Presentation for imt delhi v6 slide and linked share

Gaps across Banking, Securities
Insurance: 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 of
ACAI of India DICGC India(DICGC).
Depositor & Investment
AIF Alternative Investment Funds DIP Protection
Association of Merchant
AMBI Bankers of India DMO Debt Management Office
Association of Mutual Funds of
AMFI India DoEA Dept. of Economic Affairs
Foreign Exchange Dealers
AML Anti Money Laundering FEDAI Association of India

BCI Bar Council of India FII Foreign Institutional Investors
Fixed Income Money Mkt &
BCP Basel Core Principle FIMMDA Derivatives Association

BR Banking Regn Act FIU Financial Intelligence Unit
NBhartiya Reserve Bank Note
Mudran pvt ltd
BRBNMPL FMC Forward Mkt Commission

CG Central Govt FRA Financial Redressal Agency

satishsawnani@hotmail.com cell
OCT 7, 2012 9930438805 2

Acronyms Listing (2)
Deposit Insurance and Credit
Association of custodial agencies Guarantee Corporation of
ACAI of India DICGC India(DICGC).
Depositor & Investment
AIF Alternative Investment Funds DIP Protection
Association of Merchant
AMBI Bankers of India DMO Debt Management Office
Association of Mutual Funds of
AMFI India DoEA Dept. of Economic Affairs
Foreign Exchange Dealers
AML Anti Money Laundering FEDAI Association of India

BCI Bar Council of India FII Foreign Institutional Investors
Fixed Income Money Mkt &
BCP Basel Core Principle FIMMDA Derivatives Association

BR Banking Regn Act FIU Financial Intelligence Unit
NBhartiya Reserve Bank Note
Mudran pvt ltd
BRBNMPL FMC Forward Mkt Commission

CG Central Govt FRA Financial Redressal Agency

OCT 7, 2012 9930438805 3

Acronyms Listing (3)
PD Primary Dealers SGL Subsidiary General Ledger
Primary Dealers Association of
PDAI India SRO Self Regulatory Organisation
Pension Fund Regulatory
PFRDA Development Authority UFA United Financial Agency

PSU Public Sector Units VCF Venture Capital Funds

RAIN Registrar association of India WDM Wholesale Debt Market

RBI Reserve Bank of India
Registrar of Cooperative
RCS Societies

RRB Regional Rural Banks
Securities Contract Regulation
SCRA Act
Securities Exchange Board of
SEBI India

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
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
OCT 7, 2012 9930438805 6

SEBI RBI & IRDA Mandates
 SEBI, - is the apex regulatory body for the securities
market.
 SEBI's 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. RBI's
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
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
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
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.
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 NSE's
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.
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
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.
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

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
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.

OCT 7, 2012 9930438805 17

GAPS VIS-À-VIS IOSCO
G-SECs and Money Markets do
not have SRO. Organisations like
FIMMDA should be accorded SRO
status by defining its jurisdiction
and the delegation of appropriate
powers . It should be under RBI .

The Investment Advisers and
Research
Analysts be brought within the
regulatory ambit through SRO or
directly
by prescribing licensing and
registration
requirements, appropriate returns,
etc.( recently in Aug 2012 press
release has come but not the
notification) Prepared by Satish T Sawnani- email
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 address
o 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.
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
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.
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.
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
compliance program.
OCT 7, 2012
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
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
 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
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.

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
 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

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
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 platforms
should 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 ????)
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)

OCT 7, 2012 9930438805 33

Equity , Corporate Bond and Derivative
market – 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)
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)
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
OCT 7, 2012 9930438805 36

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)

OCT 7, 2012 9930438805 37

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
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 fund's ownership
in any single company should not exceed 10
percent of a company's 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 fund's email
OCT 7, 2012 9930438805 39

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
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
OCT 7, 2012 9930438805 41

G- SEC MARKET & MONEY MARKET - GAP ANALYSIS –
IOSCO PRINCIPLES
The Accounting system
of Central and State
Govts is on Dept
specific a/c codes and
rules and closely
following Cash system .
A Common accounting
system across all Govt
depts. is proposed to be
set up by GASAB (Govt
A/c Std Advisory Board)
to improve lacunae in
Govt accounting
practices (P 16) Prepared by Satish T Sawnani- email
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.

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
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
supvn(24-25) OCT 7, 2012
9930438805 45

Basel Core Principles – objective
independence & 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.
OCT 7, 2012 9930438805 46

BCP - 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 organisation's 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
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
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 organisation's
 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.

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 bank's policies, practices and
procedures related to the granting of loans and making
of investments and the ongoing management of the
loan and investment portfolios.

OCT 7, 2012 9930438805 50

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.
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
OCT 7, 2012 9930438805 51

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 arm's-
length basis, that such extensions of credit are
effectively monitored, and that other appropriate
steps are taken to control or mitigate the risks.

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.
OCT 7, 2012 9930438805 52

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 risk
exposures, if warranted.

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
risks. satishsawnani@hotmail.com cell
OCT 7, 2012 9930438805 53

 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.

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
institution's 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
OCT 7, 2012 9930438805 55

BCP - Methods of Ongoing
Banking Supervision (2)
19. Banking supervisors must have a means of independent validation of
supervisory information either through on-site examinations or use of
external auditors.

20. An essential element of banking supervision is the ability of the
supervisors
to supervise the banking group on a consolidated basis

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.
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
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
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
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
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 .
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
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
principle OCT 7, 2012
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
interest rate risk in Banking Book
OCT 7, 2012 9930438805 65

Whistle Blower & changing
Board 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

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
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
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
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
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
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.
OCT 7, 2012 9930438805 72

NBFC - Gaps
 No system in place to supervise the
foreign operations of NBFCs

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
OCT 7, 2012 9930438805 74

Capacity building and HR

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.
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
 separate prudential norms.
OCT 7, 2012
9930438805 78

Gaps in Home-Host country co-
operation
 There should be specific provisions in
the RBI Act, 1934 and Banking
Regulation Act, 1949 and IRDA Act,
1999
on lines of SEBI Act, 1992 so that MoUs
can be entered with foreign supervisors
establishing a formal communication
mechanism.
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-
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
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.
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

 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
its
role as majority shareholder in the public
sector banks.
 it is necessary to assign duration based capital
charge
for market risk for the Scheduled Urban Co-
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
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
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
 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
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
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
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
Board P4) OCT 7, 2012
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)
OCT 7, 2012 9930438805 93

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)
OCT 7, 2012 9930438805 94

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
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
changes in ownership in NBFC
OCT 7, 2012
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
in
the promotion of green field projects.
Market, Liquidity and Operational Risk
monitoring guidelines for NBFC to be
strengthened Prepared by Satish T Sawnani- email
OCT 7, 2012 9930438805 97

Balance of skills in front and
back 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.
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
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
OCT 7, 2012 9930438805 101

HFC – Gaps
Whistle- Blower
Screening 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.
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 Act
and Form 2A of Companies Rules, the
disclosure requirements are based on
Disclosure and I@nvestor Protection (DIP)
Guidelines issued by SEBI. To impart
 enforceability, the guidelines should be
 converted into regulations.
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.

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
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
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
OCT 7, 2012 9930438805 107

Exempted insurers
 The regulatory position with respect to
the exempted insurers is not clear. A
roadmap needs to be laid down by the
govt /supervisor for the continuance or
otherwise of these entities to address
the concerns relating to protection of
the interests of the policyholders
covered
Consultative Committee should be done
away with as recommended by IRDA
OCT 7, 2012
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.

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
OCT 7, 2012 9930438805 110

IAIS – Core Principles
 IAIS has developed the Insurance
Core principles for prudential
regulation and supervision of
insurance sector

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)

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
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)

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)
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
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)
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)
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)
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
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
OCT 7, 2012 9930438805 121

ICP- Prudential
requirements(2)
The supervisory authority requires
insurers to comply with standards for
establishing
adequate 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
increased, if necessary.(ICP 20)
OCT 7, 2012
9930438805 122

ICP- Prudential
requirements(3)
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)
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
OCT 7, 2012 9930438805 123

ICP- Prudential
requirements(4)
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)

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
 which all obligations under a contract have 125
OCT 7, 2012 9930438805

ICP- Markets &
Consumers(2)
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)
OCT 7, 2012 9930438805 126

ICP- AML/, combating the
financing of terrorism
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
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 health
insurance 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
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
financial
difficulties. Under the Insurance Act, every company
registered to carry on insurance business is regulated on
a stand-alone basis and not on a group-basis even if the
insurer belongs
to a group as defined under the Company. Monitoring
takes place through processes established by Sawnani- email
Prepared by Satish T various
regulators 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
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
OCT 7, 2012 9930438805 131

Bridging the Gaps insurance
legislation (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
OCT 7, 2012 9930438805 132

Presentation for imt delhi v6 slide and linked share

Presentation for imt delhi v6 slide and linked share

Recomendados

Recomendados

Mais conteúdo relacionado

Mais procurados

Mais procurados (20)

Destaque

Destaque (9)

Semelhante a Presentation for imt delhi v6 slide and linked share

Semelhante a Presentation for imt delhi v6 slide and linked share (20)

Último

Último (20)

Presentation for imt delhi v6 slide and linked share