Financial Services & FinTech

Exemptions to Companies Established in International Finance Service Centers

Published In:Inter Alia - Quarterly Edition - April 2017 [ English Chinese japanese ]

Public unlisted companies and private companies, which have been licensed to operate by the Reserve Bank of India (‘RBI’), Securities and Exchange Board of India (‘SEBI’), or the Insurance Regulatory and Development Authority of India (‘IRDAI’) from an International Financial Services Centre (‘IFSC’) located in an approved multi services Special Economic Zone (‘Specified IFSC Companies’), have been exempted from the applicability of certain provisions of the Companies Act, 2013 (‘CA 2013’). Pursuant to the notifications dated January 4, 2017, the MCA has granted certain general exemptions to the Specified IFSC Companies from compliance with the following provisions of CA 2013:

i. prohibition under Section 42(3) on making fresh offer for private placement of securities during pendency of allotment under an earlier;

ii. restriction under Section 54(1)(c) on issuing sweat equity shares within a period of one year from the commencement of business;

iii. requirement under Section 118(10) requiring all companies to observe secretarial standards with respect to general and board meetings;

iv. compliance with corporate social responsibility under Section 135 to not apply for a period of five years from the commencement of business;

v. restriction under Section 139(2) on the ability of a company to appoint / re-appoint statutory auditors for more than the prescribed period;

vi. director residency requirement under Section 149(3) of having at least one director who has stayed in India for a total period of not less than 182 days, to not apply for the first financial year from the date of its incorporation;

vii. prohibition on making investments through more than two layers of investment companies under Section 186(1); and

viii. directors of Specified IFSC Companies will be entitled to exercise powers either by means of resolutions passed at board meetings or through circular resolutions, including for those matters prescribed under Section 179(3).

In addition to the general exemptions, specific exemptions from applicability of the following provisions of CA 2013 have been granted to public unlisted companies located in IFSC:

i. restriction under Section 47 on the voting rights of preference shareholders, provided that the charter documents provide for it;

ii. restrictions under Section 73(2)(a) to (e) on raising public deposits from members, provided that the deposits accepted do not exceed 100% of the aggregate of the paid-up share capital and free reserves and the details of monies so accepted has been filed with the Registrar of Companies in the manner prescribed;

iii. requirement under Section 149(1) to have a woman director;

iv. requirement under Section 152(6) providing for retirement of directors of public companies by rotation;

v. requirement to appoint the audit committee, nomination and remuneration committee or stakeholders’ relationship committee under Sections 177 and 178;

vi. consent of board of directors as stipulated under Section 188(1) for related party transactions;

vii. requirement under Section 196(4) to appoint a whole-time director, managing director or manager; and

viii. restriction under Section 197 on the remuneration payable to managerial personnel.

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Amendment to the SEBI (Portfolio Managers) Regulations, 1993

Published In:Inter Alia - Quarterly Edition - April 2017 [ English Chinese japanese ]

SEBI, by way of a notification dated January 2, 2017, has amended the SEBI (Portfolio Managers) Regulations, 1993 (‘PM Regulations’) to provide an enabling framework for registration of fund managers desirous of providing services to overseas funds. A new chapter on ‘Eligible Fund Managers’ has been introduced, which inter alia sets out the registration procedure and obligations and responsibilities of eligible fund managers. Pursuant to the amendment, SEBI has permitted existing portfolio managers as well as new applicants compliant with the requirements specified under Section 9A(4) of the Income Tax Act, 1961 (‘ITA’) to act as ‘Eligible Fund Managers’. Eligible Fund Managers are exempt from certain provisions of the PM Regulations.

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Consultation Paper on Amendments/Clarifications to the Investment Adviser Regulations

Published In:Inter Alia - Quarterly Edition - January 2017 [ English Chinese japanese ]

On October 7, 2016, SEBI released a ‘Consultation Paper on Amendments / Clarifications to the SEBI (Investment Advisers) Regulations, 2013’, with the objective of specifying uniform standards for all intermediaries providing investment advisory services, regardless of whether it is their primary activity or not. The key changes proposed to the SEBI (Investment Advisers) Regulations, 2013 (‘IA Regulations’) are as follows:

i. Limitation of Exemptions: The extant regime exempts from registration certain persons who provide incidental investment advice to their clients, such as portfolio managers, chartered accountants, etc. SEBI has proposed that certain exemptions be removed, as set out below:

a. Mutual fund distributors who: (A) engage in providing incidental or basic investment advisory services on mutual fund products; or (B) want to shift from a commission-based model to an advisory fee-based model, be required to obtain registration; and

b. other classes of intermediaries who provide incidental investment advice, be limited to those persons who provide advice under other regulations specified by SEBI (for example, merchant bankers and portfolio managers);

ii. Investment Advice through Subsidiaries: Investment advisory services, which are currently provided through a separate division or department of banks, NBFCs and body corporates, should be provided exclusively through a separate subsidiary, and that a three year period be provided to comply with this provision;

iii. Definition of ‘Investment Products’: SEBI has proposed to define ‘investment products’ as all financial instruments that are regulated by any financial sector regulator in India, other than provision of advice exclusively on non-securities market that is regulated by a sectoral regulator;

iv. Advice through Electronic / Broadcasting Media: SEBI has now proposed to clarify that investment advice in any electronic or broadcasting or telecommunications medium, which is widely available to the public should comply with the provisions of Regulation 21 of SEBI (Research Analysts) Regulations, 2014 (‘RA Regulations’), which deals with recommendations in public media. Further, any such advice provided after getting clients enrolled, subscribed or registered on a public media platform will be considered as providing investment advisory services;

v. Provision of Trading Tips or Recommendations: SEBI has proposed that no person will be allowed to provide trading tips or specific stock recommendations to the general public via SMS, email, telephone calls or social networking media, unless such person is either registered under the IA Regulations or specifically exempt from registration; and

vi. Prohibition on Betting: SEBI has also proposed to prohibit any scheme, competition, game or league on securities or related to the securities market.

vii. Clarification on the Roles of Research Analysts and Investment Advisors: SEBI has proposed certain clarifications to distinguish the role of research analysts and investment advisers, with the key distinction being that research analysts should provide the research report to all classes of clients at the same time, whereas investment advisers aid their clients in making an informed decision on whether the recommendations given in the research report are suitable for his/her risk profile. Making recommendations (to buy / sell /hold) with regard to a security, by providing an entire report, would be governed by the provisions of the RA Regulations.


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Review of the Requirement of PAN Card to Open Accounts for Foreign Portfolio Investors

Published In:Inter Alia - Quarterly Edition - January 2017 [ English Chinese japanese ]

To ease the process of verification of the permanent account number (‘PAN’) of FPIs, SEBI by way of its notification dated November 17, 2016, decided that intermediaries may verify the PAN of FPIs online, using the website authorized by the Income Tax Department at the time of account opening for FPIs. Subsequently, a FPI would have a period of 60 days from the earlier of date of (i) the account opening, or (ii) remittance of funds out of India, to provide a copy of its PAN card to the intermediaries.

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Consultation Paper on Amendments/Clarifications to the SEBI (Investment Advisers) Regulations, 2013

Published In:Inter Alia - Quarterly Edition - October 2017 [ English Chinese japanese ]

SEBI, on June 22, 2017, issued a consultation paper on Amendments/ Clarifications to the SEBI (Investment Advisers) Regulations, 2013 (‘IA Regulations’), setting out the following key proposals:

i. Segregation between “investment advisory” services and “distribution/execution services”: To maintain a clear segregation between these two services provided by the same entity and to prevent associated conflicts of interest, SEBI has proposed amending the IA Regulations to prohibit entities offering investment advisory services from offering distribution/execution services, including in cases of banks, non-banking financial companies and body corporates that offer such services through separately identifiable departments or divisions. Such departments will be required to be segregated within a period of six months through a separate subsidiary. Entities which provide advice solely on products which do not qualify as securities have been excluded from the purview of the IA Regulations.

ii. Distribution of mutual fund schemes by distributors: To maintain a clear segregation between “advising” and “selling / distribution” of mutual fund products”, SEBI proposes that mutual fund distributors will only be permitted to explain the features of schemes of which they are distributors and distribute them while ensuring suitability of the scheme to the investors, but will not give any investment advice.

iii. Incidental advice by recognized intermediaries: Under the existing framework, exemptions from IA registration have been granted to inter alia various intermediaries, who give investment advice to their clients incidental to their primary activity. SEBI has now proposed that in order to have a clear segregation between “investment advisory services” and other services provided by such intermediaries, all intermediaries who receive separate identifiable consideration for investment advisory services will need to register with SEBI as an investment adviser. Moreover, persons who provide holistic advice/ financial planning services are compulsorily required to be registered as investment advisers.

iv. Relaxation in registration requirements: SEBI has proposed that the educational qualification requirements for representatives/employees of registered investment advisers be relaxed. It has also been proposed to reduce the net worth requirement for body corporates from Rs. 25 lakhs (approx. US$ 38,000) to Rs. 10 lakhs (approx. US$ 15,000).

v. Regulation of the activity of ranking of mutual fund scheme: SEBI has proposed that the activity of ranking of mutual fund schemes be brought within the ambit of SEBI (Research Analyst) Regulations, 2014, under a separate chapter.

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

Published In:Inter Alia - Quarterly Edition - October 2016 [ English Chinese japanese ]

RBI has, by way of a notification dated September 9, 2016 (‘FEMA 20 Notification’), amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (‘FEMA 20 Regulations’), to inter alia: (i) permit 100% foreign direct investment (‘FDI’) under the automatic route in financial services activities regulated by financial sector regulators (as may be notified by the Government of India (‘GoI’)); (ii) remove the restriction for FDI, under the automatic route, in NBFCs engaged in any one of the 18 specified activities; (iii) remove the erstwhile minimum capitalization requirements, however, capitalization norms and other limits prescribed by the relevant financial sector regulator will still apply; and (iv) clarify that in sectors where financial services are not regulated / partially regulated by a financial sector regulator, then 100% FDI is permitted under the Government approval route subject to conditions including minimum capitalization requirements, as may be decided by the Government.

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Meeting of the SEBI Board

Published In:Inter Alia - Quarterly Edition - October 2016 [ English Chinese japanese ]

The SEBI Board met on September 23, 2016 and took the following decisions:

i.  Currently, FPIs are required to transact in securities through stock brokers registered with SEBI, while domestic institutions such as banks, insurance companies, pension funds etc. are permitted to access the bond market directly (i.e. without brokers). SEBI has decided to extend this privilege to Category I and Category II FPIs.

ii.  In order to facilitate the growth of Investment Trusts (“InvIT”) and Real Estate Investment Trusts (“REIT”), SEBI has decided to amend the SEBI (Infrastructure Investment Trusts) Regulations, 2014 and the SEBI (Real Estate Investment Trusts) Regulations, 2014 (“REIT Regulations”). The key amendments will include:

a.  InvITs and REITs will be allowed to invest in the two level SPV structure through the holding company subject to sufficient shareholding in the holding company and other prescribed safeguards. The holding company would have to distribute 100% cash flows realised from the underlying SPVs and at least 90% of the remaining cash flows.

b.  The minimum holding of the mandatory sponsor in the InvIT has been reduced to 15%.

c.  REITs have been permitted to invest upto 20% in under construction assets.

d.  The limit on the number of sponsors has been removed under the REIT Regulations.

iii.  The SEBI Board has approved amendments to the SEBI (Portfolio Managers) Regulations, 1993, to provide a framework for the registration of fund managers for overseas funds, pursuant to the introduction of section 9A in the Income Tax, 1961.

iv.  The SEBI Board has decided to grant permanent registration to the following categories of intermediaries: merchant bankers, bankers to an issue, registrar to an issue & share transfer, underwriters, credit rating agency, debenture trustee, depository participant, KYC registration agency, portfolio managers, investment advisers and research analysts.

v.  The Securities Contracts (Regulation) (Stock Exchanges and Cleaning Corporations) Regulations, 2012 have been amended to increase the upper limit of shareholding of foreign institutional investors mentioned in the Indian stock exchanges from 5% to 15% and to allow an FPI to acquire shares of an unlisted stock exchange through transactions outside of recognised stock exchange including allotment.

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

Published In:Inter Alia - Quarterly Edition - July 2016 [ English Chinese japanese ]

Reserve Bank of India (‘RBI’) has, by way of notifications dated April 28, 2016 and May 20, 2016, made the following amendments to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000:

i. The term ‘startup’ has been defined to mean a private limited company / limited liability partnership, incorporated within the preceding five years, with an annual turnover not exceeding Rs 25 crores (approximately US$ 3.7 million) in any preceding financial year, working towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property, provided that such entity is not formed by splitting up or reconstruction of an existing business;

ii. Schedule 6 has been amended to permit foreign venture capital investors (‘FVCI’) registered with Securities and Exchange Board of India (‘SEBI’) to invest in: (a) equity, equity-linked instruments or debt instruments issued by startups, irrespective of the sector of such startup; (b) units of a registered Category I Alternative Investment Fund (‘Cat-I AIF’) or units of a scheme or a fund set up by a Cat-I AIF; (c) equity, equity-linked instruments or debt instruments issued by an unlisted Indian company engaged in specified sectors;

iii. A new Regulation 10A has been inserted which provides for the following:

• In case of transfer of shares between a resident and a non-resident, not exceeding 25% of the total consideration can be paid by the buyer on a deferred basis, for which an escrow arrangement may be made, for a period not exceeding 18 months from the date of the transfer agreement; and

• Even if the total consideration has been paid, the seller may furnish an indemnity for an amount not exceeding 25% of the total consideration, for a period not exceeding 18 months from the date of payment of the full consideration.

iv. The total consideration finally paid for such shares must comply with applicable pricing guidelines.

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Easing of access norms for investments by Foreign Portfolio Investors

Published In:Inter Alia - Quarterly Edition - March 2018 [ English Chinese japanese ]

SEBI has, by way of circulars dated February 15, 2018 and March 13, 2018 (collectively, the ‘FPI Circulars’), revised the regulatory framework governing foreign portfolio investors (‘FPIs’) under the SEBI (Foreign Portfolio Investors) Regulations, 2014 (‘FPI Regulations’) to ease the access norms for investments by FPIs. Some of the key changes that have come into force are set out below:

i. The current requirement of prior SEBI approval for a change in local custodian/ designated depository participant (‘DDP’) has been replaced with the requirement of obtaining a no-objection certificate from the earlier DDP, followed by a post-facto intimation to SEBI.

ii. The regime has been liberalized concerning FPIs having ‘Multiple Investment Managers’ structure and the same permanent account number, with respect to ‘Free of Cost’ transfer of assets. Approval of SEBI is now not required and DPPs are now entitled to process such requests.

iii. In case of addition of a new share class, where a common portfolio of Indian securities is maintained across all classes of shares/fund/sub-fund and broad based criteria are fulfilled at a portfolio level after adding a new share class, prior approval of the DDP is no longer required.

iv. Private banks and merchant banks are now permitted to undertake investments on behalf of their respective investors, provided that the investment banker/merchant banker submits a prescribed declaration.

v. SEBI also clarified that appropriately regulated Category II FPIs viz. asset management companies, investment managers/ advisers, Portfolio managers, Broker-dealer and Swap-dealer etc. are permitted to invest their proprietary funds.

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Proposals approved at SEBI Board Meetings

Published In:Inter Alia - Quarterly Edition - July 2017 [ English Chinese japanese ]

Some of the key proposals approved in the board meetings of the SEBI held on April 26, 2017 and June 21, 2017 are as follows:

i. Amendment to the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 to permit stock brokers / clearing members currently dealing in commodity derivatives to deal in other securities and vice versa, without setting up a separate entity;

ii. Relaxations from preferential issue requirements under the ICDR Regulations and from open offer obligations under the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (‘SAST Regulations’) which are currently available to lenders undertaking strategic debt restructuring of listed companies in distress, and be extended to new investors acquiring shares in such distressed companies pursuant to such restructuring schemes. Such relaxations, however, will be subject to shareholder approval by way of a special resolution and lock-in of shares for a minimum period of 3 years. The relaxations will also be extended to lenders under other restructuring schemes undertaken in accordance with the guidelines of the RBI;

iii. Exemption from open offer obligations under the SAST Regulations, for acquisitions pursuant to resolution plans approved by the NCLT under the IBC;

iv. Extension of relaxations in relation to the lock-in provisions currently available to Category I AIFs in case of an initial public offering to Category II AIFs as well;

v. Proposal for initiation of a public consultation process to make amendments to the FPI Regulations: (a) expansion of the eligible jurisdictions for the grant of FPI registrations to Category I FPIs by including countries having diplomatic tie-ups with India; (b) simplification of broad based requirements; (c) rationalization of fit and proper criteria; and (d) permitting FPIs operating under the multiple investment managers structure and holding FVCI registration to appoint multiple custodians; and

vi. Levy of a regulatory fee of USD 1,000 on each ODI subscriber, once every 3 years, starting from April 1, 2017 and to prohibit ODIs from being issued against derivatives except those which are used for hedging purposes.

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Blockchain & Cryptocurrency Regulation – 2019 | India

Published In:Blockchain & Cryptocurrency Regulation – 2019, 1st Edition [ ]


In India, cryptocurrencies started gaining popularity since around 2013, when small scale businesses began accepting bitcoin as a form of payment. Since then, cryptocurrencies have grown into a means of investment evidenced by the emergence of cryptocurrency exchanges in India.
The first regulatory response in the context of cryptocurrencies was when the Reserve Bank of India (“RBI”) issued a press release – on December 24, 2013 (“Press Note 1”). The RBI (which is in charge of monetary policy, regulation of financial markets and exchange control related issues) was careful in terms of neither sanctioning, nor prohibiting, cryptocurrencies; rather, all that Press Note 1 constituted was a caution to users, holders and traders of ‘virtual currency’, of potential risks associated with cryptocurrencies.

Almost immediately after the issuance of Press Note 1, several bitcoin exchanges such as ‘’ and ‘INRBTC’ temporarily shut operations. The Enforcement Directorate (“ED”, which enforces exchange control regulations) undertook raids on the proprietor of ‘’ to examine if transactions being carried out on its platform violated foreign exchange control regulations.

While Press Note 1 and the ED’s actions caused a setback in the popularity of cryptocurrency transactions. This was only temporary; ultimately, cryptocurrencies weren’t banned or prohibited, and India witnessed a steady rise in transactions in cryptocurrency, tracking the global increase in similar activities.

The RBI released warnings similar in scope to Press Note 1 on February 01, 2017 (“Press Note 2”) and December 5, 2017 (“Press Note 3”) reiterating its caution, and went one step further to clarify that it (i.e. the RBI) has not provided any entity any license or sanction to transact with cryptocurrency.

It should be noted that the government does distinguish between bitcoin and its underlying technology, i.e., block chain. Despite the issuance of the press notes cited above, the RBI has issued a White Paper on ‘Applications of Block Chain Technology to the Banking and Financial Sector in India’ in January 2017, which views the application of block chain technology by banks favorably. The RBI has also indicated that it may create a domestic ledger platform involving National Payment Corporation of India similar to existing platforms (such as RTGS, NEFT and IMPS). Towards this end in particular, the RBI, in September 2017, announced that it has taken steps to create such a platform, and also filed three patent applications in this regard.

Along similar lines, the Indian Finance Minister, in his Budget Speech on February 1, 2018 stated that although the Indian government does not recognize bitcoin as legal tender, it does encourage the use of block chain technology in payment systems.

The Budget Speech is often cited as the precursor to the regulation on cryptocurrency in India, although it is certainly not the sole reflection of the Indian government’s attitude to cryptocurrency. Since RBI’s press releases, the government has constituted an inter-disciplinary committee (which includes representatives from the RBI) to examine (i) the present status of cryptocurrency in India and globally; (ii) the existing global regulatory and legal structures governing cryptocurrency; (iii) measures to address issues relating to consumer protection and money laundering.

These developments initially suggested a positive approach towards the regulation of cryptocurrency, in that it was expected, by some quarters at least, that the RBI and the government would officially permit the use of cryptocurrencies.

All that changed with RBI’s circular dated April 6, 2018 (“Circular”), as a result of which the dealing of cryptocurrency in India today has been substantially impeded. Through the Circular, the RBI banned all entitles regulated by it (i.e., banks, financing institutions, non banking financing institutions, payment system providers and the like) from dealing in, or facilitating any dealings in, cryptocurrencies. These entities were provided a three month period within which all accounts dealing with cryptocurrency would have to be shut down.

As a consequence, while the government has not per se banned cryptocurrency in India, it has certainly made it quite difficult for participants to conduct transactions by using traditional banking channels.

No other regulator in India has issued any directions concerning cryptocurrencies.

Press releases as recent as July, 2018, indicate that the government will clarify its stand on cryptocurrency and is working with various industry participants to issue detailed guidelines, although timing in this regard remains uncertain.

Indian Supreme Court on Cryptocurrency

Along with the executive contemplating regulation of cryptocurrency, several stakeholders have also approached the judiciary by filing petitions before the Indian Supreme Court (“SC”) in order to compel the government to provide clarity.

The two primary petitions seeking to address the legality of cryptocurrency were filed by (i) Vijay Pal Dalmia and Siddharth Dalmia through civil writ petition 1071 of 2017 on June 2, 2017 (“Dalmia Petition”), and (ii) Dwaipayan Bhowmick through civil writ petition 1076 of 2017 on November 03, 2017 (“Bhowmick Petition”).

The Dalmia Petition was filed against the Union of India (through the cabinet secretary), Ministry of Home Affairs, Ministry of Finance and the RBI (“Respondents 1”), seeking an order to direct Respondents 1 to “restrain/ ban the sale/ purchase of or investment in, illegal cryptocurrencies and initiate investigation and prosecution against all parties which indulged in the sale/ purchase of cryptocurrency.”

The grounds for the stated petition, as available on public sources, was based on (i) the anonymous nature of cryptocurrency transactions which makes it well-suited for funding terrorism, corruption, money laundering, tax evasion, etc.; (ii) production and introduction of new cryptocurrency being generated by private parties, without the intervention of the government, and hence violating the Constitution; (iii) use of cryptocurrency being in contravention of several laws such as FEMA and Prevention of Money Laundering Act, 2002; (iv) ransomware attacks having occurred through the use of bitcoin; (v) illegal cryptocurrency providing an outlet for personal wealth that is beyond restriction and confiscation; (vi) cryptocurrency exchanges encouraging undeclared and anonymous transactions making it difficult for government authorities to identify such transactions; and (vii) the fact that trading of cryptocurrencies permits players to bypass prescribed KYC norms.

The Bhowmick Petition was filed against the Union of India, Ministry of Finance, Ministry of Law and Justice, Ministry of Electronic and Information Technology, SEBI, RBI, Income Tax Dept. (through its secretary) and Enforcement Directorate (through its joint director) seeking an “issuance of direction to regulate the flow of bitcoins as well as requiring the constitution of a committee of experts to consider prohibition/regulation of bitcoins and other cryptocurrencies.”

The grounds for the petition, as reflected in public sources, inter alia include (i) bitcoin trading/ transactions, being unregulated, lack accountability; (ii) investigators can only track bitcoin holders who convert their bitcoin to regular currency; (iii) counterfeiting of cryptocurrency is not an issue so long as the miners keep the block chain secure; (iv) bitcoins may be used for trade and other financial activities without accountability, having an affect on the market value of other commodities; (v) conversion of bitcoin into foreign exchange does not fall under the purview of the RBI, making such transactions highly unsafe and vulnerable to cyber attacks; (vi) presently, no regulator has the power to track, monitor and regulate cryptocurrency transfers; (vii) cryptocurrency has the potential to support criminal, anti-social activities, like money laundering, terrorist funding and tax evasion; and (viii) use of cryptocurrency could result in widespread adverse financial implications if left unchecked.

Subsequent to the aforementioned petitions, certain industry participants have filed writ petitions challenging the constitutionality of the RBI’s Circular and reiterated the need for clarity on regulation. Other stakeholders, such as the Internet and Mobile Association of India have filed intervention applications in the Bhowmick Petition in order to draw attention to the impact that any restrictive regulation on cryptocurrencies may have to their businesses.

Till date, while the Supreme Court has admitted these petitions, the matters remain sub judice offering limited insight on the judiciary’s stance. Nevertheless, the arguments made (as publicy reported) indicate that there is a degree of acknowledgment that various risks are presented by the continuing lack of regulation around cryptocurrencies.

Is cryptocurrency valid currency in India?

The Indian Parliament has enacted (i) Reserve Bank of India, 1934 (“RBI Act”) regulating inter alia bank notes; and (ii) Coinage Act, 2011 (“Coinage Act”) regulating coins, and these remain the only statutes that define and recognize legal tender.

Per section 26 of the RBI Act, ‘every bank note shall be legal tender at any place in India for payment, or on account for the amount expressed therein, and shall be guaranteed by the Central Government.” The central government specifies and approves the denomination value, form and material of such bank notes and the RBI has the sole right to issue bank notes in the country. Similarly, section 6 (1) of the Coinage Act provides legal sanction to coins that are made of any metal or other material as approved by the Central Government. Bank notes and coins therefore encompass the entire universe of physical legal tender available in India.

Under the existing framework therefore, there is no sanction for cryptocurrencies as legal tender.

Is cryptocurrency a valid payment system in India?

In India, prepaid instruments and payment systems are regulated by the Payments and Settlement Act, 2007 (“PSSA”). Prior to the enactment of PSSA, a working group on electronic money set up by the RBI, issued a report in July 11, 2002 (“Report”), which defined electronic money as ‘an electronic store of monetary value on a technical device used for making payments to undertakings other than the issuer without necessarily involving bank accounts in the transaction, but acting as a prepaid bearer instrument.’

These products could be classified into two broad categories that is, (a) pre-paid stored value card (sometimes called “electronic purse” or “e-wallet”) and (b) pre-paid software based product that uses computer networks (sometimes referred to as “digital cash” or “network money”). It was highlighted that the stored value card scheme typically uses a microprocessor chip embedded in a physical device (such as a plastic card) while software based scheme typically uses specialized software installed in a personal computer.

The aforementioned definition may seem wide enough to include cryptocurrency in its scope. However, this must be read in conjunction with the PSSA which does not explicitly define electronic money, but regulates payment systems that affect electronic fund transfer. These payment systems include ‘systems that enable payment between a payer and beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange’. Such systems include credit cards, debit cards, smart cards, and money transfer operations.
In addition to the PSSA, the RBI has also issued the ‘Master Direction on Issuance and Operation of Prepaid Payment Instruments’ dated October 11, 2017 (“PPI Regulations’) that regulate prepaid wallets. Prepaid wallets may be issued by bank or non-bank entities to facilitate the purchase of goods and services, including financial services, remittance facilities, etc., against the value stored on such instruments.

In order to fall under the purview of the above, the instrument in question must store some monetary value. Cryptocurrencies may not have any value stored on them and their value (if any) is contingent on market speculation. Consequently, their issuance are not likely to be construed as regulated electronic money, or a valid payment system, as is currently understood by Indian regulation. Consequently, associated compliance requirements such as obtaining RBI registration, the requirement to establish an entity incorporated in India, the requirement to comply with AML regulations etc. are not applicable.

Are cryptocurrency cross border trades, valid?

Cryptocurrencies are easily capable of being traded on a cross-border basis, and are generaqlly speaking exchangeable into fiat currency. Under the RBI Master Directions – Liberalized Remittance Scheme dated January 1, 2016, an Indian resident individual may remit up to USD 250,000 per year towards a permissible current or capital account transaction or both.

A permissible current account transaction includes inter alia remittance towards (i) private visits, business travel, or remittance by tour operators; (ii) fee for participation in global conferences and specialized training; (iii) remittance for participation in international events / competitions (towards training, sponsorship and prize money); (iv) film shooting; (v) medical treatment abroad; (vi) disbursement of crew wages, overseas education, remittance under educational tie up arrangements with universities abroad; (vii) remittance towards fees for examinations held in India and abroad and additional score sheets for GRE, TOEFL, etc; (viii) employment and processing, assessment fees for overseas job applications; (ix) emigration and emigration consultancy fees; (x) skills / credential assessment fees for intending migrants; (xi) visa fees, or processing fees required for registration of documents with other governments; (xii) registration / subscription / membership fees to international organizations.

A permissible capital account transaction includes inter alia remittance towards (i) investment in foreign securities; (ii) foreign currency loans; (iii) transfer of immovable property; (iv) guarantees; (v) export, import or holding of currency notes; (vi) loans and overdrafts; (vii) maintenance of foreign currency accounts overseas; (viii) insurance policies; (ix) capital assets; (x) sale and purchase of foreign exchange derivatives.

As is evident from the above, payments for cryptocurrency is not per se listed as a permitted activity. Nevertheless, it may have been possible for an individual to broadly declare the remittance of funds towards investments, without specifying that the intent was to invest in cryptocurrency. At present, given the financial blockage imposed by RBI’s Circular, if a banking institution were to examine the purpose of the remittance further or trace such remittance to its ultimate use, the individual may be held liable for violating foreign exchange regulations (at the very least, the banking institution in question would be unable to facilitate the transaction).

Closely associated with cross border transactions are anti-money laundering regimes that require periodic reporting and declarations being made prior to undertaking the transaction. While Indian money laundering regulations only apply to specific regulated entities such as banks, financial institutions, securities market intermediaries, etc., as a means to address concerns relating to money laundering, several cryptocurrency participants, such as cryptocurrency exchanges have imposed self regulatory measures such as complying with standard ‘know your customer’ obligations.


Regulatory uncertainty doesn’t seem to have hindered industry participants from applying creative alternatives to capitalize on the Indian cryptocurrency market. For instance, cryptocurrency exchanges are exploring the option of setting up a ‘peer to peer’ platform to act as an intermediary between entities trading in cryptocurrency. As a proof of concept, it can be argued that businesses in India are keen to adopt block chain and cryptocurrency, evidenced by various banks exploring the use of block-chain to facilitate cross border payments and large business houses contemplating issuing their own cryptocurrency.
Given the burgeoning market and technological potential, the Indian government is likely to seek to strike a balance in its approach. It will be interesting to witness whether the government recognizes the need of such technology by provisioning for regulation similar to the United States or Singapore governments that have imposed their taxation regime on cryptocurrency or, in the alternative, choose to nip this disruptive technology in the bud, like China, which has banned cryptocurrency.


1. Ashwin Ramanathan, Partner
2. Anu Tiwari, Partner
3. Rachana Rautray, Associate

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Changes Introduced for Streamlining the Process of Public Issues of Equity and Convertibles

Published In:Inter Alia - Quarterly Edition - December 2018 [ English Chinese japanese ]

SEBI, by way of its circular dated November 1, 2018, in its endeavor to provide an efficient fund-raising process, and in consultation with various stakeholder groups, has decided to introduce the Unified Payments Interface (‘UPI’)[1], as a payment mechanism supported with the Application Supported by Block Amount (‘ASBA’), for applications in public issues through various channels. This will be done by retail investors through various kinds of intermediaries (i.e. syndicate members, registered stock brokers, registrar and transfer agents and depository participants). This new process is expected to improve efficiency and reduce the duration from issue closure to listing by up to three working days in a phased manner. Prior to the introduction of ASBA, this process usually took 12 working days.

For the purpose of public issues, UPI would allow the facility to block the funds at the time of the application. In order to ensure that there is parity across the various channels for the submitted application, it has been decided that the investor must only use his/her own bank account linked UPI ID to make an application in public issues. Further, merchant bankers are required to ensure appropriate disclosures with respect to UPI in offer documents and advertisements of a company undertaking a public issue.

This circular is applicable to all red herring prospectuses filed for public issues opening on or after January 1, 2019.

[1] UPI is an instant payment system, developed by the National Payments Corporation of India (‘NPCI’), which enables merging several banking features and allows instant transfer of money between any two persons’ bank accounts using a unique payment address.

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CCI approves combination between LIC & IDBI

Published In:Inter Alia Special Edition Competition Law February 2019 [ English ]

On November 22, 2018, CCI approved acquisition of 51% shareholding and management control rights in IDBI Bank Limited (‘IDBI’) by Life Insurance Corporation of India (‘LIC’). LIC is engaged in the provision of various schemes of life insurance to retail and corporate customers. IDBI operates as a full service universal bank and provides financial products and services, encompassing deposits, loans, payment services and investment solutions. [1]

In its competitive assessment, CCI found that the combination would not have an AAEC in India in the markets for (i) provision of life insurance; (ii) provision of housing finance; and (iii) banking services (other than housing finance), in particular the segments relating to deposits, home loans, agricultural banking, card business, retail banking services other than card business, deposits and home loan, medium and small business banking, and wholesale banking (other than retail business banking), on account of IDBI having an insignificant presence in these markets. Further, CCI found that while LIC’s and IDBI’s activities overlapped in the market for mutual funds, in particular the segments relating to (i) growth /equity oriented scheme; (ii) income/debt oriented scheme; (iii) balanced fund scheme; (iv) money market/liquid fund scheme; and (v) gilt funds, neither LIC’s nor IDBI’s presence in this markets was significant enough to result in an AAEC. With regard to a potential vertical relationship between LIC and IDBI in relation to bancassurance services, CCI held that considering the nature of bancassurance services and presence of IDBI in the segment, the combination will not confer any ability or provide any incentive to LIC to foreclose other banks engaged in the provision of bacassurance services. Based on the above, CCI decided to approve this combination.

[1] Combination Registration Number C-2018/10/605.

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CCI Approves Acquisition by Integral Corporation from Toyo Engineering Corporation

Published In:Inter Alia Special Edition Competition Law February 2019 [ English ]

On December 19, 2018, CCI approved subscription to optionally convertible preferential stock (without voting rights) amounting to 34.65% of shares of Toyo Engineering Corporation (‘Toyo’) by Integral Corporation (‘Integral’) pursuant to the execution of a share subscription agreement dated November 28, 2018. Integral also acquired a right to appoint two nominee directors in Toyo. [1]

Integral, a Japanese private equity firm based in Tokyo, is engaged in making long-term equity investments and providing support to investee companies in terms of management and finance. In India, Integral is present through its stake of 29.2% shares of Ohizumi Manufacturing Company Limited, a Japanese corporation which is engaged in manufacture and sale of electronic parts and electronic equipment/devices such as thermistors which are primarily used for measurement and control of temperature. Toyo is a Japanese engineering, procurement and construction (‘EPC’) company engaged in the provision of EPC services and R&D support, design, engineering, procurement, construction, commissioning and technical assistance for industrial facilities. It provides EPC services in various sectors such as oil & gas development, petrochemicals, chemicals and biotechnology. In India, Toyo is present through its subsidiary namely Toyo Engineering India Private Limited which is also engaged in providing EPC services in India.

In its competition assessment, CCI observed that there is no horizontal overlap or vertical relationship between the activities of the parties. Therefore, CCI approved the combination as it was unlikely to have any AAEC in India.

[1] Combination Registration Number C-2018/12/619.

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