Sr. No.

Legal issue

Required Legislative changes

1.

Transparent framework for setting monetary policy objectives.

The RBI Act can be amended to provide for this, alternatively, a monetary policy statement can be mandated in the Annual Financial Statement of the Government.

2.

Greater autonomy to RBI.

Either through amending the RBI Act or ideally through a Constitutional Amendment.

3.

Greater operational flexibility to implement the policy.

A number of these are addressed in the RBI (Amendment) Bill 2000.

4.

(i) Determination of interest rates should be exclusively a monetary policy function and there should be legislative measures to separate debt management and monetary policy functions.

(ii) Government should set up its own independent debt management office to take over the present functions discharged by RBI.

Sections 21 (2) and 17(11) (e) of the RBI Act will need to be amended. In addition, appropriate changes will need to be made in the proposed Government Securities Act.

5.

Disclosure of adverse supervisory action.

Section 47 (A) of BR Act and 58B of the RBI Act could be amended to enable the publication. Alternatively, amendment of Section 28 of BR Act and 45E of RBI Act could also ensure such publication.

6.

Reasonable security of tenure to the top management of RBI.

Sections 8 to 11 of RBI Act may be suitably amended.

B. Advisory Group on Payment and Settlement System (Parts I, II and III)

1.

Section 17 (6) of the RBI Act needs to be amended to empower RBI for establishment and regulation of multiple payment system.

Proposal to insert Sub Section (6A) of Section 17 of the RBI Act is under consideration of the Government.

C. Advisory Group on Fiscal Transparency

1.

One of the quasi-fiscal activities undertaken by the Reserve Bank is intervening in the primary issue of government securities which should be avoided.

The FRBMB seeks to prohibit RBI support of government securities in the primary market after three years [Clause 5(3)]. This should be accompanied by the Government taking over debt management function from RBI as recommended by the Advisory Group on Monetary and Financial Transparency. Section 21(2) of the RBI Act may be amended accordingly.

A. Advisory Group on Securities Market Regulation

1.

Allowing SEBI enhanced authority and powers to impose penalty commensurate with the gravity of the violation (i.e. disgorgement powers).

By amending SEBI Act, the listed companies can be brought under its purview. The penal powers under the statute can also be enhanced.

2.

SEBI to be given powers to enter into agreements with Foreign Regulatory Authorities.

SEBI Act can be amended to specifically enable it to enter into agreement with foreign authority as regards the coordination among the Regulators in a transnationals context.

3.

UTI and its schemes should be brought under the regulatory powers of SEBI.

SEBI Act and UTI Act may be amended to bring UTI under the regulatory regime of SEBI.

4.

Focus of regulation should be shifted from institution specificity to market specificity and consolidation of the SCR Act and the SEBI Act in line with Dhanuka Committee.

SCR Act, RBI Act and SEBI Act could be amended to give the regulatory control, based on the market specificity and greater consolidation.

1.

Co-ordination between the regulators for an efficient unit-linked insurance business.

If regulation of unit-linked insurance is vested with SEBI both SEBI Act and IRDA Act could require a provision to ensure the co-ordination of regulators.

1.

Disclosure of adverse supervisory action.

Section 47 (A) of BR Act and 58B of the RBI Act could be amended to enable the publication. Alternatively, amendment of Section 28 of BR Act and 45E of RBI Act could also ensure such publication.

2.

Banks and other financial institutions should provide information on performance to the depositors.

Banking Regulation Act, (State Bank of India Act, Nationalisation Act, etc.) could make provisions ensuring the publication of performance Report.

1.

Powers to RBI to decide on capital requirements on a case by case basis needs to be clearly defined by law.

Included in proposed amendment to Section 11 of B.R. Act.

2.

‘Substantial interest’ as defined in Section 5(ne) of BR Act is too low. Needs to be revised upwards.

Amendment to Section 5 (ne) of BR Act has been proposed to revise the ceiling upward to Rs1crore.

3.

Prior supervisory approval should be made mandatory for change of ownership or voting rights above a threshold.

RBI should be empowered to conduct ‘fit and proper’ tests on shareholders holding in excess of a threshold level.

Restrictions on voting rights present vide Section 12 (2) and 16 (1A) of BR Act. Amendment has been proposed to restrict limit by 5 per cent of holding in capital and enhanced power for RBI to monitor.

4.

‘Closely related group’ needs to be explicitly defined and the supervisor should have the discretion, prescribed in law, in interpreting the definition on a case by case basis.

Proposed amendment to Section 20 of BR Act provides definition and empowers RBI to modify the definitions by notification.

5.

The definition of connected lending needs to be made more broad-based to include all types of counter parties irrespective of whether they are in the public or private sector.

Prohibition of loans and advances to large shareholders.

Required amendment proposed in Section 20 of BR Act.

Amendment will be required in Section 20 of BR Act.

6.

Preparation and reporting of consolidated accounts by banks should be introduced.

The required change has been proposed vide addition of Section 29A (1) to the BR Act.

7.

It is desirable to provide RBI with powers to impose conservatorship on banks in temporary trouble.

New section will be required to be added to BR Act or Section 36 will be required to be amended.

8.

Suitable legal provision obliging statutory auditors of banks to report on matters of material significance to regulators.

Amendment to section 30 of BR Act has already been proposed.

9.

Present legal provisions in India do not provided for sufficient confidentiality of information. Clearly defined laws needed for this purpose.

Section 34 A of BR Act will require amendment in this respect.

10.

Clear accountability needs to be fixed on the board of directors and individual directors for non-performance and negligence.

Amendment required in Section 46 of the BR Act to include directors. Also changes may be considered in Section 46 of SBI Act and Section 16 of the Banking Companies (Acquisition and Transfer of Undertakings) Acts, 1970 and 1980.

11.

RBI should apply stricter norms for the fit and proper test while evaluating directors and the quality of the board.

Changes have been proposed in Section 10A (2) of the BR Act to the end that at least one of the directors of the bank should have knowledge of science and technology.

12.

RBI should practice consolidated supervision over internationally active organisations and get into formal relationships with host country supervisors.

A new provision in the BR Act would empower RBI to do this. At present such supervision is based on customary practices.

1.

Provide for freezing of domestic accounts of listed terrorists in public interest.

Suitable amendment in BR Act will be required.

1.

Elimination of conflict of interest through demutualisation, which implies separation of ownership of stock exchange from the right to trade on it.

The provisions of the Securities Contracts (Regulation) Act, 1956 (SCR Act) need amendments to separate the brokers/players right to trade and the ownership.

2.

Creation of one or two clearing corporations for all the stock exchanges as against the present practice of individual clearing house.

Constitution, role and functions of clearing corporations can be incorporated in the SCR Act to grant statutory recognition for such clearing corporation.

3.

SEBI should assist Association of Mutual Funds of India to develop into a full-fledged Self-Regulatory Organisation (SRO).

These types of Associations should be given specific statutory recognition and be vested with legal character under the SCR Act also.

4.

RBI should facilitate FIMMDA and PDAI to develop into full-fledged SROs.

These associations should be given specific statutory recognition and be vested with legal character under SCR Act besides RBI Act.

V. Companies Act

A. Advisory Group on Corporate Governance

1.

SEBI has directed all stock exchanges to amend their listing agreements to incorporate new clauses to make it binding on the listed companies to improve their governance practices. The listing agreements signed between the company and the stock exchange should be strengthened with a penal provision for erring companies for their violation in respect of corporate governance norms. However, it is desirable that effective penal provisions are added in the Companies Act for violation of corporate governance norms.

A substantive provision empowering the Government to set the norms of corporate governance will need to be incorporated in the Companies Act, 1956. Once such a provision is incorporated that Government can make rules regulating the same under Section 642 of the Companies Act. This rule can also contain enhanced penal provision.

2.

SEBI has mandated disclosure of summary results by listed companies on quarterly basis and others on half-yearly basis. Although, companies present their annual accounts covering 12 months period, they take advantage of flexible legal provision and choose to present accounts for a period from 6 to 18 months to take advantage of tax benefits.

Companies should be mandated to circulate among the shareholders the annual accounts on 12 monthly basis even during the years when they decide to change their accounting year for tax purposes which should be included in the Companies Act.

3.

For effective corporate governance practices, the definition of the concept of `independent directors’ has to be made clear in the Companies Act.

Suitable amendments to Section 252 of Companies will be needed for defining the concept of independent directors and making it mandatory for specified companies to have independent directors on the board. SEBI has as part of its listing agreements specified a definition of independent directors.

4.

Some companies hold only 4 meetings in a year (the minimum indicator under Section 285 of the Companies Act) as required under the law. In fact the companies which are having diversified activities should be holding at least 6 board meetings in a year.

Companies Act should be amended to provide a minimum of 6 meetings in a year. Also the possibility of holding meetings through video conference, etc. be enabled.

5.

The recent amendments to the Companies Act have made non-executive directors of companies accountable just like full time directors. This is working against competent persons joining corporates as they have to take risks without being fully familiar with the intricacies of the business and not participated in the decision-making process concerning all the important matters.

We may wish to re-examine liability of non-executive directors.

6.

In respect of major developments of companies, the non-executive directors some times come to know about the developments through press reports as the necessary papers are not sent for long-time i.e., no periodical briefing of developments.

There should be a mandatory reporting provisions in the Companies Act.

7.

The term limits of independent directors are too small for efficient functioning.

The term limits of independent directors of companies/banks/public sector companies should be made preferably up to 10 years on a continuous basis by making amendments to Companies Act.

8.

The voting rights of small shareholders should be strengthened by introducing a provision for compounding of voting rights for small shareholders so that they are able to get their representations elected to the Board.

Amendment to the Companies Act is required.

9.

Nomination committee to identify new directors and remuneration committee to decide on senior management/directors’ remuneration should be set up.

Suitable amendments will need to be made in the Companies Act.

1.

In respect of convergence of corporate and tax laws with accounting standards, many differences arise between Indian standards and international standards due to differences in corporate and tax laws. The provisions of the Companies Act need to be examined to determine whether the relevant provisions of the Act are necessary and whether these provisions can be suitably amended.

Sections 78, 211 and 212 and Schedule VI of the Companies Act need to be re-examined in the light of the International Standards on Accounting.

2.

While the Companies Act now requires disclosure details regarding departures from Accounting Standards to be made by the company in addition to being reported by the Auditor, for policing of complain there is a need to establish a Panel to which auditors would report all cases of violations. ICAI should also be vested with the powers to investigate and punish.

Suitable amendments may be carried out to Companies Act and Chartered Accountants Act, 1949 to enable the same.

1.

NI Act needs to be amended for cheque truncation.

The recommendations of the Working Group on the amendments to the NI Act (Chairman: Shri N.V. Deshpande, PLA RBI) detail the amendments required for cheque truncation and electronic signature. These have been incorporated in the report of the Parliamentary Standing Committee on Finance. Once this is accepted and passed by the Government, the requisite legal base for cheque truncation would be provided for. The amendments to NI Act for bouncing of cheques have already been submitted to the Parliament. Both the amendments are under consideration.

1.

At present in India paper-based and electronic payment and settlement systems are governed by the contracts between the participants. A well-founded legal framework needs to be put in place to regulate paper-based and electronic payment and settlement system in India.

Although there is no separate legislation as of now for the operations of the Clearing Houses, these are nevertheless governed by the Uniform Regulations and Rules for Bankers' Clearing Houses (URR), which is a contractual agreement between the Manager of the Clearing House and the members of the Clearing House.

The Reserve Bank has already initiated the drafting of a combined Payment Systems Regulations Act (Electronic Fund Transfer Act, Payment System Regulation Act and Payment Obligations Act - Netting, Clearing and Settlement) with the assistance of international and Indian Consultant and the work is at an advanced stage of completion.

A separate legislation is being proposed for the RTGS system and there also, it is proposed to have an international consultant and Indian draftsmen.

2.

To provide necessary legal support to any electronic message-based payment and settlement system, amendments to a host of Acts required i.e. Indian Penal Code Act 1860, Indian Evidence Act 1862, Bankers’ Books Act 1891 and Section 58 of the RBI Act 1934. Besides, other legislation namely Negotiable Instrument Act, 1881, Indian Stamp Duty Act, Insolvency Law, etc. also need to be amended.

The IT Act, 2000 provides legal basis for electronic records etc., but does not apply to the Negotiable Instruments as per the NI Act, 1881. In view of this, work on drafting separate Payment Systems Act - encompassing EFT - has been taken up by the RBI. Once the draft is ready, this would be deliberated upon, finalized and forwarded to the Law Ministry for being passed as an Act.

Further, the Information Technology Act 2000 has already amended certain provisions of the IPC, Evidence Act, Bankers' Book Evidence Act, and RBI Act to provide for legal status for electronic transactions, record, security and authentication.

As far as the RBI EFT scheme is concerned, the RBI EFT Regulations have been approved by the Ministry of Finance and the same would be notified in the Gazette of India on receipt of the approval from the Central Board of Directors of the Reserve Bank of India.

3.

The rights and obligations of customers in the electronic environment need to be addressed in well-defined rules.

The Payment obligations (Netting, Clearing and Settlement) Act being drafted at the instance of RBI would be considering this issue.

4.

Netting system should have well-founded legal basis under all relevant jurisdiction.

As indicated under Sr. 1 above, the combined Payment Systems Regulations Act will take care of the netting system. The concept of netting is recognised by Section 62 of the Indian Contract Act by way of novation. However, the rules regarding the management of credit and liquidity risks need to be addressed in the relevant regulation.

VIII. Income Tax Act
Advisory Group on Accounting and Auditing

1.

Section 145 of the Income Tax Act 1961 provides that ‘profits and gains of business or profession’ or ‘income from other sources’ has to be computed in accordance with the cash or mercantile system of accounting regularly employed by the assesses. But Section 145A regarding treatment of Modvat, provides for accounting treatment which is not consonance with ICAI and IAS.

Sections 145 and 145A of Income-Tax Act may be re-examined so as to provide for minimum divergence between taxable and accounting income and ensure the compliance of the standards set by the ICAI.

1.

The taxation of shareholders’ share of surplus could be at the corporate rate and the balance below the current rate.

May be addressed in the Union Budget through the Finance Bill with corresponding amendment in First Schedule of Income-tax Act 1961.

1.

The legal form of insurance companies in India is the of joint stock company route. With a view to spreading insurance business in rural areas, the role of co-operatives may not be ruled out in future.

The amendment to the Sec. 2 (7A) and 2C of the Insurance Act by the IRDA Act restricts the legal from of insurers to companies under the Companies Act 1956 although earlier, societies registered under the Co-operative Societies Act 1912, inter alia, were allowed to carry on insurance business. The Insurance Amendment Bill 2001 proposes to permit co-operatives in insurance business.

2.

The superannuation business handled by funds needs to be brought under regulatory arrangements. (The regulatory mechanism can also be one similar to the Occupational Pension Board of UK.)

Superannuation funds can be regulated inter alia by IRDA, for example, by suitably modifying Section 14 of IRDA and Section 114 A of Insurance Act or in the alternative, by constituting a separate regulator. The IRDA has submitted a report to the Government in this regard.

3.

With a view to conform to international practice, the Insurance Act 1938 needs to be amended so as to enable insurance companies to provide allied services to their customers.

Section 2 (7AC) of the Insurance Act 1938 may be widened on the lines of Section 6 (2) (h) of the LIC Act to permit insurance companies to provide similar allied services to their customers.

4.

Introduction of elaborate classification of life and non-life business.

Section 10 (2A) of Insurance Act 1938 may be suitably amended by introducing a new provision as also a Schedule which classifies the type of business.

5.

The minimum capital levels may be fixed for each of business on a scientific and transparent basis.

Section 6 of the Insurance Act could be suitably amended. The above suggested Schedule can contain the minimum capital requirement of each class of business with a corresponding provision empowering IRDA to revise the amount by notification. For the purpose of only detailed accounting, statutory changes would not be necessary.

6.

Co-ordination between the regulators for an efficient unit-linked insurance business.

If regulation of unit-linked insurance is vested with SEBI both SEBI Act and IRDA Act could require a provision to ensure the co-ordination of regulators.

1.

To adopt international standards effectively: Restructure the Accounting Standards Board (ASB) as an autonomous and independent body with two tier structure having a Standard Setting Committee added with adequate representation of the regulators, i.e., Department of Company Affairs, Central Board of Direct Taxes, SEBI and RBI. The standards setting procedure may also be rationalised.

The Accounting Standards Board (ASB) may be given statutory recognition under the Chartered Accountants Act, 1949 (CA Act), clearly setting the constitution and functions. The ICAI may be given the power to set the accounting standards by Statutory Regulation by amending Section 30 of the CA Act.

2.

For violations of accounting standards, the system of an obligation for auditors to report directly to a Panel, set by ICAI, all cases of violation needs to be provided. ICAI should also be vested with the powers to investigate and punish.

Suitable amendments may be carried out to Companies Act and Chartered Accountants Act, 1949 to enable the same.

1.

According to IMF Manual, there should be a budget system law which should have constitutional status. There is no budget system law in India.

Although, there are clearly established rules (General Financial Rules, Treasury Rules, etc.) governing each aspect of budget preparation, they fall short of the discipline that would be covered by legislation. The Government could consider amplifying the scope of the FRBMB to include elements of a Budget Law.

2.

There is no obligation presently to report to the Parliament if the revenue out-turns deviates significantly from the levels anticipated in the Budget.

Clause 4 of Fiscal Responsibility and Budget Management Bill, 2000 (FRBMB) recently introduced in Parliament sets out certain fiscal management principles to be followed by the Central Government in reducing the revenue and fiscal deficit over a period prescribed therein. Under Clause 7, the Minister in Charge of the Ministry of Finance shall make a statement in the Parliament explaining any deviation in meeting the obligation cast on the Government under the Act. The proposed FRBMB, therefore, takes care of the suggestion.

3.

Publication of fiscal information should be based on legal obligation arising out of a Budget Law and not on convention.

The newly introduced FRBMB, if enacted, should create a legal commitment to provide certain information to be included in the Medium-Term Fiscal Policy Statement, Fiscal Policy Strategy Statement and Micro-Economic Framework Statement by the Central Government before the Parliament, along with the annual budget.

4.

There are also a number of central government units which have their own budgets outside the central government budget but which perform a non-market non-profit function, e.g. central universities, the IITs, central research institutions, etc.

Under the proposed FRBMB Central Government is empowered to make the rules. Therefore, the Central Government can prescribe the rules regarding the contents of the Budget including the expenditure on educational services and other such services.

5.

In the Central Budget, there are no forward projections or forecast. The best practise is the forecast or aggregate fiscal projections should be for a period of 5-10 years but the beginning should be made by giving a forward projection for 2 years ahead of the Budget.

The proposed FRBMB makes it mandatory to make the projection by way of fiscal policy statement suggested in Clause 3.

6.

The public policy purposes of each provision which give rise to a central government contingent liability, its duration and intended beneficiaries should be clearly stated.

Clause 3 of the proposed FRBMB requires the Fiscal Policy Strategy Statement of the Central Government to contain the policy relating to underwriting and guarantee which have potential budgetary implication. However, the contingent liability, yet to be included in the statement, suitable modifications is required.

7.

Systematic reporting of revenue loss from major existing and new tax concession and incentives, should be initiated. Initially, these details may form part of Economic Survey but in due course it should be subject to Parliamentary and budgetary scrutiny.

The proposed FRBMB requires insertion of a new provision requiring the Central Government to cast the Economic Survey presented in the Parliament with the contents prescribed by rules.

8.

Given the scale of fiscal activity at the State Government level and the size of State level fiscal imbalances, the consolidated fiscal position of general Government should be highlighted at the time of discussion of the Budget in the legislature. The Economic Survey should incorporate a fuller discussion of recent trends in the consolidated position of Central and State Governments especially regarding trends in capital expenditures and in the basic fiscal balance measures (fiscal deficit, revenue deficit, primary deficit, etc.).

The rules prescribed in contents of the Economic Survey should address these issues.

9.

While recognising the need for quality of fiscal deficit reduction, the medium-term targets should be applied to the structural deficit.

The proposed FRBMB will need to be modified to deal with this issue.

10.

It is recommended that the budget document should provide the indication of how the annual budget fits with the Government’s long-term deficit and debt target including the macro-economic assumptions underlined in the budget, quantification of fiscal risk and the overall public sector balance followed by quarterly reporting to the Parliament on the aggregate Budget out-turn.

The proposed FRBMB will need to be modified to deal with this issue.

11.

The Budget forecast should contain indication of the methods used for forecasting with a view to improve fiscal marksmanship. For ensuring integrity, independent experts should be invited to assess fiscal forecast.

The proposed FRBMB will need to be modified to deal with this issue.

12.

One of the quasi-fiscal activities undertaken by the Reserve Bank is intervening in the primary issue of government securities which should be avoided.

The FRBMB seeks to prohibit RBI support of government securities in the primary market after three years [Clause 5(3)]. This should be accompanied by the Government taking over debt management function from RBI as recommended by the Advisory Group on Monetary and Financial Transparency. Section 21(2) of the RBI Act may be amended accordingly.

13.

Supplementary budgets impart significant non-transparency because the impact on the overall fiscal situation as a result of these demands is usually not reviewed at the stage of consideration by the legislature.

The proposed FRBMB in Clause 7 prescribes the measures to be imposed for the compliance of the annual financial statement.

14.

(i) The quasi-fiscal activities, now being carried out by public financial institutions, including commercial banks involve directed lending to the priority sector. This is an implicit subsidy.

(ii) Similarly, the non-financial public enterprises perform certain quasi-fiscal activities which are not transparent in the Budget of the Government. For example, the implicit subsidy given to FCI is not distinguished if FCI carries stock in excess of buffer stock requirements, as it becomes producer subsidy; substantial degree of cross-subsidisation of passenger traffic by freight engaged by railways; Oil Pool Account operated by Oil Co-ordination Committee (OCC).

The proposed FRBMB requires the Government to include in its Fiscal Policy Strategy Statement the key fiscal measures and rationale for any major deviation in fiscal measures pertaining to subsidy, taxation, expenditure, administered pricing etc. The Clause 3 (4) (c) can be modified so as to include any quasi-financial activities. The corresponding provisions, like Section 29 of BR Act, relating to banks and public sector enterprises pertaining to the profit and loss account can be amended in respective statutes to address this issue.

15.

In order to avoid unnecessary contact between tax payer and tax administrator (which leads to non-transparency, discretion and the potential for harassment and corruption) the use of information technology and electronic filing has been recommended for implementation over a period of three to four years.

There should be a concerted effort to restructure and simplify Tax Law both legislatively and administratively. Since the Information Technology Act, 2000 reserves the right of the Government not to accept the documents in electronic form suitable amendment to Section 139 of the Income Tax Act, 1961 may be required to enable the assessee to file the return even in electronic form.

16.

A statement of Fiscal Policy objectives and an assessment of fiscal sustainability should provide the framework for the annual budget.

The newly introduced FRBMB, if enacted, would create a legal commitment to provide certain information to be included in the Medium-Term Fiscal Policy Statement, Fiscal Policy Strategy Statement and Macro-Economic Framework Statement by the Central Government before the Parliament, along with the annual budget.

1.

Preventing laundering of proceeds derived from offences stated in the 1988 Vienna Convention

Proposed in the Prevention of Money Laundering Bill(PMLB), 1999

2.

Conceiving financial institutions secrecy laws such that they do not inhibit the implementation of FATF recommendations.

Proposed in the PMLB, 1999

3.

Enforcement of money laundering programmes that include increased multilateral co-operation and mutual legal assistance in investigations, prosecution and extradition.

Proposed in the PMLB, 1999

4.

Criminalising money laundering as set forth in the Vienna Convention, and to classifying drug money laundering as a serious offence together with determining which serious crimes would be designated as money laundering predicate offences.

Proposed in the PMLB, 1999

5.

Corporations, wherever possible, and not their employees would be subject to criminal liability.

Proposed in the PMLB, 1999

6.

Enable competent authorities to confiscate property laundered, proceeds from, instrumentalities used or intended for the use of commission of any money laundering offence.

Proposed in the PMLB, 1999

7.

Ensure that financial institutions pay special attention to all complex and unusual large transactions with no apparent or visible lawful purpose and for examination and repoting of findings to supervisors, auditors and law enforcement authorities.

Proposed in the PMLB, 1999

8.

Legally protect directors, officers and employees of financial institutions from criminal or civil liability for breach of any restriction or disclosure of information imposed by relevant legislative, regulatory or administrative provisions or contracts.

Proposed in the PMLB, 1999

9.

Enable financial institutions reporting of suspicions to comply with the instructions from competent authorities

Proposed in the PMLB, 1999

10.

Establish procedures for mutual assistance in criminal matters through compulsory provisions for production of records of financial institutions, search of persons and premises, seizure and obtaining of evidence for use in money laundering investigations and prosecutions and related actions in foreign jurisdictions.

Proposed in the PMLB, 1999

11.

Enable authorities to take expeditions action to foreign country requests to identify, freeze, seize, and confiscate proceeds or other property based on money laundering crimes.

Proposed in the PMLB, 1999

12.

Devise and apply enable mechanisms for determining suitable venue for prosecution in the interests of justice and in cases involving more than one country.

Proposed in the PMLB, 1999

13.

Recognize money laundering as an extraditable offence subject to legal frameworks.

Proposed in the PMLB, 1999

14.

Enable full implementation of the 1999 United Nations International Convention for the Suppression of the Financing of Terrorism, United Nation Security Council Resolution 1373 and other related such resolutions.

1.

There is a need to streamline the procedures to detect the frauds and take appropriate remedial measures. The due process relating to procedures may also to be streamlined.

The Expert Committee on Legal Aspects of Bank Frauds in its report dated August 31, 2001 made various recommendations for the procedures to be followed in cases of bank fraud/financial fraud. The Committee has also outlined an illustrative draft legislation by name Financial Fraud (Investigation, Prosecution, Recovery and Restoration of Property) Bill, 2001. This requires a new legislation as also amendments to Indian Penal Code, Code of Criminal Procedure, etc.

2.

High level group on capital markets be given legal status and its functioning should be transparent.

Suitable legislation would need to be provided.

2. Advisory Group on Transparency in Monetary and Financial Policies

1.

Banks and other financial institutions should provide information on performance to the depositors.

Banking Regulation Act, State Bank of India Act, Banks Nationalisation Act, etc., could make provisions ensuring the publication of performance Report.

1.

The overlap of the role of RBI as owner/owners’ representative and regulator should be corrected.

This will require amendment in the Acts governing SBI, NHB and NABARD.

2.

Government ownership is not conducive to any serious and urgent corrective action by the regulator.

The Banking Companies (Acquisition and Transfer of Undertakings) and Financial Institutions Laws (Amendment) Bill, 2000 proposed to reduce government holding in nationalised banks to 33 per cent.

1.

As per the best international practice, publication of the Government balance sheet as a part of budget document covering financial liabilities and assets and also non- financial assets is suggested. At least, a beginning should be made with the publication of more comprehensive list of financial liability and assets of the Government. Information about Public Enterprises Survey on Government equity and loans to Public Sector Enterprises could be indicated in the Economic Survey.

The rules setting up the norms of Economic Survey can indicate the information relating to Public Enterprises Survey on government equity and loans also.

1.

In recent past, several companies have vanished after raising capital from the public. The investors in these companies are not able to trace the companies to resolve their grievances. Even companies which are traceable, there is no effective resolution clauses for investors in law.

The activity of the promoters/directors would fall within the ambit of financial fraud as defined in the illustrative draft legislation of Financial Fraud (Investigation, Prosecution, Recovery and Restoration of Property) Bill 2001, suggested by the expert committee on Legal Aspects of Bank Frauds. The recommendations of the Committee are under consideration of RBI.

2.

There are some restrictive provisions relating to voting rights of shareholder in public sector banks (1 per cent irrespective of the size holdings); In respect of private sector banks the limit is fixed at 10 per cent.

For the purpose of increasing corporate governance, shareholder should have right to discuss, vote and approve the profit and loss account and the balance sheet at the AGM of the banks. The relevant provision of Banks Nationalisation Act which do not provide for voting and approving the accounts by share holders should be amended.

3.

The functioning of banks and financial institutions are coming under Multiple Acts. For example, banks and financial institutions are covered and their several acts of Parliament like 1) SBI Act, 2) Bank Nationalisation Act, 3) IDBI Act, 4) Banking Regulation Act, 5) RBI Act, and Companies Act. Such multiple Acts affect the functioning of banks particularly public sector banks.

The Reserve Bank is examining the possibilities of an omnibus Legislation covering all these areas.

1.

Allocation of responsibilities for risk management and risk containment.

The regulation proposed to be framed by RBI needs to address this issue.

Sr. No.

Legal Issue

Required Legislative Changes

1.

Transparent framework for setting monetary policy objectives.

The RBI Act can be amended to provide for this, alternatively a monetary policy statement can be mandated in the Annual Financial Statement of the Government.

2.

Greater autonomy to RBI.

Either through amending the RBI Act or ideally through a Constitutional Amendment.

3.

Greater operational flexibility to implement the policy.

A number of these are addressed in the RBI (Amendment) Bill 2000.

4.

(i) Determination of interest rates should be exclusively a monetary policy function and there should be legislative measures to separate debt management and monetary policy functions.

(ii) Government should set up its own independent debt management office to take over the present functions discharged by RBI.

Sections 21 (2) and 17(11) (e) of the RBI Act will need to be amended. In addition, appropriate changes will need to be made in the proposed Government Securities Act.

5.

Disclosure of adverse supervisory action.

Section 47 (A) of BR Act and 58B of the RBI Act could be amended to enable the publication. Alternatively, amendment of Section 28 of BR Act and 45E of RBI Act could also ensure such publication.

6.

Reasonable security of tenure to the top management of RBI.

Sections 8 to 11 of RBI Act may be suitably amended.

7.

Banks and other financial institutions should provide information on performance to the depositors.

Banking Regulation Act, (State Bank of India Act, Nationalisation Act, etc.) could make provisions ensuring the publication of performance Report.

1.

Section 17 (6) of the RBI Act needs to be amended to empower RBI for establishment and regulation of multiple payment system.

Proposal to insert Sub Section (6A) of Section 17 of the RBI Act is under consideration of the Government.

2.

NI Act needs to be amended for cheque truncation.

The recommendations of the Working Group on the amendments to the NI Act (Chairman: Shri N.V. Deshpande, PLA RBI) detail the amendments required for cheque truncation and electronic signature. These have been incorporated in the report of the Parliamentary Standing Committee on Finance. Once this is accepted and passed by the Government, the requisite legal base for cheque truncation would be provided for. The amendments to NI Act for bouncing of cheques have already been submitted to the Parliament. Both the amendments are under consideration.

3.

At present in India paper-based and electronic payment and settlement systems are governed by the contracts between the participants. A well-founded legal framework needs to be put in place to regulate paper-based and electronic payment and settlement system in India.

Although there is no separate legislation as of now for the operations of the Clearing Houses, these are nevertheless governed by the Uniform Regulations and Rules for Bankers' Clearing Houses (URR), which is a contractual agreement between the Manager of the Clearing House and the members of the Clearing House.

The Reserve Bank has already initiated the drafting of a combined Payment Systems Regulations Act (Electronic Fund Transfer Act, Payment System Regulation Act and Payment Obligations Act - Netting, Clearing and Settlement) with the assistance of international and Indian Consultant and the work is at an advanced stage of completion.

A separate legislation is being proposed for the RTGS system and there also, it is proposed to have an international consultant and Indian draftsmen.

4.

To provide necessary legal support to any electronic message-based payment and settlement system, amendments to a host of Acts required i.e. Indian Penal Code Act 1860, Indian Evidence Act 1862, Bankers’ Books Act 1891 and Section 58 of the RBI Act 1934. Besides, other legislation namely Negotiable Instrument Act, 1881, Indian Stamp Duty Act, Insolvency Law, etc. also need to be amended.

The IT Act, 2000 provides legal basis for electronic records etc., but does not apply to the Negotiable Instruments as per the NI Act, 1881. In view of this, work on drafting separate Payment Systems Act - encompassing EFT - has been taken up by the RBI. Once the draft is ready, this would be deliberated upon, finalized and forwarded to the Law Ministry for being passed as an Act.

Further, the Information Technology Act 2000 has already amended certain provisions of the IPC, Evidence Act, Bankers' Book Evidence Act, and RBI Act to provide for legal status for electronic transactions, record, security and authentication.

As far as the RBI EFT scheme is concerned, the RBI EFT Regulations have been approved by the Ministry of Finance and the same would be notified in the Gazette of India on receipt of the approval from the Central Board of Directors of the Reserve Bank of India.

5.

The rights and obligations of customers in the electronic environment need to be addressed in well-defined rules.

The Payment obligations (Netting, Clearing and Settlement) Act being drafted at the instance of RBI would be considering this issue.

6.

Netting system should have well-founded legal basis under all relevant jurisdiction.

As indicated under Sr. 3 above, the combined Payment Systems Regulations Act will take care of the netting system. The concept of netting is recognised by Section 62 of the Indian Contract Act by way of novation. However, the rules regarding the management of credit and liquidity risks need to be addressed in the relevant regulation.

7.

Allocation of responsibilities for risk management and risk containment.

The regulation proposed to be framed by RBI needs to address this issue.

1.

One of the quasi-fiscal activities undertaken by the Reserve Bank is intervening in the primary issue of government securities, which should be avoided.

The FRBMB seeks to prohibit RBI support of government securities in the primary market after three years [Clause 5(3)]. This should be accompanied by the Government taking over debt management function from RBI as recommended by the Advisory Group on Monetary and Financial Transparency. Section 21(2) of the RBI Act may be amended accordingly.

2.

As per the best international practice, publication of the Government balance sheet as a part of budget document covering financial liabilities and assets and also non- financial assets is suggested. At least, a beginning should be made with the publication of more comprehensive list of financial liability and assets of the Government. Information about Public Enterprises Survey on Government equity and loans to Public Sector Enterprises could be indicated in the Economic Survey.

The rules setting up the norms of Economic Survey can indicate the information relating to Public Enterprises Survey on government equity and loans also.

3.

According to IMF Manual, there should be a budget system law which should have constitutional status. There is no budget system law in India.

Although, there are clearly established rules (General Financial Rules, Treasury Rules, etc.) governing each aspect of budget preparation, they fall short of the discipline that would be covered by legislation. The Government could consider amplifying the scope of the FRBMB to include elements of a Budget Law.

4.

There is no obligation presently to report to the Parliament if the revenue out-turns deviates significantly from the levels anticipated in the Budget.

Clause 4 of Fiscal Responsibility and Budget Management Bill, 2000 (FRBMB) recently introduced in Parliament sets out certain fiscal management principles to be followed by the Central Government in reducing the revenue and fiscal deficit over a period prescribed therein. Under Clause 7, the Minister in Charge of the Ministry of Finance shall make a statement in the Parliament explaining any deviation in meeting the obligation cast on the Government under the Act. The proposed FRBMB, therefore, takes care of the suggestion.

5.

Publication of fiscal information should be based on legal obligation arising out of a Budget Law and not on convention.

The newly introduced FRBMB, if enacted, should create a legal commitment to provide certain information to be included in the Medium-Term Fiscal Policy Statement, Fiscal Policy Strategy Statement and Micro-Economic Framework Statement by the Central Government before the Parliament, along with the annual budget.

6.

There are also a number of central government units which have their own budgets outside the central government budget but which perform a non-market non-profit function, e.g. central universities, the IITs, central research institutions, etc.

Under the proposed FRBMB Central Government is empowered to make the rules. Therefore, the Central Government can prescribe the rules regarding the contents of the Budget including the expenditure on educational services and other such services.

7.

In the Central Budget, there are no forward projections or forecast. The best practise is the forecast or aggregate fiscal projections should be for a period of 5-10 years but the beginning should be made by giving a forward projection for 2 years ahead of the Budget.

The proposed FRBMB makes it mandatory to make the projection by way of fiscal policy statement suggested in Clause 3.

8.

The public policy purposes of each provision which give rise to a central government contingent liability, its duration and intended beneficiaries should be clearly stated.

Clause 3 of the proposed FRBMB requires the Fiscal Policy Strategy Statement of the Central Government to contain the policy relating to underwriting and guarantee which have potential budgetary implication. However, for contingent liability, yet to be included in the statement, suitable modifications are required.

9.

Systematic reporting of revenue loss from major existing and new tax concession and incentives, should be initiated. Initially, these details may form part of Economic Survey but in due course it should be subject to Parliamentary and budgetary scrutiny.

The proposed FRBMB requires insertion of a new provision requiring the Central Government to cast the Economic Survey presented in the Parliament with the contents prescribed by rules.

10.

Given the scale of fiscal activity at the State Government level and the size of State level fiscal imbalances, the consolidated fiscal position of general Government should be highlighted at the time of discussion of the Budget in the legislature. The Economic Survey should incorporate a fuller discussion of recent trends in the consolidated position of Central and State Governments especially regarding trends in capital expenditures and in the basic fiscal balance measures (fiscal deficit, revenue deficit, primary deficit, etc.).

The rules prescribed in contents of the Economic Survey should address these issues.

11.

While recognising the need for quality of fiscal deficit reduction, the medium-term targets should be applied to the structural deficit.

The proposed FRBMB will need to be modified to deal with this issue.

12.

It is recommended that the budget document should provide the indication of how the annual budget fits with the Government’s long-term deficit and debt target including the macro-economic assumptions underlined in the budget, quantification of fiscal risk and the overall public sector balance followed by quarterly reporting to the Parliament on the aggregate Budget out-turn.

The proposed FRBMB will need to be modified to deal with this issue.

13.

The Budget forecast should contain indication of the methods used for forecasting with a view to improve fiscal marksmanship. For ensuring integrity, independent experts should be invited to assess fiscal forecast.

The proposed FRBMB will need to be modified to deal with this issue.

14.

Supplementary budgets impart significant non-transparency because the impact on the overall fiscal situation as a result of these demands is usually not reviewed at the stage of consideration by the legislature.

The proposed FRBMB in Clause 7 prescribes the measures to be imposed for the compliance of the annual financial statement.

15.

(i) The quasi-fiscal activities, now being carried out by public financial institutions, including commercial banks involve directed lending to the priority sector. This is an implicit subsidy.

(ii) Similarly, the non-financial public enterprises perform certain quasi-fiscal activities which are not transparent in the Budget of the Government. For example, the implicit subsidy given to FCI is not distinguished if FCI carries stock in excess of buffer stock requirements, as it becomes producer subsidy; substantial degree of cross-subsidisation of passenger traffic by freight engaged by railways; Oil Pool Account operated by Oil Co-ordination Committee (OCC).

The proposed FRBMB requires the Government to include in its Fiscal Policy Strategy Statement the key fiscal measures and rationale for any major deviation in fiscal measures pertaining to subsidy, taxation, expenditure, administered pricing etc. The Clause 3 (4) (c) can be modified so as to include any quasi-financial activities. The corresponding provisions, like Section 29 of BR Act, relating to banks and public sector enterprises pertaining to the profit and loss account can be amended in respective statutes to address this issue.

16.

In order to avoid unnecessary contact between tax payer and tax administrator (which leads to non-transparency, discretion and the potential for harassment and corruption) the use of information technology and electronic filing has been recommended for implementation over a period of three to four years.

There should be a concerted effort to restructure and simplify Tax Law both legislatively and administratively. Since the Information Technology Act, 2000 reserves the right of the Government not to accept the documents in electronic form suitable amendment to Section 139 of the Income Tax Act, 1961 may be required to enable the assessee to file the return even in electronic form.

17.

A statement of Fiscal Policy objectives and an assessment of fiscal sustainability should provide the framework for the annual budget.

The newly introduced FRBMB, if enacted, would create a legal commitment to provide certain information to be included in the Medium-Term Fiscal Policy Statement, Fiscal Policy Strategy Statement and Macro-Economic Framework Statement by the Central Government before the Parliament, along with the annual budget.

1.

Allowing SEBI enhanced authority and powers to impose penalty commensurate with the gravity of the violation (i.e. disgorgement powers).

By amending SEBI Act, the listed companies can be brought under its purview. The penal powers under the statute can also be enhanced.

2.

SEBI to be given powers to enter into agreements with Foreign Regulatory Authorities.

SEBI Act can be amended to specifically enable it to enter into agreement with foreign authority as regards the coordination among the Regulators in a transnationals context.

3.

UTI and its schemes should be brought under the regulatory powers of SEBI.

SEBI Act and UTI Act may be amended to bring UTI under the regulatory regime of SEBI.

4.

Focus of regulation should be shifted from institution specificity to market specificity and consolidation of the SCR Act and the SEBI Act in line with Dhanuka Committee.

SCR Act, RBI Act and SEBI Act could be amended to give the regulatory control, based on the market specificity and greater consolidation.

5.

There is a need to streamline the procedures to detect the frauds and take appropriate remedial measures. The due process relating to procedures may also to be streamlined.

The Expert Committee on Legal Aspects of Bank Frauds in its report dated August 31, 2001 made various recommendations for the procedures to be followed in cases of bank fraud/financial fraud. The Committee has also outlined an illustrative draft legislation by name Financial Fraud (Investigation, Prosecution, Recovery and Restoration of Property) Bill, 2001. This requires a new legislation as also amendments to Indian Penal Code, Code of Criminal Procedure, etc.

6.

High level group on capital markets be given legal status and its functioning should be transparent.

Suitable legislation would need to be provided.

7.

Elimination of conflict of interest through demutualisation, which implies separation of ownership of stock exchange from the right to trade on it.

The provisions of the Securities Contracts (Regulation) Act, 1956 (SCR Act) need amendments to separate the brokers/players right to trade and the ownership.

8.

Creation of one or two clearing corporations for all the stock exchanges as against the present practice of individual clearing house.

Constitution, role and functions of clearing corporations can be incorporated in the SCR Act to grant statutory recognition for such clearing corporation.

9.

SEBI should assist Association of Mutual Funds of India to develop into a full-fledged Self-Regulatory Organisation (SRO).

These types of Associations should be given specific statutory recognition and be vested with legal character under the SCR Act also.

10.

RBI should facilitate FIMMDA and PDAI to develop into full-fledged SROs.

These associations should be given specific statutory recognition and be vested with legal character under SCR Act besides RBI Act.

1.

Powers to RBI to decide on capital requirements on a case by case basis needs to be clearly defined by law.

Included in proposed amendment to Section 11 of B.R. Act.

2.

‘Substantial interest’ as defined in Section 5(ne) of BR Act is too low. Needs to be revised upwards.

Amendment to Section 5 (ne) of BR Act has been proposed to revise the ceiling upward to Rs1crore.

3.

Prior supervisory approval should be made mandatory for change of ownership or voting rights above a threshold.

RBI should be empowered to conduct ‘fit and proper’ tests on shareholders holding in excess of a threshold level.

Restrictions on voting rights present vide Section 12 (2) and 16 (1A) of BR Act. Amendment has been proposed to restrict limit by 5 per cent of holding in capital and enhanced power for RBI to monitor.

4.

‘Closely related group’ needs to be explicitly defined and the supervisor should have the discretion, prescribed in law, in interpreting the definition on a case by case basis.

Proposed amendment to Section 20 of BR Act provides definition and empowers RBI to modify the definitions by notification.

5.

The definition of connected lending needs to be made more broad-based to include all types of counterparties irrespective of whether they are in the public or private sector.

Prohibition of loans and advances to large shareholders.

Required amendment proposed in Section 20 of BR Act.

Amendment will be required in Section 20 of BR Act.

6.

Preparation and reporting of consolidated accounts by banks should be introduced.

The required change has been proposed vide addition of Section 29A (1) to the BR Act.

7.

It is desirable to provide RBI with powers to impose conservatorship on banks in temporary trouble.

New section will be required to be added to BR Act or Section 36 will be required to be amended.

8.

Suitable legal provision obliging statutory auditors of banks to report on matters of material significance to regulators.

Amendment to section 30 of BR Act has already been proposed.

9.

Present legal provisions in India do not provided for sufficient confidentiality of information. Clearly defined laws needed for this purpose.

Section 34 A of BR Act will require amendment in this respect.

10.

Clear accountability needs to be fixed on the board of directors and individual directors for non-performance and negligence.

Amendment required in Section 46 of the BR Act to include directors. Also changes may be considered in Section 46 of SBI Act and Section 16 of the Banking Companies (Acquisition and Transfer of Undertakings) Acts, 1970 and 1980.

11.

RBI should apply stricter norms for the fit and proper test while evaluating directors and the quality of the board.

Changes have been proposed in Section 10A (2) of the BR Act to the end that at least one of the directors of the bank should have knowledge of science and technology.

12.

RBI should practice consolidated supervision over internationally active organisations and get into formal relationships with host country supervisors.

A new provision in the BR Act would empower RBI to do this. At present such supervision is based on customary practices.

13.

The overlap of the role of RBI as owner/owners’ representative and regulator should be corrected.

This will require amendment in the Acts governing SBI, NHB and NABARD.

14.

Government ownership is not conducive to any serious and urgent corrective action by the regulator.

The Banking Companies (Acquisition and Transfer of Undertakings) and Financial Institutions Laws (Amendment) Bill, 2000 proposed to reduce government holding in nationalised banks to 33 per cent.

1.

SEBI has directed all stock exchanges to amend their listing agreements to incorporate new clauses to make it binding on the listed companies to improve their governance practices. The listing agreements signed between the company and the stock exchange should be strengthened with a penal provision for erring companies for their violation in respect of corporate governance norms. However, it is desirable that effective penal provisions are added in the Companies Act for violation of corporate governance norms.

A substantive provision empowering the Government to set the norms of corporate governance will need to be incorporated in the Companies Act, 1956. Once such a provision is incorporated that Government can make rules regulating the same under Section 642 of the Companies Act. This rule can also contain enhanced penal provision.

2.

SEBI has mandated disclosure of summary results by listed companies on quarterly basis and others on half-yearly basis. Although, companies present their annual accounts covering 12 months period, they take advantage of flexible legal provision and choose to present accounts for a period from 6 to 18 months to take advantage of tax benefits.

Companies should be mandated to circulate among the shareholders the annual accounts on 12 monthly basis even during the years when they decide to change their accounting year for tax purposes which should be included in the Companies Act.

3.

For effective corporate governance practices, the definition of the concept of `independent directors’ has to be made clear in the Companies Act.

Suitable amendments to Section 252 of Companies will be needed for defining the concept of independent directors and making it mandatory for specified companies to have independent directors on the board. SEBI has as part of its listing agreements specified a definition of independent directors.

4.

Some companies hold only 4 meetings in a year (the minimum indicator under Section 285 of the Companies Act) as required under the law. In fact the companies which are having diversified activities should be holding more than 4 meetings (at least 6 board meetings) in a year.

Companies Act should be amended to provide a minimum of 6 meetings in a year. Also the possibility of holding meetings through video conference, etc. be enabled.

5.

The recent amendments to the Companies Act have made non-executive directors of companies accountable just like full time directors. This is working against competent persons joining corporates as they have to take risks without being fully familiar with the intricacies of the business and not participated in the decision-making process concerning all the important matters.

We may wish to re-examine liability of non-executive directors.

6.

In respect of major developments of companies, the non-executive directors some times come to know about the developments through press reports as the necessary papers are not sent for long-time i.e., no periodical briefing of developments.

There should be a mandatory reporting provisions in the Companies Act .

7.

The term limits of independent directors are too small for efficient functioning.

The term limits of independent directors of companies/banks/public sector companies should be made preferably up to 10 years on a continuous basis by making amendments to Companies Act.

8.

The voting rights of small shareholders should be strengthened by introducing a provision for compounding of voting rights for small shareholders so that they are able to get their representatives elected to the Board.

Amendment to the Companies Act is required.

9.

Nomination committee to identify new directors and remuneration committee to decide on senior management/directors’ remuneration should be set up.

Suitable amendments will need to be made in the Companies Act.

10.

In recent past, several companies have vanished after raising capital from the public. The investors in these companies are not able to trace the companies to resolve their grievances. Even companies which are traceable, there is no effective resolution clauses for investors in law.

The activity of the promoters/directors would fall within the ambit of financial fraud as defined in the illustrative draft legislation of Financial Fraud (Investigation, Prosecution, Recovery and Restoration of Property) Bill 2001, suggested by the expert committee on Legal Aspects of Bank Frauds. The recommendations of the Committee are under consideration of RBI.

11.

There are some restrictive provisions relating to voting rights of shareholder in public sector banks (1 per cent irrespective of the size holdings); In respect of private sector banks the limit is fixed at 10 per cent.

For the purpose of increasing corporate governance, shareholder should have right to discuss, vote and approve the profit and loss account and the balance sheet at the AGM of the banks. The relevant provision of Banks Nationalisation Act which do not provide for voting and approving the accounts by share holders should be amended.

12.

The functioning of banks and financial institutions are coming under Multiple Acts. For example, banks and financial institutions are covered and their several acts of Parliament like 1) SBI Act, 2) Bank Nationalisation Act, 3) IDBI Act, 4) Banking Regulation Act, 5) RBI Act, and Companies Act. Such multiple Acts affect the functioning of banks particularly public sector banks.

The Reserve Bank is examining the possibilities of an omnibus Legislation covering all these areas.

G. Advisory Group on Accounting and Auditing

1.

Section 145 of the Income Tax Act 1961 provides that ‘profits and gains of business or profession’ or ‘income from other sources’ has to be computed in accordance with the cash or mercantile system of accounting regularly employed by the assesses. But Section 145A regarding treatment of Modvat, provides for accounting treatment which is not consonance with ICAI and IAS.

Sections 145 and 145A of Income-Tax Act may be re-examined so as to provide for minimum divergence between taxable and accounting income and ensure the compliance of the standards set by the ICAI.

2.

In respect of convergence of corporate and tax laws with accounting standards, many differences arise between Indian standards and international standards due to differences in corporate and tax laws. The provisions of the Companies Act need to be examined to determine whether the relevant provisions of the Act are necessary and whether these provisions can be suitably amended.

Sections 78, 211 and 212 and Schedule VI of the Companies Act need to be re-examined in the light of the International Standards on Accounting.

3.

While the Companies Act now requires disclosure details regarding departures from Accounting Standards to be made by the company in addition to being reported by the Auditor, for policing of complain there is a need to establish a Panel to which auditors would report all cases of violations. ICAI should also be vested with the powers to investigate and punish.

Suitable amendments may be carried out to Companies Act and Chartered Accountants Act, 1949 to enable the same.

4.

To adopt international standards effectively: Restructure the Accounting Standards Board (ASB) as an autonomous and independent body with two tier structure having a Standard Setting Committee added with adequate representation of the regulators, i.e., Department of Company Affairs, Central Board of Direct Taxes, SEBI and RBI. The standards setting procedure may also be rationalised.

The Accounting Standards Board (ASB) may be given statutory recognition under the Chartered Accountants Act, 1949 (CA Act), clearly setting the constitution and functions. The ICAI may be given the power to set the accounting standards by Statutory Regulation by amending Section 30 of the CA Act.

5.

For violations of accounting standards, the system of an obligation for auditors to report directly to a Panel, set by ICAI, all cases of violation needs to be provided. ICAI should also be vested with the powers to investigate and punish.

Suitable amendments may be carried out to Companies Act and Chartered Accountants Act, 1949 to enable the same.

1.

The legal form of insurance companies in India is that of joint stock company. With a view to spreading insurance business in rural areas, the role of co-operatives may be considered.

The amendment to the Sec. 2 (7A) and 2C of the Insurance Act by the IRDA Act restricts the legal from of insurers to companies under the Companies Act 1956 although earlier, societies registered under the Co-operative Societies Act 1912, inter alia, were allowed to carry on insurance business. The Insurance Amendment Bill 2001 proposes to permit co-operatives in insurance business.

2.

The superannuation business handled by funds needs to be brought under regulatory arrangements. The regulatory mechanism can also be one similar to the Occupational Pension Board of UK.

Superannuation funds can be regulated inter alia by IRDA, for example, by suitably modifying Section 14 of IRDA and Section 114 A of Insurance Act or in the alternative, by constituting a separate regulator. The IRDA has submitted a report to the Government in this regard.

3.

With a view to conform to international practice, the Insurance Act 1938 needs to be amended so as to enable insurance companies to provide allied services to their customers.

Section 2 (7A) of the Insurance Act 1938 may be widened on the lines of Section 6 (2) (h) of LIC Act to permit insurance companies to provide similar allied services to their customers.

4.

Introduction of elaborate classification of life and non-life business.

Section 10 (2A) of Insurance Act 1938 may be suitably amended by introducing a new provision as also a Schedule which classifies the type of business.

5.

The minimum capital levels may be fixed for each of business on a scientific and transparent basis.

Section 6 of the Insurance Act could be suitably amended. The above suggested Schedule can contain the minimum capital requirement of each class of business with a corresponding provision empowering IRDA to revise the amount by notification. For the purpose of only detailed accounting, statutory changes would not be necessary.

6.

Co-ordination between the regulators for an efficient unit-linked insurance business.

If regulation of unit-linked insurance is vested with SEBI both SEBI Act and IRDA Act could require a provision to ensure the co-ordination of regulators.

7.

In order to bring about level playing field between insurance companies and mutual funds for ensuring uniformity in the design of products, terms and conditions and marketability, there has to be co-ordination among regulators.

IRDA has been co-opted into the HLCC.

8.

The supervisory authority should protect the interest of both policy holders and shareholders by delinking investment of assets of shareholders’ funds from restriction.

Section 27 of Insurance Act and IRDA (Investment) Regulations need a review to ease out the restriction on investment relating to shareholders’ funds.

9.

The taxation of the shareholders’ share of surplus could be at the corporate rate and the balance surplus could be at a rate below the current rate.

May be addressed in the Union Budget through the Finance Bill with corresponding amendment in First Schedule of Income Tax Act 1961.

10.

Transfers to the Unexpired Risk Reserve and Catastrophe Reserve in case of general insurance companies, out of pre-taxed profits may be considered in certain cases.

May be addressed in the Union Budget through the Finance Bill with corresponding amendment in the Income Tax Act, 1961.

11.

There should be an explicit restriction on the formation of composites companies, i.e., doing both life and non-life business.

IRDA Regulations may be suitably modified.

12.

The regulator as a general rule should ascertain names of natural and legal persons holding direct or indirect qualifying participation in the applicant company and more importantly make this knowledge public while granting the license.

The IRDA could issue the relevant regulations in line with Section 3 of Insurance Act.

13.

For registration of new insurance companies, there should an information system calling for detailed information about the Directors/Senior Managers for submission. Sound reputation of honours may be ensured. Whenever changes are taking place in these positions, the information system needs to be made continuous one for submission of information.

The acceptable guidelines of IAIS could be brought into the IRDA (Registration of Indian Insurance Companies) Regulation 2000 in line with Section 3 of Insurance Act.

14.

It would be desirable to follow the international practice, as also other Indian industrial practices, by considering the outsourcing of various functions of an insurance company in view of the economies of scale and scope.

Necessary amendments may be made in the IRDA(Registration of Indian Insurance Companies) Regulations 2000, in consonance with Section 40 (1) of the Insurance Act which places restrictions only in respect of the marketing (distribution) function.

15.

In case of new products, the certificate of product design including the basis of premium given by the actuary the premium rate table and the benefit design could be treated as published information.

IRDA can issue suitable guidelines.

16.

Regulator may make available a recommendatory standard format of Articles of Incorporation.

IRDA Regulations should incorporate a suitable provision for such format.

17.

The firm of consulting actuaries may be considered for appointed actuaries. Condition of Certificate of Practice from the Actuarial Society of India in each year needs a relook.

IRDA (Appointed Actuary) Regulation 2000 could be modified accordingly.

18.

Unit-linked insurance business could be brought under the life insurance business, both in letter and spirit, so that life insurance companies do not engage in mutual fund operations under the guise of life insurance.

IRDA may issue necessary guidelines.

19.

The marginal gaps between the Indian and international standards the calculations of unearned premium reserves may be addressed with the passage of time.

Suitable amendments to IRDA Regulations could be considered.

20.

The deficiencies with regard to collection of claims statistics relating to the estimation of the ‘loss reserves’ could be filled up with experience in the coming years by positioning appropriate data base systems.

IRDA (Assets, Liabilities and Solvency Margin) Insurance Regulation 2000 needs amendment.

21.

Suitable standards could be evolved in setting up of catastrophe reserves, in a period of the next 2-3 years, after gaining sufficient expertise in this area.

May be addressed in the IRDA Regulations.

22.

The supervisory should protect the interest of both policy holders and shareholders by delinking investment of assets of shareholders’ funds from restriction.

Section 27 of Insurance Act and IRDA (Investment) Regulation may be reviewed to ease out the restriction on investment relating to shareholders’ funds.

1.

Preventing laundering of proceeds derived from offences stated in the 1988 Vienna Convention.

Proposed in the Prevention of Money Laundering Bill (PMLB), 1999

2.

Conceiving financial institutions secrecy laws such that they do not inhibit the implementation of FATF recommendations.

Proposed in the PMLB, 1999

3.

Enforcement of money laundering programmes that include increased multilateral co-operation and mutual legal assistance in investigations, prosecution and extradition.

Proposed in the PMLB, 1999

4.

Criminalising money laundering as set forth in the Vienna Convention, and to classifying drug money laundering as a serious offence together with determining which serious crimes would be designated as money laundering predicate offences.

Proposed in the PMLB, 1999

5.

Corporations, wherever possible, and not their employees would be subject to criminal liability.

Proposed in the PMLB, 1999

6.

Enable competent authorities to confiscate property laundered, proceeds from, instrumentalities used or intended for the use of commission of any money laundering offence.

Proposed in the PMLB, 1999

7.

Ensure that financial institutions pay special attention to all complex and unusual large transactions with no apparent or visible lawful purpose and for examination and reporting of findings to supervisors, auditors and law enforcement authorities.

Proposed in the PMLB, 1999

8.

Legally protect directors, officers and employees of financial institutions from criminal or civil liability for breach of any restriction or disclosure of information imposed by relevant legislative, regulatory or administrative provisions or contracts.

Proposed in the PMLB, 1999

9.

Enable financial institutions reporting of suspicions to comply with the instructions from competent authorities.

Proposed in the PMLB, 1999

10.

Establish procedures for mutual assistance in criminal matters through compulsory provisions for production of records of financial institutions, search of persons and premises, seizure and obtaining of evidence for use in money laundering investigations and prosecutions and related actions in foreign jurisdictions.

Proposed in the PMLB, 1999

11.

Enable authorities to take expeditions action to foreign country requests to identify, freeze, seize, and confiscate proceeds or other property based on money laundering crimes.

Proposed in the PMLB, 1999

12.

Devise and apply enable mechanisms for determining suitable venue for prosecution in the interests of justice and in cases involving more than one country.

Proposed in the PMLB, 1999

13.

Recognize money laundering as an extraditable offence subject to legal frameworks.

Proposed in the PMLB, 1999

14.

Enable full implementation of the 1999 United Nations International Convention for the Suppression of the Financing of Terrorism, United Nation Security Council Resolution 1373 and other related such resolutions.

Proposed in the POTO, 1999

15.

Provide for freezing of domestic accounts of listed terrorists in public interest.

Suitable amendment in BR Act will be required.