Financial Regulatory Practice

FIU-IND’s Annual Report 2024-25: Trends and Takeaways for India’s Digital Assets Industry

Introduction

The Financial-Intelligence Unit – India (“FIU-IND”), India’s nodal enforcement agency for anti-money laundering and combatting the financing of terrorism (“AML/CFT”), has released its Annual Report (“Report”) for FY 2024-25.[1] The Report signals two clear trends: one, the continued expansion of India’s digital assets industry, with a focus on bringing offshore virtual digital asset service providers (“VDASP”) within the regulatory ambit; and two, the FIU-IND’s emphasis on data-driven information sharing for enforcement. This FIG Paper explores key areas of the FIU-IND’s focus in the previous year and offers insights into the future of digital assets regulation in the new year.Continue Reading FIG Paper No. 53 (VDA Series 8) FIU-IND’s Annual Report 2024-25: Trends and Takeaways for India’s Digital Assets Industry

NFRA Circular on Fraud Reporting and India Inc.’s Dilemma

Context:

In recent years, India has witnessed a slew of accounting frauds, especially in the booming start-up ecosystem. Even established players have not been able to escape the ‘fraud virus’, thereby tarnishing reputations built over centuries. Over the years, businesses in various key sectors of the Indian economy have been rife with corporate governance issues, as is evident from recent reports of alleged violations of accounting norms, overstatement of revenues and underreporting of expenses[1], delayed filing of documents for foreign direct investment received[2], as well as adoption of fraudulent practices for ever-greening of NPAs[3]. Despite the commendable work done by regulators in tightening various statutory provisions, corporate fraud seems to continue to plague India Inc.Continue Reading NFRA Circular on Fraud Reporting and India Inc.’s Dilemma

Enforcing progressive compliance: Push for digitalisation by dematerialising shares of all companies

Pursuant to the issuance of the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, with effect from September 30, 2024, both public and private limited companies are required to convert the existing shares and issue new shares exclusively in dematerialised form, bringing an end to physical share certificates. While this seems like a small change, this post seeks to trace the transformation of ‘dematerialisation’ from a progressive and secure option for security holders to a compliance requirement, signifying an increased and progressive threshold of regulation. The post also highlights the key challenges that companies and investors may face with this change.Continue Reading Enforcing progressive compliance: Push for digitalisation by dematerialising shares of all Companies

RBI FURTHER PIERCES THE WIRE TRANSER VEIL KYC Guidelines

In its constant endeavour to combat money laundering, terrorist financing, and financing of other illegal activities, the Reserve Bank of India (“RBI”) has, vide a letter dated May 4, 2023, amended the Master Directions on Know Your Customer, 2016 and instructed all banks, financial institutions and other Regulated Entities (“REs”) to comply with the newly added KYC norms for wire transfers (“RBI Instructions”). It is a known fact that money launderers across the world have been using wire transfers for long now, as a means to facilitate illegal acts, owing to less/ no regulatory scrutiny.Continue Reading RBI Further Pierces The Wire Transfer Veil

I. Background:

(i) SEBI notified the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2023 (“Amendment”), on June 27, 2023. The Amendment follows a Consultation Paper on Review of Regulatory Framework for Sponsors of a Mutual Fund, which the SEBI had released on January 13, 2023 (“Consultation Paper”).

(ii) The Amendment…

SEBI’s MUTUAL FUND EXPENSE RATIO CONSULTATION PAPER

BACKGROUND

On May 18, 2023, the Securities and Exchange Board of India [“SEBI”] had placed a consultation paper related to the total expense ratio charged by Asset Management Companies [“AMC”] to unitholders of mutual funds. June 8, 2023 was set as the deadline for submission of public comments. The due date, however, was extended to June 8, 2023.

The proposal is aimed at curbing distributor practices such as unnecessary switching of schemes and pushing new fund offerings for higher commissions. SEBI in its consultation paper proposed to introduce performance fees for funds. It proposed two approaches, but also suggested testing the models under the Regulatory Sandbox.Continue Reading FIG Paper (No. 21 – Series 1): SEBI’s Mutual Fund Expense Ratio Consultation Paper: Impact Analysis

FIG Paper

BACKGROUND

While the Reserve Bank of India (“RBI”) had in its August 10, 2022 press release stated that it is examining the First Loss Default Guarantee (“FLDG”) structures, the Digital Lending Guidelines issued by the RBI on September 2, 2022 neither permitted nor expressly prohibited loss sharing arrangements such as FLDGs, but recommended that provisions of paragraph 6(c) of the Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 dated September 24, 2021 (“Securitisation MD”) be adhered to for financial products involving contractual agreements such as FLDG. Paragraph 6(c) of Securitisation MD prohibits Regulated Entities (“RE”) from undertaking or assuming exposure under “synthetic securitisation” structures. This led to industry-wide confusion regarding the permissibility of loss sharing arrangements such as FLDG.Continue Reading FIG Paper (No.18 – Series 2) RBI’s New Default Loss Guarantee Guidelines: Late but Not lost

Financial Regulation

Central banks and other financial regulatory authorities are responsible for influencing major investment decisions and resource allocation through their policies. In India, the Reserve Bank of India (RBI) has joined a growing number central banks and financial regulators, who have incorporated climate change into their financial stability mandate seeking to frame prudential regulations and/or direct credit towards sustainable projects. We have analysed the recent developments in our previous posts available here and here.Continue Reading Green Central Banks and Financial Regulators – Are they Legally Mandated?

New RBI IT Outsourcing Directions Industry Implications

Background

The Reserve Bank of India (“RBI”) has issued the RBI Master Direction on Outsourcing of Information Technology Services, dated April 10, 2023 (“Directions”), that will come into effect on October 1, 2023, in line with its earlier Draft Master Direction on Outsourcing of IT Services, dated June 23, 2022 (“Draft Directions”). The RBI’s message to Regulated Entities (“RE”) via these Directions is clear – the liability of Regulated Entities (“RE”) towards their customers does not get diminished due to such outsourcing arrangements or on account of engaging Third Party Service Providers (“TPSP”), nor does it impede effective supervision by the RBI. Outsourcing activities for financial services were already regulated (“Existing Guidelines”), but not for information technology (“IT”) services. In line with the Existing Guidelines, the idea is that core functional areas of RE cannot be outsourced.Continue Reading FIG Paper (No. 20 – Series 1): New RBI IT Outsourcing Directions: Industry Implications

Financial institutions have invested heavily into artificial intelligence (“AI”) and machine learning (“ML”) techniques globally, and in India, over the past decade. There are estimates that AI technologies could potentially contribute towards US$ 1 trillion in additional value for the global banking sector, and a World Economic Forum survey indicated that seventy seven per cent of all respondents (151 fintechs and financial institutions from thirty three countries) anticipated AI to possess a high or a very high overall importance in their businesses in the near future. Tangible use-cases in the financial sector have resultantly sprung, benefitting both customers and investors through robo advisors, portfolio optimisation, and algorithmic trading bots. Financial institutions on their part have benefitted greatly through chat bots handling consumer interactions and grievances, identity verification (including video KYC), predictive analytics to mitigate and minimise frauds, etc.Continue Reading FIG Paper (No. 19 – Series 1)- AI/ ML, ChatGPT: Legal and regulatory considerations for financial service use-cases