INTRODUCTION
The month of June 2024 has seen a flurry of regulatory activity aimed at fostering innovation, while ensuring robust governance and compliance frameworks. While not all developments may directly impact the 'tech' aspect of fintech, they have significant ramifications on regulated entities having a digital interface. For instance, the Reserve Bank of India ("RBI") has taken noteworthy steps, including liberalising norms for overseas portfolio investments and opening applications for self-regulatory organisations in the non-banking financial company ("NBFC") sector. In parallel, other regulatory bodies like the Securities and Exchange Board of India ("SEBI") has updated its guidelines on anti-money laundering measures, while Insurance Regulatory Development Authority of India ("IRDAI") has streamlined governance norms for insurers. The International Financial Services Centre Authority ("IFSCA") has also been at the forefront, issuing clarifications on cross-border arrangements and proposing new regulations for payment systems in International Financial Services Centres ("IFSC").
These moves signal a progressive approach towards expanding the scope of fintech operations while maintaining regulatory oversight. In this edition, we explore the major fintech developments in the last month of the first financial quarter of 2024 and offer a snapshot of the key trends and achievements shaping India's financial technology landscape.
RECENT LEGAL & REGULATORY DEVELOPMENTS
New obstacles along the path for Finfluencers
A Financial Influencer (popularly known as a "Finfluencer") is defined as an individual who uses social media to share information, recommendations, guidance or opinions on financial advice, news, or other related matters. Finfluencers have been on SEBI's radar over the last 12 (twelve) months in a pursuit to avoid market manipulation, safeguard investor interest, and seek accountability from regulated entities entering into partnerships with unregistered and unqualified Finfluencers. However, despite having imposed penalties, requiring mandatory registration, and pulling up regulated entities to review their arrangements, SEBI has had limited success in controlling the free access of financial information and advice on digital media and consequently, Finfluencer partnerships have continued to flourish.
While an August 2023 consultation paper issued by SEBI called for a complete disruption of the Finfluencer revenue model and suggested strong enforcement action on unregistered Finfluencers, the recent proposal from SEBI's 206th meeting on June 27, 2024,1 has suggested a more pragmatic approach. The proposal prohibits regulated entities (like brokers and mutual funds) and their agents from associating, directly or indirectly, with such person who, directly or indirectly, provide advice or recommendations or make implicit or explicit claim of return or performance with respect to securities without due authorization from SEBI. Such association includes (i) any transaction involving money or money's worth, (ii) referral of a client, (iii) interaction of information technology systems or (iv) any other association of similar nature or character.
However, SEBI has stated that this restriction does not apply if the association is: (i) with persons who are exclusively engaged in investor education and do not directly or indirectly, provide advice/recommendation/ claim of return or performance, and (ii) through a specified digital platform which has a mechanism in place to take preventive as well as curative action, to the satisfaction of SEBI, to ensure that such a platform is not used by any person for providing advice/ recommendation /claim of return or performance, unless permitted by SEBI.
The distinction made by SEBI between prohibited and permitted activities in its 206th Board Meeting is crucial as it enables educational.
RBI invites applications for recognition of Self-Regulatory Organisations ("SROs") for NBFCs
The RBI had issued the 'Omnibus Framework for recognition of Self-Regulatory Organisations (SRO) for Regulated Entities of the Reserve Bank' dated March 21, 2024 ("RE SRO Framework"), as covered in our February-March Edition of the Fintech Newsletter.2
The RBI has opened applications for recognition of SROs in the NBFC sector with an application deadline of September 30, 2024. The RBI has also prescribed additional qualification conditions for SROs for NBFCs, as specified below:3
- Membership criteria: The RBI envisages that
SROs for NBFCs will mainly be for the categories of Investment and
Credit Companies (NBFC-ICCs), Housing Finance Companies (HFCs) and
Factors (NBFC-Factors).4 That said, the RBI has stated that an SRO
may also have other NBFCs as its members.
A recognised SRO should have a 'good mix' of NBFC-ICCs, HFCs and NBFC-Factors as its members. Further, at least 10% (ten per cent) of the total number of NBFCs in the base layer as per Scale Based Regulatory Framework and categorised as NBFCICC and NBFC-Factor should be members. Failure to achieve such membership criteria, within 2 (two) years of the grant of recognition as an SRO, would render such SRO liable for revocation of recognition.
- Net worth: Applicants should have a minimum
net worth of INR 2 crore (Indian Rupees Two Crore Only): (a) within
1 (one) year of recognition as an SRO by the RBI; or (b) before
commencement of operations as an SRO.
- Maximum number of SROs: A maximum of 2 (two) SROs for the NBFC sector will be recognised, subject to fulfilment of the criteria.
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Footnotes
1. Please refer: https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/jun-2024/1719497494180.pdf#page=1&zoom=page-width,-15,842
2. Please refer: https://induslaw.com/publications/pdf/alerts-2024/fintech-newsletter-unveiling%20india-latest-legal-shifts-and-market-waves.pdf
3. The RE SRO Framework specified that additional sector-specific conditions would be prescribed at the time when an SRO for a given sector is intended to be set up
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