Regulators to see conglomerates' books

The Reserve Bank of India (RBI) along with the Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development Authority (Irda) would conduct joint study of the account books and other operations of financial conglomerates to strengthen supervisory efforts.

The three regulators have also decided to engage in direct dialogue with the principal auditors of financial conglomerates to convey supervisory concerns more effectively.

The joint study, agreed in-principle by the regulators, will provide an oversight of the activities of the major group entities. The exercise would also check the efficiency of the reporting format in capturing intra-group transactions and exposures and other relevant information.

"At present the regulators, the RBI, the Sebi and the Irda each have only a view of a part-segment of the group. Nobody has a consolidated view. Now the RBI can take a (close) look at other group entities also," said a senior banking official.

The regulators at present do not engage in direct dialogue with the principal auditor or statutory auditors of a group.

However, the regulators have agreed to the need to communicate directly with the principal auditors to help transmit their concerns to the conglomerates more efficiently. The modalities for the dialogue are being worked out.

A financial conglomerate is a group having a significant presence in at least two of the five accepted financial market segments in India. This includes banking and non-banking financial operations, insurance and mutual funds business.

The major banking conglomerates include State Bank of India (SBI), ICICI Bank and Housing Development and Finance Corporation (HDFC). SBI and ICICI Bank have insurance and mutual fund subsidiaries, while HDFC has a banking and a life insurance subsidiary.

Tata Group. Aditya Birla Group, Reliance Anil Dhirubhai Ambani Group (R-ADAG) and Bajaj Financial Services are the major non-banking conglomerates with significant presence in financial services.

Under the present framework for monitoring of financial conglomerates, the groups are required to report quarterly returns. This facilitates monitoring of intra-group transactions and group wide-risks.

The dominant entity in the group, referred to as the designated entity, is responsible for forwarding the returns to the regulator. The concerned regulators also engage in discussions with the chief executives of the major group entities every six months on the group's affairs.

This includes significant issues relating to the group-wide risk management, oversight structure and intra-group transactions.