BUSINESS PROHIBITED

FOR
BANKING COMPANIES

(BANKING LAW PROJECT)

SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES

(UNIVERSITY OF DELHI)
 INTRODUCTION

 A Very apt topic, given that the worst financial storm since the
1930s is only gradually calming down.

Banks have taken centre stage in the ongoing financial and economic
crisis.

Any definitive resolution to the crisis essentially hinges on banks

regaining financial health and public confidence.

Through this project, we take a closer look at certain aspects of our

banking regulations framework.

SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES

(UNIVERSITY OF DELHI)
WHAT’S SPECIAL ABOUT BUSINESS OF BANKING
A bank is “an institution whose current operations consist in
granting loans and receiving deposits from the public”. However,
banks typically conduct a broader range of activities, which can be
subsumed under the following three functions: 

First, banks provide the public with liquidity (money) and payment
services through their deposit-taking business.

Second, banks transform assets in terms of denomination, quality

and maturity, as well as manage the associated risks.

Third, banks process information and monitor borrowers using

specialised technologies.

SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES

(UNIVERSITY OF DELHI)
Now we shall investigate the topic in light of THE
BANKING REGULATION ACT, 1949 – with
special focus on SECTIONS 6, 8 and 9.

SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES

(UNIVERSITY OF DELHI)
 SECTION 6 AT A GLANCE….
Forms of business in which banking companies may engage. — (1) In
addition to the business of banking, a banking company may engage in any
one or more of the following forms of business, namely: —

(a) the borrowing, raising, or taking up of money; the lending or advancing

of money either upon or without security; the drawing, making, accepting,
discounting, buying, selling, collecting and dealing in bills of exchange,
hoondees, promissory notes, coupons, drafts, bills of lading, railway
receipts, warrants, debentures, certificates, scrips and other instruments and
securities whether transferable or negotiable or not; the granting and issuing
of letters of credit, traveller's cheques and circular notes; the buying, selling
and dealing in bullion and specie; the buying and selling of foreign
exchange including foreign bank notes; the acquiring, holding, issuing on
commission, underwriting and dealing in stock, funds, shares, debentures,
debenture stock, bonds, obligations, securities and investments of all kinds,

SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES

(UNIVERSITY OF DELHI)
the purchasing and selling of bonds, scrips or other forms of securities on behalf
of constituents or others, the negotiating of loans and advances; the receiving of
all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise;
the providing of safe deposit vaults; the collecting and transmitting of money and
securities;

(b) acting as agents for any Government or local authority or any other person or
persons; the carrying on of agency business of any description including the
clearing and forwarding of goods, giving of receipts and discharges and otherwise
acting as an attorney on behalf of customers, but excluding the business of a
managing agent or secretary and treasurer of a company;

(c) contracting for public and private loans and negotiating and issuing the same;

SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES

(UNIVERSITY OF DELHI)
(d) the effecting, insuring, guaranteeing, underwriting, participating in
managing and carrying out of any issue, public or private, of State, municipal
or other loans or of shares, stock, debentures, or debenture stock of any
company, corporation or association and the lending of money for the purpose
of any such issue;

(e) carrying on and transacting every kind of guarantee and indemnity

business;

(f) managing, selling and realising any property which may come into the
possession of the company in satisfaction or part satisfaction of any of its
claims;
 
(g) acquiring and holding and generally dealing with any property or any
right, title or interest in any such property which may form the security or part
of the security for any loans or advances or which may be connected with any
such security;

SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES

(UNIVERSITY OF DELHI)
(h) undertaking and executing trusts;
 
(i) undertaking the administration of estates as executor, trustee or otherwise;

(j) establishing and supporting or aiding in the establishment and support of

associations, institutions, funds, trusts and conveniences calculated to benefit
employees or ex-employees of the company or the dependents or connections
of such persons; granting pensions and allowances and making payments
towards insurance; subscribing to or guaranteeing moneys for charitable or
benevolent objects or for any exhibition or for any public, general or useful
object;

(k) the acquisition, construction, maintenance and alteration of any building or

works necessary or convenient for the purposes of the company;

(l) selling, improving, managing, developing, exchanging, leasing,

mortgaging, disposing of or turning into account or otherwise dealing with all
or any part of the property and rights of the company;

SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES

(UNIVERSITY OF DELHI)
(m) acquiring and undertaking the whole or any part of the business of any
person or company, when such business is of a nature enumerated or described
in this sub- section;
 
(n) doing all such other things as are incidental or conducive to the promotion or
advancement of the business of the company;
 
(o) any other form of business which the Central Government may, by
notification in the Official Gazette, specify as a form of business in which it is
lawful for a banking company to engage.

(2) No banking company shall engage in any form of business other than those
referred to in sub-section (1).

SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES

(UNIVERSITY OF DELHI)
 SECTION 8 – PROHIBITION OF
TRADING

Notwithstanding anything contained in section 6 or in any contract, no banking

company shall directly or indirectly deal in the buying or selling or bartering of
goods, except in connection with the realisation of security given to or held by it,
or engage in any trade, or buy, sell or barter goods for others otherwise than in
connection with bills of exchange received for collection or negotiation or with
such of its business as is referred to in clause (i) of sub-section (L) of section 6:

Explanation. — For the purposes of this section, "goods" mean every kind of
movable property, other than actionable claims, stocks, shares, money, bullion
and specie, and all instruments referred to in clause (a) of sub-section (L) of
section 6.

SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES

(UNIVERSITY OF DELHI)
 SECTION 9 – DISPOSAL OF NON-BANKING
ASSETS
Notwithstanding anything contained in section 6, no banking company shall hold
any immovable property howsoever acquired, except such as is required for its
own use, for any period exceeding seven years from the acquisition thereof or
from the commencement of this Act, whichever is later or any extension of such
period as in this section provided, and such properly shall be disposed of within
such period or extended period, as the case may be:

Provided that the banking company may, within the period of seven years as
aforesaid deal or trade in any such property for the purpose of facilitating the
disposal thereof:

Provided further that the Reserve Bank may in any particular case extend the
aforesaid period of seven years by such period not exceeding five years where it
is satisfied that such extension would be in the interests of the depositors of the
banking company.

SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES

(UNIVERSITY OF DELHI)
INTERPRETATION, IMPLICATIONS AND AMENDMENTS
(SECTION 8)
 In the case of banks, Section 6 of the Banking Regulation Act lists the
businesses that banks can engage in, while Section 8 expressly states that no
bank shall "directly or indirectly deal in the buying or selling or bartering of
goods, except in connection with the realisation of security given to or held by
it, or engage in any trade, or buy, sell or barter goods for others otherwise than
in connection with bills of exchange received for collection or negotiation".

 Goods, in turn, mean "every kind of movable property", barring those

instruments mentioned in Section 6 (including bullion and specie).

 The prohibition in dealing with goods (except for collateral purposes) has
been interpreted as a ban on banks to trade in commodity derivatives.

SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES

(UNIVERSITY OF DELHI)
The finance ministry, now however, has amended two main clauses of:

 The Securities Contracts (Regulation) Rules, 1957

 The Securities Contracts (Regulation) Act 1956,

which would substantially widen participation in commodity futures market.

The amendments now permit stock brokers as also banks and other entities
(that were hitherto restricted by their respective statutes) to trade in commodity
futures.

Further, to allow banks and other entities, the notification indicates Section 8 of
the BRA, 1949 also has been amended to permit banks under the second
schedule of the Reserve Bank of India Act, 1934, and other entities, like the
Export Import (EXIM) Bank of India, National Bank for Agriculture and Rural
Development (NABARD) and the National Housing Bank (NHB), to trade in
commodity futures.

SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES

(UNIVERSITY OF DELHI)
These amendments were in line with the recommendation of the KR
Ramamoorthy Committee, which submitted its report in February 2003. The
committee was set up to look into the various aspects of participation by banks
and securities brokers in commodity futures.

The case for allowing banks’ entry into commodity futures trading had been
argued not only to boost liquidity and turnover volumes, but also to provide them
with a protective cover against default on agricultural loans. In the new
arrangement, banks would lend to farmers or cooperatives and simultaneously
encourage them to sell into futures contracts. This would help reduce the risk of
farmers defaulting on their loans in the event of a fall in spot commodity prices.

SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES

(UNIVERSITY OF DELHI)
INTERPRETATION, IMPLICATIONS AND AMENDMENTS
(SECTION 9)

Section 9 of the BRA Act, which deals with disposal of non-banking assets,
says that no banking company can hold any immovable property, howsoever
acquired, except such as is required for its own use for any period exceeding
seven years from the acquisition thereof or from the commencement of this Act,
whichever is later.

After an amendment in 2002 however, banks can now afford to wait it out to
dispose off the seized immovable assets like land, building and plant &
machinery at the right price. The seven year disposal clause can lead to distress
sale of the seized assets.

SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES

(UNIVERSITY OF DELHI)
Another major relief for the banks was the passing of the
SARFAESI(Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest) Act in 2002. This Act eliminates the need for
court intervention in every sale of seized immovable property as was the case
under the BRA,1949.

The SARFAESI Act provides for the enforcement of security interest for
realisation of dues without the intervention of courts or tribunals. The Act
provides for the sale of financial assets by banks and financial institutions to
securitisation and reconstruction companies. Under this Act, banks and
institutions can seize the assets of any defaulter after serving a 60-day notice
period, and sell the assets to recover the dues. If a defaulter wants to file an
appeal at a DRT (Debt Recovery Tribunal) against the lender's move, under
Section 17 (2) of the Act, it needs to deposit 75 per cent of the claim by the
lenders with the DRT.

But after the ruling in the MARDIA Chemicals Vs ICICI Bank, the deposit
clause of 75 per cent has been struck down: the court held that Section 17 (2) of
the Act was blocking the ability to take legal recourse against seizure notices. 
SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES
(UNIVERSITY OF DELHI)
 CONCLUSION
The regulations set out in Section 8 and Section 9 of the Banking
Regulation Act, 1949 are not meant to cripple the banks’ hands; but
indeed to promote healthy banking practices. We see from this paper, that
though the banking industry started out more on the conservative side
with strict regulations, these restrictions have been more or less loosened
with the gradual maturing of the Indian Banking Industry.
 
In view of the above research, we must say that this paper indeed has led
to value-addition for the team. Also, we have explored the term:
“Business prohibited for banking companies” in quite a disective light-
bringing before us some of the bare fundamentals of the banking
regulations framework.

SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES

(UNIVERSITY OF DELHI)
 THANK - YOU

Presented By:
Rohitashwa Aggarwal (15919)
Pritom Das (15920)
Preetika Gupta (15930)
Sarthak Ahuja (15932)
SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES
(UNIVERSITY OF DELHI)