Omnibus Framework for SROs in RBI Regulated Entities

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The regulatory landscape governing financial entities witnessed a significant evolution on March 21, 2024, with the Reserve Bank of India (“RBI”) introducing the Omnibus Framework for recognising Self-Regulatory Organisations (“SROs”) for Regulated Entities (“REs”) of the RBI (“Omnibus Framework”). This comprehensive framework marks a crucial milestone in the industry, offering a structured approach towards recognizing SROs and enhancing regulatory oversight within the financial sector. Encompassing a wide array of parameters such as objectives, responsibilities, eligibility criteria, and governance standards, the Omnibus Framework is designed to foster collaboration, transparency, and growth while addressing critical industry concerns. The Omnibus Framework is broadly based on the draft framework issued for public feedback in December 2023 accommodating the industry feedback.

Salient Features:

Objectives of an SRO: The Omnibus Framework mandates that SROs establish overarching objectives aimed at enhancing the sector they represent, fostering progress and addressing critical industry concerns within the broader financial system. It outlines specific objectives for SROs, including promoting a culture of compliance among members, supporting smaller entities within the sector, serving as the collective voice of members in engagements with regulatory authorities, sharing sectoral information with the RBI to aid policymaking and promoting a culture of research and development within the sector to encourage innovation.
Members and membership: The Omnibus Framework emphasizes the importance of a diverse membership base for SROs to holistically represent the sector. The RBI also reserves the right to prescribe membership criteria for SROs when inviting applications for SROs for each category or class of REs. Additionally, SRO applicants falling short of the minimum membership threshold will have a grace period of up to 2 (two) years from the date of recognition to meet the requirement. Membership in SROs will always remain voluntary and regulated through membership agreements.
Responsibility towards members and the RBI: The Omnibus Framework imposes several responsibilities on SROs, vis-à-vis its members and the RBI. Some notable ones include developing a uniform, reasonable and non-discriminatory membership fee structure, disseminating sector-specific information from publicly available data, promoting knowledge of statutory or regulatory provisions and arranging skill development and awareness programs on contemporary issues (towards members), and submitting annual reports within 3 (three) months from completion of accounting year, providing necessary data sought by the RBI, and engaging in periodic interactions and providing its views on the larger picture of the industry and providing its books of accounts (towards the RBI).
Eligibility criteria: The Omnibus Framework outlines eligibility criteria for SRO recognition, including incorporation as a not-for-profit company (under Section 8 of the Companies Act, 2013), meeting prescribed net worth and membership requirements, demonstrating professional competence and a reputation of fairness and integrity (to the satisfaction of the RBI) and non-involvement in any legal proceedings that may have an adverse impact on the interest of the sector. Notably, the Omnibus Framework also clarifies that the shareholding of the SRO should be sufficiently diversified such that no entity holds more than 10% of its paid-up share capital.
Code of conduct, grievance redressal, and consequences for violation of rules: The Omnibus Framework mandates SROs to have in place objective and consultative processes for formulating conduct rules and overseeing members’ activities. Notably, while the Omnibus Framework provides that an SRO should specify consequences for violation of agreed rules and/or codes (which may include counselling, cautioning, reprimanding, and expelling members) it expressly clarifies that such consequences must not, in any case, entail imposition of monetary penalties. Further, it requires SROs to establish a grievance redressal framework for its members and offer counselling on restrictive or unhealthy practices which may be detrimental to growth of the sector.

Additionally, while the Omnibus Framework sets out overarching requirements for all RBI-REs, the RBI retains the authority to prescribe sector-specific additional conditions within the broad contours of the Omnibus Framework.

Conclusion

In our view, the Omnibus Framework is poised to enhance communication channels among industry players, stakeholders, and regulators, thereby fostering greater transparency and collaboration. Moreover, the framework will also offer vital support to small industry participants as it mandates SROs to provide them with guidance and assistance, thereby promoting their growth and development. Overall, we believe this framework sets a commendable precedent and holds the potential to positively impact the industry landscape, providing a more cohesive and structured framework for regulatory oversight and industry development.

In our view, Omnibus Framework represents a significant milestone for the industry, especially considering the previous regulatory uncertainties and overnight changes. It will also enable the extension of regulatory recognition to existing SROs such as the Digital Lenders Association of India, Merchant Payments Alliance of India, and Fintech Association for Consumer Empowerment, thereby solidifying their role in upholding industry standards and best practices.

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