India's financial sector is vast and rapidly growing. It encompasses commercial banks, insurance companies, non-banking financial institutions (NBFCs), cooperatives, pension funds, mutual funds, and other financial entities. Banks dominate the sector, accounting for over 60% of total financial system assets, followed by insurance. Other intermediaries include regional rural banks and cooperative banks that serve underbanked rural and urban populations. Many NBFCs operate in specialized areas like leasing, factoring, microfinance, and infrastructure finance, although some can accept deposits. Pension coverage extends to 12% of the working population and consists of civil service arrangements, a mandatory scheme for formal private sector employees, and private plans offered through insurance companies.

Current Regulatory Bodies

The Reserve Bank of India (RBI) is the primary regulator and supervisor of the Indian financial system. Its purview includes commercial banks, urban cooperative banks (UCBs), select financial institutions, and some NBFCs. Other institutions regulate or oversee specific sectors:

  • National Bank for Agriculture and Rural Development (NABARD) supervises Regional Rural Banks and rural cooperatives.
  • National Housing Bank (NHB) regulates housing finance companies.
  • Department of Company Affairs (DCA) regulates deposit-taking activities of non-NBFC corporations registered under the Companies Act.
  • The Registrar of Cooperatives of various states, along with the central government, jointly regulates single-state and multi-state cooperative banks, respectively. The RBI and NABARD oversee their banking functions, while the state/central government maintains control over management. This "dual control" creates challenges in supervising and regulating cooperative banks.
  • Securities and Exchange Board of India (SEBI) governs the capital market, mutual funds, and other capital market intermediaries.
  • Insurance Regulatory and Development Authority (IRDA) regulates the insurance sector.
  • Pension Fund Regulatory and Development Authority (PFRDA) regulates pension funds.

Issues with the Current Regulatory Framework

India's financial regulation is currently product-based, meaning each product has a separate regulator. For instance, the RBI regulates fixed deposits and other banking products, the government regulates small savings products, SEBI regulates mutual funds and equity markets, IRDA regulates insurance, and PFRDA regulates the New Pension Scheme (NPS). All these regulators aim to protect customer interests, but this fragmented structure leads to inconsistencies and inefficiencies.

  • Regulatory Arbitrage: The multiple regulators create varying requirements, allowing for exploitation of these differences. For example, similarities exist between mutual funds and Unit Linked Insurance Plans (ULIPs). SEBI imposes stricter disclosure standards on mutual funds compared to IRDA's requirements for ULIPs. Additionally, bank employees can distribute financial products like mutual funds and insurance products without adhering to SEBI and IRDA regulations.
  • Regulatory Gaps: The current framework has gaps where no regulator takes responsibility. These include various ponzi schemes that periodically surface and are not regulated by any existing agency. Organizations like chit funds also seem to entirely bypass financial sector regulation.
  • Overlaps and Conflicts: Overlapping laws and agencies can lead to conflicts between regulators, hindering policy development and market growth. Examples include SEBI's extended litigation against the Sahara group and recent investigations into alleged money laundering by some banks using insurance products.

International Regulatory Systems

The global financial crisis prompted several countries to reform their regulatory frameworks. The United Kingdom serves as an example. Previously, they had a unified regulator, the Financial Services Authority (FSA). It was replaced with a new regulatory structure under the Financial Services Act. This Act assigns:

  • Financial stability responsibility, encompassing macro and macroprudential regulation, to the Bank of England.
  • Prudential regulation of financial firms, including banks, investment banks, building societies, and insurance companies, to the Prudential Regulation Authority (PRA).
  • Regulatory and enforcement authority over the banking system to the Financial Conduct Authority (FCA).

The United States has a Financial Stability Oversight Council that monitors risks to the financial system and facilitates communication among financial regulators. In Australia, separate bodies handle prudential regulation and conduct regulation: the Australian Prudential Regulation Authority (APRA) governs financial institutions, and the Australian Securities & Investments Commission (ASIC) governs corporate conduct. This model, adopted in the mid-1990s, proved relatively resilient during the crisis. Canada similarly assigns prudential and conduct regulation to separate agencies.

Financial Legislative Structure in India

India's current financial legal landscape is inadequate. The sector is governed by over 60 Acts and numerous rules/regulations, many dating back to the 1950s and 1960s. These Acts often emphasize banning certain financial activities rather than establishing a regulatory framework for them. This complexity makes the system ambiguous, inconsistent, and prone to regulatory arbitrage.

Reforms 2023


The Indian regulatory landscape is undergoing a significant shift with the impending enforcement of the Digital Personal Data Protection Act, 2023 (DPDP Act). This act, coupled with existing sectoral regulations for Non-Banking Financial Companies (NBFCs) and fintech’s, presents both challenges and opportunities for these institutions. This background section explores the key areas where NBFCs and fintech’s need to adapt and ensure compliance.

Key Considerations:

  • Identifying Roles: Fiduciary vs. Processor: The DPDP Act assigns varying levels of responsibility based on data handling. Understanding if your organization acts as a Data Fiduciary (determining data purpose and processing methods) or a Data Processor (processing data on behalf of a Fiduciary) is crucial. This distinction determines the extent of compliance obligations.
  • Consent Revamp: Moving Beyond Generic: Previously, generic consent sufficed for NBFCs. However, the DPDP Act demands explicit consent for each specific data usage purpose. This applies not only to customers but also to employees, vendors, and website visitors.
  • Outsourcing with Accountability: NBFCs often outsource functions to third parties. Both the RBI's outsourcing guidelines and the DPDP Act hold NBFCs accountable for the actions of their service providers. This necessitates robust oversight and ensuring data security within partner systems.
  • Cross-border Data Flows: While the DPDP Act allows for some cross-border data transfers, existing sectoral regulations like the RBI's Payments Data Storage Circular might impose stricter data localization requirements for specific data categories. NBFCs and fintech’s must navigate these overlapping regulations.
  • Significant Data Fiduciaries (SDFs): The RBI's tiered regulatory framework for NBFCs and the DPDP Act's SDF classification might create conflicting compliance needs. Entities like NBFC-Account Aggregators, handling large volumes of sensitive data, could face additional SDF requirements despite being categorized under a lower RBI tier.
  • Grievance Redressal Mechanisms: Both the DPDP Act and the RBI's Ombudsman Scheme provide grievance redressal avenues. Overlapping jurisdictions for complaints related to personal data breaches need clarification to ensure a streamlined resolution process.
  • Data Mapping and Policy Review: To empower individuals with data rights (access, correction, erasure, and consent withdrawal), NBFCs need to establish processes for data tracking, access control, data segregation based on sensitivity, and potentially data encryption. Additionally, internal policies need to be reviewed to align with the DPDP Act's requirements, especially concerning children's personal data.

By proactively addressing these challenges, NBFCs and fintechs can ensure compliance with the evolving regulatory environment. This not only mitigates risks but also fosters trust with customers by demonstrating a commitment to data privacy.


II. Related Party Transactions: A New Scrutiny in India

This document explains a recent change in how India regulates transactions between listed companies and other parties. The focus is on a concept called the "Purpose and Effect Test" introduced in 2023.

What are Related Party Transactions (RPTs)?

RPTs are transactions between a listed company and entities it has a pre-existing connection with, like subsidiaries, major shareholders, or directors. Indian regulations aim to ensure fairness in such transactions to protect investors.

The Purpose and Effect Test - A Shift in Scrutiny

The new test looks beyond the legal relationship between the parties. It considers the purpose and outcome of a transaction with any third party (not just related parties). If the transaction aims to benefit a related party of the listed company, it's considered an RPT, even if the other party is seemingly independent.

Why the Change?

The motivation behind the Purpose and Effect Test comes from past instances of corporate misconduct. Companies used seemingly unrelated parties to avoid RPT regulations, allowing them to divert funds or gain unfair advantages for related parties.

How to Apply the Test

The key is to identify transactions that might be disguised or structured to benefit a related party at the expense of the listed company and its minority shareholders. Here are some factors to consider:

  • Lack of economic substance: Is the transaction commercially reasonable, or does it involve round-trip financing (money simply moving in circles)?
  • Unusual terms or pricing: Do the terms significantly deviate from market standards, suggesting a favour towards a related party?
  • Shell companies: Is the third party a company with no real business activity?
  • Temporary parking of funds: Does the transaction involve a third party temporarily holding funds meant for a related party?

Collective Bargaining: Not Caught in the Net

The Purpose and Effect Test shouldn't apply to situations where a listed company negotiates with independent suppliers or service providers to get better deals for the entire corporate group. Such collective bargaining benefits the whole company, not just a related party.

Challenges and the Road Ahead

Companies and auditors currently lack clear guidelines on implementing the Purpose and Effect Test. Regulatory guidance or court rulings would be helpful. While the Supreme Court is likely to support SEBI's (Securities and Exchange Board of India) approach, clarity is needed for consistent and effective implementation.

In conclusion, the Purpose and Effect Test strengthens oversight of related party transactions in India. By focusing on the actual purpose and outcome of transactions, it aims to prevent companies from exploiting loopholes and harming minority shareholders.

III. Finfluencers and Financial Literacy in India: A Regulatory Tightrope Walk

Social media has become a breeding ground for financial advice, with both qualified and unqualified influencers offering their insights. This surge in "finfluencers" has exposed a gap in regulations, leaving investors vulnerable to misleading information and potential scams.

The Problem: Unqualified Advice and Misinformation

The easy accessibility of social media has democratized access to financial information, but not necessarily accurate or unbiased information. Unlike registered advisors, finfluencers often lack qualifications and may prioritize sensational content over sound financial advice. This can lead to:

  • Misguided Investment Decisions: Retail investors, particularly those new to the market, may blindly follow finfluencer recommendations, potentially jeopardizing their financial future.
  • Market Manipulation: Finfluencers may engage in pump-and-dump schemes, artificially inflating stock prices before selling their holdings at a profit, leaving unsuspecting investors with significant losses.

The Existing Regulatory Framework: Falling Short

Currently, India lacks a specific law governing finfluencers. Existing regulations like SEBI's PFUTP Regulations aim to prevent fraudulent practices but don't adequately address the complexities of the finfluencer phenomenon.

  • Loopholes for Finfluencers: The definition of "investment advisor" excludes those offering advice without compensation, allowing many finfluencers to operate outside regulatory purview.
  • Limited Reach of Registered Advisors: Stringent qualification requirements for Registered Investment Advisors (RIAs) restrict their reach, leaving a gap that finfluencers exploit.

SEBI's Proposed Framework: A Step in the Right Direction

Recognizing the need for action, SEBI has issued consultation papers proposing a framework to regulate finfluencers. Key proposals include:

  • Disclosure and Registration: Finfluencers may need to register with SEBI or stock exchanges and disclose any conflicts of interest.
  • Collaboration with Registered Advisors: SEBI may restrict unregistered entities from collaborating with RIAs to promote financial products.

Learning from Global Examples for a Balanced Approach

While regulations are crucial, a complete ban on financial content by unqualified individuals might stifle financial literacy. Here's how international examples can inform India's approach:

  • Australia's Model: A tiered system could be implemented, with RIAs subject to stricter qualifications and unregistered advisors subject to basic disclosure requirements.
  • EU's Focus on Transparency: Finfluencers could be required to clearly distinguish factual information from opinions and disclose sponsorships to prevent hidden marketing.

The Way Forward: Striking a Balance

SEBI faces a challenge in regulating finfluencers: ensuring accountability without stifling financial education. Here are some recommendations:

  • Minimum Qualification Threshold: Basic financial literacy certifications could be introduced for finfluencers.
  • Collaboration with ASCI: SEBI and ASCI can develop joint guidelines for creating responsible financial content on social media.
  • Focus on Education: SEBI can encourage educational content creation by finfluencers, allowing them to educate audiences without regulatory concerns.


IV.RBI Tightens KYC Norms for Wire Transfers to Combat Money Laundering

The Reserve Bank of India (RBI) has taken a significant step to combat money laundering and other illegal activities by amending KYC norms for wire transfers. This update, issued on May 4, 2023, strengthens regulations for both domestic and cross-border transactions.

What are Wire Transfers?

A wire transfer is an electronic transaction where funds are sent from one financial institution to another on behalf of a customer (originator) to a recipient (beneficiary). It can be done through various channels like internet banking, mobile banking, UPI, etc. However, transactions using credit/debit cards or prepaid instruments are not covered by these new regulations.

New KYC Requirements

Cross-Border Wire Transfers:

  • Complete and Accurate Information: All cross-border wire transfers must be accompanied by detailed information about both the originator and beneficiary, including:
    • Name and account number
    • Address (or national ID, customer ID, or date of birth)
  • Unique Reference Number: If an originator doesn't have an account number, the bank must assign a unique reference number to track the transaction.

This aims to prevent "wire stripping," where information is deliberately removed to avoid detection of illegal payments.

Domestic Wire Transfers:

  • Similar Requirements: Domestic wire transfers generally follow the same requirements as cross-border transactions.
  • Threshold for KYC Information: However, for domestic transactions where the originator is not a bank customer, only transfers of INR 50,000 and above require KYC information.

Responsibilities of Regulated Entities (REs):

The new regulations place additional responsibilities on banks and other financial institutions involved in wire transfers:

  • Ordering RE: The bank initiating the transfer must ensure all required originator and beneficiary information is included for both cross-border and qualifying domestic transactions.
  • Intermediary RE: A bank receiving a wire transfer from another bank must:
    • Retain all originator and beneficiary information with the transfer.
    • Identify and report suspicious transactions lacking proper information.
    • Implement risk-based procedures for handling wire transfers.
  • Beneficiary RE: The bank receiving the final transfer (directly or through an intermediary) must:
    • Take reasonable measures (including monitoring) to identify suspicious transactions.
    • Implement risk-based procedures for handling wire transfers.

Reforms in the Financial Sector

The Need for Reform

The Indian financial sector faces challenges due to its fragmented regulatory structure, outdated legal framework, and the rapid development of new financial products and technologies. Reforms are necessary to:

  • Enhance Financial Stability: A consolidated regulatory approach can better identify and manage systemic risks across the financial system.
  • Improve Consumer Protection: Streamlined regulations can ensure consistent and effective protection for all financial product users.
  • Promote Financial Inclusion: Reforms can encourage innovation and competition, leading to a wider range of financial products and services for the unbanked and underbanked population.
  • Develop the Financial Market: A robust regulatory framework fosters investor confidence and promotes the development of deeper and more efficient financial markets.

Reform Proposals

Several proposals have been put forward to reform India's financial sector:

  • Unified Financial Regulatory Authority (UFRA): This proposal advocates for a single regulator for the entire financial system, similar to the models in the UK, US, and Australia. This would eliminate regulatory arbitrage, ensure consistent standards, and improve the efficiency of regulation. However, concerns exist about the complexity of managing such a vast and diverse sector under one entity.
  • Twin Peaks Model: This model separates prudential regulation (focusing on financial stability) from conduct regulation (protecting consumers). The RBI could retain responsibility for prudential regulation, while a new conduct regulator oversees market conduct and consumer protection. This approach balances the need for financial stability with protecting investors and consumers.
  • Harmonization of Regulatory Standards: While a single regulator may not be feasible, efforts can be made to harmonize regulations across different agencies. This could involve establishing common reporting formats, risk management frameworks, and enforcement procedures.
  • Legislative Reforms: Updating and consolidating the existing plethora of financial sector Acts is crucial. New legislation should be forward-looking, technology-neutral, and promote financial innovation while ensuring robust safeguards.