Corporate Governance by HFC- Clarifications from NHB, by Anita Baid

National Housing Bank (NHB) had come out with the Housing Finance Companies – Corporate Governance (National Housing Bank) Directions, 2016”^[1] on February 09, 2017 (“Directions”), to strengthen the requirement for compliance of corporate governance and enhance the role of board of directors of the Housing Finance Companies (HFCs). The provisions of these Directions were to be read in addition to, and not in derogation of the provisions of any other laws, rules, regulations or directions, for the time being in force. To address several confusions and concerns that has been raised by industry participants, NHB has come up with its clarification on certain provisions of the aforesaid Directions[2].

The clarifications and their impact have been discussed herein below:

The Directions requires the Audit Committee of an Applicable HFC to ensure that an Information System Audit of the internal systems and processes is to be conducted at least once in two years to assess operational risks faced by the HFCs [Paragraph 3 I (ii)].

The Directions came into immediate effect from 9^th February, 2017 and since then there has been a confusion with regard to the calculation of the two years and concerned authority who shall conduct the audit. Thought there is no clarification with regard to the calculation of the applicability period, but since the directions became applicable with immediate effect the most suitable interpretation is that the audit will be conducted once in either 2016-2017 or 2017-2018.

Further, NHB has clarified that the HFCs are necessarily required to get the aforesaid audit carried out separately through a Certified Information System Auditor (CISA), in compliance with the provisions of the Directions.

Para 4(IV) of the Directions states that Applicable HFCs are required to furnish to the NHB a quarterly statement on change of directors and a certificate from the Managing Director that fit and proper criteria in selection of the directors have been followed.

It has been clarified that the quarterly statements, can be certified by the Managing Director, except that the statement pertaining to the last quarter ended March 31 needs to be necessarily certified by the auditors. Further, in case of no change in the directors during a quarter, a ‘Nil’ statement should be submitted.

The format of Deed of Covenant, as provided in Annexure 3, to be executed by the directors of an HFC, states that HFCs shall communicate outcome of board deliberations to directors and concerned personnel and prepare and circulate minutes of the meeting of board of directors in a timely manner and to the extent possible within two business days of the date of conclusion of the board meeting.

Keeping in view the general practice, it has been clarified that circulation of minutes within 2 (two) business days is not mandatory and provisions of the Companies Act, 2013 in this regard shall apply. As per the Companies Act, 2013 read along with the Secretarial Standard on Meetings of Board of Directors (SS-1) , the minutes are required to be circulated within 15 (fifteen) days from the date of conclusion of the board meeting.

Several clarifications have also been issued by the NHB with respect to the disclosures as per Annexure 4 of the Directions stipulating an indicative list of Balance Sheet disclosures for Applicable HFCs:
HFCs are required to make certain disclosures regarding derivatives transactions. It is clarified that disclosure requirement for FY-2016-17 under the paragraph 3.4 of Annexure 4, with respect to previous year figures has been dispensed off in the light of the Guidance Note issued by Institute of Chartered Accountants of India (ICAI) on accounting for derivatives contracts, which is effective from April 1, 2016 i.e. applicable from financial year 2016-17.
HFCs are required to make certain disclosures regarding assets securitised by them. Para 3.5.1 states that the originating HFCs should indicate in the notes to accounts (NTA), the outstanding amount of securitised assets as per books of the SPVs sponsored by the HFC and total amount of exposures retained by the HFC as on the date of balance sheet towards the Minimum Retention Requirements (MRR). These figures should be based on the information duly certified by the SPV’s auditor obtained by the originating HFC from the SPV. It has now been clarified that disclosure relating to all the outstanding securitisation transactions entered into by the HFC and outstanding as on March 31 should be made by HFCs.
HFCs are required to make disclosure regarding loans sanctioned to corporates against the security of shares/bonds/debentures or other securities or on clean basis for meeting promoter’s contribution to the equity of new companies in anticipation of raising resources. It is now clarified that the computation of exposure to the capital markets should be done by HFCs in accordance with the provisions of paragraph 31(2)(d) of the HFCs (NHB) Directions, 2010, which states that for computing the exposure to the capital markets, loans/advances sanctioned and guarantees issued for capital market operations would be reckoned with reference to sanctioned limits or outstanding, whichever is higher. Further, direct investment of a housing finance company in shares, convertible bonds, convertible debentures and units of equity oriented mutual funds shall be calculated at their cost price.
HFCs are required to disclose the policy on dealing with Related Party Transactions on its website and also in the Annual Report. It is clarified that the said policy shall also be disclosed by the HFCs in their Annual Report besides being made available on the website of the Company. As per general practice prevalent, providing the web link to the policy, as uploaded on the website, in the Annual Report shall also be sufficient compliance.
HFCs are required to make disclosure of complaints. It is clarified that HFCs may be guided by the definition of ‘customer’ as given in the Guidelines on ‘‘Know Your Customer & Anti Money Laundering Measures for HFCs” issued by the NHB. As per the said guidelines, for the purpose of KYC policy, a ‘Customer’ is defined as:
1. a person or entity that maintains an account and/or has a business relationship with the HFC;
2. one on whose behalf the account is maintained (i.e. the beneficial owner);

beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers, Chartered Accountants, Solicitors, etc. as permitted under the law, and

any person or entity connected with a financial transaction which can pose significant reputational or other risks to the HFC, say, a wire transfer or issue of a high value demand draft as a single transaction.
Further, HFCs should note that all the disclosures as specified under Annexure – 4 of the Directions shall be necessarily and suitably made by the HFCs and none of them should be omitted based on the ground of its not being applicable in a particular case. In case of non-applicability, a NIL disclosure should be made in this regard. This has already been a common practice for good governance amongst the HFCs to submit a NIL return or disclosure in case of non-applicability of the concerned provisions.

[1] Notification No. NHB.HFC.CG-DIR.1/MD&CEO/2016 dated 09th February, 2017

[2] http://nhb.org.in/wp-content/uploads/2017/04/NHBND-DRS-Policy-Circular-79-2017-17.pdf

by Anita Baid (anita@vinodkothari.com)