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Implementation of consolidated supervision - The operational framework
(Contd)
At present, there is no legislative framework in place for inter-regulatory coordination. The Group recommends that one of the existing Technical Committees consisting of all the three regulators may function as a standing inter-regulatory forum to address all issues arising out the proposed framework.
The recommendations for operationalising the proposed framework are as under:
The initial cluster of conglomerates and the reporting entities within the conglomerates that may be subjected to the proposed framework has been identified by the Working Group. However, the constitution of the framework, and the criteria themselves, may be subject to yearly review by the above Technical Committee. The 'designated entity' in respect of each identified conglomerate has been identified by the Working Group. The responsibility of collating the data from all other group entities and submitting the same to their regulator (the principal regulator) in the prescribed format may lie with the 'designated entity'. It may be the responsibility of the Principal Regulator to notify the name of the "Designated Entity" and also that of reporting entities in respect of each of the identified conglomerate. Each regulator may establish a nodal cell at its end to undertake all the responsibilities in regard to all Financial Conglomerate coming under its purview including facilitating data flow and analysing the formats being received from the designated entity. The new Return devised for this purpose may be submitted at monthly/quarterly intervals by the designated entity to the principal regulator as well as to the nodal cell, RBI that would be maintaining the database. The salient features of the analysis and any unusual trend, which needs regulatory coordination, may be discussed by the Technical Committee which could recommend further course of action. A quarterly review report may be prepared on the functioning of the entire mechanism and placed before the Technical Committee. It is suggested that this responsibility may be taken up by RBI.
Role of each Regulator under the Proposed Framework
Each regulator may have overall responsibility for the Financial Conglomerate coming under its purview. The specific tasks would include:
Receiving monthly/quarterly returns from the designated entity for the Financial Conglomerate coming under their purview; Analysing the information received; Sharing with other regulators any issues arising out of the above analysis that require supervisory coordination; Putting up summary analysis notes before the Technical Committee in respect of all Financial Conglomerate coming under their purview; Exchanging with other regulators any additional information in respect of the Financial Conglomerate under its purview arising outside the reporting framework.
In addition to the above, RBI may also maintain the central database. It may also be responsible for preparing quarterly review reports on the functioning of the entire mechanism.
The Proposed Framework vis-a-vis the Joint Forum Principles on ITEs
Process of mapping the proposed supervisory framework vis-�-vis the Joint Forum principles on ITEs:
Supervisors should take steps, directly or through regulated entities, to provide that conglomerates have adequate risk management processes in place, including those pertaining to ITEs, for the conglomerate as a whole. Where necessary the supervisors should consider appropriate measures, such as reinforcing these processes with supervisory limits. There are no specific risk management guidelines for conglomerates as yet. However, the framework of Risk Based Supervision put in place by RBI in respect of banks does take into account 'group risk' as one of the key risk areas for the risk profiling of a bank.
The Group proposes that the issues of Board-approved policies for ITEs and prudential ceilings for intra-group exposures be addressed by each of the regulators.
Supervisors should monitor material ITEs of the regulated financial entities on a timely basis, as needed, through regular reporting or by other means to help form a clear understanding of the ITEs of the financial conglomerate. The reporting mechanism currently in place does not capture intra-group transactions and exposures. The CPR framework focuses on capturing exposures only at a consolidated level, ignoring the intra-group transactions and exposure levels. This was, therefore, a key mandate for the present Working Group prompting a format to be devised for the purpose. The proposed reporting format has been designed with a primary focus on capturing all intra-group transactions and exposures manifest in major financial markets.
III. Supervisors should encourage public disclosure of ITEs.
AS 18 requires disclosure of related party transactions in the financial statements of each reporting entity. However, it does not apply to consolidated financial statements as the consolidated financial statements present information about the holding and its subsidiaries as a single reporting enterprise. Further, it is mandatory for only the following entities:
Enterprises whose equity or debt securities are listed /in the process of being listed on a recognised stock exchange in India; All other commercial, industrial and business reporting enterprises, whose turnover for the accounting period exceeds Rs. 50 crore. The proposed framework does not envisage any additional public disclosures; the information sought from the conglomerates would be purely for supervisory purposes. The issue of any additional disclosure requirements need to be addressed by a proper forum involving representatives from ICAI apart from the respective regulators.
Supervisors should liaise closely with one another to ascertain each other's concerns and coordinate as deemed appropriate any supervisory action relative to ITEs within the group. As of now, there is no formalized mechanism in place for inter-regulatory exchange of information in respect of conglomerates in general or ITEs in particular. Even at the broader level, the present arrangements for coordination are mostly aimed at resolving policy issues and in monitoring exposures and flow of funds to capital market.
The proposed framework, being specifically focused on the identified conglomerates, envisages a formalised exchange of information in respect of the entities concerned involving a range of parameters.
Supervisors should deal effectively and appropriately with material ITEs that are considered to have a detrimental effect on the regulated entities, either directly or through an overall detrimental effect on the group.
As of now, the supervisors do not have the legal authority to prohibit detrimental intra-group transactions and exposures. The earlier committee on Consolidated Supervision had commented in this regard that 'such authority needs to be specifically sought and obtained, as a part of the evolution of the consolidated supervisory policy'.
The proposed framework, though not specifically and comprehensively dealing with the issue, provides a mechanism for capturing all ITEs that could serve as a useful database for identifying 'detrimental ITEs' and any future policy guidelines in this regard. The regulatory tools in this regard could include prohibiting movements of capital or income outright, requiring collateralisation, limiting transfers, requiring prior approval by supervisors, and restricting specific types of transfers.
Issues to be included in the periodic reports to be shared by each regulator with other regulators in respect of the material entities of each LCFI falling under its jurisdiction :
Any adverse or extraordinary developments relating to the entity having bearing on the group as a whole; Any adverse features observed in course of on-site or off-site inspections carried out with respect to the entity; Overall assessments regarding systems and controls in place and the efficacy of the risk management framework in place; Any major shifts in the strategic focus of the entity that may impact the group; Any adverse information about individuals such as owners, shareholders, directors, managers or employees of supervised firms that may have bearing for the whole group; and Any other relevant information.
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