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CHANAKYA NATIONAL LAW UNIVERSITY
LAW OF BANKING
POWER OF CENTRAL GOVERNMENT TO CONTROL BANK
Submitted to: Submitted by: Dr. Ajay Kumar Ravi Prakash Faculty of Law Roll no. Chankya National Law University 4th year 8th semester
CONTENTS
1. INTRODUCTION
2. POWER OF CENTRAL GOVERNMENT TO MAKE SCHEME AND RULES
3. POWER OF CENTRAL GOVERNMENT TO AMALGAMATE BANK
4. POWER OF CENTRAL GOVERNMENT TO WINDING UP
5. CONCLUSION
BIBLIOGRAPHY
ACKNOWLEDGEMENT Gratitude and thanks giving are a part of formal protocol, which is indeed to be followed while preparing a project report. For this first and foremost I would thank God Almighty. I express my sincere thanks to Dr. Ajay Kumar for providing such an interesting topic. I am indebted to my parents and siblings for guiding and motivating me all the time. I am also thankful to my friends.
1. INTRODUCTION The banks are regulated and controlled by the R.B.I. and the Central Government. The powers and actions are derived from the RBI Act, 1934 andBanking Regulation Act, 1949. The former Act constitutes the Central Banking Legislation and the latter Act contains legislation for regulating the activities of commercial and co-operative banks. The expression 'banking' has been defined in section 5(b) of the Banking Regulation Act, 1949as the acceptance of money from the public repayable on demand or otherwise and withdrawal by cheque, draft, order or otherwise. The recovery of money or deposit from the customers and honouring their cheques is the essential characteristic of banking. If the company is authorised only to grant loans, it will not be banking company, as lending of money may be a phase of banking business but it is not the main phase or the distinguishing phase of banking^1. But if the bank acts as an authorised dealer in foreign exchange to receive foreign contribution through anyone of its branches, it transacts the banking business^2 ' This is clear from the definition of banking under the B.R.Act, where banking means the acceptance of deposits of money from the public repayable on demand or The earliest attempt in India in the direction of formulating a definition was that of the Hilton Young Commission, which recommended that the term 'bank' or 'banker' should be interpreted as meaning every person, firm or company using in its description or its title bank or banker or banking and every company accepting deposits of money, subject to withdrawal by cheque, draft or order. The Indian Companies (Amendment) Act, 1936, though rejected the former part of the above definition, rightly so and substantially accepted its latter part^3. The essence of banking is the acceptance of withdrawable deposits of money for the purpose of lending or investment.^4 In France, persons accepting funds from the public for use on their own account for discounting of bill or granting of credit or rendering financial assistance to others generally come under the banking legislations. But it has been accepted universally that accepting of deposits in current (^1) Lakhirarn v. State of Haryana , 1989 (1) All India Cr1.L.R. 1187. (^2) Hirabai v. Dhugai Bai , 29 Bom.L.R. 42 &Bishop of Kottayam v. Union of India , A.I.R. 1986 Ker. 126. (^3) K.L.Pande, Development of Banking in India Since 1949, 55,56( 6TH (^) ed., 1968). (^4) Ibid.
depositors or to secure the proper management of any banking company generally^7 and (iii) under section 36 to exercise general powers on the banking companies In India, banking business is conducted by the following types of 0rganisations.- i) Statutory corporation- All the public sector banks, i.e., SBI and its associates, the nationalised banks, fall under this category. The SBI has been constituted under the SBI Act, 1955 and the six subsidiary/associate banks of State Bank have been constituted under the SBI (Subsidiaries Bank) Act, 1959. The nationalised banks constituted under the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970 & 1980. ii) Companies registered under the Companies Act, 1956:- All the banks in the private sector are registered under the Companies Act, 1956 and are governed by the Companies Act relating to their constitution and their banking business is governed by the B.R.Act 1949 and RE31 Act 1934. iii) Co-operative societies registered uder the Co-opera five Societies Act:- They transact the banking business by obtaining licence from R.B.I. under B.R.Act, 1949. Section 36 provides for further powers and functions of Reserve Bank under it, the Reserve Bank may.- (a) Caution or prohibit banking companies generally or any banking company in particular against entering any particular transaction or class or transaction and generally give advice to a banking company^8. (b) on a request in by the companies concerned and subject to the provisions of section 44A assist, as intermediary or otherwise in proposals for the amalgamation of such banking companies. (c) give assistance to any banking company by means of the grant of a loan or advance to it under clause (3) of sub-section (1) of section 18 of the RBI Act, 1934. (^7) T.S.Arumughan v. Lwkshrni Vilas Bwk Ltd. , (1994) 80 Cornp.Case 81 1 (Mad). (^8) JagdambeNihvad Company v. Punjab National Bank, Gwalior , 199 1 (2) Bank ILR 5 10 (MP)
(d) at any time, if it is satisfied that in public interest or interest of banking policy or for preventing the affairs of banking company being conducted in a manner detrimental to the interest of the banking 3 company or its depositors it is necessary so to do so.^9
2. POWER OF CENTRAL GOVERNMENT TO MAKE SCHEME AND RULES Under the Banking Regulation Act, the RBI has wider power of overall control over the management of banks^10. These powers are spread over a number of sections of the Act^11. Section 10A^12 was introduced to sub serve the purpose of social control. It also prescribed the nature and composition of the board of directors who are responsible for the management of a banking company. The Central Government is empowered to make schemes'' in consultation with the RBI for the purpose of management by the board of directors, the appointment of Managing Directors, the holding of board meetings and allied matters. In All India Bank Officers Confederation v Union of India in this case it was held that the object of section 9 of the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970, which is regarding Central Government's power to make a scheme for the constitution of the Board of Directors, is to give the Boards a truly representative character so as to reflect the genuine interests of the various persons manning or dealing with the bank as an industry and a commercial enterprise. The Legislature has left it to the Central Government to devise a scheme providing for appointment to the Board from among the specified categories either by election or by nomination. The discretion of the Central Government is however not an unrestrained discretion, but a discretion which must be reasonably exercised so as to give effect to the true intent of the Legislature as to the composition of the Board of Directors. What is postulated is such election or nomination as would lend to the Board of Directors, it’s truly representative character in consonance and (^9) Section 36, Banking Ragulation Act, 1949. (^10) Section35,35A and 35B, Banking Regulation Act, 1949 (^11) Section 12A, 35B, 36AA, 36AA(6) and 36AB, Banking Regulation Act, 1949 (^12) Section 10A of the Banking Regulation Act, 1949 deals with the Board of Directors to be constituted of persons with professional or other experience.
(b) the constitution of the first board of management (by whatever name called) of the transferee bank, and all such matters in connection therewith or incidental thereto as the Central Government may consider to be necessary or expedient; (c) the continuance of the services of all the employees of the acquired bank (excepting such of them as, not being workmen within the meaning of the Industrial Disputes Act, 1947 (14 of 1947), are specifically mentioned in the scheme) in the Central Government or in the transferee bank, as the case may be, on the same terms and conditions so far as may be, as are specified in clause (i) and (j) of sub-section (5) of section 45; (d) the continuance of the right of any person who, on the appointed day, is entitled to or is in receipt of, a pension or other superannuation or compassionate allowance or benefit, from the acquired bank or any provident, pension or other fund or any authority administering such fund, to be paid by, and to receive from the Central Government or the transferee bank, as the case may be, or any provident, pension or other fund or any authority administering such fund, the same pension, allowance or benefit so long as he observes the conditions on which the pension, allowance or benefit was granted, and if any question arises whether he has so observed such conditions, the question shall be determined by the Central Government and the decision of the Central Government thereon shall be final; (e) the manner of payment of the compensation payable in accordance with the provisions of this Part to the shareholders of the acquired bank, or where the acquired bank is a banking company incorporated outside India, to the acquired bank in full satisfaction of their, or as the case may be, its, claims; (f) the provision, if any, for completing the effectual transfer to the Central Government or the transferee bank of any asset or any liability which forms part of the undertaking of the acquired bank in any country outside India; (g) such incidental, consequential and supplemental matters as may be necessary to secure that the transfer of the business, property, assets and liabilities of the acquired bank to the Central Government or transferee bank, as the case may be, is effectual and complete.
(3) The Central Government may, after consultation with the Reserve Bank, by notification in the Official Gazette, add to, amend or vary any scheme made under this section. (4) Every scheme made under this section shall be published in the Official Gazette.^13 (5) Copies of every scheme made under this subject shall be laid before each House of Parliament as soon as may be after it is made. (6) The provisions of this Part and of any scheme made thereunder shall have effect notwithstanding anything to the contrary contained in any other provision of this Act or in any other law or any agreement, award or other instrument for the time being in force. (7) Every scheme made under this section shall be binding on the Central Government or, as the case maybe, on the transferee bank and also on all members, creditors, depositors and employees of the acquired bank and of the transferee bank and on any other person having any right, liability, power or function in relation to, or in connection with, the acquired bank or the transferee bank, as the case may be.^14 Power of Central Government to make rules -^15 (1) The Central Government may, after consultation with the Reserve Bank, make rules to provide for all matters for which provision is necessary or expedient for the purpose of giving effect to the provisions of this Act and all such rules shall be published in the Official Gazette. (2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for the details to be included in the returns required by this Act and the manner in which such return shall be submitted 269[and the form in which the official liquidator may file lists of debtors to the Court having jurisdiction under Part III or Part IIIA and the particulars which such lists may contain and any other matter which has to be, or may be, prescribed. (3) [***]^16 (^13) Section 36A, Banking Regulation Act, 1 949 (^14) Ibid. (^15) Section 52, Banking regulation Act,1949. (^16) Sub- section (3) omitted by Act 1 of 1984, s. 41 (w.e.f 15- 2 - 1984)
3. POWER OF CENTRAL GOVERNMENT TO AMALGAMATE BANK Section 44 A of the Act lays down the procedure for amalgamation of a banking company with another the scheme containing the terms of amalgamation is to be approved by a majority in number representing 2/3 rd of the value of the shareholders in a General Meeting. A dissenting shareholder is entitled to receive the value of his share as may be determined by the Reserve Bank. The reserve Bank has to sanction the scheme after the shareholders approval on such sanction the assets and liabilities of the bank are transferred to the acquiring bank. The reserve bank is empowered to order that the first bank be dissolved on a specified date. Section 4 4A Procedure for amalgamation of banking companies^17 (1) Notwithstanding anything contained in any law for the time being in force, 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) Notice of every such meeting as is referred to in sub-section (1) shall be given to every shareholder of each of the banking companies concerned in accordance with the relevant articles of association, indicating the time, place and object of the meeting, and shall also be published at least once a week for three consecutive weeks in not less than two newspapers which circulate in the locality or localities where the registered offices of the banking companies concerned are (^17) Section 44A,Banking Regulation Act, 1949.
situated, one of such newspapers being in a language commonly understood in the locality or localities. (3) Any shareholder, who has voted against the scheme of amalgamation at the meeting or has given notice in writing at or prior to the meeting to the company concerned or to the presiding officer of the meeting that he dissents from the scheme of amalgamation, shall be entitled, in the event of the scheme being sanctioned by the Reserve Bank, to claim from the banking company concerned, in respect of the shares held by him in that company, their value as determined by the Reserve Bank when sanctioning the scheme and such determination by the Reserve Bank as to the value of the shares to be paid to the dissenting shareholders shall be final for all purposes. (4) 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. (6) On the sanctioning of a scheme of amalgamation by the Reserve Bank, the property of the amalgamated banking company shall, by virtue of the order of sanction, be transferred to and vest in, and the liabilities of the said company shall, by virtue of the said order be transferred to, and become the liabilities of the banking company, subject in all cases to [the provisions of the scheme as sanctioned]. (6A) Where a scheme of amalgamation is sanctioned by the Reserve Bank under the provisions of this section, the Reserve Bank may, by a further order in writing, direct that on such date as may be specified therein the banking company (hereinafter in this section referred to as the amalgamated banking company) which by reason of the amalgamation will cease to function, shall stand dissolved and any such direction shall take effect notwithstanding anything to the contrary contained in any other law. (6B) Where the Reserve Bank directs a dissolution of the amalgamated banking company, it shall transmit a copy of the order directing such dissolution to the Registrar before whom the banking company has been registered and on receipt of such order the Registrar shall strike off the name of the company.
(3) Except as otherwise provided by any directions given by the Central Government in the order made by it under subsection (2) or at any time thereafter, the banking company shall not during the period of moratorium make any payment to any depositors or discharge any liabilities or obligations to any other creditors. (4) During the period of moratorium, if the Reserve Bank is satisfied that: (a) in the public interest; or (b) in the interests of the depositors; or (c) in order to secure the proper management of the banking company; or (d) in the interest of the banking system of the country as a whole, it is necessary so to do, the Reserve Bank may prepare a scheme- i. for the reconstruction of the banking company, or ii. for the amalgamation of the banking company with any other banking institution (in this section referred to as "the transferee bank") (5) The scheme aforesaid may contain provision for all or any of the following matters, namely: (a) the constitution, name and registered office, the capital, assets, powers, rights, interests, authorities and privileges, the liabilities, duties and obligations of the banking company on its reconstruction or, as the case may be, of the transferee bank; (b) in the case of amalgamation of the banking company, the transfer to the transferee bank of the business, properties, assets and liabilities of the banking company on such terms and conditions as may be specified in the scheme; (c) any change in the Board of Directors, or the appointment of a new Board of Directors, of the banking company on its reconstruction or, as the case may be, of the transferee bank and the authority by whom, the manner in which, the other terms and conditions on which, such change or appointment shall be made and in the case of appointment of a new Board of Directors or of any Director, the period for which such appointment shall be made; (d) the alteration of the memorandum and articles of association of the banking company on its reconstruction or, as the case may be of the transferee bank for the purpose of altering
the capital thereof or for such other purpose as may be necessary to give effect to the reconstruction or amalgamation; (e) subject to the provisions of the scheme, the continuation by or against the banking company on its reconstruction or, as the case maybe, the transferee bank, of any actions or proceedings pending against the banking company immediately before the date of the order of moratorium; (f) the reduction of the interest or rights which the members, depositors and other creditors have in or against the banking company before its reconstruction or amalgamation to such extent as the Reserve Bank considers necessary in the public interest or in the interests of the members, depositors and other creditors or for the maintenance of the business of the banking company; (g) the payment in cash or otherwise to depositors and other creditors in full satisfaction of their claim- i. in respect of their interest or right in or against the banking company before its reconstruction or amalgamation; or ii. where their interest or rights aforesaid in or against the banking company has or have been reduced under clause (f), in respect of such interest or rights as so reduced; (h) the allotment to the members of the banking company for shares held by them therein before its reconstruction or amalgamation [whether their interest in such shares has been reduced under clause (f) or not], of shares in the banking company on its reconstruction or, as the case may be, in the transferee bank and where any members claim payment in cash and not allotment of shares, or where it is not possible to allot shares to any members, the, payment in cash to those members in full satisfaction of their claim- i. in respect of their interest in shares in the banking company before its reconstruction or amalgamation; or ii. where such interest has been reduced under clause (f) in respect of their interest in shares as so reduced; (i) the continuance of the services of all the employees of the banking company (excepting such of them as not being workmen within the meaning of the Industrial Disputes Act, 1947 (14 of 1947) are specifically mentioned in the scheme) in the banking company itself on its reconstruction or, as the case may be, in the transferee bank at the same
transferee bank, the payment to such employees of compensation, if any, to which they are entitled under the Industrial Disputes Act, 1947, and such pension, gratuity, provident fund and other retirement benefits ordinarily admissible to them under the rules or authorizations of the banking company immediately before the date of the order of moratorium; (k) any other terms and conditions for the reconstruction or amalgamation of the banking company; (l) such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out. (6)(a) A copy of the scheme prepared by the Reserve Bank shall be sent in draft to the banking company and also to the transferee bank and any other banking company concerned in the amalgamation, for suggestions and objections, if any, within such period as the Reserve Bank may specify for this purpose; (b) the Reserve Bank may make such modifications, if any, in the draft scheme as it may consider necessary in the light of the suggestions and objections received from the banking company and also from the transferee bank, and any other banking company concerned in the amalgamation and from any members, depositors or other creditors of each of those companies and the transferee bank. (7) The scheme shall thereafter be placed before the Central Government for its sanction and the Central Government may sanction the scheme without any modifications or with such modifications as it may consider necessary; and the scheme as sanctioned by the Central Government shall come into force on such date as the Central Government may specify in this behalf: PROVIDED that different dates may be specified for different provisions of the scheme. [(7A) The sanction accorded by the Central Government under sub-section (7), whether before or after the commencement of section 21 of the Banking Law (Miscellaneous Provisions) Act, 1963 (55 of 1963), shall be conclusive evidence that all the requirements of this section relating to reconstruction, or, as the case may be, amalgamation have been complied with and a copy of the sanctioned scheme certified in writing by an officer of the Central Government to be a true copy
thereof, shall, in all legal proceedings (whether in appeal or otherwise and whether instituted before or after commencement of the said section 21), be admitted as evidence to the same extent as the original scheme.] (8) On and from the date of coming into operation of the scheme or any provision thereof, the scheme or such provision shall be binding on the banking company or, as the case may be, on the transferee bank and any other banking company concerned in the amalgamation and also on all the members, depositors and other creditors and employees of each of those companies and of the transferee bank, and on any other person having any right or liability in relation to any of those companies or the transferee bank[including the trustees or other persons managing, or connected in any other manner with, any provident fund or other fund maintained by any of those companies or the transferee bank.] (9) On and from the date of the coming into operation of, or as the case may be, the date specified in this behalf in the scheme], the properties and assets of the banking company shall, by virtue of and to the extent provided in the scheme, stand transferred to, and vest in, and the liabilities of the banking company shall, by virtue of and to the extent provided in the scheme, stand transferred to, and become the liabilities of, the transferee bank. (10) If any difficulty arises in giving effect to the provisions of the scheme, the Central Government may by order do anything not inconsistent with such provision which appears to it necessary or expedient for the purpose of removing the difficulty. (11) Copies of the scheme or of any order made under sub-section(10) shall be laid before both Houses of Parliament, as soon as may be, after the scheme has been sanctioned by the Central Government, or, as the case may be, the order has been made. (12) Where the scheme is a scheme for amalgamation of the banking company, any business acquired by the transferee bank under the scheme or under any provision thereof shall, after the coming into operation of the scheme or such provision, be carried on by the transferee bank in accordance with the law governing the transferee bank, subject to such modifications in that law or such exemptions of the transferee bank from the operation of any provisions thereof as the Central Government on the recommendation of the Reserve Bank may, by notification in the Official Gazette, make for the purpose of giving full effect to the scheme:
