Dear colleagues,

As I talk to you at the release of this quarterly newsletter, the group gets ready to welcome its new entrant Kotak Mahindra Asset Management Company, Singapore (KMAMC) as an 100% owned subsidiary of KMBL. Having received RBI’s approval for the same we are awaiting the nod from Monetary Authority of Singapore (MAS). This subsidiary is being formed to address the requirements from Alternate Fund Management guidelines issued by the European Union. Please join me in wishing the new entity all the very best.

The quarter witnessed the completion of the Annual Financial Inspection by RBI under the Risk Based Supervision (RBS) framework. The lessons of this exercise have been very enriching. The need for capturing minute data of all our transactions, the way we need to look at our internal MIS, the manner in which all divisions need to coordinate to collate the required information, the changes that are required to be brought about in our IT systems were some of the actions emerging out of this exercise, which the compliance department is coordinating to comply with the same.

The revised mechanism announced by RBI on Management of Stressed Assets in the industry and the final guidelines on Intra-group Transactions and Exposures are some of the important changes in the regulatory environment which have far reaching impact on our processes and procedures. All of us are required to gear up ourselves to fulfil the requirements of these regulations.

While we enter the new financial year, it is important to note that “Compliance is cheaper than non-compliance”. My department would continue to make efforts in furthering the compliance culture during the days to come by way of partnering with businesses in training the resources, sharing the spirit of regulations and also by providing tools for better compliance monitoring. I seek your individual help in ensuring that we protect the image and brand of the entity by working relentlessly to meet the regulations in letter and spirit.

T V Sudhakar Head Compliance

Mr. T V Sudhakar addressed Area Managers, RBMs from the Southern region in Bangalore on the changes in the supervisory process by RBI under Risk Based Supervision (RBS) methodology. The spirit of new approach and the focus of the RBI were explained.

Mr Sudhakar also shared some of the incidents which took place in the last couple of months which highlighted the need for strengthening stricter adherence to the regulatory guidelines and internal control processes by the branch officials.

1. Through rupee drawing arrangement, limit of trade transaction has been increased to_______

2. Banks may open _________of a foreign student studying in India

3. In an open loop prepaid card, _________________ is permitted

4. Minimum period for maintaining a fixed deposit is__________

5. Assets that are offered to secure a loan from a financial institution is called_______

Send in your answers to: zina.sequeira@kotak.com . First three correct entries get to win goodies!

Mr. T V Sudhakar for successfully completing the Certified Banking Compliance Professional Examination from IIBF.

My Musings

Training

Fill in the Blanks

Content

News from Reserve Bank of India

Securities and Exchange Board of India

Insurance Regulatory and Development Authority

FAQs on Pre-2005 Series Banknotes

Bank Secrecy Act and anti-money laundering

programs continue to result in significant penalties

Congratulations

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Overseas Direct Investments - Rollover of Guarantees

Under FEMA, it has been decided not to treat / reckon the renewal / rollover of an existing / original guarantee, which is part of the total financial commitment of the Indian party as a fresh financial commitment, provided that :

• Existing/originalguaranteewas issued intermsofthethenextant /prevailingFEMA guidelines.

• Thereisnochangeintheenduseoftheguarantee,i.e.thefacilitiesavailedbytheJV / WOS / Step Down Subsidiary;

• Thereisnochangeinanyoftheterms&conditions,includingtheamountoftheguarantee except the validity period;

• Reporting of the rolled over guarantee would be done as a fresh financialcommitment

• IftheIndianpartyisunderinvestigationbyanyinvestigation/enforcementagencyor regulatory body, the concerned agency / body shall be kept informed about the same.

In case, however, the above conditions are not met, the Indian party shall obtain prior approval of RBI for rollover / renewal of the existing guarantee through the bank.

A.P. (DIR Series) Circular No.83 dated January 3, 2014

Issue of Non Convertible /Redeemable Bonus Preference Shares or Debentures - Clarifications

RBI has decided that an Indian company may issue non-convertible / redeemable preference shares or debentures to non-resident shareholders, including the depositories that act as trustees for the ADR / GDR holders, by way of distribution as bonus from its general reserves under a Scheme of Arrangement approved by a Court in India under the provisions of the Companies Act, as applicable, subject to no-objection from the Income Tax Authorities.

This general permission to Indian companies is only for issue of non-convertible / redeemable preference shares or debentures to non-resident shareholders by way of distribution as bonus from the general reserves.

A. P. (DIR Series) Circular No.84 dated January 6, 2014

External Commercial Borrowings (ECB) Policy -Liberalisation of Definition of Infrastructure Sector

For the purpose of ECB, ‘Maintenance, Repairs and Overhaul’ (MRO) will also be treated as a part of airport infrastructure. Accordingly, MRO, as distinct from the related services which are other than infrastructure, will be considered as part of the sub-sector of Airport in the Transport Sector of Infrastructure.

A.P. (DIR Series) Circular No.85 dated January 6, 2014

Foreign Direct Investment - Pricing Guidelines forFDI Instruments with Optionality Clauses

Optionality clauses may henceforth be allowed in equity shares and compulsorily and mandatorily convertible preference shares / debentures to be issued to a person resident outside India under the Foreign Direct Investment (FDI) Scheme. The provision of optionality clause shall be subject to the following conditions:

• There is aminimum lock-inperiodofone yearoraminimum lock-inperiodas

prescribed under FDI Regulations, whichever is higher.

• Afterthelock-inperiod,asapplicableabove,thenon-residentinvestorexercisingoption / right shall be eligible to exit without any assured return, as under :

• Incaseofalistedcompany,thenon-residentinvestorshallbeeligibletoexitatthemarket price prevailing at the recognised stock exchanges

• Incaseofunlistedcompany,thenon-residentinvestorshallbeeligibletoexitfromthe investment in equity shares of the investee company at a price not exceeding that arrived at on the basis of Return on Equity (RoE) as per the latest audited balance sheet. Any agreement permitting return linked to equity as above shall not be treated as violation of FDI policy / FEMA Regulations.

• Investments in Compulsorily Convertible Debentures (CCDs) and CompulsorilyConvertible Preference Shares (CCPS) of an investee company may be transferred at a price worked out as per any internationally accepted pricing methodology at the time of exit duly certified by a Chartered Accountant or a SEBI registered Merchant Banker.

A.P. (DIR Series) Circular No.86 dated January 9, 2014

Resident Bank Account Maintained by Residents in India - Joint holder - Liberalization

Banks may include an NRI close relative in existing / new resident bank accounts as joint holder with the resident account holder on “Either or Survivor” basis subject to the following conditions :

• Such account will be treated as resident bank account for all purposes and allregulations applicable to a resident bank account shall be applicable.

• Cheques,instruments,remittances,cash,cardoranyotherproceedsbelongingtothe NRI close relative shall not be eligible for credit to this account.

• TheNRIclose relativeshalloperatesuchaccountonly forandonbehalfof theresident for domestic payment and not for creating any beneficial interest for himself.

• WheretheNRIcloserelativebecomesajointholderwithmorethanoneresidentinsuch account, such NRI close relative should be the close relative of all the resident bank account holders.

• Where due to any eventuality, the non-resident account holder becomes thesurvivor of such an account, it shall be categorized as Non-Resident Ordinary Rupee (NRO) account as per the extant regulations.

• Onuswillbeonthenon-residentaccountholdertokeepADbankinformedtogetthe account categorized as NRO account and all such regulations as applicable to NRO account shall be applicable.

• Theabove jointaccountholder facilitymaybeextendedtoall typesofresidentaccounts including savings bank account.

While extending this facility the bank should satisfy itself about the actual need for such a facility and also obtain a specific declaration duly signed by the non-resident account holder.

A.P. (DIR Series) Circular No.87dated January 9, 2014

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Memorandum of Instructions for Opening and Maintenance ofRupee / Foreign Currency Vostro Accounts of Non-resident Exchange Houses

RBI has now included additional items under permitted transactions under Rupee Drawing Arrangements (RDAs). The additional items are as follows:

• Payments toutilityserviceproviders in India, forservicessuchaswatersupply,electricity supply, telephone (except for mobile top-ups), internet, television etc.

• TaxpaymentsinIndia

• EMIpaymentsinIndiatoBanksandNBFCsforrepaymentofloans.

A.P. (DIR Series) Circular No.88 dated January 9, 2014

Risk Management and Inter Bank Dealings

RBI has decided to allow, in case of contracted exposures, forward contracts in respect of all current account transactions as well as capital account transactions with a residual maturity of one year or less to be freely cancelled and rebooked. As far as the exposure of the FIIs / QFIs / other portfolio investors is concerned, forward contracts booked by these investors, once cancelled, can be rebooked up to the extent of 10% of the value of the contracts cancelled. The forward contracts booked by these investors may, however, be rolled over on or before maturity.

A.P. (DIR Series) Circular No.92 dated January 13, 2014

Conversion of External Commercial Borrowing and Lumpsum Fee / Royalty into Equity

An Indian company can issue equity shares against External Commercial Borrowings (ECB) subject to conditions mentioned therein and pricing guidelines as prescribed by RBI from time to time regarding value of equity shares to be issued. RBI has now clarified what rate of exchange shall be applied to the amount in foreign currency borrowed or owed by the resident entity from / to the non-resident entity.

• Where the liability sought to be converted by the company is denominated inforeign currency as in case of ECB, import of capital goods, etc. it will be in order to apply the exchange rate prevailing on the date of the agreement between the parties concerned for such conversion. RBI will have no objection if the borrower company wishes to issue equity shares for a rupee amount less than that arrived at as mentioned above by a mutual agreement with the ECB lender. It may be noted that the fair value of the equity shares to be issued shall be worked out with reference to the date of conversion only.

• TheprincipleofcalculationofINRequivalentforaliabilitydenominatedinforeigncurrency shall apply, mutatis mutandis, to all cases where any payables / liability by an Indian company such as, lump sum fees / royalties, etc. are permitted to be converted to equity shares or other securities to be issued to a non-resident subject to the conditions stipulated under the respective regulations.

A.P. (DIR Series) Circular No.94 dated January 16, 2014

Merchanting Trade Transactions

While handling merchant trade transactions or intermediary trade transactions, banks may keep the following guidelines in view:

• Goods involved inthemerchantingor intermediarytradetransactionswouldbethe ones that are permitted for exports / imports under the prevailing Foreign Trade Policy (FTP) of India, at the time of entering into the contract and all the rules, regulations and directions applicable to exports (except Export Declaration Form) and imports (except Bill of Entry) are complied with for the export leg and import leg respectively.

• Both the legs of a merchanting or intermediary trade transaction are routed

through the same AD bank. The bank should verify the documents like invoice, packing list, transport documents and insurance documents and satisfy itself about the genuiness of the trade.

• Theentiremerchantingor intermediary trade transactions shouldbecompletedwithin an overall period of nine months and there should not be any outlay of foreign exchange beyond four months.

• The commencement of merchanting or intermediary trade would be the dateof shipment / export leg receipt or import leg payment, whichever is first. The completion date would be the date of shipment / export leg receipt or import leg payment, whichever is the last.

• Short-termcrediteitherbywayofsuppliers’creditorbuyers’creditwillbeavailablefor merchanting or intermediary trade transactions including the discounting of export leg LC by an AD bank, as in the case of import transactions.

• Bank should ensure one-to-one matching in case of each merchanting orintermediary trade transaction and report defaults in any leg by the traders to the concerned Regional Office of RBI on.

Bank should satisfy itself about the capabilities of the merchanting trader to perform the obligations under the order. The transactions should result in reasonable profits to the merchanting trader.

For further details, the complete circular may be referred to.

A.P. (DIR Series) Circular No.95 dated January 17, 2014

Lending against Gold Jewellery

RBI has now decided to prescribe a Loan to Value (LTV) Ratio of not exceeding 75% for banks’ lending against Gold jewellery (including bullet repayment loans against pledge of gold jewellery).

Gold jewellery accepted as security / collateral will now have to be valued at the average of the closing price of 22 carat gold for the preceding 30 days as quoted by the India Bullion and Jewellers Association Ltd.. If the gold is of purity less than 22 carats, the bank should translate the collateral into 22 carat and value the exact grams of the collateral. In other words, jewellery of lower purity of gold shall be valued proportionately.

RBI has reiterated that banks should continue to observe necessary and usual safeguards and also have a suitable policy for lending against gold jewellery with the approval of their Boards.

DBOD.BP.BC.No.86/21.01.023/2013-14 dated January 20, 2014

Facilities for Persons Resident outside India - Clarification

RBI has clarified that a foreign investor is free to remit funds through any bank of its choice for any transaction permitted under FEMA, 1999. The funds thus remitted can be transferred to the custodian bank through the banking channel.

KYC in respect of the remitter, wherever required, is a joint responsibility of the bank that has received the remittance as well as the bank that ultimately receives the proceeds of the remittance. While the first bank will be privy to the details of the remitter and the purpose of the remittance, the second bank, will have access to complete information from the recipient’s perspective. Besides, the remittance receiving bank is required to issue FIRC to the bank receiving the proceeds to establish the fact the funds had been remitted in foreign currency.

A.P. (DIR Series) Circular No.96 dated January 20, 2014

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NEFT - Customer Service and Charges -Adherence to Procedural Guidelines and Circulars

Banks have been advised to:

• Educateallstaff/officialsabouttheNEFTprocessingeneralandextensionofthefacility to walk-in customers and customer charges applicable on NEFT.

• Ensure applications forms with proper instructions are made available at allbranches. The charges applicable on NEFT transactions should be displayed at all branches / locations of the bank where NEFT transactions can be conducted. A printed “charges card” in appropriate vernacular language should invariably be carried by agents / business correspondents of the banks.

• Ensurethatthecharges leviedoncustomersfor inter-bankNEFTtransactionsatboth branch locations and CSP / BC / agent locations are at par.

• Ensurethatpositiveconfirmationofcredittobeneficiaryaccountisinvariablysentfor all inward transactions received by them. Similarly, banks originating the NEFT transactions may ensure that such positive confirmation is relayed to all remitting customers, including walk-in customers who provide their mobile number / e-mail id, in accordance with our guidelines on the matter. Intimation of failed / returned transactions should also be brought to the notice of the remitting customer and funds credited to the account immediately / returned to the remitted at the earliest.

• Ensure that in case of delayed credits or delayed returns, the penal interest asapplicable is paid suo-moto to the customer without necessitating a request for the same by the customer.

Banks resorting to back-dating or value-dating such delayed transactions are not excused from paying the penal interest for the delayed period and adoption of such practices will be viewed seriously.

DPSS.CO.EPPD.No.1583/04.03.01/2013-14 dated January 21, 2014

Third Party Payments for Export / Import Transactions

RBI has decided that the requirement of the condition “firm irrevocable order backed by a tripartite agreement should be in place” may not be insisted upon in case where documentary evidence for circumstances leading to third party payments / name of the third party being mentioned in the irrevocable order / invoice has been produced. This shall be subject to conditions as under:

• Bank should be satisfied with the bona-fides of the transaction and exportdocuments, such as, invoice / FIRC.

• BankshouldconsidertheFATFstatementswhilehandlingsuchtransaction.

A.P. (DIR Series) Circular No.100 dated February 4, 2014

FCNR (B) / NRE Deposits - Exemption from ANBC

Query

Banks were advised that advances extended in India against the incremental FCNR (B) / NRE deposits, qualifying for exemption from CRR / SLR requirements under the above circular, will be excluded from the Adjusted Net Bank Credit (ANBC) for computation of priority sector lending targets, till their repayment. What is the method of arriving at the extent of such advances?

Response

• ThedifferencebetweentheamountofoutstandingadvancesinIndiaasonMarch7, 2014 and the Base Date (July 26, 2013) is reckoned as the incremental advances, extended out of the resources generated from the eligible incremental FCNR (B) / NRE deposits, in terms of circular under reference, for exclusion from ANBC for computation of priority sector targets

• Theamount to be excluded from ANBC for computation of priority sector target will of course not exceed incremental FCNR (B) / NRE deposits eligible for exemption from maintenance of CRR / SLR in terms of circulars under reference.

• Incase,thedifferenceinamountofoutstandingadvancesbetweenMarch7,2014and base date is zero or negative, no amount would be eligible for deduction from ANBC for the purpose of arriving at the priority sector lending targets.

Mailbox clarification dated February 6, 2014

Guidelines on Management of Intra-Group Transactions and Exposures

As a prudential measure aimed at better risk management and avoiding concentration of credit risk, RBI has prescribed prudential limits on banks’ exposure to single and group borrowers. However, RBI has not placed limits on intra-group exposure. It has now been decided to prescribe guidelines on Intra-Group Transactions and Exposures (ITEs) for banks. These measures are aimed at ensuring that banks, at all times, maintain arm’s length relationship in dealings with their own group entities, meet minimum requirements with respect to group risk management and group-wide oversight, and adhere to prudential limits on intra-group exposures and are effective from October 1, 2014.

The RBI website may be referred to, for the complete guidelines on management of intra-group transactions and exposures.

DBOD.No.BP.BC.96/21.06.102/2013-14 dated February 11, 2014

Import of Gold / Gold Dore by Nominated Banks / Agencies / Entities - Clarifications

RBI, in consultation with the GoI has issued certain clarifications related to Advance Authorisation (AA) / Duty Free Import Authorisation (DFIA) as under:

• IncaseofAA/DFIAissuedbeforeAugust14,2013,theconditionofsequencingimports prior to exports shall not be insisted upon even in case of entities / units in the SEZ and EoUs, Premier and Star Trading Houses.

• The importsmadeaspartoftheAA/DFIAschemewillbeoutsidethepurviewof the 20:80 scheme. Such Imports will be accounted for separately and will not entitle the Nominated Agency / Banks / Entities for any further import.

• TheNominatedBanks/Agencies/Entitiesmaymakeavailablegoldtotheexporters(other than AA / DFIA holders) operating under the Replenishment Scheme. They can resort to import of gold for the purpose, if considered necessary. However, such import will be accounted for separately and will not entitle them for any further import.

• Importofgoldinthethirdlotonwardswillbelesserofthetwo

• Fivetimestheexportforwhichproofhasbeensubmitted;or

• QuantityofgoldpermittedtoaNominatedAgencyinthefirstorsecondlot.

Further RBI has clarified that:

• TherefinersareallowedtoimportGoldDoreof15%oftheirlicenceforeachofthefirst two months.

• Incase,thequantityhasalreadybeenidentifiedbyDGFTforfirsttwolots,importof such quantity will be in compliance with the guidelines issued.

• DGFT,throughanotification,mayincludenewrefiners,andfixlicencequantityforthem.

A.P. (DIR Series) Circular No.103 dated February 14, 2014

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KYC / AML / CFT - Recognizing E-Aadhaar as an ‘Officially Valid Document’ under PML Rules

RBI has clarified that banks may accept e-Aadhaar downloaded from UIDAI website as an officially valid document subject to the following:

• Ifcustomerknowsonlyhis/herAadhaarnumber,bankmayprinttheprospectivecustomer’s e-Aadhaar letter in the bank directly from the UIDAI portal or adopt e-KYC procedure.

• Ifthecustomercarriesacopyofthee-Aadhaardownloadedelsewhere,thebankmay print the prospective customer’s e-Aadhaar letter in the bank directly from the UIDAI portal or adopt e-KYC procedure or confirm identity and address of the resident through simple authentication service of UIDAI.

Physical Aadhaar card / letter issued by UIDAI containing details of name, address and Aadhaar number received through post and e-KYC process would continue to be accepted as an ‘Officially Valid Document’.

Banks may revise their KYC policy in the light of the above instructions and ensure strict adherence to the same.

DBOD.AML.BC.No.100/14.01.001/2013-14 dated March 4, 2014

Priority Sector Lending-Targets and Classification-Bank Loansto MFIs for On-Lending-Pricing Criteria

RBI has decided that banks have to ensure MFIs comply with the cap on individual loans and margin cap as under in order to be eligible to classify these loans under priority sector as under :-

• Caponindividualloans:-TheaverageBaseRateoffivelargestcommercialbanksby assets multiplied by 2.75 per annum or cost of funds plus margin cap, whichever is less. The average of the Base Rate shall be advised by RBI.

• Margin cap: Further, with effect from April 1, 2014, the margin cap shall notexceed 10% for MFIs having loan portfolio exceeding Rs.100 crore and 12% for others, as against 12% for all.

RPCD.CO.Plan.BC.91/04.09.01/2013-14 dated March 12, 2014

Rupee Drawing Arrangement - Increase in Trade Related Remittance Limit

On a review of the permitted transactions under the Rupee Drawing Arrangements (RDAs), RBI has increased the limit of trade transactions from the existing Rs.2 lakhs per transaction to Rs.5 lakhs per transaction, with immediate effect.

A.P. (DIR Series) Circular No.111 dated March 13, 2014

Foreign Portfolio Investor - Investment under Portfolio Investment Scheme, Government and Corporate Debt

The extant guidelines for Portfolio Investment Scheme for Foreign Institutional Investor (FII) and Qualified Foreign Investor (QFI) have been reviewed and a framework for investments under a new scheme called ‘Foreign Portfolio Investment’ scheme has been put in place. Salient features are:

• TheportfolioinvestorregisteredinaccordancewithSEBIguidelinesshallbecalled‘Registered Foreign Portfolio Investor (RFPI)’. The existing portfolio investor class, namely, Foreign Institutional Investor (FII) and Qualified Foreign Investor (QFI) registered with SEBI shall be subsumed under RFPI

• RFPImaypurchaseandsellsharesandconvertibledebenturesofIndiancompanythrough registered broker on recognised stock exchanges in India as well as purchases shares and convertible debentures which are offered to public in terms of relevant SEBI guidelines / regulations.

• TheindividualandaggregateinvestmentlimitsfortheRFPIsshallbebelow10%or 24% respectively of the total paid-up equity capital or 10% or 24% respectively of the paid-up value of each series of convertible debentures issued by an Indian company. Further, where there is composite sectoral cap under FDI policy, these limits for RFPI investment shall also be within such overall FDI sectoral caps

• RFPIshallbeeligibletoopenaSpecialNon-ResidentRupee(SNRR)accountanda foreign currency account with bank and to transfer sums from foreign currency account to SNRR account at the prevailing market rate for making genuine investments in securities. The bank may transfer repatriable proceeds (after payment of applicable taxes) from SNRR account to foreign currency account

• RFPIshallbeeligibletoinvestingovernmentsecuritiesandcorporatedebtsubjectto limits specified by the RBI and SEBI from time to time;

• RFPIshallbepermittedtotradeinallexchangetradedderivativecontractsonthestock exchanges in India subject to the position limits as specified by SEBI from time to time;

• RFPImayoffercashorforeignsovereignsecuritieswithAAAratingorcorporatebonds or domestic Government Securities, as collateral to the recognized Stock Exchanges for their transactions in the cash as well as derivative segment of the market.

Any foreign institutional investor who holds a valid certificate of registration from SEBI shall be deemed to be a registered foreign portfolio investor (RFPI) till the expiry of the block of three. A QFI may continue to buy, sell or otherwise deal in for a period of one year from the date of commencement of these regulations, or until he obtains a certificate of registration as foreign portfolio investor, whichever is earlier.

A.P. (DIR Series) Circular No.112 dated March 25, 2014

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Delivery Instruction Slip (DIS) Issuance and Processing

SEBI has decided to strengthen the supervisory and monitoring role of the depositories and their participants with respect toissuance and processing of Delivery Instruction Slips (DIS) and put in place the following measures:

Standardization of DIS

Depositories shall ensure that the DIS is standardized across all DPs in terms of:

• SerialNumberingofDeliveryInstructionSlipssoastoenablesystemlevelchecksbythedepositories

• LayoutandsizeofDISsoastofacilitatescanningandeasyretrievabilityofrecords.

The DIS must bear a pre-printed serial number, DP ID, and a pre-printed/pre-stamped Beneficial Owner (BO) ID. The depositories shall prescribe a standard method of serial numbering and ensure that serial numbers issued by a DP are unique within the DP-ID.

DPs shall ensure that:

• sameDISshallnotbeusedforgivingbothmarketandoff-marketinstructions.

• asingleDISshallnotbeusedfortransactionswithmultipleexecutiondates.

Monitoring of DIS

Upon issuance of DIS booklets or loose slips to BO, the DPs shall make available immediately the following details of the DIS to the depository system electronically:

• theDISserialnumber,

• BOID,

• dateofissuance,and

• anyotherrelevantdetailasdecidedbythedepository.

At the time of execution of DIS, DPs shall enter the serial number of DIS in the depository system for validation. The depositories shall make provisions in their systems to facilitate the same.

In respect of all the transfer instructions on a DIS, Depositories shall validate the serial number of DIS and shall ensure that no instructions accompanied by a used DIS or unissued DIS are processed.

Scanning of DIS

DPs shall scan every DIS executed during a day along with all Annexures/ Computer printouts, if any, by the end of the next working day in the manner specified by the depository.

The depositories shall ensure that their DPs have adequate infrastructure, systems and processes to implement scanning, storage and transfer of the scanned DIS in the manner specified by the depositories.

The depositories shall ensure that the systems set up by the DPs maintain proper records of all scanned DIS images including audit trails for changes made, if any and put in place adequate checks and procedures to prevent unauthorized changes to scanned DIS.

Depositories shall utilize the archived scanned images for off-site inspection.

CIR/MRD/DP/ 01/2014 dated January 07, 2014

(Information Technology) IT Governance For Depositories

The following guidelines have been issued to strengthenthe Information Technology (IT) governance framework of depositories.

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Depositories shall formulate an IT strategy committee at the Board level of depository to provide insight and advice to the Board in various areas that may include:

• DevelopmentsinITfromabusinessperspective.

• ThealignmentofITwiththebusinessdirection.

• TheavailabilityofITresourcestomeetstrategicobjectives.

• CompetitiveaspectsofITInvestments.

• AlignmentoftheITarchitecturetotheorganizationneedsanditsapproval.

• Settingprioritiesandmilestones.

Depositories shall formulate an executive level IT Steering Committee to assist the IT Strategy Committee in Implementation of IT strategy. The IT steering committee shall comprise of representatives from IT, Human Resources (HR), Legal and various business functions as felt appropriate.

The Depositories shall formulate an IT strategy document and an InformationSecurity policy which should be approved by the Board and reviewed annually.

The Depositories shall create an Office of Information Security and designate a senior official as Chief Information Security Officer (CISO) whose work would be to assess, identify and reduce information technology (IT) risks, respond to incidents, establish appropriate standards and controls, and direct the establishment and implementation of policies and procedures.

CIR/MRD/DMS/ 03 /2014 dated January 21, 2014

Clarifications on IRDA (Non-linked Insurance Products) Regulations, 2013 and IRDA (Linked Insurance Products) Regulations, 2013.

IRDA has issued the circular in the form of an addendum to IRDA (Non-Linked Insurance Products) Regulations, 2013 and IRDA (Linked Insurance Products) Regulations, 2013.

Clarifications on IRDA (Non-linked Insurance Products) Regulations, 2013 and IRDA (Linked Insurance Products) Regulations, 2013:

1. Regulation 36 of IRDA (Non-linked Insurance Products) Regulations, 2013 is substituted as below:

“Advance premium:

(i) Collection of advance premium shall be allowed within the same financial year for the premium due in that financial year. However, where the premium due in one financial year is being collected in advance in earlier financial year, insurers may collect the same for a maximum period of three months in advance of the due date of the premium.

(ii) The premium so collected in advance shall only be adjusted on the due date of the premium.

(iii) The commission shall only be paid after adjustment of premium on due date.

Regulation 52 of IRDA (Linked Insurance Products) Regulations, 2013 is substituted as below:

“Advance premium:

(i) Collection of advance premium shall be allowed within the same financial year for the premium due in that financial year. However,where the premium due in one financial year is being collected in advance in earlier financial year, insurers may collect the same for a maximum period of three months in advance of the due date of the premium.

(ii) The premium so collected in advance shall only be adjusted on the due date of the premium.

(iii) The commission shall only be paid after adjustment of premium on due date.

The circular shall be applicable with immediate effect.

IRDA/ACT/CIR/PRD/089/03/2013-14 dated March 21, 2014

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1. What are the pre-2005 series banknotes?

The RBI issued Mahatma Gandhi series (MG series) 2005 banknotes in the denomination of 10, 20, 50, 100, 500 and 1000. These notes contain some additional / new security features as compared to the 1996 MG series. All banknotes issued before the 2005 MG series are called as pre-2005 series banknotes.

2. How can one distinguish the pre-2005 series banknotes?

Apart from the additional security features, the 2005 MG series banknotes have the year of printing on the reverse of the notes in the lower middle portion. Banknotes printed before 2005 do not have the year of printing on the reverse side and hence can be easily distinguished.

3. Why has RBI decided to withdraw pre-2005 series banknotes?

Reserve Bank of India decided to withdraw from circulation all banknotes issued prior to 2005 as they have fewer security features as compared to banknotes printed after 2005. The withdrawal exercise is in conformity with the standard international practice of not having multiple series of notes in circulation at the same time. The RBI has already been withdrawing these banknotes in a routine manner through banks. It is estimated that the volume of such banknotes (pre-2005) in circulation is not significant enough to impact the general public in a large way and the members of public may exchange the pre-2005 series banknotes at bank branches at their convenience.

4. Do the pre-2005 series banknotes cease to be legal tender?

The notes issued before 2005 shall continue to be legal tender. The notes are only being withdrawn from circulation and this withdrawal exercise is in conformity with the standard international practice of not having multiple series of notes in circulation at the same time.

5. Can the pre-2005 series banknotes be used for normal transactions?

Members of the public can continue to freely use these notes for their transactions and can unhesitatingly receive these notes in payment, as all such notes continue to remain legal tender.

6. Is there any time limit for exchanging these notes?

These notes can be freely exchanged at any bank branch till January 1, 2015. The procedure to be followed after January 1, 2015, shall be communicated by RBI in due course.

7. How is RBI ensuring that these notes are withdrawn from circulation?

Banks have been advised to stop re-issue of the pre-2005 series notes over the counters / through ATMs and they have been instructed to forward them to the Reserve Bank of India.

8. Is there any restriction on the number of pieces that can be exchanged?

No. There is no such restriction. Banks have been advised to freely exchange these notes till January 1, 2015.

9. Is it necessary to be a customer of the bank to exchange the pre-2005 series notes from its branches?

No. Banks have been advised to freely provide this exchange facility to all members of public, whether customer or non-customer.

10. Is it necessary to get cash in exchange or the amount can be credited in one’s account?

It is not necessary to get cash in exchange for the pre-2005 notes. If a person desires, he can get the amount credited in his bank account.

11. Is there any fee to be paid for the exchange facility?

No. The exchange facility is to be provided free of cost by all bank branches.

(Source: RBI Website)

FAQs on Pre-2005 Series Banknotes

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Bank Secrecy Act (“BSA”) compliance, and in particular anti-money laundering (“AML”) controls, remains a focus of regulators as evidenced by record fines levied in recent

weeks. On February 7, 2014, the Financial Industry Regulatory Authority, Inc. (“FINRA”) suspended a former AML compliance officer at Brown Brothers Harriman (“BBH”) and

assessed a record $8 million fine against the firm for its inadequate AML program and lack of oversight. In addition, BBH’s former Global AML Compliance Officer was personally

fined $25,000 and suspended for one month as a result of the AML program’s failures. FINRA found that BBH’s AML program failed to adequately monitor and detect suspicious

penny stock transactions, even after such activity had been brought to its attention. BBH also failed to fulfill its Suspicious Activity Reporting filing requirements and lacked an

adequate supervisory system to prevent transactions involving unregistered securities.

FINRA also recently took formal disciplinary action against a New York-based broker-dealer that is affiliated with a Mexican broker-dealer and Mexican bank for inadequate

AML systems, finding that the broker-dealer failed to register foreign finders who functioned as the firm’s primary points of contact with its customers over a period of five

years. According to FINRA’s Letter of Acceptance, Waiver and Consent, the firm’s former AML officer and Chief Compliance Officer was suspended for 30 days and only escaped

monetary sanctions due to his inability to pay. The firm was fined$475,000 and required to certify within 90 days that it had established systems and procedures reasonably

designed to achieve compliance with all of its AML and registration obligations, including but not limited to remediating the deficiencies identified by FINRA.

Similarly, regulators outside of the United States continue to crack down on poor AML controls. Standard Bank Group became the first commercial bank to be penalized by the

Financial Conduct Authority for such an offense when it was fined $12.6 million in mid-January. In December 2012, HSBC agreed to pay $1.92 billion to settle charges that it

allowed Mexican and Colombian drug cartels to launder the proceeds of their illegal operations.

The timing of these record fines could not be worse for financial institutions and their compliance executives. According to a recent KPMG survey, one in three senior bank

executives believes that their institution has poor AML controls. Out of 317 AML and compliance professionals surveyed representing 48 countries, 35 percent said their

transaction monitoring system is neither efficient, nor effective and only half believed their monitoring systems were able to provide a complete picture by monitoring

transactions across businesses and jurisdictions. KPMG’s report also reflected that despite concerns about a lack of control and oversight, institutions continue to outsource and

off-shore AML program functions. Approximately one-third of institutions surveyed by KPMG had outsourced a portion of their AML program functions and nearly half perform

certain AML program functions off-shore.

AML Risk Assessment

The recent regulatory actions described above, combined with the findings of the KPMG survey, highlight the need for management, with appropriate board oversight, to review

and test the adequacy of their institution’s AML policies, procedures, and processes. The board of directors, acting through senior management, is ultimately responsible for

ensuring that the institution maintains an effective AML internal control structure, including suspicious activity monitoring and reporting.

In order to establish an effective AML program, a financial institution must first assess the risks that it faces, which are dynamic and depend on a variety of factors. Each financial

institution must assess the level of risk that is inherent in (i) its customer base; (ii) its products and services; and (iii) the geographic areas in which it and its customers conduct

business. Certain products and services are deemed to be high risk, such as international private banking, foreign correspondent banking, accounts maintained by, or on behalf

of, Senior Foreign Political Figures, and international funds transfers. In addition, a financial institution should consider the sophistication and knowledge of its staff, and prior

audit and examination findings related to BSA/AML compliance. The AML risk assessment must be documented by the financial institution.

In addition, the federal banking agencies expect that the AML risk assessment be reviewed on a periodic basis. The Federal Financial Institution Examination Council (“FFIEC”)

states that a financial institution should update its risk assessment to identify changes in its risk profile, as necessary (e.g., when new products and services are introduced,

existing products and services change, high-risk customers open and close accounts, or the institution expands through mergers and acquisitions). However, even in the absence

of any such changes, “it is a sound practice for banks to periodically reassess their BSA/AML risks at least every 12 to 18 months.”

Fundamental AML Compliance Risks

AML compliance is an area that creates a clear risk to the integrity of an institution’s operations. These risks typically include:

• failuretoidentifyrisksassociatedwithcertaincustomersortransactions;

• acomplianceprogramnotproportionatewiththeuniquerisksofaninstitution;

• alackofappropriateresourcesandexpertisetoeffectivelymanagerisk;

Bank Secrecy Act and anti-money laundering programs continue to result in significant penalties

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• failure to provide for dual controls and appropriate segregation of duties;

• alackofclearlydefinedlinesofauthorityandresponsibility;

• acomplianceframeworkthatisinconsistentwithregulatoryrequirementsorexpectations;

• unduerelianceonriskmodels;

• poorrisk-basedmodelcontrols;

• failuretocomplywithrecordkeepingrequirementsorinconsistentdocumentationandanalysistosupportriskmanagementactivities;

• ineffectiveorinsufficientcomplianceprogramtesting;and

• failuretoidentifycertaininternalchangesthatmayimpactriskmanagement.

Compliance Culture

Creating a culture of compliance is critical to an effective AML program. The board is responsible for setting an appropriate culture of compliance as it relates to AML obligations, establishing clear policies regarding AML risk management and ensuring that these policies are followed. Senior management is responsible for communicating and reinforcing this culture of compliance and implementing and enforcing the board-approved AML compliance program. An institution must have comprehensive risk management policies, procedures, and processes in place across the institution to address the entire institution’s risk. The importance of AML compliance must be understood and communicated across all levels of the institution.

Although some smaller institutions may be able to maintain an effective centralized compliance department that is responsible for all compliance functions, larger institutions may be better served by organizing AML compliance by business and/or geographic region, and sometimes at the enterprise level. Regardless, institution-wide integration of an AML compliance program helps balance compliance obligations across teams to meet the changing business and regulatory obligations.

Coordination of Compliance Efforts

AML compliance should be a coordinated effort. Compliance no longer needs to be viewed as a burden by business managers. In fact, understanding AML compliance may benefit business managers by allowing them to identify ways in which the AML compliance program can be used to their benefit. For example, business managers may be able to use certain customer due diligence information to better identify customer risk, develop targeted cross-selling opportunities and identify additional products and services that may fit a particular customer’s profile.

Business managers should also play a significant role in the culture of compliance. It is critical for institutions to have their business managers work closely with their BSA compliance officer in connection with the development of new products or services so that potential risks can be identified, understood and communicated early on in the process.

Similarly, an AML compliance program not only benefits from regular specialized AML training but also from product and service training targeted towards the institution’s compliance testing staff. The involvement and training of compliance testing staff on an institution’s products and services will allow AML compliance testing to better identify how AML issues interact with the products and services of the institution’s business.

Benefits of an Integrated AML Program

An integrated approach to an institution’s AML compliance not only provides a more effective AML program and reduces the potential for regulatory and reputational risk, but also results in an increase in the number of well-rounded business managers, compliance department personnel and compliance testing staff. It also may serve as an important

retention tool, as an institution is able to provide more opportunities for learning and advancement in connection with its integrated AML program.

(Source: Internet)

Disclaimer:

The material contained in this document aims at providing a summary of various guidelines, notifications, circulars etc. issued by various regulatory authorities from time to time and is for information purposes only. The same should not be construed as an advice on any matter. for complete information on the matter provided therein, readers are advised to refer to the detailed guidelines, notifications, circulars etc available on the websites of the respective regulators or they may consult the respective compliance departments before acting on any matter.