Basel Norms PDF

Chapter BASEL NORMS INTRODUCTION Basel norms or Basel accords are the international banking regulations issued by the Basel Committee on Banking Supervision. The Basel norm is an effort to coordinate banking regulations across the globe, with the goal of strengthening the international banking system.  The Basel Committee on Banking Supervision (BCBS) is the primary global standard setter for the prudential regulation of banks and provides a forum for regular cooperation on banking supervisory matters for the central banks of different countries.  The Basel Committee - initially named the Committee on Banking Regulations and Supervisory Practices - was established by the central bank Governors of the Group of Ten countries at the end of 1974 in the aftermath of serious disturbances in international currency and banking markets (notably the failure of Bankhaus Herstatt in West Germany). What is Herstatt Risk? On 26 June 1974, German regulators forced the troubled Bank Herstatt into liquidation. That day, a number of banks had released payment of Deutsche Marks (DEM) to Herstatt in Frankfurt in exchange for US dollars (USD) that were to be delivered in New York. The bank was closed at 16:30 German time, which was 10:30 New York time. Because of time zone differences, Herstatt ceased operations between the times of the respective payments. The counterparty banks did not receive their USD payments.  The Committee, headquartered at the Bank for International Settlements in Basel, was established to enhance financial stability by improving the quality of banking supervision worldwide, and to serve as a forum for regular cooperation between its member countries on banking supervisory matters.  Bank for International Settlements, international bank established at Basel, Switzerland, in 1930, as the agency to handle the payment of reparations by Germany after World War I and as an institution for cooperation among the central banks of the various countries. Prepared by: Raman Luthra Chartered Accountant Banks lend to different types of borrowers and each carries its own risk. They lend the deposits of the public as well as money raised from the market i.e, equity and debt. This exposes the bank to a variety of risks of default and as a result they fall at times. The Basel committee has produced norms called Basel Norms for banking to tackle this risk. Basel Norms Basel - I Basel - II Basel - III Basel – I - The Basel Capital Accord BASEL I focused entirely on credit risk.  Credit risk is the possibility of a loss resulting from a borrower's failure to repay a loan or meet contractual obligations. Traditionally, it refers to the risk that a lender may not receive the owed principal and interest.  In 1988, the Committee announced the Basel Capital Accord known as Basel I.  Implementation started from year 1992. ( India – 1993) It defined capital and structure of risk weights for banks.  The minimum total capital requirement was fixed at 8% of risk weighted assets (RWA). Capital as per Basel Accord, better known as regulatory capital, is sum of Tier I and Tier II capital which a bank is required to maintain in relation to its risk-weighted assets.  Tier 1 Capital (Core Capital): It refers to a bank’s core capital, equity, and the disclosed reserves that appear on the bank’s financial statements. In the event that a bank experiences significant losses, Tier 1 capital provides a cushion that allows it to weather stress and maintain a continuity of operations. The elements of Tier I capital include: i. Paid-up capital (ordinary shares), statutory reserves, and other disclosed free reserves, if any; ii. Perpetual Non-cumulative Preference Shares (PNCPS) eligible for inclusion as Tier I capital - subject to laws in force from time to time; Prepared by: Raman Luthra Chartered Accountant iii. Innovative Perpetual Debt Instruments (IPDI) eligible for inclusion as Tier I capital; and iv. Capital reserves representing surplus arising out of sale proceeds of assets  Tier 2 Capital (Supplementary Capital): The elements of Tier II capital include i. undisclosed reserves, ii. revaluation reserves, iii. general provisions and loss reserves, iv. hybrid capital instruments, v. subordinated debt vi. Investment reserve account. Tier 2 Capital is considered less reliable than Tier 1 capital because it is more difficult to accurately calculate and to liquidate. Risk Weighted Assets (RWA) means assets with different risk profiles.  For example, an asset backed by collateral (Home Loan) would carry lesser risks as compared to personal loans, which have no collateral.  Assets of banks were divided into five categories to credit risk weight of 0,10,20,50 and up to 100%. Assets like cash and coins usually have zero risk weight, while unsecured loans (loan without collateral) might have a risk weight of 100%.  In January 1996, following two consultative processes, the Committee issued the Amendment to the Capital Accord to incorporate market risks (or Market Risk Amendment), to take effect at the end of 1997. This was designed to incorporate within the Accord a capital requirement for the market risks arising from banks' exposures to foreign exchange, traded debt securities, equities, commodities and options. Market risk is the possibility that an individual or other entity will experience losses due to factors that affect the overall performance of investments in the financial markets. Eg. Interest rate risk Foreign exchange risk (including gold), Equity risk  Under Basel – I, the RBI issued guidelines to maintain CRAR (Capital to Risk Assets Ratio) or CAR (Capital Adequacy Ratio) of 9% by every Schedule Commercial Banks. Basel – II Norms Basel II guidelines were published by BCBS in 2004. These were the refined and reformed versions of Basel I accord. It took a three-pillar approach: Prepared by: Raman Luthra Chartered Accountant Pillars of Basel II Pillar I Pillar II Pillar III Minimum Capital Supervisory Review Market Discipline Requirement Pillar I - Capital Adequacy Requirements: Minimum Capital Requirements — which prescribes a risk- sensitive calculation of capital requirements that, for the first time, explicitly includes operational risk in addition to market and credit risk. Banks should maintain a minimum capital adequacy requirement of 8% of risk assets Operational risk refers to various risks that can arise from a company’s ordinary business activities. Operational (or nonfinancial) risk is “the risk of loss resulting from inadequate or failed internal processes, people, and systems. Credit Risk component can be calculated in three different ways of varying degree of sophistication, namely 1. Standardized Approach, 2. Foundation Internal Rating-Based (IRB) Approach, and 3. Advanced IRB Approach. For Operational Risk, there are three different approaches: 1. Basic Indicator Approach (BIA) 2. Standardized Approach (STA) 3. Internal Measurement Approach, an advanced form of which is the Advanced Measurement Approach (AMA) For Market Risk, Basel II allows for Standardized and Internal approaches. The preferred approach is Value at Risk (VaR). Prepared by: Raman Luthra Chartered Accountant It divided capital into three Tiers 1. Tier 1 Capital - Core Capital 2. Tier 2 Capital - Supplementary Capital 3. Tier 3 Capital – Additional Supplementary Capital Short term subordinated debt covering market risk Pillar II - Supervisory Review: Supervisory Review Process (SRP) — which envisages the establishment of suitable risk management systems in banks and their review by the supervisory authority. Pillar III - Market Discipline: Market Discipline which seeks to achieve increased transparency through expanded disclosure requirements for banks to the central banks and public. Basel II Norms were released by BCBS in 2004 and India started its implementation from 2009. Basel – III Norms Basel III was introduced following the 2008 Global Financial Crisis to improve the banks' ability to handle any shocks from financial stress and strengthen both their transparency and their disclosure. In 2010, Basel III guidelines were released by BCBS.  The Basel III capital regulations were implemented in India with effect from April 1, 2013 and have been fully implemented as on October 1, 2021. Banks have to comply with the regulatory limits and minima as prescribed under Basel III capital regulations, on an ongoing basis. Pillars of Basel III Pillar 1 Pillar 2 Pillar 3 Minimum Capital Supervisory Review and Market Discipline Requirement Evaluation Process Prepared by: Raman Luthra Chartered Accountant Minimum Capital Requirement (Pillar 1) Banks shall maintain a minimum Pillar 1 Capital to Risk-weighted Assets Ratio (CRAR) of 9% on an on-going basis (other than capital conservation buffer and countercyclical capital buffer etc.). A bank should compute Basel III capital ratios in the following manner: Components of Capital Total regulatory capital will consist of the sum of the following categories: i. Tier 1 Capital (going-concern capital) a) Common Equity Tier 1 b) Additional Tier 1 ii. Tier 2 Capital (gone-concern capital) Limits and Minima As a matter of prudence, it has been decided that scheduled commercial banks operating in India shall maintain a minimum total capital (MTC) of 9% of total risk weighted assets (RWAs) i.e., capital to risk weighted assets (CRAR). This will be further divided into different components i. Common Equity Tier 1 (CET1) capital must be at least 5.5% of risk-weighted assets (RWAs) i.e., for credit risk + market risk + operational risk on an ongoing basis. ii. Tier 1 capital must be at least 7% of RWAs on an ongoing basis. Thus, within the minimum Tier 1 capital, Additional Tier 1 capital can be admitted maximum at 1.5% of RWAs. iii. Total Capital (Tier 1 Capital plus Tier 2 Capital) must be at least 9% of RWAs on an ongoing basis. Thus, within the minimum CRAR of 9%, Tier 2 capital can be admitted maximum up to 2%. Prepared by: Raman Luthra Chartered Accountant iv. If a bank has complied with the minimum Common Equity Tier 1 and Tier 1 capital ratios, then the excess Additional Tier 1 capital can be admitted for compliance with the minimum CRAR of 9% of RWAs. v. In addition to the minimum Common Equity Tier 1 capital of 5.5% of RWAs, banks are also required to maintain a capital conservation buffer (CCB) of 2.5% of RWAs in the form of Common Equity Tier 1 capital. Common Equity Tier 1 Capital Elements of Common Equity Tier 1 Capital i. Common shares (paid-up equity capital) issued by the bank ii. Stock surplus (share premium) resulting from the issue of common shares; iii. Statutory reserves iv. Capital reserves representing surplus arising out of sale proceeds of assets; v. Revaluation reserves arising out of change in the carrying amount of a bank’s property consequent upon its revaluation may, at the discretion of banks, be reckoned as CET1 capital at a discount of 55%, instead of as Tier 2 capital subject to some conditions vi. Other disclosed free reserves, if any; vii. Balance in Profit & Loss Account at the end of the previous financial year; Additional Tier 1 Capital Elements of Additional Tier 1 Capital Additional Tier 1 capital will consist of the sum of the following elements: i. Perpetual Non-Cumulative Preference Shares (PNCPS). ii. Stock surplus (share premium) resulting from the issue of instruments included in Additional Tier 1 Prepared by: Raman Luthra Chartered Accountant capital iii. Debt capital instruments eligible for inclusion in Additional Tier 1 capital (Perpetual Debt Instruments) Elements of Tier 2 Capital i. General Provisions and Loss Reserves (Provisions or loan-loss reserves held against future, presently unidentified losses, which are freely available to meet losses which subsequently materialize, will qualify for inclusion within Tier 2 capital) ii. Investment Fluctuation Reserve shall also qualify for inclusion in Tier 2 capital iii. Provisions ascribed to identified deterioration of particular assets or loan liabilities, whether individual or grouped should be excluded. iv. Debt Capital Instruments issued by the banks v. Preference Share Capital Instruments [Perpetual Cumulative Preference Shares (PCPS) / Redeemable Non-Cumulative Preference Shares (RNCPS) / Redeemable Cumulative Preference Shares (RCPS)] issued by the banks vi. Stock surplus (share premium) resulting from the issue of instruments included in Tier 2 capital; vii. Revaluation reserves at a discount of 55% Capital Charge for Credit Risk Under the Standardised Approach, the rating assigned by the eligible external credit rating agencies will largely support the measure of credit risk. The Reserve Bank has identified the external credit rating agencies that meet the eligibility criteria specified under the revised Framework. Banks shall rely upon the ratings assigned by the external credit rating agencies chosen by the Reserve Bank for assigning risk weights for capital adequacy purposes as per the mapping furnished in these guidelines. Eg. Both fund based and non-fund based claims on the central government will attract a zero risk weight. Central Government guaranteed claims will attract a zero risk weight. The Direct loan / credit / overdraft exposure, if any, of banks to the State Governments and the investment in State Government securities will attract zero risk weight. State Government guaranteed claims will attract 20 per cent risk weight. Similarly different risk weight as per the rating assigned is prescribed for i. Claims on Foreign Sovereigns and Foreign Central Banks ii. Claims on Public Sector Entities (PSEs) iii. Claims on Banks (Exposure to capital instruments) iv. Claims on Primary Dealers v. Claims on Corporates and NBFCs etc. Prepared by: Raman Luthra Chartered Accountant Supervisory Review and Evaluation Process (Pillar 2) Banks are required to have a Board-approved policy on Internal Capital Adequacy Assessment Process (ICAAP) and to assess the capital requirement as per ICAAP. The objective of the SRP is to ensure that banks have adequate capital to support all the risks in their business as also to encourage them to develop and use better risk management techniques for monitoring and managing their risks The Basel Committee also lays down the following four key principles in regard to the SRP envisaged under Pillar 2 Principle 1: Banks should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for maintaining their capital levels. Principle 2: Supervisors should review and evaluate banks’ internal capital adequacy assessments and strategies, as well as their ability to monitor and ensure their compliance with the regulatory capital ratios. Supervisors should take appropriate supervisory action if they are not satisfied with the result of this process. Principle 3: Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of the minimum. Principle 4: Supervisors should seek to intervene at an early stage to prevent capital from falling below the minimum levels required to support the risk characteristics of a particular bank and should require rapid remedial action if capital is not maintained or restored. Part C: Market Discipline The purpose of Market discipline is to complement the minimum capital requirements (detailed under Pillar 1) and the supervisory review process (detailed under Pillar 2). The aim is to encourage market discipline by developing a set of disclosure requirements which will allow market participants to assess key pieces of information on the scope of application, capital, risk exposures, risk assessment processes and hence, the capital adequacy of the institution. Banks are required to make Pillar 3 disclosures at least on a half yearly basis, irrespective of whether financial statements are audited, with the exception of following disclosures: (i) Table DF-2: Capital Adequacy; (ii) Table DF-3: Credit Risk: General Disclosures for All Banks; and (iii) Table DF-4: Credit Risk: Disclosures for Portfolios Subject to the Standardised Approach. Prepared by: Raman Luthra Chartered Accountant The disclosures as indicated at (i), (ii) and (iii) above will be made at least on a quarterly basis by banks. Capital Conservation Buffer Framework The capital conservation buffer (CCB) is designed to ensure that banks build up capital buffers during normal times (i.e., outside periods of stress) which can be drawn down as losses are incurred during a stressed period. The requirement is based on simple capital conservation rules designed to avoid breaches of minimum capital requirements. Framework Banks are required to maintain a capital conservation buffer of 2.5%, comprised of Common Equity Tier 1 capital, above the regulatory minimum capital requirement of 9%. Capital distribution constraints will be imposed on a bank when capital level falls within this range. Minimum capital conservation standards for individual bank Leverage Ratio Framework The leverage ratio is calibrated to act as a credible supplementary measure to the risk based capital requirements. The Basel III leverage ratio is defined as the capital measure (the numerator) divided by the exposure measure (the denominator), with this ratio expressed as a percentage.  The capital measure for the leverage ratio is the Tier 1 capital of the risk-based capital framework.  A bank’s total exposure measure is the sum of the following exposures: a) on-balance sheet exposures; b) derivative exposures; c) securities financing transaction (SFT) exposures; and Prepared by: Raman Luthra Chartered Accountant d) off- balance sheet (OBS) items The minimum Leverage Ratio shall be 4% for Domestic Systemically Important Banks (D-SIBs) and 3.5% for other banks. Both the capital measure and the exposure measure along with Leverage Ratio are to be disclosed on a quarter-end basis. However, banks must meet the minimum Leverage Ratio requirement at all times. Countercyclical Capital Buffer Framework The aim of the Countercyclical Capital Buffer (CCCB) regime is twofold.  Firstly, it requires banks to build up a buffer of capital in good times which may be used to maintain flow of credit to the real sector in difficult times.  Secondly, it achieves the broader macro-prudential goal of restricting the banking sector from indiscriminate lending in the periods of excess credit growth that have often been associated with the building up of system-wide risk. The CCCB may be maintained in the form of Common Equity Tier 1 (CET 1) capital only, and the amount of the CCCB may vary from 0 to 2.5% of total risk weighted assets (RWA) of the banks. The CCCB decision would normally be pre-announced with a lead time of 4 quarters. However, depending on the CCCB indicators, the banks may be advised to build up requisite buffer in a shorter span of time. The credit-to-GDP gap shall be the main indicator in the CCCB framework in India. Banks will be subject to restrictions on discretionary distributions (may include dividend payments, share buybacks and staff bonus payments) if they do not meet the requirement on countercyclical capital buffer which is an extension of the requirement for capital conservation buffer (CCB). Assuming a concurrent requirement of CCB of 2.5% and CCCB of 2.5% of total RWAs, the required conservation ratio (restriction on discretionary distribution) of a bank, at various levels of CET1 capital held Individual bank minimum capital conservation ratios, assuming a requirement of 2.5% each of capital conservation buffer and CCCB Prepared by: Raman Luthra Chartered Accountant Basel III created two liquidity ratios: LCR and NSFR Liquidity Coverage Ratio (LCR) The Liquidity Coverage Ratio (LCR) will require banks to hold a buffer of high-quality liquid assets sufficient to deal with the cash flows encountered in an acute short term stress scenario as specified by supervisors. The goal is to ensure that banks have enough liquidity for a 30-days stress scenario if it were to happen. Stock of high quality liquid assets LCR = = 100% Total net cash flows over the next 30 calendar days Net Stable Funding Ratio (NSFR) The Net Stable Funding Ratio (NSFR) requires banks to maintain a stable funding profile in relation to the composition of their assets and their off balance- sheet activities. NSFR requires banks to fund their activities through stable sources of finance (reliable over the one-year horizon). A sustainable funding structure is intended to reduce the likelihood that disruptions to a bank’s regular sources of funding will erode its liquidity position in a way that would increase the risk of its failure and potentially lead to broader systemic stress. Available stable funding NSFR = = 100% Required Stable funding Prepared by: Raman Luthra Chartered Accountant What is payment system? Payment system means a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange. PSOs in India include Clearing Corporation of India, National Payments Corporation of India, Cards Payment Networks, Cross border Money Transfer, ATM networks, Prepaid Payment Instruments, White Label ATM Operators, Instant Money Transfer, and Trade Receivables Discounting System, Bharat Bill Payment System Different Payment System In INDIA RTGS - Real Time Gross Settlement is a system where there is continuous and real-time settlement of fund-transfers, individually on a transaction-by-transaction basis (without netting). System is available on all days on 24x7x365 basis No amount cap set by RBI. RTGS system is primarily meant for large value transactions. Minimum amount 2,00,000 and no maximum limit Unique Transaction Reference (UTR) number is a 22-character code used to uniquely identify a transaction in RTGS system. The settlement of funds is instantaneous and happens in real-time NEFT - National Electronic Funds Transfer (NEFT) is a nation-wide centralised payment system owned and operated by the Reserve Bank of India (RBI). NEFT system is available round the clock throughout the year on all days, i.e., on 24x7x365 basis. Round the clock availability on all days of the year. No limit imposed by the RBI for funds transfer through NEFT system The settlement of funds happens on a half-hourly basis The NEFT mode is used when the transactions are of smaller values. Note - RTGS and NEFT payment systems are owned and operated by RBI. Payment System owned by NPCI – National Payment Corporation of India RuPay - RuPay is an Indigenously developed Payment System – designed to meet the expectation and needs of the Indian consumer, banks and merchant eco-system. RuPay supports the issuance of debit, credit and prepaid cards by banks in India and thereby supporting the growth of retail electronic payments in India. Card Transactions - There are three types of cards (a) debit, (b) credit, and (c) prepaid. Debit Card is a physical or virtual payment instrument containing a means of identification, linked to a Saving Bank/Current Account which can be used to withdraw cash, make online payments, do PoS terminal/Quick Response (QR) code transactions, fund transfer, etc. subject to prescribed terms and conditions Credit Card is a physical or virtual payment instrument containing a means of identification, issued with a pre-approved revolving credit limit, that can be used to purchase goods and services or draw cash advances, subject to prescribed terms and conditions. Prepared by: Raman Luthra Chartered Accountant Prepaid Payment Instruments (PPIs): Instruments that facilitate purchase of goods and services, financial services, remittance facilities, etc., against the value stored therein. PPIs that require RBI approval / authorisation prior to issuance are classified under two types viz. i. Small PPIs, and ii. Full-KYC PPIs. i. Small PPIs: Issued by banks and non-banks after obtaining minimum details of the PPI holder. They shall be used only for purchase of goods and services. Funds transfer or cash withdrawal from such PPIs shall not be permitted. Small PPIs can be used at a group of clearly identified merchant locations / establishments which have a specific contract with the issuer (or contract through a payment aggregator / payment gateway) to accept the PPIs as payment instruments. ii. Full-KYC PPIs: Issued by banks and non-banks after completing Know Your Customer (KYC) of the PPI holder. These PPIs shall be used for purchase of goods and services, funds transfer or cash withdrawal. Note - Cash withdrawal using debit cards and full-KYC prepaid cards at PoS terminals has been allowed by Reserve Bank of India (RBI) whereby, a maximum of ₹2,000 can be withdrawn per transaction within an overall monthly limit of ₹10,000. AePS - AEPS is a bank led model which allows online interoperable financial transaction at PoS (Point of Sale / Micro ATM) through the Business Correspondent (BC)/Bank Mitra of any bank using the Aadhaar authentication. Banking Services Offered by AePS - Cash Deposit, Cash Withdrawal, Balance Enquiry, Mini Statement, Aadhaar to Aadhaar Fund Transfer, Authentication, BHIM Aadhaar Pay Transaction Cost is NIL to customer. There is no such limit set by RBI to use the AEPS. NPCI has set a maximum transaction amount of Rs. 10,000 on a single AEPS financial transaction. AePS Cash Withdrawal and BHIM Aadhaar Pay transactions with a cumulative limit up to Rs. 50,000/- per month. APBS - Aadhaar Payment Bridge (APB) System is used by the Government Departments and Agencies for the transfer of benefits and subsidies under Direct Benefit Transfer (DBT) scheme launched by Government of India. IIN (Institution Identification Number) is a unique 6-digit number issued by NPCI to every APB System participating bank and is used to uniquely identify a bank to which the APB transaction has to be routed in the Aadhaar Payment Bridge (APB) System. IMPS - IMPS provides robust & real time fund transfer which offers an instant, 24X7, interbank electronic fund transfer service that could be accessed on multiple channels like Mobile, Internet, ATM, SMS. The Objectives of IMPS is to enable bank customers to use mobile instruments as a channel for accessing their banks accounts and remit funds Pre-Requisites for Mobile Banking through IMPS Registration for Remitter: - Mobile Money Identifier (MMID) and MPIN from the bank Registration for Beneficiary:- Mobile Money Identifier (MMID) from the bank MMID - Mobile Money Identifier (7digit code) Each MMID is linked to a unique Mobile Number. Daily limit of IMPS transactions is ₹5 lakh NACH - “National Automated Clearing House (NACH)” for Banks, Financial Institutions, Corporates and Government a web- based solution to facilitate interbank, high volume, electronic transactions which are repetitive and periodic in nature. NACH System can be used for making bulk transactions towards distribution of subsidies, dividends, interest, salary, pension etc. Prepared by: Raman Luthra Chartered Accountant Nach Mandate is a simpler way to make payments. Your recurring payments can be made through NACH which are directly debited from your bank It shall be referred to as NACH. NACH (Debit) & NACH (Credit) aims at facilitating interbank high volume, low value debit/credit transactions, which are repetitive in nature, electronically using the NPCI service. NACH Debit limit for various types of mandates – 1 crore. A customer can issue a mandate for a maximum duration of 30 years. Note - eMandate through 2 factor authentication 1. Aadhar/PAN/CutomerID and 2. OTP on registered mobile number The limit for mandate registered through above authentication mechanism is 15,000/- per transaction. UPI - Unified Payments Interface (UPI) is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments into one hood. Immediate money transfer through mobile device round the clock 24*7 and 365 days. Single mobile application for accessing different bank accounts. UPI-PIN (UPI Personal Identification Number) is a 4-6 digit pass code you create/set during first time registration with this App UPI Limits Collect – “share intent link and pay / QR share and pay limit is 2,000/- UPI the transaction limit is up to Rs 1 Lakh per transaction. For few specific categories of transaction in UPI like Capital Markets, Collections, Insurance, Foreign Inward Remittances the transaction limit is up to 2 lakh and for Initial Public Offering and Retail Direct Scheme the limit is up to Rs 5 lakh per transaction. UPI 123PAY is an instant payment system for feature phone users who can use Unified Payments Interface (UPI) payment service in a safe and secure manner. Through UPI 123PAY, feature phone users will now be able to undertake a host of transactions based on four technology alternatives. They include calling an IVR (interactive voice response) number, app functionality in feature phones, missed call-based approach and also proximity sound-based payments UPI LITE - is a new payment solution that leverages the trusted NPCI Common Library (CL) application to process low value transactions that have been set at below ₹ 500. (without entering UPI PIN) National Electronic Toll Collection (NETC) - National Payments Corporation of India (NPCI) has developed the National Electronic Toll Collection (NETC) program to meet the electronic tolling requirements of the Indian market. It offers an interoperable nationwide toll payment solution including clearing house services for settlement and dispute management. FASTag are Radio-Frequency Identification (RFID) stickers which are affixed on the vehicle windshield and enable the driver to make toll payments electronically while the vehicle is in motion without stopping at the Toll plazas by saving Fuel and Time. CTS - Cheque truncation is a cheque clearance system that involves the digitization of a physical paper cheque into a substitute electronic form for transmission to the paying bank. Bharat Bill payment system is a Reserve Bank of India (RBI) conceptualised system driven by National Payments Corporation of India (NPCI). It is a one-stop ecosystem for payment of all bills providing an interoperable and accessible “Anytime Anywhere” Bill payment service to all customers across India with certainty, reliability and safety of transactions. Prepared by: Raman Luthra Chartered Accountant Bharat BillPay is an integrated ecosystem connecting banks and non-banks in bills aggregation business, Billers, payment service providers and retail Bill outlets. Bharat BillPay transaction can be initiated through multiple payment channels like Internet, Internet Banking, Mobile, Mobile-Banking, Mobile Wallets, Kiosk, ATM, Bank Branch, Agents and Business Correspondents, by just looking at the Bharat BillPay logo. *99#, a USSD(Unstructured Supplementary Service Data) based mobile banking service of NPCI. *99# service has been launched to take the banking services to every common man across the country. Banking customers can avail this service by dialing *99# on their mobile phone and transact through an interactive menu displayed on the mobile screen. Does not require data connectivity (works on signalling channel) that makes it high availability service Maximum fund transfer limit using *99# service is INR 5,000 in a single transaction. Prepared by: Raman Luthra Chartered Accountant THE PAYMENT AND SETTLEMENT SYSTEMS ACT, 2007 An Act to provide for the regulation and supervision of payment systems in India and to designate the Reserve Bank of India as the authority for that purpose and for matters connected therewith or incidental thereto. CHAPTER I PRELIMINARY Payment and Settlement Systems Act, 2007, extends to the whole of India. The PSS Act, 2007 received the assent of the President on 20th December 2007 and it came into force with effect from 12th August 2008. What is payment system? Payment system means a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange. PSOs in India include Clearing Corporation of India, National Payments Corporation of India, Cards Payment Networks, Cross border Money Transfer, ATM networks, Prepaid Payment Instruments, White Label ATM Operators, Instant Money Transfer, and Trade Receivables Discounting System, Bharat Bill Payment System Different Payment System In INDIA – RTGS, NEFT, RuPay, AePS, APBS, IMPS, NACH, UPI, NETC National Electronic Toll Collection (NETC) Important definitions Payment obligation means an indebtedness that is owned by one system participant to another system participant as a result of clearing or settlement of one or more payment instructions relating to funds, securities or foreign exchange or derivatives or other transactions Gross settlement system - means a payment system in which each settlement of funds or securities occurs on the basis of separate or individual instructions; Netting - means the determination by the system provider of the amount of money or securities, due or payable or deliverable, as a result of setting off or adjusting, the payment obligations or delivery obligations among the system participants, including the claims and obligations arising out of the termination by the system provider, on the insolvency or dissolution or winding up of any system participant or such other circumstances as the system provider may specify in its rules or regulations or bye-laws (by whatever name called), of the transactions admitted for settlement at a future date so that only a net claim be demanded or a net obligation be owned System participant means a bank or any other person participating in a payment system and includes the system provider. System provider- means a person who operates an authorised payment system. Prepared by: Raman Luthra Chartered Accountant Systemic risk - means the risk arising from— (i) the inability of a system participant to meet his payment obligations under the payment system as and when they become due; or (ii) any disruption in the system, which may cause other participants to fail to meet their obligations when due and is likely to have an impact on the stability of the system: CHAPTER II DESIGNATED AUTHORITY AND ITS COMMITTEE Section 3 - The Reserve Bank shall be the designated authority for the regulation and supervision of payment systems under this Act Reserve Bank has power to make regulation and constitute a committee of its Central Board to be known as the Board for Regulation and Supervision of Payment and Settlement Systems. Board constituted above shall consist of the following members Designation Appointed by Chairperson Governor, Reserve Bank Vice-Chairperson Deputy Governor who is in-charge of the Payment and Settlement Systems Directors Central Board of the Reserve Bank of India to be nominated by the Governor, Reserve Bank. (Not more than 3) As per Board for Regulation and Supervision of Payment and Settlement Systems Regulations, 2008 Two Executive Directors nominated by the Chairperson and the Principal Legal Adviser in the Bank shall be permanent invitees to the meetings of the Board. Persons with experience in the fields of payment and settlement systems may be invited by the Board to attend its meetings either as permanent or as ad-hoc invitees. CHAPTER III AUTHORISATION OF PAYMENT SYSTEMS Section 4 - Payment system not to operate without authorisation No person, other than the Reserve Bank, shall commence or operate a payment system except under and in accordance with an authorisation issued by the Reserve Bank under the provisions of this Act Section 26 – Any person who contravenes in above section shall be punishable with - Imprisonment - not be less than 1 month but which may extend to 10 years or Fine – Up-to 1 crore rupees or both and with a further fine which may extend to one lakh rupees for every day, after the first during which the contravention or failure to comply continues. Prepared by: Raman Luthra Chartered Accountant Section 5 - Application for authorisation Any person desirous of commencing or carrying on a payment system may apply to the Reserve Bank for an authorisation under this Act – Procedure of Submission of application for authorisation for commencing or carrying on payment system is given in Payment and Settlement Systems Regulations, 2008. – Application is made in FORM A with a non-refundable fees of INR 10,000/- Section 6 - Inquiry by the Reserve Bank Section 7 - Issue or refusal of authorisation Every application for authorisation shall be processed by the Reserve Bank as soon as possible and an endeavour shall be made to dispose of such application within six months from the date of filing of such application Section 26 – Any person who contravenes in above section shall be punishable with - Imprisonment - not be less than 1 month but which may extend to 10 years or Fine – Up-to 1 crore rupees or both and with a further fine which may extend to one lakh rupees for every day, after the first during which the contravention or failure to comply continues. Section 8 - Revocation of authorisation Reserve Bank may, by order, revoke the authorisation given to such system provider under this Act after giving the system provider a reasonable opportunity of being heard Section 9 - Appeal to the Central Government Any applicant for an authorisation whose application for the operation of the payment system is refused under sub-section (3) of section 7 or a system provider who is aggrieved by an order of revocation under section 8 may, within 30 days from the date on which the order is communicated to him, appeal to the Central Government. The Central Government shall endeavour to dispose of an appeal within a period of 3 months and decision of the Central Government on the appeal shall be final. CHAPTER IV REGULATION AND SUPERVISION BY THE RESERVE BANK Section 10 – Power to determine standards The Reserve Bank may, from time to time, prescribe a) the format of payment instructions and the size and shape of such instructions; b) the timings to be maintained by payment systems; c) the manner of transfer of funds within the payment system, either through paper, electronic means or in any other manner, between banks or between banks and other system participants; d) such other standards to be complied with the payment systems generally e) the criteria for membership of payment systems including continuation, termination and rejection of membership f) the conditions subject to which the system participants shall participate in such fund transfers and the rights and obligations of the system participants in such funds Prepared by: Raman Luthra Chartered Accountant Section 11 - Notice of change in the payment system No system provider shall cause any change in the system which would affect the structure or the operation of the payment system without a) the prior approval of the Reserve Bank; and b) giving notice of not less than 30 days to the system participants after the approval of the Reserve Bank: Section 12 - Power to call for returns, documents or other information Section 13. Access to information - The Reserve Bank shall have right to access any information relating to the operation of any payment system and system provider and all the system participants shall provide access to such information to the Reserve Bank Section 14. Power to enter and inspect. Any officer of the Reserve Bank duly authorised by it in writing in this behalf, may for ensuring compliance with the provisions of this Act or any regulations, enter any premises where a payment system is being operated and may inspect any equipment, including any computer system or other documents situated at such premises and call upon any employee of such system provider or participant thereof or any other person working in such premises to furnish such information or documents as may be required by such officer. Section 26 - If any person fails to produce any statement, information, returns or other documents, or to furnish any statement, information, returns or other documents, which under section 12 or under section 13, it is his duty to furnish or to answer any question relating to the operation of a payment system which is required by an officer making inspection under section 14, he shall be punishable fine which may extend to 10 lakh rupees in respect of each offence to a further fine which may extend to twenty-five thousand rupees for every day for which the offence continues Section 15. Information, etc., to be confidential Information obtained by the Reserve Bank under sections 12 to 14 (both inclusive) shall be kept confidential. Section 16. Power to carry out audit and inspection The Reserve Bank may, for the purpose of carrying out its functions under this Act, conduct or get conducted audits and inspections of a payment system Section 17. Power to issue directions The Reserve Bank may issue directions in writing to such payment system or system participant requiring it, within such time as the Reserve Bank may specify— i. to cease and desist from engaging in the act, omission or course of conduct or to ensure the system participants to cease and desist from the act, omission or course of conduct; or ii. to perform such acts as may be necessary, in the opinion of the Reserve Bank, to remedy the situation. Section 18. Power of Reserve Bank to give directions generally Section 19. Directions of Reserve Bank to be complied with. Every person to whom a direction has been issued by the Reserve Bank under this Act shall comply with such direction without any delay and a report of compliance shall be furnished to the Reserve Bank within the time allowed by it. Prepared by: Raman Luthra Chartered Accountant CHAPTER V RIGHTS AND DUTIES OF A SYSTEM PROVIDER System provider- means a person who operates an authorised payment system. Section 20. System provider to act in accordance with the Act, regulations, etc Every system provider shall operate the payment system in accordance with the provisions of this Act, the regulations, the contract governing the relationship among the system participants and the directions given by the Reserve Bank from time to time. Section 21. Duties of a system provider. Every system provider shall disclose to the existing or potential system participants, the terms and conditions including the charges and the limitations of liability under the payment system, supply them with copies of the rules and regulations governing the operation of the payment system, netting arrangements and other relevant documents. Section 22. Duty to keep documents in the payment system confidential. A system provider shall not disclose to any other person the existence or contents of any document or part thereof or other information given to him by a system participant, except where such disclosure is required under the provisions of this Act Section 26 - If any person discloses any information, the disclosure of which is prohibited he shall be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to five lakh rupees or an amount equal to twice the amount of the damages incurred by the act of such disclosure, whichever is higher or with both. Section 23. Settlement and netting Settlement and netting shall be determined in accordance with the gross or netting procedure approved by the Reserve Bank. Where the rules providing for the operation of a payment system indicates a procedure for the distribution of losses between the system participants and the payment system, such procedure shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force. A settlement effected under such procedure shall be final and irrevocable. Section 23A. Protection of funds collected from customers The Reserve Bank may require system provider of payment system a) deposit and keep deposited in a separate account or accounts held in a scheduled commercial bank; or b) maintain liquid assets in such manner and form as it may specify from time to time, of an amount equal to such percentage of the amounts collected by the system provider of designated payment system from its customers and remaining outstanding, as may be specified by the Reserve Bank from time to time Provided that the Reserve Bank may specify different percentages and the manner and forms for different categories of designated payment systems Prepared by: Raman Luthra Chartered Accountant The balance held in the account or accounts shall not be utilised for any purpose other than for discharging the liabilities arising on account of the usage of the payment service by the customers or for repaying to the customers or for such other purpose as may be specified by the Reserve Bank from time to time. CHAPTER VI SETTLEMENT OF DISPUTES Section 24. Settlement of disputes The system provider shall make provision in its rules or regulations for creation of panel consisting of not less than three system participants other than the system participants who are parties to the dispute to decide the disputes between system participants in respect of any matter connected with the operation of the payment system. Where any dispute in respect of any matter connected with the operation of the payment system arises between two or more system participants, the system provider shall refer the dispute to the panel Where any dispute arises between any system participant and the system provider or between system providers or where any of the system participants is not satisfied with the decision of the panel, the dispute shall be referred to the Reserve Bank. The decision of the Reserve Bank shall be final and binding Where a dispute arises between the Reserve Bank, while acting in its capacity as system provider or as system participant, and another system provider or system participant, the matter shall be referred to the Central Government which may authorise an officer not below the rank of Joint Secretary for settlement of the dispute and the decision of such officer shall be final. Section 25. Dishonour of electronic funds transfer for insufficiency, etc., of funds in the account. Where an electronic funds transfer initiated by a person from an account maintained by him cannot be executed on the ground that the amount of money standing to the credit of that account is insufficient to honour the transfer instruction or that it exceeds the amount arranged to be paid from that account by an agreement made with a bank, such person shall be deemed to have committed an offence and shall be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the electronic funds transfer, or with both: Provided that nothing contained in this section shall apply unless— a) the electronic funds transfer was initiated for payment of any amount of money to another person for the discharge, in whole or in part, of any debt or other liability; b) the electronic funds transfer was initiated in accordance with the relevant procedural guidelines issued by the system provider Prepared by: Raman Luthra Chartered Accountant c) the beneficiary makes a demand for the payment of the said amount of money by giving a notice in writing to the person initiating the electronic funds transfer within 30 days of the receipt of information by him from the bank concerned regarding the dishonour of the electronic funds transfer; and d) the person initiating the electronic funds transfer fails to make the payment of the said money to the beneficiary within fifteen days of the receipt of the said notice. CHAPTER VII OFFENCES AND PENALTIES Section 26. Penalties. Whoever in any application for authorisation or in any return or other document or on any information required to be furnished by or under, or for the purpose of, any provision of this Act, wilfully makes a statement which is false in any material particular, knowing it to be false or wilfully omits to make a material statement, shall be punishable with imprisonment for a term which may extend to three years and shall also be liable to fine which shall not be less than ten lakh rupees and which may extend to fifty lakh rupees Where a direction issued under this Act is not complied with within the period stipulated by the Reserve Bank or where no such period is stipulated, within a reasonable time or where the penalty imposed by the Reserve Bank under section 30 is not paid within a period of 30 days from the date of the order, the system provider or the system participant which has failed to comply with the direction or to pay the penalty shall be punishable with imprisonment for a term which shall not be less than one month but which may extend to ten years, or with fine which may extend to one crore rupees or with both and where the failure to comply with the direction continues, with further fine which may extend to one lakh rupees for every day, after the first during which the contravention continues If any provision of this Act is contravened, or if any default is made in complying with any other requirement of this Act, or of any regulation, order or direction made or given or condition imposed thereunder and in respect of which no penalty has been specified, then, the person guilty of such contravention or default, as the case may be, shall be punishable with fine which may extend to 10 lakh rupees and where a contravention or default is a continuing one, with a further fine which may extend to twenty-five thousand rupees for every day, after the first during which the contravention or default continues. Section 27. Offences by companies. Where a person committing a contravention of any of the provisions of this Act or any regulation, direction or order made thereunder is a company, every person who, at the time of the contravention, was in-charge of, and was responsible to, the company for the conduct of business of the company, as well as the company, shall be guilty of the contravention and shall be liable to be proceeded against and punished accordingly. Section 30. Power of Reserve Bank to impose fines.— 1. Notwithstanding anything contained in section 26, if a contravention or default of the nature referred to in sub-section (2) or sub-section (6) of section 26, as the case may be, the Reserve Bank may impose on the person contravening or committing default a penalty not exceeding five lakh rupees or twice the amount involved in such contravention or Prepared by: Raman Luthra Chartered Accountant default where such amount is quantifiable, whichever is more, and where such contravention or default is a continuing one, a further penalty which may extend to twenty-five thousand rupees for every day after the first during which the contravention or default continues. 2. For the purpose of imposing penalty under sub-section (1), the Reserve Bank shall serve a notice on the defaulter requiring him to show cause why the amount specified in the notice should not be imposed as a penalty and a reasonable opportunity of being heard shall also be given to such defaulter. 3. Any penalty imposed by the Reserve Bank under this section shall be payable within a period of 30 days from the date on which notice issued by the Reserve Bank Prepared by: Raman Luthra Chartered Accountant Chapter International Financial Services Centres Authority (Banking) Regulations, 2020 Important Definitions: 1. Banking Unit or BU: It means a financial institution under clause (c) of sub-section (1) of Section 3 of the Act that is licensed or permitted by the Authority to undertake permissible activities under these regulations. 2. Home Regulator: It means the regulatory authority that is responsible for regulating the Parent Bank in the jurisdiction where the Parent Bank is incorporated, licensed or established. 3. IFSC Banking Unit or IBU: It a Banking Unit licensed or permitted by the Authority to operate in an IFSC as a branch of the Parent Bank. 4. IFSC Banking Company or IBC: It means a Banking Unit licensed or permitted by the Authority to operate in an IFSC as a subsidiary company of the Parent Bank. 5. Foreign Bank: means a banking company incorporated or established outside India. 6. Indian Bank: It means any bank incorporated or established under any Act, and includes a wholly owned subsidiary of a foreign bank incorporated in India, but does not include a co-operative bank. 7. Parent Bank: means a Foreign Bank as defined under sub-regulation (d) or an Indian Bank as defined under sub-regulation (f), or both, that intends to, or has set up a Banking Unit or Representative Office or Regional Administrative Office. 8. Global Administrative Office or GAO: It means a financial institution set up by its Parent Bank in IFSC for undertaking any one or more of the following activities, namely: (i) managing, administering, or coordinating operations of the Parent Bank or any of the Group entities either in IFSC or outside IFSC; (ii) providing support services to Parent Bank or any of the Group entities for execution of the permitted activities either in IFSC or outside IFSC. 9. Referral services: It means an activity in which a BU, pursuant to an arrangement with a financial product or financial service provider, refers its clients or the clients of its Parent Bank as potential customers (or "leads"), to such financial product or financial service provider for providing them the financial product(s) or financial service(s). 10. Representative Office or RO: means a financial institution set up by its Parent Bank in IFSC for undertaking any one or more of the following activities, namely: Prepared by: Pathik Bhatia Chartered Accountant i. marketing of financial products; ii. collection of data; iii. carrying out of outreach operations. Requirement of licence to set up a Banking Unit (Regulation 3) Indian Banks and Foreign Banks shall require licence from the Authority to set up a Banking Unit in an International Financial Services Centre The applicant shall satisfy the following requirements for grant of licence by the Authority: i. The Parent bank shall provide necessary capital for the BU, subject to a minimum of USD 20 million/USD 50 million (as specified in table below). ii. Parent Bank shall obtain a No Objection Letter from its home regulator regarding setting up of the Banking Unit in the International Financial Services Centre. iii. Parent Bank shall submit an undertaking that it shall provide liquidity to its BU (only in case of IBU not for IBC) whenever needed for the operations of the IBU. iv. Any other requirement as may be specified by the Authority. Necessary Capital limits for IBU and IBC IFSC Banking Unit IFSC Banking Company 20 Millions USD 50 Millions USD If the Authority is of the opinion that licence cannot be granted, it may give 30 days’ time to the applicant, setting out the grounds based on which it cannot grant licence, to enable the applicant to make written submissions, if any. Every Parent Bank shall be permitted to establish only one Banking Unit in each International Financial Services Centre, as a branch. Withdrawn via amendment. Prudential Regulatory Requirements (Chapter III) Banking Units shall adhere to norms and guidelines as may be prescribed by authority, from time to time related to: IFSCA has released – Handbook Prudential Directions- V 5.0 containing 1. Liquidity Ratios: Liquidity Coverage Ratios, Net Stable Funding Ratios. i. Liquidity Coverage Ratio (LCR) The Liquidity Coverage Ratio (LCR) will require banks to hold a buffer of high-quality liquid assets sufficient to deal with the cash flows encountered in an acute short term stress scenario as specified by supervisors. The goal is to ensure that banks have enough liquidity for a 30-days stress scenario if it were to happen. Stock of high-quality liquid assets LCR = Total net cash flows over the next 30 calendar days Prepared by: Pathik Bhatia Chartered Accountant Liquidity Coverage Ratio (LCR) at a level that is higher of (a) and (b) below: a) minimum LCR prescribed by the Home Regulator of the Banking Company of which the IBU is a branch or b) the minimum LCR prescribed by the Authority from time to time. The minimum LCR as prescribed by the Authority is 100%, with effect from April 1, 2021. ii. Net Stable Funding Ratio (NSFR) The Net Stable Funding Ratio (NSFR) requires banks to maintain a stable funding profile in relation to the composition of their assets and their off balance- sheet activities. NSFR requires banks to fund their activities through stable sources of finance (reliable over the one-year horizon). A sustainable funding structure is intended to reduce the likelihood that disruptions to a bank’s regular sources of funding will erode its liquidity position in a way that would increase the risk of its failure and potentially lead to broader systemic stress. Available stable funding NSFR = Required Stable funding The Net Stable Funding Ratio (NSFR) at a level that is higher of (a) and (b) below: a) minimum NSFR prescribed by the Home Regulator of the Banking Company of which the IBU is a branch or b) the minimum NSFR as and when prescribed by the Authority, from time to time. At present, the Authority has not implemented the requirement for NSFR. 2. Maintenance of Leverage Ratios – As defined by home regulator – (A certificate shall be submitted within forty-five days after the end of the quarter to IFSCA) Capital Measure Leverage ratio = Exposure Measure A minimum Leverage ratio (LR), as defined under the Basel framework, for an IBU shall be maintained by its Banking Company at the level and subject to the regulations specified by the respective Home Regulator applicable on the Banking Company 3. Exposure ceiling – As defined by home regulator 4. Reserve requirements – The liabilities of an IBU, OTHER THAN the deposits raised from individuals resident in India or outside India shall be exempted from Cash Reserve Ratio and other reserve ratios Prepared by: Pathik Bhatia Chartered Accountant The deposits raised by an IBU from INDIVIDUALS resident in India or outside India shall be subject to such Reserve Ratios as may be specified by the Authority. An IBC shall maintain such reserves and in such manner as are mandated under the Banking Regulation Act, 1949 and the Reserve Bank of India, 1934 (As maintained by Indian Banks) 5. Lender of last report - Lender of Last Resort support shall not be available to a Banking Unit. Note - Qualified Resident Individuals (meaning an individual who is a person resident in India having net worth not less than USD 1 million or equivalent in the preceding financial year) are permitted to open, hold and maintain accounts in a freely convertible foreign currency, with a BU, for undertaking transactions connected with or arising from any permissible current or capital account transaction or a combination of both as specified in the Liberalised Remittance Scheme of the Reserve Bank of India. (i.e. Individuals can transact upto USD 2,50,000 per Financial Year under LRS) Other Important Points - Currency for conducting Business: A Banking Unit shall conduct such business in the specified foreign currencies and with such persons, whether resident or otherwise, as may be specified by the Authority. Transactions through foreign currency accounts: CASH TRANSACTIONS in FOREIGN CURRENCY ACCOUNTS SHALL NOT BE PERMITTED. Deposits of a Banking Unit may be insured subject to applicability of and to the extent provided under the Deposit Insurance and Credit Guarantee Corporation Act, 1961 (₹5 lakh per depositor). Prepared by: Pathik Bhatia Chartered Accountant Chapter International Financial Services Centres Authority (Payment Services) Regulations, 2024 Important Points in regulation 1. Payment system means a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange. ( As per payment and settlement Act 2007) 2. Payment service provider means a company authorised by the Authority, under these regulations, to provide one or more of the Payment Services. 3. Payment service user means any person, in IFSC or outside IFSC, that makes use of a Payment Service provided by a Payment Service Provider in the capacity of a payer or a payee, or both. 4. “Payment instrument” means any written direction, personalised device or set of procedures through which a payment service user initiates a payment order; 5. “Payment transaction” means the act of placing, transfer or withdrawal of money, whether for the purpose of paying for goods or services or for any other purpose, with or without any underlying obligations between the payer and payee 6. Payment Service means any of the activities that is specified in Part A of Schedule I of these regulations. Activities which are Payment Services (Part A of Schedule I) Account issuance service (including e-money account E-money issuance service Escrow service issuance service) Cross border money Merchant acquisition transfer service service Prepared by: Pathik Bhatia Chartered Accountant 7. E-money- means any electronically stored monetary value that- a. is denominated in any specified foreign currency; b. has been paid for in advance to enable the making of payment transactions through the use of a payment account; c. is accepted by a person other than its issuer; and d. represents a claim on its issuer. Explanation- The term “e-money” does not include deposit from any person. 8. E-money issuance service means the service of issuing e-money to a payment service user for the purpose of allowing a payment service user to make payment transactions. 9. “Money” includes e-money but EXCLUDES virtual digital asset and any excluded digital representation of value as may be specified by the Authority. 10. “virtual digital asset” – as defined in sub-section 47A of section 2 of the Income Tax Act, 1961 (a) any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically; (b) a non-fungible token or any other token of similar nature, by whatever name called; Note - Fungibility is the ability of a good or asset to be readily interchanged for another of like kind. Goods and assets such as cars and houses that aren't interchangeable are non-fungible. Money is a prime example of a fungible asset because a ₹100 bank note is easily convertible into 2 bank notes of INR 50 or 10 bank notes of INR 10. 11. Regular payment service provider means a Payment Service Provider, authorised by IFSCA to provide payment services but does other than significant payment service provider. 12. Significant payment service provider means a payment service provider designated as such owing to large value of transactions executed by it. Threshold and Conditions for Designation as Significant Payment Service Provider The following are the thresholds and conditions to be met by a Regular Payment Service Provider to be designated as a Significant Payment Service Provider- Prepared by: Pathik Bhatia Chartered Accountant a. the Regular Payment Service Provider carries on a business of providing one or more of the payment services (other than e-money account issuance service) mentioned in Part A of this schedule and i. the MONTHLY AVERAGE, over a calendar year, of the total value of all payment transactions that are accepted, processed, executed exceeds A. $2 million (or its equivalent in a Specified Foreign Currency), for any one of the payment services (other than e-money account issuance service) mentioned in Part A of this schedule or; B. $4 million (or its equivalent in a Specified Foreign Currency), for two or more of the payment services (other than e-money account issuance service) mentioned in Part A of this schedule; b. if the Regular Payment Service Provider intends to carry or carries on a business of providing an E-MONEY ACCOUNT ISSUANCE SERVICE and the AVERAGE DAILY VALUE, over a calendar year, of ALL E-MONEY THAT IS STORED IN ANY PAYMENT ACCOUNT issued by the Regular Payment Service Provider exceeds $3 million (or its equivalent in a specified foreign currency); c. if the applicant or the Regular Payment Service Provider carries on a business of providing an E-MONEY ISSUANCE SERVICE and the AVERAGE DAILY VALUE, over a calendar year, of the total value in ONE DAY OF ALL E-MONEY THAT IS INTENDED TO BE ISSUED OR ISSUED by the Regular Payment Service Provider exceeds $3 million (or its equivalent in a Specified Foreign Currency). Minimum Net Worth Requirement to become a Payment Service provider in IFSC (Regulation 6 of this regulation along with Schedule V) Net Worth as on Regular Payment Service Provider Significant Payment Service Provider Date of USD 1,00,000 USD 2,50,000 Commencement of (within 90 Days of being so designated by Operations authority) Date of end of third USD 2,00,000 USD 5,00,000 Financial Year Persons Exempted from Authorisation [Regulation 4(1) read with Schedule IV] 1. An IFSC Banking Company (IBC) or an IFSC Banking Unit (IBU) licensed or permissioned under the Banking Regulation Act, 1949 (10 of 1949). 2. A person licensed to carry on the business of issuing credit cards in IFSC. Prepared by: Pathik Bhatia Chartered Accountant Chapter Conduct of Business Directions- v 4.0 (COB) The COB directions are aimed at ensuring that IFSC Banking Units (IBUs) meet the minimum standards of conduct expected, particularly with regard to the treatment of their clients, their dealings with counterparties and other market participants. This will assist IFSCA to meet the regulatory objectives, including and particularly those related to: a) protecting the interests of investors and users of financial services; and b) ensuring that the financial markets under IFSCA’s purview are fair, efficient, transparent and orderly; and c) fostering and maintaining confidence in the IFSC's financial system and regulatory regime. MODULE NO.1 - ACTIVITIES OF BANKING UNITS These directions specify the activities that the Banking Units (BUs) may undertake and activities that the IBUs are barred from undertaking Governing law for activities - International financial transactions are often conducted on the basis of bilateral agreements between the parties. Such agreements may either be in the form of standard documents like  International Swaps and Derivatives Association (ISDA for OTC derivatives)  Global Master Repurchase Agreement (GMRA for repo transactions) in cases where standard documentation do not exist or as per the decision of the parties, in the form of bespoke agreements laying down the terms and conditions which the proposed transaction is to be governed. Permitted activities Any financial service or financial or product as per IFSCA Act’19 or any business listed in section 6 of Banking Regulation Act’1949 including- 1. Acceptance of Deposits 2. Borrowing from and Lending to other IBUs 3. Lending – Retail 4. Lending – Corporate Prepared by: Raman Luthra Chartered Accountant 5. Providing trust services 6. Credit enhancement 7. Equipment leasing and Hire purchase 8. Referral Services 9. Factoring and Forfaiting services 10. Underwriting 11. Acting as a portfolio manager 12. Providing Investment Advisory service 13. Trading and Clearing member of a stock exchange 14. Bullion Trading Member and Clearing Members in GIFT-IFSC 15. Acting as a custodian of assets/securities 16. Undertaking Over-the-Counter (OTC) derivative contracts 17. Acting as FX Prime Brokerage 18. Undertaking remittances  prohibition on drawal of foreign exchange vide Section 3 (c) of the FEMA (Current Account Transaction) Rules, 2000 shall not be applicable to such transactions.  Remittance activity in any mode/method other than in cash. 19. Undertaking foreign exchange transactions (cash, tom, spot and forward) 20. Global Administrative Office (GAO) 21. Trading & Clearing in Precious Metals Spot and OTC Derivatives Contract 22. Operating as a Foreign Portfolio investor (FPI) – take prior registration from SEBI 23. Operating as an Eligible Foreign Investor (EFI) 24. Investing in securities issued outside IFSC (other than Indian securities) 25. Operating as an Investment Banker 26. Undertaking transfer of loan assets 27. Undertaking negotiation of Letters of Credit (LC) of its constituents Activities that IBUs shall not perform IBUs shall not undertake the following activities: a) effecting contracts of insurance b) any other activity expressly prohibited under any regulation /direction issued by the Authority Compliance with Anti-Money Laundering (AML) Standards and Counter-Terrorist Financing (CFT) guidelines under Prevention of Money Laundering Act, 2002 Prepared by: Raman Luthra Chartered Accountant MODULE NO.2 - UNDERTAKING BUSINESS IN FOREIGN CURRENCY “foreign currency” means any currency other than Indian currency Permissible Business in Foreign Currency  IBUs shall undertake all transactions in IFSCs in a freely convertible foreign currency and only via bank transfers.  financial institution shall satisfy itself prior to undertaking a capital account transaction/current account transactions/taking deposits/borrowing/lending with a person resident in India that such transaction is in compliance with the regulations or directions or guidelines issued by the Reserve Bank of India (FEMA) Maintenance and use of Nostro accounts  IBUs shall maintain separate nostro accounts with correspondent banks which would be distinct from nostro accounts maintained by other branches of the same bank. MODULE NO.3 - CLIENT CLASSIFICATION An IBU providing any financial product or financial service to any person must classify that person as one of the following categories of client i. a Retail Client; Classification of a client ii. a Professional Client; or under more than one iii. a Market Counterparty category is possible i. Retail Client All clients that cannot be classified as a Professional Client or a Market Counterparty must be classified as a Retail Client. ii. Professional Client 1. Following entities shall be classified as a Deemed Professional Client unless it is a Market Prepared by: Raman Luthra Chartered Accountant Counterparty a) a national or regional government b) a central bank c) a public body that manages public debt d) a pension fund or the management company of a pension fund e) non-individual entity enjoying credit facility with any branch or subsidiary of the Banking company of which the IBU is a branch. f) trustee of a trust which has, or had during the previous 12 months, assets of at least USD 5 million g) Large Undertaking that, as at the date of its most recent financial statements, meets at least two of the following criteria i. it has total assets of at least USD 5 million on its balance sheet; ii. it has annual turnover of at least USD 10 million iii. it has own funds of at least USD 1 million h) and other such big institution 2. Assessed professional client – Individuals  the Client has net assets of at least USD 250,000 (total tangible assets owned minus total liabilities) and  IBU assesses the client, on reasonable grounds, to have sufficient experience and understanding of relevant financial products, financial services, transactions and any associated risks or  the client works or has worked in the previous two years in any regulated financial institution, including a bank, securities firm or insurance company, in a position that requires knowledge of the type of financial products, financial services, transactions envisaged 3. Assessed Professional Clients: Other than individuals  the IBU assesses the entity on reasonable grounds, to have sufficient experience and understanding of the relevant financial products, financial services, transactions and any associated risks; and  the entity has own funds of at least USD 1 million. iii. Market Counterparties An IBU may classify a person as a Market Counterparty, unless and to the extent that person is given a different classification under this chapter, if that Person meets the requirements to be a) a Deemed Professional Client or Prepared by: Raman Luthra Chartered Accountant b) an Assessed Professional Client and is the subsidiary of a Holding Company that is a Deemed Professional Client by virtue of being a Large Undertaking. In order for an IBU to classify a person as a Market Counterparty, the IBU must ensure that a. the person has been given prior written notification of its classification as a Market Counterparty; and b. the person has not requested to be classified other than as a Market Counterparty within the time specified in the notification. Record keeping An IBU must keep records of: a) the procedures which it has followed under this module including any documents that evidence the Client’s classification; and b) any notification sent to the Client under module, together with evidence of despatch. The records must be kept for at least seven years from the date on which the business relationship with a client ended MODULE NO.4 - COMMUNICATIONS WITH CLIENTS AND FINANCIAL PROMOTIONS Requirements – Communications 1. Communications to be fair, clear and not misleading 2. Evasion of regulatory liability – Communication must not attempt to limit or evade any duty or liability it may have to that client or any other person under any applicable provision of the IFSCA Act, IFSCA Banking Regulations, Rules or other directions. 3. Information to be communicated directly to client - unless it has received written instructions from the client assigning details of another person for the purpose. Financial promotions Financial promotion” means any communication, made using any medium, which invites or induces any person to: a) enter into, or offer to enter into, an agreement in relation to the provision of a financial service; or b) to enter into an agreement with any person in relation to a financial product Prepared by: Raman Luthra Chartered Accountant Note - Financial promotions give a fair and prominent indication of associated risks related to financial product. 1. Prohibition on Financial Promotions A person must not undertake a Financial Promotion in relation to an activity carried on by an IBU licensed by the IFSC unless a) the person is an IBU b) the content of the Financial Promotion is approved by a registered / licenced financial institution in IFSC c) the Financial Promotion is exempt Persons who make a Financial Promotion falling within (a), (b) or (c) above shall be "Authorised Promoters" for the purposes of this module. 2. Exempt Financial Promotions i. Communication with professional Client or Market Counterparty (and not a Retail Client) ii. made to a person as a result of an unsolicited request by that person to receive the Financial Promotion; iii. made or issued by or on behalf of a government or non-commercial government entity, including a central bank iv. made by a person in the course of providing legal or accountancy services and may reasonably be regarded as incidental to and a necessary part of the provision of such services v. included in a Prospectus approved by the Authority in accordance with the relevant regulations for Capital Market activities 3. Financial Promotion by a Representative Office A Representative Office may make a Financial Promotion only in relation to a financial product or financial Service offered by a related party of the Representative Office in a jurisdiction other than the IFSC. 4. Unsolicited Real Time Financial Promotion – a) which was not initiated by the recipient of the Financial Promotion; and does not take place in response to an express request from the recipient of the Financial Promotion; or b) in relation to which it was not clear from all the circumstances when the dialogue was Prepared by: Raman Luthra Chartered Accountant initiated or requested, that during the course of the dialogue, communications would be made concerning the kind of controlled activities and controlled investments to which the communications in fact made relate. Procedure for Unsolicited Real Time Financial Promotions An Authorised Promoter must not communicate an Unsolicited Real Time Financial Promotion to a Client who is not at the Authorised Promoter's premises, unless the person communicating it: a) only does so at an appropriate time of the day; b) identifies himself and the firm he represents at the outset and makes clear the purpose of the communication; c) clarifies if the client would like to continue with or terminate the communication, and terminates the communication at any time that the client requests it; and d) gives a contact point to any client with whom he arranges an appointment. Record keeping requirement An Authorised Promoter must keep a record of all Communications with clients Financial Promotion that it makes or approves. MODULE NO.5 - USE OF ELECTRONIC TRADING PLATFORMS AND THE SERVICES OF VOICE BROKERS “Electronic trading platform (ETP)” means an electronic platform (located within or outside IFSC) that enables the transfer of ownership of a financial asset by matching two counterparties. “Voice broker” means an entity (located within or outside IFSC) that brings together buyers and sellers of a financial asset for the purpose of executing a transaction in such financial asset. Requirement IBUs shall at the end of each quarter report to the Authority, the names of ETPs and Voice brokers through whom they have undertaken transactions during the quarter along with the volume of business (in USD) conducted through each ETP and Voice broker. Prepared by: Raman Luthra Chartered Accountant MODULE NO.6 - KEY INFORMATION AND CLIENT AGREEMENT Key information An IBU must provide specified key information (Annexure given) to a Professional Client or Market Counterparty, in accordance with this chapter, before providing services. Client agreement An IBU, must not carry on any activity with or for a person unless: a) the IBU has provided to that person the such information in good time before the service is provided to enable the person to make an informed decision relating to the relevant activity; and b) if the person is classified as a Retail Client, there is a written client agreement entered into between the IBU and that person. Exception to client agreement - An IBU may provide a financial product or financial service to a Retail Client or Professional Client without having to provide key information and/or enter into a client agreement in accordance where it is impracticable to do so, provided that the IBU explains to the client why it is impracticable to enter into a client agreement; and enters into a client agreement as soon as practicable thereafter. Record keeping IBUs should retain a copy of the client agreement for a period of seven years from the date on which the relationship with the relevant Client has ended or for such period as may be required by any law, whichever is longer. MODULE NO.7 - ORDER EXECUTION AND ORDER HANDLING Best execution obligation i. When an IBU executes orders for or on behalf of a client it must take all adequate steps to obtain the best possible result for the client taking into account the information available, including the following factors: a) Price b) Cost c) Speed Prepared by: Raman Luthra Chartered Accountant d) Likelihood of execution and settlement e) Size f) Nature Any other factor relevant to execution ii. When an IBU executes a transaction for or on behalf of a Retail client, the best possible result will be determined by reference to the price and other costs, including execution venue fees, clearing and settlement fees and any other fees paid to third parties involved in the execution of the order. Transactions at off-market rates In view of its possible use to conceal profit/loss or to perpetuate a fraud, use of off-market rates is strongly discouraged, particularly for the purposes of the extension or rollover of a maturing contract. Request from clients for transactions at off-market rates should not be accepted as a normal practice and shall be treated as exceptional transactions warranting greater scrutiny and approval of senior management. Voice and electronic communications  An IBU must take reasonable steps to ensure that it makes and retains recordings of voice communications, including telephone conversations, other than communications where both parties are physically present and copies of electronic communications, when such communications are with a client or with another person in relation to a transaction, including the receiving or transmitting of related instructions.  Recordings of relevant voice communications and copies of electronic communication recordings must be retained for a minimum of six months or for such period as may be required by any law, whichever is longer Direct electronic access Where an IBU provides a client (including a Market Counterparty) with direct electronic access to undertake transactions with itself, the IBU must: a) establish and maintain policies, procedures, systems and controls to limit or prevent a client from placing an order that would result in the position limits or credit limits being exceeded; and b) ensure that such policies, procedures, systems and controls remain appropriate and effective on an on-going basis. Prepared by: Raman Luthra Chartered Accountant MODULE NO.8 - CONFLICTS OF INTEREST An IBU must take all reasonable steps to ensure that conflicts of interest between itself and its clients, between its employees and clients and between one client and another are identified and thereafter prevented or managed, or disclosed, in such a way so as to ensure that the interests of a client are not adversely affected. Identifying a conflict of interest For the purpose of the conflicts of interest that may arise in the course of its business, an IBU must consider whether it or a person linked to an IBU: i. is likely to make a financial gain, or avoid a financial loss, at the expense of a client; ii. has an interest in the outcome of a service or a transaction carried out for the client, which is different from the client's interest; iii. has arranged for one part of its business or a business line to provide a service or carry out a transaction for a client that has a favourable or beneficial impact on another part or business line of the same IBU or a person linked to the IBU; iv. has any incentive to treat one client favourably over another client; v. carries on the same business or activities as the client; or vi. receives an inducement from a third party in relation to a service provided to a client Inducements - An IBU must have policies and procedures in place to ensure that it, or its employee or associate, does not offer, give, solicit or accept any inducement from a third party, such as a fee, commissions or other direct or indirect benefit, where the inducement is reasonably likely to be in conflict with any duty that the IBU owes to its clients. Introductions - In circumstances where an IBU introduces a client to a third party and receives a fee, commission or other benefit in respect of that introduction, such fee, commission or other benefit received in respect of such a referral would not be a prohibited inducement under this rule, provided that the IBU has acted in the best interests of the client. Record keeping An IBU shall maintain record of inducements disclosed to the clients for a period of seven years after such inducement was disclosed. Prepared by: Raman Luthra Chartered Accountant MODULE NO.9 - PROVIDING TRUST SERVICES  An IBU providing trust service must maintain proper standards of governance and professionalism and must comply with all applicable laws, rules and regulations relevant to providing trust services.  An IBU providing trust service must at all times hold adequate professional indemnity insurance appropriate to the nature and size of its business.  Professional indemnity insurance protects against claims for loss or damage made by clients or third parties as a result of the impact of negligent services provided or negligent advice offered. Due diligence  An IBU providing trust service must, at all times, have verified documentary evidence of the i. settlors, ii. trustees (in addition to the IBU providing trust service itself) iii. principal named beneficiaries of trusts for which it Provides Trust Services. Knowledge regarding source of funds  An IBU providing trust service must demonstrate that it has knowledge of the source of funds that have been settled into trusts or have been used to provide capital to companies, or have been used in transactions with which the IBU providing trust service is involved. MODULE NO.10 - COMPLAINTS HANDLING AND DISPUTE RESOLUTION  An IBU must have arrangements in place for handling and redressal of complaints / grievances made against it by its clients.  IBU should be able to resolve most complaints within 45 days from the date of receipt of a complaint.  Receiving a complaint An IBU shall: a) acknowledge the complaint promptly (latest within 7 days) in writing b) provide the complainant with the contact details of any individual responsible for handling the complaint; its complaints handling procedures; and a statement that a copy of the Prepared by: Raman Luthra Chartered Accountant procedures is available, free of charge, upon request; c) investigate the complaint.  If the complainant is not satisfied with the redressal proposed by the BU, it must inform the complainant of appeal mechanism (if any) or other means (such as arbitration or the Courts) of resolving the complaint and provide him with the appropriate contact details upon request.  Record keeping - An IBU must maintain a record of all complaints made against it for a minimum period of seven years from the date of receipt of a complaint or the period mandated by any law, whichever is longer. MODULE NO.11 - ACCEPTING DEPOSITS “Accepting deposits” means accepting deposits of money from the public repayable on demand or otherwise and used for the purpose of lending or investment. Permissible deposits 1. IBUs shall permit opening of Current account, Savings account and Term Deposit account, in any freely convertible foreign currency, by an individual client.  “Current Account” means a form of non-interest-bearing demand deposit wherefrom withdrawals are allowed any number of times depending upon the balance in the account or up to a particular agreed amount and shall also be deemed to include other deposit accounts which are neither Savings Deposit nor Term Deposit.  “Demand deposit” means a deposit received by the BU, which is withdrawable on demand  “Savings account” means a form of interest-bearing demand deposit which is subject to the restrictions as to the number of withdrawals as also the amounts of withdrawals permitted by the IBU during any specified period.  “Individual client” means a natural person. 2. IBUs shall permit opening of Current account and Term Deposit account by persons other than

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