Regulations
RBI not sharing bank inspection reports with intelligence agencies

In the Economic Intelligence Council meeting, the chief of CEIB reportedly said that RBI had initially agreed to share extracts of the inspection reports on banks but later on, had changed its stand

 

The Reserve Bank of India (RBI) has refused to share its reports on banks’ inspection on alleged money laundering laws and other violations with the Central Economic Intelligence Bureau (CEIB), citing legal hurdles.
 
The RBI was required to share relevant extracts of inspection reports with law enforcement agencies and CEIB, an apex intelligence agency under the Finance Ministry, to check black money and other financial crimes where gross violations of know your customer (KYC) guidelines and Prevention of Money Laundering Act (PMLA) are noticed, official sources said.
 
It had earlier given an assurance about sharing information relating to the Foreign Exchange Management Act (FEMA) violations with CEIB, which they share with the Enforcement Directorate (ED), they said.
 
But the central bank has not been sharing such information, the sources said.
 
The matter of non-sharing of inspection reports by RBI with CEIB was discussed during a recent meeting of the Economic Intelligence Council (EIC) headed by Finance Minister Arun Jaitley.
 
At the meeting, it was highlighted by the CEIB chief that while RBI had initially agreed to share the extracts of inspection reports with it, later on, they changed their stand.
 
RBI has cited “legal impediments” in sharing the reports with CEIB as it is not a statutory body; the sources said quoting the minutes of the meeting. 
 

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SEBI’s Safety Net Idea is Full of Holes
More silly tinkering with IPO rules
 
Every time the capital market regulator is under pressure to explain why retail investors shun the market, it fishes out the absurd idea of a ‘safety net’ for equity investors. Each time, the safety net has a new name. This time, The Economic Times tells us that its primary market advisory committee (PMAC) will discuss the idea of allowing investors to buy optionally fully convertible debentures (OFCDs) instead of plain vanilla equity. 
 
SEBI (Securities & Exchange Board of India), which celebrated 25 years of its existence with much fanfare in 2014, still does not seem to understand that equity, by its very nature, has to carry a price risk and cannot be converted into a debt-like instrument. Will OFCDs really work? The newspaper reports that OFCDs will have an 18-month tenure and carry bank interest rate (taxable); the money will be kept in an escrow account to meet redemption requirements should they arise. It is not clear if the conversion to equity will be in six months or at the end of 18 months. 
 
If the conversion to equity has to be in six months, who is to say that truly unscrupulous management will not keep the price high for that period? Many companies have managed to do it for significantly longer periods. A recent example would be Helios & Matheson, whose stock price continued to remain high even when it wasn’t able to pay salaries or interest on fixed deposits. 
 
Moreover, what happens if the price falls precipitously after the OFCDs are converted? Will SEBI act against the promoters or will they get away? Surely, the regulator realises that there must be a reason why various kinds of  ‘safety nets’ for equity investors have been discussed for over two decades and why they have never worked.
 
It is worth pondering what kind of companies would need to raise money under such conditions, while running the risk of numerous factors and circumstances that could impact stock price and corporate performance.
 
SEBI forgets that its job is to ensure that corporate fundamentals are in order, that facts stated in the IPO document are correct and accounts are not doctored. We, investor activists, pushed for an IPO rating on a scale of 1 to 5 to give investors a snapshot of the fundamentals. All they needed to do was to take a call on the price. But SEBI, under pressure from corporate lobbyists, ensured that IPO ratings were scrapped. What helped the case was that SEBI had deliberately weakened the effectiveness of ratings by allowing companies to choose their rating agency, instead using investor protection funds to pay for them and ensure independence.
 
Remember, it is SEBI that damaged the primary market permanently in the mid-1990s by allowing hundreds of fraudulent, fly-by-night companies to tap the capital market without any checks. A significant number of these companies vanished with investors’ money and there has been no serious effort to track them and recover funds. Many investors who suffered massive losses in the first flush of capital market liberalisation have never come back. India’s investor population has halved and this is affecting the government’s plan to disinvest shares of public sector undertakings (PSUs).
 
The answer to this situation is not an absurd safety net, but to rebuild investor confidence through sensible pricing of IPOs and more responsible investment banking. PSUs are unlikely to attract investors unless one of two things happen—the offer is at a significant discount to market price, or the government initiates steps to ensure operational autonomy of management with proper accountability and puts in place professional management selected on merit. 

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Financial Inclusion without Financial Consumers
For the government and regulators, financial inclusion does not mean listening to consumers
 
Corporation Bank is an exception among Indian banks—public, private and foreign. Its outspoken officers’ association often acts as a whistleblower and has prevented more than one chairman from destroying the bank’s finances through bad lending. The February issue of its monthly journal, Officers’ Voice,  published extremely forthright views on government and banking. 
 
While welcoming the prime minister’s (PM’s) views expressed at the Gyan Sangam at Pune, the journal makes some telling points. The retreat was supposed to brainstorm on what ails the industry, but except for CMDs (chairman & managing directors) there were no representatives of other stakeholders, especially officers and employees who are the backbone of banks. “Does it mean that wisdom is the exclusive domain of only CMDs?” asks Officers’ Voice. The editorial points out that while the media and other stakeholders were kept away from the retreat, the ‘knowledge partner’ for the Gyan Sangam was global consulting firm McKinsey & Company. It raises a pertinent question of whether ‘videshi’ gyan is the answer to the swadeshi problem of making public sector banks more effective. 
 
Commenting on several ‘controversial’ recommendations that emanated from the deliberations, the editorial says that the proposal to issue priority sector loan certificates (PSLs) seems to be aimed at allowing private and foreign banks to meet priority sector obligations by merely investing in PSLs while the “hard and strenuous work of priority sector lending has to be done only by PSBs.” 
 
Another revelation is the annual loss figure of Rs1,485 crore for banks on account of the PM’s Jan Dhan Yojana. This is broken up as—Rs500 crore for issue of Rupay cards, Rs780 crore for payment to banking correspondents, Rs390 crore for cost of supervision, Rs175 crore for financial literacy and advertising. 
 
Moneylife, as the voice of savers, believes that most of these observations apply to bank customers as well. Despite being the largest stakeholder in the banking system, their voice is most feeble is not heard by anybody in the banking system or the government. Neither the Reserve Bank of India (RBI) nor the Indian Banks Association (which at least two, very respected, former deputy governors of RBI call a ‘bankers’ cartel’) has any formal process of engaging or interacting with those who represent bank customers. 
 
If leveraging technology to improve banking efficiency were a key theme of the Gyan Sangam, then ensuring that customers use it safely and have access to a proper grievance redress mechanism would be a natural corollary. But there was no discussion about this issue at all. 
 
Similarly, neither banks nor the regulators care about the bugs or design flaws in the use of banking technology that cause hardship to consumers. Moneylife Foundation has long been lobbying RBI over niggling issues with NEFT transactions. But, despite a personal meeting, written submission to the top brass at RBI and persistent follow up, we have no feedback on whether consumers’ concerns are likely to be addressed at all. The unfair harassment and extortion of those in financial distress by recovery agencies also falls on deaf years. 
 
Many recent developments, including BJP’s shock defeat in Delhi, the withdrawal of ordinances issued by the government, and the controversy over the Land Acquisition Bill, have one thing in common—a sense that the government needs to communicate more effectively with various stakeholders. It is Narendra Modi’s impressive ability to communicate with one and all that swept him to power. The prime minister must ensure he does not lose that advantage, by setting up a formal system of communication with all stakeholders and ensuring that by every regulator and ministry in his government follows it. 

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COMMENTS

Vaibhav Dhoka

2 years ago

Common Man doesn't understand Whether Regulator is confused or Pretend to be confused?

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