Visual Walkthrough - McGraw-Hillnovella.mhhe.com/sites/dl/free/1259026868/1012063/Visual_Walkthrough.pdfVisual Walkthrough ... Agreement Tripartite Agreements Guarantee Agreements

Visual Walkthrough ● ● ● ➜

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Learning Objectives: To acquaint the readers with the contents of the chapter, so that they are aware of what all they should expect to know at the end of it.

Margin Notes: Brief notes in the text margins, these are definitions of important concepts and key terms, to enable the readers to reinforce their learning.

Exhibits (Flow Charts): Impact making visual representations of contents to make them crystal clear to the reader.

1

Non-Banking FinancialCompanies

Financial services is concerned with the design and de-livery of advice and financial products to individuals and busi-nesses.

C H A

P T E

R

LEARNING OBJECTIVES

● Explain the nature of fi nancial services and the three-fold classifi cation of non-banking fi nance companies in India.

● Review the main elements of Chapter III – B of the RBI Act pertaining to regulation of non-banking fi nancial companies (NBFCs).

● Discuss the features of the RBI directions to NBFCs relating to acceptance of public deposits. ● Examine the RBI’s prudential norms applicable to NBFCs accepting public deposits. ● Understand the difference between the RBI’s prudential norms applicable to NBFCs accepting

deposits and those not accepting deposits. ● Analyse the RBI’s asset-liability management (ALM) framework for NBFCs. ● Understand the features of the RBI’s NBFCs-MFI directions. ● Review the framework of regulations of credit information companies. ● Discuss the regulatory framework for core investment companies

iNtRoDuctioN

Finance may be defined as the art and service of managing money. The two major areas of finance are: (i) financial management/manage-rial finance/corporate finance and (iii) financial services. Financial management is concerned with duties of the financial managers in the business firm who perform such varied tasks as budgeting, finan-cial forecasting, cash management, credit administration, investment analysis, funds management and so on. Financial services is concerned with the de-sign and delivery of advice and financial products to individuals and businesses within the areas of banking and related institutions, personal financial planning, investment, real assets, insurance and so on. A wide variety of fund/asset-based and non-fund-based/advisory services are provided mainly by the non-banking finance companies (NBFCs). Depending on the nature and type of services provided, they are categorised, inter-alia, into (i) asset finance, consumer finance, investment and loan companies and factoring and forfaiting organisations, (ii) housing finance companies, and (iv) merchant banking organisations, stock broking firms, depositories, credit rating agencies, and venture capital funds. While the housing finance

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7.2 Financial Services

maturity on the buyer. The seller has now assumed the role of a creditor; and is called the drawer of the bill. The buyer, who is the debtor, is called the drawee. The seller then sends the bill to the buyer who acknowledges his responsibility for the payment of the amount on the terms mentioned on the bill by writing his acceptance on the bill. The acceptor could be the buyer himself or any third party willing to take on the credit risk of the buyer.

Discounting of a B/EThe seller, who is the holder of an accepted B/E has two options:

1. Hold on to the B/E till maturity and then take the payment from the buyer. 2. Discount the B/E with a discounting agency. Option (2) is by far more attractive to the

seller.

The seller can take over the accepted B/E to a discounting agency [bank, NBFC, company, high net worth individual] and obtain ready cash. The act of handing over an endorsed B/E for ready money is called discounting the B/E. The mar-gin between the ready money paid and the face value of the bill is called the discount and is calculated at a rate percentage per annum on the maturity value.

The maturity a B/E is defined as the date on which payment will fall due. Normal maturity pe-riods are 30, 60, 90 or 120 days but bills maturing within 90 days seem to be the most popular.

Types of BillsThere are various types of bills. They can be classified on the basis of when they are due for payment, whether the documents of title of goods accompany such bills or not, the type of activity they finance, and so on. Some of these bills are:

Demand Bill This is payable immediately “at sight” or “on presentment” to the drawee. A bill on which no time of payment or “due date” is specified is also termed as a demand bill.

Usance Bill This is also called time bill. The term usance refers to the time period recognised by custom or usage for payment of bills.

Documentary Bills These are the B/Es that are accompanied by docu-ments that confirm that a trade has taken place between the buyer and the seller of goods. These documents include the invoices and other documents of title such as railway receipts, lorry receipts and bills of lading issued by

custom officials. Documentary bills can be further classified as: (i) Documents against accept-ance (D/A) bills and (ii) Documents against payment (D/P) bills.

D/A Bills In this case, the documentary evidence accompanying the bill of exchange is de-liverable against acceptance by the drawee. This means the documentary bill becomes a clean bill after delivery of the documents.

D/P Bills In case a bill is a “documents against payment” bill and has been accepted by the drawee, the documents of title will be held by the bank or the finance company till the maturity of the B/E.

Discountis the margin

between the ready money paid and the face value of

the bill.

Usance billrefers to the time

period for payment of bill.

Documentary billsare bills accompa-

nied by documents confirming trade

between buyers and sellers of goods.

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Regulatory Framework

LeaseDocumentationand Agreement:

EssentialRequirements/ PurposeLeaseAppraisalProcessMaster/Supplementary LeaseAgreement TripartiteAgreements GuaranteeAgreements CollateralSecurity/HypothetcationAgreement

Concept:MeaningEssentialElements

Classification:Finance andOperatingSales andLease Backand Direct SingleInvestor andLeveragedDomestic andInternational

Profile ofLeasing inIndia:

PlayersProducts

Other Laws/Acts:

RBIDirectionsMotorVehicleActIndianStamp Act

Contract Act:GeneralProvisionsSpecialProvisions

Significance of Limitations: AdvantagesLimitations

Theoretical Framework

ConCept and ClassifiCation

ConceptIncluded in conceptual aspect of leasing are its meaning and essential elements.

Meaning Conceptually, a lease may be defined as a contractual arrangement/transaction in which a party owning an asset/equipment (lessor) provides the asset for use to another/transfer the right to use the equipment to the user (lessee) over a certain/for an agreed period of time for consideration in form of/in return for periodic payment (rentals) with or without a further

payment (premium). At the end of the period of contract (lease period), the asset/equipment reverts back to the lessor unless there is a provision for the renewal of the contract. Leasing essentially involves the divorce of ownership from the economic use of an asset/equipment. It is a device of financing the cost of an asset. It is a contract in which a specific equipment required by the lessee is purchased by the lessor (financier) from a manufacturer/vendor selected by the lessee. The lessee has possession and use of the asset on payment of the specified rentals over a predetermined period of time. Lease financing is, thus, a device of financing/money lending.

Leasingis a process by

which a firm can obtain the use of a certain fixed asset for which it must make a series of contractual peri-

odic tax-deductible payments (lease

rentals).

Exhibit 2.1 Conceptual/Theoretical and Regulatory Framework of Leasing

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Illustrations: To elaborate on a concept, to make them clearer and easier to understand; specially useful in case of the more difficult portions of the subject.

Solved Problems: A guide and aid to solving problems, will aid readers by suggesting suitable methodologies for tackling tough questions.

Recapitulation: At the end of all chapters, a brief recap of all the important points and salient features of every topic.

Factoring and Forfaiting 6.5

record of payments, the factor is able to advise the client on the credit worthiness of potential customers leading to better credit control. Operationally, the line of credit/credit limit up to which the client can sell to the customer depends on his financial position, his past payment record and the value of the goods sold by the client to the customer. One approach followed by the factors is to define the monthly sales turnover for each customer which will be automatically covered by the approved credit limit. If, for instance, the approved limit for a customer is ̀ 5 lakh and the average collection period is 60 days, sales up to `2.5 lakh [(5 3 30)/60] per month will be automatically covered. Alternatively, some factors provide periodic reports to the clients on customer-wise outstanding and ageing schedules to enable the clients to assess the extent of credit utilisation before any major sale is made. The credit-worthiness of customers is assessed by factors on the basis of information from a number of sources such as credit rating reports, if available; bank reports and trade references; analysis of financial statements on the basis of current ratio, quick ratio, net profit margin and return on investment (ROI); prior collection experience; customer visits and so on.

Advisory Services These services are spin-offs of the close relationship between a factor and a client. By virtue of their specialised knowledge and experience in finance and credit dealings and access to extensive credit information, factors can provide a variety of incidental advisory services to their clients such as:

l Customer’s perception of the client’s products, changes in marketing strategies, emerging trends and so on;

l Audit of the procedures followed for invoicing, delivery and dealing with sales returns; l Introduction to the credit department of a bank/subsidiaries of banks engaged in leasing,

hire-purchase, merchant banking and so on.

Cost of Services The factors provide the various services at a charge. The charge for collection and sales ledger administration is in the form of a commission expressed as a per cent of the value of debt purchased. It is collected up-front/in advance. The charge for short-term financing in the form of advance part-payment is in the form of interest charge for the period between the date of advance payment and the date of collection/guaranteed payment date. It is also known as discount charge. The computation of these charges is shown in illustration 6.1.

Illustration 6.1The Hypothetical Manufacturers Ltd (HML) enters into a factoring arrangement with the Hypothetical Factors Ltd (HFL). According to the agreement, the HFL would pay in advance 80 per cent of the value of the factored receivables at 25 per cent interest compounded quarterly, the balance retained as factor reserve to disputes and deductions. It also provides for guaranteed payment after three months from the date of purchase of the receivables. The factoring commission would be two per cent of the value of factored receivables. It is stipulated that interest and commission would be col-lected in advance. Assuming an advance payment of `42 lakh, compute: (A) Advance payable to HML; (B) Effective cost of funds; and

Commissionis the charge for collection and sales ledger administra-tion.

Discount chargeis the interest charge for short-term financing by the factor between the date of advance payment and the date of guaranteed payment/collection.

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Financial Evaluation of Leasing 4.19

➢ From the point of view of the lessor, the break-even lease rental is the minimum which he can accept in lieu of leasing the equipment. At this level of rental, the NAL/NPV(L) to the lessor is zero. The lease-related cash flow stream relevant to the computation of the NAL are initial investment and often direct costs, income tax on lease payments, management fee, lease payments, tax shield on depreciation and residual value. The discount rate used is the marginal cost of funds/capital to the lessor based on the debt-equity base in the target capital structure.

➢ The lease rental is determined on the basis of a negotiation between the lessor and the lessee. The difference between the break-even lease rentals to the lessee and the lessor represents the spread/range for negotiation of lease rentals. A lease rental within the range ensures a positive NAL/NPV(L) both to the lessor and the lessee. The NAL to a lessor = Present value of lease payment plus (1) present value of management fee, (2) present value of depreciation tax shield, (3) present value of net salvage value, (4) present value of tax shield on initial direct costs, minus, (1) initial investment, (2) present value of tax on lease payments, (3) present value of tax on management fee, (4) present value of initial direct cost.

➢ The lease rentals are structured to suit the lessors and the lessees. From the lessee’s angle, the structure of the lease rental should synchronise with his operational cashflows pattern. The dimensions of synchronisation between the lease rental and the cashflows pattern are periodicity of rentals, lease rentals in advance/arrear, profile of rentals and so on. The lease rental should ensure a given/expected return to the lessor.

soLVED PRoBLEMs P.4.1 The Hypothetical Equipments Ltd (HEL) has recently leased assets worth `2,500 lakh

from the Hypothetical Leasing Ltd (HLL). The following facts are available: (1) Lease period, 9 years, of which the first 6 years constitute the lease term; (2) Annual lease rates: First 6 years, `360/`1,000; Next 3 years, `15/`1,000; (3) Incremental borrowing rates for HEL, 22 per cent. (a) Assuming 14 years as the average economic life of the equipment, is the lease

a finance lease or an operating lease” (b) Assuming further (i) physical life of 14 years, (ii) technological life of 9 years

and (iii) product-market life of 11 years, how will you classify the lease?

SolutionA lease is finance lease if one of the following two conditions is satisfied: (1) The lease term exceeds 75 per cent of the useful life of the equipment (the minimum of

physical useful life, technological life and product market life). (2) The PV of lease payments exceeds 90 per cent of the fair market value of the equipment

(cost of equipment), the discount rate being incremental borrowing rate in the case of lessee and cost of capital in the case of lessor.

(a) (i) Term of lease is 9/14 years = 64 per cent.

(ii) Determination of PV of lease payment (` in lakh)

Year Lease payment Discount factor (0.22) Total PV

1 – 6 900 3.167 `2,850 7 – 9 37.5 0.62* 23 2,873

*(0.249 + 0.204 + 0.167)

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reCapitulatiOn

➢ A mutual fund pools the savings, particularly of the relatively small investors, and invests them in a well diversified portfolio of sound investment. It issues units (securities) to unithold-ers (investors) according to the quantum of money invested by them. The profits/losses are shared by the unitholders in proportion of their investments.

➢ According to the SEBI, mutual funds are funds established in the form of a Trust to raise money through the sale of units to the public under various schemes for investing in securities including money market instruments or gold/gold related instruments or real estate assets.

➢ A mutual is set up in the form of a trust which has (i) a sponsor, (ii) trustees, (iii) an asset management company (AMC) and (iv) custodians. The sponsors set up the trust as promot-ers. The trustees hold the property in trust for the benefit of the unitholders. They are vested with general powers of superintendence and direction over the AMC and they monitor their performance and compliance with the SEBI regulations. The AMC manages the funds. The custodian holds the securities of the fund in its custody.

➢ As an investment intermediary, mutual funds offer a variety of services/benefits to the inves-tors: convenience, low risk through diversification, expert management and lower cost due to economies of scale.

➢ The main elements of the regulatory mechanism for mutual funds in India in terms of the SEBI regulations are: (i) registration of mutual funds, (ii) constitution and management of mutual funds, (iii) constitution and management of AMCs/custodians, (iv) mutual fund schemes, (v) invest-

exhibit 12.4 Value Averaging

Investment Unit price at Units acquired Value of Investment to Additional value desired 10th of every investment on be made on units acquired on 10th of every month 10th of every 10th of every month before month additional units are acquired

(1) (2) (3) (4) (5) (6)

`100 `11.79 8.49 – `100

100 12.11 16.51 103 97 8

100 11.17 28.86 184 116 10

100 11.62 34.44 312 88 8

100 13.59 36.80 468 32 2

100 13.82 43.40 509 91 7

100 11.82 59.22 513 187 16

100 10.30 77.69 610 190 18

100 10.38 86.73 806 94 9

`1,000 `9.74 102.65 845 155 16

Total investment `1,150

Average unit cost = `11.21

Average unit price = `11.63

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Mini and Comprehensive Cases: Elaborate upon the concepts taken up in a particular chapter and aid understanding by relating these concepts to real world examples.

Review Questions with Answers: Very useful for readers to test their understanding of the subject; the answers will help in confirming if they have understood correctly or not.

Financial Evaluation of Leasing 4.47

(ii) Determination of NPV of cash inflows

Particulars Years

1 2 3 4 5

Lease rent `12,00,000 `12,00,000 `12,00,000 `12,00,000 `12,00,000 Less: Depreciation 10,00,000 7,50,000 5,62,500 4,21,875 3,16,406 Earnings before taxes 2,00,000 4,50,000 6,37,500 7,78,125 8,83,594 Less: Taxes (0.35) 70,000 1,57,500 2,23,125 2,72,344 3,09,258 Earnings after taxes 1,30,000 2,92,500 4,14,375 5,05,781 5,74,336 Cash inflows after taxes 11,30,000 10,42,500 9,76,875 9,27,656 8,90,742 (x) PV factor at (0.14) 0.877 0.769 0.675 0.592 0.519 Present value 9,91,010 8,01,682 6,59,391 5,49,172 4,62,295

Total PV of operating CFAT 34,63,550 Add: PV of salvage value of machine (8,00,000 3 0.519) 4,15,200 Add: PV of tax savings on short-term capital loss (52,226 3 0.519) 27,105 Gross PV 39,05,855 Less: Cost of machine 40,00,000 NPV (94,145)

Recommendation: It is not financially profitable to let out the machine on lease by the leasing Company, as NPV is negative.Assumption: The machine is to be sold after the expiry of 5 years. There is no other asset in the block of 25 per cent of the lessee.

Mini Case

4.C.1 Leasing Vs. Buying–Borrowing Teddy Bear Ltd is in the business of making toys of different ranges. Presently, Teddy Bear has one manufacturing plant having production capacity of 30,00,000 toys annually. They are sold through registered dealers in India who take delivery of toys directly from the factory situated in NOIDA. Teddy Bear does not incur any transport cost. The demand for toys has shown tremendous growth in recent years. The Vice President, marketing, Sanjay Khanna, has submitted a proposal to the CEO, Bikrant Kumar Singh, to expand the produc-tion capacity of Teddy Bear to 40,00,000 toys. The CEO directs the Vice President, Manufacturing, Virender Kumar Rathi, to put a proposal regarding the availablility of the required equipment for the expansion of the plant. A survey shows that the machinery is available for ̀ 12.5 crore having a useful life of five years and no salvage value. Assume straight line depreciation for tax purposes. It also shows that there are two alternatives to finance the proposal. The equipment can be bought and financed by borrowing from the Udharwala Financial Services Ltd at 10 per cent interest. The equipment can be alternatively taken on lease form the First Leasing Company of India Ltd at `3.5 crore annual lease rental. The First Leasing would bear the associated taxes, insurance and maintenance cost amounting to `60,00,000 annually. Required Bikrant Singh engages you as a financial consultant to advice him on the choice of the funding alternative. Should Teddy Bear buy the equipment through borrowing or acquire it on lease? What advice would you give and why? Assume 30 per cent corporate tax.

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Decision Analysis: Recourse Factoring (` crore)

Particulars Canbank Indbank

Benefits (`57.2 – `12 Bad debts to be borne by company) 45.2 45.2 Costs 36.6 29.6 Net benefits 8.6 15.6

Decision Analysis: Non-Recourse Factoring (` crore)

Particulars Canbank Indbank

Benefits (`57.2 + `1.1 Bad debts loss to be borne by factor) 58.3 58.3 Costs 54.5 45.8 Net benefits 3.8 12.5

Advice: My advice to the CFO of Sunlight Industries would be to accept the proposal of Indbank Factors for recourse factoring.

Comprehensive Case

SMART ChIP hARDwARE CoMPANy

The Smart Chip Hardware Company is a reputed company in industry with offices at Delhi, Chennai, and Mumbai. The company was founded by Mr Mahendra Kapoor and at present he is the chairman of the company.

Since the last few years, his son Gyanendra, a postgraduate in Finance has been involved in the business. Soon after joining, Gyanendra began to question a number of practices. He experimented with distribution channels and discovered that he could eliminate many dealers while increasing the sales. After being comfortable with the company’s production activities and sales efforts, he began to work on its cash flows and credit problems.

The Company sold most of its southern accounts to a subsidiary, Arrow Chip Company. The resulting cash from the sale of accounts was used to modernise the company’s machinery. Some of the funds were also used to improve the distribution system.

These actions brought about a considerable improvement in the service of western and northern customers and resulted in substantial increase in sales.

The next years sales are being forecast at `9.8 crore if the firm continues to market its products aggressively.

At the end of the previous year, Gyanendra looked at past balance sheets and forecasted ex-penses. The firm was budgeting three stable items for the next year: office and marketing salaries, `45,00,000; sales and promotion expenses, `70,00,000 and miscellaneous overheads, `22,00,000. Gyanendra knew that if the firm did not borrow any additional funds, Smart Chip would have likely interest expenses of approximately `45,00,000 next year.

Having gathered these data, Gyanendra needed to look at collection costs and bad debt losses not included in general and administrative expenses. He decided to forecast these items using data

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➢ The debt securities issued to public or on private placement basis should be traded/cleared/settled in a recognised stock exchange subject to conditions specified by the SEBI including conditions for reporting of all such trades.

➢ The debenture trustees, issuers and merchants should comply with their obligations specified by the SEBI.

➢ In case of violation of any regulation(s), the SEBI may carry out inspection of books of accounts/ records/documents of the issuers/intermediaries. It can issue such directions as it may deem fit. An aggrieved party may prefer an appeal with the SAT.

rEVIEW quEstIons

14.1 Explain briefly the common conditions for public and rights issues. 14.2 Discuss the eligibility requirements for public issues. 14.3 Examine the stipulations relating to pricing in public issues. 14.4 What are the provisions relating to promoters contribution in public issues? 14.5 What are the restrictions on transferability of promoters contribution in public issues? 14.6 Describe the provisions as to reservations in public issues. 14.7 Write a brief note on rights issue by listed issuers. 14.8 Outline briefly the general obligations of issuers/intermediaries in respect of public and

rights issues. 14.9 Describe the framework of preferential issues of capital. 14.10 Discuss qualified institutional placement as a method of capital issue. 14.11 Outline the framework relating to the issue of IDRs. 14.12 Discuss the main elements of the framework relating to issue of capital by SMEs. 14.13 Examine the framework for the issue and listing of debt securities. 14.14 Write brief notes on: ● Book building process of issues of capital ● Green shoe option ● QIBs ● Infrastructure projects

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ANSWERS

2.7 (a) `182.15 lakh (b) Year 1,`143.71 lakh; Year 2, `165.26 lakh; Year 3, `190.5 lakh; Year 4, `218.56 lakh;

Year 5, `251.34 lakh (c) `902.29 lakh (d) `388.20 lakh 2.8 (a) `45.75 lakh (primary); `2.79 lakh (secondary) (b) `23.92 lakh (c) `103.07 lakh (d) `75.04 lakh 2.9 (a) Finance lease (PV of lease payments exceeds the cost of the asset (b) Finance lease (term is 100 per cent)

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Appendices: Additional materials for readers who would like to go into fur-ther detailed study of the topics in the chapters. Apart from some Appendices in the book, a number of them have been given on the companion website.

Annexures: Contain specific Indian inputs related to the concepts discussed in the chapter

Website: The companion website of this book (http://www.mhhe.com/khanfs7e) contains in several appendices, extra material for the interested reader. Additionally, it features powerpoint slides for the instructors.

Hire-Purchase Finance and Consumer Credit 5.33

Appendix 5-aFlat rate vs Effective rate of Interest/annual Percentage rate

The interest component of each hire-purchase installment is calculated on the basis of a flat rate of interest. But the original amount of the loan is repaid over the term of the loan in equated installments. To determine the interest component of each installment of the declining balance of the principal amount over a period of time, the equivalent effective rate of interest (invariably higher than the flat rate) is to be used. Thus, the effective rate of interest (ERI) is an important element of accounting and reporting of a hire-purchase transaction. It is also known as annual percentage rate (APR). The computation of APR depends on whether the hirer has to (a) make a down payment, or (b) invest in fixed deposit of the finance company. The APR also depends on the fact that the equated installments are paid in arrears or advance. The computation of APR/ERI is shown in illustrations 5.A.1–5.A.2.

Illustration 5-A.1 (Cash Down Payment)

Under a hire-purchase deal structured by the Hypothetical Finance Ltd (HFL) for the Hypotheti-cal Industries Ltd (HIL), the (flat) rate of interest is 15 per cent. The HIL is required to make a cash down payment of 25 per cent and the repayment of the loan is to be made in 36 equated monthly installments. On the assumption of payment of installment in (a) advance (b) arrear, compute the ERI/APR for the plan.

Solution

The ERI/APR can be computed (i) by applying the trial and error approach or (ii) by using the approximation formula. (A) Approximation Approach/Formula (a) Computation of APR/ERI (Payment in Arrear)

I 2F1

N

N= �

+ I = APR/ERIs

N = Number of repayments

F = Flat rate of interest per unit time

36

= 2 0.15373 3 = 0.292 = 29.2 per cent

(b) Computation of APR/ERI (Payment in Advance):

362F 2 0.15 0.0309 30.9 per cent

1 35

NI

N= � = � � = =

�

(B) Trial and Error Approach (Assumed Amount of `1,000)

(a) Computation of APR/ERI (Payment in Arrear):

Amount of loan (0.75 3 `1,000) = `750

Total credit charge = `750 3 0.15 3 3 = `337.5

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Whistle Blowing Policy The insurers should put in place a “whistle blowing” policy, whereby mechanisms exist for employees to raise concerns internally about possible irregu-larities, governance weaknesses, financial reporting issues or other such matters. These could include employee reporting in confidence directly to the chairman/a committee of the Board/the external auditor. The policy illustratively should cover the following aspects: (i) aware-ness that such channels are available, how to use them and how their report will be handled; (ii) handling of the reports received confidentially, for independent assessment, investigation and taking appropriate follow-up actions; (iii) a robust anti-retaliation policy to protect em-ployees who make reports in good faith; and (iv) briefing of the Board of Directors. The appointed actuary and the statutory/internal auditors have the duty to “whistle blow”, that is, to report in a timely manner to the IRDA if they are aware that the insurer has failed to take appropriate steps to rectify a matter which has a material adverse effect on its financial condition. This would enable the IRDA to take prompt action before policyholders’ interests are undermined.

annexure 16-1 responsibilities of the Board of Directors

The Board of Directors should:

(1) Ensure that the governance principles set for the insurer comply with all relevant laws, regula-tions and other applicable codes of conduct.

(2) Set the following policies in consultation with the management of the company as indicated: (a) define and periodically review the corporate business policy/underwriting policy of the insurer, (b) define the policy of the insurer in investment of its assets consistent with an ap-propriate asset liability management structure/on appointments and qualification requirements for staff at all levels and for fixing their remuneration and benefits. The remuneration policy should not include incentives that encourage imprudent behaviour, (c) determine the retention and reinsurance policy and, in particular, the levels of retentions of risk by the insurer and the nature and extent of reinsurance protection to be maintained by the insurer.

(3) Define and set the following standards: (a) standards of business conduct and ethical behaviour for directors and senior management, (b) standards to be maintained in policyholders servicing and in redressal of grievance of policyholders.

(4) Be responsible to provide strategic guidance for implementation of business policy and structure a management information system for review and course correction.

(5) Take action as an integral part of the proper implementation of the guidelines of the business and other policies, as under: (a) establish appropriate systems to regulate the risk appetite and risk profile of the company. It will also enable identification and measurement of signifi-cant risks to which the company is exposed in order to develop an effective risk management system, (b) ensure that all supervisory/regulatory directions are submitted to the Board and the supervisor’s recommendations are utilised in the assessment of the performance of the senior management in implementation of Board philosophy, (c) define the role of the appointed actuary and the degree of his/her involvement in the designing and pricing of products and in determination of liabilities, (d) ensure that the (1) appointed actuary has direct access to the Board and reports to it on important matters in a timely manner, (2) IT systems in the com-pany are appropriate and have built-in checks and balances to produce data with integrity, (e) company has in place a robust compliance system for all applicable laws and regulations, and (f) prescribe the forms and frequency of reporting to the Board in respect of each of the above areas of responsibility.

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