Business NewsCOVID 19Hot Off The PressNews

Background:

Amidst the Corona crisis, PM announced  a special economic package with a new resolution. This economic package will serve as an important link in the ‘AtmaNirbhar Bharat Abhiyan” (Self Reliant India Campaign)‘.

What the Prime Minister said about the package?

In the recent past economic announcements made by the government related to the Corona crisis, which were the decisions of the Reserve Bank. The economic package that is being announced today, if added, comes to around Rs. 20 lakh crores. This package is about 10 percent of India’s GDP. With this various sections of the country and those linked to economic system will get support and strength of 20 lakh crore rupees. This package will give a new impetus to the development journey of the country in 2020 and a new direction to the Self-reliant India campaign. In order to prove the resolve of a self-reliant India, Land, Labor, Liquidity and Laws all have been emphasized in this package.

This economic package is for our cottage industry, home industry, our small-scale industry, our MSME, which is a source of livelihood for millions of people, which is the strong foundation of our resolve for a self-reliant India. This economic package is for that labourer of the country, for the farmers of the country who are working day and night for the countrymen in every situation, every season. This economic package is for the middle class of our country, which pays taxes honestly and contributes to the development of the country. This economic package is for Indian industries, which are determined to give a boost to the economic potential of India. Starting tomorrow, over the next few days, the Finance Minister will give you detailed information about this economic package inspired by the ‘Self-reliant India campaign’.

First press conference on the decoding Rs 20 Lakh Crore Package held today.

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  • Focal point: Liquidity, Labour, Law and Land.
  • 6 Major steps for MSMEs
  • Collateral free Automatic Loans upto Rs 3 lakh Crores
  • 100 % credit guarantee
  • Additional Funds for MSME revival
  • Loans to be given till October 31st
  • Rupees 20 Crore for stressed MSMEs
  • 50,000 Crore equity to be infused for viable and potential MSMEs
  • New Definition of MSMEs — Investment can be upto 1 Cr and turnover upto 5 Crore
  • Global tender to be allowed upto Rs 20 Crores
  • Other interventions for MSMEs
  • Rs 2500 crores EPF support for businesses and Workers for 3 months
  • EPF contribution reduced for Business and Workers for 3 months — Rs 6750 Crores
  • Rs 30,000 crores liquidity facility for NBFC/HCs/MFIs
  • Rs 45,000 Crores Partial Credit Guarantee Scheme 2.0 for NBFC
  • Rs 90,000 CR liquidity injection for DISCOMs
  • Relief to contractors
  • Extension of registration and completion date of real estate projects under RERA; No individual applications needed; Suo Moto be done; Registered projects expiring on or after 25th March
  • Rs 50,000 crores Liquidity through TDS/TCS reductions till March 2021
  • Tax filing due date extended to 30th November, 2020
  • Pending refunds to charitable trusts and non-corporate businesses & professions including proprietorship, partnership, LLP and Co-operatives shall be issued immediately.
  • Due date of all income tax return for FY2019-20 extended from 31st July, 2020 & 31st October, 2020 to 30th November, 2020 and Tax audit from 30th September, 2020 to 31st October, 2020.
  • Date of Assessments getting barred on 30th September, 2020 extended to 31st December, 2020 and those getting barred on 31st March, 2021 will be extended to 30th September, 2021.
  • Period of Vivad se Vishwas Scheme for making payment without additional amount will be extended to 31st December, 2020
COVID 19OP. ED.

The Government of India recently made changes to its Foreign Direct Investment Policy (FDI Policy/FDI) given the COVID-19 pandemic and the ongoing market volatility, sell offs etc., and the general economic turndown. Responding to fears that foreign investors rake up on shares of ailing companies with diminished valuations during this period, the changes seek to regulate investments from certain identified countries.

In this article, we explore the regulatory setup of FDI in India, effect of the present changes and compliance requirements that arise due to these changes.

Regulatory Framework of FDI in India

FDI is a policy decision of the Government of India, under the aegis of the Department for Promotion of Industry and International Trade (‘DPIIT’), Ministry of Commerce & Industry.

FDI policies are introduced and modified through Press Notes/Press Releases, as notified by Reserve Bank of India (RBI). Essentially, these are amendments to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (‘the TISPRO Regulations’) or the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. These notifications take effect from the date of issue of Press Notes/Press Releases, unless specified otherwise therein.

In case of any conflict, the relevant Foreign Exchange Management Act, 1999 (“FEMA”) notification will prevail. The procedural instructions are issued by RBI by way of circulars. The regulatory framework, over a period, thus, consists of Acts, Regulations, Press Notes, Press Releases, Clarifications, etc.

Sector wise Regulations

FDI in India is prohibited for activities which fall under the Prohibited Sector (atomic energy, railway operations, gambling and betting, chit funds, real estate, manufacture of tobacco products etc.). The intention behind such prohibition is to ensure FDI is restricted for sensitive sectors that concern national security, defence etc.

FDI is permitted in certain sectors under Automatic Route up to 100% (for e.g. IT sector). Under this route, no prior permission is required from the Government of India, before investments are brought in.

The other route is Government Approval Route, wherein permission from the DIPP or relevant regulator is required to bring in FDI. Permitted sectoral caps are also provided in the

Policy for any FDI which falls under the category of Approval Route. For instance, in the banking sector, 49% FDI is permitted under Automatic Route and FDI up to 74% is permitted under Government Approval Route.

Changes implemented vide Press Note 3 (2020 Series) dated April 17, 2020

The DPIIT, issued a Press Note (No. 3) on April 17, 2020 (‘PN3’) which alters Para 3.1.1 of the Consolidated FDI Policy, 2017. The extant FDI Policy was reviewed with an intention to curb opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic.

The Consolidated FDI Policy, 2017 (“Con FDI Policy”) earlier restricted Bangladesh and Pakistan from investing in India. Any person from these countries could invest in India only after obtaining prior permission of the Government of India, through the Government Approval Route.

Para 3.1.1 as it stood till Press Note 3 (2020 Series)

A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.

Press Note 3, dated 17-4-2020 extends the Government Approval route to all countries that share a land border with India. In effect, five other nations, i.e. Afghanistan, Bhutan, China, Myanmar and Nepal, in addition to Pakistan and Bangladesh, are also subject to restrictions under the FDI Policy, through Government Approval Route. In effect, investment from these seven nations can be made in India only by obtaining prior permission with the Government of India, and is subject to the Sectoral Cap under extant FDI Policy. 

Revised Position: Press Note 3 (2020 Series)

Para 3.1.1: 3.1.1(a) A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.

Beneficial Ownership (‘BO’)

Through PN3, the Government has also introduced the aspect of transfer of BO of any existing or future FDI in an entity in India. It provides that where the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly results in BO, which falls under the restrictions imposed in Para 3.1.1(a) of the FDI Policy (i.e. if the investor belongs to any one of the seven countries), such change in the BO will also require Government approval.

Revised Position: Press Note  3 (2020 Series)

3.1.1(b) In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of Para 3.1.1(a), such subsequent change in beneficial ownership will also require Government approval.

Concept of Beneficial Ownership, Beneficial Interest and Significant Beneficial Ownership

BO is not defined under the FDI Policy. The term ‘Beneficial Ownership’ is only defined under Section 2(fa) of the Prevention of Money Laundering Act, 2002 and reads as under:

An individual who ultimately owns or controls a client of a reporting entity or the person on whose behalf a transaction is being conducted and includes a person who exercises ultimate effective control over a juridical person.”

Further, Section 89 of the Companies Act, 2013 read with the Companies (Management and administration) Rules, 2014 (2018 amendment) provides for the distinction between legal owners and beneficial owners of shares having Beneficial Interest (“BI”),  to include any direct or indirect right or entitlement in a share through any contract or arrangement or otherwise to the rights attached with the share or receive dividend on its distribution. Any change in BI needs to be reported by the Company to the regulator, Ministry of Corporate Affairs (“MCA”).

Additionally, Section 90 of the Companies Act, 2013 read with the Companies (Significant Beneficial Owners) Rules, 2018, brings out the concept of the Significant Beneficial Ownership (‘SBO’) and states that whenever there is change in SBO, the Companies need to report to the MCA about the SBO. In order to ascertain the SBO, the following points need to be considered to ascertain if there is any reporting requirement or not:

  1. Identify if there are any indirect holding through a body corporate, LLP, Partnership, Trust, HUF;
  2. If individual holding is 10% or more in the Company, the company needs to report to the MCA;
  3. If individual shareholding, voting rights, dividend right exceeds 10%, SBO needs to be reported to MCA.

On examination of the records available on MCA, RBI and the regulatory authority, will have a fair idea about the investments made by the neighbouring country through Automatic Route. Any changes in the SBO or the BI will now require in addition to reporting to MCA, an in-principle approval from the DPIIT or the approval from the relevant authority under the  Government of India.

Conclusion

Indian entities have been significantly benefited by the investments made by or neighbouring countries, especially FDI from China. According to sources[1], Chinese FDI into India is approximately $6.2 billion, there is significant investments in start-ups.

This policy of the Government does not impact the existing investments made in India. There will be closer look at the investments that the country receives from the neighbouring countries due to the volatility in the market as a result of the COVID-19 pandemic.

These amendments will be effective once the requisite amendments are made to Rule 6 of the FEMA (Non-Debt Instruments) Rules, 2019. Any direct or indirect transfer of ownership of any existing FDI in the Indian entity which is more than 10% will have to be reported both to the MCA and to the exchange control regulator, RBI.

The impact on the economy, especially with this pandemic COVID –19, particularly on the start-ups is unknown. It is possible that that there will be closer inspection on the all FDIs. In respect of FDIs from neighbouring nations, since such investments now require prior approval from the Government i.e. Approval Route, and since Government Approval for FDI will requires significant amount of time, it is expected that the Companies expecting such FDI should be prepared for delays in receiving investments which is likely to have implications for future investments by venture capital funds, especially the start-ups that have seen significant investments from Chinese investors. The impact on the country’s GDP in view of this policy decision is very unclear at this stage. 


*Advocate, Shivadass & Shivadass (Law Chambers)

[1] https://www.thehindubusinessline.com/info-tech/how-china-dominates-tech-investments-in-india/article31380773.ece

Banking Sector
COVID 19OP. ED.

In order to soften the global impact of COVID-19 on the banking sector, Reserve Bank of India on 27-3-2020 announced a moratorium for a period of 3 months starting from 1-3-2020 to 31-5-2020 on repayment of all term loans by borrowers including individuals and companies. Clause 5 of RBI statement did not make the moratorium mandatory rather discretionary meaning thereby if a borrower wants, he can pay the EMI with interest and opt out of the moratorium option. On the other hand, if a borrower does avail such a moratorium then that would not lead to downgrading of the borrower’s credit rating or affect the risk classification of the loan. Further, availing the moratorium will not entail any change in the existing terms and conditions of the loan. The interest on EMI, however, shall continue to accrue on the outstanding amount and the collective interest for the 3 months shall become due and payable only after the expiry of deferment period.

This article addresses a set of peculiar issues that have arisen in view of the arrangement of repayment of loans in terms of RBI guidelines and the view taken by Courts in a few cases. The most glaring issue relates to the date of coinciding of an account becoming NPA with the declaration of 3 months moratorium period starting from 01.03.2020.

The Income Recognition and Asset Classification Guidelines (IRAC Guidelines) of RBI provide for a three-stage process before an account is declared as NPA. On default of the first 30 days, the borrower’s account is classified as Special Mention Account–1 (SMA-1) and if the instalment is overdue by 60 days, the account is classified as Special Mention Account–2 (SMA-2) and if the instalment is overdue by a period of 90 days, the account is classified as Non-performing Asset (NPA).

The case of Anant Raj Ltd. v. Yes Bank[1] filed before the Delhi High Court appears to be the first case on the issue as to whether an account having being declared SMA-2 on 01.03.2020 would be eligible to avail the moratorium period or not? The Delhi High Court interpreted the Guidelines in a manner that it provides a status quo even in the classification of any account which is already in default. The Court held that:

“The restriction on change in classification as mentioned in the regulatory package shows that RBI has stipulated that the account which has been classified as SMA-2 cannot further be classified as a non-performing asset in case the instalment is not paid during the moratorium period i.e. between 01.03.2020 and 31.05.2020 and status quo qua the classification as SMA-2 shall have to be maintained.

The Court further held that:

‘…for a period of three months there will be a moratorium from payment of that instalment. However, stipulated interest and penal charges shall continue to accrue on the outstanding payment even during the moratorium period. If post the moratorium period, borrower fails to pay the said instalment, classification would then automatically change as per the IRAC Guidelines.”

A similar proposition arose before the Bombay High Court in Transcon Sky City Pvt. Ltd. v. ICICI Bank [2], where the question for consideration was whether the moratorium period is excluded in the computation of the 90-day period for amounts that fell due prior to 1-3-2020 and which remain unpaid or in default. The Court prima facie held that the protection sought to be availed by Transcon Sky City by virtue of RBI circulars would clearly apply to all amounts due after 01.03.2020.

Another interesting yet distinct controversy has arisen before the Delhi High Court in Indiabulls Commercial Credit Ltd. v. SIDBI[3] where ICCL challenged the demand raised by Small Industrial Development Bank of India (SIDBI) for the month of April 2020. The Court considered whether the 3-months’ RBI moratorium is applicable to Non-Banking Financial Institutions (NBFC) or not? Unfortunately, RBI has not given any clarity on this issue and to twist the knife, the Indian Bank’s Association (IBA) circular leaves out NBFCs as beneficiaries of 3 month moratorium period. An indisputable argument of the NBFCs is that money is borrowed from the financial institutions in order to disburse loans to low income earners and smaller sectors. Naturally, these sectors will default in repayment by availing moratorium and if the financial institutions do not ease the repayment terms by NBFCs then it would be calamitous.

The orders passed by Delhi High Court and Bombay High Court have met with some criticism from the banking industry, apprehending its possible rippling effect on other accounts, and a possibility of other defaulters taking a shield of such orders to protect their accounts from any further downgrading.

The borrowers claim that the Courts have correctly interpreted RBI circulars to mean that status quo shall be maintained for all term loan accounts maintained with the banks as on 01.03.2020.

It would be interesting to see if the judgments are challenged by the banks or financial institutions, and what is the outcome. For the present however, the Courts have acted with a pragmatic approach to find a solution to the economic and financial difficulties of the borrowers.


*Arjun Garg is Advocate on Record and Partner at GSL Chambers

**Rati Tandon is an Advocate and Associate at GSL Chambers

[1] 2020 SCC OnLine Del 543 

[2] 2020 SCC OnLine Bom 626 

[3] 2020 SCC OnLine Del 573

Case BriefsCOVID 19High Courts

Bombay High Court: G.S. Patel, J., while fashioning a workable solution limited to the facts the instant case, ordered that subject to the conditions as set out in the order, the period of the moratorium during which there is a lockdown will not be reckoned by ICICI Bank for the purposes of computation of the 90-day NPA declaration period.

Facts & issue

The High Court was hearing a writ petition wherein the petitioners sought the exclusion of the moratorium period for the computation of the 90-day period. Notably, in the wake of the COVID-19 pandemic and the consequent lockdown, the Reserve Bank of India (“RBI”) has directed that there will be a moratorium in regard to repayments and classifications as NPAs. This moratorium period, as appears prima facie from the RBI circulars, operates with effect from 1-3-2020 and, as currently advised, goes up to 31-3-2020.

The petitioners had finance facilities with ICICI Bank which were to be repaid in instalments. The petitioners defaulted in repayment schedule due on 15-1-2020 and 15-2-2020. Notably, as per RBI’s directions, if the payment is not made and the account is not regularised within 90 days of the date of default then the borrower’s account gets classified as an NPA. In the instant case, the 90-day period in respect of 15-1-2020 default would end on 15-4-2020 and that for 15-2-2020 will end on 15-5-2020. The question before the Court was:

Now that the moratorium has started running, should there be a suspension of this countdown timer for NPA-declaration and for reckoning the 90-day period?

Contentions

Dr Birendra Saraf, Senior Advocate appearing for the petitioners submitted that the moratorium period must be excluded even for the computation of any balance days of the NPA declaration 90-day period. Otherwise, the moratorium itself would be meaningless in situations such as those of the petitioners. Per contra, Viraag Tulzapurkar, Senior Advocate representing the respondent ICICI Bank said that a broad-based declaration or finding returned by a Court could have all manner of unintended consequences in respect of other borrowers and that the Court should be slow in extending any such relief by an ad-interim order that may be construed to apply across the board. He also raised question on maintainability of the instant writ petition but the High Court left the issue open for an appropriate stage.

Order

According to the High Court, the instant case required fashioning a workable order limited to the facts of this case ensuring that it sets no precedent for ICICI Bank in other cases and yet ensuring that the petitioners have enough latitude to be able to service their debt. Having regard to the facts of this case, and recognising the need to sufficiently protect the interests of both sides, the Court made the following order:

(a) Subject to the conditions set out below, the period of the moratorium during which there is a lockdown will not be reckoned by ICICI Bank for the purposes of computation of the 90-day NPA declaration period. As currently advised, therefore, the period of 1-3-2020 until 31-5-2020 during which there is a lockdown will stand excluded from the 90-day NPA declaration computation until — and this is the condition — the lockdown is lifted. Thus, irrespective of the continuance of the moratorium until 31-5-2020, if the lockdown is lifted at an earlier date than 31-5-2020, then this protection available to the petitioners will cease on the date of lifting of the lockdown, and the computing and reckoning of the remainder of the 90-day period will start from that earlier lifting of the lockdown-ending date.

(b) In that scenario, should the lockdown be lifted before 31-5-2020, the petitioners will have 15 days after the ending of the lockdown in which to regularise the payment under the first instalment due on 15-1-2020 and a further three weeks thereafter to regularise the payment under the second instalment due on 15-2-2020.

(c) If the lockdown extends beyond 31-5-2020, then these days will be deferred accordingly, irrespective of whether the moratorium itself is extended beyond 31-5-2020.

(d) The whole of the moratorium period is, evidently, excluded for all amounts that fall due during that moratorium period.

Clarifications

By way of abundant caution, the High Court made certain clarifications:

  1. This order is not a backward extension of the moratorium to January 2020. It is predicated on, and only on, the current lockdown period which makes normal functioning impossible. The relief to the petitioners is co-terminus with the lockdown period, not the declared end of the moratorium.
  2. This may result in additional days (less than 90) being allowed to be reckoned in the countdown or timer because the lockdown came into effect after 1-3-2020. But that is a consequence the petitioners must accept in regard to the prior defaults.
  3. As to whether the petitioners are entitled to the benefit of the entire moratorium period in respect of the prior defaults of January and February 2020, the rival contentions are expressly kept open.
  4. These directions consciously do not take into account any partial or staggered lifting of the lockdown, but only a complete lifting. The reason is self-evident. It may be well nigh impossible for any court ever to decide whether or not a ‘partial lifting’ of the lockdown enables the petitioners to resume their normal operations and, if so, to what extent. The exclusion from the 90-day NPA declaration timer and countdown can only therefore operate during the lockdown period, full or partial, and will end upon the complete lifting of the lockdown.
  5. ICICI Bank is not to be held accountable or liable for these extensions.
  6. This order will not serve as a precedent for any other case in regard to any other borrower who is in default or any other bank. Each of these cases will have to be assessed on their own merits.
  7. These are only prima facie and tentative views. Nothing in this order is to be construed as a final determination of any issues or competing rights. [Transcon Skycity (P) Ltd. v. ICICI Bank, 2020 SCC OnLine Bom 626 , dated 11-4-2020]
Case BriefsSupreme Court

Supreme Court: The 3-judge bench of Rohinton Fali Nariman, S Ravindra Bhat and V Ramasubramania, JJ has struck down the curb on trading in virtual currency, cryptocurrency and bitcoins in India.

In the 180 pages long verdict penned by Justice Ramasubramania, it was held,

“When the consistent stand of RBI is that they have not banned Virtual currencies (VCs) and when the Government of India is unable to take a call despite several committees coming up with several proposals including two draft bills, both of which advocated exactly opposite positions, it is not possible for us to hold that the impugned measure is proportionate.”

The Court was hearing the matter wherein, the Internet and Mobile Association of India (IAMAI), whose members include cryptocurrency exchanges, and others had objected to a 2018 RBI circular directing regulated entities to not deal with cryptocurrencies. The petitioners had argued that the RBI’s circular taking cryptocurrencies out of the banking channels would deplete the ability of law enforcement agencies to regulate illegal activities in the industry. IAMAI had claimed the move of RBI had effectively banned legitimate business activity via the virtual currencies (VCs).

  • Reserve Bank of India issued a “Statement on Developmental and Regulatory Policies” on April 5, 2018, paragraph 13 of which directed the entities regulated by RBI (i) not to deal with or provide services to any individual or business entities dealing with or settling virtual currencies and (ii) to exit the relationship, if they already have one, with such individuals/ business entities, dealing with or settling virtual currencies (VCs).
  • Following the said Statement, RBI also issued a circular dated April 6, 2018, in exercise of the powers conferred by Section 35A read with Section 36(1)(a) and Section 56 of the Banking Regulation Act, 1949 and Section 45JA and 45L of the Reserve Bank of India Act, 1934 and Section 10(2) read with Section 18 of the Payment and Settlement Systems Act, 2007, directing the entities regulated by RBI (i) not to deal in virtual currencies nor to provide services for facilitating any person or entity in dealing with or settling virtual currencies and (ii) to exit the relationship with such persons or entities, if they were already providing such services to them.

The Court took note of the fact that the VCs are not banned, but the trading in VCs and the functioning of VC exchanges are sent to comatose by the impugned Circular by disconnecting their lifeline namely, the interface with the regular banking sector.

“What is worse is that this has been done

      • despite RBI not finding anything wrong about the way in which these exchanges function and
      • despite the fact that VCs are not banned.”

The Court further said that the concern of RBI is and it ought to be, about the entities regulated by it. Till date, RBI has not come out with a stand that any of the entities regulated by it namely, the nationalized banks/scheduled commercial banks/cooperative banks/NBFCs has suffered any loss or adverse effect directly or indirectly, on account of the interface that the VC exchanges had with any of them.

The Court, however, held that anything that may pose a threat to or have an impact on the financial system of the country, can be regulated or prohibited by RBI, despite the said activity not forming part of the credit system or payment system. It explained,

“RBI is the sole repository of power for the management of the currency, under Section 3 of the RBI Act. RBI is also vested with the sole right to issue bank notes under Section 22(1) and to issue currency notes supplied to it by the Government of India and has an important role to play in evolving the monetary policy of the country, by participation in the Monetary Policy Committee which is empowered to determine the policy rate required to achieve the inflation target, in terms of the consumer price index.”

The Court also rejected the contention that the impugned Circular was vitiated by malice in law and that it is a colorable exercise of power. It said,

“Irrespective of what VCs actually do or do not do, it is an accepted fact that they are capable of performing some of the functions of real currencies. Therefore, if RBI takes steps to prevent the gullible public from having an illusion as though VCs may constitute a valid legal tender, the steps so taken, are actually taken in good faith. The repeated warnings through press releases from December 2013 onwards indicate a genuine attempt on the part of RBI to safeguard the interests of the public.”

[Internet and Mobile Association of India v. Reserve Bank of India, 2020 SCC OnLine SC 275, decided on 04.03.2020]

Hot Off The PressNews

The Reserve Bank of India (RBI) has imposed, by an order dated January 31, 2020, a monetary penalty of Rs 2 lakh on Fortune Integrated Assets Finance Ltd., Mumbai, for non-compliance with directions issued by RBI on ‘Monitoring of Frauds in NBFCs (Reserve Bank) Directions, 2016’.

The penalty has been imposed in exercise of powers vested in RBI under the provisions of clause (b) of sub-section (1) of Section 58 G read with clause (aa) of sub-section (5) of Section 58B of the Reserve Bank of India Act, 1934, taking into account the failure of the company to adhere to the aforesaid directions issued by RBI. This action is based on deficiencies in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement entered into by the company with its customers.

Background

The statutory inspection of the company, conducted by RBI, with reference to its financial position as on March 31, 2018, had observed, inter alia, non-compliance with RBI directions on ‘Non-Banking Financial Companies – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016’, ‘Non-Banking Financial Companies – Corporate Governance (Reserve Bank) Directions, 2015’ and ‘Monitoring of Frauds in NBFCs (Reserve Bank) Directions, 2016’. In furtherance to the same, a notice was issued to the company advising it to show cause as to why penalty should not be imposed for failure to comply with the directions issued by RBI. After considering the company’s reply to the notice, oral submissions made during the personal hearing and examination of additional submissions, RBI concluded that the aforesaid charges of non-compliance with RBI directions on ‘Monitoring of Frauds in NBFCs (Reserve Bank) Directions, 2016’ warranted imposition of monetary penalty.


Reserve Bank of India

[Press Release dt. 31-01-2020]

Hot Off The PressNews

RBI Governor launched the “Mobile Aided Note Identifier (MANI)”, a mobile application for aiding visually impaired persons to identify the denomination of Indian Banknotes.

Indian banknotes contain several features which enable the visually impaired (colour blind, partially sighted and blind people) to identify them, viz., intaglio printing and tactile mark, variable banknote size, large numerals, variable colour, monochromatic hues and patterns. Technological progress has opened up new opportunities for making Indian banknotes more accessible for the visually impaired, thereby facilitating their day to day transactions. As announced in the Statement on Developmental and Regulatory Policies of June 6, 2018, the Bank has developed a mobile application, MANI, with the following features:

a) Capable of identifying the denominations of Mahatma Gandhi Series and Mahatma Gandhi (New) series banknote by checking front or reverse side/part of the note including half folded notes at various holding angles and broad range of light conditions (normal light/day light/low light/ etc.).

b) Ability to identify the denomination through an audio notification in Hindi/English and non-sonic mode such as vibration (suitable for those with vision and hearing impairment).

c) After installation, the mobile application does not require the internet and works in offline mode.

d) Ability to navigate the mobile application via voice controls for accessing the application features wherever the underlying device & operating system combination supports voice-enabled controls.

e) The application is free and can be downloaded from the Android Play Store and iOS App Store without any charges/payment.

f) This mobile application does not authenticate a note as being either genuine or counterfeit.


Reserve Bank of India

[Press Release dt. 01-01-2020]

Business NewsNews

The Reserve Bank of India released on its website, “Guidelines for ‘on tap’ Licensing of Small Finance Banks in the Private Sector”.

Major changes from the earlier Guidelines on Small Finance Banks dated November 27, 2014, are (i) The licensing window will be open on-tap; (ii) minimum paid-up voting equity capital / net worth requirement shall be ? 200 crore; (iii) for Primary (Urban) Co-operative Banks (UCBs), desirous of voluntarily transiting into Small Finance Banks (SFBs) initial requirement of net worth shall be at ? 100 crore, which will have to be increased to ? 200 crore within five years from the date of commencement of business. Incidentally, the net-worth of all SFBs currently in operation is in excess of ? 200 crore; (iv) SFBs will be given scheduled bank status immediately upon commencement of operations; (v) SFBs will have general permission to open banking outlets from the date of commencement of operations; (vi) Payments Banks can apply for conversion into SFB after five years of operations, if they are otherwise eligible as per these guidelines.

Background

It may be recalled that the Reserve Bank of India (RBI) had last issued guidelines for licensing of Small Finance Banks in the private sector on November 27, 2014. Consequently, the Reserve Bank issued in-principle approval to ten applicants and they have since established the banks. It was mentioned in the guidelines that after gaining experience in dealing with these banks, RBI would consider receiving the applications on a continuous basis. In the Second Bi-monthly Monetary Policy Statement, 2019-20 dated June 06, 2019, it was announced that the Draft Guidelines for ‘on tap’ Licensing of such banks will be issued. Accordingly, the draft guidelines were published on the RBI website on September 13, 2019 inviting comments from the stakeholders and members of the public. Taking into consideration the responses received, the final guidelines have now been issued.


Reserve Bank of India

[Press Release dt. 05-12-2019]

Cabinet DecisionsLegislation Updates

The Union Cabinet approved for withdrawing of the International Financial Services Centres Authority, 2019 Bill which was introduced in the Rajya Sabha on 12thFebruary, 2019 and pending in the Rajya Sabha and introducing the International Financial Services Centres Authority Bill, 2019 in the Lok Sabha in the ensuing session of the Parliament.

Benefits

Currently, the banking, capital markets and insurance sectors in IFSC are regulated by multiple regulators i.e. RBI, SEBI and IRDAI. The dynamic nature of business in the IFSCs necessitates a high degree of inter-regulatory coordination.  It also requires clarifications and frequent amendments in the existing regulations governing financial activities in IFSCs.

The development of financial services and products in IFSCs would require focused and dedicated regulatory interventions.  Hence a need is felt for having a unified financial regulator for IFSCs in India to provide a world-class regulatory environment to financial market participants.

Further, this would also be essential from an ease of doing business perspective. The unified authority would also provide the much-needed impetus to further development of IFSC in India in-sync with the global best practices.

Background

The Union Cabinet in its meeting held on February 6, 2019, had approved the proposal for the establishment of a unified authority for regulating all financial services through the introduction of the International Financial Services Centres Authority Bill 2019 in the Parliament.  Subsequently, the International Financial Services Centres Authority Bill, 2019 was introduced in the Rajya Sabha on February 12, 2019, by the then Hon’ble Minister of State (Finance).

The Lok Sabha Secretariat has now conveyed that this is a Finance Bill under Article 117(1) of the Constitution and that it should be introduced in Lok Sabha accordingly with the recommendation of the President under Article 117(1) and 274(1) of the Constitution.


Ministry of Finance

[Press Release dt. 20-11-2019]

[Source: PIB]

Business NewsNews

Reserve Bank of India (RBI) has, by an order dated July 31, 2019, imposed monetary penalty on seven banks for non-compliance with certain provisions of directions issued by RBI on “Code of Conduct for Opening and Operating Current Accounts”, “Opening of Current Accounts by Banks – Need for Discipline”, “Discounting/ Rediscounting of Bills by Banks”, “Reserve Bank of India (Frauds classification and reporting by commercial banks and select FIs) directions 2016”, “End Use of Funds – Monitoring ” and “Deposits on Balance Sheet Date”, as detailed below:

Sl. No. Name of the bank Amount of penalty
(Rs in crore)
1. Allahabad Bank 2.0
2. Bank of Baroda 1.5
3. Bank of India 1.5
4. Bank of Maharashtra 2.0
5. Indian Overseas Bank 1.5
6. Oriental Bank of Commerce 1.0
7. Union Bank of India 1.5

The penalties have been imposed in exercise of powers vested in RBI under the provisions of Section 47A(1)(c) read with Sections 46(4)(i) and 51(1) of the Banking Regulation Act, 1949, taking into account the failure of the banks to adhere to the aforesaid directions issued by RBI. This action is based on the deficiencies in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement entered into by the banks with their customers.

Background

A scrutiny was carried out by RBI in the accounts of the companies of a Group and it was observed that the banks had failed to comply with provisions of one or more of the directions issued by RBI as mentioned above. Based on the findings of the scrutiny, Notices were issued to the banks advising them to show cause as to why penalty should not be imposed for non-compliance with the directions. After considering the replies received from the banks, oral submissions made in the personal hearings, where sought by the banks, and examination of additional submissions, if any, RBI came to the conclusion that the aforesaid charges of non-compliance with RBI directions were sustained and warranted imposition of monetary penalty on aforementioned seven banks, based on the extent of non-compliance in each bank.


[Press release dt. 02-08-2019]

Reserve Bank of India

Hot Off The PressNews

Supreme Court: The Court has reserved order on two contempt petitions filed against Reserve Bank of India (RBI) for not complying with the Supreme Court’s direction to disclose information under the Right to Information (RTI) Act.

A bench headed by Justice L Nageshwar Rao reserved the order after hearing the parties in the case, Girish Mittal and Subhash Chandra Agrawal, who filed contempt pleas. The two had claimed that RBI and its former Governor Urjit Patel had “willfully and deliberately” disobeyed the Court’s judgement asking the central bank to disclose information under the RTI Act. The two pleas sought initiation of contempt of court action against former Governor for not disclosing information as directed by the top court. One of the contempt plea filed by Girish Mittal said that RBI refused to provide information sought about the inspection reports of some banks.

In December 2015, the petitioner under the RTI Act had sought certain information which included copies of inspection reports of ICICI Bank, Axis Bank, HDFC Bank and State Bank of India from April 2011 till December 2015. The petitioner had also sought copies of case files with file notings on various irregularities detected by RBI in case of Sahara Group of companies and erstwhile Bank of Rajasthan by these entities themselves and their known/unknown promoters. However, RBI denied the information in January 2016 that such information is exempted under Section 8(1)(e) of the RTI Act  and Section 45NB of the Reserve Bank of India Act.

The petitioners contended that top court in 2016 while directing disclosure of a very similar type of information sought under the RTI Act had observed RBI  is clearly not in any fiduciary relationship with any bank. Filing the contempt pleas, petitioners stated that the responses of RBI are in complete violation of the apex court judgment by which it was held that RBI ought to act with transparency and not hide information that might embarrass individual banks and it is duty bound to comply with the provisions of the RTI Act and disclose the information sought.

(Source: ANI)

Business NewsNews

RBI has imposed, by an order dated February 25, 2019, a monetary penalty of Rs 20 million (Rupees Twenty Million) on Punjab National Bank (the bank) for non-compliance with directions issued by RBI. This penalty has been imposed in exercise of powers vested in RBI under the provisions of Section 47A(1)(c) read with Section 46(4)(i) of the Banking Regulation Act, 1949, taking into account failure of the bank to adhere to the aforesaid directions issued by RBI and based on the extent of non-compliance in the bank.

This action is based on deficiencies in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement entered into by the bank with its customers.

[Press Release: 2018-2019/2300]

[Dt. 27-03-2019]

Reserve Bank of India

Legislation UpdatesRules & Regulations

G.S.R. 151(E)—In exercise of the powers conferred by clause (g) of sub-section (3) of Section 6 and Section 47 of the Foreign Exchange Management Act, 1999 (42 of 1999), the Reserve Bank of India hereby makes the following amendments to the Foreign Exchange Management (Export and import of Currency) Regulations, 2015 (Notification No. FEMA 6(R)/RB-2015 dated December 29,2015) (hereinafter referred to as ‘the Principal Regulations’), namely:—

1. Short Title & Commencement:—

(i) These Regulations may be called the Foreign Exchange Management (Export and import of Currency) (Amendment) Regulations, 2019
(ii) They shall come into force from the date of their publication in the Official Gazette.

2. Amendment to Regulation 8

(i) The existing sub-Regulation (1) of Regulation 8 shall be substituted with the following, namely:—

    (1) take or send out of India to Nepal or Bhutan, currency notes of Government of India and Reserve Bank of India notes (other than notes of denominations of above Rs. 100 in either case), provided that an individual travelling from India to Nepal or Bhutan can carry Reserve Bank of India notes of Mahatma Gandhi (new) Series of denominations Rs. 200/- and/or Rs. 500/- up to a total limit of Rs. 25,000;

[No. FEMA 6(R)/(1)/2019-RB]

Reserve Bank of India

Case BriefsTribunals/Commissions/Regulatory Bodies

Central Information Commission (CIC): The present matter was taken up by Sudhir Bhargava (Information Commissioner), under the Right to Information Act, 2005.

Appellant had sought information primarily on two points under the Right to Information Act, 2005, which was:

  • Total number of currency notes of Rs 2000 printed daily from 09-11-2016 to 30-11-2016; and
  • Total Number of currency notes of Rs 500 printed daily from 09-11-2016 to 30-11-2016.

Further, a second appeal was filed on the grounds that the CPIO concerned denied information under Section 8(1)(a) of the RTI Act.

According to the respondent and the submissions made on his behalf, he had submitted response to the RTI application and explained that the nature of currency printing and allied activities call for utmost exclusivity and confidentiality. He further stated that the information cannot be shared with the public at large, lest this result in proliferation of counterfeit currency and economic chaos. Disclosure of the details as regards quantity manufactured during specific period of printing need not be made known to the general public so as to safeguard the integrity of currency and to guard against counterfeiters, such information is exempted from disclosure under Section 8(1)(a) of the RTI Act.

However, the Commission on perusal of the records and submissions made, noted that the information i.e. the total number of currency notes printed daily is not so sensitive so as to attract the exemption provisions under Section 8(1)(a), RTI Act as it relates to a past event and it cannot be presumed that its disclosure would lead to divulging the other non-disclosable information pertaining to the printing of currency notes.

Thus the CPIO was directed to furnish information as asked in point number 1 & 2 within 4 weeks from the receipt of order. [Harinder Dhingra v. CPIO, Bhartiya Reserve Bank Note Mudran (P) Ltd.,2018 SCC OnLine CIC 1607, Order dated 05-12-2018]

Business NewsNews

The Reserve Bank of India (RBI) tightened rules on banks’ statutory auditors saying it reserved the right to not approve appointments of such auditors for a specified period if their audit quality was not found satisfactory. The RBI said it will take action against statutory auditors of banks in case of any lapses in their auditing processes including instances such as misstatement of a bank’s financial statement or wrong information in audit report. The framework would cover, inter alia, instances of divergence identified in asset classification and provisioning during the RBI inspection vis-à-vis the audited financial statements of banks.

[Source: The Economic Times]

Legislation UpdatesNotifications

Reserve Bank of India (RBI) has issued instructions to banks regarding the safety of bank lockers for exercising due care and necessary precaution for the protection of the lockers provided to the customer, reviewing the systems in force for their operation on an ongoing basis and taking necessary steps, having well-documented security procedures, properly training staff concerned in the procedure, and internal auditors ensuring that procedures are strictly adhered to. Further, as per an RBI communication to banks (in the context of an incident of bank burglary in which safe deposit lockers were broken open and jewellery reportedly taken away), the liability of the bank depends on the facts and circumstances of the incident and that despite the conditions of the lease agreement that lessees should insure the contents of the lockers, bank can be held liable if negligence is proved (having regard to the conditions of the strong room, the lockers, the safeguards, require in the light of the location etc.).

As per inputs from Public Sector Banks (PSBs), during the last three financial years and for the period up to 31.7.2018 in the current financial year, 43 cases of theft took place in the lockers of PSBs and the approximate amount of loss reportedly suffered by customers is Rs. 16.8 crore? .State / Union territory-wise details of theft from bank lockers of PSBs, reported by PSBs during the said period, are at Annexure. PSBs have informed that FIRs were lodged in all the cases, some arrests have been made by the police, and valuables worth Rs. 6.5 crore have been recovered so far in respect of these cases.

As per inputs from PSBs, banks exercise reasonable care and precaution for the protection of the strong room and the lockers provided, and that security measures including security of locker rooms are reviewed periodically. To strengthen security of lockers, banks also monitor access to locker rooms by CCTV cameras and install burglar alarms. Liability to compensate is governed by provisions of extant applicable laws, such as the Indian Contract Act, 1872, and as such, no specific legislation in this regard is proposed.

Ministry of Finance

Corp Comm LegalExperts Corner

Nudged by several quarters, Reserve Bank of India (RBI) has taken an explicit step towards “ringfencing regulated entities” by prohibiting Indian banks from dealing with or providing services to any entities or individuals who deal with virtual currencies. A specified period of time shall be provided to those entities who are already providing these services to exit the industry.

RBI’s aforesaid step cuts air supply to the highly speculative and unregulated cryptocurrency market. Along with this move, RBI also announced that it would be coming up with its own version of a digital currency which would be a centrally regulated currency.

Before we set out to discuss the implications of this move, it is pertinent to briefly discuss the term “cryptocurrency”.

Cryptocurrencies essentially include digital money. The most popular cryptocurrency which nowadays has become a household name is bitcoin. Cryptocurrencies do not have any intrinsic value and are completely opposite to the Government issued money which has its equivalent in gold.

Cryptocurrencies were devised in order to dispense with the intermediaries and create a peer-to-peer lending system. It has helped in lowering transactional costs and by virtue of being based on cryptography which is quite secure. However, various factors like their volatile nature, lack of a central regulatory authority, no physical equivalent contributed to the growing suspicion around cryptocurrencies and making them unreliable. Institutions and authorities as big as the International Monetary Fund have become wary of cryptocurrencies.

RBI’s move of cordoning the banks under its aegis from any kind of dealing with cryptocurrencies is at best a protective and cautious measure. In the wake of the recent financial scams which have rocked the country and its banking system and massive erosion of public confidence in the financial markets, a pre-emptive step of this kind is welcome.

However, this spells doom for traders who have been dealing in cryptocurrencies. It is to be noted that RBI has not directly placed any ban on cryptocurrencies but has constructively made trading in them almost impossible. If a middle class investor has invested in bitcoins or any other virtual currency, he/she will now not be able to convert their earnings from cryptocurrencies into money. This would lead to huge financial losses not only to the individual but also to the Government which collects huge amounts as taxes from cryptocurrencies.

It is difficult to term RBI’s move blanketly as a positive or a negative step. Some factions are arguing that it is a dictatorial move, as RBI plans to launch its own digital currency while protecting its banks from other virtual currencies.

However, given the volatility and uncertainty extant in the cryptocurrency market, it is efficient, if the Government wants to dispense with the unregulated digital currency and introduce its own digital currency. Such a move is likely to bring about the benefits of a digital currency without having to compromise on the security and safety of small and midsize investors.

One of the most pertinent questions in the wake of this announcement is that whether this step should be looked upon as a death knell to cryptocurrencies in India. RBI has isolated virtual currencies by making them a pariah to its banks. This means that one cannot redeem the cryptocurrencies held by them as bank money. Though, it is beyond doubt that this would hit the cryptocurrency traders hard, but a number of ways may be devised in order to utilise cryptocurrencies through other mechanisms.

For instance, in some countries, people use bitcoins to buy Amazon coupons. Hence, it may be fallacious to term that RBI’s announcement would completely efface unregulated virtual currencies from India. It may be tougher to deal in them but not impossible.

The efficacy of RBI moves in case of cryptocurrencies will have to face the test of time.

* Managing Partner of Corp Comm Legal

** Research Associate.

Hot Off The PressNews

Reserve Bank of India (RBI) has made linking of national biometric ID Aadhaar to bank accounts mandatory as part of its updated ‘Know Your Customer (KYC)’ guidelines. This, however, will be subject to the final decision of the Supreme Court on making of Aadhaar mandatory, RBI stated in its Master Direction – Know Your Customer (KYC) Direction, 2016 (updated as on April 20, 2018).

Till now, an Officially Valid Document (OVD) for address proof together with Permanent Account Number (PAN) issued by the Income Tax Department and a recent passport size photograph were the key KYC documents. But in the amended Customer Due Diligence (CDD) procedure, RBI said, “The Aadhaar number, the PAN or Form No. 60” need to be obtained from an individual who is eligible for applying for the biometric ID. RBI has done away with sections relating to the use of other OVD by banks for address and identity proof.

For residents of Jammu and Kashmir, Assam or Meghalaya, who do not submit Aadhaar or proof of application of enrolment for Aadhaar, the bank may obtain a “certified copy of an OVD containing details of identity and address and one recent photograph,”.

RBI said Aadhaar number shall not be sought from individuals who are not residents. “From an individual who is not eligible to be enrolled for an Aadhaar number, or who is not a resident, the following shall be obtained: PAN or Form No. 60, one recent photograph and a certified copy of an OVD containing details of identity and address.”

In terms of the provisions of Prevention of Money-Laundering Act, 2002 and the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005, Regulated Entities (REs) are required to follow certain customer identification procedures while undertaking a transaction either by establishing an account based relationship or otherwise and monitor their transactions. REs take steps to implement provisions of Prevention of Money-Laundering Act, 2002 and the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005, as amended from time to time, including operational instructions issued in pursuance of such amendment(s).

The revised Master Direction is in accordance with the changes carried out in the PML Rules vide Gazette Notification GSR 538(E) dated June 1, 2017 and thereafter and is subject to the final judgment of the Hon’ble Supreme Court in the case of Justice K.S. Puttaswamy (Retd.)  v. Union of India (Aadhaar case).

Read the Directions HERE.

[RBI/DBR/2015-16/18]

[Master Direction DBR.AML.BC.No.81/14.01.001/2015-16]

Business NewsNews

Reserve Bank has repeatedly through its public notices on December 24, 2013, February 01, 2017 and December 05, 2017, cautioned users, holders and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies.

2. In view of the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs. Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer/receipt of money in accounts relating to purchase/sale of VCs.

3. Regulated entities which already provide such services shall exit the relationship within three months from the date of this circular.

4. These instructions are issued in exercise of powers conferred by Section 35A read with Section 36(1)(a) of Banking Regulation Act, 1949, Section 35A read with Section 36(1)(a) and Section 56 of the Banking Regulation Act, 1949, Section 45JA and 45L of the Reserve Bank of India Act, 1934 and Section 10(2) read with Section 18 of Payment and Settlement Systems Act, 2007.

[RBI/2017-18/154 dt. April 6, 2018]
[DBR.No.BP.BC.104 /08.13.102/2017-18]