Week ending Dec 23, 2023

Positive global trends propel Sensex and Nifty upward on Friday. The calendar year 2023 anyway turned out to be a fabulous year for the Indian stock markets with benchmark equity indices hitting new all-time highs. The benchmark S&P 500 traded less than 1% shy of its all-time closing high as traders’ price in an aggressive timetable for interest rate cuts next year. Dow Jones industrial average was up 146 points and closed at 37452 and S&P 500 closed at 4755.


RBI surprised PE/VC industry on last Tuesday with a draconian circular with limits on investments in AIFs by banks/NBFCs. While the intention was to punish the errant NBFCs who used AIF vehicle to evergreen loans, the language of the circular, implied a complete ban on such exposures by banks/AIFs.

What was the prompt?

Some NBFCs had circumvented RBI rules on provisioning requirements last year, using the AIF vehicle and SEBI came down heavily clamping down on priority distribution model through a detailed circular in Nov 2022. SEBI noticed that some NBFCs sponsored AIFs using foreign funds, utilising them for subscribing to debentures of delinquent borrowers of those NBFCs with a proviso to have priority distribution, thereby escaping the provisioning requirements mandated by RBI on such loans which those NBFCs would have otherwise provided for and postponing the classification of those loans. SEBI circular in Nov 22 put a ban on such methods.

RBI felt perhaps that the above circular is not still effective, and practices do continue.

Why is the circular considered impractical?

  • Banks/NBFCs shall not make investments in any scheme of AIFs which has investments either directly or indirectly in any company funded by such bank/NBFC (current or in the preceding 12 months)
    • Its impractical to ensure that portfolio company does not get funded by any LPs.
    • Even working capital facility in the ordinary course of business is also not possible.
  • If so, such bank/NBFC need to liquidate such investments in AIFs within 30 days from Dec 19, 2023.
    • AIF units are illiquid; expecting liquidation within 30 days is impossible.
  • If not possible to liquidate, 100% provision to be made by such banks/NBFCs.
    • Despite loans being standard, expecting banks/NBFCs to provide 100% is onerous.
    • Piramal Enterprises hopes to provide for > ₹ 3000 cr. as against total exposure of ₹ 3817 cr in AIFs; IIFL also may make similar provisions.

What is the solution?

While the problem does require regulatory intervention, the model or process proposed by RBI is quite impractical as detailed above. IVCA has suggested the following exemptions on application of the RBI circular:

  • Exempt those banks who have exposure to AIFs, within the 10% ceiling prescribed by RBI.
  • Exempt DFIs like SIDBI, NABARD, EXIM Bank, NHB etc from the application of this circular – as there is not much scope for ever greening by these DFIs.
  • Bring similar exposure norms to NBFCs and apply the contents of the circular on those NBFCs who had larger exposure beyond those norms or those who have sponsored AIFs.

Financial Infratech Opportunity

A collaborative report by the Reserve Bank Innovation Hub, Omidyar Network India, and BCG on Financial Infratech Opportunity in India.

Key takeaways:

  • Financial Infratechs (F-ITs) are B2B fintech firms partnering with financial institutions for digital financial infrastructure.
  • There are 450+ F-ITs in India, contributing 22% of fintech market revenue (expected to grow to 32% by 2030).
  • F-ITs have received $10 billion in funding, making up 30% of global fintech funding.
  • By 2030, the F-IT revenue pool is projected to reach $60 billion.
  • Benefits of FI-FIT partnerships include improved user experience, quicker decision-making, and cost reduction; (i) 7x growth in invoice discounting through digital integrations (ii) 30-40% decrease in credit decisioning TAT (iii) 50% decrease in cost of acquiring SA customer
  • Challenges include a bias toward larger F-ITs, technology gaps, cultural differences, and regulatory complexity.
  • Key partnership practices include strategic board-level involvement, tech expertise, scalability, and regulatory understanding.
  • Various business models exist, including licensing, pay-as-you-go, and revenue sharing, depending on the services provided.


The Competition Commission of India (CCI) is proposing changes, as per notification released yesterday, to how it determines turnover or income for penalty purposes in antitrust cases.

The key points are:

  • New rules clarify turnover/income definition: The rules now define turnover/income as total sales, revenue, receipts, and other operating income, excluding taxes, discounts, and intra-group sales.
  • Foreign currency earnings included: The rules specify how to calculate turnover/income for entities earning in foreign currency.
  • Clarification on “relevant turnover”: This addresses a Supreme Court ruling limiting penalties to relevant turnover, not the entire firm’s turnover.

For mergers and acquisitions or take overs, the benefit of De-Minimis exemption is available where the value of assets being acquired, taken control of, merged or amalgamated [i.e., target] is not more than INR 350 crores in India or turnover is not more than INR 1,000 crores in India. The rules, at present, allow CCI to levy 10% penalty on the firm’s total turnover, but there is ambiguity on what the term turnover entails. Hopefully this clarification would resolve this principal issue.


The National Financial Reporting Authority (NFRA) has issued an audit quality inspection report that has pointed out deficiencies and areas of weakness within the audit affiliates of the Big Four firms in a first-of-its-kind assessment on Friday.

Key Concerns:

  • Documentation integrity issues (editable signed documents)
  • Insufficient leadership structure and governance documentation
  • Violations of independence policies with network members
  • Non-compliance with quality control standards (SQC 11)
  • Lack of transparency in disclosing non-audit services
  • Missing independence confirmations and audit evidence
  • Targeted Areas:
  • Revenue, trade receivables, and investments (high misstatement risk)

Deficiencies of this magnitude are considered serious especially from big four audit firms – Deloitte, E&Y, PWC and Deloitte.


SEBI, on Friday announced that it is proposing to introduce a same-day settlement option (T+0) for stock market trades, alongside the existing T+1 cycle. This T+0 settlement will be implemented in two phases.

  • In phase one, T+0 settlement will be available for share trades done until 1.30 PM, with settlement completed on the same day by 4.30 PM.
  • In phase two, an optional immediate trade-by-trade settlement will be introduced for transactions until 3.30 PM.
  • The introduction of T+0 settlement will exclude investors handling their trades through custodians, mainly institutional investors such as foreign funds, in phase 1. However, in real-time settlement, all investors, including those settling through custodians, will be allowed.
  • Initially, T+0 settlement will be available for the top 500 listed equity shares based on market capitalization in three tranches.
  • Sebi proposes the creation of a separate scrip code for T+0 and the imposition of a 1% price band for a stock between two settlements to address price divergence issues.
  • There will be only one continuous trading session from 9.15 am to 1.30 pm in the same-day settlement segment, with no pre-open, block, or post-close sessions.

With exclusion of foreign investors and two different options before domestic investor, market participants feel that the initiative may not cheer the markets.


  • Based on the six-month average market cap, AMFI categorises the first 100 companies as large-cap, 101 to 250 as mid-cap, and the rest as small-cap. This semi annual classification formula, coming up for review now, is under challenge given significant uptick in stock prices and listing of new companies.
    • The market capitalisation of stocks in the small-cap category, as per the existing formula, surpasses $3 billion (₹25,000 crore), deviating from the global average range of $300 million to $2 billion.
    • certain stocks featured in AMFI’s small-cap lists, such as Mazagon Dock, Suzlon Energy, Lloyds Metals, SJVN, and Kalyan Jewellers, among others need to be moved up to Mid cap and some like PFC, IRFC, etc to be moved up to large cap.

Market players feel that the current methodology of the rank-based approach may need to transition to a fixed interval method based on judgment.


As per Staff report published on 18th Dec 2023 India: 2023 Article IV Consultation-Press Release

  • The IMF praises India’s strong economic performance and suggests potential for faster, sustainable growth through a comprehensive structural reform agenda. India is projected to become the third-largest economy in FY28 with a gross domestic product (GDP) of $5 trillion (from about $3.7 trillion in FY23) underpinned by prudent economic policies.
  • Nonetheless, the economy is facing global headwinds, including a global growth slowdown in an increasingly fragmented world.
  • It questioned RBI’s forex market intervention programmes during last year and classified the exchange rate mechanism as Stable Exchange rate Mechanism and not “Fluctuating Mechanism” as claimed by India, which was strongly contested by RBI.
  • The report also warns of India’s general government debt potentially surpassing 100% of GDP in the medium term, citing high long-term risks due to the need for substantial climate resilience investment.

India: 2023 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for India (imf.org)

Key Legislations – Parliament

  1. Telecom Bill
  • The Lok Sabha approved the Telecommunications Bill, 2023, which allows the government to temporarily control telecom services for national security and allocate satellite spectrum administratively.
  • It permits taking possession of telecom networks during public emergencies or for public safety.
  • The bill exempts accredited correspondents’ press messages from interception unless prohibited by rules.
  • Spectrum allocation for satellite communications will be administrative, not through auctions, except for specific cases.
  • The bill introduces authorization for telecom services, caps penalties at Rs 5 crore, and mandates SIM issuance with verifiable biometric data. It also repeals the Indian Telegraph Act, 1885, and promotes sector reforms, cybersecurity, and innovation in the telecom sector.
  1. Criminal Laws
    Three bills modifying the current colonial criminal laws:
  • Indian Penal Code [IPC] 1860 replaced by Bharatiya Nyaya Sanita (second) bill 2023
    • Will have 358 sections instead of 511 sections in IPC
  • Code of Criminal Procedure (CrPC) 1973 replaced by Bharatiya Nagarik Suraksha(second) Sanhita, 2023
    • Will have 531 sections instead of 484 sections in CrPC.
  • Indian Evidence Act 1872 replaced by Bharatiya Sakshya (second) Bill 2023
    • Will have 170 sections instead of 166 sections in IEA.

Major changes:

  • Introduce changes dealing with offences of terrorism and acts against the State
  • Allow registration of e-FIRs
  • Factor in corruption in the election process
  • Make electronic evidence a form of primary proof
  • Separately define crimes like mob lynching for the first time
  • Enhanced punishment for crimes against women

PE.VC – Nov update – E&Y.

November 2023 saw a significant decline in PE/VC activity across investments, exits, and fundraising.

  • Significant decline: Lowest monthly total since April 2020 at US$1.6 billion, down 69% YoY and 60% MoM.
    • Fewer deals: 58 deals, down 45% YoY and 21% MoM.
    • Sector leaders: Infrastructure (US$701 million), Education (US$369 million).
  • Lower Exits activity: 22 exits worth US$1.2 billion, compared to US$2 billion in Nov 2022.
    • Open market exit dominates: US$611 million across 7 deals.
  • Fundraising:
    • Muted activity: US$401 million, down from US$1.9 billion in Nov 2022 and US$2.4 billion in Oct 2023.
  • Trends:
    • Strong PIPE activity: US$8.2 billion YTD, highest ever, 17% of all PE/VC investments.
    • Open market exits booming: US$9.5 billion YTD, driven by PE-backed IPOs.
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