Sie sind auf Seite 1von 100

Legal and Regulatory Aspects

of Banking
For JAIIB

9/21/2014

$XWKRUHGE\
.DQZDO.XPDU
INDEX

Ch-No. Contents Page No.


1 Banking Regulation Act 1-3
2 Reserve Bank of India Act 4-10
3 Indian Financial System 11-17
4 Negotiable Instrument Act 18-29
5 Indemnity, Guarantee, LC and Bill Finance 30-33
6 Types of Collaterals 34-36
7 Types of Charges 37-41
8 Types of Customers 42-48
9 SARFAESI Act 49-54
10 Banking Ombudsman Scheme and Copra 55-58
11 DRT, Bankers’ Books Evidence Act and Lok Adalat 59-61
12 Limitation 62-63
13 Tax Laws 64-66
14 Indian Contract Act 67-74
15 Indian Partnership Act 75-79
16 Indian Company Act 80-88
17 FEMA 89-91
18 Transfer of Property Act 92-94
19 Right to Information Act 95-96
20 Prevention of Money Laundering Act 97-98
CHAPTER - 1
THE BANKING REGULATION ACT, 1949
 $QDFWWRFRQVROLGDWHDQGDPHQGWKHODZVUHODWLQJWREDQNLQJ
 &DPH LQ WR IRUFH ZHI  7KH DFW ZDV SDVVHG DV ³7KH %DQNLQJ FRPSDQLHV
$FW´DQGODWHURQWKHQDPHFKDQJHGWR³7KH%DQNLQJ 5HJXODWLRQ$FWZHI

 ([WHQGVWRWKHZKROHFRXQWU\ PDGH DSSOLFDEOHWRWKH- .LQ 
 7KHDFWLVQRWDSSOLFDEOHWRSULPDU\DJULFXOWXUDOFUHGLWVRFLHWLHVFRRSHUDWLYHODQG
PRUWJDJHEDQNVDQGQRQDJULFXOWXUDOSULPDU\FUHGLWVRFLHWLHV
 6DOLHQWSURYLVLRQVRIWKHDFWDUHDVXQGHU

Summary of salient provisions


6HFWLRQ &RQWDLQVGHILQLWLRQRI%DQNLQJ%DQNLQJ&RPSDQ\VHFXUHGORDQVRUDGYDQFHV 
 Banking PHDQVDFFHSWLQJIRUWKHSXUSRVHRIOHQGLQJRULQYHVWPHQWRIGHSRVLWVRIPRQH\
IURPWKHSXEOLFUHSD\DEOHRQGHPDQGRURWKHUZLVHDQGZLWKGUDZDOE\FKHTXHGUDIWRUGHU
RURWKHUZLVH

Banking Company PHDQVDQ\FRPSDQ\ZKLFKWUDQVDFWVWKH EXVLQHVVRIEDQNLQJLQ,QGLD

Secured loan or advance PHDQV D ORDQ RU DGYDQFH PDGH RQ WKH VHFXULW\ RI DVVHW WKH
PDUNHW YDOXH RI ZKLFK LV QRW DW DQ\ WLPH OHVV WKDQ WKH DPRXQW RI VXFK ORDQ RU DGYDQFH
DQGµXQVHFXUHGORDQRUDGYDQFH¶PHDQVDORDQRUDGYDQFHQRWVHFXUHG
6HFWLRQ 'HVFULEHVWKH forms of business LQZKLFKDEDQNLQJFRPSDQ\PD\ HQJDJHLQDGGLWLRQWR
 WKH%DQNLQJ%XVLQHVV

6HFWLRQ 8VHRI:RUG Banking: %DQNLQJFRPSDQ\FDUU\LQJRQEDQNLQJEXVLQHVVLQ,QGLDWRXVHDW


 OHDVWRQHZRUGEDQNEDQNHUEDQNLQJRU EDQNLQJFRPSDQ\LQLWVQDPH

6HFWLRQ Prohibition of trading: UHVWULFWVSURKLELWVEXVLQHVVOLNHWUDGLQJIRUJRRGVHWF



6HFWLRQ Holding of Immovable Property (other than for own Use):
 1R%DQNLQJFRPSDQ\VKDOOKROGDQ\LPPRYDEOHSURSHUW\KRZVRHYHUDFTXLUHGH[FHSWDVLV
DFTXLUHGIRULWVRZQXVHIRUDSHULRG exceeding 7 years IURPWKHGDWHRIDFTXLVLWLRQ5%,
FDQIXUWKHUJUDQWH[WHQVLRQIRUDSHULRG not exceeding 5 years

6HFWLRQ
 5HTXLUHPHQWDVWR minimum paid up Capital DQG Reserves required for a Scheduled
Bank (bank included in 2nd Schedule of RBI Act 1934).
 'RPHVWLF %DQNV ± 0LQ ± 5V   ODF 5V ODF IRU EXVLQHVV LQ 0XPEDL RU
.RONDWD
 )RUHLJQ %DQNV  0LQ  5V ODF 5V ODF IRU EXVLQHVV LQ 0XPEDL RU
.RONDWD ,WLVFDOFXODWHGDV9DOXHRI$OO$VVHWVPLQXV2XWVLGH/LDELOLWLHV
 ,I SODFH RI EXVLQHVV LV RQH VWDWH ± 5V  ODF IRU SULQFLSDO SODFH EXVLQHVV
3/86  IRU DGGLWLRQDO SODFH LQ VDPH GLVWULFW RU  IRU DGGLWLRQDO
SODFHHOVHZKHUH 0D[LPXP5V 

$SDUWIURPWKLV)RUHLJQEDQNVDUHUHTXLUHGWRGHSRVLWDWOHDVWRISURILWVIRUHDFK\HDU

1
ZLWK5%,LQUHVSHFWRIEXVLQHVVWUDQVDFWHGWKURXJKEUDQFKHVLQ,QGLD 3UHVHQWO\ ± 
6HFWLRQ Regulation of paid up capital, subscribed capital and authorized capital and voting
 rights
6XEVFULEHGFDSLWDOVKRXOGQRWEHOHVVWKDQòRILWVDXWKRUL]HGFDSLWDO
3DLGXSFDSLWDOVKRXOGQRWEHOHVVWKDQòRILWV VXEVFULEHGFDSLWDO
LHUDWLRRIDXWKRUL]HGFDSLWDOVXEVFULEHGDQGSDLGXSFDSLWDOVKRXOGEHPLQLPXP
1R SHUVRQ VKDOO KDYH YRWLQJ ULJKWV LQ H[FHVV RI  RI WRWDO YRWLQJ ULJKWV RI DOO WKH
VKDUHKROGHUV

6HFWLRQ (YHU\ EDQNLQJ FRPSDQ\ to create reserve fund DQG  RI LWV SURILWV VKRXOG EH
 WUDQVIHUUHG WR WKLV IXQG EHIRUH DQ\ GLYLGHQG LV GHFODUHG  5%, KDV GLUHFWHG WKH EDQNV WR
WUDQVIHUQRWOHVVWKDQRIQHWSURILWVWR5HVHUYH)XQGV 7KHDSSURSULDWLRQRIDQ\VXP
IURPWKHUHVHUYHIXQGRUVKDUHSUHPLXPDFFRXQWLVWREHUHSRUWHGWR5HVHUYH%DQNZLWKLQ
GD\VIURPGDWHRIDSSURSULDWLRQ DVXPRIPRQH\DOORFDWHGRIILFLDOO\IRUDSDUWLFXODUXVH 

6HFWLRQ Cash Reserve: 1RQVFKHGXOHGEDQNVWRPDLQWDLQRIWKHGHPDQGDQGWLPHOLDELOLWLHVE\


 ZD\RIFDVKUHVHUYHVZLWKLWVHOIRUE\ZD\RIEDODQFHLQD&XUUHQW$FFRXQWZLWK5%,

6HFWLRQ 3HUPLWVEDQNWRIRUP subsidiary company for certain purposes (vide section 6)



6HFWLRQ 1REDQNLQJFRPSDQ\VKDOO hold shares in any companyZKHWKHUDVSOHGJHHPRUWJDJHH
  RU DEVROXWH RZQHUV RI DQ DPRXQW H[FHHGLQJ  RI LWV RZQ SDLG XS VKDUH FDSLWDO 
UHVHUYHVRURIWKHSDLGXSVKDUHFDSLWDORIWKDWFRPSDQ\ZKLFKHYHULVOHVV

6HFWLRQ Restrictions on loans and advances:


 %DQNVFDQQRWJUDQWORDQVDJDLQVWVHFXULW\RIWKHLURZQVKDUHV
6HFWLRQ (PSRZHUVWKH RBI to issue directives to banks to determine policy for advances

6HFWLRQ Rate of interest FKDUJHGE\EDQNVVKDOOQRWEHUHRSHQHGE\DQ\FRXUWRQWKHJURXQGWKDW
$ WKHUDWHRILQWHUHVWFKDUJHGE\EDQNVLVH[FHVVLYH

6HFWLRQ (PSRZHUV5%,WR issue license IRURSHQLQJDEDQN



6HFWLRQ (PSRZHUV 5%, WR JUDQW license for opening of EUDQFKHV 5%,UHTXLUHVEDQNVWR VXEPLW
 UHTXHVWIRUQHZEUDQFKHV$70V$GPQRIILFHVRQFHLQD\HDU
3HUPLVVLRQ RI 5%, LV YDOLG IRU  \HDU )RU 55%V DSSOLFDWLRQ KDV WR EH URXWHG WKURXJK
1$%$5'

1RSHUPLVVLRQLVUHTXLUHGWRRSHQWHPSRUDU\EUDQFKIRUGD\VZLWKLQLQFLW\
6KLIWLQJRIEUDQFKZLWKLQVDPHFLW\WRZQRIYLOODJHGRHVQRWUHTXLUHSHUPLVVLRQRI5%,

6HFWLRQ Statutory Liquidity Ratio(YHU\EDQNKDVWRPDLQWDLQOLTXLGDVVHWVLQIRUPRIFDVKJROG


 XQHQFXPEHUHGDSSURYHGVHFXULWLHVDWWKHFORVHRIDQ\EXVLQHVVZKLFKLVPLQLPXPRI
FHUWDLQ SHUFHQWDJH 3UHVHQWO\  RILWVWRWDOGHPDQGDQGWLPHOLDELOLWLHVLQ,1',$DVRQ
ODVW)ULGD\RIWKHVHFRQGSUHFHGLQJIRUWQLJKW 7KHUHLVQRIORRUOLPLWRI6/5DQGLW DVSHU
5%,GLVFUHWLRQDVDJDLQVWHDUOLHU +RZHYHUPD[LPXP OLPLW LV

6HFWLRQ 5HWXUQ RI unclaimed deposits  \HDUV DQG DERYH  ZLWKLQ  GD\V RI FORVH RI HDFK
 FDOHQGDU\HDU
6HFWLRQ (YHU\EDQNWRSUHSDUHLWV Balance Sheet DVRQODVWZRUNLQJGD\RI0DUFKHYHU\\HDURQ
 )RUPC$¶DQGSURILWDQGORVVDFRQ)RUPC%¶RIWKHUG VFKHGXOHRIWKH$FW

2
6HFWLRQ %DODQFH6KHHW should be got audited IURPTXDOLILHGDXGLWRUV
 ,
6HFWLRQ 7RSXEOLVK Balance Sheet and Auditors UHSRUWZLWKLQ PRQWKVIURPWKHHQGRISHULRGWR
 ZKLFKWKH\UHIHU

6HFWLRQ (YHU\EDQNKDVWRVXEPLWFRSLHVRI%DODQFHVKHHW WR5%,ZLWKLQDSHULRGRIPRQWKV


 ZKLFKFDQEHH[WHQGHGXSWRDQRWKHUSHULRGRIPRQWKV 0D[LPXPPRQWKV 
6HFWLRQ 5%,FDQWHUPLQDWHDQ\&KDLUPDQRU(PSOR\HHRIWKHEDQNZKHUH LWFRQVLGHUVGHVLUDEOHWR
 GRVR

6HFWLRQ 5HWXUQLQJDSDLGLQVWUXPHQWWRDFXVWRPHUDIWHUNHHSLQJWUXHFRS\
=
6HFWLRQ 1RPLQDWLRQ)DFLOLW\
 =$WR
=)

Constitution of Banks
 $OO3XEOLF6HFWRU%DQNVDUH%RG\&RUSRUDWHIRUPHGXQGHU6SHFLDO6WDWXWH
 2WKHUEDQNVDUHUHJLVWHUHGXQGHU&RPSDQ\$FW
 &RRSHUDWLYH 6RFLHWLHV DQG 6WDWH &RRSHUDWLYH %DQNV DUH UHJLVWHUHG DQG
FRQWUROOHGE\6WDWH*RYWXQGHU 6WDWH&RRSHUDWLYH6RFLHW\ $FW RI HDFK6WDWH
 2WKHU&RRSHUDWLYH%DQNV KDYLQJEUDQFKHVLQPRUHWKDQVWDWH DUHHVWDEOLVKHG
XQGHU 0XOWL6WDWH&RRSHUDWLYH 6RFLHW\$FW 5HJLVWUDUDSSRLQWHGE\&HQWUDO
*RYWLVWKHDXWKRULW\WRUHJLVWHUDQGZLQGXS
 &RRSHUDWLYH %DQNV RSHUDWLQJ LQ 5XUDO DUHDV DUH FRQWUROOHG E\ 6WDWH *RYW DQG
1$%$5'
 &RRSHUDWLYHEDQNVLQ8UEDQDUHDVDUHFRQWUROOHGE\6WDWH*RYWDQG5%,

Assets in India

 (YHU\ %DQNLQJ &R KDV WR PDLQWDLQ DVVHWV LQ ,QGLD XS WR WKH DPRXQW QRW OHVV
WKDQRI'7/DVRQFORVHRIEXVLQHVVGD\RQODVW)ULGD\HYHU\TXDUWHU

3
CHAPTER - 2
RESERVE BANK OF INDIA ACT, 1934
 (VWDEOLVKHG RQ VW $SULO  XQGHU 5%, $FW 1934 RQ WKH UHFRPPHQGDWLRQV RI -RKQ
+LOWRQ<RXQJ&RPPLVVLRQ NQRZQDV5R\DO&RPPLVVLRQRQ,QGLDQ&XUUHQF\ )LQDQFH
 1DWLRQDOL]HGRQ-DQ
 3DLGXSFDSLWDO ± 5VFURUH RZQHGE\&*
 0DQDJHPHQW ± 0DQDJHG E\ D &HQWUDO %RDUG RI 'LUHFWRUV ± RQH *RYHUQRU  '\
*RYHUQRUV   RWKHU 'LUHFWRUV  DQG  /RFDO %RDUGV DW 0XPEDL &KHQQDL .RONDWD
1HZ'HOKL
 VW *RYHUQRU ± 0U26PLWKVW ,QGLDQ*RYHUQRU ± 'U& 'HVPXNK 3UHVHQW*RYHUQRU ±
Raghuram Rajan
 %DQNRI(QJODQGLVFHQWUDOEDQNRI8.DQG)HGHUDO5HVHUYH%DQNLVWKDWRI86$

Functions:
$ Issuance of Currency (Section 22 of RBI Act)
6ROH DXWKRULW\ WR LVVXH FXUUHQF\ QRWHV RI YDULRXV GHQRPLQDWLRQV XQGHU VLJQDWXUHV RI
*RYHUQRU H[FHSW2QHUXSHHQRWHZKLFKLVLVVXHGE\&HQWUDO*RYWXQGHU6LJQDWXUHRI
)LQDQFH6HFUHWDU\  ,VVXH'HSDUWPHQWRI5%,XQGHUWDNHVWKHMRE

% Banker to the Government


5%,WUDQVDFWV*RYWEXVLQHVV PDQDJHVGHEW8VRI5%,$FW IRU&HQWUDO*RYW 8V
$ IRU 6WDWH *RYW  DGYLVHV *RYW RQ PRQHWDU\ SROLF\ PDWWHUV SURYLGHV ZD\V DQG
PHDQVDGYDQFH 8V  RI5%,$FW WR*RYW &HQWUDO6WDWH IRUPHHWLQJWHPSRUDU\
PLVPDWFKVKRUWIDOOLQUHYHQXH (Maximum for a period of 3 Months)

& Banker’s Bank


5%, DFWV DV D EDQNHU WR WKH 6FKHGXOHG EDQNV DQG WKH OHQGHU RI WKH ODVW UHVRUW E\
SURYLGLQJILQDQFLDODVVLVWDQFHE\ZD\RIUHILQDQFHUHGLVFRXQWLQJ 6HF     DQG
/LTXLGLW\$GMXVWPHQW)DFLOLW\ LQMHFWLRQRIOLTXLGLW\WKURXJK UHSRDXFWLRQV DEVRUSWLRQRI
OLTXLGLW\WKURXJKUHYHUVHUHSRDXFWLRQV 

' Controller of Banks


*UDQWV OLFHQVH WR FDUU\ RQ EDQNLQJ EXVLQHVV LVVXH GLUHFWLRQV FDUULHV RXW LQVSHFWLRQ
RQVLWHDVZHOODVRIIVLWH DQGH[HUFLVHVPDQDJHPHQWFRQWURO

( Controller of Credit
8V $RI%DQNLQJ5HJXODWLRQV$FW5%,FDQIL[LQWHUHVWUDWHV LQFOXGLQJ%DQNUDWH
DQGDOVRH[HUFLVHVVHOHFWLYHFUHGLWFRQWUROVLQRUGHUWRFRQWUROLQIODWLRQDQGPRQH\VXSSO\
IRUHQVXULQJJURZWKRIHFRQRP\DQGSULFHVWDELOLW\

9DULRXVPHWKRGVXVHGE\5%,IRUWKLVSXUSRVHDUH
 &KDQJHLQ&DVK5HVHUYH5DWLR6WDWXWRU\/LTXLGLW\5DWLR
 6WLSXODWLRQRIPDUJLQRQVHFXULWLHV
 'LUHFWHGFUHGLWJXLGHOLQHV
 2SHQPDUNHWRSHUDWLRQV 6DOHDQGSXUFKDVHRIVHFXULWLHV 
 5HSR5HYHUVH5HSRDQG06)
$QQXDO0RQHWDU\ &UHGLW3ROLF\LVLVVXHGE\5%,RQFHLQD\HDUZLWK %LPRQWKO\
5HYLHZV

4
F) Collection of Information
RBI collects information on borrowers enjoying credit limits up to Rs.10 lac on secured
basis & Rs. 5 lac on unsecured basis (u/s 45C) and shares this information with other
Banks (Sec. 45-D). It also collects information on BSR
(Basic Statistical Return); BSR-I – Part A: Containing particulars of borrowal a/cs
enjoying credit limits above Rs. 2 lac, Part B: aggregate figures of limits of Rs.2 lac and
less), - BSR-II (containing information on deposits with break up in to current, Savings
and term deposits) & also the information on suit filed accounts and willful defaulters.

G) Managing Payment System


Acts as a regulator of payment & settlement system, manages cheque clearing system
(introduced Magnetic Ink Character Recognition System (MICR), Cheque truncation
system (CTS), Electronic Clearing Service (ECS), National Electronic Fund Transfer
(NEFT), Real Time Gross Settlement (RTGS) system for faster cheque clearance /
settlement. NPCI (National Payment Corporation of India was set up to coordinate and
implement all payment systems in India.

H) Maintenance of value of Indian currency


RBI maintains and regulates foreign exchange transactions under the Foreign Exchange
Management Act (FEMA) through its Exchange Control Department.

I) Supervision of Financial System


Board for Financial Supervision (BFS) has been set up u/s 58 of RBI Act on
16.11.1994, with Governor, RBI as its ex-officio Chairman. Its functions include
empanelment and selection of statutory auditors and exercise of integrated supervision
over commercial banks. Financial Institutions & NBFCs and other para-banking financial
institutions through onsite inspection & off-site supervision through DSB Returns (eight
Returns, DSB-I is monthly return, DSB-VIII is daily return of structured liquidity) & other
returns are quarterly returns.

SALIENT PROVISIONS OF SOME IMPORTANT SECTIONS

Sec. 17 Defines various types of business which RBI may transact which include:
i. Accepting deposits of Central / State Governments free of interest
ii. Purchase Purchase/rediscount of Bills of Exchange from banks.
iii. Purchase/sale of Foreign Exchange to/from banks
iv. To give loans to banks, SFCs, etc.
v. To provide advances to Central/State Governments.
vi. To purchase/sale Government securities, etc.
Sec. 18 Grant of Emergency loan to banks on liberal terms
Sec. 19 Specifies business which RBI may not transact
Sec. 20 Banker to Govt.- Obligation of the Bank to transact Govt. business
Sec. 21 Confers right to transact govt. business in India
Sec.22 Exclusive right to issue bank notes.
Sec.24 Denomination of bank note may be maximum Rs.10,000/-. Central Govt. may direct
discontinuance or non-issuance to bank note of any denomination
Sec 26 Banks notes issued by RBI shall be Legal tender money and Guaranteed by Central
Government.

5
Sec.28 RBI can frame rules for refunding value of mutilated, soiled or imperfect notes as a matter
of grace.
Sec. 29 Bank note exempted from stamp duty under Indian Stamp Act.
Sec.31 No Body other than RBI or Central Government is authorized to issue promissory note
payable to bearer on Demand. Similarly, except RBI and Central Government, no one is
authorized to draw/accept / make or issue Bills of Exchange payable to bearer on
demand (Exception: Cheques payable to bearer on demand can be drawn by anybody).
Sec.33 Assets of the Issue department shall consist of gold coins, gold bullion and foreign
securities which will not be less than Rs.200 cr. at any time, of which gold coin and bullion
will not be less than Rs.115 crore.
Sec. 42 Maintenance of CRR by scheduled banks.
Sec. 45C Power to call for credit information from banks.
Sec. 48 Exemption to RBI from paying income tax and super tax
Sec. 49 Publication of Bank Rate. Standard rate at which RBI is prepared to buy or rediscount
bills of exchange or other commercial papers eligible for purchase under this Act. Current
rate is 9.00%
Sec. 58 RBI’s Central Board is empowered to make regulations consistent with the Act.

CASH RESERVE RATIO

With a view to monitoring compliance of maintenance of statutory reserve requirements viz.


Cash Reserve Ratio and Statutory Liquidity Ratio by the Scheduled Commercial Banks
(SCBs), the Reserve Bank of India has prescribed statutory returns i.e. Form A return (for
CRR) under Section 42 (2) of the RBI Act, 1934 and Form VIII return (for SLR) under
Section 24 of the Banking Regulation Act, 1949. These guidelines are applicable to all
Scheduled Commercial Banks excluding Regional Rural Banks.

The Reserve Bank In terms of Section 42 (1) of the Reserve Bank of India Act, 1934 having
regard to the needs of securing the monetary stability in the country, prescribes the
CRR for Scheduled Commercial Banks (SCBs) without any floor or ceiling rate.

CRR is 4.00 % at present w.e.f. 9.2.2013

No Interest Payment on Eligible Cash Balances maintained by SCBs with RBI under CRR In
view of the amendment carried out to RBI Act 1934, omitting sub-section (1B) of section 42, the
Reserve Bank of India does not pay any interest on the CRR balances maintained by
Scheduled Commercial Banks with effect from the fortnight beginning March 31, 2007. Minimum
Daily CRR balance on average basis be maintained at 95% (Previously 70%).

Fortnightly Return in Form A


Under Section 42 (2) of RBI Act, 1934, all SCBs are required to submit to RBI a provisional
return in Form 'A' within 7 days from the expiry of the relevant fortnight. The final Form 'A' is
required to be sent to RBI within 20 days from expiry of the relevant fortnight.

For reporting in Form 'A' return, banks should convert their overseas foreign currency
assets and bank credit in India in foreign currency in four major currencies viz., US
dollar, GBP, Japanese Yen and Euro into rupees at the Foreign Exchange Dealers
6
Association of India's (FEDAI) noon mean rate on reporting Friday.

STATUTORY LIQUIDITY RATIO (SLR)


Consequent upon amendment to the Section 24 of the Banking Regulation Act, 1949 , the
Reserve Bank can prescribe the Statutory Liquidity Ratio (SLR) for SCB in
specified assets. The value of such assets of a SCB shall not be less than such
percentage not exceeding 40 per cent of its total demand and time liabilities in India as
on the last Friday of the second preceding fortnight as the Reserve Bank may, by
notification in the Official Gazette, specify from time to time.
SLR is 22% of DTL at present
Reserve Bank has decided that all SCBs shall continue to maintain a uniform SLR of 22 per
cent on their total net demand and time liabilities (NDTL) with effect from 9.8.14.
a. in cash, or
b. in gold valued at a price not exceeding the current market price, or
c. in unencumbered investment in the following instruments which will be referred to
as “SLR securities":
I. Treasury Bills of the Government of India;
II. Existing Dated securities of the Government of India with SLR Status
III. State Development Loans (SDLs) of the State Governments issued from time
to time under their market borrowing programme; and
IV. Any other instrument as may be notified by the Reserve Bank of India.
The proposed cash management bill will be treated as Government of India Treasury Bill and
accordingly shall be treated as SLR securities

CRR & SLR AT A GLANCE

CRR SLR
Statutory basis Sec. 42 (1) of RBI Act, 1934 Sec. 24 (2.a) of Banking Regulation Act, 1949
Min. and Max. % to RBI Discretion Minimum :RBI discretion
NDTL Maximum :40%
Rate 4.00 % 22%
How maintained Cash balance with RBI Cash in hand, Gold/ investment in approved
Govt. Securities / net Bank balance with
scheduled commercial banks
Basis for %age of NDTL on fortnightly %age of NDTL on daily basis on last Friday of
computation average basis. (Min. 95% of average 2nd preceding fortnight
balance to be maintained on daily
basis)
Interest No interest payable w.e.f. 31.3.2007 According to class of securities in which
investment is made
Penal interest for 3% p.a. above bank rate(shortfall in 3% p.a. above bank rate- 1st day
default – same fortnight) 5% p.a. above bank rate- Next day
5% p.a. above bank rate (shortfall in
next fortnight)
Return to RBI Form A (fortnightly) Form VIII (by 20th every month)

7
OTHER IMPORTANT GUIDELINES

 Bank cannot declare dividend if CRAR is less than 9% of RWAs or Net NPAs
are more than 7%.
 There is no restriction on Share holding. However Voting Rights are restricted up
to 1% for PSBs and 10% for Private Banks.(Revised 10% for PSBs and 26% for
Private Banks)
 Dividend Payout Ratio should not exceed 40%. Out of current profits.
 No bank can allow Commission/brokerage on sale of shares exceeding 2-1/2%
of paid up value of shares.
 Banks cannot issue FD in name of Chit Fund Companies.
 Banks cannot make loan against FD of other banks.
 Banks cannot make loan against security of own shares or partly paid shares of
a Company.
 Banks cannot grant loan against Certificate of Deposits or Money Market Mutual
Funds.
 Banks cannot make loans to its own directors or firms in which Director is
Manager/partner/employee/guarantor (with certain exemptions).
 Banks cannot make loan to spouse/children of directors except their earning is
separate.
 Banks cannot make additional loans to Willful defaulters for a period of 5 years.
 Banks’ aggregate investment in Shares/CDs/Bonds should not exceed limit of
40% of bank’s Net Owned Funds as at end of previous year.
 RBI keeps Cash of CG free of interest and also accepts no remuneration for
conducting ordinary CG business. However, Commission is charged for
managing public debts.
 RBI supervises the banks through “Board of Financial Supervision”
 Minimum Paid up Capital Requirement for New Private Bank is Rs. 500 lacs.
 At least 51% Directors should be in Specialized Fields.
 Directors should not be a partner of a firm or have substantial interest in a
Company/Firm which carries on Trade or Business. Substantial Interest in a
Company means Holding of beneficial interest by individual or spouse of minor
child exceeding 5.00 lac or 10% of Paid up Capital of a Company.
 Period of Office for a Director is 8 years whereas that of a CMD is 5 years.
 Every Bank must have Assets in India not less than 75% of NDTL.

LATEST AMENDMENTS OF BANKING LAWS AMENDMENT BILL – DEC 2012

 Paid up Capital can be raised by banks through Public Issue, Right Issue and
Bonus Issue.
 Banks can acquire Equity and Preference Shares with Voting Rights
 Revised Voting rights: This Bill also enables the government to raise voting
rights in state banks such as the State Bank of India to 10 (ten) per cent from the
current1(one)per cent, acceding partially to foreign investors’ demands to have
more say in Indian banking.

Unclaimed Bank Accounts


 The Bill gives power to RBI to transfer the money lying in the bank
account which is not operated by the account holder for more than 10
years, to the “Depositor Education and Awareness Fund”.

8
 But in a case where the account holder returns then, the account holder
can claim this money and that bank shall be bound to pay him interest as
well.

Authorized Capital of Nationalized Banks


This bill aims to address the issue of capital raising capacity of banks in India by
enabling nationalized banks to raise capital by issue of preference shares or
rights issue or issue of bonus shares. It would 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.

Voting rights (%)

Before After
Private Banks 10% 26%
Public Sector Banks 1% 10%

Acquisition of Shares and Voting Rights


Prior approval of RBI shall be needed for acquisition of 5% or more of shares or
voting rights in a banking company by any person. The RBI shall be empowered
to impose such conditions as it deems fit in this regard..

Regulating Cooperative Societies:


A license from the RBI is to be taken by primary cooperative societies to carry
on the business of banking.

LAF (Liquidity Adjustment Facility)


Repo and Reverse Repo
It is Lending and Borrowing money for short term period (1 day to 1 year)
Under Repo, RBI purchases securities with commitment to sell at a later date in
order to Inject Liquidity. Presently, Govt. securities are dealt with. All Repo
transactions are routed through CCIL. RBI has permitted Repo in Corporate
securities for only “AA” rated companies. But the market is yet to be activated.

There will now be a cap of 0.5% of NDTL (instead of 1% previously)

Under Reverse Repo, RBI sells securities with a commitment to buy at a later
date in order to Contain Liquidity.
Repo and Reverse Repo transactions are generally conducted for Overnight
period through Auction Twice Daily. The minimum Bid is Rs. 5.00 crore and its
multiples. Margin is normally 5%.

 Maximum Cap has been increased to 0.75% for Term Repo of 7 days and 14
days; and
 Maximum Cap has been reduced to 0.25% for Overnight Repo

MSF (Marginal Standing Facility)

The banks will use Marginal Standing Facility to borrow overnight money from RBI only
when they have exhausted all other existing channels like Collateralized Borrowing and

9
Lending Obligations (CBLO) and Liquidity Adjustment Facility (LAF). The features of the
scheme are as under:
 The eligible entities can avail overnight, up to 2% of their respective NDTL
nd
outstanding at the end of the 2 preceding fortnight.
 For the intervening holidays, the MSF facility will be for one day except on
Fridays when the facility will be for 3 days or more, maturing on the following
working day.
 The facility is available on all working days in Mumbai, excluding Saturdays
between 3.30 P.M. and 4.30 P.M.
 Interest on amount availed will be 100 basis points above the LAF repo rate, or
as decided by RBI from time to time.
 Requests will be received for a minimum amount of Rs. One Crore and in
multiple of Rs. One Crore thereafter.
 MSF will be undertaken in all SLR-eligible transferable Government of India
dated Securities/Treasury Bills and State Development Loans (SDL).
 A margin of 5% will be applied in respect of GOI dated securities and Treasury
Bills. In respect of SDLs, a margin of 10 per cent will be applied.

PRESENT RATES AT A GLANCE

Previous Rate Present Rate (w.e.f. 09.08.201)


(w.e.f 29.10.13)
Repo 7.75 % 8.00 % 28.01.14
Reverse 6.75 % 7.00 % 28.01.14
Repo
MSF 8.75 % 9.0 % 28.01.14
Bank Rate 8.75 % 9.0 % 28.01.14
CRR 4% 4% 28.01.14
SLR 23% 22% 09.08.14

10
CHAPTER - 3
INDIAN FINANCIAL SYSTEM

APEX INSTITUTIONS

Institution Name Established Initial Ownership


in Capital
RBI Reserve Bank of 1-4-1935 5 crore 100% Central Govt.
India

Established under RBI Act, 1934


 It main function is Note Issuance
 It exercises Credit Control over banks and FIs
 It frames and issues Monetary and Credit Policy
 It acts as Govt. banker
 It is Lender of last resort for banks.
 It acts as Store of Foreign exchange
 It manages Currency Chest
 It manages Payment System through NPCI
 It maintains external value of Rupee
 It acts as refinancing institution.
 Supervision and Surveillance are also its functions.
EXIM Bank Export Import 1-1-1982 500 crore 100% Central Govt.
Bank

Its functions are:


Financing Exports and Imports
 Refinancing Export/Import Financial Institutions
 Financing joint ventures in Foreign countries
 Arranging Trade Credit and External Commercial Borrowings
 Loans/ Lines of Credit to Foreign Govt., Overseas Buyer Credit
 Export Bills Rediscounting

NABARD National Bank 12-7-1982 1000 50% GOI


for Agriculture crore 50% RBI
and Rural
Development
Its functions are:
 Productive and Investment Credit for Agriculture
 Refinance to eligible Institutions i.e. State Cooperative Banks, Land Development
Banks, Commercial Banks (only Long term) and other FIs approved by RBI.
 Coordinating the operation of Rural Credit agencies.
 Agent of Govt. and RBI in rural development.
 Training and Research
 Inspection of RRBs and Cooperative Banks (other than Primary Cooperative banks)
 Opening of branches of above said bank requires recommendation of NABARD.

11
NHB National Housing 9-7-1988 100 crore 100 % RBI (wholly
Bank owned subsidiary of
RBI)
 Established under NHB Act, 1987
 Promotion and Development of Specialized Housing Finance Institutions.
 Refinance to Hosing Finance Institutions and to SCBs.
 Guarantee and underwriting facilities to Housing Finance institutions.
 Promoting schemes for credit and subsidy for Housing finance to economically weaker
sector of society.
 Technical and administrative assistance to Housing Finance institutions.
SIDBI Small Industrial 2-4-1990 450 crore Previously 100% by
Development Bank IDBI.
of India Now,
72.15% by PSBs
21.43% by Insurance
Cos.
06.42% by FIs
Its Functions are: Established and working under SIDBI Act.
 Financing activities relating to Small Scale Sector
 Refinancing of Term Loans granted by banks, SFCs and SIDCs
 Discounting and Rediscounting of bills arising out of sale of machinery or Capital
equipment in small scale sector.
 Resource support to NBFCs, Electricity Boards, Factoring Companies and other
institutions concerned with small industries.

PSBs Public Sector 27 in number Includes Minimum 51% capital is


Banks SBI owned by GOI
group,
Nationaliz
ed Banks
and IDBI
 SBI and 5 subsidiaries formed under SBI Act, 1955 and SBI (subsidiary Banks), Act,
1959.
 19 Nationalized Banks formed under Banking Acquisition and Transfer of Undertakings
Act, 1970 (Amended in 1980).
 IDBI formed under IDBI Act. & Bhartiya Mahila Bank

New Set up as Body 53 in number Includes Paid up Capital and


Private Corporate Yes Bank, Reserve 300 crore
Sector Axis For new Banks, it is 500
Banks Bank, crore
HDFC etc.
 Shareholding or control in excess of 10% (now proposed 26%) in paid up capital of a
private bank by any single entity or group of entities require prior approval of RBI.
 Aggregate Foreign Investment from all sources (FDI, FII and NRI) cannot exceed 74% of
paid up capital
 For New Private banks, Requirement of minimum paid up capital is 5 billion rupees i.e.
500 crores.

12
Foreign Incorporate abroad 31 in number HSBC,
Banks Grandly,
Stan Chart
Bank etc.
 Controlled by RBI
 Governed by Banking Regulation Act
 25% of profit has to be deposited with RBI
 Can undertake normal Banking Business
 Financing of Foreign Trade.
RRBs Regional Rural 196 Authorize 50% by GOI
Banks established in d 5.00 35% by Sponsoring
Oct 1975 crore Bank
Now Paid up 15% by State Govt.
86 in number Capital
1.00 crore
 RRBS can undertake normal banking business as defined U/S 5(b) of BRA.
 These can grant loans to small enterprises for trade, commerce, industry and
Agriculture.
 Loans are refinanced by NABARD.
 Sponsoring bank also imparts training to employees of RRB.
Nos. of RRBs declined from 196 to 86 in 2009.

Cooperative One State and Cooperative Capital Control:


Credit Multi State Banks movement 1.00 lac Urban Cooperative
Institutions started in 2002 for Single Banks: SG and RBI
State Rural Cooperative
banks Banks:
SG and NABARD

Urban Cooperative Banks


 If operations lead to One State, these are governed by State Cooperative Society Act
 If operations cover more than 1 state, these are governed by Multi State Cooperative
Society Act, 2002.
Rural Cooperative Banks
3 Tier structure for short term credit is as under:
 Primary Agriculture Credit Societies at Village level
 District/Central Cooperative Banks at district level
 State Cooperative Bank at apex level.
2 tier long term credit structure is as under:
 Primary Cooperative Agriculture and Rural development Bank at district/block level.
 State Cooperative Agriculture and Rural Development Bank at apex level.

Local Area Public Limited 1996 Minimum Private Control with


Banks Companies Paid up promoter’s contribution,
Capital minimum 2.00 crore
Rs. 5.00
crore
 Area of Operation limited to maximum 3 geographically contiguous districts.
 At present 4 local area banks are functioning – one each in Punjab, Gujarat.
Maharashtra and Andhra Pradesh.

13
 Promote rural and semi urban savings.
 Provide viable economic activities in local areas.
Primary Deal in Govt. Facilitate 19 in number Out of which 11 are Bank
Dealers securities Govt. Market PDS and 8 are NBFCs
Borrowings.
NBFCs Non Banking Mainly – License is NBFCs accept only Time
Financial Leasing, Hire must from RBI Deposits.
Companies Purchase,
Loans and
Investment
Companies
DICGC Deposit Insurance Established Insurance Provides Guarantee
and Credit in 1962 Cover 1.00 lac Cover for loans granted
Guarantee Wholly per depositor by banks.
Corporation owned by per bank.
RBI Insurance
Premium @ 10
paisa per
Rs.100 p.a.
ECGC Export Credit and GOI Covers Provides Financial
Guarantee undertaking Commercial Guarantees to exporters.
Corporation and Political It also reimburses banks,
Risks of specific %age of loss
Exporters
CGTMSE Credit Guarantee Fund Trust for Micro and Small Enterprises
 Under the scheme, loans offered to SMEs are collateral free.
 Under the scheme, loan up to 100 lacs is available
 Loans can be obtained for working capital requirements, purchase of
machines, expansion plans etc.
 Small businesses involved in retail trade are not eligible
 Annual Guarantee fee @1% is payable by the borrower.
 In NE states, it is .75% of loan up to 5.00 lac and .85% for loans above 5 lacs.
 Lock-in Period for lodging claim is 18 Months.
 Claim can be lodged within 2 years from the date of account becoming NPA or
within 2 years from expiry of lock-in-period, if the account becomes NPA
within lock-in-period.
FIs  These provide long term funds for Industry and Agriculture.
Financial  The institutions work under On-site and Offsite surveillance of RBI.
Institutions  They raise funds from Financial System and International Financial
Institutions.
 These are also called Development Financial Institutions.
All India level Development banks are SIDBI, IFCI Ltd., IRBI Ltd. Set up under
separate act of Parliament.
State Level FIs are SFCs (State Financial Corporations) , SIDCs (State Industrial
Development Corporations) and SDBs (Specialized Development Banks)
FIIs Foreign Institutional Investors
These are authorized Foreign Institutions registered with SEBI and are allowed to
invest in India.
FIIs are entities established or incorporated outside India and make proposals for
investments in India.
FIIs can invest in the stocks and debentures of the Indian companies. In order to

14
invest in the primary and secondary capital markets in India, they have to venture
through the Portfolio Investment Scheme (PIS). According to RBI regulations, the
ceiling for overall investment for FIIs is 24% of the paid up capital of the Indian
company. The limit is 20% of the paid up capital in the case of public sector
banks.
NPCI National Payments Corporation of India (NPCI) was incorporated in December
(National 2008 by RBI.
Payment
Corporatio Presently, there are ten core promoter banks (State Bank of India, Punjab
n of India) National Bank, Canara Bank, Bank of Baroda, Union bank of India, Bank of India,
ICICI Bank, HDFC Bank, Citibank and HSBC).

NPCI would function as a hub in all electronic retail payment systems which is
ever growing in terms of varieties of products, delivery channels, number of
service providers and diverse Technology solutions.

 The Institute of Development and Research in Banking Technology (IDRBT),


Hyderabad had been providing ATM switching service to banks in India
through National Financial Switch. NPCI has deputed its officials to IDRBT
Hyderabad and NPCI has taken over NFS (National Financial Switch)
operations from December 14, 2009.
 Immediate Payment Service (IMPS) offers an instant, 24X7, interbank
electronic fund transfer service through mobile phones. IMPS facilitate
customers to use mobile instruments as a channel for accessing their bank
accounts and put high interbank fund transfers in a secured manner with
immediate confirmation features. This facility is provided by NPCI through its
existing NFS switch.
 Automated Clearing House system is known as Electronic Clearing Service
(ECS) in India. NPCI proposes to build, implement and manage an
Automated Clearing House (ACH) system with built-in security features and
multiple level data validation facility accessible to all participants across the
country.
 NPCI has a mandate to create a domestic card scheme. The Brand name
finalized for the same is RuPay.
 NPCI is managing implementation of CTS (Cheque Truncation System).

Scheduled Banks
RBI includes name of a bank in its 2nd schedule, if the following conditions are fulfilled:

 Value of Paid up Capital and Reserves not less than 5.00 lac (Calculated as Realizable
Value of Assets less Outside Liabilities). It is Net Worth.
 Its affairs are not detrimental to the interest of depositors.
 It must be a State Cooperative Bank or Company as defined in Indian Company Act or
Institution notified by GOI in this regard or Corporation incorporated outside India.

15
Scheduled Bank is eligible for Refinance/Financial support from RBI and is also subject to CRR
and SLR requirements.

Retail Banking Retail products fetch more business, more profits. These carry less risk and
low NPA level. It includes:
Retail Deposits: SB, RD, FD, CA, No frills accounts, Salary accounts, and
Pension accounts.
Retail Loans: Housing Loan, Vehicle Loans, Consumer Loan, Personal
Loan, Education Loans, Loans to traders, Crop Loans, Credit Card,
Education Loans (Normally up to 1.00 crore)
Retail Services: Lockers, Depository Services, Bank assurance.
Delivery channels for Retail Banking are ATM, IBS, and IMPS etc.

As per latest directives of RBI, Single Deposit of 1.00 crore and above will
be called BULK DEPOSIT and not Wholesale deposit.
Wholesale It is also called Corporate Banking or Commercial Banking. It includes:
Banking Fund Based: TL, CC, STLs, Bills rediscounting, Export Credit and
Structured finance.
Non-Fund Based: Bank Guarantee, Letter of Credit and Bills Discounting.
Value Added Services: RTGS, CMS (Cash Management Service)
Corporate Salary accounts, Derivatives, Tax collection,
International Facilities for Exporters
Banking Pre-shipment Credit, Post-shipment credit, Export Bills Purchase,
Discounting and Negotiation, Rupee Loans against Export bills, Advising
and Confirming LC.
Facilities for Importers
Import collection Bill Service, Direct Import bills and settlement of payment,
Advance Payment to suppliers, Issue of LC, Buyers’ credit and Suppliers’
credit and Issuance of Bank Guarantees against 100% Cash margin.
Universal RH Khan Committee recommended the concept of Universal Banking. It
Banking implies that Banks will be Hub of all services including Merchant Banking,
International Banking, Sale of Gold, Insurance and Mutual funds to earn fee
based and non-fee based income.

Banks will also invest in securities besides sanctioning loans. This will
result into higher profits and channelizing of public deposits into Corporate.

Universal banking resulted into transformation of banking business and


banks started selling various products like Gold coins (purity 999.9 gold),
Insurance policies etc. ICICI Ltd. Was merged with ICICI Bank and IDBI
with IDBI bank in order to implement Universal Banking.

Under Universal Banking, banks are offering Demat services as depository


participants with NSDL or CDSL.
Narrow Banking Tarapore Committee suggested model of Narrow Banking according to
which banks will invest only in low-risk and risk free assets and maturity
period matching with liabilities so that there is no Asset Liability Mismatch.

Merchant It stands for provide various services relating to Capital Market and
Banking financing of Corporate sector. It includes as under:
1. Undertaking Share Issues (IPO/FPO etc.)

16
2. Project Counseling
3. Loan Syndication
4. Making arrangement for raising Capital from market
5. Raising funds though CP, zero coupon bands etc.
6. Portfolio management
7. OTC market operations
8. Mergers and amalgamation

ADRs (American ADRs are Receipts/Certificates issued by US Bank representing specified


Depository number of shares of non-US Companies. defined as under:
Receipts)  These are issued in capital market of USA alone.
 These represent securities of companies of other countries.
 These securities are traded in US market.
 The US Bank is depository in this case.
 ADR is the evidence of ownership of the underlying shares.
Unsponsored ADRs
It is the arrangement initiated by US brokers. US Depository banks create
such ADRs. The depository has to Register ADRs with SEC (Security
Exchange Commission).
Sponsored ADRs
Issuing Company initiates the process. It promotes the company’s ADRs in
the USA. It chooses single Depository bank. Registration with SEC is not
compulsory. However, unregistered ADRs are not listed in US exchanges.
GDRs – Global GDR is a Dollar denominated instrument with following features:
Depository 1. Traded in Stock exchanges of Europe.
Receipts 2. Represents shares of other countries.
3. Depository bank in Europe acquires these shares and issues
“Receipts” to investors.
4. GDRs do-not carry voting rights.
5. Dividend is paid in local currency and there is no exchange risk for
the issuing company.
6. Issuing Co. collects proceeds in foreign currency which can be used
locally for meeting Foreign exchange requirements of Import.
7. GDRS are normally listed on “Luxembourg Exchange “and traded in
OTC market London and private placement in USA.
8. It can be converted in underlying shares.
PNs Participatory Note is an Off-shore Derivative Instrument. These are like
(Participatory Contract Notes issued by FIIS to entities that want to invest in Indian Stock
Notes) market but do not want to register with SEBI. These Notes include details of
Scripts and expected returns. The client, if agrees, deposits amount and
shares are purchased by FIIs

FIIs cannot sell these PNs to NRIs, PIOs and OCBs (Overseas Corporate
Bodies).

17
CHAPTER - 4
NEGOTIABLE INSTRUMENTS ACT 1881
 Came into force w.e.f. March 01, 1882.
 It has 147 sections and 17 chapters
 Section 138 to 142 were added in 1988 (came into effect from 1.4.1989). Section 143 to 147
were added in Dec. 2002
 This Act is applicable to entire India.

1. MEANING OF NEGOTIABLE INSTRUMENT


 As per Sec. 13 of the Act, Negotiable Instruments (NI) means and includes promissory note,
bill of exchange and cheque payable to order or bearer. Bank Draft finds mention in Sec-85(a)
of NI Act.
 Apart from the aforesaid instruments defined in the NI Act, following instruments satisfy the
features of Negotiable Instruments.

 Sr.  Instrument  Possessing feature of


No.
 i  Certificate of A promissory note
Deposit
 ii  Commercial  A promissory note
Paper
 iii  Treasury Bill  a promissory note
 iv  Share warrant  a cheque
 v  Dividend  a cheque
warrant

 Also u/s 137 of Transfer of Property Act, documents of title to goods are also negotiable, which
include:
 Bill of lading Railway Receipts
 Dock warrant Warehouse receipt
 GRs approved by IBA Wharfinger Certificate

2. CHARACTERISTIC FEATURES OF NEGOTIABLE INSTRUMENT


Negotiability

 A negotiable instrument possesses a unique characteristic called “Negotiability”.


Negotiability refer to following two features in an instrument:

(i) The instrument is freely transferable by delivery (if it is payable to bearer) and by
endorsement and delivery if it is payable to order; and

(ii) A person (i.e., transferee) taking the instrument bonafide for value (known as a holder
in due course) gets an absolute title to the instrument notwithstanding any defect in the title of
the transferor or any other prior party.

 Railway Receipt, Bill of Lading, Ware House Receipts, cannot be called negotiable
instruments because they satisfy the first feature of negotiability but not the second. Such
instruments are called Quasi Negotiable Instruments.

18
 Withdrawal slips used for drawing money from S.F. account are not negotiable instruments
(Reason: There is a condition that it must accompany the pass book). FD Receipt is also non-
transferable and as such cannot be called Negotiable Instruments.

RESERVE BANK OF INDIA ACT & NEGOTIABLE INSTRUMENT PAYABLE TO BEARER

As per section 31 of Reserve Bank of India Act 1934, no person other than Reserve Bank or
Central Government, can draw, accept, make or issue any bill of exchange or promissory note
payable; to bearer on demand.

PROMISSORY NOTE (SEC 4 OF NI ACT)


 It is a written unconditional undertaking by the maker (drawer & drawee), to pay a certain sum
of money to or to the order of a certain person) (payee) or to the Bearer of instrument. (not
being a bank note / currency note)
 Promissory Note payable on demand (immediately) is called Demand Promissory Notes
(DPN) and those payable after a definite period of time are called Usance Promissory Notes
(UPN).
 Both demand and usance promissory notes need be stamped as per Indian Stamp Act and
Stamp duty on promissory note is same throughout India.
 Promissory Note in installments
 Promissory Notes containing an undertaking to pay the amount in installments are valid and a
provision can be made that on default in payment of one installment, the entire amount will
become due.
 General Public is prohibited from issuing demand or usance promissory notes payable to
bearer.
 As per Indian Currency Act (Sec. 21), Currency note is not a Negotiable instrument (though it
fulfills a number of conditions of Promissory Note).

BILL OF EXCHANGE (SECTION 5)


 Bill of Exchange is a written unconditional order by the maker (drawer), directing a certain
person (drawee) to pay a certain sum of money or to the order of certain person (payee) or to
the bearer of the instrument.
 As per Sec 31(1) of RBI Act, Bill of Exchange / Hundi cannot be made payable to bearer on
demand.
 A bill of exchange is an order to pay money while a promissory note is a promise/undertaking
to pay money.
 It must be accepted within 48 hours after presentment.
 Demand Draft issued by banks fall in the category of bill of exchange. A cheque is also a bill
of exchange.
 Bill of exchange drawn in vernacular language as per local use is locally called “Hundis”.
 Interest for delay in payment of Due Bill is calculated @18% if otherwise not mentioned.
 Drawee in case of Need is a person name in the bill who will honor the bill in case the Drawee
makes default.

CHEQUE (SECTION 6)
 A cheque is a bill of exchange, drawn on a specified banker and payable on demand.
 A cheque is a bill of exchange and satisfies all the requirements of a bill of exchange except
that:
- It cannot be drawn on any person other than a bank;

19
It cannot be drawn payable so many days after date or after sight as is the case with a bill of
exchange. It is always payable on demand.
 Stop Payment instructions can be given by drawer verbally or in writing. A telephonic message
is valid if the banker is able to recognize voice of the drawer. Payment can be postponed till
confirmation is received in writing.
 N.I. Act does not provide any standard format for a cheque. A cheque drawn on a simple piece
of paper should be honored. Amount can be mentioned in foreign currency as well, provided
the rate of conversion is stated or it is left to be decided as per market conditions. A cheque
written in two different handwritings or two different inks should be honored by the bank.
 Cheque can be written in Hindi and date can be written in Saka Calendar.
 Minimum balance required in the account can be applied towards payment of cheque.
 A cheque dt. 31st April is payable on 30th April.
 A cheque payable to Lord Krishna or bearer can be paid. However such type of order cheque
cannot be paid.
 Since a cheque is not a legal tender nobody can be compelled to accept cheque towards
settlement of his debt.
 In case of Mutilated cheques, Drawer’s confirmation is required to pay the cheque. If torn at
the corner and no material fact is erased, can be paid.
 Payment of cheque should not be made if bank comes to know about Death of the customer
or filing of Insolvency Petition of the customer. Death or Insolvency of Director of a Company
has no effect and cheque signed by them can be paid.

DIFFERENCE BETWEEN BILL OF EXCHANGE AND CHEQUE

Sr. Bill of Exchange Cheque


No.
1. Cannot be drawn payable to bearer on demand Can be done
2. Drawee of a bill can be any one Only a banker
3. Can be made payable on demand or after Only on demand
sometime
4. Provisions of crossing not applicable Cheques can be crossed
5. Usance bills need be accepted Cheques require no
acceptance
6. Usance bills qualify for 3 days’ grace Not applicable to cheques

HOLDER (Section 8)
The “holder” of a promissory note, bill of exchange or cheque means any person entitled in his own
name to the possession thereof and to receive or recover the amount due thereon from the parties
thereto.

In order to become a holder:

1. He should have acquired title to the instrument lawfully and in a proper manner i.e. not through
fraud, coercion, undue influence or by any such illegal method.

2. He should not have stolen or found the instrument, which is lost.

3. He should be the payee or endorsee (if it is an order instrument) and bearer (if it is a bearer
instrument).

20
Actual possession is not essential legal right to possess is enough

HOLDER IN DUE COURSE (Section 9 of N.I. Act)

Holder in due course is a person (payee or endorsee or bearer) who must have the instrument in his
possession after satisfying the following three conditions:

 Consideration: He should have got the instrument for adequate and lawful consideration. (Not
by way of gift or no consideration.) A cheque issued in favour of charitable institution has no
consideration.
 Before maturity: He should have become holder of the instrument before its maturity. This
condition is applicable to usance bills and promissory notes and not a cheque which is always
payable on demand. (A person taking an instrument after it is due has right only against his
immediate transferor (Sec.59).
 Good faith: He should have become holder of the instrument without having sufficient cause
to believe that any defect existed in the title of the person from whom he derived his title.

A Holder-in-due course gets a good title over the instrument notwithstanding any defective title of the
transferor.

Where a cheque is marked ”not negotiable” nobody can get a better title than that of the transferor as
these words expressly take away the feature of negotiability that transferee gets a better title than the
transferor:

 Forged Endorsement: Any person deriving his title through a forged endorsement
cannot claim himself as a holder in due course.

 Passes better title: Any person who derives his title through a holder in due course
also gets title free of defects (Sec 53).

There cannot be a holder in due course of:


 An inchoate instrument
 An overdue instrument
 A non-negotiable instrument

 A person taking inchoate (incomplete) instrument cannot claim to be a holder in due


course even if he completes it in terms of authority of Section 20. However, if the
instrument is endorsed, the endorsee becomes holder in due course.
 A person receiving cheque from some Charitable institution as a scholarship money
cannot be called Holder in Due Course.

MICR INSRTUMENTS
The code line contains the following information:
i) First 6 digits indicate cheque number
ii) Next 3 digits indicate city code
iii) Next 3 digits indicate bank code
iv) Next 3 digits indicate branch code
v) Last 2 digits indicate transaction code (Saving or Current)

21
HOLDER & HOLDER IN DUE COURSE

Aspect Holder Holder in due course


Consideration Not essential Essential
Good Faith Not essential NI Should have been obtained in
good faith
Title Same as that of transferor Transferee’s get better title
notwithstanding any defect in
transferor’s title
Time Before or after maturity Before maturity only
Inchoate Instrument Can complete Can complete
Possession of NI May / may not be Possession essential
Authority Can sue in his own name Can sue in his own name

NEGOTIATION: (Sec. 14) is the transfer of any instrument from one person to another to convey title
and to constitute the transferee the holder thereof.

Negotiation of order instrument completes by endorsement & delivery (Sec. 48) whereas negotiation
of bearer instruments completes by mere delivery (Sec. 47)

ENDORSEMENTS
 Endorsement is defined in Sec. 15 of NI Act as “Where the maker or holder of a
negotiable instrument signs the same, otherwise than as such maker, for the purpose
of negotiation, on the back or face thereof, or on a slip of paper annexed thereto. He
is said to endorse the same, and is called the endorser”.

 According to (Sec.6 of the Indian Securities Act, 1886) an endorsement made on a


document, elsewhere than the back itself is not valid.

 Endorsement of part amount is NOT valid.

The endorser of a negotiable instrument, by act of endorsing, signifies the following to his endorsee
and any subsequent holder, that, when the instrument left his hand -

1) He had a good title to it.


2) It was genuine in all its particulars at the time of his endorsement.
3) All the previous endorsements were genuine. Thus Sec 122 of the NI Act provides that “no
endorser of a negotiable instrument shall, in a suit thereon by a subsequent holder, be
permitted to deny signature or capacity to contract of any prior party to instrument”.
4) Further the endorser, by his act of endorsing, promises to indemnify the endorsee or any
subsequent holder for any loss suffered by them on the dishonour of the instrument, provided,
the procedure necessary on dishonour has been duly followed.
5) An endorsement carries with it a right of further negotiation to the endorsee, along with the
right of ownership.
 Sec 85 (2) of NI Act states “ Where a cheque is originally expressed to be payable to bearer, the
drawee is discharged by payment in due course to the bearer thereof, notwithstanding any
endorsement, whether in full or in blank appearing thereon, and not withstanding that any such
endorsement purports to restrict or exclude further negotiation”. This section implies “once a
bearer always a bearer”.

22
 Cheques payable to an illiterate person should be endorsed with his left hand thumb
impression, which should be witnessed by an individual well known to both the parties.

 A cheque in the name of the deceased person must be endorsed by his legal representative.

 Endorsement in the case of firms can be either in the name of the firm itself, or, it may be by an
authorized agent or by a legally authorized person on behalf of the firm. But the name of the firm
must be mentioned in full. The omission of the word “company” in the endorsement amounts to an
irregular endorsement.

 A cheque payable to impersonal payees, e.g. income tax, must be endorsed by the authority in
relation to the impersonal payee.

 All endorsement must be done in ink only. Even though, endorsement in pencil is not prohibited
by law, the possibility of alteration/obliteration cannot be avoided in case of endorsement in pencil.

Who can endorse?

A Holder of an instrument, payee of a cheque or Promissory Note & drawer of an accepted bill.

Types of endorsement:

 Blank endorsement (16-1): endorser signs his name without adding any words or
direction. An order cheque or bill becomes payable to bearer, with the blank
endorsement (Sec. 54)
 Endorsement in full: Endorsement adds a direction to pay the amount to the order
of specified persons & signs the Negotiable Instrument.
 Restrictive Endorsement: (Sec. 50): Further negotiability is restricted – e.g. Pay
Ram Kumar only.
 Partial endorsement – (Sec. 56) Only a part time of Negotiable Instrument is
transferred (not valid for the negotiations)
 Sans recourse (Sec. 52) – endorser does not incur any liability i.e. Endorser says
that cheque is being transferred to Endorsee without recourse to him in case of
dishonor.
 Conditional Endorsement – conditions are stipulated. Paying bank is not bound to
verify fulfillment of such conditions. Conditions are binding between endorser &
endorsee only.
 Facultative Endorsement - Endorser reduces rights of receiving any Notice of
Dishonour i.e. Right Notice of Dishonour waived.
 Forged Endorsement –
o By a person other than the holder by signing the name of holder.
o Endorsee (including a holder in due course) or holder for value, subsequent to
forged instrument – do not derive any title.
o Paying bank gets protection (Sec. 85(1), if endorsement is regular
 Endorsement by minor - Minors can endorse, but not liable.

Regular Endorsement
 Spellings : Rajeev Kumar with correct spellings as Rajiv Kumar will endorse as under
Signatures as Rajiv Kumar
(Rajeev Kumar)

23
 Prefixes and Suffixes are to excluded
Mr. Dr. Er, Ar need not to be included in the endorsement. However, Major Raja Ram
may endorse as Raja Ram, Major and Dr. Luxmi Kanta Chwla may be endorsed as
Luxmi Kanta Chawla, (Doctor)
 Married Woman (Mrs RK Gupta) can endorse Prabha Gupta (wife of RK Gupta).
 Asha Rastogi can endorse as Asha Gupta (nee or formerly Asha Rastogi).

CROSSING (SECTION 123 TO 131 OF NI ACT)


1. Crossing is a direction by the drawer to his banker to make payment of a cheque drawn by him. In
general crossing, payment can be made through any bank, while in special crossing; it can be
made only through a specified banker. However in any case, payment can be made through a
bank account only.

 General Crossing: (Sec 123): Important aspect in a crossing is two parallel lines,
with or without the words “& CO., Not negotiable” etc

 Special crossing: (Sec 124): Where a cheque bears across its face, an additional
name of banker with or without transverse lines, cheque is deemed to be
crossed specially to that bank. Such cheques should be paid to that banker or to
his agent for collection (sec.126).

As per section 127, if cheque is crossed specially to more than one bank,(unless one bank is acting
as collecting agent to another)the payment shall be refused.

Not-Negotiable crossing (U/s 130):- This crossing does not restrict transferability; however, the
endorsees do not get a better title than the endorsers.

It is a direction to collecting banker that when the collection is for account of an endorsee instead of a
payee. Failure to ensure genuineness of the endorsement may amount to conversion. The cheque
bearing the “not-negotiable” crossing do not confer the special Privilege of the holder in due course

A/C payee crossing: It is not defined by NI Act. It is a direction to collecting banker, that such
cheques should be collected only for the named payee. This cheque cannot be endorsed further. RBI
has directed the banks (u/s 35-A of BR Act) to credit the proceeds of account payee cheques to the
account of named payee only else the payment will be treated as unauthorized.

A Crossing can be cancelled / special crossing can be converted to a general crossing only under the
signature of the drawer.

PAYMENT OF CHEQUES:
1) Duty of Banker: To honor customer’s cheque up to balance held in his accounts as per the
mandate of the customer (Apparent Tenor). Bank has to compensate the drawer for any
loss or damage, caused by non-payment. The cheques should, however, be paid as per
mandate of the customer. (Sec 31)

2) Payment in due course (Sec-10):- A payment is considered in due course if it


satisfies the following conditions:

24
 Payment in accordance with apparent tenor of the instrument, in good faith and
without negligence, to the person who possesses the instrument, and is able to
give valid discharge.
 Payment must be made under circumstances which do not afford a reasonable
ground for believing that the person is not entitled to receive payment of the
amount.
 Payment must be made in money only.

3) STATUTORY PROTECTION TO PAYING BANKER (SEC-85)

Sec. of NI Act Conditions to be fulfilled for availing protection.


85(1) Regularity of endorsement i.e. no break in chain of endorsement. Paying bank not
concerned with genuineness.
No protection is available, if drawer’s signatures are forged. If an order cheque,
without having any endorsement, is paid to someone else, banker would not get
protection.
85(2) Endorsement on bearer cheques A paying banker is not required to verify
endorsement on bearer cheques, even if, such endorsement restricts further
transferability of the instrument.
85(A) Protection available u/s 85(1), is also available to Crossed Bank drafts.

89 Cheques on which alteration is not apparent: - Where a cheque, promissory


note, or bill of exchange, has been materially altered, but does not appear to have
been so altered, payment thereof, shall discharge a banker from all liabilities
thereon.
128 Paying bank gets protection if the Payment of a crossed cheque is made in due
course.

COLLECTION OF CHEQUES & DUTIES OF COLLECTING BANKER:


Statutory protection against conversion( illegal interference in the property of another person
/collecting a cheque in customer’s account on which customer has no title.) is available to the
collecting banker as per the section 131( for cheque) and section 131 (A) for the bank draft,
subject to fulfillment of three conditions:
 Collection is in good faith & without negligence. (The account should be properly
introduced. Collection of large amount cheques in new accounts without proper
scrutiny implies negligence.
 Payment is received for a customer.( protection will not be available if collection is
for a non-customer/not maintaining an account with the bank.)
 Cheque is generally or specially crossed before it is presented to the bank.

DUTIES OF COLLECTING BANKER:


 To present cheque within a reasonable time (else liable for damages under section 72
and 84 of NI Act., if customer is put to loss for the delayed presentation.
 To serve notice of dishonor on the customer.
 To handover the proceeds after realization without delay.

BANK DRAFT (SEC 85(A) OF NI ACT.)


 It is a bill of exchange, drawn by a bank on another bank or on it’s another branch.
 As per sec 31 of RBI act, demand draft payable to bearer can be issued only by RBI.
25
 Bank’s relationship with the purchaser of a demand draft is that of a debtor and creditor and when
the draft reaches the payee, its relationship with the payee is that of a trustee and beneficiary.

IMPORTANT GUIDELINES (Bank Draft):


 DD’s/MTs/TTs Rs. 50000 & above should not be issued/paid against cash.
 Cancellation:- May be got cancelled by the purchaser before its delivery to the payee (draft
should not have any sign of negotiation.
 Stop payment:-Payment cannot be countermanded by the purchaser.
 Validity:
o All Drafts are valid uniformly for a period of 3 months.
o Validity can be extended further by the issuing branch on the request of the purchaser
or the payee.
 Duplicate Draft : -
 Issued after getting indemnity from purchaser and consent from payee (if
stands delivered to payee)
 Drafts up to Rs.5000/-, may be issued without waiting for non- payment
advice from drawee branch.
 To be issued to a customer within a maximum period of 15 days; else the
banks should pay interest as applicable to FDR of corresponding maturity for
the period of delay beyond this stipulated period. (This period of fortnight is
applicable only if the request comes from either purchaser or beneficiary and
not the 3rd party endorsee)
 In case original and duplicate drafts are presented for payment, duplicate be paid
and original be returned with remarks about loss of draft /payment on collecting
bank’s Guarantee.
 If draft was handed over to payee and lost thereafter, before making payment to
purchaser by issuing duplicate draft, consent of payee is required, as payee gets legal
right of payment once the draft has been handed over to him (including his agent i.e.
post office etc). The payee also can ask for duplicate draft in terms of section 45 of NI
Act.

Days of Grace: (Section 22): Every promissory note or bill of exchange which is not expressed to be
payable on demand, at sight or on presentment is at maturity on the 3rd day after the day on which it
is expressed to be payable. Grace days are not allowed if Due Date is already mentioned like in
CP/CD. If grace days are stated to be more than 3, it will be restricted to 3 days.

When day of maturity is a public holiday, the instruments shall be payable on the next preceding
business day (i.e. the previous business day.) Public holidays include Sunday and any other day
declared as Holiday U/s 25 of NI Act.

Interest rate: when interest rate is specified in the Bill of Exchange (BOE)/or Promissory Note (PN), it
will be charged accordingly.

If no interest is mentioned, Interest will be calculated @ 18% p.a. , as per section 80.

26
Due date calculation:-
a) If a bill is payable ‘certain number of days’ after date, usance will commence from the date
following the date of bill, for example a bill dated 2 Feb 1988, payable 30 days after date, it will
be due for payment on 6 March 1988.( 27 Feb (leap year) + 3 March + 3 days of grace.) – Sec 24
b) If a bill is payable ‘certain number of months’ after date, maturity will be the on the day of the
month which corresponds with the date of bill. For example due date of bill 2 Feb 1988, after
‘two month sight’ will be 5th April 1988. In cases where no corresponding date exists in that month,
bill shall fall due on last day of month. For example, if bill is dated 31 Jan, it will fall due on 3
March if it is one month after date.
c) When day of maturity is public holiday, the instrument shall be due on the next preceding business
day. Sec-25
d) Utmost care should be taken while calculating date of maturity when different dates i.e. date of bill,
date of sight/presentment, date of acceptance are given. Terms of payment should be taken care
of, whether these are ‘after date’ or ‘after sight’, and due date be calculated accordingly. If terms of
payment are ‘after date’ due date be calculated from the date of bill and if terms of payment
are ‘after sight’, due date be calculated from the date of ‘sight’ i.e. the date of acceptance of the
bill.

Dishonor of Bill:-
A bill may be dishonored either by way of non acceptance (Sec 91) or by nonpayment (Sec 92). In
case of dishonor, holder has to give notice of dishonor to all previous parties, to whom he wants to
make jointly liable (Sec 93). Notice is not required to drawee/ acceptor of a bill or maker of promissory
note. Notice must be given within a reasonable time,

Noting and Protesting:-


Noting and protesting is optional in case of inland bills but is compulsory in case of foreign bills.
Noting (Sec 99):- Noting is a process of collection of evidence of dishonor , under which the Notary
presents the bill again to the drawee and on dishonor, gives a noting on the bill, mentioning the date
and reasons of dishonor..

Protest (Sec-100)- is a certificate from a Notary Public containing facts of dishonour. Protest is
considered an authentic and satisfactory evidence of dishonor.

CRIMINAL LIABILITY FOR DISHONOR OF CHEQUES (NI ACT SEC 138 TO 142): Section 138 of
NI act (Amend-1988) provides for criminal liability on the drawer of dishonored cheque.
Relevant provisions are as under:

i) Consideration: Cheque should have been issued for discharge of any debt, either partly or
fully. (not as a gift). As per sec 139 until contrary is proved, it will be presumed that cheque
in question was issued for discharge of a debt.
ii) Validity: Cheque should have been presented with in its validity period or 3 months,
whichever is earlier - U/s 138(a).
iii) Dishonour:
a) Cheques should have been dishonored for insufficiency of funds.
27
b) As per sec 140, drawer himself is responsible to keep balance in account to take care
of all issued cheques.
c) The paying bank should return dishonored cheques presented through clearing houses
strictly as per the return discipline prescribed for respective clearing house in the
Uniform Regulations and Rules for Banker clearing Houses. The collecting bank on
receipt of a dishonored cheque should return it immediately to the payee/holder
iv) Notice: Payee or holder should give notice, demanding payment within 30 days of receiving
information for dishonor of cheque. Drawer can make payment within 15 days of receipt of
such notice.
v) Complaint: On a written complaint, either from payee or holder in due course, court of the
metropolitan or judicial magistrate shall try an offence. (Sec-142). The summons can be
served by speed post or by authorized courier services and if not accepted, will be treated as
duly served.
vi) Sentence:
a) The drawer may be punished up to two year imprisonment, and/or fine up to twice
the amount of cheque, or both.
b) As per Sec 141, if a company sends a cheque that is dishonored, every person who at
the time of the offence was in charge of and was responsible to the company as well
as the company shall be deemed to be guilty. As per a recent Supreme Court
judgment, only those partner or director who were directly in control of the business
would be held responsible
c) Directors of the companies who are nominated directors in employment of
Central/State Govt or FIs owned or controlled by Center/State Govt are exempted from
prosecution.
d) Stopping of payment of a post dated cheque issued shall also attract penalty under this
section.
vi) Summary Trial: Provision of summary trial has been made applicable and efforts be made to
conclude the trial within 6 months. In case of conviction in a summary trial, the Magistrate has
been empowered to pass a sentence not exceeding one year imprisonment and fine not
exceeding Rs 5000. Further offence under the act has been made compoundable.
vii) Limitation: Complaint should be made within one month, of the date on which, cause of action
arise (U/s 142) i.e. after expiry of 15 days time given to make payment.
viii) Financial Discipline: To bring financial discipline among customers banks to introduce a
condition at the time of opening of account (in AOF itself) that in case cheque valuing Rs 100
lacs (25 lacs in PNB) and above (irrespective of any amount if issued in favor of Stock
Exchanges by the Stock Brokers) are dishonored for want of sufficient balance at 4 occasions
during a financial year, cheque book facility would be stopped. Banks, at their discretion may
even consider closure of the accounts. In case of advance accounts such as CC or OD,
decision for continuation or otherwise of such cases be taken one step higher than the
sanctioning authority. Branches should report such data to their controlling office and Banks
should place before their boards/MC the data regarding dishonor of cheque involving amount
of Rs 100 lacs ( 25 lacs in PNB) and above including transactions of stock exchange brokers.

28
CTS -2010 – Important guidelines
 Likely to replace the existing form of cheque in the entire country by 1.8.2013.
Mandatory Features were made applicable w.e.f 1.12.2010. Which are as under?

 Paper will have protection against alteration by having chemical sensitivity to acids,
alkalis, bleaches and solvents. It will not glow under UV light rather it will be UV dull.
 There will be Water mark “CTS-INDIA” in oval shape with dia 2.6 to 3.00 cm.
 VOID pantograph with hidden embedded “COPY” or “VOID” feature. This feature would
be clearly visible in photocopy of the cheque.
 Bank’s logo will be printed in UV ink.
 Color of the cheque will be Light Pastel.
 No alteration or correction is to be carried out in the cheque.
 Cheques issued in current account and corporate customers should be issued with
account number field pre-printed.
 Courtesy Amount means amount in figures whereas Legal amount means amount in
Words.

Practical examples:

1. Cheque dt. 20.2.12 presented on 20.5.12 is stale.


2. A cheque favoring Lord Krishna or order can be credited to the Trust in the name of Lord
Krishna or payment can be made to Drawer only.
3. A Bearer cheque having name of payee as Balbir Singh endorsed as Balveer Singh can be
paid because a cheque once a bearer is always a bearer.
4. A payee having lost the cheque requests to stop payment, caution can be marked in the
account and Drawer’s formal instructions will be sought.
5. A customer signs the cheque differently from the record in different language can be paid
because it carries mandate of the customer.
6. A cheque DT. 5th Jan is presented for payment on 5th April owing to the fact that 5th April was
holiday; the cheque cannot be paid being stale cheque.
7. Where, there is difference in Words and Figures in amount of the cheque, amount in words
being legal amount can be paid U/S 18 of NI Act.

29
CHAPTER - 5

Indemnity, Guarantee, LC and Bill Finance

Indemnity and Guarantee.


Indemnities Bank Guarantee
It is a contract by which one party promises to Bank Guarantee means a guarantee given by
save the other from loss caused by conduct of the bank to rd person to pay him a certain sum
promisor himself or by conduct of any other of money on behalf of bank’s customer, if he
person. makes default
There are 2 parties : There are 3 parties:
1. Indemnifier—who agrees to bear the 1. Surety or Guarantor-----who agrees to
loss pay in case of default
2. Indemnified ---whose loss is to be 2. Principal Debtor -------who has to pay
borne first
3. Secured Creditor-------Beneficiary to
whom payment has to be made
Liability of Indemnifier is Primary Liability of Guarantor is secondary
There is only one contract between There are 3 contracts:
Indemnifier and Indemnified 1. Between Principal Debtor and Creditor
2. Between Surety and Creditor
3. Implied Contract between Principal
Debtor and Surety
The Risk is contingent which may or may not It is Contingent Liability
arise.
Purpose of contract is repayment of loss Purpose of Contract is to pay if there is default
from Principal Debtor
Indemnity holder i.e. Indemnified can recover: . 3 types of Bank Guarantee:
1. Payment under compromise 1. Financial Guarantee
2. Cost of suit 2. Performance Guarantee
3. Damages, if court permits. 3. DPG- Deferred Payment
Invocation of Guarantee:
 Dispute between Debtor and Creditor –
no matter
 Injection is not granted by the courts
except Fraud case
 Contract of Guarantee is an
independent contract- suspension of
main contract has no relevance
Precautions while Issuance of Guarantee
1. Amount must be specific
2. Claim period is longer than Validity
period
3. Limitation period is 3 years. But for
Govt. Guarantee, it is 30 years.
Bank can demand counter guarantee.

30
Letter of Credit
Documentary LC is a document:
Letters of Credit  Issued by Buyer’s bank at his request.
(LC)  Carrying undertaking to pay to the seller
 Upon presentation of documents evidencing shipping of goods.
 In compliance with terms and conditions.
ILC is Inland Letter of Credit and FLC is Foreign Letter of Credit. The
parties to LC are as under:
Applicant Buyer or Importer
Beneficiary Seller or Exporter
Issuing Bank It is opening Bank which ultimately pays on
behalf of importer in the Importer’s country.
Advising Bank or Bank in Exporter Country through which LC is
Notifying Bank advised. It acts as agent without responsibility to
pay unless it confirms.
Negotiating Bank Bank in Exporter Country which makes payment
or Nominated Bank to exporter or accepts Bill of Exchange.
Confirming Bank In Exporter’s country. It may be advising bank
also if it adds confirmation. This bank will be
responsible for default, if any.
Reimbursing Bank The bank which re-imburses the negotiating
bank. (Usually, it is the bank having Nostro
account of Opening Bank.
UCPDC – 600 It is a publication of ICC (international Chamber of Commerce). It does not
Uniform Custom apply by default. There must be special mention in LC about applicability of
and Practice of UCPDC – 600. It has 39 articles. Some of the important are here under:
Documentary  Reasonable time for acceptance/refusal of Documents is 5 Banking
Credit days after presentation.
 Bank to deal with documents and not with goods. Bank not to check
quality of the goods. However shipping documents must contain the
particulars of commodity shipped which should match with LC.
 Bank is not concerned with underlying contract of buyer and seller.
 Courts refrain from passing injunction on complaint of importer
regarding any discrepancy of goods.
 Amount of Bill may differ from LC amount ±10% (Tolerance limit)
 Quantity of Bill may differ from LC specification ±5% (Tolerance
limit).
 Documents are original if it carries original signatures, stamp mark
and label of issuer.
 Documents must be presented for negotiation within 21 Calendar
days from date of Shipment. It becomes stale thereafter.
 If expiry of LC falls on Public holiday, Under, such situations
documents can be submitted on Preceding banking day.
Types of LC LC Type Features
Revocable It is an LC which can be amended or cancelled
without consent of all parties. UCPDC 600 does not
allow issue of such LC.
Irrevocable It is LC which cannot be cancelled or amended

31
without consent of all parties.
Confirmed LC If confirmed by some bank in exporter country.
Transferable LC It can be transferred in Full or part by advising bank at
the request of issuing bank. ONLY ONCE
Red Clause LC It enables the beneficiary to avail pre-shipment credit
from advising bank.
Green Clause Besides pre-shipment, advising bank can allow
Letter of Credit advance for storage and shipment.
Revolving LC Where bills are negotiated and LC is automatically
renewed.
Back to Back LC Beneficiary Uses LC to open another LC in favor of
local suppliers.
Standby LC It is issued in lieu of Guarantee. It is substitute of
guarantee and is used in countries like US where
guarantees are not used.
 If nothing is mentioned, LC will be Irrevocable, non-transferable.
Documents under LC
1. Bill of exchange.
2. Invoice
3. Transport Documents: Bill of Lading & Airway Bill
4. Insurance Documents (Insurance is done at 110% of CIF value)
5. Certificate of Origin
Short Bill of Lading: Which does not carry detailed terms and conditions
Thorough Bill of Lading covers entire voyage with several modes of
transport
Straight Bill of Lading is issued directly in the name of consignee.
Clause Bill of Lading: It bears super imposed clause that declared
defective condition of Goods.
Clean Bill of Lading: It has no such super imposed clause declaring
goods or packaging as defective.

Deferred Payment Guarantee

DPG – (Deferred Payment Guarantee)

It is Guarantee assuring the exporter of timely payment of installments. The features of DPG are
as under:

 It is unconditional and irrevocable assurance to the seller.


 On invocation, payment should be made without request.
 Banks do not take responsibility to ensure that goods shipped are as per requirement
 On default, payment of installment is made by the bank
 After payment, bank falls in the shoes of creditor
 Guarantee can be invoked only if one installment is not forthcoming.

32
BILL FINANCE

Please go through definition of Promissory Note u/s 4 and Bill of Exchange u/s 5 of
Negotiable Instrument Act.

Classification of Bills

1. Inland and Foreign Bills


Inland Bills are bills drawn in India and made payable upon a person resident in
India. It may be payable in or outside India.
Foreign Bills are drawn outside India or drawn upon any person, resident in any
country outside India. Also bills drawn outside India but made payable in India
are foreign bills.
2. Demand and Usance Bills
Demand bills are also called Sight Bills which are payable on demand. If some
period is mentioned in the bill and payable on Due date, these are called Usance
Bills.
3. Clean and Documentary Bills
Documentary Bills are accompanied by documents such as Invoice, LC etc.
Whereas Clean bills are not accompanied by any document.

Types of Bill Finance


1. Bills Purchase: This is finance against security of Demand Bills. Bank becomes Holder
for Value after purchase of Demand Bill/Sight Bill.
2. Bill Discounted: The Usance Bills are generally discounted by the bank and payment is
made to the holder of the bill after deducting discount which is generally interest of the
intervening period.
3. Drawee Bill Acceptance: Banks pay on presentation and recover the money on due
date of the bill.
4. Bills Co-acceptance Facility: Banks accept the bill along with borrower. There is joint
liability of the borrower and the bank.

33
CHAPTER - 6
TYPES OF COLLATERALS

Security is of two types: Primary and Collateral. Primary Security is the item purchased out of
bank loan.

Collateral is an additional security offered by the borrower or guarantor for the purpose of
securing loan. This security is offered over and above the Primary Security.

Different types of collateral are as under:

Advance against Charge Important points


Land and Building Mortgage  Title must be verified and certified in search
report by Lawyer.
 Title deed should be original.
 NEC normally for 13 years must be obtained
from Registrar office.
 Valuation from approved valuer. In Leasehold
property, terms of Lease should allow the loan.
Goods Hypothecation  Nature of account will be Open Cash credit
or Pledge (Hypothecation)or Key Cash credit (Pledge).
 For Working Capital requirements (1 Year)
 Goods should not be obsolete or perishable.
 Stock must be paid for. If creditors are > Debtors,
net amount should be deducted from Value of
Stock.
 Periodical inspection of stock be done.
 Stock audit is required in case limit is at-least
5.00 crore.
 Valuation of stock is done at cost price or market
price (whichever is lower).
 In Pledge, bank can sell the goods after serving
reasonable notice.
 In Hypothecation, goods cannot be sold without
converting the charge into Pledge.
 Under Sarfaesi, bank can take into possession
the hypothecated goods and sell them.
Documents of Pledge  These documents are RR/GR/Bill of Lading,
Title of Goods Warehouse keeper’s certificate/Delivery order
(Defined in Sale etc.
of Goods Act)  These are quasi negotiable instruments and are
transferable through endorsement and delivery.
 Goods must be paid for.
 Genuineness of documents must be ensured.
 Whenever, these documents are released
without payment, a receipt is obtained, which is
called Trust Receipt.
LIC Policies Assignment  It may be accepted as Primary or Collateral
Security.

34
 Policy must be in force and update premium
paid.
 Original, Stamped and Signed by Issuing
Authority.
 Latest premium receipt must be obtained and
kept on record.
 Age must be admitted by Insurer.
 Assignment should be obtained on separate
Stamp paper. It must be witnessed.
 Nomination is automatically cancelled at the time
of assignment.
Shares Pledge  DL or OD can be availed against Shares.
 Margin of 50% is obtained.
 Shares in Demat form are preferred.
 No banking Co. can hold shares in any Co. of an
amount exceeding 30% of paid up capital of the
Co. or 30% of its own paid capital and reserves
(whichever is lower). --- Sec 19(2) of BRA
 Bank’s exposure in Capital market should not
exceed 5% of total advances.
 Loan should not exceed 10 lac against Shares/
debentures in physical form and 20 lac in Demat
form.
 Banks can make advance to employees to
purchase shares under ESOS up to 90%
(maximum amount Rs. 20.00 lac).
Book Debts Assignment  Finance against Accounts Receivables and Bills
Receivable.
 Trade transaction must be ensured by the bank.
 Notice of Assignment must be served upon every
Debtor.
 Debtors should not older than 6 Months.
 Factoring and Forfaiting is also same type of
advance.
 Transactions with sister concerns, transactions of
capital expenditure and advance payments must
be excluded.
Term Deposits Pledge  Lending up to 90% against bank’s own FD.
 Amount of FD plus accrued interest is taken.
 Rate of interest is decided by bank which is
normally 1-2 % higher than FD rate.
 Deposits in the name of minor cannot be taken
as security.
 However bank may consider loan to guardian for
the necessities of minor.
 Receipt must be discharged by all the account
holders
 No loan can be granted against deposit held
under Capital Gain Scheme.
 Loan to Partner against FD of the firm is treated
as 3rd party loan, but loan to Proprietor is not as

35
such treated as 3rd party loan.
Gold Pledge  For agriculture and non-agriculture purpose.
 Generally allowed for 1 year.
 TL or Overdraft facility is provided.
 Purity of Gold is verified.
 Loan is subject to NPA norms.
 Presently restriction imposed by RBI – 50 Gms.
 Margin is 25%
Supply Bills Assignment  Bill in relation to transaction with Govt.
Department and PSU is Supply bill.
 Supplier will submit Bill (Invoice) and it must be
accompanied by Inspection Note from the
concerned department.
 The proof of delivery of goods at the department
i.e. No. of RR/Bill of Lading must be incorporated
in the Note.
 These bills are not Negotiable Instruments and
are in the nature of Debts. Therefore, charge is
assignment.
 Bank will obtain letter from the supplier
addressed to the department to pay directly to
the bank.
Two types of bills are as under:
Interim Bills: against which govt. pays 80-85% a
Final Bill: It includes remaining amount which is paid in
due course after verification.

36
CHAPTER – 7
TYPE OF CHARGES

1. First charge/exclusive
2. Second charge
3. Pari passu charge
4. Floating charge

Creation of Charge under Transfer of Property Act, 1882

 MORTGAGE (SECTION 58) - IP


 ASSIGNMENT (Section 130) - ACTIONABLE CLAIMS (Unsecured Debts) Book
Debts/FD/NSC/LIC
Creation of Charge under Indian Contract Act 1872

 PLEDGE ( SECTION 172) – GOODS


 LIEN (SECTION 170 & 171) – GOODS & SECURITIES
SARFAESI ACT, 2002 (Section 2-n)

 HYPOTHECATION – GOODS & VEHICLES

LIEN

Sec 170 & 171 of Indian Contract Act, deal with Lien. Lien is a right of creditor to retain
possession of goods and securities owned by Debtor until Debt is repaid. Lien os of 3 types:

1. Particular Lien
2. General Lien
3. Negative Lien

General lien is Bankers’ lien which is also called Implied Pledge. Bank can adjust proceeds of
security not only for a particular loan account but for another loan which has fallen due for
payment. Under general lien, security can be sold without court’s intervention but after serving
proper notice. Security is under possession of the Lender bank.

Particular lien does not allow the creditor to sell the security for adjustment of dues. It entrust
right on particular security for particular debt. Security is under possession of the Creditor.

Negative lien casts upon binding upon the Debtor not to sell particular security until Debt is
repaid. Security is under possession of the borrower.

Right of Lien does not apply on:

 Goods kept with bank under Safe Custody


 Goods/Securities kept for some specific purpose
 Articles left by negligence
 Stolen goods Both Lien and Set off cannot be exercised simultaneously.

37
PLEDGE-: It is defined u/s 172 of Indian Contract Act. It is bailment of goods as security for
payment of a debt or performance of a promise. Bailment means delivery of goods for some
purpose

ACTUAL POSESSION IS GIVEN TO THE LENDER THOUGH OWNERSHIP REMAINS WITH


PLEDGER(BORROWER)

RIGHTS OF PLEDGEE

 Retain the goods


 Sell the goods after notice
 Recovery charges for preserving

DUTIES OF PLEDGEE

 To refund goods with accruals


 To take care of goods

HYPOTHECATION

 Hypothecation is defined under Sec 2 of SARFAESI Act.


 It is a charge on any movable property, existing or future, created by a borrower in
favour of a secured creditor without delivery of possession of the movable property , as
security for financial assistance

 Neither possession nor ownership is given


 Sale of goods cannot be done without taking legal action.

ASSIGNMENT

 Defined under Sec 130 of Transfer of Property Act.


 Assignment is transfer of actionable claim, which may be existing or future.
The transferor is called the Assignor and transferee is called Assignee.
 Actionable claims are Right in property or Debt e.g. LIC Policy, Book Debts, Money due
from Govt. Department etc.
 Assignment is of two types: Legal and Absolute.
 In Legal assignment, absolute transfer of actionable claim must be in writing and signed
by assigner. Due notice of assignment is given to debtor.
 Equitable assignment is handing over the possession of document representing
actionable claim without observing the above formalities
 No particular form or consideration is essential.

38
MORTGAGE

Mortgage is transfer of interest on a 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 may give rise to pecuniary liability.

 Mortgager, Mortgagee and mortgage money


 Limitation: 12 years
 Right of foreclosure and redemption (limitation: 30 years)

TYPES OF MORTGAGE

1. Equitable or Mortgage by Deposit of Title Deeds


2. Simple or Registered Mortgage
3. Usufructury Mortgage
4. English Mortgage
5. Mortgage by Conditional Sale
6. Anomalous Mortgage.
1. EQUITABLE MORTGAGE or MORTGAGE BY DEPOSIT OF TITLE DEEDS

• Handing over of title deeds.


• Possession as well as ownership remains with the borrower.
• It is affected in Notified areas declared by state govt.
• In other areas, mortgage can be created by other branch situated in notified areas.
• There must be intention to create security.
• Equitable Mortgage is not registered and therefore it attracts no stamp duty.

2. SIMPLE/REGISTERED MORTGAGE

 Mortgage deed to be executed.


 Possession as well as ownership remains with the borrower.
 Registration within 4 months with registrar of assurance
 No power to sell the property without intervention of court
 Mortgagor personally liable.

3. ENGLISH MORTGAGE

 Mortgage deed to be executed.


 Registration within 4 months with Registrar of Assurance
 Absolute transfer of property subject to re-transfer if the debt is repaid.
 Possession remains with the borrower.
 Mortgagee can sell the property without court intervention.
 Personal liability to pay on specified date.

39
4. MORTGAGE BY CONDITIONAL SALE

 Mortgagor ostensibly sells the mortgaged property on condition that on default, the sale
shall become absolute or sale shall become void if amount is paid.
 Mortgagee can sue for foreclosure
 Possession is generally transferred to the mortgagee.

5. USUFRUCTUARY MORTGAGE

 Mortgagor hands over possession of property to the mortgagee


 Mortgagee can recover his dues out of income from property without any time limit
 Sale is not allowed. Recovery suit is not filed.
 No personal liability of mortgagor.
 Borrower (Mortgager) has Right of Redemption i.e. he can get the property redeemed
by making payment of loan and the period of limitation for this is 30 years.
 Lender (Mortgagee) can exercise Right of Foreclosure that means he can apply to court
to debar the borrower from rights of the property since the loan has been adjusted within
time bound schedule. Limitation period for this purpose is also 30 years.
6. Anomalous Mortgage
 It is a mortgage which is not defined in any of the above.

REVERSE MORTGAGE

Senior citizen can avail loan in installments on the basis of mortgage of their property with the
bank. Since installments are paid by the bank on the basis of value of property mortgaged with
the bank, it is called Reverse Mortgage.

General Guidelines

 Loan sanctioned in Kolkata, Mortgage can be affected in Jaipur provided it is notified


centre.
 Mortgage becomes effective from date of its creation and not from date of registration.
 No charge is registered for Equitable Mortgage.
 No personal liability is there in case of Usufructury Mortgage and Recovery suit cannot
be filed.

Right of Subrogation

Surety gets all the rights of the creditor against Principal Debtor upon meeting his
liability under the Contract.

Right of Set Off

40
It is right of a bank as Debtor to adjust the debt owing to him owing to him by the same person
in the capacity of creditor. In simple words it is adjustment of loan account from credit balance in
some deposit account.

Essential of Right of Set Off

 Both the accounts must be in same Name and same Right.


 Same Right is not there if dues are in single name and Credit balance in joint name.
 Credit balance in a minor’s account in the capacity as Guardian is not in same right.
 Same Right is not there if dues are in the name of a partner and Credit balance in the
account of partnership firm. But reverse is true and Right of Set off can be exercised.
 Single account and Proprietor’s Account are in same right.
 Amount must be certain and debt must be due and recoverable.
 All branches of a bank are considered as single entity.
 Automatic Right of set off is available in the following:
 Death/Insanity and Insolvency of the borrower.
 Insolvency of the partner or winding up of the company.
 Garnishee order/Income Tax attachment order
 Notice under SARFAESI Act
 Dues against Guarantor only if Demand has been made from him.

NOTICE IS NOT COMPULSORY FOR EXERCISING RIGHT OF SET OFF.

41
CHAPTER - 8
TYPES OF CUSTOMERS

MINORS

Minor is defined in Section 3 of Indian Majority Act, 1875 as “Every person domiciled in India
attains the age of majority on his completing the age of 18 years”

According to Sec 11 of Indian Contract Act, 1872, “ When the age of majority has been provided
by law to be 18 years, every person less than this age will be minor in law.”

MINOR’S AGREEMENT
 A minor is not competent to enter into a contract. All agreements with a minor are void ab-initio (i.e.
invalid from the very beginning)
 However, they can open deposit accounts in the name of minors, after taking necessary precautions. As
long as the account is in credit, the banks run no risk in such accounts.
 A person upon attaining majority cannot ratify a contract entered during his minority.

WHO IS THE GUARDIAN OF A MINOR?


The guardian to a minor can be a: (a) Testamentary Guardian, or (b) Legal Guardian, or (c) Natural
Guardian.
Testamentary Guardian
Guardian appointed by the will of the minor's father is called testamentary guardian.
Legal Guardian
Where there is no natural guardian, or testamentary guardian, the Court can appoint a guardian
i.e. legal guardian as per the provisions of Guardian and Wards Act, 1890.
Natural Guardian
 Father is always natural guardian and after his death, mother becomes natural guardian. In case
of a minor boy or unmarried girl, the father and after his death the mother shall be the guardian of
both person and property of the minor. Opening of Fixed Deposit, Recurring & Savings Deposit
account under the guardianship of mother has been allowed by RBI (provided accounts are not
allowed to be overdrawn).
 After the death of both father and mother, a minor can be represented only through a legal
guardian.
 Step father/step mother cannot act as natural guardian.
 For a minor married girl, her husband (if major) is the natural guardian. In case the husband is a
minor, her father (or mother, if the father is dead) may continue to be natural guardian.
 For a minor married girl, who has become a widow, her husband’s father (mother, if father is
dead) is to act as natural guardian.
 In case of an illegitimate minor child, his/her mother is the natural guardian.
 The natural guardian of an adopted son is his adoptive father/mother.

For a Muslim minor, father is the natural guardian (for property only). After father, guardianship lies
with (i) executor appointed by father’s will and after him (ii) father’s father (iii) the executor appointed by
the will made by the father’s father.

In case of Christians and Persons of other Religions, the father, and on his death, mother acts
as natural guardian. Where both are dead, a person appointed by Court can alone act as guardian.
.

42
TYPE OF DEPOSIT ACCOUNT FOR MINORS

Account can be opened in the name of a minor are broadly the following:
I. Minor’s Account to be operated by guardian
II. Minor’s Account to be operated by mother.
III. Minor’s Account to be operated by himself/herself.

Minor’s Account Opened and Operated by Guardian

Single or Joint A/c.


The guardian can open a deposit account in sole name of the minor to be operated by him on
behalf of the minor. Alternatively he can open a joint account in the name of the minor and himself.

Guardian’s Power
 He can operate the account on behalf of the minor.
 He can foreclose the term deposit or avail loan against the same for the benefit of the minor.
 His power to operate account/foreclose deposit/borrow against deposit ceases as soon as the
minor attains majority.

Death of Minor: Balance is payable as a claim case.

Death of Guardian: The balance is treated as a Trust and is paid to the minor upon his attaining
majority. During his minority it can be paid only to his guardian appointed by Court.

Self Operated Minor Account


 Minors who have completed 10 years of age, who are literates and can sign uniformly are
permitted to open S.F. or F.D./RD account (not Current Account) in their own name and operate
the same.
 Cheque book can be issued provided the account is KYC compliant, because Minor can draw a
cheque, endorse a cheque and can also become payee
 Opening of Term deposits including R.D. can be allowed for any amount.
 Minor can bind everybody except itself
 No advance can be given to minors against such deposits.
 Joint Account with minor cannot be opened except with Guardian.

HINDU UNDIVIDED FAMILY (HUF)


There are two schools of thought – Dayabhag and Mitakshra. In Assam & Bengal, Dayabhag school of
Thought is applicable whereas in other parts of the country, MITAKSHRA school of thought is applicable.
In difference between the two is that in the former, even a son has no right in case father is alive.
Whereas under MITAKSHARA school of thought, all members of family including conceived child have
right to become coparceners and right in the property of the family.

 Hindus, Sikhs & Jains can form HUF


 Male/Female Members by Birth of adoption are coparceners
 Senior most member is the karta (Male or Female)
 Is not governed by partnership act
 Documents to be signed by the karta as ‘karta’ and major coparceners in the personal capacity.
 Karta is liable personally as well as Jointly, but coparceners are not unless specifically agreed.…
43
 Karta can
1. Compromise & refer to arbitration
2. Give valid discharge to debt and make part payment.
3. Enter into partnership & delegate authority to operate the account to any one
 Karta cannot revive a time-barred debt
 A coparcener cannot countermand a cheque unless specifically authorized.
 The death of a coparcener does not dissolve a HUF.
 In case of death, insolvency or insanity of a coparcener / Karta, fresh AOF & HUF declaration
should be taken.
 As per Hindu Succession Amendment Act, 2004, a female member can become Karta or
Coparcener.
 Bank gives loan only if documents are signed by Karta and all the major coparceners which make
all of these personally liable.

MARRIED WOMEN
Married Woman is a separate legal entity.
 Sec 14 of Hindu succession act provides that property of a Hindu female is her absolute property
 Can raise loans against her own property.
 Solvency not related to her husband
 Husband is liable for her debts if
 he has consented and stands surety or
 Loan is availed for necessities of her life
 Can be an executor or administrator without any help or guidance.

PARDANASHIN LADY
 Contract with her is not free from all defects.
 Presumption of undue influence
 Generally discourage accounts in her name as her identity can to be ascertained
 Absolute care to be taken while dealing with her.

ILLITERATE PERSONS.

 Get introduction & witness.


 Photograph to be changed every 3 years
 Take identification marks
 Payment only in person through cashier only
 In case of any dispute or explanation of rules, take independent witness
 Noting ‘ILLITERATE A/C’ to be made on ledger folio/A O F.
 Cheque Book cannot be issued.
 Current account is not opened.
Joint account of illiterate person with illiterate/ literate person

 Jointly with other illiterate person subject to compliance of KYC norms. No cheque book will
however be issued in the joint account of illiterate persons.
 Jointly with another literate person who is closely related to him which will be operated under
any mode- Joint Operation, E/S or F/S. Cheque book can be issued in such accounts.

44
BLIND PERSONS
 Get introduction & witness
 Photograph to be changed every 3 years
 Can open SB, FD, RD and Locker Account. Loan can also be given.
 Payment/ receipt to be got witnessed by an independent person which can also be a bank
employee other than the person who passes the payment.
 In case of any dispute or explanation of rules, take independent witness
 Noting BLIND PERSON to be made on ledger folio/A O F.
 Advised to open joint account
 Cheque book can be given to Blind after deleting the word “Bearer” and after affixing stamp
“Blind Person” on the face of each cheque.

INSOLVENT PERSONS
 All transactions made subsequent or during last six months are invalid
 Cannot obtain credit for more than Rs. 50.
 Minors/ lunatics cannot be declared insolvent
 Account of a person declared insolvent should be stopped and balance disposed as per
instructions of the official receiver
 Insolvent person can act as an agent under INDIAN CONTRACT ACT sec.201

INSANE PERSON
 Incapable of entering into contract
 On notice of lunacy operations to be stopped & balance disposed off as per court’s directions
 In case of temporary disorder payment to be made after obtaining a certificate from two approved
doctors reg. Mental soundness at the time of payment

INTOXICATED
 Contracts made by a person in drunken state are void
 Payment to an intoxicated person is to be made only after taking two independent witnesses
regarding the condition of the person

EXECUTORS & ADMINISTRATORS


 The person named in the will of the deceased person is the executor and account can be opened
on production of probate
 Person appointed by the court is an administrator and must produce letter of administration
 On death of one executor powers are vested in the surviving executor
 Can borrow for the immediate needs of the property

LIQUIDATOR, OFFICIAL RECEIVER /ASSIGNEE.


 liquidator is appointed in case of a company in liquidation
 Official Receiver / Official Assignee to manage the property of an insolvent person
 Letter of probate/ administration to be taken
 Style & status to be mentioned in the Title of the account
 No loan can be granted.

TRUSTS
 Trust deed to be examined
 Insolvency of trustee does not affect trust property
 Transfer of funds from trust account to personal account of the trustee be investigated
 Allow loans only if allowed in the trust deed and after taking personal guarantee of the trustee

45
 Trustees must act jointly as they have no authority to delegate unless specifically mentioned
 On death of one trustee trust property passes to the other trustees, court order required
 Any trustee can stop payment.

SOCIETIES & CLUBS


 By-laws to be obtained and read carefully
 Registration certificate
 Resolution passed regarding opening & conduct of account
 In case of death of a authorized signatory operation stopped till new resolution is received
 Bank can open accounts of unregistered clubs, institutions, societies, association, schools etc after
satisfying themselves about reputation, responsibility & standing of the office bearers .

JOINT ACCOUNTS
 Either or Survivor/Former or Survivor/Anyone or Survivor or Joint Operation
 Appointment of an agent should be confirmed by all.
 Operations to be stopped in case of death, insolvency/ insanity of any one. Payment to be made to
survivors & a the legal heirs of the deceased
 Anyone can stop payment. But revocation of stop payment will be done by all.
 Alteration in a cheque drawn should be confirmed by the drawer itself (not other account holder)
 Operation in the account will be stopped in case of death, insolvency, insanity of any of the joint
holders in case of jointly operated account.

PARTNERSHIP FIRMS
 Max no. of partners 100 ( Previously, it was 10 in banking and 20 in others)
 Registration not mandatory, but only registered firms can file suits to enforce a contract.
 Minor can be admitted only to the benefits of the firm.
 A partner can bind the firm by doing usual business on behalf of the firm.
 A partnership is not treated as a separate entity from the partners
 Death of a partner/ admission of a partner dissolves the partnership firm
 Implied authority of the partner does not cover
1. Submission of a dispute to arbitration
2. Open a/c in his name for firm’s business
3. Promise/ relinquish claim of the firm
4. Withdrawal of suit filed on behalf of the firm
5. Admit any liability in a suit against the firm
6. Acquire/ transfer immovable property
7. Enter into partnership on behalf of the firm
 While opening account, letter should be signed by all major partners along with instructions to
operate.
 Any of the partners even sleeping one can stop operations in the account.
 In case of death, insanity or insolvency of any of the partners, firm is dissolved, but account can
be continued if remaining partners confirm the balance.
 However on death, insolvency or insanity of any of the partners, if business is discontinued,
account should be closed to avoid Clayton’s rule.

46
JOINT STOCK COMPANIES

 Private Limited Companies:


1. Min 2 and max 200 shareholders (Previously it was 50),
2. Directors; min 2
3. Name must end with “private limited”
 Public Limited Companies
1. Min: Directors 3, share holders 7, max- no limit
2. Name must end with “Limited”
 Govt Companies; 51% or more share held by Govt.
 Documents reqd. for opening account
1. Memorandum of association
2. Articles of association
3. Certificate of incorporation
4. Certificate of commencement of business( Public ltd. (only)
 Third party cheques drawn by the company should not be collected/ credited to the personal
accounts of the directors.
 Insolvency/ death / insanity of a director does not affect the functioning of a company
 Borrowing Powers of the company are included in Memorandum.

OLD/SICK/INCAPACITATED PERSONS
These are the persons who are unable to sign the cheque and visit the bank to withdraw money. Bank
can obtain thumb impression or an identified mark in presence of two identified witnesses (one of them
should be bank official) and make payment. Such customer will identify the person in the presence of
witnesses to whom payment is to be made. The identified person will put his signatures/thumb
impression on the cheque/withdrawal slip.

MENTALLY ILL PERSONS AND PERSONS SUFFERING FROM DISABILITIES LIKE AUTISM,
CEREBRAL PALSY, MENTAL RETARDATION AND MULTIPLE DISABILITIES
 In case guardian of such person suffering from above said disabilities is appointed by the court
under Mental Health Act, 1987 or some other act approaches the bank to open/operate the
accounts of mentally ill person (SF, RD and FD a/cs only), opening/operation be allowed. The
rules are same as in case of accounts of Minor under guardianship.
 The guardian shall furnish a certificate at least once in a year from the appointing authority that
he continues to be the guardian of such mentally ill person. He will also submit an affidavit with
the bank that he will inform the bank about any change in the guardianship.

Limited Liability Partnership Act 2008 (LLP)


 LLP is viewed as an alternative corporate business vehicle that provides the benefits of limited
liability but allows its members the flexibility of organizing their internal structure as a partnership
based on a mutually arrived agreement.
 Government passed the Limited Liability Partnership Act, 2008, which came into force w.e.f. 9th
January, 2009.

LEGAL STATUS OF LLP


 LLP is a body corporate formed and incorporated under the LLP Act which is a distinct legal entity
separate from that of its partners. It has perpetual succession. Any change in the partners will
not affect the existence, rights or liabilities of the LLP.
47
 On Registration, a LLP would be capable of suing and being sued, acquiring, owning, holding and
developing or disposing of property moveable or immoveable. The Act provides for entry of new
partners in accordance with LLP agreement and exit of existing partners both with due notice to
the Registrar of Companies.

MINIMUM NUMBER OF PARTNERS


 LLP shall have at least two partners but there is no prescribed limit on the maximum number of
partners in an LLP. Any individual or body corporate may be a partner in LLP. There is no
specific provision to admit minor as a partner in firm. If at any time the number of partners of a
LLP is reduced below two and the LLP carries on business for more than 6 months while the
number is so reduced, the person who is the only partner of the LLP during the time that it so
carries on business after those 6 months and has the knowledge of the fact that it is carrying on
business with him alone, shall be liable personally for the obligation of the LLP incurred during
that period.

DESIGNATED PARTNERS AND THEIR OBLIGATIONS


 There is a concept of ‘Designated Partner’, which is defined as a partner designated as such.
Every designated partner of the LLP must obtain a Designated Partner Identification No. (DPIN)
from the Central Govt. Every LLP must have at-least two designated partners. Both the
designated partners must be individuals and at-least one of them must be a resident in India. If
all the partners in LLP are bodies corporate, they must nominate their respective individuals who
are to act as ‘Designated Partners’ (DP) and one of the nominee shall be a resident of India.
 DP is liable to all penalties imposed on LLP for any contravention of those provisions. Every
LLP shall file with Registrar of companies the particulars of every individual who has given his
consent to Act as DP. This is similar to provisions relating to Director in Companies Act.

48
Ch-9

SARFAESI ACT, 2002

SARFAESI (Securitization and Reconstruction of Financial Assets and


Enforcement of Security Interest Act, 2002)

SARFAESI Act is applicable throughout India including J&K. It envisazes adjustment of bank
dues through sale of security (Movable or Immovable).

SARFAESI has two purposes: SARFA (Securitization and Reconstruction of Financial Assets)
as well as ESI (Enforcement of Security Interest).

Securitization and Reconstruction Company is formed with the following features:

1. Securitization and Reconstruction Company can commence business only if it obtains


license from RBI.
2. It’s owned funds should not be less than 2 crore or it should be minimum 15% of value of
assets acquired or to be acquired.
3. It can formulate separate schemes for acquisition of Financial assets.
4. It can create separate trust for each scheme.
5. It can act as trustee and manage the assets held in trust.
6. Assets (NPAs) are purchased from Banks/FIs for agreed consideration.
7. There are two stages:

Ist: Acquisition of Fixed Assets


2nd:Issue of Security Receipts in favour of investors.

8. After acquisition of NPAS, the company becomes deemed lender and all rights of
recovery are vested with it.
9. Notice is required to be served upon borrower/guarantor (optional if charge is registered
with ROC).
10. Copy of notice must be filed with ROC.
11. The fund created by Securitization Company for the purpose of acquiring assets is called
SPV “Special Purpose Vehicle”
12. The receipt issued by Securitization Company to investors is called Security Receipt.
13. Only QIBs (Qualified Institutional Buyers can invest in Securitization Company.
14. As per latest RBI norms, CRAR required is 15% of Total assets acquired or Rs. 100
crore (whichever is less)
15. Consequent upon non-compliance of RBI guidelines, a fine of Rs. 5.00 lac (Maximum)
can be imposed. If default continues, additional fine of Rs. 10000/- per day can be
imposed.

49
ESI (Enforcement of Security Interest)

The provisions are not applicable in respect of following:

 Lien/Pledge;
 Security interest created for securing repayment not exceeding Rs.1 lac;
 Any security interest created in agriculture land;
 Where the amount due is less than 20% of the principal plus interest.
 IPs charged to the Bank by way of mortgage is shown as agricultural land in the revenue
records but the same is not being used for agriculture purposes, are not eligible for
Exemption as per the decisions of HC/SC.

HOW TO PROCEED FOR ACTION UNDER SARFAESI U/S 13(4)

 Account must have been classified as NPA.


 On behalf of the secured creditor bank, action can be taken by ‘Authorized Officers’
which will be in Scale IV and above.

Bullet Provision of Sec. 13(4)


Bank can sell the security for adjustment of its dues without intervention of court.

POSSESSION NOTICE

 After recall, the Authorized Officer shall give 60 days’ Possession Notice) to
borrower/guarantor/ mortgagor demanding to discharge full liability within 60 days.
 Notice will be served by Registered Post under acknowledgement or by pasting Notice
at the premises of the borrower if he refuses to receive the same.
 Service of Notice should be confirmed by publishing the contents of the demand notice
in two leading newspapers, one in vernacular language.
 On issue of such a notice, if the borrower/guarantor raises objections by way of
representation under section 13 (3A), bank has to give explanation/suitable reply within
15 days from the date of receipt of the objections/representation.
 If there is an apprehension that the borrower/guarantor may approach DRT/DRAT/High
Court by filing SA/appeal against an action under SARFAESI Act, bank can file caveat
before the Tribunal/Court and a notice to this effect is to be sent to the person
concerned. Caveat so filed will be valid for 90 days
 If the borrower does not make the payment in full within 60 days, Bank is entitled to take
action, as detailed herein below, under section 13(4) of the SARFAESI Act. However, in
case of joint financing, secured creditors can exercise such right only if the secured
creditor/s representing not less than 60% in value of the amount outstanding give
consent for such action.

50
PERMITTED ACTIONS UNDER SARFAESI – Section 13(4)

 Can Take possession


 Can Take over management
 Can Appoint any person to manage the secured assets
 Can demand by notice in writing, any person who has acquired any of the secured
assets from the borrower and from whom any money is due or may become due to the
borrower, to pay the amount so due to the secured creditor.

TAKING OVER POSESSION

 After completion of 60 days from the service of notice, the authorized officer can take
possession of the property by delivering a possession notice to the borrower and by
affixing the possession notice on the outer door or at such conspicuous place of the
property. This is called Symbolic Possession. However it is different from actual or
physical possession where property comes under lock and key of the bank.
 The possession notice shall also be published, as soon as possible, but in any case not
later than seven days from the date of taking possession, in two leading newspapers,
one in vernacular language, having sufficient circulation in the locality where the property
is situated.

SYMBOLIC POSSESSION OF IMMOVEABLE PROPERTIES

 There is no legal difference between symbolic and physical possession of immoveable


properties like land and building. The secured creditor, after taking symbolic possession
of the immoveable property, can proceed to sell the same. Authorized Officer shall take
possession by delivering a possession notice and by affixing the possession notice on
the property.

In terms of Section 13(3) of SARFAESI Act, “no borrower shall, after receipt of notice, transfer
by way of sale, lease or otherwise (other than in the ordinary course of his business) any of his
secured assets referred to in the notice, without prior written consent of the secured creditor.”

SALE OF SECURED ASSET

 Bank can sell the immoveable assets on “as is where is basis”. In the auction/tender
notice the general public be informed that the sale is on “as is where is basis”. However,
to fetch better price for the secured assets, efforts should be made to obtain physical
possession of the immoveable properties before effecting sale.

51
In case of any difficulty in taking possession, section 14 of the SARFAESI Act enables the bank
to seek the assistance of Chief Metropolitan Magistrate/ District Magistrate (CMM/DM). No
enquiry is contemplated to be made by CMM/DM under Section 14 of the Act and he has to
obtain possession and hand over the same to the secured creditor. The matter needs to be
taken up with CMM/DM appropriately.

POSSESSION OF MOVEABLE PROPERTY

Where possession of the secured assets to be taken are moveable property like stocks, plant &
machinery, vehicles etc. in possession of the borrower, the Authorized Officer shall take
possession of such moveable property in the presence of two witnesses after a Panchnama is
drawn and signed by the witnesses.

30 DAYS’ SALE NOTICE

 The authorized officer shall serve upon the owner of the asset concerned a notice of 30
days. The notice is to be mandatorily served upon the person concerned.

 Before affecting sale of the immovable property, the Authorized Officer shall obtain
valuation of the property from an approved valuer and fix the Reserve price of the
property and may sell the secured assets at circle office level.

 Every notice of sale shall be affixed on a conspicuous part of the immovable property
and may, if the authorized officer deems it fit, put on the website of the secured creditor
on the internet.

 On every sale of immoveable property, the purchaser shall immediately pay 25% of the
sale price and the balance shall be paid on or before 15th day of confirmation of sale or
such extended period as may be.

MODE OF SALE

 By obtaining quotation from persons dealing in the similar assets;


 By inviting tenders from public.
 By holding public auction.
 By private treaty.

52
FILING OF APPLICATION AND APPEAL UNDER SECTION 17 AND 18 F THE ACT

 Any person (including borrower) may make an application to the DRT within 45 days
from the date on which such action had been taken.
 The Act stipulates a time period of 60 days for deciding the application filed
before DRT U/s 17(1).
 However, DRT may further extend the time after recording reasons in writing but the
period so extended shall not exceed 4 months from the date of the application.
 If DRT errs in allowing application, filing of appeal before DRAT be considered and if
appeal is to be filed, the same be filed within limitation of 30 days.
 In J&K, as per the SARFAESI Act, such applications can be made to the Court of Distt.
Judge having jurisdiction over the borrower. Appeal also lies to High Court against order
of Distt. Judge.
 No appeal before DRAT/ High Court shall be entertained unless the borrower has
deposited with the appellate tribunal/court 50% of the amount of debt. It is also provided
that for the reasons to be recorded in writing, the appellate tribunal/court may reduce the
amount but not less than 25% of the debt.

CENTRAL REGISTRY

 Central Registry has been established by the Central Government and in terms of
section 20 of the SARFAESI Act. Bank has to ensure filing of charge in respect of all
equitable mortgages created in its favor.

 The same has to be filed within 30 days from the date of creation of security and on
payment of fees prescribed therein.

 Filing of charge with Central Registry is in addition to the registration of charge with ROC
etc. Every modification/ satisfaction of charge also will have to be got registered with the
Central Registry.
 If the charge is not filed with the Central Registry within the stipulated time of 30 days,
the secured creditor shall be imposed penalty as under:

Late Fees after 30 days Loan amount Loan amount


Up to 5.00 lac Above 5.00 lac
31st to 40th day 500/- 1000/-
41st to 50th day 1250/- 2500/-
51st to 60th day 2500/- 5000/-

53
Two Important Points

Can Simultaneous proceedings be initiated under SAFAESI and Court?

Yes, there is no bar. In suit filed cases, SARFAESI can be initiated. On the other hand, cases
under SARFESI can be referred to court to save the account from expiry of limitation.

IS Limitation is saved by initiating action under SARFAESI?

No. limitation is not saved. But, for initiating action under SARFAESI, it is essential that the loan
is within limitation period.

54
Ch-10
BANKING OMBUDSMAN SCHEME 2006 &
COPRA – CONSUMER PROTECTION ACT, 1986

INTRODUCTION:
 The Banking Ombudsman Scheme, 2006 enables resolution of complaints of bank
customers relating to certain services rendered by banks.
 The Scheme has come into force from January 1, 2006.
 The Banking Ombudsman is person appointed by the Reserve Bank of India to redress
customer complaints against certain deficiency in banking services.
 The Banking Ombudsman is a quasi judicial authority. It has power to summon both the
parties - bank and its customer, to facilitate resolution of complaint through mediation.
 As on date, 15 Banking Ombudsmen have been appointed with their offices located mostly
in the State Capitals. The addresses of the Banking Ombudsman offices have been
provided in the RBI website.
 All Scheduled Commercial Banks, Regional Rural Banks and Scheduled Primary Co-
operative Banks are covered under the Scheme.
 The new scheme also includes inter-bank disputes for arbitration up to an amount of
Rs.10.00 lac.
 Only those complaints are entertained by the Ombudsman, the compensation/award of
which does not exceed an amount of Rs.10.00 lac.

TYPES OF COMPLAINTS BEFORE BANKING OMBUDSMAN

Banking Ombudsman entertains any complaint pertaining to Routine, IT or loans where financial
deficiency is there and claim amount does not exceed Rs. 10.00 lac.

The Banking Ombudsman will also consider complaints from Non-Resident Indians having
accounts in India in relation to their remittances from abroad, deposits and other bank-related
matters.

APPLYING TO BANKING OMBUDSMAN Customer can file his complaint before the Banking
Ombudsman if the reply is not received from the bank within a period of one month (30 days) ,
after the bank concerned has received his representation, or the bank rejects the complaint, or
the complainant is not satisfied with the reply given to him by the bank.

Does the complainant have to fulfill any conditions before complaining to the Banking
Ombudsman?
For filing a complaint before the Banking Ombudsman, it is essential for a complainant to first
attempt to find a satisfactory solution directly with his bank by making a written representation to
the bank named in the complaint. The complaint should, however, be made after lapse of one
month from the date of lodging complaint with the bank and before expiry of period of one year
from date of reply by the bank.

 The complaint should not be for the same subject matter that was settled through the
office of the Banking Ombudsman in any previous proceedings.

55
 The complaint cannot be made before a Banking Ombudsman on the same subject
matter for which any proceedings before any court.

 The Banking Ombudsman does not charge any fee for resolving customers’ complaints.

PROCEEDINGS BEFORE THE BANKING OMBUDSMAN


 If a complaint is not settled by an agreement within a period of one month, the Banking
Ombudsman proceeds further to pass an award. Before passing an award, the Banking
Ombudsman provides reasonable opportunity to the complainant and the bank, to
present their case.

AWARD GIVEN BY BANKING OMBUDSMAN

 After an award is passed, its copy is sent to the complainant and the bank named in the
complaint. It is open to the complainant to accept the award in full and final settlement of
his complaint or to reject it.

 If the award is acceptable to the complainant, he is required to send to the bank


concerned, a letter of acceptance of the award in full and final settlement of his
complaint, within a period of 30 days from the date of receipt of the copy of the award by
him.

 If the bank is satisfied with the award, within a period of one month (from the date of
receipt of letter of acceptance from the complainant of the award in full and final
settlement of his claim in the matter), the bank is required to comply with the award and
intimate the compliance to the Banking Ombudsman.

 If the complainant is not satisfied with the award passed by the Banking Ombudsman,
he can approach the appellate authority (Dy. Governor RBI) against the Banking
Ombudsmen’s decision 30 days of receipt of the award/rejection by the Ombudsman.

What if the Award is not acceptable to the bank?


The bank has the option to file an appeal before the appellate authority under the scheme within
a period of 30 days.

APPEAL AGAINST THE AWARD

Who is the appellate authority?


The appellate authority is the Deputy Governor in the Reserve Bank of India.

Is there any time limit for filing an appeal?


Either party aggrieved by the award may, within 30 days of the date of receipt of the award,
appeal against the award before the appellate authority. The appellate authority may, if he is
satisfied that the applicant had sufficient cause for not making an application for appeal within
time, also allow a further period not exceeding 30 days.
The banks can appeal only with the prior sanction of their Chairman or, in his absence, the
Managing Director or the Executive Director or the Chief Executive Officer or any other officer of
equal rank.

56
CONSUMER PROTECTION ACT, 1986

(Not applicable in J&K)


The act seeks to promote and protect the rights of consumers such as -

1. The right to be protected against marketing of goods and services which are hazardous
to life and property.

2. The right to be informed about the quality, quantity, potency, purity, standard and price
of goods, or services so as to protect the consumer against unfair trade practices

3. The right to assured, wherever possible, access to variety of goods and services at
competitive prices.

4. The right to be heard and be assured that consumers interest will receive due
consideration at appropriate forums.

5. The right to seek Redressal against unfair practices or restrictive trade practices or
unscrupulous exploitation of consumers.

6. The right to consumer education

The Act extends to the whole of India except the State of Jammu and Kashmir. The State of
Jammu and Kashmir has separate Consumer Protection Act on similar lines.

 As per Sec.24A of the Act, the limitation period for filing complaint before the
District Forum, State Commission or National Commission is two years from
the date on which cause of action has arisen.
 In terms of Section 27 of Consumer Protection Act, if any person fails or omits
to comply with any order made by a Forum/Commission, he shall be
punishable with imprisonment for a term, which shall not be less than one
month, but may extend to three years, or with fine, which shall not be less than
Rs. Two Thousand, but may extend to Rs. Ten Thousand, or with both.
 If the complaint instituted before a Forum/Commission is found to be frivolous
such Forum/Commission shall, for reasons to be recorded in writing, dismiss the
complaint and make an order that the complainant shall pay to the opposite
party(ies) such cost, not exceeding Rs. Ten Thousand, as may be specified in
the order.
 In the case of complaint, the record containing main files with original order sheet
shall be preserved for a period of five years.

Pecuniary Jurisdiction:

57
Forum Jurisdiction
1 District Forum Complaints in which the value of the
services and the compensation, if any, claimed
does not exceed Rs.20 lac

2 State Complaints in which the value of the


Commission services and the compensation, if any, claimed is
above Rs.20 lac but does not exceed Rs.1 Crore

3 National Complaints in which the value of service and


Commission the compensation, if any, claimed, is above Rs.1 Crore.

APPEAL

Any person aggrieved by an order passed by District Forum in the above regard may file an
appeal before State Commission. Similarly, the order passed by State Commission in an
original complaint and the National Commission in an original complaint can be appealed
against before the National Commission and the Supreme Court respectively within 30 days
from date of ORDER.

58
CH-11
DRT (Debt Recovery Tribunal) Act, 1993
Bankers’s Books Evidence Act,1891
Lok Adalat

DRT (Debt Recovery Tribunal) Act, 1993

 DRT Act extends to whole of India except J & K


 Objective is to recover bank’s dues through special court called DRT
 The outstanding loan amount should be 10 lac and above
 Loan can be Term Loan, Cash Credit or Overdraft.
 Eligible institutions to file suit are banks and FIs.
 Fee structure is Rs. 12000/- up to 10.00 lac and Rs. 1000/- additional for each
additional lac (maximum Rs. 1.50 lac).
 Decrees passed by Foreign Court and Civil Courts can be executed through
DRT.
 Cases of DRT jurisdiction can be filed in Civil Court.

Set up of DRT
DRT (Debt Recovery DRAT (Debt Recovery
Tribunal) Appellant Tribunal)
What is it? Special Court to settle loan Higher Court to file appeal
cases of outstanding 10 lac against DRT
and above
Head of the institution Presiding Officer Chairperson
PO (Presiding Officer) can appoint RO (Recovery Officer)
for his assistance.
Qualifications of Head Serving or Retired Judge Serving or Retired HC
judge,
Or Working of 3 years as
PO
Or Member of Indian Legal
Services
Period of Office 5 years or up to 62 years 5 years or up to 65 years
Period of disposal 180 days 6 months
Judgement or decision is Recovery Certificate
called
At-least 75% of dues have
to be deposited before filing
appeal
Appeal within 45 days from
date of receipt of order

59
Bankers’s Books Evidence Act,1891
The lay extends whole of India except J&K.

What are bankers’ books?

Bankers’ books are : Ledgers, Day Book, Cash Book, other account books and records
used in ordinary course of business. These may be in phsical form or electronic form.

What Act Says?

It is provided in Bankers’ Books Evidence Act that whenever any claim has to be
established in the court, bankers’ books need not be produced in original?

 Certified copy of any entry shall be received as prima facie evedence to the
existence of such entry.
 In any case,, if bank is not a party, no officer can be compelled to produce
banker’s books (Certified copies). However, court may give specific orders.

Certified Copy will be accompanied with a certificate stating that:

 It is printout of such entry or a copy of such printout.


 It is true copy of the original.
 Such entry was made in ordinary course of business.
 Such records are still in custody of the bank.

Computerized Prints

Under computerized environment, the Computer Incharge will further state:

 That safeguards have been adopted by the system.


 Computer system is operated properly at the material time.
 The copy is true prinout of the original record.

60
LOK ADALAT

The Lok Adalat is a special type of court which disposes off the disputes without delay.
These Adalats are called by the authorities to provide immediate justice and to reduce
the burdon of large number of pending cases in Judiciary. It can be said Fast Track
Court.

Lok Adalat deals with

 Cases involving claims up to 20.00 lac only.


 No court fees are applicable.
 No appeal can be preferred against the decision of Lok Adalat
 No Criminal cases can not be referred to Lok Adalat.
 By referring the case to Lok Adalat, limitation is not saved.

Lok Adalat can be organised by :

1. State Govt; or
2. District Athority; or
3. HC Legal Services Committee; or
4. SC Legal services Committee

Essential of Lok Adalat

 Both parties must agree to refer the case to Lok adalat.


 Court can also provide opportunity for Lok Adalat.
 Court can refer the matter to Lok adalat.
 Compromise is entered into between the parties and is guided by Principles of
Natural Justice
 Amount must be up to Rs. 20.00 lac.
 The award passed by Lok Adalat is deemed decree.
 No appeal can be preferred against the decision of Lok adalat.

61
Ch-12

Limitation
Limitation is the period beyond which parties cannot take action in court of law. However
limitation does not take away right to recovery but it bars legal remedy.

In other words, Bank cannot file suit against the defaulter borrower if the limitation period expiry.
The Debt becomes time barred beyond the limitation period.

Limitation Period Does not Apply While

 Exercising right of Lien.


 Selling of Securities Pledged.
 Right of Set Off.

Period of Limitation

Term Loan 3 years from date when each installment becomes due
OD & DL 3 years from date of documents
CC Hypothecation 3 Years from date of documents
CC Pledge Not applicable
Sight Bill/Demand Bill 3 years from the date when bill is sighted/presented for
acceptance/payment.
Usance Bill 3 Years from due date
Mortgage 12 years from date of documents
Right of Foreclosure 30 years
Right of Redemption 30 years
Govt. Guarantee 30 years
Deposits 3 years from date of demand
Ombudsman 1 year from date of reply by the bank (1 year + 1 M. if no reply is
received from bank.
Consumer Forum 2 years from the date when cause of action arises
Against Guarantor 3 years from date when demand is made from guarantor.

Calculation of Limitation Period

 Date of filing suit is excluded

1. Extension of Period of limitation period.:


If court is closed on the day of filing suit due to which limitation expires, the period is
extended up to the date when the court re-opens.

62
2. Absence from India:
If the borrower has left India and limitation is going to expire during his stay outside
India, the period is extended by the period, the borrower remained out of India.
3. Part payment by the borrower:
If the borrower makes part payment, the limitation period is extended for another period
of 3 years from the date when part payment is made provided the pay-in-slip is signed
by the borrower himself or his authorized agent.
4. Acknowledgement of Debt
The limitation period is extended by another period of 3 years from date when borrower
gives acknowledgement of debt in writing.

Limitation Period against Guarantor

 Does not begin until demand is made from guarantor.


 Extended automatically with extension of limitation for the borrower.
 Becomes time barred automatically if limitation is expired against borrower.

63
Ch-13

Tax Laws
Two types of taxes are there:

1. Direct Taxes: Person who pays it also bears it such as Income tax, Wealth tax, Estate
Duty etc.
2. Indirect Taxes : Paid by one person but its impact falls on other person: such as sales
tax, Service Tax, Vat, Excise duty etc.

Income Tax

 Assesse is a person whose income is being taxed.


 Assessment Year is the financial year in which return of previous year is filed.
 Previous year is the year in which Income is earned
 Residents, Corporate and Not-ordinary resident

Quoting of PAN is compulsory under the following situation:

 Opening of account with bank


 Deposit of 50000/- and above
 Issue of DD for value 50000/- and above
 Remittance through NEFT/RTGS for value 50000/- and above
 Alternatively Form 60-61 must be obtained

Payment of FD cannot be made in cash if the amount of Principal or interest comes to


Rs. 20000/- or more

Tax is calculated on Income which will be aggregate of

1. Salaries
2. Income from House Property
3. Profits and Gains from Business
4. Capital Gains
5. Income from Other sources

Calculation of Income Tax is as under:

Gross Total Income (-) Deductions (-) exemptions = taxable income

Exempted Income

General Public 250000/-


Senior Citizens 300000/-
Very Senior Citizens (80 years and above) 500000/-

64
 The complete statement of Tax can be seen on 26AS appearing on NSDL site.

Other guidelines:

 Interest on FD is taxable @10% if the amount per year is 10000/- or more. (20% if PAN
number is not quoted)
 No tax is to be deducted from NRE/FCNR accounts
 No tax is deducted by the bank, if the customer submits Form 15H or 15G.
 Form 15H is meant for Senior citizens whereas Form 15G is meant for others whose
Income is not taxable.
 The deductor has to file return quarterly online.
 Tax slab at present is
o Up to 2.50 lac ---------NIL
o 2.5 lac to 5.00 lac ----10%
o 5 lac to 10 lac-----20%
o Above 10 lac------0%
 Education cess is 3%

Cenvat Credit

Service tax paid by the assess for input services can be set off from liability on output services.

It is refund by the Govt. to the assesse who pays service tax on various service availed. The
refund is made from the amount deposited on account of service tax collected by it and
deposited with the Govt. The rate of refund is 50% of amount paid.

 BCTT (Banking Service Transaction tax has been scrapped w.e.f. 1.4.2009.

Tax Related Now CBDT, vide Notification no 11/2013 & Circular No 04/2013 has
Forms – amended certain tax related forms which are listed below:
Revised
Forms S.No Form No. Topic
1 15G Form of declaration for Non deduction of TDS
2 15H Form of declaration for Non deduction of TDS by senior citizen
3 16 TDS Certificate on salary
4 16A TDS Certificate other than salary
5 24Q Quarterly return for Salary
6 26Q Quarterly return for Interest on term deposits

65
TDS Guidelines for the year 2013-14 are as under:

Thresh hold limit (up to Rate of TDS


which no TDS is
applicable)
Interest on FD 10000 per year 10%
Resident Contractor 30000 per transaction or 1% for
75000 (aggregate individual and
transaction in FY) 2% for
HUF/Entity
Commission or Brokerage to 5000 per FY 10%
a Resident
Rent 180000 per FY 2% (P/M)
10% (L/B)
Purchase of property from 50,00,000/- 1%
Resident of India (Other than
Agriculture land)
Professional fees 30000 per year 10%
Remuneration/Fees to a NIL 10%
director
 If there is no PAN number. Higher of the following is deducted as Tax.
- Rate of TDS as prescribed in relevant circular OR
- Rate in force as per Finance Act OR
- @20%

Time Period for Deposit Of Tax

April to February Within 7 days from end of


month
March By 30th April

66
Ch- 14

INDIAN CONTRACT ACT, 1872


(Includes Contract, Indemnity, Guarantee, Bailment, Pledge, Agency, Contract of Sales,
Conditions, Warranties and Unpaid Seller)

What is Contract?

A contract is:

 Agreement between two or more persons


 Agreement must be enforceable under law

Key components of Contract

When one person signifies to another, his willingness to do or not to do something with a view to
obtaining consent, he is said to have made proposal.

The other person to whom proposal is made, gives his consent, the proposal is said to be
accepted.

 A proposal becomes Promise when it is accepted. There are two parties – Promisor and
promise.

Essentials of Valid Contract

1. Proposal and acceptance


2. Oral or Written
3. Consideration: There must be lawful consideration. Consideration means one party has
done something for another or abstained from doing. Consideration may present, past or
future. If a person promises to do something or abstains from doing, it is called future
consideration. Agreement without lawful consideration is invalid. However there are
exceptions where consideration is not required:
- Agreement out of natural love and affection
- Parties standing in near relation to each other
- Agreement is in writing and registered.
4. Free Consent
One party should not be forced to enter into contract. It has to be proved in the court by
counter party.
5. Capacity to Contract
Parties must be capable of entering into contract. One of the parties of the contract
should not be:
- Minor
- Person of Unsound mind
- Person disqualified under any law to enter into contract.

67
Contract with Minor

Contract with minor is void ab-initio. This means the contract entered into with minor cannot be
enforced in court of law. It cannot be ratified at later stage. This is why, it is called void ab-initio.

There is a popular decided case of Mohiri Bibi Vs Dharmodas Ghose. In this case, a minor
borrowed a certain sum of money against mortgage of land. The court decided that Mortgage be
set aside and money cannot be recovered from Minor.

CONTRACT OF INDEMNITY

Indemnity.

It is a contract by which one party promises to save the other from loss caused by conduct of
promisor himself or by conduct of any other person

There are 2 parties :

1. Indemnifier—who agrees to bear the loss


2. Indemnified ---whose loss is to be borne

Other features of Indemnity Contract

 Liability of Indemnifier is Primary


 There is only one contract between Indemnifier and Indemnified
 The Risk is contingent which may or may not arise.
 Purpose of contract is repayment of loss
 Indemnity holder i.e. Indemnified can recover
1. Payment under compromise
2. Cost of suit
3. Damages, if court permits

Contract of Indemnity
It Is required to be entered into:

1. Insurance Contract
2. Issuance of Duplicate Drafts
3. Settlement of claim cases by the bank

CONTRACT OF GUARANTEE

Contract of Guarantee is a contract to perform the promise or discharge the liability of 3rd party
in case of latter’s default.

There are 3 parties in Contract of Guarantee:

68
1. Surety or Guarantor-----who agrees to pay in case of default
2. Principal Debtor -------who has to pay first
3. Secured Creditor-------Beneficiary to whom payment has to be made

There are 3 contracts:

1. Between Principal Debtor and Creditor


2. Between Surety and Creditor
3. Implied Contract between Principal Debtor and Surety

Basic Principles of the Contract:

 Consideration must be there. It can be past, present or future. Anything done or promise
made for the benefit of Principal Debtor is sufficient consideration.
 Parties of the contract must be capable of entering into the contract.
 There must be free consent
Other features of Contract of Guarantee

 Liability of Surety is co-extensive with Principal Debtor. This means if PD is discharged,


surety is automatically discharged.
 After payment, surety falls in the shoes of creditor i.e. he is now supposed to recover the
money from debtor. This is also called Right of subrogation.
 Guarantee ends with death of Surety if terms of contract are not otherwise.
 Surety is discharged if terms of original contract are changed without consent of surety.
 Surety is discharged if security is released or changed by the Secured Creditor without
consent of Surety.
 Release of one co-surety does not discharge the other.
 Contract of guarantee becomes invalid if there is misreprentation by the creditor while
entering into original contract.
 If there are more than one surety i.e. co-sureties are there, liability is shared between
them equally.
 Merely forbearance to sue PD on the part of creditor does not discharge the debtor.

Continuing Guarantee: a guarantee which extends to series of transactions is called


continuing guarantee.

CONTRACT OF BAILMENT

Bailment is delivery of goods by one person to another for some purpose. It may relate to
retaining of goods or selling of goods by one person on behalf of another.

Two parties are there:


1. Bailer---------Who deliver the goods.
2. Bailee--------Who takes delivery of goods.

Bailer is bound to disclose the Bailee:

Fault of goods, if any, of which Bailee is aware.


Fault which materially interfere with use of goods.
Fault which expose the Bailee to risk.

69
Bailee to take care of goods
As if goods are of his own
He can spend the amount to save the goods from loss
He will not do inconsistent with what he was supposed to have done

Effect of Mixing of goods


If done with consent, the interest in the goods will be proportionate.
If done without consent, Bailee will have to compensate the loss fully if some eventuality
occurs.

Duties of Bailee
Bailee has to return the goods after expiry of the period.
He will also return incretion of goods, if any.
He will also bear responsibility of loss caused due to his negligence.

Rights of Bailee
Bailee will claim from Bailee, any expenses incurred by him in due course.
Bailer will also compensate the loss caused to Bailee in ordinary course of business.
Bailee can retain the goods, if payment due to him is not made by the Bailer.

CONTRACT OF PLEDGE

PLEDGE-: It is defined u/s 172 of Indian Contract Act. It is bailment of goods as security for
payment of a debt or performance of a promise. Bailment means delivery of goods for some
purpose

ACTUAL POSESSION IS GIVEN TO THE LENDER THOUGH OWNERSHIP REMAINS WITH


PLEDGER(BORROWER)

TWO PARTIES ARE THERE:

1. Pledger or Pawner
2. Pledgee or Pawnee

RIGHTS OF PLEDGEE

 Retain the goods


 Sell the goods after notice
 Recovery charges for preserving

DUTIES OF PLEDGEE

 To refund goods with accruals


 To take care of goods

70
CONTRACT OF AGENCY

When one person authorizes other to act on its behalf, the person who authorizes is called
Principal and the person, to whom authority is given, is called Agent.

TWO PARTIES ARE THERE:

1. Principal
2. Agent

FEATURES OF AGENCY

Parties must be capable of entering into contract i.e. persons of sound mind, major and
not disqualified under any law.

Minor can become agent.. He can bind 3rd person on behalf of Principal. But he is not
bound to any 3rd party.

Minor cannot become Principal i.e. he/she is not competent to authorize others to act on
its behalf.

Authority of the Principal may be express or implied.

Agent is competent to perform all lawful acts on behalf of his principal which are
necessary to conduct the business.

AGENT CANOT DELEGATE HIS AUTHORITY

Agent cannot employ sub-agent without consent of Principal.


Sub-agent is employed, if it is customary or trade practices allow.

AGENT IS PERSONALLY LIABLE

For all acts done beyond the authority of Principal


For loss due to his negligence, misrepresentation or fraud

TERMINATION OF AGENCY

The agency is terminated in the following events:


1. If Principal revokes
2. If Agent renounces
3. If Business is completed
4. If anyone i.e. Agent or Principal dies
5. If anyone i.e. Principal or agent becomes person of Unsound mind
6. If Principal becomes insolvent

71
RIGTHS OF PRINCIPAL WHEN AGENT DEALS ON HIS OWN

Principal may repudiate the contract if something is done without consent.


If by any act of the Principal, contract is ratified, Principal becomes liable. For example,
P accepts part amount of a contact of credit sale (without authority), he will be liable for
the act of the agent though without authority.

AGENTS’ REMUNERATION

If remuneration is due to the Principal, Agent can:


- Retain the money due to Principal
- Retain the goods belonging to Principal
- No remuneration is payable, if agent is guilty of wrong doing

AGENT TO BE INDEMNIFIED

- For lawful acts


- For acts done in good faith

CONTRACT OF SALE

Contract of Sales is defined under Sale of Goods Act, 1930 as under:

“Contract of Sale of goods is a contract under which seller transfers or agrees to transfer the
property in goods to the buyer for price.”

Goods included movable property such as Stock, shares, growing crops etc.

Features of Contract of Sales


1. It is bilateral contract between Seller and Buyer
2. Money consideration must be there
3. Sale and purchase of Movable property
4. Contract may be oral or written

Payment of Money
1. May be immediate
2. May be in installments
Delivery of Goods
1. May be immediate
2. May be later on

Difference between Sales and Agreement to Sell

Sale Agreement to Sell


Performance of contract Performed Yet to perform
Ownership Passes at the time of sale Yet to be passed
Risk Buyer Seller

72
Non-delivery by seller Suit can be filed for delivery of Suit can be filed for damages by
goods by buyer buyer
Buyer’s default Seller can demand price, stop Seller may not part with
delivery or resell the goods possession

CONDITIONS AND WARRANTEES

Condition Warranty
It is stipulation agreed to main purpose of It is stipulation collateral to main purpose of
contract contract
If violated, party can repudiate (Cancel) the If violated, party can claim damages only.
contract. Goods can be rejected. Party cannot reject the goods.
Implied Conditions Implied Warranty
 Seller must have title of goods  Fitness of goods for particular purpose
 Goods must match with sample  Quite possession
 Goods must match with description  Free from encumbrance

 Treating of condition as Warranty depends upon the buyer

Cavet Emptor

This is a rule which says “ Let the Buyer Beware”. This implies that buyer must check the
quantity and quality of goods at the time of purchase. If, later on, the buyer complains that
counting is less or the item is broken, seller cannot be held responsible.

UNPAID SELLER

Who is unpaid seller?


 If payment is not received by the seller
 If cheque issued by the buyer is dishonored

Rights of Unpaid seller against Goods

a) If property/possession of goods has been passed from seller to buyer


 Seller has lien over price i.e. he can claim price of goods
 He cannot take back the goods sold by him
 He cannot stop delivery, if goods have been dispatched/handed over to courier.
 If the buyer becomes insolvent, the seller has right to stop delivery of goods
even if these are in transit and have been under custody of the carrier. (This is an
exception)
b) If property of goods has yet to pass on to buyer
 Unpaid seller can retain possession till price is paid.
 If goods are sold on credit and possession is yet to pass, the delivery can be
denied after lapse of credit period.
 Insolvency of the buyer will also prompt the seller to stop delivery.
c) If seller has made part delivery

73
 He has right to retain possession of remaining goods.
d) Unpaid seller can resell the goods if delivery is yet to be made.

Transmission of Lien of Seller on Goods


The seller loses lien on goods once:
 These are delivered to carrier
 Buyer lawfully obtains possession
 Lien is waived

74
Ch- 15

Indian Partnership act, 1932


Partnership is relation between two or more persons associated together who have agreed to
share the profits of a business carried on by all or any of them acting for all. It is association of
persons.

Following points are important regarding Partnership:

1. Minimum members are 2 and Maximum are 100 (Previously, it was 20 (10 in case of
Banks. There was also Limit is 50 in cases of Professional firms.)
2. Partnership agreement may be oral or written.
(As per revised Indian Company Act, Maximum number of partners can be 100)
3. If agreement is written, Partnership Deed is prepared which covers the rules and
regulations of the firm to which are partners are bound.
4. Partnership Deed is not mandatory.
5. In the absence of partnership deed, Partnership Act, 1932 applies which stipulates as
under:
 Profits and Losses are shared equally between the partners.
 No Interest is to be paid on Partners’ Capital.
 No interest is to be paid on Partners’ Drawings.
 No salary, remuneration is to be paid to partners.
 Interest @6% will be paid for loan/additional funds provided by the
partners..However, interest will be paid only if there are profits.
 Fluctuating type of capital account will be maintained.
6. However, if different stipulations are there in the Partnership Deed, these will prevail.
7. Liability of Partners is Unlimited. They are severally and Jointly liable for the debts
of the firm.
8. Any one partner can bind the firm with his acts during ordinary course of business.
9. Registration of firm is done by Registrar of Firms (ROF). But it is not compulsory.
10. The drawback of Un-registered firm is that it cannot sue others.
11. A firm cannot become partner of another firm. However, a Company can
become partner of a firm.

Types of Partnership
1. Partnership at Will : Duration is not fixed
2. Partnership for Fixed period: Ends after fixed duration
3. Particular partnership: Ends after a particular job is finished.

75
Relations of Partners with each other
Duties of Partners:

1. No secret profits will be earned by any partner from the firm’s business
2. They will submit true accounts of business and reveal every information
3. They will remain faithful to each other.
4. Duty to indemnify the loss caused to the firm by his misrepresentation or fraud.

Contract between the partners

1. It is implied or it can be decided with mutual consent


2. It should not be against the provisions of Indian Partnership Act.

Conduct of Business and Role of partners

 Partners have right to take part in day to day conduct of business.


 Partners must attend their duties with due diligence.
 Any difference in the opinion will be decided by majority.
 Partners have every right to have access of books of accounts.

Mutual Rights and Liabilities of Partners


 No remuneration can be paid to partner unless it is provided in the Deed.
 Profits will be shared equally if the deed is silent.
 Interest on Capital/Drawings – not to be paid.
 Firm to indemnify the partners for any liability incurred by them
 Partners will indemnify the firm for any loss caused by their neglect/default.

Property of the Firm


 It includes all property/right originally brought by the partners in a firm either originally or
acquired at a later stage.
 Property acquired by the partners during course of business also becomes property of
the firm.
 This property will be used to pay the liabilities of the firm.
 Profits earned from any transaction by the partners are to be paid to the firm invariably.

Mutual Rights and Duties of Partners remain Same


 After change of partner in a firm
 After fixed term, it continues the business
 For additional adventure by the same firm
 However, rights and duties can be changed by mutual consent.

76
Relations of Partners – 3rd parties
Every partner is agent of every other partner only in business of the firm. Provided:
 The contract is in name of the firm
 It is being done in ordinary course of business
A partner who uses his own name instead of firm is liable personally to 3rd parties
.

Implied Authority of Partner as agent of the firm

A partner can do the jobs singly without consent of other if it is being done in the usual course of
business under banner of firm. By acts of one of the partners, all other partners are bound/
liable.

Exceptions: In the following cases, partner has no implied authority and he has to obtain
consent of other partners before performing the following jobs:
1. Submit dispute to arbitration
2. Compromise or relinquish claim of the firm
3. Withdrawal of suit from court
4. Admit any liability in a suit on behalf of firm
5. Acquire Immovable property of the firm
6. Transfer of Immovable property of the firm
7. Mortgage of Immovable property of the firm

However, in emergency, partner can do any act to save the firm from loss.

The liability of Partners is Joint and Several.


The liability of Partners in a firm is Unlimited.

Other aspects of Liability


 Firm is liable to 3rd parties for wrongful acts of the partners done in ordinary course of
business.
 In case, there is misapplication of funds by the partner, firm is liable to rd parties. But
these will be recovered by the firm from its partners.
Partner by Holding Out
 Any person who represents himself as partner but actually he is not the partner, is called
Partner by Holding Out. He will be liable to 3rd parties like other partners. However legal
heirs or Estate of such partner will not be liable.

MINOR AS PARTNER
Minor can be admitted into benefits of partnership firm has and has the following rights:
 He can have access of books of accounts of the firm
 He can share property and profits of the business
 His share in the property is liable for acts of the firm

77
 Minor cannot file suit against the firms for his share except when ending his connection
with the firm

Minor after attaining Majority may give public notice :


 Whether he has elected to become partner or not
 If notice is not given, he will become partner automatically after expiry of 6M.

If Minor elects to become partner or remains silent for 6M


 He shall be liable to 3rd parties from the date he was admitted into the partnership and
for acts done during Minority also.
 He will share profits and property of the firm since admission.

If Minor elects not to become partner


 His rights and liabilities shall continue similar to minor.
 He can sue for his share in the profits and property of the firm.

Retirement of a Partner
A partner can retire:
1. With consent of all other partners
2. In accordance with express agreement
3. By giving notice, if partnership is at Will.
4. He can be expelled by majority
5. Public Notice is must if the partner opts to retire.
6. He will remain liable to 3rd parties till public notice is given.

Partner Becoming Insolvent


Consequent upon partner becoming insolvent, partner ceases to be partner of the firm from date
of adjudication. His estate is not liable for any act of the firm after order of adjudication.

DISSOLUTION OF FIRM

Relationship between the partners comes to an end under the following situations:
1. Dissolution by agreement:
Through mutual consent of the partners, partnership is dissolved.
2. Compulsory Dissolution:
 If all partners (Except one) are declared insolvent.
 If some even happens, which makes it unlawful for business itself.
3. Happening of certain contingencies
 Expiry of fixed term
 Completion of adventure
 Death of a partner
 Insolvency of a partner
4. Dissolution by Court
Consequent upon a suit filed by a partner, court can order dissolution of the firm on the
following grounds:
 That a partner has become person of unsound mind.

78
 That a partner has become permanently incapable of performing duties as
partner.
 That a partner is guilty of misconduct
 That a partner commits breach of agreement
 That a partner has transferred the whole of his interest in the firm to a third party.
 That business of a firm cannot be carried on except at a loss.

Liability of Partners after Dissolution


 Any partner of the firm must give public notice to the effect that the firm is dissolved.
 Failing which liability of the party towards third party continues.

Position of Bank Accounts in case of Retirement or Death of one of the partners:


 If there is credit balance in the account, bank may continue operation provided the
remaining partners produce fresh deed or give in writing that that the business will be
carried on by the remaining partners.
 If there is Debit balance in the account, bank may continue the operation provided the
remaining partners acknowledge the Debt and business is continued.
 If there is debit balance in the account and Business is discontinued, further operation in
the account will be stopped to avoid Clayton’s Rule.

Stop Payment Instructions by one of the partner


 Any partner can stop operation in the account, but again to allow operation in the
account; it requires signatures/consent of all the partners.

REGISTRATION WITH REGISTRAR OF FIRMS


Firm is registered with ROF (Registrar of Firms). But registration is optional and not compulsory.

Effect of non-registration
 Partners cannot file suit against firm
 Partners cannot file suit against each other
 Firm cannot file suit against Third party.
Although, unregistered firm cannot file suit against third party, but other parties can sue the
unregistered firm.

79
Ch- 16

INDIAN COMPANY ACT, 1956


A company is an artificial person created by law. It is also called legal person without physical
existence. The persons who contribute money or money’s worth to a common stock are
shareholders are members. The shares are transferable. Following are the features of a
Company:

1. Artificial person
2. Perpetual succession-
 Members may come and go, company goes on for ever.
3. Common seal
4. Limited Liability
5. Transferability of shares
6. Separate Property
7. Independent corporate personality
8. Corporate Veil –
 It is a wall between company and outsiders beyond which the outsiders are not
supposed to look into. It means that the outsiders need not notice internal
proceedings of the company.

Difference between Partnership and Company

Partnership Company
Nos. of members Minimum-----2 Pvt. Ltd---- Min. 2 Max.50
Maximum----20 (Revised 100)(Revised 200)
Public Ltd.---- Min 7 Max no
limit
Liability Unlimited Limited
Management By partners By Directors
Ownership Partners Shareholders or Members
Existence Can be dissolved by death, Perpetual existence
insolvency of partner
Contracts Partners cannot enter into Members can enter into
Contact with firm contract with Company
Relationship Agency Directors are employees

Types of Company

1. Statutory Company
2. Chartered Company
3. Foreign Company—Which is incorporated outside India.
4. Holding and Subsidiary Company: If 51% shares of one Co. are held by another Co.
5. Company Limited by Shares and Company Limited by Guarantee
6. Unlimited Liability Company

80
7. Govt Company – in which minimum 51% shares are held by Govt.
8. Private Company and Public Company

Private Company and Public Company

The most common types of companies are public company and Private Company. The
difference between the two is as under:

Private Company Public Company


1. Pvt. Limited is affixed against name 1. Ltd. Is affixed against name
2. Minimum nos. of members is 2 2. Minimum nos. of members is 7
3. Maximum nos. of members is 50 3. There is no limit on nos. of members
(Revised 200)
4. Prohibition on invitation to public to 4. Public is invited to subscribe for
subscribe for shares shares
5. Shares are not transferable 5. Shares are freely transferable
6. Minimum number of directors is 2 6. Minimum nos. of directors is 3
7. Certificate of Commencement is not 7. Certificate of Commencement is
required required
8. Minimum Capital is Rs. 1.00 lac 8. Minimum Capital is Rs. 5.00 lac

Types of Capital

1. Authorized Capital
2. Issued Capital
3. Subscribed Capital
4. Paid up Capital

 Minimum ratio of Authorized Capital : Subscribed Capital : Paid up Capital


is 4:2:1

Types of Shares

Shares are of two types:

1. Equity Shares and


2. Preference Shares

Equity shareholders are real owners. This is permanent capital not to be redeemed and forms
part of Tier-1 capital.

Preference Shares get preference at the time of receipt of dividend as well as at the time of
winding up of the company when capital is repaid. Preference shares are of the following types:

1. Redeemable and Irredeemable preference shares


2. Cumulative and Non-cumulative preference shares

81
3. Participative and Non-participative preference shares

Share Premium Account: This is the amount charged from the shareholders over and above
the amount of Face value of shares. Share premium once received is not reversed even if the
shares are forfeited. Share Premium can be used for the following purposes:

1. Buy Back of Shares


2. Issue of Fully paid Bonus shares
3. Writing of Preliminary Expenses
4. Paying premium on Redemption of shares and Debentures.

Share at a Discount

1. Rate of Discount cannot exceed 10% of Face Value.


2. Only same class of shares can be issued at a discount.
3. For this, a resolution is required to be passed.
4. Sanction of Company Law Board is required. Thereafter shares are to be issued within 2
months of sanction.
5. No company can issue shares at a discount within 1 year of its formation..

Other Aspects

1. Single Call should not exceed 25% of the face value


2. Maximum 6% interest can be allowed on Calls in Advance
3. Shares issued for consideration other than Cash is called “Sweet Equity”.
4. Shares issued to Employees at a pre-determined price is called “ESOS i.e. Employee
Stock Option Scheme.”

Bonus Shares:

Bonus shares are the shares issued free of cost to the existing Shareholders. Bonus can be
given in two shapes:

1. Making partly paid shares into fully paid without demanding payment from shareholders.
Following reserves are used for the purpose:
 Capital Reserve, DRR, General Reserve and P& L Account
2. Issuance of Fully paid Bonus Shares. Following reserves are used for the purpose:
 Share Premium Account, CRR etc.
 Capital Reserve, DRR, General Reserve and P& L Account,

(Share Premium Account is used only for issuance of Fully Paid Bonus Shares)

82
Incorporation of Company
Two or more persons (Seven in case of Public Limited Co.) associate together to form a
company. They decide the name of the company and location of its Registered Office.
Objectives are also finalized. The following documents are prepared.

Memorandum of Association

This is a basic document and is known as charter of the company. It contains the following
clauses:

i. Name clause
ii. Regd. Office Clause
iii. Objective Clause
iv. Liability Clause
v. Capital Clause
vi. Association Clause

Articles of Association

This is a secondary document and contains rules for insiders. Preparation of Articles of
Association is must for Private Limited Company, Unlimited Company and Company Limited by
Guarantee. Borrowing Powers are included in Articles.

Public Limited Companies (limited by Shares) can adopt Table –A instead of Articles of
Association.

Alteration in Memorandum or Articles

 Alteration of any clause of Memorandum requires Special Resolution and Sanction of


Board of Directors.
 Alteration in Articles requires special Resolution only.

Contravention of Memorandum – Ultra Vires

 If any clause of Memorandum is violated, the Contact is called Ultra Vires – Void ab
initio and cannot be enforced legally. Such contracts cannot ratified.
 The contracts entered into within scope of Memorandum are called Intra Vires.
 If a director makes Ultra Vires payment, he is personally liable to the company.
 If a company acquires property under a contract which is Ultra Vires, the company
attains ownership of the property.
 Contravention of Articles is a procedural lapse and same can be ratified by the
shareholders in general meeting.

83
Doctrine of Constructive Notice

All persons dealing with the Company are presumed to have knowledge of contents of MOA
and AOA and also understood. These are public documents when registered. This is called
Constructive Notice. Its effects are as under.

 Every person dealing with the company is deemed to have notice of MOA and AOS
 Every person dealing with the Company is deemed to have read out these documents.

Doctrine of Indoor Management

This doctrine seeks to protect outsiders against company. A person who deals with the
company is deemed to have read out the registered documents such as MOA and AOA, but he
is not bound to inquire into internal functioning or internal management.

Exceptions

i. Knowledge of Irregularities
ii. Acts outside apparent authority of officer of the company

MEMBERSHIP
Who is Member of a Company?

 Subscriber of MOA
 Who agrees in writing and whose name is entered in the Register of members.
 Who holds equity share and whose name is entered as beneficial owner in records.

How to Become a member?

 By subscribing to MOA
 BY Allotment of shares
 By transfer of shares
 By transmission of shares (Shares of deceased is transferred to his legal heir)
 By Holding out

Conditions of Becoming Member

Any person can become member of a company who fulfills the following criteria:

1. Person Competent to enter into contract


2. Person not being Minor or of Unsound Mind
3. Partnership firm cannot become member of a Company

84
4. Non-Resident cannot become member of a company without complying with the
requirement of FEMA. For this, permission has to sought from RBI.
End (Cessation) of Membership
A person ceases to be member if he/she
 Transfers the shares to another person
 Shares are forfeited
 Surrender of shares
 Rescinding Contract
 Member id adjudicated insolvent
 Death of member
 Redemption of Preference shares
 Winding up of Company

Rights of Members

 Existing members must be offered to subscribe for shares as a matter of right, if same
class of shares are issued by the Company. This is called Right Issue.
 All members have right to receive Notice of meeting
 Member can sell/transfer his shares.
 Member will receive copies of annual accounts
 Member can apply to call AGM/Extra ordinary meeting
 Members can Vote and appoint directors/auditors.
 Members have right to receive dividend
 Members can participate in distribution of assets in case of liquidation of company.

PROSPECTUS
It is a document by which public is invited to subscribe for shares. This documents contains
Company policies and Plans as well as previous results of the company. This document is
accompanied by MOA so that public can know the objectives of the company. Issue of
Prospectus is not required in case of following:

1. Purchase of shares under Underwriting agreement


2. Offer of shares to existing shareholders
3. Where shares are in all respects, uniform with shares already issued.

Statement in Lieu of Prospectus

Private Limited Companies and Companies Limited by Guarantee are not required to issue
Prospectus. For these companies, a statement has to be filed with Registrar. This Statement is
called “Statement in Lieu of Prospectus.”

Compliance with respect to Prospectus

 Time: It must be issued after incorporation of the company.


 Contents of the prospectus must include mandatory provisions.

85
 Date: Prospectus must be dated.
 Signatures of every director are required on Prospectus.
 Application Form with Prospectus is must
 Prospectus must include Statement by experts
 Before issuance of Prospectus, it must be delivered to Registrar of Companies for
registration.

Misstatement in Prospectus and Remedies

The directors who sign the Prospectus are personally responsible for any misstatement
contained in the prospectus. Their liability can be civil or criminal.

The person who has relied upon such statement, has two fold remedy:
1. Remedy against the Company: Contract can be rescinded and Damages can be
claimed.
2. Remedy against the Promoters and Experts responsible for issue of Prospectus.
Their liability can be civil or criminal.

DIRECTORS

Directors are the persons who manage the affairs of the company. They are elected
representative and are employees/officers of the company. The election of directors is made in
the Annual General meeting by the shareholders. A private Company must have at least 2
directors whereas minimum 3 directors are required in Public Company. The number of
directors can be increased up to 12. For further increase in number of Directors, approval of
Central Govt. is required. As per latest amendments in the Company Act, this number can be
increased 15.

 At least 50% directors must be independent directors.


 Subscribers of Memorandum are Deemed directors who remain in office till appointment
of permanent directors in the first AGM.
 At least 2/3rd directors retire by rotation in Annual General Meeting. This is applicable in
Public Co. and Pvt. Company which is subsidiary of Public Company.
 The directors with longer stay will retire first. However all the retiring directors are eligible
for reappointment.
 The person willing to be appointed as director will apply at least 14 days before the AGM
with minimum deposit of Rs. 100/-.
 Directors are elected through Voting. One single resolution is required to elect each
director.
 Directors after their election, will give their consent, which will be filed with ROC within
30 days.

86
 The directors must possess Qualification Shares as stipulated in Articles of Association.
 Board of Directors can fill the vacancy in Board meeting and appoint additional/alternate
directors to fill the vacancies.
 Every Public Company or a private company which is subsidiary of Public company,
having paid up share capital of Rs.5.00 crore, must have a MD or Whole Tome Director
or a Manager.

Loans to Directors and Guarantees on behalf of directors require prior approval of


Central Govt.

A person cannot be appointed as Director of more than 20 (Previously 15) companies


at a time (Private Co. and Unlimited Co. is excluded.)

The The Company Act duly amended has been passed and came into force w.e.f.
Companies 12.9.2013. Some of the amended provisions are as under;
Act – 2013
Effective from Three new types of Companies have been introduced:
12.9.2013
1. Small Company: It is a company other than public company where
paid up capital does not exceed 50 lacs or such higher amount as may
be prescribed which shall not be more than 5.00 crore Rupees.
OR
Turnover of the company does not exceed 2 crore or such higher
amount as may be prescribed which shall not be more than 20 crore
Rupees.

2. Dormant Company is a company without significant financial


transaction formed for some future project.
3. One Person Company is a company formed by one person as
Private Company.

The other major amendments are as under:


 Maximum number of members in a Private Company has been
raised to 200 members from existing guidelines of 50 members.
 Limit of number of members in a firm has been increased to 100.
 Object clause in MOA is not required to be divided into main, ancillary
and other objects.
 CIN (Certificate Identification Number) to be allotted to the company on
and from date of incorporation.
 Certificate of commencement will no longer be issued by ROC.
 Private Company will have minimum 2 directors whereas Public
Company will have at least 3 directors as usual.
 Maximum number of directors has been increased from 12 to 15
directors. Also approval of Central Govt. is not required to increase
number of directors beyond 15.
 Now, a person can hold directorships of up to 20 companies of
which public companies should not be more than 10.

87
 At-least one of the directors must have stayed in India for 182 days or
more in previous calendar year.
 Such class or classes of companies as may be shall have a woman
director.
 At-least 1/3rd of total directors must be independent directors.
 The term of independent director has been restricted to five years at
once subject to a maximum of two such terms.
 A notice of not less than 7 days in writing is required to call a board
meeting

Registration of Charge U/S 125(4) of Indian Company Act

If loan is given to a Company, charge against such type of loan has to be registered within 30
days. Following are exceptions where charge is not got registered:

1. Lien
2. Pledge

But charge has to be got registered in case of Hypothecation, Assignment and Mortgage. There
are two types of charges: 1. Fixed 2. Floating. Fixed charge is specific whereas floating charge
is general on all assets of the company. Floating charge is crystallized into fixed when company
goes into liquidation.

Registration of Charge with ROC (Registrar of Companies)

Charge has to be got registered with ROC within 30 days of its creation. This period can be
extended by another period of 30 days on merits by ROC.

Effect of non-registration of charge

It would not render the security as invalid. But in the event of winding up, charge would not be
valid against liquidator and loan will be treated as unsecured like other creditor.

88
Ch- 17

FEMA-1999
FERA (Foreign Exchange Regulation Act) replaced FEMA (Foreign Exchange Management
Act) in the year 1999. The act is applicable throughout India. This act facilitate external trade
and payments in foreign currency. It aims at management of Foreign exchange to promote trade
between the countries, to facilitate remittance system between the countries and regulate
unauthorized release of Foreign exchange.

Foreign It includes all deposits, Credit and Balances payable in Foreign currency. It
Exchange and also includes Drafts/TCs, LCs and Bills of Exchange payable in Foreign
Foreign currency. In means all claims payable abroad.
Currency

Authorized
Dealers Authorized dealers are called Authorized Persons. The categories are as
under:
AP category 1 -----AD banks, FIs dealing in Forex transactions.
AP category 2-----Money changers authorized to sell and purchase
Foreign currency notes, TCs and Handle remittances.
AP category 3----Only purchase of Foreign currency and Travelers
Cheques. These were earlier called “Restricted Money Changers.”

Capital Account Capital Account Transaction


Transaction and It means a transaction which may result into Increase or Decrease in
Current Account Assets or Liabilities outside India of the persons resident in India
Transactions Or
Increase in Assets or Liabilities in India of the persons residents outside
India.

Current Account Transactions


Other than Capital account transactions which may include:
 Payments on account of exports and imports (merchandise)
 Payments due as interest on loans and income from investments
 Remittances to relatives staying abroad
 Expenses incurred in connection with Foreign travel, education and
medical aid etc.
If Current Account receipts are less than current account payments, it is
called CAD (Current Account Deficit)

89
A person Under FEMA, a person is defined as under:
1. Individual
2. HUF
3. Firm
4. Company
5. Association of persons
6. Agency, Office or branch
Person resident Resident and Non-Resident
in India, Non A person who resides in India for more than 182 days during preceding
Resident and financial year is Resident Indian. A person who is not resident is Non-
Non-Resident Resident
Indian Non Resident Indian (NRI)
A person who is citizen of India but resides outside India owing to:
 Employment, Business, vocation-------indicating indefinite period of
stay outside.
 Work abroad on assignment with Foreign Govt., UNO, and IMF etc.
 Deputation officially.
 Study abroad
Person of Indian Origin
PIO is a person who is citizen of any other country, but he at any time:
 Held Indian Passport
 He or his grand-parents or grand grand parents were Indian citizens
by virtue of constitution of India or under Indian Citizenship Act.
 The person is spouse of Indian Citizen.

FEMA provisions
The important FEMA guidelines with regard to Foreign exchange are as under:
1. No drawl of exchange for Nepal and Bhutan
2. If Rupee equivalent exceeds Rs. 50000/-, payment by way of crossed cheque.
3. During visit abroad, one can carry foreign currency notes up to USD 3000 or equivalent.
For Libya and Iraq, the limit is USD5000 and the entire amount for Iran and Russian
states.
4. Indian citizens can retain and possess foreign currency up to USD 2000 or its
equivalent.
5. Unspent currency must be surrendered within a period of 180 days after arrival in India.
Basic Travel Quota (BTQ)

Purpose of Visit Up to USD or equivalent


Personal/Tourism 10000 per financial year
Business Purpose 25000 per visit
Seminars/conferences 25000 per visit
Employment/Immigration 100000
Studies 100000 per academic year
Medical 100000
Donations/Gifts 5000 per donor per year
Consultancy services 100000 per project
Debit Credit/Credit Card As per BTQ as above
*AD can release Foreign Exchange 60 days ahead of journey

90
LRS (Liberalized Remittance Scheme)
The scheme is meant for Resident Indians individuals. They can freely remit up to USD 125000
(Previously USD 75000) per financial year in respect of any current or capital account
transaction without prior approval of RBI. The precondition is that the remitter should have been
a customer of the bank for the last 1 year. PAN is mandatory.
Not Applicable
 The scheme is not applicable for remittance to Nepal, Bhutan, Pak, Mauritius or other
counties identified by FATF.
 The scheme is not meant for remittance by Corporate.
 The scheme should not be used for making remittances for any prohibited or illegal
activities such as margin trading, lottery etc., as hitherto.
The scheme is now allowed to be used to acquire Immovable property.

Import and Export of Indian Rupees


Limit is Rs. 25000 (Previously 10000/-) while leaving India and while coming to India.

Contravention of Central Govt. establishes a Directorate of Enforcement who has vast


FEMA powers of search and seizure.

Any person found guilty of contravention of FEMA can be imposed the


following penalties:

Penalty can be levied up to thrice ( 3 times) the sum involved or up to Rs.


2.00 lac (where sum is not quantifiable). If the default continues, a penalty
of Rs. 5000/- per day will be imposed.

91
Ch- 18

Transfer of Property Act, 1882


The Act is applicable throughout the country. Every person who is competent to enter into
contract is entitled to transfer property.

Sale of Property

Sale means transfer of ownership in exchange for price. The price may be paid or promised. But
sale of Immovable property for consideration exceeding Rs.100/- can be made through
Registered Document.

Mortgage of Immovable Property

Mortgage is transfer of interest on a 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 may give rise to pecuniary liability.

 Mortgager, Mortgagee and mortgage money


 Limitation: 12 years
 Right of foreclosure and redemption (limitation: 30 years)

TYPES OF MORTGAGE

1. Equitable or Mortgage by Deposit of Title Deeds


2. Simple or Registered Mortgage
3. Usufructury Mortgage
4. English Mortgage
5. Mortgage by Conditional Sale
6. Anomalous Mortgage.

EQUITABLE MORTGAGE or MORTGAGE BY DEPOSIT OF TITLE DEEDS

• Handing over of title deeds.


• Possession as well as ownership remains with the borrower.
• It is affected in Notified areas declared by state govt.
• In other areas, mortgage can be created by other branch situated in notified areas.
• There must be intention to create security.
• Equitable Mortgage is not registered and therefore it attracts no stamp duty.

SIMPLE/REGISTERED MORTGAGE

 Mortgage deed to be executed.


 Possession as well as ownership remains with the borrower.

92
 Registration within 4 months with registrar of assurance
 No power to sell the property without intervention of court
 Mortgagor personally liable.

ENGLISH MORTGAGE

 Mortgage deed to be executed.


 Registration within 4 months with Registrar of Assurance
 Absolute transfer of property subject to re-transfer if the debt is repaid.
 Possession remains with the borrower.
 Mortgagee can sell the property without court intervention.
 Personal liability to pay on specified date.

MORTGAGE BY CONDITIONAL SALE

 Mortgagor ostensibly sells the mortgaged property on condition that on default, the sale
shall become absolute or sale shall become void if amount is paid.
 Mortgagee can sue for foreclosure
 Possession is generally transferred to the mortgagee.

USUFRUCTUARY MORTGAGE

 Mortgagor hands over possession of property to the mortgagee


 Mortgagee can recover his dues out of income from property without any time limit
 Sale is not allowed. Recovery suit is not filed.
 No personal liability of mortgagor.
 Borrower (Mortgager) has Right of Redemption i.e. he can get the property redeemed by
making payment of loan and the period of limitation for this is 30 years.
 Lender (Mortgagee) can exercise Right of Foreclosure that means he can apply to court
to debar the borrower from rights of the property since the loan has been adjusted within
time bound schedule. Limitation period for this purpose is also 30 years.

REVERSE MORTGAGE

Senior citizen can avail loan in installments on the basis of mortgage of their property with the
bank. Since installments are paid by the bank on the basis of value of property mortgaged with
the bank, it is called Reverse Mortgage.

General Guidelines

 Loan sanctioned in Kolkata, Mortgage can be affected in Jaipur provided it is notified


centre.

93
 Mortgage becomes effective from date of its creation and not from date of registration.
 No charge is registered for Equitable Mortgage.
 No personal liability is there in case of Usufructury Mortgage and Recovery suit cannot
be filed.

ASSIGNMENT OF ACTIONABLE CLAIMS

 Defined under Sec 130 of Transfer of Property Act.


 Assignment is transfer of actionable claim, which may be existing or future.
The transferor is called the Assignor and transferee is called Assignee.
 Actionable claims are Right in property or Debt e.g. LIC Policy, Book Debts, Money due
from Govt. Department etc.
 Assignment is of two types: Legal and Absolute.
 In Legal assignment, absolute transfer of actionable claim must be in writing and signed
by assigner. Due notice of assignment is given to debtor.
 Equitable assignment is handing over the possession of document representing
actionable claim without observing the above formalities
 No particular form or consideration is essential.

94
Ch-19

Right to Information Act – 2005

RTI Act extends to whole of India except Jammu and Kashmir. The act gives right to Indian
citizens to

 Inspect the work, documents and records.


 Take notes, extracts, certified copies, samples, CDs, floppies, tapes, video-cassettes or
in other electronic mode.
Only Public institutions can provide information to information seeker who must be individual
and Indian citizen.

Bank is a public authority and as such covered under RTI Act. The procedure is as under:

 CPIO (Central Public Information Officer) is appointed at Circle level. CPIO is


empowered to provide or reject information.
 If the information is related to another circle, the case will be transferred to the
concerned CPIO within 5 days.
 If the information is related to 3rd party, notice will be served upon that party who can
make representation and CPIO will take decision accordingly.
 Information is to be provided within a period of 30 days from date of receipt of
application.
 If information is to be sought from 3rd party, notice must be served upon it within 5 days
from receipt of request by PIO and take its representation into consideration. The third
party will make representation within 10 days from date of receipt of such notice.
 If information sought concerns the life or liberty of a person, the same shall be provided
within 48 hours.
Fees to be submitted to CPIO along with application----------Rs. 10/-

Exemptions: Following information need not to be provided for:

 Information including commercial confidence, trade secrets or intellectual property which


may harm competitive position of 3rd party.
 Information available with a person in fiduciary relationship unless competent authority is
satisfied that larger public interest warrants providing of such information.
 Information which would impede the process of investigation or apprehension or
prosecution of offenders.
 Information relating to personal matters, the disclosure of which has no relationship to
public activity or interest or which causes invasion of Privacy unless CPIO or Appellate
Authority is satisfied that public interest warrants.
 Information which endangers the life of a person or a threat to physical safety.

95
Other charges to be recovered from Information seeker

 If the customer demands photocopy of desired document, charges @ Rs.2/- per


page will be recovered from information seeker.
 Cost of samples/models should also be recovered.

Appeal

Appellate Authority will be the next higher authority with whom Ist appeal will be preferred by the
aggrieved party if the information is not provided within 30 days. 2nd appeal will be preferred with
CIC (Central Information Commission) or SIC (state Information Commission under whose
jurisdiction, the department falls.

2nd appeal should be within period of 90 days from the date on which the decision should have
been made or was actually received. The appeal shall be disposed off within 30 days of its
receipt by CIC or within the extended period not exceeding 45 days

The CIC/SIC may impose a penalty of Rs. 250/- per day with maximum of Rs. 25000/-. CIC/SIC
may recommend Disciplinary action against the CPIO who failed to provide the desired
information.

96
Ch-20

PML Act-2002
Definition
Section 3 of PML (Prevention of Money Laundering Act states as under:

“Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party


or actually involved in any process or connected with proceeds of crime and projecting it as
untainted property shall be guilty of offence of money laundering.”

The PMLA and rules notified there under impose obligation on banking companies, financial
institutions and intermediaries to verify identity of clients, maintain records and furnish
information to FIU-IND. PMLA defines money laundering offence and provides for the freezing,
seizure and confiscation of the proceeds of crime.

Punishment
Non-observance of directives of the act attracts rigorous imprisonment for a term
which shall not be less than 3 year up to maximum period of 7 years and fine up to Rs.
5.00 lac.

Record Keeping

Records relating to KYC are to be kept intact at the branch for 10 years from date of
cessation of relationship of account holder with bank i.e. 10 years after closure of account.
Recently, period has been reduced to 5 years.

Cash Transaction Reports


The Prevention of Money-laundering Act, 2002, and rule there under require every banking
company, financial institution and intermediary, to furnish to FIU-IND information relating to :

A. All cash transactions of the value of more than rupees ten lakhs or its equivalent in
foreign currency;
B. Aggregate of cash transactions in a month Above Rs. 10.00 lac or its equivalent in
foreign currency where such series of transactions have taken place within a month;
C. Transactions below Rs. 50000/- need not to be reported.

Periodicity of Statement ---------Monthly

Time of submission---------------Within 15 days from close of month

Authority of submission---------Financial Intelligence Unit (Ministry of Finance) Govt. of


India

97
Suspicious Transaction Reports
 Every banking company, financial institution and intermediary shall furnish to FIU-
IND information of all suspicious transactions whether or not made in cash within 7
days.

 Suspicions transaction means a transaction referred to in clause (h), including an


attempted transaction, whether or not made in cash which, to a person acting in
good faith –

(a) gives rise to a reasonable ground of suspicion that it may involve proceeds of an
offence specified in the Schedule to the Act, regardless of the value involved; or

(b) appears to be made in circumstances of unusual or unjustified complexity; or

(c) appears to have no economic rationale or bonafide purpose; or

(d) gives rise to a reasonable ground of suspicion that it may involve financing of the
activities relating to terrorism;*

Time of submission---------------Within 7 days from date of suspicion

Authority of submission----------Financial Intelligence Unit (Ministry of Finance) Govt. of


India

Counterfeit Currency Report

The Prevention of Money-laundering Act, 2002, and rule there under require every
banking company, financial institution and intermediary, to furnish to FIU-IND information
relating to all cash transactions where forged or counterfeit currency notes or bank notes
have been used as genuine or where any forgery of a valuable security or a document has
taken place facilitating the transactions.

98