FINANCAL SERVICES LEGAL & REGULATORY ENVIRONMENT

BANKING LAW & REGULATION

NEGOTIABLE INSTRUMENT ACT 1881
• The Act relates to negotiable Instruments viz – Promissory notes – Bills of exchange – Cheques • Negotiable Instruments (Amendment) Act 1988 has inserted new section 138 which incorporated penalties for dishonour of cheque because of insufficient funds • Negotiable Instruments (Amendment & miscellaneous provisions ) Act 2002 expedited criminal proceedings & modify the requirements of E commerce

MISCELLEANOUS TERMS
• Negotiable by statute – PN , BOE , Cheques • Negotiable by Usage – Bank draft. Pay orders , Railway receipt , Hundies • Bearer instrument – Person who is lawful holder of bearer instrument can obtain payment of it • Order instrument – When it is expressed to be payable to a particular person , when the “bearer “ word is struck off • Inland instrument – Which is drawn in India upon a resident person &even though payable in foreign country

MISCELLEANOUS TERMS
• Foreign instrument – Drawn outside India , drawn on person who is resident outside India whether made payable outside or inside India • Demand instrument – An instrument like PN or BOE where in time of payment is specified • Ambiguous instrument – Treated by its holder as BOE or PN , like when drawer & drawee are same or drawee is fictitious • Inchoate or incomplete instrument – When one person signs & delivers another person an instrument which is blank or incomplete giving authority to another person to complete it

PROMISSORY NOTE (Q 100)
• Ramesh wrote a note “On demand I promise to pay Mohan a sum of 2 Lacs only for value received” • Instrument in writing ( not being Bank or currency note) , containing unconditional undertaking , signed by a person (maker) to pay a sum of money only to or to order of certain person (payee) or to the bearer of the instrument • PN cannot be made by electronic means (IT Act not applies) • “I promise to pay Mohan on order Rs 1000.” • “I acknowledge myself to be indebted to Mohan for Rs 2000 to be paid on demand for value received”

ESSENTIALS OF PN (Q100)
• • • • • • It must be in writing It must contain an express promise to pay The promise must be definite and unconditional Maker must sign the instrument Instrument must clearly point out the maker Sum payable must be certain without any scope of addition or subtraction • The payment must be in money & not in kind • Must point out the receiver

BOE (Q 101 )
• Mr. Mohan makes an instrument drawn on kanpur which states “three months after the date pay to Sohan the sum of 1 Lac for value received” • Instrument in writing containing an unconditional order , signed by maker (drawer ) , directing a certain person (Acceptor) to pay a certain sum of money only to (payee) or to order of , a certain person or to the bearer of the instrument (Holder). • The person who indorses the bill in favour of another person is called indorser & the person in whose favour bill is indorsed is called as indorsee

HOLDER IN DUE COURSE (Q 102)
• Person is Holder if he is entitled in his own name (named in instrument ) – Possession of instrument – To recover or receive amount due from parties • Holder in due course can claim to be so , only if it can be proved that – He acquired the instrument for valuable consideration – He should show that for consideration he has become payee or indorsee – Instrument is acquired at any time before it become payable

HOLDER IN DUE COURSE (Q 102)
• Holder in due course should act honestly & cautiously that there is no defect in title while acquiring an instrument • Durga Shah Mohan lal Bankers Vs Governor in council • Held - that mere failure to prove absence of negligence would not disentitle plaintiff (Banker) from enforcing a claim as holder in due course – Bank purchased two cheques indorsed by payee – Cheques were dishonoured – Drawer denied liability on ground that payee has failed to do his promise – Held bank entitled to recover amount & it was not required to check whether payee has fulfilled promises

CHEQUES
• Its a bill of exchange drawn on a specific Banker & includes electronic image of truncated cheque (cheque truncated by clearing house immediately on generation of electronics image) in electronic form • Signed by person (Drawer) & contains an unconditional order to a specific banker (acceptor) to pay on demand a certain sum of money to specified person (payee) or bearer of the instrument (holder) • Cheque in electronic form is mirror image of paper cheque generated by secured system with use of digital sign

MODES OF CROSSING(Q103)
• General crossing – Drawee bank not makes payment otherwise then to bank • Special crossing - “not negotiable” & name of banker – Drawee make payment only to bank to whom the cheque is crossed • Restrictive crossing – “account payee” – Credited in account of payee only • Not negotiable crossing– Restrict the further transferability – Protects miscarriage & dishonesty in transit

LIABILITY OF INDORSER(Q105)
• Every subsequent Indorser is compelled to pay to holder of instrument if the instrument is dishonoured • But liability to pay commences when instrument is delivered to transferee • Due notice of dishonour should be sent to indorser • Commercial Finance Vs Thressia – Where cheque returned unpaid with words" refer to drawer” , the notice should be given to indorser to make him liable – But he may give a qualified indorsement using words “without recourse to me”

SECURITIZATION & RECONSTRUCTION OF FINACIAL ASSETS & ENFORCEMENT OF SECURITIES INTEREST ACT 2002 (SARFAESI)

SARFEASI
• 29 Debt recovery tribunals & 5 DRAT in existence • But no performance for recovery or control of NPA • So the Act was enacted in 2002 to whole of India • Objectives – Legal framework of securitization of assets – Transfer NPA to ARC for disposal – Enforcement of security interest without courts intervention

SECURITIZATION
• Sell the secured NPA to Securitization company through special purpose vehicles • The Securitization Company takes over financial assets & treated as secured creditor • Formulates separate scheme for each set of assets & invites Qualified institutional Buyers (QIB) • Securitization company issues security receipts to QIB • Securitization company will realise the assets & redeem the investment by paying proceeds to QIB

ASSETS RECONSTRUCTION
• Involves both securitization & enforcement of securities • ARC has to registered with RBI • Securitization – ARC acquire NPA & issue debentures / Bonds to them – ARC issue security receipts to QIB

• Reconstruction
– – – – Rescheduling of payment of dues Enforcement of security interest Settlement of dues Taking possession of securities

ENFORCEMENT OF SECURITIES(Q108)
• Security interest – rights , title in favour of secured creditor • Secured creditor can enforce secured debt once it is classified as NPA under regulation of RBI Act • Issuance of notice to borrower ..60 days ..secured creditor can – Possession of assets – Take over or management – Transfer by sale / lease (notice of 30 days before price fixation) • Borrower raise objections within 60 days which is to be clarified • Aggrieved borrower can approach to DRT within 45 days of measures taken …..second appeal in DRAT • DRT to dispose off within 60 days (max 4 months) • In DRAT deposit 50% of debt & appeal in 30 days of DRT order

SECURITIES LAW & REGULATION

MARKET REGULATION BY COMPANIES ACT
• Regarded as elementary & most comprehensive enactments regulating the securities market viz– Kinds of share capital – Issuance of prospectus – Application to recognised stock exchange – Allotment of shares – Modes of raising of share capital – Public , right or bonus issue – Issue at premium , discount , sweat equity , redemption • But to regulate market certain specific enactments needed – Securities Contract (Regulation Act ) 1956 – Securities & Exchange Board of India Act 1992 – Depositories Act 1996

SEBI
• SEBI was set up in 1988 as non statutory body to promote the growth of securities market & to provide investors protection • Objectives – To promote fair dealing by issuers of securities (misstatement in prospectus) – Ensuring market as place to raise fund at low cost – Protection to investors for steady flow of savings (speculation ) – Develop code of conduct for brokers, merchant bankers (Plumping & dumping , Blab & grab) • In 1992 SEBI Act was enacted and since then it has become a statutory organisation with enormous powers

POWERS OF SEBI
• Power of Civil court as per Civil Court procedure – Production of Books of account or any document of Companies – Summoning the presence of any person – Inspection of Books & documents of Companies – Issuing commission for examination of witness or documents – Suspend trading or prohibit anyone to access securities market – Regulation/prohibit for issuance of capital , prospectus , transfer of securities & Advertisement soliciting investors – Levy Fees or hear appeal – Inspection of Books to check insider trading

STOCK EXCHANGES

• To deal with the products either to sell or purchase • 24 recognised stock exchanges in India – Bombay stock exchange (BSE) – National stock exchange (NSE) – Over the counter market (OTCEI)

BSE
• • • • In 1875 share & stockbrokers association was established A non profit organisation BOLT ( BSE Online Trading System) Covers 227 centers having VSAT (very small aperture terminals) & TWS (traders work station) • Objects – Transparency in deals – Improvement in liquidity – Elimination of mismatches – Mitigation of risk in settlement – Instant dissemination of information – Increase market depth

NSE
• To break monopoly of BSE , in 1992 it was established by some institutional investors • Online trading system NEAT (National exchange of Automated Trading), having 4 markets – Normal market - order of regular lot size – Odd lot market - order whose size is less than regular – Auction market – auction initiated by Exchange on behalf of trading members • Set up as Public limited company • Operates various committee viz for settlement procedures , risk containment • Committee are manned by Professionals & trading members • Exchange floor has been brought to investors door step

OBJECTIVES OF NSE
• To facilitate nationwide trading of equity ,debt & hybrid • To ensure equal access to investors through out the country • To provide fair & transparent securities market using electronic trading • To enable shorter settlement cycles • To meet current international standards of markets

OTCEI
• Incorporated U/S 25 of Companies Act • Promoters are UTI, ICICI, IDBI, IFCI, LIC, GIC SBI capital market & CAN bank financial services • To promote access to small & medium sized companies to capital market • Companies with an issued capital ranging 30 Lakhs to 3 Crores are eligible to list • Good mode for closely held companies to offer their shares to public • OASIS system- trading method combining features of Quote & Order driven system • In 1996 , it has started permitting trading of equity shares of unlisted companies

REGULATION OF STOCK EXCHANGES
• • • • Application for recognition of stock exchanges to SEBI CG Power to call for periodical returns Power of stock exchanges to make rules , bye laws SEBI can ask Exchange to amend rules within 2 months of order • SEBI can declare any trading contracts illegal • SEBI can prohibit any person to enter into any trading to avoid speculation • SEBI regulate & control dealing in spot delivery contracts

LISTING OF SECURITIES
• Admission of securities for trading on a stock exchange through a formal agreement between exchange & company • Companies Act makes compulsory for companies intending to offer share /debentures to public to get their securities listed on exchange • Allotment are void if securities could not get listed within 10 weeks from the closing of the issue

ADVANTAGES OF LISTING • To Company – Companies enjoy concession in Direct taxes – Company gets national & international recognition – FI / Bankers extends credit facilities easily – Mobilise resources from SH through Right issue – Ensures wide distribution of shareholding • To investors – Liquidity ensured – Rights entitlement can be disposed off in market – Official quotation for Tax purpose – No secrecy of price realisation – Take over announced publicly – Furnish of Unaudited / audited financial results on timely basis

BUY BACK OF SECURITIES
• Purchase of its own securities by a company if authorised by AOA and passed by a special resolution • Buy back can be made from own resources & governed by section 77 A of Companies Act • Buying back is also governed by SEBI (Buy back of securities ) regulations 1998 • A listed company buy back from open market through stock market or by tender offer • Unlisted has to buy back from existing SH or from employees if they were allotted shares in Stock option • Private ltd & unlisted are governed by Private ltd & unlisted company ( Buy back of securities ) regulations 1999 framed by CG • Not more than 10 % of outstanding shares can be bought back • Buy back should be done from free reserves only

DEPOSITORIES
• Company which is granted a certificate of registration under sub section (1A) of section 12 of SEBI Act 1992 • Main function is to dematerialise securities & keeps securities of participating investors in Demat form • Earlier certificates were lost /mutilated/stolen /misplaced • NSDL in 1996 was formed by IDBI /UTI /NSE • Advantages – Filling up of transfer deeds not necessary – No bad deliveries – Exemption of paying stamp duty on transfer – Shares transferred within a day after completion of settlement – No scope of forgery of certificates

DEPOSITORIES
• Investors opens an account with depository through Depository participant (DP) • Depository provides custodial services & transfers ownership of securities • DP are conduit though which one can deal with NSDL • They maintain investors securities account balance from time to time & intimate investors about his holding • Investors can open account with more than one DP

INSURANCE LAWS

ELEMENTS OF INSURANCE CONTRACT
• General Insurance companies – Insurance Act 1938 – Marine Insurance Act 1963 – Public Liability Act 1991 – Motor Vehicle Act 1988 • Life Insurance companies – In addition to above Life Insurance act 1956 • It is a contract by which one party undertakes to make good the loss of another in consideration of a sum of money on happening of a certain event

ELEMENTS OF INSURANCE CONTRACT
• PROPOSAL (OFFER ) – Proposal in standard format made by insured • ACCEPTANCE – Proposal form received by insurer is processed & assessed. – Insurer informs (policy) promisor that proposal is accepted • COMUNICATION – Insured communicates offer & insurer communicates acceptance • CONSIDERATION – Consent to pay premium by proposer & promise to compensate or indemnify ( to make loss good ) by insurer

ELEMENTS OF INSURANCE CONTRACT
• Parties to contract – Insurer & insured which may be an individual or firm or body corporate • Premium – No risk unless premium is paid – Policy effective from date of acceptance – But risk cover from date of payment of insurance premium • Policy term – Term of policy means the duration of risk coverage – In case of general insurance term is always one year & renewed every year

LEGAL PRINCIPLES OF INSURANCE •
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Uberrimae fide
Good faith Duty of disclosure of facts is presumed with good faith or claim can be denied

Insurable interest – Insurance contract being a contract of uncertainty treated a wagering agreement – Wagering agreement are void under Contract Act – In insurance contract it is insurable interest which makes contract valid – E g own life , husband & wife , parent & child, other relations like Debtor , director , partner

LEGAL PRINCIPLES OF INSURANCE
• PRINCIPLE OF INDEMNITY – Insurer promises to indemnify the loss caused to insured • PROXIMITY OF CLAUSE – Payment of compensation depends upon nature & proximity of cause resulting in loss • RISK – Insurer undertakes to protect insured from loss • MITIGATION OF LOSS – Insured must take all steps to minimise loss as a prudent person would do in such circumstances or insurer can dent claim

LEGAL PRINCIPLES OF INSURANCE
• SUBROGATION – Transfer of rights & remedies to insurer who has indemnified total loss – This happens in case of fire & marine insurance • CONTRIBUTION – Insured is prevented from recovering more than loss despite he has several policies – If policies are more then each insurer is to contribute ratably

REINSURANCE
• Agreement between ceding company & reinsurer • Ceding company cedes risk & reinsurer accepts • Reinsurance premium is paid by ceding company • Reinsurance commission will be paid by reinsurer company • In event of claim , ceding company gets part of claim from reinsurer company

DOUBLE or MULTIPLE INSURANCE
• Insurance of same risk with more than one insurer • Total sum insured exceeds the value of subject matter • Perfectly lawful unless policy otherwise provides • But in any case insured cannot claim more than the loss he suffered (contract of indemnity) • Purpose is protect the loss if anyone goes insolvent