CNK Knowledge Tracker Be a Step Ahead July 2016 CNK & Associates, LLP www.cnkindia.com
Contents Notifications/ Orders & Circulars Overseas Direct Investment - Submission of Annual 3 Performance Report Provisioning norms pertaining to Fraud Accounts 3 Master Directions on Frauds Classification and 4 Reporting by commercial banks and select FIs RBI notification on implementation of Ind AS 5 Format of Statutory Auditors Certificate (SAC) to be 6 submitted by NBFCs Master Direction - RBI (Financial Statements of All India 6 Financial Institutions - Presentation, Disclosure and Reporting) Directions, 2016 Revised FDI Norms 6 Disclaimer and Statutory Notice 12 CNK & Associates LLP Page 2 of 11
Reserve Bank of India (RBI)/Foreign Exchange Management Act, 1999 (FEMA) Notifications/ Orders & Circulars Overseas Direct Investment - Submission of Annual Performance Report In order to provide authorised dealer banks greater capability to track submission of Annual Performance Reports (APRs) and also improve compliance level in the matter of submission of APRs by the Indian Parties (IPs)/Resident Individuals (RIs), the RBI has advised, among other matters, as under: Certification of APRs by the Statutory Auditor or Chartered Accountant need not be insisted upon in the case of resident individuals; self-certification may be accepted An IP/RI, which has set up/acquired a joint venture (JV)/wholly owned subsidiary (WOS) overseas in terms of the Regulations of the Notification, ibid, will submit, to the AD bank every year, an APR in Form ODI (Overseas Direct Investment) Part II in respect of each JV/WOS outside India and other reports or documents by 31 st December each year or as may be specified by the RBI from time to time. The APR, so required to be submitted, will be based on the latest audited annual accounts of the JV/WOS unless specifically exempted by the Reserve Bank For details refer: https://rbidocs.rbi.org.in/rdocs/notification/pdfs/ap61f8714a04a1e44643a42fba92 420BDA33.PDF Provisioning norms pertaining to Fraud Accounts The RBI decided to amend the provisioning norms in respect of all cases of fraud, as under: Banks will normally provide for the entire amount due to the bank or for which the bank is liable (including in case of deposit accounts), immediately upon a fraud being detected. While computing the provisioning requirement, banks may adjust the financial collateral eligible under Basel III Capital Regulations - Capital Charge for Credit Risk (Standardised Approach), if any, available with them with regard to the accounts declared as fraud account; CNK & Associates LLP Page 3 of 11
However, to smoothen the effect of such provisioning on quarterly profit and loss, banks have the option to make the provisions over a period, not exceeding 4 quarters, commencing from the quarter in which the fraud has been detected; Where the bank chooses to provide for the fraud over 2 to 4 quarters and this results in the full provisioning being made in more than 1 FY, banks will debit other reserves (i.e., reserves other than the one created in terms of Section 17(2) of the Banking Regulation Act 1949) by the amount remaining un-provided at the end of the FY by credit to provisions. However, banks should proportionately reverse the debits to other reserves and complete the provisioning by debiting Profit And Loss Account, in the subsequent quarters of the next FY; Banks will make suitable disclosures with regard to number of frauds reported, amount involved in such frauds, quantum of provision made during the year and quantum of unamortised provision debited from other reserves as at the end of the year. It is reiterated that banks must scrupulously adhere to the extant guidelines on classification and reporting of frauds For details refer: https://rbidocs.rbi.org.in/rdocs/notification/pdfs/nt376bad77f2c019b42e5aaebc EED344E4618.PDF Master Directions on Frauds Classification and Reporting by commercial banks and select FIs The provisions of these Directions will apply to scheduled commercial banks (excluding Regional Rural Banks) and select Financial Institutions operating in India These directions are issued with a view to providing a framework to banks enabling them to detect and report frauds early and taking timely consequent actions like reporting to the Investigative agencies so that fraudsters are brought to book early, examining staff accountability and do effective fraud risk management. These directions also aim to enable faster dissemination of information by the RBI to banks on the details of frauds, unscrupulous borrowers and related parties, based on banks reporting so that necessary safeguards / preventive measures by way of appropriate procedures and internal checks may be introduced and caution exercised while dealing with such parties by banks. For details refer: https://www.rbi.org.in/scripts/notificationuser.aspx?id=10477&mode=0 CNK & Associates LLP Page 4 of 11
RBI notification on implementation of Ind AS The RBI had directed banks to submit Proforma Ind AS FS from the half-year ended 30 th September 2016, latest by 30 th November 2016. For details refer: https://rbi.org.in/scripts/notificationuser.aspx?id=10274&mode=0. Banks will be guided by the Ind AS notified by the MCA under the Companies (Ind AS) Rules, 2015 (and Companies (Ind AS) (Amendment) Rules, 2016, as amended from time to time, in this regard and the Report of the Working Group on Implementation of Ind AS by Banks in India. The Proforma Ind AS FS will include, the following:- Balance Sheet including Statement of Changes in Equity (Annex I & II). Profit and Loss Account (Annex III). Notes (Annex IV). The formats as per the Annexes are solely for the preparation and submission of proforma Ind AS FS to the RBI. The formats for the Ind AS FS for the accounting periods beginning 1 st April 2018 will be notified separately. The RBI does not require the proforma Ind AS FS to be audited. To begin with, banks which are not in a position to submit both standalone and consolidated proforma Ind AS FS for the half year ended 30 th September 2016 are permitted to submit only standalone FS. However, banks shall submit both proforma Ind AS standalone and consolidated FS in the subsequent periods Banks should disclose significant accounting policies including, inter alia, the following: financial assets and financial liabilities, including use of fair value option in designating financial assets or financial liabilities at Fair Value Through Profit or Loss upon initial recognition. impairment of financial assets Banks may note that Ind AS 109 Financial Instruments is not specific in terms of the approach to be followed when measuring expected credit losses (ECL) and the RBI will finalise the policy on ECL provisioning, taking into account the impairment requirements under Ind AS 109, after due deliberations, and considering various factors. For details refer: https://rbidocs.rbi.org.in/rdocs/notification/pdfs/cir429fbf1cbe38f2a47ce98e75 A2D7D7B6A0A.PDF. CNK & Associates LLP Page 5 of 11
Format of Statutory Auditors Certificate (SAC) to be submitted by NBFCs All NBFCs are required to submit a certificate from their Statutory Auditors every year to the effect that they continue to engage in the business of Non-Banking Financial Institution requiring it to hold a Certificate of Registration under Section 45- IA of the RBI Act. With a view to ensure consistency in the manner in which the information is received from the Auditors, RBI has introduced a uniform format of the SAC. For details refer: https://www.rbi.org.in/scripts/notificationuser.aspx?id=10460&mode=0 Master Direction - RBI (Financial Statements of All India Financial Institutions - Presentation, Disclosure and Reporting) Directions, 2016 The RBI has issued the above Directions which are applicable to the All India Financial Institutions regulated by RBI viz. EXIM Bank, NABARD, NHB and SIDBI with effect from the quarter ended December 2016. Until 30 September 2016, the existing instructions contained in Master Circular dated 1 st July 2015 on Disclosure Norms for Financial Institutions will continue to apply. https://rbi.org.in/scripts/bs_viewmascirculardetails.aspx?id=9910 For details refer: https://www.rbi.org.in/scripts/notificationuser.aspx?id=10461&mode=0#f1 Revised FDI Norms The Government of India has come out with a press note release dated 24 th June 2016 to bring about changes in the FDI policy. The changes as brought about in the said press note as well as the FDI policy released by Department of Industrial Policy and Promotion (DIPP) of India dated 7 th June 2016 are enumerated here under: In the Civil Aviation sector following norms have been notified: Sector/Activity Erstwhile Position Revised Position 1) Airports Greenfield projects Up to 100 % FDI under No Change CNK & Associates LLP Page 6 of 11
Sector/Activity Erstwhile Position Revised Position Brownfield /Existing projects Up to 100 % FDI: Up to 100 % FDI Automatic route was up to under 74% and beyond 74% government route was prescribed. 2)Air Transport Services A) Scheduled Air Transport Service/Domestic Scheduled Passenger Airline /Regional Air Transport B)Non Scheduled Air Transport Service F)Helicopter service/sea plane service requiring DGCA approval Foreign Investor other than NRI Maximum 49 % FDI under NRI 100% FDI under Foreign Investor other than NRI Maximum 74 % FDI in which was up to 49% and beyond 49% up to 74% government route was prescribed. NRI 100% FDI under 100% FDI under Foreign Investor other than NRI 100 % FDI permitted, with FDI up to 49% under and FDI beyond 49% through the government approval route. NRI No change Foreign Investor other than NRI Up to 100 % FDI under. NRI No change 100% FDI under Note: Foreign airlines would continue to be allowed to invest in the capital of Indian companies operating scheduled and non-scheduled air-transport services up to the limit of 49% of their paid up capital under the government approval route subject to the laid down conditions in the existing policy. CNK & Associates LLP Page 7 of 11
In the Pharmaceuticals sector following norms have been notified Sector/Activity Erstwhile position Revised Norms Greenfield projects Up to 100 % FDI under No Change Brown filed/existing projects Up to 100 % FDI under government route Up to 100 % FDI, wherein FDI up to 74% is under automatic route and beyond 74% through government route approval. In the Defence sector following norms have been notified Sector/Activity Erstwhile position Revised Norms Defence Industry subject to Industrial license under the Industries (Development & Regulation) Act,1951 Up to 49% under Automatic route. For FDI beyond 49% the approval of cabinet committee on security (CCS) on case to case basis is required, wherever it is likely to result in access to modern and state-of-art technology in the country. Now FDI up to 100% is allowed where FDI up to 49% is under and beyond 49% under Government route, in cases where it is likely to result in access to modern technology or for other reasons to be recorded. Therefore the requirement of state of art technology is removed. FDI limit for defence sector has also been made applicable to Manufacturing of Small Arms and Ammunitions covered under Arms Act 1959 Additional condition prescribed: Infusion of fresh foreign investment, within the Sectoral limits in a company not seeking license/permission from Sectoral ministry, resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor, will require Government approval. Foreign investment in the sector is subject to security clearance and guidelines of Ministry of Defence. CNK & Associates LLP Page 8 of 11
In the Single Brand Retail Trading sector following norms have been notified Sector/Activity Erstwhile position Revised Norms Single Brand Retail Up to 100% FDI in No Change Trading which 49% under and beyond 49% under government route. Important Conditions Single brand retail traders receiving foreign investment beyond 51%, will have to procure goods up to 30% from local sourcing. The said procurement of 30% will have to be met over the average period of first five years and there after the said 30% requirement is to be met annually The government has relaxed the sourcing norms for entities engaged in state of art and cutting edge technology wherein the sourcing norms will not be applicable up to 3 years from the commencement of business. In the Broadcasting Carriage Services sector following norms have been notified Sector/Activity Erstwhile position Revised Norms 1. Teleports 2. Direct to Home(DTH) 3. Cable Networks (Multi System operators (MSOs) 4. Mobile TV 5. Headend-in-the Sky Broadcasting Service (HITS) Cable Networks (Other MSOs) Up to 74% FDI Automatic route up to 49% ; Government route - Beyond 49% and up to 74%. Up to 49% FDI via 100% Automatic However Infusion of fresh foreign investment, beyond 49% in a company not seeking license/permission from Sectoral ministry, resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor, will require Government approval. CNK & Associates LLP Page 9 of 11
In the Private Security Agencies sector following norms have been notified Sector/Activity Erstwhile position Revised Norms Private Security Agencies FDI up to 49% FDI in Up to 74% FDI which government Automatic route up to 49% approval is required. and; Government route - Beyond 49% and up to 74%. Note: FDI in Private Security Agencies is subject to compliance with Private Security Agencies Regulation (PSAR) Act, 2005 as amended from time to time. General Conditions on FDI: The approval of RBI will not be required in cases where FIPB approval or license/permission has already been granted by the concerned Ministry/Regulator for establishment of branch office, liaison office or project office or any other place of business in India if the principal business of the said applicant is in Defence, telecom, Private security or Information and Broadcasting. 100% FDI under Government approval route is allowed for trading including e- commerce for Food products manufactured and /or produced in India. CNK & Associates LLP Page 10 of 11
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