COVID-19 preparedness: some questions on MCA Form CAR-2020

Vinod Kothari and Company; corplaw@vinodkothari.com

Updated as on 23rd March, 2020

All companies and LLPs must have, by now, got mailers from the Ministry of Company Affairs about COVID-19 preparedness, and the need to file a web based form CAR 2020 i.e. Company Affirmation of Readiness towards COVID 19.

The MCA circular is nothing but a disaster management step from the Ministry, imploring upon all companies and LLPs to get sensitised to the need for handling this colossal challenge to humanity, India included. It will be an ironical travesty if the filing of the form is taken as a compliance requirement.

Therefore, in our view, what matters is the preparedness itself, not so much the task of having the so-called policy or the filing of the form itself.

However, the country has a few lakhs of companies, and the affirmation of preparedness by filing this form will be expected from all the companies. Hence, there is understandably a barrage of questions from clients and others.

We at Vinod Kothari & Company will be happy to contribute in our own little way; hence, if companies/LLPs have questions around this Form, we have thought it apt to put them down into this small guidance. We wish and pray that all of you stay safe during this challenging time.

1.     Whether the Advisory has any statutory backing?

Let us not even think of this as emanating from some power under the law. Neither do we have to search for such a power, nor question it. As human beings, not every action of ours arises out of legal obligations. It is a simple step by the Ministry towards sensitisation of the corporate sector, towards fulfilling an urgent social and human obligation.

2.     What are the steps being suggested through the Advisory?

Companies and LLPs are being advised to put in place an immediate plan to implement a ‘work from home’ policy as a temporary measure.

3.     What is the object of having such a plan?

The object of having such a plan is to ensure social distancing as advised by WHO and other public health authorities in the recent outbreak of COVID-19 which is required for preventing the rapid spread and transmission of the disease at community level.

4.     My company does not have any permanent employees. Am I still required to adhere to this policy?

If there are no permanent employees, it is all peace as far as your company is concerned. Go and file the form and say you have taken necessary steps.

5.     Whether the companies and LLPs will have to frame a written ‘work from home’ policy?

The Advisory suggests to have a plan to implement the work from home policy for the employees. In our view, the same is not required to be a written or formal policy. The word “policy” here should mean the steps to be taken by the organisation to provide the facility of working from home to its employees and the manner/ procedure to be followed to ensure the same. If there is a policy, typically, the policy is applied to all employees covered by it without discrimination. Further, the process and manner to be followed shall be different from organisation to organisation. Accordingly, in case of companies, the decision may be taken at management level, while in case of others, by the head of the organisation.

6.     What all does a work from home policy include?

As we said above, we are not envisaging this to be a formal document. However, please do consider the following:

  • Who all can be permitted to work from home – for those who have to be present, whether there is rotational or staggered presence?
  • What will be the weekly and daily working hours?
  • Whether necessary equipment or software is in place for working from home?
  • Whether there will be any revision in compensation and benefits paid to the employees?
  • Whether employees have adequate internet connection required for the job?
  • What level of dedication and concentration is expected from employees during working hours?
  • What will be the method of marking attendance or absence?
  • Who will review work of whom and how?
  • Revision in employees code of conduct
  • How to maintain and ensure confidentiality of information
  • Installation of necessary software for group discussions or meetings
  • To educate remote employees on basic security policies as for example use of VPN is a secure channel and better than public network
  • Establishment of virtual employee allowance or reimbursements for expenses such as internet, phone, electricity and other utilities
  • Strict adherence to do’s and don’ts issued by public health authorities from time to time
  • Date of implementation of this policy- with immediate effect till 31st March, 2020 (tentative date, maybe extended depending upon the situation)

7.     The circulars are being addressed to CEOs/directors. Is the action required to be taken at board/CEO level?

First of all, the actions expected are urgent – therefore, please do not wait for any formal processes or board resolutions. Whoever is in charge of putting administrative allocations may take such steps. Looking at the seriousness, it is expected that senior management is involved. However, it does not matter if there is any formal ratification or issue of circular, unless the organisation expects such formal internal documents.

8.     Till what time the work from home policy to be adopted?

Till 31st March, 2020. The same shall be reviewed by the appropriate authorities based on the evolving situation.

9.     What is the form CAR all about?

It is a web form deployed on 23rd March, 2020 by the Ministry. The same is a simple web based form requiring only an OTP based verification and does not require any digital signature for affirming or denying the adoption of work from home policy.

10. Is there a fee for filing form CAR?

There is no fee for filing the form. Seriously, we don’t even imagine there can be a fee.

11. Who will require to file the said form?

All companies and LLPs are expected to file the said form. There is no exclusion or exemption for OPCs, private companies or small companies. However, looking at the language of the applicability, partnership firms and proprietorship concerns have been kept outside the purview of filing CAR, 2020.

12. What is the timeline to file?

The web form CAR, 2020 is deployed on the MCA portal on 23rd March, 2020. Initially, the advice suggested to file it on the same day, however, later it was clarified that the same can be filed till 30th March, 2020.

13. What kind of information/ data to be reported?

As per the twitter handle of the Hon’ble Minister of Finance and Corporate Affairs the possible format of the form shall contain the following:

  1. CIN/ FCRN/ LLPIN/ FLLPIN
  2. Name of the company/ foreign company/ LLP/ Foreign LLP
  3. Whether the company/ LLP is in compliance of COVID 19 Guidelines?
  4. Authorised Signatory of the company/ LLP
  5. DIN/ PAN/ Membership No. of the Authorised Signatory
  6. Mobile No.
  7. OTP

The step to step guide on filing CAR 2020 has been issued by MCA on 22nd March, 2020. The same can be viewed here.

14. Whether foreign company/ LLPs are also required to follow the Advisory?

The Advisory suggests all companies/ LLPs to file the form. The intent seems to include all the companies/ LLPs incorporated in India or companies/ LLPs not incorporated in India but having operations/ physical presence in India. The contents of the Form as provided in Query 9 above suggest the same.

15. What do the COVID 19 Guidelines mean?

There is no definition as such. However, it should mean the Advisory itself issued by the Govt. from time to time. One may refer to pages such as https://www.mygov.in/covid-19/?cbps=1.

16. Who is the Authorised Signatory of the company/ LLP for authenticating the form?

As referred to above, it seems that the authorised signatory may be a director, CS, CFO or any other person authorised to file the form. However, who is eligible to give such authority is not clear. In our view, in case of companies which have given general authority to the CS/ any director/ CFO to file necessary forms with the regulatory authorities from time to time, such authorised persons may file the form. In case of others, the same may be filed by the MD/ head of the organisation who looks after the day to day affairs or any person authorised by such MD/ head of the organisation.  Once again, we suggest there need not be a formal flow of authorisation, such as a resolution, for filing the form.

17. Whether the mobile no. has to be a registered mobile no.?

Since the form is an OTP verified form, the OTP is sent on the mobile no of the person who is authenticating the form and the same is prefilled on providing details of the authorised person.

18. What are the consequences of non- filing?

There is no penalty for non-filing of the form. Further the Advisory is not coming from any statutory requirement but out of a social obligation only, non- filing of the same may not lead to any penal consequences.

19. The Authorised Signatory may be the compliance officer. But how does the compliance officer certify the preparedness across the company, with so many locations?

The authorised signatory is not taking the burden upon himself. The signatory may, in turn, get confirmations from those who are involved, say, the HR head or similar positions.

20. In view of the lockdown/ shutdowns announced by the state governments for various places in India, does it mean lockout of operations by the corporate houses and giving leaves altogether?

Please note that shutdown does not mean shutdown of operation. Therefore, it still means work from home. The whole intent of shutdown is to control movement and not to control work.

21. Are the companies mandatorily required to file form CAR?

As per the information uploaded on MCA’s website, the filing of the form is on voluntary basis. Therefore, the company/ LLP (s) may take a call on filing. However, if one throws a question on whether they are required to take steps to combat COVID-19 by following government guidelines, please note that we have no doubt on answering this is positive. Everyone including the companies and LLPs are mandatorily required to take steps during this health emergency.

Sixth Bi-monthly Monetary Policy of RBI: Likely to spur long-term growth

-Kanakprabha Jethani | Executive

(kanak@vinodkothari.com)

The Reserve Bank of India (RBI) released its Sixth Bi-monthly Monetary Policy Statement, 2019-20[1] along with the Statement on Developmental and Regulatory Policies[2] (‘Statement’) on February 06, 2020. The said Statement proposed various measures primarily to spur the growth impulses and push credit offtake. Some of the major proposals are discussed below.

In particular, as our analysis shows, there will be increased opportunities for co-lending between banks and NBFCs.

Enhancing credit to specific sectors

  1. Allowing Scheduled Commercial Banks (SCBs) to deduct from their net demand and time liabilities (NDTL), the equivalent of incremental credit disbursed by them as retail loans for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs), over and above the outstanding level of credit to these segments as at the end of the fortnight ended January 31, 2020 for maintenance of cash reserve ratio (CRR).

The Reserve maintenance requirement for a bank= CRR*Bank Deposits/NDTL. Due to such reduction from NDTL, the reserve maintenance requirement will be reduced. This will act as a motivating factor for banks to lend more to the aforementioned sectors.  Therefore, banks save the opportunity loss on account of CRR on such incremental lending. Notably, the CRR currently is 4%, and does not fetch any return to the banks. Assuming that a bank may earn 10% interest on the lending to the specific sector, this means a direct improvement in the return to the bank to the extent of 40 bps.

It is important to note that this relaxation is only for loans directly disbursed by the banks. Therefore, acquisition of loan pools by way of direct assignment or purchase of PTCs will not qualify for this.

However, lot of banks have entered into co-lending arrangements with NBFCs. Such arrangements result into a credit originated directly in the books of the bank, and therefore, ought to qualify for the relaxation of the CRR requirement.  Loans for automobiles (which may apparently include both passenger and commercial vehicles) is one segment where NBFC-bank co-lending arrangements may work very well. The same goes for loans to MSMEs.

  1. Pricing of loans to medium enterprises by SCBs to be linked to an external benchmark.

Linking the pricing of loans to an external benchmark, say repo rate, will ensure that interest rates reflect the current market conditions.  The external benchmark rates are currently administered by Financial Benchmark India Pvt. Ltd. (FBIL)

  1. Extension of time limit for one-time restructuring scheme for loans granted to MSMEs to December 31, 2020.

Under this scheme, loans in which there is a default in repayment, but the same is being classified as standard asset in the books of the lender as on January 01, 2020.

Usually, when an account is restructured, the asset classification of such asset is downgraded. However, the accounts restructured under this scheme shall continue to be classified as standard. The restructuring is to be implemented by December 31, 2020 instead of the earlier limit of March 31, 2020. This scheme will enable the defaulted accounts to be restructured without impacting the Balance Sheet of the lender since the provisioning requirements would remain the same.

Regulating the HFCs

  1. Draft revised regulations with respect to HFCs on RBI website by the end of the month, for public comments. Till the new regulations are issued, HFCs shall continue to be regulated by the existing regulations of the National Housing Bank (NHB).

Upon introduction of the new framework, HFCs will come under regulatory control of the RBI and the efforts of NHB may then be focused towards development of housing finance market.

VKC Comment: We will be keeping a watch on these draft guidelines and will come back with analysis as and when these draft regulations are placed on the RBI website.

Relaxing the norms for Asset Classification

  1. Extension of date of commencement of commercial operations (DCCO) of project loans for commercial real estate, delayed for reasons beyond the control of promoters, by another one year, shall not result in downgrading the asset classification.

Due to introduction of this provision, project loans given for commercial real estate will continue to be classified as standard even if there is a default in repayment, in case the DCCO is extended.

Aids to Digital Payment Systems

  1. A Digital Payments Index to be issued to capture the extent of digitisation of payments. The same shall be made available w.e.f July 2020.

This index will reflect the penetration of digital payments in the financial markets.

  1. Framework to establish Self-Regulatory Organisation (SRO) for digital payment systems which will serve as a two-way communication channel between the players and the regulator/supervisor. The framework will be put in place by April 2020.

Establishment of SRO will result into enhanced control and regulation of the digital payments space while simultaneously ensuring reduced bureaucracy and faster resolution of issues.

We will be coming up with detailed analysis of the developments as and when they are introduced.

[1] https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=49342

[2] https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=49343

December Updates

MPC meeting – New type of PPI and more

finserv@vinodkothari.com

The Statement on Developmental and Regulatory Policies[1] dated 05 December, 2019 has been issued by the RBI pursuant to the fifth bi-monthly Monetary Policy Committee meeting.

Some quick updates and highlights of regulatory changes are given below –

1) Review of NBFC-P2P Directions- Aggregate Lender Limit and escrow accounts

Current limit for borrowers and lenders across all P2P platforms is ₹10 lakh, and exposure of a single lender to a single borrower is – ₹50,000 across all NBFC-P2P platforms.

It has been decided that in order to give the next push to the lending platforms, the aggregate exposure of a lender to all borrowers at any point of time, across all P2P platforms, shall be subject to a cap of ₹50 lakh.

Further, it is also proposed to do away with the current requirement of escrow accounts to be operated by bank promoted trustee for transfer of funds having to be necessarily opened with the concerned bank. This will help provide more flexibility in operations. Necessary instructions in this regard will be issued shortly.

 

2)  The ‘On tap’ Licensing Guidelines for Small Finance Banks have now been finalised and are being issued today.

 

3)New Pre-Paid Payment Instruments (PPI) 

It is proposed to introduce a new type of PPI which can be used only for purchase of goods and services up to a limit of ₹10,000. The loading / reloading of such PPI will be only from a bank account and used for making only digital payments such as bill payments, merchant payments, etc. Such PPIs can be issued on the basis of essential minimum details sourced from the customer. Instructions in this regard will be issued by December 31, 2019.

 

4) Development of Secondary Market for Corporate Loans – setting up of Self Regulatory Body

As recommended by the Task Force on the Development of Secondary Market for Corporate Loans, the Reserve Bank will facilitate the setting up of a self-regulatory body (SRB) as a first step towards the development of the secondary market for corporate loans. The SRB will be responsible, inter-alia, for standardising documents, covenants and practices related to secondary market transactions in corporate loans and promoting the growth of the secondary market in line with regulatory objectives.

Watch out for detailed articles on these topics to be published on our website soon.

[1] https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=48803

Working Group proposal for stricter vigilance on CICs

-By Anita Baid

anita@vinodkothari.com, finserv@vinodkothari.com

Regulators and stakeholders have been seeking a review of Core Investment Companies (CIC) guidelines ever since defaults by Infrastructure Leasing and Financial Services Ltd (IL&FS), a large systemically important CIC. In August 2019, there were 63 CICs registered with the Reserve Bank of India (RBI). As on 31 March, 2019, the total asset size of the CICs was ₹2.63 trillion and they had approximately ₹87,048 crore of borrowings. The top five CICs consist of around 60% of the asset size and 69% borrowings of all the CICs taken together. The borrowing mix consists of debentures (55%), commercial papers (CPs) (16%), financial institutions (FIs) other corporates (16%) and bank borrowings (13%).

Considering the need of the hour, RBI had constituted a Working Group (WG) to Review Regulatory and Supervisory Framework for CICs, on July 03, 2019. The WG has submitted its report on November 06, 2019 seeking comments of stakeholders and members of the public.

Below is an analysis of the key recommendations and measures suggested by the WG to mitigate the related risks for the CICs:

Existing Provision & drawbacks Recommendation Our Analysis
Complex Group Structure
Section 186 (1) of Companies Act, 2013, which restricts the Group Structure to a maximum of two layers, is not applicable to NBFCs

 

 

The number of layers of CICs in a group should not exceed two, as in case of other companies under the Companies Act, which, inter alia, would facilitate simplification and transparency of group structures.

As such, any CIC within a group shall not make investment through more than a total of two layers of CICs, including itself.

For complying with this recommendation, RBI may give adequate time of say, two years, to the existing groups having CICs at multiple levels.

A single group may have further sub-division based on internal family arrangements- there is no restriction on horizontal expansion as such.

Further, the definition of the group must be clarified for the purpose of determining the restriction- whether definition of Group as provided under Companies Act 1956 (referred in the RBI Act) or under the Master Directions for CICs would be applicable.

To comply with the proposed recommendations, the timelines as well as suggested measures must also be recommended.

Multiple Gearing and Excessive Leveraging
Presently there is no restriction on the number of CICs that can exist in a group. Further, there is no
requirement of capital knock
off with respect to investments in other CICs. As a result, the step down CICs can use the capital for multiple leveraging. The effective leverage ratio can thus be higher than that allowed for regular NBFCs.
For Adjusted Net Worth (ANW) calculation, any capital contribution of the CIC to another step-down CIC (directly or indirectly) shall be deducted over and above the 10% of owned funds as applicable to other NBFCs.

Furthe, step-down CICs may not be permitted to invest in any other CIC.

Existing CICs may be given a glide path of 2 years to comply with this recommendation.

Certain business groups developed an element of multiple gearing as funds could be raised by the CICs and as well as by the step down CICs and the other group companies independently. At the Group level, it therefore led to over-leveraging in certain cases.

A graded approach, based on the asset size of the CICs, must have been adopted in respect of leverage, instead of a uniform restriction for all.

Build-up of high leverage and other risks at group level
There is no requirement to have in place any group level committee to articulate the risk appetite and identify the risks (including excessive leverage) at the Group level Every conglomerate having a CIC should have a Group Risk Management Committee (GRMC) which, inter alia, should be entrusted with the responsibilities of

(a)   identifying, monitoring and mitigating risks at the group level

(b)   periodically reviewing the risk management frameworks within the group and

(c)   articulating the leverage of the Group and monitoring the same.

Requirements with respect to constitution of the Committee (minimum number of independent directors, Chairperson to be independent director etc.), minimum number of meetings, quorum, etc. may be specified by the Reserve Bank through appropriate regulation.

There is no particular asset size specified. Appropriately, the requirement should extend to larger conglomerates.

 

 

 

 

 

 

 

Corporate Governance
Currently, Corporate Governance guidelines are not explicitly made applicable to CICs i.     At least one third of the Board should comprise of independent members if chairperson of the CIC is non-executive, otherwise at least half of the Board should comprise of independent members, in line with the stipulations in respect of listed entities. Further, to ensure independence of such directors, RBI may articulate appropriate requirements like fixing the tenure, non-beneficial relationship prior to appointment, during the period of engagement and after completion of tenure, making removal of independent directors subject to approval of RBI etc.

ii.   There should be an Audit Committee of the Board (ACB) to be chaired by an Independent Director (ID). The ACB should meet at least once a quarter. The ACB should inter-alia be mandated to have an oversight of CIC’s financial reporting process, policies and the disclosure of its financial information including the annual financial statements, review of all related party transactions which are materially significant (5% or more of its total assets), evaluation of internal financial controls and risk management systems, all aspects relating to internal and statutory auditors, whistle-blower mechanism etc. In addition, the audit committee of the CIC may also be required to review (i) the financial statements of subsidiaries, in particular, the investments made by such subsidiaries and (ii) the utilization of loans and/ or advances from/investment by CIC in any group entity exceeding rupees 100 crore or 10% of the asset size of the group entity whichever is lower.

iii.  A Nomination and Remuneration Committee (NRC) at the Board level should be constituted which would be responsible for policies relating to nomination (including fit and proper criteria) and remuneration of all Directors and Key Management Personnel (KMP) including formulation of detailed criteria for independence of a director, appointment and removal of director etc.

iv.  All CICs should prepare consolidated financial statements (CFS) of all group companies (in which CICs have investment exposure). CIC may be provided with a glide path of two years for preparing CFS. In order to strengthen governance at group level, if the auditor of the CIC is not the same as that of its group entities, the statutory auditor of CIC may be required to undertake a limited review of the audit of all the entities/ companies whose accounts are to be consolidated with the listed entity.

v.   All CICs registered with RBI should be subjected to internal audit.

vi.  While there is a need for the CIC’s representative to be on the boards of its subsidiaries / associates etc., as necessary, there is also a scope of conflict of interest in such situations. It is therefore recommended that a nominee of the CIC who is not an employee / executive director of the CIC may be appointed in the Board of the downstream unlisted entities by the respective CIC, where required.

The extent of applicability of NBFC-ND-SI regulations is not clear. The FAQs issued by RBI on CICs (Q12), state that CICs-ND-SI are not exempt from the Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015 and are only exempt from norms regarding submission of Statutory Auditor Certificate regarding continuance of business as NBFC, capital adequacy and concentration of credit / investments norms.

Further, no asset size has been prescribed – can be prescribed on “group basis”. That is, if group CICs together exceed a certain threshold, all CICs in the group should follow corporate governance guidelines, including the requirement for CFS.

Most of the CICs are private limited companies operating within a group, having an independent director on the board may not be favorable.

Further, carrying out and internal audit and preparing consolidated financials would enable the RBI to monitor even unregulated entities in the Group.

Currently, the requirement of
consolidation comes from the
Companies Act read along with
the applicable accounting
standards. Usually, consolidation
is required only where in case of
subsidiaries, associates and joint
ventures.

However, if the recommendation
is accepted as is then even a
single rupee investment
exposure would require
consolidation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Review of Exempt Category and Registration
Currently there is a threshold of ₹ 100 crore asset size and access to public funds for registration as CIC
  1. The current threshold of ₹ 100 crore asset size for registration as CIC may be retained. All CICs with public funds and asset size of ₹ 100 crore and above may continue to be registered with RBI. CICs without access to public fund need not register with the Reserve Bank.
  2. The nomenclature of ‘exempted’ CIC in all future communications / FAQs etc. published / issued by the Reserve Bank should be discontinued.
Since the category of ‘exempted CICs; were not monitored, there was no means to detect when a CIC has reached the threshold requiring registration.

This remains to be a concern.

 Enhancing off-site surveillance and on-site supervision over CICs
There is no prescription for submission of off-site returns or Statutory Auditors Certificate (SAC) for CICs Offsite returns may be designed by the RBI and prescribed for the CICs on the lines of other NBFCs. These returns may inter alia include periodic reporting (e.g. six monthly) of disclosures relating to leverage at the CIC and group level.

A CIC may also be required to disclose to RBI all events or information with respect to its subsidiaries which are material for the CIC.

Annual submission of Statutory Auditors Certificates may also be mandated. Onsite inspection of the CICs may be conducted periodically.

The reporting requirements may help in monitoring the activities of the CICs and developing a database on the structures of the conglomerates, of which, the CIC is a part. This may assist in identification of unregulated entities in the group.

 

 

Our other related write-ups:

Our write-ups relating to NBFCs can be viewed here: http://vinodkothari.com/nbfcs/