Amendments in the FEMA, 1999
RBI Updates December 2023
1. Investments in Alternative Investment Funds (AIFs)
On December 19, 2023, RBI instructed about the investment in AIFs. These instructions apply to Regulated Entities (REs) i.e. All Commercial Banks (including Small Finance Banks, Local Area Banks, and Regional Rural Banks), All Primary (Urban) Co-operative Banks/State Co-operative Banks/ Central Co-operative Banks, All All-India Financial Institutions, All Non-Banking Financial Companies (including Housing Finance Companies).
REs routinely invest in units of AIFs as part of their standard investment activities. However, there are regulatory concerns arising from specific transactions where REs substitute their direct loan exposure to borrowers with indirect exposure through investments in AIF units.
To address worries about possible evergreening (Evergreening of loans is a process whereby a lender tries to revive a loan that is on the verge of default or in default by extending more loans to the same borrower) through this route, here’s some straightforward advice given by RBI:
- REs are prohibitedfrom investing in any AIF scheme that indirectly or directly has downstream investments in a debtor company of the RE.
- If an AIF scheme, where an RE is already an investor, makes a downstream investment in a debtor company, the RE must liquidateits investment in the scheme within 30 days from the date of such investment by the AIF.
- For existing investments in such schemes, REs have 30 days from the issuance of the circular to liquidate. Failure to do so requires them to make a 100% provision on these investments.
Investments by REs in subordinated units of any AIF scheme with a ‘priority distribution model’ are subject to full deduction from the RE’s capital funds.
Reason and challenges- The aim is to prevent the misuse of additional borrowed funds through the AIF route, which is done to bypass guidelines related to restructuring advances and declaring non-performing assets. In the past few years, many instances have come to light where an AIF invested in companies that have existing loans from the REs, which in turn have investments in such AIFs. These investments were then utilised to evergreen the loans given by REs allowing the REs to avoid recognizing non-performing assets (NPAs).
According to its website, SIDBI has set up the India Aspiration Fund (IAF), a Rs 2,000-crore vehicle, to make equity investments in start-ups and MSMEs. SIDBI which loans funds to small industries, and various AIFs are simultaneously seeking clarity or relief amid the sudden changes in AIF investments ordered by the Reserve Bank of India (RBI).
The Indian Venture and Alternate Capital Association (IVCA) is reportedly in discussions with central government officials to help ease the wide-ranging curbs the RBI has imposed on Alternative Investment Funds (AIFs).
The link for the aforesaid instruction is as follows:
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT9051F8256D79234D5FA6D4E4CBD029E16D.PDF
2. Manner of Receipt and Payments in compliance with FEMA Act
On December 21, 2023, RBI issued Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2023 (Regulation). These regulations shall be effective from December 21, 2023
The new Regulation provides a Manner in which the Receipts and Payments are made in compliance with the FEMA Act and are made through an Authorised Bank or Authorised Person and in the manner prescribed in these Regulations and no person resident in India can make or receive payment from a person resident outside India without adhering to these regulations unless the RBI permits a person after getting the application from him.
The new Regulation provides that the Payment and Receipt in India for any current account transaction, other than a trade transaction, between any person resident in India and a person resident outside India, who is on a visit to India, may be made only in Indian Rupees. However, any payment or receipt may also be made by debit/ credit to a bank account maintained in terms of the rules, regulations, or directions issued under the FEMA Act.
The link for the aforesaid instruction is as follows:
Reserve Bank of India – Notifications (rbi.org.in)
3. Liberalised Remittance Scheme (LRS) for Resident Individuals- Reporting of monthly returns and daily transactions
On December 22, 2023, RBI vide A.P. (DIR Series) Circular No.11 decided that, with effect from December 26, 2023, the submission of two returns which the AD Category-I banks are filing in respect of the number of applications received and the total amount remitted under Liberalised Remittance Scheme (LRS) every month on XBRL site, will be discontinued and shifted to the Centralised Information Management System (CIMS), which is the RBI’s new data warehouse.
Further AD Category-I banks have already been onboarded on the CIMS portal, and are currently submitting both the returns on the XBRL site as well as the CIMS portal. The LRS monthly return and LRS daily return have been assigned return codes- ‘R089’ and ‘R010’ respectively on the CIMS portal.
AD Category-I banks shall now upload the LRS monthly return on or before the 5th of the succeeding month commencing from the reporting month of December 2023, and the LRS daily return from December 26, 2023, onwards on the next working day on the CIMS portal (URL: https://sankalan.rbi.org.in) and in case no data is to be furnished, AD Category-I banks to upload a ‘NIL’ report.
The link for the aforesaid instruction is as follows:
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/APDIR11E221
4. Minimum Holding Period (MHP) on Transfer of Loan
- The residual maturity of such receivables, at the time of transfer, should not be more than 90 days, and
- As specified under clauses 10 and 35 of these directions, the transferee conducts proper credit appraisal of the drawee of the bill, before acquiring such receivables. Clause 10 of MD- TLE reads as follows:
- 10. The lenders must put in place a comprehensive board-approved policy for transfer and acquisition of loan exposures under these guidelines. These guidelines must, inter alia, lay down the minimum quantitative and qualitative standards relating to due diligence, valuation, requisite IT systems for capture, storage and management of data, risk management, periodic board-level oversight, etc. Further, the policy must also ensure the independence of functioning and reporting responsibilities of the units and personnel involved in the transfer/acquisition of loans from the personnel involved in originating the loans. All transactions must meet the requirements as detailed in the policy. Clause 35 of MD- TLE reads as follows:
- 35. The due diligence in respect of the loans cannot be outsourced by the transferee(s) and should be carried out by its staff with the same rigor and as per the same policies as would have been done for originating any loan. The link for the aforesaid instruction is as follows: Reserve Bank of India – Notifications (rbi.org.in)
5. Classification of MSMEs
On December 28, 2023, RBI amended the Master Direction- Lending to Micro, Small & Medium Enterprises (MSME) Sector (MD-Lending to MSME). RBI directed that the classification / re-classification of MSMEs is the statutory responsibility of the Ministry of MSME, Government of India as per the provisions of the MSMED Act, 2006 and hence the Regulated Entities are mandated that it shall be guided by the notifications issued by the Ministry of MSME in this regard, from time to time.
Accordingly, RBI amended MD- Lending to MSME and directed that MSMEs are required to register online on the Udyam Registration portal and obtain a ‘Udyam Registration Certificate’. For Primary Sector Lending (PSL) purposes, banks shall be guided by the classification recorded in the Udyam Registration Certificate (URC). The link for the aforesaid instruction is as follows:
Reserve Bank of India – Notifications (rbi.org.in)
6. Master Direction - Reserve Bank of India (Internal Ombudsman for Regulated Entities) Directions, 2023
On December 29, 2023, RBI issued Master Direction on Internal Ombudsman for Regulated Entities. The directions apply to All Scheduled Commercial Banks (excluding Regional Rural Banks), Non-Bank System Participants, all Non-Banking Financial Companies, and all Credit Information Companies. These Directions shall come into effect from December 29, 2023. The directions are focused on standardizing various aspects, including establishing timelines for escalating complaints to the Internal Ombudsman (IO), defining exclusions from escalating complaints, specifying minimum qualifications for appointing the Internal Ombudsman, and updating reporting formats. The aim is to ensure consistency and efficiency in the handling of complaints within this framework.
The link for the aforesaid direction is as follows: –
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12586&Mode=0
7. Fair Lending Practice - Penal Charges in Loan Accounts: Extension of Timeline for Implementation of Instructions
On December 29, 2023, RBI issued a circular on Fair Lending Practice – Penal Charges in Loan Accounts. This circular shall apply to all commercial banks (including Small Finance Banks, Local Area Banks, and Regional Rural Banks, excluding Payments Banks), All Primary (Urban) Co-operative Banks, All NBFCs (including HFCs), and All India Financial Institutions (EXIM Bank, NABARD, NHB, SIDBI and NaBFID). Vide this Circular, RBI granted a 3-month extension for the implementation of instructions on ‘Fair Lending Practice – Penal Charges in Loan Accounts’. Accordingly, from April 1, 2024, the new instructions will apply to all fresh loans. For existing loans, the transition to the revised penal charges regime must occur during the next review or renewal date falling on or after April 1, 2024, but no later than June 30, 2024.
The Link for the aforesaid circular is as follows: –
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12585&Mode=0