Implementation of Financial Standards and Codes: Indian Perspective and Approach
[Source: Paper presented by Dr. Y.V. Reddy, Deputy Governor, Reserve Bank of India at Conference on International
Standards and Codes organised by IMF-World Bank at Washington DC on March 7-8, 2001. ]

Highlights

1. The Indian position which recognises the significance, scope, limits and contextual degree of relevance of international financial standard and codes has been considered by a broad spectrum of experts, intellectuals and market participants as reasonable

2. Second, the need to assess Indian standards and codes with international benchmarks has also elicited broad support.

3. Third, the impact of the process could often be indirect and not necessarily direct and instant. For example, the Secretary Department of Company Affairs in a recent address to the Accountants and Auditors referred to the work of the Standing Committee and related it to the ongoing amendments to the Company Law

4. Fourth, the participative processes also have a multiplier effect in terms of several means by which the codes and standards are disseminated. For example, the widely read Economic Survey 2000-01 of Government of India released as part of set of Budget Documents makes a detailed reference to the subject (vide Box 6.4 on International Financial Standards and Codes). There have also been extensive references to this in several publications of Reserve Bank of India.

5. Fifth, several prominent intellectuals, professionals, and market participants contributed to the process of benchmarking, and identifying gaps and they participated in the exercise in a purely honorary capacity, as a national endeavor.

6. Sixth, such a process brought out the possible differing views between official bodies or authorities and domestic independent opinion as regards the extent of compliance with such codes and standards. It is considered necessary to recognise this and try to arrive at a consensus.

7. Seventh, some concern on the part of official authorities to such an independent assessment is understandable but could be significantly overcome through their participation as special invitees and the efforts of advisory group which have members of national standing.

8. Eighth, many areas of overlap among the areas covered by different Advisory Groups were observed. Also, each Advisory Group had to interact with several regulatory and standard setting bodies. The process thus becomes quite complex, especially when the jurisdictional issues come up.

9. Ninth, several standard setting bodies including professional associations and self-regulatory bodies of market participants involved with current practices have, on occasions had concerns about the Advisory Groups findings but special efforts by the Advisory Groups helped assuage these concerns.

10. Tenth, the work of the Advisory Groups required substantial technical and professional inputs located in several agencies, public and private. These had to be pooled and collated.

11. Eleventh, the Advisory Groups have found it difficult to focus entirely on compliance issues since there is a preoccupation with immediate issues of operational significance to the market participants and such issues may be policy or procedural or may even be of short term relevance. The main focus has not been, however, lost sight of.

12. Twelfth, the enthusiasm for disclosure and transparency in public agencies is not matched by eagerness to be transparent on the part of private sector. The private sector’s participation in the process helped a better appreciation of the importance of disclosures.

13. Finally, four lessons from the exercise appear to be relevant. The process of implementation demands significant resources and is time-consuming. Moreover, most of the follow-up activities require some legislative changes. In the ultimate analysis, adoption of the standards has to be driven by self-interest of the country and attempts should be toward harmony and ultimate convergence rather than mechanical compliance.

In India, we have standard setting bodies which are, in practice, the national regulators, who have the legal authority to set and implement regulatory rules and procedures in the financial sector. For example,

1. the Reserve Bank of India(RBI) is responsible for regulation and supervision of banks and other financial institutions and money, foreign exchange and Government securities market.

2. The Securities and Exchange Board in India(SEBI ) is charged with the duty to protect the interests of investors in securities and to promote the development of, and to regulate the securities market by measures as it deems fit.

3. The Insurance Regulatory and Development Authority(IRDA) is entrusted with the task of protecting the interests of the policy holders, to regulate, promote and ensure orderly growth of the insurance industry and for matters therewith or incidental thereto.

4. The Department of Company Affairs(DCA) of the Ministry of Law, Justice and Company Affairs, inter alia, provides legal framework for incorporation and proper functioning of companies, surveillance over the working of corporate sector to ensure financial health and compliance with statutory provisions, prescribing cost audit rules and appointment of cost auditors, investigation of complaints, coordination with other regulatory bodies such as other Government departments and autonomous institutions like SEBI, RBI and stock exchanges and monitoring the development of professional bodies i.e., Institute of Chartered Accountants of India(ICAI), Institute of Company Secretaries(ICS) and Institute of Cost and Work Accountants of India(ICWAI).

Further, we have self regulatory organizations such as the Indian Banks Association(IBA), Fixed Income Money Market and Derivatives Association of India(FIMMDA), Association of Merchant Bankers of India(AMBI), Association of Mutual Funds of India(AMFI), Foreign Exchange Dealers Association of India(FEDAI), Primary Dealers Association of India(PDAI), clearing house associations and stock exchanges, among others, which play a critical role in developing codes of conduct and setting and maintaining standards for different segments of the financial system with a view to promoting and protecting interests of institutions, investors and depositors in India.

India has supported the international initiatives on financial stability in various ways. It has also taken its own initiatives for improving transparency and accountability and for setting up international financial standards and codes. On December 8, 1999, the Reserve Bank appointed a Standing Committee on International Financial Standards and Codes (Chairman: Dr.Y.V. Reddy), in consultation with the Government, in order t-

1. identify and monitor developments in global standards and codes being evolved especially in the context of international developments, and discussions as part of the efforts to create a sound international financial architectur

2. consider all applicability of these standards and codes to the Indian financial system, and as necessary and desirable, chalk out a road map for aligning India's standards and practices in light of the evolving international standards;

3. periodically review the status and progress in regard to the codes and practices; and

4. make available its reports on the above to all concerned organisations in public or private sector.

The Standing Committee constituted ten Advisory Groups in the areas of accounting and auditing, banking supervision, corporate governance, data dissemination, fiscal transparency, insurance regulation, transparency in monetary and financial policies, payment and settlement systems and securities market regulation to examine the feasibility and time frame of compliance with international best practices. The Advisory Group on Monetary and Financial Transparency, Banking Supervision, Insurance Regulation, Payment and Settlement System and International Accounting and Auditing have submitted reports to the Standing Committee. The main recommendations of these groups are briefly given below.

The Advisory Group on Monetary and Financial Transparency (Chairman: Shri M. Narasimham) has recommended that the Government should set out objectives to the central bank, with parliamentary endorsement and accord it the necessary autonomy to fulfill its responsibilities, if necessary by amending the RBI Act. The Group recommended that the Government of India should consider setting out a medium term objective for monetary policy, viz., the inflation rate to the Reserve Bank. In the view of the Group, a reasonable degree of fiscal responsibility is also necessary to provide the central bank reasonable headroom to operate monetary policy. The Group also recommended setting up of a monetary policy committee (MPC) comprising of Governor, Deputy Governors and three other members drawn from the Central Board who are knowledgeable in the areas of macroeconomics, monetary analysis, central banking policy and operations in banking and finance.

The Advisory Group on Banking Supervision (Chairman: Shri M.S. Verma) assessed the position of Indian banking in respect of four major areas of supervisory concern, viz., corporate governance, transparency, cross-border supervision and banks' internal rating systems. The Group expressed the view that there was an urgent need to follow best practices in the constitution and functioning of bank boards by streamlining the process of induction and fixing accountability. The Group felt that the levels of transparency in the balance sheets of Indian banks would need to be further enhanced by stipulating disclosure in terms of maturity and repricing structure of all assets and liabilities, including calculation of capital requirements for credit and market risks, cumulative provisions against loan losses, impact of non-accrual and impaired assets on financial performance, effect of hedging activities on income and expenses and income effect of securitisation. As regards banks' internal rating systems, the Group proposed that banks should move to multi-dimensional rating systems from the hitherto uni-dimensional one, since the activities of the clients and the facilities enjoyed by them are themselves are manifold in nature. Finally, the Group was of the view that there is a need to strengthen management information systems in banks to ensure integrity and reliability in data collection and allow the use of statistical methods to arrive at informed policy making.

The Advisory Group on Insurance Regulation (Chairman: Shri R. Ramakrishnan) was of the view that the Indian position of allowing foreign companies to operate through joint venture arrangements with an Indian company with a shareholding not exceeding 26 per cent in the paid-up capital of the company, was not materially different from the international practices. Possibilities of expanding insurance coverage in rural areas through co-operatives could be explored. W hile the Indian requirements in respect of minimum capital requirements, deposit requirements, business plan and reinsurance were adequate, the Group recommended that minimum capital levels could be fixed for each class of business rather than on aggregate basis. The Group favoured the "file and proceed" requirements in respect of new insurance products, adopted in India, but recommended that the actuarial certification, premium rate tables and benefit design should be treated as public information, in the interest of transparency.

The Advisory Group on Payment and Settlement System (Chairman: Shri M.G. Bhide), in Part I of its report, critically examined two issues viz., status of clearing house operations as well as responsibilities of the Reserve Bank in the light of the consultative report on "Core Principles for Systematically Important Payment Systems" released by the Bank for International Settlements (BIS) first in December 1999 followed by in July 2000. It recommended, inter alia, extensive legal reforms especially empowering the Reserve Bank to supervise the payment and settlement system, institution of a framework ensuring at least the Lamfalussy standards for the deferred net settlement (DNS) system and such suitable framework for the real time gross settlement (RTGS) systems and spread of electronic-based transactions through appropriate price incentives. The Group was of the view that the Reserve Bank should eventually come out of the role of a payment systems provider except for funds settlement. In Part II of the Report, the Group examined the status of existing payment and settlement systems in Indian equity and debt markets including Government securities market and suggested ways for improvements in compliance with the G-30 recommendations on securities settlement system. It recommended, inter alia, introduction of rolling settlement in the liquid segment of the equity market, allowing current account facility with the Reserve Bank to clearing corporations for ensuring settlement facility on the books of the Reserve Bank as an interim measure pending eventual grant of limited purpose banking license to them with appropriate prudential guidelines thereon, building up of an institutional mechanism for centralised collection of information, their dissemination to market participants and prudential guidelines for implementing cross-merging across markets in order to deal with problems arising from participants undertaking multiple exposures in various markets at any point of time and permitting securities borrowing and lending system for institutions in both equity and debt segment in India.

The Advisory Group on International Accounting and Auditing (Chairman: Shri Y.H. Malegam) reviewed the availability of various accounting and auditing standards in India and compared them with the corresponding international standards. In case of accounting standards, the US Generally Accepted Accounting Principles (US GAAP) and the International Accounting Standards (IAS) served as the benchmark. With regard to auditing standards, standards issued by the International Auditing Practices Committee (IAPC) of the International Federation of Accountants (IFAC) served as the reference point. The Group noted that the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) has so far issued 19 standards, which are on par with those of international standards. The Auditing Practices Committee (APC) of the ICAI has issued 20 statements on Standard Auditing Practices (SAPs) and four additional statements on auditing which are anchored on the international standards

RBI placed the different reports prepared by eminent experts of our country in various subject in the public domain (on its website www.rbi.org) and invited public comments (to be submitted before March 2001) for suitable consideration by the Standing Committee.

Although, not taking any particular view on the recommendations of the Advisory Group, the Standing Committee would prepare a summary and highlight key aspects of the recommendations of the Report as also identify action points requiring attention by regulatory authorities/agencies concerned so that the follow up could be undertaken. The Standing Committee would help organize seminars and workshops to enhance awareness and concretize views on recommendations of the Report and seek comments/feedback from both private and public sector organizations, international institutions and experts. We hope to review and complete these tasks in the next few months. However, it is proposed that an annual review of status and progress regarding compliance with and implementation of standards and codes will also be subsequently prepared and submitted to the Ministry of Finance.

" With a view to aligning standards adopted by the Indian banking system with global standards, the Reserve Bank issued detailed guidelines relating to several Accounting Standards (AS) in March 2003. In April 2004, guidelines for compliance with three more standards, viz., AS 24 (discontinuing operations), AS 26 (intangible assets) and AS 28 (impairment of assets) were issued. Banks are required to ensure that there are no qualifications by the auditors in their financial statements for non-compliance with any of the accounting standard" (Paragraph 10.15)

RBI Credit Policy Annual 2004-05 (Paragraph 161)

It was indicated in the annual policy Statement of April 2003 that the Report of the Standing Committee along with the Reports of the Advisory/Technical Groups on International Financial Standards and Codes were put in the public domain for wider dissemination. The recommendations of the Advisory/Technical Groups are being pursued by RBI, SEBI and IRDA relating to their respective areas. A review of the progress made so far in this direction was undertaken in order to identify areas where further action could be taken. The review also included recent developments in the international financial standards and codes in the areas of central bank money in payment system, risk management standards for central counterparties, foreign exchange reserves management, risk integration and risk transfer, money laundering, guidelines on KYC policy on a consolidated basis and the New Basel Capital Accord with a view to comparing Indian position vis-à-vis international standards. The review is being considered by a panel of advisers and is expected to be put in the public domain in two months.

RBI Mid-Year Review of Credit Policy Oct 2004-05

A review of the progress made on the implementation of the recommendations of the Reports of the 11 Advisory/Technical Groups was considered by a panel of advisers. Taking into account the suggestions of the panel, a revised draft report is being placed in the public domain.