Checklist on Diligence Report – Lending under Consortium Arrangement / Multiple Banking Arrangements Prepared by Rajendra Kewliya , The Reserve Bank of India (RBI) vide its notification no RBI/20082009/183 DBOD No. BP. BC.46/ 08.12.001/2008-09 dated 19/09/2008 has advised the Scheduled Commercial bank (excluding Regional Rural Banks and Local Area banks) to obtain regular certification ( Diligence report) by qualified professional, preferably a Company Secretary, regarding compliance of various statutory prescriptions that are in vogue as per specimen given in the notification. This notification has clarified that Central Vigilance Commission, Government of India, in the light of frauds involving consortium/multiple banking arrangements which have taken place recently, has expressed concerns on the working of Consortium Lending and Multiple Banking Arrangements in the banking system. The Commission has attributed the incidence of frauds mainly to the lack of effective sharing of information about the credit history and the conduct of the account of the borrowers among various banks. Looking to above, the RBI has decided to obtain regular certification by qualified professional, preferably a Company Secretary. As the Company Secretary is qualified professional qualification & he has expert knowledge of various laws applicable to the Companies registered under the Companies Act, 1956. This is welcome step on the part of the RBI towards recognizing the role of company secretary in the practice to check & report on the legal compliances. This notification was issued on 19th September 2008 and further details regarding the appointment of practicing company secretary (PCS), remuneration and other requirements are yet to be finalized.
As per notification, this report shall be prepared for half yearly basis. This notification shall be applicable to borrowers availing sanctioned credit limits of Rs.5.00 crore and above or wherever, it is in their knowledge that their borrowers are availing credit facilities from other banks. As per my opinion, there will be empanelment system for appointment of PCS. The banker will communicate to the company for their appointment with scope of certification. The remuneration shall be paid by the bankers to the PCS as per slab. The report shall be submitted to the appointing bank (normally lead bank) and copy to member of the consortium arrangement. The PCS needs to check and report on the compliance of the following requirements. 1) Ensure whether the Company has maintained proper books of account, register, records and papers as per section 209 of Companies Act. 1956 and the rules made there under, the provisions of various statutes, wherever applicable. . It can be further ascertained by followings To call a list of books of accounts maintained by the company To check Form no 18 for situation of registered office of the company where the proper books of account to be maintained as per 209 (1) of the Companies Act, 1956. If the company is not maintained the books of accounts at the registered office of the company and maintained other than registered office, then PCS has to check the Form no 23 AA for filing to ROC. To check other statutory records like Minutes of Board Meeting including its committee, Minutes of General Meeting, Register of members, Register of charges, Register of Directors, Register of Directors shareholding, Register of share transfer, Register of Investment, Register of share application and share allotment, Register of Contracts and Annual Return and any other return filed to stock exchanges, where the shares of the company is listed.
2) Ensure whether the Company is listed on the recognized stock exchange and to check compliance as per listing agreement executed with the stock exchanges and further to check the timely payment of listing fees. 3) Ensure whether the company has filed DIN 3 for all its directors or not and if not, report pending status DIN. To check Register of Directors maintained under section 303 of the Companies Act, 1956. For Managing Director, to check compliance as per section 269 & 316 & schedule XIII to the Companies Act, 1956. 4) Ensure that directors of the company are not disqualified as per section 274 of the Act. For safe guard, obtain an undertaking from the director concerned for this purpose. 5) Ensure that list of shareholding pattern is tallied with the Register of Member and to also check from last annual return flied to ROC & return filed to stock exchanges, note if there is any variation. 6) Ensure that the company has complied provisions of Companies Act, 1956 for alteration in the Memorandum & Articles of Association. To also check the company has communicated to concerned stock exchanges for its alteration as per listing agreement. To further check such intimation to be given to consortium bankers, as per working capital agreement and term loan agreement if any. 7) Ensure that the company has complied the provision of under section 297, 299, 300, 301 & 302 of the companies Act, 1956 for the transactions with business entities in which directors are interested. To call the list of business entities in which directors are interested. It can also be checked from the Auditors report in related party disclosures, Register of Directors & Register of Contracts. 8) Ensure that the company has complied the provision of under section 295 & 296 of the Companies Act, 1956 for loans to directors. Please note that this section does not apply to Private Limited Company unless it is subsidiary of a public company but PCS has to report accordingly.
9) Ensure that the company has complied the provision of under section 372 A of the Act for loans and investment or given guarantees to other business entities. 10) To report the summary of borrowings from Directors, members, Public, Financial institutions, banks and other banks. To report separately the list of borrowings from banks out side the consortium arrangements. Generally, the company has always has few transactions with them for purpose of the business. To review the provisions of under section 293 1 (a) and 293 1 (d) of the Companies Act, 1956 and further the all borrowing are within the limit of borrowings limit are not. If the company has taken the borrowing from public and it means all provisions of public deposits shall also be checked as per section 58 A of the Companies Act, 1956 & rules made there under i.e. the Companies Public deposit rules, 1975. Please also check the provision of under section 58AA of the companies Act, 1956 for small depositors. 11) Ensure that the Company has not defaulted in the repayment of any public deposits or unsecured loans and the Company or its Directors are not under the Defaulter's list of Reserve Bank of India or in the Specific Approval List of ECGC. To check the name of company for the Defaulter's list of Reserve Bank of India from the list suit –filed accounts of defaulters from the web site of Credit Information Bureau (India) Limited (CIBIL). Please see web site of CIBIL i.e www.cibil.com under the clause “ suite filed cases.” Alternately, the company’s bankers can also give this list. 12) Ensure that the Company has timely created, modified or satisfied charges on the assets of the company as per section 125, 135 & 138 of the Companies Act, 1956. Please also see of the Register of Charges maintained.
Please note that every company has to keep all copies of every instrument of charges at the registered office of the Company as per section 136 of the Act. 13) Ensure that the company has compiled the requirement of the Forex exposure and Overseas Borrowings. Overseas Borrowings includes ECBs and details of external commercial borrowings (ECBs) to be checked very care fully. External The Commercials Borrowings include bank loan, suppliers and buyers creditors, fixed and floating rate bonds (without convertibility) and borrowings from private sector window of multilateral financial institutions such International Finance Corporation, Euro Issues include – convertibility bonds and GDRs. In India, ECB are being permitted by the Government for providing an additional source of funds to Indian Corporate and PSUs for financing expansion of existing capacity and as well as for fresh investment, to augment there sources available domestically. ECBs can be used for any purpose (rupee related expenditure as well as imports) except for investment in stock market and speculation in real estate. The Department of Economic Affairs, Ministry of Finance, Government of India with support of RBI, monitors and regulates Indian firms access to global capital markets. From time to time, they announce guidelines on policies and procedures for ECBs and EURO issues. To focus the checking on ECBs in following manner; Eligibility criteria for accessing external markets The total volume of borrowings raised and their maturity structure End use of the funds raised. Please also review the additional requirement of consortium banks / listing requirements / SEBI guidelines, if any. 14) Ensure that the company has properly issued, offered and allotted all the securities to the persons entitled thereto and has also issued letters, coupons, warrants and certificates thereof to the
concerned persons and also redeemed its preference shares/debentures and bought back its shares (wherever applicable) in compliance with the specified procedures and within the stipulated time. Please also check SEBI guide lines / listing requirements / provision of Memorandum & Articles of Association / Provisions of section related to issue of prospectus, allotment of securities/ securities issued on premium or discounts/ Bonus issue guide lines/ redemption of preference shares & debentures /shares allotted to employees / guidelines for issue of shares certificates / special provisions related debenture from u/s 117 to 123 of the Act including their registration of charges. 15) Ensure that the company has full coverage of insurance for its all secured assets and all non secured assets. Please review list of insurance coverage with value of assets and sum insured. Please also review the Register of Fixed Assets maintained by the company. Please also review insurance claim pending / settled during the year under review. Please also check insurance coverage for constructions / machineries under installations.
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Please also review insurance coverage for domestic marine policy and export marine policy. 16) Ensure that the Company has complied with the terms and conditions, set forth by the lending institution at the time of availing the facility and also during the currency of the loan and has utilized the funds for the purposes for which these were borrowed.
PCS has to be checked very carefully with the followings; Utilization of short term working funds into long term purpose and vice versa Utilization of funds in the other assets for which the sanctioned not granted Transfer of funds into group companies / subsidiaries companies. Utilization of funds into long and short terms investment Transfer of funds into other banks (which is not member of consortium) without permission of consortium banks Utilization of funds for not the business of the company ( for personal properties of the Directors ) The above transactions are only illustrative not exhaustive. PCS has to call list of machines sanctioned from bank and check accordingly. To check further: Financial transactions between group companies and subsidiaries companies Cash flow and fund flow of the company including group company/ subsidiary company To check General ledger trial balance / bank statement/ assets purchased during the year/ party ledgers and any accounts / books which is related for this purpose. PCS may also check the other details for diversion & end use of the funds as per need. 17) Ensure that the Company has declared and paid dividends to its shareholders as per the provisions of the Companies Act, 1956.
Check the requirement of listing agreement / bank documents for working capital and term loans. 18) Ensure that the Company has paid all its statutory dues and that there are no arrears as per section 43 B of the Income tax, 1961. If the company has not paid the legal dues on time. It has to be reported with amount of penalty and period of delay. 19) Ensure that the Company has complied with the applicable and mandatory Accounting Standards issued by the Institute of Chartered Accountants of India. This is Directors responsibilities to comply the provisions as per section 217 (2AA) of the Companies Act, 1956. 20) Ensure that the Company has credited and paid to the Investor Education and Protection Fund all the unpaid dividends and other amounts required to be so credited. 21) Ensure that the company has properly replied show cause notices received by the Company for alleged offences under the Act. Ask to arrange a list of prosecutions initiated against or and also the fines and penalties or any other punishment imposed on the Company in such cases is be attached with report. 22) Ensure that the Company has complied with the various clauses of the Listing Agreement, if applicable. 23) Ensure that the Company has deposited both Employees' and Employer's contribution to Provident Fund with the prescribed authorities. Ensure that the payment has also been deposited as per Income Tax Act, 1961 and if not deposited as per Income tax, such expenditure will not deductible from the Income as per Income tax. It shall be reported accordingly.
Other Important points to be considered while checking and further reporting. To review last Audited Annual Report, Internal & Management Audit report & Secretarial compliance report / Legal Compliance Report / Cost Audit Report, if any To review all correspondences with Banks, financial intuitions regarding working capital facilities, term loan and other loans etc and may also review all correspondences from other legal authorities. To review all correspondences with ROC and stock exchanges To call a list of applicability of various laws as per requirement & need of business of the Company. The qualification / reservation or adverse remarks, if any, may be stated at the relevant places in the report, PCS has to quantify the full details of qualification / reservation or adverse remarks, if any. To review pending the legal proceedings, if any. PCS may obtain certified copies of the statements / papers / documents from the company’s directors. PCS may also review master data and other data available on the MCA website( www.mca.gov.in) of the company including all other their group companies and subsidiary companies. Diligence Report (In Annexure III) shall be submitted to bank within time frame work decided by the bank. Prepared by Rajendra Kewliya,
