Audit norms: RBI, govt not on same page

North Block is concerned that when India is trying to attract more investment, putting up restrictions on audit firms could create an avoidable bad advertisement.
Subhomoy Bhattacharjee reports.

The finance ministry feels the Reserve Bank of India's dividend cheque of Rs 99,122 crore (Rs 991.22 billion) is just the support needed to finance a stimulus programme for the economy.

At the same time, the ministry has frowned upon the new RBI guidelines for appointment of statutory auditors for banks and other financial institutions.

It also wants the banking regulator to re-examine if allowing more private banks to offer fee-based government services will hurt the State-owned banks adversely.

Finance ministry, PMO and other ministry officials are already on the task of working out a fiscal rescue plan for the economy.

A fiscal rescue act is necessary to revive growth in the Indian economy.

But this time the problem is the World Bank or the ADB will not be able to finance a part of the expenditure.

In the calendar year 2020, the World Bank provided $1.15 billion support, including that for cash transfers and additional food rations.

Without such support, the major concern for the government this time around is that a fiscal rescue plan would need a larger borrowing from the market than the Rs 12.05 trillion it has planned for FY22.

Last fortnight the RBI central board spread cheer in the finance ministry clearing the fat dividend, which means the government does not need to announce any additional borrowing right now.

RBI Governor Shaktikanta Das has provided almost twice the Rs 53,510 crore (Rs 535.10 billion) the government had expected to receive from the RBI and the State-owned banks as dividends in FY22.

With the unexpected support the ministry officials calculate that once activity picks up in the economy, the tax and non-tax inflows will allow more space for the government to decide on additional borrowing, if at all.

In the post Budget meeting in March between the RBI and the finance ministry there was a tussle on this score.

In Finance Minister Nirmala Sitharaman and Das' presence, their officials expressed their disagreement strongly.

Finance ministry officials claimed that the sum offered then was far less than what the RBI could afford to rustle up.

RBI officials made a strong pitch for the ministry not to change the inflation targeting regime of 4 per cent as it was essential to allow the bank to keep yields soft in the market. The government has kept its part of the bargain.

But two new flashpoints have developed between the ministry and the RBI.

The more important one is about the new audit rules announced by the RBI on April 27.

The ministry's position is also shared by the Confedration of Indian Industry. The CII has issued a detailed press note saying why it thinks the RBI plans will not be helpful to address 'perceived concerns on audit quality'.

North Block is concerned that when India is trying to attract more investment into India from abroad after the second wave of Covid, putting up restrictions on audit firms could create an avoidable bad advertisement.

The department of financial services in the finance ministry has got swamped by representations from various bodies against the RBI move.

The restrictions include caps on the number of bank and NBFC clients a firm can have simultaneously as well as mandating a cooling off period before re-engagement.

The big audit partnerships in India run several audit entities under their banner and the RBI plans to club all of them as related firms on whom the restrictions shall apply has not been greeted happily.

It could also have a demonstration effect abroad of India tightening its insular position on business.

So these restrictions are not something the ministry is keen to make industry swallow at this juncture and is expected to ask RBI to put them in abeyance.

CII has argued that the RBI proposals are inconsistent with the provisions in the Companies Act, 2013.

It has even argued that the plans to rotate auditors so frequently 'are not comparable with international practices and regulations... which are widely accepted and adopted globally'.

RBI has mandated that an audit firm cannot be reappointed for six years after a three year mandate, and can audit only four commercial banks and eight NBFCs in a financial year.

The rules shall be radical particularly for NBFCs which shall come under them for the first time.

CII has also said, 'implementing these requirements is likely to create avoidable complications without any appreciable enhancement to audit quality and governance. Further, lack of harmony among various regulations on this subject is likely to add to complexity and confusion in the sector and also impact ease of doing business'.

RBI has argued that bringing the audit rules on a similar keel for banks, NBFCs and urban cooperative banks is most necessary.

In its circular issued on April 27 the banking regulator has noted this will improve the quality of financial reporting and audit of all the entities under its supervision.

Mint Road has frequently found itself salvaging NBFCs or urban cooperative banks brought to grief but not discovered because of the shoddy quality of their audit. This includes cases like those of IL&FS as well as PMC Bank in 2019.

On the proposal to allow more private banks to transact fee-based government business, the opposition has come from government banks which feel they shall lose a substantial income.

Incidentally, the government is represented on the RBI board by the secretary, department of financial services and the secretary, department of economic affairs.

Feature Presentation: Rajesh Alva/Rediff.com