Presence of Banking is identified and recognized since vedic period irrespective of subject of transaction. Banking system can be identified in barter system to digitized credit transactions. The first notable statute to regulate banking in India is the Negotiable Instruments Act 1881. Post- independence considered banking as crucial weapon to regulate economy and enacted Banking Regulation Act 1949. But the actual pitch of banking stepped-in during the Fourth Five Year Plan (1969-74) where the Indira Gandhi government nationalized fourteen major banks in India.
It is undoubtedly traced that amendments in Companies Act 1956 was the result of arrays of scams. Afterwards J.J. Irani Committee was appointed to insert full swing corporate governance in the laws regulating companies, hence the Companies Act 2013. Throughout the amendment period the Banking Regulation Act 1949 remained intact.
Fire for the Amendment 2020
Realization for amendment of Banking Regulation Act 1949 is the latest Punjab and Maharashtra Co-operative (PMC) Bank scam and crisis in 2019. PMC bank has 137 branches across seven states out of which more than eighty branches are concentrated in the rural area of the State of Maharashtra. The customers of PMC belong to small businesses, housing societies and institutions. The allegations include:
Promoters collude with bank management to draw loans without classifying it as non performing advances.
73% of the all the bank’s advances of sum of rupees six thousand five hundred crores was not serviced.
Fictitious accounts of companies borrowing small sum and created fake reports hiding from regulatory supervision.
It produced false figures with respect to net profit, advances and NPA which were attractive to future customers.
Initially case was charged against HDIL for money laundering and then the RBI-appointed administrator extended charges by adding forgery, cheating and criminal conspiracy. Bank’s Managing Director and other top management employees were arrested. The reason why I briefly discussed the said crisis in detail is to help you for better understanding as to how and why said amendments in Banking Regulation Act 1949.
The Banking Regulation Amendment Bill 2020 was introduced in March 2020 and the Ordinance was promulgated by the President of India, on 26th June 2020. The Bill focus to incorporate corporate governance, transparency, accountability, protection of investors and depositors in the co-operative Bank. In this regard ss.3, 45 and 56 of the banking Regulation Act is amended. Let us analyze the amendment of each section in detail.
Section 3: Act not to apply to certain cooperative societies
Pre amendment structure of this section narrates that, the provisions in the Banking Regulation Act is not applicable to a primary agricultural credit society (PACS), a co-operative land mortgage bank and any other corporative society except in manner and extent specified in Part V. Part V was incorporated in 1969 amendment to incorporate corporative societies under banking Regulation Act, 1949. This is the way through which the co-operative banks are regulated both by the State and Central Registrars and the Reserve bank of India.
Through amendment, the section has given a new mode of application i.e. even if anything is contained in NABARD Act, 1981, the act shall not apply to PACS, a co-operative society whose primary object and principal business is providing of long term finance for agricultural development. And such society does not use the words “Bank”, “Banker”, “Banking” and does not act as drawee of cheques.
It signifies that a co-operative society is exempted only if it does not carry out any sort of business by acting as drawee of cheques of its customers. It exempts banks aiding long term agricultural developments with a view to provide ease operational services to farmers and allied role players, and foreseeing “Make in India” in long run for transforming India to a self sufficient nation.
Section 45: RBI’s power to apply to Central Government by Banking Co. and to prepare scheme for reconstitution or amalgamation
In the pre-amendment, sub-section.1 of the section gives power to RBI to apply to central government for an order of moratorium only if RBI has good reason to believe; in respect of a banking company. Subsection. 2 empower Central Government to order moratorium if it is satisfied with reasons stated by RBI. This moratorium will stay commencement or continuance of actions and proceedings against the bank for a fixed period based on terms and conditions fixed by the government and can extend and modify terms. The period shall not exceed six months. As per Sub-section 3 moratorium the Bank is barred from making payments and discharge of liabilities.
Sub-section 4 says during Moratorium RBI can prepare scheme for reconstruction and amalgamation with other banking company/ institution, if it is satisfied that in the public interest or depositors’ interest or to secure proper management of the banking company or in the interest of banking system in the country as a whole.
As per cl.5 the following matters shall be included in the scheme.
The constitution, name and regd. Office, capital assets, powers, rights, interests, authorities and privileges, liabilities, duties and obligations of banking company on reconstruction.
In case of amalgamation, details of business, properties, assets and liabilities transferring shall be given in detail.
Change in Board of Directors, addition of new directors and time for appointment shall be specified.
Alteration as to MOA and AOA
Payment to depositors and creditors with respect of rights and interests against the banking company.
Details as to allotment of shares before reconstruction or amalgamation and details with regard to reduction of shares.
Details as to pay or grant sanctioned by central government before expiry of three years.
The section further narrates a huge description as to reconstruction. At the end, Sub-section (15) states that banking institution means any banking company and include State Bank of India or subsidiary bank or a corresponding new bank.
By the amendment, the word “reconstitution “contained in the marginal heading is substituted by the word “reconstruction”. The word reconstruction gives wider scope for the section as the word includes mergers and acquisitions and takeovers or demergers. This will enable banking companies to expand in a short span and shall procure least NPAs.
Sub-section 3, adds that on moratorium, not only discharge of liabilities shall not be made to creditors but also grant of loans or advances or make investments in any credit instruments.
In subsection 4 it is modified that not only during moratorium but also any other time, the Reserve Bank can prepare scheme based on public interest and other factors as already stated in the sub-section. It provides the Reserve bank extensive power to supersede the management of the banking company. This enables proper governance of stability in banks, thereby ensuring accountability to its depositors and stakeholders.
As already stated sub-section (5) narrates contents of the scheme for amalgamation. In the said, cl. (e), (i) and (j) instead of “during period of moratorium”, “reconstruction and amalgamation” shall be inserted. This points extension of time for proceedings and actions, which provides relaxations and amicable time to interested parties to act on amalgamation or reconstruction. It also provides transferee company amicable time to arrange finance to help provide payments of all forms to its employees. The aim of this amendment is to bring down the damages to employees with respect to employment and increase chances to compliance. Further sub-section (6), word “amalgamation” is substituted by “reconstruction and amalgamation” widens scope of the section as already said.
Sub-section (15) omits the word “subsidiary bank” from the definition of banking institution. By this the legislation intends to curtail all fictitious subsidiary banks and accounts made with the blanket name of the parent bank. This enhances internal governance and protection of depositors.
Section 56: Act to apply to co-operative societies subject to modifications
This section has undergone maximum amendments in the Banking Regulation (Amendment) Ordinance 2020. This can be regarded as key amendment for extra inclusion of cooperative banks under the control of the Reserve Bank of India. The preliminary portion has amended by substituting “The provisions of this Act, as in force for the time being” with “Notwithstanding anything contained in any other provision” in order to widen the scope of interpretation of terms narrated i.e.
Banking company or company can be construed as cooperative bank.
Commencement of the Act as “Banking Laws (Application to Co-operative Societies) Act, 1965”
In addition three terms are inserted by this amendment; Memorandum and Articles of Association in the Act shall be interpreted as bye-laws; provisions of law where bank is registered and Registrar as Registrar of Cooperative Societies/ Central or State Registrar.
Section 5A of the Banking Regulation of Act deals with Act to override memorandum, articles if any of the same act repugnant to the provisions of this Act is void. Before Amendment, this provision was included in section 56 by substituting Board of Directors etc with Co-operative societies. Its further interpretation is given in clause (e). The amendment has omitted both clause (d) and (e).
Under clause (f), it is said that the words “Bank”, “Banker” and “Banking” shall be used only by cooperative bank and no cooperative society except primary credit society, cooperative society for the protection of mutual interest of co-operative banks and co-operative society for by employees of banking Co, State Bank of India etc. In the amendment, the words “co-operative land mortgage bank” is omitted from I in cl. (b) and II in clause (c). Therefore co-operative land mortgage bank is not under exception.
Section 8 and 9 of the Banking Regulation Act 1949 deals with Prohibition of trading and Disposal of non-banking assets respectively. And section 56 says that Clauses (fi) and (fii) of the section substitutes ss.8 and 9 of the Act. This is omitted in the new amendment.
Omission of a provision omitting some provision indicates its application. Clause (g) omits sections 10, 10A, 10B, 10C and 10D. The amendment omits clause (g). Hence all the said provisions are applicable to co-operative societies. i.e.
a. S.10: Prohibition of Employment of Managing Agent and restrictions on certain forms of employment;
b. S.10A: Board of Directors to include persons with professional or other experience;
c. S.10B: Banking Company to be managed by whole time chairman;
d. S.10C: Chairman and certain directors not to hold qualification shares; and
e. S.10D: Provisions of 10A and 10B to override all other laws and contracts.
The omission adopted in the present amendment paves way to better internal management, accountability and strong application of law over agreements and byelaws.
Section 56 (i) omitted sections 12, 12A, 13 and 15 to 17 of the Banking Regulation Act 1949. The amendment mandates to substitute the above with “Issue and regulation of paid-up share capital and securities by co-operative banks”. Thus a co-operative bank can call shares by public issue or private placement with prior approval of the Reserve Bank. It can call for equity shares, preference shares, special shares on face value or at premium and issue bonds and unsecured debentures with original or initial maturity of not less than ten years. Reserve bank can impose limits on persons or operational members in the cooperative bank. Further no person shall be entitled to demand payment towards surrender of shares issued to him by a co-operative bank. Also the bank shall not withdraw or reduce its share capital superseding the conditions imposed by the reserve bank.
Clause (l) deals with restriction of loans and advances by co-operative banks. Through amendment this clause is omitted, which means the section 20 will apply without substitution i.e. as it is. Substitution of “any one party” against words “any one company, firm or association” under section 21 of the Banking Regulation Act is stated under clause (n) which is omitted in the amendment. Section 24 of the Act deal with maintenance of percentage of assets. With regard to cooperative banks, the same is dealt under clause (q). The substitution made under clause (q) is omitted by means of this amendment which indicates that the provision will apply to cooperative banks as such. Further clause (r) states that section 25 is omitted. Amendment omits this clause and hence s.25 of the Banking Regulation Act 1949 is applicable.
Clause (ria) is omitted wherein substitution of banking company under section 26A with “cooperative bank” is stated and therefore the section will apply as such. S.26A deals with establishment of depositor education and awareness fund. This will enable consumer awareness and increase of protection. It is already said that the consumers of cooperative banks are small business holders, institutions etc and therefore education is compulsory to make reach of the accountability that the bank serves for them.
Clause (sa) deals with audit of a co-operative bank where the provision is the substitution of section 30 of Banking Regulation Act deals with audit. Hence the provisions of audit will apply on co-operative banks as such.
Under s.56 (t) (i) the time period of three months given under s.31 is substituted with six months which is omitted in this amendment. Hence the section 31 will apply as such. S.31 of the Act deals with submission of returns. The reduction of time period to submit returns will ensure accountability in day to day transactions and maintenance of registered.
Clause u states that sections 32 to 34 shall be omitted. Section 32 and 34 deals with copies of balance sheet and accounts to be sent to registrar and display of audited balance sheet by companies incorporated outside India. The amendment has omitted the clause and hence the sections will be applicable as such. This is a great step taken by legislature to increase regulation of co-operative banks irrespective of place of registration to be monitored by the Reserve bank. Publication and filing of statement of accounts is the key for transparency.
Under Clause v, s.34 (3) is omitted which is omitted through the amendment and hence the provision has direct application. Through amendment cl. (x), (y), (z) and (za) are omitted whereby section 35A (Power of reserve bank to give direction), s.35B (Amendments of provisions relating to appointments of managing director etc. subject to previous approval of RBI), s.36 (Further Powers and functions of reserve bank) and s.36A (certain provisions of the Act not to apply to certain banking companies) shall apply in full and complete sense. It directly shows the increasing regulatory powers of reserve bank over the co-operative banks.
Amendment of Clause (zaa) of section 56 mandates substitution of “multi state cooperative bank” with “co-operative bank” under s.36AA which deals with Power of Reserve bank to remove managerial and other persons from office. Amendment brings in a proviso to sub-section (1) i.e. “If in case of co-operative banks registered under Registrar of Co-operative Societies of a state, then RBI shall issue orders in consultation with state government seeking its comments within the specified time period”.
The amendment also states that s.36ACA will not apply and 36AAB so inserted shall be omitted. From clause (zb) Part IIC is omitted from other omission and hence it is applicable to co-operative banks. Further sub-clause of clause (zc), (zd) are omission clauses which is omitted gives application of s.46 (Penalties)and s.47(cognizance of offences) on co-operative banks. Clause (zf) deals with application of deposits withdrawable by cheque are omitted with the present amendment. This can be regarded as the most stringent rule to maintain the character of co-operative banks from other co-operative establishments.
This amendment substitute’s central government as central registrar or registrar of Co-operative societies under s.49B said under clause (zg). This confirms the intact and unaffected role of states vide this amendment. Apart from these, the amendment Act omits clause (zh).
Clause (zj) deals with section 53 which is the power to exempt in certain cases. After this section, the amendment Act put forth new section i.e. s.53A which narrates on Power to exempt co-operative banks in certain cases which an important step is showing the element of relaxation provided.
It can be analyzed that amendment is made on the basis of the character of PMC Bank scam and crisis. Education and awareness provision is congratulating, which opens a scope to include more customers from rural sector. Earlier the dual power RBI and state were regulating simultaneously without proper identification as to exercise of powers, but the amendment has brought in clarity for this. Now Registrar will regulate the administrative part whereas the Reserve bank regulates the functional side of the co-operative banks.
Adv. Anu Bhuvanachandran is Partner, Outsay Legal; Adv. Dhanya C. practises at Karnataka High Court, Bangalore.