This February newsletter covers India's central bank and regulatory body responsible for regulation of the Indian banking system (i.e., the Reserve Bank of India ("RBI"). The RBI has updated the master directions on foreign investments in India for clarifying deferred payment arrangements for FOCC. RBI has also introduced a framework to set out the conditionalities and procedures by which penalties can be imposed on its authorized payment system operators / banks, under the Payment and Settlement Systems Act, 2007; and these are one of the important updates covered in this newsletter.
1. Reserve Bank of India ("RBI") issued master direction on investment in debt instruments by Non-Residents
January 7, 2025: Reserve Bank of India ("RBI") issued the Master Direction – Reserve Bank of India (Non-resident Investment in Debt Instruments) Directions, 2025 ("Debt Instruments Directions") to establish a comprehensive framework for non-resident investment activities by Foreign Portfolio Investors ("FPIs"), Non-Resident Indians ("NRIs"), and Overseas Citizens of India ("OCIs").
The Debt Instruments Directions sets out the routes for non-residents to invest in Indian debt instruments including but not limited to: (a) General route: Non-residents is allowed to continue investing in government and corporate debt securities through this route, subject to established limits, (b) Voluntary Retention Route for investments in Government securities and corporate debt securities, free of certain macro-prudential limits applicable to FPI investments in debt markets under the General Route, by FPIs that commit to remain invested for a stipulated retention period, (c) Fully Accessible Route for investments by non-residents in certain specified categories of Central Government securities without any restriction; and (d) Scheme for Trading and Settlement of Sovereign Green Bonds issued by the Central Government by eligible foreign investors in the International Financial Services Centre (IFSC). For each investment route, the Debt Instrument Directions provides for (i) investor eligibility; eligible limits and eligible instruments and other investment conditions.
The Debt Instruments Directions establishes specific limits and conditions for different investment instruments
These Debt Instruments Directions shall be applicable with immediate effect.
2. RBI amends Foreign Exchange Management (Deposit) Regulations, 2016 to enhance flexibility for Non-Resident accounts
January 14, 2025: As part of Reserve Bank of India's ("RBI") larger goal to encourage the use of INR for settling cross-border trade transactions and minimize currency risks for Indian parties, RBI issued the Foreign Exchange Management (Deposit) (Fifth Amendment) Regulations, 2025 ("Deposit Amendment"), to introduce several key changes such as: (a) Opening of Special Non-Resident Rupee ("SNRR") accounts: SNRR accounts can now be opened by Person resident outside India ("PROI") with authorised dealers in India as well as its branches outside India, (b) Operations of SNRR account: SNRR accounts can be opened for all 'permissible current and capital account transactions' now, (c) Tenure of SNRR accounts: Previously SNRR Accounts could be opened for a tenure which is the lesser of: () the tenure of the contract or period of operation or the business of the account holder; or (ii) 7 (seven) years from the date on which the account was opened. The Deposit Amendment removes such seven-year cap, i.e., the tenure of SNRR Accounts is now only tied to the tenure of the contract / operation period / business of the account holder and can exceed 7 (seven) years, and (d) Transfer of funds between repatriable INR accounts: The Deposit Amendment allows a PROI that maintains a repatriable INR account to use funds in such account to make payments to a repatriable INR account maintained by another PROI, provided that such transaction is bonafide in nature.
3. RBI amends regulations on Foreign Currency Accounts of resident Indians
January 14, 2025: Pursuant to RBI's fifth amendment of the Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) Regulations, 2015, Indian exporters can now open, hold, maintain use their foreign currency accounts with banks outside India for realization of the export value as well as for advance remittances, which they receive against export of goods and services.
The funds received in the foreign currency account may be used by the exporter to pay for imports into India but in any event have to be repatriated to India, within a period which does not exceed the end of the next month from the date of receipt of the funds, after making adjustments for forward commitments. The realization and repatriation must nevertheless comply with the relevant provisions of Foreign Exchange Management (Export of Goods and Services) Regulations, 2015.
4. RBI revises mode of payment and reporting framework of non-debt instruments
January 14, 2025: Reserve Bank of India ("RBI") has issued the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) (Third Amendment) Regulations, 2025 to streamline the mode of payment and remittance procedures. The key changes include:
- Person resident outside India ("PROI") can now make inward remittances for investments in (a) equity instruments of Indian companies, (b) investment in limited liability partnerships and investment vehicles, and (c) convertible notes issued by Indian start-ups, through banking channels or funds held in any repatriable foreign currency or Rupee account maintained under the Foreign Exchange Management (Deposits) Regulations, 2016 ("Deposit Regulations").
- Foreign Portfolio Investors are now allowed to invest in Indian Depository Receipts using funds held in a foreign currency account and/or a Special Non-Resident Rupee Account.
- Furthermore, the definition of banking channels has been expanded to include Rupee Vostro Accounts, including Special Rupee Vostro Accounts, permitted under the Deposit Regulations.
This amendment aims to enhance flexibility for foreign investors by broadening the types of bank accounts available for foreign investments while ensuring compliance with foreign exchange control laws.
5. RBI's attempt to mitigate financial fraud via voice calls and SMS
January 17, 2025: Owing to the dependency on an individual's personal mobile number in a digital transaction (for account authentication, OTP verification etc.), and the consequential cyber scams of mobile number linked accounts, RBI vide this notification has advised its regulated entities ("REs") to clean their customer databases using the Mobile Number Revocation List ("MNRL") and to develop a Standard Operating Procedure in this regard.
Further, to mitigate cyber frauds and enhance transparency, RBI has also issued specific directions for undertaking transactional and promotional calls and to this extent has advised its REs to follow the guidelines issued by Telecom Regulatory Authority of India in this regard.
6. RBI updates master directions on foreign investments in India
January 20, 2025: The Reserve Bank of India ("RBI") has amended the Master Direction on Foreign Investment in India ("FDI Master Directions"). Some of the key clarifications and changes introduced by the FDI Master Directions are as follows:
- Deferred payment arrangements by foreign owned or controlled companies ("FOCCs"): There has been a prolonged ambiguity on whether FOCCs could structure downstream investments through share swaps or employ deferred consideration arrangements. The FDI Master Directions have provided the much needed clarity to this topic and has clarified that the arrangements available for foreign direct investments such as share swaps and deferred payment mechanisms are also available to FOCCs when making downstream investments.
- Transfer of equity instruments, under indemnification or escrow: Any transfer of equity instruments under deferred payment arrangement, indemnification arrangements and/or escrow arrangements is required to be captured in the share purchase/transfer agreement to contain the respective clause and related conditions for such arrangement.
- Form DI filing: The FDI Master Directions states that reclassification of an investor's status from resident to FOCC i.e. an investor entity, who had made the original investment in the investee entity as a resident, but later becomes an FOCC, will be required to report such reclassification to the RBI in Form DI within 30 days from the date of acquiring FOCC status.
- Acquisition through rights issue or bonus issue: The FDI Master Directions states that the Indian companies issuing equity instruments to a person resident outside India (other than overseas corporate bodies ("OCBs")) under Section 62(1)(a)(iii) of the Companies Act, 2013, requires to adhere to entry routes, sectoral caps or investment limits, pricing guidelines and other attendant conditions as applicable for investment by a person resident outside India specified in the NDI Rules. Prior to this amendment, the pricing guidelines were not applicable when a non-resident shareholder subscribed to its entitlement under a rights issue, in accordance with Section 62(1)(a)(i) of the Companies Act, 2013. Pursuant to the FDI Master Direction, RBI has clarified that in addition to entry route, sectoral caps and other attendant conditions under the NDI Rules, the pricing guidelines will also be required to be adhered to.
- Foreign Investment to meet net-owned funds requirements: An Indian investee company whose proposed activities are regulated by a financial sector authority, may receive foreign investment to meet the criteria of minimum net owned fund ("NOF") prescribed by such regulator. It is further stated that such investment shall only be used to comply with minimum NOF criteria and shall not be used for any other purpose/activity. If the required registration/license is not granted to the investee company, then the investment so received shall be repatriated or must obtain applicable government approvals, if any, before deploying these funds.
7. RBI explores Blockchain-like distributed ledger technology ("DLT") to enable digital payments offline
January 29, 2025: In a fresh move, RBI has directed its regulated entities, in compliance with applicable regulatory requirements, to consider adopting an offline digital payment product developed by Exto India Technologies Pvt. Ltd. ("Exto"), which has cleared the test phase.
Exto's product is an offline digital payment solution which leverages distributed ledger technology in combination with private biometric authorization to enable offline card-to-card and card-to-phone transactions and secures against double spend.
8. RBI introduces revised framework for imposing monetary penalties and compounding offences under Payment and Settlement Systems Act, 2007 ("New Framework")
January 30, 2025: The New Framework aims to rationalize and consolidate the enforcement actions by RBI, and in this regard supersedes the 'Framework for imposing monetary penalty on authorized payment system operators/ banks under the Payment and Settlement Systems Act, 2007' dated January 10, 2020.
Some of the salient features of the New Framework are:
- RBI can now only compound material contraventions which materiality can be determined basis the factors enlisted in the New Framework.
- The designated authority for imposing penalties and compounding of contraventions has been bifurcated basis the office of the Enforcement Department which will handle the respective contravention.
- The procedure of imposing penalties has also been revised to include the issuance of a show cause notice by RBI as the first step and the subsequent quantum of penalty will be determined basis the principles of proportionality, intent and mitigating factors.
- Additionally, the New Framework has also revised the indicative matrix for determining the quantum of penalty.
- Compounding applications are now required to be submitted to the Chief-General-Manager, Enforcement Department.
- After imposition of monetary penalty and completion of compounding action, necessary disclosures shall be made as under Notes to Accounts that are part of Annual Financial Statements for the financial year in which the penalty is levied. A brief of the penalty action and compounding action shall be disclosed in the form of press release on the website of RBI after receipt of the compounding amount.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
