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LEGAL

REGULATORY

ASPECTS OF

BANKING

( As per NEW UPDATED SYALLABUS For

JAIIB/ Diploma in Banking Finance

Examination)


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The content of this book has been developed keeping in view courseware for the

third paper on Legal & Regulatory Aspects of Banking of JAIIB.

An attempt has been made to cover fully the syllabus prescribed for each

module/subject and the presentation of topics may not always be in the same

sequence as given in the syllabus. Candidates are also expected to take note of all

the latest developments relating to the subjects covered in the syllabus by referring

to RBI circulars, financial papers, economic journals, latest books and publications in

the subjects concerned.

Although due care has been taken in publishing this study material, yet the possibility

of errors, omissions and/or discrepancies cannot be ruled out.

We welcome suggestion for improving the book and its contents. You may write back

to us at [email protected]

All rights reserved. No part of this publication may be reproduced or transmitted, in any

form or by any means, without permission. Any person who does any unauthorized act in

relation to this publication may be liable to criminal proceedings and civil claim for

damages.

This book is meant for educational and learning purpose. The author of this book has taken all reasonable care to ensure

that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any

manner whatsoever.

About the Author:

Vaibhav Awasthi, has experience of 10 years in Banking. He has done his graduation

from Kanpur University and MBA (Finance) from Delhi. He also holds the distinction of

being part of maiden batch of “Certified Banking Compliance Professional” conductedby IIBF.

He has been mentoring students for JAIIB/CAIIB since last 8 years and presently

works in middle management of leading Public Sector Bank.


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To the thought

Jodi Tor Dak Shune Keu Na she Tobe Ekla Cholo Re


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Module A

Regulation and Compliance


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Annual accounts and Balance sheet: All Banks which are listed on stock exchange

need to publish unaudited Quarterly result in proforma prescribed by SEBI. Banking

company need to prepare their balance sheet and profit and loss account as per Section

29 of the BR act. Balance sheet and PL account needs to be published at the end of

each calendar year or on expiry of 12 month period as notified by the central government.

Balance sheet and PL need to be signed by manager or principal officer of the company

and atleast three directors if there are more than 3 directors and by all the directors ifthere are not more than 3 directors. Balance sheet and PL to be prepared in the forms set

out in the III schedule to BR act. The companies act requires company to prepare B/S

and PL in the form set out in part I of schedule VI. However in case of banking company

it is to be done as per schedule III of BR act. Balance sheet and PL along with auditor’s

report needs to be published in a newspaper which is in circulation at the place where the

banking company has principle office within 6 months.

3 copies of Balance sheet and PL to be submitted to RBI within three months from the

end of the period to which they relate. This period can be further extended by 3 months

by RBI. As per section 32 of BR act banking companies must submit 3 copies of Balancesheet and PL along with auditors report to Registrar of companies. Foreign Banks have

to display in a conspicuous place, in their principal office a copy of the last audited

balance sheet and PLaccount not later than first Monday in August of any year in which it

carries on business.

Audit and Auditors: As per section 30 of BR act Balance sheet and PL to be audited.

Reserve bank is empowered Under section 30 (1B) to order a special audit. The

expenses of special audit to be borne by the bank.

Submission of returns:

Return on liquidasset

Under section 24(3) of BR act. Within 20 days from the end of month

Monthly returns Under sec 27 of BR act showing its assets and liabilities in India as atthe close of business on the last Friday of the previous month.

Accounts andBalance sheet

To be submitted to RBI within 3 month from the end of the period towhich they relate.

Return ofAssets in India

Under Sec 25 (1) of BR act, a quarterly return regarding its assets inIndia. To be submitted within one month at the end of quarter.

Return ofunclaimeddeposits

Under section 26 of BR act, within 30 days of the close of eachcalendar year on unclaimed deposit (not operated for 10 years)

Return if cashreserve of non-scheduledbanks

Under Section 18(1) of BR act , to be submitted before the twentiethday of every month showing the amounts held on the alternateFridays during a month along with particulars of demand and termliabilities

Returns byscheduledbanks

Under sec 42 (2) of the RBI act, submit returns to Reserve bank,particulars of their demand and time liabilities.

Unit 4 Returns Ins ection Windin u


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Preservation of records and return of paid instruments:

Central Govt under section 45Y of the BR act is empowered to make rules regarding

period for preservation of Records. Under section 45Z a bank is authorized to return paid

instruments to their customers even before the end of the period of preservation specified

under the act.

Board for Financial Supervision: Established under regulation 4 of RBI regulations

1994. The members of the Board are: Governorof the Reserve Bank of India as the

chairperson, Deputy Governors of the Reserve Bank of India, and one of thedeputy

governors should be nominated by the Governor as the full time vice chairman, Four

directors from theCentral Board of the Reserve Bank nominated by the Governor as

members.

Functions and Powers: The Board performs the functions and exercises the powers of

supervision and inspection under the Reserve Bank of India Act, in respect to different

banking companies. The Board is assisted by the department of supervision. The Board

meets once monthly basis, with at least one meeting in a month. The Board has powersto constitute sub committees, like the executive committee. The vice chairman of the

Board is the ex officio chairman of the committee. Apart from the above, the Governor

may constitute an advisory committee to offer advice from time to time to the Board.

Amalgamation and Winding up : A banking company may be amalgamated with another

banking company as per BR Act. The banking companies have to prepare a scheme of

amalgamation, the draft copy of the scheme of amalgamation covering terms and

conditions needs to be placed separately by the companies to their shareholders.

Each shareholder needs to be given notice, The scheme of amalgamation should be

approved by a resolution passed by majority of members representing two-thirds in valueof the shareholders of each company present in person or by proxy. A shareholder, who

votes against the scheme of amalgamation and gives necessary notice, may claim the

value of his sharesfrom the banking company, in case the scheme is sanctioned by the

Reserve Bank. Once the scheme is sanctionedby the Reserve Bank then the assets and

liabilities of the amalgamated company pass on to the othercompanywith which it is to be

amalgamated. The order of the sanction of amalgamation by Reserve Bank will be the

conclusive proof of amalgamation.

In case the Central Government orders amalgamation of two companies, such

amalgamation would take place after consultation with the Reserve Bank. Under Sec 45of the Banking Regulation Act the Reserve Bank can apply to the Central Government for

an order of moratorium in respect of any company, on account of certain valid reasons.

After considering various aspects, the Central Government may think it fit and proper to

impose the moratorium. The period of moratorium can be extended from time to time for a

maximum period of six months. During the period of moratorium, the banking company

would not be allowed to make any payments to the depositors or discharge any liabilities

or obligations to any other creditors unless otherwise directed by the Central Government

in the order of moratorium or at any time thereafter.


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Scheme of Amalgamation

During the period of moratorium, the Reserve Bank may prepare a scheme of

reconstruction or amalgamation. Such a scheme may be prepared by the Reserve Bank

due to any one or more of the following aspects: 1. In the public interest 2. In the interests

of the depositors 3.To secure proper management of the banking company 4. In the

interest of the banking system of the country. As per the various provisions, the schemeof amalgamation would be worked out and implemented. A copy of the draft of the

scheme should be sent to the government and also to the banking company (transferee

bank) and others concerned with the amalgamation. The Government may sanction with

modifications as it may consider necessary, after that the scheme should come into effect

from the date of the sanction.

Once the scheme is sanctioned by the Central Government, it would be binding on the

banking company, transferee bank and the members, depositor and other creditors and

others as per the sanction. The sanction by the Central Government is the conclusive

proof that the amalgamation or reconstruction has been carried out with the accordance

with the provisions of the relevant sections of the Act. Consequent to amalgamation, the

transferee bank should carry on the business as required by the law.

The Central Government may order moratorium on the banking companies on the

application of the Reserve Bank. The Reserve Bank may also apply to High Court for

winding up of a banking company when the banking company is not able to pay its debts

and also in certain other circumstances. The High Court would decide the case based on

the merits of the case a moratorium order would be passed. After passing the order the

court may appoint a special officer to take over the custody and control of the assets,

books, etc of the banking company in the interests of the depositors and customers.

During the period of moratorium, the Reserve Bank is not satisfied with the functioning ofthe bank, and in its opinion the affairs of the banking company is being conducted not in

the interests of the depositors and customers, Reserve Bank may apply to the High Court

for winding up of the company.

Winding up by High Court The High Court may order winding up of a banking company

on account of (a) The banking company is unable topay its debts (b) An application of

winding up had been made by the Reserve Bank under the provisions of theBanking

Regulation Act (Sec37 and 38)

The RBI is to make an application for winding up (under Sec 38 of BR Act) and under Sec

35 (4) if directed by the Central Government. Central Government may give suchdirection, based on the report of inspection or scrutiny made by the Reserve Bank, and

on account of the situation that the affairs of the bank are being conducted to the

detriment of the interests of the depositors. However before giving such direction, the

banking company would be given an opportunity to make a representation in connection

with the inspection/scrutiny report.

In the following circumstances, the Reserve Bank of India can apply for winding up of a

banking company.

– Non- compliance with the requirements of Sec 11 regarding minimum paid up capital

and reserves.


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– Prohibition to accept fresh deposits under Sec 35(4) of the Banking Regulation Act or

Sec 42 (3A)(b) of the Reserve Bank of India Act

– Failure to comply with the requirements of the applicable provisions of the Banking

Regulation Act and the Reserve Bank of India Act

Official Liquidator:

Sec 38A of the Banking Regulation Act provides for appointment of an official liquidator

attached to the High Court by the Central Government, to conduct the winding up

proceedings of a banking company.

Reserve Bank as Liquidator

If Reserve Bank of India applies to the High Court, the Reserve Bank, State Bank or any

other bank as notified by the Central Government or an individual may also be appointed

as the official liquidator. Within the stipulated time, the liquidator is required to make a

preliminary report regarding the availability of the assets to make preferential payments

as per the provisions of the Companies Act and for discharging liabilities to depositors

and other creditors. Within the stipulated time, the liquidator is required to give notice

calling for claims for preferential payment and other claims from every secured and

unsecured creditors. However, depositors need not make claims. The claims of every

depositor of a banking company is deemed to have been filed for the amount as reflected

in the books of the banking standing in his/her credit.

Voluntary Winding Up:

Voluntary winding up would be permitted only when the Reserve Bank has certified that

the banking company will not be able to pay in full all its debts as they accrue.

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Financial Sector Legislative Reforms Commission (FSLRC) was set up by the Indian

Government in pursuance of the announcement made in Union Budget 2010-11. FSLRC

had a two year term.The Commission was chaired by Supreme Court Justice (Retired) B.

N. Srikrishna,

Key Recommendations of the committee:

The commission has proposed splitting the regulation between the Reserve Bank of

India and a new ‘Unified Financial Agency’ that will oversee the remaining financial

sector. In effect, existing sector regulators like Sebi, IRDA, PFRDA and at least some

functions of the Forward Markets Commission will be taken over by new United Financial

Agency.

A Financial Sector Appellate Tribunal will hear appeals against all financial sector

regulators and into which the existing Securities Appellate Tribunal will be subsumed and

a Resolution Corporation will replace the Deposit Insurance and Credit Guarantee

Corporation of India, which assists in closure of distressed financial sector institutions.

According to the report RBI will be divested of its powers over management of public

debt, which is currently one of its subsidiary functions. The Debt Management Bill, likely

to be considered by the Cabinet, proposes a separate debt management office to be

attached to the finance ministry. The report also recommends creation of a public debt

management office, a recommendation that was criticized by RBI when the draft report

was issued for consultations.

It also recommends empowering the existing Financial Stability and Development

Council, by making it a statutory body responsible for managing risk and crises in the

financial system. The report also recommends setting up of a financial data cell, which

will look out for systemic risk in the financial sector, especially the ones arising out of the

financial conglomerates.

In short, seven new agencies of the new Law are:

1. Reserve Bank of India: Regulator of Banking & Payments monetary policy.

2. Unified Financial Agency: Regulator of financial firms and activities other than banking

and payments.

3. Resolution Corporation: Deals with closure of distress in firms.

4. Financial Redressal Agency: Single window complaint mechanism against financial

institutions and intermediaries.

5. Financial Stability & Development Council: Recast as statutory body. Will mange

systematic risks and development.

6. Public Debt Management Agency: Government’s debt manager.

7. Financial Sector Appellate Tribunal: Will hear complaints against all financial regulators.

It is apparent by the report and recommendations, the overarching objective of the panelis to create a uniform legal process for financial-sector regulators, who would all be

Unit -6 FSLRC, FSDC and Recent legislative changes in financial sector


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statutorily adequately empowered and therefore effectively pursue protection for the

consumer’s interests.

Financial Sector Development Council:The non-legislative recommendations are taken forward under the aegis of FSDC.

In pursuance of the announcement made in the Union Budget 2010 –11 Government hassetup an apex-level Financial Stability and Development Council (FSDC), vide its notification

dated 30th December, 2010. The first meeting of the Council was held on 31st December,

2010.

FSDC has replaced the High Level Coordination Committee on Financial Markets

(HLCCFM), which was facilitating regulatory coordination, though informally, prior to the

setting up of FSDC.

Composition

The Chairman of the FSDC is the Finance Minister of India and its members include the

heads of the financial sector regulatory authorities (i.e, SEBI, IRDA, RBI, PFRDA and FMC) ,

Finance Secretary and/or Secretary, Department of Economic Affairs (Ministry of Finance),

Secretary, (Department of Financial Services, Ministry of Finance) and the Chief Economic

Adviser. The commodities markets regulator, Forward Markets Commission (FMC) was

added to the FSDC in December 2013 subsequent to shifting of administrative jurisdiction of

commodities market regulation from Ministry of consumer Affairs to Ministry of Finance. The

Joint Secretary (Capital Markets Division, Department of Economic Affairs, Ministry of

Finance) was the Secretary of the Council till August 2013. Now this post is being held by

the Additional Secretary in the Ministry of Finance.

A sub-committee of FSDC has also been set up under the chairmanship of Governor RBI.The Sub-Committee discusses and decides on a range of issues relating to financial sector

development and stability including substantive issues relating to inter-regulatory

coordination.

As a result of the deliberations of the Sub-Committee of the FSDC held on August 16, 2011,

two Technical Groups were set up – a Technical Group on Financial Inclusion and Financial

Literacy and an Inter Regulatory Technical Group.

The Inter Regulatory Technical Group is chaired by an Executive Director of RBI and

comprises of ED level representatives from the SEBI, IRDA and PFRDA. The Group will

meet once every two months. It will discuss issues related to risks to systemic financial

stability and inter regulatory coordination and will provide essential inputs for the meetings ofthe Sub-Committee.

The Technical Group on Financial Inclusion and Financial Literacy is headed by the Deputy

Governor of RBI and comprises of representatives of all Regulators and Ministry of Finance.

In addition, an Inter-Regulatory Forum for Monitoring of Financial Conglomerates has also

been set up under the aegies of FSDC.

FSDC also functions through working group and a macro financial monitoring group.

Mandate

Without prejudice to the autonomy of regulators, this Council would monitor macro prudentialsupervision of the economy, including the functioning of large financial conglomerates. It will

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address inter-regulatory coordination issues and thus spur financial sector development. It

will also focus on financial literacy and financial inclusion. What distinguishes FSDC from

other such similarly situated organizations across the globe is the additional mandate given

for development of financial sector.

Recent Updates on Legislative/Policy Reforms

The Government has taken / proposed to take many measures including legislative

measures recently to further develop banking sector in India. A brief account of the

legislations introduced and proposed is as follows:

i. The Banking Laws (Amendment) Act, 2012

In order to amend the Banking Regulation Act, 1949, the Banking Companies (Acquisition

and Transfer of Undertakings) Act, 1970 / 1980 and other certain Acts, such as, RBI Act,

1934, Indian Stamp Act, 1899 and the Indian Contract Act, 1872, the Government has

enacted the Banking Laws (Amendment) Act, 2012 (No. 4 of 2013). The Act was brought

into force with effect from 18th January, 2013. The strengthening of Reserve Bank of India

(RBI’s) powers facilitated the process of finalization of guidelines for licensing of new banksin the private sector and grant of new bank licenses. This would increase the level of

financial inclusion and also provide financing for the productive sectors of the economy so

that the growth momentum is sustained. RBI vide its Press Release dated 02.04.2014

decided to grant “in-principle” approval to two applicants viz., IIDFC Limited and Bandhan

Financial Services Private Limited, to set up banks under the Guidelines on Licensing of

New Banks in the Private Sector issued on February 22, 2013.

The salient features of the act are as follows:

• To create a Depositor Education and Awareness Fund by utilizing the inoperative deposit

accounts;

• To provide prior approval of RBI for acquisition of 5% or more of shares or voting rights in abanking company by any person and empowering RBI to impose such conditions as it

deems fit in this regard;

• To empower RBI to collect information and inspect associate enterpr ises of banking

companies;

• To empower RBI to supersede the Board of Directors of banking company and

appointment of administrator till alternate arrangements are made;

• To provide for primary cooperative societies to carry on the business of banking only after

obtaining a license from RBI;

• To provide for special audit of cooperative banks at instance of RBI by extending

applicability of Section 30 to them; and• To enable the nationalized banks to raise capital through “bonus” and “rights” issue and

also enable them to increase or decrease the authorized capital with approval from the

Government and RBI without being limited by the ceiling of a maximum of Rs. 3000 crore

under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980.

(ii) Central Know Your Customer (KYC) Registry

A central Know Your Customer (KYC) depository will be developed to avoid multiplicity of

registration, data upkeep and to bring banking payment structure at par with global

standards. Hon’ble Finance Minister in his Budget Speech 2014-15 proposed introduction of

uniform KYC norms and inter-usability of the KYC records across the entire financial sector.


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(iii) Framework for licensing small banks and other differentiated banks

Hon’ble Finance Minister in his Budget Speech 2014-15 proposed that after making suitable

changes to current framework, a structure will be put in place for continuous authorization of

universal banks in the private sector in the current financial year. RBI will create a framework

for licensing small banks and other differentiated banks. Differentiated banks serving niche

interests, local area banks, payment banks etc. are contemplated to meet credit andremittance needs of small businesses, unorganized sector, low income households, farmers

and migrant work force. RBI vide its Press Release dated 17.07.2014 has released the Draft

Guidelines for “Licensing of Payments Banks” and Draft Guidelines for “Licensing of Small

Banks”.


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Module- B

Legal Aspects of Banking

Operations


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Types of borrowers, for the convenience of our study, can be classified as follows:

1. Individual 2. Partnership Firm 3. Hindu Undivided Family 4. Companies 5. Statutory

Corporations 6. Trusts and Co-operative Societies

1. Individual : If an individual is a. minor : A person who has not attained the age of

eighteen years under Indian Majority Act and twenty-one years if he is a ward, under the

Guardians and Wards Act, is considered a 'Minor' in the eyes of law. Under the law a

'minor' is not competent to contract. Therefore, if a banker lends money to a minor, then

the same, cannot be recovered, if the minor fails to repay. The only exception recognised

in a contract with a minor is of supply of necessities to him.

(ii) If an individual is not of sound mind: If a person is not of a sound mind, then he is

incompetent to enter into a contract.

(iii) Disqualified persons: There may be statutory disqualifications imposed on certain

persons in respect of their capacity to contract. For example, a person, declared as

insolvent under the Insolvency Law.

2. Partnership Firms:

Legal posit ion of a partnership

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 partners. The Indian Partnership Act,

1932, provides for registration of a partnership and it is necessary that a banker dealing

with a partnership firm should verify as to whether the firm is registered or not. This would

help him know all the names of partners and their relationship.

Auth ori ty of the partners

Section 19 of the Indian Partnership Act, 1932 deals with the implied authority of a partner

as an agent of the firm and Section 22 deals with the mode of doing acts to bind the firm. In

view of the provisions of Sections 19 and 22, it should be noted that the acts of a partner

shall be binding on the firm if they are done:

1. in the usual business of the partnership,

2. in the usual way of the business, and

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

Section 19 of the Indian Partnership Act, 1932 states that a partner cannot affect the

transfer of immoveable property of the firm unless expressly authorised. A banker taking a

mortgage security of firm's immoveable property should ensure that the partner who is

creating the mortgage is expressly authorised to create the mortgage. If the partner, has no

authority to create the mortgage, then the banker should ensure that all the partners 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 the fact that the account is in credit or debit. In

case there is a credit balance, and the banker does not intend to set off the same against

the dues in any other account, then the balance has to be handed over to the official

receiver appointed by the Court or as directed by the Court. In case the account is in debit

then the banker would be required to prove his debt before the Court and thereafter will be

entitled to receive the same from the Official Receiver either in full or as per the dividend

declared by the Courts.

Unit 7 – Different Types of Borrowers


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Insolvency of the partner

If at the time of insolvency of one of the partners, the firm's account is in credit then the

other partners can operate the same, but the banker should obtain a fresh mandate and all

previous cheques issued by the insolvent partner may be paid provided the other partners

confirm the same.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.

RULE IN CLAYTON'S CASE

The rule in Clayton Case was laid down in Devayaney Vs Nobel.

Where does the rule operate?

It is applicable in case of accounts such as cash credit and overdraft where the customer

deposits and withdraws money from the account frequently. As per this rule, the order in

which the credit entry will set off the debit entry is the chronological order. This means that

the first item on the debit side will be the item to be discharged or reduced by a subsequent

item on the credit side.

How the rule operates? In case of death, retirement or insolvency of a borrower, a partner

in a firm or guarantors (or revocation of guarantee by the guarantor) in a loan account, the

existing debt due from the borrower is adjusted if subsequent credit are allowed. If fresh

debits are allowed, these are considered a fresh loan and the bank cannot recover such

debt from the assets of the deceased, retired or insolvent partner and may ultimately suffer

the loss if the debt cannot be recovered from the remaining partners.

How to stop operation of the rule-To avoid the operation of the rule given in the

Clayton's case, the banker stops the operations in the old account and opens a newaccount in the name' of the reconstituted firm. Thus the liability of the deceased, retired or

insolvent partner, as the case may be, at the time of his death, retirement or insolvency is

determined and he may be held liable for the same. Subsequent deposits made by

surviving/solvent partners in a different account, will not be applicable to discharge the

same.

Death of a partner

In case of death, the principles as stated in Insolvency of a partner applies. Since the death

of a partner dissolves the partnership firm, upon receipt of such information, banks are

required to stop the transactions of the firm in a running credit facility like cash credit,

overdraft to crystallize the liability of the deceased partner and make his/her estate liablefor its dues. Banks allow the transactions in a separate account so that the business of the

firm is not adversely affected.

3. Hindu Undivided Family:

Constitution of a Joint Hindu Family

A joint Hindu Family consists of male members descended lineally from a common male

ancestor, together with their mothers, wives or widows and unmarried daughters bound

together by the fundamental principle of family relationship which is the essence and

distinguishing feature of institution. The Joint Hindu Family, is purely a creature of law and

cannot be created by an act of parties.


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Law governing Joint Hindu Family

Joint Hindu Family is governed basically by two schools of thought. 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. It is to be noted that a

woman member also inherits properties at par with a male member and is treated as co-

parceners.Management of business of a Joint Hindu Family Bythe senior most male member of

the family called 'Manager' or 'Karta' . Liability of 'Karta' is unlimited, whereas the liability of

the co-parceners is limited to their shares in the joint family estate.

Banker and his dealings with joint family

(a) A banker dealing with a Hindu Undivided Family, should know the 'Karta' of the family.

(b) Banker should ensure that 'Karta' of the joint family deals with the bank and borrows

only for

the benefit of joint family business.

(c) The application to open an account must be signed by all the members and all adult

membersshould be made jointly and severally liable for any borrowings or if the account gets

overdrawn.

4.Incorporation of company Section 12 of the Companies Act, 1956 provides that any

seven or more persons or where a company formed is a private company, any two or more

persons can form a company, by subscribing their names to the Memorandum of

Association.

Requirements of forming a company

The business and objects of a company and the rules and regulations governing itsmanagement are

known by two important documents called 'Memorandum of Association' and 'Articles of

Association'. The memorandum of association is the charter of the company.Memorandum

of Association of a company contains the following details among others:

(a) Name of the company (b) State in which the registered office of the company is to be

situated

(c) Objects of the company (d) Liability of the members and (e) Share capital and its

division.

Articles of Association are rules and regulations governing the internal management of the

company.They define the powers of the officers of the company. it contains the following

details among other things:

(a) Number of directors of the company

(b) Procedure for conducting meetings of the shareholders, board of directors, etc.

(c) Procedure for transfer and transmission of shares

(d) Borrowing powers of the company

(e) Officers of the company and other details.

5. Statutory Corporations: Besides companies registered under the Companies Act,

1956, there may be corporations established by an Act of Parliament. These are called

'Statutory Corporations'. For example State Bank of India is established under State Bank

of India Act, 1955.. The Act, rules and regulations define the scope, objects and range of

business of the corporations.


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6. Trusts and Co-operative Societies, etc.

(i) Clubs, societies, schools and other non-trading associations: Such bodies, if not

incorporated under the laws governing them, cannot enter into any transactions. These

bodies are usually governed by the Companies Act or the Co-operative Societies Act and

function within the ambit of those laws. For example clubs can be registered either under

the Companies Act, 1956 or under the Societies Registration Act or the Co-operativeSocieties Act. In the 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,

(ii) Trusts: These are governed by the Indian Trusts Act, 1882, if they are private trusts

and by Public Trusts Act if they are public trust, or Religious and Charitable Endowments

Act, if they are trusts of Hindus and in the case of Muslims they are governed by Wakf Act.

A banker dealing with trusts should acquaint himself with the respective laws applicable to

them and should ensure that his lendingis within the ambit of those laws.

(iii) Trustee: Trustees manage trusts. The powers and duties of the trustees are provided

in trust deed and are also regulated by the respective laws applicable to such trusts. Forexample, in the case of public trusts, Charity commissioners, or commissioner of

endowments appointed by the Government, have the power to supervise the activities of

the trusts. The trustee of the Muslim Wakf is called Mutawali and his conduct and functions

are regulated by the Wakf Board. Therefore, a banker dealing with a trust should ensure

that all the permission required for taking a loan is obtained from respective Government

authorities.

LIMITED LIABILITY PARTNERSHIP(LLP)

The parliament on 12.12.2008 has passed the limited liability partnership Act 2008 and

the rules under the act have been framed and are made effective from 01.04.2009. The

salient features of the act and rules are as under:

The LLP will be an alternative corporate business vehicle that would give the benefitsof limited liability but would allow its members the flexibility of organising their internalstructure as a partnership based on an agreement.

The bill is for the benefit of any enterprise which fulfills the requirements of the Act.There can also be a foreign LLP.

Every person having the capacity to contract according to the law of the land can bea member of LLP. The capacity may be natural or legal. No minor or a simplepartnership firm or any entity which is not a body corporate can be a partner in a LLP.

While the LLP being a separate legal entity is liable to the full extent of its assets, itspartners will be liable only to the extent of their agreed contribution in the LLP.Further no partner will be liable for the independent or unauthorized actions of otherpartners thereby shielding the partners from the joint liability created by the otherpartners' wrongful business decisions or misconduct.

LLP shall be a corporate body and a legal entity separate from its partners. It has aperpetual succession. Indian Partnership Act shall not be applicable to LLP and theminimum number of partners of a LLP is two and there is no upper limit to thenumber of partners.

An LLP will be under obligation to maintain annual accounts reflecting true and fairview of its state of affairs.

LLP can also take actions like mergers amalgamations. Similarly there are provisionsfor winding up and dissolution.


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Every LLP should have two "Designated partners" at least one of whom should be aresident Indian satisfying the conditions stipulated by the Central Government. Theyshould apply and obtain designated partner identification number (DPIN) and digitalsignature certificate from the designated authority.

An intending unlimited liability partnership firm seeking to convert itself into a LLP isrequired to apply to the Registrar as per form 17 which should be accompanied bywritten consent from all creditors.

When once the Registrar accepts and registers the firm it comes into force and all theassets and liabilities would be transferred to the new LLP.

The Central government by a notification in the Gazette can apply any provisions ofthe Companies act to LLP either fully or with certain modifications. Perhaps thesewould cover the time frame within which charges are required to be registered, theforms for this, the inter se priority of charges etc.

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Module –C

Banking Related Laws


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On 30thSeptember, 1990 more than fifteen lakhs of cases filed by the public sector banksand about 304 cases filed by the financial institutions were pending in various courts,recovery of debts involved more than Rs.5622 crores in dues of Public Sector Banks andabout Rs.391 crores of dues of the financial institutions. It received the assent of the

President on 27th August 1993. t extends to the whole of India except the State ofJammu and Kashmir. It shall be deemed to come into force on the 24thday of June, 1993.The provisions of this Act shall not apply where the amount of debt due to any bank orfinancial institution or to a consortium of banks or financial institutions is less then ten lakhrupees or such other amount, being not less than one lakh rupees, as the CentralGovernment may, by notification, specify.

Important Definitions:

(a) bank” means— (i) banking company; (ii) a corresponding new bank; (iii) State Bankof India; (iv) a subsidiary bank; or (v) a Regional Rural Bank;

(b) debt” means any liability (inclusive of interest) which is claimed as due from anyperson by a bank of a financial institution or by a consortium of banks or financialinstitutions during the course of any business activity undertaken by the bank or thefinancial institution or the consortium under any law for the time being in force, in cash orotherwise, whether secured or unsecured, or assigned, or whether payable under adecree or order of any civil court or any arbitration award or otherwise or under amortgage and subsisting on, and legally recoverable on, the date of the application.

(c) Section 4A of the Companies Act, 1956 (1 of 1956) states that each of the followingfinancial institutions shall be regarded as a public financial institution, namely:--(i) the Industrial Credit and Investment Corporation of India Limited, a company formedand registered under the Indian Companies Act, 1913;

(ii) the Industrial Finance Corporation of India, established under section 3 of theIndustrial Financial Corporation Act, 1948;(iii) the Industrial Development Bank of India, established under section 3 of the IndustrialDevelopment Bank of India Act, 1964;(iv) the Life Insurance Corporation of India, established under section 3 of the LifeInsurance Corporation Act, 1956;(v) the Unit Trust of India, established under section 3 of the Unit Trust of India Act, 1963.

Debt recovery Tribunals:Tribunal shall consist of one person only (hereinafter referred to as the Presiding Officer)to be appointed by notification, by the Central Government. He should be qualified to bea District Judge and will hold office for a term of five years from the date on which he

enters upon his office or until he attains the age of 62, whichever is earlier. The RecoveryOfficers and other officers and employees of a Tribunal shall discharge their functionsunder the general superintendence of the Presiding Officer .

Appellate Tribubal: Appellate tribunal means where an appeal against the order of debtrecovery tribunals can be filed. It will consist of one person called as Chairperson. Hisqualification shall be as undera) is, or has been, or is qualified to be, a Judge of a High Court; or(b) has been a member of the Indian Legal Service and has held a post in Grade I of thatservice for at least three years; or(c) has held office as the Presiding Officer of a Tribunal for at least three year.

He shall hold office for a term of five years from the date on which he enters upon hisoffice or until he attains the age of 65whichever is earlier.

Unit -21 Recovery of Debts Due to Banks andFinancial Institutions Act, 1993


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The Presiding Officer of a Tribunal or the Chairperson of an Appellate Tribunal] shall notbe removed from his office except by an order made by the Central Government on theground of proved misbehaviour or incapacity after inquiry.No order of the Central Government appointing any person as [the Presiding Officer of aTribunal or Chairperson of an Appellate Tribunal] shall be called in question in anymanner, and no act or proceeding before a Tribunal or an Appellate Tribunal shall be

called in question in any manner on the ground merely of any defect in the constitution ofa Tribunal or an Appellate Tribunal.

JURISDICTION, POWERS AND AUTHORITY OF TRIBUNALS

A Tribunal shall exercise, on and from the appointed day, the jurisdiction, powers andauthority to entertain and decide applications from the banks and financial institutions forrecovery of debts due to such banks and financial institutions. Appointed day means thedate on which such Tribunal is established.

On and from the appointed day, no court or other authority shall have, or be entitled toexercise, any jurisdiction, powers or authority (except the Supreme Court, and a High

Court exercising jurisdiction under articles 226 and 227 of the Constitution) in relation tothe matters specified in section 17 of this act.

Application to the Tribunal.— A bank or a financial institution may make an applicationto the Tribunal within the local limits of whose jurisdiction—

1(a) the defendant, or each of the defendants where there are more than one, at thetime of making the application, actually and voluntarily resides or carries on business orpersonally works for gain; or(b) any of the defendants, where there are more than one, at the time of making theapplication, actually and voluntarily resides or carries on business or personally works forgain; or

(c) the cause of action, wholly or in party, arises.

(2) Where a bank or a financial institution, which has to recover its debt from any person,has filed an application to the Tribunal and against the same person another bank orfinancial institution also has to recover its debt, then, the later bank or financial institutionmay join the applicant bank or financial institution at any stage of the proceedings, beforethe final order is passed, by making an application to that Tribunal.

3) On receipt of the application the Tribunal shall issue summons requiring thedefendant to show cause within thirty days of the service of summons as to why the reliefprayed forshould not be granted.

(4) The defendant shall, at or before the first hearing or within such time as the Tribunalmay permit, present a written statement of his defence.

(5) Where the defendant claims to set-off against the applicant’s demand any ascertained sum of money legally recoverable by him from such applicant, the defendantmay, at the first hearing of the application, but not afterwards unless permitted by theTribunal, present a written statement containing the particulars of the debt sought to beset-off.

(6) The written statement shall have the same effect as a plaint in a cross-suit so as toenable the Tribunal to pass a final order in respect both of the original claim and of theset-off.(7)The Tribunal may make an interim order (whether by way of injunction or stay orattachment) against the defendant to debar him from transferring, alienating or otherwise


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dealing with, or disposing of, any property and assets belonging to him without the priorpermission of the Tribunal.

(8) The Tribunal may, after giving the applicant and the defendant an opportunity of beingheard, pass such interim or final order

(9) The Tribunal shall send a copy of every order passed by it to the applicant and the

defendant.

(10) The Presiding Officer shall issue a certificate under his signature on the basis of theorder of the Tribunal to the Recovery Officer for recovery of the amount of debt specifiedin the certificate,

(11) The application made to the Tribunal under shall be dealt with by it as expeditiouslyas possible and endeavour shall be made by it to dispose of the application finally withinonehundred and eighty days from the date of receipt of the application

Appeal to the Appellate Tribunal ( sec 20) – Any person aggrieved by an order made, or deemed to have been made, by a Tribunalunder this Act, may prefer an appeal to an Appellate Tribunal having jurisdiction in thematter. No appeal shall lie to the Appellate Tribunal from an order made by a Tribunalwith the consent of the parties. Such appeal to be filed within a period of forty-five days from the date on which a copy of the order made, or deemed to have been made, by theTribunal is received by him . Provided that the Appellate Tribunal may entertain an appealafter theexpiry of the said period of forty-five days if it is satisfied that there was sufficient causefor not filing it within that period.

On receipt of an appeal, the Appellate Tribunal may, after giving the parties to the appeal,

an opportunity of being heard, pass such orders thereon as it thinks fit, confirming,modifying or setting aside the order appealed against.

The Appellate Tribunal shall send a copy of every order made by it to the parties to theappeal and to the concerned Tribunal.

The appeal filed before the Appellate Tribunal shall be dealt with by it as expeditiously aspossible and endeavour shall be made by it to dispose of the appeal finally within sixmonths from the date of receipt of the appeal.

Where an appeal is preferred by any person from whom the amount of debt is due to abank or a financial institution or a consortium of banks or financial institutions, suchappeal shall not be entertained by the Appellate Tribunal unless such person hasdeposited with the Appellate Tribunal seventy-five per cent of the amount of debt sodue from him as determined by the Tribunal under section 19. Provided that the AppellateTribunal may, for reasons to be recorded in writing, waive or reduce the amount to bedeposited under this section.

The Tribunal and the Appellate Tribunal shall not be bound the procedure laid down bythe Code of Civil Procedure, 1908 (5 of 1908), but shall be guided by the principles ofnatural justice.

The Tribunal and the Appellate Tribunal shall have, for the purposes of discharging their

functions under this Act, the same powers as are vested in a civil court under the Code of


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Civil Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following matters,namely:--

(a) summoning and enforcing the attendance of any person and examining him on oath;(b) requiring the discovery and production of documents;(c) receiving evidence on affidavits;(d) issuing commissions for the examination of witnesses or

documents;(e) reviewing its decisions;(f) dismissing an application for default or deciding it ex parte;(g) setting aside any order of dismissal of any application for defaultor any order passed by it ex parte;(h) any other matter which may be prescribed.

RECOVERY OF DEBT DETERMINED BY TRIBUNALDRTs will issue recovery certificate for recovery of dues.The Recovery Officer shall, onreceipt of the copy of the recovery certificate proceed to recover the amount of debtspecified in the certificate by one or more of the following modes, namely:--

(a) attachment and sale of the movable or immovable property of the defendant;

(b) arrest of the defendant and his detention in prison;

(c) appointing a receiver for the management of the movable or immovable properties ofthe defendant.

Validity of certificate and amendment thereof .— The defendant shall not disputebefore the Recovery Officer the correctness of the amount specified in the certificate, andno objection to the certificate on any other ground shall also be entertained by theRecoveryOfficer.

The Presiding Officer shall have power to withdraw the certificate or correct any clerical orarithmetical mistake in the certificate by sending intimation to the Recovery Officer.

The Presiding Officer shall intimate to the Recovery Officer any order withdrawing orcanceling a certificate or any correction made by him under sub- section (2).

Stay of proceedings The Presiding Officer may also grant time for the payment of theamount, and thereupon the Recovery Officer shall stay the proceedings until the expiry ofthe time so granted.

Any person aggrieved by an order of the Recovery Officer made under this Act may,within thirty days from the date on which a copy of the order is issued to him, prefer anappeal to the Tribunal.

DRT Act overrides the Companies Act.

DOCTRINE OF ELECTION

The Supreme Court in M/s Transcore vs Union of India and Another (decided on 29-2-

2006). The Supreme Court observed that there are three elements of election, namely,

existence of two or more remedies; inconsistencies between such remedies and a choice

of one of them. If anyone of the three elements is not there, the doctrine will not

apply.Withdrawal of the Original Application before the DRT under the DRT Act is not a

pre-condition for taking recourse to the SARFAESI Act


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This was a sample preview. The original book consists of 101 pagesand 57 chapters covering all the 4 modules (A,B,C & D). The book has

been prepared keeping in view the updated syllabus of JAIIB from May

2015 onwards and efforts have been made to incorporate all the new

topics which have been added in the revised syallabus.

The book is written in concise format and in simple language to enable

students from all back ground to grasp it easily.

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