The Indian banking sector has been a vital driver of the country's economic growth, providing financial support to individuals, businesses, and the government. Despite facing numerous challenges such as asset quality, digital transformation, and financial inclusion, Indian banks have remained resilient, withstanding the recent headwinds that have affected other economies. The union budget for the financial year 2023-2024 has taken several measures to strengthen the banking industry and improve the financial landscape of the country. The government has infused capital and introduced policy reforms to stimulate micro, small and medium enterprises ("MSMEs") and the startup ecosystem. The revamped credit guarantee scheme will provide MSMEs with greater access to collateral-free loans and enhance their international competitiveness.

India's banking sector is poised for robust growth with enhanced spending on infrastructure, fast implementation of projects, and continued reforms. The growth in businesses is expected to drive credit needs, providing further impetus to the banking sector. The advancement in technology has brought mobile and internet banking services to the fore front, prompting the banking sector to lay greater emphasis on improving customer experience and upgrading their technology infrastructure for a competitive edge. Additionally, India has seen a rise in the fintech and microfinancing sector, with digital lending estimated to reach USD 1 trillion by the end of financial year 2023. India's fintech market has attracted substantial funding, accounting for 14% of the global funding and ranking second in terms of deal volume. By 2025, India's fintech market is projected to reach INR 6.2 trillion (USD 83.48 billion).

This newsletter highlights the key developments and measures as well as other developments in the Indian banking and finance space from January 01, 2023, to May 15, 2023.


Prevention of Money Laundering (Maintenance of Records) Amendment Rules, 2023

The Prevention of Money Laundering (Maintenance of Records) Amendment Rules, 2023 was introduced in March 2023, which widened the scope of reporting entities to include more disclosures for non-governmental organisations and defined politically exposed persons ("PEPs") as per the Prevention of Money Laundering Act, 2002 ("PMLA"). Reporting entities like financial institutions, banking companies, or intermediaries are now required to disclose beneficial owners in addition to the current know your customer ("KYC") requirements, with a lowered threshold of 10% ownership. The definition of "non-profit organization" has been expanded to include entities constituted for religious or charitable purposes. Due diligence and documentation requirements have also been expanded, and cryptocurrency and virtual digital assets are now brought under the ambit of anti-money laundering laws.

The new amendments to the PMLA rules will pose several challenges for financial institutions in India. They will need to allocate substantial resources towards enhancing their systems in order to meet the new obligations, as well as provide comprehensive training to their employees to ensure compliance with the updated rules. There may also be a negative impact on the customer experience due to the increased documentation requirements. The increased due diligence requirements may also lead to higher compliance costs for financial institutions, which may impact their profitability. Additionally, the inclusion of cryptocurrencies and virtual digital assets under the anti-money laundering laws will require intermediaries in the crypto ecosystem to establish and implement PMLA measures and systems.

SEBI introduces Legal Entity Identifier System for issuers with listed non-convertible debentures, securitized debt and security receipts

India's capital markets regulator, the Securities and Exchange Board of India ("SEBI"), has introduced the Legal Entity Identifier ("LEI") system for issuers of non-convertible securities, securitized debt instruments, and security receipts that are listed or plan to list. The LEI is a 20character code designed to create a global reference data system that identifies every legal entity participating in financial transactions, in any jurisdiction. Currently, the Reserve Bank of India ("RBI") mandates non-individual borrowers with an aggregate exposure above INR 25 crores to obtain an LEI code.

Issuers with outstanding listed non-convertible securities as of August 31, 2023, will need to obtain and report their LEI code in the centralized database of corporate bonds by September 01, 2023, according to a circular by SEBI. Similarly, issuers with outstanding listed securitised debt instruments and security receipts as of August 31, 2023, will need to obtain and report their LEI code to the depositories by September 01, 2023.

Moreover, issuers proposing to list non-convertible securities and securitized debt instruments as well as security receipts on or after September 01, 2023 will have to report their LEI code to the centralized database of corporate bonds and depositories, respectively, at the time of allotment of the International Securities Identification Number ("ISIN"). However, SEBI has not specified the LEI requirement for issuers proposing to list or having outstanding municipal debt securities.

The LEI code can be obtained from Legal Entity Identifier India Ltd, a subsidiary of the Clearing Corporation of India Ltd, which has been recognised by the RBI as the issuer of the LEI. The Global Legal Entity Identifier Foundation ("GLEIF") has accredited it as the local operating unit in India for the issuance and management of LEI code. Furthermore, SEBI has asked the depositories to map the LEI code to existing ISINs by September 30, 2023 and map the LEI code provided by issuers with the ISIN at the time of activation of the ISIN for future issuances.

SEBI approved the framework to set up an INR 3,000 crores Corporate Debt Market Development Fund

SEBI has approved the establishment of a Corporate Debt Market Development Fund ("CDMDF") worth INR 3,000 crores, to be set up as an Alternative Investment Fund. The fund will act as a backstop facility during market dislocations, which are situations where markets stop valuing assets correctly. The National Credit Guarantee Trust Company ("NCGTC") will guarantee the fund with a sovereign guarantee. The initial corpus of the fund will be sourced from mutual fund schemes and asset management companies, and the fund will purchase illiquid and investment-grade corporate debt securities during times of stress.

The CDMDF will instill confidence in the debt market players during crises and serve two purposes. Firstly, it will purchase illiquid and investment-grade corporate debt securities during times of stress to instill confidence amongst the participants in the corporate bond market. Secondly, it will enhance secondary market liquidity. Only the contributing mutual funds will be eligible to participate when a market dislocation is determined, and the final decision on triggering the backstop facility will rest with SEBI.

The NCGTC is a private limited company established by the Department of Financial Services, Ministry of Finance, to act as a common trustee company for multiple credit guarantee funds. It offers credit guarantee programs for students, women entrepreneurs, MSMEs, and more, to support India's economic development. Currently, there are five dedicated credit guarantee trusts under the management of NCGTC, namely the Credit Guarantee Fund Scheme for Educational Loans, Credit Guarantee Fund Scheme for Skill Development, Credit Guarantee Fund Scheme for Factoring, Credit Guarantee Fund for Micro Units, and Credit Guarantee Fund for Stand Up India.

Changes in taxation of debt mutual funds to impact indexation benefits and attract bank fixed deposits

The changes in the taxation of debt mutual funds, under which no benefit of indexation for the calculation of long-term capital gains on debt mutual funds will be available for investments made on or after April 01, 2023. However, only those debt mutual funds where equity investment is less than 35% will lose these benefits. From April 01, 2023, such debt mutual funds will be taxed at income tax rates as per an individual's income. The removal of indexation benefits from debt mutual funds could have a negative impact on all debt funds, particularly in the retail category, as investors may choose to invest in safer options such as bank fixed deposits, which will become more attractive with the given changes in taxation.

IBBI facilitates online submission of application for initiating CIRP against corporate debtor

The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 require creditors to provide a copy of the application for initiating corporate insolvency resolution process ("CIRP")

against a corporate debtor to the Insolvency and Bankruptcy Board of India ("IBBI") before filing the same with the adjudicating authority. To facilitate this process, the IBBI has made available a facility on its website for serving a copy of the application online. In circulari dated June 15, 2022, the IBBI had decided to forward all the applications received for initiating insolvency to the Information Utility ("IU") and required the IU to inform other creditors of the corporate debtor by sharing the application and issue notice to the applicant to file information of default for the purpose of issuing the Registration of Default ("ROD") by IU. In furtherance to the above and to ensure filing of authentic information with IBBI and to enable sharing of information relating to the application for initiation of CIRP with the IU efficiently, the format of filing has been revised and a step-by-step guide for submission of the application has been provided in the circular dated June 15, 2022.

SEBI proposes mechanism for voluntary delisting of non-convertible debt securities in India

SEBI has proposed a mechanism for the voluntary delisting of non-convertible debt securities. Under the proposed mechanism, all listed non-convertible debt securities of an entity can be delisted from all or any of the recognized stock exchanges. However, the delisting of non-convertible debt securities of a listed entity that have been delisted by the stock exchanges as a consequence of any penalty or delisted under a resolution plan approved under the IBC would not be covered. The proposed mechanism would also not be applicable to a listed entity that has more than 200 non- Qualified Institutional Buyers ("QIB") holders in any ISIN relating to listed non-convertible debt securities. SEBI has sought public comments on the proposals by May 26, 2023.

The impact of the proposed mechanism on corporate debt and bond markets in India would depend on the response of the market participants to the proposal. The proposal, if implemented, is likely to make it easier for entities to delist non-convertible debt securities, which could result in increased volatility in the bond markets. The proposal may also impact the liquidity of listed non-convertible debt securities and the valuation of non-listed debt securities. The impact on listed and non-listed companies would also depend on the specific circumstances of the delisting, such as the reason for delisting, the number of non-QIB holders, and the nature of the debt securities. Companies that have a large number of non-QIB holders in any ISIN relating to listed non-convertible debt securities may be restricted from voluntarily delisting their debt securities. Overall, the proposed mechanism is likely to have a significant impact on the corporate debt and bond markets in India.

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