banking regulation act, 1949

BANKING REGULATION ACT,

1949PRESENTATION BY:KAJAL BANSALB.COM, CA INTER

INTRODUCTION

• Banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.

• Banking Company means any company which transacts the business of banking in India.

Explanation: Any company which is engaged in the manufacture of goods, or which carries on any trade, and accepts deposits of money from the public merely for the purpose of financing its business , shall not be deemed to transact the business of banking within the meaning of this clause.

ACT TO HAVE OVERRIDING EFFECT

Section 5A of the Banking Regulation Act, 1949 provides that the provisions of this Act shall have effect notwithstanding anything to the contrary contained in:

Memorandum or Articles of a Banking Company Any agreement executed by it Any resolution passed by the Banking Company in General Meeting or by its Board of

Directors, whether the same be registered, executed or passed, as the case may be.It is further provided that any provision contained in the memorandum, articles,

agreement or resolution aforesaid shall, to the extent to which it is repugnant to the provisions of the Act, become or be void.

RESTRICTION ON USE OF WORD ‘BANK’, ETC.

Section 7 of the Act provides that Individual, Firm or Group of Individuals and any Company other than a Banking Company shall not use as part of its name or, in connection with its business, any of the words ‘bank’, ‘banker’ or ‘banking’

and No company shall carry on the business of banking in India unless it uses as part of its

name at least one of such words.Exceptions:- A Subsidiary of a Banking Company formed for one or more of the purposes

mentioned in Section 19(1), whose name indicates that it is a subsidiary of that banking company.

Any association of banks formed for the protection of their mutual interests and registered under Section 8 of the Companies Act, 2013.

NOT TO ENGAGE IN TRADING ACTIVITIES

Section 8 provides that any banking company shall not directly or indirectly deal in the buying or selling or bartering of goods, except in connection with the realization of security given to or held by it, or engage in any trade, or buy, sell or barter goods for others otherwise than:

• In connection with bills of exchange received for collection or negotiation, or• With such of its business as referred to in Section 6(1)(i).But this prohibition does not apply where a banking company is authorized by CG by

issue of notification under Section 6(1)(o).Goods means every kind of moveable property, other than actionable claims, stock,

shares, money, bullion and specie and all instruments referred to in Section 6(1)(a).

HOLDING AN IMMOVABLE PROPERTY

Section 9 provides that a banking company can hold any immovable property only as follows:

If required for its own use Otherwise, upto a period of 7 years + 5 years with RBI Approval.Such extension may be granted where RBI is satisfied that such

extension would be in the interests of the depositors of the banking company.

PAYMENT OF BROKERAGE OR COMMISSION

Section 13 provides that a banking company can pay out directly or indirectly, by way of

Commission Brokerage Discount Remunerationin any form in respect of any shares issued by it, any amount not

exceeding in the aggregate two and a half percent of the paid-up value of the said shares.

CHARGE ON FLOATING ASSETS

Section 14: A charge shall not be created upon any unpaid capital of the company, and any such charge shall be invalid.

Section 14A(1): A floating charge shall not be created on the undertaking, or any property of the company or any part thereof, unless the creation of such floating charge is certified in writing by RBI as not being detrimental to the interests of the depositors of such company.

Section 14A(2): Any such floating charge without obtaining the certificate of RBI shall be invalid.

Section 14A(3): Any banking company aggrieved by the refusal of certificate may, within 90 days from the date on which such refusal is communicated to it, appeal to CG.

Section 14A(4): The decision of CG on an appeal filed under sub-section (3) shall be final.

PAYMENT OF DIVIDEND

Section 15(1) provides that any banking company shall not pay dividend on its shares until all its capitalized expenses including the following have been completely written off.

Preliminary Expenses Organization Expenses Share Selling Commission Brokerage Amount of Losses Incurred, and Any other item of expenditure not represented by tangible assets

PAYMENT OF DIVIDEND

Section 15(2) provides that a banking company may pay dividends without writing off: Depreciation, if any, in the value of investments in approved securities, in any case

where such depreciation has not actually been capitalized or otherwise accounted for as a loss;

Depreciation, if any, in the value of its investment in shares, debentures or bonds (other than approved securities) in any case where adequate provision for such depreciation has been made to the satisfaction of the auditor of the banking company.

Bad debts, if any, in any case where adequate provision for such debts has been made to the satisfaction of the auditor of the banking company.

APPOINTMENT & VOTING RIGHTS OF DIRECTORSSection 16 provides that a banking company incorporated in India shall not

have any person as director on its Board of Directors if such person is already a director in any other company.

The above condition does not apply in relation to a director who is appointed by the RBI.

Section 16(1)(a) provides that any banking company incorporated in India shall not have in its BOD more than three directors, which among themselves are entitled to exercise voting rights in excess of 20% of the total voting rights of all the shareholders of that banking company.

CREATION OF RESERVE

Section 17(1) provides that every banking company incorporated in India shall transfer, before declaration of dividend, at least 20% of the profit, as per P&L A/c, to Reserve Fund.

However, CG may, on recommendation of RBI, having regard to the adequacy of the paid-up capital & reserves of a banking company in relation to its deposit liabilities, declare by order in writing that the provisions of sub-section (1) shall not apply to the banking company for such period as may be specified in the order. Such an order can be passed only when the amount in the reserve fund together with the share premium account is not less than the paid-up capital of the banking company.

CREATION OF RESERVE

Section 17(2) provides that where a banking company appropriates any amount from the reserve fund or share premium account , it shall within 21 days from the date of such appropriation report the fact to RBI, explaining the circumstances relating to such appropriation and RBI may, extend the period of 21 days by such period as it thinks fit or condone any delay in the making of such report.

MAINTENANCE OF CASH RESERVE

Section 18 provides that every banking company, not being a scheduled bank, shall maintain in India by way of Cash Reserve

With itself, or By way of balance in a current account with the Reserve Bank, or By way of net balance in current accounts or in one or more of the aforesaid ways, A sum equivalent to at least 4% of The total of its Demand & Time Liabilities in India As on the Last Friday of the second preceding fortnight and Shall submit to the Reserve Bank before the 20th day of every month a return showing the

amount so held on Alternate Fridays during a month


With particulars of its demand & time liabilities in India on such Friday, or if such Friday is a public holiday under the Negotiable Instruments Act, 1881, at the close of business on the preceding working day.

Liabilities in India shall not include: (a) The paid-up capital or the reserves, or any credit balance in P&L A/c of the

banking company. (b) Any advance taken from the Reserve Bank, Development Bank, Exim Bank,

Reconstruction Bank, National Housing Bank, National Bank, or Small Industries Bank by the Banking Company.

(c) In case of a Regional Rural Bank, also any loan taken by such bank from its sponsor bank.


Fortnight shall mean the period from Saturday to the second following Friday, both days inclusive.

Net Balance in Current A/cs shall, in relation to a banking company, means the excess, if any, of the aggregate of the credit balance in Current A/c maintained by that banking company with the State Bank of India or a Subsidiary Bank or a corresponding new bank over the aggregate of the credit balances in current account held by the said banks with such banking company.

The aggregate of the liabilities of the banking company to SBI, a subsidiary bank, a corresponding new bank, an RRB, another banking company, a co-operative bank, or any other financial institution notified by CG in this behalf, shall be reduced by the aggregate of liabilities of all such banks and institutions to the banking company.

BUSINESS ACTIVITIES OF SUBSIDIARY

Section19 provides that a banking company may form a subsidiary for carrying on any of the following activities only:

The undertaking of any business which, under clauses (a) to (o) of Section 6, is permissible for a banking company to undertake.

With the previous permission in writing of RBI, the carrying on of the business of banking exclusively outside India.

The undertaking of such other business, which RBI may, with prior approval of CG, consider to be conducive to the spread of banking in India or to be otherwise useful or necessary in public interest.

A Banking Company cannot be considered to be engaged in the business activity which is carried on by its subsidiary.

RESTRICTION ON HOLDING SHARES OF ANOTHER COMPANYSection 19(2): A Banking Company shall not hold shares in any company, whether as: Pledgee Mortgagee Absolute Ownerof an amount exceeding 30% of: Paid-up share capital of that company, or Its own paid-up share capital under reserves, whichever is less.This condition does not apply in respect of shares of the subsidiary held by the

banking company.

REGULATION OF LOANS & ADVANCES BY RBI

Section 20: Any banking company shall not:o Grant any loans or advances on the security of its own shareso Enter into any commitment for granting any loan or advance to or on behalf of: (a) Any of its Directors (b) Any firm in which any of its directors is interested as Partner, Manager, Employee

or Guarantor (c) Any company, not being its subsidiary, or a company registered under Sec 8 of

Companies Act, 2013, or a government company, of which or the subsidiary or holding of which any of the Directors of the banking company is a Director, Managing Agent, Manager, Employee or Guarantor, or in which he holds substantial interest

(d) Any individual in respect of whom any of its directors is a Partner or Guarantor.

NO REMISSION WITHOUT PRIOR APPROVAL OF RBISection 20A(1): Except with the prior approval of RBI, a banking company

shall not remit in whole or in part any debt due to it by: Any of its directors Any firm or company in which any of its directors is interested as

Director, Partner, Managing Agent or Guarantor Any individual if any of its directors, is his Partner or Guarantor.Section 20A(2): Any remission of debt in contravention of the aforesaid

shall be void and of no effect.

POWER OF RBI TO REGULATE ADVANCES

Section 21: Where RBI is satisfied that it is necessary or expedient in public interest or in the interest of depositors to do so, it may determine the policy in relation to advances to be followed by banking companies or any particular banking company, and such company shall be bound to follow such policy. The directions can be as follows:

Purposes for which advances may or may not be made; Margins to be maintained in respect of secured advances; Maximum amount of advances or other financial accomodation which, having regard to the paid-up

capital, reserves and deposits of banking company and other relevant considerations, may be made by that banking company to any company, firm, AOP or individual;

Maximum amount up to which, having regard to the above considerations, guarantees may be given by a banking company on behalf of any company, firm, AOP or individual.

The rate of interest and other terms & conditions on which advances or other financial accomodation may be made or guarantees may be given.

BANK CANNOT BE SUED FOR CHARGING EXCESS INTERESTSection 21A: A transaction between a banking company and its debtor shall not be reopened by any court on the ground that the rate of interest charged by the banking company in respect of such transaction is excessive.The provisions of this section have overriding effect over Usurious Loans Act, 1918, or any other law relating to indebtedness in force in any State.Thus, court cannot take any action against the bank.

REMOVAL OF MANAGERIAL PERSONNEL BY RBISection 36AA: Whenever RBI is satisfied that it is necessary to do so In public interest, or For preventing the affairs of a banking company (a) Being conducted in a manner detrimental to the interests of the depositors, or (b) For securing the proper management of any banking companyRBI may, for reasons to be recorded in writing, by order, remove from office, any

Chairman, Director, Chief Executive Officer, or other officer or employee of the banking company, after giving an opportunity of making representation, with effect from such date as may be specified in the order.

REMOVAL OF MANAGERIAL PERSONNEL BY RBIBut if, in the opinion of RBI, any delay would be detrimental to the

interests of the company or its depositors, RBI may, at the time of giving opportunity aforesaid or at any time thereafter, by order direct that, pending the consideration of the representation aforesaid, if any, the Chairman/ Director/ CEO/ Other Officer or Employee, shall not, with effect from the date of such order:

Act as such Chairman/ Director/ CEO/ Other Officer or Employee In any way, whether directly or indirectly, be concerned with, or take

part in the management of the banking company.

APPEALPerson aggrieved by such order

Prefer an appeal to CG, and the decision of CG shall be final

EFFECT OF REMOVAL

Ceases to hold positionShall not be concerned with, or take part in the management for such period not exceeding 5 years, as may be specified in the order

PENALTY FOR CONTRAVENTION

Fine •Rs. 250 for each day during which the contravention continues

Loss of Office

•Notwithstanding anything contained in any law or in any contract, memorandum or articles of association, the person shall not be entitled to claim any compensation for loss of office

APPOINTMENT OF NEW PERSON

The person so appointed shall hold office during the pleasure of RBI and subject thereto for a period not exceeding 3 years or such further periods not exceeding 3 years at a time as RBI may specify

The person shall not incur any obligation or liability by reason only of his being a Chairman/ Director/ CEO/ Other Officer or Employee, or for anything done or omitted to be done in good faith in the execution of duties of his office or in relation thereto.

POWER TO APPOINT ADDITIONAL DIRECTOR

Section 36AB: RBI can appoint one or more additional directors on BOD of a banking company whenever it forms an opinion that it is in the interest of:

Banking Policy, or Public Interest, or Banking Company, or Depositors.

POWER TO APPOINT ADDITIONAL DIRECTOR

The additional directors so appointed: Shall hold office during the pleasure of RBI and subject thereto for a period not

exceeding 3 years or such further periods not exceeding 3 years at a time as RBI may specify;

Shall not incur any obligation or liability by reason only of his being a Chairman/ Director/ CEO/ Other Officer or Employee, or for anything done or omitted to be done in good faith in the execution of duties of his office or in relation thereto;

Shall not be required to hold qualification shares in the banking company.Such additional directors shall not be considered for the purpose of reckoning any

proportion of the total number of directors of the banking company.

POWER OF CG TO ACQUIRE BANKING BUSINESSSection 36AE: On the basis of report of RBI, if CG is satisfied that a banking

company: Failed to comply its directions > 1 occasion Managed in a manner which is detrimental to the interest of depositors.Option 1: CG, in consultation with RBI, may acquire undertaking of such Co.,

including all its assets & liabilities. Thereupon, all assets & liabilities of acquired bank shall stand

transferred to CG.

POWER OF CG TO ACQUIRE BANKING BUSINESSOption 2: If CG is satisfied that undertaking including all assets & liabilities should vest in any other

Co., CG may make such order. Transferee bank shall be deemed as transferee of acquired bank, and all assets &

liabilities of acquired bank shall be deemed as of transferee bank. Any appeal against or by acquired bank shall be continued by or against CG or transferee

bank. CG/ Transferee Bank shall compensate every shareholder. Compensation will be decided by CG (If takeover by CG) or Transferee Bank, in

consultation with RBI. If compensation not acceptable, such person may request CG to refer the case to tribunal.

THANK YOU!!!

banking regulation act, 1949

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