Monthly Archives: December 2011

Cyber Laws In India

Cyber laws in India are very much required especially to manage the culpable dealings of big corporate houses. IT frauds and cyber crimes in Indian companies are increasing at a great speed. Currently there is no cyber due diligence for Indian companies that has been mandatorily provided by the Indian Companies Act, 1956.The Information Technology Act, 2000 (IT Act 2000) is the sole cyber law of

Digital Preservation In India Needed

Digital preservation is an issue that has not received much attention in India. Digital preservation is a process in which materials are converted into electronic form for future uses. Digital preservation also ensures that the material has a longer life shelf than the original form.Digital preservation in India is still in infancy stage. Although we have a Public Records Act 1993 that mandates a

RBI’s Draft Guidelines On Implementation Of Basel III Capital Regulations In India

The Reserve Bank of India (RBI), through its notification numbered RBI/2011-12/331 DBOD.No.BP.BC. 71/ 21.06.201 / 2011-12, dated 30th December 2011 has issued draft guidelines on implementation of Basel III capital regulations in India.
The Basel Committee on Banking Supervision (BCBS) has issued comprehensive reform packages entitled “Basel III: A global regulatory framework for more resilient banks and banking systems” and “Basel III: International framework for liquidity risk measurement, standard and monitoring” in December 2010, with the objective of improving banking sector resilience by strengthening global capital and liquidity regulations, respectively.  The reform package addresses the lessons of the financial crisis and aims at enhancing banking sector’s ability to absorb shocks arising from financial and economic stress. Further, the BCBS, through the reform package also aims to improve risk management and governance as well as strengthen banks’ transparency and disclosure standards relating to regulatory capital. The reforms also have a macroprudential focus, addressing system-wide risks which can build up across the banking sector as well as the procyclical amplification of these risks over time.
On 1 June 2011, the BCBS announced that it has completed its review of and finalised the Basel III capital treatment for counterparty credit risk in bilateral trades. The review resulted in a minor modification of the credit valuation adjustment, which is the risk of loss caused by changes in the credit spread of a counterparty due to changes in its credit quality (also referred to as the market value of counterparty credit risk). A revised version of the Basel III capital rules reflecting the CVA modification was issued that supplemented the original version was published in December 2010.
RBI, being a member of the BCBS, is fully committed to the objectives of Basel III reform package and therefore, intends to implement these proposals for banks operating in India. Accordingly, guidelines have been drafted based on the Basel III reforms on capital regulation, to the extent applicable to banks operating in India. RBI is currently working on operational aspects of implementation of the Countercyclical Capital Buffer. Guidance to banks on this will be issued in due course. Similarly, guidelines on new global liquidity standards introduced as part of Basel III (Basel III: International framework for liquidity risk measurement, standards and monitoring, December 2010) will be issued separately.
The Basel III framework will be applicable both at the level of consolidated bank as well as at the level of stand-alone bank. Accordingly, overseas operations of a bank through its branches will be covered in both the scenarios.
Banks have been requested to offer their comments / suggestions on the various proposals enumerated therein latest by February 15, 2012 by mail to the Chief General Manager-in-Charge, Reserve Bank of India, Department of Banking Operations and Development, Central Office, 12th floor, Central Office Building, Shahid Bhagat Singh Marg, Mumbai-400001 or through e-mail .

Ethical Hacking Training And Courses In India

The need of ethical hackers in India has emerged out of the necessity to tackle growing cases of cyber crimes and cyber attacks. For too long strategic systems and computers located at Indian government departments and sensitive faculties have been targeted by cyber criminals and enemy states. Incidences of cyber espionage against India have increased a lot.Naturally, India needs a skilled

Financial Frauds And IT Crimes In Indian Companies Is Increasing

Financial frauds and cyber crimes have plagued Indian corporate sector. IT and cyber frauds in Indian companies has increased a lot. Corporate IT frauds and cyber crime investigations in India have also increased. This has also necessitated cyber due diligence for Indian companies.White collar crimes and financial frauds are increasing in India. By its very nature these high profile crimes affect

Corporate IT Frauds And Cyber Crimes Investigation In India

Corporate frauds and crimes have taken a new shape in the present information technology age. Data theft, privacy violations, intellectual property rights (IPRs) violation, trade secrets theft, financial frauds, etc have also increased in the corporate sector of India. Even white collar crimes and organised crimes have increased a lot.Clearly, IT and cyber frauds in Indian companies have

Cyber Due Diligence For Indian Companies

Cyber due diligence in India has finally arrived in India. The information technology act, 2000 (IT Act 2000) is the sole cyber law of India. IT Act 2000 prescribes cyber due diligence requirements on the part of various stakeholders like banks, companies, individuals, Internet intermediaries, e-commerce sites, etc.However, till now cyber due diligence in India has not been taken seriously. This

IT And Cyber Frauds In Indian Companies Is Increasing

White collar crimes and financial frauds are increasing in India. By its very nature these high profile crimes affect corporate sector. Indian companies are also facing increased corporate frauds, financial frauds, white color crimes and technological frauds.With growing dependence upon information and communication technology (ICT) for various corporate functions, corporate systems and corporate

Mobile Banking Transactions in India – Operative Guidelines for Banks By RBI

As per the latest notification by Reserve Bank of India (RBI) numbered RBI/2011 -12/312 DPSS.CO.PD.No. 1098 / 02.23.02 / 2011-12, dated December 22, 2011, RBI has invited a reference to the guidelines appended to its circular no. RBI / 2008-09 / 208, DPSS.CO.No.619 / 02.23.02 / 2008-09 dated October 08, 2008, followed by directions issued vide circulars RBI / 2009-10 / 273, DPSS.CO.No.1357 / 02.23.02 / 2009-10 dated December 24, 2009 and RBI/2010-11/511, DPSS.CO.No.2502 / 02.23.02 / 2010-11 dated May 4, 2011 on the captioned subject.
Banks are increasingly extending mobile banking facilities (financial) to their customers. Interbank Mobile Payment Service (IMPS) developed and operated by National Payment Corporation of India (NPCI) has also enabled real time transfer of funds through the medium of the mobile phone between accounts in different banks.  The volume and value of mobile banking transactions is also showing an uptrend.
In terms of Para 2.1 of RBI’s circular dated December 24, 2009, a transaction limit of Rs. 50,000/- per customer per day had been mandated. On a review it has been decided to remove this cap. However, banks may place per transaction limits based on their own risk perception with the approval of its Board.
RBI has also clarified that the directions under Para 3 “Remittance of funds for disbursement in cash” of its circular dated December 24, 2009 stands superseded with the directions contained in  our circular RBI / 2011-12 / 213 DPSS. PD. CO. No. 622 / 02.27.019 / 2011-2012 dated October 05, 2011.
All other provisions of the extant guidelines on mobile banking remain unchanged. The directive is issued under Section 18 of Payment and Settlement Systems Act, 2007, (Act 51 of 2007) and shall come into force from the date of this circular.

Implementation Of The Internal Rating Based (IRB) Approaches For Calculation Of Capital Charge For Credit Risk

As per the latest notification by Reserve Bank of India (RBI) numbered RBI/2011-12/311 DBOD.No.BP.BC.67/21.06.202/2011-12, RBI has referred to its circular DBOD.No.BP.BC.23/21.06.001/2009-10 dated July 7, 2009, inter alia, advising banks that they can apply for migrating to Internal Rating Based Approach (IRB) for calculation of capital charge for Credit Risk from April 1, 2012 onwards.
The draft guidelines for computing credit risk capital charge under IRB were accordingly issued on August 10, 2011 to seek comments and suggestions from all the stakeholders. Based on the comments/suggestions received on the draft guidelines, the final guidelines on IRB as prepared have been prepared.
Banks intending to move to any of the IRB approaches for computing capital charge for credit risk are advised to assess their preparedness for the same with reference to these guidelines. If a bank feels that it is prepared to adopt IRB approaches as per these guidelines, it may submit a letter of intention and its Board’s approval for adoption of IRB approach for credit risk to RBI (Chief General Manager-in-Charge, Reserve Bank of India, Department of Banking Operations and Development, Central Office, 12th Floor, Shahid Bhagat Singh Road, Mumbai – 400001), along with a gist of self assessment report between April 1, 2012 and June 30, 2012. RBI will make initial assessment of the bank’s preparedness based on these documents and if satisfied, RBI will allow the bank to give detailed application for moving to IRB approaches as mentioned in Section G of the guidelines. Bank’s application will then be followed up with a detailed scrutiny by the RBI and depending on the result of the scrutiny and parallel run; RBI may consider giving final approval to the bank for moving to IRB approaches.
It may also be mentioned here that to get the final approval from RBI, the banks will not only have to ensure that they comply with these guidelines but there will also be continuous endeavour from them to improve their credit risk management processes and systems.

Online Dispute Resolution (ODR) In India

Information and communication technology (ICT) is considered to be a good option for resolving disputes of modern days. Concepts like online dispute resolution (ODR) and e-courts are proof of the same.Unfortunately, neither online dispute resolution in India nor e-courts in India has been accepted and implemented. In fact, we have a single techno legal e-courts training and consultancy centre of

Terror Funding Template Of National Investigation Agency (NIA) Of India

National investigation agency (NIA) of India is the exclusive central agency that deals with terrorism related cases in India. It has been created under the National Investigation Agency Act, 2008. It intends to strengthen Indian capabilities to fight terrorism in India.Terrorist activities heavily depend upon financial resources. Since legal channels of transfer of money are closely guarded,

Indian Research And Analysis Wing (RAW) Granted E-Surveillance Powers

Indian government is in controversies these days. Controversial functions like e-surveillance in India, websites blocking in India, Internet censorship in India, etc are performed by Indian government and its agencies without any procedural and constitutional safeguards and without any constitutionally sound legal framework supporting these functions.India does not have a constitutionally sound

Intelligence Gathering In India Is Unconstitutional

Intelligence gathering and fighting terrorism are essential national security and sovereign functions. They cannot be equated at par with other governmental functions. That is the reason why every country provides some extra protection and immunity from public scrutiny to such functions.None can doubt that Indian counter terrorism capabilities need rejuvenation. We have an obvious but

E-Delivery Of Public Services Development Policy Loan (DPL) Project Of India

Electronic delivery of services is an effective method to introduce transparency in governmental dealings and to reduce corruption therein. Similarly, e-delivery of services can also bring efficiency that can reduce costs and unnecessary time taking by government departments.For instance, Securities and Exchange Board of India (SEBI) is planning to use electronic initial public offer (E-IPO) in

The Cable TV Networks (Regulation) Second Amendment Bill 2011 Of India

Entertainment and media industry in India is witnessing an incredible growth rate. Indian government is also streamlining the legal frameworks that would help in the sustainable growth of media and entertainment industry in India.Technological advances and the need to shift from analog spectrum to digital broadcasting by television broadcasters have put digital television (DTV) on a fast track.

Enhanced Due Diligence Measures By Banks Of India For Higher Risk Customers

Reserve Bank of India’s (RBI), notification numbered RBI/2011-12/305 DBOD. AML.BC. No.65 /14.01.001/2011-12, dated 19th December 2011, has been issued under the category Know Your Customer (KYC) norms/Anti-Money Laundering (AML) standards/Combating of Financing of Terrorism (CFT)/Obligation of banks under Prevention of Money Laundering Act (PMLA), 2002- Assessment and Monitoring of Risk.

RBI has pointed towards its Master Circular DBOD.AML.BC.No.2/ 14.01.001 / 2011 -12 dated July 01, 2011 on Know Your Customer (KYC) norms /Anti-Money Laundering (AML) standards/Combating of Financing of Terrorism (CFT)/Obligation of banks under PMLA, 2002 in this regard.

In terms of paragraph 2.3 (b) and (c) of the aforesaid Master Circular, banks are required to prepare a risk profile of each customer and apply enhanced due diligence measures on higher risk customers. Some illustrative examples of customers requiring higher due diligence have also been provided in the paragraph under reference. Further, paragraph 2.12 (a) of the Master Circular requires banks to put in place policies, systems and procedures for risk management keeping in view the risks involved in a transaction, account or banking/business relationship.

The Government of India had constituted a National Money Laundering/Financing of Terror Risk Assessment Committee to assess money laundering and terror financing risks, a national AML/CFT strategy and institutional framework for AML/CFT in India. Assessment of risk of Money Laundering /Financing of Terrorism helps both the competent authorities and the regulated entities in taking necessary steps for combating ML/FT adopting a risk-based approach. This helps in judicious and efficient allocation of resources and makes the AML/CFT regime more robust. The Committee has made recommendations regarding adoption of a risk-based approach, assessment of risk and putting in place a system which would use that assessment to take steps to effectively counter ML/FT. The recommendations of the Committee have since been accepted by the Government of India and need to be implemented.

Accordingly, banks/FIs should take steps to identify and assess their ML/TF risk for customers, countries and geographical areas as also for products/ services/ transactions/delivery channels, in addition to what has been prescribed in RBI’s Master Circular dated July 1, 2011, referred to in paragraph 2 above. Banks/FIs should have policies, controls and procedures, duly approved by their boards, in place to effectively manage and mitigate their risk adopting a risk-based approach as discussed above. As a corollary, banks would be required to adopt enhanced measures for products, services and customers with a medium or high risk rating.

In this regard, Indian Banks’ Association (IBA) has taken initiative in assessment of ML/FT risk in the banking sector. It has circulated to its member banks on May 18, 2011, a copy of their Report on Parameters for Risk Based Transaction Monitoring (RBTM) as a supplement to their guidance note on Know Your Customer (KYC) norms / Anti-Money Laundering (AML) standards issued in July 2009. The IBA guidance also provides an indicative list of high risk customers, products, services and geographies. Banks may use the same as guidance in their own risk assessment.

These guidelines are issued under Section 35A of the Banking Regulation Act, 1949 read with Rule 7 of Prevention of Money-laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005. Any contravention thereof or non-compliance shall attract penalties under B R Act, 1949.

ECB For MFIs And NGOs Engaged In Micro Finance Activities Under Automatic Route In India

As per  the notification number RBI/2011-12/304 A.P. (DIR Series) Circular No. 59, dated 19th December 2011, the Reserve Bank of India gas clarified the position regarding External Commercial Borrowings (ECB) for Micro Finance Institutions (MFIs) and Non-Government Organisations (NGOs)-engaged in micro finance activities under Automatic Route.
Attention of Authorized Dealer Category-I (AD Category-I) banks has been invited to the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000, notified vide Notification No. FEMA 3/2000-RB dated May 3, 2000, amended from time to time, A.P. (DIR Series) Circular No. 5 dated August 1, 2005, amended from time to time and A.P. (DIR Series) Circular No. 40 dated April 25, 2005 relating to the External Commercial Borrowings (ECB).
Considering the specific needs of the micro finance sector, the existing ECB policy has been reviewed in consultation with the Government of India and it has been decided that hence forth MFIs may be permitted to raise ECB up to USD 10 million or equivalent during a financial year for permitted end-uses, under the Automatic Route. Detailed guidelines on ECB for MFIs with necessary safeguards are set out below.
(i) Eligible Borrower: The following MFIs engaged in micro finance activities shall be considered as eligible borrowers to avail of ECBs:-
(a) MFIs registered under the Societies Registration Act, 1860;
(b) MFIs registered under Indian Trust Act, 1882;
(c) MFIs registered either under the conventional state-level cooperative acts, the national level multi-state cooperative legislation or under the new state-level mutually aided cooperative acts (MACS Act) and not being a co-operative bank;
(d) Non-Banking Financial Companies (NBFCs) categorized as ‘Non Banking Financial Company-Micro Finance Institutions’ (NBFC-MFIs) and complying with the norms prescribed as per circular DNBS.CC.PD.No. 250/03.10.01/2011-12 dated December 02, 2011; and
(e) Companies registered under Section 25 of the Companies Act, 1956 and involved in micro finance activity.
(ii)  Borrowing relationship and fit and proper status: Further, the MFIs registered as societies, trusts and co-operatives and engaged in micro finance should have a satisfactory borrowing relationship for at least 3 years with a scheduled commercial bank authorized to deal in foreign exchange; and would require a certificate of due diligence on `fit and proper’ status of the Board/Committee of Management of the borrowing entity from the designated Authorized Dealer (AD) bank.
(iii)  Recognized lenders: ECB funds should be routed through normal banking channels. NBFC-MFIs will be permitted to avail of ECBs from multilateral institutions, such as IFC, ADB etc./ regional financial institutions/international banks / foreign equity holders and overseas organizations.
Companies registered under Section 25 of the Companies Act and engaged in micro finance will be permitted to avail of ECBs from international banks, multilateral financial institutions, export credit agencies, foreign equity holders, overseas organizations and individuals.
Other MFIs will be permitted to avail of ECBs from international banks, multilateral financial institutions, export credit agencies, overseas organizations and individuals.
Overseas organizations and individuals complying with following safeguards may lend ECB
(a) Overseas organisations planning to extend ECB would have to furnish a certificate of due diligence from an overseas bank which in turn is subject to regulation of host-country regulator and adheres to Financial Action Task Force (FATF) guidelines to the designated AD. The certificate of due diligence should comprise the following (i) that the lender maintains an account with the bank for at least a period of two years, (ii) that the lending entity is organized as per the local law and held in good esteem by the business/local community and (iii) that there is no criminal action pending against it.
(b) Individual Lender has to obtain a certificate of due diligence from an overseas bank indicating that the lender maintains an account with the bank for at least a period of two years. Other evidence /documents, such as audited statement of account and income tax return which the overseas lender may furnish need to be certified and forwarded by the overseas bank. Individual lenders from countries wherein banks are not required to adhere to Know Your Customer (KYC) guidelines are not permitted to extend ECB.
(iv) Permitted End-use: The designated AD must ensure that the ECB proceeds are utilised for lending to self-help groups or for micro-credit or for bonafide micro finance activity including capacity building.
(v) Amount of ECB : With a view to ensure minimization of systemic risk, the maximum amount of foreign currency borrowings of a borrower is capped at USD 10 million during a financial year.
It has also been decided that Non-Government Organisations (NGOs) engaged in micro finance activities can avail of ECB up to USD 10 million or equivalent per financial year under the automatic route as against the present limit of USD 5 million or equivalent per financial year. All other conditions as detailed in our A.P. (DIR Series) Circular No. 40 dated April 25, 2005 remain unchanged.
Other ECB Parameters : All other ECB parameters such as minimum average maturity, all-in-cost ceilings, restrictions on issuance of guarantee, choice of security, parking of ECB proceeds, prepayment, refinancing of ECB, reporting arrangements under the
Automatic Route

should be complied with by MFIs/NGOs availing ECBs. The designated AD has to certify the status of the borrower as eligible and involved in micro finance and ensure at the time of draw down that the forex exposure of the borrower is fully hedged.

These amendments to ECB policy will come into force with immediate effect and the framework with respect to MFIs will be subject to review after one year.
Necessary amendments to the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 dated May 3, 2000 are being issued separately, wherever necessary.
Authorized Dealer banks may bring the contents of this circular to the notice of their constituents and customers.
The direction contained in this circular have been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law.

MFIs In India Allowed To Raise ECBs Up To USD 10 Million

Considering the specific needs of the micro finance sector, the existing External Commercial Borrowings (ECB) policy has been reviewed in consultation with the Government of India and it has been decided that Micro Finance Institutions (MFIs) may be permitted to raise ECB upto USD 10 million or equivalent during a financial year for permitted end-uses, under the Automatic Route.

It has also been decided that Non-Government Organizations (NGOs) engaged in micro finance activities can avail of ECB up to USD 10 million or equivalent per financial year under the automatic route as against the present limit of USD 5 million or equivalent per financial year.
Detailed instructions have been issued vide A.P (DIR Series) Circular No. 59 dated December 19, 2011.

Electronic Bail Granting And Communication System In India

Granting of bail in a criminal matter ensures the right to life and liberty of an individual. While granting a bail, it is ensured that the normal life off the grantee is not jeopardised due to the initiation of a criminal proceeding. In many cases, although the bail is granted yet its communication and final execution may take some time. This seems to be an unreasonable exercise and avoidable

Electronic Commerce Laws In India

Technology has brought many important changes the way we deal in our day to day lives. Whether it is e-governance or e-commerce, individuals and companies are equally benefited due to use of technology.

Realising that cyberspace can bring many commercial benefits; both individuals and companies are ensuring that they have strong online presence. More and more brand promotion and protection in India are done these days in an online environment. Companies and individuals are also ensuring domain name protection in India so that their reputation and goodwill is not misappropriated by others.

We have no dedicated e-commerce laws in India. However, the information technology act 2000 (IT Act 2000), which is the sole cyber law of India, is regulating the e-commerce business and transactions in India. Internet intermediaries liability in India under the IT Act 2000 is very stringent. Cyber law due diligence in India is one aspect that all e-commerce site owners must frequently engage in.

Electronic commerce in India (E-commerce in India) has slowly and steadily entered the Indian market. Toady from tickets booking to purchasing of good and services, everything happens in an online environment.

Of course, where commercial transactions occur, disputes and differences are bound to occur. To prevent and resolve these disputes we need norms, regulations and laws that are acceptable to all the stakeholders.

The e-commerce law of India is primarily incorporated in the information technology act, 2000 (IT Act 2000) that takes cares of legal obligations of both sellers and buyers of good and services in cyberspace.

The IT Act 2000 prescribes rules and norms for online contract formulation. The traditional concepts of offer, acceptance etc, as applicable under the contractual laws, have also been covered by the IT Act 2000. The only difference is that they have been customised as per the requirements of cyberspace.

However, e-commerce transactions and contracts also attract certain additional legal liabilities that e-commerce players in India are not very much aware. For instance, very few e-commerce players in India are aware that they are “intermediaries” within the meaning of IT Act 2000. Further, there are very few e-commerce lawyers and law firms in India that can provide expert services in this regard.

Further, other laws, including intellectual property laws, make these e-commerce players labile for civil and criminal actions. For instance, these e-commerce players can be held liable for online infringement of copyright in India of the copyright owners.

Similarly, if any person posts an offending material at the e-commerce site or otherwise deal with the e-commerce site in an illegal manner, the e-commerce site owner may find himself in trouble.

Cyber law due diligence in India is one aspect that all e-commerce site owners must frequently engage in. The present laws of India are stringent in nature and subsequently claiming ignorance of such laws would not make much difference.

Perry4Law and Perry4Law Techno Legal Base (PTLB) strongly recommend that before opening an e-commerce site or business, the owner of the same must consult a good techno legal law firm that can advice him upon all the possible and applicable aspect of e-commerce laws in India.

E-Commerce Laws In India

Technology has brought many important changes the way we deal in our day to day lives. Whether it is e-governance or e-commerce, individuals and companies are equally benefited due to use of technology.Realising that cyberspace can bring many commercial benefits; both individuals and companies are ensuring that they have strong online presence. More and more brand promotion and protection in

Cyber Law On Social Media And Networking Sites In India

Social media and networking sites have a crucial role to play. Now even governments across the world acknowledge this importance of social media websites. India is one such country that is currently trying to deal with social media sites. However, we have no dedicated social media laws in India. It has even been reported that guidelines for social media contents monitoring in India would be

SEBI Contemplating Electronic Initial Public Offer (E-IPO) In India

Generally there are two types of company i.e. public company and private company. A private company is closely held company with limitation as to transfer of its shares and number of members. Of a public company can transfer shares easily and there is no restrictions as to maximum number of members.
A public limited company can also invite initial public offer (IPO) to augment its capital and financial resources. IPO is the first issuance of a company’s shares to the general public. These shares are allowed to be transacted in the stock market where they can be brought and sold
The securities and exchange board of India (SEBI) is now considering a proposal to allow the companies to sell shares through an all electronic initial public offer (E-IPO), wherein investors would be able to bid for shares electronically and without the need for signing any papers physically. This could also be used as a mean to provide an exit to companies which are listed exclusively on defunct exchanges.
This proposal intends to fast-track the IPO process and lowers the costs with the aid of technology. However, this is just a proposal of SEBI as this requires a formal clearance from the Ministry of Corporate Affairs for the e-IPO process.
Further, implementation of this E-IPO norm would require amending many laws, including the Companies Act of India. The amendment would be required to dispense with the requirements of an investor to “agree in writing”, since no application form submission is envisaged in the e-IPO process, as the allotment will be in demat account.
To further reduce the paper formalities, SEBI has also proposed to dispense with attachment of certain documents with the IPO by the companies. However, there are many techno legal issues that have been ignored by SEBI and MCA.  To avoid procedural hassles and legal issues it would be prudent to take care of these techno legal issues as well. Otherwise this is a good step in the right direction.

SEBI Guidelines on Outsourcing of Activities by Intermediaries

Securities and Exchange Board of India (SEBI) has issues an important circular numbered CIR/MIRSD/24/2011, dated December 15, 2011. Through this circular, SEBI has provided the guidelines on outsourcing of activities by intermediaries. These guidelines are as follow:

1. SEBI Regulations for various intermediaries require that they shall render at all times high standards of service and exercise due diligence and ensure proper care in their operations.

2. It has been observed that often the intermediaries resort to outsourcing with a view to reduce costs, and at times, for strategic reasons.

3. Outsourcing may be defined as the use of one or more than one third party – either within or outside the group – by a registered intermediary to perform the activities associated with services which the intermediary offers.

4. Principles for Outsourcing: The risks associated with outsourcing may be operational risk, reputational risk, legal risk, country risk, strategic risk, exit-strategy risk, counter party risk, concentration and systemic risk. In order to address the concerns arising from the outsourcing of activities by intermediaries based on the principles advocated by the IOSCO and the experience of Indian markets, SEBI had prepared a concept paper on outsourcing of activities related to services offered by intermediaries. Based on the feedback received on the discussion paper and also discussion held with various intermediaries, stock exchanges and depositories, the principles for outsourcing by intermediaries have been framed. These principles shall be followed by all intermediaries registered with SEBI.

5. Activities that shall not be Outsourced: The intermediaries desirous of outsourcing their activities shall not, however, outsource their core business activities and compliance functions. A few examples of core business activities may be – execution of orders and monitoring of trading activities of clients in case of stock brokers; dematerialisation of securities in case of depository participants; investment related activities in case of Mutual Funds and Portfolio Managers. Regarding Know Your Client (KYC) requirements, the intermediaries shall comply with the provisions of SEBI {KYC (Know Your Client) Registration Agency} Regulations, 2011 and Guidelines issued thereunder from time to time.

6. Other Obligations: The following additional obligations are worth notice:

(i) Reporting To Financial Intelligence Unit (FIU) – The intermediaries shall be responsible for reporting of any suspicious transactions / reports to FIU or any other competent authority in respect of activities carried out by the third parties.

(ii) Need for Self Assessment of existing Outsourcing Arrangements – In view of the changing business activities and complexities of various financial products, intermediaries shall conduct a self assessment of their existing outsourcing arrangements within a time bound plan, not later than six months from the date of issuance of this circular and bring them in line with the requirements of the guidelines/principles.

7. This circular is issued in exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

The following principles for outsourcing for intermediaries have been prescribed by SEBI:

1. An intermediary seeking to outsource activities shall have in place a comprehensive policy to guide the assessment of whether and how those activities can be appropriately outsourced. The Board / partners (as the case may be) {hereinafter referred to as the “the Board”} of the intermediary shall have the responsibility for the outsourcing policy and related overall responsibility for activities undertaken under that policy.

The policy shall cover activities or the nature of activities that can be outsourced, the authorities who can approve outsourcing of such activities, and the selection of third party to whom it can be outsourced. For example, an activity shall not be outsourced if it would impair the supervisory authority’s right to assess, or its ability to supervise the business of the intermediary. The policy shall be based on an evaluation of risk concentrations, limits on the acceptable overall level of outsourced activities, risks arising from outsourcing multiple activities to the same entity, etc.

The Board shall mandate a regular review of outsourcing policy for such activities in the wake of changing business environment. It shall also have overall responsibility for ensuring that all ongoing outsourcing decisions taken by the intermediary and the activities undertaken by the third-party, are in keeping with its outsourcing policy.

2. The intermediary shall establish a comprehensive outsourcing risk management programme to address the outsourced activities and the relationship with the third party. An intermediary shall make an assessment of outsourcing risk which depends on several factors, including the scope and materiality of the outsourced activity, etc. The factors that could help in considering materiality in a risk management programme include

(i) The impact of failure of a third party to adequately perform the activity on the financial, reputational and operational performance of the intermediary and on the investors / clients;
(ii) Ability of the intermediary to cope up with the work, in case of non performance or failure by a third party by having suitable back-up arrangements;
(iii) Regulatory status of the third party, including its fitness and probity status;
(iv) Situations involving conflict of interest between the intermediary and the third party and the measures put in place by the intermediary to address such potential conflicts, etc.
While there shall not be any prohibition on a group entity / associate of the intermediary to act as the third party, systems shall be put in place to have an arm’s length distance between the intermediary and the third party in terms of infrastructure, manpower, decision-making, record keeping, etc. for avoidance of potential conflict of interests. Necessary disclosures in this regard shall be made as part of the contractual agreement. It shall be kept in mind that the risk management practices expected to be adopted by an intermediary while outsourcing to a related party or an associate would be identical to those followed while outsourcing to an unrelated party.

The records relating to all activities outsourced shall be preserved centrally so that the same is readily accessible for review by the Board of the intermediary and / or its senior management, as and when needed. Such records shall be regularly updated and may also form part of the corporate governance review by the management of the intermediary.

Regular reviews by internal or external auditors of the outsourcing policies, risk management system and requirements of the regulator shall be mandated by the Board wherever felt necessary. The intermediary shall review the financial and operational capabilities of the third party in order to assess its ability to continue to meet its outsourcing obligations.

3. The intermediary shall ensure that outsourcing arrangements neither diminish its ability to fulfill its obligations to customers and regulators, nor impede effective supervision by the regulators. The intermediary shall be fully liable and accountable for the activities that are being outsourced to the same extent as if the service were provided in-house. Outsourcing arrangements shall not affect the rights of an investor or client against the intermediary in any manner. The intermediary shall be liable to the investors for the loss incurred by them due to the failure of the third party and also be responsible for redressal of the grievances received from investors arising out of activities rendered by the third party. The facilities / premises / data that are involved in carrying out the outsourced activity by the service provider shall be deemed to be those of the registered intermediary. The intermediary itself and Regulator or the persons authorized by it shall have the right to access the same at any point of time. Outsourcing arrangements shall not impair the ability of SEBI/SRO or auditors to exercise its regulatory responsibilities such as supervision/inspection of the intermediary.

4. The intermediary shall conduct appropriate due diligence in selecting the third party and in monitoring of its performance. It is important that the intermediary exercises due care, skill, and diligence in the selection of the third party to ensure that the third party has the ability and capacity to undertake the provision of the service effectively. The due diligence undertaken by an intermediary shall include assessment of:

(i) third party’s resources and capabilities, including financial soundness, to perform the outsourcing work within the timelines fixed;
(ii) compatibility of the practices and systems of the third party with the intermediary’s requirements and objectives;
(iii) market feedback of the prospective third party’s business reputation and track record of their services rendered in the past;
(iv) level of concentration of the outsourced arrangements with a single third party; and
(v) the environment of the foreign country where the third party is located.

5. Outsourcing relationships shall be governed by written contracts / agreements / terms and conditions (as deemed appropriate) {hereinafter referred to as “contract”} that clearly describe all material aspects of the outsourcing arrangement, including the rights, responsibilities and expectations of the parties to the contract, client confidentiality issues, termination procedures, etc. Outsourcing arrangements shall be governed by a clearly defined and legally binding written contract between the intermediary and each of the third parties, the nature and detail of which shall be appropriate to the materiality of the outsourced activity in relation to the ongoing business of the intermediary. Care shall be taken to ensure that the outsourcing contract:
(i) clearly defines what activities are going to be outsourced, including appropriate service and performance levels;
(ii) provides for mutual rights, obligations and responsibilities of the intermediary and the third party, including indemnity by the parties;
(iii) provides for the liability of the third party to the intermediary for unsatisfactory performance/other breach of the contract
(iv) provides for the continuous monitoring and assessment by the intermediary of the third party so that any necessary corrective measures can be taken up immediately, i.e., the contract shall enable the intermediary to retain an appropriate level of control over the outsourcing and the right to intervene with appropriate measures to meet legal and regulatory obligations;
(v) includes, where necessary, conditions of sub-contracting by the third-party, i.e. the contract shall enable intermediary to maintain a similar control over the risks when a third party outsources to further third parties as in the original direct outsourcing;
(vi) has unambiguous confidentiality clauses to ensure protection of proprietary and customer data during the tenure of the contract and also after the expiry of the contract;
(vii) specifies the responsibilities of the third party with respect to the IT security and contingency plans, insurance cover, business continuity and disaster recovery plans, force majeure clause, etc.;
(viii) provides for preservation of the documents and data by third party ;
(ix) provides for the mechanisms to resolve disputes arising from implementation of the outsourcing contract;
(x) provides for termination of the contract, termination rights, transfer of information and exit strategies;
(xi) addresses additional issues arising from country risks and potential obstacles in exercising oversight and management of the arrangements when intermediary outsources its activities to foreign third party. For example, the contract shall include choice-of-law provisions and agreement covenants and jurisdictional covenants that provide for adjudication of disputes between the parties under the laws of a specific jurisdiction;
(xii) neither prevents nor impedes the intermediary from meeting its respective regulatory obligations, nor the regulator from exercising its regulatory powers; and
(xiii) provides for the intermediary and /or the regulator or the persons authorized by it to have the ability to inspect, access all books, records and information relevant to the outsourced activity with the third party.

6. The intermediary and its third parties shall establish and maintain contingency plans, including a plan for disaster recovery and periodic testing of backup facilities. Specific contingency plans shall be separately developed for each outsourcing arrangement, as is done in individual business lines. An intermediary shall take appropriate steps to assess and address the potential consequence of a business disruption or other problems at the third party level. Notably, it shall consider contingency plans at the third party; co-ordination of contingency plans at both the intermediary and the third party; and contingency plans of the intermediary in the event of non-performance by the third party. To ensure business continuity, robust information technology security is a necessity. A breakdown in the IT capacity may impair the ability of the intermediary to fulfill its obligations to other market participants/clients/regulators and could undermine the privacy interests of its customers, harm the intermediary’s reputation, and may ultimately impact on its overall operational risk profile. Intermediaries shall, therefore, seek to ensure that third party maintains appropriate IT security and robust disaster recovery capabilities. Periodic tests of the critical security procedures and systems and review of the backup facilities shall be undertaken by the intermediary to confirm the adequacy of the third party’s systems.

7. The intermediary shall take appropriate steps to require that third parties protect confidential information of both the intermediary and its customers from intentional or inadvertent disclosure to unauthorised persons. An intermediary that engages in outsourcing is expected to take appropriate steps to protect its proprietary and confidential customer information and ensure that it is not misused or misappropriated. The intermediary shall prevail upon the third party to ensure that the employees of the third party have limited access to the data handled and only on a “need to know” basis and the third party shall have adequate checks and balances to ensure the same. In cases where the third party is providing similar services to multiple entities, the intermediary shall ensure that adequate care is taken by the third party to build safeguards for data security and confidentiality.

8. Potential risks posed where the outsourced activities of multiple intermediaries are concentrated with a limited number of third parties. In instances, where the third party acts as an outsourcing agent for multiple intermediaries, it is the duty of the third party and the intermediary to ensure that strong safeguards are put in place so that there is no co-mingling of information/documents, records and assets.

Amendment to Mortgage Guarantee Company (Reserve Bank) Guidelines, 2008

As per the Reserve Bank of India’s notification numbered RBI/2011-12/302DNBS (PD-MGC) CC. No. 10/03.11.01/2011-12, dated 16th December 2011, RBI draws attention towards Para 27 of the Mortgage Guarantee Company (Reserve Bank) Guidelines 2008 issued vide Notification DNBS(PD)MGC No.3 /CGM (PK) – 2008 dated February 15, 2008 wherein it has been stated that no mortgage guarantee company shall provide mortgage guarantee for a housing loan with 90% and above LTV ratio. As scheduled commercial banks are expected to seek mortgage guarantee for their housing loans, it has been decided to align the regulatory prescription of LTV ratio for mortgage guarantee companies with that of commercial banks and revise it downwards from 90% to 80% for housing loans exceeding Rs. 20 lakhs. However for small value housing loans i.e housing loans up to Rs. 20 lakh (which get categorized as priority sector advances), LTV ratio should not exceed 90%.

An amending Notification No. DNBS (PD) MGC No. 6 / CGM (US)-2011 dated December 16, 2011 amending Mortgage Guarantee Company (Reserve Bank) Guidelines 2008 clarifies this position.

The Reserve Bank of India, having considered it necessary in public interest and being satisfied that, for the purpose of enabling the Bank to regulate the credit system to the advantage of the country, it is necessary to amend the Mortgage Guarantee Company (Reserve Bank) Guidelines 2008 in exercise of the powers conferred by sections 45JA and 45 (L) of the Reserve Bank of India Act, 1934 (2 of 1934) and of all the powers enabling it in this behalf, hereby directs that the said Directions shall be amended with immediate effect as follows, namely -

Amendment of paragraph 27 –

The existing clause “No mortgage guarantee company shall provide mortgage guarantee for a housing loan with 90% and above LTV ratio” shall be substituted with the following ” No mortgage guarantee company shall provide mortgage guarantee for a housing loan above Rs. 20 lakhs where the LTV exceeds 80%.” For small value housing loans i.e housing loans up to Rs. 20 lakh (which get categorized as priority sector advances), LTV ratio should not exceed 90%.

Deregulation of Interest Rates on Non-Resident (External) Rupee (NRE) Deposits and Ordinary Non-Resident (NRO) Accounts

As per the Reserve Bank of India’s notification numbered RBI/2011-12/303DBOD.Dir.BC. 64 /13.03.00/2011-12, dated 16th December 2011, the RBI referred to paragraph 4 of its circular DBOD.Dir.BC.42/13.03.00/ 2011-12 dated October 25, 2011 on Deregulation of Savings Bank Deposit Interest Rate and paragraph 1 of our its circular DBOD.Dir.BC.59/13.03.00/2011-12 dated November 23, 2011 on Interest Rates on Non-Resident (External) Rupee (NRE) Deposits and FCNR (B) Deposits.

With a view to providing greater flexibility to banks in mobilising non-resident deposits and also in view of the prevailing market conditions, it has been decided to deregulate interest rates on Non-Resident (External) Rupee (NRE) Deposits and Ordinary Non-Resident (NRO) Accounts (the interest rates on term deposits under Ordinary Non-Resident (NRO) Accounts are already deregulated). Accordingly, banks are free to determine their interest rates on both savings deposits and term deposits of maturity of one year and above under Non-Resident (External) Rupee (NRE) Deposit accounts and savings deposits under Ordinary Non-Resident (NRO) Accounts with immediate effect. However, interest rates offered by banks on NRE and NRO deposits cannot be higher than those offered by them on comparable domestic rupee deposits.

Prior approval of the Board/Asset Liability Management Committee (if powers are delegated by the Board) may be obtained by a bank while fixing interest rates on such deposits. At any point of time, individual banks should offer uniform rates at all their branches.

The revised deposit rates will apply only to fresh deposits and on renewal of maturing deposits. Further, banks should closely monitor their external liability arising on account of such deregulation and ensure asset-liability compatibility from systemic risk point of view.

An amending directive DBOD.Dir.BC. 63 /13.03.00/2011-12 dated December 16, 2011 clarifies the position of deregulation of Interest Rates on Non-Resident (External)Rupee (NRE) Deposits and Ordinary Non-Resident (NRO) Accounts.

In exercise of the powers conferred by Section 35A of the Banking Regulation Act, 1949, and in modification of the directive DBOD. Dir. BC. 41/ 13.03.00/ 2011-12 dated October 25, 2011 on Deregulation of Savings Bank Deposit Interest Rate and DBOD.Dir.BC.58/13.03.00/2011-12 dated November 23, 2011 on Interest Rates on Non-Resident (External) (NRE) Deposits and FCNR(B) Deposits, the Reserve Bank of India being satisfied that it is necessary and expedient in the public interest so to do, hereby directs that banks are free to determine their interest rates on both savings deposits and term deposits of maturity of one year and above under Non-Resident (External) Rupee (NRE) Deposit accounts and savings deposits under Ordinary Non-Resident (NRO) Accounts with immediate effect. However, interest rates offered by banks on NRE and NRO deposits cannot be higher than those offered by them on comparable domestic rupee deposits.

Social Networking Laws In India

With the fast growing social networking platforms in India it has become essential to enact effective social media laws in India. Presently social networking laws in India are not mature enough to take care of social media in the most appropriate manner. Social media is considered to be an Internet intermediary as per Indian cyber law. The recent controversy of Internet censorship in India has

Social Media Laws In India

Social media laws in India are in limelight these days. Social media websites are very popular among technology savvy as well as ordinary Netizens. More and more Netizens are joining social platforms to share their opinions, views, data and details. However, social networking laws in India are not adequate and properly drafted.Social media includes social networking sites, blogs, forums, wikis,

RBI: Indian Banks’ Investments In Non Subsidiary And Non Financial Services Companies

A notification RBI/2011-12/297, DBOD. FSD. BC.62/24.01.001/2011-12, dated December 12, 2011 by Reserve Bank of India (RBI), read with the instructions contained in paragraphs 2 and 3 of RBI’s Master Circular DBOD. No. FSD.BC.15 / 24.01.001/ 2011-12 dated July 1, 2011 on Para-Banking Activities which deal with the guidelines for setting up of subsidiaries by banks as also banks’ investments in financial services companies which are not subsidiaries has been issued.  These require Reserve Bank’s prior approval and are permitted within certain prescribed prudential limits.
Banks’ investments in companies which are not subsidiaries are governed by Section 19(2) of the Banking Regulation Act, 1949 (B.R. Act).  There is no requirement, at present, for obtaining prior approval of RBI for such investments except in cases where the investee companies are financial services companies. It is, therefore, possible that banks could, directly or indirectly through their holdings in other entities, exercise control on such companies or have significant influence over such companies and thus, engage in activities directly or indirectly not permitted to banks [Section 6(1) of the Act ibid deals with the activities permitted to banks].  This would be against the spirit of the provisions of the Act and is not considered appropriate from prudential perspective.
It has, therefore, been decided to lay down prudential guidelines for banks’ investments in companies which are not subsidiaries and are not ‘financial services companies’.
In the following paragraphs, first the existing regulations governing banks’ setting up of subsidiaries and banks’ investments in companies (not being subsidiaries) engaged in financial services are enumerated to provide a perspective and then prudential regulations for governing banks’ investments in companies (not being subsidiaries) which are non financial services companies are set out.
(a) Investments in subsidiaries: In terms of Sub-section (1) of Section 19 of the  B.R. Act,  a banking company shall not form any subsidiary company except (i) for undertaking any business specified in clause (a) to (o) of Sub-section(1) of Section 6 of the Act, ibid, i.e. functions which banks can undertake or (ii) for carrying on the business of banking exclusively outside India with the previous permission of the Reserve Bank of India or (iii) for undertaking such other business, which the Reserve Bank may, with the prior approval of the Central Government, consider to be conducive to the spread of banking in India or to be otherwise useful or necessary in the public interest (for example, banks setting up IT subsidiaries catering to banking sectors’ IT requirement may fall in this category).
(b) Investments other than in subsidiaries:  Sub-section (2) of Section 19 of the  B.R. Act,  provides that no banking company shall hold shares in any company, whether as pledgee, mortgagee or absolute owner, of any amount exceeding 30 per cent of  the paid–up share capital of that company or 30 per cent of its own paid-up share capital and reserves, whichever is less. It may be noted that there are no statutory restrictions, unlike in the case of subsidiaries, on the activities of companies in which banks can hold equity within the ceiling laid down under Section 19(2) of the B.R. Act. In other words, these companies could be both financial services companies as well as companies not engaged in financial services.
(c) Prudential regulations for investments in subsidiaries and Financial Services Companies: As per extant regulations, banks are required to obtain prior approval of the Reserve Bank of India for setting up subsidiary companies and for any equity investment in financial services companies, subject to certain limits and conditions as under:
Equity investments by a bank in a subsidiary company, or a financial services company including financial institution, stock and other exchanges, depositories, etc., which is not a subsidiary should not exceed 10 per cent of the bank’s paid-up share capital and reserves and the total investments made in all subsidiaries and all non-subsidiary financial services companies should not exceed 20 per cent of the bank’s paid-up share capital and reserves. However, the cap of 20 per cent does not apply, nor is prior approval of RBI required, if investments in financial services companies are held under ‘Held for Trading’ category, and are not held beyond 90 days.
(d) Prudential regulation for banks’ investments in non financial services companies: Since investments in non financial services companies do not require prior approval from RBI, banks could potentially acquire substantial equity holding in these companies within the provisions of Section 19 (2) of the BR Act. Consequently, as stated in paragraph 2 above, banks could through their direct and indirect holdings in other entities exercise control or have significant influence over such companies and thus, engage directly or indirectly in activities not permitted to banks.  It is, therefore, necessary to limit such investments.  With this objective, the following guidelines are laid down:
(i) Equity investment by a bank in companies engaged in non financial services activities would be subject to a limit of 10 per cent of the investee company’s paid up share capital or 10 per cent of the bank’s paid up share capital and reserves, whichever is less. For the purpose of this limit, equity investments held under ‘Held for Trading’ category would also be reckoned. Investments within the above mentioned limits, irrespective of whether they are in the ‘Held for Trading’ category or otherwise, would not require prior approval of the Reserve Bank.
(ii) Equity investments in any non-financial services company held  by   (a)  a bank; (b) entities which are bank’s subsidiaries, associates or joint ventures or entities directly or indirectly controlled by the bank;  and (c) mutual funds managed by AMCs controlled by the bank should in the aggregate not exceed 20 per cent of the investee company’s paid up share capital. 
(iii) A bank’s request for making investments in excess of 10 per cent of such investee company’s paid up share capital, but not exceeding 30 per cent, would be considered by RBI if the investee company is engaged in non financial activities which are permitted to banks in terms of Section 6(1) of the B. R. Act. It is reiterated that banks are permitted to set up subsidiaries for undertaking activities which are conducive to the spread of banking in India or useful or necessary in public interest in accordance with the provisions of Section 19(1) (c) of the B.R. Act.
(iv) A bank’s equity investments in subsidiaries and other entities that are engaged in financial services activities together with equity investments in entities engaged in non financial services activities should not exceed 20 per cent of the bank’s paid-up share capital and reserves. The cap of 20 per cent would not apply for investments classified under ‘Held for Trading’ category and which are not held beyond 90 days.
(v) Equity holding by a bank in excess of 10 per cent of non financial services investee company’s paid up capital would be permissible without RBI’s prior approval (subject to the statutory limit of 30 per cent in terms of Section 19 (2) of the B.R. Act) if the additional acquisition is through restructuring/CDR, or acquired by the bank to protect its interest on loans/investments made in a company. The equity investment in excess of 10 per cent of investee company’s paid up share capital in such cases would be exempted from the 20 per cent limit referred to above. However, banks will have to submit to RBI a time bound action plan for disposal of such shares within a specified period. 
For the purposes of the above guidelines, the terms subsidiary, associate or joint venture shall have the meanings assigned to them in Accounting Standards notified by the Central Government under Section 211(3c) of the Companies Act, 1956.
Banks should strictly observe these guidelines while investing in companies undertaking non financial services activities. Banks should also carry out a review of their investments in non financial companies as also by entities referred to in para 8 above, within a period of three months. Wherever investments do not conform to the above mentioned policy parameters, banks may ensure that (a) the investments are brought down to the prescribed limits and/or control or the exercise of significant influence is given up as the case may be or (b) seek RBI’s approval in terms of para 8 above.
The review as referred to at para 9 above together with the proposed course of action to comply with the regulatory requirement, where the existing investments are not as per the above guidelines may be forwarded to the Reserve Bank of India within one month from the date of the review.
(e) Financial Services Companies: For the purpose of prudential guidelines on investments in subsidiaries and other companies, ‘financial services companies’ are companies engaged in the ‘business of financial services’. The ‘business of financial services’ means –
(i) the forms of business enumerated in clauses (a), (c), (d), (e) of sub-section (1) of section 6 of the Banking Regulation Act, 1949 and notified under clause (o) of sub-section (1) of section 6 of the Banking Regulation Act, 1949;
(ii) the forms of business enumerated in clause (c) and  clause (f) of Section 45 I of the Reserve Bank of India Act, 1934;
(iii) business of credit information as provided under the Credit Information Companies (Regulation) Act, 2005;
(iv) operation of a payment system as defined under the Payment and Settlement Systems Act, 2007;
(v) operation of a stock exchange, commodity exchange, derivatives exchange or other exchange of similar nature;
(vi) operation of a depository as provided under the Depositories Act, 1996;
(vii) business of a securitization or reconstruction company as provided under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
(viii) business of a merchant banker, portfolio manager, stock broker, sub-broker, share transfer agent, trustee of trust deeds, registrar to an issue, merchant banker, underwriter, debenture trustee, investment adviser and such other intermediary as provided in the Securities and Exchange Board of India Act, 1992 and the regulations made thereunder;
(ix) business of a credit rating agency as defined in Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999;
(x) business of a collective investment scheme as defined under the Securities and Exchange Board of India Act, 1992;
(xi) business of managing a pension fund;
(xii) business of an authorized person as defined under the Foreign Exchange Management Act, 1999; and
(xiii) such other business as may be specified by the Reserve Bank from time to time.
(f) Definition of Subsidiary, Associates, Joint Ventures, ‘Control and Significant
Influence’ in terms of Indian Accounting Standards
Accounting Standards 18, 21, 23 and 27 define the above mentioned terms.
Subsidiary is an enterprise that is controlled by another enterprise (known as the parent).
An Associate is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a Joint venture of the investor, and
Joint Venture is a contractual arrangement whereby two or more parties undertake an economic activity, which is subject to joint control.
Significant Influence is the power to participate in the financial and/or operating policy decisions of the investee but not control over their policies.
Control –
The ownership, directly or indirectly, through subsidiary (ies), of more than one-half of the voting power of an enterprise; or
Control of the composition of the board of directors in the case of a company or of the composition of the corresponding governing body in case of any other enterprise so as to obtain economic benefits from its activities.
Control exists when the parent owns, directly or indirectly through subsidiary (ies), more than one-half of the voting power of an enterprise. Control also exists when an enterprise controls the composition of the board of directors (in the case of a company) or of the corresponding governing body (in case of an enterprise not being a company) so as to obtain economic benefits from its activities.
An enterprise is considered to control the composition of the board of directors of a company, if it has the power, without the consent or concurrence of any other person, to appoint or remove all or a majority of directors of that company.  An enterprise is deemed to have the power to appoint a director, if any, if the following conditions are satisfied.
(i) A person cannot be appointed as director without the exercise in his favour by that enterprise of such a power as aforesaid; or
(ii) A person’s appointment as director follows necessarily from his appointment to a position held by him in that enterprise; or
(iii) The director is nominated by that enterprise; in case that enterprise is a company, the director is nominated by that company/subsidiaries thereof.
For the purpose of AS 23, significant influence does not extend to power to govern the financial and/or operating policies of an enterprise. Significant influence may be gained by share ownership, statute or agreement.  As regards share ownership, if an investor holds, directly or indirectly through subsidiary (ies), 20% or more of the voting power of the investee, it is presumed that the investor has significant influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the investor holds, directly or indirectly through subsidiary (ies), less than 20% of the voting power of the investee, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated. A substantial or major ownership by another investor does not necessarily preclude an investor from having significant influence. The existence of significant influence by an investor is usually evidenced in one or more of the following ways:
(i) representation on the board of directors or corresponding governing body of the investee;   
(ii) participation in policy making processes;
(iii) material transactions between the investor and the investee;
(iv) interchange of managerial personnel; and
(v) provision of essential technical information.

Foreign Investment In Pharmaceuticals Sector – Amendment To The FDI Scheme

As per the notification of Reserve Bank of India (RBI) numbered RBI/2011-12/296 A. P. (DIR Series) Circular No.56, dated December 09, 2011, the RBI has drawn the attention of Authorised Dealers Category – I (AD Category – I) banks to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, notified vide Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time. In terms of Schedule 1 of the Notification ibid, Foreign Direct Investment (FDI) up to 100 per cent is permitted in pharmaceuticals sector under the automatic route of the FDI Scheme.
The extant FDI policy for pharmaceuticals sector has since been reviewed and it has now been decided as under:
(i) FDI, up to 100 per cent, under the automatic route, would continue to be permitted for green field investments in the pharmaceuticals sector.
(ii) FDI, up to 100 per cent, would be permitted for brownfield investment (i.e. investments in existing companies), in the pharmaceutical sector, under the Government approval route.
AD Category – I banks may bring the contents of the circular to the notice of their customers/constituents concerned. Necessary amendments to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (Notification No. FEMA 20/2000-RB dated May 3, 2000) are being notified separately. The directions contained in this circular have been issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law.

Foreign Direct Investment (FDI) In India – Issue Of Equity Shares Under The FDI Scheme Allowed Under The Government Route

As per the press release of Reserve Bank of India (RBI) numbered RBI/2011-12/295 A. P. (DIR Series) Circular No.55, dated December 09, 2011 attention of Authorised Dealers Category – I (AD Category – I) banks is invited to the A.P. (DIR Series) Circular No. 74 dated June 30, 2011, allowing thereby issue of equity shares/ preference shares under the Government route by conversion of import of capital goods, / machineries / equipments (including second-hand machineries) and pre-operative / pre-incorporation expenses (including payments of rent, etc.),  subject to terms and conditions stated therein.
It has now been decided to amend certain conditions in the aforesaid A.P. (DIR Series) Circular. The amended conditions are as follows:
(a) Para 3 (I) (d): Previously all such conversions of import payables for capital goods into FDI should be completed within 180 days from the date of shipment of goods. Now applications complete in all respects, for conversions of import payables for capital goods into FDI being made within 180 days from the date of shipment of goods.
(b) Para 3 (II) (d): Previously the capitalisation should be completed within the stipulated period of 180 days permitted for retention of advance against equity under the extant FDI policy. Now the applications, complete in all respects, for capitalisation being made within the period of 180 days from the date of incorporation of the company.
All the other instructions contained in the A.P. (DIR Series) Circular No. 74 dated June 30, 2011 shall remain unchanged. AD Category – I banks may bring the contents of the circular to the notice of their customers/constituents concerned. Necessary amendments to Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (Notification No. FEMA 20/2000-RB dated May 3, 2000) are being notified separately.
The directions contained in this circular have been issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law.

Risk Management And Inter Bank Dealings In India

As per RBI/2011-12/300, A.P. (DIR Series) Circular No. 58, dated December 15, 2011 the Reserve Bank of India (RBI) has suggested some measures regarding risks management and inter banks dealings occurring in India.
RBI has sought the attention of Authorised Dealers Category – I (AD Category – I) banks to the Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000 dated May 3, 2000 [Notification No.FEMA/25/RB-2000 dated May 3, 2000] and A.P.(DIR Series) Circular No.32 dated December 28, 2010, as amended from time to time.
Keeping in view the developments in the foreign exchange market, it has been decided to implement the following measures with immediate effect until further review.
(a) Under contracted exposures, forward contracts, involving the Rupee as one of the currencies, booked by residents to hedge current account transactions, regardless of the tenor, and to hedge capital account transactions, falling due within one year, were allowed to be cancelled and rebooked.
It has now been decided to withdraw the above facility. Forward contracts booked by residents irrespective of the type and tenor of the underlying exposure, once cancelled, cannot be rebooked.
(b) Under probable exposures based on past performance residents were allowed to hedge currency risk on the basis of a declaration of an exposure and based on past performance up to the average of the previous three financial years’ (April to March) actual import/export turnover or the previous year’s actual import/export turnover, whichever is higher. Further, contracts booked in excess of 75 per cent of the eligible limit were to be on deliverable basis and could not be cancelled.
It has now been decided that:
(i) For importers availing of the above past performance facility, the facility stands reduced to 25 percent of the limit as computed above, i.e., 25 percent of the average of the previous three financial years’ (April to March) actual import/export turnover or the previous year’s actual import/export turnover, whichever is higher. In case of importers who have already utilised in excess of the revised / reduced limit, no further bookings may be allowed under this facility.
(ii) All forward contracts booked under this facility by both exporters and importers hence forth will be on fully deliverable basis. In case of cancellations, exchange gain, if any, should not be passed on to the customer.
(c) All cash/tom/spot transactions by the Authorised Dealers on behalf of clients will be undertaken for actual remittances / delivery only and cannot be cancelled / cash settled.
(d) Foreign Institutional Investors (FIIs) are currently allowed to hedge currency risk on the market value of entire investment in equity and/or debt in India as on a particular date. The contracts once cancelled cannot be rebooked except to the extent of 10 per cent of the market value of the portfolio as at the beginning of the financial year. The forward contracts may, however, be rolled over on or before maturity.
It has now been decided that henceforth forward contracts booked by the FIIs, once cancelled, cannot be rebooked. The forward contracts may, however, be rolled over on or before maturity.
(e) The Board of Directors of Authorised Dealers were allowed to fix suitable limits for various Treasury functions with net overnight open exchange position and aggregate gap limits required to be approved by the Reserve Bank.
It has now been decided that
(i) Net Overnight Open Position Limit (NOOPL) of Authorised Dealers would be reduced across the board. Revised limits in respect of individual banks are being advised to the Authorised Dealers separately.
(ii) Intra-day open position / daylight limit of Authorised Dealers should not exceed the existing NOOPL approved by the Reserve Bank.
(iii) The above arrangement would be reviewed on an ongoing basis keeping in view the evolving market conditions.
Necessary amendments to Notification No. FEMA.25/RB-2000 dated May 3, 2000 [Foreign Exchange Management (Foreign Exchange Derivatives Contracts) Regulations, 2000] have been notified separately. AD Category – I banks may bring the contents of this circular to the notice of their constituents and customers. The directions contained in this circular have been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act 1999 (42 of 1999) and are without prejudice to permissions/approvals, if any, required under any other law.

RBI Delegates Compounding Powers Under FEMA To Its Regional Offices

In continuation of its decentralisation and liberalisation of the Foreign Exchange Management Act, 1999 (FEMA 1999) Regulatory Framework in India, the Reserve Bank of India (RBI) has now delegated the compounding powers under FEMA to its regional offices. Detailed directions pertaining to compounding of contraventions under FEMA 1999 have already been issued by RBI previously. The present notification and press release numbered 2011-2012/927 is continuation of the same.
RBI maintains that as a customer service measure and for operational convenience, it has been decided to delegate powers to the Regional Offices of the RBI to compound certain contraventions of FEMA 1999. The contraventions include:
(i) delay in reporting of inward remittance,
(ii) delay in filing of form FC-GPR after allotment of shares and
(iii) delay in issue of shares beyond 180 days. (i.e. paragraphs 9(1)(A), 9(1)(B) and 8, respectively, of Schedule I to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, notified vide Notification No. FEMA 20/2000-RB dated May 3, 2000 and as amended from time to time).

Compounding Of Contraventions Under FEMA, 1999

Reserve Bank of India (RBI) has issued a press release numbered RBI/2011-12/298,  A.P. (DIR Series) Circular No.57 pertaining to compounding of contraventions under Foreign Exchange Management Act (FEMA).
RBI has declared that as a measure of customer service and in order to facilitate the operational convenience, it has been decided to delegate the powers to the Regional Offices of the Reserve Bank of India (RBI) mentioned below to compound the contraventions of FEMA involving
(i) delay in reporting of inward remittance,
(ii) delay in filing of form FC-GPR after allotment of shares and  
(iii) delay in issue of shares beyond 180 days (viz. paragraphs 9(1)(A), 9(1)(B) and 8, respectively, of the Schedule I to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, notified vide Notification No. FEMA 20/2000-RB dated 3rd May 2000 and as amended from time to time:
(a) Paragraphs 9 (1) (A) and 9 (1) (B) of Schedule I to FEMA 20/2000-RB dated May 3, 2000 -
Bhopal, Bhubaneshwar, Chandigarh, Guwahati, Jaipur, Jammu, Kanpur, Kochi, Patna and Panaji for amount of contravention below Rupees One hundred lakh only (Rs. 1,00,00,000 /-).
(b) Paragraphs 9 (1) (A), 9 (1) (B) and 8 of Schedule I to FEMA 20/2000-RB dated May 3, 2000 -
Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, Mumbai and New Delhi for amount of contravention without any limit.
The Compounding Authorities attached to these Regional Offices of the Foreign Exchange Department have been authorised to compound such cases at their level(s) within the financial powers as per the Foreign Exchange (Compounding Proceedings) Rules, 2000. Accordingly, all applications for compounding whether received on the advice of the Regional Office concerned or suo-moto, relating to the contraventions mentioned at (a) and (b) above and up to the amount of contravention stated therein, may be submitted by the companies falling under the jurisdiction of the aforesaid Regional Offices directly to the Regional Office concerned, together with the prescribed fee and other relevant documents. All other applications may be submitted to the Compounding Authority, Cell for Effective implementation of FEMA (CEFA), Foreign Exchange Department, 5th floor, Amar Building, Sir P.M.Road, Fort, Mumbai-400001, as hitherto. The prescribed fee of Rs. 5000/- (Rupees Five thousand only) may be paid by way of a demand draft drawn in favour of “Reserve Bank of India” and payable at the Regional Office where the application is being submitted and at Mumbai if the application is submitted at CEFA, Mumbai.
In terms of sub-rule (1) to Rule 8 of Foreign Exchange (Compounding Proceedings) Rules, 2000, the Compounding Authority may call for any information, record or any other documents relevant to the compounding proceedings. It has been observed that there is no uniformity in submitting the required details with supporting documents along with the compounding application. This results in avoidable correspondence between Reserve Bank and the applicant. It has, therefore been decided that along with the application in the prescribed format, the applicant may also furnish the details as per the enclosed Annexes relating to Foreign Direct Investment, External Commercial Borrowings, Overseas Direct Investment and Branch Office / Liaison Office, as applicable, along with an undertaking that they are not under investigation of any agency such as DOE, CBI, etc., a copy of the Memorandum of Association and latest audited balance sheet while applying for compounding of contraventions under FEMA, 1999.
Authorised Dealers may bring the contents of this circular to the notice of their constituents and customers concerned. The directions contained in this circular have been issued under sections 10 (4) and 11 (1) of the Foreign Exchange Management Act, 1999 (42 of 1999).

Integrated Modern Banking Law For India In Pipeline

Banking laws of India are scattered largely unrelated to each other. This not only makes them difficult to implement but at times that also pose contradictory situations, especially with the corporate laws of India. Further, banking laws in India are also in conflict with other laws in many cases.
For instance, mergers and acquisitions in banking sector of India is a bone of contention these days. Till now the Competition Commission of India (CCI) has a say in the M&A pertaining to banking companies. However, with the recent proposed amendments in the Banking Regulations Act, 1949, only Reserve Bank of India (RBI) would have power to regulate M&A pertaining to banking sector. In fact, the proposed amendments have already been approved by Cabinet of India.
Now the parliamentary standing committee on finance has also endorsed this viewpoint upon M&A of banking pertaining to banking sector though interpretation of the same differs from person to person. However, the most important suggestion by the parliamentary committee pertains to formulation of an integrated modern banking law of India.
The committee has suggested that the government should consider the formulation of an integrated modern banking law, consolidating the provisions of other statutes that cover various aspects of banking. It believes that such a holistic law would be in conformity with other existing statues and proposed legal frameworks like the Direct Taxes Code and the Companies Bill 2011. These points were suggested while submitting the committee’s report on the Banking Laws (Amendment) Bill, 2011, tabled in Parliament on Tuesday.
The committee also stressed upon employee-friendly measures in the integrated banking law. These include the introduction of employee stock options, deterrent safeguards against “wilful default’ by a borrower in repaying loans, etc.
However, the committee has failed to address the techno legal issues of banking industry of India. For instance, issues pertaining to electronic banking in India  have been added to the bill. Similarly, Internet and e-banking risks in India have also not been addressed by the committee.
While RBI has acknowledged risks of e-banking in India still the proposed bill has not addressed the issues of online banking risks in India and their redressal. Although RBI has recently directed that all banks would have to create a position of chief information officers (CIOs) as well as steering committees on information security at the board level at the earliest yet these recommendations have not been implemented by the banks. Indian banks are poor at cyber security implementation.
Further, crucial issues like encryption standards for banks of India have also been ignored.  Further ATM frauds in India and their techno legal prevention has also been missed by the committee. Cyber law due diligence for banks in India and Internet intermediary liability for banks of India have also skipped the attention of the committee. It would be better if the parliament of India also considers the techno legal issues and add them to the proposed Banking Laws (Amendment) Bill, 2011 before passing the same.

The Companies Bill 2011 Tabled In Lok Sabha

Corporate laws in India require rejuvenation in the light of modern trends and market forces. The Indian Companies Act, 1956 is the main corporate law of India that was due for major amendments for long. From time to time efforts to streamline the companies act were initiative but they failed to make a holistic impact.
Finally, the Companies Bill 2011 was tabled in the Lok Sabha on Wednesday. The Bill was already cleared by the Cabinet on 24th November this year but it could not have been introduced in the parliament of India due to protests by opposition parties over issues like corruption, FDI approval in multi-brand retail, etc.
Of late corporate and financial frauds have shattered the confidence of shareholders and foreign direct investment makers. A stringent penal regime along with strict penal liability was long expected from Indian parliament. Corporate governance norms were largely confined to self regulatory mechanism with little regulatory interventions. Incidences like Satyam frauds have woken up Indian government to bring transparency and order in the corporate world of India.
 The Companies Bill 2011 has proposed some very significant improvements over its predecessor. It proposes to introduce the concept of class action suits for the first time in India. That would empower investors to sue a company for “oppression and mismanagement” and claim damages. Among other things, it also proposes to tighten the laws for raising money from the public. The Bill also seeks to prohibit insider trading by company directors or key managerial personnel by treating such activities as a criminal offence.
The Bill proposes that companies should earmark 2 per cent of the average profit of the preceding three years for corporate social responsibility (CSR) activities, and make a disclosure to shareholders about the policy adopted in the process.
The Bill is trying to harmonise the company law framework with sectoral regulations. It has also proposed to make it mandatory for listed companies to have 33 per cent independent directors. It also provides for formation of One Person Company, while empowering the government to provide a simpler compliance regime for small companies.
There will be a single forum for approval of mergers and acquisitions, whether domestic or with foreign entities. Also the procedure for merger of holding and wholly-owned subsidiaries would be shortened.
Under the proposed norms, every company director would be required to acquire a unique Director Identification Number, a provision which would check the menace of vanishing companies. The bill also provides for a framework for enabling fair valuations of companies for various purposes and strengthening Investor Education and Protection Fund. Also, the bill gives statutory recognition to the Serious Fraud Investigation Office (SFIO) that was expected to give wider powers to investigate corporate frauds and white color crimes.
The Bill was first introduced in August 2008, but had to be withdrawn because of the dissolution of Lok Sabha. It was again introduced in Parliament in 2009 and sent to the Standing Committee, which presented its report in August 2010. Industry has for long been opposing provisions for a mandatory CSR and rotation of audit firms.  

Corporate Laws In India

Corporate world is witnessing a considerable growth in India. Similarly, regulatory issues pertaining to corporate environment are also changing rapidly. It is very important for the corporate community to keep itself updated of these fast changing and dynamic regulatory changes and growing corporate merger and acquisitions happening in India.
Corporate laws in India fall in various categories. Companies law of India, 1956 is the main corporate law of India. Other laws that fall in the corporate law category pertain to intellectual property rights (IPRs), anti competition laws, banking and financial laws of India, insurance laws, etc.
Collectively, corporations in India are required to follow an array of laws and regulatory requirements. A failure to comply with these legal and regulatory requirements results in imposition of fines and at times imprisonment as well. So corporations in India must religiously follow various laws and regulations applicable in India.
With the growth of information and communication technology (ICT), now techno legal regulatory requirements have emerged. For instance, cyber laws due diligence requirements have become very stringent in India under the information technology act 2000. Internet intermediary liability in India is now a big challenge for e-commerce, e-governance, search engines, blogging platforms, social media, etc operating in India.
Cyber security requirements have further added additional obligations upon various stakeholders and corporate entities in India. For instance, the Reserve Bank of India (RBI) has recently asked all banks in India to ensure cyber security mechanisms. Further, appointing suitable experts at the board level for ensuring cyber security compliances by banks in India has also been recommended by RBI.
Corporations in India must also keep in mind the competition policies and regulatory requirements in India. They must not indulge in anti competition practices that may trigger the anti competition law of India.
Employer employee relationships and owner workmen relationships are also governed by various employment and labour laws in India. Corporations in India must also fulfil the requirements of these laws to avoid employment related disputes.
Financial frauds, serious frauds and white collar crimes are also applicable to various companies and corporate houses running in India. Financial frauds are unearthed by using well known financial, legal, technical and scientific methods of auditing the accounts, transactions and dealings of various companies. Forensics auditing and cyber forensics is very useful in investigating these frauds and crimes.
This blog would cover all these issues in a systematic manner suggesting various scientific, legal, policies and strategic, forensics and investigative methods to resolve various techno legal issues relating to corporate laws applicable in India.

Internet Censorship In India

Internet in India is under potential threat of censorship and e-surveillance. Internet censorship in India has increased a lot. Similarly, e-surveillance in India has also increased to intolerable limits.India has a draconian but cyber criminals’ friendly cyber law in the form of information technology act, 2000 (IT Act 2000). It was amended in 2008 to confer unregulated e-surveillance, Internet