The banking business around the world has witnessed several changes and started practicing a developed system. Therefore, it has become necessary to amend the existing banking laws to enable the banking companies in India to be at par with the international standards and in tune with the advanced technologies. The Banking Law (Amendment) Bill, 2012 ("Amendment Bill") seeks to amend the Banking Regulation Act, 1949 ("Act"), the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 to strengthen the regulatory powers of the Reserve Bank of India ("RBI") and to further develop the banking sector in India.
The Amendment Bill has been passed by the Parliament and will be notified as statute once it receives the assent from the President of India. The present bulletin analyzes the crucial amendments proposed under the Amendment Bill and its possible impact on the banking system in the country. Salient features of the Amendment Bill are as follows –
1. Enhanced Regulatory Power to supersede Board of Directors
The Amendment Bill enables RBI, in consultation with the central government, to supersede the board of directors of banking company for a period up to six months, if its affairs are conducted in a manner detrimental to the interest of the depositors.1 The period of superseding can be extended to a maximum of twelve months. During this period, an administrator with requisite experience2 shall be appointed to oversee the management of the banking company. Further, a committee with experience in law, finance, banking, economics or accountancy shall also be appointed to assist the administrator, if required.
Though the existing Act provides powers to RBI to remove the director or other officers of the banking company who acts detrimental to the interest of the depositors, it cannot effectively safeguard the interest of the banking company/depositors if the entire board of directors/management functions in a prejudicial manner.3 Therefore, the aforesaid amendment has been proposed to provide greater power to RBI to effectively influence and regulate the management of banks. Further, to limit the arbitrary exercise of powers of the RBI, the proposed legislation provides to exercise the power in consultation with the central government.
2. Power to inspect associate enterprise
Section 29 A is proposed to confer power upon the RBI to call for information and records relating to business of the company and/or its associate enterprises,4 check the records, inspect books, collect information, and account books of the banking company and/or other associate enterprise. The RBI may not be able to call for information from associate enterprises incorporated outside India; however, the associate enterprises of a foreign bank in India will fall under the purview of RBI. In the present liberalized environment, the banking companies are engaging in multifarious activities including insurance business, mutual funds through the medium of associate companies and, therefore, the said proposed amendment is a step taken in the right direction as it would keep a check/prevent mismanagement on connected lending practices of the banks and safeguard the interest of the depositors.
3. Raising Investments
The Amendment Bill proposes to amend section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 & 1980. This will enable the nationalized banks to issue bonus shares and rights issue for accessing the capital market and to raise capital required for expansion of banking business. It will also enable the nationalized banks to increase or decrease the authorized capital with the approval from central government and RBI without being limited by the ceiling of a maximum of INR 3 Billion.5 It will also enable banking companies to issue preference shares subject to regulatory guidelines of the RBI. As it is necessary for the banking companies to raise capital for expansion and development to compete with the international players, the proposed move should help their cause.
4. Depositor Education and Awareness Fund
The Amendment Bill proposes to include section 26 A in the Act to establish the "Depositor Education and Awareness Fund" ("Fund") to create awareness among the customers and to carry out such other promotional activities as specified by the RBI. For this Fund, the RBI will utilize the money in any account/deposits with a bank which has not been operated for a period of 10 years or more. However, if the depositor/account holder seeks his deposit to be returned, the bank would be liable to make the payment with necessary interest as specified by RBI from time to time. The RBI shall appoint a committee to administer the Funds, oversee the implementation of the purpose and to maintain records/account books. This is an intelligent step as it has been put forth with an intention to make use of the unutilized deposits with the banks for the welfare of the customers/promotion of depositor interest.
5. Cash Reserve ratio ("CRR")
Every commercial/scheduled bank in India is required to maintain certain minimum amount of cash reserves with RBI, which is termed as CRR.6 It is mandatory for the banks to maintain prescribed CRR on a daily basis as specified by RBI from time to time. The proposed amendment empowers RBI to demand penalty from the defaulting bank, if it fails to maintain CRR on any day of the year. The defaulting bank shall be liable to pay a penalty at the rate of 3% above the bank rate on the amount by which it shortfalls from the prescribed CRR and, further the penalty shall be increased to the rate of 5% above the bank rate for each subsequent day, if the default continues.7
The RBI uses CRR as a tool to increase or decrease the money flow in the market in order to control inflation or deflation of the economy. Therefore, the said proposed amendment empowering the regulatory powers of the RBI is necessary to secure the monetary stability in the country.
6. Acquisition of Shares and Voting Rights
The Amendment Bill proposes that prior approval has to be obtained from RBI mandatorily to hold 5% or more of share capital or voting rights in any of the banking company.8 The person/company who wish to hold shares/voting rights above this limit should submit an application with the RBI. Upon receipt of such application, the RBI may grant an approval after it is satisfied that (i) It is in public interest; (ii) It is in the interest of banking policy; (iii) To prevent the affairs of banking company being conducted in a manner detrimental or prejudicial to the interest of the banking company; (iv) It is in the interest of the banking and financial systems in India; or (v) in view of the emerging trends in banking and international best practices. The RBI can call for any information/record to decide on the application and shall also prescribe/specify different criteria for acquisition of shares or voting rights in different percentages. Further, it empowers RBI to impose necessary conditions as it deems fit upon the applicant for granting permission. The RBI shall take a decision on the application within 90 days from the date of receipt provided the same is submitted with requisite documents and information.
The intention of the proposed legislation is to ensure that the control of the banking companies is in the hands of fit and proper persons, therefore, the aforesaid restrictions has been put forth to enable RBI to assess the credentials of the applicants.
7. Cooperative Societies
The Amendment Bill proposes that the cooperative societies should mandatorily obtain license from RBI to carry on the banking business.9 Further, it empowers RBI to appoint an auditor to conduct special audits at the cooperative banks for any transactions or class of transactions or for any period by extending the applicability of section 30 of the Act. The said changes sets forth a sound and healthy banking system and to protect the interest of the depositors.
8. Merger of Banks
The proposed legislation intends to exempt the mergers of banking companies from the purview of the Competition Commission of India, thereby, conferring power to RBI to take the decision.10 The Competition Act, 2002 has conferred authority to the said commission to regulate combinations/mergers of the banking companies which causes or likely to cause appreciable adverse effect on competition in the market within India. Since RBI is the banking regulator, empowering it with the powers of deciding on mergers and acquisition would be in the interest of the depositors and help to obtain the requested approvals swiftly in a timely manner.
The Amendment Bill proposes to increase the penalty for contravening the provisions of the Act as follows - (i) For providing false information to RBI, the new penalty would be INR 10 million; (ii) or failure to provide account books or any requested information to RBI, the penalty would be INR 200,000 and if the default continues then an additional fine of INR 50,000 shall be imposed;11 (iii) If the banking company defaults in complying with any of the requirement/obligation under the Act, a penalty up to INR 10 million or twice the amount involved in such contravention whichever is more shall be imposed;12 and (iv) If a banking company fails to furnish account books or any requested information, the new penalty would be up to INR 2 million.13 The proposed changes would deter the defaulters.
10. Some other crucial changes
(i) The Amendment Bill proposes to increase the voting rights of the preference shareholders to 10% from existing 1% in respect of establishment of new banks and businesses thereof;14
(ii) Conversion of branches of foreign banks to wholly-owned subsidiary entities of foreign banks and the transfer of shareholding of banks to the holding company pursuant to RBI guidelines would be exempt from the payment of stamp duty;
(iii) To exempt guarantee agreements of banks from the purview of the section 28 of the Indian Contract Act, 1872 to bring finality to redemption of such guarantees; and
(iv) To allow select directors on the board of RBI a fixed maximum tenure of 8 years with terms of not more than 4 years each either continuously or intermittently in consonance with the directions of the ACC.
The changes proposed to enable the banking companies to raise the capital by attracting more investment would accelerate the growth of the industry and to perform to the international standards. Further, the enhanced regulatory powers of the RBI would help in effective implementation of the rules and regulations. The proposed amendments will be beneficial to the various stakeholders in the banking sector and also to regulate a reliable financial market in the country.
1 Proposed amendment Part II AB of the Act
2 A person not being an officer of the central government or state government and having experience in law, finance, banking, economics or accountancy
3 Proposed amendment to section 36AA of the Act
4 Associate enterprise means a company whether incorporated or not which is a holding company or a subsidiary of the applicant or joint venture company or controls the composition of the board of directors or other body governing the applicant or exercises significant influence on the applicant in taking financial/policy decision or able to obtain economic benefits from the activities of the applicant
5 Proposed amendment to section 3 (2A) of the Amendment Bill of Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980
6 The current CRR fixed by RBI is 4%
7 Proposed amendment to section 18 of the Act
8 Proposed amendment to section 12 A of the Act
9 Proposed amendment to section 56 of the Act
10 Proposed amendment to section 2A of the Act
11 Proposed amendment to section 46 of the Act
12 Proposed amendment to section 47 A of the Act
13 Idem at 12
14 Proposed amendment to section 3 (2E) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970
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