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corporate governance

IFSCA has laid down guidelines on corporate government which needs to be followed by every Finance Company set up in the IFSC GIFT CITY, Ahmedabad. The gist of the guidelines are given below:

Part I
Generic Guidelines

  1. Corporate governance framework and disclosure
    4.1 Every Finance Company registered with the Authority shall develop and implement a Board approved framework on Corporate Governance and Disclosure Requirements as relevant to its business operations which may be guided by the Guidelines specified in Part II of this Circular.
    4.2 Every Finance Company shall publish the framework on Corporate Governance and Disclosure Requirements as per the disclosures mandated under the Companies Act, 2013, on its website, wherever available and/or in their Annual Report.
  2. Fit and Proper Criteria
    5.1 The Finance Company shall establish effective systems and controls to ensure that all the members of its Board meet the ‘fit and proper’ criteria and are eligible to be a member of its Board. A Finance Company must carry out due diligence of its Board members, both at the time of their appointment and at reasonably regular frequency during their term on the Board. The Finance Company shall, inter-alia, ensure:
    (i) To undertake a process of due diligence to determine the suitability of the person for appointment / continuing to hold appointment as a director on the Board, based upon qualification, expertise, track record, integrity and other ‘fit and proper’ criteria as specified by the Authority from time to time. It shall obtain necessary information and declaration from the proposed / existing director (s) for this purpose as per the format given in the Information on Management , on an annual basis.
    (ii) To have a Board approved mechanism to scrutinize the results of the due diligence process, information and declarations given by the proposed/existing director (s) and accordingly decide on their on-boarding.
    (iii) To obtain a declaration on an annual basis, from each and every member of its Board giving details of the material changes, if any, in the information provided earlier. Declaration shall also be required in case there is no material change in the information provided earlier. The declaration as obtained by the Finance Company, shall be certified by the auditor of the Finance Company for onward submission to the Authority not later than 30 days from the end of the financial year.

Part II
Detailed Guidelines

  1. Board of Directors
    (i) The Board of Directors of a Finance Company shall be of an appropriate size based on the scope and nature of operations of its business.
    (ii) The Board of Directors shall possess core competencies such as accounting, finance, law, business or management experience, industry knowledge, strategic planning experience and customer based experience or knowledge.
    (iii) There shall be director’s training on a regular basis to ensure that the members of the Board are kept up to date on the relevant field.
    (iv) The Finance Company shall obtain a duly signed deed of covenants (which shall deal with, but not be limited to the points mentioned below) whereby:
    (a) Every director shall:
     acknowledge that his/her appointment as the director on the Board is subject to the applicable laws, rules, regulations and Articles of Association and that he/she shall act only within the powers as laid down by the same.
     undertake to exercise the powers vested in him/her in good faith and in the interest of the Finance Company.
     disclose by general notice to the Board, his/her directorships, memberships or any interest in any form, in other corporate bodies.
     acquire proper understanding of the business of the Finance Company and perform his/her duties with proper care, diligence and skills, based on his/her knowledge and experience.
     exercise independent judgement in discharging his/ her duties and not seek to influence any decision of the Board for any consideration other than the interest of the Finance Company, shall express his/her views and opinions at the Board meetings without any fear or favor, shall not evade responsibility in any form and shall not make improper use of information disclosed to him/her.
     assist the Board in exercising adequate oversight on the business and operations of the Finance Company, particularly for ensuring compliance with all applicable laws, rules and regulations.


 shall also commit to inform the Authority, on becoming aware of a real or potential breach of any applicable laws, rules or regulations by the Finance Company.
(b) The deed of covenant shall include that the Finance Company has apprised the directors about the relevant control systems and procedures, voting rights at Board meetings, remuneration policy, insider dealing restrictions, appointment of senior executives and their authority, deliberations of the Committees of the Board and all other
information which is reasonably required for them to carry out their functions and duties, effectively.

  1. Compliance Officer
    The Finance Company shall appoint a Compliance Officer who shall be a member of the senior management with direct reporting to the Board. The Compliance Officer shall be responsible for implementing/operationalizing the policies and procedures approved by the Board and shall monitor adherence to all applicable laws, rules and
    regulations including these Guidelines as well as all internal policies and procedures.
  2. Committees of the Board
    Depending on the nature, scale and complexity of its business operations, the Board may constitute committees which may include audit committee, nomination and remuneration committee, risk management committee, stakeholder relationship committee or any other committee as may be mandated under the Companies Act, 2013, and by the Authority from time to time.
  3. Related Party Transactions
    The Finance Company shall formulate a Board approved policy which addresses all aspects of related party transactions. The same shall be reviewed by the Board of the Finance Company from time to time.
  4. Disclosure and Transparency
    Besides ensuring disclosures under the Companies Act, 2013 and these Guidelines, the Finance Company shall ensure that the information provided to stakeholders, as the case may be, is timely, accurate, relevant and is not
    misleading.
    10.1 Information to be placed before Board of Directors
    The Finance Company shall ensure to place before the Board at least the following information:
    (i) Annual operating plans and budgets, capital budgets and related updates.
    (ii) Quarterly results of the Finance Company.

(iii) Minutes of meetings of the Board constituted Committees.
(iv) A statement on the change of directors, if any, and a declaration confirming the compliance with the ‘fit and proper’ criteria about them.
(v) Any materially adverse event which could affect the Finance Company, its property or operations.
(vi) Transactions that involve substantial payment towards goodwill, brand equity, or intellectual property and about any other transaction which is carried out beyond the normal course of business of the Finance Company.
(vii) Conformity with Corporate Governance and Disclosure Requirements framework.
(viii) All material breaches of internal policies, norms, risk limits and any other important information of the like nature.
10.2 Disclosures to be made on the website of the Finance Company
The Finance Company shall disseminate the requisite information on its website, wherever available and/or in their Annual Report, which shall include the following:
(i) Basic information about the Finance Company and about its group;
(ii) The Annual Report of the Finance Company;
(iii) Corporate Governance report in conformity with the provisions of the Companies Act, 2013 and these Guidelines; and
(iv) Other significant information, if any;
10.3 Disclosures to be made in the Annual Financial Statements (AFS)
In addition to the disclosure required under the Companies Act, 2013, a Finance Company shall also include the following in its Annual Financial Statement:
(i) Components of owned funds and other related information;
(ii) Details on the off-balance sheet exposures, if any;
(iii) Its Asset Liability profile;
(iv) Extent of financing by parent company;
(v) Business ratios including Return on Equity (RoE) and Return on Assets (RoA);
(vi) Concentration of Non-Performing Assets (NPAs) including total exposure to top five NPAs;
(vii) Disclosures on provisioning in the Balance Sheet;
(viii) Details on the registration/license/ authorization, by whatever name called, obtained from any financial sector regulators;

(ix) Penalties or fine imposed by any statutory authority/ financial sector regulators including strictures or directions on the basis of inspection reports or other adverse findings against it.

NOTE: I am surprised to find no role for company secretaries in this corporate governance guidelines to the Finance Company situated in IFSC. The Compliance officer should have been a Company Secretary and the certificate of auditor in respect of the Fit and Proper Criteria of the Board of Directors should ideally have been by a Practicing Company Secretary.

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systemically important insurers

https://www.irdai.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo4251

1.      Domestic Systemically Important Insurers (D-SIIs) refer to insurers of such size, market importance and domestic and global inter connectedness whose distress or failure would cause a significant dislocation in the domestic financial system. Therefore, the continued functioning of D-SIIs is critical for the uninterrupted availability of insurance services to the national economy.

2.      D-SIIs are perceived as insurers that are ‘too big or too important to fail’ (TBTF). This perception and the perceived expectation of government support may amplify risk taking, reduce market discipline, create competitive distortions, and increase the possibility of distress in future. These considerations require that D-SIIs should be subjected to additional regulatory measures to deal with the systemic risks and moral hazard issues.

3.      In order to identify such insurers and to put such insurers to enhanced monitoring mechanism, the Insurance Regulatory and Development Authority of India (IRDAI) has developed a methodology for identification and supervision of D-SIIs. The parameters, as per the methodology for identification of D-SIIs, inter alia include the following:

a.            the size of operations in terms of total revenue, including premium underwritten and the value of assets under management;

b.            global activities across more than one jurisdiction;

c.             lack of substitutability of their products and/or operations; and

d.            interconnectedness through counterparty exposure and macro-economic exposure.

These parameters were assigned weights to cover various aspects of their operations. The Authority would identify D-SIIs on an annual basis and disclose the names of these insurers for public information.

4.      After analysis of data, the Authority has identified for the year 2020-21, the following insurers as D-SIIs:

a.    Life Insurance Corporation of India;

b.    General Insurance Corporation of India; and

c.     The New India Assurance Co. Ltd.

5.      Given the nature of their operations and the systemic importance of the D-SIIs, these insurers have been asked to carry out the following:

(i)         Raise the level of corporate governance;

(ii)       identify all relevant risk and promote a sound risk management culture.

6.      D-SIIs will also be subjected to enhanced regulatory supervision.

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core investment companies

RBI has vide its circular dated 13th August, 2020 reviewed its guidelines on core investment companies. The salient features of the guidelines are as under:

2. Definition of Adjusted Net worth (ANW)

2.1 Reference is drawn to para 3 (i) of the Master Direction on Core Investment Companies (Reserve Bank) Directions, 2016. While computing Adjusted Net Worth (ANW), the amount representing any direct or indirect capital contribution made by one CIC in another CIC, to the extent such amount exceeds ten per cent of Owned Funds of the investing CIC, shall be deducted. All other terms and conditions for computation of ANW remain the same.

2.2 The deduction requirement shall take immediate effect for any investment made by a CIC in another CIC after date of issue of this circular. In cases where the investment by a CIC in another CIC is already in excess of 10 percent as on the date of this circular, the CIC need not deduct the excess investment as on the date of this circular from owned funds for computation of its ANW till March 31, 2023.

3. Group Structure

3.1 To address the complexity in group structures and existence of multiple CICs within a group, it has been decided that the number of layers of CICs within a Group (including the parent CIC) shall be restricted to two, irrespective of the extent of direct or indirect holding/ control exercised by a CIC in the other CIC. If a CIC makes any direct/ indirect equity investment in another CIC, it will be deemed as a layer for the investing CIC.  While the regulation shall be applicable from the date of the circular, existing entities shall reorganise their business structure and adhere to this guideline latest by March 31 2023.

4. Risk Management

4.1 The parent CIC in the group or the CIC with the largest asset size, in case there is no identifiable parent CIC in the group, shall constitute a Group Risk Management Committee (GRMC). The GRMC shall report to the Board of the CIC that constitutes it and shall meet at least once in a quarter. The composition of GRMC shall be as under:

  1. The GRMC shall comprise minimum of five members, including executive members.
  2. At least two members shall be independent directors, one of whom shall be the Chairperson of the GRMC.
  3. Members shall have adequate and commensurate experience in risk management practices.

4.2 The GRMC will have the following responsibilities:

  1. Analyse the material risks to which the group, its businesses and subsidiaries are exposed.  It must discuss all risk strategies both at an aggregated level and by type of risk and make recommendations to the Board in accordance with the group’s overall risk appetite.
  2. Identify potential intra-group conflicts of interest.
  3. Assess whether there are effective systems in place to facilitate exchange of information for effective risk oversight of the group.
  4. Assess whether the corporate governance framework addresses risk management across the group.
  5. Carry out periodic independent formal review of the group structure and internal controls.
  6. Articulate the leverage of the Group and monitor the same.

4.3 Based on the analyses and recommendations of the GRMC, CICs shall initiate corrective action, where necessary. Chief Risk Officers (CROs), appointed in CICs as per Para 4.4 below, shall initiate such corrective action.

4.4 All CICs with asset size of more than ₹5,000 crore shall appoint a CRO with clearly specified roles and responsibilities. Guidelines on CRO shall be as per Para 71 on Appointment of Chief Risk Officer of Master Direction – Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.

4.5 CICs shall submit to the Board, a quarterly statement of deviation certified by the Chief Executive Officer/ Chief Financial Officer, indicating deviations  in the use of proceeds of any funding obtained by the CIC from creditors and investors from the objects/ purpose stated in the application, sanction letter or offer document for such funding.

5. Corporate Governance and Disclosure Requirements

5.1 Corporate governance requirements will be as per the Companies Act, 2013. Disclosure requirements will be applicable to NBFC-CICs as per the guidelines contained at Annex of this circular. The guidelines indicate basic minimum requirements and CICs shall strive to achieve higher standards of governance and disclosure.

5.2 CICs shall ensure that a policy is put in place with the approval of the Board for ascertaining the ‘fit and proper’ status of directors not only at the time of appointment, but also on a continuous basis. Guidelines as applicable to NBFCs as per Para 72 on Fit and Proper Criteria of Master Direction – Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 as updated from time to time, shall be applicable also to CICs.

6. Consolidation of Financial Statement (CFS)

6.1 CICs shall prepare CFS as per provisions of Companies Act, 2013, so as to provide a clear view of the financials of the group as a whole. However, it is possible that entities that meet the definition of group as per extant regulations are not covered under consolidation due to exemptions granted as per statutory provisions/ applicable accounting standards. For such entities which are not included in the consolidation, disclosures shall be made in the indicative format mentioned at paragraph 2 of the Annex. In the process of consolidation, the auditor of a CIC, as the ‘principal auditor’, shall use the work of other auditors with respect to the financial information of other respective entities, subject to auditing standards as also guidance notes issued by the Institute of Chartered Accountants of India1 from time to time.

7. Exceptions to carrying other financial activity

Reference is drawn to para 2(1)(iv) of the Master Direction on Core Investment Company (Reserve Bank) Directions, 2016 on  other financial activities that can be undertaken by the CIC. CICs are allowed to invest in money market instruments, including mutual funds which make investments in money market instruments/debt instruments with a maturity of up to 1 year.

8. Registration

8.1 Reference is drawn to Para 7 of Master Direction on Core Investment Companies (Reserve Bank) Directions, 2016. It shall be noted that CICs (a) with an asset size of less than ₹100 crore, irrespective of whether accessing public funds or not and (b) with an asset size of ₹100 crore and above and not accessing public funds are not required to register with the Bank under Section 45IA of the RBI Act, 1934 in terms of notification No. DNBS.PD.221/CGM (US) 2011 dated January 5, 2011.

9. Change in nomenclature

9.1 A Systemically Important Core Investment Company, as defined in sub-paragraph (xxv) of paragraph 3 of the Core Investment Companies (Reserve Bank) Directions, 2016 will henceforth be termed as a Core Investment Company. A Core Investment Company, which is not required to be registered in terms of para 8.1 above, will henceforth be termed as ‘Unregistered CIC’ instead of ‘exempted CIC’.

10. Others

10.1 CICs implementing Indian Accounting Standards shall adhere to the circular DOR (NBFC).CC.PD No.109/22.10.106/2019-20 dated March 13, 2020 on Implementation of Indian Accounting Standards.

10.2 All CICs shall adhere to the guidelines on Submission of Data to Credit Information Companies as per para 100 and 101 of Master Direction Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.

RBI circular is available at this link https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11949&Mode=0

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company secretary

MCA has vide amendment dated 3rd January, 2020 to the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 allowed private limited companies to appoint whole time company secretary when their paid up share capital exceeds Rs.10 crores. Hitherto the limit was Rs.5 crores.

Also it has mandated a secretarial audit report to be carried pursuant to section 203 of the Companies Act, 2013 to all companies (including private companies) who have  borrowings from banks or financial institutions exceeding Rs.100 crores. The threshold limit of Rs.100 crores to be seen from an audited financial statement. So it appears more or less at the year end status.

The circular is available at the MCA site.

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Co-operative Banks

RBI circular dated 31st December, 2019 for restructuring the Board of Management of Urban Co-operative Banks, imperative in view of the increasing risk of frauds taking place in these banks.

Reserve Bank of India had released draft guidelines on constituting BoM in UCBs on June 25, 2018 inviting comments from banks and other stakeholders. Taking into consideration the responses received, it has been decided to issue the guidelines on BoM as per Annex I.

2. UCBs shall constitute a BoM by making suitable amendments in their bye-laws. The BoM shall comprise of persons with special knowledge and practical experience in banking to facilitate professional management and focused attention to the banking related activities of the UCBs through appropriate amendments to their bye-laws, in accordance with the enclosed guidelines following the due process. While constituting the BoM, the Board of Directors (BoD) of UCB shall carry out a process of due diligence to determine the suitability of the person for appointment as the member of the BoM, based upon qualification, expertise, track record, integrity and other ‘fit and proper’ criteria as set out in Appendix I. Similar process of due diligence shall be carried out for determining the suitability of a candidate for appointment as CEO. For this purpose, banks shall obtain declaration-cum-undertaking from the proposed member of BoM/CEO in the format enclosed to the guidelines in Appendix II. The process of due diligence shall also be undertaken at the time of renewal of appointment.

3. UCBs with deposit size of ₹100 crore and above shall constitute BoM which will also be a mandatory requirement for allowing such banks to expand their area of operation and open new branches. UCBs with a deposit size less than ₹100 crore and Salary Earners’ Banks are exempted from constituting BoM. However, for having good governance practices, such banks may also constitute BoM, if they so desire.

4. Further, as per the guidelines, UCBs having deposit size of ₹100 crore and above shall obtain prior approval of Reserve Bank for appointment of CEO. In this connection, it is advised that Scheduled UCBs shall approach the Department of Regulation of Reserve Bank for approval at least three months prior to the end of tenure of the incumbent CEO. The banks shall submit the proposal for appointment of CEO along with the declaration-cum -undertaking of the CEO designate as per Appendix II of these guidelines along with the list of supporting documents as given in Annex II. Non-Scheduled UCBs shall approach the concerned Regional Office of the Department of Supervision for the requisite approval in the similar manner mentioned above. Reserve Bank reserves the right to seek additional information/documents, if deemed necessary.

5. A copy of the amended bye-laws providing for constitution of BoM shall be forwarded to the concerned Regional Office of the Department of Supervision for information and record along with details of the members of BoM immediately after constitution of BoM. UCBs shall also be required to submit an annual return furnishing details of the members of the BoM as per the format given in Annex III as on December 31 each year, within 15 days of the end of the period to the respective Regional Offices of the Reserve Bank of India.

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Annual Information Memorandum – SEBI’s new thinking

SEBI has drafted a discussion paper on Annual Information Memorandum for listed companies. Basically what it means is that all disclosures, reports under the listing agreement which are periodically sent to stock exchanges will now be subsumed in the Annual Information memorandum which is required is to be filed electronically on the company’s website and also filed with the stock exchanges simultaneously. So reports such as Corporate Governance Report (Clause 49), Business Responsibility Report (Clause 55) and Related Party disclosures (Clause 32) etc. in the AIM could pave way for removing such disclosures from Annual Report limiting its scope only to details required under the Companies Act, 1956/ Companies Act, 2013, thereby significantly reducing disclosures required in Annual Report and consequently reducing costs for the listed companies as AIM will be required to be filed in electronic format.

But clause 35 shareholding pattern and the annual reports under the Takeover Code will not be impacted. They will need to be separately sent to the stock Exchanges. The annual reports are sought to be made less bulkier which is good for the corporates because of the cost implications involved. 

 

Proposed AIM Framework 

1. Format
The proposed framework for disclosure in AIM is enclosed as Annexure. Format of AIM is in line with the format of offer documents prepared for  primary market offerings to maintain consistency in disclosures.
2. Frequency of Preparation
Frequency for preparation of AIM shall be yearly.
3. Timeline for Dissemination
AIM shall be disseminated within 135 days from the end of financial year.
4. Mode of Dissemination
AIM may be disseminated electronically by uploading the same on the company’s website and simultaneous filing with stock exchanges.
5. Approval of AIM
AIM shall be approved by Board of Directors at their meeting prior to dissemination.
6. Annual updation
AIM will be required to be updated every year. While, updating the AIM, the companies may update the quantitative as well as qualitative information by replacing the details pertaining to most distant year with details pertaining to most recent year where such information is required to be furnished for multiple years. Further, all the information (qualitative as well as quantitative)
shall be reviewed for accuracy, sufficiency and relevance.
7. Implementation timelines Category Proposed Time Frame
Top two hundred listed companies based on market capitalization at BSE or NSE as on
March 31, 2014 – Financial year beginning on or after April 1, 2014
All other listed companies Financial year beginning on or after April 1, 2015

For companies which are planning IPOs (Initial Public Offers), the requirement of AIM would commence with the IPO. This would require that the disclosures made by the companies at the IPO stage be updated on an annual basis so as to ensure that at any point of time, updated information about them is available in public domain.

8. Auditor’s Examination Report
The companies desirous of using AIM as draft offer document for future capital raisings shall be required to submit an Auditor’s Examination Report along with AIM.

The list of disclosures in the AIM is very exhaustive and runs into some 22 paragraphs so I guess that process of collation/ updation of data could also be time consuming. 

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Amendment to Listing Agreement – Review of Corporate Governance norms

SEBI has vide its press release dated 13th February 2014 amended the listing agreement to review corporate governance norms for listed companies to make it compatible with new Companies Act, 2013. The basic features of the amendment which will be brought into force from 1st October 2014 is as follows:

I. Review of Corporate Governance norms in India for listed companies

The Board has approved the proposals to amend the Listing Agreement with respect to corporate governance norms for listed companies. The amendments, inter-alia, propose to align the provisions of Listing Agreement with the provisions of the newly enacted Companies Act, 2013 and also provide additional requirements to strengthen the corporate governance framework for listed companies in India. The amendments shall be made applicable to all listed companies with effect from October 01, 2014.

The Board approved the following proposals:

 (i)         Exclusion of nominee Director from the definition of Independent Director

 (ii)        Compulsory whistle blower mechanism

 (iii)       Expanded role of Audit Committee

 (iv)       Prohibition of stock options to Independent Directors

 (v)        Separate meeting of Independent Directors

 (vi)       Constitution of Stakeholders Relationship Committee

 (vii)      Enhanced disclosure of remuneration policies

 (viii)     Performance evaluation of Independent Directors and the Board of Directors

 (ix)       Prior approval of Audit Committee for all material Related Party Transactions (RPTs)

 (x)        Approval of all material RPTs by shareholders through special resolution with related parties abstaining from voting

 (xi)       Mandatory constitution of Nomination and Remuneration Committee. Chairman of the said committees shall be independent.

 (xii)      At least one woman director on the Board of the company

 (xiii)     It has been decided that the maximum number of Boards an independent director can serve on listed companies be restricted to 7 and 3 in case the person is serving as a whole time director in a listed company

 (xiv)     To restrict the total tenure of an Independent Director to 2 terms of 5 years. However, if a person who has already served as an Independent Director for 5 years or more in a listed company as on the date on which the amendment to Listing Agreement becomes effective, he shall be eligible for appointment for one more term of 5 years only.

 (xv)      The scope of the definition of RPT has been widened to include elements of Companies Act and Accounting Standards.

 In addition to the above, the Board also approved the proposal to put in place principles of Corporate Governance,  policy on dealing with RPTs, divestment of material subsidiaries, disclosure of letter of appointment of Independent Directors and the letter of resignation of all directors, risk management, providing training to Independent Directors, E-voting facility by top 500 companies by market capitalization for all shareholder resolutions and Boards of companies to satisfy themselves that plans are in place for orderly succession for appointments to the Board and senior management.

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