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Understanding Indian Banking Sector
& Banking Institution’s Regulation

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Dr Prashant Desai,
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Assistant Professor of Law,
HAL DPSU Chair in Business Laws,
NLSIU, Bengaluru
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Banking regulation in India

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Banking

• ‘Banking’ means the accepting, for the

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purpose of lending or investment, of
deposits of money from the public,
repayable on demand or otherwise, and

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withdrawal by cheque, draft, order or
otherwise – S. 5(b)
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Essential functions

• Acceptance of public deposits

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• Lending or investment or such deposits;
and
• Agency functions

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Permissible banking business
• Sec. 6(1)

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• About 15 elements
– Borrowing, raising or taking up money;
– Lending – with or without security;
– Issuance of letters of credit, travelers cheques

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– Dealing in bullion and specie
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– Dealing in stocks and shares
– Underwriting
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– Providing of safe deposit vaults
– Collecting and transmitting of money and securities
– Acting as agents of the government
– Transact any kinds of guarantee and indemnity

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business
– Undertake and execute trusts
– Acquire, construct and maintain any building for its
own purpose

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– Do all such things which are incidental or conducive to
the promotion or advancement of the business of the
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company
– Do any other business specified by the Central
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Government as the lawful business of banking
company
• Further – Sec. 8 – prohibits specifically a

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banking company from engaging
directly or indirectly in trading activities
and undertaking trading risks

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Organization

• Dual control

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– For entry
– For expansion

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Entry license
• Sec. 22
• Criteria

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– The capacity of the company to pay its present and
future depositors
– Whether there is anything to indicate – the permit

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would affect the interests of the depositors
detrimentally
– Impact upon the public interest
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– Company’s capital structure and its adequacy
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– Other ‘banking facilities’ available in the proposed area
– Such other condition which RBI considers relevant
• Additional conditions for foreign banks

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– Whether carrying of business by the company in
India will be in pubic interest
– Whether the government or the law of the country
in which the company is incorporated

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discriminates in any way against banking
companies registered in India; and
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– Whether the company complies with the
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provisions of the BR Act as applicable to foreign
companies
• The grant of license is a discretionary

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administrative function – Shivabhai v RBI,
AIR 1986 Guj. 19
• Licence granted may be cancelled –

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Sec. 22(4)
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Expansion

• To open new branches – RBI sanction is

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mandatory
• Sec. 23
• While grant of such licences RBI may

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impose appropriate conditions
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• There are exceptions
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Capital & reserves

• Sec. 12(1)

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– Subscribed capital of a banking company shall not
be less than half of its authorized capital;
– Paid up capital shall not be less than half of its

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subscribed capital
– If the capital structure is changed then these
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proportions shall also be changed, with in two
years
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Capital composition
• Narasimham Committee has
recommended for public issue

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• Hence, the Banking Companies
(Acquisition and Transfer of Undertakings)
Act, 1970/1980 were amended

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– To enable public to subscribe to the capital of the
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nationalized banks up to 49% of their total capital
• The State Bank of India Act, 1955 was also
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suitably amended to raise public funds
Restriction on voting rights

• No shareholder (of the nationalized bank)

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other than the Central Government shall
be entitled to exercise voting rights in
respect of any shares held by him in

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excess of Ten percent of the total voting
rights of all the shareholders of the
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banking company
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Reserve funds
• Sec. 17

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• Creation of reserve fund (not applicable
to foreign banks)
– To be created out of profit

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– Not less than 20% of the profits have to be
transferred to the reserve fund (before any
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dividend to be declared)
– However, the Central Government (on the
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recommendation of RBI) may exempt the bank for
certain period of time
• For foreign banks – there is no mandate

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• But the foreign banks
– Shall deposit with RBI – 20% of their profits each
year

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– The amount may be in cash or unencumbered
approved securities
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Cash reserves

• Sec. 42 (RBI Act) – cash reserve to be

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maintained by the Scheduled Bank (as to
be determined by RBI from time to time)
• Sec. 18 – (for non scheduled banks) at

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least 3% of its demand and time deposits
in India
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Maintenance of liquid assets

• Sec. 24 – mandatory maintenance of

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liquid assets
• Not exceeding 40% of its total demand
and time liabilities in cash, gold or

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unencumbered approved securities
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• RBI will prescribe details
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Annual accounts & audit

• Sec. 29

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• Mandate to prepare final accounts (at
the end of each financial year)
• The Balance Sheet and Profit & Loss

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Account have to be prepared in
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accordance with the formats prescribed
in III Schedule
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Audit & auditors

• Sec. 30

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• The Balance Sheet and Profit & Loss
Accounts have to be audited
– Audit by a person duly qualified to audit

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– The appointment, reappointment or removal of an
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auditor – to be done with the prior approval of the
RBI
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The audit report
• Sec. 227 of Companies Act – (regarding the
powers, functions and duties) are all

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applicable to Banking Companies as well
• Some additional information to be provided
– Whether or not transactions of the company as noticed

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by him were within the powers of the company
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– Whether or not returns from branches were adequate
for the audit
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– Any other matter which the auditor considers
necessary to bring to the notice of the shareholders of
the company
Publication of final accounts
• Sec. 31 r/w Rule 15 [of Banking Regulation
(Companies) Rules, 1949

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• Final accounts are to be published in a
news paper, within a period of six months

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• Three copies of final accounts are to be
submitted to RBI (within 3 months)
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• Sec. 220 of Companies Act – Final
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accounts and auditors report to the
Registrar of Companies
Special audit
• Sec. 30(1B)

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• The RBI may order for special audit
– Such order may relate to any transaction or class of
transactions; or

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– Such period or periods as RBI may specify in the order
– The RBI appoints such auditor (or can ask the regular
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auditor)
– The directors are binding upon the auditor of the
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banking company – and to make report directly to RBI
by furnishing the copy to the bank)
Amalgamation

• Voluntary amalgamation

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– U/sec. 44A

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• Procedure

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– Scheme has to be prepared & the same to be placed
before the shareholders (notice to all shareholders is
must)
– Seeking sanction from the shareholders with 2/3rd

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majority
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– Dissenting share holders may take out their share
value
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– Then the scheme has to be presented to RBI
– On sanction of RBI the amalgamation may happen
Compulsory amalgamation

• Induced or forced by RBI

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– U/Sec. 45
• RBI recommends to the Central
Government

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Merger of bank and NBFC
• Amalgamations are governed by Ss. 391
to 394 of the Companies Act, 1956

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• The scheme of amalgamation has to be
approved by the High Court

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• June 2004 – Banks were advised to obtain
the approval of RBI after the scheme of
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amalgamation is approved by its board
before it is submitted to the HC for
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approval
Amalgamation by government

• Central Government may order for

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amalgamation of two banks – after due
consultation with the RBI
– u/sec. 396 of Companies Act, 1956

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Winding up

• Suspension of business and winding up

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– Sec. 37
• Winding up by the High Court
– Sec. 38

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• Voluntary Winding up
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– Sec. 44
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Suspension of business
• When the bank is temporarily unable to meet its
obligations

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• Procedure
– The bank to apply to HC u/s 37
– The report of the RBI be enclosed

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– If not the court can take action, by calling the report
– If satisfied the court can (with conditions) for all proceedings
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to stay for fixed term not exceeding six months
– On passing of the moratorium order, the court may appoint a
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special officer to take custody and control of the assets,
books etc., of the bank
Winding up by the HC
• To be initiated by RBI – by applying for winding
up

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– Inability to pay debts
– If RBI is asked by the Central Government to make an
application

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– Failure to comply with requirements of Sec. 11
– If the bank becomes incapable of carrying out the banking
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business – by rejection or cancellation of license
– Failure to comply with the requirements of the BR Act other
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than Sec. 11 and continuance of such failure beyond the
period specified by RBI in this behalf
• Additional grounds for RBI
– A compromise or arrangement sanctioned – can’t be

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worked satisfactorily with or without modification; or
– The returns, statements and information given by the
bank under the Act show that it can’t pay its debts; or
– The continuance of the banking company is prejudicial

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to the interest of the depositors
• Once applied by RBI – the court is bound to
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allow the application [Palai Central Bank
Case, AIR 1962 SC 1371]
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Voluntary winding up

• Not possible unless RBI certifies

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• The HC during this stage intervene (i) by
itself; or (ii) by the application of RBI
– And may order for continuation of the business for

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some time
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– It may even supervise the winding up proceedings
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