ICAI IndoreDt.24.01.2014Legal and Regulatory Aspects

ContentsBanking Law & PracticeBanking Regulation ActBanking Laws (Amendment) Act, 2012Types of charges over securities ( Transfer of Property Act, Indian Contract Act, SARFAESI) Credit Information Companies (Regulation) Act, 2005Negotiable Instruments ActAnti Money Laundering & Know Your CustomerKey Aspects and elements of AML KYC

Banking Law and PracticeSeveral enactmentsBanking Regulation Act, 1949Reserve Bank of India Act, 1934Banking Companies (Acquisition and Transfer of Undertakings) Act,1970 & 1980SBI Act, 1955 & SBI (Subsidiary Banks) Act, 1959RRB Act, 1976Companies Act, 1956Negotiable Instruments Act, 1881Prevention of Money Laundering Act, 2002Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002Credit Information Companies ActRecovery of Debts due to BanksTransfer of Property Act

Regulations

Widely accepted practices

Banking Regulation Act, 1949

Banking Regulation Act, 1949Definition of banking & banking company

Licensing

Permitted business

Prohibited business

RBIs powers

Control over management

DefinitionsBanking means accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise{Section 5(b)}

Banking companymeans any company which transacts the business of banking in IndiaExplanation excludes manufacturing and trading company{Section 5 (c)}

Use of the word bank, banker, banking or banking company - Section 7

Permitted businessCan carry on business permitted u/s 6Borrowing, lending, bill discounting, etc.Buying, selling and dealing in bullionBuying and selling of foreign exchangeTravellers chequesLetters of creditUnderwriting and dealing in shares, debentures, etc.Safe depositCollecting and transmitting of money and securitiesUndertaking/ executing trustsActivities that are incidental/ conducive to the promotion/ advancement of its businessCentral Govt. empowered to notify permitted business

Act overrides memorandum, articles, etc.

Prohibited businessTrading prohibited vide Sec 6

Non-banking assets Sec 9Immoveable property can only be held for own useOther disposed within 7 yearsRBI can give additional 5 year extension

Restriction on nature of subsidiary companies Sec 19Permitted business u/s 6Carrying on banking outside IndiaCredit information businessOther business with RBI and CG approval

LicensingRBI empowered to issue & cancel licencesSection 22 criteriaSolvencyAffairs/ management not detrimental to depositor and public interestAdequate capital structure and capital prospectsPublic interest will be servedGrant of licence not prejudicial to operation and consolidation of banking systemForeign banks home country does not discriminate against Indian banksOther conditions specified by RBI

New bank licencing requirementsBranch licencing u/s 23

ReturnsSection 24Monthly return of assets in IndiaDTL on reporting FridaySection 25Quarterly return of assets and liabilities at the close of business on the last Friday of every quarterSection 27Monthly return on Asset & Liability position as on last FridayRBI empowered to direct banks to furnish information within a specified time frameRRBs also need to submit a copy to NABARDSection 26Return of unclaimed depositsSection 31Three copies of annual returns to be submitted to RBI

InspectionSection 35Inspect booksAlso on direction of CGCopy of report to be given to bankEmpowers RBI Inspecting officer to examine bank officials under oathAlso empowers RBI to carry out a scrutiny

Powers of RBISec 35A Power to give directionsSec 35B Prior RBI approval required for appointment of Chairman, MD, CEO or directorSec 36 Further powers and functions of RBICaution/ give advice regarding certain transaction/ class of transactionsCall for meeting of directors, depute its officer to board meeting, appoint observer, etcReport on Trend and Progress in Banking in the country

Powers of RBI Control over managementSec 36AA Power to remove managerial and other persons from officeAppeal lies with Central GovernmentSec 35B Power to appoint additional directors

Other important provisionsSec 14 Prohibition of charge on unpaid capitalSec 15 Prohibition on payment of dividend unless intangible assets written offSec 17 Creation of reserve fundSec 18 Maintenance of cash reserve ratioSec 20 Restrictions on loans and advancesSec 24 SLR

Applicability of BR ActNationalised BanksBanking Companies (Acquisition and Transfer of Undertakings) Act,1970/1980; Section 51 of BR Act makes specific sections applicable

Regional Rural BanksRegional Rural Banks Act, 1976Section 51 of the BR Act

Cooperative BanksCooperative Societies Act. 1912 or the respective Co-operative Socieities Act of the state concernedPart V of the B R Act BR (AACS) Act

Some important RBI instructions in context of BR ActMaster CircularLoans & Advances Statutory and other restrictionsBranch authorisationCash Reserve Ratio and Statutory Reserve Ratio

Others Restriction on drawdown of reservesGuidelines on declaration of dividend

Banking Laws (Amendment) ActPassed by Parliament in Dec 2012Some highlightsVoting rights26% from existing 10% in private sector banks10% from existing 1% in public sector banksPrior approval for voting rights/ shareholding more than 5%Power to RBI to supersede entire board of banksPower to call for information from associate and group companiesDepositor Education and Awareness FundPrimary cooperative societies to be licenced by RBIPreference sharesNaionalised banks can issue bonus sharesJoint inspections of associates with sectoral regulator

Laws relating to securities and modes of chargingTransfer of Property Act, 1882Indian Contract Act, 1872SARFAESI

Overview of chargesCreation of a right in favour of the creditors

Nature of securityTypes of securityKind of ChargeDefined in ActImmoveable propertyLand and buildingMortgaageSec 58, Transfer of Property ActActionable claims (i.e. unsecured debts)Book debts, term deposit receipts, etc.AssignmentSec 130, Transfer of Property ActMoveable property/ goodsPlant & machinery, stocks, vehicles, etc.Pledge/ hypothecation/ lienPledge-Sec 172 Indian Contract ActHypothecation Sec 2(n) SARFAESIPaper securitiesShares, debentures, MF, bondsLienSec 170 and 171Indian Contract ActPersonal guaranteePromoters & 3rd party guaranteesPersonal liabilitySec 126 Indian Contract Act

Kinds of charges Fixed v/s FloatingFixed charge created on properties such as land and buildings, plant and machineryIdentity does not changeCredit consent required for disposalDebtor retains ownership and possession

Floating chargeCreated on assets that undergo changeSecurity allowed to be used in ordinary course of business unless charge crystallises

Kinds of chargesPari Passu chargeSeveral creditors- typically in consortium accountsEqual priority

Exclusive chargeTo one creditorNo intervention of other creditors

First chargeFirst right over the proceeds from the security charged

Second chargeRights subject to those of first charge holder

MortgageDealt with in Transfer of Property Act, 1882A mortgage is the transfer of interest in specific immoveable property, for the purpose of securing the payment of money advanced or to be advanced by way of loan, on existing or future debt or the performance of an engagement which may give rise to pecuniary liability- Section 58TypesSimpleConditional saleUnsufructuary mortgageEnglish mortgageEquitable MortgageAnomoalous morgage

Simple MortgageWithout delivering possession of the mortgaged property, the mortgager binds himself personally to pay the mortgage money and agrees, expressly or impliedly, that in the event of his failing to pay according to his contract, the mortgagee shall have a right to cause the mortgaged property to be sold by a decree of the court in a suit and the proceeds of the sale to be applied so far as may be necessary in payment of the mortgage money [Sec 58(b)]Intervention of court requiredMortgagee has no right to get any payments out of the rents and produce of the mortgaged propertyMortgagee not put in possession of the propertyRegistration is mandatory

Conditional SaleThe mortgager ostensibly sells the mortgaged property on the condition that: (a) on default of payment of the mortgage money on a certain date, the sale shall become absolute, or (b) on such payment being made the sale shall become void, or(c) On such payment being made, the buyer shall transfer the property to the seller [Sec 58(c)]Sale is ostensible not realIf money not paid ostensible sale shall become absolute Court decree requiredNo personal liability for repayment of the loan

Unsufructuary mortgagemortgage transaction in which the mortgager delivers possession expressly, or by implication binds himself to deliver possession of the mortgaged property to the mortgagee, andAuthorises the mortgagee to retain such possession until payment of the mortgage money and to receive the rents and profits accruing from the property or any part of such rents and profits and to appropriate the same in lieu of interest, or in payment of the mortgage money, or partly in lieu of interest and partly in payment of the mortgage money [Sec 58(d)]Mortgagee in actual legal possession of the property, till dues are repaidMortgage has the right to receive rents and profits accruing from the propertyNo personal liability of the mortgagerNo time limit specified

English mortgagemortgagee binds himself to repay the mortgaged property absolutely to the mortgagee, but subject to the provision that he will retransfer it to the mortgagee upon payment of the mortgage money as agreed [Sec 58(e)]Personal covenant to pay on a specified date notwithstanding the absolute transfer of property to the mortgageeAbsolute transferSubject to reconveyance in event of repaymentCourt decree for sale

Equitable mortgagewhere a person delivers to a creditor or his agent documents of title to immoveable property, with the intent to create a security thereon, the transaction is called a mortgage by deposit of title deeds [Sec 58(f)]

Deposit of title deed with intention to secure debtOriginal deed not required but recommendedSaves on stamp dutyDeposit at notified places onlyIndependent of location of the property

Anomalous mortgagea mortgage which is not a simple mortgage, a mortgage by conditional sale and Unsufructuary mortgage and English mortgage or a mortgage by deposit of title deeds within the meaning of this section [Sec 58(g)]

Should satisfy the basic definition of mortgageShould not fall in the earlier categoriesUsually a combination of two mortgages

Mortgages- Other key aspectsRegistration requirementsRegistration required for mortgages other than equitable mortgage Sec 59Indian Registration Act- Sec 23 - required within 4 months of executionCompanies Act, 1956-Sec 125- within 30 days of execution

Priority of mortgagesFirst in point of time has better title Sec 48Amongst registered instruments- date of executionRegistered has priority over unregisteredException is deposit of title deeds

Mortgages-Other key aspectsEnforcement Code of Civil procedureJurisdiction based on location of propertyPreliminary decreeFinal decreeSale

Which Mortgage would you prefer?

MortgagePersonal LiabilityPossessionSimple MortgageConditional SaleUnsufructuary MortgageEnglish MortgageEquitable Mortgage (Court decisions)(Deposit of title deeds)

AssignmentTransfer of actionable claimClaim to debt other than debt secured by mortgage of immoveable propertyHypothecation/ pledge of moveable property not in possessionKey featuresShould be in writingDue notice to be given to the debtorAssignor cannot give better titleEg LIC policies used as security

PledgePledge is the bailment (delivery) of goods as security for payment of a debt or performance of a promise (u/s 172 of Indian Contracts Act)Key aspectsDelivery of goodsNeed not be physical deliveryMay be constructive delivery eg handing over keys of godownCan only be on existing goods- not on future goodsPawnor borrower who gives the goods as securityPawnee- lender who takes the goods as securityOwnership retained with pawnorPossession with pawneePossession may be parted with against Trust ReceiptRight to retain or sell goods where pawnor makes default in paymentNotice to sell required to be givenRight of pledge prevails over any other dues including Government dues except workers wages

HypothecationDefined in SARFAESI, 2002 (Sec 2(n))Charge upon moveable propertyExisting/ futureWithout delivery possession with borrower

DrawbacksRisk of fraud- multiple charges on same propertyErosion of security value

PrecautionsPeriodic stock statementsRegistration of chargeNotice of chargeInsurance of property

LienGeneral LienCreditors right to retain property of debtorPossession in ordinary course of businessLimited to possession of property not to sell

Bankers lienGeneral lien+ right to sellApplicable to negotiable instruments and credit balancesNot applicable to safe deposit, for sale

Other aspects relating to ContractsProposal and acceptanceConsiderationExemptionFree consentCapacity to contractSound mindNot disqualified from entering into a contractMinor contract

Stamping of documentsStamp duty tax levied on documentsOriginated in Netherlands 1624France (1654), Denmark (1657), Prussia (1682)Key aspectsAmount of dutyType of stamp usedCancellation of stampTime of stamping and executionPlace of stamping and executionConsequencesAdmissibility as evidenceAdjudication

Law of limitationPeriod within which suit can be filedBars to remediesOriginal right may continue to be exercisableRight of action revived byFresh set of documentsAcknowledgement of debtWriting, signed, stamped and addressed to lenderPart payment authorised by the borrower

Power of AttorneyTypesGeneral v/s specialRegistration of power of attorneyPrecautionsScope of powersAgent acting within the scope of powersConfirmation of validity

SARFAESI Act, 2002Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002CoverageSecuritisation and reconstruction of financial assetsEnforcement of security interest without court interventionCentral Registry

SARFAESI - CoverageEffective since June 21, 2002Retrospective coverageApplicable to whole of India including J&KAlso covers notified Housing Finance CompaniesSec 31Lien and pledgeAircrafts, shipping vesselsConditional sale, hire purchase, contract where no security interest createdFinancial asset

SARFAESI Securitisation/ Reconstruction CompaniesRegistration with RBIGuidelines issued by DNBSMinimum owned fund of Rs100 crore/ 15% of financial assets to be acquired whichever is lower

Acquisition of financial assetsScheme wiseFunded by investors QIBsIssuance of Security ReceiptsManaged by trust

SARFAESI Enforcement of security interestNo need for court interventionOverriding effect over provisions of Transfer of property ActNotice mandatory60 days noticeDetails of amount payable and secured asset intended to be enforcedBorrower prohibited from transferring assetsSC Guidelines in Mardia caseBorrower can raise objectionsBank to apply mind while answering objectionsResponse to borrower within one weekRejection of objections cannot be appealed to DRTCan appeal to DRT deposit of 50% of the amount dueCan seek help of District Magistrate/ Chief Metropolitan Magistrate

SARFAESI Enforcement of security interestRecourse available to lenderPossession of secured assetManagement of secured assetAppoint person as manager of secured assetsRequire from any person who has acquired the secured asset from the borrower to pay the amount due to the extent of the secured assetAppropriation of proceedsExpenses->Dues->Balance to debtorIf winding up dues of workman have pari passu chargeConsortium accounts multiple secured creditorsCreditors representing of outstanding dues have to agreeRecent amendment- bank may purchase at auction [13(5A)]

SARFAESI Enforcement of security interestSafeguardsInventory of property taken into possessionTake care of property as owner of ordinary prudence insure if necessaryExpedite sale if subject to speedy decayPossession noticeaffixation at outer door/ conspicuous placePublication in 2 leading newspapers including one vernacularAuction30 days notice publication in 2 leading newspapers incl. vernacularValuation to fix reserve priceAppeal to DRT - CompensationWithin 45 days of measures being initiated50% to be deposited- DRT may reduce to 25%

SARFAESI - CERSAISec 25 Company promoted by Government & PSU banksMaintains registry of Securitisation of financial assetsReconstruction of financial assetsCreation of security interestsRegistration additional not substitute for existing requirementsRecords available for searchMinimisation of frauds due to multiple borrowing on same security

Recovery of Debts due to Banks and Financial Institutions Act, 1993CoverageApplicable to whole of India except J&KDebt > Rs. 10.00 lakhs

Constituted Debt Recovery Tribunals for speedy recoveryEstablished by Central GovernmentSingle member Presiding OfficerAppeal against DRT order lies with DRATChairpersonJurisdiction of civil courts (other than HC/SC) barred

Credit Information Companies (Regulation) Act, 2005

Credit Information Companies(Regulation) Act, 2005

Objective- regulation of credit information companies

RegistrationCompulsory registration with RBIExisting companies to apply within 6 monthsConditionsMinimum capital Rs. 30 crore (authorised), Rs.20 crore(issued)Management not prejudicial to interests of users, clients or borrowers, credit information companiesAdditional conditions at discretion of RBIRBI may determine cap on maximum number of credit information companiesRBI may cancel registrationAppeal lies with Central Government

RBI PowersRegistration and cancellationFrame policy and regulationsGive directionsInspectionAppoint observersSupersede board appoint administratorSpecify maximum feeRecommend exemption and rules

Management of Credit Information CompaniesManagementChairman (whole time)/ Managing Director50% of board with specialised knowledgePublic administration, law, banking, management, finance, accountancy and information technologyRBI empowered to supersede board appoint Administrator

FunctionsPermitted businessesCollect information on trade, credit and standing of borrowers of member credit institutionsProvideInformation to specific users, credit institutionsCredit scoringResearch projectsOther business specified by RBI

MembershipCredit institutions to become membersCompulsory to be member of at least oneBound to give information

Disclosure of credit information restricted

Information Privacy PrinciplesAccuracy and secrecy of credit information

Alteration of credit informationCredit information to be supplied by credit institutionsBorrower may request updation

Fine for unauthorised access

Credit Information Companies Regulations, 2006Specified usersMember credit institutions (specified in Act itself)Banks, Financial Institutions, NBFCs, credit card companies, housing finance company, state financial corporationInsurance companiesCellular phone service providersRating agencyBrokerTrading member of recognised commodity exchangeSEBIIRDAForms of businessPrivacy principlesMaximum fee and chargesMembership - Rs.15.00 lakhProviding credit information report- Rs.500 for individuals, Rs. 5,000 for other borrowers/ specified users

PrinciplesCare in collection of credit informationData security and secrecyAccess and modificationData collection limitationData use limitationData accuracyArchiving and length of preservation

Credit Information CompaniesCredit Information Bureau (India) Ltd, Equifax Credit Information Services Pvt. LtdExperian Credit Information Co. of India Pvt. Ltd,Highmark Credit Information Services Pvt. Ltd.

Reporting of wilful defaultersWilful defaultDefault in meeting obligationsDespite capacity to repayDiversion of fundsSiphoning of fundsSale of assetsDiversionShort term loans used for long term purposesPurchasing assets other than those for which the loan was sanctionedTransferring to subsidiaries group companiesInvestments of funds in equity/ debti without lenders permissionShortfall in deployment vis--vis disbursal

Reporting of wilful defaultersPenaltiesNo additional facilitiesLegal processProactive towards change of managementCovenant- prohibiting directors from wilful defaulters

Quarterly reportingSuit filedRs. 25 lakh and above

Monitoring end use

Negotiable Instruments Act, 1881

Negotiable Instruments Act, 1881Brought in to Encourage use of negotiable instrumentsImprove credibility of negotiable instruments

Important aspectsDefinitionsNegotiation v/s transfer by assignmentPresumption of considerationEndorsementPayment in due courseHolder in due course

Definitions Negotiable Instrument

Definitions - HolderHolder (Sec 8)Person entitled in his own name to possessionEntitled to receive/ recover amount due

Holder in due course (Sec 9)On consideration becomes Possessor bearer instrumentsEndorsee/Payee order instrumentsNo cause to believe that title defective

ChequesChequesCrossing Special vs generalOrder v/s Bearer Protection to Paying banker for payment in due course Sec 128Collecting banker for receiving payment for customer in good faith & without negligence Sec 131Cheques payable to order subsequently endorsed - Sec 85

So what is the difference?State Bank of IndiaAccount Payee

Crossing of ChequesGeneral Crossing (Sec 123)Two parallel transverse linesPayment only through banker (Sec 126)

Special Crossing (Sec 124)Name of the banker also mentionedPayment only through banker whose name is mentioned (Sec 126)

Liability to true owner continues if not paid through a bank (Sec 129)

Protection to paying and collecting bankersProtection to paying bankerSec 128 protection for payment in due courseSame rights and same position if the cheque had been paid to and received by the true owner thereof

Protection to collecting bankerSec 131Good faith and without negligenceNo liability if title proves defective

Payment in due coursePayment in accordance withApparent tenor of the instrumentGood faithWithout negligenceNo reasonable ground for believing that possessor of NI not entitled for to receive payment

Order and Bearer ChequesOrderDrawn payable to orderIf endorsed by/behalf of payee, drawee discharged by payment in due course

BearerExpressed payable to bearerDischarge by payment to bearerIrrespective of subsequent endorsementsEndorsement in blank payable to bearer even if originally payable to order

Account PayeeNot provided in the NI ActDeveloped as practiceRBI instructionsJanuary 23, 2006Limited exemptions to cooperative societiesDemand drafts over Rs.20,000 (AML aspect)

Anti Money Laundering Know Your Customer

AML & KYCBackgroundJune 1998 UN call on member states to adopt national money laundering legislationPrevention of Money Laundering Act, 2002

ObjectivePrevent banks from being used by criminals for money laundering and terrorist activities

Key aspectsCustomerAccount holder/ business relationshipBeneficial ownerAny person connected to the transaction which can cause significant reputational/ other risks to the bank/FI

General guidelinesConfidentiality of customer informationRemittances over Rs.50,000 only by debit to customers account/ chequeTenor of instrument reduced to 3 monthsAdherence to provisions of Foreign Contribution (Regulation) Act, 2010

Elements of KYC PolicyCustomer Acceptance Policy

Customer Identification Procedures

Monitoring of Transactions

Risk Management

Customer Acceptance PolicyNo accounts in fictitious/ benami namesParameters for categorising customers based on risk perceptionDocumentation to be collectedNot to open/ close accounts where due diligence not possibleCircumstances where agency/ fiduciary capacity allowedBackground checksProduct wise/ geography wise controlsProfile of each customer

Examples of customers requiring higher due diligenceNon Resident customersHigh Net Worth individualsPolitically exposed persons & their relativesCompanies having close family shareholding/firms with sleeping partnersNon face to face customersTrusts, charities, NGOs, etc receiving donationsExemption for NGOs promoted by UN

Customer Identification ProcedurePolicy should be specified for various stagesInitiating the relationshipCarrying out a financial transactionDoubts about veracity of dataNatural personsIdentity of customerAddressPhotographLegal persons/ entitiesLegal statusAuthorised personsOwnership and control structureUnique Customer Identification Code (UCIC)Avoid undue hardship to customers

Customer identification requirements Indicative GuidelinesWalk in customersSalaried employeesTrustee accountsCompanies and firmsAccounts managed by professional intermediariesPolitically exposed personsNon face-to-face customersProprietary concerns

Simplified KYCTargeted at low income groups - urban and rural poor

LimitsBalance not to exceed Rs.50,000Total credits not to exceed Rs.1,00,000

Simplified KYC procedureIntroduction from another account holder with full KYCOther documents that satisfy the bank about the identity

Money MulesThird parties act on behalf of criminals

Recruited throughSpam emailsAdvertisements on genuine websites/ newspapersSocial networking sites

Banks advised to strictly adhere to guidelines on KYC/AML

Monitoring of transactionsUnderstanding of normal and reasonable pattern of activityMonitoring dependent upon the risk classification of the accountSpecial attention to large and complex transactionsThreshold limitsCash transactions

Risk ManagementBoard to ensure effective KYC,AML system in placeRole of audit and compliance mechanismsQuarterly review before BoardCash Transaction ReportSuspicious Transaction ReportScreening & training of employees

Thank you

(1) In addition to the business of banking, a banking company may engage in any one or more of the following forms of business, namely,- (a) the borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security; and drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hundies, promissory notes, coupons, drafts, bill of lading, railway receipts, warrants, debentures, certificates, scrips and other instruments, and securities whether transferable or negotiable or not; the granting and issuing of letters of credit, travellers' cheques and circular notes; the buying, selling and dealing in bullion and specie; the buying and selling of foreign exchange including foreign bank notes; the acquiring, holding, issuing on commission, underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations, securities and investments of all kinds; the purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or others; the negotiating of loan and advances; the receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise; the providing of safe deposit vaults; the collecting and transmitting of money and securities; (b) acting as agents for any government or local authority or any other person or persons; the carrying on of agency business of any description including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of customers, but excluding the business of a 30[Managing Agent or Secretary and Treasurer] of a company; (c) contracting for public and private loans and negotiating and issuing the same; (d) the effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public or private, of State, municipal or other loans or of shares, stock, debentures or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue; (e) carrying on and transacting every kind of guarantee and indemnity business; (f) managing, selling and realising any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claims; (g) acquiring and holding and generally dealing with any property or any right, title or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security; (h) undertaking and executing trusts; (i) undertaking the administration of estates as executor, trustee or otherwise; (j) establishing and supporting or aiding in the establishment and support of associations, institutions, funds, trusts, and conveniences calculated to benefit employees or ex-employees of the company or the dependents or connections of such persons; granting pension and allowances and making payments towards insurance; subscribing to or guaranteeing moneys for charitable or benevolent object or for any exhibition or for any public, general or useful object; (k) the acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purpose of the company; (l) selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning into account or otherwise dealing with all or any part of the property and rights of the company; (m) doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company; (o) any other form of business which the Central Government may, by notification in the Official Gazette, specify as a form of business in which it is lawful for a banking company to engage. (2) No banking company shall engage in any form of business other than those referred to in sub-section (1).

*no banking company shall directly or indirectly deal in the buying or selling or bartering of goods, except in connection with the realization of security given to or held by it, or engage in any trade, or buy, sell or barter goods for others otherwise than in connection with bills of exchange received for collection or negotiation or with such of its business as is referred to in clause (i) of sub-section (1) of section 6:. "goods" means every kind of movable property, other than actionable claims, stock, shares, money, bullion and specie and all instruments referred to in clause (a) of sub-section (1) of section 6.

*According to this section, no banking company can commence or carry on banking business in India unless it holds a licence granted to it by the Reserve Bank for the purpose. This section states the following requirements for granting licence:(i)Necessity of licensing and mode of applying for it(ii)Conditions for granting of licenses(iii)Cancellation of licenses and appeals from such ordersBefore granting any license under this section, the Reserve Bank may require to be satisfied by an inspection of the books of the company that the following conditions are(i) that the company is in a position to pay its present or future depositors in full as their claims accrue;(ii) that the affairs of the company are not likely to be conducted in a manner detrimental to the interests of its present or future depositors;(iii) in the case of the carrying on of banking business by such company in India will be in the public interest and that the government or laws of the country in which it is incorporated does not discriminate in any way against banking companies registered in India and that the company complies with all the provisions of this Act, applicable to banking companies incorporated outside India. However, RRBs have been established under a separate Act of Parliament, viz., RRBs Act 1976 and not under Banking Regulation Act.

The Reserve Bank may cancel a license granted to a banking company under this section:(i) If the company ceases to carry on banking business in India; or(ii)If the company at any time fails to comply with any of the conditions imposed upon it; or*(iii)Any banking company aggrieved by the decision of the Reserve Bank cancelling a licence under this section may, within thirty days from the date on which such decision is communicated to it, appeal to the Central Government. The decision of the Central Government shall be final.Thus, every banking company which likes to start banking business in India must obtain licence from RBI.**Although Section 11 prescribes a minimum capital of Rs.5.00 lakh only, Reserve Bank currently prescribed a minimum paid-up capital of Rs.100 crore for setting up a new banking company. In the case of foreign banks setting up office of business in India, they are required to bring in a minimum of ten million US dollars to India as Capital. (A million is equal to ten lakhs). The minimum capital required to start a Local Area Bank is fixed at Rs. 5.00 crores.

Under the provisions of Section 12, the subscribed capital of the company is not less than half of its authorized capital and the paid up capital is not less than half of its subscribed capital, provided when the capital is increased this proportion may be permitted to be secured within a period to be determined by the Reserve Bank not exceeding two years from the date of increase.

Limiting the payment of dividends: Section 15Section 15 prohibits every banking company from paying any dividend on its shares unless it has completely written off the capitalized expenses specified therein.According to this section no banking company shall pay any dividend on its shares until all its capitalized expenses such as Preliminary Expenses, Brokerage and Commission on issue of shares, etc., have been completely written off.However as per the Banking Companies (Amendment) Act 1959, Banking Company may pay dividend on its shares without writing off the following:(a) The depreciation in the value of investments in the approved securities provided such depreciation has not been actually capitalized or accounted for a loss.(b) The depreciation in the value of its investments in shares, debentures, bonds, etc., (other than approved securities) where adequate provision has been made for such depreciation. The auditor of the banking company should approve such provision.(c) The bad debts where the adequate provision has been made in this behalf and the auditor of the banking company should approve such provision.

Transfer to Reserve Fund: Section 17Under Section 17, Banking companies incorporated in India are obligated to transfer to the reserve fund a sum equivalent to not less than 20% of the profit each year, unless the amount in such fund together with the amount in the share premium account is more than or equal to its paid-up capital.

Maintenance of cash reserve by non-scheduled banks: Section 18According to Section 18, every banking company not being a scheduled bank (i.e., a non-scheduled bank) has to maintain in India by way of cash reserve with itself or in current account opened with the Reserve Bank or the State Bank of India or any notified Bank or partly in cash with itself and partly in such account or accounts a sum equivalent to at least 3% of its total time and demand liabilities.

Restrictions on holding of shares in other companies: Section 19Section 19 of the Act restricts the scope of formation of subsidiary companies by a banking company, as well as the holding of shares in other companies. That is, this section prevents banking companies from carrying on trading activities by acquiring a controlling interest in non-banking companies. This section restricts the scope of formation of subsidiary companies by a banking company, as well as the holding of shares in other companies.A banking company may form a subsidiary company for the purposes referred to in the section, as well as for other purposes as are incidental to the business of banking, subject to the previous permission in writing of the RBI.

*As per Section 58 a of Transfer of Property Act 1882 A mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which amy give rise to a pecuniary liability.In the transaction of mortgage, the person who is transferring the property (transferor/borrower or the person providing the security on behalf of the borrower) is called mortgagor and the person or entity in whose favour the mortgage is created is the mortgagee ( the lender or the bank)The principal and the interest involved in the transaction is called mortgage money and the instrument by which the transaction is taking place is called mortgage deed.

*Simple Mortgage Simple mortgage is also called registered mortgage. In Simple Mortgage, without delivering the possession of the mortgaged property the mortgagor binds himself personally to pay the mortgage money. In case if the mortgagor fails to make payment as per the agreed terms and conditions, the mortgagee will have a right to get the property sold and to adjust for the mortgaged money.The simple mortgage is to be created before the sub-registrar after duly stamping the same and registering under Indian Registration Act 1908.This method of mortgaging is very much necessary if the mortgagor has the ownership of the property and could not produce all the relevant documents.

**English Mortgage is a registered mortgage by which the entire property gets transferred in the name of the mortgagee and upon repayment of the debt on certain date appointed date, the property will be re-conveyed to the Mortgagor.*English Mortgage is a registered mortgage by which the entire property gets transferred in the name of the mortgagee and upon repayment of the debt on certain date appointed date, the property will be re-conveyed to the Mortgagor.**Registration of Credit Information Companies3. Prohibition to commence or carry on business of credit informationSave as otherwise provided in this Act, no company shall commence or carry on the business of credit information without obtaining a certificate of registration from the Reserve Bank under this Act.4. Application for registration(1) Every company which intends to commence the business of credit information shall make an application for registration to the Reserve Bank in such form and manner as may be specified by regulations.(2) Every credit information company, in existence on the commencement of this Act, before the expiry of six months from such commencement, shall apply in writing to the Reserve Bank for obtaining a certificate of registration under this Act :Provided that in the case of a credit information company in existence on the commencement of this Act, nothing in section 3 shall be deemed to prohibit such credit information company from carrying on the business of a credit information company, until it is granted a certificate of registration or is by notice in writing informed by the Reserve Bank that a certificate of registration cannot be granted to it.5. Grant of certificate of registration(1) The Reserve Bank may, for the purpose of considering the application of a company for grant of a certificate of registration to commence or carry on the business of credit information, require to be satisfied, by an inspection of records or books of such company or otherwise that the following conditions are fulfilled, namely:(a) that the applicant company has minimum capital structure referred to in section 8;(b) that the general character of the management or the proposed management of the applicant company shall not be prejudicial to the interest of its specified users, clients or borrowers, or other credit information companies;(c) that any other condition, the fulfilment of which in the opinion of the Reserve Bank, shall be necessary to ensure that the commencement or carrying on of the business of credit information by the applicant company shall not be detrimental or prejudicial to the public interest or banking policy or credit system or its specified users or clients or borrowers or other credit information companies or others who would provide credit information to the credit information companies.(2) The Reserve Bank may, after being satisfied that the conditions as referred to in sub-section (1) are fulfilled, grant a certificate of registration to the applicant company to commence or carry on the business of credit information, subject to such conditions which it may consider fit to impose and if the company fails to fulfil any of such conditions or any of the provisions of this Act, the application of the company shall be rejected :Provided that no application shall be rejected unless the applicant has been given an opportunity of being heard.(3) The Reserve Bank may, having regard to the available business of credit information, the potential and scope for expansion of existing credit information companies and other relevant factors, determine the total number of the credit information companies which may be granted the certificates of registration for carrying on the business of credit information:Provided that the total number of such credit information companies so determined may, on being satisfied by the Reserve Bank, that there is change in available business of credit information, potential and scope for expansion of existing credit information companies and other relevant factors relating thereto, be reviewed by the Reserve Bank.6. Power of Reserve Bank to cancel certificate of registration(1) The Reserve Bank may cancel a certificate of registration granted to a credit information company under sub-section (2) of section 5 if such company,(i) ceases to carry on the business of credit information; or(ii) has failed to comply with any of the conditions subject to which the certificate of registration has been granted to it; or(iii) at any time fails to fulfil any of the conditions referred to in sub-clauses (a) to (c) of sub-section (1) or sub-section (2) of section 5; or(iv) fails(a) to comply with the provisions of any law for the time being in force or any direction issued by the Reserve Bank under the provisions of this Act; or(b) to submit or offer for inspection its books of account and other relevant documents when so demanded by the officers, persons or agency referred to in sub-section (1) of section 12.(2) Before cancelling the certificate of registration granted to a credit information company under this section on the ground that the company has failed to comply with the conditions specified in clauses (a) to (c) of sub-section (1) or sub-section (2) of section 5 or the provisions of any other law for the time being in force or directions issued under this Act, the Reserve Bank, shall grant time to such company on such terms as the Reserve Bank may deem appropriate for taking necessary steps to comply with such directions or provisions or fulfilment of such conditions, within such time:Provided that if the Reserve Bank is of the opinion that the delay in cancelling the certificate of registration of such company shall be prejudicial or detrimental to the public interest or banking policy or credit system or borrowers or other credit information companies, the Reserve Bank may cancel the certificate of registration without granting time as provided in sub-section (2).(3) No order of cancellation of certificate of registration granted to a credit information company shall be made by the Reserve Bank unless such company has been given a reasonable opportunity of being heard.7. Appeal against order of Reserve Bank(1) A credit information company aggrieved by the order of rejection of an application for grant of certificate of registration under section 5 or cancellation of certificate of registration under section 6, may prefer an appeal to the Central Government or any other authority or tribunal which may be designated by rules made by the Central Government, within a period of thirty days from the date on which such order of rejection or cancellation, as the case may be, is communicated to the credit information company.(2) The decision of the Central Government or the authority or tribunal referred to in sub-section (1) where an appeal has been preferred to it under sub-section (1), or of the Reserve Bank where no such appeal has been preferred, shall be final:Provided that before making any order of rejection of an appeal, the applicant company or the credit information company, as the case may be, shall be given a reasonable opportunity of being heard.8. Requirement as to minimum capital(1) The authorised capital of every credit information company shall be a minimum of thirty crores: Provided that the Reserve Bank may, by notification, increase the minimum amount of authorised capital to any amount not exceeding fifty crores. (2) The issued capital of every credit information company shall not be less than twenty crores: Provided that the Reserve Bank may, by notification, increase the issued capital to any amount not exceeding the minimum amount of authorised capital as referred to in sub-section (1) (3) The minimum paid up capital of every credit information company at any time shall not be less than seventy five per cent of the issued capital.*Registration of Credit Information Companies3. Prohibition to commence or carry on business of credit informationSave as otherwise provided in this Act, no company shall commence or carry on the business of credit information without obtaining a certificate of registration from the Reserve Bank under this Act.4. Application for registration(1) Every company which intends to commence the business of credit information shall make an application for registration to the Reserve Bank in such form and manner as may be specified by regulations.(2) Every credit information company, in existence on the commencement of this Act, before the expiry of six months from such commencement, shall apply in writing to the Reserve Bank for obtaining a certificate of registration under this Act :Provided that in the case of a credit information company in existence on the commencement of this Act, nothing in section 3 shall be deemed to prohibit such credit information company from carrying on the business of a credit information company, until it is granted a certificate of registration or is by notice in writing informed by the Reserve Bank that a certificate of registration cannot be granted to it.5. Grant of certificate of registration(1) The Reserve Bank may, for the purpose of considering the application of a company for grant of a certificate of registration to commence or carry on the business of credit information, require to be satisfied, by an inspection of records or books of such company or otherwise that the following conditions are fulfilled, namely:(a) that the applicant company has minimum capital structure referred to in section 8;(b) that the general character of the management or the proposed management of the applicant company shall not be prejudicial to the interest of its specified users, clients or borrowers, or other credit information companies;(c) that any other condition, the fulfilment of which in the opinion of the Reserve Bank, shall be necessary to ensure that the commencement or carrying on of the business of credit information by the applicant company shall not be detrimental or prejudicial to the public interest or banking policy or credit system or its specified users or clients or borrowers or other credit information companies or others who would provide credit information to the credit information companies.(2) The Reserve Bank may, after being satisfied that the conditions as referred to in sub-section (1) are fulfilled, grant a certificate of registration to the applicant company to commence or carry on the business of credit information, subject to such conditions which it may consider fit to impose and if the company fails to fulfil any of such conditions or any of the provisions of this Act, the application of the company shall be rejected :Provided that no application shall be rejected unless the applicant has been given an opportunity of being heard.(3) The Reserve Bank may, having regard to the available business of credit information, the potential and scope for expansion of existing credit information companies and other relevant factors, determine the total number of the credit information companies which may be granted the certificates of registration for carrying on the business of credit information:Provided that the total number of such credit information companies so determined may, on being satisfied by the Reserve Bank, that there is change in available business of credit information, potential and scope for expansion of existing credit information companies and other relevant factors relating thereto, be reviewed by the Reserve Bank.6. Power of Reserve Bank to cancel certificate of registration(1) The Reserve Bank may cancel a certificate of registration granted to a credit information company under sub-section (2) of section 5 if such company,(i) ceases to carry on the business of credit information; or(ii) has failed to comply with any of the conditions subject to which the certificate of registration has been granted to it; or(iii) at any time fails to fulfil any of the conditions referred to in sub-clauses (a) to (c) of sub-section (1) or sub-section (2) of section 5; or(iv) fails(a) to comply with the provisions of any law for the time being in force or any direction issued by the Reserve Bank under the provisions of this Act; or(b) to submit or offer for inspection its books of account and other relevant documents when so demanded by the officers, persons or agency referred to in sub-section (1) of section 12.(2) Before cancelling the certificate of registration granted to a credit information company under this section on the ground that the company has failed to comply with the conditions specified in clauses (a) to (c) of sub-section (1) or sub-section (2) of section 5 or the provisions of any other law for the time being in force or directions issued under this Act, the Reserve Bank, shall grant time to such company on such terms as the Reserve Bank may deem appropriate for taking necessary steps to comply with such directions or provisions or fulfilment of such conditions, within such time:Provided that if the Reserve Bank is of the opinion that the delay in cancelling the certificate of registration of such company shall be prejudicial or detrimental to the public interest or banking policy or credit system or borrowers or other credit information companies, the Reserve Bank may cancel the certificate of registration without granting time as provided in sub-section (2).(3) No order of cancellation of certificate of registration granted to a credit information company shall be made by the Reserve Bank unless such company has been given a reasonable opportunity of being heard.7. Appeal against order of Reserve Bank(1) A credit information company aggrieved by the order of rejection of an application for grant of certificate of registration under section 5 or cancellation of certificate of registration under section 6, may prefer an appeal to the Central Government or any other authority or tribunal which may be designated by rules made by the Central Government, within a period of thirty days from the date on which such order of rejection or cancellation, as the case may be, is communicated to the credit information company.(2) The decision of the Central Government or the authority or tribunal referred to in sub-section (1) where an appeal has been preferred to it under sub-section (1), or of the Reserve Bank where no such appeal has been preferred, shall be final:Provided that before making any order of rejection of an appeal, the applicant company or the credit information company, as the case may be, shall be given a reasonable opportunity of being heard.8. Requirement as to minimum capital(1) The authorised capital of every credit information company shall be a minimum of thirty crores: Provided that the Reserve Bank may, by notification, increase the minimum amount of authorised capital to any amount not exceeding fifty crores. (2) The issued capital of every credit information company shall not be less than twenty crores: Provided that the Reserve Bank may, by notification, increase the issued capital to any amount not exceeding the minimum amount of authorised capital as referred to in sub-section (1) (3) The minimum paid up capital of every credit information company at any time shall not be less than seventy five per cent of the issued capital.*Chapter - IIIManagement of Credit Information Companies9. Management of credit information company(1) Notwithstanding anything contained in any law for the time being in force, or in any contract to the contrary, every credit information company in existence on the commencement of this Act, or which comes into existence thereafter, shall have one of its directors, who may be appointed on whole-time or on a part-time basis as chairperson of its board, and where he is appointed on whole-time basis as chairperson of its board, he shall be entrusted with the management of the whole of the affairs of the credit information company:Provided that the chairperson of the board of the credit information company shall exercise his powers subject to the superintendence, control and directions of the board.(2) Where a chairperson is appointed on a part-time basis, the management of whole of the affairs of the credit information company shall be entrusted to a managing director or, a whole-time director by whatever name called, who shall exercise his power subject to the superintendence, control and directions of the board.(3) In addition to the chairperson or managing director or whole-time director, by whatever name called, the board of directors shall consist of not less than fifty per cent directors who shall be persons having special knowledge in, or practical experience of, the matters relating to public administration, law, banking, finance, accountancy, management and information technology.(4) In discharging its functions, the board shall act on business principles and shall have due regard to the interest of its specified users, credit institutions or the clients or borrowers of credit institutions.(5) Where the Reserve Bank is satisfied that it is in the public interest or in the interest of banking policy or credit system of the country, or for preventing the affairs of any credit information company being managed in a manner detrimental to the interest of banking policy or credit institutions or borrowers or clients or for securing the proper management of any credit information company, it is necessary so to do, the Reserve Bank may, for reasons to be recorded in writing, by order published in the Official Gazette, supersede the board of such company, for such period not exceeding six months, as may be specified in the order and which may be extended from time to time, so, however, that the total period shall not exceed twelve months:Provided that before making any such order, the Reserve Bank shall give a reasonable opportunity to the board of such credit information company to make representation against the proposed supersession and shall consider the representation, if any, of the board.(6) The Reserve Bank may, on supersession of the board of a credit information company under sub-section (5), appoint an Administrator for such period and on such salary and other terms and conditions as it may determine.(7) The Reserve Bank may issue such directions to the Administrator as it may deem appropriate and the Administrator shall be bound to follow such directions.(8) Upon making of the order under sub-section (5), superseding the board of a credit information company(a) the chairperson, managing director and other directors of such credit information company shall, as from the date of supersession, vacate their offices as such;(b) all the powers, functions and duties which may, by or under the provisions of the Companies Act, 1956 (1 of 1956) or this Act or any other law for the time being in force, be exercised or discharged, by or on behalf of the board of such credit information company, or by a resolution passed in general meeting of that company, shall, until the reconstitution of its board under sub-section (10), be exercised and discharged by the Administrator appointed by the Reserve Bank under sub-section (6):Provided that the power exercised by the Administrator shall be valid notwithstanding that such powers are exercisable by a resolution passed in the general meeting of such credit information company.(9) The salary and allowances payable to the Administrator and staff assisting the Administrator shall be borne by the credit information company.(10) On and before the expiration of two months before expiry of the period of supersession mentioned in the order of the Reserve Bank issued under sub-section (5), the Administrator of the credit information company, shall call a general meeting of the credit information company to elect new directors and reconstitute its board and any person who had vacated his office under clause (a) of sub-section (8), shall not be deemed to be disqualified for re-appointment.(11) Notwithstanding anything contained in any law for the time being in force or in any contract or the memorandum or articles of association, of the credit information company, on the removal of a person from office under this section, that person shall not be entitled to claim any compensation for the loss or termination of office.10. Power of Reserve Bank to determine policyWhere the Reserve Bank is satisfied that it is necessary or expedient in the public interest or in the interest of specified users or in the interest of credit information companies or credit institutions or clients or borrowers so to do, it may determine the policy in relation to functioning of credit information companies or credit institutions or specified users generally or in particular and when the policy has been so determined all credit information companies, credit institutions and specified users, as the case may be, shall be bound to follow the policy as so determined.11. Power of Reserve Bank to give directions(1) Where the Reserve Bank is satisfied that,(a) in the public interest; or(b) in the interest of credit institutions; or(c) in the interest of specified users; or(d) in the interest of banking policy; or(e) to prevent the affairs of any credit information company being conducted in a manner detrimental to the interests of its specified users or in a manner prejudicial to the interests of credit institutions or borrowers or clients; or(f) to secure the proper management of credit information companies generally,it is necessary to issue directions to credit information companies or credit institutions or specified users generally or to any credit information company or credit institution or specified user in particular, it may, from time to time, issue such directions as it deems fit, and such credit information companies, credit institutions and specified users or credit information company, credit institution, and specified user, as the case may be, shall be bound to comply with such directions.(2) The Reserve Bank may, on representation made to it or on its own motion, modify or cancel any direction issued under sub-section (1), and the Reserve Bank, in so modifying or cancelling any direction, may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect.(3) The Reserve Bank may, at any time, if it is satisfied that in the public interest or in the interest of a credit information company or its members, it is necessary so to do, by order in writing and on such terms and conditions as may be specified therein,(a) require such credit information company to call a meeting of its directors for the purpose of considering any matter relating to or arising out of the affairs of the credit information company;(b) depute one or more of its officers to watch the proceedings at any meeting of the board of the credit information company or of any committee or of any other body constituted by it and require the credit information company to give an opportunity to the officers so deputed to be heard at such meetings and also require such officers to send a report of such proceedings to the Reserve Bank;(c) require the board of the credit information company or of any committee or any other body constituted by it to give in writing to any officer deputed by the Reserve Bank in this behalf at his usual address all notices of, and other communications relating to, any meeting of the board, committee or other body constituted by it;(d) appoint one or more of its officers to observe the manner in which the affairs of the credit information company or of its offices or branches are being conducted and make a report thereon;(e) require the credit information company to make, within such time as may be specified in the order, such changes in the management as the Reserve Bank may consider necessary.(4) The Reserve Bank may, at any time, direct any credit information company to furnish it within such time as may be specified by the Reserve Bank, such statements and information relating to the business or affairs of the credit information company as the Reserve Bank may consider necessary or expedient to obtain for the purpose of this Act.12. Inspection of credit information company, credit institution and specified user(1) Notwithstanding anything to the contrary contained in section 235 of the Companies Act, 1956 (1 of 1956), the Reserve Bank, at any time, may and on being directed so to do by the Central Government shall, cause an inspection to be made by one or more of its officers or through such other persons or agency as the Reserve Bank may determine, of any credit information company or credit institution or specified user and their books and accounts; and the Reserve Bank shall supply to the credit information company or credit institution or specified user, as the case may be, a copy of its report on such inspection.(2) It shall be the duty of every director or other officer or employee of the credit information company, credit institution and specified user to produce to any officer or person or agency, as the case may be, making an inspection under sub-section (1) all such books, accounts and other documents in his custody or power and to furnish him with any statement and information relating to the affairs of such credit information company, credit institution and specified user, as the said officer or person or agency may require of him within such time as the said officer or person or agency may specify.(3) Any officer of the Reserve Bank or person or an agency making an inspection under sub-section (1) may examine on oath any director or other officer or employee of the credit information company, credit institution and specified user, in relation to their business, and may administer an oath accordingly.(4) The expenses of, or incidental to, the inspection under sub-section (1) by any person or any agency referred to in sub-section (1) shall be borne by the concerned credit information company or credit institution or specified user, as the case may be.

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