[1]

LEGAL UPDATES

• Clarification of Loading of Prepaid Payment Instruments 03

• Extension of Timeline to Payment Aggregators 03
• Restriction on Storage of Actual Card Data 04
• Relaxations on Investment by Foreign Portfolio Investors (“FPI”) in Debt 05
• External Commercial Borrowings (ECB) Policy – Liberalisation Measures 05
• Enhanced Guidelines for Debenture Trustees and Listed Issuer Companies on Security 06
Creation and Initial Due Diligence
• Reserve Bank - Integrated Ombudsman Scheme, 2021 07
• Recommendations of the Working Group on Digital Lending – Implementation 08
• Outsourcing of Financial Services - Responsibilities of Regulated Entities (“RES”) Employing 09
Recovery Agents
• FEMA Overseas Investment Rules, Regulations and Directions 10
• Discussion Paper on Charges in Payment Systems 11

ARTICLES

• Cross Border Finance - Securing Offshore Loans by Indian Assets and Guarantees – 12
Regulatory Overview and Challenges
• Issuance of BE(A)WARE Booklet by the Reserve Bank of India 14

CASE NOTES/REGULATORY ACTION BY RBI

• Penalty for non-compliance with Banking Regulation Act, 1949, and the Depositor Education 18
and Awareness Fund Scheme, 2014
• Penalty for non-compliance with Master Direction on Prepaid Payment Instruments, 2021 18
and Know Your Customer, 2016
• Penalty for non-compliance with Master direction on Non-Banking Financial Company Returns 19
(Reserve Bank) Directions, 2016 and Membership of Credit Information Companies (“CICs”)
• RBI takes action against Mahindra & Mahindra Financial Services Ltd 19
• Cancellation of license of the bank for non-compliance with Banking Regulation Act, 1949 20
(“BR Act”)

[2]
 CLARIFICATION OF LOADING OF PREPAID PAYMENT INSTRUMENTS
The Reserve Bank of India (“RBI”), vide a
circular dated June 20, 2022, bearing
reference number
CO.DPSS.OVRST.No.S538/06-07-004/2022-23,
has issued a clarification with respect to
loading of prepaid payment instruments
(“PPIs”) through credit lines. The clarification
is addressed to all authorized non-bank PPI
issuers. The RBI has reiterated its stance on
EXTENSION OF TIMELINE TO PAYMENT AGGREGATORS
The RBI had issued the ‘Guidelines on
Regulation of Payment Aggregators and
Payment Gateways’ vide circulars
DPSS.CO.PD.No.1810/02.14.008/2019-20
dated March 17, 2020 and
CO.DPSS.POLC.No.S33/02-14-008/2020-2021
dated March 31, 2021 as amended and
supplemented from time to time (“PA
Guidelines”). As per the terms of the PA
Guidelines, online non-bank Payment
Aggregators (“PAs”), existing as on March 17,
2020, were required to apply to RBI by
September 30, 2021, to obtain authorisation
under the Payment and Settlement Systems
Act, 2007 (“PSS Act”).
However, several applications were rejected
by the RBI due to non-compliance with the
eligibility criteria, including the minimum net
worth. Rejection of applications meant that
such entities (“Applicants”) were also
[3]
prohibition of loading of PPIs through credit
lines as per the Master Directions on PPIs
dated August 27, 2021 (as updated on
November 12, 2021). The RBI has further
stated that entities who fail to adhere to the
clarification, will be penalized in accordance
with the provisions of the Payment and
Settlement Systems Act, 2007.
required to discontinue their operations within
a period of 6 (Six) months from the date of
return of application. RBI vide circular no.
RBI/2022-23/94 CO.DPSS.POLC.No.S-761/02-
14-008/2022-23 dated July 28, 2022, has
offered another opportunity to Applicants
existing as on March 17, 2020 to apply to the
RBI by September 30, 2022, provided they
have a net worth of INR 15 Crores (Rupees
Fifteen Crores) as on March 31, 2022.
Such entities shall be permitted to continue
their operations till they receive
communication from the RBI, regarding the
fate of their application. The timeline of March
31, 2023, for achieving the net worth of INR
25 Crores (Rupees Twenty Five Crores)
continues to remain.
DSK View
Ceasing operations may lead to disruption in
payment systems. The payment ecosystems
has recently begun to recover post disruption
caused due to the COVID-19 pandemic. By
extending the timelines and permitting
RESTRICTION ON STORAGE OF ACTUAL CARD DATA
In terms of the PA Guidelines as well as RBI’s
circular on ‘Tokenisation – Card Transactions:
Permitting Card-on-File Tokenisation (CoFT)
Services’ and other circulars / guidelines
issued in relation thereto from time to time,
the RBI has, with effect from October 1, 2022,
restricted entities operating in the card
transaction / payment chain (other than the
card issuers and / or card networks), from
storing Card-on-file (“CoF”) data. The RBI has
also directed such entities to purge any such
data stored previously.
In this connection, in order to smoothen the
transition to an alternate system i.e. a system
where cardholders decide to enter the card
details manually at the time of undertaking the
transaction (“guest checkout
transactions”), the RBI has, vide circular
dated July 28, 2022, bearing reference
number RBI/2022-23/95 CO.DPSS.POLC.No.S-
760/02-14-003/2022-23 (“CoF Circular”),
permitted the following:
(a) the merchant or its payment aggregator
involved in settlement of such
transactions, can save the CoF data for a
maximum period of T+4 days (where “T”
is transaction date) or till the settlement
date, whichever is earlier. The data is
permitted to be used only for settlement
of transactions and must be purged
thereafter.
[4]
Applicants to continue until the fate of their
application is communicated, RBI has
recognised the importance of payment
aggregators in the payment ecosystem and
also taken a step to ensure smooth functioning
of the payment ecosystem.
(b) acquiring banks can continue to store CoF
data until January 31, 2023, required for
handling other post-transaction activities.
DSK View
Pursuant to the PA Guidelines, as amended
from time to time, the RBI has stipulated
guidelines to regulate the activities of payment
aggregators and payment gateways. One of
the restrictions included barring such entities
from storing CoF data, as a security measure
to prevent data theft and frauds resulting
therefrom. While it is important to take
measures to protect the data of cardholders to
avoid fraudulent transactions including
misappropriation of funds, etc. it is also
necessary to understand the practical
challenges faced by stakeholders to implement
the measures stipulated by RBI. The CoF
Circular seems to be a move taken by the RBI,
in light of the practical issues faced by
stakeholders under the extant regulatory
requirements stipulated by RBI in this regard.
While the RBI has not modified the timeline
for compliance, it has issued interim measures
to ensure the transition process is not
undertaken in a knee-jerk manner and that all
industry participants are well prepared to
handle post-transaction activities basis guest
checkout transactions.
 RELAXATIONS ON INVESTMENT BY FOREIGN PORTFOLIO INVESTORS
(“FPI”) IN DEBT
The RBI has, vide circular dated July 07, 2022,
bearing reference number RBI/2022-23/77
A.P. (DIR Series) Circular No. 07 (“Circular”),
issued directions providing relaxations on debt
investments by FPI, some of which are listed
below:
(i) Investments by FPIs in government
securities and corporate bonds made
between July 08, 2022, and October 31,
2022, (both dates included) are now
exempt from the limits on short term
investments till maturity or sale of such
investments. Currently, such investments
cannot exceed 30% (Thirty Percent) of
the total investment of the relevant FPI in
any category as per existing circulars
issued by the RBI in this regard.
(ii) During the period July 08, 2022, and
October 31, 2022 (both dates included),
FPIs may invest in commercial papers and
EXTERNAL COMMERCIAL BORROWINGS (ECB) POLICY – LIBERALISATION
MEASURES
The Reserve Bank of India (“RBI”) has, vide
circular dated August 01, 2022, bearing
reference number RBI/2022-23/98 A.P. (DIR
Series) (“Circular”), introduced the following
temporary relaxations applicable to external
commercial borrowings (“ECBs”) raised till
December 31, 2022:
i. limit for ECBs raised under automatic route
has been increased from USD 750 million
or equivalent per financial year, to USD 1.5
billion or equivalent per financial year; and
ii. all-in-cost ceiling for ECBs has been
increased by 100 bps. The revised ceiling
shall be available only to eligible borrowers
of investment grade rating from Indian
Credit Rating Agencies. Other eligible
[5]
non-convertible debentures whose
original maturity is one year. Such
investments shall be exempted from the
limit on short term investments till
maturity or sale of such instruments.
Presently, FPIs are permitted to invest in
corporate bonds with minimum residual
maturity of above 1 (One) year subject to
certain limits as per existing circulars
issued by the RBI in this connection.
DSK View
The Circular is expected to further diversify
and expand the sources of forex funding,
mitigate volatility, and dampen global
spillovers. However, the real impact of such
relaxations will be revealed in due course of
time given the prevailing international market
conditions which are expected to have a
spillover effect in Indian markets as well.
borrowers may raise ECBs as per existing
all-in-cost ceiling.
The Circular was issued pursuant to RBI’s
press release on Liberalisation of Forex Flows
in July 2022. The RBI’s Master Directions on
External Commercial Borrowings, Trade
Credits and Structured Obligations dated
March 26, 2019 (“ECB Master Directions”)
permit eligible ECB borrowers to raise ECBs up
to USD 750 million or equivalent per financial
year under the automatic route.
DSK View
With global recession setting in, the risks of a
spill over effect in the Indian markets cannot
be ruled out. The Circular seems to be a move
by the RBI to ensure that the impact on forex
flows into India is mitigated and the economy
is stable. However, the relaxations are subject
to certain conditions and a specific timeline,
thereby suggesting that RBI is adopting a wait
ENHANCED GUIDELINES FOR DEBENTURE TRUSTEES AND LISTED ISSUER
COMPANIES ON SECURITY CREATION AND INITIAL DUE DILIGENCE
The Securities and Exchange Board of India
(“SEBI”) vide circular dated August 04, 20221
(“SEBI Circular”) has issued revised
requirements relating to creation of security
and related due diligence by debenture
trustees (“Debenture Trustees”) in
pursuance of previous circulars dated
November 03, 2020 (“November 03
Circular”), November 12, 2020 (“November
12 Circular”) and May 19, 2022 (“May 19
Circular”). The SEBI Circular is applicable to
all issuers who have listed or propose to list
their debt securities.
Regulation 59 of the SEBI (Listing Obligations
and Disclosure Requirements) Regulations,
2015 (“LODR Regulations”) provides for
change in terms of listed non-convertible
debentures. As per the SEBI Circular, a change
in the structure of non-convertible debt
securities (“NCDS”) includes (i) a change in
security; (ii) creation of additional security if
the NCDS is already secured; or (iii) creation
of security for unsecured debt securities.
In order to harmonize the process of creation
of security to secure NCDS pursuant to listing,
certain guidelines have been issued vide the
SEBI Circular, some of which are listed as
below:
(i) Prior to initiating due diligence,
Debenture Trustees and the listed entity
shall enter into an amended debenture
trust agreement to incorporate certain
obligations arising out of the November
03 Circular, November 12 Circular and
May 19 Circular for continuous
monitoring, and any other stipulations of
SEBI with respect to security creation,
[6]
and watch policy, to review and decide at a
later date if there is any need to continue the
relaxations or take such other steps as may be
required considering market conditions.
initial due diligence and continuous
monitoring by Debenture Trustees.
(ii) Debenture Trustees are required to carry
out due diligence in accordance with
paragraph 4 to 7 of the November 03
Circular and issue a no-objection
certificate to the issuer company for
effecting any change proposed in the
security structure or for creation of
security.
(iii) The issuer company and Debenture
Trustee are required to execute a
supplemental/ amended debenture trust
deed to include all the terms and
conditions pursuant to the due diligence
and security created.
(iv) The issuer company is also required to
submit certain documents to the
Depositories and Stock Exchanges
including an NOC by the Debenture
Trustee for change in security/ creation of
security; the executed
supplemental/amended debenture trust
deed; undertaking from the Debenture
Trustees that the security has been
created and registered.
(v) Creation of encumbrance (as defined
under SEBI Circular) on securities for
securing the NCDS shall be through the
depository system, in accordance with the
Depositories Act, 1996, the SEBI
(Depositories and Participants)
Regulations, 2018, depository bye laws
and other applicable regulations and
circulars.
(vi) If the security has not been finalized at
the time of filing of draft shelf
prospectus/ placement memorandum,
then the Debenture Trustees are required
to undertake due diligence as per the
provisions of the SEBI Circular read with
the SEBI (Issue and Listing of Non-
Convertible Securities) Regulations, 2021
(“NCS Regulations”) and Annexure A of
November 03 Circular.
(vii) The Debenture Trustees are also required
to empanel external agencies for
undertaking due diligence and continuous
monitoring.
DSK View
The SEBI Circular aims to strengthen the
regulatory framework governing Debenture
RESERVE BANK - INTEGRATED OMBUDSMAN SCHEME, 2021
The RBI had introduced the Reserve Bank –
Integrated Ombudsman Scheme (RB-IOS) –
2021 (“RBIOS, 2021”) on November 12,
2021, as a one-point cost-effective grievance
redressal mechanism for the public. The
RBIOS 2021 is available to customers of
‘Regulated Entities’ as defined under the
RBIOS 2021.
In furtherance of the same, the RBI has, vide
notification dated August 05, 2022 bearing
reference number CEPD.PRD.No.S544 /
13.01.001 / 2022-23 (“Notification”)
extended the RBIOS, 2021 to make the same
applicable to Credit Information Companies
(“CICs”) as defined under the Credit
Information Companies (Regulation) Act, 2005
(“CIC Act”). It may be noted that the RBIOS
2021 does not apply to any dispute for which
a remedy has been provided in Section 18 of
the CIC Act.
The Notification is effective from September
01, 2022.
[7]
Trustees, clearly stipulating the role and
responsibility of the Debenture Trustees and
issuer companies in relation to encumbrance,
security creation and due diligence pertaining
to listed debt securities. SEBI has periodically
reviewed and modified / supplemented
existing regulatory framework pertaining to
the role of Debenture Trustees. In the year
2020, the SEBI had issued a slew of regulatory
changes (vide circulars and/or amendments to
existing regulations governing Debenture
Trustees and debt securities), to strengthen
the role of Debenture Trustees and stipulating
specific responsibilities on them including
independently evaluating security cover
ensuring consents and approvals in relation
thereto are in place and continuously
monitoring the cover.
DSK View
With the inclusion of CICs in RBIOS, 2021, RBI
has widened the definition of ‘Regulated
Entity’ to include CICs within its ambit.
Although Section 18 of the CIC Act provides
certain remedies for disputes with CICs, the
inclusion of CICs under RBIOS 2021, will now
provide a grievance redressal mechanism to
customers who have any grievances against
CICs and for which remedy is not provided
under Section 18 of the CIC Act.
 RECOMMENDATIONS OF THE WORKING GROUP ON DIGITAL LENDING -
IMPLEMENTATION
The RBI has, vide press release dated August
10, 2022 issued a regulatory framework
(“Framework”) to regulate and support the
growth of credit delivery through digital
lending methods. RBI has classified digital
lenders into 3 (Three) groups:
(a) entities regulated by the RBI and
permitted to carry out lending business
(“RBI REs”);
(b) entities authorized to carry out lending as
per other statutory/regulatory provisions
but not regulated by RBI; and
(c) entities lending outside the purview of
any statutory/ regulatory provisions.
The Framework regulates RBI REs as well as
lending service providers (“LSPs”) engaged by
RBI REs. Certain key features of the
Framework are given below:
(i) RBI REs must undertake transactions
related to: (a) loan disbursals, and (b)
repayment, only through their own the
bank account and the bank account of
the borrower, without any pass-through/
pool account of the LSPs or any third
party;
(ii) fees, charges etc. payable to the LSPs in
relation to the credit intermediation
process should be paid directly by the RE
and the all-inclusive cost of digital loans
in the form of Annual Percentage Rate
(“APR”) should be disclosed to the
borrower;
(iii) increasing the credit limit without
borrower’s consent has been expressly
prohibited;
(iv) a cooling-off period to be provided within
the loan contract, during which borrower
[8]
may paying the principal and
proportionate APR without any penalty;
(v) RBI REs and LSPs to appoint a nodal
grievance redressal officer who shall be
responsible for dealing with fintech/
digital lending related complaints.
Borrower may also lodge a complaint
under the RBIOS, 2021, if a complaint
remains unresolved by the RE within the
stipulated time period of 30 (thirty) days;
(vi) Digital Lending Apps (“DLAs”) may
collect only need based data with prior
explicit consent of borrower. Borrower
may either accept, deny or revoke its
consent for use of any specific data along
with the option to delete any data
collected by the DLAs/ LSPs;
(vii) Any lending sourced through DLA to be
reported to CICs, irrespective of the
nature or tenure of such lending. RBI Res
to report all new digital lending products
involving short term credit or deferred
payments, extended by them over
merchant platforms to CICs; and
(viii) RBI is examining the recommendations of
the Working Group and will issue
directions in near future. However, RBI
REs to ensure that the financial product,
wherever the contractual arrangement
provides for FLDG, are in compliance with
extant guidelines laid down in Master
Direction – Reserve Bank of India
(Securitisation of Standard Assets)
Directions, 2021 dated September 24,
202 (Reserve Bank of India - Master
Directions (rbi.org.in)).
DSK View
The RBI is constantly taking steps to
encourage innovation in the financial system
to address orderly growth, stability, and
protection of public interest. One such step
was the constitution of the Working Group on
‘digital lending including lending through
online platforms and mobile apps’ on January
13, 2021 (“WGDL”). With the increase in
digitization, servicing through the digital
lending route has gained popularity. However,
RBI has noted emergence of several issues
OUTSOURCING OF FINANCIAL SERVICES - RESPONSIBILITIES OF
REGULATED ENTITIES (“REs”) EMPLOYING RECOVERY AGENTS
The RBI has, vide circular dated August 12,
2022, bearing reference number RBI/2022-
23/108 DOR.ORG.REC.65/21.04.158/2022-23
(“OFS Circular”) expressly laid down certain
responsibilities of REs that are employing
recovery agents. The OFS Circular is
application to following REs:
(a) Commercial Banks (including Local Area
Banks, Regional Rural Banks, and Small
Finance Banks) excluding Payments
Banks;
(b) All-India Financial Institutions (viz. Exim
Bank, NABARD, NHB, SIDBI, and
NaBFID);
(c) Non-Banking Financial Companies
including Housing Finance Companies;
(d) Primary (Urban) Co-operative Banks,
State Co-operative Banks, and District
Central Co-operative Banks; and
(e) Asset Reconstruction Companies.
The OFS Circular expressly stipulates the
following responsibilities to be observed by
REs while employing recovery agents and
while undertaking recovery of overdue loans:
(i) REs and their agents not to resort to
intimidation or harassment of any kind,
either verbal or physical, against any
person in their debt collection efforts or
make false and misleading
representations, etc.;
[9]
such as unbridled engagement of third party
mis-selling, breach of data privacy, charging
exorbitant interest rates, unethical recovery
practices, etc. The Framework has taken into
consideration several recommendations of the
WGDL, which submitted its report on
November 18, 2021.
(ii) REs and their agents not to undertake
any acts intended to publicly humiliate or
intrude upon the privacy of debtors'
family members, referees or friends;
(iii) REs and their agents not to send
inappropriate messages (via mobile or
social media) or threaten or make
anonymous calls or repeatedly call
borrowers; and
(iv) REs and their agents not to call borrowers
before 8:00 a.m. and after 7:00 p.m.
The OFS Circular is not applicable to
microfinance loans covered under the
regulatory framework issued by the RBI for
microfinance loans, on March 14, 2022.
DSK View
RBI is mandated to operate the credit system
of the country, while ensuring public interest
and customer protection. The RBI has
regularly iterated that the REs are solely
responsible for any activities outsourced by
them and accordingly, for the actions of the
service providers (e.g. recovery agents)
engaged by them. The OFS Circular expressly
instructs REs to adhere to and to ensure that
the agents employed by REs also adhere to
fair practices and do not resort to unethical
means to recover payments from customers.
The OFS Circular has been issued in light of
continuous malpractices followed by REs and
their agents, especially while undertaking
recovery of dues.
 FEMA OVERSEAS INVESTMENT RULES, REGULATIONS AND DIRECTIONS

The RBI vide three separate notifications, each Revised Framework may be exceeded,
dated August 22, 2022, notified the Foreign with prior approval of the central
Exchange Management (Overseas Investment) government or RBI, as applicable
Rules, 2022 (“OI Rules”), Foreign Exchange
Management (Overseas Investment) (v) Investment through Debt Instruments:
Regulations, 2022 (“OI Regulations”), The OI Regulations, deal exclusively with
Foreign Exchange Management (Overseas financial commitments through debt
Investment) Directions, 2022 (“OI instruments and permit lending or
Directions”). The OI Rules, OI Regulations, investment only in those entities where
and OI Directions (collectively “Revised the lender has acquired control through
Framework”) supersede the Foreign the overseas direct investment. Any such
Exchange Management (Transfer or Issue of investment shall be included towards the
any Foreign Security) (Amendment) limits prescribed under the OI Rules.
Regulations, 2004 and Foreign Exchange
Management (Acquisition and Transfer of (vi) Security in relation to Debt Instruments:
Immovable Property Outside India) The financial commitment through debt
Regulations, 2015. instruments may include guarantees,
pledge, mortgage, hypothecation or
Some of the key highlights of Revised similar charges over the Indian assets of
Framework are given below: the investor, its group companies,
associate companies, promoter, or
(i) Revised Framework covers both, debt director or foreign assets of the foreign
instruments and non-debt instruments. entity, etc.

(ii) Debt instruments include government and
corporate bonds, all tranches (except
equity tranches) of securitisation
structures, borrowings by firms through
loans, and depository receipts whose
underlying securities are debt securities.
(vii) Late Submission Fees: The Revised
Framework also stipulates monetary
penalties in the form of late submission
fees, in case of delays in reporting, much
like those imposed for delays in reporting
foreign investment in India.

(iii) Investment Ceilings: The Revised DSK View

Framework permits overseas investment
in foreign entities engaged in bona fide
business activities (i.e., activities
permitted in India and the host
jurisdiction of the investee), directly or
through step-down subsidiaries, subject
to the limits prescribed in the OI Rules
and the OI Directions.
(iv) Exemptions from Investment Ceilings:
The investment ceilings prescribed in the
The Revised Framework aims to simplify the
existing regulatory structure pertaining to
overseas debt and equity investments, to bring
them in tandem with the requirements of
market participants. The Revised Framework
also provides clarity on several issues including
structure, security, modes of investment, etc.
This may assist in enhancing the overseas
investment opportunities for Indian
stakeholders.

[10]
 DISCUSSION PAPER ON CHARGES IN PAYMENT SYSTEMS

The RBI has vide press release dated August (iii) ownership of payment systems (RBI,
17, 2022 released a discussion paper on NPCI, other companies);
charges in payment systems (“Discussion
Paper”). The Discussion Paper aims to (iv) types of charges (merchant discount rate,
provide a high-level overview of the payment convenience fee, surcharge and
system in India in order to frame necessary intercharge).
policies on the issue of high and non-
transparent charges. The Discussion Paper also lists the
requirement for regulatory and government
Key points set forth under the Discussion intervention in payment systems and provides
Paper include: product wise charges.

(i) types of payment systems (fund transfer DSK View

and merchant);
The RBI’s intent to issue the Discussion Paper
(ii) common modes in which payment was to present various issues on the subject
systems prevalent in the market (RTGS, with a view to receive inputs which will be
NEFT, cards, prepaid payment taken into consideration while policymaking.
instruments, UPI etc.); However, the Discussion Paper does not put
forth any views or opinions on the specific
issues raised therein.

[11]
 CROSS BORDER FINANCE - SECURING OFFSHORE LOANS BY INDIAN
ASSETS AND GUARANTEES – REGULATORY OVERVIEW AND CHALLENGES
Cross border finance in India can either be
debt flowing into India (i.e., via external
commercial borrowings, etc.) or a complete
offshore borrowing transaction where both
borrowing and lending parties are located
overseas, but the borrowing is secured /
guaranteed by an Indian entity (over assets
located in India).
This article briefly touches upon the regulatory
framework, typical security structure and
challenges in relation to offshore borrowings
which are secured by Indian
assets/guarantees.
A. Offshore Borrowing
Offshore borrowings or offshore fundings
involve a foreign entity and a foreign lender,
i.e., neither the borrower nor the lender are
situated in India and no funds are being
brought into India. However, often the
overseas borrower offers security over its
assets located in India (usually pledge of
securities held by it in the Indian subsidiary or
group entity) or assets of its subsidiary/group
company, or a guarantee of the group entity.
Security extended to offshore lenders, are
governed by Foreign Exchange Management
Act, 1999 (“FEMA”) and circulars, rules and
regulations issued thereunder from time to
time.
[12]
B. Typical security requested by
offshore lenders
Typically, the security offered for offshore
borrowing transactions include guarantees by
Indian entities, pledge over securities held by
the overseas borrower in its Indian subsidiary/
group entity or security over receivables,
movable assets, immovable property located in
India / of its group entity in India.
C. Regulatory Framework
1. Pledge of securities held in Indian
entities:
• Transactions pertaining to pledge of
securities held in Indian entities, are
governed by the FEMA read with the
Foreign Exchange Management (Non-
debt Instruments) Rules, 2019 (“Non-
Debt Instrument Rules”), read with
the Master Direction – Foreign
Investment in India (“FII Master
Directions”), as amended from time
to time.
• As per the relevant provisions of the
Non-Debt Instrument Rules read with
the FII Master Directions, any person
resident outside India may pledge
equity instruments of an Indian
company or units of an investment
 vehicle (“Securities”), without prior
RBI approval, in favour of inter alia an
overseas bank, to secure financing
availed by a person resident outside
India (who may be the promoter or
overseas group company of the Indian
company) for genuine business
purposes overseas and not for any
investments either directly or indirectly
in India.
• The concerned authorised dealer bank
(“AD Bank”) is required to provide an
NOC to the security provider,
confirming compliance with the
relevant provisions of the Non-Debt
Instrument Rules.
• Any pledge created in favour of an
overseas lender who is extending a
loan for any direct or indirect
acquisition in India, will require prior
RBI approval and not just AD Bank
approval.
2. Pledge / mortgage / hypothecation /
charge:
• As per the Foreign Exchange
Management (Overseas Investment)
Regulations, 2022 (“FEMA OI
Regulations”) read with the Foreign
Exchange Management (Overseas
Investment) Rules, 2022 (“FEMA OI
Rules”), an Indian entity, which has
invested in equity capital in a foreign
entity, may pledge the equity capital
of the foreign entity (including any
direct or indirect shareholding in a
step down subsidiary) in favor of an
overseas lender. Indian entities may
also create a charge by way of
mortgage or hypothecation or pledge
or any other identical mode:
o over their assets in India, including
assets of group companies /
associate companies/ promoter or
director;
[13]
o assets outside India of the foreign
entity in the Indian entity has
invested (including its step down
subsidiary outside India).
• All the above charges can be created in
favour of inter alia an overseas lender,
as security for availing financing, for any
foreign entity (including foreign step-
down subsidiary) in which the Indian
entity has invested.
• The charge created is also subject to
the conditions specified under the FEMA
ODI Regulations, which include
requiring the overseas lender to be from
any country or jurisdiction in which
financial commitment is permissible
under the FEMA Overseas Investment
Rules.
3. Guarantee
• As per FEMA OI Regulations, following
guarantees can be issued on behalf of
foreign entities or step-down
subsidiaries, to secure facility availed
by these entities, from an overseas
lender:
o corporate guarantees by Indian
entity or its group company in
India which is a holding company
(which holds at least 51% in the
Indian entity) or a subsidiary
company (in which the Indian
entity holds at least 51%) or a
promoter group company, which is
a body corporate;
o personal guarantee by a resident
individual promoter of such an
Indian entity;
o bank guarantee, which is backed
by a counter-guarantee or
collateral by the Indian entity or its
group company as above, and
issued, by a bank in India.
• The issue of guarantees are subject to
the following conditions:
 o no guarantee shall be open-ended;
o the guarantee, to the extent of the
amount invoked, shall cease to be
a part of the non-fund-based
commitment but shall be
considered as lending;
o where a guarantee has been
extended jointly and severally by
two or more Indian entities, 100%
of the amount of such guarantee
shall be reckoned towards the
individual financial limits of each of
such Indian entities.
• Guarantees issued by an Indian entity
other than as specified above, to
guarantee the debt of a foreign entity,
is not permitted under FEMA and
accordingly, needs prior approval of
the RBI.
ISSUANCE OF BE(A)WARE BOOKLET BY THE RESERVE BANK OF INDIA
The RBI, vide press release dated March 07,
2022, released a booklet named ‘BE(A)WARE”
(“Booklet”) listing the common methods used
by individuals to defraud the public. The
Booklet has been issued as a public awareness
initiative by the RBI’s Consumer Education and
Protection Department and conceptualized by
the office of Ombudsman, Mumbai-II. It aims
to highlight various types of financial frauds
aimed at innocent customers while carrying
out financial transactions and provide
safeguards against them.
This article gives a brief overview of some of
the key features of the Booklet and its
usefulness to increase public awareness on
financial frauds.
The Booklet is divided into three parts - Part A
provides Modus Operandi and Precautions to
be taken against Fraudulent Transactions –
Banks; Part B provides Modus Operandi and
Precautions to be taken against Fraudulent
Transactions – Non Banking Financial
Companies; and Part C explains the general
precautions and digital hygiene to be followed
by the public.
[14]
Conclusion:
Cross border financing, especially security and
guarantees in favour of overseas lenders has
always been heavily regulated and fairly
restricted due to its transactional nature.
However, with the recent introduction of the
FEMA OI Regulations and related rules, RBI
has introduced several relaxations in the
regulatory framework of cross-border
financing. While certain types of transactions
continue to remain considerably restricted,
certain clarifications pertaining to
hypothecation, pledge etc. in respect of
overseas lenders are a welcome change.
However, being a recent introduction, its
effect in encouraging any type of investment,
remains to be seen.
A. Modes of Frauds with respect to
Banks
1. Phishing: fraudsters create a third-
party phishing website which looks like
an existing genuine website, such as a
bank’s website or an e-commerce
website or a search engine, etc.
Customers click on such links without
checking and enter secure credentials
such as personal information, one time
password (“OTP”), etc., on such
websites, which are then captured and
used by the fraudsters.
2. Vishing calls: Customers are
approached through phone calls/social
media by imposters who pose as
bankers/executives/agents and then
pressurize/trick customers into
revealing confidential information such
as OTP, personal identification
numbers (“PIN”), etc.
3. Online Sales Platforms: Fraudsters
pretend to be buyers on online sales
platforms and show an interest in
seller’s product/s. Many fraudsters
pretend to be defence personnel
posted in remote locations to gain
confidence. Instead of paying money
to the seller, they use the “request
money” option through the unified
payments interface (UPI) app and
insist that the seller approve the
request by entering UPI PIN. Once the
seller enters the PIN, money is
transferred to the fraudster’s account.
4. Use of unknown / unverified mobile
apps: links of malicious apps, masked
to appear similar to the existing apps
of authorised entities, are circulated
through SMS / email / social media /
instant messenger, etc., Customers
are tricked into clicking on the links,
leading to downloading of unknown /
unverified apps on the customer’s
electronic device, giving the fraudster
complete access to the customer’s
device and confidential details stored
therein.
5. ATM card skimming: installation of
skimming devices in ATM machines,
dummy keypads / pinhole cameras,
well-hidden from plain sight, etc. give
access to the ATM Pin and Card, which
are then duplicated.
6. screen sharing / remote access:
customer is tricked into downloading
screen sharing app/providing remote
access to the fraudster. This is used to
watch / control the customer’s mobile
/ laptop and gain access to their
financial credentials.
7. SMS swap/SIM cloning: fraudsters
gain access to the customer’s
subscriber identity module (SIM) card
or may obtain a duplicate SIM card
(including electronic-SIM) for the
registered mobile number connected
[15]
to the customer’s bank account. OTPs
received on such duplicate SIM ae
used to carry out unauthorised
transactions.
8. Compromising credentials on results
through search engines: imposters put
up their own details on search
engines, for customer care numbers of
banks, insurance companies, helpline
numbers, etc. Customers who call on
the contact numbers are then asked to
share card credentials and other
confidential information.
9. QR code scan: fraudsters often
contact customers under various
pretexts and trick them into scanning
quick response (QR) codes using the
apps on the customers’ phone which is
then used to withdraw the money
from their account.
10. Impersonation on social media: use of
fake accounts basis details of users of
social media platforms to ask for
money for urgent medical purposes or
gain trust over period of time and then
ask for personal or private information
to blackmail or extort money from
users.
11. Juice jacking: charging port of a
mobile, can be used to transfer
files/data which is used by fraudsters
to transfer malware and gain access to
confidential data.
12. Lottery fraud: customers are notified
that they have won a lottery and are
asked to confirm their identity by
entering their bank account / credit
card details on a website from which
data is captured by the fraudsters.
13. Online job fraud: fake job search
websites are created and the bank
account / credit card and other secure
credentials entered on these websites
 during registration are used to carry regularly, installing anti-virus, locking devices,
out fraudulent transactions. etc.

14. Money mules: customers are duped by D. Measures upon occurrence of fraud
fraudsters into laundering stolen /
illegal money via their bank account/s. The Booklet provides various measures that
the public can adopt after the occurrence of a
B. Modes of Frauds with respect to Non- fraud, including blocking of credit/debit cards,
Banking Financial Companies freezing bank accounts and reporting the fraud
(NBFCs) using helping numbers or on the National
Cybercrime Portal.
Common frauds with respect to customers of
NBFCs include: E. Basis for preparing the Booklet

1. fake advertisements; The modes of frauds listed in the Booklet,

2. SMS/email and instant messaging/call have been prepared and put together basis
scams; various incidents of frauds reported with the
3. money circulation; RBI and complaints by the offices of RBI
4. ponzi schemes; Ombudsmen.
5. multi-marketing schemes;
6. OTP based frauds; and Conclusion:
7. fake loan websites and fraudulent loans
with forged documents. Financial inclusion and COVID-19 induced
lockdowns, amongst other things, have
C. General Precautions catapulted the pace of digital transactions in
the three years. However, a mismatch in
The Booklet provides a list of precautions that digital awareness amongst the general public
should be adopted by the public, to avoid and the cyber security infrastructure has
falling prey to financial frauds. These include: resulted in numerous financial frauds.
Increased fraudulent activities in digital
• Staying away from suspicious pop-ups transactions may dampen the spirit of the
that appear during web-browsing public and discourage customers, which could
sessions; work against the RBI’s attempts at financial
• Checking for a secure payment gateway inclusion and digitisation. The BE(A)WARE
before making online Booklet provides detailed description of frauds
payments/transactions; typically committed and aims to educate the
• Keeping the PIN, passwords, OTPs, general public on the modus operandi of
personal information, confidential and not fraudsters. The manner of avoiding financial
sharing it with any relative or financial fraud and grievance redressal mechanism
institution or third party; have also been well detailed.
• Avoid saving card details and passwords
on websites and electronic devices; Promoting and supporting green projects /
• Not responding to unknown and fishy environmentally sustainable infrastructure
emails / mails from unknown sources; development, has been on India’s agenda for
• Not sharing KYC details, cheque books, some time now. Indian regulators have taken
etc. with strangers. certain measures in the past such as bringing
the renewable energy sector under its Priority
The Booklet also advises certain measures for Sector Lending (PSL) scheme in 2015 by the
device / computer security and safe internet RBI and mandating India’s top 100 listed
banking, including changing passwords entities (basis market capitalisation) to publish

[16]
annual business responsibility reports in their
annual reports (in 2012 by SEBI), to try and
work towards this goal. The disclosure
requirements stipulated under the extant
regulatory frameworks may bring comfort to
international and domestic investors in terms
[17]
of good corporate governance and monitoring
of projects funded by Green Debt Securities by
stipulating several obligations on the issuer, to
ensure continuity of the project and accurate
utilisation of issue proceeds.
1. Penalty For Non-Compliance With
Banking Regulation Act, 1949, And The
Depositor Education And Awareness
Fund Scheme, 2014
Background
The Reserve Bank of India (“RBI”), vide press
release dated July 04, 2022, has imposed a
monetary penalty of ₹1,05,00,000/- (Rupees
One Crore Five Lakhs Only) on Kotak Mahindra
Bank Limited (“Bank”) for contravention of
certain provisions of the Banking Regulation
Act, 1949, (“BR Act”), Depositor Education
and Awareness Fund Scheme, 2014
(“Scheme”) and RBI Directions on Customer
Protection – Limiting Liability of Customers in
Unauthorised Electronic Banking Transactions,
and Loans and Advances – Statutory and
Other Restrictions (“RBI Directions”).
As per the press release, the RBI came across
certain deficiencies in regulatory compliances
committed by the Bank in its transactions with
its customers, while conducting its statutory
inspection for supervisory evaluation. After
examining the risk assessment report,
inspection report, and all correspondences
pertaining to statutory inspection, the RBI
stated that the Bank had failed to (i) credit the
eligible amount to the Depositor Education and
Awareness Fund (“DEAF”) within the
prescribed period; (ii) credit (shadow reversal)
the amount relating to unauthorised electronic
transactions to the account of the customer
within 10 (Ten) working days from the date of
[18]
notification by the customer; and (iii) maintain
margin on advances given to stock brokers.
Accordingly, the RBI issued charges of non-
compliance with relevant provisions of the BR
Act and RBI Directions.
Key Takeaways
RBI is increasingly coming down heavily on
banks and other financial institutions to ensure
that customer and public interest and welfare
of the depositors is protected. The RBI
established the Scheme around 8 (Eight) years
ago, in order to safeguard the depositor’s
interests. The sudden increase in digital
banking transactions has resulted in a slew of
complaints by customers, with regards to
unauthorised transactions resulting in debit of
customer bank accounts through cards, e-
commerce, and other payment systems and
the RBI seems to be taking a serious stance in
order to ensure a safe and secure electronic
environment for banking transactions.
2. Penalty For Non-Compliance With Master
Direction On Prepaid Payment
Instruments, 2021 And Know Your
Customer, 2016
Background
The RBI, vide press release dated July 12,
2022, has imposed monetary penalty of
₹1,67,80,000/- (Rupees One Crore Sixty Seven
Lakh Eighty Thousand Only) on Ola Financial
Services Private Limited (“Ola”) in accordance
 with provisions of Section 30 of the Payment
and Settlement Systems Act, 2007, for non-
compliance with certain provisions of the
Master Directions on Prepaid Payment
Instruments dated August 27, 2021 and the
Master Direction – Know Your Customer
Direction, 2016 dated February 25, 2016.
The RBI in its press release, stated that it had
observed that Ola was non-compliant with the
RBI’s directions on KYC requirements and had
accordingly levied a penalty after concluding
that non-compliance with RBI directions was
substantiated and warranted imposition of a
monetary penalty.
Key Takeaways
While RBI has always stressed on the
importance of observing compliance with KYC
norms, it is now coming down heavily on all
RBI regulated entities which are falling short.
Additionally, with digitization and rapid rise of
fintech businesses, RBI is strictly regulating
inter alia prepaid payment instruments, in
order to try and regulate fraudulent
transactions and non-compliance to ensure
customer confidence is not lost amidst
increased incidences of financial frauds.
4. Rbi Takes Action Against Mahindra &
3. Penalty For Non-Compliance With Master
Direction On Non-Banking Financial
Company Returns (Reserve Bank)
Directions, 2016 And Membership Of
Credit Information Companies (“Cics”)
Background
The RBI, vide press release dated August 05,
2022, has imposed a monetary penalty of
₹81,92,000/- (Rupees Eighty One Lakhs Ninety
Two Thousand) on Jupiter Capital Private
Limited (“Company”) for non-compliance with
certain provisions of Non-Banking Financial
Company Returns (Reserve Bank) Directions,
2016 and Membership of Credit Information
Companies (“RBI Directions”). The monetary
penalty was imposed in accordance with
applicable provisions of the Reserve Bank of
India Act, 1934 (“RBI Act”) and the Credit
[19]
Information Companies (Regulation) Act,
2005.
As per the press release, the RBI, after
examination of the supervisory letter and all
correspondences pertaining to statutory
inspections of the Company conducted by it
has cited violation/ non-compliance with the
RBI Directions on (i) submission of credit
information to the Central Repository of
Information on Large Credits (“CRILC”) and
(ii) submission of credit information data to
CICs.
Key Takeaways
NBFCs form an important part of the credit
chain and are their increasing role in
promoting financial inclusion. It is therefore
necessary that NBFCs adhere to the regulatory
framework laid down by the RBI. The credit
information stored by CICs are an important
source of information for lenders, as it helps
financial institutions and banks to evaluate
non-performing assets and share this data
with other lenders to highlight early signs of
financial distress.
Mahindra Financial Services Ltd
The RBI, vide press release dated September
11, 2022, has directed Mahindra & Mahindra
Financial Services Ltd. (“MMFSL”), to
immediately cease carrying out any recovery
or repossession activity through outsourcing
arrangements. However, it is allowed to carry
out recovery or repossession activities through
its own employees. The RBI has undertaken
this action in the exercise of its power under
the RBI Act, after detecting supervisory
concerns in relation to the management of
MMFSL’s outsourcing activities.
5. Cancellation Of License Of The Bank For
Non-Compliance With Banking
Regulation Act, 1949 (“Br Act”)
Background
The RBI, vide press release dated August 08,
2022, cancelled the license of Rupee Co-
operative Bank Limited, Pune (“Rupee
Bank”) pursuant to earlier orders of the High
Court, in the matter, directing it to cease to
undertake the business of banking, acceptance
and repayment of deposits, and other related
activities, as defined under the BR Act. As per
the press release, the RBI cancelled the
license of Rupee Bank on the following
grounds:
i) lack of sufficient capital and earning
prospects, non-compliance with licensing
requirements of certain provisions of
section 22 read with section 56 of the BR
Act;
ii) continuation of Rupee Bank harmful to
depositors’ interests;
iii) Rupee Bank’s inability to pay its current
depositors in full, given its current
financial position.
Upon cessation of business, the liquidation
order will be issued by the commissioner for
cooperation and registrar of cooperative
societies, Maharashtra. More than 99%
(Ninety Nine Percent) of depositors are eligible
[20]
to retrieve the entire value of their deposits
from Deposit Insurance and Credit Guarantee
Corporation (“DICGC”), according to the data
provided by Rupee Bank. DICGC has already
paid out INR 700.44 (Rupees Seven Hundred
Crores and Forty Four Lakhs Only) of the total
insured deposits according to section 18A of
the DICGC Act, 1961, as of May 18, 2022, at
the will of the affected bank depositors. RBI
has directed that each depositor be entitled to
receive a deposit insurance claim amount of a
maximum of INR 5,00,000 (Rupees Five Lakhs
Only) from the DICGC, subject to the
requirements of the DICGC Act, 1961.
Key Takeaways
Off late, co-operative banks are not only
unable to compete with their competition (viz.
other financial institutions), but several co-
operative banks are also unable to repay their
depositors. Defective loan policing, increasing
overdues, ineffective measures for recovery,
increased incidence of wilful defaulters etc.
have brought co-operative banks at the
forefront of scams. Co-operative banks are an
important link in the financial chain, especially
with respect to being a banking solution for
rural areas in India. In order to ensure there is
no loss of trust and increase the public
confidence, RBI is not only coming down
heavily on errant co-operative banks.
AWARDS

[21]
List of Contributors

1. Archit Gupta (Associate)

2. Shravani Bhide (Associate)
3. Riddhi Sri (Associate)
4. Sanika Dalvi (Long Term Intern)
5. Supriya Upadhyayula (Long Term Intern)

[22]
[23]