Online Authentication of Aadhaar: Exclusive Club, Members Only!

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-Archisman Bhattacharjee (finserv@vinodkothari.com)

Introduction

The Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits, and Services) Act, 2016 (‘Aadhaar Act’) was introduced with a clear vision: to ensure efficient, transparent, and targeted delivery of subsidies, benefits, and services, fostering good governance. While its preamble underscores these fundamental objectives, Aadhaar’s role has expanded far beyond its original scope, becoming a cornerstone in the banking and NBFC sectors. As outlined in paragraph 16 of the RBI’s KYC Master Directions, Aadhaar now plays a central role in the Know Your Customer (KYC) process, a critical compliance measure for both prospective and existing borrowers.

A key aspect of KYC is the verification of the authenticity of customer documents, a process governed by specific guidelines. 

When it comes to Aadhaar-based KYC, there are two recognized methods: 

  1. Online Authentication and 
  2. Offline Verification 

The Offline Verification process is relatively straightforward (at least on paper), involving the verification of a Digital Signature Certificate (DSC) attached to the downloaded masked Aadhaar document. Importantly, offline verification can be conducted by all RBI-regulated entities for conducting KYC verification.

In contrast, Online Authentication, while offering a more robust and reliable method of KYC verification (refer FAQ 1 of UDIAI), is subject to stricter eligibility conditions and compliance requirements. Not all entities are permitted to perform Online Authentication (discussed in later parts of this article). While lenders may prefer Online Authentication due to its real-time verification capabilities and greater assurance of data authenticity, the regulatory fetters surrounding eligibility must be carefully navigated.

Given the evolving regulatory framework and industry practices, it is critical to develop a clear understanding of how Online Authentication operates and who is permitted to undertake it.

What is Online Authentication

The term authentication has been defined under Section 2(c) of the Aadhaar Act as a process “by which the Aadhaar number along with demographic information or biometric information of an individual is submitted to the Central Identities Data Repository for its verification and such Repository verifies the correctness, or the lack thereof, on the basis of information available with it”. Further The Aadhaar (Authentication and Offline Verification) Regulations, 2021 (‘Aadhaar Rules’) expands upon the process of carrying out online authentication. Rule 4 of the Aadhaar Rules states that:

“ Authentication may be carried out through the following modes:

(a) Demographic authentication: The Aadhaar number and demographic information of the Aadhaar number holder obtained from the Aadhaar number holder is matched with the demographic information of the Aadhaar number holder in the CIDR.

(b) One-time pin based authentication: A One Time Pin (OTP), with limited time validity, is sent to the mobile number and/ or e-mail address of the Aadhaar number holder registered with the Authority, or generated by other appropriate means. The Aadhaar number holder shall provide this OTP along with his Aadhaar number during authentication and the same shall be matched with the OTP generated by the Authority.

(c) Biometric-based authentication: The Aadhaar number and biometric information submitted by an Aadhaar number holder are matched with the biometric information of the said Aadhaar number holder stored in the CIDR. This may be fingerprints-based or iris-based authentication or other biometric modalities based on biometric information stored in the CIDR.

(d) Multi-factor authentication: A combination of two or more of the above modes may be used for authentication.”

The stated modes of how the process of online authentication is required to be carried out is quite descriptive and does not require any further explanation. However one thing is certain that, based on  the definition of the term “authentication”, obtaining the Aadhaar number becomes a mandate. The KYC Master Directions under para 17 recognizes one such mode of authentication as OTP based online authentication.  

Who can carry out Online Authentication

Considering that the authentication process and the e-KYC data obtained through Aadhaar may include biometric information, such information constitutes “sensitive personal data” under the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 (SPDI Rules). While the Digital Personal Data Protection Act, 2023 (DPDPA) does not expressly categorize any particular type of data as “sensitive personal data,” it is important to note that the Supreme Court’s judgment in the Aadhaar judgement recognized biometric data associated with Aadhaar as sensitive in nature. Given that the DPDPA itself has its origins in the principles laid down by the Aadhaar judgment, it is our view that such data should continue to be treated with a higher standard of care.

Without delving into the subject in great detail, it is sufficient to highlight that Aadhaar-based authentication exposes individuals to considerable risks of harm, particularly in the event of a data breach. This risk is exacerbated by the fact that other identifiers such as telephone numbers, PAN cards, and other financial data are often linked to an individual’s Aadhaar number. Consequently, possessing access to an individual’s full Aadhaar number may subject such an entity to considerable risk (including legal and litigation risk) in case proper security safeguards are not taken by such an organization. Usually these heightened data sensitivity concerns would not be present in case KYC verification is conducted through use of masked Aadhaar, i.e via Offline Verification.

Given the heightened sensitivity of Aadhaar information, it is imperative that, beyond compliance with technical security safeguards, the right to carry out Aadhaar authentication be restricted only to entities that have demonstrated robust security frameworks. Imbibing this philosophy, the Aadhaar Act has restricted access to Aadhaar number only to a few entities and these entities are known as “requesting entities” as defined under Section 2(u) of the Aadhar Act. From the context of Financial Sector Entities these requesting entities would be required to be a KUA/Sub-KUA (discussed in later parts of this article). 

Online authentication and KYC

Under paragraph 16(a)(ii) of the KYC Master Directions, an Aadhaar number can only be collected by entities that have been notified under Section 11A of the Prevention of Money-laundering Act, 2002 (PML Act). Further, Section 4(4)(b) of the Aadhaar Act stipulates that “authentication” can only be performed by an entity that is:

  1. either permitted to offer authentication services under any other law made by Parliament, or
  2. is seeking authentication for purposes as may be prescribed by the Central Government in consultation with the UIDAI, and in the interest of the State. 

Accordingly, a combined reading of Section 11A of the PML Act and the Aadhaar Act makes it evident that for RBI regulated entities [Except for banks, which are permitted to obtain Aadhaar numbers under paragraph 16(a)(i) of the KYC Master Directions and the proviso to Section 11A of the PMLA Act, no other entities may carry out Aadhaar authentication without being specifically notified by the Central Government.] only those entities which have been notified by the Central Government are authorized to carry out Aadhaar-based authentication by collecting Aadhaar numbers.

Under para 17 of the KYC Master Directions , OTP-based e-KYC authentication has been recognized as a valid mode of Aadhaar authentication. This form of authentication is also recognized under the Aadhaar (Authentication and Offline Verification) Regulations, 2021 (“Aadhaar Regulations”), wherein such authentication can be carried out by either a KUA (KYC User Agency) or an AUA (Authentication User Agency).

The Aadhaar Regulations further introduce the concept of a “Sub-KUA”, which is defined under Rule 2(ob) of Aadhaar rules as a requesting entity that utilizes the infrastructure of a licensed KUA to perform online Aadhaar authentication. Under Rule 16, it is stipulated that an e-KYC record obtained by a KUA can only be shared with its Sub-KUAs and cannot be transferred further to any other entity. Additionally, Rule 14(ga) of the Aadhaar Regulations mandates that a KUA must obtain prior approval from UIDAI before onboarding any third-party entity as a Sub-KUA.

Reference is also drawn to UIDAI Circular 2 of 2025 which discusses Sub-AUA and Sub-KUA application form and joint undertaking. The said documents specify that under the head “Category of Sub-KUA and Sub-AUA“, eligible entities include those “permitted to offer authentication services under Section 11A of the Prevention of Money-laundering Act, 2002 by virtue of being a reporting entity.”. A similar requirement has also been provided under the AUA/KUA Application Form.

In view of the above, it becomes clear that for any RBI-regulated entity (i.e., entities to whom the KYC Master Directions apply) wishing to onboard customers through OTP-based Aadhaar e-authentication, the following conditions must be satisfied:

  1. the entity must be registered either as a KUA or as a Sub-KUA with UIDAI; 
  2. the entity must be notified by the Central Government under Section 11A of the PML Act, thereby being authorized to collect Aadhaar numbers and conduct authentication.

However, it may be noted that in practice, the recognition processes under Section 11A of the PML Act and by UIDAI typically go hand in hand. For entities seeking notification under Section 11A of the PML Act, prior recognition by UIDAI, confirming the entity’s capability to carry out Aadhaar authentication is generally a prerequisite. This position is supported by Circular No. F.No.P-12011/7/2019-ES Cell-DOR issued by the Government of India, Ministry of Finance, Department of Revenue.

Conclusion

In today’s dynamic financial landscape, Aadhaar-based KYC—whether through online authentication or offline verification has become an indispensable tool for streamlining customer onboarding and ensuring regulatory compliance. However, the regulatory framework surrounding Aadhaar authentication remains stringent for good reason: it seeks to strike a delicate balance between enabling ease of business and safeguarding the sensitive personal information of individuals.

While offline verification using masked Aadhaar offers a universally accessible and relatively lower-risk method for KYC compliance by RBI-regulated entities, online authentication—though more robust and efficient—comes with heightened obligations. Only entities meeting the twin conditions of being recognized under Section 11A of the PML Act and being duly registered as a KUA or Sub-KUA with UIDAI are permitted to undertake online Aadhaar authentication. This dual-layered recognition ensures that only entities with demonstrably strong security practices are entrusted with the collection, storage, and processing of Aadhaar-related sensitive data.

As technology evolves and customer expectations shift toward faster, seamless digital experiences, regulated entities must not only prioritize compliance but also cultivate a strong internal culture of data protection and risk mitigation. Institutions seeking to leverage Aadhaar-based online authentication must therefore invest in robust data security frameworks, maintain strict internal governance standards, and ensure that their authentication practices align with both the letter and spirit of the law.

SEBI Securitisation Regulations: Track Record, Risk retention and Investment size among several new requirements

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– Dayita Kanodia (finserv@vinodkothari.com)

Requirements to apply to all listed issuances, from financial and non-financial issuers

Below are the major highlights of the SDI amendment regulations:

SEBI on May 5, 2025 has issued the SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) (Amendment) Regulations. 2025. It may be noted that the SDI Regulations, was first notified on 26th May, 2008, after public consultation on the proposed regulatory structure with respect to public offer and listing of SDIs, following the amendments made in the SCRA. The Regulations, originally referred to as the SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008, were subsequently renamed as SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008, w.e.f. 26th June, 2018.

In order to ensure that the regulatory framework remains in accordance with the  recent developments in the securitisation market, a working group chaired by Mr. Vinod Kothari was formed to suggest changes to the 2008 SDI regulations. Based on the suggestions of the working group and deliberations of SEBI with RBI, the amendment has been issued. The amendment primarily aims to align the SEBI norms for Securitised Debt Instruments (SDIs) with that of the RBI SSA Directions which only applies in case of securitisations undertaken by RBI regulated entities.

It can be said that these amendments are not in conflict with the SSA Directions and therefore for financial sector entities while there may be some additional compliance requirements if the securitisation notes are listed, there are as such no pain points which discourages such entities to go for listing. Further, certain requirements such as MRR, MHP, minimum ticket size have only been mandated for public issue of SDIs and therefore are not applicable in case of privately placed SDIs.

This article discusses the major amendments in the SDI Framework.

Major Changes

Definition of debt

The amendment makes the following changes to the definition of debt:

  1. All financial assets now covered – In order to align the SDI Regulations with the RBI SSA Directions, the definition of ‘debt’ has been amended to cover all financial assets as permitted to be originated by an RBI regulated originator. Further, this is subject to the such classes of assets and receivables as are permissible under the RBI Directions. Note that the RBI SSA Directions does not provide a definition of ‘debt’ or ‘receivables’, however, provides a negative list of assets that cannot be securitised under Para 6(d) of the RBI SSA Directions.
  2. Equipment leasing receivables, rental receivables now covered under the definition of debt.
  3. Listed debt securities – The explicit mention of ‘listed’ debt securities may remove the ambiguity with regard to whether SDIs can be issued backed by underlying unlisted debt securities, and limits the same to only listed debt securities. The second proviso to the definition further clarifies that unlisted debt securities are not permitted as an underlying for the SDIs.
  4. Trade receivables (arising from bills or invoices duly accepted by the obligors) – As regards securitisation of trade receivables, acceptance of bills or invoices is a pre-condition for eligibility of the same as a debt under the SDI Regulations.

‘Acceptance’, in literal terms, would mean acknowledgement of the existence of receivables. Under the Negotiable Instruments Act, 1881, ‘acceptance’ is not defined, however, ‘acceptor’ is defined to mean the drawee of a bill having signed his assent upon the bill, and delivered the same, or given notice of such signing to the holder or to some person on his behalf.

Note that a bill or invoice may either be a hard copy or in digital form. In the context of digital bill, acceptance through signature is not possible; therefore, existence of no disputes indicating a non-acceptance, should be considered as a valid acceptance.

  1. Such Debt/ receivable including sustainable SDIs as may be notified by SEBI – In addition to the forms of debts covered under the SDI Regulations, powers have been reserved with SEBI to specify other forms or nature of debt/ receivable as may be covered under the aforesaid definition. Further, the clause explicitly refers to sustainable SDIs, for which a consultation had been initiated by SEBI in August 2024[1].

Conditions governing securitisation

SEBI has mandated the following conditions to be met for securitisation under the SDI Framework:

  1. No single obligor to constitute more than 25% of the asset pool – This condition has been mandated with a view to ensure appropriate diversification of the asset pool so that risk is not concentrated with only a few obligors. However, it may be noted here that the RBI regulations does not currently prescribe any such obligor concentration condition. Only in case of Simple, Transparent and Comparable securitisation transactions, there is a mandate requiring a maximum concentration of 2% of the pool for each obligor.

However, SEBI has retained the power to relax this condition. In our view, this may be relaxed by SEBI for RBI regulated entities considering that RBI does not prescribe for any such condition.

  1. All assets to be homogenous – This is yet another provision which is only required by RBI in case of STC transactions. However, even in the context of RBI regulations, what exactly constitutes a homogenous asset is mostly a subjective test. SEBI has defined homogenous to mean same or similar risk or return profile arising from the proposed underlying for a securitised debt instrument. This has made the test of homogeneity even more subjective. For the purpose of determining homogeneity, reference can be made to the homogeneity parameters laid out by RBI in case of Simple, Transparent and Comparable securitization transactions.
  2. SDIs will need to be fully paid up-  The SDIs will need to be fully paid up, i.e., partly paid up SDIs cannot be securitised. 
  3. Originators to have a track record of 3 financial years: Originators should be in the same business of originating the receivables being securitised for a period of at least three financial years. This restricts new entities from securitising their receivables. However, this condition in our view should only apply to business entities other than business entities, complying with this condition does not seem feasible. 
  4. Obligors to have a track record of 3 financial years– The intent behind this seems to to reduce the risk associated with the transaction as the obligors having a track record in the same operations which resulted in the creation of receivables being securitized. However, this condition cannot be met in most types of future flow securitisation transactions such as toll road receivables and receivables from music royalties.

SEBI has made it clear that the last two conditions of maintenance of track record of 3 years for originators and obligors will not apply in case of transactions where the originators is an RBI regulated entity.

Amendments only applicable in case of public issue of SDIs

The following amendments will only be applicable if the SDIs are issued to the public. Here, it may be noted that the maximum number of investors in case of private placement of SDIs is limited to 50.

Minimum Ticket Size

The Erstwhile SDI Regulations did not provide for any minimum ticket size. However, with a view to align the SDI regulations with that of RBI’s SSA Direction, a minimum ticket size of Rs. 1 crore has been mandated in case of originators which are RBI regulated as well as of non-RBI regulated entities. It may however be noted that the minimum ticket size requirement has only been introduced in case of public offer of SDIs. Further, in cases with SDIs having listed securities as underlying, the minimum ticket size shall be the face value of such listed security.

Securitisation is generally perceived as a sophisticated and complex structure and therefore the regulators are not comfortable in making the same available to the retail investors. Accordingly, a minimum ticket size  of Rs. 1 Crore has been mandated for public issue of SDIs. In case of privately placed SDIs, the issuer will therefore have the discretion to decide on the minimum ticket size. However, since the RBI also mandates a minimum ticket size of Rs. 1 Crore, financial sector entities will need to adhere to the same.

Here, it is also important to note that in case of public issue of SDIs with respect to originators not regulated by RBI, SEBI has made it clear that the minimum ticket size of Rs. 1 Crore should be seen both at initial subscription as well as at the time of subsequent transfers of SDIs. However, nothing has been said for subsequent transfers in cases where the originator is a RBI regulated entity. The RBI SSA Directions also requires such minimum ticket size of Rs. 1 Crore to be seen only at the time of initial subscription. This in many cases led to the securitisation notes being broken down into smaller amounts in the secondary market.

In the absence of anything mentioned for RBI regulated entities, it can be said that there is no change with respect to the ticket size for RBI regulated entities even in the case of publicly issued SDIs which should be seen only at the time of initial subscription.

It is worth mentioning that under the SSA Directions of RBI requires that in case of transactions carried out outside of the SSA Directions (the transactions undertaken by non-RBI regulated entities), the investors which are regulated by RBI have to maintain full capital charge. This therefore discourages Banks from investing in securitisation transactions which are carried out outside the ambit of the SSA Directions.  Therefore, both retail investors as well RBI regulated entities will not be the investors which will hinder liquidity and overall growth of the SDI market.

Minimum Risk Retention

Aligning with RBI’s SSA Direction, a Minimum Risk Retention (MRR) requirement for public issue of SDIs has been mandated requiring retention by the originator of a minimum of

  1. 5% in case the residual maturity of the underlying loans is upto 24 months and
  2. 10% in case residual maturity is more than 24 months

Further, in case of RMBS transactions, the MRR has been kept at 5% irrespective of the original tenure.

SEBI has aligned the entire MRR conditions with that of the RBI SSA Directions, including the quantum and form of maintenance of MRR. Accordingly, for financial sector entities, there is no change with respect to MRR.

By introducing MRR in the SDI Regulations, non-financial sector entities will be held to similar standards of accountability, skin-in-the-game, reducing the risks associated with the originate-to-sell model and aligning their practices with those of financial sector originators. This will strengthen investor confidence across the board and mitigate risks of moral hazard or lax underwriting standards.

It may however be noted here that in case of non financial originators, there could be situations where retention is being maintained in some form (for example in leasing transactions, the residual value of the leased assets continues to be held by the originator) and therefore such originators will be required to hold MRR in addition to the retention maintained.

Minimum Holding Period

SEBI has aligned the MHP conditions as prescribed under the SSA directions for all RBI regulated entities. Accordingly, there is no additional compliance requirement for RBI regulated entities. For receivables other than loans, the MHP condition will be specified by SEBI.

Exercise of Clean up Call option by the originator

The provisions for the exercise of the clean up call option has been aligned with those prescribed under the SSA Directions. These provisions have been introduced under the chapter applicable in case of public offer of SDIs. However, the SDI Regulations always provided for the exercise of clean up call option and what has been now introduced in simply the manner in which such an option has to be exercised.

In case of private placement of SDIs, can the clean up call option be exercised at a threshold exceeding 10% ?

Although the provisions for the exercise of clean up call options has been made a part of chapter applicable in case of public offers, it should however be noted that these provisions are also a part of the RBI SSA Directions. Accordingly, financial sector originators are bound by such conditions even if they go for private placement of SDIs. Further, even in the case of the non-financial sector originator, clean up call is simply the clean up of the leftovers when they serve no economic purpose. Therefore, in our view, exercising clean up calls at a higher threshold should not arise.

Other Amendments

  1. Norms for liquidity facility aligned with that of RBI regulations
  2. All references to the Companies Act 1956 has been changed to Companies Act 2013
  3. Chapter on registration of trustees has been removed and reference has been made to SEBI (Debenture Trustees) Regulations, 1993
  4. Disclosure requirements for the originator and the SPDE have been prescribed; however the disclosure formats are yet to be issued by SEBI.
  5. Public offer of SDIs to remain open for a minimum period of 2 working days and upto a maximum of 10 working days.

Amendments proposed in the SEBI(LODR) Regulations

There are primarily two regulations which govern the listing of SDIs:

  1. SEBI SDI Regulations
  2. SEBI LODR Regulations

The following amendments have been proposed in the LODR regulations:

  1. SCORES registration to be taken at the trustee level
  2. Outstanding litigations, any material developments in relation to the originator or servicer or any other party to the transaction which could be prejudicial to the interests of the investors to be disclosed on an annual basis.
  3. Servicing related defaults to be disclosed on an annual basis.

[1] Read an article on the concept of sustainable SDIs at – https://vinodkothari.com/2024/09/sustainable-securitisation-the-next-in-filling-sustainable-finance-gap-in-india

NAME THEM ALL: SEBI reiterates mandatory disclosure of all promoter group entities in shareholding pattern, regardless of shareholding

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Lavanya Tandon, Senior Executive | corplaw@vinodkothari.com

Through the updated SEBI FAQs on LODR Regulations rolled out on April 23, 2025, SEBI has yet again clarified that  listed entities are required to disclose the names of all entities forming part of promoter / promoter group (P/PG), irrespective of any shareholding in the listed entity in the quarterly reporting of shareholding pattern to the stock exchanges. (FAQ no. 19 of section II)

Regulation 31(4) of LODR (inserted  via SEBI (LODR) (Sixth Amendment) Regulations, 2018) clearly mandates all entities falling under promoter and promoter group to be disclosed separately in the shareholding pattern. However, inspite of this clear mandate, as a matter of practice, India Inc seemingly has decided to disclose names of only such PGs who have shareholding in the company. With this reiteration of regulators expectation in its FAQ, this is the sign for the listed entities to buckle up and collate the entire list of PGs, irrespective of shareholding, for disclosure in the shareholding pattern (next disclosure due in June, 2025) 

It should be noted that a complete list of P/PG complements the listing of related parties as one of the elements of the definition of related party is “any person or entity forming a part of the promoter or promoter group of the listed entity”.

SEBI’s persistence requiring disclosure of complete list of PG

Since the longest time now (first through reg 31A and then through reg 31(4) among others), SEBI has been stressing in every way the requirement of disclosing the complete list of PG, irrespective of their shareholding.  Below are the instances where SEBI has identified the practice / clarified its position, over and over again. 

  1. Consultative Paper on re-classification of P/PG entities and disclosure of promoter group entities in the shareholding pattern dated Nov 23, 2020 

While Reg 31 of SEBI (LODR) Regulations, 2015 mandates that all entities falling under promoter and promoter group shall be disclosed separately in the  shareholding  pattern,  there  have  been  cases  where listed companies have not been disclosing names of persons in promoter(s)/ promoter group who hold ‘Nil’ shareholding. There is therefore a need for further clarification in this regard to the listed companies

  1. NSE FAQs on Disclosure of holding of specified securities and Holding of specified securities in dematerialized form dated Dec 14, 2022

Q6. Can the name of the promoter be removed from the Shareholding Pattern during the Quarter in case the Shares are transferred/sold? 

The name of the promoter can be removed only after seeking approval of Reclassification from the Exchange. Meanwhile Companies are requested to show the promoters/promoter group with nil shareholding till the approval for Reclassification is granted from Exchange. 

  1. SEBI Circular on disclosure of holding of specified securities in dematerialized form dated March 20, 2025 

Table II of the shareholding pattern has been amended as under: i. A  footnote  has  been  added  to  the table II that provides  the  details  of  promoter  and promoter group with shareholding “NIL”

Getting re-classified to stop disclosure – the only way

In the matter of Jagjanani Textiles Limited, upon transferring the entire shareholding, the name of a PG entity was not disclosed in the P/PG category; rather disclosed in the public category. SEBI observed this as a violation of Reg 31(4).  [See para 12 of the Order]

“12. It is observed that the promoter group entities of Noticee 1 i.e. Noticee 5 and 3 had acquired 2,94,000 shares and 5,51,424 shares during the quarter ended March 2013 and March 2014 respectively and since then both the Noticee 5 and 3 had been the shareholders of the Noticee 1 till the date of filing of DLoF i.e. April 10, 2023 except during the quarter ended September 2014 to June 2015 w.r.t the Noticee 5 where she ceased to be the shareholder. In this regard, it is observed that in terms of Regulation 31(4) of LODR Regulations, all entities falling under promoter and promoter group are required to be disclosed separately in the shareholding pattern appearing on the website of all stock exchanges having nationwide trading terminals where the specified securities of the entities are listed, in accordance with the formats specified by the Board. It is therefore alleged that both the Noticee 5 and 3 had been wrongly disclosed as Public shareholder during the aforesaid period. Further, it is observed that the Noticee 1 had confirmed to rectify the error in the shareholding pattern filed for the quarter ended June 30, 2023”

Where an entity not holding any shares in the listed entity wants to stop disclosing its name in the shareholding pattern – the only way is to apply for reclassification u/r 31A and get such approval from the stock exchange. Until such approval is obtained, one needs to disclose its name in the P/PG category.  

Our related resources on the topic

  1. SEBI clarifies on critical matters arising from LODR 3rd Amendments & Master Circular
  2. SEBI revisits the concept of Promoter and Promoter Group
  3. Making one’s way out – Promoter & Promoter Group
  4. Classification out of promoter category under Listing Regulations

 

Balancing between Bling & Business: RBI proposes new Gold Lending rules

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– Team Finserv | finserv@vinodkothari.com

Genesis of the change

The RBI on September 30, 2024, flagged several concerns in gold lending practices of financial entities. Further, there were separate guidelines for banks and NBFCs leading to regulatory arbitrage and operational ambiguity. On April 09, 2025, the RBI introduced the Reserve Bank of India (Lending Against Gold Collateral) Directions, 2025 (Draft Directions).

 The Draft Directions intend to:

  1. Harmonise guidelines w.r.t. gold lending across all REs.
  2. Address previous observations raised by RBI in lending practices and plug any loopholes.

In this write-up, we highlight the major changes for lenders, and particularly for NBFCs (The same are subsequently elaborated in the article).

Read more →

SOSTRA: The New shastra of liquidating Non-performing loans

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-Team Finserv (finserv@vinodkothari.com)

“Only the few know the sweetness of the twisted apples” – Sherwood Anderson

If securitisation of stressed assets abbreviates as SOSTRA, here is the new shastra (tool) for NPA clean-up from the financial system. On January 11, 2024, while speaking at the Centre for Advanced Financial Learning (CAFRAL)[1], then RBI Governor Shaktikanta Das announced that the RBI is in the process of formulating a framework for the securitisation of stressed assets based on the public comments received on the Discussion Paper on Securitisation of Stressed Assets Framework, released by the RBI on January, 2023.

Based on the comments received on the above mentioned discussion paper and as  proposed in the Statement on Developmental and Regulatory Policies dated April 09, 2025, the RBI has now released a draft framework for securitisation of non-performing assets. This is a major improvisation over the draft originally released in January 2023.

Some of the highlights of the new Draft Directions are:

  • Banks as well as NBFCs may securitise pool of NPAs;
  • The pool shall consist entirely of stressed loans, but upto 10% of the pool may be assets which are standard (that is, more than 1 but upto 89 DPD). That is, originators may add a deal-sweetener. However, re-performing loans (that is, those that earned the tag of an NPA due to past default history, which is not completely washed out) may be securitised;
  • To ensure that the pool does not have a significant concentricity, the Herfindahl Index of the loan pool should be within 0.3;
  • The originator may optionally engage the services of a resolution manager fulfilling such eligibility criteria as mentioned under the Draft Directions;
  • The originator may retain upto 20% exposure in the pool (that is, first loss piece, plus 10%, not exceeding 20% in total);
  • Securitisation notes acquired by the buyer will get a standard status to begin with, but will be subject to valuation and provisioning requirements. The provisioning requirement is based on a linear amortisation of 20% each year, and aims at splitting the total provision to the tranches in the ratio of risk weights. Highest provisioning will be taken by the equity tranche, and lowest by the senior tranche.
  • The SPV needs to ensure that the investors are not related parties of the borrower or disqualified in terms of Section 29A of the Insolvency and Bankruptcy Code, 2016
  • For the purpose of ticket size the Directions have referred to the SSA Directions hence the minimum ticket size for issuance of securitisation notes shall be Rs. 1 crore.

Team VKC notes: In the 2023 draft, team VKC submitted clause-wise comments to the RBI and also gave a presentation to the RBI’s team. Many of our recommendations have been accepted by the RBI.

In our view, the proposed draft Directions provide an effective solution to clean up the NPA clogs, particularly in case of retail loans.

The key highlights of the proposed framework are illustrated below:

Existing framework:

At present, in India, there exists a framework for securitisation of standard assets only which are regulated through the Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021’ (‘SSA Directions’), which deals with standard asset securitisation. Under the SSA Directions, the definition of standard assets does not include non-performing loans, i.e., only those assets with a delinquency up to 89 days, would qualify for securitisation under the SSA directions.

On the other hand, in case of stressed loans, the TLE  framework has always been permissive. That is, stressed loans may be sold by way of bilateral transactions.

Now, the present draft directions, Reserve Bank of India (Securitisation of Stressed Assets) Directions, 2025 (‘Draft Directions’) has been issued to facilitate securitisation of assets with a delinquency of more than 89 days, i.e stressed loans. The RBI proposed to introduce a framework for the purpose of securitisation of stressed loans back in 2023. The RBI had published a discussion paper for public consultation titled  Discussion Paper on Securitisation of Stressed Assets Framework, whereunder the paper discussed the mechanism of securitisation of stressed assets. Vide the Statement on Developmental and Regulatory Policies the RBI announced its intention to come out with a draft framework for Securitisation of Stressed Assets and accordingly the draft framework for public consultation towards the same has been published on 09 April 2025, with comment period upto 12th May, 2025.

Comparative Analysis – SOSTRA, ARC and SSFs

BasisSOSTRAAsset Reconstruction CompaniesSpecial Situation Funds
Global contextSecuritisation of NPLs happens all over the world; in some cases (home loans in particular), with State support. Globally, AMCs were envisaged, normally with a sunset, to tide over a crisis. Essentially for resolving systemic generation of NPLsFor driving investments into stressed loans, essentially with a view to the underlying collateral; mostly with significant upside opportunities
Indian contextSecuritisation is currently allowed for standard assets only; draft Directions now permit securitisation of NPLs, including, within a limit of 10%, stressed but standard assets27 ARCs exist; however, most of them focus on asset aggregation, IBC resolution etc. Relatively less active in retail loan spaceCumulative Data as at Dec 31, 2024: Commitments raised-2048 cr.; Funds Raised- 1531 cr; Investment made-1510 crComparatively less popular
Economic driversUnlocking the inherent value of NPLs, particularly those which are still giving regular cashflows. Pertinent in case of retail poolsResolution abilities of the ARC, in particular, sec 8 and 13 of the SARFAESI Act, legal powers and IBCInvestment returns based on the underlying collateral
Minimum Ticket Size For investment- min. ₹1 crore per investor  (similar to SSA Directions)No statutory ticket size, but given limited number of investors, mostly aligned with the deal size.Min. Investment by an Investor Rs 10 crores.
Nature of the investmentCredit-enhanced, mostly rated investment in securitisation notes, backed by cashflows expected from the pool of securitised loans. Distributions happen on a waterfall mechanismInvestment in security receipts; no credit enhancements. Distributions happen as and when collections are done.Pooled investment by investors into a fund, which in turn buys multiple stressed loans. Subordination structures currently not permitted.
Skin-in-game for the originatorNo originator risk retention stipulated; however, tranching/ credit-enhancement call for originator risk retention. Maximum originator retention 20%.No minimum originator retention; ARC investment minimum 15% of originator’s share, or 2.5% of total SRs, w.e.h. SRs are pari passu – hence, subordination is not common/permittedDirection acquisition of NPLs by the fund does not seem possible under the structure, except under Clause 58 of TLE Directions (resolution plans or JLF decision)
Potential InvestorsAny investor, except related parties of the borrower or persons disqualified in terms of Section 29A of the IBC. AIFs, FPIs, ARCs, all NBFCs (28th Feb 2025 notification), Banks (QBs)HNIs and well-informed, sophisticated  investors
Diversification of poolSecuritisation requires pool diversification – Herfindahl Index to be within 0.3. Single loan or chunky loans cannot be securitisedSingle loan or chunky loans may be securitisedWill mostly be applicable in case of corporate loans undergoing JLF/IBC mechanism
Types of assets that can  be acquiredNPAs- must be min. 90% Up to 10% can be stressed loans with 1 to 89 DPDFraud/red-flagged/wilful default accounts cannot be securitized.All stressed loans which are in default for 1 DPD or more, NPAs,SRs of other ARCs, Fraud/wilful default accounts allowed (with conditions)Stressed loans under clause 58 of TLE Directions, SRs of ARCs,Securities of distressed companies
MHP required on stressed assets NoneNone in case of transfer to ARCNone in case of transfer to SSF;Further 6 month MHP is applicable on SSF
Enforcement of  security interest under  the SARFAESI ActPossible to retain originator’s privity with the borrower; hence, originator’s original powers (if any) may continue. Enforcement under SARFAESI – sec 13 Special powers under sec. 9In case original loan did not have the power, the power of the assignee is questioned in court rulingsRecommendation has been made by  SEBI to RBI to include SSFs under the  definition of ‘Secured Creditor’ under  SARFAESI
Stamp Duty implicationsStamp duty as per Indian Stamp Act, 1899No stamp duty (8F of the Indian Stamp  Act, 1899)Stamp duty as per Indian Stamp Act,  1899, till any specific exemption is  granted similar to ARCs
Tax TreatmentIncome-tax Act section 115TCA currently does not cover this mode, as it refers to standard assets only.Listed PTCs may be the option.Pass through treatment u/s 115TCA of the Income Tax Act 1961SSF exempted under Section 10(23FBA) Income is taxable directly in the hands of the investors under Section 115UB
Due DiligenceRBI-regulated lenders making investment shall do DD.ARC do DD of the stressed assets.Initial and continuous DD of it’s Investors- as applicable on ARCs

Eligible Lenders

Eligible Lenders who were eligible to securitise under the Securitisation of Standards Asset Master Directions (SSA Directions) are also the permissible/eligible lenders who can securitise their stressed asset under these Draft Directions. Hence accordingly the lenders who can securitise their stressed loans shall mean:

  1. Scheduled Commercial Banks (except RRBs)
  2. All India Financial Institutions
  3. Small Finance Banks
  4. All NBFCs (Including HFCs)

Eligible Assets

Stressed Loans under the Draft Directions will include loans having a DPD status of more than 0 days. It should be mentioned here that under the current SSA Directions, loans having a DPD status of upto 89 days can be securitised. Thus, the current draft directions will cover both, i.e.,

  • Loans having a DPD status of 1-89 days as well as
  • Loans classified as Non performing assets

However, certain conditions are required to be met for the securitisation of a pool of assets under the Draft Directions:

a. The sum of the outstanding exposures in the underlying pool classified as NPA is equal to or higher than 90% of the total outstanding amount

Here, it may be mentioned that our recommendation made to RBI in February 2023, we discussed including standard assets as a part of the stressed loan pool. Our submission was that considering that regulatory frameworks world over do not restrict the inclusion of standard assets and therefore the composition of the pool should be left for the market forces to determine.

b. Sum of squares of relative shares of underlying stressed loans is 0.30 or less calculated as follows:

  1. Calculate the outstanding balance of each loan
  2. Divided this figure by total outstanding balance of the portfolio on the origination cut-off date
  3. Square the figures obtained
  4. Calculate the total sum of these squares
  5. The resulting number should be equal to or less than 0.30.

Let us illustrate the same with an example:

 Outstanding Balance of each loan (L) L/B(L/B)^2 = S
     
L1100L1/B0.10638297870.01131733816
L2120L2/B0.12765957450.01629696695
L3130L3/B0.13829787230.01912630149
L4150L4/B0.15957446810.02546401086
L5110L5/B0.11702127660.01369397918
L690L6/B0.095744680850.009167043911
L780L7/B0.085106382980.007243096424
L8160L8/B0.1702127660.02897238569
 
Total outstanding balance of the portfolio (B)940 Sum of S0.1312811227

This approach has been mandated to prevent a single loan from comprising a significant portion of the pool. Given that these are stressed loans, ensuring diversification and avoiding concentration of any one loan is particularly important.

Assets that cannot be securitised

Similar to the present SSA Directions, the Draft Directions for securitisation of stressed loans also contain a list of assets that cannot be securitised. These include,

  1. Re-securitisation exposures
  2. Exposures to other lending institutions
  3. Refinance exposures of AIFIs
  4. Farm Credit
  5. Education Loan
  6. Accounts identified as Fraud/Red Flagged Account, and
  7. Accounts identified as or being examined for ‘Wilful Default

It may also be noted that under the Draft Directions, where standard assets form part of the pool (up to a maximum of 90% of the total outstanding amount), it must be ensured that such standard loan assets do not fall under the negative list prescribed under the SSA Directions.

Homogeneity of the Pool

The Draft Directions prescribe that the underlying loans must be homogenous. In this regard, the Draft Directions provide that loan exposures from the following two categories of loans should not be mixed as a part of the same pool:

  1. Personal loans and business loans to individuals; and Loans to Micro Enterprises, not exceeding ₹50 Crore and,
  2. All other Loans

Minimum Holding Period (MHP)

The Draft Directions do not prescribe any MHP requirements, aligning with their objective of facilitating the securitisation of NPAs. Since assets must be held for a certain period to be classified as NPAs, the intent behind MHP is inherently met.

While the framework allows up to 10% of the pool to consist of stressed assets not yet classified as NPAs, we believe MHP should not apply to these either.

Minimum and Maximum Risk Retention

  1. Minimum Retention Requirements

Under the Draft Directions, unlike the SSA Directions, maintaining a MRR is not a mandatory requirement. In our representation submitted to RBI, we discussed how imposing a MRR requirement might be unnecessary. We submitted that, under the SSA Directions, MRR is intended to ensure that the originator maintains a continuing stake in the securitised pool, thereby discouraging an originate-to-sell model that could lead to weak origination or underwriting standards.

However, in the context of NPAs, the originator has already demonstrated a continuing stake in the assets, and the objective of securitisation is now to offload these stressed exposures from its books. This changes the risk dynamics, making a mandatory MRR less relevant in such cases.

It may however be noted that paragraph 8 of the Draft Directions provides that the originator, the relationship manager (ReM), or both may retain a portion of the risk, in accordance with the terms of the contractual arrangement between them. Notably, where the originator is also appointed by the Special Purpose Vehicle (SPV) to act as the ReM for the purposes of resolution and recovery, a retention requirement is triggered.

  1. Maximum Retained Exposure

Like the SSA Directions the Draft Directions provide a maximum retention of 20% by the originator, however interestingly one stipulation that has been introduced under the Draft Directions requires that any exposure above 10% upto 20% should be recognized as a first loss piece for all prudential purposes.

Structure

The Draft Directions has referred to the present SSA Directions for provisions around providing of credit enhancement facilities, liquidity facilities, underwriting facilities and servicing facilities to securitisation of stressed assets.

Resolution Manager

The Draft Directions also discuss that a ReM may be appointed who shall be responsible for administering the resolution/recovery of the underlying stressed exposures. Such ReM is required to have requisite expertise in the resolution of NPAs, including drawing of effective business plans, recovery strategies, and loan management.

It may be mentioned here that, the representation made to RBI in 2023 discussed how globally, a resolution manager is not a common feature in most NPA securitisation Structures and therefore, in this regard, the suggestion will be to provide for enabling provisions which will allow the market participants to appoint a resolution manager should there be a need to appoint one, depending on the characteristics of the underlying pool. Thus, our suggestion was to allow discretion with the market participants to appoint a RM.

Requirements relating to Resolution Manager

  1. Should not be a person disqualified under Section 29 A of IBC;
  2. Should not be a related party of the originator;
  3. Should not support losses of SPV except to the extent contractually agreed upon;
  4. Should remit all cashflows as per agreed terms;
  5. During interim period from cash collection to remitting to SPE, collections to be made in escrow account;
  6. ReM can raise additional finance for the purpose of resolution related activities of the pool to the extent of 75% of total requirement. However finance cannot be taken from originator
  7. ReM to adhere to guidelines of FPC issued by RBI

Comparison of SSA, TLE and Proposed SOSTRA Framework

 SSA frameworkTLE frameworkProposed SOSTRA framework
Loans not in defaultPermittedPermittedNot permitted
DPD 1-89 days (Classified as Standard)PermittedPermittedPermitted upto 10% of the pool size
DPD 1-89 days (Classified as NPA)Not permittedPermittedPermitted
DPD > 90 daysNot permittedPermittedPermitted
Intent of the originatorLiquidity, capital relief etcLiquidity, capital relief, off-balance sheet, concentration reliefNPA clean up
Intent of the investorYieldInorganic book buildingYield
MRRRequiredNot requiredNot required
MHPRequiredRequiredNot required
Credit EnhancementCan be providedCannot be providedCan be provided
Liquidity FacilityCan be providedCannot be providedCan be provided

[1] Availabe at: https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1402

Bank-NBFC Partnerships for Priority Sector Lending: Impact of New Directions

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-Harshita Malik (finserv@vinodkothari.com)

Background

The Reserve Bank of India (RBI) has, after almost five years, updated its Priority Sector Lending (PSL) norms that prescribes the PSL limits for banks. PSL targets ensure an adequate flow of credit from the banking system to sectors of the economy that are crucial for their socio-economic contributions, with a focus on specific segments whose credit needs remain underserved despite being creditworthy. 

On March 24, 2025, the RBI issued Master Directions – Reserve Bank of India (Priority Sector Lending – Targets and Classification) Directions, 2025 (‘New Directions’), in supersession of the 2020 Master Directions of Priority Sector Lending (PSL)- Targets and Classification, prescribing higher loan limits for housing and other loans, expanding eligible purposes for PSL classification, removing the interest rate limits caps in case of securitisation and transfer of loan exposures and including an increased list of eligible borrowers under certain categories. While these measures are expected to help banks achieve their overall targets, the limits and restrictions that persist within sub-categories often require banks to adjust underwriting standards to meet PSL requirements. The revised loan limits offer banks flexibility to address these challenges, while also providing room for growth acceleration.

Effective Date

The New Directions shall come into effect on April 1, 2025 and shall supersede the erstwhile directions on the subject, namely, the Reserve Bank of India (Priority Sector Lending – Targets and Classification) Directions dated September 04, 2020 (‘Erstwhile Directions’).

Further, all loans eligible to be categorised as PSL under the Erstwhile Directions (updated as on March 25, 2025) shall continue to be eligible for such categorisation under the New Directions, till their maturity.

Applicability 

The New Directions are applicable to all commercial banks, Regional Rural Banks (RRBs), Small Finance Banks (SFBs), Local Area Banks (LABs), and Primary (Urban) Co-operative Banks (UCBs), excluding Salary Earners’ Banks. 

Bank-NBFC Partnerships for PSL

Achieving PSL targets has always been an uphill task for banks, especially those without a strong retail branch network. PSL typically involves bite-sized/ small ticket loans to the last mile borrowers that come with borrower proximity, geographical presence, strong operational abilities and tailored recovery strategies, making it less appealing for banks to dive in wholeheartedly.

To add to the predicament, these sectors tend to bear higher risk compared to traditional borrowers, leading to a greater chance of defaults. Delinquencies in the early buckets—0+ and 30+ days past due – increased by approximately 110 basis points (bps) and ~55 bps, respectively, during the first quarter of fiscal 2025 compared to the preceding March quarter1. This indicates a rising rate of defaults in the microfinance sector, making banks naturally reluctant to adopt the “ekala chalo re” model in priority sector lending.

When banks fall short of meeting their PSL targets, they turn to alternative methods to bridge the gap. One notably effective approach has been partnering with Non-Banking Financial Companies (NBFCs), a strategy that has seen increasing acceptance with most of the banks.

Figure 1: Bank-NBFC Partnership for Priority Sector Lending

When we talk about Bank-NBFC partnership, the same can broadly be undertaken in the following four ways:

  1. Banks lending to NBFCs/HFCs for on-lending to priority sector borrowers;
  2. securitisation;
  3. Transfer of Loan Exposure (‘TLE’); and
  4. Co-lending.

Banks Giving Loans to NBFCs or HFCs for On-lending Under the PSL Category

NBFCs have broader customer coverage across priority sectors, particularly in PSL categories such as agriculture and MSMEs. By channeling funds to NBFCs with defined end-use restrictions and lending terms, banks can achieve indirect exposure to the PSL sector. While the on-book exposure remains on the NBFC, the underlying loans are directed towards the priority sectors thereby enabling banks to benefit by fulfilling their PSL target. Bank loans provided to NBFCs/HFCs for on-lending are further classified into the following three categories:

  1. Bank loans to MFIs (NBFC-MFIs, Societies, Trusts, etc.)

This category of loans remains unchanged, with the framework detailed as follows:

AttributesParticulars of the framework
BorrowersRegistered NBFC-MFIs and other MFIs (Societies, Trusts, etc.) that are members of RBI-recognised Self Regulatory Organisation (SRO) for the sector
Eligible underlying loanLoans eligible for categorization as priority sector advances under respective categories viz., Agriculture, MSME, Social Infrastructure and Others
Purpose of loanOn-lending to individuals and members of SHGs/JLGs
Conditions to be adheredMFIs to adhere to the conditions prescribed under SBR Master Directions and MFI Master Directions
Cap on quantum of loansNot specified
Maximum ticket size of underlying loansNot specified
  1. Bank loans to NBFCs (other than MFIs)

This category of loans remains unchanged; however, it has been clarified that the 5% cap on bank credit to NBFCs for on-lending is calculated based on the bank’s total PSL in the previous financial year. Further, compliance with the cap is to be ensured by averaging the eligible portfolio across four quarters of the current financial year. For instance, if the on-lending proportion for a particular quarter is more than 5% and then due to amortisation of the loan pools the same comes to below 5% in the remaining quarters, the limit shall be seen by averaging the exposure across all quarters in a particular financial year. The updated framework is detailed as follows:

AttributesParticulars of the framework
BorrowersRegistered NBFCs other than MFIs
Eligible underlying loanLoans eligible for classification as priority sector lending under the respective categories, viz., Agriculture and Micro & Small enterprises
Purpose of loanOn-lending to respective categories of priority sector lending, viz., Agriculture and Micro & Small enterprises
Conditions to be adheredBanks to maintain disaggregated data of such loans in the portfolio.
Cap on quantum of loans5% of individual bank’s total priority sector lending of the previous financial year
Banks shall determine adherence to the caps prescribed by averaging the eligible portfolio under on-lending mechanism across four quarters of the current financial year.
Maximum ticket size of underlying loans (per borrower)Agriculture: Upto Rs. 10 lakhs in respect of ‘term lending’ component under this categoryMicro & Small Enterprises: Upto Rs. 20 lakhs
  1. Bank loans to HFCs

Under the New Directions, this category of loans has been explicitly designated as part of the ‘Housing’ category with the updated framework detailed as follows:

AttributesParticulars of the framework
BorrowersHFCs approved by NHB for refinance.
Eligible underlying loanLoans eligible for classification as priority sector lending under the ’Housing’ category
Purpose of loanOn-lending for:Purchase, construction, or reconstruction of individual dwelling units.Slum clearance and rehabilitation of slum dwellers
ConditionBanks must maintain borrower-wise details of the underlying loan portfolio
Cap on quantum of loans5% of individual bank’s total priority sector lending of the previous financial year
Banks shall determine adherence to the caps prescribed by averaging the eligible portfolio under on-lending mechanism across four quarters of the current financial year.
Maximum ticket size of underlying loans (per borrower)Aggregate limit of Rs. 20 lakhs

Securitisation

The New Directions streamline the eligibility criteria by removing interest cap-related provisions. This is a significant change and aligns with the fact that no such lending rates are prescribed by RBI for direct lending exposure by the banks or the NBFCs. Earlier, the RBI had also removed such lending rate restrictions in the case of microfinance loans. The removal of capping would allow originating NBFCs to focus on the other terms of loans and the end use to classify as PSL. 

While the removal of the net interest margin cap allows substantial flexibility to the NBFCs, by way of downside, it may also allow NBFCs to charge higher interest rates to ultimate borrowers. The outlined changes might encourage banks to invest more in Securitisation Notes, as they would have fewer restrictions. However, it could also lead to a shift in focus away from the priority sector’s socio-economic objectives, as higher interest rates might deter borrowers from accessing these loans. 

Further, the general conditions for investments in Securitisation Notes and explicit exclusion of loans against gold jewellery originated by NBFCs have been retained. The New Directions focus solely on ensuring that underlying loan assets are eligible for priority sector classification before securitisation, without the additional conditions that were there in the Erstwhile Directions. 

Now, the investments by banks in ‘Securitisation Notes’ representing loans by banks and financial institutions to various categories of priority sector, except ‘others’ category, are eligible for classification under respective categories of priority sector depending on the underlying assets subject to only the following two conditions:

  1. Assets are originated by banks and financial institutions and are eligible to be classified as priority sector advances, prior to their securitisation, and the transaction is in compliance with the RBI Guidelines on ‘securitisation of Standard Assets’ as updated from time to time; and
  2. Loans against gold jewellery originated by NBFCs as underlying, are not eligible for priority sector status.

Transfer of Loan Exposures

The New Directions streamline the eligibility criteria for assignment/outright purchase of asset pools by banks, in the same manner as in the case of ‘investments by banks in Securitisation Notes’. 

Now the assignment/outright purchase of the pool of assets by banks representing loans under various priority sector categories, except the ‘others’ category, will be eligible for classification under the respective categories, subject to the following conditions:

  1. Assets are originated by banks and financial institutions and are eligible to be classified as priority sector advances prior to the purchase and fulfil the RBI guidelines on ‘Transfer of Loan Exposures’;
  2. Banks shall report the outstanding amount actually disbursed to priority sector borrowers and not the premium embedded amount paid to the seller; and
  3. Loans against gold jewellery acquired by banks from NBFCs are not eligible for priority sector status.

Co-lending

Banks collaborate with other financial entities through lending partnerships, leveraging their partners’ origination expertise to gain exposure in the PSL segment. These co-lending arrangements involve a structured sharing of risk and reward, with specific lending process functions distributed between the co-lenders. As a result, banks are able to meet their PSL targets proportionate to their share in the loans facilitated under these partnerships. 

The New Directions eliminate the temporary allowance for continuing old co-origination arrangements and clarify the eligibility of loans under these arrangements for priority sector classification, limiting it to their repayment or maturity timeline. 

Scheduled Commercial Banks can co-lend with registered NBFCs (including HFCs) for priority sector lending, as per the guidelines issued on November 5, 2020. Loans under the earlier co-origination guidelines (September 21, 2018) will remain eligible for priority sector classification until repayment or maturity, whichever is earlier.

Comparison at a glance

On-lendingSecuritisationTLECo-lending
Capping on exposure5% of individual bank’s total priority sector lending of the previous financial yearNo capNo capNo cap
Loan size capsLoan size caps exist on the loan by the NBFC, e.g. Rs. 20 lakhs in case of home loans and Micro & Small enterprises loans, and Rs. 10 lakhs in case of agriculture loans.The same loan cap that would have applied had the portfolio been originated by the bank for e.g. loans to individuals for educational purposes, including vocational courses, not exceeding Rs.25 lakhs The same loan cap that would have applied had the portfolio been originated by the bank for e.g. loans to individuals for educational purposes, including vocational courses, not exceeding Rs.25 lakhs The same loan cap that would have applied had the portfolio been originated by the bank for e.g., loans to individuals for educational purposes, including vocational courses, not exceeding Rs.25 lakhs 
Credit exposure of the bankOn the borrower i.e. NBFCOn the pool of loans, though credit enhanced by the NBFCOn the pool of loansOn the pool of loans
PSL loans originated in the books ofNBFCs (including MFIs and HFCs)NBFC (originator)NBFC (transferor)Banks (to the extent of share in the loan)
Additional compliance requirements–SSA DirectionsTLE DirectionsCo-lending Guidelines of 2020

Conclusion

The New Directions on PSL provide a significant update to the framework, aiming to enhance the flow of credit to priority sectors while making the process more efficient for banks and financial institutions. By clarifying the eligibility criteria for various mechanisms like bank-NBFC partnerships, securitisation, transfer of loan exposures, and co-lending, these amendments create a more streamlined and transparent approach for meeting PSL targets. The removal of certain provisions, such as interest rate caps and exemptions for MFIs, reflects a shift towards more simplified criteria that ensure compliance while maintaining focus on supporting critical sectors like agriculture, MSMEs, and housing. The clear guidelines on the involvement of NBFCs, HFCs, and other financial entities in PSL activities are expected to strengthen the collaborative efforts between banks and non-banking institutions, ultimately contributing to the economic growth and financial inclusion of underserved communities. As the revisions come into effect from April 1, 2025, banks and other eligible financial institutions must adapt their strategies to leverage these opportunities and fulfill their PSL obligations efficiently.

  1. https://www.crisilratings.com/en/home/newsroom/press-releases/2024/09/for-mfis-asset-quality-hiccups-to-lift-credit-cost-curb-profitability.html ↩︎

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SEBI mulls ASCR as a comprehensive diagnosis report

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ASCR would now consolidate other certifications and require specific confirmations

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Shastrartha 13 – DPDP Rules for Lenders

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In this edition of Shastrath, we address key concerns and considerations for lenders in light of the Draft DPDP Rules published on January 03, 2025, and discuss steps to take in order to ensure readiness and compliance. 


Register your interest here: https://docs.google.com/forms/d/e/1FAIpQLSf0uZidJDf8oqK0GfGygo0BmuCKRg9wMo2bXRtwRMIra7Zx5Q/viewform

Secretarial auditors for listed entities: FAQs on disqualifications and prohibited services

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FAQs on appointment of secretarial auditors for listed entitiesDownload

SEBI approves cartload of amendments 

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– Team Corplaw | corplaw@vinodkothari.com

SEBI in its Board meeting dated December 18, 2024, has approved amendments pertaining to BRSR, HVDLEs, DTs, SMEs, Intermediaries, etc.  This article gives a brief overview of the approved amendments.

Ease of Doing Business for BRSR

  • Scope of BRSR Core for Value Chain Partners shrunk
    • Value chain partners now consist of individuals comprising 2% or more of the listed entity’s purchases and sales (by value) instead of 75% of listed entity’s purchases/sales (by value).
    • Further, the listed entity may limit disclosure of value chain to cover 75% of its purchases and sales (by value), respectively.
  • Deferred applicability of ESG disclosures for the value chain partners & its limited assurance by one financial year
    • Applicability of ESG disclosures for the value chain deferred from FY 24-25 to FY 25-26.
    • Applicability of limited assurance deferred from FY 25-26 to FY 26-27.
  • Voluntary disclosure of ESG disclosures for the value chain partners & its limited assurance instead of comply-or-explain
    • Top 250 listed entities by market cap can now comply with the ESG disclosures for the value chain partners & its limited assurance on a voluntary basis in place of  comply-or-explain.
  • Term ‘Assurance’ replaced with ‘assessment or assurance’ to prevent unwarranted association with a particular profession (specifically audit profession).
    • Assessment defined as third-party assessment undertaken as per standards to be developed by the Industry Standards Forum (ISF) in consultation with SEBI. 
  • Reporting of previous year numbers voluntary in case of first year of reporting of ESG disclosures for value chain.
  • Addition of disclosure pertaining to green credits as a leadership indicator under Principle 6 – Businesses should respect and make efforts to protect and restore the environment of BRSR

Immediate actionables for Listed entities:

  • Entity to re-assess its value chain partners as per the revised definition.
  • Entity forming part of top 250 listed entities by market cap to undertake third party assessment of its BRSR Core disclosure for FY 24-25 as per the standards to be developed by ISF.
  • To disclose about the green credits procured/generated by the entity during FY 24-25.

Debenture Trustee (‘DT’) Regulations:

  • Introduction of provisions relating to ‘Rights of DTs exercisable to aid in the performance of their duties, obligations, roles and responsibilities’, which broadly indicates (as proposed in the CP):
    • Calling information/ documents from issuer w.r.t. the issuance;
    • Calling documents from various intermediaries;
    • Calling of and utilization of Recovery Expense Fund, with consent of holders.
  • Corresponding obligations on the issuers to submit necessary information/documents to DTs.

VKCo comments: In addition to the corresponding obligations on the issuer, CP also proposed to mandate Depositories and Stock exchanges to provide requisite information to DTs, which is yet to be approved. The right to call information from issuers and market participants including corresponding obligations on them will enable DTs to perform their functions efficiently.

  • Introduction of standardized format of the Debenture Trust Deed (‘DTD’)
    • To be issued by Industry Standards Forum with SEBI consultation;
    • In case of deviation from the format of DTD, disclosure is to be made for investor review. (CP proposed to disclose deviation as insertion of a key summary sheet of deviation in GID/KID)

VKCo comments: While the introduction of model DTD is appreciated, the draft model DTD proposed in the CP was not aligned with the general market practices followed by the DTs as well as the applicable laws such as SEBI Listing Regulations, NCS Regulations, Indian Trust Act, etc.

  • Activity-based Regulation for DTs:
    • DTs are to undertake only such activities regulated by other financial sector regulators/ authorities (as SEBI specifies);
    • Hive off non-regulated activities to a separate entity – within 2 years;
    • Sharing of resources between DT and hived-off entity is allowed, subject to segregation of legal liabilities;
    • Hived-off entity can use DT’s brand/logo – only for a period of 2 years (CP suggested 1 year); Both DT and hived-off entity to abide by SEBI’s code of conduct during such period.

Applicability of CG norms on HVDLEs 

Under this segment of changes discussed by SEBI, most of the proposals are in alignment with the Consultation Paper dated 31st October, 2024, except for few changes in relation with PSUs coming together with public enterprises under Public Private Partnership.

  • Threshold for being identified as HVDLE increased from 500 Crores to 1,000 Crores to align with the criteria of Large Corporates

VKCo Comments: The proposal to enhance the extant threshold is encouraging in terms of governing the maximum value of outstanding debt while at the same time achieving the same without bearing the burden of compliance by an increased number of purely debt listed entities. Subsequently, effective implementation of such a proposal aligns it with the identification criteria of Large Corporates. 

  • Introduction of a separate chapter for entities having only debt listed, and sunset clause for applicability of CG norms

VKCO Comments: While this proposal is noteworthy, however, instead of rolling out a new chapter, there could have been certain modifications in the existing regulations by way of a proviso to align with the needs of an HVDLE. Further, one also needs to wait to see the fine print -of the provisions once the same is issued.

VKCo Comments: The proposal is welcome since it clearly sets the HVDLEs free from the barrier of once an HVDLE so always an HVDLE. This proposal sets a clear nexus between the compliance and the size of the debt outstanding, for the protection of which in the very first place, the compliance triggered.

  • Optional constitution of RMC, NRC, and SRC and delegation of their functions to the AC and Board respectively.

VKCo Comments: Given the close construct of debt listed entities, it is often observed that the constitution of such committees becomes more of a hardship than in smoothing compliance and discussing specific matters. Accordingly, it looks appropriate to redirect the functions of NRC and RMC to the Audit Committee and that of the SRC to the Board.

  • HVDLEs to be included in the counting of maximum no. of directorships, memberships and chairmanships of committees. However, this shall exclude directorships arising out of ex-officio position by virtue of statute or applicable contractual framework in case of PSUs and entities set up under the Public Private Partnership (PPP) mode respectively, in the count. The said exclusion was not in the CP.

VKCo Comments: The rationale completely aligns with the proposal made and seems to be justified. Further, as far as the exclusion is concerned, this seems more from excluding those members who are part of the board not on the basis of their appointment but their current tenure being served in a particular position in the company.

  • RPT Approval by way of NOC from DT (who obtains it from holders), before going for shareholders’ approval [w.e.f. 1st April, 2025]

VKCo Comments – While the CP suggested two ways of seeking approval for material RPTs of an HVDLE. The Board has only considered the alternative mode of first seeking NOC of DT and thereafter approaching the shareholders. Further, as discussed in our related write up on the CP, there does not seem to be any incentive to first approach the DT and thereafter the DT to approach the NCD holders. Instead the approval of the NCD holders can be taken up directly by the HVDLE. 

  • Submission of BRSR on a voluntary basis

VKCo Comments: The inclusion of a voluntary provision in the legislation with respect to a comprehensive report like BRSR is not likely to be submitted given the huge details under the BRSR. However, an opportunity to submit BRSR can be a game changer for an HVDLE from the perspective of being able to raise funds based on its reporting standards in this regard. 

One of the changes discussed by the Board is relaxation to HVDLEs set up under the PPP mode from composition requirements of directors. While this was not a part of the CP, however, even if we have to understand that change proposed, this looks like relaxing the composition requirement of the Board of Directors. 

CHANGES NOT APPROVED: 

  • Compulsory filing of CG compliance report in XBRL format

VKCo Comments: This proposal was with an objective to align and standardize the filing of quarterly CG compliance report for bringing parity as in the case of equity listed entities 

  • Exemption to entities not being a Company

VKCo Comments: While SEBI refers to the introduction of similar exclusion for equity listed entities, however, it has also mentioned the subsequent amendment wherein the same was omitted. The proposal not being notified is in alignment with the position of equity listed entities, however, the same would have been a welcome change since it would have helped such entities to give preference to their principal statutes and not an ancillary one like LODR. 

Our detailed write up on the CP can be accessed here.

Amendments in the definition of UPSI – making the law more prescriptive

  • Inclusion of 17 items in definition of UPSI: The illustrative list of USPI in reg. 2 (1) (n) of the PIT Regulations has been expanded to include 17 items from the list of material events laid out in Part A of Schedule III of the Listing Regulations [Originally proposed in the CP – 13 items] 
  • Threshold limits under reg. 30 made applicable: materiality thresholds specified in reg. 30 (4) (i) (c) of the Listing Regulations have been made applicable for identification of events as UPSI 
    • As per the current practice, any event that is likely to materially affect the price of the securities can be identified as UPSI 
  • Extended timelines for making entries in SDD: for an event of UPSI that emanates outside the company, entries can be made in the SDD within 2 days of occurrence. Further closure of the trading window will not be mandatory in such cases. 
    • This has been introduced as a part of EODB
    • As per the current practice entries in the SDD have to be made promptly

Refer to our discussion on CP in: Laundry List: SEBI’s proposal to elongate list of deemed UPSIs