Control Over Organisation of Banks: Jaiib/DBF Paper 3 (Module A) Unit-2

Control Over Organisation of Banks: Jaiib/DBF Paper 3 (Module A) Unit-2

Dear bankers,

As we all know that  is Control Over Organisation of Banks for JAIIB Exam. JAIIB exam conducted twice in a year. So, here we are providing the Control Over Organisation of Banks (Unit-2), Regulations and Compliance (Module A), Legal & Regulatory Aspects of Banking -Paper 3.

♦Licensing of Banking Companies

  • License Requirement from RBI: The banking business in India, a company requires a licence form the RBI under Section 22 of the Banking Regulation Act, 1949.
  • Discretion of Reserve Bank: RBI to consider the defects or improvements revealed in an inspection held under Section 35 of the BR Act while disposing of an application for licence.
  • Conditions to be Satisfied: Section 11 BR Act specifies the minimum capital and reserve requirements of banking company, the Reserve Bank can stipulate a higher requirement of capital for licensing a banking company as under section 22. The Reserve Bank has to be satisfied that the company has a adequate capital and earning prospects.
  • Foreign Bank: In the case of companies, incorporated outside India applying for a licence, apart from the conditions specified in the case of domestic companies, three additional conditions have been stipulated for consideration by the Reserve Bank
  1. Whether carrying on a banking business by the company in India will be in public interest
  2. Whether the government or the law of the country, in which the company is incorporated discriminates in any way against banking companies registered in India
  3. Whether the company complies with provisions of the BR Act, as applicable to foreign companies.
  • Cancellation of Licence: Sub-Section(4) of Section 22 of the Banking Regulation Act Authorises the RBI to cancel the licence granted to any company.

♦Branch Licensing

Under Section 23 of the Banking Regulation Act, ‘Place of business’ for this purpose includes any sub-office, pay office, sub-pay office or any place at which deposits are received, cheques cashed or moneys lent.

For granting permission under section 23, the RBI may require to be satisfied of the following:

  • Financial condition and history of the bank;
  • General character of its management;
  • Adequacy of capital structure and earning prospects;
  • Public interest.

♦Paid-Up Capital and Reserves

Section 11 of the Banking Regulation Act provides for certain minimum requirement as to paid-up capital and reserves of banking companies.

  • Foreign Banks: Under Sub-section (2) of section 11 of the BR Act, a foreign bank operating in India, has to deposit and keep deposited with the Reserve Bank an amount 15 lakhs and if it has place of business in Mumbai or Kolkata or Both, 20 Lakhs. The amount has to be kept in cash or unencumbered approved securities or in both.
  • Indian Banks: In case of banking Companies in India, the requirements of minimum paid-up capital and reserves under Section 11 (3) are as follow:
Amount Term Condition
Rs. 5 lakhs If it has a place of business in more than 1 state
Rs. 10 lakhs If it has a place of business in more than 1 state include Mumbai and Kolkata
Rs 1 lakh If business is in only one state and does not including Mumbai and Kolkata + Rs.10000 for other places of business, in the same district in which the principal place of business is situated, +  an additional Rs. 20000 for each place of business elsewhere; in total not exceeding Rs. 5lakhs
Rs. 50000 If the bank has only one place of business
Note If place of  business are one state only, but one or more of them is in Mumbai or Kolkata Rs 5lacs + 25000 for each place of business outside these cities and the aggregate not exceeding Rs 10 lacs.

Paid-up Capital, Subscribed capital and Authorised Capital: In terms of Section 12(i) (ii) of the Banking Regulation Act, Banking Companies are permitted to issue equity share or equity share and preference share.

♦Shareholding in Banking Companies

  • Section 12(2) Banking Regulation Act 19: Certain restrictions on voting rights of shareholder.
  • Section 12 B Banking Regulation Act 1949: No person (hereinafter referred to “as the applicant”) shall, except with the previous approval of the Reserve Bank, on an application being made, acquire or agree to acquire, directly or indirectly, by himself or acting in concert with any other person, shares of a banking company or voting rights therein, which acquisition taken together with shares and voting rights.
  • Section 12(3) Banking Regulation Act 1949: on behalf of a minor or a lunatic on the ground that the registered holder holds the share on behalf of the minor or lunatic.
  • Section 13 Banking Regulation Act 1949: Under the Amending Act, Impose a ceiling on the commission, brokerage, discount or remuneration on the sale of share of banking companies.
  • Section 15 Banking Regulation Act 1949: No dividend is payable until all capitalized expenses are completely written off. Example: Preliminary expense, share-selling commission, brokerage etc.

♦Subsidiaries of Banking Companies

  • Section 19 Banking Regulation Act 1949: Restriction on nature of subsidiary companies.
  • Section 19 (2) Banking Regulation Act 1949: Apart from the restriction on subsidiaries, there is also a ceiling on shareholding in companies other than subsidiaries.

♦Board of Directors

  • Section 10A Banking Regulation Act: Stipulates certain qualifications for directors of banking companies. Board of directors to include persons with professional or other experience
  • Section 10A (2)(b) Banking Regulation Act: Have substantial interest in, or be connected with, whether as employee, manager or managing agent,—
  1.  Any company, not being a company registered under section 25 of the Companies Act, 1956 (1 of 1956), or
  2. Any firm, which carries on any trade, commerce or industry and which, in either case, is not a small-scale industrial concern, or
  3. Be proprietors of any trading, commercial or industrial concern, not being a small-scale industrial concern.
  • Period of office: The directors of a banking company shall not hold office for more than 8yrs continuously.
  • Section 10B Banking Regulation Act: Provide that every banking company should have a full-time or part-time chairman, appointed from among its directors.
  • Section 36AB Banking Regulation Act: The RBI has the power to appoint additional directors on the boards of banking companies.
  • Section 10 Banking Regulation Act: Prohibits employment of managing agents and imposes restrictions on employment.

♦Controls over Management

  • Power to remove Management and other personnel: The RBI is empowered under section 36AA of the Banking Regulation Act to remove any chairman, director, CEO or other officer or employee of a banking company.
  • Appeal: An appeal against the order of removal lies with the Central Government. Such an appeal has to be filed within 35 days from the date of communication of the order. The appellate decision of the central government, and subject there to the order of the RBI, shall be final and no liable to challenge in any Civil Court.
  • Supersession of Board of Directors of Banking Company: Section 36CA of BR act empowers RBI to supersede Board of Banking Company for a period of 6 Months which may be extended upto 12 months.

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