August 1, 2024

The directions have been issued under Reserve Bank of India Act, 1934, Banking Regulation Act, 1949 and Credit Information Companies (Regulation) Act, 2005. The objective of direction is to provide for a non-discriminatory and transparent procedure for classifying a borrower as a wilful defaulter by the lenders. As of March 2023, 16,883 accounts involving total borrowing of Rs 3.5 lakh crore had been classified as wilful defaulters.  Introduction The Reserve Bank of India on September 21, 2023 has issued the Draft Master Directions on Treatment of Wilful Defaulters and Large Defaulters (‘Proposed Directions’). The Directions, when finalized, will replace the existing Master circulars (referred below). The draft Directions are largely consolidating in nature, with some significant differences. Importantly, NBFCs of middle and upper layer have been brought into the framework, and additionally, as was clear from the recent circular on compromise/settlements, the tag of willful defaulter may be removed if the borrower does a compromise settlement with the lender. However, a mere sale of the loan will not cause removal of the tag, as the tag will pass on to the buyer. The draft Directions also assimilate the provisions about large defaulters, which was earlier a CIC filing requirement, and make it a part of these Directions. The Draft Directions, issued in September 2023, are yet to be notified. Therefore, in the meantime, the position on wilful defaulters is as follows: Banks to identify borrowers as wilful defaulter in accordance with the Master Circular on Wilful Defaulters AIFIs to also follow the Master Circular on Wilful Defaulters for identification of wilful defaulters HFCs are required to identify and report wilful defaulters as per Annex XVII Guidelines on Wilful Defaulters under the HFC Master Directions NBFCs are not covered under the aforesaid Master Circular and hence, cannot classify borrowers as wilful defaulters Why a stringent framework for wilful defaulters While a default itself is bad for a lender, where the default is backed by ability, but unwillingness to pay, it assumes a different level of seriousness. Such a borrower, and the entities that such borrower promotes or fosters, should remain deprived of further assistance from the financial system. Note that fraudulent defaulters are even a further level of seriousness, as a fraud is clearly a criminal offence. A fraudulent borrower is also a Wilful Defaulter, but vice versa need not be true. Fraudulent defaulters are covered by Master Directions on Frauds. The concept of Wilful Defaulter can be traced back to 1999 when it introduced a scheme to address Wilful Defaulters. Currently, the Master Circular dated July 01, 2015 (‘Current Circular’) is the governing framework for classifying an account as Wilful Defaulter. Wilful defaulter: Meaning “Wilful Default” (i) by a borrower shall be deemed to have occurred when the borrower defaults in meeting payment/ repayment obligations to the lender and any one or more of the following features are noticed: the borrower has the capacity to honour the said obligations; the borrower has diverted the funds availed under the credit facility from lender; the borrower has siphoned off the funds availed under the credit facility from lender; the borrower has disposed of immovable or movable assets given for the purpose of securing the credit facility without the knowledge of the lender; The borrower has failed in its commitment to the lender to infuse equity despite having the ability to infuse the equity, although the lender has provided loans or certain concessions to the borrower based on this commitment and other covenants and conditions; (ii) by a guarantor shall be deemed to have occurred if the guarantor does not honour the guarantee when invoked by the lender, despite having sufficient means to make payment of the dues Key Provisions of the Direction Wilful Defaulter: wilful default with outstanding amount of ₹25 lakh and above Wilful default occurs when borrower defaults in meeting payment/ repayment obligations to the lender and any one or more features are noticed borrower has the capacity to pay diversion of funds and siphoned off the funds,  disposal of immovable or movable assets provided for securing credit or  failure to infuse equity despite having the ability to do so. Large defaulter: default with an outstanding amount of ₹1 crore and above, and where suit has been filed  or whose account has been classified as doubtful or loss. Identification: Lenders have to establish Identification Committee to examine the evidence of wilful default.  The option of declaring a borrower as wilful, or is it an obligation? The major obligations of NBFCs include: Identification of an NPA as to whether it may fall into the category of Wilful Defaulter Having an Identification Committee, Review Committee, etc. for the process of declaration Formulating guidelines, based on their board-approved policy, for nominating authorized officers who would issue show cause notices and serve written order on behalf of the Identification Committee and Review Committee respectively. Post declaration, appropriate filing with Credit Information Companies(CICs) Internal audit system to be developed so as to specifically look into adherence to instructions for classifying a borrower as a Wilful Defaulter.  Review of status of Wilful Defaulters by the audit committee Inclusion of a covenant in lending to all companies that the company shall not induct on its board a person who has been a director of a Wilful Defaulter Determining a limit/threshold in the board approved policy for the commissioning of forensic audit To complete the investigation from a Wilful Default angle in every case before transferring the credit facility Reporting of Wilful Defaulters in the List of Wilful Defaulters with CICs before transferring the credit facility Loan agreement may be amended so as to incorporate a covenant for certification by auditors with regard to the diversion/siphoning of funds Reporting of auditors with National Financial Reporting Authority/ Institute of Chartered Accountants of India in cases they are found to be negligent or deficient in conducting the audit. Reporting the details of third parties to Indian Banks Association in cases where they are found to be negligent or deficient in their work. FAQs What are the RBI’s recent directions on the treatment of Wilful Defaulters (WD) and

Consultation paper seeks to introduce measures to enhance investor protection and promote market stability in derivative markets while ensuring sustained capital formation. Securities and Exchange Board of India (SEBI) has released a consultation paper aimed at enhancing investor protection and market stability in the derivatives market. The focus is on mitigating risks associated with speculative trading, particularly in index derivatives, where increased retail participation and short-tenure contracts have led to high volatility and market instability around expiry dates. The paper highlights the surge in trading activity and turnover in derivatives compared to the cash market, noting that individual investors, especially post-COVID, are driving significant turnover in index options. However, this has also led to a concentration of speculative trading around expiry days, resulting in heightened volatility and substantial losses for a majority of individual traders. SEBI’s paper suggests measures to address these issues, aiming to balance investor protection with market stability and ensure sustainable capital formation. The consultation invites public comments on these proposed measures to refine and strengthen the regulatory framework for index derivatives. About Index derivatives Derivatives are financial contracts that draw their value from an underlying asset (commodity, security, currency, or index). Futures and Options (F&O) are common types of derivatives (refer to the box).  Need for Strengthening Index Derivatives Framework Excessive speculative trading: ₹50,000–₹60,000 crore of household savings lost through derivatives trading. Increased retail participation in equity derivatives: Index options rose from 2% of individual trades in FY 2018 to 41% in FY 2024. Objective Derivatives market assist in better price discovery, help improve market liquidity and allow investors to manage their risks better. However, bursts of speculative hyperactivity in derivative markets, particularly by individual players, can detract from sustained capital formation by endangering both investor protection and market stability. Given the changing market dynamics in equity derivatives segment in recent years with increased retail participation, offering of short tenure index options contracts and heightened speculative trading volumes in index derivatives on expiry date, this consultation paper seeks to introduce measures to enhance investor protection and promote market stability in derivative markets, while ensuring sustained capital formation. Key Changes Proposed Increase in Minimum Contract Value from current current size is ₹5 lakh to ₹10 lakh to ₹15 lakh to ₹20 lakh which could increase to up to ₹30 lakh after six months.  Limiting Strike Prices to 50 strikes for an index derivatives contract at launch to prevent scattering of trading activity and liquidity. The strike price is the pre-determined price at which the buyer and seller of an option agree on a contract or exercise a valid and unexpired option. Members to collect option premiums upfront from clients. FAQs What is the purpose of SEBI’s consultation paper on index derivatives? SEBI’s consultation paper aims to gather feedback on proposed measures to enhance the framework for index derivatives. The goal is to improve market efficiency, transparency, and investor protection in the trading and management of index derivatives. What are index derivatives? Index derivatives are financial instruments, such as futures and options, that derive their value from an underlying stock market index. They allow investors to hedge against or speculate on movements in the index without directly buying the constituent stocks. What are some key measures proposed in the consultation paper? Key measures include improving liquidity in index derivatives, enhancing risk management practices, increasing transparency in trading, and ensuring more robust settlement processes. Specific proposals may also address margin requirements and position limits.

A dividend equalization fund is a mutual fund that invests in stocks that pay regular dividends. This type of fund aims to provide investors with a consistent stream of income by investing in companies that have a history of paying dividends. The fund manager seeks to maintain a steady dividend payout to investors, regardless of fluctuations in the dividend payments of the individual companies in the fund’s portfolio. What Is an Equalizing Dividend? Equalizing dividends are one-time payments made to eligible shareholders when a company changes its dividend schedule. They are meant to compensate investors for any lost income from the missed dividend payments that would have been received using the previous payment schedule. How Equalizing Dividends Work Equalizing dividends are certain agreements for funds made to ensure that the level of income attributable to each share is not affected during a distribution or accumulation period.  Adjustments to the dividend schedule are usually made by executives at the company or the board of directors. Firms may want to move the payment of dividends back or forward by a few weeks or months to accommodate extenuating circumstances that could arise, such as a shortage of cash on hand due to unforeseen events. In such cases, the firm may compensate shareholders with an equalizing dividend payment to offset the effect of the new schedule. Equalizing dividends are paid to shareholders to adjust for any dividend income thus lost from the change. By and large, equalizing dividends take place mainly in the United Kingdom and parts of Europe rather than in the United States. For background, funds pay out income on or after the ex-dividend date, at which point income is removed from the fund’s net asset value (NAV) and paid to shareholders on a per-share basis. Investors who buy shares in the fund after the last ex-dividend date usually have not held the stock for a full income-generating period. This means newly purchased shares will be grouped separately from those acquired earlier. They are still entitled to the same payment per share as any other owner of the fund, but part of the payment is treated as a return of capital, otherwise known as an equalizing dividend or payment. It makes the per-share amount paid to both groups whole. When that occurs both groups will be treated equally for future dividend payments. FAQs What is a Dividend Equalisation Fund? A Dividend Equalisation Fund is a reserve fund set up by a company to maintain consistent dividend payouts to its shareholders, even during periods of fluctuating profits. This helps provide a stable income stream for investors. Why do companies create Dividend Equalisation Funds? Companies create these funds to ensure they can meet their dividend commitments to shareholders, even in years when profits are lower than expected. It helps maintain investor confidence and can make the company’s shares more attractive.

The Reserve Bank of India (RBI) has introduced a separate channel, namely ‘Fully Accessible Route’ (FAR), to enable non-residents to invest in specified government bonds with effect from April 1. Fully Accessible Route (FAR) The move follows the Union Budget announcement that certain specified categories of government bonds would be opened fully for non-resident investors without any restrictions. Under FAR, eligible investors can invest in specified government securities without being subject to any investment ceilings. This scheme shall operate along with the two existing routes, viz., the Medium Term Framework (MTF) and the Voluntary Retention Route (VRR). Key Points ‘Specified securities’ shall mean Government Securities as periodically notified by the Reserve Bank for investment under the FAR route. The RBI has said that all new issuances of Government securities (G-secs) of 5-year, 10-year, and 30-year tenors will be eligible for investment as specified securities. Non Resident investors can invest in specified government securities without being subject to any investment ceilings. This scheme shall operate along with the two existing routes: The Medium Term Framework (MTF) for Foreign Portfolio Investment (FPI) in Central Government Securities (G-secs) and State Government Securities (SDLs) was introduced in October 2015. FPI consists of securities and other financial assets passively held by foreign investors. The Voluntary Retention Route (VRR) encourages Foreign Portfolio Investors to undertake long-term investments in Indian debt markets. Circular No. RBI/2023-24/81 FMRD.FMID.No. 04/14.01.006/2023-24, Earlier, the RBI vide. Circular Dated 30.03.2020 notified Fully Accessible Route (FAR), through which certain specified categories of Central Government securities were opened fully for non-resident investors without any restrictions, apart from being available to domestic investors as well. The RBI has now decided to also designate all Sovereign Green Bonds issued by the Government in the fiscal year 2023-24 as ‘specified securities’ under the FAR Earlier, vide circular dated 30.03.2020, the RBI has notified that all new issuances of Government securities of 5-year, 10-year and 30-year tenors from the financial year 2020-21 to be eligible for investment under the FAR as ‘specified securities’. Later, through circular dated 07.07.2022 and circular dated 23.01.2023, Government securities of 7-year & 14-year tenors and Sovereign Green Bonds were included as ‘specified securities’ under the FAR. Benefits of the Scheme This will ease the access of non-residents to Indian government securities markets. This would facilitate inclusion in global bond indices. Being part of the global bond indices would help Indian G-secs attract large funds from major global investors, including pension funds. This would also facilitate inflow of stable foreign investment in government bonds. FAQs What are Fully Accessible Route (FAR) bonds? Fully Accessible Route (FAR) bonds are government securities that are open to both domestic and foreign investors. They are designed to make the Indian government bond market more accessible and attractive to international investors by providing a clear and straightforward investment route. Why were FAR bonds introduced? FAR bonds were introduced to increase foreign investment in Indian government securities, enhance market liquidity, and integrate India more deeply into the global financial system. This initiative also aims to provide additional funding sources for the government’s borrowing needs.

It is a committee of the United Nations Educational, Scientific, and Cultural Organization. The Committee is responsible for the implementation of the World Heritage Convention, defines the use of the World Heritage Fund, and allocates financial assistance upon requests from States Parties. It has the final say on whether a property is inscribed on the World Heritage List.  It examines reports on the state of conservation of inscribed properties and asks States Parties to take action when properties are not being properly managed. It also decides on the inscription or deletion of properties on the List of World Heritage in Danger. Structure: It consists of representatives from 21 of the States Parties to the Convention elected by their General Assembly. A Committee member’s term of office is six years, but most state parties choose voluntarily to be members of the committee for only four years in order to give other states parties an opportunity to be on the committee. Bureau of the World Heritage Committee: The Bureau consists of seven states parties elected annually by the Committee: a Chairperson, five Vice-Chairpersons, and a Rapporteur. The Bureau of the Committee coordinates the work of the Committee and fixes the dates, hours, and order of business of meetings.  World Heritage Committee The World Heritage Committee meets once a year, and consists of representatives from 21 of the States Parties to the Convention elected by their General Assembly. • The Committee is responsible for the implementation of the World Heritage Convention, defines the use of the World Heritage Fund and allocates financial assistance upon requests from States parties. • It has the final say on whether a property is inscribed on the World Heritage List.  • It examines reports on the state of conservation of inscribed properties and asks States Parties to take action when properties are not being properly managed.  • It also decides on the inscription or deletion of properties on the List of World Heritage in Danger. World Heritage Committee members The current composition of the World Heritage Committee is: Argentina, Belgium, Bulgaria, Egypt, Ethiopia, Greece, India, Italy, Japan, Mali, Mexico, Nigeria, Oman, Qatar, Russian Federation, Rwanda, Saint Vincent and the Grenadines, Saudi Arabia, South Africa, Thailand, Zambia. What is a World Heritage Site? • The United Nations Educational, Scientific and Cultural Organisation (UNESCO) seeks to encourage the identification, protection and preservation of cultural and natural heritage around the world considered to be of outstanding value to humanity.  • This is embodied in an international treaty called the ‘Convention Concerning the Protection of the World Cultural and Natural Heritage’, adopted by UNESCO in 1972. • A World Heritage Site is a place having a special cultural or physical significance and outstanding universal value to humanity. It may be a building, a city, a complex, a desert, a forest, an island, a lake, a monument or a mountain. • Sites recognised as being of Outstanding Universal Value are inscribed each year on the World Heritage List. World Heritage Sites in India • The number of UNESCO World Heritage Sites in India grew to 42 with the ‘Sacred Ensembles of the Hoysala’ finding a place in the coveted list in September 2023. • These sites include 34 in the cultural category, seven in the natural category and one mixed property. • They include Red Fort, Humayun Tomb and Qutub Minar in Delhi; Taj Mahal in Agra; ancient Nalanda university ruins and the Mahabodhi Temple in Bihar; and Santiniketan in West Bengal. • Currently, India has the sixth largest number of (UNESCO) sites in the world. The countries that have 42 or more world heritage sites are Italy, Spain, Germany, China and France. 46th session of the World Heritage Committee (WHC) In July 2024, India hosted the 46th session of the World Heritage Committee (WHC) in New Delhi. This event was a key moment in India’s efforts to protect its heritage. During the event, Prime Minister Narendra Modi announced a $1 million grant to support UNESCO’s global conservation efforts. India’s Commitment to Heritage Conservation India has been a strong supporter of the World Heritage Convention. It has actively participated in the WHC, serving four terms since 1977. India also works with other countries to build skills and provide technical help for heritage conservation. In the past decade, India has successfully added 13 cultural and natural sites to the World Heritage list. This makes India the sixth country globally in terms of World Heritage Sites, with a total of 43 sites. During the recent WHC session, the Moidams from Assam were recognized as India’s 43rd World Heritage Site. Highlights from the 46th WHC Meeting At the session, 24 new World Heritage Sites were added worldwide, including 19 cultural, 4 natural, and 1 mixed property. India also signed a Cultural Property Agreement with the USA to fight the illegal trade in cultural artifacts. Several heritage conservation projects were discussed at the event, including the Kashi Vishwanath Corridor and new initiatives at Nalanda University. India also partnered with international organizations like ICCROM to improve skills related to heritage preservation. A major exhibition at the WHC showcased 25 repatriated historical objects, demonstrating India’s dedication to preserving and promoting its cultural heritage. About World Heritage Sites Number and Distribution: There are over 1,100 World Heritage Sites recognized for their cultural or natural significance, spanning 167 countries, with Italy having the most sites at 58. Notable Facts: The first site listed in 1978 was the Galápagos Islands, and the Great Wall of China is the longest structure on the list. Sites can be added or removed, like Dresden, which was removed in 2009 due to development. Cultural Focus and Purpose: About 80% of the sites are Cultural Heritage Sites. The designation of these sites aims to promote conservation and raise awareness of their importance. FAQs What is the World Heritage Committee (WHC)? The World Heritage Committee is a group of representatives from 21 countries elected by the General Assembly of States Parties to the World Heritage Convention. It is responsible for the implementation of the World Heritage Convention, deciding which sites to inscribe on the World Heritage List, and