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Finance Ministry appoints auditors without consulting RBI, step aimed at avoiding conflict of interest
May, 20th 2013

The government has appointed auditors for the Reserve Bank of India after consulting with the Comptroller & Auditor General (CAG), reversing the earlier practice of involving the central bank in the selection process.

The two auditors appointed by the government are V Sankar Aiyar & Co and Haribhakti & Co.

A senior government official confirmed the development, explaining that the decision not to consult with RBI was taken to avoid what he described as a "conflict of interest".

"It was not a good corporate governance practice," the official said.

A detailed email sent to RBI on the selection process and seeking confirmation on the names of the selected auditors did not elicit any response till the time of filing this story.

The decision was taken earlier this month, say officials familiar with the development. Formal appointment letters will be issued soon, they said.

A senior official with one of the CA firms appointed as auditors confirmed the appointment.

"We are yet to get the (formal) appointment letter from RBI, so we are not in a position to comment," the auditor said, requesting anonymity.

RBI and the finance ministry have appeared to be at odds over many issues in recent months, notably over the conduct of monetary policy with senior ministry officials often seemingly discontented over the pace of interest rate cuts by the central bank. There is also a less high-profile difference over dividends declared by RBI out of its profits.

In the 2013-14 budget, the government has assumed 43,996 crore in dividends from the Reserve Bank of India and state-run banks, a sharp increase from 25,447 crore the year before.

Finmin expects more dividend

Finance Minister P Chidambaram had earlier said there is a point of view that RBI can give more dividend as it has a very large income. "It puts it away in many reserves wisely but surely they have the capacity to pay us more by way of dividend," he had said.

In 2011-12, the central bank had paid a dividend of 16,010 crore to the government. Some experts say the central bank needs high reserves to manage its market operations better. The official quoted earlier said the decision to appoint auditors without consulting the RBI is not related to dividends.

"This has nothing to do with arm-twisting RBI to give more dividend," said the official, who spoke on condition of anonymity. The finance ministry has been reviewing RBI's balance sheet over the past year. In 2012, the ministry had reviewed the expenditure and reserves position of RBI after the central bank indicated it was not in position to pay interest on the reserves that banks maintain with it.

The finance ministry had then suggested that RBI should pay 7% interest on the mandatory percentage of deposits banks have to park with the central bank, called the cash reserve ratio ( CRR).

The ministry had pitched it as a measure to help lower rates even if the central bank does not ease monetary policy. It had argued that major central banks either do not mandate a reserve ratio or pay interest on the mandatory reserves they ask banks to set aside.

Under the existing mechanism for the appointment auditors, the CAG provides a list of CA firms eligible for appointment as statutory central auditors. In case of RBI, two central auditors and four local auditors were being appointed by the finance ministry in consultation with RBI.

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