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Gaps in Banking, securities and insurance vis-a-vis international benchmarks given by Basel, IOSCO and IAIS

Gaps in Banking, securities and insurance vis-a-vis international benchmarks given by Basel, IOSCO and IAIS

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    Presentation for imt delhi v6  slide and linked share Presentation for imt delhi v6 slide and linked share Presentation Transcript

    • Gaps across Banking, SecuritiesInsurance: vis-à-vis international benchmarks Judicial review Consumer Prepared by Satish T Sawnani- email decisions satishsawnani@hotmail.comDoEA- MoF Redressal Forums MCA, cell OCT 7, 2012 9930438805 1
    • Acronyms Listing Acronyms Full Acronyms Full Deposit Insurance and Credit Association of custodial agencies Guarantee Corporation ofACAI of India DICGC India(DICGC). Depositor & InvestmentAIF Alternative Investment Funds DIP Protection Association of MerchantAMBI Bankers of India DMO Debt Management Office Association of Mutual Funds ofAMFI India DoEA Dept. of Economic Affairs Foreign Exchange DealersAML Anti Money Laundering FEDAI Association of IndiaBCI Bar Council of India FII Foreign Institutional Investors Fixed Income Money Mkt &BCP Basel Core Principle FIMMDA Derivatives AssociationBR Banking Regn Act FIU Financial Intelligence Unit NBhartiya Reserve Bank Note Mudran pvt ltdBRBNMPL FMC Forward Mkt CommissionCG Central Govt FRA Financial Redressal Agency Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 2
    • Acronyms Listing (2) Acronyms Full Acronyms Full Deposit Insurance and Credit Association of custodial agencies Guarantee Corporation ofACAI of India DICGC India(DICGC). Depositor & InvestmentAIF Alternative Investment Funds DIP Protection Association of MerchantAMBI Bankers of India DMO Debt Management Office Association of Mutual Funds ofAMFI India DoEA Dept. of Economic Affairs Foreign Exchange DealersAML Anti Money Laundering FEDAI Association of IndiaBCI Bar Council of India FII Foreign Institutional Investors Fixed Income Money Mkt &BCP Basel Core Principle FIMMDA Derivatives AssociationBR Banking Regn Act FIU Financial Intelligence Unit NBhartiya Reserve Bank Note Mudran pvt ltdBRBNMPL FMC Forward Mkt CommissionCG Central Govt FRA Financial Redressal Agency Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 3
    • Acronyms Listing (3) Acronyms Full Acronyms FullPD Primary Dealers SGL Subsidiary General Ledger Primary Dealers Association ofPDAI India SRO Self Regulatory Organisation Pension Fund RegulatoryPFRDA Development Authority UFA United Financial AgencyPSU Public Sector Units VCF Venture Capital FundsRAIN Registrar association of India WDM Wholesale Debt MarketRBI Reserve Bank of India Registrar of CooperativeRCS SocietiesRRB Regional Rural Banks Securities Contract RegulationSCRA Act Securities Exchange Board ofSEBI India Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 4
    • Few Reasons why Gaps in Financial sector arose Multiplicity of Acts – more than 60 and multiple Rules/Regulations) Outdated Acts – Some more than 6 decades back (e.g. RBI Act 1935) Multiple Amendments to Acts have increased Ambiguity & Complexity Multiple Regulators each trying to protect its own turf Greater need to harmonise laws in line with fast changing and growing financial sector Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 5
    • Multiplicity of Regulators and Overlap 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 mutual fund industry is regulated by SEBI. The GSEC, money market and foreign exchange market are mainly regulated by the Reserve Bank. The insurance sector is regulated by IRDA. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 6
    • SEBI RBI & IRDA Mandates SEBI, - is the apex regulatory body for the securities market. SEBIs mandate includes responsibilities for ensuring investor protection & promoting orderly growth of the sec. mkt . The RBI, is responsible for regulation of a certain well- defined segment of the securities market. As the manager of public debt, the RBI is responsible for primary issues of Government Securities. RBIs mandate also includes the regulation of all contracts in g-Secs, gold related securities, money mkt securities & in securities derived from these securities. SEBI is mandated to regulate the trading of these securities on recognized stock exchanges in line with the guidelines issued by RBI. IRDA‘s mandate is to protect interest of policyholders, to regulate promote & ensure orderly growthTof insurance Prepared by Satish Sawnani- email industry & mattes incidental2012 satishsawnani@hotmail.com cell OCT 7, thereto 9930438805 7
    • Overlap of Jurisdiction – GOI & SEBI The power of the C.G. to make rules in respect of capital market related issues under SC(R) Act should be deleted. Central Government continues to have powers to make rules in respect of all the matters relating to securities market under the SC (R) Act. MCA has concurrent powers under the Companies Act in respect of matters relating to the capital market such as the prospectus, the issue of shares to public etc. Sec 55A empowers SEBI to administer the provisions of the Companies Act in respect of the issue, transfer of securities and non-payment of dividend in respect of listed / proposed-to-be-listed companies, SEBI has not been conferred powers to make regulations Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 8
    • No power on the companies SEBI has no powers against listed companies per se The powers of direct surveillance are on stock exchanges, members of stock exchanges & market intermediaries registered with it Despite establishment of Central Coordination and Monitoring Committee (CCMC), enforcement procedures are time consuming , cumbersome and involve too many agencies Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 9
    • Transparency in Debt Market The cash market in debt securities operates through negotiated deals either through telephone or an electronic dealing system like SEBI has taken initiatives to foster transparency through regulatory fiat by prohibiting negotiated deals on the exchanges in respect of listed corporate debt securities and prescribing that all such trades would be executed on the basis of price and order matching mechanism of stock exchanges like equities. However, negotiated deals are still continuing, albeit outside the exchange, and there is no market dissemination of information on such transactions. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 10
    • Debt Market The Indian debt market can be classified into three segments: (i) the government securities market; (ii) the public sector units (PSU) bond market; and (iii) the corporate bond market. Each segment has its own distinctive practices, procedures, institutional framework and regulatory structure. The focus of debt market reforms has been on government securities market, because not only does it dominate the debt market, but also plays an important role in establishing benchmarks for the rest of the market. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 11
    • Gaps in Debt Market Transparency (contd)affecting Banks, Debt MFs, insurance players etc. All deals in the government securities market are settled through the SGL , Daily Dissemination of such information (albeit with a one day lag) is important in the price discovery process data also available from the NSEs Wholesale Debt Market (WDM) segment has contributed to greater transparency in the secondary market for government securities. There is need to have information on a near real time basis. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 12
    • Gaps in Debt Market Transparency (contd)affecting Banks, Debt MFs, insurance players etc. progressive restrictions on on-demand government borrowing from the RBI. The earlier system of issuing ad hoc treasury bills has been replaced by a system of ways and means advances, which are being made increasingly restrictive Auction for treasury bills of varying maturity—14-day, 91-day, 182-day and 364- day—have been introduced. Also, to foster competition, non-competitive bids are now kept outside the notified Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell amount. OCT 7, 2012 9930438805 13
    • Primary Dealer and Repo Market A primary dealer system has been developed to channel securities from primary auctions to ultimate investors The RBI is actively promoting retailing of government securities by providing liquidity support to satellite dealers and dedicated gilt funds An active interbank repo market has been developed, which has helped to boost liquidity in government securities. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 14
    • Legal Gaps – RBI vis a-vis G Secs Differerent powers for diff players ! The amended (SCRA) has conferred on the RBI the responsibility of regulation of G-Secs and money markets, but not the necessary enforcement powers to regulate them As regard Banks, the RBI has statutory powers of inspection, investigation, surveillance and enforcement under Banking Regulation Act, 1949. As regards financial institutions, the regulatory powers are available to the RBI under the RBI Act 1934 With regard to Primary Dealers, the RBI exercises regulatory powers on the basis of guidelines issued by RBI and MOUs signed between PDs and RBI on a contractual basis. Thus the need for (a) the same legislation to include both regulatory responsibilities and the authority to carry them out and (b) the focus to shift from institution-specific regulation to market-specific regulations Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 15
    • Multiplicity of Acts The problem of multiplicity of regulators, as referred to earlier, emerges from the existence of multiplicity of Acts governing securities market regulation The legal framework comprises inter alia the SEBI Act, Securities Contract Regulation Act (SCRA), Indian Contracts Act, Companies Act, Public Debt Act, the RBI Act and the Banking Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 16
    • Multiplicity of Acts contd ….. A need for consolidating the SCRA and the SEBI Act in line with the recommendations of the Dhanuka Committee, will be very helpful. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 17
    • GAPS VIS-À-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 satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 18
    • Few SRO‘s in India – Financial Sector 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 Dealers Association of India) The Life Insurance Council and the General Insurance Council of the Insurance Association of India constituted under section 64 C of the Insurance Act Prepared by Satish T Sawnani- email of 2012 satishsawnani@hotmail.com cell Broker Association OCT 7,India 9930438805 19
    • Evaluation of current regulatory environment using IOSCO principles & guidelines The IOSCO(The International Organization of Securities Commissions) has set out three objectives--protection of investors, ensuring fair, transparent and efficient market and reduction of systemic risk--which securities regulations need to addresso evaluate the existing regulatory framework broadly using the IOSCO principles as criteria and to identify problem areas, which call for future reform initiatives to strengthen the current system. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 20
    • Gaps vis-à-vis IOSCO principles SEBI is apex member of IOSCO. It has framed IOSCO principles methodology for identifying and correcting gaps (30 Nos) for regulators, SRO‘s, co-operation and enforcement, market intermediaries, collective investments schemes and clearing and settlement of securities. A few important Gaps are given in following slides Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 21
    • IOSCO principles – Regulator 1 The responsibilities of the regulator should be clear and objectively stated. 2 The regulator should be operationally independent and accountable in the exercise of its functions and powers 3 The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers. 4 The regulator should adopt clear and consistent regulatory processes. 5 The staff of the regulator should observe the highest professional standards including appropriate standards of confidentiality. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 22
    • IOSCO Principles for Self Regulation The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets. 7 SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 23
    • IOSCO Principles for the Enforcement of Securities Regulation 8 The regulator should have comprehensive inspection, investigation and surveillance powers 9 The regulator should have comprehensive enforcement powers. 10 The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective Prepared by Satish T Sawnani- email compliance program. OCT 7, 2012 satishsawnani@hotmail.com cell 9930438805 24
    • IOSCO Principles for Cooperation in Regulation 11 The regulator should have authority to share both public and non-public information with domestic and foreign counterparts. 12 Regulators should establish information sharing mechanisms that set out when and how they will share both public and non- public information with their domestic and foreign counterparts. 13 The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise by Satish T Sawnani- email Prepared of their satishsawnani@hotmail.com cell powers. OCT 7, 2012 9930438805 25
    • IOSCO Principles for Issuers 14 There should be full, timely and accurate disclosure of financial results and other info that is material to investors‘ decisions.15 Holders of securities in a company should be treated in a fair and equitable manner. 16 Accounting and auditing standards should be of a high & internationally acceptable Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell quality. OCT 7, 2012 9930438805 26
    • IOSCO Principles for Collective Investment Schemes 17 The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme. 18 The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets. 19 Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor‘s interest in the scheme. 20 Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 27
    • IOSCO Principles for Market Intermediaries 21 Regulation should provide for minimum entry standards for market intermediaries. 22 There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the interim 23 Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters. 24 There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors & to contain systemic risk they undertake. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 28
    • IOSCO Principles for the Secondary Market 25 The establishment of trading systems including securities exchanges should be subject 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 unfair trading 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 efficient Prepared by Satish T Sawnani- email and that they reduce systemic risk. satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 29
    • Gaps – Security Market v/s IOSCO There are institution specific regulations. RBI powers over Banks and FI and PD are different even though activity is same Multiplicity of Acts : Problems of interpretations remain even if scope of Acts is well defined . Consolidating SC® Act and SEBI Act Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 30
    • Gaps vis-à-vis IOSCO principles Inter regulatory cooperation needs strengthening (no of meetings of HLGCM) –High level group on capital mkts HLGCM meetings need to be more transparent and sharing of specified mkt info on routine and automatic basis FIMMDA & PDAI should gradually take level of SRO instead of merely being industry level associations. They should come within regulatory oversight of RBI Absence of margin requirement for institutional trades Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 31
    • GAPS in GSEC Markets Disclosure of Mkt Intermediaries and PD‘s positions without much time lag is essential To mitigate systemic risk. Such disclosure could be encouraged but only after taking into account the effect of such disclosure on financial stability. The ownership of trading platformsshould be hived off by Reserve Bank in a phased manner to a separate agency as there is conflict of interest as it manages Public Debt also . ( A Player and referee cannot be the same ????) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 32
    • Adequacy and Timeliness of Govt disclosures There is a need for enhancing the transparency in disclosures of the financial results of the government going forward. And timeliness thereof by Central/State Governments Quality of disclosures also needs improvement (GASAB working on it) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 33
    • Equity , Corporate Bond and Derivativemarket – Assessment vis-à-vis IOSCO gaps SEBI not empowered to make regulations u/s 55A of Companies Act –Only power to administer provisions in Co Act for listed companies- (P1) To ensure operational independence and accountability Sec 5(2) gives right to CG to remove SEBI member with 3 months notice should be removed.(P2) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 34
    • Eq. Corp. Bond & Derivative mkts Assessment vis-à-vis IOSCO gaps(2)- Pvt Right of Action Private right of Action and/or class action may be allowed in law for s (P9) Only aggrieved party can approach court of competent jurisdiction and SEBI cannot approach Courts to obtain injunction on behalf of foreign regulators . This may be considered based on MoU and principle of reciprocity (P13) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 35
    • Eq. Corp. Bond & Derivative mkts–Assessment vis-à-vis IOSCO gaps (3)- Voting pattern by Significant S/Holders, R.P.T Disclosure requirements imposed based on listing agreements, DIP guidelines etc which may be converted to regulations(P14) Some regulatory framework for disclosure of voting pattern by institutional shareholders like MFs‘ FIIs, to Market & /or unit holders to be there (P15,P20) Related party transactions are now disclosed but can be made subject to shareholder‘s approval(P15) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 36
    • Eq. Corp. Bond & Derivative mkts–Assessment vis-à-vis IOSCO gaps (4) -Auditors & CS The certification authorities/auditors should be accountable to the respective regulatory authorities. (P16) The matter should be discussed with ICAI/ICWAI/ICSI or any other similar body for the issuance of appropriate directions(P16) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 37
    • Eq. Corp. Bond & Derivative mkts– Assessment vis-à-vis IOSCO gaps (5) - Market Intermediaries The need for RISK-RELATED capital requirement for market intermediaries to be explored ( PMS any size Net worth 2 Cr, MF ---> no separate or specific requirements for adequate internal control for market intermediaries and as good practice these should be issued (P 23) policy and procedure should be laid down for dealing with the failure of market intermediaries and financial conglomerates to reduce risks to systemic stability. (P24) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 38
    • Mutual Fund related Gaps Mutual Fund can be set up by Bank and insurance subsidiaries and are subject to multiple regulators Prudential norms and corporate governance related gaps Regulations provide that a funds ownership in any single company should not exceed 10 percent of a companys voting shares, although there is no upper limit on the total holdings of voting and non-voting shares of any single company. Further, there appears to be no restriction on corporate investment in a Prepared by Satish T Sawnani-units. mutual funds email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 39
    • Eq. Corp. Bond & Derivative mkts– Assessment vis-à-vis IOSCO gaps (6) - Market Intermediaries SEBI has a process for registering and inspecting brokers, but not for unlicensed affiliates of these entities. Hence, risk arising from these should be addressed (P23) the issue of management of conflict is relevant in a situation where research, investment banking, mutual fund and broking are housed under one roof this issue should be addressed (P23) Regulation of Distributors especially of PE & VCF products should be brought within the regulatory fold through SROs or direct regulations(P 17) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 40
    • G- Sec Market & Money Market -Gap analysis –IOSCO principles The CG can remove the Governor- RBI/SEBI Head as per RBI Act and this partially impairs independence of Supervisor(P1) FIMMDA & PDAI are industry level representative bodies and yet to develop into SRO‘s There are no express provisions under the RBI act and BR Act allowing RBI to provide assistance to foreign regulators as is there in SEBI Act. Informal MoU and info sharing done especially with domestic regulators–Sec 45NB(3) – P 13 Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 41
    • 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 satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 42
    • Legal Framework in which RBI operates – Multiple laws There 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 functions The 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 satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 43
    • Some Important Functions of RBI Formulation of Monetary policy Regulating and supervision of Financial System Banker to Govt Banker To Banks Note Issuing Agency Foreign Exchange Control Developmental role Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 44
    • Basel Core principles(BCP) BCP -Defacto standard for benchmarking sound prudential regulation and supervision of Banks. 25 principles 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 border Prepared by Satish T Sawnani- email supvn(24-25) OCT 7, 2012 satishsawnani@hotmail.com cell 9930438805 45
    • Basel Core Principles – objectiveindependence & cooperation 1. An effective system of banking supervision will have clear responsibilities and objectives for each agency involved in the supervision of banking organisations. Each such agency should possess operational independence and adequate resources. A suitable legal framework for banking supervision is also necessary, including provisions relating to authorisation of banking organisations and their ongoing supervision; powers to address compliance with laws as well as safety and soundness concerns; and legal protection for supervisors. Arrangements for sharing information between supervisors and protecting the confidentiality of such information should be in place. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 46
    • BCP - Licensing andStructure 2. The permissible activities of institutions that are licensed and subject to supervision as banks must be clearly defined, and the use of the word "bank" in names should be controlled as far as possible. 3. The licensing authority must have the right to set criteria and reject applications for establishments that do not meet the standards set. The licensing process, at a minimum, should consist of an assessment of the banking organisations ownership structure, directors and senior management, its operating plan and internal controls, and its projected financial condition, including its capital base; where the proposed owner or parent organisation is a foreign bank, the prior consent of its home country supervisor should be obtained. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 47
    • BCP- Licencing & Structure(2) 4. Banking supervisors must have the authority to review and reject any proposals to transfer significant ownership or controlling interests in existing banks to other parties. 5. Banking supervisors must have the authority to establish criteria for reviewing major acquisitions or investments by a bank and ensuring that corporate affiliations or structures do not expose the bank to undue risks or hinder effective supervision. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 48
    • Licensing and Structure 2. The permissible activities of institutions that are licensed and subject to supervision as banks must be clearly defined, and the use of the word "bank" in names should be controlled as far as possible. 3. The licensing authority must have the right to set criteria and reject applications for establishments that do not meet the standards set. The licensing process, at a minimum, should consist of an assessment of the banking organisations ownership structure, directors and senior management, its operating plan and internal controls, and its projected financial condition, including its capital base; where the proposed owner or parent organisation is a foreign bank, the prior consent of its home country supervisor should be obtained. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 49
    • BCP - Prudential Regulations and Requirements 6. Banking supervisors must set prudent and appropriate minimum capital adequacy requirements for all banks. Such requirements should reflect the risks that the banks undertake, and must define the components of capital, bearing in mind their ability to absorb losses. At least for internationally active banks, these requirements must not be less than those established in the Basle Capital Accord and its amendments. 7. An essential part of any supervisory system is the evaluation of a banks policies, practices and procedures related to the granting of loans and making of investments and the ongoing management of the loan and investment portfolios. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 50
    • BCP - Prudential Regulations and Requirements(2) 8. Banking supervisors must be satisfied that banks establish and adhere to adequate policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and loan loss reserves. 9. Banking supervisors must be satisfied that banks have management information systems that enable management to identify concentrations within the portfolio and supervisors must set prudential limits to restrict bank exposures to single borrowers or groups of related borrowers. by Satish T Sawnani- email Prepared satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 51
    • BCP - Prudential Regulations and Requirements (3) 10. In order to prevent abuses arising from connected lending, banking supervisors must have in place requirements that banks lend to related companies and individuals on an arms- length basis, that such extensions of credit are effectively monitored, and that other appropriate steps are taken to control or mitigate the risks. 11. Banking supervisors must be satisfied that banks have adequate policies and procedures for identifying, monitoring and controlling country risk and transfer risk in their international lending and investment activities, and for maintaining appropriate reserves against such risks. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 52
    • BCP - Prudential Regulations and Requirements (4) 12. Banking supervisors must be satisfied that banks have in place systems that accurately measure, monitor and adequately control market risks; supervisors should have powers to impose specific limits and/or a specific capital charge on market riskexposures, if warranted. 13. Banking supervisors must be satisfied that banks have in place a comprehensive risk management process (including appropriate board and senior- 6 - management oversight) to identify, measure, monitor and control all other material risks and, where appropriate, to hold capital against these Prepared by Satish T Sawnani- email risks. satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 53
    • BCP - Prudential Regulations and Requirements (5) 14. Banking supervisors must determine that banks have in place internal controls that are adequate for the nature and scale of their business. These should include clear arrangements for delegating authority and responsibility; separation of the functions that involve committing the bank, paying away its funds, and accounting for its assets and liabilities; reconciliation of these processes; safeguarding its assets; and appropriate independent internal or external audit and compliance functions to test adherence to these controls as well as applicable laws and regulations. 15. Banking supervisors must determine that banks have adequate policies, practices and procedures in place, including strict "know-your-customer" rules, that promote high ethical and professional standards in the financial sector and prevent the bank being used, intentionally or unintentionally, by criminal elements. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 54
    • BCP – Methods of ongoing Banking Supervision 16. An effective banking supervisory system should consist of some form of both on-site and off-site supervision. 17. Banking supervisors must have regular contact with bank management and thorough understanding of the institutions operations. 18. Banking supervisors must have a means of collecting, reviewing and analysing prudential reports and statistical returns from banks on a solo and consolidated basis. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 55
    • 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 basis Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 56
    • BCP - Information Requirements 21. Banking supervisors must be satisfied that each bank maintains adequate records drawn up in accordance with consistent accounting policies and practices that enable the supervisor to obtain a true and fair view of the financial condition of the bank and the profitability of its business, and that the bank publishes on a regular basis financial statements that fairly reflect its condition. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 57
    • Formal Powers of Supervisors 22. Banking supervisors must have at their disposal adequate supervisory measures to bring about timely corrective action when banks fail to meet prudential requirements (such as minimum capital adequacy ratios), when there are regulatory violations, or where depositors are threatened in any other way. In extreme circumstances, this should include the ability to revoke the banking licence or recommend its revocation. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 58
    • Cross-border Banking 23 Banking supervisors must practice global consolidated supervision over their inter- nationally-active banking organisations, adequately monitoring and applying appropriate prudential norms to all aspects of the business conducted by these banking organisations worldwide, primarily at their foreign branches, joint ventures and subsidiaries. 24. A key component of consolidated supervision is establishing contact and information exchange with the various other supervisors involved, primarily host country supervisory authorities. Satish T Sawnani- email Prepared by satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 59
    • BCP- Cross Border Banking (2) 25. Banking supervisors must require the local operations of foreign banks to be conducted to the same high standards as are required of domestic institutions and must have powers to share information needed by the home country supervisors of those banks for the purpose of carrying out consolidated supervision. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 60
    • St. Co-op Banks/Dist Cent co-op banks – gaps - BCP Multiplicity of Laws (RBI Act, BR Act- AACS) , State cop Societies/ Rules etc Multiplicity of regulators (RBI/NABARD/ RCS) No provision for Removal of Head(s) of supervisory authorities for reasons specified in Law StCBs/DCCBs licence can be withdrawn on recommendation of OCT 7, 2012 Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell 9930438805 61
    • STCB/ DCCB- Gaps All Co-op Banks can start banking business without licence . StCB need RBI licence for Expansion In case of amalgamation/ liquidation permission of RCS of concerned state is needed The word ―Bank‖ can be used as part of name by a unlicensed and un-supervised entities like PCS( Primary Credit Society) ; PACS ( Primary Agricultural Credit Society);and Land Development Bank (LDB) . Around 300 such entities . Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 62
    • StCB & DCCB‘s – Gap analysis – BCP Capital Adequacy norms /Basel norms do not apply to StCB, DCCB , Local Area Banks, RRB (Regional Rural Banks). StCBs & DCCBs are yet to put in place have rudimentary risk mitigant mechanism The risk taking function is not segregated from risk evaluation, monitoring and control No comprehensive guidelines for reputational, strategic and operational risks etc Whistle blower policy not therePrepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 63
    • RRB- Gap analysis against Basel core principles The reasons for removal of head of Supervisory authority are not publicly disclosed RBI has powers u/s 35A of BR Act 1949 to impose sanctions but licence to RRBs cannot be revoked as formed by Govt notification The powers to close amalgamate merge RRBs rest with GOI and not RBI/NABARD conflicts with Basel core Prepared by Satish T Sawnani- email principle OCT 7, 2012 satishsawnani@hotmail.com cell 9930438805 64
    • RRB- Gaps vis-à-vis BCP NABARD does not have power to reject proposal for change of significant ownership but situation does not arise as structure specified 50:15:35 (C.Govt; St Govt and Sponsor Bank) CRAR norms (Cap risk adq. Norms)and market and operational risk regulatory capital not yet made applicable to RRB No guidelines issued to RRB for Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell interest rate risk in Banking Book OCT 7, 2012 9930438805 65
    • Whistle Blower & changingBoard composition NABARD/RBI has no powers to bring changes in composition of Board or senior Management to address prudential concerns Whistle blower policy guidelines not issued for RRB Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 66
    • Gaps – HFC v- against BCP NHB – an autonomous body created under NHB act 1987, is responsible for regulation and supervision Chairman or MD can be removed by Central Govt in consultation with RBI(sec 7) raises issue of operational independence especially when reasons of removal are not disclosed Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 67
    • HFC Gaps & Bridging thereof There is no formal or informal arrangements for sharing info with foreign regulator Supervision of HFC on Consolidated basis is not done only as Solo Basis No practice of NHB obtaining NOC from Home Supervisor or ongoing supervision of cross border operations in case of foreign HFC establishing office in India Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 68
    • HFC – gaps NHB has no power to reject proposals for change in proposed ownership or controlling interest There is no blanket requirement for HFC to have in place comprehensive risk Management policies and processes and using various statistical risk models to capture operational risk. NHB does not have power to change composition of directors/ senior Managerial personnel if there are prudential concerns Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 69
    • Housing Finance Sector – Gaps Whistle- blower policy to protect HFC staff who report suspicious activity internally or in good faith Information on Solo and consolidated basis called but assessment of risk to HFC as a group is not done as a whole Power to reject or rescind the appointment of external auditor is not with NHB (Like RBI) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 70
    • NBFC (Deposit taking / NBFC-ND-SI) – Gaps against Basel core principles Reasons for removal of Head of Supervisory Agency during his term are not specified by Law There are no formal MoU with foreign supervisory agencies as law does not empower RBI but informal arrangements for sharing confidential information are there Many Foreign companies are setting up NBFC and cross border affiliations or structures which could expose NBFC o undue risk or hinder effective supervision is not reviewed Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 71
    • NBFC Gaps Comprehensive risk Mgmt guidelines to capture market risk and operational risk not yet included There is no bifurcation into trading book and banking book in case of NBFC and interest rate risk measurement in banking book are not there. RBI has no powers to limit range of activities the consolidated group may conduct and locations in which activities can be conducted. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 72
    • NBFC - Gaps No system in place to supervise the foreign operations of NBFCs Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 73
    • RBI‘s independence issues Conflict of interest takes place as RBI is regulator and supervisor of Banking and also has tasks like sovereign debt management, foreign exchange, reserve management and issuance of currency. Govt has De-jure powers to remove Governor/D.G but has never exercised it RBI is financed by its own budget and needs no financial support from the Central Government RBI therefore perceived as one of the most independent and autonomous bodies in the Indian financial sector Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 74
    • Capacity building and HR Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 75
    • Gaps across banking insurance and Security markets There is a continuing need for training and value upgrade In India, it would never be easy for the regulator to match the ever- increasing remuneration levels of industry, the gap between the two remains manageable and the efficacy of the system is not under-mined. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 76
    • NBFC and MF sector Banks need to interact with regulator (RBI) for exposures in capital markets or stakes in subsidiaries which deal in securities or insurance sector Significant portion of funding of NBFC is from Debt mutual Funds. (exposure limits in 1issuer company is 15% but for NBFC sector as a whole not there) Sept 2012 circular has put sectoral cap of 30% .( Apparently HFC also covered in ―Financial services‖ which will make around 20000 Cr move out ) and create stress in banking too. NBFC do not have limits on exposure limits to sensitive sectors like real estate or capital markets and in case of asset priceSatish T Sawnani- email Prepared by correction significant losses arise satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 77
    • Regulatory overlap examples NBFC and Debt Mutual Funds are more susceptible to liquidity crisis and mismatches compared to banks they neither have mandated pre-emption funds, nor access to last resort emergency lending. As compared to banks ULIPs were analogous to ELSS and similar mutual fund schemes. Thus, insurance companies and mutual funds operate under different regulatory regimes with Prepared by Satish T Sawnani- email separate prudential norms. OCT 7, 2012 satishsawnani@hotmail.com cell 9930438805 78
    • 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 supervisors establishing a formal communication mechanism. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 79
    • Regulatory Arbitrage (Contd) The present arrangement of inter-regulatory co-ordination needs to be strengthened and made transparent. A well established coordinating mechanism for the financial system as a whole would be most beneficial and our best bet in the current circumstances. Inter-regulatory cooperation and a collaborative approach would result in most of advantages available in unified regulation without cell email Prepared by Satish T Sawnani- satishsawnani@hotmail.com exposing the system OCT to its9930438805 7, 2012 pitfalls. 80
    • Synergies B/W Regn & Supervision and Promotion of Financial Stability The dual roles of being monetary authority and regulator and supervisor of banks and FIs have inherent seeds of conflict RBI has mitigated by having separate BFS and committee of Board of Directors The Current structure of RBI( as the monetary policy maker and Lender of Last Resort( LoLR) AS also the regulator and supervisor, though quasi-independent, is appropriate and may continue. It reduces the information risk that would otherwise be embedded between the monetary authority and the regulator andemail Prepared by Satish T Sawnani- satishsawnani@hotmail.com cell supervisor. OCT 7, 2012 9930438805 81
    • Gaps in Institutional Infrastructure The recent global financial turmoil forces us to re-look at RBI role as LoLR. The existing provisions in RBI Act, 1934, empower the Reserve Bank to provide liquidity in times of crisis. With integration of global markets & the innovations taking place, conventional methods of LoLR may not be sufficient, RBI should set up working group to study whole gamut of issues for liquidity management, types of instruments to give liquidity , current legal powers Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 82
    • DRT & Recovery proceedings Delays in the recovery proceedings before the DRT‘s results in the locking up of huge amount of public money. The SARFAESI Act has given a major boost to the recovery process and has helped them reduce NPAs. But pendency of litigations remains a major concern. The law should provide for a time-frame to conclude the liquidation proceedings. The delay impacts Banks, Insurance Companies, NBFC, Capital Mkt players, PE/VCF‘s etc too and spillover impact across economy. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 83
    • Gaps in implementation of Accounting Standards IFRS was to come into effect from April 2011. A backdoor entry in partial form done by Revised Schedule VI has been done. Banks and Insurance companies should also adopt IFRS or go for early adoption. This gives credibility to Indian Financial sector As there is lot of transparency and disclosure requirements As regards Derivative accounting Banks should fund only if IFRS or IAS 30,32 are adopted by Bank‘s customers. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell GASAB working on Govt A/c standards OCT 7, 2012 9930438805 84
    • Gaps vis-à-vis BASEL in Banking Regulatory Accountability of the Reserve Bank is not clear- More Transparency needed vis-à-vis Co-operative Banks, RRB‘s, NBFC‘s and HFC‘s Ownership Issues: In interest of proper regulation and growth of the sector and to resolve the inherent conflict of government owning the major portion of banking system, the government should consider urgently giving up itsrole as majority shareholder in the publicsector banks. it is necessary to assign duration based capital charge for market risk for the Scheduled Urban Co- Prepared by Satish T Sawnani- email operative Banks . satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 85
    • RRB & Co-operative Sector Banks For RRB‘s completion of the amalgamation and recapitalisation process of these entities. Is essential Government influence in the cooperative sector requires to be minimised and its regulation and supervision should be brought within the ambit of a single regulatory organisation. In mean time sign MoUs with all State Governments and chalk out a revival path for potentially viable institutions and a non-disruptive exit route for the non-viable ones. Licensing of Co-operative Institutions to be Mandatory Though directors are nominated to RRBs, it is desirable to make them accountable T Sawnani- email Prepared by Satish satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 86
    • Commercial Banks As per Section 10A (2) (b) of the Banking Regulation Act, 1949, directors on the banks‘ Board should not have substantial interest in a company or a firm. As per Section 5 (ne) of the Act, substantial interest means an amount paid up exceeding Rs. 5 lakh or ten per cent of the paid-up capital of the company, whichever is less. This Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 87
    • NPA provisions on Standard Assets As per existing guidelines on provisioning, banks are required to make a two per cent provision on standard assets, while NBFCs need not make any provision on standard assets. A review of norms should be made to reduce the Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell possibility of regulatory arbitrage OCT 7, 2012 9930438805 88
    • 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 Capital Market intermediaries too (New AIF raises minimum Ticket size to 1 crore from 5 Lakhs and New PMS regulations have raised limit to 25 lakhs from 5 lakhs) Thus fund raising focus has to shift to Banks /FI but norms set up more than 10-5 years back continue Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 89
    • Liquidity Risk & Operational risk reporting Liquidity Risk & Operational risk ● The effect of other risks (credit, market and operational risks) on a bank‘s balance sheet should be strengthened and reporting to supervisor made rigorous Especially for foreign exposures and for operational risk provisions and immediate notification of adverse OCT 7, 2012 Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell 9930438805 90
    • RBS & PCA Framework strengthen RBS (Risk Based Supervision) templates and Prompt corrective Action should have time deadlines which could be finalised in consultation with Govt . RBS is set of templates covering all potential risk including reputation risk, Cap Adequacy risk, NPA and provisioning etc. In PCA there is discussion with Regulator with CEO of Bank . Highlighting areas of concern Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 91
    • gAps – commercial bk- BCP The C.G. has powers to remove governor or RBI Board though not exercised till now (P1) There are no formal memoranda for sharing info with foreign supervisory Agencies. Though informal MOU exists- (P1) Low amount of ―substantial interest‖ of 5 lakhs or 10% acts as constraint for directors with requisite expertise on Prepared by Satish T Sawnani- email Board P4) OCT 7, 2012 satishsawnani@hotmail.com cell 9930438805 92
    • gAps – commercial bk-BCP(2) Need to set up working group to examine its role as LoLR in view of Banking crises and quickly meeting liquidity needs to avoid system risks Strengthen further need to capture interest rate risk in ―banking book‖. Captured in trd book presently (p16) AFI to review back office and control staff sufficency (P17) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 93
    • gAps – commercial bk-BCP(3) OSMOS (off-shore Monitoring and Surveillance ) and Risk Based Supervision(RBS) which are off-site surveillance should be exploited to fully synergise the complimentarity with AFI (P20) RBI has no significant jurisdicion over entities in a conglomerate which are outside purview of regulatory domain(P21) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 94
    • gAps – commercial bk-BCP(4) Present AFI Format does not provide for review of overall activities on group wide basis in respect of banking group(P24) Home Host country formal mechanisms for information sharing and supervision are not there. Formal enablement would primarily need to be legally mandated(P25) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 95
    • NBFC Sharing of Information with Domestic and Foreign Regulators Ownership Issues ● Explore the option of examining the suitability of the major shareholders and senior management of NBFCs (like CEO and directors of Banks) No Power in RBI Act to bring about Prepared by Satish T Sawnani- email changes in ownership in NBFC OCT 7, 2012 satishsawnani@hotmail.com cell 9930438805 96
    • NBFC (2) Reporting of Material Concentration to the Board and supervisor Exposure to Related Parties to be on arms length relationships . Guidelines to be issued in the context of the developmental role played by NBFCs inthe promotion of green field projects.Market, Liquidity and Operational Risk monitoring guidelines for NBFC to be strengthened Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 97
    • Balance of skills in front andback office of NBFC RBI does not determine whether there is an appropriate balance in the skills and resources of the Front and Back Office of NBFC. Specific provisions in the NBFC inspection manual are needed in this regard. Especially for NBFCs-ND-SI. There are no laws in place which give protection to NBFC staff who report suspicious activity in good faith either internally or directly to relevant authority. Appropriate guidelines on the lines of one introduced for private sector banksT andcell email Prepared by Satish Sawnani- satishsawnani@hotmail.com foreign banks may be OCT 7, issued. 2012 9930438805 98
    • NBFC- Substantive change and auditor appointment Notification to Regulator of Substantive Changes . No guidelines in this regard for NBFC Appointment of Auditors for NBFC‘s to have RBI‘s concurrence and policy of rotation and change after fixed period as in case of commercial banks Increased Disclosure: RBI can consider increased disclosure of NBFC in its audited accounts of ownership , types of activities and products, significant holdings etc. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 99
    • 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 of foreign shareholding of HFCs. Builders/construction companies should be precluded from using the term ‗housing finance‘ in their names. Ministry of Corporate Affairs should issue the necessary guidelines to registrars of companies inPrepared by Satish T Sawnani- email this regard satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 100
    • 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 NHB Act Norms for Major Acquisitions/Investments to be laid IRAC norms should also cover off-balance sheet items Exposure to related parties on Arm length Basis NHB does not determine whether HFCs have a permanent compliance function that assists senior management in managing effectively the compliance risks faced by the HFC. T Sawnani- email Prepared by Satish satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 101
    • HFC – Gaps Whistle- BlowerScreening HR policies in HFC not policies determined by regulator Notification to Changes –systems Regulator of not in place yet Substantive Appointment of Auditors to have regulator consent and to have policy of rotation too. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 102
    • Private Right of Action Private right of action and / or class action suit by investors should be Allowed 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 satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 103
    • Transparency & voting pattern there is no disclosure of voting pattern on significant shareholders by companies. As a part of transparency and good corporate governance it is desirable that the voting pattern on important decisions by institutional investors be disclosed to public. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 104
    • Insurance Sector In Nascent stage of development liberalisation started in 1999/2000 Staff of regulatory agencies need to have holistic approach understanding of financial institutions and financial markets and a technical understanding of modern risk management models. Such individuals are in short supply, and there is intense competition from the private sector for them Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 105
    • IRDA‘s independence issues IRDA is an autonomous body formed by the Insurance Regulatory Development Authority Act, 1999 With respect to financial independence, an issue has been raised by the government on the transfer of IRDA‘s funds to the exchequer (Public Account of India). IRDA has taken the stand that it is not carrying on sovereign functions on behalf of the government. Legacy issues arising from the provisions of the Insurance Act which vests several powers with the Government of India (GoI) in the context of the Insurance Sector Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 106
    • IAIS principles Review of outdated provisions of Insurance Act 1938 with IRDA Overlap of Supervisory functions like the constitution of the consultative committee, the enforcement of criminal penalties, and in matters of winding up of an 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 satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 107
    • 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 or otherwise of these entities to address the concerns relating to protection of the interests of the policyholders coveredConsultative Committee should be done Prepared by Satish T Sawnani- email away with as recommended by IRDA OCT 7, 2012 satishsawnani@hotmail.com cell 9930438805 108
    •  There are no formal stipulations from IRDA on the internal controls to be in place at the offices of insurance companies. These need to be formalised as part of the corporate governance framework. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 109
    • Insurance Companies -GAPS system for off-site monitoring should be developed expeditiously to facilitate development of early warning signals and for taking policy decisions . Formal Preventive and Corrective Action And sophisticated risk based supervision and risk based capital models/ framework needs to be in place There are gaps in the mechanisms available for detection various frauds and on sharing on information between insurers and with IRDA. These gaps need to be addressed expeditiously. some stipulations for a more effective dissemination of information on the financial performance by the insurance companies Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 110
    • IAIS – Core Principles IAIS has developed the Insurance Core principles for prudential regulation and supervision of insurance sector Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 111
    • ICP 1 Conditions for effective insurance supervision Insurance supervision relies upon · a policy, institutional and legal framework for financial sector supervision · a well developed and effective financial market infrastructure · efficient financial markets. (ICP 1) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 112
    • Supervisory system The principal objectives of insurance supervision are clearly defined (ICP 2) The supervisory authority: · has adequate powers, legal protection and financial resources to exercise its functions and powers · is operationally independent and accountable in the exercise of its functions and powers;· hires, trains and maintains sufficient staff with high professional standards · treats confidential information appropriately(ICP 3) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 113
    • Supervisory System The supervisory authority conducts its functions in a transparent and accountable manner. (ICP 4) The supervisory authority cooperates and shares information with other relevant supervisors subject to confidentiality requirements.(ICP 5) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 114
    • ICP- Supervised Entity An insurer must be licensed before it can operate within a jurisdiction. The requirements for licensing are clear, objective and public. (ICP 6) The significant owners, board members, senior management, auditors and actuaries of an insurer are fit and proper to fulfill their roles. This requires that they possess the appropriate integrity, competency, experience and qualifications.(ICP 7) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 115
    • ICP- Supervised Entity (2) The supervisory authority approves or rejects proposals to acquire significant ownership or any other interest in an insurer that results in that person, directly or indirectly, alone or with an associate, exercising control over the insurer. The supervisory authority approves the portfolio transfer or merger of insurance business. (ICP 8) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 116
    • ICP – Supervised Entity(3) The corporate governance framework recognises and protects rights of all interested parties. The supervisory authority requires compliance with all applicable corporate governance standards. (ICP 9) The supervisory authority requires insurers to have in place internal controls that are adequate for the nature and scale of the business. The oversight and reporting systems allow the board and management toSawnani- email Prepared by Satish T monitor and control the operations. (ICP10) satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 117
    • ICP-On-going Supervision Making use of all available sources, the supervisory authority monitors and analyses all factors that may have an impact on insurers and insurance markets. It draws conclusions and takes action as appropriate. (ICP 11) The supervisory authority receives necessary information to conduct effective off-site monitoring and to evaluate the condition of each insurer as well as the insurance market(ICP-12) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 118
    • ICP- On Going Supervision (2) The supervisory authority carries out on-site inspections to examine the business of an insurer and its compliance with legislation and supervisory requirements(ICP-13) The supervisory authority takes preventive and corrective measures that are timely, suitable and necessary to achieve the objectives of insurance supervision. (ICP 14) The supervisory authority enforces corrective action and, where needed, imposes sanctions based on clear and objective criteria that are publicly disclosed.(ICP 15) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 119
    • ICP- On Going Supervision (3) The legal and regulatory framework defines a range of options for the orderly exit of insurers from the marketplace. It defines insolvency and establishes the criteria and procedure for dealing with insolvency. In the event of winding-up proceedings, the legal framework gives priority to the protection of policy-holders (ICP 16) The supervisory authority supervises its insurers on a solo and a group-wide basis(ICP 17) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 120
    • ICP- Prudential requirements The supervisory authority requires insurers to recognise the range of risks that they face and to assess and manage them effectively (ICP 18) Since insurance is a risk taking activity, the supervisory authority requires insurers to evaluate and manage the risks that they underwrite, in particular through reinsurance, and to have the tools to establish an adequate level of premiums (ICP 19) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 121
    • ICP- Prudential requirements(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 be Prepared by Satish T Sawnani- email increased, if necessary.(ICP 20) OCT 7, 2012 satishsawnani@hotmail.com cell 9930438805 122
    • ICP- Prudential requirements(3) The supervisory authority requires insurers to comply with standards on investment activities. These standards include requirements on investment policy, asset mix, valuation, diversification, asset-liability matching, and risk management. (ICP 21) The supervisory authority requires insurers to comply with standards on the use of derivatives and similar commitments. These standards address restrictions in their use and disclosure requirements, as well as internal controls and monitoring of the related positions. (ICP 22) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 123
    • ICP- Prudential requirements(4) The supervisory authority requires insurers to comply with the prescribed solvency regime. This regime includes capital adequacy requirements and requires suitable forms of capital that enable the insurer to absorb significant unforeseen losses. (ICP 23) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 124
    • 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 minimum requirements for insurers and intermediaries in dealing with consumers in its jurisdiction, including foreign insurers selling products on a cross-border basis. The requirements include provision of timely, complete and relevant information to consumers both before a contract is entered into through to the point at Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell which all obligations under a contract have 125 OCT 7, 2012 9930438805
    • ICP- Markets & Consumers(2) The supervisory authority requires insurers to disclose relevant information on a timely basis in order to give stake- holders a clear view of their business activities and financial position and to facilitate the understanding of the risks to which they are exposed (ICP 26) The supervisory authority requires that insurers and intermediaries take the necessary measures to prevent, detect and remedy insurance fraud.(ICP 27) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 126
    • ICP- AML/, combating the financing of terrorism The supervisory authority requires insurers and intermediaries, at a minimum those insurers and intermediaries offering life insurance products or other investment related insurance, to take effective measures to deter, detect and report money laundering and the financing of terrorism consistent with the Recommendations of the Financial Action Task Force on Money Laundering (FATF). Anti-money laundering, combating the financing of Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell terrorism(ICP 28)OCT 7, 2012 9930438805 127
    • Exempted Insurers outside purview of IRDA (a) State Government insurance departments transacting general insurance business in respect of assets owned/ financed by them; (b) Exempted insurers transacting healthinsurance for its members; and (c) State Government insurance departments which transact crop insurance D) Postal life insurance E) ESIC Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 128
    • GAPS – IAIS principles The legislative framework does not prohibit cooperation, but it does not specifically provide for same (as in the case of the securities market regulator – SEBI). Sharing of information amongst regulators even if with other countries takes place under confidentiality . 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- email Prepared by Satish T variousregulators satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 129
    • Bridging the Gaps insurance legislation 1) Sovereign guarantee to policies by LIC to be removed for level playing field 2) Separate statutory reserve to be created or compulsory distribution of 95% of surplus to policyholders to be deleted 3) Strengthening powers vested with IRDA : Some powers of supervision continue with Govt like enforcement of criminal penalties, constitution of consultative committee winding up of insurance company etc Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 130
    • Bridging the Gaps insurance legislation (2) 4) Bringing exempted insurers under IRDA 5) Specific provisions applicable to state owned insurance companies by certain provisions of specific acts like capital structure, investment limits, free permission for opening offices etc to be addressed 6) Fund requirement of supervisor from regn and renewal fees 7)Capacity Building and HR issues 8) Doing away with consultative committee 9) reporting of Fit and proper by insurer to IRDA on ongoing basis Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 131
    • Bridging the Gaps insurancelegislation (3) 10) Comprehensive set of guidelines for Good Corporate governance 11) Strengthen Internal control framework (actuarial system) and off-site monitoring & PCA 12) Group wide supervision and sharing of information to be specifically provided 13) IRDA has no powers to direct suspension of dividend . 14) Board involvement to set premium rates to be in place for Life Business 15) Clarity on manner of accounting for various risk trf mechanisms(Re-insurance contracts) 16) Guidelines for AML/KYC issued but enforcement powers need to be provided for 17) Enhancement of ceiling of FDI in Insurance Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 132
    • Bridging the Gaps insurance legislation (4) Superannuation business comes under life Insurance. To protect interests of superannuation some regulatory arrangement like Occupational Pension Board of UK Name of natural and legal person holding qualifying participation in applicant company to be ascertained and made public while granting licence Regulator may make available a standard format of articles of incorporation Catastrophe reserves to be created but as it would need tax incentive same has not been done yet Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 133
    • A Few other Gaps across various sectors LLP‘s engaged in Financial services who will be the regulator??? Though permitted ROC and RBI not allowing it defacto Hedging of Entire Capital by Foreign players for entire tenure including for Insurance players with foreign partners Capital Account convertibility norms – India is not yet Fully Convertible on Capital Account – Real Estate: Concessions by RBI and MoF but not granted to PE and VCF players engaged in Real EstatePrepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 134
    • Bridging the gaps The laws need to envisage mechanisms for crisis management, which is a complex blend of resolution, emergency rule-making, temporary liquidity support, and the potential use of taxpayer resources to protect financial firms. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 135
    • Inter-regulatory co-ordination mechanisms A High Level Co-ordination Committeeon Financial Markets (HLCCFM) comprising the RBI Governor , chairman of SEBI, IRDA and PFRDA and the Finance Secretary, GoI, which serves as a forum for discussing common regulatory issues. FSDC and its sub-committee also formed for inter-regulatory co-ordination SIFI (Systemetically Important Financial Institutions) of Financial conglomerates also formed RBI & SEBI have put in place integrated system of alerts to piece together disparate signals from different elements of the market. The frequency of the meetings of the T Sawnani- email Prepared by Satish HLCCFM satishsawnani@hotmail.com cell needs to be increased 7, 2012 9930438805 OCT 136
    • Current Co-ordination Mechanism- capital markets- HLGCM Currently, coordination among domestic regulators is occurring through the High Level Group on Capital Markets (HLGCM) comprising the RBI, SEBI, the IRDA and Finance Ministry. HLGCM has 2 standing committees A) regulatory coordination B) coordination in matters relating to the development of debt markets. OCT 7, 2012 Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell 9930438805 137
    • Reducing Regulatory arbitrage Regulatory and supervisory reach has to extend to all those unsupervised entities whose condition could affect the supervised entities. (Sister concerns of financial conglomerates ) There could be arbitrage issues in respect 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 satishsawnani@hotmail.com cell 9930438805 138
    • Need for Cooperation in regulation Various segments of the domestic financial market are getting increasingly integrated There are progressive linkages between the domestic and international capital markets The regulatory interventions or their absence in one market have repercussions in other markets that are more serious and more widespread than in the past The emergence of more and more financial supermarkets and growing complexity of financial transactions, there are increasing instances of the same market intermediary coming under the purview of multiple regulatory bodies. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 139
    • Reforms in HLCCFM The role of the HLCCFM and its functions should be clearly delineated and placed in the public domain. The membership of the HLCCFM should be made more broad based and diversified and market participants should also be represented THROUGH REPRESENTATION BODIES Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 140
    • FSLRC –approach paper Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 141
    • FSLRC approach paper The financial regulatory structure has multiple laws and multiple agencies covering it leading to inconsistent treatment, and regulatory arbitrage. These problems would be reduced by having a single principles-based law which would cover the entire financial system. Consumers would then be treated fairly with consistent treatment across all aspects of their engagement of Prepared by Satish T Sawnani- email the financial system. OCT 7, 2012 satishsawnani@hotmail.com cell 9930438805 142
    • 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 satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 143
    • Proposed Regulators in FinancialSector (7 agencies) –approach paper of FSLRC RBI FSDC (Fin Sect Dev. Council) UFA (United Financial Agency) proposed merger 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 appointed panel) Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cell OCT 7, 2012 9930438805 144
    • Questions ? Comments ! Suggestions. Prepared by Satish T Sawnani- email satishsawnani@hotmail.com cellOCT 7, 2012 9930438805 145