LAW RELATING TO BANKING COMPANIES IN INDIA

 

Introduction Banking business has its own distinctive features as compared to all other trades and business.   A banking company deals mainly with the money of large number of depositors, hardly any say in the conduct of the affairs of the company. The problem, therefore, arises to safeguard the interest of the depositors in add it i onto   that   if   the   share   holds,   necessity   of   suitable   legislation   to   deal   with   the distinctive features of the banking business has been universally felt.  Banking law connotes those specific provisions of the legislation which are applicable to the banking business and institutions carrying on such business.  Banking Regulation Act 1949, is the main piece of central legislation in India embody in such specific provisions relating to the banking business.

 

OTHER BUSINESS PERMITEED FOR A BANKING COMPANY[OTHERFUNCTIONS OF THE BANKS

 

The Banking Regulation Act specifies other forms of business a banking company may be engaged in .   According to section 6 of the Act, the following business may be undertaken by a Banking company

 

a)  Various functions which form the bulk of a banks activities are called its mainfunctions:

1. The borrowing, raising or taking of money;

2. The lending or advancing of money either upon security or without security;

3. The drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hundis, promissory notes, coupons, drafts, bill of   lading,   railway   receipts,   warrants,   debentures,   certificates,   scripts   and other instruments and securities whether transferable or negotiable or not;

4. The granting and issuing of letters of credit, traveler's cheque and circular notes;

5. The buying, selling and dealing in bullion and specie foreign bank notes;

6. The acquiring holding, issuing on commission, underwriting and dealing in stock   funds,   shares,   debentures,   stock   bonds,   obligations,   securities   and investments of all kinds;

7. The purchasing and selling of bonds, scripts and other forms of securities onbehalf of constituents or others

8. The negotiating of loans and advances

9. The receiving of all kinds of bonds, scripts or valuable on deposit or for safecustody or otherwise

10. The providing of safe deposit vaults and

11. The collecting and transmitting of money and securities

 

a)  It may act as an agent of the government, local authority or person and can

carry on agency business but it cannot be as secretary and treasurer of a

company.

b) It may contract for public and private loans ad negotiate and issue the same.

c) It may  effect, insure, guarantee, underwrite, participate  in  managing  and

carrying out of any issue of State, municipal or other loans or of shares,

stocks, debentures or debenture stock of companies and may lend money for

the purpose of such issue.

d) It may carry on and transact every kind of guarantee an indemnity business.

e) It   may   manage,   self   and   realise   any   property   which   may   come   into   its

possession in satisfaction of any of its claims.

a)  It may act as an agent of the government, local authority or person and can carry on agency business but it cannot be as secretary and treasurer of acompany.

b) It may contract for public and private loans ad negotiate and issue the same.

c) It may  effect, insure, guarantee, underwrite, participate  in  managing  andcarrying out of any issue of State, municipal or other loans or of shares,stocks, debentures or debenture stock of companies and may lend money forthe purpose of such issue.

d) It may carry on and transact every kind of guarantee an indemnity business.

e) It   may   manage,   self   and   realise   any   property   which   may   come   into   itspossession in satisfaction of any of its claims.

f) It may acquire and hold and deal with any property or any right, title or

interest in any such property which may form the security for any loan or

advance.

g) It may  undertake and execute trusts, and undertake the administration of

estates as executors, trustees or otherwise.

h) It may establish, support and aid associations, institutions funds, trusts, etc.,

for the benefit of its present or past employees and may grant money for

charitable purposes.

i) It may acquire, construct and maintain any building for its own purpose.

j) It may sell, improve, manage, develop, exchange, lease mortgage, dispose of

or turn into account or otherwise dies with all or any part of the property and

rights of the company.

f) It may acquire and hold and deal with any property or any right, title orinterest in any such property which may form the security for any loan oradvance.

g) It may  undertake and execute trusts, and undertake the administration ofestates as executors, trustees or otherwise.

h) It may establish, support and aid associations, institutions funds, trusts, etc.,for the benefit of its present or past employees and may grant money forcharitable purposes.

i) It may acquire, construct and maintain any building for its own purpose.

j) It may sell, improve, manage, develop, exchange, lease mortgage, dispose ofor turn into account or otherwise dies with all or any part of the property andrights of the company.

 

Licensing of Banking companies:           Section 22 contains a comprehensive system of licensing of banks of thereserve Bank.  This section makes it essential for every banking company to hold alicense issued by the Reserve Bank.  The Reserve Bank is required to conduct aninspection of the books of the banking company and issue a license, if it is satisfiedthat all or any of the following conditions are fulfill.

a)    That  the   company is  or   will  be  in   a   position to  pay   its present  or futuredepositors in full as their claims accrue;

b)  That the affairs of the company are not being or not liked to be, conducted in amanner detrimental  to the interests of its present or future depositors;

c)  In case of a foreign bank, the carrying on of banking business by such companyin India will be in the public interest and that the Government or law of the countryin   which   it   is   incorporated   does   not   discriminate   in   any   way   against   bankingcompanies   registered   in   India   and   that   the   company   complies   with   all   theprovisions  of the Act applicable to foreign banks.

 

Control Over Management

36AA. Power of Reserve Bank to remove managerial and other persons from office

(1) Where the Reserve Bank is satisfied that in the public interest or for preventingthe affairs of a banking company being conducted in a manner detrimental to theinterests of the depositors or for securing the proper management of any bankingcompany it is necessary so to do, the Reserve Bank may, for reasons to be recordedin writing, by order, remove from office, with effect from such date as may bespecified   in   the   order,   [any   Chairman,   Director],   Chief   Executive   Officer   (bywhatever name called) or other officer or employee of the banking company.

 

Removal of managerial personnel and other persons [sub-s.(1)]:       This power can be exercised when the Reserve bank is satisfied that so to do isin public interest or for preventing the affairs of the banking company from beingconducted in a manner detrimental to the interest of its depositors or for securingproper   management   of   any   banking   company.   The   Reserve   Bank   may   afterrecording its reasons in writing, pass an order removing from office any chairman,director, chief executive officer or other officer or employee.  The date of removalhas to be specified in the order.

 

Appeal against order and its finality [sub-s.(3)]        The person against whom an order of removal has been passed may, within 30days from the date of communication, prefer an appeal to the Central Government. The decision of the Central Government is to be final.  Where no appeal has been made the order of the Reserve Bank attains finality.

 

Disqualification from banking management [sub-s.(4)]         A person who has been removed under this section can be put under restraint in any way, whether directly or otherwise, from being concerned with or take part in the management of any banking company for a period not exceeding 5 years as may be specified in the order.

 

Penalty for contravention of orders [sub-s.(5)]       Any person acting in contravention of orders made under this section is to be punishable   with   fine   which   may   extend   to   Rs   250   for   each   day   during   the contravention continues.

 

Appointment of suitable person[sub-s.(6)]         The position of the person who has been removed under this section can be filled by the Reserve Bank by appointing any suitable person with effect from the date specified in the order.  The appointee has to hold office during the pleasure of the Reserve Bank for a period not exceeding 3 years or for a further period not exceeding 3 years at a time as the Reserve Bank may specify. He is not to incur any obligation or liability by reason only of his being a chairman, director or chief-executive officer or other officer or employee, or for anything done or omitted to be done in good faith in the execution of the duties of his office or in relation thereto.

 

36AE.   Power   of   Central   Government   to   acquire undertakings  of   bankingcompanies in certain cases   (1) If, upon receipt of a report from the Reserve Bank, the Central Government issatisfied that a banking company:

 

(a) has, on more than one occasion, failed to comply with the directionsgiven to it in writing under section 21 or section 35A, in so far as suchdirections relate to banking policy.

 

(b)   is   being   managed   in   a   manner   detrimental   to   the   interests   of   itsdepositors, and that-

(i) in the interests of the depositors of such banking company, or

(ii) in the interest of banking policy, or

iii) for the better provision of credit generally or  of credit  to anyparticular  section of the community or in any particular  area, it isnecessary to acquire the undertaking of such banking company, theCentral Government may,  after such consultation with the ReserveBank as it thinks fit, by notified order, acquire the undertaking of suchcompany [hereinafter referred  to  as  the acquired bank)  with effectfrom  such  date as   may   be  specified in  this   behalf   by   the CentralGovernment (hereinafter referred to as the appointed day.

 

36AF. Power of the Central Government to make scheme

 

The Central Government may, after consultation with the Reserve Bank, make a scheme for carrying out the purposes of this Part in relation to any acquired bank. In particular, and without prejudice to the generality of the foregoing power, the said scheme may provide for all or any of the following matters namely

 

(a) the corporation, or the company incorporated for the purpose, to whichthe undertaking including the property, assets and liabilities of the acquiredbank   may   be   transferred,   and   the   capital,   constitution,   name   and   officethereof;

(b) the constitution of the first board of management (by whatever namecalled) of the transferee bank, and all such matters in connection therewithor   incidental   thereto   as   the   Central   Government   may   consider   to   benecessary or expedient;

(c) the continuance of the services of all the employees of the acquired bank(excepting such of them as, not being workmen within the meaning of theIndustrial Disputes Act, 1947 (14 of 1947), are specifically mentioned in thescheme) in the Central Government or in the transferee bank, as the casemay be, on the same terms and conditions so far as may be, as are specifiedin clause (i) and (j) of sub-section (5) of section 45;

 

36AG. Compensation to be given to shareholders of the acquired bank

 

Every person who, immediately before the appointed day, is registered as aholder of shares in the acquired bank or, where the acquired bank is a bankingcompany   incorporated outside India,  the   acquired   bank,   shall   be   given   by   theCentral   Government,   or   the   transferee   bank,   as   the   case   may   be,   such compensation in respect of the transfer of the undertaking of the acquired bank asis determined in accordance with the principles contained in the Fifth Schedule.

 

36AH. Constitution of the Tribunal

 

(1) The Central Government may, for the purpose of this Part, constitute a Tribunalwhich shall consist of a Chairman and two other members.

(2) The Chairman shall be a person who is, or has been, a Judge of a High Court orof the Supreme Court, and, of the two other members, one shall be a person, who in   the   opinion   of   the   Central   Government,   has   had   experience   of   commercialbanking and the other shall be a person who is a chartered accountant within themeaning of the Chartered Accountants' Act, 1949 (38 of 1949).

 

36AJ. Procedure of the Tribunal

(1) The Tribunal shall have power to regulate its own procedure.

(2) The Tribunal may hold the whole or any part of its inquiry in camera.

(3) Any clerical or arithmetical error in any order of the Tribunal or any errorarising therein from any accidental slip or omission may, at any time, be correctedby the Tribunal either of its own motion or on the application of any of the parties.

 

SUSPENSION OF BUSINESS AND WINDING UP OF BANKING COMPANIES

 

36B. High Court defined In this Part and in Part IIIA, "High Court", in relation  to a banking company,means  the High Court exercising  jurisdiction in the place  where the registeredoffice of the banking company is situated' or, in the case of a banking companyincorporated   outside   India,   where   its   principal   place   of   business   in   India   issituated.

37. Suspension of business  The  High Court]   may   on   the   application   of   a   banking   company   which   istemporarily unable to meet its obligations make an order (a copy of which it shallcause   to   be   forwarded   to   the   Reserve   Bank)   staying   the   commencement   orcontinuance of all actions and proceedings against the company for a fixed periodof time on such terms and conditions as it shall think fit and proper, and may fromtime to time extend the period so however that the total period of moratorium shallnot exceed six months.

 

38. Winding up by High Court

(1) Notwithstanding anything contained in section 391, section 392, section 433and section 583 of the Companies Act, 1956 (1 of 1956), but without prejudice toits powers under sub-section (1) of section 37 of this Act, the High Court shallorder the winding up of a banking company-

(a) if the banking company is unable to pay its debts; or

(b) if an application for its winding up has been made by the Reserve Bankunder section 37 or this section.

(2) The Reserve Bank shall make an application under this section for the windingup of a banking company it is directed so to do by an order under clause(b) of sub-section (4) of section 35.