Amendments in the FEMA, 1999
RBI Updates January 2024
1. Foreign Exchange Management (Debt Instruments) (Third Amendment) Regulations, 2024
RBI vide Notification FEMA.396(3)/2024-RB dated August 02, 2024, issued the Foreign Exchange Management (Debt Instruments) (Third Amendment) Regulations, 2024, effective from the date of publication in the Official Gazette. This amendment updates the Foreign Exchange Management (Debt Instruments) Regulations, 2019.
It introduces provisions for individuals residing outside India to purchase Sovereign Green Bonds issued by the Government of India if they maintain a securities account in the International Financial Services Centre (IFSC) in India.
It also specifies that payments for these bonds must be made through inward remittances from abroad through banking channels or from foreign currency accounts maintained as per the regulations issued by the RBI/IFSC.
Additionally, it allows for the remittance of sale or maturity proceeds of these bonds outside India, net of applicable taxes.
This amendment aims to facilitate foreign investment in Indian Sovereign Green Bonds and streamline related financial transactions.
The link to the aforesaid Circular is as follows:
https://egazette.gov.in/(S(53lj40bwouunt3e2szp1igmz))/ViewPDF.aspx
2. Draft circular on ‘Regulatory Principles for Management of Model Risks in Credit’
On August 5, 2024, RBI released a draft circular outlining regulatory principles for managing model risks in credit. This draft addresses potential risks and ensures robustness in credit management models used by Regulated Entities (REs) for tasks like credit appraisal, borrower scoring, and risk management.
The circular emphasizes these models’ need for comprehensive governance, oversight, and validation processes. It mandates that REs must adopt a Board-approved policy covering model development, deployment, and ongoing validation.
The draft also stipulates that new models must comply with these principles within 3 months of issuance, and existing models should be validated within 6 months. The new guidelines aim to mitigate model risks, enhance transparency, and ensure regulatory compliance. The circular repeals the 2002 guidance note on credit risk models, reflecting updated regulatory requirements.
The link to the aforesaid draft Circular is as follows:
https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=58432
3. Frequency of reporting of credit information by Credit Institutions to Credit Information Companies (CIC)
RBI vide Circular RBI/2024-25/60 dated August 08, 2024, issued the frequency of reporting of credit information by Credit Institutions (CI) to Credit Information Companies (CIC).
Vide this amendment, RBI has directed CICs and CIs to keep the credit information collected/maintained by them updated regularly on a fortnightly basis (i.e., as on the 15th and last day of the respective month) or at such shorter intervals as mutually agreed upon between the CI and the CIC. The fortnightly submission of credit information by CIs to CICs shall be ensured within 7 calendar days of the relevant reporting fortnight.
CICs are required to ingest credit information data received from the CIs, as per their data acceptance rules, within 5 calendar days (earlier it was 7 calendar days) of its receipt from the CIs.
CICs are required to provide a list of CIs to the Department of Supervision, RBI, Central Office that are not adhering to the fortnightly data submission timelines on half-yearly intervals (as on March 31 and September 30 each year) for information and monitoring purposes.
These instructions shall be effective from January 1, 2025. However, the CIs and CICs are encouraged to give effect to these instructions as expeditiously as feasible but not later than January 1, 2025.
The link to the aforesaid Circular is as follows:
https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12718&Mode=0
4. Review of the regulatory framework for Housing Finance Companies (HFC) and harmonization of regulations applicable to HFCs and Non-Banking Financial Companies (NBFC)
RBI vide Circular RBI/2024-25/61 dated August 12, 2024, outlined the significant revised regulatory frameworks for Housing Finance Companies (HFCs) and Non – Banking Finance Companies (NBFCs) as a part of its phased approach towards these entities which was announced in its previous notification.
This Circular outlines guidelines regarding the Acceptance of Public Deposits (applicable only to HFCs and NBFCs holding CoR to accept/ hold public deposits) along with other instructions (applicable to HFCs and NBFCs).
This framework guideline is set to harmonize the present regulations applicable to HFC and NBFC with effect from January 01, 2025.
The link to the aforesaid Circular is as follows:
https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12719&Mode=0
5. Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules, 2024
RBI vide Notification SO 3492(E) dated August 16, 2024, issued the Foreign Exchange Management (Debt Instruments) (Fourth Amendment) Regulations, 2024, effective from the date of publication in the Official Gazette. This amendment updates the Foreign Exchange Management (Debt Instruments) Regulations, 2019.
A new definition of “control” has been inserted which states that Control shall have the same meaning as assigned to it in the Companies Act, 2013, and for Limited Liability Partnership, it shall mean the right to appoint the majority of the designated partners, where such designated partners, with specific exclusion to others, have control over all the policies of an LLP.
The definition of the word start-up company has been substituted which means a private company incorporated under the Companies Act, 2013 and identified as a “startup” under the notification of the Government of India number G.S.R. 127 (E), dated February 19, 2019 issued by the Department for Promotion of Industry and Internal Trade, (DPIIT) , Ministry of Commerce and Industry, as amended from time to time.
Rule 9(1)(i) now mandates prior government approval for transfer in all cases wherever Government approval is applicable.
A new Rule 9A is introduced with respect to the provisions of swap of equity instruments and equity capital of an Indian Company between a person resident in India and a person resident outside India, facilitating cross-border transactions.
Rule 23(7)(d) which defines control is omitted.
Rule 23(7)(i) clarifies that an investment made by an Indian entity that is owned and controlled by a Non-Resident Indian (NRI) or an Overseas Citizen of India (OCI) including a company, a trust, and a partnership firm incorporated outside India and owned and controlled NRI or OCI, on a non-repatriation basis in compliance with Schedule IV of these rules, shall not be considered for calculation of indirect foreign investment.
Schedule I para (1)(d) is substituted which states that an Indian Company may issue equity instruments to a person resident outside India, subject to compliance with the rules prescribed by the Central Government and the regulations specified by RBI from time to time, against:
- swap of equity instruments; or
- import of capital goods or machinery or equipment (excluding second-hand machinery); or
- pre-operative or pre-incorporation expenses (including payments of rent, etc.);
- swap of equity capital of a foreign company in compliance with the rules prescribed by the Central Government including Foreign Exchange Management, (Overseas Investment) Rules 2022, and the regulations specified by RBI from time to time.
Now the aggregate Foreign Portfolio Investment up to the sectoral or statutory cap shall not require Government approval or compliance with sectoral conditions as the case may be, if such investment does not result in the transfer of ownership and/ or control of the resident Indian company from resident Indian citizens to persons resident outside India and other investments by a person resident outside India shall be subject to the conditions of Government approval and compliance of sectoral conditions as laid down in these rules.
Now White Label ATM operations can attract 100% foreign investment through an automatic entry route.
Now, in case two or more FPIs including foreign Governments or their related entities are having common ownership, directly or indirectly, of more than 50% or common control, all such FPIs shall be treated as forming part of an investor group.
The definition of “startup” in Schedule VII is updated to match the recent DPIIT notification, ensuring consistency across regulations.
The link to the aforesaid Notification is as follows:
https://egazette.gov.in/(S(uo3vyjicfg41abqbnt1vgimt))/ViewPDF.aspx
6. Review of Master Direction - Non-Banking Financial Company: Peer-to-Peer Lending Platform (Reserve Bank) Directions, 2017
RBI vide Circular RBI/2024-25/63 dated August 16, 2024, issued revisions to the Master Direction for Non-Banking Financial Companies – Peer to Peer Lending Platforms (NBFC-P2P) under its 2017 guidelines.
The revisions address observed violations and clarify specific provisions to ensure better compliance. Key issues among others include improper fund transfer mechanisms, misleading promotion of peer-to-peer lending as an investment product, and unauthorized activities like acting as deposit takers.
The updated guidelines now prohibit NBFC-P2Ps from assuming any credit risk, clarify escrow account operations, and enforce stringent disclosure norms. Additionally, NBFC-P2Ps are now restricted from cross-selling insurance products that function as credit enhancements and must not utilize lender funds to replace other lenders. RBI has mandated that all fund transfers between lenders and borrowers be conducted strictly through bank accounts, with no cash transactions allowed. These amendments aim to safeguard the interests of lenders and borrowers while ensuring that NBFC-P2P platforms operate within the legal framework. The revised provisions are effective immediately, with certain aspects coming into force within 90 days from the circular’s issuance.
The link to the aforesaid Circular is as follows:
https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12721&Mode=0