Due D iligence of Banks

1. Due Diligence of Banks Presented by Dr. SarojUpadhyay

2. Due diligence is the process of systematically researching and verifying the accuracy of a statement. The term originated in the business world, where due diligence is required to validate financial statements. The goal of the process is to ensure that all stakeholders associated with a financial endeavour have the information they need to assess risk accurately. When due diligence involves the offering of securities for purchase, as in an IPO (initial public offering), specific corporate officers are responsible for the proper completion of the process, including the issuer, issuer's counsel, underwriters, CFO and the brokerage firm offering shares. Because of the delicate nature and importance of such judgments to the prospects for the performance of a company's equities in the public market, there is a strong emphasis on neutral, unbiased analysis of both the current financial state and future prospects of the firm in question.

3. The RBI circulars dated September 19th 2008 / December 8th 2008 / February 10th 2009 – advised all scheduled commercial Banks to obtain 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.

4. In order to streamline consortium/multiple banking arrangements, Reserve Bank of India has been making regulatory prescriptions from time to time regarding conduct of consortium/multiple banking. Banks have also been advised to strengthen their information back-up about the borrowers enjoying credit facilities from multiple banks by following specified criteria.

5. Way back in October 1996, Reserve Bank of India withdrew various regulatory prescriptions regarding conduct of consortium/multiple banking/syndicate arrangements so as to bring flexibility in the credit delivery System. With the passage of time, however, it was observed that the relaxations meant for providing flexibility to the borrowing community, may also have contributed to various types of frauds, prompting the Central Vigilance Commission to attribute the incidence of frauds mainly to the lack of effective sharing of information about the credit history and the conduct of account of the borrowers among various banks. Accordingly, Reserve Bank of India in consultation with the Indian Banks’ Association, specified the framework to be observed by banks for improving the sharing/dissemination of information amongst the banks about the status of the borrowers enjoying credit facilities from more than one bank. Further, the banks are required to obtain regular certification of Diligence Report from a professional, preferably a Company Secretary about conformity to statutory prescriptions in vogue. Thus, the banking community in general and the Regulatory in particular have reposed enormous trust on professionals.

6. The Diligence Report covers many critical and relevant matters such as details of the Board of Directors, shareholding pattern, details of the forex exposure and overseas borrowings, risk mitigation through insurance cover in respect of all assets, payment of all statutory dues and other compliances, proper utilization/end-use of the loan funds, compliance with mandatory Accounting Standards, compliance with various clauses of Listing Agreement in case of a listed company etc. The compact structure of the Diligence Report under its twenty-five paragraphs makes it obligatory for a Practicing Company Secretary to prepare the Report after critical examination of all relevant records and documents of the borrowing companies which demands a high degree of care, skill and knowledge.

7. Period of Reporting Annex. III to the RBI Notification provides that the Diligence Report shall be made on a half yearly basis. Secretary in Whole-Time Practice Section 2(45A) of the Company Secretaries Act, 1980 defines “secretary in whole-time practice” as a secretary who shall be deemed to be in practice within the meaning of sub-section (2) of section 2 of the Company Secretaries Act, 1980 and who is not in full-time employment. Thus, a member of the Institute of Company Secretaries of India, who is not in full-time employment can become a Secretary in whole-time practice after obtaining from the Council of the Institute a Certificate of Practice under section 6 of the Company Secretaries Act, 1980

8. Scope of Due Dilligence Tracking the change in the composition of Board of Directors of the company. Tracking the changes in the shareholding pattern. Verification of – • The alterations in the Memorandum of Association & Articles of Association. • Related party transactions. • The companies’ loans & advances granted to the Director’s or any other company in which the Directors are interested. • Loans and investments or (given) guarantees or (provided) securities to other business entities. • Borrowings by the company from directors, members, public, financial institutions, banks and others. • Charges on the assets of the company. • Forex exposure and Overseas Borrowings of the company.

9. SCOPES CONTD. • To ensure that – • The company has not defaulted in the repayment of any public deposits or unsecured loans and the Company or its Directors are not under the Defaulter's list of Reserve Bank of India or in the Specific Approval List of ECGC. • The Company has issued, offered and allotted all the securities to the persons entitled thereto and has also issued letters, coupons, warrants and certificates thereof to the concerned persons and also redeemed its preference shares / debentures and bought back its shares (wherever applicable) in compliance with the specified procedures and within the stipulated time. • The company has insured all its secured assets & has insured fully all its assets. • The Company has complied with the terms and conditions, set forth by the lending institution at the time of availing the facility and also during the currency of the loan and has utilized the funds for the purposes for which these were borrowed.

10. Reporting under due diligence for banks can be – Reporting without Qualification – It is done in case wherein the company satisfies all the requirements as prescribed by RBI, the Companies Act, 1956 or any Act in force for the given time period, as maybe applicable. Reporting with Qualification – It indicates that the company does not comply with relevant statutory requirements and regulations, other disclosure requirements or any other requirement as stated in the format of the diligence report issued by the RBI. The same is expressly written the due diligence report.

11. Thank you