DIRECTOR-RELATED LOANS BY UCBS

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In this edition, we will be seeing about Director-related Loans by Urban Co-operative Banks (UCBs) Guidance issued by RBI. We will have our usual Legal terms and News Bites related to notifications by MCA, SEBI, RBI, IT and GST following the article.

CS Saranya Deivasigamani,

CEO

DIRECTOR-RELATED LOANS BY UCBs

The Banking Regulation Act, 1949 (“the Act”) has been amended by the Banking Regulation (Amendment) Act, 2020 notified for the Primary (Urban) Co-operative Banks (UCBs) on September 29, 2020 and deemed to have been effective from June 29, 2020. Consequently, section 20 of the principal Act has become applicable to UCBs. Keeping in view the above, the extant directions on the subject issued to UCBs have been reviewed and the revised directions are issued as under.

UCBs shall not make, provide or renew any loans and advances or extend any other financial accommodation to or on behalf of their directors or their relatives, or to the firms / companies / concerns in which the directors or their relatives are interested (collectively called as “director-related loans”). Further, the directors or their relatives or the firms / companies / concerns in which the directors or their relatives are interested shall also not stand as surety/guarantor to the loans and advances or any other financial accommodation sanctioned by UCBs. ‘Advances’ for the purpose shall include all types of funded / working capital limits such as cash credits, overdrafts, credit cards, etc.

The following categories of director-related loans shall, however, be excluded from “loans and advances” for the purpose of these directions:

Regular employee-related loans to staff directors, if any, on the Boards of UCBs;

Normal loans, as applicable to members, to the directors on the Boards of Salary Earners’ UCBs;

Normal employee-related loans to Managing Directors / Chief Executive Officers of UCBs;

Loans to directors or their relatives against Government Securities, Fixed Deposits and Life Insurance Policies standing in their own name.

Explanation: For the purpose of these directions –

The term ‘any other financial accommodation’ shall include funded and non-funded credit limits and underwritings and similar commitments, as under:

The funded limits shall include loans and advances by way of bill/cheque purchase/ discounting, pre-shipment and post-shipment credit facilities and deferred payment guarantee limits extended for any purpose including purchase of capital equipment and acceptance limits in connection therewith sanctioned to borrowers, and guarantees by issue of which a bank undertakes financial obligation to enable its constituents to acquire capital assets. It shall also include investments which are in the nature of / in lieu of credit.

The non-funded limits shall include letters of credit, guarantees other than those referred to in paragraph (a) above, underwritings and similar commitments. It shall also include off-balance sheet exposure in the form of derivatives.

The word “relative” shall have the meaning as under:

A person shall be deemed to be a relative of another, if and only if:-

a) They are members of a Hindu Undivided Family; or

b) They are husband and wife; or

c) The one is related to the other (or vice-versa) in the manner indicated below:

Father (including step-father)
Mother (including step-mother)
Son (including step-son)
Son’s wife
Daughter (including step-daughter)
Daughter’s husband
Brother (including step-brother)
Brother’s wife
Sister (including step-sister)
Sister’s husband

iii. The word “interested” shall mean the director of the UCB or his relative, as the case may be, being a director, managing agent, manager, employee, proprietor, partner, coparcener or guarantor, as the case may be, of the firm / company / concern (including HUF):

Provided that a director of a UCB or his relative shall also be deemed to be interested in a company, being the subsidiary or holding company, if he/she is a director, managing agent, manager, employee or guarantor of the respective holding or subsidiary company:

Provided further that a director of a UCB shall also be deemed to be interested in a company/firm if he/she holds substantial interest in or is in control of the company/firm or in a company, being the subsidiary or holding company, if he/she holds substantial interest in or is in control of the respective holding or subsidiary company:

Provided further that a relative of a director of a UCB shall also be deemed to be interested in a company/firm if he/she is a major shareholder or is in control of the company/firm or in a company, being the subsidiary or holding company, if he/she is a major shareholder or is in control of the respective holding or subsidiary company:

The term “substantial interest” shall have the same meaning as assigned to it in section 5(ne) of the Banking Regulation Act, 1949.

The term “control” shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in another manner.

The term “major shareholder” shall mean a person holding 10% or more of the paid up share capital.

UCBs shall submit information pertaining to their director-related loans as at the end of each quarter (i.e. Mar 31, Jun 30, Sep 30 and Dec 31), in the format given in the Annex to these directions, to the concerned Regional Office of Department of Supervision of Reserve Bank of India within fifteen days from the end of the respective quarter. In the case of UCBs functioning under Administrator(s) / Person(s)-in-Charge / Special Officers, the UCBs concerned should submit the information in respect of loans and advances availed by the Administrator(s) / Person(s)-in-Charge / Special Officers, including their relatives.

These directions supersede the earlier directives / instructions issued on the subject and shall come into force on Feb 5, 2021. The existing director-related loans sanctioned/granted by UCBs prior to Feb 5, 2021, if any, may continue till their respective maturity and shall not be renewed further.

Legal Terms

Acquiesce

To accept without protest; to give implied consent by silence.

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CSR Amendment Rules 2021

Decoding the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021

The Ministry of Corporate Affairs (MCA) vide its notification dated 22nd January, 2021 has released the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 aiming to amend the Companies (Corporate Social Responsibility Policy) Rules, 2014.
As per the new provisions, every entity that intends to undertake any CSR activity shall register itself with the Central Government by filing the form CSR-1 electronically with the Registrar of Companies, with effect from April 1, 2021.
The entity shall electronically sign and submit FormCSR-1, which shall be duly verified digitally by a Chartered Accountant in practice or a Company Secretary in practice or a Cost Accountant in practice.
On the submission of the Form CSR-1 on the portal, a unique CSR Registration Number shall be generated by the system automatically
A company may engage international organisations for designing, monitoring and evaluation of the CSR projects or programmes as per its CSR policy as well as for capacity building of their own personnel for CSR.
A company may also collaborate with other companies for undertaking projects or programmes or CSR activities in such a manner that the CSR committees of respective companies are in a position to report separately on such projects or programmes in accordance with these rules.
Further, MCA clarified that the Board of Directors of the Company shall mandatorily disclose the composition of the CSR Committee, and CSR Policy and Projects approved by the Board on their website, if any, for public access.
The board shall ensure that the administrative overheads shall not exceed five percent of total CSR expenditure of the company for the financial year.
The Board’s Report of a company covered under these rules pertaining to any financial year shall include an annual report on CSR containing particulars including projects approved, amount spent, unspent, amount available for set-off from preceding year and the following year, ongoing projects and other projects., and the breakup of amount spent per project, administrative overheads, impact assessment etc.,.
However, any surplus arising out of the CSR activities shall not form part of the business profit of a company and shall be ploughed back into the same project or shall be transferred to the Unspent CSR Account and spent in pursuance of CSR policy and annual action plan of the company or transfer such surplus amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.
With this amendment coming into force, the Companies will have to state the reasons for not spending the amount for CSR and also will have to transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.

CS Renu Wadekar,
Practicing Company Secretary
+91 95372 04838

RBIA FRAMEWORK

6 YEARS OF ZAPPY

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In this edition, we will be seeing about Risk-Based Internal Audit (RIBA) Guidance issued by RBI. We will have our usual Legal terms and News Bites related to notifications by MCA, SEBI, RBI, IT and GST following the article.

CS Saranya Deivasigamani,

CEO

RBIA FRAMEWORK

In terms of the Guidance Note on Risk-Based Internal Audit issued by RBI vide circular DBS.CO.PP.BC.10/11.01.005/2002-03 dated December 27, 2002, banks, inter alia, are required to put in place a risk based internal audit (RBIA) system as part of their internal control framework that relies on a well-defined policy for internal audit, functional independence with sufficient standing and authority within the bank, effective channels of communication, adequate audit resources with sufficient professional competence, among others.

While the aforesaid Guidance Note lays out the basic approach for risk based internal audit functions, banks are expected to re-orient their approach, in line with the evolving best practices, as a part of their overall Governance and Internal Control framework. Banks are encouraged to adopt the International Internal Audit standards, like those issued by the Basel Committee on Banking Supervision (BCBS) and the Institute of Internal Auditors (IIA).

To bring uniformity in approach followed by the banks, as also to align the expectations on Internal Audit Function with the best practices, banks are advised as under:

Þ Authority, Stature and Independence – The internal audit function must have sufficient authority, stature, independence and resources within the bank, thereby enabling internal auditors to carry out their assignments with objectivity. Accordingly, the Head of Internal Audit (HIA) shall be a senior executive of the bank who shall have the ability to exercise independent judgement. The HIA as well as the internal audit function shall have the authority to communicate with any staff member and have access to all records or files that are necessary to carry out the entrusted responsibilities.

Þ Competence – Requisite professional competence, knowledge and experience of each internal auditor is essential for the effectiveness of the bank’s internal audit function. The desired areas of knowledge and experience may include banking operations, accounting, information technology, data analytics and forensic investigation, among others. Banks should ensure that internal audit function has the requisite skills to audit all areas of the bank.

Þ Staff Rotation – Except for the entities where the internal audit function is a specialised function and managed by career internal auditors, the Board should prescribe a minimum period of service for staff in the Internal Audit function. The Board may also examine the feasibility of prescribing at least one stint of service in the internal audit function for those staff possessing specialized knowledge useful for the audit function, but who are posted in other departments, so as to have adequate skills for the staff in the Internal Audit function.

Þ Tenor for appointment of Head of Internal Audit – Except for the entities where the internal audit function is a specialised function and managed by career internal auditors, the HIA shall be appointed for a reasonably long period, preferably for a minimum of three years.

Þ Reporting Line – The HIA shall directly report to either the Audit Committee of the Board (ACB) / MD & CEO or Whole Time Director (WTD). Should the Board of Directors decide to allow the MD & CEO or a WTD to be the ‘reporting authority’ of the HIA, then the ‘reviewing authority’ shall be with the ACB and the ‘accepting authority’ shall be with the Board in matters of performance appraisal of the HIA. Further, in such cases, the ACB shall meet the HIA at least once in a quarter, without the presence of the senior management, including the MD & CEO/WTD. The HIA shall not have any reporting relationship with the business verticals of the bank and shall not be given any business targets. In foreign banks operating in India as branches, the HIA shall report to the internal audit function in the controlling office / head office.

Þ Remuneration – The independence and objectivity of the internal audit function could be undermined if the remuneration of internal audit staff is linked to the financial performance of the business lines for which they exercise audit responsibilities. Thus, the remuneration policies should be structured in a way that it avoids creating conflict of interest and compromising audit’s independence and objectivity.

The internal audit function shall not be outsourced. However, where required, experts, including former employees, could be hired on contractual basis subject to the ACB being assured that such expertise does not exist within the audit function of the bank. Any conflict of interest in such matters shall be recognised and effectively addressed. Ownership of audit reports in all cases shall rest with regular functionaries of the internal audit function.

Banks must ensure and demonstrate through proper documentation that their risk-based internal audit framework captures all the significant criteria / principles suited for their organisational structure, the business model and the risks.

The instructions contained above came into effect on January 07, 2021.

Reserve Bank of India issued a circular supplementing the guidelines on December 27, 2002 on Risk-based internal audit along with other circulars/instruction on the subject issued from time-to time and for any common areas of guidance, the prescription of this circular shall be followed.

Legal Terms

Rebuttable Presumption

A presumption that can be refuted with evidence; an assumption that is held to be true until refuted by evidence.