Tag: Mutual Funds

Non-Banking Financial Companies (NBFCs) play a vital role in advancing financial inclusion in India, especially in underserved rural and semi-urban areas. Unlike traditional banks, NBFCs offer flexibility, faster processing, and customized financial products, enabling them to bridge the credit gap for individuals and small businesses. With simplified documentation and doorstep services, they provide credit to sectors often excluded by mainstream banks such as micro-enterprises, small traders, and low-income households. By leveraging technology, NBFCs also deliver insurance, pensions, and digital payments, aligning with India’s broader goal of inclusive economic growth. Their presence helps promote entrepreneurship and financial resilience in remote regions.

• Microcredit Access for the Unbanked:

NBFCs are key providers of microcredit to individuals and businesses who lack formal income documentation or credit history. By offering small-ticket loans with minimal paperwork and flexible repayment schedules, they enable marginalized populations—such as daily wage earners, women entrepreneurs, and informal workers—to access funds for income-generating activities. NBFC-MFIs (Microfinance Institutions) have played a particularly important role in empowering rural women by facilitating self-help groups and entrepreneurship. Their field agents and local partnerships help reduce barriers to access, trust, and financial literacy. In regions where banks are absent or unwilling to lend due to risk concerns, NBFCs ensure credit reaches the last mile, thereby enhancing economic participation.

• Tailored Products for Diverse Needs

NBFCs design and deliver financial products tailored to the specific needs of underserved communities. For example, they offer vehicle loans to small transport operators, gold loans to households without collateral, and consumer durables financing to low-income families. Unlike banks with rigid criteria, NBFCs assess borrowers based on alternate data—such as business turnover or cash flows—rather than credit scores. Their agility in creating sector-specific products, such as loans for farmers, artisans, or small shopkeepers, addresses the unique challenges these groups face. NBFCs also provide financing for affordable housing, education, and health-related emergencies, making essential services accessible. These targeted offerings make NBFCs a critical instrument in deepening financial inclusion across economic strata.

• Expanding Reach Through Technology

NBFCs leverage digital tools and mobile technology to extend financial services to remote areas. With mobile apps, SMS alerts, e-KYC, and biometric authentication, they streamline loan approval, disbursement, and recovery processes—even in regions lacking physical infrastructure. Fintech NBFCs offer online onboarding, digital lending, and wallet-based services that improve convenience and transparency. This technological adoption reduces cost-to-serve, improves credit assessments through alternative data (e.g., mobile usage, payment history), and enhances user experience. Such digital-first strategies allow NBFCs to scale quickly, penetrate rural markets, and serve customers previously excluded due to geographic or documentation barriers. As a result, they help bridge the urban-rural financial divide and drive digital inclusion.

• Supporting MSMEs and Informal Sector:

NBFCs play a pivotal role in supporting Micro, Small, and Medium Enterprises (MSMEs) and informal sector workers, who often struggle to obtain funding from traditional banks. They offer working capital loans, machinery finance, and invoice discounting to small businesses with limited credit history. By providing timely credit, NBFCs help these enterprises manage cash flows, expand operations, and weather economic fluctuations. Many NBFCs adopt relationship-based lending, allowing for trust and flexibility in underwriting. They also support gig workers, vendors, and home-based entrepreneurs—segments critical to India’s economy. As enablers of employment and productivity, NBFCs strengthen local economies and contribute to inclusive growth by promoting self-reliance and business resilience in underserved regions.

Punjab and Maharashtra Cooperative Bank was established in 1984 and grew into one of India’s top 10 urban cooperative banks. It had over 137 branches across 6 states and served thousands of depositors. The bank catered to both retail and institutional clients and had earned trust over the years through its aggressive growth and high deposit interest rates. By 2019, it had deposits worth over ₹11,000 crore and a loan book exceeding ₹8,000 crore.

Discovery of Financial Irregularities

In September 2019, the Reserve Bank of India (RBI) imposed operational restrictions on PMC Bank after uncovering a ₹6,500+ crore scam, where the bank fraudulently hid and underreported its bad loans. The fraud came to light when a whistleblower informed RBI about the misreporting of loan exposures to a bankrupt real estate firm – Housing Development and Infrastructure Ltd. (HDIL).

Undisclosed Exposure to HDIL

PMC Bank had illegally lent over 73% of its total loan book (~₹6,226 crore) to HDIL and related entities, which had already been declared bankrupt. Bank officials used 21,000 fake accounts to hide the bad loans from regulators and auditors. These dummy accounts masked non-performing assets (NPAs), giving the illusion of a healthy loan portfolio.

Management’s Role in the Scam

Top executives at PMC Bank, including the Managing Director Joy Thomas and Chairman Waryam Singh, were directly involved in sanctioning and hiding loans to HDIL. Internal systems and software were manipulated to conceal the real numbers from auditors and the RBI. The auditors also failed to detect the deception, pointing to lapses in checks and balances.

RBI’s Immediate Action

On 23rd September 2019, RBI put PMC Bank under Section 35A of the Banking Regulation Act, restricting withdrawals for depositors initially to ₹1,000, later increased in phases. The bank was not allowed to offer new loans or renew existing ones, and the Board of Directors was superseded. An administrator was appointed to manage the crisis.

Public Outcry and Depositor Hardship

The sudden restrictions caused widespread panic among account holders. Many customers had life savings in the bank and couldn’t access funds for medical emergencies, education, or business needs. Emotional distress led to several deaths reportedly due to shock or suicide, highlighting the deep financial and psychological impact on the common public.

Legal and Investigative Proceedings

The Mumbai Police’s Economic Offences Wing (EOW) and Enforcement Directorate (ED) launched investigations. Multiple arrests were made, including PMC officials and HDIL promoters Rakesh and Sarang Wadhawan. ED attached HDIL’s properties worth crores under the Prevention of Money Laundering Act (PMLA). Investigations revealed that PMC gave loans despite HDIL defaulting on repayments for years.

Loopholes in Cooperative Banking Regulation

The crisis exposed serious regulatory gaps in India’s dual control structure over cooperative banks – RBI oversees banking operations, while state governments regulate administration. PMC operated with weak internal controls, and regulatory supervision was inadequate. The case led to demands for comprehensive reform in cooperative banking regulation, especially on audit and oversight.

RBI’s Corrective Measures and Policy Changes

Post-PMC crisis, the RBI and government took various steps:

• Amended Banking Regulation Act (2020) to bring cooperative banks under stricter RBI control.

• Enhanced guidelines on audit quality and loan exposure limits.

• Issued advisories on whistleblower mechanisms and stricter internal audits to detect frauds early.

Resolution Through Merging with Unity Small Finance Bank:

In November 2021, the RBI approved the merger of PMC Bank with Unity Small Finance Bank (USFB), backed by Centrum Group and BharatPe. Under the resolution plan:

• Depositors were to receive back their full deposits in a staggered manner.

• Unity took over assets and liabilities, with the goal to revive operations and restore trust.

• Large depositors had to wait longer, while smaller depositors got quicker access.

Impact on Banking Sector and Financial Confidence:

The PMC Bank debacle led to loss of public confidence in cooperative banks. Even strong urban cooperative banks saw withdrawal pressures. The crisis triggered debates around:

• Deposit insurance coverage (enhanced later to ₹5 lakh).

• Need for timely financial disclosures and audits.

• Greater oversight on urban cooperative banks to protect depositors.

Lessons Learnt and Way Forward:

The PMC crisis taught regulators, banks, and customers several lessons:

• Importance of transparency in reporting loan exposures.

• Need for robust governance and accountability mechanisms.

• Strengthening whistleblower protection and digital monitoring systems.

• Depositors also became more aware of risks associated with high-return promises.
  The crisis pushed RBI and the government to tighten norms for the cooperative banking sector and enhance trust in India’s financial system.

The Income Recognition and Asset Classification (IRAC) norms, introduced by the Reserve Bank of India (RBI), are essential guidelines followed by banks and financial institutions to assess the quality of their loan assets. These norms ensure transparency in the banking sector by identifying the performance status of loans and classifying them accordingly. They help in recognizing income only when it is realized and classifying assets based on the borrower’s repayment behavior. The main categories include Standard, Sub-Standard, Doubtful, and Loss Assets, each representing different levels of credit risk and influencing a bank’s financial health and provisioning requirements.

• Standard Assets

Standard assets are loans or advances that do not pose any risk of default. As per Reserve Bank of India (RBI) guidelines, a standard asset is one that remains performing — meaning the borrower makes regular payments of interest and principal without any delay. These assets exhibit normal risk and are not considered problematic. They do not carry any default history and are fully compliant with the agreed repayment schedule. Banks are required to classify performing assets as standard and maintain lower provisioning requirements, which enhances profitability. These assets reflect the financial health of the borrower and are considered safe for the bank. Examples include loans to large corporations, home loans with steady repayment, and education loans under active repayment. Maintaining a high proportion of standard assets is crucial for a bank’s balance sheet quality. Banks regularly monitor standard assets to detect early warning signals, if any, to ensure timely intervention and avoid future slippages into non-performing categories.

• Sub-Standard Assets

Sub-standard assets are non-performing loans (NPAs) that have remained in default for a period not exceeding 12 months. When a borrower fails to make interest or principal payments for more than 90 days, the account is classified as a non-performing asset, and within this, if it is a recent default (less than a year), it is termed a sub-standard asset. These assets carry higher credit risk and require increased provisioning by banks — typically 15% or more. Sub-standard classification reflects early signs of distress and deteriorating repayment capacity. Though still recoverable, sub-standard assets often indicate short-term liquidity issues or temporary business setbacks faced by borrowers. Banks are advised to closely monitor and restructure such loans where feasible. Timely recovery strategies such as rescheduling, settlement offers, or legal proceedings are considered to avoid further slippage into doubtful or loss categories. The classification alerts banks to initiate remedial actions and preserve asset quality.

• Doubtful Assets

Doubtful assets are those which have remained in the sub-standard category for more than 12 months. These loans show a prolonged default history, and the possibility of full recovery becomes increasingly uncertain. RBI mandates higher provisioning norms for doubtful assets — between 25% and 100%, depending on the period they’ve remained in this category and the extent of collateral cover. Banks assess doubtful assets with skepticism as repayment chances are significantly reduced, even if some security is available. This classification reflects serious financial stress in the borrower’s business and a weakened ability or intent to repay. Recovery often depends on the sale of collateral or legal actions like the SARFAESI Act or insolvency proceedings. Doubtful assets impact the bank’s profitability and reputation and require aggressive recovery efforts. Regular monitoring, asset restructuring, and negotiated settlements are pursued where viable. Moving assets out of this category often requires a turnaround in borrower performance or enforced recovery through courts or asset reconstruction companies.

• Loss Assets

Loss assets are those that are identified as unrecoverable and considered of no value to the bank, either fully or partially. As per RBI, these are loans that a bank or an auditor or even the RBI itself has deemed uncollectible, although there may be some residual recovery possible in exceptional cases. These assets have either been in default for an extended period or have no viable business or collateral backing. Banks are required to make 100% provisioning for loss assets, recognizing them as a total loss in their financial statements. Even if legal action is pending or collateral is theoretically available, these assets must be treated as fully impaired. Typically, these loans have been written off or are under liquidation or bankruptcy proceedings. Classifying an asset as a “loss” ensures complete transparency and prudent accounting. It alerts stakeholders to the deterioration in credit quality and signals the need for stricter credit appraisal and monitoring processes to prevent such losses in the future.

From 2021 to 2023, India witnessed an unprecedented surge in Initial Public Offerings (IPOs), marking a historic boom in its capital markets. Fuelled by strong retail participation, abundant global liquidity, favorable government policies, and bullish stock markets, companies across sectors rushed to raise capital through public issues. Startups, tech unicorns, and traditional businesses alike saw this period as an opportune time to tap investor appetite. Over 150 companies went public, collectively raising more than ₹1.8 lakh crore. Notable listings included Zomato, Nykaa, LIC, and Paytm. This IPO frenzy showcased India’s evolving financial landscape, with increased digitization, higher retail participation via apps, and growing confidence in equity markets. However, the boom also brought valuation concerns, regulatory scrutiny, and post-listing volatility.

• Rise of Tech and Digital Startups

Between 2021 and 2023, India saw a new wave of tech startups entering the public market. Companies like Zomato, Nykaa, PolicyBazaar, and Paytm made headlines by launching high-value IPOs, often crossing billion-dollar valuations. These firms leveraged digital platforms, created new-age customer experiences, and drew substantial investor interest. Most had never posted a profit, yet the promise of long-term scalability and innovation attracted institutional and retail investors. Their IPOs marked a shift in investor mindset—from traditional profit-based metrics to growth-driven potential. Although post-listing performance was mixed, the listings showcased India’s maturing tech ecosystem. The IPO boom gave startups access to public capital and greater visibility, but also brought them under strict regulatory and investor scrutiny, pushing them to improve transparency and accountability in operations.

• Record-Breaking Fundraising

The IPO boom resulted in record capital mobilization. Companies raised over ₹1.8 lakh crore between 2021 and 2023, with 2021 alone contributing ₹1.18 lakh crore—the highest ever in a calendar year. Traditional giants like LIC (₹21,000 crore) and Adani Wilmar, along with tech-first businesses, led the charge. The availability of liquidity due to low interest rates, recovery from COVID-19 disruptions, and strong secondary market performance created an ideal environment for companies to go public. Many firms used IPO proceeds for debt repayment, expansion, and strengthening their balance sheets. This surge was supported by higher retail and institutional investor participation, reflecting deepening trust in Indian equities. The massive inflow of capital boosted financial markets and supported broader economic recovery. However, valuation concerns and market saturation emerged, prompting more cautious investor behavior toward the end of 2023.

• Surge in Retail and First-Time Investors

One of the most defining aspects of the IPO boom was the surge in retail investor participation, especially among first-time market entrants. Fueled by digital trading platforms like Zerodha, Groww, Upstox, and widespread financial awareness, millions opened demat accounts. Retail investors eagerly applied for IPOs expecting quick listing gains, often leading to oversubscription by multiple times. SEBI’s reforms and easier online application processes under ASBA (Application Supported by Blocked Amount) also supported the trend. IPOs like Nykaa and Paras Defence saw massive oversubscriptions, largely driven by retail bids. While this enthusiasm democratized investing, many investors lacked long-term strategies and faced losses when newly listed stocks fell below offer prices. The boom highlighted the need for financial literacy and risk education, especially for newcomers. Nonetheless, the period cultivated a strong culture of retail equity participation and reshaped India’s investor demographic landscape.

• Government and Regulatory Push

The Indian government and SEBI played a pivotal role in enabling the IPO boom. The disinvestment of LIC marked a milestone in India’s economic reforms and attracted millions of first-time investors. Regulatory initiatives such as T+1 settlement, simplified IPO application processes, and digitization of KYC streamlined the IPO participation journey. SEBI also revised disclosure norms, tightened monitoring of book-building processes, and introduced frameworks to enhance transparency. The regulator emphasized investor protection, especially after volatile listings like Paytm. Government-backed reforms to boost startup funding and relax foreign investment norms encouraged unicorns to consider IPOs as a viable fundraising route. Regulatory clarity also allowed for SME and main board IPOs to flourish. Overall, institutional support ensured smoother IPO operations, increased public trust, and strengthened India’s capital market ecosystem for sustainable long-term growth.

• Post-Listing Performance and Market Volatility

While many IPOs generated hype and heavy oversubscription, their post-listing performance varied widely. Companies like Zomato and Nykaa initially delivered strong listing gains but later faced significant price corrections. Paytm, one of the biggest IPOs, saw its shares crash by over 50% shortly after listing, raising concerns over valuation mismatches and poor earnings visibility. Such volatility created unease among investors, especially retail participants expecting instant returns. Analysts criticized companies for aggressive pricing and lack of consistent profits. The broader market correction in late 2022 and 2023 further impacted investor sentiment. This turbulence highlighted the importance of due diligence, realistic valuation, and long-term business models over hype-driven investment. Regulators and brokerages urged caution and provided more detailed risk disclosures. While IPOs remain an important capital-raising tool, the period emphasized the need for sustainable fundamentals over mere market frenzy. Lessons learned may shape a more disciplined IPO culture going forward.

• SME IPO Growth and Regional Participation

The IPO boom wasn’t limited to large corporations and tech unicorns—Small and Medium Enterprises (SMEs) also tapped into public markets in unprecedented numbers. Exchanges like NSE Emerge and BSE SME platforms facilitated over 100 SME listings during this period, helping regional businesses access equity capital. Sectors like pharma, manufacturing, textiles, and IT saw mid-sized firms going public. With lower compliance norms, simplified documentation, and localized investor outreach, SME IPOs gained traction across Tier-II and Tier-III cities. Many investors found SME stocks attractive due to niche business models and early-stage growth potential. Retail and HNI investors played a key role in their subscription. However, concerns around low liquidity and price volatility were noted, prompting calls for tighter governance. Still, the SME IPO surge democratized fundraising and created a vibrant entrepreneurial ecosystem at the grassroots level, contributing significantly to employment and regional economic development.

In January 2023, U.S.-based short-seller Hindenburg Research published a report accusing the Adani Group, one of India’s largest conglomerates, of accounting fraud, stock manipulation, and corporate governance lapses. The report was released just days before the launch of Adani Enterprises’ ₹20,000 crore Follow-on Public Offer (FPO), triggering sharp declines in the group’s stock prices. Within days, Adani companies collectively lost over $100 billion in market capitalization, making it one of the largest wealth erosions in Indian stock market history.

The controversy brought global attention to the group’s financial practices and raised questions about the robustness of India’s regulatory framework. It also stirred political debates and intensified scrutiny from investors, credit agencies, and foreign institutions. The episode was a test for market resilience and the effectiveness of Indian regulators like SEBI (Securities and Exchange Board of India). It raised concerns over corporate transparency, regulatory oversight, and investor protection mechanisms in emerging markets. While the Adani Group denied all allegations and called the report malicious, the case sparked broader discussions about short-selling, disclosure norms, and systemic risks in the Indian financial ecosystem.

• Market Volatility

The Adani-Hindenburg episode triggered unprecedented market volatility, with Adani stocks witnessing steep intraday losses across multiple trading sessions. Adani Enterprises, Adani Ports, and Adani Green Energy were among the hardest hit, with price corrections of up to 50–60% in just a few weeks. The broader indices like Nifty 50 and Sensex also saw negative spillovers due to the heavy index weightage of Adani Group companies. Investor sentiment turned cautious, especially among foreign institutional investors (FIIs), some of whom began withdrawing from Indian equities fearing systemic risk.

The FPO of Adani Enterprises was fully subscribed but later withdrawn to protect investor interest. Credit agencies like Moody’s and S&P revised their outlook on Adani companies, adding further pressure. Domestic mutual funds and banks with exposure to Adani stocks also saw increased scrutiny. Retail investors were impacted by the sudden wealth erosion and uncertainty surrounding price recovery. The episode highlighted the fragility of emerging markets in the face of external shocks and speculative reports. It also raised concerns about over-leveraging, promoter-driven growth, and the interconnectedness between large corporates and financial institutions. The overall market mood remained jittery for weeks, underlining the importance of transparency, governance, and investor communication.

• SEBI’s Role:

Following the Hindenburg allegations, SEBI faced immense pressure to respond swiftly and effectively. Initially, SEBI issued a public statement confirming its ongoing surveillance of the market and the Adani stocks. Later, under Supreme Court direction, SEBI was tasked with conducting a detailed probe into possible regulatory violations, including allegations of stock price manipulation, lack of disclosure of related-party transactions, and the use of offshore shell companies.

SEBI’s investigation involved examining Foreign Portfolio Investor (FPI) links, corporate structure opacity, and compliance with minimum public shareholding norms. The regulator submitted an interim report to the court, but critics argued that its actions lacked speed and transparency. The Supreme Court-appointed expert committee concluded that SEBI had not found conclusive evidence of manipulation but recommended tightening disclosure norms and beneficial ownership rules.

In response, SEBI began proposing reforms aimed at improving disclosure standards, monitoring high-leverage positions, and enhancing the tracking of offshore fund flows. While SEBI’s role was both questioned and defended, the incident highlighted the need for greater regulatory agility, proactive enforcement, and real-time monitoring capabilities. The case may become a turning point for strengthening India’s market oversight and improving investor protection mechanisms in line with global best practices.

India’s financial markets have undergone significant reforms in recent years to enhance efficiency, transparency, and investor protection. With increasing participation from retail and institutional investors, there has been a growing need to modernize market infrastructure. Regulatory bodies like SEBI and RBI have introduced technological innovations and policy changes to reduce systemic risks and improve settlement cycles. Two such major reforms are the T+1 settlement cycle and the ASBA (Application Supported by Blocked Amount) system. These changes aim to streamline trading and IPO application processes while boosting investor confidence and aligning India’s markets with global best practices.

• T+1 Settlement:

The T+1 settlement reform, introduced by SEBI, shortens the trade settlement cycle from T+2 (trade date plus two days) to T+1. Implemented in phases starting in February 2022, the reform was fully operational by January 2023. Under T+1, funds and securities are exchanged one day after the trade date, reducing counterparty risk, improving liquidity, and enhancing capital efficiency. This move has positioned India among the fastest-settling markets globally, boosting investor confidence, especially among retail traders. For institutional investors, it enhances fund rotation speed and portfolio rebalancing capabilities. However, T+1 also requires upgraded systems, real-time processing, and greater operational discipline from brokers, depositories, and custodians. Despite initial resistance from foreign investors due to time zone and currency conversion constraints, the transition has largely been smooth, marking a significant leap in market modernization and efficiency.

• ASBA (Application Supported by Blocked Amount):

ASBA is a payment mechanism introduced by SEBI in 2008 to improve the IPO application process. Under this system, investors apply for IPO shares without transferring funds upfront. Instead, the application amount is blocked in the applicant’s bank account and is debited only if the shares are allotted. This reform eliminates the need for refunds in case of non-allotment, reducing delays and errors. ASBA improves transparency, minimizes misuse of funds, and ensures fair allocation. It is mandatory for all retail investors applying through the book-building process. Over the years, it has been integrated with UPI for faster and more seamless transactions. By keeping the funds in the investor’s account till allotment, ASBA also allows interest earnings and greater control over personal finances. The system has significantly increased investor trust in the IPO process, streamlined operations for bankers and registrars, and modernized the primary market infrastructure in India.

The Securities and Exchange Board of India (SEBI) is the primary regulator of securities markets in India. It was established on April 12, 1992, under the SEBI Act, 1992, to protect the interests of investors and promote the development of, and regulate, the securities market. SEBI’s regulatory framework plays a crucial role in ensuring transparency, accountability, and efficiency in the Indian stock markets.

Objective of SEBI Regulations:

• Investor Protection

SEBI regulations aim to safeguard the interests of investors in the securities market. By enforcing transparency, mandating disclosures, and curbing malpractices like insider trading and fraud, SEBI ensures that retail and institutional investors can trade with confidence. It also provides platforms for grievance redressal, educates investors about their rights, and promotes fair treatment in all market dealings.

• Market Transparency and Integrity

One of SEBI’s key objectives is to ensure transparency and integrity in the securities market. Regulations require companies to disclose accurate financial and operational information to prevent manipulation and misrepresentation. This helps create a fair environment where prices reflect real value and participants operate on a level playing field, thereby enhancing trust and efficiency in the functioning of stock markets.

• Market Development

SEBI promotes the orderly development of the Indian securities market through regulatory reforms, technological upgrades, and structural improvements. By encouraging innovation, introducing new financial instruments, and simplifying procedures, SEBI helps attract more participants—both domestic and global. These efforts enhance market depth, liquidity, and stability, contributing to India’s overall economic growth and integration with global financial markets.

Regulatory Framework:

SEBI has issued several regulations, circulars, and guidelines that govern various market participants, including stock exchanges, brokers, listed companies, mutual funds, foreign portfolio investors (FPIs), and more. These are binding and form the foundation of market governance in India.

Key SEBI Regulations:

a) SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR)

These regulations mandate timely and adequate disclosures by listed companies to ensure that investors are well-informed. It includes rules on:

• Corporate governance

• Financial reporting

• Shareholder rights

• Disclosure of material events

b) SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR)

These regulations govern public issues such as IPOs, FPOs, and rights issues. It ensures transparency in capital-raising processes and mandates companies to provide detailed disclosures in offer documents.

c) SEBI (Prohibition of Insider Trading) Regulations, 2015

These rules prohibit the trading of securities based on unpublished price-sensitive information (UPSI). Companies must maintain insider trading policies and codes of conduct to prevent misuse of confidential information.

d) SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST)

These are meant to protect the interest of minority shareholders during mergers and acquisitions. Acquirers must disclose when their shareholding crosses certain thresholds and make open offers to other shareholders.

e) SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003

This regulation deals with unfair trading practices like price rigging, circular trading, and pump-and-dump schemes. SEBI has powers to investigate and penalize such malpractices.

Regulation of Intermediaries:

SEBI regulates stock market intermediaries such as:

• Stock Brokers

• Merchant Bankers

• Registrars

• Credit Rating Agencies

• Depositories (NSDL, CDSL)

• Clearing Corporations

All intermediaries must be registered with SEBI and comply with its guidelines related to capital adequacy, code of conduct, grievance redressal, and risk management.

Regulation of Stock Exchanges:

SEBI oversees the functioning of stock exchanges such as BSE and NSE. It ensures that:

• Exchanges comply with listing norms

• Technology and systems ensure real-time trading and surveillance

• Investor protection funds are in place

• Surveillance mechanisms monitor unusual price movements

SEBI also mandates exchanges to implement trading halts, circuit breakers, and other risk mitigation tools.

Investor Education and Protection:

SEBI runs extensive investor awareness programs through digital campaigns, workshops, and regional investor education centers. It also operates the SEBI Complaints Redress System (SCORES) for lodging and tracking investor complaints.

Surveillance and Investigation Powers:

SEBI has quasi-judicial powers to:

• Investigate market manipulation

• Inspect books of accounts of listed companies and intermediaries

• Impose penalties

• Suspend or ban entities from the market

SEBI can conduct searches and seizures with judicial permission and initiate prosecution for criminal offences.

Corporate Governance and ESG Regulations:

SEBI has mandated several norms related to corporate governance, including:

• Board composition (e.g., independent directors)

• Audit committee roles

• CEO/CFO certification of financial statements

Additionally, SEBI is introducing Environmental, Social, and Governance (ESG) disclosures, making India one of the early adopters of sustainability reporting norms.

Paytm Payments Bank Ltd. (PPBL), a subsidiary of One97 Communications Ltd., was launched in 2017 with a vision to redefine banking by offering digital-first, low-cost, and accessible financial services. As one of the first Payments Banks in India, PPBL aimed to provide savings and current accounts, UPI services, and digital wallets, while operating under the regulatory framework defined by the Reserve Bank of India (RBI). However, the bank’s operations have undergone significant transitions due to regulatory concerns, compliance issues, and evolving market dynamics.

Background and Growth Phase:

Initially, Paytm Payments Bank garnered substantial attention and adoption. By 2021, it had become one of the most active digital banks in the country with over 100 million KYC-verified users, a massive merchant base, and significant UPI transaction volumes. PPBL offered zero balance savings accounts, competitive interest rates, and seamless integration with the Paytm ecosystem. Its digital onboarding and app-based services enabled financial inclusion, especially among small merchants and rural users.

However, as a Payments Bank, PPBL was restricted from lending activities and could not offer credit cards or fixed deposits on its own balance sheet. Instead, it partnered with financial institutions to offer such services.

Regulatory Setbacks and RBI Actions:

Despite its early success, PPBL encountered multiple regulatory hurdles. In March 2022, the Reserve Bank of India barred PPBL from onboarding new customers due to “material supervisory concerns” and ongoing non-compliances. This included lapses in KYC norms, concerns about the shareholding structure, and the segregation of bank and wallet operations, which were not clearly defined.

More serious consequences followed in January 2024, when RBI directed PPBL to cease all banking operations by March 15, 2024, including accepting deposits, top-ups, and UPI transactions. The central bank also asked NPCI to transition UPI handles of Paytm users to other banks. These directives were issued citing persistent non-compliances, failure to rectify supervisory concerns, and issues with data governance and customer privacy.

Impact on Users and the Market:

The RBI’s directive significantly impacted millions of retail customers and merchants who relied on PPBL for UPI payments, FASTag, wallets, and savings accounts. Customers were advised to withdraw balances and migrate services before the deadline. Meanwhile, Paytm’s stock price saw sharp declines, and investor confidence was shaken.

On the ecosystem level, this transition affected the broader digital payment infrastructure, particularly for small merchants and kirana stores who depended heavily on Paytm QR codes. It also prompted debates over the governance and oversight of digital financial institutions, pushing the RBI to emphasize stronger due diligence and accountability.

Transition Strategy and Realignment:

Following RBI’s orders, Paytm began transitioning its operations. UPI services were shifted to partner banks like Axis Bank, HDFC Bank, and SBI, who took over the backend operations for the Paytm app’s UPI features. While the app remains functional, its UPI handles and routing are now managed externally.

Paytm also restructured its partnerships and laid out plans to strengthen compliance, data governance, and customer safety measures. Furthermore, Paytm is focusing on becoming a distribution platform rather than a banking operator, offering financial products through licensed third-party institutions.

Key Learnings and Conclusion:

The Paytm Payments Bank transition highlights the importance of regulatory compliance in digital finance. While the platform revolutionized access to financial services for millions, its challenges emphasize that scale and innovation must be backed by robust governance.

For regulators, the case underscores the need to monitor fast-growing fintech firms, especially those straddling multiple verticals. It also shows the significance of separating financial services operations from parent companies to avoid conflicts of interest and ensure transparency.

For other Payments Banks and FinTechs, the PPBL case serves as a cautionary tale — innovation without compliance can lead to disruption, but not necessarily the kind one hopes for. The future of digital finance in India now rests on building trust, ensuring safety, and aligning closely with regulatory expectations.

Shadow Banking refers to financial activities and institutions that operate outside the traditional banking system but perform similar functions, such as lending and credit creation. These include entities like NBFCs (Non-Banking Financial Companies), hedge funds, investment firms, peer-to-peer lenders, and securitization vehicles. Unlike regular banks, shadow banks do not accept public deposits and are subject to lighter regulations, making them more flexible but also riskier. Shadow banking plays a crucial role in enhancing credit access and market liquidity but can pose systemic risks due to lack of transparency, high leverage, and limited regulatory oversight.

Reasons for Rise of Shadow Banking:

• Regulatory Arbitrage

One of the main reasons for the growth of shadow banking is regulatory arbitrage—where institutions operate outside the purview of stringent banking regulations. Traditional banks are subject to capital adequacy norms, liquidity requirements, and risk management guidelines set by central banks. In contrast, shadow banks face lighter or fewer regulatory constraints, allowing them to offer quicker, more flexible financial services. This regulatory gap enables them to undertake riskier lending, serve underserved segments, and create innovative financial products, thereby attracting borrowers and investors seeking higher returns or faster credit.

• Increased Credit Demand

As economies grow, so does the demand for credit from individuals, small businesses, and corporations. Traditional banks often follow conservative lending practices, limiting their exposure to certain sectors due to regulatory caps, risk assessments, or lack of collateral. Shadow banking institutions emerged to fill this credit gap by providing loans to those not served adequately by banks. Their ability to offer customized lending solutions, faster disbursement, and fewer procedural requirements made them appealing, particularly in developing economies like India, where access to formal banking is still evolving.

• Financial Innovation

Shadow banking entities often lead in financial innovation, introducing new credit products, securitized assets, and investment instruments. They use technologies such as digital lending platforms, alternative credit scoring models, and data analytics to underwrite loans and manage risks efficiently. These innovations improve speed, reach, and efficiency, helping them attract borrowers and investors. Unlike traditional banks, which may be restricted by legacy systems and rigid compliance structures, shadow banks can adapt quickly to market needs, making them instrumental in developing niche financial markets and alternative credit systems.

• Cost-Effective Operations

Shadow banks typically have leaner operations compared to traditional banks. They avoid heavy investments in branch infrastructure, staffing, and legacy systems. Many operate through digital platforms, reducing overhead and enabling faster, more efficient service delivery. This cost advantage allows them to offer competitive interest rates or serve high-risk borrowers who are unattractive to banks. Their streamlined business models and lower compliance burdens result in faster turnaround times, making them the preferred choice for short-term loans, consumer credit, and financing for micro, small, and medium enterprises (MSMEs).

Types of Shadow Banking:

• Non-Banking Financial Companies (NBFCs)

NBFCs are the most prominent shadow banking entities in India. They provide a range of financial services similar to banks—such as loans, asset financing, leasing, hire purchase, and investment products—but do not accept demand deposits. They are regulated by the Reserve Bank of India (RBI) under a lighter regulatory framework compared to banks. NBFCs play a crucial role in financial inclusion, catering to underserved sectors like micro, small, and medium enterprises (MSMEs), retail borrowers, and rural areas. Their flexibility, faster loan processing, and focused sectoral lending have made them major players in India’s financial ecosystem.

• Housing Finance Companies (HFCs)

HFCs are specialized financial institutions that provide loans for housing and real estate development. They operate similarly to banks in offering home loans but fall under a different regulatory category, previously overseen by the National Housing Bank (NHB) and now by the RBI. While regulated, HFCs still function with less stringent norms than banks. Their presence has grown in response to the rising demand for housing finance, especially in semi-urban and rural areas. HFCs are instrumental in expanding home ownership, offering customized mortgage solutions, and contributing to government schemes like Pradhan Mantri Awas Yojana.

• Microfinance Institutions (MFIs)

MFIs are financial entities that provide small loans (microcredit) to low-income individuals or groups, especially in rural or underbanked areas. These loans are typically used for livelihood support, education, or basic needs. MFIs operate with limited collateral requirements and often serve borrowers outside the formal banking network. While many MFIs are regulated as NBFC-MFIs, several still operate informally. They play a vital role in women’s empowerment, poverty reduction, and rural development. However, their practices are sometimes criticized for high interest rates and aggressive recovery methods, highlighting the need for better oversight and consumer protection.

• Infrastructure Finance Companies (IFCs)

IFCs are a subset of NBFCs that specialize in funding large-scale infrastructure projects such as roads, ports, airports, and power plants. Due to the long gestation periods and capital-intensive nature of infrastructure projects, these companies offer long-term financing solutions that traditional banks may avoid. They help bridge the funding gap in infrastructure development, which is essential for economic growth. Though regulated by the RBI, IFCs often enjoy relaxed capital norms to support high-ticket lending. Their role is especially important in countries like India, where government-led infrastructure initiatives require significant private sector participation.

Challenges of Shadow Banking:

• Regulatory Arbitrage

Shadow banking entities often operate under lighter or fragmented regulatory frameworks, which creates loopholes and inconsistencies in oversight. Unlike traditional banks, they may not be subject to strict capital adequacy, liquidity norms, or risk assessments. This regulatory arbitrage allows them to take higher risks without equivalent scrutiny. While it boosts innovation and credit availability, it also raises systemic risk, especially during financial stress. The lack of unified oversight can lead to poor governance, misreporting of financials, and even fraud, necessitating harmonized regulation across all lending entities to ensure financial stability.

• Liquidity Risk

Many shadow banking institutions rely heavily on short-term borrowings to fund long-term lending, creating significant asset-liability mismatches. In times of financial uncertainty, if lenders pull back or stop refinancing, these institutions face liquidity crunches. Unlike banks, shadow banks do not have access to the RBI’s lender-of-last-resort facilities or deposit insurance protection. This makes them vulnerable to sudden cash flow shocks, leading to defaults or even collapse. The 2018 IL&FS crisis is a stark example where liquidity risk in NBFCs affected the broader financial system, highlighting the urgent need for tighter liquidity management norms.

• Credit Risk and Loan Quality

Due to competitive pressure and rapid growth goals, many shadow banks extend credit to high-risk borrowers, often with limited credit history or collateral. This increases exposure to non-performing assets (NPAs), especially in economic downturns. Unlike commercial banks, they may lack robust credit appraisal systems, proper risk-based pricing, and recovery mechanisms. Additionally, aggressive lending in under-regulated segments can result in loan defaults and asset quality deterioration. The absence of stringent provisioning norms further masks the real extent of bad loans, potentially endangering investor confidence and financial health of the shadow banking ecosystem.

• Systemic Risk and Contagion Effect

Although shadow banks are non-deposit taking, their interconnectedness with banks, mutual funds, and capital markets makes them a source of systemic risk. A crisis in one large NBFC or HFC can lead to panic, withdrawal of funds, and a chain reaction across financial institutions, as seen in the IL&FS and DHFL collapses. Because many traditional lenders and investors have exposure to shadow banks, their failure can destabilize the entire financial system. The lack of proper resolution mechanisms further worsens the situation, demanding stronger surveillance and stress-testing of systemically important shadow banking entities.

The e-₹ (Digital Rupee) is a central bank digital currency (CBDC) issued by the Reserve Bank of India (RBI). It is the digital form of India’s fiat currency, having the same value as physical cash and backed by the RBI. The Digital Rupee aims to offer a safe, efficient, and regulated alternative to physical currency, enhancing the digital payment ecosystem while reducing the costs of currency printing, storage, and distribution.

Launched on a pilot basis in 2022, e-₹ is categorized into two types:

1. Retail CBDC (e–₹–R): For everyday consumers and merchants, usable through digital wallets for peer-to-peer (P2P) and person-to-merchant (P2M) transactions.

2. Wholesale CBDC (e–₹–W): Designed for financial institutions to streamline interbank settlements and reduce transaction times and costs.

e-₹ is not a cryptocurrency. Unlike Bitcoin or Ethereum, which are decentralized and volatile, the Digital Rupee is centralized, stable, and legally recognized. It does not earn interest and is considered a direct liability of the RBI.

The introduction of e-₹ aims to promote financial inclusion, improve the efficiency of monetary systems, and support the move toward a less-cash economy. As adoption increases, it may further integrate with UPI and other digital infrastructures to offer seamless, real-time digital payments across India.

Impact of Digital Rupee (e-₹) on Traditional Banking:

• Reduction in Physical Cash Handling

The Digital Rupee will significantly reduce banks’ dependence on physical cash, lowering costs associated with cash logistics like printing, transporting, and storing. This will streamline banking operations and reduce risks linked to counterfeit currency and cash theft. Banks will be able to focus more on digital infrastructure rather than managing physical currency. Over time, cash-based transactions will likely decline, pushing traditional banks toward more cashless, paperless ecosystems, improving overall efficiency and promoting a more environmentally sustainable banking system.

• Disintermediation Risk

With the RBI directly issuing e-₹ to the public, there is a potential threat of disintermediation, where customers may prefer holding digital rupee wallets over bank deposits. This could lead to a reduction in banks’ deposit base, affecting their ability to lend and manage liquidity. If people shift significant funds from savings accounts to e-₹, banks may need to offer higher interest rates to retain deposits, impacting their margins. This shift may require banks to redefine their role in the evolving digital currency ecosystem.

• Changes in Payment Systems

The e-₹ is expected to integrate with or possibly complement existing digital payment systems like UPI, NEFT, and IMPS. Traditional banks will need to adapt to new settlement models and ensure seamless compatibility with the Digital Rupee infrastructure. Payment intermediaries like card networks and payment gateways may face reduced demand if e-₹ allows direct person-to-person or merchant transactions. Banks will also need to invest in digital wallets and upgrade core systems to manage real-time digital currency flows effectively.

• Enhanced Transaction Transparency

Unlike cash, which is anonymous, transactions using the Digital Rupee can be tracked (depending on design), offering greater transparency. This will help traditional banks in areas such as fraud detection, compliance, and anti-money laundering (AML). With better data trails, banks can also improve credit assessments and customer profiling. However, this increased traceability might raise concerns about data privacy, requiring banks to adopt strict governance and cybersecurity protocols to ensure customer trust and compliance with data protection laws.

• Need for Technological Upgradation

The adoption of e-₹ will push traditional banks to upgrade their digital infrastructure. They must invest in secure APIs, blockchain-compatible systems (if used), and robust digital wallet integration. Ensuring real-time, high-volume transaction processing will become critical, especially if e-₹ is widely adopted for retail use. Banks will also need to train employees and customers on digital currency usage. This shift toward advanced tech platforms may be costly initially but will ultimately enhance banks’ digital competitiveness and service capabilities.

• Impact on Interest Income

Since e-₹ is a non-interest-bearing instrument, customers may withdraw funds from savings accounts (which earn interest) to hold in digital wallets for convenience or perceived safety. This reduces the funds available to banks for lending, potentially lowering their interest income, which is a major revenue source. To counter this, banks may need to develop innovative deposit schemes or value-added services that incentivize users to retain funds in traditional banking products rather than switching entirely to e-₹ holdings.

• Improved Financial Inclusion

e-₹ has the potential to bring unbanked populations into the digital economy, especially in rural or remote areas where physical bank branches are scarce. With mobile access and RBI-backed security, individuals can transact digitally without needing a full-fledged bank account. This challenges banks to provide basic digital banking services to compete with or complement CBDC usage. It also opens opportunities for banks to design simplified onboarding processes and financial literacy campaigns targeted at new digital currency users.

• New Regulatory and Compliance Demands

The integration of the Digital Rupee into banking systems will necessitate revised compliance frameworks. Banks must follow new RBI guidelines on e-₹ issuance, transaction monitoring, and cybersecurity standards. Anti-money laundering (AML) and know-your-customer (KYC) protocols will need updating to cover digital wallet usage. Regular audits and reporting mechanisms specific to CBDC flows may be required. This regulatory shift demands increased operational vigilance and may lead to the creation of dedicated compliance units focused on e-₹ transactions within traditional banks.