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INSTITUTE OF BANKING STUDIES (IBS)

LEGAL & REGULATORY ASPECTS OF BANKING


MODULE A - LEGAL FRAMEWORK OF REGULATION OF BANK
Business of Banking:
Banking is defined in Section 5 (b) of Banking Regulation Act: 1949. Banking means accepting money from
public for lending or investment, repayable on demand and withdrawable by cheque. i.e. a Bank performs
two functions:-

1) Acceptance of public deposits

2) Lending or investment of such deposits

A Banker can accept “deposits” of money only and not anything else. A bank can refuse opening of
accounts of undesirable parties (money laundering and combating financing of terrorism). Bank has to
follow “Know Your Customer” – (KYC) norms for proper identification of customers. The Banking Regulation
Act prohibits any organization other than a Bank to accept deposits withdrawable by cheque.

License for Banking: Every Bank has to obtain license from RBI, under Section 22 of Banking Regulation
Act 1949. For carrying on the business of Banking, Every Banking Company has to use the word “Bank” as
part of its name and no company other than a Bank can use the word “Bank”, “Banking” or “Banker” as part
of its name. Eg: Muthoot, Manappuram, Popular Finance etc; cannot use the word Bank as part of its name.

Acceptance of deposit by NBFC is regulated by RBI, under NBFC Acceptance of Public Deposit
(Reserve Bank) Direction 1998.

Permitted business: Apart from accepting deposits and lending, Banks are authorised to do a variety of
other activities under Section 6 (1) of Bank Regulation Act such as:- drawing , discounting bills of exchange,
buying and selling travellers cheque, draft, letter of credit, buying and selling of foreign exchange, collection
of cheques, hiring out safe deposit lockers, issuing guarantees, NEFT, RTGS, Speed Money, Swift Money,
insurance, issue of stocks/shares, act as trustees, lease, mortgage etc. (with permission of RBI, Banks can
enter into certain activities such as Gold Bullion/Coin sales etc. Now RBI instructed all banks to stop the
same early). Section 8 of Banking Regulation Act prohibits banks from engaging in trading Activity. Section
9 prohibits banks from holding immovable property for more than 7 years, except for their own use.
RBI may extent period by another 5 years.

As per BR Act 1949, single individuals cannot form a Bank. Only a firm, or a company , or an association of
ten or more persons can form a Bank. Banking Regulation Act 1949 deals with regulation of business
control over the management, suspension and winding up of business of the banking companies and the
penalties for the violation of the provisions of the Act

Constitution of Banks: Banks in India fall under the following categories: -

1) Body corporate constituted under special statutes (Banking Regulation Act and Banking

Companies (Acquisition and transfer of properties and undertakings) Act 1970 / 1980): i. e. 19 nationalised
Banks.

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2) State Bank of India and its associates - established under SBI Act 1955 and by separate acts for its
associates. (SBI was established as per the recommendation of “All India Rural Credit Survey Committee”)

3) Company registered under the Companies Act 1956 or a foreign company: -

All private sector Banks, foreign Banks and the new generation Banks fall under this category.

4) Co-operative Banks: A co-operative Bank is a co-operative society registered under Central or State law.

If a co-operative Bank is operating in more than one state, the Central Act applies; in other cases the State
laws apply (Co-operative Society Act 1965).

5) Regional Rural Banks established under RRB Act 2006.

Public Sector Banks: When the Central Government holds not less than 51% of a bank’s shares, the bank
is called a Public Sector Bank.

Reserve Bank of India Act, 1934: The Act was enacted to constitute the RBI (1) to regulate the issue of
Bank notes, (2) for keeping reserves for securing monetary stability in India (3) Operate the currency and
credit system. The Act provides for cash reserves of scheduled Banks for ensuring monetary stability.
(As per Section 42 of RBI Act, CRR to be maintained) Section 18 of the Act provides direct discount of bills
of exchange and promissory notes for regulating credit towards trade, industry and agriculture. SLR is to be
maintained as per section 24 of Bank Regulation Act. The banking regulation act 1949 deals with regulation
of business of banking companies, control over the management of banking companies and suspension
and winding up of banking companies.

RBI has full control over the Banks in India, its management issue of Bank notes, acceptance of deposits by
non-Banking financial institutions, general provisions regarding reserve fund, credit fund, publication of
Bank rate, audit and accounts, penalties for violation of Act are other functions of RBI. The amending Act
introduced setting up of Depositor Education and Awareness Funds (DEAF). Banking Regulation Act 1949
– (Amended in 1965 and also in 2012 – Banking Laws Amendment Act). Initially the Act was applicable to
Banking companies only and subsequently from 1965 (amendment) – Co-operative Bank also covered.
It does not apply to Primary Agriculture Credit Society and Co-operative Mortgage Banks.

RBI as Central Bank and Regulator of Banks/ Bankers Bank/Supervisor of Banks:

The whole capital is held by Central Government with its central office in Mumbai and offices in all state
capitals and some other cities. The RBI has to abide by the directions of the Central Board of Directors,
Central Govt. and the Governor of RBI. The Deputy Governors, Executive directors and other officers in
different grades assist the Governor in the discharge of the Banks functions. RBI is the Banker to Central
Govt. (as per Section 20 of RBI Act) and undertakes Banking business for the Central Govt.. RBI also
inspects Banks and supervises them, issue directions regarding interest rate, lending limits, appointment of
Banking Boards / personnel, amalgamation, winding up, impose penalties etc. RBI is the sole authority for
issue and management of currency in India. RBI issue notes (Rs. 2 to Rs. 10,000/-) as per section 22 of
RBI Act. Ways and means advances to central and state govt. by RBI are the temporary advances to meet
immediate needs when there is interval between expenditure and revenue. The Central Board of Directors

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of the RBI consists of a governor and not more than 4 (four) deputy governors and other directors
nominated by the central govt.

Financial Intelligence Unit (FIU-IND): was set up by Govt. of India – as agency responsible for receiving,
processing, analyzing and discriminating information relating to Suspicious Financial Transaction. FIU-IND
is an independent body reporting directly to Economic Intelligence Council (EIC) headed by Finance
Minister.

Co-operative Banks: A Co-operative Bank is a Co-operative society engaged in the business of Banking
and may be a primary Co-operative Bank, a District Central Co-operative Bank or a State Co-operative
Bank. Their formation and management is regulated by the Co-operative law of the state. The Registrar of
Co-operative societies exercises a wide range of powers on Co-operative societies. Thus there is dual
control of state Govt. and RBI over these Banks.

Co-operative Banks are registered either under the state laws or under the multistate co-operative societies
Act. If a Co-op Bank operates only in one state, the state laws will apply, if it operates in more than one
state, then the central law will apply. As defined in Sec 5 of BR Act, a Co-operative Bank means
a State Co-operative Bank, a Central Co-operative Bank and a Primary Co-operative Bank. A primary
Co-operative Bank is a Co-operative society, other than a primary agricultural credit society.

A State Co-operative Bank is the principal co-operative society in a state with the primary objective of
financing other societies under them such as Dist. Co-op Bank and Primary Co-op Bank etc.

A Central Co-operative Bank is the principal co-operative society in a district with the primary objective of
funding other co-operative societies in the district.

Regulation by other authorities: A Bank is subject to control by so many regulatory agencies like
Companies Act, Labour Act, Income Tax, Service Tax, SEBI, IRDA, and RBI etc.

CONTROL OVER ORGANISATION OF BANKS


To start a new Banking Company, to open a new branch or to shift a branch, permission is required from
RBI. Paid up capital, Shareholders’ rights, constitution of Board of Directors, appointment of Chairman,
formation of subsidiaries, power to remove unsuitable persons, appoint suitable persons etc... in all these
aspects, RBI exercises full control over the organisation and management of banking companies.

Before granting license to a Banking company, the RBI will analyse subjects like whether the company can
pay its present and future depositors in full, whether there is potential scope for expansion of business.
RBI has to be satisfied that the company has an adequate capital structure and earning prospects.

Foreign Banks: RBI will issue license to foreign Banks for opening branches in India subject to certain
conditions. Foreign Banks operating in India has to keep deposit Rs. 15 lacs with RBI, and if it has place of
business at Mumbai or Kolkata or both Rs. 20 lacs to be deposited plus 20 % of the profit for each year.

Local area Banks: RBI has licensed a few Banks for opening in a limited geographical area to ensure
Banking services in that area as Regional Rural Bank. (eg. KGB)

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RBI has the power to cancel the license of any Banking company, if it violates Sec 22 of the B.R Act*.

Branch licensing: Banks have to obtain prior permission of RBI for opening new branches or shifting of a
branch to another town or place other than in the same town. Banks have to submit their request for new
branches, ATMs, Administrative Offices once in a year for consideration as against the earlier practice of
making individual applications for each and every branch. When approved, the permission is valid for one
year before which the branch has to be opened. In the case of Regional Rural Banks (RRB), the application
has to be routed through the National Bank for Agriculture and Rural Development (NABARD) with its
recommendations and comments.

Paid-up Capital, Subscribed Capital and Authorised Capital: The B.R. Act* stipulates that the
subscribed capital of a Banking company shall not be less than half of its authorised capital and the paid-up
capital shall not be less than half of its subscribed capital. If capital is increased, this requirement has to be
complied within two years. To acquire 5 % or more of share capital of a bank, the applicant to get prior
approval from RBI. As per the corporate guidelines of RBI minimum capital requirement for a new private
bank is Rs. 500 Crores.

Voting right of share holders: No ceiling on a person’s holding of shares in B.R. Act*. But as regards
voting right, a share holder can exercise maximum 10% of the total voting rights of all the share holders put
together (which may be increased to 20% by RBI, it is 26%for Private sector Banks ). The share holders of
a Banking company are entitled to dividends only;

A) After all the capitalized expenses are written off.

B) Adequate Provisions have been made for depreciations and bad debts.

C) If CAR is 9% and Net NPA less than 7%.

Commission, Brokerage, Discount etc. on sale of shares should not exceed two and a half (2 ½ %) of the
price at which the said shares are issued.

A banking company shall not hold shares of any company as Pledgee or absolute owner in excess of

30% of paid up capital of that company

or

30% of its own paid-up capital and free reserves, whichever is less. (Section 19 of BR Act)

Subsidiaries of Banking Companies: There are certain restrictions for formation of subsidiaries.
Subsidiaries are permissible only for the spread of Banking in India or otherwise useful or necessary in the
public interest.

Board of Directors: At least 51% of the total number of directors. Should be well qualified in subjects like
Accountancy, agriculture and rural economy, Banking, co-operation, economics, finance, law, small scale
industry. The directors should not have “Substantial interest” in trading, commercial or industrial concerns.

They should not be employees or managers of such trading company.

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Period of directors: Maximum 8 years continuously. But this is not applicable to the chairman or a whole
time Executive Director etc.

Chairman: is appointed from one among the directors by the approval of RBI, the term is for 5 years.
The chairman and Managing Director may be the same person or may be two persons who have special
knowledge or practical experience of the working of a Banking company. The whole time chairman or M.D
of a Banking company is exempted from the requirement of holding qualification shares.

Additional director: one or more additional directors will be appointed by RBI for a term of 3 years.
Temporary vacancies can be filled for a maximum period of 4 months.

Power to remove management: RBI is empowered to remove any Chairman, Director, Chief Executive
Officer of a Banking company if found detrimental to public interest or depositors’ interest. Such person is
prohibited from taking part in management of any banking company for a period not exceeding 5 years.

Corporate Governance

It is a dynamic concept involving corporate fairness, transparency and accountability in the interest of
shareholders, employees, customers and other stake holders. Corporate governance is a way by which the
boards oversee the running of a company by its managers and how board members are accountable to
share holders. In other words it is a yardstick to measure how the company behaves towards its
employees, share holders, customers, and other stake holders. It ensures integrity and efficiency of
financial markets. Good governance protects and facilitates the exercise of shareholders’ rights. It assures
equal treatment of shareholders.

Banks have a special position in corporate governance as they accept and deploy large public funds. The
Basel Committee has issued guidance for sound practices of Corporate Governance. In India apart from
RBI, so many other agencies like Department of Company Affairs, SEBI are involved in the frame work.
Based on so many recommendations and reports submitted by various committees, RBI initiated several
measures to strengthen the corporate governance in the Indian Banking Sector. As per the existing policy,
large industrial houses will be allowed to acquire shares not exceeding 10% of the paid up capital of the
Bank.

Directors and Corporate Governance: The Board of Directors should ensure that the responsibilities of
directors are well defined and the Banks should provide need based training to the directors. As a matter of
desirable practice not more than one member of a family or an associate (partner, employee, and director)
should be on the Board of a Bank. Guidelines have been provided in respect of “fit and proper” criteria for
directors of Banks by RBI. The CEO should satisfy the requirements of the ‘fit and proper’ criteria applicable
for Directors. With regard to Public Sector Banks, the act provides for shareholder Directors to be a person
having ‘fit and proper’ status and the RBI has to notify the ‘fit & proper’ criteria.

ACCEPTANCE OF DEPOSITS
Types of Deposits: Banks may accept both time and demand deposits, from the public. Time deposits
which are fixed / recurring deposits are repayable after an agreed period. Demand deposits which are

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deposits in current a/c and saving a/c are repayable on demand, as per terms and conditions of the
deposits. The period of deposits and rate of interest will be applicable as per norms of RBI.

I. Regulation of acceptance of deposit: Sec 35 A of the B.R. Act* authorizes RBI to give directions to
Banks to regulate acceptance of deposits by Banks. RBI issues directions from time to time whereby
acceptance of deposits is regulated in the interest of banking policy. Opening of account is subject to
conditions like proper introduction and identification. KYC (Know Your Customer) guidelines help the
banks from protecting from fraud. It helps the authorities for taking anti- money laundering measures
and combating finance for terrorism.

RBI currently prescribes minimum and maximum period for which deposits can be accepted. Minimum
period of deposit 7 days - Maximum 120 months.

Unclaimed Deposits: are those deposit which are not operated for 10 years. In the case of fixed deposits
the period of 10 years starts from the expiry of deposit. Banks are required to send the return on the
prescribed format within 30 days of the end of each Calendar year to RBI (Sec 26 of BR Act). Depositor
Education and Awareness fund is created out of UCD. The fund is utilised to create awareness about
banking activities to the public.

Nomination: Sec 45ZA of BR Act provides that a depositor or depositors of a Banking company (including
Co-operative Bank) can nominate one person (nominee can be one person only ) to receive the deposit in
the event of death of depositor. In case nominee is a minor, another guardian is to be appointed to receive
the money on behalf of minor. During the pendency of the deposit, the depositor can any time
cancel/vary/delete/add any nominee’s name. That is, the nomination becomes active only on the death of
depositor. Nomination can be made for articles kept in safe custody or safe deposit lockers.

Loans and advances: Acceptance of deposits is for lending. Lending or making loans and advances is the
core business of a Banking company. Lending may be for short term or long term, secured or unsecured.
RBI issues directions as per section 21 of Bank Regulation Act from time to time regulating the lending
operations, fixes the ROI on various loans and advances, prescribes the maximum loan amount that a
Banking company can grant, prescribes maximum amount up to which guarantees can be given by a
Banking company on behalf of any company, firm or individual. At present regulated interest rate on
advances is applicable only to DRI loans.

Selective Credit Control: It is a tool to control hoarding of essential commodities by availing bank finance.

To curb this tendency RBI has stipulated higher rate of interest and margin for advances against rice, oil,
sugar etc. At present, SCC applies to sugar only.

Restriction on loans and advances: Sec 20 of BR Act* prohibits a Banking company to grant loans or
advances on the security of its own shares, no loans to be granted to its directors, for remitting any debt to
its directors, a Banking company requires prior permission of RBI under Sec 20A of BR Act*.

Regulation of rate of interest: Under Sec 21 and 35A of BR Act*, RBI is authorised to regulate ROI on
deposits as well as loans and advances.

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Interest on deposits: Now liberalization of interest rate has comes which gives increased freedom to
Banks to decide the rates themselves.

Payment of interest on Current Account is prohibited.

Interest on Loans and Advances: RBI regulates the interest rate for loans and advances also including
the lending rate. Accordingly different rates are permissible for small scale Industries, agriculture, large
scale industries etc. Interest may vary on the basis of the period of loan. Now, interest rate on advances
has been deregulated and individual banks are permitted to fix their own interest rates but not below the
base rate. Currently RBI fixes rate for DRI loans only.

Base Rate: Base rate is the minimum rate of interest, which a bank can charge for its loans except the
following; (Earlier it was PLR - Prime Lending Rate)

DRI Advances, Export Advances, loans to its employees, its pensioners, loans to weaker sections,
loan against FDRs.

Banks must review Base Rates at quarterly intervals.

Need for change to BR from PLR

Better transparency in arriving BR by banks. (There was no adequate transparency in PLR)

MCLR - Marginal Cost of funds based Lending Rate

MCLR will replace BR with effect from 1.4.2016.

Difference between BR and MCLR: BR is arrived on the basis of average cost of funds. But MCLR will be
tenor (direction) based. MCLR will be arrived on the basis of

Marginal cost of funds

Cost of maintaining Cash Reserve Ratio

Operating Cost

Tenor premium (i.e. a percentage for direction)

Objective of MCLR: RBI wants to improve the transmission of Policy Rates into lending rates of banks.
(Many banks did not change lending rates substantially, when there was a change in BR)

Banks must calculate MCLR for periods ranging from one day to one year; if necessary for more periods
also. Banks must review MCLR monthly.

Banks should not lend below MCLR with effect 1.4.2016, except for DRI Advances, Export Advances, loans
to its employees, its pensioners, loans to weaker sections, loan against FDRs.

Existing borrowers will have the option to continue with BR or MCLR.

Protection to interest rate: Sec 21A of BR Act* provides that a transaction between a Banking company
and its debtor cannot be reopened by any court on the ground that the ROI charged is excessive. This
gives an overriding effect on the Usurious Loans Act 1918.

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Payment System: Payment and Settlement Systems Act (PSS Act - 2007) The Act provides a legal basis
for Netting and Settlement Finality in respect of Payment Functions. (Payment Functions refer to the system
of settling funds transfer among financial institutions. Clearing Houses function through mutual consents,
and no statutory rules have been formed.)

RBI is the authority in respect of issues relating to Payment Functions.

The Act plays an important role in funds transfer, because except RTGS, other payment systems function
on a “Net Settlement Basis”.

Banking Ombudsman: The Banking Ombudsman is an authority established under the Banking
Ombudsman Scheme 1995 by RBI, modified in 2002 and 2006. The scheme aimed at resolution and
settlements of complaints against banking services without resorting to courts. It is a grievances redressal
forum for the short falls in Banking services like:-

Non-payment or delay in collection of cheques, inward remittances, delay in issue of drafts, delay in
credit of pension etc.

Levying charges without notice, changing the ROI without notice, forced closure of deposit accounts
without due notice, non-acceptance of loan application without valid reason (rejecting of loan and
granting of loan are outside the purview of Banking Ombudsman).

The Scheme is formulated under section 35 (A) of BR Act.

BO is an official appointed by RBI.

All Commercial Banks, Co-op Banks and RRBs are covered under the scheme.

At present there are 15 BOs.

Maximum compensation under BOS is Rs. 10 Lacs. But for Card related complaints maximum is
Rs.1 Lacs.

Card related complaints and complaints relating to centralised services must be filed to the BO
under whose jurisdictions the Billing Office is located.

BO cannot override the provisions of Debt Recovery Tribunal Act 1993.

The aggrieved party or the complainant should first make a written complaint to the concerned Bank and
the Bank had either rejected/ignored the same or he had not received any reply within one month, then only
he can approach the Ombudsman.

The Complaint should not be for a matter pending for disposal in any court, tribunal or arbitrator. The
complaint is not frivolous or vexatious in nature and that the complaint is made before the expiry of the
period of limitation, as per Indian Limitation Act 1963. When once the final order is passed by the
Ombudsman, the complainant has to give his acceptance letter within 15 days, otherwise the award will
lapse. The object of the banking ombudsman scheme is to resolve the complaints of the customers against
the bank on banking services and settlement of such complaints. The Debt Recovery Tribunal (DRT) is
meant for the expedious adjudication of the recovery of debt. Hence as per the rulings of the Allahabad
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High Court the ombudsman scheme formulated under the provisions of Banking Regulation Act 1949
cannot override the provisions of DRT Act

Reserve Fund: Every Banking Company has to create a reserve fund and should add every year a sum
equal to 20% of profits to reserve fund. This has to be created before any dividend is declared.

Scheduled Bank: means those Banks which are included in the second schedule of the RBI Act. RBI may

include any Bank in the second schedule provided such Bank has the requisite capital and reserves of
Rs. 5 lakh and the affairs of which are not conducted in a manner detrimental to the interests of depositors.

Urban Co-op Banks can also become a Scheduled Bank, if

Its deposits are not less than Rs.750 Crores on a continuous basis for one year

Its Capital Adequacy Ratio is 12%.

Gross NPA should be less than 5%.

It earns profit continuously for the last three years.

Maintenance of Cash Reserve: All scheduled Bank has a duty to maintain the prescribed cash reserve
with RBI, as per section 42 of RBI Act. No interest is paid for CRR.

Quantum of Cash Reserve: Average daily balance of the total demand and time liabilities (SB, CA, Term
deposits etc.) for a fortnight is taken into account. And a certain percentage (fixed time to time) of this
amount is to be kept as cash reserve without any ceiling or floor limit.

Returns: scheduled Bank has to submit a return to RBI showing its demand and time liabilities in every
alternate Friday. In addition a monthly return on the last Friday of the month is to be sent to RBI.

Penalty: If CRR falls below the stipulated minimum, penalty @ 3% above the Bank rate for the first
fortnight. If shortfall continues for 2nd fortnight penalty @ 5% above Bank rate. If it persists for the 3rd
fortnight, the directors of the Bank will be punishable with fine and RBI will prohibit such Bank from
accepting deposits from the public. RBI doesn’t pay any interest for the CRR balances.

CRR of Non-scheduled Banks: As per Section 18 of BR Act, Non Scheduled Banks must also maintain
CRR. However a Non Scheduled Bank can keep the CRR amount with itself in a separate current account,
or with RBI.

Maintenance of Liquid Assets: Statutory Liquidity Ratio (SLR). In addition to the CRR, all Scheduled
Banks are required to keep a certain percentage (please note latest change) of their total demand and time
liabilities in the form of liquid assets. This is as per Sec 24 of the BR Act. This can be kept in the form of
approved securities, Gold and balance with RBI. A monthly return is to be sent to RBI as on the last Friday
of the month. Non submission of this return attracts penalty as in the case of CRR return. Penalty will be
imposed for the shortfall.

SLR is applicable for Non Scheduled Banks also. RBI can stipulate SLR from 0% to 40%

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RETURNS, INSPECTION, WINDING UP


Introduction: Banking companies have to prepare their balance sheet annually, and get it audited by
qualified auditors. The audited balance sheet along with other returns to be submitted to RBI, with copy
endorsed to Registrar of Companies. The board for financial supervision will scrutinize and inspect the
books of accounts of banking companies.

Balance Sheet: All Banks whose shares are listed with Stock Exchanges are required to publish their
unaudited quarterly balance sheet as per proforma prescribed by SEBI. Every Banking company has to
prepare their annual balance sheet as on 31st March every year along with profit and loss account covering
the entire business for one year of all its branches. While preparing the balance sheet all Banks have to
comply with directions of RBI in respect of income recognition, asset classification, provisioning etc from
time to time. The balance sheet has to be signed by C & MD of the Bank along with at least three directors.
The balance sheet and P & L account is to be published in a Newspaper as well as it is to be displayed in
the Head Office and its all branches. The Balance Sheet, P & L account to be submitted to RBI and copy to
be sent to Registrar of the Companies.

Audit and Auditors: The balance sheet and P & L account is to be audited quarterly by auditors, who will
thoroughly scrutinize all the papers, verifying whether the profit and loss account shows a true picture and
he will submit his report and will sign the balance sheet with his seal and stamp.

Submission of Returns: Every Banking company has to submit various returns to RBI as per the BR Act.

1. Return on liquid assets: particulars of assets and the demand and time liabilities.

(As at the close of alternate Fridays.)

2. Return on assets and liabilities: Monthly return on assets and liabilities

(As at the close of Last Friday)

3. Balance Sheet: Annually as on 31st March

4. Return of assets in India: Quarterly return regarding assets in India

5. Unclaimed Deposits: accounts not operated for 10 years as on 31st December every year.

6. Non Scheduled Banks: CRR Returns monthly.

Inspection and Scrutiny: RBI is empowered to conduct inspection of books of accounts of any Bank.
Central Govt. may also direct RBI to conduct inspection. RBI will submit its inspection report to Govt.

Board for Financial Supervision: Is a committee established by RBI comprising of Governor of RBI as
Chairman, Deputy Governor as Vice Chairman and four directors from RBI as members who will Supervise
and inspect different sectors of the financial system including Banks. They will meet once in a month, they
can constitute sub committees. Governor may constitute an advisory council to tender advice from time to
time to the board. The Governor (presides over the meetings of the council). Vice Chairman and other
members are members of the council.

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Preservation of Records a Return of Paid Instruments: Banks to maintain records for 5 years from the
date of transaction. All KYC documents to be preserved up to 5 years from the date of closure of the
account. (Suspicious Transaction – Preserve for 10 years). - As per PML Act 2002. Banks may return paid
instruments to their customers even before the expiry of the legally required retention period. A true copy
must be preserved. Banks should not charge the customers for copying expenses.

Acquisition of Undertaking: Central Government can acquire the undertakings of Banking companies, if
the Banking company has failed on more than one occasion to comply with RBI’s directions under Sec 21
or 35 A of BR Act*, or it is managed in a manner detrimental to the interest of depositors and it is necessary
to acquire its undertaking. Before acquisition, the concerned Bank will be given an opportunity for showing
cause against the proposal. On acquisition of undertaking all the assets and liabilities of the acquired Bank
stand transferred to Central Government or to any other transferee Bank after paying compensation to
share holders, members, creditors, depositors.

Amalgamation of Bank: A Banking company may be amalgamated with another Banking company. As per
section 44 A of BR Act a scheme has to be prepared and to be placed before the share holders of the two
Banks, approved by a resolution and submitted to RBI for sanction. On sanction by RBI all the assets and
liabilities will get transferred to the Bank with which it is to be amalgamated and the amalgamated company
gets dissolved.

Moratorium: Whenever a Banking company goes bad RBI is empowered as per section 45 of BR Act to
apply the Central Govt. to order moratorium on that Bank staying all the operations of the Bank for a period
of 6 months. During this period RBI will work out a scheme either for reconstruction of the Bank or for
amalgamation with another Bank. The scheme has to provide continuance of all staff with same pay and
service conditions. On sanction from Central Government it becomes binding on the Bank, transferee Bank,
members, depositors, creditors, employees etc.

Winding up of Banks: A Banking company which is temporally unable to meet its obligations may apply to
High Court for staying the commencement or continuance of any proceedings against it. Such a stay will be
for a maximum period of 6 months. The High Court will seek the report of RBI and will order winding up of
the Bank after paying its debts fully to the depositors, creditors etc. There are other instances when RBI
asks Banking Company to wind up, when RBI finds that continuance of the Bank is detrimental to the
interest of the depositors, or it cannot pay back its debts.

Official Liquidator: Will be appointed by Central Government as per Section 38 A of BR Act attached to
respective High Court for conducting the winding up proceedings. If the RBI applies to the Court as per
Section 39 of BR Act, RBI, State Bank or any other Bank can be appointed as the liquidator, who will make
a preliminary report to High Court on the availability of assets for making preferential payments and for
discharging liabilities of depositors and creditors.

Preferential Payment: In winding up proceedings claims received within one month of service of notice
gets the first preference. After this SB account holders up to Rs. 250/- and other account holders up to

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Rs. 250/- will get priority over all other creditors. The balance available will be utilized for paying the general
creditors.

Penalties:

1. For making any statement which is false in any particular material, knowing it to be false or will fully
making any material statement is punishable with imprisonment up to a period of 3 years.

2. Provisions relating to penalties are provided in Section 46 of BR Act.

PUBLIC SECTOR BANKS AND CO-OPERATIVE BANKS


Introduction: The Public Sector Banks, namely State Bank of India and its subsidiaries, Nationalised
Banks, Regional Rural Banks are established by special statutes and these statutes provide the powers,
functions and management of these Banks and the BR Act* is applicable to them in a limited way.
Co-operative Banks are created and governed by laws relating to co-operative societies, if they operate in
one state only, the state act and in different states, Central act applies. BR Act* is applicable in a modified
manner.

SBI and its Subsidiaries: SBI was formed in 1955 by the SBI act taking over imperial Bank and carry on
the business. It is a body corporate with perpetual succession and common seal. Majority of shares are
held by Govt. of India, no other share holder other than GOI can exercise voting right above ten percent.
SBI has its central office at Mumbai and local head office at Mumbai, Kolkata, Chennai and other places.
The powers are vested with Central Board. Central Govt. gives directions on matters of policy after
consultation with RBI Governor and SBI chairman.

Board: Consists of Chairman, Vice Chairman not more than two MDs appointed by Central Govt.,
Presidents of Local Boards and other Directors. Chairman and MDs are appointed for a period of 5 years.
Local Boards are set up at each place where there is a local head office to exercise all powers and perform
functions and duties of the Bank.

Business of SBI: SBI act as an agent of Reserve Bank for transacting Govt. business and other business
entrusted to it by RBI. The State Bank may transact the work through its subsidiaries or as an agent
approved by Reserve Bank.

Accounts and Audit: SBI has to close its accounts and prepare Balance Sheet and P & L account as on
31st March every year and should be submitted to RBI. Audit may be conducted by a person duly qualified
to be auditors under section 226 of Companies Act 1956. (Corresponding Section 141 of companies Act,
2013).

Subsidiary Banks: The Subsidiary Banks of the State Bank of India were established by different statutes.
Every subsidiary Bank is a body corporate with perpetual succession and common seal. The majority of the
issued Share Capital of the Subsidiary Banks is held by SBI. The shares of the subsidiary Banks are freely
transferable. However, the SBI is not entitled to transfer the shares if such transfer would result in reducing
its share holding to less than 50% of the issued capital.

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Management: Vests in its board of directors, Board consists of Chairman, MD and other Directors. SBI
appoints the MD with approval of RBI.

Business: A subsidiary Bank has to act as an agent of SBI. A subsidiary Bank has also to act as an agent
of RBI to transact Govt. business and other works entrusted by RBI. A subsidiary Bank shall also transact
the business of general banking as well. SBI is empowered under Sec.47 to inspect the subsidiary Banks.

Regional Rural Banks (RRBs): RRBs are public sector institutions, regionally based, rural oriented and
engaged in commercial Banking. They were first formed by an ordinance in 1975 and later ordinance was
replaced by RRB act 1976. The formation of RRBs was the result of the growing realisation that the ethos
and attitude of the existing public sector Banks were not fully conducive to meet the credit needs of the rural
people. The object of setting up of RRBs is to development of agriculture, trade, commerce, industry and
other productive activities in rural areas.

Sponsor Bank: is a Bank by which an RRB is sponsored and it holds 35% of the issued capital of RRB
while the central Govt. holds 50% and the state Govt. holds the remaining 15% of the issued capital. Every
RRB is a body corporate with perpetual succession and common seal with power to acquire hold or dispose
of property. Generally an RRB is allotted a compact area of operation comprising a few districts with
homogeneous agro climatic conditions and rural clientele. These Banks may accept all types of deposits
from public and engage in the business of Banking. Two RRBs in Kerala (South Malabar Gramin Bank and
North Malabar Gramin Bank) were merged and formed KGB.

Management: Consists of chairman appointed by Sponsor Bank. The power vests in the board of directors.

Business: All Banking business as per BR Act*. However the main thrust of the business would be
granting of loans and advances to small and marginal farmers in rural areas.

Nationalised Banks: 14 Private Banks were nationalised in 1969 another 6 Banks in 1980. The Bank
nationalization act 1970 transferred the undertakings of the existing private Banks to the corresponding new
Banks called as Nationalised Banks. Originally the entire paid up capital of the Nationalised Banks were
held by Central Govt. Some of these Banks have recently made public issues of shares but central Govt.
still holds the majority of shares of not less than 51%.

Every Nationalised Bank is a body corporate having perpetual succession and common seal and power to
acquire, hold and dispose of property and enter into contracts. They can carry all Banking business; they
also act as agents of Reserve Bank.

Management: vests in the Board of Directors. The Central Govt. issues directions to the Bank in the
discharge of its functions on matters of policy.

Directors: are nominated by the Central Govt. or elected from the share holders. RBI may appoint one or
more additional directors on the board. Central Government will appoint Chairman and Directors of Public
Sector banks from among the persons recommended by “Banks Board Bureau”.

Accounts and audit: Nationalised banks have to close its accounts as on 31st March every year. Balance
sheet and P&L account to be audited and the audited balance sheet to be submitted to RBI. All public

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sector Banks are scheduled Banks and have to comply with the requirement of maintaining Cash Reserve
Ratio (CRR) as well as Statutory Liquid Ratio (SLR).

Co-operative Banks:

Co-operative banks are registered either under state laws governing co-operatives or under the
multi state co-operative societies Act. If a co-operative bank operates only in one state, the state law
applies and if it operates in more than one state, the Central Act applies.
No co-operative society other than co-operative bank is permitted to use as part of its name the
words ‘bank’ or ‘bankers’ and ‘banking’.
The minimum paid up capital and reserve required to commence or carry on banking business by a
cooperative bank is not less than Rs. 1 lac.
Co-operative banks here to maintain CRR as stipulated by RBI from time to time.
Co-operative Bank have to prepare B/S and P&L account and to be submitted to RBI along with
Stationary Auditors Certificate. State co-operative bank and central co-operative bank here to
submit returns to NABARD.
RBI Inspection as per section 35 is applicable to co-operative banks.
New Banking Licensing Policy - 2013

Formed as per recommendations of Narasimham Committee and Raghu Rajan Committee


Initial Paid-up Capital Rs.500 Crores
Entities in private sector owned by Resident Indians and Public Entities can open
These entities should promote a Bank through NOFHC (Non Operative Financial Holding Company)
A NOFHC must hold at least 40% of the Paid-up Capital.
Foreign holding should not exceed 49% of the Paid-up Capital for the first 5 years.
Payment Banks

NBFCs, Public Sector Enterprises, Individuals and pre paid payment issuers can form
Minimum Paid-up Capital Rs.100 Crores.
Promoters contribution minimum 40% 0f Paid-up Capital
Can accept deposits from a customer up to Rs.1 Lac
Can issue Debit Cards
Operate as correspondents for other banks
Small Business Banks

NBFCs , Local Area Banks, Societies owned by Resident Individuals can open
Minimum Paid-up Capital Rs.100 Crores.
Promoters contribution minimum 40% 0f Paid-up Capital
Primarily for lending to small business firms, Micro and Small Industries and Small and Marginal
Farmers
At least 50% of the total lending should be for limits up to Rs.25 Lacs
Subject to CRR and SLR norms.

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MODULE B - LEGAL ASPECTS OF BANKING OPERATIONS


UNIT 6. RESPONSIBILITY OF PAYING BANK
The negotiable instruments Act 1881 lays down the rules relating to payment of customer’s cheque
and various subsections deal with the protection available to the paying Banker.

NI Act and Paying Bank

As per Sec 31 of NI Act “ The drawee of a cheque having sufficient funds of the drawer in his hands
properly applicable to the payment of such cheque must pay the cheque when duly required to do so, and
in default of such payment must compensate the drawer for any loss or damage caused by such default “

The implications of the above sec are:

a. Sec 31 applies only to Bankers, as cheque is defined under Sec 6 of the Act as a bill of exchange
drawn on a specified banker and not expressed to be payable otherwise than on demand

b. There should be sufficient funds

c. It should also be properly available The funds may not be available to pay the cheque if:-

(i) the banker has exercised his right of set off for amounts due from the customer or

(ii) there is an attachment order from court, Income Tax officer or any other lawful authority restraining
the bank from paying the money.

d. When duly required to do so. The cheque must be properly drawn and duly signed by the drawer

e. Compensate the drawer. The bank is liable only to the drawer, except when

(i) The holder becomes a creditor and is entitled to make a claim when the Bank is wound up

(ii) The Banker pays a cheque disregarding the crossing, wherein the true owner can hold the
bank liable

f. Banker is liable to the drawer for any loss or damage, which may have occurred to him due to
wrongful dishonor of the cheque

Protection to paying banker: The paying bank can claim protection under N.I. Act, if the payment is
made in due course”.

Payment in due course: As per Sec. 10 of N.I. Act. Payment in due course means payment in
accordance with the apparent tenor of the instrument in good faith and without negligence to any person in
possession thereof under circumstances which do not afford a reasonable ground for believing that he is
not entitled to receive payment of the amount therein mentioned.

Ie. . The payment is to be made in

a) accordance with the apparent tenor of the instrument

b) in good faith

c) without negligence
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d) to the person in possession of the instrument and

e) the banker should not have any reasons to believe that he is not entitled to receive the payment.

Protection to the paying banker

Sec. 85 of the N.I Act provides protection to the paying banker.

1) When an order cheque PURPORTS to be endorsed by the payee or on his behalf, the banker is
discharged by payment in due course

2) Once a bearer always a bearer. The banker is discharged if in a bearer cheque, payment is made
to the bearer, notwithstanding any endorsement.

Sec. 89 of N.I Act states the effect of making payment on which alteration is not apparent, the banker is
discharged.

Signature of the drawer is forged: When the customer’s signature on the cheque is forged, there is no
mandate to the bank to pay. As such a banker is not entitled to debit the customer’s account on such forged
cheque. A cheque in which drawer’s signature is forged, is not at all a cheque. It is nullify, a void instrument.

Sec 85 of N.I Act says that a banker can seek protection where payment has been made to the holder, his
servant or agent, i.e. payment must be made in due course.

Sec. 89 of the N.I Act gives protection to the paying banker of a cheque which has been materially altered
but does not appear to have been so altered, if payment was made according to the apparent tenor at the
time of payment and otherwise in due course.

In one case, the court has held the view that bank cannot be held guilty if on visual examination no sign of
forgery or tampering with the writings on the cheque could be detected. But this cannot be taken as a
general rule. Each situation or case has to be scrutinized on individual merit, and the bank cannot be fully
absolved from the liability of negligence.

Payment by bank under mistake whether recoverable

The question whether a bank paying a forged cheque can recover the same from the payee was examined
by courts. On different occasions, several courts have expressed different opinion. There are instances
where the signatures as well as other writings on the cheque were forged. The forgery was so perfect that it
was not possible even for a trained eye to detect it. One court held the view that, so long as the status quo
is maintained and the payee has not changed his position to his detriment, he must repay the money back
to the payer.

Note:

Non – negotiable crossing: In certain cheques we can see the wording “non - negotiable”, especially
some cheques drawn by LIC. Non – negotiable crossing is only an indication to the collecting banker and it
has nothing to do with the paying banker. Non negotiable crossing does not restrict the transferability of
cheques, but the only thing is that the transferee will not get a better title than what the transferor had. In

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other words, if it is a stolen or forged cheque, the transferee or the “holder in due course” will also get a
defective title.

UNIT 7. RESPONSIBILITY OF COLLECTING BANK


Collecting banker: The bank (agent) who collects the cheque and credits to his customer’s account
(Principal). The NI Act does not specifically lay down the duties of a collecting banker while collecting the
cheque, it gives protection to a collecting banker under sec 131 which reads as under:

“A banker, who has, in good faith and without negligence, received payment for a customer of a cheque
crossed generally or specially to himself shall not, in case the title to the cheque proves defective, incur any
liability to the true owner of the cheque by reason only of having received such payment.”

The protection under Sec. 131 is conditional, for which the Bank has to satisfy certain conditions: -
a) The collecting banker should have acted in good faith.
b) He should have acted without negligence
c) He should receive payment for a customer
d) The cheque should be crossed generally or specially to himself.

Duties of the Collecting Bank:

1. Duty to open the account with references and sufficient documentary proof: RBI has insisted
that while opening accounts photograph of the customer and sufficient documentary proofs for
constitution and address be obtained under applicable KYC norms.

2. Duty to confirm the Reference where the referee is not known or has given Reference in
absentia: The banker is required to make enquiries with referees to confirm that the person whose
account is newly opened is a genuine person. Under the current KYC norms, the authenticity of the
customer is required to be verified by calling for a direct identification documents like, Passport,
PAN card issued by the IT Department, Driving license, Voters’ Identity Card etc. ( known as
Officially Valid Documents )

3. Duty to ensure crossing and special crossing: Before accepting a cheque for collection, the
bank should ensure that the cheque is either crossed generally or specially crossed to the collecting
bank itself. If the cheque is crossed to another bank, then such cheque should not be accepted for
collection.

4. Duty to verify the instruments or any apparent defect in the instruments: Similarly a cheque
meant for collection and credit to a particular account should not be collected and credited to
another account. For eg. Cheques favouring a firm or a limited company should not be credited to
the personal account of the MD’s, Directors or Partners. It will amount to conversion and the banker
will lose protection under sec. 131.

5. Status of the customer’s account: The collecting banker is required to take into account the
status of the customer and the various transactions taking place in his account to observe the living
conditions of the customer. If a man of small means and small income tenders cheques for huge
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amounts, naturally the banker should make discreet enquiries as to the source of income, and the
banker should desist from handling such cheques. It may lead to negligence or conversion.

6. Cheques payable to third parties: The collecting bank has to make necessary enquiries before
any third party cheques are collected on behalf of its customer.

UNIT 8. DIFFERENT TYPES OF BORROWERS


The bank deals with different types of borrowers - individuals, partnership firms, HUF, companies, statutory
corporations, trusts, co-operative societies, Limited Liability Partnerships (LLP). Etc. The laws relating to
each category is different.

1. Individual: An individual borrower is one of the constituents of a bank. When banks lend to an
individual, the banker should see whether he has the capacity to contract.

a. Individual is a Minor: - Under the law a minor is not competent to contract. Therefore, if a banker
lends money to a minor, it cannot be recovered, if he / she fail to repay.

Exceptions: if a bank lends money to a minor to meet the expenses for purchasing necessities of life, the
bank can recover the money from the estate of the minor.

b. Individual is not of sound mind: As per the Indian Contract Act, a person will be considered not of
sound mind if at the time of making contract he/ she is not capable of understanding it and of
forming a rational judgment as to its effect upon his/ her interests

c. Individual is a disqualified person: Eg. Insolvent. Under the Insolvency Law. So long as the
person continues to be a non discharged insolvent he / she cannot enter into a contract. The
contracts entered into by such a person are not enforceable.

2. Sole Proprietorship: In the eyes of the law there is no distinction between the assets and
liabilities of the person and the business conducted in the name of the sole proprietor

3. Partnership firm: (for more knowledge see chapters no 49 to 54 in module D ): As per Sec 4 of
the Indian Partnership Act 1932 a partnership is the relation between persons who have agreed to
share the profits of a business, carried on by all or any of them acting for all. The relationship
between the partners is governed by partnership deed. A partnership is not distinct from its partners.
Under the law the name of a partnership firm is regarded as an abbreviation of the names of the
partners

Authority of partners

The acts of a partner shall be binding on the firm

a. if they are done in the usual business of the partnership

b. In the usual way of the business

c. and were done as a partner, i.e., on behalf of the firm and not solely on his own behalf.

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Registration of partnership firm:

The Indian Partnership Act, 1932 contemplates registration of the firm, not the registration of the
partnership deed. The registration of the firm is optional and not compulsory.

Though registration of partnership firm is not mandatory, it is prudent on the bank’s part to verify whether
the firm is registered or not.

Consequences of Non-Registration of a Firm:

a. Suits by partners inter se: No suit to enforce a right shall be instituted in any Court by a partner
against the firm or against any other partner of the firm.

b. Suit by a Firm against Third Parties: No suit to enforce a right can be instituted in any Court by a
firm against any third party, unless the firm is registered.

c. Exceptions: (i) Enforcement of right to sue for matters relating to the dissolution of the firm and (ii)
The powers of an official assignee receiver or Court to realize the property of an insolvent partner.

(The effects of non registration are given in detail in chapter 54 in Module D)

Business of Partnership firm: The rights and duties of the partners are determined by the partnership
deed, like opening of bank accounts, borrowing powers, signing cheques etc. Generally the managing
partner may be doing the business on behalf of the firm as per the partnership deed. The bank should
ensure that the business is conducted as per the deed. If the Managing partner does not have the powers
to conduct certain transactions then it should be ensured that consent of all the partners are obtained

Transaction in immovable property: As per Sec 19 of the Act a partner can not affect the transfer of
immovable property of the firm unless expressly aut6horised. So a banker taking a mortgage security of
firm’s immovable property should ensure that the partner creating the charge has the express authority to
do so, if not, all the partners have to jointly create the mortgage.

Insolvency of the firm: The banker on receiving notice of insolvency of the firm must immediately stop any
further transactions in the account irrespective of whether it is in debit or credit.

If one of the partners become insolvent, and in case the account is in debit, then further transactions in
the account should be stopped so that the rule in Clayton’s case does not apply (i.e., the first credit will go
to wipe of the first debit) If the account is in credit the other partners can operate the account. But the bank
should obtain a fresh mandate and all previous cheques signed by the insolvent partner can be paid
provided the other partners confirm the same

Death of the partner: Since the death of a partner dissolves the partnership firm, banks should stop further
transactions in a running account like Cash Credit, Overdraft to crystallize the liability of the deceased
partner and make his estate liable for its dues. Banks can allow transactions in a separate account so that
the business of the firm is not adversely affected.

4. Hindu Undivided Family (HUF): It is creation of Customary Law among Hindus and is governed by
personal laws. A joint Hindu Family consists of male members descended lineally from a common

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male ancestor together with their mothers, wives, widows and unmarried daughters bound together
by the fundamental principle of family relationship.. It is purely a creature of law and cannot be
created by an act of parties. In a joint HUF, the senior most male or female member is entitled to
manage the family properties. He or she is called ‘Manager” or karta of the joint family. The Karta
looks after the whole business; the position of Karta comes to a person by birth and not by the
consent of the other Co-parceners. The liability of the Karta is unlimited, whereas the liability of the
co-parceners is limited to their shares in the joint family estate.

Law governing Joint Hindu Family

Joint Hindu Family is governed basically by two school of thoughts. They are Dayabhag and Mitakshara
schools. The law governing Joint Hindu Family is codified under Hindu Code and now, succession among
Hindus is governed by the Hindu Succession Act, 1956. Women are also made members of the Family as
its male members. It is to be noted that a woman member also inherits property at par with a male member
and is treated as co-parceners.

Rights of the Karta

A. Right to possession and management of the joint family property

B. Right to income from the property

C. Right to represent the family

D. Right to sell the joint family property for family purpose

Rights and duties of the Karta

A. Duty to run the family business and manage the property for the benefit of the family

B. Duty to account

The application to open an account must be signed by all the members, and all adult members should be
made jointly and severally liable for any borrowings, if the account gets overdrawn.

5. Companies: (for more knowledge refer chapters no 55 to 61 in module D ): A Company is a


juristic person created by law, having a perpetual succession and common seal distinct from its
members and is governed by the Companies Act, 2013. Among the two most important
characteristics of a company, one is its separate individuality and the other is perpetuity.
A Company has a “Corporate Personality” separate from all the members who have formed it unlike
a partnership firm. All companies are to be registered. Sec 11 of the Companies Act 1956 provides
that an association of more than ten persons in the case of banking business and more than twenty
in case of other business shall be registered under the Act. It not registered, it will be illegal.

For forming a Company two important documents called ‘Memorandum of Association’ and
‘Articles of Association’ (AOA) are necessary.

MOA: It is company’s fundamental and its unalterable charter. It enables the shareholders, creditors to
know its permitted range of business. MOA contains, name of the company, registered office of the
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company, objects of the company, liability of its members and share capital and its division. For a banker it
is absolutely essential to verify the memorandum and ensure that the business undertaken by the company
is within its objects, if not, any loan made to the company would be unrecoverable

AOA: Rules and regulations governing the internal management of the company, define powers of the
officers, number of directors, borrowing powers of the company, Board of Directors, officers of the company
and other details.

AOA is subordinate to MOA

Every person dealing with a company is expected to know the provisions of the memorandum and articles,
so far as they relate to the company’s dealings with persons outside the company. This is known as
‘constructive notice’.

Certificate of Incorporation:

If the Registrar is satisfied that all the requirements are complied with by the company and that it is
authorized to be registered under the Companies Act, he shall retain and register the memorandum,
articles, if any. On the registration of the memorandum of a company, the Registrar shall certify that the
company is incorporated. Certificate of incorporation shall be conclusive evidence that all the requirements
of the Act have been complied with and that everything is in order as regards registration and that the
company has come into existence.

0Private Company: A private company is one which has following provisions in its AOA

a) Restrictions on the right to transfer its shares

b) Limitation on number of members to 200 excluding employees and ex-employees

c) Prohibition as to participation by general public in its capital requirements

Public Company: is one which is not a private company. The main features are:

a) Shares are freely transferable

b) No restriction on number of members

c) Public can participate in its share capital.

Public companies can be further classified as:

i. Limited liability company

ii. Unlimited liability company

iii. Limited by guarantee.

Govt. Company: Central Government or State Government or both have more than 51% of the share
capital.

The main characteristics of a company:

a. A company is a voluntary association of persons .


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b. It has a perpetual existence. Only law can dissolve it, since it is a creation of law.

c. The shares of joint stock companies are freely transferrable.

d. The shareholder’s liability is limited to the extent of the nominal value of the shares held by him

e. As a corporate person, a company is entitled to own and hold property in its own name.

f. A company can sue and be sued in its own name.

6. Statutory Corporations: are formed by an Act of Parliament Eg., SBI formed under the SBI Act
1955, Nationalized Banks are established under the Banking Companies (Acquisition and Transfer
of Undertakings) Act, 1970.

7. Clubs, Societies, schools and other non-trading associations: These bodies are usually
governed by the Companies Act, or the Co-operative Societies Act and function within the ambit of
those laws. In case of lending to these bodies, a banker should study the bye-laws, rules and
regulations applicable to them and ascertain the legality of lending to them.

8. Trusts: These are governed by the Indian Trusts Act, 1882, if they are private trusts and by Public
Trusts Act if they are public trusts, or Religious and Charitable Endowments Act, if they are trusts of
Hindus and in the case of Muslims they are governed by the Wakf Act.

9. Limited Liability Partnerships (LLP): LLP is called a hybrid between a company and a
partnership. LLP is a body corporate and a legal entity separate from its partners. It has a perpetual
succession. LLP can continue its existence irrespective of changes in partners. It is capable of
entering into contracts and holding property in its own name. It is a separate legal entity, is liable to
the full extent of its assets but liability of the partners is limited to their contribution. Besides, no
partner is liable on account of the independent or unauthorized actions of other partners

UNIT 9. TYPES OF CREDIT FACILITIES


Lending is the principal activity of a Bank. Banks are offering various credit facilities to its clientele. These
credit facilities are classified into:

A) Fund based credit facilities

B) Non fund based credit facilities.

A) Fund based credit facilities: Involve the outflow of funds, ie. direct money is going out, lending out
to the customers like:-

a) Cash Credit/ Overdraft

b) Term Loans/ Working Capital

c) Bill Finance

B) Non fund based credit facilities: They do not involve an immediate outflow of funds. The banker
undertakes a risk to pay the amounts on happening of a contingency. They are:-

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a) Bank Guarantee

b) Letter of Credit

c) Co Acceptance

Cash Credit and Overdraft: A Banker allows his customer to borrow money up to a certain limit.
A customer need not withdraw the entire amount at once, he can withdraw as and when money is required
up to the maximum limit extended or sanctioned. Here the advantage is that he can make remittances to his
OD account, and he can withdraw it according to his need. It can be called as a flexible credit. Interest will
be charged on the outstanding liability on a daily basis. The facility is best suited to commercial and
industrial concerns for working capital finance. The contract of cash credit or overdraft can be express
of implied. Various court decisions uphold it

Rule in Clayton’s case: The Cash Credit/ Overdraft account is a running account. Whenever the customer
withdraws money, the account being debited and whenever he remits to his account, the account being
credited. Under the law, each item of debit is a separate loan and each credit as a repayment of the earliest
debits. This aspect was enunciated in a case called the “Clayton’s case”. In that case, the Court held that
the first sum of money paid into the account, is deemed to repay the first item recorded on the debit side of
the account. In another words, “the first credit will go to wipe of the first debit”.

Bank not to terminate OD facilities without notice: Once a bank grants an Overdraft facility, then there
is a contract between the bank and the customer that it is not to be cancelled unilaterally.

Term Loan / Demand Loan: are granted to customers to meet the capital expenditure needs of the
business. Term loans are generally granted in one lump sum and are allowed to be repaid over a period in
instalments as per the repayment schedule.

Demand loans are those which are repayable on demand.

Term loans are further classified into:-

1) Short term loans – repayable within one year

2) Medium term loans – repayable within one to seven years

3) Long term loans – repayable above seven years

In the case of demand loan the limitation period is 3 years from the date of default.

However in case of term loans it is 3 years from the date of default of a particular installment. This being the
case, the time limit gets over in case of some earlier defaulted installments and bank can lose its right
against such unpaid installments

Bill Finance: Bill Financing is conducted through discounting of Bills of Exchange drawn by the borrower
on the customers of borrower. Bill Financing is classified into 3 categories:-

a) Bill discounting and bill purchase

b) Drawee bill acceptance

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c) Bills Co-acceptance

In all these cases, Bank undertakes an obligation. The first two are fund based and the third is a
non-fund based facility.

(For more knowledge see Chapter 4 - law relating to bill finance)

UNIT 10. INDEMNITIES


Indemnity: The word indemnity means “to save from loss”. The loss could be either due to the act of the
party giving the indemnity or due to the act of a third party. Sec. 124 & 125 of Indian Contracts Act deals
with the laws of indemnity. A contract of indemnity is a contingent contract, i.e. its performance is made
dependent upon the happening or not happening of some event.

Definition : A contract by which one party promises to save the other from loss caused to him by the
conduct of the promisor himself, or by the conduct of any other person is called a contract of indemnity
( Sec 124).

The above definition is very narrow and is not exhaustive. The law regarding indemnity is much wider. For
eg all insurance contracts come within the ambit of a contract of indemnity

The person giving the promise is called the ‘indemnifier’ and the person to whom the promise is made is
called the ‘indemnified’ or the indemnity holder.

A contract of indemnity though similar to a contract of guarantee differs on various counts.

INDEMNITY GUARANTEE

Two parties – Indemnifier & the indemnified Three parties – debtor, creditor & surety

Risk is contingent Liability is subsisting

Indemnifier’s liability is primary Surety’s liability is secondary

Only one contract between two parties Three contract


1) Debtor and creditor
2) Creditor and Surety
3) Surety and debtor

Purpose is for the reimbursement of a loss Guarantee is for the security of the creditor

Scope and Application of indemnity in banks:


Customers when they have lost demand draft, travellers’ cheque etc. approach the bank for duplicate. They
are required to give an indemnity before issuance of duplicate DD. These indemnities are required since the
bank has to protect itself from any subsequent claim made by a person who may have for value received
these instruments. In some cases over and above the indemnity, banks will ask for surety especially when
the amount is huge and / or the customer is new..Indemnity bonds are insisted while issuing duplicate
FDRs, settling death claims etc.

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In the indemnity taken by the bank, the customer undertakes to protect the bank from any loss or damage
and for costs incurred. These indemnities are stamped as an agreement, and if they are witnessed, they
would be treated as indemnity bond and liable for payment of ad valorem stamp duty.

Rights of an indemnity holder when sued:

The indemnity holder can recover

(a) all damages,

(b) all costs, and

(c) all sums he may have paid under the terms of any compromise of any such suit, provided he has to
prove that

(i) he has not acted beyond the scope of this authority and

(ii) he did not contravene the specific directions of the promisor.

All insurance contracts are examples of contracts of indemnity because all insurance contracts are
contracts which indemnify a person from certain losses which he may suffer (eg fire policy )

UNIT 11. BANK GUARANTEES


Banks are issuing guarantees on behalf of their customers guaranteeing payment of financial commitments
or for the performance of contracts to third parties. The third parties may not know the financial soundness
or stability of the customers. So they ask for a guarantee from a bank in lieu of security deposit.

Bank guarantee: A guarantee given by a bank to a third person, to pay him a certain sum on behalf of the
bank’s customer, on the customer failing to fulfill any contractual or legal obligations towards the third
person. Once the bank gives a guarantee, then its commitment to honour the guarantee is onerous and as
such the banker takes appropriate security before issue of a guarantee and understands his rights and
duties. There are various types of guarantees.

Financial guarantee: These guarantees are issued on behalf of customers / contractors dealing with
Govt. departments, in lieu of customer’s requirement to deposit a cash security or earnest money. The
Govt. department before awarding a contract insists the contractors for earnest money deposit, or the dept.
is willing to accept bank guarantee. In case the contractor does not take up contract as awarded, the Govt
dept. invoke the guarantee and collect the money from the banks.

Performance guarantee : These are guarantees issued by the bank on behalf of its customer whereby the
bank assures a third party, that the customer will perform the contract entered into by the customer as per
the condition stipulated in the contract, failing which the bank will compensate the third party up to the
amount specified in the guarantee. These types of guarantees are usually issued by bankers on behalf of
their customers, who have entered into contracts to do certain things on or before a given date.
Eg: construction of a building, bridge or road etc. A mere demand from the beneficiary that there has been
a default by the customer is sufficient for the bank to make payment. Though by word it is called

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“performance guarantee”, if a contractor fails to construct a bridge within the time stipulated, the bank will
not go for construction of bridge, instead the bank will pay the guaranteed amount only.

The performance guarantees commonly issued by banks are:

i. Bid Bonds – These are generally called for in respect of publicly tendered contracts as also for
privately negotiated contracts.

ii. Performance guarantees – Performance guarantees are required to be given, for about10 to 15% of
the value of contract once a contract is awarded. This guarantee binds the guarantor.

iii. Advance Payment Guarantee – It is a common practice for the employer to pay an advance of say
10% of the contract amount to the contractor. Such advance payments are given after getting a
bank guarantee.

iv. Retention Money Guarantees –In construction contracts, while progressive payments are made
against part completion of the project, the employer generally retains a portion of the payments.

v. Maintenance guarantees/ Bonds – Even after completion of the contract to the satisfaction of the
employer, the contractor may be asked to furnish a Maintenance Bond so that any shortcoming in
the work rendered in compensated for.

vi. Guarantees on behalf of travel Agents/ Businessmen – Instances of Banks issuing guarantees on
behalf of their customers enabling them to obtain delayed payment terms from their principals (e.g.
Airline companies issuing tickets to be paid after a delay by travel agents etc.)

Deferred payment guarantee: The banker guarantees payment of instalments spread over a period. This
type of guarantee is required when goods or machinery are purchased by a customer on long term credit
and the payment is to be made in instalments on specified dates spread over more than a year. A deferred
payment guarantee constitutes an undertaking by bank to make payments of deferred instalments to the
seller (beneficiary) on the due dates, in the event of default by the customer (buyer).

Bankers duty to honour guarantee

Bank guarantees though it may appears as a primary contract between a debtor and a creditor, they are
better called as “the life blood of national and international commerce”. In most guarantees banks
undertake to make payment merely on demand. Bank, under a contract of guarantee, is bound to honour
its guarantee and its obligations to pay is primary and independent of the underlying contract between the
customer on whose behalf the guarantee is given and the beneficiary. And further, the bank has to pay
the money on ‘first demand’ and ‘without contestation’, demur or protest. Such commitments of banks must
be honored free from interference by the courts, otherwise, trust in commerce internal and international
would be irreparably damaged. It is only in exceptional cases, in case of fraud or in case of irretrievable
injustice be done, the court should interfere.

Liability of banks under a guarantee when the main contract is suspended: The question whether the
bank is absolved of its liability under a guarantee issued by it when the main contract is suspended by a
statute – The court held that – ‘NO’. The court pointed out that the bank guarantee was an independent
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contract between the bank and the company and was not affected or suspended by the cancellation of the
main contract. The contract of bank guarantee is an independent and separate contract and so the bank is
bound to pay the amount when the guarantee is invoked.

Exceptions:

Cases of fraud: Even in this case instead of the Bank deciding whether a fraud has taken place or
not , it is suggested the bank advising its customer to obtain an injunction from the Court restraining
the Bank from making the payment

Specify equity in favour of debtor: If there is a possibility of an irretrievable harm or injustice to


one of the parties concerned, the courts will adjunct the bank from making payment.

Issuance of guarantee – Precautions:

The two fundamental aspects in a bank guarantee are :-

1) Amount of guarantee

2) Period of guarantee

Both the above two aspects should be specifically mentioned in the guarantee, in the absence of the above,
the bank’s liability will be unlimited either in the amount guaranteed or the period during guarantee. The
banks should obtain a counter guarantee from his customer; in case the bank has to give the guaranteed
amount, he can fall back on the counter guarantee to claim the amount from the debtor.

Amount of guarantee:

As stated above, the amount of guarantee should be written very conspicuously in the agreement, both in
words and figures, so also it is to be mentioned whether the guaranteed amount is inclusive of all interests,
charges, taxes and other levies, so that we can avoid unnecessary disputes regarding the liability of the
bank.

Period of Guarantee: The period of guarantee should be clearly mentioned and an additional period
during which a claim has to be made on the bank to make payment. Period of guarantee is called ‘Validity
Period’ and the additional period is called ‘Claim Period’.

Claim Period: Claim period is to facilitate the beneficiary to prepare and lodge claim, if any under the
guarantee. It is very much necessary to specify the exact date, for example ‘this guarantee is valid up to
31st July 2012’. The creditor can make a claim only if the default has occurred within this period, beyond
this date, the bank cannot be held liable. The claim period should be at least 15 to 30 days after the validity
period, taking into account the time to communicate the invocation. For example, if the validity period is up
to 31st July 2012, then the claim period would normally be up to 31st August 2012. If a beneficiary were to
invoke guarantee within the claim period, for a default committed by the debtor during the validity period,
then in case the bank did not make payment, the beneficiary can sue the bank within the normal period in
the limitation Act 1963. This period under the limitation Act is thirty years in case the beneficiary is
Government department or municipality body and three years in all other cases. It is prudent on the bank’s

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part to insist that the bank guarantee be returned after the claim period duly cancelled by the beneficiary or
a certificate from the beneficiary be obtained that there are no claims under the guarantee and until such
time the cash margin and the security of the debtor ( customer ) has to be retained.

Counter guarantee: In case the guarantee is invoked by the beneficiary, bank has to make payment and in
turn bank has to recover this amount from the customer. For that bank will obtain a counter guarantee –
cum – indemnity executed by the customer in favour of the bank. The counter guarantee should also
include all other expenses like interest on delayed payment, taxes and other levies. The counter guarantee
should also include a clause that it would remain in force until the guarantee given by the Bank subsists

Payment under Bank Guarantee – Precautions to be taken

Proper invocation of the guarantee: The bank while making payment on its guarantee has to ensure
that the invocation has been properly made. A bank guarantee is a commercial document and is
neither a statutory notice nor a pleading in a legal proceeding. A bank guarantee may be invoked in
a commercial manner. The invocation would be sufficient and proper if :-

a) The invocation is within the validity period

b) The invocation amount is not more than the guaranteed amount

c) Authority invoking the guarantee is competent or empowered, especially guarantees issued to


Govt. depts.

No court injunction prohibiting payment exists

UNIT 12. LETTERS OF CREDIT


A Letter of Credit is similar to a Bank Guarantee as far as the obligation of the bank is considered. It is
primary, irrespective of the underlying contract. A letter of credit is an instrument whereby the issuing bank
undertakes to make payment to the beneficiary (seller) upon his submission of the stipulated documents as
mentioned in the LC. It is not a negotiable instrument.

Parties to a letter of credit:

1) Applicant – Buyer - Importer – Opener : He is the person who applies to the bank to open an LC

2) Issuing bank: - The bank which opens the LC on the request of the applicant / buyer, also called
the opening bank or importer’s bank.

3) Beneficiary – Exporter – Seller : is the person entitled to receive the payment under a LC

4) Advising bank: The bank in the beneficiary / exporter’s country through which the LC is advised to
the beneficiary.

5) Negotiating bank: The bank in the exporters / beneficiary’s country which negotiates the bills
(makes payment on the bills drawn by the seller and accepts the documents) also called as
nominated bank or paying bank.

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6) Confirming bank: the bank which gives an additional assurance to pay the amount, may be
advising bank itself.

7) Reimbursing bank It is the bank which is appointed by the Issuing bank to male reimbursement to
the negotiating , paying or confirming bank

Types of LCs

1. Acceptance credit: Ordinary LC’s are usually sight credits, i.e. immediate payment for the bills drawn
by the beneficiary. As per the terms of LC, sometimes bills will be payable after an agreed period of time
(Usance bills). Such LC under which Usance bills can be drawn is called ‘Acceptance credit’. The bills
drawn on various dates are honoured on their maturity.

2. Irrevocable Credit: Uniform customs and practice for documentary credits (UCPDC) have come into
force which all the countries have to obey as per the international practice. An irrevocable LC is one
when once it is established; it can neither be amended nor cancelled without the consent of the
beneficiary. All LC’s are irrevocable as per the UCPDC.

3. Confirmed credit: If a bank advising the credit to the beneficiary adds its own confirmation to the credit,
it is called a confirmed credit. Only irrevocable LC can be confirmed. Confirmation means the confirming
bank would fulfill the obligation. A confirming bank accepts this responsibility only on instructions by the
issuing bank and so if any of the terms in the LC have to be changed, then the concurrence of all the
parties would be necessary.

4. With Re course and Without Re course credit. When a beneficiary draws a bill under a LC he is
generally liable to any negotiating LC bank if the drawee fails to make payment In other words his
liability is extinguished only on the drawee making payment. LCs calling for these kinds of bills are with
recourse. However the beneficiary can exclude his liability by adding to the bill the following words
“ without recourse “

RBI does not allow any inland bills drawn “without recourse “

5. Transferable credit: A LC is not a negotiable instrument, though the bills of exchange drawn under it
are negotiable. The rights under an LC cannot be transferred and is vested in the beneficiary.
A transferable credit is one under which the beneficiary can transfer his rights to third parties. Unless
specifically stated an LC is not transferable.

6. Back to Back credits: The beneficiary in whose favour an LC is issued uses the same to open another
credit from his (beneficiary’s) bank in favour of his supplier. Thus there are three banks, the bank
issuing the original credit, advising bank and the third bank which issues an ancillary credit against the
security of the original credit.

7. Red clause LC: In the usual LC, beneficiary will receive payment on his submission of the shipping
documents to the negotiating bank. However in certain credits, the beneficiary will be entitled to receive
an advance of the price. These credits contain a red clause (clause is printed in red ink) authorises

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intermediary banks to make an advance to the beneficiary before the shipment. Red clause LC’s are
becoming obsolete.

8. Green clause LC: It is an extension of red clause LC, which permits not only pre – shipment advance,
but also permits advances to exporter to cover storage expenses at the port of shipment. The red
clause & green clause LC’s are called ‘Anticipatory Credits’.

9. Revolving LC: When there is regular trade between the same parties, it is preferable to open a
revolving LC, in which the amount is fixed, it can be renewed as soon as the earlier bills have been
paid.

Documents under a Letter of credit: The documents which are to be submitted for negotiation should
strictly be in conformity with the terms of LC. There are certain common documents: - They are:

1. Bill of Exchange: Payment is made on this document. For brevity sake, it is called “bill” or “draft”.
The bill is drawn by the beneficiary and signed by him. Bills or drafts are payable on presentation (sight
bills) or on a certain date (Usance bill).

2. Invoice: This is the basic commercial document. It should be made in the name of the opener /
importer. All the details mentioned in the LC must tally with the invoice. The invoice must contain the
total quantity of goods, total weight, Unit price, total price etc. Where the quantities are specified in a
L/C, the form in which they are specified should be adhered to.

3. Transport documents: The mode of transport of goods is as per the terms of LC. The two main
modes of transport are either by sea or by air. In case the goods are shipped, the documents are called
‘Bill of Lading’ and if by air it is called ‘Airway Bill’.

Bill of Lading is a document of title to goods. A bill of lading is issued in sets of 2, 3, or 4 and all are
termed as originals. And all the originals to be submitted. The B/L must be a ‘shipped’ B/L. Shipped B/L
means, the goods are on board of the ship and the journey has commenced. Charter party BL are not
acceptable.

Another type is the ‘Combined Transport Bill’: a creation of modern age containerization of shipments which
permits more than one means of carriage and is also known as ‘Multimodal Transport’. Unless otherwise
specified in the L/C, a bill of lading must be a ‘shipped on board’ bill of lading

Airway bill: Unlike B/L, Airway bill is not a document of title to goods. It evidences that the goods have
been received by an airline company or its agent. However if the LC permits transport through air, airway
bill is acceptable.

Post Parcel Receipt and Courier Receipts: These are similar in nature to the airway bill.

Insurance Documents: The type of insurance cover should be the same as specified in the credit. The
requirements of the buyer regarding the amount of the policy, the currency, the risk to be covered and the
place of payment in case of claim are to be strictly complied with.

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Other documents: over and above the major documents, other documents such as, certificate of origin,
certificate of weight & quality, certificate of origin, health authority’s certificate etc. are to be enclosed.

Uniform Customs and Practices for Documentary Credits – UCPDC 600

The ICC Banking Commission approved the UCPDC 600, ICC’s new rules on documentary credits on
25th October 2006. UCP 600 came into effect from 1st July, 2007. The new UCP 600 also contains within
the text the 12 Articles of the eUCP, ICC’s supplement to the UCP governing presentation of documents in
electronic or part-electronic form.

Payment under LC – Banks obligation

The responsibility of banks to honour an LC is primary, just like in a bank guarantee. The court would not
adjunct a bank from making payment under a guarantee as well as in a LC also. In a famous case
(AIR 1970) Supreme Court observed: -

An irrevocable LC has a definite implication. It is a mechanism of great importance in international trade.


Any interference with that mechanism is bound to have serious repercussions on the international trade of
this country. Except under exceptional circumstances, the court should not interfere with that mechanism.

In another case Supreme Court observed: -

A letter of credit is independent of an unqualified contract of sale or underlying transaction. The autonomy
of an LC is entitled to protection. As a rule, courts refrain from interfering with that autonomy

UNIT 13. DEFERRED PAYMENT GUARANTEE (DPG)


Deferred payment guarantee is an unconditional and irrevocable guarantee given by a bank to a seller/
exporter that on his supplying goods to the buyer / importer (who is the banks’ customer) on installment
basis the bank would ensure payment on the due dates.

This DPG is applicable in the case of import of Capital goods, where the price is to be paid in instalments
over a period. The exporter will have to wait for each installment to mature until the whole amount is repaid.
In the meantime, the importer may go bankrupt or may fail to pay the price. To avoid this risk exporter will
ask the importer to obtain a guarantee for the deferred instalments. The guarantee of the bank assuring the
exporter of the timely payment of the installment is called DPG.

Purpose of DPG: The buyer may not incur a sudden huge amount in one lump sum; substantial amount of
foreign exchange may place the buyer at a great disadvantage. The guarantee ensures timely payment,
failing which guarantee can be invoked and payment received.

Method of Payment

The payment of installments may be stretched over a period of one to seven years. In that case:-

1) Advance payment of ten to fifteen percent immediately

2) Another ten to fifteen percent on receipt of documents under LC

3) Balance amount in installments spread over one to seven years secured by DPG of banks

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In a DPG the following is mandatory:-

1) Supply of goods by seller to buyer & seller agreeing to post pone the payment of the price

2) Payment schedule of both installment and interest

3) Unconditional and irrevocable assurance of the bank to make payment on the invocation of the
guarantee.

The payment schedule is to be incorporated in the main contract between buyer and seller. Some banks as
a matter of abundant caution or to have better clarity of the payment schedule incorporate the same in the
guarantee. The seller / exporter draw Usance bills for the deferred installments and payment of these bills
are guaranteed by the banks. So the exporter can discount these bills with his banker and get immediate
finance.

In a DPG, like all other bank guarantees, the banks undertake to make payment without any demur or
protest. It is on such assurance that the seller / exporter have sold the goods. It is therefore of prime
importance that the bank honours its commitment.

UNIT 14. LAWS RELATING TO BILL FINANCE


Bill financing is one of the various modes of lending by the Banks. Bill finance involves purchasing /
discounting of commercial bills arising out of sale of goods. Compared to a cash credit account it has the
following advantages

a. The underlying transactions are easily identifiable.

b. Repayment date is definite

c. The bill will carry more than one signature, if it is on usance basis

d. There is rediscounting facility – Banks can improve liquidity position

Laws governing bills: The law on bills deals with the liabilities and rights of parties to a bill is governed
by N I Act. 1881.

1) What is a bill: Bill is the short form of Bill of exchange. Sec 5 of N I Act defines bill of exchange as
instruments in writing containing an unconditional order signed by maker, directing a certain person to
pay a certain sum of money only, to or to the order of a certain person or to the bearer of the instrument.

2) Drawer, Drawee, Payee: Sec 7 of the Act provides that maker of a ‘Bill of Exchange’ is called ‘drawer’
and the person who is directed to pay is called ‘drawee’ and the person who is entitled to receive the
money is called ‘payee’.

Holder: Sec 8 of N I Act defines a holder of B.E means a person entitled in his own name to possess the
bill and recover the amount represented by bill.

Holder in due course: Sec 9. Holder in due course means any person who for consideration became the
possessor of the bill (that is a person to whom the bill is transferred).

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Sec. 10 – Payment in due course: means payment in accordance with apparent tenor of bill of exchange
to the holder or holder in due course in good faith and without negligence.

Sec. 14 – Negotiation: When a bill is transferred for considerations to any person so as to entitle him to
claim the amount represented by bill, then such transfer is called ‘Negotiation’.

Sec. 15 - Endorsement: If the holder of instrument signs the bill of exchange for the purpose of
transferring it, such signing is called ‘Endorsement’.

Sec.30. Liability of drawer: The drawer of a bill of exchange or cheque is bound in the case of dishonour
(failure to pay, cheque is bounced) by the drawee or acceptor thereof, to compensate the holder provided
due notice of dishonour has been given.

Sec 32 – Liability of acceptor / drawee of bill: An acceptor of Bill of exchange is bound to pay the
amount thereof at maturity according to the apparent tenor of the acceptance.

Sec 35 – Liability of Endorser: In the absence of contract to contrary, whoever endorses and delivers a
negotiable instrument is bound thereby to every subsequent holder in the case of dishonour, unless his
liability is excluded

Sec 79 – Interest rate specified: When interest at a specified rate is expressly made payable on a bill of
exchange, then interest shall be calculated at such rates specified and payable.

Sec 80 – Interest when no rate is specified: When no interest is specified in the instrument, interest due
thereon shall be calculated at the rate of 18% per annum.

Classification of bills: Bills are classified depending upon the place where drawn, period and their nature
as under: -

Place Period Nature


1. Inland bills 3. Demand bills 5. Clean bills
2. Foreign bills 4. Usance bills 6. Documentary bills
Inland bills: ( sec 11 ) A promissory note, bill of exchange, or cheque drawn or made in India and made
payable in or drawn upon any person resident in India. Ie.,

a. It must be drawn and made payable in India or


b. It must be drawn in India upon some one resident in India though it may be made payable in a
foreign country
Foreign bills: ( sec 12)

a) Bills drawn outside India and made payable in or drawn upon any person, resident in any country outside
India.

a) Bills drawn outside India and made payable in or drawn upon any person, resident in India.

Demand bills: (sec 19) It is an instrument payable on demand and no time for payment is specified. It is
otherwise called ‘Sight bill’, the payee is entitled to the value on demand and on presentation.

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Usance bills: bills payable after a specified period of time. Usance bills are otherwise called ‘Bills payable
after sight’. The drawer draws a bill of exchange and specifies a time within which the payment shall be
made and presents the same to drawee for acceptance. Once the drawee accepts the bill, the drawer can
then present the bill to the drawee on the specified date and demand payment. The date specified for
payment is otherwise called ‘maturity / due date’.

Clean bills: A clean bill is a bill of exchange drawn as per the requirements of the N I Act and is not
supported by documents of title to goods. Clean bills are drawn normally to effect discharge of a debt or
claim. Clean bills also arise when goods are directly sent to the buyer due to mutual consent.

Eg: local bills & supply bills.

Documentary bill: A bill of exchange accompanied by documents of title to goods.

Document against payment bills (DP Bills)

Seller draws a bill on buyer and sends the same to his banker along with document of title (B/L, RR). The
seller instructs his banker to release the bill & documents on payment. The bills are also called ‘Delivery
against payment bills’.

Document against acceptance: A Usance bill supported by documents of title to goods will be delivered
on acceptance by the buyer.

Bill Finance: (1) Bill Purchase (BP). (2) Bill Discount (BD) (3) Advance against bills for collection (ABC)

Bills Purchased: When the bank negotiates bills payable on demand, it is called Bills Purchased. The face
value of the bill is immediately paid to the holder. Thereafter the bank becomes the holder in due course
and acquires all the rights.

Bills discounting: Bank discounts Usance bills and pays the bill amount immediately. Thereafter bank
becomes holder in due course.

Advances against bills for collection: The bank gives an advance after keeping a prescribed margin and
sends the bill for collection.

Sale of Goods Act and Bill of Lading Act: Documents of title to goods is one in which ownership in goods
can be transferred by endorsement and delivery. Therefore, a banker as an endorsee of a L/R or B/L
becomes the owner of goods on transfer of said documents in his name.

Bills co-acceptance facility: In the case of Bills against acceptance, the buyer accepts the bill. Here the
banker co - accept the bill. Under this facility banker undertakes a joint liability with the buyer and enters
into agreement with the borrower for reimbursement.

Legal aspects of Bill finance

When the Bank discounts a bill the bank makes payment to the customer and gets the bill transferred in his
name. By such transfer, which is made by endorsement by the borrower the banker becomes the holder in
due course and would be entitled to receive the amounts from the acceptor of the bill

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Document of title to goods is one in which ownership in goods can be transferred by endorsement and
delivery. Therefore a banker as an endorsee of a LR or RR or BL becomes the owner of goods on
endorsement and transfer of said documents in his name

UNIT 15. VARIOUS TYPES OF SECURITIES


Banks accept various securities either as primary or as collateral when they advance. The effectiveness of
a security would largely depend on the nature of the security - its valuation, marketability, validity and
enforceability

Requisites of a good and acceptable security

1. The borrower should have good title to the security,

2. Easily and freely transferable

3. It should not have any encumbrance / liability,

4. Easily marketable,

5. Easily ascertainable

6. Durable,

7. Easily transportable.

8. Should not be liable to wide price fluctuations

9. Storage should not be difficult

Unsecured and Secured Loans

An unsecured loan is one for which the banker has to rely only upon the personal integrity and credit
worthiness of the borrower

Secured loans are the antithesis to unsecured loans. These loans are given by a banker not merely based
on his confidence on the borrower’s future financial strength, but also based on his present net worth which
he is able to give to the banker to rely upon and recover the moneys lent in the event of his failure to repay
the loan in the ordinary course. In the case of secured loans, a banker besides verifying the future solvency
of the borrower asks for the charge over property of the borrower so that in the event of failure by the
borrower to repay, the banker can sell the property of the borrower charged to him and recover the money.

Why banks insist security?

It is common knowledge that lending by a banker is generally for the economic activity of the borrower and
recovery of loans given by the banker is mostly dependent on the economic success of the borrower.
Success or failure of an economic activity depends on various macro and micro factors. A banker cannot be
absolutely certain about the recovery of the amount lent if he solely relies on the economic success of the
borrower. Therefore a banker asks for security. The charge created over the security acts as a cushion for
the shocks of economic failure of the borrower to the bank

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Various kinds of securities

The securities depending on their nature have various advantages and disadvantages and Banks have to
take various precautions.

A. Land/ Real estate:

It is the most common form of security now.

Advantages

1) The main advantage is that the value of land always goes up. Due to the scarce availability of
land in developing areas, its value always increases.

2) It cannot be shifted ( it can be viewed as a disadvantage also )

Disadvantages

1) Valuation is often difficult, It depends on various factors such as location, size, availability of
utilities, infra structure other amenities etc.

2) The value of building depreciates due to the passage of time.

3) It is difficult to ascertain whether a person has prefect title over the property,

4) Not readily saleable in case of need,

5) Creating a charge is costly,

6) Difficulty in vacating the tenant etc.

7) Govt regulations like Rent control, land holding regulations, protection to agricultural land etc.

Precautions to be taken by the banker:

1) Bank should accord more importance to the financial soundness of borrower


2) Borrowers title should be ascertained with the help of a solicitor
3) Enquire regarding prior charges ( verification of Non encumbrance certificate )
4) Verify whether the property is freehold or leasehold
5) Valuation of the property to be taken by engaging the work to approved valuers. Valuation should
be done taking into account the latest sale transaction of neighbouring properties and the fair
value fixed by the Govt .
6) Registration: where the principal money secured is Rs100 or more, a mortgage charge is
required to be registered unless the charge is an equitable mortgage.
7) Documentation to be carefully taken. Mortgage deed should be drafted carefully considering all
the legal stipulations. It should be witnessed by two persons. In the case of simple mortgage
ad -valorum stamp duty is applicable
8) Tax paid receipts to be verified Upto date property tax receipts should be verified
9) Insurance to be taken.

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B. Stocks and Shares:

Shares are to be classified into preference shares and equity shares. Banks accept only quoted shares
as security. Promoters shares, which are not quoted, are also accepted to prevent promoters from selling
them.

Advantages:

1) Very reliable security.

2) Value can be ascertained without much difficulty ( compared to real estate )

3) Title can be easily be ascertained

4) Normally shares enjoy stability of value and not subject to wide fluctuations

5) Creation of charge is easy and less expensive

6) Formalities for taking them as security are very simple

7) Release of securities is also easy and not expensive

8) Income from shares can be appropriated to the loan amount

Disadvantages:

More fraud prone, partly paid shares are subject to violent fluctuations, not easily realizable

Precautions to be taken by the banker:

1. In the case of partly paid shares

Bank should not register them in its name

Ensure that pending calls are paid

Sufficient margin should be taken

2. Update the list of shares

3. Update the amount that can be lent ( card rate ) periodically

4. Depending on the volatility in the market periodic review should be made

C. Debentures:

Debenture is a document issued by a company acknowledging its indebtedness to the bearer or a


registered holder. A fixed rate of interest is payable at stated periods on such debentures.

Advantages:

1. Easy to sell

2. Not subject to violent price fluctuations

3. Can be transferred at minimum cost

4. Bearer debentures are fully negotiable


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5. Rank in priority to shares and mostly secured by a charge on the company’s property

Disadvantages:

1. If interest is not paid regularly on debentures it would affect its price and marketability

2. If charge is not registered the subsequent charges will get a priority

3. May be issued by companies having no power to borrow money.

Precautions to be taken by the banker:

1. Nature of debentures must be ascertained, ie whether they are secured or unsecured (the former is
preferred )

2. Borrowing powers of the company should be verified. Ensure that power is there and it has not
been exceeded

3. Deposit of debentures plus a memorandum of deposit is necessary

4. Nature and value of the assets charged must be verified periodically

5. Bank should find out whether there are any uncancelled redeemed debentures

D. Goods:

Advantages

1. Goods have a ready market and can be easily sold compared to other securities,

2. Valuation is easy

3. Tangible

4. Advances are usually for short term period and hence risk is less

5. Creating charge on security is simple and less costly.

6. Bank gets a good title to the goods

Disadvantages

1. Perishability

2. Deterioration in quality causing reduction in value

3. Possible risk of fraud in quality and quantity

4. Difficulty in storing

5. Difficulty in transporting.

6. Valuation is difficult ( eg electronic goods )

7. Inspection is difficult

8. Sale proceeds not routing through the account

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9. In the case of release against trust receipts the sale proceeds may not come to the bank

10. In the case of ware house goods, the warehouse keeper enjoys a lein over the goods for any
unpaid charges

Precautions to be taken by the banker:

1. Sanction only to genuine traders, and not to speculators,

2. Sanction only for short term period,

3. Goods must be insured,

4. Proper storage in the case of pledge - as the Bank as Pawnee is liable.

5. Price must be accurately ascertained,

6. Sufficient margin to be maintained

7. Banker should have a working knowledge and gather information of the different types of goods
regarding their character, price movement, storage, value etc.

8. The title of the borrower should be ascertained by verifying the purchase bills/ invoices . Care un
paid stock

9. Periodic inspection of stock,

10. Take precaution against double finance

11. Ensure that creditors are paid

12. Ensure that the party routes all the business transactions through the account

13. Ensure the party deals exclusively with the bank (barring consortium finance )

E. Documents of title to goods: It is a document used in the ordinary course of business as a proof of
possession, goods represented by documents can be transferred by endorsement, the transferee can take
possession of goods in his own right, they are quasi - negotiable instruments. Eg. B/L, RR

Advantages

1. By mere pledge of the instruments , goods are pledged and serve as good security;

2. The possessor can transfer the goods by endorsement and / or delivery.

3. Documents are easily transferrable

4. Formalities involved are less compared to mortage

Disadvantages

1. Possibility for fraud and dishonesty, documents may be forged ones, or even if genuine, quantity
may be altered.

2. In the case of Not negotiable instruments transferee will not get a better title

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3. Unpaid vendor’s right of stoppage: Under the Sale of goods Act 1930 an unpaid vendor has the
“right of stoppage” in transit and he can direct the carrier not to deliver the goods. If this right is
exercised by the unpaid vendor, the banker cannot obtain the goods and his security is of no value.

4. Duplicate documents. Customer may get duplicate documents on the basis of indemnity stating that
the documents are lost and may take delivery and sell, while the original may be with the bank as
security

Precautions to be taken by the banker:

1. Documenters should be thoroughly verified. Ensure genuineness and origion

2. In the case of BL all the copies should be obtained to prevent the shipper delivering against one
copy

3. Ensure documents do not contain any onerous clause or prejudicial remarks regarding condition of
goods received

4. Obtain consignee copy, ensure that bank’s name is entered as consignee

5. Ensure the goods are insured against all possible risks

F. Trust receipt: The bank releases the goods to the borrower without making payment after obtaining a
‘Letter of Trust’. The borrower has to undertake to hold the goods in trust for the banker, to ensure
proper storage and insurance, and to return unsold goods on banker’s request.

G. Life Policies

A. Life policy is taken for two purposes: -

1) In the event of death of the assured, the sum assured will be given to the dependents

2) Ideal form of savings, Income Tax exemption is available; loans can be easily availed on policies in
case of need.

Advantages:

1. Life insurance business is highly regulated and is permitted only to companies with sound financial
health Bank need not doubt the realization of the policies

2. Assignment is very easy and the Bank gets a perfect title..

3. Surrender value increases as the period increases.

4. In case of death of the assured, Company will pay the amount to the bank and the advance will be
liquidated.

Disadvantages:

1. In case of irregular payment of premium the policy will get lapsed, revival of policy is a complicated
procedure.

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2. Misrepresentation or non-disclosure of any particulars will render the policy invalid, so the banker
should make utmost care while accepting life policies.

3. The person who has obtained the policy must have an insurable interest in the life of the assured,
otherwise the contract is void

4. Policy may have special clauses which may restrict the liability of the Insurance Company

5. Risk of duplicate policies

Precautions to be taken by the banker:

1. The policy to be assigned in favour of the bank and the notice of assignment will be informed to the
company, who will in turn acknowledge the assignment and will return the policy to the bank.

2. Ensure age is admitted

3. Ensure policy is not lapsed

H. Advances against Book debts:

Borrowers can take advances by assigning book debts in favour of the bank. The assignment must be
in writing and signed by the transferor, notice of assignment to be given to the debtor and the
assignment may be absolute or by way of charge.

Precautions to be taken by the banker:

1. The value of security depends of the solvency of the debtor and his right to set off, if any

2. Bank should serve notice of assignment to the debtor who should confirm

a. Amount of the debt

b. his right to set off

c. whether any existing assignment is there or not

3. Undertaking to be obtained from the borrower to the effect that any amount realized from the debtor
directly by him will be paid to the Bank

4. Registration of charges in the case of Companies

I. Advances against Fixed Deposit

The depositor can pledge the fixed deposit receipt with the bank and can avail a loan on the security of
such deposit. The banker will grant the loan after keeping a margin. The borrower can either close the
loan by remitting the amount during the pendency of the deposit or if not closed, the surplus proceeds
will be paid to the customer after netting the deposit and loan amount.

Precautions to be taken by the banker:

1. Loans can be granted only to the person in whose name the money is deposited.

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2. Banks should not grant advances on other bank’s deposits as they have a general lien on their
deposits

3. If the deposit is in joint names the request for loan should come from all of them

4. All the depositors should discharge on the back of the instrument after affixing the appropriate
revenue stamp

5. Bank should obtain a letter of appropriation authorizing the bank to appropriate the amount of
deposit on maturity or earlier towards the loan amount

6. The banker should note the lien on such deposit.

7. Care should be taken in advances against the deposits in the name of minors

8. Care should be taken against deposits of other branches ( verify specimen signature, ensure no
prior lien exists )

9. Care should be taken in advances against third party deposits

J. Supply Bills: Supply bills are bills drawn on Govt. departments for the supply of goods or services like
contract work or construction made to Govt. departments or public sector undertakings.

Procedure: The supplier delivers the goods supported by a delivery challan and produces the documents.
The appropriate authority of the Govt. department inspects these goods and accepts for payment on due
date and the supplier obtains an inspection note. In the case of contracts, an engineer’s certificate
regarding work done is obtained.

The supplier / contractor prepare the bill for obtaining payment. Govt. department take quite some time to
verify the bills and pass them for payment. Therefore the supplier/ contractor submits these bills together
with the accepted delivery challan and inspection note or the engineer’s certificate to the appropriate Govt.
department through the banker and requests the banker to advance against such bills. These bills do not
have any status of Negotiable instruments. They are in the nature of debts and are assigned.

Precautions to be taken by the banker:

Such advances should be granted only to borrowers who have sufficient experience in Govt business. It is a
very risky transaction as the Govt will not pass the bills unless there is faithful adherence to the terms by
the supplier. Bank should get a power of attorney to receive the payment from the Govt Dept. and it should
be got registered with them. The inspection note should be carefully studied before making advance. It is
always better the bank reserve the right to demand payment if the bills remain unpaid for a long time

K. Vehicle finance : Fiancé is given against the security of vehicles. Vehicles should be hypothecated to
the Bank. Hypo charge should be registered with the concerned Regional Transport Authority

L. Gold Loan: Advance is sanctioned on the security of gold ornaments for agri. and non agri. purposes.
The nature of charge created is pledge.

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UNIT 16. LAW RELATING TO SECURITIES AND MODE OF CHARGING - I


A mortgage is the transfer of interest in specific immovable property for the purpose of securing the
payment of money advanced or to be advanced by way of loan, an existing or future debt, or the
performance of an engagement which may give rise to pecuniary liability. (Sec 58 (a) of the Transfer of
Property Act 1882

Essentials of mortgage
Transfer of interest. A mortgage does not involve transfer of ownership ( as in the case of sale )
but it only means transfer of interest
Specific immovable property
To secure the payment of loan or the performance of an obligation which may give rise to pecuniary
liability.
an existing or future debt

Mortgage of land: Transfer of Property Act contemplates 6 types of mortgages

1) Simple Mortgage 2) Mortgage by conditional sale 3) Usufructuary Mortgage

4) English Mortgage 5) Mortgage by deposit of title deed (Equitable mortgage)

6) Anomalous Mortgage

Simple Mortgage : Sec 58 (b) of the Transfer of property Act says, a Simple Mortgage is a transaction
whereby without delivering possession of the mortgaged property, the mortgagor binds himself personally
to pay the mortgage money and agrees expressly or impliedly, that is the event of his failing to pay
according to his contract, the mortgagee shall have a right to cause the mortgaged property to be sold by a
decree of the court in a suit and the proceeds of the sale to be applied so far as may be necessary in
payment of the mortgage money.

Features:

Mortgagee has

i. No power to sell the property

ii. No right to receive any rent/ profits

iii. No possession of the property

iv. Registration is mandatory if the principal amount secured is Rs.100 and above.

Mortgage by way of Conditional Sale -58(c)

i. Mortgagor ostensibly sells the property


ii. Sale is ostensible and not real
iii. If money is not repaid on the agreed date, the sale becomes absolute.
iv. Mortgagee can sue for foreclosure
v. No personal covenant for repayment of debt

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Usufructuary Mortgage – 58(d)

i. Mortgagee is put in legal possession of property, and not physical possession

ii. Mortgagee has the right to receive the rents and profits.(can be appropriated in lieu of interest or
principal or both)

iii. There is no personal liability for the mortgagor

iv. There is no time limit specified. (the creditor holds the property till debt is repaid). If not redeemed
within 30 years, mortgagee becomes absolute owner.

English Mortgage –section 58(e)

i. Absolute transfer of property in favour of the mortgagee, subject to provision for re-conveying on
repayment of mortgage money

ii. It provides for personal covenant to pay on a specified date.

iii. Mortgagee can sue the mortgagor for recovery of money

Equitable Mortgage – section 58(f)

Where a person delivers to a creditor (Bank) or his agent documents of title to immovable property with the
intent to create a security thereon, the transaction is called mortgage by deposit of title deed or Equitable
mortgagee.

Requisites of Equitable Mortgage

A Debt . It may be existing or future, or partly both

Deposit of title deeds only at notified towns

Deposit of title deeds must be made by the debtor or his agent

Deposit of title deeds must be made with the creditor or his agent

The deposit must be made of all such deeds which are material evidence of the title

The deposit of title deeds must be made with the intent to create a security on immovable property .
Intention is the essence of the transaction.

Advantages of Equitable Mortgage

Saves stamp duty and registration charges

In the absence of registration the information regarding the mortgage is known only to bank and the
customer. Hence the reputation of the latter is not affected.

On repayment of debt, the documents of title are returned to the customer and he can redeposit the
same for effecting another mortgage. In the case of legal mortgage a new deed is necessary at the
time of creating every mortgage involving expenses like stamp duty, registration charges etc.

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An equitable mortgage stands on the same footing as a mortgagee by deed for the purpose of
priority over the mortgaged property.

Demerits: In case of default, sale can be only through the decree of a court, which is expensive and time
consuming

Precaution: EM with only original title deed, no certified copy / photocopy / duplicate copy to be accepted

Anomalous Mortgage – sec 58(g)

A mortgage which is not a simple mortgage, a mortgage by conditional sale, an English mortgage or a
mortgage by deposit of title deeds

i. It must be a mortgage

ii. It is negatively defined and should not be any one of the mortgaged listed above

iii. It is usually a combination of two mortgages.

A simple and Usufructuary mortgage

An Usufructuary mortgage accompanied by conditional sale

Other forms, moulded by custom and local usage

It may be noted that in all cases other than Equitable mortgage , mortage is to be created by way
of deed and requires to be registered under the Registration Act if the value is Rs.100 or above

Priority: a registered document operates not from the date of registration, but from the date of its
execution. Thus a document executed earlier, though registered later has the priority i.e. date of execution
is important.

Priority between registered and unregistered instruments:

The rule of priority in case of successive mortgages is in the order of time they are created Prior mortgage
by deposit of title deeds (EM) is not affected by subsequent registered mortgage as EM need not be
registered.

Limitation period: for filing a suit for sale of mortgaged property is 12 years from the date mortgage debt
becomes due

Limitation period for filing a suit for foreclosure is 30 Years from the date mortgage debt becomes due

UNIT 17. LAW RELATING TO SECURITIES & MODES OF CHARGING – II


Pledge: Sec 172 of Indian Contract Act defines pledge as “The bailment of goods as security for payment
of a debt or performance of a promise”

Thus a pledge is only a special kind of bailment and the main point of difference is the object of the delivery.
When the object of the delivery of goods is to provide as security for a loan or for the fulfilment of an
obligation that kind of bailment becomes pledge

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Sec 148 of Indian Contract Act defines bailment as the delivery of goods by one person to another for
some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise
disposed of according to the directions of the person delivering them. The person delivering the goods is
called bailor and the person receiving is called bailee (eg. Delivering a cycle/ scooter for repair)

Securities which may be pledged are goods, documents of title goods (LR/MTR, BL, Dock warrant,
warehouse receipts etc), stock exchange securities such as shares and any other movable property .
Advances permitted by banks against pledge are commonly called “key loan “

Essentials of a pledge

• Delivery of possession. It may be actual or constructive (delivery of key of the godown) the legal
ownership remains with the pledge.

• As security for payment of a Debt. If bailment is done for other purpose it will not construe to be a
pledge.

• There should be a contract to return the same goods which were pledged after the debt is repaid

The person whose goods are bailed is called pawnor and who takes the goods as security is called the
Pawnee.

1) The ownership of the property is retained by the pawnor

2) The actual or constructive delivery of the goods to the Pawnee. Constructive delivery means, there
need not be physical transfer of goods, by handing over the key of the godown is construed as a
constructive delivery

Pledge can be created only in the case of existing goods which are in possession of the pawnor himself.
There can be no pledge of future goods. Possession of goods is the most important characteristic; pledge is
lost when possession of goods is lost.

Who can make a pledge: a) Owner of goods b) a mercantile agent

Rights of Pawnee

i. Right of retainer

ii. Right to claim extraordinary expenses

iii. No right to retain in respect of other debts

iv. Rights against third parties

v. Rights where pawnor makes default

• He may sue the pawnor upon the debt

• He may retain the goods as collateral security

• He may sell goods after giving reasonable notices

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Advantages of pledge

Goods are in the custody of Pawnee and so it is easy to sell the goods in case of default. Even if goods are
lost / stolen, banker can recover the amount under the insurance policy.

Precautions: ensure pawnor has the title to goods, to exercise full control over the goods pledged. Banker
must make periodical inspection to verify quality, quantity, value etc.

Hypothecation

Hypothecation is defined under section 2(n) of SARFAESI Act, 2002. It is

a. A charge upon any moveable property,

b. Existing or future

c. Created by a borrower in favour of a secured creditor

d. Without delivery of possession of the moveable property

e. As a security for financial assistance

E.g. Vehicle, stock of goods, raw materials etc.

The mortgage of movable property is called Hypothecation. Neither possession nor ownership is transferred
to the creditor

Hypothecation differs from pledge, because goods remain in the possession of the borrower. The borrower,
as per the covenants of the documents executed, agrees to give possession of the goods when called upon
to do so by the creditor. Once the possession is given up the charge is transformed into a pledge.

Hypothecation differs from mortgage in two ways. Mortgage relates to immovable property but
hypothecation relates to movables. In mortgage, there is transfer of an interest to the creditor, but in
hypothecation, there is only an obligation to repay. If loan is granted to a joint stock company, then the
charge created is to be registered with Registrar of Companies (ROC)

Disadvantages:

1) The goods remain in the possession of the borrower, so virtually the creditor / banker has no control
over the goods, which can lead to fraudulent dealings by the borrower.

2) The borrower may sell full or part of the stock and keep obsolete and slow moving stocks. Erosion of
security can take place.

3) The borrower may hypothecate the same stock to another banker.

4) There is a possibility of hypothecating unpaid stocks.

Precautions: Deed of hypothecation to be obtained from borrower which contains several clauses to
protect the banker. Periodical inspection to be done, notice board displaying the bank’s name to be kept in
the godown as a warning to other bankers. Goods to be insured for any loss /fire.

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TYPE OF CHARGE TYPE OF SECURITY EXAMPLE OF SECURITY

MORTAGAGE Immovable securities Land, building, machinery


embedded to the earth.

PLEDGE Movable assets Stocks, Gold, jewellery.

HYPOTHICATION Movable assets Stocks, motor vehicles, standing


crops.

LIEN Securities which are already in Goods and securities except


possession of the creditor actionable claims and money.

ASSIGNMENT Actionable claims LIC policies, book debts, FDR

Banker’s Lien
Lien is the right of the banks to retain possession of the goods and securities owned by the debtor until the
debt due from the latter is paid. The banker’s lien is an implied pledge. Section 171 of the Indian Contract
Act, 1872, gives to the banker an absolute right of general lien on all goods and securities received by the
banker.

Lien is of two types

i. Particular Lien: The right to retain goods in respect of which the debt was incurred. (section 170)

ii. General Lien: The right of the retainer is not only for the debt incurred for particular goods, but also
for any general balance due. (section 171)

Set-Off
A set off is a right which, in absence of any agreement to the contrary, enables a creditor to adjust wholly or
partly a debit balance in the debtor’s account with any credit balance lying in his favour

UNIT 18. REGISTRATION AND SATISFACTION OF CHARGES

What is a charge ? What is a charge ? As per Section-2 (16) Charge means- An

• interest or lien

• created on the property or assets of a company or

• any of its undertakings or both as security and includes a mortgage;

Type of Charges to be registered:

Companies Act, 1956: Section 125 specifies only 9 types of charges to be registered.viz

A charge for securing any issue of debentures;

A charge on uncalled share capital of the company;

A charge on any immovable property wherever situated or any interest therein;

A charge on any book debts of the company;


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A charge not being a pledge on any movable property of the company;

A floating charge on the undertaking or any property of the company, including stock-in-trade;

A charge on calls made but not paid;

A charge on a ship or any share in a ship.

A charge on goodwill or a patent or a license under patent or a trade mark or a copyright or a


license under copyright.

Companies Act, 2013: Section 77 states that Companies are required to register ALL TYPES OF
CHARGES, with ROC within 30 days of its creation.

• within or outside India,

• on its property or assets or any of its undertakings,

• whether tangible or otherwise, and

Types of charge

A. Fixed charge: Also called ‘specific charge’. It extends over a specific property of the company. It
gives right to the creditor to sell the said property and claim the proceeds towards the dues payable
by the Company.

B. Floating charge: Means a charge that is general and not specific. It can be said to be a charge :

a) that floats over the present and future property of the Company, and it do not attach any specific
property.

b) that does not restrict the company from assigning the property, subject to charge to third parties,
whether by way of sale or security

c) on happening of an event or contingency, crystallizes as a fixed charge. A floating charge is an equitable


charge which does not attach on any specific property but covers the whole of the company’s property.

Effect of floating charge becoming fixed charge:

When a floating charge becomes fixed charge, it constitutes a charge upon all the property or assets then
belonging to the company.

Registration of charge:

Sections 77 to 87 of the Companies Act, 1956 provides for the registration of charges.

Time Limit for filling for Creation of Charge

With in 30 days -Application should be made within 30 days of creation of charge in form CHG-1 without
any late fees.

After expiry of 30 days but not beyond 300 days – Application should be made before 300 days of creation
of charge in CHG-10 attached in CHG-1.

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After Expiry of 300 days -Application for Condonation of Delay to Regional Director in form CHG-8.

DUTY OF REGISTRATION OF CHARGE:

• As per Section 77 it is duty of Company to Create charge.

• As per Section 78 if Company fails to file form for registration of charge then, the person in whose
favour charge is created will file form for creation of charge. The person is entitled to recover from
the company the amount of fees.

But before filling of form person will give 14 days’ notice to Company. If company doesn’t register the
charge or show sufficient cause then person himself will file the form with ROC. This is not responsibility of
Person (in whose favour charge is created) to file form. Therefore if company fail to file form for registration
of charge and person also not filed form then person will not liable to pay any penalty.

Form No. CHG-1 is prescribed for registration or modification of a charge. It is the duty of the company to
ensure registration of charge within stipulated period. For satisfaction of charge Form CHG-4 is prescribed.
It is to be submitted along with the copy of the instrument evidencing the charge along with the registration
fee. For condonation of delay in registration, Form CHG -10 is required to be filed by the company.
Recently Government of India has introduced electronic filing of returns.

Effect of non-registration: If the charge created is not registered with ROC, the charge would not be valid
against the liquidator and any other creditor of the Company in the event of winding up of the company, as
against the company itself. So long as the company does not go into liquidation, the mortgage or charge is
good and may be enforced.

Section 86 provides that contravention of any of the provisions u/s 77 to 87 shall be punishable with a fine
not less than Rs.1,00,000, but which may extend to Rs.10,00,000 and every officer in default shall be
punishable with imprisonment for a term up to 6 months

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MODULE C - BANKING RELATED LAWS


SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT
OF SECURITY INTEREST ACT 2002
SARFAESI Act 2002
This act has brought a legal framework for the following important activities in the credit market.

1. Securitisation of financial assets

2. Reconstruction of financial assets

3. Recognition of any interest created in the security for due payment of a loan as a security interest

4. Power to enforce such a security for the realisation of money due to banks and financial institutions, in
the event of default, without the intervention of courts.

5. Setting up of a CENTRAL REGISTRY for the purpose of registration of transaction of securitization,

reconstruction and CREATION of the security interest.

The Act is applicable to whole of India including Jammu & Kashmir.

SARFAESI Act is applicable to:

Private Banks, SBI, Its Associates, Co-operative Banks, RRB’s, Multi State Co-op. Banks, NBFC’s with
assets over Rs.500 Crores and Housing Finance Cos. notified by central Govt.

An aggrieved person, against whom action under SARFAESI ACT is initiated, can approach the DRAT
(DEBT RECOVERY APPELLATE TRIBUNAL) by depositing 50% of the claimed amount as per section
17(2) of the Act. (earlier the provision was to deposit 75% of the claim amount which was ruled as the
violation of the constitution by the Supreme Court in the Mardia Chemicals Vs Union of India case) .

DEFINITIONS-SARFAESI ACT 2002


In SARFAESI Act 2002, the definitions are given in Section 2 of the Act

Asset Reconstruction is the takeover of loan and advances from the bank or financial institution for the
purpose of recovery. i.e., it is acquisition of any right or interest of any bank or financial institution by any
securitization or reconstruction company.

Central Registry is the registering office set up or to be set up by the Central Govt. with the purpose of
registering all transactions of (i) asset securitization (ii) asset reconstruction (iii) creation of security
interests. The registration system will operate on a priority of registration basis. i.e. the first in time to
register gets priority over the person doing registration at a later time. The Registry also can serve as a
Credit Information centre for lenders.

DRT- Debt Recovery Tribunals are established under the Recovery of Debts Due to the Banks and
Financial Institutions Act, 1993. All cases of recovery of debts of Rs.10 lakhs and above due to banks and
financial institutions are decided by DRTs.

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Default- to initiate action under the SARFAESI Act, the borrower should have failed to pay principal or
interest due to the secured creditor and the account should have been classified as NPA as per RBI norms
(90 days norms).

The lender should be a secured creditor. Any unsecured creditor has no right as per the Act.

Hypothecation is a very common type of charge on a security for a bank’s lending but it is defined for the
first time in the SARFAESI Act. Hypothecation is defined as a charge in or upon any moveable property
existing or future created by a borrower favouring a secured creditor. Under hypothecation the ownership
and possession is still with the borrower i.e. the possession of such security is not delivered to the creditor.
Hypothecation includes floating charge and crystallization of such charge to fixed charge on moveable
property.

Non-Performing Asset - NPA is an asset or account of a borrower classified by the bank as per RBI
norms (90 days norms).

(Sub-Standard, doubtful and loss)

Originator: A Bank or a Financial Institution lends money against security, they are the originator.

Sponsor - is an entity holding not less than 10 % of the paid-up capital of Securitisation Company or

Reconstruction Company.

Obligor: Borrower is the obligor (Guarantor also is an obligor).

Qualified Institutional Buyer means a financial institution or an insurance company or a bank or a state
financial corporation or state industrial development corporation or trustee, or any asset management
company making an investment on behalf of a mutual fund or provident fund or gratuity fund or pension
fund or a foreign institutional investor. These are to be registered with SEBI. QIB does not include a
company registered under the Companies Act, 1956 (Now Indian Companies Act 2013).Now individuals
can also invest in SC or ARC.

Securitisation means acquisition of financial assets by the securitization or reconstruction company from
the bank or financial institution (called the Originator). Such an acquisition may be by raising funds from
the qualified institutional buyers by issue of Security Receipts. Security Receipt is a new concept of
instrument which can be traded and are transferable. The Security Receipts represents the undivided
right/title or interest in the financial assets (security). This concept is new in the Indian laws. It is nothing but
the conversion of non-liquidated financial assets in to marketable securities by way of security receipts.
Similarly the receivable and other assets can also be converted in to securities. As per Indian Laws, there
is no provision for transfer of claims that are secured by any security. Now SARFAESI Act has
made the loans secured by mortgage or other charges transferable. On acquisition of financial assets,
the securitization or reconstruction company becomes the owner of financial assets. RBI is the regulatory
authority for all securitization or reconstruction companies.

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Security Interest is a right, title or interest upon the property created in favour of any secured creditor. It
includes mortgage, hypothecation and assignment. Interest of the lender in the security was not defined
in any law. But now it is defined in the SARFAESAI Act.

SECURITISATION AND RECONSTRUCTION


The securitization or reconstruction companies can commence its business only after complying
with two conditions.

(1) It obtains certification of registration from RBI and also registered under company’s Act.

(2) It should have own funds of not less than Rs.2 Crore at the time of registration. It should maintain
Capital Adequacy Ratio of 15% of assets acquired or Rs.100 Crores whichever is less

The business pattern of securitization or reconstruction companies as per the guidelines of RBI as
per

SARFAESI Act is:

(1) The company can formulate separate scheme for the acquisition of a financial asset.

(2) Create separate trusts for each scheme, maintain separate records and accounts for each scheme and
issue security receipts to the investors.

(3) The company can act as trustees for such trusts and manage the assets held in the trust.

(4)The risk of non-realization of assets will be impacting the investors who are the beneficiaries of the trust.

Therefore there should not be any loss to the company.

They should not invest their own funds in the acquisition of financial assets but utilize it on risk assessment
and act on careful consideration for asset acquisition decision. All the risk factors are to be disclosed to the
investors.

Cancellation of Certificate of Registration can be done by RBI on the following ground:

1. The company ceases to carry on the business of securitization or asset reconstruction.

2. The Co. ceases to receive or hold any investment from qualified institutional buyer.

3. The Co. fails to comply with any condition, directions of RBI, maintain accounts in accordance with the
requirements, and submit its accounts or other records for inspection of RBI

4. The Co. changes its management or registered office or change of its name without prior approval of
RBI.

5. RBI can Audit ARC, remove its Chairman or Directors and appoint its officials as Directors.

The securitization or reconstruction company whose registration is cancelled can prefer an appeal
within 30 days from the date of communication of such an order to the Central Government.

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Note:-Even if the application for registration is rejected or the already existing registration is cancelled, the
company will be considered as registered until the company pays the dues of the investors along with
interest within the period stipulated by the RBI.

Acquisition of rights of interest in financial assets: The securitization or reconstruction company can
acquire the financial assets of any bank or financial institution by any one of the following methods.

1. By issuing a debenture or bond or any other security in the nature of debenture for the agreed
consideration

2. By entering into an agreement with such bank or financial institutions for the transfer of financial assets to
such a company. The company can acquire financial assets without execution of any deed of assignment or
transfer in its favour by the bank or FI. Assignment is complete on the acquiring company issuing a
debenture or bond incorporating the term and conditions of acquisition. The document is to be executed by
paying the stamp duty as per Indian Stamp Act. (not as per the State stamp Act) .Therefore the
securitisation transaction has two stages.

i) Acquisition of financial assets ii) issue of security receipts in favour of investors for raising money from
the investors. Bank or FI is the lender in respect of the financial assets. But once it is acquired by the
Securitisation or Reconstruction Company, the company is deemed as lender and all the rights of the
lender vests with the company. But if there is a liability or commitment on the bank or FI, it will not pass on
to the acquiring company.

Documents involved in a securitization

(1) Offer Document – contains the full details and particulars about the financial asset, loan details of the
bank or FI, trustee’s details, some quarterly details such as profit-loss, prepayments, expenses, defaults,
collections.

(2) Debenture – Debentures are issued to the bank or FI as consideration for the acquisition of financial
assets. As per existing guidelines the rate of interest of such debenture cannot be less than one and half
percent above the Bank Rate as on the date of issue of debentures and the period of redemption of
debenture cannot exceed six years.

(3) An agreement to the effect that the originator shall continue to service the assets of the
securitization.

(4) Security Receipt – issued by the co. in favour of the investors.

Notice to the Obligor – When the bank or FI decides that the financial assets are to be acquired by the
co., a notice about such an acquisition may be given to the obligor i.e. borrower or any other person liable
to pay. But this is optional and not compulsory. If the obligor is a company and the creation of charge is
registered, then also the giving of notice to the registrar is optional. So there is no need of modification of
charge with the Registrar of Companies. However if the bank or FI decides to give notice, then notice to the
ROC is required. If notice of acquisition is not given, the money or property received by the bank or FI from

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the obligor shall be held by them in trust and shall be handed over to the concerned securitization or
Reconstruction Company.

Issue of Security Receipts and raising of funds by Securitisation or reconstruction company: The
Securitisation or Reconstruction Company raises funds for acquisition by issue of security receipts. Only
Qualified Institutional Buyers can buy those security receipts. Security receipts are not issued to the public
because the Act has debarred the individuals from investing on it. The reason for the same is that the
investment in this field is very complex and much risk assessment is required to be done by the investor.
The individual investor does not possess such expertise.

For the issue of security receipts to qualified institutional buyers the following conditions shall be
complied with:

(1) For each financial asset acquired there should be separate scheme

(2) Scheme-wise and asset-wise separate accounts should be maintained.

(3) Realisation of the asset is held and applied towards redemption of security receipts.

(4) In case there is no realisation and repayment, the qualified institutional buyers holding not less than
75 % of the total value of security receipts issued are entitled to call a meeting of all QIBs and the
resolutions passed in such a meeting is binding on the concerned company.

(5) The funds raised or assets acquired by the co. shall be held by them in trust for the investors.

Exemption from Registration of Security Receipts: When the Co. issues security receipts the holder is
entitled to an undivided interest in the financial assets. So security receipts need not be registered under
the Registration Act. However registration of security receipts is required if:

1. There is transfer of security receipts

2. If the security receipts is creating, declaring, assigning, limiting or extinguishing any right, title or interest
to or in an immovable property.

Measures of Asset Reconstruction: Asset reconstruction means acquisition of any right or interest of any

bank or FI in any financial asset for the purpose of realization. The measures are:

1. To change or take over the management of business of the borrower for proper management of
business of then borrower: As per the provisions of the SARFAESI Act, when a borrowal unit has been
classified as NPA but is still functioning, can be treated differently by the banks and FI. If the cause of
default in such a unit is any mismanagement or lack of expertise, the securitization or reconstruction
company has the powers to take over the management or change the management. The power can be
exercised even when there is no default. On realization of debt in full, the management of the business
can be restored back to the borrower.

2. To sell or lease of a part or whole of the business of the borrower

3. Rescheduling of payment of debts

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4. Enforcement of security interest in accordance with the ACT.

5. Settlement of dues payable by the borrower.

6. Taking possession of secured asset as per the Act.

Other functions of Securitisation or Reconstruction Company:

(1) Can act as an agent for the bank or FI for the purpose of recovering their dues from the borrowers on
payment of fees/ charges.

(2) Can act as a manager for the secured asset of which possession is taken by bank or FI for fees

(3) Can Act as a Receiver if appointed by any court or Tribunal. Other than this and securitization and
reconstruction functions, for undertaking other functions prior permission from RBI is required.

Resolution of dispute: Any dispute between bank and FI and securitization or Reconstruction Company
as well as with the qualified institutional buyer is required to be settled by conciliation or arbitration as per
the provisions of the Arbitration and Conciliation Act, 1996. But this is not applicable to the disputes with
obligor or borrower.

Other important guidelines

1: On acquisition of financial asset of a bank or FI that has been classified as NPA, the securitization or
reconstruction company has to formulate a plan for realization such an asset within 12 months.

During the planning period, the asset can be classified as Standard Asset.

2. Any entity not registered with RBI under SARFAESI Act, may conduct the business of securitization or
reconstruction outside the purview of SARFAESI Act.

3. The securitization company cannot raise money by way of deposits

4. On enforcing securities, the securitization or reconstruction company may acquire secured assets for its
use or resale if such a resale through a public auction.

5. When an asset is acquired for reconstruction there is a limit of 5 years for such reconstruction.

6. The co. shall maintain the capital adequacy of 15% of total assets acquired or the capital of Rs.100 Cr,
whichever is less.

7. Deeds executed by an ARC, while buying a loan from banks are now exempted from stamp duty.

ENFORCEMENT OF SECURITY INTEREST

With the introduction of SARFAESI Act banks and FIs are empowered to enforce securities in the event of
default by the borrower without the intervention of Civil Court or the Debt Recovery Tribunal. This is over
and above all other remedies available including filing suit. Before enforcing the security interest, the bank
or FI shall give a notice to the borrower under section 13(2) of the Act. The notice will stipulate the borrower
to discharge his liability in full within 60 days from the date of notice. As per amendment to the Act under

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section 13(3 A), the borrower on receipt of the notice can make a representation or raise an objection to the
secured creditor. The creditor shall consider it or send reply within 15 days to the borrower.

Enforcement: I (6) The securitization or reconstruction company is permitted to set up trusts that can issue
security receipts trusteeship of such trusts vest in the concerned Co. If the borrower does not pay in full as
per the notice the secured creditor has the right to take recourse to one or more of the following measures

1. Take possession of the secured assets of the borrower including the right to transfer by way of lease,
assignment or sale for the realization of money from the secured asset.

2. Take over the management of the secured asset of the borrower including the right to transfer by way of
lease, assignment or sale and realize the secured asset.

3. Appoint any person as the manager to manage the secured assets, the possession of which has been
taken by the secured creditor.

4. Sometimes it is possible that a person might have acquired the secured asset from the borrower and
money may be due from him to the borrower. The secured Creditor may demand the money from that
person by giving a notice.

Sale Proceeds: When the secured asset is sold the sale proceeds is to be appropriated in the following
order:

(1) Firstly towards costs, charges and expenses on preservation and protection, of securities, insurance
premiums that are recoverable from the borrower.

(2) Secondly towards the dues of the secured creditors

(3) Thirdly, if there is any surplus it will be paid to the persons who are entitled to recover the amount in
accordance with the right and interest. The secured creditor has the right in preference to all other creditors
including Govt. dues.

* If the borrower pays in full before the date fixed for sale or transfer, the secured creditor shall not sell or
transfer the secured asset. In the case of joint finance or consortium finance, no secured creditor can take
such an action of taking possession unless it is agreed upon by the secured creditors representing not less
than 60% in the value of outstanding dues.

* In case of a borrower company which is under liquidation, the dues payable to the workmen have
parri passu charge with the secured creditors as per section 325 and 326 of the Companies Act 2013. This
is the exception for the priorities the secured creditor otherwise gets in recovery of dues.
* The right of the secured creditor is to be exercised by the one or more of its authorized officer who shall
be of the level equivalent to Chief Manager.

* Once the borrower receives the notice U/S 13(2), the borrower shall not transfer the security by way of
sale, lease or otherwise. The Act stipulates the punishment of one year or fine or both for the non-
compliance of this provision.

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* Inventory of the property taken in to possession be made and the property must be entrusted to the
authorized person.

* The property taken into possession should be properly taken care of, preserved and protected by the
secured creditor until they are sold.

* If the property is subject to speedy decay or expenses to keep in custody are likely to exceed its vale, then
the authorized officer can sell it at once.

* For taking possession of an immoveable property under section 13(4), the secured creditor is required

to serve a possession notice as early as possible as given in the Appendix IV of the rules on the borrower
and by affixing the possession notice on the outer door or at a conspicuous place at the property.

* The authorized officer is required to publish the possession notice in two leading newspapers, one of
which should be in the local vernacular language within 7 days from the date of taking possession.

* The authorized officer shall obtain a valuation of the immoveable property from a approved valuer as per
Wealth Tax Act before sale and fix a reserve price.

* Thirty days before sale of the immoveable property, the borrower should be given a notice about the sale.
If the sale is by public auction or by inviting tenders from the public, the notice should be published in two
leading newspapers, one of which should be in the local vernacular language, detailing the terms of sale.

* Once the sale is accepted by the purchaser and the secured creditor, the purchaser has to deposit 25 %
of the offer price. The authorized officer is authorized to issue the sale certificate. Such a certificate is
conveyance of the immoveable property and it is to be stamped as per State stamp act.

Chief Metropolitan magistrate or District Magistrate’s Assistance to take possession of secured


Asset U/S 14. -- If the secured creditor finds it difficult to take the physical possession of the immoveable
property, he can seek the help of Chief Metropolitan Magistrate or District Magistrate and they are bound to
take possession (even by force) and hand it over to the secured creditor.

Takeover of management: When a secured creditor takes over the business of a borrower, he may
publish a notice in a newspaper in English and in an Indian language in circulation in the place where the
principal office of the borrower is situated for the appointment of:

1. If the borrower is a company, to be directors of such company

2. In any other case, to be administrator of the business of the borrower. On publication of the notice, the
directors of the company and in any other case, the person holding any office of superintendence
immediately before such publication, shall be deemed to have vacated their office. Then the directors or
administrators appointed by the secured creditor shall be in control of such property. On realisation of debt
in full, the secured creditor shall restore the management to the borrower. The erstwhile directors of the Co.
cannot claim any compensation on account of his loss of office.

Application to DRT-Debt recovery Tribunal: The borrower or any person aggrieved by the action taken
by the secured creditor for taking possession of the security may prefer an application to the DRT having

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jurisdiction by paying prescribed fees within 45 days from the date on which such measures are taken. The
DRT has to dispose of the application as per The Recovery of Debts due to the Banks and Financial

Institutions Act. 1993. The DRT has to dispose the application within 60 days. But if the DRT could not
dispose of the application within 45 days, DRT has to record the reasons for the delay. But the delay should
not be beyond 4 months from the date of filing the application. If DRT has not decided within 4 months they
can approach the Appellate Tribunal for early disposal of the application.

Appeal to Appellate Tribunal- DRAT: Any person who is aggrieved by the decision by the DRT can
appeal to the Appellate Tribunal by paying prescribed fees within 30 days of receipt the DRT order. But the
borrower should deposit 50% of the debt claimed by the secured creditor while submitting an appeal to
Appellate Tribunal. But the DRAT has the power to reduce this amount to 25% of the claim amount.

For the banks and FI to file a suit for recovery with the DRT, the claim amount should be Rs.10 lakhs and
above under The Recovery of Debts Due to banks and FI Act, 1993. However SARFAESI Act does not
provide any pecuniary limit. Therefore, appeal before the DRT against the action by the secured creditors in
cases below Rs.10 lakhs is also permitted. Banks can now file cases in Tribunals having jurisdiction over
the branch where the debt is pending. Earlier it was borrowers’ residence or business place. DRT
proceedings can now be undertaken in electronic formats.

CENTRAL REGISTRY
The Central Govt. is authorized to set up a Central Registry for the purpose of registration of transactions
involving

(1) Securitisation and reconstruction of financial assets

(2) Creation of security interest under SARFAESI Act.

There are other acts which require registration of certain things and charges such as: Registration Act,
1908, Companies Act, 1956, Merchant Shipping Act, 1958, Patents Act, 1970, Designs Act, 2000, Motor
Vehicles Act, 1988 .The registration before the Central Registry is in addition to the respective registration
as per the above Acts. The Central Govt. can appoint a Central Registrar for the purpose of registration
under the SARFAESI Act a record shall be maintained at the central registrar in which all transactions
relating to

(1) Securitisation of financial assets

(2) Reconstruction financial assets

(3) Creation of security interests. For the purpose of registering these transactions an application in the
proper form is to be filed before the Central Registrar within 30 days from the date of transaction or creation
of security interest. Registration of securitization and reconstruction transaction is to be registered with the
central registrar by the securitization and Reconstruction Company and the creation of security interest by
the secured creditor (bank/FI). The delay in filing for registration can be condoned by the central registrar
for a period of next 30 days, on payment of fees not more than 10 times of the prescribed fees.

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Modification of security Interest: Whenever any security interest registered with the Central Registrar is
modified, modification is to be registered within 30 days. Delay condonation will be for next 30 days on
payment of fees not more than 10 times of the prescribed fees.

Satisfaction of security interest: The security interest registered with the Central Registry is required to
be satisfied on the payment of full amount by the borrower. This is to be done with 30 days from the date of
payment in full or satisfaction of the charge. On receipt of the satisfaction of the charge the central registrar
is required to cause a notice to be issued to the securitization or reconstruction co. or secured creditor,
calling upon to show cause within a time not exceeding 14 days as to why the payment or satisfaction
should not be recorded. If any cause is intimated to the central registrar, they will record it and inform the
borrower about it. The particulars entered in the central register on securitization or reconstruction or
security interest are open for inspection by any person by payment of fees. Creation, Modification,
Satisfaction of charges by hypothecation over Plant & Machinery, Book debts, Intangible assets like Trade
mark , patent and all types of Mortgage must be registered with the Central Registry.

OFFENCES AND PENALTIES

Section 23 of SARFAESI Act provides for filing of the particulars of charge created, Section 24 for
modification and section 25 for satisfaction before the Central Registrar. If the securitisation or
reconstruction company or secured creditor fails to perform any of these duties, the company and the
officers of the company are punishable with a fine that may extend to Rs.5000 for each day during which
the default continues.

If the directions of RBI are not complied with, such company is punishable with a fine not exceeding
Rs.1 crore for the default. In case of further continuation of the offence, an additional fine up to
Rs.10000 per day can be imposed. As per section 30, only courts of Metropolitan Magistrate or the Judicial
Magistrate of First Class (not below rank than this) can hear any cases relating to such offenses.

MISCELLANEOUS PROVISIONS

The banks/ FIs can initiate action under SARFAESI Act only in the case of securities not in possession of
them. i.e. securities already in possession of the bank/FI are not covered by the Act

SERFAESI Act will not cover the following types of credit facilities.

• Unsecured credits like clean loans


• When the debt is not in default as per 90 days NPA norms of RBI
• When the outstanding in the A/C is less than 20% of principal and interest
• When the loan amount due is less than Rs.1 Lac
• When the charge is over A) Vessel (merchant ships) B) Air Craft C) The rights of an unpaid seller
as per Sale of Goods Act
• When the charge is over any property which is not liable for attachment or for sale as per Civil
Procedure Code Sec. 60
• When the charge is by lien or pledge (since the creditor will be having the possession)
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• Any security interest created on agricultural land.

Non fund based facilities like Bank Guarantee, L/C and DPG are also covered under SARFAESI Act.

* The secured creditors and their officers are protected for actions taken in good faith by the provisions of
the Act. So no legal action can be taken against them.

* The Act has conferred jurisdiction to DRT and Appellate Tribunal. No civil courts have any jurisdiction to
entertain any suit or proceedings. The courts cannot grant injunctions on any action under the Act. These
provisions make the Act more effective.

Limitation: The actions that the secured creditor can take against the security are subject to the Limitation
Act Section 36. i.e., action is to be taken within 3 years from the date of on which the cause of action
arose. (Acknowledgement of debt or security must be taken for all cases where action is initiated
under the Act).

* No reference to the BIFR- Board for Industrial and Financial Reconstruction shall lie when financial assets
are acquired by Securitisation or reconstruction Co.

* If the secured creditors representing not less than three-fourths in value of the amount outstanding take
any measures under SARFAESI Act, the reference already pending with BIFR will get abated.

THE BANKING OMBUDSMAN SCHEME, 2006

The banking Ombudsman Scheme 2006, came in to force w.e.f 1-1-2006.The scheme was introduced with
the objectives of :- (1) To resolve complaints relating to banking services and to facilitate the satisfaction or
settlement of such complaints (2) Resolve disputes between a bank and its constituents as well as amongst
banks, through the process of conciliation, mediation and arbitration. The scheme is applicable to the whole
of India and applicable to all banks in India. The RBI has the authority to suspend the operation of the
scheme fully or partially.

Definitions

Appellate Authority- is the Deputy Governor in charge of the Banking department of RBI.

Bank means a banking company including a corresponding New Bank, a Regional Rural Bank (RRB), SBI
and its subsidiaries, scheduled primary co-operative bank which is included in the second schedule of RBI
Act, 1934, having a place of business in India.

Complaint- means a representation in writing or through electronic means, containing a grievance, alleging
deficiency in banking services.

Appointment of Ombudsman—RBI appoints one or more of its officers in the rank of Chief General
Manager or General Manager as Banking Ombudsman for a period of not exceeding 3 years at a time.

Grounds of Complaint

(1) Non-payment/inordinate delay in the payment of cheques, drafts and bills.

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(2) Non-acceptance of small denomination notes or coins tendered for any purpose and for charging
commission for the service.

(3) Non-payment or delay in payment of inward remittance.

(4) Failure or delay in the issue of drafts, pay orders and banker’s cheques.

(5) Failure to honour a guarantee or letter of credit commitments

(6) Failure to provide or delay in providing a banking facility (other than loans and advances) promised in
writing by a bank or its direct selling agents,

(7) Delay in receipt of export proceeds, handling of export bills, collection of bills for exporters pertaining to
the bank’s operation in India

(8) Delay, non-credit of proceeds to parties accounts, non-payment of deposits, or non-observance of RBI
directives applicable to rate of interest

(9) Complaints from NRIs

(10) Refusal to open a deposit account without any valid reasons

(11) Levying of charges without prior notice to the customer

(12) Non-adherence to the instructions of RBI on Debit/Credit card operations

(13) Non-disbursement or delay in disbursing of pension (except for the employees of bank)

(14) Refusal or delay in accepting taxes

(15) Refusal or delay in servicing or redemption of Govt. securities

(16) Forced closure of deposit account without notice

(17) Refusal or delay in closing the deposit accounts

(18) Non-adherence to the fair practices code by the bank

A complaint cannot be filed for non-sanction of a loan. But non-observance of RBI directives on rate of
interests, delays in sanction, disbursements, non-acceptance of application for loans without furnishing
valid reasons can be raised as complaint.

Procedure of filing complaint—any person aggrieved against a bank for reasons mentioned above may
make a complaint by himself or through a representative (not an advocate) to the banking Ombudsman with
whose jurisdiction the branch or office is located. Complaints on credit card operations shall be filed before
the ombudsman within whose jurisdiction the billing address of complainant is located. A complaint shall be
in writing or on-line as per the specified form.

Before filing complaint before the Ombudsman, the complainant should have made a written
representation which was rejected by the bank or not received any reply within one month after the bank
received the complaint or he is not satisfied with the reply received from the bank. The complaint can be

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made not later than one year after the cause of action has arisen. Complaint shall be made before the
expiry of the period of limitation as per the Limitation Act, 1963.

Settlement—the ombudsman has to serve a notice of receipt of complaint to the bank along with a copy of
the complaint. He will try to settle the complaint through conciliation or mediation. If the complaint is not
settled within one month from the date of receipt, the ombudsman may pass an award after giving the
parties sufficient opportunity to present their case. The ombudsman can award compensation up to Rs.10
lakhs. The award shall be binding all parties concerned. The award shall be accepted by the complainant
within 15 days. If it is not accepted the award will lapse. The bank shall comply with the award within one
month of receipt of the acceptance letter of the complainant. In case of complaints relating to Credit Card
operations, the compensation shall not exceed Rs. 1 lac.

Appellate Authority—any person aggrieved by the award of the ombudsman can file an appeal to the
appellate authority within 45 days from the date of receipt of award. For genuine reasons, the Appellate
authority can grant a further time of 30 days to file the appeal. If the appeal is filed by bank, it should be with
the sanction of the Chairman/MD/ED/CEO of the bank. After giving opportunity to all parties, the appellate
authority will pass an award. His award has also the same effect as that of the award of the banking
ombudsman. All banks shall display the name and address of the ombudsman in their office premises. A
copy of the scheme shall be available with the designated officer of the bank. A nodal officer shall be
appointed for the scheme at each bank’s regional office/zonal office.

RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT, 1993-DRT ACT
The DRT Act, 1993 was enacted for the establishment of Debt Recovery Tribunals for speedy decision and
recovery of debts of banks and financial institutions. The Act is applicable to the whole of India except
Jammu & Kashmir. The debt of Rs.10 lakhs and above only can be referred to DRTs. All banks including
RRBs can file cases. But Co-operative banks are not brought under the purview of the Act. The debt for the
purpose of this Act is (1) any liability inclusive of interest whether secured (2) any liability inclusive on
interest insecured (3) any liability payable under a decree of a civil court or any arbitration award (4) any
liability payable under mortgage and subsisting on the date of application to DRT. A payment made by
mistake by a bank is also a debt. The money withdrawn from a bank account without any of facility is also a
debt. But a liability in respect of a fraud committed by an employee is not a debt and not recoverable under
DRT Act.
Appointment of DRT & DRAT--The Central Govt. is empowered to establish DRTs, its jurisdiction and
appointment of the presiding officer of DRT. There will be only one presiding officer for a DRT who should
be qualified to be appointed as the District Judge. He is appointed for a term of 5 years or until he attains 65
years whichever is less. The central Govt. will appoint one or more recovery officer who will work under the
presiding officer. The Central Govt. also appoints the Appellate Tribunals which are called Debt Recovery
Appellate Tribunal - DRAT. The person occupying the office of the appellate tribunal is called the
chairperson. There will be only one chair person for a DRAT. The qualifications of a chairperson to be
appointed for a DRAT are:

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(1) he should be qualified to be a Judge of a High Court

(2) has been a member of India Legal Service and held a post in grade-1 of that service for at least 3 years
(3) has held office as the presiding officer of a tribunal for at least 3 years. He can hold office for a term of 5
years or till he attains 67 years whichever is less. In a judgment of the Bombay High Court it was held that
an application for execution of the decree of foreign court can be entertained by the DRT. The chairperson
of the Appellate Tribunal can transfer an application from any presiding officer in his jurisdiction to any other
presiding officer within his jurisdiction. Before such a transfer he will give notice to all parties and hear them.
From the date of establishing the Tribunal, no court or other authority shall have powers to deal in any way
the recovery cases of Rs.10 lakhs and above. But high court and Supreme Court has the powers to deal in
such cases under 226 and 227 Articles of the Constitution.

PROCEDURE OF TRIBUNALS

The Bank/FI has to file an application in the prescribed form to the DRT by paying the prescribed fees along
with the required documents as per section 19(1) of the Act. When a case is transferred from civil court to
tribunal fresh court fee is not required to be paid. If the same person has debt with another Bank / FI, the
other bank/FI may also join at any stage of the proceedings by filing an application before the DRT, but
before the final orders are passed by the DRT [Sec 19(2) ] . On receipt of the application, the DRT will issue
summons to the defendant requiring him to show cause within 30 days of service of summons as to why the
relief prayed should not be granted. [Sec 19(4)]. On receipt of the summons, the defendant shall submit his
written statement on or before the first hearing or within such time as permitted by DRT [Sec 19(5)]. If the
defendant has any claims of amount from the applicant and wants to set off against the liability, such a
claim is to be submitted in his written statement on the first hearing [sec 19(6)]. Such a claim will have the
same effect as a plaint in a cross-suit. The defendant can, in addition to his claim for set off can submit a
counter-claim by filing an application. The counter-claim may be for damages also.[Sec 19(8)]. Such a
counter-claim has the same effect as a complaint in across-suit [Sec 19(9)]. The applicant (bank/FI) is at
liberty to file a written statement to the counter-claim [sec19 (10)]. If the applicant wants to contend that the
counter-claim by defendant need not be disposed of as a counter claim but as an independent application,
the applicant should make an application

[sec19 (11)].The tribunal may pass an interim order against the defendant to debar him from transferring,
alienating or disposing off of the property without the permission of the DRT. Such an order may be by way
of an injunction or stay or attachment [sec19 (12)].

If at any stage, the tribunal is satisfied that the defendant obstructs or delays or frustrates the execution of
any order, the DRT may pass an order for the recovery:

1) When he is about to dispose of the whole or part of his property.

(2) Is about to remove the whole or part of the property from the local limits of the jurisdiction of DRT.

(3) Is likely to cause any damage or mischief to the property or affect its value or creating third party
interest, the DRT may direct the defendant to furnish security of the value of the property or to place the

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said property at the disposal of the tribunal or the value of the same. If the defendant fails to comply with
this, the tribunal can pass an order for attachment of the whole or part of the property. The tribunal may
also pass conditional order of attachment of whole or part of the property [sec 19(15)]. The tribunal has
power to pass interim orders, attachment orders. If there is a breach of the orders, the tribunal may order
that the person be detained in civil prison for a term not exceeding three months. [Sec19 (17)]. Under Sec
19(18) – (1) the tribunal may appoint a receiver for any property before or after the grant of certificate of
recovery of debt. (2) remove any person from the custody or possession of the property (3) give
possession, custody or management of the property to the receiver (4) appoint a commissioner for
preparation of an inventory of the properties of the defendant or the sale thereof. If recovery certificate is
granted against a company under Companies Act, the tribunal may order the sale proceeds may be
distributed among the secured creditors and surplus if any be given to the company. The tribunal may pass
interim or final orders for payment of amount after giving opportunity to both sides and shall send copies of
such order to the applicant and the defendant. The presiding officer of the tribunal has to issue a certificate
under his signature to the recovery officer for affecting the recovery of debts. As per sec 19(24) application
received by the tribunal shall be decided as early as possible and attempted to dispose of finally within
180 days from the date of receipt of application. The DRT can order that any fact can be proved by affidavit
submitted to the tribunal and tribunal may allow cross examination of witness if necessary.

Appeal to the Appellate Tribunal: Any person aggrieved by the order of the tribunal may prefer an appeal
to an Appellate Tribunal having jurisdiction. But if the order is passed with the consent of all parties, no
appeal shall lie. The appeal is to be filed within 45 days from the date of receipt of order. 75% of the dues
shown in the order have to be deposited by the appellant as per sec 21 of the Act. When the defendant
wants to prefer an appeal to the appellate tribunal, he is required to deposit 75% of the amount
determined by the tribunal. The appellate tribunal has the power to reduce or waive such payment.

The appeal shall be decided at the earliest and attempted to dispose of within 6 months from the date of
receipt of appeal. There is no provision for any appeal to the order passed by the appellate tribunal as per
the Act. But writ jurisdiction of High Court as per Article 226 and supervisory jurisdiction of High Court and
Special Leave Petition-SLP before Supreme Court are not barred. The tribunal and the appellate tribunal
are not bound by the procedure laid down by the civil procedure Code, 1908. It is guided by the principles of
natural justice and provisions of the Act. While trying a suit, DRT and DRAT have the same powers vested
in a civil court and any proceedings of the tribunals are deemed to be judicial proceedings.

For application to be filed with the tribunal, The Limitation Act, 1963 apply. So it is to be filed within 3 years
from the cause of action.

Recovery of Debts: The tribunal issues Recovery Certificates to the applicant. There are Recovery
Officers appointed under the Act who are given powers to recover the amount awarded. On receipt of such
a Recovery Certificate, the amount can be recovered by any one or more of the following methods:

(1) Attachment and sale of moveable and immoveable property of the defendants.

(2) Arrest of the defendant and his detention in prison

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(3) Appointment of a receiver for the management of the moveable and immoveable property of the
defendant.

Validity of Recovery Certificate: The defendant is debarred from raising any dispute before the recovery
officer about the correctness of the amount in the recovery certificate and the recovery officer also cannot
entertain any objection raised by the defendants on any grounds against the certificate.

The presiding officer of the tribunal who had issued the recovery certificate can withdraw or correct any
clerical or arithmetical mistake in the certificate. If any party wants to review the orders passed by the
tribunal on the ground of any error, he can file an application for the review to the tribunal within 60 days of
passing such an order.

Stay an amendment for recovery proceedings: When a recovery certificate is issued to recovery officer,
the presiding officer can grant some time for the payment of the amount. In such cases the recovery officer
has to stay the proceedings until the expiry of such a period. If the appellate tribunal in an appeal has
changed the order, the presiding officer who has issued the certificate has to amend or withdraw the
recovery certificate.

Other Modes of Recovery: In addition to the modes of recovery as per the Act, additional modes can also
be adopted by the recovery officer. The recovery offices can adopt the powers given to the Income tax
officer under sec 226 of IT Act, 1961. These powers are also similar to passing of garnishee orders in
respect of debt, share or other property not in possession of the judgment debtor.

If any amount is due from any person to the defendant, the recovery officer may ask such person by giving
notice to pay the amount to the recovery officer. When such a notice is issued to a bank, FI, post office or
insurer, it is not necessary to produce the pass book, deposit receipt, policy or other document. This
provision applies to money held by other person who is holding it on behalf of the defendant. If it is a joint
holding, then equal shares of joint holders are presumed unless the contrary is proved. If any amount is
payable by a court to the defendant, the recovery officer can apply to the court for payment to him.

Appeal against the order of recovery officer: The defendant cannot question the order of recovery
officer. While attaching and selling the property, any third person having any interest in the property may
get affected. He can appeal to the tribunal within 30 days from the receipt of such an order.

For any acts done in good faith under this Act, no suit, prosecution or other proceedings shall lie against the
Central Govt. the Chairperson, presiding officer or the recovery officer.

In Allahabad Bank Vs Canara Bank 2000 case, the question brought before the Supreme Court was that in
the case of winding up proceedings of a company are pending in a company court, whether the permission
of the company court is required for filing a case before the DRT. The Supreme Court held that:

(1) The adjudication under DRT Act is exclusive and no civil court or company court has any jurisdiction.

(2) DRT proceedings cannot be stayed by the company court

(3) DRT Act over rides the Companies Act

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When the bank or FI with the permission of DRT withdraw its application, for taking action under
SARFAESI Act, if no such action had been taken earlier, such an application for withdrawal shall be
disposed of by the DRT within 30 days from the date of such application. Withdrawal of application before
DRT is not a pre-condition for taking action under SARFAESI Act.

THE BANKERS’ BOOKS EVIDENCE ACT, 1891


The Act extends to the whole of India except Jammu and Kashmir. The Act is also applicable to post office
saving bank, or money order office. Bankers’ book includes ledgers, day books, Cash books, account
books and all other records used in the ordinary business of bank. These records may be kept in written
form or stored in a micro-film, magnetic tape or any other form of mechanical or electronic data retrieval
mechanism. Such record can be either on site or at any off site location and includes a back-up or disaster
recovery site. The evidence may be called for in any legal proceedings which means

(1) any proceeding or inquiry

(2) an arbitration

(3) any investigation or inquiry under Criminal Procedure Procedure,1973 or any other law in force
conducted by a police officer or any other person authorized by the magistrate. Such other person need not
be a magistrate.

Certified Copy: A. if the records are maintained in the written form—a copy of any entry in such books
together with a certificate written at the foot of such copy mentioning that (1) it is a true copy of such entry
(2) that such entry is contained in one of the ordinary books of the bank (3) that such entry was made in the
ordinary course of business (4) that such book is still in the custody of the bank (5) and if the copy was
obtained by a mechanical or other process that in itself ensures the accuracy of the copy, a further
certificate to that effect. If after taking out the copy from the books of the bank, the original books are
destroyed in the usual course of bank’s business a further certificate to that effect of having
destroyed the book is necessary. Each certificate as above shall bear date and signature of principal
accountant or manager of the bank with his name and official title.

B. If the records are maintained in the electronic form –

(1) Consists of printout of data stored in floppy, disc, tape or any other electromagnetic data storage device

OR

(2) A copy of such printout with all certificate mentioned above.

C. If maintained in mechanical form—a print out of any entry in the books of a bank stored in a microfilm,
magnetic tape OR any other form of mechanical or electronic data retrieval mechanism obtained by a
mechanical or other process with applicable certificates as above.

Conditions in the Printout-- When the books of the bank are not written in the handwritten and copies are
taken by way of printout the copy must accompany following: (1) a certificate by the principal accountant or
the manager to the effect that it is a printout of such entry or a copy of such a printout.

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AND

1. A certificate by a person in charge of computer system containing a brief description of the computer
system and the particulars.

(2) the safeguards adopted to prevent and detect unauthorized change of data

(3) the safeguards available to retrieve data that is lost due to systemic failure or other reasons.

(4) the manner in which the data is transferred from the system to removable media like floppies, discs,
tapes

(5) the mode of verification in order to ensure that data has been accurately transferred to such removable
media.

(6) mode of identification of such data storage device

(7) the arrangement for the storage and custody of such storage devices

(8) the safeguards to prevent and detect any tampering with the system and

(9) any other factor which will vouch for the integrity and accuracy of the system.

Other Matters—In any proceedings where the bank is not a party, no officer of a bank shall be compellable
to produce the evidence. Similarly no officer of the bank shall be called as witness to prove the matters,
transactions and accounts recorded in the certified copies. A certified copy of any entry in a bankers’
book received in legal proceedings is prima facie evidence for existence of such entry. Inspection
of books by order of court or judge — As per the order of the court , a person can be permitted to
inspect and take copies of any entries or ask the bank to prepare and produce certified copies with
certificate that no other entries are to be found.

LOK ADALATS

THE LEGAL SERVICES AUTHORITIES ACT, 1987

Lok Adalats are organised by the State Authority, District Authority, the Supreme Court Legal Services
Committee, High Court Legal Services Committee or Taluk Legal Services Committee. Lok Adalats shall
have jurisdiction to determine and arrive at a compromise or settlement between the parties to a dispute.
The dispute should be either a pending case before any Court or a matter which is falling within the
jurisdiction but not pending in any Court. The offenses which are compoundable cannot be brought under
the purview of Lok Adalats. The monetary ceiling of the civil disputes that can be settled under Lok Adalats
mechanism is Rs. 20 lakhs.

The types of disputes:

(1) The disputes the parties agree to refer

(2) One of the parties applies to the Court to refer to the Lok Adalts and the Court is satisfied that there are
chances of settlement.

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(3) The dispute which, in the opinion of the Court, it is appropriate to be taken up by Lok Adalts.

(4) Where in respect of potential dispute, the authority or committee organizing the Lok Adalts, on receipt of
application from any one of the parties.

Court fee will not be charged for approaching Lok Adalts. Court fee already paid in other courts can be
refunded, if a compromise is arrived through Lok Adalts.

Disposal of cases by Lok Adalats: The Lok Adalats shall arrive at a compromise or settlement between
the parties. The cases shall be decided immediately as far as applicable and shall be guided by the
principles of justice, equity, fair play and other legal principles. When no settlement can be reached the
case is returned to the Court and action will re-initiate from the stage it had reached before reference to the
Lok Adalats. In respect of cases not in Court, if no settlement can be reached, the parties shall seek
remedy in a Court. The award of the Lok Adalats is considered as a decree of a civil Court and shall be
binding all parties concerned. No appeal shall lie against this award at any Court.

THE CONSUMER PROTECTION ACT – 1986


The consumer protection Act, 1986 was enacted with the objective: for better protection of interests of
consumers. Different authorities were established for the settlement of consumers’ disputes. It is
established at district, state and central levels. The Act is social benefit oriented legislation for the
consumers providing self-contained quasi-judicial machinery to provide speedy and simple redresal to
consumer disputes. The Act extends to whole of India except Jammu and Kashmir. The Act applies to all
goods and services excluding goods for resale or for commercial purpose and services rendered free
of charge and under a contract for personal service. The word consumer and services are defined in
the Act. The Act shall not have overriding effect on any other law.

Service as per the Act includes banking services also. A person having an A/C, a purchaser of DD, a
person obtaining BG are also consumers.

Complaint: - means any allegation in writing on:

• An unfair trade practice or a restrictive trade practice adopted by any trader or service provider.

• The goods bought suffer from one or more defects.

• The services hired suffer from deficiency in any respect

• A trader or the service provider has charged for the goods or for the services mentioned in the
complaint, at a price in excess of price fixed under any law, displayed on the goods or packages,
displayed on the pricelist exhibited or agreed between the parties.

• The goods which will be hazardous to life safety when used and

• The services which are hazardous to life and safety of the public when used.

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Consumer: - means any person who:

A. Buys any goods for a consideration

(1) Which has been fully paid, partly paid or to be paid or partly promised

(2) Under any system of deferred payment

(3) Includes any user of such goods other than who buys the goods.

B. Hires or avails of any services for consideration

(1) Which has been paid or promised or partly paid or partly promised

(2) Under any system of deferred payment

(3) Includes any beneficiary of such services other than who hires or avails of the services.

A person who bought the goods for resale or for any commercial purpose is not a consumer.

Goods: - means goods as defined in the Sale of Goods Act, 1930. It means any goods or moveable
property other than actionable claims and money. It does not include stocks and shares, growing crops,
grass and things attached to or forming part of the land which are agreed to be served before sale.

Restrictive Trade Practice means

(1) Trade practice which tend to bring about manipulation of price,

(2) Its conditions of delivery

(3) To affect the flow of supplies in the market relating to goods and services in a manner to impose on the
consumers unjustified costs or restrictions.

Unfair practice means

(1) Adoption of unfair methods or unfair or deceptive practice for the purpose of promoting the sale, use or
supply of any goods or services.

(2) Publication of any advertisement for sale of goods or supply or service in the newspaper or otherwise at
a bargain price that are not in fact a bargain price.

(3) Offer of gifts or prizes with the intention of not providing it.

(4) Conduct of any lottery, contest, game or skill for the purpose of promoting the sale.

(5) Withholding of schemes of prizes, gifts

(6) Sale or supply or goods knowing that these goods do not comply with the standards prescribed by
competent authority.

(7) Hoarding or destruction of goods or refuses to sell the goods to raise its cost and

(8) Manufacture of spurious goods.

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Complainant means a consumer, any voluntary consumer association registered under Companies Act,
1956 or under any other law, Central or state Govt.., in case of death of a consumer, his legal heirs or
representative, one or more consumers having the same interest.

Consumer dispute means a dispute where the person against whom complaint has been made denies or
disputes those allegations in the complaint.

CONSUMER PROTECTION COUNCILS


The highest council is the Central Council which has the jurisdiction for the entire country. Below it is the
State Council for each state. Below that is, the District Council for each district. These are established to
promote and protect the right of consumers. The Central Council – Central Consumer Protection
Council The national commission is established by the Central Govt. The minister-in-charge of the
Consumer Affairs in the Central Govt. shall be the Chairman of the Council. There shall be such number of
official and non-members as prescribed.

The State Consumer Protection Council is constituted by the state by a notification. The Minister-in-
charge of the Consumer affairs in the state Govt. shall be the Chairman of the council. There shall be at
least two meetings every year. Such number of official and non-official members may be prescribed by
state Govt. Such other number of official and non-official members not exceeding 10 may be nominated by
the central Govt.

The District Consumer Protection Council is established by the state Govt. in all districts. The Collector
is the chairman. Such number of official and non-official members may be prescribed by state Govt. There
shall be at least two meetings every year. The state Govt. may establish more than one District council for
any district.

CONSUMER DISPUTES REDRESAL AGENCIES


Constitution of the District Forum: - The President of the district forum should be a person qualified to be
a District Judge. Two other members one of them must be a woman should have the following
qualifications:

(1) Not less than 35 years of age

(2) Possess a bachelor’s degree

(3) Person of ability, integrity and standing and have adequate knowledge and experience of ten years in
economics, law, commerce, accountancy, industry, public affairs or administration.

Every appointment is done by the state Govt. as per the recommendations of a selection committee
consisting of the following:

(1) President of State Commission is the chairman of the selection committee

(2) Secretary, Law Dept. of the state a member of the selection committee

(3) Secretary-in-charge of consumer affairs of the state shall e another member. If the president is absent
the state Govt. may ask the Chief Justice of the High Court to nominate a sitting judge of the HC to act as
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Chairman. Every member of the district forum shall hold office for 5 years or till he attains the age of
65 whichever is earlier. He can be reappointed.

Section 12 of the CUPRA stipulates the manner in which a complaint shall be made.

Section 13 of the CUPRA stipulates the procedure upon admission of a complaint.

Jurisdiction of District Forum: - Is to entertain complaints where the value of the goods or services and
the compensation if any, claimed does not exceed Rs. 20 lakhs. The district forum has to decide within
21 days from the date of receipt of complaint about its admissibility. The complaint cannot be rejected
without hearing the complainant. Once the complaint is admitted by the district forum it cannot be
transferred to any other Court or tribunal.

On receipt of a complaint relating to goods, the district forum shall refer a copy of it to the opposite party
within 21 days from the date of its admissibility. The opposite party shall give his version within 30 days or
extended period of not more than 15 days. If the good is to be analyzed in a laboratory its sample is to be
sent in a sealed condition. The report of the laboratory shall be given within 45 days or the extended period
as permitted by the forum. After receipt of the report opportunity is to be given to both the parties.

The forum will decide based on the evidence brought to its notice, or as ex-party if the opposite party has
not appeared. If the complainant fails to appear, the district forum may either dismiss the complaint for
default or decide it on merits. Every complaint has to be heard as early as possible and attempted to decide
within 3 months from the date of receipt of notice by the opposite party. If the goods are to be analyzed, the
complaint is to be decided within 5 months. The district forum has the same power as are vested in Civil
Court under Code of Civil Procedure. Every proceeding is to be conducted by the president and by at least
one member. If the president and one member conduct the proceedings and they differ on any point, the
point of difference has to be referred to the other member for hearing and thereafter the opinion of majority
shall be the order of the forum. Any person aggrieved by the order passed by the district forum can prefer
an appeal before the State Commission within 30 days from the date of order. If the order of the district
forum involves the payment of any amount by the person preferring the appeal, the appeal cannot be filed
without the payment of 50% of the amount ordered or Rs. 25000 whichever is less.

State Commission: - The president of the State commission shall be a person who is or has been a Judge
of High Court. He can be appointed only with the consultation with the Chief Justice of the High Court.

There shall be not less than two other members and not more than such member as may be prescribed,
one of whom shall be a woman having the following qualifications.

(1) Not less than 35 years of age

(2) Possess a bachelor’s degree

(3) Person of ability, integrity and standing and have adequate knowledge and experience of ten years in
economics, law, commerce, accountancy, industry, public affairs or administration. However not more than
50% of the members shall be from persons of judicial background. i.e. minimum ten years of knowledge
and experience as presiding officer of district Court, tribunal or equivalent level. Every member shall hold

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office for 5 years or till he attains the age of 67 years whichever is earlier. They are eligible for
reappointment for further period of 5 years or till they attains 67 years whichever is earlier. The jurisdiction
of the state commission is the value of goods, services or compensation if any claim exceeds
Rs. 20lakhs but does not exceed Rs. 1 Cr and appeals against District Forum.

National Commission

*Under Section 20 of the consumer Protection Act each National commission shall consist of following:

A. A person, who is or has been Judge of the Supreme Court, shall be its President. His appointment
has to be made by the Central Government only after consultation with the Chief Justice of India.

B. Not less than four other members and not than such number of members as may be prescribed, one
of whom shall be a woman having qualifications as under,

1. Be not less than thirty-five years of age.

2. Possess a bachelor’s degree from a recognized university.

3. Be person of ability, integrity and standing, and have adequate knowledge and experience of at
least ten years in dealing with problems relating to economics, law, commerce, accountancy,
industry, public affairs or administration. However, not more than 50 per cent of the members
shall be from amongst persons having a judicial background. For this section the expression
judicial background means knowledge and experience for at least ten years as a presiding
officer at the district level Court or any tribunal at equivalent level.

*Every appointment as member of the National Commission has to be made by the Central Government on
the recommendations of the Selection Committee consisting of the following:

1. A person who is a Judge of the Supreme court, to be nominated by the Chief Justice of India, who
shall be the Chairman of Selection Committee.

2. Secretary, in the Department of Legal Affairs in the Government of India, who shall be the member
of Selection Committee,

3. Secretary of the Department dealing with Consumer Affairs in the Government of India, who shall be
the member of Selection Committee.

*The jurisdiction, powers and authority of the National Commission may be exercised by Benches thereof. If
the President and one member conduct the proceeding and they differ on any point, the point of difference
has to be referred to the other member for hearing on such point and thereafter the opinion of majority may
be exercised by Benches thereof. A Bench may be constituted by the President with one or more members,
as the President may deem fit. If the Members of the Bench differ on any point, the point has to be decided
by majority. If there is equality in differing members, then the point of difference has to be referred to the
President. The President may hear the point of difference himself or refer it to some other member for
hearing. The point of difference has to be then decided by majority of the members who heard the case
initially and after reference of difference.

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*Every member of the National commission shall hold office for a term of five years or up to the age of
seventy years, whichever is earlier. Member will be eligible for reappointment for another term of 5 years or
up to age of 70 years. A member may resign from his office, in writing, under his hand, addressed to the
Central Government.

1. The jurisdiction of National Commission is to entertain complaints where the value of goods or
services or compensation claimed exceeds Rs. 1 Cr and appeals against the decision of State
Commission. Any person aggrieved by the decision of the national commission may prefer an
appeal to the Supreme Court within a period of 30 days from the date of order. If such an order
involves the payment of any amount by the person preferring the appeal, the appeal cannot be filed
without payment of 50% of the amount so ordered or Rs. 50000 whichever is less.

Limitation Period: - The limitation period for filing a complaint before District, State or national forum the
limitation period is two years from the date of cause of action.

Enforcement of orders: - If the interim orders passed by any forum at any level are not complied with, the
property of the person who is not complying with can be attached. If within 3 months of attachment of
property, the person does not comply with the order, the attached property can be sold.

General

Once an order is passed the person entitled for the same has to apply to the same forum for issue
of a certificate to the collector of the district. The Collector has to proceed to recover the amount as
arrears of land revenue.

If somebody makes a false complaint, he may be ordered to pay a cost not exceeding Rs. 10000
that the complainant shall pay to the opposite party.

When a trader or a person against whom a complaint is made or the complainant fails or omits to
comply with any order of any forum, he shall be punishable with imprisonment for a term not less
than 1 month but which may extend to 3 years, or with fine of minimum Rs. 2000 that may be
extended to Rs. 10000 or both.

For the trial of offences by district, state or national forum, it is deemed as and is conferred with the
powers of the First Class Judicial magistrate.

THE LAW OF LIMITATION


Period of limitation is always in relation to a document which entitles the beneficiary to take action in a
Court of law. Suit defined in this act does not include an appeal or an application. It is necessary that every
suit or application or appeal shall have to be made within the period of limitation. A suit is instituted when
the plaint is presented to the proper officer in the Court. Section 3 of the Act declares that every suit
instituted, appeal preferred and application made after the prescribed period shall be dismissed although
limitation has not been set up as a defence. Some important provisions in schedule to Limitation Act are
furnished below:

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Period of
Description of Suit Time from which period begins to run
limitation

For money lent under an agreement


that it shall be payable on demand Three
When the loan is made
AND For money payable for money years
lent

The expiration of the first term of payment as to


On a promissory note or bond Three
part then payable; and for the other parts, the
payable by instalments years
expiration of the respective terms of payment

On a Bills of Exchange payable at


Three
sight or after sight but not at a fixed When the bill is presented
years
time

On BE or promissory note payable


Three
at a fixed time, after sight, or after When the fixed term expires
years
demand

Three
For arrears of rent When the arrears become due
years

The date fixed for the performance or if no such


For a specific performance of a Three
date is fixed, when the plaintiff has noticed that
contract years
performance is refused

When the money secured by the mortgage become


By mortgage for foreclosure 30 years
due

By a mortgage for possession of


12 years When the mortgage become entitled to possession.
immoveable property

Any suit by or behalf of the central


When the period of limitation would begin to run
or any state Govt. (except a suit Three
under this Act against a like suit by a private
before the Supreme Court in the years
person
exercise of its original jurisdiction)

Any suit for which no period of


limitation is provided in this 30 years When the right to sue accrues
schedule

Execution of a Decree: Twelve years – from the date of decree.


Recovery of loss caused by fraud: Three years – from the date of fraud.
Appeal to file in High court against judgement of lower court: Ninety days – from the date of decree.
Appeal to file in other courts against judgement of lower court: Thirty days from the date of decree
When the period of limitation expires on a day when the Court is closed, the suit, appeal or
application may be filed on the day when the Court reopens.
An appeal or application other than execution petitions may be admitted after the period, if the
applicant makes out sufficient cause for the delay.

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In computing the period of limitation, the day from which such period is to be reckoned shall be
excluded. In the case of filling an appeal the Day of Judgment is excluded. The time taken to obtain
copy of the decree is also excluded.
For an application for execution of decree, the period during which the execution has been stayed
by injunction, the day on which the order was issued or withdrawn shall be excluded.
For filing a suit of which a notice is to be given or for which the consent of the Govt. or any other
authority is required, the period of notice or the time taken for obtaining the permission can be
excluded.
In computing the period of limitation for any suit, the time during which the defendant has been
absent from India and from the territories outside India under the administration of India shall be
excluded.
There are two instances which will give rise to fresh period of limitation. In these cases the period of
limitation will be computed as if the starting point is the happening of the instances.
• Before the expiration of such a period, an acknowledgment of liability has been obtained. The fresh
limitation period starts from the date of the acknowledgement.
• Where the payment on account of a debt or of interest is made before expiration of the period by the
debtor or his duly authorised agent, a fresh period of limitation starts from the date of such payment.
In this case debt does not include money payable under a decree or order of the Court.

TAX LAWS
Income Tax, 1961: - As per the Income Tax Act, taxation of income of an assessee is done on the basis of
his residence and place of source of income. The income is taxed on the basis of assessment year.
Assessment year is the period of 12 months from 1st April every year. The income arising in the previous
year is taxed in the assessment year. The previous year is the financial year immediately preceeding the
assessment year of the assessee.

Residential Status: - The residential status of an assessee is determined on the basis of the number of
days an assessee was present in India during the previous year. In the case of corporate, it is determined
on the basis of location of control and management of the co. and also the place of registration. A Co. is a
resident Co. if it is registered under Companies Act of India or a body corporate set up by statute whose
control and management is based in India. There is a third category called Resident but not ordinarily
resident which is relevant only for individuals and Hindu undivided families. The income declared by the
resident assessee from anywhere in the world is taxable. But in the case of NRIs and persons who are not
ordinarily resident – PNOR, any income derived abroad is not taxable and only income derived in India is
taxable.

Quoting of PAN is compulsory for the following:


1. Opening Bank A/Cs
Opening of no frills accounts like Jan Dhan account will not require PAN
2. Opening TDRs for above RS.50000
If a person does not have PAN, he must submit Form 60 or 61
Minors should quote PAN of parent or Guardian
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3. Cash deposits in a day aggregating to Rs.50000 and above


4. Purchase of DD or Pay Order in a day aggregating to Rs.50000 and above
5. All payments whether by cash or cheque or Debit / Credit Cards above Rs.2 Lacs
6. Immoveable properties transactions for Rs.10 Lacs and above
7. Hotel Bills at any one time Rs.50000 and above
8. Bills on account of foreign travel Rs. 50000 and above
9. Purchase or sale of shares in an unlisted company Rs.1 Lac and above
As per IT Act, taxation of income is assessed on the following heads: (1) Salaries (2) Income from house
property (3) Profits and gains from business or profession (4) capital gains (5) Income from other sources.
All persons, whose total income in the previous year exceeds the maximum exemption, are liable to file tax
return. A Co. or partnership firm shall also file return before Oct 31 of the assessment year.

The return filed is assessed by AO- Assessment Officer of the IT department. The AO may scrutinize the
return and complete the assessment under Sec 143(3) which is called Scrutiny Assessment. Once the
notice order of AO is received, the assessee shall remit the tax within 30 days. Other form of assessment is
summary assessment. It is done by accepting the return without further enquiry.

IT for the financial year 2016-2017

FINANCIAL YEAR 2016-2017

UP TO RS. 2.50 Lacs NIL

ABOVE RS.2.50 Lacs UP TO RS.5 Lacs 10%

ABOVE RS. 5 Lacs UP TO RS.10 Lacs 20%

ABOVE RS. 10 Lacs 30%

WOMEN NO DISTINCTION

SENIOR CITIZEN – 60 YEARS TO 80 YEARS – UP TO Rs.3 Lacs NIL

VERY SENIOR CITIZEN – ABOVE 80 YEARS - UPTO 5 Lacs NIL

Interest income up to Rs. 10000 from SB Accounts is exempted from Tax.

W.E.F 1.6.2015 interest on RD accounts is also taxable.

Payment of Tax:- Advance tax is payable under section 210 of IT Act. Advance tax arises from the
concept of pay as you earn. The advance tax for the corporate assesses is payable in four instalments as
below: By June 15th -15%; by Sep 15th -30%; By Dec 15th -60% and by March 15th - 100 %.

The advance tax is paid based on the estimation of income by the assesses. Any shortfall is to be paid by
way of self-assessment tax. Other modes of payment are TDS-deduction of tax at source & TCS –
Collection of TAX at Source. TDS is to be done on salaries, Interest on securities, Payment of interest
other than on securities, payment of professional and technical fees and payment to Non-resident. Person

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deducting tax has to obtain a TAN- Tax Deduction Account Number from IT Dept and submit quarterly
returns. Failure to deduct IT or remit the deducted IT to the Govt. will result in the disallowance of the
relevant expenditure in computation of income of the bank. Tax deducted at source is to be deposited within
one week from the end of the month in which it is deducted.

W.E.F 1.6.2015 Co op Banks must also deduct TDS.

Fringe Benefit Tax – FBT intends to tax fringe benefits which are provided or deemed to have been
provided by an employer to its employees during the previous year. It is in the nature of a presumptive tax
levied on an employer in respect of various expenses incurred by the employer on behalf of its employee.
FBT is payable by an employer at the rates applicable to the assessee on the value of such fringe benefit.
This tax is in addition to Income tax. Fringe benefit is of two parts. 1. First defines three categories of
benefit which are fringe benefit. The second part treats certain benefits or expenditure incurred by the
employer as deemed fringe benefit. Return of FBT is also required to be filed before due date and there is
no separate return for it.

Service Tax: - The service Tax introduced in 1994 in the Finance Act initially for 3 services - telephone,
general insurance and stock broking-. No separate Act exists for Service Tax. The Finance Act is amended
for including other services within the applicability of the Service Tax. There will be no service tax if the turn
over does not exceed Rs. 10 lakhs. Service Tax is leviable on banking and financial service w.e.f
16-7-2001. It has been extended to lending related activities, fees, commission, Merchant banking
activities, securities and Foreign Exchange brokerage, advisory service, safe deposit locker, debit & Credit
card services, business auxiliary service. But it is not payable on interest income of the bank. The service
provider will have to obtain separate registration for each such service from Service Tax authorities. The
service tax is 15% wef 01/06/2016.

ST is applicable for Locker services, Card services, Merchant Banking activities, Advisory services and
some FOREX transactions. Service tax is not applicable for service rendered outside India i.e. exports. But
it is applicable for import services.

ST collected must be remitted to the Govt. account before the 5th of succeeding month, except in March.

ST collected in March must be remitted in March itself.

CENVAT Credit (Central Value Added Tax) If service tax is paid by an assessee for input service, the
same can be set off against the liability on output services. This system of availing credit on the Service Tax
paid and using the credit for the Service Tax payable is known as CENVAT Credit.

Commodity Transaction Tax (CTT): was introduced under Chapter VII of the Finance Act: 2013. A
transaction shall be taxable as a CTT only if it is a (i) sale of commodity derivatives; (ii) commodities other
than agricultural commodities, and (iii) commodities traded in recognized associations. Sale of commodity
derivatives in respect of agricultural commodities shall not attract CTT. A levy of 0.01 % in charge on such
transactions. Every recognized association (“assessee”) shall collect CTT from the seller who enters into a
transaction in that recognized association. CTT collected during a calendar month has to be deposited by
recognized association within 7 days of the next calendar month.
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MODULE- D: COMMERCIAL LAWS WITH REFERENCE TO BANKING OPERATIONS


UINIT 40. MEANING AND ESSENTIALS OF A CONTRACT
Contract is an agreement enforceable by law.

• An agreement between two or more persons.

• It is enforceable in a court of law.

When a person to whom a proposal is made, gives his unconditional consent, the proposal is accepted.

• A proposal becomes a promise when it is accepted.

• Conditions can be added with the proposal, but acceptance must be unconditional.

• The person making the proposal is called the promisor.

• The person accepting the proposal is called the promisee.

Consent is said to be free when the parties to the contract agree to the same thiong in the same sense

An agreement can be oral or written. But in case of sale, mortgage, lease etc it has to be written.

But agreements of social nature are not covered under this as the intention is not to create a legal
relationship.

Essential of an Agreement/ Contract

• There should be a proposal and acceptance

• Consideration should exist between the parties concerned.

• Agreement may be oral or written ( In the case of sale, mortgage of immovable property, lease etc.
the agreement should in writing and registered )

• Free consent should exist.

• Parties to the agreement should have attained majority. ( section 11 of contract Act)

• Parties should be of sound mind. ( do )

• They / any of them are not disqualified from entering in to a contract. ( do )

• An agreement by a minor is void ab initio. ( do )

• Stamp duty is as per state stamp act.

What is consideration ?

The Contract Act defines consideration as under

When, at the desire of the promisor , the promisee or any other person

• Has done or abstained from doing or

• Does or abstains from doing

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• Promises to do or to abstain from doing something.

Such act or abstinence of promise is called a consideration for the promise

Exceptions of consideration:

• An agreement made out of natural love and affection between parties standing in near relation to
each other which is in writing and registered;

• Fulfilment of voluntary promise or under legal compulsion;

• promise to pay time barred debts;

• contracts of agency.

Consideration must move at the desire of the promised, promisee or from any other person; It must be real
and not something the promisor is already bound to do; It must not be illegal, immoral or against public
policy.

The following agreements are void under contract Act:

• Where there is a mistake of fact & law and where fraud exists

• Wagering agreements, Agreement in restraint of trade & Agreement in restraint of marriage

• Agreement in restraint of legal proceedings & Agreements where performance is impossible

• The object of agreement is unlawful & consideration is unlawful

Termination or discharge of Contract

• By performance of the promise or by Mutual consent or by substituting a new contract

• By operation of law or by lapse of time

• Material alteration without the consent of the other party or breach by one party

• Subsequent impossibility of performance ( Not commercial /non viability )

UNIT 41. CONTRACTS OF INDEMNITY (Also refer UNIT 10 Module B)

It is a contract by which one party promises to save the other from loss likely to be caused to him by the act
of the promisor or a third party. (Section 124) (Eg; Insurance policy)- There are two parties to the contract.
(Indemnifier & indemnity holder). Liability of the indemnifier is always primary. However indemnity cannot
be for a gainful transaction. The essence of any contract of indemnity is that the assured must prove a loss

The indemnity holder has the following rights; (Section 125)

• All damages which may be compelled to pay in any suit.

• All costs compelled to pay in any suit.

• All sums paid in a compromise, not contrary to indemnity.

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UNIT 42. CONTRACTS OF GUARANTEE (SECTION 126)

(Also refer UNIT 11 Module B )

Guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of latter’s
default. Guarantee can be oral or written. There are three parties to the contract;

• The person who gives the guarantee is called surety.

• The person in respect of whose default the guarantee is given is called the principal debtor.

• The person to whom the guarantee is given is called the creditor / beneficiary.

Basic Principles

• All the principles and rules which apply to other contracts, like what can form consideration, or what
would be a valid contract , also apply to a Contract of Guarantee

• Consideration – Anything done, any promise made, for the benefit of the principal debtor is a
sufficient consideration for the Surety for giving the agreement. ( Section 127).

• The surety is entitled to the benefit of every security which the creditor has against the principal
debtor

• The liability of the surety is co-extensive with that of the principal debtor.

• Continuing guarantee is a guarantee which extends to a series of transactions

• Normally when the guarantor dies the guarantee ends from that date.

• Any variance made in the contract without the consent of the surety discharges him from liability to
transactions after that date.

• Contrary to indemnity, this is a composite contract where three different contracts are merged;

Types of Guarantees:

a. Specific guarantee: For specific amount and specific transaction and once the liability becomes
‘NIL’ the guarantee is discharged.

b. Continuing guarantee: A guarantee which extends to a series of transactions is called a


‘Continuing Guarantee’.

Forbearance to sue Mere forbearance on the part of the creditor to sue the principal debtor or to enforce
any other remedy against him does not discharge the surety unless the parties had agreed for such
discharge

Discharge of Surety: By Revocation (section 130), By death of the surety (section 131), By substitution
(section 62)

By Conduct of the creditor: Variance in terms (section 133), By release or discharge of the principal
debtor (section 134)

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By Compounding by creditor (section 135-136), Creditors action or omission (section 139), loss of
security (section 141) the surety is discharged to the extent of the value of the security. The surety is
entitled to the benefit of every security which the creditor has against the principal debtor

By invalidation of the contract of guarantee: Guarantee obtained by misrepresentation (section 142),


Failure of a co-surety to join (section 144), guarantee obtained by concealing and absence of consideration.

By release of one surety does not release the other surety. The surety released does not become free
from his responsibility to the other sureties)

Rights of the surety: Surety has certain rights once the payment is made by him.

a) Against the Creditor- Right to securities (section 141), Creditor has to handover securities to the
guarantor and if the creditor loses them, then the guarantor is discharged to the extent of value of
the security. Right of set off – Creditor has to set off any counter claim with the principal debtor
before claiming the amount from the surety.

b) Against the Principal Debtor - Right of subrogation (section 140) – All rights which the principal
creditor had, right of indemnity (section 145) –right to recover the money from the principal debtor.

c) Against the Co-sureties.- Liability joint and several- intra liability to be shared equally ( section 146)

A continuing guarantee can be revoked by the surety as to future transactions

UNIT 43. CONTRACT OF BAILMENT

A bailment is the delivery of goods by one person to another for some purpose. When the purpose is
accomplished the goods will have to be returned to the original owner or disposed off as per the owner’s
directions; A bailment is different from sale which involves an intentional transfer of ownership. Bailment
involves only a retransfer of possession of custody and not of ownership

• The person delivering the goods is called the bailor.

• The person to whom they are delivered is called the bailee.

• The bailor is bound to disclose the bailee any faults in the goods delivered of which he is aware, and
which materially interfere with the use of the same or exposes the bailee to extra ordinary risks. If
this disclosure is not made, then he is liable for damages to the bailee.

• Bailee has to take care of the goods bailed to him as he would do for his own goods and he is not
responsible for any loss, destruction or deterioration if he does as above. If he neglects, then he is
liable for damages to the bailor. If the bailee does anything inconsistent with the terms of the bail,
then it becomes void as far as the bailor is concerned.

Duties of the bailee with regard to goods

• Bailee to return the goods on expiry of the period or the purpose of bailment (sec 160).

• Take care of the goods bailed ( sec 151)

• Not to make any unauthorized use of goods (sec 154)


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• Not to mix the goods with his own goods ( sec 155-157)

• If the goods are not returned, then bailee is responsible to the bailor, for any loss, damage or
destruction.

• In absence of any contract to the contrary, the bailee has to return to the bailor any increase or profit
arisen out of the bailment sec 163).

Rights of the bailee with regard to the goods

• The bailor is responsible for any loss sustained by the bailee.

• If the bailor has no title to the goods and the bailee in good faith returns the goods to the bailor, then
bailee is not responsible to the true owner of the goods for such wrong delivery.(sec 166). Bailee
has to return to any one of the joint bailers (sec 165)

• Any expenses incurred by the bailee will be compensated by the bailor.

• Right against wrongful depravation or injury to goods ( sec 180-181)

Bailee’s lien

Bailee can retain the goods till he is compensated for the services rendered by him.( sec 170-171)

Duties of the Bailor:

• Duties to disclose faults in the goods & Duty to receive the goods back

• Duty to bear expenses - sec 158 & Duty to indemnify the bailee – sec 164

• Duty to compensate the bailee for loss foe termination of the bailment before time – sec 159

Rights of the Bailor:

• Enforcement of bailee duties & To claim damages ( sec 151)

• To terminate the contract of bailment – to claim damages -sec 153

• To demand return of goods – sec 154,155 & 155

• To claim increase or profit from goods bailed

UNIT 44. CONTRACT OF PLEDGE

Bailment of goods as security for payment of a debt or performance of a promise is called a pledge (sec
172).

The bailor in this case is called the pawnor. The bailee is called Pawnee. Delivery of goods may be
physical or constructive .

Rights of Pawnee:

• Right to retain goods for debt, interest and expenses & right for extra ordinary expenses.

• Right against the true owner when the title of the pawnor is defective.
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• When pawnor makes default, right for suit against pawnor and to sell the goods- retention of goods
as collateral security- right of sale- right to recover deficit on sale.

• Pledge by non-owners: Valid if – Pledge by mercantile agent, pledge by seller or buyer who is in
possession after sale, pledge by person having limited interest, pledge by co-owner in possession,
pledge by a person in possession by a voidable contract.

On default by the pawnor, the Pawnee can sell the goods pawned after giving due notice to the pawnor
(sec 176). In case the sale proceeds are less than the amount due, the Pawnee can claim the balance from
the pawnor and in case of surplus, the Pawnee has to return to the pawnor the excess amount.

In all contracts of bailment the bailee, while in possession of the goods steps into the shoes of the owner
for the purpose of legal remedy. For eg if a theft takes place, pawnee has the right to file complaint and
receive compensation . The amount will have to be divided between the original owner and the Pawnee
in the ratio of their losses. The pawnee can retain the goods for the amount due to him, interest, if any, as
agreed upon and any expenses incurred for preservation/ safe keeping of the goods pledged.

Difference between pledge and lien

Under lien there is no power of sale or disposition of goods. In lien there is no transfer of interest. The
person in possession has only the right to retain the until he is paid. In the case of pledge sale can be made
in the event of default. A pledge is assignable

UNIT 45. CONTRACT OF AGENCY (SEC 182-237 OF CONTRACT ACT)

A person employed to act or represent another person in dealing with third parties, is called an agent..
Agent can be appointed by express appointment, implication of law, or by ratification by the principal. When
a person by his word or conduct appoints someone as his agent it is known as agency by estoppel.

Unlike other contracts, no consideration is essential for contract of agency.

It is the duty of the agent to perform as per the principal’s lawful directions and get paid for services and be
indemnified against consequences. The usual form of contract of agency is by way of a power of attorney.

The person employing / appointing an agent is called the principal.

Eg. The bank acts as an agent when they collect a cheque / bill for their customer.

In an agency the agent is authorized by the principal to represent him in an act with a third party and to bind
the principal for the authorized act executed by him. Thus the agent creates a contract between the
principal and a third party.

The contract between the principal and the agent is also a contract by itself.

Both the principal and the agent must be major and of a sound mind.

The authority of an agent may be express or implied. An agency is express when the same is written or
spoken and implied when that can be inferred from the circumstances and acts of the parties concerned.

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An agent authorized to do an act, has the authority to do all other lawful acts which are necessary to do
the original act.

An agent has, in an emergency, the authority to do all acts necessary to protect the interests of the
principal as it would be necessary, if it is his own case.

An agent cannot appoint another agent (sub agent) to perform the duties which he has undertaken to
perform personally. However if the custom in the trade, permits so, he can appoint a sub agent. The sub
agent is responsible to the agent only and not to the principal (sec 191). But the agent is responsible to the
principal for all acts of the subagent. Frauds and wilful wrong actions are exempted from this clause.

If the agent does acts which are not delegated by the principal, then the principal has options to ratify them
or disown them. If ratified, the principal is bound by the same. Ratification can be express or implied.

Substituted agent: (sec 194) a substituted agent is a person named by the original agent holding an
express or implied authority from the principal to act for the principal.

An agency can is terminated by

• The principal revoking the authority.

• Agent giving up (denouncing) the agency.

• The completion of the business of the agency.

• The death or lunacy of principal and / or the Agent.

• The principal being declared (adjudicated) as insolvent.

Duty of an agent:

An agent has to conduct the business as per the directions of the principal. In absence of any directions, he
has to conduct the business as per the prevailing customs/ practice, in the place of business. If he violates
this, then he has to make good any loss to the principal and any profit he has to share with the principal. An
agent has to submit proper accounts to the principal when he demands.

Rights of principal:

If the agent violates the terms of the agency, the principal may repudiate the transactions so done by him if
he finds that the same is disadvantageous to the principal.

Right of an Agent:

Agent is not eligible for any remuneration if he is guilty of misconduct, for that part of sale which he has not
conducted properly.

Agent can retain the goods, papers and other property of the principal (right of lien), in the absence of any
contract to the contrary, until the amount due to him on account of commission, expenses etc is paid or
accounted by the principal.

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The principal has to indemnify the agent against the consequences of all lawful acts done in terms of the
agency and those acts done in good faith, though the same may cause injury to a third person.

Agent has a right of compensation and right of stoppage of goods in transit.

A principal is liable for the agent’s fraud acting within the scope of his authority whether the fraud is
committed for the benefit of the principal or for the benefit of the agent

Personal liability of agent:

• He acts for foreign principal or acts for a concealed principal or acts for a nonexistent principal

• Where the contract expressly provides such an eventuality

• He acts for a principal who cannot be sued or where he signs a contract in his own name

UNIT 46. CONTRACT OF SALE

Sale of Goods Act 1930 (1st July 1930) defines ‘goods’ as every kind of moveable property (other than
actionable claims and money) and includes;

• Stock and shares

• Growing crops & grass

• Things attached to and forming part of the land which are agreed to be severed before sale or under
the contract of sale. ( Fixtures can be regarded as movable goods only if they are intended to be
severed and sold separately )

• Buyer means a person who buys or agrees to buy goods.

• Seller means a person who sells or agrees to sell goods.

• Price means the money consideration for sale of goods.

• Delivery means voluntary transfer of possession from one person to another.

• Document of title to goods includes bill of lading, warehouse keeper’s certificate, wharfinger’s
certificate, railway receipt, lorry receipt, multimodal transport document, warrant or order of delivery
of goods or any other document used in the ordinary course of business as proof of the possession
or control of goods authorized by endorsement and delivery to transfer or receive goods as
possessor of documents.

• Future goods mean goods which are to be manufactured or acquired after entering in to a contract
of sale.

• Specific goods mean those goods identified and agreed up on at the time of executing the contract
of sale.

• Mercantile agent means an agent having authority, either to sell goods or to consign goods for the
purpose of sale, or to buy goods or to raise money on the security of goods.

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The contract under which a seller transfers or agrees to transfer the right in goods to a buyer for a price is
called contract of sale. This converts in to a sale when the property in the goods is transferred from the
seller to the buyer.

Features of sale

• Bi lateral contract A sale involves two persons – the buyer and seller

• Money consideration The sale consideration must be money- the price. It cannot be an exchange
( Barter )

• Movable property The Sale of Goods Act covers only the sale of moveable assets.

The sale of immoveable property is covered under Transfer of Property Act.

• No particular form It is not mandatory that there is written contract for the sale of goods. But if the
law stipulates it for some goods, it should be written. The contract may be oral or written or may be
implied

A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of
such offer

• Contract of sale may provide for


a) immediate transfer of goods on immediate payment
b) delivery or payment by installments,
c) postponement of payment or delivery
When the transfer of the property in the goods is to take place at a future time or subject to some
conditions, thereafter to be fulfilled the contact is called an agreement to sell

An agreement to sell becomes a sale when the time elapses or the conditions mentioned are fulfilled

Sl Sale Agreement to sell


no

1 Parties have already performed their part Parties are yet to perform their mutual promises

2. Ownership of goods have already passed Ownership of goods is yet to pass from the seller
( irrespective of whether the goods are to buyer at a later date after the fulfillment of
delivered or not certain conditions as agreed upon

3. The risk in goods is with the buyer The risk in goods is still with the seller. The risk is
transferred only after it becomes a sale

4. If the seller does not deliver the goods, the If the seller does not deliver the goods, the buyer
buyer can file a suit and demand specific can only claim damages in a suit and cannot
performance and delivery of the goods demand the delivery as sale is not yet concluded.

5. If the buyer does not pay for the goods, the The seller may the not part with the goods until
seller can claim, file a suit and demand the he is paid the price.
price.

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UNIT 47. CONDITIONS AND WARRANTIES


There are conditions and warranties in a contract of sale.

A condition is one, which is essential to the main purpose of the contract and if breached, can treat the
contract as cancelled by any party to the contract.

A warranty is collateral to the main purpose and can claim damages for breach of conditions, but cannot
repudiate the sale.

The buyer has the option to waive any conditions not fulfilled by the seller. But if the buyer has accepted the
goods and non-fulfilment of conditions exists, then he can treat them as non-fulfilment of warranties and
claim damages only. Conditions and warranties may be expressed (stated expressly in the contract) ) or
implied ( which the law implies into every contract ) However such implied conditions and warranties can
be excluded by the parties to the contract if they agree expressly on these issues

• A. Title of the seller- There is an implied condition that the seller has a right to sell and that right
exists at the time of transfer of the goods to the buyer. ( Eg. Mr X buys an ornament from Mr. Y. But
police takes away the ornament as it was stolen by Mr. Y . Mr X can recover the amount from Mr
Y as he has violated the implied condition )

• Sale of goods by description – There is an implied condition that the goods finally intended to
deliver shall correspond with the description.

• Sale by Sample -There is an implied condition that the bulk will correspond with the sample in
quality, buyer will have an opportunity to compare with the sample and goods shall be free from any
defects and any breach cancels the contract.

• Sale by sample and description- then both conditions should be satisfied.

• Quiet possession – The contract will have an implied warranty that the buyer will have the quiet
possession of the goods

• Goods are free from any prior charge or encumbrances – This implied condition means that the
buyer can presume that the goods being sold to him is free from any charge and it would be his
absolute property and nobody will make any claim on that property.

• Quality or fitness of the property for any particular purpose – There is no warranty or prior
condition that the goods sold is suitable for any particular purpose by quality or in fitness unless
there is a disclosure by the buyer to this effect to the seller and he is relying on this purchase for the
particular purpose.

• Caveat Emptor (Buyer Beware ) - caveat means a caution or warning – As per the doctrine the
person who buys the goods should keep his eyes open and should examine the goods thoroughly
and he is responsible for any non-suitability found later on.

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UNIT 48. UNPAID SELLER


The Seller of goods is deemed to be an unpaid seller

1) When the entire price is not paid and

2) When the cheque for the payment remains dishonoured.

Rights of an unpaid seller

Against the goods Against the buyer personally

Where the property in the Where the property in Suit Suit for Repudiati Suit for
goods have passed over the goods have not for damages on interest
been passed over price contract

Lien Stoppage Right of Withholdi Stoppage


in transit Resale ng in of
delivery transit delivery
In case of
insolvenc
y of the
buyer

Unpaid Seller’s Lien


The unpaid seller of goods (who is in possession ) the goods, can retain the goods provided,
• The goods have been sold without any stipulation as to credit
• The term of credit has expired where the same has been sold on credit
• The buyer becomes insolvent
Termination of lien
The unpaid seller loses the right of lien;
• When the goods have been delivered or handed over to the another bailee without exercising his
right of lien on the goods;
• When the buyer or his agent lawfully takes possession of the goods
• By waiver of lien
Right of stoppage in transit
The unpaid seller can retain the goods in transit till payment is made if comes to know that the buyer has
become insolvent.
Duration of transit
Goods are said to be in transit from the time of delivery of the same to a carrier or to a bailee (for
transmission) till the same is received by the buyer or his agent.
Stoppage in transit
Stoppage of goods in transit is exercised by taking actual possession or by giving notice to the carrier or the
bailee for transmission, of his claim.

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Effect of sub sale or pledge by buyer


• Even if the buyer sells the goods or pledges the goods (without the consent of the unpaid seller), the
unpaid seller’s right remains intact.
• However if a person buys the goods from the buyer or advances money against pledge in good faith
and for consideration, takes title to goods, then this right of unpaid seller is forfeited.
• An unpaid seller can sell the goods after giving prior notice to the buyer if he is not paying the price
within the time given in the notice.
• Notice is not absolutely necessary if the goods are of a perishable nature.
• He can recover any loss from the buyer where as the buyer is not entitled to any profit from such sale.
• In the absence of any notice the seller will not have such right.
• The unpaid seller can file a suit to claim damages, claim the price of goods with interest and repudiate
the contract.

UNIT 49. INDIAN PARTNERSHIP ACT 1932


Definition: The relation between persons who have agreed to share the profits of a business carried on by
all or any of them acting for all. (Sec 4)
Partnership is not a separate legal entity like a company. Partnership firm and the partners are not separate
from each other.
Characteristics:
• Association of two or more persons
• Must be formed for carrying on a lawful business
• Agreement which can be oral or written
• The business must be carried on to earn and share profits
• There must be mutual relation of “agency” between the partners: It means any partner can by his
acts bind all partners of the firm. This is the meaning of “business carried on by all or any of them
acting for all.”

TYPES OF PARTNERSHIP

Particular Partnership Partnership for a Fixed period Partnership at Will

• Partnership formed for • When two or more persons • No duration is fixed for the
taking up a particular join to form a partnership continuation of the partnership
job for a particular period
• Can be dissolved by any Partner
• This type of partnership • When the fixed period is giving notice to all other
does not continue after over, it can be continued partners. The firm is dissolved
the purpose is over as partnership at Will if the on the date mentioned in the
partners agree and notice.
continue the business
• If no date is mentioned, it is
• The mutual rights and dissolved from the date of
duties continue unaffected receipt notice.

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Registration: Registration with registrar of firms not compulsory. However an unregistered firm cannot sue
its debtors, where as its creditors can sue the firm for recovery of dues. Hence registration is desirable.

Limited Liability Partnerships (LLP)

LLP is a body corporate and a legal entity separate from its partners. It has a perpetual succession. The
provisions of Indian Partnership Act, 1932 is not applicable to LLPs. An LLP has to be incorporated with a
minimum of two persons. While LLP will be a separate legal entity liable to the full extent of its assets , the
liability of partners would be limited to their agreed contribution Thus an LLP is a hybrid between a
company and a partnership. ALLP is to be registered with ROC

Salient Features of the LLP Act 2008

a. LLP shall be a body corporate and a legal entity separate from its partners.

b. The mutual rights and duties of the partners of LLP and those of the LLP shall be governed by an
agreement between the partners, subject to the provisions of the Act.

c. No partner would be liable on account of the independent or unauthorized actions of other partners
or their misconducts.

d. Every LLP shall have at least two partners and shall also have at least two individuals as
Designated Partners having Designated Partner Identification Number (DPIN), of whom at least one
shall be resident in India.

e. Central Government shall have powers to investigate the affairs of a LLP.

f. A firm, private company or an unlisted public company would be allowed to be converted into a LLP
in accordance with the provisions of the Act.

g. Indian Partnership Act, 1932 shall not be applicable to LLPs.

h. The winding up of LLP may be either voluntary or by the National Company Law Tribunal (NCLT).

UNIT 50. RELATIONS OF PARTNERS TO ONE ANOTHER

Partners should carry on the business of the firm to the greatest common advantage. The partners are
responsible to each other for the conduct of the business of the firm. Partners should not make secret profit.
They have to be just and faithful to each other. They must render true accounts of the business and full
information of all things affecting the firm to all the partners or their legal representatives.

Duty to indemnify the loss caused by fraud

Every partner is bound to indemnify the firm for any loss caused to the partnership firm by his fraud.

Determination of right and duties:

The partners of a firm can decide their mutual rights and duties and change them for time to time with the
consent of all the partners.

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Conduct of Business

a. Every partner has a right to take part in the conduct of the business

b. Every partner is bound to attend diligently to his duties in the conduct of the business

c. No change can be made in the nature of business without the consent of all the partners

d. Every partner has right to have access to and to inspect the books of the firm

Mutual right and liabilities

Subject to a contract between the partners

a. A partner is not entitled to receive remuneration for taking part in the conduct of the business

b. Profit and loss to be shared equally

c. If a partner is entitled to interest on his capital it is to be paid from profit only

d. Interest at 6%PA on extra amount paid by the partner

e. The firm has to indemnify a partner in respect of payments made and liabilities incurred by him

In the ordinary and proper conduct of the business

In doing such act in an emergency for protecting the interests of the firm

f. A partner has to indemnify the firm for any loss caused to it by his wilful neglect

Property of the firm

It includes all properties originally brought into the firm or later on acquired by the firm and also the goodwill.
The property acquired by the partners from the funds of the partnership business is deemed to be the
property of the firm. Firm’s property should be used exclusively for the benefit of the firm . However partners
can decide the use of the property by mutual consent

Profits

If a partner derives any profit for himself from any transaction of the firm or using the firms property he is
bound to pay it to the firm (unless there is an agreement to the contrary)

Right and duties of partners

After a change in the partners of a firm the mutual right and duties of the partners in the reconstituted firm
remain the same as they were immediately before the change ( unless there is an agreement to the
contrary ).

UNIT 51. RELATION OF PARTNERS TO THIRD PARTIES

Every partner is an agent of the firm for the purpose of the business of the firm. (Sec 18)

A partner can bind the firm by his acts as partner (sec 19 (1)) this is called implied authority.

However this implied authority does not empower him;

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1) Submit a dispute relating to the business to business of the firm to arbitration.

2) Open a banking account on behalf of the firm in his own name.

3) Compromise or relinquish any claim by the firm.

4) Withdraw a suit or proceeding filed on behalf of the firm.

5) Admit / accept any liability in a suit or proceeding against the firm

6) Acquire immovable properties on behalf of the firm.

7) Transfer immovable properties belonging to the firm.


8) Enter in to partnership on behalf of the firm (sec 19 (2) )
A partner can exercise express authority granted to him and/or do the acts the usage of custom of the trade
permits.
Rights and Duties of partners

Rights Duties

To take part in the conduct of the business of the To observe good faith
firm
To be consulted To indemnify for fraud
Of access to accounts and books To attend diligently to the business of the firm
To share in the profits of the business Not to claim any remuneration
To interest in the capita; ( if there is an agreement) To indemnify for willful neglect
To interest @6% per annum on money advanced To hold and use the property of the firm for the firm
To be indemnified where he incurs liability in the To account for personal profits
ordinary course of business of the firm
To have the use of partnership property for the To account for profits in competing business
purpose of business of the firm

To retire To act within authority


Not to be expelled To be liable jointly and severally
To act in an emergency to protect the firm from loss Not to assign his rights
as agent of the firm.
In order to bind firm the partner must do the activities under the name of the firm and execute the
documents on behalf of the firm Every partner is labile jointly with all other partners and also
severally for all the acts of the firm done while he is a partner, This is the core principle of
partnership business . The rights of a partner can be restricted by partnership deed. If a third party
has no knowledge about the restrictions then the firm will be liable to the acts of each partner

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Types of Partners

Actual partner A partner by an agreement & actively engaged in the conduct of the
business

Sleeping Partner One who does not take an active part in the conduct of the business of
the firm. He is however liable for the debts of the firm

Nominal Partner One who lends his name to the firm, without having any real interest in
it. He is liable to the outsiders for the debts of the firm

Partner in Profits only One who gets share in the profits only and not liable for losses, but is
liable for the debts

Partner by estoppels or Holding Anyone by words spoken or written or by conduct represents himself or
out knowingly permits himself to be represented, to be a partner in the firm,
is liable as a partner to anyone who has on the faith of such
representation given credit to the firm.

UNIT 52. MINOR ADMITTED TO BENEFITS OF A PARTNERSHIP


A Minor cannot be a partner since a contract with minor is void. Partnership is a relation resulting from a
contract

A Minor may be admitted to the benefits of a partnership firm with the consent of all partners and minor’s
liability is limited to his share in the partnership. He has access for copy of the accounts and can have the
share of profit as agreed up on. When he attains majority he can become a normal partner or quit
partnership with in six months after giving a public notice and the same has to be informed to the registrar
of firms, where the firm is registered. If he does not give notice he is deemed to have elected to become
the partner (sec 72).

Reconstitution of the firm.

Introduction of a new partner (sec 31) – Consent of all partners required. He is not liable for prior acts.

Retirement: (sec 32) – With the consent of all other partners / by giving notice to all other partners.

Expulsion of a partner: (sec 38) – Possible if there is a clause in the partnership and majority agrees for the
same.

Insolvency of a partner (sec 34): Whether the firm is dissolved or not with the insolvency a partner, he
automatically ceases to be a partner.

Death of a partner (sec 42) – In absence of a clause to the contrary the firm is automatically dissolved on
the death of a partner.

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UNIT 53. DISSOLUTION OF A FIRM

Voluntary dissolution By the orders of a court ( sec 44)

• A firm may be dissolved with the consent of all • At the suit of a partner, the court
the partners or in accordance with the contract may dissolve a firm under any of the
between partners ( sec 40 ). following grounds;
• A firm is compulsorily dissolved i) when all the a) insanity of a partner,
partners or all the partners except one are b) permanent incapacity of a
adjudicated insolvent ii) On the happening of partner,
any event which makes it unlawful for the
business to be carried on or for the partners to c) Misconduct of a partner,
carry on the business. d) Persistent breach of agreement
• Subject to contract between partners a firm is by a partner,
dissolved e) Transfer of interest by a partner,
a) by the expiry of the term, if constituted for a f) business working at a loss,
fixed period, g) Any other ground which the court
deems just and equitable.

b) by the completion of the undertaking if


constituted for the specific purpose
c) by the death of a partner and
d) by the adjudication of a partner as insolvent.
( sec 42)
• By any partner giving a notice in writing to all
other partners of his intention to dissolve the
firm.

UNIT 54. EFFECTS OF NON-REGISTRATION OF A FIRM:

d. Suits by partners inter se: No suit to enforce a right shall be instituted in any Court by a partner
against the firm or against any other partner of the firm.

e. Suit by a Firm against Third Parties: No suit to enforce a right can be instituted in any Court by a
firm against any third party, unless the firm is registered.

f. Exceptions:

(i) Enforcement of right to sue for matters relating to the dissolution of the firm

(ii) The powers of an official assignee receiver or Court to realize the property of an insolvent
partner.

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UNIT 55. THE COMPANIES ACT 2013


Essential features of a company: .

a. Registration of a company is compulsory.

No. of Members: a) Minimum 2 and Maximum 200 in the case of private limited companies.

b) Minimum 7 and no Maximum limit, in the case of public limited companies.

b. Artificial Legal Person

A company is an artificial legal person created by law and can be dissolved by law alone It enjoys many of
the rights of a natural person. A company may enter into contracts in its own name and can acquire and
dispose of property and can be fined under the provisions of law for violation of law. However it has no
citizenship. Company is a legal entity, separate from its members.

c. Independent corporate personality (apart from its members)

g. Limited liability

h. Perpetual Succession: Company will remain as a legal person for ever until the same is wound up.

i. Transfer of shares A shareholder may sell his shares in the open market and get back his money
without changing the capital of the company

j. Common Seal: A common seal with the name of the company (embossed) acts as a substitute for
signature. The articles of association of the company stipulate conditions under which the common
seal is to be affixed.

k. Corporate veil: Even though the company is a separate legal entity in reality it is an association of
persons. And accordingly the court may at times lift the corporate veil in public interest

UNIT 56. TYPES OF COMPANIES

On the basis of mode of incorporation

1. Statutory Company

A company formed by a special act of Parliament and governed by the statute creating it is called a
statutory company. The provisions of the companies act are applicable to it except where it has been
specifically excluded by the statute by which the company was formed. Statutory Companies are not
required to have Memorandum of Association

Eg. RBI, FCI

2. Registered under the Companies Act 1956 /2013

Eg.TISCO, Reliance

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On the basis of Public Interest

1. Private company
1) minimum paid up capital of rupees one lakh
2) Right to transfer its shares is restricted.
3) Shares and/or debentures of the company are not open to public subscription.
4) Total number of members is limited to 200
5) Acceptance of deposits from persons other than its members, directors or their relatives is
prohibited.

2. Public limited company is defined under the Companies Act, 2013 as a company which Is not a
private limited company

No of members is unlimited.

Minimum 7 members

Shares are listed

3. Government Company: The Companies Act, 2013 sec 2 (45) defines a government company as
any company in which not less than 51% of the paid-up share capital is held by:

• The Central government or

• Any State government or Governments or

• Partly by the Central Government. And partly by one or more State Governments.

And includes a company which is subsidiary of a government company. Eg. .BHEL

4. Foreign Company

Foreign company as per section 2 (42) of Indian Companies Act, 2013 means any company or body
corporate incorporated outside India which:

a. Has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and

b. Conducts any business activity in India in any other manner.

5. One Person company – Sec 2(62)

A company which has only one person as a member. One Person Company shall indicate the name of the
other person, with his prior written consent, who shall, in the event of the subscriber’s death or his
incapacity to contract become the member of the company and the written consent of such person shall
also be filed with the Registrar at the time of incorporation of the One Person Company along with its
memorandum and articles.

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6. Small Company

It means a company other than a public company,

i. Paid-up share capital of which does not exceed Rs.50 lakhs,

ii. Turnover of which as per the its last P & L account does not exceed Rs.2 crores.

On the basis of Liability

Company limited by shares

The members are not bound to pay anything more than the fixed amount on the share. It may be a private
company or public company

Company limited by Guarantee: where the liability of the members of the company is limited by the MoA
to such an amount as the members undertake to contribute to the assets of the company in the event of
liquidation. Such a company may or may not have share capital. Liability of the members is limited to the
extent of guarantee and share capital (if any) A company formed with no intention to generate profit is
usually formed like this. It can either be private of public company

Company with unlimited liability: Every member of such a company is liable without any limit for its debts
as in the case of partnership firm

Holding and Subsidiary:

A company is called a holding company of another where it controls the composition of the board of
directors of the second company and holds more than half of its voting rights. The other company is called
a subsidiary of the first company.

Comparative features of LLP vis-à-vis Partnership Firm and Pvt. Ltd. Company

Sl no Particulars Partnership Firm Limited Liability Pvt. Ltd.


Partnership Company

1. Statute Indian Partnership The Limited Indian Companies


Act, 1932 Liability Act, 2013
Partnership Act,
2008

2. Regulated by Registrar of Firms RoC under the RoC under the


under the State Central Central
Government Government Government

3. Registration Not compulsory Compulsory Compulsory

4. Incorporation Partnership Deed Partnership MoA & AoA


Documents Agreement

5. No. of members/ Minimum2 and Minimum 2 and Minimum2-


partners maximum 10 for maximum not maximum 200 for
banking activities specified Pvt. Co. and

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and 20 for others. minimum 7 and no


(as per Companies limit for maximum
Act 2013, the no in case of
maximum number public co.
of partners is 100)

6. Legal status No legal existence Formed as a Body Legal existence


separate from the Corporate separate from its
partners members

7. Common seal No common seal Optional Compulsory

8. Perpetual No Yes. Subject to Yes. Subject to


Existence Dissolution and Dissolution and
winding up winding up

9. Suits against A registered firm LLP can always A Pvt. Ltd.


and by can sue & be sued sue and be sued in Company can
in its own name its own name always sue and
be sued in its own
name

Companies Act Amendment 2015

Some of the key amendments and clarifications in the CA Amendment 2015 are as follows:

• No Minimum Paid-up Share Capital: The minimum paid-up share capital requirement of INR
100,000 (in case of a private company) and INR 500,000 (in case of a public company) under CA
2013 has been done away with. Consequently, the definitions of private and public companies stand
amended.
Accordingly, no minimum paid-up capital requirements will now apply for incorporating private as
well as public companies in India.

• Common Seal Optional: CA 2013 required common seal to be affixed on certain documents (such
as bill of exchange, share certificates, etc.) Now, the use of common seal has been made optional.
All such documents which required affixing the common seal may now instead be signed by two
directors or one director and a company secretary of the company. An employee can also be
authorised to signthe documents of the company in addition to key management persons.

Consequently, several sections of CA 2013 dealing with common seal have been amended to
incorporate the above requirement.

• No declarations for commencement of business, etc.: CA 2013 required all companies to file
following additional declarations with the Registrar of Companies prior to commencement of
business or exercising any borrowing power: (i) declaration by a director that minimum paid-up
share capital has been paid; and (ii) company has filed verification of registered office.

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The CA Amendment 2015 has removed the above requirements and deleted Section 11 of CA
2013. This reduces the filings to be made by companies in India.

• Violation of Acceptance of Deposits, etc.: CA 2013 introduced stringent provisions in relation to


acceptance/ renewal / repayment of deposits. However, no specific penalty was prescribed for non-
compliance with the relevant provisions i.e. Section 73 and Section 76. This lacuna has been filled
by the CA Amendment 2015.

A new Section 76 A has been introduced for the above non-compliances. The defaulting company
will be liable for fine of a minimum amount of INR 10,000,000 and a maximum of INR 100,000,000
in addition to the amount of deposit or part thereof, along with interest. Further, every officer of the
company in default is punishable with imprisonment which may extend upto 7 years or with a fine
amounting to a minimum of INR 2,500,000 and maximum of INR 20,000,000 or both. Such officer
may attract additional penalty for fraud under CA 2013 if the non-compliance was done knowingly or
with the intention to deceive the company, shareholders, depositors, creditors or tax authorities.

• Reporting by Auditors in respect of Fraud: CA 2013 introduced the reporting obligations on


auditors of companies to the Central Government if the auditor has reason to believe that a fraud
has been committed by officers or employees of the company, irrespective of the amounts involved.
The CA Amendment 2015 has provided that thresholds will be prescribed for reporting of frauds to
the Central Government, or the audit committee or the board of directors. All such instances of
frauds falling below prescribed thresholds will be reported to the board or the audit committee and
will need to be disclosed in the annual report of the company, instead of mandatory reporting to the
Central Government.

The above amendment eases the administrative burden for the auditors, however, these
amendments have not been notified as yet.

• Exemptions to Section 185: Section 185 includes restrictions on loans by a company to a director
or other interested persons / entities. But, the rules prescribed under Section 185 exempted any
loans / guarantee / security by a holding company to its wholly owned subsidiary, and any guarantee
or security by a holding company to a financial institution for loan availed by its subsidiary, provided
the loan in each of these cases is utilized by the subsidiary for its principal business.

The above provisions of the Rules have now been inserted under Section 185 of CA 2015 itself.

• Dividend: Section 123 is an enabling provision for companies to declare divided in a financial year,
subject to fulfilment of prescribed conditions. The CA Amendment 2015 has introduced a new
proviso which states that a company cannot declare dividend for a financial year, unless the losses
and depreciation carried over from past years have been set-off against the profits of the company,
in the year it proposes to declare a dividend.

• Special Courts: Section 435 read with Section 436 provides the Central Government the power to
set up special courts to try offences under CA 2013.
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By way of the above amendment, special courts may now only try offences punishable under CA
2013, with imprisonment for 2 years or more. All other offences are to be tried by a Metropolitan
Magistrate or a Judicial Magistrate of the First Class.

UNIT 57 MEMORANDUM & ARTICLES OF ASSOCIATION

Memorandum of Association and Articles of Association are the basic documents that are required for
incorporating a company. The business of the company is carried on the basis of the objectives laid down in
the memorandum of association while the internal management and procedures are regulated by the
Articles of Association

Memorandum of Association

It is document of great significance .It embodies the fundamental rules regarding the constitution and
scope of activities of the Company. It contains various caluses:

Name clause: A company has to have a name since it is a legal person. But the name should not be
undesirable. It should not be identical with or too nearly resembling the name of another company. Limited
Liability companies should suffix the word “limited “and private companies the word “private limited” to the
names. The Govt has power to permit not to use the above words in the case of companies formed for
promotion of art, literature, science, commerce, religion, charity etc and they do not pay dividend to the
members

Registered Office: Registered office of a company establishes its domicile. The name should be informed
within 30 days of incorporation or change of name

Objectives Clause: Objectives should be legal

As against the existing requirement of the 1956 Act, the 2013 Act does not require the objects clause in the
memorandum to be classified as the following:

(i)The main object of the company

(ii) Objects incidental or ancillary to the attainment of the main object

(iii) Other objects of the company [section 4(1) of 2013 Act]

Liability clause: This clause states the liability of the members shall be limited by the unpaid amount on
shares.

Capital Clause: This clause must state that the amount of share capital which the company will be
authorized to raise and the number and the value of shares into which it is divided.

Association or subscription clause: The Memorandum of Association concludes with a declaration of


the subscription that the persons who have subscribed their signatures intend to form themselves into an
association in accordance with the MoA.

The contents of a memorandum can be altered only in the manner and to the extent provided in the act.
Name of a company can be changed by passing a special resolution in the General Body and obtaining the

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approval of the Central Government. However the approval of Central Govt. is not required where the
change sought is only addition or deletion of the word “private”.

Articles of Association

The articles of association of a company are its by-laws or the rules and regulations that govern the
management of the company, where the powers of its officers are defined.

The day to day functioning of the company, share capital, calls on shares, appointment of directors, and
conversion of stock in to shares and vice versa, etc are governed by articles of a company.

The articles of a company are subordinate to the memorandum of association, and in case of doubt or
conflict the memorandum prevails over the articles.

As per Section 30, the articles will have to be printed, divided into paragraphs which should bear
consecutive numbers and will have to be signed by every subscriber of memorandum, duly witnessed.

Articles can be amended by a special resolution in a general body meeting of share holders. However it
should not be inconsistent with the companies act or any other statute. Generally the amendment will not
have retrospective effect.

Distinction between memorandum and articles of association

Sl. No. Memorandum Articles of Association

1 Object Clause- for the benefits of public Internal regulations of the company and meant for
dealing with it the officers as guidelines

2 Dominant instrument and states purpose of Subordinate to Memorandum


incorporation

3 Clauses can be altered only by special Articles of association can be altered by special
resolution passed by the company and with resolution and ratification of company law board is
the sanction of company law board not required.

4 Any act in contravention of the Any act in contravention of the articles of


memorandum of association does not bind association is a procedural irregularity and can be
the company and the same cannot be ratified by the share holders at a general body
ratified by the company. meeting.

UNIT 58. DOCTRINE OF ULTRA VIRES / CONSTRUCTIVE NOTICE/


INDOOR MANAGEMENT
DOCTRINE OF ULTRA VIRES

When a company exercises its powers to promote and / or realize any of its objectives stated in the MoA, it
is intra vires (within the powers of) the Company.

Any other act of the company which is outside the scope of the objects clause of the MoA is known as ultra
vires (beyond the powers of) the company.

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An ultra vires transaction is void ab initio and therefore cannot become intra vires by reason of ratification.
No company can be held liable for obligations arising out of such a contract .

If a lending done by the company is ultra vires the company can recover the money from the debtors
because the debtors cannot say the company had no power to lend. If a company’s money has been spent
ultra vires in purchasing any property the company is entitled to the ownership of the property. If a director
makes an ultra vires payment he is personally liable to the company.

CONSTRUCTIVE NOTICE

The memorandum and articles of association, when registered become a public document and any person
who applies for it can see / inspect them. Hence any party dealing with the company is presumed to have
knowledge of these documents and they cannot plead ignorance at any point of time. This is called doctrine
of constructive notice.

In fact the doctrine of constructive notice is a negative doctrine in the sense that it stops a person from
arguing that he had no notice of the contents of the documents

RULE OF INDOOR MANAGEMENT

The principle of constructive notice seeks to protect the company from outsiders, whereas the doctrine of
indoor management seeks to protect outsiders against the company. Of course a person dealing with the
Company is deemed to have read and understood the MoA and AoA to see that his contract with the
company is not inconsistent. But he is not bound to inquire into the regularity of the company’s internal
functioning or the compliance of internal management of the company.

Hence even if his contract is inconsistent with the MoA and AoA the company is bound. He will not be
affected by any irregularity in the internal management. This is known as doctrine of indoor management
But it may be noted that if the person had actual knowledge of the internal irregularity before entering into
the contract he is not entitled to claim protection under the doctrine

UNIT 59. MEMBERSHIP OF COMPANY


Member of a company is one whose name is entered in the register of members. He is a shareholder.
However those persons who purchase share for trading and holding for a short period will not have their
name entered in the register of members of the company, though they are shareholders.

Various modes of becoming a member:

a. By subscribing to memorandum of Association


b. Membership by allotment of shares
c. By Transfer of shares (buys in the market and applies for registration of his name)
d. By transmission of shares (Surviving joint holders/ legal heirs)
e. Membership by acquiescence
f. Joint Membership

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Who can become a member?

a. Any person competent to contract.

b. Minors and persons of unsound mind cannot become members of the company

c. A partnership cannot become a member of a company. The shares have to be bought only in the
name of the individual partners.

d. A company can become member of another company if it is authorized by memorandum of


association

e. A society registered under the societies registration act 1860 and has a legal existence can become
a member of a company.

f. A non-resident cannot become a member of a company without complying with the requirements of
FEMA, 1999.

g. Application in fictitious names or person inducing a company to issue shares in fictitious names are
punishable with imprisonment for a term which may extend to 5 years.

Cessation of membership:

Membership in a company ceases in case of any of the following;

• If a member transfers his shares to another person

• If a members shares are forfeited

• If the shares are sold pursuant to a court order

• If the member surrenders his shares to a company if such surrender is permitted

• If a person rescinds the contract to take the shares

• If a member is adjudicated insolvent

• On the death of a member

• On redemption of preference shares if they are redeemable

• If the company is wound up

Register of members:

Every company shall maintain a register of its members showing the following details:

• Name and address, occupation, if any, of each member

• Shares held by each member showing the distinctive numbers

• The date on which each member was entered in the register as member

• The date on which any person ceased to be a member

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Place of keeping the register:

At the registered office of the company

Rights and duties (liabilities) of members:

The liability depends upon the nature of the company

Unlimited liability- Liable in full for all debts of the company

Company limited by guarantee – The member is liable to contribute a sum of money agreed up on and
specified during the period of his membership

Company limited by shares – The member is liable to pay the nominal full value of shares and the liability
of the member ends there.

Rights:

A. Statutory Rights

• Priority to have new shares offered

• To receive notice of meetings, attend and vote at meetings

• Transfer shares

• Receive copies of annual accounts

• To inspect the register of members, register of debenture holders and copies of annual returns

• To convene an extra ordinary meeting of the company

• Appoint the directors and auditors at the general body meeting of the company

• To approach the Company Law Board (CLB) to order an investigation in to the affairs of the
company

• To file a petition to high court to order the winding up of the company

B. Documentary rights.

These are the rights conferred upon the members by memorandum of association and article of association
are called documentary rights.

C. Proprietary rights:

To be registered as a member in the company.

No personal liability to a company’s debts,

To receive dividends and to participate in the distribution of assets in the case of liquidation of the company.

UNIT 60. PROSPECTUS

The Companies Act, 2013 Sec 2 (70) defines a prospectus as any document described or issued as a
prospectus and includes a red herring prospectus (sec.32) or shelf prospectus (sec 31) or any notice,
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circular, advertisement or other document inviting offers from the public for subscription or purchase of any
securities of a body corporate

Private companies cannot issue a prospectus to raise funds from the public.

Prospectus is not required in the following cases:

When a person is invited to enter into an underwriting agreement / arrangement to purchase / subscribe
shares

When the shares are offered only to the existing share holders or debenture holders of the company

When the shares or debentures offered are in all respects uniform with the shares or debentures previously
issued and are listed in a recognized stock exchange.

Compliance of prospectus

Sec 26 of the Companies act 2013 stipulates the mandatory provisions that are to be stated in the
prospectus

Section 55 states that a prospectus must be dated.

It must be signed by every person mentioned therein as a director or proposed to be a director

Section 56 stipulates the mandatory provisions that are to be stated in the prospectus.

A prospectus can be issued only after the incorporation of a company.

Every application for a share should be accompanied by a copy of prospectus.

Before issue of the prospectus, the same should be submitted to the registrar of companies for
registration.

Any mis-statement in prospectus attracts both civil and criminal liability on the company and its promoters

UNIT 61. DIRECTORS

The ownership of a company is diversified from the management of the company (unlike a partnership
firm). The ownership of the company is with the members of the company where as the management of the
company is with the board of directors elected by the members.

Only an individual can be appointed as director of a company and a body corporate, a firm or association
cannot be appointed director of a company.

Important provisions of the Companies Act regarding Directors are given below

A single resolution can appoint only one director and separate resolutions are required for appointment of
each director. A person cannot act as director unless he/she signs and files his/her consent with the
registrar of companies within 30 days of his/her appointment.

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Number of Directors

Minimum (As per Sec 149 of ICA 2013 )

Public Company 3

Private Company 2

One Person Company 1

Maximum 15

Woman director

The following categories of companies need to comply with the requirement of having at least of one
woman director [section 149(1) of 2013 Act]

(i) Every listed company, within one year from the commencement of second proviso to sub-section (1) of
section 149

(ii) Every other public company that has paid–up share capital of one hundred crore rupees or more, or a
turnover of three hundred crore rupees or more within three years from the commencement of second
proviso to sub-section (1) of section 149

At least one director must have stayed in India for at least 182 days in the previous calendar year [section
149(3) of 2013 Act].

Every listed public company to have at least one-third of the total number of directors as independent
directors.

Number of directorships that can be held by an individual - 20 [section 149(1) of 2013 Act]. Out of these
20, not more than 10 can be Public Companies.

Subscribers of Memorandum are deemed to be Directors until Directors are duly appointed

The Board of Directors ( if provided by AofA) can appoint an alternate director in place of a director who
stays away from the place of meeting for a period exceeding three months and automatically vacates the
post on the return of the original director. The Board of Directors can also appoint additional Directors if
provided by Aof A. his office will be upto the next annual general meeting

Vacation of office by directors (sec.167 of ICA 2013 ):

The office of director becomes automatically vacant if; he incurs any of the disqualifications as specified in
sec.164

1. He fails to obtain qualification shares within six months of his becoming a director

2. He is found to be of unsound mind by a court

3. He applies to be adjudicated as an insolvent

4. He is adjudged as an insolvent

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5. He is convicted by a court for any offence involving moral turpitude and sentenced to imprisonment for
not less than 6 months

6. He fails to pay any call in respect of shares

7. He absents himself from all the meetings of the board of directors held during the last 12 months (with or
without seeking leave)

8. He acts in contravention of section 184 (loan to directors or disclosure of interest by directors)

9. He is removed by the shareholders by resolution passed in a general meeting.

A company can remove a director before the expiry of his term (not being a director appointed by the
central govt.) by passing an ordinary resolution.

Certain Powers can be exercised only at Board Meeting: ( not by issue of circulars )

Powers to

1. Make call on unpaid shares

2. issue debentures

3. borrow money otherwise than on debentures

4. invest the funds of the company

5. make loans

6. Authorize a particular buy back

Restrictions on powers of Board

A public company or a subsidiary of a public company can exercise certain powers only after passing a
resolution in a general meeting of the share holders;

• Dispose of any undertaking of the company

• Remit, or give time for repayment of, any debt due by a director ( except in the case of renewal or
continuance of an advance made by a banking company to its director in the ordinary course of
business)

• Invest otherwise than in trust securities, the amount of compensation received by the company in
respect of compulsory acquisition

• Borrow money beyond aggregate of the paid up capital of the company plus its free reserves;

• Contribute charitable and other funds not directly connected to the business of the company or the
welfare of its employees, an amount exceeding five percent of its average net profits during the
three immediately preceding financial years or Rupees Fifty thousand, whichever is greater.

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Loan to Directors:

To ensure that the directors do not misuse the funds of the company, a stipulation has been made that a
public limited company shall not grant any loan to its directors or extends surety for any loan granted to any
of its directors or their relatives.

When a company enters in to contract with any firm in which any of its directors have interest, then the
same may be done only after passing a resolution in the board meeting and also obtaining the permission
of the central govt. when the paid up capital of the company is Rs. One Crore or more. Further the director
concerned will have to disclose the nature of his interest in the concerned firm.

COMPANY ACT AMENDMENT 2015 HIGHLIHTS

1. Minimum capital requirement for Private Ltd and Public Ltd companies is done away with. Hence
definition of companies changed to this extent (section 2)
2. The common seal made optional. When common seal is not available the documents are to be
signed compulsorily by two directors or one director and Company secretary for authentication.
( Section 9 and 22)
3. Filing of e-form 21 under section 11 is done away with. With this the companies need not obtain
certificate of commencement of business (section 11)
4. Instead of engraving the Registered office on common seal it is enough it is done in legible
characters (section 12)
5. In case of unauthorized acceptance of deposits or failure to pay back deposits the Company shall
be punishable with fine of Rupees one crore but which may go up to 10 crore rupees. Additionally
every officer who is in default shall be punishable with imprisonment which may extend upto 7 years
with or without fine which shall not be less than Rupees twenty five lakh but may extend upto
Rupees two crore ( SECTION 76)
6. No company shall declare dividend unless carried over previous losses and depreciations not
provided in previous years are set off against profit of the company for the current year ( section
123)
7. Unclaimed dividend is defined as dividend which has not been paid or claimed for seven
consecutive years. (section 124)

UNIT 62. FOREIGN EXCHANGE MANAGEMENT ACT (FEMA) 1999

FEMA replaced FERA 1973 w e f 01.06.2000. The provisions of FEMA extends to the whole of India and
also applies to all branches offices and agencies outside India owned or controlled by a person resident in
India. Any violations under FEMA will attract penal provisions including arrest and detention

Important terms used in FEMA

• Authorised persons: means any Bank or other person including authorized money changer or
dealer authorized under FEMA to deal in foreign exchange or securities

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• Capital account transactions: A transaction which brings in a change in the assets or liabilities
outside India of a person resident in India or assets and liabilities in India of a person resident
outside India.

• Current account transaction : A transaction other than a capital account transaction


(Eg; payments in connection with trade or business or service or short term credits etc, interest paid
or income from investments, remittances for living expenses of parents, spouse and children
residing abroad, expenses in connection with foreign travel, education and medical care of parents,
spouse and children)

• Foreign Currency: Means any currency other than Indian currency.

• Foreign exchange : includes a) foreign currency, b) amounts payable in any foreign currency, c)
drafts, travellers cheques, letters of credit, Bill of exchange payable in any foreign currency even if
drawn in Indian rupees d ) Drafts travellers cheques, letters of credit or bill of exchange drawn by
banks, institutions or persons outside India, but payable in Indian currency.

• Foreign Security: Means shares, stocks, bonds and debentures, Govt securities, savings
certificates, deposit receipts and units of any mutual funds etc.

• Person: an individual, a HUF, a company, a firm, an association of persons or body of individuals,


whether incorporated or not, every artificial judicial person, any agency, office or branch owned or
controlled by such persons.

• Persons resident in India is defined

A) those residing in India for at least 182 days in the preceding financial year but does not include;

a) A person who has gone out of India or who stays outside India

1) for taking up employment outside India,

2) For carrying on a business or vocation outside India, or

3) for any other purpose in such circumstances as would indicate his intention to stay outside India
for an uncertain period.

b) A person who has come to India or stays in India otherwise than

1) for taking up employment in India,

2) for carrying on a vocation or business in India, or

3) for any other purpose under circumstances indicating his intention to stay in India for an uncertain
period.

B) Any person or body corporate registered or incorporated in India

C) An office, branch or agency in India owned or controlled by a person resident outside India

D) An office, branch or agency outside India owned or controlled by a person resident in India.

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• Person Resident outside India: Means any person who is not resident in India as per the above
definition.

• Repatriate to India: Bringing Foreign exchange to India and surrendering it to an authorized dealer
in exchange for Indian Currency is called repatriation.

Regulation and Management of Foreign Exchange

Export: Goods taken out of India or services provided to any person outside India are referred as export.
Every exporter of goods and services will have to repatriate to India the proceeds there of within a
reasonable time and the noncompliance is a violation of FEMA and is punishable as such.

The difference between FERA and FEMA is that “violation of FERA was a criminal Offence and violation of
FEMA is a civil offence”. Penalty- thrice the sum involved for contravention or Rs. two lakhs where the
amount is not quantifiable. Civil Courts have no jurisdiction to entertain any suit or proceedings in respect of
any matter under FEMA. Appeals have to made with special Director (Appeals) and thereafter to Appellate
Tribunals Only questions of law can be referred to High Court or Supreme Court.

The Central Govt establishes a Directorate of Enforcement for this purpose and only officers not below the
rank of an Assistant Director can investigate violations.

RBI has powers to appoint authorized persons and powers to inspect authorized persons.

UNIT 63. THE TRANSFER OF PROPERTY ACT 1882.

This act covers transfer of immoveable properties by a competent person (includes legal persons too) in
present or in future to one or more living persons including himself.

Sale: is transfer of ownership for a price paid or promised or part paid and part promised

Sale of tangible immovable property: for a consideration exceeding Rs100/- can be made only by a
registered instrument necessarily registered. The transaction is complete when the seller gives possession
to the buyer.

Mortgage: A mortgage is the transfer of interest in specific immovable property for the purpose of securing
the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the
performance of an engagement which may give rise to pecuniary liability. ( Sec 58 (a) of the Transfer of
Property Act 1882

Essentials of mortgage

Transfer of interest. A mortgage does not involve transfer of ownership ( as in the case of sale )
but it only means transfer of interest

Specific immovable property

To secure the payment of loan or the performance of an obligation which may give rise to pecuniary
liability.

an existing or future debt


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The mortgage referred in the Transfer of Property Act is a mortgage of immovable property. It has
no application to movable property. Mortgage of movable property is called Hypothecation

The transferor is called the mortgagor. The transferee is called the mortgagee. The amount and interest
secured is called the mortgage money. The instrument by which the transfer is conveyed is called the
“mortgage deed “.

Mortgagor may be

• An absolute owner

• One of the co-owners

• Kartha of H U F

• Guardian of minor’s property with sanction of court under the Guardians and Wards act 1890

• Executor or Administrator

Different kinds of mortgage

a. Simple Mortgage

Possession of the property with the mortgagor.

On default mortgagee can sell the property with intervention of the court.

Registration of the mortgage is compulsory if the amount is Rs.100 and above .

Mortgagor is personally liable.

Mortgagee has no right to get any payment out of the rents and produce of the mortgaged property.

b. Mortgage by conditional sale

Mortgagor apparently sells the mortgaged property and sale is NOT real.

If money becomes unpaid as per agreement the sale becomes absolute and motgagee by applying
to court can get decree in his favour.

Mortgagor loses rights of redemption.

No personal liability for loan repayment.

c. Usufructuary Mortgage

Mortgagee is in actual legal possession of the property till dues are repaid.

Mortgagee has the right to receive rent and profits accruing from the property

No personal liability of the mortgagor.

No time limit is specified

No sale allowed.

d. English Mortgage
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Absolute transfer of the property to the mortgagee subject to retransfer of the property on repayment
of the debt.

Personal liability of the mortgagor to pay on a specified date.

e. Equitable Mortgage

Where a person delivers to a creditor (Bank) or his agent documents of title to immovable property with the
intent to create a security thereon, the transaction is called mortgage by deposit of title deed or Equitable
mortgagee.

Requisites of Equitable Mortgage

A Debt . It may be existing or future, or partly both

Deposit of title deeds only at notified towns

Deposit of title deeds must be made by the debtor or his agent

Deposit of title deeds must be made with the creditor or his agent

The deposit must be made of all such deeds which are material evidence of the title

The deposit of title deeds must be made with the intent to create a security on immovable property
. Intention is the essence of the transaction.

Advantages of Equitable Mortgage

Saves stamp duty and registration charges

In the absence of registration the information regarding the mortgage is known only to bank and the
customer. Hence the reputation of the latter is not affected.

On repayment of debt, the documents of title are returned to the customer and he can redeposit the
same for effecting another mortgage. In the case of legal mortgage a new deed is necessary at the
time of creating every mortgage involving expenses like stamp duty, registration charges etc.

An equitable mortgage stands on the same footing as a motgagee by deed for the purpose of
priority over the mortgaged property.

Demerits: In case of default, sale can be only through the decree of a court, which is expensive and
time consuming

Precaution: EM with only original title deed, no certified copy / photocopy / duplicate copy to be
accepted

f. Anomalous mortgage: A mortgage which is not covered under any of the above mortgages.

Limitation period for filing a suit for sale of mortgaged property is 12 years from the date mortgage
debt becomes due

Limitation period for filing a suit for foreclosure is 30 Years from the date mortgage debt becomes
due.
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All mortgages other than EM can be effected only in terms of a mortgage deed which is to be witness by
two persons and registered EM requires no writing As an evidence banks obtain a confirmation for deposit
of title deeds from the mortgagor. Charge is to be registered with ROC in the case of companies

Sale without Court Intervention

Section 69 of the TP Act gives power of sale

(a) where the mortgage is an English mortgage and neither mortgagor or mortgagee is a Hindu,
Buddhist or Muslim,

(b) where a power of sale without the intervention of court is explicit and the mortgagee is the
Govt. and

(c) the power of sale is expressly stated and the property or any part thereof is situated in an area
notified by the Govt. in this respect.

No such power shall be exercised unless and until notice in writing demanding the payment is served on
the mortgagor and default has been made by the mortgagor for three months after such notice has been
served or amount in arrear is not below Rs500/- and remains unpaid for three months after becoming due.

Enforcement of mortgage through court: Civil suit can be initiated for the recovery of dues by
enforcement of document; subject to certain conditions:

1. The suit shall be filed in the court of lowest jurisdiction in whose jurisdiction the mortgaged properties are
situated.

2. All subsequent mortgagees will have to be impleaded as defendants.

3. If the lender has more than one mortgage, then all the debts should be sued for or he should obtain leave
of court for separate suits.

4. In case personal liability is also to be pleaded, then it should be within the limitation period.

5. In civil suits, a primary decree is first issued setting a time limit for clearing the dues. Final execution
petition can be filed only after expiry of this period.

6. In the case of execution of mortgage decrees, the decree holder can bring the property first to sale
without seeking an attachment from court.

Lease

A lease is a transfer of a right to enjoy the property for a certain time ( express or implied ) or in perpetuity
(for ever) in consideration of a price paid or promised or any other thing of value ( it is called rent ), to be
given to the transferor (called lessor) by the transferee. (called lessee) Sale is an absolute transfer of
property, whereas a lease is a partial or limited transfer of property .In a lease there is a transfer of the right
to enjoy such property Thus in a lease there is separation between ownership and possession.

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Duration of lease in the absence of written contract or local usage

A lease for an agricultural or manufacturing purpose is deemed to be a lease from year to year. It can be
terminated by giving 6 months notice A lease for any other purpose is deemed to be a lease from month
to month. It can be terminated by giving 15 days notice

A lease exceeding one year can be made only by a registered document

Mortgage of lease hold rights: procedure to be followed by the bank

• Original lease agreement can constitute the title deeds if the lease is perpetual

• The lease agreement should be duly stamped and registered

• The unexpired lease period must be sufficiently longer and must cover, the period allowed for
repayment of bank loan.

• A tripartite agreement may also be entered in to between the lender bank, the lessor and the lessee.

• The lease deed must contain a clause permitting / authorizing the lessee to create a mortgage or a
separate letter of authority to the lessee for creating a mortgage in favour of financial institutions /
banks as well an undertaking not to revoke the lease agreement during the period.

Actionable Claim: Actionable claim means a claim to any debt (other than a debt secured by mortgage,
hypothecation or pledge). The actionable claim can be transferred with or without consideration, by
execution of an instrument in writing. It is not mandatory to give notice to the debtor before transferring the
claim The transferee can file a suit without notice to the debtor or the transferor.

UNIT 64. RIGHT TO INFORMATION ACT 2005.

The intention of the act is to give a right to the citizens for access to information under the control of public
authorities. The act came in to force fully w e f 12 October 2005. Act is applicable throughout India except
J&K

Terms used in the Act:

Appropriate Government: Either the central govt. or the State Govt.

Central Information Commission: Constituted by the Central Govt.

Central Public Information Officer: Central Public Information Officer Designated by Public authority and
includes an Assistant Central Public Information Officer.

Information : Any material in any form, including records, documents, memos, e-mails, opinions, advices,
press releases, circulars, orders, log books, contracts, reports, papers, samples, models, data materials
held in any electronic form, and information relating to any private body which can be assessed by a public
authority under any law for the time being in force.

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Public Authority means any authority or body or institution of Self Govt established:

1. By or under constitution;

2. By any other law made by Parliament;

3. By any other law made by state Legislature;

4. By notification issued or order made by the appropriate government and includes any a) body
owned, controlled or substantially financed; b) non government organizations substantially
financed, directly or indirectly by funds provided by the appropriate government’

Right to Information has been used as an inclusive term and it means the right to information accessible
,under the act, held by or under the control of any public authority and includes the right to

a) inspection of work, documents, records;

b) taking notes, extracts or certified copies of documents or records;

c) taking certified samples of material;

d) obtaining information in the form of diskettes, floppies, tapes, video cassettes or in any other electronic
mode or through print out where such information is stored in computers or in other device.

State Information Commission means the State Information Commission constituted by the State Govt
under this Act.

UNIT 65. OBLIGATIONS OF PUBLIC AUTHORITIES:

The Public Authority shall publish within 120 days of the enactment of the act;

1. The particulars of its organization, functions and duties.

2. The powers and duties of its officers and employees

3. The procedure followed in its decision making process, including channels of supervision and
accountability.

4. The norms set by it for the discharge of the functions.

5. The rules, regulations, instructions, manuals and records used by its employees for discharge of its
functions.

6. A statement of the categories of documents held by it or under its control.

7. A statement of boards, councils, committees and other bodies consisting of two or more persons
constituted by it.

8. The monthly remuneration received by its officers and employees.

9. The particulars of facilities available to citizens for obtaining information, including the working hours
of a library or reading room for public use.

10. The names, designation and other particulars of the public information officers.
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PIO – Roles and Duties:

• Public Information Officers are internal officers designated by the public authorities to deal with the
citizens seeking information under the act from their organizations.

• PIO shall deal with the requests from persons seeking information and where the requests cannot
be made in writing, to render reasonable assistance to the person to reduce the same in writing.

• If the information requested for is held by another public authority, the request will be transferred to
that authority.

• PIO may seek the assistance of any other officer to discharge his duties properly.

• PIO shall furnish the information in the form in which it is sought unless it would disproportionately
divert the resources of the Public Authority. In case full information cannot be given, the PIO shall
give a notice to the applicant in this respect clearly showing the reasons for the same and indicating
the fees to be deposited.

• Normally within 30 days and where the life or liberty of a person is involved, then the same shall be
provided within 48 hours.

• In the case of refusal, the reasons for refusal should be informed, the particulars of Appellate
authority should also be furnished.

• No fees from people below poverty line. Fees can be fixed by the concerned Public office.

• The information should be provided free of cost if the PIO fails to give it in time.

• Where the information has to be given by a third party, then PIO should give notice to him within 5
days of receipt of the notice. Third party will be given 10 days time to give his representation to PIO.

Exemptions to Disclosure:

• Disclosure of information would prejudicially affect the integrity / sovereignty of India, the security,
strategic, scientific or economic interest of the State, relations with foreign States, or lead to an
offence, Disclosure which may constitute contempt of court.

• Information relating to commercial confidence, trade secrets or intellectual property etc

• Information available in fiduciary relationship

• Information received in confidence from foreign govt, the disclosure of information is a threat to the
physical safety of a third person etc

• Where disclosure may impede the process of investigation or prosecution of offenders

• Cabinet papers including records of deliberations

• Personal information which has no relation to any public activity or interest and which may amount
to invasion to privacy of individual.

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Rejections: are possible if it is covered by the exemptions and where it infringes copyright of any person
other than State.

Appeal: to State Information Commission and Central Information Commission, when;

• The application has been rejected or refused to be received by a PIO.

• Access to information has been refused

• Response has not been given to a request

• Fee is considered unreasonable

• Information given is incomplete, misleading or false.

Orders on Appeal: Central Information Commission may provide access to information in a particular form
or appoint a Central Public Information Officer or require public authority to compensate the complainant or
impose a penalty or reject the appeal.

UNIT 66. PREVENTION OF MONEY LAUNDERING ACT, 2002.

There is no definition of money laundering in the Act. Section 3 of the Act states whosoever directly or
indirectly attempts to indulge or knowingly assists or knowingly is a party to or is actually involved in any
process or activity connected with the proceeds crime and projecting it as untainted property shall be guilty
of offence of money laundering.

Punishment: Rigorous imprisonment of not less than 3 - 7years, may go up to 10 years in case of narcotic
Drugs and Psychotropic substances Act 1985, and a fine.

Obligations of banking companies:

• Maintain a record of all transactions of nature and value as per the rules

• Furnish information of the transactions to the director within the time

• Verify and maintain records of the identity of all its clients

Records to be maintained:

• All cash transactions of Rs 10 lakhs and above

• A series of cash transactions which totals to the above figure

• All cash transactions were forged or counterfeit currency notes or bank notes have been used as
genuine and where a forgery of a valuable security has taken place.

• The record must contain information as to the nature of transaction, the amount of transaction and
the currency in which it was denominated, date and parties to the transaction.

• The principal officer of a banking company shall furnish the details of transaction by seventh day of
the following month in respect of

1) Forged or counterfeit notes, bank notes or forgery of valuable securities,


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2) 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.

Verification of records of the identity of clients:

Individuals Certified Copy of an Officially Valid Document (OVD)

Company Certificate of incorporation. Memorandum and articles of association. Board


resolution or the power of attorney. OVD in respect of the person operating the
account.

Partnership firm Registration Certificate. Partnership deed. Officially valid document in respect of
the person acting in the transaction

Trusts Registration certificate. Trust deed. OVD in respect of the person acting in the
transaction.

Unincorporated Registration of the managing body. Power of attorney granted to the person
associations conducting the transactions. Information as may be required by the banking
company to establish the legal existence of the association or body of individuals.
Resolution

UNIT 67. INFORMATION TECHNOLOGY ACT, 2000

The Act was introduced on account of the initiatives of United Nations Commission on International Trade
Law

The act aims to give legal infra-structure to e-commerce and E transactions. The act states that unless
otherwise agreed, an acceptance of contract may be expressed through electronic means of
communication and the same shall have legal validity and enforceability.

Definitions:

Access: gaining any entry in to, instructing or communicating with the logical, arithmetical, or memory
function resources of a computer system or computer network.

Addressee: means a person who is intended by the originator to receive the electronic record but does not
include any intermediary.

Adjudicating Officer: is an adjudicator appointed under subsection (1) of section 46.

Affixing digital signature: means adoption of any methodology or procedure by a person for the purpose
of authenticating an electronic record by means of digital signature.

Digital Signature: means authentication of any electronic record by a subscriber by means of an electronic
method or procedure in accordance with the provisions of section 3.

Digital signature Certificate: means a digital signature certificate issued under the subsection (4) of
subsection 35.

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Appropriate Govt means: the Central Govt, the State Govt, or one enumerated in List II of the Seventh
Schedule to the Constitution or relating to any state law enacted under list III of the Seventh Schedule of
Constitution.

Asymmetric Crypto System : is a system of a secure key pair consisting of a private key for creating a
digital signature and a public key to verify the digital signature.

Certifying authority: is a person who has been granted license to issue a digital certificate under Section
24.

Certification practice statement: refers to a statement issued by a certifying authority to specify the
practices that the certifying authority employs in issuing Digital Signature Certificates.

Computer : means any electronic, magnetic, optical or other high speed data processing device or system
which performs logical, arithmetic and memory functions by manipulations of electronic, magnetic or optical
impulses, and includes all inputs, outputs, processing, storage, computer software or communication
facilities which are connected or related to the computer network. Computer system means a device or
collection of devices including input or output support devices and excluding calculators.

Controller; means the Controller of certifying authorities appointed under subsection (1) of section 17.

Cyber Appellate Tribunal: means the Cyber Regulations Appellate Tribunal established under the
subsection (1) of section 48

Data ; means a representation of information, knowledge, facts, concepts or instructions which are being
prepared or have been prepared in a formalized manner and intended to be processed or have been
processed in a computer system or computer network and may be in any form or stored internally in the
memory of the computer.

Electronic form ; with reference to information means any information generated, received, sent or stored
in media, magnetic optical, computer memory, microfilm, computer generated micro fiche or similar device.

Electronic Gazette: means the official notifications published in the electronic form.

Electronic record: means data record or data generated, image or sound stored, received or sent in an
electronic form or micro film or computer generated micro fiche.

Function: in relation to a computer, include logic, control arithmetical process, deletion, storage and
retrieval and communication or telecommunication from or within a computer.

Information: includes data, text, images, sound, voice codes, computer programmes, software and data
base or microfilm or computer generated micro fiche.

Intermediary: with respect to any particular electronic message means any person who on behalf of
another person receives stores or transmits that message or provides any service with respect to that
message.

Key pair; in an asymmetric crypto system means a private key and its mathematically related public key, so
related that the public key can verify the digital signature created by the private key.
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Originator: means a person who sends, generates, stores or transmits any electronic message to any
other person but does not include an intermediary.

Private Key: means the part of key pair used to create digital signature.

Public key: means the other part of the key pair used to verify the digital signature Certificate.

Secure System: .means computer hardware, software and procedure that a) are reasonably secure from
unauthorized access and misuse ,b) provide a reasonable level of reliability and correct operation,

d) are reasonably suitable for the intended functions d) adhere to generally accepted security

e) procedures.

Security procedure: means the security procedure prescribed by the central govt. under section 16.

Subscriber: means a person in whose name the digital signature certificate is issued.

Verify: in relation to a digital signature, electronic record or public key, with its grammatical variations and
cognate expressions means to determine whether a) the initial electronic record was affixed with digital
signature by the use of a private key corresponding to the public key of the subscriber; b) the initial
electronic record is retained intact or has been altered since such an electronic record was so affixed with
the digital signature.

Electronic governance: Chapter III says that the requirement of law that certain matters need to be written
or in printed form , will automatically stand fulfilled if a) rendered or made available in an electronic form and
b) accessible so as to be usable for subsequent references. The chapter deals with the recognition of
digital signature too.

Certifying authorities: The scheme of regulating certifying authorities is prescribed in chapter III of the Act.
There will be Controller of Certifying authorities as supervisor who will also be laying down standards and
conditions governing the certifying authorities.

Penalties: Chapter IX of the act states the penalties and adjudication for various offences. The
compensation for damages to computer system has been set with a minimum of Rs one crore. An officer
not below the rank of a director to the govt. of India or equivalent rank will be made the adjudicator for this
purpose.

Appeal: Chapter X talks about the establishment of a Cyber Regulations appellate Tribunal.

Investigation: Chapter XI of the act talks about various offences and the said offences will be investigated
by a Police Officer not below the rank of Deputy Superintend of Police.

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