RBI panel for focus on corporate structures

A Reserve Bank of India (RBI) panel has highlighted the need for special attention to control structures of corporates.

The necessity stems from the fact that control is often exercised through thin holdings and cross holdings through a complex pattern of subsidiaries, companies and investment companies. It has also recommended close monitoring of arms length transactions.

The complex holdings now have an added dimension of investments by institutions incorporated abroad, the standing committee on international financial standards and codes said in its report on the progress and agenda ahead released today.

The report contains the recommendations of the advisory groups constituted by the committee. RBI has placed the report in public domain for wider dissemination and sought views on the recommendations.

The panel has also suggested bringing foreign lenders within the scope of the country's corporate debt restructuring (CDR) mechanism, as it would go a long way in improving cross-border insolvency procedures.

This has been sought in addition to granting of statutory recognition to CDR as implementing bankruptcy procedures is important for attaining international standards.

On corporate governance, the report said there is a gap between corporate governance in law and words and the corporate governance as it is enforced. While there has been improvement in both the legal framework as well as the way corporate governance is practiced in the country, the gap still remains large.

The committee said the success of corporate governance initiative would ultimately depend on legal and regulatory enforcement.

Citing examples, the committee said legal protection of minority shareholders leads to higher valuation of the firm. Poor corporate governance laws encourage not only bad behaviour by management, but also activities that fall under the classification of "looting" or "tunnelling".

Dwelling on bankruptcy, the report said it would be possible to be compliant with the best practices in respect of cross-border bankruptcy with the adoption of UNCITRAL model of insolvency in India.

Once the enabling legislative changes are made in respect of the Companies Act, 1956, provisions relating to insolvency in respect of non-financial companies could be implemented by the government, while those in relation to banks and financial institutions could be implemented by RBI.

The committee, however, said before adoption of UNCITRAL model, its provisions need to be examined in detail to give force to the law in the Indian conditions.

It may be useful for the government to set up a committee involving RBI and other regulators such as the SEBI, IRDA and TRAI to prepare the preliminary draft in this regard.

Extension of UNCITRAL model to banks and FIs could also be considered, if necessary, through a separate law to deal with their insolvency.

The committee also felt that in the context of cross-border transactions of banks/ financial institutions, it is necessary to provide for netting of counter party obligations.

At present, the proposed Payment and Settlement Bill, 2002 provides for netting relating to the payment leg of the transactions routed through banks and financial institutions, which are participants of a payment system.

However, the Bill does not provide for final settlement of mutual obligations of counterparties as also the closing out method of settlement.

A separate legislation for the purpose of enabling multilateral netting of securities and closing out netting may be recommended.