The B&B Regulatory Updates #1: RBI on Deposit Interest, SEBI on REITs & more

Starting this week, Bar & Bench will bring you the latest regulatory and policy updates from different ministries and regulatory authorities. 

Reserve Bank of India 

The RBI has on 3 March 2016 issued two master directions relating to interest on Advances and Deposits (“Directions”). With the issuance of these Directions, all prior circulars/notifications relating to interest on Advances and Deposits have been repealed. While the Directions on Deposits are applicable to all Scheduled Commercial Banks (“SCBs”) (including Regional Rural Banks) accepting deposits in rupee and foreign currency, the Directions on Advances are applicable to all Scheduled Commercial Banks (excluding Regional Rural Banks), granting rupee and foreign currency advances to their customers. However, both the Directions will not apply to foreign branches of Indian banks.

The Directions provide for terms and conditions pursuant to which the SCBs shall pay interest on deposits and charge interest on advances respectively:

• The conditions for deposits inter alia require the SCBs to maintain uniform rates of interests across all branches and prohibit charging of interest rates by the means of negotiations.
• The conditions for advances appear to be far less onerous. The Directions on Advances also empower the banks to charge penal interests to the customers after taking into consideration the difficulties of customers and incentive to service debt.

As far as interest rates are concerned:

• The Directions on Deposits further provide for the interest rates to be charged for various Domestic Rupee Deposits and Rupee Deposits of Non-Residents. Banks are also permitted to pay an additional interest of one percent per annum to certain employees subject to the conditions provided.
• The Directions on Advances provide that all rupee loans sanctioned and credit limits renewed after 1 July 2010 and before 1 April 2016 shall be priced with reference to the Base Rate whereas all such loans sanctioned and credit limits renewed after 1 April 2016 shall be priced with reference to the Marginal Cost of Funds based Lending Rate.

Provisions have been made for foreign currency deposits and advances:

• The Directions on Deposits provide for the conditions under which banks will accept/renew Foreign Currency Deposits which inter alia include the interest rates, the tenor of deposits, size of deposits, manner of calculation of interest, payment of interest on Foreign Currency (Non-Resident) Account deposits of Non-Residents on return to India, premature withdrawal and penalty thereon.
• However, in the case of advances, banks are free to determine interest rates on advances in foreign currency as per the comprehensive policy on interest rates on advances, which is to be formulated as provided for in Section 13 of the Directions.

Securities Exchange Board of India

Investment by FPIs in REITS, InvIts, AIFs and corporate bonds under default

The SEBI issued a circular dated 15 March 2016 permitting Foreign Portfolio Investors (“FPIs”) to invest in Real Estate Investment Trusts, Infrastructure Investment Trusts and Category III Alternate Investment Funds (“AIFs”) (subject to a maximum of twenty five per cent in AIFs) in order to align the SEBI (FPI) Regulations, 2014 with the RBI notification dated 16 November 2015.

Additionally, on the lines of a 26 November 2015 decision by the RBI to allow FPIs to invest in corporate bonds under default, SEBI has now allowed FPIs to acquire non-convertible debentures (“NCD”) or bonds, which are under default, either fully or partly, in the repayment of principal on maturity or principal instalment in the case of an amortising bond provided that such NCDs and bonds must have a minimum revised maturity period of three years to allow an FPI investment.

Press Release

In light of the recent violations by several companies involving issuance of securities (including shares and debt securities) in the garb of private placement without complying with the Companies Act, 1956 read with Companies Act, 2013 and all applicable securities laws (“Requisite Laws”), SEBI issued a Press Release dated 16 March 2016 cautioning investors to beware of such malpractices.

The PR also briefly enlists the provisions to be complied with for issuance of securities in case private placement.

The PR further informs that SEBI has taken action against 233 companies (“Defaulting Companies”) as of 15 March 2016 for issuing securities in violation of the Requisite Laws. In all such cases, SEBI has passed orders against the directors/promoters of such Defaulting Companies to:

• Refund the money collected by the Defaulting Companies through issuance of any of the securities with interest rate of 15% per annum;
• Not access the capital market in any manner;
• Restrain and prohibit from buying, selling or otherwise dealing in the securities market, from the date of order till the expiry of four years from the date of completion of refunds to investors;
• Restrain from associating themselves with any public listed company and any public company, which intends to raise money from the public, or any intermediary registered with SEBI and;
• Issue public notice, in all editions of two National Dailies (one English and one Hindi) and in one local daily with wide circulation, detailing modalities for refund, including details of contact persons including names, addresses and contact details, within fifteen days of the Order coming effect.