case study on banking regulation act 1949

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case study on banking regulation act 1949

Overview Of Banking Regulation Act, 1949

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This Blog is written by Sarthak Verma from Symbiosis Law School, Noida . Edited by Anumeha Jain .

INTRODUCTION

Banking Sector in India is by far one of the most dynamic sectors with regular changes and innovations taking place. Being so dynamic yet so stable is a characteristic feature of or banking sector that makes it a prominent one. According to the Reserve Bank of India [1], India’s banking sector is well – regulated and adequately capitalized, it was also emphasized that the financial and economic condition of our country is way too better than other countries of the world. Indian banks have always withstood the global turnovers very well establishing their resilience.

The banking sector emphasizes on providing better service to the customers through technological advancements systems like bringing forward the mobile or internet banking systems and improvising the technological edge to have competitiveness. Despite being so dynamic, variant, and subjected to changes, there’s always a scope for development and improvement and the banking sector also has a pathway and road ahead to attain what is needed. But being the heart of all the economic activities, even a minor or slight change in the banking sector has a major effect on the economy of the country. Therefore, to have monetary stability in India RBI was formed with the enactment of 50 of the Reserve bank of India Act, 1934 [2].

Indian Banking required reforms to cater to the difficulties it faced relating to the uncertain political scenario, inflation, payment crisis, etc. Their reforms were aimed to lead to transformational changes and innovations to efficiency and stability to the Indian banks and integrate them at the International level.

Banking Companies Act, 1949 was passed and came into force on 16.03.1949; gradually it was renamed and changed to Banking Regulations Act, 1949 [2] w.e.f. 01.03.1966. This Act aimed at the interest of the Indian economy by safeguarding the interests of customers and controlling the abuse of power.

SIGNIFICANCE OF BANKING REGULATION ACT, 1949

The enactment of the Banking Regulation Act, 1949 holds a great significance for India which was politically, economically, and socially unstable yet was emerging as a new superpower post its independence. Therefore, it was the need of the hour to strengthen the measures that target at minimizing the vulnerability of the banks due to the fluctuations in the economic environment inclusive of the inadequacy of the capital, income recognition, assets and liabilities clarification, the improved level of transparency and the disclosure standards. This act also brought in certain minimum capital requirements for the banks during the inadequacies of capital and during the times when most of the banks collapsed and henceforth, it was necessary to have or prescribe the minimum capital and resource requirement.

This Act empowers the Reserve Bank of India to license the banks and regulate the shareholding. It also gives the power to RBI for the conduction of the appointments of the board as well as management members of the bank, further laying down the guidelines for the audits to be managed by the Reserve bank of India with their controlling and the liquidation tactics.

Power is given to RBI to issue directives on banking policy in good faith and public interest whereas it can also impose the penalties as and when needed. This act incorporated under it with the amendment of 1965 the Co-Operative Banks. This act includes detailed provisions relating to the various businesses that a bank in India is permitted to engage in. Two new sections (viz. 35AA and 35AB ) are inserted in the Banking Regulation (Amendment) Ordinance, 2017 [7].

IMPACT OF THE BANKING REGULATION ACT, 1949

The Banking Regulation Act, 1949 extends to the entire nation and is not just pertinent to the primary agricultural societies, non-agricultural primary credit societies, and cooperative land mortgage banks. The act impacts and applies to Nationalized, Non- Nationalized, and Cooperative banks.

Impact On The Reserve Bank Of India

The act impacts the power given to the Reserve Bank of India to directly intervene in the bad loan cases. After this, the central bank will be able to directly ask banks to sit down with defaulters and reach a settlement as part of the package. The plan will be begun with banks being advised to determine the main 40-50 cases. Under the altered demonstration or the law, if banks can’t discover an answer for the issue by the predetermined time, the national bank will step in legitimately. RBI had been impacted and now it has the power that will ensure the timely completion of the settlement processes.

Impact On The Bankers

A banking company transacts business banking in India. This act defines in the business of banking by stating the essential features and functions of bankers and the providers with the list of businesses banking companies can engage in whereas it prohibits some. There have been complaints by the bankers on the prospective interrogation by the vigilance committees. Thought the central bank had already addressed the issue and had taken care by increasing the standards of the questions to be asked from the bankers but no assurance can be given for the protection from the investigation.

STATUTORY PROVISIONS RELATING TO THE ACT

Section 6(1) and 6(2) when read with section 56(b) describe the businesses that banking companies can indulge in like borrowing, raising or taking of Money, giving advances, guarantees, indemnity. The provisions of the Banking Regulation Act,1949 cannot be used as the substitute to the laws applicable unless explicitly mentioned ( Section 2 (56)(b)) i.e. the act does not apply to the primary agricultural society, cooperative land mortgage and any other cooperative society that is not provided in Section 56 of the Act .

The main provisions vis-à-vis Banking Regulation Act, 1949 includes, Prohibition of trading (Section 8) wherein it has been mention that a banking company cannot be involved in buying or selling or bartering goods. Section 9 relating to Non – Banking Assets prohibits banking company to hold any immovable property, howsoever gained, aside from its utilization, for any period surpassing seven years from the date of securing thereof. The organization is allowed, inside the time of seven years, to arrangement or exchanges any such property for encouraging its removal. Furthermore, Section 10 of the act states Management related provisions whereas Section 11 relates to minimum capital and reserves required for a banking company to carry its business in India and even in foreign companies and Section 12 relates to the Capital Structure and conditions relating to banking companies to carry out business in India. Where on one hand Section 17 relates to the Reserve Fund or the Statutory Reserve on the other hand Section 18 have Cash Reserves and maintenance by cash flow. The Liquidity Norms are discussed in Section 24 of the action whereas the restrictions on loans and advances are discussed in Section 20 . Section 29 and 34A have provisions relating to Accounts and Audit. The provisions of the act are clear instructions for a banking company and this act can be considered as a superior act to the other acts like Negotiable Instruments Act, 1881 [5] or Companies Act, 2013 [6], etc.

THE 2017 AMENDMENT

Need to amend the act .

Indian bank has been experiencing NPA, Bad credits, and focused on resource issues from numerous years. This issue has been exacerbating with the time despite a few endeavors made by the banks and the administration of India. In the beginning phases of the issue, the explanations behind this issue were credited to the supposed arrangement loss of motion with numerous enormous ventures being stuck as a result of crude material flexibly and land securing issues.

The RBI ’s December Financial Stability Report 2016 said that large borrowers (the central bank defines these as debtors to whom lenders have an exposure of at least Rs. 5 crore) account for 56% of bank debt and 88% of their NPAs. Despite a number of schemes launched by the Reserve Bank of India (RBI), this growing stock of toxic debt continue to elude resolution. Therefore, something was needed to have more stability in the Indian banking system. Hence the amendment of 2017.

Amendment Of 2017

Two new sections (viz. 35AA and 35AB) are embedded in the Banking Regulation (Amendment) Ordinance, 2017. Section 35A of the Banking Regulation Act, 1949 , this demonstration empowers the Central Government to approve the Reserve Bank of India (RBI) to guide banking organizations to determine explicitly focused on resources by leading the bankruptcy goals process, where required. This law likewise enables the RBI to give different headings for goals, and affirm or designate or for arrangement, specialists, or boards of trustees to prompt financial organizations to focused on resource goals.

Impact Of Amendment Of 2017

The amendment in the banking regulation act which is being set up by the administration will enable the Reserve Bank of India (RBI) to legitimately mediate in settling awful advance cases. After this, the national bank will have the option to legitimately request that banks plunk down with defaulters and arrive at a settlement as a feature of the bundle. Directly, there is an arrangement for an oversight council comprising of “prominent people under the Scheme for Sustainable Structuring of Stressed Assets (S4A) which is suggested by the Indian Banks’ Association in an interview with RBI. Under this mandate, Section 35 of the Banking Regulation Act, will be changed which right now manages forces of examination for RBI.

The learner feels that many acts used for commercial uses and cooperate use can be considered as subordinate to this very act. This act is very heart and soul of the Indian Economy since it relates to banking which is directly proportional to the economic growth of the country. This act and the 2017 amendment were required for this activity since there were requirements for the stability and reforms were considered as the need of the hour. The reforms in the banking sector in India intended to enhance the stability and efficiency of banks. To remove the operational rigidities in the credit delivery system to ensure allocation efficiency and achievement of social objectives. To place the Indian banking system on par with international standards in respect of capital adequacy and other prudential norms. The strengthening measures aimed at reducing the vulnerability of banks in the face of fluctuations in the economic environment. These included capital adequacy, income recognition, asset classification, provisioning norms, exposure norms, improved levels of transparency, and disclosure standards.

After an away from the arrangements of the BR Act on the bank mergers it very well may be presumed that the financial division is controlled by RBI . Its inclusion is growing as the requirement for the guideline of mergers is getting significant in this profoundly serious corporate world for getting different advantages by a company. RBI practices its capacity to control mergers and acquisitions in the private part banks to ensure the enthusiasm of the contributors and open. It is to be noticed that regardless of the forces of the High Court on the trade-off or course of action regarding the amalgamation of banking organizations, just RBI has the last power to affirm the plan of amalgamation. Segment 44A makes the prior conflict apparent and it appears that the High Court isn’t given the forces to concede its endorsement to the plans of a merger of banking organizations. Further after digging profound into the arrangements of the BR Act with respect to the bank mergers it very well may be seen that if any plan of amalgamation of banks doesn’t include two banking organizations then the arrangements of BR Act won’t be relevant. In such cases, the arrangements of Companies Act [4] will be relevant and the Tribunal will have a ward to engage such courses of action. Bank mergers are removed from the domain of the administrative arrangements under the Companies Act in every other case. Private part banks additionally need the RBI’s endorsement for merger and procurement with non-banking 68 Section 10FB of the Companies Act, 1956 , 1969 Section 396 of the Companies Act, 1956 money organization. The last is anything but a proper necessity under the arrangements of the Banking Regulation Act and is case explicit. Before, RBI has opposed numerous mergers in light of the fact that it had concerns about the forerunners of the procuring substance, for example, Indusland Bank with Ashok Leyland Finance and that of limiting Chrys Capital from putting resources into the Centurion Bank. To formalize this plan, the working gathering of the Indian Banks. The affiliation has prescribed to the Finance Ministry that the RBI ought to be the last position to settle on all mergers and acquisitions issues, including trade proportions. This is to guarantee severe money related order.

(1) Wikipedia

(2) Jagranjosh.com

(3) Ibef.org

(4) globallegalinsights.com

[1] https://www.rbi.org.in/

[2] https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBIAM_230609.pdf

[3] https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/BANKI15122014.PDF

[4] https://indiankanoon.org/doc/1353758/

[5] https://indiankanoon.org/doc/1132672/

[6] http://ebook.mca.gov.in/default.aspx

[7] https://www.prsindia.org/billtrack/banking-regulation-amendment-ordinance-2017

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Landmark Judgments on Banking Laws [2022] Part I

by Siddharth R. Gupta† Cite as: 2023 SCC OnLine Blog Exp 30

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Landmark Judgments on Banking Laws [2022] Part I

This article takes a brief sojourn into the landmark judgments delivered by the Supreme Court of India and the High Courts in the year 2022. The judgments are falling under the broad umbrella of banking laws, which comprises four principal enactments of Banking Regulation Act, 1949 (for short “BR Act”), Reserve Bank of India Act, 1934 (for short “RBI Act”), Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (for short “RDDFI Act”) and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short “SARFAESI Act”). Part I of this compendium thus comprises judgments on the aforementioned enactments and banking laws as a broad subject for the months from January to June 2022, quoting the views taken in judgments across the country. Part II which shall be the sequel to this part shall comprise judgments from July to December 2022. They are as follows:

(1) Phoenix ARC (P) Ltd. v. Vishwa Bharati Vidya Mandir 1

(Delivered on January 12, 2022)

Coram: 2-Judge Bench of HM Justices M.R. Shah and B.V. Nagarathna

Authored by: HM Justice M.R. Shah

Issue before the court was maintainability of writ petition under Article 226 of the Constitution of India against an asset reconstruction company (for short “ARC”) and passing of interim orders protecting the interest of the secured creditor. Referring to the longline of judgments of United Bank of India v. Satyawati Tondon , 2 Kanaiyalal Lalchand Sachdev v. State of Maharashtra , 3 Sri Siddeshwara Cooperative Bank Ltd. v. Ikbal , 4 City and Industrial Development Corpn. v. Dosu Aardeshir Bhiwandiwala , 5 and Sadhana Lodh v. National Insurance Co. Ltd. , 6 Court held that interim orders stalling/restricting the proceedings of the SARFAESI Act cannot be passed, especially when a large sum amount is involved.

It was further held that ARC is a “ private financial institution”, and thus writ petition against such entities is not maintainable, since they cannot be stated to be performing public functions, normally expected to be performed by the State authorities. The court disallowed the judgments of J. Rajiv Subramaniyan v. Pandiyas , 7 Praga Tools Corpn. v. C.A. Imanual , 8 and Ramesh Ahluwalia v. State of Punjab , 9 relied upon by the borrowers as mentioning the writ petition to be maintainable. The filing of writ petitions was thus held to be an abuse of the process of the court and interim orders passed in favour of the borrowers set aside.

* * *

(2) Pradeep Kumar v. Postmaster General 10

(Delivered on February 7, 2022)

Coram: 3-Judge Bench HM Justices L. Nageshwara Rao, Sanjiv Khanna and B.R. Gavai

Authored by: HM Justice Sanjiv Khanna

The petitioner had laid a challenge to the dismissal order of the National Consumer Dispute Redressal Court (for short “NCDRC”) rejecting the claim of the petitioner for the grant of compensation under various heads along with interest for illegal encashment of Kisan Vikas Patra (for short “KVP”) purchased by them. The said KVPs were illegally encashed through the post office concerned at the instance of one agent Ruksana, who was employed by the State of U.P. The entire payment outstanding on the date of encashment was paid in cash , which was siphoned off and misappropriated by the said agent to her personal benefit. The agent was eventually convicted for various offences under IPC for cheating, misappropriation, etc. Question arose about the vicarious liability of the post office for the faults attributable to its employees. The court examined various provisions of Negotiable Instruments Act, 1881 (for short “NI Act”), especially the definitions of “banker”, “holder”, “endorse”, “holder in due course” and “payment in due course”, along with Sections 78 and 82 providing for the liability of the acceptor/endorser of the negotiable instrument concerned. It was further held that to saddle the bank with the liability of payment to an incorrect entity/person, what must be seen is the compliance of the standard bank practices. Whether the person to whom the payment is made is not entitled to seek payment of the amount mentioned is the line of enquiry. The scope of banker’s protection under Section 131, NI Act was also elaborated upon, with reference to several precedents and judgments on the said aspect. The banker was stated to be acting in good faith and without negligence, in view of the statutory duty enjoined by Sections 131 and 131-A of the NI Act. The agent Ruksana was not treated to be “holder in due course”, since she adopted possession of the owner under lawful possession by means of an offence of fraud or misrepresentation. She was just a carrier for the purposes of change of details in the KVP. Reference was also made to Government Savings Certificate Act 1959, pertaining to the transfer of NI. It was further held that no payment of the claimed amount could have been made through cash but could have been made only through cheque. The provisions of Rules 14 and 15 of the KVP Rules, 1988 were referred to hold that the post office was responsible for any loss caused to the holder by the fraud played by any person towards its encashment. In the process of encashment of the KVP, there was gross violation of various statutory provisions, especially the fraud played in the process. The employee of the bank, Mr M.K. Singh was also held to have acted irresponsibly and carelessly in disregard of the applicable procedure and provisions of KVP Rules, 1988. For all the aforesaid reasons, it was held that the post office was vicariously responsible for the fraud perpetrated by its employees and thus compensation of the claimed amount along with interest and various heads were awarded to the petitioner claimant, setting aside the order of NCDRC.

(3) Bank of Baroda v. Karwa Trading Co. 11

(Delivered on February 10, 2022)

Coram: 2-Judge Bench HM Justices M.R. Shah and Sanjiv Khanna

Appeal before the Supreme Court was preferred against the order of Rajasthan High Court, through which direction was issued to the borrower to deposit a part of outstanding amount to the bank, which was accordingly directed to release the property and hand over physical possession along with title deed of the same to the borrower. The borrower had deposited only half of the total outstanding amount with the bank and sought for quashing of the auction-sale in handing over the property back to him. Referring to the amended provisions of Section 13(8) of the SARFAESI Act, it was held that the secured asset cannot be sold or transferred by the secured creditor if outstanding amount is paid by the borrower prior to the issuance of auction notice. Admittedly in the present case, since the borrower did not deposit, nor was he ready to deposit the entire amount of dues with the secured creditor, he had no right to redeem the mortgaged property, secured in favour of the bank. Thus, the directions of the High Court were contrary to the mandate of amended provisions to Section 13(8) of the SARFAESI Act. It was further held that until and unless the borrower is ready and willing to deposit the entire amount along with the entire costs and expenses with the bank/secured creditor, no order could be passed of handing over the property back in his favour or compelling the bank to settle the outstanding amount at a much lesser value. Accordingly, the judgment of the High Court was set aside.

(4) Union Bank of India v. Rajasthan Real Estate Regulatory Authority 12

(Delivered on February 14, 2022)

Coram: 2-Judge Bench HM Justices M.R. Shah and B.V. Nagarathna

The Court held that in the event of conflict between RERA and SARFAESI Act, the provisions contained in RERA would prevail. RERA would not apply in relation to transactions between the borrower and the banks/financial institutions where security interest has been created by mortgaging the property prior to the introduction of the Act unless and until the same is found to be fraudulent or collusive. RERA shall have the jurisdiction to entertain a complaint under RERA Act by any aggrieved person against the bank as a secured creditor if the bank resorts to Section 13(4) or any incidental provision under the SARFAESI Act.

(5) NKGSB Cooperative Bank Ltd. v. Subir Chakravarty 13

(Delivered on February 25, 2022)

Coram: 2-Judge Bench of HM Justices A.M. Khanwilkar and C.T. Ravikumar

Authored by: HM Justice A.M. Khanwilkar

The seminal question before the court was powers of District Magistrate (DM) or Chief Metropolitan Magistrate (CMM) for appointing an advocate authorising him/her to take position of the secured asset for being forwarded to the secured creditor under Section 14(1)( a ) of the SARFAESI Act, 2002. There was a deep cleavage of opinion amongst the High Courts with some deciding in favour and some deciding against the propositions. The issue arose in the context of phrase “may authorise any officer subordinate to him” employed under Section 14(1)( a ) of the 2002 Act. Whether an advocate can be treated as an “ officer subordinate to the DM/CMM”. The court delved into three forms of subordination “administration subordination”, “functional subordination” and “statutory subordination”.

It extensively referred to the pari materia phrases in other legislations, both Central and State. Referring to a host of judgments like A. St. Arunachalam Pillai v. Southern Roadways Ltd . 14 , S. Krishnaswamy Mudaliar v. P.S. Palani Pillai 15 , B. Veeraswamy v. State of A.P. 16 , and other such judgments, Court held that the nature of subordination depends on the scheme and intent of the statute. Holding that the advocate stands in a “ functional subordination”, the Court referred to the Statement of Objects and Reasons, various statutory provisions, and the Rules framed thereunder of the SARFAESI Act, 2002. Referring to Rule 2( a ) of the Security Interest Rules, 2002, Court held that the debt can be realised through the “authorised officer”. It was further held that the amending provision of Section 14 clause (1)( a ) inserted through the 2013 Amendment simply clarifies and reiterates the existing position and does not invest new powers with the DM/CMM as such for the first time. The job of the DM/CMM is purely “ ministerial in nature ” and does not involve any quasi-judicial adjudicatory function. Such an act under Section 14 cannot brook delay and time is of the essence, which is the spirit of the special enactment. Court also interpreted various words and terms in the judgment viz. “any”, “officer subordinate”, etc. to hold that lawyer is functionally subordinate to CMM/DM exercising power under Section 14. There is no prohibition either on engaging any Advocate Commissioner for taking the position of the secured assets. Accordingly, the view taken by the Bombay High Court was set aside and it was held that advocates can be appointed for the said purpose of taking over of the physical position of secured assets and the documents.

(6) Punjab National Bank v. Union of India 17

(Delivered on February 24, 2022)

Coram: 2-Judge Bench HM Justices L. Nageswara Rao and Vineet Saran

Authored by: HM Justice Vineet Saran

The issue that arose before the Supreme Court was primacy of the provisions of SARFAESI Act vis-à-vis the Central Excise Act, 1944 . Who would have a better charge for the realisation of its dues, the secured creditor for Department of Customs and Central Excise (for short “CCE”). The proceedings under the SARFAESI Act, specifically taking over the symbolic possession under Section 13(4) was initiated by the PNB, which was objected to by the CCE.

On the date of confiscation of the land and the superstructure of the subject property, Rule 173-Q(2) had been omitted and as such the power to confiscate was not existing. The court referring to Section 34, read with Section 11-E of the Central Excise Act, 1944 read with Rule 173-Q of the Central Excise Rules, 1944, held that the power to confiscate stood omitted in the year 2000, whereafter a positive affirmative provision to confiscate the properties of the defaulting entities was not provided or existing. Referring to the Constitution Bench judgment in Kolhapur Canesugar Works Ltd. v. Union of India , 18 the Court held that in the absence of any enabling or saving position protecting and conserving the pending confiscation proceedings in the Act of 1944 or the Excise Rules, 1944, the pending proceedings were bound to lapse, and it is not covered by the provisions of General Clauses Act, 1897 . If a provision of any statute is unconditionally omitted without a saving clause in favour of pending proceedings, all actions must stop, and fresh proceedings may be instituted as per the altered/substituted procedure. Thus, the proceedings by the CCE of confiscation got terminated on the date of the amendment of the applicable rules of the Central Excise Rules, 1944 with the omission of operative provisions without any savings therein. Further held that General Clauses Act, 1897 does not apply to the “ rule ” but applies only to a “ Central Act ” or “ regulation ” and thus prayer for its applicability was also negatived. Referring to the Full Bench judgment of the Madras High Court in UTI Bank Ltd. v. CCE , 19 it was further stated that there is no enabling or positive statement giving first charge to the dues of CCE over any other statutory due, the said right cannot be claimed by the Revenue. Referring to the longline of judgments in Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. , 20 Central Bank of India v. Siriguppa Sugars & Chemicals Ltd. , 21 the Court held that the rights of the secured creditor under a statute is protected and takes upper claim over the crowns dues. Thus, in light of provisions of Sections 2( f ) and 2(1) ( zc ) to 2( zf ) read with Section 13 of the SARFAESI Act, 2002, the secured creditor was said have had a first charge on the secured assets and shall have an overriding effect on all other laws. Accordingly, the judgment of the Allahabad High Court was set aside.

(7) Asset Reconstruction Co. (India) Ltd. v. Chief Controlling Revenue Authority 22

(Delivered on April 26, 2022)

Coram: 2-Judge Bench of HM Justices Hemant Gupta and V. Ramasubramanian

Authored by: HM Justice V. Ramasubramanian

The challenge was laid to the view taken by the Full Bench of Gujarat High Court in stamp reference under Section 54(1)( a ) of the Gujarat Stamp Act, 1958 at the instance of CCRA, Gujarat. The sole issue was about the levy of extent of stamp duty on the assignment deed of debt in favour of asset reconstruction company (for short “ARC”) registered with the RBI. The assignment deed contained reference to power of attorney (PoA), which was stated to be chargeable to stamp duty under Article 45( f ) of Schedule I to the Gujarat Stamp Act, 1958. The nature of PoA was “irrevocable in nature”. It was held by the court that no independent instrument of PoA was executed; the power of sale of secured assets in favour of ARC flowed out of the provisions of SARFAESI Act, 2002, vide Section 2( zd ), “secured creditor” included an ARC. Vide Section 5(1-A), stamp duty was exempted on any document executed by the bank in favour of ARC for the purposes of asset reconstruction or securitisation. Interpreting Article 45( f ) of Schedule I to the Stamp Act, 1958, Court held that two conditions have to be satisfied; Firstly, PoA should have been given for consideration and secondly an authorisation to sell any immovable property flowing out of the said instrument . The draft PoA appended to the assignment deed was only incidental to the deed of assignment, but not the principle instrument in itself. The deed of assignment was already charged to duty under Article 20( a ) as a “ conveyance “. The Court held that since a single instrument has been charged under the correct charging provision of the statute, namely, Article 20( a ) of Schedule I, Revenue cannot be allowed to split the instrument into two only because of reduction of stamp duty by a notification issued by the State Government under Section 9( a ). If the Government has exempted the levy of stamp duty under particular entry (Article 20 of Schedule I), then the same could not have been charged again/twice through splitting. Accordingly, the view taken by the Full Bench of Gujarat High Court was set aside by the Supreme Court.

(8) Nedumpilli Finance Co. Ltd. v. State of Kerala 23

(Delivered on May 10, 2022)

The issue before the court was whether non-banking financial companies (for short “NBFCs”) regulated by RBI in terms of provisions of the RBI Act, 1934 could also be regulated by respective State enactments such as Kerala Money Lenders Act, 1958 and Gujarat Money Lenders Act, 2011. The court traced the history of various State enactments as also the scheme and framework of the provisions under the RBI Act relating to the NBFCs. The power of the union was traceable to Entry 43 List I , whilst the power of the State was stated to be traceable to Entry 30 List II falling under Schedule VII. In the process of reasoning, the court extensively referred to provisions of Chapter III-B of the RBI Act and the regulatory measures undertaken by the RBI from time to time pertaining to the NBFCs. It was held that RBI Act takes a holistic approach to the business of banking, money lending and operation of the currency and credit system of the country. It is a complete code in itself that empowers RBI to control all the essential aspects and features of NBFCs from the “ cradle to the grave “ . No NBFC can carry on business without being registered under the RBI Act and entire life of NBFC “ from the womb to the tomb ” is regulated and monitored by the RBI. Scanning the provisions of Section 45(I to Q), as also the various circulars issued thereunder, it was held that nothing has been left untouched insofar as regulation of NBFCs by RBI is concerned and thus it can safely be concluded that it is a “ complete code in itself “. Thus, in light of the same, the State of Kerala or any other State cannot step in or regulate even those features of NBFCs, on which the RBI Act is silent, as the silence of RBI implies that it was deliberately not intended to be regulated by the Parliament or RBI.

In the process of reasoning, the court explained and elucidated the doctrines of eclipse, conflict and repugnancy. Referring to the judgment of the Constitution Bench of Deep Chand v. State of U.P. 24 , Court explained the “ doctrine of eclipse “, meaning as to how a law when validly made gets subjected to a shadow by supervening constitutional inconsistencies or statutory inconsistencies. Thus, with the advent of Chapter III-B of the RBI Act, the State enactments specifically the Kerala Act or the Gujarat Act got eclipsed relating to the subject-matter of NBFCs.

Referring to the recent judgment of Innoventive Industries Ltd. v. ICICI Bank 25 , Court examined the “ doctrine of repugnancy ” and inconsistency of law to hold that the repugnancy shall arise only when State laws are referable to enactments under entries of List III and not otherwise. In other circumstances when the legislations relate to different lists under Schedule VII, when the Parliamentary and State legislations are referable to different entries under Schedule VII, then Article 246 shall apply, along with the accompanying “ doctrine of conflict “. It was held thus that provisions of the RBI Act override all the State enactments, which cannot therefore govern the operation and functioning of NBFCs.

(9) R.D. Jain and Co. v. Capital First Ltd. 26

(Delivered on July 27, 2022)

Issue before the Court was whether the term District Magistrate/Chief Metropolitan Magistrate (for short “DM/CMM”,) under Section 14 of the SARFAESI Act, 2002 includes within its ken Additional District Magistrate or Additional Chief Metropolitan Magistrate also. The question arose because the borrowers contended that the Additional Chief Metropolitan Magistrate cannot be treated as an officer subordinate to the DM/CMM.

The Bombay High Court held that functions of DM/CMM under Section 14 are purely executionary in nature and not, without any element of quasi-judicial functions and that they are not a “ persona designata ” for the purposes of Section 14 of the SARFAESI Act. Referring to the recent judgment of NKGSB Cooperative Bank Ltd. v. Subir Chakravarty 27 , Court held that the amendment of 2013 to Section 14 inserting sub-section (1-A) is purely an explanatory provision merely restating the implicit power of the CMM/DM. The same does not invest a new power for the first time in the CMM/DM as such. Thus, the powers exercised by CMM/DM are of a “ purely ministerial nature ” and can be exercised by the Additional CMM/DM.

Referring to the provisions of Sections 11, 12, 15, 16, 17, 19 and 35 CrPC, Court held that powers exercisable by CMM are exercisable in equal capacity and equal role by the Additional CMM, who are on par with the former insofar as powers under CrPC are concerned. Therefore by no stretch of imagination can they be treated as officers subordinate to the CMM/DM, to whom the powers can be delegated or to be allowed to exercise such powers through special orders in this regard. Accordingly, the contrary view taken by some of the High Courts as expressed by the Supreme Court was specifically overruled.

(10) Indian Overseas Bank v. RCM Infrastructure Ltd. 28

(Delivered on May 18, 2022)

Coram: 2-Judge Bench of HM Justices L. Nageswara Rao and B.R. Gavai

Authored by: HM Justice B.R. Gavai

Issue before the court was relating to impact of Section 10 r/w Section 14 moratorium under the provisions of Insolvency and Bankruptcy Code, 2016 on the issuance of sale confirmation letter pending under Rule 94-A of the Security Interest Rules, 2002 (for short “Rules of 2002”). The sale was confirmed in favour of the auction-purchaser; however the formal sale certificate could not be issued since 75% balance payment of the big amount was pending, which period was extended under Rule 94-A of the Rules of 2002. It was argued on behalf of the auction-purchaser that considering Section 54 (part performance) of the Transfer of Property Act, 1882 (for short “the TP Act”), the auction-purchasers being bona fide purchasers, put into possession of the auctioned property, should not be disturbed. The right of the corporate debtor to redeem the mortgage property under Section 60 of the TP Act was lost in view of amended provisions of Section 13(8) of the SARFAESI Act, 2002. Referring to the provisions of Section 14 and 238 of the IBC, the Court held that provisions of the IBC shall have effect notwithstanding anything inconsistent with any other law for the time being in force. Referring to the judgments of CIT v. Monnet Ispat & Energy Ltd. 29 and Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. 30 , Court held that Section 238 overrides and prevails over all other laws for the time being in force, including the provisions of the TP Act as also the SARFAESI Act. The sale in favour of the auction-purchaser was held to be a statutory sale, effected under Rules 8 and 9 of the Rules of 2002 and thus subject to the impact of Section 238 of the IBC. The balance amount was held to have been outstanding on the date of imposition of the statutory moratorium, on which date the CIRP commenced, and moratorium was ordered. The sale was thus incomplete without the receipt of outstanding part payment. Thus, in view of the IBC moratorium, it could not have been confirmed and rightly negated as null and void by the NCLT.

(11) Annam Steels (P) Ltd. v. Canara Bank Ltd. 31

(Delivered on January 3, 2022)

Coram: Single Judge Bench of HM Justice Bechu Kurian Thomas

Authored by: HM Justice Bechu Kurian Thomas

The petitioner had borrowed loans from multiple banks, who formed a consortium and raised demands from the petitioners. Proceedings under the SARFAESI Act were initiated separately, whereafter recovery proceedings were also instituted by the banks before the DRT. DRT directed the petitioner to pay the consortium of banks a particular amount with pendency lite and future interest @ 14 % p.a. The amount was received by the banks, whereafter for the outstanding amount, the banks started proceeding against the petitioner again. In this backdrop, the question arose was whether fresh securitisation proceedings from the stage of Section 13(2) notice ought to be initiated or the banks were entitled to continue the securitisation proceedings from the State at which the order by the DRT was passed. The case of the petitioner was that the banks are entitled to fresh de novo proceedings since they had paid the amount as per the directions of the DRT in the settlement arrived at mutually by all the parties. The order passed by DRT operated as a termination of pending securitisation recovery proceedings against the petitioner. The case of the bank was that the proceedings can be resumed from the stage and can be continued till and until the outstanding amount due has been received fully. The Court held that the word “ debt ” occurring under the provisions of the RDDB Act, as also the SARFAESI Act has to be interpreted with the same meaning and interpretation. Once an amount is declared as non-performing with the issuance of notice under Section 13(2), the borrower is statutorily obligated to discharge the entire liability to overcome the rigours of the Securitisation Act. A “ partial discharge of the debt ” is not sufficient to discharge the liability of the borrower and part payment of the amount under whatever mode (even through court order) is also not sufficient to discharge the debt due. Referring to the judgments of Mardia Chemicals Ltd. v. Union of India , 32 and Transcore v. Union of India , 33 the Court held that question of difference of amount may always be kept open and decided before the auction-sale of property, implying that DRT order does not terminate, till specifically mentioned the right of the bank to recover the outstanding due in the same proceedings. Part payment does not erode the sanctity of notice under Section 13(2) of the SARFAESI Act, otherwise a shrewd borrower will always be able to defeat the provisions of Act by making such a part payment and getting away with it. Accordingly, the writ petition was dismissed.

(12) Bajaj Finance Ltd. v. Ali Agency 34

(Delivered on January 10, 2022)

Coram: 2-Judge Bench of HM Justices Jaswant Singh and S.K. Panigrahi

Authored by: HM Justice Jaswubraant Singh

Multiple questions arose about the scope of remedies available to secured creditor/bank in the case of adverse orders being passed against them by the District Magistrate (for short “DM”) under Section 14 of the SARFAESI Act. The broad questions were as follows:

Whether the present writ petition is maintainable in view of the remedy provided under Section 17 of the SARFAESI Act, 2002?
Whether Chief Judicial Magistrate would have the jurisdiction to entertain an application under Section 14 of the SARFAESI Act, 2002?

Scope of exercise of jurisdiction by the authorities concerned, while examining an application under Section 14 of the Securitisation Act, 2002.

On the first issue , it was held that under Section 17 of the Act of 2002, remedy is available to the “ borrower or person aggrieved ” against the actions of the secured creditor, but not to the secured creditor himself. The parliamentary intent is crystal clear from the phraseology employed thereunder. Referring to the judgment of Division Bench of Punjab and Haryana High Court in Allahabad Bank v. DM, Ludhiana 35 and Kotak Mahindra Bank Ltd. v. DM, Ludhiana 36 , it was held that writ petition under Articles 226/227 of the Constitution of India is available as a remedy to the secured creditor for assailing the orders or inaction of the DM whilst adjudicating upon applications preferred under Section 14. Accordingly, the writ petition at the instance of secured creditor/bank was held to be maintainable.

On the second issue , it was held that jurisdiction to entertain an application under Section 14 is equally vested with the CJM as well as the DM and no distinction has been created between the two authorities by the legislature, for which reason they are therefore equally competent to entertain applications and pass appropriate orders. Referring to the judgment of Supreme Court in Indian Bank v. D. Visalakshi 37 , it was held that powers and functions of CMM and CJM are equivalent and similar in relation to matters specified in CrPC as also under Section 14 of the SARFAESI Act. Holding the power to be exercisable under Section 14 to be purely non-judicial, ministerial and exercise of coercive power, it was held that merely because only the word/term “CMM” has been used, instead of Chief Judicial Magistrate, it cannot be held that CJM becomes incompetent authority to entertain applications under Section 14. CJM was thus held to be possessing equivalent authority to entertain applications for handing over of physical possession to the secured creditor.

The court reiterated the principles governing disposal of Section 14 application, which does not involve any adjudicatory or quasi-judicial functions but is purely ministerial non-adjudicatory power sought to be exercised by the DM/CJM/CMM. Accordingly, the writ petitions were allowed.

(13) SBI v. Tax Recovery Officer 38

(Delivered on January 20, 2022)

Coram: Single Judge Bench of HM Justice S.M. Subramaniam

Challenge was laid to order of the Tax Recovery Officer, Income Tax Department, through which it was directed that subsequent mortgage with the bank is void considering Section 281 of the IT Act. The question thus arose about interplay and conflict between the provisions of IT Act and the SARFAESI Act. The mortgage was admittedly effected after the date of attachment of the assets for tax default and thus it was submitted on behalf of the IT Department that the transfer of the subject property through mortgage was void, being contrary to Section 281 of the IT Act. The court considered and interpreted the conflicting provisions of the IT Act, SARFAESI and the RDDB Act, 1993. It was held by the court that Section 281 unambiguously hits at all transactions or transfers made during the pendency of income tax proceedings. The mortgagee or the secured creditor is expected to follow the principles of “ caveat emptor ” (buyer beware), with the bound and duty of the borrower to inform the secured creditor about the existence/pendency of the IT proceedings on the subject-matter. The Court referred to and followed two doctrines – “ The doctrine of priority of crown’s debts” and “the doctrine of constitutional priority “. Under the latter, priority is given to those debts, which are traceable and recognised under the constitutional provisions. Taxation laws are constitutionally recognised with reference to the sovereignty and the policies of the Government and thus, the supremacy of the Constitution overtakes the statutes enacted in such enactments which takes direct enactments under such statutes. Referring to the Constitution Bench judgment of the Supreme Court of India, in Builders Supply Corpn. v. Union of India , 39 Court held that its a settled principle of Constitution law that as between creditors of same rank, Government is entitled to priority as arrears of tax due to the State always have an upper hand over private debt. Interpreting the rigours of Sections 34 of the IDDB Act and Section 35 of the SARFAESI Act, the Court held that they shall override other legislations only when there is an inconsistency. If there is no inconsistency between two enactments, then there is no question of overriding other legislations. Held that realisation of taxes by the State is a sovereign function, which must therefore be accorded primacy over other private debts. Accordingly, Section 281 of the IT Act was interpreted to mean that no mortgage ought to be created during the pendency of IT proceedings, which would render the whole mortgage void.

(14) Mahipal Singh Yadav v. Union Bank of India 40

(Delivered on January 24, 2022)

Coram: 2-Judge Bench of HM Justices Vipin Sanghi and Jasmit Singh

Authored by: HM Justice Vipin Sanghi

High Court entertained the writ petition against the orders passed by DRT, Jaipur since the post of the Presiding Officer in the office of DRAT (Debts Recovery Appellate Tribunal) had been lying vacant. The appeals under Section 18 were thus entertained by the High Court in view of the directions of the Supreme Court through its order dated 16-12-2021. The question arose about the consent of secured creditor as a precondition of sale of asset “ below the reserve price ” determined by the bank in terms of the Security Interest (Enforcement) Rules, 2002.

Referring to the provisions of Rule 8(6), the reserve price is fixed as a benchmark below which the property may not be sold and thus if at any stage the secured creditor intends to dispose of the property at a value lesser than the same, it is mandatory to share the said offer with the borrower, without whose consent the sale could not be affected. Referring to the judgment of Seaford Court Estates Ltd. v. Asher 41 , Court held that if any statutory provision is not very happily worded, is ambiguous then, the court must perform the constructive task of finding the intention of the Parliament (Legislature) for interpreting the written words in a way as to give “ force and life ” to the intention of the legislature. The Court held that the whole purpose of undertaking the sale of immovable property through public auction/tender stands defeated if the authorised officer is required to obtain the consent for disposing of the property for a value equivalent or higher than the reserve price. The second proviso to Rule 9(2) becomes relevant and attracted only if the case is not covered by the first proviso, namely, where the amount offered towards sale price is equal to or more than the reserve price specified under Rule 8(5). Accordingly, the order of DRT was affirmed, through which the request of the borrower to seek his consent prior to selling the mortgaged property at specifically the reserve price was rejected.

(15) Amrik Singh v. DCB Bank Ltd. 42

(Delivered on April 6, 2022)

Coram: 2-Judge Bench of HM Justices M.S. Ramachandra Rao and Jasjit Singh Bedi

Authored by: HM Justice M.S. Ramachandra Rao

The petitioner approached the High Court against rejection of their proposal for one-time settlement (for short “by the bank”), when it was stated that a substantial amount was already deposited and the remaining amount was being promised to be deposited within a short time of further 3 to 4 months. Various questions arose, firstly about the maintainability of the writ petition. The respondent DCB Bank was held to be a scheduled bank mentioned under RBI Act and governed by Banking Regulation Act, 1949. The OTS policy framed by the respondents was pursuant to certain circulars and departmental orders issued by the RBI, which was held to be binding on the bank, for enforcement of which an appropriate writ could have been rightly issued.

For various reasons demonstrating the bona fide of the borrower and his readiness to pay the outstanding amount, along with other factors, it was held by the court that writ petition is maintainable for directing the bank to consider and act upon the OTS proposal. Since the measures under SARFAESI Act viz. Section 13(4) have not been initiated by the Bank, therefore writ petition under Article 226 is maintainable. The judgment of Phoenix ARC (P) Ltd. v. Vishwa Bharati Vidya Mandir 43 was distinguished and held to be inapplicable since DCB Bank as the asset reconstruction company was registered with the RBI, which registration could also be cancelled under Section 4 of the SARFAESI Act. The DCB bank as the asset reconstruction company was resultantly held to be amenable to writ jurisdiction under Article 226 of the Constitution of India. Since the petitioner had deposited a substantial amount of Rs 49 lakhs out of total of Rs 85 lakhs, his case was entitled to be considered sympathetically and non-acceptance of OTS was held to be arbitrary. He was entitled to be extended the date of repayment of the remaining amount along with an appropriate and reasonable rate of interest and to settle the dues outstanding to him. Accordingly, the petition was allowed with directions to the bank to act upon the OTS proposal of the petitioner.

(16) Ballyfabs International Ltd. v. State of W.B. 44

(Delivered on April 22, 2022)

Coram: 2-Judge Bench of HM Justices Harish Tandon and Rabindranath Samanta

Authored by: HM Justice Harish Tandon

The issue before the court was whether the sale conducted by an authorised officer under SARFAESI Act, 2002 is an “open market sale” and thus excluded from the scrutiny under Section 47-A of the Stamp Act, 1899. The matter was referred to 2-Judge Bench in view of difference of opinion amongst similar Benches. The controversy arose when the Registrar of Assurance, Calcutta took a view that since the public auction was conducted by statutory authority under the provisions of SARFAESI Act, and not by the Court, then in such circumstances, the price fetched cannot be treated as the price in the open market sale and would have to be subjected to the scrutiny of Section 47-A of the Stamp Act. The case of the petitioner was that if the sale is conducted by an authorised officer, it is preceded by white circulation in newspapers inviting the prospective buyers, which is from the general public and thus cannot be treated as a private transaction at all.

Court in its analysis interpreted the term “ open market ” as a market wherein supply and demand are explicitly in terms of the price determined between the seller and the purchaser in the ordinary course of trade. The expression “ if sold in the open market ” employed under Section 47-A clearly envisages that it is applicable only to private transactions between a private seller and an open buyer and not to open-market transactions. The said expression presupposes that property was not sold in open market between individuals, for which only Section 47-A has been enacted to deal with the cases of undervaluation/underpricing. Section 47-A, by its necessary implication applies only to properties not being sold in open market. Referring to the host of judgments especially to Anil Kumar Srivastava v. State of U.P. 45 , Duncans Industries Ltd. v. State of U.P. 46 , B. Susila v. Saraswathi Ammal , 47 Court held that the “ reserve price ” is entirely different from the “ concept of valuation “. Reserve price is the minimum price with which the public auction starts, and the auction bidders are not permitted to offer bids below the set price, the minimum bid at the auction. Thus, the reserve price so fixed in any public auction is not at all relatable to the valuation of the property which it would fetch or would have fetched, if sold in open market. In the case of auction-sale under the SARFAESI Act, Court held that there is a right publication and advertisement of the property and the proposed auction inviting bid from the intending purchaser who has no connection or relation with the seller, for which reason only it is an open market share. The element of uncertainty about the final purchaser and inconceivability that the secured creditor would always sell the property at a consideration to fetch maximum price for the property, lies at the heart of this transaction. Accordingly, the reference was answered by the court as follows:

The sale conducted by the authorised officer in exercise of the powers conferred under Rule 8 of the Security Interest (Enforcement) Rule, 2002 by public auction or by inviting tenders from the public would be regarded as the sale in the open market and the price so accepted shall be the price which it would fetch if sold in the open market under Section 47-A of the Stamp Act. The sale must be conducted by making a wide publication at least in one newspaper widely circulated in the particular city/town/district where the property is situated.

The authorised officer shall not have any relation or connection with the intending purchaser.

(17) HDFC Bank Ltd. v. Parwati Cotton 48

(Delivered on April 29, 2022)

Coram: Single Judge Bench of HM Justice Bhargav D. Karia

The issue that arose before the court was whether Section 14 application for procuring physical possession of the property can be filed directly before the DM/CMM without first issuing the notice of taking over symbolic possession of Section 13(4) of the SARFAESI Act, 2002. Referring to the 2013 Amendment to Section 14, it was held that the affidavit under 9 points is to be submitted along with the application under Section 14 by the secured creditor. The application is incomplete in the absence of accompanying affidavits under 9 points as aforestated. Referring to the judgments of the Supreme Court in Jagdish Singh v. Heeralal , 49 Standard Chartered Bank v. V. Noble Kumar , 50 Court held that occasion for any borrower to approach the DRT by way of a securitisation application under Section 17 as a remedy being aggrieved by any action of the bank can arise only after issuance of Section 13(4) notice under the SARFAESI Act, not before. The DRT can examine the validity of the measures taken only thereafter, not before whilst exercising powers under Section 17 of the SARFAESI Act. Accordingly, the matter was remitted back to the District Magistrate, Rajkot for fresh adjudication and decision in view of the amended provisions of Section 14 and the non-issuance of notice under Section 13(4) of the SARFAESI Act by the secured creditor. Order passed by the DM was accordingly quashed and set aside.

(18) Om Prakash Kumawat v. Hero Housing Finance Ltd. 51

(Delivered on May 11, 2022)

Coram: Single Judge Bench of HM Justice Mahendar Kumar Goyal

Court negatived the contention of the petitioner that proceedings under Section 9 of the Arbitration and Conciliation Act, 1996 as also those under the SARFAESI Act cannot run simultaneously. Referring to the judgments of the Supreme Court in M.D. Frozen Foods Exports (P) Ltd. v. Hero Fincorp Ltd. 52 and Indiabulls Housing Finance Ltd. v. Deccan Chronicle Holdings Ltd. 53 , that provisions of the SARFAESI Act are a remedy in addition to provisions of the Arbitration Act, where under liquidation of secured asset through a more expeditious procedure is what has been envisaged for. They are “cumulative remedies” and not “substitutionary remedies” of each other. SARFAESI proceedings were held to be in the nature of enforcement proceedings, whereas arbitration is an adjudicatory process. In the event the secured assets are insufficient to satisfy the debt, the secured creditor can proceed against other assets in execution against the debtor after determination of the pending amount in arbitration proceedings by a competent forum. It was further held that order passed under Section 14 by the District Magistrate directing for taking over a possession is an appealable order, for challenging which, writ petition cannot be preferred and is not maintainable.

† Partner at SVS Attorneys, Expert in constitutional, civil and financial laws, Practising Advocate at the Supreme Court of India.

1. (2022) 5 SCC 345 .

2. (2010) 8 SCC 110 .

3. (2011) 2 SCC 782 .

4. (2013) 10 SCC 83 .

5. (2009) 1 SCC 168 .

6. (2003) 3 SCC 524 .

7. (2014) 5 SCC 651 .

8. (1969) 1 SCC 585 .

9. (2012) 12 SCC 331 .

10. (2022) 6 SCC 351 .

11. (2022) 5 SCC 168 .

12. SLP (C) Nos. 1861-1871 of 2022, order dated 14-2-2022 (SC).

13. (2022) 10 SCC 286 .

14. AIR 1960 SC 1191 .

15. 1957 SCC OnLine Mad 97 .

16. 1958 SCC OnLine AP 168 .

17. (2022) 7 SCC 260 .

18. (2000) 2 SCC 536 .

19. 2006 SCC OnLine Mad 1182 .

20. (2000) 5 SCC 694 .

21. (2007) 8 SCC 353 .

22. 2022 SCC OnLine SC 515 .

23. (2022) 7 SCC 394 .

24. AIR 1959 SC 648 .

25. (2018) 1 SCC 407 .

26. (2023) 1 SCC 675 .

27. (2022) 10 SCC 286

28. (2022) 8 SCC 516 .

29. (2018) 18 SCC 786 .

30. (2021) 9 SCC 657 .

31. 2022 SCC OnLine Ker 234 .

32. (2004) 4 SCC 311 .

33. (2008) 1 SCC 125 .

34. AIR 2022 Ori 68 .

35. 2021 SCC OnLine P&H 2858 .

36. 2021 SCC OnLine P&H 763 .

37. (2019) 20 SCC 47 .

38. (2022) 441 ITR 516 .

39. AIR 1965 SC 1061 .

40. (2022) 1 HCC (Del) 292 .

41. (1949) 2 All ER 155 .

42. 2022 SCC OnLine P&H 3518 .

43. (2022) 5 SCC 345 .

44. 2022 SCC OnLine Cal 863 .

45. (2004) 8 SCC 671 .

46. (2000) 1 SCC 633 .

47. 1968 SCC OnLine Mad 226 .

48. SCA 5773 of 2020, decided on 29-4-2022 (Guj)

49. (2014) 1 SCC 479 .

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52. (2017) 16 SCC 741 .

53. (2018) 14 SCC 783 .

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Major Provisions of Banking Regulation Act

All the provisions of the Act have been divided into five parts. There are in all fifty-six Sections and five Schedules attached to the Act. The main provisions or contents or characteristics of the Act may be summarised as:

According to Section 1 , the Act is called the Banking Regulation Act, 1949. It extends to the whole of India. It came into force on 16th March, 1949. A chit fund transaction under the Chit Fund Act, 1982 is also a banking transaction and is covered under the Banking Regulation Act. 1949.

According to Section 5(b) , “banking” means the accepting of deposits of money from the public for the purpose of lending or investment, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise. It may be noted that “banking does not include other commercial activities carried on by a banking company”.

Section 5(c) states that “banking company” means any company which transacts the business of banking in India. According to explanation to Section 5, any company which is engaged in the manufacture of goods or carries on any trade and which 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, and therefore shall not be called a “banking company”.

Section 7 stipulates that every banking company, and no other company, shall use any of the words “bank”, “banker”, or “banking” as part of its name. Only then, it can carry on the business of banking in India.

Section 6 provides a list of various forms of business which a banking company may do in addition to the business of banking.

According to Section 8 and 9, the banks cannot engage themselves in carrying on the following activities:

No banking company shall directly or indirectly deal in the buying or selling or bartering of goods, or engage in any trade.
No banking company shall buy or sell, or barter goods for others.
No banking company shall hold any immovable property howsoever acquired for more than 7 years from the acquisition thereof. However, it can hold any immovable property required for its own use.

With regard to the management of a banking company, Section 10 provides as follows:

A banking company cannot employ or be managed by a managing agent.
It cannot employ “any person” who has been adjudicated insolvent, or has been convicted by a criminal Court for any act of moral turpitude; who is a director of any other company; who is engaged in any other business or vocation; whose terra of office as a person managing the company is for more than 5 years at any one time; whose total remuneration or its part takes the form of commission or of a share in the profits of the company; and whose remuneration is excessive in the opinion of the Reserve Bank of India.
The board of directors of a banking company shall include not less than 51% of its total number of members, persons with professional or other practical experience in the matters such as accountancy, agriculture and rural economy, banking, cooperation, economics, finance, law, small scale industry, etc.
Every banking company shall be managed by a whole-time chairman who shall be entrusted with the management of the whole of its affairs. The chairman shall exercise his powers subject to the superintendence, control, and direction of the board of directors. The chairman shall be one of the directors.
Section 16 prohibits common directors and states that a banking company cannot have a person as director, who is a director of any other banking company.

According to Section 11, the aggregate value of a banking company's paid-up capital and reserves shall not be less than Rs. 5 lakhs, if the bank has been established after 16th September, 1962. This minimum amount varies according to the number of places of business in one or more states and also with the nature of banks such as Indian banks and foreign banks whose branches are in India. Section 12 states that the subscribed capital of a banking company cannot be less than 50% of the authorised capital, and the paid-up capital cannot be less than 50% of the subscribed capital. Further, the capital of the company shall consist of ordinary shares or equity shares only. A shareholder cannot exercise Ms voting rights on poll in excess of 10% of the total voting rights of all the shareholders of the banking company.

According to Section 17 , every banking company shall create a Reserve Fund (known as Statutory Reserve Fund), and before declaring any dividend, transfer to it at least 20% of its profit each year) When the amount in the reserve fund together with the amount in the share premium account equals the paid-up capital, then (and not before that) the Central Government on the recommendation of the Reserve Bank, can allow a banking company not to transfer the stipulated 20% of profit to the reserve fund. The Reserve Fund cannot be used for any purpose until it is equal to the paid-up capital. Where a banking company appropriates (uses) any amount from the Reserve Fund or the share premium account, it shall report the fact to the Reserve Bank within 21 days of such appropriation, explaining the circumstances thereof.

Section 18 states that every unscheduled bank shall maintain a Cash reserve with itself or in a current account with the Reserve Bank equal to at least 3% (increasable up to a maximum of 15%) of the total of its demand and time liabilities in India.

According to Section 24 , every bank shall maintain a liquid reserve in cash, gold or unencumbered approved securities at least 25% of the total of its demand and time liabilities in India.

According to Section 15, no bank shall pay any dividend on its shares until all its capitalised, expenses (including preliminary expenses, organisation expenses, share-selling commission, brokerage, amount of losses incurred or any other item of expenditure on intangible assets) have been completely written off. However, the bank may pay such dividends without writing off the depreciation on investment in approved securities, or the depreciation on investment in shares, debentures or bonds (other than approved securities), and the bad debts.

Section 19 states that a banking company cannot form any subsidiary company. However, it may establish a subsidiary company in the following circumstances:

To undertake any one or more forms of business permissible for a banking company under Section 6; or
To carry on the business of banking exclusively outside India. However, before creating a subsidiary company for this purpose, previous permission in writing of the Reserve Bank is necessary; or
To undertake such other business which the Reserve Bank may, with the prior approval of the Central Government, consider to be conducive to the spread of banking in India or to be otherwise useful or necessary in the public interest.

According to Section 20 , the following restrictions have been laid down on loans and advances of a bank:

A bank cannot grant any loans or advances on the security of its own shares.
It cannot enter into any commitment for granting any loan or advance to or on behalf of any of its directors; any firm in which any of its directors is interested as partner, manager, employee, or guarantor; any company in which any of the directors of the bank is a director, managing agent, manager, employee, or guarantor; any company in which any of the directors of the bank holds substantial interest; or, any individual in respect of whom any of its directors is a partner or guarantor.
A bank cannot remit (mitigate or leave) the whole or any part of a loan or advance granted by it, without the previous approval of the Reserve Bank. Any remission without such approval shall be void and of no effect.

According to Section 22 , a banking company cannot carry on banking business in India unless it holds a licence issued in that behalf by the Reserve Bank. Before commencing banking business in India, every banking company shall apply in writing to the Reserve bank for a licence. Before granting any licence, the Reserve Bank has to be satisfied that the following conditions have been fulfilled:

The banking company is or will be in a position to pay its present or future depositors in full as their claims accrue.
The affairs of the company are not being or likely to be conducted in manner detrimental to the interests of its present or future depositors.
The general character of the proposed management of the company will not be prejudicial to the public interest or the interest of its depositors.
The company has adequate capital structure and earning prospects.
The public interest will be served by the grant of a licence to the company to carry on banking business in India.
Having regard to existing banking facilities and the potential scope for expansion of banks in the proposed area, the grant of licence would not be prejudicial to the operation and consolidation of the banking system with monetary stability and economic growth.
Any other condition, the fulfilment of which would be in the public interest or the interests of the depositors, in the opinion of the Reserve Bank.

The Reserve Bank may cancel a licence granted to a bank in the following circumstances:

if the bank ceases to carry on banking business in India; or
if the bank fails to comply with any of the conditions imposed upon it by the Act.

However, the aggrieved bank may appeal to the Central Government against the decision of the Reserve Bank for cancelling the licence, whose decision in the matter shall be final.

Section 23 provides that without obtaining the prior permission of the Reserve Bank, a banking company cannot open a new branch. It cannot change the location of an existing branch. The same restriction applies to opening or transferring branches outside India. However, a temporary branch may be opened for a, maximum period of one month for the purpose of affording banking facilities to the public on the occasion of an exhibition, a conference, or a ' mela ' or any other similar occasion, if the banking company already has a branch in that city, town, or village.

A banking company is required to observe and comply with the following requirements:

As per Section 25, every banking company shall maintain its assets in India at least 75% of its demand and time liabilities in India. It shall submit to the Reserve Bank a quarterly return of its assets and liabilities.
As per Section 26, every banking company shall submit an annual return of each calendar year to the Reserve Bank with the details of all accounts which have not been operated upon for 10 years.
As per Section 27, every banking company shall submit a monthly return to the Reserve Bank showing its assets and liabilities in India. The Reserve Bank has power to call for other returns and information which it may consider necessary or expedient.
As per Section 29, at the expiry of each calendar year, every banking company shall prepare a balance sheet and profit and loss account for that year in the forms set out in the Third Schedule or as near thereto as circumstances admit.
As per Section 30, the balance sheet and profit and loss account shall be audited by a person duly qualified to be an auditor of companies.
As per Section 31, the accounts, balance sheet and profit and loss account together with auditor's report shall be published in prescribed manner and three copies thereof shall be furnished as returns to the Reserve Bank, and as per Section 32, the same number of copies shall also be sent to the Registrar.
As per Section 33, banking companies incorporated outside India shall display at their principal offices and in every branch office in India, a copy of its first audited balance-sheet and profit and loss account, in a conspicuous place. Section 34A protects a banking company from being compelled to give confidential documents and information. Similarly, an employee of the bank cannot be compelled to do so (AIR 1983).

According to Section 35 , the Reserve Bank on its own or on being directed by the Central Government, can cause an inspection of any banking company and its books and accounts; may also cause a scrutiny of its affairs and books and accounts, and the officers of the company shall have to fully cooperate with it. The Reserve Bank shall supply a copy of its report on such inspection or scrutiny to the banking company, and to the Central Government if the inspection has been directed by her.

According to Section 36AD , any person must not obstruct the business of a banking company; must not hold within its office any demonstration which is violent or which prevents its normal business; and must not act in any manner calculated to undermine the confidence of the depositors in the banking company. Whosoever contravenes these provisions without any reasonable excuse, shall be punishable with imprisonment for a term which may extend to 6 months, or with fine which may extend to Rs. 1,000 or with both.

Section 36AE states that the Central Government has the power to acquire undertakings of a banking company if upon receipt of a report from the Reserve Bank, she is satisfied that the banking company has failed to comply with the Reserve Bank's policy in relation to advances or the directions given by it, or is being managed in a manner detrimental to the interests of its depositors, after giving a reasonable opportunity of showing cause against the proposed action. As per Section 36AG, compensation shall be given to shareholders of the acquired bank.

According to Section 37 , if a banking company is temporarily unable to meet its obligations, it may apply for a moratorium to the High Court. (Moratorium means a legally authorised postponement of fulfilment of an obligation). The High Court may make an order staying the commencement or continuance of all actions and proceedings against the company for a fixed period of time on such terms and conditions as it may think fit and proper. However, the total period of moratorium shall not exceed 6 months. The High Court shall forward a copy of its order of moratorium to the Reserve Bank. As per Section 38, the High Court can order the winding up of a banking company if it is unable to pay its debts, or if an application for its winding up has been made by the Reserve Bank.

The Reserve Bank may make an application for the winding up of a banking company:

If the banking company has failed to comply with the requirements concerning minimum paid-up capital and reserves, or has become disentitled to carry on banking business due to non-fulfilment of any of the licensing conditions; or has been prohibited from receiving fresh deposits by an order of the Reserve Bank; or has contravened any provision of the Banking Regulation Act; or
If in the opinion of the Reserve Bank a compromise or arrangement sanctioned by a Court cannot be worked satisfactorily with or without modifications; or the returns and information furnished to it disclose that the company is unable to pay its debts; or the continuance of the company is prejudicial to the interests of its depositors.

According to Section 44A , a banking company cannot be amalgamated with another banking company, unless a scheme containing the terms of such amalgamation has been placed in draft before the shareholders of each of such companies separately, and approved by a resolution passed by a 2/3rd majority of shareholders of each of the said companies, present either in person or by proxy at a meeting called for the purpose.

According to Section 49A , no person other than a bank shall accept deposits of money withdrawable by cheque.

According to Section 49B , a banking company can change its name if tie Reserve Bank has no objection to such change and the Central Government gives its approval to such change.

According to Section 52 , after consultation with the Reserve Bank, the Central Government may make rules to provide for all matters for which provision is necessary or expedient for the purpose of giving effect to the provisions of this Act and all such rules shall be published in the official Gazette.

Section 53 states that on the recommendation of the Reserve Bank, the Central Government may declare by notification in the official Gazette that any or all of the provisions of the Act shall not apply to any banking company or institution generally or for such period as may be specified.

According to Section 56 , the provisions of this Act shall apply to cooperative societies as they apply to banking companies, but subject to certain modifications.

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I. Law of Contract

1. nature and kinds of contracts.

Agreement under Contract Law: Meaning, Essentials, Types and FAQs
Contract : Meaning, Elements, Types and Purpose
Types of Contract | Based on Validity, Formation and Performance
Law of Contracts : Elements, Purpose and FAQs
Doctrine of Privity of Contract: Meaning, Exceptions and FAQs
Doctrine of Restitution: Meaning, Exceptions and FAQs
Difference between Agreement and Contract
Franchising Agreements: Meaning, Components, and Types
Master Service Agreement (MSA): Significance, Merits, Clauses and FAQs
Pre-Incorporation Contracts: Meaning, Legality and FAQs
Balfour Vs. Balfour: Case Analysis
How to Read a Contract in 7 Easy Steps?
Rental Agreements: Important Clauses and Format
Rental Agreements : Meaning, Importance, Procedure and Documents
Types of Legal Agreement
Difference between Under Contract and Pending Contract
Essentials of a Strong Contract : A Checklist
All about Termination of Employment Contracts in India

2. Offer and Acceptance

Proposal or Offer: Meaning, Legal Rules and Revocation
Acceptance: Meaning, Legal Rules and FAQs
Communication of Offer, Acceptance and Revocation

3. Consideration

Consideration: Meaning, Essentials and FAQs
No Consideration, No Contract : Exceptions and FAQs

4. Capacity of Parties

Capacity of Parties : Capacity to Contracts and Legal Requirements
Minor: Meaning, Minor's Agreements and Exception
Person of Unsound Mind: Meaning, Cases and Effects
Disqualified Persons under Law: Meaning and Disqualifications

5. Free Consent

Free Consent : Meaning, Elements and FAQs
Coercion under Indian Contract Act : Case Laws and Effects
Undue Influence : Meaning, Presumption and Effects
Difference between Coercion and Undue Influence
Misrepresentation : Meaning, Cases & Effects (Indian Contract Act)
Fraud: Meaning, Cases and Effects
Difference between Fraud and Misrepresentation
Mistake under Indian Contract Act, 1872

6. Legality of Object and Consideration

Consideration: Meaning and Unlawful Considerations
Unlawful Consideration in Part & Illegal Agreements (Indian Contract Act)

7. Void Agreements

Void Agreements : Meaning and Expressly Declared Void Agreements
Difference between Void and Voidable Contract
Difference between Void and Illegal Agreement

8. Contingent Contract

Contingent Contract: Meaning, Elements and Enforcement

9. Performance of Contracts

Performance of Contract under Indian Contract Act
Doctrine of Frustration : Meaning, Applicability, Conditions, and Effects

10. Discharge of Contract

Discharge of Contract : Meaning, Modes and Exceptional Cases

11. Quasi-Contracts

Quasi Contracts: Meaning, Features and Types

12. Remedies for Breach of Contract

Remedies for Breach of Contract: Meaning, Legal Remedies and FAQs
Consequences of Breach of Confidentiality

13. Indemnity and Guarantee

Contract of Indemnity: Meaning & Features (Indian Contract Act)
Contract of Guarantee: Meaning & Features (Indian Contract Act)
Difference between Contract of Indemnity and Guarantee
Difference between Guarantee and Warranty

14. Bailment and Pledge

Contract of Bailment : Meaning, Features, Duties and Rights
Contract of Pledge : Meaning, Features, Duties and Rights
Contract of Pledge: Meaning and Important Cases
Difference between Contract of Bailment and Contract of Pledge
Agent: Definition, Meaning, Rules and Kinds
Contract of Agency : Meaning, Characteristics, Methods and Types
Extent of Agent's Authority: Indian Contract Act
Duties & Rights of Agent: Indian Contract Act 1872
Rights, Duties & Liabilities of Principal: Indian Contract Act 1872
Termination of Agency : Indian Contract Act, 1872
Difference between Agent and Servant

II. Law of Sale of Goods

16. contract of sale of goods.

Contract of Sale of Goods: Meaning, Definition and Essentials
Difference between Sale and Agreement to Sell
Kinds of Goods under the Sale of Goods Act, 1930

17. Conditions and Warranties

Conditions under Sale of Goods Act, 1930
Warranty: Meaning, Elements and Types
Difference between Condition and Warranty

18. Transfer of Property

Transfer of Property under Sale of Goods Act 1930
Transfer of Title by Non-Owners: Meaning and Rules

19. Performance of Contract of Sale

Delivery : Meaning, Modes & Rules (Sale of Goods Act)

20. Rights of Unpaid Seller

Rights of Unpaid Seller : Sale of Goods Act 1930
Buyer's Rights Against Seller and Auction Sale

III. Law of Partnership

21. definition and nature of partnership.

Indian Partnership Act, 1932: Meaning, Essential Requirements and Kinds
Partnership | Meaning and Features of Partnership

22. Formation of Partnership

Partnership Deed : Aspects and Registration
Types of Partnership
Non- Registration of Partnership Firm: Effects and Exceptions

23. Rights, Duties and Liabilities of Partners

Rights & Duties of Partners (Law of Partnership)
Relations of Partners to Third Parties (Law of Partnership)

24. Dissolution of Partnership Firm

Dissolution of a Partnership Firm: Meaning, Modes of Dissolution, Modes of Settlement of accounts (Section 48)

IV. Law of Negotiable Instruments

25. negotiable instruments.

Negotiable Instruments Act 1881 : Definition, Kinds & Features
Promissory Note: Features and Parties
Bills of Exchange: Meaning, Features, Parties, and Advantages
Difference between Bills of Exchange and Promissory Note
Types of Bills of Exchange
What is a Cheque – Types, Features, Chequebook, Advantages
Dishonour of Cheque : Meaning, Essentials, and Legal Implications
Types of Instruments under Negotiable Instruments Act
Maturity of Negotiable Instruments : Meaning, Rules, and Payment

26. Parties to Negotiable Instruments

Holder and Holder in Due Course: Meaning, Conditions and Privileges
Capacity of Parties under Negotiable Instruments Act
Liability of Parties to Negotiable Instruments: Negotiable Instruments Act, 1881

27. Presentment of Negotiable Instruments

Presentment For Acceptance: Negotiable Instruments Act
Presentment for Sight & Payment: Negotiable Instruments Act

28. Negotiation of Negotiable Instruments

Negotiation of Negotiable Instruments: Definition, Meaning and Modes
Negotiation by Unauthorised Parties: Negotiable Instrument Act, 1881

29. Dishonour and Discharge of Negotiable Instruments

Dishonour of Negotiable Instruments: Types, Effects & Notice
Discharge of Negotiable Instruments : Meaning, Types and Concepts
Difference between Dishonour and Discharge of Negotiable Instrument

30. Crossing and Bouncing of Cheques

Crossing of Cheques (Negotiable Instruments Act)
Bouncing of Cheques: Meaning, Remedies, Offences and Case Laws

V. Law of Information Technology

31. information technology act, 2000.

Information Technology Act, 2000: Elements, Applicability and Amendments
Difference between Electronic Signature and Digital Signature
Electronic Governance : Information Technology Act, 2000
Electronic Contracts: Meaning, Legal Validity and Kinds
Electronic Payment System: Types, Advantages, Disadvantages and Regulatory Bodies
Legal Issues and Consideration in E-commerce
Digital Signature, Electronic Signature & Authentication of Electronic Records

VI. Law of Consumer Protection

32. consumer protection act, 1986.

Consumer Protection Act 2019 : Features, Significance, Rights and Provision

VII. Law of Insurance

Viii. law of insolvency, 37. objects and scope of the insolvency law.

SARFAESI Act: Introduction, Procedure, Penalties and FAQs

38. Procedure of Insolvency

Adjudication - Meaning, Definition, Process and Examples

IX. Law of Arbitration and Conciliation

41. general provisions regarding arbitration.

Alternative Dispute Resolution (ADR): Meaning, Types and FAQs

42. Arbitral Tribunal

Arbitral Tribunal: Appointment, Composition, Jurisdiction and FAQs
List of 7 Famous Arbitrators Who Made an Impact

44. Conciliation

Difference between Mediation and Conciliation

Banking Regulation Act, 1949: Features, Objectives and Provisions

Factories Act, 1948: Provisions, Advantages, Disadvantages and FAQs
Employees' Compensation Act, 1923: Rights, Liability, and Compensation
Maternity Benefit Act, 1961: Objectives, Provisions, Impact and Challenges
The Apprentices Act 1961: Meaning, Obligations, Legal Status and FAQs
Payment of Gratuity Act, 1972: Features, Advantages, Disadvantages and FAQs
Industrial Disputes Act, 1947 : Objectives, Amendments, Provisions & FAQs
Provident Fund: Types, Applicability, Eligibility and FAQs
Child Labour Legislation in India: Features, Evolution, Amendments, and Ongoing Challenges
Difference between Payment of Wages Act, 1936 and Minimum Wages Act, 1948
Difference between Strict Liability and Absolute Liability
10 Common Signs of Child Abuse : What to Look For
Internet Safety for Kids: 10 Legal Tips for Parents
10 Steps to file an FIR
10 Steps to Apply for Mutual Consent Divorce
10 Top Law Colleges in India in 2023
Legal Aspects of Buying a Home : 10 Step-by-Step Guide
10 Factors Property Owners Must Consider
10 Must Have Skills to get a Good Legal Job in India
10 Best Certificate Courses for Law Students in India
7 Child Custody Tips for Parents Going Through Divorce
Top 7 Career Options in Law in India in 2024
5 Steps to Take if You Are a Victim of Domestic Violence
Juvenile Delinquency | Meaning, Causes, Types and FAQs
Professional Ethics in Law: Legal Framework and Advantages
Nidhi Companies: Meaning, Benefits, Rules & Registration
Medical Malpractice: Signs, Prevention & Legal Recourse
How to Send a Legal Notice?
How to Start Studying Law : Step-by-Step Guide for Indian Students
Role of Cryptocurrencies in Money Laundering : Myth vs Reality
How can you become Advocate on Record (AOR) in Supreme Court of India?

What is Banking Regulation Act, 1949?

Banking Regulation Act, 1949 regulates and supervises the banks that have been established in India. India’s Banking Regulation Act, 1949 makes laws concerning banking companies in India. This acts as in charge of regulating and managing the operations of all banking corporations in India. The Banking Regulation Act, 1949 is an act for regulating the banks in India.

The RBI is the governing body that regulates and supervises the banks. The introduction of Section 56, gave the Reserve Bank of India the authority to regulate its operations in the same way other banks in the country are functioning. This Act also gives RBI, the authority to license banks, regulate shareholder voting and shareholding, oversee board and management appointments, and set auditing instructions. RBI is also involved in mergers and liquidations of the banks.

Key Takeaways: It was observed that earlier provisions regulating banking firms in India were insufficient and unsatisfactory. It was determined that India required a specialized law to address banking operations comprehensively. The main features of the Banking Regulation Act, 1949 include limiting dividend payments, establishing minimum capital levels, preventing non-banking entities from accepting repayable deposits, and prohibiting trading to eliminate non-banking asset threats and comprises 56 provisions. In addition, a comprehensive overview of banking would include all entities that accept deposits for lending or investing, whether or not they are repayable on demand, come under the authority of this law.

Table of Content

Features of Banking Regulation Act, 1949

Objectives of the banking regulation act, 1949, important provisions of the banking regulation act, 1949, offences and punishments under the banking regulation act, 1949, banking regulation act, 1949- faqs.

The Act has been divided into five parts and comprises 56 sections. The main features of the act are mentioned below:

It prevents non-banking enterprises from taking demand-repayable deposits.
It restricts trading related to non-banking entities to remove potential risks.
It also establishes minimum capital requirements for the bank.
It limits dividend payouts of the bank.
This act provides the legal framework for banks registered outside of India’s provinces.
It helps in implementing an extensive licensing program for banks and their branches.
It determines a unique format for the balance sheet and gives the Reserve Bank authority to call for periodic reports.
This act gives the Reserve Bank the right to examine a bank’s books of accounts.
Enabling the central government, the authority to take action against banks that conduct in a way that harms depositors’ interests.
A clause that calls for the Reserve Bank of India to communicate with banking institutions regularly.
This act also establishes a quick liquidation procedure for the bank.
It increases the capability of the Reserve Bank of India to assist banking institutions when emergencies arise.
To prevent banking companies from engaging in fierce competition, this act regulated the opening of new branches and the relocating of existing ones.
To ensure the balanced growth of banks through a licensing system and to stop the indiscriminate openings of additional branches.
To assign RBI the authority to appoint, remove, and reappoint the chairman, directors, and bank officers. This might help in the effective and smooth functioning of Indian banks.
To safeguard the interests of depositors and the general public by implementing certain measures which include maintaining ratios for cash reserve and liquidity reserve. This enables the bank to meet the demand of depositors.
To strengthen India’s financial system by mandating the merging of weaker banks with senior banks.
To include certain clauses that can limit the ability of foreign banks to invest funds from Indian depositors outside of India.
To assist banks in quick and easy liquidation when they are unable to continue or merge with other banks.

1. Definitions

The Banking Regulations Act, 1949 provides definitions for several terminology, including branch offices, banking companies, and banking. Under this act, a company engaged in banking activities within India is called a Banking Company . Bank includes the acceptance of public deposits of money for lending or investment that can be repaid on demand. As per the State Bank of India (Subsidiary Banks) Act, 1959 , subsidiary banks are defined in the same way. An advance or loan secured against the security of assets is a secured loan or advance.

2. Business which can be undertaken by the Banking Companies

A banking company may engage in the following activities under Section 6(1): borrowing or lending money; purchasing or disposing of bills of exchange , promissory notes , coupons, drafts, bills of lading, railway receipts, warrants, and debentures; trading in stocks and funds; and buying or selling foreign exchange bonds, debentures; managing agency activities such as clearance and shipment of goods; managing guarantee and indemnity, etc.

3. Prohibition of Trading

As per Section 8 of this Act, Trading is not permitted. Banking companies are prohibited from engaging in the purchasing, selling, or bartering of products unless they are selling goods held in its security. In addition, the bank is prohibited from trading, buying, selling, or bartering anything other than bills of exchange that are obtained through negotiation or collection.

4. Management of Bank

As specified by Section 10 of the Act, the bank should not employ managing partners or be employed by them. An individual whose compensation is dependent on the company’s profitability or who has been declared insolvent should not be employed by the bank. A minimum of 51% of the board’s members must have professional expertise in fields such as accounting, small-scale industry, banking, cooperatives, agriculture, rural economy, economics, and finance. In addition, the director’s tenure should not exceed eight years.

5. Minimum Paid-up Capital and Reserves

According to Section 11 , a banking company’s paid-up capital should not be more than Fifteen Lakhs if it was incorporated outside of India, and Twenty Lakhs if it holds its principal place of business in Calcutta, Bombay, or both.

The banking company is required to deposit 20% of its annual profit. The minimum paid-up capital required for a company that is incorporated in India and has branches in multiple states is five lakhs of rupees. If the company’s place of business is located in Bombay, Calcutta, or both, it must have ten lakhs of rupees as minimum paid-up capital. If a company maintains all of its branches within the same state, none of which are located in Bombay or Calcutta, the paid-up capital requirement is one lakh rupees for the company’s principal place of business, ten thousand rupees for each branch located within the same district as the principal place of business, and twenty-five thousand rupees for each branch located outside of the same district. The company’s paid-up capital and subscribed capital cannot be less than half of the authorised capital or subscribed capital, respectively. The bank can not place a charge on unpaid capital. A minimum of twenty percent of the company’s annual profits must be transferred to the Reserve Fund. The banking company is required to notify the RBI of the Reserve Fund’s allocation within twenty-one days of the date of appropriation.

6. Limitations on the Nature of Subsidiary Companies

A Banking Company should not establish a subsidiary unless the company is being used for a business venture or the Reserve Bank of India has granted written permission. The banking company can hold up to 30% of the company’s paid-up share capital or its own paid-up capital.

7. Licensing of Banking Companies

Banking companies are not permitted to conduct business in India unless they hold an RBI license. The RBI can grant the license after the books of accounts have been inspected. If the company stops conducting banking operations in India, RBI has the authority to terminate the license.

8. Opening of New Branches and Transfer of Existing Branches

A Banking Company must have RBI approval before starting a new branch or moving an existing branch to a new city, town, or state. Without RBI’s prior approval, no banking company with its headquarters in India may operate a new branch outside of the country. On the other hand, a new branch may open for only a short period of not more than a month.

9. Accounts and Balance Sheet

On the last working day, the banking companies must create a balance sheet and a profit and loss account.

10. Inspection

RBI has the authority to order a banking company inspection and is required to send the company a report. The directors must bring all books, accounts, and documents related to the banking company must be submitted for investigation.

11. RBI’s Authority to give Instructions

If RBI believes that giving instructions to a banking company is in the public interest or will prevent the company from conducting harmful business, it may do so regularly.

12. Prohibition of Specific Operations by the Banking Company

The banking company is not allowed to prevent anyone from entering its location of business. It is not permitted to keep anything violent in the workplace. If the bank violates any of the mentioned acts, it is accountable under Section 36AD.

13. Powers and Functions of RBI

The powers of RBI are mentioned in Section 36 . The Reserve Bank has the authority to advise banking companies and prevent them from engaging in certain transactions. Further, as per Section 18, it can help the banking institution by providing advances or loans. Reserve Bank of India can also order the banking company to organise a meeting of its directors to consider company issues. It may also designate officials to look after the operations of a banking company.

14. Business Suspension

The financial company may request a pause in operations from the High Court if it is unable to fulfill its obligations temporarily. The High Court may approve the pause in action and put an end to the proceedings temporarily. The pause in operations cannot last more than six months. The RBI report certifies that the banking company will be able to pay its debts is the only way that makes the banking company valid.

15. Acquisition of the Undertakings of Banking Companies

The central government must establish banking companies after consultation with the Reserve Bank of India. The process can be completed once the financial businesses have been given the chance to show their reasons for carrying the business.

16. Payment of Dividends

Banking companies must pay dividends only when all the capital expenses have been paid. Dividends must not be paid until the value of investments in approved securities, shares, bonds, or debentures has declined and is written off.

17. Reserve Fund

Every single banking company is required to establish a reserve fund and allocate at least 20% of its profits to it. If the bank appropriates any funds from the reserve fund, it must inform the Reserve Bank.

18. Power of Central Government with Respect of the Liquidation of Companies

If the banking companies have violated the Insolvency and Bankruptcy Code, of 2016 the Central Government may direct the RBI to start the process of insolvency.

The Act contains several provisions which describe the consequences of violation of the act, including fines and imprisonment of the same. The following is mentioned in Section 46:

In case a person purposefully presents false information or promotes fraudulent acts, they risk imprisonment of up to three years and a fine of up to one crore rupees.
In case a person does not share the records or documents or refuses to answer the inquiries of the inspection officer, then a fine of up to twenty lakh rupees, and another fine of fifty thousand rupees in case of continuing offence.
In case the banking company has received any deposits illegally, all of the directors will be held accountable and charged twice the value of the deposits made with the banking company.
In case there is a default and it is caused by the banking company, or by directors’ negligence, then the directors or the secretary will be held responsible for the same.

The Banking Regulation Act, 1949 is an act that governs all banking companies in the countries. It is now applicable to cooperative banks after an amendment. It provides controller, supervisor, and regulator positions to the Reserve Bank of India. The act aims to protect the interests of depositors by increasing the liabilities of the bank. Thus, the act aims in the proper growth of the banking companies which was lacking earlier.

What is the main objective of Banking Regulation Act, 1949?

The main objective is to regulate and manage the operations of all banking corporations in India.

Who has the authority to issue instructions to the banks in India for audits?

The Central Bank or Reserve Bank of India has the authority to issue instructions to the banks in India for audits.

Describe the roles that RBI has to perform under the Banking Regulation Act of 1949?

As per Banking Regulation Act, 1949, RBI acts as a regulator, controller and supervisor. It generates license to various banks, issue instructions to the banks for audits, regulates the functioning of the banks and if required, facilitates quick mergers and acquisitions.

Who is known as the Father of the Bank?

The father of the bank is Maidavolu Narasimham . He established first bank and was also appointed as the 13 th governor of the Reserve Bank of India.

What is the enactment date of the Banking Regulation Act, 1949?

It came into force on 10 March, 1949.

References:

Ministry of Finance
National Bank For Agriculture And Rural Development

Note: The information provided is sourced from various websites and collected data; if discrepancies are identified, kindly reach out to us through comments for prompt correction.

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Salient features of Banking Regulation Act 1949
The law relating to banking in India today is the outcome of gradual process of evolution before 1949. The Indian companies Act 1913 contained special provisions relating to banking companies, which were inadequate and were subsequently incorporated in the comprehensive legislation passed in 1949 under the name of Banking Regulation Act 1949.
Banking Regulation Act, 1949
The Reserve Bank of India (RBI) is the governing body for regulating and supervising the banks. Banking Regulation Act, 1949 is an Act that provides a framework for regulating the banks of India. The Act came into force on 16th March 1949. This Act gives RBI the power to control the behaviour of banks. This Act was passed as Banking Companies ...
Know about the Banking Regulation Act, 1949 by unacademy
The Banking Regulation Act, 1949 or rbi Act 1949 is a regulation in India that manages all banking firms in India. Passed as the Banking Companies Act 1949, it came into power from Sixteen March 1949 and changed to Banking Regulation Act 1949 from first March 1966. It has been in Jammu and Kashmir since 1956.
Section 5 in The Banking Regulation Act, 1949
Union of India - Section Section 5 in The Banking Regulation Act, 1949 5. Interpretation. [In this Act] [Substituted by Act 55 of 1963, Section 6, for " (1) In this Act" (w.e.f. 1.2.1964).], unless there is anything repugnant in the subject or context,-[ "approved securities" means the securities issued by the Central Government or any State Government or such other securities as may be ...
The Banking Regulation Act, 1949
The Banking Regulation Act, 1949 Act 10 of 1949. Published on 10 March 1949 Commenced on 10 March 1949 [This is the version of this document from 29 September 2020.] [Note: The original publication document is not available and this content could not be verified.] ... [ In the case of a banking company incorporated outside India- ...
Banking regulation act,1949
2. A Kasinathan Vs The Branch Manager CASE:A Kasinathan Vs the Branch Manager Court : Before Chennai High Court Judge : V. RAMASUBRAMANIAN, J. Decided On:Dec-12-2011 Act: Banking Regulation Act,1949 Sections : Sec 21,Sec 35A Petitioner: A Kasinathan Respondent: Branch Manager (Canara Bank) Abstract: The petitioner passed BBA course from the American College, Madurai in the year 2007.
Section 14A in The Banking Regulation Act, 1949
Section 14A in The Banking Regulation Act, 1949. 14A. [ Prohibition of floating charge on assets. [Inserted by Act 33 of 1959, Section 9 (w.e.f. 1.10.1959).] (1) Notwithstanding anything contained in section 6, no banking company shall create a floating charge on the undertaking or any property of the company or any part thereof, unless the ...
PDF The Banking Regulation Act, 1949
—(1) This Act may be called the Banking 3[Regulation] Act, 1949. 4[(2) It extends to the whole of India 5(* * *]. (3) It shall come into force on such date6 as the Central Government may, by notification in the Official Gazette, appoint in this behalf. 2. Application of other laws riot barred.—The provisions of this Act shall be in addition
Banking Regulation Act, 1949: Features, Objectives and Provisions
The Banking Regulation Act, 1949 is an act for regulating the banks in India. The RBI is the governing body that regulates and supervises the banks. The introduction of Section 56, gave the Reserve Bank of India the authority to regulate its operations in the same way other banks in the country are functioning.
PDF Kansas Bankers Association
A 2022 International Monetary Fund study on Dodd-Frank supports that banks of all sizes are subject to extensive levels of regulation which have notable effects on bank customers and the economy. The effect of this regulatory landscape hurts bank consumers and hurts businesses of all sizes. The Call Report Should Continue to be Simplified
PDF The Banking Regulation Act, 1949
ACT NO. 10 OF 19491 [10th March, 1949.] An Act to consolidate and amend the law relating to banking 2***. WHEREAS it is expedient to consolidate and amend the law relating to banking 2***; It is hereby enacted as follows:— PART I PRELIMINARY 1. Short title, extent and commencement.—(1) This Act may be called the Banking 3[Regulation] Act, 1949.