A Note on “Exposure Draft of ICSI Guidance on Diligence Report on Governance for Banks dated 18th May 2018.

Lending under Consortium Arrangement / Multiple Banking Arrangements:

In order to strengthen the information sharing system among banks in respect of the borrowers enjoying credit facilities from multiple banks, the banks are required to obtain regular certification by a professional, preferably a Company Secretary, regarding compliance of various statutory prescriptions that are in vogue. Please refer to Paragraph 2(iii) of the RBI circular RBI/2008-09/183/DBOD.No.BP.BC.46 /08.12.001/2008-09 dated September 19, 2008.

This aforesaid RBI Circular is limited up to Lending under Consortium Arrangement / Multiple Banking Arrangements only. In my opinion this should be extended for all corporate lending …up to certain limit. Such due diligence at initial stage as well as half yearly review report will provide comfort to the Banks with respect to the potential risks.

It is important to note that there have been several structural changes like enactment of the Companies Act 2013 and amendments thereof, replacement of Listing Agreement with SEBI LODR 2015 further the Securities and Exchange Board of India has come up with the revised Listing Obligations and Disclosure Requirements in line with the Kotak Committee recommendations in 2018, secretarial audit being made mandatory for companies of certain size, etc.

This draft of the ICSI has been recommended with the objective of the Diligence Report on Governance for Banks. It is to examine the records of a borrowing entity to assess borrowers conduct (as a corporate entity) from the perspective of status of governance and compliance of certain statutory and procedural requirements to provide comfort to the banks with respect to the potential risks may be in terms of not using the funds for the purpose for which they may have been borrowed, diversion of funds, legal and regulatory risks which could act as early warning to the lender.

This draft includes the Format of the Diligence Report with Check Points (illustrative list) in the document /record/evidence, on Governance for Banks. There are 24 Annexures to have complete details as recommended below in 24 paras.

PARA – 1. Details of Directors on the Board / Committees

A. The management of the Company is carried out under the directions of the Board of Directors. The details of the Board and the Committees of the Board.(Details of the Board of Directors, indicating nature of each of the directors (i.e.) promoter or independent or nominee or whole time to be clearly mentioned).

B. The Board and the Committees are constituted and their terms of reference are in accordance with the provisions of the Companies Act, 2013 and the LODR requirements.

C. Remuneration to Board Members is in accordance with the provisions of the Act/limits set by the members.

PARA -2. Details of KMP

A. The details of senior management personnel functioning just below the level of the Board and the KMPs.

B. Changes to the Senior Management/KMPs or their terms of engagement therefor and the reasons therefor(Nature of changes and reasons should be elaborated and if such changes occurred before the expiry of contract, reasons should be elaborated)

PARA – 3 Board & Committee

A. The Board and the Committees of the Board were duly constituted.

B. During the period under review the following changes took place in the Board/Committee of Directors of the Company, [Indicate at the relevant sub-clause suggested in the draft format if there are any observations on the composition or functioning of the Board or Committee(s)]

PARA – 4. Shareholding

A. The shareholding pattern of the Company as on date

B. During the period under review major changes to the shareholding together with the events / corporate actions leading or impacting the changes to the shareholding.

C. Details of pledge executed by promoters and non-disposal undertakings executed (also detail the disclosure, if applicable whether made to the stock exchange)

D. Details of stock options vested during the period.

E. Details of convertible instruments issued by the Company during the period.


A. The Company has altered / not altered the provisions of MOA or AOA during the period under review, requirements of the provisions of the Act have been complied in connection with the amendments.

B. Reasons for such changes as noted from the Board notice, shareholder notice, agenda and minutes.

C. Provisions of MOA or AOA not adhered to.

PARA – 6. Related Party Transactions:

A. The number and value of related party transactions during the relevant period

B. The Company has a Board approved Policy on entering into transactions with related parties as defined in the Act and LODR. The transactions with related parties have been entered into by the Company after seeking necessary approvals from Audit Committee and/or Board and/or shareholders. All transactions entered into with related parties are on arm’s-length basis and in ordinary course of business except the transactions listed.

C. The details of transactions entered into with business entities in which directors and promoters of the Company were interested are detailed.

D. It is observed that the Company has made necessary disclosures on related party transactions and has complied with relevant provisions of the Act and LODR provisions on such decisions. (OR) The transactions have the following shortcomings generally accepted (not meeting generally accepted criteria/norms) [insert the list of shortcomings]. The said transactions were entered in the Register of Contracts or arrangements in which Directors are interested as required as per section 189 of the Companies Act, 2013 and the same has been placed before the Board and signed by all the Directors.

E. The notable points on the related party transactions are as follows:

(i) Detail the adverse financial implications of the RPT.

(ii) Liabilities, if any, absorbed by the Company due to such transactions.

PARA – 7. Subsidiaries and JVs

A. The Company has [insert number] wholly owned subsidiaries and [insert number] subsidiaries and [insert number] joint ventures.

B. The shareholding of the Company in its subsidiaries, joint ventures, if any, are detailed

C. Loans & guarantees given, investments made and securities provided are in accordance with the provisions of Section 186 of the Act, and such details are also elaborated.

i. The Company has granted a total of [insert] loans and [insert] guarantees / comfort letters during the period.

ii. Details of such loans and guarantees/comfort letters together with notable discussions on the same at the relevant Board / Committee meetings.

iii. Guarantees/comfort letters issued by the Company under the Overseas Direct Investments Regulations.

iv. The loans and guarantees are in compliance of the provisions of Section 185 and 186 of the Act (OR) Granting of loan and guarantees not in compliance with sec 185 and 186 of the Act [insert non-compliances].

D. ODI approvals in connection with loans, investments and guarantees or securities provided abroad by the Company are detailed in Annexure 9. The Company has also confirmed that the provisions of FEMA were complied with in respect of such loans, investments, guarantees or securities.

PARA – 8. Borrowings from Banks/ FIs and NBFCs

A. The Company’s total borrowings from its directors, members, financial institutions, banks and others as on [insert date] is [insert], the details of which, indicating the names of the lenders and security created .

B. The borrowings of the Company are within the borrowing limits prescribed by the Act and the general Meeting Resolutions and relevant Board resolutions.

C. Such borrowings were made by the Company after taking necessary approvals from the Board and/or shareholders and the same are in compliance with applicable laws.

PARA – 9. Information on repayment of loans/facilities from Banks, FIs and NBFCs

A. The details of the Company’s payment schedule of interest, principal repayment, public deposits, unsecured loans, debentures, facilities granted by financial and/or operational creditors (as defined in Insolvency & Bankruptcy Code), are detailed along with repayment dates.

B. The Company confirmed that as on [insert date] there are no delayed payment of dues in respect of any borrowings of the Company (OR) as confirmed by the Company, the details of delayed payments.

PARA – 10. Report on Charges subsisting on the Assets of the Company.

A. The Company has created modified or satisfied charges on the assets of the company.

B. Charges pending registration with ROC / CERSAI/ sub-registrar of Assurances / other Authorities.

C. The details of letters regarding sharing of security / inter creditor agreements

D. The charges created by the Company are in accordance with the provisions of the Act (OR) [indicate the shortcomings on the compliance].

PARA – 11. Forex Exposures and Risk Management Policy

The Company represented that the principal value of its forex exposure and overseas Borrowings as on [insert] are in aggregate [insert amount].

A. Details of the exposure and the measures taken by the Company to mitigate such exposures, confirmed by the Company.

B. A copy of the relevant extract of hedging / risk management policy of the Company

C. Matters discussed regarding forex exposures at the Board / Committee meetings are as follows: [insert the notable points of the discussion] (OR) No discussions on the forex exposures were noted during this period either on the Board or on the Committee meetings.

PARA – 12. Status of conditions of loan/ facility agreements not complied

Status of compliance of positive/negative undertakings, creation of security, end use of facility/ loan etc., of the Company under various facility/ loan documentation, as confirmed by the Company.

(a) It is observed that non-compliance of conditions at [insert details] is due to [insert reasons given by the Company]

(b) Details of the end use certificates furnished by the Company to its bankers.

(c) Notable points discussed on the borrowings and utilisation of such borrowings/facilities at the Board and Committee meetings are as follows [insert the gist of discussions] (OR) there was no discussion at the Board or Committee regarding the borrowings and utilisation of such borrowings/facilities.

(d) Elaborate if there are any partial compliance of conditions.

PARA – 13. Details on Dividend and not paid / delayed payments

Details of dividend declared and not paid / delayed payments.

PARA – 14. Details of Assets not insured.

A. The Company has confirmed that it has adequate insurance covering all its assets.

B. The details of the insurance and the assets covered, as confirmed by the Company.

PARA – 15. Details on disputed statutory liabilities

A. Details of statutory dues paid during the FY [insert].

B. Details of disputed liabilities, as declared by the Company and duly verified with the financial statements as on [insert date].

PARA – 16. The statutory Auditor vide his report dated [insert] has confirmed that the Company is a going concern and has made the following observations/ qualifications on the functioning of the Company [insert the notable observations].

PARA – 17. Cases filed / Show Cause Notices received by the Promoters / Directors of the Company

A. The Company has shared the details of cases filed against / notice issued to the Company for alleged defaults/ non-compliance of statutory provisions etc.

B. The Company has also shared the status of such proceedings / notices.

(a) It is seen from the details that there are no winding up petitions/ proceedings at NCLT / DRT or any action under SARFAESI. OR

(b) Elaborate, if there are any pending proceedings under winding up, NCLT, DRT or SARFAESI. Elaborate on Section 138 NI act proceedings, if any.

(c) Notices received from [insert authorities] are in the nature of challenging the business of the Company and [insert the analysis on the business impact, if any]

PARA – 18.

A. The Company has shared the details of cases filed against / notice issued to the Promoters / Directors for alleged defaults/ non-compliance of statutory provisions etc.

B. The Company has also shared the status of such proceedings / notices.

(a) It is seen from the details that there are no Section 138 NI Act proceedings, proceedings at NCLT against the Promoter / Directors.

(b) Elaborate, if there are any pending proceedings

(c) Notices received from [insert authorities] are in the nature of challenging the business proposing of the Company and [insert the analysis on the business impact, if any]

PARA – 19. The Company has (being a listed entity) complied with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and other applicable SEBI regulations.

PARA – 20.

A. Based on the Annual Report for the FY [insert] and the discussions at the meetings of the Board and various Committees and the audit observations by the Statutory Auditor,

B. Events concerning the business prospects of the Company.

PARA – 21. Observations or comments made by the industry specific regulator relating to the major business of the Company during its recent inspection along with the response of the Board thereon, if any.

PARA – 22. The details of Contingent liabilities of the Company.

PARA – 23. Certain early warning signals noted during the review. An illustrative list has been suggested as Annexure 24 example…

1. Default in payment to the banks/ sundry debtors and other statutory bodies, etc., bouncing of the high value cheques.

2. Raid by Income tax /sales tax/ central excise duty officials

3. Frequent change in the scope of the project to be undertaken by the borrower

4. Under insured or over insured inventory

5. Invoices devoid of TAN and other details

6. Dispute on title of the collateral securities

7. Costing of the project which is in wide variance with standard cost of installation of the project

8. Funds coming from other banks to liquidate the outstanding loan amount

9. Foreign bills remaining outstanding for a long time and tendency for bills to remain overdue

10. Onerous clause in issue of BG/LC/standby letters of credit

11. In merchandising trade, import leg not revealed to the bank

12. Funding of the interest by sanctioning additional facilities

13. Same collateral charged to a number of lenders

14. Frequent ad hoc sanctions.

15. Not routing of sales proceeds through consortium banks.

16. LCs issued for local trade / related party transactions

17. High value RTGS payment to unrelated parties.

18. Heavy cash withdrawal in loan accounts.

19. Non submission of original bills. ……………………….

Any other area of concern may also be indicated.

PARA – 24. Salient aspects culled out from the various Annexures having bearing on the functioning of the company are as under: This is a concluding paragraph of the report. While most critical points are repeated here, attention should be drawn to ‘early warnings’ if any under para 23.

Author Bio

Qualification: CS
Company: Mritunjay Shekhar & Associates
Location: New Delhi, New Delhi, IN
Member Since: 01 Jan 2018 | Total Posts: 25
A result oriented professional with 17 yrs. of experience, have worked in different industries (manufacturing, capital market, service) and in different set up. Have good exposure and experience in compliance viz. includes Corporate Laws, FEMA, Corporate Regulatory Compliance Management, Contract Ma View Full Profile

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