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Open in new tab Expanding the ambit of IT Act in a bid for increased digitalisation
– Neha Sinha, Assistant Legal Advisor | finserv@vinodkothari.com
Introduction
The Information Technology Act, 2000 (‘IT Act’) allows digital execution of documents by way of electronic and digital signatures. While the reach of IT Act is wide, certain contracts and transactions were excluded from its ambit. The First Schedule of IT Act enumerates the documents or transactions to which IT Act is not applicable and such documents or transactions cannot be signed digitally. Recently, the Ministry of Electronics and Information Technology has released a notification amending the First Schedule of the IT Act. The amendments are as follows:
- Entry No. 5 of the said Schedule included “any contract for sale or conveyance of immovable property or any interest in such property”. Contracts for sale of immovable property fell outside the scope of the IT Act and hence, could not be signed digitally. The Amendment has omitted the Entry No. 5, thus, bringing contracts for sale or conveyance of immovable property within the ambit of the IT Act. This amendment allows a contract for sale of immovable property to be executed digitally.
- Entry No. 2 of the said Schedule contained power-of-attorney, thus, excluding it from the purview of the IT Act. The amendment allows the application of the IT Act to those power-of-attorney that empower an entity regulated by the RBI, National Housing Bank, SEBI, IRDAI and PFRDA to act for the person executing it. Hence, a power-of-attorney in favour of entities regulated by these bodies can now be executed digitally.
- Entry No. 1 of the said Schedule, excluded the application of the IT Act to negotiable instruments other than a cheque. Hence, negotiable instruments could not be signed digitally, but cheques were exempt from this provision and they could be signed digitally. The amendment has included other negotiable instruments and brought them within the purview of the IT Act. Now, a cheque, a demand promissory note or a bill of exchange issued in favour of or endorsed by an entity regulated by the Reserve Bank of India, National Housing Bank, Securities and Exchange Board of India, Insurance Regulatory and Development Authority of India and Pension Fund Regulatory and Development Authority, can be signed digitally.
RBI introduces corporate governance norms for Asset Reconstruction Companies
Timothy Lopes | Manager | finserv@vinodkothari.com
The RBI has, on October 11, 2022, issued a circular[1], amending the extant regulatory framework for Asset Reconstruction Companies (‘ARCs’) and introducing corporate governance norms and other aspects through this circular.
Considering the importance of ARCs, a need was felt to review the extant regulatory framework. Through the Statement on Developmental and Regulatory Policies released along with the Monetary Policy Statement on April 7, 2021, the RBI had set up a committee to “undertake a comprehensive review of the working of ARCs in the financial sector ecosystem and recommend suitable measures for enabling such entities to meet the growing requirements of the financial sector.” The committee, constituted on April 19, 2021[2], had submitted its report to RBI and the same was placed on the website of RBI on November 02, 2021[3] and many recommendations have been implemented since. The circular comes pursuant to the recommendations of the said committee.
This circular is in addition to the extant regulatory framework governing ARCs and come into effect immediately or as otherwise indicated specifically therein.
Read more →Group NBFCs’ assets to be aggregated for middle layer classification: RBI clarification
– Aanchal Kaur Nagpal, Manager | aanchal@vinodkothari.com
RBI vide notification dated October 11, 2022, has clarified that the assets of NBFCs forming part of a group will be aggregated for determination of the “middle layer” status of NBFCs. This clarification dates back to the 1st of October and therefore, as on the effective date of the SBR framework, NBFCs which, on a consolidated basis, have assets of Rs 1000 crores or above, will have to start adhering to the SBR framework as applicable to NBFC-ML.
Effective date
The Circular will be effective retrospectively from the date of applicability of the SBR Framework i.e. October 01, 2022.
Read more →SEBI rationalizes issuances on Electronic Book Platform – Limits | Bidding Process | Anchor Investor | Basis of Allotment
– Kaushal Shah, Executive & Lovish Jain, Executive | corplaw@vinodkothari.com
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Also read our articles on the topic here
Lending Service Providers for digital lenders: Distinguishing agency contracts and principal-to-principal contracts
– Neha Sinha, Assistant Legal Advisor | finserv@vinodkothari.com
Introduction
Lending Service Providers (LSPs) are engaged by the Regulated Entities (REs) (banks or NBFCs) to carry out some functions of RE in connection with lenders’ functions on digital platforms. These LSPs may be engaged in customer acquisition, underwriting support, recovery of loan, etc. As the LSPs are acting in association with REs and on behalf of REs, the question arises if LSPs are engaged as “agents” of REs or the arrangement between RE and LSP is that of on a principal to principal basis.
Aspects surrounding agency contracts are dealt with in Indian Contract Act, 1872. Principal-principal relation is not defined specifically in any statute, but the obligations and liability of both the parties is as in case of any usual commercial contract, where each party is acting independently. If it is the latter, the LSP cannot be termed as “agent”. If the LSP is not an agent, then, looking at the definition of LSP in the RBI’s Digital Lending Guidelines (discussed below), it is possible to contend that the activities of the so-called LSP do not bind the RE, as the so-called LSP, acting as a principal, is not to be treated as LSP within the meaning of the RBI Digital Lending Guidelines.
In this article, the defining features of agency contracts, in light of whether the role of LSPs is either a principal or an agent has been discussed, on the basis of the provisions of the contract law and jurisprudence thereunder.
Read more →Resolution Regime for Systemic Financial Firms: The IBC Way or the Other Way?
– Sikha Bansal, Partner and Timothy Lopes, Manager | resolution@vinodkothari.com
Every economy has entities that carry with them systemic risk, which is essentially the risk that failure of such entities could result in financial contagion through a sort of domino/cascading effect on the economy. The contagion effect multiplies manifold if such an entity has cross-border operations and linkages. These entities are considered systemically important and are universally termed as being ‘Too Big To Fail’.
Going by the definitions of ‘corporate debtor’ and ‘corporate person’ a ‘Financial Services Provider (FSP)’ is not a Corporate Debtor. An FSP is one which provides ‘financial services’. ‘Financial services’, in turn, has been defined to include a list of services like accepting deposits, offering various services pertaining to financial products. Hence, the entities which provide such a financial service cannot be ‘resolved’ or ‘liquidated’ under IBC, except in case an entity (or a class of such entities) is notified under section 227 by the Central Government. The Central Government has thus notified non-banking financial companies including Housing Finance Companies having asset size of ₹ 500 crore or more as FSPs (Notified NBFCs). The insolvency resolution and liquidation process of FSPs, as notified separately through rules, is different in certain aspects as it needs regulatory involvement at different stages.
In this article, the authors discuss the need for a specific framework for insolvency resolution of systemic financial firms and study whether the present framework for insolvency resolution and liquidation of FSPs is sufficient. The authors also present a view as to how the construct of the definition of ‘FSP’ is quite specific and is different from the popular meaning assigned to typical financial entities engaged in lending activities. As such, notifying all NBFCs (with or without asset thresholds), without any regard to the function or activity being carried out by the NBFC, may not sync with the design and intent of IBC.
The article also explores a global perspective on the coverage and scope of the resolution framework for financial firms.
The article has been published in the IBBI’s Annual Publication titled ‘IBC: Idea, Impressions and Implementation’ and can be accessed on the link here, from page 157 onwards.
Outsourcing (Direct Selling Agent) v. Business Correspondent route
– Aanchal Kaur Nagpal, Manager (finserv@vinodkothari.com)
If everything’s a priority, then nothing’s a priority. Focusing on core activities while leaving non-core functions sub-contracted to specialized experts has been one of the key modus operandi to achieve efficiency. Banks and other financial institutions are increasingly outsourcing various financial activities ranging from onboarding customers to payment recovery. Since these outsourcing agents perform the activities that a Bank is originally supposed to do, they too, come with a set of regulations from RBI, with Banks being ultimately responsible for activities of their outsourcing agents.
Based on the scope of the outsourcing function and the responsibility dawned upon such agents, RBI identifies two outsourcing modes – Business Correspondence and Direct Selling/Marketing Agents (‘DSA/DMA’), with separate guidelines for each of the two.
In this article, the author has attempted to delve into the differences and commonalities between outsourcing of financial services by Banks to business correspondents and DSAs/DMAs.
Read more →Memorandum of Entry for equitable mortgages: A Mortgage by Conduct?
– Neha Sinha, Assistant Legal Advisor | Shraddha Shivani, Executive | corplaw@vinodkothari.com
Mortgage is a transfer of an interest in a specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt or the performance of an agreement, which may give rise to a pecuniary liability.
Section 58(f) of the Transfer of Property Act, 1882 (“TP Act”) provides, among other modes, for the creation of mortgage by deposit of title deeds, widely known as equitable mortgage. Applicable to the notified towns under this provision, when a person delivers to a creditor or his agent documents of title deeds to immoveable property, with an intent to create security, then the transaction is called mortgage by deposit of title deeds.
Legally there is no document needed to create an equitable mortgage. In fact, if there is a document, it will be mortgage by instrument and not mortgage by conduct, and hence, will cease to be an equitable mortgage. The Supreme Court expounded in Rachpal Mahraj v. Bhagwandas Daruka and others[1]–
“…when the debtor deposits with the creditor the title deeds of his property with intent to create a security, the law implies a contract between the parties to create a mortgage, and no registered instrument is required under section 59 as in other forms of mortgage.”
However, in practice, a memorandum accompanies the deposit of title deeds. The lender may execute a Memorandum of Entry (“MoE”) which records the delivery of title documents for the creation of mortgage by the mortgagor to the lender. The purpose of the MoE is most intuitive – the title deeds are valuable documents, and lie with the lender or a trustee for the lender. The MoE serves as a matter of record that the borrower placed these documents of his own free will with the intention to create a charge on his property with the lender/trustee, as also serves as a safeguard if the borrower were to play mischief claiming those very title deeds having been lost.
The borrower may also give an undertaking known as Memorandum of Deposit of Title Deed (“MoDT”) which states that the borrower, at his own free will, has deposited his property’s title document with the lender in order to secure a loan by creating a mortgage.
Read more →SEBI approves amendments: Alternate thresholds for ID Appointment | Online bond trading platform | Scheme of arrangement of NCS-listed entities | Trading in MF units
– Team Corplaw | corplaw@vinodkothari.com
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Related write-ups:
- SEBI proposes to regulate private debt platforms – https://vinodkothari.com/2022/07/sebi-proposes-to-regulate-private-debt-platforms/
- SEBI: Insider trading norms should apply to fund managers – https://vinodkothari.com/2022/07/sebi-proposes-to-extend-applicability-of-insider-trading-regulations-to-units-of-mutual-funds/
