This article has been published by the Asia Business Law Journal in its Banking & Finance Regional Guide, at Key developments in India’s evolving financial framework | Law.asia.

In recent years, India has been steadily reshaping its financial regulatory landscape in banking, debt markets, overseas investment, digital finance and asset recovery. This shift is driven by policy reforms, enhanced supervisory oversight and judicial interpretation. Many of these changes are structural and ongoing, indicating a steady shift towards a more sophisticated and more disclosure-driven financial system. This article examines the most significant legal and regulatory developments in recent years across key segments of India’s financial ecosystem.

FPI in debt

Foreign portfolio investment (FPI) allows registered non-resident entities to invest in Indian capital market instruments, including government securities and corporate debt (both listed and unlisted). Investment in debt by FPIs typically occurs via two primary routes regulated by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI).

• General route. Under this route, FPI investments are subject to specific regulatory conditions and oversight. Key conditions include minimum residual maturity requirements (generally more than one year for unlisted corporate debt), issue-wise limits (typically capping investment at 50% of any single corporate debt issue) and concentration limits based on the FPI’s category. It is pertinent to note that the overall investment limits applicable to various debt categories under this route are periodically reviewed and enhanced by the regulators; and
• Voluntary retention route (VRR). The VRR serves as an alternative channel, offering exemptions to FPIs from certain general route conditions, notably the minimum residual maturity requirement for unlisted debt and the issue-wise and concentration limits. This flexibility allows FPIs to potentially hold larger stakes or participate in instruments with shorter residual tenors. In exchange, FPIs using the VRR commit to retaining a minimum percentage (currently 75%) of their allocated investment in India for a specified minimum period, typically three years. It is important to note that allocation under the VRR occurs through auctions or on an on-tap basis, as decided by the RBI.

Separately, the SEBI continues to refine FPI oversight and has recently notified enhanced beneficial ownership disclosure requirements to FPIs that meet specific high-value thresholds (equity assets under management (AUM) of more than INR500 billion (USD5.9 billion) or more than 50% equity AUM concentration in a single corporate group.

ECBs

External commercial borrowings (ECBs) are loans raised by eligible resident entities from recognised non-resident lenders. To consolidate and simplify the regime, the RBI issued a comprehensive master direction in December 2023. Key features include:

-Rationalised framework. Borrowing categories and procedural tracks (automatic versus approval route) have been streamlined with clearer definitions and guidelines;
– End-use and cost ceilings. Continued emphasis on monitoring end-use (with a defined negative list) of the ECBs and market-linked all-in-cost ceilings to ensure capital controls;
– Revised limits. The automatic route limit is standardised at USD750 million per financial year for all eligible borrowers by replacing sector-specific caps and earlier fragmented limits, offering greater clarity to borrowers and lenders; and
– Structured obligations compliance. Streamlined compliance for structured obligations, particularly where foreign companies and entities issue guarantees or securities for rupee borrowings of their subsidiaries or group companies in India.

Debt instruments

India’s corporate debt market, particularly for non-convertible debentures (NCDs), has seen reforms aimed at improving transparency, standardising disclosures and strengthening the role of intermediaries. Both the SEBI and the Ministry of Corporate Affairs have driven these changes.

-Mandatory dematerialisation. A significant push towards digitisation mandates that securities, including NCDs, issued by Indian companies must be in dematerialised form;
– Standardised issue documents. The SEBI introduced mandatory general information documents and key information document formats for listed debt issuances, replacing varied disclosure practices and ensuring that investors receive consistent essential information;
– Enhanced debenture trustee (DT) role. The obligations of DTs have been significantly enhanced. They now have clearer responsibilities for pre-issuance due diligence, periodic monitoring of asset cover and issuer covenants, and timely reporting of defaults or breaches, shifting their role towards active investor protection; and
– Market stability mechanism. The Corporate Debt Market Development Fund, operational since 2023, acts as a backstop liquidity facility for specified mutual funds facing redemption pressures during market stress, aiming to prevent contagion in the secondary debt market.

Asset reconstruction companies

Asset reconstruction companies (ARCs) play a role in resolving stressed assets by acquiring non-performing assets from banks and financial institutions. Traditionally governed by the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, their scope and oversight were revisited by the RBI and revised guidelines were issued in late 2022 to enhance their efficacy and governance. Key updates include:

1. ARCs with a minimum net owned fund (NOF) of INR10 billion are now permitted to act as resolution applicants under the Insolvency and Bankruptcy Code, 2016, enabling more direct participation in the corporate insolvency process;
2. A comprehensive corporate governance framework (covering board composition, committees and key managerial personnel) was introduced. The minimum NOF requirement is being increased in phases to INR3 billion by 31 March 2026, aligning larger ARCs with the scale-based regulations applicable to non-banking financial companies (NBFCs); and
3. New disclosure norms mandate detailed reporting on recovery track records, valuation methodologies for security receipts (SRs), recovery ratings and management fee structures, improving transparency for SR investors.

NBFCs

Non-banking financial companies form a vital part of India’s financial landscape. Recognising their growing systemic importance, the RBI introduced the scale-based regulation framework in October 2022, moving away from a uniform approach towards layered supervision based on size, activity and risk. Under this revised regime:

1. NBFCs are classified in four layers:
   (a) base layer;
   (b) middle layer;
   (c) upper layer; and
   (d) top layer. The top layer is currently empty and will be populated if the RBI believes there is a substantial increase in the potential systemic risk from specific NBFCs in the upper layer;
2. NBFCs in the middle layer and upper layer are now subject to stricter prudential norms, governance requirements and exposure limits, aligning more closely with banks; and
3. Disclosure and capital adequacy obligations have increased for housing finance companies, infrastructure NBFCs and core investment companies.

Digital lending

The rapid rise of digital lending apps and platforms necessitated regulatory intervention to curb unfair practices and protect consumers. Accordingly, the RBI issued its guidelines on digital lending in 2022 and further clarified the status of first loss default guarantee (FLDG) structures in June 2023. This has enabled a revival of regulated co-lending and credit-enhancement models in retail and SME lending. Under the current operational framework:

– All loan disbursements and repayments must be routed directly between borrowers and regulated entities; lending service providers are no longer permitted to operate pool accounts;

– A key fact statement is mandatory, disclosing annualised percentage rates, charges and recovery policies; and

– The FLDG arrangements are now permitted, subject to a 5% cap on portfolio coverage, formal documentation and due diligence of the FLDG providing entities.

Other key developments

-Overseas direct investment (ODI). The 2022 overseas investment framework permits Indian entities to provide guarantees and create security for their overseas joint ventures or wholly owned subsidiaries under the automatic route, subject to financial commitment limits. Guarantees for second and subsequent level step-down subsidiaries are now allowed under the automatic route. Reporting via authorised dealer category I banks is mandatory;

– KYC (know your customer) and beneficial ownership. The recent amendments to the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, have lowered the beneficial ownership identification thresholds to 10% for companies and 15% for partnerships. Reporting entities such as banks and NBFCs are now required to conduct independent verification and enhanced due diligence for high-risk clients;

– Banking law amendments. The Banking Laws (Amendment) Act, 2024, introduced operational changes such as revising the “substantial interest” monetary threshold (to INR2 million), adjusting director tenure norms for co-operative banks and standardising reporting timelines and auditor fee processes; and

– Legal entity identifiers (LEIs). The RBI has mandated LEIs for non-individuals in single payment transactions of INR500 million and above.

India is now building a clearer, more transparent financial system with stronger rules for borrowing, investing and digital finance.