ISFA JAIIB PAPER 3 · ISFA JAIIB PAPER 3 Notes on Legal Aspects of Banking 1 Legal & Regulatory...

ISFA JAIIB PAPER 3

Notes on Legal Aspects of Banking 1 www.isfaindia.com

Legal & Regulatory Aspects of Banking

INDEX

CHAPTER PAGE NO.

1. Banking Regulations Act 1949 & RBI Act, 1934 22. Types of Banks 243. Negotiable Instrument Act 314. Loan Products 385. Registration of Documents 496. Transfer of Property Act, 1882 517. Guarantees 548. SARFAESI ACT 619. Debt Recovery Tribunal 7010.Bankers Books Evidence Act, 1891 7311.Banking Ombudsman Scheme, 2006 7412.The Insolvency and Bankruptcy Code, 2016 (IBC) 7613.Consumer Protection Act & Lok Adalat 7714.Indian Contract Act 8115.Sale of Goods Act, 1930 8616.Company Law 9017.Partnership Act, 1932 9818.Foreign Exchange Management Act,1999 10319.Money Laundering 11220.Right to Information Act, 2005 11421.The Law of Limitation, 1963 11522.Information Technology Act, 2000 11723. Payment & Settlement Systems Act, 2007 11924.Tax Laws & Its Provisions 12025. Multiple Objective Question Bank 123

The study material for JAIIB - Paper 3 has been prepared by our expert group and would like to give in-depth knowledge of subject, so that, after learning the student can score good marks in this subject. We wish you all the best & success.Here we would like state that the contents of this material is strictly available to the students of the ISFA and no copy or any part of contents in any way be copied or reproduced. Further, making available on any form the contents of this study material on Internet or blogs of any website will be considered illegal and liable for legal action.

THIS VERSION OF STUDY MATERIAL IS UPDATED UPTO 31.12.2018

ISFA JAIIB PAPER 3


CHAPTER 1BANKING REGULATIONS ACT 1949 & RBI ACT 1934

The Banking Regulation Act was passed as the Banking Companies Act 1949 and came into force wef 16.3.49. Subsequently it was changed to Banking Regulations Act 1949 wef 01.03.66. Recently, the BRA is amended in 2013. Summary of some important sections is provided hereunder. The section no. is given at the end of each item..

Statutory background- Banking Regulation Act, 19491 Background Prior to the enactment of Banking Regulation Act, 1949 which aims to consolidate the law relating to banking and to provide for the nature of transactions which can be carried on by banks in India, the provisions of law relating to banking companies formed a part of the general law applicable to companies and were contained in Part XA of the Indian Companies Act, 1913. These provisions were first introduced in 1936, and underwent two subsequent modifications, which proved inadequate and difficult to administer. Moreover, it was recognised that while the primary objective of company law is to safeguard the interests of the share holder, that of banking legislation should be the protection of the interests of the depositor. It was therefore felt that a separate legislation was necessary for regulation of banking in India. With this objective in view, a Bill to amend the law relating to Banking Companies was introduced in the Legislative Assembly in November, 1944 and was passed on 10th March, 1949 as the Banking Companies Act, 1949. By Section 11 of the Banking Laws (Application to Cooperative Societies) Act, 1965, the nomenclature was changed to the Banking Regulation Act, 1949.

2 Indian banking systemThe Indian financial system currently consists of commercial banks, co-operative banks, financial institutions and non-banking financial companies ( NBFCs). The commercial banks can be divided into categories depending on the ownership pattern, viz. public sector banks, private sector banks, foreign banks. While the State bank of India and its associates, nationalised banks and Regional Rural Banks are constituted under respective enactments of the Parliament, the private sector banks are banking companies as defined in the Banking Regulation Act. The cooperative credit institutions are broadly classified into urban credit cooperatives and rural credit cooperatives.

3. Certain Definition:-“Approved Securities” means the securities issued by Central Government or any State Government or such other securities as may be specified by the Reserve Bank from time to time (Sec. 5 (1) (a)).

“Banking” means accepting for the purpose of lending or investment of deposits of money from public repayable on demand or otherwise and withdrawable by cheque, drafts order or otherwise (Sec. 5 (1) (b)).

“Banking company” means any company which transacts the business of banking [In India](Sec. 5(1)(c))

“Demand liabilities” are the liabilities which must be met on demand and time liabilities means liabilities which are not demand liabilities (5(1)(f)

“Secured loan” or advances means a loan or advance made on the security of asset the market value of which is not at any time less than the amount of such loan or advances and unsecured loan or advances means a loan or advance not secured (5(1)(h).

4. Forms of business in which banking companies may engage: Section 6 of the Banking Regulation Act, 1949 specifies the forms of business in which a banking company may engage.

ISFA JAIIB PAPER 3


These are bifurcated as primary & secondary only to understand it better, no such bifurcation in BR act : 1. The bank can do the following primary business:a) the borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security; b) the drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hundies, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrips and other instruments and securities whether transferable or negotiable or not; c) the granting and issuing of letters of credit, traveller's cheques and circular notes; d) the buying, selling and dealing in bullion and specie; e) the buying and selling of foreign exchange including foreign bank notes; f) the acquiring, holding, issuing on commission, underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations, securities and investments of all kinds; g) the purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or others, h) the negotiating of loans and advances; i) the receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise; the providing of safe deposit vaults; the collecting and transmitting of money and securities;

2. The bank is also allowed to do the following secondary business:a) acting as agents for any Government or local authority or any other person or persons; the carrying on of agency business of any description including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of customers, but excluding the business of a [Managing Agent or Secretary and Treasurer] of a company; b) contracting for public and private loans and negotiating and issuing the same; c) the effecting, insuring, guaranteeing, underwriting, participating in Managing and carrying out of any issue, public or private, of State, municipal or other loans or of shares, stock, debentures, or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue; d) carrying on and transacting every kind of guarantee and indemnity business; e) Managing, selling and realising any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claims; f) acquiring and holding and generally dealing with any property or any right, title or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security;g) undertaking and executing trusts; h) undertaking the administration of estates as executor, trustee or otherwise; i) establishing and supporting or aiding in the establishment and support of associations, institutions, funds, trusts and conveniences calculated to benefit employees or ex-employees of the company or the dependents or connections of such persons; granting pensions and allowances and making payments towards insurance; subscribing to or guaranteeing moneys for charitable or benevolent objects or for any exhibition or for any public, general or useful object;j) the acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purposes of the company; k) selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning into account or otherwise dealing with all or any part of the property and rights of the company; l) acquiring and undertaking the whole or any part of the business of any person or company, when such business is of a nature enumerated or described in this sub- section; m) doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company;

ISFA JAIIB PAPER 3


n) any other form of business which the Central Government may, by notification in the Official Gazette, specify as a form of business in which it is lawful for a banking company to engage.

(2) No banking company shall engage in any form of business other than those referred to in sub-section (1).

4. Few compulsory restrictions as per Banking Regulation Act:-a) For banking companies carrying on banking business in India to use at least one word bank, banking, banking company in its name. - Sec.7

b) No banking company shall directly or indirectly deal in the buying or selling or bartering of goods or engage in any trade, or buy, sell or barter goods for others. However, they can deal with goods in connection with the realisation of security given to or held by it - Sec.8

c) BRA prohibits banks from holding any immovable property howsoever acquired except as acquired for its own use for a period exceeding 7 years from acquisition of the property. RBI may extend this period by five years. - Sec.9

d) No banking company shall pay out directly or indirectly by way of commission, brokerage, discount or remuneration in any form in respect of any shares issued by it, any amount exceeding in the aggregate two and one-half per cent of the .- Sec 13

d) The Act prohibits a banking company from creating a charge upon any unpaid capital of the company. (14) Section 14(A) prohibits a banking company from creating a floating charge on the undertaking or any property of the company without the RBI permission.

e) Restriction as to the payment of Dividend:-i) The Act prohibits payment of dividend by any bank until all of its capitalised expenses(including preliminary expenses, organisation expenses, share selling commission, brokerage, amounts of losses incurred and any other item of expenditure not represented by tangible assets) have been completely written off . - Sec 15ii) To create reserve fund and 20% of the profits should be transferred to this fund before any dividend is declared. However, w.e.f 31-03-2001 for all schedule commercial bank including foreign banks operating in India, it will be 25%. Sec. 17 (1)iii) Specific requirement of RBI as relates to declaration of dividend:The banks would have to pay dividend out of the current year's profits. Cap on payout of Dividend to 40%, subject to capital adequacy, asset quality restrictions. The Reserve Bank of India (RBI) has raised the ceiling on the dividends that commercial banks are permitted to pay to 40 per cent of a bank’s net profits, from the earlier 33.33 per cent. Banks can pay dividends only if their net non-performing assets (NPAs) are less than 7 per cent of their total advances and they have had a capital adequacy ratio (CAR) of at least 9 per cent for three consecutive years, including the latest accounting year. If a bank does not meet the CAR but has a CAR of at least 9 per cent for the accounting year for which it proposes to declare dividend, it will be eligible to dividend provided its net NPA ratio is less than 5 per cent.

f) A bank cannot grant any loans and advances against the security of its own shares.- Sec 20 (1).

g) Restriction on nature of Subsidiary : As per sec.19 (1), a banking company shall not form any subsidiary company except a subsidiary company formed for one or more of the following purposes, namely.-(i) the undertaking of any business which is permissible for a banking company to undertake, or(ii) with the previous permission in writing of the Reserve Bank, the carrying on of the business of banking exclusively outside India, or(iii) the undertaking of such other business, which the Reserve Bank may, with the prior approval of the Central Government, consider to be conducive to the spread of banking in India or to be otherwise useful or necessary in the public interest.

ISFA JAIIB PAPER 3


In extension to this clause, Sec.19 (4) says that, a banking company may form a subsidiary company to carry on the business of credit information in accordance with the Credit Information Companies (Regulation) Act, 2005.As per sec.19 (2), No banking company shall hold shares in any company, whether as pledgee, mortgagee or absolute owners of any amount exceeding 30% of its own paid up share capital + reserves or 30% of the paid up share capital of that company whichever is less.

5.Board of Directors:-As per Sec. 10A Board of Directors to include persons with professional or other experience,not less than fifty-one per cent of the total number of members of the Board of Directors of a banking company shall consist of persons, who-(a) shall have special knowledge or practical experience in respect of one or more of the following matters, namely,-(i) accountancy, (ii) agriculture and rural economy, (iii) banking, (iv) co-operation,(v) economics, (vi) finance, (vii) law, (viii) small-scale industry,(ix) any other matter the special knowledge of, and practical experience, which would, in the opinion of the Reserve Bank, be useful to the banking company:

Also out of the aforesaid number of Directors, not less than two shall be persons having special knowledge or practical experience in respect of agriculture and rural economy, co-operation or small-scale industry; and

(b)However the directors shall not-(1) have substantial interest in, or be connected with, whether as employee, manager or managing agent- (i) any company, not being a company registered under section 25 of the Companies Act, 1956 (1 of 1956), or (ii) any firm, which carries on any trade, commerce or industry and which, in either case, is not a small-scale industrial concern, or (2) be proprietors of any trading, commercial or industrial concern, not being a small-scale industrial concern.

Term of Board of Director:-Sec.10 (2A)(i) No Director of a banking company, other than its Chairman or whole-time Director, by whatever name called, shall hold office continuously for a period exceeding eight years;

(ii) a Chairman or other whole-time Director of a banking company who has been removed from office as such Chairman, or whole-time Director, as the case may be, under the provisions of this Act shall also cease to be a Director of the banking company and shall also not be eligible to be appointed as a Director of such banking company, whether by election or co-option or otherwise, for a period of four years from the date of his ceasing to be the Chairman or whole-time Director, as the case may be.]

(3) If, in respect of any banking company, the requirements, as laid down in sub-section (2), are not fulfilled at any time, the Board of Directors of such banking company shall re-constitute such Board so as to ensure that the said requirements are fulfilled.

(4) If, for the purpose of re-constituting the Board, it is necessary to retire any Director or Directors, the Board may, by lots drawn in such manner as may be prescribed, decide which Director or Directors shall cease to hold office and such decision shall be binding on every Director of the Board.

(5) Where the Reserve Bank is of opinion that the composition of the Board of Directors of a banking company is such that it does not fulfil the requirements of sub-section (2), it may, after giving to such banking company a reasonable opportunity of being heard, by an order in writing, direct the banking company to so re-constitute its Board of Directors as to ensure that the said requirements are fulfilled and, if within two months from the date of receipt of that order, the banking company does not comply with the directions made by the Reserve Bank, that Bank may, after determining, by lots drawn in such manner as may be prescribed, the person who

ISFA JAIIB PAPER 3


ought to be removed from the membership of the Board of Directors, remove such person from the office of the Director of such banking company and with a view to complying with provisions of sub-section (2), appoint a suitable person as a member of the Board of Directors in the place of the person so removed whereupon the person so appointed shall be deemed to have been duly elected by the banking company as its Director.

(6) Every appointment, removal or reconstitution duly made, and every election duly held, under this section shall be final and shall not be called into question in any court.

(7) Every Director elected or, as the case may be, appointed under this section shall hold office until the date up to which his predecessor would have held office, if the election had not been held, or, as the case may be, the appointment had not been made.

(8) No act or proceeding of the Board of Director of a banking company shall be invalid by reason only of any defect in the composition thereof or on the ground that it is subsequently discovered that any of its members did not fulfil the requirements of this section.

Chairman & Whole Time Director:-Banking company to be managed by whole-time Chairman (Sec.10B):-Every banking company in existence on the commencement of the Banking Regulation (Amendment) Act, 1994, or which comes into existence thereafter shall have one of its Directors, who may be appointed on a whole-time or a part-time basis as Chairman of its Board of Directors, and where he is appointed on a whole-time basis as Chairman of its Board of Directors, he shall be entrusted with the management of the whole of the affairs of the banking company:The Chairman shall exercise his powers subject to the superintendence, control and direction of the Board of Directors.(1A) Where a Chairman is appointed on a part-time basis-(i) such appointment shall be with the previous approval of the Reserve Bank and be subject to such conditions as the Reserve Bank may specify while giving such approval:(ii) the management of the whole of the affairs of such banking company shall be entrusted to a Managing Director who shall exercise his powers subject to the superintendence, control and direction of the Board of Directors.

(1B) Every Chairman of the Board of Directors who is appointed on a whole-time basis and every Managing Director of a banking company shall be in the whole-time employment to such company and shall hold office for such period, not exceeding five years, as the Board of Directors may fix, but shall subject to the provision of this section, be eligible for re-election or re-appointment:

6. Advances to bank's Directors Section 20(1) of the Banking Regulation Act, 1949, lays down the restrictions on loans and advances to the directors and the firms in which they hold substantial interest. Purchase of or discount of bills from directors and their concerns, which is in the nature of clean accommodation, is reckoned as ‘loans and advances’ for the purpose of Section 20 of the Banking Regulation Act, 1949.Banks are prohibited from entering into any commitment for granting any loans or advances to or on behalf of any of its directors, or any firm in which any of its directors is interested as partner, manager, employee or guarantor, or any company [not being a subsidiary of the banking company or a company registered under Section 8 of the Companies Act, 2013, or a Government company] of which, or the subsidiary or the holding company of which any of the directors of the bank is a director, managing agent, manager, employee or guarantor or in which he holds substantial interest, or any individual in respect of whom any of its directors is a partner or guarantor. For the above purpose, the term 'loans and advances' shall not include the following: (a) loans or advances against Government securities, life insurance policies or fixed deposit;(b) loans or advances to the Agricultural Finance Corporation Ltd;

ISFA JAIIB PAPER 3


(c) such loans or advances as can be made by a banking company to any of its directors (who immediately prior to becoming a director, was an employee of the banking company) in his capacity as an employee of that banking company and on the same terms and conditions as would have been applicable to him as an employee of that banking company, if he had not become a director of the banking company. The banking company includes every bank to which the provisions of Section 20 of the Banking Regulation Act, 1949 apply; (d) such loans or advances as are granted by the banking company to its Chairman and Chief Executive Officer, who was not an employee of the banking company immediately prior to his appointment as Chairman/ Managing Director/CEO, for the purpose of purchasing a car, personal computer, furniture or constructing/ acquiring a house for his personal use and festival advance, with the prior approval of the RBI and on such terms and conditions as may be stipulated by it; (e) such loans or advances as are granted by a banking company to its whole-time director for the purpose of purchasing furniture, car, Personal Computer or constructing/acquiring house for personal use, festival advance with the prior approval of RBI and on such terms & conditions as may be stipulated by it; (f) call loans made by banking companies to one another; (g) facilities like bills purchased/discounted (whether documentary or clean and sight or usance and whether on D/A basis or D/P basis), purchase of cheques, other non-fund based facilities like acceptance/co-acceptance of bills, opening of L/Cs and issue of guarantees, purchase of debentures from third parties, etc.; (h) line of credit/overdraft facility extended by settlement bankers to National SecuritiesClearing Corporation Ltd.(NSCCL) / Clearing Corporation of India Ltd. (CCIL) to facilitatesmooth settlement; and (i) a credit limit granted under credit card facility provided by a bank to its directors to the extent the credit limit so granted is determined by the bank by applying the same criteria as applied by it in the normal conduct of the credit card business.

7.Requirement as to minimum paid-up capital and reserves. Sec.11- No banking company in existence on the commencement of this Act, shall, have to maintain the capital as per the following:-

(a) Place of business not in Bombay or Calcutta

Place of business in Bombay or Calcutta

Banking company incorporated outside India (Foreign Bank)Total of paid-up capital and reserves should be Rs. 15 lakhs Rs. 20 lakhs

(b) the banking company shall deposit and keep deposited with the Reserve Bank either in ash or in the form of unencumbered approved securities, or partly in cash and partly in the form of such securities-(i) an amount which shall not be less than the minimum required by clause (a); and (ii) as soon as may be after the expiration of each year, an amount calculated at twenty per cent of its profit for that year in respect of all business transacted through its branches in India, as disclosed in the profit and loss account prepared with reference to that year :

(II) In the case of any other banking company ( Indian Bank) the aggregate value of its paid-up capital and reserves shall not be less than -(a) Place of business in one

state not in Bombay or Calcutta

Place of business inmore than one state not in Bombay or Calcutta

Place of business inone state & one place in Bombay or Calcutta

Place of business inmore than one state & place in Bombay or Calcutta

ISFA JAIIB PAPER 3


Total of paid-up capital and reserves should be

If only place of business the Rs.50,000/- only.

If more than one place: 1 lakh for Principle place of business + Rs.10,000 for other place of business in same district of principle place of business + Rs. 25,000 for other place of business in state but not in same district of principle place of business.

However max will be Rs. 5,00,000.

Further, banks commenced business after Banking Companies (Amendment) Act, 1962 (36 of 1962), then Rs.5,00,000.

Rs. 5 lakhs Rs. 5 lakhs

+ Rs. 25,000 for other place of business not in Bombay or Calcutta

However max will be Rs. 10,00,000.

Rs. 10 lakhs

(III) For the purposes of this section-(a) "place of business" means any office, sub-office, sub-pay office and any place of business at which deposits are received, cheques cashed or moneys lent;

(b) "value" means the real or exchangeable value, and not, the nominal value which may be shown in the books of the banking company concerned.

(IV) If any dispute arises in computing the aggregate value of the paid-up capital and reserves of any banking company, a determination thereof by the Reserve Bank shall be final for the purposes of this section.

(V) For private banks incorporated after 3rd January,2001, the initial minimum paid-up capital for a new bank shall be Rs.200 crore. The initial capital will be raised to Rs.300 crore within three years of commencement of business. The overall capital structure of the proposed bank including the authorised capital shall be approved by the RBI.

(SEE new banking licensing norms in recent developments on page no.16 of these notes for capital requirements of new private banks after Feb’13.)

8. Regulation of paid-up capital, subscribed capital and authorised capital and voting rights of shareholders, Sec.12 of BRA:No banking company shall carry on business in India, unless it satisfies the following conditions, namely,-(i) that the subscribed capital of the bank should be atleast one-half of the authorised capital and the paid-up capital is not less than one-half of the subscribed capital and that, if the capital is increased, it complies with the conditions prescribed in this clause, within such period not exceeding two years as the Reserve Bank may allow;(ii) That the capital of the company consists of a) Equity shares or b) Equity shares and Preference shares. If Preference shares are issued, then it should be according to the guidelines of RBI. Also preference share holders do not have any voting rights specified in clause (b) of sub-section (2) of section 87 of the Companies Act, 1956(1 of 1956).

Voting Rights:-

ISFA JAIIB PAPER 3


No person holding shares in a banking company shall, in respect of any shares held by him, exercise voting rights in excess of ten per cent (10%) of the total voting rights of all the shareholders of the banking company.Pursuant to The Banking Laws (Amendment) Act, 2012, the RBI may increase, in a phased manner, such ceiling on voting rights from ten per cent (10%) to twenty six percent (26%).Every Chairman, Managing Director or Chief Executive Officer by whatever name called of a banking company shall furnish to the Reserve Bank the returns containing full particulars of the extent and value of his holding of shares, whether directly or indirectly, in the banking company and of any change in the extent of such holding or any variation in the rights attaching thereto ( i.e shareholding pattern).

In case of private banks the acknowledgement from RBI for acquisition/transfer of shares will be required for all cases of acquisition of shares which will take the aggregate holding of an individual or group to equivalent of 5 percent or more of the paid-up capital of the bank.

The term "holding" in paragraph above refers to both direct and indirect holding, beneficial or otherwise. The holdings will be computed with reference to the holding of the applicant, relatives (where the applicant is a natural person) and associated enterprises.

"relative" has the same meaning as assigned under section 6 of the Companies Act, 1956."associate enterprise' has the same meaning as assigned under Section 92A of the Income Tax Act 1961.

9.Compulsory Compliances & Restrictions:-1.Restrictions on banks to grant loan to person interested in management of the bank . 2.Power to Reserve Bank to issue directive to banks to determine policy for advances 3.Every bank to maintain a percentage of its demand and time liabilities by way of cash, gold, unencumbered securities 25%-40% as on last Friday of 2nd preceding fortnight. 4.Every bank has to publish its balance sheet as on March 31st .

5.Balance sheet is to be got audited from qualified auditors (30 (i)) 6.Publish balance sheet and auditors report within 3 months from the end of period to which they refer. RBI may extend the period by further three month. 7.Prevents banks from producing any confidential information to any authority under Industrial Disputes Act. (34A) 8.RBI authorised to undertake inspection of banks. 9.Amendment carried in the Act during 1983 empowers Central Govt to frame rules specifying the period for which a bank shall preserve its books (45-y), nomination facilities (45ZA to ZF) and return a paid instrument to a customer by keeping a true copy (45Z). Certain returns are also required to be sent to RBI by banks such as monthly return of liquid assets and liabilities (24-3), quarterly return of assets and liabilities in India (25), return of unclaimed deposits i.e. 10 years and above (26) and monthly return of assets and liabilities (27-1).

****

ISFA JAIIB PAPER 3


Part II.THE RESERVE BANK OF INDIA

The Reserve Bank of India is an institution functioning under the provisions of Reserve Bank of India Act, 1934. It started its operations from 1st of April 1935.It is known as the "Banker's Bank" or "banker to the Government". Since its inception it has been discharging its functions quite satisfactorily. The capital of the Bank shall be five crore rupees.The basic function of the RBI is stated in the preamble to the Act which is as follows "...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage." Hence the basic functions are(1)Regulation and issue of currency notes except one rupee note and all coins which are issued by the Government of India.2) Monetary control 3) Fiscal control 4) Credit control 5) currency management etc.

The main functions actually discharged by RBI may be summarized broadly as under.1)Issue of currency note of Rs 2,5,10,20,50,100,500 and Rs 1000 & Rs.10,000. The RBI issues them and withdraws them. There are around 17 issue offices. The currency is kept in the currency chests either by RBI directly or chest kept by other banks on behalf of RBI.There are around 4000 such chests in India.2)Supervisory role: It has supervisory function and controls commercial banks, All India FIIs, NBFC's, State Co-op Banks etc.

3) RBI Act has given the powers under various sections of RBI Act related to Central banking functions, some important are:Sec. 20 Obligation of the RBI to transact Government business. Sec 21 RBI to have the right to transact Government business in India. Sec 21 A RBI to transact Government business of States on agreement.Sec 31 Issue of demand bills and notes. Sec 40 Transactions in foreign exchangeSec 42. Cash reserves of scheduled banks to be kept with the Bank

1. General Framework of RegulationThe existing regulatory framework under the Banking Regulations Act 1949 can be categorised as follows : a) Business of Banking Companies b) Licensing of banking companiesc) Control over Management d) Acquisition of the Undertakings of banking companies in certain casese) Restructuring and Resolution including winding up operationf) Penal Provisions

2. LicensingAs per sec. 22A of Banking Regulation Act, no company shall carry on banking business unless it holds a license issued by RBI. Before granting a license, RBI needs to be satisfied, by an inspection or otherwise, that the following conditions are fulfilled:a) that the bank will be in a position to pay its present or future depositors;b) that the affairs of the bank are not being conducted in a manner detrimental to the interest of depositors.c) that the general character of the proposed management will not be prejudicial to the public interest or the interest of its depositorsd) that the Bank has adequate capital structure and earning prospects,e) that the public interest will be served.The RBI may cancel a license if the bank fails to comply / fulfill any of the conditions referred to above. A bank aggrieved by the decision of RBI may, within 30 days, appeal to the Central Govt. whose decision will be final.

ISFA JAIIB PAPER 3


2.1Opening of new offices: Sec 23 of Banking Regulation Act:No bank shall open new place of business or change the location of existing place of business without obtaining prior permission of RBI. Before granting permission, RBI may need to be satisfied by an inspection under Section 35 or otherwise as to:a) financial condition and history of the bank;b) general character of its management;c) adequacy of its capital structure;d) earning prospects; ande) that public interest would be served.The restriction does not apply to the opening of a temporary place of business in the same city or village for a period not exceeding one month on special occasions like exhibition or mela.Every Bank is required to submit to RBI a quarterly return showing Offices opened and closed in Form – VI.

Section 23 of the Banking Regulation Act, 1949 - Relaxations in Branch Authorisation Policyw.e.f August 6, 2015:Merger/Closure/ Shifting of branchesi) Banks may shift, merge or close all branches except rural branches and sole semi-urban branches at their discretion.ii) Shifting, merger, or closure of any rural branch as well as a sole semi urban branch would require approval of the DCC/DLRC.Part-shifting of BranchesBanks may require shifting some activities/part shift activities of a branch in any centre due to space/rent constraints, and may do so without seeking prior approval of Reserve Bank of India. However, it may be noted that banking activity, i.e., deposit or loan business cannot be maintained at both places, and the new location for part shifting would have to be within 1 km of the existing location

3.ReturnsEvery Bank shall, before the close of succeeding month, submit to RBI a return showing assets and liabilities in India as at the close of business on the last Friday of every month in Form IX.RBI may direct a bank to furnish it with such statement and information relating to the business and affairs of the bank as may be considered necessary.

4.Accounts and Balance sheetEvery Bank shall prepare Balance Sheet (BS) and Profit & Loss (P & L) Account as on the last working day of the year in the prescribed form. The Principal Officer and three Directors should sign the BS and P & L Account. The accounts and BS, together with auditor's report, should be published in a local newspaper and three copies thereof submitted to RBI within six months from the end of the year. Banks with deposits of less than Rs.20 lakhs may only display the accounts in every office of the bank instead of publishing in newspaper.

5.InspectionRBI may on its own, and on a direction from the Govt. of India, inspect, through its officers, any Bank and its books and accounts. RBI shall supply to the bank a copy of its report. It shall be the duty of every Director, officer or employee of the Bank to produce to any officer making inspection all such books, accounts and other documents in his custody or power and to furnish to him any statement and information relating to the Bank within such time as the said Officer may specify.

6. RBI directionsRBI maya) in the public interest;b) in the interest of banking policy; orc) to prevent affairs detrimental to the interest of depositors; ord) to secure proper management of the business of the bank issue directions and an UCB shall be bound to comply.

ISFA JAIIB PAPER 3


Further powers of RBIRBI maya) caution or prohibit a bank against any transaction;b) give assistance of loan;c) In order to ensure reorganization or expansion of cooperative credit on sound lines

6.1 POWER TO ISSUE DIRECTIONSi. The Banking Regulation Act authorised the Reserve Bank to issue directions to banks under Sec. 21 and 35A of the Act. While Section 21 gives the power to regulate advances by banking corn Section 35A gives wide powers generally to regulate banking companies. The Reserve Bank been issuing directions from time to time under Section 21 (read with Section 35A) regulating of interest and other terms and conditions of acceptance of deposits and making of loans advances. Regulation of deposits and loans and advances. ii. Nature of Directions: The directions issued by the Reserve Bank in exercise of powers ii Sections 21 and 35A of the BR Act, being statutory directions, are binding on the banks. Circulars of the Reserve Bank giving instructions to banks where it has statutory powers to such instructions are also binding on the banks, even if they do not specifically refer to statutory provisions.

Bonafides: The powers of the Reserve Bank to issue directions have to be exercised with bonafide intentions, as held by the Gujarat High Court in RBI vs Harisidh Co-op. Bank Ltd. (AIR 1988 Guj 107). In that case the Court considered the power of the Reserve Bank to issue directions for superseding the board of a co-operative bank for securing its proper management and upheld the action taken by the Reserve Bank on the finding that was without mala fide.Caution and Advice: Apart from giving directions, the Reserve Bank may also caution or give advice to banking companies. Section 36 of the Banking Regulation Act provides that the Reserve Bank may caution or prohibit banking companies generally or any banking company in particular against any transaction or class of transactions. Further, the Reserve Bank may generally give advice to any banking company.

A. ACCEPTANCE OF DEPOSITSAs discussed in unit I, the essence of banking business is the acceptance of deposits from the public withdrawable by cheque.

Types of Deposits: Banks accept different types of deposits, both time and demand deposits, from the public. While time deposits, like fixed deposits or recurring deposits are repayable after an agreed period, demand deposits, like deposits in current account and savings bank accounts, are repayable on demand, subject to the terms and conditions of the deposits. The period of the deposit and rate of interest applicable to the deposit are matters to be agreed between the depositor and the bank under the terms of the deposit, subject to any directions given by the Reserve Bank in this regard.

Regulation of acceptance of deposits: The Banking Regulation Act does not contain any specific provisions for regulation of acceptance of deposits of banks. However, Section 35A which authorises the Reserve Bank to give directions is wide enough to cover acceptance of deposits. Accordingly, acceptance of deposits may be regulated in the public interest or in the interest of banking policy or in the interests of depositors by issuing directions. The Reserve Bank issues directions from time to time regulating the rates of interest applicable to deposits. The directions may either fix the rates or specify the minimum and/or maximum rate of interest on savings deposits and time deposits for various periods as also for special categories of deposits like senior citizen, NRI deposits. If only minimum and/or maximum rates are specified or no rates are specified, the banks are free to decide their rates accordingly. The directions issued by the Reserve Bank may also stipulate conditions regarding minimum or maximum periods for which deposits may be accepted, reduction of interest payable on premature withdrawal and payment of interest on renewal of overdue deposits.

ISFA JAIIB PAPER 3


However, currently RBI prescribes the minimum and maximum period for which deposits can be accepted and prescribes interest rates only in respect of Savings Deposits and NRI deposits leaving others for the individual banks.

Returns on unclaimed deposits: Banks have to file a return every year on their unclaimed deposits under Section 26 of the Banking Regulation Act. The return has to be filed within thirty days of the end of each calendar year in the form and manner prescribed and should cover all deposits not operated for ten years. In the case of fixed deposits the period of ten years starts from the expiry of the period of the deposit.Pursuant to the amendment of the Banking Regulation Act, 1949 (The Banking Laws (Amendment) Act, 2012), section 26A has been inserted in that Act, empowering Reserve Bank to establish The Depositor Education and Awareness Fund (the Fund). Under the provisions of this section the amount to the credit of any account in India with any bank which has not been operated upon for a period of ten years or any deposit or any amount remaining unclaimed for more than ten years shall be credited to the Fund, within a period of three months from the expiry of the said period of ten years. The Fund shall be utilized for promotion of depositors’ interest and for such other purposes which may be necessary for the promotion of depositors’ interests as specified by RBI from time to time. The depositor would, however, be entitled to claim from the bank her deposit or any other unclaimed amount or operate her account after the expiry of ten years, even after such amount has been transferred to the Fund. The bank would be liable to pay the amount to the depositor/claimant and claim refund of such amount from the Fund.

B NOMINATIONi. Repayment of Deposits: Section 45ZA of the Banking Regulation Act provides that a depositor or depositors of a banking company (including co-operative banks) may nominate one person in the prescribed manner as nominee to whom the deposit may be returned in the event of death of sole depositor or depositors. Unless the nomination is varied or cancelled, the nominee is entitled; all the rights of the depositor/s in the event of death of the depositor/s. In the case of minor nominees, there is also a provision to appoint a person to receive the deposit on behalf of the minor. Payment by a bank in accordance with these provisions gives a valid discharge to the bank, but does not affect the right or claim a person may have against the nominee in respect of the am received by him. Rule 2 of the Banking Companies (Nomination) Rules, 1985 provides for procedure and forms for making nomination in respect of deposits with commercial banks. In case of Co-operative banks, similar provisions are incorporated in the Co-operative Bank (Nomination) Rules, 1985.

ii. Articles in Safe Custody and Safety Lockers: There are also provisions in the Banking Regulation Act for nomination in respect of articles kept in safe custody with banks and safety lockers. (Sec. 45ZC)

C LOANS & ADVANCES:-Regulation of Loans and Advances(a) The Reserve Bank is empowered under Section 21 of the Banking Regulation Act to is directions to control advances by banking companies. Such directions may be issued to bank companies generally or to any particular banking company. The Reserve Bank may determinethe policy in relation to advances and issue directions when it is satisfied that it is necessarygive directions: (i) In public interest (ii) In the interests of depositors (iii) In the interests of banking policy.

(b) The directions given by the Reserve Bank are binding on banking companies, and may be one or more of the following matters: (i) Purpose for which advances may or may not be made.(ii) Margins, to be maintained in respect of secured advances.(iii) Maximum amount of advances or other financial accommodation which may be made any company, firm, association of persons or individual. The policy on these matters ii be specified

ISFA JAIIB PAPER 3


having regard to the paid-up capital, reserves and deposits of the banking company and other relevant considerations.(iv) Maximum amount up to which guarantees may be given by a banking company on behalf of any company, firm, association of persons or individual. In this case, also the paid-up capital, reserves, deposits and other relevant considerations have to be taken into account for determining the maximum amount.(v) Rate of interest and other terms and conditions on which advances and other financial accommodation may be made or guarantees may be given.The Reserve Bank issues directions from time to time regulating the lending operations of banking companies in exercise of these powers vested under Section 21. Apart from this, the general powers to give directions under Section 35A are also available for regulation of loans and advances.

c. Selective Credit ControlPurpose: Banks have been traditionally financing trade and commerce and against items they deal in even before the country started industrializing. To ensure that prices of essential commodities like food grains, pulses, edible oils, sugar, jaggery and cotton and textiles are not increased by certain sections of the business community with a motive of profit maximisation by hoarding with the help of bank finance, these restrictions have been put in place. These cover the quantum of credit that can be extended and also the rate at which it can be extended. With self-sufficiency achieved by our country over the years in almost all of the above, RBI had taken them out of the purview of selective credit control and currently restrictions are there only in case of levy sugar.b) Methods and tools: Selective credit control seeks to influence the demand for credit by(i) making borrowing more costly for certain purposes which are considered relatively inessential, or(ii) by imposing stringent conditions on lending for such purposes, or (iii) by giving concessions for certain desired types of activities.

The tools employed for exercising selective credit control are:1.minimum margins for lending against selected commodities; 2.ceilings on the levels of credit; and3.charging of minimum rate of interest on advances against specified commodities.

The quantum and cost of credit are regulated by operating these tools of control.

d. Price control: In India, selective credit control has been generally used for preventing speculative barding of essential commodities and basic raw materials using bank credit. This is with a view to check the undue rise of prices of such sensitive commodities.

e. Restrictions on loans and advances: Section 20 of the Banking Regulation Act imposes certain restrictions on loans and advances. Accordingly, no banking company shall grant loans or advances the security of its own shares. Further, a banking company, is prohibited from entering into any commitment for granting any loans or advances to or on behalf of any of its directors. The prohibition also applies to loans and advances to:(a) firms in which any director is interested as a partner, manager, employee or guarantor, and(b) any company (other than a company registered under Section 25 of the Companies Act) in which a director of the banking company holds substantial interest as defined in Section 5(ne)of the Act or of which he is director, manager, managing agent, employee or guarantor.

D REGULATION OF INTEREST RATE The Reserve Bank is authorised to regulate interest rates under Section 21 (read with Section 35L the Banking Regulation Act. This includes rates of interest for loans and advances as well as deposits. While giving directions on interest rates, there should not be any discrimination against any class depositors or loanees or banks. Any differential treatment should be justifiable in law as not be; against the principles of equality.

ISFA JAIIB PAPER 3


i. Interest on Deposits: The rates of interest on deposits were not regulated by the Reserve Bank 1964. Hence, it was open to the banks to decide their deposit rates freely. Thereafter the Reserve Bank has been issuing directions from time to time regulating rates of interest applicable to different types of deposits. Accordingly, payment of interest on current account was prohibited. As directions are issued by virtue of the powers vested in the Reserve Bank under Section 35A of Banking Regulation Act, before issuing the directions the Bank has to be satisfied that the directions are necessary in public interest or in the interest of depositors or of banking policy. Reserve Bank may permit higher rate of interest in favour of certain categories of depositors like former/existing employees or depositors of certain classes of banks like co-operative banks. Of late, the movement has been in the direction of liberalisation of interest rates, thereby giving increased freedom banks to decide the rates themselves.

ii. Interest rate on loans and advances: Interest rate on loans and advances is subject to regulation specifically under Section 21 (2)(e) of the Banking Regulation Act apart from the general provision of Section 35A. Accordingly, different rates are permissible for different sectors like small-scale industries, agriculture, large-scale industries, etc., and of late, much freedom has been given to banks to decide the rates themselves. Further, the rate of interest may vary on the basis of the period of the loan. The Reserve Bank tightens the regulations or gives relaxations thereby permitting banks to decide the rates on their own, depending on the position of money supply in the public interest or in the interest of depositors or of banking policy. Currently the directions of RBI regarding interest rates of advances cover only finance to exporters and small loans with limits up to Rs 2 lac and DRI loans.

E. INTERNET BANKING GUIDELINESThe Reserve Bank has issued guidelines in respect of internet banking. These guidelines cover: (I) technology and security issues; (ii) legal issues;(iii) regulatory and supervisory issues.These guidelines apply, in addition to Internet banking, to other forms of electronic banking to extent relevant. All banks offering internet banking have to make a review of their systems in the lieu of these guidelines and report to the Reserve Bank the types of services offered, extent of their compliance with the recommendations, deviations, if any and their proposal indicating a timeframe for compliance.

F.REGULATION OF MONEY MARKET INSTRUMENTS The Reserve Bank of India (Amendment) Act, 2006 (Section 45W) empowers the Bank, in public interest or to regulate the financial system of the country to its advantage, to determine the policy relating to interest rates or interest rate products and give directions in that behalf to all agencies or of them, dealing in securities, money market instruments, foreign exchange, derivatives, or instruments of like nature as the Bank may specify from time to time. Further, the Bank may, for purpose of enabling it to regulate these agencies call for any information, statement or other particulars from them, or cause an inspection of such agencies to be made. However, the directions issued by Bank in this behalf shall not relate to the procedure for execution or settlement of the trades in respect of the transactions on the recognised Stock Exchanges. Every director or member or other body the time being vested with the management of the affairs of the agencies falling under Section 45W to comply with the directions given by the Reserve Bank and submit the information or statement particulars as required.

G.MAINTENANCE OF CASH RESERVEEvery banking company which is a scheduled bank has a duty to maintain certain cash reserve with Reserve Bank under Section 42 of the Reserve Bank of India Act. In the case of non-Scheduled Section 18 of the Banking Regulation Act provides for the maintenance of cash reserve. i. Scheduled Banks: A scheduled bank is a bank included in the second schedule of the Reserve Bank of India Act. Under Section 42(6) of the Act, the Reserve Bank may include any bank in the second schedule if it satisfies the following requirements -

ISFA JAIIB PAPER 3


(a) it has a paid-up capital and reserves of an aggregate value of not less than Rs. 5 lac; (b) it satisfies the Reserve Bank that its affairs are not conducted in a manner detrimental to interests of depositors; (c) it is: (i) a state co-operative bank, or (ii) a company as defined in Section 3 of the Companies Act, or (iii) an institution notified by the Central Government in this behalf, or (iv) a corporation or a company incorporated outside India under the foreign laws.

Thus, a banking company which has the requisite capital and reserves of Rs. 5 lac and the affairs of which are not conducted in a manner detrimental to the interests of depositors is eligible to be included in the second schedule. The Reserve Bank, may exclude any bank from the second schedule, if the aggregate value of its paid-up capital falls below Rs. 5 lac, or its affairs are found to be conducted in a manner detrimental to the interests of depositors on an inspection Section 35 of the Banking Regulation Act, or if it goes into liquidation, or otherwise ceases to carry on banking business.

ii. Quantum of Cash Reserve: The cash reserve required to be maintained by a scheduled bank the Reserve Bank under Section 42(1) of the Reserve Bank of India Act (as amended in 2006) is an Average daily balance, being ‘such per cent of the total of the demand and time liabilities in India of hank as shown in the return referred to in the sub-Section (2), as the Reserve Bank may from to time, having regard to the needs of securing the monetary stability in the country, notify in the Gazette of India’. Thus, under the amended statute, the Reserve Bank can, in order to secure monetary stability in the country, determine the CRR for scheduled banks without any ceiling or rate (as against a statutory minimum of three per cent earlier). ‘Average daily balance’ for this pose means the average of the balances held at the close of business of each day for a fortnight. The liabilities, for this purpose do not include paid-up capital and reserves and any credit balance in the profit and loss account.

Interest: Until the amendment to the RBI At in 2006, the Reserve Bank was authorised under the Act [Section 42(1 B)] to pay interest to a scheduled bank when it maintained reserves above the statutory minimum as required under the Reserve Bank’s notification under the erstwhile proviso to the sub-Section (1) or under the sub-Section (1A) of Section 42. As the sub-Section (1 B) providing for interest has been omitted now, the Reserve Bank cannot pay interest on any portion of the CRR balances of banks.

Returns: Every scheduled bank has to submit a return to the Reserve Bank showing its demand and liabilities and borrowings from banks in India, classifying them into demand and time liabilities and giving other details required under Section 42(2) of the Reserve Bank of India Act. The returns to be as at the close of business on each alternate Friday and has to be sent not within seven days after the date to which it relates. In some cases, it may be impracticable to furnish fortnightly urns by reason of the geographical position of the banks and its branches. If so, the Reserve Bank may permit presentation of a provisional return fortnightly, to be followed by a final return within twenty days after the date to which it relates. Alternatively, such a bank may be permitted to file a monthly return within twenty days after the end of the month. In addition to the above, where the last Friday of the month is not an alternate Friday for the purpose of return, a special return as the close of business on that day has to be submitted within seven days. Where the relevant Friday is a holiday under the Negotiable Instruments Act, the return has to be prepared as at the close of the preceding working day.

Penalties: When the balance maintained by any scheduled bank or even non scheduled bank(as per The Banking Laws (Amendment) Act,2012) falls below the stipulated minimum, such a bank shall be liable to pay a penal interest to the Reserve Bank. During the first fortnight, when such shortage occurs, the penal interest shall be three per cent above the bank rate and if the shortage continues in the next fortnight, the penal interest shall increase to five per cent above the bank rate. Where the shortfall still persists in the third fortnight, every director, manager or secretary of the bank who is a willful party thereto shall be punishable with a fine. In that case,

ISFA JAIIB PAPER 3


the Reserve Bank may also prohibit the bank from accepting fresh deposits. Contravention of the order of prohibition is also punishable with a fine. Failure to file the return as required, also attracts a penalty under Section 45(4) of the Act. Where Reserve Bank is satisfied that a bank had sufficient reason for committing the default, either in maintaining reserves or in filing return, the penalty may be waived. When penalty is imposed for a default, the amount has to be paid within fourteen days of the notice demanding payment. On failure to pay accordingly, Reserve Bank may obtain a direction from Principal Civil Court for levying the penalty and obtain a certificate for the amount may be enforced like a decree of a civil court.

vi. Cash Reserves of Non-Scheduled Banks: Pursuant to the enactment of the Banking Laws (Amendment) Act, 2012, giving powers to RBI to specify the percentage of CRR for Non-scheduled State cooperative banks (StCBs) and all Central cooperative banks (CCBs) and the percentage of SLR as well as the form and manner of holding SLR by cooperative banks, it has been decided to increase the CRR for Non-Scheduled StCBs and all CCBs by 100 basis points from 3.00 per cent to 4.00 per cent of their total net demand and time liabilities, on par with Scheduled StCBs, with effect from the fortnight beginning July 12, 2014.The bank has also to submit a return to the Reserve Bank before the twentieth day of every month showing the amount so held on alternate Fridays during the month, along with particulars of its demand and time liabilities in India on such Fridays. If the Fridays concerned fall on holidays under the Negotiable Instruments Act, the returns have to be filed as on the preceding working day.

H.MAINTENANCE OF LIQUID ASSETS (Statutory liquidity ratio i.e SLR)Every banking company has a duty to maintain a certain percentage of their assets in India under Section 24 of the Banking Regulation Act in the form and manner specified by the Reserve Bank. Recently, the Banking Regulation (Amendment) Ordinance, 2 amended the provisions of Section 24, omitting the sub-Sections (1) and (2) of Section 24 which provides for a statutory minimum requirement of 25 per cent. That means hereonward there will not be any minimum rate for keeping SLR. A scheduled bank, in addition to the average daily balance which it is, or may required to maintain under Section 42 of the Reserve Bank of India Act, 1934 shall maintain in India assets, the value of which shall not be less than such percentage not exceeding 40 per cent of the of its demand and time liabilities in India as on the last Friday of the second preceding fortnight. Banking companies other than scheduled banks have also to maintain such assets in addition to the cash reserve, which they are required to maintain under Section 18 of the BR Act. Pursuant to the enactment of the Banking Laws (Amendment) Act, 2012, giving powers to RBI to the percentage of SLR as well as the form and manner of holding SLR State cooperative banks (StCBs) and all Central cooperative banks (CCBs), it has been decided to reduce the SLR for all State cooperative banks and Central cooperative banks by 250 basis points from 25.00 per cent to 22.50 per cent of their total net demand and time liabilities with effect from the fortnight beginning July 12, 2014. However, term deposits held by StCBs and CCBs with Public Sector Banks will also be eligible for being reckoned for SLR purpose in the interim period, upto March 31, 2015.

i. Returns: For ensuring compliance with the above provisions, a monthly return has to be submission to the Reserve Bank by every banking company. The return has to be submitted not later than twenty days from the end of the month to which it relates, in the prescribed form and manner giving particulars of assets and demand and time liabilities at the close of business of each alternate Friday. If such a Friday is a public holiday, the return has to be prepared as at the close of preceding working day.

ii. Penalty for Default: If the balance on any alternate Friday (or the preceding working day, when such Friday is a holiday) falls below the minimum requirement, the banking company is liable pay to the Reserve Bank penal interest at the rate of three per cent above bank rate on the shortfall for the day. If the default recurs on the succeeding alternate Friday, the penal interest is raised five per cent above the bank rate on the shortfall. If the default occurs on the

ISFA JAIIB PAPER 3


next succeeding Friday, then every director, manager and secretary of the banking company is punishable with fine. If the Reserve Bank is satisfied on the application of a banking companythat it had sufficient cause not to comply with the provisions as to maintenance of assets, penalinterest may be waived.

I.RECENT IMPORTANT DEVELOPMENTS:1. Savings Deposit Interest Rate:- The Reserve Bank of India on 25th October,2012, announced deregulation of the interest rate on savings bank deposits with immediate effect. However, each bank will have to offer a uniform interest rate on SB deposits up to Rs 1 lakh. In the case of SB deposits over Rs 1 lakh, banks may provide differential rates of interest.2. Deregulation of Interest Rates on Advances:- Till late 1980s, the interest rate structure on loans and advances extended by commercial banks was largely administered by the RBI and banks did not have any freedom to fix the interest on loan products, irrespective of the nature of advance and the amount lent. Banks were simply advised to follow the interest rate prescription of RBI, primarily to ensure the flow of adequate credit to the desired productive sectors of the economy. However from 1990, RBI has initiated a number of steps to simplify and rationalize the complex interest rate structure as well as to bring in transparency in the loan pricing system. During 1990 to 2003 several reforms were made in this regard. In 2003, BPLR (Banks Prime Lending Rate) was introduced.Extending credit at BPLR implies that the borrower is AAA rated and the associated risk is low. With increasing competition in the banking industry, the BPLR lost its relevance as large chunk of bank lending to the commercial sector happened at sub BMPLR rates i.e. around 7.50% as against average BPLR of 12.5%. RBI report on BPLR reveals that more than two-thirds credit portfolio of the Banks (excluding small loans and export credit) belongs to sub BPLR category and majority of these loans pertains to Corporate Sector / Large Borrowers where as Retail and Small borrowers continued to pay higher interest rates. Lending to Corporate Sector / Large Borrowers at relatively low interest rates has a direct bearing on Yield on Advances and Net Interest Margin (NIM) of the banks.Interest Rate war among banks has caused unhealthy competition and led to unwarranted low interest offerings to corporate/large borrowers, detrimental to the interest of banks and stake-holders. Contrarily, banks are reluctant to revise BPLR downwards in respect of retail loans despite reduction of key rates by RBI.

Base Rate:In the above backdrop, RBI constituted a working group under the Chairmanship of Shri. Deepak Mohanty to examine the related issues of BPLR and suggest a transparent credit pricing mechanism with an objective to ensure effective transmission of the Monetary Policy signals from time to time. The working group suggested Base Rate in the place of existing BPLR, which is arrived, duly taking the following components: - Cost of Deposits / Funds- Negative carry in respect of CRR and SLR- Unallocatable Overhead Costs- Average Return on Net Worth Based on the Working Group recommendations, RBI issued guidelines to all banks to announce Base Rate, duly taking the said criteria and directed the banks to price the loans accordingly w.e.f. 01.07.2010. Under this system, banks cannot lend below Base Rate except for certain categories such as Differential Rate of Interest (DRI) advances, Loans to bank’s own employees, Loans to bank’s depositors against their own deposits, Interest Subvention Schemes viz., Crop loans, Export credit and Restructured loans. The final lending rates include the Base Rate plus variable or product specific operating expenses, credit risk premium and tenor premium.Banks are required to review the Base Rate at least once in a quarter with the approval of the Board or the Asset Liability Management Committee as per the bank's practice and inform the same to RBI.

Internal Benchmark

ISFA JAIIB PAPER 3


i. All rupee loans sanctioned and credit limits renewed w.e.f. April 1, 2016 will be priced with reference to the Marginal Cost of Funds based Lending Rate (MCLR) which will be the internal benchmark for such purposes.ii. The MCLR will comprise of:- Marginal cost of funds;- Negative carry on account of CRR; - Operating costs;- Tenor premium.iii. Marginal Cost of fundsThe marginal cost of funds will comprise of Marginal cost of borrowings and return on networth.

New License guidelines with effect from 22nd Feb’2013:The RBI after the amendments in Banking Regulation Act, 1949 in winter session of parliament i.e in Dec.12, has finalized the following guidelines for licensing the private sector entities applying for licensing of bank.

Key features of the guidelines are:(I) Who will be the promoters of bank:a) Eligible Promoters: Entities / groups in the private sector, entities in public sector and Non-Banking Financial Companies (NBFCs) shall be eligible to set up a bank through a wholly-owned Non-Operative Financial Holding Company (NOFHC).

b) Promoters / Promoter Groups with an existing non-banking financial company (NBFC) will be eligible to apply for a bank licence. If considered eligible for promoting a bank, they will have to comply with the requirements laid down in these guidelines

(II) ‘Fit and Proper’ criteria: Entities / groups should have a past record of sound credentials and integrity, be financially sound with a successful track record of 10 years. For this purpose, RBI may seek feedback from other regulators (and enforcement and investigative agencies like Income Tax, CBI, Enforcement Directorate, etc. as deemed appropriate. Promoter / Promoter Groups’ business model and business culture should not be misaligned with the banking model and their business should not potentially put the bank and the banking system at risk on account of group activities such as those which are speculative in nature or subject to high asset price volatility.

(III) Corporate structure of the NOFHC:The NOFHC shall be wholly owned by the Promoter / Promoter Group. The NOFHC shall hold the bank as well as all the other financial services entities of the group.The capital structure of the wholly-owned NOFHC set up by Promoter / Promoter Groups in Private Sector shall consist of :a) voting equity shares not exceeding 10 per cent of the total voting equity shares of the NOFHC held by any individual belonging to the Promoter Group, along with his relatives (as defined in Section 6 of the Companies Act 1956) and along with entities in which he and / or his relatives hold not less than 50 per cent of the voting equity shares, and

b) companies forming part of the Promoter Group whereof companies in which the public hold not less than 51 per cent of the voting equity shares shall hold not less than 51 per cent of the total voting equity shares of the NOFHC.

c) The initial minimum paid-up voting equity capital for a bank shall be `5 billion ( Rs.500 crore). Any additional voting equity capital to be brought in will depend on the business plan of the Promoters.

d) The NOFHC shall initially hold a minimum of 40 per cent of the paid-up voting equity capital of the bank which shall be locked in for a period of five years.

ISFA JAIIB PAPER 3


e) The shareholding by NOFHC shall be brought down to 20 per cent of the paid-up voting equity capital of the bank within a period of 10 years, and to 15 per cent within 12 years from the date of commencement of business of the bank.

f) Regulatory framework for capital: The bank shall be required to maintain a minimum capital adequacy ratio of 13 per cent of its risk weighted assets (RWA) for a minimum period of 3 years after the commencement of its operations subject to any higher percentage as may be prescribed by RBI from time to time. On a consolidated basis, the NOFHC and the entities held by it shall maintain a minimum capital adequacy of 13 per cent of its consolidated RWA for a minimum period of 3 years.

g) The bank shall get its shares listed on the stock exchanges within three years of the commencement of business by the bank.

IV) Regulatory framework:a) The bank will be governed by the provisions of the Banking Regulation Act, 1949, Reserve Bank of India Act, 1934, Foreign Exchange Management Act, 1999, Payment and Settlement Systems Act, 2007, other relevant Statutes and the Directives, Prudential regulations and other Guidelines/Instructions issued by RBI and other regulators from time to time, including the regulations of SEBI regarding public issues and other guidelines applicable to listed banking companies.

b) Foreign shareholding in the bank: The aggregate non-resident shareholding from FDI, NRIs and FIIs in the new private sector banks shall not exceed 49 per cent of the paid-up voting equity capital for the first 5 years from the date of licensing of the bank. No non-resident shareholder, directly or indirectly, individually or in groups, or through subsidiary, associate or joint venture will be permitted to hold 5 per cent or more of the paid-up voting equity capital of the bank for a period of 5 years from the date of commencement of business of the bank. After the expiry of 5 years from the date of commencement of business of the bank, the aggregate foreign shareholding would be as per the extant FDI policy.

c) Corporate governance of NOFHC: At least 50% of the Directors of the NOFHC should be independent directors. The corporate structure should not impede effective supervision of the bank and the NOFHC on a consolidated basis by RBI.

d) The NOFHC shall create a reserve fund and shall, out of the balance of profit each year as disclosed in the profit and loss account and before any dividend is declared, transfer to the reserve fund a sum equivalent to not less than 25 per cent of such profit.

(V) Prudential norms for the NOFHC: The prudential norms will be applied to NOFHC both on stand-alone as well as on a consolidated basis and the norms would be on similar lines as that of the bank.

(VI) Exposure norms: The NOFHC and the bank shall not have any exposure to the Promoter Group. The bank shall not invest in the equity / debt capital instruments of any financial entities held by the NOFHC.(VII) Business Plan for the bank: The business plan should be realistic and viable and should address how the bank proposes to achieve financial inclusion.

(VIII) Other conditions for the bank : The Board of the bank should have a majority of independent Directors.

The Independent Directors referred to above shall have special knowledge or practical experience in respect of one or more of the following matters, namely, (a) Accountancy, (b) Agriculture, rural economy and co-operation, (c) Banking, (d) Insurance, (e) Economics, (f) Finance, (g) Micro, Small and Medium Enterprises (MSME), (h) Law; or, (i) any other matter, the special knowledge of, and practical experience in, which would, in the opinion of the Reserve Bank, be useful to NOFHC.

ISFA JAIIB PAPER 3


The bank shall open at least 25 per cent of its branches in unbanked rural centres (population upto 9,999 as per the latest census)

The bank shall comply with the priority sector lending targets and sub-targets as applicable to the existing domestic banks.

Banks promoted by groups having 40 per cent or more assets/income from non-financial business will require RBI’s prior approval for raising paid-up voting equity capital beyond `10 billion for every block of `5 billion.

Any non-compliance of terms and conditions will attract penal measures including cancellation of licence of the bank.

(IX) Additional conditions for NBFCs promoting / converting into a bank : Existing NBFCs, if considered eligible, may be permitted to promote a new bank or convert themselves into banks.

(X) Procedure for application:In terms of Rule 11 of the Banking Regulation (Companies) Rules, 1949, applications shall be submitted in the prescribed form (Form III). The eligible promoters can send their applications for setting up of new banks along with other details mentioned in Annex II to the Guidelines to the Chief General Manger-in-Charge, Department of Banking Operations and Development, Reserve Bank of India, Central Office, 12th Floor, Central Office Building, Mumbai – 400 001 on or before July 1, 2013.

Procedure for RBI decisions: At the first stage, the applications will be screened by the Reserve Bank. Thereafter, the

applications will be referred to a High Level Advisory Committee, the constitution of which will be announced shortly.

The Committee will submit its recommendations to the Reserve Bank. The decision to issue an in-principle approval for setting up of a bank will be taken by the Reserve Bank.

The validity of the in-principle approval issued by the Reserve Bank will be one year. In order to ensure transparency, the names of the applicants will be placed on the

Reserve Bank website after the last date of receipt of applications.

J. WINDING UP & AMALGAMATION OF BANK:-Sec 36AE. Power of Central Government to acquire undertakings of banking companies in certain cases :- (This provision is also applicable to foreign bank operation in India)(1) If, upon receipt of a report from the Reserve Bank, the Central Government is satisfied that a banking company: (a) has, on more than one occasion, failed to comply with the directions given to it in writing under section 21 or section 35A, in so far as such directions relate to banking policy, or (b) is being managed in a manner detrimental to the interests of its depositors, and that-(i) in the interests of the depositors of such banking company, or (ii) in the interest of banking policy, or (iii) for the better provision of credit generally or of credit to any particular section of the community or in any particular area, it is necessary to acquire the undertaking of such banking company, the Central Government may, after such consultation with the Reserve Bank as it thinks fit, by notified order, acquire the undertaking of such company(2)After the acquisition all the assets and liabilities of the acquired bank shall stand transferred to, and vest in, the Central Government.

Sec 36AG. Compensation to be given to shareholders of the acquired bank (1) Every person who, immediately before the appointed day, is registered as a holder of shares in the acquired bank shall be given by the Central Government, or the transferee bank, as the case may be, such compensation in respect of the transfer of the undertaking of the acquired bank as is determined in accordance with the principles contained in the Fifth Schedule of Banking regulation Act.

Sec37. Suspension of business

ISFA JAIIB PAPER 3


(1) The High Court may on the application of a banking company which is temporarily unable to meet its obligations make an order (a copy of which it shall cause to be forwarded to the Reserve Bank) staying the commencement or continuance of all actions and proceedings against the company for a period of which shall not exceed six months. (2) No such application shall be maintainable unless it is accompanied by a report of the Reserve Bank indicating that in the opinion of the Reserve Bank the banking company will be able to pay its debts if the application is granted:

Sec38 :-Provisions related to the winding up of banking companya) If the banking company is unable to pay its debts orb) If the application for its winding up has been made by the RBI - the RBI may make an application, if the banking company:i. has failed to comply with the requirements as to minimum paid up capital and cash reserves

or ii. has become disentitled to carry on banking business in India orc) If in the opinion of the RBI,i. a compromise or arrangement sanctioned by a Court in respect of the banking company

cannot be worked satisfactorily with or without modifications orii. the returns, statements or information furnished to it under or in pursuance of the provisions

of this Act disclose that the banking company is unable to pay its debts oriii.the continuance of the banking company is prejudicial to the interest of its depositors.

Further, in the case B. Suryanarayanan v. The K.P. Co-op. Bank Ltd, it was held that co-operative banks are excluded from being wound up under the Banking Regulation Act, 1949. However, if the RBI, with its necessary expertise in the matter of banking, sanctions the winding up of a co-operative bank, the High Court should not interfere unless the decision is malafide.

Sec 39. Reserve Bank to be official liquidator in case of winding up:-Where in any proceeding for the winding up by the High Court of a banking company, an application is made by the Reserve Bank in this behalf, the Reserve Bank, the State Bank of India or any other bank notified by the Central Government in this behalf or any individual as stated in such application shall be appointed as the official liquidator of the banking company in such proceeding.

Sec 44A. Procedure for amalgamation of banking companies (1) No banking company shall be amalgamated with another banking company, unless a scheme containing the terms of such amalgamation, has been placed in draft before the shareholders of each of the banking companies concerned separately, and approved by the resolution passed by a majority in number representing two-thirds in value of the shareholders of each of the said companies, present either in person or by proxy at a meeting called for the purpose.2) If the scheme of amalgamation is approved by the requisite majority of shareholders in accordance with the provisions of this section, it shall be submitted to the Reserve Bank for sanction and shall, if sanctioned by the Reserve Bank by an order in writing passed in this behalf, be binding on the banking companies concerned and also on all the shareholders thereof.

Financial Sector Legislative Reforms:To rewrite and harmonise financial sector legislations, rules and regulations, the Central Government constituted the Financial Sector Legislative Reforms Commission (FSLRC) in 2014. This Commission is chaired by a former Judge of the Supreme Court of India, Justice B. N. Srikrishna and has an eclectic mix of expert members drawn from the fields of finance, economics, public administration, law etc.The institutional framework governing the financial sector has been built up over a century. There are over 60 Acts and multiple rules and regulations that govern the financial sector. Many of the financial sector laws date back several decades, when the financial landscape was very different from that seen today. For example, the RBI Act and the Insurance Act are of 1934 and 1938 vintage respectively. The Securities Contract Regulation Act was enacted in 1956, when

ISFA JAIIB PAPER 3


derivatives and statutory regulators were unknown. The superstructure of the financial sector governance regime has been modified in a piecemeal fashion from time to time, without substantial changes to the underlying foundations. These piecemeal changes have induced complex and cumbersome legislation, and raised difficulties in harmonising contradictory provisions. Such harmonisation is imperative for effectively regulating a dynamic market in the era of financial globalisation. The need for complete review of the existing financial sector laws has been underlined to make the Indian financial sector more vibrant and dynamic in an increasingly interconnected world.The remit of FSLRC, as contained in its Terms of Reference (TOR), comprises the following:1. Review, simplify and rewrite the legislations affecting the financial markets in India, focusing on broad principles.2. Evolve a common set of principles for governance of financial sector regulatory institutions.3. Remove inconsistencies and uncertainties in legislations/Rules and Regulations.4. Make legislations consistent with each other.5. Make legislations dynamic to automatically bring them in tune with the changing financial landscape.6. Streamline the regulatory architecture of financial markets.

Financial Stability and Development Council (FSDC):With a view to strengthening and institutionalizing the mechanism for maintaining financial stability, enhancing inter-regulatory coordination and promoting financial sector development, the Financial Stability and Development Council (FSDC) was set up by the Government as the apex level forum in December 2010.

The Council has the following composition:-(a) The Union Finance Minister as the Chairperson.(b) lts members are as follows:-(i) Governor, Reserve Bank of India (RBl),(ii) Finance Secretary and/ or Secretary, Department of Economic Affairs (DEA),(iii) Secretary, Department of Financial Services (DFS),(iv) Chief Economic Advisor, Ministry of Finance,(v) Chairman, Securities and Exchange Board of India (SEBI),(vi) Chairman, lnsurance Regulatory and Development Authority (IRDA),(vii) Chairman Pension Fund Regulatory and Development Authority (PFRDA),

The Council deals with issues relating to:-

(a) Financial stability

(b) Financial sector development

(c) lnter-regulatory coordination

(d) Financial literacy

(e) Financial inclusion

(f) Macro prudential supervision of the economy including the functioning of large financial conglomerates

(g) Coordinating lndia's international interface with financial sector bodies like the Financial Action Task Force (FATF), Financial Stability Board (FSB) and any such body as may be decided by the Finance Minister from time to time.

****

ISFA JAIIB PAPER 3


CHAPTER 2TYPES OF BANKS

There are various types of banks which operate in our country to meet the financial requirements of different categories of people engaged in agriculture, business, profession, etc. On the basis of functions, the banking institutions in India may be divided into the following types:

1.STATE BANK:i. Establishment: State Bank of India was established under Section 3 of the State Bank of India Act, 1955 for taking over the undertaking of the Imperial Bank and to carry on the business of banking and other business in accordance with that Act. It is a body corporate, with perpetual succession and common seal and shall sue and be sued in its name. The majority of shares are held by the GOI. Further, no shareholder other than the GOI can exercise voting right above ten per cent, unless otherwise specified by the Central Government in consultation with the Reserve Bank. Now the complete holding of RBI is acquired by the central government.

ii. Management: The State Bank has its central office in Mumbai and local head offices at Mumbai, Kolkata, Chennai and other places as decided by its Central Board in consultation with the Central Government. The superintendence and direction of the affairs of the bank is vested in the Central Board, which has to function according to the business principles having regard to public interest.

iii. Composition of the Board: The Board shall consist of Chairman, not more than fourManaging Directors appointed by the Central Government, minimum 2 & maximum 4 directors to be appointed by other shareholder other than Central Govt., not less than two and not more than six directors to be nominated by the Central Government from among persons having special knowledge of the working of co-operative institutions and of rural economy or experience in commerce, industry, banking or finance, one director, from among the employees of the State Bank, who are workmen, to be appointed by the Central Government, One director, from among such of the employees of the State Bank, as are not workmen, to be appointed by the Central Government, One director to be nominated by the Central Government, One director, possessing necessary expertise and experience in matters relating to regulation or supervision of commercial banks to be nominated by the Central Government on the recommendation of the Reserve Bank.The chairman and managing directors are appointed for a period not exceeding five years and are eligible for reappointment. Their services can be terminated by the Central Government by giving a three month’s notice or notice pay in lieu thereof, after consultation with the Reserve Bank.

ISFA JAIIB PAPER 3


iv, Business of State Bank: The State Bank shall act as an agent of the Reserve Bank at the places where it has a branch and where Reserve Bank has no branch, if so required, by the Reserve Bank, for transacting Government business and other business entrusted to it by the Reserve Bank. The State Bank may transact the work through its subsidiaries or an agent approved by the Reserve Bank. Apart from this, the State Bank may carry on the business of banking as defined in Section 5(b) of the Banking Regulation Act and other business specified in Section 6(1) of that Act.

v. Accounts and Audit: The State Bank has to close its books and balance accounts each year as on 31 March or such other date as may be specified by the Central Government. Within three months of the closing date, it has to furnish to the Central Government and the Reserve Bank its balance sheet and profit and loss account together with auditors’ report and a report by the Central Board on the working and activities of the bank. The audit may be conducted by any person duly qualified to be auditors of companies under Section 226 of the Companies Act. The auditors’ report and report of the Central Board have to be placed before the Parliament. The State Bank has also to transmit to the Central Government and the Reserve Bank within two months of the date of annual closing of accounts, the particulars of its shareholders as on that date. The annual general meeting has to he held within six weeks of the date of sending the balance sheet, etc., to the Central Government and the Reserve Bank.

vi. Subsidiary Banks: The subsidiary banks of the State Bank of India were merged with SBI As per the Gazette of India Notification dated February 22, 2017, effect on April 1, 2017.

2. The Regional Rural Banks (RRBs) are public sector institutions, regionally based, rural oriented and engaged in commercial banking. They were set up by the Regional Rural Banks Act, 1976. i. Establishment of RRBs:. Section 3 of the Act authorises the Central Government to establish regional rural banks by notification in the official gazette at the request of a sponsor bank to operate within specified local limits. ‘Sponsor Bank’ is a bank by which a regional rural bank is sponsored and it holds 35 per cent of the issued capital of the RRB, while the Central Government holds 50 per cent and the State Government holds the remaining fifteen per cent of the issued capital. Generally, a regional rural bank is allotted a compact area of operation comprising a few districts with homogeneous agro-climatic conditions and rural clientele. These banks may accept all types of deposits from the public and engage in the business of ‘banking’ as defined in Section 5(b) of the Banking Regulation Act.ii. Management of the Affairs of an RRB: The management of RRB vests in the board of directors. - The board consists of a chairman appointed by the sponsor bank from among its officers in consultation with the National Bank, or otherwise in consultation with the Central Government. The chairman holds office on whole-time basis and is removable by the sponsor bank, where the chairman is an officer of the sponsor bank, in consultation with the Central Government.iii. Business of Regional Rural Banks: Regional rural banks may transact the business of banking as defined in Section 5(h) of the Banking Regulation Act and any other business permissible for a bank to undertake tinder Section 6(1) of that Act. However, the main thrust of the business would be granting of loans and advances to small and marginal farmers, agricultural labourers, agricultural marketing societies, farmers’ service societies, artisans, small entrepreneurs, etc., within the notified area of operation. iv. Accounts & Audit: Every RRB has to close and balance its accounts as on 31 March or such other date as the Central Government may specify. The auditors have to be appointed with the approval of the Central Government. A person qualified to act as an auditor of companies under Section 226 of the Companies Act is qualified to be an auditor of a regional rural bank. The auditor’s report and report on the working of the bank has to be laid before the Parliament. The sponsor bank is empowered to monitor the progress of the RRBs by inspection, internal audit and scrutiny and suggest corrective measures. v. Amalgamation: Two or more RRBs may be amalgamated by the Central Government by notification in the official gazette. Such notification shall provide for all terms and conditions of

ISFA JAIIB PAPER 3


amalgamation including continuation of service of employees and shall he binding on the banks and all other parties concerned.

3. NATIONALISED BANKSThe Bank Nationalisation Acts [Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 transferred the undertakings of then existing private banks to the corresponding new banks established under these Acts. These corresponding new banks, are popularly known as Nationalised banks. Originally, the entire paid up capital (equity shares), of the Nationalised banks were held by the Central Government. - Some of these banks have recently made public issues of shares, but the Central Government still holds the majority of shares in all these banks. The Banking Companies (Acquisition and Transfer of Undertakings) and Financial Institutions Laws (Amendment) Act, 2006 enables these banks to raise capital by way of public issue or preferential allotment or private placement of equity shares or preference shares. The Central Government shall, however, at all times hold not less than fifty one per cent of the equity of these banks. The shares other than those held by the Central Government are freely transferable. No equity shareholder other than the Central Government can exercise voting rights in excess of one per cent of the total voting rights to all the shareholders. a Management:- The general superintendence, direction and management of the affairs of a Nationahsed bank vests in the board of directors. The board can exercise all the powers and functions of the bank and shall be entitled to discuss, approve and adopt the annual accounts. b. Directors: The directors of Nationalised banks are nominated by the Central Government or elected from the shareholders. The nomination of directors is as under: (i) not more than four whole-time directors (as against two earlier); (ii) one director who is an official of the Central Government to be nominated by the Central Government;(iii) one director, possessing necessary expertise and ‘experience in matters relating to regulation or supervision of commercial banks, to be nominated by the Central Government on the recommendation of the Reserve Bank;(iv) a director representing workmen employees of the bank;(v) a director representing officers of the bank;(vi) one chartered accountant with not less than fifteen years experience nominated in consultation with Reserve Bank;(vii) not more than six directors to be nominated by Central Government. The other shareholders can elect up to a maximum of three directors to the board. The directors nominated under item (vii) and the elected directors should have special knowledge or practical experience of agriculture and rural economy, banking, cooperation, economics, finance, law, small scale industry or other knowledge or experience useful to the bank in the opinion of the Reserve Bank or must represent the interest of depositors or farmers or workers and artisans. c. Additional directors: The Reserve Bank may appoint one or more additional directors on the board of a Nationalised hank, if it is of the opinion that in the interest of banking policy or in the public interest or in the interests of the bank or its depositors, it is necessary to do so. The appointment may he made from time’ to time, by order in writing, with effect from such date, as may be specified in the order and the additional directors shall hold office during the pleasure of the Reserve bank and subject thereto, for a period not exceeding three years or such further periods not exceeding three years at a time as the Reserve Bank may specify. d. Accounts and Audit: Every Nationaliscd hank has to close its account as on 31 March or such other date specified by the Central Government by notification in the official gazette as provided in Section 10 of the Act. The auditor shall be a person duly qualified to be an auditor of a company under section 226 of the companies act. The auditor shall make a report to the central Government . The auditor shall send copies of the report to the bank and the Reserve Bank. The auditor’s report and report of the board have to be laid before the Parliament.A Nationalised bank may pay dividends out of profits after making the necessary provisions under the law or as usually provided by banking companies. An annual general meeting of shareholders has to be held within six weeks of the date of forwarding the balance sheet, etc., to the Central Government.

ISFA JAIIB PAPER 3


e. Captial: As certain changes in banking capital structure has been made by The Banking Laws (Amendment) Act, 2012, some amendments has also be done in Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 & 1980, to enable the nationalized banks to raise capital through “bonus” and “rights” issue and also enable them to increase or decrease the authorized capital with approval from the Government and RBI without being limited by the ceiling of a maximum of Rs. 3000 crore.

4.CO-OPERATIVE BANKSi. Applicability of BR Act: (a) Co-operative banks are registered either under the state laws governing co-operatives or under the multi-state Co-operative Societies Act. If a co-operative bank operates only in one state, the state law applies and in the case of co-operative banks operating in more than one state, the Central Act applies. While the state law/Central law governs the constitution and related matters, the business of banking is regulated by the Banking Regulation Act as applicable to co-operative societies.(b) The Banking Regulation Act is applicable to co-operative societies subject to the modifications stipulated in Part V (Section 56) of the Act. The Act was made applicable to co-operative societies by the Banking,Laws (Application to Co-operative Societies) Act, 1965. A primary co-operative bank is a co-operative society other than a primary agricultural credit society, which satisfies the following criteria; (i) The primary object or principal business is the transaction of banking business. (ii) The paid-up share capital and reserves are not less than Rs. 1 lac.(iii) The byelaws do not permit admission of any other co-operative society as a member (except the membership of a co-operative bank by subscribing to the share capital of the society out of the funds provided by the state Government).

For inclusion of Urban Primary Cooperative bank in Second Schedule to RBI Act, 1934 the fulfillment of the following financial criteria based on the assessed financials as per inspection reports, is a must: w.e.f September,2013.1. DTL of not less than Rs. 750 crore on a continuous basis for one year;2. CRAR of minimum 12%;3. Continuous net profit for the previous three years;4. Gross NPAs of 5% or less;5. Compliance with CRR / SLR requirements and6. No major regulatory and supervisory concerns

C. Cash Reserve: Co-operative banks other than scheduled Co-operative Banks and scheduled state co-operative banks have to maintain in India by way of cash reserve with itself or by way of balance in current account with the Reserve Bank or the state co-operative bank of the state concerned or district Co-operative Bank or by way of net balance in current accounts or any one or more of these ways a sum equivalent to at least three per cent of its total demand and time liabilities in India. In the case of a primary co-operative bank the balance in current accounts with the central co-operative bank of the district concerned may also be taken into account. The balance has to be reckoned as on the last Friday of the second preceding fortnight. The co-operative bank has to submit a return every month showing such amount held by it on alternate Fridays-during a month along with the particulars of its demand and time liabilities in India on such Fridays. When the relevant Friday is a holiday under the Negotiable Instruments Act, the return shall be required as at the close of business on the preceding working day. The demand and time liabilities have to be calculated as stipulated in Section 18 (as applicable to co-operative societies). For scheduled Primary Co-operative Banks and State co-operative Banks, CRR has to be maintained as per Section 42 of RBI Act,

d. Restrictions on Loans and Advances:(a) Section 20 of the Banking Regulation Act (as applicable to co-operative societies) lays down certain restrictions on loans and advances by co-operative banks. Accordingly, a co-operative bank shall not grant loans and advances as under:(i) loans and advances on the security of its own shares;(ii) unsecured loans or advances to any of its directors;

ISFA JAIIB PAPER 3


(iii) unsecured loans or advances to firms or private companies in which any of its directors are interested as partner, managing agent or guarantor, or to individuals in cases where any of its directors is a guarantor for the loans or advances; (iv) unsecured loans or advances to any company in which the chairman of the co-operative hank is interested as managing agent or chairman or managing director. However, these restrictions do not apply to unsecured loans or advances made by a co-operative bank against bills for supplies or services made to Government or bills of exchange arising out of bona fide, commercial or trade transactions. Further, unsecured loans or advances in respect of which trust receipts are furnished to the co-operative bank and loans to directors or any other persons within the limits and on terms and conditions approved by the Reserve Bank arc also exempted.

e. Every co-operative bank has to submit a return in the prescribed form showing the unsecured loans and advances granted by it to companies in which its directors are interested as director, managing agent, or guarantor. Such returns have to be filed before the close of the month succeeding to which the return relates. If it appears to the Reserve Bank on examination of any return that the loans or advances were granted to the detriment of the interest of depositors, Reserve Bank may prohibit granting of such further loans or advances. The Reserve Bank may also impose other restrictions on the grant of such loans and direct the co-operative bank to secure the repayment of the loan or advance within a stipulated time.Note: It must be noted here that RBI with effect from 1 October 2003, has prohibited co-operative banks from providing, renewing secured or unsecured loans and advances or any other funded or non- funded financial accommodation to their directors or their relatives and firm/companies in which their relatives are interested.f. Licensing of Co-operative Banks:(a) Every co-operative society requires a licence from the Reserve Bank under Section 22 of the Banking Regulation Act (as applicable to co-operative societies) to carry on banking business in India. However, primary credit societies are exempt from the requirement. The Reserve Bank may impose such conditions as it may deem fit while granting licence to a co-operative bank. Co-operative societies carrying on banking business at the commencernent of the Banking Laws (Application to Co-operative Societies) Act, 1965 were given exemption for a period of one year. Every co-operative society carrying on banking business at the commencement of the Act had to apply for a licence within three months from such commencement and every primary co-operative society, which becomes a primary co-opcrtive bank after such commencement has to apply for a licence before three months from the date of it becoming a primary co-operative bank. After applying for licence the co-operative bank can continue to carry on banking business unless its licence is rejected.(b) A co-operative bank requires the prior permission of the Reserve Bank for opening a new place of business or changing an existing place of business otherwise within the same city, town or village where it has an existing place of business. However, opening of temporary branches for a period not exceeding one month within the city, town or village where it has a place of business, on the occasion of an exhibition, conference, mela or any like occasion is permissible. The opening or changing of location of branches by a central co-operative hank within its area o[ operation is also exempt. The application of a co-operative bank for permission to open a branch. other than of a primary co-operative bank, has to be routed through the National Bank. However, an advance copy of the application has to be sent directly to Reserve Bank.

g. Liquid Assets: Co-operative banks have to maintain liquid assets as provided in Section 24(I) of the Banking Regulation Act. In computing the amount of liquid assets any balances maintained by a cooperative bank in current account with the Reserve Bank or by way of net balances in current accounts would be taken into account. In the case of state co-operative banks, which are scheduled banks, the balances required under Section 42 of the RBI Act will also be accounted. In the case of the Central co-operative banks, balances maintained with the state co-operative bank concerned and in the case of primary co-operative banks the balances maintained with Central co-operative banks or the state co-operative bank concerned shall be accounted. The co-operative banks have also to maintain as specified in Section 24(2A) liquid

ISFA JAIIB PAPER 3


assets being not less than 25 per cent or such other percentage not exceeding forty per cent as the Reserve Bank may stipulate by notification in the Gazette. The amount has to he maintained as at the close of business on any day. For this purpose, any balance maintained by a scheduled private co-operative banks and state co-operative bank with the Reserve Bank in excess of the balance required under Section 42 of the RBI Act- be accounted, Similarly, cash or balances maintained in India by a non-scheduled co-operative bank with itself or with the state co-operative hank or in current account with Reserve Rank or net balance in current accounts in excess of the requirement of Section 18 would be accounted. In the case of primary co-operative banks, such balances maintained with the Central co-operative bank of the district concerned will also be taken into account.The co-operative banks have to file a return with the Reserve Bank and every co-operative bank. other than a primary co-operative bank has also to furnish a copy thereof to the National Bank.

h. Accounts and Audit: Every co-operative bank has to prepare a balance sheet and profit and loss account of its business as on the last working day of the year. The, balance sheet and accounts have to be prepared in the forms set out in the third schedule to the Act or as near thereto as circumstances admit. Three copies of such balance sheet and accounts, along with statutory auditor’s report has to be submitted to the Reserve Bank within six months. A state co-operative bank and a central cooperative bank have to submit such return to the National Bank also.

i.Registration with DICGC: The Deposit Insurance and Credit Guarantee Corporation Act, 1961, which provides for insuring deposits of banks, is applicable to co-operative banks also. Accordingly, under Section l3Cof the Act, co-operative banks have to be registered with the corporation for this purpose. The registration of a co-operative bank may be cancelled if:(i) it is prohibited from accepting deposits;(ii) its license is cancelled;(iii) it has been ordered to be wound up;(iv) it has ceased to be a co-operative bank under the sub-Section (2) of Section 36A of the BR Act; (v) it has converted into a non-banking co-operative society;(vi) it has been amalgamated with any other co-operative society;(vii) it has transferred its deposit liabilities to any other institute or; (viii) it ceases to be an eligible co-operative bank.

j. Requisition by Reserve Bank for Winding Up: Section 130 of the DICGC Act mentions the circumstances in which Reserve Bank may require winding up of a co-operative bank. Such circumstances are that:(i) the co-operative bank has failed to comply with the requirements as to minimum paid-up capital and reserves specified in Section ii of the Banking Regulation Act; (ii) the co-operative bank has under Section 22 of the Act (dealing with license) become disentitled to carry on banking business in India;(iii) the co-operative bank has been prohibited from receiving fresh deposits by an order under Section 35(4) of the Act or under Section 42(3A)(b) of the Reserve Bank of India Act; (iv) the co-operative bank having failed to comply with any requirement of the Banking Regulation Act, 1949, other than the requirements laid down in Section 11 thereof, has continued such failure or having contravened any provisions of the Act, has continued such contravention beyond such period or periods as may be specified by the Reserve Bank, after notice in writing of such failure or contravention has been conveyed to the co-operative bank;(v) the co-operative bank is unable to pay its debts;(vi) in the opinion of the Reserve Bank, a compromise or arrangement sanctioned by a competent authority in respect of the co-operative bank cannot be worked satisfactorily with or without modification, or the continuance of the co-operative bank is prejudicial to the interests of its depositors.A co-operative bank, shall be deemed to be unable to pay its debts if, (i) on the basis of the returns, statements or information furnished to the Reserve Bank under or in pursuance of the

ISFA JAIIB PAPER 3


provisions of the Banking Regulation Act, the Reserve Bank is of opinion that the co-operative bank is unable to pay its debts, (ii) if the co-operative bank has refused to meet any lawful demand made at any of its offices or branches within two working days, if such demand is made at a place where there is an office, branch or agency of the Reserve Bank, or within five working days if such demand is made elsewhere and, in either case, the Reserve Bank certifies in writing that the co-operative bank is unable to pay its debts.

Donations by Urban Coopertive banks:Urban Co-operative Banks (UCBs) are allowed normal donations to be made during a year should be restricted to a ceiling of 1% of the published profits of the bank for the previous year and such normal donations, together with those that may be made to National Funds and other funds recognized /sponsored by the Central /State Government, during a year, should not exceed 2% of the published profits of the bank for the previous year.Donations to Trusts and Institutions where Directors, their relatives hold position or are interested:UCBs are, prohibited from giving donations to Trusts and Institutions, where directors, and/or their relatives hold position or are interested, even within the permissible ceiling of 1% of the published profits of the bank for the previous year.

****

ISFA JAIIB PAPER 3


CHAPTER 3Negotiable Instrument Act

Introduction:The Negotiable Instruments Act was enacted, in India, in 1881. This law facilitates the commercial world to carry on activities in trade & commerce, providing them an instrument of credit which could be deemed to be convertible into money and easily passable from one person to another. In the absence of such instruments, the commercial activities were likely to be adversely affected as it was not practicable for the traders to carry on with it the bulk of the currency in force. This law deals with Promissory Notes, Bills of Exchange and chqeues. These are the three most common types of negotiable instruments. The act applies to the whole of India and to all persons resident in India, whether foreigners or Indians.

Types of Negotiable Instrument:Sec.13 of N.I Act recognizes only three instruments as negotiable instruments a) Promissory notes b) Bills of exchange c) Cheques.Other than the above certain instruments have acquired the status of negotiability by virtue of customs of trade in India and they are Government Promissory notes, banker’s draft & pay orders, hundies, railway receipts, Dividend warrants.

Cheques:Section 6 of the Act defines “A cheque is a bill of exchange drawn on a specified banker, and not expressed to be payable otherwise than on demand” and it includes the electronic image of a truncated cheque and a cheque in the electronic form.A cheque is bill of exchange with two more qualifications, namely, (i) it is always drawn on a specified banker, and (ii) it is always payable on demand. Consequently, all cheques are bill of exchange, but all bills are not cheque. A cheque must satisfy all the requirements of a bill of exchange; that is, it must be signed by the drawer, and must contain an unconditional order on a specified banker to pay a certain sum of money to or to the order of a certain person or to the bearer of the cheque. However, it does not require acceptance as that of Bills of exchange.

Parties to a Cheque 1. Drawer: A person who draws the cheque, i.e., the depositor of money in the bank. 2. Drawee: It is the drawer’s banker on whom the cheque has been drawn. 3. Payee: A person who is entitled to receive the payment of the cheque. 4. The holder, endorser and endorsee (the same as in the case of a bill or note).

Banker’s Obligation to pay: U/s 31 of Negotiable Instruments Act, bank under statutory obligation to honour cheque issued by the customer where (a) there are sufficient funds (b) funds are meant for payment of the cheque and (c) there is proper demand to make the payment.Now let us take one by one :a. there are sufficient funds means, the banker should have sufficient funds of the drawer, i.e. there should be sufficient credit balance in the customers account.

b. funds are meant for payment of the cheque: The funds available in the customers account, should also be properly available to the payment of the cheque. The funds may not be availableto pay the cheque if:i. the banker has exercised his right of set off for amounts due from the customer; ii. there is an order passed by a Court, competent authority or other lawful authority restraining the bank from making payment.

c. there is proper demand to make the payment : This means that the cheque must be properly drawn and signed by the drawer.

Different Types of Cheques:

ISFA JAIIB PAPER 3


There may be different types of Cheques depending on how the drawer has issued the Cheque.a. Open / Bearer Cheque : When the word “Bearer” on the cheque is not crossed or cancelled, the cheque is called a bearer cheque. Open / Bearer Cheques are payable to person specified in the instrument or any person who posses it and present for payment over the counter.

b. Order Cheque : When the word “Bearer” written on cheque is crossed or cancelled it becomes an order cheque. An order Cheque is payable to a specified person named in the cheque or any other to whom it is endorsed.

c. Crossed Cheque: Cheques are usually crossed as a measure of safety. Cheque can be crossed in different ways:1. General crossing: According to Sec. 123 of NI Act, crossing is made by drawing two parallel transverse lines across the face of the cheque with or without the words like “& Company”, or “not negotiable” in between the transverse lines. The usage of crossing distinguishes the cheque from bill of exchange. The object of general crossing is to direct drawee banker to pay the amount of cheque only to a banker (collecting bank), to prevent the payment of the cheque being made to wrong person.

2. Special crossing: According to Sec. 124 of NI Act, where a cheque bears across its face an entry of the name of the banker either with or without the words like “not negotiable” in between the transverse lines, the cheque is considered to have crossed specially. The effect of this crossing is that, the proceeds of the cheque should be paid only to that banker. Because of this reason, the banks, put the crossing stamp on the cheque received by them for collection.

3. Account Payee crossing: It is a form of restrictive crossing, represented by words “Account Payee” entered on the face of the cheque. This type of crossing has not been provided for in the NI Act. Such a crossing acts as a warning to the collecting bankers that the proceeds are to be credited only to the account of the payee. If the collecting bankers allows the proceeds of the cheque so crossed to be credited to pay any other account, they may be held guilty of a negligence in the event of an action for wrongful payment. These words do not affect the paying banker who is under no duty to ascertain that the cheque in fact has been collected for the account of the person named as the payee.

4. Cheque marked “ not negotiable”: According to section 130, a person taking a cheque crossed generally or specially bearing in either case the words ’not negotiable’ shall not have or shall not be able to give a better title to the cheque than that title the person from who, he took had. In consequence if the title of the transferor is defective, the title of the transferee would be vitiated by the defect. Cheque crossed ‘not negotiable’ does not affect the transferability of the negotiable instrument in anyway. The cheque still continues to be transferable but only those rights are conveyed to the transferee which transferor has.For example, Mr. X, by means of fraud obtained from Mr. Y a cheque crossed ‘not negotiable’ and got it cashed at a bank other than the drawee bank. Mr.Y sued the bank for conversion. Is the bank liable? Section 130 of NI Act, broadly said that if the holder has a good title, he can still transfer it with a good title, but if the transferor has a defective title, the transferee is affected by such defects, and he cannot claim the fight of a holder in due course by proving that he purchased the instrument in good faith and for value. Here, in this case, as Mr. X, has obtained the cheque by fraud, he had not title to it and could not give to the bank any title to the cheque or the money, and bank would be liable for the amount of the cheque conversion. A similar decision was taken in Great Western Railway co. Vs. London and Country Banking Co(1901).

d. Post Dated Cheque: Cheque bearing the date which is yet to come in future is called Post Dated Cheque. Cheque is honored only on or after the date (upto three months) written on cheque.

ISFA JAIIB PAPER 3


Note: The RBI vide Notification No. RBI/2011-12/251 DBOD.AML BC.No. 47/14.01.001/2011-12,dated 4.11.2011, directed that the validity of Cheques/Pay order/Banker’s cheques will be 3 months w.e.f 1.4.2012.

e. Stale Cheque: A Cheque turns stale after three months of the date written on cheque. A Stale Cheque can not be honored by the bank.

f. Mutilated Cheque : When cheque gets torn into two or more pieces and presented in bank for payment. Such cheques are called mutilated cheque. Bank requires confirmation by the drawer before honoring such cheques.

Negotiation:When a Promissory note, bill of exchange or cheque is transferred to any person, so as to constitute the person the holder thereof, the instrument is said to be negotiated.Negotiation thus requires two conditions to be fulfilled, namely:1. There must be a transfer of the instrument to another person; and 2. The transfer must be made in such a manner as to constitute the transferee the holder of the instrument. Handing over a negotiable instrument to a servant for safe custody is not negotiation; there must be a transfer with an intention to pass title.Negotiation may be effected in the following two ways: 1. Negotiation by delivery (Sec. 47): Where a cheque is payable to a bearer, it may be negotiated by delivery thereof. Example: A, the holder of a negotiable instrument payable to bearer, delivers it to B’s agent to keep it for B. The instrument has been negotiated. 2. Negotiation by endorsement and delivery (Sec. 48): A cheque payable to order can be negotiated only be endorsement and delivery. Unless the holder signs his endorsement on the instrument and delivers it, the transferee does not become a holder. If there are more payees than one, all must endorse it.

ENDORSEMENT:The word ‘endorsement’ in its literal sense means, writing on the back of an instrument. But under the Negotiable Instruments Act it means, the writing of one’s name on the back of the instrument or any paper attached to it with the intention of transferring the rights therein. Thus, endorsement is signing a negotiable instrument for the purpose of negotiation. The person who effects an endorsement is called an ‘endorser’, and the person to whom negotiable instrument is transferred by endorsement is called the ‘endorsee’.Effect of Endorsements: According to Section 50 of N.I. Act, the endorsement of a negotiable instrument followed by delivery transfers the endorsed property therein with the right of further negotiation. Thus the endorsee acquires property or interest in the instrument as its holder. He can also negotiate it further. (His right can, of course, be restricted by the endorser in case of a restrictive endorsement.)Section 50 also permits that an instrument may also be endorsed so as to constitute the endorsee an agent of the endorser.a. to endorse the instrument further, or b. to receive its amount for the endorser or for some other specified person.

Essentials of a valid Endorsement:The following are the essentials of valid endorsement :1. It must be on the instrument. The endorsement may be on the back or face of the instrument and if no space is left on the instrument, it may be made on a separate paper attached to it called allonage. It should usually be in ink. That means there is no restriction on number of times it can be endorsed.2. It must be made by the maker or holder of the instrument. A stranger cannot endorse it.3. It must be signed by the endorser. Thumb-impression should be attested. Signature may be made on any part of the instrument. . If the endorser signs in block letters, it will not be considered a regular endorsement.

ISFA JAIIB PAPER 3


4. Spelling: The endorser should spell his name in the same way as his name appears on the cheque or bill as its payee or endorsee. If his name is misspelt or his designation has been given incorrectly, he should sign the instrument in the same manner as given in the instrument. Thereafter, he may also put his proper signature in the same handwriting, if he likes to do so. For example, if the payees name is wrongly spelt as Vijay Chaudhary instead of Vijay Chavdhary regular endorsement will be as follows: Vijay Chavdhary Merely writing the correct name will not be regular endorsement.5. No addition or omission of initial of the name. An initial name should neither be an added nor omitted from the name of the payee or endorsee as given in the cheque. For example, a cheque is payable to H.C. Kapoor should not be endorsed as H. Kapoor or vice versa. Similarly, a cheque payable to Harish Nath should not be endorsed as H. Nath. 6. It must be an endorsement of the entire bill. A partial endorsement i.e. which purports to transfer to the endorsee a part only of the amount payable does not operate as a valid endorsement.Types of Endorsement:(a) Blank or general endorsement (Sections 16 and 54). It is an endorsement when the endorser merely signs on the instrument without mentioning the name of the person in whose favour the endorsement is made. Endorsement in blank specifies no endorsee. It simply consists of the signature of the endorser on the endorsement. A negotiable instrument even though payable to order becomes a bearer instrument if endorsed in blank. Then it is transferable by mere delivery. Example: A cheque is payable to X. X endorses the bill by simply affixing his signature. This is an endorsement in blank by X. In this case the cheque becomes payable to bearer.(b) Special or full endorsement (Section 16) When the endorsement contains not only the signature of the endorser but also the name of the person in whose favour the endorsement is made, then it is an endorsement in full. Thus, when endorsement is made by writing the words “Pay to A or A’s order,” followed by the signature of the endorser, it is an endorsement in full. In such an endorsement, it is only the endorsee who can transfer the instrument.(c) Restrictive endorsement (Section 50) The endorsement of an instrument may contain terms making it restrictive. Restrictive endorsement is one which either by express words restricts or prohibits the further negotiation of a bill or which expresses that it is not a complete and unconditional transfer of the instrument but is a mere authority to the endorsee to deal with bill as directed by such endorsement. “Pay C,” “Pay C for my use,” “Pay C for the account of B” are instances of restrictive endorsement. The endorsee under a restrictive endorsement acquires all the rights of the endoser except the right of negotiation.

‘Sans recourse’ endorsement: An endorser may be express word exclude his own liability thereon to the endorser or any subsequent holder in case of dishonour of the instrument. Such an endorsement is called an endorsement sans recourse (without recourse). Thus ‘Pay to A or order sans recourse, ‘pay to A or order without recourse to me,’ are instances of this type of endorsement. Here if the instrument is dishonoured, the subsequent holder or the endorsee cannot look to the endorser for payment of the same.An agent signing a negotiable instrument may exclude his personal liability by using words to indicate that he is signing as agent only. The same rule applies to directors of a company signing instruments on behalf of a company. The intention to exclude personal liability must be clear.Example: A is the holder of a negotiable instrument. Excluding personal liability by an endorsement without recourse, he transfers the instrument to B, and B endorses it to C, who endorses it to D. Here, if cheque dishonoured then, D can recover the amount of the cheque from B and C and not from A.

Duties & responsibilities of paying bankers & collecting bankers:As seen above, the banker is required to honor the cheque drawn on it. However, there are certain instances which gives rise to obtain protection by bank under the act.

ISFA JAIIB PAPER 3


PAYING BANKER AND PROTECTION :Paying bank is getting certain protection under N.I. Act in section 85a.Protection on uncrossed cheques:- If the banker pays an uncrossed cheque in due course, he is authorized to debit the account of his customer with the amount so paid irrespective of the genuineness of the endorsement on the cheque.

b.Protection in respect of crossed cheques:- When a banker pays a cheque drawn by his customer, he can debit the drawer’s account even though the amount of the cheque does not reach the owner.

c. Protection in respect of truncation:- It is the duty of the banker who receives the payment on an electronic image of a truncated bill held with him to verify the genuineness of the cheque to be truncated and any fraud, forgery or tampering on the face of the instrument that can be verified with due diligence and ordinary care.

Paying bank is getting certain protection under N.I. Act in section 10 as payment in due course :Prerequisites for claiming protection:- The payment must be made in due course: i. According to the apparent tenor of the instrument ii. In good faith iii. To any person in possession thereof iv. In circumstances, which do not excite any doubt that he is not entitled to receive payment of the cheque.

Paying bank is getting protection under N.I. Act in section 89: a. Where cheque has been materially altered but does not appear to have been so altered, or b. where a cheque is presented for payment which does not at the time of presentation appear to be crossed or c. to have had a crossing which has been obliterated, Then, payment thereof by a person or banker is liable to pay, and paying such sum according to the apparent tenor thereof, at the time of payment and otherwise in due course, shall discharge such person or banker from all liability thereon; and such payment shall not be questioned by reason of the instrument having been altered or the cheque crossed.

Case laws on liability of the paying bankersWhen customer's signature is forged there is no mandate to the bank to pay. As such the bank is not entitled to debit customers account on such forged note cheque. [Canara Bank vs. Canara Sales Corporation & others 1987, SC]In a joint account if one of the signatures is forged then there is no mandate and banker cannot make payment. [Bihta Coop. Development and Cane Marketing Union Ltd. vs. Bank of Bihar, SC]Payment should be made in due course to seek protection under Sec. 85 [Bank of Bihar vs. Mahabir Lal 1964, SC]Where there are no circumstances which afforded any reasonable ground for believing that the payee was not entitled to receive payment of the cheques, the bank is deemed to have made payment in due course. [Bhutoria Trading Co. vs. Allahabad Bank 1977, Calcutta HC]Payment made to a liquidator against the cheques presented across the counter was not payment in due course. [Madras Provincial Coop. Bank Ltd. vs. Official Liquidator, South Indian Match factory Ltd. 1945, Madras HC]Bank is protected if payment was made in good faith without negligence of a cheque on which alteration was not apparent. [Bank of Maharashtra vs. M/s Automotive Engineering Co. 1993, SC]The bank is liable where payment was made on cheques on which alterations were authenticated by not all but some of the drawers. [Brahma Shumshere Jung Bahadur vs. Chartered Bank of India, Australia & China 1956 Calcutta HC]

COLLECTING BANKER AND PROTECTION :

ISFA JAIIB PAPER 3


Collection of cheques on behalf of a customer is an indispensable service rendered by a banker to his customer. When a customer of a banker receives a cheque drawn on any other banker send it to his banker for the purpose of collection from the drawee bank. In the latter case the banker, deputed to collect the amount of the cheque from another banker, is called the collecting banker.While collecting his customers cheques, a banker acts either ;(i) as a holder for value, or (ii) as an agent of the customer.

A collecting banker who collects a cheque for a person other than the true owner is said to be guilty of conversion. Under the Common Law principle of conversion, a collecting banker would be liable to the true owner of the cheque to pay damages or to refund the money had and received, in case of wrongful collection.

Protection to collecting Bankers:-Section 131 Non-liability of banker receiving payment of chequeA banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment.

Explanation [1] - A banker receives payment of a crossed cheque for a customer within the meaning of this section notwithstanding that he credits his customer's account with the amount of the cheque before receiving payment thereof [Added by Act 18 of 1922]

[Explanation II.- It shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care.](Inserted by Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002)

131A Application of Chapter to drafts –The provisions of this Chapter shall apply to any draft, as defined in section 85A, as if the draft were a cheque. [Added by Act 33 of 1947]

In other words,Under Section 131 of Negotiable instrument act a collecting bank is protected if following conditions are met.The collecting banker should have acted in good faithHe should have acted without negligenceHe should receive payment for customerThe check should have been crossed generally or specially to the bank.

The Collecting Banker is often sued for conversion of money had and received on the ground that the banker collected the cheque or draft in bad faith and exhibited gross negligence, which disentitles him from seeking protection. Cases where bad faith and negligence are attributed to a banker can be in the following instances:(i) No proper enquires were made at the time of opening the account;(ii) The nature of transactions are such that it would arouse suspicion to a man of ordinary prudence;(iii) The apparent irregularities on the apparent tenor of the cheque or the indorsements were not noticed, which could have been noticed if reasonable care was exercised;(iv) The banker collected the instrument without due enquiry to the account of a person who could ex-facie be not entitled to receive the payment under the cheque.

Bouncing of Cheque: A bank can refuse the payments on a Cheque:1. Cheque undated. 2. Cheque becomes stale 3. Instrument inchoate

ISFA JAIIB PAPER 3


4. Cheque may be post dated 5. Inadequate funds position of the customer6. Customer might have credit in one branch and cheque drawn on another branch.7. Bank might have received report of insolvency/lunacy of customer.8. Countermanding / stop payment instruction of customer.9. Bank receiving attachment order by a court 10. Bank receiving notice of customer’s death11. Closure of account by customer.12. Material alterations like irregular signature, difference of amount in words and figure etc.

Immediately upon dishonour the drawee bank issues a ‘Cheque Return Memo’ to the banker of the payee citing the reason for non-payment. In turn the payee’s banker shall handover the dishonoured cheque and the memo to the payee.

Negotiable Instruments Act, 1881 on Dishonour of Cheques:The cheques if remain unpaid and are returned by the bank on which they are drawn, by the reason of inadequate funds or insufficient fund, for such cases punishment is provided by Section 138 of Negotiable Instruments Act, 1881. Offence of dishonour of cheque as mentioned u/s. 138 of the Act is considered as a criminal offence.Section 138 of N.I.Act, states that when a person issues a cheque to be encashed and the cheque so issued is issued towards payment of a ‘debt’ or liability and it is returned unpaid for want of funds, the person issuing such a cheque shall be deemed to have committed an offence. Section 138 presupposes three conditions for prosecution of an offence they are:a. Cheque shall be presented for payment within three months from the date of issue or before expiry of its validity.b. The holder shall issue notice demanding payment in writing to the drawer with in 30 days of the receipt of information of the bounced cheque, andc. The drawer inspite of the demand notice fails to make payment within 15 days of the receipt of the notice. If the above three conditions are satisfied the holder in due course gets the cause of action to launch prosecution against the drawer of the bounced cheque.

Acceptance of cheques bearing a date as per National Calendar (Saka Samvat) for payment:Government of India has accepted Saka Samvat as National Calendar with effect from March 22, 1957 and all Government statutory orders, notifications, Acts of Parliament, etc. bear both the dates i.e., Saka Samvat as well as Gregorian Calendar. Therefore, a cheque written in Hindi and bearing a date in Hindi is a valid instrument. Banks therefore should accept cheques bearing a date as per National Calendar (Saka Samvat) for payment, if otherwise found in order.

****

ISFA JAIIB PAPER 3


CHAPTER 4LOAN PRODUCTS

History of loan & borrowings:-Being India as agro economy, prior to 1960, the agriculturist were dependable for loans and borrowing on moneylenders, shop keepers , jamindars or their relatives and friends. Further, the option for industries, traders were also limited at that time. Private banks present were also acted like moneylenders. However, in ancient India, these money lenders have started banking on ‘benches’ where they lend money and exchange valuables. After the nationalization and reforms of banking in 1960, bank credit have gone up significantly year after year. Now, the situation has changed and banking credit is the first option. The banks established after reforms with object of lending function. Further, you are aware that banking means 'Accepting deposits for the purpose of lending and investment'. This definition of banking stresses the importance of lending function. Hence, the basic objective of bank is pre-supposed to be lending and for that purpose, it is expected to mobiles resources by accepting deposits from the public. The process of creation of credit through deposits is called multiple credit creation by banking system. We can see this from the following example: If Mr. Ram, a depositor deposits Rs. 5,000/- in Bank of India and the cash reserve ratio is 10% ( CRR is ratio of cash always to be kept in bank), then bank can grant a loan of Rs.4,500 ( Rs.5000- 10% ) to a person . If that person pays the amount of Rs.4,500/- to the suppliers of material by a cheque and if the supplier of the material deposit that cheque in Bank of Baroda, the deposit will be primary deposit for Bank of Baroda. Now, Bank of Baroda can grant loan of Rs.4050/- after CRR of 10% on Rs.4,500/- to another person. If this person pays this amount to his creditor and if they deposit in Syndicate Bank, this amount of Rs.4050/- will be primary deposit for Syndicate bank. Again, the Syndicate Bank will maintain CRR of 10% on Rs 4050/-and will lend it to its borrower. Thus total credit creation by banking system comes to Rs. 4,500+ Rs.4050+Rs.3645+…..do on , with initial amount of just Rs.5,000/-. This is advantage of banking system as regards the lending.

Need for loans and types of loans i.e. Fund based & Non-fund based.:-Every individual want to upgrade lifestyle and the businessman want to increase income or develop business. And to do so they require capital. Since, the own capital is very limited they have explore the other sources of finance for the desire purpose. If that individual or businessman thinks that they will earn own capital and then will go for the development then they have to wait for long time. Instead they can borrow money and can use the money for desire purpose.The businessman is always in need of loan to start new or develop his business, upgrade his activity by purchasing goods / machinery etc. An Individual also needs loan for purchase of two/four wheeler, tv, fridge, purchase/construction of house etc.

Types of loans /credit facilities : Banks lend money in various forms and practically for every activity. Loans are given against or in exchange of the ownership (physical or constructive) of various types of tangible items. Some of the securities against which the banks lend are:

Commodities [In the form of finished industrial produce or agricultural produce]Debts [Books debts]Financial instruments [Shares, bonds, debentures, commercial papers etc.] Real estate [Realty property] Automobiles [Cars and the like]Consumer durable goods; Documents of title [Bill of lading, Airway bill etc.]

Banks business finance facilities include the following:Fund based credit facilities;Non-fund based credit facilities;Equipment leasing, hire purchase finance and factoring services;

ISFA JAIIB PAPER 3


Advances against shares, debentures, bonds, units of mutual funds and similar instruments; Financing promoters’ contributions;Bridge loans against equity flows / issues;Financing of Initial Public Offerings (IPOs);Forward rate agreements (FRAs) and Interest Rate Swaps (IRSs). Forward contracts in foreign exchange and other derivatives produces like currency swaps, options etc at their replacement cost value .Direct investments in securities including share and debentures.Export finance both for pre-shipment and post–shipment.

There are two types of loan or credit facilities extended by banks -1. Fund Base2. Non- Fund Base

The fund base loan means where funds made available to borrower and borrower avail the fund at his requirement. The non-fund base loan means where funds deployment is not require at least at the initial stage. In other words, the time period has been granted to make the payment at the guarantee of bankers.

- The fund base credit facilities are of following types -1) Working capital finance includes overdrafts, cash credit, bill discounting etc.2) Demand loan3) Term loan

Types of working capital finance:-a) overdraft ( OD): Overdraft can be defined as debit allowed by the bank in current accountholders account and to draw more than the credit balance in the account.The Overdraft are generally granted against the security of government securities, shares & debentures, National Savings Certificates, LIC policies and bank's own deposits etc. The interest is charged on debit balances at the rate applicable at the time of sanction of OD.

b) Cash-credit ( CC ):A cash-credit is an arrangement to extend short term working capital facility wherein customers allowed to borrow money upto a certain limit. Under the system, bank sanctions a limit called the cash-credit limit to each borrower in which he is allowed to borrow against the security of stipulated tangible assets i.e. stocks, book debts etc. supported by collateral security. The customer need not draw the whole of the credit limit sanctioned at one go, but can withdraw from his cash-credit account as and when he needs the funds and deposit the surplus cash/funds proceeds of sale etc., into the account. For e.g if XYZ Ltd., has sanctioned limit of say Rs.10.00 lakhs, then he can draw the amount according to his business needs.

c) Demand loan :A demand loan can be sanctioned for a period of less than 3 years repayable on demand. The loan amount after the disbursement can be withdrawn at one go. The loan may be allowed to be repaid in lump sum or in suitable installments, as per terms of sanction. In demand loan no further debits is allowed except interest, insurance Premium or any other incidental charges by bank. Further, the borrower can deposit or credit the receivable, as there no restriction on it and it will in turn reduces the liability of the borrower.Generally, demand loan is repayable by demand or in lumsum or monthly /quarterly/half-yearly installments within a period of 3 years as per sanction term of the bank. The interest is calculated on debit products on daily product basis and applied on monthly basis.

d) Bills Purchase/Discounting :There are two schemes in this type financing. One is Acceptance system and other is Bill discounting system.

ISFA JAIIB PAPER 3


Bill limit is generally provided to the seller, which represent advances against bills of exchange/ sales bill drawn on customer for sale of goods. Bills are either purchased or discounted by banks. In this case of drawer ( seller) bills, banker primarily sees the creditworthiness of the drawer of the bills. In case of drawee bills, the bill limit is provided to the purchase of goods to acquire raw materials. Here drawee’s ( purchaser) bank provides finance taking into account the drawee credit worthiness.

a) Acceptance System :- To obtain finance under this type of arrangement a borrower draws bill of exchange on bank. The bank accepts the bill thereby promising to payout the amount of the bill at some specified future date. The bill itself is then worth something as the holder is to receive a sum of money at a future date. This bill can be sold either at once or when the funds are need. It is sold in the money market to, say, discount house.

b) Bills discounting system:- Under this system, the drawer sends a bill to the buyer or is bank. The latter in turndiscounts the bills and sends the proceeds to seller. In the books of the buyer’s bank the bill will remain as ‘bill discounted’. The bank earmarks suitably the drawing power available against stocks after providing the prescribed margin.

Bills may be either clean or documentary. Bills accompanied by title to goods i.e. R/R, MTR, etc. are called documentary bills. Bills without such documents are known as clean bills. Documents under bills are either deliverable against acceptance or against payment.

Long-term loans: This type of loan is given for a fixed period (exceeding one year and not more than 7 years) to the borrowers for acquiring long-term assets i.e. assets that will benefit the borrower over a long period. The repayment is by way of installments according to agreed terms and conditions. However in the case of infrastructure projects, the repayment period may be for more than 7 years. A term loan is extended to finance the following purposes:

Specific asset; Modernization programme;Expansion programme; Diversification programme;New Project; Rehabilitation project.

Non Fund Base Working Capital Loans :-The fund base credit facilites are following types -i) Bank Guaranteesii) Letter of Credit

i) Bank Guarantees :-Bank guarantees are issued as a guarantee-bond whereby bank undertake to make the payment of a specified sum to the beneficiary in the event of the applicant’s failure to honour his commitment. The guarantees issued by the bank can be broadly classified into three categories -

a) Financial guaranteeb) Performance guaranteec) Deferred Payment guarantee, and,

d) Bid Bond guaranteeA Contract of Guarantee is a Tripartite Agreement which contemplates the Principal Debtor, the Creditor or Beneficiary and the Surety.

A Bank Guarantee is a contract between the issuing Bank and the beneficiary in whose favour the Guarantee has been furnished. Though the Bank Guarantee may have been issued by the Banker at the instance of his client, as far as the Bank Guarantee is concerned, it is a contract between the Banker and the Beneficiary in whose favour the Bank Guarantee has been issued. The party at whose instance the Guarantee has been furnished is, in a way, a stranger to the said contract of Bank Guarantee. The person in whose favour the Bank Guarantee has been issued has a right to ask the Bank to fulfil its obligation in terms of the Bank Guarantee.

ISFA JAIIB PAPER 3


If the terms of the Bank Guarantee entitle a party to ask for the payment of money from the Bank then this right cannot be interfered with merely for the reason that there exists a dispute between the party and the client at whose instance the Bank Guarantee has been issued. A Bank Guarantee is a commercial document and may be invoked in a commercial manner.

a) Financial Guarantees :-In case of financial guarantees, issuing in favour of tax dept/ customs/ excise or court authorities, the strength of customer’s financial worth, his credit worthiness, his capacity to take up financial risk and liquidity are taken into consideration. Therefore whenever bank issues such guarantees it comes under financial guarantees.

b) Performance guarantees:-Performance guarantees are issued on behalf of customers guaranteeing their performance as per the contracts entered into , performance of machineries supplied, due discharge of other contractual obligations undertaken. In such guarantees, bank does not undertake to perform the obligation undertaken by the customer, but in the event of customer’s failure or default which may be due to technical nature bank promises that on such event of default and on being intimated to bank, they will make payment to the beneficiary under the guarantee. c) Deferred payment guarantees:-Deferred payment guarantees, is a financial guarantee, issued by a bank at the request of borrower/customer, who is raising long term resources for acquiring fixed assets/capital goods, for repayment of principal and interest to the supplier of capital goods. Whenever the borrower does not get term loan from bank for acquiring fixed assets / capital goods due to various constraints the deferred payment guarantee comes into picture. Under such circumstances, the borrower / intending purchaser request the supplier to extend him long term credit. The supplier agree to extend such credit which is repayable over a period of 3 to 7 years in installment with interest. These type of guarantees are provided by banker where the supplier is unsatisfied about the capacity of the purchaser to pay the amount on due dates, he insist the purchaser for bank guarantee for the repayments. On such request of borrower, the bank will extend the guarantee covering an extended repayment period or ‘Deferred Payment’ by the borrower/purchaser to the supplier/beneficiary.

d) Bid Bond Guarantees Whenever a bank customer participates in an international tender /bid, he is required to furnish a bid bond guarantee. Such tenders are of large magnitude and the completion of projects or contracts requires considerable time. While issuing bid bond guarantee the bank have to satisfy themselves regarding the viability of the project/contract as well as the technical and financial capability of the party to completion of such projects as once bid is accepted, the party may requires various facilities such as performance guarantee for earnest money deposit, working capital for completion of the project/contract.

Precautions to be taken while issuing the bank guarantee document from the point of view of law of contract:-In a bank guarantee , the amount has to be specifically stated both in figures and words. The liability of a bank under a bank guarantee depends on two important criteria, viz, the amount guaranteed and the period of the guarantee. These two factors have to be specifically stated in a bank guarantee to avoid future disputes.1.If the amount and period are not specifically mentioned in a bank guarantee then , the liability of a bank could be unlimited either in the amount guaranteed or the period during guarantee. 2.Banks always specify the period for which their guarantee subsists and an additional period during which a claim has to be made upon the bank to make payment. A) The period during which a bank guarantee subsists is called “validity period”. B) On the expiry of validity period another period called “claim period” during which a claim has to be made on a bank to make

ISFA JAIIB PAPER 3


payment. In a bank guarantee, it is necessary to provide for a period slightly longer than the validity period for the beneficiary to make a claim.3.On invocation , a bank is liable to pay the whole amount of bank guarantee unless stated earlier a case of fraud has been brought to its notice. If any default has been committed by the debtor(bank’s customer), it should be within the validity period . The period of a bank guarantee has to be specifically stated to the exact date, For example, “ this guarantee is valid upto 31 December,2005”.

4.Once the period of bank guarantee is specifically mentioned therein, then the beneficiary /creditor/owner can make a claim only if the default has occurred within the date of the bank guarantee , and for any default beyond the date of a bank guarantee , the bank cannot be held liable. Once a default is made then the beneficiary/creditor/owner has to make a claim on the bank to make good the loss within the claim period.5.The main contract and bank guarantee are two independent contracts. Both surety (the bank) and the principal debtor(the contractor) should sign the bank guarantee. In a contract of bank guarantee , at least one witness should sign it. Under the provisions of Transfer of Property Act, attestation of witness is mandatory.

6.In M.S.E.B, Bombay Vs Official Liquidator, HC of Kerala & Another AIR 1982 SC-1497, The SC has held that a discharge which a principal debtor may secure by operation of law in bankruptcy or in liquidation proceedings of a company, would not absolve the bank from its liability under the bank guarantee.

7.A bank guarantee must be irrevocable, unconditional and be payable on demand in writing. The bank which gives a guarantee, must pay the guaranteed amount without any contestation, demur or protest and/or without reference to the buyer/contractor/principal debtor. In the absence of any special equities and in the absence of any clear fraud, the bank must pay the guaranteed amount on demand.

8.A bank which gave a guarantee ,must pay the guaranteed amount without questioning the legal relationship subsisting between a contractor and a beneficiary. A bank guarantee is an independent contract between a contractor and a beneficiary and it is not affected by or suspended by operation of any statute or notification.

9.The liability of a bank in a bank guarantee is not dependent on the underlying contract between a contractor (bank’s customer or principal debtor) and a beneficiary (owner/creditor) but is an independent contract which the courts would enforce/honour except in case of clear cut fraud.10.In case of bank guarantees issued on behalf of companies that are under liquidation, the bank ,on invocation of the guarantee by the beneficiary, must pay the beneficiary.

11.Amendment to Sec. 28 of the Indian Contract Act and its impact on Bank Guarantees:-a) Prior to this amendment of Sec. 28 of the Indian Contract Act, 1872 most bank guarantees had standard clause at the end of their guarantee agreements. As per this clause, the beneficiary is required to enforce claims within a period of three to six months , failing which , the banks liability was extinguished and the rights of the beneficiary as well. Because of the amendment to Sec. 28 of the I.C.Act, on 01.01.1997, the standard limitation clauses in the bank guarantee agreements by which the banks extinguished their liability has been declared as illegal.However, in 2012 again a new exception No.3 has been added in Sec 28 of Indian contract Act, which is specifically for Banking companies. This exception says that the bank or financial institution can stipulate a term in a guarantee for expiry of a specified period which is not less than one year from the date of occurring or non occurring of specified event for extinguishment or discharge of such party from said liability. Means, bank can now specifiy the period after the expiry of term of bank gurantee.

ISFA JAIIB PAPER 3


b) As such, it is prudent to insist that the bank guarantee has to be returned after the claim period duly cancelled by the beneficiary or a certificate has to be obtained from the beneficiary that there are no claims under the guarantee, till such time the cash margin and the security of the debtor (bank’s customer) has to be retained.

12. Counter Guarantee and Other Security:-Though a bank guarantee is contingent liability, it is always prudent for a banker to secure this liability in case it is enforced. This can be done by obtaining a counter guarantee –cum-Indemnity executed by the customer in favour of the bank. Such counter guarantee –cum-Indemnity should be carefully drafted to ensure that in case the bank were to make payment on behalf of the customer , then customer in turn should not only pay back the amounts paid by the bank to the creditor but also any expenses connected therewith. The counter guarantee should also include a clause that it would remain in force till the guarantee given by the bank subsists i.e. till the bank is duly discharged by the beneficiary or a certificate to that effect is issued by the beneficiary. Though a counter guarantee –cum-Indemnity is taken as a security for every guarantee issued by the bank, its value would depend on the financial standing of the person giving the counter guarantee. As it is preferable that keeping in mind the financial worth of the counter guarantor(bank’s customer) necessary security in the form of fixed deposits, mortgage,etc, be obtained or the existing charge of the debtor can also be extended to cover the guarantee.

RBI Guidelines for Issuance of Bank Guarantees The following are the guidelines issued by RBI for issuance of Bank Guarantees by banks on behalf of their customers.1)Commercial banks should limit to financial guarantees and exercise caution with regard to issuance of performance guarantees.2)Guarantees covering custom/import duty on selective credit control items should be opened only with minimum cash margin of 50%.3).Banks should not issue guarantees covering inter-company deposits/loans.

4).Banks should not issue guarantees on behalf of Non-Banking Finance Companies guaranteeing repayment of deposits placed to them by investors.5).Banks should issue guarantees for shorter period and there should be no guarantees for a period exceeding 10 years.

Expiry of bank guarantee is governed by Law of Limitation ranging from 3 years to 30 years if the beneficiary is Government/Govt body/Govt Deptt.

Revolving Bank Guarantee:-Revolving bank guarantee connotes that a bank fixes upto a limit for issuing guarantees on behalf of its client and issues guarantees within the limit. When some of the guarantees are not invoked within time or cancelled, fresh guarantees are issued upto the limit sanctioned. For example, a Bank at the request of a customer can fix a limit of say Rs.1 Lakh. It will issue one or more guarantees upto that limit. When the work or performance or earnest money for the guarantee is completed, there may not be occasion to invoke the guarantees issued for those purposes. The client/customer can request for fresh guarantees to be issued in respect of those guarantees which were not to be invoked. It is just like a cash credit limit so that the limit is always maintained notwithstanding the guarantees issued within that limit are cancelled or become uninvokable. There are more advantages for a customer who has to seek more than one guarantee to be issued to his principals/creditors. He need not separately apply every time for issue of number of guarantees within that limit As it is there are no disadvangages in getting such a revolving guarantee limit. The facility is usually granted for contractors who undertake works contract with Government departments.

Types of borrowersi) A borrower may be an individual, a group of individuals, a partnership firm, a Hindu individed family or a limited company. It is necessary to ascertain the legal status of a borrower before

ISFA JAIIB PAPER 3


drafting a document relating to any borrowing. In case of limited companies, it is necessary to obtain a certified copy of the resolution of the Board of Directors authorising such borrowing.ii) In case of partnership firms, the bank should obtain a copy of the partnership agreement and signatures of all the partners on the documents. In case of Hindu undivided family, a joint Hindu family letter duly signed by the Karta and all other adult members of the family would suffice. In case of a group of individuals, the bank has to obtain signatures of all the members of the group.iii) A secured loan, as defined under Section 5 (n) (i) of the Banking Regulation Act, 1949 means a loan or advance made on security of assets, the market value of which is not at any time less than the amount of such loan or advance and; unsecured loan means a loan or advance not so secured.

Some more basic concept about securities that has been offered by borrower:-→ What are the different types of security which are generally stipulated by the lenders? Who is required to provide such security and in whose favour such security is to be created?

Generally stipulated security --Charge on moveable fixed assets / properties - either all or assets situate in particular locationCharge on current assetsCharge Specific equipment or machineryMortgage on immoveable fixed assets / properties - either all or assets situate in particular locationGuaranteeLetter of comfort by a third partyPledge / hypothecation of shares, units of mutual funds, insurance policiesMortgage / charge / assignment by way of security over / of rights under project documentsCharge on receivables, bank accountsAssignment by way of security of trade mark / brand names / goodwillMortgage of a shipLien / pledge on/of Term Deposits

Such security may be required to be provided by either the borrower or third party or both.The lenders may require the security to be created either in their own favour or the lead bank / institution or a facility agent or a security trustee.

→ What are the different modes / forms of creation of security?Hypothecation :Moveable assets can be either hypothecated by way of charge or mortgaged. Generally, the mode / form of creation of security on moveable fixed assets, specific machinery, current assets, receivables, is by way of hypothecation. There is no specific definition of the term “hypothecation”. Section 2(n) of the Securitisation & Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 however defines “hypothecation”.The charge could be either in the nature of a fixed charge or a floating charge. The aforesaid assets are hypothecated by way of charge under “Deed of Hypothecation”.

A “fixed charge” is a charge where specific identified moveables are secured in favour of the lender (e.g. specific item of machinery / equipment, vehicle, etc.). In the case of a fixed charge, the property charged must be described, and the information of the existence of the charge thereon must be specified on the property itself / place where the property is installed / stored / lying, e.g. by affixing a board / notice thereon. The rights available to the lenders / hypothecatee in respect of the charge (e.g. the right to appoint a receiver, enter and inspect, sell the properties, restrain the borrower from dealing with the property, etc.) must be specified in the security documents.

ISFA JAIIB PAPER 3


A “floating charge” is an equitable charge on the assets for the time being of a going concern. It attaches to the subject charged in the varying condition in which it happens to be from time to time. An essential term of such charge is that the security provider may continue to use its assets in the ordinary way until the charge is crystallized, when it fastens on the underlying assets. The charge, so to say, is kept latent and dormant, till it crystallizes by the happening of some event which fixes the charge, e.g. liquidation / bankruptcy / insolvency of the security provider or the appointment of a receiver for taking possession of the charged property, or default by the security provider / borrower, which would entitle its holder to take action for the enforcement of the security

There is no delivery of the assets / delivery of possession of the assets / properties by the security provider to the hypothecatee (i.e. person in whose favour the security is created).

Pledge :Moveable properties / assets can also be pledged. The ingredients of a pledge are the delivery of the properties / assets being pledged to the pledgee (i.e. person in whose favour the security is created), with the intention of creating security thereon, coupled with the authority to deal with or dispose of the said property.

A pledge can be created in respect of any tangible moveable property – goods, stocks, jewelry, etc. In cases where physical delivery of the pledged property is not possible, constructive delivery can constitute a pledge, e.g. when documents of title to the goods, such as warehouse receipts, are duly discharged and handed over to the pledgee, or when the goods are stored in a godown, and the keys to the same are handed over to the pledgee and separate independent access is made available to the pledgee, so as to ensure that the pledge has control of the pledged assets / securities.

In case of shares/securities held in physical form, the deposit of the relevant certificate along with duly signed blank transfer forms (with endorsement of the concerned Registrar of Companies, where applicable) will be required to be made to the pledgee.

In the case of shares held in dematerialised form, the procedure stipulated under the Depositories Act, 1996 must be followed :Filing of the relevant form by the Pledgor with his Depository Participant (DP) containing details of the DP account, the shares pledged, the details of the pledgee’s DP account, etc. (the duplicate/acknowledgement copy of this form is to be deposited with the pledgee).The details are then forwarded by the Pledgor’s DP to the central depository service (NSDL/CSDL), who seek confirmation from the pledgee’s DP.Upon the pledgee’s DP accepting/confirming the pledge, the shares held in the Pledgor’s DP account are locked in favour of the pledgee’s DP account.

In case of other securities, such as units, etc. for which no certificates are issued and the same are not held in DP accounts, the specific procedure for pledge/creation of charge in each case would need to be examined – e.g. in the case of GOI securities (which are held in ledger form), the securities are required to be transferred in the name of the pledgee; in the case of certain mutual fund units, certain forms have to be filed with the Registrars of the said funds for noting the pledgee’s pledge on the same.

It must also be noted that certain securities may not be pledgeable – e.g. certain types of units, etc., or certain specific approvals may be required e.g. shares of a special purpose vehicle (SPV) where the Memorandum of such SPV restrict transferability, etc., or certain conditions may be required to be met for the same – e.g. shares under lock-in, etc.. It should also be ensured that the limits specified under S. 19 (2) of the Banking Regulation Act, 1949 and relevant circulars of Reserve Bank of India in relation to pledge of shares for financial assistances by banks are not breached.

Term Deposits :

ISFA JAIIB PAPER 3


For creation of security over the term deposits, the security provider should deposit the receipt(s) of the term deposit with the lenders, duly discharged. A lien of the lenders is noted by the lenders on the term deposits. Banks are not allowed to lend against term deposits of other banks.

Mortgage of a Ship :Ships, being moveable property, would generally be hypothecated. However, ships registered under specific Act(s) may have to be secured by following a different procedure as specified in such Act(s) – e.g. ships registered under the Merchant Shipping Act, 1958, are required to be mortgaged, by filling in the particulars of the mortgage on a specific form (Form 11) and filing the same with the concerned Mercantile Marine Department.

Mortgage : There are various methods of creation of mortgage of immoveable properties. Methods generally adopted by the institutions /banks in India are mortgage by way of deposit of title deeds or by way of legal mortgage.

Escrow Account arrangement: An Escrow Account is an arrangement for safeguarding the borrower against its customers from the payment risk for the goods or services sold by the former to the latter. This is achieved by removing the control over the cash flows from the hands of the customer to an independent agent, who in turn could ensure appropriation of cash flows as per the its mandate. The Escrow arrangement provides for directing a pre-determined payment stream from the customers of the borrower to a special account maintained with a designated agent. Payment / deposit by the user / buyer into such an account is assumed to be a valid discharge of his liability to the supplier of the goods / services. An Escrow arrangement involves parties different from the parties in a TRA mechanism. The Escrow arrangement would involve usually four parties: the lender, the borrower, the customers of the borrower and the Escrow Agent. The mandate to the Escrow Agent would normally be finalised by the lenders in consultation with the borrower and its customers. Thus, for instance, in financing of a power plant which sells its power generated to a SEB, the Escrow arrangement would involve the power producer (borrower), the SEB concerned (customer), the bank / FI (lenders) and the Escrow Agent (a designated bank). The SEB would agree to direct its collection centres to deposit the electricity charges received from retail consumers, into a designated account with the designated bank (Escrow agent) and to direct its bulk consumers to deposit their payments directly with the Escrow Agent in the specified account. The Escrow Agent would then appropriate the funds in the Escrow account as per the priority laid down in the Escrow Agreement.

Trust and Retention Account (TRA) mechanism:TRA mechanism has been a common feature in financing of infrastructure projects. It seeks to protect the project lenders against the credit risk (the risk of debt service default) by insulating the cash flows of the project company. This is done through shifting the control over future cash flows from the hands of the borrowers (project company) to an independent agent, called TRA agent, duly mandated by the lenders. The infrastructure projects are executed through a separate company created for the purpose (called 'Special Purpose Vehicle' - SPV) and the shares of the SPV would normally be held, among others, by the sponsors of the project. The cash flows of the SPV (project company) are subjected to a TRA arrangement. Under this arrangement, the lenders, the borrower and the TRA agent enter into a tri-partite agreement, which provides for all revenues of the project to be directed into a single account, maintained with the designated TRA agent. The lenders, in consultation with the borrower, draw up a detailed mandate for the TRA agent as to periodic transfer and utilisation of funds available in the TRA. The mandate basically spells out the manner and purpose of various payments including the debt service to the lenders. The payment to the lenders is to be made directly by the TRA agent, as per its mandate, without any intervention by the borrower. For operational convenience, the TRA could be sub-divided into several sub-TRAs dedicated to separate heads of expenses / purposes. In case of multi currency cash flows, there could also be separate TRAs with the same agent or different TRA

ISFA JAIIB PAPER 3


agents for handling the cash flows in various currencies. Thus, the TRA agent acts as a trustee on behalf of the lenders and ensures that the cash flows are accessible to the borrower / project company, strictly as per the mandate. Thus, the TRA mechanism could be viewed as a sophisticated version of the traditional 'No Lien' accounts, on which the concerned bank could not exercise its right of general lien.3. Illustratively, the mandate to the TRA agent by the lenders for appropriation of cash flows could prescribe the following sequence for end use of funds:a. All operation and maintenance expenses of the project;b. Monthly dues / accruals of net principal and interest payments to lenders;c. A debt service reserve equal to, say, six months' dues - which could also be backed by a letter of credit to be arranged by the sponsors of the project company;d. A cash reserve equal to, say, four months' operating expenses;e. After meeting all the foregoing obligations, either through L/C or out of project cash flows, the residual funds, if any, would be available to the project company for disposal as per their discretion or as pre-determined by the mandate given to the TRA agent. .

Bill finance:During the time lag between the dispatch of the goods by seller and getting the payment from buyer, the supplier may be short of funds to meet his working capital requirements. Here again the Supplier can avail of the banks services whereby, the bank will Purchase/Discount the bill raised by the supplier and give immediate credit against it. The bank in turn will send the bill for collection. Once the bill is realized, the bank will recover the credit given to the supplier from the bill realization proceeds. The bank earn commission for the collection of the bill and will also earn interest on the amount disbursed at the time of purchase of the bill. The interest will be charged for the duration between the date of disbursement and the date of realization. In case the buyer does not accept the bill, it is returned to the supplier and the amount advanced earlier by way of purchase is recovered. Commission and interest recovered at the time of purchase is, however, retained by the bank, in case of returned bill.Under bills finance mechanism a seller of goods draws a bill of exchange (draft) on buyer (drawee), as per payment terms for the goods supplied. Such bills can be routed through the banker of the seller to the banker of the buyer for effective control.

(i) Clean & Documentary bill : (a)When documents to title to goods are not enclosed with the bill, such a bill is called Clean Bill. When documents to title to goods along with other documents are attached to the bill, such a bill is called Documentary Bill.(b)Documents, the due possession of which give title to the goods covered by them such as RR/MTR, bill of lading, delivery orders etc. are called documents to title to goods.(c)Cheques and drafts are also examples of clean bills.

(ii) Demand & Usance bill : When the bill of exchange either clean or documentary is made payable on demand or sight, such a bill is called Demand Bill. The buyer is expected to pay the amount of such bill immediately at sight. If such a demand bill is a documentary bill, then the documents including document to title to goods are delivered to the buyer only against payment of the bill. (Documents against Payment-D/P Bills).When a bill, either clean or documentary is drawn payable after certain period or on a specified date, the bill is called Usance Bill. Such bill is presented to the buyer once for Acceptance, when he accepts to pay the bill on due date and on due date the bill is presented again for Payment. In case of documentary usance bill, the documents are delivered to the buyer (drawee/acceptor) against his acceptance of bill (Documents against acceptance - DA Bills).

Finance against bills of exchange: Difference between Bills Purchase and Bills Discounting: Banks consider working capital finance to meet the post- sale requirements of borrowers through Bill finance either by Purchasing bills or Discounting them.

(a)Bill Purchase facility is extended against clean demand bills like cheques / drafts/ bills of exchange/ hundies & demand documentary bills, whereby the bank lends money to the payee

ISFA JAIIB PAPER 3


of the cheque/ draft and to the drawer of the bills by purchasing the same against tendering of such bills by the payee/ drawer. The bank in turn sends the bills for collection, preferably to its own branch at the place of drawee or to its correspondent bank or to the buyers (drawees) bank.

(b)Bills Discounting facility is extended against usance bills: In such cases, the seller tenders the usance bill drawn by him usually along with documents to title to goods, to his banker who discounts the bill i.e. levies discount charges for the unexpired portion of the duration of the bill and credits the balance amount to the sellers account. Thereafter the drawers bank sends the bill to collecting bank at the centre of drawee either to its own branch or drawees bank, with instructions to release the documents to title against acceptance and thereafter, to recover the bill amount on due date. Sometimes the accepted usance bills are also tendered and discounted by the bank.

Apart from sanctioning loans and advances, discounting of bills of exchange by bank is another way of making funds available to the customers. Bills of exchange are negotiable instruments which enable debtors to discharge their obligations to the creditors. Such Bills of exchange arise out of commercial transactions both in inland trade and foreign trade. When the seller of goods has to realize his dues from the buyer at a distant place immediately or after the lapse of the agreed period of time, the bill of exchange facilitates this task with the help of the banking institution. Banks invest a good percentage of their funds in discounting bills of exchange. These bills may be payable on demand or after a stated period.

In discounting a bill, the bank pays the amount to the customer in advance, i.e. before the due date. For this purpose, the bank charges discount on the bill at a specified rate. The bill so discounted , is retained by the bank till its due date and is presented to the drawee on the date of maturity. In case the bill is dishonoured on due date the amount due on bill together with interest and other charges is debited by the bank to the customers.

****

ISFA JAIIB PAPER 3


CHAPTER 5REGISTRATION OF DOCUMENTS

The law relating to registration of documents is contained in Registration Act 1908. (However, there are certain specific provisions applicable to companies as contained in Companies Act 1956).

The object of the registration of a document is as under:-to give notice to the public at large that such a document has been executed.-to prevent fraud and forgery.-to ensure that every person who may like to deal with a property, the transaction in respect of which requires registration, has complete notice of all transactions affecting the title to the property:

Following documents are to be compulsorily registered:a.-a mortgage deed b-a written memorandum of deposit of title deeds for creating equitable mortgagec-lease of immovable property where the period of lease is one year or more.d-a sale deed in respect of a propertye-an assignment of some right, title or interest in a property made through a deed

In respect of cases from (a) to (e) the charge is to be registered with the Registrar of Assurances under whose jurisdiction the property falls.Under section 32 of Registration Act only the executor or a person claiming under him or a representative or assignee of such person or a person holding power of attorney from such person, can present the documents for registration.

Time for presenting documents

No document other than a will shall be accepted for registration unless presented for that purpose to the proper officer within four months from the date of its execution:

PROVIDED that a copy of a decree or order may be presented within four months from the date on which the decree or order was made or, where it is appealable, within four months from the day on which it becomes final.

Documents executed out of India

When a document purporting to have been executed by all or any of the parties out of India, is not presented for registration till after the expiration of the time within four months from the date of its execution, the registering officer, if satisfied-

(a) that the instrument was so executed, and

(b) that it has been presented for registration within four months after its arrival in India

may, on payment of the proper registration-fee, accept such document for registration.

Where document should be registered - Document relating to immovable property should be registered in the office of Sub-Registrar of sub-district within which the whole or some portion of property is situated [section 28]. Other document can be registered in the office of Sub-Registrar where all persons executing the document desire it to be registered [section 29]. A Registrar can accept a document which is registerable with sub-registrar who is subordinate to him [section 30(1)]. Document should be presented for registration at the office of Registrar/Sub-Registrar. However, in special case, the officer may attend residence of any person to accept a document or will [section 31].

ISFA JAIIB PAPER 3


All persons executing document must appear before Registrar - All persons executing the document or their representatives, assigns or agents holding power of attorney must appear before registering officer [section 34(1)]. They have to admit execution and sign the document in presence of Registrar, as required under section 58(1)(a). Appearance may be simultaneous or at different times [section 34(2)]. If some of the persons are unable to appear within 4 months, further time upto additional 4 months can be given on payment of fine upto 10 times the proper registration fee [proviso to section 34(1)].

If document relates to transfer of ownership of immovable property, passport size photograph and finger prints of each buyer and seller of such property shall be affixed to document. [proviso to section 32A]. The Registrar is required to ensure that these are endorsed on the document.

Certificate of registration (1) After any document presented for registration have been complied with, the registering officer shall endorse thereon a certificate containing the word "registered ", together with the number and page of the book in which the document has been copied. (2) Such certificate shall be signed, sealed and dated by the registering officer, and shall then be admissible for the purpose of proving that the document has been duly registered in manner provided by this Act.

Effect of non-registration - If a document which is required to be registered under section 17 or under provisions of Transfer of Property Act, 1882 is not registered, the effect is that such un-registered document * does not affect any immovable property comprised therein * cannot be received as evidence of any transaction affecting such property. - - - Thus, the document becomes redundant and useless for all practical purposes. It can be accepted as evidence in criminal proceedings.

Some important Sections of Indian Registration Act 1908 are:-Sec 18 enumerates the documents which are optionally registerable. -Sec 23 states that all documents which are required to be registered should be presented at the office of Registrar or Sub-registration within 4 months from date of execution. -Section 25 stipulates that if the document is not presented for registration within 4 months, it can be presented for registration requesting for condonation of delay and payment of fine not exceeding 10 times the prescribed fee. -Sec 32 states that only the executor or his authorised person can present the documents for registration. -As per Sec 49, the non-registered documents, otherwise requiring registration, cannot be admitted as an evidence. -As per Sec 50, the registered documents prevail over an unregistered documents where registration is compulsory.

****

ISFA JAIIB PAPER 3


CHAPTER 6TRANSFER OF PROPERTY ACT, 1882

Entry 6 of List III (Concurrent List) of Seventh Schedule to Constitution reads ‘Transfer of property other than agricultural land; registration of deeds and documents’. Thus, transfer of property is a ‘Concurrent Subject’. Both Central and State Government can take legislative action in respect of transfer of property except that relating to agricultural land. [Transfer of agricultural land is a State subject under Entry 18 of List II (State List)]The Act proposes to prescribe law relating to transfer of property by act of parties. Thus, the Act applies only to voluntary transfer or property. It does not cover transfer of property by ‘will’.Section 4 of the Act clarifies that the part of the Act which relates to contracts shall be taken as part of Indian Contract Act and some specified sections shall be read as supplemental to Indian Registration Act. Thus, the Act is complimentary to Indian Contract Act and Registration Act. The Act applies both to movable and immovable property.

TRANSFER OF PROPERTY – ‘Transfer of Property’ means an act by which a living person conveys property, in present or future, to one or more living persons, or to himself or to himself and one or more other living persons. ‘Living person’ includes a company or association or body of individuals, whether incorporated or not. [section 5]. - -

The property may be movable or immovable, present or future. - - Such transfer can be made orally, unless transfer in writing is specifically required under any law. [section 9]. - -

Any person competent to contract and entitled to transferable property, or authorised to dispose of transferable property on his own, is competent to transfer such property. The property can be transferred wholly or in part. It can be transferred either absolutely or conditionally. Such transfer can be only to the extent and in manner allowed and prescribed by law. [section 7].

Transfer for benefit of unborn person(Sec.13)

Where, on a transfer of property, an interest therein is created for the benefit of a person not in existence at the date of the transfer, subject to a prior interest created by the same transfer, the interest created for the benefit of such person shall not take effect, unless it extends to the whole of the remaining interest of the transferor in the property.

Illustration:- ‘A’ transfers property of which he is the owner to ‘B’ in trust for A and his intended wife successively for their lives, and, after the death of the survivor i.e ‘A & his wife’, for the eldest son of the intended marriage for life, and after his death for A's second son. The interest so created for the benefit of the eldest son does not take effect, because it does not extend to the whole of A's remaining interest in the property.

SALE OF IMMOVABLE PROPERTY – ‘Sale’ is a transfer of ownership in exchange for a price paid or promised or part-paid and part promised. Such transfer in case of tangible immovable property of value of Rs 100 or more can be made only by a registered instrument. Delivery of tangible immovable property is made when seller places the buyer, or such person as he directs, in possession of property. Thus, delivery of immovable property can be only by handing over actual possession to buyer or to a person authorised by buyer. [section 54].

MORTGAGE – ‘Mortgage’ is the transfer of an interest in specific immovable property for the purpose of securing payment of money advanced or to be advanced, by way of loan or an existing or future debt. The transferor is called a mortgagor, the transferee a mortgagee, the principal money and interest of which payment is secured are called as ‘mortgage money’ and the instrument by which transfer is effected is called a mortgage-deed. [section 58(a)]. Mortgage can be * simple mortgage * Mortgage by conditional sale * Usufructuary mortgage * English Mortgage * Mortgage by deposit of title deeds or * Anomalous mortgage.

ISFA JAIIB PAPER 3


(a) Simple mortgage-Where, without delivering possession of the mortgaged property, the mortgagor binds himself personally to pay the mortgage-money, and agrees, expressly or impliedly, that, in the event of his failing to pay according to his contract, the mortgagee shall have a right to cause the mortgaged property to be sold and the proceeds of sale to be applied, so far as may be necessary, in payment of the mortgage-money, the transaction is called a simple mortgage and the mortgagee a simple mortgagee.(b) Mortgage by conditional sale-Where, the mortgagor ostensibly sells the mortgaged property-on condition that on default of payment of the mortgage-money on a certain date the sale shall become absolute, or on condition that on such payment being made the sale shall become void, or on condition that on such payment being made the buyer shall transfer the property to the seller, the transaction is called a mortgage by conditional sale and the mortgagee a mortgagee by conditional sale:PROVIDED that no such transaction shall be deemed to be a mortgage, unless the condition is embodied in the document which effects or purports to effect the sale.(c) Usufructuary mortgage-Where the mortgagor delivers possession or expressly or by implication binds himself to deliver possession of the mortgaged property to the mortgagee, and authorises him to retain such possession until payment of the mortgage-money, and to receive the rents and profits accruing from the property or any part of such rents and profits and to appropriate the same in lieu of interest or in payment of the mortgage-money, or partly in lieu of interest or partly in payment of the mortgage-money, the transaction is called a usufructuary mortgage and the mortgagee a usufructuary mortgagee.(d) English mortgage-Where the mortgagor binds himself to repay the mortgage-money on a certain date, and transfers the mortgaged property absolutely to the mortgagee, but subject to a proviso that he will re-transfer it to the mortgagor upon payment of the mortgage-money as agreed, the transaction is called an English mortgage.(e) Mortgage by deposit of title-deeds-Where a person in any of the following towns, namely, the towns of Calcutta, Madras, and Bombay, and in any other town which the State Government concerned may, by notification in the Official Gazette, specify in this behalf, delivers to a creditor or his agent documents of title to immovable property, with intent to create a security thereon, the transaction is called a mortgage by deposit of title-deeds.(f) Anomalous mortgage-A mortgage which is not a simple mortgage, a mortgage by conditional sale, a usufructuary mortgage, an English mortgage or a mortgage by deposit of title-deeds within the meaning of this section is called an anomalous mortgage.

WHEN MORTGAGEE CAN TAKE POSSESSION OF MORTGAGED PROPERTY IN CASE OF DEFAULT - Under provisions of section 69 of Transfer of Property Act, mortgagee can take possession of mortgaged property and sale the same without intervention of Court only in case of English mortgage, if there is default of payment of mortgage money. In addition, mortgagee can take possession of mortgaged property where there is specific provision in mortgage deed and the mortgaged property is situated in towns of Kolkata, Chennai or Mumbai. In other cases, possession of property can be taken only with intervention of Court. [English Mortgage is where mortgagor binds himself to repay the mortgaged money on a certain date, and transfers the mortgaged property absolutely to the mortgagee, but subject to a proviso that he will re-transfer the property to the mortgagor upon payment of the mortgage-money as agreed. - section 58(e) of Transfer of Property Act].

Mortgage to secure uncertain amount when maximum is expressed (Sec 79):-

If a mortgage made to secure future advances, the performance of an engagement or the balance of a running account, expresses the maximum to be secured thereby, a subsequent mortgage of the same property shall, if made with notice of the prior mortgage, be postponed to the prior mortgage in respect of all advances or debits not exceeding the maximum, though made or allowed with notice of the subsequent mortgage.

Illustration

A mortgages land in Mumbai to his bankers, B & Co., to secure the balance of his account with them to the extent of Rs. 1,00,000. A then mortgages this land in Mumbai to C, to secure Rs.

ISFA JAIIB PAPER 3


50,000, C having notice of the mortgage to B & Co., and C gives notice to B & Co. of the second mortgage. At the date of the second mortgage, the balance due to B & Co. does not exceed Rs. 50,000. B & Co. subsequently advances to A, sums making the balance of the account against him exceed the sum of Rs. 1,00,000. B & Co. are entitled, to the extent of Rs. 1,00,000, to priority over C.

Persons who may sue for redemption(Sec.91):-

Besides the mortgagor, any of the following persons may redeem, or institute a suit for redemption of, the mortgaged property, namely,-

(a) any person (other than the mortgagee of the interest sought to be redeemed) who has any interest in, or charge upon, the property mortgaged or in or upon the right to redeem the same;

(b) any surety for the payment of the mortgage-debt or any part thereof; or

(c) any creditor of the mortgagor who has in a suit for the administration of his estate obtained a decree for sale of the mortgaged property.

Subrogation(Sec.92):-

Any of the persons referred to in section 91 (other than the mortgagor) and any co-mortgagor shall, on redeeming property subject to the mortgage, have, so far as regards redemption, foreclosure or sale of such property, the same rights as the mortgagee whose mortgage he redeems may have against the mortgagor or any other mortgagee.

The right conferred by this section is called the right of subrogation, and a person acquiring the same is said to be subrogated to the rights of the mortgagee whose mortgage he redeems.

A person who has advanced to a mortgagor money with which the mortgage has been redeemed shall be subrogated to the rights of the mortgagee whose mortgage has been redeemed, if the mortgagor has by a registered instrument agreed that such persons shall be so subrogated. .

Nothing in this section shall be deemed to confer a right of subrogation on any person unless the mortgage in respect of which the right is claimed has been redeemed in full.

Example:- Guarantor stepping into the shoes of creditor on discharging the liability of the principal borrower.

CHARGE – Where immovable property of one person is, by act of parties or by operation of law, made security for payment of money to another, and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property; and all provisions in respect of ‘simple mortgage’ will apply to such charge. [section 100]. [Mortgage is not a ‘charge’ as per section 100 of Transfer of Property Act, but it will be a ‘charge’ for purpose of registration under Companies Act, as per section 124 of Companies Act].

A 'charge' is not 'mortgage'. In every mortgage, there is 'charge', but every charge is not a mortgage. Section 100 of Transfer of Property Act states that if immovable property is made as security for payment of money and if it does not amount to mortgage, then the later person is said to have a charge on property. However, a 'charge' does not create an interest in the property. - Dattatreya Mote v. Anand Datar - (1994) 2 SCC 799. Thus, no particular form is necessary to create 'charge'. [However, for purpose of registration under Companies Act, ‘charge’ includes mortgage].

Charge creation in case of companies u/s 77 of Companies Act, 2013:The particulars of charges are to be registered in the prescribed format along with the prescribed fee within 30 days after the date of its creation. In case of delay, the Registrar may allow the charge to be registered within 270 days thereafter on payment of additional fee. The aforesaid forms are required to be digitally signed on behalf of the company and the charge-holder.

ISFA JAIIB PAPER 3


LEASE OF IMMOVABLE PROPERTY – A lease of immovable property is transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity. Such transfer of right should be in consideration of a price paid or promised, or of money, or a share of crops, or service or anything of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms. [section 105]. Lease of property from year to year or for any term exceeding one year can be made only by registered instrument. [section 107].

EXCHANGE – When two persons mutually transfer the ownership of one thing for the ownership of another, neither thing or both things being money only, the transaction is called an ‘exchange’. [section 118].

ACTIONABLE CLAIM – ‘Actionable claim’ means a claim to any debt or to any beneficial in movable property not in possession (either actual or constructive) of the claimant. The debtshould be other than a debt secured by mortgage of immovable property or pledge of movable property. The claim should be such be such as Civil Court would recognise as affording grounds for relief. Such debt or beneficial interest be existent, accruing, conditional or contingent. [section 3 para 6]. Such transfer of an actionable claim shall be effected only by execution of an instrument is writing. [section 130]. - - One normal example is that receivable from a person is ‘actionable claim’, which can be transferred to another (e.g. one bank may transfer some of its receivables to another).

→ What do the terms “first”, “exclusive”, “second”, “subsequent”, “prior”, / “pari passu” charge mean? Is there a separate process for creation of security for first charge, exclusive charge, etc.?

Explanation of the terms:A first / prior charge means that the person in whose favour mortgage / charge is created holds charge in priority to other chargeholders.An exclusive charge means that the person in whose favour mortgage / charge is created holds charge is only entitled to the charge on the properties / assets secured in his favour.A second / subsequent charge means that the person in whose favour mortgage / charge is created holds charge subsequent to the other chargeholders in whose favour first charge has been created.The term “pari passu” means that the chargeholders of the same ranking charge hold similar rights amongst themselves in relation to the secured properties.

Ranking of charges will normally rank in chronological order – i.e. the priority of charge is determined by their priority in time. The ranking of charge between the lenders can vary as per the terms agreed to by each of them; this means that the rights of the lenders vis a vis between themselves in relation to enforcement proceeds, etc. will depend on the ranking agreed to by each of them. This priority can be varied by a contract/agreement between the chargeholders, by ceding prior charge, or by accepting a subsequent charge. Without such agreement, a charge created later in time (even if designated as a ‘first charge’) will rank subsequent to any charge created earlier.

Creation of mortgage or charge on any asset by a security provider involves the same procedure and documentation irrespective of ranking of charge between the lenders / creditors in whose favour such mortgage / charge is created. However, the documents should mention the ranking of charge.

A formal letter ceding first / prior / second / subsequent charge on the assets charged in favour of the lenders / their agent or trustee has to be exchanged. It is also advisable to enter into a detailed inter se / pari passu arrangements as per prescribed format.

→Why should particulars of charge be registered with the ROC by a company?

ISFA JAIIB PAPER 3


The system of charge registration is intended to disclose to persons about to deal with or become creditors of, the company the degree of creditworthiness of the company in so far as their position might be affected by the existence of certain debts entitled to be paid in priority. By virtue of the Companies Act, 2013 every relevant charge created by a company is, so far as any security on the company’s property is conferred by the charge, void against the liquidator or any creditor of the company unless registered with the ROC within time allowed under the act.The Companies Act, 2013 gives a list of assets, a charge on which must be registered. Registration of charges identifies the assets which are subject to the charge and operates as constructive notice. It makes the charge effective against each and every person including the liquidator.If a mortgage or charge, which requires registration, is not registered, it does not mean that the transaction is altogether void or the debt not recoverable. The only consequence is that the security created becomes void against the liquidator and other creditors.The omission to register charge does not prejudice any contract or obligation for repayment of the money secured by such charge, and where the charge becomes void for want of registration, the money secured by it immediately becomes payable. However, the above will be so only if the company is under winding up.A subsequent charge in respect of which particulars of charge are registered will have priority over a prior charge in respect of which such particulars are not registered, even if the subsequent chargeholder had notice of the prior charge.

Companies Act, 2013 consisting of section 77 to 87 deals with the subject of registration of ‘Charges’.

*** *

ISFA JAIIB PAPER 3


CHAPTER 7GUARANTEES

IntroductionContracts of guarantee have special significance in the business of banking as a means to ensure safety of funds lent to the customers. The safety of such funds is primarily ensured by securing a charge over the tangible assets owned by the borrower and /or by the personal security of the latter. But in case, the borrower is unable to provide the security of tangible assets or the value of the latter falls below the amount of the loan and the borrower’s personal security is not considered sufficient, an additional security is sought by the banker in the form of a ‘guarantee’ given by a third person. A guarantee is, in fact, the personal security of the third person, who must command the confidence of the banker.

Definition of GuaranteeA contract of guarantee is a specific contract and is governed by the provisions of the Indian Contract Act, 1872. Section 126 defines a contract of guarantee as a “Contract to perform the promise or discharge the liability of a third person in case of his default”. The person who undertakes the above obligation to discharge the liability of a third person is called the guarantor or the surety. The person in respect of whose default the guarantee is given is called the principal debtor and the person to whom the guarantee is given is called the ‘creditor’. A contract of guarantee is thus a secondary contract, the principal contract being between the creditor and the principal debtor themselves. If the promise or liability in the principal contract is not fulfilled or discharged, only then the liability of the guarantor or the surety arises. For example, X takes a loan of Rs.50,000 from Y on the guarantee of Z. The agreement between X and Y is the principal contract and that between Y and Z is a contract of guarantee. The liability of Z the guarantor) to pay the amount of the loan will arise only when X fails to fulfil his promise to repay the loan. The existence of a principal contract is essential for entering into a contract of guarantee.

Essential Features of a Contract of Guarantee1. A contract of guarantee may be either oral or written [Section 126]. Bankers invariably like to have a written contract of guarantee to avoid uncertainty in future and to bind the surety by his words.2. Sometimes a contract of guarantee is implied also from the special circumstances. For example, the endorser of a bill of exchange is liable to pay the amount of the bill to the payee in the case the acceptor of the bill defaults to fulfil his promise.3. A guarantee may be either 1) a specific guarantee, or 2) a continuing guarantee. A specific guarantee is given in respect of a single transaction or promise undertaken by the principal debtor. It comes to an end when the specific promise or transaction is fulfilled or undertaken.Example. ABC bank sanctions a loan of Rs.1000 to B. C stands as surety for the repayment of the same. This is a specific guarantee. As soon as B repays the loan to the Bank, C’s liability as surety is over. If subsequently B takes another loan from the same Bank, C will not be deemed as surety for the same.A guarantee which extends to a series of promises or transactions is called a “continuing guarantee” Section 129). The surety specifies the amount up to which and the period within which he shall remain liable as a surety.

Example: A enters into a cash credit arrangement with OBC for a credit limit of Rs.10,000. C stands as surety for A up to this amount for a period of one year ending 31st December 2007. Under this arrangement A will be permitted to undertake any number of transactions with the bank subject to the limit that the maximum amount outstanding in his account at any time should not exceed Rs.10,000. C will remain liable as surety for the actual amount of debt taken by A but within the limit of Rs. 10,000 and that too within a period of one year up to 31.12.2007.In case of a continuing guarantee the surety remains liable during the specified period of guarantee. But he can at any time revoke the continuing guarantee as to future transactions, by giving notice to the creditor. Section 130).

ISFA JAIIB PAPER 3


Example: In the above example, C can revoke his guarantee at any time during the period of guarantee. Suppose he gives notice of revocation on 1st July, 2006, he will remain liable for the dues from A to OBC on that day but not in respect of debts granted thereafter.

Right to Revoke Continuing Guarantee: A continuing guarantee is given in respect of a series of promises or transactions and remains in force over a period of time. The surety has the right to revoke at any time a continuing guarantee by giving a notice of such revocation to the creditor Section 130). The surety may revoke a continuing guarantee as to future transactions only, but he remains liable in respect of the transactions which have already taken place.

Example: C discounts bills of exchange with B. A guarantees to B for 12 months, the due payment of all such bills to the extent of Rs.5,000. B discounts bills for C to the extent of Rs.2,000. At the end of three months, A revokes the guarantee. This revocation of guarantee discharges A from all liability to B in respect of bills discounted after the date of such revocation. But A is liable to B for Rs.2,000 in case C defaults.

A continuing guarantee is also revoked on the death of the guarantor. According to Section 131, ‘the death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as with regards to future transaction.” It is to be noted that the death of surety revokes a continuing guarantee as regard to future transactions only but the liability of the surety remains in respect of the transactions undertaken till the time of his death. The revocation of the guarantee in the above manner takes place, if there is no contract to the contrary. For example, if the contract of guarantee provides that the surety and his legal representative, in case of his death, shall remain liable for the guarantee, the continuing guarantee will not be terminated on the death of the surety. His legal representative will remain liable for the guarantee, after the death of the surety.

Liability of the Surety1. The extent of liability. According to Section 128, “the liability of the surety is co-existence with that of the principal debtor, unless otherwise provided by the contract.” This means that the liability of the surety is to the same extent to which the principal debtor himself is liable to the creditor, provided the surety does not restrict his liability in the contract of guarantee. If the liability of the principal debtor increases, the liability of the surety also goes up to the same extent. For example, A guarantees the repayment of a loan granted by X to Y along with interest due thereon. The liability of the principal debtor increases by the amount of interest which becomes due with the passage of time. The liability of the surety also increases to the same extent. But the liability of the surety cannot, in any circumstances, exceed that of the principal debtor.The surety may, however, undertake liability for less than the amount of debt of the principal debtor by specifying the same in the contract of guarantee. The extent of guarantee may be limited in either of the following two ways:i. He may guarantee only a part of the entire debt, orii. He may guarantee the whole of the debt but may specify the amount up to which he makeshimself liable to pay to the creditor.The burden of liability that will fall on the surety will be different in each of the two circumstances.

Examples:a) ABC bank grants a loan of Rs.10,000 to Y. Z guarantees the loan to the extent of Rs.5,000 only.

b) BSC Bank sanctions a loan of Rs.10,000 to A. B guarantees the loan with the proviso that not more than Rs.5,000 shall be recoverable from him.

Suppose in both the cases the banks are able to recover one-fourth of the amount of the loan. The amount which they can realize from the sureties in each case shall be determined as follows:

ISFA JAIIB PAPER 3


In example a), the loan is guaranteed to the extent of Rs. 5,000 only. So whatever loss is being suffered by ABC Bank in respect of the first Rs. 5,000 of the loan is recoverable from the surety Z. As one-fourth of the entire amount is recovered, the liability of the surety will be to the extent of Rs. 3,750 only i.e., Rs. 5,000 minus Rs. 1,250 recovered from the debtor in respect of the guaranteed amount of loan, i.e. half of the entire loan). The bank will also realise Rs. 1,250 from the debtor being one-fourth of the amount of the loan not guaranteed). ABC Bank thus recovers the amount of Rs. 6,250.

In example b) the surety has guaranteed the entire debt but has restricted the maximum amount of his liability to Rs. 5,000. The bank realizes Rs.2,500 one fourth of the entire debt) from the debtor. The remainder of the loss is Rs.7,500 i.e., Rs.10,000 minus Rs. 2,500). As the surety is liable to pay the maximum amount of Rs.5,000, which is less than the amount of actual default, the bank can get Rs.5,000 only from the surety. BSC Bank thus realizes Rs.2,500 plus Rs.5,000, i.e. Rs.7,500 in all.

c) The liability of the surety arises as soon as the principal debtor makes a default. The creditor need not exhaust all remedies against the principal debtor before recovering the amount from the surety. In other words, the liability of the surety cannot be postponed. In the Bank of Bihar Limited vs. Damodar Prasad and Another Civil Appeal NO.1109 of 1965), the Supreme Court held that “the liability of the surety is immediate and cannot be deferred until the creditor has exhausted his remedies against the principal debtor. A surety has no right, before making payment, to ask the creditor to pursue his remedies against the principal debtor in the first instance. Similarly, he has no right, in the absence of some special equity, to restrain an action against him by the creditor on the ground that the principal debtor is solvent or that the creditor may have relief against the principal debtor in some other proceedings. It is the duty of the surety to pay the decrial amount.”

3. Liability of co-sureties. In case more than one person guarantees a debt, all of them are called co-sureties and are liable to pay the debt of the principal debtor. If one of them has paid the entire amount to the creditor, he is entitled to claim contribution from his co-sureties. Sections 146 and 147 provide for the determination of the liability of co-sureties as follows:a) “Where two or more persons are co-sureties for the same debt on duty, either jointly or severally and whether under the same or different contracts, and whether with or without the knowledge of each other, the co-sureties, in the absence of any contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal debtor Section 146).

The co-sureties are liable to contribute equal amounts towards the liability of the debtor, provided:i. there is no agreement to the contrary; andii. they are co-sureties for the same amount of debt.

It is immaterial whether the contract or guarantee was the same or separate between each one of them and the creditor and whether they knew about the guarantee given by the other person or not.

Example: SBI grants a loan of Rs.5,000 to Y on the guarantee of A, B and C. On the date, it is able to recover Rs.2,000 only from Y. The three co-sureties A, B and C are liable, as between themselves, to pay Rs.1,000 each.If, in the above example, there is an agreement between the co-sureties that A will be liable to pay 50% of the amount of default and B and C will each contribute 25% of the amount of such default, the liability of A will be to the extent of Rs.1,500 while B and C will pay Rs.750 each.b) “Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit Section 147)”. Thus, if the co-sureties have guaranteed a loan up to different limits, each of them will be liable to contribute equally provided their own

ISFA JAIIB PAPER 3


contribution does not exceed the amount for which guarantee is undertaken by them individually.

Examples:1) A has take a loan of Rs.7,000 from PNB. C has guaranteed it for Rs.4,000, D for Rs.4,000 and E for Rs.1,000 separately. On due date PNB recovers Rs.1,000 only from A. The remainder of the amount Rs.6,000 is recoverable from the three sureties equally i.e. Rs.2,000 each), but as E guaranteed the loan up to Rs.1,000 only, he is liable to pay Rs.1,000 only. The balance of Rs.5,000 will be contributed by C and D equally i.e. Rs.2,500 each).

2) If in the above example D stands surety for Rs.2,000 only instead of Rs.4,000), the maximum amount to be contributed by him will be Rs.2,000. The rest of the amount of default Rs.3,000 will be paid by C.It is to be noted that Section 147 clearly lies down that the contribution of each co-surety shall be equal and not proportional. The actual amount of such contribution shall, however, not exceed the amount for which the guarantee is given by any one of them.

Each co-surety shall have a claim against other co-sureties provided he pays to the creditor more than his own contribution. If in example 1) above, E pays Rs.2,000 to PNB, he shall be entitled for a claim of Rs.1,000 from C and D.

If the creditor releases one of the co-sureties, other sureties are not discharged and the surety so released is also not discharged from his responsibilities to other sureties Section 138). In M/s. Moolangudi Chit Fund P) Ltd. Vs. K.S. Kasiviswanathan & Others 1987 TLNJ 55) the creditor returned to one of the co-sureties the title deeds of his immovable property, which were earlier deposited by way of equitable mortgage. The Madras High Court held that such release by the creditor of the security of one of the co-sureties was not an act inconsistent with the rights of other sureties. The remedy of the other sureties against the principal debtor was not affected.

Some decisions of Supreme court in recent past:1) Decision in 2008:-Mr. Ashok has taken loan from PNB and Mr.Sitaram Gupta stood as guarantor. But before granting loan Mr.Sitaram Gupta cancelled guarantee issued by him to PNB, by his letter datedJuly 31, 1980. However, when the agreement for such loan was made there was clause whichreads as follows: "The guarantor hereby guarantees... to pay the bank on demand all principal,interest, costs, charges and expenses due and which may at any time become due to the bankfrom the borrower down to the date of payment."The agreement also stated: "the guarantors hereby declare that this guarantee shall be acontinuing guarantee and shall not be considered as cancelled or in any way affected...."Mr.Ashok made a default and PNB decided to recover the amount from Mr. Sitaram. HoweverMr. Sitaram argued that since his guarantee stood revoked on 31/07/1980, he was not liable topay the loan for which he had initially agreed to stand guarantee.He said Section 130 of the Indian Contract Act clearly provided for revocation of guarantee byprior notice to the creditor and argued that he had revoked the guarantee long before the loanwas givenBut Supreme court has relied on two clauses in the guarantee agreement, which is virtuallypresent in every loan agreement, the bench said, "This was an agreement entered into byGupta with the bank, which is binding on them."Having entered into the agreement in the manner indicated above, it was not open to Gupta toturn around and say that in view of Section 130 of the Contract Act, since the guarantee wasrevoked before the loan was advanced to the persons, he was not liable to pay the decretalamount as a guarantor to the bank as his guarantee had already stood revoked."

ISFA JAIIB PAPER 3


The bench added, "It was not open to Gupta to revoke the guarantee as he had agreed to treat the guarantee as a continuing one and was bound by the terms and conditions of the said guarantee."

2) Decision in 2012:-The Supreme court gave the ruling on an appeal by one Ganga Kishun, who had stood as a guarantor to a bank loan, raised by one Mr. Prasad, who had died without clearing it. Ganga Kishun had come to the apex court against the Banks decision to recover the loan arrears from him after the death of principal debtor Mr. Prasad.Mr. Ganga Kishun argued that the creditor must first exhaust all remedies against the principal debtor before recovering the debts from the surety holders.

The Supreme court has given the following decision:There can be no dispute to the settled legal proposition that in view of the provisions of Section 128 of the Indian Contract Act, 1872, the liability of the guarantor / surety is co-extensive with that of the debtor.Therefore, the creditor has a right to obtain a decree against the surety and the principal debtor.The surety has no right to restrain execution of the decree against him until the creditor has exhausted his remedy against the principal debtor. And hence Mr. Ganga Kishun has to pay the amount as stated in decree.

** ***

ISFA JAIIB PAPER 3


CHAPTER 8SARFAESI ACT

Ιn theory, a loan is a simple transaction. A borrower wants money, and a lender offers it and collects interest: this arrangement continues until the loan is repaid. In some cases, however, the borrower may be unable or unwilling to pay back the loan. Secured loans, where the borrower offers collateral such as real estate or machinery, are supposed to cater to just such contingencies. In case of a default, creditors can seize and sell the asset to recover their money. This neat concept breaks down if the seizure of an asset is impossible within reasonable time limits has been the case in India. A tardy legal system makes it virtually impossible to seize the assets of defaulters. Endless hearings and appeals keep things in limbo for decades; borrowers can afford to ignore creditors’ demands and pay the legal fees instead. As a result, there are bad debts across the entire financial system. These drive up the cost of loans and ruin the lenders’ financials. Banks and financial institutions write off huge sums each year to cover bad debts. Estimates of the size of these“non-performing assets”–bankers’ jargon for bad debts– vary from Rs 85,000 crore to twice as much.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security InterestAct, 2002 SARFAESI) empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of the Court.

Howerver, the provisions of this Act shall not apply to--a) a lien on any goods, money or security given by or under the Indian Contract Act, 1872 9 of1872; or the Sale of Goods Act, 1930 3 of 1930) or any other law for the time being in force;b) a pledge of movables within the meaning of section 172 of the Indian Contract Act, 1872 9of 1872);c) creation of any security in any aircraft as defined in clause 1) of section 2 of the AircraftAct, 1934 24 of 1934);d) creation of security interest in any vessel as defined in clause 55) of section 3 of the Merchant Shipping Act, 1958 44 of 1958);e) any conditional sale, hire-purchase or lease or any other contract in which no security interest has been created;f) any rights of unpaid seller under section 47 of the Sale of Goods Act, 1930 3 of 1930);g) any properties not liable to attachment excluding the properties specifically charged with the debt recoverable under this Act) or sale under the first proviso to sub-section 1) of section 60 of the Code of Civil Procedure, 1908 5 of 1908);h) any security interest for securing repayment of any financial asset not exceeding one lakh rupees;i) any security interest created in agricultural land;j) any case in which the amount due is less than twenty per cent 20%) of the principal amount and interest thereon.

Methods of Recovery

under SARFAESI

Enforcement of Security Interest by secured creditor (Banks/Financial Institutions)

Transfer of NPA to Asset Reconstruction Company, which will then dispose of those assets and realise the proceeds.

To provide a legal framework for securitisation of assets.

ISFA JAIIB PAPER 3


Powers to Banks:This act gives the following powers to the affected Banks To issue demand notice under section 13 2) of the Sarfaesi Act, to the defaulting borrower and guarantor, calling upon them to discharge their dues in full within 60 days from the date of the notice. In case the borrower fails to discharge his liability within 60 days period, the secured creditor may under Section 13 4) : -a) take possession of secured assets of the borrower including the right to transfer by way of lease, assignment or sale, for releasing the secured assets.b) Take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale, for releasing the secured assets.To give notice to any person who has acquired any of the secured assets from the borrower to surrender the same to the Bank. To ask any debtor of the borrower to pay any sum due or becoming due to the borrower. Any Security Interest created over Agricultural Land cannot be proceeded with. Procedure:If on receipt of demand notice, the borrower makes any representation or raises any objection, “Authorised Officer” shall consider such representation or objection carefully and if he comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate the reasons for non acceptance within one week of receipt of such representation or objection.A borrower / guarantor aggrieved by the action of the Bank can file an appeal with DRT and then with DRAT, but not with any civil court. The borrower / guarantor has to deposit 50% of the dues before an appeal with DRAT.

More Measures:If the borrower fails to comply with the notice, the Bank may take recourse to one or more of the following measures: Take possession of the security Sale or lease or assign the right over the security Manage the same or appoint any person to manage the same For all purposes in the Act, the “Authorised Officer” means “an officer not less than a chief manager of a public sector bank or equivalent, as specified by the Board of Directors or Board of Trustees of the secured creditor or any other person or authority exercising powers of superintendence, direction and control of the business or affairs of the secured creditor under the Act.”

SECURITY INTEREST ENFORCEMENT) RULES, 2002Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, empowers the Central Government to make the rules for the proper implementation of this Act. The following are the important rules in operation: 1. "Authorised officer" means an officer not less than a chief manager of a public sector bank or equivalent, as specified by the Board of Directors or Board of Trustees of the secured creditor or any other person or authority exercising powers of superintendence, direction and control of the business or affairs of the secured creditor, as the case may be, to exercise the rights of a secured creditor under the act.

2. Demand Notice:1) The service of demand notice as referred to in 13 2) of Section 13 shall be made by delivering or transmitting at the place where the borrower or any other person as his agent empowered to accept the notice or documents on behalf of the borrower, actually and voluntarily resides or carries on business, by registered post with acknowledgement due or by Speed Post or by courier or by any other means of transmission of documents like fax message or electronic mail service: If authorised officer has reason to believe that the borrower or his agent is avoiding acceptance of the notice, then demand notice shall be effected by affixing a copy of the on the outer door or some other conspicuous part of the house or building in which the borrower or his agent ordinarily resides or carries on business or personally works for gain

ISFA JAIIB PAPER 3


and also by publishing the contents of the demand notice in two leading newspapers, one in vernacular langauage, having sufficient circulation in that locality. 2) where the borrower is a body corporate, the demand notice shall be served on the registered office or any of the branches of such body corporate as specified under sub-rule 1). 4) Where there are more than one borrowers, the demand notice shall be served on each borrower.

3. Procedure after issue of notice for Movable assets —If the amount mentioned in the demand notice is not paid within the time specified therein, the authorised officer shall proceed to realise the amount by adopting any one or more of the measures specified in 13 4) of Act for taking possession of movable property, namely:--1) Where the possession of the secured assets to he taken by the secured creditor are movable property in possession of the borrower, the authorised officer shall take possession of such movable property in the presence of two witnesses after a Panchanama drawn and signed by the witnesses as nearly as possible in Appendix-I to these rules, 2) After taking possession as above, the authorised officer shall make or cause to be made an inventory of the property deliver a copy of such inventory to the borrower or to any person entitled to receive on behalf of borrower. 3) The authorised officer shall keep the property taken possession either in his own custody or in the custody of any person authorised or appointed by him, who shall take as much care of the property in his custody as an owner of ordinary prudence would, under the similar circumstances, take of such property: Provided that if such property is subject to speedy or natural decay, or the expense of keeping such property in custody is likely to exceed its value, the authorised officer may sell it at once.

4. Valuation of movable secured assets.—After taking possession 13 4) 1) and in any case before sale, the authorised officer shall obtain the estimated value of the movable secured assets and thereafter, if considered necessary, fix in consultation with the secured creditor, the reserve price of the assets to he sold in realisation of the dues of the secured, creditor.

5. Sale of movable secured assets.—1) the authorised officer may sell the moveable secured assets taken possession in one or more lots by adopting any of the following methods to secure maximum sale price for the assets, to be so sold--a) obtaining quotations from parties dealing in the secured assets or otherwise interested in buying such assets; or b) inviting tenders from the public; or c) holding public auction; or d) by private treaty.

2) The authorised officer shall serve to the borrower a notice of thirty days for sale of the movable secured assets. Provided that if the sale of such secured assets is being, effected by either inviting lenders from the public or by holding public auction, the secured creditor shall cause a public notice in two leading newspapers, one in vernacular language, having sufficient circulation in that locality by setting out the terms of sale, which may include,--a) details about the borrower and the secured creditor; b) description of movable secured assets to be sold with identification marks or numbers, if any, on them; c) reserve price, if any, and the time and manner of payment; d) time and place of public auction or the time after which sale by any other mode shall be completed; e) depositing earnest money as may be stipulated by the secured creditor; f) any other thing which the authorised officer considers it material for a purchaser to know in order to judge the nature and value of movable secured assets. 3) Sale by any methods other than public auction or public tender, shall be on such terms as may be settled between the parties in writing.

ISFA JAIIB PAPER 3


6. Issue of certificate of sale.—1) Where movable secured assets is sold, sale price of each lot shall be paid as per the terms of the public notice or on the terms as may be sealed between she parties, as the case may be, and in the event of default of payment, the movable secured assets shall be liable be of used for sale again. 2) On payment of sale price, the authorised officer shall issue a certificate of sale in the prescribe form specifying the movable secured assets sold, price paid and the name of the prescribe form and thereafter the sale shall become absolute. The certificate of sale so issued shall be prima facie evidence of title of the purchaser.

7. Sale of Immovable secured assets.—1) Where the secured asset is an immovable property, the authorised officer shall take or cause to be taken possession, by delivering a possession notice prepared, to the borrower and by affixing the possession notice on the outer door or at such conspicuous place of the property. 2) The possession notice as referred to in 13 4) shall also be published in two leading newspaper, one in vernacular language having sufficient circulation in that locality, by the authorised officer. 3) In the event of possession of immovable property is actually taken by the authorised officer, such property shall be kept in his own custody or in the custody of any person authorised or appointed by him, who shall take as much care of the property in his custody as a owner of ordinaryprudence would, under the similar circumstances, take of such property. 4) The authorised officer shall take steps for preservation and protection of secured assets and insure them, if nessarry, till they are sold or otherwise disposed off. 5) Before effecting sale of the immovable property, the authorised officer shall obtain valuation of the property from an approved valuer and in consultation with the secured creditor, fix the reserve price of the property and may sell the whole or any part of such immovabnle secured asset by any of the following methods :--a) by obtaining quotations from the persons dealing with similar secured assets or otherwise interested in buying the such assets; or b) by inviting tenders from the public; c) by holding public auction; or d) by private treaty. 6) the authorised officer shall serve to the borrower a notice of thirty days for sale of the immovable secured assets. Provided that if the sale of such secured asset is being effected by either inviting tenders from the public or by holding public auction, the secured creditor shall cause a public notice in two leading newspapers one in vernacular language having sufficient circulation in the locality by setting out the terms of sale, which shall include, -a) the description of the immovable property to be sold, including the details of the encumbrances known to the secured creditor; b) the secured debt for recovery of which the property is to be sold; c) reserve price, below which the property may not be sold; d) time and place of public auction or the time after which sale by any other mode shall be completed; e) depositing earnest money as may stipulated by the secured creditor; f) any other thing which the authorised officer considers it material for a purchaser to know in order to judge the nature and value of the property. 7) Every notice of sale shall be affixed on a conspicuous part of the immovable property and may, if the authorised officer deems it fit, put on the web-site of the secured creditor on the Internet. 8) Sale by any methods other than public auction or public tender, shall he on such terms as may be settled between the parties in writing.

8. Time of sale, Issue of sale certificate and delivery of possession, etc.—1) No sale of immovable property under these rules shall take place before the expiry of thirty days from the date on which the public notice of sale is published in newspapers or notice of sale has been served to the borrower.

ISFA JAIIB PAPER 3


2) The sale shall be confirmed in favour of the purchaser who has offered the highest sale price in his bid or tender or quotation or offer to the authorised officer and shall be subject to confirmation by the secured creditor: Provided that no sale under this rule shall be confirmed, if the amount offered by sale price is less than the reserve price. Provided further that if the authorised officer fails to obtain a price higher than the reserve price, he may, with the consent of the borrower and the secured creditor effect the safe at such price. 3) On every sale of immovable property, the purchaser shall immediately pay a deposit of twenty five per cent of the amount of the sale price, to the authorised officer conducting the sale and in default of such deposit, the property shall forthwith be sold again. 4) The balance amount of purchase price payable shall be paid by the purchaser to the authorised officer on or before the fifteenth day of confirmation of sale of the immovable property or such extended period as may be agreed upon in writing between the parties. 5) In default of payment within the period mentioned in 4) above, the deposit shall be forfeited and the property shall be resold and the defaulting purchaser shall forfeit all claim to the property or to any part of the sum for which it may be subsequently sold. 6) On confirmation of sale by the secured creditor and if the terms of payment have been complied with, the authorised officer exercising the power of sale shall issue a certificate of sale of the immovable property in favour of the purchaser. 7) Where the immovable property sold is subject to any encumbrances, the authorised officer may, if he thinks fit, allow the purchaser to deposit with him the money required to discharge the encumbrances and any interest due thereon together with such additional amount that may be sufficient to meet the contingencies or further cost, expenses and interest as may be determined by him! 8) On such deposit of money for discharge of the encumbrances, the authorised officer may issue or cause the purchaser to issue notices to the persons interested in or entitled to the money deposited with him and take steps to make, the payment accordingly. 9) The authorised officer shall deliver the property to the purchaser free from encumbrancesknown to the secured creditor on deposit of money. 10) The certificate of sale issued under 6) above shall specifically mention that whether the purchaser has purchased the immovable secured asset free from any encumbrances known to the secured creditor or not.

9. Procedure for Recovery of shortfall of secured debt.—1) An application for recovery of balance amount by any secured creditor pursuant to sub-section 10) of Section 13 of the Act shall be presented to the Debts Recovery Tribunal.Where dues of the secured creditor are not fully satisfied with the sale proceeds of the secured assets, the secured creditor may file an application in the form and manner as may be prescribed to the Debts Recovery Tribunal having jurisdiction or a competent court, as the case may be, for recovery of the balance amount from the borrower. Also the secured creditor shall be entitled to proceed against the guarantors or sell the pledged assets without first taking any of the measures specified in clauses a) to d) of sub-section 4) in relation to the secured assets i.e taking possession of property etc…

CASE LAWS:1. The branch of BBC Bank Ltd was holding a decree for Ring-o-Plastic Pvt Ltd and after great efforts had found a buyer in New Technologies Pvt. Ltd for the industrial property. The agreed price was Rs 52 lacs and the new buyers had deposited the amount in a “no lien” account as agreed and took over the assets of Ring-o-Plastic Pvt Ltd. In the meanwhile the Sales Tax authorities and the erstwhile workers of Ring-o- Plastic obtained a Court Injunction and the entire amount of Rs 52 lacs paid by New Technologies Pvt Ltd could not be appropriated towards the outstanding dues of Ring-o- Plastic and instead had to be deposited in the court by the branch. Looking to the above answer the following question:

I. Are Statutory dues here in this case Sales Tax dues get preference over secured lenders claim?a. Yesb. No

ISFA JAIIB PAPER 3


II. According to provision of Companies Act, do you think that preference will be given to workers dues over secured creditora. No, secured creditor has only preference & right to sale the property to recover the dues.b. Yes, workers dues will get preference over secured creditorc. According provisions of companies act, workers will receive there claim from sale of property other than those mortgage with secured creditor.d. Yes, workers claims are pari passu with that of secured creditor in case of winding of insolvent company.

2. A Nationalised bank, which is having one of its branches at Karamadai, Coimbatore District. M/s. V.K. Textiles Mills P. Ltd., availed cash credit and term loans for the purchase of machinery, construction of building etc. The total limit sanctioned was of Rs.6.50 Crores. The said company did not adhere to the terms and conditions of sanction with regard to payment and consequently the accounts became NPAs. As on 18.12.2006 a total sum of Rs.6,17,61,308/- was due. Therefore, issued a demand notice dated 18.12.2006 under Section 132) of the SARFAESI Act. The demand notice was not complied with. Hence, the bank took physical possession of the secured assets on 19.3.2008. The bank arranged the auction & M/s. Narshkumar Textile mill purchased it by depositing 25% amount with the bank. The recovery officer immediately issued sale certificate u/s. Rule 72) of the Securtisation Act. Mrs. Nath, sister of Director of M/s. V.K. Textile file a writ petition challenging the bank action of sale with the contention that the property mortgaged were purchased from joint family funds and hence the same cannot be mortgaged and requested the court for granting injunction.In view of the following answer the following questions:

I. What will be your view about courts interference in the above matter as Sec.34 of the SARFESAI Act, barred any civil court from the SARFESAI proceedings?a. Yes, the civil court has no jurisdiction under SARFESAI Actb. No, they have jurisdiction if the matter is having civil aspects in the case.c. They have jurisdiction as SARFESAI Act is applicable to suits between banks & borrowers and not to third party.d. Civil court don’t have right but DRT is having that right.

II. Whether the sale of the secured asset in public auction as per Section 134) of SARFAESI Act, which ended in issuance of a sale certificate as per Rule 97) of the Security Interest Enforcement) Rules, 2002 is a complete and absolute sale for the purpose of SARFAESI Act or whether the sale would become final only on the registration of the sale certificate ? a. Yesb. No

Note: Some States have afforded priority to sales tax dues by making specific provision in the sales tax Acts. The Supreme Court has also held such statutory provisions as valid in following cases:State Bank of Bikaner & Jaipur vs National Iron & Steel Rolling Corporation 1995) 2 SCC 19Dena Bank vs Bhikabhai Prabhudas Parekh & Co. 2000) 5 SCC 694

Students should note that, this recovery of sales tax/VAT is by virtue of some other act, but no such provision in Companies Act, 2003 for priority and hence please read the questions and look what has asked in question. If they ask priority of such recovery according to Companies Act, then the answer will be negative always.

3. M/s. Naren & Co., has taken a machinery loan from your bank by hypothecation deed executed on 12.04.2012 of Rs.2.00cr. The machinery has purchased from RR Machinery for Rs.3.70cr on 05.04.2012, in which Rs. 80.00 lakh is on deferred credit to be repaid in 6 months. M/s. Naren recently classified as NPA outstanding of Rs.1.98cr prin.+ intt + penal intt together) and bank started recovery proceedings under SARFESAI by taking machinery in possession and fixed date for auction. Before such auction RR Machinery approached the bank stating that

ISFA JAIIB PAPER 3


such auction is illegal as M/s. Naren & co has not paid there dues to the extent of Rs.45 lakhs and hence they have lien on machinery as “Right of Unpaid seller” under Sale of Goods Act,1930. Now answer the following question:

I. Is the claim of RR machinery is right from the point of Sale of Goods Act,1930a. Yes b. No

II. After hypothecation deed, the bank has completed the procedure of creation of _________a. Mortgageb. Chargec. Pledged. Bailment

III. As a banker you want to refuse the claim and for that what you would like to state to RR Machinery about there claim?a. Hypothecation is just like mortgage and hence they have first preference as secured creditorb. Since, RR Machinery sold out the goods on credit which means property in the goods has passed to buyer and hence cannot claim any charge on such machineryc. Hypothecation created here, is a specific charge created u/s 100 of Transfer of Property act for money advanced and hence have preferential right.d. No claim can be made unless a decree has been obtained by court.

Ans: 1: I b II d, 2: I c II a 3: I a II b III c

► What is securitisationSecuritisation is the process of pooling and repackaging of homogenous illiquid financial assets into marketable securities that can be sold to investors. Securitisation has emerged as an important means of financing in recent times. A typical securitization transaction consists of the following steps: Creation of a special purpose vehicle to hold the financial assets underlying the securities; Sale of the financial assets by the originator or holder of the assets to the special purpose vehicle, which will hold the assets and realize the assets Issuance of securities by the SPV, to investors, against the financial assets held by it. This process leads to the financial asset being taken off the balance sheet of the originator, thereby relieving pressures of capital adequacy, and provides immediate liquidity to the originator.

→ASSET RECONSTRUCTION COMPANY LIMITED The word asset reconstruction company is a typical used in India. Globally the equivalent phrase used is " asset management companies". The word "asset reconstruction" in India wereused in Narsimham I report where it was envisaged for the setting up of a central Asset Reconstruction Fund with money contributed by the Central Government, which was to be used by banks to shore up their balance sheets to clean up their non-performing loans. However, this never saw the light of the day and later on Narsimham II floated the idea asset reconstruction companies..→Why ARC :In last 15 years or so the a number of economies around the world have witnessed the problem of non performing assets. A high level of NPAs in the banking system can severely affect the economy in many ways. The high level of NPAs leads to diversion of banking resources towards resolution of this problems. This causes an opportunity loss for more productive use of resources. The banks tend to become risk averse in making new loans, particularly to small and medium sized companies. Thus, large scale NPAs when left unattended, cause continued economic and financial degradation of the country. The realization of these problems has lead to greater attention to resolve the NPAs. ARCs have been used world-wide, particularly in Asia, to resolve bad-loan problems. However, these had a varying degree of success in different countries. ARCs focus on NPAs and allows the banking system to act as "clean bank".

ISFA JAIIB PAPER 3


→ARC in India : In India the problem of recovery from NPAs was recognized in 1997 by Government of India. The Narasimhan Committee Report mentioned that an important aspect of the continuing reform process was to reduce the high level of NPAs as a means of banking sector reform. It was expected that with a combination of policy and institutional development, new NPAs in future could be lower. However, the huge backlog of existing NPAs continued to hound the banking sector. It impinged severely on banks performance and their profitability. The Report envisaged creation of an "Asset Recovery Fund" to take the NPAs off the lender's books at a discount. Accordingly, Asset Reconstruction Company Securitization Company / Reconstruction Company) is a company registered under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest SRFAESI) Act, 2002. It is regulated by Reserve Bank of India as an Non Banking Financial Company u/s 45I f ) iii) of RBI Act, 1934). RBI has exempted ARCs from the compliances under section 45-IA, 45-IB and 45-IC of the Reserve Bank Act, 1934. ARC functions like an AMC within the guidelines issued by RBI. ARC has been set up to provide a focused approach to Non-Performing Loans resolution issue by:-a) isolating Non Performing Loans NPLs) from the Financial System FS), b) freeing the financial system to focus on their core activities and c) Facilitating development of market for distressed assets.

→Functions of ARC :As per RBI Notification No. DNBS.2/CGMCSM)-2003, dated April 23, 2003, ARC performs the following functions :-i) Acquisition of financial assets as defined u/s 2L) of SRFAESI Act, 2002)ii) Change or take over of Management / Sale or Lease of Business of the Borroweriii) Rescheduling of Debtsiv) Enforcement of Security Interest as per section 134) of SRFAESI Act, 2002)v) Settlement of dues payable by the borrower

→How Does ARC actually Works :ARC functions more or less like a Mutual Fund. It transfers the acquired assets to one or more trusts set up u/s 71) and 72) of SRFAESI Act, 2002) at the price at which the financial assets were acquired from the originator Banks/FIs). Then, the trusts issues Security Receipts to Qualified Institutional Buyers [as defined u/s 2u) of SRFAESI Act, 2002]. The trusteeship of such trusts shall vest with the ARC. ARC will get onlymanagement fee from the trusts. Any upside in between acquired price and realized price will be shared with the beneficiary of the trusts Banks/FIs) and ARC. Any downside in between acquired price and realized price will be borne by the beneficiary of the trusts Banks/FIs). "Qualified institutional buyer" means a financial institution, insurance company, bank, state financial corporation, state industrial development corporation, trustee or securitisation company or reconstruction company which has been granted a certificate of registration under sub-section 4) of section 3 or any asset management company making investment on behalf of mutual fund or pension fund or a foreign institutional investor registered under the Securities and Exchange Board of India Act, 1992 15 of 1992) or regulations made there under, or any other body corporate as may be specified by the Board;

Minimum Net owned fund of ARC:-ARC must be having the owned fund of not less than two crore rupees or such other amount not exceeding fifteen per cent of total financial assets acquired or to be acquired by the securitisation company or reconstruction company, as the Reserve Bank may, by notification, specify:PROVIDED that the Reserve Bank may, by notification, specify different amounts of owned fund for different class or classes of securitisation companies or reconstruction companies:

However w.e.f 28.04.2017, RBI has been decided to fix the minimum Net Owned Fundsrequirement for ARCs at Rs.100 crore on an ongoing basis. All the ARCs which are already registered with Reserve Bank of India as on the date of the Notification and not having the revised minimum NOF as on date shall achieve a minimum NOF of Rs. 100 crore latest by March 31, 2019. ARCs shall submit a certificate from their Statutory Auditors periodically as evidence of compliance thereof.

ISFA JAIIB PAPER 3


Registration:- No ARC shall commence or carry on the business without obtaining a certificate of registration from RBI.

►Central registry● The Central Government may, by notification, set up the Central Registry with its own seal for the purposes of registration of transaction of Securitisation and reconstruction of financial assets and creation of security interest.Accordingly, all particulars of creation, modification or satisfaction of security interest inimmovable property by mortgage & other than mortgage by deposit of title deeds shall be filed in Form I or Form II, as the case may be, and shall be authenticated by a person specified in the Form for such purpose by use of a valid digital signature. That means not only for immovable property but also for Hypothecation of Plant & Machinery, Book Debts receivables, & including Charge on Intangible Property.● The central government may also notify the territorial limits within which an office of a Central Registry may perform.● The central registrar is to beinformed within 30 days of any Securitisation transaction, asset reconstruction or security interest.● The particulars of Securitisation or reconstruction or security interest entered in the Central Register of such transactions kept under section 22 shall be open during the business hours for inspection by any person on payment of such fees as may be prescribed. →Offences and Penalties if a default is made:a) in filing under section 23, the particulars of every transaction of any Securitisation or asset reconstruction or security interest created by a Securitisation company or reconstruction company or secured creditors; orb) in sending under section 24, the particulars of the modification referred to in that section; orc) in giving intimation under section 25,● Every company and every officer of the company or the secured creditor and every officer of the secured creditor who is in default shall be punishable with fine that may extend to five thousand rupees for every day during which the default continues.● If any Securitisation company or reconstruction company fails to comply with any direction issued by the Reserve Bank under section 12, such company and every officer of the company who is in default, shall be punishable with fine which may extend to five lakh rupees and in the case of a continuing offence, with an additional fine, which may extend to Rs. 10,000 for every day during which the default continues. ● If any person contravenes or attempts to contravene or abets the contravention of the provisions of this Ordinance or of any rules made there under, he shall be punishable with imprisonment for a term which may extend to one year, or with fine, or with both.● No court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the First Class shall try an offence punishable under this Ordinance.Creation of a Central Repository of Large Common Exposures - Across BanksThe Reserve Bank of India being satisfied that it is necessary to build a repository of large credits and share with the banks for enabling them to be aware of building leverage and common exposures. Accordingly, it has been decided to use the information supplied by the banks through the Return on Large Borrowers Form A) [Part D of Return on Large Credit in the revised XBRL based reporting system], which captures system-wide exposure of individuals and entities having exposure both fund and non-fund based) of more than Rs 10 crore, for creation of central repository of large credits across banks.

► Civil Court not to have jurisdictionNo civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 51 of 1993).

****

ISFA JAIIB PAPER 3


CHAPTER 9DEBT RECOVERY TRIBUNAL

The Debts Recovery Tribunal have been constituted under Section 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. The original aim of the Debts Recovery Tribunal was to receive claim applications from Banks and Financial Institutions against their defaulting borrowers. For this the Debts Recovery Tribunal Procedure) Rules 1993 were also drafted.While the amending notification of 2000 did bring in some amount rationalization in the jurisdiction of the Debts Recovery Tribunal, yet it was not sufficient to coax the big borrowers to acquiesce to the jurisdiction of the Debts Recovery Tribunal easily. The lenders continued to groan under the weight of the Non Performing Assets. This led to the enactment of one more drastic act titled as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, also called as SRFAESI Act or SRFAESIA for short.

This new Act, the SRFAESI Act, empowered the lenders to take into their possession the secured assets of their borrowers just by giving them notices, and without the need to go through the rigors of a Court procedure. Initially this brought in lot of compliance from borrowers and many a seasoned defaulter coughed up the Bank dues. However the tougher ones punched whole in the new Act too. This led Supreme court striking down certain provisions and allowing the borrowers an adjudicatory forum before their properties could be taken over by the lenders.

And the adjudicatory forum turned out to be the Debts Recovery Tribunal. The Debts Recovery Tribunal now deal with two different Acts, namely the Recovery of Debts Due to Banks and Financial Institutions Act as well as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act. It extends to the whole of India except the State of Jammu and Kashmir. While the aim of the both the Acts is one and the same, but their route is different.In matters of Recovery of Debts to Due to Banks and Financial Institutions, the Debts Recovery Tribunal DRT) enjoy far greater powers than do the civil courts. The Recovery Officer of a DRT has even more powers to issue a variety of orders for enforcing the Recovery Certificate.

No appeal shall be entertained unless the borrower has deposited with the Appellate Tribunal fifty per cent of the amount of debt due from him, as claimed by the secured creditors or determined by the Debts Recovery Tribunal, whichever is less:PROVIDED ALSO that the Appellate Tribunal may, for the reasons to be recorded in writing, reduce the amount to not less than twenty-five per cent of debt.

Procedure for filing applications.-1) An application shall be presented in Form annexed to these rules by the applicant in person or by his agent or by a duly authorised legal practitioner to the Registrar of the Bench within whose jurisdiction his case falls or shall be sent by registered post addressed to the Registrar.

2) An application sent by post shall be deemed to have been presented to the Registrar the day on which it was received in the office of the Registrar.

3)Every application shall be accompanied by a paper book containing,-i) statement showing details of the debt due from a defendant and the circumstances under which such a debt has become due; ii) all documents relied upon by the applicant and those mentioned in the application;

4) DRT Act is set up to decide on applications of recovery by banks/FI for any amount above Rs.10 lakh only.

ISFA JAIIB PAPER 3


Note:- Can the barrower aggrieved by the action of the secured creditor appeal to DRT as provided in section 17 of the SARFAESI Act 2002, though the amount of the assets is below ten lakh?Ans:- When a borrower aggrieved by an order of the DRT under the SARFAESI Act 2002, the appeal would lie to the Debt Recovery Appellate Tribunal Delhi, irrespective of the fact of the amount of debt.

Filing of reply and other documents by the respondent.- 1) The defendant may file two complete sets containing the reply to the application along with documents in a paper book form with the registry within one month of the service of the notice of the filing of the application on him. 2) The defendant shall also endorse one copy of the reply along with documents. 3) The Tribunal may, in its discretion on application by the respondent, allow the filing of reply, after the expiry of the period referred to therein.4) If the defendant fails to file the reply or on the date fixed for hearing of the application, the Tribunal may proceed forthwith to pass an order on the application as it thinks fit. 5) Where a defendant makes an admission of the full or part of the amount of debt due to a bank or financial institution, the Tribunal shall order such defendant to pay the amount, to the extent of the admission, by the applicant within a period of one month from the date of such order failing which the Tribunal may issue a certificate in accordance with section 19 of the Act to the extent of amount of debt due admitted by the defendant.

Communication or orders to parties.- Every order passed on an application shall be communicated to the applicant and to the defendant either in person or by registered post free of cost.The period of limitation for filing an appeal to DRTA is 45 days from the date of the receipt of the order by a party.

Composition of DRT:A tribunal shall consist of one person only- the Presiding Officer- to be appointed, by notification, by the Central Government. The Central Government may, also, specify that a Presiding Officer of one tribunal may, also, takeover the functions of the Presiding Officer of another tribunal.

→The qualifications of a Presiding Officer:A person shall not be qualified for appointment as the Presiding Officer of a Tribunal unless, he is, or has been, or is qualified to be, a District Judge.

→Term of Office:The Presiding Officer of a Tribunal shall hold office for a term of five years from the date he enters upon his office or, until he attains the age of sixty-two years, whichever is earlier.

Debt Recovery Appellate Tribunals:- Second Stage of Proceedings under Recovery of Debts due to banks and financial institution Act, 1993, if opted by aggrieved party:-Following Appeals can be filed in DRAT:

1. Against the final orders passed by the Presiding Officers of various DRTs.2. Against Interim orders/directions given by the Presiding Officers of various DRTs.3. Against orders on MA/IA/Appeal against RO’s orders, etc passed by the Presiding

Officers of various DRTs.4. Against orders on appeals filed under The Securitisation & Reconstruction of Financial

Assets & Enforcement of Security Interest Act, 2002, passed by the Presiding Officers of various DRTs.

5. Applications under subsection 6) of section 17 of the Securitisation & Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002.

Deposit Amount of Debt due on filling appeal:

ISFA JAIIB PAPER 3


The aggrieved party against whom an order is made by the tribunal determining the quantum of liability of debt of such person may prefer an appeal to the Appellate Tribunal under section 20 of the act. But it is subject to depositing 75 % of the amount of debt so determined in to the appellate tribunal. However, the Appellate Tribunal may, for reasons to be recorded in writing, waive or reduce the amount to be deposited.

Composition of Appellate Tribunal:The composition of the appellate tribunal has been dealt under section 8 of the Debt Due to Banks and Financial Institution Act. Section 8 of the act provides for the composition of the Appellate Tribunal and requires the central government to appoint by notification one person to be called as the chairperson of the appellate tribunal.

Section 10 of the act prescribes the qualifications for the appointment as chairperson of the Appellate Tribunal. The negative aspect of this section is that it provides a person shall not be qualified for the appointment as the chairperson of an appellate tribunal unless the person:-[16]a) Is or has been a judge of High Courtb) Is qualified to be a judge of High Courtc) Has been a member of the Indian legal service and has held a post in grade I of that service for at least three yearsd) Has held the office as the presiding officer of the Debt Recovery Tribunal for at least three years.

Term of Office:- The term of the office of the chairperson of the Appellate Tribunal is explained in section 11 of the act. Section 11 provides the terms of the office of chairpersons of an Appellate Tribunal and provides that the chair person shall hold the office for the term of five years from the date of entering up on his office or until he completes the age of sixty two years or which ever is earlier.

****

ISFA JAIIB PAPER 3


CHAPTER 10BANKERS BOOKS EVIDENCE ACT, 1891

It extends to the whole of India except the State of Jammu and Kashmir. The Act became necessary because banking companies involved in litigation were required to produce their books in the courts in evidence of the transactions made by them."Bankers books" include ledgers, day-books, cash-books, account-books and all other records used in the ordinary business of the bank, whether these records are kept in written form or stored in a micro film, magnetic tape or in any other form of mechanical or electronic data retrieval mechanism, either onsite or at any offsite location including a back-up or disaster recovery site of both.Evidence:- A certified copy of any entry in a bankers book shall in all legal proceedings be received as prima facie evidence of the existence of such entry, and shall be admitted as evidence of the matters, transactions and accounts therein recorded in every case where, and to the same extent as, the original entry itself is now by law admissible, but not further or otherwise."Certified copy" means when the books of a bank, -a) Are maintained in written form, a copy of any entry in such books together with a certificate written at the foot of such copy that it is a true copy of such entry, that such entry is contained in one of the ordinary books of the bank and was made in the usual and ordinary course of business and that such book is still in the custody of the bank, and where the copy was obtained by a mechanical or other process which in itself ensured the accuracy of the copy, a further certificate to that effect, but where the book from which such copy was prepared has been destroyed in the usual course of the bank's business after the date on which the copy had been so prepared, a further certificate to that effect, each such certificate being dated and subscribed by the principal accountant or manager of the bank with his name and official title; andb) Consist of printouts of data stored in a floppy, disc, tape or any other electromagnetic data storage device, a printout of such entry or a copy of such printout together with such statements certified in accordance with the provisions of section 2A.c) a printout of any entry in the books of a bank stored in a micro film, magnetic tape or in any other form of mechanical or electronic data retrieval mechanism obtained by a mechanical or other process which in itself ensures the accuracy of such printout as a copy of such entry and such printout contains the certificate in accordance with the provisions of section 2A.Case in which officer of bank not compellable to produce books:-No officer of a bank shall in any legal proceeding to which the bank is not a party be compellable to produce any bankers book the contents of which can be proved under this Act, or to appear as a witness to prove the matters, transactions and accounts therein recorded, unless by order of the Court or a Judge made for special cause.Inspection of books by order of Court or Judge 1) On the application of any party to a legal proceeding the Court or a Judge may order that such party be at liberty to inspect and take copies of any entries in a bankers book for any of the purposes of such proceeding, or may order the bank to prepare and produce, within a time to be specified in the order, certified copies of all such entries, accompanied by a further certificate that no other entries are to be found in the books of the bank relevant to the matters in issue in such proceeding, and such further certificate shall be dated and subscribed in manner hereinbefore directed in reference to certified copies.2) An order under this or the preceding section may be made either with or without summoning the bank, and shall be served on the bank three clear days exclusive of bank holidays) before the same is to be obeyed, unless the Court or Judge shall otherwise direct.3) The bank may at any time before the time limited for obedience to any such order as aforesaid either offer to produce their books at the trial or give notice of their intention to show cause against such order, and thereupon the same shall not be enforced without further order

** ***

ISFA JAIIB PAPER 3


CHAPTER 11BANKING OMBUDSMAN SCHEME, 2006

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 CooperativeBanks are covered under the Scheme.

How is the new Banking Ombudsman Scheme, 2006 different from the Old Banking Ombudsman Scheme, 2002The extent and scope of the new Scheme is wider than the earlier Scheme of 2002.

The new Scheme also provides for online submission of complaints. The new Scheme additionally provides for the institution of an 'appellate authority' for providing scope for appeal against an award passed by the Ombudsman both by the bank as well as the complainant.

The Banking Ombudsman can receive and consider any complaint relating to the following deficiency in banking services:→non-payment or inordinate delay in the payment or collection of cheques, drafts, bills, etc.;→non-acceptance, without sufficient cause, of small denomination notes tendered for any purpose, and for charging of commission for this service;→�non-acceptance, without sufficient cause, of coins tendered and for charging of commission for this service;→�non-payment or delay in payment of inward remittances ;→failure to issue or delay in issue, of drafts, pay orders or bankers’ cheques;→�non-adherence to prescribed working hours;→failure to honour guarantee or letter of credit commitments ;→failure to provide or delay in providing a banking facility other than loans and advances) promised in writing by a bank or its direct selling agents;→delays, non-credit of proceeds to parties' accounts, non-payment of deposit or non-observance of the Reserve Bank directives, if any, applicable to rate ofinterest on deposits in any savings, current or other account maintained with a bank ;→�delays in receipt of export proceeds, handling of export bills, collection of bills etc., for exporters provided the said complaints pertain to the bank's operations in India;→refusal to open deposit accounts without any valid reason for refusal;→levying of charges without adequate prior notice to the customer;→non-adherence by the bank or its subsidiaries to the instructions of Reserve Bank on ATM/debit card operations or credit card operations;→non-disbursement or delay in disbursement of pension to the extent the grievance can be attributed to the action on the part of the bank concerned,but not with regard to its employees);→refusal to accept or delay in accepting payment towards taxes, as required by Reserve Bank/Government;→refusal to issue or delay in issuing, or failure to service or delay in servicing or redemption of Government securities;→forced closure of deposit accounts without due notice or without sufficient reason;→�refusal to close or delay in closing the accounts;→non-adherence to the fair practices code as adopted by the bank; and→�any other matter relating to the violation of the directives issued by the Reserve Bank in relation to banking or other services.

ISFA JAIIB PAPER 3


The Complainant can file his complaint before the Banking Ombudsman if the reply is not received from the bank within a period of one month, 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.→The Banking Ombudsman does not charge any fee for resolving customers’ complaints.→The Banking Ombudsman endeavors to promote, through conciliation or mediation, a settlement of the complaint by agreement between the complaint and the bank named in the complaint.→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.→The Banking Ombudsman shall not have power to pass an award which is more than actual loss suffered by the complainant or Rs. 10 lakhs rupees whichever is lower. In case complaints arising out of credit card it will be not exceeding Rs. 1 lakh considering time & expenses incurred by complainant, harassment and mental anguish of complainant.→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 15 days from the date of receipt of the copy of the award by him.→If the Banking Ombudsman is satisfied with the reasons stated by the complainant in his letter of request for extension of time for sending his letter of acceptance of the award), he may grant extension of time up to further period of 15 days for such compliance.→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 against the Banking Ombudsmen’s decision.→The rejection of an award by the complainant does not affect any other recourse and/or remedies available to him as per the law.→The bank has the option to file an appeal before the appellate authority under the scheme.

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

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.

The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India to provide an expeditious grievance redressal mechanism to customers of banks. It provides for an institutional and legal framework for resolution of complaints relating to banking services and other matters as specified under the Scheme. The Scheme has been brought into force by way of direction issued by the Reserve Bank in terms of Section 35A of the Banking Regulation Act, 1949. The Reserve Bank will also appoint its serving senior officials as the Banking Ombudsman and will also fully fund it for better effectiveness.

*** *

ISFA JAIIB PAPER 3


CHAPTER 12THE INSOLVENCY AND BANKRUPTCY CODE, 2016 (IBC)

The Insolvency and Bankruptcy Code, 2016 (IBC) was passed by the Parliament on 11 May 2016, received Presidential assent on 28 May 2016 and was notified in the official gazette on the same day.Why IBC: The current Indian bankruptcy regime is highly fragmented, borne out of multiple judicial forums resulting in a lack of clarity and certainty in jurisdiction. Decisions are often appealed, stayed or overturned by judicial forums having a concurrent or overlapping jurisdiction. Secured and unsecured creditors, employees, regulatory authorities have different and often competing rights with no common regulatory process to determine the priority of claims. As a result, the average time to resolve insolvency in India is 4.5 years, as compared to 0.8 years for Singapore and one year in London. Currently large amount of NPA with Banks which don’t have easy solutions and hence the IBC may give good hand to banks to resolve the issue.

Key Features of it:1. Insolvency and Bankruptcy Code, 2016 (Code) provides for a specialised forum to oversee all insolvency and liquidation proceedings for individuals, SMEs, Partnerships, LLP and corporates.2. The existing debt recovery tribunals to be adjudicating authority (enforcement & approval authority) for individuals and unlimited liability partnership firms. The National Company law Tribunal (NCLT) would be adjudicating authority for companies and limited liability entities.3. It empowers all classes of creditors (secured and unsecured lenders, employees, trade creditors, regulatory authorities) to trigger a resolution process in case of non payment of a valid claim.4. Provides for immediate suspension of the Board of Directors and promoters’ powers.5. Provides for an insolvency professional to take control of the Corporate debtor.6. To initiate an insolvency process for corporate debtors, the default should be at least INR 100,000 (this limit may be increased up to INR 10,000,000 by the Government). For Individuals & Partnerships the limit is Rs.1000 (Govt. may fix the higher amount whenever deem fit).7. The Code makes a distinction between creditors holding Financial debt and creditors holding Operational debt. Financial debt means Term Loans, Working capital loans etc.,Non fund based limits such as bank guarantees, Bonds, notes, debentures, loan stock or any similar instrument; Lease or hire purchase agreements, receivables sold or discounted (other than any receivables to the extent they are sold on a non-recourse basis);any other transaction, having the commercial effect of a borrowing;Operational debt means debt incurred in exchange for the provision of goods or services (including employment) or debt in respect of the payment of dues arising under any law for the time being in force payable to the Central Government, any State Government or any regulator;8. After the default, if creditors wants to enforce the IBC, they have to make a petition with adjudicating authority, and adjudicating authority is required to Approve or reject the petition within 14 days.9. Financial creditors filing the petition should propose the name of interim resolution professional in the petition10. The interim resolution professional’s appointment will be subsequently approved by 75% of the creditors by value in the first creditors committee meeting. Fees of RP to be decided by creditors committee.11. The Code provides for an automatic moratorium of 180 days against any debt recovery actions by the creditors. The moratorium can only be extended by a further period of 90 days in exceptional circumstances.

****

ISFA JAIIB PAPER 3


CHAPTER 13CONSUMER PROTECTION ACT & LOK ADALAT

Consumer Protection Act can be described as common man’s Civil Court and MRTP Act for the poor. The Act is designed to make available cheap and quick remedy to a small consumer. The Act was passed in 1986 and was made effective in 1987. Amendments were made in 1991 to provide for situations of absence of President of Forum. Major changes were made in 1993 effective from 18-6-1993). - -

Three-Tier Grievance Redressal MachineryFor enforcement of the rights of the consumers, the Act has created special consumer Courts. As Act provides for a three-tier consumer grievance redressal machinery with the District Forums at the base, the State Commission at the middle level and the National Commission at the apex level. The State and national level bodies also function as appellate authorities. Any verdict given by the National Commission can be challenged in the Supreme Court.

After 1993 amendments, on getting further experience of implementation of the Act, substantial changes have been made by Amendment Act, 2002. Major changes made in the Amendment Act are - * Enhancement in monetary limit of District Forum from Rs 5 lakhs to 20 lakhs and of State Commission from Rs 20 lakhs to Rs one crore * Payment of fees for filing complaint/appeal * Complaint/appeal will have to be admitted first * Reason to be recorded if decision not given within specified time * Cost of adjournment can be imposed * Interim orders can be passed * In absence of President, senior most member can discharge functions of President * Pre-deposit of certain amount before appeal is entertained * Notice can be sent by Fax/courier. The amendments have been made effective from 15-3-2003.

Composition of the District Fourm:- Each District Forum shall consist ofa) A person who is, or who has been or is qualified to be, a District Judge, who shall be its President;b) two other members, one of whom shall be a woman, who shall have the following qualifications, namely:-i) be not less than thirty-five years of age,ii) posses a bachelor's degree from a recognized university,iii) be persons of ability, integrity and standing, and have adequate knowledge and experience of at least ten years in dealing with problems relating to economics, law, commerce, accountancy, industry, public affairs or administration:

Provided that a person shall be disqualified for appointment as member if he-a) has been convicted and sentenced to imprisonment for an offence which, in the opinion of the State Government, involves moral turpitude; orb) is an undischarged insolvent; orc) is of unsound mind and stands so declared by a competent court; ord) has been removed or dismissed from the service of the Government or a body corporate owned or controlled by the Government; ore) has, in the opinion of the State Government, such financial or other interest as is likely to affect prejudicially the discharge by him of his functions as a member; orf) has such other disqualifications as may be prescribed by the State Government.

2) Every member of the District Forum shall hold office for a term of five years or up to the age of sixty-five years/ whichever is earlier.

Composition of state Commission:-Each State Commission shall consist of -

a) a person who is or has been a Judge of a High Court, appointed by the State Government, who shall be its President :Provided that no appointment under this clause shall be made except after consultation with the Chief Justice of the High Court;

ISFA JAIIB PAPER 3


b) two other members, who shall be persons of ability, integrity and standing and have adequate knowledge or experience of, or have shown capacity in dealing with problems relating to economics, law, commerce, accountancy, industry, public affairs or administration, one of whom shall be a woman.

2) Every member of the State Commission shall hold office for a term of five years or up to the age of sixty-seven years, whichever is earlier and shall not be eligible for re-appointment.

Composition of National Commission :- The National Commission shall consist of-a) a person who is or has been a Judge of the Supreme Court, to be appointed by the Central Government, who shall be its President:[Provided that no appointment under this clause shall be made except after consultation with the Chief Justice of India;]

[b) not less than four, and not more than such number of members, as may be prescribed, and one of whom shall be a woman, who shall have the following qualifications, namely:-i) be not less than thirty-five years of age;ii) possess a bachelor's degree from a recognised university; andiii) be persons of ability, integrity and standing and have adequate knowledge and experience of at least ten years in dealing with problems relating to economics, law, commerce, accountancy, industry, public affairs or administration.

Provided that not more than fifty per cent, of the members shall be from amongst the persons having a judicial background.

Explanation.--For the purposes of this clause, the expression "persons having judicial background" shall mean persons having knowledge and experience for at least a period of ten years as a presiding officer at the district level court or any tribunal at equivalent level:

2) Every member of the National Commission shall hold office for a term of five years or up to the age of seventy years, whichever is earlier:Provided that a member shall be eligible for re-appointment for another term of five years or up to the age of seventy years, whichever is earlier, subject to the condition that he fulfils the qualifications and other conditions for appointment mentioned in clause b) of sub-section 1) and such re-appointment is made on the basis of the recommendation of the Selection Committee.

Procedure under CPA - Section 121) provides that a complaint in relation to any goods sold or delivered or to be sold or delivered or any service provided or agreed to be provided may be filed with consumer forum.The Act envisages setting up of ‘Consumer Disputes Redressal Agency’ at local, i.e., district level, state level and national Central) level. District Forum has jurisdiction to decide consumer disputes where value of goods or services and the compensation claimed does not exceed Rs. 20 lakhs. State Commission has jurisdiction to decide the cases where value of goods and services plus compensation is over Rs. 20 lakhs but not over Rs. 100 lakhs. In addition, it decides appeals filed against order of District Forum. National Commission HQ at New Delhi) has original jurisdiction where matter is over Rs. 100 lakhs. It also has appellate jurisdiction over State Commission. Appeal against order of State Commission can be filed only in case of original order by State Commission i.e. when matter was over Rs. 20 lakhs. No appeal can be filed to National Commission in case where State Commission has passed order in appeal against original order of District Forum.

Appeal against order of National Commission lies with Supreme Court only in matters where it exercises original jurisdiction, i.e., when matter is over Rs. 100 lakhs. There is no provision of appeal in cases where National Commission decides under its appellate jurisdiction, i.e., when it decides appeal against order of State Commission.

ISFA JAIIB PAPER 3


Thus, in all cases, only one appeal has been provided.[However, revision petition to National Commission, which is second appeal, can be filed].

Complaint can be filed by a consumer, a voluntary consumer association or Central/State Government. Class Action i.e., some consumers filing complaint on behalf of many consumers is also permitted. Complaint can be filed against a) deficiency in goods or service b) unfair trade practice or restrictive trade practice c) charging of higher prices d) Supplying hazardous goods or services. Fees are required to be paid along with the complaint. Complaint must be filedwithin two years from ‘cause of action’. This period can be extended on showing sufficient cause. Appeal against order of District Forum/State Commission/National Commission must be filed within 30 days from date of order. Penalty upto Rs. 10,000 can be imposed on a complainant, if it is found that he has made frivolous bogus) complaint. Persons not complying with order of redressal authorities can be punished with imprisonment upto three years and/or fine upto Rs. 10,000.

Provisions are made for enforcement of order and imposition of penalty in case order of consumer forum is disobeyed.

Complaint to consumer forum - Section 121) provides that a complaint in relation to any goods sold or delivered or to be sold or delivered or any service provided or agreed to be provided may be filed with consumer forum.District, State Commission and National Commission are consumer forums, termed as Consumer Dispute Redressal Agencies. It is necessary to understand meaning of ‘complaint’ and who can file the same.

Defect - The word ‘defect’ means any fault, imperfection or shortcoming in the quality, quantity potency, purity or standard that is required to be maintained by or under any law for the time being in force or under any contract, express or implied, or as is claimed by the trader in any manner whatsoever in relation to any goods Section 21)f) of CPA).

Consumer Dispute - ‘Consumer Dispute’ means a dispute where the person against whom a complaint has been made, denies or disputes the allegations contained in the complaint [section 21)e)]. - - Obviously, if the person against whom complaint is made agrees to the complaint, there is no ‘consumer dispute’.

Who is ‘Complainant’ - Section 21)b) of CPA defines that "Complainant" means i) a consumer; or ii) any voluntary consumer association registered under the Companies Act, or under any other law for the time being in force; or iii) the Central Government or any State Government, who or which makes a complaint or iv) One or more consumers, where there are numerous consumers having the same interest or v) in case of death of a consumer, his legal heir or representative; - - who or which makes a complaint.Exclusion if goods or services for Commercial purpose - A person who buys goods for resale or commercial purposes or avails services for commercial purposes is specifically excluded from definition of ‘consumer’.

Trader - Complaint can be lodged against a trader in case of goods and against service provider in case of services. ‘Trader’ includes manufacturer.

Deficiency in service - Complaint can be lodged against service provider if there is deficiency in service, or if he charges higher prices or provides services which are hazardous or where service provider follows unfair or restrictive trade practice.

Deficiency - ‘Deficiency’ means any fault, imperfection or shortcoming in the quality, quantity, potency, purity or standard, which is required to be maintained by or under any law for the time being in force or has been undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service. [section 21)g) of CPA].

ISFA JAIIB PAPER 3


LOK ADALATLok Adalats are organized under the Legal Services Authorities Act, 1987. They are intended to bring about a compromise or settlement in respect of any dispute or potential dispute. Lok Adalats are swift, hassle free and cheaper forum of recovering Bank dues. Every Award made by the Lok Adalat is final and binding on all the parties. Award becomes decree of the court. Could be executed on default. The award passed in respect of pre-litigative cases is executable by the court of District Judge in which the lok Adalat is held. OTS proposals sanctioned by the Bank can be put through Lok Adalats, so that in case of default, the Award/Decree could be executed by filing EP. Entire court fee paid at the time of filing of suit , shall be refunded in respect of cases settled in Lok Adalat. Monetary Ceiling of cases referred to Lok Adalat has been enhanced to Rs 20 lakh .DRT/DRAT can also organize lok adalat for dues Rs 10 lacs and above.

*** *

ISFA JAIIB PAPER 3


CHAPTER 14INDIAN CONTRACT ACT

We enter into contracts so many times in a day that ‘contract’ has become an indispensable part of our life. When you purchase milk or newspaper in the morning or go to movie in the evening, you are entering into a contract. Indian Contract Act really codifies the way we enter into a contract, execute a contract, implement provisions of a contract and effects of breach of a contract. Basically, a person is free to contract on any terms he chooses. The Contract Act consists of limiting factors subject to which contract may be entered into, executed and breach enforced. It only provides a framework of rules and regulations which govern formation and performance of contract. The rights and duties of parties and terms of agreement are decided by the contracting parties themselves. The court of law acts to enforce agreement, in case of non-performance.

Essential Ingredients of a contract - As per Contract Act, an agreement enforceable by law is a contract. [section 2h)]. Hence, we have to understand first what is ‘agreement’.Every promise and every set of promises, forming the consideration for each other, is an agreement. [section 2e)]. - - A person makes a proposal offer). When it is accepted by other, it becomes a promise. However, promise cannot be one sided. Only a mutual promise forming consideration for each other is ‘agreement’. - - For example, A agrees to pay Rs 400 to B and B agrees to give him a book which is priced at Rs 400. This is set of promises which form consideration for each other. However, if A agrees to pay Rs 400 to B, but B does not promise anything, it is not ‘set of promises forming consideration for each other’ and hence not an agreement.It should be noted that the term ‘agreement’ as defined in Contract Act requires mutual consideration. - - Thus, if A invites B to dinner and B agrees to come, it is not an ‘agreement’ as defined in Contract Act.

MEANING OF ‘PROPOSAL’ - When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal. [section 2a)].- - Thus, a ‘proposal’ can be to do a positive act or abstinence from act i.e. negative act). [English Act uses the word ‘offer’, while Indian Contract Act uses the word ‘proposal’. Generally, both words are used inter-changeably. This is not technically correct, as the word ‘offer’ is not used in Contract Act].

MEANING OF ‘PROMISE’ - When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise. [section 2b)]. - - Thus, when a proposal offer) is accepted, it becomes a ‘promise’. As is clear from the definition, only person to whom proposal is made can signify his assent. Other person cannot accept a proposal.PROMISOR AND PROMISEE - The person making the proposal is called the “promisor”, and the person accepting the proposal is called the “promisee”. [section 2c)].RECIPROCAL PROMISES - Promises which form the consideration or part of the consideration for each other are called reciprocal promises. [section 2f)].

Consideration for promise – The definition of ‘agreement’ itself states that the mutual promises should form consideration of each other. Thus, ‘consideration’ is essential for an agreement. A promise without consideration is not ‘agreement’ and hence naturally, it is not a ‘contract’.DEFINITION OF ‘CONSIDERATION’ - When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consid-eration for the promise. [section 2d)].Steps involved in contract - The steps involved in the contract are – * proposal and its communication * acceptance of proposal and its communication * Agreement by mutual promises * Contract * Performance of Contract. - - All agreements are not contract. Only those agreements which are enforceable by law are ‘contracts’. Following are essential requirements of a valid contract.

ISFA JAIIB PAPER 3


Offer and its acceptanceFree consent of both partiesMutual and lawful consideration for agreementIt should be enforceable by law. Hence, intention should be to create legal relationship. Agreements of social or domestic nature are not contractsParties should be competent to contractObject should be lawfulCertainty and possibility of performanceContract should not have been declared as void under Contract Act or any other law

Communication, acceptance and revocation of proposals - Communication of proposal/ revocation/acceptance are vital to decide validity of a contract. A ‘communication’ is complete only when other party receives it.

ACCEPTANCE MUST BE ABSOLUTE - In order to convert a proposal into a promise, the acceptance must - 1) be absolute and unqualified; 2) be expressed in some usual and reasonable manner, unless the proposal prescribed the manner in which it is to be accepted. If the proposal prescribes a manner in which it is to be accepted, and the acceptance is not made in such a manner, the proposer may, within a reasonable time after the acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but if he fails to do so, he accepts the acceptance. [section 7].Acceptance of offer is complete only when it is absolute and unconditional. Conditional acceptance or qualified acceptance is no acceptance.

PROMISES, EXPRESS OR IMPLIED - Insofar as the proposal or acceptance of any promise is made in words, the promise is said to be express. Insofar as such proposal or acceptance is made otherwise than in words, the promise is said to be implied. [section 9]. - - For example, if a person enters a bus, there is implied promise that he will pay the bus fair.

VOIDABLE CONTRACT - An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract. [section 2i)]. - - a) When consent is obtained by coercion, undue influence, misrepresentation or fraud is voidable at the option of aggrieved party i.e. party whose consent was obtained by coercion/fraud etc. However, other party cannot avoid the contract. b) When a contract contains reciprocal promises and one party to contract prevents the other from performing his promise, the contract becomes voidable at the option of the party to prevented. section 53). Obvious principle is that a person cannot take advantage of his own wrong c) When time is essence of contract and party fails to perform in time, it is voidable at the option of other party section 55). A person who himself delayed the contract cannot avoid the contract on account of his own) delay.

VOID CONTRACT - A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable. [section 2j)]. - - Thus, initially a contract cannot be void, i.e. a contract cannot be void ab initio. The simple reason is that in such a case, it is not a contract at all to begin with. Hence, only a valid contract can become void contract due to some subsequent events. e.g. the person dies or property is destroyed or Government imposes a ban etc. - - A void agreement is void ab initio. It never becomes a contract. It is nullity and cannot create any legal rights.

What agreements are contracts - All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Nothing herein contained shall effect any law in force in India and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents. [section 10].

ISFA JAIIB PAPER 3


Who are competent to contract - Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject. [section 11].

Free consent – Consent of both parties must be free. Consent obtained through coercion, undue influence, fraud, misrepresentation or mistake is not a ‘free consent’. - - Two or more persons are said to consent when they agree upon the same thing in the same sense. [section 13]. - - Consent is said to be free when it is not caused by - 1) coercion, as defined in section 15, or 2) undue influence, as defined in section 16, or 3) fraud, as defined in section 17, or 4) misrepresentation, as defined in section 18, or 5) mistake, subject to the provisions of sections 20, 21 and 22. - - Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation or mistake. [section 14].

Void agreements - An agreement not enforceable by law is said to be void. [section 2g)]. - -Note that it is not ‘void contract’, as an agreement which is not enforceable by law does not become ‘contract’ at all. Following are void agreements - * Both parties under mistake of fact section 20) * Unlawful object or consideration section 24) * Agreement without consideration section 25) * Agreement in restraint of marriage section 26) * Agreement in restraint of trade section 27) * Agreement in restraint of legal proceedings section 28) * Uncertain agreement section 29) * Wagering agreement section 29) * Agreement to do an impossible Act section 56). - - These are discussed below.

Obligation of person who has received advantage under void agreement or contract that becomes void - When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it.

Contingent contract - A “contingent contract” is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. Illustration - A contracts to pay B Rs. 10,000 if B’s house is burnt. This is a contingent contract. [section 31].

Consequences of Breach of Contract - Compensation is payable for breach of contract. Penalty is also payable if provided in contract. Breach of contract may be actual or anticipatory.Summary of principles of compensation and damages - Following points are important - * Compensation for loss or damage is payable. Since the word used is ‘compensation’, punitive damages cannot be awarded. * These should be in usual course or known to parties i.e. both parties must be aware * No compensation for remote and indirect loss or damage * Same principle applies to quasi contract also.

Contract of indemnity - A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a ‘contract of indemnity’. - - Illustration - A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity. [section 124].

Contract of guarantee - A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written. [section 126]. - - [Person giving guarantee is also called as ‘guarantor’. However, Contract Act uses the word ‘surety’ which is same as ‘guarantor’]. - - Three parties are involved in contract of guarantee. Contract between any two of them is not a ‘contract of guarantee’. It may be contract of indemnity. Primary liability is of the principal debtor. Liability of surety is secondary and arises when Principal Debtor fails to fulfill his commitments. However, this is so when surety gives guarantee at the request of principal

ISFA JAIIB PAPER 3


debtor. If the surety gives guarantee on his own, then it will be contract of indemnity. In such case, surety has all primary liabilities.CONSIDERATION FOR GUARANTEE - Anything done, or any promise made, for the benefit of the principal debtor, may be sufficient consideration to the surety for giving the guarantee. - -Illustrations - a) B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s promise to deliver the goods. This is sufficient consideration for C’s promise. b) A selms and delivers goods to B. C afterwards requests A to gorbear to sue B for the debt for a year, and promises that if xe does so,`C will pay for them in default of payment by B. A agrees to forbear as requested. This is a sufficient consideration for C’s promise. c) A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B. The agreement is void. [section 127].

Bailment - Bailment is another type of special contract. Since it is a ‘contract’, naturally all basic requirements of contract are applicable. - - Bailment means act of delivering goods for a specified purpose on trust. The goods are to be returned after the purpose is over. In bailment, possession of goods is transferred, but property i.e. ownership is not transferred. A “bailment” is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the “bailor”. The person to whom they are delivered is called the “bailee”. - - Explanation : If a person already in possession of the goods of another, contracts to hold them as a bailee, he thereby becomes the bailee, and owner becomes the bailor, of such goods, although they may not have been delivered by way of bailment. [section 148]. [Thus, initial possession of goods may be for other purpose, and subsequently, it may be converted into a contract of bailment, e.g. seller of goods will become bailee if goods continue in his possession after sale is complete].Bailment can be only of ‘goods’. As per section 27) of Sale of Goods Act, ‘goods’ means every kind of movable property other than money and actionable claim. - - Thus, keeping money in bank account is not ‘bailment’. Asking a person to look after your house or farm during your absence is not ‘bailment’, as house or farm is not a movable property.

Bailment of pledges - Pledge is special kind of bailment, where delivery of goods is for purpose of security for payment of a debt or performance of a promise. Pledge is bailment for security. Common example is keeping gold with bank/money lender to obtain loan. Sincepledge is bailment, all provisions applicable to bailment apply to pledge also. In addition, some specific provisions apply to pledge.The bailment of goods as security for payment of a debt or performance of a promise is called “pledge”. The bailor is in this case called the “pawnor”. The bailee is called the “pawnee”. [section 172].

Contract of Agency - Agency is a special type of contract. The concept of agency was developed as one man cannot possibly do every transaction himself. Hence, he should have opportunity or facility to transact business through others like an agent. The principles of contract of agency are – a) Excepting matters of a personal nature, what a person can do himself, he can also do it through agent e.g. a person cannot marry through an agent, as it is a matter of personal nature) b) A person acting through an agent is acting himself, i.e. act of agent is act of Principal. - - Since agency is a contract, all usual requirements of a valid contract are applicable to agency contract also, except to the extent excluded in the Act. One important distinction is that as per section 185, no consideration is necessary to create an agency.

AGENT AND PRINCIPAL DEFINED - An “agent” is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the “principal” [section 182].

WHO MAY EMPLOY AGENT - Any person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent. [section 183]. - - Thus, any person competent to contract can appoint an agent.

ISFA JAIIB PAPER 3


WHO MAY BE AN AGENT - As between the principal and third persons any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal according to the provisions in that behalf herein contained. [section 184]. - - The significance is that a Principal can appoint a minor or person of unsound mind as agent. In such case, the Principal will be responsible to third parties. However, the agent, who is a minor or of unsound mind, cannot be responsible to Principal. Thus, Principal will be liable to third parties for acts done by Agent, but agent will not be responsible to Principal for his i.e. Agent’s) acts.

CONSIDERATION NOT NECESSARY - No consideration is necessary to create an agency. [section 185]. Thus, payment of agency commission is not essential to hold appointment of Agent as valid.

Authority of agent – An agent can act on behalf of Principal and can bind the Principal.AGENT’S DUTY TO PRINCIPAL - An agent has following duties towards principal. * Conducting principal’s business as per his directions * Carry out work with normal skill and diligence * Render proper accounts [section 213]. * Agent’s duty to communicate with principal [section 214] * Not to deal on his own account, in business of agency [section 215].* Agent’s duty to pay sums received for principal [section 218] * Agent’s duty on termination of agency by principal’s death or insanity - [section 209].

REMUNERATION TO AGENT - Consideration is not necessary for creation of agency. However, if there is an agreement, an agent is entitled to get remuneration as per contract.

RIGHTS OF PRINCIPAL - * Recover damages from agent if he disregards directions of Principal * Obtain accounts from Agent * Recover moneys collected by Agent on behalf of Principal * Obtain details of secret profit made by agent and recover it from him * Forfeit remuneration of Agent if he misconducts the business.

DUTIES OF PRINCIPAL - * Pay remuneration to agent as agreed * Indemnify agent for lawful acts done by him as agent * Indemnify Agent for all acts done by him in good faith * Indemnify agent if he suffers loss due to neglect or lack of skill of Principal.

TERMINATION OF AGENCY - An agency is terminated by the principal revoking his authority; or by the agent renouncing the business of the agency; or by the business of the agency being completed; or by either the principal or agent dying or becoming of unsound mind; or by the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insolvent debtors. [section 201]. - - In following cases, an agency cannot be revoked – * Agency coupled with interest section 202) * Agent has already exercised his authority section 203) * Agent has incurred personal liability.

****

ISFA JAIIB PAPER 3


CHAPTER 15SALE OF GOODS ACT,1930

I)‘Sale’ and ‘Agreement to sell’ under Sale of Goods Act:According to Section 4 of the Sale of Goods Act, 193, ‘A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in the goods to the buyer for a price.’ The term ‘Contract of sale’ is a generic term and includes both a sale and an agreement to sell. Where under a contract of sale, the property in the goods is transferred from the seller to the buyer i.e. at once), the contract is called a ‘sale’ but where the transfer of the property in the goods is to take place at a further time or subject to some condition thereafter to be fulfilled, the contract is called an ‘agreement of sell’. [Section 43)]. An agreement to sell becomes a sale when the time elapses or the condition, subject to which the property in the goods is to be transferred, is fulfilled. [Section 44)].

→The essentials of a contract of sale are :-1.Numbers of parties – In a contract of sale, minimum two parties are necessary namely the seller and buyer. Sale involves transfer of ownership from one to another. 2. Goods – The subject matter of a contract of sale must be goods. Goods mean every kind of movable property other than actionable claims and money. Transfer of immoveable property is not regulated by the Sale of goods Act. 3. Price – The consideration for a contract of sale is price. Price means money consideration. If it is anything other than money, it will not be sale. But if the exchange is made partly for goods and partly for price, it will still amount to sale. However, the price may be paid or promises to be paid. 4. Transfer of property – In a contract of sale, there must be transfer of property, from the seller to the buyer.

►The terrm ‘goods’ under the Sale of Goods Act, 1930. Goods is defined in Section 2 7) as ‘Every kind of moveable property other than actionable claims and money; and includes stocks and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.’ Trade marks, copyrights, patent rights, goodwill, electricity, water and gas are all considered as goods.

Goods may be classified into various types as under :-1. Existing goods – These are goods which are owned and possessed by the seller at the time of sale. Only existing goods can be the subject-matter of a sale. The existing goods may be –a) Specific goods – These are goods which are identified and agreed upon at the time ofcontract of sale is made. For eg. A person visit s a Titan showroom and identifies a watch for purchase. b) Ascertained goods – Though commonly used as similar in meaning to specific goods, these are the goods which become ascertained subsequent to the formation of contract of sale. For eg. From say 10 Sony T.V. a person identifies the particular T.V. c) Unascertained goods – These are the goods which are not identified and agreed upon at the time of the contract of sale. They are defined only by description and may form part of a lot. For eg. A shopkeeper has a bag containing 50 kgs of sugar. He agrees to sell 10 kg sugar to X out of that bag The 10 kg of sugar is unascertained goods as they are yet to be identified from the bag containing 50 kg.

2. Future Goods – These are goods which a seller does not possess at the time of the contract but which will be Manufactured, or produced, or acquired by him after the making of the contract of sale. [Section 26)]. A contract of present sale of future goods, though expresses as an actual sale, purports to operate as an agreement to sell the goods and not a sale. This is because the ownership of a thing cannot be transferred before that thing comes into existence.

3. Contingent Goods – It is a type of future goods but these are goods the acquisition of which by the seller depends upon a contingency which may or may not happen.

►‘Condition’ and ‘Warranty’ under sale or contract of sale

ISFA JAIIB PAPER 3


Condition :- Section 122) states that a condition is a stipulation which is essential to the main purpose of the contract. The breach of a condition gives rise to a right to treat the contract as repudiated or broken. Example – A buys from B a hair oil advertised as pure coconut oil. The oil turns out to be mixed with herbs. A can return the oil and claim the refund of price.

Warranty:- Section 123) states that a warranty is a stipulation which is collateral to the main purpose of the contract. The breach of a warranty gives rise to a claim for damages but not a right to reject the goods and treat the contract as repudiated. Example – A while selling his car to B, stated the car gives a mileage of 12 kms per litre of petrol. The car gives only 10 kms per litre. B cannot reject the car. It is breach of warranty. He can only claim damages for the loss due to extra consumption of petrol.

►Implied warranties and Implied conditions. Implied conditions:1. Condition as to title – In a contract of sale, unless the circumstances of the contract are such as to show a different intention, there is an implied condition on the part of the seller that –a) in the case of a sale, he has a right to sell the goods and b) in the case of a agreement to sell, he will have a right to sell the goods at the time when the property is to pass. 2. Sale by description – Where there is a contract for the sale of goods by description, there is an implied condition that the goods shall correspond with the description Section 15). If you contract to sell peas, you cannot oblige a party to take beans. 3. Sale by sample – In a case of a contract for sale by sample, there is an implied condition –a) that the bulk shall correspond with the sample in quality b) that the buyer shall have a reasonable opportunity of comparing the bulk with the sample. c) that the goods shall be free from any defect, rendering them unmerchantable. 4. Sale by description as well as sample – Section 15 further provides that if the sale is by sample as well as by description, the goods must correspond both with the sample and with the description. 5. Condition as to quality or fitness – Normally, in a contract of sale there is no implied condition as to quality or fitness of goods for a particular purpose. The buyer must examine the goods thoroughly before he buys them in order to satisfy himself that the goods will be suitable for the purpose for which he is buying them. However, in the following instances, the condition as to quality or fitness applied –a) Where the buyer, expressly or by implication makes known to the seller the particular purpose for which he needs the goods and depends upon the skill and judgement of the seller whose business it is to supply goods of that description, there is an implied condition that the goods are reasonable fit for that purpose. [Section 161)]. For eg. An order was placed for some lorries to be used “for heavy traffic in a hilly area”. The lorries supplied were unfit and broke down. Held, there is a breach of condition as to fitness. b) An implied condition as to quality or fitness for a particular purpose may also be annexed by the usage of trade. [Section 163)]

Implied warranties 1.Warranty of quiet possession – In a contract of sale, unless there is a contrary intention, there is an implied warranty that the buyer shall have and enjoy quiet possession of the goods. If buyer’s possession is disturbed because of some defect in seller’s title, he can claim damages from the seller. 2. Warranty of freedom from encumbrances – The buyer is entitled to a further warranty that the goods are not subject to any charge or right in favour of a third party. 3. Warranty to disclose dangerous nature of goods – Where a person sells goods, knowing that the goods are inherently dangerous or they are likely to be dangerous to the buyer and that the buyer is ignorant of the danger, he must warn the buyer of the probable danger, otherwise he will be liable for damages.

→The term ‘Caveat Emptor’ under the Act:-

ISFA JAIIB PAPER 3


The term ‘Caveat Emptor’ means ‘buyer beware’ i.e. in sale of goods, the seller is under no duty to reveal unflattering truths about the goods sold. Therefore, when a buyer buys some goods, he must examine them thoroughly. If the goods turn out to be defective or do not suit his purpose, or if he depends upon his own skill and judgment and makes a bad selection, he cannot blame anybody excepting himself. For e.g. H bought oats from S a sample of which had been shown to H. H erroneously thought that the oats were old. However the oats were new. Held, H could not avoid the contract. Smith vs. Huges)

→‘Unpaid Seller’& the rights available under the Sale of Goods Act to an unpaid seller:Section 45 define an unpaid seller as “One who has not been paid or tendered the whole of the price or one who receives a bill of exchange or other negotiable instrument as conditional payment and the condition on which it was received has not been fulfilled by reason of dishonour of the instrument or otherwise.” The following conditions must be fulfilled before a seller can be deemed to be an unpaid seller –a) He must be unpaid and the price must be due. b) He must have an immediate right of action for the price.c) A bill of exchange or other negotiable instrument was received but the same has been dishonoured.

The rights of an unpaid seller can be broadly divided under 2 main headings –I] Rights against the goods and II] Rights against the buyer

I] Rights against the goodsA. Where the property in the goods has passed to the buyer – Where the ownership in the goods has already been transferred to the buyer the following rights are available to an unpaid seller –1. Right of Lien – The right of lien means the right to retain the possession of goods until the full price is paid or tendered.

2. Right of stoppage of goods in transit – The right of stoppage in transit means the right to stopping the goods while they are in transit, to regain possession and to retain them until the price is paid. The essential feature of stoppage in transit is that the goods should be in the possession of someone intervening between the seller and the buyer. The unpaid seller can exercise the right of stoppage in transit if: a) The seller has parted with the possession of the goods. b) The buyer has not taken possession of goods. c) Buyer has become insolvent. The unpaid seller may exercise the right to stoppage in transit in any one of the following 2 ways : a) by taking actual possession of the goods, or b) By giving notice of his claim to the carrier or other bailee in whose possession the goods are.

The right to stoppage in transit is lost under the following circumstances: a) If the buyer or his agent obtains possession. b) If after arrival of the goods at the appointed destination, the carrier or the bailee acknowledges to the buyer that he holds the goods on his buyer’s) behalf. c) If the carrier or bailee wrongfully refuses to deliver the goods to the buyer or his agent. d) Where the part delivery of the goods has been made to the buyer or his agent, the remainder of goods may be stopped in transit. But if such part delivery has been given in such circumstances as to show an agreement to give up possession of the whole of the goods the transit comes to an end at the time of part delivery. For eg. A, in Mumbai sends goods to a buyer in Pune through a carrier. The goods are in transit when it leaves A’s possession and B or his agent has not taken possession

ISFA JAIIB PAPER 3


3. Right of resale – Where the unpaid seller has exercised his right of lien or resumes possession of the goods by exercising his right of stoppage in transit upon insolvency of the buyer, he can re-sell the goods under the following circumstance –a) where the goods are of perishable nature. b) Where the seller has given notice of his intention to re-sell the goods and yet the priceremains unpaid. c) Where the seller expressly reserves a right of resale if the buyer commits a default in making the payment.

B. Where the property in the goods has not passed to the buyer – Where the property in the goods has not passed to the buyer, the unpaid seller can exercise the right to withholding delivery of the goods. This right is similar to and co-extensive with the right of lien and stoppage in transit where the property has passed to the buyer. Other remedies may include the right to claim damages for the loss suffered, special damages, etc.

II] Rights of an unpaid seller against the buyer personallyIn addition to the unpaid seller’s rights against the goods, he has rights even against the buyer personally. They are as follows : 1.Suit for Price – Generally the seller can sue for the price of the goods only when the property in the goods has passed to the buyer and the price is not paid as per the terms of the contract. In cases where the property in the goods has not passed to the buyer, suit for price generally, cannot be maintained, unless under the contract, price is payable on a certain date irrespective of the delivery of passing of the ownership of the goods. 2. Suit for damages – The unpaid seller can bring an action for damages where the buyer wrongfully refuses to accept the goods or repudiates the contract. 3. Suit for interest – In case of breach of contract on the part of the buyer, the unpaid seller can claim for interest from the date of tender of the goods or from the date, the price becomes payable along with a suit for price.

****

ISFA JAIIB PAPER 3


CHAPTER 16COMPANY LAW

Compulsory registration under the Companies Act :

Pursuant to section 112) of the Companies Act, 2013, hereinafter called "the Act"), states that no association or partnership consisting of more than the given number of persons as may be prescribed shall be formed for the purpose of carrying on any business that has for its object the acquisition of gain by the association or partnership or by the individual members thereof, unless it is registered as a company under this 1956 Act or is formed under any other law for the time being in force.

The Companies Act, 2013 Act puts a given number of persons restriction as the partners that can be admitted to a partnership at 100 Previously it was 20 partners).

The important criteria for mandatory registration as a company arises only when an association of more than 100 persons intend to carry on some business with the object of acquisition of gain or intention to earn profit.

What is a company?

In the legal sense, a company is an association of both natural and artificial persons and is incorporated under the existing law of a country). In terms of the Companies Act, 2013 Act No. 18 of 2013) a “company” means a company incorporated under this Act or under any previous company law [Section 220)]. In common law, a company is a “legal person” or “legal entity” separate from, and capable of surviving beyond the lives of its members. However, an association formed not for profit also acquires a corporate character and falls within the meaning of a company by reason of a licence issued under Section 81) of the Act.

Company is a 'juristic person' and it can file a suit as an 'indigent person'

An expression 'person' includes not merely a natural person but also other juridical persons. A company being a juristic person would be represented before a Court of law or any other place by a person competent to represent it. It is enough that the person competent to represent a company presents the application on behalf of the company. Minors, lunatics or person under any disability are also entitled to file a suit either through guardian or the next friend. In such a case it is the guardian or next friend who is competent to represent the petitioner. A public limited company, which is otherwise entitled to maintain a suit as a legal person, can maintain an application under the Civil Procedure Code.

Company is a separate legal entity

Limited company is a separate legal entity distinct from its shareholder. Merely because there is only one shareholder, the entities which are otherwise distinct, one is a natural person and the other is an artificial juristic person, it cannot be contended that the said entities merge and one can act for and on behalf of other.

A shareholder has no right to intervene or object in suit pending against company in respect of some of its assets independently of company.

Perpetual successionAn incorporated company has perpetual succession. This means company will remain same notwithstanding any change in its members. Members may come and members may go but the company can go for ever. The death or insolvency of individual members does not in any way, affect the existence or continuity of the company. It can exist indefinitely till it is wound up in accordance with the provisions of the companies act.

Common Seal Upon incorporation, a company becomes a legal entity with perpetual succession and a common seal. Since the company has no physical existence, it must act through its agents and all contracts entered into by its agents must be under the seal of the company. The Common

ISFA JAIIB PAPER 3


Seal acts as the official signature of a company. The name of the company must be engraved on its common seal. A rubber stamp does not serve the purpose. A document not bearing common seal of the company, when the resolution passed by the Board, for its execution requires the common seal to be affixed is not authentic and shall have no legal force behind it. However, a person duly authorised to execute documents pursuant to a power of attorney granted in his favour under the common seal of the company may execute such documents and it is not necessary for the common seal to be affixed to such documents.

Types of Companies : 1. Limited Companies In such types of companies, the liabilities of members are always limited subject to some exceptions. a. Companies limited by shares These types of companies are quite common in commercial, trading and industrial world. Such companies are characterised with an authorised share capital of a certain amount, which is divided into units of definite sum called shares. The authorised share capital may comprise of more than one kind of shares, viz. ordinary or equity shares voting and non-voting) and preference shares. The liability of each member of such company is limited to the unpaid amount of shares and premium, if any, held by him. b. Companies limited by guarantee :Such a company by way of undertaking in its Memorandum of Association restricts the liabilities of its members to a certain fixed amount, for payment of the debts and liabilities of the company in the event of winding up. The members are liable only for the amount contracted before he ceased to be a member or payment of the debts and liabilities within one year after he ceased to be a member. Such companies may also have share capital whenever necessary. In that event, the members will be liable for the amount, if any, remaining unpaid on the shares subscribed by them, in addition to the above guaranteed amount.

2. Unlimited Companies:Such types of companies are analogous to that of partnership firm in respect of the liability of a member. Every member in such a company is jointly and severally liable for all the debts and liabilities of the company.

3. One-person company: The 2013 Act introduces a new type of entity to the existing list i.e. apart from forming a public or private limited company, the 2013 Act enables the formation of a new entity a ‘oneperson company’ OPC). An OPC means a company with only one person as its member [section 31) of 2013 Act].

4. Private company: A company shall considered as a private company where such company having following future: a. Having requirement of minimum of 2 membersb. Minimum capital contribution of one lakh.c. Minimum no. of director - 2d. Maximum no. of director is restricted to 200.e. Restriction on i. issue of shares in and debenture of the company.ii. Accepting the deposit.iii. Restriction on transfer of share.iv. invitation to the public to subscribe for any securities of the company.

5. Small company: A small company has been defined as a company, other than a public company. i) Paid-up share capital of which does not exceed 50 lakh INR or such higher amount as may be prescribed which shall not be more than five crore INR

ISFA JAIIB PAPER 3


ii) Turnover of which as per its last profit-and-loss account does not exceed two crore INR or such higher amount as may be prescribed which shall not be more than 20 crore INR: As set out in the 2013 Act, this section will not be applicable to the following: • A holding company or a subsidiary company • A company registered under section 8 • A company or body corporate governed by any special Act [section 285) of 2013 Act]

6. Dormant company: The 2013 Act states that a company can be classified as dormant when it is formed and registered under this 2013 Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction. Such a company or an inactive one may apply to the ROC in such manner as may be prescribed for obtaining the status of a dormant company.[Section 455 of 2013 Act]

7. Public limited Companies:The Company defined under Companies Act, 2013 is a public company which—i) is not a private company; ii) has a minimum paid-up capital of Rs. 5 lakhs or such higher capital as may be prescribed; iii) is a private company but subsidiary of a public company. Some more features are:a.There is no such restriction on transfer of shares or issue of shares or inviting public deposits. b. Minimum no.of members should be 7. c. Minimum director is 3. d. Max no. of director is 15 after 15 any further increase in number of directors, the company will need to pass a special resolution at its ‘General Meeting’ and no approval from the Central Government is required

8. Government Company : 1. Any company in which at least 51% of paid up share capital is held by : a. By central govt, or b. By state govt.c. Partly by state govt. and partly by the central govt. d. Partly by one or more state govt. e. By company which is subsidiary by govt, company.

MEMORANDUM OF ASSOCIATION : Meaning and Purpose of Memorandum:-An important step in the formation of a company is to prepare a document called memorandum of association. It is the charter of the company and is very important document as it contains the basic conditions on which the company is incorporated. The Memorandum contains the name, registered office, main and other objects of the company, liability of the members and the authorized capital of the company. The main purpose of the memorandum is to limit the scope of activities and powers of the company. Thus, any act outside the memorandum is ultra vires the company. Such an act is not enforceable and directors involve personal liability for it.

ARTICLES OF ASSOCIATION: Meaning and purpose of Articles:-Articles of Association of the company contain rules, regulation and bye-laws for the general management of the company .It is compulsory to get the articles of associations registered along with the memorandum of association in case of a private company.

The articles of association constitute a contract between the company and its members and the members inter se. The Articles are subordinate to the Memorandum of Association. Therefore, the Articles should not contain any regulation, which is contrary to provisions of the Memorandum or the Companies Act. The Articles are binding on the members in relation to the company as well as on the company in its relation to members. However, this does not constitute a contract between the company and a third personThe articles of private company having share capital must specify the following conditions:

ISFA JAIIB PAPER 3


The right to transfer shares shall be restricted according to ArticlesThe maximum number of members shall be 50;The invitation to public to subscribe shares and debentures shall be prohibited.

→Meaning of 'Board' and 'Board of directors'

The expression 'Board of directors' means a group of those individuals elected by the shareholders of a company to manage the business affairs of the company.

Since a company is an artificial legal person created by law, therefore, it is necessary to act only through the agency of natural persons. It can only act through human beings, and it is the directors through whom mainly the company acts. It is on account of the peculiar character of a company that the need for directors arises. Therefore, the management of a company is entrusted to a body of persons called 'Board of directors'.

Who can be director & types of directors

I. Only individuals can be directors

Section 253 of the Companies Act, 1956 states that no body corporate, association or firm shall be appointed as a director of any company, and only an individual shall be so appointed. Further, Company should have at least one director who has stayed in India for a total period of not less than hundred and eighty two days in the previous calendar year

II. Types of Directors

Following are the categories of directors who constitute 'Board' of a company:—

1. Ordinary DirectorsOrdinary directors are also referred to as simple directors who attends Board meeting of a company and participate in the matters put before the Board. These directors are neither whole time directors nor managing directors.

2. Managing Director Managing Director is a director who, by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its Board of directors or, by virtue of its Memorandum or Articles of Association, is entrusted with substantial powers of management which would not otherwise be exercisable by him, and includes a director occupying the position of a managing director, by whatever name called.

3. Whole-time/Executive Directors Whole-time Director or Executive Director includes a director in the whole-time employment of the company.

4. Women directorAll listed companies and other public companies having a paid-up share capital of more than Rs 100 crores or turn-over of more than three hundred crore must appoint atleast one woman director.

5. Additional Directors Additional Directors may be appointed by a company under section 161 of the New Act. The article should confer such power on the Board of Directors of the Company. A provision further added in 2013 with regards to such appointment is that the proposed person should not have failed to get appointed as a Director in a General Meeting.

6. Alternate Director Alternate Directors, under section 1612) of Companies Act, 2013, may be appointed by a company if the articles confer such power or a decision is passed by a resolution if an independent Director is absent from India for not less than three months. He must be qualified to become an independent director, but should not hold any Directorship. An alternate Director cannot hold the office longer than the term of the Director in whose place he has been

ISFA JAIIB PAPER 3


appointed. Additionally, he will have to vacate the office, if and when the original Director returns to India. Any alteration in the term of office made during the absence of the original Director will apply to the original Director and not to the Alternate Director.

7. Director appointed by minority shareholders:To have a fair representation of the minority shareholders in a listed company a shareholder having shares whose nominal value is less than twenty thousand rupees), the minority shareholders may elect one director

8. Nominee Directors The banks and financial institutions which grant financial assistance to a company generally impose a condition as to appointment of their representative on the Board of the concerned company. These nominated persons are called as nominee directors.

9. Independent Directors Independent Director is for the first time introduced in the New Act, and has been clearly defined as “any director other than a managing director, a whole time director, and a nominee director.” Such a director not having any significant pecuniary relationship with the company is more efficient. Section 149 4) requires that one third of the directors should be independent directors. Section 1496) lists in detail the specific qualifications for an independent director-a. Person of integrity and relevant experienceb. Is not a promoter, nor has any relation with the promoters or directors of the company, its holding, subsidiary or associate company;c. Has no pecuniary relationship with company, its holding, subsidiary or associate company, its promoters or directors in the preceding two years of his appointmentd. Has no relatives who have pecuniary relationship with company, its holding, subsidiary or associate company, its promoters or directors, amounting to two percent in the preceding two years of his appointmente. Neither he, nor any of his relatives have held a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed.f. Neither he nor any of his relatives have been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of a) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or b) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm;g. Neither he nor any of his relatives hold together with his relatives two per cent. or more of the total voting power of the company; orh. Neither he nor any of his relatives is a Chief Executive or director, by whatever name called, of any nonprofit organization that receives twenty-five per cent. or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the company; ori. who possesses such other qualifications as may be prescribed.

The appointment of independent directors has to also be approved by the shareholders.

Applicability – Independent directors: Listed companies or public company having:a. Paid-up-capital of Rs. 100 cr. or more,b. Turnover of Rs. 300 cr. or more,c. In aggregate, outstanding loans or borrowings or debentures or deposits, exceeding INR. 200 cr.

Protection for independent directors: Independent directors shall be held liable, only for such acts by a company which had occurred with their knowledge, attributable through board processes and with their consent or connivance or where they have not acted diligently.

ISFA JAIIB PAPER 3


Minimum & maximum number of directors : Section 1491) of the Companies Act, 2013

1 Total strength of the Board of directors

Company can have a maximum of fifteen directors on the ‘Board’ and will be applicable to allcompanies. Any further increase in number of directors, the company will need to pass a special resolution at its ‘General Meeting’ and no approval from the Central Government is required

2 Minimum number of directors Section 252 provides that every public company shall have at least three directors and every private company shall have at least two directors at all time in the Board of directors of the company.

Composition: At least 1/3rd of the total number of directors will be independent directors. If higher number has been prescribed under any other governing law/regulation then such company shall comply with the same

Kinds of meetings under Companies Act,

A. Annual General Meeting AGM) : Sec 96 & 97 of Companies Act,2013)Annual General Meeting of a company, as the name signifies, is an annual meeting of the body of the members. Every company, whether public or private, having a share capital or not, limited or unlimited must hold this meeting. i) First AGM – Every Company to which this section applies shall hold its 1st AGM within 9 months from the closure if financial year ii) Subsequent AGMs : within 6 months form the closure of financial year.

The gap between two meetings shall not be more than 15 months and in case of first AGM, it is not necessary to hold AGM in the year of incorporation. ROC has power to give extension upto 3 months for holding AGM except first AGM on special reason.

Day, hour and place of AGM – Every AGM shall be called during business hour i.e. 9.00 a.m. to 6.00 p.m. on any day except national holiday and shall be held at registered office or other place within the city, town or village in which the registered office of the company is situated.

However, the Central Government may exempt any class of companies from the provisions of this sub-section subject to such conditions as it may impose.

Default in holding AGM – In case of default in holing AGM, Tribunal may call AGM on application of any member of the company and give ancillary or consequential directions as it may think expedient and such directions may include a direction that one member can present in person or by proxy shall constitute quorum.Business to be transacted:a. Ordinary: means all businesses of consideration of financial statements, report of Board and Auditors, declaration of any dividend, appointment of Directors in place of retiring and appointment of and fixation of remuneration of Auditors.b. Special: Special Business in AGM means business to be transacted other than ordinary.

QUORUM: Sec 103)In case of public Company if on date of meeting:Members Less than 1000 then 5 members personally presentMembers more than 1000 but upto 5000 then 15 members personally present.Members more than 5000 then 30 members personally present.

In case of Private Company 2 members personally present shall constitute quorum.

ISFA JAIIB PAPER 3


However, Articles may provide larger quorum.

B. Extraordinary General Meeting EGM) All general meetings other than the annual general meeting shall be called as extraordinary general meetings. An EGM is convened for transacting some special or urgent business that may arise in between two AGMs for instance, change in the objects or shift or registered office or alteration of capital or removal of a directorss)/auditors).Who may call – An EGM, may be called;i) By the Board of Directors of its own accord: Board may whenever think necessary may callgeneral meeting of the Company.ii) On requisition ;Board shall proceed to call EGM at the requisition made by members holding on the date of receipt of requisition atleast 1/10 of share capital carrying voting right in case of company having share capital) or 1/10 of total voting power in case of company not having share capital) as on the date of receipt of requisition. If Board fail to proceed to call an EGM within in a period of twenty one day from the date of receipt of valid requisition in regard to any matter on a day not later than 45 days from the date of receipt of such requisition, the meeting may be called and held by requisitionist themselves within a period of three months form the date of requisition. Requisition shall set out the matter for which meeting is to be called and shall be singed by requisitionsts and shall be sent to the registered office of the Company. EGM called by requisition will canceled if adjourned due to want of quorum.

Business to be transacted: Special Business only.

POSTAL BALLOT Sec 110)A Company shall in respect of items of businesses as the Central Government may by notification, declare to be transacted only by means of postal ballot and if Company voluntary want in respect of any item of business, other than Ordinary Business and any other in respect of which Directors or Auditors have a right to be heard at any meeting, transact by means of postal ballot in such manner as prescribed in rule 22 of Companies Management & Administration) Rules 2014, instead of transacting at General Meeting.

C. Board Meetings: Sec 173): Applicable to all companies other than One person Company:1. Need for Board Meetings:A company, subject to the specific requirements of the Companies Act, any provision in the articles of association and subject to any resolution that may be passed by the company in general meeting, has to act through its Board of directors. The Board can only act by taking decisions collectively through passing resolutions made in the meetings of the Board except where the Act permits the resolution to be passed by circulation among the directors.The decision of a Board meeting will not be considered valid unless it is properly convened and duly constituted. The Board meeting must, therefore, be convened by proper authority, by a proper notice, the proper person must be in chair and the requisite quorum must be present.

2.When to hold/Frequency of Board MeetingsFirst Board Meeting: Within thirty days of the date of its incorporation.

Subsequent Board Meeting: 4 Board meeting in ever year and maximum gap between two meetings shall be 120 days

One Person Company, Small Company and Dormant Company may convene Board meeting at least once in half calendar year and gap between two meetings is not less then ninety days.

Board of Director may participate either personally or by video conferencing or other audio-video means, as prescribed in Rule No. 3 of Companies Meeting of Board and its Power) Rules, 2004, which are capable of recording and recognizing and storing.

ISFA JAIIB PAPER 3


Notice of Meeting:Not less then 7 days notice writing to every director at his usual address registered with company and such notice shall be sent by hand delivery or by post or by e-mode. Board meeting may be called at shorter notice to transact urgent business subject to condition that atleast one independent director, if any, shall be present at the meeting and in case of absence of independent directors from such a meeting of board, decisions taken at such a meeting shall be circulated to all directors and shall be final only on ratification thereof by atleast one independent director, if any. Failure to give notice may attract penalty of Rs. 25000/- on every officer whose duty is to do so.

Quorum of Board Meeting :1/3rd of total strength or 2 whichever is higher and participation by video conferencing shall also be counted. Where meeting of board couldn’t be held for want of quorum and articles is silent in that then the meeting shall automatically stand adjourned to the same day at the sametime and place in the next week or if that day is national holiday, till the next succeeding day, which is not a national holiday, at the same time and place.

D. AUDIT COMMITTEE MEETING: Sec 177 read with rule 6 of Companies meeting of Board and its power):Applicability:a. All Listed Companiesb. All public Companies with a paid-up capital of 10 crore or morec. All public Companies having turnover of 100 crore rupees or mored. All public companies, having in aggregate, outstanding loans or borrowings or debentures or deposit exceeding 50 crore or more as existing on the date of last audited financial statements.

Composition: Minimum 3 directors with majority of directors shall be independent. Majority of members of audit committee including chairperson shall have ability to read and understand the financial statement.

Remuneration to Managerial Person:Section 197 of the Companies Act, 2013 provides a way to pay managerial remuneration in case of Company’s having adequate profits i.e not in loss. A Public Company can pay remuneration to its directors including Managing Directors and Whole-time Directors, and its managers which shall not exceed 11% of the net profit as calculated in a manner laid down in section 198 of the Companies Act, 2013. Wherein a Company in which there is one Managing Director; Whole-time Director or manager the remuneration to be payable shall not exceed 5% of net profits and where there are more than one of such Directors remuneration payable shall not exceed 11 % of the net profit.

Remuneration Payable by a company in case where is no profit or inadequacy of profit without central government is detailed below:

Where the effective capital is Limit of yearly remuneration payable shall not exceed (Rupees)

(i) Negative or less than 5 crores 30 lakhs(ii) 5 crores and above but less than 100 crores

42 lakhs

(iii) 100 crores and above but less than 250 crores

60 lakhs

(iv) 250 crores and above 60 lakhs plus 0.01% of the effectivecapital in excess of Rs. 250 crores:

****

ISFA JAIIB PAPER 3


CHAPTER 17PARTNERSHIP ACT, 1932

The Indian Partnership Act was passed in 1932 to define and amend the law relating to partnership. Indian Partnership Act is one of very old mercantile law. Partnership is one of the special types of Contract. Initially, this was part of Indian Contract Act itself Chapter IX -sections 239 to 266), but later converted into separate Act in 1932.

The Indian Partnership Act is complimentary to Contract Act. Basic provisions of Contract Act apply to contract of partnership also. Basic requirements of contract i.e. legally enforceable agreement, mutual consent, parties competent to contract, free consent, lawful object, consideration etc. apply to partnership contract also.

Partnership Contract is a ‘concurrent subject’ - ‘Contract, including partnership contract’ is a ‘concurrent subject, covered in Entry 7 of List III Seventh Schedule to Constitution). Indian Partnership Act is a Central Act, but State Government can also pass legislation on this issue. Though Partnership Act is a Central Act, it is administered by State Governments, i.e. work of registration of firms and related matters is looked after by each State Government. The Act is not applicable to Jammu and Kashmir.

UNLIMITED LIABILITY IS MAJOR DISADVANTAGE - The major disadvantage of partnership is the unlimited liability of partners for the debts and liabilities of the firm. Any partner can bind the firm and the firm is liable for all liabilities incurred by any firm on behalf of the firm. If property of partnership firm is insufficient to meet liabilities, personal property of any partner can be attached to pay the debts of the firm.

Partnership Firm is not a legal entity - It may be surprising but true that a Partnership Firm is not a legal entity. It has limited identity for purpose of tax law. As per section 4 of Indian Partnership Act, 1932, 'partnership' is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all. - - Under partnership law, a partnership firm is not a legal entity, but only consists of individual partners for the time being. It is not a distinct legal entity apart from the partners constituting it - Malabar Fisheries Co. v. CIT 1979) 120 ITR 49 = 2 Taxman 409 SC).

FIRM LEGAL ENTITY FOR PURPOSE OF TAXATION - For tax law, income-tax as well as sales tax, partnership firm is a legal entity - State of Punjab v. Jullender Vegetables Syndicate -1966 17) STC 326 SC) * CIT v. A W Figgies - AIR 1953 SC 455 * CIT v. G Parthasarthy Naidu1999) 236 ITR 350 = 104 Taxman 197 SC). Though a partnership firm is not a juristic person, Civil Procedure Code enables the partners of a partnership firm to sue or to be sued in the name of the firm. - Ashok Transport Agency v. Awadhesh Kumar 19985) SCALE 730 SC). [A partnership firm can sue only if it is registered].

Partnership, partner, firm and firm name - “Partnership” is the relation between persons who have agreed to share the profits of business carried on by all or any to them acting for all. - -Persons who have entered into partnership with one another are called individually “partners” and collectively “a firm”, and the name under which their business is carried on is called the “firm name”. [section 4].

“Business” includes every trade, occupation and profession. [section 2b)]. Thus, a ‘partnership’ can be formed only with intention to share profits of business. People coming together for some social or philanthropic or religious purposes do not constitute ‘partnership’.

PARTNERS ARE MUTUAL AGENTS - The business of firm can be carried on by all or any of them for all. Any partner has authority to bind the firm. Act of any one partner is binding on all the partners. Thus, each partner is ‘agent’ of all the remaining partners. Hence, partners are ‘mutual agents’.

ISFA JAIIB PAPER 3


ORAL OR WRITTEN AGREEMENT - As per normal provision of contract, a ‘partnership’ agreement can be either oral or written. - - Agreement in writing is necessary to get the firm registered. Similarly, written agreement is required, if the firm wants to be assessed as ‘partnership firm’ under Income Tax Act. A written agreement is advisable to establish existence of partnership and to prove rights and liabilities of each partner, as it is difficult to prove an oral agreement. - - However, written agreement is not essential under Indian Partnership Act.

SHARING OF PROFIT NECESSARY - The partners must come together to share profits. Thus, if one member gets only fixed remuneration irrespective of profits) or one who gets only interest and no profit share at all, is not a ‘partner’. - - Similarly, sharing of receipts or collections without any relation to profits earned) is not ‘sharing of profit’ and the association is not ‘partnership’. For example, agreement to share rents collected or percentage of tickets sold is not ‘partnership’, as sharing of profits is not involved. - - The share need not be in proportion to funds contributed by each partner. - - Interestingly, though sharing of profit is essential, sharing of losses is not an essential condition for partnership . - - Similarly, contribution of capital is not essential to become partner of a firm.

NUMBER OF PARTNERS - Since partnership is ‘agreement’ there must be minimum two partners. The Partnership Act does not put any restrictions on maximum number of partners. However, section 11 of Companies Act prohibits partnership consisting of more than 20 members, unless it is registered as a company or formed in pursuance of some other law.

Mode of determining existence of partnership - In determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together. [section 6].

MUTUAL AGENCY IS THE REAL TEST - The real test of ‘partnership firm’ is ‘mutual agency’, i.e. whether a partner can bind the firm by his act, i.e. whether he can act as agent of all other partners.

Partnership at will - Where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership is “partnership at will”. [section 7]. - - Partnership ‘at will’ means any partner can dissolve a firm by giving notice to other partners or he may express his intention to retire from partnership) - -Partnership deed may provide about duration of partnership say 10 years) or how partnership will be brought to end. In absence of any such term, the partnership is ‘at will’. - - In case of ‘particular partnership’, the partnership comes to end when the venture for which it was formed comes to end.

Determination of rights and duties of partners by contract between the partners - Subject to the provisions of this Act, the mutual rights and duties of the partners of a firm may be determined by contract between the partners, and such contract may be express or may be implied by a course of dealing. - - Such contract may be varied by consent of all the partners, and such consent may be express or may be implied by a course of dealing. [section 111)]. - -Thus, partners are free to determine the mutual rights and duties by contract. Such contract may be in writing or it may be implied by their actions.

Duties and mutual rights of partners - Subject to contract to contrary, partners have duties and mutual rights as specified in Partnership Act-

EVERY PARTNER HAS RIGHT TO TAKE PART IN BUSINESS - Subject to contract between partners to the contrary), every partner has right to take part in the conduct of the business. [section 12a)]. - - Thus, every partner has equal right to take active part in business, unless there is specific contract to the contrary. Even if authority of a partner is restricted by contract,

ISFA JAIIB PAPER 3


outside party is not likely to be aware of such restriction. In such case, if such partner acts within the apparent authority, the firm will be liable for his acts.

The property of the firm - Subject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business. - - Unless the contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm [section 14].

Partner to be agent of the firm - Subject to the provisions of this Act, a partner is the agent of the firm for the purposes of the business of the firm. [section 18].

Implied authority of partner as agent of the firm - Subject to the provisions of section 22, the act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm. The authority of a partner to bind the firm conferred by this section is called his “implied authority”. [section 191)]. -

PARTNERS JOINTLY AND SEVERALLY LIABLE ACTS OF THE FIRM - Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner. [section 25]. ‘An act of a firm’ means any act or omission by all the partners, or by any partner or agent of the firm which gives rise to a right enforceable by or against the firm [section 2a)]. ‘Joint and several’ means each partner is liable for all acts. Thus, if amount due cannot be recovered from other partners, any one partner will be liable for payment of entire dues of the firm.

Partner by Holding out - ‘Holding out’ means giving impression that a person is partner though he is not. This is principle of ‘estoppel’. If a person gives an impression to outsiders that he is partner of firm though he is not partner, he will he held liable as partner, if third party deals with the firm on the impression that he is a partner. Similarly, if a person retires from the firm but does not give notice of retirement, he will be liable as a partner, if some third party deals with the firm on the assumption that he is still partner.

Minors admitted to the benefits of partnership - A person who is a minor according to the law to which he is subject may not be a partner in a firm, but, with the consent of all the partners for the time being, he may be admitted to the benefits of partnership. [section 301)].

RIGHTS OF MINOR - Minor who is admitted to benefit of partnership) has a right to such share of the property and of the profits of the firm as may be agreed upon and he may have access to and inspect and copy any of the accounts of the firm. [section 302)]. [Since the word used is ‘may’, it seems that right of minor to inspect accounts can be restricted by agreement among partners].

MINOR’S SHARE LIABLE BUT NOT MINOR HIMSELF - Such minor’s share is liable for the acts of the firm, but the minor is not personally liable for any such act. [section 303)].

Reconstitution of a Partnership Firm - A partnership firm is not a legal entity. It has no perpetual existence as in case of a company incorporated under Companies Act. However, the Act gives the partnership limited rights of continuity of business despite change of partners. In absence of specific provision in partnership deed, death or insolvency of a partner means dissolution of the firm. However, partnership can provide that the firm will not dissolve in such case.

Change in partners may occur due to various reasons like death, retirement, admission of new member, expulsion, insolvency, transfer of interest by partner etc. After such change, the rights and liabilities of each partner are determined afresh. This is termed as reconstitution of a firm.

ISFA JAIIB PAPER 3


Dissolution of a Firm - A partnership firm is an ‘organisation’ and like every ‘organ’ it has to either grow or perish. Thus, dissolution of a firm is inevitable part in the life of partnership firm some time or the other.

Dissolution of a firm without intervention of Court can be a) By agreement section 40) b) Compulsory dissolution in case of insolvency section 41) c) Dissolution on happening of certain contingency section 42) d) By notice if partnership is at will section 43).

A firm can also be dissolved by Court u/s 44.

DISSOLUTION OF PARTNERSHIP AND DISSOLUTION OF FIRM - The dissolution of partnership between all the partners of a firm is called the dissolution of the firm. [section 39]. - -. As per section 4, Partnership is the relation between persons who have agreed to share profits of business carried on by all or any of them acting for all. - - Thus, if some partner is changed/added/ goes out, the ‘relation’ between them changes and hence ‘partnership’ is dissolved, but the ‘firm’ continues. Hence, the change is termed as ‘reconstitution of firm’. However, complete breakage between relations of all partners is termed as ‘dissolution of firm’. After such dissolution, the firm no more exists. Thus, ‘Dissolution of partnership’ is different from ‘dissolution of firm’. ‘Dissolution of partnership’ is only reconstruction of firm, while ‘dissolution of firm’ means the firm no more exists after dissolution.

Mode of dissolution of firm - Following are various modes of dissolution of firm. * Dissolution by agreement - [section 40]. * Compulsory dissolution in case of insolvency - [section 41] * Dissolution on the happening on certain contingencies [section 42] * Dissolution by notice of partnership at will [section 432)] * Dissolution by the court

Consequences of dissolution of firm - After firm is dissolved, business is wound up and proceeds are distributed among partners. The Act specifies what are the consequences of dissolution of a firm.

Sale of goodwill of firm after dissolution - Business is attracted due to reputation of a firm. It creates a ‘brand image’ which is valuable though not tangible. ‘Goodwill’ is the value of reputation of the business of the firm. Goodwill of a firm is sold after dissolution either separately or along with property of firm. - - As per section 14, property of partnership firm includes goodwill of the firm. - - Goodwill is the reputation and connections which the firm establishes over time, together with circumstances which make the connections durable. This reputation enable to earn profits more than normal profits which a similar business would have earned. Goodwill is an intangible asset of the firm. - -

In settling the accounts of a firm after dissolution, the goodwill shall, subject to contract between the partners, be included in the assets, and it may be sold either separately or along with other property of the firm. [section 551)].

Settlement of accounts after dissolution - Accounts are settled after a firm is dissolved as provided in the Act. A firm is said to be ‘wound up’ only after accounts are fully settled.

Registration of Firms - Registration of firm is not compulsory, though usually done as registration brings many advantages to the firm. Since ‘partnership contract’ is a ‘Concurrent Subject’ as per Constitution of India, registration of firms and related work is handled by State Government in each State. Section 71 authorises State Government to make rules for * prescribing fees for filing documents with registrar * prescribing forms of various statements and intimations are to be made to registrar and * regulating procedures in the office of Registrar.

PARTNER CANNOT SUE IF FIRM IS UNREGISTERED - No suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any court by or on behalf of any person suing as a partner in a firm against the firm or an{ person alleged to be or to`have been a Ápartner in the fir} unless the firm is registered and the person suing!is or has been shown iø the Register of Firms as a partner in the firm.$ [section 691)]. - - Thus, a partner cannot sue the firm or any otheÄ ” partner if firm is unregistered. - - If third party files suit against a partner, he cannot claim of set off or institute other proceeding to enforce a right arising from a contract. - -

ISFA JAIIB PAPER 3


Suit or claim or set off upto Rs 100 can be made as per section 694)b), but it is negligible in today’s standards. - - Criminal proceedings can be filed, but civil suit is not permissible.

UNREGISTERED FIRM CANNOT SUE THIRD PARTY - No suit to enforce a right arising from a contract shall be instituted in any Court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the firm. [section 692)]. - - If third party files suit against the unregistered firm, the firm cannot claim set off or institute other proceeding to enforce a right arising from a contract. -- Suit or claim or set off upto Rs 100 can be made as per section 694)b), but it is negligible in today’s standards. - - Criminal proceedings can be filed, but civil suit is not permissible.

****

ISFA JAIIB PAPER 3


CHAPTER 18FOREIGN EXCHANGE MANAGEMENT ACT, 1999

1. BASICSThe Foreign Exchange Management Act, 1999 FEMA) deals with cross border investments, foreign exchange transactions and transactions between residents and non-residents. It has replaced the erstwhile Foreign Exchange Regulation Act, 1973 FERA) with effect from June 1, 2000.

The operation of FEMA is akin to any other commercial law. However as compared to most other commercial laws FEMA is one of the smallest, having only 49 Sections. If guidelines, rules, etc. are followed, the person can undertake the transaction without any approvals. If proposed transactions fall outside the guidelines, one will have to take necessary approvals. The consequence of any violation is a penalty. If penalty is not paid, then there can be prosecution.

FEMA extends to the whole of India. It also applies to all branches, offices and agencies outside India, which are owned or controlled by a person resident in India.

2. IMPORTANT TERMS UNDER FEMA – Section 2

2.1 Capital Account Transaction means a transaction which: –• Alters foreign assets and foreign liabilities including contingent liabilities) of Indian residents.• Alters Indian assets and Indian liabilities of Non-residents.• Is a Specified transaction listed in section 63).

Essentially this is an economic definition and not an accounting or legal definition. It is intended to cover cross border investments, cross border loans and transfer of wealth across borders. RBI has been empowered to regulate capital account transactions. Unless the transaction is permitted as per regulations, Foreign Exchange FX) cannot be drawn for the same.

Capital account transactions though freed to a great extent, continue to be regulated by RBI. Unless RBI permits by way of rules or specific approvals, transactions cannot be undertaken. But there are two very important purposes for which RBI cannot impose any restrictions viz. drawing of foreign exchange for the repayment of any loans and for replenishing depreciation of direct investments in the ordinary course of business. Section 6)

2.2 Current Account Transaction means all transactions, which are not capital account transactions. Specifically it includes:–

• Business transactions between residents and non-residents.

• Short-term banking and credit facilities in the ordinary course of business.

• Payments towards interest on loans and by way of income from investments.

• Payment of expenses of parents, spouse or children living abroad or expenses on their foreign travel, medical and education.

• Scholarships/Chairs.

Primarily there are no restrictions on current account transactions. A person may sell or draw foreign exchange freely for his current account transactions, except in a few cases where limits have been prescribed Section 5). The Central Government has the power to regulate current account transactions. Unless the transaction is restricted, FX can be drawn for the same.

See para 7 for more details on current account transactions.

2.3 Person includes:–

ISFA JAIIB PAPER 3


a) an individualb) a Hindu Undivided Family HUF)c) a companyd) a firme) an association of persons or body of individuals, whether incorporated or notf) every artificial judicial person not falling in any of the above sub-clausesg) any agency, office or branch owned or controlled by such person.2.4 Resident/Non-Resident:– If an individual stays in India for more than 182 days during the course of the preceding financial year, he will be treated as a person resident in India. There are a few exceptions as under:

If a person goes/stays outside India for a) taking up employment, or b) carrying on business or vocation, or c) for any other purpose for an uncertain period; he will be treated as a person resident outside India non-resident). It has been clarified that students going abroad for further studies will be regarded as non-residents.)

If a person who is residing abroad comes to/stays in India only for a) taking up employment, or b) carrying on business or vocation, or c) for any other purpose for an uncertain period; he will be treated as a person resident in India.

The term financial year means a twelve-month period beginning from April 1 and ending on March 31 next.Following persons other than individuals, will be treated as person resident in India:- Person or body corporate which is registered or incorporated in India.- An office, branch or agency in India, even if it is owned or controlled by a person resident

outside India.- An office, branch or agency outside India, if it is owned or controlled by a person resident in

India.The definition is however inadequate to define residential status of a firm, an HUF, a trust or any entity which does not have to be registered.Conversely, a non-resident means a person who is not a resident in India.

IMPORTANT FEATURES3.1 All dealings in foreign exchange or foreign security can be done only through an authorized person if permitted by FEMA, rules & regulations framed thereunder, or by general or special permission of the RBI. Further no payments can be made by a resident to a non-resident unless permitted under FEMA section 3).

3.2 Holdings / surrender of foreign currency, etc. sections 4, 8 & 9) – Persons resident in India are primarily prohibited from acquiring, holding, owning, possessing, etc. any foreign exchange, foreign security or immovable property outside India. Also they are required to repatriate and bring to India all foreign exchange that is due to or accrued to them and deposit the same in the bank account. However they are permitted to hold foreign coins without any limit, and foreign currency notes and travellers’ cheques up to US $ 2,000 or equivalent foreign currency. The foreign exchange received has to be surrendered to the authorized dealer within the prescribed time limit as mentioned below:

Services rendered, settlement of lawful obligation, inheritance, settlement, gift

180 days from date of receipt.

Unutilised foreign exchange 180 days from date of acquisition.Unspent foreign currency notes and coins taken for travel

180 days from date of return. In the case of an individual, if he has not deposited the same in his Resident Foreign Currency Domestic) Account.)

Unspent foreign currency travellers’ cheques taken for travel

180 days from date of return. In the case of an individual, if he has not deposited the same in his Resident Foreign Currency Domestic) Account.)

ISFA JAIIB PAPER 3


Other cases 180 days from date of receipt.

3.3 Residents have been allowed to maintain foreign currency accounts in India as under:

A. EEFC (Exchange Earners Foreign Currency) ACCOUNTA person is permitted to credit the under mentioned amounts out of his foreign exchange earnings to his EEFC Account: -

Entity or person Limit in %

1 Status Holder Exporter as defined in the EXIM Policy in force) 100

2 Individual professionals ** 100

3 100% EOU Unit in EPZ/STP/EHTP 100

4 Any other person 100

** Professionals mean Director on Board of overseas company; Scientist /Professor in Indian University/Institution; Economist;s Lawyer; Doctor; Architect; Engineer; Artist; Cost/Chartered Account; Any other person rendering professional services in his individual capacity, as may be specified by the Reserve Bank from time to time. Professional earnings including director's fees, consultancy fees, lecture fees, honorarium and similar other earnings received by a professional by rendering services in his individual capacity.

However, amounts received to meet specific obligations of the account holder cannot be credited e.g. equity investment from a non-resident investor). The balances do not earn any interest.

These funds can be used for several current account purposes. For many transactions, where there are restrictions under the current account rules, funds in EEFC account can be used without restrictions.

B. Units in SEZ are permitted to open, hold and maintain a Foreign Currency Account with an authorized dealer in India.

C. BANK ACCOUNTS BY NRI:Particulars Foreign Currency Non-

Resident) Account Banks) Scheme FCNRB) Account

Non-Resident External)Rupee Account Scheme NRE Account)

Non-Resident Ordinary Rupee Account Scheme

NRO AccountWho can open an account

NRIs individuals / entities of Bangladesh/ Pakistan nationality/ownership require prior approval of RBI)

NRIs individuals / entities of Bangladesh / Pakistan nationality/ownership require prior approval of RBI)

Any person resident outside India other than a person resident in Nepal and Bhutan). individuals / entities of Bangladesh / Pakistan nationality / ownership as well as erstwhile OCBs require prior approval of RBI)

Joint account Non-Resident Indian NRI), are permitted to open FCNRB) account jointly with their resident close relative relative as defined in Section 2 of the

Non-Resident Indians NRIs), are permitted to open NRE / account jointly with their resident close relative relative as defined in Section 2 of the Companies Act,

May be held jointly with residents

ISFA JAIIB PAPER 3


Companies Act, 2013) with operational instructions ‘former or survivor’, where NRI is ‘Former’.

2013) with operational instructions ‘former or survivor’, where NRI is ‘Former’.

Nomination Permitted Permitted PermittedCurrency in which account is denominated

Pound Sterling, US Dollar, Japanese Yen, Euro, Canadian Dollar and Australian Dollar

Indian Rupees Indian Rupees

Whether Repatriable

Repatriable Repatriable Not repatriable except for the following in the account - 1) current income 2) up to USD 1 million per financial year April- March), for any bonafide purpose out of the balances in the account / sale proceeds of assets in India acquired by way of inheritance / legacy inclusive of assets acquired out of settlement subject to certain conditions

Type of Account

Term Deposit only Savings, Current, Recurring, Fixed Deposit

Savings, Current, Recurring, Fixed Deposit

Period for fixed deposits

For terms not less than 1 year and not more than 5 years.

At the discretion of the bank As applicable to resident accounts

Rate of Interest

From 01.03.2014Maturity Period:1 year to less than 3 years:LIBOR/Swap plus 200 basis points3 - 5 years: LIBOR/ SWAP plus 300 basis points

Banks are free to determine interest rates for term deposits

Banks are free to determine interest rates for term deposits

Operations by Power of Attorney in favour of a resident by the non-resident account holder

Operations on the account in terms of Power of Attorney is restricted to withdrawals for permissible local payments or remittance to the account holder himself through normal banking channels.

Operations on the account in terms of Power of Attorney is restricted to withdrawals for permissible local payments or remittance to the account holder himself through normal banking channels

Operations on the account in terms of Power of Attorney is restricted to withdrawals for permissible local payments or remittance to the account holder himself through normal banking channels

NOTE: Change from 14th August,2013 :Deregulation of Interest Rates on Non-Resident External) NRE) Deposits and Ordinary Non-Resident NRO) Accounts, the Reserve Bank of India directs that banks are free to offer interest rates without any ceiling on NRE deposits with maturity of 3 years and above. The extant ceiling on NRO Accounts shall continue. These instructions will be valid up to November 30, 2013,subject to review.

ISFA JAIIB PAPER 3


a. When a person resident in India leaves India for Nepal and Bhutan for taking up employment or for carrying on business or vocation or for any other purpose indicating his intention to stay in Nepal and Bhutan for an uncertain period, his existing account will continue as a resident account. Such account should not be designated as Non-resident Ordinary) Rupee Account NRO).

b. ADs may open and maintain NRE / FCNR B) Accounts of persons resident in Nepal and Bhutan who are citizens of India or of Indian origin, provided the funds for opening these accounts are remitted in free foreign exchange, Interest earned in NRE / FCNR B) accounts can be remitted only in Indian rupees to NRIs and PIO resident in Nepal and Bhutan.

c. In terms of Regulation 44) of the Notification No.FEMA.5/2000-RB dated May 3, 2000, ADs may open and maintain Rupee accounts for a person resident in Nepal / Bhutan.

Remittance of current income from NRO account : NRI may remit outside India or may credit to NRE account current income like rent, dividend, pension, interest etc. earned in India subject to payment of applicable taxes in India.

Remittance of sale proceeds of assets from NRO account : NRI / PIO may remit an amount, non exceeding USD 1,000,000 per financial year, being sale proceeds of financial assets/ immovable property acquired by him by way of inheritance/legacy/settlement, on production of documentary evidence in support of acquisition, inheritance or legacy of assets by the remitter, and an undertaking by the remitter and certificate by a Chartered Accountant in the formats prescribed by the Central Board of Direct Taxes.

Change of Status: When a resident proceeds to foreign country for stay for uncertain period, the existing ordinary rupee account will be converted as NRO account. Fresh NRE account should be opened with remittance from abroad. On his return back to India for stay for uncertain period / permanent settlement, all the Non Resident running accounts will be converted as resident accounts immediately and Term Deposits will be allowed to continue till maturity.

E. BANK ACCOUNT OUTSIDE INDIA OF EMPLOYEES OF FOREIGN COMPANIES ON DEPUTATION IN INDIAEmployees of foreign companies either foreign nationals or Indian nationals) who are on deputation in India are permitted to open, hold and maintain a foreign currency account outside India and receive salary due to them as under:–a) The amount of salary to be credited to such account should not exceed 75% of the salary accrued or received by the employee from the foreign company.b) The remaining salary shall be paid in Rupees in India.c) The tax on the whole salary has been paid.

F. FOREIGN CURRENCY ACCOUNT OF PROJECT / SERVICE EXPORTERExporters of projects/services are permitted to open, hold and maintain foreign currency bank accounts either in India or abroad for each project under execution abroad.

G. FOREIGN CURRENCY ACCOUNTS BY SHIP-MANNING / CREW-MANAGEMENT AGENCIESShip manning/crew managing agencies rendering services to shipping companies incorporated outside India can open and maintain non-interest bearing foreign currency accounts in India, till the validity period of their agreement, for the purpose of undertaking transactions in the ordinary course of their business.3.4. Any passenger bringing in foreign exchange on his arrival in India in the form of currency notes, bank notes or traveller's cheques exceeding US $ 10,000 or its equivalent and / or the value of foreign currency notes exceeding US $ 5,000 or its equivalent is required to file a declaration in Form CDF with the Custom Authorities.

ISFA JAIIB PAPER 3


3.5. An Indian entity opening a Branch / Representative / Liaison Office outside India is allowed to remit, subject to certain terms and conditions, as under:–a) For Initial Expenses – Up to 15% of its average annual sales / income or turnover during the last two accounting years or up to 25% of net worth, whichever is higher.b) For Recurring Expenses – Up to 10% of its average annual sales / income or turnover during the last two accounting years.The overseas office is also permitted to acquire immovable property outside India for its business and for residential purpose of its staff out of the above remittances.

4. CONTRAVENTION, PENALTIES & APPEALS – Sections 13 To 354.1 Penalties for contraventions under FEMA are per se monetary in nature. If any person contravenes any provisions, rules, regulations, etc. the penalty imposed may be 3 times the amount involved in contravention; and if the amount of contravention is not ascertainable, penalty can be up to Rs. 200,000. If the contravention is a continuing one, a penalty up to Rs. 5,000 per day may be imposed for every day after the 1st day during which the contravention continues.4.2 The adjudicating officer may also confiscate any currency, security or property in addition to imposing penalty.4.3 If a person does not pay up the penalty within 90 days, he is liable for civil imprisonment.4.4 There is a right to appeal given at every stage and an appeal against an order of the Adjudicating Authority can be made to the Special Director Appeal). An appeal against the order of the Special Director Appeals) can be made to the Appellate Tribunal. An appeal, on questions of Law, against the order of the Appellate Tribunal can be made to the High Court.4.5 A person preferring an appeal to the Special Director Appeals) or the Appellate Tribunal can take assistance of a Chartered Accountant or Legal Practitioner.

5. DIRECTORATE OF ENFORCEMENT – SECTIONS 36 TO 385.1 The officers of the Directorate have powers to investigate contraventions referred to in section 13.5.2 The powers and limitations of these officers are the same as those conferred on Income-tax Authorities under the Income-Tax Act, 1961.

6. COMPOUNDING OF CONTRAVENTIONSPowers for compounding of offences – RBI has been given powers for compounding all cases of contraventions other than cases under section 3a) of FEMA. Cases of contravention under section 3a) relate to dealing in or transfer of foreign exchange and foreign security to any person other than an authorised dealer. For these, Enforcement Directorate will be responsible. Powers of compounding with RBI should give confidence to public.Depending on the amount involved, various officers have been designated to look into applications for compounding. The compounding authority can call for any information, record or any other documents relevant to the compounding proceedings. The compounding authority is required to pass an order within 180 days from the date of application. The sum for which the contravention is compounded has to be paid within 15 days from the date of order of compounding.

7. PERMISSIBLE TRANSACTIONS BY RESIDENTS7.1 Current Account Transactions See para 2.2 for meaning)Unless the transaction falls within the below mentioned restrictions, FX can be drawn for the same without any limit.Broad categories of current account transactions can be classified as under:i. Transactions for which FX withdrawal is totally prohibited such as payment for lotteries, transactions with residents of Nepal and Bhutan, etc.ii. Transactions for which FX can be withdrawn only with prior approval of Government, such as specified transactions by PSUs, lump sum knowhow payments exceeding US $ 2 million, etc. However payments from EEFC, RFC D) and RFC Account do not require any approval.iii. Transactions for which FX can be withdrawn only with prior approval of Government even if payment is made from EEFC Account.

ISFA JAIIB PAPER 3


iv. Transactions for which FX can be withdrawn only with prior approval of RBI such as FX for business travel exceeding US $ 25,000, etc. However, payments from EEFC, RFC D) and RFC Account do not require any approval.v. Transactions for which FX can be withdrawn only with prior approval of RBI even if payment is made from EEFC Account.Residents are permitted to remit US $ 200,000 for any current and capital account purpose except those transactions which are prohibited altogether – refer paragraph A below), without any limit. See para 7.2.6 below for further details on investments abroad by Individuals)The details of restrictions on Current Account Transactions are as follows:A. Payments or withdrawal of FX for following purposes are totally prohibited:-1. Travel to Nepal and Bhutan.2. Transaction with a person resident in Nepal and Bhutan.3. Remittance out of lottery winnings.4. Remittance of income from racing/riding, etc. or any other hobby.5. Remittance for purchase of lottery tickets, banned/ proscribed magazines, football pools, sweepstakes, etc.6. Payment of commission on exports made towards equity investment in Joint Ventures/Wholly Owned Subsidiaries abroad of Indian companies.7. Payment of commission on exports under Rupee State Credit Route, except commission up to 10% of invoice value of exports of tea and tobacco.8. Payment related to “Call Back Services” of telephones.9. Remittance of interest income on funds held in NRSR Scheme Account.10. Remittance towards participation in lottery schemes involving money circulation or for securing prize money / awards, etc.

B.1. The following payments will require prior approval from the Government of India, except where the payment is made from the RFC or RFCD) or EEFC Account of the remitter:–

Purpose of Remittance Approval to be obtained from1 Cultural Tours Ministry of HRD

Department of Educationand Culture)

2 Advertisement in foreign print media Ministry of Financefor the purpose other than promotion Department of Economic Affairs)of tourism, foreign investments andinternational bidding exceeding US $10,000) by a State Government or itsPSU

3 Remittance of Freight of vessel Ministry of Surface Transportchartered by a PSU Chartering Wing)

4 Payment of import through ocean Ministry of Surface TransportTransport by a Government Chartering Wing)Department or a PSU on c.i.f. basis

5 Multi-modal transport operators Registration certificate from themaking remittance to their agents Director General of Shippingabroad

6 Remittance of hiring charges ofTransponders

ISFA JAIIB PAPER 3


a) TV Channels Ministry of Information andBroadcasting

b) Internet service providers Ministry of Communication andInformation Technology

7 Remittance of container detention Ministry of Surface Transportcharges exceeding the rate prescribed Director General of Shipping)by Director General of Shipping

8 Remittances under technical collabo- Ministry of Industry & Commerceration agreements where paymentsof royalty exceeds 5% on local sales& 8% on exports & lump sumpayment exceeds US $ 2 million

9 Remittance of prize money/sponsor- Ministry of HRD Department ofship of sports activity abroad by a Youth Affairs & Sports)person other than International/National/State Level Sports bodies,if the amount involved exceedsUS $ 1,00,000

B.2. Remittance for membership of P & I Club would require prior approval from the Ministry of Finance except where the payment is made from RFC or RFCD) Account of the remitter.

C.1. The following payments will require prior approval of RBI, except where the payment is made from the RFC or RFCD) or EEFC Account of the remitter:–1. Release of exchange exceeding US $ 10,000 or its equivalent in one calendar year, for one or more private visits to any country except Nepal and Bhutan).2. Exchange facilities exceeding US $ 100,000 for persons going abroad for employment.3. Exchange facilities for emigration exceeding US $ 100,000 or amount prescribed by country of emigration.4. Remittance for maintenance of close relatives abroad,i) exceeding the net salary after deduction of taxes, contribution to provident fund and other deductions) of a person who is resident but not permanently resident in India and a) is a citizen of a foreign state other than Pakistan or b) is a citizen of India who is on deputation to the office or branch or subsidiary or joint venture in India of such foreign company.ii) exceeding US $ 100,000 per year per recipient.Explanation: for the purpose of this item, a person resident in India on account of his employment or deputation of a specified duration irrespective of the length thereof) or for a specific job or assignment; the duration of which does not exceed three years, is a resident but not permanently resident.5. Release of foreign exchange, exceeding US $ 25,000 to a person, irrespective of period of stay, for business travel, or attending a Conference or specialized training or for maintenance expenses of a patient going abroad for medical treatment or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/check-up.6. Release of exchange for meeting expenses for medical treatment abroad exceeding the estimate from the doctor in India or hospital / doctor abroad. However, an amount up to US $ 100,000 or its equivalent can be released without insisting on any estimate from a hospital / doctor.7. Release of exchange for studies abroad exceeding the estimates from the institution abroad or US $ 100,000 per academic year, whichever is higher.

ISFA JAIIB PAPER 3


8. a) Remittances exceeding US $ 1,000,000 per project, for any consultancy services procured from outside India.b) Remittances exceeding US $ 10 million per project, consultancy services procured from outside India by Indian companies executing infrastructure projects.9. Advance towards import of services in India exceeding US $ 100,000.

C.2. The following payments will require prior approval of RBI, except where the payment is made from the RFC or RFCD) Account of the remitter:–1. Commission to agents abroad for sale of residential flats/commercial plots in India, exceeding US $ 25,000 or 5% of the inward remittance whichever is higher) per transaction.2. Remittance exceeding US $ 100,000 or 5 % of the investment brought into India, whichever is higher, by an entity in India by way of reimbursement of pre-incorporation expenses in India.3. Donations in excess of US $ 5,000 by Indian corporates.4. Donations by Indian corporates, in exceeding 1% of the foreign exchange earnings during the previous 3 financial years or US $ 5 million, whichever is less, for a) Creation of Chairs in reputed educational institutes.b) Donations to funds not being an investment fund) promoted by educational institutes.c) Donation to technical institution or body or association in the field of activity of the donor company.5. Payment for purchase of Trade Marks)/Patents).

Remittance under the Us $ 2,50,000 Scheme Monetary Policy Review’ in February, 2015,)An individual resident in India is permitted to remit up to US $ 2,50,000 per calendar year for any legal and lawful purpose without obtaining prior permission of RBI. The individual can use said facility for any current account transaction, acquisition of any movable and/or immovable property, remittance towards gift and donation, investment in overseas companies or opening of a bank account outside India. However, remittances cannot be made to Bhutan, Nepal, Mauritius or Pakistan or countries identified as “non co-operative countries and territories” by the Financial Action Task Force. Currently i.e., as per list updated as on February 17, 2006), the countries where investment cannot be made are Myanmar, Nigeria. The updated list can be seen at the website of FATF - http://www.fatf-gafi.org. An application cum declaration form is required to be filed with the A. D.

****

ISFA JAIIB PAPER 3


CHAPTER 19MONEY LAUNDERING

The Prevention of Money Laundering Act, 2002 PMLA) forms the core of the legal framework put in place by India to combat 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.

Money Laundering refers to the conversion or "Laundering" of money which is illegally obtained, so as to make it appear to originate from a legitimate source. Money Laundering is being employed by launderers worldwide to conceal criminal activity associated with it such as drug / arms trafficking, terrorism and extortion. As per an estimate of the International Monetary Fund, the aggregate size of money laundering in the world could be somewhere between two and five percent of the worlds gross domestic product.

There are three independent steps or stages in Money Laundering as shown below: 1. Placement: "Placement" refers to the physical disposal of bulk cash proceeds derived from illegal activity. 2. Layering: "Layering" refers to the separation of illicit proceeds from their source by creating complex layers of financial transactions. Layering conceals the audit trail and provides anonymity. 3. Integration: "Integration" refers to the reinjection of the laundered proceeds back into the economy in such a way that they re-enter the financial system as normal business funds.

Section 12 - Obligations of Banking Companies, Financial Institutions and Intermediaries of securities market. These are stated in Rule 3.

Rule 3 of the Prevention of Money-laundering Maintenance of Records) Rules, 2005 lays down following obligations for maintenance of records.Maintenance of records of transactions nature and value)1) Every reporting entity shall maintain the record of all transactions including, the record of—A) all cash transactions of the value of more than rupees ten lakhs or its equivalent in foreign currency;B) all series of cash transactions integrally connected to each other which have been individually valued below rupees ten lakh or its equivalent in foreign currency where such series of transactions have taken place within a month and the monthly aggregate exceeds an amount of ten lakh rupees or its equivalent in foreign currency;BA) all transactions involving receipts by non-profit organisations of value more than rupees ten lakh, or its equivalent in foreign currency;C) 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;D) all suspicious transactions whether or not made in cash and by way of- i) deposits and credits, withdrawals into or from any accounts in whatsoever name they are referred to in any currency maintained by way of—a) a) cheques including third party cheques, pay orders, demand drafts, cashiers cheques or any other instrument of payment of money including electronic receipts or credits and electronic payments or debits, orb) travellers cheques, orc) transfer from one account within the same banking company, financial institution and intermediary, as the case may be, including from or to Nostro and Vostro accounts, ord) any othed) any other mode in whatsoever name it is referred to;ii) credits or debits into or from any non-monetary accounts such as d-mat account, security account in any currency maintained by the banking company, financial institution and intermediary, as the case may be;

ISFA JAIIB PAPER 3


iii) money transfer or remittances in favour of own clients or non-clients from India or abroad and to third party beneficiaries in India or abroad including transactions on its own account in any currency by any of the following:-a) payment orders, orb) cashiers cheques, orc) demand drafts, ord) telegraphic or wire transfers or electronic remittances or transfers, ore) internet transfers, orf) Automated Clearing House remittances, org) lock box driven transfers or remittances, orh) remittances for credit or loading to electronic cards, ori) any other mode of money transfer by whatsoever name it is called;

iv) loans and advances including credit or loan substitutes, investments and contingent liability by way of:a) subscription to debt instruments such as commercial paper, certificate of deposits, preferential shares, debentures, securitized participation, inter bank participation or any other investments in securities or the like in whatever form and name it is referred to, orb) purchase and negotiation of bills, cheques and other instruments, orc) foreign exchange contracts, currency, interest rate and commodity and any other derivative instrument in whatsoever name it is called, ord) letters of credit, standby letters of credit, guarantees, comfort letters, solvency certificates and any other instrument for settlement and/or credit support;

v) collection services in any currency by way of collection of bills, cheques, instruments or any other mode of collection in whatsoever name it is referred to.

E) all cross border wire transfers of the value of more than five lakh rupees or its equivalent in foreign currency where either the origin or destination of fund is in India;

F) all purchase and sale by any person of immovable property valued at fifty lakh rupees or more that is registered by the reporting entity, as the case may be.

Rule 9 of the Prevention of Money-laundering Maintenance of Records) Rules, 2005 makes it mandatory to verify records of the identity of clients.

*** *

ISFA JAIIB PAPER 3


CHAPTER 20RIGHT TO INFORMATION ACT 2005

Govt of India enacted the right to information act 2005, comes into effect 13.10.2005. The Right to Information Act, 2005 confers the right to information for citizens to secure access to information under the control of public authorities in order to promote transparency and accountability in the working of every public authority. It has been made obligatory for every public authority to publish certain information, under Section 41) b) of the Act, besides maintaining all its records computerized and connected through a network all over the country on different systems so that access to such records is facilitated. The act under sec 8&9 provide for certain categories of information to be exempt from disclosure. The act also provides for appointment of a Chief Public Information Officer to deal with requests for information.

EXEMPTIONSec 81) d of the Act provides for exemption from disclosure of information which would harm the competitive position of the third party. Clause j) of Section 81) of the Act exempts any personal information, the disclosure of which has no relationship to any public activity or interest or which would cause unwarranted invasion of the privacy of the individual. Therefore, in regard to obligation of secrecy, apart from the right to privacy of a borrower of a Bank, the Bank cannot provide access to information relating to affairs of customers, as disclosure of such information has no relationship with any public activity or interest which is referred to in Clause j) of Sub-section 1 of Sec.8 of the Act.

Whether to sanction a loan or not, is in the absolute discretion of concerned sanctioning authority of the Bank and such discretion is exercised after taking into consideration the relevant facts and circumstances of each case. Information relating to sanction of loans particulars of loan accounts and related information is exempted from disclosure.

Any citizen can request for information by making an application in writing or through electronic means in English / Hindi / official language of the areas in which the application is being made together with the prescribed fees.Rs10 per application+Rs2/- for each pageA4/A3),or actual cost if large size paper, For Inspection of Record-no fee for first hour, Rs5/-for each 15 Minutes or part thereof, in case of diskette-Rs50 per diskette/floppy- Addl fee for other cost –actual cost-No fee for below poverty line persons- no charges if the information is not provided with in time limit)

The Central Public Information OfficerGM-CSD) and the Central Assistant Public Information Officers Regional Heads) will provide necessary information to the public as permitted under the law within 30 days. Any person who does not receive the decision from the Central Public Information Officers whether by way of information or rejection within the time frame may within 30 days from the expiry of period prescribed for furnishing the information or 30 days from the date of receipt of the decision prefer an appeal to the Appellate Authority to be designated by the Bank.

****

ISFA JAIIB PAPER 3


CHAPTER 21THE LAW OF LIMITATION, 1963

Why period of Limitation?It is for general welfare that a period be put on litigation. Further, it is a general principle of law that law is made to protect only diligent and vigilant people. Equity aids the vigilant and not the indolent. Law will not protect people who are careless about their rights. Vigilantibus non domientibus jur A subventiunt). Moreover, there should be certainty in law and matters cannot be kept in suspense indefinably. It is, therefore, provided that Courts of Law cannot be approached beyond fixed period. In civil matters, the limit is provided in Limitation Act, 1963.

What does limitation period mean?The law prescribes different periods within which a person who has a grievance should go to court. For example, if somebody has borrowed your money and not returned it, you should approach the court within three years from the date you lent the money. Note : If you don't go to the court within that time, the courts will not be of help to recover your money. This is called the limitation period. After the limitation period, you cannot enforce your rights in a court. The Limitation Act 1963 prescribes different limitation periods for different kinds of claims. Some other Acts such as the Consumer Protection Act also prescribe limitation periodsPeriod as prescribed in Schedule to the Act –SOME OF THE IMPORTANT LIMITATIONS FOR BANKERS :-Description of Suit Period of limitation Time from which period

begins to runFor money payable for money lent.

Three years When the loan is made

Like suit when the lender has given a cheque for the money

Three years When the cheque is paid.

For money lent under an agreement that it shall be payable on demand

Three years When the loan is made

For money deposited under an agreement that it shall be payable on demand, including money of a customer in the hands of his banker’s so payable

Three years When the demand is made.

For money payable for interest upon money found to be due from the defendant to the plaintiff

Three years When the interest becomes due

On a bill of exchange or promissory note payable at a fixed time after sight or after demand.

Three years When the fixed time is expires

To enforce payment of money secured by a mortgage or otherwise charged upon immovable property

Twelve years When the money sued for becomes due

By mortgagee. –a) For foreclosure

Thirty years When the money secured by the mortgaged becomes due.

b) For possession of immovable property mortgaged.

Twelve years When the mortgagee becomes entitled to possession.

Any suit for which no period of limitation is provided elsewhere in this Schedule.

Three years When the right to sue accrues.

For arrears of rent. Three years When the profits are received.

ISFA JAIIB PAPER 3


→Acknowledgement of debtImpliedly includes the acknowledgement of security for the debt. An acknowledgement signed by one of the joint borrowers or partners does not bind the others unless it can be established by evidence that the person signing was authorised expressly or impliedly to sign.

→Part paymenta: If the debtor makes a part payment before the expiry of the limitation period, either by himself or by his agent duly authorised on his behalf or in the handwriting of himself or such agent, fresh period of limitation starts from date of such part payment. b: A credit entry by itself does not save limitation. Pay in slip signed by the borrower or his duly authorised agent amounts to part-payment. A pay in slip signed by an employee of a partnership firm or a company does not save limitation.c: It needs to be noted that acknowledgement of debt and part payment should be obtained before the expiry of limitation period as they cannot revive the limitation if already expired.

→Fresh promise to pay Even after the expiry of limitation, the liability can be enforced if there is a fresh promise to pay the outstanding debt already barred by limitation, because u/s 253) of the Contract Act, a time barred debt is a valid consideration for a fresh promise to pay.If court is closed on last day – If court is closed on last day of limitation, suit, appeal or application can be filed on next day when Court reopens. [section 4]. Continuous running of time – When once period of limitation starts running, it continues even if there is any subsequent disability or inability to institute a suit or make an application. [section 9]. - - However, if at the time when person is entitled to file a suit or make application, if a person was disabled as he was minor or insane), the period of limitation will start after the disability is removed. [section 61)].In case of appeals against any judgment, if limitation is provided in any statute, that will prevail.

►Exclusion of time in legal proceedings –1) In computing the period of limitation for any suit, appeal or application, the day from which such period is to be reckoned, shall be excluded. 2) In computing the period of limitation for an appeal or an application for leave to appeal or for revision or for review of a judgment, the day on which the judgement complained of was pronounced and the time requisite for obtaining a copy of the decree, sentence or order appealed from or sought to be revised or reviewed shall be excluded. 3) Where a decree or order is appealed from or sought to be revised or reviewed, or where an application is made for leave to appeal from a decree or order, the time requisite for obtaining a copy of the judgement on which the decree or order is founded shall also be excluded.4) In computing the period of limitation for an application to set aside an award, the time requisite for obtaining a copy of the award shall be excluded.Explanation. -In computing under this section the time requisite for obtaining a copy of a decree or an order, any time taken by the court to prepare the decree or order before an application for a copy thereof is made shall not be excluded.

►Suits against trustees and their representatives:-Notwithstanding anything contained in the Provisions of this Act, no suit against a person in whom property has become vested in trust for any specific purpose, or against his legal representatives or assigns not being assigns for valuable consideration), for the purpose of following in his or their hands such property, or the proceeds thereof, or for an account of such property or proceeds, shall be barred by any length of time.

Explanation. -For the purposes of this section any property comprised in a Hindu, Muslim or Buddhist religious or charitable endowment shall be deemed to be property vested in trust for a specific purpose and the manager of the property shall be deemed to be the trustee thereof.

****

ISFA JAIIB PAPER 3


CHAPTER 22INFORMATION TECHNOLOGY ACT, 2000

New communication systems and digital technology have made dramatic changes in way of transacting business. Use of computers to create, transmit and store information is increasing. Computer has many advantages in e-commerce. It is difficult to shift business from paper to electronic form due to two legal hurdles - a) Requirements as to writing and b) Signature for legal recognition. Many legal provisions assume paper based records and documents and signature on paper. The General Assembly of the United Nations by resolution dated the 30th January, 1997 adopted the Model Law on Electronic Commerce and recommended that all States should give favourable consideration to the Model Law when they enact or revise their laws.The Information Technology Act has been passed to give effect to the UN resolution and to promote efficient delivery of Government services by means of reliable electronic records. As per preamble to the Act, the purpose of Act is a) to provide legal recognition for transactions carried out by means of electronic data interchange and other means of electronic communication, commonly referred to as "electronic commerce", which involve the use of alternatives to paper-based methods of communication and storage of information and b) to facilitate electronic filing of documents with the Government agencies. - - The Act came into effect on 17.10.2000.The Act does not apply to — a) a negotiable instrument as defined in section 13 of the Negotiable Instruments Act, except cheque b) a power-of-attorney as defined in section 1A of the Powers-of-Attorney Act c) a trust as defined in section 3 of the Indian Trusts Actd) a will as defined in section 2h) of the Indian Succession Act, including any other testamentary disposition by whatever name called e) any contract for the sale or conveyance of immovable property or any interest in such property f) any such class of documents or transactions as may be notified by the Central Government in the Official Gazette. - - Broadly, documents which are required to be stamped are kept out of the provisions of the Act.Overview of the Act - The Act provides for - * Electronic contracts will be legally valid * Legal recognition of digital signatures * Digital signature to be effected by use of asymmetric crypto system and hash function * Security procedure for electronic records and digital signature * Appointment of Certifying Authorities and Controller of Certifying Authorities, including recognition of foreign Certifying Authorities * Controller to act as repository of all digital signature certificates * Certifying authorities to get License to issue digital signature certificates * Various types of computer crimes defined and stringent penalties provided under the Act * Appointment of Adjudicating Officer for holding inquiries under the Act * Establishment of Cyber Appellate Tribunal under the Act * Appeal from order of Adjudicating Officer to Cyber Appellate Tribunal and not to any Civil Court * Appeal from order of Cyber Appellate Tribunal to HighCourt * Act to apply for offences or contraventions committed outside India * Network service providers not to be liable in certain cases * Power of police officers and other officers to enter into any public place and search and arrest without warrant * Constitution of Cyber Regulations Advisory Committee who will advice the Central Government and Controller What does IT Act enable? - The Information Technology Act enables:* Legal recognition to Electronic Transaction / Record * Facilitate Electronic Communication by means of reliable electronic record * Acceptance of contract expressed by electronic means * Facilitate Electronic Commerce and Electronic Data interchange * Electronic Governance * Facilitate electronic filing of documents * Retention of documents in electronic form * Where the law requires the signature, digital signature satisfy the requirement * Uniformity of rules, regulations and standards regarding the authentication and integrity of electronic records or documents * Publication of official gazette in the electronic form * Interception of any message transmitted in the electronic or encrypted form * Prevent Computer Crime, forged electronic records, international alteration of electronic records fraud, forgery or falsification in Electronic Commerce and electronic transaction.

DIGITAL SIGNATURE - Any subscriber may authenticate an electronic record by affixing his digital signature. [section 31)]. “Subscriber" means a person in whose name the Digital Signature Certificate is issued. [section 21)zg)]. "Digital Signature Certificate" means a Digital Signature Certificate issued under section 354) [section 21)q)].

ISFA JAIIB PAPER 3


"Digital signature" means authentication of any electronic record by a subscriber by means of an electronic method or procedure in accordance with the provisions of section 3. [section 21)p)]."Affixing digital signature" with its grammatical variations and cognate expressions means adoption of any methodology or procedure by a person for the purpose of authenticating an electronic record by means of digital signature. [section 21)d)].

Authentication of records - The authentication of the electronic record shall be effected by the use of asymmetric crypto system and hash function which envelop and transform the initial electronic record into another electronic record. [section 32)].

Verification of digital signature - Any person by the use of a public key of the subscriber can verify the electronic record. [section 33)]. The private key and the public key are unique to the subscriber and constitute a functioning key pair. [section 34)].The idea is similar to locker key in a bank. You have your ‘private key’ while bank manager has ‘public key’. The locker does not open unless both the keys come together match.

Electronic records acceptable unless specific provision to contrary - Where any law provides that information or any other matter shall be in writing or in the typewritten or printed form, then, notwithstanding anything contained in such law, such requirement shall be deemed to have been satisfied if such information or matter is - a) rendered or made available in an electronic form; and b) accessible so as to be usable for a subsequent reference. [section 4]. - - Unless there is specific provision in law to contrary, electric record or electronic return is acceptable. - -Soon, it will be possible to submit applications, income tax returns and other returns through internet. DEPARTMENT OR MINISTRY CANNOT BE COMPELLED TO ACCEPT ELECTRONIC RECORD - Section 8 makes it clear that no department or ministry can be compelled to accept application, return or any communication in electronic form.

Legal recognition of digital signatures - Where any law provides that information or any other matter shall be authenticated by affixing the signature or any document shall be signed or bear the signature of any person then, notwithstanding anything contained in such law, such requirement shall be deemed to have been satisfied, if such information or matter is authenticated by means of digital signature affixed in such manner as may be prescribed by the Central Government. - - "Signed", with its grammatical variations and cognate expressions, shall, with reference to a person, mean affixing of his hand written signature or any mark on any document and the expression "signature" shall be construed accordingly. [section 5].Secure digital signature - If, by application of a security procedure agreed to by the parties concerned, it can be verified that a digital signature, at the time it was affixed, was - a) unique to the subscriber affixing it b) capable of identifying such subscriber c) created in a manner or using a means under the exclusive control of the subscriber and is linked to the electronic record to which it relates in such a manner that if the electronic record was altered the digital signature would be invalidated, - - then such digital signature shall be deemed to be a secure digital signature. [section 15].Certifying digital signature - The digital signature will be certified by ‘Certifying Authority’. The ‘certified authority’ will be licensed, supervised and controlled by ‘Controller of Certifying Authorities’.

****

ISFA JAIIB PAPER 3


CHAPTER 23PAYMENT & SETTLEMENTS SYSTEMS ACT, 2007

The PSS Act, 2007 received the assent of the President on 20th December 2007 and it came into force with effect from 12th August 2008.Objective of the PSS Act, 2007:The PSS Act, 2007 provides for the regulation and supervision of payment systems in India and designates the Reserve Bank of India Reserve Bank) as the authority for that purpose and all related matters. The Reserve Bank is authorized under the Act to constitute a Committee of its Central Board known as the Board for Regulation and Supervision of Payment and Settlement Systems BPSS), to exercise its powers and perform its functions and discharge its duties under this statute. The Act also provides the legal basis for “netting” and “settlement finality”. This is of great importance, as in India, other than the Real Time Gross Settlement RTGS) system all other payment systems function on a net settlement basis.

Important terms are defined in Section 2 1) of the PSS Act, 2007:“Payment Obligation” : Is defined as what is owed by one participant in a payment system to another such participant which results from clearing or settlement or payment instructions relating to funds, securities or foreign exchange or derivatives or other transactions.

“Payment Instruction”:Is defined as any instrument, authorization or order in any form, including by electronic means, to effect a payment by a person to a participant in a payment system or from one participant in such a system to another participant in that system.The payment instruction can be communicated either manually i.e. through an instrument like a cheque ,draft , payment order etc or through electronic means, so that a payment can be made by either a person to the participant in such a system or between two participants.

“Settlement”: Means the settlement of payment instructions received and these include settlement of securities, foreign exchange or derivatives or other transactions. Settlement can take place either on a net basis or on a gross basis. Both netting and gross settlement system are defined under the Act.

“Payment System” : To mean a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange Section 34 of the PSS Act 2007 states that its provisions will not apply to stock exchanges or clearing corporations set up under stock exchanges). It is further stated by way of an explanation that a “payment system” includes the systems enabling credit card operations, debit card operations, smart card operations, money transfer operations or similar operations.

Other Important points:a. In terms of Section 4 of the PSS Act, 2007 no person other than the Reserve Bank can operate or commence a payment system unless authorized by the Reserve Bank. Any person desirous of commencing or operating a payment system needs to apply for authorization under the PSS Act, 2007Section 5).b. The Reserve Bank is empowered to prescribe the format of payment instructions, size and shape of instructions, timings to be maintained by payment systems, manner of funds transfer criteria for membership including continuation, termination and rejection of membership, terms and conditions for participation in the payment system etcc. Under the PSS Act, 2007, dishonor of an electronic fund transfer instruction due to insufficiency of funds in the account etc., is an offence punishable with imprisonment or with fine or both, similar to the dishonor of a cheque under the Negotiable Instruments Act 1881. Subject to complying with the procedures laid down under the PSS Act, 2007, criminal prosecution of defaulter can be initiated in such cases. This provision was introduced to discourage dishonour of electronic payment instructions. Section 25 of the Act)

*****

ISFA JAIIB PAPER 3


CHAPTER 24TAX LAWS & ITS PROVISIONS

1. Interest other than “Interest on securities” Section 194A)Any person, who is responsible for paying to a resident any income by way of interest shall,

a) at the time of credit of such income to the account of the payee orb) at the time of payment thereof in cash or by issue of a cheque or draft or by any other

mode, whichever is earlier, deduct income-tax thereon at the rates in force.

The tax liability for the purpose of TDS is determined at the branch level. Whenever the bank pays an interest on your fixed deposits, it checks it for TDS eligibility. If it qualifies, the TDS is deducted. TDS is also deducted on interest accrued but not yet paid) at the end of the financial year viz. 31st March every year.

Exception:-No deduction if the amount paid or credited or likely to paid not more than Rs.10,000/- in that particular financial year. Also the interest paid on demand deposit & recurring deposit is not covered by the above provision and hence no deduction on it.

Rate of Deduction: In case of resident assessee, TDS is deducted at a rate of 10% .

As per latest amendment if the tax payer fails to provide PAN Permanent Account Number) then the rate will be 20% plus education cess and surcharge if applicable).

Self declaration for non deduction of Tax:Form No. 15G and Form 15H, furnished by a deductee u/s. 197A, should also be accepted bythe tax deductor i.e Bank) before the due date for making the deduction. Under section 206AA2), the deductor can not accept such declaration if the deductee does not mention his permanent account number in the declaration so furnished . It may be noted that a trust or AOP can also furnish such Form No. 15G in applicable cases.

Obligation of payment of TDS deducted:Under section 2001), any person deducting any sum by way of TDS is liable to make the payment to the credit of Central Government or the Board within within a period of seven days from the end of the month in which the payment is made or credited. However, when the payment is made at any time in the month of March or credited to the account of the payee on the last day of the accounting year the TDS can be deposited till 30th April.

Consequences if not paid in time: Interest @1.5% p.m till the date of payment and penalty

Returns of TDS:W.e.f. 01-04-2005, every person who has deducted any tax for any quarter and has also paid the tax so deducted, is required→ to prepare quarterly returns and submit such quarterly returns within a period of 15 days from end of the concerning quarter. However, for the last quarter the due date is 15th May.→These quarterly statements are required to be made in Form No. 26Q.

These Form No.26Q are required to be e-filed with TIN central management system managed by NSDL.

CERTIFICATE FOR TAX DEDUCTED Section 203)Every person deducting tax in accordance with the provisions of Income tax act, shall issue a certificate to the effect that tax has been deducted, and specifying the amount so deducted.After 01.04.2012: Every banking company regulated by banking regulation act, 1949 is required to download system generated certificates Form 16A) from TIN central system managed by NSDL with unique TDS certificate number.

ISFA JAIIB PAPER 3


Time Limit of issue of such certificate:Quarter Ending 30th June : Due date is 30th JulyQuarter Ending 30th September: Due date is 30th OctoberQuarter Ending 31st December : Due date is 30th JanuaryQuarter Ending 31st March : Due Date is 30th May

Penalties:a) Section 271 H- Penalty for failure to furnish TDS returns New insertion- applicable w.e.f. 1st

day of July 2012).A person shall be liable to pay a sum between Rs 10000/- to Rs 1,00,000/- if he fails to deliver or delivers an incorrect information in TDS returns.However, no penalty shall be levied if the person proves that he had delivered the required statement within one year of the period prescribed under the said sections.

b) Section 234E New Section) Levy of fee in certain cases w.e.f. 1st day of July 2012) The section proposes to levy a fee of Rs 200/-per day subject to the total amount of TDS) incase of late furnishing of TDS returns.

2. Income Tax Provisions for Filing Annual Information Report:-Sub-section 1) of section 285BA requires certain specified persons to furnish Annual Information Return AIR) in respect of specified financial transactions registered or recorded by them during the financial year

Specified Person Financial Transaction

Banking company/institution Total cash deposits in a savings bank account in a year Rs. 10 lakhs or more

Banking company/ institution or Payments received in the year in respect of a credit cardany other company / institution issued. ---- Rs. 2 lakhs or moreissuing credit card

TIME LIMIT OF FILING AIRRule 114E 5) prescribes that AIR is to be furnished on or before 31st August, immediately following the financial year in which the transaction is registered or recorded.

Note: GST is made effective from 01.07.2017 and thereafter no Service Tax will be applicable.

Goods & Service Tax Act, 2017 : GST is one indirect tax for the whole nation, which will make India one unified common market. GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

GST Structure: Keeping in mind the federal structure of India, there will be two components of GST – Central GST (CGST) and State GST (SGST). Both Centre and States will simultaneously levy GST across the value chain. Tax will be levied on every supply of goods and services. Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State. The input tax credit of CGST would be available for discharging the CGST liability on the output at each stage. Similarly, the credit of SGST paid on inputs would be allowed for paying the SGST on output. No cross utilization of credit would be permitted.In case of inter-State transactions, the Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supplies of goods and services The IGST would roughly

ISFA JAIIB PAPER 3


be equal to CGST plus SGST. The IGST mechanism has been designed to ensure seamless flow of input tax credit from one State to another. The inter-State seller would pay IGST on the sale of his goods to the Central Government after adjusting credit of IGST, CGST and SGST on his purchases (in that order). The exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The importing dealer will claim credit of IGST while discharging his output tax liability (both CGST and SGST) in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST. Since GST is a destination-based tax, all SGST on the final product will ordinarily accrue to the consuming State.

Rates of GST: The government has categorised items in five major slabs - 0%, 5%, 12%, 18% and 28%. Banking & financial services will attract 18% as GST.

Registration:Under the new GST regime, all entities involved in buying or selling goods or providing services or both are required to register for GST. Entities without GST registration would not be allowed to collect GST from a customer or claim input tax credit of GST paid or could be penalised. Further, registration under GST is mandatory once an entity crosses the minimum threshold turnover of starts a new business that is expected to cross the prescribed turnover.

As per the GST Council, entities in special category states (North East states) with an annual turnover of Rs.10 lakhs and above would be required to register under GST. All other entities in rest of India would be required to register for GST if annual turnover exceeds Rs.20 lakhs.

GST Returns: All registered businesses have to file monthly, quarterly and/or annual GST. There are total 11 different types of returns which are required to be filed, based on the type of business. GSTR 1 to GSTR 11. The due dates will as notified by Government time to time.

****

XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

Next Multiple objective question bank

ISFA JAIIB PAPER 3


MULTIPLE OBJECTIVE QUESTION BANK

The following multiple choice questions are for practice purpose, we don’t guarantee that these questions will appear in examination. The intention for providing these MCQ’s is concept clearance and practice. WE also request you that these are available only for students of ISFA and not available for sharing to non ISFA students. Copying, reproducing or sharing on any media, social networking or any website is considered to be illegal.

1. Banking Regulations Act & RBI Act:

1. Sec. 21 of RBI Act empowers RBI to: a) act as Banker to Central Government b) Banker to State Governments c) both d) NONE OF THESE

2. Sec. 18 of BR Act provides for a) winding up of banks b)direct discounting of bills and promissory notes c)supervision of banks d)appointment of CEOs of Banks

3. Fit and Proper Criteria are applicable to appointment of a) CEOs b) Board of Directors c) General Managers d) a and b

4. An employee of X bank applied for a loan against the security of their banks shares. a)Sec. 20 permits. b)Sec. 20 bars. c) Sec. 20 permits upto Rs. 10 lacs d) N.O.T.

5. Section 7 of BR Act requires banks to a) obtain licence to start banks b) seek permission to open new branches c)use suffix bank in name d) close branches

6. Banks which have been registered Companies Act have to comply with a) Companies Act b) BR Act c) both d) any one

7. Sec. 42 of RBI is connected with a)C.R.R. b) S.L.R. c) Branch Licensing d) Branch regulation

8. The rate of interest which RBI pays for balances maintained by Banks with it, IN EXCESS OF CRR is: a) 5% b) 6% c) 7% d) No interest

9. NON-SCHEDULED BANKS have to maintain their CRR with a) RBI b) State Governments c) SBI d) with themselves

10. Sec. 44A of BR Act deals with a) voluntary amalgamation of banks b) compulsory amalgamation of banks c) liquidation of banks d) all

11. Sec. 49A of BR Act permits banks to a) issue cheque books b) close unsatisfactory accounts c) prosecute persons misusing cheque books d) deny cheque books to customers with unsatisfactory accounts

12. Sec. 10A of BR Act stipulates qualifications of a) Auditors b) Employees c) Managers d) Directors

13. Who can order winding up of a co-operative bank? a) RBI b) Central Government c) Registrar of Co-op. Societies d) all

ISFA JAIIB PAPER 3


14.The provisions relating to Nominations on deposit and locker accounts can be found in a) BR Act b) RBI Act c) NI Act d) Contract Act

15. In Nationalised Banks no one share holder other than Govt., can exercise voting powers in excess of ___% of Capital. a) 1% b) 2% c) 5% d) 10%

16. A private bk. unhappy with RbI guidelines under BR Act can appeal first toa) civil courts b) Govt. of India c) any one d) none

17.Businesses other than banking business, which banks can undertake are listed a) in Section 6 of BR Act b) in Sec. 6 of RBI Act c) in Sec 6 of NABARD Act d) no where

18.Section 22 of BR Act a)insists on use of the suffix bank in name b) waives need of licence to start new banks c) insists on a licence to start new banks d) none

19. Which of the following is true: a) NO Primary Credit Society can use the suffix bank in its name b) some permitted Primary Credit Societies can use the name bank c) Primary Credit Societies with Capital of Rs. 1 crore and above can use the name bank d) none

20. Section 5b of BR Act defines a) RBI's powers b) defines banking c) Capital requirements of banks d) licensing provisions to start new banks

21.Sec.22 sub sec 4 of BR Act empowers RBI to a) issue licenses to new banks b) cancel licenses of existing banks c) recognise local area banks d) license foreign banks

22. Opening of stalls temporary places of businesses) in exhibitions/mela’s a) require RBI permission b) does not require RBI permission c) does not require RBI permission is sponsored by District Authorities d) NONE OF THESE

23.Maximum period for which stalls temporary place of business) in exhibitions and melas can operate without RBI permission a) 15 days b) 30 days c) 60 days d) 90 days

24.RBI permissions for opening new branches are issued with a validity of a) 3 months b) 6 months c) 1 year d) 3 years

25.Sec.23 of BR Act defines a a) place of business b) branch c) banking business d) trading

26. Transfer of shares of Banking Companies is governed by a) BR Act b) Companies Act c) both d) NONE OF THESE

27.Transfer of shares exceeding 5% of Paid UP Capital of a Banking Company needs a) RbI prior approval b) RBI acknowledgement c) RBI post-facto approval d) None of these

28.Sec. 13 of BR Act stipulates ceiling on a) interest rates b) dividends c) commission on sale of bank's shares d) NONE OF THESE

29.Sec. 19 of BR Act a) freely allows Banks to start subsidiaries for any purpose b) restricts Bank's freedom to start subsidiaries c) allows only Public Sector Banks d) allows only Private Sector Banks

ISFA JAIIB PAPER 3


30.Who can liquidate a multi-state Co-operative Bank? a) RBI b) Registrar of Co-operatives State Govt.) c) Registrar of Co-operatives Central Government) d) Any one

31. Authorised Capital of a Bank should be at least a) double its Subscribed capital b) equal to its Subscribed Capital c) three times its Subscribed capital d) four times its Subscribed capital

32.Ways and Means Advances are: a) temporary advances to Governments. b) long term advances to Governments c) both d) N.O.T.

33.Local Clearing Houses run under the rules made by a) RbI b) SBI c) District Authorities d) locally mutually agreed rules among member banks

34.Shareholders of Banks can get dividends only after a) RbI approval b) Central Govt approval c) SEBI's approval d) writing off Capital expenses

35. Director of X Bank asked a Manager of their Bank to grant a loan to an individual. The individual is not a relative of the Director. The Director offered to stand as a guarantor. a) Sec. 20 permits b) Sec.20 prohibits conflict of interest) c) We have to examine on merits d) N.O.T.

2. N.I ACT - Paying & collecting banker

1. A paying bk. received a telephonic instruction from its customer to stop payment of a cheque drawn by him. The Bank asked him to send a letter. In the meantime, it received the cheque in clearing. a) The paying bank must pay. b) It returns the cheque with reason : payment countermanded over phone. Payment postponed till receipt of confirmation. c) returns with the reason payment stopped d) none

2. Not-Negotiable crossing in India does not a) prohibit negotiation b) prohibit transfer c) prohibit endorsement d) all e) d.

3.Crossing of cheques by collecting banks before receiving them for collection is to get protection of a) S. 10 b) S.85 c) S. 131 d) all

4. A city mayor asked a bank to collect a cheque. He doesn't want to open an a/c. Can a bank allow? a) can allow b) The Bank will not get protection of S.131 c) Managers discretion d) NONE OF THESE

5. X Ltd. sold jute to Y Ltd. Y Ltd. handed over an uncrossed cheque fvg X Ltd. or order to X Ltd's Manager. The Manager of X Ltd encashed the chq using X Ltd's seal. a) X Ltd should suffer loss b) Paying Bk should suffer the loss c) both should share d) none

6.Bank of Maharashtra vs Automotive Manufacturers 1993 case. Amt. of chq. altered. Not detectable to naked eye. The Paying Branch didn't have ultra violet rays machine. Other branches in Mumbai had the machine. Excess amt. was paid. Customer alleged that Paying Bank was negligent in not supplying the machine to the paying branch. Trial court held that Bk was negligent. Dt. held that Bank was negligent. High Court held that the Bank was negligent. Supreme Court held that

ISFA JAIIB PAPER 3


a) the Bk was negligent b) was not negligent.

7.S. 89 of NIA protects a) paying banks b) collecting banks c) both d) none

8.Payment in due course is defined by S __ of NIA. a) 10 b) 85 c) 89 d) 131

9. Transferee not getting a better title than the trasnsferer is indicated by the ___ crossing. a) a/c payee b) general crossing c) special crossing d) not negotiable

10."Sans Recourse" refers to a) endorsements b) crossings c) alterations d) forgeries

11.A holder can cross an uncrossed cheque only with drawer's consent. a) true b) false

12.A cheque bearing a date earlier than the date of the issuance of the cheque book is presented in clearing . a) no bar on issuance of pre-dated cheques. Can be paid. b) Presumption of cheque being issued on the day which the chq bears. Can lead to a charge of forgery of drawer's signature because the cheque book was not in drawer's hand on that day. Hence return. c) Can be paid with drawer's consent d) b or c

3. BG, LC & Guarantees

1. Bank guarantees can be a) financial b) performance c) any one

2.Disputes between beneficiary and applicant ___ the obligations of guaranteeing bk. a) affect b) do not affect

3. Deffered Payment Guarantees are guarantee payment of ___. a) instalments b) purchase price c) NONE OF THESE

4.Bank guarantees in India are ___ commitments. a) independent b) dependent c) NONE OF THESE

5.Banks have to honor their guarantee commitments unless there arises a suspicion of ___ a) government policy change b) fraud c) both d) N.O.T.

6. 'Demur' in the context of a bank guarantee refers to a) delay b) doubt c) hesitation d) all or any

7. The number of parties in a guarantee is a) 1 b) 2 c) 3 d) 4

8. Guarantees can/must be a) oral b) written c) registered d) a or b

9. Creditor should do something beneficial to the surety. a) true b) false

10. Discharge of one surety does not discharge other co-sureties. a) true b) false c) does not discharge only those co-sureties who consented to the discharge of the first surety.

ISFA JAIIB PAPER 3


11. Surety is discharged is Principal Debtor is a)discharged b) dead c) arrested d) insolvent

12.Co-sureties have to contribute equally if share of surety is not specifieda) true b) false

13. Promise of Principal Debtor to indemnify surety is/can be/should be a) express b) implied c) either d) none

14. Guarantor entering into the shoes of the creditor is a) subsistence b) subrogation c) subjugation d) foreclosure

4. Registration of documents & T.P Act

1. Absolute transfer of property takes place in case of a) Conditional sale b)English Mortgage c) Usufructuary Mortgage d) Simple Mortgage

2. ___Mortgage has no limitation. a) Conditional Sale b) English Mortgage c) Usufructuary Mortgage d) Simple Mortgage

3. English Mortgage has a)personal covenant b) no personal covenant

4. An equitable mortgage can be created at ___ places. a) all b) Municipalities c) Taluk Headquarters d) notified places

5. Equitable mortgage can take place a) only at the place nearest to the property b) notified place nearest to the property c)at any notified place whether near or far from the property d) only in Presidential Towns

6. An anomalous mortgage is a) equitable mortgage b) English mortgage c) usufructuary mortgage d) none

7. ___ mortgage remains private unless disclosed by mortgagor or the mortgagee. a)equitable mortgage b) English mortgage c) usufructuary mortgage d) anomalous mortgage

8. An equitable mortgage and a registered mortgage was created on the same date. Which mortgage gets priority? a) Equitable b) Registered c) whichever was created first in time.

9.Sec. 58 of Transfer of Property Act defines a) pledges b)—mortgages c) hypothecation d) charges

10. Mortgage by conditional sale envisages ___ sale. a) actual b) absolute c) ostensible

11. Mortgage suits should comply with a) Civil Procedure Code b) Criminal Procedure Code c) SARFAESI d) all

12. Preliminary decrees arise in case of a) money suits b) mortgage suits c) DRT cases d) SARFAESI cases

13.Arrears of tax on a property offered as security is an encumbrance. Absence of tax arrears, a lending bank should verify a) encumbrance certificate EC) b) tax receipts c) both d) none

ISFA JAIIB PAPER 3


14.Sec. 130 of Transfer of Property Act permits assignment of a) actionable claims b) floating charges c) fixed charges d) hypothecation agreements

5. Hypothecation, Pledge & loan against document of title:

1. Documents of Title to goods do not guarantee a) quality b) quantity c) existence of goods d) all

2. Unpaid Vendor's right to stoppage of goods in transit, does not apply to lorry receipts and railway receipts endorsed in favour of banks and held by them as security. a) true b) false c) none

3. Banks financing against documents of title to goods should notify a) consignors b) consignees c) borrowers d) custodians of goods

4. Warehouse Receipts financed by banks should not contain ___ clauses. a) concise b) precise c) abridged d) onerous

5. Goods were under hypothecation to a bank. Borrowing Company went into liquidation. Liquidator demanded possession of the hypothecated goods. a) Lending Bank should comply b) Need not comply

6. We can find the definition of a document of title in Sec. 24) of ___ Act. a) Indian Contract Act b) Sale of Goods Act c) Transfer of Property Act d) Registration Act

7. ___ security suffers from "uberrimae fidei". a) Book Debts b) LIC Policies c) documents of title d) goods

8. Assignment of book debt should be a) oral b) written c) uncommunicated d) all

9. Assignment of Book Debts, Lending Banks financing Companies, should register with a) Registrar of Companies b) Registrar of Assurances c) both d) none

10. Loan Agreements for accounts involving a series of transactions should have a a) continuity clause b) contingency clause c) both d) neither

11. A hypothecation is a ___ charge. a) equitable b) floating c) both d) none

12. Conversion of floating charge into fixed charge is a) conversion b) attornment c) amortisation d) crystallisation

13. A Pledgee will be held liable for ___ in case of an improper sale. a) conversion b) crystallisation c) attornment d) amortisation

14. A pledgee can repledge the pledged security. a) true b) false c) only after notice to pledger d) none

15. Pledge by attornment can take place in case of a) goods b) immovable’s c) document of title d) none

16. Pledge extends to a) past advances b) present advances c) future advances d) all

6. SARFESI Act

ISFA JAIIB PAPER 3


1. SARFAESI is available only to a) secured creditors b) preferred creditors c) unsecured creditors d) all

2. When a bank is unable to get co-operation from the borrower for taking possession of the security, the bank should a) file a suit b) approach police c) approach District Magistrate or Chief Metropolitan Magistrate d) b or c

3. Banks intending to resort to SARFAESI should give a notice of a) 30 days b) 60 days c) 90 days d) 180 days

4. Amounts recovered by Banks under SARFAESI should first be appropriated towards a) loan outstandings b) overdues c) time-barred debts d) costs, charges and incidental expenses

5. SARFAESI transactions are to be registered with a) Central Registry b) Registrar of Companies c) Registrar of Assurances d) all, as per applicable laws.

6. Invocation of SARFAESI can be done only when there is a) default b) no payment even after 60 days notice c) Bank declares the debt as NPA d) b and c

7. Future receivables can also be treated as property under SARFAESI. a) true b) false

8. Function of a SECURITISATION AND RECONSTRUCTION COMPANY is a) acquisition of loans from lenders b) provide recovery help to lenders c) sue borrowers onbehalf of borrowers d) acquisition of assets from originators.

9. Min. cap for an SECURITISATION AND RECONSTRUCTION COMPANY is a) Rs. 2 crore b) 100 crore c) 15% of asset under acquisition d)b or c whichever is less

10. SECURITISATION AND RECONSTRUCTION COMPANY should acquire and arrange assets a) schemewise b) industry-wise c) company-wise d) a and c

11. SECURITISATION AND RECONSTRUCTION COMPANY should act ___ for buyers. as a) creditors b) managers c) trustees d) a and b

12. SECURITISATION AND RECONSTRUCTION COMPANY can acquire assets even when disputes are pending with a) courts b) DRTs and DRATs c) any one or both

13. SECURITISATION AND RECONSTRUCTION COMPANY proposing to change their management should obtain prior approval of a) Central Govt. b) Company Law Board c) CBDT d) RBI

14. A security receipt represents a/an a) separate interest b) undivided interest

15. Security Receipts require registration with the Registrar of Assurances only in case of a) the transfer of the security receipt b) transfer of interest in immovable property c) both d) none

ISFA JAIIB PAPER 3


16. SECURITISATION AND RECONSTRUCTION Companies cannot raise moneys by way of deposits. a) true b) false

17. Time for registration of noting with SARFAESI Registrar is a) 30 days b) 60 days c) 90 days d) 180 days

18. Penalty for violation of RbI guidelines under SARFAESI can be: a) upto Rs. 5 lacs b) upto Rs. 5 lacs + Rs. 10,000 per day c) Rs. 10,000 per day d) imprisonment

19. Penalty for violation of SARFAESI provisions, with Authorities other than RBI can be a) Rs.5,000 per day b) Rs.10,000 per day c) Rs. 5 lacs d) Rs. 5 lacs + Rs. 10,000 per day

20. Collector-and-District Magistrate can levy penalty for offenses under SARFAESI . a) true b) false

21. SARFAESI provisions do not apply toa) agricultural lands b) banjar lands c) industrial lands d) industrial lands

22. SARFAESI provisions do not apply to overdues of less than ___% of principal. a) 5% b) 10% c) 15% d) 20%

23. Limitation period for enforcing security interest under SARFAESI Act is ___ years from Cause of Action. a) 30 years b) 12 years c) 3 years d) none

24. Time for registration of modifications in securitisation under SARFAESI is: a) 30 days b) 60 days c) 90 days d) 180 days

25. Rules under SARFAESI can be framed/changed only by a) RBI b) Central Government c) Parliament d) none

26. SARFAESI Possession Notice should be published at least in ___ leading newspapers. a) 1 b) 2 c) 3 d) 4

27. Purchaser of a SARFAESI Property in auction/tender should deposit ___% of his offer price. a) 10% b) 25% c) 50% d) 75%

28. Rights under pledged securities and Rights against other securities under SARFAESI, a) can be separately enforced b) should be kept separate and enforced separately c) should be concurrently and jointly enforced

29. According to SARFAESI, Govt. dues have ___ priority over Secured Creditors. a) pari passu b) lower c) higher d) top

30. Aggrieved SARFAESI borrower can challenge the reply of Secured Creditor to his objections, in ___ . a) Civil Courts b) DRT c) DRAT d) cannot challenge

31. SARFAESI secured creditor , taking over the management of a Partnership firm, can appoint a/an a) Administrator b) Director c) Manager d) General Manager

7. DRT & DRAT

ISFA JAIIB PAPER 3


1. Minimum debt amount for approaching a DRT is Rs. a) 5 lacs b) 10 lacs c) 20 lacs d) 50 lacs e) b.

2. A Bank paid Rs. 15 lacs to a Company by mistake. Can it be recovered through a DRT? a) yes b) no

3. The definition of a FINANCIAL INSTITUTION under DRT Act includes a) banks only b) banks and mutual funds only c) Securities and Reconstruction Companies also

4. Qualification to get appointed as a chairperson of a DRAT Debt Recovery Appellate Tribunal) is a) same as a District Judge b) Same as a High Court Judge c) 3 years experience as a DRT Presiding Officer d) b and c

5. The jurisdiction of a DRT extends to a) same as a District Court b) same as a High Court c) same as a Civil Court d) as per Govt. notifications

6. Where DRT has jurisdiction for deciding a case a) civil courts are debarred b) civil courts are not debarred c) both can continue d) Bank's choice

7. X Bank gave a loan to B in Bangalore. B shifted to Mumbai. X Bank should approach a DRT in a) Bangalore b) Mumbai c) Banks choice

8. Banks can approach DRTs a) only for secured debts b) only for unsecured debts c) both d) N.O.T.

9. DRT has ___ members. a) 4 b) 2 c) 3 d) 1

10. DRT and DRAT members are appointed for a term of ___ years : a) 1 b) 3 c) 5 d) 7

11. Party aggrieved with the decision of a DRAT can approach a) Dt. Court b) High Court c) Supreme Court d) no appeal

12. A debtor is unhappy with the decision of DRT. Wants to appeal to DRAT. He should deposit ___% of decided debt. a) 25% b) 50% c) 75% d) 100%

13. Maximum time available for approaching a DRAT? a) 15 days b) 30 days c) 45 days d) 60 days

14. DRTs and DRATs cannot issue ex-parte decrees. a) true b) false

15. Limitation Act 1963 applies while approaching DRTs. a) true b) false

16. A Bank has its H.O. in Bengaluru. Its Kolkata Branch gave a loan to a party in Kolkata. Can it approach the DRT in Bangalore?a) yes b) no

ISFA JAIIB PAPER 3


17. X Bank has to get some debt from A. Y Bank has to get some dues from A. Can X and Y Bank file a single recovery application with DRT? a) yes b) no

18. DRT Recovery Certificate is issued by a) Presiding Officer of DRT b) DRAT c) Recovery Officer d) a or b

19. A customer has a deposit with a bank. A DRT Recovery Officer instructed that the Bank should pay the deposit amount to the DRT instead of the depositor. a) The Bank should pay to DRT b) Bank should pay to customer c) 50-50 d) should ask DRTRO to approach a court

20. SARFAESI aggrieved borrower, after possession by secured creditor, can appeal to DRT. DRT should settle the case within ___ days. a) 30 days b) 45 days c) 60 days d) 90 days

8. Banking Ombudsman Scheme:

1. Banking Ombudsman can call for information from a) the complainants b) banks c) any one d) cannot call

2. Limitation period for filing review petitions on the awards of Ombudsman is a) 30 days b) 45 days c) 60 days d) 90 days

3. Maximum amount of compensation which a Banking Ombudsman award is Rs. a) 1 lac b) 10 lac c) 50 lacs d) 1 crore

4. Complainants can/should approach the Ombudsman through a) themselves b) advocates c) NGOs d) anyone

5. Which of the following does not fall under the jurisdiction of an Ombudsman? a) non-acceptance of small denominations b) fraudulent withdrawals c) credit refusals d) excess service charges

6. A Bank deciding not to appeal the award of Ombudsman, should implement it within a) 30 days b) 45 days c) 60 days d) 90 days

7. A person filed a complaint against a bank, with the Ombudsman. The Bank didn't reply. He can complain to Ombudsman within ___ days from the date of receipt of his complaint by the Bank. a) 30 days b) 6 months c) 1 year d) one month.

8. Ombudsman has to function under the directions of a) independently b) RBI c) IBA d) Ministry of Finance

9. Where there is a conflict between a decision of Ombudsman and a DRT, the decision of ___ will be final. a) Ombudsman b) DRT c) courts d) RBI

10. When the matter is pending with Ombudsman, a customer approached court. The Ombudsman a) can continue b) has to stop c) Ombudsman should appear in court d) Ombudsman's decision should not be in conflict with decisions of courts

9. Registration Act & Transfer of Property Act

1. Absolute transfer of property takes place in case of

ISFA JAIIB PAPER 3


a) Conditional sale b) English Mortgage c) Usufructuary Mortgage d) Simple Mortgage

2. ___Mortgage has no limitation. a) Conditional Sale b) English Mortgage c) Usufructuary Mortgage d) Simple Mortgage

3. English Mortgage has a) personal covenant b) no personal covenant

4. An equitable mortgage can be created at ___ places. a) all b) Municipalities c) Taluk Headquarters d) notified places

5. Equitable mortgage can take place a) only at the place nearest to the property b) notified place nearest to the property c) at any notified place whether near or far from the property d) only in Presidential Towns

6. An anomalous mortgage is a) equitable mortgage b) English mortgage c) usufructuary mortgage d) none

7. ___ is the cheapest mortgage a) equitable mortgage b) English mortgage c) usufructuary mortgage d) anomalous mortgage

8. ___ mortgage remains private unless disclosed by mortgagor or the mortgagee. a) equitable mortgage b) English mortgage c) usufructuary mortgage d) anomalous mortgage

9. An equitable mortgage and a registered mortgage was created on the same date. Which mortgage gets priority? a) Equitable b) Registered c) whichever was created first in time.

10. Equitable mortgage and Registered mortgage rank equally. a) true b) false

11. ___ date decides priority between two Registered mortgages. a) date of registration b) date of execution of the deed c) date of purchase of stamps

12. Mortgages can cover pecuniary obligations. But they do not cover performances leading to pecuniary obligations. a) true b) false

13. ___mortgagee has a right to collect rents and harvests. a) equitable b) registered c) english d) usufructuary

14. ___mortgage is possessionary. a) english b) usufructuary c) conditional sale d) equitable

15. Sec. 58 of Transfer of Property Act defines a) pledges b) mortgages c) hypothecation d) charges

16. Sec. 130 of Transfer of Property Act permits assignment of a) actionable claims b) floating charges c) fixed charges d) hypothecation agreements

10. Consumer Forum & Lokadalat

1. Jurisdiction of District Forum. Max. amount of compensation/value of goods is a) 10 lacs b) 20 lacs c) 50 lacs d) 1 crore

2. Jurisdiction of State Commission: Max. amount of compensation/value of goods is

ISFA JAIIB PAPER 3


a) 10 lacs b) 20 lacs c) 50 lacs d) 1 crore

3. Jurisdiction of National Commission: Max. amount of compensation/value of goods is a) 10 lacs b) 20 lacs c) 1 crore d) no limit

4. The term of a member of a District Consumer's Forum is a) 2 years b) 3 years c) 4 years d) 5 years

5. State Consumer Protection Council is to be presided by a) Governor b) C.M. c) CJ of High Court d) Consumer Affairs Minister

6. Central Consumer Protection Council is to be presided by a) President b) P.M. c) CJ of Supreme Court d) Consumer Affairs Minister

7. The Chairman of District Consumers Protection Council is a) Supdt. of Police b) Dt. Judge c) Collector d) non-official

8. District Consumer Protection Councils should meet at least ___ times a year. a) 1 b) 2 c) 3 d) 4

9. State Consumer Protection Councils should meet at least ___ times a year. a) 1 b) 2 c) 3 d) 4

10. Central Consumer Protection Council should meet at least ___ times a year. a) 1 b) 2 c) 3 d) 4

11. Consumer Protection Councils are a) protectional b) promotional c) adjudicative d) conciliatory

12. PERSON in Consumer Protection Act does not include a) society b) firm c) Joint Hindu Family d) a Company

13. ___ is not an over-riding law. a) Income Tax Act b) Debt Recovery Tribunals Act c) SARFAESI d) Consumer Protection Act

14. Payee of a draft wanted a duplicate draft from the issuing branch. Issuing branch wanted completion of some formalities by purchaser. Can the payee complain to a Consumer Forum against the issuing branch? a) yes, payee is a consumer b) no, payee of a draft is not a consumer of the issuing branch

15. ___ do not fall within the purview of Consumer Prot. Act. a) shares b) crops c) actionable claims d) all

16. Consumer's Dispute Readressal Forums are a) judicial b) non-judicial c) quasi-judicial d) none

17. ___ cannot approach Consumer's Dispute Readressal Forums. a) wholesalers b) retailers c) resellers d) all

18. Lok Adalats can settle disputes only upto Rs. a) 10 lacs b) 20 lacs c) 50 lacs d) 1 crore

19. Lok Adalats cannot handle a) compoundable offences b) property suits c) family cases d) all

20. Lok Adalats an be organised at

ISFA JAIIB PAPER 3


a) Taluka level b) Distric levels c) High Court and Supreme Court levels d) all

11. Bankers Book's evidence Act

1. Provisions of Bankers Books Evidence Act 1891 ___ to electronic accounting systems. a) apply b) do not apply c) at the discretion of the court d) with the consent of parties

2. Certified Copy of a Banker’s Book is ___ evidence under BBE Act 1891. a) prima facie b) conclusive c) circumstantial d) no evidence

3. Bks. need ___ notice under BBE Act 1891, for inspection of books. a) 3 hours b) 3 days c) 3 weeks d) 3 months

4. Courts can direct Banks to produce original books in spite of giving a Certified Copy. a) true b) false

12. Law of Limitation:

1. Courts ___ a suit filed after limitation. a) continue to try the suit if the defendent does not object b) dismiss the suit if defendent objects c) continue the suit whether defendent objects or not d) cannot continue trial

2. For the purpose of Limitation Act, the date of suit filing is a) date of admission b) date of handing over the plaint to the proper officer of the court c) date of numbering d) whichever is first

3. Courts did not function owing to a general strike on the expiry date. a) The plaint can be filed next day b) The suit will be barred by limitation c) Special application will have to be made to court giving reasons d) none

4. The limitation for a DP Note starts on a) date of note b) part payment c) acknowledgement of debt d) anyone whichever is the last

5. Limitation period for filing a suit for sale of mortgaged property is a) 12 years b) 30 years c) 3 years d) None of These

6. Limitation for filing suit to enforce sale of mortgaged property commences from a) date of mortgage b) due date of debt c) date of demand d) None of These

13. Indian Contract Act, Sale of Goods Act

1. Agreements can bea) oral b) written c) either d) registered

2. Contracts without ___ are void a) consent b) consideration c) intention to create legally enforceable obligations d) all

3. Conjugal or natural love can be a ___ consideration for a contract. a) valid b) good c) bad d) a and b

4. A contract becomes complete with a) acceptance b) dropping the acceptance letter in the medium c) receipt of acceptance letter by proposer d) none e) b.

ISFA JAIIB PAPER 3


5. Promise of abstinence is a/an ___ consideration. a) valid b) void c) illegal

6. ___ agreements are deemed to have valid consideration. a) promise out of natural love b) written registered agreements c) agreements among near relatives d) all

7. A promised B to perform an act in consideration of B doing something which is B's legal duty. The promise is a) enforceable b) not enforceable c) enforceable at the option of A d) none e) a.

8. Agreement by a minor is a) void ab initio b) not void ab initio c) unlawful d) valid

9. Insurance policies area) guarantees b) indemnities c) pledges d) all-in-one

10. Costs for claiming damages under an indemnity are a) recoverable b) not recoverable c) recoverable only in England

11. Arun lent his car to his friend Hari. The car had a loose brake. Arun was not aware of it. The car met with an accident, hurting Hari. Can Hari claim compensation from Arun? a) In case of gratuitous bailments bailor not liable for not disclosing defects not known to him b) Arun will be liable because he has not taken reasonable care of his vehicle c) Arun has a duty to disclose all defects whether known to him or not

12. In gratuitous bailments, bailor has a duty to a) disclose defects whether asked or not b) disclose when asked c) disclose the defects in the goods which he knows, whether asked or not d) compensate bailee for all defects whether known or not e) c.

13. ___ consideration is necessary to create an Agency. a) No consideration b) adequate c) Cash d) Ample

14. In the absence of directions, an agent should conduct his business according to customs of that particular trade. a) true b) false

15. An agent has ___ lien over his principal's goods. a) general b) particular c) banker's lien d) no lien

16. A mercantile agent can a) buy and sell goods b) consign goods c) raise money on the security of goods d) any one or all

17. Distinction between a contract of sale and an agreement to sell relates to a) timing of transfer of title b) conditions on transfer of title c) anyone or both d) none e) c.

18. An unpaid seller was holding possession of goods on behalf of buyer. The buyer became insolvent. Official Liquidator demands delivery of goods. a) The unpaid seller should deliver and rank as unsecured creditor b) seller can refuse delivery c) seller can demand payment d) none

19. A seller sold some goods. Before buyer took delivery seller became insolvent. Buyer demands delivery of goods. Official Liquidator of seller

ISFA JAIIB PAPER 3


a) should deliver the goods to buyer b) can refuse to deliver and ask the buyer to rank as unsecured creditor for the price c) either d) none

20. In case of an agreement to sell, ___ passes on to buyer immediately. a) ownership b) risk c) both d) none

21. ___ are essential to the main purpose of the contract of sale. a) Conditions b) Warranties c) both d) none

22. ___ are collateral and secondary in a contract ofsale. a) Conditions b) Warranties c) both d) none

23. Breach of ___ can result in repudiation of a contract of sale. a) Condition b) Warranty c) both d) none

24. In a contract of sale, under ___, a buyer cannotreturn the goods. He can only claim damages. a) Conditions b) Warranties c) both d) none

25. A buyer and seller agreed that a particular stipulation was a warranty. Whether the stipulation is a condition or a warranty in reality will be decided bya) its essentiality for the contract b) the legality of the contract c) customs and practices in the trade d) none

26. Quiet possession is a ___ in a contract of sale. a) Condition b) Warranty c) both d) none

14. Companies Act & Partnership Act

1. ___ has perpetual existence. a) sole trader b) partnership firm c) a company d) none

2. Minimum number of members required to form a Private Limited Company is: a) 2 b) 7 c) 11 d) 21

3. Minimum number of members required to form a Public Limited Company is: a) 2 b) 7 c) 11 d) 21

4. Maximum number of members for a Private Limited Company is a) 20 for all businesses b) 10 for banking business c) 200 d) no limit

5. Shares of a Private Limited Company a) are freely traded b) cannot be freely traded c) none

6. Registration of a firm does not involve registration of a partnership deed. a) true b) false

7. Minority in case of Guardians and Wards Act is a) 18 years b) 21 years c) 25 years d) 30 years

8. Sec. 19 and 22 of Partnership Act deal with a) implied authority of partner b) express authority of partner c) ostensible authority of partner d) actual authority of a partner

9. A single partner ___ create mortgages on partnership property. a) can create b) cannot create c) only Managing Partner can create

ISFA JAIIB PAPER 3


10. A bank should stop the account of an insolvent firm, even if the a/c is in credit . a) true b) false

11. An insolvent partner cannot operate the a/c of a solvent firm. a) true b) false

12. Borrowing powers of a Company can be checked from a) memorandum b) articles c) both d) none

13. Borrowing powers of Board of Directors of a Company can be checked from a) memorandum b) articles c) both d) none

14. A holding Company should hold more than or equal to ___% of shares of a subsidiary Company. a) 25% b) 51% c) 75% d) none

15. Death of a partner, unless otherwise agreed upon, a) dissolves a partnership automatically b) allows a partnership to continue c) courts dissolve them compulsorily

16. Insolvency of a partner, unless otherwise agreed upon, a) dissolves a partnership automatically b) allows a partnership to continue c) courts dissolve them compulsorily

15. Money Laundering Act & RTI Act1. The word 'Money Laundering' has been defined in ___ Act. a) Income Tax Act b) FEMA c) Prevention of Money Laundering Act 2002 d) Not defined anywhere

2. The Director with authority to collect information under Money Laundering Act 2002 is appointed by a) Central Government b) RBI c) Enforcement Directorate d) Chief Vigilance Commissioner

3. The minimum punishment for the offense of money laundering is a) rigorous imprisonment of 3 years b) simple imprisonment of 3 years c) rigorous imprisonment of 7 years d) simple imprisonment of 7 years

4. The maximum punishment for the offense of money laundering is a) rigorous imprisonment of 3 years b) simple imprisonment of 3 years c) rigorous imprisonment of 7 years d) simple imprisonment of 7 years

5. Maximum fine for the offence of Money Laundering is a) 1 lac b) 5 lacs c) 10 lacs d) 20 lacs

6. Banks have to preserve records of transactions, to comply with Prevention of Money Laundering Act, for a period of a) 5 years b) 10 years c) 15 years d) 20 years

7. Maximum fine to a Banking Institution which does not comply with Prevention of Money Laundering Act, is Rs. a) 10,000 b) 20,000 c) 50,000 d) 1,00,000

8. Prevention of Money Laundering Act requires Banks to maintain proper records of all transactions exceeding Rs. a) 1 lac b) 10 lacs c) 50 lacs d) 1 croree

ISFA JAIIB PAPER 3


9. Letters of Credit transactions are not covered by Prevention of Money Laundering Act 2002. a) true b) false

10. Banks should, under the Prevention of Money Laundering Act, maintain records of transactions, as a) hard copies b) soft copies c) both d) any one

11. RTI Act, 2005 applicant for information, can be a) any Indian citizen b) Only that citizen who is connected with the information in some way or other

12. Every Public Authority should designate a a) Central Public Information Officer at Head Office b) Central Asst. Public Information Officer at Branches c) both d) none

13. ___ appoints Central Public Information Officer in every Bank. a) RBI b) Central Govt. c) Head Office of that Bank d) State Govt.

14. A Cent. Pub. Inf. Officer of an authority finds that the application for the RTI does not pertain to his Organisation. He should forward it to the concerned Organisation within a) 5 days b) 10 days c) 15 days d) 21 days

15. Request for information under Right to Information Act should normally be disposed off within ___ days. a) 5 days b) 15 days c) 30 days d) 45 days

16. No third party information can be sought from a Public Authority, under the Right to Information Act. a) true b) false

17. An applicant for RTI could not get the information he sought from a Public Authority. His first appeal lies with a) Central Inforation Commission b) State Information Commission c) an Officer senior/superior to the Central Public Information Officer in the PUblic Authority d) any one

18. An applicant for RTI could not get the information he sought from a Public Authority. He can make his first appeal to an Officer senior/superior to the Central Public Information Officer in the Public Authority. This must be done within a) 5 days b) 15 days c) 30 days d) 45 days

19. Six months time is available to a minor attaining majority, to decide whether to continue in a Partner Ship firm or not. This 6 months is counted from a) the date of attaining his majority b) the date he comes to know that he was a beneficiary of a PS c) a or b whichever is earlier d) a or b which is later

20. DOCTRINE OF HOLDING OUT relates to a) liability of minors b) liability of pretendors as partners c) liability of third parties d) liability of firm to third parties

****KEYS:

1. Banking Regulations Act & RBI Act:1 2 3 4 5 6 7 8 9 10b b d b c c a d d a11 12 13 14 15 16 17 18 19 20

ISFA JAIIB PAPER 3


a d c a a b a c b b21 22 23 24 25 26 27 28 29 30b b b c a c b c b c31 32 33 34 35a a d d b

2. N.I ACT - Paying & collecting banker

1 2 3 4 5 6 7 8 9 10b d c b a b a a d a11 12b d

3. BG, LC & Guarantees

1 2 3 4 5 6 7 8 9 10c b a a b d c d b a11 12 13 14a a c b

4. Registration of documents & T.P Act

1 2 3 4 5 6 7 8 9 10b c a d c d a c b c11 12 13 14a b b a

5. Hypothecation, Pledge & loan against document of title:

1 2 3 4 5 6 7 8 9 10d b d d d d b b b b11 12 13 14 15 16c d a c c d

6. SARFESI Act

1 2 3 4 5 6 7 8 9 10a c a d a d a d d d11 12 13 14 15 16 17 18 19 20c c d b c a a b a b21 22 23 24 25 26 27 28 29 30a d c a c b d b b d31a

7. DRT & DRAT

1 2 3 4 5 6 7 8 9 10b a c d d a a c d c11 12 13 14 15 16 17 18 19 20d c c b a b a d a c

8. Banking Ombudsman Scheme:

ISFA JAIIB PAPER 3


1 2 3 4 5 6 7 8 9 10c b b a c a d b b d

9. Registration Act & Transfer of Property Act

1 2 3 4 5 6 7 8 9 10b c a d c d a a c a11 12 13 14 15 16b b d b b a

10. Consumer Forum & Lokadalat

1 2 3 4 5 6 7 8 9 10b d d d d d c b b a11 12 13 14 15 16 17 18 19 20b c d b d c d b a d

11. Bankers Book's evidence Act

1 2 3 4a a b a

12. Law of Limitation:

1 2 3 4 5 6d b a d a b

13. Indian Contract Act, Sale of Goods Act

1 2 3 4 5 6 7 8 9 10c d d b a d a a b a

11 12 13 14 15 16 17 18 19 20b a a a b d c a a d21 22 23 24 25 26a b a b a a

14. Companies Act & Partnership Act

1 2 3 4 5 6 7 8 9 10c a b c b a b a b a11 12 13 14 15 16a c b b a a

15. Money Laundering Act & RTI Act

1 2 3 4 5 6 7 8 9 10d a a c b b d b b c11 12 13 14 15 16 17 18 19 20a c c a c b c c d b

WISH YOU ALL THE BEST FROM ISFA

ISFA JAIIB PAPER 3 · ISFA JAIIB PAPER 3 Notes on Legal Aspects of Banking 1 Legal & Regulatory...

Documents

Transcript of ISFA JAIIB PAPER 3 · ISFA JAIIB PAPER 3 Notes on Legal Aspects of Banking 1 Legal & Regulatory...