RBI Guidelines on Statutory Auditors for Co-op Banks

RBI/2023-24/113 Ref.No.DOS.ARG/SEC.8/08.91.001/2023-24 January 15, 2024 The Chairman / Managing Director / Chief Executive Officer, All State Co-operative Banks (StCBs) All Central Co-operative Banks (CCBs) Madam / Dear Sir, Guidelines on Appointment / Re-appointment of Statutory Auditors of State Co-operative Banks and Central Co-operative Banks The Banking Regulation (Amendment) Act, 2020 (No. 39 of 2020), notified in the Gazette of India on September 29, 2020 (vide Notification No. 64 of that date), has come into force with effect from April 01, 2021 (Gazette Notification No. 4113 dated December 23, 2020), for Rural Co-operative Banks i.e., State Co-operative Banks (StCBs) and Central Co-operative Banks (CCBs). 2. Accordingly, Reserve Bank of India (RBI), in exercise of its powers conferred under Section 30(1A) of the Banking Regulation Act, 1949, has framed the guidelines enclosed as Annex of the Circular which shall be applicable to StCBs and CCBs for seeking prior approval of RBI for appointment, re-appointment or removal of Statutory Auditor (SA), and other related matters. 3. These guidelines shall come into effect from April 1, 2024. Accordingly, for all accounting periods commencing on or after April 1, 2024, all StCBs and CCBs shall submit application for prior approval of RBI before July 31 of the reference accounting year, in accordance with the guidelines. Yours faithfully, (Rajnish Kumar) Chief General Manager Encl.: Annex Annex Guidelines on Appointment / Re-appointment of Statutory Auditors of State Co-operative Banks (StCBs) and Central Co-operative Banks (CCBs) 1. Purpose 1.1 State Co-operative Banks (StCBs) and Central Co-operative Banks (CCBs) are required to obtain prior approval of Reserve Bank of India (RBI) for appointment, re-appointment or removal of Statutory Auditor (SA) as per the provisions of Section 30(1A) of the Banking Regulation Act, 1949 (BR Act), with effect from 1st April 2021, i.e., the date on which Banking Regulation (Amendment) Act, 2020 (Act 39 of 2020) came into effect. Accordingly, the following guidelines are being issued by the Reserve Bank of India (‘RBI’), in exercise of its powers under the BR Act, to StCBs and CCBs, on appointment, re-appointment or removal of Statutory Auditors (SAs) and other related matters. 1.2 Definitions i) “State co-operative bank” shall be as defined under sub-section (u) of Section 2 of National Bank for Agriculture and Rural Development Act, 1981. ii) “Central co-operative bank” shall be as defined under sub-section (d) of Section 2 of National Bank for Agriculture and Rural Development Act, 1981. iii) “NABARD” means “National Bank” established under Section 3 of National Bank for Agriculture and Rural Development Act, 1981. 2. Applicability These guidelines shall be applicable to StCBs and CCBs (hereinafter referred to as the ‘bank’ ) with effect from April 1, 2024. 3. Prior Approval of RBI for Appointment / Re-appointment of Statutory Auditors (SAs) 3.1 The bank shall obtain prior approval of RBI before appointment, re-appointment or removal of SA. 3.2 The bank shall seek prior approval for re-appointment of SA annually. 3.3 Procedure NABARD shall obtain a list of audit firms [Partnership firms / Limited Liability Partnerships (LLPs)], on an annual basis, from the Institute of Chartered Accountants of India (ICAI). Thereafter, NABARD shall apply the eligibility criteria prescribed for SAs in this circular and prepare an All-India State-wise list of eligible audit firms. NABARD shall then share this list with the banks for selection and appointment / re-appointment of SAs. The bank shall select the audit firm(s) from this list, obtain the necessary approvals from the Board of Directors (Board) / Audit Committee of the Board (ACB), and submit application for prior approval to Department of Supervision, RBI, before July 31 of the reference financial year. 4. Eligibility Criteria of Statutory Auditors (SAs) In case of appointment of fresh SA, the bank shall select from the list provided by NABARD the audit firms fulfilling the requirements under these guidelines as enumerated in Appendix I and forward the name(s) of the shortlisted audit firms to RBI as per the procedure prescribed in Appendix II . 5. Independence of Auditors 5.1 Board / ACB of the bank shall monitor and assess the independence of auditors and conflict of interest, if any, in terms of the relevant statutory / regulatory provisions, Standards and best practices. Concerns, if any, raised by the Board / ACB shall be reported to NABARD. 5.2 Concurrent auditors of the bank shall not be considered for appointment as SA of the same bank. There shall be a minimum gap of one year between completion of one assignment and commencement of the other assignment. 5.3 The time gap between any non-audit work (services mentioned in Section 144 of the Companies Act, 2013, internal assignments, special assignments, etc.) undertaken by the SA for the appointing bank shall be at least one year, both before appointment and after completion of tenure as SA. However, during the tenure as SA, based on the decision of the Board / ACB, an audit firm may provide such services to the appointing bank which may not normally result in conflict of interest. Special assignments, including those such as (i) Tax audit, tax representation and advice on taxation matters, (ii) Audit of interim financial statements, (iii) Issuance of certificates that are required to be made by the SA in compliance with statutory or regulatory requirements, and (iv) Reporting on financial information or segments thereof, may not be treated as conflict of interest. 5.4 The restrictions, as detailed in paras 5.2 and 5.3 above, shall also apply to an audit firm under the same network of audit firms or any other audit firm having common partner(s), as defined in Rule 6(3) of the Companies (Audit & Auditors) Rules, 2014. 5.5 The SA shall report concern(s), if any, regarding the conduct of Management such as non-availability of information / non-cooperation by the Management (which may hamper the audit process), etc., to the Board / ACB and also to NABARD. 6. Review of Performance of Statutory Auditors (SAs) 6.1 The Board / ACB of the bank shall review the performance of SA annually. Any serious lapse / negligence in discharging audit responsibilities, conduct issues on the part of the SA, or any other matter considered as relevant, shall be reported with the approval of the Board / ACB to NABARD within two months from the completion of the audit. 6.2 Violation of extant statutory / regulatory norms and lapses in carrying out audit assignments such as misstatement of financial statements, etc., by the SAs would be dealt suitably under the relevant statutory / regulatory / supervisory framework. 7. Tenure and Rotation of Statutory Auditors (SAs) 7.1 SAs shall be appointed at a time for a period of one year only and shall be reappointed annually for the succeeding two years subject to them continuing to satisfy eligibility norms stated in these guidelines. During such period, premature removal of the SA shall require prior approval of RBI. However, any such request for removal shall be forwarded to RBI with the approval of the Board / ACB. 7.2 An auditor / audit firm shall not be eligible for appointment / re-appointment in the same bank for six years (two tenures) immediately after completion of a full or part tenure. In case an auditor / audit firm has conducted audit of the bank for part-tenure (one year or two years) and then is not re-appointed for the remainder tenure, it shall not be eligible for re-appointment in the same bank for six years after completion of part-tenure. However, audit firms can continue to undertake statutory audit of other banks. 8. Number of StCBs / CCBs an Audit firm can Audit 8.1 An audit firm can concurrently take up statutory audit of a maximum of five banks ( including not more than one StCB ) in a year. 8.2 The limit of five banks will be in addition to the limit of 20 Regulated Entities (REs), as prescribed in the ‘Guidelines for Appointment of Statutory Central Auditors (SCAs) / Statutory Auditors (SAs) of Commercial Banks (excluding RRBs), UCBs and NBFCs (including HFCs)’ dated April 27, 2021. 8.3 Further, in a year, an audit firm cannot simultaneously take up statutory audit of both StCB and CCBs operating in the same State. 8.4 In other words, an audit firm can concurrently take up statutory audit of a maximum of four Commercial Banks [including not more than one PSB or one All India Financial Institution (NABARD, SIDBI, NaBFID, NHB, EXIM Bank) or RBI], eight Urban Co-operative Banks (UCBs), eight Non-Banking Financial Companies (NBFCs), and five StCBs / CCBs (including not more than one StCB) in a year. 8.5 This limit is subject to the audit firm’s compliance with the eligibility criteria and other conditions as prescribed in these guidelines and within the overall ceiling prescribed by any other statute or rules. 8.6 For the purpose of these guidelines, a group of audit firms having common partner(s) and / or under the same network shall be considered as one unit and considered for appointment as SA accordingly. The incoming audit firm shall not be eligible if such an audit firm is associated with the outgoing audit firm or is under the same network of audit firms. 8.7 Shared / Sub-contracted audit by any other audit firm or by an associate audit firm under the same network of audit firms, is not permitted. 9. Audit Fees and Expenses of Statutory Auditors (SAs) 9.1 The audit fees for SAs of all the banks shall be decided in terms of the relevant statutory / regulatory provisions and the Board / ACB of banks shall make recommendation to the competent authority as per the relevant statutory / regulatory instructions for fixing audit fees of SAs. 9.2 The audit fees for SAs of banks shall be reasonable and commensurate with the scope and coverage of audit, size and spread of assets, accounting and administrative units, complexity of transactions, level of computerization, identified risks in financial reporting, etc. 10. Statutory Audit Policy, Appointment Procedure, Working knowledge of the language of the state and Familiarisation Mechanism for Statutory Auditors (SAs) 10.1 The bank shall frame a Board-approved policy on appointment of SA and host it on its official website / public domain. The bank shall also formulate necessary procedures thereunder for selection / appointment / re-appointment / removal of SA. Apart from conforming to all the relevant statutory / regulatory requirements, the policy shall accord necessary transparency and objectivity on all the major aspects of this important assurance function. 10.2 To decide the branch / business coverage under the Statutory Audit, the bank shall be guided by the guidelines given in Appendix III of the circular. 10.3 For smooth conduct of the statutory audit, it is preferable that the audit firm to be appointed as SA has proficiency in the local language of the state / UT where the auditee bank is located. 10.4 Before commencement of the audit, the bank shall sensitize its SAs, on aspects such as relevant RBI Regulations, systems and procedures at the bank, expectations and requirements from the SAs, etc. Appendix I Eligibility Criteria for Appointment as SA - Basic Eligibility for StCBs / CCBs Asset Size of StCB / CCB as on 31st March of Previous Financial Year

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2023-24/113 · issued 15 Jan 2024. The plain-English explanation above is BankPulse’s own independent summary.

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