May 2016|Page 1 of 8

Contents (Click on the topics)

1. From Regulators

Reserve Bank of India (RBI)

Securities and Exchange Board of India (SEBI)

Insurance Regulatory and Development

Authority (IRDA)

Pension Fund Regulatory and Development

Authority (PFRDA)

Ministry of Commerce & Industry

2. Amended Tax Treaty with Mauritius

3. Quotes

4. Article – “Peer-to-Peer (P2P) Lending”

5. Fun Zone

May 2016

Dear Colleagues,

We are happy in noting that the newsletter is receiving

applause from the readers across the group and we are

pleased to note that it is meeting the objectives for

which it has been started. Present day regulators are

very proactive and there are multiple regulations issued

frequently with an eye on plugging the gaps in the

environment – while ensuring ease of doing business.

The information sharing could be made more

meaningful if each and every one of you, an expert in

your own area of work, could provide an analysis of

what you think of the new regulation or directions

issued by the regulator. The views expressed also could

lead to an healthy debate which will enable the group

to take a considered stand on important and sensitive

issues. I therefore request you all to make efforts to

send in your comments on important developments in

your area to be published in this newsletter.

Looking forward to your valuable contributions.

T V Sudhakar

Head of Compliance, KMBL

Editorial

May 2016|Page 2 of 8

I. From Regulators

Reserve Bank of India (RBI) Can be accessed through https://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx

1. Remittance by sole proprietor under Liberalised Remittance Scheme (LRS) FED Mailbox clarification dated April 13, 2016

RBI vide this clarification, made it clear that, if an individual in his own capacity remits USD 250,000 in a

financial year under LRS, he cannot remit another USD 250,000 in the capacity of owner of the sole

proprietorship business as there is no legal distinction.

2. Guidelines on Investment Advisory Services (IAS) offered by Banks Circ. No.: DBR.No.FSD.BC.94/24.01.026/2015-16 dated April 21, 2016

RBI vide this circular prohibited banks to undertake IAS departmentally. Accordingly, banks desirous of

offering these services have to do so either through a separate subsidiary set up for the purpose or one of

the existing subsidiaries after ensuring that there is an arm's length relationship between the bank and the

subsidiary.

Banks which are currently offering IAS have to move the activity to its subsidiary within a period of three

years from the date of issue of this circular.

3. Publicity in the Bank Branches Cautioning Public against Placing Deposits in Dubious Schemes Circ. No.: DBR.No.Leg.BC.93/09.07.005/201516 dated April 21, 2016

RBI vide this circular has asked the banks to display posters or provide pamphlets to customers cautioning

them of dubious schemes for mobilisation of funds by way of deposits / investments etc., as part of RBI’s

effort in promoting financial literacy and awareness among the general public about safe and secured

investments through the wide branch network of commercial.

4. Foreign Investment in units issued by Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs) and Alternative Investment Funds (AIFs) governed by SEBI regulations Circ. No.: A.P. (DIR Series) Circular No.63 dated April 21, 2016

RBI vide this circular had brought out guidelines to rationalize and facilitate foreign investment in

collective investment vehicles for real estate and infrastructure sectors through units of Investment

Vehicles registered and regulated by SEBI, (namely REITs, InvITs and AIFs), or any other competent

authority.

5. Import of Goods : Import Data Processing and Monitoring System (IDPMS) Circ. No.: A.P. (DIR Series) Circular No.65 dated April 28, 2016

RBI vide this circular has notified the introduction of “Import Data Processing and Monitoring System”

(IDPMS) in line with the existing "Export Data Processing and Monitoring System" (EDPMS), an IT based

system developed in consultation with Custom Authorities, to track the import transactions through

banking system. The date of operationalisation of IDPMS will be notified subsequently.

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May 2016|Page 3 of 8

6. Transactions in derivatives by regulated institutional entities on Electronic Platforms Circ. No.: FMRD.DIRD.No.9/14.03.01/201516 dated May 5, 2016

RBI vide this circular has notified that with effect from 1st June 2016, the regulated institutional entities

(under SEBI / IRDAI / PFRDA), subject to the approval of their respective sectoral regulators, may apply for

membership of electronic trading platforms in Interest Rate Swaps (IRS) which have Clearing Corporation

of India Ltd (CCIL) as the central counterparty for settlement.

7. Master Direction - Financial Services provided by Banks, 2016 Circ. No.: Master Direction/DBR.FSD.No.101/24.01.041/201516 dated May 26, 2016

RBI vide this circular has issued directions to Scheduled Commercial Banks who provide various Financial

Services like sponsoring of an Infrastructure Debt Fund (IDF), Equipment Leasing and Hire Purchase,

Factoring, Mutual Fund, Insurance & Pension Fund businesses, Investment Advisory and Agency

businesses, either departmentally or through a separate subsidiary. The directions also cover prudential

regulation limit upto which a Bank can invest in a subsidiary or in a financial services company.

8. ATMs Security and Risk Mitigation Measures for Card Present (CP) Transactions Circ. No.: DPSS.CO.PD.No./2895/02.10.002/20152016 dated May 26, 2016

RBI vide this circular has issued guidelines to Banks and White Label ATM operators in India to enable EMV

Chip and PIN based processing in the existing ATMs by September 30, 2017 while the new ATMs to be

installed henceforth should be necessarily be enabled for EMV Chip and PIN based processing from

inception.

Securities and Exchange Board of India (SEBI) Can be accessed through http://www.sebi.gov.in/sebiweb/home/list/1/7/0/0/Circulars

1. Electronic book mechanism for issuance of debt securities on private placement basis Circ. No.: CIR/IMD/DF1/48/2016 dated April 21, 2016

SEBI vide this circular has laid down a framework for issuance of debt securities on private placement basis

through an electronic book mechanism in order to streamline the procedure for issuance and enhance

transparency to discover prices. To begin with, this electronic book mechanism is made mandatory for all

private placements of debt securities in primary market with an issue size of ` 500 crores and above,

inclusive of green shoe option, if any.

2. Guidelines for public issue of units of InvITs Circ. No.: CIR/IMD/DF/55/2016 dated May 11, 2016

In line with the Regulation 14(6) of SEBI (Infrastructure Investment Trusts) Regulations, 2014 ("InvIT

Regulations"), SEBI vide this circular has issued detailed guidelines for public issue of units of InvITs. The

guidelines cover aspects like appointment and obligations of merchant banker, filing of offer document,

opening of an issue and subscription period, underwriting, price and price band, bidding process and

allotment procedure and basis of allotment, similar to an equity issue.

Some of the important aspects are:

Allocation in the public issue to Institutional Investors should not be more than 75% while to other

investors it should not be less than 25% of the issue.

Out of the portion allocated for Institutional Investors, 60% can be made available to strategic

investors under the category “Anchor Investors”.

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May 2016|Page 4 of 8

A security deposit of ` 5 crores or 0.5% of the amount of units offered for subscription to be maintained

with stock exchanges.

The public issue to be kept open atleast for 3 days and should not exceed 30 days.

3. Disclosure of the Impact of Audit Qualifications by the Listed Entities Circ. No.: CIR/CFD/CMD/56/2016 dated May 27, 2016

SEBI vide this circular had amended the procedure as stated in the SEBI (Listing and Other Disclosure

Requirements) Regulations, 2015 for disclosure of impact of audit qualifications by the listed entities.

Accordingly, the listed entities have to provide the cumulative impact of all the audit qualifications in a

separate format to the stock exchanges, simultaneously while submitting the annual audited financial

results. This will help the investors to take well informed investment decisions without any delay.

The guidelines are applicable for all the annual audited standalone / consolidated financial results, as

applicable, submitted by the listed entities for the period ending on or after March 31, 2016.

4. Restriction on redemption in Mutual Funds Circ. No.: SEBI/HO/IMD/DF2/CIR/P/2016/57 dated May 31, 2016

Currently, the restriction on redemption of mutual fund under any scheme, can be done only after the

approval from the Board of Directors of the AMC and the trustees. The provisions given in relevant SEBI

circular was very generic in nature and do not specifically spell out any circumstances in which such

restrictions may be applied and it leads to discretionary disclosure and practices in the industry.

Now, SEBI vide this circular had formalized the restriction on redemption in Mutual Funds during

circumstances leading to a systemic crisis or event that severely constricts market liquidity or the efficient

functioning of markets such as:

Liquidity issues.

Market failures, exchange closures.

Operational issues.

Further the guidelines also state that, if restriction on redemption is imposed, then:

The restriction should not be for more than 10 working days in any 90 days period.

Redemption requests upto ` 2 lakhs shall not be subject to such restriction and in case, if the

redemption request is more than ` 2 lakhs, then the first ` 2 lakh shall be without restriction and the

balance can be subject to restriction.

Any imposition of restriction would require specific approval of Board of AMCs and Trustees and the

same should be informed to SEBI immediately.

The scheme related documents should prominently display the information, that the investors right to

redeem may be restricted in such exceptional circumstances and the time limit for which it can be

restricted.

Insurance Regulatory and Development Authority (IRDA) Can be accessed through https://www.irda.gov.in/Defaulthome.aspx?page=H1

1. Guidelines on Corporate Governance for Insurers in India Circ. No.: IRDA/F&A/GDL/CG/100/05/2016 dated May 18, 2016

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In view of the extensive changes to the governance of companies brought about by the Companies Act,

2013, IRDA has reviewed its various guidelines relating to the governance of insurance companies.

Accordingly, the revised guidelines on Corporate Governance practices including appointment of MD / CEO

/ Whole Time Directors (WTD) and other Key Management Persons (KMPs) as well as the appointment of

statutory auditors of insurers are introduced. These revised guidelines are applicable from FY 2016-17

onwards.

Pension Fund Regulatory and Development Authority (PFRDA) Can be accessed through http://www.pfrda.org.in/index.cshtml

1. Investment in 'Alternative Investment Funds (AIF)' Circ. No.: PFRDA/2016/8/PFM/02 dated April 8, 2016

PFRDA vide this circular had permitted Pension Funds to invest the NPS scheme corpus in AIF (Cat I & Cat

II) upto a ceiling of 2% of the Pension Fund Corpus. The other important conditions are provided below:

Pension Fund shall only invest in AIFs whose corpus is equal to or more than ` 100 crores, with the

exposure to single AIF not exceed 10% of the AIF size and having a minimum rating of AA and above.

Pension funds to ensure that funds should not be invested in securities of the companies or Funds

incorporated and operated outside the India in violation of section 25 of the PFRDA Act 2013.

The sponsors of the AIFs should not be the promoter in Pension fund or the promoter group of the

Pension Fund.

The AIFs shall not be managed by Investment manager, who is directly or indirectly controlled or

managed by Pension fund or the promoter group of the Pension Fund.

Ministry of Commerce & Industry – Director General of Foreign Trade (DGFT) Can be accessed through http://dgft.gov.in/

1. Introduction of definition of “e-commerce” in Foreign Trade Policy Notification No.: 2/2015-2020 dated April 11, 2016

DGFT vide this notification as defined “e-commerce” for the purpose of Merchandise Exports from India

Scheme (MEIS)under Chapter 10 of the Foreign Trade Policy 2015-2020 which states as:

e-commerce shall mean the export of goods hosted on a website accessible through the internet to a

purchaser. While the dispatch of goods shall be made through courier or postal mode, as specified

under the MEIS, the payment for goods purchased on e commerce platform shall be done through

international credit / debit cards and as per RBI guidelines amended from time to time.

2. Amendment to the criteria for recognition of “Status Holders” in Foreign Trade Policy Notification No.: 4/2015-2020 dated April 29, 2016

DGFT vide this notification as amended the criteria for recognition of “Status Holder”, where the revised

condition for categorization of Status Holders will be based on achieving export performance during the

current and previous three financial years instead of the earlier criteria of current and previous two

financial years. However, Gems & Jewellery Sector is exempted from the revised criteria and hence

continues to be categorized under the earlier criteria of current and previous two financial years.

Ministry of Commerce &

Industry Government of India

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May 2016|Page 6 of 8

II. India – Mauritius Tax Treaty amended Can be accessed from http://incometaxindia.gov.in/Lists/Press%20Releases/Attachments/468/Press-

release-Indo-Mauritius-10-05-2016.pdf

In a bid to prevent “abuse” of the tax avoidance treaty of 1983, India and

Mauritius had signed an amendment to the existing pact on 10th May 2016 to get

rights to tax capital gains on shares of Indian company.

The pact of 1983 provided that capital gains on sale of assets in India by companies registered in Mauritius can only be

taxed in Mauritius. While short-term capital gains are taxed in India, they are exempt in Mauritius. So, such companies

escape paying taxes in both countries.

Now with the amendment to the pact, sale of shares of an Indian resident company will be taxed at 50 per cent of the

applicable rate between April 1, 2017, to March 31, 2019 and full capital gains tax will apply from April 1, 2019.

“The Protocol will tackle the long pending issues of treaty abuse and round tripping of funds attributed to the India-

Mauritius treaty, curb revenue loss, prevent double non-taxation, streamline the flow of investment and stimulate the

flow of exchange of information between India and Mauritius,” a finance ministry statement said.

The amendment to pact will ensure that firms in Mauritius that invest in India are not just ‘shell’ companies who could

earlier avoid paying capital gains tax in India. Also, India for long suspecting that chunk of the funds were not real

foreign investment but Indians routing cash through the island to avoid domestic taxes, a practice known as “round

tripping”.

Similar amendments on the pacts with other countries like Cyprus, Singapore, Netherlands, etc., may be expected in

near future.

III. Quotes

“It doesn’t matter that we have a precise definition. There’s so much demand for financial services in the country that we don’t need to delineate - you get it & you don’t. Everybody needs it.” RBI Governor Dr.Raghuram G Rajan

"While foreign investors are coming in, we have not been able to convince the trustees of provident funds in the country that they can invest in the Indian market and that things are well regulated and well-governed in the Indian market. That should be one of our tasks" SEBI chairman Shri .U. K. Sinha

IV. Article: “Peer-to-Peer (P2P) Lending”

Background

In India many people face difficulties in getting loans from formal financial institutions,

be it from banks or non-banking financial companies (NBFCs). The difficulties or reasons

could vary from lack of credit information about the borrower or may be delay in the

process of getting a loan. To bridge the gap of unavailability of proper formal credit, an

aggressive breed of loan providers has emerged in India, called peer-to-peer (P2P)

lending. The concept is not new - it is basically an individual or a firm, which is not a

financial institution, lending money to another individual or a firm.

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What is P2P Lending?

P2P lending is a form of crowd-funding which can be defined as the use of an online

platform that matches lenders with borrowers in order to provide unsecured loans. The

borrower can either be an individual or a business requiring a loan. The lender can also be

a natural or a legal person. Fee is paid to the online platform by both the lender as well as

the borrower.

How it works?

Individuals (or a legal person) register themselves on P2P as either a borrower or lender. Registration includes

providing information such as personal, professional, financial details which the P2P entity verifies through other

available resources. Further, some of the P2P entities also require physical documents to be submitted to verify the

information provided by the borrowers / lenders.

Once verified, all approved borrowers and lenders are listed on the site of the P2P

portal. Lenders can view borrower loan listing which includes information such as

loan purpose, personal, professional and financial information that allows lenders

to make an informed decision before lending to a borrower. Borrowers can receive

offers from multiple lenders and similarly, lenders can lend to multiple borrowers

thereby diversify their risk. Each P2P lending providers have a standard loan

agreement that will be entered between the lender and borrower.

Loans through P2P lending ranges between ` 25,000 and ` 30 lakh with tenors range from 6 months to 5 years and the

interest rates vary between 12% and 36% per annum depending on the credit profile.

Risks

Online P2P lending is a good concept but the problem is that no one is accountable. Hence, it comes with higher risk

attached. Also, the amount borrowed from online P2P companies is not recorded and informed to a formal credit

information bureau which may result in over-leverage. In case of fraud or credit risk, there is no safety net in place as

of now.

Who Governs it?

Currently, there are around 30 such service providers / lending platforms in India and there is no clear regulatory

framework governing the functioning of these P2P lending platforms.

Recently RBI had come out with “Consultation Paper on Peer to Peer Lending”, seeking

comments/views from all interested parties and general public, (may be accessed from

https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=3164). RBI’s consultation paper was

prepared taking into consideration SEBI’s “Consultation Paper on Crowd funding in India”

released in June 2014 which mainly focused on Security based Crowd funding – raising equity /

debt securities through a Crowd funding platform – so as to avoid overlap of jurisdiction and the

current consultation paper of RBI focus exclusively on lending through P2P platforms.

Proposed guidelines – applicable for the online platforms / service providers

To classify entities engaged in P2P lending as NBFCs in a bid to bring them under its regulatory purview.

Only those firms with a minimum capital of ` 2 crore will be eligible to operate.

No entity other than a company can undertake this activity; if the P2P platforms are run by individuals,

proprietorship, partnership or Limited Liability Partnerships, they will not fall under the RBI’s purview.

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P2P companies can be registered only as an intermediary, which means the role of the platform would be limited

to bringing the borrower and lender together without the lending and borrowing being reflected on its balance-

sheet.

The platforms will be prohibited from giving any assured return either directly or indirectly.

They will be allowed to opine on the suitability of a lender and credit worthiness of a borrower.

Funds will have to necessarily move directly from the lender’s bank account to the borrower’s to avert the threat

of money laundering.

Prohibits the platforms being used for any cross-border transaction in view of FEMA provisions relating to

transactions between residents and non-residents.

The proposed regulation could ask for a reasonable proportion of the board members to have financial sector

background.

The norms may also require the P2P lender to have a brick-and-mortar office in India and the management and

operational personnel would need to be stationed within the country.

V. Fun Zone (Anonymous Quotes)

A market analyst is an expert who will know tomorrow why the things he predicted yesterday

didn’t happen today.

During market turmoil, the easiest way to make a small fortune is to start-off with a large one.

My doctor gave me six months to live, but when I couldn’t pay the bill he gave me six months more.

The perfect office computer is the one which if it makes a mistake, blames another computer.

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Disclaimer:

Logos and Terminologies used in the document are properties of respective organizations / departments. The material contained in this document aims at providing a summary of various guidelines, notifications, circulars etc. issued by

various regulatory authorities from time to time and is for information purposes only. The same should not be construed as an advice on any matter.

For complete information on the matter provided therein, readers are advised to refer to the detailed guidelines, notifications, circulars etc. available on the websites of the respective regulators or they may consult the respective compliance departments before acting on any matter.

Structured by: Srivatsan S, Compliance