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Market-linked debentures: Is it the end of the market for them?

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– Aanchal Kaur Nagpal, Manager | finserv@vinodkothari.com

Tax proposal to tax gains on MLDs as short-term capital gains

The Budget proposes that the capital gains on market linked debentures (MLDs) will be taxed as short term capital gain.

Presently, MLDs are mostly listed, and as listed securities they have 2 advantages:

  • First , there are exempt from withholding tax. This is one of the carve-outs in sec. 193
  • Secondly, the holding period for capital gain purposes is 12 months,  as opposed to 36 months in case of normal capital assets. This comes from sec. 2 (42A) of the Act. Therefore, if a listed security is held for at least 12 months, and transferred or redeemed thereafter, the gain will be taxed as long term capital gain, with a rate as low as 10%.

Market linked debentures is a concept that prevails world-over, with different names such as equity-linked bonds, index-linked bonds, etc. However, in India, the issuance of MLDs was being exploited as a regulatory and tax arbitrage device.

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Tweezing out for dormancy: RBI intends to intensify regulatory audits of NBFCs

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  • By CS Anita Baid, Vice President, Vinod Kothari Consultants P. Ltd.

As per reports available on public domain[1], the RBI intends to intensify regulatory audits of non-banking finance companies, to find dormancy, non-compliance, non clarity of business models, or other risks that the regulator may wish to check. The intent seems to be weed out the truant ones out of the crowd of over 9000 NBFCs that exist. It is a fact that in the recent years, the RBI has been granting lesser new registrations, and canceling more of existing registrations, causing the number to come down. It is also important to note that if the number of NBFCs looks overwhelming, it is not because so many companies are into real operation: it is because the regulations currently define a company investing its owned capital into financial investments, with absolutely no access to either public funds or customer interface, as an NBFC, by imputing the public interest that actually does not exist. The number would have been a lot lesser had the regulator had the realisation that if there are no public funds, no customer interface and investment of owned funds being done, there is no reason for the regulator to interfere, as the intent of the country’s Central Bank cannot be to regulate investment activity that one does with one’s own money.

While this issue remains to be advocated for a potential reform, in the meantime, it is important for NBFCs to brace up for the RBI’s inquisitorial interest.

This article is intended to help NBFCs to be better prepared for such regulatory interface.

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Presentation on ICAAP for NBFCs

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Our services and Assistance for ICAAP Implementation can be viewed here – https://vinodkothari.com/2022/09/services-and-assistance-for-icaap-implementation/

Our resources on the topic:

Understanding ICAAP for NBFCs

In-house Training on SBR Framework for NBFC-ML/UL

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Resources on Scale Based Regulations

Services and Assistance for ICAAP Implementation

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Our resources on the topic:

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Click here to view our firm profile – https://vinodkothari.com/2021/09/vkcpl-team-profile/

Workshop on Emerging Regulatory Framework for NBFCs and digital lending

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Register here: https://forms.gle/D7QTKbPDcZn3AP7y6
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The Law of Co-lending

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Financial Services Division | finserv@vinodkothari.com

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Our write-ups on related topics may be viewed here –

Exploring Core Financial Services Solution for NBFCs

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Applicability, Features, Modules & Challenges

– Subhojit Shome, Executive and Parth Ved, Executive | finserv@vinodkothari.com

Background

As a part of the overhaul for the NBFC Sector, the Reserve Bank of India (‘RBI’) had, on October 22, 2021, introduced the Scale Based Regulations (SBR): ‘A Revised Regulatory Framework for NBFCs’. Upon application of SBR, NBFCs will now be divided into four major categories starting from base layer, followed by middle and upper layers and a top layer. The categories can be briefly summarised through the below chart (visit https://vinodkothari.com/sbr/ to read our write-ups on SBR and related topics).

Overview of the Scalar Approach for Classifying NBFCs

Through SBR, various governance guidelines have been newly introduced while the existing guidelines have been modified to keep up with the current market practices. One of the requirements is the introduction of Core Financial Services Solution (CFSS) for NBFCs vide RBI circular dated February 23, 2022 (‘CFSS Circular’).

In this article, we discuss the applicability of CFSS on NBFCs, explore the current core banking systems of banks, highlight the necessary modules which can be adopted by NBFCs along with the issues that may arise during implementation.

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The Pious Intent of Promoting Factoring

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Preserve of a select few?  

Over the last two years, the regulatory developments vis-à-vis factoring, and more specifically, ‘who can be a factor’ has been a to-and-fro ride. With widening of the scope of entities eligible for factoring to its effective roll back vide the Registration of Factors (Reserve Bank) Regulations, 2022 (‘Registration Regulations’), the factoring market found itself stuck in ambiguity arising because of the disparity between the Factoring Regulation (Amendment) Act, 2021 (‘Amendment Act’) and the Registration Regulations. Ironically enough, only days after the notification of Registration Regulations, the Economic Survey 2021-22 was released, which held a rather positive outlook as regards the factoring market, in view of the reliefs provided vide the Amendment Act.

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Understanding ICAAP for NBFCs

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– Qasim Saif | Manager | finserv@vinodkothari.com

Systemic risk of NBFCs has been an issue for discussion, specifically in India as there have been some major NBFC failures, and the issue of inter-connectivity between NBFCs and the rest of the financial sector became clearly evident. The issue is not limited to India, an annual publication of the Financial Stability Board, called Global Monitoring Report on Non-banking Financial Intermediation has been drawing attention to the increasing relevance of non-banking financial intermediaries and the risk they pose on a global level.[1]

In order to carry out the risk assessment, the banks are required to follow the Internal Capital Adequacy Assessment Process (ICAAP) as per Pillar II of the Basel II framework. However, with the increasing importance of non-banking financial institutions, the RBI has through its Revised Regulatory Framework for NBFCs (Revised Framework)[2] have inserted the ICAAP requirements to the middle layer NBFCs too from October 2022.

Under the existing regulatory framework, the NBFCs are required to carry out stress testing of only securitisation exposures or pool of loans acquired from other institutions.

Our services and Assistance for ICAAP Implementation can be viewed here – https://vinodkothari.com/2022/09/services-and-assistance-for-icaap-implementation/

As this would be a new requirement for NBFCs, and the specific directions in this respect are still awaited, the literature and guidance in this respect is scarce. In this article we have tried to discuss in brief, the expectations of the regulator along with a probable approach for NBFCs towards the ICAAP.

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