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All you wanted to know about NBFCs

B. Entities Regulated by RBI and applicable regulations

20. Whether the circular on Lending against shares dated August 21, 2014 is applicable to existing loans also? +

The Circular is applicable from the date of the circular and therefore the Circular shall not apply on those transactions which have been entered into prior to the date of the Circular. However, the guidelines will be applicable in case of roll-over/ renewal of loans. Guidelines will not apply to transactions where documents have been executed prior to the date of the circular and disbursement is pending.

Foreign Investment in India

Q.20: Can a foreigner set up a partnership/ proprietorship concern in India ? +

Answer: Only NRIs/ OCIs are allowed to invest in partnership/ proprietorship concerns in India on non-repatriation basis.

FAQs on Non-Banking Financial Companies

Inter-corporate deposits (ICDs)

20. Whether ICDs can be accepted repayable on demand ? +

As per provisions of the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998, the prohibition from acceptance of deposits repayable on demand applies to public deposits only. ICDs are not public deposits. As such, ICDs can be accepted repayable on demand or notice.

Annual Return on Foreign Liabilities and Assets (FLA) under FEMA 1999

Procedure for submission of the FLA return

Q20. Where should we contact regarding any query/ clarification for submission of FLA Return? +

Ans: Any query regarding filling of FLA return should be sent by email. We will revert back to you within one or two working days.

External Commercial Borrowings (ECB) and Trade Credits

F. LEVERAGE CRITERIA AND BORROWING LIMIT

20. Is the enhancement of ECB amount permitted under the delegated powers? +

Yes, provided the enhanced amount does not breach the applicable annual limit for the automatic route for the current financial year and the other parameters of the ECB are in compliance with the existing ECB guidelines also. Since this would be considered as change in terms for the same ECB, no separate LRN is required for the enhanced amount.

Government Securities Market in India – A Primer

20. What is the ‘When Issued’ market and “Short Sale”? +

"When, as and if issued" (commonly known as ‘When Issued’) security refers to a security that has been authorized for issuance but not yet actually issued. When Issued trading takes place between the time a Government Security is announced for issuance and the time it is actually issued. All 'When Issued' transactions are on an 'if' basis, to be settled if and when the actual security is issued. RBI vide its notification FMRD.DIRD.03/14.03.007/2018-19 dated July 24, 2018 has issued When Issued Transactions (Reserve Bank) Directions, 2018 applicable to ‘When Issued’ transactions in Central Government securities.

Both new and reissued Government securities issued by the Central Government are eligible for ‘When Issued’ transactions. Eligibility of an issue for ‘When Issue’ trades would be indicated in the respective specific auction notification. Participants eligible to undertake both net long and short position in ‘When Issued’ market are (a) All entities which are eligible to participate in the primary auction of Central Government securities,(b) However, resident individuals, Hindu Undivided Families (HUF), Non-Resident Indians (NRI) and Overseas Citizens of India (OCI) are eligible to undertake only long position in ‘When Issued’ securities. (c) Entities other than scheduled commercial banks and Primary Dealers (PDs), shall close their short positions, if any, by the close of trading on the date of auction of the underlying Central Government security.

When Issued transactions would commence after the issue of a security is notified by the Central Government and it would cease at the close of trading on the date of auction. All ‘When Issued’ transactions for all trade dates shall be contracted for settlement on the date of issue. When Issued’ transactions shall be undertaken only on the Negotiated Dealing System-Order Matching (NDS-OM) platform. However, an existing position in a ‘When Issued’ security may be closed either on the NDS-OM platform or outside the NDS-OM platform, i.e., through Over-the-Counter (OTC) market. The open position limits are prescribed in the directions. All NDS-OM members participating in the ‘When Issued’ market are required to have in place a written policy on ‘When Issued’ trading which should be approved by the Board of Directors or equivalent body.

"Short sale" means sale of a security one does not own. RBI vide its notification FMRD.DIRD.05/14.03.007/2018-19 dated July 25, 2018 has issued Short Sale (Reserve Bank) Directions, 2018 applicable to ‘Short Sale’ transactions in Central Government dated securities. Banks may treat sale of a security held in the investment portfolio as a short sale and follow the process laid down in these directions. These transactions shall be referred to as ‘notional’ short sales. For the purpose of these guidelines, short sale would include 'notional' short sale.

Entities eligible to undertake short sales are (a) Scheduled commercial banks, (b) Primary Dealers, (c) Urban Cooperative Banks as permitted under circular UBD.BPD (PCB). Circular No.9/09.29.000/2013-14 dated September 4, 2013 and (d) Any other regulated entity which has the approval of the concerned regulator (SEBI, IRDA, PFRDA, NABARD, NHB). The maximum amount of a security (face value) that can be short sold is (a) for Liquid securities: 2% of the total outstanding stock of each security, or, ₹ 500 crore, whichever is higher; (b) for other securities: 1% of the total outstanding stock of each security, or, ₹ 250 crore, whichever is higher. The list of liquid securities shall be disseminated by FIMMDA/FBIL from time to time. Short sales shall be covered within a period of three months from the date of transaction (inclusive of the date). Banks undertaking ‘notional’ short sales shall ordinarily borrow securities from the repo market to meet delivery obligations, but in exceptional situations of market stress (e.g., short squeeze), it may deliver securities from its own investment portfolio. If securities are delivered out of its own portfolio, it must be accounted for appropriately and reflect the transactions as internal borrowing. It shall be ensured that the securities so borrowed are brought back to the same portfolio, without any change in book value.

Business restrictions imposed on Paytm Payments Bank Limited vide Press Releases dated January 31 and February 16, 2024

National Common Mobility Card (NCMC) issued by Paytm Payments Bank

20. Can I transfer the balance from my old NCMC card issued by Paytm Payments Bank to a new card obtained from another Bank? +

Balance transfer feature is not available in the NCMC card. Therefore, you may use the card upto the available balance. In case you have some more balance which you have not been able to use, you may request Paytm Payments Bank for a refund.

Retail Direct Scheme

Know Your Customer (KYC) related queries

20. What if my KYC process does not get completed in one session? +

Your progress during KYC verification process will be saved so that you do not have to re-enter the details if you start again. The saved progress can be accessed using the link in the email which you received after registration, intimating you about KYC initiation. However, when you start again, you will have to keep clicking on ‘Next’ to move ahead without re-entering the previously saved details.

Domestic Deposits

II. Deposits of Non-Residents Indians (NRIs)

20. What is meant by Reinvestment Deposit? +

Reinvestment deposits are those deposits where interest (as and when due) is reinvested at the same contracted rate till maturity which is withdrawable with the principal amount on maturity date. It is also applicable to domestic deposits.

Indian Currency

B) Banknotes

12. Are the banknotes issued by RBI backed by any assets such as gold? +

All banknotes issued by RBI are backed by assets such as gold, Government Securities and Foreign Currency Assets, as defined in Section 33 of RBI Act, 1934.

All you wanted to know about NBFCs

B. Entities Regulated by RBI and applicable regulations

21. Will the circular on Lending against shares be applicable on restructured accounts? +

No. the Circular will not be applicable on restructured accounts

Foreign Investment in India

Q.21: Can a foreign investor invest in Rights shares issued by an Indian company at a discount ? +

Answer: There are no restrictions under FEMA for investment in Rights shares issued at a discount by an Indian company under the provisions of the Companies Act, 2013. The offer on rights basis to the persons resident outside India shall be:

in case of shares of a company listed on a recognized stock exchange in India, at a price, as determined by the company; and
in case of shares of a company not listed on a recognized stock exchange in India, at a price, which is not less than the price at which the offer on right basis is made to resident shareholders.

FAQs on Non-Banking Financial Companies

Mutual benefit financial companies (nidhis)

21. The nidhi companies have been precluded from accepting deposits in the nature of a Current Account. Whether they can open Savings Bank Account ? +

A. There is no prohibition for Nidhi companies opening Savings Bank Account.

Coordinated Portfolio Investment Survey – India

Some important definitions and concepts

Q21. What are short-term debt securities? +

Ans: Debt securities with original maturity of one year or less is classified as short-term debt securities. Examples of short-term securities are treasury bills, negotiable certificates of deposit, bankers’ acceptances, promissory notes, and commercial paper.

Business restrictions imposed on Paytm Payments Bank Limited vide Press Releases dated January 31 and February 16, 2024

Merchants using Paytm Payments Bank to receive payments

21. I am a merchant and I accept payments using a Paytm QR code, Paytm soundbox or Paytm POS terminal, linked to another bank account (not with Paytm Payments Bank). Can I continue to use this set-up even after March 15, 2024? +

Yes. If your receipt and transfer of funds is linked to any bank account other than Paytm Payments Bank, you can continue to use this arrangement even after March 15, 2024.

Annual Return on Foreign Liabilities and Assets (FLA) under FEMA 1999

Procedure for submission of the FLA return

Q21. How can an entity get approval for revising the previous year returns? +

Ans: Please follow the below given step to revise the FLA return for a previous year:

Visit https://flair.rbi.org.in/fla/faces/pages/login.xhtml → Login to FLAIR → Click on MENU tab on the left-hand side of the homepage → ONLINE FLA FORM → FLA ONLINE FORM → “Please click here to get the approval to fill revised FLA form for current year after due date /previous year” → select "Year" and click on → Click “Request”.

Your request status will be visible in the table below available on the screen. After sending request to RBI through FLA portal, entities need to wait for at least one working day for approval. Entities can check the status of their request in “Multiple Year Enable Screen” under menu on the left corner. Once approved by DSIM, RBI, the entity can revise FLA return for selected year.

External Commercial Borrowings (ECB) and Trade Credits

G. ALL-IN-COST

21. Does all-in-cost ceiling apply on a continuous basis or can it be calculated even on an average basis? +

All-in-cost should be within the applicable ceiling at all times, e.g., breach of all-in-cost ceiling in the first year and a much lower all-in-cost in the second year so as to comply on an average, is not permitted.

Government Securities Market in India – A Primer

21. What are the basic mathematical concepts one should know for calculations involved in bond prices and yields? +

The time value of money functions related to calculation of Present Value (PV), Future Value (FV), etc. are important mathematical concepts related to bond market. An outline of the same with illustrations is provided in Box II below.

BOX II

Time Value of Money

Money has time value as a Rupee today is more valuable and useful than a Rupee a year later.

The concept of time value of money is based on the premise that an investor prefers to receive a payment of a fixed amount of money today, rather than an equal amount in the future, all else being equal. In particular, if one receives the payment today, one can then earn interest on the money until that specified future date. Further, in an inflationary environment, a Rupee today will have greater purchasing power than after a year.

Present value of a future sum

The present value formula is the core formula for the time value of money.

The present value (PV) formula has four variables, each of which can be solved for:

Present Value (PV) is the value at time=0
Future Value (FV) is the value at time=n
i is the rate at which the amount will be compounded each period
n is the number of periods

The cumulative present value of future cash flows can be calculated by adding the contributions of FV_t, the value of cash flow at time=t

An illustration

Taking the cash flows as;

Period (in Yrs)	1	2	3
Amount	100	100	100

Assuming that the interest rate is at 10% per annum;

The discount factor for each year can be calculated as 1/(1+interest rate)^no. of years

The present value can then be worked out as Amount x discount factor

The PV of ₹100 accruing after 3 years:

Year	Amount	discount factor	P.V.
1	100	0.9091	90.91
2	100	0.8264	82.64
3	100	0.7513	75.13

The cumulative present value = 90.91+82.64+75.13 = ₹ 248.69

Net Present Value (NPV)

Net present value (NPV) or net present worth (NPW) is defined as the present value of net cash flows. It is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting, and widely throughout economics, it measures the excess or shortfall of cash flows, in present value (PV) terms, once financing charges are met.

Formula

Each cash inflow/outflow is discounted back to its present value (PV). Then they are summed. Therefore

Where
t - the time of the cash flow
N - the total time of the project
r - the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk.)
C_t - the net cash flow (the amount of cash) at time t (for educational purposes, C₀ is commonly placed to the left of the sum to emphasize its role as the initial investment.).

In the illustration given above under the Present value, if the three cash flows accrues on a deposit of ₹ 240, the NPV of the investment is equal to 248.69-240 = ₹ 8.69