New MCA rules make cryptocurrencies, benami, loan disclosures mandatory

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Starting April 1, companies must state if they have been declared wilful defaulters by banks, financial institutions or other lenders. The ministry also mandated companies to record audit trails of their accounts. Firms using accounting software to maintain their books need to use features that can record the audit trail of each transaction and create an edit log, including the date of such changes.

India Inc will have to declare investments in cryptocurrencies, relationships with dissolved companies and loans extended to related parties, among a host of other disclosures mandated by the government to improve transparency.

Starting April 1, companies must state if they have been declared wilful defaulters by banks, financial institutions or other lenders.

 The ministry of corporate affairs announced a new set of disclosures rules under the Companies Act on Wednesday, significantly enhancing financial and general reporting requirements for companies.

The ministry also mandated companies to record audit trails of their accounts. Firms using accounting software to maintain their books need to use features that can record the audit trail of each transaction and create an edit log, including the date of such changes.

Amending the Companies (Accounts) Rules, the ministry said firms must ensure the audit trail feature on the accounting software cannot be disabled. The move is aimed at curbing backdated entries and will affect mainly smaller companies as the bigger ones already use such software, according to Shalu Kedia, a partner at Nangia & Co.

Additional disclosures to be made under schedule III of the Companies Act, 2013, relate to matters such as corporate social responsibility spending, cryptocurrency dealings, benami property, relationship with struck-off, or dissolved, companies, and ageing of payables & receivables with vendors.

These disclosures will make it easier for the government to track non-compliance and take action against defaulting companies, experts said.

“Earlier, the companies were only required to disclose trade payables and receivables, but there was no requirement to provide ageing details. This disclosure will mandate the company to disclose the ageing payment cycle for MSMEs and non-MSME vendors,” said Nischal Arora, a partner at Nangia Andersen LLP.

Dealings in cryptocurrencies must be disclosed with details of the profit or loss on such transactions, amounts of such currency held and deposits or advances from any person for trading or investing in these currencies.

“While the government is already working on a bill on cryptocurrency, the disclosure for such currency has made it clear that the government wants to gather data on cryptocurrency,” said Arora.

Another important change was related to the disclosure of any benami property holdings.

“This disclosure is another step to improve transparency for the stakeholders as they will have to disclose any proceeding that has been initiated or pending against the company for holding any benami property and also provide a reasoning and view on the same,” said Amit Maheshwari, a partner at AKM Global.

The additional disclosures will make it mandatory for companies to provide details of shortfall in CSR spending for the previous years, including reasons for not meeting targets.

Loans granted to promoters, directors and related parties that are repayable on demand or without specific repayment terms from companies must be declared in terms of amount and percentage to total loans granted.

While this will push firms to regularly service their loans, it “will be helpful for the investor and other lenders to be aware about these types of companies before making any investment or lending the money,” Maheshwari said.

Schedule III Amendment Notification_24032021

Source: Economic Times

Year-long IBC suspension to be lifted ‘after March 24’, hints MCA

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The Ministry for Corporate Affairs Ministry has hinted that the suspension of the Insolvency and Bankruptcy Code (IBC) is likely to be revoked after March 24.

he Ministry for Corporate Affairs Ministry has hinted that the suspension of the Insolvency and Bankruptcy Code (IBC) is likely to be revoked after March 24.

This has been conveyed in a written submission by the Ministry to the Standing Committee on Finance headed by Jayant Sinha. This submission came along with the note on allocation and utilisation of funds for the Insolvency and Bankruptcy Board of India (IBBI), which is the insolvency regulator.

“It is expected that the suspension of the Insolvency and Bankruptcy Code will likely be revoked after March 24 and activities of IBBI will be increased manifold in the next financial year,” the MCA submission said.

Given that the economy is now in recovery mode, it is widely expected that the Centre will revoke the suspension after March 24. Also, any extension of the suspension this date would require Parliament approval, legal experts said.

6-month suspension

A six-month suspension was first introduced in June 5 for debt defaults arising post March 25, 2020, when the Covid-induced lockdown was announced. The suspension was to end on September 25, but was extended up to December 25. In mid-December, the suspension was further extended by three months, up to March 25.

In effect, the government had ensured that any corporate debt default during Covid, between March 25, 2020 and March 25, 2021, will remain outside the IBC purview. However, for defaults before March 25, 2020, there will be no protection, said experts.

While the law protects the corporate debtor from insolvency proceedings for the one-year period till March 25, it does not disallow such action against the personal guarantors of a corporate debtor.

‘Go digital’

In a separate development, the Standing Committee on Finance has, in its latest report tabled in the Lok Sabha on Tuesday, directed the MCA to move towards full digitisation of its functions, particularly of its statutory bodies. It sees the quasi judicial bodies facing a deluge of cases post withdrawal of the moratorium and underscored stressed the need to enhance their digital and infrastructural capacities to handle the increase in caseload.

Source: Business Line

No need to apply for loan interest waiver, relief to be automatically credited into accounts: Finance Ministry

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– The rate of interest as of February 29 that will be used to calculate the interest differential will not include any penalties or any penal rate of interest applied to the loan. – The package will be available for eligible borrowers irrespective of whether they have availed or partially availed or not availed the moratorium on repayment announced by RBI

Borrowers will not need to apply for the interest-on-interest waiver scheme for the six-month loan moratorium, the finance ministry has said, asking lenders to credit ex-gratia relief amount into the accounts of those eligible.

The ministry late Tuesday issued a set of 20 clarifications on the scheme in form of frequently asked questions or FAQs

The lending institutions will draw up a list of their borrowers eligible under the criteria laid down by the government and refund the difference between the compound interest and simple interest paid between March 1 and August 31.

The benefit is available to all eligible borrowers including those who did not opt for moratorium. The lenders can seek a refund from the government that will foot the bill.

According to a Crisil report, 75% of borrowers will be covered under the scheme, which likely to cost the government Rs 7,500 crore.

The scheme is not applicable to accounts classified as non-performing assets (NPAs) at the end of February as also loans against fixed deposits, bonds, shares or other interest-bearing instruments and loans given for investment in financial assets such as shares and debentures.

While the scheme includes any outstanding amount on credit cards, relief will not be paid to those credit card holders with a card balance in ‘credit’, as per the FAQs.

The Rs 2 crore limit is based on the borrower’s aggregate loans across lending institutions as on February 29.

Non-fund based limits such as letters of credit and guarantees would not count towards the Rs 2 crore limit.

For calculating the interest differential, lending institutions will consider the contracted interest rate on loans as of February 29. For zero interest loans, the lender’s base rate should be used while for credit card dues, the weighted average lending rate for the transactions between March 1 and August 31 should be applied, the ministry said.

On October 23, the government had announced the scheme for ex-gratia payment of difference between compound interest and simple interest for six months (March 1, 2020 to August 31, 2020) to borrowers in specified loan accounts.

The move was in response to the Supreme Court (SC) seeking clarity on the waiver of ‘interest on interest’ in the ongoing case filed for relief of borrowers availing the moratorium on loan repayments granted by the Reserve Bank of India (RBI).

The case was filed on behalf of borrowers, seeking relief from payment of the interest accruing on the monthly instalments that were paused for six months.

The SC has set the next hearing for November 2 to assess the implementation of the scheme, which the government said would be completed by November 5.

“Banks will not have to go through individual borrowers, only the categories need to be selected and the scheme needs to be applied. It will all be system-based, there is not much manual intervention required,” said Mukesh Kumar Jain, former managing director and CEO of the erstwhile Oriental Bank of Commerce.

The FAQs said banks would use the information they had along with information from credit bureaus to assess a borrower’s aggregate loans. Jain said this should not be an issue as, “Normally, loans up to Rs 2 crore are taken from a single bank since it is a relatively small amount”.

Source: Economic Times

RBI releases Long Form Audit Report (LFAR)

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The overall objective of the LFAR should be to identify and assess the gaps and vulnerable areas in the business operations, risk management, compliance and the efficacy of internal audit and provide an independent opinion on the same to the Board of the bank and provide their observations

The Reserve Bank on Saturday came up with revised long format audit report (LFAR) norms with a view to improving efficacy of internal audit and risk management systems.

 

The LFAR, which applies to statutory central auditors (SCA) and branch auditors of banks, has been updated keeping in view the large scale changes in the size, complexities, business model and risks in the banking operations, the RBI said.

 

RBI/2020-21/33
Ref.No.DOS.CO.PPG./SEC.01/11.01.005/2020-21

September 05, 2020

To:

The Chairman / Managing Director / Chief Executive Officer
All Scheduled Commercial Banks (Excluding RRBs)
All Local Area Banks
All Small Finance Banks and
All Payment Banks

Madam /Dear Sir,

Long Form Audit Report (LFAR) – Review

Please refer to RBI circular No. DBS.CO.PP.BC.11/11.01.005/2001-2002 dated April 17, 2002 on revision of Long Form Audit Report (LFAR).

2. Keeping in view the large scale changes in the size, complexities, business model and risks in the banking operations, a review of the LFAR formats, in consultation with the stakeholders, including the Institute of Chartered Accountants of India (ICAI), was undertaken and it has been decided to make the following changes.

3. The format of LFAR, as mentioned below, have been revised:

  1. Annex I for Statutory Central Auditors (SCA)
  2. Annex II for Branch Auditors
  3. An Appendix as part of Annex II for the specialized branches and
  4. Annex III on Large / Irregular / Critical accounts for branch auditors.

The revised formats are enclosed.

4. The revised LFAR formats are required to be put into operation for the period covering FY 2020-21 and onwards. The mandate and scope of the audit will be as per this format and if the SCA feels the need of any material additions, etc., this may be done by giving specific justification by the SCA and with the prior intimation of the bank’s Audit Committee of Board (ACB).

5. Regarding other operational issues relating to submission of LFAR, we further advise as under:

  1. Timely receipt of LFARs from the auditors should be ensured;
  2. The LFAR on the bank, after due examination, should be placed before the ACB / Local Advisory Board of the bank indicating the action taken/proposed to be taken for rectification of the irregularities, if any, mentioned therein; and
  3. A copy each of the LFAR (i.e. for the bank / all Indian Offices of foreign bank as a whole) and the relative agenda note, together with the Board’s views or directions, should be forwarded to the concerned Senior Supervisory Manager (SSM) in the Department of Supervision, Reserve Bank of India within 60 days of submission of the LFAR by the statutory auditors.

6. The LFAR format and other instructions issued vide RBI circular No. DBS.CO.PP.BC.11/11.01.005/2001-2002 dated April 17, 2002 stand repealed.

7. Please acknowledge receipt.

Yours faithfully,

(Ajay Kumar Choudhary)
Chief General Manager

Encl: Annex I and II and III

RBI sets new conditions for Current Accounts to improve Credit Discipline

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Banks cannot open a current account for a customer, who has already availed himself of credit facilities from the banking system.

The Reserve Bank of India set new conditions for banks to open current accounts for large borrowers in order to strengthen credit discipline. Use of multiple operating accounts by borrowers—both current well as cash/overdraft accounts—has been observed to be prone to vitiating credit discipline, the RBI said its Statement on Developmental and Regulatory Policies on Thursday.

“The checks and balances put in place in the extant framework, for opening of current accounts, are found to be inadequate,” it said, adding that the central bank has revised its guidelines to bring in appropriate safeguards

The revised norms are also expected to bring in the requisite discipline in collective actions by creditors for speedier resolution of stress in the accounts of borrowers, it said.

The purpose of the revised guidelines is to ensure that borrowers route their payments to and from a current account with a bank that has the largest exposure to the borrower, instead of having multiple current accounts across banks.

Here are the revised guidelines:

Opening Current Accounts

For a borrower with an existing CC or OD Facility
The bank cannot open a current account for the borrower and all transactions have to be routed through the cash credit or overdraft account.

For a borrower with No existing CC or OD Facility
Banks can open a current account if the total exposure to the borrower is less than Rs 5 crore. As and when the exposure goes beyond Rs 5 crore, the borrower has to inform the bank and, thereafter, it will be governed differently.

Credit Facilities of Rs 5 Crore to Rs 50 Crore

Any lender can open a current account, while non-lending banks can only open a collection account.

Credit Facilities of more than Rs 50 Crore

Any lender can open a current account, while non-lending banks can only open a collection account. Credit Facilities of more than Rs 50 Crore Banks have been mandated to create an escrow mechanism and only the escrow-managing lender or agent can open the current account for the borrower.

The balances in such accounts cannot be used as a margin for availing any non-fund based credit facilities. While there is no prohibition on the amount or the number of credits in ‘collection accounts’, any debits will be limited to the purpose of remitting the proceeds to the escrow account.

The banks should not route any withdrawal transaction from term loans availed by the borrower through current accounts and, instead, funds from term loans should be remitted directly to the supplier of goods and services.

Expenses incurred by the borrower for day-to-day operations should be routed through the cash credit/overdraft account, if the borrower has one; else, it should be routed through a current account.

Conditions to avail CC Or OD Facility
When a bank’s exposure to a borrower is less than 10% of Aggregate Banking System Exposure

The CC and OD facility can be availed but it can only be used for credits. Any debit transaction can only be to remit funds to the borrower’s CC or OD account held with a bank which has an exposure of 10% or more of the banking system’s total exposure to the borrower.

When a bank’s exposure to a borrower is more than 10% of Aggregate Banking System Exposure

Banks can provide the borrower with a CC/OD facility. If the borrower has availed loans from more than one bank and more than one bank has an exposure of 10%, the bank to which the funds are to be remitted may be decided mutually between the borrower and the banks.

All large borrowers that have a working capital facility bifurcated between a loan component and a cash credit component need to maintain the balances at individual banks in all cases, including consortium lending.

“The RBI has been concerned about diversion of funds. Therefore, the norm that RBI has put in place is that if a bank opens a current account, they receive a no-objection-certificate from the lending bank, so that the lending bank knows another current account is being opened for its loan customer,” said Rajiv Anand, executive director, Axis Bank.

These conditions have been put in place to bring in credit discipline and ensure that the issue if diversion of funds is much better managed than it is today, he said.

According to Ajay Shaw, partner, DSK Legal, the new conditions are aimed at ensuring that large borrowers do not use multiple accounts and route money to and from them.

“The RBI is insisting that all current accounts should be unified and for large borrowers there should be an escrow or trust and retention mechanism, with a waterfall, to ensure that there is a control of cash-flows.”

In an extreme case, if a borrower had an escrow account in a consortium loan and another lender is brought in, the borrower would then route all payments to the new lender and not to others, he said.

The RBI, according to Shaw, is trying to avoid these situations. “Banks will need to review all their current accounts and they have already begun informing their clients to close accounts and to maintain only one,” he said.

Source: Bloomberg Quint

The Micro Small and Medium Enterprises (MSMEs) hit by Covid pandemic may have something to cheer at last.

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Insolvency and Bankruptcy Board of India (IBBI) has formulated a Special Resolution Process (SRP) for MSMEs who find their financial position unmanageable due to Covid crisis.


While presenting the ‘Atma Nirbhar Bharat’ package Finance Minister had announced to come out with a Special insolvency resolution framework for MSMEs under section 240A of the Insolvency and Bankruptcy Code.

According to sources close to the development, the scheme would be available to corporate MSMEs, that is, units incorporated as Companies or LLP.

The salient features of the scheme are proposed to be:

  —   If an MSME finds it unable to meet its financial obligations, the insolvency resolution process could be initiated on the occurrence of default of at least Rs.1 lakh

  —   It can be triggered by the MSME promoter/ owner only (not by the Financial or other creditors)

  —   During the process of resolution, the MSME owner remains in control and keeps running the unit but all legal proceedings to take control of assets by creditors are stopped.

  —   It provides first right of offer to promoters of the MSME to submit resolution plans

  —   It proposes a simplified claim verification process and preparation of information memorandum

  —   It expands the scope of interim finance to facilitate rescue financing of the CD during COVID-19 with the approval of 3/4th financial creditors in value.

Federation of Indian Micro and Small & Medium Enterprises (FISME) which facilitated a consultation round of MSME associations with IBBI shared that most participants found the scheme potentially useful.

According to Lucknow based V K Agarwal Managing Director of Shashi Cables Ltd and former FISME President, the scheme seemed to be modelled on insolvency provisions under US chapter-11, was very promising indeed but some way needed to be found to make financial creditors to come on board and cooperate.

The scheme envisages appointment of an Insolvency Professional (IP) as Resolution Professional to conduct the process, with the consent of the unrelated financial creditors having at least 25% of the outstanding financial claims.

The scheme is under final stages of approval and is expected to be announced soon.

IBBI proposes to limit cases with insolvency professionals

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The IBBI’s discussion paper said that the processes under the Insolvency and Bankruptcy Code (IBC) require a unique combination of skill sets in terms of subject matter knowledge and management skills for an IP and at different stages of transactions, different sets of skills are called for.

In what may bring about major reform and efficiency in the insolvency regime in India, the Insolvency and Bankruptcy Board of India (IBBI) has proposed to limit the number of cases an insolvency professional can handle to five as it noted that few insolvency professionals (IP) are handling too many cases

In a recent discussion paper, the board noted the “skewed” work allocation and has come up with a matrix for allocation of cases.

Citing observations by courts and  tribunals, the paper said: “Keeping in mind the provisions of the Companies Act, 2013, the skewed work allocation amongst the IPs and the observations of the Supreme Court or Adjudicating Authority, and given the expansive and intense responsibilities of an IP in corporate processes, it is proposed to issue necessary guidelines to IPs advising them to limit the maximum number of assignments handled by them, to five, at a given point of time.”

As per the proposed matrix an insolvency resolution professional (IRP) can handle a total of five cases of resolution or liquidation, including voluntary liquidation, wherein the turnover of the corporate debtors is less than or equal to Rs 1,000 crore. As the matrix progresses, an IRP handling the case of a corporate debtor with the turnover of Rs 50,000 crore would be able handle only that very case, and no more.

“On the basis of information available, it is observed that a few IPs are handling too many assignments under the Code, which is detrimental to the institution of IP in the long run,” it noted.

The IBBI’s discussion paper said that the processes under the Insolvency and Bankruptcy Code (IBC) require a unique combination of skill sets in terms of subject matter knowledge and management skills for an IP and at different stages of transactions, different sets of skills are called for.

A spike in one area of expertise will not be sufficient to create a uniform experience for stakeholders. Further, it cannot be ignored that no two IPs possess identical sets of qualification, experience, skills and expertise, it said.

“Similarly, no two CIRPs are same as it involves diverse businesses, complex corporate structures, varied stakeholders. The said restriction on an IP will put a check on undesirable instances of delay and disturbance to the processes led by IPs while simultaneously handling too many assignments under the Code.”

The Board was of the view that with limits in place, quality of output is expected to improve and it will facilitate the realisation of the objective of value maximisation as enshrined in the Code.

The major inputs for violation will be through complaints and therefore, the cost of surveillance for the Board may not be significant. Further, this will be conducive for development of the market for professionals as more talent will be drawn towards IP profession, it added.

The IBBI has sought public comments on the proposal till July 25, 2020.

Source: Economic Times