Corporate & Commercial Monthly Newsletter | December 2024

REVISED FRAMEWORK ON DOMESTIC MONEY TRANSFER

Background

The framework for Domestic Money Transfer ("DMT") was initially introduced by the Reserve Bank of India ("RBI") vide its notification dated October 5, 2011¹ ("DMT Framework") due to receipt of numerous requests to expand formal banking options for small-value fund transfers, with monthly limits and monitoring, in order to promote financial inclusion.

Following this, RBI announced the revised framework on July 24, 2024² , to be effective from November 1, 2024 ("Revised Framework"), aimed at enhancing the DMT system established in 2011. Under the Revised Framework, RBI noted that since the DMT Framework, there has been a notable increase in the number of banking outlets, advancements in payment systems for fund transfers, and ease in fulfilling of Know Your Customer (KYC) requirements. As a result, users now have access to a variety of digital options for transferring funds. RBI conducted a review of the existing services under DMT Framework, and accordingly announced the Revised Framework. This article seeks to cover the Revised Framework and outlines the measures signifying the changing landscape of digital payments, the need for greater efficiency and transparency to improve the security of the DMT system.

Significance of the Revised Framework

The DMT Framework earlier permitted only banks³ to initiate DMT in the country subject to adherence of KYC/ Anti-Money Laundering (AML) guidelines. However, the new/updated measures taken by RBI are aimed at promoting financial inclusion, enhancement of financial security and streamlining monetary transactions, by providing for the following:

1. Cash Payouts: The remitting banks are required to obtain and maintain records of the name and address of the beneficiaries. Such enhanced KYC record-keeping is intended to bolster transparency and diminish the likelihood of fraudulent transactions.
2. Cash Pay-in Service:
   1. Remitting banks / Business Correspondents (BCs) are mandated to register the remitter based on a verified cell phone number and a self-certified 'Officially Valid Document (OVD)', being a passport, driving licence, voters' ID card, PAN card, Aadhaar Card (as issued by Unique Identification Authority of India) etc. This measure is intended to establish a more robust framework for the identification and verification of individuals engaged in money transfer transactions.
   2. Every transaction by a remitter must be validated by an Additional Factor of Authentication (AFA), being SMSbased OTP. The AFA which is an additional layer of security is anticipated to substantially decrease the risk of unauthorized transfers and safeguard end users against potential financial fraud.
   3. Remitting banks and their BCs are required to conform to the provisions of the Income-tax Act, 1961 and the rules / regulations framed thereunder (as amended from time to time), pertaining to cash deposits, such as the cash deposits aggregating to ten lakh rupees or more in a financial year, in one or more accounts (other than a current account and time deposit) of a person. If such threshold for the cash deposit limit is crossed then the banks are required to report the excess transactions to the Income Tax Department. Such mandates assists in aligning the DMT framework with overarching financial regulations and aids in the prevention of money laundering activities.
   4. Remitter bank is mandated to include remitter details as part of the Immediate Payment Service (IMPS) / National Electronic Funds Transfer (NEFT) transaction message, which will enhance the traceability of transactions and aids in monitoring.
   5. Remitter bank is mandated to include remitter details as part of the Immediate Payment Service (IMPS) / National Electronic Funds Transfer (NEFT) transaction message, which will enhance the traceability of transactions and aids in monitoring.

Additionally, regarding the card-to-card transfer as specified under the DMT Framework are excluded from the purview of the Revised DMT Framework and will be governed under the guidelines / approvals granted for such instruments, being debit/credit/pre-paid cards. All other instructions as per the DMT Framework including the limits in size of transactions will continue to be applicable, which are as follows:⁴

1. Liberalising the cash pay-out arrangements for amounts being transferred out of bank accounts to beneficiaries not having a bank account and enhancing the transaction cap from the existing limit of INR 5,000 to INR 10,000 subject to an overall monthly cap of INR 25,000 per beneficiary.
2. Enabling walk in customers not having bank account (for instance migrant workers) to transfer funds to bank accounts (of say family members or others) subject to a transaction limit of INR 5,000 and a monthly cap of INR 25,000 per remitter.

Conclusion

The recent revisions to the DMT Framework as outlined in the Revised Framework represent a significant step forward in enhancing the accessibility and security of DMT services in India and preventing fraudulent transactions and money laundering. For instance, the increasing exploitation of DMT networks by fraudsters poses significant challenges for the industry and raises concerns among law enforcement agencies. Major BCs are facing account freezes by cybercrime police across various states, as their platforms are being misused for illicit fund transfers. Fraudsters are utilizing payment mechanisms such as DMT to channelize money through agents who exploit the settlement accounts of these corporations, further complicating the situation. The ongoing threat of fraudsters taking control of accounts belonging to vulnerable individuals, such as the unprivileged, highlights the need for enhanced safeguards5 . RBI through its Revised Framework has taken a crucial step aiming to prevent and protect both consumers and legitimate businesses from the repercussions of financial crime. The Revised framework addresses the lacunas in the existing framework and provides enhanced security measures to prevent unauthorised transfers and fraud transactions.

Additionally, the Revised Framework offers significant advantages to stakeholders, i.e., banks, non-banks, BCs, and, most importantly, the end-users. By establishing a streamlined structure for financial transactions, the Revised Framework mandates adherence to KYC compliance guidelines, the procurement of verified information, and the implementation of additional layers of security. These measures collectively enhance operational integrity, facilitate transaction validation, and foster customer trust in availing DMT services. As a result, the Revised Framework not only strengthens the security and reliability of financial transactions but also promotes a more inclusive an d accessible banking environment for all stakeholders involved.

STRENGTHENING THE OVERSEAS INVESTMENT FRAMEWORK FOR MUTUAL FUNDS: A CRITICAL ANALYSIS OF SEBI CIRCULAR

Introduction

The Securities and Exchange Board of India issued a circular⁶ on international investments by Indian mutual funds on 4 November 2024. It is a significant step toward increasing transparency, compliance, and diversified global investment opportunities for Indian mutual funds that will usher in the better practices into the Indian investment environment while at the same time protecting investors' interests.

The Circular: A new investment era for international investments

Indian mutual funds are permitted to invest directly in international securities since its introduction. The current circular, however goes a step further in expanding this permission to also include investment in overseas mutual funds/unit trusts (MF/UTs) that have exposure to Indian securities. Provided however, such investments are capped at no more than 25 percent of the assets of the fund. This strategic restraint would enable Indian investors to fully harness overseas opportunities while being balanced and risk-aware concerning their investments.

These circular sets stringent conditions for the operational regulation of pooled investment vehicles. The main conditions are as follows:

1. Pari-Passu Rights: The implementation of pari-passu rights guarantees equitable treatment for all investors. This concept of equal treatment implies that all investors receive returns in proportion to their investments, thereby eliminating any preferential advantages. For example, when a fund allocates dividends or other forms of returns, such distributions must occur uniformly among all investors according to their respective shareholdings. This is especially advantageous for smaller investors, as it guarantees that they do not experience disadvantages relative to larger investors.
2. No Side Vehicles Rule: The circular distinctly forbids the utilization of side vehicles in pooled investment arrangements. Side vehicles represent distinct investment entities established concurrently with the primary investment fund, frequently utilized to cater to particular investors under varying terms and conditions. This regulation guarantees that every investor in a pooled vehicle is governed by identical investment terms and conditions, consequently fostering consistency and equity. This stipulation obstructs situations in which specific investors might gain access to more advantageous conditions, thus protecting the interests of all stakeholders in an equal manner.
3. Independent Investment Manager: Independent management of funds ensures self-governance and the decisions based on the principles of the market and not individual interests. The task of fund managers is strictly independent of interference either from the investor or affiliated concerns. Independence is very crucial for determining the strategy of investment based upon sound financial principles and dynamics of the market.
4. Transparency: The overseas MF/ UT are required to disclose their portfolios on quarterly basis. This disclosure will ensure the investors know where their money is being invested.
5. No Advisory Agreement: The circular provides that there shall not be any advisory agreements between Indian MFs and underlying overseas MF/UT, to prevent any conflict of interest and avoid any undue advantage to either of the parties.
6. Risk Management: The circular introduces a comprehensive compliance structure meant to reduce the risks that arise from heavy investments in Indian securities. In case an overseas fund surpasses the 25% limit threshold for Indian securities, Indian mutual funds are granted a six-month grace period for determining rebalancing efforts. When the offence persists, the funds are required to sell off their investments within the next six months.

Conclusion

Retail domestic investors do not have the means to access the international market for their investments, this circular will help them to access the international markets through Indian MFs which can give higher returns. Indian investors will be able to access varied investment opportunity through overseas MFs/UTs whereby they can diversify their investment portfolios.

While this circular brings much benefit, there are various challenges that it poses. One of the challenges would be the such investments in overseas MFs/UT would attract currency risk due to fluctuations in exchange rates which can have the effect on returns. Further, the international investment may also be adversely affected by global economic and political crisis. For example 2009 Lehman Brothers crash did not have much impact on domestic Indian economy, however such a global economic crisis in future will directly impact the investments in overseas MF/UT by Indian MFs.

Footnotes

1. Domestic Money Transfer – Relaxations, RBI/2011-12/213, DPSS.PD.CO.No. 622/02.27.019/2011-2012 https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=6750&Mode=0

2. Domestic Money Transfer – Review of Framework, RBI/2024-25/52, CO.DPSS.POLC.No.S415/02.27.019/2024-25, https://m.rbi.org.in/scripts/FS_Notification.aspx?Id=12707&fn=9&Mode=0

3. Supra, note 1.

4. Supra, note 2.

5. https://economictimes.indiatimes.com/tech/newsletters/morningdispatch/import-relief-for-it-hardware-fraudsters-use-agentnetworks/articleshow/114710829.cms

6. SEBI Circular No. SEBI/HO/IMD/IMD-PoD-1/P/CIR/149

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