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Due Diligence of Banks - Indore Branch Of CIRC of ICAI

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Due Diligence of Banks
Presented byDr.SarojUpadhyay
Due diligence is the process of systematically researching and verifying the accuracy of a statement.Theterm originated in the business world, where due diligence is required to validate financial statements. The goal of the process is to ensure that all stakeholders associated with a financial endeavour have the information they need to assess risk accurately.Whendue diligence involves the offering of securities for purchase, as in an IPO (initial public offering), specific corporate officers are responsible for the proper completion of the process, including the issuer, issuer's counsel, underwriters, CFO and the brokerage firm offering shares.Becauseof the delicate nature and importance of such judgments to the prospects for the performance of a company's equities in the public market, there is a strong emphasis on neutral, unbiased analysis of both the current financial state and future prospects of the firm in question.
The RBI circularsdated September 19th2008 / December 8th2008 / February 10th2009 – advised all scheduled commercial Banks to obtain regular certification on a half yearly basis (Diligence Report) by a professional, preferably a Company Secretary, regarding compliance by the Borrowing Company of the various statutory provisions that are invogue.Thesame is done to inculcate a strong foundation of good governance culture among borrowing corporate and correspondingly enhance the comfort level of banks by reducing the informationasymmetry.
Inorder to streamline consortium/multiple banking arrangements, Reserve Bank of India has been making regulatory prescriptions from time to time regarding conduct ofconsortium/multiple banking.Bankshave also been advised to strengthen their information back-up about the borrowers enjoying credit facilities from multiple banks by following specified criteria.
Wayback in October 1996, Reserve Bank of India withdrew various regulatory prescriptionsregarding conductof consortium/multiple banking/syndicate arrangements so as to bring flexibility in the credit delivery System. With the passage of time, however, it was observed that the relaxations meant for providing flexibility to the borrowing community, may also have contributed to various types of frauds, prompting the Central Vigilance Commission to attribute the incidence of frauds mainly to the lack of effective sharing ofinformation aboutthe credit history and the conduct of account of the borrowers among various banks.Accordingly, Reserve Bank of India in consultation with the Indian Banks’ Association, specifiedthe frameworkto be observed by banks for improving the sharing/dissemination of information amongstthe banksabout the status of the borrowers enjoying credit facilities from more than one bank. Further,the banksare required to obtain regular certification of Diligence Report from a professional, preferablya CompanySecretary about conformity to statutory prescriptions in vogue. Thus, the banking communityin generaland the Regulatory in particular have reposed enormous trust on professionals.
TheDiligence Report covers many critical and relevant matters such as details of the Board ofDirectors, shareholdingpattern, details of theforexexposure and overseas borrowings, risk mitigationthrough insurancecover in respect of all assets, payment of all statutory dues and other compliances,proper utilization/end-useof the loan funds, compliance with mandatory Accounting Standards, compliance with various clauses of Listing Agreement in case of a listed company etc. The compact structure of the Diligence Report under its twenty-five paragraphs makes it obligatory for a Practicing Company Secretary to prepare the Report after critical examination of all relevant records and documents of the borrowing companies which demands a high degree of care, skill and knowledge.
Period of ReportingAnnex. III to the RBI Notification provides that the Diligence Report shall be made on a half yearly basis.Secretary in Whole-Time PracticeSection 2(45A) of the Company Secretaries Act, 1980 defines “secretary in whole-time practice” asa secretarywho shall be deemed to be in practice within the meaning of sub-section (2) of section 2 ofthe CompanySecretaries Act, 1980 and who is not in full-time employment. Thus, a member of the Instituteof CompanySecretaries of India, who is not in full-time employment can become a Secretary inwhole-time practice afterobtainingfromthe Council of the Institute a Certificateof Practiceunder section 6 of the Company Secretaries Act, 1980
Scope of DueDilligenceTrackingthe change in the composition of Board of Directors of the company.Trackingthe changes in the shareholding pattern.Verificationof–
The alterations in the Memorandum of Association & Articles of Association.Related party transactions.The companies’ loans & advances granted to the Director’s or any other company in which the Directors are interested.Loans and investments or (given) guarantees or (provided) securities to other business entities.Borrowings by the company from directors, members, public, financial institutions, banks and others.Charges on the assets of the company.Forexexposure and Overseas Borrowings of the company.
To ensure that –The company has not defaulted in the repayment of any public deposits or unsecured loans and the Company or its Directors are not under the Defaulter's list of Reserve Bank of India or in the Specific Approval List of ECGC.The Company has issued, offered and allotted all the securities to the persons entitled thereto and has also issued letters, coupons, warrants and certificates thereof to the concerned persons and also redeemed its preference shares / debentures and bought back its shares (wherever applicable) in compliance with the specified procedures and within the stipulated time.The company has insured all its secured assets & has insured fully all its assets.The Company has complied with the terms and conditions, set forth by the lending institution at the time of availing the facility and also during the currency of the loan and has utilized the funds for the purposes for which these were borrowed.
Reporting under due diligence for banks can be–Reportingwithout Qualification– It is done in case wherein the company satisfies all the requirements as prescribed by RBI, the Companies Act, 1956 or any Act in force for the given time period, as maybe applicable.Reporting with Qualification– It indicates that the company does not comply with relevant statutory requirements and regulations, other disclosure requirements or any other requirement as stated in the format of the diligence report issued by the RBI. The same is expressly written the due diligence report.
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Due Diligence of Banks - Indore Branch Of CIRC of ICAI