RBI issues draft framework to strengthen liquidity of NBFCs

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Abhirup Ghosh

abhirup@vinodkothari.com

Financial year 2019 has been a year to remember, as the NBFC sector, which caters to a significant portion of the financial needs in the economy, almost choked due to lack of liquidity. While there was an undercurrent already, but the fall of the mammoth ILFS group, ignited the crisis. Resultantly, the banks stopped taking fresh exposures on the NBFCs, the mutual funds pulled out plug, and other investors also became wary of the financial services sector. Businesses of all almost of all the NBFCs came to a standstill.

Considering the sensitivity of the situation, the RBI had to step in and take initiatives to address the concerns. Relaxations with respect to minimum holding period, for direct assignments and securitisation transactions, was one of them. This measure was however, temporary in nature.

In order to address the issues that pop up in the longer run, the RBI has framed a draft framework, which is now open for comments, to deal with liquidity risk. The draft framework was placed on the RBI’s website on 24th May, 2019[1] and is open for comments till 14th June, 2019.

The framework is divided into two parts – a) liquidity risk management framework; and b) liquidity coverage ratio. While the first part is a mix of new and existing provisions of asset liability management; the latter is a new requirement altogether.

In this write-up we intend to discuss about this framework.

Applicability

The first part of the framework, that is the liquidity risk management framework, shall be applicable to the following classes of NBFCs:

  1. Non-deposit taking NBFCs with asset size of ₹ 1 billion or above (₹ 100 crores or above);
  2. Systemically important core investment companies (CICs with asset size of more than ₹ 100 crores and having public funds)
  3. Deposit taking NBFCs

The second part of the framework, which introduces the concept of liquidity coverage ratio among NBFCs shall be applicable to the following classes of NBFCs:

  1. Non-deposit taking NBFCs with asset size of ₹ 50 billion or above (₹ 5000 crores or above);
  2. Deposit taking NBFCs

Liquidity risk management framework

The liquidity risk management framework is divided into the following parts –

a. Liquidity risk management policy, strategies and practices:

This requires formulation of risk management framework, which should be much more comprehensive than the existing one, and should address the following:

  1. Governance related issues –
  • The Board of Directors of the NBFC must retain the overall responsibility of liquidity risk management and the same shall also be responsible of laying down policies, strategies and practices to be followed by the company.
  • The Risk Management Committee shall report to the Board of Directors of the Company. The Committee must be constituted with CEO/ MD and the heads of the various risk verticals of the company. The existing Corporate Governance framework requires formation of RMC, however, the same does not specify desired constitution of the Committee. In fact, companies which have Chief Risk Officer, should also appoint CROs as a part of the RMC[2].
  • Asset Liability Management Committee – There is a slight change in the composition proposed under this framework against the existing provisions relating to formation of ALCO. As per the existing regulations, the ALCO must consist of senior management including CEO. However, this framework states that the committee must be headed by CEO/ MD or Executive Director and may have the Chiefs of Investment, Credit, Resource Management or Planning, Funds Management / Treasury (forex and domestic), International Banking and Economic Research as members. Also, the scope of ALCO has also been modified to include – taking decisions on desired maturity profile and mix of incremental assets and liabilities, sale of assets as a source of funding, the structure, responsibilities and controls for managing liquidity risk, and overseeing the liquidity positions of all branches.
  • Asset Liability Management Support Group – Formation of this group is a new requirement. The group should be consisted of operating staff of the organisation and shall be responsible for analysing, monitoring and reporting the liquidity risk profile to the ALCO.2. Off balance sheet exposures and contingent liabilities must be given desired level of attention so that risks arising from all off-balance sheet exposures, be it securitisation, financial derivatives, guarantees or other commitments. The focus should be on assessment of inherent risks that can cause problems at times of stress.

    3. Diversification of funding sources must be achieved by the NBFCs. This is a qualitative requirement where RBI has urged the NBFCs to establish strong connection with each of its funding sources and to keep itself active in the funding market. Over reliance on a particular source has been condemned.

    4. The NBFCs must have a proper collateral management system where it should be in a position to distinguish between encumbered and unencumbered assets.

    5.Stress testing must be inculcated as an important exercise in the overall governance and risk management culture in the NBFC. Stress testing must be conducted on a regular basis for a variety of short term, entity specific and market specific situations. The various activities of the business and their vulnerabilities must be taken into consideration so that the stress testing scenarios can cover every aspect of market risk and major funding risks that the NBFC is exposed to.

    6. A contingency funding plan must be formulated which can be followed while responding to severe disruptions in the funding abilities of the NBFCs. It should contain the available r potential contingency funding sources and the estimated amount which can be drawn from these sources, clear escalation or prioritisation procedures detailing when and how each of the actions can and should be activated, and the lead time needed to tap funds from each of these sources.

    7. Intra group transactions and exposures must be under special supervision and the Group CFO should develop and maintain liquidity management process and funding programs that are consistent with the activities of the group.

    8. Other issues like liquidity risk tolerance, liquidity costs, internal pricing must be properly framed by the senior management.

    9. Public disclosure on liquidity risk, the NBFC is exposed has to be made on regular basis. The disclosure should include –

    • Funding concentration based on significant counterparty,
    • Top 20 large deposits,
    • Top 10 borrowings,
    • Funding concentration based on significant products/ instruments,
    • Stock ratios with respect to commercials, NCDs and other short term liabilities each as a percentage of total assets, total liabilities and total public funds
    • State of the institutional setup for liquidity risk management

b. The Management Information System (MIS) should be structured in a manner that is capable of generating information both in normal and stress scenarios.

c. Internal controls of the NBFCs must be strong enough which can ensure adherence to policies and procedures with respect to liquidity risk management. The internal controls must be independently reviewed on a regular basis.

d. The assets and liabilities must be monitored based on the time buckets they fall in. As against the existing framework, the framework requires micro monitoring, that is, the time brackets have been broken further. The proposed time brackets as well as the current set of time brackets have been provided below:

 

Time brackets as provided in the existing guidelines Time brackets proposed in the framework
1 day to 30/ 31 days  1 day to 7 days
Over one month and upto 2 months  8 day to 14 days
Over two months and upto 3 months 15 days to 30/31 days (One month)
Over 3 months and upto 6 months  Over one month and upto 2 months
Over 6 months and upto 1 year  Over two months and upto 3 months
Over 1 year and upto 3 years  Over 3 months and upto 6 months
Over 3 years and upto 5 years  Over 1 year and upto 3 years
Over 5 years  Over 3 years and upto 5 years
 Over 6 months and upto 1 year
 Over 1 year and upto 3 years
Over 3 years and upto 5 years
Over 5 years

 

The maximum mismatches allowed in the 1-7 days, 8-14 days and 15-30/31 days bracket are 10%, 10% and 20% of the cumulative cash flows in the respective time brackets.

 

The investments in securities must be classified into “mandatory” and “non-mandatory” categories. Mandatory category is that where the securities acquired under legal obligation must be classified and anything apart from these must be classified under non-mandatory category.

 e. Stock approach must be adopted in the NBFCs’ liquidity risk management. Certain critical ratios must be monitored in this regard by putting in place internally defined limits as approved by their Board. The ratios and the internal limits shall be based on an NBFC’s liquidity risk management capabilities, experience and profile.
f. Liquidity risks arising out of other risks like currency risk and interest rate risk must also be managed.
g. Monitory tools like statement of structural liquidity and others, prescribed by the RBI should be used.

Liquidity coverage ratio

The concept of liquidity coverage ratio adopted here is similar to this concept under Basel III: International framework for liquidity risk measurement, standards and monitoring[3]. This requires NBFCs with specified asset size, to maintain specified level of LCR. The framework currently proposes following levels of LCR:

From 01.04.2020 01.04.2021 01.04.2022 01.04.2023 01.04.2024
Minimum LCR 60% 70% 80% 90% 100% 
 

The formula of LCR has been defined in the framework to mean:

Stock of High Quality Liquid Assets(HQLAs) / Total Net Cash Outflows over the next 30 calendar years

In simple terms, LCR represents the readily available cashflows/ cash equivalents as a proportion of the total net cash outflows over the next 30 calendar days. Ideally, the LCR should be more than 100%. The manner of computation of each of these have been elaborately discussed in the framework.

While calculating the stock of HQLA, certain items like cash, government securities and certain specified marketable securities without any haircut. However, other assets, including corporate bonds, equity shares etc. are to be considered after considering haircuts ranging from 15% – 50%.

In the denominator, the net of cash outflows are to be considered, that is total cash outflows minus the specified cash inflows.

As per the RBI framework, “Liquidity Coverage Ratio (LCR) which will promote resilience of NBFCs to potential liquidity disruptions by ensuring that they have sufficient High Quality Liquid Asset (HQLA) to survive any acute liquidity stress scenario lasting for 30 days”.

Conclusion

This framework was a much awaited piece of legislation and the industry felt the dire need of such a guided document on the liquidity risk management. With the growing importance of this industry and amount of exposure they have on the economy, a strong liquidity management is the need of the hour. The nation certainly doesn’t want another ILFS or a similar crisis to happen.

[1] https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=3678

[2] The RBI on 16th May, 209 required mandatory appointment of CRO by NBFCs having assets of ₹ 50 billion or above.

[3] https://www.bis.org/publ/bcbs188.pdf



	NBFCs in troubled waters as Madras Court Bench rules in favour of RBI				
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The latest judgement by the Madras HC as on 22nd April, 2019 has set aside an earlier single judge order in January this year, and ruled in favour of RBI. RBI argued that there was an appeal remedy available and the companies instead of filing writ petitions with the court could have approached the appellate authority.


However before citing the details of the present judgement, this writer believes a firm background is required to grasp the gravity of the present situation. The reader may feel free to scroll further down, if acquainted with the January single-judge decision beforehand.


Background 


Since the Sarada scam in 2015, the Reserve Bank of India (RBI) had been on high alert and had been subsequently tightening regulations for NBFCs, micro-finance firms and such other companies which provide informal banking services. As of December 2015, over 56 NBFC licenses were cancelled[1]. However, recently in light of the uncertain credit environment (recall DHFL and IF&LS) among other reasons, RBI has cancelled around 400 licenses [2]in 2018 primarily due to a shortfall in Net Owned Funds (NOF)[3] among other reasons. The joint entry of the Central Govt. regulators and RBI to calm the volatility in the markets on September 21st, 2018 after an intra-day fall of over 1000 points amid default concerns of DHFL, warranted concern. Had it been two isolated incidents the regulators and Union government would have been unlikely to step in. The RBI & SEBI issued a joint statement on September saying they were prepared to step in if market volatility demanded such a situation. This suggests a situation which is more than what meets the eye.


Coming back to NBFCs, over half of the cancelled NBFC licenses in 2018 could be attributed to shortfall in NOFs. NOF is described in Section 45 IA of the RBI Act, 1934. It defines NOF as:


1) “Net owned fund” means–

(a) The aggregate of the paid-up equity capital and free reserves as disclosed in the latest

Balance sheet of the company after deducting therefrom–

(i) Accumulated balance of loss;

(ii) Deferred revenue expenditure; and


(iii) Other intangible assets; and

(b) Further reduced by the amounts representing–

(1) Investments of such company in shares of–

(i) Its subsidiaries;

(ii) Companies in the same group;

(iii) All other non-banking financial companies; and

(2) The book value of debentures, bonds, outstanding loans and advances

(including hire-purchase and lease finance) made to, and deposits with,–

(i) Subsidiaries of such company; and

(ii) Companies in the same group, to the extent such amount exceeds ten per cent of (a) above.


At present, the threshold amount that has to be maintained is stipulated at 2 crore, from the previous minimum of 25 lakhs. Previously, to meet this requirement of Rs. 25 lakh a time period of three years was given. During this tenure, NBFCs were allowed to carry on business irrespective of them not meeting business conditions. Moreover, this period could be extended by a further 3 years, which should not exceed 6 years in aggregate. However, this can only be done after stating the reason in writing and this extension is in complete discretion of the RBI. The failure to maintain this threshold amount within the stipulated time had led to this spurge of license cancellations in 2018.


However, the Madras High Court judgement dated 29-1-2019 came as a big relief to over 2000 NBFCs whose license had been cancelled due a delay in fulfilling the shortfall.


 


THE JUDGEMENT


The regulations


On 27-3-2015 the RBI by notification No. DNBR.007/CGM(CDS)-2015 specified two hundred lakhs rupees as the NOF required for an NBFC to commence or carry on the business. It further stated that an NBFC holding a CoR and having less than two hundred lakh rupees may continue to carry on the business, if such a company achieves the NOF of one hundred lakh rupees before 1-04-2016 and two hundred lakhs of rupees before 1-04-2017.


The Petitioner’s claim


The petition was filed by 4 NBFCs namely Nahar Finance & Leasing Ltd., Lodha Finance India Ltd., Valluvar Development Finance Pvt. Ltd. and Senthil Finance Pvt. Ltd. for the cancellation of Certificate of Registration (CoR) against the RBI. The petitioners claim that they had been complying with all the statutory regulations and regularly filing various returns and furnishing the required information to the Registrar of Companies. These petitions were in response to the RBI issued Show Cause Notices to the petitioners proposing to cancel the CoR and initiate penal action. The said SCNs were responded to by the petitioners contending that they had NOF of Rs.104.50 lakhs, Rs.34.19 lakhs, Rs.79.50 lakhs and Rs.135 lakhs respectively, as on 31.03.2017.


Valluvar Development Finance also sent a reply stating that they had achieved the required NOF on 23-10-2017, attaching a certificate from the Statutory Auditor to support its claim. The other petitioners however submitted that due to significant change in the economy including the policies of the Govt. of India during the fiscal years 2016-17 and 2017-18 like de-monetization and implementation of Goods & Services Tax, the entire working of the finance sector was impaired and as such sought extension of time till 31-03-2019 to comply with the requirements.


Now despite seeking extension of time, having given explanations to the SCNs, the CoRs were cancelled without an opportunity for the NBFCs to be heard.


 


The Decision


It was argued that there is a remedy provided against the cancellation of the CoRs, the petitioners had chosen to invoke Article 226 contending violation of the principles of justice. The proviso to Section 45-IA(6) relates to the contentions in regards to cancellation of the CoRs.


“45-IA. Requirement of registration and net owned fund –


(3) Notwithstanding anything contained in sub-section (1), a non-banking financial company in existence on the commencement of the Reserve Bank of India (Amendment) Act, 1997 and having a net owned fund of less than twenty five lakh rupees may, for the purpose of enabling such company to fulfil the requirement of the net owned fund, continue to carry on the business of a nonbanking financial institution–


(i) for a period of three years from such commencement; or


(ii) for such further period as the Bank may, after recording the reasons in writing for so doing, extend,


subject to the condition that such company shall, within three months of fulfilling the requirement of the net owned fund, inform the Bank about such fulfilment:


Provided further that before making any order of cancellation of certificate of registration, such company shall be given a reasonable opportunity of being heard.


(7) A company aggrieved by the order of rejection of application for registration or cancellation of certificate of registration may prefer an appeal, within a period of thirty days from the date on which such order of rejection or cancellation is communicated to it, to the Central Government and the decision of the Central Government where an appeal has been preferred to it, or of the Bank where no appeal has been preferred, shall be final:


Provided that before making any order of rejection of appeal, such company shall be given a reasonable opportunity of being heard.


The decision was taken on two grounds. First, the statute specifically provides for an opportunity of personal hearing besides calling for an explanation. The amended provision is very particular that opportunity of being personally heard is mandatory, as the very amendment relates to finance companies, which are already carrying on business also. Not affording this opportunity would cripple the business of the petitioners.


Second, the amended section provides NBFCs sufficient time to enhance their NOF by carrying on business and comply with the notifications. For the aforesaid reasons, the orders by the RBI requires interference. Resultantly, the respondents (RBI authorities) are directed to restore the CoR of the petitioners and also extend the time given to the petitioners.


 


The Latest Judgement


The judgement pronounced as on 22nd April, 2019 was an appeal by the RBI to the aforementioned writ petitions. This latest decision which ruled in favour of the RBI had contentions on several grounds. However, all of them stem (invocation of sub-clauses) from the following four.


First, the RBI against the order in the writ petitions submitted that there is an appeal remedy available and the petitioners without availing such remedy have filed the petitions and as such petitions ought not to have been entertained.


Second that there were only four such companies (the ones above) who sought writ petitions and the remaining numbering more than 40 Non-Banking Financial Companies (NBFCs) have filed statutory appeals and therefore, the petitioners should be relegated to avail the appeal remedy.


Third, the present cancellation is owed to the petitioners’ failure to comply with the NOF conditions issued by the RBI. The notification dated 27.03.2015 specifying 200 lakhs as NOF for NBFCs to carry or commence operations has not been challenged by the petitioners. Therefore, if they do not achieved the said conditions, they cannot to continue to remain in business.


Fourth, it was submitted that the reasons assigned by the petitioners in the reply to the show cause notice were considered and the reasons not being sustainable were thus rejected.


 


Conclusion


This was a landmark hearing in the case of NBFCs with increasing pressure as of recent times. Many NBFCs may now apply for restoration of their licenses as per the present laws or file for statutory appeals. The case stands as an indication of the firm regulatory policies of the RBI amidst the environment of credit uncertainty. The last statement of the judgement also stands apt here. The brief sentence read, “Consequently connected miscellaneous petitions are closed.”


[1] https://economictimes.indiatimes.com/news/economy/finance/rbi-cancels-license-of-56-nbfcs-bajaj-finserv-gives-away-license/articleshow/50045835.cms?from=mdr


[2] https://www.businessinsider.in/indias-central-bank-has-scrapped-the-licenses-of-nearly-400-nbfcs-so-far-this-year/articleshow/65698193.cms


[3] https://www.firstpost.com/business/ilfs-dhfl-shocks-may-be-temporary-triggers-but-the-bad-news-for-indian-financial-markets-do-not-end-there-5248071.html


[4] https://enterslice.com/learning/wp-content/uploads/2019/02/Madras-high-court-Judgement-on-NBFC-License-Cancellation.pdf


[5] https://indiankanoon.org/doc/91785347/


	Safe in sandbox: India provides cocoon to fintech start-ups				
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-Kanakprabha Jethani


kanak@vinodkothari.com, finserv@vinodkothari.com


Published on April 22, 2019 | Updated as on April 22, 2020


Background


April 2019 marks the introduction of a structured proposal[1] on regulatory sandboxes (“Proposal”). ‘Sandboxes’ is a new term and has created a hustle in the market. What are these? What is the hustle all about? The following article gives a brief introduction to this new concept. With the rapidly evolving entities based on financial technology (Fintech) having innovative and complex technical model, the regulators have also been preparing themselves to respond and adapt with changing times. To harness such innovative business concepts, several developed countries and emerging economies have recognised the concept of ‘regulatory sandboxes’. Regulatory sandboxes or RS is a framework which allows an innovative startup involved in financial technologies to undergo live testing in a controlled environment where the regulator may or may not permit certain regulatory relaxations for the purpose of testing. The objective of proposing RS is to allow new and innovative projects to conduct live testing and enable learning by doing approach. The objective behind the framework is to facilitate development of potentially beneficial but risky innovations while ensuring the safety of end users and stability of the marketplace at large. Symbolically, RSs’ are a cocoon in which the startups stay for some time undergoing testing and growing simultaneously, and where it is determined whether they should be launched in the market. In furtherance to the recommendation of an inter-regulatory Working Group (WG) vide its Report on FinTech and Digital Banking1 , the Reserve Bank of India has released the draft ‘Enabling Framework for Regulatory Sandbox’ on April 18, 20192 . The final guidelines shall be released based on the comments of the stakeholders on the aforesaid draft.


Benefits and Limitations


Benefits:


    

  • Regulator can obtain a first-hand view of benefits and risks involved in the project and make future policies accordingly.
    • 

  • Product can be tested without an expensive launch and any shortcoming thereto can be rectified at initial stages.
    • 

  • Improvement in pace of innovation, financial inclusion and reach.
    • 

  • Firms working closely with RS’s garner a greater degree of legitimacy with investors and customers alike.
    • 



Limitations:


    

  • Applicant may tend to lose flexibility and time while undergoing testing.
    • 

  • Even after a successful testing, the applicant will require all the statutory approvals before its launch in the market.
    • 

  • They require time and skill of the regulator for assessing the complex innovation, which the regulator might not possess.
    • 

  • It demands additional manpower and resources on part of regulator so as to define RS plans and conduct proper assessment.
    • 



Emergence of concept of RS


The concept of RS emerged soon after the Global Financial Crisis (GFC) in 2007-08. It steadily gained prominence and in 2012, Project Catalyst introduced by US Consumer Financial Protection Bureau (CFPB) finally gave rise to the sandbox concept. In 2015, UK Government Office for Science exhibited the benefits of “close collaboration between regulator, institutions and FinTech companies from clinical environment or real people” through its FinTech Future report. In 2016, UK Financial Conduct Authority launched its regulatory sandbox. Emergence of RS in India In February 2018, RBI launched report of working group on FinTech and digital banking. It recommended Institute for Development and Research in Banking Technology (IDRBT) as the entity whose expertise could run RS in India in cooperation with RBI. After immense deliberations and research, RBI announced its detailed proposal on RS in April 2019. Some of the provisions of the proposal are described hereunder.


Who can apply?


A FinTech firm which fulfills criteria of a startup prescribed by the government can apply for an entry to RS. Few cohorts are to be run whereby there will be a limited number of entities in each cohort testing their products during a stipulated period. The RS must be based on thematic cohorts focusing on financial inclusion, payments and lending, digital KYC etc. Generally , 10-12 companies form part of each cohort which are selected by RBI through a selection process detailed in “Fit and Proper Criteria for Selection of Participants in RS”. Once approval is granted by RBI, the applicant becomes entity responsible for operating in RS. Focus of RBI while selecting the applicants for RS will be on following products/services or technologies:


Innovative Products/Services


    

  • Retail payments
    • 

  • Money transfer services
    • 

  • Marketplace lending
    • 

  • Digital KYC
    • 

  • Financial advisory services
    • 

  • Wealth management services
    • 

  • Digital identification services
    • 

  • Smart contracts
    • 

  • Financial inclusion products
    • 

  • Cyber security products Innovative Technology
    • 

  • Mobile technology applications (payments, digital identity, etc.)
    • 

  • Data Analytics
    • 

  • Application Program Interface (APIs) services
    • 

  • Applications under block chain technologies
    • 

  • Artificial Intelligence and Machine Learning applications
    • 



Who cannot apply?


Following product/services/technology shall not be considered for entry in RS:


    

  • Credit registry
    • 

  • Credit information
    • 

  • Crypto currency/Crypto assets services
    • 

  • Trading/investing/settling in crypto assets
    • 

  • Initial Coin Offerings, etc.
    • 

  • Chain marketing services
    • 

  • Any product/services which have been banned by the regulators/Government of India
    • 



For how long does a company stay in the cocoon?


A cohort generally operates for a period of 6 months. However, the period can be extended on application of the entity. Also, RBI may, at its discretion discontinue testing of certain entities which fails to achieve its intended purpose. RS operates in following stages:






S.No.
Stage
Time period
Purpose




1
Preliminary screening
4 weeks
The applicant is made aware of objectives and principles of RS.




2
Test design
3 weeks
FinTech Unit finalises the test design of the entity.




3
Application assessment
3 weeks
Vetting of test design and modification.




4
Testing
12 weeks
Monitoring and generation of evidence to assess the testing.




5
Evaluation
4 weeks
Viability of the project is confirmed by RBI






An alternative to RS


An alternative approach used in developing countries is known as the “test and learn” approach. It is a custom-made solution created by negotiations and dialogue between regulator and innovator for testing the innovation. M-PESA in Kenya emerged after the ‘test-and-learn’ approach was applied in 2005. The basic difference between RS and test-and-learn approach is that a RS is more transparent, standardized and published process. Also, various private, proprietary or industry led sandboxes are being operated in various countries on a commercial or non-commercial basis. They conduct testing and experimentation off the market and without involvement of any regulator. Asean Financial Innovation Network (AFIN) is an example of industry led sandbox.


Globalization in RS


A noteworthy RS in the Global context has been the UK’s Financial Conduct Authority (FCA) which has accepted 89 firms since its launch in 2016. It was one of the early propagators to lead the efforts for GFIN and a global regulatory sandbox. Global Financial Innovation Network (GFIN) is a network of 11 financial regulators mostly of developed countries and related organizations. The objective of GFIN is to establish a network of regulators, to frame joint policy and enable regulator collaboration as well as facilitate cross border testing for projects with an international market in view.


Final framework for RS


RBI introduced final framework[2] for the RS on August 13, 2019 which is almost on the same lines as the Proposal as mentioned above. However the RBI has relaxed the minimum capital requirement to Rs 25 lakhs in place of Rs. 50 lakhs as required under the draft framework with a view to expand the scope of eligible entities.


SEBI’s framework for RS


In May 2019, SEBI also came up with a discussion paper on RS for entities registered with SEBI under section 12 of SEBI Act. The framework was later on finalised in a board meeting of SEBI held in 2020. In line with the finalised framework, various SEBI regulations have also been amended to include a new chapter, allowing case-to-case based exemptions to entities operating in RS.


The SEBI framework is slightly different from the one prescribed by the RBI. SEBI has kept an open window for accepting applications under the RS framework, while the RBI will accept applications under theme-based cohorts. Further, RBI allows entities registered with it as well as other start-ups to apply for entry into RS. However, for the time being, SEBI has allowed only the entities registered under section 12 of SEBI Act to apply. Intermediaries that are registered under section 12 of SEBI Act are as follows:


    

  • stock broker
    • 

  • sub-broker
    • 

  • share transfer agent
    • 

  • banker to an issue
    • 

  • trustee of trust deed
    • 

  • registrar to an issue
    • 

  • merchant banker
    • 

  • underwriter
    • 

  • portfolio manager
    • 

  • investment adviser
    • 

  • 

    depository
    

    • 

  • 

    depository participant
    

    • 

  • 

    custodian of securities
    

    • 

  • credit rating agencies
    • 

  • any other intermediary associated with the securities market
    • 



In the due course of time, SEBI may allow applications by other entities not registered with it.


Conclusion


Regulatory sandboxes were introduced with a motive to enhance the outreach and quality of FinTech services in the market and promote evolution of FinTech sector. Despite certain limitations, which can be overcome by using transparent procedures, developing well-defined principles and prescribing clear entry and exit criteria, the proposal is a promising one. It strives to strike a balance between financial stability and consumer protection along with beneficial innovation. It Is also likely to develop a market which supports a regulated environment for learning by doing in the scenario of emerging technologies.


 


 


[1] https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=46843


[2] https://www.rbi.org.in/scripts/PublicationReportDetails.aspx?ID=938


 


	Extension of Ombudsman Scheme to remaining class of notified NBFCs				
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By Dibisha Mishra (dibisha@vinodkothari.com)


Updated as on April 26, 2019


Introduction


Reserve Bank of India (RBI), in its Statement on Development and Regulatory Policies[1] dated April 04, 2019, stated its intention to extend the same to the remaining notified classes of NBFCs as well, by the end of April, 2019.


Ombudsman Scheme for Non-Banking Financial Companies, 2018 (Scheme) on 23rd February, 2018[2] was introduced with the intent of curbing down the time, costs and complexities involved in complaint redressal mechanism for certain services rendered by non-banking financial companies (NBFC). The salient features of the Scheme worth taking note of has been explained in our previous article.[3] The Scheme covered within its ambit, all NBFCs registered with RBI, who are:


    

  • authorized to accept deposits; or
    • 

  • having customer interface, with assets size of Rs. 100 Crores or above, as on the date of the audited balance sheet of the previous financial year,
    • 



(hereinafter referred to as “notified classes of NBFCs”)


However, to start with, the Scheme was made applicable to deposit taking NBFCs only and the idea was to make it applicable on the other notified classes of NBFCs, once the same could gather some traction.


Subsequently, as per RBI’s recent statement in regard to increased applicability, a formal notification in this regard was expected to follow. The aforesaid has finally been notified vide. RBI’s notification dated April 26, 2019[4].


Considering the importance of the matter, in this article we will discuss all that the remaining notified classes of NBFCs must prepare for.


Applicability


As already stated the Scheme is applicable to all notified classes of NBFCs, however, the following classes of companies are excluded from its purview:


    

  • Non-banking Financial Company – Infrastructure Finance Company (NBFC-IFC);
    • 

  • Core Investment Company (CIC);
    • 

  • Infrastructure Debt Fund – Non-banking Financial Company (IDF-NBFC); and
    • 

  • A company under liquidation.
    • 



To do list for newly included entities


Upon notification of Scheme, the newly notified NBFCs will have to immediately take care of the following:


    

  1. Make the copy of the Scheme available on the website and also with the designated officer of the company for perusal in the office premises.
    2. 

  2. Display prominently in all its offices and branches:
    3. 



    

  • the purpose of the Scheme;
    • 

  • the contact details of the Ombudsman to whom the complaint is to be made by the aggrieved customer;
    • 

  • notice about the availability of the copy of Scheme with such designated officer.
    • 



    

  1.  Appoint Nodal Officers at Head/ Registered/ Regional/ Zonal Offices and inform all the Offices of the Ombudsman about the same.
    2. 

  2. Nodal Officers so appointed must be responsible for representing the company and furnishing information to the Ombudsman in respect of complaints filed against the NBFC.
    3. 

  3. Wherever more than one zone/ region of a NBFC is falling within the jurisdiction of an Ombudsman, designate one of the Nodal Officers as the ‘Principal Nodal Officer’ for such zones or regions
    4. 



Pre-Conditions for availing the Scheme by an aggrieved customer


A customer aggrieved by the acts of the company or its representatives can make an application under the Scheme, however, the following pre-conditions must be satisfied before making an application:


    

  1. Complaint must refer to any of the grounds mentioned under Clause 8 of the Scheme.
    2. 

  2. Customer must have filed a written representation to the respective NBFC regarding the grievance
    3. 

  3. Concerned NBFC must have rejected the complaint or the complainant must not have received any reply within one month of NBFC receiving the representation or the complainant must not have been satisfied with the reply given to him by the NBFC.
    4. 

  4. Not more than one year must have elapsed after the complainant received the unsatisfactory reply or where no reply was received, not later than one year and one month have elapsed after the date of representation to NBFC.
    5. 

  5. The complaint must not be in respect of the same cause of action which was settled or dealt with on merits by the Ombudsman in any previous proceedings whether or not received from the same complainant or along with one or more complainants or one or more of the parties concerned with the cause of action;
    6. 

  6. The complaint must not pertain to the same cause of action, for which any proceedings before any court, tribunal or arbitrator or any other forum is pending or a decree or Award or order has been passed by any such court, tribunal, arbitrator or forum;
    7. 

  7. The complaint must not be frivolous or vexatious in nature;
    8. 

  8. The complaint must fall under the period of limitation prescribed under the Indian Limitation Act, 1963 for such claims; and
    9. 

  9. The complainant must have filed along with the complaint, copies of the documents, if any, which he intends to rely upon, and a declaration that the complaint is maintainable under Clause 9-A.
    10. 



Roadmap while availing the Scheme


Once the complainant is satisfied that the aforesaid conditions are satisfied, it will have to take the following route to make the application:


    

  1. Make a complaint, as per Annex II of the Scheme, to the Ombudsman under whose jurisdiction the concerned NBFC falls. The complaint can be made either by the aggrieved customer himself or by his authorized representative;
    2. 

  2. Where extra clarification or documents is required from the customer, the same is to be provided;
    3. 

  3. Ombudsman shall send a copy of the complaint to the branch or registered office of the NBFC named in the complaint, under advice to the designated Nodal Officer (NO);
    4. 

  4. Ombudsman may require NBFC to provide information or furnish certified copies of any document relating to the complaint which is or is alleged to be in its possession;
    5. 

  5. Endeavour should be made to promote a settlement of the complaint by agreement between the complainant and the NBFC through conciliation or mediation. He/ she may convene a meeting of NBFC and the complainant together to promote an amicable resolution;
    6. 

  6. If complaint is still not settled by agreement, Ombudsman shall pass an award of either allowing or rejecting the case after giving both parties an opportunity of being heard;
    7. 

  7. The Ombudsman shall take into account the evidence being placed, the underlying principles on which the practices, directions, instructions and guidelines issued by the Reserve Bank from time to time and such other factors which in his opinion are relevant to the complaint;
    8. 

  8. A copy of the Award shall be sent to the complainant and the NBFC free of cost;
    9. 

  9. An Award shall take effect only when the complainant furnishes to the NBFC and the Ombudsman concerned within a period of 30 days from the date of receipt of copy of the Award, a letter of acceptance of the Award in full and final settlement of his claim;
    10. 

  10. Unless an appeal is filed, the NBFC shall then comply with the Award and intimate compliance of the same to the complainant and the Ombudsman;
    11. 

  11. Award or appeal rejection can be appealed against within 30 days of receipt of such communication.
    12. 



Conclusion


The Ombudsman scheme plays a very important role in the banking system. Considering the growing importance of NBFCs in the country, introduction of this became essential. However, effectiveness of any initiative depends on how well the beneficiaries of the same are informed; same will be the case with this Scheme as well. This Scheme will turn out to be fruitful only if the same borrowers are educated about this. RBI must also take some initiative to achieve that as well


[1] https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR23654E42140EAC6347D1A9D08AF62F5BF2E9.PDF


[2] https://rbidocs.rbi.org.in/rdocs/Content/PDFs/NBFC23022018.pdf


[3] https://vinodkothari.com/2018/02/rbis-ombudsman-storm-tough-road-ahead-for-nbfcs/


[4] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11546&Mode=0


	RBI’s 12th February circular: The Last Word Becomes the Lost World				
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RBI’s 12th February circular:


The Last Word Becomes the Lost World


Abhirup Ghosh (abhirup@vinodkothari.com)


The 12th February 2018 circular of the Reserve Bank of India (RBI)[1] (Circular), arguably one of the sternest of measures requiring banks to stop ever-greening bad loans, and resolve them once for all, with a hard timeline of 6 months, or mandatorily push the matter into insolvency resolution, was aimed at being the last word, overriding several of the previous measures such as CDR, JLF, SSSS-A, etc. However, with the Supreme Court striking it down, in the case of Dharani Sugars and Chemicals Limited vs Union of India and Ors.[2], the mandate of the RBI in directing banks with how to deal with stressed loans has fallen apart. While the SCI has used very technical grounds to quash the 12th Feb circular, the major question for the RBI is whether it should continue to micro-manage banks’ handling of bad loans, and the major question for the banks is when will they grow up into big boys and stop expecting RBI to tell them how to clean up the mess on their balance sheet. Read more  →