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Regulatory Compliance AdvisoryRBI Circular Synopsis – July – Aug 2011

Riskpro, India

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Regulatory Compliance – Challenges & Solutions

Regulatory Compliance is increasing becoming more challenging.

Global regulators, including Indian regulators such as SEBI, RBI, IRDA, are introducing significant

regulatory reforms.

Financial institutions are just not able to cope up with these requirements and often find themselves

incurring significant costs and efforts to achieve compliance

Regulatory non compliance attracts heavy penalties / loss of license and other measures

Challenges

Riskpro provides Regulatory alerts to clients to assist them with the knowledge sharing and

awareness of regulatory requirements

Riskpro’s compliance management webinars are offered for Free and open to all users to register and

benefit from Industry experiences relating to Regulatory Compliance

Automated compliance management solutions are usually able to automate a significant part of the

compliance processes

Issues and Action Plan modules enable Financial Institutions to manage non compliance and amend

processes until completion.

Solutions

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Source of Promoter Equity in NOHC should be transparent /verifiable.

THE NEW BANKING FRAMEWORK

Non Operative Holding Company

(NOHC)~ Registered with RBI as NBFC ~ Regulated by RBI ~ Cannot borrow funds ~No operations, merely a

holding company ~ 50% of Board of Directors totally independent of promoter group

ONLY NON FINANCIAL Entities / groups / operating in the private

sector; owned and controlled by Residents can promote NOHC

(Diversified ownership, sound credentials, 10+ years track record,

Management to be professional with adequate corporate governance standards )

NOT ALLOWED

Entities / groups / having greater

than 10% income/assets in real

estate construction and broking

activities in last 3 years

NEW BANK~ Minimum capital - Rs 500 Crore ~ Business Model to RBI

~ Existing NBFC can turn a Bank only if ALL activities permitted in Banks

~ No shareholder, group to own 10%+ in New Bank except NOHC

~ Arm’s length relationship with promoter group entities

~Listed on Exchange in 2 years ~ CAR 12% for 3 years

~ 25% branches in unbanked rural centres

~ Group exposure as % of net-worth: Max 10% single; 20% all entities

~ New Bank on CBS, use Technology, innovation, have grievance cell

OTHER GROUP FINANCIAL

ENTITIES

~ Compulsory ownership by NOHC

of ALL financial entities of the

Promoter group. Ie financial entities

to be under the NOHC umbrella

~ Cannot do any activity that is

Banking in nature. To move all such

activities to new Bank.

~ No new Financial entity for 3 years

from bank License date

Shareholder Holding Period

NOHC Min 40% at inception Lock in 5 years

Max 40%, 20%,12% Year 2, 10,12

Foreign Holding Max 49% 5 Years. 5+ years, as per policy.

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Investment in the Units of Domestic Mutual Funds

Background

Hitherto, units of domestic Mutual Funds are permitted to be purchased, on repatriation basis, by FII

(registered with SEBI) and NRI, subject to certain terms and conditions and limits as prescribed for the

same by the RBI and SEBI from time to time.

Investment in SEBI registered domestic MFs:

QFIs are now permitted to purchase, on repatriation basis, rupee denominated units of equity schemes

of domestic MFs issued by SEBI registered domestic MFs.

Investment routes

The QFIs has two options to invest in rupee denominated units of equity schemes of domestic MFs

issued by the SEBI registered domestic MFs:

i) Direct Route - SEBI registered Depository Participant (DP) route

ii) Indirect Route - Unit Confirmation Receipt (UCR) route

SEBI Registered domestic Mutual Funds

As per SEBI guidelines, Mutual Funds have to be

registered with SEBI. Mutual Funds are regulated

entities that are supposed to be registered with

Securities & Exchange Board of India (SEBI).

Qualified Foreign Investors (QFI):

QFIs are non-resident investors (other than SEBI

registered FIIs and FVCIs) who meet the KYC

requirements of SEBI.

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Investment in the Units of Domestic Mutual Funds

1. Impact on Banks

The permission to purchase domestic MFs by NRIs will open the opportunity for banks to tap the NRI customers for (i) opening of DP accounts (ii) Cross-selling of MFs (iii) Cross-selling for other NRI accounts – Terms and conditions specify “QFIs are not permitted to open a bank account in India”. (iv) Exchange profits (v) Banks having their branches abroad can open the Indian MFs accounts abroad for the purpose of collecting the subscription amounts.

2. Impact on Indian Economy

Foreign exchange inflows will be increased. Rupee demand will increase thereby appreciation in rupee value can be expected. More economic investments in India will lead to economic growth of the country. Additional investment opportunities are provided for investment in the units of Infrastructure companies. India can see infrastructural development.

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Security Issues and Risk Mitigation measures related to

Card Not Present (CNP) Transactions

Background

While customers like to do their transactions from a merchant entity or home or internet café, if they

think about the security measures it will be decided not to use at a new place.

There are two types of transactions a customer can do.

Transactions in the presence of the card, where the biometric engraved in the card would be read by

the swiping machine and the password has to be entered by the card holder. Eg., ATM transaction.

Transaction permitted when the card is not present, where the CVV number which is available on the

backside of the card, has to be entered. Eg., Booking a ticket on line.

As a security measure for the second type of transaction where the card is not present, additional factor

of authentication is insisted upon. The authentication code should not be available on the card.

There is no specific solution provided as how to introduce this, it is made mandatory that the

additional factor of authentication should be in place before 1st May 2012.

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Security Issues and Risk Mitigation measures related to

Card Not Present (CNP) Transactions

1. Impact on Banks

Many customers, for whom cards are issued by the banks, are not utilizing the cards due to the distrust on the security measures for using the card.

Huge costs are involved for banks to plan and implement the card system.

Unless cards are utilized by the customers, banks cannot break even their implementation costs. Improving security measures will create trust in the minds of the customers to use their cards.

At the same time banks should keep up their security measures above the thinking level of fraudsters.

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CNP Transactions

CNP transactions are those that pass through

electronically from the bank to the merchant for

purchase / availing of goods / services. Information like

Card No., CVV number etc., would flow from the

secured website of the merchant to the switch service

provider to the card issued bank and the payment

would be made through the Payment Gateway.

Additional Security Measure

While passing through the CNP transactions, a type of

verification is being insisted. This verification shall not

be information that is available on the card. This is

because if a third party knows the information available

on the card, he will put through the CNP transactions. It

is a risk mitigation factor to insist on the information that

is not available on the card

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Comprehensive guidelines on Derivatives – Modifications

RBI has included / modified some of the terms in the Suitability and Appropriateness Policy for offering

of derivative products.

Market-makers should not undertake derivative transactions with or sell structured products to users

that do not have properly documented policies regarding management of risks that include among

other things, guidelines on risk identification, management and control.

Before offering derivative products to clients, banks should obtain Board resolution of the company to

undertake derivative transactions.

BR to be signed by a person other than the persons authorized to undertake the transactions;

be specific and should articulate specific products that can be transacted;

Mention the person(s) authorized to sign the ISDA and similar agreements;

Explicitly mention the limits assigned to a particular person;

Specify the names of the people to whom transactions should be reported by the bank. These

personnel should be distinct from those authorized to undertake the transactions.

No bank can be a market maker in a product it cannot price independently. This will also be

applicable to deals undertaken on back-to-back basis. Similarly, foreign banks operating in India can

be market makers for specific products only if they have the ability to price the products locally in

India. The pricing of such products should be locally demonstrable at all times, particularly whenever

RBI needs such evidence.

Banks are required to obtain Board Resolution from the corporate that states certain clauses.

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Comprehensive guidelines on Derivatives – Modifications

1. Impact on Banks

The Suitability and Appropriateness Policy is a risk mitigation factor for the banks, as the client, if do not understand the complexity of the derivative structures would sue the bank when they are at loss. The clarity from the corporate as who has to execute the derivative transactions, the corporate has appropriate risk management policy etc., are covered in the policy.

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2. Impact on Indian Corporates

Corporate clients who are executing the derivative products should have the appropriate risk management policy with them clearly stating the various requirements. The contents of the Board Resolution requirements are also specified and to be complied with.

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Other Miscellaneous RBI Circulars

Misuse of Banking Channels – Issue and Payment of Demand Drafts for

Rs.50,000 and above

RBI reiterated the guidelines related to demand drafts, mail transfers, telegraphic transfers and

travelers cheques, retail sale of gold / silver / platinum for Rs.50000 and above should be issued only

by debit to the customer’s account or against cheques or other instruments and not against cash

payment.

Detection of Counterfeit Banknotes – Revised Procedure

Till date, banks were required to file FIRs in all cases of counterfeit banknotes. Now, the procedure is

modified that

For cases of detection of counterfeit notes up to 4 pieces, in a single transactions, a

consolidated report at the end of the month is required.

For cases of detection of counterfeit notes of 5 or more pieces in a single transaction, FIRs

should be lodged with the Nodal Police Station / Police Authorities as per the jurisdiction.

Hedging Facilities for Non-Resident Entities.

In order to facilitate greater use of Indian Rupee in trade transactions, it is allowed now to non-

resident importers and exporters to hedge their currency risk in respect of exports from and imports to

India, invoiced in Indian Rupees.

Banks can provide additional service to their non-resident customers for hedging their currency risks

arising out of genuine trade transactions involving exports from and imports to India, invoiced in Indian

Rupees.

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Web Based Regulatory Compliance Training

Today organisations face immense regulatory, compliance and operational risks

People who execute key processes such as settlements, KYC, AML reviews, account openings, payment processing are some times not trained enough

Untrained people often make excessive errors or ignore key process controls

Web based training is a very cost effective way to impart knowledge to large employee base to minimize operational and reputational risks

Why

This is not E – Learning. This is real industry experts talking about key issues.

A series of 5-10 sessions are customized and outlined that touch upon key risk

issues and compliance requirements.

Practical, industry knowledge is shared as the speakers are industry experts

The sessions are grouped with other users to bring down delivery costs. We can

also deliver sessions exclusively for your organisation.

How

Training can be delivered as low as Rs 200 / employee / per session.

We can discuss your training requirements and provide final quoteHow Much

TRAINING

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Who is Riskpro… Why us?

ABOUT US Riskpro is an organisation of member firms

around India devoted to client service excellence. Member firms offer wide range of services in the field of risk management.

Currently it has offices in three major cities Mumbai, Delhi and Bangalore and alliances in other cities.

Managed by experienced professionals with experiences spanning various industries.

MISSION

Provide integrated risk management consulting services to mid-large sized corporate /financial institutions in India

Be the preferred service provider for complete Governance, Risk and Compliance (GRC) solutions.

VALUE PROPOSITION You get quality advisory, normally delivered

by large consulting firms, at fee levels charged by independent & small firms

High quality deliverables

Multi-skilled & multi-disciplined organisation.

Timely completion of any task

Affordable alternative to large firms

DIFFERENTIATORS

Risk Management is our main focus

Over 200 years of cumulative experience

Hybrid Delivery model

Ability to take on large and complex projects due to delivery capabilities

We Hold hands, not shake hands.

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Risk Management Advisory Services

Training Recruitment

Basel II/III Advisory Market Risk

Credit Risk

Operational Risk

ICAAP

Corporate Risks Enterprise Risk Assessment

Fraud Risk

Risk based Internal Audit

Operations Risk

Forensic services

Information Security IS Audit

Information Security

IT Assurance

IT Governance

Operational Risk Process reviews

Policy/ Process Review

Process Improvement

Compliance Risk

Governance Corporate Governance

Business Strategic risk

Fraud Risk

Forensic Accounting

Other Risks Business/Strategic Risk

Reputation Risk

Outsourcing Risk

Contractual Risk

Banking – E Learning

Corporate Training

Regular Risk Management Training

Online Training material

Workshops / Events

Virtual Risk Managers

Full Time Risk Professionals

Part time Risk Professionals

Risk Managers on call – free

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Contacts and Office Locations

THANKS

Corporate Mumbai Delhi Bangalore

info@riskpro.in

www.riskpro.in

Manoj Jain

Director

M- 98337 67114

manoj.jain@riskpro.in

Shriram Gokte

Principal - Information Risk

M- 98209 94063

shriram.gokte@riskpro.in

Rahul Bhan

Director

M- 99680 05042

rahul.bhan@riskpro.in

Raj Sawhney

Principal – Business Risk

M- 99711 03510

raj.sawhney@riskpro.in

Casper Abraham

Director

M- 98450 61870

casper.abraham@riskpro.in

Ahmedabad Pune Agra

Maulik Manakiwala

Associate Firm

M - 91 9825640046

Gourav Ladha

Sap Risk Advisory

M- 97129 52955

M.L. Jain

Principal – Strategy Risk

M- 9822011987

mljain@riskpro.in

Alok Kumar Agarwal

Associate Firm

M- 99971 65253