Master Directions

(618 kb)
Master Direction - Standalone Primary Dealers (Reserve Bank) Directions, 2016 (Updated as on November 09, 2017)

RBI/DNBR/2016-17/42
Master Direction DNBR.PD.004/03.10.119/2016-17

August 30, 2016
(Updated as on November 09, 2017)
(Updated as on March 31, 2017)

Master Direction - Standalone Primary Dealers (Reserve Bank) Directions, 2016

The Reserve Bank of India (the Bank), having considered it necessary in the public interest, and being satisfied that, for the purpose of enabling the Bank to regulate the financial system to the advantage of the country and to prevent the affairs of any Standalone Primary Dealer (SPD) from being conducted in a manner detrimental to the interest of investors or in any manner prejudicial to the interest of such SPD, and in exercise of the powers conferred under Section 45JA, 45L and 45M of the Reserve Bank of India Act, 1934 (2 of 1934), hereby issues to every SPD, in supersession of the list of circulars as provided for in Chapter XI, the Directions hereinafter specified.


Subject
Section I : Introduction
Chapter I – Preliminary
Chapter II – Definition
Chapter III – Registration
Section II : Prudential Issues
Chapter IV – Capital Funds and Capital Requirements
Chapter V – Sources and Application of Funds
Chapter VI – Prudential Regulations
Section III : Governance Issues
Chapter VII – Corporate Governance
Section IV : Miscellaneous Issues
Chapter VIII - Miscellaneous Instructions
Chapter IX – Reporting Requirements
Chapter X – Interpretations
Chapter XI – Repeal
Annex
Annex I – Guidelines on SD Bonds (Tier-II Capital)
Annex II - Capital Adequacy for Credit Risk
Annex III - Measurement of Market Risk
Annex IV- Illustration
Annex V - Guidelines for Entry of NBFCs into Insurance
Annex VI - Guidelines on Distribution of Mutual Fund Products by NBFCs
Annex VII - Publication of Financial Results
Annex VIII - ‘Fit and Proper’ Criteria for directors of NBFCs
Annex IX - Declaration and Undertaking by Director
Annex X - Form of Deed of Covenants with a Director of an NBFC
Annex XI – Indicative list of Balance Sheet Disclosure
Annex XII - Capital Charge for Foreign Exchange (FE) Position
Annex XIII- Reporting Format for Primary Dealers declaring Dividend
Annex XIV - Directions on Managing Risks and Code of Conduct in Outsourcing of Financial Services by SPDs

Section – I
Introduction

Chapter – I
PRELIMINARY

1. Short Title and Commencement.

(1) These Directions shall be called the Standalone Primary Dealers (Reserve Bank) Directions, 2016

(2) These directions shall come into force with immediate effect.

2. Applicability

(1) The provisions of these Directions shall apply to all Standalone Primary Dealers (SPDs) registered as non-banking financial company with the Bank.

(2) This Direction consolidates the regulations as issued by Department of Non-Banking Regulation, Reserve Bank of India. However, any other Directions/guidelines issued by any other Department of the Bank, as applicable to a Standalone Primary Dealer shall be adhered to by it.

Chapter II
Definitions

3. For the purpose of these Directions, unless the context otherwise requires:

(i) "Act" means the Reserve Bank of India Act, 1934;

(ii) "Bank" means the Reserve Bank of India constituted under section 3 of the Reserve Bank of India Act, 1934

(iii) Subordinated Debt (SD): means an instrument which is fully paid-up, unsecured, subordinate to the claims of other creditors, free of restrictive clauses, and shall not be redeemable at the initiative of the holder or without the consent of the Bank. SD instruments with an initial maturity of less than 5 years or with a remaining maturity of less than one year shall not be included as part of Tier-II capital. SD instruments eligible to be reckoned as Tier-II capital will be limited to 50 percent of Tier-I capital. The issuance shall be in adherence to the Guidelines on SD Bonds (Tier-II Capital), as provided in Annex I. The SD instruments shall be subjected to progressive discount at the rates shown below:

Residual Maturity of Instruments Rate of Discount (%)
Less than one year 100
One year and more but less than two years 80
Two years and more but less than three years 60
Three years and more but less than four years 40
Four years and more but less than five years 20

(iv) Tier-I capital means paid-up capital, statutory reserves and other disclosed free reserves. Investment in subsidiaries (where applicable), intangible assets, losses in current accounting period, deferred tax asset and losses brought forward from previous accounting periods will be deducted from the Tier-I capital.

In case any SPD is having substantial interest/exposure (as defined for NBFCs) by way of loans and advances not related to business relationship in other Group companies, such amounts will be deducted from its Tier-I capital.

(v) Tier-II capital includes the following:

i. Undisclosed reserves and cumulative preference shares1 (other than those which are compulsorily convertible into equity). Cumulative preferential shares shall be fully paid-up and shall not contain clauses which permit redemption by the holder.

ii. Revaluation reserves, discounted at a rate of fifty five percent.

iii. General provisions and loss reserves (to the extent these are not attributable to actual diminution in value or identifiable potential loss in any specific asset and are available to meet unexpected losses), up to a maximum of 1.25 percent of total risk weighted assets.

iv. Hybrid debt capital instruments, which combine certain characteristics of equity and debt.

v. Subordinated debt

4. Words or expressions used but not defined herein and defined in the RBI Act shall have the same meaning as assigned to them in the RBI Act. Any other words or expressions not defined in the RBI Act or any of the Directions issued by the Bank, shall have the meanings respectively assigned to them under the Companies Act, 1956 or Companies Act, 2013 (Act 18 of 2013) as the case may be.

Chapter III
Registration

5. In exercise of the powers conferred under clause (b) of sub-section (1) of section 45-IA of the Reserve Bank of India Act, 1934 (Act 2 of 1934) and all the powers enabling it in that behalf, the Bank, hereby specifies two hundred lakhs rupees as the net owned fund (NOF) required for a non-banking financial company to commence or carry on the business of non-banking financial institution, except wherever otherwise a specific requirement as to NOF is prescribed by the Bank. Authorisation to act as a Standalone Primary Dealer is subject to the NBFC fulfilling the eligibility conditions as prescribed by Internal Debt Management Department of the Bank from time to time.

Section –II
Prudential Issues

Chapter IV
Capital Funds and Capital Requirements

6. Capital Funds

Capital funds include Tier-I and Tier-II capital.

7. Minimum CRAR Ratio

SPDs are required to maintain a minimum Capital to Risk-Weighted Assets Ratio (CRAR) of 15 per cent on an ongoing basis.

8. Measurement of Risk Weighted Assets

The details of credit risk weights for various on-balance sheet and off-balance sheet items and methodology of computing the risk weighted assets for the credit risk are listed in Annex II. The procedure for calculating capital charge for market risk is detailed in Annex III.

9. Capital Adequacy requirements

(i) The capital charge for credit risk and market risk as indicated in Annex II and Annex III, shall be maintained at all times.

(ii) In calculating eligible capital, it will be necessary first to calculate the SPD’s minimum capital requirement for credit risk, and thereafter its market risk requirement, to establish how much Tier-I and Tier-II capital is available to support market risk. Of the 15% capital charge for credit risk, at least 50% shall be met by Tier-I capital, that is, the total of Tier-II capital, if any, shall not exceed one hundred per cent of Tier-I capital, at any point of time, for meeting the capital charge for credit risk.

(iii) Subordinated debt as Tier-II capital shall not exceed 50 per cent of Tier-I capital.

(iv) The total of Tier-II capital shall not exceed 100% of Tier-I capital.

(v) Eligible capital will be the sum of the whole of the SPD’s Tier-I capital, plus all of its Tier-II capital under the limits imposed, as summarized above.

(vi) The overall capital adequacy ratio will be calculated by establishing an explicit numerical link between the credit risk and the market risk factors, by multiplying the market risk capital charge with 6.67 i.e. the reciprocal of the minimum credit risk capital charge of 15 per cent.

(vii) The resultant figure shall be added to the sum of risk weighted assets worked out for credit risk purpose. The numerator for calculating the overall ratio will be the SPD’s total capital funds (Tier-I and Tier-II capital, after applicable deductions, if any). The calculation of capital charge is illustrated in Annex IV.

10. Diversification of SPD Activities

(i) The guidelines on diversification of activities by SPDs shall be as contained in the Operational Guidelines for Primary Dealers issued vide Master Direction IDMD.PDRD.01/03.64.00/2016-17 dated July 01, 2016 in addition to that prescribed in these directions.

(ii) The capital charge for market risk {Value-at-Risk (VaR) calculated at 99 per cent confidence level, 15-day holding period, with multiplier of 3.3} for the activities defined below shall not be more than 20 per cent of the Net Owned Fund2 (NOF) as per the last audited balance sheet:

(a) Investment / trading in equity and equity derivatives

(b) Investment in units of equity oriented mutual funds

(c) Underwriting public issues of equity

(d) Participation in Currency Futures Market

(iii) SPDs shall calculate the capital charge for market risk on the stock positions/ underlying stock positions /units of equity oriented mutual funds using Internal Models (VaR based) as per the directions contained in Annex VII of the Operational Guidelines for Primary Dealers issued vide Master Direction IDMD.PDRD.01/03.64.00/2016-17 dated July 01, 2016. As regards credit risk arising out of exposure in equity, equity derivatives and equity oriented mutual funds, SPDs shall calculate the capital charge as per the guidelines prescribed in Annex II.

Chapter V
Sources and Application of Funds

11. Sources of funds

(1) SPDs are permitted to borrow funds from call/notice/term money market, repo (including CBLO) market, Inter-Corporate Deposits, FCNR (B) loans, Commercial Paper and Non-Convertible Debentures. They are also eligible for liquidity support from the Bank.

(2) Call/Notice Market

(i) SPDs are allowed to borrow from call/notice market, on an average in a ‘reporting fortnight’, up to 225 percent of their NOF as at the end March of the preceding financial year. They may lend up to 25 percent of their NOF in call/notice money market, on an average in a ‘reporting fortnight’. These limits on borrowing and lending are subject to periodic review by the Bank. SPDs are governed by the provisions of the RBI Master Circular FMRD.DIRD. 01/14.01.001/2015-16 dated July 1, 2015 on “Call/Notice Money Market Operations” and as amended from time to time,

(3) Inter-Corporate Deposits (ICDs)

(i) ICDs may be raised by SPDs as per their funding needs. The SPDs shall put in place a Board approved policy for ICDs which takes due consideration of the associated risks and shall include the following general principles:

  1. The ICD borrowings shall in no case exceed 150 per cent of the NOF as at the end of March of the preceding financial year.

  2. ICDs accepted by SPD shall be for a minimum period of one week.

  3. ICDs accepted from parent/promoter/group companies or any other related party shall be on ‘arm’s length basis’ and disclosed in financial statements as "related party transactions".

  4. Funds raised through ICDs are subject to ALM discipline.

(ii) SPDs are prohibited from placing funds in ICD market.

(4) FCNR (B) loans / External Commercial Borrowing

(i) SPDs may avail of FCNR(B) loans up to a maximum of 25% of the NOF as at the end of March of the preceding financial year and subject to the foreign exchange risk of such loans being hedged at all times at least to the extent of 50 per cent of the exposure.

SPDs are governed by the provisions of the RBI Circular IDMC.PDRS.No. 3820 /03.64.00/2002-03 dated March 24, 2003, as amended from time to time, on “Availment of FCNR (B) Loans by Primary Dealers (PDs)”.

(ii) SPDs are not permitted to raise funds through External Commercial Borrowings.

(5) Non-Convertible Debentures (NCDs):

SPDs may issue NCDs of maturity up to one year, without the requirement of having a working capital limit with a bank. They shall be governed by the directions, “Issuance of Non-Convertible Debentures (Reserve Bank) Directions, 2010”, issued vide circular RBI/2009-10/505-IDMD.DOD.10/11.01.01(A)/2009-10 dated June 23, 2010, as amended from time to time.

(6) Commercial Paper

Issuance of Commercial Paper by SPDs shall be as per “Guidelines for Issue of Commercial Paper” isuued vide RBI Master Circular FMRD.DIRD.02/14.01.002/2015-16 dated July 1, 2015 and as amended from time to time.

12. Application of Funds

(1) SPDs are permitted to undertake a set of core and non-core activities. SPDs which undertake only the core activities shall maintain a minimum NOF of ₹ 150 crore. SPDs which also undertake non-core activities shall maintain a minimum NOF of ₹.250 crore.

(2) The investment in G-Sec must have predominance over the non-core activities in terms of investment pattern. SPDs shall ensure predominance by maintaining at least 50 per cent of their total financial investments (both long term and short term) in G-Sec at any point of time. Investment in G-Sec shall include the SPD’s Own Stock, Stock with the Bank under Liquidity Support / Intra-day Liquidity (IDL)/ LAF, Stock with market for repo borrowings and G-Sec pledged with the CCIL.

(3) An SPD’s investment in G-Sec (including T-Bills and CMBs) and Corporate Bond (to the extent of 50% of NOF) on a daily basis shall be at least equal to its net call/notice/repo (including CBLO) borrowing plus net RBI borrowing (through LAF/ Intra-Day Liquidity/ Liquidity Support) plus the minimum prescribed NOF.

(4) The following are permitted under core activities:

  1. Dealing and underwriting in G-Sec,

  2. Dealing in Interest Rate Derivatives,

  3. Providing broking services in G-Sec,

  4. Dealing and underwriting in Corporate / PSU / FI bonds/ debentures,

  5. Lending in Call/ Notice/ Term/ Repo/ CBLO market,

  6. Investment in Commercial Papers (CPs),

  7. Investment in Certificates of Deposit (CDs),

  8. Investment in Security Receipts issued by Securitization Companies/ Reconstruction Companies, Asset Backed Securities (ABS), Mortgage Backed Securities (MBS),

  9. Investment in debt mutual funds where entire corpus is invested in debt securities,

  10. Investments in NCDs, and

  11. Dealing in Credit Default Swaps.

(5) SPDs are permitted to undertake the following non-core activities:

(i) Activities which are expected to consume capital such as:

  1. Investment / trading in equity and equity derivatives market,

  2. Investment in units of equity oriented mutual funds,

  3. Underwriting public issues of equity, and

  4. Participation in Currency Futures Market.

(ii) Services which may not require significant capital outlay such as:

  1. Professional Clearing Services,

  2. Portfolio Management Services,

  3. Issue Management Services,

  4. Merger & Acquisition Advisory Services,

  5. Private Equity Management Services,

  6. Project Appraisal Services,

  7. Loan Syndication Services,

  8. Debt restructuring services ,

  9. Consultancy Services,

  10. Distribution of mutual fund units, and

  11. Distribution of insurance products.

(iii) For distribution of insurance products, SPDs are advised to make an application along with necessary particulars duly certified by their statutory auditors to the Regional Office of Department of Non-Banking Supervision under whose jurisdiction the registered office of the SPD is situated. SPDs may take up insurance agency business on fee basis and without risk participation, without the approval of the Bank subject to the certain eligibility conditions. The Detailed Guidelines are as provided for in Annex V.

(iv) SPDs registered with the Bank are allowed to distribute mutual fund products subject to compliance with the SEBI guidelines / regulations, including its code of conduct, for distribution of mutual fund products. The detailed guidelines are as provided in Annex VI.

(v) Specific approvals of other regulators, if needed, shall be obtained for undertaking the activities detailed above.

(vi) SPDs are not allowed to undertake broking in equity, trading / broking in commodities, gold and foreign exchange.

(vii) The exposure to non-core activities shall be subject to the regulatory and prudential norms for diversification of activities by SPD as provided for in the Directions.

(viii) SPDs choosing to diversify into non-core business segments shall define internally the scope of diversification, organization structure and reporting levels for those segments. They shall clearly lay down exposure and risk limits for those segments in their Board approved investment policy.

(6) The exposure to core and non-core activities of SPD shall be subject to risk capital allocation (credit risk & market risk) as prescribed in Chapter IV of these Directions.

Chapter VI
Prudential Regulations

13. Accounting Standards for securities transactions

(1) All securities in trading portfolio shall be marked to market, at appropriate intervals.

(2) Costs such as brokerage fees, commission or taxes incurred at the time of acquisition of securities, are of revenue/deferred nature. The broken period interest received/paid also gets adjusted at the time of coupon payment. SPDs can adopt either the IAS or GAAP accounting standards, but have to ensure that the method shall be true and fair and shall not result in overstating the profits or assets value. It shall be followed consistently and be generally acceptable especially to the tax authorities.

(3) Broken period interest paid to seller as part of cost on acquisition of Government and other securities shall not be capitalized but treated as an item of expenditure under Profit and Loss Account. The SPDs may maintain separate adjustment accounts for the broken period interest.

(4) The valuation of the securities portfolio shall be independent of the dealing and operations functions and shall be done by obtaining the prices declared by FIMMDA periodically.

(5) SPDs shall publish their audited annual results in leading financial dailies and on their website in the format prescribed (Annex VII). The following minimum information shall be included by way of notes on accounts to the Balance Sheet:

  1. Net borrowings in call (average and peak during the period),

  2. Basis of valuation,

  3. Leverage Ratio (average and peak),

  4. CRAR (quarterly figures), and

  5. Details of the issuer composition of non-G-Sec investments.

SPDs may also furnish more information by way of additional disclosures.

14. Exposure Norms

(1) The extant exposure norms for SPDs are as follows:

  1. The exposure shall not exceed 25 percent of Net Owned Funds (NOF) as per last audited accounts in case of a single borrower/counterparty and 40 percent of NOF in case of a group borrower/counterparty except for investments in AAA rated corporate bonds wherein exposure shall not exceed 50 percent of Net Owned Funds (NOF) as per last audited accounts in case of a single borrower/counterparty and 65 percent of NOF in case of a group borrower/counterparty.

  2. The ceilings on single /group exposure limit shall not be applicable where principal and interest are fully guaranteed by the Government of India.

  3. SPDs shall include credit risk exposures to all other categories of non-Government securities including investments in mutual funds, commercial papers, certificate of deposits, positions in OTC derivatives not settled through Qualifying CCP (QCCP) etc. to compute extent of credit exposure to adhere to the prescribed prudential limits.

  4. Clearing exposure to a QCCP shall be kept outside of the exposure ceiling of 25 per cent of its NOF applicable to a single counter party.

  5. Clearing exposure to QCCP shall include trade exposure and default fund exposure as defined in the guidelines on capital requirements for SPDs’ exposure to central counterparties issued vide Circular IDMD.PCD.11/14.03.05/2013-14 dated March 27, 2014 and as amended from time to time.

  6. Other permissible exposures to QCCPs such as investments in the capital of CCP etc. shall continue to be within the existing exposure ceiling of 25 per cent of NOF to a single borrower/counterparty. However, all exposures of a SPD to a non-QCCP shall be within the exposure ceiling of 25 per cent.

  7. Presently, there are four CCPs viz. Clearing Corporation of India Ltd. (CCIL), National Securities Clearing Corporation Ltd. (NSCCL), Indian Clearing Corporation Ltd. (ICCL), and MCX-SX Clearing Corporation Ltd. (MCX-SXCCL) that are subjected, on an ongoing basis, to rules and regulations that are consistent with CPSS-IOSCO Principles for Financial Market Infrastructures. While the CCIL has been granted the status of a QCCP by the Bank, the other three CCPs have been granted the status of QCCP by SEBI.

(2) SPDs shall calculate exposure for various items as per the Directions contained in Chapter IV of these Directions.

Section – III
Governance Issues

Chapter VII
Corporate Governance

15. Constitution of Committees of the Board

(1) Audit Committee

(i) SPDs shall constitute an Audit Committee, consisting of not less than three members of its Board of Directors.

Explanation I: The Audit Committee constituted by an SPD as required under Section 177 of the Companies Act, 2013 shall be the Audit Committee for the purposes of this paragraph.

Explanation II: The Audit Committee constituted under this paragraph shall have the same powers, functions and duties as laid down in Section 177 of the Companies Act, 2013.

(ii) The Audit Committee must ensure that an Information System Audit of the internal systems and processes is conducted at least once in two years to assess operational risks faced by the SPDs.

(2) Nomination Committee

SPDs shall form a Nomination Committee to ensure 'fit and proper' status of proposed/ existing directors.

Explanation I : The Nomination Committee constituted under this paragraph shall have the same powers, functions and duties as laid down in Section 178 of the Companies Act, 2013.

(3) Risk Management Committee

To manage the integrated risk, SPDs shall form a Risk Management Committee, besides the Asset Liability Management Committee.

16. Fit and Proper Criteria

(1) SPDs shall

  1. ensure that a policy is put in place with the approval of the Board of Directors for ascertaining the fit and proper criteria of the directors at the time of appointment, and on a continuing basis. The policy on the fit and proper criteria shall be on the lines of the Guidelines contained in Annex VIII;

  2. obtain a declaration and undertaking from the directors giving additional information on the directors. The declaration and undertaking shall be on the lines of the format given in Annex IX;

  3. obtain a Deed of Covenant signed by the directors, which shall be in the format as given in Annex X;

  4. furnish to the Bank a quarterly statement on change of directors, and a certificate from the Managing Director of the SPD that fit and proper criteria in selection of the directors has been followed. The statement must reach the Regional Office of the Department of Non-Banking Supervision of the Bank where the company is registered, within 15 days of the close of the respective quarter. The statement submitted by SPD for the quarter ending March 31, shall be certified by the auditors.

Provided that the Bank, if it deems fit and in public interest, reserves the right to examine the fit and proper criteria of directors of any SPD.

17. Disclosure and transparency

(1) SPDs shall put up to the Board of Directors, at regular intervals, as may be prescribed by the Board in this regard, the following:

  1. the progress made in putting in place a progressive risk management system and risk management policy and strategy followed by the SPD;

  2. conformity with corporate governance standards viz., in composition of various committees, their role and functions, periodicity of the meetings and compliance with coverage and review functions, etc.

(2) SPDs shall also disclose the following in their Annual Financial Statements, with effect from March 31, 2015:

  1. registration/ licence/ authorisation, by whatever name called, obtained from other financial sector regulators;

  2. ratings assigned by credit rating agencies and migration of ratings during the year;

  3. penalties, if any, levied by any regulator;

  4. information namely, area, country of operation and joint venture partners with regard to Joint ventures and overseas subsidiaries and

  5. Asset-Liability profile, extent of financing of parent company products, NPAs and movement of NPAs, details of all off-balance sheet exposures, structured products issued by them as also securitization/ assignment transactions and other disclosures, as given in Annex XI.

(3) In respect of penalty levied by the Bank, a Press Release will be issued by the Bank, giving details of the circumstances under which the penalty is imposed on the SPD along with the communication on the imposition of penalty in public domain.

18. Rotation of partners of the Statutory Auditors Audit Firm

SPDs shall rotate the partner/s of the Chartered Accountant firm conducting the audit, every three years so that same partner does not conduct audit of the company continuously for more than a period of three years. However, the partner so rotated will be eligible for conducting the audit of the SPD after an interval of three years, if the SPD, so decides. SPD shall incorporate appropriate terms in the letter of appointment of the firm of auditors and ensure its compliance.

19. Framing of Internal Guidelines

SPDs shall frame their internal guidelines on corporate governance with the approval of the Board of Directors, enhancing the scope of the guidelines without sacrificing the spirit underlying the above guidelines and it shall be published on the company's web-site, if any, for the information of various stakeholders.

Section IV
Miscellaneous Issues

Chapter - VIII
Miscellaneous Instructions

20. Change in shareholding pattern

Any change in the shareholding pattern / capital structure of a SPD shall need prior approval of the Bank. SPDs shall report any other material changes such as business profile, organization, etc. affecting the conditions of licensing as SPD to the Bank immediately.

21. Norms for Ready Forward transactions

SPDs are permitted to participate in ready forward (Repo) market both as lenders and borrowers in corporate debt securities and Government securities subject to directions issued by FMRD and IDMD vide circulars FMRD.DIRD.03/14.03.002/2014-15 dated February 3, 2015, FMRD.DIRD.6/14.03.002/2016-17 dated August 25, 2016 and IDMD.PDRS.05/10.02.01/2003-04 dated March 29, 2004, respectively, as amended from time to time. Further, such NBFCs participating in repo transactions shall comply with guidelines on uniform accounting for repo/ reverse repo transactions issued by IDMD vide circular IDMD/4135/11.08.43/2009-10 dated March 23, 2010 and FMRD.DIRD.10/14.03.002/2015-16 dated May 19, 2016, as amended from time to time.

2. An SPD shall not enter into a repo in Corporate Debt Securities with its own constituent or facilitate a repo between two of its constituents

3. Listed companies can enter into repo transactions subject to the following condition:

Where the listed company is a 'buyer' of securities in the first leg of the repo contract (i.e. lender of funds), the custodian through which the repo transaction is settled should block these securities in the gilt account and ensure that these securities are not further sold or re-repoed during the repo period but are held for delivery under the second leg.

22. Portfolio Management Services by SPDs

(1) SPDs may offer Portfolio Management Services (PMS) to their clients under the SEBI scheme of PMS, subject to the following conditions:

  1. Before undertaking PMS, the SPD must have obtained the Certificate of Registration as Portfolio Manager from the SEBI and also a specific approval from the Bank.

  2. PMS cannot be offered to any RBI regulated entity. However, advisory services can be provided to them with suitable disclaimers.

  3. Where applicable, the clients regulated by any other authority should obtain clearance from the regulatory or any other authority before entering into any PMS arrangement with the SPD.

  4. SPDs are required to comply with the SEBI (Portfolio Managers) Regulations, 1993 and any amendments issued thereto or instructions issued there under.

(2) SPDs shall adhere to the under noted conditions:

  1. A clear mandate from the PMS clients shall be obtained and the same shall be strictly followed. In particular, there should be full understanding on risk disclosures, loss potential and the costs (fees and commissions) involved.

  2. PMS shall be entirely at the customer's risk without guaranteeing, either directly or indirectly, any return.

  3. Funds/securities, each time they are placed with the SPD for portfolio management, shall not be accepted for a period less than one year.

  4. Portfolio funds shall not be deployed for lending in call/notice/term money/Bills rediscounting markets, badla financing or lending to/placement with corporate/non-corporate bodies.

  5. Client-wise accounts/records of funds accepted for management and investments made there against shall be maintained and the clients shall be entitled to get statements of account at frequent intervals.

  6. Investments and funds belonging to PMS clients shall be kept segregated and distinct from each other and from those of the SPD. As far as possible, all client transactions shall be executed in the market and not off-set internally, either with the SPD or any other client. All transactions between the SPD and any PMS client or between two PMS clients shall be strictly at market rates.

23. Guidelines on Interest Rate Derivatives

(1) SPDs shall adhere to the guidelines applicable to interest rate derivatives as laid down in circular DBOD.No.BP.BC.86/21.04.157/2006-07 dated April 20, 2007 and Interest Rate Futures (Reserve Bank) Directions, 2013 dated December 05, 2013, as amended from time to time. SPDs are allowed to deal in Interest Rate Futures (IRFs) for both hedging and trading on own account and not on client’s account, as given in the circular IDMD.PDRD.No.1056/03.64.00/2009-10 dated September 1, 2009 and as amended from time to time.

(2) As per RBI circular IDMD/11.08.15/809/2007-08 dated August 23, 2007, SPDs shall report all their IRS/FRA trades, except with clients, on the CCIL reporting platform within 30 minutes from the deal time. Further, as per circular FMD.MSRG.No.94/02.05.002/2013-14 dated December 4, 2013, all transaction with clients in INR FRA/IRS shall be reported before 12 noon of the following business day.

24. Guidelines on Credit Default Swaps

SPDs shall adhere to the guidelines laid down in circular IDMD.PCD.No.10 /14.03.04/2012-13 dated January 07, 2013 as applicable to Credit Default Swaps. SPDs intending to act as market makers in CDS shall fulfill the following criteria:

  1. Minimum Net Owned Funds of ₹ 500 crore

  2. Minimum CRAR of 15 percent

  3. Have robust risk management systems in place to deal with various risks

The regulatory approval to SPDs to act as market makers in the CDS market would be accorded by the Chief General Manager, Internal Debt Management Department, Central office, RBI, Mumbai on a case by case basis, on application for the same.

25. Guidelines on investments in non-G-Sec

(1) SPDs shall adhere to guidelines on investments in non-G-Sec (including capital gain bonds, bonds eligible for priority sector status, bonds issued by Central or State public sector undertakings with or without Government guarantees and bonds issued by banks and financial companies) generally issued by corporate, banks, FIs and State and Central Government sponsored institutions, Special Purpose Vehicles (SPVs), etc. These guidelines will, however, not be applicable to

(i) units of equity oriented mutual fund schemes where any part of the corpus can be invested in equity,

(ii) venture capital funds,

(iii) CPs,

(iv) CDs, and

(v) investments in equity shares.

The guidelines will apply to investments both in the primary and secondary market.

(2) SPDs are permitted to become members of SEBI approved Stock Exchanges for the purpose of undertaking proprietary transactions in corporate bonds. While doing so, SPDs shall comply with all the regulatory norms laid down by SEBI and all the eligibility criteria/rules of stock exchanges.

(3) In terms of instructions contained in the Master Direction – Operational Guidelines for Primary Dealers issued vide Master Direction IDMD.PDRD.01/03.64.00/2016-17 dated July 01, 2016, SPDs are allowed a sub-limit of 50% of NOF for investment in corporate bonds within the overall permitted average fortnightly limit of 225 per cent of NOF as at the end of March of the preceding financial year for call /notice money market borrowing.

(4) SPDs shall not invest in non-G-Sec of original maturity of less than one year, other than NCDs, CPs and CDs, as provided for in Master Direction on Money Market Instruments: Call/Notice Money Market, Commercial Paper, Certificates of Deposit and Non-Convertible Debentures (original maturity up to one year) vide FMRD.Master Direction No. 2/2016-17 dated July 07, 2016. SPDs are permitted to invest in NCDs with original or initial maturity up to one year issued by the corporates (including NBFCs). However, their investments in such unlisted NCDs shall not exceed 10 per cent of the size of their non-G-Sec portfolio on an on-going basis. While investing in such instruments, SPDs shall be guided by the extant prudential guidelines in force and instructions contained in the circulars IDMD.DOD.10/11.01.01(A)/2009-10 dated June 23, 2010, IDMD.PCD.No.24/ 14.03.03/2010-11 dated December 6, 2010 and IDMD.PCD.08/14.03.03/2011-12 dated August 23, 2011 as amended from time to time.

(5) SPDs shall undertake usual due diligence in respect of investments in non-G-Sec.

(6) SPDs shall not invest in unrated non-G-Sec.

(7) SPDs shall abide by the requirements stipulated by SEBI in respect of corporate debt securities. Accordingly, while making fresh investments in non-Government debt securities, SPDs shall ensure that such investments are made only in listed debt securities, except to the extent indicated in (6) above.

(8) SPD's investment in unlisted non-G-Sec shall not exceed 10% of the size of their non-G-Sec portfolio on an on-going basis. The ceiling of 10% shall be inclusive of investment in Security Receipts issued by Securitization Companies/Reconstruction Companies and also the investment in ABS and MBS. The unlisted non-Government debt securities in which SPDs shall invest up to the limits specified above, should comply with the disclosure requirements as prescribed by the SEBI for listed companies.

(9) As per SEBI guidelines, all trades with the exception of the spot transactions, in a listed debt security, shall be executed only on the trading platform of a stock exchange. All entities regulated by the Reserve Bank shall report their secondary market OTC trades in Corporate Bonds and Securitized Debt Instruments within 15 minutes of the trade on any of the stock exchanges (NSE, BSE and MCX-SX). These trades may be cleared and settled through any of the clearing corporations (NSCCL, ICCL and MCX-SX CCL).

(10) SPDs shall ensure that their investment policies are formulated after taking into account all the relevant issues specified in the guidelines on investment in non-G-Sec. They should put in place proper risk management systems for capturing and analysing the risk in respect of non-G-Sec before making investments and taking remedial measures in time. SPDs shall also put in place appropriate systems to ensure that investment in privately placed instruments is made in accordance with the systems and procedures prescribed under respective SPD’s investment policy.

(11) Boards of the SPDs shall review the following aspects of investment in non-G-Sec at least at quarterly intervals:

  1. Total business (investment and divestment) during the reporting period.

  2. Compliance with the prudential limits as well as prudential guidelines prescribed by the Board for investment in non-G-Sec.

  3. Rating migration of the issuers/ issues held in the SPD’s books.

(12) In order to help creation of a central database on private placement of debt, a copy of all offer documents shall be filed with the Credit Information Bureau (India) Ltd. (CIBIL) by the SPDs. Further, any default relating to interest/ installment in respect of any privately placed debt shall also be reported to CIBIL by the investing SPDs along with a copy of the offer document.

26. Trading of G-Sec on Stock Exchanges

(1) With a view to encouraging wider participation of all classes of investors, including retail, in G-Sec, trading in G-Sec through a nationwide, anonymous, order driven screen based trading system on stock exchanges, in the same manner in which trading takes place in equities, has been permitted. Accordingly, trading of dated G-Sec in demat form is allowed on automated order driven system of the National Stock Exchange (NSE) of India, the Bombay Stock Exchange Ltd., Mumbai (BSE), the Over the Counter Exchange of India (OTCEI) and the MCX Stock Exchange. This trading facility is in addition to the reporting/trading facility in the NDS. Being a parallel system, the trades concluded on the exchanges will be cleared by their respective clearing corporations/clearing houses.

(2) SPDs shall play an active role in providing liquidity to the G-Sec market and promote retailing. They shall, therefore, make full use of the facility to distribute G-Sec to all categories of investors through the process of placing and picking-up orders on the exchanges. SPDs may open demat accounts with a Depository Participant (DP) of NSDL/CDSL in addition to their accounts with RBI. Value free transfer of securities between SGL/CSGL and own demat account is enabled by PDO-Mumbai subject to guidelines issued by Department of Government and Bank Accounts (DGBA), RBI.

(3) For trading of G-Sec on Stock Exchanges the following shall be adhered to by SPDs:

  1. SPDs shall take specific approval from their Board to enable them to trade in the Stock Exchanges.

  2. SPDs shall undertake transactions only on the basis of giving and taking delivery of securities.

  3. Brokers/trading members shall not be involved in the settlement process. All trades shall be settled either directly with clearing corporation/clearing house (in case they are clearing members) or else through clearing member custodians.

  4. The trades done through any single broker shall also be subject to the current regulations on transactions done through brokers.

  5. A standardized settlement on T+1 basis of all outright secondary market transactions in G-Sec has been adopted to provide the participants more processing time for transactions and to help in better funds as well as risk management.

  6. In the case of repo transactions in G-Sec, however, market participants will have the choice of settling the first leg on either T+0 basis or T+1 basis, as per their requirements.

  7. Any settlement failure on account of non-delivery of securities/ non-availability of clear funds will be treated as SGL bouncing and the current penalties in respect of SGL transactions will be applicable. Stock Exchanges will report such failures to the respective PDOs.

  8. SPDs who are trading members of the Stock Exchanges may have to put up margins on behalf of their non-institutional client trades. Such margins are required to be collected from the respective clients. SPDs shall not pay up margins on behalf of their client trades and incur overnight credit exposure to their clients. In so far as the intraday exposures on clients for margins are concerned, the SPDs shall be conscious of the underlying risks in such exposures.

  9. SPDs who intend to offer clearing /custodial services shall take specific approval from SEBI in this regard. Similarly, SPDs who intend to take trading membership of the Stock Exchanges shall satisfy the criteria laid down by SEBI and the Stock Exchanges.

27. Participation of SPDs in Currency Futures Market

SPDs are permitted to deal in currency futures contracts traded on recognized exchanges subject to the following conditions:

(1) Eligibility:

i. Exposure to currency futures shall be treated as a non- core activity for SPDs and only SPDs having a minimum Net Owned Fund of ₹ 250 crore or any amount as prescribed for undertaking diversified activity shall be allowed to participate in currency futures.

ii. As prescribed in the Directions on capital requirements, the capital charge for market risk for the non-core activities (including currency futures) which are expected to consume capital shall not be more than 20 per cent of the NOF as per last audited balance sheet.

(2) Membership:

i. SPDs are permitted to participate in the currency futures market either as clients or direct trading / clearing members of the currency derivatives segment of the Stock Exchanges recognized by SEBI.

ii. SPDs shall trade only on their own account and they are not permitted to take positions on behalf of clients.

(3) Position limits:

i. SPDs are permitted to take long and short positions in the currency futures market with or without having an underlying exposure subject to the position limits specified by the exchanges. However, the aggregate gross open positions across all contracts in all the stock exchanges in the respective currency pairs shall not exceed the limits as mentioned below:

Currency Pairs Position Limits
USD-INR Gross open position across all contracts shall not exceed 15% of the total open interest or USD 50 million, whichever is higher.
EUR-INR Gross open position across all contracts shall not exceed 15% of the total open interest or EUR 25 million, whichever is higher.
GBP-INR Gross open position across all contracts shall not exceed 15% of the total open interest or GBP 25 million, whichever is higher.
JPY-INR Gross open position across all contracts shall not exceed 15% of the total open interest or JPY 1000 million, whichever is higher.

(4) Risk Management:

i. SPDs shall lay down detailed guidelines on risk management including exposure, risk limits and reporting requirements with Board's approval for conduct of this activity and management of risks.

ii. SPDs shall put in place appropriate system to ensure strict adherence to the above prescribed position limits.

iii. SPDs shall maintain adequate infrastructure in terms of systems and manpower for participation in currency futures.

(5) General:

i. For capital adequacy purpose, SPDs shall adhere to the guidelines given in Annex XII to this circular and other instructions prescribed in the Directions for providing capital charge for various risks arising from outstanding contracts.

ii. In case of failure to meet the obligations of Primary Dealership business in the Government securities market or any other violations leading to supervisory concern, the Bank reserves the right to impose restrictions or withdraw permission to deal in currency futures contracts.

28. Business through brokers

(1) Business through brokers and limits for approved brokers

SPDs may undertake securities transactions among themselves or with clients through the members of the BSE, NSE and OTCEI. However, if the SPDs undertake OTC interest rate derivative transactions through brokers, they shall ensure that these brokers are accredited by FIMMDA. SPDs shall fix aggregate contract limits for each of the approved brokers. A limit of 5% of total broker transactions (both purchase and sales) entered into by a SPD during a year shall be treated as the aggregate upper limit for each of the approved brokers. However, if for any reason it becomes necessary to exceed the aggregate limit for any broker, the specific reasons thereof shall be recorded and the Board shall be informed of this, post facto.

(2) With the approval of their top management, SPDs shall prepare a panel of approved brokers, which shall be reviewed annually or more often if so warranted. Clear-cut criteria shall be laid down for empanelment of brokers, including verification of their creditworthiness, market reputation, etc. A record of broker-wise details of deals put through and brokerage paid, shall be maintained.

(3) Brokerage payable to the broker, if any (if the deal was put through with the help of a broker), shall be clearly indicated on the notes/memorandum put up seeking approval for putting through the transaction, and a separate account of brokerage paid, broker-wise, shall be maintained.

(4) The role of the broker shall be restricted to that of bringing the two parties to the deal together. Settlement of deals between SPDs and counter-parties shall be directly between the counter-parties and the broker will have no role in the settlement process.

(5) While negotiating the deal, the broker is not obliged to disclose the identity of the counter-party to the deal. On conclusion of the deal, he should disclose the counter-party and his contract note should clearly indicate the name of the counter-party.

29. Guidelines on declaration of dividend

SPDs shall follow the following guidelines while declaring dividend distribution:

  1. The SPD shall have complied with the regulations on transfer of profits to statutory reserves and the regulatory guidelines relating to provisioning and valuation of securities, etc.

  2. SPDs having CRAR below the regulatory minimum of 15 per cent in any of the previous four quarters shall not declare any dividend. For SPDs having CRAR at or above the regulatory minimum of 15 per cent during all the four quarters of the previous year, but lower than 20 per cent in any of the four quarters, the dividend payout ratio (DPR) shall not exceed 33.3 per cent. For SPDs having CRAR at 20 per cent or above during all the four quarters of the previous year, the DPR shall not exceed 50 per cent. DPR shall be calculated as a percentage of dividend payable in a year (excluding dividend tax) to net profit during the year.

  3. The proposed dividend shall be payable out of the current year’s profits. In case the profit for the relevant period includes any extraordinary income, the payout ratio shall be computed after excluding such extraordinary items for reckoning compliance with the prudential payout ratio ceiling.

  4. The financial statements pertaining to the financial year for which the SPD is declaring dividend shall be free of any qualifications by the statutory auditors, which have an adverse bearing on the profit during that year. In case of any qualification to that effect, the net profit shall be suitably adjusted downward while computing the DPR.

  5. In case there are special reasons or difficulties for any SPD in strictly adhering to the guidelines, it shall approach RBI in advance for an appropriate ad hoc dispensation in this regard.

  6. All the SPDs declaring dividend shall report details of dividend declared during the accounting year as per the prescribed pro forma (Annex XIII) along with the Board resolution passed for declaration of dividend. The report shall be furnished within a fortnight of payment of dividend.

30. Applicability of Know Your Customer (KYC) Direction, 2016

All SPDs having customer interface shall be required to follow the Know Your Customer (KYC) Direction, 2016, issued by the Department of Banking Regulation and as amended from time to time.

31. Managing Risks and Code of Conduct in Outsourcing of Financial Services by SPDs.

SPDs shall conduct a self-assessment of their existing outsourcing arrangements and bring these in line with the directions as provided at Annex XIV.

Chapter IX
Reporting Requirements

32. The reporting requirements as prescribed by Internal Debt Management Department and Department on Non-Banking Supervision shall be adhered to by the SPDs.

33. All operational guidelines issued by Internal Debt Management Department shall also be adhered to by the SPDs.

Chapter – X
Interpretations

34. For the purpose of giving effect to the provisions of these Directions, the Bank may, if it considers necessary, issue necessary clarifications in respect of any matter covered herein and the interpretation of any provision of these Directions given by the Bank shall be final and binding on all the parties concerned. Any violation/circumvention of the above guidelines would be viewed seriously and such violation would attract penal action including the withdrawal of liquidity support, denial of access to the money market, withdrawal of authorization for carrying on the business as a SPD, and/or imposition of monetary penalty or liquidated damages, as the Bank may deem fit. Further, these provisions shall be in addition to, and not in derogation of the provisions of any other laws, rules, regulations or directions, for the time being in force.

Chapter - XI
Repeal Provisions

35. With the issue of these directions, the instructions / guidelines contained in the following circulars issued by the Bank stand repealed (list as provided below). All approvals / acknowledgements given under these circulars shall be deemed as given under these directions. Notwithstanding such repeal, any action taken/purported to have been taken or initiated under the instructions/guidelines having repealed shall continue to be guided by the provisions of said instructions/guidelines.

Sr.No. Circular no Date Subject
1 IDMC.PDRS.1532/03.64.00/1999-00 November 2, 1999 Primary Dealers – Leverage
2 IDMC.PDRS.2049A/03.64.00/1999-2000 December 31,1999 Guidelines on Securities transactions to be followed by Primary Dealers
3 IDMC.PDRS.5122/03.64.00/1999-00 June 14, 2000 Guidelines on Securities Transactions by Primary dealers
4 IDMC.PDRS.4135/03.64.00/2000-01 April 19, 2001 Scheme for Bidding, Underwriting and Liquidity support to Primary Dealers
5 IDMC.PDRS.87/03.64.00/2001-02 July 5, 2001 Liquidity support to Primary Dealers
6 IDMC.PDRS.1382/03.64.00/2000-01 September 18, 2001 Dematerialised holding of bonds and debentures
7 IDMC.PDRS.3369/03.64.00/2001-02 January 17, 2002 Guidelines on Counter party limits and Inter-corporate deposits
8 IDMC.PDRS.4881/03.64.00/2001-02 May 8, 2002 Guidelines to Primary Dealers
9 IDMC.PDRS.5018/03.64.00/2001-02 May 17, 2002 Scheme for Bidding, Underwriting and liquidity support to Primary dealers
10 IDMC.PDRS.5039/03.64.00/2001-02 May 20, 2002 Transactions in Government securities
11 IDMC.PDRS.5323/03.64.00/2001-02 June 10, 2002 Transactions in Government securities
12 IDMC.PDRS.418/03.64.00/2002-03 July 26, 2002 Publication of Financial results
13 IDMC.PDRS.1724/03.64.00/2002-03 October 23, 2002 Underwriting of Government dated securities by Primary Dealers
14 IDMC.PDRS.2269/03.64.00/2002-03 November 28, 2002 Publication of Financial results
15 IDMC.PDRS.2896/03.64.00/2002-03 January 14, 2003 Trading in Government securities on Stock Exchanges
16 IDMC.PDRS.3432/03.64.00/2002-03 February 21, 2003 Ready Forward Contracts
17 IDMC.PDRS.3820/03.64.00/2002-03 March 24, 2003 Availment of FCNR(B) loans by Primary Dealers
18 IDMC.PDRS.1/03.64.00/2002-03 April 10, 2003 Portfolio Management Services by Primary Dealers – Guidelines
19 IDMC.PDRS.4802/03.64.00/2002-03 June 3, 2003 Guidelines on Exchange Traded Interest Rate Derivatives
20 IDMC.PDRS.122/03.64.00/2002-03 September 22, 2003 Rationalisation of returns submitted by Primary Dealers
21 IDMD.1/(PDRS)03.64.00/2003-04 January 07, 2004 Capital Adequacy Standards and Risk Management Guidelines for Primary Dealers
22 IDMD.PDRS.No.3/03.64.00/2003-04 March 08, 2004 Prudential guidelines on investment in non-Government securities
23 IDMD.PDRS.05/10.02.01/2003-04 March 29, 2004 Transactions in Government Securities
24 IDMD.PDRS.06/03.64.00/2003-04 June 03, 2004 Declaration of dividend by Primary Dealers
25 IDMD.PDRS.01/10.02.01/2004-05 July 23, 2004 Transactions in Government securities
26 IDMD.PDRS.02/03.64.00/2004-05 July 23, 2004 Success Ratio in Treasury Bill auctions for Primary Dealers
27 IDMD.PDRS.No.03/10.02.16/2004-05 August 24, 2004 Dematerialization of Primary Dealer’s investment in equity
28 IDMD.PDRS.No.06/03.64.00/2004-05 October 15, 2004 Capital Adequacy Standards – Guidelines on Issue of Subordinated Debt Instruments – Tier- II and Tier-III Capital
29 IDMD.PDRS.4783/10.02.01/2004-05 May 11, 2005 Government Securities Transactions – T+1 settlement
30 IDMD.PDRS.4779/10.02.01/2004-05 May 11, 2005 Ready Forward Contracts
31 IDMD.PDRS/4907/03.64.00/2004-05 May 19, 2005 Conduct of Dated Government Securities Auction under Primary Market Operations (PMO) module of PDO-NDS – Payment of Underwriting Commission
32 IDMD.PDRS.337/10.02.01/2005-06 July 20, 2005 Transactions in Government Securities
33 IDMD.No.766/10.26.65A/2005-06 August 22, 2005 NDS-OM – Counterparty Confirmation
34 DBOD.FSD.BC.No.64/24.92.01/2005-06 February 27, 2006 Guidelines for banks’ undertaking PD business
35 IDMD.PDRS/26/03.64.00/2006-07 July 4, 2006 Diversification of activities by standalone Primary Dealers-Operational Guidelines
36 IDMD.PDRS.No.148/03.64.00/2006-07 July 10, 2006 Risk reporting of derivatives business
37 FMD.MOAG No.13/01.01.01/2006-07 March 30, 2007 Liquidity Adjustment Facility – Acceptance of State Development Loans under Repos
38 IDMD.530/03.64.00/2007-08 July 31, 2007 FIMMDA Reporting Platform for Corporate Bond Transactions
39 DBOD.FSD.BC.No.25/24.92.001/2006-07 August 9, 2006 Guidelines for banks undertaking PD business
40 IDMD.PDRS.1431/03.64.00/2006-07 October 5, 2006 Operational guidelines for banks undertaking/proposing to undertake PD business
41 IDMD/11.08.15/809/2007-08 August 23, 2007 Reporting platform for OTC Interest Rate Derivatives
42 IDMD.PDRS.No.2382/03.64.00/2007-08 November 14, 2007 Revised Scheme of Underwriting Commitment and Liquidity Support
43 IDMD.PDRD.1393/03.64.00/2008-09 September 19, 2008 Settlement of Primary Auctions – Shortage of Funds
44 IDMD.PDRD.No.4878/03.64.00/2008-09 April 1, 2009 Issue of Tier-II and Tier-III Capital
45 IDMD.PDRD.1050/03.64.00/2009-10 August 31, 2009 Investment Portfolio of Primary Dealers-Relaxation in the existing norms
46 IDMD.PDRD.1097/03.64.00/2009-10 September 2, 2009 Enhancement of Minimum Net Owned Funds
47 IDMD.PDRD.1096/03.64.00/2009-10 September 2, 2009 Increase in Call/Notice Money Borrowing Limit
48 IDMD.PDRD.2424/03.64.00/2009-10 December 1, 2009 Waiver of trade confirmation in Government Securities transactions in OTC market
49 IDMD.PDRD.3843/03.64.00/2009-10 March 9, 2010 Extension of HTM Category for PDs
50 IDMD.PDRD.No./03.64.00/2009-10 April 9, 2010 Mail box clarifications - on conversion factor for off-balance sheet items
51 IDMD.PDRD.4537/03.64.00/2009-10 April 12, 2010 Quantum of Government securities to be held in the HTM category by PDs
52 IDMD.PDRD.5533/03.64.00/2009-10 June 15, 2010 Primary Dealers – Imposition of Penalties – Disclosure
53 IDMD.PDRD.5573/03.64.00/2009-10 June 17, 2010 Cash Management Bills – Bidding Commitment and Success Ratio
54 IDMD.PDRD.No.19/03.64.00/2010-11 July 27, 2010 Applicability of Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 to Primary Dealers
55 IDMD.PCD.No.20/14.03.05/2010-11 October 1, 2010 Raising resources through Inter Corporate Deposits (ICDs)
56 IDMD.PCD.No.1652/14.03.05/2010-11 November 11, 2010 Exposure Norms: Applicability of Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 to standalone Primary Dealers
57 IDMD.PCD.No.26/14.03.05/2010-11 February 10, 2011 Investment in non-Government Securities- Non-Convertible Debentures (NCDs) of maturity up to one year by standalone Primary Dealers (PDs).
58 IDMD.PDRD.No.3961/03.64.00/2010-11 March 18, 2011 FIMMDA accredited brokers for transactions in OTC Interest Rate Derivatives Market.
59 IDMD.PCD.No./03.64.00/2009-10 April 5, 2011 Mail box clarifications- Tier-III bonds issued by standalone PDs
60 IDMD.PCD.9/14.03.05/2011-12 August 30, 2011 Authorisation Guidelines for Primary Dealers (PDs)
61 IDMD.PCD.No.5053/14.03.04/2010-11 May 23, 2011 Guidelines on Credit Default Swaps (CDS) for Corporate Bonds
62 IDMD.PCD.06/14.03.07/2011-12 July 06, 2011 Transactions in Government Securities-Extension of DVP III facility to Gilt Account holders
63 IDMD.PDRD.No.3464/06.64.00/2011-12 March 07, 2012 Bidding in Primary Auctions-Clarification
64 IDMD.PCD.08/14.03.03/2011-12 August 23, 2011 Issuance of Non-Convertible Debentures (NCDs) - Minimum Rating of NCDs
65 IDMD.PCD.9/14.03.05/2011-12 August 30, 2011 Authorisation Guidelines for Primary Dealers (PDs)
66 IDMD.PCD.No.2301/14.03.04/2011‐12 November 30, 2011 Guidelines on Capital Adequacy and Exposure Norms for Credit Default Swaps (CDS)
67 IDMD.PCD.14/14.03.07/2011-12 December 28, 2011 Secondary market transactions in Government Securities - Short Selling
68 IDMD.PCD.17/14.03.01/2011-12 December 30, 2011 Exchange-traded Interest Rate Futures
69 IDMD.PCD.15/ED (RG)-2011 December 30, 2011 Interest Rate Futures (Reserve Bank) (Amendment) Directions, 2011
70 IDMD.PCD.19/14.03.07/2011-12 February 06, 2012 Transactions in Government Securities
71 IDMD.PCD.21/14.03.07/2011-12 June 21, 2012 Secondary market transactions in Government Securities-Short Selling
72 IDMD.PCD.No.4896/14.03.05/2011-12 June 27, 2012 Phasing out Tier-III capital for standalone PDs
73 IDMD.PDRD.188/03.64.00/2012-13 July 16, 2012 Sale of securities allotted in Primary issues on the same day
74 IDMD.PCD.No.718/14.03.05/2012-13 September 3, 2012 Applicability of credit exposure norms for bonds guaranteed by the Government of India
75 IDMD.PCD.No.2223/14.03.05/2012-13 January 30, 2013 Measures to enhance the role of standalone Primary Dealers in Corporate Bond Market
76 IDMD.PCD.No.2310/14.03.05/2012-13 February 06, 2013 Permission to standalone PDs for membership in SEBI approved Stock Exchanges for trading in corporate bonds
77 IDMD.PDRD.No.3089/03.64.027/2012-13 May 08, 2013 Submission of Undertaking: Renewal of Authorisation
78 IDMD.PCD.13/14.03.07/2012-13 June 26, 2013 Guidelines on Securities Transactions to be followed by Primary Dealers
79 IDMD.PDRD.No.346/10.02.23/2013-14 July 31, 2013 Revised PD returns for Primary Dealers
80 IDMD.PDRD.No.828/03.64.00/2013-14 September 10, 2013 Increase in HTTM limits for Standalone PDs
81 IDMD.PCD.12/14.03.05/2013-14 March 27, 2014 Exposure norms for standalone PDs
82 IDMD.PCD.11/14.03.05/2013-14 March 27, 2014 Capital requirements for standalone Primary Dealers’ exposure to interest rate derivative contracts, repo/reverse repo transactions and central counterparties
83 IDMD.PDRD.No.3404/03.64.000/2013-14 June 5, 2014 Annual Turnover Target on behalf of Mid-segment and Retail investors for Primary Dealers (PDs)
84 IDMD.PDRD.No.7/03.64.00/2014-15 December 15, 2014 Decrease in Held to Maturity (HTM) limits for Standalone PDs
85 IDMD Mailbox January 19, 2012 Maintenance of Distinct PD Book
86 IDMD Mailbox February 06, 2012 Secondary Market Transactions in Government Securities-Short Selling
87 IDMD Mailbox February 28, 2012 Investment in Cash Management Bills by Foreign Institutional Investors
88 DNBR.(PD).CC.No.021/03.10.001/2014-15 February 20, 2015 Raising Money through Private Placement of Non-Convertible Debentures (NCDs) by NBFCs
89 DNBR.CO.PD.No.068/03.10.01/2015-16 August 06, 2015 Exposure Norms limit for the Standalone Primary Dealers (SPDs)
90 FMRD.FMD.No.02.03.183/7/2015-16 March 17, 2016 Participation of Standalone Primary Dealers in Currency Futures Market
91 DNBR.CO.PD.No.080/03.10.01/2015-16 April 28, 2016 Risk Weight in respect of investments in Corporate Bonds by Standalone Primary Dealers (SPDs)

C. D. Srinivasan
(Chief General Manager)


Annex I

Guidelines on Subordinated Debt (SD) Bonds (Tier-II Capital)

  1. The amount to be raised may be decided by the Board of Directors of the SPD.

  2. The SPDs may fix coupon rates as decided by their Board.

  3. The instruments should be 'plain vanilla' with no special features like options, etc.

  4. The debt securities should carry a credit rating from a Credit Rating Agency registered with the Securities and Exchange Board of India (SEBI).

  5. The issue of SD instruments should comply with the guidelines issued by SEBI vide their circular SEBI/MRD/SE/AT/36/2003/30/09 dated September 30, 2003 (ref: www.sebi.gov.in/circulars), as amended from time to time, wherever applicable.

  6. In case of unlisted issues of SD, the disclosure requirements as prescribed by the SEBI for listed companies in terms of the above guidelines should be complied with.

  7. Necessary permission from the Foreign Exchange Department of the Bank should be obtained for issuing the instruments to Non-Resident Indians/Foreign Institutional Investors (FIIs). SPDs should comply with the terms and conditions, if any, prescribed by SEBI / other regulatory authorities with regard to issue of the instruments.

  8. Investments by SPDs in SD of other PDs/banks will be assigned 100% risk weight for capital adequacy purpose. Further, the SPD’s aggregate investments in Tier-II bonds issued by other PDs, banks and financial institutions should be restricted to 10 percent of the investing SPD's total capital funds. The capital funds for this purpose will be the same as those reckoned for the purpose of capital adequacy.

  9. The SPDs should submit a report to the Chief General Manager, Department of Non-Banking Supervision (DNBS), RBI, giving details of the capital raised, such as, amount raised, maturity of the instrument, rate of interest together with a copy of the offer document, soon after the issue is completed.


Annex V

Guidelines for Entry of NBFCs into Insurance

1. NBFCs registered with the Bank are permitted to undertake insurance agency business on fee basis and without risk participation, without the approval of the Bank subject to the following conditions:

(i) The NBFCs shall obtain requisite permission from IRDA and comply with the IRDA regulations for acting as ‘composite corporate agent’ with insurance companies.

(ii) The NBFCs shall not adopt any restrictive practice of forcing its customers to go in only for a particular insurance company in respect of assets financed by the NBFC. The customers shall be allowed to exercise their own choice.

(iii) As the participation by a NBFC's customer in insurance products is purely on a voluntary basis, it shall be stated in all publicity material distributed by the NBFC in a prominent way. There shall be no ₹linkage' either direct or indirect between the provision of financial services offered by the NBFC to its customers and use of the insurance products.

(iv) The premium shall be paid by the insured directly to the insurance company without routing through the NBFC.

(v) The risks, if any, involved in insurance agency shall not get transferred to the business of the NBFC.

2. No NBFC would be allowed to conduct such business departmentally. A subsidiary or company in the same group of an NBFC or of another NBFC engaged in the business of a non-banking financial institution or banking business will not normally be allowed to join the insurance company on risk participation basis.

3. All NBFCs registered with RBI which satisfy the eligibility criteria given below will be permitted to set up a joint venture company for undertaking insurance business with risk participation subject to safeguards. The maximum equity contribution such an NBFC can hold in the joint venture company will normally be 50 per cent of the paid-up capital of the insurance company. On a selective basis, the Bank may permit a higher equity contribution by a promoter NBFC initially, pending divestment of equity within the prescribed period [see Note (1) below].

In case more than one company (irrespective of doing financial activity or not) in the same group of the NBFC wishes to take a stake in the insurance company, the contribution by all companies in the same group shall be counted for the limit of 50 percent prescribed for the NBFC in an insurance JV.

In cases where IRDA issues calls for capital infusion into the Insurance JV company, the Bank may, on a case to case basis, consider need based relaxation of the 50% group limit as specified. The relaxation, if permitted, will be subject to compliance by the NBFC with all regulatory conditions as prescribed for in these Directions and such other conditions as may be necessary in the specific case. Application for such relaxation along with supporting documents is to be submitted by the NBFC to the Regional Office of the Bank under whose jurisdiction its registered office is situated.

The eligibility criteria for joint venture participant will be as stated below:

(i) The owned fund of the NBFC shall not be less than ₹ 500 crore,

(ii) The CRAR of the NBFC engaged in loan and investment activities holding public deposits shall be not less than 15% and for other NBFCs at 12% irrespective of their holding public deposits or not.

(iii) The level of net non-performing assets shall be not more than 5% of the total outstanding leased/hire purchase assets and advances taken together,

(iv) The NBFC shall have net profit for the last three continuous years,

(v) The track record of the performance of the subsidiaries, if any, of the concerned NBFC shall be satisfactory,

(vi) Regulatory compliance and servicing public deposits, if held.

The provisions of RBI Act shall be applicable for such investments while computing the net owned funds of the NBFC.

4. In case where a foreign partner contributes 26 per cent of the equity with the approval of insurance Regulatory and Development Authority/Foreign Investment Promotion Board, more than one NBFC may be allowed to participate in the equity of the insurance joint venture. As such participants will also assume insurance risk, only those NBFCs which satisfy the criteria given in paragraph 2 above, would be eligible.

5. NBFCs registered with RBI which are not eligible as joint venture participant, as above can make investments up to 10 per cent of the owned fund of the NBFC or ₹ 50 crore, whichever is lower, in the insurance company. Such participation shall be treated as an investment and should be without any contingent liability for the NBFC. The eligibility criteria for these NBFCs will be as under:

(i) The CRAR of the NBFC (applicable only to those holding public deposits) shall not be less than 12 per cent if engaged in equipment leasing/hire purchase finance activities and 15 per cent if it is a loan or investment company ;

(ii) The level of net NPA shall be not more than 5 per cent of total outstanding leased/hire purchase assets and advances;

(iii) The NBFC shall have net profit for the last three continuous years.

Notes :

(1) Holding of equity by a promoter NBFC in an insurance company or participation in any form in insurance business will be subject to compliance with any rules and regulations laid down by the IRDA/Central Government. This will include compliance with Section 6AA of the Insurance Act as amended by the IRDA Act, 1999, for divestment of equity in excess of 26 per cent of the paid up capital within a prescribed period of time.

(2) The eligibility criteria shall be reckoned with reference to the latest available audited balance sheet for the previous year.


Annex VI

Guidelines on Distribution of Mutual Fund Products by NBFCs

1. NBFCs, which desire to distribute mutual funds, shall be required to adhere to the following stipulations:

(i) Operational Aspects

(a) The NBFC is required to comply with the SEBI guidelines / regulations, including its code of conduct, for distribution of mutual fund products;

(b) the NBFC shall not adopt any restrictive practice of forcing its customers to go in for a particular mutual fund product sponsored by it. Its customers must be allowed to exercise their own choice;

(c) the participation by the NBFCs customers in mutual fund products is purely on a voluntary basis and this information shall be stated in all publicity material distributed by it in a prominent way. There shall be no 'linkage' either direct or indirect between the provisions of financial services offered by the NBFC to its customers and distribution of the mutual fund products;

(d) the NBFC shall only act as an agent of its customers, forwarding their applications for purchase / sale of MF units together with the payment instruments, to the Mutual Fund / the Registrars / the transfer agents. The purchase of units should be at the customers' risk and without the NBFC guaranteeing any assured return;

(e) the NBFC shall neither acquire units of mutual funds from the secondary market for sale to its customers, nor shall it buy back units of mutual funds from its customers;

(f) in case the NBFC is holding custody of MF units on behalf of its customers, it shall ensure that its own investments and the investments belonging to its customers are kept distinct from each other.

(ii) Other Aspects

(a) The NBFC shall have put in place a comprehensive Board approved policy regarding undertaking mutual funds distribution. The services relating to the same should be offered to its customers in accordance with this policy. The policy will also encompass issues of customer appropriateness and suitability as well as grievance redressal mechanism. The code of conduct prescribed by SEBI, as amended from time to time and as applicable, must be complied with by NBFCs undertaking these activities;

(b) the NBFC shall be adhering to Know Your Customer (KYC) Guidelines and provisions of prevention of Money Laundering Act.

2. NBFCs shall comply with other terms and conditions as the Bank may specify in this regard from time to time.


Annex VIII

‘Fit and Proper’ Criteria for directors of NBFCs

Reserve Bank had issued a Directive in June 2004 to banks on undertaking due diligence on the persons before appointing them on the Boards of banks based on the ‘Report of the Consultative Group of directors of Banks / Financial Institutions’. Specific ‘fit and proper’ criteria to be fulfilled by the directors were also advised.

2. The importance of due diligence of directors to ascertain suitability for the post by way of qualifications, technical expertise, track record, integrity, etc. needs no emphasis for any financial institution. It is proposed to follow the same guidelines mutatis mutandis in case of NBFCs also. While the Bank does carry out due diligence on directors before issuing Certificate of Registration to an NBFC, it is necessary that NBFCs put in place an internal supervisory process on a continuing basis. Further, in order to streamline and bring in uniformity in the process of due diligence, while appointing directors, NBFCs are advised to ensure that the procedures mentioned below are followed and minimum criteria fulfilled by the persons before they are appointed on the Boards:

(a) NBFCs shall undertake a process of due diligence to determine the suitability of the person for appointment / continuing to hold appointment as a director on the Board, based upon qualification, expertise, track record, integrity and other ‘fit and proper’ criteria. NBFCs shall obtain necessary information and declaration from the proposed / existing directors for the purpose in the format given at Annex IX.

(b) The process of due diligence shall be undertaken by the NBFCs at the time of appointment / renewal of appointment.

(c) The boards of the NBFCs shall constitute Nomination Committees to scrutinize the declarations.

(d) Based on the information provided in the signed declaration, Nomination Committees shall decide on the acceptance or otherwise of the directors, where considered necessary.

(e) NBFCs shall obtain annually as on 31st March a simple declaration from the directors that the information already provided has not undergone change and where there is any change, requisite details are furnished by them forthwith.

(f) The Board of the NBFC must ensure in public interest that the nominated/ elected directors execute the deeds of covenants in the format given in Annex X.


Annex XIV

Directions on Managing Risks and Code of Conduct in Outsourcing of Financial Services by SPDs

1. Introduction

1.1 'Outsourcing' is defined as the NBFC’s use of a third party (either an affiliated entity within a corporate group or an entity that is external to the corporate group) to perform activities on a continuing basis that would normally be undertaken by the NBFC itself, now or in the future.

‘Continuing basis' includes agreements for a limited period.

1.2 NBFCs have been outsourcing various activities and are hence exposed to various risks as detailed in para 5.3. Further, the outsourced activities are to be brought within regulatory purview to a) protect the interest of the customers of NBFCs and b) to ensure that the NBFC concerned and the Reserve Bank of India have access to all relevant books, records and information available with service provider. Typically outsourced financial services include applications processing (loan origination, credit card), document processing, marketing and research, supervision of loans, data processing and back office related activities, besides others.

1.3 Some key risks in outsourcing are Strategic Risk, Reputation Risk, Compliance Risk, Operational Risk, Legal Risk, Exit Strategy Risk, Counterparty Risk, Country Risk, Contractual Risk, Access Risk, Concentration and Systemic Risk. The failure of a service provider in providing a specified service, a breach in security/ confidentiality, or non-compliance with legal and regulatory requirements by the service provider can lead to financial losses or loss of reputation for the NBFC and could also lead to systemic risks.

1.4 It is therefore imperative for the NBFC outsourcing its activities to ensure sound and responsive risk management practices for effective oversight, due diligence and management of risks arising from such outsourced activities. The directions are applicable to material outsourcing arrangements as explained in para 3 which may be entered into by an NBFC with a service provider located in India or elsewhere. The service provider may either be a member of the group/ conglomerate to which the NBFC belongs, or an unrelated party.

1.5 The underlying principles behind these directions are that the regulated entity shall ensure that outsourcing arrangements neither diminish its ability to fulfil its obligations to customers and RBI nor impede effective supervision by RBI. NBFCs, therefore, have to take steps to ensure that the service provider employs the same high standard of care in performing the services as is expected to be employed by the NBFCs, if the activities were conducted within the NBFCs and not outsourced. Accordingly, NBFCs shall not engage in outsourcing that would result in their internal control, business conduct or reputation being compromised or weakened.

1.6 (i) These directions are concerned with managing risks in outsourcing of financial services and are not applicable to technology-related issues and activities not related to financial services, such as usage of courier, catering of staff, housekeeping and janitorial services, security of the premises, movement and archiving of records, etc. NBFCs which desire to outsource financial services would not require prior approval from RBI. However, such arrangements would be subject to on-site/ off- site monitoring and inspection/ scrutiny by RBI.

(ii) In regard to outsourced services relating to credit cards, RBI's detailed instructions contained in its circular on credit card activities vide DBOD.FSD.BC.49/24.01.011/2005-06 dated November 21, 2005 would be applicable.

2. Activities that shall not be outsourced

NBFCs which choose to outsource financial services shall, however, not outsource core management functions including Internal Audit, Strategic and Compliance functions and decision-making functions such as determining compliance with KYC norms for opening deposit accounts, according sanction for loans (including retail loans) and management of investment portfolio. However, for NBFCs in a group/conglomerate, these functions may be outsourced within the group subject to compliance with instructions in Para 6.Further, while internal audit function itself is a management process, the internal auditors can be on contract.

3. Material Outsourcing

For the purpose of these directions, material outsourcing arrangements are those which, if disrupted, have the potential to significantly impact the business operations, reputation, profitability or customer service. Materiality of outsourcing would be based on:

  • the level of importance to the NBFC of the activity being outsourced as well as the significance of the risk posed by the same;

  • the potential impact of the outsourcing on the NBFC on various parameters such as earnings, solvency, liquidity, funding capital and risk profile;

  • the likely impact on the NBFC’s reputation and brand value, and ability to achieve its business objectives, strategy and plans, should the service provider fail to perform the service;

  • the cost of the outsourcing as a proportion of total operating costs of the NBFC;

  • the aggregate exposure to that particular service provider, in cases where the NBFC outsources various functions to the same service provider and

  • the significance of activities outsourced in context of customer service and protection.

4. NBFC's role and Regulatory and Supervisory Requirements

4.1 The outsourcing of any activity by NBFC does not diminish its obligations, and those of its Board and senior management, who have the ultimate responsibility for the outsourced activity. NBFCs would therefore be responsible for the actions of their service provider including Direct Sales Agents/ Direct Marketing Agents and recovery agents and the confidentiality of information pertaining to the customers that is available with the service provider. NBFCs shall retain ultimate control of the outsourced activity.

4.2 It is imperative for the NBFC, when performing its due diligence in relation to outsourcing, to consider all relevant laws, regulations, guidelines and conditions of approval, licensing or registration.

4.3 Outsourcing arrangements shall not affect the rights of a customer against the NBFC, including the ability of the customer to obtain redress as applicable under relevant laws. In cases where the customers are required to deal with the service providers in the process of dealing with the NBFC, NBFCs shall incorporate a clause in the relative product literature/ brochures, etc., stating that they may use the services of agents in sales/ marketing etc. of the products. The role of agents may be indicated in broad terms.

4.4 The service provider shall not impede or interfere with the ability of the NBFC to effectively oversee and manage its activities nor shall it impede the Reserve Bank of India in carrying out its supervisory functions and objectives.

4.5 NBFCs need to have a robust grievance redress mechanism, which in no way shall be compromised on account of outsourcing.

4.6 The service provider, if not a group company of the NBFC, shall not be owned or controlled by any director of the NBFC or their relatives; these terms have the same meaning as assigned under Companies Act, 2013.

5. Risk Management practices for Outsourced Financial Services

5.1 Outsourcing Policy

An NBFC intending to outsource any of its financial activities shall put in place a comprehensive outsourcing policy, approved by its Board, which incorporates, inter alia, criteria for selection of such activities as well as service providers, delegation of authority depending on risks and materiality and systems to monitor and review the operations of these activities.

5.2 Role of the Board and Senior Management

5.2.1 Role of the Board

The Board of the NBFC, or a Committee of the Board to which powers have been delegated shall be responsible inter alia for the following:

i. approving a framework to evaluate the risks and materiality of all existing and prospective outsourcing and the policies that apply to such arrangements;

ii. laying down appropriate approval authorities for outsourcing depending on risks and materiality;

iii. setting up suitable administrative framework of senior management for the purpose of these directions;

iv. undertaking regular review of outsourcing strategies and arrangements for their continued relevance, and safety and soundness and

v. deciding on business activities of a material nature to be outsourced, and approving such arrangements.

5.2.2 Responsibilities of the Senior Management

i. Evaluating the risks and materiality of all existing and prospective outsourcing, based on the framework approved by the Board;

ii. developing and implementing sound and prudent outsourcing policies and procedures commensurate with the nature, scope and complexity of the outsourcing activity;

iii. reviewing periodically the effectiveness of policies and procedures;

iv. communicating information pertaining to material outsourcing risks to the Board in a timely manner;

v. ensuring that contingency plans, based on realistic and probable disruptive scenarios, are in place and tested;

vi. ensuring that there is independent review and audit for compliance with set policies and

vii. undertaking periodic review of outsourcing arrangements to identify new material outsourcing risks as they arise.

5.3 Evaluation of the Risks

The NBFCs shall evaluate and guard against the following risks in outsourcing:

i. Strategic Risk – Where the service provider conducts business on its own behalf, inconsistent with the overall strategic goals of the NBFC.

ii. Reputation Risk – Where the service provided is poor and customer interaction is not consistent with the overall standards expected of the NBFC.

iii. Compliance Risk – Where privacy, consumer and prudential laws are not adequately complied with by the service provider.

iv. Operational Risk- Arising out of technology failure, fraud, error, inadequate financial capacity to fulfil obligations and/ or to provide remedies.

v. Legal Risk – Where the NBFC is subjected to fines, penalties, or punitive damages resulting from supervisory actions, as well as private settlements due to omissions and commissions of the service provider.

vi. Exit Strategy Risk – Where the NBFC is over-reliant on one firm, the loss of relevant skills in the NBFC itself preventing it from bringing the activity back in-house and where NBFC has entered into contracts that make speedy exits prohibitively expensive.

vii. Counter party Risk – Where there is inappropriate underwriting or credit assessments.

viii. Contractual Risk – Where the NBFC may not have the ability to enforce the contract.

ix. Concentration and Systemic Risk – Where the overall industry has considerable exposure to one service provider and hence the NBFC may lack control over the service provider.

x. Country Risk – Due to the political, social or legal climate creating added risk.

5.4 Evaluating the Capability of the Service Provider

5.4.1 In considering or renewing an outsourcing arrangement, appropriate due diligence shall be performed to assess the capability of the service provider to comply with obligations in the outsourcing agreement. Due diligence shall take into consideration qualitative and quantitative, financial, operational and reputational factors. NBFCs shall consider whether the service providers' systems are compatible with their own and also whether their standards of performance including in the area of customer service are acceptable to it. NBFCs shall also consider, while evaluating the capability of the service provider, issues relating to undue concentration of outsourcing arrangements with a single service provider. Where possible, the NBFC shall obtain independent reviews and market feedback on the service provider to supplement its own findings.

5.4.2 Due diligence shall involve an evaluation of all available information about the service provider, including but not limited to the following:

i. past experience and competence to implement and support the proposed activity over the contracted period;

ii. financial soundness and ability to service commitments even under adverse conditions;

iii. business reputation and culture, compliance, complaints and outstanding or potential litigation;

iv. security and internal control, audit coverage, reporting and monitoring environment, business continuity management and

v. ensuring due diligence by service provider of its employees.

5.5 The Outsourcing Agreement

The terms and conditions governing the contract between the NBFC and the service provider shall be carefully defined in written agreements and vetted by NBFC's legal counsel on their legal effect and enforceability. Every such agreement shall address the risks and risk mitigation strategies. The agreement shall be sufficiently flexible to allow the NBFC to retain an appropriate level of control over the outsourcing and the right to intervene with appropriate measures to meet legal and regulatory obligations. The agreement shall also bring out the nature of legal relationship between the parties - i.e. whether agent, principal or otherwise. Some of the key provisions of the contract shall be the following:

i. the contract shall clearly define what activities are going to be outsourced including appropriate service and performance standards;

ii. the NBFC must ensure it has the ability to access all books, records and information relevant to the outsourced activity available with the service provider;

iii. the contract shall provide for continuous monitoring and assessment by the NBFC of the service provider so that any necessary corrective measure can be taken immediately;

iv. a termination clause and minimum period to execute a termination provision, if deemed necessary, shall be included;

v. controls to ensure customer data confidentiality and service providers' liability in case of breach of security and leakage of confidential customer related information shall be incorporated;

vi. there must be contingency plans to ensure business continuity;

vii. the contract shall provide for the prior approval/ consent by the NBFC of the use of subcontractors by the service provider for all or part of an outsourced activity;

viii. it shall provide the NBFC with the right to conduct audits on the service provider whether by its internal or external auditors, or by agents appointed to act on its behalf and to obtain copies of any audit or review reports and findings made on the service provider in conjunction with the services performed for the NBFC;

ix. outsourcing agreements shall include clauses to allow the Reserve Bank of India or persons authorised by it to access the NBFC's documents, records of transactions, and other necessary information given to, stored or processed by the service provider within a reasonable time;

x. outsourcing agreement shall also include a clause to recognise the right of the Reserve Bank to cause an inspection to be made of a service provider of an NBFC and its books and account by one or more of its officers or employees or other persons;

xi. the outsourcing agreement shall also provide that confidentiality of customer's information shall be maintained even after the contract expires or gets terminated and

xii. the NBFC shall have necessary provisions to ensure that the service provider preserves documents as required by law and take suitable steps to ensure that its interests are protected in this regard even post termination of the services.

5.6 Confidentiality and Security

5.6.1 Public confidence and customer trust in the NBFC is a prerequisite for the stability and reputation of the NBFC. Hence the NBFC shall seek to ensure the preservation and protection of the security and confidentiality of customer information in the custody or possession of the service provider.

5.6.2 Access to customer information by staff of the service provider shall be on 'need to know' basis i.e., limited to those areas where the information is required in order to perform the outsourced function.

5.6.3 The NBFC shall ensure that the service provider is able to isolate and clearly identify the NBFC's customer information, documents, records and assets to protect the confidentiality of the information. In instances, where service provider acts as an outsourcing agent for multiple NBFCs, care shall be taken to build strong safeguards so that there is no comingling of information / documents, records and assets.

5.6.4 The NBFC shall review and monitor the security practices and control processes of the service provider on a regular basis and require the service provider to disclose security breaches.

5.6.5 The NBFC shall immediately notify RBI in the event of any breach of security and leakage of confidential customer related information. In these eventualities, the NBFC would be liable to its customers for any damages.

5.7 Responsibilities of Direct Sales Agents (DSA)/ Direct Marketing Agents (DMA)/ Recovery Agents

5.7.1 NBFCs shall ensure that the DSA/ DMA/ Recovery Agents are properly trained to handle their responsibilities with care and sensitivity, particularly aspects such as soliciting customers, hours of calling, privacy of customer information and conveying the correct terms and conditions of the products on offer, etc.

5.7.2 NBFCs shall put in place a board approved Code of conduct for DSA/ DMA/ Recovery Agents, and obtain their undertaking to abide by the code. In addition, Recovery Agents shall adhere to extant instructions on Fair Practices Code for NBFCs as also their own code for collection of dues and repossession of security. It is essential that the Recovery Agents refrain from action that could damage the integrity and reputation of the NBFC and that they observe strict customer confidentiality.

5.7.3 The NBFC and their agents shall not resort to intimidation or harassment of any kind, either verbal or physical, against any person in their debt collection efforts, including acts intended to humiliate publicly or intrude the privacy of the debtors' family members, referees and friends, making threatening and anonymous calls or making false and misleading representations.

5.8 Business Continuity and Management of Disaster Recovery Plan

5.8.1 An NBFC shall require its service providers to develop and establish a robust framework for documenting, maintaining and testing business continuity and recovery procedures. NBFCs need to ensure that the service provider periodically tests the Business Continuity and Recovery Plan and may also consider occasional joint testing and recovery exercises with its service provider.

5.8.2 In order to mitigate the risk of unexpected termination of the outsourcing agreement or liquidation of the service provider, NBFCs shall retain an appropriate level of control over their outsourcing and the right to intervene with appropriate measures to continue its business operations in such cases without incurring prohibitive expenses and without any break in the operations of the NBFC and its services to the customers.

5.8.3 In establishing a viable contingency plan, NBFCs shall consider the availability of alternative service providers or the possibility of bringing the outsourced activity back in-house in an emergency and the costs, time and resources that would be involved.

5.8.4 Outsourcing often leads to the sharing of facilities operated by the service provider. The NBFC shall ensure that service providers are able to isolate the NBFC's information, documents and records, and other assets. This is to ensure that in appropriate situations, all documents, records of transactions and information given to the service provider, and assets of the NBFC, can be removed from the possession of the service provider in order to continue its business operations, or deleted, destroyed or rendered unusable.

5.9 Monitoring and Control of Outsourced Activities

5.9.1 The NBFC shall have in place a management structure to monitor and control its outsourcing activities. It shall ensure that outsourcing agreements with the service provider contain provisions to address their monitoring and control of outsourced activities.

5.9.2 A central record of all material outsourcing that is readily accessible for review by the Board and senior management of the NBFC shall be maintained. The records shall be updated promptly and half yearly reviews shall be placed before the Board or Risk Management Committee.

5.9.3 Regular audits by either the internal auditors or external auditors of the NBFC shall assess the adequacy of the risk management practices adopted in overseeing and managing the outsourcing arrangement, the NBFC's compliance with its risk management framework and the requirements of these directions.

5.9.4 NBFCs shall at least on an annual basis, review the financial and operational condition of the service provider to assess its ability to continue to meet its outsourcing obligations. Such due diligence reviews, which can be based on all available information about the service provider shall highlight any deterioration or breach in performance standards, confidentiality and security, and in business continuity preparedness.

5.9.5 In the event of termination of the outsourcing agreement for any reason in cases where the service provider deals with the customers, the same shall be publicized by displaying at a prominent place in the branch, posting it on the web-site, and informing the customers so as to ensure that the customers do not continue to deal with the service provider.

5.9.6 Certain cases, like outsourcing of cash management, might involve reconciliation of transactions between the NBFC, the service provider and its sub-contractors. In such cases, NBFCs shall ensure that reconciliation of transactions between the NBFC and the service provider (and/ or its sub-contractor), are carried out in a timely manner. An ageing analysis of entries pending reconciliation with outsourced vendors shall be placed before the Audit Committee of the Board (ACB) and NBFCs shall make efforts to reduce the old outstanding items therein at the earliest.

5.9.7 A robust system of internal audit of all outsourced activities shall also be put in place and monitored by the ACB of the NBFC.

5.10 Redress of Grievances related to Outsourced Services

i. NBFCs shall constitute Grievance Redressal Machinery as contained in RBI’s circular on Grievance Redressal Mechanism vide DNBS. CC. PD. No. 320/03.10. 01/2012-13 dated February 18, 2013. At the operational level, all NBFCs shall display the name and contact details (Telephone/ Mobile nos. as also email address) of the Grievance Redressal Officer prominently at their branches/ places where business is transacted. The designated officer shall ensure that genuine grievances of customers are redressed promptly without involving delay. It shall be clearly indicated that NBFCs' Grievance Redressal Machinery will also deal with the issue relating to services provided by the outsourced agency.

ii. Generally, a time limit of 30 days may be given to the customers for preferring their complaints/ grievances. The grievance redressal procedure of the NBFC and the time frame fixed for responding to the complaints shall be placed on the NBFC's website.

5.11 Reporting of transactions to FIU or other competent authorities

NBFCs would be responsible for making Currency Transactions Reports and Suspicious Transactions Reports to FIU or any other competent authority in respect of the NBFCs' customer related activities carried out by the service providers.

6. Outsourcing within a Group/ Conglomerate

6.1 In a group structure, NBFCs may have back-office and service arrangements/ agreements with group entities e.g. sharing of premises, legal and other professional services, hardware and software applications, centralize back-office functions, outsourcing certain financial services to other group entities, etc. Before entering into such arrangements with group entities, NBFCs shall have a Board approved policy and also service level agreements/arrangements with their group entities, which shall also cover demarcation of sharing resources i.e. premises, personnel, etc. Moreover the customers shall be informed specifically about the company which is actually offering the product/service, wherever there are multiple group entities involved or any cross selling observed.

6.2 While entering into such arrangements, NBFCs shall ensure that these:

a. are appropriately documented in written agreements with details like scope of services, charges for the services and maintaining confidentiality of the customer's data;

b. do not lead to any confusion to the customers on whose products/services they are availing by clear physical demarcation of the space where the activities of the NBFC and those of its other group entities are undertaken;

c. do not compromise the ability to identify and manage risk of the NBFC on a stand-alone basis;

d. do not prevent the RBI from being able to obtain information required for the supervision of the NBFC or pertaining to the group as a whole; and

e. incorporate a clause under the written agreements that there is a clear obligation for any service provider to comply with directions given by the RBI in relation to the activities of the NBFC.

6.3 NBFCs shall ensure that their ability to carry out their operations in a sound fashion would not be affected if premises or other services (such as IT systems, support staff) provided by the group entities become unavailable.

6.4 If the premises of the NBFC are shared with the group entities for the purpose of cross-selling, NBFCs shall take measures to ensure that the entity's identification is distinctly visible and clear to the customers. The marketing brochure used by the group entity and verbal communication by its staff / agent in the NBFCs premises shall mention nature of arrangement of the entity with the NBFC so that the customers are clear on the seller of the product.

6.5 NBFCs shall not publish any advertisement or enter into any agreement stating or suggesting or giving tacit impression that they are in any way responsible for the obligations of its group entities.

6.6 The risk management practices expected to be adopted by an NBFC while outsourcing to a related party (i.e. party within the Group / Conglomerate) would be identical to those specified in Para 5 of this directions.

7. Off-shore outsourcing of Financial Services

7.1 The engagement of service providers in a foreign country exposes an NBFC to country risk -economic, social and political conditions and events in a foreign country that may adversely affect the NBFC. Such conditions and events could prevent the service provider from carrying out the terms of its agreement with the NBFC. To manage the country risk involved in such outsourcing activities, the NBFC shall take into account and closely monitor government policies and political, social, economic and legal conditions in countries where the service provider is based, both during the risk assessment process and on a continuous basis, and establish sound procedures for dealing with country risk problems. This includes having appropriate contingency and exit strategies. In principle, arrangements shall only be entered into with parties operating in jurisdictions generally upholding confidentiality clauses and agreements. The governing law of the arrangement shall also be clearly specified.

7.2 The activities outsourced outside India shall be conducted in a manner so as not to hinder efforts to supervise or reconstruct the India activities of the NBFC in a timely manner.

7.3 As regards the off-shore outsourcing of financial services relating to Indian Operations, NBFCs shall additionally ensure that

a) Where the off-shore service provider is a regulated entity, the relevant off-shore regulator will neither obstruct the arrangement nor object to RBI inspection visits/ visits of NBFCs internal and external auditors.

b) The availability of records to management and the RBI will withstand the liquidation of either the offshore custodian or the NBFC in India.

c) The regulatory authority of the offshore location does not have access to the data relating to Indian operations of the NBFC simply on the ground that the processing is being undertaken there (not applicable if off shore processing is done in the home country of the NBFC).

d) The jurisdiction of the courts in the off shore location where data is maintained does not extend to the operations of the NBFC in India on the strength of the fact that the data is being processed there even though the actual transactions are undertaken in India and

e) All original records continue to be maintained in India.


1 Cumulative preference shares (prefs) will accumulate any dividend that is not paid when due and no dividends can be paid on ordinary shares until the entire backlog of unpaid dividends on cumulative prefs is cleared.

2 In terms of the explanatory note to Section 45-IA of Chapter III-B of the RBI Act, 1934, NOF is calculated as (a) the aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance-sheet of the company after deducting there from– (i) accumulated balance of loss; (ii) deferred revenue expenditure; and (iii) other intangible assets; and (b) further reduced by the amounts representing– (1) investments of such company in shares of– (i) its subsidiaries; (ii) companies in the same group; (iii) all other non-banking financial companies; and (2) the book value of debentures, bonds, outstanding loans and advances (including hire-purchase and lease finance) made to, and deposits with,– (i) subsidiaries of such company; and (ii) companies in the same group, to the extent such amount exceeds ten per cent of (a) above.


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