NEWS & VIEWS FOR MEMBERS / SUBSCRIBERS / VOL. 23 - NO. 8- MARCH 2020 From President's Desk... Dear Professional Colleagues and Readers, CA Sanjay Visanji Chheda Thank you all..... Always in Gratitude C.V.O.CA'S Follow us on , , LinkedIn@cvocain Join Yahoo group : [email protected]“What makes Your Brain Happy and Why You should do the Opposite”. Last week, while surfing on the internet, came across a book by David DiSalvo with aforesaid title. Yet to go through the book, but summary of book is something like “What Your Brain wants is frequently not what Your Brain NEEDS” How much true or how far proved scientifically is all subject to studies, surveys, research and so on and so forth. Interestingly books talks that what makes our brain Happy leads to errors, biases and distortions. But what I liked is novel thinking. Something out of box which easily fits in logic. Broadly, it all revolves around Comfort Zone. What brain wants is Comfort Zone whereas what brain needs is slightly out of this Comfort Zone. Same thing applies to all of us in each and every phase of life, whether personal or professional. We all are used to first find and then stay within our Comfort Zone, which is dangerous for one's individual growth as well as growth of society, economy as well as universe as a whole. Recently while listening to some prominent speaker on GDP, one simple thing which was explained in his speech was real growth will come only out of inventions, innovations and disruptions. None can grow while remaining within its own cocoon. If one has to grow, if society has to grow, if Country has to grow, one needs to take calculated risks and tread out of his Comfort Zone. So let's try to know our Comfort Zone and then try breaching it with calculated risks. Events in retrospect Between last communication and this communication, lot many things have happened. Union Budget, a longest speech by Finance Minister, which is new record, whole new rate of taxation for individual opting to forego various exemptions, deductions. CVOCA had its Publication in Gujarati and English which was well received by readers. CVOCA also had Public Program on Union Budget at King George Auditorium which was all House Full event, well received by 600 plus audience for Capital Market as well as Income Tax Provisions. CVOCA also had local meeting at Ghatkopar, which was well received and attended by more than 125 participants. This month, CVOCA also lost one of its finest leader, Past President Hiten Liladhar Gada, who was always a phone call away for any sort of help in Income Tax or GST queries, always ahead in sports, singing and various other events of CVOCA. With his sad demise, CVOCA has suffered a huge loss. We at CVOCA deeply mourn his demise and pray to lord to give him Param Shanti at the earliest. Upcoming Events: CVOCA has planned a Public Program in Hindi / English for Society at Large on “How India can become Economic Super th Power” on Saturday, 11 April 2020 at Yogi Sabhagruh. We look forward to see you all in huge numbers to listen to lucid, free flow by eminent speakers. Latest issue of CVOCA News & Views By the time, you all will receive and start reading this News & Views, we all would have finished all our refresher course and now would be gearing up for Bank Audits. Lot many things have happened over last few months. Due to various factors including latest one COVID-19, also known as Corona Virus, many economies across universe are going to take hit. Industries at large will be hit due to its direct effect on consumption, tourism, trade across borders. All these is going to have impact on entire economy including industries which are clientele of Banks which we are going to audit. Let's remain extra vigil, alert and use all our expertise and prudence while moving our pen for concluding LFAR. We, at CVOCA, hope and wish that present issue which broadly covers many facets of Bank Audit will help members in better understanding of most evolving banking industry. Wish you all Happy, Interesting and Helpful Reading. February 29th, 2020.
42
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NEWS & VIEWSFOR MEMBERS / SUBSCRIBERS / VOL. 23 - NO. 8- MARCH 2020
From President's Desk...Dear Professional Colleagues and Readers,
CA Sanjay Visanji Chheda
Thank you all..... Always in Gratitude
C.V.O. CA'S
Follow us on , , LinkedIn@cvocain Join Yahoo group : [email protected]
“What makes Your Brain Happy and Why You should do the Opposite”. Last week, while surfing on the internet, came across a book by David DiSalvo with aforesaid title. Yet to go through the book, but summary of book is something like
“What Your Brain wants is frequently not what Your Brain NEEDS”
How much true or how far proved scientifically is all subject to studies, surveys, research and so on and so forth. Interestingly books talks that what makes our brain Happy leads to errors, biases and distortions.
But what I liked is novel thinking. Something out of box which easily fits in logic. Broadly, it all revolves around Comfort Zone. What brain wants is Comfort Zone whereas what brain needs is slightly out of this Comfort Zone.
Same thing applies to all of us in each and every phase of life, whether personal or professional. We all are used to first find and then stay within our Comfort Zone, which is dangerous for one's individual growth as well as growth of society, economy as well as universe as a whole.
Recently while listening to some prominent speaker on GDP, one simple thing which was explained in his speech was real growth will come only out of inventions, innovations and disruptions. None can grow while remaining within its own cocoon. If one has to grow, if society has to grow, if Country has to grow, one needs to take calculated risks and tread out of his Comfort Zone. So let's try to know our Comfort Zone and then try breaching it with calculated risks.
Events in retrospect
Between last communication and this communication, lot many things have happened. Union Budget, a longest speech by Finance Minister, which is new record, whole new rate of taxation for individual opting to forego various exemptions, deductions.
CVOCA had its Publication in Gujarati and English which was well received by readers. CVOCA also had Public Program on Union Budget at King George Auditorium which was all House Full event, well received by 600 plus audience for Capital Market as well as Income Tax Provisions. CVOCA also had local meeting at Ghatkopar, which was well received and attended by more than 125 participants.
This month, CVOCA also lost one of its finest leader, Past President Hiten Liladhar Gada, who was always a phone call away for any sort of help in Income Tax or GST queries, always ahead in sports, singing and various other events of CVOCA. With his sad demise, CVOCA has suffered a huge loss. We at CVOCA deeply mourn his demise and pray to lord to give him Param Shanti at the earliest.
Upcoming Events:
CVOCA has planned a Public Program in Hindi / English for Society at Large on “How India can become Economic Super thPower” on Saturday, 11 April 2020 at Yogi Sabhagruh. We look forward to see you all in huge numbers to listen to lucid, free
flow by eminent speakers.
Latest issue of CVOCA News & Views
By the time, you all will receive and start reading this News & Views, we all would have finished all our refresher course and now would be gearing up for Bank Audits. Lot many things have happened over last few months. Due to various factors including latest one COVID-19, also known as Corona Virus, many economies across universe are going to take hit. Industries at large will be hit due to its direct effect on consumption, tourism, trade across borders. All these is going to have impact on entire economy including industries which are clientele of Banks which we are going to audit. Let's remain extra vigil, alert and use all our expertise and prudence while moving our pen for concluding LFAR.
We, at CVOCA, hope and wish that present issue which broadly covers many facets of Bank Audit will help members in better understanding of most evolving banking industry. Wish you all Happy, Interesting and Helpful Reading.
February 29th, 2020.
FROM THE DESK OF CHAIRMAN
NEWS BULLETINNEWS BULLETINCOMMITEECOMMITEE
PresidentCA Sanjay Visanji Chheda
Chairman CA Hasmukh Bhavanji Dedhia Convenor CA Parin Dinesh Gala Jt. Convenor CA Umang Lalit Soni Sp. Invitees CA Rakesh Maganlal Vora
Members CA Dharmi Mulchand Kenia CA Hitesh Keshavji Pasad CA Kunjesh Raju Shah CA Nihar Suresh Dharod CA Nisha Ninad Gala CA Priten Bhupendra Shah CA Ankur Kishor Sangoi CA Nainit Digesh Savla
CONTENTSCONTENTS
CA Hasmukh Bhavanji Dedhia
ASSOCIATIONASSOCIATION
C.V.O. CA'S NEWS & VIEWS
Upcoming Events .........................3
Events in Retrospect...............3 & 4
Bank Audit ‐ Audit Planning ..........5Areas to be caution.
Audit of Advances ........................9
Audit Through ............................14Core Banking Solutions
Gmail Tricks.................................23Everyone Should Know! Brief Update On
SEBI & Corporate Law.................28
FEMA Updates............................31
RERA Updates.............................34
Direct Taxes Law Updates ...........36
GST Updates ...............................39
VOL. 23 - NO. 8 - MARCH 2020
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What's Ailing Commercial Banking in India India's banking sector is passing through challenging times like never before. With gross NPA's hovering around 12% (for PSU Banks it may be higher, around 14%), credit growth stagnating over last about a decade, CASA not being too favourable and numerous scams getting exposed, tough times are likely to last longer.
So, what's ailing this sector?
The public ownership of most banks and 'populist' loans, especially to the agriculture sector, are often cited as causes of the current impasse
The dominant classes such as rich farmers and industrial capitalists have had a dismal record of defaults and non-repayments of loans despite availing subsidised credit
The role of commercial banks as providers of business funds and
working capital finance got blurred and Banks ended up providing
project finance with long gestation.
Most Development Financial Institutions (DFIs) got themselves converted
into or begun to play role of commercial banks; roles/objectives got mixed
up and long-term or short-term finance increasingly lost relevance,
particularly because PSU banks were made to invest huge in infra
projects
Over the years, this resulted in 'asset-liability mismatch' (ALM) being
ignored for constant monitoring and PSU Banks remained less
capitalised
As a result, resources of the PSBs began draining; profitability was
jeopardised, and politicisation of its management eroded operational
autonomy and efficacy
One major factor, less spoken about, is terrible lack of developed bond
market in India, which could have lessened the burden on bank credits to
a large extent. The share of bonds in India's total corporate debt is a mere
8%; the efforts to develop a competitive fixed income segment largely got
stacked in working papers and reports
Whilst most of the above causes still subsisting, business failures of banks or compromising with credit appraisals and inadequate risk assessment is no wonder.
The statutory and branch auditors of Banks have mammoth task to report the red flags in the given scenario within extremely limited timelines. Bank Branch auditors would be well advised to be technically sound with minute planning of resources and use intensified professional scepticism in course of their engagement.
- CA Hasmukh B Dedhia
C.V.O. CA'S NEWS & VIEWS
3
Event In Retrospect - Programme Committee
VOL. 23 - NO. 8 - MARCH 2020
Forthcoming Event - Programme CommitteeHow India can become Economic Super Power ?
Speaker : Dr. Subramanian Swamy
(Member of Rajyasabha & Economist) Eminent Speaker from Industry
Topic Time Speaker
Impact on Capital
Market
09.30 AM to 11:00 AM
CA Nilesh Shah
Direct Taxes Analysis 11.00 AM to 12:30 PM CA Nitin Maru
Union Budget 2020
Date : February 8, 2020
Time : 9.00 AM to 1.00 PM
Venue : King George, Matunga
Union Budget 2020
Jointly with Shree Ghatkopar Kutchi Jain
Shwetambar Murtipujak Jain Sangh
Date : February 8, 2020
Time : 6.00 PM to 8.30 PM
Venue : Ghatkopar
Topic Speaker
Direct Tax Analysis CA Ketan Gada
Impact on Capital CA Sudhir Bheda
Date : April 11, 2020 Time : 5:30 PM OnwardsVenue : Yogi Sabhagruh, Dadar
Attendance - 600
The accountancy profession lost one of its leading lights when Past President of CVO Chartered & Cost Accountants’ Association, CA Hiten Liladhar Gada passed away on 13th February 2020 in Mumbai at the age of 56 years. He was President of the CVOCA during the year 2001 - 2002.
Late CA Hiten Liladhar Gada was an active member of the profession. He was widely known for his core simplicity, love for sports, cheering nature and always smiling face. The whole profession stands by the aggrieved family of Late Hiten Liladhar Gada on this irreparable loss and prays for the peace of the departed soul.
Inspection Audit Report. We should list out all major irregularities reported in this reports and suitably
modify our audit program as per the irregularities noted. We need to study how these irregularities are
rectified by bank.
Obtain monthly average of advances and deposits and interest earned and paid on the same for current
year and previous year.
This works really well. We are able to analyze major income and expenses of bank branch. If there any
deviation as compare to previous year, we should ask for justification for the same. However, we can do
data analysis in various other manners by ratio analysis, comparative data etc.
Review accounting policies and auditors report of the bank.
To understand accounting policies which are being followed at macro level by the bank, we should ask for
bank as whole annual report copy and study the same. Qualification (if any) at bank as whole level can be
examined at for branch level.
Obtain H.O. circulars/guidelines of CSAs
We should obtain bank circulars from head office for closing as well as normal circulars like for change in
interest rates etc. Now-a-days all banks are hosting the internal circulars on their intranet.
Prepare / Amend Audit programme
After study all above we should amend the audit program suitably as per the need of the branch work and
risk detected out of above review. We should focus more on high risk areas where more irregularities are
noted.
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C.V.O. CA'S NEWS & VIEWS
VOL. 23 - NO. 8 - MARCH 2020
Stage III - ACTUAL AUDIT AT BRANCH
Carry out actual audit.
We should carry out actual audit with full team. Based audit program we should apply appropriate test
check. We should document all our findings and query. Keeping Materiality in mind we should decide
about whether to report, where to report the irregularities found.
Memorandum of changes (MOC) to be given with explanation and justification.
If there are material changes we should issue MOC. We should always give justification for the MOC
prepared. It should have detailed explanation for stand taken by us and we can also report management
view if different from our view.
Issue Nil MOC even if it is NIL or don't make AR subject to MOC.
If there is no MOC we should issue a NIL MOC certificate or accordingly we should mention in our main
report. For qualification we should avoid giving any reference to other reports.
Independence of main report and LFAR- No Referencing of each other, independent qualification/adverse
remarks.
Both this reports are independent reports and we should not do cross referencing in these two reports. We
should refer SA
Discuss the draft reports- reservation, major observation, qualifications with branch managementIt is one of best practices that we should discuss our observations / draft report with the management.
Audit Report format is modified and suggested to see draft report as given in Standard on auditing.
Qualification to be given in bold or italicStill many of us are not reporting qualification as required by ICAI.
To quantify the qualification
We must quantify the qualification (if any). If for any reason we are not able to get qualification from
management we should mention the fact in our report.
Stamping on all pages and initialing the correction done
We must stamp and put our initials on all pages. We must authenticate corrections wherever done in
statements or reports signed by us.
Issue of final reports in time
We must issue report in time. We should adhere to time dead line given by the bank authorities. If there are
any practical problems, we should inform to top management in writing about such problems being cause
of delay for non-completion of audit in time. Now we need to generate UDIN as per ICAI requirements.
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C.V.O. CA'S NEWS & VIEWS
VOL. 23 - NO. 8 - MARCH 2020
8
Critical Areas to be focused
Apart from audit of fund-based advances, auditors must focus on non-fund base advances such as letter of
credit, bank guarantees issued. Auditor must examine entire process from sanction to closure of non-fund
based advances.
Further auditor must examine, source of data given to them. Recent fraud divulge that banks have given data in
excel which was manipulated. Data in given was not original data extracted from system. Post extracting the
data same was manipulated before giving to auditors. Auditor must examine authenticity of data or he himself
should extract the data from system through auditors login given by bank.
Forex Transactions is another critical area as illegal money transfers from India have happened wherein no
proper documents / KYC documents were available with branch office. RBI norms / requirements of filing
various forms with AD need to be understood by auditor and same needs to be examined.
Loan against third party fixed deposit is another gray area which needs proper examination of all
documentation formalities minutely and carefully. Auditor should examine bank must have followed all
process as per their internal guidelines set.
Documents for online transactions / mobile transactions need careful examination by auditor. Modus of
transactions, authorization and complaint for unauthorized transactions calls for auditors attention.
Last but not least, auditor must carefully examine all data given in certification and wherever required he must
give suitable notes / disclaimer / qualification if there is any limitation is place on scope of verification. Auditor
must understand rational/ objective behind each certificate being called by Reserve Bank of India. Once he is
clear about that auditor can ask relevant details / eligibility criteria for such borrower's certificate being asked
for. For example in textile interest subvention certificate auditor should not merely check interest figure but he
must examine whether borrower was eligible for such interest concessions.
Compiled by:
C.V.O. CA'S NEWS & VIEWS
CA Harsh Hasmukh Dedhia
VOL. 23 - NO. 8 - MARCH 2020
Introduction:
Indian banking industry has recently witnessed the roll out of innovative banking models like payments and
small finance banks. RBI's new measures such as instructions to the banks for strict recognition of NPA, faster
resolution of such NPA, enactment of Insolvency Bankruptcy Code, 2016 and its strict implementations,
recapitalization of the banks by the government etc. may go a long way in strengthening the banking industry.
For the onerous task of implementing and complying with the regulator's expectations, bank audits are
carried out. The bank audit is a part of the Internal Control Mechanism of the bank. Chartered Accountants
are entrusted with the responsible task of carrying out their audit. Considering the new and innovative ways of
committing frauds and misappropriation of funds, effective audit and raising red flags in critical issues is of
utmost importance.
Advances, the main part of the Bank audit also constitutes the largest item on the asset side of the balance
sheet of a bank and are major source of income. Thus it needs a significant time of auditor and also he must
have adequate knowledge of the banking industry and regulations governing the banks. While doing
verification of advances, impact of irregularities needs to be seen from point of view of its asset classification.
This article briefly attempts to articulate some key points to be considered while carrying out audit of
advances portfolio of banks.
Types of AdvancesFund based credit facilities are those where, upon sanction, there is an actual outflow of funds from the bank
to the borrower, whereas non-fund based facilities are those, at the time of sanction which do not involve such
outflow of the bank's funds. Some of the credit facilities are as follows:
Audit of Advances
Cash Credit - Enables borrower to meet the gap in their working capital
requirements. Generally granted against the security. Repayable
on demand.
Overdrafts - It may be either secured or without security and does not
generally carry a fix repayment schedule.
Term Loans - Facility provided based on sanctioned terms for various purposes
like acquisitions of plant and machinery or other fixed assets,
meeting personal expenses, meeting deficit in net working capital
requirements, other business needs, etc. Repayable in
installments spread over a period of time.
Working Capital Demand Loans - Generally granted to meet the gap in working capital requirement.
Repayment can be either in the form of installments or a bullet
payment depending on the terms of sanction.
Bills Purchased/ Discounted - It is meant to finance the actual sale transactions. It can be either
accompanied or without the original documents of title to the
goods.
Fund based credit facilities:
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C.V.O. CA'S NEWS & VIEWS
VOL. 23 - NO. 8 - MARCH 2020
Packing Credit - Facilities extended to exporters in the form of 'pre-shipment credit' and
'post-shipment credit'. It is given either for individual order obtained or
the customer is sanctioned an Export Packing Credit limit.
Foreign Currency Loans - It may be in the nature of term loan or working capital loan. It is
sanctioned as per the EXIM policy and RBI guidelines.
Non fund based credit facilities:
Guarantees - It is a contractual obligation made by the bank to any third person to
undertake the payment risk on behalf of borrower. It comprises both
performance guarantees and financial guarantees
Letter of Credit - Legal document issued by the bank that acts as an irrevocable
guarantee in making payment to a beneficiary. It is mandatory in foreign
transactions.
Co-acceptance of Bills - An undertaking from the bank to make payment to the drawer of bill
(seller/exporter) even if the buyer/importer fails to make the payment on
due date.
Sample Selection Process:
Considering the nature and volume, it may not be possible for the branch auditor to verify 100% of the
accounts. Hence, selection of appropriate samples of advance accounts is critical. Here SA 320 (Materiality in
Planning and Performing and Audit) and SA 530 (Audit sampling) need to be considered. There are no specific
rules for selection of samples for verification of advances and auditor will have to use his own judgment based
on preliminary review of the documents stated above. However, following accounts must be included for
verification:
(Iaccounts appearing in the overdue statement.
(ii) Accounts upgraded by the branch to standard category.
(iii) Top 10 borrower accounts by outstanding at the end of the year depending upon size of branch under
each facility and some accounts randomly selected from other retail loan portfolio.
(iv) Top 5 or 10 accounts sanctioned during the year apart from above accounts.
(v) Accounts having adverse comments in the concurrent audit report of the branch.
(vi) Accounts reported in the previous year LFAR with adverse comments of branch statutory auditor.
(vii) Accounts appearing in the SMA account statement of the branch.
(viii) Accounts restructured during the year.
Verification of Advances:
Sanctioning/ Disbursement
Auditor has to examine whether bank has sanctioned advances beyond the delegated authority and whether
telephonic sanctions are followed by written confirmations by appropriate authorities. He also has to examine
whether the ad hoc limits given to borrower were liquidated in time. Also it needs to be verified that security/
mortgage are created, CERSAI registration and charge has been registered with ROC. Auditor should ensure
that no advance was disbursed without complying with terms and conditions of sanction. Examples/instances
of non-implementing of terms and conditions of sanction:
Promoters contribution not brought in
Guarantors' Networth not furnished
Unit not inspected
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C.V.O. CA'S NEWS & VIEWS
VOL. 23 - NO. 8 - MARCH 2020
Borrower instructed to close other bank accounts. But the same is not complied with
Security not created e.g., equitable mortgage of immovable property
End use of the loan not verified
Advances given to a group in excess of RBI norms during the year
Reviewing/ Monitoring/ Supervision
Review of ledger for various facilities of large borrower samples selected should be done to get idea on
operations of account. Generally, interest application, penal interest etc., would be done by the system.
However it is advisable to check for few samples whether amount of interest is correct.
An auditor needs to check if there are frequent delays in payment of dues of loans or overdrawing in case of
CC/OD accounts. Apart from this, development of LCs, regularization in account around critical dates such as
dates for consideration as NPA, etc., are some examples, which may require detailed review of the account
operations. Auditor may check the latest audited financial statements of the borrower, qualifications of
borrowers' statutory auditors if any, transactions with related parties etc. Here one should also check if the
account is regularised at end of the financial year by showing cheque deposited under bank reconciliation and
subsequently reverse in the following year indicating possible evergreening.
Auditor should see whether the stock/ book debt statements and other periodic operational data and financial
statements, etc., received regularly from the borrowers and duly scrutinised? Is suitable action taken on the
basis of such scrutiny in appropriate cases? Auditor should verify whether Quarterly book debts statements
are duly certified by CA, if stipulated in terms of sanction, whether the unit is providing age–wise analysis of
Book– debts. Auditor should also see whether stocks are being critically scrutinised for
non–moving/obsolete/damaged stock and action taken thereon, whether such year–end stock/book debt
statements are compared with audited balance sheet to ascertain variance in stocks/ book debts. In cases
where borrower is availing Multiple banking Facility, whether the branch obtains outstanding position from
each Bank and compares the limits availed with stocks held and DP applicable, in order to know whether the
borrower is over – financed, and any margin is to be introduced.
Stock audit for large advances is essential for effective monitoring of the advance. Auditor should comment on
its adequacy and frequency and review the stock audit reports critically. Also, Auditor should check if the bank
has obtained necessary explanations and responses on stock audit reports, from the borrowers and
considered necessary remarks while computing DP.
In case of bill discounting, most banks have policy of recognising interest over period of the bills. Such interest
collected in advance is kept under other liabilities in balance sheet of the branch. Bill wise breakup of the same
may be taken and mapped with the interest on balance period of outstanding bills discounted. In case if
difference is noticed, auditor may ask explanation from the branch and insist for passing necessary entry
through profit & loss account to match the actual interest that ought to be kept under 'interest received in
advance' at the year end.
List of Letters of Credit (LC) and Bank guarantees should be obtained borrower wise. Check if LCs are
outstanding against borrower having frequent overdrawing in other limits. In case of invocation/ devolvement
of LCs, operative CC/OD account of the borrower is to be debited and not to be parked in a separate account to
consider the overdue position in the account. Guarantees should be checked with the dates of expiry and
verified whether all the expired guarantees have been removed from the system. Guarantees are classified in
Performance and Financial. Correct classification of nature of guarantee is very important as it will have
implication on the Risk Weighted Assets of the Bank for its Capital Adequacy requirements. On sample case
selected, commission on LCs and guarantee fees need to be checked along with the adequacy of cash collateral
margin.
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VOL. 23 - NO. 8 - MARCH 2020
Security
Checking security is the most important aspect of verification of advances. Auditor should verify the following:
i. Mode of creation of security – Mortgage, pledge, hypothecation, assignment, or set-off.
ii. Verify
a) Whether it is legally enforceable
b) Whether it is in effective control of the bank/transferability
c) Whether it is recently inspected
d) Whether valuation of security is realistic, current and stable
e) Whether security covers value of advance
Identification and Verification of NPAs
The non-performing assets are classified into four categories based on the period for which the asset has
remained non-performing and the realisability of the dues.
Sub-Standard Asset
Which has remained NPA for a period less than or equal to 12 months.In such cases, the current net worth of the borrower/guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. In other words, such an asset will have well defined credit weaknesses that jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.
Doubtful Asset An asset would be classified as doubtful if it has remained in the sub-standard category for a period of 12 months.
A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation, highly questionable and improbable on the basis of currently known facts, conditions and values.
For provisioning, Doubtful Assets are further classified as per age in doubtful category, in sub-categories generally called as D-1, D-2 and D-3.
Loss Asset A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly or partly.
In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.
Accounts where there is erosion in the value of security/ frauds committed by borrowers
In respect of accounts where there are potential threats for recovery on account of erosion in the value of security or non-availability of security and existence of other factors such as frauds committed by borrowers it will not be prudent that such accounts should go through various stages of asset classification.
In cases of such serious credit impairment the asset should be straight away classified as doubtful or loss asset as appropriate:
Value Classification to be done
Less than 50% Doubtful Asset
Less than 10% Loss Asset
NPA Category Criteria for classification
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C.V.O. CA'S NEWS & VIEWS
VOL. 23 - NO. 8 - MARCH 2020
Apart from correct classification of NPA category, it is also important to check the correctness of provision
created on NPA accounts. Sometimes, if the classification of advances is found correct, amount of provision
against individual borrower accounts is assumed to be proper and auditor may tend to ignore detailed
verification of computation of such provision. However, in terms of master circular on IRAC norms issued by
RBI, if the valuation report is not obtained for 3 years in case of immovable property and 1 year in case of other
assets, the value of security would be considered as NIL and 100% provision would be required to be created
on outstanding amount. Hence, auditor need to check all the cases of doubtful loans if latest valuation report is
obtained as required. Also, when the classification of any NPA changes all the accounts of borrower
irrespective of regularity of payment with other facilities need to change. Unrealised income in all NPA
accounts is reversed as on the date of NPA classification. An example of NPA classification is as follows:
Classification NPA Date
Sub-Standard 1-April-2019 31-March-2020
Doubtful up to 1 Year (D1) 1-April-2018 31-March-2019
Doubtful 1 to 3 Years (D2) 1-April-2016 31-March-2018
Doubtful more than 3 years (D3) Before 31-March-2016
Some Important Practical aspects:
A few important aspects that may be kept in mind which will help conducting effective audit for Advances of the bank:
Most banks in India are on Core Banking Solution (CBS). Manual intervention is reduced to a large extent due to implementation of CBS and hence it is essential for an Auditor to have a working knowledge of such software.
Entire GL with sub-heads can be asked to converted into excel with opening and closing balances and transactions during the year. This will give accounts where balances are constant and needs to be enquired into.
Last year's MOC and its effect in books subsequent to completion of audit whether given or not to be seen along with copy for auditor's record
A few important exception reports related to advances like excess drawing permitted over sanctioned limit through TOD, changes done in master data of borrowers, interest rate changes, etc. can be asked for.
CC accounts to be verified for interest debits and total credits for the end of the quarter. This is one of the reasons for identifying and classifying NPA in sticky or problematic accounts. CC accounts with no credits in the accounts for the last quarter also need to be classified as NPA.
Concurrent auditor's negative observations or comments on accounts with irregularities should be checked to see whether the discrepancies noticed have been resolved or still persists.
stQuarter to quarter movement of NPA with NPA as on 31 March of previous year to be compared. This will
give a list of advances which are upgraded or restructured or written off during the period Restructuring of advances should not be repeated restructuring Get a Suspicious transaction report (STR) to check response provided by the bank for suspicious
transactions and how they were dealt with by the bank.
Conclusion:
From the above article it is noted that verification of advances is a challenging task. Proper planning and training is required on the part of auditor to audit a specialized industry working in a fully computerized environment and dealing with a commodity called 'money' which is largely public money. Also, since the classification, provisioning and income recognition is governed by RBI norms, we have to carry out audit of advances based on latest RBI norms and directives. Further, ICAI has always been alert and has always updated its knowledge database including Guidance Note on Bank Audits time and again for members.
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C.V.O. CA'S NEWS & VIEWS
Compiled by:
CA Het Dhanji Bheda
VOL. 23 - NO. 8 - MARCH 2020
Introduction of CBS:
CBS system works on a concept of Centralised Database and processing. Transaction take place at various
geographical locations which get recorded and processed at a Centralised Server. Updating of database is on
Real time basis. Due to centralisation of transaction processing, issues of out of date information is
eliminated.
Under CBS data is stored in centralised servers at data centre. This effectively means that all operations at the
connected branches, CBS developed by various software companies available in the market and most
commonly used are FINACLE, TCS BaNCS and Flex cube
Audit through CBS:
Generally, the following set of steps is recommended at the start of the audit to understand the operations at
the branch level and familiarize oneself with the branch and its team
Document list of software's, application and interface details associated with CBS
Review of usage manual or Document software navigation options and menu codes
Document list of reports available in CBS and its menu codes
Review Exceptions Reports/ MIS Reports generated by Data Centre
This article discussed the area wise indicative list of reports to be generated from CBS and menu codes of few
important areas for performing audit procedures
I. Audit of Loans through CBS
Auditor is required to perform audit process by considering various parameters that may affects proper
disclosure of balance in Loans & borrowings under the financial statements
a. Reports :
Auditor is required to obtained below mentioned reports from CBS for assessment of risk, selection
of samples and further audit procedures
1. Advances snapshot covering all important parameters
2. Accounts with overdue in excess of 90 Days and are classified as Standard Assets
3. List of LCs devolved & BGs Invoked during the period / year and current status of account
4. Non-Fund Based Limits granted to customers
5. List of SMA / Watchlist / Probable NPA/Weak account accounts as on the last date of audit
period
6. Backdated updating of stock and book debt statements (Difference between date of updating
in CBS and date of Stock Statement updated)
7. List of Accounts wherein the facility is not renewed / reviewed
8. List of Accounts slipped to NPA during the current period
9. List of Accounts wherein there is an amendment in date of NPA
10. List of Accounts written off during the period / year
Audit Through Core Banking Solutions
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C.V.O. CA'S NEWS & VIEWS
VOL. 23 - NO. 8 - MARCH 2020
11. List of Accounts upgraded (along with date of upgrade and the overdues on the date of
upgrade)
12. Quick Mortality (NPA within 1 year of Advance)
13. List of NPA Accounts with Security Valuation not carried out within the prescribed period
14. List of accounts wherein rephasement (Change in EMI, Tenor, Moratorium period) is carried
out in CBS (excluding rephasement due to change in the reference rate)
15. Loan / OD against FD with no linkage to FD (i.e. Security)
16. Loans below the benchmark rate (as applicable in each bank)
17. Loans above the maximum lending rate (as applicable in each bank)
18. Loans where disbursement is made in Cash (Threshold limit may be prescribed)
19. Credit transactions in CC / OD / Loan Accounts with Value Date (Back Date) without Value
Date (Back Date) at Debit Leg
20. Advance accounts where effective interest rate is Zero
21. CC Accounts with primary security is “Nil”
22. Multiple TODs / Adhoc Sanctions for a customer
23. Non delinking of Adhoc facility sanctioned on expiry
b. Audit primary check & system supports :
Followings are the list of activities to be perform while doing the audit of Borrowings and it's
suggested system supports in case of Finacle and BaNCS:
Risk descriptions Auditor's primary checks Menu code
Discrepancies in
setting up the EMI/
Instalments
Whether EMI /instalment is correctly
setup
Whether EMI./ Instalments amount is
matching with sanctioned Terms
Finacle : ACI � Option
“E” Repayment details
BaNCS:
- DL/TL Accounts &
Services � Enquires �
Account
- Deposit/CC/OD accounts
& services � Enquiries �
Deposits/CC/OD Account
Multiple Set of EMI/
Instalments
Whether sets of EMI are properly entered?
Is there any substantial differences st ndbetween 1 Set of EMI and 2 or other sets
st nd(e.g. 1 set Rs. 5,000 and 2 1,00,000)
which cause doubt on debt serviceability
Finacle : ACI -� Option
“E” Repayment details
BaNCS:
- DL/TL Accounts &
Services � Enquires
� Account
- Deposit/CC/OD accounts
& services � Enquiries �
Deposits/CC/OD Account
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C.V.O. CA'S NEWS & VIEWS
VOL. 23 - NO. 8 - MARCH 2020
System determined
Asset Classification vis
a vis user defined
Asset Classification
CBS contains two sets of parameters. At
first instance CBS identify the account
based on se t parameters under
classification types
In few CBS it has been observed that user
is generally given the option to differ and
select/amend the classification. In such
cases detailed scrutiny of NPA system is
required to be carried out
Finacle :
- ACM/ACI option � 'Y'
Asset classification inquiry
BaNCS :
- A report containing
account wherein there is
difference between Asset
Classification by System
and by user should be
requested for. Account
listed in the said report
should be thoroughly
Manipulation in SL/DP Changes in SL/DP should be cross
checked with sanctioned letter.
Whether any changes in Limit is
supported by necessary documentation?
Finacle :
- ACLHM � Account limit
history maintenance
BaNCS:
- Tailor Made report on
Incorrect moratorium
period
Based on moratorium period CBS will
identify the loan instalment and will track
repayment
In case the moratorium period / instal-
ment start date is erroneously updated
system will not show correct result
Finacle :
- ACI � Option “E”
Repayment details
BaNCS:
Account Master details
Re- Phasement without
reporting it as
reschedule
Loan Account Instalment are rephased/
recalibrated without reporting the same
as Re- Schedule.
Verify whether any changes in Repayment
in Repayment instruction is made
through system. Compare the said
account with list of
Finacle:
- ACI � Option “E”-
Repayment details
BaNCS:
- Account Master details
(Long inquiry)
Instalment start date is
Future date
Check whether instalment start date
entered as per sanctioned term?
In case of future date system will not
identify instalment and any repayment
received will be shown as “overflow”
Finacle :
- ACI � Option “E”
Repayment details
BaNCS:
- Account master details
Interest Demand date Check whether Interest start date entered
is as per sanctioned term?
In case of future date as Interest Demand
date system will not accrue interest and
any repayment received will be shown as
“Overflow”
Finacle :
- ACI � Option “E”
Repayment details
BaNCS:
- Account master details
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C.V.O. CA'S NEWS & VIEWS
VOL. 23 - NO. 8 - MARCH 2020
Round tripping from
internal accounts
Close scrutiny of transactions and review
of Chain/Series of transaction for accounts
with deficiency is required
Such transactions will inflate the credit
turnover in the account.
Finacle:
- ACLI � (use CTRL + E
to Explore the Tran)
- Using only account
turnover information
generated through “ATOR”/
“CUTT”/ “ACTI”
Menu may lead to
incorrect interference,
since the credit are not
solitary credits in
accountsI. BaNCS :
- Deposit/ CC/OD accounts
& services � Enquires �
Transaction
Temporary overdrafts Check whether TOD is sanctioned in
order to bring the overdrawn limit to base
level additional facility through TOD is
sanctioned
Finacle :
- ACLI � Option “O”
- TODRP � TOD register
printing
BaNCS :
TOD report
Devolved bills parked
in office accounts and
not in limit account
Devolved Bill under LCs are required to be
debited to the limit accounts only.
Assessment of Asset classification will be
based on composite overdrawn portion
limit + LC Devolved amount (if any on
devolvement)
Check whether the amount of devolve-
ment of LC backed bills are parked in
office accounts or any
Finacle :
- BI & FBI� with Bill
status as “K” using status
date filter
BaNCS:
Report on Devolved bills
under Import LC
Fictitious credit
through office account/
Inter- branch account
Are there any quarter/ year end credits
cited in the account?
Check the source of credit entries
Review transactions in office accounts/
Inter Branch accounts
Finacle:
- ACLI � (Use CTRL + E
to Explore the Tran)
- Review of Office accounts
ledger
Bancs :
- Deposit/ CC/OD accounts
& services � Enquires �
Transaction
- DL/TL Account &
Services � Enquiries �
Transactions
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C.V.O. CA'S NEWS & VIEWS
VOL. 23 - NO. 8 - MARCH 2020
Multiple CUST ID to
prevent the other
account from
becoming NPA
Check whether multiple CUST IDs have
been opened for the borrower with
different accounts?
NPA report and search all the case by few
characters of name
Finacle :
- ACS � Account selection
(search based on Name)
- LAGI Loan account
general inquiry (Inquiry
based on other
parameters)
BaNCS:
- Customer management
� Enquiries � Search by
Name
II. Profit & loss account :
Interest income is the major source of revenue for the banks, hence thorough checking of collection of
interest requires to be carry out by the auditor.
a. Reports:
Followings are the few reports that will be useful to the auditor to check in details about major income
and expenses booked in profit and loss accounts :
i. Manual debit to Interest Income and Other Income Account
ii. Manual credits to Interest Income and Other Income Account
iii. Manual debit to Interest Expense Account
iv. Interest Pegging marked as “Y” for loans sanctioned at variable rate i.e. w.r.t. benchmark rates
(Pegging may freeze the interest rate at the respective time.)
b. Audit primary checks & system supports:
Auditor's Primary Check Menu codes
Interest pegging in advance accounts set as “Y”. (If “Y” is selected
system will charge interest at the rate prevailing at the time of
accounts opening. For the cases of fixed rate loan pegging flag will
be “Y”)
Future date is updated in interest demand date
Interest on Principle / Payment of interest flag is set as “N”
Effective rate of interest is updated as “0”
Account open and interest start dates are identical
Account open and interest demand dates are identical
Interest Table codes “Zero” is selected
Interest Demand date is past date
Interest Demand frequency is Blank
Finacle : INTCI,
AINTRPT, INTPRF,
INTTM
TCS BaNCS:
- OD/CC Accounts �
Interest Rate History
- DL/TL � Interest
rate
III. Audit of Office accounts through CBS
The transactions processed in office/ parking accounts are not routine hence it calls for continues
monitoring and earliest reversal followings are the list of events can be found in the banks using office
accounts and suggested system supports for detailed verifications
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C.V.O. CA'S NEWS & VIEWS
VOL. 23 - NO. 8 - MARCH 2020
Multiple CUST ID to
prevent the other
account from
becoming NPA
Check whether multiple CUST IDs have
been opened for the borrower with
different accounts?
NPA report and search all the case by few
characters of name
Finacle :
- ACS � Account selection
(search based on Name)
- LAGI Loan account
general inquiry (Inquiry
based on other
parameters)
BaNCS:
- Customer management
� Enquiries � Search by
Name
II. Profit & loss account :
Interest income is the major source of revenue for the banks, hence thorough checking of collection of
interest requires to be carry out by the auditor.
a. Reports:
Followings are the few reports that will be useful to the auditor to check in details about major income
and expenses booked in profit and loss accounts :
i. Manual debit to Interest Income and Other Income Account
ii. Manual credits to Interest Income and Other Income Account
iii. Manual debit to Interest Expense Account
iv. Interest Pegging marked as “Y” for loans sanctioned at variable rate i.e. w.r.t. benchmark rates
(Pegging may freeze the interest rate at the respective time.)
b. Audit primary checks & system supports:
Auditor's Primary Check Menu codes
Interest pegging in advance accounts set as “Y”. (If “Y” is selected
system will charge interest at the rate prevailing at the time of
accounts opening. For the cases of fixed rate loan pegging flag will
be “Y”)
Future date is updated in interest demand date
Interest on Principle / Payment of interest flag is set as “N”
Effective rate of interest is updated as “0”
Account open and interest start dates are identical
Account open and interest demand dates are identical
Interest Table codes “Zero” is selected
Interest Demand date is past date
Interest Demand frequency is Blank
Finacle : INTCI,
AINTRPT, INTPRF,
INTTM
TCS BaNCS:
- OD/CC Accounts �
Interest Rate History
- DL/TL � Interest
rate
III. Audit of Office accounts through CBS
The transactions processed in office/ parking accounts are not routine hence it calls for continues
monitoring and earliest reversal followings are the list of events can be found in the banks using office
accounts and suggested system supports for detailed verifications
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C.V.O. CA'S NEWS & VIEWS
VOL. 23 - NO. 8 - MARCH 2020
Events Audit actionable Menu codes
Cash payment from
office accounts
Authorisation of transaction
as per Delegated Authority
Finacle:
- ACLI � For
Transaction
- FTI �For search
BaNCS :
- BGL � Enquiries �
TOD through Office
accounts
Through ineligible credit
originating from a office
account, customer can be
accommodated.
It also circumvents the number
of TODs granted to customer.
Moreover, interest will not
Finacle :
- ACLI � For transaction
in office account
BaNCS:
- BGL � Enquires �
Transaction
Parking of cash
difference in office
accounts, Clearing/
Remittance differences
through office accounts
Differences in Reconciliation,
Cash Shortage debited to office
account and not reversed
Review ledger account in
detailed on monthly basis
Finacle:
- ACLI : For transaction
in office account
- IOT � For Inquiry on
outstanding transaction
- MSGOIRP: For printing
of outstanding office
account transaction
reportI. BaNCS:
- BGL � Enquire �
Transaction
- “Outstanding BGL
Rotation of entries in
office accounts
To preven t en t r y be ing
reported as long outstanding
entry a new transaction with
debit and credit leg in the same
account is posted. Thus, the
system considers the new
transaction date for reporting
as outstanding entries.
Review transactions with
same debit and credit amount
through ledger
Finacle :
- ACLI : For transactions
in office account
BaNCS :
- BGL � Enquire�
Transaction
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C.V.O. CA'S NEWS & VIEWS
VOL. 23 - NO. 8 - MARCH 2020
Correctness in
mapping of reversal
transaction to
originating
transactions
If the transactions have not
been reversed against the
related originating entries
the report generated by CBS
will show incorrect out-
standing items
Finacle:
- ACLI : For reversal
transactions in office
account
BaNCS :
- BGL � Enquire �
Value dated (Back
dated) transactions
Transactions credited in the
advance type accounts,
Operative accounts with a
value date (Back date)
wherein the clear funds were
not available in the office
accounts
Review the transactions from
revenue leakage perspective
Finacle :
- ACLI : For transaction in
the office account
- FTI � For value dated
transaction
BaNCS :
- BGL � Enquire �
Transaction
Round tripping Rotation of entry from office
a c c o u n t t o o p e r a t i v e
account(s) without any
jus t i f i ca t ions / source
documents
Review the transactions from
the perspective of inflating
credit turnover of account
Finacle:
- ACLI : For transaction in
office accounts
BaNCS:
- BGL � Enquire �
Transaction
Advance paid for Fixed
Assets not capitalised
Entries for payment of
advance against procure-
ment of fixed assets not
reversed
Finacle :
- ACLI : For transaction in
office account
- IOT� For inquiry on
outstanding transaction
- MSGOIRP � For printing
of outstanding office
account transaction report
BaNCS :
- BGL � Enquire �
Transaction
- Outstanding BGL
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C.V.O. CA'S NEWS & VIEWS
VOL. 23 - NO. 8 - MARCH 2020
Income realised not
credited to revenue
account
Loan instalment received from
customer not adjusted
Processing fees received , not
credited to Income account
Charges collected, not credit
to income account
Finacle :
- ACLI : For transaction in
office account
- IOT � For inquiry on
outstanding transaction
- MSGOIRP � For printing
of outstanding office
account transaction report
BaNCS :
- BGL � Enqire �
Transaction
- Outstanding BGL
IV. Exceptional and Irregularities reports :
Apart from the above report auditors can use the below mentioned exceptional reports for the
detailed scrutiny of the transactions
a. Balance exceeded account limit
b. Manual debit to Income account
c. Value dated transaction
d. Manual entry for SI failure cases
e. Instrument passed against clearing
f. Backdated entries (normally restricted)
g. Granting of Intraday TOD
h. Passing of Instruments against clearing effects
22
C.V.O. CA'S NEWS & VIEWS
Compiled by:
CA Henik Dilip Shah
Almost all of the readers must be having at least one Gmail address, i.e. a Google account. Here are a few ways
in which you can use that account effectively and efficiently in your daily activities, for free.
1. Snooze
Gmail gives you the option to resurface any email on your inbox later in the day, tomorrow, later this week,
on the weekend or next week. This means an email you snooze will simply pop back up in your inbox when
you want it to, as though it's a fresh email. It reminds you of particular emails to be worked upon in later
time.
Gmail Tricks Everyone Should Know!
VOL. 23 - NO. 8 - MARCH 2020
2. Schedule
You draft an email and keep it ready but do not want to send immediately. In such scenarios, you can
schedule your emails to be sent at a later time. Gmail will send that email automatically at that specified
time. Further, you can also cancel the sending and re-schedule the time.
3. Label
Gmail label is a tag that can be added to every email you receive or send. You can also add them to drafts.
You can also apply more than one label to a single email. These labels can be used to keep your inbox
organized. You can search for emails of the particular label.
23
C.V.O. CA'S NEWS & VIEWS
VOL. 23 - NO. 8 - MARCH 2020
4. Check mail from other accounts
If you have, say, a Rediffmail account, and you want to check those emails on Gmail, then you can use the
said option from “Accounts and Import” tab under Settings.
5. Auto-forwarding
You can automatically forward all the emails which are received by your staff or another Gmail account to
your email through “Forwarding and POP/IMAP” tab under Settings. Further you can also set filters for
forwarding emails received from specified email addresses.
6. Themes
Bored of the white background on the Gmail web-page? Do you want to give some different/ personalised
touch? You can do that through Settings>Themes. You can select any of the available themes or your
favourite picture through the “My photos” option at the bottom on the left.
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C.V.O. CA'S NEWS & VIEWS
VOL. 23 - NO. 8 - MARCH 2020
7. Calendar
You can set and send periodic reminders of various events through Google calendar. Further, the guests
can be asked in the reminder email itself whether they would be attending the event. The creator of the
event reminder email will receive an email every time a guest agrees to attend. The icon of Calendar is
located below the profile picture of the email account holder. For creating a new event, clicking on the
calendar, and then selecting “Edit in Calendar” will open a web-page as below:
8. Sharing Folders
You can create a folder on Google drive and share it with any person. Once the invitation is accepted, that
person can also upload the documents, spreadsheets etc. in the folder. Thus data can be stored at one
place on the cloud accessible to specific people. The need to email data and keep a track of files no longer
exists.
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C.V.O. CA'S NEWS & VIEWS
VOL. 23 - NO. 8 - MARCH 2020
8. Cloud printing
Print any document from any mobile or computer to your office printer through cloud printing option.
This shall work even for regular non-WiFi printers provided they are connected to a computer with a
logged in Google account. In such a computer, you shall open the Chrome browser, go to Settings>
Advanced settings> Printing> Google Cloud Print> Manage Cloud Print devices. Click on it and a new
web page opens up, which will ask you to add printer. Here it will ask to log in to the Google account. Once
done, it shows the printer to be registered, then by clicking on “Manage printer”, select the printer you
want to share to other Google accounts. Once the share invitation is accepted by such persons, they can
also print from their phones or computers. (You may need to install the Google cloud printing app on your
phone, and the Google cloud printing driver on your computer from https://www.google.com
/cloudprint/learn/apps/)
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C.V.O. CA'S NEWS & VIEWS
VOL. 23 - NO. 8 - MARCH 2020
10. Alerts
If you want to receive emails on any new happening in your topics of interest, then you can create an alert
from Google alerts. Further, you can also set the frequency of alert emails, the region (India), language, etc.
Many day to day Apps that we use have features which you might be unaware of, and when used can make your
life simpler.
Think over it! Think Different!
27
C.V.O. CA'S NEWS & VIEWS
BRIEF UPDATE ON SEBI AND CORPORATE LAW
by CA IP Neha Rajen Gada and CA IP Rajen Hemchand Gada
VOL. 23 - NO. 8 - MARCH 2020
SEBI
A. CIRCULARS
1. Non-compliance with certain provisions of the
SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015 and the
Standard Operating Procedure for suspension
and revocation of trading of specified
securities
[Issued by the Securities and Exchange Board
of India vide Circular No. SEBI/HO/CFD/CMD/
CIR/P/2020/12 dated January 22, 2020]
The Notification lays down the quantum of
penalty to be paid for non-compliance with the
requirements specified in SEBI (Listing Obliga-
tions and Disclosure Requirements) Regulations,
2015. It also lays down the steps to be taken in
case of continued non-compliance.
2. Streamlining the Process of Rights Issue
[Issued by the Securities and Exchange Board
of India vide Circular No. SEBI/HO/CFD/DIL2
/CIR/P/2020/13 dated January 22, 2020]
SEBI has introduced credit of rights entitlement
in dematerialized mode. It has also laid down the
process for credit, renunciation and trading of
rights entitlements.
3. Disclosure Standards for Alternative Invest-
ment Funds (AIFs)
[Issued by the Securities and Exchange Board
of India vide Circular No. SEBI/HO/IMD/DF6/
CIR/P/2020/24 dated February 06, 2020]
SEBI has laid down the template of Private
Placement Memorandum being issued by AIFs. It
has also introduced the concept of performance
benchmarking of AIFs and has laid down the
operational guidelines for performance
benchmarking.
4. Guidelines for Portfolio Managers
[Issued by the Securities and Exchange Board
of India vide Circular No. SEBI/HO/IMD/DF1/
CIR/P/2020/26 dated February 13, 2020]
In addition to the revised SEBI (Portfolio
Managers) Regulations, 2020 notified on January
16, 2020, SEBI has issue the stated guidelines.
These guidelines deal with the following aspects
of Portfolio Managers:
(a) Fees and Charges
(b) Direct on-boarding of clients by Portfolio
Managers
(c) Nomenclature 'Investment Approach'
(d) Periodic reporting by Portfolio Managers
(e) Reporting of Performance by Portfolio
Managers
(f) Disclosure Documents
(g) Supervision of Distributors
The provisions of the guidelines are applicable
from May 01, 2020.
CORPORATE LAW
A. RULES
1. Companies (Winding Up) Rules, 2020
[Issued by Ministry of Corporate Affairs vide
Notification No. G.S.R. 46(E) dated January
24, 2020]
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C.V.O. CA'S NEWS & VIEWS
VOL. 23 - NO. 8 - MARCH 2020
The Central Government has issued a 241 page
notification (113 pages in English language)
laying down the Winding Up Rules which would
be effective from April 01, 2020. It deals with
various aspects of Liquidation, actions of
Liquidators, Procedure and Compliances to be
undertaken and contains various formats and
forms.
2. Companies (Accounts) Amendment Rules,
2020
[Issued by Ministry of Corporate Affairs vide
Notification No. G.S.R. 46(E) dated January
24, 2020]
Every Non-Banking Financial Company
(NBFC) that is required to comply with
Indian Accounting Standards (Ind AS) shall file
the financial statements with Registrar together
with Form AOC-4 NBFC (Ind AS) and the
consolidated financial statement, if any, with
Form AOC-4 CFS NBFC (Ind AS).
3. Companies (Compromises, Arrangements and
Amalgamations) Amendment Rules, 2020
[Issued by Ministry of Corporate Affairs vide
Notification No. G.S.R. 79(E) dated February
03, 2020]
Rule 3(4) has been newly inserted wherein a
member either singly or alongwith any other
member / members holding not less than three-
fourths of the voting right shall file an application
with MCA for acquisition of remaining shares of
the Company.
This sub-rule does not apply to any transfer or
transmission of shares through a contract,
arrangement or succession, as the case may be,
or any transfer made in pursuance of any
statutory or regulatory requirement.
The application has to be supported by a
valuation certificate issued by a registered valuer
and details of a separate bank account, opened
specifically for the purpose takeover of remaining
shares, wherein atleast fifty percent of the funds
to be utilized for the purpose of acquisition are
deposited.
4. National Company Law Tribunal (Amend-
ment) Rules, 2020
[Issued by Ministry of Corporate Affairs vide
Notification No. G.S.R. 80(E) dated February
03, 2020]
It has been notified that the application for
takeover of shares of unlisted companies, as
specified under section 230(11) read alongwith
Rule 3 (4) o f the amended Companies
(Compromises, Arrangements and Amalga-
mations) Amendment Rules, 2020, shall be
accompanied with a fee of Rs. 5,000/- and the
following information / documents:
(a) Affidavit verifying the petition;
(b) Memorandum of appearance with copy of the
Board's Resolution or the executed
vakalatnama, as the case may be;
(c) Documents in support of the grievance
against the takeover; and
(d) Any other relevant document.
5. Companies (Issue of Global Depository Rece-
ipts) Amendment Rules, 2020
[Issued by Ministry of Corporate Affairs vide
Notification No. G.S.R. 111(E) dated February
13, 2020]
Among others, the reference to “Foreign Currency
Convertible Bonds and Ordinary Shares
(Through Depository Receipt Mechanism)
Scheme, 1993” has now been amended to
“Depository Receipts Scheme, 2014”.
6. Companies (Incorporation)Amendment Rules,
2020
[Issued by Ministry of Corporate Affairs vide
Notification No. G.S.R. 128(E) dated February
18, 2020]
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C.V.O. CA'S NEWS & VIEWS
VOL. 23 - NO. 8 - MARCH 2020
SPICe+ form has to be used for
reservation of name for new
incorporations. For change of name of
existing companies, the Run form needs
to be utilized.
B. CIRCULARS
1. Relaxation of additional fees and
extension of last date of filing of AoC-4
NBFC (Ind AS) and AoC-4 CFS NBFC
(Ind AS) for FY 2018-19 under the
Companies Act, 2013 - reg.
[Issued by Ministry of Corporate Affairs
vide General Circular No. 02/2020
dated January 30, 2020]
The last date for filing of AoC-4 NBFC (Ind
AS) and AoC-4 NBFC CFS (Ind AS) has
been extended to March 31, 2020 without
payment of additional fees.
2. Filing of forms in the Registry (MCA-21)
by the Insolvency Professional (Interim
Resolution Professional (IRP) or
Resolution Professional (RP) or
Liquidator) appointed under Insolvency
Bankruptcy Code, 2016 (IBC, 2016)
[Issued by Ministry of Corporate Affairs
vide General Circular No. 04/2020
dated February 17, 2020]
The Central Government has laid down
the process and procedure for filing of
various documents in case of a corporate
debtor where and Insolvency Resolution
Professional / Insolvency Professional /
Liquidator has been appointed by
National Company Law Tribunal or the
National Company Law Appel late
Tribunal.
C. Notifications
1. Commencement notification dated
03.02.2020 – Section 230 (11) & (12) of
Companies Act, 2013
[Issued by Ministry of Corporate Affairs
vide Notification No. S. O. __(E) dated
February 03, 2020]
The Provisions relating to takeover of
unlisted company have been notified.
Rules regarding the same have been
mentioned herein before.
30
CA Manoj Chunilal Shah CA Viral Vinod Satra
Compiled by:FEMAUPDATES
C.V.O. CA'S NEWS & VIEWS
VOL. 23 - NO. 8 - MARCH 2020
Relaxations in Voluntary Retention Route for Investment in Debt Markets by Foreign Portfolio Investors
A.P. DIR (Circular Series) No. 19 dated January 23, 2020
Reserve Bank vide A.P. DIR Circular 34 dated May 24, 2019 had introduced, separate channel called
“Voluntary Retention Route – VRR” to enable FPIs to invest in debt markets in India. The features of route were
directed in said circular hereinafter referred to as “Directions”. Following changes have been made to the said
directions:
a. Investment cap is increase to Rs. 1,50,000 crores. Previously it was Rs. 75,000 crores.
b. FPIs are allowed to transfer their investments made under General Investment Limited to VRR.
c. Presently FPIs can invest under VRR in any Corporate Debt Instruments listed under Schedule 1 of Debt
Instrument Regulations other than those specified at 1(a) and 1(d) of the said schedule.
FPIs are now also allowed to invest in Exchange Traded Funds which are investing only in debt instruments.
Revision in Merchanting Trade Transactions guidelines
A.P. (DIR Series) Circular No. 20 dated January 23, 2020
The existing guidelines of Merchanting Trade Transactions (MTT) are revised as under:
a. Goods shall not enter domestic tariff area.
b. Considering that in some cases goods acquired may require certain specific value addition/processing,
state of goods may be allowed transformation subject to AD being satisfied of documentary evidence.
c. MTT shall be undertaken for goods that are permitted for export/import under Foreign Trade Policy.
d. AD bank shall satisfy itself with the bonafides of the transactions. Further, KYC and AML guidelines shall
be scrupulously adhered to by the AD bank while handling such transactions.
e. The entire Merchanting Trade is to be routed through the same AD bank. The AD bank shall verify the
documents like invoice, packing list, transport documents and insurance documents (if originals are not
available, Non-negotiable copies duly authenticated by the bank handling documents may be taken) and
satisfy itself about the genuineness of the trade. The AD bank may, if satisfied, rely on online verification of
Bill of Lading/ Airway Bill on the website of International Maritime Bureau or Airline web check facilities.
However, the AD bank shall ensure that the requisite details are made available /retrievable at the time of
Inspection/Audit/investigation of the transactions.
f. The entire MTT shall be completed within an overall period of nine months and there shall not be any
outlay of foreign exchange beyond four months. The commencement date of Merchanting Trade shall be
the date of shipment / export leg receipt or import leg payment, whichever is first. The completion date
shall be the date of shipment / export leg receipt or import leg payment, whichever is the last.
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C.V.O. CA'S NEWS & VIEWS
VOL. 23 - NO. 8 - MARCH 2020
g. Short-term credit either by way of suppliers' credit or buyers' credit may be extended for MTT to the extent
not backed by advance remittance for the export leg, including the discounting of export leg LC by the AD
bank, as in the case of import transactions. However, Letter of Undertaking (LoU)/ Letter of Comfort (LoC)
shall not be issued for supplier's/ buyer's credit.
h. Any receipts for the export leg, prior to the payment for import leg, may be parked either in Exchange
Earners Foreign Currency (EEFC) account or in an interest-bearing INR account till the import leg liability
arises. It shall be strictly earmarked/ lien-marked for the payment of import leg and the liability of the
import leg, as soon as it arises, shall be extinguished out of these funds without any delay. If such receipts
are kept in interest-bearing INR account, hedging thereof may be allowed by the AD bank at the request of
its customer, as per extant regulations. No fund/non-fund-based facilities shall be extended against these
balances
i. In case of discounting of export leg LC where payment for import leg is still to be made (even if partially),
the proceeds shall be utilized in the manner prescribed at point no. (h) above.
j. Payment for import leg may also be allowed to be made out of the balances in EEFC account of the
merchant trader.
k. Merchanting traders may be allowed to make advance payment for the import leg on demand made by the
overseas supplier. In case where inward remittance from the overseas buyer is not received before the
outward remittance to the overseas supplier, AD bank may handle such transactions based on its
commercial judgment. It may, however, be ensured that any such advance payment for an import leg
beyond USD 500,000/- per transaction, shall be made against Bank Guarantee / an unconditional,
irrevocable standby Letter of Credit from an international bank of repute. Overall prudential limits on
allowing such advance payments by a customer may be fixed by the AD bank.
l. Letter of Credit to the supplier for the import leg is permitted against confirmed export order, keeping in
view the foreign exchange outlay of four months and completion of the MTT within nine months and
subject to compliance with the instructions issued by Department of Banking Regulation on “Guarantees
and Co-acceptances”, as amended from time to time.
m. AD bank shall ensure one-to-one matching in case of each MTT and report defaults in any leg by the
traders to the concerned Regional Office of the Reserve Bank, on half yearly basis in the format as
annexed, within 15 days from the close of each half year, i.e. June and December.
n. Merchant traders with outstanding of 5% or more of their annual export earnings shall be liable for
caution listing.
The Merchanting traders shall be genuine traders of goods and not mere financial intermediaries. Confirmed
orders must be received by them from the overseas buyers. AD banks shall satisfy themselves about the
capabilities of the Merchanting trader to perform the obligations under the order. The Merchanting trade shall
result in profit which shall be determined by subtracting import payments and related expenses from export
proceeds for the specific MTT.
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Write-off of unrealized amount of export leg:
i. AD bank may write-off the unrealized amount of export leg, without any ceiling, on the request made by
the Merchanting trader, in the following circumstances:
a. The MTT buyer has been declared insolvent and a certificate from the official liquidator specifying that
there is no possibility of recovery of export proceeds has been produced.
b. The goods exported have been auctioned or destroyed by the Port / Customs / Health authorities in the
importing country and a certificate to that effect has been produced.
c. The unrealized amount of the export leg represents the balance due in a case settled through the
intervention of the Indian Embassy, Foreign Chamber of Commerce or similar Organization;
provided, the MTT is in adherence to all other provisions except the delays in timelines (either for outlay
or completion period of MTT or both) attributed to reasons mentioned at a, b and c above.
ii. In addition to above, write-off as at (i) shall be subject to following conditions:
a. AD bank shall satisfy itself with the bonafides of the transactions and ensure that there are no
KYC/AML concerns.
b. The transaction shall not be under investigation under FEMA by any of the investigating agency/ies.
c. The counterparty to the merchant trader is not from a country or jurisdiction in the updated FATF
Public Statement on High Risk & Non-Co-operative Jurisdictions on which FATF has called for
counter measures.
Third party payments for export and import legs of the MTT are not allowed.
Agency commission is not allowed in MTTs. However, AD banks may allow payment of agency commission up
to a reasonable extent by way of outward remittance under exceptional circumstances, subject to the following
conditions:
a. MTT has been completed in all respects.
b. The payment of agency commission shall not result in the MTT ending into a loss.
c. The Merchanting trader shall make a specific request to the AD bank in this regard.
AD bank may approach Regional Office (RO) concerned of the Reserve Bank for regularization of the MTT for
deviation, if any, from the prescribed guidelines and the MTT shall be closed only after receiving approval from
the RO concerned of the Reserve Bank.
Reporting for Merchanting Trade Transactions under FETERS shall be done on gross basis, against the under
mentioned codes:
Trade Purpose Code
under FETERS
Description
Export P0108 Goods sold under Merchanting /receipt against export leg of Merchanting trade
Import S0108 Goods acquired under Merchanting /payment against import leg of Merchanting trade
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C.V.O. CA'S NEWS & VIEWS
Compiled by:
CA Ashwin Bhawanji Shah
RERA
UPDATES
VOL. 23 - NO. 8 - MARCH 2020
UPDATE ON REAL ESTATE (REGULATION &
DEVELOPMENT ) ACT , 2016
RECENT JUDICIAL PRONOUNCEMENT ON
S E C T I O N 7 ( 3 ) P R O N U O U N C E D B Y
MAHARERA AUTHORITY Contd…
ANALYSIS OF SECTION 7 OF RERDA, 2016 :-
Section 7(1) of the Act deals with Revocation of
registration of project upon satisfaction that :-
a. Promoters violates anything required to be
done under Act, Rules and Regulation made
thereunder.
b. Promoter violates terms or conditions of the
approval granted by competent authority
c. Promoter is involved in any kind of unfair
trade practices or irregularities.
Section 7(2) of the Act provides that no such
revocation can be done by authority unless not
less than 30 days notice stating the grounds of
revocation is given to the promoter and promoter
be given chance of reply to the proposed
revocation.
Section 7(3) of the Act empowers the Authority to
impose certain terms and conditions on
promoter in the interest of allottees, instead of
revoking the registration and these terms and
conditions shall be binding on the promoter.
The issue raised by various developers under
Writ Petition 2737 of 2017 before Hon. High
Court Mumbai in connection with stringent
provision of Section 6 has been elaborately
discussed in the said judgement as under :-
a. Section 6 permits authority to grant
extension only for one year and such
provisions were harsh in nature and it fails to
appreciate various force majeure conditions
and the same has been challenged by
developers in the Writ Petition for declaring it
to be arbitrary and constitutionally invalid.
b. Hon. High Court observed that intention of
the legislation to be viewed looking at the
larger public interest and there lies answer in
Section 7(3) which empowers authority to
further grant extension beyond one year
based on merits of the case. Harmonious and
balance construction of Section 6 and
Section 7(3) shall suffice the purpose of
enactment of RERA law.
Accordingly, authority was required to
consider each such case individually on merit
and decide the terms and conditions to be
imposed upon the promoter for further
extension instead of revoking the registration
of project as spelled out in Section 7(3) of the
Act.
However, authority has issued Maharera thOrder No.07/2019 dated 8 Feb , 2019
imposing common conditions to all such
promoters intending to seek further
extension beyond one year that concerned
association of allottees resolves that existing
promoter be permitted to complete the
project in specified time limit.
This means that if association of allottees
decides not to continue with the existing
promoter then association of allottees shall
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C.V.O. CA'S NEWS & VIEWS
VOL. 23 - NO. 8 - MARCH 2020
have first right of refusal to continue as
promoter and it can appoint some other
developer as promoter.
Authority has imposed such blanket conditions
on all promoters without first going into the
merits of the case and satisfying whether such
projects requires imposition of terms or
conditions.
The following issues and practical difficulties
arises from operation of this order of the
authority :-
a. In many projects , there are secured creditor
like banks and financial institutions having
charge on the project land and various units.
The issue remains unaddressed in light of the
facts that these financial institutions have
absolute right to dispose of the project land as
it is where it is.
b. It is difficult to unite all such allottees in the
absence of required data viz address, contact
details etc. The current Form 3 issued by
Chartered Accountants does not have all these
details and practically uniting all these
allottees is challenge before authority
especially where promoter are not attending to
such proceedings.
c. Further, there is requirement of resolution of
association of allottee which means that
meeting is required to called for and resolution
is to be passed in the said meeting. Practically
various allottee are spread over geographical
area across various cities or countries and it
become difficult for promoter to hold the
meeting of the association of allottee for getting
the resolution passed in favour of the
promoter.
d. In lay out conditions standalone project if
revoked will affect the entire project land which
remains unexplored on account of proposed
projects in future and there could be ongoing
litigation by the promoter to protect his rights
and interest.
e. There are many projects which have become
non feasible for new developer to take over and
association will have to complete the project on
its own by contributing additional funds and on
this count no resolutions could be dawn by the
association of allottees.
In Nutshell , the issue requires analytical thought
process in depth industry to revive the stalled
projects under prevailing state of recession on Real
Estate Sector with various stakeholders like
financial institutions, promoter and association of
allottees etc.
Authority need to assume its administrative
jurisdiction to balance out the progress of real
estate sector and protect the rights of consumers
and should not on back seat by issue of such order
u/s 7(3) of the Act and passing all the tasks to be
performed by association of allottees which are
generally unorganized with different group of
allottees having different mind set.
Further, complaint filed by allottees with respect to
their claim u/s 18 for refund of entire sum with
interest or interest claim for delay in possession,
remain unaddressed till revival of the project and
presently their complaints are disposed off and they
have liberty to re approach Maharera once project
is revived by filing new complains , which involves
Disclaimer: The views / opinions expressed in the articles are purely of the writers. The readers are requested to take proper professional guidance before abiding the views expressed in the articles. The publisher, the editor and the association disclaim any liability in connection with the use of the information mentioned in the articles.
PRINTED AND PUBLISHED BY MANOJ SHAH ON BEHALF OF C.V.O. CHARTERED AND COST ACCOUNTANTS' ASSOCIATION - 304, JASMINE APARTMENT, DADA SAHEB PHALKE ROAD, DADAR (EAST), MUMBAI - 400014.TEL: 022-24105987. EDITOR: RAMESH CHHEDA
CIRCULARS - CGST:
rd Circular No. 128/47/2019 - GST- dated 23
December, 2019.
The Circular deals with generation and quoting
of document Identification Number (DIN) on any
communication including e-mails issued by the
officers of the Central Board of Indirect Taxes
and Customs (CBIC) to tax payers and other
concerned persons.
th Circular No. 129/48/2019 - GST- dated 24
December, 2019.
The Circular in details gives Standard Operating
Procedure to be followed in case of non-filers of
returns.
Circular No. 130/49/2019 - GST- dated Nil.
The Circular gives clarification on the RCM
applicability on Service of renting of any motor
vehicle to carry passengers where the cost of fuel
is included in the consideration charged from
the service recipient, and service is provided to a
body corporate.
rd Circular No. 131/1/2020 - GST- dated 23
January, 2020.
The circular in details give Standard Operating
Procedure (SOP) to be followed by exporters.
ORDERS: GST:
th Order No. 1 /2020 – GST- dated 7 February,
2020
Due date of furnishing FORM GST TRAN-1 is
extended to 31/03/2020 in respect of registered
persons who could not submit the said
declaration by the due date on account of
technical difficulties on the common portal and
in respect of whom the Council has made a
recommendation.
ORDERS: CGST:
th Order No. 10/2019 - Central Tax – dated 26
December, 2019.
The Order extends the due date of furnishing the
annual return in FORMs GSTR-9 and GSTR-9C st stfor the period from the 1 July, 2017 to the 31