Corporate governance of banks

The corporate governance of banks is different and unique from that of the other organizations. This is because the activities of the bank are less transparent than other organizations. Thus, it becomes difficult for shareholders and creditors to monitor the activities of the bank. The situation becomes even more difficult when a major part of the share capital is with government. Additionally, banks also differ from most other companies in terms of the complexity and range of their business risks, and the consequences if these risks are poorly managed.

The Banking Sector in India has definitely not remained unaffected to the developments taking place worldwide. Enhancing the level of corporate governance structure of Indian banks is imperative. The regulatory bodies in India are the Reserve Bank of India and the Securities Exchange Board India. The RBI prescribes prudential principles and norms. The RBI performs the corporate governance function under the Board for Financial Supervision (BFS).

The Basel Accord was first established in 1988 by the Basel Committee on Banking Supervision under the Bank for International Settlements. The BIS was established on 17 May 1930 and is the world's oldest international financial organization. The Basel Committee was established by the central-bank Governors of the Group of Ten countries in 1974. It meets regularly four times a year. It has four main working groups. The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide.

The Basel Accord was established to provide a set of minimum capital requirements to banks. According to this accord, the banks would be required to maintain a minimum capital requirement a propos the loans given out by them. The 1988 Basel Accord also known as Basel I primarily focused on credit risk. The Central Banks of several countries that have agreed to become signatories have been given the responsibility of enforcing the provisions. In India, the Reserve Bank of India shoulders this responsibility.

The second of the Basel Accords, Basel II was first published in June 2004 and established in 2005. This accord widened the scope of Basel I by establishing capital requirements for market risk and operational risk, in addition to credit risk. Basel II also included provisions which allowed banks to use advanced statistical methods to compute possible losses for which they were required to hold capital. Therefore, international banks had an advantage as they could lower their capital requirements through the use of advanced models.

The third of the Basel Accords, Basel III was created in response to the flaws in financial regulation which led to the crisis and also due to appeals for the reform of capital adequacy and liquidity standards for banks.

According to the Basel Committee Report of 1999, Banks have to maintain a certain level of transparency and disclosures in their statements. The annual report should disclose a number of factors relating to the operations of the banks such as accounting ratios, business per employee, related party disclosures and information.

Recent Steps Taken by Banks in India for CG

•                   Induction of non-executive members on the boards

•                   Constitution of various Committees like Management committee, Investor’s Grievances committee, ALM committee, etc.

•                   Role of Independent auditor

•                   Gradual implementation of prudential norms as prescribed by the RBI,

•                   Introduction of Citizens Charter in banks

•                   Implementation of “Know Your Customer” concept

•                   The Board of Directors and top management of the Bank are chiefly responsible for good CG.

Frauds by others

•                   Forgery and altered cheques -This type of fraud involves altering the amount on the face of a cheque for nefarious purposes

•                   Stolen cheques -This type of fraud is initiated by the theft of a few cheques. Then accounts are opened using fake identities, and the suitably altered stolen cheques are deposited, followed by convenient withdrawal of the amount. In a similar way, stolen blank cheque books are misused by fraudsters.

•                   Accounting fraud -Overstating sales and income, dishonest accounting and inflating the worth of the company’s assets to hide that the company is actually functioning in loss constitute Accounting Fraud. E.g., Satyam.

•                   Credit card fraud - Credit cards lend themselves to several opportunities for fraud. Made of three PVC sheets, of which the central sheet is known as the core stock, credit cards carry substantial data. Credit card frauds can be carried out in several ways.

•                   Frauds committed by auditors

•                   Power of Attorney fraud- A “Power of Attorney” (“POA”) is a legal document through which the donor grants the power to his attorney to ‘step into the donor’s shoes’ and conduct legal and financial matters on the donor’s behalf.

•                   Phishing- In this type of fraud, sensitive data such as account numbers, login Independent Directors (IDs), passwords, and other verifiable information are extracted from gullible individuals either through fraudulent telephone calls or emails. These data are then misused for dishonest purposes, including identity theft. Phishing is most often perpetrated through mass emails and spoofed websites.

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ETHICAL ISSUES IN CORPORATE GOVERNANCE

Corporate fraud is defined as “one that occurs within an organization or by its owners or managers and involves deliberate dishonesty to deceive the public, investors or lending companies, usually resulting in a financial gain to the individuals or organization.” Most of the corporate frauds fall under the categories of asset misappropriation, money laundering, accounting frauds, frauds committed by senior management, bribery and corruption and regulatory non-compliance. It is practices such as these that are denting the image of our financial system. The organizations, therefore, must be attentive to these challenges and adopt pro-active anti-fraud measures rather than being reactive. Otherwise, organizations and entire societies have to bear the risk of fraud and its consequences, which will become more devastating.

Keys to solving ethical issue

1.        Sound Risk Management Framework

2.        Data Management and analysis

3.        Code of Conduct for Board of Directors

4.        Internal & External control system

5.        Forensic Accounting

6.        Independent auditor’s role

7.        Role of top management

8.        Whistle blowing policy

A. Sound Risk Management Framework

With the occurrence of such major financial crisis globally a lot of emphasis is laid on strengthening risk management practices for both financial and non-financial institutions. However, with respect to the financial institutions, it is evident that much attention is being paid to financial risk such as market risk, credit and liquidity, despite the focus being on managing operational risk. Accordingly, major reports have been published by many organizations, such as the Basel Committee, Institute of International Finance and others that highlight the need for effective risk management in financial institutions (OECD report, 2014).

B. Data Management and Analysis

An organization’s ability to generate revenue, manage the expenses and extenuate risks is determined by its ability to successfully share, store, retain and retrieve the escalating data. Effective data management practices can bring in large customer base, improve customer relationships which in turn help in generating revenue. According to American Institute of Certified Public Accountant (AICPA) report 2013, accountants play an important role in governing the organization’s data and ensure that it is in accordance with the CG practices of the organization. Since any financial institutions’ operation is based entirely on its customer base, governing the ever-increasing customer data becomes an important part of its CG practices.

C. Strict code of Conduct for Board Of Directors

Although people have always questioned the need for having corporate boards, it is empirically proven that their presence matters a lot at the time of organizational crisis. This can be verified as in the case of Enron, Worldcom and Parmalat scandals where the directors in particular were held liable for the fraud. Consequently, more attention is being paid to research on the role of corporate boards. Uzun, Szewczyk and Verma (2004) have demonstrated that the composition of the board and the structure of the supervisory committee were significantly related to occurrence of corporate frauds. In contrast, the study also found that the larger the number of independent outside directors, lesser was the possibility of occurrence of corporate frauds in U.S during the period 1978-200. Nevertheless, not many papers are available on the composition and effectiveness of corporate boards in the financial sector, which motivated this study to investigate the relationship between CG and fraud.

D. Internal and External Control Systems

Internal control system refers to the approved policies and procedures followed by the management in order to carry out smooth and proper functioning of business thereby avoiding various types of risks such as improper maintenance of accounts, unauthorized transactions and frauds which may affect the organization’s financial performance.

On the other hand external control system refers to the government regulations, market competition, media exposure, takeover activities, public release and assessment of financial statements. In spite of the fact that the company’s governance process also comprises of government regulations the role of external control systems in the financial sector is still a mystery.

E. Forensic Accounting

Forensic accounting is a special field related to accountancy profession where the accountants implement their accounting, auditing and investigative skills to detect frauds, bankruptcy and other litigations. The role of forensic accountants in investigating corporate frauds has long been identified by many countries and they now play a major role in probing corporate frauds. However the field is still in its nascent stage in India due to rapid increase in “white collar crimes” and the notion that the law enforcement agencies do not have sufficient time or expertise to expose the frauds committed. Therefore the researcher anticipates studying the role of forensic auditors and auditing process which may determine the quality of CG practices in the banking sector.

F. Independent auditor’s role

The purpose of designing a set of codes for CG is to enhance the efficiency of auditing process in order to retain the interests of all the stakeholders and investors. This is where the role of independent auditor comes into picture. The auditor has all the authority to capture the offender, eliminate bias from financial reports of the company and report objectively. Recently a lot of emphasis is placed on the role of auditor with respect to CG as auditors’ are solely responsible in detecting the scam. On the contrary, the auditor’s must not be forced into any kind of obligation which may bind his hands from discharging his duties veritably.

G. Role of top management

According to the Basel Committee report on banking supervision published in the year 2014 (Bank for International Settlements, 2014), it is the responsibility of the senior managers to carry out and manage all the activities of the banks in accordance with the business strategy, risk policies and other strategies as approved by the board. The top management’s personal conduct also contributes significantly in achieving “sound CG” along with the members of the board.

H. Whistle blowing policy

Whistle blowing policy in a company refers to the particular internal policy designed for its employees to report to the management about any suspicious behavior or frauds or any kind of infringement in company’s norms or code of conduct. The policy enables an employee to report to the senior managers or top management directly without informing his immediate manager(s). Because of this advantage, whistle blowing policy is considered to be a valuable tool in an organizations effective CG strategy.

The issues of corporate governance

1.        Asset Misappropriation

2.        Money laundering

3.        Accounting frauds

4.        Frauds committed by senior management

5.        Bribery and corruption

6.        Regulatory non-compliance

7.        Practice of Insider Trading and Selective leak of sensitive data

A. Asset Misappropriation

Asset misappropriation refers to the misuse of a company’s assets or resources for an individual’s personal use at the expense of the company. Sometimes it may even involve stealing of the company’s assets for personal interests and producing false records to mask the committed fault. Studies have shown that though asset misappropriation might not be visibly significant, disregarding the same may become “an incurable disease” and consequently affect the financial status due to unnecessary expenditure incurred.

B. Money laundering

Money laundering is gaining illegal money from criminal activities and projecting it to be a source from legal proceedings by concealing its actual source of inflow, ownership and use of funds.

C. Accounting frauds

Accounting frauds refer to deliberate falsification introduced in the financial statement to gain unlawful financial advantage by employees, management or any other individuals related to the organization. On the other hand, accounting irregularities arise due to inadvertent misrepresentation of facts or omission of certain entries in the financial statements. Both these mistakes lead to economic problems which ultimately find its root cause in fruitless CG mechanism and its inability to detect and prevent such faults. For instance the financial irregularities that happened with Enron, WorldCom and Satyam, all point towards a lack of proper CG at some point for the tragedy occurred.

D. Frauds committed by senior management

Also known as “white collar crime”, frauds committed by the members of the top management directly impacts the shareholders, employees and society as a whole. Frauds committed may not always be in terms of capital. It may also include the involvement of top managers in certain activities that are against the rules and regulations of the company or refrain themselves from taking necessary action after being aware of any illegal activity happening in the organization or certain disastrous decisions taken by the managers.

E. Bribery and corruption

Studies have demonstrated that poor CG practices can breed corruption. Corruption pertains to “the misuse of public office for private gains and has both demand and supply sides to it”. CG practices can be affected by bribery and corruption practices of the members involved at various levels including the board members, to managers, employees, shareholders and stakeholders. Good CG is expected to reduce the level of corruption by imposing strict constraints on the officials.

F. Regulatory non-compliance

For any organization it is mandatory to comply with the legal framework prescribed by the respective boards apart from the internal rules and regulations of the company. In India the Securities and Exchange Board of India imposes the rules and regulations and frames the guiding the guiding principles for companies to protect the interests of the investors. Apart from this, companies are also required to comply with the provisions of Companies Act 1956, Kumara Mangalam Birla report on CG, accounting standards issued by ICAI and additional listing agreements with the stock exchange they are listed with.

G. Practice of Insider trading and Selective leak of sensitive data

Insider trading indicates the practice of buying and selling company’s securities illegally without the knowledge of the public with the intention of making profit or preventing loss in the securities transactions of the company. In India it is considered as illegal trading by SEBI. In this case, the management of the company may take advantage of the confidential and price-sensitive data to make profit for themselves without informing the public investors.

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How to Apply for a New GST Registration

If you are a regular dealer or a composite tax payer, you need to do the following for GST registration:

1.    Fill Part-A of Form GST REG-01. Provide your PAN, mobile number, and E-mail ID, and submit the form.

2.    The PAN is verified on the GST Portal. Mobile number, and E-mail ID are verified with a one-time password (OTP).

3.    You will receive an application reference number on your mobile and via E-mail.

4.    Fill Part- B of Form GST REG-01 and specify the application reference number you received. Attach other required documents and submit the form. Following is the list of documents to be uploaded –

5.    Photographs: Photographs of proprietor, partners, managing trustee, committee etc. and authorized signatory

6.    Constitution of taxpayer : Partnership deed, registration certificate or other proof of constitution

7.    Proof of principal / additional place of business :

8.    For own premises – Any document in support of the ownership of the premises like latest property tax receipt or Municipal Khata copy or copy of electricity bill.

9.    For rented or leased premises – copy of rent / lease agreement along with owner’s (landlord) documents like latest property tax receipt or Municipal Khata copy or copy of electricity bill.

10.                       Bank account related proof : Scanned copy of the first page of bank pass book or bank statement

11.                       Authorization forms: For each authorized signatory, upload authorization copy or a copy of resolution of managing committee or board of directors in the prescribed format.

12.                       If additional information is required, Form GST REG-03 will be issued to you. You need to respond in Form GST REG-04 with required information within 7 working days from the date of receipt of Form GST REG-03.

13.                       If you have provided all required information via Form GST REG-01 or Form GST REG-04, a certificate of registration in Form GST REG-06 will be issued within 3 days from date of receipt of Form GST REG-01 or Form GST REG-04.

14.                       If the details submitted are not satisfactory, the registration application is rejected using Form GST REG-05

Casual Registration

A person who occasionally supplies goods and/or services in a territory where GST is applicable but he does not have a fixed place of business. Such a person will be treated as a casual taxable person as per GST.

Example: A person who has a place of business in Bangalore supplies taxable consulting services in Pune where he has no place of business would be treated as a casual taxable person in Pune.

Composition Dealer

This is an option available to small businesses and taxpayers having a turnover less than Rs. 50 lakhs. They can opt for Composition scheme where they will tax at a nominal rate of 1% or 2.50% (for manufacturers) CGST and SGST each (rates will be notified later).

They will be required to maintain much less detailed records and file only 1 quarterly return instead of three monthly returns. However, they cannot issue taxable invoices, i.e., collect tax from customers, but are required to pay the tax out of their own pocket. They cannot also claim any input tax credit.

Composition levy is available to only small businesses. It is not available to interstate sellers, e-commerce traders, and operators.

Applicability

GST will apply when turnover of the business exceeds Rs 20 lakhs (Limit is Rs 10 lakhs for the North Eastern States). [Earlier the limit was Rs 10lakhs and Rs 5lakhs for NE states.]

Migration to GST

All existing Central Excise and Service Tax assessees and VAT dealers will be migrated to GST. To migrate to GST, assessees would be provided a Provisional ID and Password by CBEC/State Commercial Tax Departments.

Provisional IDs would be issued to only those assessees who have a valid PAN associated with their registration. An assessee may not be provided a Provisional ID in the following cases:

1.    The PAN associated with the registration is not valid

2.    The PAN is registered with a State Tax authority and Provisional ID has been supplied by the said State Tax authority.

3.    There are multiple CE/ST registrations on the same PAN in a State. In this case, only 1 Provisional ID would be issued for the 1st registration in the alphabetical order provided any of the above 2 conditions are not met.

The assessees need to use this Provisional ID and Password to login to the GST Common Portal (https://www.gst.gov.in) where they would be required to fill and submit the Form 20 along with necessary supporting documents.

Penalties for Not Registering Under GST

An offender not paying tax or making short payments has to pay a penalty of 10% of the tax amount due subject to a minimum of Rs.10,000. The penalty will be high at 100% of the tax amount when the offender has evaded i.e., where there is a deliberate fraud.

However, for other genuine errors, the penalty is 10% of the tax due.

Multiple Registrations Under GST

A person with multiple business verticals in a state may obtain a separate registration for each business vertical.

PAN is mandatory to apply for GST registration (except for a non-resident person who can get GST registration on the basis of other documents).

A registration which has been rejected under CGST Act/SGST Act shall also stand rejected for the purpose of SGST/CGST act.

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Composition Scheme Rules under GST

Composition Scheme Rules under GST provide for all the procedural compliance w.r.t. intimation for Composition Scheme, effective date for levy, conditions and restrictions on levy, validity of levy and rate of tax.

The current state indirect tax regime has provided a simpler compliance for small dealers known as the Composition Scheme. Under this scheme you,

• Pay taxes only at a certain percentage of turnover
• File periodic returns only (usually on a quarterly basis)
• Have an option of not having to maintain detailed records or follow tax invoicing rules
• Are not allowed to take Input Tax Credit (ITC)
• Are not allowed to collect tax on sales

A. Intimation and Effective date for Composition Levy

1.   For persons already registered under pre-GST regime

Any person being granted registration on a provisional basis (registered under VAT Act, Service Tax, Central Excise laws etc) and who opts for Composition Levy shall file an intimation in FORM GST CMP-01, duly signed, before or within 30 days of appointed date. If intimation is filed after the appointed day, the registered person:

a) Will not collect taxes

b) Issue bill of supply for supplies

FORM GST CMP- 03 must also be filed within 60 days of exercise of option:

a) Details of stock

b) Inward supply of goods received from unregistered persons held by him on the date preceding the day of exercise of option.

2. For persons who applied for fresh register under GST to opt scheme

For fresh registration under the scheme, intimation in FORM GST REG- 01 must be filed.

3. Registered under GST and person switches to Composition Scheme

Every registered person under GST and opts to pay taxes under Composition Scheme, must follow the following:

a) Intimation in FORM GST CMP- 02 for exercise option

b) Statement in FORM GST ITC- 3 for details of ITC relating to inputs lying in stock, inputs contained in semi-finished or finished goods within 60 days of commencement of the relevant financial year

b. Conditions for a Composite Tax Payer

Apart from the threshold limit, the following conditions are applicable for a composite tax payer:

• Cannot be engaged in supply of services, other than supply of food or drinks for human consumption
• Cannot be engaged in manufacture of specific notified goods
• Cannot supply goods not taxable under GST
• Cannot supply goods through an e-commerce operator
• No Interstate outward supplies – A composite tax payer should not engage in interstate outward supply of goods and / or services .
• Payment of composition tax – If the composite tax payer is in the trade of supplying goods and services, then composition levy will be applicable for both supply of goods and supply of services.
• Does not have to collect tax – The composite tax payer does not have to collect tax on all his outward supply of goods and / or services.
• Applicable for all business verticals under the same PAN – Composition levy will be applicable for all business verticals operating within state or interstate under the same pan.
• What does this mean?
• An individual with different business verticals, like:
• Mobiles & Accessories
• Stationery
• Franchisee

In the above scenario, the composition scheme will be applicable for all three business verticals. The dealer cannot opt for any one business vertical to fall under the composition scheme. For example, if the business vertical’s place of business is in Karnataka & Kerala for a single PAN, each of the business vertical in that particular state should have only ‘Intra-State(within state)’ supplies.

• Cannot claim Input Tax Credit – The composite tax payer is not eligible to claim input tax credit on all his inward supply of goods and / or services.
• What does this mean?
• If a dealer chooses to be a composite tax payer, he cannot claim input tax credit even if he makes taxable purchases from a regular taxable dealer. Ideally, the taxable amount would be added to the composite tax payer’s cost.
• Conclusion

Any person who opts for the scheme will be deemed to have been opted for all the places of business having the same registered PAN. Hence, you may not choose any one of all the place of business to be registered under scheme.

Composition Scheme Rules under GST have been targeted to be strict and crisp for the persons availing the Composition Scheme.

We, "PNJ Legal Consultants" are one of the well known organizations engaged in providing Consultancy Services keeping in mind the Client Service Mentality.

We have a team of highly qualified professionals and time to time training is provided by us as per the requirements. Our team members deliver excellent performance in providing these services and our clients can avail the services at affordable prices.

Our sophisticated team has complete knowledge of various exercises and technicalities that are used in our services. Our services includes Strategy Consulting, GST Consulting, Asset Management, Feasibility Study, International Arbitration, Due Dilligence, Franchisee Consulting, Financial Audits, Operational Audits, Tax Heaven Registrations, Shareholder Agreements, Start up Consulting, IP Consulting, Taxation Services, Accounting system design and Mergers Acquisitions.

Contact at parascs@gmail.com or refer website www.pnjlegal.com