INTRODUCTION
Fintech's potential to transform the delivery of financial services continues to take more meaningful strides as India is embracing global breakthroughs in artificial intelligence ("AI") and machine learning ("ML") technology. At present, the industry is at its most significant crossroads as automation is reaching new levels with the integration of AI and ML tools in financial institutions' decision-making processes.1 Last month, the Reserve Bank of India ("RBI") notified the Master Direction on Outsourcing of Information Technology Services, where it intends to regulate the outsourcing of information technology services by regulated entities.2
As for digital payments, India's highly successful payment infrastructure Unified Payments Interface ("UPI") has also been growing as UPI transactions are projected to account for 90% (ninety per cent) of transaction volume in retail digital payments by 2026-2027.3 The network is also turning out to be of interest from abroad as a Japanese minister expressed his country's intent to join the network for facilitation of cross-border payments.4 Overall, this indicates exciting times for India's role in shaping global payments systems.
Cognizant of the speed with which the industry is growing, the RBI as well as other regulators, continue to take active steps towards regulating one of the most dynamic sectors at present. This newsletter highlights the key developments and measures as well as other developments in the Indian fintech space from May 01, 2023, to May 31, 2023.
RECENT LEGAL & REGULATORY DEVELOPMENTS
SEBI consultation paper on regulatory framework for fractional ownership platforms
On May 12, 2023, the Securities and Exchange Board of India ("SEBI") released a consultation paper proposing regulation of fractional ownership platforms ("FOPs") for real estate assets ("Consultation Paper").5 FOPs are platforms that allow investors to buy a small share of a real estate asset. The Consultation Paper proposes to regulate FOPs as micro, small, and medium real estate investment trusts under the SEBI (Real Estate Investment Trusts) Regulations, 2014 ("REIT Regulations").
The Consultation Paper proposes that the FOPs should be required to register with SEBI and comply with the REIT Regulations. The Consultation Paper proposes to structure FOPs as follows:
- the FOP shall hold 100% (one hundred per cent) of the equity share capital in all Special Purpose Vehicles ("SPV(s)");
- the SPV(s) shall hold 100% (one hundred percent) ownership in all the underlying property(ies);
- the sponsor shall be required to hold a minimum of 15% (fifteen per cent) of the total units of the FOP for each scheme for a period of at least 3 (three) years from the date of listing of such units of such scheme pursuant to initial offer on a post-issue basis.
Among other things, the Consultation Paper proposes that the FOPs should be required to:
- have at least half of its directors as independent and not directors of the investment manager or manager of another FOP;
- have a valuation done by an independent valuer at least once a year;
- provide investors with regular updates on the performance of their investments;
- mandatorily list all the units of the FOPs scheme(s) on a stock exchange and hold all units of the FOP and investments of the FOP in SPVs in dematerialized form;
- ensure that the size of the asset proposed to be acquired in the initial offer of the scheme should be of a value between INR 25 crores to INR 499 crores (approximately USD 3.045 million to USD 60.8 million);
- ensure that the sponsor shall have a net worth of at least INR 20 crores (approximately USD 2.4 million) of which at least INR 10 crores (approximately USD 1.2 million) shall be in the form of positive liquid net worth and the investment manager shall have a net worth of at least INR 10 crores (approximately USD 1.2 million), in the form of positive liquid net worth;
- have a minimum subscription size of INR 10 lakhs (approximately USD 12,000) for the units of an FOP scheme and each unit size shall be INR 10 lakhs (approximately USD 12,000);
- ensure that the maximum subscription to an FOP scheme from any investor (other than sponsor(s), its related parties and its associates) shall not be more than 25% (twenty-five per cent) of the total unit capital;
- comply with the standard know-your-customer ("KYC") requirements prescribed by the RBI Master Direction on KYC, 2016 ("KYC MD") while registering clients.
The Consultation Paper was open for public comments till May 27, 2023. It remains to be seen if stakeholder feedback will impact the FOP framework proposed by the Consultation Paper.
Footnotes
2. https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12486
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