DILIGENCE REPORTS FOR BANKS

1. DILIGENCE REPORTS FOR BANKS

2. Why Due Diligence Focus on Consortium lending & Multiple Banking regulatory prescriptions regarding conduct of consortium / multiple banking / syndicate arrangements were withdrawn by Reserve Bank of India in October 1996 Central Vigilance Commission (CVC) expressed concerns on the working of Consortium Lending and Multiple Banking Arrangements in the banking system. CVC attributed the incidence of frauds mainly to the lack of effective sharing of information about the credit history and the conduct of the account of the borrowers among various banks.

3. RBI Circular The RBI circular dated September 19th 2008 / December 8th 2008 / February 10th 2009 Regular certification on a half yearly basis (Diligence Report) by a professional, preferably a Company Secretary, regarding compliance by the Borrowing Company of the various statutory provisions that are in vogue.  The same is done to inculcate a strong foundation of good governance culture among borrowing corporate and correspondingly enhance the comfort level of banks by reducing the information asymmetry prevailing currently.

4. Consortium Vs Multiple Banking Consortium + One leader who monitors and controls + Common documentation + Proper sharing of business among member banks + More transparency + Proper sharing of data

5. Consortium Vs Multiple Banking Consortium • Rigid and inflexible • Less opportunity for innovation • More oriented towards banks

6. Consortium Vs Multiple Banking Multiple Banking + Flexible + Free access to credit + best rates for borrowers + Competition among Bankers

7. Consortium Vs Multiple Banking Multiple Banking • Can lead to over financing • Opaque and not transparent • Sickness can be hidden • Documentation at multiple level • Probable issue of priority of charges

8. Why do we need due diligence report No exchange of information among banks Absence of leader – free for all Over financing Governance issues not being tracked Compliance issues not being tracked Control issues not being tracked In consortium – leader was doing all these acts

9. Gist of RBI Circular Diligence report is based on • Based on the examination of the registers, records, books and papers as required to be maintained under the Companies Act, 1956 (the Act) and the rules made thereunder • provisions contained in the Memorandum and Articles of Association of the Company, • provisions of various statutes, wherever applicable, • provisions contained in the Listing Agreement/s,

10. Gist of RBI Circular • Tracking the changes in Directorship • Tracking the share holding pattern • Tracking the changes to MOA & AOA • Contracts with Related Parties • Loans advanced to related parties • Loans advanced to other parties • Guarantees extended to 3rd parties

11. Gist of RBI Circular • Default in the repayment of public deposits, unsecured loans, debentures, facilities granted by banks, financial institutions and nonbanking financialcompanies. • Creation, modification or satisfaction charges on the assets of the company • Investments in wholly owned Subsidiaries and/or Joint Ventures abroad made by the company. • Principal value of the forex exposure and Overseas Borrowings of the company. • Compliance to commitments relating share warrants, preference shares etc.,

12. Gist of RBI Circular • Insurance cover for all assets. • Compliance with the terms and conditions, set forth by the lending bank/financialinstitution at the time of availing any facility and also during the currency of the facility. • Dividends are declared and paid as per the provisions of the Companies Act, 1956. • Company and or any of its Directors does not appear in the defaulters' list of Reserve Bank of India. • Company and or any of its Directors does not appear in the SAL of ECGC.

13. Gist of RBI Circular • No outstanding Statutory dues and satisfactory arrangements had been made for arrears of any such dues. • The funds borrowed from banks/financial institutions have been used for the purpose for which they were borrowed. • Compliance to the provisions of Section 372 A of the Companies Act in respect of its Inter Corporate loans and investments.

14. Gist of RBI Circular Compliance with the applicable Accounting Standards. Timely crediting of amounts to Investor Education and Protection all the unpaid dividends. Prosecutions initiated against or show cause notices received by the Company for statutory violations. Fines and penalties imposed on the Company and or any other action initiated against the Company and /or its directors in such cases. Compliance to the provisions of the Listing Agreement. Timely deposit of both Employees' and Employer's contribution to Provident Fund with the prescribed authorities.

15. Common deal killers Some common “deal killers” that surface prior to the fieldwork of diligence of banks are – Incomplete records during the middle of the year Assessing the asset quality Compliance to sanction terms End use of funds Prosecution action against the company Compliance to accounting standards

16. Reporting • Reporting under due diligence for banks can be – • Reporting without Qualification • Reporting with Qualification

17. Thank You