MODULE A

REGULATIONS AND COMPLIANCE

1. LEGAL FRAMEWORK OF REGULATION OF BANKS

Sec 5 (b) of BR Act 1949 Define Banking

KYC guideline issued by RBI Anti money laundering measures and combating financing of
terrorism

Sec 49A of BR Act 1949 There is no organization other than bank is authorized to accept deposit
withdrawal by cheque

Acceptance of deposits by Non Banking entities NBFC are regulated by NBFC Acceptance of
Public Deposits (Reserve Bank) Directions, 1998

Sec 22 of BR Act License from RBI

Sec 7 of BR Act In Banking Company Bank its part of word

Sec 6 (1) of BR Act 1949 Business Permissible

The Central Govt has accordingly specified Leasing and Factoring as permissible business for
banking.

Sec 8 of BR Act 1949 Prohibits banking companies in direct or indirect trading activities

Sec 9 of BR Act 1949 Immoveable property

Public Sector Banks is a Body Corporate constituted under Special Statue

SBI SBI Act 1955

SB Associates SB (Subsidiary Bank) Act 1959

RRB RRB Act 1975

Sec 5 BR Act 1949 is a (Private sector banks) company which transacts the business of banking

Banking companies governed by

1. Companies Act 1956 Regarding constitution
2. BR Act 1949 & RBI Act 1934 Regarding Business of Banking

RBI Act 1934 Came in to force on March 6 th 1934. Last amendment RBI (amendment) Act
2006

RBI Act 1934 deals with constitution, power and functions of Reserve Bank. It does not
dealing directly with the regulation of Banking System (Except for Sec 42 of RBI
Act(Scheduled Banks))

Sec 18 RBI Act (Non scheduled Banks) direct discount of Bill of Exchange and Promissory
notes

Acceptance of Finance by NBFC

Banking Regulation Act 1949

1. Companies act 1956 deals with incorporation and working of companies is applicable to
banking.
2. B R Act 1949 deals with Regulation business of banking companies, control over the
management of banking companies & suspension and winding up of banking companies
and penalties for violation of the provision of the Act

Sec 3 of RBI Act 1934 Reserve Bank as Central Bank and Regulator of Bank

The Bank abide by the direction given by the Central Govt in Public Interest after consultation
with the Governor of the Bank
1

Reserve Bank is Sole Authority for issue and management of currency in India under Sec 22
of the RBI Act 1934.

Sec20 of RBI Act Act as Banker to the Central Govt

Sec 21A of RBI Act Act as Banker to the State Govt

RBI is the Primary Regulator of Banks

Sec 7(1) of the RBI act 1934 Central Govt gives direction to RBI

Sec10B and 36AA of BR Act 1949 Removal of Managerial Personnel

Sec 22 (4) of BR Act 1949- Cancellation of Banking License

Sec14A of BR Act 1949 Refusal certificate regarding floating on assets

If Co operative bank operates in one state only, then it will be registered under State Co
operative Societies Act. If more than one State, its under Multi State Co operative Societies
Act 2002. These are regulated by Co-operative law of the State.

Function of Co operative Bank

1. Formation & Management under State Government
2. Licensing and Regulation of Banking business by RBI
3. If Co operative Banks registered under DICGC Act (Deposit Insurance and Credit Guarantee
Corporation Act) RBI has the power to order their winding up.

2. CONTROL OVER ORGANISATION OF BANKS

Sec 22 of BR Act 1949 Prohibits banking business without licence

Sec 11 of BR Act 1949 Minimum Capital and reserves requirements of a banking company.

Sub sec (4) of Sec 22 of BR Act 1949 Cancel the licence granted to any banking company

A banking company, whose license is cancelled, can be appeal to the Central government within
period 30 days from the date of the order rejecting licence.

Sec 23 of BR Act 1949 Place of Business for this purpose includes any sub office, pay office,
sub pay office or any location f an existing place of business within the same city, town or village
would not need such permission

In the case of Regional rural banks, the applications for permission have to be routed through
the National Bank (NABARD) and the national bank has to offer its comments on merits to the
Reserve Bank

Paid up capital and Reserves

o Foreign Bank (Banking Company incorporated outside India) operating in India has to
deposit and keep deposited with the Reserve Bank, an amount of Rs 15 Lacs. (Mumbai or
kolkatta Rs 20 Lacs)
o Indian Bank if a place of business in more than one state Rs 5 Lacs
o If the place of business is only one state Rs 1 Lac
o For banking companies commencing business after the commencement of the Act, paid up
capital is stipulated as Rs 5 Lac.
o During 2005, RBI stipulated the minimum capital requirement for a new private bank at Rs
300 Crore as a part of corporate governance guidelines and as a policy of Foreign Direct
investment

The Banks shall not transfer the shares without receiving Reserve Banks Acknowledgement.

Commission, Brokerage, Discount Sec 13 of BR Act 1949

2

Sec 19 of BR Act 1949 Certain Restriction on formation of subsidiaries

It should not exceed 2.5% of the paid up value of the shares.

by banking companies.

Share holding in other companies Sec 19(2) of BR act 1949. the holding shares by a banking
company in any company as pledge, mortgagee or absolute owner shall not be exceeding 30% of
the paid up share capital of that company or paid up share capital and reserves of the banking
company.

Sec 10 of BR Act 1949 Stipulates certain qualification for directors of Banking companies

At least 51% of the total number of directors shall be persons who have special knowledge or
practical experience, with respect of accountancy, agriculture and rural economy, banking, co
operation, economics, finance, law, small scale industry or any other matter. At least two of the
directors should have special knowledge or practical experience in agriculture and rural
banking or co operation or small scale industry.

Substantial interest Sec 10 A (2) (b) of the BR act 1949. Companies registered under Sec 25 of
the Companies Act and SSI concerns are not included for this purpose.

The directors of the banking company shall not hold office for more than eight years
continuously.

Any proceedings of a Banking company will not be invalid only because of any defect in the
composition of the board.

Sec 10B of BR act 1949 Whole time chairman or managing director. The whole time chairman
and a managing director shall hold office for a period not exceeding five years as the board may
fix and is also eligible for reelection or reappointment.

If the banking company does not comply with the order within two months, the reserve bank
may remove that person from the office and appoint a suitable in his place.

The Banking company or the person affected by the Reserve Banks order may appeal to the
Central government within 30 Days.

In case where the whole time chairman or managing director dies temporary arrangements
for a period not exceeding of four months

Sec 10C of BR Act 1949 Qualification shares

Sec 36AB Appointment of Additional Directors (To do so in the interest of Banking policy,
Public, Banking Company & Depositors of the Banking company)

Sec 36AA of BR Act 1949 Power to remove Management and other personnel.

An appeal against the order of removal lies with the central government. Such an appeal has to be
filed within 30 days from the date of communication of the order.

Contravention of the order is punishable with a fine of Rs 250 for each day during which the
contravention continues.

DECO Principles of corporate governance published in 1999.

Good Corporate governance plays a vital role in ensuring the integrity and efficiency of financial
markets and the lack of it can pave the way for financial difficulties and sometimes even fraud.

BCBS (Banking Committee on Banking Supervision) has issued guidance (Feb 2006) for
promoting the adoption of sound practices of corporate governance by banking institutions.

Reserve Banks Approach Fit and Proper criteria for directors of banks which included
the process of collecting information, exercising due diligence and constitution of a nomination
committee of the board to scrutinize the declarations made by the bank directors.

Fit and proper Share holding of 5% and above as laid down in RBI circular dated 25th June
2004.

In Public Sector Banks The principles of corporate governance have been statutorily recognized as
per banking companies (Acquisition and transfer of Undertaking) Financial Institutions Laws
(Amendment) Act, 2006
3. REGULATION OF BANKING BUSINESS

The Directions issued by Reserve Bank Sec 21 and 35A of BR Act 1949.

Directions are addressed to banks only and not to customers or the public.

Sec 26 of BR Act 1949 Returns of unclaimed deposits ( the return has to be filed within 30
days of the end of each calendar year in the form and manner prescribed and should cover all
deposits not operated for 10 years. If fixed deposit, the period of 10 years starts from the expiry
date of the deposit)

Sec 45ZA of BR Act 1949 Repayment of Deposits

Sec 45ZC and 45ZE of BR Act 1949 Articles in safe custody and safety lockers (may nominate
one person as nominee to receive the article in the event of death of that person)

Tools employed for exercising selective credit control (SCC)

1. Minimum Margins for lending against selected commodities
2. Ceilings on the levels of credit
3. Charging of minimum rate of interest on advances against specified commodities

Sec 20 of BR Act 1949 Restrictions on Loans and Advances

Interest rate on loans and advances

1. Specifically noted in Sec 21(2) (e) of BR Act 1949
2. Generally noted in Sec 35A of BR Act 1949
(Currently the directions of RBI regarding interest rates of advances cover only finance to exporters
and small loans with limits upto Rs 2 Lac and DRI loans)

Usurious Loans Act 1919 Prohibits lending at exorbitant rates.

Sec 58 of BR Act 1949 Regulation of Payment systems

Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) as a committee
of its central board

Guidelines issued by RBI in respect of Internet Banking

1. Technology and Security Issue
2. Legal Issue
3. Regulatory and Supervisory Issues

Reserve Bank of India (Amendment) Act 2006 Sec 45W Regulations of Money Market
Instrument

Ombudsman: it is generally an authority (official) appointed to receive and investigate on the

public grievances against the Government or any other authority or institution or organization and
redress such grievances as a non adversarial adjudicator or an alternative to the adversary system for
resolution of disputes.

Banking Ombudsman Scheme 2002

4

The Complaint is made before the expiry of the period of limitation prescribed under the Indian
Limitation Act 1963.

The scheme formulated by the reserve bank under the BR Act 1949, cannot override the
provisions of the Banking Ombudsman Act.

Sec 17(1) of BR Act 1949 Creation of Reserve Fund (not less than 21% of such profits has be
transferred to the Reserve fund before dividend declared)

Reserve Fund for Foreign Banks Sec 17(1) and Sec 11 (2) of BR Act 1949 21% of the profit for
each year in respect of all the business transacted through their branches in India.

Maintenance of Cash Reserve

1. Scheduled Bank Sec 42 of RBI Act (Paid up capital and reserves of aggregate value of not
less than Rs 5 Lac)
2. Non Scheduled Bank Sec 18 of RBI Act

The Reserve Banks cannot pay interest on any portion of the CRR balances of Banks.

When the Penalty is imposed for a default, the amount has been paid within 14 days of the notice
demanding payment.

Sec 24 of BR Act 1949 Maintenance of Liquid Assets

Sec 25 of BR Act 1949 Quarterly position of Assets (at the close of business on the last Friday
of every quarter, such assets shall not be less than

75% of the demand and time

liabilities of the Banking company in India.)

4. RETURNS, INSPECTIONS AND WINDING UP

The Reserve Bank has the power to apply to the High Court for the winding up of Banking
Companies.

The respective provisions of the Banking Regulations Act have overriding effect in respect of
Banking Companies

Every Banking company has to submit three copies of its balance sheet and profit and loss
account to the Reserve Bank within 3 Months from the end of the period to which they relate.

Display of Balance Sheet and Accounts Done not later than the first Monday in august of any
year in which it carries on business.

Sec 30 of BR Act 1949 The Balance Sheet and Profit and loss account of a banking company
have to be audited

Sec 30(1B) of BR Act 1949 Special Audit of the banking company

Sec 24(3) of BR Act 1949 Return of Liquid assets (submitted within 21 days from the end of the
month to which they relate)

Governor of the Reserve Bank of India, is the chairperson of the Board (Board for Financial
Supervision (Board) is a committee under Regulation 4 of RBI (Board for financial supervision)
regulations, 1994.

Governor may constitute an advisory council to tender advice from time to time to the board.

Sec 36AG of BR Act 1949 Compensation to share holders

Sec 44A of BR Act 1949 Voluntary Amalgamation

Sec 37 of BR Act 1949 Suspension of Business and winding up total period of moratorium
shall not exceed six months.

Within 15 days of the winding up order, the liquidator has to give notice calling for claims for
preferential payment and other claims from every secured and unsecured creditor.

Chapter of RBI Act 1934 Penalty for violation of the Act (is punishable with imprisonment
up to a period of three years and fine(Rs 2000 for each offence) also)

Sec 46 of BR Act 1949 Penalities for violation of the act (3 years imprisonment and fine (Rs
2000) also)

5 PUBLIC SECTOR BANKS AND CO OPERATIVE BANKS

The Chairman and managing directors are appointed for a period not exceeding 5 years and
are eligible for reappointment.

In SBI No director, member of local board, local committee or an officer of the state bank
shall be eligible to be the auditor.

The annual general meeting has to be held within 6 Weeks of the date of sending the balance
sheet etc to the central government and the reserve bank

Sec 18 of State Bank of India (Subsidiary Banks) Act 1959 The shares of the subsidiary
banks are freely transferable

Sec 36 of SBI Subsidiary Banks Act 1959 A Subsidiary Bank has to act as agent of the SBI

Sec 47 of SBI Subsidiary Banks Act 1959 SBI is empowered to inspect the subsidiary banks.

Regional Rural Banks RRB first set up in 1975 under Regional Rural Banks ordinance 1975 and
later replaced by Regional Rural Banks Act 1976.

Establishment of RRB
1. RRB holds 35% of the issued capital of the RRB
2. Central Government holds 50%
3. State Government holds 15%

Sec 5 (b) of BR Act 1949 Define the business of Banking

Directors of Nationalized Banks are nominated by the central government or elected from the
shareholders.
1. not more than four whole time directors
2. not more than six directors to be nominated by central government

Sec 20 of BR Act 1949 Restrictions of Loans and Advances of Co operative Banks

A co operative bank requires the prior permission of the RBI for opening a new place of business or
changing an existing place of business otherwise within the same city or town or village where it
has an existing place of business.

MODULE B
LEGAL ASPECTS OF BANKING OPERATIONS
6. CASE LAWS ON RESPONSIBILITY OF PAYING BANK

Sec 10, 85,85A, 89 & 128 of Negotiable Instrument Act 1881, grant protection to a paying banker.

Payment in due course: means payment in accordance with the apparent tenor of the instrument in
good faith and without negligence to any person in possession thereof under circumstances which
does not afford a reasonable ground for believing that he is not entitled to receive payment of the
amount therein mentioned.

Sec 10 of NI Act 1881 Payment in Due Course

7. CASE LAWS ON RESPONSIBILITY OF COLLECTING BANK

6

Sec 131 of NI Act 1881 Grants protection to a collecting Banker (Non Liability of a Banker
receiving payment of cheque)

Conditions for Protection

1. The Collecting Banker should have acted in good faith
2. He should have acted without negligence
3. He should receive payment for a customer
4. The Cheque should be crossed generally or specially to himself

Duties of the Collecting Bank:

1. Duty to open the account with references and sufficient documentary proof
2. Duty to confirm the Reference where the referee is not known or has given reference in absentia
3. Duty to ensure crossing and special crossing
4. Duty to verify the instruments or any apparent defect in the instruments
5. Duty to take into account the State of Customers Account
6. Negligence of collecting bank in collecting cheques payable to third parties

8 INDEMNITIES

Sec 124 of the Indian Contract Act 1872 define Contract of Indemnity

Contact of Indemnity two parties

Contract of Guarantee three parties

In Indemnity Risk is contingent

In a Guarantee the liability is subsisting

Sec 125 of Indian Contract Act 1872 Rights of an indemnity holder

9 BANK GUARANTEES

Bank Guarantee : a guarantee given by a bank to a third person, to pay him a certain sum on
behalf of the banks customer, on the customer failing to fulfill any contractual or legal
obligations towards the third person.

Financial Guarantee : these are mostly issued an behalf of customers/contractors dealing with
government departments. In such a situation, party is required to deposit cash as a part of contract.

Performance Guarantee: The customer will perform the contract entered into by the customer as
per the condition stipulated in the contract. Usually issued by bankers on behalf of their customers,
who have entered into contracts to do certain things on or before a given date.

Deferred Payment Guarantee: the Banker guarantees payment of installments spread over a
period. eg. Goods or machinery purchased by a customer on long term credit and the payment is to
be made in installments on specified dates spread over more than a year.

Bank Guarantees are called Life blood of national and international commerce

Where under a letter of guarantee the bank has undertaken to pay any amount not exceeding Rs
50,000/- to the board within forty eight hours of the demand.

Sec 134 of Indian Contract Act 1872 A surety is discharged between the creditor and debtor

The liability of the bank is not dependent on the underlying contract but is an independent contract
which the courts would enforce except in case of fraud

Bank guarantee specify the period for which their guarantee subsists (validity period) & an
additional period (Claim period)

The claim period is only to facilitate the beneficiary to prepare and lodge claim, if any, under the
guarantee.

The claim period should at least be 15 to 30 days after the validity period.

Government departments and municipal bodies can file a suit against the bank under a bank
guarantee within a period of thirty years after making claim.

Bank guarantee is a contingent liability

A Bank guarantee is a commercial document and is neither a statutory notice nor a pleading
(means demanding) in legal proceedings.

The invocation is within validity period

The invocation amount is not greater than the guaranteed amount

The bank has no right to saddle its customer with any additional liability under the guarantee by
issuing the same contrary to the instructions by its customer.

10 LETTERS OF CREDIT

Parties to a letter of credit

1. Applicant Buyer Importer Opener
2. Issuing Bank / Opening Bank / Importers Bank The Bank which opens the LC on the
request of the applicant or buyer.
3. Beneficiary Exporter Seller: is the person who is entitled to receive the benefits under LC
4. Advising Bank/ Notifying Bank The Bank in the beneficiary / exporters country through
which the LC is advised to the beneficiary. The advising bank only forwards the LC to the
beneficiary.
5. Negotiating Bank/Nominated Bank/Paying Bank: if the LC specifies a bank then that the
bank is negotiating bank
6. Confirming Bank: The confirming bank is deemed to undertake on its part the liabilities of the
credit vis--vis the beneficiary or the Negotiating Bank. The second guarantee is called
confirming the LC
7. Reimbursing Bank: it is the bank, which is appointed by the issuing bank to make
reimbursement to the negotiating, paying or confirming bank.

Types of LC:
1. Acceptance Credit / Sight Credit: immediate payment should be made of the bills drawn by
the beneficiary. sometimes as per the terms of the LC the bills will be payable after an agreed
period of time(Such bills being called Usance bills)
2. Irrevocable Credit : An irrevocable credit is a credit, that can neither be amended nor cancelled
without the consent of the beneficiary
3. Confirmed Credit: if a bank advising the credit to the beneficiary adds its own confirmation to
the credit, then the credit would be called a confirmed credit.
4. With Recourse and without recourse credit
5. Transferable credit
6. Back to Back credits: The beneficiary in whose favour an LC is issued uses the same to open
another credit from his (beneficiarys) bank in favour of his supplier.
7. Anticipatory LC:
a. Red Clause LC: the beneficiary will be entitled to receive payment only on his handing
over the documents and the bills drawn under the LC to the negotiating Bank.(Clause is
printed in red). Red clause LCs is however dying out.
8

b. Green Clause LC: This type of LC not only permits pre shipment advance but also
permits advances to the exporter to cover storage at the port of shipment
8. Revolving LC: once the bills are negotiated the entire transaction comes to an end.

Documents under LC :
1. Bill of Exchange
2. Invoice
3. Transport Document
4. Bills of Lading
5. Airway bill
6. Post parcel receipt and courier receipts
7. insurance documents
8. other documents

UCP 600 Uniform Customs and Practice for Documentary Credit 1st July 2007.

UCP 600 published by ICC (International Chamber of Commerce)

11. DEFERRED PAYMENT GUARANTEE

In a Deferred Payment Guarantee (DPG), a third party, mostly banks and financial
institutions, guarantee the payment of the installment.

The payment is usually done on the following terms:

1. Advance payment to 10% to 15% of the price of the goods is made by the buyer.
2. Another 10% to 15% on receipt of documents under LC
3. The Balance amount is paid in installments spread over a period of one to seven years, which
is secured by a DPG

12. LAWS RELATING TO BILL FINANCE

Bills Discounted by banks belongs to

1. Clean Bills
2. Documentary Bills and
3. Bills drawn under Credit

NI Act 1881 deals with the liabilities and rights of parties to a bill

Sec 8 of NI Act 1881 define Holder

Sec 9 of NI Act 1881 Holder in due course

Sec10 of NI Act 1881 Payment in due course

Sec 14 of NI Act 1881 Bill negotiated for consideration

Sec 15 of NI Act 1881 Endorsement of the bill

Sec 30 of NI Act 1881 Liability of Drawer

Sec 32 of NI Act 1881 Liability of Acceptor / Drawee of Bill

Sec 35 of NI Act 1881 Liability of Endorser

Sec 79 of NI Act 1881 Interest rate specified

Sec 80 of NI Act 1881 Interest rate is not specified

Classification of Bills
1. Inland Bills Sec 11 of NI Act eg. a promissory note, bill of exchange or cheque drawn or
made in India and made payable in or drawn upon any person resident in India
2. Foreign Bills Sec 12 of NI Act 1881. Bills drawn outside India
9

3. Demand Bills (Sight Bills) Sec 19 of NI Act 1881. Instrument payable in demand and no time
for payment is specified therein. Its also called as Sight Bills
4. Usance Bills (Bills payable after sight) a bill payable otherwise than on demand. It specifies
normally a time for payment of the value it represents. The date specified for payment is
otherwise called Maturity/due date
5. Clean Bills: Bills are not supported by documents of title to goods. Clean bills are drawn
normally to effect discharge of debt or claim. Eg. local bills and supply bills
6. Documentary Bills: Accompanying documents of title of goods. These bills are drawn to claim
price of goods supplied
(1) Bills drawn with an instruction to deliver against payment or D.P. Bills (Delivery against
Payment Bills)
(2) Bills drawn instruction to deliver against acceptance or D.A Bills (Delivery against
Acceptance bills)

Various types of Bill Finance:

1. Bill Purchase
2. Bill Discount
3. Advance against Bills for Collection (ABC)

Sales of Goods Act and bills of Lading Act: Documents of title to goods is one in which
ownership in goods can be transferred by endorsement and delivery. Eg. a banker as an endorsee of
a lorry receipt, railway receipt or bill of lading becomes the owner of goods on transfer of said
documents in his name.

13. VARIOUS TYPES OF SECURITIES

The effectiveness of the security can be broadly classified into two aspects
1. Economic Aspect Marketability and Valuation and other economic factors
2. Legal Aspect Validity and Enforceability of the security

Various Kinds of Securities:

1. land / real estate
2. stocks and shares
3. Debentures
4. Goods
5. Documents of title to goods
6. Trust receipts
7. Life Policies
8. Book Debts
9. Fixed Deposits
10. Supply Bills

14. LAW RELATING TO SECURITIES AND MODES OF CHARGING I

Sec 58(a) of Transfer of Property Act 1882 define Mortgage

Mortgage: it is the transfer of interest in specific immovable property for the purpose of
securing the payment of money advanced or to be advanced by way of loan, on existing or future
debt or the performance of an engagement which may give rise to a pecuniary liability.

The transferor is called Mortgagor

The Transferee is called Mortgagee

Mortgage Money: the principal money and interest of which payment is secured
10

Types of Mortgages:
1. Simple Mortgage : Sec 58(b) of the Transfer of Property Act 1882- 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 by a decree of the court in a suit and the proceeds of the sale to be applied so far as may
be necessary in payment of the mortgage money.
2. Conditional Sale: Sec 58 of the Transfer of Property Act 1882. the mortgagor ostensible sells
the mortgaged property on the condition that: a) on default of payment of the mortgage money
on a certain date, the sale shall become absolute or b) sale shall become void(means invalid) &
C) the buyer shall transfer the property to the seller. In this, the mortgagee can sue for
foreclosure, but not for sale of the property.
3. Usufructuary Mortgage: Sec 58(d) of the Property Transfer Act 1882. The mortgagor delivers
possession expressly, or by implication and binds himself to deliver possession of the mortgaged
property to the mortgagee & authorizes the mortgagee to retain such possession until payment
of the mortgage money and to receive the rents and profits accruing from the property. In this,
by possession means, the legal possession but not the physical possession. If the mortgagor
fails to sue redemption within thirty years, the mortgagee becomes the absolute owner of
the property.
4. English Mortgage: Sec 58(e) of the Property Transfer Act 1882. it is the transaction, in which
the mortgagor binds himself to repay the mortgage money on a certain date and transfer the
mortgaged property absolutely to the mortgagee, upon the payment of the mortgage money as
agreed.
5. Equitable Mortgage or Mortgage by Deposit of Title deeds: Sec 58 (f) of the Transfer of
Property Act 1882. delivers to a creditor o rhis agent documents of title to immovable property,
with intent to create a security thereon, the transaction is called mortgage by deposit of title
deeds.
6. Anomalous Mortgage: Sec 58 (g) of the Transfer of Property Act 1882. a mortgage which is
not a simple mortgage, a mortgage by conditional sale and usufructuary mortgage and English
Mortgage or a mortgage by deposit of title deeds within the meaning of this section is called an
Anomalous Mortgage
Pledge
Limited

interest

property

and

in

Mortgage
the Legal
ownership

ownership mortgagee

and

passes

to

subject

to

remains with the rights of mortgagor to redeem the property

pledger
Pawnee

has

no

right

of Mortgagee

foreclosure

can

foreclose

the

property

Limitation Period in Mortgage:

1. Article 62 of the Indian Limitation Act 1963 provides limitation period for filing of suit for
recovery of mortgaged debt and sale of mortgaged property (12 Years) in the event of non
payment of the mortgaged debt.
2. Article 63 (a) of the Indian Limitation Act 1963 the limitation period in case of foreclosure
(30 Years) of the mortgaged property.

15. LAW RELATING TO SECURITIES AN MODES OF CHARGING II

11

Sec 172 of the Contract Act 1872 Pledge means bailment of goods for purpose of providing
security for payment of debt or performance of promise

The person, whose goods are bailed is called Pawnor

The person who takes the goods as security is called the Pawnee (Legal transfer not a
physical transfer)

The mortgage of moveable property is called Hyphothecation

Mortgage is relates to Immoveable Property

General lien is also called as implied pledge

16. DIFFERENT TYPES OF BORROWERS

Types of Borrowers:
1. Individual (If an individual is minor, if an individual is not of sound mind, disqualified persons
2. Partnership Firm (1. Sec 19 Indian Partnership Act 1932 deals with the implied authority of a
partner as an agent of the firm and Sec 22 of Indian Partnership Act 1932 deals with the mode
of doing acts to bind the firm. 2. Insolvency of the firm 3. Insolvency of the partner 4. death of
the partner)
3. Hindu Undivided Family basically governed by school of thought (Dayabhag and
Mitakshara schools)
4. Companies Governed by Companies Act 1956. Sec 11 of Companies Act Banking business
(10 partners) and other business (20 partners) & Sec 12 of the Companies Act 1956 Private
Company (min 2) and in Public limited company (min 7 members)
5. Statutory corporations
6. Trust and Co operative societies

Memorandum of Association : It is the charter(means license or agreement) of the company, its

purpose is to enable the shareholders, creditors and those dealing with the company to know its
permitted range of business

Articles of Association : These are rules and regulations governing the internal management of
the company

Types of Companies:
1. Private Company Sec 3 (1) (iii) of companies Act 1956. 1. Restriction on the rights to
transfer its share 2. Limitation 2 (min) to 50 (max) members
2. Public Company 1. Does not have any restriction of the private company 2. shares are freely
transferable 3. No restriction on number of members (min 7 to max unlimited).
a. Limited Liability Company
b. Unlimited Liability Company
c. Limited by Guarantee
3. Other companies:
a. Existing Company : A company already existing before the coming into force of the
Companies Act 1956
b. Foreign Company: A company registered in a foreign country
c. Holding Company: A company owning more than 51% share capital in another
company or a company, which can appoint the majority of directors in another company.
d. Subsidiary Company: it can be seen that when there is a holding company, the other
company is called a subsidiary company.
12

Statutory Corporations: Besides Companies registered under the Companies Act 1956, there may
be corporations established by an Act of Parliament. Eg. State Bank of India is established under
State Bank of India Act 1955

Trusts Governed by Indian Trust Act 1882

17 TYPES OF CREDIT FACILITIES

Fund Based Credit facilities (Money of the banker is lent to the customer)
1. Cash Credit / Overdrafts
2. Term loans / demand loans
3. Bill finance

Non fund based credit facilities (Banks funds are not directly lent to the customer)
1. Bank Guarantee
2. LC
3. Acceptance facility

Rule in Claytons Case: Discharge of the debit items by subsequent credits was first enunciated in
the called Claytons case. Its agree on the method of appropriation and treat all debits as one debt.

The limitation period for filing suit in the case of term loans is 3 years from the date of default
of a particular/ specific installment.

Bill Finance:
1. Bill Discounting(BD) and Bill Purchase (BP)
2. Drawee Bill acceptance (Both are fund based)
3. Bills Co acceptance Non fund based.

18.

SECURED

AND

UNSECURED

LOANS,

REGISTRATION

OF

FIRMS,

INCORPORATION OF COMPANIES

Unsecured Loans / Cleans Loans: all unsecured loans, otherwise called Clean Loans are
dependent on the borrowers Financial strength to pay in future.

Secured Loans: These loans are given by a banker not merely based on his confidence on the
borrowers future financial strength but also based on his present net worth that he is able to give a
banker to rely upon and recover the moneys lent in the event of his failure to repay the loan in the
ordinary course.

The Registrar has power at all times to rectify any mistake so as to bring the entry in the Register or
firms relating to any firm in conformity with the documents relating to that firm already filed with
him.

Sec 69 of Indian Partnership Act 1932 Consequences of Non Registration of a Firm

1. Suits by Partners inter se
2. Suits by a firm against third parties
3. Exceptions
4. Non application of provisions to certain suits.

Company: A Company is an artificial person, since it is created by law. It is a voluntary association

of persons who have come together to carry on some business for profit. Change in its members or
in their identity does not affect the legal existence or its identity. Only law can dissolve it, since it is

13

a creation of law. Any absolute bar or restriction on the right to transfer shares is void (means
invalid)

Types of Companies: Public Companies & Private Companies. Further classified as 1. Company
limited by shares 2. Companies limited by guarantee with or without share capital and Unlimited
companies with or without share capital

Memorandum of Association: It is the constitution of a company and amongst other things,

defines the area within which the company can act.

Articles of Association: The rules and regulations relating to the internal management of a
company

Certificate of Incorporation: on the registration of the memorandum of a company the Registrar

shall certify under his hand that the company is incorporated and, in the case of a limited company
that the company is limited. The certificate of incorporation is conclusive evidence that everything
is in order as regards registration and that the company has come into existence from the earliest
moment of the day of incorporation stated therein with rights and liabilities of a natural person,
competent to contracts.

Certificate of commencement of Business: A Public company statutory compliances, as prescribed

under sec 149 with the Registrar of Companies of the State where the company is situated and
obtain from the Registrar a Certificate of commencement of business before the company
commences business.

Both Memorandum of Association and Articles of association signed by the prescribed

minimum no. of subscribers, duly stamped and signed by witness.

Letter of authority Stamped as a Specific power of attorney.

19. REGISTRATION AND SATISFACTION OF CHARGES

Charge it is used to mean any form of security for debt, unless the word is used otherwise. Sec
125 (4) of Companies Act 1956.

Charge
1. Purpose of securing debentures
2. uncalled capital of the company
3. calls made but not paid

Types of Charges:
1. Fixed Charges / Specific Charges: it extends over a specific property or properties of the
company.
2. Floating Charges / Charges: It is general and not specific. It floats over the present and future
property of the company subject thereto.

A floating charge may also crystallize on the

happening of an event specified in the creating a charge deed.

Companies Act 1956 under sec 125(1) provides that all the particulars of a charge created by the
company shall be fined with the Registrar of Companies together with an instrument, creating
charge for registration within thirty days of the creation of charge. The time limit of thirty days
within which the charge shall be registered can be extended by the Registrar of Companies (ROC)
by further thirty days.

Sec 125 to 144 of the Companies Act 1956 provides for the registration of charge.

MODULE C
SARFAESI ACT
14

20. INTRODUCTION TO SECURITISATION AND RECONSTRUCTION OF

FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT
2002 (SARFAESI ACT, 2002)

The Act extends to whole of India including the State of Jammu and Kashmir. It is effective
from 21.06.2002.

The Supreme Court has declared the condition of the deposit of 75% the claim amount as
unreasonable, oppressive, arbitrary and violative of the Article of 14 of the constitution.

An aggrieved person has now aright to refer the matter to DRT (Debt Recovery Tribunal) and
then to the Appellate Tribunal by depositing 50% of the claimed amount.

21. DEFINITIONS OF SARFAESI ACT, 2002

Appellate Tribunal: Any person aggrieved by the order passed by the DRT can fine an appeal to
the authority called as the Appellate Tribunal.

The Word Board is used in the Act to mean the Securities and Exchange Board of India (SEBI). It
is established under the SEBI Act 1992

Central Registry : Registering Office Set up by the Central Government. The registry will also
serve the purpose of maintaining credit information for the lenders.

DRT It deals with the cases of recovery of debts above Rs 10 Lacs due to the banks and
financial institutions.

Financial assistance : whenever any bank or financial institutions grants a loan or advance or
makes subscription of debenture or bonds or gives guarantee or issues LC or extends other credit
facility

International Financial Corporation established under the International Financial Corporation

(Status, Immunities and Privileges) Act 1958.

Originator: It is the owner of a financial asset that is acquired by a Securitization company or

reconstruction company for the purpose of securitization or asset reconstruction. When the bank or
financial institution lends money against security they are the originator.

Obligor: means a person liable. To pay to the originator, whether under a contract or otherwise.
Sponsor: Sponsor is an entity holding not less than 10% of the paid up equity capital of
securitization or Reconstruction Company.

22. REGULATION OF SECURITISATION AND RECONSTRUCTION OF

FINANCIAL ASSETS OF BANKS AND FINANCIAL INSTITUTIONS.

Securitization or Reconstruction company have to comply two conditions to carry business

1. It obtain certificate of registration from the Reserve Bank of India by applying in prescribed
format &
2. It has the owned funds at the time of registration not less than Rs 2 Crore or such other amount
not exceeding 15% of the total financial assets acquired or to be acquired as the RBI may
specify.

Securitization or Reconstruction Company can act as trustees for such trust and manage the assets
held in trust.

Certificate of Registration is cancellable under

1. The company ceases to carry on the business of securitization or reconstruction
15

2. The company ceases(means come to an end or close) to hold any investment from a qualified
institutional buyer
3. The company fails to comply with any of the conditions subject to which the certificate of
registration was granted

The securitization or reconstruction company whose registration is cancelled can prefer an appeal
within 30 days from the date of communication of order, to the central government.

The Acquisition of funded assets should not include takeover of outstanding commitments, if any, of
any bank or financial institution to lend further.

Documents involved in Securitization transaction:

1. Offer Document: it includes the details about profit loss, prepayments, expense, defaults,
collection etc and also any other materials thing affecting the securitization arrangement.
2. Debenture: The rate of Interest offered in the debenture cannot be less than 1.5% above the
Bank Rate as on the date of issue of the debentures and the period of redemption of debenture
cannot exceed six years.
3. An agreement: it is with the originator to continue to service the assets of the securitization.
4. Security Receipt: it is in favour of the investor.

No need of modification of charge with the Registrar of Companies

The Act provides that settlement of disputes through Arbitration and Conciliation Act 1996

RBI has the powers to make policy or issue directions to any particular securitization or
reconstruction company.

23. ENFORCEMENT OF SECUIRTY INTEREST

The SARFAESI ACT 2002, empowers banks and financial institutions to enforce securities in the
event of default by the borrower without the intervention of either the Civil Court or the DRT

It is advisable that the notice mentions about the legal consequences and the penal provisions.

The record date means the date agreed upon by the secured creditors representing not less than
th in values, of the amount outstanding on such date

The authorized officer is authorized to issue the sale certificate. Such a certificate is conveyance of
immoveable property and requires stamping, as may be required under the relevant State Laws.

The authorized officer is required to publish the possession notice in two leading newspapers,
one of which should be in the local vernacular language.

The secured credit or his authorized officer for taking possession of the security may make an
application along with the prescribed fees, to the DRT having jurisdiction within 45 Days from
the date on which such measures are taken.

No appeal can lie unless the borrower deposits 50% of the debt claimed by the secured creditor.
The Tribunal has powers for reasons to be recorded, to reduce this amount to 25% of the claim
amount.

24. CENTRAL REGISTRY

The central government is authorized to set up or cause to be set up a Central Registry by issue of
notification from such date as may be specified in the notification for the purpose of registration of
1. Securitization and Reconstruction of financial assets
2. Creation of Security interest under the SARFAESI Act 2002.

Acts which require registration on certain things and charges

16

1. Registration Act 1908

2. Companies Act 1956
3. Merchant Shipping Act 1958
4. Patents Act 1970
5. Designs Act 2000
6. Motor Vehicle Act 1988

The delay in filing the said particulars can be condoned by the central registrar for a period of next
30 days after the first days prescribed, on payment of fees not more than ten times of prescribed
fees.

Modification is also same as said above

The reporting is required to be done within 30 days of payment in full or satisfaction of the
charge.

25. OFFENCES AND PENALTIES

Sec 23 of SARFAESI Act filing of the particulars of charge created

Sec 24 modification of the charge filed and

Sec 25 the satisfaction of the charge has to be intimated to the central registrar

If Securitization and Reconstruction Company fails to comply with any of the direction issued by
the RBI, then such company is punishable with a fine not exceeding Rs 5 Lakhs for the default. In
case of further continuation of the offence, an additional fine up to Rs 10,000/- per day of the
default can be imposed.

Offences: if any person

1. contravenes (means break or disregard)

2. Attempts to contravene and
3. Abets (means support) the contravention of the provisions of the SARFAESI Act or rules made
there under.

Cognizance of offence taken by Judicial Magistrate of first class only. (No court below rank than
this can take cognizance of such offence)

26. MISCELLANEOUS PROVISIONS

The action has to be taken within three years from the date on which the cause of action arose.

Any conditional sale, hire purchase or lease or any other contract in which no security interest
has been created

Any security interest for securing repayment of any financial asset not exceeding one lakh rupee

27. BANKING OMBUDSMAN SCHEME, 2006: PURPOSE, EXTENT, DEFINITIONS,

ESTABLISHMENT AND POWERS
RBI decides Banking Ombudsman officer appointment, other terms of office, his secretariat, his
powers etc. RBI also decides the Territorial Jurisdiction of the Banking Ombudsman. The scheme
has come in force with effect from 1st January 2006

Appellate Authority means the Deputy Governor in charge of the department of the RBI
implementing the scheme.

Co operative Banks also covered by Banking Ombudsman Scheme.

28. PROCEDURE FOR REDRESSAL OF GRIEVNCE
17

Maximum amount the banking ombudsman can award as compensation is Rs 10 Lakh

Limitation period for filing of the review application against the award given by the banking
ombudsman is 45 days.

Advocates are not allowed to act as authorized representatives of the complainants under the
scheme.

29. RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT,

1993 (DRT ACT) PRELIMINARY

DRT ACT 1993 Recovery of Debts Due to Banks and Financial Institutions came into operation
from 24th June 1993

The Act is applicable to the whole of India Except the State of Jammu and Kashmir

Chairperson means a Chairperson of an appellate tribunal appointed under Sec 9.

DRT Act is applicable only if the debt recoverable is above RS 10 Lakhs

30. ESTABLISHMENT OF TRIBUNAL AND APPELLATE TRIBUNAL

The Central Government is empowered to establish one or more tribunal to be known as debt
recovery tribunal to exercise the jurisdiction, powers and authority conferred on such tribunal by or
under this Act

The Tribunal is made up of only one person called presiding officer and the appointment is done by
the Central Government by issuing a Notification.

A person is qualified for appointment as presiding officer of a tribunal if he is, or has been, or is
qualified to be appointed as District Judge.

The Presiding officer of a tribunal holds officer for a term of five years from the date on which he
enters upon his office or until he attains age of 62 years, whichever is earlier.

The person occupying the officer of the appellate tribunal is called as the Chairperson, appointed
by the Central Government.

The Chairperson of an appellate tribunal shall hold office for a term of five years from the date
on which he enters upon his office, until he attains the age of 65 years, whichever is earlier.

31. JURISDICTION, POWERS AND AUTHORITY OF TRIBUNALS

Chairperson of Appellate Tribunal is given general power of superintendence and control over
the tribunals under his jurisdiction

The Chairperson can transfer any application from any presiding officer within his jurisdiction to
any other presiding officer within his jurisdiction.

32. PROCEDURE OF TRIBUNALS

The appeal is required to be filed within 45 days from the date on which copy of the order is
received.

The appeal is required to be in the form prescribed and along with the prescribed fees

There is no provision in the Act for further appeal against the order passed by the Appellate
Tribunal

For application to be filed before the Tribunal the Limitation Act 1963. This means that the
application must be filed by the bank or the financial institution within three years from cause
of action.

18

33. RECOVERY OF DEBTS DETERMINED BY TRIBUNAL AND MISCELLANEOUS

PROVISIONS

The Tribunal issues Recovery Certificate to the applicant

The Presiding officer of the Tribunal who had issued the Recovery certificate is authorized to
withdraw the certificate or correct any clerical or arithmetical mistake in the certificate

There is fresh hearing or trial, etc., in such cases and the tribunal has to directly issues the recovery
certificate based on the decree (means order or declaration) of the Civil Court.

DRT Act is a Special law and is overrides the Companies Act.

34. THE BANKERS BOOKS EVIDENCE ACT, 1891

Bankers Books Evidence Act 1891 extends to the whole India except the State of Jammu
and Kashmir.

Bankers Books include ledgers, day books, cash books, account books and all other records used in
the ordinary business of a bank.

Judge means a judge of a High Court

Trial means any hearing before the court at which evidence is taken
Certified copy means when the books of a bank.
Certified copy of any entry in the legal proceedings be received as Prima Facie evidence.
Court can order inspection of books of accounts.
The order for inspection of books must give three clear days for the bank to arrange for inspection.
35. THE LEGAL SERVICES AUTHORITIES ACT, 1987: LOK ADALATS

Lok Adalats organized under the Legal Services Authorities Act, 1987 for compromise or
settlement of disputes between parties.

The monetary ceiling of amounts regarding which civil disputes can be settled under this
mechanism is presently Rs 20 Lakhs.

In case of compromise or settlement arrived at by a Lok Adalat the court fee paid in the case shall
be refunded in the manner provided under the Court Fees Act, 1870.

No appeal shall lie to any court against the award.

36. THE CONSUMER PROTECTION ACT, 1986: PREAMBALE, EXTENT AND

DEFINITIONS

The Objective of Consumer Protection Act 1986 for better protection of the interest of
consumers (Quasi judicial)

Quasi judicial machinery is established at the District, State and Central levels.

This Act extends to whole India except the State of Jammu and Kashmir

Complaint means any allegation (means claim) in writing made by a complainant with a view to
obtaining any relief provided by or under this Act

Consumer Disputes means a dispute where the person against whom complaint has been made,
denies (means refuse) or disputes the allegations contained in the complaint.

Goods defined in the Sales of Goods Act 1930.

37. CONSUMER PROTECTION COUNCILS

The highest council is the Central Council who has the jurisdiction for the entire country
19

The Central Government has established a council known as the Central Consumer Protection
Council called as Central Council

The Minister-in-Charge of the Consumer Affairs in the Central Government, who shall be the
Chairman of the Council.

The Central Council shall meet as and when necessary but at least once in a year.

Like wise State and District council meet twice in a year

38. CONSUMER DISPUTES REDRESSAL AGENCIES

Consumer Disputes Redressal Agencies established by the State Government or Central

Government, as the case may be.

A person who shall be or has been qualified to be a District Judge, who shall be the President of
the District Forum.

The President of the State Commission, who shall be the Chairman of Selection Committee.

Every member of the District Forum shall hold office for a term of five years or up to the age of 65
years, which ever is earlier.

The District Forum has jurisdiction to entertain complaints where the value of the goods or services
and the compensation, if any, claimed does not exceed Rs 20 Lakh

The District Forum has to ordinarily decide within 21 days from the date of receipt of the
complaint about its admissibility. The complaint cannot be rejected without hearing the
complainant.

Once the complaint is admitted by the District Forum it cannot be transferred to any other Court
or Tribunal or any authority set up under any law.

The apposite party is required to give his version within 35 days or extended period of not more
than 15 days.

If the goods under reference to the complaint are required to be analyzed or tested then the
complaint should be decided within 5 Months.

Any person aggrieved by the order passed by the District Forum may prefer as appeal to the State
Commission within a period of 30 Days from the date of order, in the form and manner as may be
prescribed.

If the order of the District Forum involves payment of any amount by the person preferring the
appeal, the appeal cannot be filed without payment of 50% or the amount ordered to be paid or Rs
25,000/- whichever is less.

Every member of the State Commission shall hold office for a term of five years or up to the age
of 67 years, whichever is earlier.

Any person aggrieved(means hurt or wounded by) by the order passed by the State Commission
may prefer as appeal to the National Commission within a period 30 days from the date of order,
in the form and manner as may be prescribed

The appeal cannot be filed without payment of 50% or the amount ordered to be paid or Rs
35,000/- whichever is less.

Every member of the National Commission shall hold office for a term of five years or up to the
age of 70 a years, whichever is earlier.

Every order of a District Forum, State Commission or of the National Commission is final if no
appeal is preferred against such order under the provisions of the Act.

20

For filing any complaint before a District Forum, State Commission or National Commission the
limitation period is 2 years from the date of cause of action.

District Forum has powers to deal with cases up to Rs 20 Lakhs

39. THE LAW OF LIMITATION

The Limitation Act, 1963 is an Act to consolidate and amend the law for the limitation of suits and
other proceedings.

Suit does not include an appeal or an application.

In the case of a Set Off, on the same date as the suit in which the set off is pleaded (means beg or
appeal)

In the case of a counterclaim, on the date on which the counter-claim is made in court.

40. TAX LAWS

The Law relating to taxation of income is governed by Income Tax Act 1961

The term assessment year represents the period of 12 months from first April every year.

Income Tax Act, 1961 envisages taxation of income under following heads
1. Salaries
2. Income from house property
3. profits and gains from business or profession
4. Capital Gains
5. Income from other sources

Advance Tax is payable as per the provisions of section 210 of the Income Tax Act. Advance Tax
arises from the concept of pay as you earn.

Advance Tax is payable in four installments as given below

1. By June 15-15%
2. By September 15-30%
3. By December 15-60%
4. By March 15-100%

Members of Co operative Banks are exempted from the TDS

TDS Deduction of Tax at Source

TCS Collection of Tax at Source

TAN Tax Deduction Account Number

DTAA Double Taxation Avoidable Agreement

Non compliance with provisions relating to TDS attracts

1. Levy of Interest @ 12% p.a on the amount on tax payable at source from the date on which it is
deductible until the date of payment.
2. Any failure to file returns/statements in this regard attracts penalty @ Rs 100 per day for the
period of default.

Fringe Benefit Tax (FBT) was introduced by Finance Act 2005 and is applicable for the previous
year beginning 01.04.2005 (i.e for AY 2006-2007 onwards)

Banking Case Transaction Tax (BCTT) effect from 01.06.2005. This tax is payable @ 0.1% of
the value of every taxable banking transaction.

Any default in payment of BCTT attracts interest @ 1% for every month

21

BCTT is payable to the credit of the Central Government by 15th day of the next month.

BCTT is payable if withdrawal by an individual exceeds Rs 50,000/- in a day.

Service Tax was introduced by Finance Act 1994.

Cenvat Credit is available on services tax payable on the basis of service tax on input services.

MODULE D
COMMERCIAL LAWS WITH REFERENCE TO BANKING OPERATIONS
41. MEANING AND ESSENTIALS OF CONTRACT

In India, the Law relating to contracts is governed by the Indian Contract Act 1872.

Contract means an agreement enforceable by law

A proposal becomes a promise when it is accepted

The person making the proposal is called the Promisor

The person accepting the proposal is called Promisee

An agreement made by minor is void(means invalid)

42. CONTRACTS OF INDEMNITY

A Contract of Indemnity is a contract by which one party promise to save the other from loss likely
to be caused to him.

The Promise is entitled to recover from the promisor, in respect of the matter to which the promise
to indemnify applies:
1. All damages which he may be compelled to pay in any suit
2. All costs which he may be compelled to pay in any suit
3. All Sums paid in compromise, not contrary to indemnity.

There are 2 parties in the Contract of Indemnity

43. CONTRACTS OF GUARANTEE

A Contract of Guarantee is a contract to perform the promise, or discharge the liability, of a third
person in case of latters default.

There are three parties in the Contract of Guarantee viz., Surety, Principal Debtor and Creditor or
Beneficiary.

Surety : The Person who gives the Guarantee

Principal Debtor: The Person in respect of whose default the guarantee is given

Creditor/ Beneficiary: The Person to whom the guarantee is given.

Continuing Guarantee: A Guarantee which extends to a series of transactions. Generally all

guarantees obtained by banks are continuing guarantees and in the case of death of a surety, the
guarantee would stand revoked (means cancel or invalidate) for future transactions.

The surety is discharged if the principal debtor is released by the creditor.

Any guarantee obtained by means of misrepresentation made by the creditor is invalid.

44. CONTRACT OF BAILMENT (BAILOR, BAILEE)

A Bailment is the delivery of goods by one person to another for some purpose

Bailor : The Person delivering the goods

Bailee: The person to whom they are delivered the goods

22

Contract of Bailment: When one person delivers to another, certain goods to be used for a certain
purpose.

If the goods are bailed for hire, the bailor is responsible for any damage whether he was aware of
the existence of such faults in the goods bailed or not.

45. CONTRACT OF PLEDGE (PAWNOR, PAWNEE)

Pledge: The Bailment of goods as security for payment of a debt or performance of a promise

Pawnor: the Bailor is in the case

Pawnee: The Bailee is in the case.

The pawnee can sell the goods, if the pawnor fails to pay.

46. CONTRACT OF AGENCY

Agent: is a person employed to do any act for another person or to represent another person in
dealings with some third person

Principal: The Person for whom such act is done (or who is represented) is called the principal.

Agent should be major and sound mind

No consideration is necessary to create an agency

The authority of an agent may be expressed or implied

1. Expressed: when it is given by words spoken or written
2. Implied: when it is to be inferred(means incidental or indirect) from the circumstances of the
case

An agent is bound to conduct the business of his principal according to the directions given by the
Principal.

An Agent is bound to render proper accounts to his principal on demand

Minor can not be a principal or agent

47. MEANING AND ESSENTIALS OF A CONTRACT OF SALE

Goods: Means every kind of moveable property (other than actionable claims and money)
Document of title to goods: includes Bill of lading, Dock- Warrant, Warehouse-keepers certificate,
wharfingers certificate, railway receipt, multimodal transport document, warrant or order for the
delivery of goods and any other document used in the ordinary course of business as proof of the
possession.

Future Goods: Goods to be manufactured or produced or acquired by the seller after making of the
contract of sale

Specific goods: Goods identified and agreed upon at the time a contract of sale is made
Mercantile Agent: An agent having authority either to sell goods or to consign (means sending)
goods for the purpose of sale or to buy goods, or to raise money on the security of goods.

Features of contract of sale of goods

1. Bilateral contract
2. Money consideration
3. Moveable property
4. No particular form

Agreement to sell: when the transfer of the property in the goods is to take place at a future time or
subject to some conditions, thereafter to be fulfilled
23

48. CONDITIONS AND WARRANTIES

Condition: If the stipulation agreed to between the parties is essential to the main purpose of the
contract and is of such a nature that if the stipulation is breached (i.e violated / not complied) then a
party to the agreement would have a right to treat the contract as repudiated (Cancelled) then such a
stipulation is known as Condition

Warranty: It is Stipulation collateral to the main purpose of the contract.

Implied Conditions and Warranties:
1. Title of the Seller(Implied)
2. Sale of Goods made by Description(Implied)
3. Sale by sample(Implied)
4. Sale is by sample as well as description(Implied)
5. Quiet possession(Implied)
6. Goods are free from any charge or encumbrance(Implied)
7. Quality or fitness of goods for any particular purpose(No implied)
8. Caveat Emptor (Buyer Beware) Caveat means a warning or a caution.(No implied condition or
warranty)

49. UNPAID SELLER

The seller of goods is deemed (i.e think or consider) to be an unpaid seller
When the whole of the price has not been paid or tendered
When the payment for the goods is received in the form of a cheque or other negotiable instrument
and the same is dishonored for financial or other reasons.

Lien is terminated when the buyer gets the possession of the goods.
50. DEFINITION, MEANING AND NATURE OF PARTNERSHIP
Partnership: It is the relation between persons who have agreed to share the profits of a business
carried on by all or any of them acting for all.

Partners: Persons who have entered into partnership with one another are called individually
Partners

Firm: Persons who have entered into partnership with one another are called collectively Firm
Types of Partnership:
Partnership at Will: Where no provision is made by a contract between the partners for the duration
of their partnership or for the determination (i.e. the termination or end) of the partnership

Partnership for a fixed period: When two or more persons enter into a partnership agreement for a
fixed period of time.

Particular Partnership: Such partnership is entered into, for completing a particular job or
assignment taken up by two or more persons jointly and to share the profits arising there from.

51. RELATIONS OF PARTNERS TO ONE ANOTHER

Every partner is bound to indemnify the firm for any loss caused to the partnership firm by his
fraud, in the conduct of the business of the firm.

Every partner has a right to take part in the conduct of the business
24

 Every partner is bound to attend diligently(means carefully or meticulously) to his duties in the
conduct of business

Every partner has a right to have access to and to inspect and copy any of the books of the firm.

A partner is not entitled to receive remuneration(means fee or wage) for taking part in the conduct
of the business

Interest at 6% on extra amount paid by the partner.

Mutual rights and duties remain same for additional undertaking//advantage carried out.

52. RELATIONS OF PARTNERS TO THIRD PARTIES

Every partner plays a dual role in a partnership

A partner, who contracts in his own name, incurs only a personal liability and not the collective
liability of the firm.

Core principle of Partnership Business: 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.

Doctrine of holding out: when a person who is not at all a partner in a firm, either represents
himself, or knowingly permits himself to be represented, as a partner in a firm and as a result of
this, he induces others to give credit to the firm then he is known as a partner holding out.

53. MINOR ADMITTED TO THE BENEFITS OF PARTNERSHIP

As per Indian Contract Act 1872, a Minor is not competent to enter into a contract

A Minor has a right to share the property and profits of the firm as may be agreed upon by the
partners and the minor can have access to the accounts of the firm.

At anytime within six months of his attaining majority, the person may give public notice to the
effect whether he has elected to become a partner or not

A partner may retire

1. with the consent of all other partners
2. In Accordance with an express agreement by the partners or
3. Where the partnership is at will, by giving notice in writing to all the other partners of his
intention to retire.

54. DISSOLUTION OF A FIRM

A Partnership firm can be dissolved with the consent of all the partners or in accordance with a
contract between the partners

A Firm Dissolved under circumstances of:

1. all the partners (except one) are adjudicated (means umpire or judge) insolvent or
2. by the happenings of any event which makes it unlawful for the business itself to be carried on
or the event makes the business unlawful if it carried on in partnership

A Firm not dissolved under circumstances of:

1. Partnership is constituted for a fixed term
2. Death of the partner
3. Adjudication of a partner as an insolvent

55. EFFECT OF NON-REGISTRATION

A Company is compulsorily required to be incorporated and registered with the Registrar of

Companies under the Companies Act 1956

A Partnership firm is not required to be compulsorily registered with the Registrar of Partnership
Firms.
25

A partner of an unregistered firm cannot enforce by way of a suit, any right available to him under
the Partnership Act

56. DEFINITION AND FEATURES OF A COMPANY

Features of a Company:
1. Registration under the Companies Act 1956
2. Artificial Legal Person
3. Independent corporate personality
4. Limited Liability
5. Perpetual(means permanent or continuous or never end) succession
6. Separate Property
7. Transfer of Shares
8. Common Seal
9. Corporate veil

Distinction between a Company and Partnership

Particulars
Registration

Company
Partnership
Compulsory under Companies Not Compulsory
Act 1956

No. of Members

Indian

Under

Partnership

Act,

1932
Min 2 members and 2 directors Min 2 person, Max 10
(only) and Max 50 (in Private person in Banking business
company).

and 20 in other business

Min 7 , 3 directors and Max

Unlimited in Public Company
Have separate legal existence

Does not have a separate

Ownership of property

Owned by the company itself

legal existence
Owned by the partners

Management

themselves
By Board of directors elected By the partners except the

Legal Status

by shareholders

dormant

Perpetual(continuity)

Yes

partners
No

existence
Contracts

A member of the company can A partner cannot contract

Liability

contract with the company

with the partnership firm
The liability of the members of The liability of the partners
the company is limited except in
company

Transfer

with

and

sleeping

partnership

is

unlimited unlimited

liability
A transferee of shares in a A partner can become a
company becomes a member of partner in a partnership
the company and the consent firm with the consent of all
(means approval or authority) the members
of all members is not required

Death

of all the partners

The death of any or all the Death

of

the

partner

members of the company does dissolves the partnership

not

determine

(end)
26

the unless the partnership deed

existence of the company.

provides otherwise
The members of the company Every partner of a firm is

Agency

are not the agents of each other an agent of the other

or the company

57. TYPES OF COMPANIES

Companies are classified on the basis of

1. Mode of incorporation
2. On the basis of liability
3. on the basis of Public Interest
4. holding and subsidiary companies

Classified based on the Mode of Incorporation:

1. Statutory Company: Its created by a special Act passed by either the Central or the State
Legislature. The Statutory companies are not required to have Memorandum of Association.
2. Registered under the Companies Act 1956

Classified on basis of Liability

1. Company limited by shares: There is a share capital and each share has a fixed nominal value
also known as the face value which the shareholder is bound to pay either at a time or in
installments.
2. Company Limited by Guarantee: Where the liability of the members of he company is limited
by the memorandum of association to such an amount as the members undertake to contribute to
the assets of the company in the event of the liquidation of the company, the company is known
as a company limited by guarantee.
3. Company with unlimited liability: Where the Liability of the members of a company is
unlimited it is known as unlimited company. It must have Articles of Association and it must
state the no. of members and the share capital (if any) with which it is proposed to be registered

Classified on the basis of Public Interest:

1. Private Company: Registered under Sec 3 of Companies Act, 1956. as a company which under
its Articles of association contains the following restrictions

Transfer of shares: imposes restriction on the right to transfer shares.

Restricts the no. of members to 50.

Issue of prospectus: Cannot issue prospectus and cannot invite public to subscribe for
any shares or debentures of the company.

Deposits: prohibits acceptance of deposits from persons other than its members,
directors or their relatives

Private company should have a minimum paid up capital of Rs 1 Lakh

2. Public Company: A public company should have a minimum paid up capital of Rs 5 Lakhs. A
private company need not obtain a certificate of commencement of business from the Registrar
of Companies where as the public company has to get the commencement of certificate from the
ROC.
3. Government Company: Not less than 51% of the paid up share capital
4. Foreign Company: Is a company which is incorporated outside India but has a place of business
in India.

58. MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION

The business of the company is carried on the basis of the objectives laid down in the Memorandum
of Association
27

Internal Management and procedures are regulated by the articles of association

First step in the formation of companies is the preparation of the Memorandum of Association

The companies Act 1956 requires that the articles of association must be filed together with the
memorandum of Association by the following kind of companies
1. Unlimited company
2. Company limited by Shares
3. Private company limited by shares

59. DOCTRINES OF ULTRA VIRES / CONSTRUCTIVE NOTICE / INDOOR

MANAGEMENT

Doctrines deals with the rights and duties of the company with respect to
1. the members
2. amongst the members
3. of the company with the outsiders

Doctrine(Principle) of Ultra Vires: Any other act of the company which is outside the scope of the
objects clause of the memorandum of association is known as ultra vires (i.e. beyond the powers of)
the company

If a director of a company makes an ultra payment he is personally liable to the company and he can
be compelled to refund the money.

Exception of Doctrine of indoor management

1. Knowledge of internal irregularity
2. Acts outside apparent authority of an officer of company

60. MEMBERSHIP

Various modes of becoming a member of a company:

1. By subscribing to Memorandum of Association
2. Membership by Allotment of shares
3. Transfer of Shares
4. Transmission of Shares
5. Membership by Acquiescence
6. Joint Membership

Who can be members of a company:

1. Any person competent to contract
2. Registered Society

Rights of Members:
Statutory rights
Documentary rights
Proprietary rights

A member can inspect the register of members.

61. PROPSECTUS

Prospectus: a public company can raise the funds for its business from the public by issuing a
document known as prospectus. A prospectus as any document described or issued as a prospectus
and includes any notice, circular, advertisement or other document inviting deposits from the public
or inviting offers from the public for the subscription or purchase of any shares in, or debentures of
a body corporate

Private companies cannot issue a prospectus to raise the funds from the public.
28

Compliance with respect to prospectus:

a. Time of Issue of Prospectus
b. Contents of the Prospectus
c. Date of Publication
d. Signature of every director on the prospectus
e. Application form with a prospectus
f. Statements by expert in prospectus
g. Registration of the prospectus

Every person who is responsible for the untrue statement in the prospectus shall be
Punishable with a fine or imprisonment or with both (Sec 63)

62. DIRECTORS

Every public company must have at least 3 directors

Public company having a min paid up capital of Rs 5 Lac to max Rs 5 Crore or more.

A private company must have at least two directors

All listed companies should have at least 50% of their directors as independent

directors

Fit and proper concept is to be followed for appointing the directors.

A Company can have a maximum no. of 12 directors and to increase this number, the

Approval of Central Government is required.

The board of directors can fill the vacancy at a meeting of the board

One single resolution can appoint one director only and not two or more.

A person cannot act as a director unless he/she within 30 days of his appointment

signs and files with the Registrar his consent to act as a director.

A Person can not be a director of more than 15 companies

A company can remove a director before the expiry of his period of office by passing

ordinary resolution

A Public company requires the previous approval of the central government to give

any loan to its directors

The board of directors can appoint an alternate director to act for director during the

Original directors absence for a period of not less than 3 months from the state in

which meetings of the board are ordinarily held

DRT Acts overrides the Company Act.

63. FOREIGN EXCHANGE MANAGEMENT ACT, 1999

FERA Foreign Exchange Regulation Act, 1973

FEMA Foreign Exchange Management Act, 1999.

Authorized Person: any bank or other person including authorized money changer or dealer,
authorized under the FEMA to deal in foreign exchange or securities.

Capital Account transaction: a transaction by which there may be a change (either an increase or
decrease) in the assets or liabilities outside India of persons resident in India or assets or
liabilities in India of persons resident outside India

Current Account transaction: a transaction other than a capital account transaction

29

Currency: Under FEMA, not only include all currency notes but also postal notes, postal orders,
money orders, cheques, drafts, travellers cheque, LC, Bills of Exchange and promissory notes,
credit cards or such other similar instruments as may be notified by the RBI

Foreign Currency: any currency other than Indian Currency

Penalty can be levied up to thrice the sum involved in such contravention (breaking or flouting)
where such amount is quantifiable, or up to Rs 2 Lac where the amount is not quantifiable.

64. TRANSFER OF PROPERTY ACT, 1882

Sale: Sale is a transfer of ownership in exchange for a price paid or promised or part-paid and partpromised.

Mortgage: A Mortgage is the transfer of an interest in specific immoveable property to secure the
payment of money given by way of loan or to secure the performance of an engagement which may
give rise to a pecuniary (monetary) liability.

Hypothecation or Pledge or Pawn: Security by way of moveable property

A Mortgage other than a mortgage by deposit of title deeds can be effected only in terms of a
mortgage deed duly signed by the mortgagor and attested by at least two witness

Lease: A lease is a transfer of a right to enjoy the property for a certain time (express or implied) or
in perpetuity (that is forever), in consideration of a price paid or promised or any other thing of
value, to be given periodically to the transferor by the transferee.

The Transferor is called Lessor & the transferee is called Lessee and the price is called the
Premium and the money or any other thing to be given is called as rent.

A lease for an agricultural or manufacturing purpose is deemed to be a lease from year to year. It
can be terminated by the lessor or lessee by giving 6 months notice to one another.

A lease for any other purpose is deemed to be a lease from month to month. It can be terminated by
the lessor or lessee by giving 15 days notice to one another

The lease agreement should be duly stamped and registered

Actionable claim means a claim to any debt (other than a debt secured by mortgage,
hypothecation or pledge)

There is no mandatory requirement of giving notice to the debtor before the transfer of the
actionable claim.

65. THE RIGHT TO INFORMATION ACT, 2005

Right to Information Act, 2005 came into force on 15 th June 2005. Remaining provisions were
made effective on 12th October 2005 as Freedom of Information Act, 2002.

Central Information Commission: Means its constituted by the Central Government

Central Public Information Officer: Means its designated by the Public authority and includes a
Central Assistant Public Information Officer

Public authority: means any authority or body or institution of self government established

State Information Commission: constituted by State Government under this Act.

66. RIGHT TO INFORMATION AND OBLIGATIONS OF PUBLIC AUTHORITIES

PIOs (Public Information Officer): designated by the Public authorities in all administrative units or
officers under it to provide information to the citizens that request for information under the Act.

Where the information requested for concerns the life or liberty of a person, the same shall be
provided within 48 hours of the receipt of the request.

30

As per the Right to Information (Regulation of Fee and Cost) Rules, 2005, the application shall be
accompanied by a fee of Rs 10.

If the Central Public Information officer fails to give decision on the request for information within
the period of 35 days, the request shall be deemed to have been refused.

Third party information: means a person other than the citizen making a request for information and
includes a public authority.

If the appeal is against the third party information, the appeal by the concerned third party shall be
made within 30 days from the date of order.

The central information commission has the power to impose a penalty of Rs.250/- for each day till
the information is furnished subject to a maximum of Rs.25,000/-

67. THE PREVENTION OF MONEY LAUNDERING ACT,2002

Whosoever commits the offence of money laundering shall be punishable with rigorous
imprisonment for a term which shall not be less than three years but may extend to seven years and
also be liable to a fine which may extend to Rs 5 Lacs.

The records relating to the identity of clients shall be maintained for a period of ten years from the
date of cessation of the transaction between the client and the banking company.

68. INFORMATION TECHNOLOGY ACT, 2000

This Act facilitated the amendments to

1. Indian Penal Code
2. The Indian Evidence Act, 1872
3. Bankers Books Evidence Act, 1891
4. Reserve Bank of India Act, 1934

Its aims to provide the legal framework so that legal sanctity is accorded to all electronic records
and other activities carried out by electronic means.

Not applicable to Jammu and Kashmir State

1. DRT Act 24.06.1993
2. Bankers Books Evidence Act, 1891
3. Consumer Protection Act, 1986
4. Right to Information Act, 2005.

31