06 November, 2011

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RBI ON A ROLLERCOASTER .....!!

Reserve Bank of India has been on a Role Indeed, Whether it has been constant hikes in bank rates or Changes and reforms in banking structure. It has been the Limelight for Most obvious Reasons. This Article Aims at Discussing RBI's Recent Most Reforms and Guidelines Issued that plays a Major Impact on Indian Banking Sphere and India Inc. at Large.
Date :November 4, 2011
Collection of Account Payee Cheques -Prohibition on Crediting Proceeds to Third Party Account

Please refer to our circular DBOD.BP.BC.No.56/21.01.001/2005-06 dated January 23, 2006 in terms of which banks are prohibited from crediting 'account payee' cheques to the account of any person other than the payee named therein.

In view of concerns raised that these instructions are not being adhered to, we reiterate that banks shall strictly adhere to the instructions contained in our circular referred to above and not collect account payee cheques for any person other than the payee constituent.

With a view to mitigate the difficulties faced by the members of co-operative credit societies in collection of account payee cheques, relaxation was extended vide our circular DBOD.BP.BC.No. 47/21.01.001/2010-11 dated October 1, 2010. In terms of the said circular, banks may consider collecting account payee cheques drawn for an amount not exceeding Rs.50,000/- to the account of their customers who are co-operative credit societies, if the payees of such cheques are the constituents of such co-operative credit societies. The above relaxation will continue as hitherto, subject to the conditions outlined in the circular dated October 1, 2010 referred to above.

Banks may note that the above prohibition and relaxation shall also extend to drafts, pay orders and bankers’ cheques

Date:November 4, 2011
Payment of Cheques/Drafts/Pay Orders/Banker’s Cheques
In India, it has been the usual practice among bankers to make payment of only such cheques and drafts as are presented for payment within a period of six months from the date of the instrument.

It has been brought to the notice of Reserve Bank by Government of India that some persons are taking undue advantage of the said practice of banks of making payment of cheques/drafts/pay orders/banker’s cheques presented within a period of six months from the date of the instrument as these instruments are being circulated in the market like cash for six months. Reserve Bank is satisfied that in public interest and in the interest of banking policy it is necessary to reduce the period within which cheques/drafts/pay orders/banker’s cheques are presented for payment from six months to three months from the date of such instrument. Accordingly, in exercise of the powers conferred by Section 35A of the Banking Regulation Act, 1949, Reserve Bank hereby directs that with effect from April 1, 2012, banks should not make payment of cheques/drafts/pay orders/banker’s cheques bearing that date or any subsequent date, if they are presented beyond the period of three months from the date of such instrument.

Banks should ensure strict compliance of these directions and notify the holders of such instruments of the change in practice by printing or stamping on the cheque leaves, drafts, pay orders and banker’s cheques issued on or after April 1, 2012, by issuing suitable instruction for presentment within the period of three months from the date of the instrument.

Date:November 4, 2011
Issue of Demand Drafts for Rs. 20,000/- and above

As banks are aware, instruments with account payee crossing are required to be credited to the payee's
account and not paid in cash over the counter. However, some unscrupulous elements use demand drafts
without any crossing for transfer of money as an alternative to settlement through cash.

In order to address the regulatory concerns that have arisen in this context, banks are advised to ensure
that demand drafts of Rs. 20,000/- and above are issued invariably with account payee crossing.

Date:November 4, 2011 
Customer Service - Non-Issuance of Passbooks to Savings Bank Accountholders (Individuals)
Please refer to our circular DBOD. No. Leg.BC.32/09.07.005/2006-07 dated October 4, 2006 on the captioned subject wherein banks were advised to invariably offer pass book facility to all its savings banks account holders (individuals) and in case banks offer the facility of sending statement of account and the customer chooses to get statement of account, banks must issue monthly statement of account. The cost of providing such pass book or statements should not be charged to the customer.

It has come to our notice that some banks are not issuing pass books to their savings banks account holders (individuals) and only issue a computer generated account statement even when the customer desires pass book facility. Banks are, therefore, advised to strictly adhere to the instructions contained in the above circular.

Date:November 4, 2011
Repayment of Term/Fixed Deposits in banks

It has come to our notice that some banks insist on the signatures of both the depositors to allow
repayment of money in fixed/term deposits, though the deposit account is opened with operating instructions
(sometimes called ‘repayment instructions’), ‘Either or Survivor’ or ‘Former or Survivor’. Such insistence
on the signatures of both the depositors has the effect of making the mandate given by the depositors
redundant. This, in turn, results in unjustified delays and allegations of poor customer service.

In this connection, it is clarified that if fixed/term deposit accounts are opened with operating instructions
‘Either or Survivor’, the signatures of both the depositors need not be obtained for payment of the amount
of the deposits on maturity. However, the signatures of both the depositors may have to be obtained, in case the deposit is to be paid before maturity. If the operating instruction is ‘Either or Survivor’ and one of the depositors expires before the maturity, no pre-payment of the fixed/term deposit may be allowed without the concurrence of the legal heirs of the deceased joint holder. This, however, would not stand in the way of making payment to the survivor on maturity.

In case the mandate is ‘Former or Survivor’, the ‘Former’ alone can operate/withdraw the matured amount of the fixed/term deposit, when both the depositors are alive. However, the signature of both the depositors may have to be obtained, in case the deposit is to be paid before maturity. If the former expires before the maturity of the fixed/term deposit, the ‘Survivor’ can withdraw the deposit on maturity. Premature withdrawal would however require the consent of both the parties, when both of them are alive, and that of the surviving depositor and the legal heirs of the deceased in case of death of one of the depositors.

If the joint depositors prefer to allow premature withdrawals of fixed/term deposits also in accordance with the mandate of ‘Either or Survivor’ or ‘Former or Survivor’, as the case may be, it would be open to banks to do so, provided they have taken a specific joint mandate from the depositors for the said purpose.

Date:November 04, 2011
Foreign Direct Investment – Transfer of Shares

Attention of Authorized Dealers Category-I (AD Category-I) banks is invited to Regulations 9 and 10 of the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2000 notified vide Notification No.FEMA 20/2000-RB dated May 3, 2000, as amended from time to time.

Accordingly, the transfer of shares from a Resident to a Non Resident where i) the transfer does not conform to the pricing guidelines as stipulated by the Reserve Bank from time to time; or ii) the transfer of shares requires the prior approval of the FIPB as per the extant Foreign Direct Investment (FDI) policy; or iii). the Indian company whose shares are being transferred is engaged in rendering any financial service; or iv) the transfer falls under the purview of the provisions of SEBI (SAST) Regulations, require the prior approval of the Reserve Bank of India.

Further, transfer of shares from a Non Resident to a Resident which does not conform to the pricing guidelines as stipulated by the Reserve Bank of India from time to time also requires the prior approval of the Reserve Bank of India.

2. As a measure to further liberalize and rationalize the procedures and policies governing FDI in India, it has now been decided to allow the following without the prior approval of the Reserve Bank of India :

A. Transfer of shares from a Non Resident to Resident under the FDI scheme where the pricing guidelines under FEMA, 1999 are not met provided that :-


The original and resultant investment are in line with the extant FDI policy and FEMA regulations in terms of sectoral caps, conditionalities (such as minimum capitalization, etc.), reporting requirements, documentation, etc.;


The pricing for the transaction is compliant with the specific/explicit, extant and relevant SEBI regulations / guidelines (such as IPO, Book building, block deals, delisting, exit, open offer/ substantial acquisition / SEBI SAST, buy back); and


Chartered Accountants Certificate to the effect that compliance with the relevant SEBI regulations / guidelines as indicated above is attached to the form FC-TRS to be filed with the AD bank.

B. Transfer of shares from Resident to Non Resident :

i) where the transfer of shares requires the prior approval of the FIPB as per the extant FDI policy provided that :

a) the requisite approval of the FIPB has been obtained; and

b) the transfer of share adheres with the pricing guidelines and documentation requirements as specified by the Reserve Bank of India from time to time.

ii) where SEBI (SAST) guidelines are attracted subject to the adherence with the pricing guidelines and documentation requirements as specified by Reserve Bank of India from time to time.

iii) where the pricing guidelines under the Foreign Exchange Management Act (FEMA), 1999 are not met provided that:-

a) The resultant FDI is in compliance with the extant FDI policy and FEMA regulations in terms of sectoral caps, conditionalities (such as minimum capitalization, etc.), reporting requirements, documentation etc.;

b) The pricing for the transaction is compliant with the specific/explicit, extant and relevant SEBI regulations / guidelines (such as IPO, Book building, block deals, delisting, exit, open offer/ substantial acquisition / SEBI SAST); and

c) Chartered Accountants Certificate to the effect that compliance with the relevant SEBI regulations / guidelines as indicated above is attached to the form FC-TRS to be filed with the AD bank.

iv) where the investee company is in the financial sector provided that :

a) NOCs are obtained from the respective financial sector regulators/ regulators of the investee company as well as transferor and transferee entities and such NOCs are filed along with the form FC-TRS with the AD bank; and

b). The FDI policy and FEMA regulations in terms of sectoral caps, conditionalities (such as minimum capitalization, etc.), reporting requirements, documentation etc., are complied with.

3. Necessary amendments to the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2000 notified vide Notification No. FEMA 20/2000-RB dated May 3, 2000 are being notified separately.

4. AD Category – I banks may bring the contents of the circular to the notice of their constituents.

5. The directions contained in this circular have been issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law.

Date:November 3, 2011
Guidelines on Commercial Real Estate (CRE)

Please refer to the circular DBOD.No.Dir.(Hsg).BC.31/08.12.001/2009-10 dated August 27, 2009 on ‘Finance for Housing Projects’. Banks were advised, inter-alia, to stipulate a clause, in the terms and conditions of granting finance to specific housing/development projects, regarding disclosure of mortgage of property to the bank in the Pamphlets / Brochures/ Advertisements etc., which may be published by developer/owner inviting public at large to purchase flats and properties.

2. On a review, it has been decided that the provisions contained therein will be, mutatis-mutandis, applicable to Commercial Real Estate also.

Date:November 03, 2011
Foreign investment in India by SEBI registered FIIs in other securities

Attention of Authorized Dealer Category-I (AD Category-I) banks is invited to A.P.(DIR Series) Circular No.55 dated April 29, 2011, in terms of which the limit for FII investment in non-convertible debentures / bonds issued by Indian companies in the infrastructure sector was enhanced from USD 5 billion to USD 25 billion. This was subject to the conditions that such instruments shall have a residual maturity of five years and above, the investments would have a lock-in-period of three years and ‘infrastructure’ would be as defined under the extant External Commercial Borrowings (ECB) policy. Attention of the AD Category-I banks is also invited to A.P. (DIR Series) Circular No.8 dated August 9, 2011, in terms of which Qualified Foreign Investors as defined therein (QFIs) were allowed to invest in units of Mutual Funds debt schemes upto a limit of USD three billion within the overall limit of USD 25 billion for FII investment in non-convertible debentures / bonds issued by Indian companies in the infrastructure sector.

2. On a review it has been decided as under :

i) FIIs would also be allowed to invest in non-convertible debentures / bonds issued by Non-Banking Financial Companies categorized as ‘Infrastructure Finance Companies’(IFCs) by the Reserve Bank of India within the overall limit of USD 25 billion.

ii) The lock-in-period of three years for FII investment stands reduced to one year up to an amount of USD 5 billion within the overall limit of USD 25 billion. This lock-in-period shall be computed from the time of first purchase by FIIs.

iii) The residual maturity of five years and above stipulated would now onwards refer to the original maturity of the instrument at the time of first purchase by an FII.

iv) The above changes at (i) and (iii) above would also apply for QFI investment in units of Mutual Fund debt schemes within the limit of USD three billion.

3. Necessary amendments to the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2000 notified vide Notification No. FEMA 20/2000-RB dated May 3, 2000 are being notified separately.

4. AD Category – I banks may bring the contents of the circular to the notice of their constituents.

5. The directions contained in this circular have been issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law.

Date:November 2, 2011
Comprehensive Guidelines on Derivatives: Modifications

Please refer to our Circular DBOD No.BP.BC.86/21.04.157/2006-07 dated April 20, 2007 on Comprehensive Guidelines on Derivatives. The guidelines with regard to suitability and appropriateness policy for offering of derivative products to users, as outlined in paragraph 8.3 of the said circular, were reviewed in the light of the experience gained in implementation of the guidelines over last four years, and the revised version of the paragraph 8.3 was issued vide circular DBOD.No. BP.BC.27/21.04.157/2010-11 dated August 2, 2011.

2. In the light of suggestions made by FEDAI and other market participants, paragraph 6 of the circular dated April 20, 2007 and the revised paragraph 8.3 of the circular dated August 2, 2011 have been modified. The revised paragraphs are furnished in the Annex (deletions indicated in strikethrough and additions in bold italics).

3. Revised guidelines will be effective from January 1, 2012.

ANNEX

6. Broad Principles for Undertaking Derivative Transactions by Market-makers

The major requirements for undertaking any derivative transaction from the regulatory perspective would include:
Market-makers may undertake a transaction in any derivative structured product (a combination of permitted cash and generic derivative instruments) as long as it is a combination of two or more of the generic instruments permitted by RBI and does not contain any derivatives as underlying;

6.1 In addition to generic derivative products, market-makers may also offer structured derivative products to users as long as they do not contain any derivative instrument as underlying and have been specifically permitted by the RBI. For the purpose of the guidelines contained in this circular1,

a. The following derivative instruments used to hedge an existing interest rate and forex exposure, on a standalone basis, may be treated as generic derivative products:
Forex Forward Contracts
Forward Rate Agreements
Interest rate caps and floors (plain vanilla only)
Plain Vanilla Options (call option and put option)
Interest Rate Swaps
Currency Swaps including Cross-Currency Swaps

b. The following derivative products may be treated as structured derivative products:
Instruments which are combination of eithercash instrument and one or more generic derivative products
Instruments which are combination of two or more generic derivative products

6.2 Market-makers should be in a position to arrive at the fair value of all derivative instruments, including structured products on the basis of the following approach:

a. Marking the product to market, if a liquid market in the product exists.
b. In the case of structured products, marking the constituent generic instruments to market.
c. If (a) and (b) are not feasible, marking the product to model, provided:
All the model inputs are observable market variables.
Full particulars of the model, including the quantitative algorithm are documented.

It may be ensured that structured products do not contain any derivative, which is not allowed on a standalone basis.

6.3 All permitted derivative transactions, including roll over, restructuring and novation shall be contracted only at prevailing market rates.

6.4 All risks arising from derivatives exposures should be analysed and documented, both at transaction level and portfolio level.

6.5 The management of derivatives activities should be an integral part of the overall risk management policy and mechanism. It is desirable that the board of directors and senior management understand the risks inherent in the derivatives activities being undertaken.

6.6 Market-makers should have a 'Suitability and Appropriateness Policy' vis-á-vis users in respect of the products offered, on the lines indicated in these guidelines.

6.7 Market-makers may, where they consider necessary, maintain cash margin / liquid collateral in respect of derivative transactions undertaken by users on mark-to-market basis.

8.3 Suitability and Appropriateness Policy

The guidelines contained in this paragraph are applicable to all permitted generic and structured derivative products, except forex forward contracts which shall continue to be governed by the circular AP(DIR) 32 dated December 28, 2010.

8.3.1 The rapid growth of the derivatives market, especially structured derivatives has increased the focus on 'suitability' and 'appropriateness' of derivative products being offered by market-makers to customers (users) as also customer appropriateness. Market-makers should undertake derivative transactions, particularly with users with a sense of responsibility and circumspection that would avoid, among other things, mis-selling. It is imperative that market-makers offer derivative products in general, and structured products, in particular, only to those users who understand the nature of the risks inherent in these transactions and further that the products being offered are consistent with users' business, financial operations, skill & sophistication, internal policies as well as risk appetite. Inadequate understanding of the risks and future obligations under the contracts by the users, in the initial stage, may lead to potential disputes and thus cause damage to the reputation of market-makers. The market-makers may also be exposed to credit risk if the counterparty fails to meet its financial obligations under the contract.

8.3.2 The market-makers should carry out proper due diligence regarding 'user appropriateness' and 'suitability' of products before offering derivative products to users. Each market-maker should adopt a Board-approved 'Customer Appropriateness & Suitability Policy' for derivatives business.

8.3.3 The objective of the policy is prudential in nature: to protect the market-maker against the credit, reputation and litigation risks that may arise from a user's inadequate understanding of the nature and risks of the derivatives transaction. In general, market-makers should not undertake derivative transactions with or sell structured products to users that do not have properly documented policies regarding management of risks that include among other things, guidelines on risk identification, management and control.Furthermore, structured products should be sold only to

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