Regulatory Updates #24: SEBI on REITs, RBI forms group to review FinTech & more

Bar & Bench will bring to you the latest regulatory and policy updates from different ministries and regulatory authorities. In this edition of the Bar & Bench Regulatory Updates, we analyse the latest updates by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI).

SEBI tightens collateral norms

SEBI has observed that some banks who are also trading/clearing members on stock exchange/ clearing corporation have placed fixed deposit receipts (FDRs) issued by themselves as collateral with the clearing corporation.

In order to align itself with the global risk management practices set by the international securities regulator body IOSCO, SEBI last week issued a circular directing such clearing corporations to not accept FDRs from banks as ‘collateral’ who are also clearing members, or are associates of clearing members.

SEBI further directed clearing members who have deposited their own FDRs or FDRs of associate banks to replace such collateral with other eligible collateral as per extant norms.

SEBI proposes easier norms for REITs

SEBI introduced the concept of Real Estate Investment Trusts (REITs) back in 2014, however it failed to attract investors and not a single trust has been set up since then. In a bid to make REITs more attractive to investors and real estate players, SEBI has issued a consultation paper making various proposals based on representations received from the industry.

The paper inter alia proposes:

• Allowing REITs to invest in holding companies which have investments in other Special Purpose Vehicles (SPV) instead of restricting investments through one layer of SPV;
• Greater flexibility to REITs for purchasing properties, by allowing them to purchase properties at any value as long as the price is not greater than 110% of the average of the two independent valuations;
• Relaxing the requirement of minimum number of investors every REIT needs to have while going public by bringing it at par with the Securities Contracts (Regulation) Rules, 1957;
• REITs may invest up to 20% in under-construction projects while at least 80% should continue to be invested in completed and rent-generating properties;
• Alignment of related party transactions threshold with Companies Act, 2013 as opposed to the existing 60% and 75%

RBI forms panel to study financial technology and digital banking issues

The RBI has constituted an inter-regulatory working group which will study issues relating to financial technology and digital banking in India.

The 13-member working group will be chaired by Sudarshan Sen, executive director at RBI, along with members from various regulatory authorities such as the SEBI, Insurance Regulatory and Development Authority of India, Pension Fund Regulatory and Developmental Authority, National Payments Council of India, among others.

This group has been primarily created in view of the growing significance of technology in financial companies.

Among other functions, the working group will be responsible for mapping out the latest Fin Tech innovations, assess opportunities and risks arising in the financial system from digitisation and chalk out appropriate regulatory response to address these opportunities and risks.

This development also comes in light of the recent financial stability report, wherein RBI has questioned whether technology is an ‘agathokakological’ companion? (agathokakological: composed of both good and evil). The rapidly increasing levels of cyber attacks, which are cross border in nature, have posed a threat to the stability of the financial system.