This Newsletter sets out some of the key legislative and regulatory updates in the banking and finance space for the month of December 2022.

Offshore subsidiaries and branches of Indian banks and All India Financial Institutions permitted to deal in structured financial products

The Reserve Bank of India ("RBI") has issued the notification dated December 1, 2022, titled 'Operations of subsidiaries and branches of Indian banks and All India Financial Institutions (AIFIs) in foreign jurisdictions and in International Financial Services Centres (IFSCs) - Compliance with statutory/regulatory norms' ("RBI Notification").

The RBI Notification permits the subsidiaries/branches of Indian banks and AIFIs operating outside India and in GIFT City to deal in financial products (including structured financial products) that are not specifically permitted in the domestic market, subject to certain conditions specified in the RBI Notification, without the prior approval of the RBI. While dealing with such financial products, the offshore branches of the banks and AIIFs have to comply with all applicable laws, regulations and conditions prescribed by the regulator of the host jurisdiction in addition to the conditions set out in the RBI Notification.

Some of the key conditions that the parent bank or AIF needs to ensure while allowing their branches and subsidiaries outside India and in GIFT City ("Offshore Branches") in dealing with financial products are as follows:

  1. the Offshore Branches should act as market makers for products only if they have the ability to price/value such products and the pricing of such products is demonstrable at all times;
  2. the exposure and mark-to-market (MTM) of the Offshore branches on these products are appropriately captured and reported in the returns furnished to the RBI;
  3. the Offshore Branches should not deal in products linked to Indian Rupee unless specifically permitted by the RBI; and
  4. the Offshore Branches should not accept structured deposits from any Indian resident.

The RBI Notification is applicable to all banks regulated by the RBI (excluding co-operative banks, regional rural banks and local area banks) and AIFIs.

Updates to the RBI Loan Transfer Directions

The Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 ("Loan Transfer Directions") have been updated on December 5, 2022. The key updates to the Loan Transfer Directions are as follows:

  1. Overseas branches of lenders which are Indian banks are permitted to undertake the following type of transactions in relation to transfer of loan exposures:
    1. acquisition of loans which are not in default from another Indian or foreign bank;
    2. transfer of all kinds of exposures, whether in default or not, pertaining to resident entities to another bank; and
    3. transfer of all kinds of exposures, whether in default or not, pertaining to non-residents to any financial sector entity in India or abroad.

This clarification has cleared the ambiguity that there was a restriction on the overseas branches of foreign banks to acquire loans from any person other than those permitted under the Loan Transfer Directions.

  1. The minimum holding period in relation to transfer of loans will be calculated from the date of registration of the underlying security interest with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India ("CERSAI"). Where security cannot be registered with CERSAI, the MHP shall be calculated from the date of first repayment of the loan. The Loan Transfer Directions earlier provided that the minimum holding period will be calculated from the date of registration of underlying security.
  2. All stressed loans that are in default in the books of the transferors have been permitted to be transferred to asset reconstruction companies. Earlier, loans which were in default for more than 60 (sixty) days or had been classified as non-performing assets in the books of the transferors could be transferred to asset reconstruction companies

Updates to the RBI Securitisation Directions

The Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 ("Securitisation Directions") have been updated on December 5, 2022. The key updates to the Securitisation Directions are as follows:

  1. Loans with residual maturity of less than 365 days will not be eligible for securitisation by lenders.
  2. The minimum holding period for commercial or residential mortgages will be calculated from the later of the date of disbursement of the loan and registration of the underlying security interest with the CERSAI

SEBI circular on foreign investment in Alternative Investment Funds ("AIFs")

The Securities and Exchange Board of India ("SEBI") has issued the circular dated December 9, 2022, with respect to foreign investments in AIFs ("SEBI AIF Circular"). The SEBI AIF Circular lays down the provisions to be followed by the AIFs at the time of onboarding foreign investors. It is pertinent to note that if the provisions of the SEBI AIF Circular are not adhered to by the AIF, then the manager of the AIF will not be permitted to draw down any further capital contribution from the relevant foreign investor till the provisions of the SEBI AIF Circular have been met.

Further, the provisions of the circular shall also apply to foreign investors who have already been onboarded to existing schemes of AIFs but are not in compliance with the provisions of the SEBI AIF Circular.

SEBI circular on Scheme(s) of Arrangement by entities who have listed their non-convertible debt securities / non-convertible redeemable preference shares

SEBI has issued the circular dated December 9, 2022, wherein it has clarified that the provisions of the SEBI circular dated November 17, 2022, titled 'Scheme(s) of Arrangement by entities who have listed their Non-convertible Debt securities (NCDs)/ Non-convertible Redeemable Preference shares (NCRPS)' shall not apply to a scheme of arrangement which solely provides for an arrangement between a debt listed entity and its unlisted wholly owned subsidiary. However, such debt listed entity shall file the draft scheme of arrangement with the stock exchange(s) for the purpose of disclosure and the stock exchange(s) shall disseminate the scheme documents on their websites.

No change to ISIN in case of change of security for NCDs

Pursuant to a circular dated December 19, 2022, SEBI has clarified that:

  1. a change in underlying security;
  2. creation of additional security; and
  3. creation of security in case of unsecured debt securities,

will not be regarded as a change in the structure of the non-convertible debt securities.

If there are no other changes to the terms/ nature of issue of the non-convertible debt securities like the maturity date, coupon rate, face value, redemption schedule and nature of the non-convertible debt securities (secured/unsecured), then a new ISIN is not required to be obtained.

The obligations of the debenture trustees to conduct due diligence on the underlying security under the existing SEBI circulars will continue to apply.

Timelines for listing of securities issued on a private placement basis

SEBI has issued the circular dated November 30, 2022, titled 'Review of timelines for listing of securities issued on a private placement basis' ("SEBI Circular") in order to bring about clarity and standardization in the process of issuance and listing of non-convertible securities, on private placement basis. SEBI has listed the steps involved, pre-listing and post-listing, and relevant timelines have been detailed, both through Electronic Book Provider (EBP) platform and otherwise.

The key features of the SEBI Circular are as follows:

  1. Issuers of non-convertible securities (which have previously issued debt securities through the EBP platform) will now be required to be in receipt of the in-principle approval 2 (two) days prior to the issue opening date (T), and first-time issuers on the EBP platform will now be required to be in receipt of the in-principle approval, prior to T-5 days. In case of issuances which are not through the EBP platform, issuers are required to be in receipt of the in-principle approval prior to 'T'.
  2. Issuers are now required to obtain the ISIN on or before T+1 days for EBP issuances and prior to pay-in for non-EBP issuances.
  3. The timeline for listing of securities on the stock exchange has been reduced from T+4 to T+3 days (wherein T refers to issue closure date).
  4. The SEBI Circular has listed out the various activities which are to be undertaken for settlement of the issuance on or before T+1/ T+2 (as per settlement cycle chosen by the issuer) for issuances through the EBP or on or before T+2 for non-EBP issuances.

The provisions of the SEBI Circular have come into effect from January 1, 2023.

QUICK SNAPSHOTS:

Change in repo rate under the Liquidity Adjustment Facility

The Monetary Policy Committee of the RBI ("MPC") has, on December 7, 2022, increased the policy repo rate under the Liquidity Adjustment Facility by 35 basis points from 5.90% to 6.25% with immediate effect. Consequently, the standing deposit facility rate and marginal standing facility rate stand adjusted to 6% and 6.5%.

Change in Bank Rate

The MPC has vide notification dated December 7, 2022, revised the Bank Rate1 from 6.15% to 6.50% with immediate effect. Consequently, all penal interest rates on shortfall in reserve requirements, which are specifically linked to the Bank Rate have also been revised as indicated the annexure of the said notification.

Change in repo rate for Standing Liquidity Facility provided to Primary Dealers

Pursuant to the increase in the repo rate under the Liquidity Adjustment Facility from 5.90% to 6.25%, the MPC has vide notification dated December 7, 2022, revised the repo of the Standing Liquidity Facility provided to Primary Dealers to 6.25% with immediate effect.

Issue of the Master Direction – Foreign Exchange Management (Hedging of Commodity Price Risk and Freight Risk in Overseas Markets) Directions, 2022 ("Hedging Directions")

The RBI has issued the Hedging Directions on December 12, 2022, for the purposes of laying down the modalities for Authorised Dealer Category – I Banks for facilitating hedging of commodity price risk and freight risk in overseas markets by their customers / constituents. Eligible entities2 having exposure to commodity price risk for any eligible commodity or exposure to freight risk may hedge such exposure in overseas markets using any of the permitted products (as defined in the Hedging Directions).

The RBI circular dated March 12, 2018, titled 'Hedging of Commodity Price Risk and Freight Risk in Overseas Markets' and RBI circular dated January 15, 2020, titled 'Hedging of Commodity Price Risk and Freight Risk in Overseas Markets – Amendment' have been repealed from the date of the Hedging Directions.

Master Circular for Foreign Portfolio Investors, Designated Depository Participants and Eligible Foreign Investors

SEBI has issued the Master Circular for Foreign Portfolio Investors, Designated Depository Participants and Eligible Foreign Investors dated December 19, 2022 ("FPI Master Circular"), consolidating all the previous circulars issued by SEBI with respect to foreign portfolio investors, designated depository participants and eligible foreign investors. The circulars set out therein have been rescinded pursuant to the issuance of the FPI Master Circular.

Any other directions or guidance issued by SEBI that are applicable to foreign portfolio investors will continue to apply.

Footnotes

1 Bank Rate means the rate at which the RBI grants loans or advances to commercial banks.

2 Eligible entities have been defined under the Hedging Directions as residents other than individuals.

Originally Published December 2022

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.