This October newsletter covers categories of relevant updates notified by the Ministry of Corporate Affairs (MCA), the Indian securities market regulator (SEBI) and India's central bank and regulatory body responsible for regulation of the Indian banking system (RBI) in the month of October. The notification of the MCA on mandatory dematerialisation of securities of all private companies other than small companies, the RBI issuance of the new Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 and amendment to the Guidelines on Anti-Money Laundering (AML) Standards and Combating the Financing of Terrorism (CFT) /Obligations of Securities Market Intermediaries issued by the SEBI are some of the important updates covered in this newsletter.

MCA

Moratorium under IBC Inapplicable to Agreements under Convention & Protocol relating to Aircraft, Aircraft Engines, Airframes and Helicopters.

October 3rd, 2023: The Ministry of Corporate Affairs (“MCA”), by its Notification S.O. 4321 I dated October 3rd 2023, has exempted the applicability of moratorium under Section 14(1) of the Insolvency and Bankruptcy Code, 2016 to transactions, arrangements or agreements relating to aircraft, aircraft engines, airframes and helicopters under the Convention on International Interests in Mobile Equipment (Convention) and the Protocol to the Convention on International Interests in Mobile Equipment on Matters specific to Aircraft Equipment (Protocol).

Link here.

MCA amends the Companies (Incorporation) Rules, 2014.

October 20th, 2023: The MCA has notified the Companies (Incorporation) Third Amendment Rules, 2023 (“Rules 2023”) to amend the Companies (Incorporation) Rules, 2014 (“Rules”) and facilitate ease of doing business.

Vide the Rules 2023, MCA has made two changes to Sub-rule 9 of Rule 30 of the Rules. Rule 30 of the Rules deals with the process for shifting of registered office of the companies from one state or union territory to another state or union territory.

Firstly, through the Rules 2023, MCA has deleted some words from Sub-rule 9. The deleted words read as, “and may include such orders as to cost as it thinks proper,”. Prior to amendment, due to presence of these words, the Central Government/ Regional Director (“RD”) had powers to impose any cost upon the company at the time of approving the shifting of registered office outside the state or union territory if so, thought necessary by RD. However, due to removal of the said words, now the RD shall not be authorized to impose any cost on the company. 

Further, vide the Rules 2023, the MCA has inserted a second proviso to Sub-rule 9. The first proviso to the sub-rule says that if any prosecution is going on against the company, then the application for shifting of registered office outside the state or union territory shall not be allowed. However, a new proviso is inserted which provides for an exception and states that the shifting of a registered office may be allowed, where the management of a company is taken over by a new management, pursuant to a resolution plan approved under Section 31 (Approval of resolution plan) of the Insolvency Bankruptcy Code, 2016 and where no appeal against the resolution plan is pending in any court or tribunal and no inquiry, inspection, investigation is pending or initiated after the approval of the said resolution plan.

They shall come into force with effect from October 21, 2023.

Link here.

MCA introduces major amendments with the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023.

October 27th, 2023: The MCA vide the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 (“Rules 2023”) dated October 27th, 2023 has introduced two major amendments with respect to (i) the bearer share warrants under the erstwhile Companies Act, 1956; and (ii) mandatory dematerialization for all private companies excluding small companies and government companies. Please note that ‘Small Companies’ are private companies whose (a) paid-up share capital does not exceed fifty lakh rupees or such higher amount as may be prescribed, but which shall not be more than ten crore rupees; and (b) whose turnover as per its profit and loss account for the immediately preceding financial year does not exceed two crore rupees or such higher amount as may be prescribed, but which shall not be more than one hundred crore rupees.

A. In Rule 9 of the Companies (Prospectus and Allotment of Securities) Rules, 201“ ("Rules”) (Dematerialisation of securities), a new Sub-rule (2) is inserted which now requires that:

(i) Every public company that had issued share warrants prior to the commencement of the Companies Act, 2013 and not converted them into shares, shall within a period of three (3) months from the commencement of the Rules 2023, inform the Registrar about the details of these warrants in Form PAS-7.

The bearers of these share warrants have to surrender their warrants within six (6) months of the commencement of the Rules 2023 and get the shares dematerialized in their account. For this purpose, the company is required to place a notice for the bearers of these share warrants in Form PAS-8 on its website and to publish the same in a vernacular language newspaper which is in circulation in the district where the registered office of the company is situated along with publishing it in English in an English language newspaper, widely circulated in the State.

If any bearer of a share warrant fails to surrender their share warrants within the timeline mentioned, the company must convert their share warrants into dematerialized form and transfer the same to the Investor Education and Protection Fund.

B. New Rule 9B (Issue of securities in dematerialized form by private companies) is inserted in the Rules which provides that:

1. Every private company, not being a small company as per its audited financial statements for the financial year ending on or after March 31st,2023, shall within eighteen (18) months of closure of such financial year, issue securities in only dematerialized form and facilitate dematerialisation of all their securities in accordance with the Depositories Act, 1996 and regulations made thereunder
2. Every such private company making an offer for the issue of any securities or buyback of securities or issue of bonus shares or rights offer must also ensure that before making such offer, the entire holding of securities of its promoters, directors, key managerial personnel has been dematerialized in accordance with the Depositories Act, 1996 and regulations made thereunder.
3. Every holder of securities of such private company who intends to transfer such securities and / or subscribe to the securities of a private company must also ensure that her securities are held in dematerialized form before such transfer / subscription.
4. The provisions of this new Rule 9B however will not apply to a government company.

The Rules 2023 shall come into force on October 27th, 2023.

Link here.

RBI

Display of information - Secured assets possessed under the SARFAESI Act, 2002.

September 25, 2023: The Reserve Bank of India (“RBI”) has published a notification for the Regulated Entities (“REs”) of the RBI for displaying of information with respect to the borrowers whose secured assets have been taken into possession by the secured creditors as per the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.   As per the notification, the first such list shall be displayed on the website of REs within six months from the date of this notification in the prescribed format as provided by RBI. 

The notification can be accessed here.

Master Direction - Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016 (Updated as on October 10, 2023).

October 10, 2023: RBI updated provisions of the Master Direction - Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016 (“Master Direction”). The following provision has been updated under Chapter IV of the Master Direction which prescribes restrictions on acceptance of public deposits by NBFC:

1. No non-banking financial company having Net Owned Fund (NOF) of INR 25,00,000 and above shall accept public deposit unless it has obtained minimum investment grade or other specified credit rating for fixed deposits from any one of the approved credit rating agencies at least once a year and a copy of the rating is sent to the Bank along with return on prudential norms.
2. In the event of upgrading or downgrading of credit rating of any non-banking financial company to any level from the level previously held by the non-banking financial company, it shall within 15 working days of its being so rated inform, the Bank in writing, of such upgrading/downgrading.

These Directions shall apply to an NBFC being a Government Company as defined in section 2(45) of the Companies Act, 2013. The directions relating to prudential regulation, acceptance of public deposits, corporate governance, conduct of business regulations and statutory provisions etc. shall, however, be followed by the government NBFCs as per the timeline provided in the directions.

The updated Master Direction can be accessed here.

RBI amends Master Direction - Know Your Customer (KYC) Direction, 2016.

October 17, 2023: RBI has amended the Master Direction - Know Your Customer (KYC) Direction, 2016 (“KYC Directions”) to:

1. update certain instructions considering amendments to the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 vide Government notifications dated September 4, 2023 and October 17, 2023;
2. update Annex II of the KYC Directions considering the changes to Government of India Order related to Unlawful Activities (Prevention) Act (UAPA), 1967, vide corrigendum dated August 29, 2023;
3. update Annex III of the KYC Directions by replacing the Government of India Order dated January 30, 2023, related to Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005 (WMD Act, 2005) with the Government of India Order dated September 1, 2023 (which has been issued by the Government in suppression of the earlier WMD Act Order dated January 30, 2023), on the matter;
4. update certain instructions in accordance with the Financial Action Task Force Recommendations;
5. add a new Section 55A, on Foreign Contribution (Regulation) Act 2010, in the KYC Directions; and
6. update certain other instructions post review.

The amended provisions in the KYC Directions shall come into force with immediate effect.

The changes carried out in the KYC Directions in this regard are provided in the link below.

Click here.

RBI replaces the Master Direction – Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021.

October 19, 2023: RBI has replaced the existing Master Direction – Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021 as of October 19, 2023 (“HFC Directions”).

The HFC Directions can be accessed here.

RBI issues the Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023.

October 19, 2023: RBI has issued the Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 (“NBFC-SBR Directions”) for every non-banking financial company (NBFCs), in supersession of the existing Non-Banking Financial Company–Non-Systemically Important Non-Deposit taking (Reserve Bank) Directions, 2016 and Non-Banking Financial Company–Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016. 

As per the new NBFC-SBR Directions, the regulatory structure for NBFCs shall comprise of four layers based on their size, activity and perceived riskiness. NBFCs in the lowest layer shall be known as NBFCs-Base Layer (NBFCs-BL). NBFCs in the middle layer and upper layer shall be known as NBFCs-Middle Layer (NBFCs-ML) and NBFCs Upper Layer (NBFCs-UL), respectively. The Top Layer is ideally expected to be empty and will be known as NBFCs-Top Layer (NBFCs-TL).

From October 01, 2022, all references to NBFC-ND (i.e., non-systemically important non-deposit taking NBFC) shall mean NBFC-BL and all references to NBFC-D (i.e., deposit taking NBFC) and NBFC-ND-SI (systemically important non-deposit taking NBFC) shall mean NBFC-ML or NBFC-UL, as the case may be.

The NBFC-SBR Directions further enlists the set of existing applicable directions and guidelines, as issued by RBI for various classifications of NBFCs, as described therein.

The introduction of the NBFC-SBR Directions indicates the progressive measure of the regulator to streamline the existing set of laws pertaining to NBFCs, which is the need of the hour.

The NBFC-SBR Directions can be accessed here.

SEBI

Extension of timelines (i) for nomination in eligible demat accounts and (ii) for submission of PAN, Nomination and KYC details by physical security holders; and voluntary nomination for trading accounts.

September 26, 2023: SEBI vide circular dated September 26, 2023 (“Circular”) approved certain extensions in the timeline in relation to the following: 

The deadline for submission of ‘choice of nomination’ with respect to trading and demat accounts has been extended from September 30, 2023¹ till December 31, 2023.

The deadline for submission of PAN, nomination, contact details, bank A/c details and specimen signature by holders of physical securities for their corresponding folio numbers has been extended from September 30, 2023² till December 31, 2023.

Link here.

Nomination for Mutual Fund Unit Holders – Extension of timelines.

September 27, 2023: SEBI vide circular dated September 27, 2023 has extended the timeline for nomination/ opting out of nomination for all existing individual unit holders holding mutual fund units either solely or jointly from September 30, 2023³ to January 1, 2024. Failing to comply with this extended timeline will result in freezing of the folios for debits from January 01, 2024.

Link here.

Extension of timeline for verification of market rumours by listed entities.

September 30, 2023: SEBI (Listing   Obligations   and   Disclosure) Regulations, 2015 (the “SEBI LODR Regulations”) inter-alia requires top listed entities by market capitalization to mandatorily verify and confirm, deny or clarify market rumors. This obligation was earlier supposed to come into effect from October 1, 2023 for the top 100 listed entities, and from April 1, 2024 for the top 250 listed entities. SEBI vide circular dated September 30, 2023 (“Circular”) has extended the effective date of implementation of the proviso to regulation 30(11) of the SEBI LODR Regulations in the following manner:

1. Top 100 listed entities: February 1, 2024; and
2. Top 250 listed entities: August 1, 2024.

Link here. 

Relaxation from compliance with the requirement to send physical copies of documents under the SEBI LODR Regulations.

October 7, 2023: SEBI Master Circular dated July 11, 2023 on compliance with the SEBI LODR Regulations (“Master Circular”) inter-alia relaxed the applicability of regulation 36(1)(b) of the LODR Regulations for Annual General Meetings (AGMs) and regulation 44(4) of the LODR Regulations for general meetings (in electronic mode) held till September 30, 2023 (section VI-J of the Master Circular).

The Ministry of Corporate Affairs has, on September 25, 2023 further extended the relaxation from sending physical copies of financial statements (including Board’s report, Auditor’s report or other documents required to be attached therewith) to the shareholders, for the AGMs conducted till September 30, 2024, following which, SEBI has also decided to extend the relaxations till September 30, 2024. However, the listed entities are required to ensure while availing these relaxations, that physical copies of full annual reports are sent to shareholders who request for the same, and the notice of the annual general meeting provides the weblink to enable shareholders to access the full annual report.

Link here.

Amendment to the Guidelines on Anti-Money Laundering (AML) Standards and Combating the Financing of Terrorism (CFT) /Obligations of Securities Market Intermediaries.

October 13, 2023: SEBI has amended the Master Circular bearing number SEBI/HO/MIRSD/MIRSD-SEC-5/P/CIR/2023/022 dated February 03, 2023 (as amended on June 16, 2023) in view of the amendments to the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 and to further enhance the effectiveness of the AML/CFT framework. The key changes are as follows:.

1. Additional measures will be required to be taken by financial groups in the host country to manage Money Laundering (ML)/ Terrorism Financing (TF) risks when the host country does not permit proper implementation of AML/CFT measures;
2. Requirement for financial groups in the host country to implement group wide programmes for dealing with ML/TF which shall be applicable, and appropriate to, all branches and majority owned subsidiaries of the financial group;
3. Where a reporting entity is a trust, its trustees will be required to disclose their status at the commencement of an account-based relationship;
4. Clear guidelines have been provided for identifying beneficial owners of various forms of entities such as company, partnership firm, unincorporated association or body of individuals, trust and foreign investors;
5. Registered intermediaries are required to periodically update all documents, data or information of all clients and beneficial owners collected under the customer due diligence process to ensure that the information or data collected under client due diligence is kept up-to-date and relevant, particularly for high risk clients;
6. No transaction or account-based relationship shall be undertaken without following the customer due diligence procedure;
7. Intermediary shall specifically apply enhanced due diligence measures, proportionate to the risks, to business relationships and transactions with natural and legal persons (including financial institutions) form countries for which this is called for by the Financial Action Task Force ("FATF”);
8. Where the registered entity does not have records of the identity of its existing clients, it is now required to obtain the records forthwith, failing which the registered intermediary shall close the account of the clients after giving due notice to the client; and
9. A Principal Officer is required to be appointed who shall ensure that the registered intermediaries properly discharge their legal obligations to report suspicious transactions to the authorities, and shall act as a central reference point in facilitating onward reporting of suspicious transactions.

Link here.

Revision in the framework for fund raising by issuance of debt securities by large corporates.

October 19, 2023: SEBI vide a circular dated October 19, 2023 (“Circular”) revised the framework for fund raising by issuance of debt securities by Large Corporates (“LCs”), and the key features of the revised framework are as below:

1. The Circular shall be applicable to all LCs, which has been defined as all listed entities (except for Scheduled Commercial Banks) with (a) listed securities/ debt securities/ non-convertible redeemable preference shares; (b) having outstanding long-term borrowings of Rs.1,000 crore or above; and (c) having a credit rating of “AA”/ “AA+”/”AAA”.
2. An LC is required to raise not less than 25% of its qualified borrowings through issuance of debt securities in the financial years subsequent to the financial year in which it is identified as an LC. Starting from FY 2025, LCs must meet the requirement of mandatory qualified borrowing over three years. Changes in the requisite borrowing will lead to changes in the way incentive is calculated and the mechanism for such calculation has been specified in the Circular.
3. Stock Exchanges and Limited Purpose Clearing Corporations are responsible for ensuring compliance with the provisions of incentive and dis-incentive in relation to the contribution to the core Securities Guarantee Fund. Further, Stock Exchanges are required to put in place the necessary systems and infrastructure for implementation of the Circular.
4. The Circular shall come into effect from April 1, 2024 for LCs following April-March as their financial year and from January 1, 2024 in case of LCs following January-December as their financial year.

Link here.

Applicability of contra trade restrictions under Securities and Board of India (Prohibition of Insider Trade) Regulations, 2015 (“SEBI PIT Regulations”) on promoters individually or as a group.

SEBI considered the issue regarding the applicability of the contra trade restrictions in the case of Deccan Gold Mines Limited (a company incorporated under Companies Act, 1956, whose equity shares are listed on BSE), where the factual matrix is as below:

Rama Mines (Mauritius) Limited (“RMML”) and Australian Indian Resources Limited, Australia (“AIRL”) are promoters of Deccan Gold Mines Limited ("DGML”). The shares of these two companies are also held by common shareholders, namely, (i) Yandal Investments Pty Ltd (“YIPL”) which holds 48.98% shares of RMML and 22.45% of AIRL; and (ii) Halcyon Investments Ltd (“HIL”) which holds 24.75% of RMML and 30.88% of AIRL. AIRL was allotted shares of DGML on March 02, 2023 which were subject to lock-in for a period of 18 months. RMML proposed to sell equity shares of DGML in the open market (stock exchange platform).

Informal guidance was sought from SEBI as to whether contra trade restrictions were to be considered separately for each promoter or together as the promoter group. SEBI has, vide its Informal Guidance Letter bearing no. SEBI/HO/ISD/ISD-PoD-2/P/OW/2023/0000029686/1 dated July 25, 2023, issued a clarification as below:

1. The provisions of contra trade restrictions (i.e., Regulation 9 and clause 3 and 10 of Schedule B) under the SEBI PIT Regulations may apply to trades made by promoters individually. However, since in this case, both promoters of DGML i.e., RMML and AIRL have common promoter shareholders (i.e., HIL and YIPL), it can be said that RMML and AIRL are being controlled by same corporates.
2. Therefore, in light of the foregoing, the provisions of contra trade restrictions shall apply to RMML and AIRL jointly as a group, i.e., if AIRL has purchased the shares of DGML then restrictions on contra trade shall apply to AIRL as well as RMML.

Link here.

1. Pursuant to the SEBI circular no. SEBI/HO/MIRSD/RTAMB/CIR/P/2021/601 dated July 23, 2021
2. Pursuant to the SEBI circular no. SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/37 dated March 16, 2023
3. Pursuant to SEBI Circular No. SEBI/HO/IMD/IMD-II DOF3/P/CIR/2022/82 dated June 15, 2022 (r/w SEBI Circular No.  SEBI/HO/IMD/IMD-I DOF1/P/CIR/2022/105 dated July 29, 2022, and SEBI Circular No. SEBI/HO/IMD/IMD-I POD1/P/CIR/2023/47 dated March 28, 2023

Contributors to the newsletters:

• Nusrat Hassan, Managing Partner
• Ambuj Sonal, Partner
• Tanvi Pande, Principal Associate
• Abhinav Anand, Senior Associate
• Meghna Punjabi, Senior Associate
• Tamilarasi A Mudaliar, Senior Associate
• Kunal Mehta, Senior Associate
• Sarjana Pandey, Senior Associate
• Dewang Khandelwal, Associate
• Aayushi Barot, Associate
• Akanksha Prakash, Associate