PwC Banking Insights · October 2016, FATF issued a call for an action report highlighting the...

PwC Banking Insights

March 2017

Table of contentsImpact assessment of regulatory changes in January and February 2017 ...................... 4

Prohibition on Indian party from making direct investment in countries identified by FATF as ‘non co-operative countries and territories’ (Foreign Exchange Management Act, 1999) ........................................ 4

Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) (Fifteenth Amendment) Regulations, 2016 ............................................................................................................ 6

Evidence of Import under Import Data Processing and Monitoring System ............................................................ 8

Reimbursement of Merchant Discount Rate (MDR) ............................................................................................. 10

Other notifications in January and February 2017 ....................................................... 13

PwC Banking Insights 3

PrefaceIn November 2016, India witnessed the unprecedented move of demonetisation. This move helped drive the digitisation of banking in India, with private, public and foreign banks doing their best to help customers exchange and deposit currency notes and also adopting a strategy to push for digital payments via cards and mobile applications. Since the move was unprecedented, RBI had to change the guidelines to ensure order and prevent any major frauds during the exercise. Though the constant changing of rules was intended to help the public and the banking system, it created lot of confusion. Towards the end of the demonetisation exercise, some small frauds were uncovered, leading RBI to ask banks to obtain independent certification on the adequacy and effectiveness of existing controls related to demonetisation.

Further, in its monetary policy review, RBI signalled a pause in rate cuts. Due to demonetisation, banks are flush with funds, and some banks cut the lending and deposit rates, indicating the start of a low interest rate era once again. The annual Budget was balanced and suggested that the government is confident about its plan for fiscal prudence. With the focus on affordable housing and infrastructure spending, coupled with the low interest rates, we expect growth to pick up significantly in Q2 of FY18. We have also seen banks cleaning up their balance sheets. Moreover, there is a need for significant capital infusion, especially in smaller public sector undertaking (PSU) banks, given the strain on the balance sheet due to large NPAs in their loan portfolio. We hope that post Q2 of FY18, the loan intake will pick up in the economy, thus leading to an overall improvement in banks’ balance sheets.

In January 2017, RBI extended the availability of Bill of Entry details for imports at non-EDI ports as well. The amendment in the procedure is operationally beneficial in terms of reduced manual intervention and increased authenticity of import details. Further, RBI came up with guidelines on investments in ‘non-cooperative countries and territories’ as per the updated instruction of the Financial Action Task Force (FATF). In February 2017, RBI allowed banks to claim the merchant discount rate for certain transactions where it was waived off to promote digital payments.

We at PwC are starting this initiative to update you on all the regulations issued by RBI and their probable impact on your operations. This newsletter we will be published on a monthly basis. In addition, we will provide you with our analysis of the impact of any significant update from RBI via special issues. We hope that you find this newsletter useful and are open to feedback and suggestions as we start this journey towards knowledge and helping you with your regulatory queries.

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Impact assessment of regulatory changes in January 2017

Prohibition on Indian party from making direct investment in countries identified by FATF as ‘non co-operative countries and territories’ (Foreign Exchange Management Act, 1999)

Circular reference: RBI/2016-17/216 dated 25 January 20171

Applicability: Authorised Dealer Category-I banks

Background and objective:FATF regularly makes recommendations and proposes standards to set out a comprehensive and consistent framework of measures which member countries should implement in order to combat money laundering and terrorist financing, as well as the financing of the proliferation of weapons of mass destruction.On the basis of a review by the International Co-operation Review Group (ICRG), at a meeting held in Paris on 21 October 2016, FATF issued a call for an action report highlighting the deficiencies in anti-money laundering (AML) and the failure in combating the financing of terrorism (CFT) initiatives of high risk and non-cooperative jurisdictions. FATF has urged all jurisdictions to advise their financial institutions to give special attention to business relationships and transactions with these jurisdictions, including companies, financial institutions and those acting on their behalf.In order to align the instructions with the objectives of FATF, RBI has issued a notification to that effect.

Extract from the regulation:‘At present, there is no restriction on an Indian Party with regard to the countries, where it can undertake Overseas Direct Investment. In order to align, the instructions with the objectives of FATF, on a review, it has been decided to prohibit an Indian Party from making direct investment in an overseas entity (set up or acquired abroad directly as JV/ WOS or indirectly as step down subsidiary) located in the countries identified by the FATF as “non-cooperative countries and territories” as per list available on FATF website www.fatf-gafi.org or as notified by the Reserve Bank of India from time to time.’

1. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10839&Mode=0


Impact assessment: The release of the notification will have the following impact: • Direct investments/undertaking of a financial

commitment by residents in a joint venture (JV) and wholly owned subsidiary (WOS) situated in or arising out of high risk and non-cooperative jurisdictions has been restricted. The Liberalised Remittance Scheme (LRS) policy documents will have to be updated with the names of the restricted countries to bring this regulation into effect. Employees of the Trade Finance Division/Remittance teams will have to be informed about remittances of such nature as mentioned in the circular to ensure that transactions in high risk and non-cooperative jurisdictions are rejected at the processing stage. Banks may choose to put in place additional scrutiny measures to identify the nature and purpose of foreign exchange outflow. Banks may also ask for additional documentation to safeguard against non-compliance—for example, banks may ask for a self-declaration certificate detailing the purpose and other particulars of the transaction.

• Authorised Dealer Category-1 is required to monitor the movement of funds to or from these jurisdictions and duly report the same to RBI. The quality control units within the Trade Finance Division will have to include additional parameters in their monitoring tools so as to track and report such restricted transactions. The Compliance Division will have to independently monitor these transactions and report results to RBI on a timely a basis.

• Banks will have to notify their constituents and customers about the update. In order to ensure maximum awareness of the impact of the circular, a bank may choose to have branch officials impart further information about the stated RBI notifications amongst bank customers.

Some questions remain:• Position of existing investments by Indian residents in

these jurisdictions• What about foreign direct investment (FDI) received by

Indian residents from these jurisdictions?• Is the restriction limited only to investments in these

jurisdictions or does it also extend to payment for goods/services?

• Do any restrictions on subscriptions to American Depository Receipts/Global Depository Receipts (ADRs/ GDRs) arise out of these jurisdictions?

High risk and non-cooperative jurisdictions

Afghanistan Bosnia and Herzegovina

North Korea Iran

Iraq Lao People’s Republic

Syria Uganda

Vanuatu Yemen

Call for action Other monitored jurisdictions

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Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) (Fifteenth Amendment) Regulations, 2016

Circular reference: RBI/2016-17/216 dated 10 January 20171

Background and objective:In most developed start-up industries, raising early-stage money through a convertible note is quite common—it makes the funding process relatively easier and quicker. However, in India, which ranks third among the global start-up ecosystems with more than 4,200 new-age companies,2 issuing convertible notes to foreign investors was always forbidden by RBI. Such money was treated as an external commercial borrowing (ECB).This made the process of getting foreign investors to invest in start-ups cumbersome.On 10 January 2017, RBI issued a notification allowing Indian start-ups to raise funds from foreign investors through convertible notes by making the necessary amendments to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000.

Extract from the regulation:1. Amendment to Regulation2

‘convertible note’ means an instrument issued by a startup company evidencing receipt of money initially as debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company, within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument;”

2. Insertion of new regulation a. A person resident outside India (other than an

individual who is citizen of Pakistan or Bangladesh or an entity which is registered / incorporated in Pakistan or Bangladesh), may purchase convertible notes issued by an Indian start-up company for an amount of twenty five lakh rupees or more in a single tranche.

b. A start-up company engaged in a sector where foreign investment requires Government approval may issue convertible notes to a non-resident only with approval of the Government.

c. A start-up company issuing convertible notes to a person resident outside India shall receive the amount of consideration by inward remittance through banking channels or by debit to the NRE / FCNR (B) / Escrow account maintained by the person concerned in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016, as amended from time to time.Provided that an escrow account for the above purpose shall be closed immediately after the requirements are completed or within a period of six months, whichever is earlier. However, in no case continuance of such escrow account shall be permitted beyond a period of six months.

d. NRIs may acquire convertible notes on non-repatriation basis in accordance with Schedule 4 of the Principal Regulations.

e. A person resident outside India may acquire or transfer, by way of sale, convertible notes, from or to, a person resident in or outside India, provided the transfer takes place in accordance with the pricing guidelines as prescribed by RBI. Prior approval from the Government shall be obtained for such transfers in case the start-up company is engaged in a sector which requires Government approval.

f. The start-up company issuing convertible notes shall be required to furnish reports as prescribed by Reserve Bank.

1. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10825&Mode=02. http://economictimes.indiatimes.com/small-biz/startups/india-ranks-third-in-global-startup-ecosystem-nasscom/articleshow/49341735.cms


Impact assessment:The release of the notification will have the following impact: • A new instrument, ‘convertible notes’, has been

included for receipt of funds from foreign investors. Banks will have to create a detailed policy for start-up companies, addressing aspects right from identification of a start-up company to restriction on inflow and outflow of funds, accountability of different departments, documents to process transactions (including government approval), non-compliance effect, limits on an individual transaction, etc.

• A person resident outside India (other than from Bangladesh, Pakistan) can subscribe to convertible notes issued by Indian start-ups for an amount of 25 lakh INR or more in single tranche. Employees of remittance teams will have to be notified about remittances of such nature as mentioned in the circular, and LRS process notes need to be amended to ensure that transaction limits are complied with.

• Banks will have to ensure the escrow accounts opened for this purpose are monitored and closed immediately after the funding requirements are completed or within a period of six months, whichever is earlier. Necessary amendments to the monitoring terms of existing escrow agreements of customers, if any, need to be made to comply with the regulations.

• The amendment is likely to make start-ups in India more lucrative to early-stage foreign investors.

• Start-ups will have to comply with additional RBI compliance requirements.

Some questions remain:Does a note, if not converted earlier, become compulsorily convertible at the end of the five-year period?

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Evidence of Import under Import Data Processing and Monitoring System

Circular reference: RBI/2016-17/212 A.P. (DIR Series) Circular No.271

Applicability: All Category-I Authorised Dealer Banks

Background and objective:As announced by RBI, its fourth bi-monthly Import Data Processing and Monitoring system (IDPMS) went live in the month of October 2016. All AD Category-I Banks were advised to use IDPMS to report and monitor the import transactions. This progressive initiative helped enhance ease of doing business, facilitate efficient data processing for payment of import transactions and effective monitoring thereof.While the Bill of Entry data was received through the IDPMS from Customs for EDI ports, this data had to be entered manually by AD Category-I banks for non-EDI ports. Taking cognisance of the increased transaction costs and to enhance processing efficiency, the manual entry of Evidence of Import details, i.e. Bill of Entry data, has been discontinued with effect from 1 December 2016 as these details are available in IDPMS.

Extract from the regulation:The revised procedures are as below:1. AD Category – I bank will enter BoE details (BoE

number, port code and date) as received from the importer and download the BoE message data from “BOE Master” in IDPMS. Thereafter, match and settle the BoE data with Outward Remittance Message (ORM) associated with the payment for import as per the message format “BOE Settlement” in IDPMS. Multiple ORMs can be settled against single BoE and also multiple BoE(s) can be settled against one ORM.

2. In respect of imports on ‘Delivery against Acceptance’ basis, on request of importer, AD Category – I bank shall verify the evidence of import from IDPMS at the time of effecting remittance of import bill.

3. On settlement of ORM with evidence of import AD Category – I bank shall in all cases issue an acknowledgement slip to the importer containing the following particulars:a. importer’s full name and address with

code number;b. number and date of BoE and the amount

of import; andc. a recap advice on number and amount of BoE and

ORM not settled for the importer.4. The importer needs to preserve the printed

‘Importer copy’ of BoE as evidence of import and acknowledgement slip for future use.



Impact assessment: Extension of the availability of the Bill of Entry details for imports at non-EDI ports is a welcome move. The amendment in the procedure is operationally beneficial in terms of reduced manual intervention and increased authenticity of the import details. However, due to increased use of this automated process, RBI expects adequate controls over these processes and envisages a larger extent of independent verification of such processes embedded in the system. • Banks may need to form operational guidelines/SOPs

for this process as a part of their broader policy on import bill discounting and import remittances. EDMPS experience will be helpful to functionally operate IDMPS. Banks may amend their existing IT policies and application documents to include this process.

• AD Category-I banks are to now ensure that the internal inspectors and IS auditors carry out verification and IS audit and assurance of the ‘BOE Settlement’ process in IDPMS. Annual audit plans of banks will have to be updated to include a review of the process through the system. The audit teams will have to assess the automated process and prepare a detailed risk and control matrix for the bank’s record and future reviews.

• The data and processes undertaken by a bank for ‘BOE Settlement’ have to be preserved in the guidelines under its cyber security framework.

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Impact assessment of regulatory changes in February 2017

Reimbursement of Merchant Discount Rate (MDR)

Circular reference: RBI/2016-17/228 Dated 16 February 20171

Applicability: All agency banks

Background and objective:MDR refers to the fees charged to the merchant by an acquiring bank on every digital transaction processed.In a bid to promote the Government of India’s initiatives towards a cashless economy and encourage people to make digital payments over cash payments, in December 2016, the Finance Ministry has made necessary budgetary provisions allowing the government to absorb the MDR charges in respect of debit card transactions levied while making payments to the Government of India.

Extract of the regulation: In order to operationalise the office memorandums issued by the Office of Controller General of Accounts dated December 14 and 15, 2016 and Central Board of Direct Taxes dated January 30, 2017, RBI will reimburse banks the MDR on debit cards used for payment of tax and non-tax dues to the Government of India with effect from January 1, 2017. Agency banks are advised to forward their claim for reimbursement of MDR along with statutory auditor’s certificate, as in the case of agency commission claims, to our CAS Nagpur on a quarterly basis. The claims may be signed by the Officer-in-Charge of the Government Banking Division of the bank. He should also certify that MDR charges for transaction amounts upto Rs. 1.00 lakh have not been collected from the payer. The first such claim may be made by April 30, 2017 for the quarter ending March 31, 2017.



Impact assessment: Banks may have to take note of the following in order to claim reimbursement of MDR: • Banks to identify all applicable Merchant Category

Codes (MCCs) for government merchants falling under the said circular.

• All approved transactions below 1.00 lakh INR for these MCCs would require to be extracted for preparing separate MIS for calculation of MDR and subsequent claim.

• Format of the claim submission may be decided internally by the respective acquiring teams and vetted by the Statutory Auditor.

• Process to monitor non-collection of MDR from the customers on such transactions should be formulated by the card operations team and ensure that the same is added as quarterly monitoring exercise.

• Process to ensure quarterly validation of the claim by the Statutory Auditor has to be in place for timely collection of a certificate on the claim.

While the notification states MDR will be reimbursed on certain transactions, there is still some ambiguity on the following issues:• What will the course of action be on reimbursement

of MDR in cases of disputed transactions where chargeback is initiated or where post-chargeback the merchant/issuing bank decides on representment of the case?

• How will service tax which is usually collected on MDR be treated?

• In cases where interchange is a flat fee, why can’t MDR on credit card transactions be included in the purview of this notification?

• Do payments to ministries, municipalities, state governments, panchayats and other local state authorities also have to be included as payments made to the Government of India for raising MDR reimbursement claims?

• Will payments to entities owned and operated by the government through various ministries (Indian Railways, Air India, etc.) be considered as payments made to the Government of India?


Other notifications in January and February 2017

Foreign direct investment in the infrastructure sector

Pradhan Mantri Garib Kalyan Deposit Scheme

Small savings schemes

Circular ref. no.

Circular ref. no.

Circular ref. no.

RBI/2016-17/216 dated 10 January 2017

RBI/2016-17/ dated 7 February 2017

RBI/2016-17/225/ dated 9 February 2017

Name of the circular



Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) (Amendment) Regulations, 2017

Amendment to Pradhan Mantri Garib Kalyan Deposit Scheme, notification no. S.O. 4061 E

Interest rates for small savings schemes

Brief impact/instructions



Foreign investment permitted in infrastructure companies in securities markets, namely stock exchanges, depositories and clearing corporations up to 49%, in compliance with SEBI Regulations subject to the guidelines/regulations issued by the central government, SEBI and RBI from time to time

Notification has been issued to allow subscriptions in multiple tranches before filing of declaration under sub-section (1) of section 199C of the Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016.

The interest rates on various small savings schemes for the fourth quarter of the financial year 2016–17 starting 1 January 2017 and ending on 31 March 2017 have been notified.

The contents of this circular may be brought to the notice of the branches of your bank operating government small saving schemes for necessary action. These should also be displayed on the notice boards of your branches to inform subscribers to these schemes.

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Deposit of Specified Bank Notes (SBNs)

Forward rate agreement (FRA) and interest rate swap (IRS): Withdrawal of fortnightly return

Issuance of rupee denominated bonds overseas

Savings bank accounts

Circular ref. no.

Circular ref. no.

Circular ref. no.

Circular ref. no.

RBI/2016-17/226/dated 13 February 2017


RBI/2016-17/233 dated 16 February 2017






Deposit of SBNs – chest balance limit/cash holding limit

FRA and IRS: Withdrawal of fortnightly return

Issuance of rupee denominated bonds overseas: Multilateral and regional financial institutions as investors

Removal of limits on withdrawal of cash from savings bank accounts





SBNs deposited in bank chests shall be considered as a part of the soiled note category and such deposits shall not be reckoned for calculating the chest balance limit/cash holding limit.

Banks are not required to submit a fortnightly return on FRA/IRS to the Monetary Policy Department with a copy to various RBI departments.

The existing procedures for reporting OTC foreign exchange and interest rate derivative transactions to the trade repository hosted by CCIL need to be adhered to.

In order to provide more choices of investors to Indian entities issuing rupee denominated bonds abroad, it has been decided to also permit multilateral and regional financial institutions where India is a member country to invest in these rupee denominated bonds.

Effective 20 February 2017, the limits on cash withdrawals from savings bank accounts will be increased to 50,000 INR per week (from the current limit of 24,000 INR per week).

Effective 13 March 2017, there will be no limits on cash withdrawals from savings bank accounts.

Vernon Dcosta Associate Director [email protected] Mobile: +91 9920651117

Dnyanesh Pandit Director [email protected] Mobile: +91 9819446928

Vivek Iyer Partner [email protected] Mobile: +91 9167745318

Rajeev Khare Manager [email protected] Mobile: +91 9702942146

Dhruv Khandelwal Assistant Manager [email protected] Mobile: +91 9820589399

Ramkumar Subramanian Associate Director [email protected] Mobile: +91 9004644029

Contacts

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About PwC

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This document does not constitute professional advice. The information in this document has been obtained or derived from sources believed by PricewaterhouseCoopers Private Limited (PwCPL) to be reliable but PwCPL does not represent that this information is accurate or complete. Any opinions or estimates contained in this document represent the judgment of PwCPL at this time and are subject to change without notice. Readers of this publication are advised to seek their own professional advice before taking any course of action or decision, for which they are entirely responsible, based on the contents of this publication. PwCPL neither accepts or assumes any responsibility or liability to any reader of this publication in respect of the information contained within it or for any decisions readers may take or decide not to or fail to take.

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