presentation for imt delhi v6 slide and linked share

1.Gaps across Banking, SecuritiesInsurance: vis--vis international benchmarksJudicial review ConsumerPrepared by Satish T Sawnani- emaildecisions [email protected] MoFRedressal ForumsMCA, cellOCT 7, 2012 9930438805 1

2. Acronyms Listing AcronymsFull Acronyms FullDeposit Insurance and CreditAssociation of custodial agencies Guarantee Corporation ofACAIof IndiaDICGC India(DICGC).Depositor & InvestmentAIF Alternative Investment Funds DIPProtectionAssociation of MerchantAMBIBankers of India DMODebt Management OfficeAssociation of Mutual Funds ofAMFIIndiaDoEA Dept. of Economic AffairsForeign Exchange DealersAML Anti Money Laundering FEDAI Association of IndiaBCI Bar Council of IndiaFII Foreign Institutional InvestorsFixed Income Money Mkt &BCP Basel Core PrincipleFIMMDADerivatives AssociationBRBanking Regn ActFIU Financial Intelligence UnitNBhartiya Reserve Bank NoteMudran pvt ltdBRBNMPL FMC Forward Mkt CommissionCGCentral GovtFRA Financial Redressal AgencyPrepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 99304388052 3. Acronyms Listing (2) AcronymsFull Acronyms FullDeposit Insurance and CreditAssociation of custodial agencies Guarantee Corporation ofACAIof IndiaDICGC India(DICGC).Depositor & InvestmentAIF Alternative Investment Funds DIPProtectionAssociation of MerchantAMBIBankers of India DMODebt Management OfficeAssociation of Mutual Funds ofAMFIIndiaDoEA Dept. of Economic AffairsForeign Exchange DealersAML Anti Money Laundering FEDAI Association of IndiaBCI Bar Council of IndiaFII Foreign Institutional InvestorsFixed Income Money Mkt &BCP Basel Core PrincipleFIMMDADerivatives AssociationBRBanking Regn ActFIU Financial Intelligence UnitNBhartiya Reserve Bank NoteMudran pvt ltdBRBNMPL FMC Forward Mkt CommissionCGCentral GovtFRA Financial Redressal AgencyPrepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 99304388053 4. Acronyms Listing (3) AcronymsFull AcronymsFullPDPrimary DealersSGL Subsidiary General LedgerPrimary Dealers Association ofPDAIIndiaSRO Self Regulatory OrganisationPension Fund RegulatoryPFRDA Development AuthorityUFA United Financial AgencyPSU Public Sector UnitsVCF Venture Capital FundsRAINRegistrar association of India WDM Wholesale Debt MarketRBI Reserve Bank of IndiaRegistrar of CooperativeRCS SocietiesRRB Regional Rural BanksSecurities Contract RegulationSCRAActSecurities Exchange Board ofSEBIIndia Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 9930438805 4 5. Few Reasons why Gaps in Financial sector arose Multiplicity of Acts more than 60 andmultiple Rules/Regulations) Outdated Acts Some more than 6decades back (e.g. RBI Act 1935) Multiple Amendments to Acts haveincreased Ambiguity & Complexity Multiple Regulators each trying to protectits own turf Greater need to harmonise laws in linewith fast changing and growing financialsector Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 99304388055 6. Multiplicity of Regulators andOverlap Banks are regulated by RBI/NABARD RRB and coop banks also by RCS , NBFC are regulated by RBI/MCA and HFCs are regulated by NHB. The equities/corporate bond market /exchange traded derivatives and mutualfund industry is regulated by SEBI. The GSEC, money market and foreignexchange market are mainly regulatedby the Reserve Bank. The insurance sector is regulated byIRDA.Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 99304388056 7. SEBI RBI & IRDA Mandates SEBI, - is the apex regulatory body for the securitiesmarket. SEBIs mandate includes responsibilities for ensuringinvestor protection & promoting orderly growth of thesec. mkt . The RBI, is responsible for regulation of a certain well-defined segment of the securities market. As themanager of public debt, the RBI is responsible forprimary issues of Government Securities. RBIsmandate also includes the regulation of all contracts ing-Secs, gold related securities, money mkt securities &in securities derived from these securities. SEBI is mandated to regulate the trading of thesesecurities on recognized stock exchanges in line withthe guidelines issued by RBI. IRDAs mandate is to protect interest of policyholders, toregulate promote & ensure orderly growthTof insurance Prepared by Satish Sawnani- emailindustry & mattes incidental2012 [email protected] cell OCT 7,thereto 99304388057 8. Overlap of Jurisdiction GOI & SEBI The power of the C.G. to make rules in respect ofcapital market related issues under SC(R) Act should bedeleted. Central Government continues to have powers to makerules in respect of all the matters relating to securitiesmarket under the SC (R) Act. MCA has concurrentpowers under the Companies Act in respect of mattersrelating to the capital market such as the prospectus,the issue of shares to public etc. Sec 55A empowers SEBI to administer the provisions ofthe Companies Act in respect of the issue, transfer ofsecurities and non-payment of dividend in respect of listed /proposed-to-be-listed companies, SEBI has not beenconferred powers to make regulations Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 99304388058 9. No power on the companies SEBI has no powers against listedcompanies per se The powers of direct surveillance are onstock exchanges, members of stockexchanges & market intermediariesregistered with it Despite establishment of Central Coordination and Monitoring Committee(CCMC), enforcement procedures aretime consuming , cumbersome andinvolve too many agenciesPrepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 99304388059 10. Transparency in Debt Market The cash market in debt securities operatesthrough negotiated deals either throughtelephone or an electronic dealing system like SEBI has taken initiatives to foster transparencythrough regulatory fiat by prohibiting negotiateddeals on the exchanges in respect of listedcorporate debt securities and prescribing that allsuch trades would be executed on the basis ofprice and order matching mechanism of stockexchanges like equities. However, negotiated deals are still continuing,albeit outside the exchange, and there is no marketdissemination of information on suchtransactions.Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 9930438805 10 11. Debt Market The Indian debt market can be classified intothree segments: (i) the government securitiesmarket; (ii) the public sector units (PSU) bondmarket; and (iii) the corporate bond market. Each segment has its own distinctive practices,procedures, institutional framework andregulatory structure. The focus of debt market reforms has been on government securities market, because not onlydoes it dominate the debt market, but also playsan important role in establishing benchmarks forthe rest of the market.Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880511 12. Gaps in Debt Market Transparency (contd)affecting Banks, Debt MFs, insurance playersetc. All deals in the government securitiesmarket are settled through the SGL , Daily Dissemination of such information(albeit with a one day lag) is important inthe price discovery process data also available from the NSEsWholesale Debt Market (WDM) segmenthas contributed to greater transparencyin the secondary market for governmentsecurities. There is need to have information on anear real time basis. Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880512 13. Gaps in Debt Market Transparency (contd)affecting Banks, Debt MFs, insurance playersetc. progressive restrictions on on-demandgovernment borrowing from the RBI. The earlier system of issuing ad hoctreasury bills has been replaced by asystem of ways and means advances,which are being made increasinglyrestrictive Auction for treasury bills of varyingmaturity14-day, 91-day, 182-day and364- dayhave been introduced. Also, tofoster competition, non-competitive bidsare now kept outside the notified Prepared by Satish T Sawnani- email [email protected] cellamount.OCT 7, 2012 993043880513 14. Primary Dealer and Repo Market A primary dealer system has beendeveloped to channel securities fromprimary auctions to ultimate investors The RBI is actively promoting retailing ofgovernment securities by providing liquidity support to satellite dealers anddedicated gilt funds An active interbank repo market hasbeen developed, which has helped toboost liquidity in government securities. Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880514 15. Legal Gaps RBI vis a-vis G Secs Differerent powers for diff players ! The amended (SCRA) has conferred on the RBI theresponsibility of regulation of G-Secs and money markets, butnot the necessary enforcement powers to regulate them As regard Banks, the RBI has statutory powers of inspection,investigation, surveillance and enforcement under BankingRegulation Act, 1949. As regards financial institutions, the regulatory powers areavailable to the RBI under the RBI Act 1934 With regard to Primary Dealers, the RBI exercises regulatorypowers on the basis of guidelines issued by RBI and MOUssigned between PDs and RBI on a contractual basis. Thus the need for (a) the same legislation to include bothregulatory responsibilities and the authority to carry them out and (b) the focus to shift from institution-specific regulation tomarket-specific regulations Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880515 16. Multiplicity of Acts The problem of multiplicity ofregulators, as referred to earlier,emerges from theexistence of multiplicity of Actsgoverning securities market regulation The legal framework comprises interalia the SEBI Act, Securities ContractRegulation Act (SCRA), IndianContracts Act, Companies Act, PublicDebt Act, the RBI Act and the Banking Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880516 17. Multiplicity of Acts contd .. A need for consolidating the SCRAand the SEBI Act in line with therecommendations of the DhanukaCommittee, will be very helpful. Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880517 18. GAPS VIS--VIS IOSCOG-SECs and Money Markets donot have SRO. Organisations likeFIMMDA should be accorded SROstatus by defining its jurisdictionand the delegation of appropriatepowers . It should be under RBI .The Investment Advisers andResearchAnalysts be brought within theregulatory ambit through SRO ordirectlyby prescribing licensing andregistrationrequirements, appropriate returns,etc.( recently in Aug 2012 pressrelease has come but not thenotification) Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880518 19. Few SROs in India FinancialSector Registrars Association of India (RAIN) Association of Custodial Agencies of India(ACAI) Association of Mutual Funds of India (AMFI) Association of Merchant Bankers of India(AMBI) FEDAI (Foreign Exchange DealersAssociation of India) The Life Insurance Council and the GeneralInsurance Council of the InsuranceAssociation of India constituted under section64 C of the Insurance Act Prepared by Satish T Sawnani- email of 2012 [email protected] cellBroker Association OCT 7,India 9930438805 19 20. Evaluation of current regulatory environment using IOSCO principles & guidelines The IOSCO(The International Organizationof Securities Commissions) has set outthree objectives--protection of investors,ensuring fair,transparent and efficient market andreduction of systemic risk--which securitiesregulations need to addresso evaluate the existing regulatory frameworkbroadly using the IOSCO principles as criteriaand to identify problem areas, which call forfuture reform initiatives to strengthen thecurrent system.Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880520 21. Gaps vis--vis IOSCO principles SEBI is apex member of IOSCO. It has framed IOSCO principlesmethodology for identifying andcorrecting gaps (30 Nos) forregulators, SROs, co-operation andenforcement, market intermediaries,collective investments schemes andclearing and settlement of securities.A few important Gaps are given infollowing slidesPrepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880521 22. IOSCO principles Regulator 1 The responsibilities of the regulator shouldbe clear and objectively stated. 2 The regulator should be operationallyindependent and accountable in the exerciseof its functions and powers 3 The regulator should have adequatepowers, proper resources and the capacity toperform its functions and exercise its powers. 4 The regulator should adopt clear andconsistent regulatory processes. 5 The staff of the regulator should observethe highest professional standards includingappropriate standards of confidentiality. Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880522 23. IOSCO Principles for Self Regulation The regulatory regime should makeappropriate use of Self-RegulatoryOrganizations (SROs) that exercise some directoversight responsibility for theirrespective areas of competence, to the extent appropriate tothe size and complexity of the markets. 7 SROs should be subject to theoversight of the regulator and shouldobserve standards of fairness andconfidentiality when exercising powersand delegated responsibilities.Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880523 24. IOSCO Principles for the Enforcement of Securities Regulation 8 The regulator should havecomprehensive inspection, investigationand surveillance powers 9 The regulator should havecomprehensive enforcement powers. 10 The regulatory system should ensurean effective and credible use ofinspection, investigation, surveillance andenforcement powers and implementationof an effectivePrepared by Satish T Sawnani- emailcompliance program.OCT 7, [email protected] cell993043880524 25. IOSCO Principles forCooperation in Regulation 11 The regulator should have authority toshare both public and non-public informationwith domestic and foreign counterparts. 12 Regulators should establish informationsharing mechanisms that set out when andhow they will share both public and non-public information with their domestic andforeigncounterparts. 13 The regulatory system should allow forassistance to be provided to foreignregulatorswho need to make inquiries in the dischargeof their functions and exercise by Satish T Sawnani- emailPrepared of [email protected] cellpowers. OCT 7, 2012 9930438805 25 26. IOSCO Principles for Issuers 14 There should be full, timely andaccurate disclosure of financial resultsand other info that is material to investors decisions.15 Holders of securities in a companyshould be treated in a fair and equitablemanner. 16 Accounting and auditing standardsshould be of a high & internationallyacceptable Prepared by Satish T Sawnani- email [email protected] cell quality. OCT 7, 2012 993043880526 27. IOSCO Principles for CollectiveInvestment Schemes 17 The regulatory system should set standards for theeligibility and the regulation of those who wish tomarket or operate a collective investment scheme. 18 The regulatory system should provide for rulesgoverning the legal form and structure of collectiveinvestment schemes and the segregation andprotection of client assets. 19 Regulation should require disclosure, as set forthunder the principles for issuers, which is necessary toevaluate the suitability of a collective investmentscheme for a particular investor and the value of the investors interest in thescheme. 20 Regulation should ensure that there is a proper anddisclosed basis for asset valuation and the pricing andthe redemption of units in a collective investmentscheme.Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 9930438805 27 28. IOSCO Principles for Market Intermediaries 21 Regulation should provide for minimum entrystandards for market intermediaries. 22 There should be initial and ongoing capital andother prudential requirements for market intermediariesthat reflect the risks that the interim 23 Market intermediaries should be required to complywith standards for internal organization and operationalconduct that aim to protect the interests of clients,ensure proper management of risk, and under whichmanagement of the intermediary accepts primaryresponsibility for these matters. 24 There should be procedures for dealing with thefailure of a market intermediary in order to minimizedamage and loss to investors & to contain systemic riskthey undertake. Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880528 29. IOSCO Principles for theSecondary Market 25 The establishment of trading systems including securities exchanges should besubject to regulatory authorization and oversight. 26 There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants. 27 Regulation should promote transparency of trading. 28 Regulation should be designed to detect and deter manipulation and other unfairtrading practices. 29 Regulation should aim to ensure the proper management of large exposures, default risk and market disruption. 30 Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficientPrepared by Satish T Sawnani- email and that they reduce systemic risk. [email protected] cellOCT 7, 2012 9930438805 29 30. Gaps Security Market v/sIOSCO There are institution specificregulations. RBI powers over Banksand FI and PD are different eventhough activity is same Multiplicity of Acts : Problems ofinterpretations remain even if scope ofActs is well defined . ConsolidatingSC Act and SEBI Act Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880530 31. Gaps vis--vis IOSCOprinciples Inter regulatory cooperation needsstrengthening (no of meetings ofHLGCM) High level group on capitalmkts HLGCM meetings need to be moretransparent and sharing of specified mktinfo on routine and automatic basis FIMMDA & PDAI should gradually takelevel of SRO instead of merely beingindustry level associations. They shouldcome within regulatory oversight of RBI Absence of margin requirement forinstitutional tradesPrepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880531 32. GAPS in GSEC Markets Disclosure of Mkt Intermediaries andPDs positions without much time lag isessential To mitigate systemic risk. Suchdisclosure could be encouraged but onlyafter taking into account the effect ofsuch disclosure on financial stability. The ownership of trading platformsshould be hived off by Reserve Bank in a phased manner to a separate agency asthere is conflict of interest as it managesPublic Debt also . ( A Player and refereecannot be the same ????) Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880532 33. Adequacy and Timeliness ofGovt disclosures There is a need for enhancing the transparency in disclosures of the financial results of the government going forward. And timeliness thereofby Central/State Governments Quality of disclosures also needsimprovement (GASAB working on it) Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880533 34. Equity , Corporate Bond and Derivativemarket Assessment vis--vis IOSCO gaps SEBI not empowered to makeregulations u/s 55A of Companies ActOnly power to administer provisionsin Co Act for listed companies- (P1) To ensure operational independenceand accountability Sec 5(2) gives rightto CG to remove SEBI member with 3months notice should beremoved.(P2)Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880534 35. Eq. Corp. Bond & Derivative mktsAssessment vis--vis IOSCO gaps(2)- PvtRight of Action Private right of Action and/or classaction may be allowed in law for s (P9) Only aggrieved party can approachcourt of competent jurisdiction andSEBI cannot approach Courts toobtain injunction on behalf of foreignregulators . This may be consideredbased on MoU and principle ofreciprocity (P13)Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880535 36. Eq. Corp. Bond & Derivative mktsAssessment vis--vis IOSCO gaps (3)- Voting pattern by Significant S/Holders, R.P.T Disclosure requirements imposed basedon listing agreements, DIP guidelines etcwhich may be converted toregulations(P14) Some regulatory framework fordisclosure of voting pattern byinstitutional shareholders like MFs FIIs,to Market & /or unit holders to be there(P15,P20) Related party transactions are nowdisclosed but can be made subject toshareholders approval(P15)Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880536 37. Eq. Corp. Bond & Derivative mktsAssessment vis--vis IOSCO gaps (4) -Auditors & CS The certification authorities/auditorsshould be accountable to therespective regulatory authorities. (P16) The matter should be discussed withICAI/ICWAI/ICSI or any other similarbody for the issuance of appropriatedirections(P16)Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880537 38. Eq. Corp. Bond & Derivative mktsAssessment vis--vis IOSCO gaps (5) -Market Intermediaries The need for RISK-RELATED capitalrequirement for market intermediaries tobe explored ( PMS any size Net worth 2Cr, MF ---> no separate or specific requirements foradequate internal control for marketintermediaries and as good practicethese should be issued (P 23) policy and procedure should be laiddown for dealing with the failure ofmarket intermediaries and financialconglomerates to reduce risks tosystemic stability. (P24)Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880538 39. Mutual Fund related Gaps Mutual Fund can be set up by Bank andinsurance subsidiaries and are subject tomultiple regulators Prudential norms and corporategovernance related gaps Regulations provide that a funds ownershipin any single company should not exceed 10percent of a companys voting shares,although there is no upper limit on the totalholdings of voting and non-voting shares ofany single company. Further, there appears to be no restriction oncorporate investment in a Prepared by Satish T Sawnani-units.mutual funds [email protected] cell OCT 7, 2012 9930438805 39 40. Eq. Corp. Bond & Derivative mkts Assessment vis--vis IOSCO gaps (6) -Market Intermediaries SEBI has a process for registering andinspecting brokers, but not for unlicensedaffiliates of these entities. Hence, risk arisingfrom these should be addressed (P23) the issue of management of conflict isrelevant in a situation where research,investment banking, mutual fund and brokingare housed under one roof this issue shouldbe addressed (P23) Regulation of Distributors especially of PE &VCF products should be brought within theregulatory fold through SROs or directregulations(P 17) Prepared by Satish T Sawnani- [email protected] cell OCT 7, 2012 9930438805 40 41. G- Sec Market & Money Market -Gap analysis IOSCO principles The CG can remove the Governor-RBI/SEBI Head as per RBI Act and thispartially impairs independence ofSupervisor(P1) FIMMDA & PDAI are industry levelrepresentative bodies and yet to developinto SROs There are no express provisions underthe RBI act and BR Act allowing RBI toprovide assistance to foreign regulatorsas is there in SEBI Act. Informal MoUand info sharing done especially withdomestic regulatorsSec 45NB(3) P 13Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880541 42. G- SEC MARKET & MONEY MARKET - GAP ANALYSIS IOSCO PRINCIPLESThe Accounting systemof Central and StateGovts is on Deptspecific a/c codes andrules and closelyfollowing Cash system .A Common accountingsystem across all Govtdepts. is proposed to beset up by GASAB (GovtA/c Std Advisory Board)to improve lacunae inGovt accountingpractices (P 16) Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880542 43. Legal Framework in which RBI operates Multiple lawsThere are various acts which govern the functioning of RBI, specific functions, banking operations and individual institutions owned by RBI.1. Umbrella Acts:The reserve Bank of India Act, 1934, governs the RBI functionsThe Banking regulation Act, 1949, governs the financial sector.2. Acts Governing Specific Functions.like The Securities Contract(Regulation) Act, 1956, regulates govt securities market, FEMA Act, 1999 etc.3. Acts Governing Banking Operations.like Negotiable Instruments Act, 1881 etc.4. Acts Governing Individual Institutions.like State Bank of India Act, 1954, The Industrial Development Bank of India Act, the National Housing Bank Act etc. Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880543 44. Some Important Functions of RBI Formulation of Monetary policy Regulating and supervision ofFinancial System Banker to Govt Banker To Banks Note Issuing Agency Foreign Exchange Control Developmental role Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880544 45. Basel Core principles(BCP) BCP -Defacto standard forbenchmarking sound prudentialregulation and supervision of Banks. 25principles in all I. Powers & independence of regulator,(1) II.licencing and structure(2-5) IIIPrudential req. & risk Mgmt (6-18) IV. Method of ongoing supervision (19-21) V. A/c & disclosure (22) VI. Corrective & remedial powers(23) VII. Consolidated & cross borderPrepared by Satish T Sawnani- emailsupvn(24-25)OCT 7, [email protected] cell993043880545 46. Basel Core Principles objectiveindependence & cooperation 1. An effective system of banking supervision will haveclear responsibilities and objectives for each agencyinvolved in the supervision of banking organisations. Each such agency should possess operationalindependence and adequate resources. A suitable legalframework for banking supervision is also necessary,including provisions relating to authorisation of banking organisations andtheir ongoing supervision; powers to address compliance with laws as well assafety and soundness concerns; and legal protection for supervisors. Arrangements forsharing information between supervisors and protecting the confidentiality of suchinformation should be in place.Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880546 47. BCP - Licensing andStructure 2. The permissible activities of institutions that arelicensed and subject to supervision as banks must be clearly defined, and theuse of the word "bank" in names should be controlledas far as possible. 3. The licensing authority must have the right to setcriteria and reject applications for establishments thatdo not meet the standards set. The licensing process, ata minimum, should consist of an assessment of thebanking organisations ownership structure, directorsand senior management, its operating plan and internalcontrols, and its projected financial condition, includingits capital base; where the proposed owner or parent organisation is a foreignbank, the prior consent of its home country supervisorshould be obtained. Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 9930438805 47 48. BCP- Licencing & Structure(2) 4. Banking supervisors must have theauthority to review and reject anyproposals to transfer significantownership or controlling interests inexisting banks to other parties. 5. Banking supervisors must have theauthority to establish criteria forreviewing major acquisitions orinvestments by a bank and ensuring thatcorporate affiliations or structures do notexpose the bank to undue risks or hindereffective supervision. Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880548 49. Licensing and Structure 2. The permissible activities of institutions that are licensed andsubject to supervision as banks must be clearly defined, and the use of theword "bank" in names should be controlled as far as possible. 3. The licensing authority must have the right to set criteria andreject applications for establishments that do not meet the standards set.The licensing process, at a minimum, should consist of an assessment of thebanking organisations ownership structure, directors and senior management, its operatingplan and internal controls, and its projected financial condition, including its capitalbase; where the proposed owner or parent organisation is a foreign bank, the priorconsent of its home country supervisor should be obtained. Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880549 50. BCP - Prudential Regulationsand Requirements 6. Banking supervisors must set prudent andappropriate minimum capital adequacy requirements forall banks. Such requirements should reflect the risksthat the banks undertake, and must define thecomponents of capital, bearing in mind their ability toabsorb losses. At least for internationally active banks,these requirements must not be less than thoseestablished in the Basle Capital Accord and itsamendments. 7. An essential part of any supervisory system is theevaluation of a banks policies, practices andprocedures related to the granting of loans and makingof investments and the ongoing management of theloan and investment portfolios. Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880550 51. BCP - Prudential Regulations and Requirements(2) 8. Banking supervisors must be satisfied thatbanks establish and adhere to adequatepolicies, practices and procedures forevaluating the quality of assets and theadequacy of loan loss provisions and loanloss reserves. 9. Banking supervisors must be satisfied thatbanks have management informationsystems that enable management to identifyconcentrations within the portfolio andsupervisors must set prudential limits torestrict bank exposures to single borrowers orgroups of related borrowers. by Satish T Sawnani- email [email protected] cellOCT 7, 2012 9930438805 51 52. BCP - Prudential Regulationsand Requirements (3) 10. In order to prevent abuses arising fromconnected lending, banking supervisors musthave in place requirements that banks lend torelated companies and individuals on an arms-length basis, that such extensions of credit areeffectively monitored, and that other appropriatesteps are taken to control or mitigate the risks. 11. Banking supervisors must be satisfied thatbanks have adequate policies and procedures foridentifying, monitoring and controlling countryrisk and transfer risk in their international lendingand investment activities, and for maintainingappropriate reserves against such risks. Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880552 53. BCP - Prudential Regulationsand Requirements (4) 12. Banking supervisors must be satisfied thatbanks have in place systems that accuratelymeasure, monitor and adequately control marketrisks; supervisors should have powers to imposespecific limits and/or a specific capital charge onmarket riskexposures, if warranted. 13. Banking supervisors must be satisfied thatbanks have in place a comprehensive riskmanagement process (including appropriateboard and senior- 6 -management oversight) to identify, measure,monitor and control all other material risks and,where appropriate, to hold capital against thesePrepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880553 54. BCP - Prudential Regulationsand Requirements (5) 14. Banking supervisors must determine that banks have inplace internal controls that are adequate for the nature andscale of their business. These should include cleararrangements for delegating authority and responsibility;separation of the functions that involve committing the bank,paying away its funds, and accounting for its assets andliabilities; reconciliation of these processes; safeguarding itsassets; and appropriate independent internal or external auditand compliance functions to test adherence to these controlsas well as applicable laws and regulations. 15. Banking supervisors must determine that banks haveadequate policies, practices and procedures in place,including strict "know-your-customer" rules, that promote highethical and professional standards in the financial sector andprevent the bank being used, intentionally or unintentionally,by criminal elements.Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880554 55. BCP Methods of ongoingBanking Supervision 16. An effective banking supervisorysystem should consist of some form ofboth on-site and off-site supervision. 17. Banking supervisors must haveregular contact with bank managementand thorough understanding of theinstitutions operations. 18. Banking supervisors must have ameans of collecting, reviewing andanalysing prudential reports andstatistical returns from banks on a soloand consolidated basis.Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880555 56. BCP - Methods of Ongoing Banking Supervision (2)19. Banking supervisors must have a means of independent validation ofsupervisory information either through on-site examinations or use ofexternal auditors.20. An essential element of banking supervision is the ability of thesupervisorsto supervise the banking group on a consolidated basisPrepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880556 57. BCP - Information Requirements 21. Banking supervisors must besatisfied that each bank maintainsadequate records drawn up inaccordance with consistent accountingpolicies and practices that enable thesupervisor to obtain a true and fairview of the financial condition of thebank and the profitability of itsbusiness, and that the bank publisheson a regular basis financial statementsthat fairly reflect its condition.Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880557 58. Formal Powers of Supervisors 22. Banking supervisors must have attheir disposal adequate supervisorymeasures to bring about timelycorrective action when banks fail to meetprudential requirements (such asminimum capital adequacy ratios), whenthere are regulatory violations, or wheredepositors are threatened in any otherway. In extreme circumstances, thisshould include the ability to revoke thebanking licence or recommend itsrevocation.Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880558 59. Cross-border Banking 23 Banking supervisors must practice globalconsolidated supervision over their inter-nationally-active banking organisations,adequately monitoring and applyingappropriate prudential norms to all aspects ofthe business conducted by these bankingorganisations worldwide, primarily at theirforeign branches, joint ventures andsubsidiaries. 24. A key component of consolidatedsupervision is establishing contact and information exchange with the various othersupervisors involved, primarily host country supervisory authorities. Satish T Sawnani- email Prepared by [email protected] cell OCT 7, 2012 9930438805 59 60. BCP- Cross Border Banking(2) 25. Banking supervisors must requirethe local operations of foreign banksto be conducted to the same high standardsas are required of domestic institutionsand must have powers to shareinformation needed by the homecountry supervisors of those banks forthe purpose of carrying outconsolidated supervision. Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880560 61. St. Co-op Banks/Dist Cent co-opbanks gaps - BCP Multiplicity of Laws (RBI Act, BR Act-AACS) , State cop Societies/ Rulesetc Multiplicity of regulators(RBI/NABARD/ RCS) No provision for Removal of Head(s)of supervisory authorities for reasonsspecified in Law StCBs/DCCBs licence can bewithdrawn on recommendation ofOCT 7, 2012Prepared by Satish T Sawnani- [email protected] cell993043880561 62. STCB/ DCCB- Gaps All Co-op Banks can start bankingbusiness without licence . StCB need RBI licence for Expansion In case of amalgamation/ liquidationpermission of RCS of concerned state isneeded The word Bank can be used as part ofname by a unlicensed and un-supervisedentities like PCS( Primary Credit Society); PACS ( Primary Agricultural CreditSociety);and Land Development Bank(LDB) . Around 300 such entities . Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880562 63. StCB & DCCBs Gap analysis BCP Capital Adequacy norms /Basel normsdo not apply to StCB, DCCB , Local AreaBanks, RRB (Regional Rural Banks). StCBs & DCCBs are yet to put in placehave rudimentary risk mitigantmechanism The risk taking function is not segregatedfrom risk evaluation, monitoring andcontrol No comprehensive guidelines forreputational, strategic and operationalrisks etc Whistle blower policy not therePrepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880563 64. RRB- Gap analysis againstBasel core principles The reasons for removal of head ofSupervisory authority are not publiclydisclosed RBI has powers u/s 35A of BR Act 1949to impose sanctions but licence to RRBscannot be revoked as formed by Govtnotification The powers to close amalgamate mergeRRBs rest with GOI and notRBI/NABARD conflicts with Basel corePrepared by Satish T Sawnani- emailprinciple OCT 7, [email protected] cell993043880564 65. RRB- Gaps vis--vis BCP NABARD does not have power toreject proposal for change ofsignificant ownership but situationdoes not arise as structure specified50:15:35 (C.Govt; St Govt andSponsor Bank) CRAR norms (Cap risk adq.Norms)and market and operationalrisk regulatory capital not yet madeapplicable to RRB No guidelines issued to RRB forPrepared by Satish T Sawnani- [email protected] cellinterest rate risk in Banking BookOCT 7, 2012 993043880565 66. Whistle Blower & changingBoard composition NABARD/RBI has no powers to bringchanges in composition of Board orsenior Management to addressprudential concerns Whistle blower policy guidelines notissued for RRB Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880566 67. Gaps HFC v- against BCP NHB an autonomous body createdunder NHB act 1987, is responsiblefor regulation and supervision Chairman or MD can be removed byCentral Govt in consultation withRBI(sec 7) raises issue ofoperational independence especiallywhen reasons of removal are notdisclosedPrepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880567 68. HFC Gaps & Bridging thereof There is no formal or informalarrangements for sharing info withforeign regulator Supervision of HFC on Consolidatedbasis is not done only as Solo Basis No practice of NHB obtaining NOCfrom Home Supervisor or ongoingsupervision of cross border operationsin case of foreign HFC establishingoffice in IndiaPrepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880568 69. HFC gaps NHB has no power to reject proposalsfor change in proposed ownership orcontrolling interest There is no blanket requirement for HFCto have in place comprehensive riskManagement policies and processes andusing various statistical risk models tocapture operational risk. NHB does not have power to changecomposition of directors/ seniorManagerial personnel if there areprudential concerns Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880569 70. Housing Finance Sector Gaps Whistle- blower policy to protect HFCstaff who report suspicious activityinternally or in good faith Information on Solo and consolidatedbasis called but assessment of risk toHFC as a group is not done as awhole Power to reject or rescind theappointment of external auditor is notwith NHB (Like RBI)Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880570 71. NBFC (Deposit taking / NBFC-ND-SI) Gaps against Basel core principles Reasons for removal of Head ofSupervisory Agency during his term arenot specified by Law There are no formal MoU with foreignsupervisory agencies as law does notempower RBI but informal arrangementsfor sharing confidential information arethere Many Foreign companies are setting upNBFC and cross border affiliations orstructures which could expose NBFC oundue risk or hinder effective supervisionis not reviewedPrepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880571 72. NBFC Gaps Comprehensive risk Mgmt guidelines tocapture market risk and operational risknot yet included There is no bifurcation into trading bookand banking book in case of NBFC andinterest rate risk measurement inbanking book are not there. RBI has no powers to limit range ofactivities the consolidated group mayconduct and locations in which activitiescan be conducted. Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880572 73. NBFC - Gaps No system in place to supervise theforeign operations of NBFCs Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880573 74. RBIs independence issues Conflict of interest takes place as RBI isregulator and supervisor of Banking and alsohas tasks like sovereign debt management,foreign exchange, reserve management andissuance of currency. Govt has De-jure powers to removeGovernor/D.G but has never exercised it RBI is financed by its own budget and needsno financial support from the CentralGovernment RBI therefore perceived as one of the mostindependent and autonomous bodies in theIndian financial sector Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880574 75. Capacity building and HRPrepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880575 76. Gaps across banking insuranceand Security markets There is a continuing need for trainingand value upgrade In India, it would never be easy for the regulator to match the ever-increasing remuneration levels of industry, thegap between the two remainsmanageable and the efficacy of thesystem is not under-mined.Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880576 77. NBFC and MF sector Banks need to interact with regulator (RBI) forexposures in capital markets or stakes insubsidiaries which deal in securities or insurancesector Significant portion of funding of NBFC is fromDebt mutual Funds. (exposure limits in 1issuercompany is 15% but for NBFC sector as a wholenot there) Sept 2012 circular has put sectoral cap of 30% .(Apparently HFC also covered in Financialservices which will make around 20000 Cr moveout ) and create stress in banking too. NBFC do not have limits on exposure limits tosensitive sectors like real estate or capitalmarkets and in case of asset priceSatish T Sawnani- emailPrepared by correctionsignificant losses [email protected] cell OCT 7, 2012 993043880577 78. Regulatory overlap examples NBFC and Debt Mutual Funds are moresusceptible to liquidity crisis andmismatches compared to banks they neither have mandated pre-emption funds, nor access to last resortemergency lending. As compared tobanks ULIPs were analogous to ELSS andsimilar mutual fund schemes. Thus,insurance companies and mutual funds operate under different regulatory regimes withPrepared by Satish T Sawnani- email separate prudential norms.OCT 7, [email protected] cell993043880578 79. Gaps in Home-Host country co-operation There should be specific provisions inthe RBI Act, 1934 and BankingRegulation Act, 1949 and IRDA Act,1999on lines of SEBI Act, 1992 so that MoUscan be entered with foreign supervisorsestablishing a formal communicationmechanism. Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880579 80. Regulatory Arbitrage (Contd) The present arrangement of inter-regulatory co-ordination needs to be strengthened and made transparent. A well established coordinating mechanismfor the financial system as a whole would bemost beneficial and our best bet in the current circumstances. Inter-regulatory cooperation and acollaborative approach would result in mostof advantages available in unified regulation without cell email Prepared by Satish T Sawnani- [email protected] the systemOCT to its9930438805 7, 2012 pitfalls. 80 81. Synergies B/W Regn & Supervision and Promotion of Financial Stability The dual roles of being monetary authorityand regulator and supervisor of banks andFIs have inherent seeds of conflict RBI has mitigated by having separate BFSand committee of Board of Directors The Current structure of RBI( as themonetary policy maker and Lender of LastResort( LoLR) AS also the regulator andsupervisor, though quasi-independent, isappropriate and may continue. It reduces the information risk that wouldotherwise be embedded between themonetary authority and the regulator andemail Prepared by Satish T Sawnani- [email protected] cellsupervisor.OCT 7, 2012 9930438805 81 82. Gaps in InstitutionalInfrastructure The recent global financial turmoil forcesus to re-look at RBI role as LoLR. Theexisting provisions in RBI Act, 1934,empower the Reserve Bank to provideliquidity in times of crisis. With integration of global markets & theinnovations taking place, conventionalmethods of LoLR may not be sufficient, RBI should set up working group to studywhole gamut of issues for liquiditymanagement, types of instruments togive liquidity , current legal powers Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880582 83. DRT & Recovery proceedings Delays in the recovery proceedings before the DRTs results in the locking up ofhuge amount of public money. The SARFAESI Act has given a major boostto the recovery process and has helped themreduce NPAs. But pendency of litigationsremains a major concern. The law should provide for a time-frame toconclude the liquidation proceedings. The delay impacts Banks, InsuranceCompanies, NBFC, Capital Mkt players,PE/VCFs etc too and spillover impact acrosseconomy.Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880583 84. Gaps in implementation of Accounting Standards IFRS was to come into effect from April2011. A backdoor entry in partial formdone by Revised Schedule VI has beendone. Banks and Insurance companies shouldalso adopt IFRS or go for early adoption.This gives credibility to Indian Financialsector As there is lot of transparency anddisclosure requirements As regards Derivative accounting Banksshould fund only if IFRS or IAS 30,32 areadopted by Banks customers. Prepared by Satish T Sawnani- email [email protected] cell GASAB working on Govt A/c standards OCT 7, 2012 993043880584 85. Gaps vis--vis BASEL inBanking Regulatory Accountability of the Reserve Bank isnot clear- More Transparency needed vis--visCo-operative Banks, RRBs, NBFCs and HFCs Ownership Issues: In interest of proper regulation and growth of the sector and to resolve the inherent conflict of governmentowning the major portion of banking system, thegovernment should consider urgently giving upitsrole as majority shareholder in the publicsector banks. it is necessary to assign duration based capitalcharge for market risk for the Scheduled Urban Co- Prepared by Satish T Sawnani- emailoperative Banks [email protected] cell OCT 7, 2012 993043880585 86. RRB & Co-operative SectorBanks For RRBs completion of the amalgamation andrecapitalisation process of these entities. Isessential Government influence in the cooperative sector requires to be minimised and its regulationand supervision should be brought within theambit of a single regulatory organisation. Inmean time sign MoUs with all StateGovernments and chalk out a revival path forpotentially viable institutions and a non-disruptiveexit route for the non-viable ones. Licensing of Co-operative Institutions to beMandatory Though directors are nominated to RRBs, it isdesirable to make them accountable T Sawnani- email Prepared by Satish [email protected] cell OCT 7, 2012 9930438805 86 87. Commercial Banks As per Section 10A (2) (b) of theBanking Regulation Act, 1949, directors on the banks Board should not havesubstantial interest in a company or afirm. As per Section 5 (ne) of theAct, substantial interest means anamount paid up exceeding Rs. 5 lakhor ten per cent of the paid-up capital of thecompany, whichever is less. This Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880587 88. NPA provisions on StandardAssets As per existing guidelines on provisioning, banks are required tomake a two per cent provision on standard assets, while NBFCs need not makeany provision on standard assets. A review of norms should be made to reducethePrepared by Satish T Sawnani- email [email protected] cell possibility of regulatory arbitrage OCT 7, 2012 993043880588 89. Exposure to Capital Markets of Banks A review of the limits on capital market exposure should be made keeping in view the associated risks arising out of such exposures. This impacts Fund raising of CapitalMarket intermediaries too (New AIFraises minimum Ticket size to 1 crorefrom 5 Lakhs and New PMS regulationshave raised limit to 25 lakhs from 5lakhs) Thus fund raising focus has toshift to Banks /FI but norms set up morethan 10-5 years back continue Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880589 90. Liquidity Risk & Operational riskreporting Liquidity Risk & Operational risk The effect of other risks (credit,market and operational risks) on a banksbalance sheet should be strengthenedand reporting to supervisor maderigorous Especially for foreign exposures andfor operational risk provisions andimmediate notification of adverseOCT 7, 2012Prepared by Satish T Sawnani- [email protected] cell993043880590 91. RBS & PCA Frameworkstrengthen RBS (Risk Based Supervision) templatesand Prompt corrective Action shouldhave time deadlines which could befinalised in consultation with Govt . RBS is set of templates covering allpotential risk including reputation risk,Cap Adequacy risk, NPA andprovisioning etc. In PCA there is discussion withRegulator with CEO of Bank .Highlighting areas of concernPrepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880591 92. gAps commercial bk- BCP The C.G. has powers to removegovernor or RBI Board though notexercised till now (P1) There are no formal memoranda forsharing info with foreign supervisoryAgencies. Though informal MOU exists-(P1) Low amount of substantial interest of 5lakhs or 10% acts as constraint fordirectors with requisite expertise on Prepared by Satish T Sawnani- emailBoard P4)OCT 7, 2012 [email protected] cell 993043880592 93. gAps commercial bk-BCP(2) Need to set up working group toexamine its role as LoLR in view ofBanking crises and quickly meetingliquidity needs to avoid system risks Strengthen further need to captureinterest rate risk in banking book.Captured in trd book presently (p16) AFI to review back office and controlstaff sufficency (P17) Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880593 94. gAps commercial bk-BCP(3) OSMOS (off-shore Monitoring andSurveillance ) and Risk BasedSupervision(RBS) which are off-sitesurveillance should be exploited tofully synergise the complimentaritywith AFI (P20) RBI has no significant jurisdicion overentities in a conglomerate which areoutside purview of regulatorydomain(P21)Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880594 95. gAps commercial bk-BCP(4) Present AFI Format does not providefor review of overall activities on groupwide basis in respect of bankinggroup(P24) Home Host country formalmechanisms for information sharingand supervision are not there. Formalenablement would primarily need tobe legally mandated(P25)Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 993043880595 96. NBFC Sharing of Information with Domesticand Foreign Regulators Ownership Issues Explore the option of examining thesuitability of the major shareholdersand senior management of NBFCs(like CEO and directors of Banks) No Power in RBI Act to bring about Prepared by Satish T Sawnani- emailchanges in ownership in NBFC OCT 7, 2012 [email protected] cell 993043880596 97. NBFC (2) Reporting of Material Concentration tothe Board and supervisor Exposure to Related Parties to be onarms length relationships . Guidelinesto be issued in the context of thedevelopmental role played by NBFCsinthe promotion of green field projects.Market, Liquidity and Operational Riskmonitoring guidelines for NBFC to bestrengthened Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880597 98. Balance of skills in front andback office of NBFC RBI does not determine whether there is anappropriate balance in the skills andresources of the Front and Back Office ofNBFC. Specific provisions in the NBFC inspectionmanual are needed in this regard. Especiallyfor NBFCs-ND-SI. There are no laws in place which giveprotection to NBFC staff who reportsuspicious activity in good faith eitherinternally or directly to relevant authority.Appropriate guidelines on the lines of oneintroduced for private sector banksT andcell email Prepared by Satish Sawnani- [email protected] banks may be OCT 7, issued.2012 993043880598 99. NBFC- Substantive change andauditor appointment Notification to Regulator of Substantive Changes . No guidelines in this regardfor NBFC Appointment of Auditors for NBFCs tohave RBIs concurrence and policy ofrotation and change after fixed period asin case of commercial banks Increased Disclosure: RBI can considerincreased disclosure of NBFC in itsaudited accounts of ownership , types ofactivities and products, significantholdings etc. Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 993043880599 100. HFC- Gaps and recommendations Information Sharing and Due Diligence in respect of Foreign HFCs . There should be specific provisions in the NHB Act, 1987 on lines of the SEBI Act, 1992 There is a need for reckoning FII as part offoreign shareholding of HFCs. Builders/construction companies should be precluded from using the term housingfinance in their names. Ministry of CorporateAffairs should issue the necessary guidelinesto registrars of companies inPrepared by Satish T Sawnani- emailthis regard [email protected] cell OCT 7, 2012 9930438805 100 101. HFC Gaps NHB should have the power to bring about changes in the composition of the Board and senior management to address prudential concerns. By amending NHBAct Norms for Major Acquisitions/Investments to belaid IRAC norms should also cover off-balance sheetitems Exposure to related parties on Arm length Basis NHB does not determine whether HFCs have apermanent compliance function that assistssenior management in managing effectively thecompliance risks faced by the HFC. T Sawnani- emailPrepared by Satish [email protected] cell OCT 7, 2012 9930438805 101 102. HFC Gaps Whistle- BlowerScreening HRpolicies in HFC not policies determined byregulatorNotification to Changes systemsRegulator ofnot in place yet Substantive Appointment of Auditors to haveregulator consent and to have policy of rotation too.Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 9930438805102 103. Private Right of Action Private right of action and / or class action suit by investors should beAllowed by law. Disclosure and investment protection Schedule II of Companies Actand Form 2A of Companies Rules, thedisclosure requirements are based onDisclosure and I@nvestor Protection (DIP)Guidelines issued by SEBI. To impart enforceability, the guidelines should be converted into regulations.Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 9930438805103 104. Transparency & voting pattern there is no disclosure of voting patternon significant shareholders bycompanies. As a part of transparencyand good corporate governance it isdesirable that the voting pattern onimportant decisions by institutionalinvestors be disclosed topublic.Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 9930438805104 105. Insurance Sector In Nascent stage of developmentliberalisation started in 1999/2000 Staff of regulatory agencies need tohave holistic approach understandingof financial institutions and financialmarkets and a technicalunderstanding of modern riskmanagement models. Such individualsare in short supply, and there isintense competition from the privatesector for themPrepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 9930438805105 106. IRDAs independence issues IRDA is an autonomous body formed by theInsurance Regulatory Development Authority Act,1999 With respect to financial independence, an issuehas been raised by the government on thetransfer of IRDAs funds to the exchequer (PublicAccount of India). IRDA has taken the stand that it is not carryingon sovereign functions on behalf of thegovernment. Legacy issues arising from the provisions of theInsurance Act which vests several powers withthe Government of India (GoI) in the context of theInsurance Sector Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 9930438805 106 107. IAIS principles Review of outdated provisions ofInsurance Act 1938 with IRDA Overlap of Supervisory functions like theconstitution of the consultativecommittee, the enforcement of criminalpenalties, and in matters of winding up ofan in Government owned insurers continue to be governed by certain provisions of the specific legislations (that regulate their activities), apart from the insurance legislation governing the industry Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 9930438805107 108. Exempted insurers The regulatory position with respect tothe exempted insurers is not clear. Aroadmap needs to be laid down by thegovt /supervisor for the continuance orotherwise of these entities to addressthe concerns relating to protection ofthe interests of the policyholderscoveredConsultative Committee should be done Prepared by Satish T Sawnani- emailaway with as recommended by IRDA OCT 7, 2012 [email protected] cell 9930438805108 109. There are no formal stipulations from IRDA on the internal controls to be in place at the offices of insurance companies. These need to beformalised as part of the corporate governance framework.Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 9930438805109 110. Insurance Companies -GAPS system for off-site monitoring should be developedexpeditiously to facilitate development of early warningsignals and for taking policy decisions . Formal Preventive and Corrective Action And sophisticated risk based supervision and risk basedcapital models/ framework needs to be in place There are gaps in the mechanisms available fordetection various frauds and on sharing on informationbetween insurers and with IRDA. These gaps need tobe addressed expeditiously. some stipulations for a more effective dissemination of information on the financial performance by theinsurance companies Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 9930438805110 111. IAIS Core Principles IAIS has developed the InsuranceCore principles for prudentialregulation and supervision ofinsurance sector Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 9930438805111 112. ICP 1 Conditions for effective insurance supervision Insurance supervision relies upon a policy, institutional and legalframework for financial sectorsupervision a well developed and effectivefinancial market infrastructure efficient financial markets. (ICP 1) Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 9930438805112 113. Supervisory system The principal objectives of insurancesupervision are clearly defined (ICP 2) The supervisory authority: has adequate powers, legal protection andfinancial resources to exercise its functionsand powers is operationally independent andaccountable in the exercise of its functionsand powers; hires, trains and maintainssufficient staff with high professionalstandards treats confidential informationappropriately(ICP 3) Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 9930438805113 114. Supervisory System The supervisory authority conducts itsfunctions in a transparent andaccountable manner. (ICP 4) The supervisory authority cooperatesand shares information with otherrelevant supervisors subject toconfidentiality requirements.(ICP 5) Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 9930438805114 115. ICP- Supervised Entity An insurer must be licensed before it canoperate within a jurisdiction. Therequirements for licensing are clear,objective and public. (ICP 6) The significant owners, board members,senior management, auditors andactuaries of an insurer are fit and properto fulfill their roles. This requires that theypossess the appropriate integrity, competency,experience and qualifications.(ICP 7) Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 9930438805115 116. ICP- Supervised Entity (2) The supervisory authority approves orrejects proposals to acquire significantownership or any other interest in aninsurer that results in that person,directly or indirectly, alone or with anassociate, exercising control over theinsurer. The supervisory authority approvesthe portfolio transfer or merger ofinsurance business. (ICP 8) Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 9930438805116 117. ICP Supervised Entity(3) The corporate governance frameworkrecognises and protects rights of allinterested parties. The supervisory authority requirescompliance with all applicable corporate governance standards. (ICP 9) The supervisory authority requires insurers tohave in place internal controls that are adequate for the nature and scale of thebusiness. The oversight and reportingsystems allow the board and management toSawnani- email Prepared by Satish T monitorand control the operations. (ICP10) [email protected] cell OCT 7, 2012 9930438805 117 118. ICP-On-going Supervision Making use of all available sources, thesupervisory authority monitors andanalyses all factors that may have animpact on insurers and insurancemarkets. It draws conclusions and takesaction as appropriate. (ICP 11) The supervisory authority receivesnecessary information to conducteffective off-site monitoring and toevaluate the condition of each insurer aswell as the insurance market(ICP-12)Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 9930438805118 119. ICP- On Going Supervision (2) The supervisory authority carries out on-siteinspections to examine the business of aninsurer and its compliance with legislationand supervisory requirements(ICP-13) The supervisory authority takes preventiveand corrective measures that are timely,suitable and necessary to achieve theobjectives of insurance supervision. (ICP 14) The supervisory authority enforces correctiveaction and, where needed, imposes sanctions based on clear and objectivecriteria that are publicly disclosed.(ICP 15)Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 9930438805119 120. ICP- On Going Supervision (3) The legal and regulatory frameworkdefines a range of options for the orderlyexit of insurers from the marketplace. Itdefines insolvency and establishes thecriteria and procedure for dealing withinsolvency. In the event of winding-upproceedings, the legal framework givespriority to the protection of policy-holders(ICP 16) The supervisory authority supervises itsinsurers on a solo and a group-widebasis(ICP 17) Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 9930438805120 121. ICP- Prudential requirements The supervisory authority requiresinsurers to recognise the range of risksthat they face and to assess andmanage them effectively (ICP 18) Since insurance is a risk taking activity,the supervisory authority requiresinsurers to evaluate and manage the risks that theyunderwrite, in particular throughreinsurance, and to have the tools toestablish an adequate level of premiums(ICP 19) Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 9930438805121 122. ICP- Prudentialrequirements(2)The supervisory authority requires insurers to comply with standards for establishingadequate technical provisions and other liabilities, and making allowance for reinsurance recoverables. The supervisory authority has both the authority and the ability to assess the adequacy of the technical provisions and to require that these provisions bePrepared by Satish T Sawnani- email increased, if necessary.(ICP 20)OCT 7, [email protected] cell9930438805122 123. ICP- Prudentialrequirements(3) The supervisory authority requires insurers tocomply with standards on investmentactivities. These standards includerequirements on investment policy, asset mix,valuation, diversification, asset-liabilitymatching, and risk management. (ICP 21) The supervisory authority requires insurers tocomply with standards on the use ofderivatives and similar commitments. Thesestandards address restrictions in their useand disclosure requirements, as well asinternal controls and monitoring of the relatedpositions. (ICP 22) Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 9930438805 123 124. ICP- Prudentialrequirements(4) The supervisory authority requiresinsurers to comply with the prescribedsolvency regime. This regime includescapital adequacy requirements andrequires suitable forms of capital thatenable the insurer to absorbsignificant unforeseen losses. (ICP 23)Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 9930438805124 125. ICP- Markets & Consumers The supervisory authority sets requirements,directly or through the supervision of insurers,for the conduct of intermediaries (ICP 24) The supervisory authority sets minimumrequirements for insurers and intermediariesin dealing with consumers in its jurisdiction,including foreign insurers selling products ona cross-border basis. The requirements includeprovision of timely, complete and relevant information to consumers both before acontract is entered into through to the pointatPrepared by Satish T Sawnani- [email protected] cell which all obligations under a contract have 125OCT 7, 2012 9930438805 126. ICP- Markets & Consumers(2) The supervisory authority requiresinsurers to disclose relevant informationon a timely basis in order to give stake-holders a clear view of their businessactivities and financial position and tofacilitate the understanding of the risks towhich they are exposed (ICP 26) The supervisory authority requires thatinsurers and intermediaries take thenecessary measures to prevent, detectand remedy insurance fraud.(ICP 27)Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 9930438805126 127. ICP- AML/, combating the financing of terrorism The supervisory authority requiresinsurers and intermediaries, at aminimum those insurers andintermediaries offering life insuranceproducts or other investment relatedinsurance, to take effective measures todeter, detect and report moneylaundering and the financing of terrorismconsistent with the Recommendations ofthe Financial Action Task Force onMoney Laundering (FATF). Anti-moneylaundering, combating the financing of Prepared by Satish T Sawnani- email [email protected] cellterrorism(ICP 28)OCT 7, 2012 9930438805127 128. Exempted Insurers outsidepurview of IRDA (a) State Government insurancedepartments transacting generalinsurance business in respect of assetsowned/ financed by them; (b) Exempted insurers transacting healthinsurance for its members; and (c) State Government insurancedepartments which transact cropinsurance D) Postal life insurance E) ESIC Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 9930438805128 129. GAPS IAIS principles The legislative framework does not prohibitcooperation, but it does not specifically provide forsame (as in the case of the securities market regulator SEBI). Sharing of information amongst regulatorseven if with other countries takes place underconfidentiality .The legislation does not vest IRDA with requisite powers to ensure protection of an insurance company in case of the group to which it belongs encounters any financialdifficulties. Under the Insurance Act, every companyregistered to carry on insurance business is regulated ona stand-alone basis and not on a group-basis even if theinsurer belongsto a group as defined under the Company. Monitoringtakes place through processes established by Sawnani- emailPrepared by Satish T [email protected] cellOCT 7, 2012 9930438805 129 130. Bridging the Gapsinsurance legislation 1) Sovereign guarantee to policies byLIC to be removed for level playing field 2) Separate statutory reserve to becreated or compulsory distribution of95% of surplus to policyholders to bedeleted 3) Strengthening powers vested withIRDA : Some powers of supervisioncontinue with Govt like enforcement ofcriminal penalties, constitution ofconsultative committee winding up ofinsurance company etcPrepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 9930438805130 131. Bridging the Gapsinsurance legislation (2) 4) Bringing exempted insurers under IRDA 5) Specific provisions applicable to stateowned insurance companies by certainprovisions of specific acts like capitalstructure, investment limits, free permissionfor opening offices etc to be addressed 6) Fund requirement of supervisor from regnand renewal fees 7)Capacity Building and HR issues 8) Doing away with consultative committee 9) reporting of Fit and proper by insurer toIRDA on ongoing basis Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 9930438805131 132. Bridging the Gaps insurancelegislation (3) 10) Comprehensive set of guidelines for GoodCorporate governance 11) Strengthen Internal control framework (actuarialsystem) and off-site monitoring & PCA 12) Group wide supervision and sharing of informationto be specifically provided 13) IRDA has no powers to direct suspension ofdividend . 14) Board involvement to set premium rates to be inplace for Life Business 15) Clarity on manner of accounting for various risk trfmechanisms(Re-insurance contracts) 16) Guidelines for AML/KYC issued but enforcementpowers need to be provided for 17) Enhancement of ceiling of FDI in Insurance Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 9930438805132 133. Bridging the Gapsinsurance legislation (4) Superannuation business comes under lifeInsurance. To protect interests ofsuperannuation some regulatoryarrangement like Occupational PensionBoard of UK Name of natural and legal person holdingqualifying participation in applicant companyto be ascertained and made public whilegranting licence Regulator may make available a standardformat of articles of incorporation Catastrophe reserves to be created but as itwould need tax incentive same has not beendone yetPrepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 9930438805 133 134. A Few other Gaps across varioussectors LLPs engaged in Financial services whowill be the regulator??? Thoughpermitted ROC and RBI not allowing itdefacto Hedging of Entire Capital by Foreignplayers for entire tenure including forInsurance players with foreign partners Capital Account convertibility norms India is not yet Fully Convertible onCapital Account Real Estate: Concessions by RBI andMoF but not granted to PE and VCFplayers engaged in Real EstatePrepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 9930438805134 135. Bridging the gaps The laws need to envisagemechanisms for crisis management,which is a complex blend of resolution,emergency rule-making, temporaryliquidity support, and the potential useof taxpayer resources to protectfinancial firms.Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 9930438805135 136. Inter-regulatory co-ordination mechanisms A High Level Co-ordination Committeeon Financial Markets (HLCCFM) comprising theRBI Governor , chairman of SEBI, IRDA andPFRDA and the Finance Secretary, GoI, whichserves as a forum for discussing commonregulatory issues. FSDC and its sub-committee also formed forinter-regulatory co-ordination SIFI (Systemetically Important FinancialInstitutions) of Financial conglomerates alsoformed RBI & SEBI have put in place integrated systemof alerts to piece together disparate signals fromdifferent elements of the market. The frequency of the meetings of the T Sawnani- emailPrepared by Satish [email protected] cellneeds to be increased 7, 2012 9930438805OCT136 137. Current Co-ordinationMechanism- capital markets-HLGCM Currently, coordination amongdomestic regulators is occurringthrough the High Level Group onCapital Markets (HLGCM) comprisingthe RBI, SEBI, the IRDA and FinanceMinistry. HLGCM has 2 standing committees A) regulatory coordination B) coordination in matters relating tothe development of debt markets. OCT 7, 2012 Prepared by Satish T Sawnani- email [email protected] cell 9930438805137 138. Reducing Regulatoryarbitrage Regulatory and supervisory reach hasto extend to all those unsupervisedentities whose condition could affectthe supervised entities. (Sisterconcerns of financial conglomerates ) There could be arbitrage issues inrespect of both institutions and markets across the regulatory jurisdictions of the Prepared by Satish T Sawnani- email Reserve Bank, SEBI and IRDA. OCT 7, 2012 [email protected] cell 9930438805138 139. Need for Cooperation inregulation Various segments of the domestic financialmarket are getting increasingly integrated There are progressive linkages between thedomestic and international capital markets The regulatory interventions or their absencein one market have repercussions in othermarkets that are more serious and morewidespread than in the past The emergence of more and more financialsupermarkets and growing complexity offinancial transactions, there are increasinginstances of the same market intermediarycoming under the purview of multipleregulatory bodies. Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 9930438805 139 140. Reforms in HLCCFM The role of the HLCCFM and itsfunctions should be clearly delineatedand placed in the public domain. The membership of the HLCCFMshould be made more broad basedand diversified and market participantsshould also be representedTHROUGH REPRESENTATIONBODIES Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 9930438805140 141. FSLRC approach paper Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 9930438805141 142. FSLRC approach paper The financial regulatory structure hasmultiple laws and multiple agenciescovering it leading to inconsistenttreatment, and regulatory arbitrage. These problems would be reduced byhaving a single principles-based lawwhich would cover the entire financialsystem. Consumers would then betreated fairly with consistent treatmentacross all aspects of their engagement ofPrepared by Satish T Sawnani- emailthe financial system.OCT 7, [email protected] cell9930438805142 143. Present Regulators in FinancialSector (8 agencies) RBI SEBI IRDA PFRDA(Pension Fund Regulatory &dev Authority) FMC(Forward Market Commission) SAT(Securities Appellate Tribunal) DICGC FSDC (Fin Sect Dev. Council)Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 9930438805143 144. Proposed Regulators in FinancialSector (7 agencies) approach paper of FSLRC RBI FSDC (Fin Sect Dev. Council) UFA (United Financial Agency) proposedmerger of SEBI, IRDA, PFRDA &FMC) DMO (Debt Management Office) FRA( Financial Redressal Agency) FSAT (Fin Sector Appellate Tribunal) Resolution Corporation (source TOI dt. 2/10/12-govt appointedpanel) Prepared by Satish T Sawnani- email [email protected] cell OCT 7, 2012 9930438805144 145. Questions ?Comments !Suggestions.Prepared by Satish T Sawnani- [email protected] cellOCT 7, 2012 9930438805145

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