INTRODUCTION
The month of May has been particularly dynamic for the fintech sector in India, marked by a series of significant advancements and regulatory changes owing to issuance of a slew of notifications/directions by the regulators. From SEBI releasing framework for designating supervisory bodies for investment advisors and research analysts to NPCI releasing guidelines for members on merchant acquisition for BHIM Aadhar Pay, the fintech landscape in India continues to thrive and transform. In this edition, we delve into the key developments that shaped the fintech sector in the month of May, and provide you with a comprehensive overview of the trends and milestones that are redefining financial technology in the country.
RECENT LEGAL & REGULATORY DEVELOPMENTS
RBI releases draft guidelines on 'Prudential Framework for Income Recognition, Asset Classification and Provisioning pertaining to Advances - Projects Under Implementation'1
On May 03, 2024, the Reserve Bank of India ("RBI") released the 'Draft Prudential Framework for Income Recognition, Asset Classification and Provisioning pertaining to Advances - Projects Under Implementation, Directions, 2024' ("Draft Prudential Norms"). The RBI noted that the Prudential Framework for Resolution of Stressed Assets issued on June 07, 2019 excluding the provisions regarding restructuring of exposures for the projects which are under implementation owing to any modification in the commencement of commercial operations. Accordingly, the Draft Prudential norms have been released to provide an effective and harmonised prudential framework.
The Draft Prudential Norms will be applicable to the regulated entities such as (i) Scheduled Commercial Banks (including Small Finance Banks but excluding Payments Banks, Local Area Banks and Regional Rural Banks); (ii) Non-Banking Financial Companies ("NBFCs"); (iii) Primary (Urban) Cooperative Banks; and (iv) All India Financial Institutions ("AIFIs"). These Draft Prudential Norms set out the prudential norms for financing of projects in infrastructure, non-infrastructure and commercial real estate sectors. The Draft Prudential Norms, inter alia, prescribes obligations including (a) having a Board-approved policy for resolution of stress in the projects on occurrence of a credit event; (b) monitor build-up of stress in a project on an on-going basis; (c) initiating a resolution plan prior to a credit event; (d) criteria for upgrading project finance which have been downgraded to non-performing assets; and (e) conditions to be satisfied for implementing resolution plan involving extension of date of commencement of commercial operations.
RBI issues amendment to the Foreign Exchange Management (Deposit) (Fourth Amendment) Regulations, 20242
On May 06, 2024, the RBI issued amendments through Foreign Exchange Management (Deposit) (Fourth Amendment) Regulations, 2024 to the Foreign Exchange Management (Deposit) Regulations, 2016 ("FEMA Amendments 2024"). The amendments will come into force from May 06, 2024. As per the FEMA Amendments 2024, an Authorised Dealer will be allowed to permit a person resident outside India to hold and maintain an interest-bearing account in Indian currency i.e. Indian Rupees (INR) or foreign currency for a valid derivative contract, and posting and collecting margin in India for such derivative contract entered into by such person in terms of the Foreign Exchange Management (Margin for Derivative Contracts) Regulations, 2020, dated October 23, 2020.
RBI releases framework for administration and supervision of Research Analysts and Investment Advisers3
SEBI, vide its circular 'Framework for administration and supervision of Research Analysts and Investment Advisers' dated May 02, 2024 ("Framework"). As per the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018, stock exchanges are required to supervise and administer over the specified intermediaries. Pursuant to the release of the Framework, the regulated 'stock exchange' will be designated as the Research Analyst Administration and Supervisory Body ("RAASB") and Investment Advisor Administration and Supervisory Body ("IAASB") under Regulation 14 of the SEBI (Research Analysts) Regulations, 2014, and Regulation 14 of the SEBI (Investment Advisers) Regulations, 2013, respectively. All the entities seeking to register as Research Analysts ("RAs") and Investment Analysts ("IAs") are now required to enlist with RAASB and IAASB, instead of obtaining membership under RAASB and IAASB. Existing RAs will be deemed to be RAASB. In case of existing SEBI registered IAs, they will be deemed to be enlisted with the IAASB only if they are extant members of BSE Administration and Supervision Limited.
A recognised stock exchange will be granted recognition as a RAASB and IAASB basis the eligibility criteria including (i) 15 (fifteen) years of existence as a recognised stock exchange; (ii) minimum net worth of INR 2,00,00,00,000 (Indian Rupees Two Hundred Crores); (iii) existence of nation-wide terminals; and (iv) effective investor grievance redressal mechanism including Online Dispute Resolution Mechanism.
To delineate the roles and responsibilities of the SEBI and RAASB/ IAASB, SEBI has clarified that SEBI will continue to perform the core functions including registration and enforcement actions as provided under the Securities and Exchange Board of India Act, 1992. Further, SEBI, RAASB and IAASB will be concurrently responsible for registration of RAs and IAs. While SEBI will provide requisite approval for registration of RAs and IAs, and grant approvals for post registration changes to the information furnished at the time of registration, RAASB and IAASB will undertake initial scrutiny of applications for registration and post registration changes.
RAASB, IAASB and SEBI will also concurrently undertake supervision of RAs and IAs. SEBI will supervise RAs and IAs, and take enforcement actions, disciplinary or penal actions. SEBI will also provide a grievance redressal mechanism. On the other hand, RAASB and IAASB will monitor RAs and IAs by way of reports and disclosures made by the RAs and IAs. Additionally, SEBI may also require RAASB and IAASB to conduct certain activities on its behalf including inspection of RAs and IAs.
The stock exchanges designated as a RAASB and/or IAASB will be required to incorporate provisions to ensure compliance with the abovementioned obligations, roles and responsibilities in its charter documents and by-laws. RAASB and IAASB must also have in place appropriate infrastructure, systems and process for maintaining databases. The circular will become effective on July 25, 2024.
SEBI revises provisions for review of validation of KYC records by KRAs under the Risk Management Framework4
SEBI has amended the Master Circular on Know Your Client norms for the securities market dated October 12, 2023, on the 'Risk Management Framework' at KYC Registration Agency ("KRA") basis feedback received from the stakeholders. Vide these modifications, the SEBI has revised the information which will have to be verified by the KRAs as part of the risk management framework. KRAs will now be required to verify information such as Permanent Account Number ("PAN"), name and address of the clients within 2 (two) days of receiving the Know Your Client ("KYC") records. Further, client records verified by the KRAs with official databases including the database of the Income Tax Department will be deemed as validated records for the purpose of such verification. All the exchanges, depositories and intermediaries are required to complete the necessary changes by May 31, 2024.
NPCI releases reference Guidelines for Members on Merchant Acquisition for BHIM Aadhaar Pay5
The National Payments Council of India ("NPCI") has released 'Reference Guidelines for Members on Merchant Acquisition for BHIM Aadhaar Pay' dated May 02, 2024 ("Reference Guidelines") applicable on the acquirer member banks for merchant acquisitions and transactions in relation to Bharat Interface for Money Aadhar ("BHIM") Aadhar Pay. Under the Reference Guidelines, the NPCI has directed the acquiring member bank to adopt a Board approved policy for merchant acquisition and enter into agreements with merchants and third-party service providers prior to providing any services. An acquiring member bank is also required to lay down guidelines on portfolio risk monitoring and merchant training. The Reference Guidelines also recommend criteria for merchant, aggregator or master merchant underwriting including (a) verification of origin country of a merchant to prevent any conflict with the governance or regulatory guidelines; (b) validation and screening of merchant website and information to establish the nature of its business; KYC validation, sanction screening and other such verifications; and (c) compliance with data security standards and requirements.
Further, an acquiring member bank should also be classify merchant into critical, high, medium and low risk segments, and it is also required to define prohibited merchant categories and lines of business. Prohibited merchants includes merchants (a) banned under the Central or state laws; (b) carrying out business activities not specifically permitted by the regulators or statutory authority; (c) falling under the high band risk; and (d) operating in unregulated financial services or products. Notably, as per the Reference Guidelines, the Acquiring Member will now be responsible for any outsourcing of security system-related activities by a merchant.
RBI releases Master Direction – Reserve Bank of India (Margining for Non-Centrally Cleared OTC Derivatives) Directions, 20246
On May 08, 2024, the RBI has issued Master Direction – Reserve Bank of India (Margining for Non-Centrally Cleared OTC Derivatives) Directions, 2024 ("OTC Derivatives MD"), which will come into force on November 08, 2024. OTC Derivatives MD is applicable to the following contracts entered into on or after the date on which the OTC Derivatives MD comes into force, such as (a) Non-centrally cleared foreign exchange derivative contractsi ; (b) Non-centrally cleared interest rate derivative contractsii; (c) Non-centrally cleared credit derivative contractsiii; and (d) Any other non-centrally cleared derivative ("NCCD") contract specified by the RBI. That said, the OTC Directives MD are not applicable to an NCCD transaction if the counterparties include Indian or state governments, foreign sovereign or a central bank.
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Footnotes
1. https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=57841
2. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12684&Mode=0
6. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12682&Mode=0
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