Tag Archives: compliance

union budget – direct taxes

  • Direct Tax proposals aim to maintain continuity and stability of taxation, further simplify and rationalise various provisions to reduce the compliance burden, promote the entrepreneurial spirit and provide tax relief to citizens.
  • Constant endeavour of the Income Tax Department to improve Tax Payers Services by making compliance easy and smooth.
  • To further improve tax payer services, proposal to roll out a next-generation Common IT Return Form for tax payer convenience, along with plans to strengthen the grievance redressal mechanism.
  • Rebate limit of Personal Income Tax to be increased to Rs. 7 lakh from the current Rs. 5 lakh in the new tax regime. Thus, persons in the new tax regime, with income up to Rs. 7 lakh to not pay any tax.
  • Tax structure in new personal income tax regime, introduced in 2020 with six income slabs, to change by reducing the number of slabs to five and increasing the tax exemption limit to Rs. 3 lakh. Change to provide major relief to all tax payers in the new regime.

New tax rates

Total Income (Rs)Rate (per cent)
Up to 3,00,000Nil
From 3,00,001 to 6,00,0005
From 6,00,001 to 9,00,00010
From 9,00,001 to 12,00,00015
From 12,00,001 to 15,00,00020
Above 15,00,00030
  • Proposal to extend the benefit of standard deduction of Rs. 50,000 to salaried individual, and deduction from family pension up to Rs. 15,000, in the new tax regime.
  • Highest surcharge rate to reduce from 37 per cent to 25 per cent in the new tax regime. This to further result in reduction of the maximum personal income tax rate to 39 per cent.
  • The limit for tax exemption on leave encashment on retirement of non-government salaried employees to increase to Rs. 25 lakh.
  • The new income tax regime to be made the default tax regime. However, citizens will continue to have the option to avail the benefit of the old tax regime.
  • Enhanced limits for micro enterprises and certain professionals for availing the benefit of presumptive taxation proposed. Increased limit to apply only in case the amount or aggregate of the amounts received during the year, in cash, does not exceed five per cent of the total gross receipts/turnover.
  • Deduction for expenditure incurred on payments made to MSMEs to be allowed only when payment is actually made in order to support MSMEs in timely receipt of payments.
  • New co-operatives that commence manufacturing activities till 31.3.2024 to get the benefit of a lower tax rate of 15 per cent, as presently available to new manufacturing companies.
  • Opportunity provided to sugar co-operatives to claim payments made to sugarcane farmers for the period prior to assessment year 2016-17 as expenditure. This expected to provide them a relief of almost Rs. 10,000 crore.
  • Provision of a higher limit of Rs. 2 lakh per member for cash deposits to and loans in cash by Primary Agricultural Co-operative Societies (PACS) and Primary Co-operative Agriculture and Rural Development Banks (PCARDBs).
  • higher limit of Rs. 3 crore for TDS on cash withdrawal to be provided to co-operative societies.
  • Date of incorporation for income tax benefits to start-ups to be extended from 31.03.23 to 31.3.24.
  • Proposal to provide the benefit of carry forward of losses on change of shareholding of start-ups from seven years of incorporation to ten years.
  • Deduction from capital gains on investment in residential house under sections 54 and 54F to be capped at Rs. 10 crore for better targeting of tax concessions and exemptions.
  • Proposal to limit income tax exemption from proceeds of insurance policies with very high value. Where aggregate of premium for life insurance policies (other than ULIP) issued on or after 1st April, 2023 is above Rs. 5 lakh, income from only those policies with aggregate premium up to Rs. 5 lakh shall be exempt.
  • Income of authorities, boards and commissions set up by statutes of the Union or State for the purpose of housing, development of cities, towns and villages, and regulating, or regulating and developing an activity or matter, proposed to be exempted from income tax.
  • Minimum threshold of Rs. 10,000/- for TDS to be removed and taxability relating to online gaming to be clarified. Proposal to provide for TDS and taxability on net winnings at the time of withdrawal or at the end of the financial year.
  • Conversion of gold into electronic gold receipt and vice versa not to be treated as capital gain.
  • TDS rate to be reduced from 30 per cent to 20 per cent on taxable portion of EPF withdrawal in non-PAN cases.
  • Income from Market Linked Debentures to be taxed.
  • Deployment of about 100 Joint Commissioners for disposal of small appeals in order to reduce the pendency of appeals at Commissioner level.
  • Increased selectivity in taking up appeal cases for scrutiny of returns already received this year.
  • Period of tax benefits to funds relocating to IFSC, GIFT City extended till 31.03.2025.
  • Certain acts of omission of liquidators under section 276A of the Income Tax Act to be decriminalized with effect from 1st April, 2023.
  • Carry forward of losses on strategic disinvestment including that of IDBI Bank to be allowed. 
  • Agniveer Fund to be provided EEE status. The payment received from the Agniveer Corpus Fund by the Agniveers enrolled in Agnipath Scheme, 2022 proposed to be exempt from taxes. Deduction in the computation of total income is proposed to be allowed to the Agniveer on the contribution made by him or the Central Government to his Seva Nidhi account.

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company secretary

ROC (Registrar of Companies), Pune adjudication order against a company I2IT Private Limited for non appointment of a whole time company secretary within six months after the previous company secretary resigned.

The previous company secretary resigned on 7th August, 2020 and the company had time until 6 months to fill up the vacancy as per the provisions of section 203(4) of the companies act, 2013. The company failed to do so by 7th February 2021 when the six months ended and therefore the ROC issued a notice of non compliance followed by an adjudication hearing.

The company replied (in writing i suppose) that they had no business whatsoever and therefore no revenues also as it is struggling for survival.

Section 203(5) provides for penalty for non compliance which is Rs.5 lakhs on the company and Rs.50,000/- on the officers in default with continuing offence penalty of Rs.1000- per day, subject however to a maximum penalty of Rs.5 lakhs.

The pleas of the company regarding no business and desperate financial position did not cut much ice with the ROC adjudicating officer and he levied a penalty of Rs.5 lakhs on the company and Rs.5 lakhs on one director, who is the managing director. The remaining two directors of the company are ordinary directors of the company so they escaped penalty.

Rs.10 lakhs penalty for not appointing a company secretary and that too for a company which is claiming poor financial position, its a huge penalty.

You can view the orders at this link.

https://www.mca.gov.in/content/mca/global/en/data-and-reports/rd-roc-info/roc-adjudication-orders.html

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insolvency professional agencies

Now IBBI (Insolvency and Bankruptcy Board of India) has mandated that the compliance officer of Insolvency Professional Agency (IPA) submit an annual compliance certificate. The certificate will state that the IPA has complied with the provisions of the Code, regulations, guidelines, circulars etc. issued by IBBI.

The compliance certificate has to be submitted within 45 days from the end of the financial year.

IBBI should consider whether this compliance certificate can be issued by Practising Company Secretaries. That would lend an independent external view which is unbiased and is able to pinpoint the deficiencies in the working of the IPA.

The relevant extracts of the IBBI circular is given below.

In terms of Regulation 7 of the Insolvency and Bankruptcy Board of India (Model Bye-Laws and Governing Board of Insolvency Professional Agencies) Regulations, 2016, an Insolvency Professional Agencies (IPA) shall designate or appoint a compliance officer who shall be responsible for ensuring compliances with the provisions of the Code and regulations, circulars, guidelines, and directions issued thereunder.

The compliance officer is mandated to submit a compliance certificate to the Board annually, verifying that the IPA has complied with the provisions of the Code and regulations, circulars, guidelines, and directions issued thereunder.

In this regard, the format of annual compliance certificate specifying the list of the compliances was issued by the Board vide Circular No: IPA/009/2018 dated 19th April, 2018.

Now in consequence of amendments in regulations and in suppression of the above Circular, the revised format of Annual Compliance Certificate for IPAs is being issued by the Board as per Annexure. All the registered IPAs have to submit the annual compliance certificate to the Board in the said format within 45 days of the end of the financial year.

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SEBI order against research analyst

https://www.sebi.gov.in/enforcement/orders/sep-2022/adjudication-proceeding-in-the-matter-of-bikash-kumar-jain-research-analyst_63097.html

SEBI adjudication order against a research analyst – entity has registered under the SEBI (Research Analyst) Regulations, but not complied with any of the rules and regulations of the said Regulations, such as:.

not conducting annual compliance audit

not maintaining regular records

furnishing false & misleading information.

Misrepresented to be an investment advisor and promised guaranteed returns.

non-fulfillment of certification requirements;

Failure to have an internal policy.

failure to obtain SCORES authentication

Failure to maintain net worth

Failure to keep necessary compliance measures with respect to anti money laundering regulations

Penalty of Rs.1.4 million levied on him for the contravention of these regulations.

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compliance function in co-op banks

RBI has decided to beef up the function and role of compliance in co-operative banks and mandated large co-operative banks to appoint compliance officers. This is all the more important in view of the spate of penalties levied by the RBI on co-operative banks for various compliance lapses.

Given below the framework for compliance function in co-operative banks.

Framework for Compliance Function and Role of Chief Compliance Officer in Primary (Urban) Co-operative Banks (UCBs) under Tier 3 and Tier 4 categories4

1. Introduction

The Compliance Function is an integral part of effective governance, along with the internal control and risk management processes. The UCBs under Tier 3 and Tier 4 categories shall treat the guidelines in the Circular as a set of minimum guidelines only and accordingly frame their own guidelines taking into account their corporate governance framework, the scale of operations, risk profile, organisational structure and code of conduct, etc.

2. Compliance Risk

Compliance risk is the risk of legal or regulatory sanctions, material financial loss or loss of reputation a UCB may suffer, as a result of its failure to comply with laws, regulations, rules, and codes of conduct, etc., applicable to its activities.

3. Scope and Coverage of Compliance Function

Compliance Function shall ensure strict observance of all statutory and regulatory requirements for the UCB, including standards of conduct, managing conflict of interest, treating customers fairly and ensuring the suitability of customer service.

4. Responsibility of the Board and Senior Management

4.1 The Board / Board Committee5 shall ensure that an appropriate Compliance Policy is put in place and implemented. Further, the Board / Board Committee shall prescribe the periodicity for review of Compliance risk.

4.2 The Senior Management shall:

  1. carry out an exercise, at least once a year, to identify and assess the major Compliance risk facing the UCB and formulate plans to manage it;
  2. submit to the Board / Board Committee a review at the prescribed periodicity and a detailed annual review of Compliance; and
  3. report promptly to the Board / Board Committee on any material Compliance failure while ensuring that appropriate remedial or disciplinary action is taken.

5. Responsibilities of Compliance Function

5.1 Compliance Function shall be responsible for undertaking the following activities at the minimum:

i) Assist the Board and the Senior Management in overseeing the implementation of Compliance Policy including policies and procedures, prescriptions in Compliance Manuals, internal codes of conduct, etc.

ii) Play the central role in identifying the level of Compliance risk in the organisation. The Compliance risks in existing / new products and processes shall be analysed and appropriate risk mitigants put in place. The Chief Compliance Officer (CCO) shall be a member of the ‘new product’ committee/s6. All new products shall be subjected to intensive monitoring at least for the first six months of introduction to ensure that the indicative parameters of Compliance risk are adequately monitored.

iii) Compliance Function shall monitor and test Compliance by performing sufficient and representative Compliance testing, and the results of such Compliance testing shall be reported to the Senior Management. It shall periodically circulate the instances of Compliance failures among staff, along with the required preventive instructions. Staff accountability shall be examined for major Compliance failures.

iv) Ensure compliance of regulatory / supervisory directions given by RBI in both letter and spirit in a time-bound and sustainable manner. RBI will continue to expect an effective Compliance Program where all Risk Mitigation Plan (RMP) / Monitorable Action Plan (MAP) points are complied with within the timelines prescribed. Unsatisfactory compliance with RMP/MAP may invite penal action from RBI.

v) Attend to compliance with directions from other regulators in cases where the activities of the entity are not limited to the regulation / supervision of RBI. Further, discomfort conveyed to the UCB on any issue by other regulators, and action taken by any other authorities / law enforcement agencies, shall be brought to the notice of RBI.

vi) The Compliance Department may also serve as a reference point for the staff from operational departments for seeking clarifications / interpretations of various regulatory and statutory guidelines.

5.2 The CCO shall be the nodal point of contact between the UCB and the regulators / supervisors and shall necessarily be a participant in the structured or other regular discussions held with RBI. Further, compliance to RBI inspection reports shall be communicated to RBI necessarily through the office of the Compliance Function.

5.3 In some UCBs, there may be separate departments / divisions looking after compliance with different statutory and other requirements. In such cases, the departments concerned shall hold the prime responsibility for their respective areas, which shall be clearly outlined. Adherence to applicable statutory provisions and regulations is the responsibility of each staff member. However, the Compliance Function would need to ensure overall oversight.

6. Broad Contours of Compliance Framework in UCBs

A. Compliance Policy

a. The UCB shall lay down a Board-approved Compliance Policy clearly spelling out its Compliance philosophy, expectations on Compliance culture, structure and role of the Compliance Function, the role of CCO, processes for identifying, assessing, monitoring, managing and reporting on Compliance risk. The Policy shall be reviewed at least once a year.

b. Broadly, the Policy shall ensure coverage of the following aspects:

  1. Measures to ensure the independence of the Compliance Function and its responsibility to freely disclose findings and views to Senior Management, Board / Board Committee;
  2. Focus on various regulatory and statutory Compliance requirements;
  3. Monitoring mechanism for the Compliance testing procedure;
  4. Reporting requirements, including Compliance risk assessment and change in risk profile, etc., to the Senior Management and to the Board / Board Committee;
  5. The authority of the Compliance Function to have access to information as specified in Part D below;
  6. A mechanism for dissemination of information on regulatory prescriptions and guidelines among staff and periodic updating of operational manuals; and
  7. The approval process for all new processes and products by the Compliance Department, prior to their introduction.

B. Compliance Structure

The Compliance Department shall be headed by the Chief Compliance Officer, meeting the requirements prescribed in this Circular. UCBs are free to adopt their own organizational structure for the Compliance Function. However, the function shall be independent and sufficiently resourced, its responsibilities shall be clearly specified, and its activities shall be subject to periodic and independent review.

C. Compliance Programme

UCBs shall carry out an annual Compliance risk assessment in order to identify and assess major Compliance risks faced by them and prepare a plan to manage the risks. The annual review, to be carried out by the Senior Management, shall ensure coverage of at least the following aspects:

  1. Compliance failures, if any, during the preceding year and consequential losses and regulatory action, as also steps taken to avoid recurrence of the same;
  2. Listing of all major regulatory guidelines issued during the preceding year and steps taken to ensure compliance;
  3. Compliance with fair practices codes and adherence to standards set by self-regulatory bodies and accounting standards; and
  4. Progress in the rectification of significant deficiencies and implementation of recommendations pointed out in various audits and RBI inspection reports.

D. Authority

The CCO and Compliance Function shall have the authority to communicate with any staff member and have access to all records or files that are necessary to enable her / him to carry out entrusted responsibilities in respect of Compliance issues. This authority shall flow from the Compliance Policy of the UCB.

E. Dual Hatting

i. There shall not be any ‘dual hatting,’ i.e., the CCO shall not be given any responsibility which brings elements of conflict of interest, especially any role relating to business. The CCO shall generally not be a member of any committee which conflicts her / his role as CCO with responsibility as a member of the committee, including any committee dealing with purchases / sanctions. In case the CCO is a member of any such committee, that would only be an advisory role.

ii. The staff in the Compliance Department shall primarily focus on Compliance Function. However, the Compliance staff could be assigned some other duties while ensuring that there is no conflict of interest.

F. Qualifications and Staffing of Compliance Function

Apart from having staff with basic qualifications and practical experience in business lines / audit & inspection functions, Compliance Function shall have adequate staff members with knowledge of statutory / regulatory prescriptions, law, accountancy, risk management, information technology, etc. Appropriate succession planning shall be ensured to avoid any future skill gap.

G. Internal Audit & Independent Review of Compliance Function

Compliance risk shall be included in the risk assessment framework of the Internal Audit Function, and Compliance Function shall be subject to regular internal audit. The CCO shall be kept informed of audit findings related to Compliance, which shall serve as a feedback mechanism for assessing the areas of Compliance failures.

H. Supervisory Focus

Examination of Compliance rigor prevalent in the UCB shall be a part of Reserve Bank’s supervisory risk assessment process.

7. Appointment and Tenure of CCO

  1. Tenure: The CCO shall be appointed for a minimum fixed tenure of not less than 3 years. However, in exceptional cases, the Board/ Board Committee may relax the minimum tenure by one year, provided appropriate succession planning is put in place;
  2. Removal: The CCO shall be transferred / removed before completion of the tenure only in exceptional circumstances, with the explicit prior approval of the Board / Board Committee, after following a well-defined and transparent internal administrative procedure;
  3. Rank: The CCO shall be a senior executive of the UCB with a position not below two levels from the CEO. However, in the case of UCBs under Tier 3 category, this requirement can be relaxed by one level further. If the UCB considers necessary, the CCO can also be recruited from the market;
  4. Skills -The CCO shall have a good understanding of the industry and risk management practices, knowledge of regulations, legal requirements, and have sensitivity to Supervisory expectations;
  5. Stature – The CCO shall have the ability to exercise judgment independently. She / He shall have the freedom and authority to interact with regulators / supervisors directly and ensure compliance;
  6. Conduct – CCO shall have a clean track record and unquestionable integrity;
  7. Selection Process – Selection of the candidate for the post of the CCO shall be made based on a well-defined selection process and recommendations made by a committee constituted by the Board / Board Committee for the purpose. The Board / Board Committee shall take final decision in the appointment of CCO.
  8. Reporting Requirements – A prior intimation to the Senior Supervisory Manager, Department of Supervision, Reserve Bank of India, shall be provided before appointment of the CCO, pre-mature transfer, resignation, early retirement, removal or any other change in terms and conditions regarding tenure of the CCO. In the case of appointment, such intimation shall be supported by a detailed profile of the candidate along with the ‘Fit and Proper’ certification by the MD & CEO of the UCB, confirming that the person meets the prescribed supervisory requirements and rationale for changes, if any. ‘Fit and Proper’ criteria may be examined based on the requirements spelt out in this Framework;
  9. Reporting Line – The CCO shall have direct reporting lines to the MD & CEO and / or Board / Board Committee. In case the CCO reports to the MD & CEO, the Board / Board Committee shall meet the CCO at quarterly intervals on a one-to-one basis, without the presence of the Senior Management, including MD & CEO. The CCO shall not have any reporting relationship with the business verticals. Further, the performance appraisal of the CCO shall be reviewed by the Board / Board Committee.

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form 11 LLP

MCA has vide its circular dated 27th May, 2022 extended the last date for filing of form 11 LLP for the financial year 31st march, 2022 to 30th June, 2022. The extant last date was 31st May, 2022.

This is because of the new V.3 web based system that the MCA has introduced without any thought or planning or even testing. It was a disaster right from day one.

From unending buffering to technical problems to faulty data to attachments not being visible to uploading – everything was an utter failure. I don’t understand how the MCA introduced this system so shoddily.

Still there are problems persisting in other forms and the system is not right. They should revert to V.2 or run both simultaneously so that stakeholders do not get inconvenienced while doing the compliance.

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insurance ombudsman

IRDAI circular dated 26th May, 2022 to all insurance companies advising them to strictly comply with the compliance deadlines on the orders of the Insurance Ombudsman as per the Insurance Ombudsman Rules 2017.

Insurers have to adhere to the timelines of the awards settlements and in case they have gone in appeal against any award, then they have to inform the complainant accordingly and also the respective Insurance Ombudsman who heard the case.

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compliance function in NBFCs

RBI has issued an important and a very interesting circular on compliance function and the role of compliance officers in NBFCs. Its a very landmark document because it is exhaustive and gives due importance to the compliance function in any organisation. The first line itself says “The Compliance Function is an integral part of effective governance, along with the internal control and risk management processes.” and then goes on to lay down the contours of compliance function in an organisation, compliance structure, compliance policy etc. The other regulators MCA, SEBI, IRDAI, can take a leaf out of this and lay down similar compliance structures for entities under their regulation. Read on.

Framework for Compliance Function and Role of Chief Compliance Officer in Non-Banking Financial Companies in Upper Layer and Middle Layer (NBFC-UL & NBFC-ML)

1. Introduction

The Compliance Function is an integral part of effective governance, along with the internal control and risk management processes. The NBFCs in Upper Layer and Middle Layer shall treat the prescriptions in the Circular as a set of minimum guidelines only and accordingly frame their guidelines taking into account their corporate governance framework, the scale of operations, risk profile and organizational structure, etc.

2. Compliance Risk

Compliance risk is ‘the risk of legal or regulatory sanctions, material financial loss or loss of reputation an NBFC may suffer, as a result of its failure to comply with laws, regulations, rules and codes of conduct, etc., applicable to its activities.

3. Scope and Coverage of Compliance Function

Compliance Function shall ensure strict observance of all statutory and regulatory requirements for the NBFC, including standards of market conduct, managing conflict of interest, treating customers fairly and ensuring the suitability of customer service.

4. Responsibility of the Board and Senior Management

4.1 The Board / Board Committee3 shall ensure that an appropriate Compliance Policy is put in place and implemented. Further, the Board / Board Committee shall prescribe the periodicity for review of Compliance risk.

4.2 The Senior Management shall:

  1. carry out an exercise, at least once a year, to identify and assess the major Compliance risk facing the NBFC and formulate plans to manage it;
  2. submit to the Board / Board Committee a review at the prescribed periodicity and a detailed annual review of Compliance; and
  3. report promptly to the Board / Board Committee on any material Compliance failure while ensuring that appropriate remedial or disciplinary action is taken.

5. Responsibilities of Compliance Function

5.1 Compliance Function shall be responsible for undertaking the following activities at the minimum:

  1. Assist the Board and the Senior Management in overseeing the implementation of Compliance Policy, including policies and procedures, prescriptions in Compliance Manuals, internal codes of conduct, etc.
  2. Play the central role in identifying the level of Compliance risk in the organisation. The Compliance risks in existing / new products and processes shall be analysed and appropriate risk mitigants put in place. The Chief Compliance Officer (CCO) shall be a member of the ‘new product’ committee/s. All new products shall be subjected to intensive monitoring for at least the first six months of introduction to ensure that the indicative parameters of Compliance risk are adequately monitored.
  3. Compliance Function shall monitor and test Compliance by performing sufficient and representative Compliance testing, and the results of such Compliance testing shall be reported to the Senior Management. It shall periodically circulate the instances of compliance failures among staff, along with the required preventive instructions. Staff accountability shall be examined for major Compliance failures.
  4. Ensure compliance of regulatory/ supervisory directions given by RBI in both letter and spirit in a time-bound and sustainable manner. RBI will continue to expect an effective Compliance Program where all Risk Mitigation Plan (RMP) / Monitorable Action Plan (MAP) points are complied with within the timelines prescribed. Unsatisfactory compliance with RMP/MAP may invite penal action from RBI.
  5. Attend to compliance with directions from other regulators in cases where the activities of the entity are not limited to the regulation/supervision of RBI. Further, discomfort conveyed to the NBFC on any issue by other regulators, and action taken by any other authorities / law enforcement agencies, shall be brought to the notice of RBI.
  6. The Compliance Department may also serve as a reference point for the staff from operational departments for seeking clarifications / interpretation of various regulatory and statutory guidelines.

5.2 The CCO shall be the nodal point of contact between the NBFC and the regulators / supervisors and shall necessarily be a participant in the structured or other regular discussions held with RBI. Further, compliance to RBI inspection reports shall be communicated to RBI necessarily through the office of the Compliance Function.

5.3 In some NBFCs, there may be separate departments / divisions looking after compliance with different statutory and other requirements. In such cases, the departments concerned shall hold the prime responsibility for their respective areas, which shall be clearly outlined. Adherence to applicable statutory provisions and regulations is the responsibility of each staff member. However, the Compliance Function would need to ensure overall oversight.

6. Broad Contours of Compliance Framework in NBFCs

A. Compliance Policy

a. The NBFC shall lay down a Board-approved Compliance Policy clearly spelling out its Compliance philosophy, expectations on Compliance culture, structure and role of the Compliance function, the role of CCO, processes for identifying, assessing, monitoring, managing, and reporting on Compliance risk. The Policy shall be reviewed at least once a year.

b. Broadly, the Policy shall ensure coverage of the following aspects:

  1. Measures to ensure the independence of the Compliance function and its right to freely disclose findings and views to senior management, Board / Board Committee;
  2. Focus on various regulatory and statutory Compliance requirements;
  3. Monitoring mechanism for the Compliance testing procedure;
  4. Reporting requirements, including Compliance risk assessment and change in risk profile, etc. to the Senior Management and to the Board / Board Committee;
  5. The authority of the Compliance Function to have access to information as specified in Part D below;
  6. A mechanism for dissemination of information on regulatory prescriptions and guidelines among staff and periodic updating of operational manuals; and
  7. The approval process for all new processes and products by the Compliance Department, prior to their introduction.

B. Compliance Structure

The Compliance Department shall be headed by the Chief Compliance Officer, meeting the requirements prescribed in this Circular. NBFCs are free to adopt their own organizational structure for the Compliance Function. However, the function shall be independent and sufficiently resourced, its responsibilities shall be clearly specified, and its activities shall be subject to periodic and independent review.

C. Compliance Programme

The NBFC shall carry out an annual Compliance risk assessment in order to identify and assess major Compliance risks faced by them and prepare a plan to manage the risks. The annual review, to be carried out by the Senior Management, shall ensure coverage of at least the following aspects:

  1. Compliance failures, if any, during the preceding year and consequential losses and regulatory action, as also steps taken to avoid recurrence of the same;
  2. Listing of all major regulatory guidelines issued during the preceding year and steps taken to ensure compliance;
  3. Compliance with fair practices codes and adherence to standards set by self-regulatory bodies and accounting standards; and
  4. Progress in the rectification of significant deficiencies and implementation of recommendations pointed out in various audits and RBI inspection reports.

D. Authority

The CCO and Compliance Function shall have the authority to communicate with any staff member and have access to all records or files that are necessary to enable her / him to carry out entrusted responsibilities in respect of Compliance issues. This authority shall flow from the Compliance Policy of the NBFC.

E. Dual Hatting

i. There shall not be any ‘dual hatting,’ i.e., the CCO shall not be given any responsibility which brings elements of conflict of interest, especially any role relating to business. The CCO shall generally not be a member of any committee which conflicts her / his role as CCO with responsibility as a member of the committee, including any committee dealing with purchases / sanctions. In case the CCO is a member of any such committee, that would only be an advisory role.

ii. The staff in the Compliance Department shall primarily focus on Compliance Functions. However, the Compliance staff could be assigned some other duties while ensuring that there is no conflict of interest.

F. Qualifications and Staffing of Compliance Function

Apart from having staff with basic qualifications and practical experience in business lines / audit & inspection functions, Compliance Function shall have adequate staff members with knowledge of statutory / regulatory prescriptions, law, accountancy, risk management, information technology, etc. Appropriate succession planning shall be ensured to avoid any future skill gap.

G. Internal Audit & Independent Review of Compliance Function

Compliance risk shall be included in the risk assessment framework of the Internal Audit Function, and Compliance Function shall be subject to regular internal audit. The CCO shall be kept informed of audit findings related to Compliance, which shall serve as a feedback mechanism for assessing the areas of Compliance failures.

H. Supervisory Focus

Examination of Compliance rigor prevalent in the NBFC shall be a part of Reserve Bank’s supervisory risk assessment process.

7. Appointment and Tenure of CCO

  1. Tenure: The CCO shall be appointed for a minimum fixed tenure of not less than 3 years. However, in exceptional cases, the Board / Board Committee may relax the minimum tenure by one year, provided appropriate succession planning is put in place;
  2. Removal: The CCO shall be transferred / removed before completion of the tenure only in exceptional circumstances, with the explicit prior approval of the Board / Board Committee, after following a well-defined and transparent internal administrative procedure;
  3. Rank: The CCO shall be a senior executive of the NBFC with a position not below two levels from the CEO. However, in the case of NBFCs-ML, this requirement can be relaxed by one level further. If the NBFC considers necessary, the CCO can also be recruited from the market;
  4. Skills: The CCO shall have a good understanding of the industry and risk management practices, knowledge of regulations, legal requirements, and have sensitivity to Supervisory expectations;
  5. Stature: The CCO shall have the ability to exercise judgment independently. She / He shall have the freedom and authority to interact with regulators / supervisors directly and ensure compliance;
  6. Conduct: CCO shall have a clean track record and unquestionable integrity;
  7. Selection Process: Selection of the candidate for the post of the CCO shall be made based on a well-defined selection process and recommendations made by a committee constituted by the Board / Board Committee for the purpose. The Board / Board Committee shall take final decision in the appointment of CCO.
  8. Reporting Requirements: A prior intimation to the Senior Supervisory Manager, Department of Supervision, Reserve Bank of India, shall be provided before appointment, premature transfer, resignation, early retirement or removal of the CCO. Such information shall be supported by a detailed profile of the candidate along with the ‘Fit and Proper’ certification by the MD & CEO of the NBFC, confirming that the person meets the prescribed supervisory requirements and rationale for changes, if any. ‘Fit and Proper’ criteria may be examined based on the requirements spelt out in this Circular;
  9. Reporting Line: The CCO shall have direct reporting lines to the MD & CEO and / or Board / Board Committee. In case the CCO reports to the MD & CEO, the Board / Board Committee shall meet the CCO at quarterly intervals on a one-to-one basis, without the presence of the senior management, including MD & CEO. The CCO shall not have any reporting relationship with the business verticals. Further, the performance appraisal of the CCO shall be reviewed by the Board / Board Committee.

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foreign portfolio investors

SEBI has vide its notification dated 14th January, 2022 amended the SEBI (Foreign Portfolio Investors), Regulations, 2019 to provide for a window wherein exemption from enforcement of these regulations can be provided to foreign portfolio investors, either suo moto by the Board or on application made by the foreign portfolio investor. The reasons to be given for non compliance with the regulations are that it is due to factors beyond the control of the entity or the compliance requirement is procedural or technical in nature.

Strange this from SEBI, this will open the floodgates for all market intermediaries to demand leeway for them to avoid compliances on these grounds.

The applicable amendment reads as under:

“Exemption from strict enforcement of the regulations in other cases.
43B. (1) The Board may suo motu or on an application made by a foreign portfolio investor, for reasons
recorded in writing, grant relaxation from the strict enforcement of any of the provisions of these regulations, subject to such conditions as the Board deems fit to impose in the interests of investors and the securities market and for the development of the securities market, if the Board is satisfied that:
(a) the non-compliance is caused due to factors beyond the control of the entity; or
(b) the requirement is procedural or technical in nature.
(2) The application referred to under sub-regulation (1) shall be accompanied by a non-refundable fee of
US $ 1,000 payable by way of NEFT/ RTGS/ IMPS or any other mode allowed by the Reserve Bank of
India in the designated bank account of the Board.”

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penalty on Apna Sahakari Bank

https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=52291

The Reserve Bank of India (RBI) has, by an order dated September 23, 2021, imposed a monetary penalty of ₹79.00 lakh (Rupees seventy-nine lakh only) on Apna Sahakari Bank Ltd., Mumbai (the bank) for non-compliance with directions issued by RBI on ‘Income Recognition, Asset Classification, Provisioning and other related matters (IRAC norms)’, ‘Interest Rate on Deposits’ and ‘Maintenance of Deposit Accounts’. This penalty has been imposed in exercise of powers vested in RBI conferred under section 47 A (1) (c) read with sections 46 (4) (i) and 56 of the Banking Regulation Act, 1949, taking into account failure of the bank to adhere to the aforesaid directions issued by RBI.

This action is based on deficiency in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement entered into by the bank with its customers.

Background

The statutory inspection of the bank conducted by the RBI with reference to the bank’s financial position as on March 31, 2019, the Inspection Report pertaining thereto, and examination of all related correspondence revealed, inter alia, that the bank had not complied with the directions issued by RBI on NPA classification, payment of interest on deposits lying in current accounts of deceased individual depositors or sole proprietorship concerns while settling the claims and levying of penal charges in savings bank accounts for non-maintenance of minimum balances. In furtherance to the same, a notice was issued to the bank advising it to show cause as to why penalty should not be imposed for contravention of aforesaid directions.

After considering the bank’s reply to the notice, additional submissions and oral submissions made during the personal hearing, RBI came to the conclusion that the charge of non-compliance with the aforesaid RBI directions were substantiated and warranted imposition of monetary penalty, to the extent of non-compliance with the aforesaid directions.

AUTHORS NOTE: We have seen this kind of press releases almost every day, where RBI imposes monetary penalties on banks and FIs for non compliance with the extant regulations. Wondering why these banks are so lax in complying with the regulations. They should appoint Company Secretaries to handle their compliance functions either in house or outsourced to PCS.

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investment advisors

SEBI has brought in a concept of an Investment Advisor Administration and Supervisory Body which will regulate the registered investment advisors in the country under the SEBI (Investment Advisors) Regulations. For that purpose they have granted recognition to BSE Administration & Supervision Limited as an Investment Advisor Supervisory Body. This body i.e. BASL, shall have the following responsibilities, viz.

i. Supervision of IAs including both on-site and offsite
ii. Grievance redressal of clients and IAs
iii. Administrative action including issuing warning and referring to SEBI for enforcement action
iv. Monitoring activities of IAs by obtaining periodical reports
v. Submission of periodical reports to SEBI
vi. Maintenance of database of IAs

SEBI shall also concurrently administer and supervise the RIAs (registered investment advisors) and shall be subject to periodic inspection by SEBI. So there will be a dual supervisor body for RIAs going forward.

Pursuant to this grant of recognition to BASL, all RIAs are required to ensure compliance with the following:
i. Membership of IAASB – they have to take membership of BASL within 3 months of the recognition of BASL, which has been recognized from 1st June, 2021. So all RIAs have to perforce take membership of BASL by end August, 2021
ii. Payment of fees: All RIAs have to pay the membership fees to BASL. The fee structure is given below:

SEBI has also modified its fee structure w.e.f. 1st April, 2021 vide its amendment notification dated 11th January, 2021. It appears that fees to SEBI has been discontinued, instead the fees have to be paid to BASL.

Detailed SOPs and FAQs have been issued by BASL with respect to the membership of BASL and other incidental matters. That can be found here.

https://www.sebi.gov.in/media/press-releases/jun-2021/bse-administration-and-supervision-limited-granted-recognition-for-administration-and-supervision-of-investment-advisers_50540.html

Get ready for increased supervision and more compliances – RIAs


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AGM by video conferencing

MCA has issued a very confusing circular no. 2/2021 dated 13/1/2021 wherein they have allowed companies to hold their annual general meetings of their shareholders via video conferencing means upto end of 2021 i.e. upto 31st December 2021.

In the same breath they also say that this does not confer any extension of time to hold AGM for companies and they remain liable to be prosecuted for any compliances on that count.

Its a very confusing circular worded very badly, one needs to read it half a dozen times to understand what it means.

Its a pity that MCA officers do not understand the ground reality – that many companies and their office staff are still held back due to the covid pandemic and are not attending their offices, ditto for auditors staff. The local trains of Mumbai which is the lifeline of Mumbai has not been opened for the general public. In absence of that commuting becomes extremely difficult.

Government could very well have extended the time to hold the AGM for companies having march 2020 as their annual closing date, despite the section allowing only 3 months extension, what prevented the government from passing an ordinance to that effect.

Copy of the above circular can be found at the MCA site.

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perpetual validity to PSOs

RBI circular dated 4th December, 2020 announcing perpetual validity to Payment System Operators subject to them fulfilling some compliance conditions. Read on.

Perpetual Validity for Certificate of Authorisation (CoA) issued to Payment System Operators (PSOs) under Payment and Settlement Systems Act, 2007 (PSS Act)

This has reference to the Statement on Developmental and Regulatory Policies dated October 9, 2020 wherein Reserve Bank of India (RBI) had announced granting of authorisation for all PSOs under PSS Act on a perpetual basis, subject to certain conditions.

2. Currently, RBI grants authorisation to new entities desirous of operating a payment system for specified periods up to five years. Similar approach is adopted for renewal of validity of authorisation to existing entities. To reduce licensing uncertainties and enable PSOs to focus on their business as also to optimise utilisation of regulatory resources, it has been decided to, hereafter, grant authorisation for all PSOs (both new and existing) on a perpetual basis, subject to the usual conditions.

3. For existing authorised PSOs, grant of perpetual validity shall be examined as and when the CoA becomes due for renewal subject to their adherence to the following:

  1. Full compliance with the terms and conditions subject to which authorisation was granted;
  2. Fulfilment of entry norms such as capital, networth requirements, etc.;
  3. No major regulatory or supervisory concerns related to operations of the PSO, as observed during onsite and / or offsite monitoring;
  4. Efficacy of customer grievance redressal mechanism;
  5. No adverse reports from other departments of RBI / regulators / statutory bodies, etc.

4. Existing PSOs who do not satisfy all conditions will be given one-year renewals to enable them to comply; if any entity fails to do so in a reasonable time, its authorisation may be withdrawn.

5. If an entity becomes non-compliant with any of the conditions of authorisation, RBI may undertake action as deemed fit under the provisions of PSS Act, including imposition of restrictions on payment system operations and / or revocation of CoA.

6. This directive is issued under Section 10(2) read with Section 18 of Payment and Settlement Systems Act, 2007 (Act 51 of 2007).

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SaaS for GRC functions

SEBI advisory dated 3rd November, 2020 regarding advisory for financial sector organisations in respect of software as a solutions (SaaS) for their Governance, Risk & Compliance (GRC) functions especially from the point of view of cyber security. Gist of guidance given below.

https://www.sebi.gov.in/legal/circulars/nov-2020/advisory-for-financial-sector-organizations-regarding-software-as-a-service-saas-based-solutions_48081.html

  1. Ministry of Electronics & Information Technology, Govt. of India (MoE&IT), has informed SEBI that the financial sector institutions are availing or thinking of availing Software as a Service (SaaS) based solution for managing their Governance, Risk & Compliance (GRC) functions so as to improve their cyber Security Posture. As observed by MoE&IT, though SaaS may provide ease of doing business and quick turnaround, but it may bring significant risk to health of
    financial sector as many a time risk and compliance data of the institution moves beyond the legal and jurisdictional boundary of India due to nature of shared cloud SaaS, thereby posing risk to the data safety and security.
  2. In this regard, Indian Computer Emergency Response Team (CERT-in) has issued an advisory for Financial Sector organizations. The advisory has been forwarded to SEBI for bringing the same to the notice of financial sector organization. The advisory is enclosed at Annexure A of this circular.
  3. It is advised to ensure complete protection and seamless control over the critical systems at your organizations by continuous monitoring through direct control and supervision protocol mechanisms while keeping the critical data within the legal boundary of India.
  4. The compliance of the advisory shall be reported in the half yearly report by stock brokers and DP to stock exchanges and depositories respectively and by direct intermediaries to SEBI with an undertaking, “Compliance of the SEBI circular for Advisory for Financial Sector Organizations regarding Software as a Service (SaaS) based solutions has been made.”
  5. The advisory annexed with this circular shall be effective with immediate effect.

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one resident director

Under section 149 of the Companies Act, 2013 every company in India should have at least one director who is a resident in India, i.e. he has been in India in the financial year for at least 182 days in a year. This has been brought out by the Companies Act, 2013 w.e.f. 1st April, 2014.

Now in view of the covid pandemic, this requirement is relaxed for the financial year 2020-21. So even if a company does not or is not able to comply with the said provisions during the financial year 2020-21 it shall NOT be treated as non compliance.

MCA has clarified this vide their circular no. 36/2020 dated 20th October, 2020, which is available on the MCA site. i.e. http://www.mca.gov.in

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