Banking Laws: Now and Then!

By: Dipanshu Singhal, Symbiosis Law School

The instant note discusses the amendment in the Banking Laws which were passed by both houses of the Parliament last winter and which are awaiting the assent of President to become the law. Parliament has made changes across the banking laws and they aim at smooth transactions and quick recovery process. Amendments also have extended the scope and power of the regulator ensuring that the interest of the banks and customers are safeguarded. The Lok Sabha on December 10th, 2012 passed the ‘Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2012’ amending two laws, namely - I. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”)
II. Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“RDDB Act”) And on December 18th, 2012 Lok Sabha passed the 'THE BANKING LAWS (AMENDMENT) BILL, 2012' amending: I. Banking Regulation Act, 1949
II. Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970
III. Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 Some of the important amendments to the SARFAESI Act are: I. Right to bid for immoveable property Lenders will now be allowed to bid for an immoveable property during any subsequent sale, wherein such sale of immoveable property has been postponed, for want of bid of an amount not less than the reserve price. This will help in reducing the interest liability of stressed borrower and in preventing a situation, wherein there are no bidders for a property and therefore, the banks/lenders are not in a position to dispose off the asset. II. Conversion of debt into equity Extant laws provide that the Securitization Companies (SC)/Reconstruction Companies (RC) can initiate the measures listed under section 9 of the SARFAESI Act for the purpose of asset reconstruction only. New amendment broadens the scope and provides that in addition to the measures listed under section 9 of the SARFAESI Act, SC/RC now also have a right to convert any portion of debt into shares of the borrower, which will give relief to stressed borrowers from high interest payments. III. Reduction in minimum threshold for enforcement in case of joint financing Lenders of joint financing to initiate action under the SARFAESI Act will now have lot more flexibility as in case of joint financing of a financial asset by secured creditors, no creditor shall be entitled to exercise any or all of the rights, unless exercise of such right is agreed upon by the secured creditors representing not less 60 percent in value of the amount outstanding as on a record date, instead of the earlier stipulation of three-fourth in value of the amount outstanding. IV. Registration with Central Registry A proviso have been added to section 23, which empowers the Central Government to issue notification requiring registration of all transactions of securitization, or asset reconstruction or creation of security interest, which are subsisting on or before the date of establishment of the central registry. V. Right to file caveat In order to prevent the unwanted ex-parte order that a borrower may pre-empt for the purpose of derailing the enforcement process. The secured creditors have been given specific right to file caveat before the Debt Recovery Tribunal (“DRT”) or Court of District Judge or Debt (“DRAT”) or High Court, if an application or an appeal is expected to be made or has been made u/s 17(1) or 17(A) or 18(1) or 18(B) of the SARFAESI Act. Some of the important amendments to the RDDB Act are I. Refund of court fees Applicants/lender can seek refund of the fees paid by them at the time of filing of an application for recovery of dues before the DRT, if the application filed before the DRT for recovery of any debt is settled prior to the commencement of the hearing before that DRT or at any stage of the proceedings before the final order is passed. II. Expeditious hearing before DRT The amendments have been brought in order to expedite the whole process by way of the following changes: A fixed period of thirty days (30 days) is provided to the defendant to file a written statement of its defense from the date of service of summons, And wherein the defendant fails to file written statement within the stipulated period of thirty days, the Presiding Officer may, in exceptional cases and in special circumstances to be recorded in writing, allow not more than two extensions to the defendant to file the written statement. Further it provides for the day-to-day hearing, provided that the tribunal may grant adjournments if sufficient cause is shown but no such adjournment shall be granted more than three times to a party and where there are three or more parties, the total number of such adjournments shall not exceed six. Provided further that, the Presiding Officer may grant such adjournments on imposing such costs, as may be considered necessary. The amendment has provided power to the Presiding Officer to impose costs on the party seeking adjournment. This in itself shall be a detriment to the borrowers who willfully, prolong the recovery suits for avoidance of payment of their debts. Some of the important amendments to the Banking Regulation Act are: I. Regulation of acquisition of shares or voting rights Amendment proposes addition of Section 12B in the Banking Regulation Act(herein after the Act), the section regulates the acquisition of shares or voting rights by a person in excess to the total holding of 5% has to take permission from Reserve Bank of India (“RBI”). Total holding will be calculated by including the shares and voting rights of the relatives (as defined in Section 6 of the Companies Act, 1956). And RBI will have the power to impose conditions on granting approval of such acquisition of share capital. II. Depositor Education and Awareness Fund Amendment proposes addition of Section 26A in the Act setting up a 'Depositor Education and Awareness Fund'. The Fund will take over the deposit accounts which have not been claimed or operated for a period of ten years or more. Provided that nothing will prevent the depositor or claimant to claim the money back, the fund will be used to promote the activities in depositor's interest. III. Check on Associate Enterprise Amendment proposes addition of Section 29A in the Act whereby the RBI can ask for the statements and information related to business or affairs of associated enterprise of the banking company. Banking companies engage in various financial activities through the medium of associate enterprises. To ensure better regulation of such activities the Bill confers powers on the RBI to call for information and returns from such associate enterprises and also inspect them if required. IV. Suppression of board of directors of banking company Under the regulations of the Banking Regulations Act, 1949, the RBI has the power to remove a director or any other officers of the banking company. The Statement of Objects and Reasons of the Bill states that such power is not adequate if the entire Board of Directors is working against the interest of the depositors and the company. Part IIA is added in the Act, it confers powers on the RBI to supersede the Board of Directors of a banking company for not more than 12 months and appoint an administrator for the managing the company during that period. V. Penalties Amendment of the Section 47A will result in the increase of quantum of the penalties where there is failure to furnish important information or wilful provision of false information (Section 46 of the Act). VI. Time Limit for Co-operative Societies. The extant Banking Regulation Act, 1949 gives a time limit of one year to primary co-operative societies to get a license from the RBI to perform banking activities. Amendment has extended the time period to three years within which a cooperative society can get the license by fulfilling all requirements to carry on banking business or cease doing so if the license is not granted. Some of the important amendments to the Banking Company (Acquisition or Transfer of Undertakings) Act, 1970 and Banking Company (Acquisition or Transfer of Undertakings) Act, 1980 are: I. Section 3 of the above Acts has been amended; it fixes the three thousand crores rupees as the authorised capital of every new bank. II. Approval to increase or decrease the authorized capital has to be taken from the Central Government and the RBI.
III. It allows nationalised banks to issue two additional instruments (bonus shares and rights issue) to enable them to access the capital market for raising capital. IV. Amendment has empowered the shareholders of the banking company as the ceiling on voting rights has been raised in case of the nationalised banks from one percent to ten percent. Conclusion Amendment of banking laws were long pending and Parliament by amending all the major related laws together has aimed at smooth implementation of the changes. The changes introduced are laudatory in nature taking into account all the parties i.e. banks and customers. Changes introduced will benefit both the parties. And the extended power given to the regulator will ensure the same. Disclaimer: The views expressed here are those of the author and do not represent the views of The Firm, its host channel CNBC TV18, the owner Network 18 or this website and/or any related parties. The student has vouched for his/her identity and the authenticity of the article. We have not conducted independent verification of the same. This website is not responsible for misrepresentations. In case of any anomalies/errors/complaints  you can write to us atthefirm@in.com