Notification No. S.O. 1796(E)., Dated 25.04.2024

Earlier, Finance Ministry vide notification dated 11.07.2019, stated that the pecuniary limit of Rs. 10 Lakhs for filing application for recovery of debts in the Debts Recovery Tribunals by such banks and financial institutions shall continue to apply for applications filed prior to 06.09.2018. Now, Ministry has stated that this limits shall also be applicable to applications filed between 26.09.2018 and 30.06.2019.

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Circular No. RBI/2024-25/24 A.P. (DIR Series) Circular No.02; Dated: 24.04.2024

The RBI has come across instances of unauthorised entities offering foreign exchange (forex) trading facilities to Indian residents with promises of disproportionate/exorbitant returns. Upon investigation, the RBI observed that to facilitate unauthorised forex trading, these entities have resorted to engaging local agents who open accounts at different bank branches to collect money towards the margin, investment, charges, etc.

These accounts are opened in the name of individuals, proprietary concerns, trading firms etc. and the transactions in such accounts are not found to be commensurate with the stated purpose for opening the account in several cases.

Further, RBI observed that these entities are providing residents with options to remit/deposit funds in Rupees to undertake unauthorised forex transactions using domestic payment systems like online transfers, payment gateways, etc. Thus, greater vigilance is needed to prevent the misuse of banking channels to facilitate unauthorised forex trading.

In this regard, RBI has advised AD Category-I banks to be more vigilant and exercise greater caution to prevent the misuse of banking channels in facilitating unauthorised forex trading.

Further, as and when AD Category-I banks come across an account being used to facilitate unauthorised forex trading, they are required to report it to the Directorate of Enforcement for further action.

Also, AD Cat-I banks may bring the contents of this circular to the attention of their constituents and customers. They may advise their customers to deal in forex only with ‘Authorised Persons’ and on ‘authorised ETPs’ and give wide publicity to the list of ‘Authorised Persons’ and the list of ‘authorised ETPs’ available on the RBI website.

AD Cat-I banks are also advised to publicize the ‘Alert List’ and Press Releases issued by the RBI in this regard.

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Master Direction No. RBI/DOR/2024-25/116 DoR.FIN.REC.16/26.03.001/2024-25; Dated: 24.04.2024

RBI has issued master directions on Asset Reconstruction Companies (ARCs). These directions shall apply to every ARC registered with RBI u/s 3 of the SARFAESI Act, 2002. They outline norms regarding the registration of ARC, the requirement of having a min. net-owned fund, activities of ARCs, and guidelines on ARCs. Further, ARC must have a board-approved policy regarding a change in or takeover of management. These directions shall come into effect on the day they are placed on the website of RBI.

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Circular No. RBI/2024-25/23 DOR.MRG.REC.15/00.00.018/2024-25; Dated: 23.04.2024

RBI has decided to permit Small Finance Banks (SFBs) to deal in permissible rupee interest rate derivative products for hedging interest rate risk. This aims to expand the avenues available to the SFBs for hedging interest rate risk in their balance sheets and commercial operations more effectively and to provide them with greater flexibility. Earlier, RBI permits SFBs to use only interest rate futures (IRFs) for the purpose of proprietary hedging. The circular is effective immediately.

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Notification No. FEMA. 395(2)/2024-RB; Dated: 19.04.2024

Earlier, the Govt. vide. Notification No. S.O. 332(E) dated 24.01.2024 notified the Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2024, whereby a new Rule 34 in Chapter X has been inserted, which permits the Investment by permissible holders in Equity Shares of Public Companies Incorporated in India and Listed on International Exchanges.

Now, the RBI has amended Regulation 3.1 of the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019. Regulation 3.1 deals with the instructions on the Mode of payment and Remittance of sale proceeds.

A new schedule XI has been added after Schedule X. Schedule XI prescribes the norms regarding the mode of payment and remittance of sale proceeds for the purchase/subscription of equity shares of an Indian company listed on an International Exchange.

Further, regulation 4 has been amended. Regulation 4 deals with the reporting requirement. Now, the Investee Indian Company shall be under an obligation to report (through an Authorised Dealer Category I bank) to the Reserve Bank in Form LEC (FII) the purchase/subscription of equity shares (where such purchase/subscription is classified as Foreign Portfolio Investment under the rules) by permissible holder, other than transfers between permissible holders, on an International Exchange. The discussion of the amendments is elaborated as follows:

1. Mode of Payment for Purchase or Subscription of Equity Shares of Indian Companies on International Exchanges Scheme by Permissible Holder

The amount of consideration for the purchase/subscription of equity shares of an Indian company listed on an International Exchange shall be paid:

(a) through banking channels to a foreign currency account of the Indian company held in accordance with the Foreign Exchange Management (Foreign currency accounts by a person resident in India) Regulations, 2015, as amended from time to time or

(b) as inward remittance from abroad through banking channels.

Further, it is to be noted that the proceeds of the purchase/subscription of equity shares of an Indian company listed on an International Exchange shall either be remitted to a bank account in India or deposited in a foreign currency account of the Indian company held in accordance with the Foreign Exchange Management (Foreign currency accounts by a person resident in India) Regulations, 2015, as amended from time to time.

2. Remittance of sale proceeds of Equity Shares of Indian Companies on International Exchanges Scheme by Permissible Holder

The sale proceeds (net of taxes) of the equity shares may be remitted outside India or may be credited to the bank account of the permissible holder maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.

3. Obligation on the investee Indian Company to report purchase/subscription of equity shares, classified as FPI in form LEC (FII)

As per the amended regulation 4, the Investee Indian Company shall be under an obligation to report (through an Authorised Dealer Category I bank) to the Reserve Bank in Form LEC (FII) the purchase/subscription of equity shares (where such purchase/subscription is classified as Foreign Portfolio Investment under the rules) by permissible holder, other than transfers between permissible holders, on an International Exchange.

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Notification No. FEMA 10R (3)/2024-RB; Dated: 19.04.2024

Earlier, the Govt. vide. Notification No. S.O. 332(E) dated 24.01.2024 notified the Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2024. A new Rule 34 in Chapter X has been inserted which permits investment by permissible holders in equity shares of public companies incorporated in India and listed on International Exchanges.

Now, the RBI has notified the FEM (Foreign Currency Accounts by a person resident in India) (Amendment) Regulations, 2024. An amendment has been made to Regulation 5(F)(1) of the existing regulations.

As per the amended norms, funds raised via the direct listing of equity shares of companies incorporated in India on International Exchanges, pending their utilisation or repatriation to India can be held in foreign currency accounts with a bank outside India.

Currently, Foreign Currency Accounts with a bank outside India could be opened to hold deposits raised through External Commercial Borrowings (ECB), American Depository Receipts (ADRs), or Global Depository Receipts (GDRs), pending their utilisation or repatriation to India.

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Central Banking refers to the management and oversight of a country's currency, money supply, and interest rates by a central institution, usually known as the central bank. Central banks have several key functions, including regulating the money supply through monetary policies, maintaining financial stability, overseeing commercial banking operations, and serving as a lender of last resort to other banks during financial crises. They also typically manage the country's foreign exchange and gold reserves and may issue currency.

Table of Contents

1. Introduction
2. Interest Rate
3. Functions of a Central Bank
4. Means of Credit Control

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1. Introduction

You must have come across headlines like ‘RBI hikes repo rate by 50 basis points. RBI adopts a tight monetary stance amid inflationary pressures.’ ‘Sensex tanks 1000 points, amid fears of Fed rate increase.’ The above statements refer to the monetary policy of a central bank— Reserve Bank of India (RBI) is the Central Bank of India—via effecting a change in the interest rate.¹ Each country has its own Central Bank like the U.S. Federal Reserve System, Bank of England, Bank of France etc. A Central Bank (e.g., RBI) is different from a commercial bank like State Bank of India or Axis Bank. It plays an important role in the macroeconomic management of a country in terms of monetary policy.²

In some countries, the central bank has emerged out of the process of evolution in the same way as commercial banks did. For example, the Bank of England was established in the late 17th century but it was not the central bank of the U.K. at that time. Over the years, it gradually occupied this status. In many countries, the central bank has been established by a statutory process. The RBI was set up in 1935 and was nationalised in 1949. Unlike the Bank of England, which evolved into a central bank, RBI was designated as the Central Bank of India right from its inception.

In this article we learn central banking, monetary policy—how it is executed—and interest rates. Just as fiscal policy impacts on a macroeconomy by affecting aggregate demand, monetary policy does so by affecting the interest rate. It will be convenient to begin with knowing about various types of interest rates.

It should be kept in mind at the outset that we do not consider in this article

• how monetary policy affects output and employment and
• the full impact of monetary policy on the interest rate after taking into consideration how other macro variables are affected.

Thus, it is not a chapter on the determination of output, employment or interest rate. In this article, we will understand the effect of monetary policy on the interest rate in a very short run, defining the execution of monetary policy so to speak.

2. Interest Rate

Interest rate is simply the charge or a fee for using someone else’s money over a specified period of time. As you step out of college to accept a well-paying position in an established firm, you may want to buy a car (you fancied in your teen years) before you have enough savings out of your forthcoming income stream. How? By taking a loan from a local bank and paying the bank the principal and the interest in terms of EMI, equated monthly instalment. You are paying interest because you are using the bank’s money for a period of time. The entity who provides money or cash is the lender (the local bank in the example) and the entity who accepts money with a promise to repay is the borrower (yourself). Not just individuals, businesses, private and public institutions including central and local governments also need to borrow funds. From whom? The household sector, the business sector and the governments. Borrowing and lending activities at some aggregate level like the domestic economy or the international economy are collectively referred to as the loan, the credit or the debt market.

2.1 A Classification of Loan Markets and Interest Rates

There are various types of loan markets and interest rates that coexist in an economy. Figure 1 presents a classification. Loan markets can be informal or formal, depending on whether or not the loans are legally recorded. Whether informal or formal, loans can be short-term and long-term loans. Accordingly, there are short-term interest rates and long-term interest rates. Typically, loans up to one year are considered short-term and those maturing after one year are called long-term loans. In the formal (legally recorded) loan market, we talk about gross or before-tax interest rate and net or after-tax interest rate. The term TDS (Tax Deducted at Source) must be familiar to most of you.³

Figure 1: Various Kinds of Interest Rates

The informal loan market includes private money lenders in rural and urban areas, loans from family and friends, and those from the ‘underground world.’ Imagine a poor farmer needing money for some urgent purpose approaches a village money lender who lends money at a very high interest rate along with the farmer’s land as collateral. You know the rest of the story to come. Such money lenders are pictured as villains of society. Earning interest from such loans is seen as a sin. Clip 1, which is partly informative, is a narrative that you may enjoy reading.⁴

CLIP 1: Indictment Surrounding Interest Earnings

The very mention of the word interest rate must be bringing to your mind several Bollywood movies depicting the blood-sucking, cruel, ruthless village moneylenders harassing the poor yet adorable heroes and heroines. In your childhood and early youth, you must have developed a hatred for actors like Kanahiyalal, Prem Chopra, Om Prakash, Gulshan Kumar, and Amrish Puri who often played the role of money lenders in several movies. You must have seen the Nargis-Sunil Dutt starrer ‘Mother India’, so well depicting the problem of rural credit and its sole source of availability in those times. In medieval Europe, money lending business was largely controlled by the Jews, and, for this reason, the Jews were held in contempt among Christians for this reason. Remember the well known play ‘The Merchant of Venice’ written by William Shakespeare.

Are interest earners sinners? Is it unethical to charge interest? Keeping aside the economic rationale for the time being, there is a social stigma attached to the interest earners. They are see e enjoying while doing nothing. It is regarded as an unearned income. In Islam, charging of interest is prohibited. It is ‘haraam’ (unislamic) to charge interest. A devout Muslim should, therefore, not charge interest and should also have no dealings with people who do so. However, the Shariya (Islamic Law) permits ‘profit sharing’ with the person from whom you have borrowed. There are several Islamic banks that carry out their commercial banking in accordance with the Shariya. For example, they would not lend money to liquor producers and dealers or to casinos. They wouldn’t buy or hold shares of such mutual funds whose holding includes the shares of such companies. It creates problems for such banks to deal with other commercial banks who do not have such taboos. In recent times, Middle-East Asia (which is largely Islamic) has emerged as a major economic power. This makes the study of Islamic banking even more relevant and challenging.

2.2 Different Interest Rates in the Formal Loan Market

Macro management deals mostly with the formal loan market. Depending on who the lenders and borrowers are, the maturity period of the loan etc., a number of interest rates prevail in an economy.

Interest on savings and time deposits: This is all too familiar with us.

Fixed deposits: This should also be quite familiar with you. Generally, the fixed deposits pay a higher interest rate than a savings or time deposit, because the money is locked in. In the U.S., it is called the certificates of deposit. These are available for different durations like three months, six months, one year, two years etc.

Interest on credit card: Any purchase with a credit card is a loan with the proviso that if you pay back an amount no later than the due date, the interest rate is zero. Otherwise, the outstanding amount entails a hefty interest rate. This is how the credit card companies make their money.

Interest on personal and business loans: Banks and other financial institutions loan funds to individuals and businesses. Interest rates vary, depending on the trust or credit worthiness of individuals, assessed viability of businesses etc.

LIBOR and SOFR: Banks lend each other on a short-term basis depending on their needs. LIBOR stands for the London Interbank Offered Rate. It is the average interbank interest rate at which the banks in the London money market lend to one another. In 2023 it was replaced by Secured Overnight Financing Rate (SOFR). LIBOR/SOFR serves as a global benchmark for setting interest rates on corporate debt, mortgages etc.

Bank Rate: Any business faces cash-flow problems periodically. It includes commercial banks, who borrow from different sources. Bank Rate is the rate of interest at which the central bank lends money to commercial banks.

Repo rate: It is the rate at which the central bank provides loans to the commercial banks. Thus, the bank rate and then repo rate are almost the same. The only difference is that in case of bank rate, the lending facility is available without any collateral, while repo rate refers to the situation where the central bank gives loans to commercial banks against some securities which the commercial bank must sell to the central bank with a repurchase option (repo).⁵

A change in the bank/repo rate is typically expressed in what is called basis points (bps). One basis point is equal to one-hundredth of one per cent. For example, an increase in the bank rate by 75 basis points from say 5% means an increase from 5% to 5.75%.

As will be discussed later, the bank rate or the repo rate serves as the “benchmark” interest rate in a country in that it acts as a signal to commercial banks with which they can read the policy stance of the central bank.

Marginal Standing Facility (MSF) rate: It was introduced in India in 2011. It is the rate at which commercial banks can borrow overnight (in an emergency situation) from the RBI against approved government securities.⁶

Federal Funds Rate: In the U.S., the federal funds rate is the interest rate at which depository institutions like commercial banks, credit unions etc. lend their overnight excess reserves to one another. This is the U.S. equivalent of the bank/repo rate of India, in the sense that the U.S. Fed adjusts the money supply so that the actual funds rate moves toward the target interest rate by the Fed.⁷

Interest Rates in the Bond Market: Corporate businesses and the governments—central/federal, state and local—borrow from the public regularly by issuing bonds, respectively called corporate and government bonds. A bond is essentially an ownership certificate issued by the borrowing party to the lender, stating the amount lent and coupon payments, from which one can deduce the interest rate. We will not get into details, except to note that different bonds are issued with different maturity periods like three months, one year, five years, ten years etc. and they carry different interest rates.⁸ For instance, RBI issues saving bonds with a maturity period of seven years. There are several bonds floated by corporate houses like Reliance Industries, Kotak, ICICI, L&T among many, many others. Bonds issued by the Government of India and State Governments are referred to as “G-sec.” The maturity period of G-sec varies from three months to well over thirty years.⁹,¹⁰

2.3 Marketability of Bonds and the Link Between the Interest Rate and the Price of Bonds

Unlike other interest-bearing assets like a savings or fixed deposit with a bank, the distinguishing feature of bonds are that many (not all) are marketable, in the sense that if you have a bond with a maturity date, say one year from now, within this period you can sell this bond just like shares or stocks of public limited companies. For instance, you hold five government bonds, each with a face value of ` 20,000 (meaning a certificate with a principal amount of ` 20,000) and you need cash now. You can sell one, some or all of the bonds you have in the bond market. Once you do it, someone else becomes the owner of that pre-existing bond.

However, it is very important to know that when you sell the bond, its price will most likely be different from ` 20,000. Why? Suppose that your bond offers an 8% interest rate annually. This is fixed. Now when you sell it, suppose that new government bonds of the same duration are offering 10% interest rate. (Interest rates change over time and we will see why). If so, no one would buy your bond that gives 8% interest for the same amount of the principal, because the option of buying a bond offering a higher (10%) interest rate is available. Therefore, your bond will be priced less than ` 20,000 at a level which brings an equivalence between an existing bond and a new bond. It follows that an increase in the interest rate lowers the price of existing marketable bonds. Likewise, a decrease in the interest rate implies a higher price of the same. See Appendix 11-A for details on how interest rate changes and bond prices are related.

You should know that bonds are rated according to how safe or reliable they are in terms of the servicing of the interest payments and return of the principal upon maturity.¹¹

2.4 Nominal Versus Real Interest Rate

For analytical purposes, we differentiate between the nominal interest rate and what is called the real interest rate. Nominal interest rate is the rate specified on or implied from a bond instrument, e.g., 8% for a fixed deposit of 3-year duration or 6% for a 2-year government bond or whatever. The real interest rate accounts for the expected rate of inflation and is defined as:

Real interest rate = Nominal interest rate—Expected rate of inflation.

Suppose you buy or an agent for you buys a government bond that gives 4% interest at the end of one year and experts are saying that the inflation rate will be 2.5% during the forthcoming year. In this example, the nominal interest rate is 4%, the expected inflation rate is 2.5% and thus the real interest rate is 4–2.5 = 1.5%. This is your expected return from investing in the government bond in real terms. Note that:

(a) Real interest rates can be negative. In our example if the expected rate of inflation was, say, 5%, the real interest rate would have been –1%

b) Real interest rate is a hypothetical (yet very useful) concept in the sense that expected inflation refers to the future which no one can predict with certainty. This is why it is expected in the first place, not actual. However, sometimes, in reference to the past, “real interest rate” is interpreted as the difference between nominal rate and the observed inflation rate. This is, strictly speaking, not the real interest rate. More appropriately, it is the realized real interest rate. But the word “realized” is kept silent.

2.5 Interrelationships Between Various Types of Interest Rates and the Interest Rate Linked Directly to Monetary Policy

Are various types of interest rates unrelated? No. In fact, they are closely related since they all involve time, and a longer time interval is cumulative of shorter time periods. In normal times, the family of interest rates moves in tandem. For example, there are theories on how interest rates of different maturity durations may be related. This is known as the term structure of interest rate, which is beyond our scope of analysis in this book.

You can also imagine that if the cost of—that is, interest charge on—borrowing by the commercial banks from other commercial banks or the central bank increases, the (profit maximizing) commercial banks will charge a higher interest for loans that they offer to their customers.¹² Therefore, the bank/repo rate and interest on personal and business loans are positively and strongly correlated.

In general, given that various interest rates are closely related, for analytical simplicity, we will assume a single loan/bond market, and therefore, a single interest rate. We will understand in this chapter how a central bank’s monetary policy directly impacts on the short-term interest rate like the bank rate, repo rate or the federal funds rate — with the implicit understanding that changes in these interest rates have a ripple effect on other interest rates in the economy that affect macroeconomic variables like investment, output and employment.

3. Functions of a Central Bank

We will understand what a central bank of a country is by understanding what it does. Traditionally, there are seven standard functions of a central bank:

1. Bank of Issue,
2. Banker, Agent and Advisor to the government,
3. Custodian of cash reserves of commercial banks,
4. Custodian of a nation’s reserves of international currencies,
5. Lender of the last resort,
6. Clearing house and
7. Controller of credit.

3.1 Bank of Issue

The central bank is the sole authority of issuing the currency of a nation, including coins and notes. In India, coins are minted by the Government of India and issued by the RBI. As you know, the currency notes of ` 500 and ` 1,000 denominations ceased to be the legal tender (legally acceptable currency) following demonetization in November 2016.

Thereafter, the RBI issued fresh currency notes of ` 500 and ` 2,000 denominations along with new currency notes of ` 200, ` 100, ` 50, ` 20, ` 10 and ` 5 denominations. In 2023, the RBI withdrew the 2000-rupee notes and directed the public to get these notes exchanged for some other currency notes.

Figure 2 shows the value of the RBI issued banknotes in circulation in all denominations for the year 2022. Notice that ` 500 notes (bills) constitute nearly 3/4th of the total value of all bills. Coins of ` 1, ` 2, ` 5, ` 10 and ` 20 denominations also circulate. As of early 2020s, the coins in fractional denominations in India have gone out of circulation almost entirely. Some countries have fractional components in their currencies, like cent in US and pence in UK while in other countries there is no fractional component, e.g., yen of Japan.

Figure 2: Banknotes (Currency Notes) in Circulation, India, 2022

Source: Reserve Bank of India, Database on the Indian Economy, rbi.org.in/DBIE/dbie.rbi?site=statistics

After the demonetization of 2016, the currency in circulation in India went down from roughly ` 17 trillion (` 17 lakh crore) in 2016 to ` 13.5 trillion (` 13.5 lakh crore) in 2017. However, in the next four years it increased rapidly and more than doubled, reaching ` 28 trillion or ` 28 lakh crore in 2021. This happened despite constant efforts of the government to reduce the use of currency money and move towards digital modes of payment.

Being the bank of issue provides status and superiority to the central bank. In many developed countries, this function is losing its importance because of the growing and widespread use of a digital currency. There are multiple ways in which transactions of any magnitude and denominations can be carried out without using notes and the problem of small change does not arise. However, we are still far away from a situation where the role of currency as a medium of exchange will become insignificant or redundant.

3.2 Banker, Agent and Advisor to the Government

The central bank maintains the accounts of all State Governments and Central Governments. As an advisor, the central bank officials and policy makers are always available to the government on matters of economic management. On its own as well, the central bank publishes periodical reports on the state of the economy and its policy stance. As an agent, the central bank floats and manages all types of loans which the government plans to issue. The government borrowings can be domestic as well as international, and they have different maturity periods in the form of treasury bills and bonds. Treasury bills normally have a short maturity date of six months or less. Bonds are the long-term borrowing instruments of the government. The maturity date of bonds ranges from one year to well over thirty years.¹³ Sometimes the bonds have no maturity date. These bonds, called perpetuities, simply carry a fixed rate of annual return which the holder gets. As borrowing by the government is considered very safe, government bonds are termed as gilt-edged securities.¹⁴

In the Indian framework, RBI is constitutionally obligated to undertake the receipts and payments of the Central Government and carry out the exchange, remittance and other banking operations, including the management of public debt. State Government transactions are carried out by RBI as per the terms of agreement with the State Governments.

RBI carries out the banking business through its own offices and via commercial banks appointed as its agents. It can appoint scheduled commercial banks as agents for specified purposes. RBI maintains the Principal Accounts of central and State Governments at its Central Accounts Section, Nagpur. A well-structured arrangement exists for revenue collection as well as payments on behalf of the government across the country.

3.3 Custodian of Cash Reserves and Banker to Commercial Banks

Please recall the dilemma of a commercial bank arising out its conflicting objectives of profitability and security. If an overenthusiastic bank chases the profitability motive too far, it must keep less cash (low CRR). But this endangers it to a default on depositors’ withdrawals and hence carries the risk of losing public trust. As the apex regulatory body, the central bank cannot allow this situation to occur. It mandates the commercial banks to keep a certain minimum portion of their deposits with the central bank. This is CRR, the cash reserve ratio. For instance, if the CRR is 4.5 per cent, then all commercial banks must keep at least ` 4.50 with the RBI for every ` 100 deposit with them. The central bank acts as a custodian of this cash reserve.

RBI acts as a common banker to all banks and for this purpose, the banks maintain current accounts with it. As per the guidelines of the Department of Government and Bank Accounts, the current accounts of individual banks are opened in e-Kuber (Core Banking System of RBI) by Banking Departments of the regional offices. RBI-stipulated minimum balance must be maintained by banks in these accounts, which enables participation in payment systems, inter-bank settlements, sale/purchase of securities and foreign currencies, etc.

3.4 Custodian of Nation’s Reserves of International Currencies

The central bank keeps foreign currencies as reserves, called forex reserves. They are used in order to intervene in the forex market if the value of the domestic currency starts falling sharply, particularly due to speculative pressures. This is done by selling the forex reserves and buying domestic currency, which tends to halt the downward pressure on the value/price of the domestic currency in the forex (foreign exchange) market. This means a depletion of forex reserves. For example, between January and August in 2022, the RBI intervened repeatedly to stop a sharp decline in the value of Indian rupee. In the process, the forex reserves fell from nearly 600 billion USD to 530 billion USD during the same period. Typically, such intervention by the central bank has limited success. The RBI failed to stop the declining rupee as the dollar-rupee exchange rate rose from $1 = ` 75 in January 2022 to more than $1 = ` 82 in October 2022. Figure 3 illustrates impressive growth in India’s forex position over the decades. A central bank may also intervene in the forex market to reduce the value of its own currency if it rises sharply. This is done by selling their own currency and buying foreign currencies, which tends to increase foreign reserves.

Figure 3: India’s (RBI’s) Forex Reserves in Billions of US Dollars

Source: Reserve Bank of India, Database on Indian Economy, rbi.org.in/DBIE/dbie.rbi?site=statistics

A large amount of forex reserves is an important indicator to the rest of the world that the nation is not going to default on its international payments obligations.¹⁵ Overall, a central bank’s policies for foreign exchange reserves management are guided by safety, liquidity and returns.

3.5 Lender of the Last Resort

The central bank does not provide any lending facility to commercial banks in normal times. It periodically advises and sometimes cautions the commercial banks to keep enough liquid assets with themselves to meet depositors’ demands. On its part, the central bank keeps a close watch on the liquidity position of the banks and issues warnings to those who either flout its directive and/or are too tight on their liquidity fronts. The erring commercial bank soon falls in line for fear of losing its association with the apex bank.

What if a commercial bank (unexpectedly) faces a liquidity crunch due to sudden and massive withdrawal requests of the depositors? The central bank comes to the rescue by providing short term loans to the commercial bank to tide over the crisis. The central bank is thus a lender to the commercial banks of the last resort. Before granting the temporary loan facility however, the central bank ensures that the liquidity crisis in the commercial bank had occurred not due to the latter’s negligence or laxity but because of circumstances which were normally beyond its control. Moreover, this short-term loan facility is not free: there is an interest charge.

3.6 Clearing House

As you all know, we accept cheques of other banks (in which we do not have our account) as payments because we can easily deposit the cheque of the other banks in our account which is in a different bank. It leads to a situation where commercial banks have claims over one another. The central bank acts as a clearing house for settling the interbank claims. When these claims were in paper form, the representatives of all the banks would literally assemble and settle accounts at periodic intervals. In modern times, information technology does it all.

In this context, National Payments Corporation of India (NPCI) was set up in 2008 by RBI (as a specialized division) for operating retail payments and settlement systems in India through a digital mode. In its wide portfolio of services, among others, are the Cheque Truncation System (CTS) and the National Automated Clearing House (NACH). Digitization has made it possible to stop the movement of physical cheques (known as cheque truncation). Instead, its electronic image is transmitted along with related information.¹⁶

In 2021, RBI announced its intention of bringing all bank branches under the system and consolidating multiple clearing locations managed by different banks with service variations into a nationwide standard clearing system. Another significant service of the NCPI is NACH — a centralised clearing service for high-volume and low-value interbank transactions, that are repetitive and periodic in nature. Clearly, information and communication technologies have made money transfer services much faster and at a lower cost than earlier.

In 2009, RBI mandated upper limits to cheque clearance for local/state capitals or major cities/other locations at one-to-seven and ten-to-fourteen days respectively. From 2021 onwards, the nationwide coverage of CTS combined with speed clearing has drastically lessened the time involved.¹⁷ Also, there are no collection charges on cheques drawn on a bank located within the CTS defined grid.

3.7 Credit Regulation

The total money supply is composed of currency money and bank deposits. The currency component in the total money supply is rather small. Thus, if monetary management requires a reduction or an expansion of money supply, it is more effective to do so by reducing or expanding bank money. Commercial banks create money supply via credit creation. The central bank acts as a regulator of this credit money, which is discussed next.

4. Means of Credit Control

There are several ways in which a central bank can regulate the credit creation process of the commercial banks. The word ‘regulate’ means both reduction and expansion in credit money. To avoid confusion, let us stick to one aspect, that is, reduction of credit. We can easily understand what to do if an expansion is required. Thus, from now, let credit control mean a reduction in money supply.

The central bank must address the following questions before implementing any technique.

• What should be the magnitude of credit control? It is a ‘how much’ question.
• If a single technique is to be adopted, then which one and why?
• If two or more techniques are to be adopted, then which ones, in what order and to what extent?
• What if credit control is required for a particular bank or a group of banks, not the entire banking system?

The techniques of credit control are grouped into two broad categories: selective and quantitative. Selective techniques, as the name suggests, affect only a particular bank or banks, while quantitative techniques are those which affect the credit creation capacity of all banks. Needless to say, the latter is more effective and is normally used to regulate money supply.

4.1 Selective Techniques

Methods like rationing of credit, changes in margin requirements, moral persuasion and direct action come under the category of selective methods. Rationing of credit simply implies that the central bank would set an upper limit to how much credit the erring bank can create. It may also entail restricting the access of bank credit to certain sectors. For example, the central bank can prohibit a commercial bank from extending, beyond a certain limit, loan facility to industries producing luxuries.

Margin requirements are related to the collateral. The banks demand and keep some assets of the borrowers as collateral which acts as an insurance against default. The collateral can be in physical or in financial forms. Normally, the banks do not give loans equal to the (then) value (price) of the asset given as collateral. It is because the price of the collateral may fall, which may induce the borrower to default and get the collateral confiscated rather than paying back the loan. It is unlikely as it may erode the borrower’s reputation, yet the possibility remains. Therefore, the banks typically keep a margin as a cushion against price reduction of the collateral. If the margin requirement of a particular form of collateral is 20%, then for ` 100 worth of collateral, the bank will advance ` 80 as loan at the most. The margin requirements for various forms of collateral differ depending upon their nature and price fluctuations. Clip 2 is a brief write-up on the link between the collateral and the Great Recession and how that didn’t apply to India.

Clip 2: Property Collateral, Great Recession and Its ‘Irrelevance’ in India

The Great Recession of 2008 was triggered by the large-scale default on housing loans which the banks had given to people with dubious credit-worthiness in the U.S. and Europe. (Remember the term, NINJA, no income no job American!) Banks had advanced these loans to these people keeping their apartments as collateral. When large scale default occurred, these apartments were confiscated and offered for sale. This resulted in a massive decline in property prices leading to poor loan recovery as the value of the ‘collateral’ was not enough to cover even the principal. Ever wondered why such a thing never happens in India in case of loans advanced against house/real estate as collateral? You will be surprised to note the credit for this (ironically) goes to the prevalence of large-scale use of black money in property related transactions. In India if a house is sold/purchased for, say, ` 1 crore, it is likely that 60 per cent of this amount, (`60 lakhs) will be paid in ‘white’ while the rest in ‘black’. Now suppose the buyer approaches a bank for loan and offers his house as collateral and the bank finds this per- son credit-worthy. If the margin requirement is, say, 25%, the maximum amount of loan granted by the bank will be 75% of `60 lakh, that is, `45 lakh. In such a case even if the value of collateral declines sharply, the bank will still be safe. Remember! The de facto value of the collateral is `1 crore. What an irony! Black money saved Indian banks.

To regulate credit, the central bank can increase the margin requirement in case of a few commodities and for a particular bank or a group of banks. The central bank may also exert moral pressure on a particular bank through oral and/or written communication. The erring bank is expected to fall in line for fear of stricter actions. If a bank ignores the moral persuasion of the central bank, it can be subjected to a more direct and unpalatable action from the central bank. An extreme, albeit rather rare, example will be to withdraw the recognition of the bank by de-scheduling it, if it happens to be a scheduled commercial bank. A scheduled commercial bank is one which is listed In Schedule II of the RBI Act. Scheduled commercial banks enjoy a greater degree of trust of the depositors. Next time you happen to go to a bank branch just check whether it is a scheduled commercial bank or not.

4.2 Quantitative techniques

The quantitative techniques are used for comprehensive control of money supply. They include:

1. Changes in Bank Rate,
2. Variations in Cash and Liquidity Reserve Requirements and
3. Open Market Operations.

Bank rate or the repo rate

Recall that the bank/repo rate is the rate of interest at which the central bank lends money to commercial banks. It serves as the representative rate among all the rates of short-term lending by a central bank. It is, in fact, much more than a short-term interest rate: it acts as a signal to commercial banks with which they can read the policy stance of the central bank. The lending rates of the commercial banks are normally fixed in tune with the bank rate — which is why it is a technique of credit control. You must have understood the mechanism by now. For instance, if the central bank decides to reduce money supply (same as controlling credit), it would increase the bank rate, signalling to the commercial banks that in case of a liquidity crunch the central bank’s lending facility will be available at a higher cost.

There could be a two-fold impact on commercial banks. First, the banks could follow suit and increase the lending rate accordingly. An increase in lending rate will dampen the borrowing plans of firms and households, resulting in a reduction in borrowing from commercial banks. This would reduce the credit creation capacity of the banks. Clip 3 provides two examples illustrating the link between RBI’s change in the repo rate and the change in lending rates by commercial banks.

Clip 3: Repo Rate Changes Transmitting Into Bank Lending Rate Changes

June 2022: A week after RBI’s Monetary Policy Committee increased the repo rate by 50 bps, the State Bank of India, the country’s largest lender, increased its marginal cost of funds-based lending rate (MCLR) by 20 bps across all tenors with immediate effect. Other major players in banking sector too followed similarly. SBI also raised its external benchmark-based and repo-linked lending rates by 50 bps.

August 2022: SBI again raised its Marginal Cost of Lending Rate (MCLR) on loans by 20 basis points with effect from August 15, 2022. This was a reaction to RBI’s raising of the repo rate by a sharp 50 basis points. It prompted many banks to hike various kinds of lending rates they charge on borrowers.

Source: https://www.livemint.com/money/personal-finance/sbi-hikes-mclr-on-loans-emis-to-go- up-11660540445161.html
https://www.business-standard.com/article/finance/sbi-raises-lending-rates-hdfc-bank-and-bob-in- crease-deposit-rates-122061501085_1.html

Second, what if a commercial bank has a comfortable liquidity position in its own asset structure and does not foresee any compulsion to seek central bank’s loan in the near future? It would be least worried about an increase in the bank rate. Theoretically, a commercial bank need not restrict its credit creation. Does it then mean that the bank rate policy is of limited use as a technique of credit control? To an extent, the answer is yes. As a matter of fact, large commercial banks normally have comfortable liquidity positions and do not seek the central bank’s lending facility. However, the utility of the bank rate policy lies in that it acts as a warning signal. An increase in the bank rate is an advance signal to commercial banks who would understand that the central bank wants to restrict credit. If commercial banks do not control credit on their own, the central bank may follow suit with more comprehensive techniques.

Thus, the bank rate or the repo rate serves as the “benchmark” interest rate in a country. In India, it is determined by the Monetary Policy Committee consisting of six members (three from within the Reserve Bank of India and three outside experts who are nominated) plus the Governor of the RBI as the ex officio chairman.

1. As we will learn soon, the repo rate is an interest rate.
2. Incidentally, there is a public-sector commercial bank in India named Central Bank of India.
3. Also, there is simple versus compound interest rate, which applies to any loan with an  interest.
4. Of course, not all in informal lending is a bad thing. If your friend needs urgent money to meet some family emergency and you lend him/her some amount, this is obviously a good thing
5. In other words, the rate charged by the central bank from commercial banks on loans against no security is the bank rate.
6. As of September 2022, the bank rate and the MSF were both 5.65%, while the repo rate was 5.4%.
7. Commercial banks in the U.S. can borrow from the Fed at an interest rate, called the discount rate, which is typically 100 basis points (1%) higher than the federal funds rate. It is because the Fed prefers that the commercial banks borrow from each other while monitoring each other with regard to liquidity and risk.
8. A textbook on finance would explain terms like coupon payments and how to calculate the interest rate from the coupon payments and face value of a bond. The bond certificates exist in terms of electronic accounts, called “demat”. Some decades ago, they were physical, a piece of paper stating the borrower’s name, the lender’s name, the amount of the principal and the coupon payments.
9. The RBI website, https://www.rbi.org.in/commonperson/English/Scripts/FAQs.aspx?Id=711 (accessed on July 2, 2023), provides a primer on G-sec.
10. Debentures are loan instruments very similar to bonds. The usage of the term ‘debenture’ varies somewhat between countries, but generally they mean unsecured loans that do not involve a collateral.
11. In the U.S., there are three main bond rating agencies: Standard & Poor’s, Moody’s and Fitch. Prominent credit rating agencies in India include, among others, CRISIL (Credit Rating Information Services of India, Ltd.), ICRA (Investment Information and Credit Rating Agency), CARE (Credit Analysis and Research Ltd.) and India Ratings and Research Pvt. Ltd.
12. More will be said on this later
13. For instance, in 2023 the RBI announced, among other bonds, an auction of central government bonds that would mature in 2062.
14. Sometimes, the bonds issued by big, reputed companies are also called gilt-edged for their security and safety.
15. For example, in September 2022, RBI’s forex reserves were enough to finance nearly eight months of imports.
16. The CTS was started in 2008 in New Delhi, and it has gradually extended to the rest of India.
17. State Bank of India’s cheque collection policy among other things states: “Cheques deposited at branch counters and Cheques deposited in the drop-box within the branch premises, before the specified cut-off time, will be sent for clearance on same day, for which the clearance period will be T+1 working day. Cheques deposited after this cut off
    time will be sent for clearing on next day, for which clearance period will be T+2 working days”.

The post Introduction to Central Banking – Monetary Policy | Interest Rates | Functions appeared first on Taxmann Blog.

Under the Foreign Exchange Management Act (FEMA) in India, the terms "Offences," "Penalties," and "Compounding" refer to the legal framework and procedures for dealing with violations of foreign exchange rules:

– Offences: These are violations of the provisions of FEMA, which governs the management of foreign exchange in order to facilitate external trade and payments and maintain the foreign exchange market in India. Offences typically involve non-compliance with regulatory requirements such as misreporting or under-reporting of transactions, non-adherence to the rules regarding foreign investments and currency exchanges, etc.

– Penalties: If a person or entity commits an offence under FEMA, they are subject to penalties. These penalties can vary widely depending on the nature and severity of the violation. The penalties might include monetary fines or even imprisonment in severe cases. The amount of the penalty is usually determined by the specific provisions of FEMA that have been violated.

– Compounding: This is a voluntary process that allows the offenders to avoid litigation. When an offence under FEMA is compounded, the accused pays the monetary penalty, and in return, the authorities forego further legal proceedings related to the offence. This process is meant to simplify and expedite the resolution of lesser offences under FEMA. The Reserve Bank of India (RBI) provides specific guidelines on how the compounding process works, including a matrix for calculating the quantum of compounding fees based on the nature of the contravention.

These mechanisms ensure compliance with the foreign exchange rules and help maintain economic stability and integrity within the country's financial system.

By Natwar Thakrar – Partner | N.G. Thakrar & Co., Chartered Accountants

Table of Contents

1. Contraventions and Penalties
2. Compounding of Contraventions
3. Procedure for Compounding
4. Method for Computing Compounding Quantum – RBI Guidance on Compounding Matrix
5. Practical Examples for Computing Compounding Quantum

1. Contraventions and Penalties

• Contravention is an action which is against the Act or Rule made thereunder.
• Contravention means violation, breach, infringement, transgression, trespassing, etc.
• It is  an action which offends against a law, treaty, or ruling.
  • Publishing misleading advertisement is a contravention of the Act.
• Under FEMA, contravention refer to breach of provisions of the Act or non-compliance with the regulatory requirements, undertaking unauthorized activities, or improper conduct in foreign exchange transactions.

1.1 Types of Contraventions

• Contravention of Act
• Contravention of any Rules, Regulations, Notification, Direction
• Contravention of any order issued in exercise of the powers under the Act.
• Contravention further classified as:

1. 1. Sensitive Contraventions: Suspected money laundering, terror financing or affecting sovereignty of the nation
   2. Material Contravention: which are required to be compounded for which necessary compounding procedure has to be followed
   3. Technical Contravention: Contravention identified by the RBI or brought to its notice by the entity involved in contravention by way of a reference other than through the prescribed application for compounding

• Once a compounding application is filed by the concerned entity suo moto, admitting the contravention, the same will not be considered as ‘technical’ or ‘minor’ in nature and the compounding process shall be initiated in terms of section 15 (1) of Foreign Exchange Management Act, 1999 read with Rule 9 of Foreign Exchange (Compounding Proceedings) Rules, 2000.

1.2 Contraventions – Illustrative Examples

• Failure to submit required reports, returns, or information to RBI within the stipulated timeline.
• Engaging in foreign exchange transactions without proper authorization or conducting transactions that are prohibited or restricted under FEMA.
• Non-compliance with foreign direct investment (FDI) guidelines, such as exceeding sectoral caps, incorrect reporting of investment, or contravening conditions imposed by the RBI.
• Non allotment of shares within 2 months
• Non-filing FCGPR within 30 days of allotment
• Non-filing of FCTRS with AD Bank within two months of transfer of shares, where required.
• Purchase of agricultural land/farm house by NRIs/OCIs
• Loan to a foreign company by Individuals under LRS
• Investment in a foreign company abroad without filing Form FC
• Remittance of funds by HO directly to vendors without routing the same through LO/BO/PO
• Delay in receipt of export proceeds beyond prescribed period.
• Netting of proceeds of export sale and import purchase beyond the prescribed time limit
• Acquisition of a immovable property abroad out of borrowed funds

1.3 Penalties

• In terms of Section 13, any person contravening FEMA shall be liable, upon adjudication, to a penalty up to three times the sum involved in contravention, where such amount is quantifiable or up to Rs. 2,00,000, where the amount is directly not quantifiable, with further penalty up to Rs. 5,000 per day after the first day during which such contravention is continuing.
  • Explanation: For the purposes of this sub-section, “property” in respect of which contravention has taken place, shall include:

1. 1. 1. deposits in a bank, where the said property is converted into such deposits;
      2. Indian currency, where the said property is converted into that currency; and
      3. any other property which has resulted out of the conversion of that property.

• Penalty Proceeding is not criminal in nature.
• Penalty cannot be based on guess work, conjecture or surmise.
• The powers of enforcement officers is quasi judicial.
• Punishment by imposition of penalty as well as imprisonment for non payment of penalty would not amount to double jeopardy.

2. Compounding of Contraventions

2.1 What is Compounding of Contravention?

• Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and seeking redressal.
• It is a mechanism whereby the defaulter is reprieved of major legal consequences by affording him with an opportunity to pay a smaller sum of money and also to escape prosecution.
• It provides comfort to individuals and corporate community who commit contravention [except contravention of section 3(a) of the Act] by minimizing transaction costs.
• Compounding of offence is not a right of the defaulter. Competent authority has the power to compound offense in appropriate cases either prior to or following the commencement of legal proceedings.
• Willful, malafide and fraudulent transactions are, however, viewed seriously, which will not be compounded by the Reserve Bank.
• CG under s. 46 read with s. 15(1) of FEMA notified “Compounding Proceedings Rules, 2000” empowering the RBI to compound any contraventions as defined under s. 7, 8 and 9 and the third schedule to FEMA Current Account Rules.
• Further, Vide GSR 609€ dated 13.09.2004, RBI is further empowered to compound all types of contraventions under FEMA, 1999, except contravention of the provisions of s. 3(a).
• Compounding can be considered on an application made by the person committing the contravention for a specified sum. RBI shall offer an opportunity of personal hearing before compounding the contravention.
• Enforcement Directorate (ED) is empowered to compound contravention under s. 3(a) of FEMA {Rule 5}

2.2 Who Can Apply for the Compounding and When?

• Who can apply?

1. 1. Any person who contravenes any provision of FEMA, 1999 [except contraventions under s. 3(a)] or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act or
   2. Contravenes any condition subject to which an authorization is issued by the Reserve Bank
   3. Can apply for compounding to the Reserve Bank.

• When?

1. 1. Suo moto, on becoming aware of the contravention, or
   2. the person is made aware of the contravention by the RBI or any other statutory authority or auditors or by any other means.

• It is expected that the person who has contravened the provisions has regularized the transactions involved in the contravention before filing the compounding application.

2.3 Non-Compoundable Offenses

• Money Laundering (PMLA)/Hawala Transactions
• Matter already a subject matter of Show cause notice issued by the ED ( Refer Para 5.3 of Master Direction on Compounding)
• Identical matter is compounded within a period of previous three years
• Matters is pending in an appeal filed by the applicant
• Matters requires Prior Permission from Government/Department or Ministry
• Where the amount involved in contravention is not directly quantifiable

2.4 Why Compounding?

• Compounding helps in regularizing the mistakes/contraventions
• The procedure is simple and fast
  • One completed application, one hearing and the final order of disposal is passed within 180 days
• No legal proceedings
• No further penalty or prosecution for the issues compounded
• Savings in penalty amount is much higher as compared to the compounding fees levied by the RBI
• All contraventions compounded stand regularized
• Pending documents are admitted and taken on record

2.5 Pre-requisite for Compounding

• Compounding of contraventions pertaining to any transactions requiring regularization or approvals from Government or any statutory authority concerned shall not be compounded unless the required regularization process is completed or necessary approvals are obtained from concerned authorities.
• In cases where adjudication is done by the DoE and an appeal has been filed under section 17 or 19 of the FEMA, no contravention can be compounded in terms of Rule 11 of the Foreign Exchange (Compounding Proceedings) Rules, 2000
• Similar/Identical contravention compounded within a period of three years prior to the contravention also cannot be compounded.

2.6 Compounding Authority

2.7 Delegation to Regional Offices – Notification 20(R)

• Regulation 13.1(1) – Delay in reporting inward remittance for issue of shares
• Regulation 13.1(2) – Delay in filing form FC(GPR) after issue of shares
• Regulation 13.1(3) – Delay in filing Annual Return of the Foreign Liabilities & Assets (FLA)
• Paragraph 2 of Schedule I – Delay in issue of shares/refund of share application money beyond 60 days, mode of receipt of funds, etc.
• Regulation 11 – Violation of pricing guidelines for issue of shares
• Regulation 2(v) read with Regulation 5 – Issue of ineligible instruments
• Regulation 16.B – Issue of shares without prior approval of the RBI or Government, wherever required
• Regulation 13.1(4) – Delay in submission of Form FC- TRS on transfer of shares from Resident to Non-Resident or from Non-resident to resident
• Regulation 4 – Receiving investment in India from non-resident or taking on record transfer of shares by investee company
• Regulation 13.1(11) – Downstream Investment – To notify the Secretariat for Industrial Assistance, DIPP and file Form DI within 30 days
• Regulations 13.1(7) and 13.1(8) – Filing of Form LLP(I) & LLP (II)
• Regulation 10(5) – Schedule IV Violations

2.8 Delegation to Regional Offices – FEM (Non-Debt Instrument) Rules, 2019

• Rule 2(K) read with Rule 5 – Investment in equity instruments in violation of conditions of entry routes, sectoral caps or the investment limits
• Rule 21 – Contravention of Pricing Guidelines
• Paragraph 3(b) of Schedule I – Issue of shares without approval of RBI or Government, wherever required
• Rule 4 – Receiving Investment in India from non-resident or taking on record transfer of shares by investee company in violation of Act or Rules or Regulations
• Rule 9(4) – Transfer of investment in Indian company held on a non-repatriation basis to a person resident outside India by way of gift without the prior approval of the Reserve Bank

2.9 Delegation to Regional Offices –FEM (Mode of Payment and Reporting of Non-Debt Instruments) Regulations

• Regulation 3.1 (I)(A) – Mode of Payment
• Regulation 4(1) – Delay in Reporting issue of equity instruments in FC-GPR within thirty days from the date of issue of equity instruments
• Regulation 4(2) – Delay in filing form FLA by 15th July of each year
• Regulation 4(3) – Delay in reporting transfer of shares in FC- TRS
• Regulation 4(6) – Delay in submission of Form LLP(I) in respect of the receipt of consideration for capital contribution and acquisition of profit shares
• Regulation 4(7) – Delay in submission of Form LLP(II) for disinvestment/transfer of capital contribution or profit share between a resident and a non-resident (or vice versa)
• Regulation 4(11) – Delay in filing form InVi by an investment vehicle which has issued unit to non residents

2.10 Delegation to FED CO Cell, New Delhi

• Upon transfer of work of three divisions of Foreign Investment Division (FID) (viz. LO/BO/PO division), Non Resident Foreign Account Division (NRFAD) and Immovable Property (IP) Division to FED, CO Cell, New Delhi, the officers attached to the FED, CO Cell at New Delhi office are authorized to compound the contraventions as under:

1. 1. FEMA -7 – Contraventions relating to acquisition and transfer of immovable property outside India
   2. FEMA -21 – Contraventions relating to acquisition and transfer of immovable property in India
   3. FEMA -22 – Contraventions relating to establishment of Branch office, Liaison Office or Project office in India
   4. FEMA -5 – Contraventions falling under Foreign Exchange Management (Deposit) Regulations, 2000

• The above contraventions can be compounded by all Regional Offices of FED (except Kochi and Panaji) without any limit on the amount of contravention.
• Kochi and Panaji Regional offices can compound above contraventions for amount below Rs. 1,00,00,000/-.
• The contraventions of Rs. 1,00,00,000/- and above under the jurisdiction of Panaji and Kochi Regional Offices and all other contraventions of FEMA will be compounded at Cell for Effective Implementation of FEMA (CEFA), Mumbai.

3. Procedure for Compounding

3.1 Procedure & Prerequisite for Compounding

• Procedure for compounding is provided in Foreign Exchange (Compounding Proceedings) Rules, 2000 – Rule 1 to 13 and the Master Direction on Compounding.
• The Contraventions should have crystallized

1. 1. Period of contravention,
   2. Amount of contravention and
   3. Rule or Regulation contravened. (PAR)

• In case contravention cannot be quantified, it cannot be compounded [Proviso to Rule 5(1)]
• No Similar contravention should have been committed in past 3 years. [Rule 5 (2)]. For this purpose, any second or subsequent contravention committed after expiry of a period of three years from the date on which the contravention were previously compounded shall be deemed to be a first contravention
• Contraventions should have been duly regularized
  • Approvals/Permissions granted, Excess amounts refunded etc.
• Where any contravention is compounded before adjudication under S 16, no inquiry shall be held for adjudication of such contravention against the person in relation to whom the contravention is so compounded
• No contravention shall be compounded if an appeal has been filed under S 17 or S.19 of the Act

3.2 Procedure for Compounding

• Application in duplicate in prescribed Form to RBI, Exchange Control Department, Central Office, Mumbai
• Furnish details in Annexures – (As provided in Annex – II to Master Direction on Compounding requiring information in 4 Tables + relevant information i.e. information relating to Foreign Direct Investment, External Commercial Borrowings, Overseas Direct Investment and Branch Office/Liaison Office, as the case may be applicable, along with
• An Undertaking (Refer Annex III to Master Direction) that the applicant is not under investigation by agency such as DOE, CBI, etc.
• Provide a copy of Memorandum of Association and the latest audited financials along with the compounding application
• Furnish duly filled in Electronic Clearing System (ECS) Mandate Form (Refer Annex IV to Master Direction)
• Pay Fees by DD Rs. 5,000/- in favour of the “Reserve Bank of India” and payable at MRO
• Examination of the application by RBI
• Calling for additional documents, if required
• Serious contraventions

1. 1. Proviso added to Rule 8(2) of Compounding Rules February 20, 2017 – (money laundering, terror financing, affecting sovereignty and integrity of the nation) including non-payment of penalty in the compounding order
   2. Cases to be remitted to appropriate Adjudicating Authority i.e. DoE

• Material: Non-compliance with regulatory requirements – Compounding by RBI
• Sensitive: Case referred to DoE under Section 37 by virtue of Rule 8(2)
• Opportunity for personal hearing – Optional – RBI encourages applicant to appear directly rather than being represented/accompanied by legal experts/consultants, as compounding process is only for the admitted contraventions
• Passing of compounding order – Within 180 days from the date of receipt of completed application
• Payment of compounding amount within 15 days from the date of order. RBI issues a certificate of completion of the proceedings upon payment of compounding fees
• Where a contravention has been compounded, no further prosecution for the same contravention [Rule 6]
• In case of non-payment of fees amount indicated in compounding order within 15 days of the order, it will be treated as if the applicant has not made any compounding application to the RBI
• Other provisions of FEMA, 1999 in respect of contraventions will apply
• RBI refers such cases to the Directorate of Enforcement for appropriate action
• As the compounding is based on voluntary admissions and disclosures, there cannot be an appeal against the Compounding Order
• The order, however, can be challenged through a WRIT Petition in High Court

3.3 Format for Application

1. Name of the applicant (in BLOCK LETTERS)
2. Full address of the applicant (including Phone and Fax No. and email id)
3. Whetherthe applicant isresident in India orresident outside India
4. Name of the Adjudicating Authority before whom the case is pending
5. Nature of the contravention [according to sub-section (1) of Section 13]
6. Brief facts of the case
7. Details of fee for application of compounding
8. Any otherinformation relevantto the case

I/We declare that the particulars given above are true and correct to the best of my/our knowledge and belief and that I/We am/are willing to accept any direction/order of the Compounding Authority in connection with compounding of my/our case.

Dated :
Name :

(Signature of the Applicant)

3.4 Details Required in Case of Contravention of ECB Guidelines

• Name of the applicant
• Date of incorporation, Income-tax PAN
• Nature of activities undertaken (Please give NIC code – 1987)
• Brief particulars about the foreign lender
• Is the applicant an eligible borrower?
• Is the lender eligible lender? Is the lender an equity holder?
• What is the level of his holding at the time of loan agreement?
• Details of ECB – Amount in Foreign Currency and Indian Rupee
• Rate of interest, Period of loan
• Repayment particulars – date of drawdown, amount In FC and INR
• Details of drawdown
• Details of LRN Number- application and receipt
• Details of ECB 2 returns submitted, Period of return, Date of submission
• Details of Utilization of ECB in Foreign Currency and Indian Rupee
• Nature of contravention and reasons for the contravention
• All supporting documents may be submitted

3.5 Details Required for Contraventions Relating to ODI

• Name of the applicant
• Date of incorporation
• Income-tax PAN
• Nature of activities undertaken (Please give NIC code – 1987)
• Name of Overseas entity
• Date of incorporation of overseas entity
• Nature of activities under taken by overseas entity
• Nature of entity – WOS/JV
• Details of remittance sent- Date of remittance; Amount in FCY and in INR
• Details of other financial Commitment
• Details of UIN applied and received
• Date of receipt of share certificate
• Approval of other regulators if required
• Details of APRs submitted: For the period ended; date of submission
• Nature of contravention and reasons for the contravention
• All supporting documents may be submitted

3.6 Details Required in Case of Contraventions Relating LO/BO in India

• Name of the applicant
• Date of incorporation
• Income-tax PAN
• Nature of activities undertaken (Please give NIC code – 1987)
• Date of approval for opening of Liaison Office/Branch Office
• Validity period of the approval
• Income and expenditure of the LO/BO
• Dates of submission of Annual activity Certificates
• Nature of contravention and reasons for the contravention
• All supporting documents may be submitted

3.7 Tables As per Annex-II to Master Direction

• Date of reporting to RBI and not AD

A= B+C
Please give supporting documents
Table A- Copies of FIRC with date stamp of receipt at RBI
Table B- Copies of FCGPR with date stamp of receipt at RBI
Table C- letter seeking refund/allotment of shares- approval letter from RBI A2 form

• Copies of Balance Sheet during the period of receipt of application money and allotment of shares
• Nature of contravention and reasons for the contravention

3.8 Format of Undertaking

We ______________ hereby confirm/declare that we are not under any enquiry/investigation/adjudication by Directorate of Enforcement, as on the date of this application.

We further undertake to inform to the Compounding Authority/Reserve Bank of India immediately, in writing, if any enquiry/investigation/adjudication proceedings are initiated by the Directorate of Enforcement against us at any time hereafter but on or before the date of issuance of the compounding order in respect of the compounding application filed by us.’

OR

We (Name of the applicant) hereby confirm/declare that I/we am/are or was/were under enquiry/investigation/adjudication by Directorate of Enforcement, and the details are given in the Annex.

We further undertake and confirm that no appeal has been filed by us under section 17 or section 19 of FEMA, 1999.

Signature of the applicant/authorized signatory

Name:

Date:

3.9 Electronic Clearing Service (ECS) Mandate

Name of the Party (Beneficiary):

PAN:

Particulars of the Bank Account –
Name of the Bank, Name of the Branch, Address – (As appearing on the cheque issued by the Bank)

Telephone No: ______________

Type of Account

IFSC Code

The 9 Digit MICR Code Number
(As appearing on the cheque book issued by the Bank)

Account No.
(As appearing on the cheque book issued by the Bank)

Checklist for attachments:
Photocopy of PAN Card
Photocopy of a cancelled blank cheque

We hereby declare that the particulars given above are correct and complete. If the transaction is delayed or not effected at all for reasons of incomplete or incorrect information, we would not hold the user institution responsible.

Signature of the Authorised Signatory

4. Method for Computing Compounding Quantum  – RBI Guidance on Compounding Matrix

Quantum Imposed generally depends upon:

• Financial gain of unfair advantage, wherever quantifiable to the contravener or to any other person resulting from the contravention;
• The amount of loss caused to any authority/agency/exchequer
• Economic benefits from delayed compliance, duration and amount of contravention
• Repetitive nature of contravention, track record and or/history of non-compliance and any other relevant factor
• Contravener’s conduct in undertaking the transaction and in disclosure of full facts in the application and the submissions made during the personal hearing;
• Any other factor as considered relevant and appropriate.

4.1 RBI Guidance on Compounding Matrix

4.2 Compounding of Contraventions & Penalties

The compounding matrix is subject to the following provisions:

• Maximum Amount imposed should not exceed 300% of the amount involved in contravention
• If amount of contravention is less than Rs. One lakh, the total amount imposed should not be more than amount of simple interest @5% p.a. calculated on the amount of contravention and for the period of the contravention in case of reporting contraventions and @10% p.a. in respect of all other contraventions
• In case of paragraph 8 of Schedule I to FEMA 20/2000 RB contraventions, the amount imposed will be further graded as under:

1. 1. If the shares are allotted after 180 days without the prior approval of Reserve Bank, 1.25 times the amount calculated as per table above (subject to provisos at (i) & (ii) above)
   2. If the shares are not allotted and the amount is refunded after 180 days with the Bank’s permission: 1.50 times the amount calculated as per table above (subject to provisos above)
   3. If the shares are not allotted and the amount is refunded after 180 days without the Bank’s permission: 1.75 times the amount calculated as per table above (subject to provisos above)

Further points to be noted:

• In cases where it is established that the contravener has made undue gains, the amount thereof may be neutralized to a reasonable extent by adding the same to the compounding amount calculated as per the chart
• If a party who has been compounded earlier applies for compounding again for similar contravention, the amount calculated as above may be enhanced by 50%
• For calculating amount in respect of reporting contraventions, the period of contravention may be considered proportionately {(approx. rounded off to next higher month ÷ 12) X amount for 1 year}. The total no. of days does not exclude Sundays/holidays
• RBI has clarified that the guidance is meant only for the purpose of broadly indicating the basis on which the amount to be imposed is derived by compounding authorities. The actual amount imposed may sometimes vary, depending on the circumstances of the case taking into account the various factors

5. Practical Examples for Computing Compounding Quantum

5.1 Illustration on Contravention of Para 9(1)(A) or Para 9(1)(B) of Schedule 1 to Notification No. FEMA20/2000-RB

5.2 Illustration Contravention of Para 8 of Schedule 1 to Notification No. FEMA20/2000-RB (Allotment of Shares/Refunds)

5.3 Illustration Availing ECB Without Approval/Not Permitted End Use/Ineligible Borrower

5.4 Illustration Acquisition of Immoveable Property in India

5.5 Dos and Don’ts for Compounding

• Admit each contravention honestly and with a request for leniency
• Spell out each contravention correctly with reference to the Rule, Para, Regulation, etc. violated, amount involved, no of days for delays/contraventions, reasons of contravention
• If any defect is noticed in the application for compounding, file request for modification
• Enclose supporting documents which are relied upon
• Keep all the papers ready at the time of hearing as no adjournment is generally granted
• Language of the application should be polite
• No arguments with the authority at the time of hearing yet the situation and circumstances that lead to contravention can be narrated in brief and politely

5.6 Foreign Exchange (Compounding Proceedings) Rules, 2000

The post Offences | Penalties | Compounding Under FEMA with Practical Case Studies appeared first on Taxmann Blog.

Foreign Direct Investment (FDI) refers to an investment made by a firm or individual in one country into business interests located in another country. Typically, FDI takes the form of a parent company starting a subsidiary abroad, acquiring a controlling interest in an existing foreign company, or through a merger or joint venture with a foreign company.

FDI is crucial because it allows the direct investor to gain a foothold in foreign markets, and it often involves not just the transfer of funds but also the exchange of expertise, technology, and human resources. There are two main types of FDI:

– Horizontal FDI: This occurs when a business expands its domestic operations to a foreign country, creating the same kind of products or services in a different country. This might be done to bypass tariffs, reduce transport costs, or access new markets.
– Vertical FDI: This takes place when a company invests in a foreign business that is not a direct competitor but a supplier or distributor. It often involves different aspects of related businesses to control the supply chain or distribution network.

FDI is considered a critical driver of economic growth in developing countries, as it can lead to job creation, improved productivity, and technology transfer. It can also have a significant impact on global trade patterns.

By CA. Niki Shah – Partner | SN & Co.

Table of Contents

1. Statistics & Trends
2. Basics: FDI
3. Rights Issue and ESOP
4. Pricing Guidelines
5. Reporting Requirements
6. Case Studies
7. FDI vs FPI
8. Downstream Investment
9. Sector Specific

1. Statistics & Trends

1.1 Statistics

FDI Sectors (April 2023 – December 2023)

States Attracting Highest Inflow (April 2023 – December 2023)

1.2 Recent Trends in FDI

Macro Reasons

• Repatriation of Capital/Disinvestment by existing investors
• Global FDI down y/y 12% for 2022
• Steep decline in transactions in developed economy
• Pre Election Nervousness

2. Basics: FDI

2.1 Entry Routes

FDI Guidelines for Investing in India

Automatic Route: No prior approval from the Government of India is required.

• Available for most sectors, except those specifically restricted.
• Limits: Sectoral caps/ stipulated sector specific guidelines.
• Investors only need to inform the Reserve Bank of India (RBI) within 30 days of investment.
• Faster process since it bypasses government scrutiny.

Government Route: Prior approval from the Government of India is mandatory

• Only for cases other than Automatic Route and those mentioned in sectoral policy.
• Investors must obtain permission from the concerned ministry or department before investing.
• An entity of a country, sharing land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country (Pakistan)

2.2 Sectoral Caps

Automatic Route

• Mining
• IT
• Financial services(a)
• Insurance (a)
• Construction Development
• Infrastructure
• Manufacturing sector

Government Route

• Titanium (Mining) – 100%
• Broadcasting (Content) – 46%
• Banking for Public – 20%
• Print – 26%

Negative List

• Agriculture (b)
• Atomic energy
• Lottery, betting and gambling
• Chit fund, Nidhi company
• Trading in Transferable Development Rights
• Cigars & Cigarettes

Note: (a) Sector specific guidelines
(b) Subject to certain exceptions

2.3 Eligible Entities

• Limited Liability Partnership
• Company
• Partnership/Proprietary Concern*
• Investment Vehicles**

*A NRI or an OCI may invest on a non-repatriation basis
**I.V like REITS, AIFs, etc.

2.4 FDI Compliant Securities

*Share Warrants are those issued by an Indian company in accordance with the regulations by the SEBI

3. Rights Issue and ESOP

3.1 Rights and Bonus Issue

Investment via Rights and Bonus Issue

• Offer made must be in compliance with Companies Act, 2013
• Such issue shall not breach the sectoral cap applicable
• Listed Company: Rights Issue to PROI shall be at a price determined by the company
• Unlisted Company: Rights issue to PROI shall not be at a price less than the one offered to Resident
• The mode of payment and attendant conditions are specified by the RBI

3.2 Issue of Employees Stock Options

Eligible Issuers

• Indian companies can issue ESOs/sweat equity shares to their employees or directors abroad
• Applies to employees/directors of the company’s holding, JV or WOS

Regulatory Framework

• Scheme must comply with SEBI Act, 1992 regulations
• Alternatively, adherence to the Companies (Share Capital and Debentures) Rules, 2014 is required

Government Approval

• Prior approval needed if the investment is under the government approval route
• Mandatory government approval for issues to citizens of Bangladesh or Pakistan

Special Case

• Shares acquired via ESOs while being a resident in India must be held on a non-repatriation basis by overseas residents

Compliance

• Issued shares must adhere to the applicable sectoral investment caps

4. Pricing Guidelines

*Note that these pricing guidelines shall not be applicable for investment in equity instruments by a person resident outside India on a non-repatriation basis.

5. Reporting Requirements

6. Case Studies

Case 1: Shares Allotted Before Inward Remittance

Facts of the case

• An Indian Company was incorporated as a Private Limited on 28.12.2018.
• The company allotted 400 and 6000 equity shares of Face Value Rs. 10 each to the foreign investors ABC Ltd (UK) and XYZ (individual) respectively on 14th August 2019 against subscription to Memorandum of Association against which the company received Inward remittances from them as FDI on 8th September 2019 amounting to Rs. 67,000.
• However, the company had surplus share application money after the shares were allocated. Also, No FEMA compliances were done for FDI received and shares allotted.

Question

• What will be the course of action and Compliance required to be done?

Case 2: KYC Missing for FCGPR Filing

Facts of the case

• Company A, based in India, received an investment from foreign Investors X, Y, and Z against which Equity Shares were allotted.
• Fresh Issue of shares necessitated the filing of Form FC-GPR, for FDI received from foreign Investors.
• However, later on, while filing the Form FC-GPR, a necessary document i.e. 6-pointer KYC of the Foreign Investors could not be obtained as their local bank accounts were dormant.

Question

• What would be the appropriate way forward for Company A to ensure compliance with the FEMA regulations while facilitating the fresh issue of shares to foreign investors?

Case 3: Compliance on Bonus Issue of Shares

Facts of the case

• A Listed company X issued ESOPs to its Resident and Non-Resident Employees under different ESOP Schemes.
• Subsequently, twice the Bonus Shares were also issued to their employees in 2000 and 2006.
• Form FC-GPR was duly filled by the company under the regulatory compliances for the issuance of ESOPs to non-resident employees on a timely basis.
• However, Company X was unaware of the compliance while issuing Bonus Shares to its  Non-Resident employees.

Question

• What are the immediate regulatory steps the company must take to rectify the non-compliance?

Case 4: Delay in Filing of FC-TRS

Facts of the case

• Mr. A, a Person of Indian origin held shares of M/S XYZ Limited on Non-Repatriable basis.
• He was granted permission by RBI Foreign Exchange department to convert his investment into repatriable basis for transfer to M/S AD Limited (Non-Resident Company).
• However, the FC-TRS forms for these transfers were filed belatedly.

Question

• What are corrective measures for compliance with Regulation 10A(b)(i)

Case 5: Non-refund of Excess Share Application Money

Facts of the case

• M/S VX Limited incorporated on 31.12.2022, allotted 2,000 equity shares to M/S Dataex (NonResident).
• However, a part of the consideration was received after the allotment by the company.
• The company failed to refund the excess application money beyond the prescribed time limit of 75 days from the date of inward remittance.

Question

• What regulations should the company have followed and the way forward?

Case 6: Fund Transfer to NRO/NRE Account

Facts of the case

• Mr. X who is Non-Resident transferred equity shares of an Unlisted Company to M/s AB Private Limited (Resident Indian).
• M/s AB Private Limited transferred the Sales consideration to Mr. X’s (Non-Resident) NRO A/c.

Questions

• Is M/s AB Private Limited is liable for any compliance to be done?
• What are the compliances if the Sales consideration is transferred to NRE A/c?

Case 7: Money Exchanger

Facts of the case

• M/s XYZ Private Limited incorporated in India received Foreign Investment from Mr. A (NonResident)
• Mr. A who is Non-Resident transferred the Share Application money via the Money Exchanger platform. The company received the Share Application money in INR as a result.
• Since the transaction was not processed under the traditional banking channels, FIRC copy could not be raised.
• Hence, M/s XYZ Private Limited was unable to file Form FC-GPR.
• XE International Money Transfer, Payoneer, PayPal

7. FDI vs FPI

7.1 Foreign Direct Investment

Definition

Investment through equity instruments by a PROI in an unlisted Indian company; or in ten per cent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company.

Control & Ownership

Implies acquiring a substantial degree of control and ownership in the foreign business entity. The investor often holds a significant stake, usually 10% or more, in the company.

Purpose

Often aimed at establishing production facilities, expanding operations, accessing new markets, or obtaining strategic assets in a foreign country.

Economic Impact

Generally viewed as more beneficial for the host country’s economy in the long run due to technology transfer, employment generation, and infrastructure development.

Investment Vehicles

FDI is allowed in entities like companies, partnerships, and trusts*, subject to certain conditions and guidelines outlined under FEMA.

Pricing Guidelines

Pricing guidelines for issuing and transferring shares are specified under FEMA regulations.

Registration Requirements

There is no such requirement here. However, there are compliance and reporting requirements under FEMA for entities receiving FDI.

7.2 Foreign Portfolio Investment

Definition

Investments by non-residents in Indian company equity instruments, where the investment is below 10% of the paid-up capital or equity series of a listed company.

Control & Ownership

Generally does not result in ownership or significant control over the invested entity.

Purpose

Brings in capital from foreign investors, which can be used for the development and growth of the country’s financial markets. It allows for a wider investor base.

Economic Impact

Provides short-term capital for the country’s financial markets, which can help in improving liquidity. However, it can lead to volatility.

Investment Vehicles

FPI is allowed mainly in marketable securities like Listed Companies , Government Bonds, Corporate Bonds, Mutual Funds, ETFs.

Pricing Guidelines

The purchase and sale of shares must comply with the market price for listed companies. For unlisted companies, investment by FPIs is subject to guidelines similar to FDI but mainly focused on debt instruments.

Registration Requirements

FPIs need to obtain a certificate of registration from SEBI and comply with the conditions prescribed in the SEBI (FPI) Regulations, 2014. The process involves due diligence  requirements, adherence to KYC norms, and other regulatory compliances.

7.3 FDI vs FPI: Cases

8. Downstream Investment

• Downstream Investment refers to the investment made by an Indian entity that has received foreign direct investment (FDI) into another Indian company
• Reporting requirements within 30 days of investment with DIPP/FIPB introduced
• Indian company making downstream investment not permitted to leverage funds from domestic market

• FI to include all types of foreign investments
• For RIC own and control are cumulative conditions; for NRE these are non-cumulative
• The methodology to apply to every stage of investment at Indian company

1. If ICO2 & ICO1 owned and controlled by RIC, investment by ICO1 in ICO2 is not indirect FDI 1
2. If ICO1 is owned or controlled by NRE, investment by ICO1 in ICO2 is considered indirect FDI
3. If ICO1 holds 100% in ICO2, NRE investment in ICO1 is considered indirect FDI in ICO2

Total FI is sum of Direct FI and Indirect FI

9. Sector Specific

9.1 Sectoral Caps

9.2 Pharmaceutical Sector

Two Major Types:

1. Greenfield Investment: The parent company creates a new operation in a foreign country from the ground up.
2. Brownfield Investment: The parent company creates a new operation in a foreign country from the ground up.

General Rule: ‘Non-compete’ clause shall not be allowed except in special circumstances with the Government approval.

Brownfield Specific Rules

• Maintain the production level of essential medicines at the highest of the past three years for the next five years.
• Keep R&D spending at the highest level of the past three years for the next five years.
• Report any technology transfers to the Ministry of Health and Family Welfare or Department of Pharmaceuticals.
• The Ministry of Health and Family Welfare and other relevant authorities will monitor compliance with these conditions.

9.3 Real Estate Sector

Construction Development: Townships, Housing, Built-up infrastructure

Permissible Activities

1. Development of Townships
2. . Construction of Residential/Commercial Premises
3. Roads and Bridges
4. Hotels, Resorts, Hospitals , Educational Institutes

Exit and Repatriation Conditions

• Exit permitted upon project completion or after developing basic infrastructure (e.g., roads, water supply).
• Foreign investors can exit before project completion after a 3-year lock-in period for each investment tranche, under automatic route.

Transfer of Stake

• Transfer of stake from one non-resident to another is unrestricted by lock-in periods or government approval, without requiring repatriation of investment.

Project Standards Compliance

• Projects must meet all applicable norms, standards, and regulatory requirements, including land use and community amenities.

Developed Plots Sales

• Only plots with completed trunk infrastructure are to be sold as “developed plots.“

Responsibilities of the Indian Investee Company

• Must secure all necessary approvals and comply with local regulations, including development charges and infrastructure development.

Monitoring of Compliance

• Local or state government bodies to monitor developer compliance with the conditions.

Prohibited FDI Activities

• FDI not permitted in real estate business, construction of farmhouses, and trading in transferable development rights (TDRs).
• Real estate business is defined as dealing in land and immovable property for profit, excluding specified development projects.

Lock-in Period Exemptions

• Lock-in period does not apply to investments in hotels, tourist resorts, hospitals, SEZs, educational institutions, old age homes, and investments by NRIs.

FDI in Completed Projects

• 100% FDI allowed under automatic route in completed projects for townships, malls, business centres, etc., with a 3-year lock-in period per FDI tranche.
• Transfer of ownership/control to non-residents permitted, but immovable property transfers are restricted during the lock-in.

Notes:
The term “real estate business” does not include the development of townships, construction projects, or earning rent/income from property leasing.
Completion of the project is determined according to local regulations.

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What are the regulatory updates and guidelines issued by RBI addressing the operations and responsibilities of Regulated Entities (REs)?

The Reserve Bank of India (RBI) frequently issues regulatory updates and guidelines to address the operations and responsibilities of Regulated Entities (REs) within the financial sector. These updates are critical for maintaining the stability, transparency, and efficiency of the financial system. REs include a wide range of financial institutions such as commercial banks, non-banking financial companies (NBFCs), asset reconstruction companies, small finance banks, and credit information companies, among others.

Key Areas of Regulatory Focus
1. Credit Regulation
2. Operational Guidelines
3. Transparency and Disclosure
4. Customer Protection
5. Financial Stability
6. Innovation and Inclusivity

Table of Contents

1. Display of information – Secured assets possessed under the SARFAESI Act, 2002
2. Regulatory measures towards consumer credit and bank credit to NBFCs
3. Strengthening of customer service rendered by Credit Information Companies and Credit Institutions
4. Data Quality Index for Commercial and Microfinance Segments by Credit Information Companies
5. Responsible Lending Conduct – Release of Movable/Immovable Property Documents on Repayment/Settlement of Personal Loans
6. Operation of Pre-Sanctioned Credit Lines at Banks through Unified Payments Interface (UPI)
7. Reset of Floating Interest Rate on Equated Monthly Instalments (EMI) based Personal Loans
8. Fair Lending Practice – Penal Charges in Loan Accounts
9. General Credit Card (GCC) Facility – Review
10. Master Circular – Asset Reconstruction Companies

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1. Display of information – Secured assets possessed under the SARFAESI Act, 2002

1.1 Introduction

The Reserve Bank has directed the Regulated Entities (REs), which are secured creditors as per the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, to display information in respect of the borrowers whose secured assets have been taken into possession by the REs under the Act.

1.2 Summary

REs shall upload this information on their website in the format as prescribed by RBI. The first such list shall be displayed on the website of REs within six months from the date of this circular, and the list shall be updated on monthly basis. These guidelines are applicable to all Commercial Banks including Small Finance Banks and excluding Payment Banks, Local Area Banks, Regional Rural Banks, all Primary (Urban) Co-operative Banks/State Co-operative Banks/Central Co-operative Banks, all India Financial Institutions (Exim Bank, NABARD, NHB, SIDBI and NaBFID), all Non-Banking Financial Companies including Housing Finance Companies and all Asset Reconstruction Companies.

1.3 Comments/Rationale

These guidelines help to improve transparency in the assets taken into possession by the regulated entities under SARFAESI Act, 2002.

1.4 Reference/Link

RBI/2023-24/63 DoR.FIN.REC.41/20.16.003/2023-24, dated September 25, 2023
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12539&Mode=0

2. Regulatory measures towards consumer credit and bank credit to NBFCs

2.1 Introduction

In light of high growth in certain components of consumer credit and increasing dependency of NBFCs on bank borrowings, Reserve Bank of India has advised banks and Non-Banking Financial Companies (NBFCs) to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interest.

2.2 Summary

A. (a) Consumer credit exposure of commercial banks

As per extant instructions applicable to commercial banks, consumer credit attracts a risk weight of 100%. On a review, it has been decided to increase the risk weights in respect of consumer credit exposure of commercial banks (outstanding as well as new), including personal loans, but excluding housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery, by 25 percentage points to 125%.

(b) Consumer credit exposure of NBFCs

In terms of extant norms, NBFCs’ loan exposures generally attract a risk weight of 100%. On a review, it has been decided that the consumer credit exposure of NBFCs (outstanding as well as new) categorised as retail loans, excluding housing loans, educational loans, vehicle loans, loans against gold jewellery and microfinance/SHG loans, shall attract a risk weight of 125%.

(c) Credit card receivables

As per extant instructions, credit card receivables of Scheduled Commercial Banks (SCBs) attract a risk weight of 125% while that of NBFCs attract a risk weight of 100%. On a review, it has been decided to increase the risk weights on such exposures by 25 percentage points to 150% and 125% for SCBs and NBFCs respectively.

B. Bank credit to NBFCs

In terms of extant norms, exposures of SCBs to NBFCs, excluding core investment companies, are risk weighted as per the ratings assigned by accredited External Credit Assessment Institutions (ECAI). On a review, it has been decided to increase the risk weights on such exposures of SCBs by 25 percentage points (over and above the risk weight associated with the given external rating) in all cases where the extant risk weight as per external rating of NBFCs is below 100%. For this purpose, loans to HFCs, and loans to NBFCs which are eligible for classification as priority sector in terms of the extant instructions shall be excluded.

C. Strengthening credit standards

(a) The REs shall review their extant sectoral exposure limits for consumer credit and put in place, if not already there, Board approved limits in respect of various sub-segments under consumer credit as may be considered necessary by the Boards as part of prudent risk management. In particular, limits shall be prescribed for all unsecured consumer credit exposures. The limits so fixed shall be strictly adhered to and monitored on an ongoing basis by the Risk Management Committee.

(b) All top-up loans extended by REs against movable assets which are inherently depreciating in nature, such as vehicles, shall be treated as unsecured loans for credit appraisal, prudential limits and exposure purposes.

2.3 Comments/Rationale

These measures are aimed at building suitable internal surveillance system in banks and NBFCs as a suitable risk management measure, at a backdrop of high growth in consumer credit domain.

2.4 Reference/Link

RBI/2023-24/85. DOR.STR.REC.57/21.06.001/2023-24 dated, 16th November, 2023
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12567&Mode=0

3. Strengthening of customer service rendered by Credit Information Companies and Credit Institutions

3.1 Introduction

The Statement on Developmental and Regulatory Policies sets out various developmental and regulatory policy measures relating to Financial Markets, Regulation and Supervision and Payment and Settlement Systems. A comprehensive framework has been put in place for strengthening and improving the efficacy of the grievance redressal mechanism and customer service provided by the Credit Institutions (CIs) and Credit Information Companies (CICs). The directions shall come into effect six (6) months from the date of this circular. CICs and CIs are directed to put in place necessary systems and processes to implement these directions within this period.

3.2 Summary

In exercise of the powers conferred by sub-section (1) of section 11 of the Credit Information Companies (Regulation) Act, 2005 (CICRA, 2005), the Reserve Bank of India directs CICs and CIs to implement the directions as detailed below:

Intimation of access to Credit Information Report and to update credit information with Credit Information Companies

• CICs shall send alerts through SMS/email to customers when their Credit Information Report (CIR) is accessed by the Specified Users (SUs) as defined in sub-section (1) of section 2 of CICRA, 2005, wherever mobile number/email ID details of the customers are available. The alerts shall be sent by CICs only when the CIR enquiry reflects in the CIR of the customer.
• CIs shall send alerts through SMS/email to customers while submitting information to CICs regarding default/Days Past Due (DPD) in existing credit facilities, wherever the mobile number/email ID details are available.
• To enable sending of alerts through SMS/email, the Uniform Credit Reporting Format for reporting credit information by CIs to CICs has been modified.
• CIs are advised to organise special awareness campaigns to sensitise their customers about benefits of submission of their mobile numbers/email IDs.

Setting up of Nodal points/officials by CIs

• CIs shall have a dedicated nodal point/official of contact for CICs for redress of customer grievances. Details of the nodal point/official along with email ID and telephone/mobile number shall be furnished by CIs to CICs.
• CIs shall inform CICs of any changes in the nodal points/official within five (5) calendar days of such a change.

Root Cause Analysis of the Complaints by CIs

• CIs shall undertake Root Cause Analysis (RCA) of the customer grievances at least on a half yearly basis. CIs shall also use, among others, information on data rejected by the CICs and Data Quality Index (DQI) provided by CICs as sources of information for carrying out RCA.
• Analysis of the RCA shall be reviewed by the Top Management of CIs, at least, on an annual basis.

Reasons for rejection of requests for data correction by CIs

• CIs shall inform the customers the reasons for the rejection of their request for data correction, if any, to enable such customers to better understand the issues in the CIR.
• A list of reasons for rejection of requests shall be circulated by CICs to all CIs. CIs shall use the same while communicating the rejections of the request for data correction made by customers/CICs during the grievance redress process.

Periodic review of match logic algorithm by CICs

• CICs shall have a board-approved policy for undertaking periodic review (at least on a half-yearly basis) of the ‘Search & Match’ logic algorithm implemented by them to provide Credit Information Report (CIR) of a borrower.
• Root Cause Analysis (RCA) of the complaints being undertaken by CICs shall be used to identify issues in the existing ‘Search & Match’ logic algorithm.
• Results of the RCA and subsequent changes in the search and match logic shall be placed before the Board of Directors of the CIC for review.

Ingestion of credit information data by CICs

• CICs shall ingest credit information data received from the Credit Institutions (CIs) as per its data acceptance rules, into their databases within seven (7) calendar days of its receipt from the CIs.
• In case of data rejection, CICs shall communicate to the concerned CI, regarding rejection of the data with reasons, within seven (7) calendar days of receipt of the data.

Disclosure of complaints on credit information reporting by CICs

CICs shall disclose on their websites, details of complaints registered against them and Cis.

Easy access to Free Full Credit Report for the individuals by CICs

CICs shall provide easy access to Free Full Credit Report (FFCR) including credit score, once in a year (January- December), to individuals whose credit history is available with the CIC by displaying the link prominently on their website (on the Home page itself) so that individuals are able to access their FFCR conveniently.

CICs and CIs which contravene or default in adherence to the above directions shall be liable for penal action as per the provisions of CICRA, 2005.

3.3 Comments/Rationale

These guidelines are aimed at reduction in customer complaints regarding credit information reporting and the functioning of CICs.

3.4 Reference/Link

RBI/2023-24/73 DoR.FIN.REC.49/20.16.003/2023-24, dated October 26, 2023
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12553&Mode=0

4. Data Quality Index for Commercial and Microfinance Segments by Credit Information Companies

4.1 Introduction

A Committee was constituted by the RBI to Recommend Data Format for Furnishing of Credit Information to Credit Information Companies. In line with the same, a common Data Quality Index (DQI) has been implemented to assess the quality of data submissions by Credit Institutions (CIs) to Credit Information Companies (CICs) and to improve the same over a period of time. Currently, the DQI is being used for data submitted under the consumer segment.

4.2 Summary

Data Quality Index would assist banks/FIs in determining the gaps in their data and also move towards improving their performance over a period of time. In addition, they would also be able to rank their own performance against that of their peers and identify their relative position. Annex 6 of the Report contains a draft Data Quality Index as agreed upon by all the CICs giving different parameters for assessing the data submitted by the banks/FIs. CICs and banks/FIs may adopt this Data Quality Index for assessing the quality of data submissions and make efforts towards improving data quality and minimising data rejections, within a time period of six months.

With a view to enable further implementation of DQI, it has been decided that CICs shall prepare DQIs for Commercial and Microfinance segments also. CICs shall provide the DQIs for Commercial and Microfinance segments to all CIs latest by March 31, 2024.

Further, CICs are advised as under:

• CICs shall provide DQIs for Commercial and Microfinance segments in the form of numeric scores on a monthly basis to all member credit institutions.
• DQI scores for Commercial and Microfinance segments shall be provided at CI and file level. The DQI scores for Commercial and Microfinance segments at CI level shall be computed as weighted average of file level DQI scores of commercial and microfinance segment respectively of that CI.
• CICs shall compute industry level DQIs for each of the three reporting segments as weighted average of the CI level DQI in their respective category (e.g. Public Sector Banks, Private Sector Banks, Foreign Banks, Co-operative Banks, RRBs, NBFCs etc.) on monthly basis. Further, a half yearly Industry Benchmark shall be calculated as a rolling average of preceding six months Industry level DQI score of respective category of CIs.
• CICs shall provide reasons for decline in score to each CI, if its (a) CI level score has declined over the previous month or (b) CI level score is lower than the half yearly industry benchmark.
• CICs shall provide monthly data of CI level DQI and industry level DQI of all segments to Department of Supervision, Reserve Bank of India, Central Office at half yearly intervals as on September 30 and March 31 each year, for information and monitoring purposes.

CIs are advised to undertake half yearly review of the DQI for all segments to improve the quality of the data being submitted to CICs. Corrective steps taken on the above issues along with a report on the same shall be placed before its top management by each CI for review within two months from the end of that half-year.

4.3 Comments/Rationale

Tracking the quality of data in financial industry helps maintain the accuracy, completeness, consistency, reliability, relevance of the data involved in making constructive decisions in the banking sector.

4.4 Reference/Link

RBI/2023-24/62 DoR.FIN.REC.39/20.16.056/2023-24, dated September 20, 2023
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12537&Mode=0

5. Responsible Lending Conduct – Release of Movable/Immovable Property Documents on Repayment/Settlement of Personal Loans

5.1 Introduction

RBI, in line with guidelines on Fair Practices Code, has directed all Regulated Entities (REs) to release all movable/immovable property documents within a period of 30 days upon receiving full repayment and closure of loan account.

5.2 Summary

The borrower shall be given the option of collecting the original movable/immovable property documents either from the banking outlet/branch where the loan account was serviced or any other office of the RE where the documents are available, as per her/his preference. The timeline and place of return of original movable/immovable property documents will be mentioned in the loan sanction letters issued on or after the effective date. In order to address the contingent event of demise of the sole borrower or joint borrowers, the REs shall have a well laid out procedure for return of original movable/immovable property documents to the legal heirs. Such procedure shall be displayed on the website of the REs along with other similar policies and procedures for customer information.

In case of delay in releasing of original movable/immovable property documents or failing to file charge satisfaction form with relevant registry beyond 30 days after full repayment/settlement of loan, the RE shall communicate to the borrower reasons for such delay. In case where the delay is attributable to the RE, it shall compensate the borrower at the rate of ₹ 5,000/- for each day of delay.

In case of loss/damage to original movable/immovable property documents, either in part or in full, the REs shall assist the borrower in obtaining duplicate/certified copies of the movable/immovable property documents and shall bear the associated costs, in addition to paying compensation as indicated earlier. In such scenarios, an additional time of 30 days will be available to the REs to complete this procedure and the delayed period penalty will be calculated thereafter (i.e., after a total period of 60 days).

5.3 Comments/Rationale

These directions will reduce customer grievances and disputes by addressing the issues faced by the borrowers. It will promote responsible lending conduct among the REs, which in turn lessens the various divergent practices observed by REs in release of such movable/immovable property documents.

5.4 Reference/Link

RBI/2023-24/60 DoR.MCS.REC.38/01.01.001/2023-24, dated September 13, 2023
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12535&Mode=0

6. Operation of Pre-Sanctioned Credit Lines at Banks through Unified Payments Interface (UPI)

6.1 Introduction

Unified Payments Interface (UPI) is a robust payments platform supporting an array of features. Presently it handles 75% of the retail digital payments volume in India. The UPI system has been leveraged to develop products and features aligned to India’s payments digitisation goals. Recently, RuPay credit cards were permitted to be linked to UPI. At present, UPI transactions are enabled between deposit accounts at banks, sometimes intermediated by pre-paid instruments including wallets. It is now proposed to expand the scope of UPI by enabling transfer to/from pre-sanctioned credit lines at banks, in addition to deposit accounts. In other words, UPI network will facilitate payments financed by credit from banks.

6.2 Summary

As for the change, RBI aims to expand the scope of UPI by enabling transfer to/ from pre-sanctioned credit lines at banks. In this feature, payments through a pre-sanctioned credit line issued by a Scheduled Commercial Bank to individuals, with prior consent of the individual customer, are enabled for transactions using the UPI System.

Currently, savings accounts, overdraft accounts, prepaid wallets and credit cards can be linked to UPI.

Banks may, as per their Board approved policy, stipulate terms and conditions of use of such credit lines. The terms may include, among other items, credit limit, period of credit, rate of interest, etc.

6.3 Comments/Rationale

Earlier, only the deposited amount could be transacted through the UPI. With this feature, amount taken on credit too can be transacted via UPI channel. This may reduce the cost of credit offers. Also, may pave path to building unique credit products for Indian markets.

6.4 Reference/Link

RBI/2023-24/58 CO.DPSS.POLC.No.S-567/02-23-001/2023-2024, dated September 04, 2023
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12532&Mode=0

7. Reset of Floating Interest Rate on Equated Monthly Instalments (EMI) based Personal Loans

7.1 Introduction

As per the notification, any increase in the EMI/tenor or both on account of Floating Interest Rate shall be communicated to the borrower immediately through appropriate channels. At the time of reset of interest rates, the REs (Regulated Entities) shall provide the option to the borrowers to switch over to a fixed rate as per their board approved policy.

7.2 Summary

Following are the required guidelines for implementation and compliance:

• At the time of sanction, REs shall clearly communicate to the borrowers about the possible impact of change in benchmark interest rate on the loan leading to changes in EMI and/or tenor or both. Subsequently, any increase in the EMI/tenor or both on account of the above shall be communicated to the borrower immediately through appropriate channels.
• At the time of reset of interest rates, REs shall provide the option to the borrowers to switch over to a fixed rate as per their Board approved policy. The policy, inter alia, may also specify the number of times a borrower will be allowed to switch during the tenor of the loan.
• The borrowers shall also be given the choice to opt for

1. 1. enhancement in EMI or elongation of tenor or for a combination of both options; and,
   2. to prepay, either in part or in full, at any point during the tenor of the loan. Levy of foreclosure charges/pre-payment penalty shall be subject to extant instructions.

• All applicable charges for switching of loans from floating to fixed rate and any other service charges/administrative costs incidental to the exercise of the above options shall be transparently disclosed in the sanction letter and also at the time of revision of such charges/costs by the REs from time to time.
• REs shall ensure that the elongation of tenor in case of floating rate loan does not result in negative amortisation.
• REs shall share/make accessible to the borrowers, through appropriate channels, a statement at the end of each quarter which shall at the minimum, enumerate the principal and interest recovered till date, EMI amount, number of EMIs left and annualized rate of interest/Annual Percentage Rate (APR) for the entire tenor of the loan. The REs shall ensure that the statements are simple and easily understood by the borrower.

Apart from the equated monthly instalment loans, these instructions would also apply, with necessary changes, to all equated instalment based loans of different periodicities.

In case of loans linked to an external benchmark under the External Benchmark Lending Rate (EBLR) regime, the banks should follow extant instructions and also put in place adequate information systems to monitor transmission of changes in the benchmark rate to the lending rate.

REs shall ensure that the above instructions are extended to the existing as well as new loans suitably by December 31, 2023.

These instructions are issued under sections 21, 35A and 56 of the Banking Regulation Act, 1949, sections 45JA, 45L and 45M of the Reserve Bank of India Act, 1934, and sections 30A and 32 of the National Housing Bank Act, 1987.

7.3 Comments/Rationale

By implementing these guidelines, the consumer grievances due to increase in loan tenor or increase in EMI amount with regard to EMI-based floating rate personal loans, without proper communication or consent of the borrower’s will get reduced considerably.

7.4 Reference/Link

RBI/2023-24/55 DOR.MCS.REC.32/01.01.003/2023-24, dated August 18, 2023
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12529&Mode=0

8. Fair Lending Practice – Penal Charges in Loan Accounts

8.1 Introduction

The RBI has amended the guidelines for lenders on charging penal charges in loan  accounts. This is done to ensure that the consumers are not exploited to enhance revenue generation for the respective lending institutions. These guidelines are effective from January 1, 2024.

8.2 Summary

Reserve Bank has issued various guidelines to the Regulated Entities (REs) to ensure reasonableness and transparency in disclosure of penal interest. Under the extant guidelines, lending institutions have the operational autonomy to formulate Board approved policy for levy of penal rates of interest. It has been observed that many REs use penal rates of interest, over and above the applicable interest rates, in case of defaults/non-compliance by the borrower with the terms on which credit facilities were sanctioned.

The intent of levying penal interest/charges is essentially to inculcate a sense of credit discipline and such charges are not meant to be used as a revenue enhancement tool over and above the contracted rate of interest. However, supervisory reviews have indicated divergent practices amongst the REs with regard to levy of penal interest/charges leading to customer grievances and disputes.

On a review of the practices followed by REs for charging penal interest/charges on loans, the following instructions are issued for adoption.

• Penalty, if charged, for non-compliance of material terms and conditions of loan contract by the borrower shall be treated as ‘penal charges’ and shall not be levied in the form of ‘penal interest’ that is added to the rate of interest charged on the advances. There shall be no capitalisation of penal charges i.e., no further interest computed on such charges. However, this will not affect the normal procedures for compounding of interest in the loan account.
• The REs shall not introduce any additional component to the rate of interest and ensure compliance to these guidelines in both letter and spirit.
• The REs shall formulate a Board approved policy on penal charges or similar charges on loans, by whatever name called.
• The quantum of penal charges shall be reasonable and commensurate with the non-compliance of material terms and conditions of loan contract without being discriminatory within a particular loan/product category.
• The penal charges in case of loans sanctioned to ‘individual borrowers, for purposes other than business’, shall not be higher than the penal charges applicable to non-individual borrowers for similar non-compliance of material terms and conditions.
• The quantum and reason for penal charges shall be clearly disclosed by REs to the customers in the loan agreement and most important terms & conditions/Key Fact Statement (KFS) as applicable, in addition to being displayed on REs website under Interest rates and Service Charges.
• Whenever reminders for non-compliance of material terms and conditions of loan are sent to borrowers, the applicable penal charges shall be communicated. Further, any instance of levy of penal charges and the reason there for shall also be communicated.
• These instructions shall come into effect from January 1, 2024. REs may carry out appropriate revisions in their policy framework and ensure implementation of the instructions in respect of all the fresh loans availed/renewed from the effective date. In the case of existing loans, the switchover to new penal charges regime shall be ensured on next review or renewal date or six months from the effective date of this circular, whichever is earlier.

The above instructions are issued under sections 21, 35A and 56 of the Banking Regulation Act, 1949, sections 45JA, 45L and 45M of the Reserve Bank of India Act, 1934, and section 30A of the National Housing Bank Act, 1987 and shall be updated in the relevant Master Directions/Master Circulars of the applicable REs. The list of amendments to the Master Directions/Master Circulars has been provided in the Annex.

These instructions shall, however, not apply to Credit Cards, External Commercial Borrowings, Trade Credits and Structured Obligations which are covered under product specific directions.

8.3 Comments/Rationale

The guidelines issued on regularising fair lending practices will ensure reasonable transparency in disclosure of penal interest. Also, this will promote credit discipline among consumers.

8.4 Reference/Link

RBI/2023-24/53 DoR.MCS.REC.28/01.01.001/2023-24, dated August 18, 2023
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12527&Mode=0

9. General Credit Card (GCC) Facility – Review

9.1 Introduction

RBI has revised the norms for General Credit Card (GCC) Scheme to include the entrepreneurial credit extended to individuals. To ensure greater credit linkage for all productive activities within the overall Priority sector guidelines and to capture all credit extended by banks to individuals for non-farm entrepreneurial activity the GCC guidelines are being revised.

9.2 Summary

The revised instructions on GCC are as follows:

• The GCC Scheme shall henceforth be called “General Credit Card (GCC) Facility”.
• The instructions shall apply to all banks which are eligible to issue credit cards under the above Master Direction.
• Individuals/entities sanctioned working capital facilities for non-farm entre- preneurial activities which are eligible for classification under the priority sector guidelines, may be issued General Credit Cards.
• GCC shall be issued in the form of a credit card conforming to the stipulations in the above Master Direction as updated from time to time.
• The terms and conditions of the credit facilities extended in the form of GCC shall be as per the Board approved policies of the banks, within the overall framework laid down by Reserve Bank. Guidelines on collateral free lending for micro and small units issued from time to time shall apply.
• Bank shall adhere to the instructions on reporting GCC data as issued by RBI from time to time.

9.3 Comments/Rationale

The revised General Credit Card (GCC) Scheme norms will enable increased flow of credit to individuals for entrepreneurial activity in the non-farm sector provided through the General Credit Card.

9.4 Reference/Link

RBI/2023-24/19 FIDD.MSME & NFS.BC.No.06/06.02.31/2023-24, dated April 25, 2023
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12492&Mode=0

10. Master Circular – Asset Reconstruction Companies

10.1 Introduction

RBI has issued guidelines and directions relating to registration, measures of asset reconstruction, functions of the company, prudential norms, acquisition of financial assets and matters related thereto.

ARCs are required to comply with Indian Accounting Standards (Ind AS) for the preparation of their financial statements. In order to promote a high quality and consistent implementation as well as facilitate comparison and better supervision. The Reserve Bank has issued regulatory guidance on Ind AS which along with subsequent instructions on the subject is applicable on such ARCs for preparation of their financial statements from financial year 2019-20 onwards.

10.2 Summary

Every ARC shall apply for registration in the form of application hosted on the Bank’s website and obtain a certificate of registration from the Bank as provided under section 3 of the Act.

The ARC seeking registration from the Bank shall submit their application duly filled in with all the relevant annexures/supporting documents to the Chief General Manager-in-Charge, Department of Regulation, Central Office, Reserve Bank of India, 2nd Floor, Main Office Building, Shahid Bhagat Singh Marg, Fort, Mumbai – 400 001.

An ARC, which has obtained a Certificate of Registration issued by the Bank under Section 3 of the Act, can undertake both securitisation and asset reconstruction activities.

An ARC shall commence business within six months from the date of grant of Certificate of Registration by the Bank.

Net Owned Fund (NOF) for ARCs shall be minimum ₹ 300 crore on an ongoing basis with effect from October 11, 2022. Consequently, any ARC obtaining the certificate of registration on or after October 11, 2022 shall not commence the business of securitisation or asset reconstruction without having minimum NOF of ₹ 300 crore.

Every ARC shall frame with the approval of its Board of Directors, a ‘Financial Asset Acquisition Policy’, within 90 days of grant of Certificate of Registration, which shall clearly lay down the policies and guidelines.

Every ARC shall frame policy guidelines regarding change in or takeover of the management of the business of the borrower, with the approval of its Board of Directors and the borrowers shall be made aware of such policy of the ARC.

ARCs shall report to the Bank all cases where they have taken action to cause change in or takeover of the management of the business of the borrower for realization of its dues from the borrower.

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