LEGAL &

REGULATORY
ASPECTS OF
BANKING
( As per NEW UPDATED SYALLABUS For
JAIIB/ Diploma in Banking & Finance
Examination)

The content of this book has been developed keeping in view courseware for the
third paper on Legal & Regulatory Aspects of Banking of JAIIB.

An attempt has been made to cover fully the syllabus prescribed for each
module/subject and the presentation of topics may not always be in the same
sequence as given in the syllabus. Candidates are also expected to take note of all
the latest developments relating to the subjects covered in the syllabus by referring
to RBI circulars, financial papers, economic journals, latest books and publications in
the subjects concerned.
Although due care has been taken in publishing this study material, yet the possibility
of errors, omissions and/or discrepancies cannot be ruled out.
We welcome suggestion for improving the book and its contents. You may write back
to us at admin@jaiibcaiib.co.in
About the Author:

Vaibhav Awasthi, has experience of 10 years in Banking. He has done his graduation
from Kanpur University and MBA (Finance) from Delhi. He also holds the distinction of
being part of maiden batch of Certified Banking Compliance Professional conducted
by IIBF.

He has been mentoring students for JAIIB/CAIIB since last 8 years and presently
works in middle management of leading Public Sector Bank.

All rights reserved. No part of this publication may be reproduced or transmitted, in any
form or by any means, without permission. Any person who does any unauthorized act in
relation to this publication may be liable to criminal proceedings and civil claim for
damages.

This book is meant for educational and learning purpose. The author of this book has taken all reasonable care to ensure
that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any
manner whatsoever.

To the thought
Jodi Tor Dak Shune Keu Na Ashe Tobe Ekla Cholo Re

Module A
Regulation and Compliance

Unit 4 Returns, Inspection, Winding up

Annual accounts and Balance sheet: All Banks which are listed on stock exchange
need to publish unaudited Quarterly result in proforma prescribed by SEBI. Banking
company need to prepare their balance sheet and profit and loss account as per Section
29 of the BR act. Balance sheet and PL account needs to be published at the end of
each calendar year or on expiry of 12 month period as notified by the central government.
Balance sheet and PL need to be signed by manager or principal officer of the company
and atleast three directors if there are more than 3 directors and by all the directors if
there are not more than 3 directors. Balance sheet and PL to be prepared in the forms set
out in the III schedule to BR act. The companies act requires company to prepare B/S
and PL in the form set out in part I of schedule VI. However in case of banking company
it is to be done as per schedule III of BR act. Balance sheet and PL along with auditors
report needs to be published in a newspaper which is in circulation at the place where the
banking company has principle office within 6 months.
3 copies of Balance sheet and PL to be submitted to RBI within three months from the
end of the period to which they relate. This period can be further extended by 3 months
by RBI. As per section 32 of BR act banking companies must submit 3 copies of Balance
sheet and PL along with auditors report to Registrar of companies. Foreign Banks have
to display in a conspicuous place, in their principal office a copy of the last audited
balance sheet and PLaccount not later than first Monday in August of any year in which it
carries on business.
Audit and Auditors: As per section 30 of BR act Balance sheet and PL to be audited.
Reserve bank is empowered Under section 30 (1B) to order a special audit. The
expenses of special audit to be borne by the bank.
Submission of returns:
Return on liquid Under section 24(3) of BR act. Within 20 days from the end of month
asset
Monthly returns

Under sec 27 of BR act showing its assets and liabilities in India as at

the close of business on the last Friday of the previous month.

Accounts
and To be submitted to RBI within 3 month from the end of the period to
Balance sheet
which they relate.
Return
of Under Sec 25 (1) of BR act, a quarterly return regarding its assets in
Assets in India
India. To be submitted within one month at the end of quarter.
Return
unclaimed
deposits

of Under section 26 of BR act, within 30 days of the close of each

calendar year on unclaimed deposit (not operated for 10 years)

Return if cash Under Section 18(1) of BR act , to be submitted before the twentieth
reserve of non- day of every month showing the amounts held on the alternate
scheduled
Fridays during a month along with particulars of demand and term
banks
liabilities
Returns
scheduled
banks

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

Preservation of records and return of paid instruments:

Central Govt under section 45Y of the BR act is empowered to make rules regarding
period for preservation of Records. Under section 45Z a bank is authorized to return paid
instruments to their customers even before the end of the period of preservation specified
under the act.
Board for Financial Supervision: Established under regulation 4 of RBI regulations
1994. The members of the Board are: Governorof the Reserve Bank of India as the
chairperson, Deputy Governors of the Reserve Bank of India, and one of thedeputy
governors should be nominated by the Governor as the full time vice chairman, Four
directors from theCentral Board of the Reserve Bank nominated by the Governor as
members.
Functions and Powers: The Board performs the functions and exercises the powers of
supervision and inspection under the Reserve Bank of India Act, in respect to different
banking companies. The Board is assisted by the department of supervision. The Board
meets once monthly basis, with at least one meeting in a month. The Board has powers
to constitute sub committees, like the executive committee. The vice chairman of the
Board is the ex officio chairman of the committee. Apart from the above, the Governor
may constitute an advisory committee to offer advice from time to time to the Board.
Amalgamation and Winding up :A banking company may be amalgamated with another
banking company as per BR Act. The banking companies have to prepare a scheme of
amalgamation, the draft copy of the scheme of amalgamation covering terms and
conditions needs to be placed separately by the companies to their shareholders.
Each shareholder needs to be given notice, The scheme of amalgamation should be
approved by a resolution passed by majority of members representing two-thirds in value
of the shareholders of each company present in person or by proxy. A shareholder, who
votes against the scheme of amalgamation and gives necessary notice, may claim the
value of his sharesfrom the banking company, in case the scheme is sanctioned by the
Reserve Bank. Once the scheme is sanctionedby the Reserve Bank then the assets and
liabilities of the amalgamated company pass on to the othercompanywith which it is to be
amalgamated. The order of the sanction of amalgamation by Reserve Bank will be the
conclusive proof of amalgamation.
In case the Central Government orders amalgamation of two companies, such
amalgamation would take place after consultation with the Reserve Bank. Under Sec 45
of the Banking Regulation Act the Reserve Bank can apply to the Central Government for
an order of moratorium in respect of any company, on account of certain valid reasons.
After considering various aspects, the Central Government may think it fit and proper to
impose the moratorium. The period of moratorium can be extended from time to time for a
maximum period of six months. During the period of moratorium, the banking company
would not be allowed to make any payments to the depositors or discharge any liabilities
or obligations to any other creditors unless otherwise directed by the Central Government
in the order of moratorium or at any time thereafter.

Scheme of Amalgamation
During the period of moratorium, the Reserve Bank may prepare a scheme of
reconstruction or amalgamation. Such a scheme may be prepared by the Reserve Bank
due to any one or more of the following aspects: 1. In the public interest 2. In the interests
of the depositors 3.To secure proper management of the banking company 4. In the
interest of the banking system of the country. As per the various provisions, the scheme
of amalgamation would be worked out and implemented. A copy of the draft of the
scheme should be sent to the government and also to the banking company (transferee
bank) and others concerned with the amalgamation. The Government may sanction with
modifications as it may consider necessary, after that the scheme should come into effect
from the date of the sanction.
Once the scheme is sanctioned by the Central Government, it would be binding on the
banking company, transferee bank and the members, depositor and other creditors and
others as per the sanction. The sanction by the Central Government is the conclusive
proof that the amalgamation or reconstruction has been carried out with the accordance
with the provisions of the relevant sections of the Act. Consequent to amalgamation, the
transferee bank should carry on the business as required by the law.
The Central Government may order moratorium on the banking companies on the
application of the Reserve Bank. The Reserve Bank may also apply to High Court for
winding up of a banking company when the banking company is not able to pay its debts
and also in certain other circumstances. The High Court would decide the case based on
the merits of the case a moratorium order would be passed. After passing the order the
court may appoint a special officer to take over the custody and control of the assets,
books, etc of the banking company in the interests of the depositors and customers.
During the period of moratorium, the Reserve Bank is not satisfied with the functioning of
the bank, and in its opinion the affairs of the banking company is being conducted not in
the interests of the depositors and customers, Reserve Bank may apply to the High Court
for winding up of the company.
Winding up by High Court The High Court may order winding up of a banking company
on account of (a) The banking company is unable topay its debts (b) An application of
winding up had been made by the Reserve Bank under the provisions of theBanking
Regulation Act (Sec37 and 38)
The RBI is to make an application for winding up (under Sec 38 of BR Act) and under Sec
35 (4) if directed by the Central Government. Central Government may give such
direction, based on the report of inspection or scrutiny made by the Reserve Bank, and
on account of the situation that the affairs of the bank are being conducted to the
detriment of the interests of the depositors. However before giving such direction, the
banking company would be given an opportunity to make a representation in connection
with the inspection/scrutiny report.
In the following circumstances, the Reserve Bank of India can apply for winding up of a
banking company.
Non- compliance with the requirements of Sec 11 regarding minimum paid up capital
and reserves.

 Prohibition to accept fresh deposits under Sec 35(4) of the Banking Regulation Act or
Sec 42 (3A)(b) of the Reserve Bank of India Act
Failure to comply with the requirements of the applicable provisions of the Banking
Regulation Act and the Reserve Bank of India Act
Official Liquidator:
Sec 38A of the Banking Regulation Act provides for appointment of an official liquidator
attached to the High Court by the Central Government, to conduct the winding up
proceedings of a banking company.
Reserve Bank as Liquidator
If Reserve Bank of India applies to the High Court, the Reserve Bank, State Bank or any
other bank as notified by the Central Government or an individual may also be appointed
as the official liquidator. Within the stipulated time, the liquidator is required to make a
preliminary report regarding the availability of the assets to make preferential payments
as per the provisions of the Companies Act and for discharging liabilities to depositors
and other creditors. Within the stipulated time, the liquidator is required to give notice
calling for claims for preferential payment and other claims from every secured and
unsecured creditors. However, depositors need not make claims. The claims of every
depositor of a banking company is deemed to have been filed for the amount as reflected
in the books of the banking standing in his/her credit.
Voluntary Winding Up:
Voluntary winding up would be permitted only when the Reserve Bank has certified that
the banking company will not be able to pay in full all its debts as they accrue.

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

Financial Sector Legislative Reforms Commission (FSLRC) was set up by the Indian
Government in pursuance of the announcement made in Union Budget 2010-11. FSLRC
had a two year term.The Commission was chaired by Supreme Court Justice (Retired) B.
N. Srikrishna,
Key Recommendations of the committee:
The commission has proposed splitting the regulation between the Reserve Bank of
India and a new Unified Financial Agency that will oversee the remaining financial
sector. In effect, existing sector regulators like Sebi, IRDA, PFRDA and at least some
functions of the Forward Markets Commission will be taken over by new United Financial
Agency.
A Financial Sector Appellate Tribunal will hear appeals against all financial sector
regulators and into which the existing Securities Appellate Tribunal will be subsumed and
a Resolution Corporation will replace the Deposit Insurance and Credit Guarantee
Corporation of India, which assists in closure of distressed financial sector institutions.
According to the report RBI will be divested of its powers over management of public
debt, which is currently one of its subsidiary functions. The Debt Management Bill, likely
to be considered by the Cabinet, proposes a separate debt management office to be
attached to the finance ministry. The report also recommends creation of a public debt
management office, a recommendation that was criticized by RBI when the draft report
was
issued
for
consultations.
It also recommends empowering the existing Financial Stability and Development
Council, by making it a statutory body responsible for managing risk and crises in the
financial system. The report also recommends setting up of a financial data cell, which
will look out for systemic risk in the financial sector, especially the ones arising o ut of the
financial conglomerates.
In short, seven new agencies of the new Law are:
1. Reserve Bank of India: Regulator of Banking & Payments monetary policy.
2. Unified Financial Agency: Regulator of financial firms and activities other than banking
3.
4.
5.
6.
7.

and payments.
Resolution Corporation: Deals with closure of distress in firms.
Financial Redressal Agency: Single window complaint mechanism against financial
institutions and intermediaries.
Financial Stability & Development Council: Recast as statutory body. Will mange
systematic risks and development.
Public Debt Management Agency: Governments debt manager.
Financial Sector Appellate Tribunal: Will hear complaints against all financial regulators.
It is apparent by the report and recommendations, the overarching objective of the panel
is to create a uniform legal process for financial-sector regulators, who would all be

statutorily adequately empowered and therefore effectively pursue protection for the
consumers interests.

Financial Sector Development Council:

The non-legislative recommendations are taken forward under the aegis of FSDC.
In pursuance of the announcement made in the Union Budget 201011 Government has
setup an apex-level Financial Stability and Development Council (FSDC), vide its notification
dated 30th December, 2010. The first meeting of the Council was held on 31st December,
2010.
FSDC has replaced the High Level Coordination Committee on Financial Markets
(HLCCFM), which was facilitating regulatory coordination, though informally, prior to the
setting up of FSDC.
Composition
The Chairman of the FSDC is the Finance Minister of India and its members include the
heads of the financial sector regulatory authorities (i.e, SEBI, IRDA, RBI, PFRDA and FMC) ,
Finance Secretary and/or Secretary, Department of Economic Affairs (Ministry of Finance),
Secretary, (Department of Financial Services, Ministry of Finance) and the Chief Economic
Adviser. The commodities markets regulator, Forward Markets Commission (FMC) was
added to the FSDC in December 2013 subsequent to shifting of administrative jurisdiction of
commodities market regulation from Ministry of consumer Affairs to Ministry of Finance. The
Joint Secretary (Capital Markets Division, Department of Economic Affairs, Ministry of
Finance) was the Secretary of the Council till August 2013. Now this post is being held by
the Additional Secretary in the Ministry of Finance.
A sub-committee of FSDC has also been set up under the chairmanship of Governor RBI.
The Sub-Committee discusses and decides on a range of issues relating to financial sector
development and stability including substantive issues relating to inter-regulatory
coordination.
As a result of the deliberations of the Sub-Committee of the FSDC held on August 16, 2011,
two Technical Groups were set up a Technical Group on Financial Inclusion and Financial
Literacy and an Inter Regulatory Technical Group.
The Inter Regulatory Technical Group is chaired by an Executive Director of RBI and
comprises of ED level representatives from the SEBI, IRDA and PFRDA. The Group will
meet once every two months. It will discuss issues related to risks to systemic financial
stability and inter regulatory coordination and will provide essential inputs for the meetings of
the Sub-Committee.
The Technical Group on Financial Inclusion and Financial Literacy is headed by the Deputy
Governor of RBI and comprises of representatives of all Regulators and Ministry of Finance.
In addition, an Inter-Regulatory Forum for Monitoring of Financial Conglomerates has also
been set up under the aegies of FSDC.
FSDC also functions through working group and a macro financial monitoring group.
Mandate
Without prejudice to the autonomy of regulators, this Council would monitor macro prudential
supervision of the economy, including the functioning of large financial conglomerates. It will

address inter-regulatory coordination issues and thus spur financial sector development. It
will also focus on financial literacy and financial inclusion. What distinguishes FSDC from
other such similarly situated organizations across the globe is the additional mandate given
for development of financial sector.

Recent Updates on Legislative/Policy Reforms

The Government has taken / proposed to take many measures including legislative
measures recently to further develop banking sector in India. A brief account of the
legislations introduced and proposed is as follows:
i. The Banking Laws (Amendment) Act, 2012
In order to amend the Banking Regulation Act, 1949, the Banking Companies (Acquisition
and Transfer of Undertakings) Act, 1970 / 1980 and other certain Acts, such as, RBI Act,
1934, Indian Stamp Act, 1899 and the Indian Contract Act, 1872, the Government has
enacted the Banking Laws (Amendment) Act, 2012 (No. 4 of 2013). The Act was brought
into force with effect from 18th January, 2013. The strengthening of Reserve Bank of India
(RBIs) powers facilitated the process of finalization of guidelines for licensing of new banks
in the private sector and grant of new bank licenses. This would increase the level of
financial inclusion and also provide financing for the productive sectors of the economy so
that the growth momentum is sustained. RBI vide its Press Release dated 02.04.2014
decided to grant in-principle approval to two applicants viz., IIDFC Limited and Bandhan
Financial Services Private Limited, to set up banks under the Guidelines on Licensing of
New Banks in the Private Sector issued on February 22, 2013.
The salient features of the act are as follows:
To create a Depositor Education and Awareness Fund by utilizing the inoperative deposit
accounts;
To provide prior approval of RBI for acquisition of 5% or more of shares or voting rights in a
banking company by any person and empowering RBI to impose such conditions as it
deems fit in this regard;
To empower RBI to collect information and inspect associate enterprises of banking
companies;
To empower RBI to supersede the Board of Directors of banking company and
appointment of administrator till alternate arrangements are made;
To provide for primary cooperative societies to carry on the business of banking only after
obtaining a license from RBI;
To provide for special audit of cooperative banks at instance of RBI by extending
applicability of Section 30 to them; and
To enable the nationalized banks to raise capital through bonus and rights issue and
also enable them to increase or decrease the authorized capital with approval from the
Government and RBI without being limited by the ceiling of a maximum of Rs. 3000 crore
under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980.
(ii) Central Know Your Customer (KYC) Registry
A central Know Your Customer (KYC) depository will be developed to avoid multiplicity of
registration, data upkeep and to bring banking payment structure at par with global
standards. Honble Finance Minister in his Budget Speech 2014-15 proposed introduction of
uniform KYC norms and inter-usability of the KYC records across the entire financial sector.

(iii) Framework for licensing small banks and other differentiated banks
Honble Finance Minister in his Budget Speech 2014-15 proposed that after making suitable
changes to current framework, a structure will be put in place for continuous authorization of
universal banks in the private sector in the current financial year. RBI will create a framework
for licensing small banks and other differentiated banks. Differentiated banks serving niche
interests, local area banks, payment banks etc. are contemplated to meet credit and
remittance needs of small businesses, unorganized sector, low income households, farmers
and migrant work force. RBI vide its Press Release dated 17.07.2014 has released the Draft
Guidelines for Licensing of Payments Banks and Draft Guidelines for Licensing of Small
Banks.

Module- B
Legal Aspects of Banking
Operations

Unit 7 Different Types of Borrowers

Types of borrowers, for the convenience of our study, can be classified as follows:
1. Individual 2. Partnership Firm 3. Hindu Undivided Family 4. Companies 5. Statutory
Corporations 6. Trusts and Co-operative Societies
1. Individual : If an individual is a. minor: A person who has not attained the age of
eighteen years under Indian Majority Act and twenty-one years if he is a ward, under the
Guardians and Wards Act, is considered a 'Minor' in the eyes of law. Under the law a
'minor' is not competent to contract. Therefore, if a banker lends money to a minor, then
the same, cannot be recovered, if the minor fails to repay. The only exception recognised
in a contract with a minor is of supply of necessities to him.
(ii) If an individual is not of sound mind: If a person is not of a sound mind, then he is
incompetent to enter into a contract.
(iii) Disqualified persons: There may be statutory disqualifications imposed on certain
persons in respect of their capacity to contract. For example, a person, declared as
insolvent under the Insolvency Law.
2. Partnership Firms:
Legal position of a partnership
A partnership is not distinct from its partners. Under the law, the name of a partnership
firm, is regarded as an abbreviation of the names of partners. The Indian Partnership Act,
1932, provides for registration of a partnership and it is necessary that a banker dealing
with a partnership firm should verify as to whether the firm is registered or not. This would
help him know all the names of partners and their relationship.
Authority of the partners
Section 19 of the Indian Partnership Act, 1932 deals with the implied authority of a partner
as an agent of the firm and Section 22 deals with the mode of doing acts to bind the firm. In
view of the provisions of Sections 19 and 22, it should be noted that the acts of a partner
shall be binding on the firm if they are done:
1. in the usual business of the partnership,
2. in the usual way of the business, and
3. as a partner, i.e. on behalf of the firm and not solely on his own behalf.
Section 19 of the Indian Partnership Act, 1932 states that a partner cannot affect the
transfer of immoveable property of the firm unless expressly authorised. A banker taking a
mortgage security of firm's immoveable property should ensure that the partner who is
creating the mortgage is expressly authorised to create the mortgage. If the partner, has no
authority to create the mortgage, then the banker should ensure that all the partners jointly
create the mortgage.
Insolvency of the firm
The banker, on receiving notice of insolvency of the firm, must immediately stop any further
transactions in the account irrespective of the fact that the account is in credit or debit. In
case there is a credit balance, and the banker does not intend to set off the same against
the dues in any other account, then the balance has to be handed over to the official
receiver appointed by the Court or as directed by the Court. In case the account is in debit
then the banker would be required to prove his debt before the Court and thereafter will be
entitled to receive the same from the Official Receiver either in full or as per the dividend
declared by the Courts.

Insolvency of the partner

If at the time of insolvency of one of the partners, the firm's account is in credit then the
other partners can operate the same, but the banker should obtain a fresh mandate and all
previous cheques issued by the insolvent partner may be paid provided the other partners
confirm the same.In case, the account is in debit then further transactions in the account
should be stopped so that the rule in Clayton's case does not apply.
RULE IN CLAYTON'S CASE
The rule in Clayton Case was laid down in Devayaney Vs Nobel.
Where does the rule operate?
It is applicable in case of accounts such as cash credit and overdraft where the customer
deposits and withdraws money from the account frequently. As per this rule, the order in
which the credit entry will set off the debit entry is the chronological order. This means that
the first item on the debit side will be the item to be discharged or reduced by a subsequent
item on the credit side.
How the rule operates? In case of death, retirement or insolvency of a borrower, a partner
in a firm or guarantors (or revocation of guarantee by the guarantor) in a loan account, the
existing debt due from the borrower is adjusted if subsequent credit are allowed. If fresh
debits are allowed, these are considered a fresh loan and the bank cannot recover such
debt from the assets of the deceased, retired or insolvent partner and may ultimately suffer
the loss if the debt cannot be recovered from the remaining partners.
How to stop operation of the rule-To avoid the operation of the rule given in the
Clayton's case, the banker stops the operations in the old account and opens a new
account in the name' of the reconstituted firm. Thus the liability of the deceased, retired or
insolvent partner, as the case may be, at the time of his death, retirement or insolvency is
determined and he may be held liable for the same. Subsequent deposits made by
surviving/solvent partners in a different account, will not be applicable to discharge the
same.
Death of a partner
In case of death, the principles as stated in Insolvency of a partner applies. Since the death
of a partner dissolves the partnership firm, upon receipt of such information, banks are
required to stop the transactions of the firm in a running credit facility like cash credit,
overdraft to crystallize the liability of the deceased partner and make his/her estate liable
for its dues. Banks allow the transactions in a separate account so that the business of the
firm is not adversely affected.
3. Hindu Undivided Family:
Constitution of a Joint Hindu Family
A joint Hindu Family consists of male members descended lineally from a common male
ancestor, together with their mothers, wives or widows and unmarried daughters bound
together by the fundamental principle of family relationship which is the essence and
distinguishing feature of institution. The Joint Hindu Family, is purely a creature of law and
cannot be created by an act of parties.

Law governing Joint Hindu Family

Joint Hindu Family is governed basically by two schools of thought. They are Dayabhag
and Mitakshara schools.
The law governing Joint Hindu Family is codified under Hindu Code and now, succession
among Hindus is governed by the Hindu Succession Act, 1956. It is to be noted that a
woman member also inherits properties at par with a male member and is treated as coparceners.
Management of business of a Joint Hindu Family Bythe senior most male member of
the family called 'Manager' or 'Karta' . Liability of 'Karta' is unlimited, whereas the liability of
the co-parceners is limited to their shares in the joint family estate.
Banker and his dealings with joint family
(a) A banker dealing with a Hindu Undivided Family, should know the 'Karta' of the family.
(b) Banker should ensure that 'Karta' of the joint family deals with the bank and borrows
only for
the benefit of joint family business.
(c) The application to open an account must be signed by all the members and all adult
members
should be made jointly and severally liable for any borrowings or if the account gets
overdrawn.
4.Incorporation of company Section 12 of the Companies Act, 1956 provides that any
seven or more persons or where a company formed is a private company, any two or more
persons can form a company, by subscribing their names to the Memorandum of
Association.
Requirements of forming a company
The business and objects of a company and the rules and regulations governing its
management are
known by two important documents called 'Memorandum of Association' and 'Articles of
Association'. The memorandum of association is the charter of the company.Memorandum
of Association of a company contains the following details among others:
(a) Name of the company (b) State in which the registered office of the company is to be
situated
(c) Objects of the company (d) Liability of the members and (e) Share capital and its
division.
Articles of Association are rules and regulations governing the internal management of the
company.They define the powers of the officers of the company. it contains the following
details among other things:
(a) Number of directors of the company
(b) Procedure for conducting meetings of the shareholders, board of directors, etc.
(c) Procedure for transfer and transmission of shares
(d) Borrowing powers of the company
(e) Officers of the company and other details.
5. Statutory Corporations: Besides companies registered under the Companies Act,
1956, there may be corporations established by an Act of Parliament. These are called
'Statutory Corporations'. For example State Bank of India is established under State Bank
of India Act, 1955.. The Act, rules and regulations define the scope, objects and range of
business of the corporations.

6. Trusts and Co-operative Societies, etc.

(i) Clubs, societies, schools and other non-trading associations: Such bodies, if not
incorporated under the laws governing them, cannot enter into any transactions. These
bodies are usually governed by the Companies Act or the Co-operative Societies Act and
function within the ambit of those laws. For example clubs can be registered either under
the Companies Act, 1956 or under the Societies Registration Act or the Co-operative
Societies Act. In the case of
lending to these bodies, a banker should study the bye-laws, rules and regulations
applicable to them and ascertain the legality of lending to them,
(ii) Trusts: These are governed by the Indian Trusts Act, 1882, if they are private trusts
and by Public Trusts Act if they are public trust, or Religious and Charitable Endowments
Act, if they are trusts of Hindus and in the case of Muslims they are governed by Wakf Act.
A banker dealing with trusts should acquaint himself with the respective laws applicable to
them and should ensure that his lendingis within the ambit of those laws.
(iii) Trustee: Trustees manage trusts. The powers and duties of the trustees are provided
in trust deed and are also regulated by the respective laws applicable to such trusts. For
example, in the case of public trusts, Charity commissioners, or commissioner of
endowments appointed by the Government, have the power to supervise the activities of
the trusts. The trustee of the Muslim Wakf is called Mutawali and his conduct and functions
are regulated by the Wakf Board. Therefore, a banker dealing with a trust should ensure
that all the permission required for taking a loan is obtained from respective Government
authorities.
LIMITED LIABILITY PARTNERSHIP(LLP)
The parliament on 12.12.2008 has passed the limited liability partnership Act 2008 and
the rules under the act have been framed and are made effective from 01.04.2009. The
salient features of the act and rules are as under:

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

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

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

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

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

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

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

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

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

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

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

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Module C
Banking Related Laws

Unit -21 Recovery of Debts Due to Banks and

Financial Institutions Act, 1993
On 30thSeptember, 1990 more than fifteen lakhs of cases filed by the public sector banks
and about 304 cases filed by the financial institutions were pending in various courts,
recovery of debts involved more than Rs.5622 crores in dues of Public Sector Banks and
about Rs.391 crores of dues of the financial institutions. It received the assent of the
President on 27th August 1993. t extends to the whole of India except the State of
Jammu and Kashmir. It shall be deemed to come into force on the 24thday of June, 1993.
The provisions of this Act shall not apply where the amount of debt due to any bank or
financial institution or to a consortium of banks or financial institutions is less then ten lakh
rupees or such other amount, being not less than one lakh rupees, as the Central
Government may, by notification, specify.
Important Definitions:
(a) bank means (i) banking company; (ii) a corresponding new bank; (iii) State Bank
of India; (iv) a subsidiary bank; or (v) a Regional Rural Bank;
(b) debt means any liability (inclusive of interest) which is claimed as due from any
person by a bank of a financial institution or by a consortium of banks or financial
institutions during the course of any business activity undertaken by the bank or the
financial institution or the consortium under any law for the time being in force, in cash or
otherwise, whether secured or unsecured, or assigned, or whether payable under a
decree or order of any civil court or any arbitration award or otherwise or under a
mortgage and subsisting on, and legally recoverable on, the date of the application.
(c) Section 4A of the Companies Act, 1956 (1 of 1956) states that each of the following
financial institutions shall be regarded as a public financial institution, namely:-(i) the Industrial Credit and Investment Corporation of India Limited, a company formed
and registered under the Indian Companies Act, 1913;
(ii) the Industrial Finance Corporation of India, established under section 3 of the
Industrial Financial Corporation Act, 1948;
(iii) the Industrial Development Bank of India, established under section 3 of the Industrial
Development Bank of India Act, 1964;
(iv) the Life Insurance Corporation of India, established under section 3 of the Life
Insurance Corporation Act, 1956;
(v) the Unit Trust of India, established under section 3 of the Unit Trust of India Act, 1963.
Debt recovery Tribunals:
Tribunal shall consist of one person only (hereinafter referred to as the Presiding Officer)
to be appointed by notification, by the Central Government. He should be qualified to be
a District Judge and will hold office for a term of five years from the date on which he
enters upon his office or until he attains the age of 62, whichever is earlier. The Recovery
Officers and other officers and employees of a Tribunal shall discharge their functions
under the general superintendence of the Presiding Officer.
Appellate Tribubal: Appellate tribunal means where an appeal against the order of debt
recovery tribunals can be filed. It will consist of one person called as Chairperson. His
qualification shall be as under
a) is, or has been, or is qualified to be, a Judge of a High Court; or
(b) has been a member of the Indian Legal Service and has held a post in Grade I of that
service for at least three years; or
(c) has held office as the Presiding Officer of a Tribunal for at least three year.
He shall hold office for a term of five years from the date on which he enters upon his
office or until he attains the age of 65whichever is earlier.

The Presiding Officer of a Tribunal or the Chairperson of an Appellate Tribunal] shall not
be removed from his office except by an order made by the Central Government on the
ground of proved misbehaviour or incapacity after inquiry.
No order of the Central Government appointing any person as [the Presiding Officer of a
Tribunal or Chairperson of an Appellate Tribunal] shall be called in question in any
manner, and no act or proceeding before a Tribunal or an Appellate Tribunal shall be
called in question in any manner on the ground merely of any defect in the constitution of
a Tribunal or an Appellate Tribunal.
JURISDICTION, POWERS AND AUTHORITY OF TRIBUNALS
A Tribunal shall exercise, on and from the appointed day, the jurisdiction, powers and
authority to entertain and decide applications from the banks and financial institutions for
recovery of debts due to such banks and financial institutions. Appointed day means the
date on which such Tribunal is established.
On and from the appointed day, no court or other authority shall have, or be entitled to
exercise, any jurisdiction, powers or authority (except the Supreme Court, and a High
Court exercising jurisdiction under articles 226 and 227 of the Constitution) in relation to
the matters specified in section 17 of this act.
Application to the Tribunal. A bank or a financial institution may make an application
to the Tribunal within the local limits of whose jurisdiction
1(a) the defendant, or each of the defendants where there are more than one, at the
time of making the application, actually and voluntarily resides or carries on business or
personally works for gain; or
(b) any of the defendants, where there are more than one, at the time of making the
application, actually and voluntarily resides or carries on business or personally works for
gain; or
(c) the cause of action, wholly or in party, arises.
(2) Where a bank or a financial institution, which has to recover its debt from any person,
has filed an application to the Tribunal and against the same person another bank or
financial institution also has to recover its debt, then, the later bank or financial institution
may join the applicant bank or financial institution at any stage of the proceedings, before
the final order is passed, by making an application to that Tribunal.
3) On receipt of the application the Tribunal shall issue summons requiring the
defendant to show cause within thirty days of the service of summons as to why the relief
prayed for
should not be granted.
(4) The defendant shall, at or before the first hearing or within such time as the Tribunal
may permit, present a written statement of his defence.
(5) Where the defendant claims to set-off against the applicants demand any
ascertained sum of money legally recoverable by him from such applicant, the defendant
may, at the first hearing of the application, but not afterwards unless permitted by the
Tribunal, present a written statement containing the particulars of the debt sought to be
set-off.
(6) The written statement shall have the same effect as a plaint in a cross-suit so as to
enable the Tribunal to pass a final order in respect both of the original claim and of the
set-off.
(7)The Tribunal may make an interim order (whether by way of injunction or stay or
attachment) against the defendant to debar him from transferring, alienating or otherwise

dealing with, or disposing of, any property and assets belonging to him without the prior
permission of the Tribunal.
(8) The Tribunal may, after giving the applicant and the defendant an opportunity of being
heard, pass such interim or final order
(9) The Tribunal shall send a copy of every order passed by it to the applicant and the
defendant.
(10) The Presiding Officer shall issue a certificate under his signature on the basis of the
order of the Tribunal to the Recovery Officer for recovery of the amount of debt specified
in the certificate,
(11) The application made to the Tribunal under shall be dealt with by it as expeditiously
as possible and endeavour shall be made by it to dispose of the application finally within
one
hundred and eighty days from the date of receipt of the application
Appeal to the Appellate Tribunal ( sec 20)
Any person aggrieved by an order made, or deemed to have been made, by a Tribunal
under this Act, may prefer an appeal to an Appellate Tribunal having jurisdiction in the
matter. No appeal shall lie to the Appellate Tribunal from an order made by a Tribunal
with the consent of the parties. Such appeal to be filed within a period of forty-five days
from the date on which a copy of the order made, or deemed to have been made, by the
Tribunal is received by him . Provided that the Appellate Tribunal may entertain an appeal
after the
expiry of the said period of forty-five days if it is satisfied that there was sufficient cause
for not filing it within that period.
On receipt of an appeal, the Appellate Tribunal may, after giving the parties to the appeal,
an opportunity of being heard, pass such orders thereon as it thinks fit, confirming,
modifying or setting aside the order appealed against.
The Appellate Tribunal shall send a copy of every order made by it to the parties to the
appeal and to the concerned Tribunal.
The appeal filed before the Appellate Tribunal shall be dealt with by it as expeditiously as
possible and endeavour shall be made by it to dispose of the appeal finally within six
months from the date of receipt of the appeal.
Where an appeal is preferred by any person from whom the amount of debt is due to a
bank or a financial institution or a consortium of banks or financial institutions, such
appeal shall not be entertained by the Appellate Tribunal unless such person has
deposited with the Appellate Tribunal seventy-five per cent of the amount of debt so
due from him as determined by the Tribunal under section 19. Provided that the Appellate
Tribunal may, for reasons to be recorded in writing, waive or reduce the amount to be
deposited under this section.
The Tribunal and the Appellate Tribunal shall not be bound the procedure laid down by
the Code of Civil Procedure, 1908 (5 of 1908), but shall be guided by the principles of
natural justice.
The Tribunal and the Appellate Tribunal shall have, for the purposes of discharging their
functions under this Act, the same powers as are vested in a civil court under the Code of

Civil Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following matters,
namely:-(a) summoning and enforcing the attendance of any person and examining him on oath;
(b) requiring the discovery and production of documents;
(c) receiving evidence on affidavits;
(d) issuing commissions for the examination of witnesses or
documents;
(e) reviewing its decisions;
(f) dismissing an application for default or deciding it ex parte;
(g) setting aside any order of dismissal of any application for default
or any order passed by it ex parte;
(h) any other matter which may be prescribed.
RECOVERY OF DEBT DETERMINED BY TRIBUNAL
DRTs will issue recovery certificate for recovery of dues.The Recovery Officer shall, on
receipt of the copy of the recovery certificate proceed to recover the amount of debt
specified in the certificate by one or more of the following modes, namely:-(a) attachment and sale of the movable or immovable property of the defendant;
(b) arrest of the defendant and his detention in prison;
(c) appointing a receiver for the management of the movable or immovable properties of
the defendant.
Validity of certificate and amendment thereof. The defendant shall not dispute
before the Recovery Officer the correctness of the amount specified in the certificate, and
no objection to the certificate on any other ground shall also be entertained by the
Recovery
Officer.
The Presiding Officer shall have power to withdraw the certificate or correct any clerical or
arithmetical mistake in the certificate by sending intimation to the Recovery Officer.
The Presiding Officer shall intimate to the Recovery Officer any order withdrawing or
canceling a certificate or any correction made by him under sub- section (2).
Stay of proceedings The Presiding Officer may also grant time for the payment of the
amount, and thereupon the Recovery Officer shall stay the proceedings until the expiry of
the time so granted.
Any person aggrieved by an order of the Recovery Officer made under this Act may,
within thirty days from the date on which a copy of the order is issued to him, prefer an
appeal to the Tribunal.
DRT Act overrides the Companies Act.

DOCTRINE OF ELECTION
The Supreme Court in M/s Transcore vs Union of India and Another (decided on 29-22006). The Supreme Court observed that there are three elements of election, namely,
existence of two or more remedies; inconsistencies between such remedies and a choice
of one of them. If anyone of the three elements is not there, the doctrine will not
apply.Withdrawal of the Original Application before the DRT under the DRT Act is not a
pre-condition for taking recourse to the SARFAESI Act

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topics which have been added in the revised syallabus.
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students from all back ground to grasp it easily.