Partial Credit Enhancement to Bonds Issued by Non-Banking Financial Companies and Housing Finance Companies
Reserve Bank has decided to allow banks to provide partial credit enhancement (PCE) to bonds issued by systemically important non-deposit taking, non-banking financial companies (NBFC-ND-SIs) registered with the Reserve Bank of India and Housing Finance Companies (HFCs) registered with National Housing Bank, subject to the following conditions:
- The tenor of the bonds issued by NBFC-ND-SIs/HFCs for which PCEs are provided shall not be less than three years.
- The proceeds from the bonds backed by PCE from banks shall only be utilised for refinancing the existing debt of the NBFC-ND-SIs/HFCs. Banks have been advised to introduce appropriate mechanisms to monitor and ensure that the end-use condition is met.
- The exposure of a bank by way of PCEs to bonds issued by each such NBFC-ND-SI/HFC shall be restricted to one percent of capital funds of the bank within the extant single/group borrower exposure limits and
- The exposure of banks to NBFC-ND-SIs/HFCs by way of PCEs shall be within the aggregate PCE exposure limit of 20 percent.
Interest Equalisation Scheme on Pre and Post Shipment Rupee Export Credit
It has been decided by the Government of India to increase the Interest Equalisation rate from 3% to 5% in respect of exports by the Micro, Small & Medium Enterprises (MSME) sector manufacturers under the Interest Equalisation Scheme on Pre and Post Shipment Rupee Export Credit with effect from November 2, 2018.
The scheme is available to all exports under 416 tariff lines (at ITC (HS) code of 4 digits) and export made by MSMEs across all ITC (HS) Code. Banks are advised that the benefit of the scheme be provided to all eligible MSME Exporters.
Basel Framework on Liquidity Standards – Net Stable Funding Ratio (NSFR) – Final Guidelines
Reserve Bank of India decided that the NSFR guidelines will come into effect from 1st April 2020
External Commercial Borrowings (ECB) Policy – Review of Minimum Average Maturity and Holding Provisions
Reserve Bank has reviewed the minimum average maturity and hedging provisions and the provisions of the ECB framework have been amended as below:
- Minimum Average Maturity:
The minimum average maturity requirement for ECBs in the infrastructure space raised by eligible borrowers has been reduced from 5 years, as stipulated under paragraph 2.4.1(iv), to 3 years
- Hedging Requirements:
The average maturity requirement has been reduced from the extant 10 years to 5 years for exemption from the mandatory hedging provision applicable to ECBs raised by above referred eligible borrowers. Accordingly, the ECBs with minimum average maturity period of 3 to 5 years in the infrastructure space will have to meet the 100% mandatory hedging requirement. Further, it has been clarified that ECBs falling under the aforesaid revised provision but raised prior to the date of the circular will not be required to mandatorily roll-over their existing hedges.
All other provisions of the ECB policy remain unchanged.
External Commercial Borrowings (ECB) Policy – Review of Hedging Provision
It has been decided by RBI, to reduce the mandatory hedge coverage from 100 per cent to 70 per cent for ECBs raised under Track I of the ECB framework by eligible borrowers for a maturity period between 3 and 5 years. Further, it has also been clarified that ECBs falling within the aforesaid scope but raised prior to the date of the circular will be required to mandatorily roll-over their existing hedge(s) only to the extent of 70 per cent of outstanding ECB exposure.
Real Time Gross Settlement (RTGS) System – Implementation of Positive Confirmation
Presently, the National Electronic Funds Transfer (NEFT) system provides for sending a positive confirmation to the remitter of the funds regarding completion of the funds transfer, thus giving an assurance to the remitter that the funds have been successfully credited to the beneficiary account. It has now been decided that banks will provide the same facility to the remitter of funds under the RTGS system as well.
Initially, the positive confirmation feature in RTGS would be available for member banks wherein both remitter and beneficiary banks access RTGS through thick client interface/Structured Financial Messaging System (SFMS) member interface. Member banks are expected to communicate the same to their customers. The positive confirmation feature will now be enabled for member banks accessing RTGS through other channels as well.
Value Free Transfer (VFT) of Government Securities – Guidelines
Reserve Bank of India has revised its guidelines on the Subsidiary General Ledger (SGL) and the Constituent Subsidiary General Ledger (CSGL) accounts. RBI has now decided to issue separate guidelines for Value Free Transfers (VFT) to enable more efficient operations in the Government securities market. VFTs between SGL/CSGL accounts not covered by the circular would require specific approval of RBI.
Permitted Transactions for Value Free Transfer (VFT) of Government Securities have been given in the Circular.
Legal Entity Identifier Code for Participation in Non-Derivatives Markets
The Legal Entity Identifier (LEI) code has been conceived as a key measure to improve the quality and accuracy of financial data systems for better risk management post the Global Financial Crisis. The LEI is a 20-character unique identity code assigned to entities who are parties to a financial transaction. The LEI system has been implemented in a phased manner for participants (other than individuals) in the over-the-counter markets for rupee interest rate derivatives, foreign currency derivatives and credit derivatives in India. The directions on requirement of LEI Code for participation in non-derivative markets have been finalised and issued by RBI (see circular dated 29th November 2018). Key provisions of the circular are as below
- All participants, other than individuals, undertaking transactions in the markets regulated by RBI such as Government securities markets, money markets (markets for any instrument with a maturity of one year or less) and non-derivative forex markets (transactions that settle on or before the spot date) shall obtain Legal Entity Identifier (LEI) codes by the due date indicated in the schedule attached to the circular.
- Only those entities that obtain an LEI code on or before the due dates applicable to them shall be able to undertake transactions in these financial markets after the due date, either as an issuer or as an investor or as a seller/buyer.
- Transactions undertaken on recognised stock exchanges would be outside the remit of the LEI requirement.
- In case of non-derivative forex transactions, while all inter-bank transactions shall be subject to LEI requirement, client transactions would require LEI code for transactions involving an amount equivalent to or exceeding USD one million or equivalent thereof in other currencies.
- Non-resident entities undertaking financial transactions in the relevant markets would also require the LEI code. Such entities that are not legal entities in their country of incorporation (e.g., funds operated by a non-resident parent/management company that are each registered as an FPI) would be required to use the LEI code of the parent/management company.
- Entities responsible for executing transactions, reporting or for depository functions in these markets shall capture the LEI code of the transacting participants in their systems.
- Entities can obtain LEI from any of the Local Operating Units (LOUs) accredited by the Global Legal Entity Identifier Foundation (GLEIF) (https://www.gleif.org/en). In India, the LEI code may be obtained from Legal Entity Identifier India Ltd. (LEIL) (https://www.ccilindia-lei.co.in).
- Entities undertaking financial transactions would need to ensure that their LEI code is considered current under the rules of the Global LEI System. Lapsed LEI codes would be deemed invalid for transactions in markets regulated by RBI.
During November 2018, 23 NBFCs surrendered their Certificates of Registration to RBI who, consequently, cancelled them. These companies cannot transact the business of a Non-Banking Financial Institution, as laid down in clause (a) of Section 45-I of the RBI Act, 1934.
Following RBI’s cancellation of registration certificates of 475 NBFCs, these companies cannot now undertake the business of a Non-Banking Financial Institution, as laid down under clause (a) of Section 45-I of the Reserve Bank of India Act, 1934.
In exercise of powers conferred by Section 4 of Government Securities Act 2006, RBI had notified the conditions applicable for opening and maintaining SGL and CSGL accounts as per notification No. 183 dated 5th September 2011, and as amended thereafter. Revised notifications and tracked changes have now been issued by RBI.
SEBI has introduced certain measures for streamlining the process of public issues of equity shares and convertibles (See circular dated 1st November 2018). The key changes introduced are as below.
- It has been decided to introduce the use of Unified Payments Interface (UPI) as a payment mechanism with Application Supported by Block Amount (ASBA) for applications in public issues by retail individual investors through intermediaries. The UPI is an instant payment system developed by the National Payments Corporation of India (NPCI). The proposed process is expected to increase efficiency and reduce the time duration from issue closure to listing by up to 3 working days.
- This mechanism is proposed to be introduced in a phased manner as below:
- Phase I- From 1st January 2019, the UPI mechanism for retail individual investors through intermediaries will be made effective along with the existing process and existing timeline of T+6 days. The same will continue, for a period of 3 months or floating of 5 main public issues, whichever is later.
- Phase II- Thereafter, for applications by retail individual investors through intermediaries, the existing process of physical movement of forms from intermediaries to Self-Certified Syndicate Banks (SCSBs) for blocking of funds will be discontinued and only the UPI mechanism with the existing timeline of T+6 days will continue, for a period of 3 months or floating of 5 main public issues, whichever is later.
- Phase III- The final reduced timeline will be made effective using the UPI mechanism.
- A Sponsor Bank would need to be appointed by the Issuer and would act as a conduit between the Stock Exchanges and NPCI in order to push the mandate collect requests and/or payment instructions of the retail investors into the UPI. Banks which are keen to be recognised as Sponsor Banks would need to register with SEBI as a Banker to Issues and also obtain a UPI certification as specified by NPCI. They also need to certify to SEBI about their readiness to act as a Sponsor Bank and for inclusion of their name in SEBI’s list of Sponsor Banks, by 15th December 2018.
- Merchant bankers have been advised to ensure that appropriate disclosures with respect to the UPI are made in offer documents and advertisements, in accordance with the circular.
SEBI previously published requirements for transfer of securities in physical mode in its Listing Obligations and Disclosure Requirements (LODR) Regulations. These have now been modified (See Circular dated 6th November 2018):
- Non-availability of Permanent Account Number (PAN) of the Transferor for Transfer Deeds Executed Prior to 1st December 2015: It has been clarified that that transfer deeds executed prior to notification of the LODR Regulations may be registered with or without the PAN of the transferor.
- Mismatch of Name in PAN Card Vis-à-vis Name on Share Certificate/Transfer Deed: In cases of such mismatch, the transfer can be registered on submission of any of the four following additional documents explaining the difference in the names:
- a copy of the Passport
- a legally recognized Marriage Certificate
- a Gazette notification regarding change in name
- a copy of the Andhra Card.
- Major Mismatch/Non-availability of Transferor’s Signature: The Issuers/Registrars & Transfer Agents (RTAs) would need to make efforts to contact the transferor by
- checking the dividend history and obtaining the current contact details from the bank where dividend was encashed
- Using information from the address, email ids and phone numbers, if any, available with the Depositories/KYC Registration Agencies (KRAs).
- Notice of the Proposed Transfer: Companies/RTAs would be required to publish an advertisement in at least one English language national daily newspaper having nationwide circulation and in one regional language daily newspaper. The purpose of the advertisement is to give notice of the proposed transfer and seek objections, if any, to the same within a period of 30 days from the date of advertisement. A copy of the advertisement would need to be published on the company’s website. The transfer can be effected only after the expiry of 30 days from the newspaper advertisement.
- Lock-in Period: The securities so transferred would need to bear a stamp affixed by the Company/RTA stating that these would be under lock-in for a period of 6 months from the date of registration of the transfer and should not be transferred or dematerialised during the said period.
SEBI’s circular dated 1st November 2016, prescribed the standard format for the press release to be issued regarding rating actions by Credit Rating Agencies (CRAs). The following specific disclosures would be required to be made in the section on “Analytical Approach” in the press release (see SEBI circular dated 13th November 2018):
- Rating Actions -
- When a rating factors in support from a Parent/Group/Government, with an expectation of infusion of funds towards timely debt servicing, the name of such entities, along with the rationale for such expectation, is required to be provided.
- When subsidiaries or group companies are consolidated to arrive at a rating, a list of all such companies, along with the extent and rationale of consolidation, would need to be provided.
- A specific section on “Liquidity” highlighting parameters such as liquid investments or cash balances, access to unused credit lines, liquidity coverage ratio, and adequacy of cash flows for servicing maturing debt obligations, etc. would need to be included in the press release. CRAs would also be required to disclose any linkage to external support for meeting near term maturing obligations.
- Review of Rating Criteria
- CRAs would need to review their rating criteria with regard to assessment of holding companies and subsidiaries in terms of their inter-linkages, holding company’s liquidity, financial flexibility and support to the subsidiaries, etc.
- CRAs have been advised to analyse the deterioration in the liquidity conditions of the issuer and also take into account the asset liability mismatch.
- While reviewing “Material Events”, a sharp deviation in bond spreads of debt instruments vis-à-vis relevant benchmark yield may be treated as a material event.
CRAs have been advised to provide an insight on the stability of ratings for long term investments over a period of time. They would be required to publish information about the historical average rating transition rates across various rating categories so that investors can understand the historical performance of the ratings assigned by the CRAs.
Highlights from SEBI’s circular in relation the above (dated 26th November 2018) are as follows:
- Eligibility –
- Any fund established or incorporated in the IFSC in the form of a trust or a company or a limited liability partnership or a body corporate, can seek registration under the provisions of SEBI (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations’)
- Investments by AIFs –
- Earlier, such AIFs were permitted to invest in India through the Foreign Portfolio Investment route. AIFs have now been permitted to invest in India through the Foreign Venture Capital Investor or Foreign Direct Investment (FDI) route also, in accordance with applicable FDI policy/guidelines issued by Government of India and RBI in this regard.
- Each scheme of the AIF shall have corpus of at least USD three million. The minimum value to be invested by one investor should be not less than USD 150,000. In case of investors who are employees or directors of the AIF, or employees or directors of the manager, the minimum value of investment shall be USD 40,000
- An AIF set up in the IFSC may invest in the units of other AIFs set up in the IFSC and other AIFs in India, subject to the provisions of the AIF Regulations.
- Manager/Sponsor of the AIF -
- The Manager or Sponsor should have a continuing interest in the AIF of not less than two and half percent of the corpus or USD 750,000, whichever is lower, in the form of investment in the AIF. Such interest should not be through the waiver of management fees. For Category III AIF, the continuing interest shall be not less than five percent of the corpus or USD 1.5 million, whichever is lower.
- A Sponsor/Manager of an existing AIF in India may act as a Sponsor/Manager of an AIF set up in the IFSC. The Sponsor/Manager to be set up in IFSC shall need to incorporate a company or a limited liability partnership in the IFSC
- Appointment of a Custodian
- A SEBI registered custodian would need to be appointed for safekeeping of securities if the corpus of the AIF is more than USD seventy million. It is mandatory for Category III AIFs to appoint a custodian.
- Angel Funds -
- An angel fund would be required to have a corpus of at least USD 750,000.
- An individual angel investor should have net tangible assets of at least USD 300,000 excluding the value of his principal residence. A body corporate shall have a net worth of at least USD one million five hundred thousand.
- Angel funds would have to accept, up to a maximum period of five years, an investment of not less than USD 40,000 from an angel investor.
- Angel funds can invest in venture capital undertakings (VCU) in India in accordance with the AIF Regulations.
SEBI has evolved a framework that will require large corporates to raise 25% of their borrowings through corporate bonds from the next financial year (see SEBI Circular dated 26th November 2018). The framework would be applicable to all listed entities, which have their specified securities or debt securities or non-convertible redeemable preference share, listed on a recognised stock exchange in terms of the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015, and which have an outstanding long term borrowing of INR 100 crores or above.
- Outstanding borrowing would mean borrowings with original maturity of more than 1 year and would exclude external commercial borrowings and inter-corporate borrowings between a parent and its subsidiary.
- The listed entity should have a credit rating of "AA and above”. Where an issuer has multiple ratings from multiple rating agencies, the highest of such rating would need to be considered for the purpose of applicability of this framework.
- The framework will come into effect from 1st April 2019. For firms which follow the calendar year as their financial year, the guidelines will be effective from 1st January 2020.
- For FY 2020 and 2021, the requirement of meeting the incremental borrowing norms shall be applicable on an annual basis. From the financial year 2022, companies would be required to meet the incremental 25 percent borrowing requirement over a contiguous block of two years.
On 14th November 2018, SEBI introduced amendments to its Delisting Regulations, as below:
- Previously, once the price for a delisting offer was discovered through the Reserve Book Building (RBB) process, the only option available to an acquirer, who did not agree with the RBB price, was to reject it and withdraw from the delisting. Acquirers now have an additional option to propose a counter-offer to the public shareholders within 2 working days of the RBB price being determined. The counter-offer price should not be less than the book value of the listed company, as certified by a merchant banker.
- The Delisting Regulations provide that the floor price for the RBB process will be determined using the process as per the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”). Under the Takeover Regulations, the floor price is calculated by identifying the historic price for prescribed look-back periods. The look-back period starts from the date of the public announcement of a tender offer. It has now been clarified that the reference date for computing the floor price would be the date on which the recognised stock exchange should have been notified of the board meeting in which the delisting proposal would have been considered.
On 5th November 2018, RBI imposed monetary penalties of INR 30 million on Deutsche Bank A.G. and INR 30 million on The Jammu and Kashmir Bank, both for non-compliance with the directions issued by RBI on Income Recognition and Asset Classification (IRAC) norms and Know Your Customer/Anti-money Laundering (KYC/AML) norms.
In a move aimed at protecting investors from unscrupulous entities which promise exorbitant returns, SEBI has advised investors to deal only with registered investment advisors, a list of which is available on its website. SEBI has advised investors to pay advisory fees to such registered investment advisors through banking channels and maintain receipts in respect of the same.
Investors have been advised to have their risk profiling done before accepting any investment advice.
SEBI is contemplating the issue of a new rule to allow mutual funds to segregate distressed debt securities in their portfolios. The rule, known as side-pocketing, will give fund houses the flexibility to carve out defaulting papers from the rest of the portfolio to ensure that the scheme’s net asset value (NAV) remains insulated.