RBI July 2024 - AmitaDesai

Amendments in the FEMA, 1999

RBI Updates January 2024

1. Release of foreign exchange for Miscellaneous Remittances

RBI vide Circular RBI/2024-25/47 dated July 03, 2024, issued directions on the release of foreign exchange for Miscellaneous Remittances.

Previously, Authorised Dealers (AD) were permitted to release foreign exchange for any current account transaction based on a simple letter containing basic information, with an upper limit of USD 25,000 or its equivalent. There was no requirement for additional documents like Form A2. The payment was made through a Demand Draft or a cheque drawn on the applicant’s bank account.

To streamline the regulatory compliances and operational procedures, it is now decided that the Authorised Dealers (AD) shall obtain Form A2 in physical or digital form for all cross-border remittances irrespective of the value of the transaction. AD is also required to ensure that the transactions do not contravene the FEMA provisions.

The link to the aforesaid Circular is as follows:
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/APDIRCIRCULAR13MISCELLANEOUSREMITTANCES9203E1CCD86041B793025A37F951F3F0.PDF

2. Remittances to International Financial Services Centres (IFSCs) under the Liberalized Remittance Scheme (LRS)

RBI vide Circular RBI/2024-25/49 dated July 10, 2024, issued directions on Remittances to International Financial Services Centres (IFSCs) under the Liberalised Remittance Scheme (LRS).

At present remittances under the Liberalised Remittance Scheme (LRS) to IFSCs are limited to

Making investments in securities within IFSCs and
Payments of fees for education to foreign universities or institutions in IFSCs for pursuing courses notified and issued by the Central Government.

The Authorised Persons may facilitate remittances for all permissible purposes under LRS to IFSCs for:

Availing financial services or financial products within IFSCs as per the IFSC Authority Act, 2019; and
All current or capital account transactions, in any other foreign jurisdiction (other than IFSCs) can be facilitated through a Foreign Currency Account (FCA) held in IFSCs.

Resident individuals are permitted to open Foreign Currency Accounts (FCA) in IFSCs for the aforementioned permissible purposes related to remittances.
The link to the aforesaid Circular is as follows:
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/APDIRCIRCULARNO15951E78C6770D4FDF97640B7E13DEDB08.PDF

3. Master Directions on Fraud Risk Management

RBI vide Circulars RBI/DOS/2024-25/118, RBI/DOS/2024-25/119, and RBI/DOS/2024-25/120 dated July 15, 2024, issued 3 revised Master Directions on Fraud Risk Management superseding previous guidelines and consolidating 36 existing circulars. The purpose of these Directions is to provide a framework for prevention, early detection, and timely reporting of incidents of fraud to Law Enforcement Agencies, RBI, and NHB.

These Master Directions apply to various ‘Regulated Entities (REs)’:

Commercial Banks
Cooperative banks
Non-Banking Financial Companies (NBFCs) (including Housing Finance Companies)

The directions mandate REs to comply with principles of natural justice in a time-bound manner before classifying persons or entities as fraud, taking into account the Honorable Supreme Court Judgment dated March 27, 2023 (Civil Appeal No. 7300 of 2022 in the matter of State Bank of India & Ors Vs Rajesh Agarwal & Ors)

Governance Structure:

There should be a Board approved Policy on fraud risk management delineating roles and responsibilities and a Special Committee of the Board for Monitoring and Follow-up of cases of Fraud should be constituted.

Framework for Early Warning Signals (EWS):

All REs should have a framework for EWS under the overall Fraud Risk Management Policy and they must identify appropriate early warning indicators for monitoring credit facilities, loan accounts, and other financial transactions. The EWS system should be comprehensive with quantitative and qualitative indicators and EWS alerts should trigger an investigation for potential fraud.

Credit facility / Loan account / Other financial transactions:

The Directions specify indications of fraudulent activities, the requirement of independent confirmation, staff accountability, penal measures, and treatment of accounts under resolution.

Reporting of Frauds:

All REs are required to report incidents of fraud to Law Enforcement Agencies and RBI.
Specific modalities of reporting incidents of fraud and closure of fraud cases reported to RBI are outlined.

Other Instructions:

Legal audit of title documents, treatment of accounts classified as fraud, the role of auditors, and reporting cases of theft, burglary, dacoity, and robbery are covered.

Credit facility / Loan account / Other financial transactions – indication of fraudulent activities:

All REs should monitor and investigate suspicious activities and External or internal audits should be used for further investigation.

Independent confirmation from third-party service providers:

Hold third-party service providers accountable for negligence or malpractice and include relevant terms in agreements with third-party providers.

Penal Measures:

Debar fraud classified entities from raising funds for 5 years.
Lending decisions after the cooling period are at the discretion of regulated entities.

Types of Fraudulent Activities:

Cheating by concealment of facts to deceive any person and cheating by impersonation.
Forgery to commit fraud by making any false documents/electronic records.

Modality of Reporting Incidents of Fraud to RBI:

All REs shall furnish Fraud Monitoring Returns in individual fraud cases immediately but not later than 14 days from the date of classification of an incident/account as fraud.
Incidents of fraud at overseas branches of Indian-regulated entities shall also be reported to the concerned overseas LEAs in accordance with the relevant laws/regulations of the host countries.

Closure of Fraud Cases Reported to RBI:

All REs are allowed, for limited statistical/reporting purposes, to close those reported fraud cases involving amounts upto ₹25 lakh, where examination of staff accountability and disciplinary action, if any, has been taken.

Other Instructions:

All REs shall subject the title deeds and other related title documents in respect of all credit facilities of ₹1 crore and above to periodic legal audit and re-verification, till the loan is fully repaid.
All REs shall complete the investigation from a fraud angle before transferring the loan account/credit facility to other lenders/ARCs.

Reporting Cases of Theft, Burglary, Dacoity, and Robbery:

All REs shall report instances of theft, burglary, dacoity, and robbery to the Fraud Monitoring Group (FMG), Department of Supervision, Central Office, and RBI, immediately (not later than 7 days) from their occurrence.
All REs shall submit a quarterly Return (RBR) on theft, burglary, dacoity, and robbery to RBI using an online portal, covering all such cases during the quarter.

Regulatory Guidelines and Compliance:

All REs should consider third-party service providers and professionals before taking action.
Non-whole-time directors’ roles in REs should be acknowledged for decision-making.

The link to the aforesaid Master Directions is as follows:
Master Directions on Fraud Risk Management in Commercial Banks (including Regional Rural Banks) and All India Financial Institutions:
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/118MDE97B8ED9A09B4B21BE7FDDE5F836CD09.PDF

Master Directions on Fraud Risk Management in Non-Banking Financial Companies (NBFCs):
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/120MDFRAUDRISKNBFCS82139F5C3E9E47798592706B653930FA.PDF

Master Directions on Fraud Risk Management in Urban/ State/ Central Cooperative Banks (UCBs): https://rbidocs.rbi.org.in/rdocs/notification/PDFs/119MD1507243E72581B827246DA93059E0EC1951F6F.PDF

4. Domestic Money Transfer: Review of Framework

RBI vide Circular RBI/2024-25/52 dated July 24, 2024, reviewed the framework relating to Domestic Money Transfer (DMT).

DMT framework was introduced in 2011 vide RBI circular DPSS.PD.CO.No.622/02.27.019/2011-2012. The recent review prompted certain adjustments due to increased banking outlets and advancements in payment systems since the above-mentioned circular.

1. Cash Pay-out Service:

Remitting banks shall obtain and keep a record of the name and address of the beneficiary.

2. Cash Pay-in Service:

Remitting banks / Business Correspondents (BCs) shall register the remitter based on a verified cell phone number and a self-certified ‘Officially Valid Document (OVD)’.
Every transaction by a remitter shall be validated by an Additional Factor of Authentication (AFA).
Compliance with the Income Tax Act, of 1961, and related regulations for cash deposit activities.
The Remitter bank shall include remitter details as part of the IMPS / NEFT transaction message
The transaction message shall include an identifier to identify the fund transfer as a cash-based remittance.

3. Card-to-card transfers:

Excluded from the DMT framework and governed by separate guidelines.

The link to the aforesaid Circular is as follows:
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT52B66E482667DD49C19E61D7C6DED456FB.PDF

5. Master Direction on Overseas Investment

RBI vide Circular RBI/FED/2024-25/121 dated July 24, 2024, issued Master Direction on Overseas Investment which consolidates instructions on overseas investments by persons resident in India.

The Master Directions cover the following:

Rules for Overseas Direct Investment (ODI) and Overseas Portfolio Investment (OPI).
Financial commitments by Indian entities are subject to limits and reporting requirements.
Resident individuals can make overseas investments within prescribed limits.
Specific provisions for investments in financial services and IFSCs are outlined.
Acquisition of immovable property outside India is regulated.

Summary of the above Master Direction:

Governing Regulations: Overseas Investments by persons resident in India are regulated by the provisions of Foreign Exchange Management (Overseas Investment) Rules, 2022, and Foreign Exchange Management (Overseas Investment) Regulations, 2022.
Administration and Issuance of Directions: RBI is empowered to administer these Rules and issue regulations, directions, and circulars for effective implementation.
Requirements and Permission: Persons resident in India may make or transfer any investment or financial commitment outside India under general permission/automatic route, subject to the provisions contained in the OI Rules, OI Regulations, and related directions.
Reporting and Approval: Instructions for overseas investment by persons resident in India have been compiled in the Master Direction. Reporting instructions related to Overseas Investment are provided, and certain financial commitments exceeding specified limits require prior approval from the Reserve Bank.
Restrictions and Obligations: Various restrictions and prohibitions on overseas investment, obligations of the person resident in India, and reporting requirements are defined. Pricing guidelines, mode of payment, and other operational instructions for AD banks are also addressed.

The link to the aforesaid Master Direction is as follows:
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/121MDOI2507202427D16C96B42C4E0B849FFD9732752B68.PDF

6. Fully Accessible Route’ for Investment by Non-residents in Government Securities – Exclusion of new issuances in 14-year and 30-year tenor securities

RBI vide Circular RBI/2024-25/56 dated July 29, 2024, introduced a fully accessible route allowing non-resident investors to invest in specified categories of Central Government securities fully without restrictions.

The eligible Government Securities for investment under this route were listed in circulars from March 30, 2020, July 7, 2022, January 23, 2023, and November 8, 2023.

New securities with tenors of 14-year and 30-year have been excluded from the Fully Accessible Route. Future issuances of Government Securities in these tenors will not be available for investment under this route. Foreign Portfolio Investors’ investments in new Government Securities with 14-year and 30-year tenors will be subject to specified investment limits and conditions outlined by the RBI in circulars dated April 26, 2024, June 15, 2018, and February 10, 2022.

Existing stocks of Government Securities with 14-year and 30-year tenors, already considered as ‘specified securities’ under the Fully Accessible Route, will continue to be available for investments by non-residents in the secondary market.

The link to the aforesaid Circular is as follows:
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NOT56A267C7C0DAC04DC9AAF57F68453C8887.PDF

7. Master Direction on Treatment of Willful Defaulters and Large Defaulters

RBI vide Circular RBI/2024-25/56 dated July 30, 2024 issued Master Directions on Treatment of Willful Defaulters and Large Defaulters which shall come into force after 90 days from placing it on the RBI website.

This Master Direction provides guidelines for classifying borrowers as willful defaulters and ensures the integrity of the financial system by outlining measures and consequences for deliberate defaulters.