Tag Archives: RBI

Relaxations to FPIs and Companies under bankruptcy wrt ECB

Regulatory update: RBI’s Bi-Monthly Monetary Policy Statement grants important relaxations to FPIs and Companies under bankruptcy with respect to ECB

The Reserve Bank of India (RBI) on 7 February 2019 has issued its Sixth Bi-monthly Monetary Policy Statement (Monetary Policy Statement), for the current fiscal year 2018-19. The key relaxations announced for foreign investors are as follows:

  1. Relaxation to FPIs investing under the debt route:

Under the extant framework for FPI investment in corporate debt, the RBI’s A.P. (DIR Series) Circular No. 31 dated June 15, 2018 restricted an FPI from having more than 20% exposure of its total corporate bond portfolio, in the corporate debt market in a single corporate (including exposure to entities related to the corporate). Imposed with the aim of incentivizing FPIs to maintain a diverse portfolio of assets, existing FPIs were also given an exemption from this requirement till end of March 2019 to adjust their portfolios. However, the market feedback according to the RBI indicated that FPIs have been constrained by the earlier requirements, and relaxations were needed.

Accordingly, in order to encourage investment in the Indian corporate debt market, the RBI vide the Monetary Policy Statement, removed the abovementioned restriction and has declared that all FPIs shall henceforth again be permitted to invest any portion of its corporate bond portfolio in a single borrower entity. The Monetary Policy Statement indicates that RBI would issue a circular in this regard by mid-February 2019 to make it official.

The Monetary Policy Statement however did not provide any relaxation on the following key restrictions imposed vide the aforementioned A.P. (DIR Series) Circular No. 31 dated June 15, 2018:

  1. Investment by a single FPI or a group of related FPIs shall not exceed 50% of the issue size of a corporate bond; and
  2. At any point of time, a FPI’s investments in corporate / government bonds maturing within one year shall not exceed 20% of the FPI’s total portfolio in corporate / government bonds.
  1. Relaxation ECB framework norms on end-use restrictions for companies under bankruptcy:

Under the extant External Commercial Borrowing (ECB) framework, any borrowing proceeds from an ECB could not be utilized for repayment or for on-lending for repayment of domestic rupee loans. However, cognizant of the prospect that resolution applicants under Corporate Insolvency Resolution Process (CIRP) under Insolvency and Bankruptcy Code (IBC), 2016 might find it attractive to borrow abroad to repay the existing lenders, the RBI has decided to relax the end-use restrictions for resolution applicants under the CIRP.

Further under A.P. (DIR Series) Circular No. 18 also dated 7 February 2019 the resolution applicants, who are otherwise eligible borrowers, have been allowed to raise ECBs from recognised lenders, except the branches/ overseas subsidiaries of Indian banks, for repayment of Rupee term loans of the target company under the approval route.

Sources:

  1. Sixth Bi-monthly Monetary Policy Statement for the current fiscal year 2018-19: https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=46237
  2. P. (DIR Series) Circular No. 18 date February 07, 2019: https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11472&Mode=0
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Authorisation of New Retail Payment Systems : RBI’s Policy Paper

Reserve Bank of India (“RBI”) vide its press release on January 21, 2019 has invited comments on the Policy Paper on Authorisation of New Retail Payment Systems (“Policy Paper”). Earlier in June 26, 2018 RBI had released a Statement on Developmental and Regulatory Policies which aimed to minimize the concentration risk in retail payments systems and foster innovation and competition in the retail payments market. With this objective in mind RBI has placed this Policy Paper in public domain, inviting comments till February 20, 2019.

Existing retail payment services and operators in India

RBI is the regulator for payment and settlements systems under the Payment and Settlement Systems Act, 2007 and it ensures that the payment systems operate in a secure and efficient manner with regard to banks as well as non-bank entities. Banks have been the traditional gateway to payment systems but with the demand for varied payment systems and technological changes, non-bank entities have been granted access to the payment systems. These non-bank entities have been competing with the banks by providing retail electronic payment services. As a result, RBI has been issuing guidelines for various payment systems and granting the non-bank entities to setup and operate payment systems. It is to be noted that RBI had granted permission to eighty- nine (89) non-bank entities to act as payment system operators.

Analysis of the current landscape w.r.t retail payment system operators

Though there are many payment systems such as card networks, Prepaid instrument issuers (PPIs), ATM networks, etc. there are only a handful of payment operators in India. As a result of which, there are concerns around concentration and competition and its impact on the current financial of the country. Therefore there are a number of issues which need attention. The issues for discussion are as follows:

  1. a single operator having multiple and varied retail payment systems versus diversification across multiple operators;
  2. payments systems managed by a single operator such as Unified Payments Interface (UPI), Immediate Payment Service (IMPS), Aadhaar Enabled Payment System (AePS) ,etc. versus multiple systems with similar product features being offered by multiple operators;
  3. availability of a window for licensing operators of a payment system on-tap; and
  4. reviewing the criteria of licensing to foster innovation and competition and to broad base potential applicants.

RBI has classified the payment systems as follows:

Serial Number. Basis of Classification Particulars
1. Number of operators 1.    Single operator for a single or multiple retail payments systems

·         NPCI- National Financial Switch (NFS), IMPS, BHIM Aadhaar Pay, National Electronic Toll Collection (NETC), etc.

·         Empays-IMT

 

2.    Multiple operators for similar payment services- to name a few:

·         ATM networks- 5

·         Card Payment Networks- 5

·         Prepaid Payment Instrument (PPI) issuers- 48 non-banks and 60 banks

 

2. Type of payment services Classification on the payment service based on the end user as under:

1.    Fund transfer and merchant payments systems- IMPS, UPI, PPI, Aadhaar based payments, etc.

2.    Card based payments- Card networks, ATM networks

3.    Bulk and repetitive payments, utility payments- NACH, BBPS

4.    Toll collection- NETC

5.    MSME receivables’ financing- TReDs

NPCI has become pivotal to the operation of many critical retails payments systems in the country. By October 2018, NPCI was accounting for almost 48% of the retail electronic payment transactions (excluding paper) in volume to 15% of the value of the retail electronic payment transactions.

The advantages of having concentrated system operations with few entities are as follows: (a) leads to standardisation with uniform and tested payment systems; (b) less pressure on capital and infrastructure; and (c) a unity of approach by the regulators. Whereas the disadvantages of having a single operator are as follows: (a) absence of redundancy and fall-back arrangements may impact continued availability; (b) inadequate competition may lead to complacency with no upgradation and improvement in the product; and (c) increase of the prices at which the services are being offered with reduction in quality of service.

The Policy Paper also discusses a multi-pronged action for a more appropriate level of retail payment systems and operators.

The pros of having multiple entities which provide similar payment services would be to increase the competition. However, this may require additional investments, creation of a suitable infrastructure, and this may be achieved over phases. Also, the feature of adding inter-operability in the new payment systems would incur huge costs.

Open and keep-on-tap window for making applications

There can be an open and keep-on-tap window for making applications by all the payment systems in place. This window would permit the receipt of applications for all payment systems and would prescribe for a specific “point of arrival” metric which would allow the entities who are unable to achieve the desired capacity and scale to have a defined-time line exit.

Liberal entry norms

The Policy calls for a liberal entry norm which would require reviewing the entry point capital (net worth) requirement and an analysis of the capability potential of the entities. Finally the Policy also recommends that all payment systems should have a physical presence in the country, an impeccable track record, and shall conform to the best overall standards including those pertaining to customer service and efficiency.

The Policy also makes it clear that there should be an alignment of regulatory framework to encourage enhanced participation of both bank and non-bank entities.

Further, Annexure III of this Policy Paper lays down the authorisation criteria for non-bank payment system operators which discusses the review possibility of the financials in terms of the reduction or revision of the net worth for payment systems such as WLAOs, BBPOUs, and TReDS.

Source: https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/ANRPS21012019A8F5D4891BF84849837D7D611B7FFC58.PDF

Data Protection and the many facets of it: Inter-collegiate Essay Competition

NovoJuris Legal is proud to announce the Inter-collegiate Essay Competition on Data Protection and its various facets. 

Data Protection has taken very high importance not only in India but across the World. The Personal Data Protection Bill, 2018 (“Bill”) and the Data Protection Committee’s (“Committee”) Report (released on 27 July 2018) provides for the framework and the policymakers’ insight on protection of individual’s privacy and personal data in India. The Bill has set high expectations particularly after the European Union’s General Data Protection Regulation (“GDPR”) came into force on 25 May 2018. It is also essential to note the important judgments including the now famous “Aadhar case” of Justice Puttaswamy (Retd.) V. Union of India.

Reserve Bank of India (RBI) in April this year has mandated that all data generated by the payment systems in India, is to be stored in India. The Ministry of Health and Welfare has also published the draft legislation called Digital Information Security in Healthcare Act, to safeguard e-health records and patients’ privacy.

Thus, all these new rules/policies/regulations (collectively referred as “the Data Protection Framework”) indicate a very strong direction that the Government wishes to undertake on protection of data including but not limited to data localisation, which helps in enforcing data protection, nation’s security and protect its citizen’s data, better control on transmission of data outside the country and more.

Topics for the Essay Competition:

The following sub-themes have been identified as requiring academic consideration:

  1. General Data Protection Regulation in European Union has raised the bar on legislation on data protection across the world. Would this be beneficial or would it stunt technological growth and innovation?
  2. Is our Privacy safe under the Aadhar scheme? A critical analysis of change in the privacy law regime post Aadhar case in India.
  3. Implication and critical analysis of the Data (Privacy and Protection) Bill, 2017.
  4. Do we need a stronger consumer centric data protection law in India like the Customer Online Notification for Stopping Edge – Provider Network Transgressions (CONSENT Act), USA in the aftermath of the Facebook data breach incident?
  5. With all the industry specific regulator (RBI, TRAI, MHoW and etc.) providing various regulations, guidelines and draft policy notes with regards to Data Protection Framework in India, what do you think the outcome will be? Is India formalizing a uniform law for data protection?

Important Dates

▪ Submission Date – The essays must be submitted on or before 11:59 PM on 30 January 2019.

▪ Declaration of the Result on 31 March 2019.  – The winners of the competition shall be notified by email and by declaration of results of the competition on this website.

Details about the prizes, guidelines for submission and other details can be found here.  Intercollegiate-Data Privacy Essay-Competition-NovoJuris

 

Basic Cyber Security Framework for Primary (Urban) Cooperative Banks (UCBs)

The Reserve Bank of India (RBI) on October 19, 2018 issued a set of guidelines for Basic Cyber Security Framework for Primary (Urban) Cooperative Banks (UCBs). Such a framework was issued by the RBI as a measure to enhance security of the UCBs in light of the increasing number and impact of cyber security attacks on the financial sector including banks. [1]

  1. Board Approved Cyber Security Policy
  • All UCBs need to immediately put in place a Cyber Security policy, duly approved by their Board/Administrator, giving a framework and the strategy containing a suitable approach to check cyber threats depending on the level of complexity of business and acceptable levels of risk.
  • On completion of the process, confirmation of same within 3 months must be sent to the Department of Co-operative Bank Supervision.
  • The Cyber Security Policy should inter alia encapsulate the following concerns:
  • Preventing access of unauthorised software.
  • Network Management and Security.
  • Secure Configuration.
  • Anti-virus and Patch Management.
  • Secure mail and messaging systems.
  • The IT framework/framework must be reviewed periodically by the Board or its IT subcommittee in order to identify vulnerable areas and put in place a suitable cyber security system to address the issues after assessment.
  1. Cyber Crisis Management Plan
  • The Cyber Crisis Management plan, prepared by CERT-In (Computer Emergency Response Team – India maybe referred to by the UCBs for guidance.
  • UCBs should promptly detect any cyber intrusions (unauthorised entries) so as to respond/recover/contain impact of cyber-attacks, especially those offering services such as internet and mobile banking, RTGS/NEFT/SWIFT, credit and debit cards etc.
  1. Organizational Arrangements
  • UCBs should review the organisational arrangements so that the security concerns are brought to the notice of suitable/concerned officials to enable quick action.
  • UCBs should actively promote among their customers, vendors, service providers and other concerned parties an understanding of its cyber security objectives.
  • UCBs, as owners of customer sensitive data, should take appropriate steps in preserving the Confidentiality, Integrity and Availability of the same, irrespective of whether the data is stored/in transit within themselves or with the third party vendors; the confidentiality of such custodial information should not be compromised in any situation.
  • UCBs to put in place suitable systems and processes across the data/information lifecycle. UCBs may educate and create awareness among customers with regard to cyber security risks.
  1. Supervisory reporting framework
  • UCBs should report immediately all unusual cyber security incidents (whether they were successful or mere attempts) to Department of Co-operative Bank Supervision giving full details of the incident.
  • UCBs are advised to implement basic Cyber Security Controls and report the same to respective Regional Offices of Department of Co-operative Bank Supervision on or before March 31, 2019.

Source: http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11397&Mode=0

https://rbidocs.rbi.org.in/rdocs/content/pdfs/63NT19102018_A1.pdf

[1] http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11397&Mode=0.

Regulatory update: Prepaid Payment Instruments (PPIs) – Guidelines on Interoperability

The Reserve Bank of India (RBI) on October 16, 2018 issued a set of guidelines for interoperability of PPIs. The guidelines are issued under Section 18 read with Section 10(2) of the Payment and Settlements Act, 2007. PPI issuers who choose to adopt interoperability shall adhere to these guidelines along with the Master Direction[1].

  1. Common requirements for achieving interoperability for wallets and cards
    • Where the PPIs are issued in form of online wallets, interoperability shall be facilitated through UPI and where PPIs is issued through a card, the cards shall be affiliated to authorised card networks. Option of interoperability has also been provided to PPI issuers operating in segment of meal, gift and mass transit system (MTS).
    • The interoperability shall be facilitated to all KYC compliant PPI account and entire acceptance infrastructure.
    • Technical Requirement: While facilitating interoperability the PPI issuer shall comply and adhere to all requirements of respective card networks and UPI, including adherence to various standards, technical requirement specific to a payment system, certification, audit and etc.
    • Further the PPI issuers will have to comply with mechanism established for reconciliation, grievance redressal and consumer protection by UPI and specific card networks.
  2. Specific Requirements for achieving interoperability through card networks
    • Card networks are allowed to integrate PPI issuers on their network. Further the non-banking PPI issuers are allowed to join card networks as members or associate members.
    • Settlement: For the purpose of settlement, Non-banking PPI issuer may directly participate in the card network or through a sponsor bank arrangement while adhering to requirements of the specific card network which it is a member of.
    • Safety and Security
  3. Non-banking PPI issuers will be issuing interoperable cards for the first time and therefore they shall make sure that the cards have an EMV chip and are PIN compliant.
  4. Banks shall ensure that while issuing new PPIs and renewing the old PPIs, the cards shall have EMV and shall be PIN compliant.
  • If a PPI issuer in the meal segment intends to facilitate interoperability, it shall also issue EMV chip and PIN compliant cards, whereas it is not compulsory for PPI issuers in the gift cards and MTS segment to have EMV chip and PIN.
  1. Specific requirements for achieving interoperability through UPI
    • PPI issuers will operate as payment system providers (PSP) in the UPI network. National Payment Corporation of India (NPCI) will provide all the PPI issuers, including non-banking PPI issuers a platform for linking their respective PPI holders/users to the platform to facilitate interoperability. The platform issued will use UPI to provide such Interoperability.
    • The PPI issuers as PSPs are only allowed to integrate their PPI holders/users and shall not on board PPI holders/users of other PPI issuers or customers of banks.
    • Any interoperable transaction will be approved as per the credentials of an individual’s online wallet before the same transaction reaches UPI network.
    • Settlement: Non-banking PPI issuer can directly settle a payment though a sponsor bank. Non-banking PPI issuers shall adhere to the requirements of sponsor bank in the UPI network and shall also comply with requirements stipulated by NPCI.

Source: https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11142

[1] https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11142

Initial Coin Offerings – A Case for Regulatory Framework in India

Initial Coin Offerings (“ICOs”) has gained prominence in the world of crypto-currencies and startups as a relatively-easy fundraising mechanism. News about raising millions of dollars in a few seconds upon opening of the ICO is adding to the frenzy. Many of them view ICO as a disruption to the venture capital industry.

The nature of ICOs may lead to people equating them to both IPOs and crowdfunding. In an IPO an investor invests in return for a security (ownership) in a company, under highly regulated process, which gives the investors voting rights, dividend rights etc.

In an ICO, investors transfer funds, usually in the form of crypto-currencies, to the ICO organiser. In return they receive a quantity of blockchain-based coins or tokens which are created and stored in a decentralised form either on a blockchain specifically created for the ICO or through a smart contract on a pre-existing blockchain.

An ICO which provides voting or profit sharing is under high scrutiny by the regulators, since it would blur the distinction to that of an IPO.

Even though the trade in ICOs, bitcoins and other crypto-currencies has been increasing rapidly with the passage of time, there still exists a large vacuum of regulations by governments in this space, which not only increases the risk posed to investors but also disincentives some investors from entering the process at all.

ICO regulation in India:

  • Currently crypto/virtual currencies and ICO’s remain unregulated in India. The Government is yet to finalise a regulatory mechanism so as to govern and regulate crypto/virtual currencies.
  • RBI on 1 February 2017 issued a press release, cautioning the users, holders and traders of crypto / virtual currencies. The press release stated that RBI has not given any licence / authorisation to any entity / company to operate such schemes or deal with Bitcoin or any virtual currency. As such, any user, holder, investor, trader, etc. dealing with virtual currencies will be doing so at their own risk.[1] The RBI in this press release also mentioned the press release published by the RBI cautioning the users of virtual/crypto currency.[2]
  • The Ministry of Finance on 12 April 2017 constituted an Inter- Disciplinary Committee chaired by Special Secretary (Economic Affairs) to examine the existing framework with regard to virtual currencies. The Committee was constituted to provide a detailed report on (a) take stock of the present status of virtual currencies both in India and globally; (b) examine the existing global regulatory and legal structures governing virtual currencies; (c) suggest measures for dealing with such virtual currencies including issues relating to consumer protection, money laundering, etc; and (d) examine any other matter related to virtual currencies which may be relevant.
  • The Government panel is also contemplating introducing compulsory Know Your Customer (KYC) norms in order to regulate the kinds of individuals/entities who can invest in these activities, and be able to track and identify them. If cross-border payments are involved, then it will automatically fall under the scope of FEMA rules and regulations
  • As of date, there is no regulation tabled before the legislature.

Recently, bank transactions and operation of a number of cryptocurrency exchanges in India were hampered without any prior intimation. Users were unable to trade or credit money to their wallet on the exchange/withdraw money to their bank account. This is speculated to be a knee-jerk reaction on the part of the banks, in response to the non-supportive stance of the Government with respect to cryptocurrencies. This certainly does not seem like an efficient and productive method of moving forward. While recognizing that the Government’s concerns regarding cryptocurrencies are genuine, we believe that it will be in the best interests of all stakeholders if the Government releases its official rules/regulations on the matter soon.

Regulatory framework:

ICOs raise a variety of legal issues for which there is no relevant case law and no consistent legal doctrine. Given the wide variety of types of token and ICO set-ups, it is not possible to generalise. Circumstances must be considered holistically in each individual case. The minimum information requirements for organisers form the basis for these decisions.

On 16 February 2018, Swiss Financial Market Supervisory Authority, FINMA, released guidelines to support the issuance of ICO and said will base its assessment on the underlying economic purpose of an ICO, most particularly when there are indications of an attempt to circumvent existing regulations.

We believe that the first step for the regulator to understand the ICO token categories. The world-wide discomfort of the regulators has been perhaps ICOs which issues tokens which is akin to a “security”. But there are many other ICOs which are not “securities”.

FINMA’s guidelines talk about the following token categories:

Payment tokens: Payment tokens (synonymous with cryptocurrencies) are tokens which are intended to be used, now or in the future, as a means of payment for acquiring goods or services or as a means of money or value transfer. Cryptocurrencies give rise to no claims on their issuer. Utility tokens: Utility tokens are tokens which are intended to provide access digitally to an application or service by means of a blockchain-based infrastructure.

Asset tokens: Asset tokens represent assets such as a debt or equity claim on the issuer. Asset tokens promise, for example, a share in future company earnings or future capital flows. In terms of their economic function, therefore, these tokens are analogous to equities, bonds or derivatives. Tokens which enable physical assets to be traded on the blockchain also fall into this category.

The individual token classifications are not mutually exclusive. Asset and utility tokens can also be classified as payment tokens (referred to as hybrid tokens). In these cases, the requirements are cumulative; in other words, the tokens are deemed to be both securities and means of payment.

In some ICOs, tokens are already put into circulation at the point of fund-raising. This takes place on a pre-existing blockchain. In other types of ICO, investors are offered only the prospect that they will receive tokens at some point in the future and the tokens or the underlying blockchain remain to be developed. This is referred to as pre-financing. Pre-sale represents another possible permutation. In this case, investors receive tokens which entitle them to acquire other different tokens at a later date.

Should the tokens at any point in time fall under Asset tokens or SEBI’s regulatory framework on the issuance of a “security”, then SEBI should definitely have a say.

The other regulations such as Prevention of Money Laundering, Collective Investment Schemes, Deposits under Companies Act should also be taken into account as a single guidance note to the issuance of an ICO.

A regulation / guidance such as this would augur well for Indian entrepreneurs to have an ICO in India and with clarity. It also provides a good base for the tax authorities to tax the economic benefits accordingly.

[1] https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=39435

[2] https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=30247

P2P LENDING IN INDIA: OLD ROADS NEW RULES

P2P LENDING IN INDIA: OLD ROADS NEW RULES

Introduction

Peer to Peer (“P2P”) lending platforms (the “Platforms”) aims to provide individuals and entities with an alternative source for fulfilling their capital requirements. Whether it is for obtaining capital to run a business, financing to complete a personal project, or to obtain a loan for any other purpose, these Platforms allow borrowers and lenders to meet and transact on mutually acceptable terms.The Platform itself typically assists the process by listing lenders and their terms and conditions, verifying the identity and initial creditworthiness of the borrowers, disbursing the loans/tranches, collecting loan repayments etc.For these services, both the borrowers and lenders pay the Platform a commission.

Most Platforms follow a ‘reverse auction model’, where the lenders bid with their own terms and conditions for a borrower’s loan proposal, and the borrower has the freedom to choose between the various bids.This gives borrowers who would typically struggle to get loans from banks/NBFCs with a variety of options. Further, the other advantage of the Platforms is that borrowers can now stay away from money lenders/the unorganized sector, as the Platform verifies all lenders and provides a streamlined and regulated process for obtaining loans. Finally, in most cases, the interest rates on loans obtained on the Platforms is also lower than what individual money lenders would usually charge.

Since the popularity of P2P Platforms in India has grown in the recent past, they remained unregulated till recently. However, with the growth of the fintech industry and the multiple use cases/benefits of these Platforms, the RBI released a consultation paper on regulating P2P Platforms, in 2016. On receipt of feedback and comments from the public and all stakeholders, the RBI released its Master Direction –Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 (the “Directions”)– recently to officially regulate and monitor P2P Platforms. Thus, it is pertinent to understand and analyse the regulations laid down by the Directions:

Registration

The Directions provide that only corporate entities registered as a ‘company’can operate and engage in the business of P2P lending. Companies operating existing Platforms will have to obtain a certificate of Registration (“CoR”) from the RBI within a period of 3 months from the date of publication of the Directions.Additionally, the Directions provide for minimum capitalisation requirements, which need to be met before obtaining registration. This requirement is INR 2,00,00,000 (Rupees Two crore only), which is in line with the requirement for all NBFC’s in accordance with Section 45-IA of the Reserve Bank of India Act, 1934.

The Directions also provide the criteria on which registration will be determined.This includes ensuring that the Platform has the necessary technological and managerial resources, a robust IT system, fit and proper directors, a viable business plan etc. On being satisfied with an application, the RBI will first give an in-principle approval for setting up and operating a prospective NBFC-P2P platform. Within 12 months from the in-principle approval, the company must develop its technology platform as per the RBIs satisfaction, and also submit all other legal documentation as may be requested.

For a platform acting as a mere marketplace for the meeting of lenders and borrowers (one that does not provide any of the additional services described above), the capitalisation requirements contained in the Directions seem a little harsh. Additionally, the requirement may prevent start-ups from entering this space entirely, which will adversely affect innovation in this space.We recommend that the threshold should be revised downwards and can be made incremental with each year of an entity’s operations, to ensure that only companies that are growing continue to retain their license/registration.

Permitted Activities

As per the Directions, the Platforms can perform the following activities/services:

  1. Mere Aggregator

The Platform can act as a mere aggregator, intermediary or marketplace to facilitate the meeting of lenders and borrowers. While they can participate in the lending/borrowing process in certain ways (described below), and cannot raise deposits in any capacity.

  1. Principle, Return and Guarantees

The Platform cannot guarantee the return of a loan to any lender or provide guarantees of no loss. This will ensure that all lenders signing up on the Platform do so at their own risk, and will hopefully bring about transparency by reducing instances of false advertisement/lending in the name of the Platform.

  1. Nature of the Loan

The Platform can allow lenders to offer only unsecured loans. This was the original idea behind P2P Platforms, and it allows customers with little/no security to avail of loans as well.

  1. Associated Businesses

The Platform shall not cross-sell any product except for loan specific insurance products.

  1. Financial don’ts for the Platform
  • The Platform cannot hold, on its own balance sheet, funds received from lenders for lending, or funds received from borrowers for servicing loans. This ensures that no money from any of the transaction on the Platform can be compromised by the Platform provider’s own financial standing as an entity;
  • The Platform cannot permit the international flow of funds. With this restriction, foreign lenders and/or borrowers have been excluded from participating directly on the Platforms in India, unless they hold a bank account within India.
  1. Duties of the Platform
  • The Platforms are required to conduct a due-diligence on all participants in the Platform. This includes a credit risk assessment and risk profiling of all borrowers registering on the Platform. This information is also required to be disclosed to the lenders, and it helps in creating a transparent environment on the Platform;
  • Platforms can render services for recovery of loans originated on the Platform;
  • Platforms can undertake the documentation of loan agreements; and
  • Platforms can provide assistance in disbursement and repayments of loans.

Prudential Requirements

  1. Permissible Thresholds of Lending and Borrowing

Any registered lender or borrower cannot lend or borrow more than INR 10,00,000/- (Rupees Ten Lakhs only) across all registered and authorised P2P Platforms. Further, no single lender can lend more than INR 50,000/- (Rupees Fifty Thousand only) to any single borrower across all Platforms. While these thresholds may seem conservative at first, considering the nascent stage of the P2P lending industry we believe that these limits are appropriate. The Platforms were anyway meant to facilitate small, unsecured loans from individual lenders, and if demand rises the limits can be revised in the future.

  1. Maturity Period: No loan provided via a Platform can have a maturity period of more than 36 (thirty-six) months. This seems apt, given the loan value is also capped at a number that is not very high.

Operational Guidelines

The Platform is required to have and implement a policy approved by the Board of Directors of the Company (the “Board”) regarding the eligibility criteria for participants, pricing of their services, and detailed rules for matching lenders with borrowers on an equitable and non-discriminatory manner, and other matters concerning the operation of the Platform. Additionally, any and all liabilities regarding the collection, storage and protection of personal data by the Platform will have to be borne by the Platform itself, even if any of these functions are outsourced to third-party service providers.

The Platforms are also required to maintain 2 escrow accounts for the transfer of funds – one for funds from lenders and the other one for funds collected from borrowers.Cash transactions are prohibited, which will help in accounting for all money being transacted via a particular Platform.

Enhanced Transparency and Disclosure Requirements

Previously, the scant availability of information regarding a borrowers’ credit history and defaults made the sheltering of defaulters easy. The Directions are aimed at rectifying this situation.They seek to introduce transparency and information symmetry between the borrowers and lenders, while simultaneously protecting the privacy of the data belonging to both parties.

  1. Disclosure to the Lenders:

Prior to accepting any loan arrangement on a Platform, the lenders should be made aware of the personal identity of the borrower, the loan amount, the credit score determined by the Platform and other details regarding the borrower.This ensures that the lenders can be made an informed decision regarding engaging with any borrower.

  1. Disclosure to the Borrower:

Borrowers are made aware of fewer details than the lender – they are informed about the lender’s proposal, repayment terms and interest rate, but are not informed of the lender’s personal identity, contact information and other personal information. This seems logical, as the borrower’s decision regarding the lender’s proposal should be based purely on the commercial terms offered, and not on the details of the particular lender.

  1. Public Disclosures:

The Platform is required to publish on its website the overview of the credit assessment methodology and factors considered; data protection and privacy measures; dispute settlement mechanism; portfolio performance including a share of non-performing assets monthly and segregation by age; and its broad business model.This is intended to give any individual/entity looking to register on the Platform the opportunity to make an informed decision.

Data Security and IT Framework

Considering the volume of personal data collected, stored and analysed on the Platform, ensuring a robust IT and data security framework is one of the foremost necessities. In light of this, the Directions lay down some robust standards:

  1. All Platforms are required to have “adequate safeguards” in their IT systems to protect against unauthorized access, destruction, modification, utilization etc. of the data. While the Directions do not lay down any specific minimum standard for maintaining these safeguards since the Platforms deal with personal data it can be assumed that they fall within the stipulations of the IT Reasonable Security Practice Rules, 2011;
  2. All Platforms are required to have a Board approved Business Continuity Plan in place for safekeeping of information and documents and servicing of loans for full tenure in case of closure of the Platform;
  3. The Platform has to carry out a yearly information system audit, as well adhere to all requirements under the Master Direction on Information Technology Framework for the NBFC Sector, June 8, 2017.

Conclusion

With India marching towards the aim of being a paperless, cashless and consent-secured data sharing economy, these Directions are expected to open up new avenues for obtaining capital for individuals and small businesses, while simultaneously maintaining transparency and accountability in the process.Perhaps the only clause missing from the Directions is one on penalties, describing the repercussions if a Platform fails to adhere to any of the given guidelines. Yet overall, the Directions seem to be apt for P2P Platforms and well-thought through, especially considering that the industry around such Platforms is still nascent in India. As these Platforms gain more prominence the Directions can be modified accordingly, but for now, they seem to be a good starting point.

 

Author: Ayushi Singh; Reviewed by Madhav Rangrass