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Unit Ii
Unit Ii
I.
Banks are public service institutions dealing with the funds of the public unlike joint stock companies which obtain the required capital from the shareholders; banks obtain a very large proportion of their working capital from the public in the form of deposits. Hence, in the national interest, there is a need to regulate the working of banks by a separate Act. Unfortunately, in India, there was no separate legislation for banking till 1949 and so banks were brought under the control of the Indian Companies Act. Though the Central Banking Enquiry Committee recommended the need for a separate legislation, it was not given due consideration then. However, subsequent developments like mushroom growth of banks with adequate capital, dishonest management, speculative investment, appointment of incompetent directors for long periods with high salaries, poor liquidity of funds etc., necessitated the passing of a separate Act for banking companies. Accordingly, a bill was introduced in March 1948 and was passed in the Parliament in February 1949. It came into force from 16th March 1949. This Act was originally called the Banking Companies Act, 1949 an now it is renamed as the Banking Regulation Act, 1949. The important provisions of the Act have been discussed under the following heads:-
1) Definition of Banking 2) Business of Banking Company and Prohibited Business 3) Capital Requirements 4) Management 5) Maintenance of Liquid Assets 6) Licensing of Banks 7) Opening of New Branches 8) Provisions regarding Loans and Advances 9) Inspection of Banks 10) Powers of the Reserve Bank of India 11) Returns to be submitted 12) Acquisition of Business 13) Winding up of Banking Companies 14) Amalgamation of Banking Companies 15) Penalties
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1. DEFINITION OF BANKING
The business of Banking has been defined in Section 5(b) of the Act as follow:Accepting, for the purpose of lending or investment of deposit, of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. This definition is very comprehensive in the sense that it has clearly mentioned the purpose for which deposits can be accepted and that such deposits must be withdrawable by cheque, draft, order or otherwise. Hence, money lenders, indigenous bankers etc., do not come within the scope of this definition since they do not deal in cheque, draft, order or otherwise. Section 5(c) defines Banking Company , as any company which transacts the business of banking in India. Joint Stock Companies which at present accept huge deposits from public for the purpose of financing their business do not come under the purview of this definition since they do not follow withdrawal by cheque, draft, order etc.
KINDS OF BUSINESS THAT CAN BE DONE:- Apart from the main business that is listed in Section 5(b) of the Act, Banking Companies are allowed to carry on other forms of businesses that are stated in Section 6 of the Act. They are as follows:-
MAIN FUNCTIONS
1) The borrowing, raising or taking up of money. 2) The lending of money with or without security. 3) The granting and issuing of letters of credit of various kinds, traveller s cheque etc. 4) The buying, selling and dealing in bullion. 5) The buying and selling of foreign exchange including foreign currencies.
SUBSIDIARY FUNCTIONS
1) Acting as an agent for individuals, government etc. 2) Carrying on agency business of any description. 3) Contracting, negotiating and issuing public and private loans. 4) Effecting, insuring, guaranteeing, underwriting, and participating in managing and carrying out of any issue, public or private.
MAIN FUNCTIONS
6) The acquiring, holding, issuing on commission, underwriting and dealing in stock, funds, shares, debentures, bonds, securities and investments of all kinds. 7) The purchasing and selling of bonds, scripts etc., on behalf of customers or receiving such securities for safe custody. 8) The providing of safe deposits. 9) The collection and transmission of money and securities.
SUBSIDIARY FUNCTIONS
5) Carrying on and transacting every kind of guarantee and indemnity business. 6) Managing, Selling and realizing any property which may come into its possession in satisfaction of any claims. 7) Acting as trustees for customers. 8) Undertaking of the administration of estates. 9) Doing any other business notified by the Central Government as lawful for a banking company.
KINDS OF BUSINESS THAT CANNOT BE DONE:- It was found that a combination of trading with banking business was one of the major causes for bank failures. Taking into consideration the above fact, the present Act, by Section 8, prohibits a bank from carrying on trading activities which are not incidental to banking business. However, it can deal in those businesses that are permitted under Section 6 of this Act. For Example:- it can buy or sell securities for the purpose of realizing them, it can deal with stocks, shares money etc., and it can act as trustees, executor, administrator etc. Again Section 19 of the Act prohibits a banking company from entering into trading activities by acquiring a control in non-banking companies by:1) The formation of subsidiary companies; 2) The holding of shares in other companies beyond a certain limit; 3) The holding of shares in any company in the management of which any managerial personnel of the bank is interested. However, a banking company is permitted to form subsidiaries for the purposes of:a) Undertaking and executing trusts; b) Undertaking the administration of estates as executor; c) Providing safe deposits; d) Carrying on the business of banking exclusively outside India with the prior permission of the Reserve Bank of India.
3. CAPITAL REQUIREMENTS
Previous to the passing of this Act, banks were started with meager capital. Moreover, the relationship between Authorized, Subscribed and Paid-up capital was an exaggerated one. It led to the starting of more bogus companies which failed subsequently within a very short period of their establishment. Again, the Companies Act permitted the Banking companies to create a charge over its uncalled capital and it also allowed issue of ordinary and preference shares which were not at all suitable to banking business. The present Act removes the above said defects. Section 11 of the Act lays down the minimum capital requirement. It classifies banks into Foreign Banks and Indian Banks for that purpose. According to the Section 12, the subscribed capital of the banking company should not be less than one-half of the authorized capital and the paid-up capital should not be less than one-half of the subscribed capital. If the capital has to be increased, the above rules must be complied with within a maximum period of 2 years. Again, it has been provided that no banking company will create any charge upon its uncalled capital. New bank licensing norms announced by the RBI on 3rd January 2001 stipulates initial paid up capital of Rs.100 crore. It has to be raised to Rs. 300 crores within 3 years of commencement of business. Although Section 11 prescribes a minimum capital of Rs.5 lakh only, RBI currently prescribed a minimum paid up capital of Rs. 100 crore for setting up of a new banking company. A foreign bank setting up of business in India is required to bring in a minimum of $10 million to India as capital.
4. MANAGEMENT
Board of Directors:- Section 10(A) provides that at least 51% of the Board of Directors of a banking
company must consist of persons who have special knowledge in (i) Accounting, (ii) Agricultural and rural economy, (iii) Banking, (iv) Economics, (v) Law etc. But they should not be proprietors of any trading, commercial or industrial concern.
Whole time Chairman:- Every banking company shall have a chairman who will be a professional
banker. He shall be entrusted with the management of the whole affairs of the banking company subject to the superintendence, control and guidance of the Board of Directors. His appointment shall be made by the banking company subject to the approval of the Reserve Bank of India. Section 10 of the Act lays down that a banking company should not be managed by persons who have been adjudicated insolvent or who have been convicted for criminal offence or by a managing agent or by any person whose remuneration takes the form of commission or of a share in the profits of the company or whose remuneration is excessive in the opinion of the Reserve Bank of India.
6. LICENSING OF BANKS
Section 22 of the Act requires every banking company to obtain a license from the Reserve Bank of India before commencing business. In granting the license, the Reserve Bank of India will consider the following facts after inspecting the banking company concerned: (i) Whether the bank is or will be in position to pay its present or future depositors in full as their claims accrue. (ii) Whether the affairs of the company are not being conducted to the detriment of the interest of the depositors. (iii) In the case of foreign banks, in addition to the above requirements the following must be complied with:(a) The law of the Government of their origin does not discriminate in any way against Indian banks. (b) Their business in India will be in the public interest. (c) They comply with all the provisions of the Act of the country of their origin. If any defects are found out during inspection, the bank concerned will be informed of them and will be asked to rectify them. The Reserve Bank of India will call for periodical reports to watch the progress of the bank. If defects are immaterial and the progress is satisfactory, license will be issued. Otherwise it will be cancelled or refused. However, sufficient opportunity will be given to the bank to show progress before refusing or cancelling the license. If dissatisfied, the aggrieved bank may apply to the Central Government for final decision.
(ii) The consent of the Reserve Bank of India is not necessary when the banking company changes the place of business within the same city or when an office is opened for a temporary period not exceeding 6 months. (iii) The Reserve Bank of India will grant permission only when it is satisfied that:(a) The financial condition and management of the bank concerned is sound, (b) Its capital structure is adequate, (c) The earnings prospects of the proposed branch are good, and (d) The opening of new branch or changing the location is in the interest of the public. (iv) The reserve Bank of India may also grant conditional license in which case the permission will be revoked if the bank fails to comply with any such condition.
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(ii) The margins to be prescribed for secured advances, (iii) The maximum amount of advances bank may give to any company, firm or individual, taking into account the amount of the paid-up capital, reserves and other related matters of the bank, (iv) The maximum amount upto which guarantees may be given taking into consideration the facts mentioned above, (v) The ratio of interest and other terms and conditions on which loans/guarantees are given.
9. INSPECTION OF BANKS
The present Act permits the Reserve Bank of India to conduct inspection of bank on its own initiative with a view to establish sound banking traditions by drawing the attention of banks concerned to their defects and unsatisfactory working methods. Section 35 of the Act contains the following provisions for inspection:(i) The Reserve Bank of India has been given the power to inspect the books of accounts of any banking company.
(ii) During inspection, every director/officer/employee of the bank is under an obligation to produce all books of accounts and documents in his custody and to furnish the information required. (iii) Any officer of the Reserve Bank of India who is conducting inspection has a right to examine any director/officer/employee of the bank under oath. (iv) The Reserve Bank of India may conduct such inspection either on its own initiative or under the direction of the Central Government. (v) In any case, after the inspection is over, the Reserve Bank of India sends a copy of it to the bank concerned to the Government. (vi) On seeing the report, if the Central Government opines that the affairs of the bank are conducted to the interest of depositors, it may give an opportunity to the bank concerned to make a representation.
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meeting or observe the manner in which the affairs of the banks are being conducted. On seeing the report of such deputed officers, the Reserve Bank of India may take suitable action.
11.RETURNS TO BE SUBMITTED
All the banking companies are required to submit the following returns to the Reserve Bank of India in the prescribed form and manner as at the close of business on the last Friday of every month. If the Friday is a public holiday, then at the close of the business on the preceding working day. Returns of liquid assets and liabilities: - Every banking company, under Section 23(3) is required to furnish to the Reserve Bank, a monthly return showing particulars of its assets and time and demand liabilities in India. (ii) Return of unclaimed deposits: - According to Section 26, every banking company is under an obligation to send a statement showing the unclaimed deposits. This return must contain all accounts in India, which have not been operated upon for 10 years. (iii) Monthly returns: - Section 27 requires every banking company to submit the Reserve Bank of India, a monthly return showing its assets and liabilities in India on the last Friday of every month and if it is a public holiday, then on the preceding working day. (iv) Return of annual accounts: - As per Section 31, every banking company shall prepare the final account and the balance sheet and send it to the Reserve Bank of India together with the Auditor s Report. Further, a copy of the above must be displayed in every place of business of the banks. (v) Additional information: - The Reserve Bank of India has the power to call for information regarding the investment of a bank and also the classification of its advance in respect of industry, commerce and agriculture. (i)
Before acquiring the undertaking of any banking company, the Central Government shall give a reasonable opportunity to the bank proposed to be acquired of showing cause against its proposed action.
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The Central Government may, after consultation with the Reserve Bank, make a scheme for carrying out the acquisition of the bank. Compensation shall be paid to the registered shareholders of the acquired bank in accordance with the principles contained in the Fifth Schedule of the Banking Regulation Act, 1949.
(ii) When a banking company fails to implement satisfactorily compromise or arrangement sanctioned by a court, (iii) When the returns, statements etc., furnished to the RBI disclose that the banking company is unable to pay its debts, or (iv) When the continuance of the business is prejudicial to the interests of its depositors.
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(ii) A notice of such meeting must be given to every shareholder of the Bank concerned indicating the time, place and object of the meeting. Such a notice must have been published in at least two newspapers for three consecutive weeks. (iii) The shareholders who have objected to such a scheme of amalgamation are entitled to claim the value of the shares held by them. The value of such shares will be determined by the RBI. (iv) Besides the approval of the shareholders, the scheme has to be sanctioned by the RBI. Once it is sanctioned, it is binding on the companies. (v) Again, once the scheme is sanctioned by the RBI the assets and liabilities of the amalgamated banks are transferred to the absorbing company. (vi) The amalgamated banking will cease to function and shall stand dissolved by reason of such amalgamation on a specified date notified by the RBI. A copy of this order must also be sent to the Registrar of Companies.
15. PENALTIES
Section 46 of the Act lays down the following penalties in case of violation of any provision of the Act:(i) For submitting false or inaccurate return, the penalty is imprisonment upto 3 years and fine. (ii) For failure to furnish documents, account or information during inspection, penalty upto Rs. 2,000. If the offence continues, fine of Rs. 100 per day during the continuance of the default. (iii) For receiving deposits in contravention of an order by the Reserve Bank of India, the penalty is fine upto twice of the amount received. (iv) Failure to comply with the provisions of the Act, the penalty is a fine upto Rs. 2,000. Where a default is a continuing one, a further fine of Rs. 100 for every day. (v) Where a default has been committed by a company, every person who, at the time of default was responsible to the company, shall be deemed guilty of the default.
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The Negotiable Instruments Act, 1881 INTRODUCTION In India, there is reason to believe that instrument to exchange were in use from early times and we find that papers representing money were introducing into the country by one of the Mohammedan sovereigns of Delhi in the early part of the fourtheenth century. The word 'hundi', a generic term used to denote instruments of exchange in vernacular is derived from the Sanskrit root 'hund' meaning 'to collect' and well expresses the purpose to which instruments were utilised in their origin. With the advent of British rule in India commercial activities increased to a great extent. The growing demands for money could not be met be mere supply of coins; and the instrument of credit took the function of money which they represented. Before the enactment of the Negotiable Instrument Act, 1881, the law of negotiable instruments as prevalent in England was applied by the Courts in India when any question relating to such instruments arose between Europeans. When then parties were Hindu or Mohammedans, their personal law was held to apply. Though neither the law books of Hindu nor those of Mohammedans contain any reference to negotiable instruments as such, the customs prevailing among the merchants of the respective community were recognised by the courts and applied to the transactions among them. During the course of time there had developed in the country a strong body of usage relating to hundis, which even the Legislature could not without hardship to Indian bankers and merchants ignore. In fact, the Legislature felt the strength of such local usages and though fit to exempt them from the operation of the Act with a proviso that such usage may be excluded altogether by appropriate words. In the absence of any such customary law, the principles derived from English law were applied to the Indians as rules of equity justice and good conscience. The history of the present Act is a long one. The Act was originally drafted in 1866 by the India Law Commission and introduced in December, 1867 in the Council and it was referred to a Select Committee. Objections were raised by the mercantile community to the numerous deviations from the English Law which it contained. The Bill had to be redrafted in 1877. After the lapse of a sufficient period for criticism by the Local Governments, the High Courts and the chambers of commerce, the Bill was revised by a Select Committee. In spite of this Bill could not reach the final stage. In 1880 by the Order of the Secretary of State, the Bill had to be referred to a new Law Commission. On the recommendation of the new Law Commission the Bill was re-drafted and again it was sent to a Select Committee which adopted most of the additions recommended by the new Law Commission. The draft thus prepared for the fourth time was introduced in the Council and was passed into law in 1881 being the Negotiable Instruments Act, 1881 (26 of 1881)
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