Finance | January – March 2025

Regulatory Updates

RBI Directions on Credit Information Reporting

The Reserve Bank of India (“RBI“) has, vide notification dated 6 January 2025, notified the Master Direction on Credit Information Reporting Directions, 2025. These directions consolidate the prior instructions of RBI in relation to the reporting of the credit information issued to banks, All India Financial Institutions, Non-banking Financial Companies, Asset Reconstruction Companies and Credit Information Companies.

RBI Directions on Non-resident Investment in Debt Instruments

The RBI has, vide notification dated 6 January 2025, notified the Master Direction on Non-resident Investment in Debt Instruments) Directions, 2025. These directions consolidate RBI’s prior regulations to regulate non-resident investment in debt instruments in India.

Amendments to Guidelines on Settlement of Dues of borrowers by ARCs

The RBI has, vide notification dated 20 January 2025, issued revised guidelines in relation to settlement of dues payable by the borrowers of the Asset Reconstruction Companies (“ARCs“). The key aspects of the revised guidelines are set out below:

The board-approved policy for settlement of dues payable by borrowers should now set out inter alia the cut-off date for one time settlement eligibility and methodology for arriving at the realisable value of the security.

The earlier requirement of settling dues with the borrower after undertaking all other methods of recovery with no further prospects of recovery, has been modified. Settlements can now be done after all possible ways to recover the dues have been examined and settlement is considered as the best option available.

Settlement of accounts pertaining to a borrower having aggregate value of more than INR 1,00,00,000 in terms of outstanding principal in the books of transferor/s, must be made in accordance with the board approved policy and be reviewed by an Independent Advisory Committee (“IAC“). The board of directors of the ARC shall deliberate on the recommendations of IAC and consider various recovery options before deciding whether the option of settlement of dues with the borrower is the best option and formally record its rationale in the minutes of the meeting. The same process will be applicable for settlement of dues payable by the borrowers classified as frauds or wilful defaulters, irrespective of the amount involved. In the erstwhile guidelines, this mechanism was applicable on settlement of dues with any borrower, irrespective of the aggregate outstanding dues.

The settlement of accounts of a borrower having aggregate value of INR 1,00,00,000 or less must be made in accordance with the board approved policy, provided that no person involved in the asset acquisition shall be involved in approving its settlement and a quarterly report on the resolution of accounts shall be placed before the board of directors / its committee. Such format will inter alia provide the trends, fraud / wilful defaulter classifications, segment-wise data, and recovery timelines. Such provisions were not provided in the erstwhile guidelines.

Amendments to Guidelines for Private Placement of NCDs with maturity of more than one year by HFCs

The RBI has, vide its notification dated 29 January 2025, modified the ‘Master Direction – Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021’ regarding private placements of non-convertible debentures (“NCDs“) (with maturity more than 1 year). The guidelines applicable to non-banking financial companies (“NBFCs“) in this regard will now be applicable mutatis-mutandis to Housing Finance Companies (“HFCs“). Accordingly, the existing guidelines applicable to HFCs under Chapter XI of Master Direction – Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021 have been repealed. The revised guidelines shall apply to all fresh private placements of NCDs (with maturity more than 1 year) by HFCs from the date of the notification.

Some of the key aspects of the new guidelines applicable to issuance of private placement of NCDs (with maturity more than 1 year) by an HFC are set out below:

HFCs are no longer required to obtain a credit rating from approved agencies for issuing such NCDs.

The erstwhile guidelines mandated the offer document for placement of such NCDs to be issued within 6 months from the date of the board resolution authorizing the issue. Such requirement has been done away with.

The new guidelines have removed the requirement for mandatory appointment of a Debenture Trustee for each issue of NCDs. However, in case of listed NCDs, the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 will still apply, which mandate appointment of a Debenture Trustee and define their roles and responsibilities.

The erstwhile guidelines provided that an HFC issuing NCDs shall ensure that at all points of time such debentures are fully secured. No such requirements have been provided under the new guidelines.

According to the new guidelines, HFCs shall issue such NCDs only for deployment of funds on its own balance sheet and not to facilitate resource requests of group entities/parent company/ associates.

Amendment to the RBI Directions on Prudential Regulations on Investment Norms for All India Financial Institutions

RBI has, vide notification dated 17 February 2025, notified an amendment (“Amendment“) to the RBI (Prudential Regulations on Basel III Capital Framework, Exposure Norms, Significant Investments, Classification, Valuation and Operation of Investment Portfolio Norms and Resource Raising Norms for All India Financial Institutions) Directions, 2023 (“Directions“).

The Directions specify that the investments held by All India Financial Institutions (“AIFIs“) included under the Held to Maturity (“HTM“) category shall not exceed 25% of the AIFI’s total investments. The Amendment provides that the investments made by AIFIs in long-term bonds and debentures (i.e., having minimum residual maturity of 3 years at the time of investment) issued by non-financial entities shall not be accounted for the purpose of the ceiling of 25% cap applicable to investments included under HTM category.

RBI Directions on Forward Contracts in Government Securities

RBI has, on 21 February 2025, notified the RBI (Forward Contracts in Government Securities) Directions, 2025 (“Directions“) which will come into effect on 2 May 2025.

The Directions apply to forward contracts in government securities (“Bond Forwards“) undertaken in the Over-the-Counter (“OTC“) market in India. Some of the key provisions of the Directions are set out below:

Bond Forward transactions may be undertaken by residents and non-residents who are eligible to invest in government securities (“G-Secs“). Any entity eligible to be classified as a non-retail user in terms of the Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019, can undertake transactions in Bond Forwards as a user.

Scheduled Commercial Banks (excluding small finance, payment, local area, and regional rural banks) and standalone primary dealers can act as market-makers (entities which provide prices to users and other market-makers) in Bond Forward transactions. A market-marker may undertake long positions without any limits and covered short positions.

Every Bond Forward transaction must involve at least 1 market-maker or a central counterparty authorized by RBI for this purpose.

An entity eligible to be classified as non-retail user under the Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019, are eligible to participate in Bond Forward transactions as users.

Bond Forward transactions may be settled physically or through cash. A physically settled bond forward transaction must be settled through Clearing Corporation of India Ltd. (“CCIL“) or any other clearing agency or clearing arrangement approved by RBI, while cash-settled Bond Forward transaction may be settled bilaterally or through an RBI approved clearing arrangement.

Market participant may exit its position in a Bond Forward by unwinding the position with the original counterparty or assigning the position to any other eligible market participant(s) through novation, subject to the provisions of the RBI circular on Novation of OTC Derivative Contracts dated 9 December 2013.

The market timing for undertaking Bond Forward transactions shall be the market timing specified by the RBI for undertaking OTC rupee interest rate derivative transactions.

Market-makers must report all Bond Forward transactions daily to the Trade Repository of CCIL before its closure, inter alia including details of counterparties, underlying G-Sec, settlement type and short position type. Any instances of unwinding, novation, bilateral settlement and settlement defaults must be reported.

Market participants are required to comply with applicable prudential norms including those related to capital adequacy, exposure norms, related party transactions, etc., issued by the relevant regulators for Bond Forward transactions.

G-Secs held to cover short positions in bond forwards are eligible to be reckoned for Statutory Liquidity Ratio (SLR) by the entity covering the short position, provided that the security is otherwise eligible to be reckoned for SLR.

For more information contact:

Jhinook Roy
Practice Head – Finance
jhinook.roy@veritaslegal.in

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