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Following the success of our recent workshop in Mumbai and Bengaluru, we are delighted to announce our upcoming 2-day refresher course on RBI regulations for NBFCs in Delhi!Loading…
Dayita Kanodia and Manisha Ghosh l finserv@vinodkothari.com
RBI on August 16, 2024 has issued a notification for the review and modification of Master Direction – Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 (‘Directions’) for platforms acting as intermediaries and providing an online marketplace for lending between peers.
The review has been carried out pursuant to observations that some of these platforms have adopted certain practices which are violative of the said Directions. These practices include, among others, violation of the prescribed funds transfer mechanism, promoting peer to peer lending as an investment product with features like tenure linked assured minimum returns, providing liquidity options and at times acting like deposit takers and lenders instead of being a platform.
Read more →Vinod Kothari | finserv@vinodkothari.com
The RBI’s 16th August 2024 changes in P2P Directions may have been inspired by its supervisory observations, and comments by some observers and experts, but the likely impact of the changes may be to make this disintermediation model operationally tough to the extent of unviability.
The key spirit of the amendments is that P2P Platforms (P2PPs) cannot function as virtual alternative deposit-taking entities, promising liquidity, reinvestment and giving tacit assurance of rates of interest. However, to enforce its intent, the regulator has also provided that the lenders’ funds will be called only on “just in time” basis, that is, only when they can be lent within a day. Further, the regulator has put specific stipulation against any secondary market in loans on a P2PP, whereas, for any mode of savings or investment, an exit when needed is a necessary attribute.
P2P, like any platform, premises itself on the ability to match the two parties to the bargain. To the borrower, it has to promise funds; and to the lender, it has to promise deployment. Since no borrower may conceivably wait until the P2PP ramps up requisite lenders, the only intuitive solution would be that the P2PP gets lenders, keeping their money in readiness mode, to be deployed when borrowers are available. However, the regulator has now prescribed that, effective 15th November, the funds in lenders’ escrow should not be there for more than 1 day.
It is important to realise, and it seems that this point has escaped attention of the regulator, that funds in lenders’ escrow need to be a state of readiness for 2 reasons: one, at the time of the lender first investing his money; and secondly, as repayments trickle in from the various loans given to borrowers. As a matter of prudent spreading of the risks of a lender, one particular lender’s funds are not lent to a single borrower – on the contrary, the funds are spread, say over 100 or even larger number of borrowers (a process called “mapping”, which has been recognised by the regulator). Thus, each lender would have lent to hundreds of borrowers, and each borrower would have borrowed from hundreds of lenders. Thus, for each such lender, money starts trickling in small bits and pieces every month. If this money is not reinvested into new loans, the lender’s whole purpose, which was to keep money invested and not just to invest it in one cycle of loans, will not be met. Now, between the repayment of the existing loans, and the redeployment into new loans, there may be a time gap, which may be a few days. Under the new regulatory framework, if the money is not redeployed within a day, the money will have to flow back to the lenders.
If the regulator’s expectation is that the P2PP would be making calls on lenders every time there are borrowers, and the lenders will have ready availability of funds to meet such calls, it is quite an impractical expectation. Such a perfect match between cash inflows and cash outflows is aggressively optimistic. In global markets, there are “warehouse financiers” who provide temporary funding to meet these gaps, but that is not the case in India.
In fact, the whole existential idea of P2PPs is disintermediation.
If the Airbnb model will become impractical if the platform starts searching for houses only when an occupier is ready to check-in, the same argument applies with a stronger force in case of loan-connecting platforms.
It seems the regulator may not have been happy with the redeployment of funds by the P2PP, but that is exactly what a lender would want and need. The lender should be free to choose to reinvest his funds, or retrieve them, to be able to get a slow exit.
In P2PP, a lender provides loans to borrowers; but can a lender buy existing loans given by other P2PP lenders to borrowers? A priori, there should be no reason why a lender could have given a loan to an unknown borrower, but couldn’t have bought the loan taken by an existing borrower. After all, for existing loans, there is a history of performance as well as seasoning. If existing loans given by a lender are bought by incoming lenders, the process will lead to creation of a so-called “secondary market”, which will allow existing lenders to exit by selling their portfolio of loans to incoming lenders. It is in the public domain that the P2P industry has been making a case for such secondary market.
The amended Directions have inserted a clause in reg 6 (1) to say: “NBFC-P2P shall not utilize funds of a lender for replacement of any other lender(s)”. This clause may either be interpreted to mean that there is an absolute bar on secondary marekt in P2P loans. Or, there may be another interpretation: that the right of using the funds of a lender to buying existing lenders shall not be available to the P2PP. However, if that is something that the incoming lender himself wants, that is the exercise of a prudent discretion by the incoming lender, and there should be nothing wrong with that. If it is the first interpretation that the regulator has, then putting a bar on secondary market is most undesirable, given the nature of P2P investing. Exit opportunity is needed for almost every mode of investment. But it becomes critical inthe case of P2P investing, because of the granular spreading of the loans discussed above. Therefore, every lenders’ loans trickle back over a long period, and if the lender has chosen to reinvest the repayments, the period becomes infinite. If at any stage the lender needs to exit, he will have to wait for months and months for the loans to repay. Since need for exit may arise due to exigencies which cannot wait, the slow and protracted exit is unlikely to serve the needs of the lender. As a result, it is only such lenders, and only for a very small part of their lendable portfolios, who can afford to invest in P2PPs, making it a leisurely investing game of one who is flush with money. The whole idea of P2PPs is to take them to a modest lender, so that he may lend at affordable rates to a modest borrower. The idea of reducing cost of lending by a lending marketplace can only be met if the platforms become more and more inclusive on either end. Putting a bar on the secondary market will make it exclusive, rather than inclusive.
See P2P India Report 2023 here
Team Finserv (finserv@vinodkothari.com)
Vide notification dated August 12, 2024, RBI has amended certain regulations applicable to Housing Finance Companies, and NBFCs to enure harmonization between HFC Master Directions and SBR Master Directions. These amendments shall be effective from January 01, 2025. The following table contains a snapshot of the changes from all HFCs and NBFCs1:
| Sr. | Particulars | Erstwhile provision | Amended / Harmonised provision |
|---|---|---|---|
| Changes in HFC Master Directions for all HFCs | |||
| 1 | Participation in exchange-traded currency derivatives | HFCs were allowed to participate in currency futures and options however no regulatory guidelines were prescribed for the same. | All HFCs can now participate in currency futures exchanges and Non-deposit HFCs with asset size of ₹1000 crore and above can participate in currency option exchanges, subject to the guidelines issued in the matter by the Foreign Exchange Department of the Reserve Bank and necessary disclosures in the balance sheet in accordance with guidelines issued by SEBI. |
| 3 | Participation in Interest Rate Futures | HFCs were allowed to participate in interest rate futures however no regulatory guidelines were prescribed for the same. | All HFCs can now participate in interest rate futures exchanges as clients and Non-deposit HFCs with asset size of ₹1000 crore and above are permitted to participate in interest rate futures market as trading members, subject to adherence to instructions contained in Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019 dated June 26, 2019, as amended from time to time. |
| 4 | Credit Default Swaps (CDS) | HFCs were allowed to participate in the CDS market however no regulatory guidelines were prescribed for the same. | HFCs will now be permitted to participate in the CDS market as users only and they may buy credit protection only to hedge their credit risk on corporate bonds they hold. HFCs cannot enter into short positions in CDS contracts. HFCs shall be required to comply with Annex XIV of SBR Directions while participating in CDS market as users. |
| 5 | Issue of co-branded credit cards | HFCs were not allowed to issue co-branded cards under the erstwhile directions. | HFCs are now allowed to issue co-branded credit cards, subject to the instructions prescribed in Master Direction – Credit Card and Debit Card – Issuance and Conduct Directions, 2022, as amended from time to time. |
| 6 | Accounting Year | Every HFC shall prepare its financial statements for the year ending on the 31st day of March. | HFCs must finalize their balance sheets within 3 months from the relevant date. If an HFC wishes to extend this period under the Companies Act, it must first obtain approval from NHB before seeking an extension from the RoC. In cases where NHB and RoC grants extension of time, the HFC shall furnish to NHB a proforma balance sheet(unaudited) as on March 31 of the year and the returns due on the said date. |
| 7 | Periodicity of IS Audit | The Audit Committee must ensure that an Information System Audit of the critical and significant internal systems and processes is conducted at least once in two years to assess operational risks faced by the HFC. | HFCs can now decide the periodicity of IS Audit as per its policy in accordance with IT Governance Directions. However, a continuous auditing approach for critical systems shall be undertaken. |
| 8 | Investment through Alternative Investment Funds for calculation of NOF | No regulatory guidelines were prescribed | To determine the Net Owned Funds (NOF) of a Housing Finance Company (HFC), investments or loans to subsidiaries, group companies, and other HFCs exceeding 10% of owned funds are deducted from the owned funds. Investments made by an HFC in group entities, either directly or indirectly through an AIF (if 50% or more of the AIF’s funds come from the HFC) or an AIF trust (if the HFC is the beneficial owner and 50% of the trust’s funds come from the HFC), shall be treated similarly. |
| 9 | Technical Specifications for all participants of Account Aggregator ecosystem | Regulatory provisions did not exist | HFCs acting either as ‘Financial Information Provider’ or ‘Financial Information User’ are expected to adopt the technical specifications published by ReBIT, as updated from time to time. |
| Changes in SBR Directions for all NBFCs | |||
| 7 | Periodicity of IS Audit | The Audit Committee must ensure that an Information System Audit of the critical and significant internal systems and processes is conducted at least once in two years to assess operational risks faced by the NBFCs. | NBFCs can now decide the periodicity of IS Audit as per its policy in accordance with IT Governance Directions. Further, a continuous auditing approach for critical systems shall be undertaken. |
Mahak Agarwal | corplaw@vinodkothari.com
After the recent Finance Act of 2024 shifts the incidence of tax in case of buyback from the company to the shareholders, a pertinent question that arises is what could be the next best mode for a company which is looking to partially exit from business and scale itself down.
Here is a quick 5 min video analyzing the above: https://lnkd.in/gK6878qg
Also watch our video on the tax regime on buyback proposed by the Finance Bill, 2024 (now enacted as the Finance Act) here: https://lnkd.in/gu7NrbeM
Read our FAQs on Buyback here: https://lnkd.in/gTZx838x
Vinod Kothari and Anita Baid l finserv@vinodkothari.com
RBI has issued notification dated August 12, 2024 on Review of Risk Weights for Housing Finance Companies (HFCs). Accordingly, with immediate effect, the RWsfor computation of risk weighted assets (RWAs), for capital adequacy purposes, for for undisbursed portion of housing loans/other loans shall be capped at the RWA computed on a notional basis for an equivalent amount of disbursed loan. In other words, the applicable RW shall be lower of (a) RW, applying the credit conversion factor (CCF) on the undisbursed loan, with a 100% RW; and (b) the RW that will be applicable, based on the size and the LTV of the loan, if the undisbursed part were to be disbursed.
Read more →| Date of Publication | Title | Author/ Speaker | Link |
| August 09th, 2024 | FAQs on Share Buybacks | Team Corplaw | https://vinodkothari.com/2024/08/faqs-on-share-buybacks/ |
| July 29th,2024 | Discussion on Proposed tax regime on buyback | Vinod Kothari and Payal Agarwal | https://www.youtube.com/watch?v=RLC34F_qZkw |
| July 23rd,2024 | Bye bye to Share Buybacks | Team Corplaw | https://vinodkothari.com/2024/07/bye-bye-to-share-buybacks/ |
| February 10th, 2023 | SEBI notifies amendments to all modes of Buy-back | Sanya Agrawal | https://vinodkothari.com/2023/02/sebi-notifies-amendments-to-all-modes-of-buy-back/ |
| November 19th 2022(updated February 8th, 2023) | SEBI’s revised framework brings relaxation under buy-back norms | Payal Agarwal | https://vinodkothari.com/2022/11/ease-of-corporate-slimming-sebi-proposes-substantial-relaxation-of-buy-back-norms/ |
| September 2022 | Insight on the concept of Buyback of Securities (podcast) | Team Corplaw | https://open.spotify.com/episode/1Zs92WR7GNGWsIR89bTTBK |
| September 08th , 2021 | Presentation on Buyback of securities | Harsh Juneja | https://vinodkothari.com/2021/09/buy-back-of-securities/ |
| March 28th, 2020 | Buy-back of shares during Covid-19 Pandemic | Vinita Nair | https://www.moneylife.in/article/share-buyback-during-covid19-pandemic/59865.html |
| September 22th, 2019 | SEBI’s Buyback Rules For Leverage Limits | Team Corplaw | https://vinodkothari.com/2019/09/sebis-buyback-rules-for-leverage-limits/ |
| September 11th, 2018 | SEBI amends Buyback Regulations:-Aligning and re-framing the requirements with other laws | Nikita Snehil | https://vinodkothari.com/2018/09/sebi-amends-buyback-regulations-aligning-and-re-framing-the-requirements-with-other-laws/ |
| April 02nd,2018 | Proposed changes under SEBI(Buy-Back Of Securities) Regulations, 2018 | Nikita Snehil | https://vinodkothari.com/2018/04/proposed-changes-under-sebi-buy-back-of-securities-regulations-2018/ |
| March 27th, 2012 | Guide to buy-back shares of unlisted companies | Team Corplaw | https://vinodkothari.com/2012/03/guide-to-buy-back-shares-of-unlisted-companies/ |
-Team Corplaw | corplaw@vinodkothari.com
Our other resources on the topic :
Last updated on 1st October, 2024
– Payal Agarwal, Associate and Dayita Kanodia, Executive | finserv@vinodkothari.com
An investment in knowledge pays the best interest
– Benjamin Franklin
Investment advisors and research analysts, including the unregistered ones have been on SEBI’s radar for quite some time. As per latest data available on SEBI’s website (30th September, 2024), there are 953 Investment Advisors1 and 1358 Research Analysts2 registered with SEBI. Following the consultation paper on review of regulatory framework for investment advisors and research analysts SEBI, in its Board meeting on 30th September, 2024, has approved many of these proposals. While some proposals are aimed at an ease of registration for an entity/ person as an RA/ IA, the CP also contained substantial proposals w.r.t. the activities and functioning of IAs and RAs.
In this article, we discuss the broad concept of IAs and RAs and a few major proposals under the CP, with our analysis on the potential implications. The fine text of the Amendment Regulations is awaited, for getting the necessary clarity on the position of IAs and RAs, pursuant to the revised regulatory framework.
Read more →Vinod Kothari (finserv@vinodkothari.com)
The RBI’s bi-monthly Monetary Policy review was accompanied by the Governor’s customary statement, dated 8th August, 2024, highlighting 4 areas of potential risks to financial stability. Two of these relate to uncollateralised or personal lending.
The 4 red flags raised by the Governor are as follows.
First, with alternative financial instruments being available and attractive, lesser money is flowing into the banking system by way of deposits, thereby the credit-deposit ratio indicates deposit growth trailing the growth in credit. This would force banks to look for alternative short term sources of funding, to fund the credit growth, potentially creating what is known as structural liquidity risk. Structural liquidity risk is said to exist when there is greater dependence on short-term sources of funding, as compared to short-term assets.
It is notable that recently, the RBI proposed to increase the run-off rate for retail deposits which are backed by internet banking facility. Most retail deposits these days are. A higher run-off rate implies a faster ability of the depositor to withdraw his deposit, thereby increasing the assumption for outflows, which is used for computing the liquidity coverage ratio (LCR). Higher LCR requirement means higher funds blocked in so-called high-quality liquid assets, and thereby lesser funds available for lending. Thus, the Governor’s reference to slower deposit growth relative to lending will get be even stronger, once the proposed changes in LCR are implemented.
Read more →
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