The Banking Regulation Act, Question 1

Transcription

1 21 Overview of Banking Regulation Act, 1949, The Insurance Act, 1938, The Insurance Regulatory and Development Authority Act, 1999, The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 Question 1 The Banking Regulation Act, 1949 XLR Bank Limited is not managing its affairs properly. Employees as well as depositors of the bank have complained to the Central Government from time to time about such mismanagement and requested the Central Government to acquire the undertaking of the Banking Company. Explain the powers of the Central Government in this regard under the Banking Regulation Act, Under Section 36AE of the Banking Regulation Act, 1949, if the Central Government upon a report from RBI, is of the opinion that a Banking company has failed to comply with the directions given by RBI relating to policy matters under section 21 and 35A and or the affairs of the Bank are being managed in a manner detrimental to the interest of depositors or that of the banking policy or for better provision of credit generally or of credit to any particular section of the community or in any particular area; it is necessary that the Government may after consultation with RBI, by notified order, acquire the undertaking of a Banking Company. In such a case, on the date specified in the notification, the undertaking of the Banking Company and its assets and liabilities shall stand transferred to and vest in Central Government. Before acquiring the undertaking, the Central Government shall give a reasonable opportunity of hearing to the Banking Company.

2 21.2 Corporate and Allied Laws Question 2 Explain the provision relation to Reserve Fund under the Banking Regulation Act, (Section 17) Every Banking Company incorporated in India must create a Reserve Fund and transfer a sum equal to not less than 20 % of its net profits. However, Central Govt. is empowered to exempt from this requirement on the recommendation of the RBI. Such exemption will be allowed only:- _ when the amounts in the reserve fund and the share premium account are equal to the paid-up capital of the banking company _ when the Central Govt. feel that its paid-up capital and reserves are adequate to safe guard the interest of the depositors If a banking company appropriates any sum from the Reseve fund or the share premium account, it must be reported to RBI within 21 days explaining the circumstances leading to such appropriation. Question 3 Explain the provision relating to audit of banking companies under the Banking Regulation Act, Balance sheet & profit & loss account as prepared in terms of section 29 are subject to audit by a person duly qualified under any law for the time being in force to be an auditor for auditing such balance sheet and profit & loss accounts. (These Auditors are known as Statutory Auditors for the said purpose and appointment /reappointment or removal is subject to prior approval of the RBI. Under these Statutory Auditors there are numbers of External Auditors who conduct audit operation of the branch accounts). Further Reserve Bank can by order, direct for special Audit of Banking Company, if it is of the opinion that it is in the public interest or in the interest of the depositors. The auditors shall comply with the directions given by the RBI and shall submit a report of the audit to RBI and also to the bank. The auditor shall have the powers and exercise the functions as specified in section 227 of the Indian Companies Act, 1956/section 143 of the Companies Act, Apart from the above, the auditor is required to state in his report: Whether or not the information and explanation required by him have been found to be satisfactory The transactions of the bank which have come to his notice have been within the powers of the bank or not The return received from branch offices have been found adequate for the purpose of his audit

3 Overview of Banking and Insurance Laws 21.3 Whether the profit and loss account shows a true balance of profit or loss for the period covered by such account Any other matter which he considers should be brought to the notice of the share holders of the company {In addition to what have been stated here-in-above auditors are also required to audit and certify the statement of advances as prepared in terms of prudential accounting norms, required to certify some other returns viz. utilization of govt. subsidies, payment of premium of deposit insurance & credit guarantee scheme, Long Form Audit Report, 3CB & 3CD Return as applicable and many others} Section 31:- Submission of Balance Sheet & P&L:- These returns along with auditors report shall be published in the prescribed manner and three copies thereof shall be submited to RBI within three months from the end of the period to which they refer. The RBI may extend the period by a further of not exceeding three months. Section 32:- Three copies of such accounts and balance sheet along with auditor s report shall be sent by the banking company to the ROC, at the same time while sending the same to RBI. Section 35:- Power of RBI to inspect banks:- RBI is empowered to conduct inspection of any bank and to give them direction as it deems fit. All banks are bound to comply with such directions. Every director or other officer of the bank shall produce all such books, documents as required by the inspector. The inspector may examine on oath any director or other officers. RBI shall supply the bank a copy of such inspection report. RBI submits report to Central Govt. and the latter, on scrutiny, if is of the opinion that the affairs of the bank are being conducted detrimental to the interest of its depositors, it may, after giving an opportunity of being heard, to the bank, may order in writing prohibiting the bank from receiving fresh deposits, direct the RBI to apply section 38 for winding up of the bank. Apart from inspection under section 35 RBI is empowered to undertake inspection of a bank for the purposes of the following sections:- Section 11 Section 22 Section 23 Section 37 Section 38 Section 44 Section 44A Section 45 Requirement as to maintaining paid-up capital & reserve Licensing of banks Restrictions on opening new and transfer of existing places of business Suspension of business Winding up by High Court Power of High Court in voluntary winding-up Procedure for Amalgamation of banking companies Power of RBI to apply to Central Govt. for suspension of business by a bank and prepare scheme of reconstitution or amalgamation

4 21.4 Corporate and Allied Laws Question 4 Mr. Gopal is a director in a Bank. The Reserve Bank of India terminates him on the ground that his conduct is detrimental to the interest of the depositors. Decide, whether the Reserve Bank of India can do so under the Banking Regulation Act, Can the Reserve Bank of India appoint additional Director in a Bank under the said Act? Power of RBI to remove director: Under section 36AA of the Banking Regulation Act, 1949, RBI can terminate any Chairman, Director, Chief Executive, other officials or any employee of the bank where it considers desirable to do so particularly when RBI is of the opinion that conduct of such persons is detrimental to the interest of the depositors or for securing proper management of the banking company. Before such termination concerned person should be given opportunity to be heard of. Such terminated officials can make appeal to the Central Govt. within 30 days from the date of communication of such termination order. The decision of the Central Government cannot be called into question. In case an order is issued pursuant to this section the concerned person shall cease to hold his office for a period of not exceeding 5 years as may be specified in the order. Contravention of the above provision shall be punishable with a fine, which may extent to ` 250 per day. Any such order shall be valid for a period not exceeding three years or such further periods of not exceeding three years at a time as RBI may specify. Under section 36AB: RBI is empowered to appoint additional Directors for the banking company with effect from the date to be specified in the order, in the interest of the bank or that of depositors. Such additional directors shall hold office for a period not exceeding three years or such further periods not exceeding three years at a time. Question 5 The Board of directors of VDV Ltd., a banking company incorporated in, India, for the accounting year ended transferred 15% of its net profit to its Reserve Fund. Certain shareholders of the company object to the above Act of the Board of Directors on the ground that it is violative of the provisions, of the Banking Regulation Act, Examine the provision of Banking Act and decide: (i) Whether contention of the Shareholders is tenable. (ii) Would your answer be still the same in case the Board of Directors transfer 30% of the company s net profits to Reserve Fund. In accordance with the provisions of the Banking Regulation Act, 1949 as contained in section 17, every banking company incorporated in India must create a reserve fund and transfer a sum equal to not less than 20% of its net profits. However, Central Government is empowered

5 Overview of Banking and Insurance Laws 21.5 to exempt from this requirement on the recommendation of the RBI. Such exemption will be allowed only: 1 when the amount in the reserve fund and the share premium account are equal to the paid-up share capital of the banking company. 2. when the Central Govt. feels that its paid-up share capital and reserves are adequate to safeguard the interest of the depositors. If the banking company appropriates any sum from the Reserve Fund or the Share Premium account, it must be reported to RBI within 21 days explaining the circumstances leading to such appropriation. Therefore, applying the above provisions: 1. Contention of share holders shall be tenable since the %age of transfer of profits to Reserve Fund is lower than statutory limits, as provided in the Act. 2. In the second case the contention of shareholders shall not be tenable, since 30% is more than the minimum statutory limit of 20% of the net profits. Question 6 The Central Government acquired a Banking Company. The scheme of acquisition, apart from other matters, provided for the quantum of compensation payable to the shareholders of acquired bank. Some shareholders are not satisfied with the amount of compensation fixed under the scheme of acquisition. Is there any remedy available to the share holders under the provisions of the Banking Regulation Act, 1949? Compensation to shareholders of the acquired bank: Under section 36AE of the Banking Regulation Act, 1949, the Central Government has power to acquire the undertaking of Banking Companies. When a bank is acquired by the Central Government, a scheme for the acquired bank is made in consultation with the Reserve Bank of India. Such Scheme also provides for compensation payable to the registered shareholders of the acquired Bank (Section 36AF). Section 36AG of the Banking Regulation Act, 1949 states that compensation is paid to the registered shareholders in accordance with the principles provided in section 5 of the said Act. Any shareholder aggrieved with the amount of compensation may request the Central Government to refer the matter to Tribunal to be constituted under section 36AH of the Act. If the number of representation received is not less than one-fourth of the total number of shareholders holding not less than one-fourth of the paid-up share capital of the acquired Bank, the Central Government shall constitute a Tribunal for the purpose. Thus, such matters

6 21.6 Corporate and Allied Laws can be resolved through the Tribunal by the Central Government and the amount of compensation determined by the Tribunal is final and binding on all concerned parties. Question 7 Various complaints have been made against the activities of a Co-operative Banking Company to the effect that if unchecked, the shareholders, depositors and others will suffer heavily and the complainants requested for the appointment of directors by Reserve Bank of India. Discuss whether the Reserve bank has any powers to inspect the records of the Co-operative Bank to ascertain the truth or otherwise in the complaints and to appoint directors in the Cooperative Bank under the Banking Regulation Act, Power of Reserve Bank of India to inspect banks (Section 35 of the Banking Regulation Act, 1949): RBI is empowered to conduct inspection of any bank and to give them direction as it deems fit. All banks are bound to comply with such directions. Every directors or other officer of the bank shall produce all such books, documents as required by the inspector. The inspector may examine on oath any director or other officers. RBI shall supply the bank a copy of such report of the inspection. RBI submits report to Central Government and the latter, on scrutiny, if is of the opinion that the affairs of the bank are being conducted detrimental to the interest of its depositors, it may, after giving an opportunity of being heard, to the bank, may order in writing prohibiting the bank from receiving fresh deposits, direct the RBI to apply section 38 for winding up of the bank. Power of RBI to appoint Directors (Section 36AB of the Banking Regulation Act, 1949): RBI is empowered to appoint additional Directors for the banking company with effect from the date to be specified in the order, in the interest of the bank or that of depositors. Such additional directors shall hold office for a period not exceeding three years or such further periods not exceeding three years at a time. Question 8 The Reserve Bank of India issued certain directives to a Banking Company. The company does not care-to act as per the directives. This fact comes to the notice of the officials of the Government of India. The officials, therefore desire to exercise the Central Government's powers to acquire the said Banking Company. Examining the provisions of the Banking Regulation Act, 1949, state the manner, if any, such powers can be exercised. Also, state the matters that may be incorporated in the scheme of acquisition. Power of Central Government to acquire the undertaking of Banking Companies in certain cases:- According to Section 36AE of the Banking Regulation Act, 1949, if Central Government is of the opinion that the Banking Company has failed to comply with the direction given to it by Reserve Bank of India (RBI) relating to policy matters under section 21 and 35A

7 Overview of Banking and Insurance Laws 21.7 and/ or the affairs of the bank being managed in a manner is detrimental to the interest of the depositors or that of to the banking policy, or for 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, it (Central Government) may after consultation with RBI as it thinks fit, by notified order, acquire the undertaking of such banking company with effect from such date as may be specified in this behalf by the Central Government. In case of such a notification, on the specified date the undertaking of the acquired bank and its assets & liabilities shall stand transferred to, and vests in Central Government. Before acquiring the undertaking of any banking company, the Central Government shall give a reasonable opportunity to the banking company proposed to be acquired of showing cause against the proposed action. Power of Central Govt. to make a scheme for the acquired bank in consultation with RBI: According to Section 36AF of the Banking Regulation Act, 1949, the scheme may provide for transfer of assets & liabilities of the acquired bank, constitution of the first Board of Management and incidental matters, the service condition of the employees, compensation payable to the shareholders of the acquired bank and such other incidental, consequential and supplemental, as may be necessary to complete the transfer. Question 9 Mr. Jhameshwar was working as Manager in a banking company. The Reserve Bank of India removed Mr. Jhameshwar on the ground that his conduct was detrimental to the interests of the depositors. Decide whether the Reserve Bank of India has power to remove the said Manager under the provisions of the Banking Regulation Act, What remedies are available to Mr. Jhameshwar against his removal under the provisions of the said Act? Removal of a manager of a banking company: According to Section 36AA of the Banking Regulation Act, 1949, Reserve Bank of India (RBI) can terminate/ remove any chairman, Director, Chief Executive, other officials or any employee of the bank where it considers desirable to do so particularly when RBI is of the opinion that conduct of such persons is detrimental to the interest of the depositors or for secure proper management of the banking company. Accordingly as per the above provision, RBI has power to remove Mr. Jhameshwar who was working as Manager in a banking company. Remedies available: The same provision prescribes the remedies available to the Mr. Jhameshwar against his removal- (i) Before such removal, he should be given an opportunity to be heard of. (ii) He can make an appeal to the Central Government within 30 days from the date of communication of such termination order. (iii) The decision of the Central Government cannot be called into question.

8 21.8 Corporate and Allied Laws Question 10 The Board of Directors of a newly incorporated Banking Company is required to file the accounts and Balance sheet. Advise the Board of Directors about the law relating to preparation, signing and filing of accounts and Balance sheet under the provisions of the Banking Regulation Act, Law related to preparation, signing and filing of Accounts and Balance Sheet: Preparation of Accounts and Balance Sheet: According to section 29 of the Banking Regulation Act, 1949, every Banking Company incorporated in India, in respect of all business transacted by it and through its branches in India, shall prepare a balance sheet and profit & loss account as on the last working day of the Accounting year (which is April to March i.e. 31st March) in the Form A and B given in the third schedule of the Act. Signing of Accounts and Balance Sheet: The amalgamated Balance Sheet and Profit and Loss Account should be signed by the CMD (Chairman and Managing Director) and at least three Directors where there are more than three directors or where there are not more than three directors, by all the directors. In case of banking companies incorporated outside India by the principal officer of the company in India. Filing/ submission Balance Sheet & Profit and Loss Account: Sections 31 and 32 of the Banking Regulation Act, 1949 lay down the procedure for the filing of the accounts and balance sheet. The accounts and balance sheet along with auditor s report shall be published in prescribed manner and three copies thereof shall be furnished as returns to Reserve Bank of India (RBI) within three months from the end of the period to which they refer. The RBI may extend the period by a further period of not exceeding three months. These three copies of accounts and balance sheet along with auditor s report shall be sent by the banking company to the Registrar of Companies, at the same time while sending the same to RBI. Question 11 Due to financial irregularities, the affairs of MNP Bank Limited have gone from bad to worse and this fact has come to the notice of the Reserve Bank of India as well as Central Government. Examining the provisions of the Banking Regulation Act, 1949, answer the following: (i) Powers of RBI to inspect the Bank. (ii) Powers of Central Government to give directions in this matter.

9 Overview of Banking and Insurance Laws 21.9 (i) Power of the RBI to inspect banks: As per section 35 of the Banking Regulation Act, 1949, the RBI at any time may, and on being directed so to do by the Central Government shall cause an inspection to be made by one or more of its officers of any banking company and its books and accounts. The RBI shall supply to the banking company a copy of its report on such inspection. All banks are bound to comply with such directions. Every director or other officer of the bank shall produce all such books, documents as required by the inspector. The inspector may examine on oath any director or other officers of the banking company in relation to its business. The RBI shall, if it has been directed by the Central Government to cause an inspection to be made, and may, in any other case, report to the Central Government on any inspection made under this section. (ii) Power of the Central Government to give directions in this matter: Apart from the powers of the Reserve Bank, the Central Government has also the power to direct the RBI to cause an inspection to be made under section 35 of the Banking Regulation Act, The RBI submits report to Central Government and the latter, on scrutiny, if is of the opinion that the affairs of the bank are being conducted detrimental to the interest of its depositors, it may, after giving an opportunity of being heard, to the bank, may order in writing prohibiting the bank from receiving fresh deposits, direct the RBI to apply section 38 of the said Act for winding up of the bank. Question 12 Referring to the provisions of the Banking Regulation Act, 1949, examine the validity of the following: (i) Accounts and Balance Sheet along with auditor`s report has been filed with Reserve Bank of India after nine months from the end of the period to which these relate. (ii) Trinity Bank Limited acquired a building from ABC College in discharging a term loan advance. The building had been mortgaged as security with the bank and the college had failed to repay the loan. The bank proposes to retain the building with it and let out on commercial basis to shops. Delay in Filing Accounts a Balance Sheet: Acquisition of Properties for Security (Sections 31 and 6 of the Banking Regulation Act, 1949): (1) Filing of Accounts and Balance Sheet: According to section 31 of the Banking Regulation Act, 1949, the accounts and balance sheet along with auditor's report shall be published in prescribed manner and three copies thereof shall be furnished as returns to the Reserve Bank of India within three months from the end of the period to which they refer. The Reserve Bank of India may extend the period by a further period of not exceeding three months.

10 21.10 Corporate and Allied Laws In the given question, accounts and balance sheet along with auditor's report has been filed with the Reserve Bank of India after nine months from the end of the period to which these relate, which is not valid. (2) Acquisition of Property: Section 6 of the Banking Regulation Act, 1949, provides a list of activities which Banking Company may engage in addition to the business of banking, wherein it is provided that among other activities the Banking company may also engage in: 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. As per the given question, Trinity Bank Limited proposes to retain and let out on commercial basis to shops, the building that the Bank has acquired from ABC college in discharge of a term loan advanced and which the college failed to repay. In the light of the provisions of section 6 of the Banking Regulation Act, 1949, and facts of the case, Trinity Bank Limited's proposal to retain the building with it and letting out on commercial basis is valid. Question 13 As per the provisions of the Banking Regulation Act, 1949, a Banking Company, in addition to the business of Banking, may carry on some General Utility Services as listed in Section 6. List out any four of the General Utility Services, that a bank may carry on. Section 6 of the Banking Regulation Act, 1949 provides a list of activities which a banking company may engage in addition to the business of banking. From among them, General Utility Services, which can be provided by a bank are as follows: (1) Providing safe-custody facility to its customers for keeping their valuables; (2) Providing the facility of Safe Deposit Vault (Locker) under lease agreement to its customers for keeping their valuables; (3) Technology based general utility services like Tele-banking, Phone-banking, Online banking, Home banking, Single window banking, Demat services for security trading, ATM services, Credit Card services etc., (4) Consultancy services; (5) ECS services for payment of different dues of the people; (6) Payment of pension; (7) Payment of salaries of employees of schools etc.;

11 Overview of Banking and Insurance Laws (8) Payment of salaries etc.; (9) Many other services. Question 14 The Insurance Act, 1938 With reference the provisions of Insurance Act, 1938, what do you mean by Life Insurance Business? As per section 2(11) of the Insurance Act, 1938, Life Insurance Business means the business of effecting contracts of insurance upon human life, including any contract whereby the payment of money is assured on death (except death by accident only) or the happening of any contingency dependent on human life, and any contract which is subject to payment of premiums for a term dependent on human life and shall be deemed to include: (a) (b) (c) The granting of disability and double or triple indemnity accident benefits, if so provided in the contract of insurance. The granting of annuities upon human life; and The granting of superannuation allowances and benefits payable out of any fund applicable solely to the relief and maintenance of persons engaged or who have been engaged in any particular profession, trade or employment or of the dependents of such persons. Question 15 X, a newly established insurance company started the business of health insurance. It decided to get itself registered with the paid up equity capital of ` 99 crore excluding the preliminary expenses incurred during formation and registration. Examine in the light of the Insurance Act, 1938, whether X can be registered and conduct the insurance business. Requirements as to Capital: As per the Insurance Laws (Amendment) Act, 2015, section 6 of the Insurance Act, 1938, has been amended. According to which the requirements as to capital for registration of the insurer has been modified. No insurer (not being an insurer as defined in sub-clause (d) of clause (9) of section 2) carrying on the business of life insurance, general insurance, health insurance or re-insurance in India or after the commencement of the Insurance Regulatory and Development Authority Act, 1999, shall be registered unless he has minimum paid up equity capital as prescribed below-

12 21.12 Corporate and Allied Laws Type of Insurance Business Life insurance or general insurance Health insurance (exclusively) Re-insurer (exclusively) Minimum Paid-up equity capital required (with a provision for further enhancement & Paid-up equity excludes preliminary expenses incurred during formation and registration) 100 crore 100 crore 200 crore (besides re-insurer shall not be registered unless he has net owned funds of not less than 5,000 crore) In the given case, X an insurance company is an insurer carrying business of health insurance. For registration as per the above provision, minimum paid-up equity capital required for conduct of business of health insurance is ` 100 crore. Since paid up equity capital of X insurance company is less than 100 crore, so it cannot be registered for carrying of the insurance business. Question 16 A life insurance policy, in favour of Kamal Kumar, came into force on 1st February, In February, 2012 the insurer came to know that there was a mis-statement in the proposal for insurance regarding the age of the insured. Decide, under the provisions of the Insurance Act, 1938, whether the said insurance policy can be called in question? Policy not to be called in question on ground of mis-statement: According to section 45 of the Insurance Act, 1938 vide the Insurance Laws (Amendment) Act, 2015, no policy of life insurance is effected after the expiry of three years from the date of the policy, i.e., from the date of issuance of the policy or the date of commencement of risk or the date of revival of the policy or the date of the rider to the policy, whichever is later on the ground of the fraud. Nothing in this section shall prevent the insurer from calling for proof of age at any time if he is entitled to do so, and no policy shall be deemed to be called in question merely because the terms of the policy are adjusted on subsequent proof that the age of the life insured was incorrectly stated in the proposal.' Thus, the insurance policy cannot be called in question. Correction as to the age of the life insured can be made at any time on subsequent proofs. Question 17 With reference to the provisions of Insurance Act, 1938 as amended by Insurance Regulatory and Development Authority Act, 1999, state the norms in respect of paid up equity capital for

13 Overview of Banking and Insurance Laws carrying out the business of an insurer. Also state the items that are excluded in determining the amount of paid up equity capital of an insurer under the said Acts. Requirement of Paid Up equity capital for insurance business: No insurer carrying on the business of life insurance, general insurance, health insurance or re-insurance in India on or after the commencement of the Insurance Regulatory and Development Authority of India Act, 1999, shall be registered unless he has, (i) (ii) a paid-up equity capital of rupees one hundred crores, in case of a person carrying on the business of life insurance or general insurance; or a paid-up equity capital of rupees one hundred crore, in case of a person carrying on exclusively the business of health insurance; or (iii) a paid-up equity capital of rupees two hundred crore, in case of a person carrying on exclusively the business as a re-insurer. Items to be excluded in determining the amount of paid up equity share capital: In determining the paid-up equity capital specified above, any preliminary expenses incurred in the formation and registration of any insurer as may be specified by the regulations made under this Act, shall be excluded. Question 18 Bharat Insurance Company issued a policy having sum assured of ` 5 lakhs on the life of Ms. Nirmala. While obtaining education loan of ` 4 lakh for higher studies, Ms. Nirmala assigned the above insurance policy in favour of the Bank providing the loan. Who, in this case, will be called the policy holder under the Insurance Act, 1938 and why? Explain. As per section 2(2) of the Insurance Act, 1938, 'Policy holder' includes a person to whom the whole of the interest of policy holder in the policy is assigned once and for all, but does not include an assignee thereof whose interest in the policy is defeasible or is for the time being subject to any condition. As per the given facts, Ms. Nirmala assigned insurance policy in favour of Bank. As of consequence, Bank becomes assignee. According to the above given definition of policy holder, assignee is excluded from its preview. Thus, in the given case, Ms. Nirmala will be the Policy holder.

14 21.14 Corporate and Allied Laws The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 Question 19 Explain briefly the concept of "Securitization" under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 came into force in June, The preamble of the Act says that this Act has been enacted to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto. The legal framework for securitisation in India emerged to promote the setting up of asset reconstruction/securitisation companies, which are supposed to take over the Non Performing Assets (NPA) accumulated with the banks and public financial institutions. The Act provides special powers to lenders and securitization/ asset reconstruction companies, to enable them to take over assets of borrowers without first resorting to courts. Note: The concept of securitisation may also be explained by following two approaches: Approach 1. Securitisation: Securitisation means acquisition of financial assets by any securitization company or reconstruction company from any originator, whether by raising of funds by such securitisation company or reconstruction company from qualified institutional buyers by issue of security receipts representing undivided interest in such financial assets or otherwise [Section 2(z)]. Banks/Financial Institution (known as originators) give loans secured by properties to original borrowers. These loans or receivables are known as financial assets [Sec.2(i)]. These financial assets are acquired by securitization company or reconstruction company (known as special purpose vehicles-spv). The SPV issues security receipts which are distributed to investors (i.e. qualified institutional buyers). The SPV pays the bank/financial institution for the assets purchased with the proceeds from the sale of securities. In short, securitization is a method adopted by banks/financial institutions for raising funds by way of selling receivables for money. These receivables are illiquid because these are nonperforming assets.

15 Overview of Banking and Insurance Laws Approach 2. Securitisation: Borrower Financial Assistance Originator or (Banks/ Financial Institution) Secured Assets Transferring Secured Assets Cash Investors (QIB) Cash SPV Sec Co/ Rec. Co Security Receipt Question 20 What do you understand by asset reconstruction under the SARFAESI Act, 2002? "Asset reconstruction" means acquisition by any securitisation company or reconstruction company of any right or interest of any bank or financial institution in any financial assistance for the purpose of realization of such financial assistance. [Section 2(b)] Question 21 What are financial assets? "financial asset" means debt or receivables and includes- (i) a claim to any debt or receivables or part thereof, whether secured or unsecured; or (ii) any debt or receivables secured by, mortgage of, or charge on, immovable property; or (iii) a mortgage, charge, hypothecation or pledge of movable property; or

16 21.16 Corporate and Allied Laws (iv) any right or interest in the security, whether full or part underlying such debt or receivables; or (v) any beneficial interest in property, whether movable or immovable, or in such debt, receivables, whether such interest is existing, future, accruing, conditional or contingent; or (va) any beneficial right, title or interest in any tangible asset given on hire or financial lease or conditional sale or under any other contract which secures the obligation to pay any unpaid portion of the purchase price of such asset or an obligation incurred or credit otherwise provided to enable the borrower to acquire such tangible asset; or (vb) any right, title or interest on any intangible asset or licence or assignment of such intangible asset, which secures the obligation to pay any unpaid portion of the purchase price of such intangible asset or an obligation incurred or credit otherwise extended to enable the borrower to acquire such intangible asset or obtain licence of the intangible asset; or; (vi) any financial assistance [Section 2(l)] The use of the word future in clause (v) of section 2(l) means that the term financial asset includes a future debt also. In case of a future debt, what exists today is an agreement to transfer and it will be possible to transfer the future debt when it actually arises, for example sales that will occur in future. In case of conditional receivable, the receivable is transformed into a financial asset after the fulfillment of the relevant conditions. [Note: is revised as per the amendment made by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 notified on 16 th August For details see supplementary.] Question 22 What are non-performing asset? "Non-performing asset" means an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or under guidelines relating to asset classifications issued by the Reserve Bank [Section 2(o)] Question 23 How are rights or interest in financial assets acquired under the SARFAESI Act, 2002?

17 Overview of Banking and Insurance Laws Section 5: (1) Notwithstanding anything contained in any agreement or any other law for the time being in force, any securitisation company or reconstruction company may acquire financial assets of any bank or financial institution- (a) by issuing a debenture or bond or any other security in the nature of debenture, for consideration agreed upon between such company and the bank or financial institution, incorporating therein such terms and conditions as may be agreed upon between them; or (b) by entering into an agreement with such bank or financial institution for the transfer of such financial assets to such company on such terms and conditions as may be agreed upon between them. "(1A) Any document executed by any bank or financial institution under sub-section (1) in favour of the asset reconstruction company acquiring financial assets for the purposes of asset reconstruction or securitisation shall be exempted from stamp duty in accordance with the provisions of section 8F of the Indian Stamp Act, 1899: Provided that the provisions of this sub-section shall not apply where the acquisition of the financial assets by the asset reconstruction company is for the purposes other than asset reconstruction or securitisation."; (2) In case the bank or financial institution is a lender in relation to any financial assets acquired by the securitisation company or the reconstruction company, then such securitization company or reconstruction company shall, on such acquisition, be deemed to be the lender and all the rights of such bank or financial institution shall vest in such company in relation to the subject financial assets. "(2A) If the bank or financial institution is holding any right, title or interest upon any tangible asset or intangible asset to secure payment of any unpaid portion of the purchase price of such asset or an obligation incurred or credit otherwise provided to enable the borrower to acquire the tangible asset or assignment or licence of intangible asset, such right, title or interest shall vest in the asset reconstruction company on acquisition of such assets under sub-section (1)." (3) Unless otherwise expressly provided by this Act, all contracts, deeds, bonds, agreements, powers-of-attorney, grants of legal representation, permissions, approvals, consents or no-objections under any law or otherwise and other instruments of whatever nature which relate to the said financial asset and which are subsisting or having effect immediately before the acquisition of financial asset and to which the concerned bank or financial institution is a party or which are in favour of such bank or financial institution shall, after the acquisition of the financial assets, be of as full force and effect against or in favour of the securitisation company or reconstruction company, as the case may be, and may be enforced or acted upon as fully and effectually as if, in the place of the said bank or financial institution, securitisation company or reconstruction company, as the case may be, had been a

18 21.18 Corporate and Allied Laws party thereto or as if they had been issued in favour of securitisation company or reconstruction company, as the case may be. (4) If, on the date of acquisition of financial asset, any suit, appeal or other proceeding of whatever nature relating to the said financial asset is pending by or against the bank or financial institution, save as provided in the third proviso to sub-section (1) of section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) the same shall not abate, or be discontinued or be, in any way, prejudicially affected by reason of the acquisition of financial asset by the securitisation company or reconstruction company, as the case may be, but the suit, appeal or other proceeding may be continued, prosecuted and enforced by or against the securitisation company or reconstruction company, as the case may be. [Note: is revised as per the amendment made by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 notified on 16 th August For details see supplementary] Question 24 Explain briefly the procedure relating to enforcement of security interest under SARFAESI Act, Procedure relating to enforcement of security interest (Section 13 of SARFAESI Act, 2002): Notwithstanding anything contained in section 69 or section 69A of the Transfer of Property Act, 1882 (4 of 1882), any security interest created in favour of any secured creditor may be enforced, without the intervention of the court or tribunal, by such creditor in accordance with the provisions of this Act. Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any installment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4) of section 13. "Provided that (i) (ii) the requirement of classification of secured debt as non-performing asset under this sub-section shall not apply to a borrower who has raised funds through issue of debt securities; and in the event of default, the debenture trustee shall be entitled to enforce security interest in the same manner as provided under this section with such modifications as may be necessary and in accordance with the terms and conditions of security documents executed in favour of the debenture trustee;";

19 Overview of Banking and Insurance Laws This notice shall give details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non-payment of secured debts by the borrower. Sub-section (4) of section 13 provides that if the borrower fails to discharge his liability in full within the above specified period, the secured creditor may take recourse to one or more of the following measures to recover his secured debt:- (a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset; (b) take over the management of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale and realise the secured asset; (c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor; (d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt. [Note: is revised as per the amendment made by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 notified on 16 th August For details see supplementary] Question 25 RST Ltd. is a securitization and reconstruction company under SARFAESI Act, The certificate of registration granted to it was cancelled. State the authority which can cancel the registration and the right of RST Ltd. against such cancellation. Cancellation of Certificate of Registration under SARFAESI Act, 2002: The Reserve Bank of India may cancel a certificate of registration granted to a securitisation and reconstruction company for the reasons stated in Section 4 of SARFAESI Act, RST Ltd., can prefer an appeal to the Central Government (Secretary, Ministry of Finance, Government of India) within a period of 30 days from the date on which order of cancellation was communicated to it. The Central Government must also give such company a reasonable opportunity of being heard before rejecting the appeal. If RST Ltd., is holding investments of qualified institutional buyers at the time of cancellation of certificate of registration, it shall be deemed to be a securitisation and reconstruction company until it repays the entire investments held by it, together with interest if any, within such period as may be specified by the Reserve Bank.

20 21.20 Corporate and Allied Laws Question 26 Referring to the provisions of the Securitisation & Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 state the circumstances under which the Reserve Bank of India may cancel the certificate of registration granted to a Securitisation Company. Cancellation of Certificate of Registration ( Section 4 of the securitisation & reconstruction of financial assets & enforcement of Security Interest Act, 2002) As per the section 4 of the Securitisation & Reconstruction of Financial Assets & Enforcement of security Interest Act, 2002, the Reserve Bank may cancel a certificate of registration granted to a securitization company or a reconstruction company, if such company- (i) ceases to carry on the business of securitisation or asset reconstruction; or (ii) ceases to receive or hold any investment from a qualified institutional buyer; or (iii) has failed to comply with any conditions subject to which the certificate of registration has been granted to it; or (iv) at any time fails to fulfil any of the conditions referred to in clauses (a) to (g) of sub-section (3) of section 3; or (v) fails to- (a) comply with any direction issued by the Reserve Bank under the provisions of this Act; or (b) maintain accounts in accordance with the requirements of any law or any direction or order issued by the Reserve Bank under the provisions of this Act; or (c) submit or offer for inspection its books of account or other relevant documents when so demanded by the Reserve Bank; or (d) obtain prior approval of the Reserve Bank required under sub-section (6) of section 3. Question 27 Apex Limited failed to repay the amount borrowed from the bankers, ACE Bank Limited, which is holding a charge on all the assets of the company. The Bank took over management of the company in accordance with the provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 by appointing four persons as directors. The company is managed by a Managing Director, Mr. X. Referring to the provisions of the said Act, examine whether Mr. X is entitled to compensation for loss of office and also explain the effect of such takeover on certain rights of the shareholders of the company.

21 Overview of Banking and Insurance Laws Apex Limited failed to repay the amount borrowed from the bankers, ACE Bank Limited, which is holding a charge on all the assets of the company. The bank took over management of the company in accordance with the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 by appointing four persons as directors. The company is managed by a Managing Director, Mr. X. Here, Apex Limited is a borrower and ACE Bank Limited is a secured creditor. Compensation to Managing director (Mr. X) for loss of office: According to section 16 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, irrespective of anything contained in any contract or in any other law for the time being in force, no managing director or any other director or a manager or any person in charge of management of the business of the borrower shall be entitled to any compensation for the loss of office or for the premature termination under this Act. However any such managing director or any other director or manager or any such person in charge of management has the right to recover from the business of the borrower, moneys recoverable otherwise than by way of such compensation. Effect of takeover on rights of the shareholders: Where the management of the business of a borrower, being a company as defined in the Companies Act is taken over by the secured creditor, then, notwithstanding anything contained, such borrower- in the said Act or in the memorandum or articles of association of such company - (1) it shall not be lawful for the shareholders of such company or any other person to nominate or appoint any person to be a director of the company; (2) no resolution passed at any meeting of the shareholders of such company shall be given effect to unless approved by the secured creditor; (3) no proceeding for the winding up of such company or for the appointment of a receiver in respect thereof shall lie in any court, except with the consent of the secured creditor. The secured creditor is under an obligation to restore the management of the business of the borrower, on realisation of his debt in full, in case of takeover of the management of the business of a borrower by such secured creditor. "Provided that if any secured creditor jointly with other secured creditors or any asset reconstruction company or financial institution or any other assignee has converted part of its debt into shares of a borrower company and thereby acquired controlling interest in the borrower company, such secured creditors shall not be liable to restore the management of the business to such borrower."