LEGAL FRAMEWORK OF BANKING

MBA II Year (III SEM)

Unit 5

Laws With Reference to Banking Operations

The Right to Information Act 2005:

The Right to Information Act, 2005 was enacted with intent to provide for setting out the
practical regime of right to information for citizens to secure access to information under
the control of public authorities, in order to promote transparency and accountability in
the working of every public authority. The Act aims at containing corruption and holding
the Governments and their instrumentalities accountable to the governed by providing
access to information. The Act also creates machinery for ensuring effective
implementation of the Act.

Applicability:

The Act applies both to Central and State Governments and all public authorities. A public
authority (sec. 2(h)) which is bound to furnish information means any authority or body
or institution of self-government established or constituted (a) by or under the
Constitution, (b) by any other law made by Parliament, (c) by any other law made by State
Legislature, (d) by a notification issued or order made by the appropriate Government
and includes any (i) body owned, controlled or substantially financed, (ii) non-
government organization substantially financed - which, in clauses (a) to (d) are all,
directly or indirectly funded by the appropriate Government.

Definition:

Information:

The Act defines information in sec. 2(f) as any material in any form, including the records,
documents, memos, e-mails, opinions, advices, press releases, circulars, orders, log books,
contracts, reports, papers, samples, models, data material held in any electronic form and
information relating to any private body which can be accessed by a public authority

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under any law for the time being in force. Sec. 2(i) defines the word record as including
(a) any document, manuscript and file, (b) any microfilm, microfiche and facsimile copy
of a document, (c) any reproduction of image or images embodied in such microfilm and
(d) any other material produced by a computer or any other device.

Right to Information:

The right to information is defined in sec. 2(j) as a right to information accessible under
the Act which is held by or under the control of any public authority and includes a right
to (i) inspection of work, documents, records, (ii) taking notes, extracts or certified copies
of documents or records, (iii) taking separate samples of material, (iv) obtaining
information in the form of diskettes, floppies, tapes, video cassettes or in any other
electronic mode or through printouts where such information is stored in a computer or
in any other device.

Key Provisions:

Section 2(h): Public authorities means all authorities and bodies under the Constitution
or any other law, and inter alia includes all authorities under the Central, state
governments and local bodies. The civil societies substantially funded, directly or
indirectly, by the public funds also fall within the ambit

Section 4 (1)(b): Maintain and proactively disclose information.

Section 6: Prescribes simple procedure for securing information.

Section 7: Fixes time limit for providing information(s) by PIOs.

Section 8: Only minimum information exempted from disclosure

Section 19: Two tier mechanism for appeal

Section 20: Provides penalties in case of failure to provide information on time, incorrect,
incomplete or misleading or distorted information.

Section 23: Lower courts are barred from entertaining suits or applications. However,
the writ jurisdiction of the Supreme Court and high courts under Articles 32 and 225 of
the Constitution remains unaffected.

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The Prevention of Money Laundering Act 2002:

Introduction:

The Prevention of Money Laundering Act, 2002 was enacted to prevent money
laundering and to provide for the confiscation of property derived from, or involved in,
money laundering. The banking machinery has been used by the persons indulging in
money laundering. Financial Institutions and Intermediaries has been included in the
Act. The Central Government in consultation with the Reserve Bank of India has framed
the rules.

Obligations of Banking Companies, Financial Institutions and Intermediaries:

Every banking company, financial institution and intermediary is required to

(a) Maintain a record of all transactions, of the nature and value specified in the rules
whether such transactions comprise of a single transaction or a series of transactions
integrally connected to each other, and where such a series of transactions take place
within a month;

(b) Furnish information of the transactions to the director within the prescribed time;

(c) Verify and maintain records of the identity of all its clients. The records shall be
maintained for ten years from the date of cessation of the transactions between the
clients and the banking company, financial institution or intermediary. The director
appointed by the Central Government, has the right to call for the records and make such
inquiry or cause an enquiry to be made. If he finds that the banking company, financial
institution or intermediary has not complied with the requirements he may impose a fine
on the banking company which shall not be less than ten thousand rupees but may extend
to one lakh rupees. The Act also specifically provides that the banking companies and
their officers shall not be liable to any civil proceedings against them for furnishing
information.

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Records To Be Maintained:

The Act envisages the following records shall be maintained by every banking company,
financial institution or intermediary, namely:

(A) all cash transactions of the value of more than rupees ten lakh or its equivalent in
foreign currency;
(B) all series of cash transactions integrally connected to each other which have been
valued below rupees ten lakh or its equivalent in foreign currency where such series
of transactions have taken place within a month;
(C) all cash transactions where forged or counterfeit currency notes or bank notes have
been used as genuine and where any forgery of a valuable security has taken place,
(D) all suspicious transactions, whether or not made in cash and by way of:
i. deposits and credits, withdrawals into or from any accounts in whatsoever name
they are referred to in any currency maintained by way of:
a. cheques including third party cheques, pay orders, demand drafts, cashiers
cheques or any other instruments or payment of money including
electronic receipts or credits and electronic payments or debits; or
b. travelers cheque; or
c. transfer from one account within the same banking company, financial
institution and intermediary, as the case may be, including from or to
Nostro and Vostro accounts; or
d. any other mode in whatsoever name it is referred to;
ii. credits or debits into or from any non-monetary accounts such as a demat
account, security account in any currency maintained by the banking company,
financial institution and intermediary, as the case may be;
iii. money transfer or remittances in favour of own clients or non-clients from India
or abroad and to third party beneficiaries in India or abroad including
transactions on its own account in any currency by any of the following:
a. Payment orders, or
b. Cashier cheques; or
c. Demand drafts; or
d. Telegraphic or wire transfer or electronic remittances or transfer; or

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 e. Interest transfers; or
f. Automated clearing house remittances; or
g. Lock box driven transfers or remittances; or
h. Remittances for credit or loading to electronic cards; or
i. Any other mode of money transfer by whatsoever name it is called;
iv. loans and advances including credit or loan substitutes, investments and
contingent liability by way of:
(a) subscription to debt instruments such as commercial paper, certificate of
deposits preferential shares, debentures, securitised participation, inter-bank
participation or any other investments in securities or the like whatever form and
name it is referred to; or
(b) Purchase and negotiation of bills, cheques and other instruments; or
(c) foreign exchange contracts, currency, interest rate and commodity and any
other derivative instrument in whatsoever name it is called; or
(d) Letters of credit, standby letters of credit, guarantees, comfort letters, solvency
certificates and any other instruments for settlement and/or credit support.
v. Collection service in any currency by way of collection of bills, cheques,
instruments or any other mode of collection in whatsoever name it is referred to.

Procedure for Maintaining Information:

The information as to the transactions shall be maintained in hard and soft copies in
accordance with the procedure and manner as may be specified by the RBI or SEBI.
Banking company shall have to evolve a mechanism for maintaining such information in
such form and at such intervals as may be specified by the RBI or SEBI. It is the duty of
the banking company to observe the procedure and manner of maintaining the
information as specified by the RBI or SEBI.

The principal officer of a banking company shall furnish the information in respect of the
transaction every month to the director by the seventh day of the succeeding month. If
the transactions relate to (a) forged or counterfeit currency notes or bank notes or
forgery of valuable security or (b) all suspicious transactions, whether or not made in
cash shall be promptly furnished in writing or by way of fax or electronic mail to the
director not later than three working days from the date of occurrence of such
transactions.

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Information Technology Act 2000:

This Act aims to provide the legal infrastructure for e-commerce in India which involves
the use of alternatives to paper based methods of communication and storage of
information and also to facilitate electronic filing of documents of Government agencies.
Therefore the Act facilitated the amendments to Indian Penal Code, the Indian Evidence
Act, 1872, the Bankers' Books Evidence Act, 1891 and the Reserve Bank of India Act, 1934
and for matters connected therewith or incidental thereto. And the cyber laws have a
major impact for e-businesses and the new economy in India. So, it is important to
understand what the various perspectives of the IT Act, 2000 are and what does it offer.
The Information Technology Act, 2000 also aims to provide the legal framework so that
legal sanctity is accorded to all electronic records and other activities carried out by
electronic means. The Act states that unless otherwise agreed, an acceptance of contract
may be expressed by electronic means of communication and the same shall have legal
validity and enforceability.

Definitions:

1. The IT Act defines "Data" as representation of information, knowledge, facts, concepts

which have been prepared in a formalized manner and processed or intended to be
processed in a computer system or computer network (Section 2(o)).
2. "Electronic Form" refers to any information generated, sent, received or stored in media,
magnetic, optical, computer memory, micro film, computer generated micro fiche or
similar device (section 2 (r) ) and "Electronic Record" refers to data, record or data
generated, image or sound stored, received or sent in an electronic form (section 2(t)).
3. "Information" includes data, message, text, images, sound, voice, codes, computer
programmes, software and databases.
4. "Intermediary" refers to any person who on behalf of another person receives, stores or
transmits that record or provides any service with respect to that record. The definition
of intermediary includes telecom service providers, network service providers, internet
service providers, web hosting service providers, search engines, online payment sites,
online-auction sites, online market places and cyber cafes (Section 2(w)).

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Electronic Governance:

Chapter III of the Act deals with electronic governance and provides that information or
any other matter shall be in writing or in the typewritten or printed form, then
notwithstanding anything contained in such law, such requirement shall be deemed to
have been satisfied if such information or matter is

A. Rendered or made available in an electronic form; and

B. Accessible so as to be usable for a subsequent reference. The said chapter also
details recognition of Digital signatures. The said chapter also details the legal
recognition of Digital Signatures.

Digital Signature Certificates:

Chapter VII of the Act deals with the scheme of things relating to Digital Signature
Certificates. The duties of subscribers are also enshrined in the said Act.

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