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Introduction
The banking business around the world has witnessed several changes and started practicing a developed system. Therefore, it has become necessary to amend the existing banking laws to enable the banking companies in India to be at par with the international standards and in tune with the advanced technologies. The Banking Law (Amendment) Bill, 2012 ("Amendment Bill") seeks to amend the Banking Regulation Act, 1949 ("Act"), the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 to strengthen the regulatory powers of the Reserve Bank of India ("RBI") and to further develop the banking sector in India. The Amendment Bill has been passed by the Parliament and will be notified as statute once it receives the assent from the President of India. The present bulletin analyzes the crucial amendments proposed under the Amendment Bill and its possible impact on the banking system in the country. Salient features of the Amendment Bill are as follows
3. Raising Investments
The Amendment Bill proposes to amend section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 & 1980. This will enable the nationalized banks to issue bonus shares and rights issue for accessing the capital market and to raise capital required for expansion of banking business. It will also enable the nationalized banks to increase or decrease the authorized capital with the approval from central government and RBI without being limited by the ceiling of a maximum of INR 3 Billion. It will also enable banking companies to issue preference shares subject to regulatory guidelines of the RBI. As it is necessary for the banking companies to raise capital for expansion and development to compete with the international players, the proposed move should help their cause.
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The RBI uses CRR as a tool to increase or decrease the money flow in the market in order to control inflation or deflation of the economy. Therefore, the said proposed amendment empowering the regulatory powers of the RBI is necessary to secure the monetary stability in the country.
7. Cooperative Societies
The Amendment Bill proposes that the cooperative societies should mandatorily obtain license from RBI to carry on the banking business. Further, it empowers RBI to appoint an auditor to conduct special audits at the cooperative banks for any transactions or class of transactions or for any period by extending the applicability of section 30 of the Act. The said changes sets forth a sound and healthy banking system and to protect the interest of the depositors.
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8. Merger of Banks
The proposed legislation intends to exempt the mergers of banking companies from the purview of the Competition Commission of India, thereby, conferring power to RBI to take the decision. The Competition Act, 2002 has conferred authority to the said commission to regulate combinations/mergers of the banking companies which causes or likely to cause appreciable adverse effect on competition in the market within India. Since RBI is the banking regulator, empowering it with the powers of deciding on mergers and acquisition would be in the interest of the depositors and help to obtain the requested approvals swiftly in a timely manner.
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9. Penalties
The Amendment Bill proposes to increase the penalty for contravening the provisions of the Act as follows - (i) For providing false information to RBI, the new penalty would be INR 10 million; (ii) or failure to provide account books or any requested information to RBI, the penalty would be INR 200,000 and if the default continues then an additional fine of INR 50,000 shall be imposed;
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(iii) If the banking company defaults in complying with any of the requirement/obligation under the Act, a penalty up
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to INR 10 million or twice the amount involved in such contravention whichever is more shall be imposed;
and (iv) If a
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banking company fails to furnish account books or any requested information, the new penalty would be up to INR 2 million. The proposed changes would deter the defaulters.
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(i) The Amendment Bill proposes to increase the voting rights of the preference shareholders to 10% from existing 1% in respect of establishment of new banks and businesses thereof;
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(ii) Conversion of branches of foreign banks to wholly-owned subsidiary entities of foreign banks and the transfer of shareholding of banks to the holding company pursuant to RBI guidelines would be exempt from the payment of stamp duty; (iii) To exempt guarantee agreements of banks from the purview of the section 28 of the Indian Contract Act, 1872 to bring finality to redemption of such guarantees; and (iv) To allow select directors on the board of RBI a fixed maximum tenure of 8 years with terms of not more than 4 years each either continuously or intermittently in consonance with the directions of the ACC.
Conclusion
The changes proposed to enable the banking companies to raise the capital by attracting more investment would accelerate the growth of the industry and to perform to the international standards. Further, the enhanced regulatory powers of the RBI would help in effective implementation of the rules and regulations. The proposed amendments will be beneficial to the various stakeholders in the banking sector and also to regulate a reliable financial market in the country.
Footnotes
1 Proposed amendment Part II AB of the Act 2 A person not being an officer of the central government or state government and having experience in law, finance, banking, economics or accountancy 3 Proposed amendment to section 36AA of the Act 4 Associate enterprise means a company whether incorporated or not which is a holding company or a subsidiary of the applicant or joint venture company or controls the composition of the board of directors or other body governing the applicant or exercises significant influence on the applicant in taking financial/policy decision or able to obtain economic benefits from the activities of the applicant 5 Proposed amendment to section 3 (2A) of the Amendment Bill of Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 6 The current CRR fixed by RBI is 4% 7 Proposed amendment to section 18 of the Act 8 Proposed amendment to section 12 A of the Act 9 Proposed amendment to section 56 of the Act 10 Proposed amendment to section 2A of the Act 11 Proposed amendment to section 46 of the Act 12 Proposed amendment to section 47 A of the Act 13 Idem at 12 14 Proposed amendment to section 3 (2E) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970
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