Amendments in the FEMA, 1999
RBI Updates January 2024
1. Participation of NaBFID as an AIFI in financial markets
- Vide: RBI/2024-25/101
- Dated: January 1, 2025.
Reserve Bank of India (RBI) issued Circular RBI/2024-25/101 on January 1, 2025, permitted the National Bank for Financing Infrastructure and Development (NaBFID) to participate as an All-India Financial Institution (AIFI) in financial markets. NaBFID can now undertake credit default swaps and repurchase (repo) transactions in accordance with the Master Directions on Credit Derivatives (2022) and Repo Transactions (2018).
- Regulatory Framework: NaBFID is regulated and supervised as an AIFI by the Reserve Bank of India (RBI) under Sections 45L and 45N of the Reserve Bank of India Act, 1934.
- Master Direction Issued: Relevant Master Directions include:
- Master Direction – Reserve Bank of India (Credit Derivatives) Directions, 2022.
- Master Direction – Repurchase Transactions (Repo) (Reserve Bank) Directions, 2018.
- Permitted Activities: NaBFID is permitted to engage in credit default swaps and repurchase transactions in accordance with the updated directions.
- Immediate Effect: The updates and Directions are applicable immediately upon issuance.
2. Status of March 30, 2025, for Government transactions through integration with e-Kuber
- Vide: RBI/2024-25/103
- Dated: January 03, 2025
The ‘e-Kuber’, which is the Core Banking Solution platform of RBI for Government and other payments does not process any Government transactions on Global holidays (which are the 26th of January, 15th of August, 2nd of October, all 2nd and 4th Saturdays of a month and on all Sundays).
It is observed that March 30, 2025, falls on a Sunday. Therefore, the Office of Controller General of Accounts, Government of India has advised that to account for all the Government transactions relating to receipts and payments in the financial year 2024-25 itself, March 30, 2025 (Sunday) be marked as a working day for the Government transactions.
In other words,
- 30thMarch 2025 will be a working day for Government transactions via e-Kuber.
- Luggage files from banks related to government transactions will be accepted by e-Kuber.
- This is to ensure all financial activities for the fiscal year 2024-25 are accounted.
Link: https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NOTI1033D63656112C84614A441726C51293520.PDF
3. Master Direction – Reserve Bank of India (Credit Information Reporting) Directions, 2025
- Vide: RBI/DoR/2024-25/125
- Dated: January 06, 2024
Reserve Bank of India (RBI) has issued the “Master Direction – Reserve Bank of India (Credit Information Reporting) Directions, 2025,” consolidating previous guidelines under Section 11 of the Credit Information Companies (Regulation) Act, 2005.
RBI has periodically issued various instructions and directives to its Regulated Entities (“REs”) regarding credit information reporting. Master Directions aims to create a standardized system for the reporting and dissemination of credit information, safeguarding the confidentiality and security of sensitive credit data, and offering consumers mechanisms to access their credit information and address grievances related to credit reporting.
The key points from the Master Direction – Reserve Bank of India (Credit Information Reporting) Directions, 2025:
Objectives
– Establish a standardized framework for credit information reporting and dissemination.
– Safeguard confidentiality and security of credit data.
– Provide mechanisms for consumer access to credit information and grievance redressal.
Applicability
– Applicable to all credit institutions (CIs) and credit information companies (CICs) registered with the RBI.
Membership
– All CIs must become members of all registered CICs.
– One-time membership fee charged by the CICs from the CIs: Max ₹10,000.
– Annual membership fee charged by the CICs from the CIs: Max ₹5,000.
Reporting Requirements
– Credit information must be reported in standardized formats (Uniform Credit Reporting Format – UCRF).
– Data should be submitted on a fortnightly basis.
– CIs must ensure accurate reporting and timely updates of borrower records.
Data Quality and Validation
– CICs will share validation processes with CIs to minimize data rejection.
– Data Quality Index (DQI) will be created for assessing data submissions and will be reported monthly to member CIs.
Credit Information Reports (CIR)
– No standardized format for CIRs, but key fields must be consistent across CICs for comparison.
– A Unique Identification Number is recommended for identifying borrowers across multiple accounts.
Consumer Protection
– Consumers must have access to one free full credit report annually.
– Grievance redressal mechanisms for data correction must be in place.
Best Practices
– CICs and CIs are encouraged to adhere to best practices outlined within the directions for data reporting and dissemination.
Compliance and Monitoring
– CICs must conduct regular audits and will be held accountable for any breaches or failures in upholding the provisions laid out.
– CIs are required to submit periodic reports on their compliance with data quality standards.
Miscellaneous
– Directions also include guidelines for reporting data related to members of Self Help Groups (SHGs) and handling data subsequent to license cancellations.
Link:
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/125MD0601257105ED8375BB487AAA4C45F3B88AD0C5.PDF
4. Master Direction – Reserve Bank of India (Non-resident Investment in Debt Instruments) Directions, 2025
- Vide: RBI/2024-25/126
- Dated: January 07, 2025
Summary
The Master Direction applies to all eligible non-resident transactions in debt instruments with immediate effect. It consolidates previous circulars and regulations related to non-resident investments.
Short Title and Applicability
- The directions are titled “Master Direction – Reserve Bank of India (Non-resident Investment in Debt Instruments) Directions, 2025.”
- They apply to all transactions by eligible non-residents in debt instruments.
- These Directions shall be applicable with immediate effect.
Investment Channels
Non-residents can invest via:
- General Route: Government securities and corporate debt securities with specified limits.
- Voluntary Retention Route (VRR): Investments without certain macro-prudential limits; require a commitment to remain invested for a certain period.
- Fully Accessible Route: Investments in specified categories of Central Government securities without restrictions.
- Sovereign Green Bonds: Investments by eligible foreign investors in the International Financial Services Centre (IFSC).
Eligible Investors
- General Route: Foreign Portfolio Investors
- Voluntary Retention Route (VRR): Foreign Portfolio Investors
- Fully Accessible Route: (i) Foreign Portfolio Investors, Non-Resident Indians, and Overseas Citizens of India and (ii) Any other person resident outside India, as may be notified by the Reserve Bank from time to time.
- Sovereign Green Bonds: Eligible investors in India’s International Financial Services Centre. Such investment shall be in terms of the ‘Scheme for Trading and Settlement of Sovereign Green Bonds in the International Financial Services Centre in India’, notified by the Reserve Bank.
Investment Limits
- General Route Limits
- VRR Investment Limit: Estimated at ₹2,50,000 crore or as notified by the RBI
Investment Requirements
General Route Conditions
Residual maturity requirements apply based on the type of investment:
- Government Securities: No minimum residual maturity for FPIs.
- Corporate Debt Securities: Minimum residual maturity above one year.
VRR Conditions
- FPIs must invest at least 75% of their Committed Portfolio Size (CPS) within three months of allotment.
- Retention period typically set at three years.
- An additional retention period can be selected post the minimum retention.
Sector-Specific Restrictions
Certain securities have restrictions regarding investments in real estate and capital markets.
Default bonds must be disclosed to debenture trustees by FPIs acquiring them.
Regulatory Oversight
The Reserve Bank may request information relevant to non-resident investments.
Violations of the outlined regulations can result in regulatory actions by the Reserve Bank or Securities and Exchange Board of India (SEBI).
Reporting and Monitoring
Clear reporting mechanisms for transactions and limits to be monitored by custodians and the Clearing Corporation of India Ltd. (CCIL).
Miscellaneous
Other directives include specifics on trading operations and obligations for providing information to the Reserve Bank.
Link
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/MD126B9CF2E0CABD14471955E50A54D8291F2.PDF
5. Foreign Exchange Management (Deposit) (Fifth Amendment) Regulations, 2025
- Vide: Notification No. FEMA 5(R)(5)/2025-RB
- Dated: January 14, 2025.
The Regulation 5(4) of the Principal Regulations previously allowed any person resident outside India, having business interest in India to open, hold, and maintain a Special Non-Resident Rupee Account (“SNRR Account”), with an authorized dealer in India.
The amendments now extend this provision to allow such persons to open, hold, and maintain an SNRR Account, not only with an authorized dealer in India but also with a branch of the authorized dealer located outside India.
Accordingly, Paragraph 1 of Schedule 4 of the Principal Regulations has been amended to reflect this change, now permitting a person resident outside India with business interests in India to open an SNRR Account either with an authorised dealer in India or with its branch outside India.
This SNRR Account may be used for conducting permissible current and capital account transactions with residents of India, in accordance with the relevant rules or regulations. The said SNRR Account may also be used for transactions with non-residents.
Furthermore, the amendments provide that units located in an International Financial Services Centre (“IFSC”), under Section 18 of the Special Economic Zones Act, 2005, may now open an SNRR Account with an authorized dealer in India (outside the IFSC) to conduct business-related transactions outside the IFSC.
- Title and Commencement:
– The regulations are titled “Foreign Exchange Management (Deposit) (Fifth Amendment) Regulations, 2025.”
– They come into force from the date of publication in the Official Gazette.
- Amendments to Regulations:
– In regulation 5(4), the term “authorized dealer in India” is expanded to include “or its branch outside India.”
– Regulation 9 is added allowing the transfer of funds for bona fide transactions between repatriable Rupee accounts maintained under these regulations.
- Special Non-Resident Rupee Account (SNRR):
– A person residing outside India, with a business interest in India, can open an SNRR account for permissible current and capital account transactions with residents in India and transactions with other non-residents.
– Units in an International Financial Services Centre (IFSC) can also open an SNRR account under certain conditions.
- Changes in Account Terminology:
– The term “Indian bank” is replaced with “A bank” in paragraph 2 of schedule 4.
- Tenure of SNRR Account:
– The tenure of the SNRR account will align with the tenure of the associated contract or period of operation of the account holder.
- Clarifications in Schedule 4:
– In paragraphs 9, 11, and 12, specifications are added to clarify that terms pertain to “SNRR account in India”.
– Additional clarifications are made regarding the account holder having an SNRR account in India.
This amendment reflects several updates aimed at enhancing the framework for the management of foreign exchange deposits, particularly for non-resident Indians and entities engaging with India.
Link:
6. Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) Regulations, 2025
- Vide: Notification No. FEMA 10(R)(5)/2025-RB
- Dated: January 14, 2025.
A person resident in India, being an exporter, may open, hold, and maintain a Foreign Currency Account with a bank outside India, for the realization of full export value and advance remittance received by the exporter towards the export of goods or services. Funds in this account may be utilized by the exporter for paying for its imports into India or repatriated into India within a period not exceeding the end of the next month from the date of receipt of the funds after adjusting for forward commitments, provided that the realization and repatriation requirements as specified in Regulation 9 of Foreign Exchange Management (Export of Goods and Services) Regulations, 2015 are also met.”
Eligibility for Foreign Currency Accounts:
- Indian exporters are now permitted to open and maintain foreign currency accounts with banks outside India.
- These accounts are intended for the realization of full export value and advance remittances.
Utilization of Funds:
- Funds in these accounts can be used for imports into India or repatriated back within a specified time frame.
- This amendment supports exporters in managing their foreign currency exposure effectively.
Regulatory Compliance:
- Exporters must comply with the realization and repatriation requirements outlined in existing regulations.
- These requirements are designed to promote transparency and compliance in foreign exchange dealings.
Link:
7. Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2025
- Vide: Notification No. FEMA 395(3)/2025-RB
- Dated: January 14, 2025.
Reserve Bank of India (RBI) has issued amendments to the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, [Notification No. FEMA.395/2019-RB dated October 17, 2019] (hereinafter referred to as ‘the Principal Regulations).
Vide Notification No. FEMA 395(3)/2025-RB, dated January 14, 2025, the Principal Regulation has been amended to streamline the payment methods and reporting for investments by persons residing outside India.
Key updates include revised rules under various schedules:
- Effective Date: January 14, 2025
- Schedule-specific Amendments:
In the Principal Regulations, in regulation 3.1, for the existing provision at Sl. No. I, II, VI, VII, VIII, and IX the following shall be substituted, namely:
Instructions on Mode of payment and Remittance of sale proceeds
Schedule of the Rules | Instructions on Mode of payment and Remittance of sale proceeds |
I. Schedule I | Mode of payment (1) The amount of consideration shall be paid as inward remittance from abroad through banking channels or out of funds held in any repatriable foreign currency or Rupee account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.
Explanation: The amount of consideration shall include:
(4) An Indian company issuing equity instruments under this Schedule may open a foreign currency account with an Authorised Dealer in India in accordance with Foreign Exchange Management (Foreign currency accounts by a person resident in India) Regulations, 2016.
Remittance of sale proceeds The sale proceeds (net of taxes) of the equity instruments may be remitted outside India or may be credited to any repatriable foreign currency or Rupee account of the person concerned, maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.
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II. Schedule II | Mode of payment
Remittance of sale proceeds
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VI. Schedule VI | Mode of payment Payment by an investor towards capital contribution of an LLP shall be made by way of an inward remittance through banking channels or out of funds held in any repatriable foreign currency or Rupee account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.
Remittance of disinvestment proceeds The disinvestment proceeds may be remitted outside India or may be credited to any repatriable foreign currency or Rupee account of the person concerned, maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016. |
VII. Schedule VII | Mode of payment (1) The amount of consideration shall be paid as inward remittance from abroad through banking channels or out of funds held in a foreign currency account and/ or a Special Non-Resident Rupee (SNRR) account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.(2) Unless otherwise specified in these regulations or the relevant Schedules, the foreign currency account shall be used only and exclusively for transactions under this Schedule.
Remittance of sale/ maturity proceeds
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VIII. Schedule VIII | Mode of payment
The amount of consideration shall be paid by the person concerned as inward remittance from abroad through banking channels or by way of swap of shares of a Special Purpose Vehicle or out of funds held in any repatriable foreign currency or Rupee account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.
Remittance of sale/ maturity proceeds:
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IX. Schedule X | Mode of Payment
Remittance of sale/ maturity proceeds
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Link:
8.Coverage of customers under the nomination facility
- Vide: RBI/2024-25/104
- Dated: January 17, 2025.
- Purpose of Nomination Facility: The nomination facility is designed to reduce hardship and facilitate the quick settlement of claims for the family members of deceased depositors.
- Broad Applicability: The instructions apply to Scheduled Commercial Banks (excluding RRBs), Primary (Urban) Co-operative Banks, and Deposit-Taking Non-Banking Financial Companies (NBFCs).
- Current Observations: A significant number of deposit accounts lack a nomination, which can cause inconvenience for survivors and family members of deceased depositors.
- Mandatory for All Accounts: All existing and new customers with deposit accounts, safe custody articles, and safety lockers are encouraged to have a nomination.
- Review Process: The Customer Service Committee of the Board must periodically review the achievement of nomination coverage. The progress will be reported via the Reserve Bank’s DAKSH portal on a quarterly basis starting from March 31, 2025.
- Modification of Account Opening Forms: The account opening forms should include provisions that allow customers to opt for or out of the nomination facility.
- Public Awareness Campaign: Banks are advised to promote the benefits of the nomination facility through various media and initiate periodic drives to achieve full coverage of eligible customer accounts.
Link: https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT10407A7943D557D4FF4BD376800F331C3B9.PDF
9. Prevention of financial frauds perpetrated using voice calls and SMS
- Vide: RBI/2024-25/105
- Dated: January 17, 2025.
This circular is aimed at addressing the growing menace of financial frauds perpetrated through voice calls and SMS. With digital transactions becoming an integral part of modern banking, this circular provides regulatory measures and safeguards to ensure enhanced consumer protection.
Background
While digital banking offers unmatched convenience, it has also become a fertile ground for fraudsters. Mobile numbers, being key identifiers in the banking ecosystem, have become vulnerable to misuse. Criminals use these identifiers for activities such as obtaining unauthorized access to accounts or diverting funds fraudulently. To combat this, the RBI has outlined measures that combine regulatory oversight, technological integration, and customer awareness.
Measures Required of Regulated Entities (REs)
The circular directs REs, including banks, non-banking financial companies (NBFCs), prepaid payment instrument issuers, and others, to implement the following measures:
- Utilize the Mobile Number Revocation List (MNRL):
- Source and Purpose:
The MNRL is available on the Digital Intelligence Platform (DIP) developed by the Department of Telecommunications (DoT). It contains categories of disconnected mobile numbers such as:
- Numbers taken on forged documents.
- Numbers involved in cybercrimes or financial frauds.
- Numbers reported by citizens or disconnected due to fraud analysis by Telecom Service Providers (TSPs).
- Actions for REs:
- Clean and update customer databases using the MNRL.
- Enhance monitoring of accounts linked to revoked mobile numbers.
- Prevent such accounts from being used as “money mules” or in other fraudulent activities.
- Verified Customer Care Numbers:
- REs are required to share verified customer care numbers with the DIP to enable publication on the “Sanchar Saathi” portal “https://sancharsaathi.gov.in”.
- Use Specified Numbering Series for Communication:
- Transactional and Service Calls:
- Use the ‘1600xx” numbering series (to be operationalized soon).
- Promotional Voice Calls:
- Use only the “140xx” numbering series.
- Guidelines Compliance:
- Adhere to TRAI’s “Important Guidelines for sending commercial communication using telecom resources through Voice Calls or SMS.”
- Awareness Initiatives:
- REs must educate customers through emails, SMS, and other means, including vernacular languages, about these measures.
- Awareness campaigns should include information on identifying fraud, using DND registration to block unsolicited communications, and recognizing trusted communication from REs.
- Implementation Timeline:
REs must ensure full compliance with these directives by March 31, 2025.
Key Highlights from the Annexure
The circular includes an annexure detailing TRAI’s Telecom Commercial Communications Customer Preference Regulations, 2018 (TCCCPR-2018), which are critical for curbing unsolicited commercial communications (UCC). Some important regulatory requirements include:
- Registration on DLT Platforms:
- All entities sending commercial communications must register on Distributed Ledger Technology (DLT) platforms.
- Use only registered headers and content templates.
- Digital Consent Acquisition (DCA):
- Obtain explicit digital consent from customers for promotional communications.
- Use only the DCA systems deployed by Access Providers.
- Data Confidentiality and Security:
- Ensure confidentiality and security of customer data.
- Minimize the number of intermediaries (e.g., telemarketers) handling customer information.
- Measures Against Misuse:
- Register only the necessary headers and content templates.
- Deactivate unused headers to prevent unauthorized use.
- Prohibit the use of URL shortening services that do not clearly indicate the sender’s identity.
- Actionable Penalties:
- Non-compliance can result in disconnection of telecom resources and blacklisting of the entity for up to two years.
Conclusion
The RBI’s proactive measures underline the importance of a secure digital ecosystem, especially as reliance on mobile-based transactions continues to grow. By mandating the use of advanced fraud detection tools, standardized communication protocols, and robust customer awareness programs, this circular seeks to create a safer financial environment for all stakeholders. The timely adoption of these measures by REs will play a pivotal role in minimizing fraud risks and building trust in digital banking services.
Link: https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT1058876D2198D1842F5B5CA2B669BCA5C97.PDF
10. Guidelines on Settlement of Dues of Borrowers by ARCs
- Vide: RBI/2024-25/106
- Dated: January 20, 2025
The Guidelines are issued in the exercise of the powers conferred by the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).
- Previously, all settlements were subjected to a two-stage review, first by the Independent Advisory Committee (IAC) for preliminary examination, and review by a Board Level Committee. Now, for settlement, such process is prescribed only for cases where the outstanding amount is ₹1 crore or above,or where the borrower is classified as Fraud/Wilful Defaulter.
- Earlier, settlement proposals for dues up to Rs 1 crore principle outstanding also had to be examined by the IAC of the ARC.
- Settlement of accounts with outstanding dues exceeding Rs 1 Crore:
- The process begins with the Independent Advisory Committee (IAC),composed of professionals with technical, finance, or legal backgrounds, conducting a preliminary examination of the borrower. The IAC evaluates the borrower’s financial position, recovery time frame, projected earnings, cash flows, and other relevant factors, and then provides recommendations to the Asset Reconstruction Company (ARC) regarding debt settlement.
- Following this, the Board of Directors of the ARC, which must include at least two independent directors reviews the IAC’s recommendations. They consider various options for recovering dues and determine whether settling with the borrower is the best course of action. The decision and its rationale are recorded in the minutes of the meeting.
Now, for settlement, such process is prescribed only for cases where the outstanding amount is 1 crore or above, or where the borrower is classified as a Fraud/Wilful Defaulter.
- For settlement of accounts with dues Rs 1 Crore or below:
To quicken the resolution process, such cases can now be cleared by a competent authority established under a board-approved policy. However, such officials involved in acquiring the financial asset cannot participate in the approval of the settlement to prevent conflicts of interest.
In other words, settlements of dues of less than Rs 1 crore can be approved by an official who was not part of the acquisition (as an individual or part of a committee) of the concerned financial assets, in any capacity.
Other Considerations
- Policy Framework:Every ARC must create a Board-approved policy for settling dues. This policy should cover aspects such as the cut-off date for one-time settlement eligibility and permissible sacrifice for various categories of exposures while arriving at the settlement amount.
- Exhaust Recovery Options:Settlement should only be considered after evaluating all possible recovery methods.
- Net Present Value (NPV):The settlement amount’s NPV must generally be not less than the realizable value of the security. Significant differences must be explained.
- Payment Structure:Preferably, settlements should involve a lump sum payment. If not, a viable business plan must back proposals for staggered payments.
- Fraud and Wilful Defaults:Settlements with fraud or wilful defaulter borrowers must adhere to the same guidelines regardless of the amount, without hindering ongoing criminal proceedings.
- Legal Compliance:Compromise settlements will not undermine other statutory provisions and require consent from judicial authorities if recovery proceedings are in progress.
*Business Standard
Link: https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT106271D7E1C6213494BBC7F0A5CC1B2ECAE.PDF
11. Private Placement of Non-Convertible Debentures with maturity period of more than 1 year by HFCs
- Vide: RBI/2024-25/107
- Dated: January 29, 2025
It has been decided that the Guidelines on Private Placement of NCDs (with maturity more than one year) by NBFCs, as contained in para 58 of the Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 (as amended from time to time) shall be applicable, mutatis-mutandis, to HFCs.
Overview of Guidelines Update:
- The Reserve Bank of India (RBI) has updated the guidelines for Housing Finance Companies (HFCs) regarding the Private Placement of Non-Convertible Debentures (NCDs).
- The new guidelines replace the previous regulations under Chapter XI of the Master Direction for HFCs concerning NCDs with maturities exceeding one year.
Applicability of NBFC Guidelines:
- HFCs will now follow the Private Placement guidelines outlined for Non-Banking Financial Companies (NBFCs)from the Master Direction related to Scale Based Regulation.
- The revised guidelines shall be applicable to all fresh private placements of NCDs(with maturity more than one year) by HFCs from the date of this circular.
- This change ensures alignment between regulations for HFCs and existing protocols for NBFCs, promoting consistency in the financial sector.
Link: https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT107F51C2368ABD744919286A390E3875FCC.PDF
12. Framework for monetary penalty and compounding of offences under the Payment and Settlement Systems Act, 2007 (PSS Act, 2007)
- Vide: RBI/2024-25/108
- Dated: January 30, 2025
The Reserve Bank of India (RBI) has introduced a revised framework for imposing monetary penalties and compounding offences under the Payment and Settlement Systems Act, 2007 (PSS Act).
General Overview
– The framework is an update to the earlier circular dated January 10, 2020.
– Revised due to amendments in the PSS Act as of January 22, 2024.
Offenses & Penalties (Section 26)
Section 26 of the PSS Act details the offences that warrant penalties, including:
- Operating a payment system without authorization or failing to comply with authorization conditions.
- Providing false statements or omitting crucial information in applications or returns.
- Failing to submit required statements, information, or documents to the RBI.
- Unauthorized disclosure of prohibited information.
- Non-compliance with RBI directions, including failure to pay imposed penalties.
- Violations related to data storage, KYC/AML norms, and escrow account maintenance.
These contraventions affect the integrity and security of India’s financial ecosystem, necessitating stringent regulatory oversight.
Penalties
- As per Section 30 of the PSS Act, RBI can levy fines up to ₹10 lakh or twice the amount involvedin the contravention, whichever is higher.
- In cases of ongoing violations, an additional penalty of ₹25,000 per daymay be imposed until the contravention ceases.
Compounding of Contraventions (Section 31)
Entities seeking compounding must submit an application to the RBI along with relevant documents. The RBI then examines the case, seeks additional information if required, and may conduct a personal hearing. A final compounding order is issued within six months of receiving a complete application.
Process for Penalty:
- Show Cause Notice issued based on contraventions.
- Personal Hearing offered if requested.
- Issuance of a Speaking Order after reviewing the case.
Assessment of Penalty
– Factors considered include severity, frequency, seriousness of the violation, and any gains obtained.
Compounding Procedure
- Application Submission to RBI including specific documents.
- Examination of the application.
- Personal Hearing for the contravener.
- Compounding Order issued within six months of receiving a complete application.
Monetary & Compounding Payment
Failure to pay monetary penalties within 30 days can result in further regulatory action, including criminal proceedings and additional financial penalties. Non-payment of compounding fees nullifies the compounding benefit, making the violator liable for further legal consequences.
Disclosure Requirements
– Monetary penalties must be disclosed in the entity’s financial statements.
– Summary of penalties and compounding actions to be posted on the RBI website.
Important Amendments
The maximum penalty has increased from ₹5 lakh to ₹10 lakh as per the Jan Vishwas (Amendment of Provisions) Act, 2023.
Link: https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT108AA12014D00734F849B0B871142686CC0.PDF
13. Master Direction – Foreign Investment in India (Updated as on January 20, 2025)
On 20 January 2025, the Reserve Bank of India (“RBI”) issued an updated Master Direction on Foreign Investment in India (“Master Direction”).
The Master Direction now expressly states that, based on the guiding principles of downstream investment, arrangements permitted for direct investment under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”), such as investment through equity instrument swaps and deferred payment arrangements, will also be available for downstream investments, provided they comply with the provisions governing such investments under the NDI Rules.
This clarification addresses longstanding uncertainty regarding whether Foreign Owned Or Controlled Companies (“FOCCs”) making downstream investments are permitted to enter into deferred payment arrangements. The NDI Rules stipulate that, in cases involving the transfer of equity instruments between a person resident in India and a non-resident, the buyer may defer up to 25% of the total consideration for a period not exceeding 18 months from the date of the transfer agreement.
However, as FOCCs were not explicitly mentioned in the provision permitting deferred consideration, ambiguity arose regarding their eligibility to avail this benefit. Consequently, there were divergent views being taken in this regard.
This uncertainty was further exacerbated in 2023, when the RBI issued notices to several FOCCs that had entered into deferred payment arrangements for their downstream investments. This resulted in an anomalous situation where indirect foreign investments by FOCCs were subjected to more stringent regulatory standards than direct foreign investments made by non-residents.
The recent clarification by the RBI resolves this discrepancy, and subject to compliance with all relevant regulatory requirements, FOCCs may now structure their downstream investments with the same flexibility that is available to direct investment by non-residents.
While the amendments introduced in the Master Direction provide long -awaited clarity in relation to the permissibility of an FOCC to undertake deferred consideration transactions and equity instrument swaps; however, given the clarification does not specify the extent to which provisions applicable to direct investments will apply to downstream investments, the fundamental differences in the scope of downstream and direct investments may give rise to a need for certain additional clarifications from the RBI.
Some of the important changes and clarifications made by the Master Direction are as follows:
- Regulatory Framework:
– Governed by the Foreign Exchange Management Act, 1999 (FEMA) and related rules.
– Compliance with the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
- Definitions:
– Foreign Investment: Investment by a non-resident in equity instruments of an Indian company or in capital of a Limited Liability Partnership (LLP).
– Equity Instruments: Includes equity shares, convertible debentures, preference shares, and share warrants issued by an Indian company.
– Foreign Portfolio Investor (FPI): Includes Foreign Institutional Investors (FIIs) registered with SEBI.
- Investment Categories:
– Investments can be classified as either Foreign Direct Investment (FDI) or Foreign Portfolio Investment (FPI).
- Pricing Guidelines:
– Transfer pricing for equity instruments must adhere to SEBI guidelines for listed companies or be based on fair value for unlisted companies.
– The price at which equity instruments are transferred should not exceed specific thresholds as determined by SEBI.
- Reporting Requirements:
– Foreign investors must comply with reporting requirements as specified in FEMA regulations.
- Equity Instrument Transfers:
– Transfers of equity instruments must involve unencumbered securities.
– Specific approvals are required for pledging of securities and transfers involving financial sector companies.
- Investing via Memorandum of Association:
– Investment in Indian companies via the Memorandum of Association must occur at face value and comply with entry routes and sectoral caps.
- Conditions for Transfer:
– Any transfer from a resident to a non-resident in the financial sector must meet due diligence requirements established by relevant financial sector regulators.
- Convertible Notes and ESOPs:
– Convertible notes are specifically defined and regulated for start-up companies.
– Employees’ stock options (ESOPs) follow provisions under the Companies Act, 2013.
- Investor Exit:
– There is no assured exit price at the time of investment; exit must be at the prevailing market price.
Link
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/MD11_04012018B4D0DB4E6DA04CC4B7AF62AA03D902BE.PDF