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A SUMMARY
27-11-2017
Contents
Banking Law & Practice
- Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
Regulations
Banking Regulation Act, 1949
Banking Regulation Act, 1949
Definition of banking & banking company
Licensing
Permitted business
Prohibited business
RBI’s powers
Banking company
“means any company which transacts the business of banking in India”
- Explanation excludes manufacturing and trading company
{Section 5 (c)}
- Section 22 criteria
• Solvency
• Affairs/ management not detrimental to depositor and public interest
• Adequate capital structure and capital prospects
• Public interest will be served
• Grant of licence not prejudicial to operation and consolidation of banking system
• Foreign banks – home country does not discriminate against Indian banks
• Other conditions specified by RBI
Section 25
- Quarterly return of assets and liabilities at the close of business on the last Friday of every
quarter
Section 27
- Monthly return on Asset & Liability position as on last Friday
- RBI empowered to direct banks to furnish information within a specified time frame
- RRBs also need to submit a copy to NABARD
Section 26
- Return of unclaimed deposits
Section 31
- Three copies of annual returns to be submitted to RBI
Inspection
Section 35
- Inspect books
• Also on direction of CG
oath
Sec 24 – SLR
Applicability of BR Act
Nationalised Banks
- Banking Companies (Acquisition and Transfer of Undertakings) Act,1970/1980;
- Section 51 of BR Act makes specific sections applicable
Cooperative Banks
- Cooperative Societies Act. 1912 or the respective Co-operative Socieities Act of the
state concerned
- Part V of the B R Act – BR (AACS) Act
Some important RBI instructions in
context of BR Act
Master Circular
- Branch authorisation
Others
Immoveable property Land and building Mortgaage Sec 58, Transfer of Property Act
Actionable claims (i.e. Book debts, term deposit receipts, Assignment Sec 130, Transfer of Property Act
unsecured debts) etc.
Moveable property/ Plant & machinery, stocks, Pledge/ Pledge-Sec 172 Indian Contract Act
goods vehicles, etc. hypothecation/ lien Hypothecation – Sec 2(n) SARFAESI
Paper securities Shares, debentures, MF, bonds Lien Sec 170 and 171Indian Contract Act
Personal guarantee Promoters & 3rd party guarantees Personal liability Sec 126 Indian Contract Act
Kinds of charges – Fixed v/s Floating
Fixed charge
Floating charge
Exclusive charge
- To one creditor
- No intervention of other creditors
First charge
- First right over the proceeds from the security charged
Second charge
- Rights subject to those of first charge holder
Mortgage
Dealt with in Transfer of Property Act, 1882
- “A 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 58
Types
- Simple
- Conditional sale
- Unsufructuary mortgage
- English mortgage
- Equitable Mortgage
- Anomoalous morgage
Simple Mortgage
“Without 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)]
Registration is mandatory
Conditional Sale
“The 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)]
(a) the mortgager delivers possession expressly, or by implication binds himself to deliver possession
of the mortgaged property to the mortgagee, and
(b) Authorises 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 repaid
Mortgage has the right to receive rents and profits accruing from the
property
No personal liability of the mortgager
Priority of mortgages
- Preliminary decree
- Final decree
- Sale
Which Mortgage would you prefer?
English Mortgage
Equitable Mortgage
(Court decisions) (Deposit of title deeds)
Assignment
Transfer of actionable claim
- Claim to debt other than debt
• secured by mortgage of immoveable property
Key features
- Should be in writing
Drawbacks
- Risk of fraud- multiple charges on same property
- Erosion of security value
Precautions
- Periodic stock statements
- Registration of charge
- Notice of charge
- Insurance of property
Lien
General Lien
- Creditor’s right to retain property of debtor
Banker’s lien
- General lien+ right to sell
Consideration
- Exemption
Free consent
Capacity to contract
- Sound mind
- Minor contract
Stamping of documents
Stamp duty – tax levied on documents
- Originated in Netherlands – 1624
- France (1654), Denmark (1657), Prussia (1682)
Key aspects
- Amount of duty
- Type of stamp used
- Cancellation of stamp
- Time of stamping and execution
- Place of stamping and execution
Consequences
- Admissibility as evidence
- Adjudication
Law of limitation
Period within which suit can be filed
- Bars to remedies
- Acknowledgement of debt
• Writing, signed, stamped and addressed to lender
Precautions
- Scope of powers
- Confirmation of validity
SARFAESI Act, 2002
Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act,
2002
- Coverage
- Managed by trust
SARFAESI – Enforcement of security
interest
No need for court intervention
- Overriding effect over provisions of Transfer of property Act
- Notice mandatory
• 60 days notice
• Details of amount payable and secured asset intended to be enforced
• Borrower prohibited from transferring assets
Appropriation of proceeds
- Expenses->Dues->Balance to debtor
- If winding up – dues of workman have pari passu charge
- Auction
• 30 days notice – publication in 2 leading newspapers incl. vernacular
• Valuation to fix reserve price
Maintains registry of
- Securitisation of financial assets
Registration
- Compulsory registration with RBI
• Existing companies to apply within 6 months
- Conditions
• Minimum capital – Rs. 30 crore (authorised), Rs.20 crore(issued)
• Management not prejudicial to interests of users, clients or borrowers, credit information companies
• Additional conditions at discretion of RBI
Give directions
Inspection
Appoint observers
Administrator
Functions
Permitted businesses
- Collect information on trade, credit and standing of borrowers of member credit institutions
- Provide
• Information to specific users, credit institutions
• Credit scoring
- Research projects
- Other business specified by RBI
Membership
- Credit institutions to become members
- Compulsory to be member of at least one
- Bound to give information
- Insurance companies
- Cellular phone service providers
- Rating agency
- Broker
- Trading member of recognised commodity exchange
- SEBI
- IRDA
Forms of business
Privacy principles
Diversion
- Purchasing assets other than those for which the loan was sanctioned
- No additional facilities
- Legal process
Quarterly reporting
- Suit filed
Important aspects
- Definitions
- Presumption of consideration
- Endorsement
- Cheque (Sec 6)
• Bill of exchange
• Drawn on banker
• Payable on demand
• Includes image of cheque
NB. All are to be in writing
Definitions - Holder
Holder (Sec 8)
- Person entitled in his own name to possession
- Protection to
Liability to true owner continues if not paid through a bank (Sec 129)
Protection to paying and collecting
bankers
Protection to paying banker
- Good faith
- Without negligence
Bearer
- Endorsement in blank –
• payable to bearer even if originally payable to order
Account Payee
Not provided in the NI Act
Developed as practice
RBI instructions
Objective
• Prevent banks from being used by criminals for money
laundering and terrorist activities
Key aspects
Customer
- Account holder/ business relationship
- Beneficial owner
- Any person connected to the transaction which can cause significant reputational/
other risks to the bank/FI
General guidelines
- Confidentiality of customer information
- Remittances over Rs.50,000 – only by debit to customer’s account/ cheque
- Tenor of instrument reduced to 3 months
- Adherence to provisions of Foreign Contribution (Regulation) Act, 2010
Elements of KYC Policy
Customer Acceptance Policy
Monitoring of Transactions
Risk Management
Customer Acceptance Policy
No accounts in fictitious/ benami names
Documentation to be collected
Background checks
Natural persons
- Identity of customer
- Address
- Photograph
Salaried employees
Trustee accounts
Proprietary concerns
Simplified KYC
Targeted at low income groups - urban and rural poor
Limits
- Balance not to exceed Rs.50,000
Recruited through
- Spam emails
activity
the account
Threshold limits
Cash transactions
Risk Management
Board to ensure effective KYC,AML system in
place
Role of audit and compliance mechanisms