Need to do legal audits as 'health check' says Shyamala Gopinath  

In the light of various developments in the fast changing financial markets during the recent crisis, the importance of legal audit in all financial institutions cannot be overemphasised, said Shyamala Gopinath, deputy governor, Reserve Bank of India (RBI). 
 

Speaking at a symposium on “Changing Dynamics of Legal Risks in Financial Sector,” the deputy governor said the objective of the legal audit could be to review the various agreements with the custodians, counterparties and service providers and the coverage of the audit could include all the agreements, the legal title to the foreign assets and liabilities under various laws.
 

Terming legal audit as a 'health check' Ms Gopinath said it is also a means of identifying legal risks and suggesting course correction for smoother sailing during crises. The recent global financial crisis has brought to light various risks and has to a great extent, blurred the distinction between operational risks and legal risks, she said.
 

The RBI deputy governor said keeping pace with the changing needs and aspirations of the customers, banks have been venturing into various kinds of innovative products and identifying the legal risks that lurk behind modern techno-savvy complex transactions and market jargon could be a difficult task.
 

Another area where banks are increasingly exposed to legal risk is the rising consumer grievances about the services rendered by the banks. Many a time, the lack of awareness among customers about the niceties of the innovative products offered by banks leads to customer grievances and resultant litigations.
 

Ms Gopinath said that in such cases, it is imperative that the contracts governing such innovative products clearly exhibit fairness in the terms and conditions and are transparent with adequate disclosures and are not one-sided contracts.

Here is a list of legal reforms suggested by the Committee on Financial Sector Assessment…
 

(1) Enactment of the United Nations Commission on International Trade Law (UNCITRAL) on Cross Border Insolvency with modifications suitable to India’s needs. 
 

(2) Conferring statutory priority to the claim of banks and financial institutions in respect of the financial assistance given to rehabilitate a sick/weak company in financial distress,
 

(3) Extension of such priority of claim even while disbursing the assets in liquidation,
 

(4) National Company Law Tribunal (NCLT) to be made functional for any significant improvement in the restructuring process,
 

(5) Extension of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act to cover security interest in agricultural land beyond a specified holding (for eg. five acres). 
 

(6) insertion of Section 29A in Banking Regulation Act empowering the RBI to call for information and returns from the associate enterprises of banking companies and inspect the same, if necessary. 
 

(7) Setting up of the Central Registry urgently to have a central and reliable record of all security interests created by banks and financial institutions and other entities/individuals in respect of both immovable and movable property by a separate legislation in respect of the Central Registry.
-Yogesh Sapkale [email protected]