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Taxability of Personal and Corporate Guarantee: Insights from the Goods and Services Tax Council (“GST Council”)

Please click here to download the Prism as PDF.

In its 52^nd meeting held on October 7, 2023, the Goods and Services Tax Council (“GST Council”) clarified the position on taxability of: (a) personal guarantees offered by directors to banks for credit limits and loans sanctioned to a company; and (b) corporate guarantees extended to related persons, including those provided by a holding company to its subsidiary.

In relation to the above the GST Council has made the following recommendations:

“(a) issue a circular clarifying that when no consideration is paid by the company to the director in any form, directly or indirectly, for providing personal guarantee to the bank/ financial institutes on their behalf, the open market value of the said transaction/ supply may be treated as zero and hence, no tax to be payable in respect of such supply of services.

(b) insert sub-rule (2) in Rule 28 of Central Goods and Services Tax Rules, 2017 (CGST Rules, 2017), to provide for taxable value of supply of corporate guarantee provided between related parties as one per cent of the amount of such guarantee offered, or the actual consideration, whichever is higher.

(c) clarify through the circular that after the insertion of the said sub-rule, the value of such supply of services of corporate guarantee provided between related parties would be governed by the proposed sub-rule (2) of rule 28 of CGST Rules, 2017, irrespective of whether full Input Tax Credit is available to the recipient of services or not.”

Taxability of Personal Guarantees

GST authorities have continued to raise GST demands on companies to pay tax under reverse charge mechanism, with respect to personal guarantees issued by directors to secure credit limits sanctioned to the companies. It was unclear on whether personal guarantees extended by directors, constitute a service provided by such directors under their terms of employment (and hence exempt from GST as per the GST laws), or is it a service provided by the directors as a related party of the company in which it is a director (and hence subject to GST).

GST Council has recommended issuance of a circular to clarify that in cases where no consideration is paid by the company, the open market value of such transaction can be treated as zero and hence not be subject to any GST.

Taxability of Corporate Guarantees

GST authorities are of the view that extending corporate guarantees to related parties are subject to GST. Assesses have been challenging this levy of GST on various counts including the issue that there is no mechanism to value such transactions.

The GST Council has recommended that the CGST Rules, 2017, be amended to provide for the taxable value of supply of corporate guarantees provided for benefit of related parties at 1% of the amount of such corporate guarantee, or the actual consideration received by the corporate guarantor, whichever is higher. GST Laws currently do not prescribe a valuation mechanism for taxing such transactions.

Legal Standpoint of GST on Guarantees

As per the GST authorities, providing guarantee on behalf of their associated enterprises, whether with or without consideration, amounts to “supply” of services under the GST Law. Assesses argue that extending guarantees on behalf of their associated enterprises does not qualify as “supply” of goods and / or services under the GST Law. A holding company has a ‘corporate’ and a ‘fiduciary duty’ to fund its subsidiary. Such funding could be in the nature of equity investments or in the nature of loans given, and therefore, not a service. The activity of extending guarantees to associated enterprises are in the nature of actionable claims[1], and therefore not subject to GST.

The recommendations of the GST Council do not address the core issue on whether the transactions are taxable. Prescribing valuation provisions for an issue of taxability does not address the core issue of taxability of such inter-company transactions. It is important that the clarification addresses the issue of taxability for settling the controversy.

Impact on Banking and Finance Transactions

Given the ambiguities around the taxability of personal and corporate guarantees, till date financing transactions were concluded without the payment of any GST on corporate or personal guarantees. The recommendations appear as a mixed bag – relaxation for personal guarantors and additional burden for corporate guarantors.

In recent times, there is a reduced prevalence of personal guarantees in corporate financing transactions. This relaxation, though welcome, may not encourage promoters to issue personal guarantees, given the personal and unlimited nature of liabilities, and the potential risks for personal insolvencies.

Corporate guarantees are an integral part of most corporate and project financing transactions. Levy of GST thereon will certainly add to the financing cost for the borrowers / obligors. For obvious reasons, in practice, the GST will mostly have to be determined on the amount of the corporate guarantee and a recurring cost, if the same is renewed on a periodic basis. Mostly, corporate guarantees are expected to be unlimited in nature and need to cover for repayment of the principal amount and all other agreed amounts like interest, default interest, costs, fees etc. Accordingly, it may be difficult to ascertain the full aggregate value of a corporate guarantee.

It is important to note that if taxability of intercompany transactions, similar to corporate guarantees, is not clarified by the Government with adequate legal basis, treatment of other forms of contractual undertakings provided by holding companies / sponsors for the benefit of borrowers, like in the nature of shortfall undertakings or sponsor support undertakings, will also have to be examined. Keeping the tax treatment uncertain for these financing transactions may pose a serious challenge.

Adoption of recommendations of the GST Council could further open the floodgates for ambiguities around retrospective levy and taxability of corporate guarantees, including (a) corporate guarantees issued by Indian companies extended for the benefit of offshore subsidiaries, and (b) guarantees (structured obligations) undertaken by non-residents for the benefit of onshore entities.

Conclusion

The recommendations and clarifications made during the 52nd GST Council meeting aim to address concerns of the industry.

The proposed amendments and clarifications are aimed at expanding the scope of services under the GST net, which is most certainly going to increase the financing costs for borrowers for with-recourse / limited recourse financings. Care needs to be exercised to ensure that this does not impede the momentum of our credit markets.

This Prism has been prepared by:

Soumitra Majumdar
Partner

Manish Mishra
Partner

Nand Gopal Anand
Partner

Shareen Gupta
Partner

Vrindesh Patel
Associate

For more details, please contact [email protected]

[1] Actionable claims are included in the definition of goods under the Central Goods and Services Tax Act, 2017 (“CGST Act”). However, except specified actionable claims, such as lottery, gambling, online money gaming etc., all other actionable claims are outside the purview of GST, as per Schedule III of the CGST Act.

Tags GST, GST Council, JSA, Leading Law Firm, Leading Lawyers, Legal Updates

IPO of Sai Silks (Kalamandir) Limited

JSA advised Sai Silks (Kalamandir) Limited (“Issuer“) in relation to its initial public offering of equity shares aggregating to ₹ 12,009.98 million (“IPO“). The IPO comprised of a Fresh Issue of ₹6,000.00 million and an Offer for Sale of ₹ 6,009.98 million.

The Issuer is amongst the top 10 retailers of ethnic apparel, particularly sarees, in south India in terms of revenues and profit after tax in Fiscal 2020, 2021 and 2022 (Source: Technopak Report) and offers their products to various segments of the market that include premium ethnic fashion, ethnic fashion for middle income and value-fashion.

Our Team Comprised Lead Partner – Madhurima Mukherjee Saha, Principal Associate – Shivali Singh, Associate – Rishika Kharbanda and Shristi Kanchan.

Tags Banking and Finance, Capital Markets, Equity Shares, IPO, JSA, Leading Law Firm, Leading Lawyers, QIP

IPO of Yatra Online Limited

JSA advised Yatra Online Limited in relation to its initial public offering of equity shares aggregating to ₹ 7,750.00 million which comprised of a Fresh Issue of ₹ 6,020.00 million and an Offer for Sale of 12,183,099 Equity Shares.

Yatra Online Limited is India’s largest corporate travel services provider in terms of number of corporate clients and the third largest online travel company in India among key OTA players in terms of gross booking revenue and operating revenue, for Fiscal Year 2023 (Source: CRISIL Report).

Our Team Comprised Lead Partner – Madhurima Mukherjee Saha, Principal Associate – Shivali Singh, Senior Associate – Sagar Batra, and Associate – Bhavini Mohan, Richa Prasad, and Rishika Kharbanda.

Tags Banking and Finance, Capital Markets, IPO, JSA, Leading Law Firm, Leading Lawyers, QIP

JSA Newsletter | Finance | August – September Edition 2023

Please click here to download the Newsletter as PDF.

This Newsletter sets out some of the key legislative and regulatory updates in the banking and finance and insolvency space for the month of August and September 2023.

Revisions to the format of abridged prospectus for non-convertible debt securities

The Securities and Exchange Board of India (“SEBI”), vide circular dated September 4, 2023, has published a new format of the abridged prospectus for public issue of non-convertible debt securities and/or non-convertible redeemable preference shares opening on or after October 1, 2023. The new format provides consistency in disclosure across documents and includes additional critical information.

Calculation of asset allocation limits in relation to investment by mutual fund schemes in units of Corporate Debt Market Development Fund (“CDMDF”)

The SEBI had issued an earlier notification regarding the creation of the CDMDF vide circular[1] dated July 27, 2023, as a backstop facility for the purchase of investment grade corporate debt securities. The Association of the Mutual Funds in India requested SEBI to exclude investments by any mutual fund in the CDMDF while calculating asset allocation limits of such mutual fund schemes. Consequently, the SEBI has issued circular[2] dated September 6, 2023, to clarify that, for the calculation of asset allocation limits of mutual fund schemes, in accordance with Part IV (Categorisation and Rationalisation of Mutual Fund Schemes) of Chapter 2 (Conversion and Consolidation Of Schemes, Launch of Additional Plan and Categorization and Rationalization of Mutual Fund Schemes) of the Master Circular[3] for Mutual Funds dated May 19, 2023, the value of investment in units of the CDMDF will be excluded from the base of net assets of the relevant mutual fund scheme.

Special rights to unitholders and role of sponsor in Real Estate Investment Trusts (“REITs”) and Infrastructure Investment Trusts (“InvITs”)

SEBI (Real Estate Investment Trusts) Regulations, 2014 (“REIT Regulations”) and SEBI (Infrastructure Investment Trusts) Regulations, 2014 (“InvIT Regulations”) were notified on September 26, 2014. The underlying principle of various provisions in both the REIT Regulations and the InvIT Regulations is that the units of REIT and InvIT are equal in all respects and hence all unitholders should have equal rights and no special rights should exist with any unitholder based on the units held in REIT/InvIT. It was noted by SEBI that certain REITs/InvITs have provided the right to nominate directors on the board of Manager/Investment manager to unitholders holding certain percentage of units of REIT/InvIT. Such rights provided to the unit holders above certain percentage of units were not envisaged in the REIT Regulations and InvIT Regulations and appears to be unequal. In this context, it has been represented before SEBI that the special rights are required by institutional investors to protect their investments in the REIT/InvIT. It was further argued that these rights are in the nature of protective rights typically sought by minority unitholders to protect their investment and would not impact the day-to-day functioning, business or operations of the REIT/InvIT. It has also been represented that such investors do not seek to control the manager/investment manager or REIT/InvIT in any manner. Taking the above into consideration, SEBI issued the following notifications amending the REIT and InvIT Regulations to provide regulatory framework for the special rights in REITs and InvITs:

SEBI (REIT) (Second Amendment) Regulations, 2023 dated August 16, 2023. The key amendments are as follows:
- new definitions, such as, “group entities of the Manager”, “Self-Sponsored Manager”, have been added;
- unitholders holding at least 10% of the total outstanding units can nominate a director on the board of directors of the Manager;
- Schedule IX inserted which specifies the stewardship code. Unitholders with substantial holdings are now obligated to act in the best interests of the REIT and its unitholders, formulate stewardship policies, manage conflicts of interest, and periodically monitor and intervene when necessary;
- the sponsor(s) and sponsor group(s) collectively must hold a specified percentage of units for varying periods, ensuring a sustained commitment to the REIT’s success; and
- transition from a Manager to a Self-Sponsored Manager is allowed.
SEBI (InvIT) (Second Amendment) Regulations, 2023 dated August 16, 2023. The key amendments are as follows:
- new definitions, such as, “group entities of the Investment Manager”, “Self-Sponsored Investment Manager”, “sponsor group”, have been added;
- “Self-Sponsored Investment Manager” is now recognized, referring to an Investment Manager with dual responsibilities as the Investment Manager and sponsor;
- unitholders holding at least 10% of the total outstanding units can nominate a director on the board of directors of the Investment Manager;
- units held to fulfil the minimum unitholding requirements will be locked in and cannot be encumbered;
- Schedule VIII inserted which specifies the stewardship code. This code is applicable to unitholders holding a minimum of 10% of the outstanding units and are obligated to act in the best interests of the InvIT and its unitholders, formulate stewardship policies, manage conflicts of interest, and periodically monitor and intervene when necessary; and
- transition from a Manager to a Self-Sponsored Investment Manager is allowed.

Board nomination rights to unitholders of REITs/ InvITs

The SEBI, vide 2 (two) circulars[4], both dated September 11, 2023, has prescribed the framework to be followed for the exercise of rights by unitholders to nominate directors to the board of directors of the manager of the REIT/ InvIT (“Board”). Under Regulation 4(2)(h) of the SEBI (Infrastructure Investment Trusts) Regulations, 2014 and Regulation 4(2)(g) of the SEBI (Real Estate Investment Trusts) Regulations, 2014, unitholders holding not less than 10% of the total outstanding units of the REIT/ InvIT, either individually or collectively, are entitled to nominate 1 (one) director on the Board. Accordingly, a framework to exercise such right to nominate a director to the Board has been set out in the aforementioned circulars. Some of the key provisions of the framework are as follows:

eligible unitholders will have the right, but not the obligation, to nominate any person for appointment as unitholder nominee director;
the Board must formulate and adopt a policy in relation to the qualification and criteria for appointment and evaluation parameters of individuals nominated by a unitholder as a director;
the trust deed and investment management agreement shall stand amended or be deemed to incorporate provisions to provide such rights of nomination;
the manager must send a written intimation to all unitholders within 10 (ten) days from the end of each financial year requesting unitholders to inform the manager if any eligible unitholders wish to exercise the right to nominate a nominee director; and
eligible unitholders will be determined based on the unitholding pattern of the REIT/InvIT as on March 31^st of the relevant financial year.

Framework for voluntary delisting of non-convertible debt securities/ non-convertible redeemable preference shares

The SEBI, vide notification dated August 23, 2023 (“Notification”), has amended the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”) and introduced a specific framework for voluntary delisting of non-convertible debt securities/ non-convertible redeemable preference shares.

Prior to the Notification, neither SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (“NCS Regulations”) nor the LODR Regulations had any specific provisions dealing with the voluntary delisting of non-convertible debt securities/ non-convertible redeemable preference shares. In the absence of any specific provisions, Regulation 59 of the LODR Regulations which deals with restructuring of non-convertible debt securities was used by certain issuers for delisting non-convertible debt securities.

The Notification seeks to address that concern and provides for a specific framework in relation to voluntary delisting of non-convertible debt securities/ non-convertible redeemable preference shares and specifically provides for exclusion of Regulation 59 of LODR Regulations for voluntary delisting of non-convertible debt securities/ non-convertible redeemable preference shares under the new chapter. A new Chapter VIA has been added to the LODR Regulations which deals with the voluntary delisting of non-convertible debt securities or non-convertible redeemable preference shares from any or all the stock exchanges where they are listed. The broad framework contemplated by the Notification (along with timelines) is as under:

Sr. No.	Nature of event	Timeline (in working days) latest by
1.	Approval of proposal for delisting of non- convertible securities by board of directors of the listed entity	X
2.	Application for seeking in-principle approval from the stock exchange	X+15
3.	Grant of in-principle approval by the stock exchange	(X+15) + 15
4.	Disclosure of the prescribed information on the website of the listed entity as well as to the stock exchanges	[(X+15)+15] + 2
5.	Notice of delisting to be sent to holders of non- convertible debt securities	[(X+15)+15] +3
6.	Receipt of approval from all holders of non- convertible debt securities/ no-objection letter from the Debenture Trustee	{[(X+15)+15] +3} +15
7.	Final application to the stock exchange for delisting	({[(X+15)+15] +3} +15) + 5
8.	Disposal of final application by the stock exchange	({[(X+15)+15] +3} +15) +5) + 15
9.	Intimation to the stock exchange in the event of failure of delisting proposal	1 day from the date of event of failure

The above framework is not applicable in the following cases :

a listed entity that has outstanding listed non-convertible debt securities or non-convertible redeemable preference shares issued by way of a public issue; or
a listed entity has more than 200 (two hundred) security holders (other than qualified institutional buyers); or
non-convertible debt securities or non-convertible redeemable preference shares have been delisted by the stock exchanges as a consequence of any penalty or action initiated against the listed entity or on any grounds as specified under Rule 21 of the Securities Contracts (Regulation) Rules, 1957; or
non-convertible debt securities or non-convertible redeemable preference shares have been delisted by the stock exchanges pursuant to redemption of such securities or shares; or
non-convertible debt securities or non-convertible redeemable preference shares have been delisted pursuant to a resolution plan as per Section 31 of the of the Insolvency and Bankruptcy Code, 2016.

Listing of subsequent issuances of non-convertible debt securities

The SEBI vide notification dated September 19, 2023, has issued the SEBI (Listing Obligations and Disclosure Requirements) (Fourth Amendment) Regulations, 2023, to amend the LODR Regulations. This amendment has introduced Regulation 62A which provides for the listing of subsequent issuances of non-convertible debt by listed entities. Some of the key provisions are as follows:

a listed entity, whose non-convertible debt securities are listed must list all non-convertible debt securities, proposed to be issued on or after January 1, 2024;
a listed entity, whose subsequent issues of unlisted non-convertible debt securities made on or before December 31, 2023, are outstanding on the said date, may list such securities, on the stock exchange(s);
a listed entity that proposes to list the non-convertible debt securities on the stock exchange(s) on or after January 1, 2024, must list all outstanding unlisted non-convertible debt securities previously issued on or after January 1, 2024, on the stock exchange(s) within 3 (three) months from the date of the listing of the non-convertible debt securities proposed to be listed; and
a listed entity is not required to list the following securities:
1. bonds issued under section 54EC of the Income Tax Act, 1961;
2. non-convertible debt securities issued pursuant to an agreement between the listed entity of such securities and multilateral institutions, provided these securities are locked in, held till maturity by the investors and are unencumbered; and
3. non-convertible debt securities issued pursuant to an order of any court or tribunal or regulatory requirement as stipulated by a financial sector regulator, provided these securities are locked in, held till maturity by the investors and are unencumbered.

Provisions relating to enhanced transparency in ownership of Foreign Portfolio Investors (“FPIs”)

SEBI, vide notification dated August 10, 2023 (“August 10 Notification”), has amended the SEBI (FPI) Regulations, 2019 (“FPI Regulations”), to enhance transparency in ownership of FPIs.

August 10 Notification seeks to address the concerns in relation to:

Certain FPIs hold concentrated portion of their equity portfolio in a single investee company/ corporate group. Such concentrated investments raise the possibility that promoters of such investee companies/ corporate groups, or other investors acting in concert, could be using the FPI route for circumventing regulatory requirements like disclosures required under the SEBI (Substantial Acquisition of Shares and Takeovers Regulations), 2011 or maintaining the prescribed minimum public shareholding in the listed company.
Entities with large Indian equity portfolios potentially disrupting the orderly functioning of Indian securities markets by utilizing the FPI route to circumvent Press Note 3 dated April 17, 2020 (Press Note 3 dated April 17, 2020, is not applicable to FPI investments).
Non identification of natural persons as Beneficial Owners (“BO”) of several FPIs. While the thresholds for identification of BOs of FPIs are specified in Prevention of Money Laundering (Maintenance of records) Rules, 2005 (“PMLR”), it is often observed that no natural person is identified as the BO of several FPIs based on economic interest or ownership interest, since each investor entity in the FPI may be below the threshold prescribed in the PMLR. However, there is a possibility that the same natural person may hold a significant aggregate economic interest in the FPI via various investment entities, each of which are individually below the threshold for identification as a BO as prescribed in PMLR.

To allay the above concerns, August 10 Notification has added certain additional obligations in the Regulation 22 of FPI Regulations. The additional obligations provide for provision of such information or documents in relation to the persons with any ownership, economic interest or control, as specified by SEBI, by certain objectively identified FPIs. While August 10 Notification laws down the substantial law, the procedural law including the criteria of FPIs and the documents has been detailed vide circular dated August 24, 2023 (“Circular”), which will come into effect from November 1, 2023. The Circular provides that granular details of all entities holding any ownership, economic interest, or exercising control in the FPI must be provided by FPIs that fulfil any of the following criteria:

FPIs holding more than 50% of their Indian equity Assets Under Management (“AUM”) in a single Indian corporate group;
FPIs that individually, or along with their investor group hold more than INR 25,000 crore (Indian Rupees twenty five thousand crore) of equity AUM in the Indian markets.

The following FPIs are not required to make the disclosures:

government and government related investors registered as FPIs under Regulation 5 (a) (i) of the FPI Regulations;
public retail funds as defined under Regulation 22(4) of the FPI Regulations;
exchange traded funds (with less than 50% exposure to India and India-related equity securities) and entities listed on specified exchanges of the permissible jurisdictions as may be notified by the SEBI; and
pooled investment vehicles registered with/ regulated by a Government/ regulatory authority in their home jurisdiction/ country of incorporation/ establishment/ formation.

Reduction in validity period of approval granted by SEBI to Alternative Investment Funds (“AIFs”) and Venture Capital Funds (“VCFs”) for overseas investment

The SEBI, vide circular dated August 4, 2023, has reduced the time limit for making overseas investments by AIFs/VCFs from 6 (six) months to 4 (four) months from the date of prior SEBI approval. In case the applicant AIF/VCF does not utilize the investible fund limits allocated to them within the prescribed time, then SEBI may allocate such unutilized limit to other applicant AIFs/VCFs. The reason for the change is to ensure that the allocated limit is utilised efficiently and, if unutilised, the same is again available to the AIF industry in a shorter time span.

Amendment to the Corporate Insolvency Resolution Process (“CIRP”)

The Insolvency and Bankruptcy Board of India (“IBBI”), vide notification dated September 18, 2023, has issued the IBBI (Insolvency Resolution Process for Corporate Persons) (Second Amendment) Regulations, 2023 (“Amending Regulations”) amending the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“Principal Regulations”). Some of the key provisions of the Amending Regulations are set out below:

while filing an application under Section 7 (claims by operational creditors) or Section 9 (claims by workmen and employees) of the Principal Regulations, the financial creditor or the operational creditor, must also submit along with evidence, the chronology of debt and default including the date when the debt became due, the date of default, dates of part payments, if any, the date of last acknowledgment of debt, and the limitation applicable;
the interim resolution professional or resolution professional, must take custody and control from the personnel of the corporate debtor, its promoters or any other person associated with the management of the corporate debtor of: (i) the records of information relating to the assets, finances and operations of the corporate debtor; and (ii) the assets recorded in the balance sheet of the corporate debtor or in any other records;
while appointing the authorised representative for any class of creditors, the financial creditors in the class, representing not less than 10% voting share, may seek replacement of the authorised representative with an insolvency professional of their choice by making a request to the interim resolution professional or resolution professional;
increase in the timelines to file claims to the adjudicating authority up to the date of issue of request for resolution plans;
committee members may propose an audit of the corporate debtor and include the cost of such audit in the CIRP cost;
substitution of Form G (Invitation for expression of interest) to provide more information to prospective resolution applicants;
changes in Form H (Compliance certificate) to include minutes of the meeting of the committee of creditors in which resolution plan is approved to enable the adjudicating authority to understand the rationale of the decision of the committee of creditors; and
for assignment of debt by a creditor to another person, the details of such assignment are required to be provided to the resolution professional within 7 (seven) days.

Clarification on liquidators’ fee calculation

IBBI, vide circular dated September 28, 2023[5], has issued clarifications regarding the interpretation and computation of the liquidators’ fee under Regulation 4 (Appointment and remuneration of liquidator) of the IBBI (Liquidation Process) Regulations, 2016. While earlier, Regulation 4(2)(b) of the IBBI (Liquidation Process) Regulations, 2016, provided that the liquidator will be entitled to a fee as a percentage of the amount realised net of other liquidation costs, and of the amount distributed, for the balance period of liquidation, the new regulations have clarified that:

the ‘amount realised’ will mean the amount realised from assets other than liquid assets such as cash and bank balance including term deposits, mutual fund investments, quoted shares available on start of the process after exploring compromise and arrangement, if any, and ‘amount distributed to stakeholders’ will mean distributions made to the stakeholders, after deducting CIRP and liquidation cost;
all components of liquidation costs, except the liquidator’s fee, should be considered as part of ‘other liquidation costs’; and
exclusions for fee calculation should only apply if explicitly authorised by the National Company Law Tribunal, National Company Law Appellate Tribunal, or other courts of law.

Operation of pre-sanctioned credit lines at banks through Unified Payments Interface (“UPI”)

The Reserve Bank of India (“RBI”), vide directive dated September 4, 2023, has authorised scheduled commercial banks to link pre-sanctioned credit lines with UPI. The scope of UPI has been expanded to include credit lines as a funding account. Under this facility, payments through a pre-sanctioned credit line issued by a scheduled commercial bank to individuals are enabled for transactions using the UPI system. Banks can develop their own board-approved policies regarding the terms and conditions for the use of credit lines. Such policies can cover various aspects, including the credit limit, period of credit and rate of interest, for credit lines issued to fund UPI payments.

Release of property documents on closure of loan account

The RBI, vide circular[6] dated September 13, 2023, has issued further directions to promote responsible lending conduct amongst Regulated Entities (“REs”). REs must comply with the directions for the release of all documents pertaining to movable / immovable property (“Documents”) due on or after December 1, 2023, upon receiving full repayment of the loan and closure of the loan account. Some of the key provisions of the directions are set out below:

REs must release all the original Documents and remove charges registered with any registry within a period of 30 (thirty) days after full repayment/ settlement of the loan account;
the borrower must be given the option to collect the original Documents either from the banking outlet/ branch servicing the loan account, or any other office of the RE where the Documents are available, as per her / his preference;
where there is a delay in releasing of original Documents or failure to file the charge satisfaction form with relevant registry beyond 30 (thirty) days after full repayment/ settlement of loan, the RE must communicate to the borrower reasons for such delay. Where the delay is attributable to the RE, the RE must compensate the borrower at the rate of INR 5,000 (Indian Rupees five thousand) for each day of delay;
upon loss/damage to original Documents, either in part or in full, the REs must assist the borrower in obtaining duplicate/certified copies of the Documents and must bear the associated costs, in addition to paying compensation as indicated above; and
to address the contingent event of demise of the sole borrower or joint borrowers, REs must have a well laid out procedure for the return of original Documents to the legal heirs.

Secured assets possessed under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (“SARFAESI Act, 2002”)

RBI, vide circular[7] dated September 25, 2023, has directed REs acting as secured creditors under the terms of the SARFAESI Act, 2002, to display information in respect of the borrowers whose secured assets have been taken into possession by such REs. The REs must upload the information on the respective websites in the prescribed format by March 25, 2024, and thereafter update such information on a monthly basis.

Fund Management Entities (“FMEs”) to seek authorisation for filing schemes

The International Financial Services Centres Authority (Fund Management) Regulations, 2022 (“Fund Management Regulations, 2022”), issued pursuant to the International Financial Services Centres Authority Act, 2019, were issued to regulate the landscape for investment funds and fund managers operating in an International Financial Services Centre (“IFSC”). Vide circular[8], dated September 15, 2023, the International Financial Services Centres Authority (“IFSCA”) has issued directions setting out the procedure to obtain authorisations for schemes filed under Chapters III, IV, and V of the Fund Management Regulations, 2022, i.e., schemes relating to:

fund management such as the venture capital schemes, restricted schemes (non-retail schemes) and retail schemes;
exchange traded funds; and
environmental, social and governance.

This Newsletter has been prepared by:

Aashit
Shah
Partner

Megha
Saraf
Partner

Anjana
Potti
Partner

Harshil Shubham
Associate

Shivpriya
Gurtoo
Associate

For more details, please contact [email protected]

[1] SEBI/HO/IMD/PoD2/P/CIR/2023/129

[2] SEBI/HO/IMD/PoD2/P/CIR/2023/152

[3] SEBI/HO/IMD/IMD-PoD-1/P/CIR/2023/74

[4] SEBI/HO/DDHS-PoD-2/P/CIR/2023/153 and SEBI/HO/DDHS-PoD-2/P/CIR/2023/154

[5] IBBI/LIQ/61/2023

[6] RBI/2023-24/60DoR.MCS.REC.38/01.01.001/2023-24

[7] RBI/2023-24/63 DoR.FIN.REC.41/20.16.003/2023-24

[8] IFSCA-AIF/47/2023-Capital Markets

Tags Banking and Finance, JSA, Leading Law Firm, Leading Lawyers, Legal Updates, Mutual Funds, Real Estate Investments, SEBI

JSA Newsletter | FinTech | Twentieth Edition, 2023

Please click here to download the Newsletter as PDF.

What’s New?

RBI issues draft circular on card network portability

The Reserve Bank of India (“RBI”), has published a draft circular on Arrangements with Card Networks for issue of Debit, Credit and Prepaid Cards (“Draft Circular”) – proposing a new framework that seeks to enable cardholders to choose any preferred card network for cards they hold. The RBI invited industry comments on the Draft Circular up to August 4, 2023, and we (JSA) also made submissions on the same on behalf of our clients. The move is aimed at giving consumers more choice and control over their payment options. However, there are practical and business considerations which we believe the RBI must also consider.

Under the rules proposed under the Draft Circular, card issuers will be prohibited from entering into any arrangements or agreements with card networks that restrict them from offering cards on multiple networks. This would allow cardholders to choose between different networks – such as Visa, Mastercard and RuPay at any time.

The proposed rule is in line with the RBI’s efforts to promote competition and innovation in the payments sector. The RBI also hopes that this will benefit consumers by giving them more flexibility and control over their payment options.

However, in the long run, this move may create saturation in the market and impact growth and development in the card ecosystem. This also appears to be an attempt by the RBI to promote migration of cardholders to the RuPay network.

Delhi High Court classifies PayPal as a ‘reporting entity’

In December 2020, the Financial Intelligence Unit India (“FIU-IND”) ordered PayPal Payments Private Limited (“PayPal”) to register as a “reporting entity” under the Prevention of Money Laundering Act. 2002 (“PMLA”) and imposed a penalty of ₹ 96,00,000 (Indian Rupees Ninety Six Lakhs) (approx. $116,000 (US Dollars One Hundred and Sixteen Thousand)) for failing to do so. PayPal challenged the order and penalty in the Delhi High Court, arguing that it was a technology provider and did not fall under the definition of a “payment system operator” under the PMLA.

The Delhi High Court rejected PayPal’s argument and held that the definition of “payment system” for purposes of the PMLA must be interpreted broadly to include any system that enables the transfer of money between two parties. The Hon’ble High Court found that PayPal’s technology enabled the transfer of money between parties, and consequently classified PayPal as a “payment system operator” under the PMLA. However, the Hon’ble High Court partially relieved PayPal by quashing the penalty – stating that PayPal’s violation of the law was not deliberate and that it acted in good faith.

PayPal has appealed the Delhi High Court’s decision to a larger bench.

The broad interpretation of the term “payment system” as taken by the Hon’ble High Court blurs the line between regulated and unregulated entities – creating an onerous obligation for even unregulated entities under the Payment and Settlement Systems Act, 2007 (such as payment gateways) to comply with the reporting and other obligations under the PMLA. However, this interpretation is consistent with the recent approach of the FIU-IND, which has sent notices to other previously unregulated entities directing them to comply with the obligations of reporting entities under the PMLA.

RBI develops a digital public tech platform for credit enablement

As part of the Statement on Developmental and Regulatory Policies, the RBI announced the development of a public tech platform for frictionless credit (“Platform”), developed by the Reserve Bank Innovation Hub (RBIH). The platform is an end-to-end digital platform with open architecture and open application programming interfaces (APIs) and standards to which all financial sector players can connect seamlessly in a plug and play model. In essence, the Platform will enable delivery of frictionless credit by facilitating the flow of required information to lenders, to assist them with making informed lending decisions. The platform will also be linked to services such as Aadhaar e-KYC, land records from on-boarded State Governments, satellite data, PAN validation and account aggregation by RBI authorised account aggregators.

The pilot project of the Platform was rolled out in August 2023 and primarily focussed on products such as Kisan Credit Card loans, dairy loans, MSME loans (without collateral), personal loans, and home loans through participating banks. RBI proposes to broaden the scope based on the learnings of the pilot project.

The development of the public tech platform for credit enablement is a major step forward in the RBI’s efforts to promote financial inclusion and make credit more accessible to people across India.

RBI Governor and NPCI launch key digital payment initiatives at the Global FinTech Fest, 2023

The 2023 edition of the Global FinTech Fest was organised from September 5, 2023, till September 7, 2023 in Mumbai with the theme ‘Global Collaboration for a Responsible Financial Ecosystem – Inclusive | Resilient | Sustainable’. At the event, the RBI Governor and National Payments Corporation of India (“NPCI”) announced the launch of several digital payment initiatives, including:

UPI-ATM, which will enable users to withdraw cash at ATMs using their UPI application. The ability to withdraw cash at ATMs through UPI was previously contemplated by RBI in a notification dated May 19, 2022, on Interoperable Cardless Cash Withdrawal. Please see the Fifteenth and Sixteenth editions of our FinTech newsletter for details on the same;
Credit Line on UPI, which will enable pre-sanctioned credit lines from banks via UPI, to foster a more streamlined and digital banking ecosystem. NPCI has also issued operational instructions for implementation of the same;
UPI LITE X, an enhanced version of UPI Lite (an on-device wallet for small value digital payments), which will enable users to send and receive money whilst being completely offline, thereby allowing initiation and execution of transactions even in remote areas and areas with poor connectivity;
UPI Tap & Pay, which, as the name suggests, will enable users to tap near-field communication (“NFC”) enabled quick response (“QR”) codes at merchant locations to complete their payments;
Hello! UPI, a conversational payment mechanism that will enable users to make voice-enabled UPI payments through UPI apps, telecom calls and other internet of things (IoT) devices. This facility will initially be available in English and Hindi and will gradually be enabled in several regional languages. In particular, this facility aims to benefit senior citizens and digitally inexperienced persons who can simply give voice commands to transfer funds and then input UPI PIN to complete the transaction;
BillPay Connect, a nationalised number for bill payments across India which will enable users to conveniently fetch and pay their bill by sending a ‘Hi’ on the messaging app or giving a missed call to the number;
UPI AutoPay on QR, a solution that will allow users to scan a QR code to set up recurring payment instructions; and
OTG Ring, a contactless payment wearable ring that will allow users to make payments to any NFC-based device and will aim to replace plastic cards for various open-loop transit programs.

All these developments will contribute to increasing the adoption rate of FinTech products and services and further India’s aim to become the global leader for FinTech.

Parliament enacts the Digital Personal Data Protection Act, 2023

The Parliament of India enacted the Digital Personal Data Protection Act, 2023 (“DPDPA”) – India’s first comprehensive law on protection of personal data. A draft of the DPDPA (in its bill form) was circulated in November 2022 and underwent public consultation before taking its current form. For a detailed analysis of the DPDPA, please refer to JSA Prism dated August 5, 2023. The DPDPA has been notified in the official gazette of India for general information. Its provisions will take effect once specific sections of the enactment, along with rules, are notified for enforcement.

Draft Digital India Bill to be released soon

We expect the draft Digital India Bill (“DIB”) to be published for public consultation soon. With the DIB, the Government seeks to replace the existing two-decade old Information Technology Act, 2000 and overhaul India’s digital regulatory landscape.

The DIB will reportedly include provisions to tackle new-age cyber-crime and regulate artificial intelligence and algorithmic accountability. The DIB may also include significant penalties for non-compliance.

Quick Snapshots

CBDC and UPI QR codes are now interoperable: As part of its ongoing pilot project for retail central bank digital currency (“CBDC-R”), RBI announced interoperability of the QR codes for UPI and CBDC-R. Both UPI payments and use of CBDC-R may be undertaken by scanning a QR code which will procure the recipient’s details. However, now, to leverage the acceptance and adoption of UPI and likewise, encourage the adoption of CBDC-R – both these QR codes will be interoperable. This means the same QR code may be scanned to make payments to (a) a merchant’s bank account (UPI) or (b) the merchant’s CBDC-R wallet. At present, several banks, including Axis Bank, SBI, Kotak Mahindra Bank and HDFC Bank have introduced UPI interoperability in their digital rupee application. NPCI has also issued instructions in this regard.
Central Government introduces point of sale (PoS) reforms: The Central Government has introduced PoS registration reforms to promote a cleaner and safer digital ecosystem. The reforms include (a) mandatory registration of franchisees, agents and distributors by PoS licensees, (b) indisputable verification of PoS by the licensee and (c) blacklisting of fraudulent PoS for 3 (three) years. All these steps are proposed to help with the identification, blacklisting and elimination of rogue PoS from the licensees’ system and to provide encouragement to the upright PoS.
Mastercard launches solution to enhance security of guest checkout transactions: In furtherance of RBI’s mandate to tokenise all card data and prohibition on merchants and payment aggregators from storing card data – Mastercard has launched the ALT ID solution for guest checkout transactions (i.e., transactions where the customer opts to manually input card details for each transaction). The solution will create an alternate identifier for the real card numbers provided by cardholders during guest checkout transactions on e-commerce platforms, thereby enhancing online payment security for both merchants and consumers.
Enhanced transaction limits for small value offline digital payments: In furtherance of RBI’s Statement on Regulatory Development, RBI enhanced the per transaction limit for small-value digital payments conducted in offline (face-to-face) mode from ₹ 200 (Indian Rupee Two Hundred) (approx. $2 (US Dollars Two)) to ₹ 500 (Indian Rupees Five Hundred) (approx. $6 (US Dollars Six)). Consequently, NPCI has also adopted this enhanced threshold for UPI Lite transactions. This move will encourage the adoption rate of UPI Lite and enable users to undertake transactions of up to ₹ 500 (Indian Rupees Five Hundred) (approx. $6 (US Dollars Six)) without two-factor authentication or utilising the bank’s core banking systems in real time (which will in turn decrease time taken for transaction processing). It will also simplify the payment process for users undertaking small value transactions due to absence of requirement of two-factor authentication, thereby increasing volumes.
UPI in Sri Lanka: The Prime Minister of India has entered into an agreement with the Sri Lankan President for the acceptance of UPI in Sri Lanka, thereby adding yet another country to the list of countries that accept India’s “crown jewel”.
Cross-border bill payments for NRIs: The CEO of Bharat BillPay Limited announced during the G20 Summit that soon non-resident Indians (“NRIs”) in the United Kingdom will be able to make recurring bill payments on Bharat Bill Payment System (“BBPS”) directly. At present, this facility is extended to NRIs residing in several middle eastern countries. For the rest of the world, NRIs have to transfer the money to their resident family members who can in turn make payment. However, soon NRIs residing in the United Kingdom will also be able to make direct payments on BBPS without having to route it through a resident family member.

Investments in the FinTech Sector

Perfios Software Solutions, a FinTech focussed software-as-a-service (SaaS) company has raised approximately $229,000,000 (US Dollars Two Hundred and Twenty Nine Million) from Kedaara Capital in a transaction that comprised of a primary and a secondary leg. Perfios plans to use the funds to fuel its continued global expansion plans in North America and Europe alongside investing in new age technologies to enhance its comprehensive stack of decision analytics SaaS products.
Credgenics, a debt collection-focused software-as-a-service startup has raised approximately $50,000,000 (US Dollars Fifty Million) in a round led by existing investors Westbridge Capital, Accel and Tanglin Ventures. Credgenics plans to use the fresh funds for product development, international business expansion and capturing other banking, financial services and insurance industry segments.
Brine Fi, a decentralised exchange has raised approximately $16,500,000 (US Dollars Sixteen Million Five Hundred Thousand) in a series A funding round led by Pantera Capital.
CredRight, a FinTech startup that provides institutional debt capital to micro, small and medium enterprises in tier 3 (three) and tier 4 (four) towns in India, has raised approximately $9,700,000 (US Dollars Nine Million Seven Hundred Thousand) in a mix of equity and debt funding. The equity capital round was led by Michael and Susan Dell Foundation while the debt capital round saw participation from Blacksoil, Caspian Debt and Westen Capital. CredRight plans to use the funding to expand into newer locations and strengthen its technology stack.
Efficient Capital Labs, a business-to-business software-as-a-service-focused FinTech startup, has raised approximately $7,000,000 (US Dollars Seven Million) in a pre-Series A funding round led by QED Investors. The company plans to use the fresh capital to build its technological stack, expand team and achieve better unit economies.
GradRight, a FinTech platform that helps students aspiring for education overseas secure financing, has raised approximately $6,050,000 (US Dollars Six Million Fifty Thousand) in a Series A funding round from IvyCap Ventures.
Xtracap Fintech, a supply-chain finance platform has raised approximately $3,000,000 (US Dollars Three Million) from IIFL Fintech Fund.
Vegapay has raised approximately $1,100,000 (US Dollars One Million One Hundred Thousand) in a pre-seed funding round led by Eximius Ventures. The company plans to use the fresh capital to develop its technology stack further and to create an omnichannel lending solution.
CheqUPI, a UPI wallet for foreign nationals, has raised approximately $500,000 (US Dollars Five Hundred Thousand) in a pre-seed funding round from Y Combinator. It has also joined the Y Combinator Accelerator Program.
Plus, a jewellery savings application, has raised approximately $350,000 (US Dollars Three Hundred and Fifty Thousand) in a seed funding round from EvolveX, WeFounderCircle, Venture Catalyst, Jito Angel Networks and angel investors. Plus plans to deploy the proceeds for expanding its operations by acquiring jeweller partners.
BizPay, an expense management platform, has raised an undisclosed amount in a seed funding round from Inflection Point Venture. BizPay plans to use this funding for product development and marketing.
Aaritya Tech, a WealthTech platform has raised an undisclosed amount in a seed funding round from Accel and Elevation Capital.

This Newsletter has been prepared by:

Probir Roy Chowdhury
Partner

Yajas
Setlur
Partner

Nikhil
George
Associate

Moushami
Nayak
Associate

For more details, please contact [email protected]

Tags Delhi High Court, Fintech, JSA, Leading Law Firm, Leading Lawyers, Legal Updates, NPCI, RBI, UPI

Qualified Institutions Placement of IDFC FIRST Bank Limited

JSA advised IDFC FIRST Bank Limited (“IDFC FIRST Bank”) in relation to their qualified institutions placement. IDFC FIRST Bank had filed a placement document on October 6, 2023, for issue of 33,24,09,972 equity shares to qualified institutional buyers aggregating to approximately ₹ 3,000 crore (the “Issue”). ICICI Securities Limited, Jefferies India Private Limited, J.P. Morgan India Private Limited and Nuvama Wealth Management Limited (formerly known as Edelweiss Securities Limited) acted as the lead managers to the Issue.

Our Transaction Team Lead Partner – Arka Mookerjee, Partner – Siddhartha Desai, Principal Associate – Anshu Bansal, Associate – Shambhavi Kumar and Pooja Tada.

Tags Banking and Finance, IDFC FIRST Bank Limited, JSA, Leading Law Firm, Leading Lawyers, QIP, Wealth Management

JSA Prism | Finance | October 2023

Please click here to download the Prism as PDF.

The Supreme Court holds that the right of redemption of mortgage stands extinguished upon the publication of the auction notice by the secured creditor in terms of Section 13(8) of the SARFAESI Act.

The Supreme Court in its recent judgement Celir LLP Vs. Bafna Motors (Mumbai) Pvt. Ltd. and others[1], has held that in terms of Section 13(8) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”), the right of the borrower to redeem the secured asset stands extinguished upon issuance of the notice for public auction and the same will prevail over the right of the mortgagor to redeem the mortgage under the Transfer of Property Act, 1882 (“TOPA”).

Brief Facts

Bafna Motors (Mumbai) Pvt. Ltd. (“Borrower”) availed lease rental discounting credit facility from Union Bank of India (“Bank”) to the tune of INR 100,00,00,000 (Indian Rupees one hundred crore). In order to secure the loan, certain immovable property (“Secured Asset”) was mortgaged in favour of the Bank. The Borrower defaulted in repaying the loan and was classified as non-performing asset. Consequently, the Bank took steps under the SARFAESI Act to realise the Secured Asset. The Bank issued an auction sale notice on June 14, 2023 to sell the Secured Asset at a reserve price of INR 105,00,00,000 (Indian Rupees one hundred five crore). Celir LLP (“Auction Purchaser”) submitted a bid for Rs. 105,5,00,000 (Indian Rupees one hundred five crore five lakh) and emerged as the successful bidder.

The Bank issued a sale confirmation letter on June 30, 2023 to the Auction Purchaser; and thereafter the Auction Purchaser also deposited the bid amount with the Bank. Before the sale certificate could be issued, the Borrower filed an application before Debts Recovery Tribunal – I, Mumbai (“DRT”) for redemption of mortgage over the Secured Asset for INR 123,83,00,000 (Indian Rupees one hundred twenty three crore eighty three lakh), which was higher than the bid amount of the Auction Purchaser. During the pendency of the application before the DRT, the Borrower filed a writ petition before the Bombay High Court apprehending that the application before the DRT may be dismissed; and stating that the Borrower is willing to pay INR 129,00,00,000 (Indian Rupees one hundred twenty nine crore) to the Bank towards redemption of the mortgage. The Bombay High Court allowed the writ petition vide order dated August 17, 2023 and permitted the Borrower to redeem the mortgage over the Secured Asset by paying the said sum, on or before August 31, 2023. The Bombay High Court further directed the Bank to refund the entire bid amount to the Auction Purchaser upon payment of the agreed amount by the Borrower. Against the said order, the Auction Purchaser preferred an appeal before the Supreme Court.

Decision of the Supreme Court

The primary contention of the Auction Purchaser was that the auction proceedings under SARFAESI Act attained finality since the entire consideration has been paid by the Auction Purchaser; the sale in favour of the Auction Purchaser has been confirmed by the Bank; and that in terms of Section 13(8) of the SARFAESI Act, the right of redemption of mortgage expired upon issuance of auction notice by the Bank. It was further submitted that the Bombay High Court erred in exercising writ jurisdiction when the Borrower had already availed the remedy before the DRT.

The Borrower contended even a sale under the SARFAESI Act will be governed by Section 60 of the TOPA read with Section 17 of the Registration Act, 1908 (“Registration Act”), which preserves the right of a mortgagor to redeem the mortgage until the mortgaged property is transferred to a third party under a registered conveyance deed. Reliance was placed on the judgement of the Supreme Court in Mathew Varghese v. M. Amritha Kumar[2] and judgement of the Telangana High Court in Concern Readymix, rep. by its proprietor, Smt. Y. Sunitha v. Authorised Officer, Corporation Bank[3], an appeal against which was dismissed by the Supreme Court[4]. The Borrower further contended that in compliance with the Bombay High Court’s order, the amounts have been paid; the Bank had issued no-objection certificate on August 28, 2023; and subsequently, third party rights have been created on the Secured Asset.

The Supreme Court, while rejecting the contentions of the Borrower clarified that under Section 13(8) of the SARFAESI Act as it stood prior to the amendment with effect from September 1, 2016, the borrower / mortgagor had a right to redeem the mortgage at any time prior to the secured creditor selling the mortgaged property to a third party under a registered instrument in terms of Section 60 of the TOPA read with Section 17 of the Registration Act. While Section 60 of the TOPA entitles a mortgagor to redeem the mortgage till the mortgaged property is transferred, the said right can be extinguished by act of parties. The Supreme Court held that failure on the part of the borrower to tender the due amount before the publication of auction notice under the SARFAESI Act, amounts to extinguishment of right to redeem the mortgage by its act. It was further held that in terms of the amended Section 13(8) of the SARFAESI Act effective from September 1, 2016, the right of the borrower to redeem the mortgage over the secured asset is extinguished upon publication of auction notice or notice inviting quotations / tender from public or upon entering into private treaty for transfer of secured assets by way of lease, assignment or sale under the SARFAESI Act. The Supreme Court further clarified that the SARFAESI Act being a special law, Section 13(8) of the SARFAESI Act, under which the right of redemption is available till the date of publication of notice for auction will prevail over the general right of redemption under Section 60 of the TOPA.

The Supreme Court allowed the appeal of the Auction Purchaser and confirmed the sale in its favour. While setting aside the Bombay High Court’s order, the Supreme Court reiterated that High Courts should not exercise extra-ordinary powers under writ jurisdiction to interfere with the proceedings under the SARFAESI Act when an alternate efficacious remedy is available under the SARFAESI Act.

Conclusion

There were conflicting judgements of various High Courts regarding the interpretation of the right of redemption under Section 13(8) the SARFAESI Act. The High Courts of Telangana[5], Punjab & Haryana[6] and Madras High Court[7] had held that the right of redemption of the mortgagor subsists till the property is transferred. Whereas Andhra Pradesh High Court[8] had held that in terms of Section 13(8) of the SARFAESI Act, the right of redemption is extinguished upon issuance of auction notice. This judgement of the Andhra Pradesh High Court was subsequently followed by the High Court of Telangana[9].

This judgement of the Supreme Court is significant since it settles the law on the issue by clarifying that right of redemption under Section 13(8) the SARFAESI Act is not subject to the general right of redemption under Section 60 of the TOPA; and that the right to redeem the mortgage gets extinguished once the auction sale notice issued in terms of the SARFAESI Act.

This Prism has been prepared by:

Vinod Kumar
Partner

Srinivasan M.D
Principal Associate

Ancy Jacob
Associate

For more details, please contact [email protected]

[1] Civil Appeal Nos. 5542 – 5543 of 2023 dated September 21, 2023.

[2] 2014 5 SCC 610.

[3] 2018 SCC OnLine Hyd 783.

[4] SLP(C) D. No. 28967 of 2019.

[5] Concern Readymix, rep. by its proprietor, Smt. Y. Sunitha v. Authorised Officer, Corporation Bank (2018 SCC OnLine Hyd 783); and Judgement dated 17.8.2022 in W.P. No. 11435 of 2021 in Amme Srisailam v. Union Bank of India.

[6] Pal Alloys and Metal India Private Limited v. Allahabad Bank (2021 SCC OnLine P&H 2733).

[7] Sri International v. Central Bank of India, 2023 SCCOnLine Mad 2210

[8] Sri Sai Annadhatha Polymers v. Canara Bank (2018 SCC OnLine Hyd 178)

[9] KVV Prasad Rai Gupta v. State Bank of India (2021 SCC OnLine TS 328).

Tags Finance, JSA, JSA Prism, Leading Law Firm, Leading Lawyers, Legal Updates, mo, Supreme Court

Offer for Sale by Equity International in the IPO of SAMHI Hotels Limited

JSA also advised Equity International (Blue Chandra Pte. Ltd.) in relation to its offer for sale of 8,428,510 Equity Shares aggregating to approximately ₹ 1,062 million in the initial public offering of equity shares (“IPO”) of SAMHI, comprising of a fresh issue of approximately INR 12,000 million and an offer for sale of approximately INR 1,701 million, at a price of Rs. 126 per equity share, aggregating to a total IPO size of approximately INR 13,701 million.

Equity International, as part of their pre-IPO funding round, partially exited from its investment in SAMHI by a sale of its equity shares held in SAMHI immediately prior to the IPO of SAMHI which successfully listed on September 22, 2023.

The book running lead managers to the IPO were JM Financial Limited and Kotak Mahindra Capital Company Limited.

SAMHI is a branded hotel ownership and asset management platform in India with a portfolio of 3,839 keys across 25 operating hotels in 12 of India’s key urban consumption centers, as of March 31, 2023

Our Transaction Team Comprised Lead Partner – Arka Mookerjee and Partner – Siddhartha Desai

Tags Banking and Financial Services, Equity Capital, IPO, JSA, Leading Law Firm, Leading Lawyers, Sale of Shares

Banking Regulation in India – Overview

This Banking Regulation guide provides a high level overview of the governance and supervision of banks, including legislation, regulatory bodies and the role of international standards, licensing, the rules on liquidity, foreign investment requirements, liquidation regimes and recent trends in the regulation of banks.

Please click here to read the full publication by Nand Gopal Anand, Pratish Kumar, Vrindesh Patel, and Sonali Singh.

Tags Banking and Financial Services, JSA, Leading Law Firm, Leading Lawyers

Real estate investment trusts: Recent amendments to the regulations puts the spotlight on exits and governance

Please click here to download the Prism as PDF.

Real estate investment trusts (“REITs”) are pooled investment vehicles that hold and make investments in real assets. Structurally, a REIT is no different from any other pooled investment vehicle where the sponsor sets up the fund, raises capital and appoints a trustee who manages the fund for the benefit of the beneficiaries (i.e., investors in the fund). A REIT is a professionally managed investment vehicle that allows unit holders to partake in the economic benefits of commercial real estate ownership. From the perspective of the unit holder, investment in REITs offer predictable cash flow, capital appreciation from passive ownership of real estate assets and liquidity of investment.

Ever since 2014, when the REIT framework was notified by the Securities and Exchange Board of India (“SEBI”)[1], it has emerged as a preferred vehicle for institutional investment in the real estate sector.

Despite the positive outlook, a recent report[2] puts the REIT penetration at 11%. It identifies commercial reasons for achieving a substantial upside[3].

The REIT regime has evolved over the years, and SEBI has proactively engaged with relevant stakeholders from time to time. SEBI recently published consultation papers on February 23, 2023 (“February 23 Consultation Paper”) and May 16, 2023 (“May 16 Consultation Paper”) proposing certain changes to the REIT framework. On August 16, 2023, SEBI notified the Securities and Exchange Board of India (Real Estate Investment Trusts) (Second Amendment) Regulations, 2023 (the “Amendment”). The impact of the Amendment is discussed below.

Key Changes

Sponsor ‘lock-in’ during the lifetime of the REIT

A sponsor is a person who establishes the REIT i.e., the person who files the relevant application with SEBI and procures the necessary registration from SEBI. The sponsor is also responsible for transferring the assets from the relevant special purpose vehicles (i.e., the owner of the relevant real estate asset) to the REIT, filing an application for registration of the REIT with SEBI and the appointment of trustees of the REIT.

Prior to the Amendment, the REIT Regulations mandated a minimum ownership percentage with respect to the sponsor. The minimum ownership percentage was 15% of the total number of units, and this ownership stake had to be maintained for 3 (three) years from the date of listing of the units. The Amendment has changed this position considerably. According to the newly inserted Regulation 11(3), the sponsor is required to maintain a minimum stake in the REIT throughout the term of the REIT. We explain with the help of the table below.

Time period (From the date of listing of the units)	Percentage or maximum value of units held by sponsor
First 3 (three) years	15%
From the beginning of 4^th year till end of 5^th year	5% or INR 500,00,00,000 (Indian Rupees five hundred crore) (whichever is lower)
From the beginning of 6^th year till end of 10^th year	3% or INR 500,00,00,000 (Indian Rupees five hundred crore) (whichever is lower)
From the beginning of 11^th year till 20^th year	2% or INR 500,00,00,000 (Indian Rupees five hundred crore) (whichever is lower)
After completion of 20 (twenty) years	1% or INR 500,00,00,000 (Indian Rupees five hundred crore) (whichever is lower)

The manner of arriving at the value of units has been prescribed by the Amendment. Accordingly, it provides that the value of units will be based on the net asset value of the REIT.

In relation to REITs that exist at the commencement of the Amendment, the lock in covenant will only apply in respect of fresh units issued by the REIT. The new Regulation 11(3A) of the REIT Regulations also provides that the locked-in units will remain un-encumbered. The sponsor is restricted from the creation of any security interest or rights over such units during the restricted period.

The Amendment also provides for a mechanism to evaluate compliance of the above requirements by the sponsor. It provides that an assessment of compliance will be done from the fourth year onwards: (a) at the time of each fresh issuance of units; and (b) at the beginning of change in threshold of the percentage for minimum unitholding requirement.

The rationale for the minimum lock-in stipulation is to ensure ‘skin in the game’ for the sponsor. SEBI wants the sponsor to remain invested in the REIT for as long as possible. They do not want the REIT platform to be used by unscrupulous sponsors who are looking to make a ‘quick’ buck from the REIT platform. SEBI had also raised concerns on the high levels of leverage held on the books of the REIT. In the February 23 Consultation Paper, SEBI pointed out that the sponsor contracts the debt even before the transfer of the assets to the REIT. This puts other institutional and retail investors at a disadvantage as the REIT would have to service the debt from its future cash-flow.

Appointment of a director on the board of the investment manager

Regulation 4(2)(g) of the REIT Regulations stipulates that no unitholder will enjoy superior voting rights or any other rights over other unitholders and there should not be multiple classes of units in a REIT. The Amendment has changed this position. Pursuant to the Amendment, a proviso to Regulation 4(2)(g) has been introduced. The proviso provides that unitholders who individually or collectively hold not less than 10 % of the units of the REIT are entitled to nominate a director on the board of the manager. One could argue that the proviso is a departure from the regulatory principle of treating all unitholders alike.

Since the expression “collectively” has been used, it means that one unitholder can get together with other unitholders and achieve the 10% threshold required to undertake such appointment. The May 16 Consultation Paper recognizes the disparity between the unitholders holding a majority and the rest. Essentially, the proviso is a minority-protection measure.

The REIT Regulations do not provide a framework for exercising such right. It is silent on whether such a right is to be exercised pursuant to a contract between like-minded unitholders, or an ad-hoc exercise of powers.

Framework for Self-Sponsored Managers

A new definition of ‘Self- Sponsored Manager’ by way of Regulation 2(1)(zra) has been introduced in the REIT Regulations. Accordingly, a ‘Self Sponsored Manager’ is defined in Regulation 2(1)(zra) of the REIT Regulations to mean the manager of a REIT who has dual responsibilities of both the manager as well as the sponsor.

The REIT Regulations now include a framework that enables a sponsor to transition the REIT from a sponsor-controlled REIT to a professionally managed REIT. Accordingly, a sponsor of a REIT can disassociate itself as sponsor and convert the REIT to a self-sponsored REIT subject to the fulfilment of certain conditions. The key requirements are:

The REIT has been listed for a period of at least 5 (five) years.
The REIT has undertaken not less than a minimum of 12 (twelve) distributions on a continuous basis and complied with the distribution norms set out in the REIT Regulations in the preceding 5 (five) years.
The REIT has been rated AAA by a registered credit rating agency for a continuous period of 5 (five) years immediately preceding exit of the sponsor.
The sponsor has not transferred / sold assets to the REIT in the last 3 (three) years and no assets/ projects will be acquired by the REIT from the outgoing sponsor(s) for a period of 1 (one) year from the date of conversion to self-sponsored manager.
The REIT does not have any under-construction properties acquired from the sponsor that have not commenced commercial operations.

The Amendment is currently silent on the mechanics for undertaking the above transition and one would have to wait for SEBI to provide the necessary guidance on the same.

Stewardship code for unitholders

A new ‘stewardship’ code for unitholders has been introduced. A new proviso to Regulation 4(2)(g) of the REIT Regulations provides that unitholders holding not less than 10% of the units of the REIT must comply with a ‘stewardship’ code’. The stewardship code has been specified in Schedule IX of the REIT Regulations. The stewardship code requires the unitholders to:

act in the best interests of the REIT and its unitholders.
formulate a comprehensive policy on the discharge of their stewardship responsibilities, review and update the same periodically.
implement a policy to manage issues of conflict of interest while fulfilling their stewardship responsibilities.
periodically monitor the REIT and its investee entities viz. the holding company and special purpose vehicle.
implement a policy on voting.

The May 16 Consultation Paper states that the rationale behind a stewardship code is to ensure greater responsibility on the part of institutional investors.

JSA Analysis

The requirement to ‘lock-in’ the sponsors’ holding till the lifetime of the REIT is likely to increase the investment horizon for institutional investors such as private equity funds and other strategic investment platforms. Accordingly, their exit timelines will have to be adjusted. Also, large unitholders and institutional investors will have to cede certain governance rights in favor of unitholders holding 10% or more of the units who decide to appoint a director.

The criteria to transition to a self-sponsored manager is stringent and one needs to see how many sponsors really exercise this option. There could be some practical difficulties in fulfilling all the requirements set out by SEBI. For example, the restriction on not including any under construction properties within the REIT is quite difficult to fulfil. The ground reality is that a significant portion of the assets held by a REIT are usually under construction projects acquired from the sponsor. The REITs that are currently listed are likely to find it difficult to transition the REIT to a self-sponsored manager.

This Prism has been prepared by:

Ajay G Prasad
Partner

Soham Roy
Senior Associate

For more details, please contact [email protected]

[1] SEBI notified the Securities and Exchange Board of India (Real Estate Investment Trust) Regulations, 2014 (“REIT Regulations”) in 2014.

[2] https://www.colliers.com/en-in/research/reits-june-2023-report

[3] According to the report, listed REITs in India have provided an annualized distribution yield of 6-7%. The three listed office REITs cumulatively hold approximately 74.4 (seventy four point four) million square feet of office space, representing around 11% of the total existing Grade A office stock.

Tags Banking and Finance, Corporate, Disputes, JSA, Leading Law Firm, Leading Lawyers, Legal Updates

New Filters: Banking and Finance (including Securities)

Revisions to the format of abridged prospectus for non-convertible debt securities

Calculation of asset allocation limits in relation to investment by mutual fund schemes in units of Corporate Debt Market Development Fund (“CDMDF”)

Special rights to unitholders and role of sponsor in Real Estate Investment Trusts (“REITs”) and Infrastructure Investment Trusts (“InvITs”)

Board nomination rights to unitholders of REITs/ InvITs

Framework for voluntary delisting of non-convertible debt securities/ non-convertible redeemable preference shares

Listing of subsequent issuances of non-convertible debt securities

Provisions relating to enhanced transparency in ownership of Foreign Portfolio Investors (“FPIs”)

Reduction in validity period of approval granted by SEBI to Alternative Investment Funds (“AIFs”) and Venture Capital Funds (“VCFs”) for overseas investment

Amendment to the Corporate Insolvency Resolution Process (“CIRP”)

Clarification on liquidators’ fee calculation

Operation of pre-sanctioned credit lines at banks through Unified Payments Interface (“UPI”)

Release of property documents on closure of loan account

Secured assets possessed under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (“SARFAESI Act, 2002”)

Fund Management Entities (“FMEs”) to seek authorisation for filing schemes

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