Legal and Regulatory Aspects of Banking

LEGAL AND REGULATORY ASPECTS OF
BANKING
MODULE A
• Banking in India is mainly governed by BRA-1949 & RBI Act
1934.
• There is a dual control over the banks by GOI & RBI.
• Applicability of these acts depends upon constitution of the
banks.
• Sec 5(b) of BRA defines banking as a institution which accepts
deposit from public for the purpose of lending and investment.
Such deposits are always payable on demand and
withadrawable by cheque, draft order or otherwise.
• Banker has right of refusal for undesirable person & opening
of a/c is subject to KYC/AML/CFT.
• Deposits may be accepted by NBFCs or unincorporated
associations of persons or individuals.
• Acceptance of deposit by NBFCs is regulated by RBI under
NBFC acceptance of public deposits directives of 1988.
• Acceptance of deposit by unincorporated bodies is prohibited
by RBI except by manufacturing or trading firms.
• Licencing for Banking:-Under sec 22 of BRA, RBI grants
licence for conducting banking business.
• Sec 7 of BRA permits use of words “Bank”, “Banker” ,
“Banking” as part of its name.
Permitted Business of Banks
• According to sec 6 of BRA, banks are permitted to undertake the
following business:
(a)
(i) Borrowing, raising or taking of money
(ii) Lending or advancing of money on a secured or unsecured basis.
(iii) Drawing, making, accepting, discounting, buying, selling, collecting
& dealing in B/E, PN, DD, BL, RR, warrants, debentures i.e.
transferable or non-transferable instruments.
(iv) Granting & issuing LC, TC and circulatory notes
(v) Buying, selling & dealing in bullion & specie (money in the form of
coins)
(vi) Buying, selling of forex including FCN & FTCs
(vii) Acquiring, holding, issuing on commission, Purchasing & selling
underwriting & dealing in debt, non-debt & hybrid securities.
(viii) Negotiations of loans & advances
(ix) Receiving of all kinds of bonds or scrips or valuables on deposit or
safe custody or otherwise
(x) Providing safe deposit vaults
(xi) Collecting & transmitting of money & securities
• According to sec 6 of BRA, banks are permitted to undertake
the following business:
(b) Carrying on agency business.
(c) Contracting for public & private loans and negotiating and
issuing the same
(d) Merchant Banking: Pre-issue management & Post issue
management.
(e) Guarantee and indemnity business.
(f) Manage, sell & realise any property which may come into its
possession in satisfaction of any of its claim.
(g) Acquire hold & deal with any property or any right, title or
interest in any such property which may form the security for
any loan or advance.
(h) Undertake & execute trusts.
(i) Undertake the administratin of estates as executor, trustee
or otherwise.
(j) Establish, support and aid associations, institutions, funds,
trusts etc., for the benefit of its present or ex-employees,
grant money for charitable purposes.
(k) Acquire, construct and maintain any building for its own
purpose
(l) Sell, improve, manage, develop , exchange, lease, mortgage
dispose of or turn into account or otherwise deal with all or
any part of the business of any person or company, when
such business is of a nature described in section 6.
(m) Acquire & undertake whole or any part of the business of any
person or company, when such business is of a nature
described in section 6.
(n) Do all such things which are incidental or conducive to the
promotion or advancement of the business of the company.
(o) Do any other business specified by the central government as
the lawful business of a Banking company. The central
Government has accordingly specified leasing and factoring
as permissible business for the Bank.
Prohibited Business
• Sec 8 of BRA prohibits a banking company from
engaging in trading activities and undertaking
trading risks.
• Buying, selling or bartering of goods directly or
indirectly is prohibited
• However, exception to this is business permitted
under sec 6, accordingly a bank can realise the
securities given to it or held by it for loan.
• Section 9 prohibits a banking company from
holding immovable property, except as required for
its own use, for a period exceeding 7 years from
the acquisition date.
• RBI may extend this period by anther 5 years if it
satisfied that such extension would be in the
interest of the depositors.
Constitution of Banks
i. Banks in India fall under the following categories:
(a) Body corporate constituted under special statute
(b) Companies registered under company’s Act 1956 or
foreign company.
(c) Co-operative society registered under central or state
enactment on co-operative societies.
ii. Public Sector banks include nationalised banks, SBI
& RRBs. 14 banks were nationalised under the
Banking companies (Acquisition and transfer of
undertaking) Act 1970 and 6 banks were nationalised
under the Banking companies (Acquisition and transfer
of undertaking) Act 1980.
SBI was constituted under SBI Act of 1955
RRBs are constituted under the RRB Act of 1976
These Banks are governed by statute
Constitution of Banks
iii. Banking Companies: section 5(c) of BRA defines
banking companies as a company which transacts
business of banking & constituted under sec 3 of
company’s act or a foreign company. These banks are
governed by the company’s act 1956 in respect of their
constitution and by the BRA & RBI Act with regard to
their business of banking
IV. Co-operative banks: Co-op bank is a co-operative
society under any central or state act for multi state co-
op societies. If co-op bank is operating in more than
one state then central act applies, in other cases state
act applies
• RBI ACT OF 1934
(a) To regulate the issue of bank notes, for keeping reserves & to
operate currency & credit system of the country. The act came
into force from 6th March 1934.
• It deals with constitution, powers & functions of RBI & does
not interfere in the banking system except section 42 which
deals with CRR.
• Sec 18 of the act provides for discounting of B/E & PN for the
purpose of regulating credit in the interest of trade, industry
& agriculture. The act in short deals with:
(i) Incorporation, capital, management & business of the bank.
(ii) Central banking functions like issue of bank notes, monitory
control, acting as a banker to the government, Lender of the
last resort
(iii) Collection & furnishing of credit information
(iv) Acceptance of deposits by NBFCs
(v) General provisions regarding reserve funds, publication of
bank rate, audit & accounts and
(vi) Penalties for violation of the provisions of the act or the
directions issued thereunder.
Banking Regulations Act 1949
• Act for regulating the banking companies.
• In 1965 the act was amended to cover co-op banks as
well.
• Does not apply to primary agricultural credit societies &
co-op land mortgage banks.
• Companies Act 1956 is applicable to banking companies
in addition to BRA-1949.
• Licence is required for entering in to banking business as
per Sec 22.
• The act also restricts shareholding, directorship, voting
rights of the banking companies.
• In short this act deals with (i) Regulation of business (ii)
Control over the management (iii) Suspension and
winding up (iv) Penalties for violation of provisions
• RBI as Central Bank & Regulators of Banks
• RBI had responsibility of (a) regulating the issue of
bank notes (b) Keeping of reserves for ensuring
monetary stability (c) to operate currency & credit
system.
• The whole capital is owned by Central Government.
• Functions under the supervision of central board of
directors & has to abide by the directions given by
Central Government in consultation of Governor in
public interest.
• The board consists of Governor & 4 deputy
governors appointed by Central Government.
• Sec 22 Sole Note issuing authority. May issue notes from
Rs.2 to Rs.10,000 denomination as Central Government
may decide on the recommendations of central board.
• Sec 20 Government’s Banker on the basis of agreement
as per sec 21A.
• Provides ways & means of advances to the Central &
State Governments as a temporary advances to meet the
immediate needs when there is a gap between
expenditure & revenue.
• Regulator of the Banking system, issues licences for
banking business, exercises control over the
shareholding & voting rights of the shareholders,
management & business of banks.
• Powers to inspect banks & supervisory powers & powers
to issue directions regarding interest rates, lending
limits & investment to banks in public interest.
• The major powers of RBI are as under:
(a) Power to licence
(b) Power of appointment & removal of banking
board/personnel
(c) Power to regulate business of banks
(d) Power to give directions
(e) Powers to inspect & supervise & audit of
banks
(f) Powers to collect, collate & furnish credit
information.
(g) Powers relating to moratorium,
amalgamation & winding up
(h)Powers to impose penalties.
• Government as a Regulator of Banks
• Central Government has been conferred extensive powers under RBI
Act & BR Act.
• Government holds entire capital & appoints Governor & member of
central Board & has powers to remove them.
• Government has powers to issue directions to RBI under sec 7(1) of
RBI Act in consultation with Governor.
• Government has powers to exercise control over RBI & has got
appellate authority in respect of several matters.
• Government has powers to suspend the operations of BRA or to
exempt from any of the provisions of the act on the recommendation of
RBI.
• Central Government exercises following powers:
(a) Approval for formation of subsidiary for certain business under sec
19.
(b) Notification with reference to accounts & balance sheet under sec 29
(c) Issue directions for inspection of banks under sec 35
(d) Power to acquire undertakings of banks (Sec 36AE)
(e) Appointment of court liquidator
(f) Suspension of business & amalgamation of banks under sec 45
• Control over the co-op Banks
(1) Co-op bank is a co-op society engaged in the business of
banking & may be primary co-op bank, District Central Co-op
bank or State Co-op bank.
• State co-op banks operating in one state only are registered
under state co-op society’s act.
• The formation of such banks, their management & control is
regulated by the co-op law of the state.
• The Registrar of co-op societies under the co-op society’s act
exercise wide range of powers on co-op societies from
Registration to winding up.
(2) Multi State Co-op Societies Act 2002 is applicable for Multi
State Co-op banks. Registrar appointed by Central
Government takes the place of Registrar appointed by State
government. Co-op banks came under the regulatory aspect of
RBI with introduction of sec 56 in BRA from 1965. There is a
dual control of state government & RBI on these banks.
• Regulation by other authorities
• Banking companies are subject to
Companies Act 1956, labour authorities,
income tax, service tax, regulations of
SEBI, IRDA
• State Whether the following statements are true or false
(1) A public sector bank is a body corporate created under special statute.
True
(2) A Banking company is registered under BRA-1949
False
(3) Co-op banks are registered under Multi State Co-op Societies Act or State
co-op societies Act.
True
(4) Accepting deposits for safe custody would fall within definition of banking.
False
(5) Central Government can give directions to RBI
True
(6) All kinds of business of banks is regulated only by the RBI.
False
(7) Central Government is the primary regulator of banks.
False
(8) State Governments have no control over co-op banks.
False
(9) On cancellation of licence of any bank, an appeal lies with the central
government.
True
• Fill in the gaps choosing the correct answer
(1) RBI was constituted under:
(a) BR Act (b) RBI Act (c) Companies Act
Ans: RBI Act
(2) RRB is a:
(a) Body corporate created under special statute
(b) A co-operative society
(c) A Company
Ans: (a)
(3) A government can exempt a bank from the provisions of BR Act:
(a) On the recommendation of RBI
(b) Whenever the government is satisfied
(c) If requested by a bank
Ans: (a)
(4) _____________exercises the central banking functions in India.
(a) State Bank (b) Central Bank of India (c) RBI
Ans: (c)
(5) Company matters of Banking company are regulated by:
(a) RBI (b) Authorities under Companies Act (c) SEBI
Ans: (b)
(6) Trading in shares & securities by banks is subject to regulation by:
(a) CCI (b) SEBI (c) Company Law Board
Ans: (b)
(7) Banking companies are licenced by:
(a) RBI (b) ROC (c) Company Law Board
Ans: (a)
(8) Business which banking company may undertake other than
banking is stipulated by:
(a) RBI (b) BR Act (c) RBI Act
Ans: (b)
(9) BR Act was enacted for:
(a) Regulating banking companies
(b) Creating Reserve Bank
(c) Regulating acceptance of deposits from public
Ans: (a)
UNIT-2 Control Over Organisation of Banks
• Licencing of Banking Companies
i) Licence requirement from RBI under sec 22 of BRA
ii) RBI has the discretion to grant or refuse the licence based on
relevant, material consideration.
iii) Conditions to be satisfied:
1) Ability to pay depositors as & when demand is raised &
the affairs should not be detrimental to the interest of the
present & future depositors
2) Adequate capital & earning prospect
3) Whether public interest will be served or not?
6) Potential scope for business
7) Fulfilment of any other condition put by RBI in the
interest of public & depositors
Sec 11 of BR Act specifies minimum capital requirement but RBI
may stipulate higher requirement of capital under sec 22 of
BRA.
• Control Over Organisation of Banks
• Licencing of Banking Companies- continued
iv) Foreign Banks: 3 additional conditions
1) Whether banking business will be in interest of the public?
2) Whether law or government of the foreign country discriminates
in any way against banking companies in India?
3) Whether the company complies with provisions of the BR Act
applicable to foreign companies?
v) Local Area Banks: Operating only in a limited geographical area
restricting their operations to specified local area.
vi) Cancellation of licence: sec 22(4) of BRA authorises RBI to cancel
the licence of any banking company on the following grounds:
(a) Company ceases to carry banking business
(b) fails to comply with any of the conditions imposed under BRA
(c) Does not fulfill anytime any of the conditions referred in sub
section 3 or 3A of section 22 of BRA (inspection of the books)
Before cancellation opportunity is given to fulfill conditions. Right to
appeal to Central Government within 30 days.
Branch Licencing:
i) Apart from banking business, banks are required to
obtain licence from RBI for opening the branches,
changing location of existing branch. These restrictions
are also applicable for foreign banks.
ii) For granting permission under sec 23 of BRA, RBI
require to be satisfied of the following:
(a) Financial condition & history of the bank
(b) General character of its management
(c) Adequacy of capital structure & earning prospects
(d) Public interest
This may be done by inspection by RBI under sec 35 of
BRA
iii) In case of RRBs, the application for permission is to be
routed through NABARD.
Paid up capital & Reserves
• Sec 11 of BRA provides for minimum requirement of paid up
capital & reserves for banks.
• The amount stipulated depends on place of business.
i) For foreign banks: Under Sec 11(2) of BRA foreign banks
has to deposit Rs.15 lacs with RBI, however if it has branch
in Mumbai or Kolkata the amount to be deposited is Rs.20
lakhs. Apart from this 20% profit for each year has to be
deposited with RBI. Central government has powers to
exempt from this requirement.
ii) Indian Banks: Under sec 11(3) of BRA requirement of
minimum capital & reserves are as follows:
(a) Branches in more than one state Rs.5 lakh and if the
bank has branch at Mumbai or Kolkata then Rs.10 lakh.
(b) If the bank is operating only in one state then Rs.1 lakh &
if bank has branch at Mumbai or Kolkata then addition
Rs.10,000/- for additional branch in a district Rs.20,000
additional for each place, total not exceed Rs.5 lakh.
Paid up capital & Reserves
(c) If places of business are in one state only, but one or

more of them is in Mumbai or Kolkata then Rs.5 lakh +
Rs.25000/-for each branch, aggregate not to exceed
Rs.10 lakhs.
This limit is raised by RBI to Rs.300 crores in 2005 for
new private banks for FDI purpose.
iii) Paid up, subscribed & Authorised capital: Under sec
12(1) subscribed capital shall not be less than half of its
authorised capital & paid up capital shall not be less
than half of its subscribed capital. Banking companies
are permitted only to have ordinary or equity shares.
From 2005 RBI permitted bank to raise capital in
innovative debt instrument which are perpetual & non
cumulative preference shares in addition to the equity
capital.
SHARE HOLDING IN BANKING COMPANIES
i) Voting Rights of Shareholders: Under sec 12(2) no
restriction on No. of shares but restriction is on voting rights
which is maximum 10% of the total voting rights, No
restriction on transfer of shares.
ii) Acknowledgement by RBI: To ensure controlling interest,
Banking companies are under obligation to inform RBI if they
receive shares for transfer more than specified limit.
iii) Reports on share holding: Report regarding full particulars
of shareholding by the chairman, MD, CEO is required to be
submitted to RBI.
iv) Commission, Brokerage, Discount: Maximum commission
brokerage, discount or remuneration on the sale of shares
should not exceed 2.5% of paid up value of share.
v) Dividend: As per Sec 15 of BRA, no dividend is payable untill
all capital expenses are written off. However, dividend is
payable without writing off depreciation & bad debt.
• Subsidiaries of Banking Companies: Subsidiaries are
permitted only for the following purposes:
(i) Only for permitted business under sec 6 (1)
(ii) For carrying business outside India exclusively
(iii) Undertaking any other business which RBI may permit in
consultation of Central Government.
There is a ceiling on shareholding in companies other than
subsidiaries & shall not be more than 30% of paid capital of
the company or the paid capital & reserves of the bank.
Qualification of Board of Directors: Sec 10A of BRA stipulates
certain qualifications for directors. Atleast 51% should have
special knowledge, practical experience regarding
accountancy, agriculture, rural economy, banking, co-
operation, economics, finance, law, SSI etc
Period of office: Director should not hold office for more than 8
years continuously. It does not apply to Chairman & Whole
time director.
If chairman & whole time director are removed then not eligible
as director for further period of 4 years.
• Controls Over Management
• Under Sec 36AA of BRA, RBI has powers to remove any
chairman, director, CEO or other officer or employee of
bank in the following circumstances:
(a) Public interest
(b) Conducting affairs of the bank to the detriment of
depositor.
(c) Securing proper management
• Order has to be passed in writing giving opportunity to
the affected person. Such person on removal is not
entitled for any compensation. The person has a right of
appeal with Central Government.
• Such person is prohibited to take part in banking affairs
for 5 years. Contravention is subject to fine of Rs.250
per day.
• Regulation of Banking Business
• RBI has been vested exclusive powers under sec 35
of BRA on:
• Acceptance of Deposits
• Nominations
• Loans & Advances
• Regulations of interest rates
• Regulation of payment systems
• Internet Banking Guidelines
• Regulation of Money Market Instruments
• Banking Ombudsman
• Reserve Funds
• Management of Cash Reserves
• Maintenance of Liquid Assets
Reserve Funds
• Every Banking company is required to create reserve
fund u/s 17(1) of BR Act out of the profit.
• Minimum 20% of profit is to be transferred reserve
fund before declaration of dividend.
• If bank is having sufficient network to meet its
deposit liabilities, RBI may recommend to GOI to
exempt from trf of profit to reserve.
• Appropriation from reserve fund or share premium
a/c has to be reported to RBI within 21 days.
• This requirement is not applicable to foreign banks.
Reserve Funds
• CRR is to be maintained by SCB as prescribed by RBI on a
average daily balance.
• DTL does not include capital & reserves & credit balance of
P & L A/c
• Further amount borrowed from RBI, IDBI, EXIM Bank,
NHB, NABARD & borrowing from other banks are
excluded.
• RBI does not pay any interest on CRR balances.
• Details of demand & Time liabilities has to be submitted by
Banks to RBI as on every alternate Friday within 7 days.
• Penalty for non-maintenance of CRR is 3% above bank rate
for the first fortnight & 5% above bank rate for the next
fortnight.
• Non-scheduled banks need not maintain cash balance for
CRR with RBI but it may be with bank itself.
(1) The director of a banking company should not
have__________in any other company.
(a) Beneficial interest
(b) Any interest
(c) Substantial interest
(d) Majority interest
Answer is (c)
• Unit-4 Returns, Inspection, Winding up, Mergers
& Acquisitions
• Annual Accounts & Balance Sheet:
• All listed banks are required to publish their
unaudited quarterly B/S & P&L as per sec 29 of
BRA. The B/s has to be signed by manager or
principal officer & atleast 3 directors. If more than 3
directors, then by all the directors.
• Banking companies need not submit B/S, P & L to
ROC because BRA supersedes companies Act.
• Foreign banks have to display in their principal office
copy of last audited B/S & P & L a/c not later than
first Monday in August of any year until replaced by
new B/S.
AUDIT & AUDITORS
• B/S & P & L need to be audited u/s 30 of BRA.
• Powers & Functions of Auditors: Following additional
information to be submitted by Auditors.
(a) Information & explanation was found to be satisfactory
(b) Transaction of the company as noticed by himshows a
true were within the powers of the company.
(c) Returns from branches were adequate for the audit.
(d) P & L a/c shows true profit or Loss for the period
covered.
(e) Any other matter which the auditor considers necessary
to bring to the notice of the shareholders
RBI is empowered to order special audit u/s 30(1B) of BRA
in the interest of the public & depositors.
SUBMISSION OF RETURNS
• Every banking company a has to submit return in prescribed
format of its liquid assets u/s 24(3) of BRA within 21 days
from the end of the month. The return should contain
particulars of assets & demand & time liabilities as at the
close of the business of each alternate Friday & preceding day
if the Friday is holiday.
• Every month, bank has to submit its assets & liabilities at the
close of the business on the last Friday of previous month.
• Annual accounts & B/S have to be submitted to RBI within 3
months from the end of the period to which they relate. RBI
may extend this time further by 3 months.
• Quarterly return regarding assets in India within 1 month of
the end of the quarter.
• Return of unclaimed deposits: has to be submitted within 30
days of the close of each calendar year for a/cs not operated
for 10 years.
• Return of Cash Reserve of Non-Scheduled banks: Every NSCB
has to furnish a return of Cash reserve to RBI u/s 18(1) of
• PRESENTATION OF RECORDS & RETURNS OF PAID
INSTRUMENTS
• Sec 45Y of BRA gives power to GOI to make rules
specifying the period of preservation of books, accounts &
documents & different instruments paid by the bank.
Central government has notified Banking Companies
(Preservation of Records Rules 1985.
• These rules have given exclusive powers u/s 35A(1) to
RBI to direct any bank, longer period of preservation for
records.
• Transactions & information (a) Nature of the transaction
(b) amount of the transaction & currency (c) Date of
transaction (d) Parties to the transaction has to be
preserved by Banks as per provisions of PMLA-2002.
• Banks should ensure that record pertaining to
identification of the customer, address, PAN card, utility
bills are preserved for minimum period of 5 years after
the business relationship
Inspection and Scrutiny
i) u/s 35 of BRA RBI is empowered to inspect any bank at any
time. GOI may direct RBI to conduct inspection of any bank
& RBI is bound to comply the same. Copy of inspection
report is to be provided to bank, bank & its officials are
bound to provide books, accounts, document, statement or
information within specified time.
ii) Copy of report is to be provided to GOI if directed by GOI, in
other cases it is optional. If the central government is of the
opinion that the affairs are detrimental to the interest of the
depositor then GOI may prohibit bank from accepting
deposit or may direct RBI to apply for winding up of the bank
u/s 38 of BRA after providing opportunity to bank to
represent.
iii) RBI is also empowered to scrutinise the affairs & books of
accounts, a copy of the same on request has to be provided
to bank. However, it is not mandatory for RBI.
Board for Financial Supervision (BFS)
• BFS is a board set up by RBI with sanction of GOI & has
jurisdiction over Banking companies, nationalised bank & SBI
& its subsidiaries.
• The Board consists of Governor, Deputy Governors, 4 directors
from the central board of RBI nominated by GOI.
• Board performs the functions & exercises powers of
supervision under RBI Act & BRA in respect of financial sector
including banks. Board shall perform any other function
notified by the central government,
• Board meets atleast once in a month. Board has powers to
constitute executive committee, Advisory council.
• Acquisition of Undertakings: GOI has powers to acquire any
Bank on consultation with RBI if the bank fails to comply with
the RBI directions u/s 21 or 35A of BRA. GOI is also
empowered to make scheme for the acquisition & to decide
compensation to shareholders.
Amalgamation of Banks
i) Voluntary Amalgamation
ii) Amalgamation by Government
iii) Moratorium & Amalgamation
iv) Preparation of Scheme of Amalgamation
v) Sanction of Scheme by Government
vi) Effect of Sanction
Winding up of Banks:
i) Suspension of Business & Winding U
ii) Winding Up by High Court
iii) Official Liquidation
iv) RBI as a liquidator
v) Preferential Payment as per sec 530 of companies Act
vi) Voluntary Winding UP
1) RBI is empowered to conduct______ of a Banking company
u/s 35A(1) of the BR Act.
a) Inspection b) Special Audit
c) Audit d) None of the above
Answer is (a)
2) Which of the following statements are true?
(i) Foreign Banks have to prepare accounts & B/S in respect
of all business transacted by them in India.
(ii) RBI requires permission of the GOI for ordering special
audit of a Banking Company.
(iii) 3 copies of B/S, P&L account & auditor’s report of a
Bank have to be submitted to the RBI as returns.
(iv) A copy of scrutiny report has to be given to the banking
company whether requested or not
(a) (i) (b) (ii) (c) (i) & (ii) (d) (ii) & (iv)
Answer (i) & (iii)
3) ______ may apply to the High Court for winding up of a banking company u/s
38 of BRA.
a) Registrar of Companies
b) Reserve Bank
c) Central Government
d) Finance Ministry
Answer is (b)
4) Which of the following statement is/are true?
(i) Central Government can acquire the undertaking of a Bank u/s 36AE of
BRA in the interest of the banking policy without any report from the RBI
on the affairs of the Banking company
(ii) The undertaking of acquired bank may vest in the Central Government
or in , any company or corporation as directed by Central Government
(iii) On the application of RBI the High Court may stay the commencement
or continuance of proceedings against any banking company for any
period.
(iv) RBI or SBI or another person as specified by RBI in its application
before High Court may be appointed as liquidator of a banking company.
(a) (i) & (ii) (b) (iii) & (iv) (c) (ii) & (iv) (d) (i) & (iii)
Answer is (c)
PSU BANKS & CO-OPERATIVE BANKS
• PSU BANKS namely SBI & its subsidiaries,

nationalised & RRBs are established by special
statute. Statute & the rules. Regulations & or
schemes framed there under provide the powers,
functions & management of these banks.
• Co-operative banks are created & governed by
the laws relating to co-operative societies, if they
operate in one state, the state act & if they
operate in different states, the central act
applies. BRA is applicable to co-operative banks
in a modified manner as per sec 56 of the act.
State Bank & Its Subsidiaries
• SBI was established u/s 3of SBI Act, 1955 taking over
Imperial Bank, It is a body corporate with perpetual
succession & common seal. Majority shares held by GOI.
Shareholders other than GOI may exercise 10% voting right.
• Superintendence & direction of the affairs is vested with
central Board. Central Government can give directions to the
bank on the matters of policy involving public interest in
consultation with RBI Governor & Chairman of SBI.
• Board consists of chairman, not ore than 4 managing
directors appointed by central government & other directors.
• CMD are appointed for a period not exceeding 5 years & are
eligible for re-appointment & can be terminated by CG by
giving 3 months notice or pay in lieu thereof in consultation
with RBI.
• SBI shall act as a agent of RBI where RBI has no branch.
• Should close Books & B/S as of 31st March & should furnish
to GOI & RBI with auditor’s report.
REGIONAL RURAL BANKS
• RRBs are PS institutions regionally based, rural oriented & engaged in
commercial banking. Were set up in 1975 under RRB Ordinance 1975
replaced by RRB Act 1976. The object is to develop rural economy by
providing credit for the purpose of Agriculture, trade, commerce,
industry & other productive activities in rural areas, particular to small
& marginal farmers, agricultural labourers, artisans & small
entrepreneurs.
• Sponsor Bank is a bank by which RRB is sponsored & holds 35%
capital, Central Government 50% & State Government holds 15%
• Management vests with the Board which is empowered to make
regulations in consultation with the sponsored bank & with previous
approval of central government.
• The Board consists of chairman appointed by sponsored bank in
consultation with NABARD.
• Business as per sec 5(b) & u/s 6(1) with main thrust on small &
marginal farmers, service societies, artisans, small entrepreneurs within
the notified area.
• Every RRB has to close its accounts as on 31st March.
• Two or more RRBs may be amalgamated by central government by
notification.
NATIONALISED BANK
• Bank Nationalisation Acts:
• Banking Companies (Acquisition & Transfer of
Undertakings) Act of 1970 & 1980 through which GOI
acquired private banks. Originally 100% capital was held
by GOI but later on GOI permitted these nationalised
Banks to raise capital from market.
• Shares held by other(except GOI) are freely transferable
& shareholders have maximum 1% voting rights.
• Every nationalised bank is a corporate body having
perpetual succession & common seal. They are permitted
to undertake banking business as per sec 5(b) & Sec 6(1)
of BRA.
• Nationalised banks have to act as a agent of RBI for
Government business.
NATIONALISED BANK
• Management is with the Board which consists of 4
directors appointed by GOI. GOI can nominate
maximum 6 directors.
• Shareholders can elect maximum 3 directors. RBI
may appoint one or more additional directors.
• Every nationalised bank has to close its accounts as
on 31st March.
• Nationalised bank may pay dividend after making
provisions
• AGM has to be held within 6 weeks after submission
of audited B/S, P&L to GOI.
Co-operative Banks
• Co-op banks are registered under the state laws governing
co-operatives or under Multi State co-op societies Act.
• If a co-op bank operates only in one state then state law
applies, if it operates in more than one state then central
Act applies.
• State/Central Act deals with constitution but for
conducting banking business BRA applies.
• A co-op bank means State Co-op Bank, Central Co-op Bank
& a primary co-op bank.
• A Primary co-op bank is a co-op society other than a
primary agricultural society whose principal business is of
banking & networth is not less than Rs.1 lakh. Byelaws do
not permit admission of any other society as a member.
• A State Co-op Bank is the principal co-op society in a state
with a primary objective of financing other societies.
Co-operative Banks
• A Central Co-op bank is the principal co-op society in a
district with the primary objective of financing other co-op
societies in district.
• No Co-op societies except co-op bank can use the word Bank,
Banking Company.
• Minimum paid up capital of co-op bank should be minimum
Ra.1 lakh
• CRR of minimum 3% of NDTL.
• U/S 20 of BRA co-op bank can not grant loans & advances on
the security of its own shares, unsecured loans to any of its
director, unsecured loans to any firm or private company in
which director or chairman of the bank has controlling
interest.
• Every co-op society requires licence from RBI to carry on
banking business u/s 22 of BRA.
Co-operative Banks
• A co-op bank requires prior permission of RBI for opening new
branch, changing existing branch except opening of temporary
branch for max 1 month on the occasion of exhibition,
conference or Mela etc.
• Co-op bank has to maintain liquid assets as per sec 24(1) of
BRA.
• Every co-op bank has to prepare B/S, P&L as on the last
working day of the year. 3 copies of B/S, P&L alongwith
Statutory Auditor’s report is to be submitted to R.BI &
NABARD
• RBI has powers to inspect books of accounts of any co-op
bank.
• Every co-op bank must register itself with DICGC u/s 13 C
• RBI has powers for winding up of co-op banks u/s 130 of
DICGC Act.
1) SBI is a_______Constituted under the SBI Act.
a) Banking Company
b) Body Corporate
c) Society
d) Financial Institution
Answer is (b)
2) Co-op bank has to prepare its B/S & P&L account in the form set out
in the third schedule to________.
a) Banking Regulations Act
b) RBI Act
c) State Co-op Societies Act
d) Central Co-op Societies Act
Answer is (a)
3) A Co-op Bank means:
a) A Primary Co-op Bank
b) A Central Co-op Bank
c) A State Co-op Bank
d) All of the above
Answer is (d)
MODULE-B
LEGAL ASPECT OF BANKING
OPERATIONS
• Unit 6- Case Laws on Responsibilities of Paying Bank
• Unit 7-Case Laws on Responsibilities of Collecting Bank.
• Unit 8-Different Types of Borrowers
• Unit 9-Types of Credit Facilities
• Unit 10-Indemnities
• Unit 11-Bank Guarantees
• Unit 12-Letter of Credit
• Unit 13-Deferred Payment Guarantee
• Unit 14-Law Relating to Bill Finance
• Unit 15-Various Types of Securities
• Unit 16-Law Relating to Securities & Modes of charge-I
• Unit 17-Law Relating to Securities & Modes of charge-II
• Unit 18-Registration and Satisfaction of Charges
UNIT 6 CASE LAWS ON RESPONSIBILIT OF PAYING BANK
• N.I. Act 1881 lays down the law relating to payment of

customer’s cheque by banker & protection available to the
banker. Due to debtor-creditor relationship banker is bound to
honour the mandate & pay cheque drawn by customer.
• Section 10, 85, 85A, 89 & 128 grant protection to paying
banker.
• NEGOTIABLE INSTRUMENT ACT & PAYING BANKER
• u/S 31 Banker is under obligation to pay the cheque if there is
sufficient balance, in case bank defaults must pay
compensation to the drawer.
• Sec 31 applies only to bankers because as per sec 6 of NI Act
cheque has been defined as a bill of exchange on a specified
banker & always payable on demand.
• Funds available in the customer’s account should be available
properly i.e. Banker should not have availed right of set off or
funds of the customer are not attached by garnishee order.
• Cheque must be properly drawn & signed by the drawer
• In case the banker refuses payment wrongfully, then he is

liable only to the drawer & not to any endorsee or holder.
• PROTECTION TO PAYING BANKER: If the banker has made
payment in due course as per sec 10.
• Payment in due course means payment in accordance with
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.
• Payment in due course requires payment to be made:
(a) In accordance to the apparent tenor of the instrument.
(b) In good faith & without negligence
(c) To the person in possession of the instrument
(d) There is no reason to believe that the person in possession is
not entitled to receive the payment.
• Sec 85 grants protection to paying banker as under:

1. Where cheque payable to order purports to be endorsed by or
on behalf of the payee, the drawee is discharged by payment
in due course.
2. Where a cheque is originally expressed to be payable to
bearer, the drawee is discharged by payment in due course to
the bearer thereof, despite any endorsement purports to
restrict or exclude further negotiation.
• Section 89 in The Negotiable Instruments Act, 1881
• Payment of instrument on which alteration is not apparent.—
1] Where a PN, B/E or cheque has been materially altered but
does not appear to have been so altered, or where a cheque
does not appear to be crossed or crossing is obliterated,
payment thereof by banker according to the apparent tenor, in
due course is discharged for such payment & shall not be
questioned by reason of the instrument having been altered,
or the cheque crossed.
• Section 89 in The Negotiable Instruments Act, 1881

2) Where the cheque is an electronic image of a truncated
cheque, any difference in apparent tenor of such electronic
image and the truncated cheque shall be a material alteration
and it shall be the duty of the bank or the clearing house, as
the case may be, to ensure the exactness of the apparent tenor
of electronic image of the truncated cheque while truncating
and transmitting the image.
3) Any bank or a clearing house which receives a transmitted
electronic image of a truncated cheque, shall verify from the
party who transmitted the image to it, that the image so
transmitted to it and received by it, is exactly the same.
LIABILITY OF PAYING BANKER WHEN CUSTOMER’S
SIGNATURE ON THE CHEQUE IS FORGED
1) When the customer’s signature on the cheque is forged, there
is no mandate to the bank to pay. As such banker is not
entitled to debit the customer’s account on such forged
cheque.
2) In a joint account, if one of the signature is forged, there is no
mandate & banker can not make payment.
3) PAYMENT TO BE IN DUE COURSE FOR BANK TO SEEK
PROTECTION
4) PAYMENT IN GOOD FAITH WITHOUT NEGLIGENCE OF AN
INSTRUMENT ON WHICH ALTERATION IS NOT
APPARENT.
• Supreme Court passed a land mark judgment in case Bank of
Maharashtra v. M/s Automotive Engineering Co. (1993).
Supreme Court dealt with the effect of sections 10, 89 and 31
of Negotiable Instrument Act and their impact on the paying
banker.
• BOM referred an appeal to Supreme Court. The Supreme Court
allowed the appeal of the bank on the following grounds:
1. Section 89 of the N.I.Act gives protection to the paying banker of a
cheque which has been materially altered but does not appear to
have so altered, if payment was made according to the apparent
tenor thereof at time of payment and otherwise in due course.
2. Section 10 of the Act defines payment in due course to mean
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 do not afford a reasonable
ground for believing that he is not entitled to receive payment of the
amount therein mentioned.
3. Section 31of the said Act obliges the drawee bank having sufficient
funds of the drawer in his account for payment of such cheque.
4. On visual examination no sign of forgery tampering with the
writings on the cheque could be detected. The agent of the appellant
bank had verified the serial number and signature on the cheque
and had compared the signature on the cheque with the specimen
signature of the respondent and on scrutiny of the cheque visually
no defects could be detected by him. There was no evidence to hold
that the payment was not made in good faith.
• Simply because the ultraviolet ray lamp was not kept in the branch
and the said cheque was not subject to such lamp, would not be
sufficient to hold the appellant bank guilty of negligence.
• 5. In such circumstances, it is not correct legal proposition that the
bank, in order to get absolved from the liability of negligence, was
under an obligation to verify the cheque for further scrutiny under
advanced technology for that matter under ultraviolet ray lamp apart
from visual scrutiny even through the cost of such scrutiny was only
nominal and it might be desirable to keep such lamp at the branch
to take aid in appropriate case.
• 6. The lower courts were not justified in holding that the bank had
failed to take reasonable care in passing the cheque for payment
without subjecting it for further scrutiny under ultraviolet ray lamp
because the branch was in the industrial area where such forgery
was rampant and other branches of the appellant were provided with
such lamp.
• The appeal was, therefore allowed and the suit of the appellant bank
was decreed for the principal amount without any interest on the
same.
• The protection granted to a banker under section 89 had held by
courts from time to time.
PAYMENT BY BANK UNDER MISTAKE WHETHER
RECOVERABLE
• If payment has been made by a banker in mistaken belief, can
it be recovered from the payee? This question was examined
by Kolkata High Court in United Bank of India vs M/s A.T. Ali
Hussain & co and others (AIR 1978, Kolkata 169). The facts of
the case were as under:
• M/s A received a cheque for Rs. 5200/- from a customer who
purchased some goods from them. They sent the cheque to
their banker, Union bank, for collection. When the collecting
bank advised them that the cheque had been realized, they
delivered the goods to the people who gave the cheque.
• The paying banker, United Bank of India, subsequently found
that the drawer’s signature on the cheque had been forged and
that the payment has been made by mistake. It filed a suit for
recovery of the amount from the Union Bank and M/s A.
• The court found that the forgery of the cheque on the cheque
had been done so skillfully that it could not be detected by a
trained eye.
PAYMENT BY BANK UNDER MISTAKE WHETHER
RECOVERABLE
• Even the authorized signatory found it difficult to deny his
signature on the forged cheque. The High Court, therefore,
held that the paying banker was neither negligent nor careless
in paying the cheque. The payment was made under a
mistaken belief that the instrument was genuine.
• According to section 72 of Indian Contract Act, a person to
whom money has been paid or anything delivered by mistake
or under coercion must repay it. But this rule is qualified by
the Doctrine of Equity. The Doctrine disfavors unjust
enrichment. If a payee has not been enriched unjustly, he
cannot be required to repay. In other words, if the position of
the payee has not been altered to his detriment, he must repay
the money to the payer. But if the position of the payee has
been changed to his prejudice, and thereafter the mistake has
been detected, he cannot be held liable.
Cheque Truncation System (CTS) or Image-based
Clearing System (ICS)
• IT is a project of the RBI started in 2010, for faster clearing of

cheques. CTS is based on a cheque truncation or online
image-based cheque clearing system where cheque images
and magnetic ink character recognition (MICR) data are
captured at the collecting bank branch and transmitted
electronically.
• Cheque truncation means stopping the flow of the physical
cheques issued by a drawer to the drawee branch.
• An electronic image of the cheque is sent to the drawee branch
along with the relevant information like the MICR fields, date
of presentation, presenting banks etc.
• This eliminates the need to move the physical instruments
across branches, except in exceptional circumstances,
resulting in an effective reduction in the time required for
payment of cheques, the associated cost of transit and delays
in processing, etc., thus speeding up the process of collection
1) The law relating to the payment of cheque & protection to a
banker is contained in:
a) Indian Contract Act
b) RBI Act
c) BRA
d) N.I.Act 1881
Answer is (d)
2) A customer is bound to inform the____about lost cheque
leaves.
(a) Payee (b) Endorsee (c) Collecting Bank (d) Drawee Bank
Answer is (d)
3) In a joint account if one of the signature is forged:
a) The bank & customer are equally liable
b) Only the customer is liable
c) Only the bank is liable
d) No one is liable
Answer is (c)
4) Payment to be made in due course:
a) Need not always be made to holder but
can be made to his agent or servant
b) has to be made to holder but can be
made to his agent or servant.
c) Made to customer’s agent or servant
d) All above are correct
Answer is (a)
CASE LAWS ON RESPONSIBILITY OF COLLECTING BANK
• Statutory Protection to Collecting Bank
• Sec 131 of N.I Act grants protection to collecting banker as
under:
1. Non-liability of a Banker Receiving Payment of Cheque: A
Banker, who has, in good faith & without negligence, received
payment for a customer of a cheque crossed generally or
specially to himself shall not, in case the title to the cheque
proves defective, incur any liability to the true owner of the
cheque by reason only of having received such payment.
A banker receives payment of a crossed cheque for a
customer within the meaning of the section despite that he
credits his customer’s account with the amount of the cheque
before receiving the payment.
The provision of the above section have been applied to drafts
as per section 131 A of N.I.Act
CASE LAWS ON RESPONSIBILITY OF COLLECTING BANK
• Statutory Protection to Collecting Bank
2. Conditions for protection: Sec 131 grants conditional protection to
a collecting bank. For collecting bank to claim protection u/s 131,
he has to comply with certain conditions:
(a) Should act in god faith & without negligence
(b) Should receive the payment for a customer only
(c) The cheque should be crossed generally or specially to himself
DUTIES OF THE COLLECTING BANK:
i. Duty to open the account with reference & sufficient
Documentary Proof
ii. Duty to confirm the reference where the referee is not known or
has given reference in absentia.
iii. Duty to ensure crossing & Special Crossing
iv. Duty to verify the Instruments or any Apparent Defect in the
Instruments:
v. Duty to take into Account the state Customer’s Account
vi. Negligence of Collecting Bank in Collecting cheques Payable to
Third parties
1) Sec 131A of the N.I.Act extends the protection granted to a
Banker while:
(a) Receiving payment of a cheque & drafts
(b) Making payment of a cheque & drafts
(c) Endorsing payment of a cheque & drafts
(d) All the above
Answer is (a)
2) The duties of collecting bank to claim protection has been laid
down under the:
(a) Indian Contract Act
(b) Banking Regulations Act
(c) Negotiable Instruments Act 1881
(d) Banking Companies Rules
Answer is (c)
3) In the absence of proper reference the banker can be held liable
on the grounds of:
(a) Negligence (b) Connivance (c) Crime (d) Arrogance
Answer is (a)
Different Types of Borrowers
• The borrower of a bank may be Individuals, Partnership Firms,

HUF, Companies & other Corporate entities.
• TYPES OF BORROWERS
(1) Individual (2) Partnership Firm (3) HUF
(4) Companies (5) Statutory Corporations
(6) Trust & Co-op Societies (7) Limited Liability Partnerships
(1) INDIVIDUAL: One of the customer of the bank. While lending
to Individual bank should ensure that he is competent to
enter in to a contract. If he is incompetent the loan can not be
recovered in the following circumstances:
(i) If an Individual is Minor: Person below 18 years is considered
minor. Minor is not competent to contract & cannot be lent
except for his own benefit through his natural guardian.
(ii) If an Individual is not f a sound mind
(iii) Disqualified person, insolvent
PARTNERSHIP FIRM
• Sec 4 Indian Partnership Act, 1932 defines partnership as 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 &
governed by partnership deed.
• Legal Position of a partnership: Partnership is not distinct
from its partners. As per Indian Partnership Act partnership
deed should be registered to understand names & relationship
of partners.
• Sec 19 of Indian Partnership Act deals with implied authority
of a partner as an agent of the firm & sec 22 deals with the
mode of doing acts to bind the firm.
• Business of Partnership Firm; How it is done?
• Rights & duties are determined by the deed of partnership,
provides for opening the bank account, borrowing powers,
signing of cheques etc.
PARTNERSHIP FIRM
• Partnership firm & transactions in Immovable
Property:
• u/s 19 of Indian Partnership Act, partner can not affect
the transfer of immovable property of the firm unless
expressly authorised. Banker taking mortgage security of
immovable property should ensure that the partner
creating the mortgage is expressly authorised to do so. If
there is no specific authority to a particular partner then
signatures of all the partners should obtained.
• Insolvency of the Firm: Upon receiving notice of
insolvency of the firm, must stop further transactions
immediately. Credit balance in the account will be
handed over to the official receiver appointed by the
court. If in debit, bank must lodge the claim with official
receiver.
PARTNERSHIP FIRM
• Insolvency of the Partner: If at the time of insolvency
of the partner, account is in credit then other partners
can operate the same with fresh mandate & all
previous cheques issued by insolvent partner may be
with the consent of other partners.
• Death of the partner: In case of death the principals
as stated in Insolvency of a partner apply. Since death
of the partner dissolves the partnership firm, upon
receipt of such information, bank should stop
transactions in a running credit facility like CC, OD &
make his/her estate liable for its dues.
• Banks allow transactions in separate account so
that business of the firm is not adversely affected.
HINDU UNDIVIDED FAMILY (HUF)
• HUF KNOWN AS “Joint Hindu Family” is a creature of
customary law & is governed by personal law. In Bengal HUF
is governed by Dayabhag Law & in other parts it is governed
by Mitakshara Law.
• HUF consists male members together with their mothers,
wives or widows & unmarried daughters bound together by
fundamental principle of family relationship which is the
essence & distinguishing feature of the HUF.
• Succession is governed by Hindu Succession Act, 1956
according to which woman member also inherit properties at
par with a male member & is treated as co-parceners.
• Senior most male member of the family is entitled to manage
the family property & is called “Manager” Or “Karta” &
occupies superior position. Looks after the family interest on
behalf of the other members. It comes by birth & not on the
consent of co-parceners. The liability of Karta is unlimited
whereas liability of co-parceners is limited to their shares.
HINDU UNDIVIDED FAMILY (HUF)
• Karta has following powers & Duties:
• (a) Right to possession & management of the joint family
• (b) Right to income from the joint family property.
• (c) Right to represent the joint family
• (d) Right to sell the joint family property for family purpose.
• Duties:
• (a) Duty to run the family business & manage the property for
the benefit of the family.
• (b) Duty to account for the income from the joint family
business & Property.
• Banker & his Dealing with Joint Family:
• (a) Banker dealing with HUF should know Karta of the family.
• (b) Banker should ensure that “Karta” of the joint family deals
with the bank for the benefit of the family
• (c) The AOF must be signed by all the members & adult
members should be made jointly & severally liable.
Companies
• A company is a legal person created by law, having perpetual
succession, common seal and distinct from members &
governed by Companies Act 2013.
• According to Sec 11 of Companies Act 1956an association or
partnership having more than 10 in case of Banking business
& more than 20 in case of other business, shall be registered
under company’s act, if not registered, will be illegal.
• Sec 12 provides that any 7 or more person or where company
formed is Private company, any 2 or more persons can form a
company by subscribing their names to the MOA.
• MOA of the company contains: (a) Name of the Company (b)
State in which registered office is located (c) Objects of the
company (d) Liability of the members (e) Share Capital & its
division.
• Articles of Association includes: (a) No.of directors (b)
Procedure for conducting meeting of the share holder, Board of
Directors (c) Procedure for transfer of share (d) Borrowing
Power, Officers of the company.
Companies
• Types of companies:
(a) Private Limited: Following provisions in AOA
• (i) Restrictions on the right to transfer its share
• (ii) Max number of member 50
• (iii) Prohibition to general public to participate
(b) Public Company:
• (i) Shares are freely transferable
• (ii) No restriction on number of members
• (iii)Public at large can participate
Public Companies can be further classified as:
• (i) Limited Liability Company
• (ii) Unlimited Liability Company
• (iii) Limited by Guarantee
Companies
• Types of companies:
(c) Government Companies: A company in which
Central/State Govt has not less than 50% of the
share capital.
(d) Other Companies: Companies Act 1956 classifies
companies on the basis of time, place of
incorporation, nature of working Share Capital in to
the following categories:
(i) Existing Company (ii) Foreign Company
(iii) Holding Company (iv) Subsidiary Company etc
5) Statutory Corporations: Corporations established
under Act of Parliament are called as “Statutory
Corporation”. For e.g. SBI is established under SBI Act
1955, Nationalised Banks are established under
“Banking Companies (Acquisition & Transfer) of
Undertaking Act of 1970 & 1980. These Act provide for
making rules, regulations by the Government for the
corporation Which defines scope, objects & range of
business of the corporation.
6) Trust & Co-operative Societies:
Such bodies, if not incorporated under laws governing
them, can not enter in to any transaction. These bodies
are usually governed by Companies Act or the Co-op
Societies Act & function within the ambit of these laws.
For e.g. Clubs can be registered under Companies Act,
Societies Registration Act or Co-op Societies Act. Banker
should study the bye-laws, rules & Regulations
applicable to them while lending.
7) Limited Liability Partnership:
LLP is alternative corporate business form which
gives the benefits of limited liability of a company &
flexibility of partnership. LLP can continue
irrespective of changes in partners & is capable of
entering in to contracts & holding property. It is a
separate legal entity liable to the full extent of its
assets but liability of the partners is limited to their
agreed contribution. No partner is liable on a/c of
independent or un-authorised action of other
partners & shielded from joint & several liability.
Rights & duties of the partners are governed by an
agreement between the partners & LLP as the case
may be. LLP is called as hybrid business entity.
Detailed Provisions Pertaining to the Types of Borrowers
A. Registration of Partnership Firms:
As per sec 56 to 68 of Indian partnership Act, 1932, it is
advisable to register the partnership firm.
Rectification of Mistake: Registrar has powers to rectify any
mistake in conformity with documents.
Amendment of Register by Court’s Order:
Inspection: The register of firms is to open to inspection by
any person as well as copies of any entry can be obtained on
payment of prescribed fee.
u/s 68(1) any statement, intimation or notice recorded or
noted in the Register of Firms is having evidentiary value.
False entry, statement in Registrar of Firms is Punishable
offense.
U/s 69 Non-Registration of firms deprives it from (i) Suits by
partners inter se (ii) Suits by firm against third parties
B. Incorporation of a Company
The main characteristics of a company are as under:
(i) It is a voluntary association of persons who have come
together to carry on some business for profit
(ii) It has perpetual existence & though member come & go, the
company continues forever. Change in its members or in
their identity does not affect the legal existence or its identity
(iii) Shares of joint stock company are freely transferable while
shares of Pvt Limited companies are non-transferable.
(iv) Member’s/Share holder’s liability is limited to the extent of
their share holding.
(v) As a corporate person, a company is entitled to own & hold
property in its own name.
(vi) Being a body corporate can sue & be sued in its name.
(vii) Certificate of Incorporation is a conclusive evidence
(viii)Certificate of Commencement of Business
B. Incorporation of a Company
Steps to be taken for incorporation of company:
(a) Two types of companies are registered under companies Act
(i) Public Companies (ii) Private Companies
These companies are further classified as:
(i) Companies limited by shares
(ii) Companies limited by guarantee with or without share capital
&
(iii) Unlimited comapnies with or without share capital
(b) Nature of company
(c) Memorandum of Association
(d) Articles of Association
(e) Preparation of other documents
(f) Payment of registration fees:
(g) Certificate of Incorporation
(h) Certificate of Commencement of Business
1) Individual borrowers are governed by the ____Act.
(a) Partnership Act (b) LLP Act
(c) Indian Companies Act (d) None of the above
Answer is (c)
2) In a HUF, the business of the family is managed by:
(a) Karta (b) Proprietor (c) Partner (d) Director
Answer is (a)
3) A Public Limited Company Share are:
(a) Not transferable (b) Transferable
(c) The Act is silent (d) All the above
Answer is (b)
4) Private trusts are governed by the _________Act
(a) Companies Act (b) Partnership Act
(c) Indian Trust Act (d) None of the above
Answer is (c)
UNIT -9 TYPES OF CREDIT FACILITIES
• Credit facilities are broadly classified as:
• 1. Fund Based Credit Facilities
• 2. Non-Fund Based Credit Facilities
• Fund Based Credit Facilities include:
• (a) CC/OD (b) Term Loans/Demand Loans (c)
Bill Finance
• Non Fund Based Credit facilities include:
• (a) Bank Guarantee (b) Letter of Credit (c)
Acceptance facility
• CC/OD: It is a contract between a bank &
borrower which may express or implied & is
usually given to business firm for its working
capital purposes.
UNIT -9 TYPES OF CREDIT FACILITIES
• Clayton’s Rule: CC/OD facility is operated through a
running account.
• Whenever customer withdraws money, the account
gets debited & whenever customer pays, the account
gets credited.
• Under the law, every debit forms separate loan &
each credit as a repayment of earliest debits.
• This aspect of discharge of debit by subsequent
credits was first enunciated in a case called
Clayton’s case, in which court held that the first sum
of money paid in to the account, is deemed to repay
the first item recorded on the debit side.
• Bank can not terminate overdraft facility without
notice
TERM/DEMAND LOANS
• Granted for meeting capital expenditure needs of
business.
• Granted in one lump sum & repaid over a period
in instalments, the schedule of which is specified
in the agreement. Demand loans are repayable
on demand as agreed upon by the bank. Terms
loans are further classified as:
• (i) Short Term Loans (ii) Medium Term Loans
• (iii) Long Term Loan
• Short term loan repayable within one year,
medium term loans within 2 to 7 years & Long
term loans above 7 years
TERM/DEMAND LOANS
• LAW RELATED TO TERM LOANS
• Term loans are governed by the agreement which
contains details of the loans, repayment & other
obligation of the borrower like payment of interest, cost
& expenses.
• (i) Acceleration of Repayment: If borrower default in
one instalment then, bank has a right to recover the
whole debt inclusive of future instalments
• (ii) Time within which a suit for recovery shall be filed:
• The limitation period for filing a suit in case of term
loan is 3 years from the date of default of a particular
specific instalment. However, if by doing so time limit
gets over for earlier defaulted instalments, bank looses
its right against such unpaid instalments.
BILL FINANCE
• Generally given by discounting of bills of exchange drawn by the
borrower or 3rd persons on the customers of borrower.
• Method of bill finance depends upon payment obligations incurred
by the bank which can be classified in to:
• (i) Bill discounting & Bill purchase
• (ii) Drawee Bill Acceptance
• (iii) Bills Co-acceptance
• First two are fund based and last one is non-fund based.
• Non-Fund Based Facilities:
• NFB facility do not involve an immediate outflow of funds. The
banker undertakes a risk to pay the amounts on happenings of
contingency. NFB facility are classified as:
• (a) Guarantee facility (b) Letter of Credit facility (c)
Underwriting & credit guarantee.
• Under guarantee facility banker undertakes to discharge the liability
of the borrower to third parties . Guarantee facility include
Performance Guarantee, Fund Based Guarantees, Deferred payment
guarantees, Advance Payment guarantee, Bid Bond guarantee,
Guarantees to Government departments.
LETTER OF CREDIT
• Letter of credit or Documentary letter of credit is another Non-
fund based facility extended by the bankers to their customers.
• Under this facility banker undertakes to pay on presentation of
documents, as specified in letter of credit.
• All the letter of credit all over the world are governed by article of
“Uniform Customs & Practices for Documentary Credits (UCPDC)
publication No.600 dtd 1/7/2007 of International Chamber of
Commerce (ICC) Paris.
• Underwriting & Credit Guarantee: Besides the above non-fund
based facilities, some banks also do underwriting & credit
guarantee business. The risk under this activity involves the
obligation of the banker to provide funds or pay, on the event of
the failure of the borrower to raise money or to repay money.
Normally it happens in Merchant Banking.
• Derivative Products: In addition to the above traditional non-
fund based facilities banks are now increasingly offering the
derivative products to their clients to enable them to hedge their
currency & interest rate risk.
1) CC/OD Facility is:
(a) Fund based facility (b) Non-fund based facility
(c) Both fund & Non-fund based (d) All the above
Answer is (a)
2) Bills co-acceptance facility is :
(a) Fund based facility (b) Non-fund based facility
(c) Both fund & Non-fund based (d) All the above
Answer is (b)
3) Limitation period for filing a suit in term loans is ____years
from the date of default of instalment.
(a) 1 year (b) 2 years (c) 3 years (d) 5 years
Answer is (c)
4) Contract of CC/OD can be:
(a) Express (b) Implied (c) Both (d) None of the above
Answer is (c)
Unit-10 Indemnities
• Sec 124 0f Indian Contract Act 1872 defines indemnity as “A
contract by which one party promises from loss caused to him
by the conduct of promisor himself, or by the conduct of any
other person is called a contract of Indemnity.
• Person giving promise is called as “Indemnifier” & the person
to whom promise is made is called as “Indemnified” or
Indemnity holder.
• Distinctive features of Indemnity contract & Guarantee:
BASIS FOR
INDEMNITY GUARANTEE
COMPARISON
Meaning A contract in which one A contract in which a
party promises to party promises to
another that he will another party that he will
compensate him for any perform the contract or
loss suffered by him by compensate the loss, in
the act of the promisor or case of the default of a
the third party. their person, it is the
contract of guarantee.
Unit-10 Indemnities
• Distinctive features of Indemnity contract & Guarantee:
BASIS FOR
INDEMNITY GUARANTEE
COMPARISON
Defined in Section 124 of Indian Section 126 of Indian
Contract Act, 1872 Contract Act, 1872
Parties Two, i.e. indemnifier Three, i.e. creditor,
and indemnified principal debtor and
surety
Number of Contracts One Three
Degree of liability of Primary Secondary

the promisor
Purpose To compensate for the To give assurance to
loss the promisee
Maturity of Liability When the contingency Liability already exists.
occurs.
• Scope & Application of Indemnity Contract to Banks:
• (a) For issuing duplicate draft in lieu of lost draft
• (b) For issue of duplicate FDR in lieu of lost FDR
• (c) Settling death claims
• Rights of Indemnity Holder:
• As per the section 125 the rights of indemnity holder are
• Indemnity holder is entitled to recover from the promiser all
damages, costs & sums to which the promise of indemnity
applies.
1) A person promising to save another from loss is called as:
(a) Indemnified (b) Indemnifier (c) Collecting Banker (d)
Paying Banker
Answer is (b)
2) There are _____parties in contract of indemnity:
(a) 1 (b) 2 (c) 3 (d) 4
Answer is (b)
3) Indemnifier’s liability in a contract of indemnity is:
(a) Primary (b) Secondary (c) Collateral (d) Discretionary
• Bank guarantee: It is a promise from a bank or
other lending institution that if a particular borrower
defaults on a loan, the bank will cover the loss. Note
that a bank guarantee is not the same as a letter of
credit.
• A financial guarantee is a promise to take
responsibility for another company's financial
obligation if that company cannot meet its
obligation. The entity assuming this responsibility is
called the guarantor.
• A Performance Guarantee is issued by bank to a
contractor to guarantee the performance of the
contract according to the plans and specifications. A
project requiring a payment & performance bond will
usually require a bid bond, in order to qualify to bid
for the project.
• Deferred Payment Guarantee: Under this type of the
guarantee, the banker guarantees payment of
installments over a period of time. This type of the
guarantee is required when the customer on credit
purchases goods/machinery and payment is to be made
in installments on specified dates. A deferred payment
guarantee constitutes an undertaking on the part of the
bank to make payment of deferred installments to the
seller (beneficiary) on due dates in the event of default by
the customer (buyer).
• Statutory Guarantee: These are guarantees issued by
banks favoring Courts and other statutory authorities
guaranteeing that the customer will honor his
commitments imposed on under law, failing which bank
will compensate to the extent of the amount guaranteed.
• Banker’s Duty To Honour Guarantee:
• BG is a primary contract between the debtor & creditor. BG
are independent commitments taken by bank on behalf of
their customers.
• Banks undertake to make payment merely on demand by the
beneficiary irrespective of the underlying contract & any
dispute between the parties to the contract.
• i) Banker’s obligation to pay is Primary
• ii) U/S 128 of the contract act, the liability of the surety is co-
extensive with that of the principal.
• iii) Bank guarantee can not be enforced in the event of fraud,
special equity in favour of debtor.
• Precautions to be taken while issuing Guarantee:
i) BG should be issued in security forms serially numbered to
prevent issuance of fake guarantees.
ii) should be issued under two signatures in triplicate, one copy
for the branch, beneficiary and Controlling Office /HO.
Beneficiary should seek confirmation from the issuing bank
or RO or HO.
iii) BG to be issued to regular customer of the bank & for the
genuine need of the customers. Bank should ensure that the
customers would be in a position to meet the claims under
the guarantees, when received, and not seek additional credit
facility for the same. Banks should study financial position of
the customers, the source of funds from which they would be
in a position to meet the liability and prescribe a suitable
margin and obtain other security, as necessary. The banks
may also call for the detailed financial statements and
Wealth-tax / Income-tax returns of the customer to satisfy
themselves of their financial status. The observations of the
banks in respect of all these points should be recorded in
• Precautions to be taken while issuing Guarantee:
• (iv)Where the customers enjoy credit facilities with other banks, the
reasons for their approaching the bank for extending the guarantees
should be ascertained and invariably, a reference should be made to
their existing bankers with whom they are enjoying credit facilities.
• (v) Banks, when approached to issue guarantees in favour of other
banks for grant of credit facilities by another bank, should examine
thoroughly the reasons for approaching another bank for grant of
credit facilities and satisfy themselves of the need for doing so. This
should be recorded in bank's books.
• When it is considered necessary to issue such guarantees, the banks
concerned should ensure that the relative guarantee document,
beyond a stipulated amount, should not be signed singly but by two
authorised officials jointly after obtaining proper sanction and
authority and proper record of such guarantee issued being
maintained. The credit proposals should be subjected to usual
scrutiny by the lending bank ensuring that the proposals conform to
the prescribed norms and guidelines and credit facilities are allowed
only if the bank is satisfied about the merits of the proposal and the
availability of another bank's guarantee should not result in a
dilution of the standards of evaluation of the proposal and financial
• Payment of BG-Precautions to be taken:
• Ensure that the invocation is well within the claim period.
• The amount claimed by way of invocation is not in excess of
what is guaranteed.
• The authority invoking the guarantee has the powers to do so.
• Invocations of the bank guarantee is in terms of the
guarantee.
• There is no injunction prohibiting payment.
1) In Bank guarantee the bank makes paymenton:
a) Being convinced that the beneficiary has incurred loss
b) On being sued by the beneficiary
c) On the guarantee being invoked & after seeking concurrence
of the debtor
d) Merely on demand by the beneficiary.
Answer is (d)
• Payment of BG-Precautions to be taken:
2) In case of BG on behalf of company that is in liquidation the
bank on invocation of the guarantee by the beneficiary
should:
a) Must pay the amount to the Liquidator & not to the
beneficiary
b) Must deposit the amount in the court to avoid the
controversy
c) Must pay the beneficiary
d) Need not pay, since the BG lapses on the company being
liquidated.
e) Answer is (c)
3) The person in whose favour guarantee is issued is called:
a) Issuer
b) Banker
c) Indemnifier
d) Beneficiary
e) Answer is (d)
Letter of Credit
• Introduction
• LC- General Consideration
• Parties to a LC
• Types of Letter of Credit
• Documents under LC
• UCPDC-600
• Payment under LC-Bank’s Obligation
Deferred Payment Guarantee
• DPG is a guarantee for deferred payment where payment is made in
instalments by the buyer. As such DPG is issued on behalf of buyer or
importer & mainly used in international trade & investments.
• For import of capital goods payment is made on instalment basis. In
DPG Bank or FI guarantee the payment of instalment to the seller.
• The payment in DPG is made on the following terms:
1. Advance payment of 10 to 15% by the buyer to seller
2. Another 10 to 15% upon receipt of documents under LC
3. Balance amount is paid in instalments over a period of 1 to 7 years
which is secured by DPG
• Following terms are mandatory in DPG:
• The supply of goods by the seller to the buyer on deferred payment
basis.
• Payment schedule of instalment & interest
• Unconditional & irrevocable assurance of the bank that it will make
payment on the invocation of guarantee.
• In DPG or LC banks deal in documents & not in goods.
• DPG is a replica or mirror image of the contract between buyer & seller,
however, DPG and contract are different from each other.
Laws relating to bill finance
• One of the short term fund based method of financing of
working capital in addition to CC/OD.
• Bill finance is given by way of purchasing of DP bill,
discounting of DA bill & Negotiation of bills under LC.
• Bill finance is self liquidating provided it arises out of genuine
trade transactions.
• Types of Bills & Laws relating to Bills: Three types of bills
• (i) Clean Bill (ii) Documentary Bill (iii) Bills drawn under LC.
• Laws related to Bills: N.I. Act 1881 governs the bills.
• What is Bill?
• Bill is the short form of ‘Bill of Exchange” defined u/s 5 of
N.I.Act as instrument is writing, containing an unconditional
order, signed by the maker, directing a certain person to pay
certain sum of money only to or to the order of a certain
person or to the bearer of the instrument.
• Drawer, Drawee, Payee: Sec 7 provides that a maker of B/E is
called drawer, a person who is directed to pay is called as Drawee
& person entitled to receive payment is called as Payee.
• Relationship of parties: Drawer of bill is creditor/seller & Drawee
of the bill is debtor/buyer. If the bill is assigned to third party
such assignees will become creditors & drawer would be liable to
such assignees in case of default by drawee.
• Sec 8 of N.I.Act defines Holder means a person entitled in his own
name to possess & recover the amount of bill.
• Sec 9 defines “Holder in Due Course” means any person who has
received Bill for consideration, in good faith & without negligence.
(i.e a person to whom bill is transferred)
• Sec 19 defines “Payment in Due Course” as a payment in
accordance with apparent tenor in good faith & without
negligence.
• Sec 15 defines “Endorsement”: If the holder signs B/E for the
purpose of transferring it, such signing is called as
“Endorsement”
• Sec 30 “Liability of Drawer”: The drawer of B/E or cheque is
bound in case of dishonour by the drawee to compensate the
holder provided due notice of dishonour has been given to the
drawer.
• Sec 32 “Liability of Acceptor/Drawee of Bill”: An acceptor of
B/E is bound to pay amount at maturity according to
apparent tenor of the bill.
• Sec 33 “Liability of Endorser”: Whoever endorses & delivers
negotiable instrument is bound to every subsequent holder in
case of dishonour.
• Classification of Bills: Bills used under bill finance are
classified on the basis of:
• (a) Where the bill is drawn (b) Period (c) nature of bill
Place Period Nature
Inland Bills Demand bills Clean Bills
Foreign Bills Usance Bills Documentary Bills
1. Inland Bills: Bills drawn or made in India & payable to resident person.
2. Foreign Bills: Bills drawn outside India & payable to any person in any
country outside India or any person resident of India.
3. Demand Bills: Payable on demand & is also referred as “Sight Bill”
4. Usance Bills: Payable after “Usance” period or on due date.
5. Clean Bill: The bill which is not supported by “Documents of Title to the
goods”
6. Documentary Bills: The bill which are supported by “Documents of Title to
the goods.
Bill Finance & Legal Position of the Banker.
• While discounting the bill, banker becomes a holder in due
course.
• When documentary bill ( which is supported by documents of
title to the goods like RR,TR, LR, BL etc) is discounted by
bank, it becomes holder in due course and becomes owner of
the goods on transfer of the said documents.
• Choose the right answer from the choices given:
(i) In bank guarantees the bank makes payment on:
(a) being convinced that the beneficiary has incurred loss;
(b) on being sued by the beneficiary;
(c) on the guarantee being invoked and after seeking concurrence of
the debtor;
(d) merely on demand by the beneficiary.
Answer is (d)
(ii) In case of bank guarantees on behalf of companies that is in
liquidation the bank on invocation of the guarantee by the
beneficiary:
(a) must pay the amount to the Liquidator and not the beneficiary;
(b) must deposit the amount in the court to avoid any controversy;
(c) must pay the beneficiary;
(d) need not pay, since the bank guarantee lapses on the company
being liquidated.
Answer is (c)
(iii) In case of fraud committed by the debtor on whose behalf the bank
guarantee is given, the bank on invocation:
(a) need not pay the beneficiary;
(b) has to pay the beneficiary;
(c) direct the beneficiary to sue to debtor;
(d) none of the above.
Answer is (b)
(4) The Letter of Credit is opened on the request of
(a) Issuing bank (b) Applicant
(c) Beneficiary (d) Confirming bank
Answer is (b)
(5) The LC issuing bank is also called
(a) the importers bank or the opening bank
(b) the advising bank or the confirming bank
(c) the negotiating bank or the nominated bank
(d) the reimbursement bank
Answer is (a)
(6) The right to receive payment under a letter of credit or the
right to draw bills on a Letter of Credit is vested in
(a) the opener of the LC (b) the Issuing Bank only
(c) the Seller or beneficiary only (d) all the three parties
Answer is (c)
(7) The advising banks responsibility is
(a) to inform the issuing bank as to whom to issue the letter of
credit
(b) to advise the buyer the despatch of documents by the seller
(c) to verify & certify authenticity of the credit to beneficiary
(d) None of the above
(8) The advising bank is also called the
(a) Confirming Bank (b) Notifying Bank
(c) Reimbursing Bank (d) None of the above
Answer is (b)
(9) Negotiating bank is the bank which
(i) negotiates the preliminary contract of sale between the buyer and
the seller
(ii) makes payment of the bills drawn by the seller and accepts the
documents
(iii) guarantees payment by the issuing bank
(iv) None of the above
(10) When the LC specifies the Bank that is to negotiate the bills drawn
under the LC then the bank is also called
(i) Confirming Bank (ii) Reimbursing Bank
(iii) Nominated Bank (iv) None of the above
(11) The confirming bank is
(i) the issuing bank when it confirms the issue of the LC
(ii) the negotiating bank when it confirms the negotiation of the bills
(iii) the advising bank when it confirms the LC
(12) When the confirming bank confirm the credit it
(i) does not take any liability (ii) undertakes on its part the
liability under the LC
(9) Negotiating bank is the bank which
(i) negotiates the preliminary contract of sale between the buyer and
the seller
(ii) makes payment of the bills drawn by the seller and accepts the
documents
(iii) guarantees payment by the issuing bank
Answer is (ii)
(10) When the LC specifies the Bank that is to negotiate the bills drawn
under the LC then the bank is also called
(i) Confirming Bank (ii) Reimbursing Bank
(iii) Nominated Bank (iv) None of the above
Answer is (iii)
(11) The confirming bank is
(i) the issuing bank when it confirms the issue of the LC
(ii) the negotiating bank when it confirms the negotiation of the bills
(iii) the advising bank when it confirms the LC
Answer is (ii)
(12) When the confirming bank confirm the credit it
(i) does not take any liability
(ii) undertakes on its part the liability under the LC
(iii) undertakes to make timely delivery of the documents and
bills to the buyer or his bank
Answer is (ii)
(13) Reimbursing Bank is the Bank
(i) that reimburses the seller
(ii) that reimburses the Negotiating/Paying or Confirming
Bank
(iii) that reimburse the buyer on the goods being found
defective
Answer is (ii)
State whether True or False.
(1)The matter relating to payment of cheques and protection to a

banker is contained in the India Contract Act.
False
(2) The responsibility of a banker to pay back the money of the
customer specifically stated in the N.I. Act, 1881.
True
(3) Section 31 of the N. I. Act applies only on banker.
True
(4) The banker is first bound to honour a customer’s cheque &
only thereafter can exercise the right of set off.
False
(5) A forged signature is no mandate of the customer.
True
(6) A customer is bound to inform the bank about lost cheque
leaves.
False
State whether True or False.
(7) In a joint account if one of the signature is forged the bank

and the customer are equally liable.
False
(8) Payment to be made in due course need not always be made
to holder but can be made to his agent or servant.
True
(9) In case bank makes payment by mistake it can recover the
same even if the payee has changed his position.
False
(10) If a bank makes payment without checking the instrument
under an ultraviolet lamp, it can be held liable on the grounds
of negligence.
False
(11) The statutory protection to a collecting banker is as per
Section 6 of the Indian Contract Act.
FALSE
(12) As per Section 131A of the Negotiable Instruments Act the
protection granted to a banker while paying cheques has been
made applicable to drafts.
TRUE
(13) The duties of collecting bank to claim protection has been
laid down under the Indian Contract Act and Banking
Regulation Act.
FALSE
(14) In the absence of proper reference the banker can be held
liable on the grounds of negligence.
TRUE
(15) It is necessary for the banker to make enquiries regarding
the reference given by the customer.
TRUE
(16) Contract of Indemnity as defined in the Contract Act is
exhaustive.
FALSE
(17) Insurance Contracts are not contracts of indemnity.
FALSE
(18) An indemnity holder can act beyond his authority.
TRUE
(19) An indemnity holder can be compensated only for damages
& not for the costs incurred by him.
FALSE
(20) An indemnity holder is entitled to compromise a suit as
thought fit by him though contrary to the orders of the
indemnifier.
FALSE
(21) A Letter of Credit is a form of guarantee given by Banks
on behalf of its customer.
TRUE
(22) Letters of Credit are Bills of Exchange drawn by a seller
on a buyer.
FALSE
(23) LCs are negotiable instruments.
FALSE
(24) All parties to a Letter of Credit transaction need to comply
with the terms only as far as practical and not strictly.
FALSE
(25) In case the documents submitted by seller do not comply
with the LC then the same can be accepted subject to
confirmation of buyer.
FALSE
(26) A Bill of Exchange is a document to title to goods.
FALSE
(27) A Bill of Exchange is also called a "bill" or a "draft".
TRUE
(28) Invoice in a Letter of Credit transaction is a document
similar to a quotation based on which the buyer places his
order.
FALSE
(29) A Bill of Lading on a bona fide transfer confers on the
transferee a right to the goods.
TRUE
(30) An Airway bill is also a document evidencing title to goods.
FALSE
(31) UCP 500 being law is enforceable and cannot be excluded
by contract.
FALSE
(32) A standby Letter of Credit is also a credit coming under
UCP 500.
TRUE
(33) In a Letter of Credit transaction banks if required have to
verify and check the condition of goods physically though the
documents certify their quality.
FALSE
(34) All Letters of Credit are irrevocable unless specifically
stated otherwise.
TRUE
(35) The advising bank's responsibility is limited to advising the
credit irrespective of its authenticity.
FALSE
(36) An advising bank that has acted on a revocable credit
which has been, later cancelled is not entitled to any
compensation or payment.
FALSE
(37) The beneficiary can cancel an irrevocable credit without
concurrence of confirming bank or the issuing bank, but has
to inform the applicant.
FALSE
(38) A credit conveyed by authenticated telex has to be
confirmed by mail.
FALSE
(39) Bank can return the documents within 10 days from
receipt of the same.
FALSE
(40) In case documents turn out to be forged the banks can be
liable since forged document is no document in the eye of law.
FALSE
(41) In case Letter of Credit is expiring on a bank holiday the
Letter of Credit has to be presented one day before.
FALSE
(42) Bill of exchange means a unconditional direction to the
drawer to pay the monies.
TRUE
(43) Bill purchase facility is granted in the case of demand bills.
TRUE
(44) In co-acceptance facility the banker becomes a surety for the
value of the bill.
TRUE.
45) If money is lent is more than Rs.100 on the security of land,
then the mortgage deed has to be registered.
TRUE
46) A mortgage deed need not be witnessed.
FALSE
47) Permission from income tax authorities under sec 230 to
create mortagage is required only if the land belongs to a
company.
FALSE
48) Arrears of tax constitute a preferential charge on the
property.
TRUE
49) There are three types of shares-ordinary, equity & preference.
False
50) Debenture is a kind of share issued by company & has no
voting rights.
FALSE
51) Borrower can create a valid pledge with documents of title to
goods.
TRUE
52) BL, Dock Warrants, Warehouse keepers certificate, etc are
some examples of document of title to the goods.
TRUE
53) Documents of title to goods are negotiable instruments.
False
53) Insurance contracts are contracts of absolute good faith.
TRUE
54) An assignee of life policy can sue in his own name.
TRUE
55) For a loan against FDR, the stamp duty is very high.
False
56) Supply bills are bills of exchange.
False
Fill in the Blanks:
1. Section ____ of the Indian Contract Act defines an indemnity.
124
2. A person promising to save another person from loss is called
____.
Indemnifier
3. There are ____ parties to a contract of indemnity.
TWO
4. Indemnifiers liability in a contract of indemnity is_____
Primary
5. Ordinary Letter of Credit are usually _______i.e. Bills drawn
there under have to be paid immediately.
Sight Credits
6. Letter of Credit under which usance bills can be drawn is
called an_______.
Acceptance Credit
Fill in the Blanks:
7. In a Revocable LC the credit can be amended or cancelled by
the __________.
Issuing bank
8. Only ________ Letters of Credit can be confirmed.
Irrevocable.
9. Credit in which the beneficiary is not liable for the bills drawn
there under is ______ credit.
Without Recourse.
10. A back-to-back credit would involve at least _______ bank
viz., the ________
bank, _______ bank and the ___________bank.
Three, Issuing, advising & third
11. A shipping document indicating the details of the shipment
and delivery of goods and their ownership is a __________.
Bill of Lading
12. The maker of the Bill is called _______ .
Drawer
13) _________ facility is granted in the case of usance bills.
Bill Discounting.
14) _________ of the bill is bound in case of dishonour of bill.
DRAWER
15) Ownership of goods can be transferred by endorsement &
delivery of _______
Document of Title to goods.
Various Types of Securities
• What are Secured and Unsecured loans?
• Secured Loans are those which are protected by some sort of
asset or collateral, for example – mortgage, auto loan,
construction loan etc. If the lender is unable to repay the loan,
the borrower has the right to sell off the asset to recover the
loan.
• Unsecured loans include credit card purchases, education
loan.
• If a person default in such loans then his credit scoring gets
affected.
• The requisites of a good & acceptable security are as under:
1. Borrower should have a good title to the security.
2. Should easily & freely transferable & Should be free from all
encumbrances
3. It should be MAST security i.e. Marketable, Ascertainable,
Specific & Transferability.
4. Should not be subject to wide price fluctuations
5. Storing should not be difficult & it should be durable
• What is Security?
• Security provides a protection to the lender in case of loan
default as the lender could acquire the security if the
repayment is not done by the borrower.
1. Land or Real Estate: Value increases over the time.
However, it is difficult to find proper valuation, Title
clearance & search report. It is difficult to realise these
security & costly to create charge. Due to rent control
act, it is difficult to sell these assets.
2. Precautions to be taken by the Banker:
(a) Ensure financial soundness of the borrower
(b) Ensure clear & un encumbered title of the borrower
(c) Do enquiry regarding the prior charges
(d) Ensure whether the property is freehold or Leasehold
(e) Ensure valuation of the property by a approved
valuer
(f) Get proper documents, Register your charge, get
proper insurance for full value with agreed bank clause.
2. Stock and Shares: Normally quoted company’s shares
are accepted as security.
Advantages:
a) Value can be ascertained from market and easy liquidity
Subject to wide fluctuations
b) Very little formalities to take them as security.
c) Creation of charge is inexpensive
d) Income by way of dividend, capital appreciation
Disadvantages:
(a) Subject to fraud prone
Precautions: Partly paid shares should not be accepted,
sufficient margin should be taken, Ensure M to M
3. Goods: having ready market & can be sold easily, valuation is
easy. Advances against goods are self liquidating & less risky,
charge creation is easy & inexpensive.
Disadvantages: Value may deteriorate over time, may become
obsolete or out of fashion due to change in technology,
difficulty in storage
Periodical stock valuation is required.
Precautions:
(a) Advances should be only for genuine trade transactions
(b) Loans should be for short period
(c) Banker must understand the trade of the borrower in & out.
(d) Proper insurance for full value with agreed bank clause
(e) Periodical stock inspection & valuation
(f) Ensure borrower submits stock statement regularly.
(g) Proper & necessary margin
4.Documents of Title to the goods:
• As per sec 2(4) of Sale of goods Act,1930 a Document of
Title to Goods is a document used in ordinary course of
business as a proof of possession of goods authorising by
endorsement or delivery, the possessor of documents to
transfer or receive the goods thereby represented.
• Essential Features of Document of Title to Goods:
(i) Gives right either by virtue of law or trade usage to possess
the goods represented by the documents.
(ii) Goods representated by the documents can be transferred by
endorsement & or delivery of the documents.
(iii) Transferee of documents can take delivery of goods in his
own right.
(iv) Quasi Negotiable Instrument because the transferee does not
get better title than transferor.
Merits of this security:
(i) By mere pledge of the instruments the goods are pledged &
serve as a good security.
(ii) Possessee can transfer the goods by endorsement & delivery
& transferee is entitled to to take delivery of the goods
thereafter.
(iii) Easy transferability & without any formality.
Demerits:
(i) Possibility of fraud & dishonesty
(ii) Forged & altered documents
(iii) Not Negotiable documents
(iv) Unpaid vendor’s right of stoppage in transit
Precautions to be taken:
(i) Thorough examination of documents & full set of B/L to be
obtained
(ii) Obtain Clean documents of Title to the goods
(iii) Obtain full value comprehensive insurance
(iv) In case of LC documents Bank’s name should appear as
consignee.
5. Trust Receipt:
• When bank releases documents of title to goods to the buyer on his
acceptance & without payment then a Letter of Trust is obtained so
that goods are hypothicated to the bank. The reasons are as follows:
(i) Buyer on sale of goods has to hold proceeds in trust for banker.
(ii) The goods taken under such trust receipts or the sale proceeds thereof,
are not available to the official receiver in case of the borrower becomes
insolvent.
A Trust Letter contains following clauses:
(i) Borrower’s recognition of bank’s rights in the goods as security & in
case of sale, the proceed thereof.
(ii) Borrower’s undertaking to hold goods or sale proceeds thereof, in trust
for the banker.
(iii) Borrower’s undertaking to ensure proper storage & insurance at his
cost
(iv) Borrower’s Undertaking to direct the buyer to pay directly to banker
(v) Borrower’s undertaking to return unsold goods on banker’s request or
dispose the same as directed by the banker.
6. Life Policies: A life policy is taken for saving, insurance & IT
deduction.
Advantages:
(i) Easy to obtain the claim
(ii) Assignment of LIC policy is easy & without any formalities.
(iii) Surrender value is proportionate to the period of policy
(iv) Security can be realised immediately on the default of the
borrower.
(v) Policy is tangible security & remains in the custody of the bank.
Disadvantages:
(i) If the premium is not paid policy lapses
(ii) Since insurance contract is based on utmost faith, any
misrepresentation or non-disclosure of any particulars by
assured would make the policy void.
(iii) Policy may be with restrictive clauses
6. Life Policies:
(i) Policy must be assigned in favour of bank & should be sent to
LIC for registration & ensured that LIC has noted assignment.
(ii) The bank should see that age of the assured is admitted
(iii) The banker should ensure regular payment of premium.
7. Gold Loan: Bank gives loan against gold ornaments. Nature of
charge created is a pledge. Banks also give Overdraft facility
against gold.
8. Book Debts: Borrower can take advance by assignment of book
debts in favour of the bank. Sec 130 of transfer of property act
permits assignment of actionable claim & the procedure to be
followed as under:
(a) Assignment must be in writing & signed by transferer.
(b) Notice of assignment in writing must be given to the debtor
(c) The assignment may be absolute or by way of charge
8. Book Debts:
Legal Implications of Assignment:
(i) The assignee can sue in his/their own name & can give a
valid discharge.
(ii) The debtor can exercise any right of set off against the
assignee.
(iii) As an Actionable claim includes future debts, there can be
valid assignment for future debt as well.
(i) The instrument of assignment must be in writing & duly
signed in presence of the banker.
(ii) Banker must serve notice of assignment on debtor & obtain
acknowledgement of amount of debt, his right of set off.
(iii) In case of book debt finance to the company, charge must be
registered with ROC.
9. Fixed Deposit: Bankers give advance against their own FDR
which is a most tangible & liquid security.
Precautions:
(i) No advance against the FDR of other banks because every
bank has a general lien over its FDR. The other bank may
refuse to register lien in favour of lending bank.
(ii) For Joint FDR, request for advance should be from all joint
holder.
(iii) Letter of appropriation should be obtained
(iv) Must note his lien on FDR receipt & in ledger folio as well
(v) Avoid advance against the FDR receipt in the name of minor
unless a declaration is taken from guardian that loan will be
utilised for benefit of minor.
(vi) If advance is against the FDR of another branch, the FDR
duly discharged must be sent to the branch for verification of
signature, to ensure that there is no prior lien & to mark lien
on the FDR.
10. Supply Bills: These bills arise out of supply to Government
& PSU for execution of contract & the contractor is entitled
for progressive payment based on the work done, for which
he has to submit bills as per terms & conditions of the
contract.
Similarly, parties who have accepted tenders for supply of
goods over a period of time are entitled to payment for supply
of goods for which they submit bills as per terms &
conditions of the contract. Such bills are known as supply
bills.
Procedure followed in respect of supply bills:
(i) The supplier delivers goods by a delivery challans & produces
documents. The government authority inspect goods &
accept for payment on due date & supplier obtains
inspection note. In case of contract, an engineer’s certificate
regarding work done is obtained.
10. Supply Bills: Procedure followed in respect of supply
bills:
(ii) Supplier or contractor prepares bill. Government department
take long time to verify & pass it for payment. Therefore,
supplier or contractor submits these bills with accepted
delivery challans & inspection note or engineer’s certificate to
Government department through bankers & request bankers
to advance against such bills. These bills are negotiable
instrument, they are in nature of debt & are assigned in
favour of the banker for payment, after affixing a revenue
stamp for having received the amount. Banker should obtain
a letter from the supplier or contractor, requesting the
appropriate department to make the payment directly to the
banker.
10. Supply Bills: Procedure followed in respect of
supply bills:
Risks involved in advancing against supply bills:
(i) Even though this advance is self liquidating, there may
be delay from Government department
(ii) It is virtually a clean advance & banker may not realise
full amount due to counter claim or the right of set off of
Government itself.
(iii) Government may not pass the bill for unsatisfactory
quality of goods or defective or delayed work by the
contractor.
10. Supply Bills:
Precautions:
(i) Advance should be made to reputed borrower having
sufficient experience in Government business.
(ii) Scrutiny of the contract, volume of transaction, period of
supply, rates & terms & conditions
(iii) Banker should obtain POA from the supplier authorising him
to receive the payment directly.
(iv) Banker should obtain inspection note or engineer’s certificate
alongwith bills. There should not be any adverse remarks in
the inspection report regarding the quality & quantity of
goods supplied.
(v) Suppliers/contractors submit interim & final bill. Keep
sufficient margins against each bill.
(vi) Bankers must reserve the right of demanding the repayment
of advance, if the bills remain unpaid for a specified period.
LAW RELATING TO SECURITIES & MODES OF CHARGE
• When land/building is offered as security, mortgage is created.

• Sec 58 to 99 & 102 to 104 of Transfer of Property Act 1882
deal with mortgage.
• MORTGAGE:
• Sec 58 of TPA 1882 defines mortgage as under:
• A mortgage is the transfer of interest in specific immovable
property for securing the advance by way of a existing or
future loan.
• The Transferer is called “Mortgagor” & transferee is
“Mortgagee”. The instrument by which the transfer is effected
is called “Mortgage deed”
• Ingredient of Mortgage:
• (i) There should be transfer of interest in the property by the
Mortgagor (the owner or lessor)
• (ii) The transfer should be to secure the money paid or to be
paid by way of loan.
• MORTGAGE:
• Mortgage of land are of different types:
• (a) Simple Mortgage (b) Mortgage by conditional sale
• (c) Usufructuary mortgage (d) English Mortgage
• (e) Mortgage by way of deposit of title deeds (Equitable
Mortgage) (f) Anamolous Mortgage.
• Simple Mortgage: u/s 58(b) of TPA simple mortgage is a
transaction whereby without delivering possession of the
mortgaged property, the mortgagor binds himself personally to
pay the mortgage money & agree that in the event of default,
mortgagee shall have a right to sell the mortgaged property by
decree of the court.
• Mortgage by way of conditional sales: u/s 58(c) of TPA
A mortgage by conditional sale is different. In case of a
mortgage by conditional sale, a mortgagor ostensibly
sells the mortgaged property on the condition that on
default of repayment of the mortgage money by a certain
date the sale will become absolute.
• Usufrutuary Mortgage: Sec 58(d) of TPA defines Usufructuary
Mortgage as a transaction where the mortgagor delivers
possession & binds himself to deliver possession of the
mortgaged property to the mortgagee and authorizes him to
retain such possession until payment of the mortgage money,
and to receive the rents and profits accruing from the
property. Bankers do not prefer this type of mortgage.
• English Mortgage: (Sec 58(e) of TPA)
• Where the mortgagor binds himself to repay the mortgage
money on a certain date, and transfers the mortgaged property
absolutely to the mortgagee, but subject to a proviso that he
will re-transfer it to the mortgagor upon payment of the
mortgage money as agreed, the transaction is called an
English mortgage.
• Anomalous Mortgage (Sec 58(g) of TPA
• A mortgage which is not a simple mortgage, a mortgage by
conditional sale, an usufructuary mortgage, an English
mortgage or a mortgage by deposit of title deeds within the
meaning of section 58 is called an anomalous mortgage.
• Usufrutuary Mortgage: Sec 58(d) of TPA defines
Usufructuary Mortgage as a transaction where the
mortgagor delivers possession & binds himself to
deliver possession of the mortgaged property to the
mortgagee and authorizes him to retain such
possession until payment of the mortgage money,
and to receive the rents and profits accruing from
the property. Bankers do not prefer this type of
mortgage.
• English Mortgage: (Sec 58(e) of TPA)
• Where the mortgagor binds himself to repay the
mortgage money on a certain date, and transfers the
mortgaged property absolutely to the mortgagee, but
subject to a proviso that he will re-transfer it to the
mortgagor upon payment of the mortgage money as
agreed, the transaction is called an English
• Anomalous Mortgage (Sec 58(g) of TPA
• A mortgage which is not a simple mortgage, a
mortgage by conditional sale, an usufructuary
mortgage, an English mortgage or a mortgage by
deposit of title deeds within the meaning of section
58 is called an anomalous mortgage.
• An equitable mortgage in which the lender is
secured by taking possession of all the original title
documents of the property that serves as security for
the mortgage. It gives the mortgagee the right to
foreclose on the property, sell it, or appoint a receiver
in case of non payment.
• priority of mortgages
• The rule is “He has a better title who was the first point of
time”. It deals with priorities of rights created by a person at
different times over the same immovable property &
provides that each right created late, is subject to the rights
previously created.
• Priority among registered instruments: Sec 47 of
Registration Act 1908 states that a registered document
operates not from date of registration but time of its
execution. As such document executed earlier though
registered later than another has priority over the
documents executed later.
• Priorities among registered & unregistered mortgage:
• The difference between the two. If there is more than one
mortgage on the property, the registered mortgage will take
priority over the equitable mortgage in order of dealing when
it comes time to settle the debts on that property. A registered
mortgage has a greater legal standing than an equitable
• Limitation Period in Mortgages :
• The limitation period for filing a suit for sale of mortgaged
property is 12 years, from the date the mortgage debt
becomes due. The limitation period for filing suit, for
foreclosure (taking possession) is 30 years, from the date
the money secured by mortgage becomes due.
• Enforcement of Mortgage – Some Important Aspects
• (i) Mortgage by deposit of title deeds
• (ii) Simple mortgage and in some cases
• (iii) English mortgage.
• Enforcement of all these types of mortgages is by way of
filing a suit for sale of mortgaged properties. The
procedure for filing a suit for a sale is provided for in the
Code of Civil Procedure, 1908.
• Limitation Period in Mortgages :
• The Section 16(c) of the Civil Procedure provides that a
suit for sale of mortgaged property shall be filed in the
Court within whose jurisdiction the mortgaged property
is situated. Order 34 of the Code provides for various
things to be adhered to while filing suit for sale
of mortgaged property. When a suit for sale is filed, the
Court after hearing the parties passes a preliminary
decree. Through the preliminary decree it directs the
mortgagor to pay the mortgage debt within a certain
period and in the event of his failure to pay the money
due under the mortgage, the Court orders for sale of
mortgaged properties by passing a final decree. After
passing of the final decree, the mortgagee with the help of
the Court gets the mortgaged property sold in execution
of the mortgage decree.
UNIT 17 LAW RELATING TO SECURITIES & MODES OF CHARGE
• A banker in his business of lending takes security of pledge and
hypothecation of moveable goods to secure cash credit and
overdraft.
PLEDGE :
Bailment of goods for purpose of providing security for payment of
debt or performance of promise as per Section 172 of Contract
Act , 1872.
The Person whose goods are bailed is called the Pawnor , the
person who takes the goods as security is called the Pawnee.
I) Legal Implications of a Pledge :
a) Ownership of a property is retained by Pawnor .
b) Actual or Constructive Delivery of goods to the Pawnee.
c) Created only in case of existing goods which are in the
possession of Pawnor himself .
d) Possession of goods is the most important characteristic of
pledge and thus, Pledge is lost when possession of the goods is
lost .
e) An agreement may be implied from the nature of the
transaction or the circumstances of the case.
UNIT 17 LAW RELATING TO SECURITIES &
MODES OF CHARGE-II
• Who Can Create a Pledge ?
Owner of goods
Mercantile agent
Persons in Possession of goods under a voidable contract,
provided the contract, has not been rescinded at the time
of pledge.
Seller of the goods , who continues to be in possession of
goods even after sale can create a valid pledge .
Rights of a Pawnee :
a) Rights of a retainer
b) Right to claim extraordinary purpose
c) No right to retain in respect of other debts
d) Rights against Third Party
e) Pawnee's right when Pawnor makes default in
payment.
UNIT 17 LAW RELATING TO SECURITIES & MODES OF CHARGE
• HYPOTHECATION:
The mortgage of a moveable property and and obligation to repay money and
no transfer of interest .
• BANKERS LIEN:
Right of a banker to retain possession of goods and securities owned by the
debtor until the debt due from the latter is paid
• SET-OFF:
Right of a debtor to take into account a debt owning to him by a creditor,
when claiming a debt due from him to the creditor.
Pledge and Mortgage
Pledge required only a limited interest in the property and ownership
remains with the right of pledger.
Here the legal ownership passes to mortgagee.
Of course subject to the mortgagor to redeem the property.
The Pawnee has “special property” in the goods decree of pledged
The mortgage as a rule, takes decree of a Court of Law before having
recourse against the property mortgaged. Pawnee has no right to foreclosure.
In certain cases, the mortgagee can foreclose the property.
Hypothecation and Mortgage
The mortgage of moveable property is called Hypothecation
Mortgage relates to immoveable property
There is only obligation to repay the money and no transfer of interest.
There is transfer of interest.
TYPES OF CHARGES
Type of Charge Is created on Such as And the
possession of the
asset is with
I. Mortgage Immovable Land and Building Borrower
Properties
II. Pledge Movable goods or Shares/NSC Lender, i.e., the
property /Gold jewellery Bank = Pledgee
III. Hypothecation Movable goods or Plant and Borrower.
property Machinery/ Usually for car,
Automobiles vehicle loans.
IV. Lien Paper security Shares/Debenture

s/Mutual
Funds/Bonds
V. Personal Is nothing but By 3rd parties Like a guarantee
Liability personal
guarantee
UNIT 18 REGISTRATION &
SATISFACTION OF CHARGES
WHAT IS A CHARGE
AS PER TRANSFER OF PROPERTY

AS PER COMPANIES ACT, 2013 ACT, 1882
Section 2(16) of the Companies Act, According to Section 100 where
2013 defines charges so as to mean an immovable property of one person
interest or lien created on the is, by act of parties or operation of
property or assets of a company or law, made security for the payment
any of its undertakings or both as of money to another, and the
security and includes a mortgage. transaction does not amount to
mortgage, is called charge.
MORTGAGE
Mortgage is the transfer of an OR the performance of

interest in specific immovable an engagement which
property for the purpose of may give rise to
securing the payment of pecuniary liability
money advanced or to be
advanced by way of Loan
An existing Or future Debt

Debt
Distinction between Mortgage
and Charge
• A mortgage is transfer of an interest in the
property made by the mortgagor as a security for
the loan, while the charge is not the transfer of
any interest in the property through it is security
for the payment of an amount.
• A charge may be created by act of parties or by
operation of law. A mortgage can only be created
by act of parties.
Distinction between Mortgage
and Charge
• A mortgage deed must be registered and
attested by two witness, while a charge need
not be made in writing, and if reduced to
writing, it need not be attested or registered.
DUTY TO REGISTER
CHARGE
• A Company creating a charge, shall, register the particulars
of the said charge with the ROC within 30 days of its
creation in Form CHG-1.
• This charge could be:
a) on its property or assets or
b) any of its undertakings
c) whether tangible or otherwise
• Situated in or outside India
• Signed by both the Companies and the charge-holder
• Together with the instruments creating the charge
DUTY TO REGISTER CHARGE
• Creating or modifying the charge shall be filled in

Form CHG-1 (for other than Debentures) or
Form No. CHG-9 (for debentures including
rectification) with the registrar.
• Where a charge is registered with the Registrar,
he shall issue a certificate of registration of such
charge in Form No CHG-2.
• Where the particulars of modification of charge is
registered under section 79, the Registrar shall
issue a certificate of modification of charge in
Form CHG-3.
Section 77(1)- 1st Proviso
• ROC may on application in Form CHG-10 by
the company, allow this registration within
300 days (30+270), on payment of additional
fees
• This application shall be supported by a
declaration from the company by its secretary
or director that such not adversely affect
rights of any other creditors of the company
• If not within 300 days, company to seek
extension of time from the CG; applicable
Section 87 in Form CHG-8
Condonation of delay for Registration of Charge
• Where the instrument creating or

modifying a charge is not filed within a
period of 300 Days from the date of its
creation or modification the Registrar
shall not register the same unless the
delay is condoned by the Central
Government.
• Where the instrument satisfaction of the
charge is not filed within 30 Days from
the date on which such payment of
satisfaction, the Registrar shall not
register the same unless the delay is
condoned by the Central Government.
Condonation of delay for
Registration of Charge
• The application for condonation of delay shall be filed
with the Central Government in Form No.CHG-8
along with the fee. [ By Notification F. No. 1/6/2014-
CL.V Dated: 21-5-2014 THIS POWER HAS BEEN
DELEGATED TO REGIONAL DIRECTOR)
• The order passed by the Central Government under
sub-section (1) of section 87 of the Act shall be
required to be filed with the Registrar in Form
No.INC.28.
Satisfaction of Charge
• A Company shall within a period of 30 days
from the date of payment or satisfaction in full
of any charge registered under Chapter VI, give
intimation of the same to the Registrar in
Form CHG-4.
• Registrar shall issue a certificate of registration
of satisfaction of charge in Form CHG-5.
CHARGES FILING OF WHICH
WITH ROC IS NOT
NECESSARY
• Guarantee doesn’t require Registration.
• Charge created by operation of law need not be

filed.
• Negotiable Instrument (Hundi) is not a ‘Charge’

and registration not required.
EFFECT OF REGISTRATION OF
CHARGE
• Maintain Register of Charge by ROC: As per Section- 81 ROC will
maintain Register of Charges in respect of each company, containing
particulars of all charges registered
• Inspection of Register of Charge:The Register of charges maintained by
ROC is open for inspection by any person on payment of prescribed
inspection fees.
• Deemed Notice: Any person intending to lend moneys or who has lent
money to a company can know which of company’s assets are already
charged and extent to which type are charged.
• Charge binding even on subsequent purchaser: Provisions relating to
charge apply even to a subsequent purchaser, even if he had not purchased
property directly from company. The purchaser is required to make
reasonable enquiries as to title of vendor.
REGISTER OF CHARGE BY
COMPANY
• Every company shall maintain, at registered office a register of
charge in Form No. CHG-7.
• Copy of the instrument creating the charge shall also be kept at the
registered office of the company along with register of charge-
(Proviso of Section 85(1)
• The entry in the register authenticated by a director or secretary
of the company or the other person authorized.
• Company will maintain this register for life time of Company.
• Instrument creating charge or modification of charge shall be
preserved for a period of 8 year from the date of satisfaction of
charge by the Company.
Section 77(3) (4)
• The liquidator or any other creditor shall not take
into account any charge created unless registered
with the Registrar and a certificate of registration of
such charge is given by the Registrar under sub-
section (2).
• Nothing in sub-section (3) shall prejudice any
contract or obligation for the repayment of the
money secured by a charge.
(SECTION 86) PUNISHMENT FOR
CONTRAVENTION
• If any Company contravenes any provision of this

Chapter, the Company shall be punishable with fine
which shall not be less than Rs.1 Lacks and every
officer of the Company who is in default shall be
punishable with imprisonment for a term which may
extend to 6 months or with fine which shall not be
less than Rs. 25,000 which may extend to Rs. 1
Lacks, or with both.
UNIT-19 INTRODUCTION TO SARFAESI ACT 2002
• Prior to this Act a special legislation called ‘The
Recovery of Debts due to Banks and
Financial Institution Act, 1993 (RDDB)’ was
enacted creating a Special Tribunal called ‘Debt
Recovery Tribunal’.
• Under the Act, the Banks are entitled to
approach the Tribunal by filing an ‘Original
Application’ which is similar to filing a suit
in Civil Court proceedings. However, unlike the
‘Civil Court’ which is supposed to follow the ‘Civil
Procedure Code’, a special and simple procedure
was prescribed in RDBI, Act.
Need for SARFESI ACT
• The object of reducing NPA could not be achieved even
after enacting ‘RDBI, Act1993’ and as a result, another
legislation was enacted and called ‘SARFAESI Act’.
• There is inordinate delay in Civil courts for deciding the
cases.
• Under SARFAESI Act, the Bank can take possession of
secured assets & initiate auction proceedings in
accordance with the provisions and the SARFAESI rules.
Object, Extent & Need
 Act regulates securitisation and reconstruction of
the financial assets and enforcement of the security
interest.
 The acts extends to whole of India including J & K &
came into force from 21/6/2002.
MARDIA CHEMICALS VS UNION OF INDIA
• Remedy of appeal under S.17 of the Act was available
only when 75% of amount claimed, is deposited by the
borrower.
• Based on the observation of the Supreme Court in the
Mardia Chemicals vs Union of India case, the GOI issued
notification amending the provisions of the SARFAESI
Act.
• The amendment stipulates payment of 50% amount
instead of 75% as originally enacted. (When appealed)
Important Aspects
• The two important aspects dealt in the Act are:
• (a) Enforcement of Security Interest &
• (b) Securitisation and Reconstruction of Financial
Assets of Banks and Financial Institution.
• What is securitisation?
• Securitization is the process of taking
an illiquid asset, or group of assets by any
securitization company from any originator, and
through financial engineering, transforming them
into a security and sold to investors thereby raising
funds by securitization company through QIB’s by
issue of security receipts representing, undivided
interest in such financial asset or otherwise.
Important Aspects
• For taking the assets for securitisation under sec
6(1), it is necessary for bank or financial institution to
give notice the borrower about such acquisition.
• u/s 13(2) it is necessary to give notice by Bank or FI to
the borrower who has defaulted in making the repayment
and whose account is classified as NPA to repay the
entire loan within 60 days from the date of notice.
• The notice should give the details of the amount payable
by the borrower and the secured asset intended to be
enforced by the secured creditor in the event of non-
payment of secured debt by the borrower.
• Any contravention of these legal consequences if made by
the borrower is punishable under the SARFESI Act. So it
is advisable that the notice mentions about the legal
consequences and penal provisions.
Important Aspects
• The Act does not expect delay in reply from the borrower
to the notice. If the borrower submits any representation
to the said notice, the Bank is required to give reply to
that notice under Section 13(3A) within a week.
• The secured creditor must apply his mind to the
objection raised by the borrower & if banker rejects
objections raised by the borrower then it should be in
writing with reasons for rejection.
• By giving the reasons for not accepting the objections of
the borrower, bank prevents him to bring any stay ,
injunction etc. to restrain creditor’s actions.
IF BORROWER DOES NOT PAY AS PER NOTICE
• Bank can take possession of the secured assets
of the borrower including right to transfer by way
of lease, assignment or sale for realising the
secured asset.
• Take over the management of the secured
asset of the borrower including the right to
transfer by way of lease, assignment or sale and
realize the secured asset.
• Appoint any person as manager to manage the
security assets the possession of which has been
taken over by the secured creditor.
HPW TO APPROPRIATE SALE PROCEEDS?
• When sale of secured asset is made the appropriation of
sale proceeds is made in the following order:
• Firstly, towards costs, charges and expenses incidental
towards preservation and protection of securities,
insurance premiums etc. that are recoverable from the
borrower.
• Secondly, towards the due of the secured creditors.
• Thirdly, if there is any surplus it will be paid to the
person entitled there to in accordance with the right and
interests.
– Attempt must be made for best possible price - easiest
indication is a public auction.
– Borrower should be given a right of first refusal or
improving upon the price
– The sale must not be made at the back of the borrower
Who can act on behalf of the Bank
• The senior officer of the rank of Chief Manager can act on
behalf of the bank.
• The powers of enforcing securities need to be exercised
prudently, fairly and with due care and caution the Rules
framed under SARFESI Act.
• Restrictions on borrower on receiving notice
u/s.13(2)
• When the borrower receives the notice from the creditor
under section 13(2) the borrower shall not transfer by
way of sale, lease or otherwise, other than in the ordinary
course of business, any of his secured assets referred to
in the notice without prior written consent of the secured
creditor.
• Non compliance with this provision attracts penal
provisions under SARFAESI Act that provide punishment
of imprisonment of one year or fine or both.
Judicial Authority’s help to Bank for taking possession
• When the secured creditor is required to take possession or
control of the secured asset or when the secured asset is
required to be sold or transferred under the provisions of
the SARFAESI Act, the secured creditor can take help of the
Chief Metropolitan Magistrate or the District Magistrate by
making request in writing.
• On such request being made the Chief Metropolitan
Magistrate or the District Magistrate, as the case may be,
shall take possession of security asset and documents
relating thereto.
• The Metropolitan Magistrate or the District Magistrate may
take or cause to be taken such steps and use or cause to be
used such force as may be in his opinion necessary.
• Any act of the Metropolitan Magistrate or the District
Magistrate for and while taking possession of the security
shall not be called in question in any court or before any
authority.
• Notice on taking Management of the borrower
concern
• When the secured creditor takes over the management of
business of a borrower, he may publish a notice in a
news paper published in English language and in a news
paper published in Indian language in circulation in the
place where the principal office of the borrower is
situated, for appointment of,
• Director -if the borrower is a company as defined in the
companies Act, 1956, to be the directors of such
company or
• Administrator -in any other case, to be the administrator
of the business of borrower.
• Notice on taking Management of the borrower
concern
• On publication of such notice, the directors of the
company in case the borrower is a company and in other
cases person holding any office having power of
superintendence, direction and control of the business of
the borrower immediately before publication of the
notice, shall be deemed to have vacated their offices.
• As effect of this, any contract or management between
the borrower and any directors or manager thereof shall
be deemed to be terminated.
• On publication of the above said notice and then after the
appointments of directors or the administrators as stated
above, all the property and effects of the business of
borrower is deemed to be in the custody of the directors
or the administrators so appointed, as the case may be.
Challenging before DRT Bank’s action to take
possession (APPEAL)
• Any person, including borrower, aggrieved by any of the
measures taken by the secured creditor or his authorized
officer for taking possession of the security may make an
application along with the prescribed fees to the Debts
Recovery Tribunal having jurisdiction within 45 days from the
date on which such measure are taken.
• The DRT has to dispose of the applicationunder the provisions
of the RDDB Act, 1993 and rules made there under. The
application has to be disposed as early as possible but within
sixty days.
• If for any reason it is not possible to so dispose the
application, the DRT has to record the reasons for delay but
such delay should not be beyond four months from the date of
filing of the application.
• If any such application is not disposed so within four months,
the aggrieved party can prefer an application to the Appellate
Tribunal for seeking directions for the early disposal of the
Appeal to Appellate DRT
• Any person aggrieved by any order made by the DRT can
appeal along with the prescribed fees to the appellate
Tribunal within 30 days from the date of receipt of the
order of DRT.
• For appeal it is necessary for the borrower to deposit 50%
of the. The Tribunal has powers to reduce this amount to
25% of the claim amount.
• The secured creditors and their officers are protected by
the provisions made in the Act for actions taken in good
faith.
• Protection is provided to the staff of bank against any
suit, prosecution or any other legal proceeding.
• This protection is given so that actions can be taken
without fear of counter action from the borrower or any
other person having interest in the property.
CIVIL COURTS HAVE NO JURISDICTION
• The SARFAESI Act has given powers to DRT or DRAT
• No Civil Court shall have jurisdiction to entertain any
suit or proceeding.
• Similarly, any Court or Authority cannot grant injunction
in such matters and actions taken or to be taken under
this Act as well as under RDDB Act, 1993. Due to such
provisions the implementation of the Act becomes
effective.
• The actions the secured creditor can take against the
security the SARFAESI Act are required to be taken
within the limitation as per section 36 of the Limitation
Act. That means the action has to be taken within three
years from the date on which cause of action arose
DUES AFTER THE SARFAESI ACTIONS
• If after sale of securities the claim is not fully

satisfied and still there are any dues to be
recovered from the borrower, the creditor is
required to file civil suit before the Civil Court or a
claim before the Debt Recovery Tribunal or the
Authorities /Courts under the Co-operative
Societies Act, as may be applicable within
limitation period.
• Therefore, the secured creditor will have to make
an assessment, before taking possession of the
security, whether it would be possible to sell the
security and make eventual claim for shortfall
within the limitation period.
Exceptions under sec. 31
• The provision of act shall not apply to:
• Lien on goods, money or security under Contracts law or
Sale of Goods Act.
• Pledge of movable within meaning of 172 of Indian
contract act
• Creation of security in any aircraft
• Creation of security in vessels
• Conditional sale, hire purchase or lease or any other
contract in which no security interest has been created
• Rights of unpaid seller
• Properties not liable for attachment under CPC:
• Where financial assistance not exceeding Rs 1 lac
• where dues are less than 20% of principal and interest
• Agricultural land
When Borrower Succeeds in Appellate u/s17
• If borrower succeeds in his Appeal u/s 17 of the, the
borrower may have alleged or established that the Bank
was at fault in adhering to the terms and conditions of
the sanction and may convince DRT to force the Bank to
act upon the agreed terms.
• However, DRT may simply set-aside the possession
notice issued by the Bank u/s 13 (4) of the Act and the
Bank have an opportunity to start the proceedings
afresh.
• It is felt that the Debt Recovery Tribunal can grant no
relief to the borrowers under section 17 except asking
the Bank to start the proceedings afresh.
Some Definitions
• All the Banking Companies, Nationalized Banks, SBI and
Co-operative Banks are within the meaning of the word
bank for the purpose of this Act
• "FINANCIAL INSTITUTION" means--
(i) a public financial institution within the meaning of
section 4A of the Companies Act, 1956
(ii) any institution specified by the GOI under RDDB Act,
1993.
(iii) the International Finance Corporation established
under the International Finance Corporation Act, 1958
(iv) any other institution or NBFC as defined in RBI Act
1934.
Some Definitions
• BORROWER
• The borrower means, any person who has been granted
financial assistance by any bank or who has given any
guarantee or who has created any mortgage, hypothecation
or pledge as security for the financial assistance granted by
any bank or FI.
• FINANCIAL ASSET
• A claim to any debt or receivables or part thereof whether
secured or unsecured or any debt or receivable secured by
mortgage of immovable property or hypothecation or pledge
of movable property or any right or interest in the security,
whether full or part, securing debt or any beneficial interest
in any movable or immovable property or in debt,
receivables, whether such interest is existing, future,
accruing, conditional or contingent or any financial
assistance
Some Definitions
• NON PERFORMING ASSET
• An asset or account of a borrower classified by a bank as
sub-standard, doubtful or loss asset in accordance with the
directions relating to asset classification issued by the
Reserve Bank of India
• PROPERTY
• Property means, immovable property, movable property,
any debt or any right to receive payment of money whether
secured or unsecured, receivables, whether existing or
future, intangible assets such as known-how, patent,
copyright, trade mark, license, franchise or any other
business or commercial right of similar nature.
• Secured Asset means the property on which security
interest is created. The powers given by SARFAESI Act for
enforcement of securities are against secured assets
only
Some Definitions
• ASSET RECONSTRUCTION
• Acquisition of any right or interest, in the security, by
any securitization company or reconstruction company
for the purpose of realization of such financial assets is
called as asset reconstruction
• SECURITIZATION
• Securitization means acquisition of financial asset by
securitization or reconstruction company from the Bank
for realization of debt. It is also called asset
reconstruction
• It also includes change or take over of the management of
the business of the borrower for proper management of
business of the borrower
• RBI is the regulatory authority for securitisation
or reconstruction company.
• Securitisation company is a company registered
under the Companies Act,1956 for the purpose
of securitisation. It also needs registration from
RBI under the provisions of SARFAESI Act.
• Security agreement includes an agreement,
instrument or any other document or
arrangement under which security interest is
created in favor of secured creditor
• Secured debt means a debt which is secured by
any security interest.
• Secured Asset means the property on which
security interest is created.
• The powers given by SARFAESI Act for
enforcement of securities are against secured
assets only.
• The security receipt evidences the purchaser’s
undivided right, title and interest in the security.
• These receipts are transferable in the market.
• Sponsor is a person holding not less than 10% of
the paid up capital of securitisation or
reconstruction company.
(1) Which of the following statements regarding security
enforcement is not true:
(a) Any security interest can be enforced by secured creditor
without intervention of the Court or Tribunal except the
provisions contained in Section 69 or 69A of Transfer of
Property Act
(b) If funds are raised through debt securities, then action can
be initiated even if secured debt was not classified as NPA
(c) No action can be taken if the debt is time barred or it
involves agricultural land
(d) No action can be taken when amount of due is more than
Rs. 5 lakhs or when amount due is less than 40% of the
principal amount and interest thereon
Answer is (d)
(2) Which of the following is not a security interest:
(a) Any mortgage, charge, hypothecation, assignment or any
right, title or interest of any kind, on tangible asset, retained
by the secured creditor as an owner of the property, given on
hire or financial lease or conditional sale or under any other
contract
(b) Such right, title or interest in any intangible asset or
assignment or licence of such intangible asset which secures
the obligation to pay any unpaid portion of the purchase price
of the intangible asset or the obligation incurred or any credit
provided to enable the borrower to acquire the intangible asset
or licence of intangible asset
(c) A lien on any goods, money or security given by or under
the Indian Contracts Act, 1872 or the Sale of Goods Act, 1930
or any other law for the time being in force
(d) Lien of goods, pledge of movables, security interest of less
than Rs. One Lakh
• Answer is (c)

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Legal and Regulatory Aspects of Banking

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LEGAL AND REGULATORY ASPECTS OF

(c) If places of business are in one state only, but one or

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• N.I. Act 1881 lays down the law relating to payment of

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• Section 89 in The Negotiable Instruments Act, 1881

• IT is a project of the RBI started in 2010, for faster clearing of

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Degree of liability of Primary Secondary

(1)The matter relating to payment of cheques and protection to a

(7) In a joint account if one of the signature is forged the bank

• When land/building is offered as security, mortgage is created.

IV. Lien Paper security Shares/Debenture

AS PER TRANSFER OF PROPERTY

Mortgage is the transfer of an OR the performance of

An existing Or future Debt

• Creating or modifying the charge shall be filled in

• Where the instrument creating or

• Charge created by operation of law need not be

• Negotiable Instrument (Hundi) is not a ‘Charge’

• If any Company contravenes any provision of this

• If after sale of securities the claim is not fully

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