Compliance Quarter

June 2011

Circulars

MY MUSINGS
One more issue of Newsletter from Compliance. The staff working in Compliance Function devotes good amount of time in collecting and summarizing the circulars issued by various regulators like RBI, SEBI, IRDA etc. It also covers a few articles on topical interest, some FAQs and a few case studies relating to banking. I would request all the staff working with Kotak to spare an hour or so once in a quarter and get updated on all regulatory issues. Once I was talking to a group of officers of the Bank and discussion went to mis-selling. Some of the participants were not in a position to explain all the features of the product they are required to sell. In such situations, the product seller will never know whether he or she is selling or mis-selling the product. An officer having full knowledge of the product may sell or mis-sell a product, but one having incomplete knowledge will never know whether he is selling or mis-selling the product. It is therefore my earnest request to all of you to keep yourself updated about the products which you plan or are required to sell. One never knows you may unintentionally be mis-selling some product. It could be in any area like retail, forex, trade etc. I will term all those cases as mis-selling where there is communication gap between seller and buyer, intentional or unintentional. Another aspect I would like to emphasise from compliance viewpoint is KYC. One has to be very careful while sourcing the relationship and ascertaining the correct profile of the customer. However KYC does not end with just obtaining proof of identity and address while starting relationship. KYC means you know your customer and his profile as long as he is dealing with the bank. All the transactions in the account should be in conformity with the business and profile of the customer. Unusual credits and debits should attract attention of all those who are dealing with the transaction including those who get reports by way of MIS. Compliance Function is always there for any help and clarification. Shyam Sunder Group Head - Compliance

RBI SEBI NSDL IRDA

FeatureContravention of FEMA

Penalties

Case Studies KYC /AML

Did You Know

Internal Gupshup
Workshops conducted by Compliance KYC/AML/CFT workshop in Bangalore Workshop on Knowledge Management Tools search engine by Alpha Plus

Congratulations!!!
Sanjay Singhania from the Compliance team received his long service award for completion of five years at Kotak. Zina Sequeira from the Compliance team received her long service award for completion of five years at Kotak and also recognized as outstanding performer for the January March 2011 quarter for coordinating the RBI Annual Financial Inspection. She has also cleared AML Certification Course conducted by IIBF.

Click here to download entire document

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Orientation on regulatory aspects of PSL classification

For feedback, mail zina.sequeira@kotak.com

Compliance Quarter
June 2011

Circulars - RBI

News from the Reserve Bank of India

RBI circulars can be accessed through the following link: http://www.rbi.org.in/scripts/NotificationUser.aspx

RETAIL ASSETS
Mailbox Clarification - Advances against Bullion / Primary Gold Query: Can a Bank grant loans against pledge of specially minted gold coins purchased by customers from the applicant bank / other banks? Response: Banks should not grant any advance against bullion / primary gold. However, specially minted gold coins sold by banks cannot be treated as "bullion" or "primary gold" and hence there is no objection to the bank granting loans against the coins. However, such loans to be granted by the bank may be covered under the policy framed by the bank's Board. Further, while granting advances against the gold coins, Bank may ensure, that the end use of the funds is for approved, non-speculative purposes.
Mailbox clarification dated April 5, 2011

housing loans has been liberalized by extending it to housing loan upto Rs.15 lakh where the cost of the house does not exceed Rs.25 lakh from the present limit of Rs.10 lakh and Rs.20 lakh respectively.
RPCD.SME&NFS.BC.No.62/06.11.01/2010-11dated April 21, 2011

Bank Loans to Micro Finance Institutions (MFIs) Priority Sector Status Reserve Bank has advised that bank credit to MFIs extended on, or after, April 1, 2011 for on-lending to individuals and also to members of SHGs / JLGs will be eligible for categorisation as priority sector advance under specific categories. Banks have to ensure that MFIs comply with the caps on margin and interest rate as also other pricing guidelines, to be eligible to classify these loans as priority sector loans. Banks should obtain from MFI, at the end of each quarter, a Chartered Accountant's Certificate stating, that (i) 85% of total assets of the MFI are in the nature of qualifying assets. (ii) the aggregate amount of loan, extended for income generation activity, is not less than 75% of the total loans given by the MFIs, and (iii) pricing guidelines are followed. Bank loans to MFIs, which do not comply with the conditions and bank loans to other NBFCs, will not be considered as priority sector loans.
RPCD.CO.Plan.66/04.09.01/2010-11 dated May 3, 2011

Setting up of Central Electronic Registry under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 Government of India, Ministry of Finance notified the establishment of the Central Registry with the objective of preventing frauds in loan cases involving multiple lending from different banks on the same immovable property. Transactions relating to securitization and reconstruction of financial assets and those relating to mortgage by deposit of title deeds to secure any loan or advances granted by banks and financial institutions are to be registered in the Central Registry. The records maintained by the Central Registry will be available for search by any lender or any other person desirous of dealing with the property. Under the provisions of Section 23 of the SARFAESI Act, particulars of any charge creating security interest over property is required to be filed with the Registry within 30 days from the date of creation.
DBOD.Leg.No.BC.86/09.08.011/2010-11dated April 21, 2011

Housing Loan Limit under Priority Sector As per the budget for the year 2011-12, the housing loan limit under priority sector has increased from Rs.20 lakh to Rs.25 lakh irrespective of location, to individuals for purchase / construction of dwelling unit per family, excluding loans granted by banks to their own employees are eligible for classification under priority sector.
RPCD.CO.Plan.BC.69/04.09.01/2010-11dated May 9, 2011

Scheme of 1% Interest Subvention on Housing Loans upto Rs.10 Lakh - Guidelines The existing scheme of interest subvention of 1 per cent on

Compliance Quarter
June 2011

Circulars - RBI

RETAIL ASSETS / FINCON

Enhancement of Rates of Provisioning for NonPerforming Assets and Restructured Advances The revised provisioning requirements on certain categories of non-performing advances and restructured advances are as under: Sub-Standard Advances Sub-standard advances will attract a provision of 15 per cent as against the existing 10 per cent. Unsecured exposures classified as sub-standard assets will attract an additional provision of 10 per cent. However, unsecured exposures in respect of Infrastructure loan accounts classified as sub-standard, in case of which certain safeguards such as escrow accounts will attract an additional provision of 5 per cent only. Doubtful Advances Doubtful Advances will continue to attract 100% provision. However, in respect of the secured portion, following provisioning requirements will be applicable: Doubtful category up to one year will attract a provision of 25 per cent. Doubtful category for more than one year but upto 3 years will attract a provision of 40 per cent Doubtful category for more than 3 years will continue to attract a provision of 100%. Restructured Advances Restructured accounts classified as standard advances will attract a provision of 2 per cent in the first two years from the date of restructuring. Restructured accounts classified as NPAs, when upgraded to standard category will attract a provision of 2 per cent in the first year from the date of upgradation
DBOD.No.BP.BC.94/21.04.048/2011-12 dated May 18, 2011

of notionally computing the amount of diminution in the fair value and providing therefore at five percent of the total exposure in respect of all restructured accounts where the total dues are less than rupees one crore till the financial year ending March 2011. RBI has now decided that the above alternative option of computing diminution in the fair value of advances extended by small and rural branches on restructuring will remain applicable for another two years, i.e. till the financial year ending March 31, 2013.
DBOD.BP.BC.No.99 /21.04.132/2010-11 dated 10th June 2011

RETAIL LIABILITES
Interest Rates on Deposits Reserve Bank of India has directed that the rate of interest on domestic and ordinary Non-Resident savings deposits as well as savings deposits under Non-Resident (External) Accounts Scheme shall be 4.0 per cent per annum with immediate effect.
DBOD.Dir.BC.89/13.03.00/2010-11dated May 3, 2011

Reconciliation of failed Transactions at ATMs RBI, to further improve the efficiency of operations has decided as under: Time limit for resolution of customer complaints by the issuing banks shall stand reduced from 12 to 7 working days from the date of receipt of customer complaint. Failure to recredit the customer's account within 7 working days of receipt of the complaint shall entail payment of compensation to the customer @ Rs.100/per day by the issuing bank. Any customer is entitled to receive such compensation for delay, only if a claim is lodged with the issuing bank within 30 days of the date of the transaction. Number of free transactions permitted per month at other bank ATMs to Savings Bank account holders shall be inclusive of all types of transactions, financial or non-financial.

FINCON
Prudential Guidelines on Restructuring of Advances by Banks RBI had previously advised that banks will have the option

DPSS.PD.No.2632/02.10.002/2010-2011dated May 27, 2011

Compliance Quarter
June 2011

Circulars - RBI

Remittance of Assets by Foreign Nationals - Opening of NRO Accounts RBI has advised that banks may permit foreign nationals to re-designate their resident account maintained in India as NRO account on leaving the country after their employment to enable them to receive their pending bonafide dues, subject to the following conditions: Bank to obtain the full details from the account holder about his legitimate dues expected to be received into his account. Bank has to satisfy itself as regards the credit of amounts which have to be bonafide dues of the account holder when she / he was a resident in India. The funds credited to the NRO account should be repatriated abroad immediately, subject to the bank satisfying itself regarding the payment of the applicable Income tax and other taxes in India. The amount repatriated abroad should not exceed USD one million per financial year. The debit to the account should be only for the purpose of repatriation to the account holder's account maintained abroad. There should not be any other inflow / credit to this account other than that mentioned at point (a) above. Bank should put in place proper internal control mechanism to monitor the credits and debits to this account. The account should be closed immediately after all the dues have been received and repatriated as per the declaration made by the account holder.
A.P. (DIR Series) Circular No.70 dated June 9, 2011

As regards the compensation to destination banks, it has been decided that destination banks may be paid by the originating banks as below: 25 paise (exclusive of service tax) for every credit transaction 50 paise (exclusive of service tax) for every debit transaction The charges may be collected on a monthly basis. Banks are not permitted to pass on these charges to customers.
DPSS.(CO).EPPD.No.2649/04.03.01/2010-11dated June 2, 2011

RETAIL LIABILITIES / CREDIT CARDS

Acquisition of Credit Card / Debit Card Transactions in India by Overseas Banks - Payments for Airline Tickets RBI advises that banks should inform foreign airlines to discontinue immediately the practice of using overseas banks for settlement of INR transactions on account of sale of air tickets in India.
A.P. (DIR Series) Circular No.48 dated April 5, 2011

TRADE CPC
Liquidation of Post-Shipment Rupee Export Credit Banks were previously advised that post-shipment credit is to be liquidated by the proceeds of export bills received from abroad in respect of goods exported / services rendered. Further, subject to mutual agreement between the exporter and the banker it can also be repaid / prepaid out of balances in Exchange Earners Foreign Currency (EEFC) Account as also from proceeds of any other unfinanced (collection) bills. RBI has now decided that in order to reduce the cost to exporters (i.e. interest cost on overdue export bills), exporters with overdue export bills may also extinguish their overdue post shipment rupee export credit from their rupee resources. However, the corresponding GR form will remain outstanding and the amount will be shown outstanding in XOS statement. The exporter's liability for realisation would continue till the export bill is realised.
DBOD.Dir.BC.No.85/04.02.001/2010-11dated April 18, 2011

Retail Electronic Payment Systems - NEFT / NECS / RECS / ECS - Levy of Processing Charges RBI has decided to permit Clearing Houses / processing centers to levy charges for retail electronic payment products (NEFT, NECS, RECS and ECS) on the originating banks as under : 25 paise (exclusive of service tax) for every outward transaction 25 paise (exclusive of service tax) for every return transaction

Compliance Quarter
June 2011

Circulars - RBI

Pledge of Shares for Business Purposes To further liberalise, rationalise and simplify the processes associated with (Foreign Direct Investment) FDI flows to India, it has been decided to delegate powers to the banks to allow pledge of shares of an Indian company held by non-resident investor/s in accordance with the FDI policy in the following cases below subject to compliance with certain conditions. Shares of an Indian company held by the non-resident investor can be pledged in favour of an Indian bank in India to secure the credit facilities being extended to the resident investee company for bonafide business purposes. Shares of the Indian company held by the non-resident investor can be pledged in favour of an overseas bank to secure the credit facilities being extended to the nonresident investor / non-resident promoter of the Indian company or its overseas group company.
A.P.(DIR Series) Circular No.57dated May 2, 2011

constituents of Co-operative banks, they must satisfy themselves that KYC has been done properly in these cases.
Mailbox clarification dated May 19, 2011

Overseas Direct Investment - Liberalisation / Rationalisation RBI has decided to further liberalise / rationalise the following regulations relating to overseas direct investment Performance Guarantees issued by the Indian Party Restructuring of the balance sheet of the overseas entity involving write-off of capital and receivables Disinvestment by the Indian Parties of their stake in an overseas JV / WOS involving write-off Issue of guarantee by an Indian Party to step down subsidiary of JV / WOS under general permission For complete details on the guidelines, the below mentioned circular can be referred.
A.P.(DIR Series) Circular No.69 dated May 27, 2011

Mailbox Clarification - Issue of Bank Guarantee (BG) / Letter of Credit (LC) by Commercial Banks to constituents of Co-operative Banks Query: Banks should refrain from issuing guarantees on behalf of customers who do not enjoy credit facilities with them. Further, banks should not extend fund based / non fund based facilities like opening of LCs, guarantees and acceptances to non-constituent borrower or / and non constituent member of a consortium / multiple banking arrangement. However, since many Corporates / Government Departments do not accept the BGs issued by Co-operative banks, these banks are compelled to approach the Scheduled Commercial banks for getting the BG / LC required by their constituents. Is it in order for banks to provide such BG / LC to Co-operative bank's constituents? Response: Where BG / LC are issued by scheduled commercial banks to clients of Co-operative banks against counter guarantee of the co-operative banks, they may be guided by the provisions of the MC on Loans and AdvancesStatutory and Other Restrictions dated July 1, 2010. Further, banks must satisfy themselves that the concerned Co-operative banks have sound credit appraisal and monitoring systems as well as robust Know Your Customer (KYC) regime. Before issuing BG / LCs to specific

TRADE CPC / CORPORATE BANKING

Foreign Exchange Management Act, 1999 - Import of Rough, Cut and Polished Diamonds RBI has decided that suppliers' and buyers' credit (trade credit) including the usance period of Letters of Credit opened for import of rough, cut and polished diamonds should not exceed 90 days from the date of shipment. The revised directions will come into force with immediate effect. Banks should ensure that due diligence is undertaken and Know-Your-Customer (KYC) norms and Anti-Money Laundering (AML) standards, issued by RBI are adhered to while undertaking the import transactions. Further, any large or abnormal increase in the volume of business should be closely examined to ensure that the transactions are bonafide and are not intended for interest / currency arbitrage.
A.P.(DIR Series) Circular No.59 dated May 6, 2011

Compliance Quarter
June 2011

Circulars - RBI

CORPORATE BANKING
Mailbox Clarification - Exposure to Indian Joint Ventures /Wholly Owned Subsidiaries Abroad and Overseas Step-down Subsidiaries of Indian Corporates Query: The import of Section 25 of the Banking Regulation Act 1949 that assets in India of every banking company at the close of business on the last Friday of every quarter shall not be less than 75 percent of its demand and time liabilities in India does not necessarily imply the assertion in Para 2.2.3.2(iii) of Master Circular on Exposure Norms dated July 1, 2010, that aggregate assets outside India should not exceed 25 percent of the bank's demand and time liabilities in India. Response: Master Circular on Exposure Norms, states that while extending credit / non-credit facilities to Indian Joint Ventures / Wholly-owned Subsidiaries abroad and stepdown subsidiaries which are wholly owned by the overseas subsidiaries of Indian Corporates, banks will have to comply with Section 25 of the Banking Regulation Act 1949, in terms of which the assets in India of every banking company at the close of business on the last Friday of every quarter shall not be less than 75 percent of its demand and time liabilities in India. However, the assets in India will include assets funded by the DTL in India as well as bank's capital and other liabilities in India not included in DTL. Further, the overseas branches would create assets from the demand and time liabilities contracted in those jurisdictions, consequently the overseas assets of domestic and overseas operations taken together will exceed 25% of the demand and time liabilities in India. Hence, the converse of this proposition, namely, "In other words, aggregate assets outside India should not exceed 25 percent of the bank's demand and time liabilities in India" does not hold good.
Mailbox clarification dated June 20, 2011

issued by Indian companies in the infrastructure sector from USD 5 billion to USD 25 billion (with this the total limit available to FIIs for investment in listed non convertible debentures / bonds would be USD 40 billion with a sub limit of USD 25 billion for investment in listed non-convertible debentures / bonds issued by corporates in the infrastructure sector). Such investment by FIIs in listed non-convertible debentures / bonds would have a minimum lock-in period of three years. However, FIIs are allowed to trade amongst themselves during the lock-in period. It has also been decided to allow SEBI registered FIIs to invest in unlisted non-convertible debentures / bonds issued by corporates in the infrastructure sector.
A.P.(DIR Series) Circular No.55 dated April 29, 2011

Forward Cover for Foreign Institutional Investors (FII)Rebooking of Cancelled Contracts FIIs are permitted to cancel and rebook upto two percent of the market value of the portfolio as at the beginning of the financial year. RBI has now decided to enhance the existing limit to ten per cent with immediate effect. Other operational guidelines as also terms and conditions of the circular shall remain unchanged.
A.P.(DIR Series) Circular No.67 dated May 20, 2011

Hedging IPO Flows by Foreign Institutional Investors (FIIs) under the ASBA Mechanism RBI has now advised that for Initial Public Offers (IPO) related transient capital flows under the Application Supported by Blocked Amount (ASBA) mechanism, foreign currency-rupee swaps may be permitted to the Foreign Institutional Investors FIIs subject to the following terms and conditions: FIIs can undertake foreign currency-rupee swaps only for hedging the flows relating to the IPO under the ASBA mechanism. The amount of the swap should not exceed the amount proposed to be invested in the IPO. The tenor of the swap should not exceed 30 days.

CUSTODY
Foreign Investments in India by SEBI registered FIIs in Other Securities RBI in consultation with Government has enhanced the FII investment limit in listed non-convertible debentures / bonds, with a residual maturity of five years and above, and

The contracts, once cancelled, cannot be rebooked. Rollovers under this scheme will also not be permitted.
A.P.(DIR Series) Circular No.68 dated May 20, 2011

Compliance Quarter
June 2011

Circulars - RBI

IT
Working Group on Information Security, Electronic Banking, Technology Risk Management and Cyber Frauds- Implementation of recommendations RBI has released a report on the above mentioned wherein banks would be required to conduct a formal gap analysis between their current status and stipulations as laid out in the circular and put in place a time-bound action plan to address the gap and comply with the guidelines. However, banks need to ensure implementation of basic organizational framework and put in place policies and procedures which do not require extensive budgetary support, infrastructural or technology changes, by October 31, 2011. The rest of the guidelines need to be implemented within period of one year unless a longer time-frame is indicated in the circular. Few provisions which are recommendatory in nature which are left to the discretion of banks for implementation. The progress in implementation of recommendations to be monitored by the top management and a review of the implementation status to be put up to the Board at quarterly intervals. Banks to also incorporate in their Annual Report from 2011-12 onwards broadly the measures taken in respect of various subject areas indicated in these guidelines.
DBS.CO.ITC.BC.No. 6/31.02.008/2010-11 dated April 29, 2011

Or, Unlisted companies with a minimum net worth of Rs. 200 crore provided that: All such products are fair valued on each reporting date The companies follow the Accounting Standards notified under section 211 of the Companies Act, 1956 and other applicable Guidance of the Institute of Chartered Accountants of India (ICAI) for such products/ contracts as also the principle of prudence which requires recognition of expected losses and non-recognition of unrealized gains Disclosures are made in the financial statements as prescribed in ICAI The companies have a risk management policy with a specific clause in the policy that allows using the type/s of cost reduction structures.
A.P. (DIR Series) Circular No. 60 dated 16th May 2011.

Guidelines for Accounting of Repo / Reverse Repo Transactions-Clarification RBI clarifies that the Master Repo Agreement finalised by FIMMDA is not mandatory for repo transactions in Government Securities settling through a Central Counter Party (CCP) having various safeguards like haircut, MTM price, margin, multilateral netting, closing out, right to set off, settlement guarantee fund/ collaterals, defaults, risk management and dispute resolution/ arbitration etc. However, Master Repo Agreement is mandatory for repo transactions in Corporate Debt Securities, which is settled bilaterally without involving a CCP.
IDMD No./29 /11.08.043/2010-11 dated 30th May 2011.

TREASURY
Comprehensive Guidelines on Over the Counter (OTC) Foreign Exchange Derivatives and Overseas Hedging of Commodity Price and Freight Risks RBI has decided to amend the eligibility criteria for the users of cost reduction structures. The amended provision is as under: Users - Listed companies and their subsidiaries/joint ventures/associates having common treasury and consolidated balance sheet

Compliance Quarter
June 2011

Circulars - SEBI

News from Securities and Exchange Board of India

SEBI circulars can be accessed through the following link: http://www.sebi.gov.in/Index.jsp? ContentDisp=SiteMap

Limitation period for filing an arbitration reference SEBI has decided that the limitation period for filing an arbitration reference shall be governed by the law of limitation, i.e., The Limitation Act, 1963. The modified limitation period shall also be applicable to cover inter alia the following cases: where the limitation period (in terms of Limitation Act 1963) have not yet elapsed and the parties have not filed for arbitration with the depository, or, where the arbitration application was filed but was rejected solely on the ground of delay in filing within the earlier limitation period; and the limitation period (in terms of Limitation Act 1963) have not yet elapsed.
CIR/MRD/DP/4/2011 April 07, 2011

sending periodical statement of accounts to the clients, shall mention therein that their running account authorisation would continue until it is revoked by the clients.
SEBI/ MIRSD /Cir/ 01/ 2011

Option to hold units in demat form SEBI has advised that Mutual Funds should provide an option to the investors to receive allotment of mutual fund units in their demat account while subscribing to any scheme (open ended/close ended/Interval). Therefore Mutual Funds/AMCs are advised to invariably provide an option to the investors to mention demat account details in the subscription form, in case they desire to hold units in demat form. Mutual Funds/AMCs have also been advised to obtain ISIN for each option of the scheme and quote the respective ISIN along with the name of the scheme, in all Statement of Account/Common Account Statement (CAS) issued to the investors. This is effective from October 01, 2011 onwards.
CIR/IMD/DF/9/2011 May 19, 2011

Review of Annual Issuers charges SEBI has decided to modify the methodology of calculating the Annual Issuers charges. The annual issuer charges would be based on the average no. of folios (ISIN positions) during the previous financial year instead of the total number of folios (ISIN positions) as on 31st March of the previous financial year. The average no. of folios (ISIN positions) for an Issuer may be arrived at by dividing the total number of folios for the entire financial year by the total number of working days in the said financial year.
CIR/MRD/DP/ 05 /2011 April 27, 2011

Pre- funded instruments / Electronic fund transfers SEBI has permitted the stock brokers to accept pre-funded instruments from their clients. However, now the following have been decided: If the aggregate value of pre-funded instruments is Rs. 50,000/- or more, per day per client, the stock brokers may accept the instruments only if the same are accompanied by the name of the bank account holder and number of the bank account debited for the purpose, duly certified by the issuing bank. An audit trail of the funds received through electronic fund transfers are to be maintained to ensure that the funds are received from their clients only.

Clarification on circular dated December 3, 2009 on Dealings between a Client and a Stock broker SEBI has modified the requirements pertaining to renewal of running account authorization as follows: Clause 12(a) of the aforesaid annexure pertaining to renewal of authorization stands deleted. Clause 12(c) of the aforesaid annexure is revised and shall read, as under: The authorisation shall be dated and shall contain a clause that the clients may revoke the authorisation at any time. The stock brokers, while

CIR/MIRSD/03/2011 June 9, 2011

Compliance Quarter
June 2011

Circulars - NSDL

News from National Securities Depository Ltd.

NSDL circulars can be accessed through the following link: https;//nsdl.co.in/business/circulars.php

Internal and Concurrent Audit for depository operations NSDL had previously issued guidelines related to scope of the audit and format of the audit report were provided. It has now been decided to include the following audit areas to be covered under the concurrent audit on 100% basis: Account Closure initiated by the Participant (i.e. not at the request of the client) Investor grievances received by the Participant Power of Attorney modifications Providing transaction statements to clients (process level)

NSDL has advised the following: Auditor may expand the scope of audit / add more audit points to achieve the objectives listed above and cover all facets of the depository operations. Concurrent audit should be done by the next working day. If audit cannot be completed by next working day due to large volume, it must be completed within a week. Participants may appoint same auditor for concurrent and internal audit. Guidelines provided in the circular are applicable for audit period April 1, 2011 to September 30, 2011 and onwards.

NSDL/POLICY/2011/0031 dated April 8, 2011

Compliance Quarter
June 2011

Circulars - IRDA

News from Insurance Regulatory and Development Authority

IRDA circulars can be accessed through the following link: http://www.irda.gov.in/ADMINCMS/cms/ Circulars_List.aspx?mid=3.1.3

Accounting Treatment of Enhanced Provision of Gratuity IRDA now permits the insurers to amortize the additional liability on account of gratuity over a period of five years starting from FY 2010-11 subject to compliance of the following conditions: The additional liability on account of enhancement in gratuity limits may be fully recognized and charged to Revenue Account and/or Profit and Loss Account for the FY 2010-11.The expenditure may, if not fully charged to the Revenue Account and/or Profit and Loss Account during the financial year 2010-11, be amortized over a period of five years beginning with the FY ending March 31, 2011 subject to a minimum of 1/5th of the total amount involved every year. The unamortized expenditure carried forward should not include any amounts relating to separated/retired employees. A complete disclosure in the notes of accounts should be made in the Notes to Accounts to the financial statements.

90 days of the close of the financial year, the status on disclosure in the Financial Statements as required under the aforementioned clause may be made within 15 days of adoption of the Annual Accounts by the Board of Directors of the insurers. This is in line with the stipulations issued by IRDA vide Circular No. IRDA/F&A/013/2005-06 dated 9th June, 2005. Filling up of the Vacancy to the Post of Independent Director on the Board

Clause 5.1 of the CG Guidelines lays down the requirements regarding appointment of a minimum number of independent directors on the Board of Directors of an insurer. These stipulations are in line with Section 48 of Insurance Act, 1938. All insurers are required to ensure compliance with the stipulations regarding the minimum number of independent directors at all times. In case, the number of independent directors falls below the minimum requirement laid down, the vacancy shall be filled up within a maximum period of 180 days, under intimation to the Authority. Optional Committees

IRDA/F&A/CIR/ACT/069/04/2011 dated 18 April 2011

Compliance with Corporate Governance Guidelines (CG Guidelines) IRDA has stipulated the additional below to form part of the existing Guidelines: Annual Filing of Compliance Status: Insurers are required to file a report on status of compliance with the C G Guidelines on an annual basis as per the specific format. Clause 9 of the CG Guidelines requires confirmation of disclosures made in the Annual Accounts. In such instances, where the finalization of Annual Accounts extends beyond

Clause 7 of the CG Guidelines provides for the formation of following three optional committees: Remuneration Committee Nomination Committee Ethics Committee

IRDA/F&A/CIR/CG/081/05/2011

Compliance Quarter
June 2011

Feature

Contravention: Breach of provisions and norms under FEMA

Contributed by: Darshana Mehta Manager Compliance, KMBL

What is contravention and compounding of contraventions? Contravention is the breach of provisions and norms under the Foreign Exchange Management Act, or FEMA 1999. Compounding of contraventions refers to the process where the individual or the corporate entity can admit the contravention and seek redress from the Reserve Bank, restricted to a specific sum. What are the pre requisites of compounding process? In respect of a contravention committed by any person within a period of three years from the date on which a similar contravention committed by him was compounded under the Compounding Rules, such contraventions would not be compounded. Such contravention would be dealt with under relevant provisions of the FEMA, 1999 for contravention. Any second or subsequent contravention committed after the expiry of a period of three years from the date on which the contravention was previously compounded shall be deemed to be a first contravention. Contraventions relating to any transaction where proper approvals or permission from the Government or statutory authority concerned, as the case may be, have not been obtained, such contraventions would not be compounded unless the required approvals are obtained from the authorities concerned. Cases of contravention, such as, those having a money laundering angle, national security concern and / or involving serious infringements of the regulatory framework or where the contravener fails to pay the sum for which contravention was compounded within the specified period in terms of the compounding order, shall be referred to the Directorate of Enforcement for further investigation and necessary action under FEMA, 1999 or to the authority instituted for implementation of the Prevention of Money Laundering Act 2002, (PMLA) or to any other agencies, for necessary action , as deemed fit. What is procedure for compounding of offence? The individuals are required to furnish all the details of the contravention along with the application form and a demand draft of Rs. 5,000 in favour of "Reserve Bank of

India" and payable at Mumbai. The contravention penalty has to be paid up within 15 days of the compounding order being signed. If the erring individual fails to pay the penalty within the time specified, it is treated as if the individual never applied for compounding contravention, thus he would be liable for the legal action under FEMA (1999). The compounding process is normally completed within 180 days of the receipt of compounding application. What is the process of issuance of compounding order? An opportunity for personal hearing is given to the applicant for further submission of documents in person in support of the application within a specified period. If the contravener or its authorized representative fails to appear in person or make any submissions before the Compounding Authority (CA) for personal hearing, the CA may proceed with the processing of the compounding application on the basis of information and documents available in the application for compounding. The CA will pass a compounding order on the basis of the averments made in the application as well as other documents and submissions made in this context by the contravener during the personal hearings, if any. How much penalty is the applicant liable to pay? An applicant would be liable to pay penalty up to thrice the sum involved in such contravention where the amount is quantifiable or up to Rupees Two lakh, where the amount is not quantifiable and where the contravention is a continuing one, further penalty which may extend to Rupees Five thousand for every day after the first day during which the contravention continues.
(Source: FEMA)

Compliance Quarter
June 2011

PENALTIES

FSA fines individual 1m and secures first final High Court injunction to prevent market abuse Samuel Kahn co-ordinated a scheme to deliberately inflate the share price of Global Brands Licensing plc (GBL), orchestrating and controlling the vast majority of the trading in GBLs shares in March and April 2010, disguising his involvement in the scheme by repeatedly impersonating other people when placing orders to trade in GBLs shares and co-ordinating trading conducted by third parties. The profits from this trading were withdrawn from a third partys bank account at Kahns instruction and delivered to him in cash. The scheme also involved a significant proportion of GBLs shares being donated to charities, co-ordinated by Mr Kahn and aimed at illegitimately taking advantage of GBLs artificially inflated share price for tax relief purposes and for the purpose of facilitating boiler room activities. Kahn was the subject of an FSA investigation and enforcement action previously for his involvement in overseas boiler-room activities. In light of Kahns previous misconduct and his actions in GBL, the FSA has obtained an injunction at the High Court restraining Kahn from committing market abuse in future. The fine consists of disgorgement of 210,563 and a financial penalty of 884,365, leading to a total fine of 1,094,900. SEC sanctions broker, CCO for submitting backdated documents The Securities and Exchange Commission (SEC) sanctioned a Broker Dealer and its Chief Compliance Officer for responding to an SEC staff request with documents a firm employee had been told to create and back date. The SEC fined Legend Securities $50,000and Sal C Caruso, its co-founder, president, chief financial officer and CCO $25,000 and ordered them to cease and desist for violating the Securities Exchange Act of 1934. The SEC found that after the New York Regional Offices broker dealer inspection staff repeatedly asked for document and for one associated person, Caruso emailed the person saying, Im going through my employee files for the SEC audit and realized that I dont have all the other employment / registration forms for you. I only have your form U4. I have attached the forms that I need you to complete, sign and fax back to me ASAP. Please have the forms predated. Its very important. Caruso submitted the documents from the person to SEC staff without disclosing the circumstances surrounding the back dating of the documents. Thereby violating rules which require making and keeping current records of all agreements pertaining to the relationship between each associated person. RBI penalizes Banks RBI has penalised Mehsana Urban Co-operative Bank Ltd and the Jamnagar Peoples Co-operative Bank Ltd upto Rs 5 lakh for violations ranging from conduct of non-banking business to non-reporting of cash transactions. A monetary penalty of Rs 5 lakh was imposed on the Kutch-based Bhuj Co-operative Bank for violation of RBIs instructions related to KYC norms, AML guidelines, temporary overdrafts and use of the banks name without the word Co-operative. In the case of Nashik-based Independence Co-operative Bank, a fine of Rs 1 lakh was imposed for violation directives related to loans for directors. RBI had issued show-cause notices to both lenders and the penalties were imposed after going through the submissions made by them.

Compliance Quarter
June 2011

CASE STUDIES

Case study - 1 AB was issued a credit card in January 2002 with credit limit Rs. 30,000. There were some small transactions and payment through third party cheques drawn in favour of the card holder. Since April 2004, demand drafts drawn in favour of various persons with endorsements authorising payment to AB's credit card account were noticed. Number of withdrawals in cash through ATMs and branches, high value purchases from jewelers, electronic shops, etc. were carried out in the said card account. However, the said account continuously remained in credit balance. Fraud Control Unit got an alert due to high value transactions. They verified with the customer who confirmed the transactions. A complaint from one of the beneficiaries of the draft led to the discovery that about 30 drafts for approximately Rs. 950,000 were fraudulently collected through the credit card account. Subsequent investigation revealed airline staff pilfered drafts from mail bags and they were credited to the said card account. The drafts should not have been credited in the account, as the endorsements were not valid. Authorisation while making the verification should have gone through the pattern of transactions in the account. There were indications such as large purchases from jewelers, electronic goods shop and cash withdrawals that would have given suspicion about the transactions. The large credit balance in a credit card account and the odd figures of deposit should also have given doubt about the transactions.

Case study 2 FIU received suspicious transaction reports from three financial institutions concerning international fund transfers. Through police investigation, it was discovered that several individuals were acting as money collectors for a cocaine trafficking organisation. The job of these individuals was to identify and recruit professionals already established in various trades and services who might be agreeable to earning some extra money by allowing their bank accounts to be used in a laundering scheme. The professionals would place cash in their accounts and then transfer the sum to accounts indicated by the money collectors. The professionals who became involved in this activity were active in several types of business, including travel agencies, and import/export in commodities and computers. In return for their services, they received a commission on the funds transferred through their accounts. The transfers out of the accounts were justified by fictitious invoicing that corresponded to their particular business. This investigation uncovered an organisation that was laundering the proceeds of cocaine trafficking believed to be worth US$ 30 million. Several members of the group were identified and tried in two countries.

Compliance Quarter
June 2011

DID YOU KNOW

The first banks in India were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790; both are now defunct. The three presidency banks, the Bank of Bengal (1809), the Bank of Bombay (1840) and the Bank of Madras (1843), established under charters from the British East India Company acted for many years as quasi-central banks. The three banks merged in 1921 to form the Imperial Bank of India. Post independence, the Imperial Bank of India was nationalized to form State Bank of India.

WHAT IS SMURFING?

Structuring transactions/deposits, e.g., making deposits part by part in different accounts so that the total deposit to any single account in a day does not exceed the prescribed threshold limit thus avoiding the regulatory reports by the bank/institution in the name of the depositor.

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