PNB FRUAD – an eye opener

PNB FRUAD – an eye opener

What is banking?

Banking is dealing with public money by accepting deposits from the public and lending to them to earn profit out of the transactions.  Till 1985, Indian banking had a strong system and procedure and whatever work you do there is clear systems and procedures which includes the accounting procedure and reporting also.  When the banking system starts computerizing their operations starting from 1985, it is presumed that the computers will not do any mistakes and whatever reports generated by the computers were accepted as it is, without any verification process. We used say in a lighter vain that if you generate a resignation letter through the computer, it will be signed by the manager without any hesitation.

The department of technology in the banking sector does not coordinate with the operation department and User Acceptance Test is also done by a group based on the operating instruction but they do not have much exposure to the operation.

Now the bank in order to increase the profitability by selling insurance, credit cards etc under the name cross selling and to increase the cross selling activity, incentives are given to all the people starting from the marketing team at the branch to the top Management  of the bank. Therefore, the top Management is only interested in the incentives instead of their core banking activity. The core banking activity has been pushed to back seat at the bank as the top Management  drive the entire unit towards the cross selling activity.

Till 1990, the banking is traditional but thanks to globalization, the banking has transformed into global business with many complicated products and cross border transactions. The products “buyers credit”, “Suppliers Credit”, options, swaps etc., are predominant and availed by the borrowers in order to reduce the cost of borrowings. Due to globalization process, Indian customer has access to the international Market for their borrowing to reduce the cost of borrowings. But the bank has not implemented the risk management and compliance process as per international standard although they have some position as Risk manager and banking operation department to take of compliance. These people will be working directly under the operation department hence their  reports are not effective.

The top Management  also of the opinion that the department compiling the returns, system and procedures, control frauds, risk management departments etc are useless and the people working therein are also will not receive any recognition for their good work. Therefore, people who wants go up in the cadre will not incline to work in these departments.

Now come to the fraud of PNB:

Mr. Nirav Modi wanted to import pearls and diamonds, design exquisite world-class jewellery and sell them. He needed money to buy the pearls and diamonds. He did not want to opt for a rupee loan, and rightly so as it is expensive and there is foreign currency risk. He wanted foreign currency loan. That’s cheap and he had a natural hedge against currency fluctuations as he was earning in foreign currency by exporting jewellery.

As the loans is foreign currency loan arranged through the bank abroad, and there will not be any entry in their accounting system except the contingent liability by way of guarantee/ comfort letter. But in the PNB case there is no loan account created in the books of the bank including contingent liability and letter of comforts were issued through MT799 through swift to the foreign bank for release of loan. RBI instruction in this regard is clear that buyers’ credit can be arranged through a bank abroad by issuing letter of comfort for the import of goods (raw materials) or capital goods. The Buyers credit period should not exceed the working capital cycle.  

For any guarantee without any collateral, it is normal on the part of the bank to ask for 100/110 % margins (to cover foreign exchange fluctuation but PNB is liberal enough to do letter of comfort (LOC) without any margin. When the devolvement of the LOCs takes placed the bank wake up to a USD 1.77 billion fraud that shook the Indian banking system. They had continued the entire operations by opening one LOC to meet the liability on account of previous LOC which is nothing but kite flying.

The violations done by PNB

No loan appraisal has taken place and limit of letter of credit or letter of comfort has been sanctioned. The MT799 has been issued without any back up collateral as paper without understanding the implication or otherwise.

There is huge money flowing through the bank both inward and outward and as normal practice it should be reported to the controllers at least as forex sales and purchase figures.

 The controller might not have time to check these reports and arrive at a logical conclusion of the business. On the other hand there is no risk management system prevailing at the Apex office / forex managing branch to check the matching transaction of inflow and outflow on regular basis.

The audit conducted by the Head office fails to track these transactions as normally the person who does audit normally do not have an idea about foreign exchange / trade related transactions.

Buyers credit operations:

Most of the bank resort to the buyers’ credit through a bank abroad to meet the import payments. The normal practice is to open a letter of credit on usance term for import of Raw materials and on receipt of the goods under the LC, the value of bill is paid by arranging through buyers credit.  It is nothing but converting a non fund based facility into a fund based facility although it is contingent liability to the bank by way LOU. But this may leads to double finance as the imported materials might have been added to the stock pledged to the bank and availed cash credit against the same. The banks do not have a proper SOP (standard Operating Procedure) for the buyers’ credit as it will not reflect into their Books/CBS.

Although most of the bank claims that there is integration of CBS and swift and the swift message is generated from the system automatically from CBS, it is not fool proof as the verification/ authorization should be done in Swift. There is a possibility of generating swift directly also without any involvement of CBS.

What are the learning points?

1. Normally, the top management escapes out of such large frauds blaming of the people at the bottom which is not true. The fraud to the tune of Rs.11000 crores cannot be committed without the knowledge of the top management. Their failure for not managing the bank in a proper way by creating proper SOPs and strengthening the report system, audit system, risk management system etc, if at all they are really unaware of it which is a very remote possibility.
2. The Technology is incomplete and do not have checks and balances required to be there because it is being rolled out at the urgency of the top management without giving adequate time for testing the roll outs. The Computerization is not done 100 % due to lack of coordination between IT and Operation department of the bank.  Working knowledge is required for computerizing the operations which will not be available. The management / technology department do not take any feedback from the operations on the technology introduced in operation.
3. Most of the time as the management never invests in developing the work force as they themselves do not have faith in the training system. Specialization of work is not supported by the Management.
4. The due importance is not given by the management for support departments such as Risk Management, Audit, Vigilance, Training etc. and it is normal the management see them as not contributing to the bank as their contribution is invisible. I have personally come across top management blaming opening these departments that they have wasting their time and do not contribute to the bank’s growth.
5. Top management is selected based on the political influence not based on their ability leads,  deteriorate the management function of the of the Banks.
6. Importance to cross selling at the cost of the core business by the management for personal interest of earning incentive.
7. RBI also failed in their role as supervisor of the banking system, has never evaluated the technology upgrade and new product Standard Operating Procedures, and also audit of the Banks. Further, till now RBI has not insisted that Risk Management and compliance function should be reported to a different vertical and to RBI directly not to the Chairman of the bank.
8. The management has withdrawn the concurrent auditor position at a medium and a large branch is a unwise action and shows their ignorant to the internal Audit function.
9. Last but not the least, in the previous generation, the employees are wedded to the bank and work for the bank till they retire from service. The will be more committed to work because their stake of PF, pension is in the bank. Now, the generation switch between banks at least once in 3 to 5 years and hence it will difficult for the bank to understand the attitude and values of their employees.

Conclusion:

It is high time the bank should centralize the process of loans, international Banking, liability products and marketing activities from the branch and treat the branches as only a delivery points. Two / three stages of verification of important process such as loan sourcing, appraisal , sanction, administration, processing international banking activities, KYC process etc to protect the interest of the bank. More training to be organized to enrich the knowledge of the work force and also to inculcate the Risk management at each stage of transaction. Enhance the supervision of Reserve Bank of India to protect the public money and also financial sector stability of the country

AADHAAR COULD BE A SINGLE TARGET FOR CYBER CRIMINALS (based on an article in Business standard

AADHAAR COULD BE A SINGLE TARGET FOR CYBER CRIMINALS

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AADHAAR

The benefits of Aadhaar, India’s biometrics-based unique national identity system–the world’s largest–are unclear and the impact of direct benefit transfers it will be used to deliver to the poor is not studied enough, a new study published by an arm of the Reserve Bank of India (RBI) has concluded.

The paper, ‘Biometric and Its Impact in India’, was a part of Staff Papers series published in its October 2017 edition. It is written by S Ananth, an adjunct faculty at the Institute for Development and Research in Banking Technology (IDRBT), which was established by the RBI as an autonomous institute.

Aadhaar is becoming central to India’s public policy with increasing number of programmes being linked to it. And its scope is constantly increasing. In the seven years following its introduction, 1.12 billion Indians or 88.2% of the population have enrolled for Aadhaar, IndiaSpend reported in March 2017.

LINKING OF AADHAAR

Established by Unique Identification Authority of India (UIDAI) under Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016, Aadhaar is now used for direct benefit transfers as well as the distribution of foodgrains and essential commodities–under the public distribution system (PDS)–by the state. It includes various payments linked through the Aadhaar-enabled payment system.

The Supreme Court has extended the deadline of linking of Aadhaar with various welfare schemes up to March 31, 2018.

The paper has flagged issues related to Aadhaar such as problems of access to the last mile, issues with the quality of authentication, unclear financial benefits and security concerns and said there needs to be caution in the manner in which the government is linking more economic programmes and activities with Aadhaar.

Ever since its inception, Aadhaar has been caught in various debates, especially over the issue of the citizen’s right to privacy and threat of information leak. The latest of these controversies is an investigative story reported in The Tribune on January 3, 2018. It alleged that unrestricted access to details of over one billion Aadhaar numbers can be purchased at as little as Rs 500.

By paying Rs 300 more, the details of any Aadhaar card can be printed, the report said. “..[It] is a major security breach,” the deputy director of UIDAI regional officer Chandigarh was quoted to have said.

Although there is news of compromise of the AADHAAR data we have not heard any action initiated against the person who shares these data and also the action initiated to secure the system further to avoid such recurrence in future. Instead, we are hearing the only message to deny such happening.

‘Could be a single target for cybercriminals’

The protection of the data under its control is a major challenge for the UIDAI. “Thanks to Aadhaar, for the first time in the history of India, there is now a readily available single target for cybercriminals as well as India’s external enemies,” the paper said. Any attack on UIDAI data can cripple Indian businesses and administration and would result in a huge loss to the country’s economy and the privacy of its citizens.

Also, since Aadhaar is required for a number of transactions, it is available in the database of a large number of service providers and any breach can compromise the information contained in it. The UIDAI allows private players to build an ecosystem–that is, services and applications–around Aadhaar, which raises questions about the security of the database.

In December 2017, the UIDAI barred Bharti Airtel and Airtel Payment Bank from opening new accounts. It was found that Airtel used the Aadhaar-based verification to open payment bank accounts of their customers without their informed consent. There are allegations that these accounts were linked to receive LPG subsidy. No penal action was taken by the UIDAI for the violation of the Aadhaar Bill.

The paper calls for a more robust and comprehensive law on the use and misuse of the massive amount of data being generated and collected.

The action against Bharti Airtel and Airtel Payment bank is not commensurate with the crime committed by them. Further, we do not know whether the system has been stabilized to avoid such happening in future is also not known.

Problems with last-mile reach

Financial inclusion was one of the goals of Aadhaar since its inception, but a biometric solution tends to be long on promise and short on delivery, according to Ananth.

The paper has cited the example of unspanided Andhra Pradesh to prove this. This was one of the first states to embark on a massive modernization programme for its administrative apparatus by creating various databases that mapped public schemes.

It began in 2002 and by 2014, the state had mapped self-help groups, the National Rural Employment Guarantee Scheme, pensions, student scholarships, disability benefits, health insurance and so on.

But the growing emphasis on the use of Aadhaar as a compulsory ‘know your customer’ (KYC) norm is emerging as an obstacle in banking access for those who had registered with the earlier system in Andhra Pradesh, the report found.

In Kurnool district of Andhra Pradesh, those who opened accounts between 2010 and 2013 are now having problems of access, according to bank correspondents (agents who provide banking services in underbanked areas). Banks have blocked access to those who have not submitted their Aadhaar numbers.

This lack of access has inconvenienced customers who need an account for various direct benefit transfers (DBT). In the case of accounts closed by banks due to non-linking with Aadhaar, money has returned to government agencies. The customer then has to open a new bank account in another bank and then run to various government offices to change their bank account number registered under the scheme.

“Problems with the withdrawal of money at a time when it is needed the most either due to non-working channels or problems with KYC compliance has convinced people that the best place for their money in their pocket or at home under the mattress,” the paper noted.

Also, there is one significant disparity between financial inclusion accounts–zero balance accounts opened for inspaniduals who didn’t have a bank account–and ordinary bank accounts. Customers with financial inclusion accounts are not allowed access to their accounts from non-home branches, but regular accounts are.

Contradicting cost-benefit analyses

There are contradicting cost-benefit analyses about Aadhaar, the paper stated. The government, in a paper put out by the National Institute of Public Finance and Policy, claims that till date it has saved about Rs 146.720 billion using Aadhaar through DBT schemes. But a Canadian non-profit, International Institute of Sustainable Development, has claimed that the government has incurred a loss of Rs 970 million.

Does the change in the system of subsidy delivery–from the current practice of providing tangible commodities and services to cash transfers–actually benefit the poor? There are no clear answers, said the paper. It may inconvenience public distribution system beneficiaries and “the long-term benefits of DBT on the poor (sic) are as yet largely unstudied (sic) and most of the expectations are based on theoretical assumptions”, the paper said.

Biometric authentication: The problem of quality

The Aadhaar Act allows the government to establish the citizen’s identity as a condition for the delivery of subsidies, benefits or services. In such cases, biometric authentication allows the government to reach genuine beneficiaries.

But for this, the biometric authentication system has to be flawless which is not the case in India currently. Failures in biometric authentication between January and June 2017 have fallen by half–from 7.14% to 3.56%, according to Andhra Pradesh’s UID data. However, there was also a 61% fall in the number of authentications in June as compared to January.

Aadhaar allows a beneficiary to access benefits like PDS in any location irrespective of where he is registered. But a high failure rate was detected in this provision in districts with high levels of migration.

Authentications and failures were found to be the highest when a large number of people–migrants and non-migrants–were present in the village. These flaws in the biometric system raised the question if a government can provide benefits to citizens irrespective of where his/her Aadhaar was registered.

“There is no way of cross verifying the quality of biometrics stored, especially by the person who has enrolled,” the study noted.

In a worst-case scenario, a flawed biometric authentication system can lead to ‘identity denials’–wherein a person can be denied the fact that they are who they are, the paper said.

Even assuming that only 5% of Indians are denied government benefits due to issues with Aadhaar, we are still looking at 50 million citizens, said the paper. That is more than the population of many European countries. “Does it mean this exclusion of a small minority is condonable in a democratic society?” the author has asked.`

Virtual ID

In a bid to address privacy concerns, the UIDAI on Wednesday introduced a new concept of 'Virtual ID' which Aadhaar-card holder can generate from its website and give for various purposes, including SIM verification, instead of sharing the actual 12-digit biometric ID.This will give the users the option of not sharing their Aadhaar number at the time of authentication.

The Virtual ID, which would be a random 16-digit number, together with biometrics of the user would give any authorized agency like a mobile company, limited details like name, address, and photograph, which are enough for any verification. Officials said a user can generate as many Virtual IDs as he or she wants. The older ID gets automatically canceled once a fresh one is generated.  The Unique Identification Authority of India (UIDAI) has also introduced the concept of 'limited KYC' under which it will only provide need-based or limited details of a user to an authorized agency that is providing a particular service, say, a telco. The Virtual ID will be a temporary and revocable 16 digit random number mapped to a person's Aadhaar number and the Aadhaar-issuing body will start accepting it from 1 March 2018. From 1 June 2018, it will be compulsory for all agencies that undertake authentication to accept the Virtual ID from their users.

Representational image. Courtesy- News18

Agencies that do not migrate to the new system to offer this additional option to their users by the stipulated deadline will face financial disincentives. "Aadhaar number holder can use the Virtual ID in lieu of Aadhaar number whenever authentication or KYC services are performed. Authentication may be performed using the Virtual ID in a manner similar to using Aadhaar number," a UIDAI circular said. The move aims to strengthen the privacy and security of Aadhaar data and comes amid heightened concerns around the collection and storage of personal and demographic data of individuals. Users can go to the UIDAI website to generate their virtual ID which will be valid for a defined period of time, or till the user decides to change it. They can give this Virtual ID to service agencies along with the fingerprint at the time of authentication. Since the system generated Virtual ID will be mapped to an individual's Aadhaar number itself at the back end, it will do away with the need for the user to share Aadhaar number for authentication. It will also reduce the collection of Aadhaar numbers by various agencies. As per the UIDAI, agencies that undertake authentication would not be allowed to generate the Virtual ID on behalf of Aadhaar holder. The UIDAI is instructing all agencies using its authentication and eKYC services to ensure Aadhaar holders can provide the 16-digit Virtual ID instead of Aadhaar number within their application. As many as 119 crores biometric identifiers have been issued so far and Aadhaar is required as an identity proof of residents by various government and non-government entities.

For instance, the government has made it mandatory for verifying bank account and PAN to weed out black money and bring unaccounted wealth to book. The same for SIM has been mandated to establish the identity of mobile phone users.

Conclusion:

The Aadhaar is very good scheme to identify the people and ensure that all the benefit will reach to needy without the intervention of middlemen. However, the following issues are not yet addressed

1.   The biometric system needs to be improved to protect against misuse of data.

2.   Since it is linked to various other servers such as Income Tax, Public Distribution System. Mobile operations, Payment banks, Banks and Financial institutions, whether these systems have necessary control to protect the data of common men. Any Audit system prevails and what action will be initiated against errant.

3.   The common men do not have any platform to know what are the services are linked to Aadhaar. There should be dashboard required for this purpose.

4.   All the Aadhaar updates required only one authorization mode such as OTP. We need to find a second stage authorization for the AAdhaar to make it more secured.

Based on the article in business standard http://www.business-standard.com/article/economy-policy/rbi-researchers-say-attack-on-aadhaar-can-cripple-economy-doubt-its-pros-118010900158_1.html

INITIAL COIN OFFERING (ICO) --- AN UNDERSTANDING

INITIAL COIN OFFERING (ICO)

What is Initial coin offering?

An initial coin offering is similar in concept to an initial public offering (IPO), both a process in which companies raise capital. In the IPO, the company raises fund from the local / foreign market which is highly regulated, while an ICO is an investment that gives the investor a crypto coin, more commonly known as a coin or a token in return for investment, which is quite different to the issuance of securities as is the case in an IPO investment.

History and Evolution of ICO

The first ICO was by Mastercoin back in 2013, which raised approximately US $600,000 for a project to create a Bitcoin exchange and platform for transactions, while Bitcoin led the way on Cryptocurrencies, becoming the first decentralized cryptocurrency back in 2009, other cryptocurrencies sometime referred to as Altcoins, essentially Bitcoin alternatives have hit the market.

What is a Blockchain?

A blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record, not just financial transactions, but anything of value. It’s essentially a digital spreadsheet that is duplicated across a network of computers. The network is designed to update the spreadsheets on a regular basis. As the information is shared and regularly updated and not stored in a single location, it’s considered to be truly public and easily reconciled.

What are Tokens?

Tokens are coins that are offered during an ICO and would be considered an equivalent to shares purchased in an IPO and are also referred to as crypto coins.

What are Cryptocurrencies?

Cryptocurrencies are a digital or virtual currency that uses cryptography for security. It is not issued by any central authority, such as a central bank, taking it out of the reach of governments who can interfere or manipulate. The transactions are anonymous in nature.

Tokens issued from an ICO will have a value, with the ICO allocating equivalent to equity to the token, which gives the investor ownership with voting rights and, in certain cases, qualifying for dividends.

While this will be the closest format of an ICO to IPOs, the vast majority of ICOs issue tokens that are an asset giving investors access to the features of a particular project rather than ownership of the company itself.

It’s ultimately the process of crowdfunding a new cryptocurrency project, involving a token sale, with the cryptocurrency project raising capital to fund operations, with investors receiving an allocation of the project’s tokens in return.

ICOs tend to be open from between a few weeks to a month, though some have been open for longer and fundraising for a particular ICO possibly taking place on multiple occasions, unlike an IPO which is a onetime event.

Some key characteristics of an ICO include:

·         Participation in a project, Decentralized Autonomous Organization (DAO) or an economy.

·         Coin ICOs generally sell participation in an economy, while token ICOs sell a right of ownership or royalties to a project or DAO.

·         Owning tokens do not always give the investor a right to vote on the direction of a project or DAO, with the rights of the investor embedded within the structure of the ICO, though generally, the investor will have input throughout a project lifespan.

·         The majority of ICOs involve the creation of a defined number of coins or tokens prior to sale.

·         ICO prices are usually established by the creators of the economy, project or DAO.

·         ICOs may have multiple rounds of fundraising, with coins or tokens on offer, increasing in value until the release date, with early investors likely to have greater rewards embedded within their tokens as an incentive.

·         ICOs conclude once the coins or tokens are tradable on the open market.

If we were to compare the key features of ICOs and IPOs, some of the similarities and differences would be as follows:

·         An IPO gives you ownership of the company based on the number of shares acquired, whilst an ICO may only give you rights to a particular project, not the company launching the project.

·         Decision making in IPO companies are centralized with the CEO and the board involved in the day to day running of the business, whilst with ICO companies/projects, decision making is decentralized, giving the investor a material decision making position.

·         Financial data is released as per the rules of the exchange on which the IPO took place, whilst for ICOs, these will either be public by way of the blockchain or as outlined within the white paper and agreement with the investors.

·         Companies launched by way of an IPO must pay taxes, with investors having to pay capital gains tax, whilst for ICOs, the company may not be subject to direct tax, only the investor is required to pay capital gains tax.

·         An IPO is a onetime sale with multiple intermediaries involved in the process of determining the conditions, pricing, etc., whilst ICOs can have multiple rounds of fundraising, with few if any intermediaries, the white paper the blueprint.

·         And finally, stock exchanges and companies listed by IPO are heavily regulated, whilst the exchanges on which ICOs are launched are quite the opposite.

For companies raising capital through ICOs, the advantages include:

·         The project, DAO or economy is not necessarily subject to direct taxation, which in contrast to companies fundraising through IPOs.

·         Sales of coins or tokens are direct, including multiple rounds, with few if any intermediaries required in the process, investors basing investment decisions on the content of white papers prepared by the fundraising entity.

While ICOs are to mainly raise capital for a startup, they are also used to kick-start the sale of a service to be taken to market or the use of a new cryptocurrency.

On most occasions, the investor becomes the consumer of the service being offered by the company raising funds through an ICO, which allows investors to buy coins at a discount, though valuation will ultimately be dictated by supply and demand once released to market.

Before getting into the details, it’s worth providing some detail on blockchains, tokens, and cryptocurrencies.

BREAKING DOWN 'Initial Coin Offering (ICO)'

When a cryptocurrency startup firm wants to raise money through an Initial Coin Offering (ICO), it usually creates a plan on a whitepaper which states what the project is about, what need(s) the project will fulfill upon completion, how much money is needed to undertake the venture, how much of the virtual tokens the pioneers of the project will keep for themselves, what type of money is accepted, and how long the ICO campaign will run for. During the ICO campaign, enthusiasts and supporters of the firm’s initiative buy some of the distributed crypto coins with fiat or virtual currency. These coins are referred to as tokens and are similar to shares of a company sold to investors in an Initial Public Offering(IPO) transaction. If the money raised does not meet the minimum funds required by the firm, the money is returned to the backers and the ICO is deemed to be unsuccessful. If the fund requirements are met within the specified timeframe, the money raised is used to either initiate the new scheme or to complete it.

Early investors in the operation are usually motivated to buy the crypto coins in the hope that the plan becomes successful after it launches which could translate to a higher crypto coin value than what they purchased it for before the project was initiated. An example of a successful ICO project that was profitable to early investors is the smart contracts platform called Ethereum which has Ethers as its coin tokens. In 2014, the Ethereum project was announced and its ICO raised $18 million in Bitcoins or $0.40 per Ether. The project went live in 2015 and in 2016 had an ether value that went up as high as $14 with a market capitalization of over $1 billion.

ICOs are similar to IPOs and crowdfunding. Like IPOs, a stake of the startup or company is sold to raise money for the entity’s operations during an ICO operation. However, while IPOs deal with investors, ICOs deal with supporters that are keen to invest in a new project much like a crowdfunding event. But ICOs differ from crowdfunding in that the backers of the former are motivated by a prospective return on their investments, while the funds raised in the latter campaign are basically donations. For these reasons, ICOs are referred to as crowd sales.

Although there are successful ICO transactions on record and ICOs are poised to be disruptive innovative tools in the digital era, investors are cautioned to be wary as some ICO or crowd sale campaigns are actually fraudulent. Because these fund-raising operatives are not regulated by financial authorities such as the Securities Exchange Commission(SEC), funds that are lost due to fraudulent initiatives may never be recovered.

In early September 2017, the People's Bank of China officially banned ICOs, citing it as disruptive to economic and financial stability. The central bank said tokens cannot be used as currency on the market and banks cannot offer services relating to ICOs. As a result, both bitcoin and ethereum tumbled, and it was viewed as a sign that regulations of cryptocurrencies are coming. The ban also penalizes offerings already completed. 

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Drawback in investing in ICO

The Cryptocurrencies are not regulated by the regulators and hence there will not be any legal support in case of default.

In vetting ICOs, there is no guarantee or sure-fire way of distinguishing the good from the bad, investors needing to avoid scammers who are using ICOs to dupe investors out of funds.

There’s plenty of interest at present from an investor perspective, attributed to sizeable returns that investors have enjoyed to date, demand driving prices, with large prices gains incentivizing investors to lock in profits, which can lead to mass sell-offs that could ultimately wipe out investor money, not to mention the company.

How to Join Initial Coin Offering?

There are a number of sites that list current and up and coming initial coin offerings including Reddit, Cyber Fund and even social media sites such as Facebook.

To invest, the first step of the process is to identify which project or company launch is of most interest and while searching through the ever-increasing number of ICOs hitting the worldwide web, set up a cryptocurrency wallet.

With a lack of formal structure, each ICO will likely have a different set of requirements, though ultimately it’s a simple process of sending tokens upon payment by cryptocurrency to the blockchain identified and listed on the ICO website, which will also provide the investor a step-by-step guide into the investment process.

Public sites, such as Blockchainhub, advise that before investing it is important not to use any kind of an online wallet or exchange. Backers are generally required to export their private keys into another wallet in order to access their new coins, so it is vital to ensure that the wallet’s private keys are exportable.

Companies have looked to facilitate the process by making available functioning online wallets for their ICOs, where the investor can send the money directly to the wallet established, the funds exchanged for tokens using the exchange rate at the time of purchase, with the tokens deposited into the wallet. Others remit the purchased tokens to the address from which the funds were sent.

Investors will also need to be aware that certain wallets may be incompatible with the tokens and are therefore not visible following purchase and receipt. For this reason, it’s essential to have a wallet which permits the export of private keys, so that it is permissible to transfer the tokens to a new compatible wallet.

It’s become far simpler since the launch of Ethereum, with creators setting up user-friendly campaigns, with Ethereum’s wallet supporting multiple tokens, making access to purchase tokens far easier than before.

Outside of identifying the ICO itself, due diligence is also recommended in the interest of avoiding scams and Ponzi schemes, with ICO Rating providing would-be investors with a full assessment of the project or company in question and other companies providing some additional background should more details be needed.

Conclusion:

ICO is one more option for the new ventures to raise funds, besides IPO, Venture capital. The IPO is in a highly regulated market and the company has to comply with many regulations and the process is time-consuming. The venture capital is a costly affair. The ICO balance both and hence the company can raise funds with less paperwork and at a cheaper cost. However, for the investor, it is the risky venture and it is invested only to get a higher return on the investment.

based on articles on webpage and readings 

YEAR 2017 -- INDIA SOME IMPORTANT EVENTS

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 (IBC) A view

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 (IBC)

The Financial sector is facing a crisis of mounting Non-performing assets and the initiatives taken by the Government to speed up the process of recovery through DRTs and SARFAESI Act has not effectively addressed the Problem. Gross NPA ratio was 2.7 per cent in 2011, 3.4 per cent in 2012 and 4 per cent in 2013. In 2014 it rose to 4.3 per cent, and further to 5.9 per cent in 2015 and peaked to 9.2 per cent in 2016. With 470 cases admitted by the National Company Law Tribunal (NCLT) under the IBC, most experts are keenly watching the outcome of the first set of 12 big corporate defaulters that lenders have sought to resolve under the RBI’s directive in June this year. RBI will release the next 12 default companies list with a deadline to resolve the same before Dec 2018.

Hence, the Government proposed to amend the Insolvency and Bankruptcy code to give more teeth to the Bankers.

Highlights of the Ordinance

Ø  Prohibit the wilful defaulters, disqualified directors, promoters or management of the defaulting company, and any person who has committed these activities abroad from submitting a resolution plan for restructuring the debt.

Ø  Bars an insolvency professional from selling the property of a defaulter to any such person during liquidation.

Key Issues and Analysis

  

ü  Resolution applicant:  The Ordinance amends to define a resolution applicant as a person who submits a resolution plan after receiving an invite by the insolvency professional to do so.

ü  Eligibility for resolution applicants:  It amends a resolution professional/ Insolvency and Bankruptcy Board will only invite those resolution applicants to submit a plan, subject to certain condition.

ü  Ineligibility to be a resolution applicant:  The amendment prohibits the following persons from submitting resolution plan .

(i)              he is an undercharged insolvent (individual unable to repay his debt),

(ii)                    he is a wilful defaulter identified by the Reserve Bank of India,

(iii)            his account has been identified as a non-performing asset for more than a year,

(iv)                he has been convicted of an offence punishable with two ormore years of imprisonment,

(v)                he has been disqualified as a director under the Companies Act, 2013,

(vi)               he has been prohibited from trading in securities,

(vii)               he has indulged in undervalued or fraudulent transactions,

(viii)             he has executed an enforceable guarantee in favour of a person who is a creditor to a defaulter undergoing a resolution process,

(ix)               he is connected to any such person mentioned above (including promoters or people in control of the defaulting firm during the implementation of the resolution plan), or

(x)                he has indulged in any of these activities outside India.

ü  Approving resolution plan: The Ordinance amends to state that the committee will approve this resolution plan by 75% majority subject to any other conditions specified by the Insolvency and Bankruptcy Board.

ü  The Ordinance prohibits the committee of creditors from approving a resolution plan submitted before the promulgation of this Ordinance, where the plan has been submitted by a person ineligible to be a resolution applicant.

ü   Liquidation: Ordinance prohibits the insolvency professional from selling the property to any person who is ineligible to be a resolution applicant.

ü  Penalties: Provision to specify that any person contravening provisions of the Code for which no penalty has been specified will be punishable with a fine ranging between one lakh rupees to two crore rupees.

ü  Loan defaulters can not participate in bidding under the insolvency proceedings after paying due interest and making their bad loan accounts operational,

What is in it for banks?

At present the bank has to get a buyer and accept a huge haircut to get ride of the NPA otherwise they will be left with nothing if the company goes into liquidation.  Insolvency & Bankruptcy Code is likely to play an important role in addressing the non-performing assets (NPA) of the banking sector. The NPA affects the CRAR of the banks thereby affecting the economic growth due to poor credit off take.  

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1.   In terms of Section 14(1)(c) of the Insolvency and Bankruptcy Code, 2016 the Code takes  precedence over the DRT Act and SARFAESI Act that during the insolvency resolution process

2.   “All pending proceedings are stayed for a period of 180 days from the date of admission of the application to initiate such proceeding in terms of Section 12 of the Code”

3.    The Code devises two separate processes for corporate insolvency matters and individual/ un-incorporated bankruptcy matter. Part II of the Code deals with corporate insolvency mechanism pertaining to companies incorporated under the Companies Act, 1956 and 2013 and limited liability partnership incorporated under the Limited Liability Partnership Act, 2008; matters in this regard will be dealt by the National Company Law Tribunal. Part III deals with the bankruptcy process for individuals and partnership firms (unincorporated entities) and is maintainable before the Debt Recovery Tribunal. Both Parts II and III provide a detailed procedure for declaring a company, LLP, individual, or unincorporated entity.

4.   Section 14 of the Code the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:, on the insolvency commencement date        

(a)        The institution/ continuation of any pending including execution of judgment or decree..

(b)         Transferring, encumbering, alienating, or disposing of corporate debtors assets.

(c)          Any action to foreclose, recover, or enforce any security interest created by the corporate debtor in respect of its property including SARFAESI act

(d)         The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.

(e)         The provisions shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.

(f)           The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process except liquidation process.

(g)        that all pending proceedings are stayed for a period of 180 days from the date of admission of the application to initiate such proceeding.

(h)         The second stage that the security held by a creditor may be affected with respect to a corporate debtor is under the liquidation order. The Secured creditor will have two option

(a)        A secured creditor can choose to relinquish his/her security interest and be part of the liquidation process with preference of distribution; or

(b)        A secured creditor can choose to stay outside the liquidation process and enforce his/her security interest.

Concerns ahead:

Though the legislature has made extensive efforts to bring harmony between these laws, it is yet to stand the test of implementation. Some immediate concerns are as follows:

1. Time-bound insolvency resolution requires the establishment of several new entities.

2. Interpretation and harmonization of various laws, leading to delay in insolvency proceedings.

3. Harmonization for the interplay of the different laws will have to be done.

4. Applicability of the CDR and JLF proceedings on the Code will have to be addressed separately.

Though the provisions are yet to be examined by the courts of law, Section 14(1)(c) of the Code clearly provides that during the insolvency resolution process as defined in the Code, the Code takes precedence over the DRT Act and SARFAESI Act.

Conclusion

We trust and hope that the NCLT and Debt Recovery Tribunal under the Code will function effectively and follow the timelines.  However, it is our experience that the objectives were not achieved due to the delayed legal process, ignorance of the banks, in case DRT act and SARFAESI act and the same should not happens in IBC also.

BASED on the Governement notifications and selected readings in Internet