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International Banking & Finance - India

posted 1 year ago


Anish Mashruwala



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Anish Mashruwala
J. Sagar Associates (JSA)

Our full spectrum of banking and finance services includes the following:

• Corporate Debt, both Rupee and foreign currency facilities (bilateral and syndicated) for capex, working capital and general corporate purposes.

• Acquisition and Leveraged Finance – for domestic and cross border acquisitions and leveraged deals, using senior secured, mezzanine and subordinated debt structures.

• Project Finance across various Infrastructure & Energy sectors, including roads, ports, airports, railway, conventional power, wind and solar power and oil & gas.

• Real Estate Finance – for acquisition of real estate properties and projects, construction of residential and commercial projects, lease rental discounting and refinancing.

• Asset Finance – for acquisition of equipment, ships, aircrafts and helicopters and security creation on such assets with Indian regulatory authorities.

• Trade Finance – Buyer’s credit, supplier’s credit, short term and long-term export advances, supply chain financing, pre-shipment and post shipment credit, factoring and bill discounting.

• Securitization – loan and asset backed securitisation, setting up securitisation trusts, issuance of security receipts and issuance of securitised debt instruments.

• Debt Capital Markets – issuance of privately placed debentures, Rupee / foreign currency bonds, masala bonds, MTN programmes and other privately placed debt securities.

• Debt Restructuring and re-financing, including corporate debt restructuring, asset reconstruction and schemes of arrangement.

• Insolvency – advising creditors committees, resolution professionals and resolution applicants as well as interim financing.

We are a full-service national law firm in India with a single balance sheet and accordingly, when necessary, our banking lawyers work in tandem with members of the firm’s capital markets & securities team, mergers & acquisitions team, projects & infrastructure team, real estate team, dispute resolution team and teams of other sectoral expertise so that our clients receive seamless service and in-depth legal advice and solutions.

JSA is a Tier 1 banking and finance law firm in India and has a widely recognised market leading banking & finance practice in the country. Our practice is partner led and is committed to providing quality professional service combining domain knowledge with a constructive, consistent, comprehensive and commercial approach to issues. Clients trust our banking and finance lawyers to take a practical and business-oriented approach in achieving their objectives. Our lawyers have a clear understanding of the expectations and requirements of both sides to a financing transaction and provide tailored advice to each client’s needs. The practice is especially praised for its accessibility and responsiveness and its ability to work well with international firms and clients.

We are empaneled by several global and domestic banks, and also represent a variety of other clients including non–banking finance companies, institutional lenders, multi-lateral, developmental and export credit institutions, asset managers, funds, real estate investors, arrangers and corporate borrowers in different sectors on a wide range of financing transactions.

India is an exchange control jurisdiction and the regulations relating to foreign exchange laws undergo constant change. Some of the significant recent changes in foreign exchange laws are:

• The Reserve Bank of India (“RBI”) came out with its new overseas investment regime(1) with the aim to boost the ease of doing business in September 2022. The new regime significantly simplifies the process of making overseas investment by Indian entities. New and enhanced definitions have been introduced under this regime.

• The borrowing from foreign entities (known as external commercial borrowings) is also regulated by the RBI. There are many regulatory terms and conditions that are required to be complied with for availing such borrowings. The RBI has recently enhanced the limit of external commercial borrowing under automatic route from USD 750 million to USD 1.5 billion in August 2022. Further, the cap on all-in-cost ceiling has also been increased by 100 bps for entities who have investment grade rating.

• Small finance banks have been allowed to deal in foreign currency (specific license has been issued by the RBI) once they complete two years of operations.

Some of the recent changes in the trade finance space are:

• In July 2022, the RBI has put in place an additional arrangement for invoicing, payment, and settlement of exports / imports in Indian rupees. This was introduced in order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of global trading community in INR.

• Further, in September 2021, the Insurance Regulatory and Development Authority of India (IRDAI) has issued guidelines on trade credit insurance. The new guidelines will provide insurance options to banks, factors, financiers or lenders who are providing factoring services to its customers.

Some other significant legal developments are:

• Issuance of Guidelines on Digital Lending(2) by the RBI in September 2022. Targeting banks and non-banking financial companies disbursing loans through digital platforms, these guidelines aim at protection of borrowers from unscrupulous lending practices. These guidelines, inter alia, prescribe uniform terms & conditions and disclosure formats to be adopted by all digital lenders, prohibit hidden charges, permit exits from loan arrangements within a specified time-period, mandate appointment of a nodal grievance redressal officer to address customer complaints, and introduce data minimization norms.

• RBI has introduced a new securitisation regulatory framework by way of Master Direction – Reserve Bank of India (Securitization of Standard Assets), 2021. This new framework, inter alia, permits single asset securitisation, introduces a minimum INR 10 million investment threshold for securitisation notes, introduces the two methods of securitisation (simple transparent and comparable securitisation (“STC”) and non-STC securitizstions). A separate set of guidelines for direct assignment transactions by way of Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 have been notified by RBI, as well.

(1) Foreign Exchange Management (Overseas Investment) Rules, 2022; Foreign Exchange Management (Overseas Investment) Regulations, 2022; and Foreign Exchange Management (Overseas Investment) Directions, 2022.

(2) RBI – Guidelines on Digital Lending dated September 02, 2022. Reserve Bank of India – Notifications (rbi.org.in).

India has become an attractive foreign direct investment (“FDI”) destination in the recent years due to favorable government policies, especially in sectors such as defence, manufacturing, real estate, infrastructure and research and development. In fact, India reported its FDI inflow to be $83.57 billion for the financial year 2021-22, highest till date, despite the Covid-19 pandemic and the Ukraine conflict. FDI inflows in India have increased 20-fold in the last 20 years.(3) Further, computer software and hardware became the top recipient sector of FDI equity inflow with around a 25% share.(4) We have also seen keen interest in the education and ed-tech sectors, healthcare and renewable energy sectors.

On the foreign portfolio investment (“FPI”) front, despite a tough beginning this year the market is steadily gaining momentum and restabilizing. FPIs have infused INR 51,200 crore and INR 5600 crore in Indian equities in August 2022 & September 2022, respectively.(5)

Indian Government takes proactive steps in terms of periodic reviews and changes to the foreign investment policy of India to ensure that India remains an attractive and investor friendly destination.

(3) Press Information Bureau on May 20, 2022. Available at: https://www.pib.gov.in/PressReleasePage.aspx?PRID=1826946 (Last accessed September 14, 2022)

(4) Ibid.

(5) Press Trust of India, FPIs infuse ₹5,600 crore in Indian equities in September so far, THE HINDU, September 11, 2022. Available at: https://www.thehindu.com/business/markets/fpis-infuse-5600-crore-in-indian-equities-in-september-so-far/article65878294.ece (Last accessed September 14, 2022)

In India, every transaction involving a non-resident and resident can be classified as a capital account transaction or a current account transaction. To determine the permissibility of such transactions, the provisions of the Foreign Exchange Management Act, 1999 and the regulations, rules, circulars, notifications, and directions thereunder (“FEMA”) are referred. The general rule is that all current account transactions are permitted unless prohibited or specifically regulated by FEMA. On the other hand, all capital account transactions are prohibited by FEMA, unless specifically permitted.

The RBI is the financial services regulator and issues guidelines and directives for banks and financial institutions at regular intervals.

Our banking and finance team are fully updated on these changes. The team also interacts with various market participants to find business-oriented solutions within the legal framework. Our team members specialize in specific practice areas of banking and finance in order to provide apt advice as per specific requirements of the clients. Our advisory services are based on a careful perusal of all factual and legal aspects surrounding a transaction. Post-identification of the nature and practical implications of a transaction with respect to FEMA and the Indian legal policy and framework, we offer specialised advice to our clientele.

With the advancement in digital banking, India has witnessed a rampant rise in the menace of online banking related fraud in the last few years. Phishing links, vishing calls, frauds using remote access, QR code scams and misuse of compromised payment credentials are a few examples of such fraud. Since such fraud is perpetuated by a lack of public awareness and inadequate cybersecurity measures, the RBI regularly attempts to fight back on both these fronts.

To enhance public awareness, RBI recently published its ‘BE(A)WARE’ booklet aims at enhancing public awareness on various types of financial frauds, their modus operandi, and prevention/ precautionary steps that customers may follow. Since sharing of confidential financial information is the top-most root cause of such frauds, this booklet through reader friendly language and engaging pictorial representations aims at safeguarding gullible customers against commonly used fraudulent techniques and precautions to keep in mind while sharing confidential information.

RBI has mandated need-based data collection and storage and appointment of nodal grievance redressal officers by all digital lenders in the Guidelines on Digital Lending. Digital lenders are also required to comply with the extant outsourcing guidelines(6) issued by RBI aimed at effective management of attendant risks in outsourcing.

RBI recently integrated all its existing banking ombudsmen schemes and set up a centralised receipt and processing centre to provide cost-free redressal of customer complaints. It has also tried to limit the liability of customers in case of unauthorized transaction wherein liability is determined basis prompt reporting of such transactions and the extent of contributory negligence/deficiency/fraud, if any. The burden of proving customer liability lies on the bank.(7)

Prepaid payment instruments (“PPI”) are popular in India and RBI has mandated that PPI issuers have a, inter alia, board approved information security policy and customer redressal framework – information on customer protection, awareness and education and a grievance redressal policy. Further, the limitation of liability norms mentioned above apply to PPI issuers, as well.(8)

Lastly, RBI has issued a cyber security framework(9) requiring regulated entities to proactively create and modify their policies, procedures and technologies based on new security developments and concerns.

Public awareness coupled with adequate cybersecurity measures will be instrumental in fighting the menace of online banking frauds. Public awareness can be achieved by constant outreach programmes that the government and the RBI are undertaking in India. The market players will also have to provide adequate cybersecurity measures so that such online frauds may be minimised. JSA has a dedicated team of fintech lawyers who work with the banking and finance teams and disputes teams to assist clients in this area.

(6) RBI circular dated August 3, 2021 on Framework for Outsourcing of Payment and Settlement-related Activities by Payment System Operators, https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12136&Mode=0. See also, RBI circular dated June 24, 2020 on Loan Sourced by Banks and NBFCs over Digital Lending Platforms: Adherence to Fair Practices Code and Outsourcing Guidelines, https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11920&Mode=0.

(7) RBI circular RBI/2017-18/15 dated July 06, 2017 on Customer Protection – Limiting Liability of Customers in Unauthorized Electronic Banking Transactions. https://rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=11040

(8) RBI Master Direction on Prepaid Payments Instruments, 2021 dated August 27, 2021. https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12156.

(9) RBI – Cyber Security Framework in Banks dated June 02, 2016. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10435&Mode=0.

With the global as well as domestic rise of popularity of distributed ledger technology, and cryptocurrency in particular, Indian regulators initially struggled to classify this new class of assets. RBI had initially prohibited regulated entities to deal with virtual currencies, however, the Supreme Court of India set aside this blanket prohibition.(10)

In October 2021, the Indian Government received a proposal from the RBI to amend the definition of a “bank note” in the RBI Act, 1934 to broaden its scope and include currency in digital form. The Cryptocurrency and Official Digital Currency Bill, 2021 was also tabled to be presented in Parliament, however, it was dropped for want of further deliberation.

In 2022, India classified digital or cryptocurrency related assets, including non-fungible tokens and decentralised finance as ‘virtual digital assets’.(11) With the announcement of Union Budget in March 2022, a 30% income tax for transactions in virtual digital assets applicable from July 2022, along with a 1% tax deduction at source, has been imposed (“Crypto Tax”). Indian Government also announced India’s own digital currency – Central Bank issued Digital Currency (“CBDC”) – intending to use blockchain and other related technologies for the same. With this, though, the Indian Government has neither banned nor legalized virtual digital assets.

While cryptocurrency markets are highly volatile globally, in India this market is facing the added challenges of high inflation, taxation and uncertain regulatory environment. Following the announcement of Crypto Tax, the trading volumes of cryptocurrency exchanges witnessed a massive plunge. Banking industry in India has shown reluctance in providing channels for fund deposit to cryptocurrency exchanges. In July 2022, the Internet and Mobile Association of India (“IAMAI”) announced that it was shutting down its Blockchain and Crypto Assets Council owing to the uncertain regulatory environment of the crypto industry in India. Instead IAMAI will focus on the promotion of CBDC. Therefore, while growth of digital assets sector has been exponential, the uncertain regulatory environment proves to be an impediment to sustainable and stable growth of this sector at present.

(10) Internet and Mobile Association of India v. Reserve Bank of India, Supreme Court of India, Writ Petition (Civil) No. 528 & 373 of 2018.

(11) Section 2(47A), Income Tax Act, 1961.

The securitisation market in India is still developing although for some structures it has evolved over the last 15 years. Securitisation transactions in India are classified as standard asset securitisation and stressed assets securitisation.

Even before the COVID-19 pandemic, the Indian government, and the RBI were giving specific attention to the rising non-performing assets in the books of financial institutions. Many regulatory measures were suggested, and few regulations / laws were enacted to solve this problem. The COVID-19 pandemic and the Ukraine conflict brought big risk to the Indian financial sector, leading to increased attention to the ‘stressed assets’. Due to the above, there have been quite a few securitisation transactions in relation to stressed assets. We have advised financial institutions (who are selling the stressed assets), asset reconstruction companies (who are purchasing the stressed assets) and investors (who are investing in the securitisation paper and instruments) on several recent transactions.

Due to suspension of movement and reduction in commercial activity caused by the lockdown, many borrowers faced restrictions in cash flows. The collection of loan instalments had substantially reduced, in the initial phases, due to strict lockdown and moratorium extended by RBI on loan repayment. The Ukraine conflict has brought more financial strain to businesses linked with exports or imports. Given the consequent impact on the cash flows under existing securitization exposures, we were involved in advising market participants in relation to utilization of credit enhancements during this time.

A vast majority of our clientele consists of overseas players providing us with adequate opportunity and exposure to deliver world-class legal advice. Our firm has a culture of knowledge sharing and conducts regular training sessions to ensure all our lawyers are well-informed about the legal developments and practices in India as well as in the world, impacting the banking and finance industry.

Some of the activities that we undertake to keep our clients updated and well informed are:

• Sending regular updates on the legal development in the banking and finance practice. We issue monthly new letters for our clients as well as ad-hoc updates on significant developments.

• Providing tailor made presentations and conducting workshops based on the specific requirements of our clients.

• Organizing curated events for our clients.

• Attending and speaking at conferences (both at domestically (in India) and at internationally).

The Indian Government’s push towards digitization in the march towards the modern digital age, has witnessed a massive surge in digital payments, fuelled further due to the Covid-19 pandemic. RBI has been diligently tracking this change and proactively amending the extant framework to ensure that the regulations keeping up with the dynamic technological developments. Having notified a few operational provisions of the Guidelines on Digital Lending, RBI is deliberating further on a few of the guidelines before implementing them. In the same spirit, NITI Aayog – the apex public policy think tank of the Indian Government – released a report, offering a template and roadmap for a licensing and regulatory regime for digital banks. Considering the same, developments on this front can be expected.

Reduction of compliance burden, digitization and simplification is another trend that can be observed in the Indian regulatory environment. Regulations Review Authority 2.0 of the RBI recommended withdrawal of 239 circulars of the RBI for redundancy. RBI is consciously coming up with comprehensive master directions and online forms to ensure ease of doing business and compliance.

A new legislation called ‘Digital India Act’ is likely to be introduced in the Parliament of India this year. This, if passed, will replace the extant Information Technology Act, 2000 and cover the entire digital ecosystem, from OTT platforms to social media, online apps to metaverse and blockchain.

On the insolvency front, while the new insolvency regime for corporate entities is slowly stabilizing, Indian Government is in process of framing separate insolvency laws relating to financial institutions.

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