UNDERSTANDING THE CONCEPT OF OUTSOURCING- ENVISAGING A TOUGH ROAD AHEAD FOR THE SERVICE PROVIDERS

/0 Comments/in , /by

By Saloni Mathur (finserv@vinodkothari.com)

INTRODUCTION

Mr. Le Kuan Yu, Singapore’s founding father once said, “If you are depriving yourself of the outsourcing business and your competitors do not, you are putting yourself out of the business.” These words reflect upon the importance of outsourcing as a function that has become a necessity for the business organizations in the current scenario, to manage their core as well as ancillary functions through the specialized services of the third parties. This business process re-engineering can reap bundle of benefits to the organizations and its inevitability can be based on the fact that these activities can help organizations to access skilled expertise, reduce overhead, offer flexible staffing, increase efficiency, enhance technological know-how, reduce turnaround time, and eventually generate more profits for the business houses.

SOURCE– KPMG INSTITUTES.COM, “THE RADICAL NEW
WAY OF OUTSOURCING FOR TECHNOLOGY RELATED SERVICES

According to a report of the Boston consulting group ‘21st annual analysis of the outsourcing industry’, the average number of functions outsourced by the organizations across the world has risen by 225% over the past 5 years and are expected to keep on growing. Outsourcing has been moving from the peripheral activities to the core ones. The recent survey report of the ‘Statistita on Global market size of the Outsourced services from 2000-2016, March 2017’ says that  the use of outsourcing in the Indian financial services sector is projected to increase by 36% in the next 3 years, with a CAGR of 7.6%.[1]

Suffice it to say, that the competition between banks, financial institutions in India have increased significantly in the last decade and the consumers now have even higher expectations than in the past when it comes to customer experience and service for which they are using the services of specialised entities. However, such rampant outsourcing of key functions are coming at the cost of loss of managerial control, threat to security and confidentiality and the quality problems, owing to the fact that these institutions are responsible for the funds of the general public. Therefore, it is the need of the hour to have a robust regulatory mechanism which shall ensure appropriate norms for the outsourcing, in order to safeguard the interest of both the customers and the organization.

WHAT IS OUTSOURCING OF FINANCIAL SERVICES?

The transferring of financial services to the third parties for using their specialised services, which otherwise could be performed by them itself, would amount to outsourcing. However, using the services of the third parties for actions that could not be taken in-house would not be considered as outsourcing. For example, statutory audits of the companies cannot be conducted in house itself, thereby keeping them out of the purview of the concept, outsourcing. Similarly, the payment gateway services and agreements would not constitute to outsourcing because these cannot be taken by the companies itself and require the services of the third parties for a speedy and an efficient process.

Thus, the agreements in the nature of debt recovery and repossession agreements, the agreements with the direct selling agents, the agreements related to cash management with the third party would constitute to outsourcing.

Hence organizations have to clearly demarcate between what is outsourcing and what is not,  thereby applying this code of conduct only to the key areas of outsourcing.

AN OVERVIEW OF THE RBI’S MASTER DIRECTIONS ON OUTSOURCING BY NBFC’S

The RBI’s master directions [2]on the outsourcing norms have put stringent compliances on the service providers while discharging their functions, and increased responsibility and monitoring on the part of the non-banking financial companies. The RBI has come up with more tougher norms, where the new directions prohibits the NBFC’s to outsource the core management functions to the third parties including the internal audit, the strategic and compliance functions, and the decision-making functions. However, they can be outsourced within the same group/conglomerate subject to the compliance and instructions in para 6 of the master directions, which states that the NBFC’s shall have a board approved policy and service level arrangements with the group entities prior to entering into such transactions with them.

Further the scope of these directions and new code of conduct applies only to the ‘outsourcing of the financial services’ keeping, general IT related services, and management services like janitorial services, housekeeping, catering of staff out of the purview of this code. Further the code requires NBFC’s strict compliance and monitoring of the activities of the service providers, where the service providers shall not impede or interfere with the RBI during the monitoring of its functions.

RATIONALE BEHIND THE NEW NORMS

The RBI is of the view that over the years, increased outsourcing in the financial sector have posed major risks to the organizations in terms of strategy, reputation, compliance operational, legal, concentration and the country risk. As we could see the rapid outsourcing in different sectors of the services, the underlying principles behind these directions emphasise that the regulated entity shall ensure that outsourcing arrangements neither diminish its ability to fulfil its obligations to customers and RBI nor impede effective supervision by RBI. NBFCs, therefore, have to take steps to ensure that the service provider employs the same high standard of care in performing the services as is expected to be employed by the NBFCs, if the activities were conducted within the NBFCs and not outsourced.

REGULATORY IMPACT ANALYSIS OF THE NEW MASTER DIRECTIONS

ANALYSING MATERIAL OUTSOURCING

The  board of directors and the senior management shall have to observe the materiality while outsourcing the key functions in terms of the business operations, reputability, profitability and customer service. The materiality would be based and assessed on the following parameters.

Thus, companies board first need to determine the materiality of the activities being outsourced. For example, an agreement with the direct selling agents, direct marketing agents, debt recovery agents, to market the company’s products would be material outsourcing, because here the brand value of or the reputation would be at stake if the service provider fails. Further such kind of outsourcing would be material in nature because of the huge operational costs in direct marketing and high DSA’s pay-outs.

CONCLUDING REMARKS

The new directions on outsourcing can be envisaged as careful and robust approach by the RBI in safeguarding the NBFC’S from certain risk exposures with the service providers. Initiatives like a holistic code of conduct for the direct selling agents, the setting up of the internal and the external audit committees to monitor the outsourcing activities, the increased role of RBI to have a close eye on the operations, substantially drafted service agreements that deal with all the risks that could arise and the subsequent clauses to address them,  set up of a grievance redressal mechanism, could pave a way for a better regulatory environment and protection of the interests of the public, the NBFC’S and the service providers.

  1. http://www.kpmg.institutes.com/content/dam/kpmg/sharedservicesoutsourcinginstitute/pdf/2015/spps-it-outsourcing-infographic-2014-15.pdf
  2. ttps://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT87_091117658624E4F2D041A699F73068D55BF6C5.PDF

 

NHB introduces Aadhaar based OTP for HFCs

/0 Comments/in , /by

By Mayank Agarwal (finserv@vinodkothari.com)

Introduction

The National Housing Bank (NHB) has introduced various reforms to the existing Aadhaar based e-KYC procedure vide Circular No.85[1] issued on 8th December, 2017. Bringing certain modifications to Circular No. 72[2] issued on 23rd April, 2015 which recognizes E-Aadhaar as an Officially Valid Document (OVD) under the PML Rules, NHB has further introduced an option of Aadhaar based One Time Pin (OTP) for carrying out e-KYC  of the prospective customer.

Read more →

IBBI’s Grievance Handling Regulations to keep a check on service providers

/0 Comments/in /by

Vallari Dubey

resolution@vinodkothari.com

 

The Insolvency and Bankruptcy Board of India (“IBBI”) has notified a new set of regulations, named the Insolvency and Bankruptcy Board of India (Grievance and Complaint Handling Procedure) Regulations, 2017 (“Grievance Handling Regulations”) vide Gazette Notification dated 6th December, 2017, effective from 7th December, 2017[1][2].

The Regulations shall seek to protect the interests of stakeholders by getting their redressals addressed against any alleged contravention and /or suffering caused to them on an alleged conduct of service providers. There are eight Regulations, divided into 5 Chapters.

 

 

 

Grievance v. Complaint

The Regulations make a clear distinction between ‘grievance’ and ‘complaint’. Both are defined separately (refer definitions later) and the process of filing and disposal is different.

A grievance, as defined is filed by a stakeholder, called an aggrieved, when any suffering is caused to him/her/it due to a wrongful conduct of a service provider. On the other hand, a complaint is specifically filed by a stakeholder, called a complainant, when there is a contravention/breach alleged against a service provider. A complaint may or may not include a grievance.

Filing of Grievance

Regulation 3 of the Regulations provides the process of filing of grievance and complaint both.

In case of grievance, it shall contain following details as provided under Regulation 3(2):

Filing of Complaint

A complaint shall be filed as per Regulation 3(3) containing details as may be prescribed in Form A. The Form has to be accompanied along with a fee of Rs. 2,500[3]. Form A contains all the details as provided under Regulation 3(2), with following differences:

  1. Name and identity of the authorized representative of the complainant, if any;
  2. Details of the alleged contravention of any provision of the Code or rules, regulations, or guidelines made thereunder or circulars or directions issued by the Board by a service provider or its associated persons;
  3. Details of alleged conduct or activity of the service provider or its associated persons, along with date and place of such conduct or activity, which contravenes the provision of the law;
  4. Details of evidence in support of alleged contravention;
  5. Does the complainant have a grievance? If so, how it may be redressed?;
  6. Details of fees paid;
  7. Option of complainant to keep its identity confidential;
  8. List of documents attached to the Form.

Submission

The grievance and complaint, as the case may be, shall be submitted online on the website of IBBI. However, till such arrangement is facilitated, it can be submitted either through e-mail or by post/hand delivery.

Confidential Identity

A stakeholder (aggrieved or complainant, as the case may be), may request the IBBI to keep its identity confidential. IBBI may allow the same unless, it disclosure is required to process the grievance/complaint or as required by law.

Registration Number

Each grievance and compliant shall be allotted a unique registration number, which shall be communicated to the aggrieved or complainant, as the case may be, within a week of its receipt.

In case more than one grievance/complaint is received in relation to single matter, such grievances/complaints shall be clubbed together for the purpose of disposal.

Disposal of Grievance/Complaint

Grievance

IBBI shall seek information from aggrieved person or service provider, if required and shall thereon dispose of the grievance within 45 days of its receipt.

The Regulations however, do not provide for the cases where the Service Provider does not redress the grievance or ignore the direction of IBBI as above. In such cases, there is a chance that the grievance of the aggrieved remains unattended and his/its interest prejudiced.

Complaint

Alike grievance, a complaint shall also be disposed of within a period of 45 days of its receipt.

 

 

Statistics

IBBI shall disclose on its website, summary statistics of the grievances and/or complaints received and disposed of, periodically.

Conclusion

In absence of any specific regulation in this regard, protection of interest of stakeholders would not be managed properly by the IBBI. Due to such Regulations, it will now on be possible to keep a check on misconduct of any fraudulent service providers, having malafide intent or those that have supposedly breached any provisions of law, which may be prejudicial to the interest of a stakeholder(s).

Interestingly, the Regulations do not provide for marking any copy of the grievance or complaint to the service provider, against whom the same is being/has been filed while it is being filed with IBBI. Furthermore, confidentiality of identity of the aggrieved/complainant has been provided for. Seemingly, the Regulations are favoured towards an aggrieved party and stricter towards a defaulter. Adequate protection may however, will be needed for innocent service providers.

Relevant Definitions (Regulation 2)

  1. “aggrieved” means a stakeholder who has filed a grievance with the Board on failing to get his grievance redressed from the concerned service provider;
  2. “associated person” means a proprietor, partner, director, officer, or an employee of a service provider, a professional or a valuer engaged by a service provider or any other person acting for or on behalf of a service provider;
  3. “complaint” means a written expression by a stakeholder alleging contravention of any provision of the Code or rules, regulations, or guidelines made thereunder or circulars or directions issued by the Board by a service provider or any of its associated persons and includes a complaint-cum-grievance;
  4. “complaint-cum-grievance” means a complaint and grievance in the same matter.
  5. “complainant” means a stakeholder who has filed a complaint or a complaint-cum-grievance with the Board;
  6. “grievance” means a written expression by a stakeholder of his suffering on account of conduct of a service provider or its associated persons;
  7. “service provider” means an insolvency professional agency, an insolvency professional, an insolvency professional entity or an information utility;
  8. “stakeholder” means a debtor, a creditor, a claimant, a service provider, a resolution applicant and any other person having an interest in the insolvency, liquidation, voluntary liquidation, or bankruptcy transaction under the Code.

 

 

[1] http://ibbi.gov.in/webadmin/pdf/whatsnew/2017/Dec/180723_2017-12-09%2009:58:17.pdf

[2] http://ibbi.gov.in/webadmin/pdf/whatsnew/2017/Dec/press%20release-Complaint%20handling_2017-12-09%2012:16:40.pdf

[3] Fees is refundable in case of genuine complaints

ICSI’s Golden Jubilee Release-Governance Code for Charitable Entities

/0 Comments/in , /by

By Dipanjali Nagpal (corplaw@vindokothari.com)

The Institute of Company Secretaries of India has released the Code for Charity Governance[1] at the 45th National Convention of Company Secretaries to bring about charitable entities within the ambit of good governance as envisioned by the Hon’ble Prime Minister Shri Narendra Modi for empowering the nation. Read more →

Defaulting LLPs under the radar of MCA – Clean India Drive Continues!

/0 Comments/in , /by

By Smriti Wadehra, (corplaw@vinodkothari.com)

The recent massive clean-up operation of Ministry, whereby RoCs started issuing public notices in April, 2017 to strike off the name of the companies from the register of companies and to dissolve them unless a cause is shown to the contrary, within thirty days from the date of the notice, has come to centre of focus. Thereafter, on September 5, 2017 the government confirmed that names of over 2.09 lakh companies have been struck off from the Register of Companies for failing to comply with regulatory requirements and was decided that the Directors of such shell companies which have not filed returns for three or more years, will be disqualified from being appointed in any other company as Director or from being reappointed as Director in any of the companies where they had been Directors, thereby compelling them to vacate office. It has been reported that as a result of this exercise, at least two to three lakh of such disqualified Directors has been debarred and Roc wise list of directors was uploaded on MCA website along with MCA circular stating as:

 

“Pursuant to Section 164 (2) (a) of Act, 2013 the directors of the companies  which  have not filed financial statements or annual returns for any continuous period of three financial Years 2014, 2015 and 2016 have been hereby declared disqualified. Accordingly, Directors enlisted in Annexure A attached shall stand disqualified upto 31.10.2021.”

 

Further, pursuant to the action of the Ministry of Corporate Affairs of removing/striking-off and consequent cancellation of the registration of around 2,09,032 shell companies, the Department of Financial Services, Ministry of Finance has directed all the Banks to restrict operations of bank accounts of such companies by the Directors of such companies or their authorized representatives making the clean up operation a massive drive.

 

This drive was undertaken for companies but its seems that Ministry has extended its ambit to include Limited Liablility Partnerships (“LLPs”) registered under Limited Liability Act, 2008 (“Act”) under its scrutiny process. It is being noticed that the Ministry has recently started issuing notices to LLPs individually by way of a reminder notice to make the compliances w.r.t filing of necessary returns/ statements as per the Act failing which the LLP and its designated partners will be liable to prosecution apart from unlimited penalty.

As per the provisions of sections 23 and 34 of the Act read with Limited Liability Partnership (Amendment) Rules, 2017 all the Limited Liability  Partnerships is statutorily required to file:

  • the Initial Agreement constituting the LLP in Form-3 within 30 days of its incorporation;
  • a Statement of Account & Solvency has to be filed in Form-8 within 30 days from the end of six months of the financial year; and
  • Annual Return 11 has to be filed within 60 days of closure of its financial year.

Vide the aforesaid notices, the Ministry has provided a firm reminder to comply with the reporting requirements as aforesaid failure of which may lead to prosecution of defaulting LLPs along with their designated partners,  besides being liable for unlimited penalty on per diem basis.

 

 

RBI now allows ARCs to hold more than 26% shares

/0 Comments/in /by

By Mayank Agarwal ( finserv@vinodkothari.com )

Introduction

The ever-increasing volume of Non-Performing Assets has paralyzed the Indian banking sector, with the gross NPA figures reported to be around Rs. 8.4 lakh crores at the end of September 2017.[1] Forming around 12% of the total banking advances, the distressed Indian banking situation should have provided the Indian Asset Reconstruction Companies (ARCs) with a vast share of market to cater to and thus yield impressive results. However, the past few years have resulted in the contrary, with the Indian ARCs failing to live up to its expectations.

Read more →

Presidential Ordinance makes Amendments to Insolvency and Bankruptcy Code

/0 Comments/in /by

By Vinod Kothari, (resolution@vinodkothari.com)

The Presidential Ordinance to amend the Insolvency and Bankruptcy Code tries to address a few concerns, which seem to have been noticed in the early stages of resolution plans being approved by creditors’ committees. Essentially, under the scheme of the Code, a resolution plan may be submitted by a “resolution applicant”, who can be any person proposing a resolution alternative. The resolution applicant may, therefore, be the existing management itself, or may be a potential acquirer. Sometimes, the potential acquirer comes with a masked identity, and the true acquirer is hiding somewhere behind the screen. The true acquirer might be the existing promoters themselves, or may be someone else. Read more →

State of Indian Capital Markets

/0 Comments/in /by

By Mayank Agarwal (finserv@vinodkothari.com )

Capital market is the one-stop solution for both companies and investors looking to utilize idle money in the most financially sound manner. While money markets provide short-term (generally less than one year) route of raising money, capital markets provide a much broader avenue. Although businesses rely upon money market sources to address liquidity issues, capital markets are explored with the intention of improving the solvency situation of the businesses.

A healthy and booming capital market is a clear-cut indication that the domestic people have confidence in the financial ecosystem of the country and that they trust the government and financial institutions with their money. Strong capital market volume aids economic growth by mobilization of savings and providing funds to those in need, thus increasing productivity.

Read more →