Introduction to Legal Aspects

Name of the faculty

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Agenda
• Licensing and branch licensing
• Paid up capital and reserves
• Shareholding and rights of shareholders
• Formation of subsidiaries and holding of shares of other
companies
• Constitution and regulation of board of directors
• Power of RBI and government over the appointment and
removal of chairman, managerial and other personnel
• Corporate governance

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 Licensing and branch licensing
• Before granting license, RBI has right to inspect the books of the
company applying for the banking license under Section 35 of the
BR Act. (See Sajjan Bank Pvt Ltd vs RBI)
• RBI should be satisfied that the company will be in position to pay
its present and future depositors in full as their claims accrue.
• Conduct of the company applying for banking license should not be
detrimental to the interests of its present and future depositors.(
That is loans should not be given only to one company under
political pressure)
• RBI should be satisfied that company has adequate capital structure
and earning prospects.
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 Licensing and branch licensing
• Companies outside India and applying for banking license
(Foreign Banks)should satisfy all the conditions applicable for
domestic companies;
• In case of companies located outside India, local government
policies should not discriminate in any way against banking
companies registered in India;
• Company should comply with the provision of BR Act, as
applicable to foreign companies.

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 Licensing and branch licensing
Local Area Banks
• These are banking companies operating only in a limited
geographical area.
• The license issued to these banks would restrict their
operations to the specified local area to ensure adequate
banking services in that area.

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 Licensing and branch licensing
Cancellation of License
• Sub-Section (4) of section 22 of BR Act, authorizes the RBI to cancel the
license granted to the banking company;
• If company ceases to carry on banking business in India;
• Company fails to comply with the provisions of BR Act;
• Before cancelling the license for non compliance with any of the
conditions mentioned in BR Act, the company has to be given an
opportunity for taking necessary steps for complying with conditions. (In
certain situation where it is felt that delay in cancellation of license will be
detrimental to the interest of depositors or public, license is cancelled on
immediate basis.)
• A banking company whose license has been cancelled, can appeal to the
Central Government within a period of 30 days from the date of the order
rejecting the license.
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 Licensing and branch licensing
Branch Licensing
• If banks are looking to open new “Place of Business” or
changing location, they will have to take permission from RBI;
• Under Section 23 of BR Act, “Place of Business” for this
purpose includes any sub office, pay office or any place where
deposits are received, cheques cashed or moneys lent;
• Changing the location of business within same city, doesn’t
require permission of RBI;
• Restrictions also apply to foreign branches of banking
companies;
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 Licensing and branch licensing
Branch Licensing
• RBI allows opening a temporary place of business for 1 month
without approval provided the place of business is in the same
city and the bank has an existing operating branch there.
• Present guidelines from RBI provide that banks should submit
their request for new branches, ATM, administrative offices
once in a year, for consideration of RBI as against the earlier
practice of making individual applications for each and every
branch.

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 Licensing and branch licensing
Branch Licensing
RBI considers the following before granting license:
Financial condition and history of the bank;
General character of its management;
Adequacy of capital structure and earning prospects;
Public Interest;
In the case of RRBs, the applications for permission have to be
routed through the NABARD.

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