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Part I

Government Control of Corporate Activity

Give intrduction to Competition Law?
In the pursuit of globalisation, India responded to opening up its economy,
removing controls and resorting to globalisation. The natural corollary of this
motion is that the Indian market should be geared to face competition from
within the country and outside. The Central Government for this purpose,
constituted a High Level Committee on Competition Policy and Law. The
Committee submitted its Report in 2000 to Central Government. On the basis of
this Report made the competition law in the shape of the Competition Act of
2002 to ensure competition in India by prohibiting trade practices which cause
appreciable adverse effect on competition in markets within India and as well
provides for the establishment of a quasi-judicial body i.e., Competition
Commission of India which came into operation in 2009, to undertake
competition advocacy for creating awareness and imparting training on
competition issues. This law also curbs negative aspects of competition through
the Competition Commission of India (CCI) which has a principal Bench and also
additional benches. The Competition Commission is empowered to pass orders
for granting interim relief or any other compensation or any order imposing
An appeal from orders of the Competition Commission lies to Supreme Court or
to Competition Appellate Tribunal as prescribed in 2007. The Central
Government has the power of supervision and control over the Competition
Commission of India. The Director-General is the head of the too such
Moreover, the Competition Law was made keeping in view of economic
development of our country, preventing the practices having adverse effect on
competition, promoting and sustaining competition in markets, protecting the
interests of consumers and ensuring freedom of trade carried on by other
participants in markets in India.
Competition Policy
The Competition Policy may be defined as government measures that directly
affect the behaviour of enterprises and the structure of industries. The object
of competition policy is to promote efficiency and maximise welfare. It is wellknown that in the presence of competition, welfare maximisation is synonymous
with allocative efficiency. The taxes are generally welfare-reducing.

The competition policy has two objectives in general. The first involves putting
in place a set of policies that enhance competition in local or national markets.
It may include a liberalised trade policy, relaxed foreign investments, ownership
requirements and economic deregulation.
The second objective is legislation or law makings to prevent anti-competitive
business practices and unnecessary governmental intervention. Hence an
effective competition policy promotes the creation of business environment
which improve static and dynamic efficiencies and leads to efficient resource
allocations, and in which the abuse of market power is prevented mainly
through competition. It also requires a creation of regulatory framework for
achieving all around efficiency. The policy also prevents artificial entry barriers
and facilitates market access and complements other competition promoting
activities. The trade liberalisation alone is not sufficient to promote competition
and there might be a need for a separate competition policy through the strong
implementation of competition law.
The economic consequences of the competition policy leads a positive approach
to resource allocation and industrial growth, productivity and efficiency,
competitiveness, inflexibility, minimum efficient scale, Industrial concentration
capacity utilisation, technology and research and development within a specific
market regime with the goal of consumer welfare.
What are the Advantages of Competition?
Stimulating innovation and efficiency.
Providing Consumer with a variety of alternatives, enhancing product
differentiation and better satisfaction of consumers.
It includes competitive products in Competitive prices. in giant sectors.
Bigger manufacturers tend to keep the market reserved for themselves and
try to subvert free competition by wing methods like
(a) Forcing a competing firm out of business by predation and other methods.
(b) Buying out competing firms by takeover or merger.
(c) Colluding with competing firms and fixing prices.
In order to stop the unfair trade practices, a free competition, regulation is
1. To prevent practices having adverse effect on competition.
2. To promote and sustain competition in markets.

3. To protect the interests of consumers.

4. To ensure freedom of trade carried for other participants in markets.
The Competition Commission of India under the Competition Act, 2002 is to
facilitate competition and to regulate a firm from abusing its market power.
Name briefly the Competition Laws in other Countries?

(a) Sherman Act, 1890U.S.A.

(b) Clayton Act, 1914

(c) Celler-Kefauver Act, 1950
2. Competition Law in European Union.
Treaty of Rome, 1957.
3. U.K. Competition Act, 1998.
Define nature and scope of the Indian MRTP Act, 1969?
The Indian Law was contained in the MRTP Act (now repealed by the
Competition Act, 2002). Its genesis can be found in Article 38 and Article 39 of
the Constitution of India embedded in the directive principles of State Policy. The
Act originally was to curb monopolistic and restrictive trade practices only.
1984 Amendment to the Act brought unfair trade practices within purview of
the Act.
The Act was mainly directed towards:
1. Prevention of Concentration of Economic Power.
2. Control and restriction of monopolies.
3. Control and restriction of monopolistic trade practices.
4. Prohibition of restrictive trade practices.
5. Prohibition of unfair trade practices.
The 1991 Amendment to the Act deleted provisions relating to concentration
of economic power in a few hands.
The MRTP Act did not addressed Competition and anti-Competitive practices.

It lacked provisions for implementing WTO Agreements and commitments and

to deal with identifiable anti-competitive practices.
In order to make a comprehensive policy on competition the Central
Government appointed Raghavan Committee which submitted its Report in May,
Under the Chairmanship of Justice Sh. Rajinder Sachar, former Judge of the High
Court of Delhi.
Appointed/constituted by Government in terms of the Ministry of Law, Justice &
Company Affairs (Department of Company Affairs).
To recommend changes (structural or form) in Companies Act, 1956 and
Monopolistic & Restrictive Trade Practices Act, 1969.
Topics on which recommendations sought are:
(1) Formation of Board of Directors (BOD) in consonance with the interest of
minority shareholders.
(2) Exercise of managerial powers by the BOD to protect the interest of
shareholders and creditors.
(3) To increase participation of workers in share capital.
(4) To make provisions of mismanagement more effective so as to protect public
interest and companies interest.
(5) More professional attitude of company and better remuneration.
(6) Companies contribution to social causes.
(7) Simplification of winding-up procedure.
(8) Changes in foreign companies.
(9) Changes in the MRTP Act.
(10) Changes in the Companies Act, 1956 and the provision for exclusion or
inclusion of Government or public company.
Concepts and Definition:

(a) Combination of definition of alter and alteration and modify and

modification into one.
(b) Definition of member (Section 2(27) to be replaced by definition provided in
Section 41 (member).
(c) Changes in the definition of relative under Section 2(41) in line with the
provisions of Section 6.
(d) Definition of Company to indicate Company before the commencement of
this Act
(e) Definition of Court must include Registrar and Company Law Board (CLB).

New (i) Accountant

(ii) Auditor

Professional (iv) Recognised Shareholders

Part AState the Sachar Committee's Recommendations for the

Companies Act, 1956?
Classification of companies:
1. Few structural changes within the existing classification of public and private
2. Existing companies fulfilling certain conditions to be compulsorily converted
into limited companies.
3. Guarantee companies allowed only as public limited companies as per
Section 25.
4. No public company, itself, converts into private company.
5. Changes in Private Limited Structure.
6. Apply provision of Private Limited Company, Public Limited Company.
7. Boost to small scale industries, therefore, advent of new class of industries
(a) Small private paid up capital Rs. 5 lakh
(b) Others

Management Structure and Professionalisation of Management:

1. Professionalisation of management is an inevitable necessity for the wellbeing of the company itself. Thus, this needs to be carried forward.
2. Representation of minority shareholders in Board and other measures for
protecting their interests.
3. For workers participation in management. The 2-tier Board is not
4. Public Limited Companies Paid up capital of 50 lakh, one managing director
or whole time director.
5. No person to hold office of MD in more than one public limited company
unless specified procedure and permission of CLB.
6. Maximum directorship 10 to 20
7. Section 283 regarding the vaction of office was proposed to be amended.
Director to file returns, mandatory, before registrar
8. Board meeting at least once in every two months.
9. Amendment to Section 203 no vacation of office after the commencement
of winding-up.
Managerial and Executive Recommendation:
(1) Recommendations of the Bhoothalingam Committee on wages. Incomes and
Prices Policy including top managerial salaries
(a) Managerial remuneration should be regulated by the Company by special
resolution at the Annual General Meeting and subject to the recommendation of
this Committee.
(b) Division of Companies according to effective capital and maximum/minimum
salary payable. Any abridgement of laid guidelines needs prior approval of the
Central Government.
(2) Appointment/reappointment at Annual General



(3) Annual report of Board must enclose undertaking compliance of statutory

guidelines. Any breach cognizable by CLB on a complaint.
Shareholder Protection and Mismanagement:

1. Recognition of shareholders Association maintain vigilance over earning

2. Proxy holders
Right to vote by show of hands.
Right to speak and express their opinion.
3. The twin proof requires, in Section 397, justifying winding-up in onerous and
even a single act of oppression is sufficient. Further Government under Section
408(i) can exercise its process after abiding by the principles of natural justice.
4. Appointed Director under Section 408 by Central Government to report every
three months.
5. The power of Central Government under Section 409 to be transferred to CLB
6. Under Section 409 interim order operative two months unless extended.
CLB to pass final orders within six months.
7. Appeal from CLB to a High Court. High Court to decide within six months.
8. CLB should have power to investigate under Section 237(a).
Accounts and Audit:
1. Maintenance of account by companies on mercantile system obligatory.
2. The Financial Year 18 months permitted by ITO and Registrar of
3. Companies with paid-up capital of Rs. 25 lakhs or more to employ:
(a) Chief Accountant or Financial Controller
(b) A Cost Accountant and an Internal Auditor for companies engaged in
manufacturing/specified activities.
Social Responsibilities of Company:
(1) Openness and disclosure of corporate affairs.
(2) Public accountability, like adherence to environmental laws.
Political Donations:

1. Pressure increased during 1957 General Elections. Bombay and Calcutta High
Courts condemned the Act.
2. ParliamentSection 293A Companies (Amendment) Act, 1960.
3. Santhanam Committee call for total ban under Section 293A.
Part BState the Sachar Committee's Recommendation for MRTP Act,
Concept and Definition:
Title of Act should be changed to Monopolies and Trade Practices Act as it
includes Unfair Trade Practices also.
Commission should be read as MRTPC and therefore necessary changes
should be made in the definition.
The concept of calendar year and adoption of lowest figure for production
should be changed instead use of the term average annual production for 3
years preceding the calendar year should be made (in which dispute arise).
Amendment of definition of goods under Section 2(e) so as to bring it in
conformity with Sale of Goods Act so as to include shares and stocks.
No exemptions for Government/Government-controlled/owned under-takings
from the purview of the Act.
No exemption for newspapers also.
Concentration of Economic Production:
The role of MRTPC to be strengthened.
Section 30 of MRTP Actamendment.
In case of a merger/amalgamation approved by Central Government under
Section 396 of Companies Act, in public interest then no approval be required of
MRTPC under Section 20 or 23.
In case of acquisition if the result is control of 33.3% or more of voting power
or the cost of acquisition more than Rs. 3 crore matter compulsorily be
referred to MRTPC for final disposal.
The power to initiate action under Section 27 for division of an undertaking is
with the Central Government, who rarely exercises it. However in case a
reference is made to MRTPC, then MRTPC should hear the matter and pass final

Section 29 amendment MRTPC to pass final order after following natural

Proposal for diversification falls under Section 22 but if proposal is for
manufacturing of new articles by utilising waste/by-product or within the
licensed capacityexemption to be granted.
Monopolistic, Restrictive and Unfair Trade Practices:
Protection of the consumers against false/misleading advertisements and
other UTP. The Committee proposes to specify certain UTP and prohibit them.
Commission must be given more protection so as to see compliance of its
orders under Section 31 and protection to pass order on any RTP which occurs
while inquiring into any MTP under Section 37.
Prohibition of collective agreement and RTP arising out of collective bidding,
collective discrimination, re-sale price maintenance subject to exception of
general defences.
All prohibited practices MTP, RTP and UTP should be made actionable
whether it is in the form of agreement or not.
The requirement of compulsory registration of agreements relating to RTP
should be abandoned.
Section 41 to be amended and the MRTPC to be empowered to exempt any
class of goods from RPN.
Provision to be added to entitle a complainant to recover damages, amount of
loss from the guilty party.
All matters relating to recovery of loss or damage should be triable by the
MRTPC and not by the Magistrate.
Administrative Machinery:
Chairman of the Commission should be a sitting Judge of a High Court and
should enjoy all privileges of a High Court Chief Justice. All appeals from
Commissions lie to the Supreme Court.
If the office of the Chairman falls vacant the senior-most member should fill in
until a new Chairman is appointed.
The post of Registrar of Restrictive Trade Agreement and Director-General
(DG) should be Director-General of Investigation (IDG) of Trade Practices (TP).
Section 8 to be amendedappoint DG of T.P. and appoint the members/staff.

The DGTP must be empowered:

a. to search, seize and impound document.
b. to initiate proceeding.
c. to move for recovery of damages on behalf of Central or State Government.
Section 12 to be amended to empower the commission with respect to:
a. Production of books of account and other documents.
b. Examination of same by an officer.
c. Must be made a court of records.
d. Punish for contempt.
e. To issue injunction interim/final.
Amendment to Section 13(3) to empower the MRTPC with respect to particular
Amendment to Section 18 of the Indian Evidence Act. To make the provision
not applicable to the proceedings before MRTPC.
Amendment of Sections 50 and 51 made into one Section 50 to punish
persons contravening provisions of MTP, RTD and UTP by the commission.
Appeals to lie before the Supreme Court if there is a substantial question of
law involved.







What are the Objects of Competition Act, 2002?

Most of the recommendations made by the Raghavan Committee were accepted
and the Competition Act, 2002 was passed accordingly.
Objects of the Act:
To provide for the establishment of a Commission to prevent practices having
adverse effect on Competition.
To promote and sustain competition and freedom of trade in the markets.
The main objective of the Act is to promote free Competition in India.

Prohibition of Anti-Competitive Agreements:

(a) Two types of agreements, horizontal and vertical which have the potential of
retrociting competition.
(b) Horizontal agreements refer to the agreements amongst competitors in the
same stage of production and in the same market.
(c) Vertical agreements in actual or potential relationship of buying or selling to
each at different stages of production and at different markets.
(d) Horizontal agreements are related to prices, quantities, bids (collusive
tendering) and market sharing.
(e) Vertical agreements: Tie-in-arrangements, exclusive supply/distribution
agreements and refusal to deal.
What are the anti-competitive agreements of the Act?
The Act provides for the prohibition of entering into anti-competitive
agreements is respect of production, supply, storage, distribution, acquisition or
control of goods or provisions of services which causes or is likely to cause an
adverse effect on competition within India.
Such agreements entered between competitors are horizontal and;
Between enterprises at different stages or levels of production in different
markets are vertical.
Prohibition of Abuse of Dominant Position:
The Act does not prohibit dominance but abuse of dominance is prohibited.
Dominance is the position of strength enjoyed by an enterprise or group*
which can withstand any competitive pressure in the relevant market by its
economic strength.
The Act prohibits the abuse of such dominant position which includes direct, or
indirect, unfair or discriminatory purchases or selling on condition including
predatory prices of goods and services;
Limiting production or restricting services;
Practices which deny market access;
Conclusion of contracts subject to acceptance by accepting supplementary

Regulation of Combinations:
Combination between enterprises is also prohibited under the Act, if it causes
or is likely to cause adverse effect on competition within the relevant market in
Such combinations can be achieved by acquisition of one or more enterprises
or by one or more persons;
Acquisition or control or merger or amalgamation of enterprises under certain
Establishment of Competition Commission of India:
For implementing the competition Law the Act provides for the establishment
of Competition Commission of India (CCI) with adequate powers for effective
enforcement of the law and with appropriate machinery for the implementation
of its decisions.
Though the Competition Commission took a shape in 2002 by the Competition
Act of 2002, it came to be operated from July 2009 though effective date
pertains to 14 October, 2003.
Structure of the Commission:
A multi-member body consisting a Chairperson and not less than two or not
more than 6 other members.
Qualified persons of ability, integrity and standing from the fields of judiciary,
economics, Law, international trade, Commerce and Industry.
Independent functioning, with independent investigative, prosecution and
adjudicative functions.
Penalties for Non-compliance of Orders:
Act contains provisions for punishing contravention of the orders of the
Commission, failure to comply with the directions of Director-General, making
false statements, or omissions to furnish material information.
If any person without reasonable cause, fails to comply with the orders or
directions of Commission, he shall have to be punished with fine which may
extend to Rs. 1,00,000 for each day during which such non-compliance occurs,
subject to a maximum of Rs. 10 crore.
Further if any person does not comply with the orders or directions issued, or
fails to pay the fine imposed, he shall without prejudice to any proceeding be

punishable with imprisonment for a term which may extend to three years or
with fine which may extend to Rs. 25 crore or with both.
Competition Appellate Tribunal:
The Competition (Amendment) Act of 2007 inserted the provision for
constituting and functioning of Competition Appellate Tribunal. Thereby an
appeal from the orders of the Competition Commission by the Central
Government or State Government or a local authority or an enterprise or any
aggrieved person, can lie either to Supreme Court or to the Competition
Appellate Tribunal. Every appeal is to be filed within a period of 60 days from
the date on which a copy of direction or decision or order made by the
Commission is received by the Central Government or the State Government or
a local authority or enterprise or any person aggrieved in the prescribed form
along with the fee required thereof. The disposal of appeal is to be made by the
Competition Appellate Tribunal within six months from the date of receipt of the
Competition Advocacy:
The Competition Commission has a positive role in making Competition policy in
the country and advising the Government of India as and when required. The
Commission also takes suitable measures for promotion of competition policy
and advocacy, creating awareness and training.
Competition Fund:
The Act provides for constitution of a competition fund which will be for meeting
salaries and allowances and other expenses of the Commission.
The recommendation includes both policy and Law of Competition.
Competition law should cover all consumers who purchase goods or services.
The state monopolies, government procurement and foreign companies
should be subject to Competitive Law.
All agreements (include horizontal and vertical) should be covered by
competition law if it is prejudicial to the competition.
Horizontal agreements with regard to prices, quantities, bids and market
shaving are anti-competitive.
Vertical agreements like, tie-in arrangements, exclusive supply distribution
agreements and refusal to deal are generally anti-competitive.

Agreements that contribute to improvement of production, distribution and

promote technical and economic progress should be dealt with leniently.
Abuse of dominance rather than dominance should be the key for Competition
Abuse of dominance includes practices like restriction of quantities, markets
and technical developments.
Predatory pricing in the long run is prejudicial to Consumer interests and it is
to be treated as abuse.
Mergers need to be discouraged, if they reduce or harm Competition.
If the suggested merger is more than the value of assets of entity of Rs. 500
crore or more and of the group to which the merged belongs at Rs. 2000 crore
or more, it requires prior notifications.
Recommended for constitution of a Competitive Commission of India (CCI).
Basing on these recommendations the competition law was made in India by
repealing the MRTP Act, for protecting the interest of consumers and preventing
the practices having adverse effect on competition. It is to be noted that all the
pending cases before the MRTP Commission on or before the commencement of
the Competition Act, 2002 i.e., in the year 2003 were transferred to and
adjudicated by Competition Commission is accordance with the MRTP Act, 1969.
Further all the cases pertaining to unfair trade practices under the MRTP Act,
1969, pending before the commencent of the Competition Act, 2002 were
transferred to and disposed of by the National Commission constituted under
the Consumer Protection Act, 1986.
KLM Royal Dutch Airlines v. Director-General of Investigation and
Registration, MANU/SC/8162/2008 : (2009) 1 SCC 230
Law Point:Ingredients necessary to constitute Unfair Trade Practice.
Facts:The appellant was a worldwide airlines company. A consignment of
three parcels was booked for carriage by the complainant, out of which two
parcels went missing and could not be delivered to the addressee immediately.
The said missing parcels where however traced out and were forwarded to the
destination later on. The allegations were made that due to the missing of the
aforesaid two parcels in the course of transmission, the complainant suffered a
By the impugned judgment and orders, MRTP Commission found the appellant
guilty of adoption of and indulgence in unfair trade practices to the extent that
there was deficiency in service. The Commission issued a direction to the

appellant to cease the aforesaid trade practice and also file an affidavit stating
that the appellant would desist from the same in future. Being aggrieved by the
aforesaid order passed by the MRTP Commission, the appeals were made in
Supreme Court.
Issue:Whether any deficiency in service could be said to amount to an unfair
trade practice as envisaged under the provisions of the MRTP Act, 1969.
Decision:Before it can be said that the act amounts to an unfair trade
practice the complainant is required to show that the trade practice was
employed for the purpose of promoting the sale, use or supply of any goods or
the provision of any services and also that the statement or advertisement is
the false representation of the kind specified under Section 36A of the MRTP Act,
1969. It was also held that there could be no finding by the MRTP Commission
that the appellant was guilty of unfair trade practice. Hence the order of
Commission was set aside by the Supreme Court.
Several amendments were made in Foreign Exchange Regulation Act (FERA) as
part of the ongoing process of economic liberalisation relating to foreign
investments and foreign trade for closer interaction with the world economy. In
1993 FERA was reviewed in light of subsequent developments and economic
and financial experience in relation to foreign trade and investments. Hence it
was decided by the Central Government to enact a new law i.e., Foreign
Exchange Management Act, 1999 (FEMA) in consultation with Reserve Bank of
India. The main reason behind this law is the substantial development in our
foreign exchange reserves, growth in foreign trade, rationalisation of tariffs,
current account convertibility, liberalisation of Indian investments abroad,
increased access to external commercial borrowings by Indian corporates and
participation of foreign institutional investors in our stock markets.
Moreover, FEMA is dynamic law relating to foreign exchange with the objective
of facilitating external trade and payments and for promoting the orderly
development and maintenance of foreign exchange market in India. FEMA
though was enacted in 1999 came into force from 1st June, 2000.
Capital Account Transaction:
Capital Account Transaction (CAT) means a transaction which alters the assets
and liabilities, including contingent liabilities, outside India of persons resident in
India or assets or liabilities in India of persons resident outside India including
permissible class of capital account transaction, and also admissible limit of
capital account transaction.

The RBI is empowered under FEMA to prohibit, restrict or regulate viz.

(1) transfer or issue of any foreign security by a person resident in India
(2) transfer or issue of any security or foreign security
(3) borrowing or lending in foreign exchange
(4) deposit between persons resident in India and persons resident outside India
(5) export, import or holding of currency or currency notes
(6) transfer of immovable property outside India
(7) acquisition or transfer of immovable property in India
(8) giving a guarantee or surety in respect of any debt, obligation or other
liability by a person resident in India or owned to a person resident outside India
or by a person resident outside India.
Within the meaning of the provisions of FEMA Currency includes all currency
notes, postal notes, postal orders, money orders, cheques, drafts, travellers
cheques, letters of credit, bills of exchange and promissory notes and credit
Foreign Exchange:
Under FEMA foreign exchange means foreign currency and includes, deposits,
credits, balances payable in foreign currency, drafts, travellers chaques, letters
of credit or bills of exchange drawn in Indian currency but payable in foreign
currency and drafts, travellers chaques, letters of credit or bills of exchange
drawn by banks, institution or person outside India but payable in Indian
Foreign Security:
The foreign security means any security, in the form of shares, stocks bonds,
debentures or any other instrument denominated or expressed in foreign
currency and includes securities expressed in foreign currency, but where
redemption or any form of return such an interest or individuals is payable in
Indian currency.
Security under FEMA:
The security means shares, stocks, bonds and debentures, government
securities, savings certificates, deposit receipts and any mutual fund but does

not include bills of exchange or promissory notes other than government

promissory notes.
Regulation, Restrictions and Management of Foreign Exchange:
Within the meaning of FEMA no person, without the general or special
permission of RBI can deal in or transfer any foreign exchange or foreign
security to any person not being an authorised person, no person can make any
payment to or for the credit of any person resident outside India in any manner,
no person can receive otherwise through an authorised person, any payment by
order or on behalf of any person resident outside India in any manner, no
person enter into any financial transaction in India as consideration for or in
association with acquisition or creation or transfer of a right to acquire, any
asset outside India by any person, no person resident in India shall acquire,
hold, own, possess or transfer any foreign exchange, foreign security or any
immovable property existing outside India.
Export of Goods and Services:
Every exporter of goods shall furnish to the Reserve Bank or to such other
authority a declaration in such form and in such manner containing true and
correct material particulars, including the amount representing the full export
value or, if the full export value of the goods is not ascertainable at time of
export, the value which the exporter, having regard to the prevailing market
conditions, expects to receive on the sale of the goods in the market outside
Further every exporter of goods is to furnish to RBI the required informations for
purpose of ensuring the realisation of export proceedings by such exporter.
Again, where any amount of foreign exchange is due or has accrued to any
person resident in India, such person is to take all reasonable steps to realise
and repatriate to India such foreign exchange within such period as prescribed
by RBI.
Penalties under FEMA:
If any person contravenes any provision of FEMA or orders, directions and
Regulations of RBI he is liable to:
(a) Penalty upto 3 times the sum involved in such contravention, where such
amount is quantifiable, or upto Rs. 2,00,000 where the amount is not quantified
and where such contravention is a continuing one further penalty upto Rs. 5000
for every day after the first day during which the contravention continues.
(b) An adjudicating authority adjudging any contravention under FEMA, may if
he thinks fit in addition to any penalty which he may impose for such
contravention direct that any currency, security or any other money or property

in respect of which such contravention has taken place shall be confiscated to

the Central Government and further direct that the foreign exchange holdings if
any, of the person committing the contravention or any part thereof, shall be
brought back into India or shall be retained outside India in accordance with the
directions made thereof.
State the relevant procedure of Refund of Inward Remittances?
Some of the relevant provisions of Exchange Control Manual under FEMA, which
are still existing are:
If a request is made from the overseas for cancellation of Inward Remittances,
Authorised Dealers may do so without referring to Reserve Bank, if refunds are
not to compensate for a loss.
What is the application for remittances in foreign currency?
A person, firm or bank may apply to an Authorised Dealer for remittances in
any foreign currency to a beneficiary abroad.
Application should be made in Form-A1, if the purpose of remittance is import
of goods into India.
For any other purpose in Form-A2.
The Authorised Dealer may sell the Foreign Exchange applied for if he thinks
fit provided it is within his powers, and the purpose of remittance is an approved
What is the mode of payment of rupees against sale of Foreign
In case of sale of Foreign Exchange or remittance in Foreign Exchange
amounting to Rs. 20,000 or more the payment received by the Authorised
Dealer, from the applicant should be through a crossed cheque drawn on the
applicant bank account or on the bank account of the Firm/Company. Payment
can also be accepted in the form of a Bankers Cheque/Pay Order/Demand Draft.
Receipt of Payment in cash in case of such sale of Foreign Exchange or
remittance in Foreign Exchange is strictly prohibited.

However where purpose of sale of foreign exchange is for travel abroad for
business etc., cash may be received by the Authorised Dealer from Applicant
upto Rs. 50,000.
Where the rupee equivalent for drawing foreign exchange exceeds Rs. 50,000
either for any single instalment or for more than one instalment reckoned
together for a single journey/visit it should be paid by the traveller by means of
a cross cheque/demand draft/pay order as stated above.
What is the status of Travell-ers Cheque neg-otiable only in India?
Rupee Travellers Cheque cannot be encashed outside India, if they are issued
solely for use within India. In such a case they cannot be taken or sent out of
What is the mode of reim-bursement outside India?
Reimbursements should be strictly refused where such travellers cheques have
been encashed outside India.
Rupee Travellers Cheque, which are issued by authorised dealers, encashable
outside India, may be reimbursed by Authorised Dealers or by their selling
How the Import of Foreign Curr-ency Notes takes place?
When the stock of foreign currency notes with Authorised Dealer is not
adequate for meeting their normal business requirement they can import
foreign currency notes from their overseas branches or correspondents.
Define mode of Reconversion of Indian Currency?
Foreign currency may be sold against Indian Rupees held by persons who are
not residents of India but are passing through or leaving India after a visit, at
the time of their departure from India.
For this purpose, a Bank or Encashment certificate issued by a Authorised
Dealer, exchange bureau or Authorised Money changer in form BCI, ECF or ECR,
is required to show that the rupee had been acquired by sale of Foreign
Exchange to an Authorised Dealer or money changer in India.
Such a certificate is valid for such reconversion, i.e., a period of three months
should not be over from the date of sale of the foreign currency by the traveller.
What is the Rates of Exchanges?
Authorised dealers and their Exchange bureau may buy from and sell to public
foreign currency notes and coins at rates of exchange determined by market

conditions. Dealings in foreign currency notes and coins between authorised

dealers themselves and between authorised dealers and money changers would
also be at rates determined by market conditions.
WHAT are the similarities between FERA and FEMA?
The similarities between FERA and FEMA are as follows:
The Reserve Bank of India and Central Government would continue to be the
regulatory bodies.
Presumption of extra-territorial jurisdiction as envisaged in Section (1) of FERA
has been retained.
The Directorate of Enforcement continues to be the agency for enforcement of
the provisions of the law such as conducting search and seizure






FERA consisted of 81 FEMA

was much more
more complex
simpler and
consists of


(Mens Rea) and joining

s of Mens

existed in FERA




excluded in

IN Terms
service etc., were not
defined in FERA.


OF Definition
Authorised Person in
FERA was a narrow
one [2(b)]

definition of
person has
widened to

OF There
AS difference
COMPARED WITH definition
FERA, and Income Tax

provisions of
FEMA, are in
with Income
Tax Act, in

definition of
In India for
182 days to
resident has
under FEMA.
Therefore a
person who
qualifies to
be a nonresident
Income Tax
will also be
considered a
purposes of
of FEMA, but
to be nonresident
under FEMA
be a nonresident
Income Tax
abroad and

there for a
182 days or
more in a
under FEMA.




FERA, was a criminal
with imprison-ment as
per Code of Criminal
Procedure, 1973

to be a civil
offence only
money as a
one fails to

OF The monetary penalty

payable under FERA
was nearly five times
the amount involved.

Under FEMA
quantum of
penalty has

An appeal against the The

order of Adjudicating appellate
before authority




Board went before
High Court

under FEMA
against the
and special
Tribunal for
would lie to
17, 18, 35)

FERA did not contain

any express provision
on the right of an
impleaded person to
take legal assistance

the right of
appellant to
or chartered
(Section 32)

OF FERA conferred wide The

AND powers on a police and



officer not below the

rank of a Deputy
Police to make a

and seizure
curtailed to

What is the difference between FEMA and FERA?

1. Object of the Acts. The main object of FERA was to conserve the foreign
exchange resources and prevent the misuse thereof. However, the main, object
of FEMA is to promote and develop the foreign exchange management of the
country. In other words, FERA sought to control foreign exchange transactions
while FEMA seeks to regulate and manage it.
2. Meaning of person resident in India. Citizenship was the criterion to
determine the residential status of a person under FERA. The definition of
resident in India has been redefined in FEMA. A person residing for more than
183 days in India is a resident of India as per Fema.
3. Structure of the Act Prohibition/relation. FERA prohibited almost all the
foreign exchange transactions unless a general or special permission was
issued. However, under FEMA, all the current account transactions are
permissible except some transactions controlled by the rules.
4. Nature of offences: The offences under FEMA shall be treated as civil
wrongs whereas under FERA, offences were subject to criminal punishments.
Therefore, FERA was held to be draconian, severe and harsh.
5. Presumption of mens-rea. Under FERA there was a presumption of existence of guilty mind, unless the accused proved otherwise. Under FEMA,
however, the prosecution will have to prove that a person has committed an
6. Power to arrest. Section 35 of FERA empowered the Enforcement officers to
arrest a person, if they had reason to believe that the person was guilty of FERA
violations, FEMA provides such power of arrest only in the following cases:
a. Where the accused person fails to pay the full payment of penalty within 90
days from service of notice on him.
b. Where the accused person fails to furnish the security for his appearances
before the Adjudicating Authority, the Adjudicating Authority may, in his
discretion, order that the accused person be detained in the custody of an
officer of the adjudicating authority.

7. Compounding of offences. All the offences under FEMA are compoundable

whereas compounding was not permissible under FERA.
8. Appellate authorities. There was only one appellate authority under FERA
whereas in FEMA, there exists two appellate authorities.
9. Right of legal assistances. The accused has a right to take the assistance
of a legal practitioner or a chartered accountant under FEMA and under FERA,
even a friend or a relative of the person could represent the accused person
before the Adjudicating Authority.
10. Role of Reserve Bank of India has been portrayed as a facilitator under
FEMA instead of a regulator of foreign exchange as it was under FERA.
There is, however, one underlying similarity in both these legislations that
FEMA, just like FERA, is also governed by the notification to be issued by the
Central Government/Reserve Bank of India for granting general permissions.
Enactment of FEMA has brought in many changes in the dealings of Foreign
Exchange, as compared to FERA. Some of them are restrictive, and some have
widened the scope.
How FERA made a progress in drawal of Foreign Exchange?
However the relevant progress made, from FERA to FEMA, is as follows:
Now, the restrictions on drawal of Foreign Exchange for the purpose of current
Account Transactions, has been removed. However, the Central Government
may, in public interest, in consultation with the Reserve Bank impose such
reasonable restrictions for current account transactions as may be prescribed.
FEMA has also, by and large, removed the restrictions on transactions in Foreign
Exchange on account of trade in goods and services except for retaining certain
enabling provisions for the Central Government to impose reasonable
restrictions in public interest.
How the omission of Criminal Proceedings takes place in FEMA?
Under FERA, any contravention was a criminal offence and the proceedings were
governed by the Code of Criminal Procedure. Moreover the Enforcement
Directorate had powers to arrest any person, search any premise, seize
documents, and initiate proceeding.
Now all this has been done away with, and contravention of FEMA is no more a
criminal offence, and only monetary penalty, i.e. civil proceedings are
applicable. Civil imprisonment is provided, only in case of default to pay fine.

Define Residential Status?

The definition of Residential Status under FEMA has gone through
considerable change. It has now been made compatible with the definition
provided under Income Tax Act.
The residential status is now based on the physical stay of the person in the
country. The period of 182 days as provided, indicates that it is not necessary
that there should be a continuous period of stay. The period of stay would be
calculated by adding up all the days of stay of the individual in the country.
An Indian resident becomes a non-resident when he goes abroad and takes up a
job or engages in business.
A major change in the definition of residential status of partnerships and firms is
worth noticing. Earlier, under FERA, a branch was considered a resident of a
place where it was situated. Now, under FEMA, an office, branch or agency
outside India, owned or controlled by a person resident in India, will be
considered a resident of India for the purposes of this Act.
If a person residing in India whose Company or Firm has a branch in Mauritius,
such branch will be considered to be a resident in India.
What is the position of immovable property outside India under FERA
and FEMA?
Earlier, under FERA, there was no restriction placed on foreign citizens who were
residents of India for acquiring immovable property outside India.
Now FEMA prohibits a resident to acquire, own, possess, hold or transfer any
immovable property situated outside India. This restriction applies irrespective
of whether the resident is an Indian citizen or foreign citizen. With this provision
being effective a foreign citizen who is a resident of India has to take approval of
the Reserve Bank of India for selling or buying any immovable property situated
outside India.
How the transaction of immovable property in India takes place under
Earlier, under FERA, a foreign citizen could acquire or transfer immovable
property in India only after seeking permission from the Reserve Bank.
Now, under FEMA, the control of Reserve Bank is determined by the residential
status of a person. Only a non-resident as defined within the meaning of FEMA
would require permission of the Reserve Bank to acquire or transfer an
immovable property in India. The distinction based on citizenship has been
abolished and that based on residentship has been introduced.

What are the provisions of Export of Services under FEMA?

FERA had no provision for export of services. Now, FEMA has included payment
received by an Exporter of Services in its ambit.
Every Exporter, who receives payment from outside India for his services is
obliged to furnish details of payment to the Reserve Bank.
For example; a Doctor, or Engineer or Lawyer or Accountant or any other
professional may give opinions or consultation to people outside India, via
internet or e-mail, and his fees may be credited to his credit account. Then he is
obliged to furnish details of such payment to Reserve Bank.
Define the terms which are included in FEMA in progress to FERA.
Some new terms like Capital Account Transactions, Current Account
Transactions; have been included in FEMA. Reserve Bank has been conferred
with powers (with consultation with the Central Government) to specify
maximum permissible limit upto which exchange is admissible for such
WHAT TYPE OF restrictions?
What are the restrictions pertain to Foreign Exchange under FEMA?
Although under FEMA, offences pertain to transactions in Foreign Exchange only.
However relevant restrictions are as follows:
Only a person Authorised by Reserve Bank can deal in Foreign Exchange.
No one can make a payment to a person who is a non-resident, without
permission of Reserve Bank.
No one can receive any payment from a person who is a non-resident, without
permission of Reserve Bank.
A resident of India cannot deal in foreign exchange, foreign security or any
immovable property situated outside India, without the permission of the
Reserve Bank. (Section 4)
Similarly, a person who is a non-resident cannot acquire immovable property
in India without permission.
What are the obligations of Exporter of Goods and Services?
Every exporter of goods and services is under an obligation to give details to the
Reserve Bank regarding the value of export, mode of payment, and amount of
payment received etc.

How the repatriation of Foreign Exchange takes place?

Where any amount of foreign exchange has become due or accrued to any
person who is a resident of India, he shall realise and repatriate (Bring Back)
such amount within the time specified by the Reserve Bank.
An Authorised Person under FEMA, is a person who is authorised by Reserve
Bank to deal in Foreign Exchange.
Who is the Authorised Person?
For being registered as an Authorised Person, necessary application alongwith
relevant documents has to be furnished to Reserve Bank.
An Authorised Person is also, not given a free hand to deal in Foreign
Exchange. He has to furnish details and information to the Reserve Bank from
time to time as may be required by it.
Explain the procedure of prosecution of offences committed?
Before detailing the procedure for prosecution, it is important to mark out the
Adjudicating Agencies. They are:
Who is Adjudicating Authority?
The inquiry of any contravention of FEMA is conducted by an Adjudicating
Authority appointed by the Central Government.
State the jurisdiction of Special Director (Appeals)?
The Special Director (Appeals) is authorised to hear the appeals arising out of an
order of the Adjudicating Authority.
State the jurisdiction in appeal to the Appellate Tribunal.
The Appellate Tribunal is entitled to hear appeals from an order made by
Adjudicating Authority or special Director (Appeals).
What are the powers of Director of Enforcement?
The Director of Enforcement and other officers have the power to conduct
investigation and search and seize any article.
How the inquiry by Adjudicating Authority under (S. 14) takes place?

The inquiry into any contravention of FEMA is conducted by an Adjudicating

When, an inquiry is to be conducted against a person for any contravention,
the Adjudicating Authority shall issue a notice to such person.
The notice will also indicate the date on which the offender is required to
appear before authority, and also the nature of the offence committed by him.
Such person (offender) will have a right to give reasons or explanation, and
then a date will be fixed for his appearance. He can appear either personally or
through an Advocate or a chartered accountant.
On the date of appearance, the Adjudicating Authority shall present its case,
and explain the reason, type and implications of the offence committed by
Then in turn, such person will also be given an opportunity to put up his case,
and to produce documents and evidence.
Finally, if Adjudicating Authority is convinced, that the offender has committed
an offence, it will impose such fine and penalty, as it thinks fit.
How the appeal to Special Director (Appeals) (S. 17) preferred?
Appeal from an order of Adjudicating Authority lies before Special Director
The appeal shall be made in Form No. 1, along with three copies of the order
appealed against and the requisite fees.
The appeal should be filed within 45 days, from the date of receipt of the
impugned order.
On the date of hearing of the appeal the applicant may appoint a legal
practitioner or a chartered accountant to appear, plead and act on his behalf
before the Special Director (Appeal)
The order of the Special Director (Appeals) made at the conclusion of the
proceedings shall be in writing and shall state briefly the grounds for the
How the appeal to the Appellate Tribunal (S. 19) preferred?
Appellate Tribunal is entitled to hear appeal arising out of an order from
Adjudicating Authority and Special Director (Appeal).

The appeal shall be made in Form No. 2, along with three copies of the
impugned order and requisite fees.
The appeal shall be made within 45 days, from the date on which copy of the
impugned order is received.
A copy of the order and appeal shall be sent to the opposite party, i.e.
Director of Enforcement, and a date shall be fixed for hearing of the appeal.
The appellant shall have the right to present his case/appeal through a legal
practitioner or a chartered accountant.
On the fixed date of hearing, the Appellate Tribunal shall pass its order in
writing with the reasons.
How the appeal to High Court (S. 35) preferred?
An appeal from the decision of Appellate Tribunal lies before High Court.
The appeal shall be filed within 60 days from the date of communication of
the decision or order of the Appellate Tribunal to him on any question of law
arising from the impugned order.
What is the amount of penalty under FEMA?
Any contravention, under FEMA, may invite following kinds of penalties:
If the amount against the offence can be quantified, then penalty will be
THRICE the sum involved in contravention.
Where the amount cannot be quantified the penalty may be imposed upto two
lakh rupees.
If, the contravention is continuing everyday, then Rs. Five Thousand for every
day after the first day during which the contravention continues.
Further in addition to the penalty, any currency, security or other money or
property involved in the contravention may also be confiscated.
Union of India v. Venkateshan S., MANU/SC/0355/2002 : AIR 2002 SC
Facts:By order dated 8 February, 2000 the Joint Secretary, Ministry of
Finance, Government of India made a detention order under Section 3(1) of the
Conservation of Foreign Exchange and Prevention of Smuggling Activities Act
(COFEPOSA) directing that one B. Shankar be detained and kept in custody with

a view to prevent him from acting in any manner prejudicial to the

augmentation of foreign exchange. The said order was served upon detenue on
15-2-2000 along with grounds of detention and copies of the documents relied
upon the Detaining authority the order was challenged by filing writ petition in
High Court of Karnataka.
The High Court quashed and set aside the detention order on the ground that
what was considered to be criminal violation of the Foreign Exchange Regulation
Act, 1973, has ceased to be on repeal of FERA which is replaced by the FEMA in
1999. This order was challenged. It was argued that in view of the fact that
FERA had been repealed and in its place FEMA had been enacted by virtue of
which violations of the provisions of the FEMA are now only civil wrongs, a
person cannot be continued to be preventively detained under COFEPOSA Act
for violations of FERA after its repeal.
Issue:Whether a person who violates the provisions of the FEMA to large
extent can be detained under COFEPOSA Act?
Decision:The person dealing in foreign exchange in violation of provisions of
FERA which is repealed by FEMA, can be detained under Section 3 of the
COFEPOSA Act. Mere fact that such an activity ceases to be an offence under
FEMA after repeal of FERA is immaterial. For preventively detaining a person
under COFEPOSA it is not essential that that person must be involved in criminal
offence. That apart, COFEPOSA Act and FEMA occupy different fields.
Mantosh Saha v. Special Director, Enforcement Directorate, (2008) 69
Facts:A memorandum was issued by the Enforcement Directorate, Ministry of
Finance. On the basis of certain statements recorded it was indicated therein
that M/s. Godsons (India) and its proprietor, the present appellant had acquired
foreign exchange contravening the provisions of Section 8(1) of the FERA, 1973
thereby rendering him liable to be proceeded under Section 50 of FERA.
The memorandom was issued under Rule 3 of the Adjudication Proceedings and
Appeal Rules, 1974. The reply to show cause notice was filed by the Appellant.
The Special Director passed an order on 13 May, 2005 imposing penalty of Rs.
25 lakhs on the appellant.
The appellant preferred an appeal before the Appellate Tribunal and filed an
application for dispensing with the requirement of pre-deposit. By order dated 73-2006 the Tribunal passed an order directing deposit of 60 per cent. of the
penalty amount for the purpose of entertaining the appeal. An appeal was filed
under Section 35 of the Act. Section 35 of the Act which came to be dismissed
by the High Court holding that no case for hardship was made out either before

the Tribunal or before it and, therefore, there was no scope of interference with
the order of the Tribunal. However the time permitting the deposit was
Issue:Whether the interim order of stay can be passed. And whether any
reduction of the amounts to be deposited as directed by the Tribunal is called
Decision:Undisputably the appellant had deposited the amount which was
directed to be deposited. However for the balance amount demanded with a
view to safeguard the realisation of penalty the appellant shall furnish such
security as may be stipulated by the Tribunal. On that being done, the appeal
shall be heard without requiring further deposit if the appeal is otherwise free
from defect. The appeal was disposed of by Supreme Court accordingly.
Give introduction to FCRA, 1976?
The FCRA,1976 came into existence at a time when some of the foreign
countries had stalled funding and extending hospitality to individuals,
associations, political parties, candidates, editors and owners of newspapers.
This Act came into effect from 5th August, 1976 to regulate the acceptance and
utilization of foreign contribution by certain individuals or associations with an
objective of ensuring that Parliamentary institution!". Political associations,
academic and other voluntary 4:1;.,anizations. haying an influence on national
interest, :function in a manner consistent with values of a sovereign democratic
What are the applications of FCRA?
The FCRA applies to all citizens of India, :n India or outside India. it also applies
to associates, branches or subsidiaries outside India of companies registered or
incorporated in India.
What are the restrictions to FCRA?
The FCRA puts a restriction on elected candidates, newspersons like
correspondents, columnists, editors or even publishers, judges, government
servants of corporations owned and controlled by the government, members of
legislature, members and office bearers of any political party from taking any
foreign contribution, whether direct or indirect. The Act also imposes a
restriction on acceptance of foreign hospitality (e.g., cost of travelling, boarding,
lodging , transport) by these people. A foreign contribution may be a donation,
delivery or transfer by any foreign source in form of currency, foreign securities
or articles It does not include articles worth less than Rs. 1000 in Indian markets
given as gifts for personal use.

What are the exceptions to FCRA?

This restriction does not apply to contributions accepted by way of salary.
wages, remuneration or other payments in the ordinary course of business; or
as an agent of a foreign source. Acceptance of foreign contribution is also not
barred when received by way of gift in his capacity as a member of any Indian
delegation or from a relative when such contribution being above Rs. 8000 per
annum has been received with previous permission of the Central Government
Any citizen receiving any scholarship, stipend or any such payment shall intimate the Central Government about the source, purpose and amount of such
How the modifications In FCRA takes place?
If the Central Government is satisfied that the acceptance of a certain foreign
contribution or hospitality is likely to affect the sovereignty and integrity of
India, the public interest, freedom Or fairness of election, friendly relations with
an$ foreign state or harmony between religious, racial, linguistic or regional
groups, castes or communities, then it has the power to restrict foreign
contribution to any person not mentioned in the Act.
Further, if the Central Government is of the opinion that if it is necessary or
desirable in the interest of the general public, it may exempt any association,
organisation or individual from the operation of this Act or any part thereof_
Foreign Source:
The foreign source under the FCRA includes (a) the government of any foreign
country or territory and its agencies, (b) any international agency, not being the
United Nations- or any of its specialised agencies, the World Bank, International
Monetary Fund or such agency as the Central Government may decide, (c) a
foreign company, (d) a corporation not being a foreign company incorporated in
a foreign country or territory, (el a multinational corporation. (f) a trade unton,
(g) a foreign trust, (h) a societyclub or other association of individuals formed or
registered outside a citizen of a foreign country.
Foreign Hospitability:
The Foreign Hospitability (FH) under the FCRA means any offer, not being a
purely casual one made by a foreign source for providing a person with a costs
of travel to any foreign country or territory or with free boarding, lodging,
transport or medical treatment;
Regulations and Restrictions on Foreign Contribution and Foreign

The restrictions are viz,:

(a) the contribution cannot be accepted by a candidate for election,
(b) the contribution cannot be accepted by any correspondent, columnist.
cartoonist, editor, owner, printer or publisher of a registered newspaper,
(c) the contribution cannot be accepted by any judge, government servant or
employee of any corporation,.
(d) the contribution cannot be accepted by member of any legislature,
(e) the contribution cannot be accepted by any political party or its office
Penalties for Offences under FCRA
If any person, on whom any prohibitory order has been served, pays, delivers,
transfers or otherwise deals with any article or currency whether Indian
currency or foreign currency.. he shall be punished with imprisonment upto
three years or with fine or with both subject to additional fine by court
equivalent to market value of the article the amount of currency.
Further punishment for accepting or assisting any person, political party or
organisation in accepting any foreign contribution or any currency from a
foreign source, shall be punished with imprisonment upto five years or with fine
or with both.
Again whoever accepts any foreign hospitability in contravention of any
provision under FCI&A shall be punished upto) three years or with fine or with
State by CBI v. K. Milian, Chief Functionary of the Cress, (2001) 4 SCC
Facts:The appeals by CBI were directed against the Judgment dated 7-9-1999
of a single Judge of Delhi High Court. By the impugned judgment, the High Court
in exercise of power under Section 482 of Cr. P.C. held that a breach of
undertaking given by an Association under Section 6(1)(b) of the Foreign
Contribution (Regulation) Ad, 1976 would nut amount to contravention of the
provisions of the Act within the meaning of Section 23 of the Act and as such
the criminal prosecution had been launched, would not lie. The High Court
quashed the criminal proceedings arising out of FIRS the CBI appealed in
Supreme Court.
issue:.--reaction 23 of the Foreign Contribution (Regulation) Act, 19Th, makes
only the contravention of any provisions of the Act and Rules punishable and the

information provided in Form FC-1 in Schedule of the Act and violation thereof
whether constitutes a contravention of the provision of Act and Rules,
Decision:If a society is registered under Section ti of the Foreign Contribution
(Regulation) Act, 1976 for receiving foreign contribution only through a
particular branch of a bank, but the society deposits the contribution received
by it from a foreign organization in another bank without intimating Central
Government about receipt of contribution, would amount to violation of Section
6(11(h) and attract the penal provisions under Section 23 of the Act.
The sick Industrial Companies (Special Provisions) Act, 1985

Introduction of sick Industrial Companies in India

Discuss briefly the salient features of the Act relating to sick industries
and its objectives?
What is a sick industrial company?
For industrial Companies becoming sick in India, the Government has
formulated 'The Sick Industrial Companies (Special Provisions) Act, 1985' (SICA)
which got amended in the year 1993 with a prime objective of: To timely detect the sick and potentially sick industrial companies,
To speedily take preventive, ameliorative, remedial & other measures, and
To enforce the measures so determined.
The 'sick industrial company' defined under the provisions of Section 3(1)(o) of
SICA means an industrial company (being a company registered for not less
than five years) having at the end of any financial year accumulated losses
equal to or exceeding its entire net worth.
Accordingly, sick industrial company means a company:i. must be an industrial company which is as specified in the First Schedule to
the Industries (Development and Regulation) Act, 1951 (IDRA) but does not
include an ancillary industrial undertaking or a small scale industrial
undertaking as defined under IDRA,
ii. should be in existence for at least five years since the date of incorporation.
iii. should have accumulated losses equal to or exceeding its networth at the
end of any financial year.
('Net Worth' means the sum total of paid-up capital and free reserves)

'Potentially Sick Industrial Company' means an industrial company whose

accumulated losses is more than fifty per cent. or more of its peak net worth
during the immediately preceding four financial years.
* This Act was repealed by the Sick Industrial Companies (Special Provisions)
Repeal Act, 2003 (1 of 2004).
The reasons for industrial sickness may differ from industry to industry and
within the industry from unit to unit. These can be categorised as follows:What are the reasons of becoming sick?
What are the symptoms of becoming sick?
1. Internal Reasons
1. Internal Reasons-The reasons which can be controlled by the company itself.
Some of them are as follows:i. Mismanagement
ii. Underestimation of the cost of the project
iii. Delay in the implementation of project
iv. Increase in cost due to delay in implementation of project
v. Under Utilisation of Resources
vi. Diversion of Funds
vii. Lack of Management depth
viii. Bad Industrial Relations
ix. Bureaucratic management
x. Inadequate working capital
xi. Heavy Expenditure in Advertisements.
2. External Reasons
2. External Reasons-The reasons which cannot be controlled by the company
and are external in nature. Some of them are as follows:-

Adverse Government Rules & Regulations

Adverse Price Control Policy
Recession Trend/economic conditions
Tough Competition
Shortage of Manpower, Raw Materials etc.
Changes in Technology
Changes in Consumer Behaviour
Shortage of Power Supply
Delay in getting any financial assistance.
3. Symptoms of Industrial Sickness
Frequent Liquidity Problems, Fall in sale/profits, rapid increase in debtors,
Reduced Working Capital, etc.
Unfavourable Market Development
High Managerial turnover
Labour unrest
Rise in staff and customers' complaints and failure to respond such complaints
Declining morale of the employees
Lack of planning and strategic thinking
Strike, lockout.
Comment on establishment of Board for Industrial and Financial
Reconstruction (BIFR
What are the obligations of such companies?
Explain the role of BIFR?
Under the provisions of SICA, the Central Government has established Board for
Industrial and Financial Reconstruction (BIFR), (presently situated at New Delhi)
consisting of experts for timely detection of sick and potentially sick companies,

speedy determination of remedial and other measures with respect to such

companies and for expeditious implementation of these measures.
If the industrial company becomes sick as per the definition, it is the obligation
of such company to make reference to BIFR within sixty days from the date of
finalisation of duly audited accounts of the company for the financial year at the
end of which the company has become sick. The date of finalisation of the duly
audited accounts means the date on which the audited account of the company
are adopted at the annual general meeting of the company.
Even before finalisation of accounts for the relevant year, if the Board has
sufficient reasons to form an opinion that the company has become sick, the
Board of directors must within sixty days from the date of forming such opinion
make a reference to the BIFR.
In the case of potentially sick industrial company, the company shall within sixty
days from the date of finalisation of the duly audited accounts of the company
for the relevant financial year report to BIFR and shall hold a general meeting of
the shareholders for considering such erosion.
Such Companies have to comply with the BIFR Regulations, 1987 and
application have to be made under Form A (in respect of an industrial company
other than a Government Company) with BIFR and in Form AA in respect of a
Government Company.
The BIFR will make such enquiry as it may deem fit for determining whether the
concerned company has become sick. Such enquiry can be made by BIFR upon
the receipt of information from the Board of Directors of the concerned company
or from other agencies like Central Government, RBI, etc. or upon its own
knowledge as to the financial position of the company.
The BIFR may if it deems necessary, appoint any Operating Agency (any Public
Financial Institution, State Level institution, scheduled bank or any other person
as may be specified by BIFR) to enquire into and make a report.
BIFR or the operating agency, as the case may be, shall complete the inquiry
within sixty days from the commencement of the inquiry.
If the Board decides to institute inquiry then it may appoint one or more persons
as special directors(s) of the company concerned with a view to safeguard the
financial and other interests of the company or in public interest.
Define the mode of execution of Order by BIFR
How the winding-up takes place?
What are the objectives of the Act?

Notwithstanding anything contained in the Companies Act, 1956 or any other

law or the memorandum and articles of the industrial company or any other
instrument, such appointment of a special director shall be valid and such
special director need not hold any qualification shares and cannot be removed
except with BIFR's consent and that age limit and number of directors
restrictions do not apply to such a director.
If the Board is satisfied after the completion of inquiry that the company has
become sick, the BIFR has to make an order in writing whether it is possible for
the sick industrial company to make its networth exceed the accumulated losses
within a reasonable time.
If the Board is satisfied after the completion of inquiry that it is not practically
possible to make its net worth exceed the accumulated losses within a
reasonable time, it may direct the operating agency to prepare a scheme for
such measures in relation to such company. The operating agency then shall,
within a period of ninety days from the date of such order prepare a scheme
which may provide any or more of the following measures:
Financial Reconstruction
Change in Management
Sale or lease of a part or whole of any industrial undertaking of such company
Rationalisation of managerial Personnel
Such other Preventive, ameliorative and remedial measures as may be
The BIFR may on such recommendation sanction the scheme and will
periodically monitor the sanctioned scheme.
Considering all the relevant facts, if the BIFR is of the opinion that the sick
industrial company is not likely to make its net worth exceed the accumulated
losses within a reasonable time, it may, after offering opportunity of being heard
to all concerned parties, form a opinion to wind up the company and forward its
opinion to the concerned High Court.
The High Court on the opinion of the Board may order winding-up of the sick
industrial company in accordance with the provisions of the Companies Act,
This Act is to make special provisions with a view to securing the timely
detection of sick and potentially sick companies owning industrial undertakings.

The speedy determination by a group of experts of the preventive,

ameliorative, remedial and other measures which need to be taken with respect
of companies.
Expeditious enforcement of the minimum so determined and for matters
connected therewith or incidental thereto.
Explain the Industrial undertaking?
Sec. 5. Discuss briefly Appellate Authority for Industrial and Financial
Essentially the legislation is enacted to safeguard the economy of the nations
and to protect viable sick units.
Aimed at reviving and rehabilitating sick industries.
Sec. 3 (1)(O):-A sick industrial company is an industrial company being a
company registered for not less than five years, which has at the end of any
financial year accumulated losses equal to or exceeding its entire net worth: Loss of production;
Loss of employment;
Loss of revenue to Central as well as State Government;
Locking up of funds of banks and financial institutions.
Section 3(d) of the Industries (Development and Regulation) Act, 1951 defines
Industrial undertaking as any undertaking pertaining to an industry in one or
more factories by any person or authority including Government.
This Act excludes ancillary industry and small scale industry from its purview.
An ancillary undertaking is one in which the investment in fixed assets
whether held on ownership or on lease or on hire purchase does not exceed Rs.
75 lakh and it also satisfies the following conditions:(i) The manufacture or production of parts, components,
sub-assemblies or intermediaries.
(ii) Rendering of services and its supplies not more than 50% of its production.
A sick unit means a company with erosion of net worth by 100% or more of its
net worth.

When the erosion of net worth is of the order of 50% the Board of Directors of
the sick unit are required to bring this fast to the notice of the Board of
Industrial and Financial Reconstruction and also to the shareholders within 60
The Board of Industrial and financial Re-construction was set up in 1987 for
providing speedy mechanism for amalgamation, merger etc., in large and
medium sector.
The Board consists of a Chairman and not less than two and not more than 14
other members to be appointed by the Central Government.
The Chairman and members shall be persons who are qualified to be High
Court Judges, or persons of ability, integrity and those who have special
knowledge and professional experience, of not less than 15 years in Science,
technology, economics, banking industry, law, labour matters, etc.
Consisting of Chairman and not more than three other members.
The chairman shall be a person who is or has been a Judge of the Supreme
Court or who has been a Judge of High Court for not less than five years.
A member shall be a person who has been Judge of a High Court or an officer
not below the rank of a Secretary to the Government of India.
The Board or the Appellate Authority shall, for the purpose of inquiry have the
powers as vested in the Civil Court in the case of:(a) Summoning and enforcing the attendance of any witness;
(b) Discovery and production of document or material object;
(c) Reception of evidence on affidavit;
(d) The requisition of any public record;
(e) Issuing of any Commission.
4. Discuss briefly the Board for Industrial and Financial Reconstruction
1. When the company has become a sick industrial company the Board of
Directors of the Company shall, within 60 days from the date of audited
accounts in the financial year, make a reference to the Board for determination
of the measure which shall be adopted with respect to the company.
2. If Central Government, RBI, or a State Government or a public financial
institution or a State level institution has sufficient reason to believe that any
company has become sick, it can make a reference to the Board.

1. All or any of the industrial undertakings under such company is situated in
such State.
2. Such financial institutions have an interest in the company.
Sec. 15. Discuss briefly reference to Board
Section 15 makes it mandatory for the Board of Directors of a sick industrial
company to make a reference to the Board. But it is not mandatory for any
other agency as specified is Section 15(2) to make a reference to the Board.
The BIFR may make such inquiries for determining whether a company has
become a sick unit upon receipt of a reference under section 15 or upon
information received with regard to such company or upon its own knowledge.
The BIFR can appoint any operating agency such as public financial
institutions, state level institution, scheduled Bank or any other person for such
inquiry and report within 60 days from the commencement of the inquiry.
Sec. 16. Explain








Section 16(4) -The Board may appoint one or more persons to be special
directors for safeguarding the financial and other interests of the company.
Where a reference has been made to the Board for considering a company as
sick industrial company under Section 3(1)(O) the creditors have the right to
intervene in the inquiry stage where they dispute such claim and have
material to show that industrial sickness is a devise to defeat claims as held in
the case of Sponge from India Ltd. v. Neelima Steels Ltd., (1990) 68 Comp Cas
After the inquiry under section 16 the Board may make an order for the
improvement and revamping of the company and may give such time for the
purpose as it deems fit.
After passing an order under Section 17 the operating agency specified shall
prepare within a period of 90 days from the date of such order a scheme with
regard to:(a) Financial re-construction.
(b) Any change in management.
(c) Amalgamation or take over by any company.

(d) The sale or lease of any part or whole of any industrial undertaking of the
sick industrial company.
(e) Any such, preventive, ameliorative and remedial measurers.
Sec. 18. Explain briefly pre-paration of schemes
All such schemes shall be laid before the General Body by its shareholders.
The Scheme can induce transfer of controlling shares or substantial
shareholder's interest as held in the case of Bennett Coleman & Co. Ltd. v.
Appellate Authority for Industrial and Financial Reconstruction, 1995 (3) AD (Del)
432 (DB).
The Terms, revival or rehabilitation would cover the selling off of assets and
starting a fresh industrial undertaking at a different place as held in the case of
Upper India Couper Paper Mills Co. Ltd. v. AAIFR, (1992) 75 Comp Cas 653 (Del).
Sec. 19. Explain briefly rehabilitation by Financial Assistance?
The rehabilitation package may contain the provision of additional financial
assistance for either the modernization or expansion of the plant.
Under Section 19(3A) the banks and financial institutions will adopt a
consortium approach and designate a bank or financial institution for the
disbursement of loans provided in the Scheme.
Section 19A provides for interim relief for sick companies during the pendency
of an enquiry under Section 16. The Board is empowered to make an order
within 60 days from the receipt of an application.
Sec. 20. Explain briefly winding-up of Sick Industrial Company?
The Board is free to accept or reject an application.
Where the Board after making an inquiry under Section 16 and considering all
the facts and after hearing all the parties concerned is of the opinion that it is
not feasible to revive or rehabilitate the sick industrial undertaking can
recommend to the High Court the
winding-up of the Company as held in the case of Lakshmi Porcelains Ltd. v.
Union of India, 1995 (35) DRJ 182.
Sec. 21 The Board can direct any operating agency to prepare an inventory of
all assets and liabilities.
Sec. 23. Explain briefly proce-dure in the case of loss of 50% net work
by Industrial Companies?

Sec. 22 If any inquiry under Section 16 or implementation of scheme is pending

under Section 17, then no proceeding for the winding-up of the industrial
company or for execution or any proceedings against the properties of the
industrial undertakings shall be suspended.
Any land of legal proceedings is prohibited under this section as held in Punjab
United Forge Ltd. v. Hindustan Hydraulics (P) Ltd., (1992) 75 Comp Cas 316
Sec. 22A-The BIFR can order the sick industrial undertaking not to dispose of
any asset without its consent under this section.
If the accumulated losses of any company at the end of any financial year
preceding four financial years (earlier) have resulted into erosion of 50% of its
net worth.
Within 60 days report the matter to the BIFR.
Hold a general meeting of the company shareholders informing about the
Before 21 days of such meeting, the Director of the company should forward
the report to every member of the company.
Sec. 24. Explain briefly mis-feasance proceedings?
In the course of inquiry or implementation of any scheme, if it appears to the
Board that any officer or employee of the sick industrial company has
misapplied or retained or misappropriated any money, the Board can direct to
repay or restore the money or property and also report to the Central
Government for any other action.
Misfeasance is the improper performance of some act which a man may
lawfully do or omission of an act which a person ought to do.
Sec. 25. Explain briefly to Appeal?
Any person aggrieved by the order of the Board can prefer an appeal with the
Appellate Body within 45 days from the date of such order to him.
-The order of the Board or Appellate Authority would not be appealable in Civil
Sec. 33. Explain briefly to Penalties?
Whoever violates the provisions of the act or any scheme made thereunder by
the Board or an order of the Appellate Authority shall be punishable with simple
imprisonment for a period upto three years and shall also be liable to fine.

Sec. 34. Explain briefly to offences by Company?

(1) Where any offence, punishable under this Act has been committed by a
company, every person who, at the time the offence, was in charge of, and was
responsible to the company for its conduct of its business, as well as the
company, shall be deemed to be guilty of the offence and shall be liable to be
proceeded against and punished accordingly.
Provided that nothing contained in this sub-section shall render any such person
liable to any punishment, if he proves that the offence was committed without
his knowledge or that he had exercised all due diligence to prevent the
commission of such offence.
(2) Notwithstanding anything contained in sub-section (1), where any offence
punishable under this Act has been committed by a company and it is proved
that the offence has been committed with the consent or connivance of, or is
attributable to any neglect on the part of, any director, manager, secretary or
other officer of the company, such director, manager, secretary or other officer
shall also be deemed to be guilty of that offence and liable to be proceeded
against and punished accordingly.
Explanation.-For the purposes of this section,(a) "company" means any body corporate and includes a firm or other
association of individuals; and
(b) "director", in relation to a firm, means a partner in the firm.
board for industrial and financial reconstruction (BIFR)
How does the hearings in BIFR takes place?
Normally, in case of competitive bids, the Operating Agency2 prepares
comparative tables etc. and presents them before the BIFR. The BIFR considers
the various competitive bids and depending upon the facts of the case, it may
request the proposers to increase or improve their offers. Some of the important
factors, which BlFR normally considers while approving an acquisition or change
in the management of a sick company are:
The capacity and standing of the acquirer.
The financial commitments and the seriousness of the acquirer. The proposer
may be required to deposit some money in a no-lien interest bearing bank
account to demonstrate its commitment.
Long-term viability of the unit/company.

A fair treatment to the secured creditors, labourers and all other interested
What is the mode of Final BIFR Order/Scheme?
After being satisfied about various aspects, the BIFR can order the publishing of
the draft scheme for the rehabilitation of the sick company. After a period
specified by the BIFR, the BIFR hears objections and suggestions, if any, from
the various concerned parties on the draft scheme. After suitably modifying the
draft scheme, a final scheme is ordered by the BIFR. If an appeal is made before
the BIFR, then the fate of the scheme will depend on the outcome of the BIFR
What are the advantages in BIFR scheme?
How does the reduction of Share Capital takes place?
Features of BIFR
After erosion of the net worth, the share capital appearing in the
balance-sheet is only notional and it may be worthwhile to bring the existing
share capital of the company in line with reality. It is possible to reduce the
share capital of the company without going to the court under Section 100 of
1. BIFR stood dissolved by the Sick Industrial Companies (Special Provisions)
Repeal Act, 2003 (1 of 2004).
2. Operating agency means any public financial institution state level
institutions, Scheduled Bank or any other specified by BIFR.
the Companies Act, 1956 by incorporating the capital restructuring features in
the BIFR scheme itself. This is fair to the new promoter, as any further
share capital that it will bring in will be in line with the actual worth of the
Discuss briefly Shares at Discount in one-time settlement to creditors?
A One-Time Settlement (OTS) proposal may be made to the secured creditors
(banks, financial institutions, etc.) involving concessions and sacrifices by
repayment of the entire dues over a short period of two or three years.

Alternatively, the scheme may provide for restructuring of the liabilities and
repayments over the rehabilitation period.
Reliefs and concessions within the RBI parametres are generally easily agreed
upon, but relief beyond that may require some convincing and adequate
justifications. Generally, banks and financial institutions are extremely hesitant
to waive any portion of the principal amount of loans. However, the OTS and/or
the restructuring of liabilities depends entirely upon the way the matter is
presented and discussed/negotiated with the secured creditors.
What is the Right to Re-compens-ation?
Many times the banks/financial institutions insist that they shall have a right to
re-compensation in respect of the amounts waived and sacrifices made by
them, if the sick company is revived. This, in effect, means that if the sick
company revives, then the amounts waived/sacrifices made by them shall be
made good by the company. Though, there may be a justification for including
such a term in an existing promoter's scheme of rehabilitation, there is no
justification for including such a term in the new promoter's scheme. This issue
should be considered while finalizing the OTS or restructuring of liabilities.
What is the Leveraged Buy Out?
Under a BIFR scheme if a suitable package is worked out with the secured
creditors, then the acquirer can, in effect, acquire the sick company by way of a
leveraged buy out wherein he gets an opportunity to pay a part of the total
consideration, that is, dues of the secured creditors, over a period of time. In a
non-BIFR situation the acquirer would not easily be able to achieve such a
financing pattern.
It is important to note that a scheme can be sanctioned by the BIFR only if
consented to by the concerned Government, banks, public financial institutions,
State level institutions or any institution or authority required by the scheme to
provide financial assistance, reliefs, concessions or sacrifices. Therefore, for any
scheme to go through, the consent of the above persons is a must. The consent
of the other creditors is, strictly speaking, not necessary for the scheme to go
through, even if the scheme involves extinguishments or reduction of their
rights. However, the BIFR will normally hear all the parties concerned before
sanctioning the scheme.
One of the features, which can be gainfully incorporated in a BIFR scheme, is
the issue of optionally convertible instruments to the secured creditors as a part
of the OTS/restructuring of the liabilities. If the company does not revive during
the conversion option period, then to that extent the secured creditors are not
adversely affected as the nature of the instrument continues to be a debt.

However, if the company revives and the stock prices of the company start
looking up (if listed) then it works out to be a win-win situation. The company
gains by way of conversion of loans into shares, which may be at a premium
and the creditor gains by being able to recover its money faster through the
sale of the shares as also a possible recovery of a higher amount by way of
appreciation in the value of the shares.
One can also consider offering the shares of one of acquirer group's healthy
listed company at a fair price to the secured creditors as repayment of their
The present position in law is that the consent of the CBDT (Central Board of
Direct Taxes) is necessary before a scheme containing reliefs and concession
under the Income-tax Act, 1961 is approved. Even then, it is better to include
tax concession and litigious tax issues in the scheme.
One important point that can be incorporated in the scheme is relating to the
set-off of the carried forward business loses and depreciation against the capital
gains that may be made by the sick company from the sale of its surplus assets.
Presently, the issue is not fully settled under the income tax law and, therefore,
there is a scope for litigation in regular income tax assessment. It may also be
advisable to ask for exemption under Section 41(1) of the Income-tax
Act, 1961 regarding the non-taxability of the interest waived, etc.
To take advantage of the time gap before the company is acquired; it may be
advisable to propose an arrangement for using the production facilities of the
sick company on a job-work basis or a short-term lease. The advantages to the
acquirer are that it gets a hands-on experience of the production facilities and it
starts exploiting the business potential of the production facilities. At the same
time, for the sick company it would ensure capacity utilization, which at the very
least, will keep the production facilities and the workers working and will
generate revenue.
It may be advantageous to request the BIFR, as a part of scheme, to suspend
operation of those contracts, agreements, awards, settlements, etc. which are
likely to adversely affect the quick and smooth implementation of the scheme.
The BIFR is empowered to do so for an initial period of two years which may be
extended by one year at a time, such that the total suspension period cannot
exceed seven years in the aggregate.

(Report of Tiwari Committee)
Continuous irregularity in cash-credit accounts.
Low capacity utilization.
Profit fluctuations, downward trends in sales and stagnation or fall in profit
followed by contraction in the share of the market.
Higher rate of rejection of goods manufactured.
Reduction in credit summations whenever the companies are in financial
difficulty, they open a separate account with another bank and deposit all
collections therein.
Failure to pay statutory liabilities.
Larger and longer outstanding in the bill accounts.
Longer period of credit allowed on sale documents negotiated through the
bank and frequent returns by customers of the same.
Constant utilization of cash credit facilities to the maximum and failure to pay
timely instalment of principal and interest on term loans and instalment credits.
Non-submission of periodical financial data/stock statements, etc. in time.
Financial capital expenditure out of funds provided for working capital
Decrease in working capital on account of Increase in debtors and particularly dues from selling agents.
Increase in debtors.
Increase in inventories which may include large number of slow or non-moving
Increase in inventories which may include large number of slow or non-moving
A general decline in that particular industry combined with many failures.
Rapid turnover of key personnel.

Existence of a large number of law suits against the company.

Rapid expansion and too much diversification within a short time.
Sudden/frequent changes in management - whether professional or otherwise
and/or dominated by one man/few individuals.
Diversion of funds for purposes other than running the unit.
Any major change in the shareholdings.
Define strike?
2 (1) (xvii) (b)The cessation of works by a body of persons while employed in any essential
service, refusal under a common understanding of any number of persons,
includes: Refusal to work overtime where such work is necessary for the maintenance of
any essential service.
Any other conduct which is likely to result in substantial retardation of work of
any essential service.
Sec. 3. Explain








If the Central Government is satisfied that in the public interest it is necessary

to prohibit striking essential services by general or special order it can do so.
The order shall be in force for six months only but the Central Government can
extend it for any period not exceeding six more months.
After issuance of the order, no person shall go or remain on strike.
Any strike declared before or after the issue of the order in such service shall
be illegal.
Explain briefly Sec. 4. Dismissal of employees participating in illegal
(a) whoever goes or remains on or otherwise takes part in any such strike or,
(b) who instigates any person to commence or go on for such strike shall be
liable for disciplinary action including dismissal in accordance with the
conditions of service applicable to him.
Explain briefly Sec. 5. Penalty for illegal strikes?

Any person who commences or takes part in any such illegal strike shall be
punishable with imprisonment for a term of six months or with fine which may
extend to Rs. 2000 or with both.
Explain Sec. 6. Penalty for instigation?
Any person who instigates other persons to take part in such an illegal strike
shall be punishable with imprisonment for a term of one year imprisonment, or
with fine which may extend to Rs 2000 or with both.
If the Central Government is satisfied, in the public interest, it may by general
or special order, prohibit lockouts in any establishment catering to essential
An order under Section 8(1) shall be in force for six months only. But the
Central Government can extend it if in the public interest, is necessary to do so.
Explain Sec. 8. Power to prohibit Lock-outs?
Section 8(4)(a).-No employer in relation to an establishment to which an order
applies shall declare any lock-out.
(b) Any such lock-out declared before or after the issuance of such order shall
be illegal.
What are the Consequences of Sec. 8 of ESMA?
Section 8(5).-Any such contravention shall be punishable with imprisonment for
a term which may extend to six months or fine up toRs. 1000 or with both.
Explain Sec. 9. Power to prohibit lay-off?
Section 9(1).-If the Central Government is satisfied it may prohibit lay-off, on
any ground other than shortage of power or national calamity, of any workman
whose name is on the master rolls of any such establishment in public interest.
Explain Sec. 10. Power to arrest without warrant?
Any police officer may arrest without warrant any person who is reasonably
suspected of having committed any offence under this Act.
The offences under this section shall be tried summarily by under this Act and
Sections 262 to 265 of Cr.P.C, 1973 shall apply to such trials.


The SEBI was established on April 12,1988 through an administrative order to

promote orderly and healthy growth of securities market and investor's
protection but it became a statutory and a powerful organisation due to
tremendous growth in capital market in 1992 when SICA was repealed and the
office of the Controller of Capital Issues was abolished. Government of India
issued an Ordinance on 30th Jan, 1992 and pursuant to this Ordinance SEBI was
set-up on 21st Feb, 1992. The SEBI Act replaced this Ordinance on 4th April,
The regulatory powers of the SEBI were increased through the Securities Law
(Amendment) Ordinance of January, 1995 which was subsequently replaced by
an Act of Parliament. SEBI is under the overall control of the Ministry of Finance.
Its Head Office is at Mumbai (formerly Bombay). It has since become a very
important constituent of the financial regulatory framework in India.
SEBI' s governing board comprises of a Chairman, two members from the
ministries of the Central Government dealing with Finance and Administration of
Companies Act, 1956, and one member from the officials of RBI and five other
members of whom at least three are wholetime members. All members, except
the RBI member, are appointed by Government of India. Their terms of office,
tenure, and conditions of service are also laid down by Government of India. It
can also remove any member from office under certain circumstances.
Government of India is empowered to supersede the SEBI in any of the following
If it is deemed to be expedient in public interest
If SEBI' s board is unable to discharge its functions or duties
If it persistently defaults in complying with any direction issued by the
If its financial position and administration deteriorates.
Regulation of the capital markets and protection of investor's interest is
primarily the responsibility of the Securities and Exchange Board of India (SEBI),
which is located in Bombay.
(Functions of SEBI)
What are the Fraudulent and Unfair Trade Practices?
Briefly explain Inspection and Enforcement Procedure of SEBI?
Regulating the business in stock exchanges and any other securities markets
Registering and regulating the working of collective investment schemes and
venture capital funds including mutual funds.

Registering and regulating the working of the depositories, participant,

Custodians of Securities, FIIs Credit Rating Agencies
Promoting and regulating the self-regulatory organisations
Registering and regulating the working of stock-brokers, sub-brokers, share
transfer agents, trustees of trust deeds, merchant bankers, underwriters,
portfolio managers, investment advisors and share intermediaries.
Prohibiting fraudulent and unfair trade practices relating to securities markets.
Promoting investor's education and training of intermediaries of securities
Prohibiting insider trading in securities, with the imposition of monetary
penalties, on erring market intermediaries.
Regulating substantial acquisition of shares and takeover of companies.
Calling for information from, carrying out inspection, conducting inquiries and
audits of the stock exchanges and intermediaries and self regulatory
organizations in the securities market.
Keeping this in view, SEBI issued a new set of comprehensive guidelines
governing issue of shares and other financial instruments, and has laid down
detailed norms for stock-brokers and sub-brokers, merchant bankers, portfolio
managers and mutual funds.
On the recommendations of the Patel Committee Report, SEBI on
27th July, 1995, permitted carry forward deals. Some of the major features of
the revised carry-forward transactions as directed by SEBI are:
carry-forward deals permitted only on stock exchanges which have screen
based trading system.
transactions carried-forward
transactions on any one day.

cannot exceed





90-day limit for carry-forward and squaring off allowed only till the 75th day
(or the end of the fifth settlement).
daily margins to rise progressively from 20% in the first settlement to 50% in
the fifth.
In accordance with the amendment in 1995 an adjudicating mechanism was
created within SEBI and any appeal against this adjudicating authority is to be

made to a separate Securities Appellate Tribunal. These appeals are heard only
in the High Courts.
The main features of the amendment in 1995 to the Securities Contract
(Regulation) Act, 1956 pertaining to SEBI's functioning are:
The ban on the system of options in trading has been lifted.
The time limit of six months, by which stock exchanges could amend their
bye-laws, has been reduced to two months.
Additional trading floors on the stock exchanges can be established only with
prior permission from SEBI.
Any company seeking listing in stock exchanges would have to comply with
the listing agreements of stock exchanges, and the failure to comply with these,
or their violation, is punishable.
SEBI is vested with powers to take action against these practices relating to
securities market manipulation and misleading statements to induce
sale/purchase of securities.
SEBI has the powers of Civil Court in respect of discovery and production of
books, documents, records, accounts, summoning and enforcing attendance of
company/person and examining them under oath. SEBI can levy fines for
violations relating to failure to submit information to SEBI/to enter into
agreements with clients/to redress investor grievances, violations by mutual
funds/stock brokers and violations related to insider trading and takeovers.
Important provisions under SEBI Act, 1992
Collective Investment Scheme
Any scheme or arrangement offered by any company under which:
(a) the contributions or payment made by the investors are pooled and utilised
from such scheme.
(b) the contributions and payments are made to such scheme or arrangement
by the investors with a view to receive profits, income and property whether
movable or immovable from such scheme.
(c) the property, contribution or investment forming part of scheme, the
investors do not have day-to-day control over the management and operation of
the scheme.
Prohibition of Manipulative and Deceptive Services, Insider Trading and
Substantial Acquisition of Securities or Control

No person shall directly or indirectly:

(a) use or employ in connection with the issue, purchase or sale of any
securities listed on a recognised stock exchange, any manipulative or deceptive
(b) employ any device, scheme or article to defraud in connection with issue or
dealing in securities which are listed on a recognised stock exchange.
(c) engage in any act, practice, course of business which operates as fraud in
connection with the issue, dealing in securities which are listed in a recognised
stock exchange.
(d) engage in insider trading.
(e) deal in securities while in possession of material or non-public information.
(f) acquire control of any company or securities more than the percentage of
equity share capital of a company whose securities are listed in a recognised
stock exchange.
Securities and Exchange Board of India General Fund
All the grants, fees, and charges received by the SFBI, and all sums received by
SEBI from other sources, are credited to securities and Exchange Board of India
General Fund.
This Fund is applied for the salaries, allowances and other remunerations of the
members, officers and other employees of the SEBI, and the expenses of SEBI.
Major Penalties under SEBI Act
Penalty for non-furnishing of any Rs. 1 lakh for each day during
document, return or report to SEBI which such failure continues or
Rs. 1 crore whichever is less.
Penalty for non-filing of return Rs. 1 lakh for each day during
within specified time to SFBI which such failure continues or
Rs. 1 crore whichever is less.
Penalty for failure to maintain Rs. 1 lakh for each day which such
books of account or records failure continues or Rs. 1 crore

whichever is less.
Penalty for failure to enter into Rs. 1 lakh for each day during
agreement with clients which such failure continues or
Rs. 1 crore whichever is less.
Penalty for failure to redress Rs. 1 lakh for each day during
Investor's Grievance which such failure continues or Rs. 1 crore whichever is
Penalty for failure to observe Rs. 1 lakh for each day during
Rules and Regulations by an which such failure continues or
asset management company Rs. 1 crore whichever is less.
Penalty for insider trading Rs. 25 crore or three times of amount of profits made
of insider trading whichever is higher.
Penalty for non-discloser of Rs. 25 crore or three times the amount acquisition of
shares and take-overs of profit made out of such failure
whichever is higher.
Penalty for fraudulent Rs. 25 crore or three times the amounts
and unfair Trade Practices of profit made out of such practices
whichever is higher.
Clariant International Ltd. v. Securities and
MANU/SC/0694/2004 : (2004) 8 SCC 524 Facts:-





The Colour Chem Ltd. was the target company. Its shares were listed on BSE and
NSE. An agreement was entered into by and between one Hoechest and one
Clariant pursuant whereto and in furtherance whereof the German speciality
chemicals business of the target company was transferred to Clariant by
transferring about 6 lakh equity shares of Rs. 100 each of the target company.
On or about 21-11-1997, with a view to give effect to the said agreement,
Clariant sought for an exemption from compliance with the requirements of
making an open offer to the shareholders of the target company in terms of the
provisions of the SFBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997. Such exemption however, was not granted. Hoechest in the
aforementioned situation decided to sell off the shares held by it in the target
company to Ebito, a company which was floated on 19-5-2000 as a special

purpose vehicle. The actual transfer took place on 13-10-2000. Ebito by reason
of the aforementioned transfer became 100% subsidiary of Clariant.
A complaint was received by SEBI to the effect that as by reason of the
aforementioned arrangement a transfer of 50.1 per cent shares/voting rights
and control in the target company had been made without any public
announcement, the provisions of regulations had been violated. Upon an
enquiry made in this behalf, the board came to the conclusion that the acquirer
had actually acquired the control over the target company on 21-11-1997. By
reason of an order SEBI on 16-10-2002 issued certain directions.
An appeal was preferred against the said order of SEBI by the acquirer wherein
the primary question raised was the rate of interest for the delay involved in
making payment to shareholders who had tendered the shares in the public
offer required to be made in terms of Regulations.
Issue:The rate of interest was on the higher side, the dividends having been paid in
the meantime, the same should be set off from the amount of payable interest
and the interest was payable only to those shareholders who held shares on the
targeting date.
Decision:The interest can be awarded in terms of an agreement or statutory provisions. It
can also be awarded by reason of usage or trade having the force of law or an
equitable considerations. The interest cannot be awarded by way of damages
except in cases where money due is wrongfully withheld and these are equitable
grounds therefor for which a written demand is mandatory.
Technip SA v. SMS Holding (P) Ltd., MANU/SC/0385/2005 : (2005) 5 SCC 465
Facts:Technip and Coflexip were both registered in France and takeover of Coflexip by
Technip also took place in France, the applicable law was of France. In terms of
French law, according to Technip there was no control of Coflexip by Technip in
April 2000 and as such there was no change in control of SEAMEC on that date
but in July, 2001. It is further submitted that in any event the SEBI Regulation
did not apply to the take-over because SEAMEC was not the target company and
that while taking over Coflexip, Technip neither had the common objective nor
was there any agreement between Technip and Coflexip with regard to SEAMAC.
The rate of interest had also been challenged. Although there was no challenge
to the rate which was fixed by SEBI, if the Tribunal's order is upheld, then the
impact of interest would be much greater. It was submitted that in any event,
the dividend paid must be adjusted against the interest claimed. It was the Final
Submission of Technip that if April, 2000 is to be taken as the date of control,

then only those shareholders who were shareholders of SEAMAC on the

specified date and continued as such till the offer was made were entitled to the
benefit of the Tribunal's order.
The respondent argued that the law applicable to SEAMAC was Indian Law and
to determine if there was a change in the management and control of SEAMAC
the provisions of the Regulations would apply. The respondent also claimed that
Technip had in fact applied to SEBI to exempt them from the operation of the
Regulations. The application had been rejected. This issue according to the
respondent could not, therefore, be reopened. It was said that SEAMAC was very
much in the contemplation of Technip when it decided to take-over Coflexip.
Issue:Whether Technip acquired control of SEAMAC through Coflexip in April, 2000 or
in July, 2001?
Decision:On examination of remaining facts, having regard to balance of probabilities,
there was no evidence that Technip obtained de facto control of Coflexip in April,
2000. In any case even if Technip did acquire Coflexip in
April, 2000, the shareholding of Coflexip in SEAMAC did not constitute a
substantial part of the assets of Coflexip. The take-over of SEAMAC was only an
incidental fall out of control of Coflexip and SEAMAC formed only about
2 per cent of total asset base of Coflexip at the time. Hence Technip did not
acquire control of SEAMAC in April, 2000. Substantial acquisition took place in
July, 2001. Hence the public offers are to be with reference to share price of
SEAMAC in July, 2001.
The global securities market is passing through an interesting phase. Driven by
globalization of the securities market, technology innovations and increasing
trade volumes, the financial industry is moving straight towards global heights
through processing. In this globalization era led by major financial markets, you
may wonder where India fits in. Before you start making any judgment, read
through the following words used by the Securities Industry Association (SIA) of
USA, in arguing the case of dematerialization in the world's biggest securities
market, i.e., United States of America.
"Some of the latecomers to the capital markets have leap-frogged into the next
century by rapidly moving into the dematerialized status already or at least very
soon. Among these would be...India."

Unbelievable! When we compare this statement with the following one made by
an international magazine covering clearing and settlement in the worlds'
securities markets not very long ago.
"India's financial markets, unlike the country itself, have long conjured up
images of interminable delays, infuriating obstructions and an infrastructure
that belongs more to the 19th than the 20th century. The country has long been
a safekeeping and settlement nightmare; the country's sub-custodians
struggling gamely-if ultimately pretty ineffectively-to deliver a consistent level
of service to clients. Bogged down by lack of liquidity, entry restrictions on
foreign participants, heavy transaction costs and frankly painful registration
processes, any talk of the markets' supposed liberalization back in early nineties
rings decidedly hollow."
When we look at the above two statements, the first being the recent reference,
one realizes that things have changed dramatically in the securities market for
better, as far as India is concerned. No longer we have the taboo of bad
deliveries, payment delays, paper movement and slower settlement. The two
entities, which can among others claim, a major credit for improving the market
efficiency of the Indian Securities market are National Securities Depositories
Ltd. (NSDL) and the Central Depository Services Ltd. (CDSL), both established in
In 1996, the Indian Government passed the Depositories Act allowing the
establishment of securities depositories in India. The principle function of a
depository in the Indian context is to dematerialize securities and enable their
transaction in book-entry form. In simple terms, the depository has the following
It is the succession of a recognised stock exchange, being a body of individuals
or a society registered under the Societies Registration
Act, 1860, by another stock exchange, being a company incorporated for the
purpose of assisting, regulating or controlling the business of buying, selling or
dealing in securities carried on by such individuals or society.
It is the process of converting securities in physical form into holdings in bookentry form.
It is the seggregation of ownership and management from the trading rights of
the members of a recognised stock exchange in accordance with a scheme
approved by the Securities and Exchange Board of India.

It is the process of converting securities in electronic form into holdings in
physical form, for those investors who opt to move out of the depository
Account Transfer:
The securities are transferred by debiting the transferer's depository account
and crediting the transferee's depository account.
Pledge and Hypothecation:
Depositories allow the securities placed with them to be used as collateral to
secure loans and other credits. The securities pledged/hypothecated are
transferred to a segregated or collateral account through book entries in the
records of the depository.
Linkages with the Clearing System:
The clearing system performs the functions of ascertaining the pay-in (sell) or
payout (buy) of brokers who have traded in the stock exchange. Actual delivery
of securities to the clearing system from the selling brokers and delivery of
securities to the buying broker is done electronically by the depository. To
achieve this, the depositories and clearing system are electronically linked.
Corporate Actions:
The depository may handle corporate actions in two ways. In the first case, it
merely provides information to the issuer about the persons entitled to receive
corporate benefits. In the other case, depository itself takes the responsibility of
distribution of corporate benefits.
Mumbai, being the financial capital of India and hub of stock market activities,
was the natural choice for establishment of depositories. NSDL was registered
as a depository on June 7, 1996. The depository commenced operations on
November 8, 1996 by implementing a state-of-the-art technology system in
record time. NSDL operates as a profit institution and is owned primarily by the
IDBI, UTI, NSEIL, SBI with several other Indian and Foreign Banks having a small
Bombay Stock Exchange (BSE) established the CDSL, in 1998,
commenced operations on March 22, 1999.CDSL is a public company for
and is owned by the BSE, Bank of India, Bank of Baroda, SBI, HDFC
Centurion Bank, and Standard Chartered Bank, Bank of Maharashtra,
Bank of India, Calcutta Stock Exchange and other depository participants.


The changes in the last five years, thanks to the two major infrastructures, NSDL
and CDSL, have altered the face of the Indian capital market. Gone are the days
of paper deliveries and the related issues of bad deliveries. The settlements
through book entry transfer of securities have removed the major problem of
bad deliveries, delay in settlement and the related cost in the settlement.
International norms of rolling settlements have been introduced and well
adapted to the Indian markets conditions. With effect from April 2002, the
system of settlement in the Indian capital market has moved to T+3
settlements. Both the depositories have faced the challenges of T+3, effectively
and efficiently. With these changes, the settlement system in India has been
completely overhauled. The move from an Account period settlement in "Paper
form only" to a T+3 settlement in pure electronic form has been achieved in a
record span of under five years, whereas it took anywhere between 10-20 years
in most of developed countries.
Today, Indian settlement infrastructures have been built to meet the
requirements of the 21st century. Everybody will envy the settlement
infrastructure, wherein 99 per cent of the settlement in the country takes place
in the dematerialized way. Even the developed capital markets are struggling to
achieve this. Improvements that have taken place in the Indian capital market
have been the model for others to emulate.
As on August 2002, the statistics of NSDL is impressive:

Companies Available for Demat:


Companies Signed for Demat:


Debt Instruments Admitted for Demat:


Commercial Papers Admitted for Demat:


Depository Participants of NSDL:


Depository Participants Service Center Locations:


Active Client Accounts (in thousands):


Demat Custody (Qty in crores)


Demat Custody (Value in Rs. crores)


Mumbai, being the financial capital of India has its own share in the success of
depositories. The number of investors account from Maharashtra (no doubt
major portion of this is from Mumbai) alone is more than 30 per cent. The
impressive growth in the number of investor accounts in NSDL is reflected in the
graph below:
Not far behind is the CDSL, which too has equal number of companies whose
shares are available for Demat. CDSL also has 1710 debt instruments available
for Demat. CDSL services investors through its network of 176 Depository
This impressive result is a reflection of a campaign that involved:
Strong government, regulatory and stock exchange support the Minister of
Finance, Securities Exchange Board of India (SEBI), and Reserve Bank of
India(RBI) openly promoted the depository and provided supportive regulatory
changes(e.g., SEBI's introduction of compulsory dematerialized settlement only
in a growing number of securities starting in 1999 and RBI's increase in
permitted lending limits against dematerialized securities pledged).
Depository Participant (DP) supports as DPs was not only the benefits of reduced
paper, but also new clients and the ability to cross-sell a growing number of
products/services to them.
An aggressive investor communications programme (publications, seminars,
website, videos, TV "infomercials" and credible spokespeople from across a
spectrum of backgrounds-academics, business writers, government/regulatory
officials) and provision of an active grievance redressal mechanism.
Both the depositories have successfully deployed technology for the full benefit
of the ultimate stakeholder i.e., the Indian investor. Today, making use of
Internet, these depositories provide user-friendly features, which provide
complete control to the investor in the settlement process.
In line with global trends, further steps are being taken to implement the world's
best practices. The planned implementation of an Electronic Contract Note
System is the first step towards "Straight Through Processing", which is aimed
at enabling a move from T+3 to T+2 settlement. Additionally the
implementation of RTGS (Real Time Gross Settlement) system, planned for
implementation in the near future, will improve the payment side of settlement.
With all this sophistication and modernization that is taking place in the
securities market, related to exchanges, clearing and settlement, Depository
Participants, brokers, etc. the day is not too far when the Indian securities
market will be recognised as one of the well developed markets in the world.

TATA Consultancy Services (TCS), which was entrusted with the responsibility of
implementing the NSDL, depository solution, based on its earlier state-of-art
solution implementation at SIS, SegaInterSettle, Switzerland, is working closely
with NSDL in constantly bringing the benefits of its global securities experience
to the Indian securities market.
Who is the Issuer/Registrar and Transfer Agent Guided Tour under
India set up its first depository (NSDL) under the Depositories Act passed by the
Parliament in August, 1996. NSDL was set up with an initial capital of INR one
billion (USD 28 million), promoted by Industrial Development Bank of India
(IDBI), Unit Trust of India (UTI) and National Stock Exchange of India Ltd. (NSEIL).
Subsequently, State Bank of India, Global Trust Bank Limited, Citibank NA,
Standard Chartered Bank, HDFC Bank Limited, The Hongkong and Shanghai
Banking Corporation Limited, Deutsche Bank, Dena Bank and Canara Bank have
become a shareholder of NSDL.
Stated in simple terms, the depository system comprises of Depository
Participants (DPs), through whom the investors and brokers use depository
facilities, the Companies or their share registrar and transfer agents (R&T
agents), who agree to have their shares and securities admitted into the
system, and the clearing corporations/houses of the stock exchanges, who sign
up with the depository to facilitate trading and settlement of demat securities.
In order to clear and settle trades that have been done for dematerialised
securities, clearing members have to open Clearing Member Accounts with the
DPs. Similarly, investors have to open Depository Accounts with DPs in order to
use the facilities of the depository system. These investors offer their share
certificates and scrips to the latter for dematerialisation i.e., credit to their
electronically maintained accounts. For transfer or transmission of these shares
or for further purchases, the investors operate these accounts almost like any
other running account in banks.
NSDL itself functions as the central accounting and record keeping office and
clearing house in respect of these shares and securities through electronic
operations. As all these are electronically linked, speed, accuracy and safety are
assured. Risks attendant on handling physical scrips are eliminated.
Depository helps eliminating the following problems:
At the time of issue of securities, processing, printing and posting of physical
securities increases the issue cost. In addition, very high load at the time of a
public issue, both with the registrar and the postal system, results in inefficient
distribution of securities leading to investor dissatisfaction.

The increase in trading in secondry market increases the cost to the company
for effecting transfers and also increases time taken for transfer causing
inconvenience to the investor.
The reconciliation of the securities in the hand of the various investors and
market intermediaries is at best achieved once in a year in the physical form,
which increases the possibility of proliferation of bad paper.
The system of handling market deliveries also increases the unchecked growth
of bad paper. In addition, the issuing company is unable to monitor, in a regular
fashion, the change in holding pattern of securities.
The load on the registrar and the postal system also increases at the time of
book closure and record date for distribution of corporate benefits, which results
in higher cost and delay in processing these.
NSDL provides an efficient solution to the ills associated with paper and offers
numerous benefits to various market participants and reduces transaction cost.
Advantages specific to you as an issuing company/registrar and transfer agent
The electronic holding reduces paperwork and thereby reduces direct costs of
record keeping, physical handling, movement and safekeeping of certificates.
Corporate actions such as public offers, rights, conversions, bonus,
mergers/amalgamations, sub-divisions & consolidations will be carried out
without the movement of papers, saving both cost and time.
Information of beneficiary owners is readily available. The issuer gets
information changes in shareholding pattern on a regular basis, which would
enable the issuer to efficiently monitor the changes in share holdings.
Instances of loss/theft/mutilation/forgery, etc. of certificates will be completely
The company acquires a progressive , investor friendly image.
Company can save substantial time of the secretarial department spent on
transfer of shares, followup with registrars, etc.
An issuer of securities can join NSDL directly by establishing electronic
connectivity with NSDL (TYPE-I) or by utilising the services of a registrar and
transfer agent who is connected to NSDL (TYPE-II). In the latter case, the
company may hire a registrar to obtain electronic connectivity to handle demat
shares, while keeping the share registery work with itself or it may outsource
the share transfer work as well. NSDL does not charge any fees for making the
securities available in the dematerialised form.

Steps involved in joining NSDL when the issuer company decides to go in for a
in-house route are:
Issuer sends a letter of intent (LOI) to join NSDL.
The issuer enters into an bipartite agreement with NSDL. The agreement has a
standard format (part of NSDL Bye Laws and hence, SEBI approved) and is the
same for all issuers.
After signing the agreement, the issuer has to get the VSAT installed.
The issuer has to install the required IT hardware. The hardware shall be
strictly in accordance with the specifications given. The hardware is to be used
exclusively for NSDL operations.
The application software for depository operations (DPM-SHR) will be provided
by NSDL.
The issuer/R&T agent has to nominate a System Administrator.
NSDL conducts training programme for representatives of the issuer/R&T
Agent. This is done to familiarise the staff with the depository system.
Once the hardware and software are installed, there will be a test run (for
about four days) after which dematerialisation of securities can start.
It is observed that the whole procedure of establishing connectivity takes
about eight to ten week's time.
The steps involved in joining the depository through a registrar are:
Issuer sends a letter of intent (LOI) to join NSDL.
A Tripartite Agreement has to be entered into between NSDL, the issuer and
the registrar.
If the registrar is already connected electronically
dematerialisation of securities can start immediately.




If the registrar has yet to attain connectivity, then it may take about 8-10
weeks to commence dematerialisation. The registrar will take all the steps
stated in Type-I.

Comment on the role of Registrar in Type-II connectivity?

The demat request generated on behalf of the clients by the various DP's are
available with the registrar. The physical papers along with a copy of the demat
request will be received by the company. The registrar will forward the
electronic request to the company. Once the company has completed the
scrutiny of the document and has done the necessary updation in its Register of
Members (RoM) it will send a confirmation to the registrar. The registrar on the
basis of this advice will confirm the demat request. The investor will now have
electronic balances. These investors are known as "Beneficiary Owners"(BO).
The list of investors in a particular security is downloaded to the registrar every
week (as of every Friday). The registrar is expected to forward the same to the
company in a format as agreed between them.
Book Closure & Record Date:
The company will inform NSDL and registrars about the impending record date.
This date may be critical for the purpose of distributing interest proceed or
call/put option or for final redemption. The registrar will solicit the benpos for
the record date and NSDL will download the BO information to the registrar as of
the record date. The registrar will forward it to the company.
If a BO wishes to hold physical securities he will approach his DP and make an
application for the same. The DP will enter the request in the NSDL system and
forward the physical application to the company. The NSDL system will forward
the request to the registrar. The registrar will forward the electronic request to
the company. The company on the basis of the electronic request and the
physical application received will print a certificate in the name of the BO and
will directly send it to the BO.
The Securities Contracts (Regulation) Act, 1956 came into effect from 20-2-1957
was enacted with the objective of preventing undesirable transactions in
securities by regulating the business of dealing in securities and it provides for
the regulation of stock exchanges and of transactions in securities dealt in on
them with a view to prevent undesirable speculation in them. It also provides for
procedure of buying and selling of securities outside the limits of stock
exchange though licensing security dealers.
Define Stock Exchange?

Stock exchange means any body of individuals, whether incorporated or not,

constituted for the purpose of assisting, regulating or controlling the business of
buying, selling or dealing in securities.
How the recognition of Stock Exchange takes place?
Any stock exchange which is desirous of being recognised for the purposes of
this Act may apply in the manner and with annexures as prescribed in the Act.
The Central Government after receiving an application and making due inquiry
may grant recognition, subject to the conditions imposed upon it. Any
application for grant of recognition can be refused only after giving an
opportunity to the stock exchange concerned to be heard and any reasons for
refusal are to be recorded in writing and communicated to the concerned stock
In the interest of trade or general public, recognition may be withdrawn after a
notice stating the reasons has been served to the stock exchange. Such
withdrawal can take place only after an opportunity to be heard is given to the
governing body.
Define powers of a recognised Stock Exchange?
A recognised stock exchange may make rules or amend any rules relating to
voting rights. These stock exchanges may also make bye-laws for regulation and
control of contracts. Any bye-law made by the Stock Exchange when approved
by the Securities and Exchange Board of India, is published in the Gazette of
India and the Official Gazette of the State in which the principal office is
Define power of Securities and Exchange Board of India?
The Securities and Exchange Board of India (SEBI) may make or amend the bye
laws of a recognized stock exchange if it receives a request to do so from the
governing body or it is satisfied after consultation with the governing body that
it is necessary to do so.
If the Central Government is of the opinion that the governing body of any stock
exchange is to be superseded, it may do so after serving a notice and giving the
governing body an opportunity to be heard. Further, the government may
appoint any person or persons to exercise and perform all the powers and duties
of the governing body.
If in the opinion of the Central Government an emergency has arisen and
business of recognized stock exchange should be suspended, it may direct the
stock exchange to do so for maximum seven days.




Government Security:It means a security created and issued, whether before or after the
commencement of this Act, by the Central Government or a State Government
for the purpose of raising a public loan and having one of forms specified in
Clause (2) of Section 2 of the Public Debt Act, 1944.
Option of Securities:It means a contract for the purchase or sale of a right to buy or sell securities in
future, and includes a teji, mandi, a teji a mandi, a galli a put, a call or a put and
call in securities.
Derivatives:It includes security derived from debt instrument, share, loan, whether secured
or unsecured, risk instrument or contract for difference or any other form of
Securities:It include shares, scrips, stocks, bonds, debentures, debenture stock or other
marketable securities of a like nature in or of any incorporated company or
other body corporate and derivatives and also units.
Spot Delivery Contract:It means a contract which provides for actual delivery of securities and the
payment of a price therefor either on the same day as the date of the contract
or on the next day, the actual profits taken for the despatch of the securities or
the remittance of money therefor through the post being excluded from the
computation of the period aforesaid if the parties to the contract do not reside in
the same locality and also the transfer of securities by the depository from the
account of a beneficial owner to the account of another beneficial owner when
such securities are dealt with by a depository.
Clearing Corporation:A recognised stock exchange may, with the prior approval of the Securities and
Exchange Board of India, transfer the duties and functions of a clearing house to
a clearing corporation, being a company incorporated for the purpose of
periodical settlement of contracts and differences, the delivery of, and payment
for securities.
Every clearing corporation shall for the purpose of transfer of the duties and
functions of a clearing house to a clearing corporation make bye-laws and
submit the buy-laws to SEBI for its approval.

Listing of Securities:Where the securities are listed on the application of any person in any
recognised stock exchange, such person shall comply with the conditions of the
listing agreement with that stock exchange.
Delisting of Securities:A recognised stock exchange may delist the securities, after recording the
reasons, from any recognised stock exchange.
A listed company or an aggrieved investor may file an appeal before the
Securities Appellate Tribunal against the decision of the recognised
stockexchange delisting the securities.
Explain the concept of Illegal Contracts?
Briefly explain Void Contracts?
Discuss briefly the exceptions to the Securities Contracts (Regulation)
Act, 1956?
If the Central Government is satisfied that it is necessary to do so, it may
declare this provision of the Act to apply to that area. Consequently, every
contract in such state or area otherwise than between members of a recognized
stock exchange in such state or through or with such member shall be illegal.
The Central Government may declare that no person, except with permission of
Central Government, can enter into a contract for sale or purchase of a security.
Any contract in contravention of this provision is also illegal.
Any contract entered into in any state or area specified in the above provision
which is in contravention with any bye-laws specified on that behalf shall be
void as resect to the rights of any member of the recognised stock exchange
and other persons who knowingly participate in such transaction
Any person except with the permission of the Central Government, cannot
assist, organise or be a member of any stock exchange not recognized for
entering into a contract in securities.
This Act does not apply to the Government, Reserve Bank of India, any local
authority or any corporation set up by a special law or any agent thereof. The
Act is also not applicable in cases of convertible bond or share warrant in so far
as it entitles the person to obtain at his option from the company or other body
corporate issuing the same from any of its share holders or agents' shares of the
company whether by conversion of the bond or the warrant.

The Central Government may exempt any class of contracts from application of
this Act in the interests of trade and commerce or overall economic
development of the country.
Canara Bank v. Standard Chartered Bank, MANU/SC/0730/2001 : AIR 2002 SC
132 Facts:The securities were purchased by the appellant. The respondent filed the suit for
recovery of sale consideration. The plea was done for squaring up of transaction
taken by appellant in written statement. The permission to raise plea was that
the transaction was opposed to public policy. The Appellant did not file any
application for amendment of the written statement before the special court.
Issue:Permission to such a plea to be raised whether would be contrary to the plea
already taken in the written statement and whether the amendment to written
statement can be allowed at the stage of appeal.
Decision:No plea was that the transactions were fictitious. The prices fixed under the
transaction did not allege to derived prices. The allegation was that there was
an understanding between the seller and notified person to the effect that the
notified person would ensure a return of 15% in turn and purchase and sale of
securities would take place under the instruction of notified person would not
make the transaction. Contrary to the circulars of RBI or opposed to public
policy the amendment could not be allowed at the stage of appeal in Supreme
Part II
Corporate Finance institutions
Financial Institutions
The Industrial Finance Corporation (IFCI)
Give salient provisions of the legislation in respect of Financial
IFCI was set up by Industrial Finance Corporation Act, 1948 as a statutory

For imparting greater operational flexibility and ability to respond to its

greater needs of the financial system after the liberalization of the economy it
was incorporated as a company in 1993.
Functions: Project financing;
Financial services;
Corporate Advisory Services.
The financial assistance is provided by way of rupee and foreign currency
loans, underwriting or direct subscription to shares and debentures, guarantees,
equipment finance, equipment leaving, supplier's-buyer's credit,
Finance to leasing and hire-purchase companies corporate loans;
Short-term loans and working capital loans;
The subsidiary companies of IFCI, the IFCI custodial services and IFCI Investors
Services Ltd. were amalgamated with IFCI Financial Services Ltd. on Feb. 2000.
IFCI also set-up Investment information and credit Rating Agency (ICRA) for
Credit Rating Services.
Another subsidiary of IFCI, Risk Capital Technology Finance Corporation Ltd.
Concentrates on managing venture capital funds and its name has been
changed to IFCI Venture Capital Funds Ltd. (IVCF).
The financial assistance can be availed by any limited company, public or
private or joint sector or a co-operative society incorporated in India.
Financial assistance can be availed for setting up of new industrial projects
and also for expansion diversification, renovation or modernization of existing
Its Corporate Services covers funds support for technical consultancy, risk
capital, venture capital, technology development, tourism development and
finance, entrepreneurship development, development of Science and
technology, etc.
Explain the role of IDBI with reference to long-term finance in industry?
The Industrial Development Bank of India is another one in the series of
specialized institutions set up since 1947 to provide long-term finance in

industry. IFCI, the State Finance Corporation, ICICI, NIDC and the Refinance
Corporation of India have been functioning for several years with the object of
providing direct plans, subscribing to shares and bonds and guaranteeing of
loans and deferred payments. The volume of long-term finance provided by
these institutions has been substantial and steadily increasing too, but it was
found inadequate to meet the requirements of new and growing industrial
enterprises. On one side, the needs of rapid industrialization necessitated the
establishment of a new institution with large financial resources. On the other
side, there was the need for co-ordination of activities of all agencies, which are
conceded, with the provision of finance for industrial development. It was to
fulfil this two-fold objective that the Government decided to establish the
Industrial Development Bank of India which formally came into existence in July,
The Industrial Development Bank of India which is now the apex institution
providing term finance was a wholly-owned subsidiary of the Reserve Bank of
India till 1976. The general direction, management and superintendence of the
Industrial Development Bank were vested in a Board of Directors, which was the
same as the Central Board of Directors of the Reserve Bank of India. The
Governor and Deputy-Governor of the Reserve Bank were the Chairman and
Vice-Chairman of the Development Bank. In 1976, IDBI was delinked from the
Reserve Bank of India and was taken over by the Government of India.
The main function of the Industrial Development Bank, as its name suggests, is
to finance industrial enterprises such as manufacturing, mining, processing,
shipping, and other transport industries and hotel industry.
(i) Direct Assistance.
The Development Bank grants direct assistance by way of project loans,
underwriting of and direct subscription to industrial securities, soft loans,
technical refund loans and equipment finance loans. It subscribes to purchase
and underwrites the issue of stocks, shares and bonds or debentures. The loans
and advances, which the Industrial Development Bank makes to any industrial
concern, may be converted into equity stocks and shares at the option of the
Development Bank. The Bank is also empowered to guarantee loans raised by
industrial concerns in the open market from scheduled banks, the State
Cooperative Banks, IFCI, and other "notified" financial institutions. The Bank can
also accept, discount or re-discount bona fide commercial bills or promissory
notes of industrial concerns and in direct lending the Bank resembles IFCI and
(ii) Indirect Assistance.
The Industrial Development Bank can assist industrial concerns in an indirect
manner also, that is, through other institutions. First of all, it can refinance term
loans to industrial concerns, repayable within 3 to 25 years given by the I.F.C.I.,

the State Financial Corporation and other financial institutions. Secondly, it can
refinance term loans repayable between 3 and 10 years given by scheduled
banks or State co-operative banks. Thirdly, it can refinance export credit given
by the scheduled banks and State co-operative banks. Thus, the Development
Bank finances those banks and financial institutions, which are lending to
industrial concerns. Further, the Bank can subscribe to stocks, shares bonds, or
debentures of the IFCI, the State Financial Corporations or any other "notified"
financial institutions and thus increase their financial resources and enable them
to provide larger assistance to industry.
(iii) Special Assistance.
The Industrial Development Bank of India Act, 1964, has provided for the
creation of a special fund known as the Development Assistance Fund. This fund
is to be used by the Development Bank to assist those industrial concerns,
which are not able to secure funds in the normal course because of low rate of
(iv) Foreign Currency requirements.
IDBI raises foreign funds from international money markets and funding
organization and makes them available to those industrial units, which need
It is interesting to note that unlike the other existing statutory financial
corporations, the Development Bank has no restrictions imposed regarding the
nature and type of security, which it should accept.
Define Soft Loan Scheme?
IDBI introduced in 1976 the soft loan scheme to provide financial assistance to
productive units in selected industries, viz., cement, cotton textiles, jute, sugar
and certain engineering industries on concessional terms to enable them to
overcome the backlog in modernization, replacement and renovation of their
plant and equipment so as to achieve higher and more economic levels of
production. The scheme is administered by IDBI with financial participation by
IFCI and ICICI. The basic criterion for assistance under the scheme is the
weakness of the units on account of obsolescence of machinery. The rate of
interest is 7.5 per cent and the period of loan is 15 years. The pace of
disbursement was very slow till 1978. The soft loan scheme was not attractive
to the private sector units because of the convertibility clause.
From January, 1984, the soft loan scheme was modified-now called Soft Loan
Scheme for Modernization-so as to cover deserving units in all industries. Under
this scheme, assistance is available to production units for financing
modernization, primarily aimed at upgradation of process, technology and
product, export orientation, import substitution, energy saving, prevention of

pollution, recycling of wastes and by products, etc. Other changes and

relaxations were also made to make the scheme attractive and popular.
IDBI has been permitted by SEBI to carry out merchant banking activities which
cover professional advice and services to industry for raising capital from the
market, acquisition of assets on lease, mergers/take-over of existing units etc.
The Merchant Banking Division of IDBI, in the first 2 years of its existence had
lead managed 118 issues and had helped to mobilize Rs. 12,340 crore from the
Criticially examine the role of Narasimham Committee (1991) on IDBI?
The IDBI, as the institution in the field of industrial finance, has been playing a
dominant role since its inception, and specially since 1976 when it was taken
over by the Government. The IDBI's sanctions and disbursements constitute
about 36 per cent of the total sanctions and 40 per cent. of all disbursements, of
all term-lending institutions.
A major recommendation of the Narasimham Committee is that there should be
competitive efficiency among banks and DFIs. For instance, all the term lending
institutions like IFCI, ICICI, IDBI, etc., should compete in the market for funds
and in providing lending facilities to the corporate borrower. A precondition for
bringing about such competitive efficiency is the restoration of "a level playing
field" between different DFIs. To facilitate this process, the Narasimham
Committee would like to bring about certain changes in the role and functions of
At present IDBI performs two functions: direct financing like other DFIs and
indirect financing through the system of refinance. This is the basic difference
between IDBI and other DFIs. The Narasimham Committee proposes that the
IDBI should give up its direct financing function and perform only promotional
apex and refinancing role in respect of other institutions like SFCs, SIDBI, etc.
The direct lending function should be entrusted to a separate finance company,
specially set up for this purpose.
The Government of India has not accepted Narasimham Committee's
recommendation. The Government, however, amended IDBI Act, with a view to
restructure IDBI's share capital and empower IDBI to raise equity from the
capital market.
Explain the role of UTI as a financial institution?
UTI is a statutory public Sector investment institution set up in 1964 by Unit
Trust of India Act, 1965.

It mobilises the savings of the Community and invests them in various types
of Securities like shares and debentures of various Companies.
To pool the savings, the Unit Trust sells to the Public Units.
By buying units, people can invest their money stately and derive professional
management of their funds.
The risk of investment is always with the UTI and not on the investor.
Its object is to afford the small investor means of acquiring a share with
minimum risk and a reasonable return.
By mobilising resources and channelling into investment it increases the
overall productivity of capital and facilitates growth of the economy.
It was started with an initial capital of Rs. 5 crore.
The management and business of the Trust is invested in the Board of
Trustees. The Board consist of a Chairman appointed by RBI from amongst
persons of special knowledge and experience in commerce, industry, banking,
Finance or investment. One trustee is nominated by the LIC.
UTI Act provides for significant tax concessions to the Trust and unit holders,
under Section 80L of Income tax Act, if it does not exceed
Rs. 1000.
What are the various guide-lines for Private Sector Banks given by
In January, 2001 RBI issued Guidelines for licensing of new banks in the
Private Sector.
Under the Guidelines the Non-Banking Finance Companies (nbfcs) will be
allowed to convert themselves into banks, subject to following regulations.
Minimum net is Rs. 200 crore.
Capital adequacy has been raised to Rs. 300 crore in 3 years.
The new Bank can have head office any where in India.
Corporates have been allowed to invest up to a maximum of 10%.
Promoters will have to dilute their holdings above 40% within one year.
Preference would be given to promoters in financing priority and financing of
rural and agro-based industries.

NRIs can invest up to 40% equity stock in new banks.

If any foreign bank or finance Company plans of participation will be restricted
to 20% which will be within the ceiling of 40% allowed to NRIs.
Give the guidelines for Banks entering into Insurance?
Those Banks who can satisfy the following conditions can set up a joint
venture company for undertaking insurance business.
The net worth of the bank should not be less than Rs. 500 crore.
The Capital adequacy Ratio of the Bank should not be less than 10%.
The Bank should have net profit for the last 3 continuous years.
The performance of the subsidiaries should be satisfactory.
The maximum equity contribution of the Bank in the joint venture will
normally be 50% of the paid up capital.
A subsidiary of the bank or of another bank will not normally be allowed to join
the insurance company.
The Banks which are not eligible for as joint venture participants can make
investments up to 10% of the net worth of the Bank or Rs. 50 crore whichever is
Any scheduled commercial bank is permitted to undertake insurance business
as agent of insurance company on fee basis.
The subsidiaries of banks would also be allowed to undertake distribution of
insurance product on agency basis.
All banks entering into insurance business will require prior approval of the RBI
The risk in insurance business should not be transferred to the bank.
Reserve Bank of India
Briefly discuss RBI as note issuing authority?
RBI Act, 1934:Central Bank of India.
Under Section 38 of RBI Act Government puts into circulation, counts meter
through RBI, sole authority to issue Bank notes number of India.

Issue of notes and general Banking Business and undertaking by different

What are the various departments under RBI?
1. Issue Department Responsible for issue of new notes. It keeps assets,
separate from banking deptartment.
2. Banking Deptartment holds stocks of currency.
Explain the term RBI as banker to Government?
Banker to Central and State Governments.
Under Section 20 of the RBI Act it is obligatory for bank to transact
government treasures and the management of public departments.
Section 21 requires the Central Government to deposit all money with the RBI.
Section 21A makes similar provision with respect to the State Governments.
Section 45 stipulate RBI to afford SBI as its sole agents at a places where no
branch or office of the RBI is there.
RBI is authorised to make advances to the State and Central Government.
It acts as exclusion to Government on import and export matters.
Explain the term RBI as Bankers Bank?
It controls banking and credit system through its position as bankers bank.
It holds cash balances of commercial banks.
Discuss the role of RBI as controller of credit?
RBI is empowered to remove any scheduled bank from Schedule II of the RBI
By charging the statutory amount regarding maintenance of liquid assets as
stated in Section 24 of the Banking Regulation Act, 1949.
At present all scheduled commercial banks are registered to maintain
statutory liquidity ratio (SLR).
By issuing directions
Act, 1949 with relation to:






1. The purposes for which advances may or may not be made.


2. The margins to be maintained.

3. The maximum amount of advance.
Discuss the role of RBI as a tender of last resort?
1. Re-discounting of bills under Section 17(2) and (3).
Commercial bill arising out of the bona fide commercial or trade transaction.
Bill for financing e.g., operation bill for financing cottage industries.
A foreign bill.
2. Loans, Advances, against securities.
Stocks, funds and securities (other than immovable property) in which a
trustee is authorised to invest trust money.
Gold or silver or documents of title to the same.
Bills of exchange and Promissory notes.
Q. Explain the term emergency advance?
Under Section 18, commercial banks and co-operative banks may be granted
emergency advance by RBI on special occasions when the Reserve Bank is
satisfied that the grant of such loan is necessary for the purpose of regulating
credit in the interest of Indian trade, commerce, industry and agriculture. Such
emergency advances may be given notwithstanding any limitation contained in
Section 17.
Explain the assistance given by RBI to special agencies?
Nearly 1/5th of paid-up capital of industrial finance corporation was subscribed
by RBI.
The bank has subscribed about 20% of share capital of State Finance
The bank has representatives in the board of directors of IFCI and FCs and
thus takes part in management of instruction.
IDBI was established as wholly owned subsidiary of the RBI in 1964.
RBI contributed to the establishment of UTI, 50% of share capital.

Maintains a separate agriculture credit department since 1955 to finance

agriculture sector.
Briefly discuss the relation between client and bank?
Industrial and finance departments look after credit needs of industry and
industrial finance corporation.
Obligation to honour cheques subject to the credit balance.
Cheque must be presented within time.
There should not be on court order.
What are the consequences of dishonour?
1. Nominal damages.
2. Exemplary/special damages.
Write a detailed note on History of Banking
French-Banqa, German-Banco Bench
North Italy-Lombardy-operated from benches.
When benches got looted-then term 'bankrupt' came.
Babylonians deposited money in temples but used to get it stolen, so lost
Romans, Muslims-Charging of interest was not allowed so banking business
suffered a set back.
India (Manusmriti)-Special Chapters were made for this purpose and mention
of interest etc. was there.
Gautama, Katyayana-They also prescribed for this in their works.
Middle ages-developed banking business 12th century-Bank of Venice Bank of
Geneva 8 banks were established in the 12th century alone. 1401-Barcelona
England Royal exchangers were appointed by royal family. The king was
Charles I and he looted the entire money deosited in Royal exchangers.

Individual cashiers were established in England but did not work successfully
as they used to misappropriate the money.
Goldsmiths earlier used to charge fees for deposits but later on started giving
Dutch banks were giving interest on money deposited-1672-Charles II also
took all the money deposited in the Goldsmiths institutions.
Mr. Patterson suggested a new banking institution to be established and
passed the Tonnage Act. [Mention 1708 Act]
1749, 1759-Issue of cheque books for the first time.
Peel's Act, 1844-This act gave monopoly to bank started by
Mr. Patterson's bank.
1920 Bank of England came into being and got nationalised in 1947.
Give Introduction to Banking?
Before 1936, there were no special provisions of law, except the Reserve Bank
of India Act which itself was passed in 1934 and consequently the Reserve Bank
of India was established on April 1, 1935, in respect of banking companies which
used to be governed by Indian Companies Act, 1930. In 1936, some new
provisions were introduced in the Indian Companies Act, 1913 relating to
banking companies; but these provisions proved inadequate and necessity to
bring a new legislation for banking companies was felt. Abuse of powers by
persons controlling some banks, absence of measures for safeguarding the
interests of depositors and economic interest of the country were some of the
causes to bring a new legislation which ultimately came into force on 16th
March, 1949 in the form of the Banking Companies Act, 1949. The Act was
passed to consolidate and amend the law relating to banking. The Act was later
amended in 1965 and a new name "The Banking Regulation Act, 1949" was
given to it. The Act extends to the whole of India. The provisions of the Act are
in addition to and not, except as provided in the Act, in derogation of the
Companies Act, 1956 and any other law for the time being in force. The Act does
not apply to a primary agricultural credit society, a co-operative land mortgagee
bank and any other co-operative society, except in the manner and to the
extent specified in Part V of the Act. Section 4 of the Act gives powers to the
Central Government and the Reserve Bank of India to suspend the operation of
all or any of the provisions of the Act, either generally or in relation to any
specified banking company for a specified period mentioned in the section.
Banking Regulation Act, 1949

Banking Regulation Act, 1949 was passed to consolidate and amend the law
relating to banking Companies.
It come into force from 16th March, 1949 and applies to the whole of India.
What is the purpose behind enactment of BRA, 1949?
1. Abuse of powers by persons controlling the banks.
2. Absence of measures of safeguarding
(a) the interests of depositors of banking costs.
(b) economic interests of the country.
Discuss the aim of the Act?
1. To consolidate and amend the law relating to banking costs.
2. It does not codify the laws of banking, merely regulates the functioning of
banking companies.
Provisions of Act are "in addition to, and not, same as expressly provided in
derogation of the Companies Act, 1956 and any other law for the time being in
Amendment Act-w.e.f. 1-2-1969.
How the Social Control is imposed by the Amending Act?
It was imposed by Amending Act.
State Preamble of Amending Act
An Act further to amend the Banking Regulation Act, so as to provide for the
extension of social control over the banks.
1. To determine priorities for lending and investment.
2. To evolve appropriate guidelines for management.
3. To promote re-orientation for decision-making machinery of banks.
4. To leave no opportunity in hand of bank managers and directors to
Ist Step

1. Finance Minister-Chairman
2. Governer RBI-Vice-Chairman.
3. Deputy Chairman, Planning Commission.
4. The Secretary (Ministry of Finance)
5. Chairman Agriculture Refinance Corporation.
Remaining 20-Appointed by Government to secure adequate representation
from sectors like commercial banks, co-operative sector, large and medium
scale industries, agriculture and other professional groups, e.g., economists and
After nationalization in 1969-NCC dissolved.
Additional controls and restrictions were imposed.
IInd Step
1. Constitution of board of directors of a banking company.
2. Management of affairs of banking company by a whole time Chairman.
3. Restrictions on loans and advances by banking company to its directors or to
a company or firm in which he is interested.
4. Additional powers confered on the RBI.
5. Punishments for(a) obstructing any person from lawfully entering or leaving a bank.
(b) holding demonstration within a bank.
(c) acting to undermine depositors' confidence in a bank.
6. Special powers of Central Government to acquire undertakings of banking
company if committing defaults.
Nationalisation of 14 major banks-w.e.f. 19-7-1969.
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.
14 major banks were nationalised-whole of the undertakings taken over
-became vested in 14 new corporate bodies-these new banks function as public
sector banks.

Discuss the applicability of the Act to different types of banks?

3 types of banks : (1) Non-nationalised banking companies, (2) Nationalised
banks (14+6=20+SBI+Regional rural banks+subsidiary banks), (3) Cooperative banks.
Explain Sec. 2 Application of other laws not barred?
The provisions of this Act shall be in addition to, and not, save as hereinafter
expressly provided, in derogation of the Companies Act, 1956 and any other law
for the time being in force.
Explain Sec. 3 Act to apply to co-operative societies?
Nothing in this Act shall apply to (a) a primary agricultural credit society; (b) a
co-operative land mortgage bank; and (c) any other co-operative society,
except in the manner and to the extent specified in Part V.
Explain Sec. 4 Power to suspend operation of Act?
The Legislature has deligated the power to suspend the operation of the Act to
the Government or to Governer or in his absence, the Deputy Governor of RBI.
The suspension of the operation of the provisions of the Act cannot exceed 1
year. The copy of the notification issued by the Government suspending the
operation of provisions of the Act is required to be placed before the Parliament
Explain Sec. 5(b) "banking"?
"The accepting for the purpose of lending or investment of deposits of money
from the public, repayable on demand or otherwise, and withdrawable by
cheque, draft, order or otherwise."
According to this definition major characteristics of banking business are:
1. There should be acceptance of deposits.
There is difference between the terms "loans" and "deposits" when amounts are
borrowed on the condition that they should be repaid on the expiry of a term,
then they are "loans". In "deposits", the liability to replace arises only when a
demand for repayment has been made.
In the case of Hirabhai v. Dhugnibai, the court held that "there is no distinction"
between a deposit and a loan therefore, they both are money lent by the
customer to the bank.
2. Deposits should be from public;
3. Repayable on demand or otherwise;

4. Withdrawable by Cheque, Draft, and order or otherwise.

Explain Sec. 5(c) "Banking Company"?
The "Banking Company" is one which is formed and registered under the
Companies Act.
Explain Sec. 5(ca) "Banking policy"?
"Banking policy" is one which is specified from time to time by the Reserve Bank
in the interest of the banking system or in the interest of monetary stability or
sound economic growth, having due regard to the interests of the depositors,
the volume of deposits and other resources of the bank and the need for
equitable allocation and the efficient use of these deposits and resources.
Explain Sec. 5(ffc) "Recon-struction bank"?
"Reconstruction bank" has been changed to Indian Investment Bank of India.
Reconstruction Bank was construed for the Principal credit of Reconstruct
agency, for industrial revival, to coordinate similar work of other institutes to
assist and promote industrial development and to rehabilitate Industrial
Explain Sec. 6 Forms of business in which Banking Co's may engage?
Any business which a bank is reqd. to undertake has been covered in
the definition. But it is not obligatory on the banks to undertake forms of
Write short notes on: bank, banker, banking or banking company
The banking company cannot undertake the business of banking without using
as part of its name at least one of the words "bank", "banking", banking
company. This has been done to ensure the interest of the depositors of the
What is the purpose of Acceptance of Deposits?
Purpose of Acceptance of Deposits should be 'lending' or 'investment'.
Therefore those Companies which accept deposists for financing their trading or
manufacturing business, will not come within the definition.
Explain Sec. 8 Prohibition of Trading?

According to Section 8, a banking company cannot engage itself directly or

indirectly in the buying or selling or bartering of goods except for the purpose of
realising a security given to or held by it.
Explain Sec. 9 Disposal of non-banking assets?
A banking company is prohibited from acquiring immovable property otherwise
then for the purpose of its own business. The banking compay can acquire
immovable property for its own business. The banking compay can acquire for
its own use. The provisions of Section 9 applies when the bank acquires building
then for its own use. If the bank acquires any immovable property as a nonbanking asset, it can hold the same for a period of 7 years.
Explain Sec. 10 Prohibition of employment of managing agents?
The banking company cannot employ or be managed by a managing agent or
employ or continue to employ any person who has been adjudicated as an
insolvent or who has been convicted by a criminal court of an offence involving
moral turpitude or who works for commission or share in the profits of the
company or whose remuneration in the opinion of the Reserve Bank is
Explain Sec. 10A?
This Section 10A provides for the appointment of persons having professional
experience on the Board of Directors.
Explain Sec. 10B Banking company to be managed by Chairman?
It provides that one of the directors of the Banking company be a chairman
either on whole-time or on part time basis. If the Chairman is appointed on a
whole-time basis, he shall be entrusted with the management of the banking
company. If Chairman is appointed on part-time basis, such appointment shall
be made with the approval of Reserve Bank of India of the management of the
affairs of the banking company shall be entrusted to the managing director who
shall be in whole time employment of the banking company.
Explain Sec. 11 Requirement of paid-up capital?
Though Companies Act, 1956 does not prescribe any minimum capital reserves
for any company, this Banking Regulation Act, 1949 prescribes minimum capital
is reserves for the banking company.

For companies incorporated in India

Aggregate Value of paidup Capital Reserves

1. If it has place of business (POB) in Rs. 5,00,000

more than one State

2. State of Bombay and Calcutta for Rs. 10,00,000


3. If it has POB in 1 state but neither

of which in Bom. or Cal.

(a) For principal POB Plus

Rs. 1,00,000

(b) For each POB in the same distt.

Rs. 10,000

(c) In each POB outside the distt 25,000


(d) For only one POB

Rs. 50,000

[Subject to a min. of

Rs. 5,00,000].

4. If it has all the POB in 1 State

(a) If one/more POB is/are in City of Rs. 5,00,000

Bom./Cal. Plus

(b) For each POB situated outside Rs. 25,000


[max. 10,00,000]

Explain Sec. 12 Regulation of Capital and Voting Rights?

Section 12(1) provides that in case of banking company incorporated after 15th
January, 1973 the subscribed capital of the company must be at least one-half
of the authorized capital; and paid-up capital must be at least half of the
subscribed capital. The capital of the banking company must consist of ordinary
shares only or of ordinary shares and such preference shares as may have been

issued before July 1, 1944. Section 12(2) provides that the voting rights of any
one shareholder on poll shall not exceed ten per cent. of the total voting rights
of all the shareholders.
Explain Sec. 13 Restriction on Commission etc. on sale of shares?
Section 13 provides that no banking company can payout directly or indirectly
by way of commission, brokerage, discount or remuneration in any form in
respect of any shares issued by it, any amount exceeding in the aggregate of
two and one half per cent of paid-up value of the said shares.
Explain Sec. 15 Restriction on Payment of Dividend?
Section 15 provides that a banking company cannot pay any dividend on its
shares until all its capitalised expenses have been completely written off.
Restrictions as to payment of divindend: Special provisions have been made by
this section for the payment of dividends to the share holders of the banking
companies the provisions of Companies Act, 1956 relating to payments of
deividends to the share holders don't apply to the banking companies. These
special provisions have been made to safeguard the depositors interest and to
ensure that the financial position of the banking companies may remain sound.
Explain Sec. 16 Prohibition of common directors?
This section imposes restrictions on the directors of a banking company under
the Companies Act, 1956. A director can be director in 20 public companies but
under this section, a director of a banking company cannot hold the office of a
director in another banking company. Similarly, if a person has a share holding
in a company or companies which hold 20% of the share capital of the banking
company, such person cannot be appointed as a director of such company.
However the restrictions on the directorship of the banking company are not
applicable to the directors appointed by the Reserve bank.
Write a short note on Sec. 17 Reserve Fund?
Section 17(1) provides that a banking company must maintain a reserve fund
and transfer thereto at least 20% of its net profit each year. The company may
be exempted from this requirement by the Central Government on the
recommendation of the Reserve Bank of India, provided at the time it is made,
the amount in the reserve fund together with the amount in the share premium
account is not less than the paid up capital of the banking company.
Section 17(2) provides that where a banking company appropriates any sum or
sums from the reserve fund or the share premium account, it must
communicate this fact, explaining the circumstances relating to such an
appropriation to the Reserve Bank of India, within 21 days from the date of
appropriation. The Reserve Bank may in any particular case, extend the said

period of 21 days by such period as it thinks fit or condone any delay in the
making of such report.
Write a short note on Sec. 18 Cash Reserve?
Section 18 provides that every banking company other than a scheduled bank
must maintain in India a cash reserve with itself or in current account with
Reserve Bank or the State Bank of India or any other bank notified by the
Central Government in this behalf, or partly in cash and partly in such account
or accounts, a sum equivalent to at least three per cent of the total of its time
and demand liabilities in India. The section further provides that the banking
company must also submit to the Reserve Bank before the 15th day of every
month a return showing the amount so held on Friday of each week of the
preceding month with particulars of its time and demand liabilities in India on
each such Friday or, if any such Friday is a public holiday under the Negotiable
Instruments Act, at the close of business on the preceding working day.
Write a short note on Sec. 20 Restrictions on loans and advances?
This section prohibits any banking company from entering into any commitment
for granting any loan or advance to any of the directors or any firm in which any
of its director is a partner or manager etc. or company or its subsidiary in which
any director of the banking is interested or to any individual for whom a director
is a guaranter or with whom a director is a partner or director. The restrictions
on loans and advances do not apply to the loans and advances granted by the
banking company to its subsidiary company or to a company incorporated
under Section 25 of the Companies Act. The directors of a banking company
delegating their powers are under a duty to see that the delegate is kept within
the limits of the powers delegated & function of property and effectively. If the
directors fail to discharge such duty of supervision & effective control over the
deligate they will be liable.
Section 20(1) provides that no banking company shall(a) grant any loans or advances on the security of its own shares or;
(b) enter into any commitment for granting any loan or advance to on behalf of(i) any of its directors,
(ii) any firm in which any of its directors is interested as partner, manager,
employee or guarantor, or,
(iii) any company (except a subsidiary of the banking company or a company
registered under Section 25 of the Companies Act, 1956 or a Government
Company) of which or the subsidiary or the holding company of which any of the
directors of the banking company is a director, managing agent, manager,
employee or guarantor or in which he holds substantial interest or,

(iv) any individual in respect of whom any of its directors is a partner or

The explanation to Section 20 provides that "loan or advance" shall not include
any transaction which the Reserve Bank may specify by general or special order
as not being a loan or advance for the purpose of this section. It further states
that in case any question arises whether any transaction is a loan or advance
for the purpose of this section, it shall be referred to the Reserve Bank whose
decision thereon shall be final.
What are the restrictions on power to remit debts?
Section 20A provides that a banking company shall not, except with the prior
approval of the Reserve Bank of India, remit in whole or in part any debt due to
it by:(a) any of its directors, or
(b) any firm or company in which any of its directors is interested as director,
partner, managing agent or guarantor, or
(c) any individual if any of its directors is his partner or guarantor.
Any remission made in contravention of the above provisions shall be void and
of no effect.
Explain Sec. 21 Power of Reserve Bank to Control Advances by Banking
Section 21 empowers the Reserve Bank to control the advances by banking
companies in the public interest or in the interest of depositors or if
necessitated by the banking policy. The Reserve Bank in this connection may
give directions to the banking companies, either generally or to any banking
company or group of banking companies in respect of the purpose of margins,
maximum amount and rates of interest for such advances.
Explain Sec. 22 Licensing of Banking Companies?
Section 22 provide that every banking company must obtain a license before
commencing banking business in India from the Reserve Bank of India. The
section is reproduced below:
"(1) Save as hereinafter provided, no company shall carry on banking business
in India unless it holds a licence issued in that behalf by the Reserve Bank and
any such licence may be issued subject to such conditions as the Reserve Bank
may think fit to impose.

(2) Every banking company in existence on the commencement of this Act,

before the expiry of six months from such commencement, and every other
company before commencing banking business in India, shall apply in writing to
the Reserve Bank for a license under this section:
Provided that in the case of a banking company in existence on the
commencement of this Act, nothing in sub-section (1) shall be deemed to
prohibit the company from carrying on banking business until it is granted a
licence in pursuance of this section or is by notice in writing informed by the
Reserve Bank that a licence cannot be granted to it:
Provided further that the Reserve Bank shall not give a notice as aforesaid to a
banking company in existence on the commencement of this Act before the
expiry of the three years referred to in sub-section (1) of Section 11 or of such
further period as the Reserve Bank may under that sub-section think fit to allow.
(3) Before granting any licence under this section, the Reserve Bank may
require to be satisfied by an inspection of the books of the company or
otherwise that the following conditions are fulfilled, namely:(a) that the company is or will be in a position to pay its present or future
depositors in full as their claims accrue;
(b) that the affairs of the company are not being, or are not likely to be,
conducted in a manner detrimental to the interests of its present or future
(c) that the general character of the proposed management of the company will
not be prejudicial to the public interest or the interest of its depositors;
(d) that the company has adequate capital structure and earning prospects;
(e) that the public interest will be served by the grant of a licence to the
company to carry on banking business in India;
(f) that having regard to the banking facilities available in the proposed principal
area of operations of the company, the potential scope for expansion of banks
already in existence in the area and other relevant factors the grant of the
licence would not be prejudicial to the operation and consolidation of the
banking system consistent with monetary stability and economic growth;
(g) any other condition, the fulfilment of which would, in the opinion of the
Reserve Bank, be necessary to ensure that the carrying on of banking business
in India by the company will not be prejudicial to the public interest or the
interests of the depositors.
(3A) Before granting any licence under this section to a company incorporated
outside India, the Reserve Bank may require to be satisfied by an inspection of

the books of the company or otherwise that the conditions specified in subsection (3) are fulfilled and that the carrying on of banking business by such
company in India will be in the public interest and that the Government or law of
the country in which it is incorporated does not discriminate in any way against
banking companies registered in India and that the company complies with all
the provisions of this Act applicable to banking companies incorporated outside
(4) The Reserve Bank may cancel a licence granted to a banking company
under this section(i) if the company ceases to carry on banking business in India; or
(ii) if the company at any time fails to comply with any of the conditions
imposed upon it under sub-section (1); or
(iii) if at any time, any of the conditions referred to in sub-section (3) and subsection (3A) is not fulfilled:
Provided that before cancelling a licence under Clause (ii) or Clause (iii) of this
sub-section on the ground that the banking company has failed to comply with
or has failed to fulfil any of the conditions referred to therein, the Reserve Bank,
unless it is of opinion that the delay will be prejudicial to the interests of the
company's depositors or the public, shall grant to the company on such terms
as it may specify, an opportunity of taking the necessary steps for complying
with or fulfilling such condition.
(5) Any banking company aggrieved by the decision of the Reserve Bank
cancelling a licence under this section may, within thirty days from the date on
which such decision is communicated to it, appeal to the Central Government.
(6) The decision of the Central Government where an appeal has been preferred
to it under sub-section (5) or of the Reserve Bank where no such appeal has
been preferred shall be final."
What are the restrictions on Opening of New, and Transfer of Existing
Place of Business?
Section 23 empowers the Reserve Bank to control the opening of new place of
business and transfer of existing place of business. These restrictions do not
apply to the opening for a period not exceeding one month of a temporary place
of business for the purpose of affording banking facilities to the public on the
occasion of an exhibition, a conference or a mela or any other like occasion
within a town, city or village or in the environs thereof within which the banking
company already has a place of business.
Before granting any permission under this section, the Reserve Bank may be
required to be satisfied by an inspection under Section 35 or otherwise, as to

the financial condition and history of the company, the general character of its
management, the adequacy of its capital structure and earning prospects and
that public interest will be served by the opening or, as the case may be,
change of location, of the place of business.
Explain the powers of the Reserve Bank to give directions?
Section 35A empowers the Reserve Bank to give directions to banking
companies generally or to a particular banking company. The section is
reproduced below:
"(1) Where the Reserve Bank is satisfied that(a) in the public interest; or
(aa) in the interest of banking policy; or
(b) to prevent the affairs of any banking company being conducted in a manner
detrimental to the interests of the depositors, or in a manner prejudicial to the
interests of the banking company; or
(c) to secure the proper management of any banking company generally;
it is necessary to issue directions to banking companies generally or to any
banking company in particular, it may, from time to time, issue such directions
as it deems fit, and the banking companies or the banking company, as the
case may be, shall be bound to comply with such directions.
(2) The Reserve Bank may, on representation made to it or on its own motion,
modify or cancel any direction issued under sub-section (1), and so modifying or
cancelling any direction may impose such conditions as it thinks fit, subject to
which the modification or cancellation shall have effect."
Section 36 gives further powers and functions of Reserve Bank which is also
reproduced below:"The Reserve Bank may(a) caution or prohibit banking companies generally or any banking company in
particular against entering into any particular transaction or class of
transactions, and generally give advice to any banking company.
(b) on a request by the companies concerned and subject to the provision of
Section 44A, assist, as intermediary or otherwise, in proposals for the
amalgamation of such banking companies;

(c) give assistance to any banking company by means of grant of a loan or

advance to it under Clause (3) of sub-section (1) of Section 18 of the Reserve
Bank of India Act, 1934 (2 of 1934).
(d) at any time, if it is satisfied that in the public interest, or in the interest of
banking policy or for preventing the affairs of the banking company being
conducted in a manner detrimental to the interest of the banking company or
the depositors it is necessary so to do, by order in writing and on such terms
and conditions as may be specified therein:(i) require the banking company to call a meeting of its directors for the purpose
of considering any matter relating to or arising out of the affairs of the banking
company, or require an officer of the banking company to discuss any such
matter with an officer of the Reserve Bank;
(ii) depute one or more of its officers to watch the proceedings of any meeting
of the Board of directors of the banking company or of any committee or of any
other body constituted by it; require the banking company to give an
opportunity to the officers so deputed to be heard at such meetings and also
require such officers to send a report of such proceedings to the Reserve Bank;
(iii) require the Board of directors of the banking company or any committee or
any other body constituted by it to give in writing to any officer specified by the
Reserve Bank in this behalf at, his usual address all notices of, and other
communications relating to any meeting of the Board, committee or other body
constituted by it;
(iv) appoint one or more of its officers to observe the manner in which the
affairs of the banking company or of its officers or branches are being
conducted and making a report thereon;
(v) require the banking company to make within such time as may be specified
in the order, such changes in the management as the Reserve Bank may
consider necessary.
(2) The Reserve Bank shall make an annual report to the Central Government on
the trend and progress of banking in the country, with particular reference to its
activities under Clause (2) of Section 17 of the Reserve Bank of India
Act, 1934 (2 of 1934), including in such report its suggestions, if any, for the
strengthening of banking business throughout the country.
(3) The Reserve Bank may appoint such staff at such places as it considers
necessary for the scrutiny of the returns, statements and information furnished
by banking companies under this Act, and generally to ensure the efficient
performance of its functions under this Act."
(1) Applies to all banking companies which are nationalised.

(2) Only few sections are applicable to nationalised banks.

(3) For company of banks(i) Paid-up share capital and reserves of Rs. 1 lakh and more
(ii) Applies to all State & Central Co-operative Banks
(iii) While applying, its sections are to be read as modified by
Section 56.
RBI Act:
Constitutes central banking legislation.
Banking Regulation Act: Contains legislations for regulating the activities of
commercial and co-operative banks.
Banker & customer
Define Banker?
Negotiable Instruments Act: Section 3-The term includes any person acting as a
American definitionThe business dealing in credits is banking.
Definition of Japanese Bank Act, 1927-Banks are defined as "Institutions which
carry on operations of giving as well as receiving credit.
Zurich :
Bank is an institute which appeals to public for deposits.
Sweden :
Private banking firms can't use this word.
Argentina, Belgium, Canada, Denmark, Germany, Italy : Unauthorised use of the
word 'bank' is prohibited.
English Law :

Dr. Hart : Essential functions to enable a person, firm or institute to be regarded

as a banker or a bank, is that of receiving current deposits against which
cheques may be drawn.
Sir John Paget's definition :
Four essential functions to be performed by persons desiring to be called
bankers : (1) take deposit accounts (2) issue and pay cheques (3) take current
accounts (4) collect cheques crossed and uncrossed for his customers.
More characteristics of present day bankers
Define Agency services?
(a) Collection of bills, promissory notes, coupons, dividends, payment of
subscriptions and insurance premium.
(b) Acting as a trustee, attorney or executor of his customers.
Define General Utility Services?
(a) Issue of credit instruments.
(b) Transaction of foreign exchange business.
(c) Safeguarding of valuables and documents against fire, theft etc.
Define Blacks Law Dictionary?
"Banker" is a person who engages in business of banking.
"Bank" is a financial establishment for the deposit, loan, exchange, or issue of
money and for the transmission of funds.
No statutory definition (By Sir John Paget's definition).
Define Customer?
"To constitute a customer, there must be some recognisable course or habit of
dealing in one nature of regular banking business.
Discuss relationship between Banker and Customer?
It arises out of the Contract between them and cannot be created except by
mutual consent.

A Contract which exists between both of them is a loan contract. Therefore, if

customer account is in credit, then bank can give him money, vice-versa if
account is overdrawn.
The relationship between them is basically a contractual relationship of
debtor and creditor and is regulated by the provisions contained in the
Negotiable Instruments Act, 1881 and Indian Contract Act, 1872.
Discuss the types of services, decide the nature of relationship of the
Banker and Customer?
Services provided by banks in our country are classified into two categories (1)
Traditional (2) New services.
1. Traditional Services:
It confers:
Maintenance of different types of deposit accounts e.g., savings, fixed and
Grant of advances through cash credit, overdraft and loan accounts
Collection of cheques, bills of exchange and other instruments.
Issue of performance and financial guarantees.
Permission of remittance facilities by issue of draft, mail transfers and
telegraphic transfers.
Provision of facilities of safe deposit and safe custody.
Purchase and sale of securities.
2. New Services:
New services laid emphasis on deposit mobilization and grant of credit to
weaker sections of the society.
In the case of Central Bank of India Ltd., Bombay v. Gopinath Nair, Customer is
Relationship is of following types:1. Debtor and Creditor.
2. Trustee and Beneficiary.

3. Agent and Principle.

4. Bailee and Bailor.
5. Mortgagee and Mortgagor.
6. Lessee and Lessor.
7. Relationship defined by rules of banking practice.
Structure of R.B.I. is:
It was set-up as a shareholder's bank with a share capital of Rs. 5 crore
divided in 5 lakh fully paid-up shares of Rs. 100 each.
Entire share Capital was owned by private shareholders with exception of Rs.
2,20,000 which was reserved for allotment to the Government.
What is Currency Chests?
Nationalization of the bank
Close integration between policies of RBI and Government were found to be
It was done after independence only when RBI (Transfer of Ownership) Act,
1948 was passed as per provisions of the Act and entire share Capital was
acquired by Government of India with effect from 1 Jan, 1949.
In the hands of a Central Board of Directors and four local Boards.
[4 local Boards with headquarters at Mumbai, Calcutta, Chennai, and New
Central Board has 20 members.
(a) One Governor and four Deputy Governors appointed by Central Government
for a term not exceeding five years.
(b) Four directors nominated by Central Government from each local Board.
[Sec. 8(1)(b)]
(c) Ten directors are to represent business, industry and co-operation.
[Sec. 8(1)(c)]

(d) One official nominated by Government of India. [Sec. 8(1)(d)]

Main function of local Board is to advice the Central Board.
Elaborate the functions of the Bank?
R.B.I has authority to issue currency in the country. All currencies (except 1
rupee coins, 1 rupee notes and other smaller coins) are issued by RBI.
According to Section 33 of RBI Act, 1934,
Assets of the issue deptt. shall have;
Gold coin and Gold bullion.
Foreign securities
Rupee coins and rupee securities.
They are receptacles, (i.e., boxes or containers) in which stock of new or
re-issuable notes are stored along with rupee coins.
(2) Banker to the Government:
It acts as the agent and advisor of both Central and State Governments (except
Jammu and Kashmir).
(R.B.I) it discharges following functions to Government(i) It keeps cash balances by the Government as deposits free of interest.
(ii) It receives and makes payments on behalf of the Government.
(iii) It carries out their exchange remittance of other banking operations.
(iv) It helps both Central and State Government to float near loans and to
manage public debt.
(v) It creates ways and means for advances to the State and local authorities.
(vi) It acts as advisor to the Governments on all monetary and banking matters.
(3) Banker's Bank:

It is the apex banking institution controlling the banking and credit system
through its position as banker's bank.
As Banker's Bank it holds cash balances of the commercial banks.
(4) Controller of credit:
Its function is to provide enough assistance in regulating the credit creating
activities of commercial banks.
(5) Banks rate:
Section 49 of the Reserve Bank of India Act empowers the bank to publish the
bank rate from time to time and it defines bank rate as "standard rate at which
it is prepared to buy or re-discount bills of exchange or other commercial papers
eligible for purchase under this Act."
(6) Cash Reserve Ratio (C.R.R.):
It is another weapon at the disposal of the Reserve Bank to control credit.
According to the Reserve Bank of India Act, 1934, every scheduled bank has to
keep certain minimum cash reserves with the RBI. The present CRR remains at
10%, effective from Jan 18, 1997.
(7) S.L.R.:
Statutory Liquidity Ratio (SLR) is another method of influencing the lending
policies of commercial banks. All commercial banks have to maintain liquid
assets in the form of cash, gold and unencumbered approved securities equal to
not less than 25% of their total demand and time deposit liabilities.
(8) Open Market Operation:
In India open market operation refers to the purchase and sale of government
securities by the Reserve Bank from/to the public and banks on its own account.
(9) Maintenance of internal as well as external value of the currency:
Ensues effective co-ordination and control over credit. Organizes sound and
healthy commercial banking system(i) Development of rural banking
(ii) Promotion of financial institutions
(iii) Development of money and capital market in India.
(10) Promotional measures taken by RBI :

(1) Established the Bill Market Scheme in 1952.

(2) Helps to provide credit to agriculture sector/industrial sector of economy.
(3) Has promoted Regional Rural Banks with the help of commercial Banks to
extend banking facilities to rural area.
Various Types of Accounts in banks
Describe Current Deposits?
Describe Saving Deposits?

credit account (b)

(a) Current Deposits

over drawn (d)

Demand deposits
(c) Saving Deposits
(a) Generally maintained by firms/business organizations.
(b) No interest rather than fee is charged by bank.
(c) No restriction on the number of transactions a day.
(d) No duty of the customer to notify the banks of any items which not
authorised by him.
Discuss the mode of Opening of New Account?
What is Recurring Deposit Accounts and Special Accounts?
Before opening a new account a banker should take certain precautions i.e. the
applicant who wants to open an account with a bank must be properly
introduced to the banker. If the banker opens account without proper
introduction or shows carelessness in this regard, the chance of fraud or
misrepresentation may occur.
By opening an account with the banker, a customer enters into relationship with
a banker. The banker-customer relationship imposes several obligations on the
banker e.g., honouring of cheques drawn by the customer, maintenance of

secrecy of the account, etc. To safeguard the interest of banker, it is necessary

that bankers should open only for honest, reliable, and responsible parties.
Therefore, before opening an account the banker should observe the following
precautions:What are the general precautions to be taken by a bank in opening of a
New Account
1. Application on the prescribed Form: To open an account the customer is
required to mention his name, occupation, full address, specimen signature and
the name and signature of a person for reference.
2. Introduction of the applicant: A bank should enquire from responsible parties
given as references by the customer about the latter's integrity and honesty. If a
bank fails to do this it will result in serious consequences not only to it but also
for other banks and the general public. By allowing a person to open an account
without satisfactory introduction or reference, a banker would be inviting
unpleasant consequences. Further, if the person happens to be on undischarged
bankrupt the banker would be facing serious consequences.
3. Safety against wrong overdraft granted: At the time of opening an account
although the banker may not intend to grant an overdraft to the prospective
customer at times an over draft may be granted inadvertently. In such a case
the amount can be realized only if the customer is a respectable solvent party.
4. Enquiries about the customer: A banker should retain sufficient information
about his customer regarding the latter's financial soundness, nature of
business in which he is engaged etc.
5. Evidence of negligence: In any enquiry regarding the new customer may
make a banker guilty of negligence, he can not claim protection under Section
131 of Negotiable Instruments Act, 1881. In the course of his judgement in the
case of Lad Broke v. Todd Justice Balthackere said that the bank acted
negligently for they did not make ordinary enquiries which ordinarily reasonable
people should make in opening an account. A contradictory view was given in a
more recent case, Bapulal Premchand v. Nath Bank Ltd. (1946). In this case
Justice Chaglo held that, it was not obligatory upon a bank to make enquiries as
to the respectability of a customer in order to avail itself of the protection given
to it under Section 131 of the Negotiable Instruments Act. In view of these
contrary ideas, it is therefore safe for a bank not to accept a person as a
customer without introduction or some reference except in case of parties
personally known to an office of the bank.
6. Specimen Signature: Every customer is required to supply his banker with a
few (usually three) specimens of his signature on the specimen signature cards
kept by the banker. A recent practice is that bankers take specimen signature of
a customer at the top of the ledger sheet where the account of a particular

customer is opened. The customer's name and address will also be written
7. Mandate for the operation of the account: The banker should get from his
customer a mandate if the latter intends operations on his account by another
person. His power to draw and endorse cheques does not give him powers to
accept bills or overdraw the account. Specimen signature of the persons
authorized to operate on the account should be given in the mandate. A banker
should supply to the customer free of cost a cheque book, pass book and a payin slip book.
Discuss the risks in opening Accounts without proper Introduction?
If the banker opens an account without introduction the banker runs certain
risks which are as follows:
(i) The banker cannot avail of the statutory protection: Section 131 of the Indian
Negotibale Instruments Act provides statutory protection to the banker, if he
collects bills or cheque etc., on behalf of a customer in case the latter has no
title, or defective title thereto. This means the banker should have collected the
cheque or bill on behalf of a "customer" i.e., who has been allowed to open the
account with proper introduction.
(ii) Risk in case of overdrafts: If a customer who is not properly introduced is
granted an overdraft even by mistake or negligence, the banker may not be
able to recover the amount under such circumstances of granting overdraft by
mistake. The bank can recover the amount only if the customer is a respectable
(iii) Risk in case of undischarged insolvent: The deposits received by a banker
from an undischarged insolvent without proper introduction carries the risk of
(iv) Issue of bogus cheques: A customer who is not properly introduced, obtains
possession of cheque books and may issue cheques without sufficient balance.
As a result of the failure to make necessary enquiries, the banker may enable a
dishonest person to obtain for fraudulent purposes, the possession of a cheque
book and if such a person happens to be an undischarged insolvent the bank
might be placed in a difficult position by unknowingly allowing such a person to
operate on his account with the bank.
(v) As per the directives of RBI, bank should immediately obtain introduction for
all deposit accounts. Introduction is necessary for all types of accounts except
that of a limited company. Also introduction is not required in case of opening a
fixed deposit account because a cheque book is not issued under such an
Special Type of Banker's Customers

The primary function of a commercial bank is to attract deposits of money from

the bank. The bank does this by opening accounts. An account in a bank can be
opened by any person who (i) is legally capable of entering into a valid contract,
and (ii) applies to the banker in the proper manner i.e., he follows the procedure
laid down by the banker and accepts the terms of conditions stipulated by the
latter. Under the provisions of the Indian Contract Act, 1872, certain persons like
minor, insolvent, lunatic and drunkards are incompetent to enter into valid
contracts. The bank must take necessary precautions in dealing with such
persons in order to safeguard its interests. Institutions like clubs, societies,
Colleges, partnership firms and joint stock companies also open account with
the banker. The bank should take special care and precautions while dealing
with such special types of customers.
Who is Natural Guardian of Minor
According to Section 3 of the Indian Majority Act, 1875 a person who has not
completed the age of 18 years, is a minor. If he is under the court of wards the
age of majority is 21 years. That is, if a guardian of such person on property is
appointed by the court before he completes 18th year, he remains a minor till
he completes his 21st year. According to the Indian Contract Act, 1872, a minor
is not capable of entering into a valid contract because any contract entered
into by a minor is void except a contract for supply of necessaries of life which is
regarded as valid contract.
It was decided in the leading case of Mohori Bibi v. Dharmadas Ghose that all
contracts entered into by minors are void. Hence as long as a minor is a party,
contract for monies lent or to be sent for goods supplied or to be supplied and
accounts stated are absolutely void but contract with a minor will be valid if
they are for necessities of life or for the benefit of the minor and suitable for the
standard of living of the minor.
A minor can effectively discharge his duties as agent since an agent does not
require contractual capacity. He can also be a witness to a sign. More than all he
can be a beneficiary in any contract and enforce it in his favour.
Usually the banker encourages opening of Saving Bank Accounts in the name of
the minor represented by his natural guardian. Father is a natural Guardian. If
the father is not alive or available, the mother of the minor will be the natural
Guardian. If both of them are not available, then the court of competent
Jurisdiction can appoint a Guardian. The bank should record the date of birth of
the minor and can take any action on his attaining Majority. The account shall
stand in the name of the customer alone. His specimen signature will be
brought on record and the minor shall be allowed to operate the account
independently. Thus the guardianship can be summarized as follows:-

1. In case of a boy or unmarried girl father is the Guardian, if father is not alive
then mother.
2. In case of illegitimate boy or illegitimate unmarried girl mother is the natural
guardian if not alive then father.
3. Minor married girl-husband.
4. If both father and mother are not alive a person appointed by competent
5. Father and mother as above do not include step father and step mother.
6. Parsis/Christians same as above.
7. In case of Muslims father is the natural Guardian.
On death of father the sequence being(a) Executor appointed by father's Will
(b) Father's father
(c) Executor appointed by Will of father's father.
8. Mother as guardian for opening of Account: As per the guidelines of R.B.I.,
Banks can open Savings Bank and term-deposit accounts in the names of Minors
with mother as guardian while father is alive.
9. Testamentary guardian for Hindu Minor: A Hindu father by Will can appoint a
guardian in respect of minor's property. Such a testamentary guardian will act
as guardian only after the death of father and mother.
Discuss Minor as Agent?
If the minor customer dies, the balance in the account will revert to and in
favour of the Guardian. But if the Guardian dies, the balance will be available to
the minor only on attaining Majority of course it is open to the court to appoint
any person as a guardian instead of deceased.
Since the minor can effectively function as agent he can over draw his principal
account. The latter is bound by the same. The banker should see that the minor
acts within the authority granted to him by his principal-Even if an advance is
granted to a minor on the guarantee of a third party in as much as the contract
between the creditor and the minor. The banker cannot in any event recover the
money even from his customer. If the minor acts without authority or exceeds
his authority, the agent will be personally liable and the agent being a minor,
the banker cannot proceed against.

Discuss Minor as Partner?

There is nothing to prevent a minor from becoming a partner in a firm and
transacting business on its behalf. However, he cannot be held liable for any
debts of the partnership incurred before he attains majority. In a contract of
partnership within six months of his attaining majority, he will be regarded as
having ratified the agreement and will become liable as a general partner for all
debts incurred by the partnership since he was admitted to the benefits of
What are the precautionary measures in lieu of account of minor?
(1) The bank may open a Saving Bank Account in the name of the minor in any
of the following ways:(i) In the name of the minor, to be operated upon by the natural guardian of the
minor or guardian appointed by the court.
(ii) In the name of minor, to be operated upon himself, if he has attained the
age of 14 years.
(2) The bank records the date of birth of the minor as given by the minor or
his/her guardian on the attainment of maturity. The account of the minor in the
name of the guardian should be closed and the balance paid to the minor or to
be offered to a new account of his/her own name in case of a Joint account.
(3) If the father of Hindu minor dies, his mother becomes his natural guardian.
After the death of the mother during the minority of the boy, there is either the
testamentary guardian or the guardian appointed by the court.
(4) In case if the minor dies, the balance in the account is permitted to be
withdrawn by the guardian and in case of Joint account the balance will be held
at the absolute disposal of the guardian.
(5) No risk is involved if an Account is operated in the name of a minor so long
as the Account is not overdrawn by the minor. But if an overdraft or advance is
granted to a minor even by mistake or unintentionally the banker has no legal
remedy to recover the amount from the minor.
(6) If an advance is granted to a minor on the guarantee of a third party, such
advance cannot be recovered from the guarantor also because the contract of
Guarantee is invalid.
(7) A minor may draw, endorse or negotiate a cheque or a bill but he cannot be
held liable on such cheque or bill. He cannot be sued in respect of a bill
accepted by him during his minority. The banker should therefore be very
cautious in dealing with a negotiable instrument to which a minor is a party.

(8) A minor can be admitted to the benefit of partner with the consent of all the
partners but he will not be liable for the losses or debts of the firm within six
Married Women
What are the precautionary measures in lieu of account of a married
A married woman can enter into a contract in her own name. Such a contract
will bind any property which she has acquired either as Stridhan or otherwise.
Hindu married women are governed by the Hindu Succession Act, 1956. The
status of married women of other religions is governed by the Indian Succession
Act, 1925 and by the Married Women's Property Act, 1874.
According to Indian Contract Act, a married woman has the right to enter into
contract to acquire and sell property, to lend and borrow money etc. In other
words she has all the rights which a man has. A Current Account may be opened
in the name of a married woman. A married woman has power to draw cheques
and give sufficient discharge. Even if she has separate property the property
may be so settled upon her that she is entitled to the income as it falls due but
may not touch the corpus or the anticipated income. A married woman cannot
make her husband liable except for the necessities of life.
Married women are competent to enter into contracts. A banker may open an
Account in the name of a married woman and she can enter into contracts and
bind her separate estate.
A married woman can open a Joint Account with her husband. In such a case a
banker should obtain clear instructions as to who is entitled to operate the
Account and to whom the amount is payable in the event of the death of any
one of them. In the absence of clear instructions, the banker should not pay the
amount standing in the Joint Account to the widow on the death of the husband,
because the question of inheritance is involved in all such cases.
A banker should be very careful in granting an overdraft to a married woman. If
she has property, it must have been endowed in such a way that she can enjoy
the income of the property but has no right to sell property.
A married woman cannot make her husband responsible for the debts incurred
by her except in some cases. If she is authorized to act as an agent of her
husband, then her husband can be made liable for the debts.
Her husband can be made liable for the debts of a married woman in following
cases:(1) If the loan is taken with his consent or authority

(2) If the debt is taken for the supply of necessities of life to the wife in case the
husband defaults in supplying the same to her.
Banker does not have any risk in dealing with a married woman so long as the
Account shows a credit balance. But if an overdraft is granted to her, he may
find it difficult to recover the amount.
(1) The husband of a married woman is not liable for debts contracted by her
except insofar as they are for necessities or for house hold purposes. So the
banker should not lend money to a married woman simply because her husband
has sufficient property.
(2) If she does not have separate property, there will not be sufficient security
for overdrafts granted to her. It may be difficult to recover money from her.
(3) If she has separate property the banker must find out the nature of her right
to that property, although she may enjoy the income thereform.
(4) If there is a Joint Account in the names of husband and wife and if there is
clause to the effect that in the event of the death of one party, the balance
should vest in the survivor, the banker's position will be safe.
Illiterate Person
The banker can open a Account in the name of an illiterate person who cannot
sign but banker can take his thumb impression as a substitute for signature. The
banker should also take his recent photograph attested by a first class
magistrate for the purpose of identification. While drawing cash from the bank,
such persons should come to the bank and get cash in the presence of a witness
in the office of the Bank Manager.
Illiterate persons cannot sign their names but affix their thumb impression. In
such cases the bank may permit the opening of a Savings Bank Account or fixed
deposit Account by an illiterate person by taking thumb impression instead of
his signature. The bank should also insist on a copy of the photograph affixed on
the account-opening form. Withdrawals from his Account will be allowed only if
he comes personally to the bank and puts its thumb impression in the presence
of some responsible officer of the bank.
What are the precautionary measures in lieu of account of the
Section 3 of the Indian Trustees Act, 1882 defines a trust as "it is a relationship
which arises where a person holds a property for the benefit of certain other
persons or for some objects allowed by law." The real benefit accrues not to the
trustees but only to the beneficiary or the objects for which the trust is created.

The person, who has settled the property, is the authority of the trust and is
known as a "setter". A trustee is a person entrusted with the responsibility of
managing an estate for the benefit of a person or persons according to the trust
deed or Will. Person in whom the property is vested is the trustee. He is so
called because of trust or confidence reposed in him. The document through
which the trust is created is called "trust deed".
While opening an account the names of persons in the capacity as trustee, the
banker should take the following precautions:1. The banker should thoroughly examine the trust deed, appointing the person
as a trustee.
2. He must also inspect the official probate or letter of administration.
3. He must acquaint himself with the names of the trustees, their powers and
4. The banker should obtain specimen signature of person or persons authorized
to operate on the Account.
5. A trust is an office of confidence. They cannot delegate their power. They
must act personally.
6. The banker must see that the trust funds are not misapplied.
7. He should not allow transfer of trust funds to the personal Account of the
8. The banker should not lend to a trustee as he does not have general power to
The banker should take all possible precautions to safeguard the interest of the
beneficiaries of the trust, failing which he shall be liable to compensate the
latter for any fraud on the part of the trustee.
Customer's Attorney
What are the precautionary measures in lieu of accounts maintained by
customers attorney?
A customer may appoint an attorney to deal with his bank account. The power
of attorney may be either special or general. In the case of special power of
attorney, the person so authorized gets power only for some limited purpose
mentioned e.g., sale or purchase of property etc. In the case of general power of
attorney, the grantor of powers authorizes the other person to act on his behalf
in all matters concerning his business.

While opening an Account in the name of an attorney for a person the bank
should take the following precautions:1. The banker should get a copy of the registered document attested by a
notary public and keep it for his own record.
2. The banker should take note of all the terms of the power of attorney which
are likely to be of concern to him at any time.
3. It must be seen that specific power is granted for opening and operating a
bank Account by the attorney himself.
4. The banker should note down the name and address of the person who has
granted the power of attorney.
5. The Account opening form should be signed by the principal and the
signature of the attorney must be attested by him.
6. The banker should not accept any conditional power of attorney.
7. The banker should note that the death, insolvency or insanity of the principal
revolves the authority vested in the agent and the latter ceases to act as agent
of the principal.
Drunken persons
One of the conditions of a valid contract is that it must be entered into between
persons who are of sound mind. A person is said to be of sound mind for the
purpose of making a contract if at the time he makes it he is capable of
understanding it and of forming a rational judgment as to its effect upon his
If a person alleges that as a result of intoxication, he was incapable of
under standing the nature and terms of the contract, which fact was known to
the other party, he may invoke the protection of a court of law in setting aside
the contract. The onus will be on the party who sets up the plea of disability to
prove that it existed at the time of the contract. It should, however, be known
that if a negotiable instrument in the meantime has been transferred to a holder
who takes it in good faith and for value, the drunken person cannot deprive the
holder in due course of his right under the instrument. It follows that banks have
to be careful in getting documents executed by persons while they are in a state
of intoxication.
A drunkard is a person who is under the influence of alcoholic drinks or drugs
and stands on the same footing as a lunatic. An agreement made during
drunkenness is void. The bank should not honour cheques of a person who has
issued them under the influence of liquor. However, it is very difficult to judge

whether the person is so intoxicated that he is not capable of understanding the

implications of issuing the cheque. When customer presents his own cheque
when is drunk, the bank should not make immediate payment. Therefore, it is
better and safer that the bank should insist upon such a customer getting a
witness to countersign before making any payment against the cheque.
Pardanashin Woman
As she remains completely secluded, a presumption in law exists there.
(i) Any contract entered into by her might have been subject to undue influence,
(ii) The same might not have been made with her free will & with full
understanding of what the contract means.
Thus, a contract entered into by pardanashin woman is not a contract free from
all defects. The other party to the contract shall have to prove that the contract
with her was free from the above mentioned defects in order to enforce the
same. The banker should, therefore, take due precaution in opening an account
in the name of the pardanashin woman. As the identity of such a woman cannot
be ascertained, the banker generally refuses to open an Account in her name.
Therefore, a contract entered into by a pardanashin woman is not a contract
free from all defects. The banker should, therefore, take due precaution in
opening an Account in the name of such woman. Usually the banker refuses to
open an Account in her name as the identity of such woman cannot be
What are the precautionary measures in respect to lunatics account?
Lunatic is a person of unsound mind and hence he is incompetent to enter into a
valid contract under the Indian Contract Act, 1872. Since a lunatic does not
understand what is right and what is wrong, a contract entered into by him is
1. If a lunatic applies to the bank for opening an account, the bank should refuse
to open an Account for him.
2. When a person who has an Account with a bank, has become insane or
lunatic, the bank should suspend his account and the bank is however, entitled
to debit the account of the lunatic customer in respect of all cheques honoured
by the bank before getting the notice.

3. While suspending the operating of the Account of any customer on the

ground of lunacy, the bank must have sufficient proof (doctor's certificate or a
court notice) of his lunacy.
A person of unsound mind can avoid a debt if he or his legal representatives
prove that he was of unsound mind at the time of borrowing. On receiving an
express notice of a customer's insanity, it is customary for the banker to stop all
operations on the Account and await a court order appointing a receiver. It may
be stated that reliance on hearsay would be dangerous. The bank should take
care to ascertain the correct position. In case a person suffers from temporary
mental disorder, it is customary to obtain a certificate from two reliable medical
officers regarding his mental soundness at the time the advance is made. It is
always safe to avoid lending to persons who fall in this category.
Hindu Family
What are the precautionary measures in lieu of account of joint Hindu
A joint Hindu family possesses ancestral properties and carries on ancestral
business. The ownership of such property passes on to the members of the
family according to the Hindu Law. While dealing with the Account of a joint
Hindu family and granting it a loan, the banker is naturally faced with a difficult
task of ascertaining the rights of the members of the joint family.
The following legal precautions should be taken by the banker in this regard:1. The family business and its assets are managed by the eldest male member
known as the Karta. According to the law, the Karta has an implied authority to
take a loan, execute necessary documents and pledge the securities on behalf
of the family for the purpose of the business of the family. However to be on the
safe side, the loan documents should be executed by all the adult male
members of the family or with their consent by the head of the family in his
capacity as its Karta or Manager.
2. The power of the Karta to borrow money on the security of the family
property is subject to the limitation that the loan should have been taken for the
purpose necessary for or beneficial to the family. He can take a loan and pledge
the property of the family for the purpose of meeting the needs of usual
business of the family and not for any speculative business or for starting a new
business. Other coparceners will not be liable for a loan contract for a purpose
other than in the interest of the family business.
1. The managers of a joint Hindu family have the power to alienate joint family
property so as to bind the interests of both adult and minor coparceners in the
property, provided that the alienation is made for legal necessity or for the

benefit of the estate the payments of debts incurred for family business or other
necessary purpose constitute a legal necessity.
2. The burden of proving legal necessity to support alienation is upon the
3. The alienee can succeed in proving legal necessity not only on proof of legal
necessity but also on the proof that the alience made reasonable enquiries and
was satisfied as to the existence of legal necessity. In case of dispute on this
point the burden of proof, that the bank was satisfied before granting a loan
that the loan was sought for the benefit of the family business lies on the banker
himself. He should, therefore, be very careful in ascertaining the purpose of the
loan sanctioned on the security of joint family assets.
4. If there is a minor coparcener in a joint family, his guardian must sign the
documents on his behalf. When the minor coparcener attains majority he should
also sign the documents to give his assent to the undertaking given by major
Clubs, Societies and Charitable Institutions
What are the precautionary measures in lieu of account of Clubs,
Societies and Charitable Institutions?
Clubs, societies, charitable and religious institutions, libraries, schools etc. are
not engaged in trading activities but their object is to render service to the
public. These associations may be registered under the Societies Registration
Act or the Indian Companies Act.
Before opening an Account for it the Bank should observe the following points:1. Incorporation : A society gets the legal recognition as an entity separate from
its members only after its incorporation. Thereafter it is empowered to enter
into valid contracts and to sue or be sued. The unregistered society cannot be
sued in law.
These institutions may be registered or incorporated according to the Indian
Companies Act or the Co-operative Societies Act or the Societies Registration
Act. It will have no right to contract with the outside parties.
2. Constitutions : A registered society is governed by the provisions of the Act
under which it has been registered. It may have its own constitution charter or
Memorandum of Association and rules and by laws etc. to carry on its activities.
Every organization should have a constitution of its own in the name of byelaws
or rules or Memorandum of Association and Articles of Association. This will help
the banker to deal with such organization properly.

3. Resolution of Managing Committee : Opening a bank account, the Managing

Committee of the society must pass a resolution;
(a) Appointing the bank concerned as a bank by the society.
(b) Mentioning the name/names of person/persons who are authorized to
operate the account.
(c) Giving any other direction for the operation of the said account.
A copy of the Resolution must be obtained by the bank for its own record.
4. Death or Registration : In case the person authorized to operate the account
on behalf of a society dies or resigns, the banker should stop the operating of
the societies Account till the society nominates another person to operate its
5. While granting loans to such non-trading club the banker should examine the
borrowing power from the constitution of the club. A resolution must be passed
by the managing committee for this purpose and a copy thereof be received by
the banker.
6. Transfer of funds : The banker should take care in case of personal accounts.
If the person authorized to operate the society Account, is also having his
personal Account with the same branch of the bank, the banker is under an
obligation to ensure that the funds of the society are not being credited to the
personal Account of the said person or office-bearer.
Executors and Administrators
Discuss the precautionary measures
executors and administrators?





Executors and administrators are persons who are appointed to conduct the
affairs of a person after his death. The executor is appointed by the testator
(person making a Will) to execute his Will after his death, but whereas an
administrator is appointed by a court for the execution of a Will if the executor is
not named in the Will.
If the testator has executed a Will and appointed persons to look after his affairs
after his death, the appointees are known as executors. But if there is no such
mention in the Will or if the person dies intestate, the court may appoint a
person to administer the estate of the deceased. They are known as
In the case of executors their powers and duties are mentioned in the Will. The
only thing is that the Will should be probated, that is certified by competent
Court as a bona fide document.

In the case of administrators, who are appointed by courts, their powers, duties
and responsibilities will be defined by the letters of administration issued by
On the death of a customer his account is automatically frozen and the banker
should not allow further operations. The executor can be allowed to operate the
same on production of probate obtained from the court. In the case of
administrator the banker should insist upon the letters of administration issued
by the Court of competent jurisdiction. In earlier case the Account of the
deceased must be closed and a new Account should be opened, indicating the
trust character of the Account of the deceased that is as executors or
administrators of the estate of the deceased.
When the appointees are more than one person they shall have a joint interest
in the estates of the deceased. The Banker may allow operation of the Account
by one or more upon authority in writing by all the executors or administrators.
But this authority is revocable and in case of revocation all the executors and
administrators should operate the accounts jointly.
The banker should take the following precautions while dealing with executors
and administrators:1. On the death of a customer, the banker must stop payments from his
account. The executor should be permitted to operate the account of the
deceased after he has obtained the probate from the court. The administrator is
authorized to do so after securing the letter of administration. The banker
should examine these documents before the appointed person is permitted to
operate the account.
2. When two or more persons are appointed as executors or administrators, they
shall have joint interest in the estate of the deceased and this interest is not
capable of division. Then they should open a joint Account with the bank. In
such cases, the bank should obtain clear instructions regarding the operation of
the Account.
3. The banker should be very cautious in conducting the Account of
executors/administrators so as to prevent them from misappropriating the funds
of the deceased.
4. The banker cannot exercise his right of set-off against the credit balance in
the executors personal Account in respect of a debit balance in the account of
the deceased.
5. The banker should not permit transfer of funds from the estate Account to the
personal Account of the executor.

6. On the death, insolvency, insanity or resignation, of any of the executors or

administrators the bank can honour the cheque issued by him and can continue
to operate the account, unless otherwise provided in the Will.
7. The executor/administrator may pledge the property of the testator to obtain
an overdraft from the banker. The executor may do so only if he is permitted by
the Will. Hence the banker should examine the Will before granting any loan to
the executor or the administrators must jointly fill the loan document.
Joint Stock Companies
Explain the mode of opening and operating Joint Stock Companies?
The capital of Joint Stock Companies is divided into shares. People who purchase
these are the proprietors of the companies concerned. But a Joint Stock
Company is a separate legal entity. It has a separate legal existence, apart from
that of the shareholder. Although some share holders may die or become
bankrupt the company is not dissolved.
The liability of the shareholders is limited. A shareholder cannot, under any
circumstance, be called upon to pay any more than the face value of the shares
allotted to him. If the assets of the company are insufficient to discharge the
debts of the company, it is the creditors of the company that have to suffer,
since the liability of the shareholders is limited. A shareholder of a company can
sell his shares to others without the approval of the company or that of other
shareholders. They cannot get any money from the company.
The management of the companies is entrusted to directors elected by the
shareholders from among themselves. Since the number of shareholders is very
large, it is not possible to give the right to management to all the shareholders.
Hence management is entrusted to certain persons called directors, elected
democratically by the shareholders. Directors will have to manage the affairs of
the company keeping in view the interests of the company and of the
shareholders subject to the conditions, rules and regulations prescribed by law.
The establishment as well as the management of companies takes place
according to the laws in force in the country. The law generally prescribes what
should not be done, and penalties are levied for the infringement of the law, but
in the case of companies, the law prescribes what should be done.
Discuss the







Discuss the procedure in opening a bank account in the name of a

public limited company?
The precautions which a banker should take at the time of opening an account
in the name of a company and in conducting transactions thereafter are
described below:-

1. Before opening an account in the name of a public limited company he must

satisfy himself that the company has been duly incorporated. The procedure for
incorporating a public limited company is prescribed by the Companies Act. At
least seven persons must sign the Memorandum of Association, Articles of
Association and submit them to the registrar of Joint stock companies. The
Registrar issues a Certificate of Incorporation. The banker must therefore
examine the Certificate of Incorporation of the company before opening an
account in its name.
2. The banker must then examine the Memorandum of Association and Articles
of Association of the company. In the Memorandum are mentioned the name of
the company, place of registered office, objects, capital, liability of the
shareholders and the willingness of at least seven members to form themselves
into a company.
These documents are of utmost importance in the conduct of the affairs of the
company. The company must pursue only the objects mentioned in the
Memorandum of Association. Anything done which is not sanctioned by the
objects clause of the Memorandum of Association is ultra vires the company.
Similarly, the conduct of the company must be in accordance with the
provisions in the Articles of Association of the company. These are public
documents. Anybody who deals with the company is supposed to be acquainted
with the provisions of these two documents. The banker, before opening the
account in the name of the company should ask for the latest copies of these
documents duly certified. By examining these documents, the banker will be
able to know the powers of the company to contract debts, to pledge or
mortgage the properties of the company, the powers of the directors in this
behalf, and so on.
3. Then the banker must ask for a copy of the resolution of the Board of
Directors appointing him the banker of the company. He should definitely
ascertain the person/persons authorized to conduct bank transactions, to sign
cheques, to accept bills of exchange, to entrust valuables for safe custody and
so on.
4. The banker must also examine the certificate of commencement of Business.
After obtaining the Certificate of Incorporation, the company issues a
prospectus. After the minimum subscription is collected and the directors have
paid all their dues in full, the registrar issues the certificate of commencement
of business. A company cannot begin to operate until this certificate is obtained.
5. If a company which has been operating for some time asks for the opening of
a bank account, the banker should also examine the balance sheets and the
profit and loss accounts of the company for the last two or three years.
Private Companies

Some of the restrictions imposed on public limited companies do not apply to

private limited companies. Provisions relating to the convening of Statutory
meeting, submission of the Statutory report, submission of balance sheet to the
Registrar, etc. are not applicable to private limited companies. Private limited
Companies can commence business immediately after obtaining the Certificate
of Incorporation without obtaining the certificate of commencement of Business.
A private limited company must file with the Registrar, Articles of Association.
A banker, while opening an account in the name of Private Limited company,
must also examine the Memorandum, Articles, resolution appointing him as
banker etc. in the same manner as opening an account in the name of a public
limited company.
Other Companies
Non-trading and Non-profit making associations may also be incorporated under
the Indian Companies Act. They are established for promotion of arts, literature,
music, religion and so on. These companies also have distinct legal entity and
perpetual succession.
Discuss the precautionary measures regarding the rights & duties of
directors of the company?
Discuss the precautionary measures regarding advances to companies?
The rights and duties of directors are laid down in the Articles of Association of
the company. The banker must examine this document with reference to his
own responsibilities in the matter. Although a particular act may be ultra vires
the Board of Directors, but being intra vires the company, may be ratified by the
Directors at its general meeting.
When a company is under liquidation, the powers of the directors automatically
cease. No director can issue cheques or endorse bills etc. All these powers vest
in the official liquidator appointed by the Government.
When a company applies for a loan from a bank, the bank must examine the
Memorandum and Articles of Association to ascertain whether the company has
the power to borrow and if so to what extent. In the case of trading companies
the power to borrow must be conferred upon the company by its Memorandum
and Articles. Where there is an implied power to furnish the necessary security,
to pledge or mortgage the property of the company and so on. Generally, it will
be mentioned in the Articles that the company has the right to borrow.
Sometimes the right to borrow vests only with the shareholders, in which case
the resolution to borrow must be passed at the General Meeting. The banker
should also be careful in regard to the securities offered for loan. No registration
is necessary if the loan is granted on the security of stock exchange securities
of the company or of the personal security of the directors.

When a loan is applied for on the security of fixed assets of the company, the
banker should see whether such securities are registered under Section 125 of
the Indian Companies Act. The securities obtained by the banker must be
registered according to the provisions of that section. Companies cannot lend or
borrow on the security of their own shares. A company may borrow by issuing
According to Section 292 of the Companies Act, loans secured otherwise than by
the issue of debentures must be supported by a resolution of the Board of
Directors. The amount of the loan is indicated in that resolution. According to
Section 293 loans exceeding the paid up capital and reserves must be approved
by the shareholders in General meeting. These restrictions do not apply to
temporary loans obtained for business purposes.
What are the precautionary measures regarding cheques in favour of
the company?
Cheques drawn in favour of a company may be asked to be credited to the
personal accounts of directors or the employees of the companies. In such cases
the banker should act with extreme care as otherwise he may be held guilty of
negligence, and lose the protection given to the collecting banker under
Section 131 of Negotiable Instruments Act.
Discuss the precautions to be taken by a banker when a sole trader
concern or a partnership is converted into a private limited company?
Sometimes a sole trader may convert his concern into a private company and
ask for loan on the security of the company's assets. If the debts of the previous
sole trader concern have not been completely paid off, one of the creditors may
bring an action against the trader. It is an act of insolvency for a trader to
transfer all the assets of the business to a company. The banker should
therefore ascertain whether all the debts of the previous concern have been
completely liquidated.
The banker must satisfy himself about the following while opening an account in
the name of the company.
Examination of Documents
As a company is an artificial person, its constitutional powers and objectives,
rules and regulations etc. are contained in the following important documents.
The banker should thoroughly and carefully examine those documents.
(i) Certificate of incorporation and certificate of commencement of business.
The certificates issued by the Registrar of companies, provide a conclusive proof
that the company is a duly incorporated body and all the necessary formalities
regarding its formation have been fulfilled by the promoters.

(ii) The banker should examine the Memorandum specially to note the
objectives for which the company is incorporated because any contract entered
into by a company which serves an object other than the objects mentioned in
the Memorandum is unenforceable at law and ultra vires.
(iii) The Articles of Association contain the rules and regulations of a company
regarding its internal management. It contains in detail all matters which are
concerned with the conduct of day-to-day business of the company.
The banker should scrutinize these doicuments very carefully.
Copy of the Board's Resolution
Alongwith the application to open an account in the company's name, the
banker should obtain a certified copy of the resolution passed by the Board of
Directors of the company.
The Borrowing Power of the Company
What are the precautions to be taken by the banker in its transaction?
All joint stock companies engaged in trade or industry have the implied powers
to borrow money for the purpose of carrying on their business. The borrowing
power of the company may be restricted by its Memorandum of Association. The
banker should be very careful in ensuring that the total borrowing of the
company does not exceed the limit.
(i) The banker should ascertain that the company borrows only for the purpose
mentioned in its Memorandum of Association and within the limits if any,
specified therein
(ii) A certified copy of the resolution of the Board of Directors should be obtained
by the banker for his own record.
(iii) The Board of Directors should also pass a resolution certifying that the
company's borrowing including the proposed borrowings are within the limit
specified by the Companies Act or the limit sanctioned by the shareholders at
their general meeting
Directors Personal Accounts
The banker of a company having personal accounts of the directors of the
company must handle the latter with care. If a director, deposits cheques drawn
in favour of the company to be credited to his personal account the banker
should first enquire the purpose for which such cheques are intended to be
credited to his personal account and on being satisfied about the genuine
reason, credit them in his account.

Discuss the precautionary measures in a Partnership Account?
According to Section 4 of the Indian Partnership Act, a partnership is a relation
between persons who have agreed to share the profits of a business, carried on
by all or any of them acting for all. There are no legal formality for starting a
partnership firm. Registration is not compulsory. It may be oral or written.
Opening of a bank account : Since each partner has an implied right to act on
behalf of the firm, any partner has the right to open a bank account, unless
otherwise stated in the partnership agreement. If there are any provisions
regarding the bank account in the partnership deed, bank transactions must
take place accordingly. The Account must be opened in the name of the
partnership firm, but not in the name of the partner himself. A partner has no
implied right to open the firm's bank account in this own name. This has been
decided in Alliance Bank v. Kearsley. Section 19(2)(b) of the Indian Partnership
Act says that unless there is a custom to the contrary, no partner has the
implied right to open a bank account in his own name.
Death of a partner : When a partner dies the partnership comes to an end. The
legal heir of the deceased partner does not automatically become the partner of
the firm. The legal heir has only the right to recover the money due to him from
the partnership firm. The banker may continue the bank account if by the date
of the death of the partner there is a credit balance in the account. The banker
thus will secure for himself the right to recover the amount from the estate of
the deceased partner also.
Bankruptcy of a partner : The partnership also comes to an end when one of the
partners becomes bankrupt. The banker should not honour cheques drawn by
the bankrupt partner, unless it bears the signatures of the other partner as well.
Insanity of a partner : A partnership is not dissolved when one of the partners
becomes insane, but it becomes a sufficient reason for the dissolution of the
firm. The relations of the insane partner may file a petition in the court for
ordering the dissolution of the firm.
Retirement of a partner : When a partner retires from the partnership firm, he
must notify the same to the banker. Otherwise, he also becomes liable for the
debts incurred by the firm. After the receipt of retirement notice, if the
partnership is indebted to the bank, the bank must stop the account and start a
fresh account. In this case, the retiring partner also will be liable for the debt
owed by the partnership firm at the date of retirement.
Advances to Partnership Firm
When a trading partnership firm applies for a loan, the banker should call for the
balance sheets of the firm of the preceding two or three years. The banker will

be able to form an idea of the creditworthiness of the firm, and he will be able to
know the other partners in the firm and other relevant information.
The partnership deed contains the details of the agreement reached between
the partners. A banker should take the following precautions while operating an
account in the name of a partnership firm.
1. Number of Partners : The banker should very carefully examine the
partnership deed which is the charter of the firm.
2. Title of the firm's Account : A firm's account should always be opened in the
name of the firm and not in the name of the individual.
3. Opening of an account : An account in the name of a firm may be opened by
a banker on receipt of an application from one or more of the partners. Banker
however insists that all the partners should join to pen the firm's account.
Specimen signatures of all the partners is derived to open an account in the
firm's name and this fact is within the knowledge of the banker.
4. The partnership letter of mandate : The banker should take a letter signed by
all the partners stating :(i) The name and addresses of the partners.
(ii) The nature of the business undertaken by the firm; and
(iii) The name/names of the partner/partners who will operate the account on
behalf of the firm and will have the authority to draw and accept bills etc. and to
sell and mortgage the property of the firm.
5. Revocation of authority to operate the account : The authorities given in
favour of a particular partner/partners to operate the firm's account may be
withdrawn by any of them by giving a notice to the banker. A partner can also
stop the payment of a cheque issued by any other partner on the firm's
Joint Account
Explain the mode of operation of a Joint account?
Discuss the precautionary measures in Joint account?
When an account is opened in the names of two or more persons, who are not
partners in a firm or who are not joint trustees, it is called a Joint account. When
a Joint account is opened the banker should obtain a comprehensive mandate.
The mandate should cover all points because the right to draw cheques
conferred upon a person does not automatically confer upon him the right to

deal in securities. If one of the Joint account holders obtains an overdraft, the
other does not have any liability.
1. Issuing of cheques : It should be clearly specified as to who is authorized to
draw cheques. All the Joint customers must sign the cheques. The right to draw
cheques may be conferred on one or more of the parties and any one of the
Joint account holders can countermand a cheque. In case, the right to sign the
cheques conferred on one of the parties is deemed to be temporarily withdrawn.
2. Death of a Joint Account Holder : If one of the Joint account holder dies,
according to the English Law, the survivors can continue to transact the
business relating to the Joint account.
3. Joint debts : The right to draw cheques given to a Joint customer is limited to
the credit balance available in the bank account. If cheques are drawn in excess
of the amount, all the joint customers become indebted to the bank. But the
right to draw cheques does not extend to contract debts. So, the banker must
ascertain whether the person who has the right to draw cheques has also the
power to overdraw the account.
4. Joint and several liabilities : According to Indian Law, Joint liability means joint
and several liabilities. If one of the Joint customer dies and the account is
overdraw, by that time, the banker must stop that account and open a fresh
account in order to make the estate of the deceased customer liable for the
5. Safe custody deposits : If Joint account holders deposit valuables for safe
custody with the bank, no one of them can take delivery of them. The banker
should return the securities only on the requisition of all the joint customers.
Similarly, one of the joint customer cannot stand surely on behalf of all the joint
customers. No single joint customer can pledge the fixed property of the joint
parties without a power of attorney granted to him.
6. Death, insanity or bankruptcy of a joint customer : When the bank is duly
informed of the death of one of the joint customers, the banker should not,
thereafter, honour cheques presented for payment. Similarly, when a notice is
given to him of the insanity or bankruptcy of one of the joint customers the
banker should not honour cheques subsequently presented.
7. Garnishee order : If the banker receives a garnishee order in respect of one of
the Joint account holders asking him not to make any payment out of the Joint
account, he should inform the court that it is a Joint account and request the
court to withdraw the garnishee order.
8. Trust accounts : If the Joint account relates to a trust, but the banker is not
informed of the same, the banker need not take cognizance of the fact. After he

comes to know that it is a trust account, he should be careful to see that it is not
overdrawn at any time.
9. Joint account of husband and wife : A Joint account may be opened in the
names of husband and wife. If the account is in the name of the husband and he
predeceases his wife, the balance will devolve on his legal heirs but not on his
wife. To avoid legal formalities, a husband usually opens a joint account with his
wife with the term "either or survivor". In this case on the death of one of the
parties, the survivor can draw the amount.
10. Others : The banker should take the following precautions in opening and
dealing with a Joint account.
1. The application for opening a Joint account must be signed by all the persons
intending to open a Joint account.
2. The banker should obtain clear instructions in writing signed by all the Joint
account holders regarding the operation of the account. The Joint account may
be operated in any of the following ways:(a) by all the depositors jointly
(b) by either or survivor of them
(c) by former or survivor of them.
3. Any Joint account holder can stop payment of a cheque issued on a joint
account. Banker must honour such order even if an agent or attorney has been
appointed to operate the account.
4. The banker should be given clear instructions regarding the withdrawal of
securities in the Joint account and the power conferred upon the person
operating the account to lodge the securities.
5. The full name of the account holders must be given in the entire document
furnished to the banker, even if the account is to be operated upon by one or a
few of Joint account holders.
6. The banker should also take a mandate to ascertain whether the persons
operating the Joint account are also authorized to overdraw the account.
7. The authority to operate the account can be revoked by any of the persons
giving such authority.
In times of death of a Joint account holder, the balance in the Joint account shall
be payable to all the Joint account holders together if there is no instruction. If a
survivor condition is included, the balance is payable to the survivor or

Explain the liability of Banking in case of Defects in Services with the

help of latest case laws?
Banking is one of the most important services expressly covered under
Section 2(1)(o) of the Consumer Protection Act, 1986. This fact has been well
recognised by court also and the remedy has been extended to any kind of
deficiency in payment of interest on overdraft, charging of interest at leading
rate, wharfage, demurrage, defects in demand draft, wrongful crediting of an
amount, delay in crediting, improper maintenance of lockers, passing of forged
cheques etc. In Consumer Unity & Trust Society, Jaipur v. Chairman and
Managing Director, Bank of Baroda, Calcutta, there was an illegal strike resorted
to by the employees of the bank during the pendency of conciliation
proceedings in contravention of Section 22 of the Industrial Disputes Act, 1947
and the nature of the agitation and demonstration carried on by them was such
as to effectively prevent ingress from the premises of the branches of the bank
in the State of West Bengal. The question before the National Commission was
that whether a banking company which had been forced to suspend its business
operations on account of an illegal strike, by its employees, could be held liable
to pay compensation to the account holders for the inconvenience and loss
caused to them during the period of the strike. The National Commission held
that when the suspension of the business was caused on account of an illegal
strike it could not be said that the inconvenience, loss or injury caused to the
consumers was due to the negligence of the bank. The Supreme Court, on
appeal against the order of the National Commission gave a very wide
connotation to the words "service of any description" in the definition of service
under Section 2(o) and widened the ambit of the section and extended it to all
banking activities but the bank was not held liable to pay compensation to its
customers in the present case. Thus, the bank escaped liability because the
depositors were prevented to avail the services of the bank not because of any
deficiency on the part of the bank but due to strike resorted to by the
employees who almost physically prevented the bank from functioning.
Accordingly, in State Bank of India v. Jiya Lal Kamboj (Dr.), it has been held that
the banking service is actually a service for consideration and when a bank is
appointed to handle public issue of a company, the bank renders service to the
company for a consideration.
An important case decided on banking service, in which the bank authorities
had used harassment tactics to extract bribe from the complainants, is Mike's
Private Ltd. v. State Bank of Bikaner and Jaipur. In this case, the preliminary
inspection and review of the complainant's application from bank finance was
completed and it was agreed in principle that a credit of Rs. 6 lakh could be
sanctioned. For sanctioning the credit, the bank manager demanded bribe and
following a trap, he was caught red-handed, while taking bribe. The cheques
issued by the complainant were maliciously dishonoured because of which it
failed to avail valuable export orders. The complainant had to sell its immovable
properties and shift to a central building. It also had to retrench several of its

employees. Besides the general practice of issuing cheques, the consumers

sometimes give stop-payment instructions to banks. In Bank of India v. Mukesh
Kumar Shukla (Dr.) the responsibility of the bank to follow the stop-payment
instructions has been held by Madhya Pradesh State Commission as a matter
relevant to assess deficiency in the banking Service. If a customer gives stoppayment instructions, his intention is that the bank should countermand the
payment. Bankers have to follow such instructions and ensure that no payment
is made in respect of a cheque for which stop-payment instructions are received
from the customer. If the bank makes payment against countermanding
instructions that would amount to deficiency in its services and it cannot defend
any action for damages on the ground that the customer's instructions were not
followed by the bank due to inadvertence or bona fide mistake. In Bhandari

Life Insurance

Fire Insurance


Insurable interest present at Present both at

Present at
time when insurance is time of insurance loss of subject
and at time of loss matter.
of subject-matter.

Not a contract of indemnity



Regular premium is to be For

paid. If not paid contract period of
lapses and can be required usually a year
subject to fulfilment of
certain conditions.

Contract of



Q. Write a detailed History on Insurance?
After independence we were given a separate status i.e. status of dominion
Swadeshi movement gave a new life.

In 1934, Mr. S.C. Sen was appointed as special officer. A Committee was
appointed in 1936 under the Chairmanship of Mr. N.N Sircar to examine reports
submitted by S.C. Sen.
In 1937, whatever suggestions made by this Committee Bill of Insurance was
passed in 1937, which in 1938 became first Indian Insurance Act.
Both Indian as well as foreign companies were governed by this Act. As a
result, foreign companies ran away.
From 1938 to 1950, in a period of stability and consolidation, small industries
merge with the big.
Therefore in 1938 Act amendments were made in the Act and it was
In 1939 there started a IInd World War. Again Swadeshi movement was on
After IInd World War, officers invested Capital of Insurance into wrong projects
i.e., malpractices were started.
In 1945, one committee was appointed to review all this under the
chairmanship of Cowasji Jehangir. He condemned the malpractices which were
going under.
Government made certain amendments to tighten the shortcomings.
After 1947, partition took place. After that another Committee was made
under chairmanship of S. R. Ranganathan in 1949.
Therefore in 1950 we got Insurance Amendment Act.
Certain suggestions and changes were made for making:
1. insurance institutions more useful.
2. appointing one Controller of Insurance.
3. two councils (i) Life Insurance Council, (ii) General Insurance Council.
4. Appointment of investigators and administrators for ill-managed and sick
5. As a result, we have to make efforts to see that the foreign exchange should
not drain out.
After 1950-till date, we call it as a period of boom and nationalism.

In 1956, Nationalisation of Insurance Act was passed.

Ist Sept., 1956, this Life Insurance Corportion was established (LIC). When LIC
started its initial capital was only Rs. 5 crores.
In 1968, Amendments were passed.
In 1972, General Insurance business was also nationalised (General Insurance
Corporation (GIC).
GIC has four subsidiary companies:
LIC is State under Article 12 because government has control over it.
Cases :
1. Asha Goel v. LIC, MANU/MH/0188/1986 : AIR 1986 Bom 412.
Whether a writ under Article 226 is maintainable under LIC. Yes. It is under
2. National Insurance Co. v. Jugal Kishore, AIR 1988 SC 789
Supreme Court said that the LIC is not mere commercial activity, they are kept
under higher pedestal (place).
3. Assam & Meghalaya State Road Transport Corporation v. Abdul Razzak, AIR
1988 Gau 67
Q. Write a note on Foreign History of Insurance?
Insurance-security against risk.
There are two types-Life and General Insurance.
Insured/Assured-used for person who is taking protection.
indemnify the person.





Premium-Consideration paid by insured to the insurer.

Insurance -






Definition-Maclean :
Insurance is a method spread over a large number of persons. A possible
financial loss too serious to be borne conveniently by an individual, is covered
by it.
Marine Insurance came first as most of the trade was done by English traders
during colonial times.
Then came fire insurance due to the great fire in London in 1666.
Bubbles Act, 1720-it gave authority to only two companies to carry on
insurance business. Small companies were abolished and these Companies were
given entire control.
Amicable Society was established for Fire Insurance.
In 1807 a new charter was made and added to Bubbles Act in which modern
techniques were adopted.
Mortality tables calculate life expectancy of a person to determine how much
premium has to be taken from each person.
After this the Insurance business got converted into gambling as no principle
were laid down properly (no settled principles).
To reaffirm people's faith in insurance a new concept of Insurable interest was
Q. Give in detail Indian History of Insurance?

Bombay Mutual




Oriental Bank

1900-1912- Small companies cropping up.

1912-Indian Life Insurance Act-to regulate all the companies


1913-1938-Process of struggle and growth

FWW, SWW-Loss of Economy
1949-Committee under chairmanship of S.R. Ranganathan
1950-1938 Act was amended. Changes were made.
(i) for making insurance institutions more useful.

(ii) for appointing



of Life Insurance Council

(iii) for making two Councils



(iv) for appointing investigations and administration for ill-managed and sick
(v) For reducing drain of Foreign Exchange.
1950-till date-period of Boom and Nationalization
1956-Nationalization of Insurance

LIC Act was passed

exclusive articles to carry on Life


1st Sept., 1956, LIC was initial capital-> Rs. 5 crores


1968-Amendments were passed in 1956 Act.

1972-General Insurance business was also nationalized.
GIC and four Subsidiary Companies
Q:-Is LIC an instrumentality of the State?
Asha Goel v. LIC, MANU/MH/0166/1986 : AIR 1986 Bom 112.

Q:-Is a writ under Article 226 maintainable against LIC?

Yes, as instrumentality of the State.
National Insurance Co. v. Juggal Kishore, AIR 1988 SC 789.
LIC is neither a commercial enterprise nor commercial activity, so have to keep
it on a higher pedestal. It has duty to take care of citizens of State.
Assam & Meghalaya SRTC v. Abdul Razzaq, AIR 1988 Gau 67.
Rs. 60,000 to be paid to a person by LIC, went in appeal against that amount.
LIC got Court-bashing.
Contract of insurance means:
A contract of insurance means a contract by which a person, in consideration of
a sum of money, undertakes to make good the loss to another against a
specified risk e.g. fire or accident or death.
Q. Define Contracts of insurance?
(1) Proposed, (2) Acknowledgement (3), Consideration (4), Must be in writingInsurance policy.
Case : Medical Defence Union Ltd. v. Deptt. of Trade (1979)
Certain Medical practitioners formed this Union. It undertook few business.
(i) It used to provide education and advice to the practitioners.
(ii) To conduct legal proceedings on behalf of its members.
(iii) Indemnify members against claims for damages and cost.
(iv) Members had the right to ask this union for help.
Annual subscription fee was to be paid by the members of the Union .
Deptt. of trade said that the union was carring on the business of insurance.
Other clause was: Compensation could be in form of money or money's worth.
Held: That they were not paying only money but also money's worth.
Hence they were not an insurance company.
Insurer: The one who undertakes the risk

Insured: The one whose loss is to be made good.

Premium: Consideration for which insurer undertakes to indemnify the assured
against the risk. It may either be a single or periodical payment.
Policy: Instruments in which contract of insurance is generally embodied.
Subject-matter of insurance and insurable interest:
Subject-matter is the thing or property insured in the interest of assured.
There are number of kinds of insurance:
1. Life Insurance:
In this, certain amount becomes payable on the death of the assured or on the
expiry of certain fixed period whichever is earlier.
2. Fire Insurance:
It covers losses by fire.
3. Marine:
Losses incidental to marine adventure.
4. Personal accident insurance:
Amount payable is a compensation for any personal injury caused to the
Anson says :All contracts of insurance are wagering contracts even though there
is an insurable interest.
A "wager" is a promise to give money or money's worth upon the determination
or ascertainment of an uncertain event, the consideration being either
something given or promised to be given by the other party in the event
determining in a particular way.
Though insurance is a wagering contract it is permitted by and therefore
enforced by law.
Q. Differentiate between Insurance and Wager?



1. It seeks to indemnify the 1. No indemnity: no intent

assured for loss suffered by him is there to cover any risk.
on happening of an uncertain

2. Object: Protect the assured

against losses on happening of an speculation gains.
uncer tain event.


3. Assured must have insurable 3.

interest in subject-matter of procuring interest except
that created by the contract

4. Parties must have utmost good 4. Good faith need not be


5. It is legally enforceable.

6. It is based on scientific to
actual calculations of risks.

5. It is void as it is against
public policy.

6. It is a mere gamble.

7. Insured even may cause 7. A wager either wins or

varying degrees of loss or lost.

Q. What are the Fundamental Elements of Insurance?

1. Utmost good faith:
As the assured knows more about the subject-matter of the contract than the
insurer consequently, it is the duty of assured to disclose all material facts
If he does not do this then, Insurer does not know: Whether he should accept the risk.
What premium he should charge

Insurer can avoid the contract (as held in the case of Mithoolal Nayak v. LIC of
If assured has knowledge of all the facts which insurer doesn't know then the
assured should not hide those facts and/or tell wrong facts (as held in the case
of V. Srinivasa Pillai v. LIC of India).
E.g. a man insures his life from a life insurance company for Rs. 50,000 &
truthfully gives answers to the company. After a few days, but before
acceptance of proposal by the insurance Co., he suffered from pneumonia and
Company, know about the pneumonia for the first time. Therefore Court held
Co. not liable to pay. (As held in the case of Looker v. Law Union and Rock
2. Indemnity:
This means that the assured, in case of loss against which the policy has been
issued, shall be paid the actual amount of loss not exceeding the amount of the
Porter says:
Indemnity is the controller price of insurance law and it is by the reference to
this principle that all problems in insurance can be solved.
A contract of Life Insurance is not a contract of indemnity. Therefore, sum is
already mentioned in the Policy which is to be paid on such incidence.
Exception (Life, personal accident and sickness insurance).
3. Insurable interest:
Assured must have insurable interest in the subject-matter of the insurance.
In life insurance:
Insurable interest must be present at time when insurance is affected.
In fire:
Must be present both at the time of insurance and at the time of loss of subjectmatter.
In Marine:
Must be present at the time of loss of subject-matter.
4. Cause proxima:

Assured can recover loss only if it is proximately caused by any of perils insured
against, e.g. ship having cargo or cargoes collided with another. Cargo was
Damage to cargo was not direct result of collusion but of delay and mishandling.
Assured could not recover the loss. (as held in the case of Pink v. Fleming, 1899
25 QBD 396).
5. Risk must attach:
Insurer is premium of risk involved. If no risk is involved then it is to be returned.
For, example if the subject-matter had already been destroyed or the ship had
already returned safely but both the parties were ignorant about it, the risk does
not attach and the contract is thus void ab-initio.
6. Mitigation of loss:
Assured to step in so that there is minimum of losses. An insured is bound to do
his best under the circumstances, but he is not bound to do at his own peril.
7. Contribution:
Means if there is more than one insurer, then loss is to be paid by them in
contribution of the actual amount of loses.
Either one of the Insurer pays and the second will take afterwards from him.
E.g. A insures his house against fire for Rs. 10,000 with X and Rs. 20,000 with Y.
A loss of Rs. 12,000 occurs. Here X is liable to pay Rs. 4,000 and Y Rs. 8,000 or,
X will pay the whole amount and afterwards take from Y Rs. 8,000.
Formula is: Sum insured with X or Y x loss
Total sum insured For X = 10,000 x 12,000 = Rs. 4,000
Similarly from Y = Rs. 8,000
8. Subrogation:
According to it, insurer, on making good the loss, is entitled to be put into the
place of the assured.
E.g. A insures his goods with B for Rs. 100. Goods were damaged by fire by C. A
recovers loss from B and subsequently he recovers loss from C also.

A must hold the amount recovered from C in trust of B.

9. Scope of duty of disclosure :
1. It relates only to material facts.
2. This duty extends to only facts which are within his knowledge and not to
those which he ought to know.
3. This duty to disclose extends to the authorised agents only.
4. This duty extends to both the parties i.e. insurer and insured.
5. This duty of disclosure applies only to negotiation proceedings to formation of
the contract. When a relevant fact comes to the knowledge of either party after
the completion of the contract, there is no duty to disclose.
6. The duty of disclosure is deemed to have been cast on the insured when the
insurer specifically asks a question.
7. The duty does not extend to certain types of facts though they are material
(i) facts which he is not aware of.
(ii) facts which are within the knowledge of the insurer.
(iii) facts of which information is waived by the insurer.
(iv) facts which tend to diminish the risk.
(v) any circumstance which is superfluous to disclose by reason of any express
or implied warranty.
10. Period of insurance:
In Life Insurance:
regular premium is to be paid. If not paid contract lapses and can be required
subject to fulfilment of certain conditions.
In Fire:
for a certain period, usually a year. Contract automatically comes to an end
after a particular period.
In Marine:

for a particular period or for a particular voyage.

Person in order to safeguard his own interest he insures the same insured risk
either wholly or partially with other insurers in this as Re-insurance.
Re-insurance can be resorted to in all kinds of insurance.
Double insurance:
where the assured insures same risk with two or more independent insurers and
Total sum exceeds the value of the subject-matter, the assured is said to be
over-insured by double insurance.
E.g. of Double insurance
A insures his house worth Rs. 50,000 with B for Rs. 40,000 and with C for Rs.
30,000. There is double insurance. If he insures Rs. 25,000 each with B and C,
there is no double insurance.
Imp. In Life Insurance, no limit is there, an assured can take any number of
Q. Discuss Life Insurance contract: [Life Insurance Act, 1956]?
A contract of life insurance is a contract by which the insurer, in consideration of
the payment of certain sums, called premiums, undertakes to pay a certain sum
of money on the death of a person whose life is insured or on expiry of a certain
period, whichever is earlier? Premium may be paid in a lump-sum or by
periodical instalments.
Q. Discuss the types of Policies of Life Insurance?
1. Endowment Policy:
It provides for payment of the sum assured at the end of a specified term of
years or at death, whichever is earlier. This is most popular form of life
2. Children Endowment Policy:
It is taken for purpose of marriage of children when they attain a certain age. It
may be for education. After the death of the life of the assured, by way of
annuity payments.
3. Whole-Life Policy:

In it, premium is payable throughout the life-time of the life assured, payable
only on the death.
4. Limited Payment Life Policy:
Premiums are payable for a selected period of years or until death if it occurs
within this period.
5. Joint Use Policy:
Sum assured is payable at the end of endowment terms or on its death of any of
the lives assured. Partnership firms in such policies.
6. Convertible Whole-Life Policy:
Policy is to meet the need of young person who are on threshold of their carrier
and hence prospects of increase in income is there after some years.
Earlier premium are payable at lower rates, but afterwards assured get the
option to convert it into endowment policy. If option not exercised, the policy
continues as whole-life policy, the premium ceasing at certain age.
7. Anticipated policy:
It provides for payment of sum assured at the end of specified intervals; say
20% at the end of first 5 years, 20% at the end of next 5 years, and the balance
at the end of the term of the policy. If death occurs, full amount is payable.
8. Annuity Policy:
If amount payable by insurer is not in lump-sum, but by monthly, quarterly, half
yearly or annually after assured attain certain age.
9. Sinking Fund Policy:
It is useful for companies for redeeming their determines or paying off the loans.
A fixed amount is paid annually.
10. Janta Policy:
It concerns risk of death by accident for 1 year only. At death fixed amount is
Q. What is Surrender Value?
It is the amount which the insurer is prepared to pay to the assured in case he
does not continue a policy for agreed period of time and surrenders his title and

interest under the policy of insurer. Before policy acquires any surrender value,
it should have undergone for few number of years.
Surrender Value increases as more and more premium is paid.
Q. What are the characteristics of Fire Insurance?
1. It is a contract of indemnity which means whatever is the loss, will be only
2. It is a contract of UBERIMAE FIDEI i.e. assured and insurer have to disclose
everything, which is in their knowledge.
3. Assured must have insurable interest in subject-matter both at time of
insurance and at time of loss.
4. Risk concerned by it is loss resulting from the fire.
5. It is subject to principles of subrogation and contribution.
6. It is a contract from year to year.
Sum to be recovered = Value of policy x Actual loss/Full value of subject-matter
Q. Explain types of Policies of Fire Insurance?
1. Specific Policy:
It covers the loss of assured up to a specific amount which is less then the real
value of the policy.
2. Comprehensive policy:
It covers losses against risks like fire, theft, burglary, third party risk etc. Such
policy is also known as "All-in-one policy."
3. Valued Policy:
Amount payable in case of loss is fixed in it.
4. Floating policy:
It covers the property which is placed at different places, e.g., 2 warehouses at
different places having goods.
5. Replacement or reinstalment policy:

It says assured can do any type of fraud so, that he can get the policy money.
Therefore, it is stated in the policy that insurer can re-instate new property
instead of that damaged property.
Q. What is Marine Insurance?
Marine Insurance is an insurance whereby an insurer undertakes to indemnify
the assured against marine losses.
Policy must contain the following:1. Name of assured.
2. Voyage or period of time or both concerned by the insurance.
3. Subject-matter insured and risk insured against.
4. Sum insured.
5. Name or names of insurer or insurers.
Types of policies of marine insurance are:1. Voyage Policy:
It is to insure subject-matter from one place to another, e.g., Bombay to New
2. Time Policy:
Subject-matter for a definite period of time.
3. Mixed Policy:
Combination of voyage in time policies.
4. Valued:
Agreed value of subject-matter insured.
5. Open or unvalued:
Does not specify value of subject-matter insured.
6. Floating policy:
It describes insurer in general terms. Only amount is mention in it.

7. Wagering policy:
Every such contract is void.
Q. Describe the aims of Insurance Act?
(1) To prevent the mushroom growth of companies.
(2) To enforce working on sound principles.
(3) To prevent misappropriation of funds and protection of assets.
Q. What are the special features of the Act?
(i) Well balanced (ii) Wide
Ist comprehensive piece of insurance legislation in this country.
Q. Describe the salient features of the Act?

1. Wide Scope

(a) Application
(b) Prohibition

(a) It applies to all types of insurance business-life, fire, marine etc. done by
companies incorporated in India. It also governs:
Provident companies
Co-operative societies
Mutual Offices
(b) Section 2(c) prohibits transaction of insurance business by certain persons.
(1) No person shall carry unless he is:
(a) a public company
(b) A registered society
(c) A body corporate incorporated by the law of any country outside India not
brief of nature of a private company.

(d) Every notification issued of sub-section (1) shall be laid before Parliament as
soon as it is issued.

2. Requirement as to Section 6: Requirement as to capital

Voting Rights
Maintenance of Registers of beneficial
winners of shares.

3. Deposits:
To prevent the growth of insurers of small financial resources or speculative
concerns, the Act provided for registration of all insurers with a substantial
deposit with the Reserve Bank.
4. Registration :
Section 3(1)
Section 3(2) : Every application for registration shall be accompanied by:(a) A certified copy of the MOA and AOA
(b) Name, Address & occupation of directors.
(c) A statement of the class or classes of insurance business done or to be done.
(d) Principal place of business or domicile outside India, a statement verified by
an affidavit made by the principal officer of the insurer.
(e) A certified copy of the published prospectus.
(f) The receipt showing payment in the prescribed manner not exceeding Rs.
Q. Explain Insurance against third party risks?
Contract of Insurance are based on principle indeminity: Goverened by Motor
Vehicles Act, 1939.
Q. Define Motor Vehicles Act?
Now it is 1988 Act. Changes were also made i.e. amendments in 1994 by which
maximum limit of compensation was fixed.

Q. Define Indemnity?
Motor Vehicles Act, 1939 amended in 1988. Also amended in 1994. Maximum
limit of compensation was fixed.
Q. What is the object behind this policy?
To safeguard a person known as insured.
-When a vehicle is propelled mechanically it is known as a MOTOR VEHICLE.
Case :
Lawrence v. Hemllete, (1952) 2 QBD 74
A propelled engine was attached in Bicycle but Piston was removed though
petrol was there. It was held that engine was not functional. Therefore, not
motor vehicle.
Case :
Floyd v. Bush, (1953) 1 QBD 265
Bicycle with engine but using pedals for running. It was held as motor vehicle.
Case :
Saumitra Auto Rickshaw Sahakari Sangh v. Director of Transport Bombay, AIR
1957 Bom 402
Auto was held as maxi cab thus a motor vehicle.
Q. Discuss vicarious liability with caselaws?
Case :
Mangilal v. Paras Ram, MANU/MP/0002/1971 : AIR 1971 MP 5
For plying a motor vehicle at public place, insurance is necessary.
Section 147 and Section 2(34) of Motor Vehicles Act, 1988.
Q. Define public place?
The right of access may be permissive, limited or restricted or regulated by oral
or written permission or on payment of fee. It is necessary that the place of
payment of fee, must be accessible to members of public and be available for
their use, enjoyment etc.

Case :
Pandurang v. New India Life Insurance Co., MANU/MH/0014/1988 : AIR 1988 Bom
It was a private factory and inside it certain vehicles were plying and some
accident occurred and above definition was needed.
Q. Motor Vehicle ?
It includes:
(1) Chasis, (2) Trailer
It does not include:
(1) Anything moving on railway tracks.

Motor Vehicles
Act, 1988Vehicles against IIIrd party

S-14, S-146, S-147, S-148,

S-149 S-145 Definitions



Policy should be there

Policy should be
in force



of Bad condition of car

More Premium
has to be paid



Good condition of car

has to be paid



Case :
New India Assurance Co. Ltd. v. B. Saraswati Ammal, (1991) ACC 512
The owner of the goods who accompanies his goods in the lorry transporting
them can't be said to be person employed by the person insured by the policy
and that either the injury or death arose out of and in the course of his
employment. Insurance company is not liable.
This case has been overruled by 1994 amendment. Owner of goods is also part
of policy, now.
Case :
National Insurance Co. v. Jugal Kishore, 1988 ACJ 270 (SC)
Comprehensive insurance of the vehicle and payment of higher premium do not
mean that the limit of the liability covering third party risks becomes unlimited
or higher than the statutory liability fixed under Section 147(2) of the Act. For
this purpose a specific arrangement has to be arrived between owner and
Insurance Company and separate premium has to be paid on the amount of the
liability undertaken by the insurance company in this behalf. Likewise if risk of
any other nature for driver or passengers in excess of statutory liability is
sought to be covered, it has to be clearly specified in the policy.
Case :
United India Insurance Co. v. K. Subramanium, (1991) ACC 520
Insurance company can't be made liable to pay compensation, if the offending
vehicle was being driven by a person not holding a valid driving licence at the
time of accident.
Health Insurance
Q. What is Health Insurance?
Health insurance is a safeguard against rising medical costs. A health insurance
policy is a contract between an insurer and an individual or group in which the
insurer agrees to provide specified health insurance at an agreed-upon price
(the premium). Depending on your policy, your premium may be payable either
in a lump sum or in instalments. Health insurance usually provides either direct
payment or reimbursement for expenses associated with illness and injuries.
The cost and range of protection provided by your health insurance will depend
on your insurance provider and the particular policy you purchase. These days,
most companies give the benefit of health insurance to its employees. However,
in case your employer does not offer a health insurance plan, it is advisable to
opt for a health insurance scheme.

Q. Why do you need it?

Health insurance has become a necessity in today's world. The cost of medical
care and treatment has soared to new heights in recent years and is expected
to rise even further in the years to come. Think for a moment about the
enormous medical costs you would incur if you suffered a major injury tomorrow
or were suddenly stricken with a life-threatening illness. Uninsured people live
with such risk every day of their lives; health insurance can shield you from that
risk. Even if you are healthy today and have never had any major problems in
the past, you simply cannot predict the future.
The health insurance industry in India is going to take a big leap with the
opening up of the insurance sector. As of now there are only two players in this
field, Life Insurance Corporation and the General Insurance Corporation with its
four subsidiaries.
The General Insurance Corporation (GIC) was formed by a legislative act. It is a
merger of more than a hundred private companies. It was then regrouped into
the four subsidiaries of GIC.
National Insurance Company with its Head Quarter in Calcutta
New India Assurance Company with its Head Quarter in Mumbai
Oriental Insurance Company with its Head Quarter in New Delhi
United India Insurance Company with its Head Quarter in Chennai.
These are the main companies that compete with each other for business in all
parts of the country.
Some of the existing health insurance schemes currently available are
individual, family and group insurance schemes, senior citizens insurance
schemes, long-term health care and insurance cover for specific diseases.
The insurance schemes offered by GIC include:
Individual and Group Mediclaim Insurance Scheme
Bavishya Arogya (Insurance for Senior Citizens)
Jan Arogya and Cancer Insurance.
The Life Insurance Corporation (LIC) offers:
The Asha Deep plan. It provides cover for cancer, paralytic stroke, renal
failure, and coronary artery disease.

Jeevan Asha. The Jeevan Asha policy is the other health care product offered
by LIC.
The other medical insurance products are those that are channelised from the
two insurers, but mainly the GIC's Mediclaim. These institutions include the UTI
with its senior citizens unit plan, Unit linked insurance plans, credit cards
offering medical insurance and new service providers like Medicare, Paramount
and Sedgwick Parekh which provide additional services around the basic
insurance plans being offered by GIC.
Q. Explain the concept of Social Insurance?
Social Insurance programs mitigate risks by providing income support in the
event of illness, disability, work injury, maternity, unemployment, old age, and
Programs include.
Unemployment insurance to deal with frictional or structural unemployment
Work injury insurance to compensate workers for work-related injuries or
Disability and invalidity insurance, linked to old age pensions, to cover full or
partial disability.
Sickness and health insurance to protect workers from diseases
Maternity insurance to provide benefits to mothers during pregnancy and
Old-age insurance to provide income support after retirement
Life and survivor insurance to ensure that dependents are compensated for
the loss of the breadwinner.
Q. What are the Social Security Legislations?
It states the security which society furnishes through appropriate organisation
against certain risks to which its members are exposed. The individual of small
means are exposed to risks which are essentially contingencies against the
means which cannot be effectively provided by his own ability or even in private
combination with his colleagues.
A system of social assistance scheme can only be assured through security of
employment, security of income and security against health. It is also
committed to assure and implement such assistance to its citizen through a
welfare state.

It is mainly a 20th Century concept. The condition of human existence compels

the state to give security to its citizens. The very important aspect of social
justice provides security to man against ravages of social conflicts and
inadequacies. Social Justice leads to social security. In a way both are two sides
of the same coin, because where there is social Justice there is social security.
The social measures which every welfare state should endeavour to provide for
its citizens are1. Unemployment benefits
2. Maternity benefits
3. Family allowances
4. Old age grants
5. Death grants
6. Industrial injury benefits
7. Nationalised health services
8. The weaker sections of the society
Q. Describe Social Security Measures
Organisations with different caselaws?




In the 19th century the ill consequences of the Industrial revolution in the
western world compelled by the governments of those countries to introduce a
spate of welfare measures and social assistance schemes. The role of the
International Labour Organisation was to provide social security measures not
only in the advanced countries but in the developing world as well since its
inception in 1919 gave an added dimension to the effectuation. The ILO exerted
its influence to extend the range of security and the classes of persons
protected thereunder through many conventions and recommendations. The
basic principles and common standards of social security are influencing the
social security measures throughout the world.
Its emergence in India:
Social Security Legislations are of more recent origin in India. Workmen's
Compensation Act, 1923, gave the first piece of social security legislation in
India to protect the workers against employment injury. Some States followed it
by maternity legislations. The more areas are highlighted in many conferences
which are in need of more social security measures and the extension thereof.
We witnessed the emergence of more and more social security legislations and
measures only after independence.

The welfare state of India designed under the Constitution is committed to

secure Justice-social, economic and political. The directive principles emphasize
the need of social security schemes which are reinforced by the five year plans.
They provide the benefits for better implementation, wide coverage of
employees and better benefits. The society and the nation have to shoulder the
responsibility and measures which are based on the accepted proposition that
many of the so-called misfortunes, disabilities and accidents are social.
Effects of social security measures:
It signifies two angles, (1) that they constitute an important step towards the
goal of a welfare state, (2) that they enable workers to become more efficient
and thus reduce wastage arising from industrial disputes. It prevents the
formation of a stable and efficient labour force with a lack of social security
measures. The social security measures are not a burden but a wise investment
which yield good dividends.
Social security measures against Employment injuries:
The Workmen's Compensation Act, 1923, provides for payment of compensation
by employers to workmen and their dependants against death or employment
injuries which includes occupational diseases arising out of and in the course of
employment. The Act applies to the workers who were given less wages towards
their work per month in factories, mines, plantations, transport, construction
work, railways and specified hazardous occupations. The scope of the Act is to
serve any class of persons whose occupations are considered hazardous in the
Central and the State Governments.
The benefits to workers and their dependants in cases of sickness, maternity
and employment injury is covered by the Act of Employees State Insurance Act,
1948 which provides the cash benefits. The measure of security against
sickness and industrial injuries are introduced. All non-seasonal factories except
mines and railway running sheds are applied by this Act. The employees
engaged by or through contractors are covered by all employees, namely
clerical and supervisory. The wages of the employees should not exceed Rs.
3000 per month. The Act was drawn and implemented in most parts of India
through Employees State Insurance Schemes. The Scheme discharges
creditable services to employees and their dependants under the Employees
State Insurance hospitals.
Maternity Benefits:
The Maternity Benefits legislations are passed both by the Centre and the States
in order to safeguard the health and interests of pregnant women and the
children. Current Maternity Benefits Act, 1961 of the Centre is adapted by many
States. Both the Central and State Acts provide payment of cash on behalf of

maternity for a certain period and the government also provides for grant of
leave and many other facilities to women employees in certain conditions.
Retirement Benefits:
The Employees Provident Fund Act, 1952, the schemes thereunder, the Payment
of Gratuity Act, 1972 are certain major steps towards providing some security
against minimum economic requirements to employees after retirement. The
system of compulsory contributory provident fund is introduced by the Provident
Fund Act. Apart from these there are State enactments and Plantation Provident
Funds Acts, Seamen's Provident Fund Acts.
Security of Employment:
The Industrial Disputes Act provides incorporating provisions for lay-off and
retrenchment compensations and operates as security against involuntary
unemployment. The lay-off and retrenchment conditions and compensation
thereof act as deterrent against any hasty and capricious action. They provide
some relief and safeguard against such contingencies.
The list of legislation and measures like1. Bonus Act,
2. Minimum Wages Act
3. Payment of Wages Act
4. Factories Act
5. Employment of Children Act etc.
which are focussing towards healthy factory conditions, better working
conditions and maintenance of a tolerable standard of life.
The welfare State
with the National
single fund with
benefits according

emphasised the felt need of such social security measures

Commission on Labour. All social security collections in a
different agencies can draw upon for disbursing various
to needs.

Insurance, like banking is an important service sector specifically covered under

the definition of "service" in Section (1)(o) of the Consumer Protection Act. The
insurance schemes have multiplied over the years to cover various types of
risks to life and property. Since "insurance" has been included in the definition of
service, any deficiency in the services of an insurance company would enable
the aggrieved party to make complaint for redressal of its grievances under the
Article 225

The protection granted under the Act, is of course, very wide and extends to all
the cases of unilateral repudiation of the insurance contract by the insurer,
delay in settlement of claims, breach of terms of the policy and all other actions
affecting the interests of the insured. The consumer fora can adjudicate any
dispute regarding such matters. Even if there is unilateral repudiation of the
insurance contract by the insurer, jurisdiction of consumer fora to conduct
adjudication of the complainant is not affected. All this is explained by the
National Commission in LIC of India, A.P. v. Bhavanam Srinivas Reddy, that if the
unilateral repudiation of an insurance contract is held to oust the jurisdiction of
the consumer fora, such an interpretation may lead to abuse and grave public
mischief. The insurance company has to satisfy the court that the repudiation is
justified. Further, in terms of Section 3 of the Consumer Protection Act, the
provisions of the Act are in addition to and not in derogation of any other law. In
this view of the matter, a consumer forum cannot be debarred from
investigating the unilateral repudiation of the claim.
This proposition was followed by the National Commission in National Insurance
Co. Ltd. v. Lal Chand Jain & Sons and Tanawala Synthetic Textile Ltd. v. Oriental
Insurance Co. Ltd. and held that a long delay of more than three years on the
part of an insurance company in deciding the claim of the insured is a deficiency
in service.
In United India Insurance Co. Ltd. v. Mrs. Pooja Gyanchandra Joshi, the National
Commission held that the settlement of a claim by any insurance company on
the plea of belated report of the surveyor amounts of deficiency in service. The
State Commission accepted the complaint and declared the complainant
entitled to the claim. The National Commission also upheld the view of the State
In New India Assurance Co. Ltd. v. Sakar Iran Industries, the complainant had
taken a burglary and house breaking insurance policy. During the insurance
period, theft took place in his factory and the insurance company refused the
claim. The commission directed the opposite party to pay to the complainant
compensation along with interest. On appeal the National Commission upheld
the order of the State Commission.
In MCD/DESU v. Basant Devi, the National Commission has held that if an
insurance policy, taken by an employee under salary deduction scheme lapses
due to fault on the part of the employer in remitting premium deducted from the
salary, the employer is liable for deficiency in service and not the insurance
The National Commission has held in Ozma Shipping Company v. Oriental
Insurance Co. Ltd., that an insurance company cannot be justified in assessing
and paying lower amount than the amount agreed in the policy. Taking a similar
view in Oriental Insurance Co. Ltd. v. Padmanabha Acharya, where FIR was
registered in respect of dacoity in a shop and challan was filed after

investigation the National Commission held that refusal of a claim on the ground
that no dacoity took place was unjustified. The company was held liable to
satisfy the claim as per agreed terms of the policy. The National Commission has
held that an insurance company is liable to pay repair cost to a complainant as
agreed. Any failure to pay in the settled terms would make the company guilty
of deficiency in service.
Delay in making payment of a claim has been simply held as deficiency in
service. In such cases of deficiency, proper interest on the withheld claims
should be paid to the complainants. Further, Compensation for financial loss and
mental stress may be allowed in such cases. In National Insurance Co. Ltd. v.
Nagendra Prasad Singh, a claim had been made in respect of a taxi which had
met with an accident.
An interesting issue of medi-claim policy has been favourably considered by the
consumer fora in New India Assurance Co. Ltd. v. Ambalal Chandulal Shah. In
this case, while taking a medi-claim policy, the complainant had disclosed in the
proposal that he was mildly hypertensive. Meanwhile, the complainant
underwent coronary angiography and was thereafter admitted for coronary bypass surgery, but his claim for reimbursement of expenses was repudiated by
the insurance company. The State Commission and National Commission
refused to interfere with the decision of the district forum.
All the above cases indicate that the machinery for the settlement of consumer
disputes is working in accordance with the spirit of the legislation and is
protecting the consumer interest to the optimum possible.
Insurance and Consumer Protection Act
Section 2(i)(o)-Service
1. Unilateral Repudiation of insurance contract
2. Delay in settlement of claims
3. Breach of terms of the policy
4. Other actions affecting the interests of insured deficiency in Service- Section
Part IV
Regulatory frame Work for Multinational Companies
The UNCTAD Code on Transfer of Technology
Give Salient features of UNCTAD Code of Transfer of Technology?

The negotiation of an international code of conduct on the transfer of

technology has been the objective of the developing countries.
Most of the transfers are between the developed countries themselves and
only 10% occur between developed and developing countries.
The principal complaint of the developing countries is that the Transfer of
Technology is too costly and they are in a disadvantageous position to bargain.
The monopolistic and patent regime prevent the developing countries from
developing indigenous technologies.
Objective of the Code is to strike a balance between the rights and interests of
the suppliers of technology developing countries.
The work for a Code was started in 1974 and an expert group was constituted.
It was its first draft in 1978 and its final form resulted in 1981. The Code was
adopted in 1985.
What are the Objectives and Principles of UNCTAD?
In the first place it is recognized that science and technology plays a
fundamental role in the socio-economic development of all countries.
Secondly it declares that technology is to buy the progress of making.
It also asserts the belief that a code of conduct will assist the developing
countries in their selection; acquisition and effective of technology which are
appropriate to their needs.
It also recognized the need to strengthen the scientific and technological
capabilities of all countries.
It also drew attention to the need to improve the flow of technological
information so that countries could select the technology that was appropriate
to their needs.
Definition of transfer of technology under this Code is the "transfer of
systematic knowledge for the manufacture of a product, for the application of a
process or for the rendering of a service and does not extend to the sale or
lease of goods".
The objective of the Code is to establish general and equitable standards for
the transfer of technology and facilitate the international flow of technological
information and also to specify restrictive practices which would restrain parties'
technology transfer transaction.

The States have the right to adopt appropriate steps for encouraging transfer
of technology under mutually fair and reasonable terms.
The principles of sovereignty and political independence of States should be
States should co-operate in the international terms for transfer of technology
in order to promote economic growth.
Describe Nationalisation and Compensation?
Para 55 of 1990 Code acknowledges the right of the State to nationalize the
assets of TNC's and to pay adequate compensation in accordance with national
laws under the Ecosoc.
In 1990 a draft Code was formulated on the basis of proposal by
G-77 countries.
Define General Treatment?
Chapter IV of the Code provides for general provisions relating to the
treatment of TNC's and Chapter V deals with Inter-Government Corporation.
General treatment of TNC by the countries in which they operate.
(a) Paragraph 48, Regulation of the role of the TNC in different countries, their
entry and establishment.
Their role is the economic development and prohibiting their presence in
certain areas.
(b) Para 50, Non-discriminatory or equality of treatment.
Subject to national treatment protesting National Security and public order,
the TNC should be entitled to treatment not less favourable then the domestic
enterprises in certain circumstances.
The liberalization process started from 1970's in developing countries, in
particular in India during 1990's had opened the activities of Trans-National
Corporations (TNC's) Developing Countries.
(a) To prevent interference in the internal affairs of the countries.

(b) To eliminate their restrictive business practice and conform to their national
development plans.
(c) To bring about assistance in transfer of technology and management skills in
developing countries.
(d) To regulate the re-partition of the profits accruing from their operators.
(e) To promote investment of their profits in developing countries.
Many NGO's pointed out the right of TNC's and child labour.
Foreign Company
Discuss the procedure in setting up a Liaison Office/Representative
Office of a foreign company?
What are the standard conditions imposed for
Liaison/Representative Office of a foreign company?



Explain the mode of setting up a Project Office?

Explain the mode of setting up a Branch Office?
Foreign Company is one, which has been incorporated outside India and
conducts business in India. The company is required to comply with the
provisions of the Companies Act, 1956.
Foreign Company can set up Liaison/Representative, Project and Branch
Offices in India.
Such companies have to register themselves with Registrar of Companies
(ROC) within 30 days of setting up a place of business in India.
A Liaison office is not allowed to undertake any business activity in India and
cannot therefore, earn any income in India. The role of such offices is, therefore,
limited to collecting information about possible market opportunities and
providing information about the company and its products to the prospective
Indian Customers.
The opening and operation of such offices is regulated by the Foreign
Exchange Management Act (FEMA), 1999. Approval from the Reserve Bank of
India (RBI) is required for opening such offices.
Expenses of such offices are to be met entirely through inward maintenances
of foreign exchange from the Head Office, abroad.

Such offices cannot do trading or commercial activities. Permission to set up

such offices is initially granted for a period of 3 years.
Office activities should be limited to collecting and transmitting information
between the overseas Head Office and potential Indian customers.
Such offices should not charge any commission from Indian customers for
providing liaison services.
1. Temporarory projects.
2. Approval of RBI is required.
To represent the foreign companies in various matters in India e.g. acting as
buying/selling agents in India.
To conduct research work.
To undertake export and import trading activities.
To promote possible technical and financial collaborations between the Indian
companies and overseas companies.
Rendering professional or consultancy services.
Rendering services in Information Technology and development of software in
Rendering technical support to the products supplied by the parent/Group
companies like LG, Whirlpool, Godrej, and GE.
Foreign Companies can set up operations in India.
Write a short note on Joint Venture (J.V.) with an Indian Partner or
Establishment of wholly owned subsidiary (WOS)?
It (J.V. & W.O.S.) is subject to the government regulations and approvals.
sold off Coke.
Coke acquired running business of Thumsup/Limca/Goldspot so that they were
at par with Pepsi.

Describe the Role of Foreign Investment Promotion Board (FIPB)?

The FIPB is the nodal, single window agency for all matters relating to FDI as
well as promoting investment in the country.
For the following categories for FDI/NRI and OCB investment, government
approval for FDI through FIPB is necessary:All proposals that require an Industrial Licence include:
the item requiring an Industrial Licence under the Industries (Development
and Regulation) Act, 1951;
foreign investment being more than 24% in the equity capital of units,
manufacturing items reserved for small scale industries; and
all items which require an Industrial Licence in terms of the locational policy
notified by Government under the New Industrial Policy of 1991.
all proposals relating to acquisition of shares in an existing Indian company in
favour of a foreign/NRI/OCB investor.
What are the other modes of Foreign Direct Investments?
Explain Preference Shares?
Foreign Investment through Global Depository Receipts (GDR)/American Deposit
Receipts (ADR)/Foreign Currency Convertible Bonds (FCCB) is treated as Foreign
Direct Investment.
Indian companies are allowed to raise equity capital in the international market
through the issue of GDR/ADRs/FCCBs. These are not subject to any ceiling on
Foreign investment through preference shares is treated as foreign direct
investment. Proposals are processed either through the automatic route or FIPB
as the case may be:
- Foreign investment in preference share is considered as part of share capital
and falls outside the External Commercial Borrowing (ECB) guidelines/capital.
- Preference shares to be treated as foreign direct equity for purpose of sectoral
capitals on foreign equity, where such capitals are prescribed, provided they
carry a conversion option. If the preference shares were structured without such
conversion option, they would fall outside the foreign direct equity capital.
Foreign Companies {as per Companies Act, 1956}

Q. 1. What is a foreign company?
When a company is called a 'foreign company' and a 'foreign controlled
Ans 1. The terms 'foreign company' and 'foreign controlled company' are
explained as follows:
1. Meaning of a 'foreign company'
What is the meaning of a foreign company (Section 591)?
As per Section 591, a company shall be a foreign company if(a) It is incorporated outside India; and
(b) It has established a place of business in India.
Discuss establishment of place of business in India by estoppels?
What is foreign controlled company?
Place of business in India is a must. It must be shown that the company has
more or less a permanent location in India from which it regularly conducts
business. At least some degree of regularity in the conduct of business should
be shown. Following points may be noted:
(a) If a company incorporated outside India employs agents in India but has no
office or place of business in India, it will not be a foreign company.
(b) A company is said to have a place of business in India if it has a specified or
identifiable place at which it carries on business such as an office, store house,
godown or other premises and has some concrete connection between the
locality and business of the company. A mere occasional connection would not
be sufficient. [Deverall v. Grant Advertising Inc., (1955) 25 Comp Cas 37].
(c) Where the representatives of a company incorporated outside India
frequently visit and stay in a hotel for looking after the purchase of machinery
and other articles, it may be said that the company has a place of business in
the hotel. (Re, Tovarishestvo Manufacture Liudvig Rabenek, 1944 Ch 404).
(d) Where a company incorporated outside India uses the premises in India for
storing works of art and for viewing of works of art stored there, the company
has established a place of business in India.

(e) Even if a representative of a company, incorporated outside India, visits

India and elicits orders from the customers, the company can not be said to
have established a place of business in India, if the representative has no
authority to make contracts on behalf of the company.
(f) Where a company incorporated outside India maintains a liaison office it
would also amount to establishment of a place of business in India even if no
trading or manufacturing activity is carried on at the liaison office.
(g) A share transfer office or share registration office constitutes a place of
business (Section 602).
Section 592 requires a company incorporated outside India to submit to the
registrar, certain documents within 30 days of establishment of a place of
business in India. As such, where a company filed such documents with the
registrar, it amounted to admission of the fact of establishment of a place of
business in India. [Framroze Rustomji Paymaster v. British Burmah Petroleum
Company. Ltd. (1976) 46 Comp Cas 87].
It means a company in which the majority shareholding and voting power is held
by foreign individuals and/or bodies corporate. Such a company may be
incorporated in India or outside India. Where it is incorporated in India, all the
provisions of the Companies Act, 1956 apply to it. Where it is incorporated
outside India, no provision of the Companies Act shall apply to it. However, if it
establishes a place of business in India, it shall be covered in the definition of
foreign company and consequently the provisions of Sections 592 to 602 shall
apply to it.
This section seeks to have more control over such foreign companies that are
foreign companies only in name, i.e., the companies which are incorporated
outside India, but carry on practically the entire business in India.
What is the case if Indians holding 50% share capital in a foreign
company [Section 591(2)]?
Where not less than 50% of the paid-up share capital of a foreign company is
held by Indian citizens or bodies corporate incorporated in India, whether singly
or in the aggregate, such a foreign company will be treated as an Indian
company in respect of its Indian business. It shall comply with such provisions of
the Act as may be prescribed, as if it were a company incorporated in India.
Foreign companies in india and corporate law
What is a Foreign Company?
Corporate law in India has for several years relied on its English counterpart.
The same is true with the provisions governing foreign companies. The relevant
sections of the Indian Companies Act, 1956 ("the Act") closely follow

Sections 408 to 423 of the English Act save for some sections which have no
application to India.
Sections 591 to 608 of the Act are relevant and provide in detail the duties of a
foreign company in terms of supplying information to the Registrar of
Companies, submitting account conditions on issue of prospectus, registration
charges on properties held by it in India, and the like. This article, which does
not claim to be exhaustive, attempts to deal with some of the provisions in the
Act which affect foreign companies.
Section 591 of the Act provides that Sections 592 to 608 shall apply to all
foreign companies. A foreign company falls under the following two heads: a company incorporated outside India which, after the commencement of the
Act (1 April, 1956), establishes a place of business within India; and
a company incorporated outside India which has, before the commencement
of this Act, established a place of business within India and continues to have an
established place of business within India at the commencement of this Act.
The foreign company must be distinguished from a "foreign controlled
company"; the latter means a company (foreign or Indian) in which a majority
shareholding and voting power is in the hands of foreign individuals and/or
bodies corporate.
"Place of business" extends to having a specified or identifiable place at which it
carries on business, like an office, store house or godown or having a share
transfer or registration office or maintaining a liaison or branch office.
"Establish" would imply having a more or less permanent location from which
the company habitually or with some degree of regularity conducts its business.
"Carrying on business" by a company would be satisfied if its business is carried
on at a fixed and definite place in India for a sufficiently and reasonably long
period of time [P.J. Johnson v. Astrofiel Armandorn (1989) 3 CLJ 1].
Explain the initial obligations of the Foreign Company?
Explain the continuing obligations of the Foreign Company?
A foreign company of which more than 50 per cent paid-up share capital (equity
or preference) is held by Indian citizens or bodies corporate, would attract
compliance with more provisions than are stipulated below.
Foreign companies shall within 30 days of establishing a place of business in
India deliver to the Registrar of Companies for Registration (Section 592) the
following documents-

A certified copy of the charter, statutes, or memorandum and articles of the

company or other instruments constituting or defining the constitution of the
company. If the instrument is not in English language, a certified translation
thereof should be provided;
The full address of the registered or principal office of the company;
A list of the directors and secretary of the company with prescribed particulars
as specified;
The name and address or the names and addresses of some one or more
persons resident in India, authorised to accept on behalf of the company,
service of process and any notices or other documents required to be served on
the company; and
The full address of the office of the company in India which is to be deemed its
principal place of business in India.
The filing shall be done at two places:
with the Principal Registrar of Companies at New Delhi, the Capital of India and
with the Registrar of Companies of the State having jurisdiction where the
principal place of business of the company is situated. Filing fees shall, however,
be done only with the former and not the latter.
Certification of documents shall be in accordance with Rule 16 of the Companies
(Central Government's) Rules and Forms, 1956. Translation shall be in
accordance with Rule 17.
An Indian company is a "person" under Indian law and can be authorised by a
foreign company to accept service on its behalf through the Indian directors of
the former company.
These may be summarised as Name of the foreign company
Section 595 obliges every foreign company to conspicuously exhibit on the
outside of every office or place of business where it carries on business in India,
its name and country of incorporation, in letters easily legible in English
characters and also in the local language (where it is situated). It must cause
both these details also to be stated in all letter-heads, business letters, billheads and letter papers, and in all notices and other official publications of the
company. It must similarly give notice of the fact that the liability of its members
is limited, if that is so,
Notifying alterations by delivering a return

Section 593 provides that if any alteration is made or occurs in the charter,
statutes, memorandum and articles of association of a foreign company or other
instrument constituting or defining its constitution, its registered or principal
office, its directors or secretary, the name or address of any of its authorised
representatives in India or its principal place of business, the foreign company
shall within a period of 30 days of the alteration, deliver to the Registrar for
registration, a return containing the details of alteration.
It may be noted that changes in particulars of directors and secretary, as
originally notified, need not be delivered.
The provisions concerning the accounts of a foreign company are detailed in
Section 594. It lays down the general obligation - once in every calendar year to
make out a balance sheet and profit and loss account in respect of its Indian
business, under the presumption that it were an Indian company, giving details
also of its subsidiaries and to deliver three copies of the documents to the
Registrar. When not in English, a certified translation should also be annexed. A
list of all places of business established by the foreign company in India with
reference to which the balance sheet is made out should also be sent regularly.
In other words, the foreign company shall maintain books of accounts of its
Indian business and file, every year, three copies of its world accounts (within
nine months from the close of the financial year), Indian business accounts
(within nine months from the close of the financial year) and a list of places of
business established in India.
In respect of its Indian business, the foreign company is required to maintain at
its principal place of business in India, proper books of accounts with respect to
all sums of money received and expended by the company and the matters in
respect of which the receipt and expenditure take place, all sales and purchases
of goods by the company, and all assets and liabilities of the company.
Where the foreign company sets up a liaison office in India, it shall prepare a
"statement of receipts and payments" and a "statement of assets and liabilities"
instead of a balance sheet and profit and loss account. These shall be in the
prescribed form and shall be duly audited, the auditor giving his report as to the
truth and fairness of the receipt and payments during the financial year.
How the service on the Foreign Company is made?
The Government has granted several exemptions and made modifications in
regard to the above, in the light of its general policy as to foreign companies.
Exemptions are also given to liaison offices. Special clarifications are issued in
regard to foreign shipping, airline and insurance companies and also trade and
industrial activities of foreign companies.

Service of any process, notice or any other document required to be served on a

foreign company shall be deemed to be sufficiently served if addressed to the
authorised person and left at, or sent by post to, the address registered with the
What is the case if a Foreign Company ceasing to have a Place of
Business in India?
If the company defaults in delivering details of the authorised person to the
Registrar, or if such person is dead, or ceases to reside in India or refuses to
accept service on behalf of the company, a document may be served by leaving
it at, or sending it by post to, any place of business established by the company
in India.
Mode of service shall be as above, and not according to the Code of Civil
Procedure, 1908, being the civil procedural legislation in India.
A subsidiary could be considered as a proper agent and authorised person of the
principal foreign company for the purposes of service.
Section 597, inter alia, provides that if any foreign company ceases to have a
place of business in India, it shall forthwith give notice thereof to the Registrar,
and from such date, all the obligations to deliver documents, cited above, shall
cease, provided it has no other place of business in India.
Two sections merit particular attention Section 599 states that any failure by a foreign company to comply with the
above specified obligations shall not affect the validity of any contract, dealing
or transaction entered into by it or its liability to be sued in respect thereof. The
company shall, however, not be entitled to bring any suit, claim any set-off,
make any counter claim or institute any legal proceeding in respect of any such
contract, dealing or transaction, until it has complied with the obligations.
Penalties for non-compliance are laid down in Section 598. It provides that if
any foreign company fails to comply with its specified obligations, the company
and every officer or agent of the company who is in default shall be punishable
with a fine of up to 1,000 Indian Rupees, and in case of a continuing offence,
with an additional fine of up to 100 Indian Rupees for every day during which
the default continues. The offence is compoundable.
What is the effect of the Foreign Company not complying with its
Under the provisions of Section 600, a foreign company has to file the document
relating to the particulars of a charge within 30 days of the date of the creation
of charge with the principal Registrar as well as the Registrar of the State in
which the company's principal place of business is situated.

This is in respect of charges on properties in India which are created by a foreign

company after 15 January, 1937 and charges on property in India which is
acquired by any foreign company after 15 January, 1937.
Where a charge is created or the completion of the acquisition of the property
which takes place outside India, 30 days after the day on which the instrument
creating or evidencing the charge or a copy thereof could, in due course of post
and if dispatched with due diligence, have been received in India, shall be the
time available to file the charge with the Registrar.
Discuss the Registration of Charges in respect to a Foreign Company?
The charges which have to be registered are a charge for the purpose of securing any issue of debentures;
a charge on uncalled share capital of the company;
a charge on any immovable property, wherever situated, or any interest
a charge on any book debts of the company;
a charge, not being a pledge, on any movable property of the company;
a floating charge on the undertaking or any property of the company including
a charge on calls made but not paid;
a charge on a ship or any share in a ship;
a charge on goodwill, on a patent or a licence under a patent, on a trade
mark, or on a copyright, or a licence under a copyright.
Non-registration would not affect the transaction altogether; however, the
security created by the charge becomes void as against the liquidator and other
A foreign company is also under an obligation to provide inspection and copies
of the trust deed recording the creation of a charge for securing any issue of
debentures to the debenture holder.
Give details of issue of prospectuses of Foreign Companies?
Sections 603 to 608 relate to the issue of a prospectus and allotment by foreign

No person shall issue, circulate or distribute in India any prospectus offering for
subscription, shares in or debentures of a foreign company (whether
incorporated or to be incorporated, and whether it has or has not established, or
when formed will or will not establish, a place of business in India), unless the
prospectus is dated and provides particulars of the following matters: The instrument constituting or defining the constitution of the company;
The enactments or provisions having the force of enactments, by or under
which the incorporation of the company was effected;
Any address in India where the said instrument, enactments or provision, or
copies thereof, and if the same are not in English, a translation thereof, certified
in the prescribed manner, may be inspected;
The date on which and the country in which the company was incorporated;
Whether the company has on established place of business in India, and if so,
the address of its principal office in India.
If the liability of the members of the company is limited, it must cause notice of
that fact also to be stated in the prospectus.
The first three requirements do not apply in case of issue of prospectus more
than two years after the date on which the company is entitled to commence
Similarly, no person shall issue a form of application for shares in or debentures
of such a company or intended company unless the form is issued with a
prospectus which complies with the above (save when issued in connection with
a bona fide invitation to enter into an underwriting agreement with respect to
the shares or debentures).
Where such prospectus includes a statement purporting to be made by an
"expert", it must be ensured that such person has given, or has before delivery
of the prospectus for registration not withdrawn, his written consent to the issue
of the prospectus with the statement included in the form and context in which
it is included, or there does not appear in the prospectus a statement that he
has given and has not withdrawn his consent as aforesaid.
"Expert" includes an engineer, a valuer, an accountant, and any other person
whose profession gives authority to a statement made by him.
Before issue of the prospectus, it has to be delivered (with specified
attachments) for registration to the Principal Registrar in the form of a copy duly
certified by the Chairman and two other directors of the company as having
been approved by the managing body of the company. Material mis-statements

in the prospectus attract civil, but not criminal penalties, in the case of foreign
On reading Section 582(b) of the Act, it is clear that the provisions of
Part X of the Act dealing with winding-up of unregistered companies shall apply
to foreign companies, whatever the number of their members
[1985 (58) Comp Cas 285].
A foreign company incorporated in a foreign country may be wound up in India if
it has an office and assets here, and if a pending foreign liquidation does not
affect the jurisdiction to make a winding-up order.
Where a foreign company is already being wound-up in the country of its
domicile, the winding-up in India will be ancillary to the foreign liquidation, and
the liquidator's powers in this country are restricted to dealing with assets in
this country [Re Russian and English Bank Ltd., 1932 (2) Comp Cas 424].
Describe Winding-Up of Foreign Companies?
A subsequent winding-up in the foreign country does not affect prior
proceedings taken in India, and the liquidator's discretion is not fettered [1958
(28) Comp Cas 204]
Section 584 of the Act provides that where a body corporate incorporated
outside India which has been carrying on business in India ceases to carry on
business in India, it may be wound-up as an unregistered company,
notwithstanding that the body corporate has been dissolved or otherwise
ceased to exist as such under or by virtue of the laws of the country under
which it was incorporated. Such winding-up can only be made through the court.
Where a foreign company ceases to carry on business in India or its substratum
is gone or it carries on ultra vires business, it may be wound-up under the 'just
and equitable' ground; (1972 (42) Comp Cas 197 Bom).

Part V
Corporate liability in Environment Protection
Relevant provisions relating to environmental protection laws
The Water (Prevention and Control of Pollution) Act, 1974
Discuss briefly the salient features of the law relating to water

Section 20(3). Without prejudice to the provisions of sub-section (2), a State

Board may, with a view of preventing or controlling pollution of water, give
directions requiring any person incharge of any establishment where any
industry, operation or process, or treatment and disposal system is carried on,
to furnish to it information regarding the construction, installation or operation
of such establishment or of any disposal system or of any extension or addition
thereto in such establishment and such other particulars as may be prescribed.
Discuss the liability in offences by companies?
(1) Where an offence under this Act has been committed by a company, every
person who at the time the offence was committed was incharge of, and was
responsible to the company for the conduct of the business of the company, as
well as the company, shall be deemed to be guilty of the offence and shall be
liable to be proceeded against and punished accordingly:
Provided that nothing contained in this sub-section shall render any such person
liable to any punishment provided in this Act if he proves that the offence was
committed without his knowledge or that he exercised all due diligence to
prevent the commission of such offence.
(2) Notwithstanding anything contained in sub-section (1), where an offence
under this Act has been committed by a company and it is proved that the
offence has been committed with the consent or connivance of, or is
attributable to any neglect on the part of, any director, manager, secretary or
other officer of the company, such director, manager, secretary or other officer
shall also be deemed to be guilty of that offence and shall be liable to be
proceeded against and punished accordingly.
Explanation for the purpose of this section,
(a) "company means any body corporate, and includes a firm or other
association of individuals; and
(b) "Director" in relation to a firm means a partner in the firm.
The Air (Prevention and Control of Pollution) Act, 1981
Discuss the liability in offences by companies with reference to Air Act,
(1) Where an offence under this Act has been committed by a company, every
person who, at the time the offence was committed, was directly incharge of,
and was responsible to the company for the conduct of the business of the
company, as well as the company, shall be deemed to be guilty of the offence
and shall be liable to be proceeded against and punished accordingly:

Provided that nothing contained in this sub-section shall render any such person
liable to any punishment provided in this Act, if he proves that the offence was
committed without his knowledge or that he exercised all due diligence to
prevent the commission of such offence.
(2) Notwithstanding anything contained in this sub-section (1), where an offence
under this Act has been committed by a company and it is proved that the
offence has been committed with the consent or connivance of, or is
attributable to any neglect on the part of, any director, manager, secretary or
other officer of the company, such director, manager, secretary or other officer
shall also be deemed to be guilty of that offence and shall be liable to be
proceeded against and punished accordingly.
Explanation _ For the purpose of this section,
(a) "company" means any body corporate, and includes a firm or other
association of individuals; and
(b) "Director" in relation to a firm, means a partner in the firm.
The Environment (Protection) Act, 1986
Discuss the liability in offences by companies with reference to
Environment Act?
(1) Where any offence under this Act has been committed by a company, every
person who, at the time the offence was committed, was directly incharge of,
and was responsible to, the company for the conduct of the business of the
company, as well as the company, shall be deemed to be guilty of the offence
and shall be liable to be proceeded against and punished accordingly:
Provided that nothing contained in this sub-section shall render any such person
liable to any punishment provided in this Act, if he proves that the offence was
committed without his knowledge or that he exercised all due diligence to
prevent the commission of such offence.
(2) Notwithstanding anything contained in sub-section (1), where an offence
under this Act has been committed by a company and it is proved that the
offence has been committed with the consent or connivance of, or is
attributable to any neglect on the part of, any director manager, secretary or
other officer of the company, such director, manager, secretary or other officer
shall also deemed to be guilty of that offence and shall be liable to be
proceeded against and punished accordingly.
Explanations- For the purpose of this section,
(a) "company" means any body corporate and includes a firm or other
association of individuals;

(b) "Director" in relation to a firm, means a partner in the firm.

the Indian Penal Code, 1860 (Relevant Provisions)
What is the criminal liability in Negligent Act. Likely to Spread
Infection of Disease Dangerous to life?
Whoever unlawfully or negligently does any act which is, and which he knows or
has reason to believe to be, likely to spread the infection of any disease
dangerous to life, shall be punished with imprisonment of either description for
a term which may extend to six months, or with fine, or with both.
Discuss the criminal liability fouling Water of Public Spring or
Whoever voluntarily corrupts or fouls the water of any public spring or reservoir,
so as to render it less fit for the purpose for which it is ordinarily used, shall be
punished with imprisonment of either description for a term which may extend
to three months, or with fine which may extend to Rs. 500 or with both.
Discuss the criminal liability of punishment for Public Nuisance in
Cases not otherwise provided for?
Whoever commits a public nuisance in any case, not otherwise punishable by
this Code, shall be punished with fine which may extend to two hundred rupees.
Define mischief?
Whoever with intent to cause, or knowing that he is likely to cause, wrongful
loss or damage to the public or to any person, causes the destruction of any
property, or any such change in any property or in the situation thereof as
destroys or diminishes its value or utility, or affects it injuriously, commits
Explanation 1: It is not essential to the offence of mischief that the offender
should intend to cause loss or damage to the owner of the property injured or
destroyed. It is sufficient if he intends to cause, or knows that he is likely to
cause, wrongful loss or damage to any person by injuring any property, whether
it belongs to that person or not.
Explanation 2: Mischief may be committed by an act affecting property
belonging to the person who commits the act, or to that person and others
What is the punishment under Section 426 for mischief?

Whoever commits mischief shall be punished with imprisonment of either

description for a term which may extend to three months, or with fine, or with
Explain the criminal liability in Sec. 511. Punishment for Attempting to
Commit Offences Punishable with Imprisonment for Life or other
Whoever attempts to commit an offence punishable by this Code with
imprisonment for life or imprisonment, or to cause such an offence to be
committed, and in such attempt does any act towards the commission of the
offence, shall, where no express provision is made by this Code for the
punishment of such attempt, be punished with imprisonment of any description
provided for the offence, for a term which may extend to one-half of the
imprisonment for life or, as the case may be, one-half of the longest term of
imprisonment provided for that offence, or with such fine as is provided for the
offence, or with both.
Relevant Section under the Code of Criminal Procedure
B. Public nuisances
Briefly discuss Sec. 133. Conditional order for removal of nuisance?
(1) Whenever a District Magistrate or a Sub-Divisional Magistrate or any other
Executive Magistrate specially empowered in this behalf by the State
Government, on receiving the report of a police officer or other information and
on taking such evidence (if any) as he thinks fit, considers
(a) that any unlawful obstruction or nuisance should be removed from any
public place or from any way, river or channel which is or may be lawfully used
by the public; or
(b) that the conduct of any trade or occupation, or the keeping of any goods or
merchandise, is injurious to the health or physical comfort of the community,
and that in consequence such trade or occupation should be prohibited or
regulated or such goods or merchandise should be removed or the keeping
thereof regulated; or
(c) that the construction of any building, or, the disposal of any substance, as is
likely to occasion conflagration or explosion, should be prevented or stopped; or
(d) that any building, tent or structure, or any tree is in such a condition that it
is likely to fall and thereby cause injury to persons living or carrying on business
in the neighbourhood or passing by and that in consequence the removal, repair
or support of such building, tent or structure, or the removal or support of such
tree, is necessary; or (e) that any tank, well or excavation adjacent to any such

way or public place should be fenced in such manner as to prevent danger

arising to the public; or
(f) that any dangerous animal should be destroyed, confined or otherwise
disposed of, such Magistrate may make a conditional order requiring the person
causing such obstruction or nuisance, or carrying on such trade or occupation,
or keeping any such goods or merchandise, or owning, possessing or controlling
such building, tent, structure, substance, tank, well or excavation, or owning or
possessing such animal or tree, within a time to be fixed in the order.
(i) to remove such obstruction or nuisance; or
(ii) to desist from carrying on, or to remove or regulate in such manner as may
be directed, such trade or occupation, or to remove such goods or merchandise,
or to regulate the keeping thereof in such manner as may be directed; or
(iii) to prevent or stop the construction of such building, or to alter the disposal
of such substance; or
(iv) to remove, repair or support such building, tent or structure, or to remove or
support such trees; or
(v) to fence such tank, well or excavation; or
(vi) to destroy, confine or dispose of such dangerous animal in the manner
provided in the said order;
or, if he objects to do so, to appear before himself or some other Executive
Magistrate subordinate to him at a time and place to be fixed by the order, and
show cause, in the manner hereinafter provided, why the order should not be
made absolute.
Explain Sec. 144. Power to issue order in urgent cases of nuisance or
apprehended danger
(3) No order duly made by a Magistrate under this section shall be called in
question in any Civil Court.
ExplanationA "public place" includes also property belonging to the State,
camping grounds and grounds left unoccupied for sanitary or recreative
(1) In cases where, in the opinion of a District Magistrate, a Sub-Divisional
Magistrate or any other Executive Magistrate specially empowered by the State
Government in this behalf, there is sufficient ground for proceeding under this
section and immediate prevention or speedy remedy is desirable, such
Magistrate may, by a written order stating the material facts of the case and
served in the manner provided by Section 134, direct any person to abstain

from a certain act or to take certain order with respect to certain property in his
possession or under his management, if such Magistrate considers that such
direction is likely to prevent, or tends to prevent, obstruction, annoyance or
injury to any person lawfully employed, or danger to human life, health or
safety, or a disturbance of the public tranquillity, or a riot, or an affray.
(2) An order under this section may, in cases of emergency or in cases where
the circumstances do not admit of the serving in due time of a notice upon the
person against whom the order is directed, be passed ex parte.
(3) An order under this section may be directed to a particular individual, or to
persons residing in a particular place or area, or to the public generally when
frequenting or visiting a particular place or area.
(4) No order under this section shall remain in force for more than two months
from the making thereof:
Provided that, if the State Government considers it necessary so to do for
preventing danger to human life, health or safety or for preventing a riot or any
affray, it may, by notification, direct that an order made by a Magistrate under
this section shall remain in force for such further period not exceeding six
months from the date on which the order made by the Magistrate would have,
but for such order, expired, as it may specify in the said notification.
(5) Any Magistrate may, either on his own motion or on the application of any
person aggrieved, rescind or alter any order made under this section, by himself
or any Magistrate subordinate to him or by his predecessor-in-office.
(6) The State Government may, either on its own motion or on the application of
any person aggrieved, rescind or alter any order made by it under the proviso to
sub-section (4).
(7) Where an application under sub-section (5), or sub-section (6) is received,
the Magistrate, or the State Government, as the case may be, shall afford to the
applicant an early opportunity of appearing before him or it, either in person or
by pleader and showing cause against the order, and if the Magistrate or the
State Government, as the case may be, rejects the application wholly or in part,
he or it shall record in writing the reasons for so doing.
the Factories Act, 1948
Define cleanliness under Factories Act, 1948?
(1) Every factory shall be kept clean and free from effluvia arising from any
drain, privy or other nuisance, and in particular

(a) accumulation of dirt and refuse shall be removed daily by sweeping or by

any other effective method from the floors and benches of workrooms and from
staircases and passages, and disposed of in a suitable manner;
(b) the floor of every workroom shall be cleaned at least once in every week by
washing, using disinfectant, where necessary, or by some other effective
(c) where a floor is liable to become wet in the course of any manufacturing
process to such extent as is capable of being drained, effective means of
drainage shall be provided and maintained;
(d) all inside walls and partitions, all ceiling or tops of rooms and all walls, sides
and tops of passages and staircases shall
(i) where they are painted otherwise than with washable water paint or
varnished, be repainted or revarnished atleast once in every period of five
(ia) where they are painted with washable water paint, be repainted with at
least one coat of such paint at least once in every period of three years and
washed at least once in every period of six months;
(ii) where they are painted or varnished or where they have smooth impervious
surfaces, be cleaned at least once in every period of fourteen months by such
method as may be prescribed;
(iii) In any other case, be kept whitewashed or colour washed, and the
whitewashing or colour washing shall be carried out at least once in every once
in every period of fourteen months;
(dd) all doors and window frames and other wooden or metallic framework and
shutters shall be kept painted or varnished and the painting or varnishing shall
be carried out at least once in every period of five years;
(e) The dates on which the processes required by Clause (d) are carried out shall
be entered in the prescribed register.
(2) If, in view of the nature of the operations carried on in a factory or class or
description of factories or any part of a factory or class or description of
factories, it is not possible for the occupier to comply with all or any of the
provisions of sub-section (1), the State Government may by order exempt such
factory or class or description of factories or part from any of the provisions of
that sub-section and specify alternative methods for keeping the factory in a
clean state.
How the disposal of wastes and effluents should be carried out?

(1) Effective arrangements shall be made in every factory for the treatment of
wastes and effluents due to the manufacturing process carried on therein, so as
to render them innocuous, and for their disposal.
(2) The State Government may make rules prescribing the arrangements to be
made under sub-section (1) or requiring that the arrangements made in
accordance with sub-section (1) shall be approved by such authority as may be
Explain Sec.





Information by


(1) The occupier of every factory, involving a hazardous process, shall disclose
in the manner prescribed all information regarding dangers, including health
hazards and the measures to overcome such hazards arising from the exposure
to or handling of the materials or substances in the manufacture, transportation,
storage and other processes, to the workers employed in the factory, the Chief
Inspector, the local authority within whose jurisdiction the factory is situate and
the general public in the vicinity.
(2) The occupier shall, at the time of registering the factory involving a
hazardous profess, lay down a detailed policy with respect to the health and
safety of the workers employed therein and intimate such policy to the Chief
Inspector and the local authority and, thereafter, at such intervals as may be
prescribed, inform the Chief Inspector and the local authority of any change
made in the said policy.
(3) The information furnished under sub-section (1) shall include accurate
information as to the quantity, specifications and other characteristics of wastes
and the manner of their disposal.
(4) Every occupier shall, with the approval of the Chief Inspector, draw up an onsite emergency plan and detailed disaster control measures for his factory and
make known to the workers employed therein and to the general public living in
the vicinity of the factory the safety measures required to be taken in the event
of an accident taking place.
(5) Every occupier of a factory shall, (a) if such factory engaged in a
hazardous process on the commencement of the Factories (Amendment) Act,
1987 (2 of 1987), within a period of thirty days of such commencement; and (b)
if such factory proposes to engage in a hazardous process at any time after
such commencement, within a period of thirty days before the commencement
of such process, inform the Chief Inspector of the nature and details of the
process in such from and in such manner as may be prescribed.
(6) Where any occupier of a factory contravenes to the provisions of sub-section
(5), the licence issued under Section 6 to such factory shall, notwithstanding

any penalty to which the occupier of factory shall be subjected to under the
provisions of this Act, be liable for cancellation.
(7) The occupier of a factory involving a hazardous process shall, with the
previous approval of the Chief Inspector lay down measures for the handling,
usage, transportation and storage of hazardous substances inside the factory
premises and the disposal of such substances outside the factory premises and
publicise them in the manner prescribed among the workers and the general
public living in the vicinity.
Discuss Sec. 96A. Penalty for contravention of the provisions of
Sections 41B 41C and 41H?
(1) Whoever fails to comply with or contravenes to any of the provisions of
Sections 41B, 41C or 41H or the rules made there under, shall, in respect of
such failure or contravention, be punishable with imprisonment for a term which
may extend to seven years and with fine which may extend to two lakh rupees,
and in case the failure or contravention continues, with additional fine which
may extend to five thousand rupees for every day during which such failure or
contravention continues after the conviction for the first such failure or
(2) If the failure or contravention referred to in sub-section (1) continues beyond
a period of one year after the date of conviction, the offender shall be
punishable with imprisonment for a term which may extend to ten years.
The Bhopal toxic gas leak tragedy
The Bhopal crisis was triggered by a technological accident: 45 tons (1,00,800
IB) of methyl isocyanate (MIC) gas escaped from two underground storage tanks
at a Union Carbide pesticide plant. The accident occurred between 10 p.m. (2
December) and 1.30 a.m. (3 December) when the plant was on second shift and
the surrounding population was asleep in slum "hutments" that are densely
packed together in this part of Bhopal (fig.5.1).
Leaked gases were trapped under a nocturnal temperature inversion in a
shallow bubble that blanketed the city within five miles of the plant. Next
morning, over 2,000 people were dead and 3,00,000 were injured. Another
15,000 people died in subsequent months owing to injuries caused by the
accident. At least 7,000 animals perished but damage to the natural
environment remains largely unassessed (Prasad and Pandey 1985).
Emergency services were completely overwhelmed and confusion was rampant
in the affected neighbourhoods. Police instructed people to run away from the
area, but many of those who did so inhaled large amounts of toxic MIC and
succumbed to its effects. Residents were unaware that the simple act of
covering their faces with wet clothes and lying indoors on the floor provided

effective protection against the gas. That night, and in the days that followed,
nearly 4,00,000 people fled the city in a haphazard and uncontrolled
evacuation. Two weeks later, during Government attempts to neutralize the
plant's remaining MIC, another wave of mass flight involved 2,00,000 people.
(Shrivastava 1992; Diamond 1985; Morehouse and Subramanian 1988).