Banking Law

[By Lavanya Chetwani] The author is a student of National Law University Odisha.   INTRODUCTION  Recently, the Reserve Bank of India (‘RBI’) vide its circular dated December 19 has issued guidelines to prevent all Regulated Entities (‘RE’) from holding units of Alternative Investment Funds (‘AIF’) which have invested in a debtor company of the RE. AIFs are currently regulated by the Securities and Exchange Board of India (‘SEBI’)  under the SEBI (AIF) Regulations, 2012 (‘The Regulation’) and  SEBI Master Circular For AIFs, 2023 (‘MC-AIF’).  The guidelines issued by the RBI is motivated by a consultation paper issued by SEBI on 19 May 2023. SEBI had identified in its consultation paper certain structures which could be used for “evergreening” of loans by regulated entities. However, the guidelines might have an impact beyond the stated intent.   UNDERSTANDING THE GUIDELINES  AIFs have been defined by SEBI in paragraph 2(1)(b) of the Regulation as any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors. As per paragraph 3(4) of the regulations, there are three categories of AIFs. Category I include infrastructure funds, angel funds, venture capital funds etc. Category II include funds like private equity funds, debt funds etc. and Category III includes funds which give returns under a short period of time like hedge funds.  The latest guidelines by the RBI bring the following changes:  1. Investment Restriction   The guidelines prohibit REs from investing in any scheme of the AIFs which has downstream investments in a ‘debtor company of the RE’. Downstream investments, though not defined in these guidelines, have been defined under Rule 23 Explanation (g) of the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 as investment made by an Indian entity which has total foreign investment in it, or an Investment Vehicle in the capital instruments or the capital, as the case may be, of another Indian entity. The circular is unfavourable for REs with genuine investments in these AIFs, and due to strict timelines, there is a high probability that these REs will struggle to liquidate their investments.    2. Liquidation time  Moreover, if in case, the RE has already invested in an AIF scheme and that AIF later makes a downstream investment in the debtor company of the RE then the RE has to liquidate its investments in such AIF scheme within 30 days. Additionally, should the RE already have invested in an AIF scheme, the 30-day timeframe will start on the date of issuance of circular i.e. 19 December 2023. The guidelines also lay out that the REs have to make 100 percent provision on such investments if they are unable to comply with the stipulated timelines. These regulations strengthen transparency and compliance through clear definitions and timeframes, but also raises concerns about administrative burden, exit challenges, and potential unintended consequences like decreased RE participation and concentration risk.  3. Priority Distribution Model  The directions also provide that investment by REs in the subordinated units of any AIF scheme with a ‘priority distribution model’ will be subject to a full deduction from RE’s capital funds. The explanation of this clause provides that ‘priority distribution model’ shall have the same meaning as in the circular issued by SEBI. According to paragraph 3 of the circular it means AIF schemes that use a waterfall distribution model suffer a share loss relative to other investor classes or unit holders that is greater than pro rata to their investment in the AIF because the latter has priority in distribution over the former.   While transparency and risk mitigation improve, REs face limited options and AIFs with these models may struggle to attract investors.  EVERGREENING OF LOANS   The RBI in its circular mentioned that the guidelines have been issued in order to deal with the problem of REs ‘evergreening’ loans through the AIF route. The similar issue was highlighted and informed by the SEBI to the RBI last year. In simple words, evergreen loans mean loans that never end. Evergreening of loans imply instances when REs provide the borrower another loan through AIF as an investment vehicle in order to repay the previous in default debt. Then, in order to demonstrate a low percentage of non-performing assets on their books, REs turn to these loans. The REs do so because once classified as such, they will have to provide for losses, which will in turn reduce profits. It has the  potential to mislead about the profitability and asset quality of banks and to postpone the identification and resolution of stressed assets.   However, the circular is unclear about whether AIFs in the Debtor Companies are pursuing this evergreening through fresh debt or equity infusion. Consequently, the circular refers to “investments” without making a distinction between debt and equity infusion.    DECIPHERING THE GUIDELINES: UNVEILING KEY CONCERNS    It is pertinent to highlight that SEBI, through paragraph 11 of the MC-AIF, has already imposed a restriction on arrangements incorporating priority distributions. Consequently, this broad prohibition by the RBI has the potential to negatively affect REs’ capacity to engage with AIFs that provide risk-adjusted returns for diverse groups of investors via various unit classes.   Additionally, the RBI Circular appears to be at odds with the inherent characteristics of AIFs. AIFs (Category I and Category II) are legally structured as privately pooled blind investment vehicles, characterized by a close-ended nature. AIF investors typically lack visibility into the AIFs’ investments and lack the right to freely redeem their units due to the highly illiquid nature of the AIF’s investments. Moreover, any transfer of AIF units necessitates explicit consent from the investment manager of the AIFs. In contrast, the RBI Circular mandates regulated entities to liquidate their investments in AIFs with downstream investments in debtor companies within 30 days. Assuming consent from the investment manager for the transfer, regulated entities may encounter challenges in finding buyers in the market, given

[By Sibasish Panda & Janhavi Mahalik] The authors are students of National Law University Odisha. Introduction India had been touted to bring a digital technology revolution in this decade with the Central Bank playing a pivotal role. It is at the cusp of a Fin-tech revolution with the market expected to hit $150Bn by 2025. It had to play a balancing role to facilitate innovative approaches by the Fin-tech companies vis-a-vis protection of consumer rights. To further this goal, the Reserve Bank of India (RBI) has also set up separate Fin-tech units under the Department of Payments and Settlement of Systems. Securing the cross-border payments was at the helm of the RBI’s focus. In light of recent judicial pronouncements, the RBI has overhauled the regulatory framework governing cross-border payment service providers. Formerly requiring partnership with an authorised dealer bank, Online Payments Gateway Service Providers (OPGSPs) are now directly overseen by the RBI and renamed Payment Aggregators – Cross Border (PA-CB). In this article the authors aim to analyse the stance of the Fin-tech companies post the guidelines. Understanding the Scope of the Regulations Under the new regulations, entities involved in the processing of import and export activities of cross-border payment transactions must comply with the instructions laid out by the RBI. This includes Authorised Dealer (AD) banks, Payment Aggregators (PAs), and PA-CBs.  Non-banks aiming to operate as Payment Aggregators for cross-border transactions need RBI authorisation by April 30, 2024. This authorisation categorised as import-only, export-only, or both, is essential for offering cross-border payment services. Existing non-bank providers of these services must notify the RBI about their activities within 60 days and seek approval to continue. Entities offering cross-border trade settlement services must have a minimum net worth of Rs 15 crore at the application time, increasing to Rs 25 crore by March 31, 2026. Non-bank lenders without prior business in the segment must have a minimum net worth of Rs 15 crore when applying. Payment aggregators are now under the PMLA microscope. The current RBI regulations require all Payment Aggregators and Payment Gateways to undergo registration with the Financial Intelligence Unit India (FIU-IND) before seeking authorization. Consequently, they will be categorized as “reporting entities” by the Prevention of Money Laundering Act (PMLA). From now any payment transaction deemed suspicious will be reported to the Financial Intelligence Unit as per the new guidelines.  This finally comes as a clear stance from the RBI on the issue that was contested in PayPal Payments Private Limited v Financial Intelligence Unit India. The tussle of whether PayPal qualified to be a “payment system operator” under the act was answered in affirmative by the court, thus qualifying it to be a reporting entity as defined under section(1)(a) of the act. This move is aimed at bolstering India’s position which is under the Financial Action Task Force (FATF) review which was scheduled in November this year. Payment aggregators asserted their role as mere “transaction interfaces,” facilitating import-export transactions between Indian and overseas parties without directly handling payments between payer and beneficiary. Despite this, classifying them as reporting entities increases compliance burdens, especially for Fintech startups with modest business plans. The start-up Fintech companies with a small goal business plan now have to rewire their finances and meet the costs that come with setting the infrastructure to maintain and furnish records of all the transactions.  The broad definition of reporting entities encompasses banks and payment firms conducting their Know Your Customer (KYC) checks, extending to technology service providers. Now to mandate even technology service providers to do the same will increase the cost of compliance and will also be burdensome on the state machinery to process the data multiple times. The authors however feel that keeping in mind the stringent nature of the PML act, Fintech companies must take a conservative reading of the same before reporting any transaction to the FIU-IND. Balancing stringency and the ease of doing business. The recent stringent control by regulators on Fin-tech companies, coupled with current guidelines, underscores India’s aim to secure cross-border transactions giving paramount importance to customer data, privacy, and security. The payment aggregator business is heavily influenced by merchant onboarding policies and adherence to anti-money laundering (AML) and counter-terrorist financing (CFT) regulations. While the BIS-CPSS principles may not cover AML/CFT and customer data privacy, these factors directly impact merchant operations and customer safeguarding. When designing a payment aggregator business model, considerations extend to regulations like data privacy, competition policy promotion, and specific investor and consumer protections. The PA-CB Guidelines mandate payment aggregators to comply with KYC/AML/CFT regulations outlined by the RBI, following the “Master Direction – Know Your Customer (KYC) Directions,” and now by categorising them as “reporting entities” also adhere to the provisions of Money Laundering under the PMLA act and rules. The added due diligence checks during merchant onboarding along with KYC and transaction monitoring added to the woes of these Fin-tech companies. While the compliance checks seem burdensome, the RBI has made an attempt to ensure the seamless processing of all trade payments efficiently. The latest guidelines have streamlined fund flows, making transactions more convenient. Such as the OPGSP guidelines, which aim to simplify transactions, PA-CBs are required to uphold an Import Collection Account (ICA) and an Export Collection Account (ECA) for their corresponding transactions. Notable distinctions include the OPGSP guidelines, which required the transfer of balances in the ICA to the overseas exporter’s account within two days of receiving funds. The RBI, as per the PA – CB Directions, has aligned the timelines for fund settlement from the ICA with those specified in the Payment Guidelines for settling funds from domestic payment aggregators’ escrow accounts. This adjustment provides greater flexibility to PA–CBs, allowing settlement timelines from the ICA to be tied to the receipt of delivery confirmation intimation or the expiration of relevant refund periods. Additionally, PA-CBs involved in export transactions are not obliged to establish separate Nostro accounts for fund flows. It is also felt that applying as an export PA-CB will

[By Aryan Dash & Rishita Sinha] The authors are students of National Law University Odisha. INTRODUCTION: In the bustling landscape of India’s financial technology sector, the crescendo of UPI transactions have reached a staggering 9.3 billion in June 2023. Projections paint a vibrant future for the Indian fintech industry, eyeing a valuation surpassing $2 trillion by 2030. The meteoric rise of UPI has not only transformed the payment ecosystem within India but has also sparked a global ripple effect. The primary purpose of the extension of UPI abroad is to boost cross-border transactions, foster financial inclusion, and reduce reliance on cash transactions. However as the National Payments Corporation of India (NPCI) extends UPI services beyond borders, a critical conversation emerges – one that delves into the implications of managing vast data under the existing data protection regulations and the recently introduced Digital Protection & Data Privacy Act 2023 (DPDP Act). THE NPCI’S ROLE AND GLOBAL UPI EXPANSION: In an era where global connectivity is paramount, the expansion of UPI services abroad marks a pivotal step in revolutionizing cross-border transactions. Founded in 2008 as a not-for-profit under the RBI and Indian Banks’ Association, the NPCI has been a linchpin in providing cutting-edge payment system technologies, including RuPay and UPI. In a bid to cater to Indian tourists and the diaspora abroad, NPCI’s wholly-owned subsidiary, NPCI International Payments Limited (NIPL), has embarked on an ambitious initiative to extend UPI services globally. Agreements with countries like Singapore, France, Malaysia, South Korea, and Japan underline NPCI’s intent to facilitate cross-border transactions, enhance financial inclusion, and reduce dependence on traditional payment methods. The NPCI envisions a two-pronged approach, developing international interoperability for travellers and collaborating with central banks to fortify UPI ecosystems worldwide. RBI’S STANCE ON DATA LOCALIZATION: In an era dominated by digital transactions, robust data privacy regulations are imperative, especially for sensitive information like banking transactions. Safeguarding critical data ensures not only the security of individuals but also the integrity of financial systems. Preceding the current surge in data protection concerns, in 2018, the RBI introduced the Storage of the Payment System Data circular to regulate data storage in the context of cross-border transactions. RBI’s Guidelines for In-Country Storage with Foreign Transaction Exceptions This circular mandates banks and payment service providers to store data within India, with exceptions for foreign components in a transaction. For foreign data processing, there is a 24-hour limit set for data storage abroad, after which it must be deleted and brought back to India. Real-Time Settlements and In-Country Data Storage: Regarding payment settlements, transactions settled outside India require real-time basis settlement with exclusive data storage within the country. The RBI’s circular encompasses all banks, payment system providers, and third-party applications providing UPI services, with the data stored in India being eligible for limited sharing, subject to necessary permissions. CROSS-BORDER DATA SHARING AND THE DPDP ACT: The DPDP Act, in its current form, introduces some shifts in data-sharing dynamics. Section 16 of the Act allows unrestricted data sharing with countries whitelisted by the government, while blacklisted countries are ineligible for such arrangements. Undefined Territories: The Need for DPDP Rules Presently, the DPDP Act lacks a predefined roster of countries classified as either blacklisted or whitelisted. The government aims to address this gap by formulating detailed DPDP rules. These regulations will outline the criteria for categorizing countries onto the blacklist, based on considerations the government deems necessary to safeguard the data of Indian citizens and businesses. Consent Matters: Obligations of Data Fiduciaries However, data fiduciaries, including third-party applications and payment service providers, are obligated to obtain valid consent from users before sharing sensitive financial data. DPDP Act vs. RBI Circular The Act seemingly contradicts the RBI’s circular, especially in terms of data localization and sharing. While the RBI circumscribes cross-border data transfer, the DPDP Act presents a more lenient approach, opening avenues for data sharing under consent. This creates a nuanced landscape where reconciling the differences between the two becomes imperative. BALANCING ACT: RBI CIRCULAR VS. DPDP ACT: In the intricate regulatory dance between the DPDP Act and the RBI’s Circular, achieving a delicate balance becomes paramount. DPDP’s Section 16, permitting global data sharing with consent, collides with the RBI’s stringent data localization directives. The DPDP Act seemingly contradicts the RBI’s data localization directive, which requires deleting processed data abroad within 24 hours. While the RBI allows data sharing for processing outside India, the DPDP Act prohibits exporting Indian data, even for processing. Despite government assurances that RBI regulations will endure, reconciling these disparities in practice remains a challenge. Notably, DPDP’s Section 17 introduces exceptions, aligning with the RBI’s circular, allowing data sharing for legal claims or breaches. Crafting a cohesive framework that respects user privacy, aligns with global standards, and adheres to financial data mandates is a crucial task in this evolving regulatory landscape. EXPANSION OF UPI SERVICES: NRIS AND FOREIGN TOURISTS: In a move to broaden UPI services, the RBI, in a circular dated 10 February 2022, greenlit the extension of UPI services to Non-Resident Indians (NRIs) and foreign tourists. NRIs can set up a UPI ID using their international numbers, linked to NRE/NRO accounts, provided they comply with KYC regulations. Similarly, foreign tourists can avail themselves of Prepaid Payment Instruments (PPIs) from banks or corporate entities, loaded using various methods, adhering to RBI’s guidelines. The Indian government has been actively forging strategic agreements to enhance cross-border transactions and simplify fund transfers for the Indian diaspora worldwide. Under NPCI’s global UPI initiative, services have been extended for foreign remittances, exemplified by the UPI-PayNow linkage between India and Singapore. the collaboration between India and France marked a milestone, allowing Indian tourists to effortlessly make payments in INR using their UPI apps, even from the iconic Eiffel Tower. Early on, Bhutan joined hands with India to introduce UPI-based transactions, initially limited to the BHIM app for Indian travelers and residents in the country. This move showcased the early adoption of UPI technology beyond India’s borders. A significant leap forward

[By Yuvraj Sharma & Vandana Kaniya] The authors are students of School of Law, Narsee Monjee Institute of Management & Studies, Hyderabad.   Introduction In the recent SEBI circular dated June 8th, 2023, a significant change has taken place with SEBI permitting mutual funds to take part in repo transactions involving Commercial Papers (“hereinafter referred to as CPS”) and Certificates Of Deposits (“hereinafter referred to as CDs”). The regulatory authority has explicitly stated that these transactions are limited to corporate debt securities with a credit rating of AA and higher. This circular represents an expansion of the scope of repo transactions by mutual funds in the corporate debt market, signaling a significant shift in regulatory policies. In this Blog, the author(s) aims to provide a comprehensive understanding of the circular. It likely delves into the implications of this regulatory change, exploring how it may impact the behaviour of mutual funds in the corporate debt market. In addition to this, the blog may discuss the potential benefits and risks associated with allowing mutual Funds to engage in repo transactions involving CPS and CDs. Overall, this SEBI circular introduced a crucial regulatory shift that warrants careful analysis and understanding, and the blog aims to provide a comprehensive exploration of its nuances. Navigating Risk: Role of Retail Investors in Mitigating Corporate Risk Through Mutual Funds Engagement This section of the article delves into critical aspect of how the inclusion of retail investor in the corporate bonds market, triggered by increase mutual fund involvement, has the potential to not only drive market growth but also play a crucial role in. mitigating excessive corporate risk. During a repo transaction, mutual funds obtain short-term money by using corporate debt instruments as collateral. Essentially, this is borrowing money with the promise to repay it later at the going rate of interest against the value of corporate debt instruments. The purpose of such repo transactions is twofold. Firstly, it allows mutual funds to raise short-term capital addressing immediate liquidity requirements. Secondly, it provides A mechanism to manage redemption demands, offering flexibility in meeting investor redemptions. This financial tool is crucial for maintaining the liquidity and operational efficiency of mutual funds. The significance of the latest development lies in expanding the scope of rapport transactions to include CPs and CDs. CPs are defined as unsecured short-term debt regulations that companies issue to satisfy their immediate financial obligations. Conversely, certificates of deposit (CDs) are marketed as dematerialized fixed-income securities with a set maturity period that are issued by banks and other financial organizations. This development offers mutual funds more diverse options for collateral in repo transactions, potentially broadening their ability to raise short-term capital. It also reflects the adaptability of financial instruments to meet the evolving needs of market participants. Over the last decade, the corporate bonds market has exhibited consistent expansion growing by 29 trillion rupees from 2012 to 2022. Despite this growth, the absence of engagement from retail investors is impeding the market’s potential for further development. Industry experts perceive the corporate bonds market as being at a crucial turning point, where the inclusion of retail investors could trigger exponential growth. This growth has the potential to substantially alleviate the excessive corporate risk currently borne by the banking system. Increased involvement by mutual funds could incentivize retail investor participation it means if mutual funds become more involved in a particular market or investment activity, it could encourage individual retail investors to participate more actively in that market. Mutual funds actively participate in the corporate markets holding substantial share (ranking third among all categories) as of the end of the Financial Year, 2022. Recent data shows a growing trend in repo transactions within the corporate bond market. The latest SEBI circular signals a pivotal juncture for the expansion of the corporate bond market. The circular focus on increasing repo transactions for mutual funds in this market indicates a strategic move by the securities regulator to harness this potential growth. A comprehensive analysis of the circular’s modifications is essential to fully comprehend its impact. The 2023 SEBI’s Circular a. Credit Rating Revolution The latest SEBI circular introduces a significant change by broadening the investment opportunities accessible to mutual funds. This expansion of feasible investments within the corporate bond market through repo transactions is not unprecedented. In November 2012, the SEBI circular permitted mutual funds to engage in repo transactions involving corporate debt Securities rated AA or higher deviating from the prior requirement of AAA-rated securities. This relaxation of credit rating standards enlarges the pool of securities that mutual funds could involve in repo transactions. This underscores SEBI’s history of taking proactive measures to stimulate the growth of the corporate bonds market. b. SEBI’s Evolving Guidelines: A deep dive into credit rating parameters The recent SEBI circular introduces additional to provide auxiliary support for mutual funds participating in repo transactions involving corporate bonds. As well as CPs and CDs. This report introduces a constructive tradition through guidelines aimed at assessing the credit rating of exposure objections. The revised exposure emphasis a comprehensive approach in evaluating elements like the Potential Risk Class (RPC) Metrix, liquidity ratios, risk meter, and other pertinent parameters, related to underlying securities. In essence it encourage a thorough analysis of various factors to examine creditworthiness.  This enhancement supplements the original November 2011 circular, which lacked specific criteria for evaluating the credit rating exposure in corporate bond repo transactions, by introducing constructive guidelines to assess elements such as RPC metrics, and liquidity ratios. c. Amplifying Market Appeal: Impact of Circular on Bosting Confidence in Unsecured CP’s The guidelines enhance confidence in short-term debt instruments particularly relevant for unsecured CPs issued by private firms. Despite CPs being vital for short-term debt raising, their secondary market remains small. The recent circular enabling mutual fund participation in CP repo transactions alongside structured risk assessment aims to amplify the secondary markets’ attractiveness for institutional investors. Another significant change in the circular pertains to the accounting of repo transaction exposure in corporate bonds if backed

[By Gurumurthy Cherukuthota] The author is a student of Symbiosis Law School, Pune.   Introduction On July 11, 2022, India’s Central Bank, the Reserve Bank of India (RBI), issued a circular announcing its decision to introduce an international trade settlement mechanism for invoicing, payment, and settlement of exports and imports in Indian Rupees (INR). The RBI’s strategic move illustrates India’s commitment to promoting cross-border transactions and fostering international trade in INR, with the visionary ambition being to establish the INR as a truly global, international currency. In pursuit of this goal, India has outlined a comprehensive plan involving several measures, including promoting the use of the rupee in international trade, relaxing restrictions, and improving accessibility to Indian markets for foreign investors by liberalising foreign exchange regulations (such as the Foreign Exchange Management (Deposit) Regulations, 2016). Two critical instruments pivotal in achieving these goals are the Special Rupee Vostro Accounts (SRVAs) and Correspondent Banking. By promoting the adoption of SRVAs and Correspondent Banking, India aims not only to boost the visibility and acceptance of the INR as an international currency but also to solidify its position as a burgeoning global economic superpower. Notably, India has already demonstrated its commitment by engaging in bilateral trade with Russia in INR. While financial liberalisation does not inevitably guarantee currency internationalisation, correspondent banking emerges as a crucial factor in facilitating cross-border transactions. The general decline in correspondent banking, influenced by factors such as anti-money laundering regulations, risk perceptions, and uncertainties, underscores the need for a workable and efficient framework. Recognizing the limited role of the Indian Rupee in trade invoicing and settlements due to convertibility and risk management issues, India’s strategic move towards trade settlement in INR with Russia, amid global uncertainties, stands out. This not only safeguards bilateral trade but also positions India strategically to leverage the vulnerabilities in global monetary supply chains, opening up avenues for trade with BRICS and other Asian nations. In essence, the trajectory set by India, as guided by the RBI’s Circular, demonstrates a determined effort to elevate the INR’s status on the international stage. This move aligns with the evolving landscape of the global financial infrastructure, emphasising the role of correspondent banking and innovative approaches in shaping the future of international economic and financial activities. In this context, the article examines the role of correspondent banking in the process of currency internationalisation, conducting a comprehensive analysis of the potential challenges and solutions for establishing the INR as an international currency, drawing insights from India’s experience with Russia. Correspondent Banking and Internationalising INR Correspondent Banking is vital to India’s efforts to globalize the INR. It encompasses a financial relationship between two institutions, where one bank (correspondent bank) offers banking services to another (respondent bank). In India’s case, the RBI has been encouraging the use of Correspondent Banking as a means to promote the international use of the INR. The RBI has introduced the concept of SRVAs, which are rupee-denominated accounts held by foreign banks in India. Regulation 7(1) of the Foreign Exchange Management (Deposit) Regulations, 2016 empowers Authorised Dealer (AD) banks to open Rupee Vostro Accounts. These accounts allow foreign banks to hold INR balances and facilitate cross border and international trade settlement in INR with India, thereby eliminating the need for using other currencies like the USD and the Euros, among others. India’s Experience with Russia: Challenges to Overcome In pursuit of internationalising the INR, India has been actively promoting trade settlements with other countries in INR, such as Russia and several other Asian and neighbouring countries. In 2022, India and Russia entered into an agreement to settle bilateral trade in INR to reduce dependency on the USD and avoid currency exchange risk/volatility. In furtherance of the same, several Russian banks have already opened Vostro accounts in India. This move is expected to reduce transaction costs, increase the volume of trade between the two countries and encourage other countries also to adopt this model. A critical appraisal of India’s experience with Russia would be incomplete without examining the inherent challenges associated with this model. One of the foremost challenges lies in the limited acceptance and liquidity of the INR in the global markets. The INR has not yet attained widespread recognition as an international currency, consequently restricting its liquidity in global markets. Russia’s willingness to transact with India in INR is not rooted in the strength and global standing of the currency but rather emerges from the global economic sanctions imposed on Russia, along with being banned from using the SWIFT gateway, as a result of the Russia-Ukraine war. Therefore, the real test would be to assess Russia’s commitment to this model once the sanctions are lifted. Another significant challenge surfaces in the form of India’s substantial oil imports from Russia, which have considerably augmented India’s current account trade deficit with Russia. Settling all imports in INR would potentially lead to excessive accumulation of INR for Russia, limiting its utility as a medium of exchange with nations that accept INR for trade. This predicament has already forced India to partially compensate Russia in UAE’s Dirhams, underscoring the necessity for wider acceptability of the currency to ensure the success of this model. The inadequate development of India’s financial infrastructure emerges as an additional obstacle. To facilitate international trade transactions in INR, substantial investments in technology and human resources are imperative, highlighting the need for a robust and comprehensive financial infrastructure and framework. Moreover, regulatory and operational challenges must also be addressed to support international trade settlements, necessitating the establishment of Correspondent Banking (CB) relationships through modifications to existing frameworks in India and the participating nations. Key areas demanding adaptation include further amendments to regulations under the Foreign Exchange Management Act, 1999 (FEMA) for accommodating INR settlements, the formulation of specific guidelines for cross-border transactions in INR, and the development of a structured regulatory framework for CB relationships addressing anti-money laundering (AML) and counter-terrorist financing (CTF) compliance. Harmonising regulatory standards among participating countries is also crucial. Additionally, addressing inadequacies

[By Chetna Alagh] The author is a student of UPES, Dehradun.   The process of schemes of arrangement, which falls under the purview of the Companies Act, 2013, has a significant role to play in the dynamic world of corporate complexities. These arrangements provide businesses with a methodical way to restructure their operational and financial situations. A company is legally allowed to restructure its financial debts using a scheme of arrangement if it can reach an agreement with all its stakeholders, including creditors, debtors, and holders of debentures. Once the proposed plan gets approved, it becomes enforceable against all parties. Section 230 of the Companies Act, when read in consonance with Regulation 2-B of the Insolvency and Bankruptcy Board of India’s (IBBI hereinafter) Liquidation Process Regulations 2016, establishes guidelines for the approval of time period in relation to “Schemes of Compromise or Arrangement”. Regulation 2B specifically addresses the time period for the scheme of arrangement when the company is in liquidation. It specifies that the proposed scheme of compromise or arrangement shall be completed within 90 days of the order of Liquidation. The persons who are not eligible under the Insolvency and Bankruptcy Code of India, 2016 (IBC, 2016 hereinafter) to submit the Resolution Plan shall not be a party to such compromise or arrangement. A significant question that arises with regard to schemes of arrangements or compromise is the fundamental character of the 90-day period required by Regulation 2B i.e., whether or not this period is directory or mandatory in nature. In the case of Arun Kumar Jagatramka vs. Jindal Steel & Power Ltd., the apex court talked about the interplay between the IBC, 2016, and Section 230 of the Companies Act, 2013. The court stated that the IBC and Section 230 must be construed in harmony. It was determined that suggested compromise or arrangement solutions should follow the IBC’s guiding principles, particularly in situations when companies are in liquidation. This was held keeping in view with the objective of safeguarding businesses against poor management and going into liquidation. The court ruled that Section 230 and the IBC are inextricably linked when addressing firms that are in liquidation, rejecting the claim that Section 230 stands alone and has no relationship to the IBC. In the case of Bharat Sharma Resolution Applicant vs. Reshma Mittal RP & Anr the National Company Law Tribunal (NCLT) order was the subject of the case’s appeal. The main question was whether the appellant, an MSME, should have been permitted to propose a compromise/arrangement scheme under Regulation 2B of the IBBI (Liquidation Process) Regulations, 2016, and whether the rejected Resolution Plan of the appellant should have been taken into consideration. The Liquidator argued that liquidation was the best option given the failure of the plan. It was held that the 90-day window under Regulation 2B was flexible and that the appellant should be permitted to submit a compromise/arrangement scheme within a month as per Section 230 of the Companies Act. Even though the 90-day window had passed, the appellant was allowed to submit a scheme of arrangement within one month, the tribunal did not view the 90-day window as an inflexible requirement, but rather as a directory provision. Further, in the case of Kshitiz Gupta (Liquidator in the matter of Abhishek Corporation Ltd.) Vs. Asset Reconstruction Company (India) Limited and Ors, the tribunal was asked to rule on how the Companies Act of 2013’s Sections 230 to 232 should be applied when a corporate debtor is being liquidated under IBC, 2016. The issue was whether the liquidator should try to save the business by reaching a scheme of arrangement with the creditors in accordance with Sections 230-232, and if that failed, move forward with the asset sale. It was held that the liquidator should prioritize trying to revive the company using the procedures outlined in Sections 230-232 of the Companies Act, 2013, and that these proceedings could take longer than the usual 90 days and emphasized that asset sales should only be pursued in cases where Sections 230–232 revival efforts have failed. This interpretation permitted a more adaptable strategy, acknowledging that the precise timetable for revival efforts and legal actions could change depending on the situation. The decision emphasized that when considering the revival and arrangement processes under the Companies Act, 2013, adherence to the strict 90-day period was not required. In the context of an ongoing liquidation processing the case of Small Industrial Development Bank of India and Ors vs. Delicious Cocoo Water Pvt. Ltd. and Ors, the tribunal was asked to decide whether to accept or not a Scheme of Arrangement pursuant to Section 230 of the Companies Act, 2013. The main issue was whether the submission deadline outlined in Regulation 2B (1) of the IBBI (Liquidation Process) Regulations, 2016, was mandatory or merely directory in nature. It was held that the timeline can be extended if it serves the scheme’s purpose as there was no specific timeline prescribed in the IBC, 2016 itself for submitting such a scheme. The tribunal’s decision emphasized the IBC’s goals of maximizing the value of a corporate debtor’s assets and favouring resolution over liquidation. As a result, the tribunal ordered the liquidator to present the proposed plan as soon as possible for the creditors’ consideration, maintaining the status quo with regard to the corporate debtor’s assets until the creditors decided regarding the plan’s viability. However, in the case of Mr. Harish Sharma vs. C&C Constructions Ltd. & Ors, the appellant sought an extension of the timeline for a scheme of compromise. It was held that the appellant had not met the requirements to request an extension of the deadline for submitting a compromise and arrangement plan, i.e., a formulated and ready plan was not demonstrated by the appellant, and their proposed plan was not approved by at least 75% of the secured creditors. Furthermore, no proof of the scheme’s readiness had been provided by the end of the process’s prescribed 90-day period. Therefore, it was concluded

[By Rishabh Shivani] The author is a student of National Law School of India University, Bengaluru.   Introduction Bank guarantees are special contracts where a bank guarantees performance by one party in a separate, underlying contract and agrees to furnish payment unconditionally on the demand of the beneficiary. However, egregious fraud and special equities are two exceptions based on which injunctions restraining the  encashment of a guarantee can be granted. While egregious fraud  necessitates fraud by the beneficiary in the underlying contract, special equities conventionally demand exceptional circumstances leading to irretrievable injustice or financial harm to the party claiming the injunction, if such injunction is not granted. Irretrievable injustice has, therefore, been considered a necessary consequence of establishing special equities. In Standard Chartered Bank v Heavy Engineering Corporation Ltd (“Standard Chartered”), the Supreme Court deviated from this rule and recognised special equities as a distinct circumstance from irretrievable injustice, thereby increasing the number of exceptions from two to three. However, the scope of special equities is still unclear, with no single principle laid down to determine when special equities can be claimed. In this piece, I attempt to clarify the meaning of “special equities” after the Standard Chartered ruling and lay down a test of prima facie breach now being used by Courts to establish special equities. Firstly, I provide a brief evolution of the law on special equities, and the changes brought by Standard Chartered. I then look at cases post-Standard Chartered and argue that the single guiding principle for Courts to establish special equities now is when no prima facie breach is attributable to the party claiming the injunction. I conclude by arguing that this changed meaning of special equities was much needed and does not affect the unconditional nature of bank guarantees. Evolution of Special Equities as a Ground for Injunctions The phrase “special equities” neither originates from English common law nor is statutorily defined. It is merely a product of judicial creation and was mentioned for the first time in Texmaco Ltd v State Bank of India, where the Calcutta High Court recognised “special equities” as a second exception where injunctions could be awarded. However, the Court did not elaborate upon what it meant by special equities. It was only after the ruling in Itek Corporation v First National Bank of Boston that there was some clarity. Here, a US District Court held that injunctions may be granted when the encashment would cause irretrievable injustice, such that the party would not be able to reimburse itself later. This dictum has been uniformly applied by Indian Courts. For example, in UP Cooperation Federation v Singh Consultants, the Supreme Court held that parties claiming injunctions will have to prove special equities, the consequence of which is irretrievable injustice, to successfully claim injunctions. In subsequent cases such as UP State Sugar Corporation v Sumac International and Svenska Handelsbanken v Indian Charge Chrome Ltd, courts have focused only on the irretrievability of damages for establishing special equities. Hence, special equities were established only in cases of irretrievable injustice, not otherwise. In fact, in Indu Projects v Union of India, the Delhi High Court went to the lengths of holding that special equities are interchangeably used with irretrievable injustice and are not larger in scope than the latter. Special equities were, therefore, practically ignored by Indian courts as an independent ground for awarding injunctions. However, this position was entirely changed in Standard Chartered. Here, the Supreme Court deviated from its rulings and held that injunctions can be granted when there is fraud, irretrievable injustice and special equities. It recognised special equities as a distinct circumstance from irretrievable injustice and hence, as a third exception. Establishing Special Equities Post Standard Chartered While Standard Chartered has transformed special equities by recognising it as a third exception, the extent of such transformation is, solely by the judgement, unclear as the Court did not define what it meant by special equities and how it was different from irretrievable injustice. Hence, it must be understood by analysing relevant case law post-Standard Chartered’s ruling. Standard Chartered was first applied by the Delhi High Court in Halliburton Offshore Services Inc Limited v Vedanta Limited and Others (“Halliburton”). Here, the imposition of the COVID-19 lockdown made it impossible for Halliburton to perform the contract. Consequently, Vedanta claimed breach and sought to encash the bank guarantees, and in response, Halliburton approached the Court seeking an injunction. Now, as per the pre-Standard Chartered position, the injunction would not have been granted as the damages were not irretrievable. However, the Court here recognised the distinction created in Standard Chartered and held that as Halliburton was willing to perform the contract but was genuinely disabled from doing so due to the lockdown, the encashment of bank guarantees would have caused unfair prejudice to it, and hence there were special equities in its favour. The injunction was, therefore, granted on the ground of special equities. However, the mere existence of COVID-19 is not sufficient to establish special equities. In Shaarc Projects Limited v Indian Oil Corporation (“Shaarc”), there were bank guarantees furnished by Shaarc in favour of Indian Oil. When several breaches were flagged by Indian Oil, Shaarc sought an injunction against the invocation of the bank guarantee, claiming that the performance became burdensome due to COVID-19. The Court rejected this plea holding that the increased burden does not make out a case of special equities. Why did the Court hold differently in these cases, given that both were marred by COVID-19? The differentiating factor was the existence of a prima facie breach. In Halliburton, the breach allegations were unfounded because Halliburton was genuinely disabled from performing the contract due to COVID-19. However, in Shaarc, the pandemic – did not disable Shaarc from performing the contract. The breach allegations were reasonable and well-founded. This prima facie breach principle has also been used in cases where there are arbitral awards in favour of the claimant. In Technimont Pvt Ltd v ONGC Petro Additions, the Delhi High Court

[By Tanya Verma] The author is a student of Dr. Ram Manohar Lohiya National Law University.   Introduction In Digital Lending (DL) context, individuals can conveniently secure loans through online platforms. These platforms, typically accessible as applications or websites, are managed by entities known as Loan Service Providers (LSPs). The digital lending process necessitates borrowers to furnish requisite documentation and request specific financial solutions, including Buy Now Pay Later loans (BNPL), Small Medium Enterprise (SME) loans, Personal loans, Trade loans, and more. These LSPs, duly authorized by Financial Institutions (FIs), evaluate the financial history of applicants along with the submitted documents. Upon thorough assessment, loans are digitally approved through the platform. Following the guidelines established by the Reserve Bank of India (RBI) for Digital Lending, Financial Institutions (FIs) are designated as Regulated Entities (RE). These REs primarily extend loans to entities deemed to have low risk, thereby safeguarding the return of invested funds. However, there are instances where borrowers cannot fulfill their loan obligations, resulting in potential losses for the REs. To mitigate this scenario, LSPs offer a guarantee to REs through an agreement referred to as a Default Loss Guarantee (DLG). The DLG agreement ensures loan protection up to a specified limit. Yet, before August 2022, LSPs introduced a synthetic securitization process involving transferring credit risk for digitally provided loans using credit derivatives or guarantees while retaining the loan portfolio on their own balance sheet. This process included a 100% risk guarantee. In response, the RBI prohibited this approach due to its adverse impact on bank balance sheets and implications for the risk management commitments made by LSPs. This piece attempts to shed light on the broader implications of the same, starting with that of lenders, then loan service providers, and lastly for borrowers, which eventually turn out to be on the brighter side. Before that, a look at the major terms of the guidelines: The LSP providing DLG must be a company incorporated under the Companies Act, 2013. DLG agreements must be legally enforceable contracts between the RE and DLG provider. The DLG arrangement should not exceed 5% of the loan portfolio. The DLG arrangement’s tenor should match the longest tenor of the loan portfolio. DLG can be accepted as cash deposits, fixed deposits, or bank guarantees. REs can invoke DLG within 120 days of overdue. LSPs must publish information about DLG portfolios and amounts on their websites. REs are responsible for identifying loan assets as Non-Performing Assets (NPAs). REs need a board-approved policy before entering any DLG arrangement, covering selection criteria, guarantee scope, monitoring processes, and fees. DLG arrangements are governed by RBI’s Digital Lending Guidelines and other relevant regulations for customer protection and grievance redressal. Implications For brevity of expression, I shall analyze the implications in three parts. First, I shall deal with the implications on lenders, second, for loan service providers, and lastly, for borrowers. For Lenders: We see three major implications for the lenders. First, the RBI’s 5% cap on DLG addresses the issue of high guarantee rates, preventing banks from writing off loans through synthetic securitization. In simpler terms, in a synthetic securitization, a bank buys credit protection on a portfolio of loans from an investor, thereby implying that when a loan in the portfolio defaults, the investor reimburses the bank for the losses incurred on loans in that portfolio up to a maximum, which is the amount invested. This suggests that the RBI’s decision to limit the DLG to 5% of the loan portfolio is a strategic move to curb the practice of offering excessively high guarantee rates by LSPs. By imposing this cap, the RBI aims to prevent banks from taking advantage of synthetic securitization, a process where credit risk is transferred through derivatives or guarantees. The implication is that the RBI seeks to ensure a more controlled and realistic financial environment by discouraging risky lending practices that could lead to potential loan write-offs. Second, it can be seen that the DLG contracts offer security, allowing lenders to enforce terms and impose penalties on breaching LSPs. This highlights the contractual security provided by DLG agreements. Lenders can use these agreements to establish clear terms and conditions with LSPs. In case of any breaches, lenders have the authority to enforce penalties as per the agreement terms. This creates a framework that encourages LSPs to adhere to their commitments, ensuring higher accountability and reducing the risk of non-compliance or misconduct. Thirdly, REs must still identify NPAs for asset classification, excluding guaranteed amounts from LSPs. This point emphasizes that while Digital Lending Guarantee (DLG) agreements provide assurance for loan repayment, it’s still the responsibility of the Regulated Entities (REs) to identify Non-Performing Assets (NPAs) for proper asset classification. The guaranteed amounts from LSPs are excluded from this classification process, indicating that the guarantees do not affect the overall assessment of the financial health of the loans. This separation maintains asset quality and risk assessment transparency, regardless of the guarantees provided. Adding onto the above, it can be seen that board-approved policies and auditor-certified disclosures enhance credit standards and reliability. Here, the focus is on robust credit underwriting standards and transparency in the DLG arrangement process. The requirement for board-approved policies ensures that the entire DLG process adheres to specific criteria, from selecting providers to monitoring and review mechanisms. Auditor-certified disclosures add another layer of reliability by ensuring that the financial information provided by the DLG provider is accurate and trustworthy. This enhancement in credit standards and transparency improves the overall credibility and effectiveness of the DLG arrangements. For Loan Service Providers The situation of LSPs is not the same too, for they can no longer offer exorbitant DLG rates, affecting their risk exposure and credit management. This highlights a significant change for LSPs resulting from implementing the RBI’s DLG guidelines. The guidelines impose a maximum cap on the rates at which DLG arrangements can be offered by LSPs. This cap effectively curtails the ability of LSPs to provide excessively high guarantee rates to

[By Yuvraj Sharma & Jatin Patil] The authors are students of School of Law, Narsee Monjee Institute of Management & Studies, Hyderabad.   Introduction On August 18, 2023, the Reserve Bank of India (“RBI”) has recently released fresh directives regarding the imposition of Penal interest rates on loan accounts. These guidelines will affect from January 1, 2024. According to these new guidelines, any penalties incurred by borrowers due to Not adhering to loan terms will be classified as “penal charges” rather than “penal interest”, added to the existing interest rate on the loans. These guidelines, titled “Fair Lending Practice- Penal Charges in Loan Accounts”, also emphasise that penal charges should not be subjected to interest accumulation, effectively preventing additional interest from being calculated on these charges. This blog analyses critically evaluates the benefit and drawbacks of these guidelines and proposed potentials for enhancements for their effectiveness. Background The Reserve Bank of India has issued guidelines to regulated entities to ensure transparency and fairness in disclosing penal interest. The current regulations provide lending institution with the authority to formulate board approved policies governing the application of Penal Interest rates. However, The RBI has observed that a significant number of Real Estate (“RE”) firms levy penal interest rates alongside the regular interest rate for instances of default or non-compliance with credit terms. The purpose of penal interest Is to promote credit discipline among borrowers and ensure equitable compensation for lenders. Not to serve as a revenue enhancement mechanism beyond the contracted interest rate. The Supervisory assessment conducted by the RBI have unveiled a wide range of practices within the real estate sector concerning the imposition of penal charges or interest. This disparity in approaches has given rise to customer grievances and dispute, highlighting the need for standardization and better regulatory oversight. Presently, these rates and charges vary across banks and other lenders. They are applied in scenarios like missed or delayed EMI repayment, check bounces, repayment of loans. The Term “Penal Charges” and “Penal Interest” ‘Penal charges’ represent extra fees imposed by lenders upon borrowers. These charges become applicable when a borrower experience delays in repaying a loan or the equated monthly installment linked to a loan or other financial instruments. These specific of penal charges for payment defaults differ across banks and non-banking financial companies letting standardized guidelines. These charges are usually stipulated in the agreement terms for payment default. Nevertheless, instances have arisen where lenders attempted to impose higher charges than outlined in the agreement as reported by borrowers. ‘Penal Interest’, In the event that the borrower does not receive the installments in accordance with the specified repayment terms by the end of the month, they will incur an additional charge known as Penal Interest on the delayed installments. This practice is designed to ensure timely to ensure repayment and discourage delays in meeting financial obligations. Triggered Reason for RBI Guidelines The Central Bank has issues new regulations due to the discovery that numerous lending institutions it regulates were imposing extra penal interest rates on borrowers who defaulted or failed to comply with the terms of their credit agreements. These regulations state that penal charges should not be compounded, meaning no additional interest should be calculated based on these charges. However, the standard interest compounding procedure for the loan account remains unaffected. The guidelines set by the regulatory authority RBI concerning penal charges for non-compliance with non-contract terms. These guidelines, effective from January 1, 2024, apply to various financial entities under RBI regulation, including commercial banks, cooperative banks and NBFC’s, housing financial companies and board. The guidelines prohibited imposing penal interest as an additional interest rate on top of the loans rate and institute maintained reasonable “penal charges” for breach of loan terms. These charges must be non-discriminatory and proportional to the severity of non-compliance. The instruction requires entities to disclose the nature and amount of penal charges in loan agreements, important terms and their websites. Furthermore, communication of applicable charges and reason is mandatory when notifying borrowers about non-compliance. Existing loans will transition to the new regime. Their next review or renewal date or within six months of the circular effective date. Notably, these rules exclude credit card, external commercial borrowings, trade units and structure obligations which are covered by civil specific product directions. In essence, the RBI mandates that financial entities regulated by it implement guidelines to ensure fair and transparent penal Charges for Loan Non-Compliance while providing clear disclosure to borrowers. The new rules are applicable to various financial institutions under the RBI jurisdiction except for specific financial product outlines in the text. Fostering Equitable Borrowing Practice: Promoting Uniformity and Fairness through new lending guidelines The new guidelines have been introduced with the intention of covering divergent practice among lending institutions and ensuring that borrowers are not burdened with excessive charges for defaults or non-compliance. This progressive step aims to establish uniformity in the penalties being charged, thus preventing the abuse of process. While instances of process abuse have been noted in the past, these guidelines seek to comprehensively address the issue. As stated, the RBI intention in implementing these guidelines is not to employ them as a tool for revenue enhancement beyond the contracted interest rate. The primary objective of achieving uniformity is a crucial step, although it is important to note that these guidelines do not extend to areas such as credit cards external, commercial borrowings, trade credit, etc. This approach is distinctly centered around individual borrowers aiming to safeguard their interest. These guidelines also mandate that both the rational and the quantum of charges must be transparently disclosed to the borrower within the loan agreement. This major ensures the overall well-being of the borrower and is warmly welcomed. Moreover, these guidelines are the purpose of installing senses of credit discipline among borrowers, emphasizing fairness and the paramount factor, these guidelines have been introduced to uphold the principle of fairness Conclusion In conclusion, The Reserve Bank of India has introduced vital guidelines with the