery agents, the same should ideally be maintained as a separate policy. The DSA/DMA CoC policy deals largely with sourcing-stage conduct such as mis-selling and consequent compensation-related aspects. However, where there are overlapping requirements, NBFCs may structure the same within a broader conduct framework, divided into separate sections. However, it should remain distinct from the outsourcing policy.

Due diligence (DD) requirements

  1. Frame and implement a due diligence framework in line with the RBI Outsourcing Directions, 2025.
    1. RE to ensure that recovery agencies shall undertake due diligence and verification of their employees/representatives at the time of engagement and on a periodic basis. Policy to specify such periodicity and scope of verification.

Training Requirements

  1. Recovery agents shall mandatorily possess certification from the Indian Institute of Banking and Finance (IIBF) for debt recovery agents. (Aligned with the HFC Master Directions)
    1. Existing agents without certification shall obtain the same within one year from issuance of directions

Code of Conduct for recovery Agents

  1. REs shall put in place a CoC for recovery agents and employees engaged in recovery and obtain undertakings for adherence.
    1. The CoC shall include, inter alia:
      1. Fair and respectful treatment of borrowers.
      2. Sharing only limited borrower information necessary for recovery and preventing misuse.
      3. Mandatory documents to be carried (ID card, copy of recovery letter etc)
      4. Permissible hours of contact
      5. Place of contact rules
      6. Restriction on contacting third parties
      7. Detailed prohibition of harsh practices
      8. Borrower information confidentiality
      9. No recovery action where grievance is pending
      • Recording of recovery calls with due borrower intimation.

Though the earlier draft proposed that recovery action cannot be taken if the grievance is found to be frivolous, however, the revised draft specifies that recovery cases cannot be referred to recovery employees or agencies while a borrower grievance relating to loan dues or recovery remains pending with the NBFC.

While the intent of the proposal is to strengthen borrower protection, it may make recoveries more difficult for lenders, as any borrower grievance can pause recovery action regardless of whether the complaint has merit. In our view, this could be misused by borrowers with malicious intent, by raising complaints primarily to delay or stall recovery proceedings.

Issue: Whether the CoC prescribed earlier under HFC Directions stands subsumed?

Our view: Yes. The earlier HFC provisions largely stand harmonised and subsumed within the present draft framework, except for certain differences which have been captured in the Annexure below.

Recovery agents shall be required to carry recovery notice, identity card and authorisation letter which shall include the telephone number of the / recovery agency and the grievance redressal officer appointed by the NBFC, and shall adhere to the following conduct requirements:

  • Interact only with the borrower / guarantor and not approach relatives or other contacts; maintain civil behavior;
  • Contact / visit borrowers only between 08:00 hours and 19:00 hours;
  • Honour borrower’s request to avoid calls / visits at particular times in normal circumstances;
  • Contact borrowers ordinarily at the place of their choice, failing which at residence, and thereafter at place of business / occupation. In the absence of any specific choice or if the borrower / guarantor fails to appear at the chosen place on two or more successive occasions, the employee / recovery agent may contact the borrower / guarantor at the place of his / her residence / occupation.
  • Avoid calls / visits during inappropriate occasions such as bereavement, calamities, marriage functions, festivals, etc.
  • In case of microfinance loans, undertake recovery at a mutually decided designated place, with field visits permitted only upon repeated non-appearance.
  • Ensure only duly authorised representatives visit borrower’s premises for recovery activities.
  • Ensure any written communication to borrowers has RE’s approval.
  • Promptly issue proper acknowledgement / receipt for collections made.
  • Refrain from harsh practices, including use of abusive/minatory  language,
  • use of social media for posting video / audio recordings or personal details of the borrower / guarantor;
  • sending inappropriate messages either on mobile or through social media;
  • excessive or anonymous calls, intimidation or harassment, threats of violence, misleading representations, or intrusion into borrower’s privacy,
  • making false or misleading representations to the borrower / guarantor, especially about the extent of the debt or the consequences of nonrepayment

    The revisions to the draft has widened the scope of “harsh practices” to explicitly include misuse of social media for recovery purposes, including disclosure of borrower information and sending abusive, threatening, or inappropriate communications through mobile or digital platforms.

Grievance redressal mechanism

  • Establish a dedicated recovery-related grievance redressal mechanism.
  • Provide complete details of the Grievance Redressal Officer and the mechanism in all recovery communications and loan agreements.
  • Define criteria for identification and closure of frivolous complaints with appropriate internal oversight.
  • REs should address issues including for issues relating to delays or difficulties in unlocking mobile device functionalities.

Responsibilities of REs

REs shall:

  • Prominently display an up-to-date list of empanelled recovery agents on all customer interface channels. Details to be provided
    • names of agents,
    • details of individuals engaged
    • period of engagement.
    • Type of recovery agent (corporate / individual),
    • Correspondence address,
    • Purpose of engagement (recovery / possession of security),
    • Assigned geographical areas,
  • The revised draft has introduced a timeline for REs to update the list within seven calendar days of any modification to the list.
  • In case of termination of agreement with the recovery agency,  REs are required to  inform the borrowers immediately.
  • Maintain records of recovery calls, including timing, frequency, and call recordings, for at least 6 months or until disposal of sub judice matters.
  • Inform the borrowers/guarantors that calls are being recorded.
  • At the time of forwarding cases for recovery,
    • In case a registered mobile number or email is available, inform borrowers atleast one day before the first recovery visit about the details of the recovery agent through SMS/Email.
    • In case digital details of the borrower  are  unavailable, inform borrowers atleast 3 days prior through physical notice.

Possession of mortgaged / hypothecated assets

Loan agreements shall contain a legally enforceable possession clause, clearly disclosed at the time of execution. The agreement shall, inter alia, specify:

  • Notice period and circumstances for waiver;
  • Procedure for taking possession of security;
  • Final opportunity to the borrower for repayment prior to sale/auction;
  • Procedure for restoration of possession;
  • Transparent process for sale or auction of the secured asset.

Periodic review, monitoring and control

REs shall put in place a management structure to monitor and control the activities of recovery agents and ensure that such agents refrain from actions that could harm the RE’s integrity and reputation. Accordingly, the RE should ensure:

  • Appropriate monitoring and conduct provisions shall be incorporated in agreements with recovery agents.
  • Remain fully responsible for the actions of recovery agents.
  • Undertake periodic review of recovery mechanisms to learn from experience and effect improvements.

Technology-Based Recovery Restrictions

The revised draft also proposes that the REs are restricted from using technology-based mechanisms (Remote Device Locking) to remotely restrict or disable functionalities of a borrower’s mobile device as a recovery tool, except in cases where the loan itself was granted for financing that specific device.

This can be done subject to certain conditions:

  1.  Loan agreement must expressly authorise such restrictions in clear and unambiguous terms.
  2. Trigger events for recovery actions must be specifically defined and disclosed upfront.
  3. A structured notice mechanism must be provided before any restriction is imposed.
    1. Notice of  atleast 21 days to be issued to borrower after the loan becomes 60 DPD
    1. After expiry of 21 days notice atleast another 7 days of time to the borrower to cure the default.

The default is 90DPD and the borrower has not curated the default irrespective of the notices Restrictions should follow a graduated, step-by-step escalation process.

  • REs  shall not restrict or disable essential device functionalities including internet access, incoming calls, emergency SOS, or emergency government/public safety notifications.
  • NBFC must reverse any restriction within 1 hour of default being cured.
  • NBFC must pay ₹250 per hour compensation for wrongful restriction or delayed reversal.
  • Device restriction mechanism must be uninstalled after full loan repayment.
  • Borrower retains the right to prepay the loan anytime (partial or full).
  • NBFC must maintain a strong grievance redressal system for unlocking-related issues.
  • NBFC is strictly prohibited from accessing, using, or retaining borrower device data for        recovery or any purpose.
  • NBFC is not allowed to access, use or obtain or retain the data in the phone for recovery in any circumstances

This means the lender cannot view personal files, contacts, messages, photos, location data, or any other information stored on the device while enforcing recovery measures.

Please refer to our detailed write -up on this–Remote Device Locking: RBI proposes highly guarded path

For Housing Finance Companies:

Most of the proposed requirements are not entirely new in substance for HFCs, as they were already reflected in the Guidelines for Engaging Recovery Agents under paragraph 170 of the RBI HFC Directions, 2025. The proposal now is to delete those HFC-specific guidelines and require HFCs to comply with the proposed Directions.

However, while the underlying principles remain largely consistent, the proposed Directions significantly strengthen and formalise the recovery framework. The approach shifts from principle-based guidance to a more structured, prescriptive, and compliance-oriented regime. The key changes are as follows:

  1. Mandatory written recovery policy:Under the HFC Directions, compliance was required with paragraph 170, but there was no express requirement to frame a consolidated written policy governing recovery of loans, engagement of recovery agents, and repossession of security. The proposed Directions now mandate a formal, documented recovery policy. Such policy must specifically cover eligibility criteria for engagement of agents, due diligence standards, performance evaluation parameters, inspection and audit mechanisms, and penal actions for non-adherence. This marks a shift from guideline-based adherence to a structured governance framework.
  2. Borrower distress identification mechanism: The HFC Directions required utilisation of credit counsellors in cases where a borrower was considered to “deserve sympathetic consideration,” which was discretionary and reactive in nature. The requirement of early stage borrower distress identification has been removed from the revised draft which indicates a shift from a proactive, structured borrower support system to a more reactive, institution-led approach based on observed default or non-payment events.
  3. Explicit data governance controls:While the HFC Directions required training of recovery agents on respecting customer privacy, the proposed draft goes further by mandating that only limited borrower information be shared with recovery agents and that adequate safeguards be put in place to prevent misuse or unauthorised transfer of customer data. This introduces clearer data governance and accountability obligations.
  4. Restriction on initiating legal action as first resort: The HFC Directions did not prescribe any sequencing rule regarding enforcement remedies. The earlier draft proposed that legal action for recovery or enforcement of security shall not be initiated as a first resort, thereby imposing a structured progression in recovery measures.

However, the revised draft provides for removal of this provision and suggests a relaxation of the earlier restriction against initiating legal action as a first resort for recovery.

This may provide lenders greater flexibility in choosing recovery measures and pursuing legal remedies at an appropriate stage.

Conclusion

Recovery is as vital to lending as disbursement, if not more. Credit often begins with a courteous engagement by the lender, but too often, the standards of professionalism seen at the time of sanction weaken at the stage of enforcement. The right to recover is unquestionable; harassment is not. The proposed Directions seek to correct this imbalance by requiring lenders to uphold the same standards of fairness, transparency and discipline during recovery as at the time of origination.