RBI announces direct GSec access to retail investors, clarifies its stand on NBFC investments from Mauritius and more...

Hello there, and welcome to MoneyRules, a fortnightly newsletter from Setu covering fintech regulatory developments with a focus on India. Regulatory changes can (and often do) make or break fintech products overnight, which means keeping on top of these changes are critical to your business. We aim to alert you to these changes, provide context, and demystify where necessary.

In this edition, we look at what the Budget held for the fintech world, the RBI’s decision to open up the gilt securities market directly to retail investors (making India the first Asian country to do so) and its notification partially relaxing the bar on investments in NBFCs from Mauritius.

RBI opens up government securities to retail investors

The RBI’s quarterly Statement of Developmental and Regulatory Policies announced that retail investors would soon be able to open accounts with the RBI to directly access the government securities (G-Sec) market. While more details on the facility are awaited, offering retail investors an account with the RBI could be a first step towards a central bank digital currency.

Since November 2018, retail investors have been able to purchase G-Secs of a minimum value of INR 10,000 via the NSE GoBID platform. However, this move has not gained much traction, primarily due to poor liquidity in the secondary market in case an investor wants to sell G-Secs worth less than INR 5 crore. Under the new plan, all an investor needs to do is to open a gilt securities account ('Retail Direct') with the RBI, with the details of the facility to be announced separately.

It is expected that individuals will be allowed to open a gilt account with the RBI’s electronic platform E-kuber. The retail investor can then place a direct bid with the NDS-OM, an electronic anonymous order matching system for secondary market trading in government securities, run by the RBI. Currently, NDS-OM members include banks, primary dealers, and insurance companies. A number of details are still scarce, including investor KYC, onboarding, order placement, secondary market liquidity, and incentives for various service providers in the chain.

Here are the potential implications#

For Government: Lower cost of borrowing since there are more buyers.

For RBI: Quicker transmission of monetary policy. Diversified buyer base that reduces volatility in interest rates. First step towards introducing a digital currency.

For retail investors: Direct access to an attractive asset class that gives high returns without overheads of intermediaries.

For banks: Competition for their low cost deposits forcing efficiency.

For an overview of the implications of this move, check out our colleague Krishna Hegde’s twitter thread on the subject, and this piece by Andy Mukherjee for the Economic Times. Thank you to Krishna and our colleague Ron for walking us through the announcement!

RBI partially relaxes bar on NBFC investments from Mauritius#

The RBI issued a notification last week effectively allowing new investors in NBFCs from FATF non-compliant jurisdictions (such as Mauritius) to hold up to 20% voting rights, relaxing the earlier absolute bar.

For some quick background, the Financial Action Task Force (FATF) is an intergovernmental body that sets global anti-money laundering standards. In February 2020, a few countries including Mauritius and Pakistan were added to the FATF ‘grey list’, resulting in increased monitoring and obligations to take on extra measures to address the FATF’s findings. Following this development, the RBI had began to return the NBFC applications of applicants which had any investment (directly or indirectly) routed through Mauritius, citing inability to conduct satisfactory due diligence. The regulator later confirmed this in a response to the Indian Private Equity and Venture Capital Association (IVCA).

This posed a clear problem for the VC-backed fintech ecosystem - many fintechs whose business model revolved around (or even partially depended on) lending, had applied for NBFC licenses. Most of these fintechs had at least a few investors whose investment pooling vehicles were based in Mauritius, leading to their NBFC applications being returned.

Partially addressing this issue, the RBI issued a notification last week effectively allowing new investors in NBFCs from FATF non-compliant jurisdictions (such as Mauritius) to hold up to 20% voting rights. The notification requires them to ensure they do not directly or indirectly hold ‘significant influence’ in the investee company. Notably, to safeguard business continuity, this threshold does not apply to existing investors in NBFCs, who can continue to hold their stakes in such companies, and infuse additional capital if necessary.

India’s FY22 Budget continues digital payments push#

Nirmala Sitharaman presented the Union Budget 2021-22 earlier this month, which announced development of a fintech hub in Gandhinagar, and earmarking INR 1500 crores towards a scheme intended to boost digital payments. This scheme is likely to take the form of a subsidy for firms setting up payments infra in tier-3 towns and beyond. Offering a further fillip to digital payments, the Budget announced an exemption from tax audit for entities with turnover of up to INR 10 crore which carried out ‘95% of their transactions digitally’. However, industry hopes for either a rollback of the UPI zero MDR policy or a direct subsidy to offset the consequent losses, were not fulfilled.

Here are some articles that caught our attention this past fortnight:#

Amidst the buzz surrounding India’s forthcoming Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, former Coinbase CTO and A16Z General Partner Balaji Srinivasan wrote about why India should buy bitcoin, not ban it.

ICICI Group General Counsel Pramod Rao, on the other hand, wrote in Bloomberg Quint that India needed to encourage growth of central bank digital currencies over that of any private cryptocurrencies.

ET Prime (paywall) also spoke to crypto stakeholders about the proposed legislation, who emphasized the need for definitional clarity between public cryptoassets and privately issued crypto.

The government’s intent to ban cryptocurrencies seems clear, but it also intends to promote blockchain technologies across domains like health, governance, smart city programmes and insurance, in a roadmap suggested in the MeitY’s National Strategy on Blockchain.

That’s all for this fortnight, folks. Both of us (Atulaa and Vinay) are on twitter, so feel free to DM us with feedback and topics to include in the next edition. If you liked this, please share it with people interested in Indian fintech regulation!