<br>

CONTENTS

1. Banking Regulation Act, 1949

... 1.1 - 1.12

2. The Negotiable Instrument Act, 1881 2.1 -2.26

3. The Reserve Bank of India Act, 1934 3.1 -3.24

4. Securitisation and Reconstruction of Financial Assets and

Enforcement of Security Interest Act, 2002............. 4.1 - 4.20

<br>

SYLLABUS
1. Banking Regulation Act, 1949
• Provisions relating to- Definition of bank (Sec. 5B and 5C), Business of Banking

Companies (Sec. 6), Restrictions on business of banking companies (Sec.8, 19 and

20), Captal Structure (Sec. 12), Powers of the RBI (Sec. 21, 22 and 36 to 36AD),
Applicability of the Act to Cooperative Banks (Sec. 56), amendments of BRA1949
up to 2012, Banking Regulation (Amendment) Bill 2017

2. The Negotiable Instrument Act, 1881

• Provisions relating to: Definition of negotiable Instrument (Sec- 13), Promissory note

(Sec -4), Bill of exchange (Sec -5), and Cheque (Sec -6), Comparative Study of
Negotiable Instruments Parties to negotiable instrument (Section -7), Holder (Sec -8),

Holder due course (Sec -9), Payment in due course (Sec -10), Negotiation (Sec -
14), Endorsement (Sec -15), Dishonour of Negotiable Instruments (Sec -91-92),

Noting and Protest (Sec -99-104-A), Penalties in case of dishonour of certain

cheques for insufficiency of funds in the account (Sec. 138 to 147), Negotiable
Instruments (Amendment and Miscellaneous Provisions) Act, 2002: Electronic
Cheques/ Truncated Cheques

• Negotiable Instruments (Amendment) Act, 2018- Empowers the Appellate Court to

order payment pending the appeal against conviction (Sec. 148)

3. (A) The Reserve Bank of India Act, 1934

• Provisions relating to: Incorporation, Capital management and Business (Sec 3 to

19), Central Banking functions (Sec -20 to 45),Regulatory and Supervisory

Collection and fumishing of credit infomation (45 A to 45 G) ,Penalties (Sec 58 B to

58 -G), RBI Act ( As Amended By Finance Act 2018)- Monetary Policy Committee
(Sec.45 ZA to 45 ZO)

(B) RBI and Requlation of Digital Financial Services in India, 2012 to 2016.
<br>

4. Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002
. Provisions relating to: Preliminary
(Sectionl and 2) Regulation of securitisation and

reconstruction of financial assets and financial institutions (Section 3 to 12 A)

Enforcement of security interest (Section 13 to 19) Central registry (Section 20 to 26)
Offences and penalties (Section 27 to 30) Miscellaneous (Section 31 to 41) Relevant

amendments between 2004 and 2008 and Amendments in SARFAESI Act in 2016:
(Taking possession over collateral: Audit and inspection).
<br>

Chapter 1.
Banking Regulation Act, 1949
Contents .
1.1 Provisions relating to Definition of Bank (Sec. 5B and 5C), Business of Banking
Companies (Sec. 6), Restrictions on Business of Banking Companies (Sec. 8, 19 and
20), Capital Structure (Sec.12), Powers of the RBI (Sec. 21, 22 and 36 to 36AD),
Applicability of the Act to Cooperative Banks (Sec. 56), Amendments of BRA, 1949
up to 2012, Banking Regulation (Amendment) Bill 2017
1.1.1 Definition of Bank (Sec. 5B and 5C)
1.1.2 Objectives of the Banking Regulation Act, 1949
1.1.3 Business of Banking Companies (Sec. 6)
1.1.4 Restrictions on Business of Banking Companies (Sec. 8, 19 and 20)
1.1.5 Capital Structure (Sec. 12)
1.1.6 Powers of the RBI (Sec. 21,22 and 36 to 36 AD)
1.1.7 Applicability of the Act to Cooperative Banks (Sec. 56)
1.1.8 Amendments of BRA, 1949 upto 2012
1.1.9 Banking Regulation (Amendment) Bill, 2017
• Questions for Discussion

1.1 PROVISIONS RELATING TO DEFINITION OF BANK (SEC. 5B AND

5C), BUSINESS OF BANKING COMPANIES (SEC. 6), RESTRICTIONS
ON BUSINESS OF BANKING COMPANIES (SEC. 8, 19 AND 20),
CAPITAL STRUCTURE (SEC. 12), POWERS OF THE RBI (SEC. 21, 22
AND 36 TO 36 AD), APPLICABILITY OF THE ACT TO COOPERATIVE
BANKS (SEC. 56), AMENDMENTS OF BRA, 1949 UPTO 2012,
BANKING REGULATION (AMENDEMENT) BILL 2017
Banking Regulation Act, 1949- An Introduction
The Banking Regulation Act, passed by the Indian Parliament and enacted on March
16, 1949, became operative and regulated all banks. It was passed as the Banking
Companies Act 1949, which went into effect on March 16, 1949, and was renamed the
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Legal Framework of Banking Banking Regulation Act, 1949

Banking Regulation Act 1949 on March 1, 1966.All Indian banking institutions are
governed by the Banking Regulation Act, 1949.
The Banking Regulation Act of 1949 was expanded to include those banks in 1966
that have paid-up share capital and excess reserves of one lakh rupees. The RBI controls
its operations and governed these banks. The Act gives the Reserve Bank of India (RBI)
the power to license banks, control shareholder ownership and voting rights, issue
directives regarding banking policy and when doing so is in the public interest, and
impose fines. Simply put, the act establishes an appropriate framework for the control
and oversight of commercial banking in our nation.
1.1.1 Definition of Bank (Sec. 5B and 5C)
As per Section 5(b) of "the Banking Regulation Act, 1949, "banking" means accepting.
for the purpose of lending or investing, of deposits of money from the public, repayable
on demand or otherwise, and withdrawable by cheque, draft, order, or otherwise."
Section 5(c) of the Act defines a banking company "as a company that transacts the
business of banking." The explanation in the section makes it clear that any company
that accepts deposits merely for the purpose of financing its business will not be treated
as a banking company.
A banking company is a company that accepts deposits of money for the purpose of
lending or investment from the public that is payable on demand (savings bank and
current accounts) or otherwise (after a period such as fixed deposits) and withdrawable
by cheque (Savings Bank and Current Accounts) or otherwise (by other instruments such
as fixed deposits).

1.1.2 Objectives of the Banking Regulation Act, 1949

1. To provide provisions that can control the business of banking in India.
2. To regulate the opening of branches and changing of locations of existing
branches.
3. Toestablish basic standards for bank capital.
4. To maintain a balance in the growth of banking institutions.
1.1.3 Business of Banking Companies (Sec.6 )

Under Section 6(1), A bank may engage in the following activities: borrowing and
lending money, purchasing and selling bills of exchange, promissory notes, coupons,

1.2
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Legal Framework of Banking Banking Regulation Act, 1949

drafts, bills of lading, railway receipts, warrants, and debentures, as well as trading in
stock, funds, shares, debentures, bonds, and foreign exchange.
Section 6 of the BRA, 1949 deals with businesses where companies, specifically
banking companies, may engage. Some of them include the following :
The borrowing, raising, or taking up funds; lending or advancing funds with or
without security: drawing, making, accepting, discounting, purchasing, selling,
accumulating, and dealing in bills of exchange, hundis, promissory notes, coupons,
drafts, bills of lading, railway receipts, warrants, debentures, certificates, scripts, and other
instruments and securities, whether transferable or negotiable or not.
1.1.4 Restrictions on Business of Banking Companies
(Sec.8, 19 and 20)
1. Sec.8 Prohibition of Trading : According to the legislation, banks are not
permitted to engage in direct or indirect trade in the sale and purchase of products or in
the bartering of items.
If the security is held or given, then this is an exception. Additionally, banking

institutions are prohibited from engaging in any bartering, selling, purchasing, or dealing
of products unless bills of exchange have been received for settlement or discussion.
2. Sec. 9 Non-Banking Assets : According to Sec. 9, "A banking company cannot
hold any immovable property, howsoever acquired, except for its own use, for any period
exceeding seven years from the date of acquisition thereof. The company is pernmitted,
within the period of seven years, to deal or trade in any such property for facilitating its
disposal"
3. Sec. 1O(a) Management : According to Section 10(a), individuals with specific
expertise or relevant experience in one or more of the following sectors shall make up at
least 51% of the total number of Board of Directors members of a financial firm:
Agriculture and Rural Economy, Banking. Accountancy, Cooperation, Economics,
Finance, Law, and Small Scale Industry.
4. Sec. 11 Minimum Capital and Reserves : According to Section 11, a banking firm
must have paid-up capital totaling more than twenty lakhs, if it is incorporated outside
of India and more than fifteen lakhs, if it has a place of business in either Kolkata or
Mumbai or both.

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Legal Framework of Banking Banking Regulation Act, 1949

5. Sec 19.(2) Aside from what is allowed by subsection (1), no banking institution
:

may control more than 30% of the paid-up share capital of any company. This includes

ownership as an absolute owner as well as a pledgee or mortgagee.

6. Sec.20: The restrictions on loans and advances to any of its directors are covered
by section 20 of the Banking Regulation Act of 1949. No banking company may provide
loans or advances using the shares as security.
No banking company enter into any commitment for granting any loan/advance to
or on behalf of:
(a) Any of its directors.
(b) Directors interested as partners, manager, employee or guarantor.
(c) Any individual in respect of whom any of its director is a partner/guarantor.

1.1.5 Capital Structure (Sec.12)

The Banking Regulation Act of 1949 is a key piece of legislation that regulates
banking and financial institutions in India. Section 12 of this Act pertains to the "Capital
Structure" of banking companies. This section outlines the regulations and requirements
related to the capital structure of banks, including provisions related to the authorized
capital, paid-up capital, and other aspects of a bank's capitalization.
Sectionl12 : Capital Structure- No banking company can carry on business in India,
unless it meets the requirements listed below:
1. Its subscribed capital is not less than half of its authorized capital,
2. Its paid-up capital is not less than half of its subscribed capital.
Primary Objectives of Capital Structure (Section 12)
Section 12 of the Banking Regulation Act, 1949 in India outlines the objectives and
regulations related to the capital structure of banking companies. The primary objectives
of this section include:
1.Authorized Capital : It specifies the maximum amount of capital that a banking
company can raise through the issuance of shares.
2. Paid-up Capital : It sets the minimum amount of capital that a banking company
must have through the actual issuance and payment for shares.

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Legal Framework of Banking Banking Regulation Act, 1949

3. Reserve Fund: mandates the creation of a reserve fund by the banking

It
company. This reserve fund is to be maintained to absorb losses before distributing
dividends and to meet various contingencies.
: It outlines rules regarding
4. Undivided Profits the distribution of undivided
profits. A portion of these profits must be transferred to a Reserve Fund before paying
dividends to shareholders.
5. Maintenance of Capital Adequacy : It ensures that banking companies maintain
a certain level of capital adequacy to safeguard the interests of depositors and maintain

the stability of the banking system.

6. Control Over Capital : It provides regulatory authorities with the power to
monitor and control the capital structure of banking companies to prevent over
leveraging and financial instability.
These objectives are designed to promote the stability, soundness, and integrity of
the banking system in India by ensuring that banking companies maintain adequate
capital to absorb losses and meet their financial obligations.(As per update in September
2021).
1.1.6 Powers of the RBI(Sec. 21,22 and 36 To 36 AD)
The Reserve Bank of India was established on April 1, 1935 in agreement with the
Reserve Bank of India Act, 1934. RBI fulfills the responsibilities of controller, regulator,
and supervisor. The RBI grants licenses to banks, inspects banking organizations,
establishes guidelines for audits, manages mergers and liquidations, and governs how
banks are run. The Reserve Bank of India holds several key concepts related to its powers
and functions. Some power under Sec. 21, 22 and 36 to 36 AD are as follows
Powers of the RBI (Section 21)
Section 21 of the Reserve Bank Act grants the Reserve Bank of India (RBI Act, 1934)
the authority to regulate and govern advances made by banking companies. As the
central bank of India, the RBI is entrusted with the task of developing and executing
monetary policies. This includes formulating guidelines on interest rates, lending
practices, risk management, and other related matters. The maximum advances that can
be granted to a specific company, firm, association of individuals, or an individual, taking
into account the paid-up capital, reserves, and deposits of a banking company.

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Legal Framework of Banking Banking Regulation Act, 1949

Right to Issue Bank Notes (Section 22)

In terms of Section 22 of the Act, Reserve Bank has the sole right to issue bank notes
or currency notes in India only except one rupee notes. Reserve Bank of India Act,1934
outlines, "The Bank shall have the sole right to issue bank notes in India, and may, for a
period which shall be fixed by the Central Government on the recommendation of the
Central Board, issue currency notes of the Government of India and the provisions of this
Act applicable to bank notes shall, unless a contrary intention appears, apply to all
currency notes of the Government of India issued either by the Central Government or
by the Bank in like manner as if such currency notes were bank notes, and references in
this Act to bank notes shall be construed accordingly."
Empowered to Caution or Prohibit Banking Companies (Section 36)
Under Section 36 of Banking Regulation Act, the RBI is empowered to caution or
prohibit any banking company regarding any transaction or class of actions. The Reserve
Bank may prohibit banking companies from entering into a particular sale and can advise
the banking company. It can also help the banking company by granting loans or
advances under Section 18.

Punishments for Certain Activities in relation to Banking Companies (Section

36AD)
Power of Central Government to acquire undertakings of banking companies in
certain cases. The restriction does not apply to any specific group or category of people
but to all people in general. Anyone who prevents someone from entering or leaving a
bank, doing banking transactions, or interfering with regular operations is subject to
punishment with either imprisonment or a with fine.
Powers of Reserve Bank of India (as per Banking Regulation Act, 1949)
Reserve Bank of India the Central Bank of the country. Under the Banking
Regulation Act, 1949, it possesses wide powers to safeguard the interest of the depositor
and shareholders of the banks.
1. Inspection of the Bank (Section 35)
• According to this Section, the Reserve Bank may, either at its own initiative or at
the instance of the Central Government, cause an inspection to be made by one
or more of its officers of any Banking company and its books and accounts.
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Legal Framework of Banking Banking Regulation Act, 1949

The Banking companies have to produce all such books of account and other
related documents as required for inspection by the Reserve Bank of India.
• If it is found that particular Banking company is not working in the public interest,
the may by order in writing prohibit the bank from receiving fresh deposits or
RBI

wind up the Bank.

The Central Government may however defer the passing of such order or cancel
or modify such order.
The Central Government however, depends on the report submitted by the
Reserve Bank of India in this regard.
2. Issue Directions (Section 35 A) (and Section 36)
This section confers powers on the Reserve Bank to issue directions from time to
time to Banking companies generally or to any banking company in particular.
• The Reserve Bank issues directions in the public interest, in the interest of
banking policy, to prevent the affairs of any banking company being detrimental
(harmful) to the interest of the depositors.
According to Section 36, the Reserve Bank can caution on prohibit banking
companies either generally or in particular against entering into any class of
activity which may be detrimental to the depositor and the company.
In that case, the Reserve Bank has power to call a meeting of the Board of
Directors to discuss the matter with any official of the Banking company, to
depute its officer to watch the proceedings of the meeting of the Board of
Directors, to appoint officer for keeping a watch on the working of the Banking
Company, make necessary change in the management as suggested by the
Reserve Bank.
3. Control Over Advances (Section 21)
• This section gives wide powers to the Reserve Bank to issue directions to the
banks to determine a policy in relation to advances. This was done keeping in
mind the public interest.
Sub-section (2) of Section 21 specifies the nature and scope of the directives the
Reserve Bank may issue under this section.

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Legal Framework of Banking Banking Regulation Act, 1949

This may be with reference to the purposes for advance, margins to be

maintained, maximum amount of advance etc.,
The main objective of the RBI's directions has been to control credit granted by
banks, to check speculation, and to control rising prices.
4. Power to Call a General Meeting (Section 12 A)
• According to Section 12 the Reserve Bank of India has the powers to call a
A,

general meeting of the shareholders of the Banking company to elect fresh

directors.

5. Permission (Section 35 B)
• Every Banking company has to take prior permission from the Reserve Bank of
India for the appointment, re-appointment or termination of appointment of a
Chairman, Whole time director, Manager or Chief executive officer.
6.Other Powers of the RBI
(a) Power to grant permission for subsidiary companies (Section 19).
(b) Power to publish information (Section 28).
(c)Power to extend time to submit returns (Section 31).
(d) Power to notify that a certain Banking company has ceased to be a banking
company (Section 36 A).
(e) Power to control over management (Section 36 AA to 36 AB).

1.1.7 Applicability of the Act to Cooperative Banks (Sec. 56)

A co-operative bank small-scale financial institution where its members serve as
is a

both shareholders and clients. They are registered under the States Cooperative Societies
Act and are subject to RBI regulation. Section 56 related to Act apply to co-operative
societies subject to changes. Subject to the adjustments listed below, the provisions of
this Act as they currently stand shall apply to, or in respect to, cooperative societies in
the same manner as they do to, or in relation to, banking organizations.
Provisions of 'BRA, 1949' as Applicable to Co-operative Banks
1. No Co-operative society can carry on the banking business in India unless it is a

Primary Co-operative Credit Society, or it is a Co-operative bank and holds a

license issued in that behalf by the RBI.

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Legal Framework of Banking Banking Regulation Act, 1949

2. No Co-operative bank can commence or carry on the business of banking in

India unless the aggregate value of its paid-up capital and reserves is not less
than one lakh.
3. No Co-operative bank shall hold shares in any other Co-operative society except
to such extent and subject to such conditions as specified by the RBI Act.
4. No Co-operative bank can make any loans or advances on the security of its own
shares or from granting unsecured loans or advances to any office directors or to
firms in which a Director has an interest.
5. No Co-operative bank shall open a new place of business or change place of

business otherwise than within the same city, the location of an existing place of
business.
6. Every Co-operative bank shall prepare a Balance Sheet and Profit and Loss A/c in
the prescribed format as per Schedule IIl at the expiry of each year ending on 30th
June every year.
7. Every Co-operative bank (not being a State Co-operative Bank) shall maintain in
India, by way of cash reserves with itself, or by way of balance in current account
with the RBI or the State Co-operative Bank, a sum equivalent to at least 3% of
the total of its demand and time liabilities in India as on the last Friday of the
Second preceding fortnight and has to submit to the RBI, before the 15 day of
every month, a return showing the amount, so held with particulars of demand
and time liabilities.
1.1.8 Amendments of BRA, 1949 upto 2012
The Banking Regulation Act, 1949 is an Indian law that regulates all banking
companies in India. The Bill has been enacted to protect the interests of depositors and
curb abuse of power by controlling banks by any necessary means and in the interest of
the overall Indian economy.
The Banking Regulation Act, 1949 had been amended several times to reflect
changes in the banking sector in India. Some key amendments made up to that date
included changes related to banking licenses, regulatory powers, capital requirements,
and more. The amendments to the Banking Regulation Act, 1949 up to 2012
encompassed various key concepts and changes in the regulation of the banking sector
in India.

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Legal Framework of Banking Banking Regulation Act, 1949

Some of the significant concepts and changes included:

1. Licensing and Regulation
• Amendments often addressed the licensing of new banks and the regulatory
framework governing them. This included changes in the criteria for issuing
banking licenses and the supervisory powers of the Reserve Bank of India (RBI).
2. Deposit Insurance
Amendments often included provisions related to deposit insurance, which aimed
to protect depositors' interests in the event of a bank's failure.
3. Capital Requirements
• Amendments introduced changes to the minimum capital requirements for
banks. These requirements were adjusted to ensure the financial stability and
soundness of banks. Corporate Governance: Concepts related to corporate
governance, such as the structure of the board of directors, management, and
transparency, were often addressed to enhance the governance of banks.
4. Cooperative Banks
• Special provisions were included for cooperative banks to regulate their
operations and ensure their compliance with the broader regulatory framework.
5. Regulatory Powers
• Changes were made to the regulatory powers of the RBI, including its authority to
issue directives and quidelines to banks, monitor their activities, and take
corrective actions.
6. Prudential Norms
• Amendments introduced prudential norms related to asset classification,
provisioning, and risk management, ensuring that banks maintained the quality
of their assets and reduced non-performing assets.
7. Foreign Investment
Some amendments focused on foreign investment in Indian banks, including
provisions related to the permissible levels of foreign shareholding and the entry
of foreign banks into the Indian market.

1.10
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Legal Framework of Banking Banking Regulation Act, 1949

8. Branch Expansion
• Concepts regarding branch expansion, including permissions and restrictions on
opening new branches, were addressed to manage the growth of the banking
network.
1.1.9 Banking Regulation (Amendment) Bill, 2017
The Finance Minister introduced the Banking Regulation (Amendment) Bill, 2017 in
the then Finance Minister Mr. Arun Jaitley introduced the Banking
Lok Sabha. The
Requlation (Amendment) Bill, 2017 in the Lok Sabha on July 24, 2017. It seeks to amend
the Banking Regulation Act, 1949, to include provisions for handling cases related to
stressed assets. Stressed assets are loans in which the borrower has defaulted on
payments or the loan has been restructured (for example, by changing the repayment
plan).
The RBI have the power to issue resolution guidelines and set-up boards or
willalso

committees to advise banking companies on resolution of non-performing assets. It will

replace the Banking Regulation (Amendment) Ordinance 2017.
With the Banking Regulation Act of 2017, India's banking industry attempted to
address issues such rising NPAs, poor governance, and fraud. It built a thorough
resolution system to effectively manage failing banks, expanded the RBI's regulatory
authority, and implemented prompt corrective action (PCA) for early intervention.
The billwas passed to achieve the following objectives :
1. Setting-up of a Committee by RBI to Advise Banks on Resolution of Non

performing Assets
• RBI will constitute committees or boards comprising independent members of
the board to advise banks on resolution of non-performing assets.
2. Direct Banks to Initiate Insolvency Proceedings against Defaulting
Borrowers
• The bill empowers the Reserve Bank of India to issue instructions to all banking
companies to initiate insolvency proceedings in case of default in loan
repayments. The proceedings will be in compliance with the provisions of the
Insolvency Act, 2016.
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Legal Framework of Banking Banking Regulation Act, 1949

3. Directions on Stressed Assets

• The RBI has the authority to order one or more bankS on how to address the
problem of stressed assets.
4. Applicability of the Bill to the State Bank of India
The State Bank of India, its subsidiaries, and Regional Rural Banks are all covered
by this provision, which the Bill includes as a separate clause.
5. Prevention Measures against Buying Credit Rating Agency Ratings
With the introduction of the law, the RBI is looking into various rating
assignments to improve the standing of rating agencies and prohibit rating
purchasing.
Provisions were also added to the Banking Regulation Act of 1949 to allow the
Reserve Bank of India to give instructions to any banking company or companies in this
regard. It aims to replace the 2017 Banking Regulation (Amendment) Ordinance and
revise the Banking Requlation Act of 1949. It gives the RBI the authority to address the
issue of stressed assets. Also Empowerment of the Reserve Bank of India i.e. the confers
additional powers to the Reserve Bank of the central banking institution of the country.
As well as the RBI was now given more powers to effectively supervise and regulate
banks.

QUESTIONS FOR DISCUSSION

1. Define Bank under Section 5B. Explain various provisions in respect to business of
banking companies under section 6 of Banking Regulation Act, 1949.
2. Explain the Applicability of BRA, 1949 to Cooperate Banks.
3. Write Short Notes
(A) Power of RBI (Under Section 21 and 22)
(B) Banking Regulation Bill 2017
(C) Primary Objectives of Capital Structure(Section 12)
(D) Restrictions on the Business of Banking Companies.

1.12
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Chapter 2..
The Negotiable Instrument Act,
1881
Contents eee

2.1 Provisions relating to : Definition of Negotiable Instrument (Sec-13), Promissory Note

(Sec-4), of Exchange (Sec -5), and Cheque (Sec -6), Comparative Study of
Bill

Negotiable Instruments, Parties to Negotiable Instrument (Section-7), Holder

(Sec-8), Holder in due course (Sec -9), Payment in due course (Sec -10), Negotiation
(Sec-14), Endorsement (Sec -15), Dishonour of Negotiable lInstruments (Sec -91-92),
Noting and Protest (Sec -99-104-A), Penalties in case of Dishonour of certain
Cheques for Insufficiency of Funds in the Account (Sec. 138 to 147), Negotiable
Instruments (Amendment and Miscellaneous Provisions) Act, 2002: Electronic
Cheques/Truncated Cheques, Negotiable Instruments (Amendment) Act, 2018
Empowers the Appellate Court to Order Payment pending the Appeal against
conviction (Sec.148)
2.1.1 Definition of Negotiable Instrument
2.1.2 Types of Negotiable Instruments
2.1.3 Features of Negotiable Instruments
2.1.4 Advantages of Negotiable Instruments
2.1.5 Promissory Note (Sec. 4)
2.1.6 Key Features of the Promissory Note
2.1.7 Bill of Exchange (Sec. 5)
2.1.8 Definition of Bill of Exchange
2.1.9 Cheque (Sec. 6)
2.1.10 Definition of Cheque
2.1.11 Important Features of Cheques
2.1.12 Types of Cheque
2.1.13 Difference between Cheque and Bill of Exchange
2.1.14 Holder (Sec. 8)

2.1
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Legal Framework of Banking The Negotiable Instrument Act, 1881

2.1.15 Holder in Due Course (Sec. 9)

2.1.16 Payment in Due Course (Sec. 10)
2.1.17 Negotiation (Sec. 14)
2.1.18 Endorsement (Sec. 15)
2.1.19 Dishonour of Negotiable Instruments (Sec. 91-92)
2.1.20 Noting and Protest (Sec. 99-104-A)
2.1.21 Notice of Protest (Sec. 102)
2.1.22 Penalties in case of Dishonour of Certain Cheques for Insufficiency of Funds
in the Account (Sec. 138 to 147)

2.1.23 Negotiable instruments (Amendment and Miscellaneous Provisions) Ac,

2002
2.1.24 The Negotiable Instruments (Amendment) Act, 2018
• Questions for Discussion

2.1 PROVISIONS RELATING TO: DEFINITION OF NEGOTIABLE

INSTRUMENT (SEC- 13), PROMISSORY NOTE (SEC -4), BILL OF
EXCHANGE (SEC -5), AND CHEQUE (SEC -6), COMPARATIVE
STUDY OF NEGOTIABLE INSTRUMENTS, PARTIES TO
NEGOTIABLE INSTRUMENT (SECTION -7), HOLDER (SEC -8),
HOLDER IN DUE COURSE (SEC -9), PAYMENT IN DUE COURSE
(SEC -10), NEGOTIATION (SEC - 14), ENDORSEMENT (SEC -15),
DISHONOUR OF NEGOTIABLE INSTRUMENTS (SEC -91-92),
NOTING AND PROTEST (SEC 99-104-A), PENALTIES IN CASE OF
DISHONOUR OF CERTAIN CHEQUES FOR INSUFFICIENCY OF
FUNDS IN THE ACCoUNT (SEC. 138 TO 147), NEGOTIABLE
INSTRUMENTS (AMENDMENT AND MISCELLANEOUS PROVISIONS)
ACT, 2002: ELECTRONIC CHEQUESITRUNCATED CHEQUES,
NEGOTIABLE INSTRUMENTS (AMENDMENT) ACT, 2018
EMPOWERS THE APPELLATE COURT TO ORDER PAYMENT
PENDING THE APPEAL AGAINST CONVICTION (SEC.148)
Introduction
The Negotiable Instrument is a very important document. The term "negotiable"
denotes the ability to transfer ownership, while "instrument" refers to a written
2.2
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Legal Framework of Banking The Negotiable Instrument Act, 1881

document. Therefore, a "Negotiable Instrument" is defined as a written document that

can be transferred. The governing legislation for such instruments is the Negotiable

Instruments Act of 1881. It is a paper that guarantees payment of a certain sum of

money,either immediately or at a certain period, and whose payer is typically identified.

Negotiable instruments are transferable and allow the holder to accept the money as
cash, use it as they see fit, or in any other way they choose. The fund amount on the
paper includes a remark describing the precise deposit amount and is to be paid in full
upon request or by a particular date. It is simple to pass security from one person to
another. Negotiable instruments means instruments such as promissory notes, bills of
exchange, and cheques.
2.1.1 Definition of Negotiable Instrument
A negotiable instrument is a written document. This document designates payment
to be made to a particular person or the instrument's holder on a specific date.
Accordingly, a bill of exchange can be described or defined as "a document signifying an
unconditional promise signed by the person giving the promise, requiring the person to
whom it is addressed to pay on demand or at a fixed date or time."
Definition
Section 13 of the Negotiable Instruments Act states that, "A negotiable instrument
means a promissory note, bill of exchange or cheque payable either to order or to
bearer". The use of these negotiable instruments between two parties is governed by
the Negotiable Instruments Act, 1881.
2.1.2 Types of Negotiable Instruments
Negotiable instruments means instruments such as promissory notes, bills of
exchange, and cheques.
1. Promissory Note
A written promise to pay a specific sum of money to a designated person or

entity.
• Promissory Notes Payable to the Bearer are promissory notes that are payable to
whoever holds them, making them transferable by physical possession.
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2. Bills of Exchange
• An unconditional written order to pay a specified sum of money to a payee on
demand or at a specific future date.
3. Cheques
• Awritten order by an account holder their bank to pay a specific amount of
money to a named person or entity.
Examples of other negotiable documents include government promissory notes,
railroad receipts, delivery instructions, etc. By convention or accepted practice in the
industry, these may constitute negotiable instruments.
2.1.3 Features of Negotiable Instruments
1. In Writing : They must be written form, usually on paper but can also be in
electronic form in some cases.
2. Negotiability : They can be transferred from one party to another, usually by
endorsement and delivery,making them capable of being bought and sold.

3. Unconditional Promise or Order : They contain an unconditional promise to

pay or an unconditional order to pay a specific amount.
4. Payable to Bearer or Order: They are usually payable either to the bearer
(anyone who possesses the instrument) or to a specific person (payee) named on
the instrument.
5. Fixed Amount: The amount to be paid must be fixed and certain.
6. Date : They include a date when payment is due or when the instrument was
issued.
7. Signature : They must be signed by the person or entity making the promise or
order (the drawer or maker).
8. No Further Action : Once the instrument is paid, no further action is required,
and it is discharged.
9. Legal Consideration :
There must be a legal consideration for the promise or
order.

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These features are essential for negotiable instruments to facilitate trade and
financial transactions. However, the specific requirements may vary by jurisdiction and
the type of negotiable instrument.
2.1.4 Advantages of Negotiable Instruments
Advantages make negotiable instruments a vital part of modern financial systems
and trade, offering convenience, security, and flexibility. Some advantages of negotiable
instruments are as follows :
1. Ease of Transfer
They are easily transferable from one party to another, making them convenient
for commerce and trade.
2. Enhanced Security
• They offer a degree of security against loss or theft, especially in the case of
cheques or drafts.
3. Reduced Risk
• The negotiation of these instruments often carries lower risk compared to the
transfer of cash.
4. Credit Facilities
• They provide a basis for obtaining credit or loans, as they represent a promise to
pay.
5. Uniformity
The rules and regulations governing negotiable instruments are often
standardized, providing a level of consistency in financial transactions.
6. Liquidity
• They can be readily converted into cash or used to settle debts and obligations.
(a) Record-keeping :
Negotiable instruments often come with built-in records of
transactions, simplifying accounting and financial tracking.
(b) Global Acceptance : They are recognized and accepted in many countries,
facilitating international trade and financial transactions.

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Legal Framework of Banking The Negotiable Instrument Act, 1881

(c)Legal Protection : They offer legal protection to both the issuer and the holder,
as they are subject to specific laws and regulations.
(d) Financing Flexibility : They can be used for short-term or long-term financing,
depending on the type of instrument.
2.1.5 Promissory Note (Section 4)
A promissory note is a written promise to repay a specific amount of money to a

specified person or entity on a particular date. There are typically two parties involved in
a promissory note: the maker (borrower), who promises to pay, and the payee (lender),
who will receive the payment. The note should specify the principal amount borrowed,
which is the amount to be repaid.
Promissory notes are a form of debt that companies used to raise money. Investors
advanced loan to a company. return, investors are promised a fixed amount of
In

periodic income. Typically, the rate of return promised is very high.

Definition
"A promissory note is an instrument in writing (not being a bank note or a currency
note) containing an unconditional undertaking, signed by the maker, to pay a certain
sum of money only to, or to the order of, a certain person, or to the bearer of the
instrument."

2.1.6 Key Features of the Promissory Note

1. Principal Amount :
the amount of money that is being borrowed or
It is

promised to be paid back. This specifies the initial amount of money that the borrower
has agreed to repay. It's essential to clearly state the principal amount to avoid any
confusion.
2. Interest Rate:The rate at which interest will be charged on the principal
amount, if applicable or If the promissory note includes interest. Section 4 will detail the
interest rate agreed upon. This information helps determine the additional amount the
borrower must pay for borrowing the money.
3. Repayment Terms : This may specify the schedule for repayment, including
the
number of installments and their due dates. This part provides information about the

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timing and structure of repayments. might specify whether payments are due in
regular installments or as a lump sum and the due dates for each payment.
4. Maturity Date : It is the date on which the promissory note becomes due and
must be paid in full. Section 4 typically states the final due date, when the entire principal
and any accrued interest must be repaid in full. This is a crucial date for the borrower to
keep in mind.
5. Placeof Payment: The location where the borrower must make payments.
6. Default : Conditions under which the note is considered in default, and the
consequences of default.
7. Governing Law : The legal jurisdiction or state laws that will govern the
promissory note.
2.1.7 Bill of Exchange (Section 5)
of exchange" is a financial document that functions as a written order by one
A "Bill

party to another to pay a specified sum of money to a third party at a future date. It is
governed by various laws and regulations depending on the jurisdiction, and the
reference to Section 5 of the N.I Act, 1881 pertains to a legal or regulatory framework
related to bills of exchange.
It is an instrument in writing containing an unconditional order, signed by the maker,
directing a certain person to pay, on demand or at a fixed or determinable future time, a
certain sum of money only to, or to the order of, a certain person or to the bearer of the
instrumnent.

2.1.8. Definition of Billof Exchange

According to Section 5 of the Negotiable Instruments Act, "a bill of exchange is an
instrument in writing containing an unconditional order, signed by the maker,
directing a certain person to pay a certain sum of money only to, or to the order of, a
certain person or to the bearer of the instrument".
A of exchange is a negotiable instrument used in international trade and
bill

domestic commerce to facilitate payments. It's an unconditional order in writing that one
person (the drawer) directs another person (the drawee) to pay a specified sum of
money to a third party (the payee) on a specific date.
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Sample Format : Bill of Exchange

Amount :2,00,000 Place, Date

Stamp 60 days after the date, pay Mr. ABCa sum of 2,00,000 for
value received.

Accepted Drawer
(Signed) (Signed)
Drawee's Name Drawer's Address
Drawee's Address
A bill of exchange is a types of negotiable instrument. The main Key Elements of bill
of exchange i.e. the amount to be paid, the date when the payment is due (maturity
date),the name of the drawee, the name of the payee, signatures of the drawer and,
ideally,the drawee etc.
Parties Involved in the Billof Exchange
1. Drawer : The person or entity who creates and issues the bill of exchange.
2. Drawee : The person or entity on whom the bill is drawn and who is expected to
make the payment.
3. Payee : The person or entity to whom the payment is to be made.
4. Endorser : A person or entity who transfers the bill to another party by endorsing
it on the back of the instrument.
5. Endorsee : The person or entity to whom the bill is transferred through
endorsement.
of exchange, also known as a draft is a short-term negotiable financial instrument
Bill

that consists of an order in writing addressed from one person (the seller of the goods)
to another (the buyer) requiring the latter to pay a certain sum of money to a specific
person or to the bearer of the bill on demand (a sight draft) or at a fixed or determinable
future time (a time draft).
2.1.9 Cheque (Section 6)
Cheque one type of negotiable instruments .A "cheque" is a written, unconditional
is

order issued by an account holder to their bank, instructing the bank to pay a specific
sum of money to the person or entity named on the cheque. The person who writes a
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Legal Framework of Banking The Negotiable Instrument Act, 1881

cheque is called the "Drawer" and the person who receives the cheque is called the
"Payee". The cheque contains the transfer amount, payee's name, date and payee's
signature.
2.1.10 Definition of Cheque
As definedunder section 6 of the NI Act, 1881, "A cheque is a bill of exchange
drawn on a specified banker and not expressed to be payable otherwise than on
demand and it includes the electronic image of a truncated cheque and a cheque in
the electronic form."
2.1.11 Important Features of Cheques
1. A Written, Unconditional Order: cheque must contain a written,
A

unconditional order to pay a certain sum of money to the bearer or the person
named on the cheque.
2. Payee's Name: The name of the person or entity to whom the payment is to be
made must be clearly specified on the cheque. It can be a "order" cheque or a
"bearer" cheque, which can be encashed by anyone presenting it.
3. Drawee Bank: The cheque must be payable on demand from the drawee bank,
which is usually a bank where the drawer holds an account.
4. Properly Drawn : The cheque should be properly filled out, with no alterations,
overwriting, or discrepancies that could raise doubts about its authenticity.
5. Amount in Words and Figures : The amount to be paid should be mentioned in
both words and figures on the cheque to avoid any discrepancies.
6. Date : The date when the cheque is issued should be written on it. A post-dated
cheque is one with a date in the future.
7. Drawer's Signature : The cheque should be signed by the drawer (the person
issuing the cheque). The signature is crucial for authentication.
8. Not Stale : A
cheque is considered stale presented for payment after a
if it is

certain period, typically three months. Stale cheques may not be honored.
9. Adequate Funds: There should be sufficient funds the drawer's account to
cover the amount mentioned on the cheque.

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10. Crossed Cheques: A cheque may be crossed with two parallel lines, which
means it can only be deposited into the payee's bank account and not cashed
over the counter.
2.1.12 Types of Cheque
The most common types of Cheques are as follows:
1. Bearer Cheque : It is payable to the bearer of the cheque, which means anyone
who holds the cheque can cash A bearer cheque is a cheque for which the

drawer is authorized to pay. This means that a person who brings a cheque to a
bank has the right to demand payment from the bank. This type of cheque can
be used to withdraw cash.
2. Order Cheque: Payable only to a specified person or entity, as indicated by the
"Pay to the order of" line. It requires the payee to endorse the cheque to receive
payment.
3. Crossed Cheque: A cheque with two parallel lines across the face, which means it
can only be credited to the bank account of the payee, making it a more secure
form of payment.
4. Open Cheque: A cheque with no crossing or specific instructions, making it
payable to the bearer or the specified payee.
5. Post-Dated Cheque: A cheque with a future date written on it. It cannot be
cashed until the date specified.
6. Ante-Dated Cheque: A cheque with a date earlier than the actual date of
issuance.
7. Self Cheque: A cheque made out to the drawer themselves. It can be used for
withdrawing cash from their own account.
8. Stale Cheque: A cheque that is not presented for payment within a certain
period (usually three to six months) from the date of issuance. Banks may refuse
to honour stale cheques.
9. Traveller's Cheque: A secure form of payment used by travellers. They are pre

printed with fixed denominations on it and can be replaced if lost or stolen.

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Legal Framework of Banking The Negotiable Instrument Act, 1881

10. Certified Cheque: cheque for which the bank guarantees that there are
A

sufficient funds in the drawer's account to cover it.

11. Banker's Cheque or Demand Draft: A cheque issued by the bank, ensuring the
payment as the bank itself is the drawer. It's often used for secure transactions.
12. Cancelled Cheque: cheque that has been marked as cancelled by the drawer,
A

typically by writing "Cancelled" across it. It's often used for verification of bank
account details.
13. Non-Negotiable Cheque: A cheque with the words "non-negotiable" written on
it, indicating that it cannot be transferred to another party.
2.1.13 Difference between Cheque and Bill of Exchange

Points of Difference Cheque Bill of Exchange

1, Drawer & Drawee A cheque is drawn by anA bill of exchange a written

individual or entity (the order from one party (the
drawer) on a bank (the drawer) to another party (the
drawee) to pay a specific drawee) to pay certain
sum of money to the bearer amount of money to a third
or a specified payee. party (the payee) at a specified
future date.

Parties Involved Usually involves two parties Involves three parties: the
the drawer and the drawee drawer, the drawee, and the
bank. payee.

3. Nature Typically used for day-to Often used for credit

day transactions and is a transactions and is a time
demand instrument, instrument, payable at a future
payable on demand when date specified on the bill.
presented to the bank.

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Points of Difference Cheque Bill of Exchange

4. Acceptance No need for acceptance; the Requires acceptance by the

drawee bank is obligated to drawee (who becomes the
pay if sufficient funds are acceptor) for to become a
it

available. |legally binding obligation.

5. Transferability Can be transferred only by Can be freely transferred by

endorsement or assignment.endorsement or delivery.

6. Usage Common for routine Used in commercial

payments like salaries, bills, transactions, credit transactions,
and retail and trade and international trade.
transactions.

7. Promissory Usually contains a directive Often contains conditions, such

Language to pay without any as grace periods or interest

additional conditions. rates, depending on the

agreement between the parties.

8. Legal Framework Governed by the rules and Governed by various legal

regulations of the bank and frameworks, including the Bills

various national laws. of Exchange Act and the

Uniform Commercial Code
(UCC), which vary by
jurisdiction.

2.1.14 Holder (Section 8)

A "holder" of a negotiable instrument is a person who possesses the instrument and
is entitled to receive the amount mentioned in it. This holder can be the original payee or
someone who has received it through a valid endorsement. Holders have certain rights
and can sue parties liable for the instrument.

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"Holder" of a promissory note, draft or cheque means the payee or payee in

possession of the promissory note, draft or cheque or the holder thereof, but does not
include a beneficial owner asserting his claim through Benamida people.
-
"Explanation Where the note, bill or cheque is lost and not found again, or is
destroyed, the person in possession of it or the bearer thereof at the time of such loss or
destruction shall be deemed to continue to be its holder."
2.1.15 Holder In Due Course (Section 9)
A "holder in due course" is a holder of a negotiable instrument who has acquired it
for value, in good faith, without notice of any defects or claims against it, and before it is
overdue. Such a holder enjoys certain privileges and protection under the law, and their
title to the instrument is considered valid.
"Holder" in due course" means any person who for consideration becomes the
possessor of a promissory note, billof exchange or cheque if payable to bearer, or the
payee or indorsee thereof, if payable to order, before it became overdue, without notice
that the title of the person from whom he derived his own title was defective.
Explanation : For the purposes of this section, the title of a person to a promissory
note, exchange or cheque is defective when he is not entitled to receive the
bill of

amount due thereon by reason of the provisions of Section 58.

2.1.16 Payment In Due Course (Section 10)
This section deals with the circumstances under which payment of a negotiable

instrument should be made. Payment should be made to the holder of the instrument in
due course, and it discharges the payer's liability. Payment should be made at the proper
time and place and to the proper person, as per the instrument's terms.
2.1.17 Negotiation (Section 14)
When a promissory note, or cheque is handed over to a person so that that person is
the holder thereof, the bill is said to be negotiated.
Section 14 defines "negotiation" as the transfer of an instrument by one party to
another, in such a manner that the transferee becomes the holder of the instrument. This
transfer can occur by delivery or by endorsement and delivery.
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Legal Framework of Banking The Negotiable Instrument Act, 1881

Section 14 of the Negotiable Instruments Act defines and governs the process of
negotiation, which is essential for the transfer and circulation of negotiable instruments
like promissory notes and bills of exchange. It sets the rules for transferring ownership
and the rights of the transferee.
2.1.18 Endorsement (Section 15)
An endorsement is a form of approval, support, or authorization given to something,
typically a document or a product, by an individual, organization, or authority. In the
context of documents like contracts or cheque, an endorsement is a signature or
additional writing on the document, indicating consent or support. For example, when
you sign on the back of a cheque to cash it, that's a form of endorsement.
Endorsements can vary widely in their implications and can signify agreement,
recommendation, consent, or certification, depending on the specific context in which
they are used.
When the maker or holder of a negotiable instrument signs the same, otherwise than
as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of
paper annexed thereto, or so signs for the same purpose a stamped paper intended to
be completed as a negotiable instrument, he is said to endorse the same, and is called
the "Endorser".
2.1.19 Dishonour of Negotiable Instruments (Section 91-92)
As per Negotiable Instruments Act 1881 dishonoured by non-acceptance and
dishonoured by non-payment are as follows:
) Dishonoured by Non-acceptance (Section 91)
"A bill of exchange is said to be dishonoured by non-acceptance when the drawee, or
one of several drawees not being partners, makes default in acceptance upon being duly
required to accept the bill, or where presentment is excused and the bill is not accepted.
Where the drawee is incompetent to contract, or the acceptance is qualified, the bill may
be treated as dishnoured."
The Negotiable Instruments Act, 1881(section 91) deals with the concept of dishonor
by non-acceptance which are as follows
:

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1. Legal Clarity :
A clear legal framework for situations where a bill of exchange is
not accepted by the drawee. This clarity is essential in commercial transactions to ensure
that parties understand their rights and obligations.
2. Protection of Holder's Rights : This section safeguards the rights of the holder
of the instrument. When the drawee refuses to accept a bill, the holder can take legal
actions and follow the procedures outlined in the Act to seek remedy, including holding
the drawer and endorsers liable.
3. Preservation of Commercial Integrity addressing dishonor due to non
: By

acceptance, Section 91 maintains the integrity of commercial transactions. It encourages

parties to honour their obligations and promotes trust in financial instruments.
4. Enforcement of Contractual Commitments : It enforces the contractual
commitment of the drawee to accept the bill. This is particularly important for trade and
credit transactions where bills of exchange are commonly used.
This section is in ensuring that non-acceptance of bills of exchange is handled within
a legal framework, protecting the interests of the parties involved in such transactions.

(I) Dishonour by Non-payment (Section 92)

"A promissory note, bill of exchange or cheque is said to be dishonoured by non
payment when the maker of the note, acceptor of the bill or drawee of the cheque
makes default in payment upon being duly required to pay the same."
The Indian Negotiable Instruments Act, 1881 (Section-92) deals with the concept of
"Dishonour by Non-payment which are as follows:
1. Legal Consequences: Dishonour by non-payment is a significant legal term. It

refers to the situation where a negotiable instrument, such as a cheque, is not honoured
due to insufficient funds or other reasons. Understanding of Section 92 is crucial as it
outlines the legal consequences for parties involved.
2. Rights and Liabilities: This section outlines the rights and liabilities of various
parties, including the drawer of the instrument (the person who wrote the cheque), the
payee (the person to whom the cheque is payable), and the drawee bank (the bank on
which the cheque is drawn).

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Legal Framework of Banking The Negotiable Instrument Act, 1881

3. Legal Remedies: It's important to know the legal remedies available to the payee
in case of dishonour by non-payment. Section 92 provides a framework for initiating
legal proceedings and allows the payee to take the drawer to Court for recovery.
4. Deterrent for Dishonest Practices: Section 92 serves as a deterrent against
dishonest practices like issuing bad cheques. It encourages financial discipline and
ensures that negotiable instruments are honoured, maintaining trust in financial
transactions.
5. Commercial Transactions: Understanding this section is essential for businesses
and individuals involved in commercial transactions. It helps protect their financial
interests and ensures the proper functioning of the payment system.
2.1.20 Noting and Protest (Section-99-104-A)
() Noting (Section 99)
"When a promissory note or bill of exchange has been dishonoured by non
acceptance or non-payment, the holder may cause such dishonour to be noted by a
notary public upon the instrument, or upon a paper attached thereto, or partly upon
each."
Such noting can be done on paper attached to the instrument.
Noting is an apparent proof which makes clear that the instrument is
dishonoured.
Noting for dishonour by non-acceptance or non-payment must be made within
reasonable time.
Contents of Noting
(a) The fact and date of dishonour,
(b) The reason, if any, assigned for such dishonour,
(c) If the instrument has not been expressly dishonoured, the reasons why the holder
wants to treat the same as dishonoured,
(d) Notary charges incurred.
Process of Noting
(a) On dishonour of the negotiable instrument, the holder takes the instrument to
the Notary public for noting the dishonour.
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Legal Framework of Banking The Negotiable Instrument Act, 1881

(b) The Notary Public presents the instrument to the party liable to pay and if

dishonoured again, the Notary note down such fact on the instrument or paper
attached to it.
(c) The Notary records the fact of dishonour, date of dishonour alongwith reasons of
dishonour, if any. He also records notary charges.
(d) Mere noting without giving above particulars are not evidence of dishonour.
Noting should be made within reasonable time.
(e) Noting sorts an authentic evidence of the dishonour.

Notary Public
Notary public is an officer appointed by the government to carry out functions as
prescribed by Notaries Act, 1952.
His main function is to take note of anything concerning the public e.g. noting
and protesting.
He attests the documents, deeds etc. to make them authentic.
(I) Protest (Section 100)
"When a promissory note or bill of exchange has been dishonoured by non
acceptance or non-payment, the holder may, within a reasonable time, cause such
dishonour to be noted and certified by a notary public. Such certificate is called a
protest."
Contents of Protest (Section 101)
According to Section 101 of the Act, a regular and flawless protest must contain the
following:
1. The original document or an exact transcription of it; and of anything thereupon
written or printed.
2. The reality and causes of dishonor, i.e., a declaration that depending on the

situation,choose between better security or money

3. Demand and dishonor locations and times.
4. The notary public's signature.

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Legal Framework of Banking The Negotiable Instrument Act, 1881

2.1.21 Notice of Protest (Section 102)

When a promissory note or billof exchange is required by law to be protested, notice
of such protest must be given instead of notice of dishonour, in the same manner and
subject to the same conditions; but the notice may be given by the Notary Public who
makes the protest."
(1) Protest for Non-payment after Dishonour by Non-acceptance (Section 103) :
All bills of exchange drawn payable at some other place than the place mentioned as the
residence of the drawee, and which are dishonoured by non-acceptance, may, without
further presentment to the drawee, be protested for non-payment in the place specified
for payment, unless paid before or at maturity.
: "Foreign bills of exchange must be
() Protest of Foreign Bills (Section 104)
protested for dishonour when such protest is required by the law of the place where they
are drawn."

(II) When Noting equivalent to Protest (Section 104 (4)) : For the purposes of
this Act, where a bill or note is required to be protested within a specified time or before
some further proceeding sufficient that the bill has been noted for protest
is taken, it is

before the expiration of the specified time or the taking of the proceeding: and the
formal protest may be extended at any time thereafter as of the date of the noting.
related to Inland may or may not be opposed. However, international bills must
Bills

be protested for dishonor if the legislation of the jurisdiction where they were drawn
requires it (Section 104).

2.1.22 Penalties In Case of Dishonour of Certain Cheques For

Insufficiency of Funds in the Account (Sec. 138 to 147)
Section 138 to 147 of the Negotiable Instruments Act, 1881 in India deal with
penalties in case of dishonour of certain cheques due to insufficiency of funds in the
account.
(I) Section 138 of the Negotiable Instruments Act, 1881
If a cheque is dishonored due to insufficient funds or if it exceeds the amount

arranged to be paid by the drawer's account, the drawer is liable for a penalty.
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Legal Framework of Banking The Negotiable Instrument Act, 1881

1. Bouncing of a Cheque: Section 138 deals with the offense of bouncing of a

cheque due to insufficient funds or other reasons.
Notice: After receiving information about the dishonored check, the payee (the
person to whom the cheque was issued) must send a legal notice within 30 days to the
drawer (the person who wrote the cheque) demanding the payment of the cheque
amount.
2. Drawer's Liability: After receiving the notice, the drawer has 15 days to make
the payment. If they fail to do so within this period, they can be held liable for the
offense and they can be subject to criminal prosecution.
3. Criminal Penalty: The drawer may be punished with imprisonment for a term
that may extend to two years or with a fine that may extend to twice the amount of the
cheque, or with both.
4. Presumption: The law presumes that the drawer is aware that there are
insufficient funds in their account, unless proven otherwise.
5. Cognizance of Offense: The offense under Section 138 is a criminal offense, and

the Court can take cognizance of the matter only upon a complaint made by the payee.
6. Compounding of Offense: In certain cases, the drawer and the payee can agree
to a settlement, and the payee can withdraw the complaint. However, this should be
done with the permission of the Court.
Section 139 of the Negotiable Instruments Act, 1881
(II)

When a negotiable instrument is presented for payment or endorsed, and it's proved
that there was no consideration for the transfer of the instrument, the burden of proving
consideration lies with the person claiming it. In simple terms, if someone claims that
they are entitled to the payment on a negotiable instrument, they must prove that there
was a valid consideration for the transfer of that instrument.
1. Presumption of Consideration: This section creates a legal presumption that
when a negotiable instrument is transferred, there is a presumption that it was done for
consideration. In other words, it is presumed that the transfer of the instrument was in
exchange for something of value.
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Legal Framework of Banking The Negotiable Instrument Act, 1881

2. Burden someone disputes the existence of consideration in the

of Proof: If

transfer of a negotiable instrument, the burden of proving the lack of consideration falls
on the person making the claim. In practical terms, if a party challenges a transaction
involving a negotiable instrument, they must prove that the transfer was without
consideration.
3. Exception: Section 139 provides for an exception in case of a promissory note
made or drawn for a loan. In such cases, if the person in possession of the instrument
claims it was a gift, the burden of proving this gift is on that person.
4. Protecting Holders in Due Course: This section is crucial for protecting holders
in due course, who are individuals or entities that have acquired a negotiable instrument
for value, in good faith, and without notice of any defects. It ensures that such holders
are not unjustly deprived of their rights, if someone later claims a lack of consideration.
5. Legal Implications: If the claimant fails to prove the absence of consideration,

the Court may presume that the transfer of the negotiable instrument was indeed for
consideration, and the person seeking payment on the instrument may be entitled to it.
(III) Section 139 of the Negotiable Instruments Act, 1881
It helps maintain the integrity and trustworthiness of negotiable instruments in
commercial transactions by creating a legal presumption of consideration and allocating
the burden of proof accordingly.
(IV)Section 140 of the Negotiable Instruments Act, 1881
It deals with the liability of the person who draws a post-dated cheque. It states that

when a person draws a post-dated cheque, they incur no liability until the date of the
cheque arrives. If the cheque ispresented for payment before the date, the drawee (the
bank) is not bound to pay it. This section provides protection to the drawer till the date
mentioned on the cheque.
1. Protection for Drawer: The provision in Section 140 is meant to protect the
drawer of the post-dated cheque from any premature presentation of the cheque for
payment. In other words, if someone tries to cash the cheque before the specified date,
the bank is not obligated to honour it.

2.20
<br>

Legal Framework of Banking The Negotiable Instrument Act, 1881

2. Enforcement On or After the Date: The drawer's liability to make funds

available for the cheque becomes enforceable on or after the date mentioned on the
cheque. This means that the cheque becomes a valid negotiable instrument only when
the date arrives.
3. Use in Business Transactions: Post-dated cheques are commonly used in
business transactions to provide a degree of security and ensure that payment is made
on a specified future date. Section 140 allows businesses to issue such cheques without
the immediate risk of the cheque being cashed earlier.
(V) Section 141 of the Negotiable Instruments Act, 1881
When a cheque is dishonored under this section, the drawer of the cheque may be
subject to criminal liability. The penalties typically involve a fine or imprisonment or both,
depending on the circumstances and the amount involved. It's essential to consult legal
counsel for specific advice on such cases, as the penalties can vary based on the
particulars of the situation and local regulations.
Under Section 141 of the Negotiable Instruments Act, 1881 when a cheque
in India,

is dishonored due to insufficiency of funds in the account, the penalties may include:
1. Penalty Fine: The drawer of the dishonored cheque may be liable to pay a

penalty, which can vary depending on the amount mentioned in the cheque.
2. Imprisonment: In certain cases, imprisonment may also be imposed along with
the penalty. The duration of imprisonment can vary, and it's typically determined by the
Court based on the circumstances.
It's important to note that the exact penalties can differ based on the specific case,
the amount mentioned in the cheque, and other factors.
(VI) Section 138 and Section 142 of the Negotiable Instruments Act, 1881
Section 141 is closely related to Section 138 and Section 142 of the Negotiable
Instruments Act. Section 138 deals with the offense of dishonor of a cheque for
insufficiency of funds, and Section 142 outlines the procedure for filing a complaint.
Section 142 of the Negotiable Instruments Act, 1881 in India deals with penalties in
case of dishonor of certain cheques due to insufficiency of funds in the account. If a

2.21
<br>

Legal Framework of Banking The Negotiable Instrument Act, 1881

cheque dishonored due to insufficient funds, the drawer of the dishonored cheque can
is

be liable for penalties and legal consequences, including imprisonment. The penalties
and consequences may include:
1. Penalty : The drawer of the dishonored cheque may be liable to pay a penalty,
which can be a specific amount mentioned in the section.
2. Imprisonment: In certain cases, if the drawer is found guilty of issuing a
dishonored cheque with fraudulent intent, they may face imprisonment for a term which
may extend to two years.
3. Compensation: The payee of the dishonored cheque may also seek
compensation for the amount mentioned in the dishonored cheque.
It's important to note that the legal provisions regarding dishonored cheques may
vary based on the specific circumstances, jurisdiction, and any subsequent amendments
to the law. Legal advice should be sought in case of a dishonored cheque to understand
the exact implications and consequences.
(VII) Section 143 of the Negotiable Instruments Act, 1881
Section 143 outlines penalties for the dishonor of certain cheques due to
insufficiency of funds in the account, specifically when the offense is repeated within a
six-month period. The penalties under this section include:
1. Enhanced Penalty: If an individual issues a cheque that is dishonored due to
insufficient funds, and they commit a repeat offense within six months of the first
dishonor, a higher penalty may be imposed. This penalty could be greater than the one
specified in Section 138 of the Act.
2. Imprisonment: addition to the enhanced penalty, the drawer of the
In

dishonored cheque may also face imprisonment for a term that could extend to one
year.
These penalties are applicable when there is a repeat offense within the specified
time frame. The exact legal consequences can vary depending on the circumstances and
local jurisdiction. It's advisable to consult with legal experts for guidance when dealing
with such cases.

2.22
<br>

Legal Framework of Banking The Negotiable Instrument Act, 1881

(VIII) Section 144 of the Negotiable Instruments Act, 1881

Section 144 deals with the discharge of liability on a negotiable instrument. It states
that the liability of the parties involved in a negotiable instrument is discharged in the
following ways:
1. By payment due course according to the apparent tenor of the instrument.
in

2. By payment in due course by the drawee or acceptor of a bill of exchange,

payable to his order, or to the order of another, when the bill is endorsed to him
in due course.
3. By payment in due course by the maker of a promissory note, payable to bearer
or to order when the note is endorsed in due course.
These provisions ensure that parties handling negotiable instruments can discharge
their obligations by making payments as specified under the law.
(DX) Section 146 of the Negotiable Instruments Act, 1881
1. Liability for Dishonor : Section 146 holds the maker or drawer of a dishonored

negotiable instrument responsible for any loss or damage suffered by the holder of the
instrument due to the dishonor. This means that if a cheque, promissory note, or bill of
exchange is not honoured by the bank or the drawee, the person who issued it is legally
obligated to compensate the holder for any resulting financial harm.
2. Compensation: The maker or drawer may be required to compensate the holder
for the principal amount of the instrument and any additional costs or damages incurred
as a result of the dishonour. These additional costs might include bank charges, legal
fees, and any losses incurred by the holder due to non-payment.
3. Legal Recourse: If the maker or drawer fails to honour their liability under
Section 146, the holder of the dishonored instrument can take legal action to recover the
owed amount. Legal proceedings may be initiated to enforce the compensation.
4. Protection of Holder's Rights: This provision serves to protect the rights of
holders of negotiable instruments, ensuring that they have legal recourse if the
instruments are dishonored. It helps maintain the trust and reliability of these financial
instruments in commercial transactions.

2.23
<br>

Legal Framework of Banking The Negotiable Instrument Act, 1881

It's important to note that the specific application and interpretation of Section 146
may vary depending on the circumstances and legal developments, so it's advisable to
consult with a legal expert for guidance on specific cases involving dishonored
negotiable instruments.
Section 147 of the Negotiable Instruments Act, 1881
(X)

This section outlines the acceptor's responsibilities and liabilities in the case of a bill
of exchange. The key points covered by Section 147 are as follows:
1. Liability of the Acceptor: When a person accepts a bill of exchange, they
become the acceptor and accept liability to pay the amount mentioned in the bill to the
holder or to any subsequent endorsee when the bill matures. The acceptor is legally
bound to fulfill this obligation.
2. Primary Liability : The acceptor has primary liability on the bill. This means that
the holder of the bill can directly enforce the payment against the acceptor when the bill
becomes due. The acceptor is obligated to pay the specified amount to the holder upon
maturity.
3. Transfer of Liability: When a bill of exchange is transferred through
endorsement, the acceptor's liability is transferred to the endorsee. The endorsee can
also hold the acceptor liable for payment upon maturity.
4. Protection of Holder's Rights: Section 147 ensures that the holder of a bill of
exchange has a clear legal remedy to recover the amount due from the acceptor when
the bill matures. It reinforces the reliability of bills of exchange in commercial
transactions.
2.1.23 Negotiable Instruments (Amendment And Miscellaneous
Provisions) Act, 2002
The Act introduced significant changes in the context of negotiable instruments in
India. One of the important amendments was related to Electronic Cheques and
Truncated Cheques.
1. Electronic Cheques: The Act allowed for the use of electronic cheques. Electronic
cheques are essentially the digital or electronic form of physical cheques. This
amendment enabled the electronic processing of cheques, making transactions more
2.24
<br>

Legal Framework of Banking The Negotiable Instrument Act, 1881

efficient and reducing the need for physical cheques. It provided a legal framework for
the use of digital signatures and other electronic means to create and process cheques.
2. Truncated Cheques: The Act also introduced the concept of truncated cheques.
Truncation refers to the process of stopping the flow of the physical cheque at some
point within the clearing cycle. Instead of the physical cheques moving through the
entire clearing process, only electronic images of the cheques are exchanged between
banks. This significantly speed up the clearing process and reduced the risk associated
with physical cheque transportation.
These amendments were aimed at modernizing the payment systems in India and
promoting efficiency and security in cheque processing. They were significant steps
toward embracing electronic payment methods and reducing the reliance on traditional
paper-based instruments.
2.1.24 The Negotiable Instruments (Amendment) Act, 2018
The Negotiable Instruments (Amendment) Act, 2018 introduced several changes to
the Negotiable Instruments Act, 1881. One of the key provisions was the empowerment
of the Appellate Court to order payment pending the appeal against conviction under
Section 148. The objectives of this provision include:
1. Expedited Resolution: The provision aims to expedite the resolution of cases
related to negotiable instruments by allowing the Appellate Court to order the accused
to make payment even before the appeal against conviction is concluded. This can help
in ensuring speedy justice.

2. Protecting Payees: It is intended to protect the interests of payees or holders of

the negotiable instruments, as they can receive payments promptly, reducing financial
hardships.
3. Reducing Delay:By allowing payment to be ordered during the appeal process,
the Act intends to reduce delays in the realisation of funds in cases of dishonored
negotiable instruments.
4. Promoting Confidence in Financial Transactions: The provision can contribute
to greater confidence in financial transactions involving negotiable instruments by
making it more certain that payees will receive their due payments.
2.25
<br>

Legal Framework of Banking The Negotiable Instrument Act, 1881

In summary, Section 148 of the Negotiable Instruments (Amendment) Act, 2018,

empowers the Appellate Court to order payment pending the appeal against conviction,
with the objectives of expediting case resolution, protecting payees, reducing delays, and
enhancing confidence in financial transactions.

QUESTIONS FOR DISCUssION

1. Define Negotiable Instrument. State its Types.
2. State the Features of Negotiable Instruments.
3. Define Promissory Note. State its Features.
4. Define Cheque. State its Features.
5. State the various Types of Cheques.
6. Distinguish between Cheque and Bill of Exchange.
7. What is Noting and Protesting ?
8. Explain the Provisions under Section 138 to Section 147 of Negotiable
Instruments Act, 1881 regarding Penalties in case of Dishonour of Certain
Cheques for Insufficiency of Funds.
9. Write Short Notes
(A) Advantages of Negotiable Instruments.
(B) Billof Exchange.

(C) Holder and Holder in Due Course.

(D) Negotiation.
(E) Endorsement.
(F) Notice of Protest.
(G) N.I. (Amendment and Miscellaneous Provisions) Act, 2002.
(H) Dishonour by Non-acceptance.

2.26
<br>

Chapler 3.

The Reserve Bank of India Act,

1934
Contents
3.1 Introduction
3.2 Provisions relating to Incorporation, Capital Management and Business (Sec 3 to
:

19)

3.3 Central Banking Functions (Sec. 20 to 45)

3.4 Regulatory and Supervisory Collection and Furnishing of Credit Information (45A to
45G)
3.5 Penalties (Sec 58 B
to 58- G)
-
3.6 RBI Act. (As Amended by Finance Act, 2018) Monetary Policy Committee (Sec. 45
ZA to 45 ZO)
3.7 RBI and Regulation of Digital Financial Services in India, 2012 to 2016
• Questions for Discussion

3.1 INTRODUCTION
The Reserve Bank of India Act, 1934, is the legislation that established the Reserve
Bank of India (RBI) as the central bank of India. It outlines the functions, powers, and
structure of the RBI.

Abank to be known as Reserve Bank of India shall be established to undertake the

management of the currency of and to carry out its banking operations in accordance
with the provisions of Section of this Act.
The Act has undergone several amendments over the years to adapt to the changing
financial and economic landscape of the country. It serves as the foundational document
for the operation of the RBI, including its role in monetary policy, regulation of the
banking sector, and various other functions related to the Indian economy.
3.1
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Legal Framework of Banking The Reserve Bank of India Act, 1934

The primary objectives of the RBI, as stated in the Act, are to regulate the issue of
banknotes, maintain reserves, and operate the monetary system of India to the best
advantage of the country's economic interests.
The Reserve Bank of India (RBI) was established on April 1, 1935, in accordance with
the provisions of the Reserve Bank of India Act, 1934. The Act was enacted to address
the need for a centralized and regulated banking system in India, particularly in the wake
of economic challenges during the early 20th century.
The Act recognizes the RBI's role in fostering economic development while
maintaining price stability, ensuring credit flow to productive sectors, and supporting
government policies for promoting economic growth.
The Reserve Bank of India (RBI) was established on April 1, 1935, based on the
recommendations of the Hilton Young Commission, also known as the Royal
Commission on Indian Currency and Finance. The RBI was incorporated as a private
entity initially, but in 1949, it was nationalized, becoming a fully government-owned
institution.
Its primary purpose is to regulatethe issuance and supply of the Indian Rupee and to
ensure the stability and soundness of the country's monetary and financial system.
The plays a crucial role in managing India's monetary policy, controlling inflation,
RBI

and supervising the banking sector.

Functions and Provisions for the Reserve Bank of India (RBI)
1. Issuance of Currency: The RBI was entrusted with the sole right to issue
currency notes in India. It was responsible for the design, production, and circulation of
currency notes. One of its primary functions is the issuance and management of the
Indian Rupee.
2. Monetary Policy The RBI was given the authority to formulate and implement
:

monetary policy to control the money supply, interest rates, and inflation in the country.
The RBI formulates and implenments India's monetary policy to maintain price stability
and support economic growth
3. Regulation of Banking System : The RBI was responsible for regulating and
supervising the banking and financial system in India. It had the power to issue licenses
to banks and set banking regulations. It regulates and supervises the banking sector,
including commercial banks, cooperative banks, and non-banking financial institutions.
3.2
<br>

Legal Framework of Banking The Reserve Bank of India Act, 1934

4. Exchange Rate Management : The RBI was tasked with managing the exchange
rate and maintaining the stability of the Indian rupee in international markets.
5. Developmental Functions : The RBI was expected to promote and develop
financial institutions and markets in India to support economic growth.
6. Banker to the Government: The RBI served as the banker and financial advisor
to the central and state governments, managing their accounts and facilitating
government borrowing.
7. Reserve Management The RBI was responsible for managing the country's
:

foreign exchange reserves and gold reserves.

8. Supervision of Payment Systems : The RBI had the authority to regulate and
oversee payment systems in India, ensuring their efficiency and safety.
3.2 PROVISIONS RELATING TO INCORPORATION, CAPITAL
MANAGEMENT AND BUSINESS (SEC 3 to 19)
1. Establishment and Incorporation of Reserve Bank
(1) "A bank to be called the Reserve Bank of India shall be constituted for the
purposes of taking over the management of the currency from the (Central Government]
and of carrying on the business of banking in accordance with the provisions of this Act."
Section 3: This section establishes the Reserve Bank of India the central bank of
the country.
The establishment of a Reserve Bank, often referred to as the central bank, is vital for
a country's monetary and financial system. It is responsible for regulating and controlling

the money supply and interest rates to ensure economic stability. The incorporation of
the Reserve Bank typically involves legislative processes, such as passing an Act of
Parliament. This Act defines the central bank's objectives, powers, and governance
structure.
The Reserve Bank is granted the authority to issue and regulate the national
currency. manage foreign exchange reserves, and oversee the banking and financial
system to maintain stability.
2. The Reserve Bank of India Act, 1934 - Provisions relating to : Incorporation,
Capital Management and Business (Sec 3 to 19)
1. Section 3 Establishes the Reserve Bank of India (RBI) : This section likely
outlines the legal framework for establishing and incorporating the Reserve Bank. Its
3.3
<br>

Legal Framework of Banking The Reserve Bank of India Act, 1934

objectives, which include managing the country's currency and credit system for the
benefit of the economy.
Section 3 of the Reserve Bank of India Act, 1934, pertains to the "Incorporation" of
the Reserve Bank of India (RBI). This section establishes the RBI as the central bank of
India and outlines its incorporation details. The RBI was established on April 1, 1935, in
accordance with the Reserve Bank of India Act, 1934.It is wholly owned by the
Government of India. The RBI's headquarters is in Mumbai, but it has regional offices and
branches across India. The RBI is governed by a central board, and its policies are
determined by the Central Board of Directors and the Central Board's various
committees.
2. Section 4 Capital of the Bank : This section is probably discussing the capital
structure and financial resources of the central bank.
3. Section 5 Omitted "[Increase and Reduction of Share Capital] : Omitted by
the Reserve Bank (Transfer to Public Ownership) Act, 1948 (62 of1948), s. 7 and the
Schedule (w.e.f. 1-1-1949)."
4. Section 6 Offices, Branches, and Agencies : It likely explains how and where the
central bank can establish its various offices, branches, and agencies.
5. Section 7 Management : This section probably defines how the central bank is
managed, including the roles and responsibilities of key personnel.
6. Section 8 Composition of the Central Board, and Term of Office of
Directors: This likely discusses the composition of the central bank's governing body
and the tenure of its directors.
7. Section 9 Local Boards, their Constitution and Functions: It might describe
the formation and roles of local boards associated with the central bank.
:
8. Section 10 Disqualifications of Directors and Members of Local Boards This
section could specify the criteria that would disqualify individuals from serving as
directors or on local boards.
:
9. Section11 Removal From and Vacation of Office This section likely explains
the procedures for removing individuals from their positions within the central bank.
10. Section 12 Casual Vacancies and Absences : This section may detail how
temporary or unplanned vacancies are filled and how absences are managed.

3.4
<br>

Legal Framework of Banking The Reserve Bank of India Act, 1934

11. Section 13 Meetings of the Central Board: This section likely outlines the rules
and procedures for conducting meetings of the central bank's governing board.
[Section 14, Section 15,& Section 16 -Omitted by the Reserve Bank]
12. Section 17 Business which the Bank may Transact: This section might list the
various types of financial transactions or activities that the central bank is allowed to
engage in.
13. Section 18 Power of Direct Discount : It could discuss the central bank's
authority to engage in direct discounting of financial instruments.
14. Section 18A. Validity of Loan or Advance not to be Questioned : This section
likely states that the legality of loans or advances provided by the central bank cannot be
challenged.
15. Section 19 Business which the Bank may Not Transact : This section may
specify restrictions or limitations on certain types of business or activities that the central
bank is not allowed to undertake.
3.3 CENTRAL BANKING FUNCTIONS (SEC 20 to 45)
The Reserve Bank of India Act, 1934 is the legislation that established the Reserve
Bank of India (RBI) and outlines its various functions and powers as the central bank of
India. The Act has been amended over the years to adapt to changing economic and
financial conditions in the country.
The various functions of Central Banking are as followS:
1. Obligation of the Bank to Transact Government Business (Section 20) :
This section implies that the central bank, in this case, the Reserve Bank of India, is
legally required to handle various financial transactions related to the government. These
transactions could include managing the government's accounts, handling the issuance
and redemption of government securities, and conducting various financial operations
on behalf of the government.
[Section 20A (Omitted) : it has been omitted or removed.].
2. Bank's Right to Transact Government Business in India (Section 21) :
Section 21 likely grants the central bank (Reserve Bank of India) the legal authority or
right to conduct government-related financial operations within the territory of India.
This is a fundamental function of central banks in many countries, as they play a crucial
role in managing the financial affairs of the government.
3.5
<br>

Legal Framework of Banking The Reserve Bank of India Act, 1934

of Agreements made between the Bank and Certain States before the
3. Effect
1" November, 1956 (Section 21B.):
This provision likely pertains to agreements between the central bank (the "Bank")
and certain states that were in effect before November 1, 1956. These agreements may
have outlined specific terms or arrangements related to banking operations, financial
regulations, or other matters. The provision likely addresses the continuation,
modification, or validity of these agreements after the specified date.
4. Right to Issue Bank Notes (Section 22) :

This section usually deals with the legal authority and responsibility of a central bank
to issue and regulate the circulation of banknotes within a country. It grants the central
bank the exclusive right to issue physical currency, such as paper money, and ensures
that these notes are legal tender for the payment of debts.
5. Non-applicability of Certain Provisions to Digital Form of Bank Notes
(Section 22A):
This section may address the adaptation of regulations and provisions traditionally
designed for physical banknotes when it comes to digital or electronic forms of currency.
It's likely that this section clarifies how certain rules may not apply or may need
modifications in the context of digital currencies, such as crypto currencies or central
bank digital currencies (CBDCS).
6. Issue Department (Section 23) :
The "Issue Department" is a term used in the context of central banking. It typically
refers to the department or division within a central bank that is responsible for the
issuance and management of currency. This includes the issuance of physical banknotes
and, in modern times, the potential issuance of digital forms of currency like central bank
digital currencies (CBDCs). The Issue Department plays a crucial role in maintaining the
integrity and stability of a country's currency supply.
7. Denominations of Notes (Section 24) :
In India, the Reserve Bank of India (RBI) is responsible for determining the
denominations of banknotes. Denominations refer to the face values of the currency
notes. The Indian Rupee (INR) is issued in various denominations, including 2, 5, 10, 20,
50, 100, 200, 500, and 2000 rupee notes, among others. These denominations are

3.6
<br>

Legal Framework of Banking The Reserve Bank of India Act, 1934

decided based on the requirements of the economy, and the RBI can introduce new
denominations as needed.
8. Form of Bank Notes (Section 25) :

The form of Indian banknotes has evolved over time. Indian currency notes are
printed on special paper made of cotton and cotton rag. They typically have a
rectangular shape and feature images of prominent Indian personalities, historical
landmarks, and other national symbols. Security features such as watermarks, security
threads, and micro printing are incorporated to deter counterfeiting. The design and
form of Indian banknotes are periodically updated to include advanced security features
and to showcase elements of India's rich cultural heritage.
:
9. Legal Tender Character of Notes (Section 26)
currency notes issued by the RBI are considered legal tender. This means
In India, all

that they are officially recognized as a valid medium of exchange for settling transactions
and debts. Any individual or business is required to accept these notes as a means of
payment. However, it's essential to note that coins issued by the government also hold
legal tender status for smaller denominations.
10. Certain Bank Notes Cease to be Legal Tender (Section 26A)
:

The RBI has the authority to demonetize or withdraw specific banknote

denominations as legal tender when it deems necessary. This process involves
announcing the discontinuation of certain notes, and there is typically a window of time
during which people can exchange or deposit these notes in banks.
Inthe recent past, India experienced a notable instance of demonetization when, in
November 2016, the government announced the discontinuation of 500 and 1,000 rupee
notes to curb black money and promote digital payments.
11. Re-issue Notes (Section 27) :
This section deals with the process of reissuing currency notes. When currency notes
are returned to the RBI, they are carefully examined for their fitness. If they are found to
be fit for further use, they are re-issued. The Act provides guidelines on how this process
should be conducted, including the quality standards that notes must meet to be
reissued.

3.7
<br>

Legal Framework of Banking The Reserve Bank of India Act, 1934

12. Recovery of Notes Lost, Stolen, Mutilated, or Imperfect (Section 28) :

This section outlines the procedures for handling currency notes that are lost, stolen,
mutilated, or in imperfect condition. The RBI is responsible for managing and
investigating cases involving such notes. This includes the process for reporting lost
stolen notes, exchanging mutilated notes, and determining the validity of notes in
imperfect condition.
13. Issue of Special Bank Notes and Special One Rupee Notes in Certain Cases
(Section 28A) :
This section allows the RBI to issue special bank notes or special one rupee notes
under specific circumstances. These notes may be issued to meet unusual or emergency
situations, and the conditions for their issuance are determined by the RBI based on the
situation at hand. This provision gives the central bank flexibility to respond to
extraordinary financial or economic events.
14. Bank Exempt from Stamp Duty on Bank Notes (Section 29):
This section provides an exemption to the Reserve Bank of India (RBI) from paying
stamp duty on banknotes issued by it. Stamp duty is a tax collected on certain legal
documents, and this exemption ensures that the RBI doesn't have to pay this tax when
issuing or handling currency notes.
15. Powers of Central Government to Supersede Central Board (Section 30)
:

This section gives the Central Government the authority to supersede (temporarily
replace) the Central Board of the Reserve Bank of India if it deems it necessary in the
public interest. This provision allows the government to take control of the RBI's central
functions under extraordinary circumstances.
16. Issue of Demand Bills and Notes (Section 31):
Section 31 of the Act relates to the issuance of demand bills and notes by the
Reserve Bank. These demand bills and notes are financial instruments issued by the RBI
to control the money supply in the economy. It specifies the conditions and procedures
for the issuance of these instruments. (Sections 32, 35, and 36 - these sections have been
omitted or removed).
17. Assets of the Issue Department (Section 33) :
This section pertains to the assets held by the Issue Department of the RBI. The Issue
Department manages and controls the issuance of currency notes. This section likely
outlines the types of assets and their management within this department.
3.8
<br>

Legal Framework of Banking The Reserve Bank of India Act, 1934

18. Liabilities of Issue Department (Section 34):

contrast to the assets, this section addresses the liabilities of the Issue Department.
In

It would specify what obligations or debts the Issue Department has, which are

associated with the issuance of currency notes.

19. Suspension of Assets Requirements as to Foreign Securities (Section 37) :
This section deals with the suspension of asset requirements for foreign securities
held by the RBI. It gives the the authority to temporarily suspend the requirements
RBI

for certain types of foreign securities, allowing the central bank flexibility in managing its
foreign assets during exceptional circumstances.
20. Obligations of Government and the Bank in Respect of Rupee Coin (Section
38) :

The obligations of the Indian government and the RBI concerning the issuance and
management of rupee coins. It defines their respective responsibilities related to coinage
and circulation.
21. Obligation to Supply Different Forms of Currency (Section 39):
This section imposes an obligation on the RBI to ensure the supply of various forms
of currency, including banknotes and coins, to meet the monetary needs of the
economy. It underscores the central bank's responsibility for maintaining an adequate
supply of currency in different denominations.
:
22. Transactions in Foreign Exchange (Section 40)
Section 40 pertains to the RBI'S role in regulating foreign exchange transactions. It
grants the RBI the authority to control and manage foreign exchange operations in India.
The central bank plays a role in facilitating and regulating cross-border
crucial

transactions and managing the foreign exchange reserves of the country.

[Sections 41A and 44 of these sections have been omitted or removed.]
23. Cash Reserves of Scheduled Banks to be Kept with the Bank (Section 42) :
Section 42 mandates scheduled banks in India to maintain cash reserves with the RBI.
These reserves are an essential part of the country's monetary policy and banking
regulations. The RBI uses these reserves to control the money supply and maintain
financial stability.
3.9
<br>

Legal Framework of Banking The Reserve Bank of India Act, 1934

24. Publication of Consolidated Statement by the Bank (Section 43) :

This section requires the RBI to publish a consolidated statement, which provides a
comprehensive overview of the central bank's financial position and activities. This
transparency and disclosure are important for accountability and financial stability.
:

25. Protection of Action Taken in Good Faith (Section 43 A)

This section offers protection to individuals and entities who have acted in good faith
while carrying out their duties or responsibilities under the RBI Act. It safeguards them
from legal consequences if they acted in accordance with the law and in the best
interests of the central bank.
26. Appointment of Agents (Section 45):
Section 45 empowers the RBI to appoint agents who can act on its behalf or perform
specific functions. These agents can include banks or financial institutions that assist the
RBI in carrying out its operations, especially in remote or underserved areas.

The Reserve Bank of India Act, 1934, is crucial in defining the legal framework for
India's central banking functions and ensuring the effective functioning of the RBI in
maintaining monetary and financial stablity in the country. This information is based on
up to January 2022.

3.4 REGULATORY AND SUPERVIsORY COLLECTION AND FURNISHING

OF CREDIT INFORMATION (45 A to 45 G)
The objectives of Sections 45A to 45G of the Reserve Bank of India Act, 1934,
pertaining to the collection and furnishing of credit information, are as follows
:

1. Credit Information Sharing : These sections enable the establishment of a

comprehensive credit information sharing system in India. This system helps in the
efficient sharing of credit-related information among financial institutions and credit
bureaus.
2. Risk Mitigation : By collecting and sharing credit information, the Act aims to
reduce credit risk for financial institutions. Access to an individual's credit history helps
lenders make informed lending decisions and assess the creditworthiness of borrowers.
3. Consumer Protection : It also serves to protect consumers' rights by ensuring
that their credit information is used responsibly and with their consent. The Act
establishes rules and regulations to safeguard the privacy and accuracy of credit data.
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Legal Framework of Banking The Reserve Bank of India Act, 1934

4. Economic Stability : Effective credit information sharing contributes to the

stability of the financial system by preventing over-indebtedness and reducing the
likelihood of loan defaults.
5. Facilitating Financial Inclusion These provisions support financial inclusion
efforts by enabling a more accurate assessment of individuals creditworthiness,
including those who were previously excluded from the formal banking system.
6. Regulatory Oversight: The Reserve Bank of India (RBI) is responsible for
supervising and regulating credit information companies and ensuring that they comply
with the established guidelines. This oversight ensures the integrity and reliability of the
credit information system.
1. Section 45A - Banking Company
Section 45A of the Reserve Bank of India Act, 1934, deals with the regulatory and
supervisory aspects of collecting and providing credit information. Regulatory and
Supervisory means that the Reserve Bank of India (RBI) uses this section to regulate and
supervise the activities of banks and financial institutions.
Definitions
(a) "Banking company' means a banking company as defined in section 5 of the
1[Banking Requlation Act, 1949) (10 of 1949) and includes the State Bank of India,
2[any subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act,
1959 (38 of 1959), any corresponding new bank constituted by section 3 of the
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of
1970), and any other financial institution notified by the Central Government in
this behalfl"
(b) "Borrower" refers to any individual or entity to whom a credit limit has been
sanctioned by a banking company. This includes subsidiaries in the case of
companies or corporations, members ofa Hindu undivided family or frms in which
the member is a partner, partners in a firm or other firms in which the partner is
involved, and individuals who are partners in a firm.
(c) "Credit information" encompasses various details related to loans, advances, and
credit facilities granted bya banking company, the nature of security provided by
borrowers, guarantees offered by a banking company to its customners, information

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Legal Framework of Banking The Reserve Bank of India Act, 1934

about the financial history and creditworthiness of borrowers, and any other
information that the Reserve Bank of India (RBI) may consider relevant for
regulating credit or credit policy more effectively.
2. Section 45B- Power of Bank to Collect Credit Information
It appears to pertain to a "Bank" having the power to collect and share credit

information with banking companies. The Bank, as mentioned in this regulation, is

authorized to collect credit information. This credit information is collected from banking
companies. It can be about individuals or entities that have credit relationships with
these banks.
(a) Manner of Collection: The Bank can collect this information "in such a manner
as it may think fit." This provides flexibility to the Bank to determine how to gather the
credit information.
: The Bank is also empowered to
(b) Furnishing Information (Section 45B(b)
furnish this collected credit information to other banking companies.
3. Section 45C - Power to Call for Returns containing Credit Information
(a) Power to Request Credit Information: Under this section, the central bank
(referred to as "the Bank") is granted the authority to request specific credit information
from any banking company. This authority is given to the central bank to enable it to
fulfill its functions as outlined in the relevant chapter of the legislation or regulation.
(b) Request for Statements : The central bank can, at any time, direct a banking
company to submit statements containing credit-related information. These statements
should be in a form specified by the central bank, and the central bank can set deadlines
for their submission. The exact content and format of these statements would be defined
by the central bank as needed.
(c) Obligation to Comply : Importantly, the section states that a banking company

must comply with the central bank's directives issued under sub-section (1), irrespective
of any existing laws, instruments regulating the company's constitution, or agreements it
may have in place. This means that the central bank's authority to request credit
information takes precedence over other regulations or secrecy agreements that a
banking company might have with its customers.

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Legal Framework of Banking The Reserve Bank of India Act, 1934

-
4. Section 45D Procedure for Furnishing Credit Information to Banking
Companies
A banking organization may, in connection with any monetary association entered
into or proposed to be entered into via it, with any man or woman, make an application
to the financial institution in such shape because the financial institution may specify
inquiring for it to grant the applicarnt with such credit score records as can be unique
inside the software.
On receipt of a software beneath sub-phase (1), the financial institution shall, as
quickly as can be, supply the applicant with such credit records relating to the subjects
designated in the software, as can be its possession.
The financial institution may also in admire of each utility levy such expenses, now
not exceeding twenty-five rupees, as it could deem fit for furnishing credit score facts.
5. Section 45E - Disclosure of Information Prohibited
(a) Confidentiality of Credit Information : Credit information submitted by a
banking company under section 45C or provided by the Bank to a banking company
under section 45D must be treated as confidential and cannot be published or disclosed,
except for purposes mentioned in this chapter.
(b) Exceptions to Confidentiality:
(i) Banking companies can disclose information with the prior permission of the

Bank.
(i) The Bank can publish consolidated information if it deems it necessary for the
public interest, without revealing specific bankingg company or borrower names.
(i) Disclosure or publication of credit information to other banking companies or in
accordance with established banking practices is allowed.
(iv) Credit information disclosures are permitted under the Credit Information

Companies (Regulation) Act, 2005, subject to certain conditions.

(c) Legal Protection : No court, tribunal, or authority can force the Bank or any
banking company to produce or provide inspection of statements submitted by the
banking company under section 45C or disclose credit information provided by the Bank
under section 45D, regardless of other existing laws.
These rules aim to protect the confidentiality of credit information while allowing for
specific exceptions and legal safeguards.
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Legal Framework of Banking The Reserve Bank of India Act, 1934

6. Section 45F - Certain Claims for Compensation barred

"No person shall have any right, whether in contract or otherwise, to any
compensation for any loss incurred by reason of the operation of any of the provisions
of this Chapter".
Section 45G - Omitted by the Reserve Bank of India
3.5 Penalties (Sec 58 B to 58 -G)
(I) Section 58 B

(1) Whoever in any software, announcement, go back, statement, facts or particulars

made, required or furnished via or under or for the functions of any provisions of this act,
or any order, regulation or direction made or given there under or in any prospectus or
commercial issued for or in connection with the invitation through any individual, of
deposits of money from the general public wilfully makes a declaration which is fake in
any material specific knowing it to be false or wilfully omits to make a fabric assertion
will be punishable with imprisonment for a term which may amplify to a few years and
shall also be at risk of fine.
(2) If any person fails to produce any book, account or other document or to furnish
any statement, records or details which, under this act or any order, requlation or route
made or given there under, it's his duty to provide or furnish or to answer any query
positioned to him in pursuance of the provisions of this Act or of any order, law or path
made or given there under, he shall be punishable with penalty which may amplify to
one lakh rupees in respect of every offence.
(3) If any individual contravenes the provisions of section 31, he will be punishable
with pleasant which may expand to the quantity of the invoice of change, hundi,
promissory observe or engagement for payment of money in admire whereof the
offence is devoted.

(4) If any man or woman discloses any credit statistics, the disclosure of which is
prohibited, he be punishable with imprisonment for a time period which may
will

additionally enlarge to 6 months, or with fine which may extend to one thousand rupees.
(I) Offences by Companies (Section 58 )
(1) "Where a person committing a contravention or default referred to in Section 58B
is a company, every person who, at the time the contravention or default was committed,

3.14
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Legal Framework of Banking The Reserve Bank of India Act, 1934

was in charge 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 contravention
or default 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 punishment if he proves that the contravention or default was committed
without his knowledge or that he had exercised all due diligence to prevent the
contravention or default.
(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 same was
committed with the consent or connivance of, or is attributable to any neglect on the
part of, any director, manager, secretary, or other officer or employee of the company,
such director, manager, secretary, other officer or employee shall also be deemed to be
guilty of the offence and shall be liable to be proceeded against and punished
accordingly."
Explanation 1. Any offence punishable under this Act shall be deemed to have been
committed at the place where the registered office or the principal place of business, as
the case may be, in India, of the company is situated.
Explanation 2. For the purpose of this section,
(a) "a company" means any body corporate and includes a corporation, a non
banking institution, a firm, a co-operative society or other association of individuals;
(b) "director", in relation to a firm, means a partner in the firm.
Application of Section 58B barred (Section 58 D)
Nothing independent in area 58B shall administer to, or in account of, any amount
dealt with in area 42.
() Cognizance of Offences (Section 58 E)
No Court shall take cognizance of any offense punishable under this Act except upon
a complaint in writing made by an officer of the Bank, and no Court other than that of a
Judicial magistrate of the first class or court superior thereto shall try any such offence.
(IV) Application of Fine (Section 58 F)

A Court imposing any fine under this Act may direct that the whole or any part
thereof shall be applied in, or towards payment of, the cost of the proceedings.

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Legal Framework of Banking The Reserve Bank of India Act, 1934

(V) Power of Bank to Impose Fine (Section 58 G)

If the contravention or default of the nature referred to in section 58 B is committed

by a non-banking financial company, the Bank may impose on such non-banking

financial company, a penalty not exceeding rupees twenty five thousand.
-
3.6 RBI Act (As Amended By Finance Act 2018) Monetary Policy
Committee (Sec. 45 ZA to 45 ZO)
The Reserve Bank of India Act, 1934 as per arrangement of section 45ZA to 45ZO are
as follows :
Inflation Target
(1) The Central Government shall, in consultation with the Bank, determine the
inflation target in terms of the Consumer Price Index, once in every five years.
(2) The Central Government shall, upon such determination, notify the inflation
target in the Official.
(A) Constitution of Monetary Policy Committee
(1) The Central Government may, by notification in the Official Gazette, constitute a
Committee to be called the Monetary Policy Committee of the Bank.
(2) The Monetary Policy Committee shall consist of the following Members, namely:
(a) The Governor of the Bank- Chairperson, ex officio;
(b) Deputy Governor of the Bank, in charge of Monetary PolicyMember, ex
officio;
(c) One officer of the Bank to be nominated by the Central Board -Member, ex
officio; and
persons to be appointed by the Central Government -Members.
(d) Three
(3) The Monetary Policy Committee shall determine the Policy Rate required to
achieve the inflation target.
(4) The decision of the Monetary Policy Committee shall be binding on the Bank.
(B) Eligibility and Selection of Members appointed by Central Government
The Members of the Monetary Policy Committee referred to in clause (d) of sub
section (2) of Section 45ZB shall be appointed by the Central Government from amongst
persons of ability, integrity and standing, having knowledge and experience in the field
of economics or banking or finance or monetary policy: Provided that no person shall be
appointed as a Member, in case such person

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Legal Framework of Banking The Reserve Bank of India Act, 1934

(1) has completed the age of seventy years on the date of appointment as Member;
(2) is a Member of any Board or Committee of the Bank;
(3) is an employee of the Bank;
(4) is a public servant as defined under section 21 of the Indian Penal Code (45 of
1860):
(5) is a Member of Parliament or any State Legislature;

(6) has been at any time, adjudged as an insolvent;

(7) has been convicted of an offence which is punishable with an imprisonment for a
term of one hundred and eighty days or more;
(8) is physically or mentally incapable of discharging the duties of a Member of the

Monetary Policy Committee; or

(9) has a material conflict of interest with the Bank and is unable to resolve such

conflict.
(C) Terms and Conditions of Appointment of Members of Monetary Policy
Committee
(1) The Members of the Monetary Policy Committee appointed under clause (d) of
sub-section (2) of section 45ZB shall hold office for a period of four years and
shall not be eligible for re-appointment.
(2) The terms and conditions of appointment of Members of the Monetary Policy

Committee shall be such as may be prescribed by the Central Government and

the remuneration and other allowances payable to such Members shall be such
as may be specified by the regulations made by the Central Board.
(3) A Member may resign from the Monetary Policy Committee, at any time before

the expiry of his tenure under sub-section (1), by giving to the Central
Government, a written notice of not less than six weeks, and on the acceptance of
the resignation by the Central Government, he shallcease to be a Member of the
Monetary Policy Committee.
(D) Removal of Members of Monetary Policy Committee
(1) The Central Government may remove from office any Member of the Monetary
Policy Committee appointed under clause (d) of sub-section (2) of section 45ZB,
who:
(a) is, or at any time has been, adjudged as an insolvent; or
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Legal Framework of Banking The Reserve Bank of India Act, 1934

(b) has become physically or mentally incapable of acting as a Member; or

(c) has been convicted of an offence which, in the opinion of the Central

Government, involves moral turpitude; or

(d) has failed to adequately disclose any material conflict of interest at the time of his
appointment; or
(e)does not attend three consecutive meetings of the Monetary Policy Committee
without obtaining prior leave; or
() has acquired such financial or other interest as is likely to affect prejudicially his
functions as a Member; or
(g) has acquired any post referred to clauses (b), (c), (d) and clause (e) of the
in

proviso to sub-section (1) of section 45ZC; or

(h) has, in the opinion of the Central Government, so abused his position as to
render his continuance in office detrimental (harmful) to the public interest.
(2) No Member appointed under clause (d) of sub-section (2) of section 45ZB shall
be removed under clause (d) or clause (e) or clause () or clause (g) or clause (h)
of sub-section (1) unless he has been given a reasonable opportunity of being
heard in the matter.
(E) Vacancies, etc., not to Invalidate Proceedings of Monetary Policy Committee
(1) No act or proceeding of the Monetary Policy Committee shall be invalid merely
by reason of
:

(a) Any vacancy in, or any defect in the constitution of the Monetary Policy
Committee; or
(b) Any defect in the appointment of a person acting as a Member of the Monetary
Policy Committee; or
(c) Any irregularity in the procedure of the Monetary Policy Committee not affecting
the merits of the case.
(F) Secretary to Monetary Policy Committee
(1) The Bank shall appoint a Secretary to the Monetary Policy Committee to provide
secretariat support to the said Committee.
(2) The Secretary shall perform such functions and in such manner as may be
specified by the regulations made by the Central Board.

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Legal Framework of Banking The Reserve Bank of India Act, 1934

(G) Information for Monetary Policy Committee Members

(1) The Bank shall provide all information to the Members of the Monetary Policy
Committee that may be relevant to achieve the inflation target.
(2) In addition to information provided by the Bank under sub-section (1), any
Member of the Monetary Policy Committee may, at any time, request the Bank
for additional information, including any data, models or analysis.
(3) The Bank shall provide the information, as referred to in sub-section (2), to the

Member of the Monetary Policy Committee, within reasonable time, unless :

(a) The information pertains to an entity or person and is not publicly available; or
(b) The information allows an entity or person to be identified and the information is
not publicly available.
(4) Any information provided by the Bank to a Member of the Monetary Policy
Committee shall be provided to all the Members of the Monetary Policy
Committee.
(H) Meetings of Monetary Policy Committee
(1) The Bank shallorganise at least four meetings of the Monetary Policy Committee
in a year.
(2) The quorum for the affair of the Monetary Policy Committee shall be four
Members, of whom one shall be the Governor and in his absence, the Deputy
Governor who the Member of the Monetary Policy Committee.
is

(3) The affairs of the Monetary Policy Committee shall be presided over by the
Governor and in his absence by the Deputy Governor who is a Member of the
Monetary Policy Committee.
(4) All questions which appear before the Monetary Policy Committee shall be

decided by a majority of votes by the Members present and voting, and in case
of equal votes, the Governor shall accept an additional or casting vote.
(5) The proceeding ofthe Monetary Policy Committee shall be confidential.
() Steps to be taken to Implement Decision of Monetary Policy Committee
(1) The Bank shall publish a document explaining the steps to be taken by it to

implement the decisions of the Monetary Policy Committee, including any

changes thereto.
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Legal Framework of Banking The Reserve Bank of India Act, 1934

(2) The particulars to be included in such document and the frequency of

publications of such document shall be such as may be specified by the
regulations made by the Central Board.
(U) Publication of Decisions
The Bank shall publish, after the conclusion of every meeting of the Monetary
Policy Committee, the resolution adopted by the said Committee.
(K) Publication of Proceedings of Meeting of Monetary Policy Committee
(1) The Bank shall publish, on the fourteenth day after every meeting of the
Monetary Policy Committee, the minutes of the proceedings of the meeting
which shall include the following, namely:
(a) the resolution adopted at the meeting of the Monetary Policy Committee;
(b) the vote of each member of the Monetary Policy Committee, on resolutions
adopted in the said meeting; and
(c) the statement of each member of the Monetary Policy Committee under sub

section (11) of section 45ZL on the resolutions adopted in the said meeting.
(4) Monetary Policy Report
(1) The Bank shall, once in every six months, publish a document to be called the
Monetary Policy Report, explaining:
(a) the sources of inflation; and
(b) the forecasts of inflation for the period between six to eighteen months from the
date of publication of the document.
(2) The form and contents of the Monetary Policy Report shall be such as may be
specified by the regulations made by the Central Board.
(M) Failure to Maintain Inflation Target
(1) Where the Bank fails to meet the inflation target, it shall set out in a report to the
:
Central Government
(a) The reasons for failure to achieve the inflation target;
(b) Remedial actions proposed to be taken by the Bank; and
() An estimate of the time-period within which the inflation target shall be achieved
pursuant to timely implementation of proposed remedial actions.
(N) Power to Make Rules
(1) The Central Government may, by notification in the Official Gazette, make rules
for the purpose of carrying out the provisions of this Chapter.

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Legal Framework of Banking The Reserve Bank of India Act, 1934

(2) In particular and without prejudice to the generality of the foregoing power, such
rules may
provide for :
(a) The procedure of functioning of the Search-cum-Selection Committee under sub
section (3) of section 45ZC;
(b) The terms and conditions of appointment, (other than the remuneration and
other allowances), of Members of the Monetary Policy Committee under sub
section (2) of section 45ZD; and
(c) Any other matter which is to be, or may be, prescribed by the Central
Government by rules.

3.7 RBI and Regulation of Digital Financial Services in India, 2012 to

2016
The Reserve Bank of India (RBI) has played a pivotal role in regulating digital financial
services in India from 2012 to 2016. During this period, the rapid growth of digital
financial services, including mobile banking, digital wallets, and payment gateways,
posed new challenges and opportunities.
Objectives of RBI's Digital Financial Services in India
The objectives of RBI's Digital Financial Services in India as follows:
1. Financial Inclusion : To promote financial inclusion and ensure that a larger
segment of the population, particularly in rural areas, has access to digital financial
services.
2. Security and Consumer Protection : To establish robust security and consumer
protection measures to safeguard the interests of users and prevent fraud and data
breaches.
3. Payment and Settlement Systems: To modernize and regulate payment and
settlement systems, making them more efficient, secure, and transparent.
4. Monetary Policy Transmission : To improve the transmission of monetary policy
through digital channels, facilitating smoother and more effective monetary policy
implementation.

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Legal Framework of Banking The Reserve Bank of India Act, 1934

5. Compliance and Anti-Money Laundering (AML) Regulations : To ensure that

digital financial service providers comply with AML and Know Your Customer (KYC)

regulations, reducing the risk of money laundering and fraud.

:
6. Innovation and Competition To foster innovation and competition in the
digital financial services sector, allowing new players to enter the market while
maintaining a level playing field.
7. Data Privacy and Cyber security To address concerns related to data privacy
:

and cyber security, given the growing reliance on digital transactions and data sharing.
8. Interoperability : To encourage interoperability among different digital financial
service providers, making it easier for users to transact across various platforms.
Regulation and Guidelines to Oversee Digital Financial Services in India
The Reserve Bank of India (RBI) introduced a series of regulations and guidelines to
oversee digital financial services in India from 2012 to 2016. Following are significant
developments during this period:
1. Prepaid Payment Instruments (PPI) Regulations, 2012 : RBI introduced
requlations for prepaid payment instruments in 2012, which laid down the framework for
the issuance and operation of prepaid wallets and cards in India. These requlations
aimed to promote digital transactions and enhance financial inclusion.
2. Guidelines for Mobile Banking Transactions, 2013 : In 2013, RBI issued

guidelines for mobile banking transactions, allowing banks to offer various banking
services through mobile phones. This move aimed to make banking services more
accessible through mobile devices.
:
3. Payment and Settlement Systems Act, 2007 Amendment 2014 An

amendment to the Payment and Settlement Systems Act, 2007 in 2014 gave the RBI
greater authority to regulate and oversee payment systems India, including digital
payment systems.
4. Licensing of Payment Banks and Small Finance Banks 2015 : In 2015, RBI

introduced a new category of banks called "Payment Banks" and "Small Finance Banks."
These banks were allowed to provide a range of digital financial services, including small
savings accounts, remittance services, and payment services.
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Legal Framework of Banking The Reserve Bank of India Act, 1934

:
5. Unified Payment Interface (UPI), 2016 One of the most significant
developments was the launch of the Unified Payment Interface (UPI) in 2016. UPI
revolutionized digital payments in India, allowing users to make instant, secure, and
interoperable transactions using their mobile phones. It paved the way for the rapid
growth of digital payment apps and services in the country.
6. Demonetization, 2016: While not a regulation per se, the demonetization of
high-denomination currency notes in 2016 had a significant impact on digital financial
services. The government's move to reduce cash usage and promote digital transactions
led to a surge in the adoption of digital payment methods.
: RBI
7. Mobile Banking and Payment Systems issued guidelines in 2012 to
regulate mobile banking and payment services, allowing banks to offer mobile-based
financial services to customers. This enabled the growth of mobile wallet and payment
apps.
:
8. Prepaid Payment Instruments (PPIs) In 2014, RBI released comprehensive
guidelines for prepaid payment instruments, which included digital wallets and prepaid
cards. These guidelines imposed restrictions on the issuance and usage of PPls, aiming to
enhance security and customer protection.
9. Payment and Settlement Systems: RBI introduced the Payment and Settlement
Systems Act, 2007, and its regulations to oversee payment and settlement systems in

India. This included the Real-Time Gross Settlement System (RTGS) and the National
Electronic Funds Transfer (NEFT) system, which are crucial for digital transactions.
10. Know Your Customer (KYC) Norms: RBI revised and streamlined KYC norms for
financial institutions, including digital wallet providers, in 2016. This made it mandatory
for customers to complete the KYC process to use digital wallets, enhancing security and
reducing the risk of fraud.
11. Cashless Transactions : During this period, RBI actively encouraged the adoption
of digital payment methods and cashless transactions, including the promotion of the
Unified Payments Interface (UPI) system, which was introduced in 2016.

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Legal Framework of Banking The Reserve Bank of India Act, 1934

: RBI
12. Data Security and Fraud Detection also emphasized the need for data
security and fraud detection in digital financial services. It required financial institutions
to implement robust security measures and reporting mechanisms to combat cyber
threats.
: In
13. Licensing and Regulation of Payment Banks and Small Finance Banks
2014, RBI issued licenses for Payment Banks and Small Finance Banks, allowing them to
provide digital financial services. These entities played a significant role in expanding
financial inclusion in India.
These regulations and quidelines laid the foundation for the growth of digital
financial services in India, making it easier for consumers to access a wide range of
financial products and services through digital channels.

QUESTIONS FOR DISCUssION

1. State the provisions of RBI Act, 1934 relating to Incorporation, Capital
Management and Business.
2. Explain the various Central Banking Functions under the RBI Act, 1934.
3. Explain the various Provisions relating to Regulatory and Supervisory Collection

and Furnishing of Credit Information under the RBI Act, 1934.

4. Explain about RBI and Regulation of Digital Financial Services in India (2012 to
2016).
5. Write Short Notes
(A) Penalties (RBI Act, 1934)
(B) Monetary Policy Committee

3.24
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Chapter 4..
Securitisation and Reconstruction of
Financial Assets and Enforcement
of Security Interest Act, 2002
Contents
Provisions relating to
:
4.1 Preliminary (Section l and 2), Regulation of Securitisation
and Reconstruction of Financial Assets and Financial Institutions (Section 3 to 12 A),

Enforcement of Security Interest (Section 13 to l9), Central Registry (Section 20 to

26), Offences and Penalties (Section 27 to 30), Miscellaneous (Section 31 to 41),
Relevant Amendments between 2004 and 2008 and Amendments in SARFAESI Act
in 2016 : (Taking Possession over Collateral: Audit and inspection)

4.1.1 Introduction
4.1.2 Objectives of SARFAESI Act, 2002
4.1.3 Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002 - Provisions relating to Preliminary (Section land 2)
:

4.1.4 Regulation of Securitisation and Reconstruction of Financial Assets and Financial

Institutions (Section 3 to 12 A)
4.1.5 Enforcement of Security Interest (Section 13 to 19)
4.1.6 Central Registry (Section 20 to 26)
4.1.7 Asset Reconstruction Company or Secured Creditors to Report Satisfaction of Security
Interest (Section 25)
4.1.8 Right to Inspect Particulars of Securitisation, Reconstruction and Security Interest
Transactions (Section 26)
4.1.9 Offences and Penalties (Section 27 to 30)
4.1.10 Miscellaneous (Section 31 to 41)
4.1.11 Relevant Amendments between 2004 and 2008 and Amendments in SARFAESI Act
in 2016
• Questions for Discussion

4.1
<br>

.
Legal Framework of Banking Securitisation and Reconstruction

4.1 PROVISIONS RELATING TO: PRELIMINARY (SECTION AND 2), 1

REGULATION OF SECURITISATION AND RECONSTRUCTION OF
FINANCIAL ASSETS AND FINANCIAL INSTITUTIONS (SECTION 3
TO 12 A), ENFORCEMENT OF SEcURITY INTEREST (SECTION 13
TO 19), CENTRAL REGISTRY (SECTION 20 TO 26), OFFENCES AND
PENALTIES (SECTION 27 TO 30), MISCELLANEOUS (SECTION 31
TO 41), RELEVANT AMENDMENTS BETWEEN 2004 AND 2008 AND
AMENDMENTS IN SARFAESI ACT IN 2016: (TAKING POSSESSION
oVER COLLATERAL: AUDIT AND INSPECTION)
4.1.1 Introduction
The Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (SARFAESI Act) is an Indian financial law aimed at addressing
non-performing assets (NPAs) and facilitating the recovery of loans by banks and
financial institutions.
SARFAESI Act is applicable to the entire territory of India for securitization, recovery
of financial assets, and recovery of security interest.
SARFAESI Act applies to all financial institutions registered by the Reserve Bank of
India as securitisations companies or as asset reconstruction companies.
The SARFAESI Act was enacted to provide a legal framework that allows banks and
financial institutions to efficiently recover their dues from defaulting borrowers and
reduce the burden of bad loans on the financial system.
In 1991, the Narasimham Committee-I (Committee on the Financial System) noted
that borrowers often seek stay orders from Ordinary Courts, causing banks and financial
institutions to encounter difficulties in recovering Non-Performing Assets (NPAs).
Consequently, in order to enhance this process, Debt Recovery Tribunals were
established in 1993, thereby removing the loan recovery process from the jurisdiction of
Ordinary Courts.
In 1998,the Narasimham Committee - II (Committee on Banking Sector Reforms)
recognized the need to fortify the Debt Recovery Tribunals (DRTs) through legislation. As
a result, the Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest (SARFAESI) Act was enacted in 2002.
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4.1.2 Objectives of SARFAESI Act, 2002

The Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002, primary objectives include :
1. To empower banks and financial institutions to take legal action for the
enforcement of security interest.
2. To enable the sale of financial assets to asset reconstruction companies for faster
recovery.
the securitization of financial assets to improve liquidity for banks.
3. To facilitate
4. To streamline the process of recovery by providing a framework for debt recovery
tribunals.
5. Toreduce the burden of mounting NPAs in the banking sector.
4.1.3 Securitisation and Reconstruction of Financial Assets and
-
Enforcement of Security Interest Act, 2002 Provisions relating
to : Preliminary (Section 1 and 2)
Section 1 of the SARFAESI Act provides the title and extent of the law. It states that
the Act may be called the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002.
This section also mentions that the Act extends to the whole of India. It shall be
deemed to have come into force on the 21st day of June, 2002.
Definitions
1. "Appellate Tribunal" means a Debts Recovery Appellate Tribunal established
under sub-section (1) of section 8 of the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993 (51 of 1993);"
2. Asset reconstruction" means acquisition by any securitisation company or
reconstruction company of any right or interest of any bank or financial
institution in any financial assistance for the purpose of realisation of such
financial assistance:"
Section 2 iscrucial as it defines various terms used throughout the Act. Some of the
key definitions include:
1. Asset Reconstruction Company (ARC): It defines what an ARC is and its role in
acquiring and managing financial assets.

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2. Debenture: It explains the meaning of debenture, which can be considered a

security.
3. Financial Asset: This section clarifies what is considered a financial asset.
4. Non-Performing Asset (NPA): Defines an NPA, which is an asset where the
borrower has defaulted on repayment.
5. Security Interest: Explains the concept of security interest and the types of
securities that fall under its purview.
6. Securitisation Company: Describes what a securitization company is and its
functions.
7. Securitisation Receipt: This term is also defined in this section.
8. Securitisation Transaction: Provides a definition for a securitization transaction.
These definitions are essential to understanding the Act and how it applies to various
financial instruments and transactions.
4.1.4 Regulation of Securitisation
and Reconstruction of Financial
Assets and Financial lnstitutions (Section 3 to 12 A)
) Registration of Securitization Companies and Reconstruction Companies
(Section 3)
This section deals with the registration of asset reconstruction companies and
securitization companies. No securitisation company or reconstruction company shall
commence or carry on the business of securitisation or asset reconstruction without
obtaining a certificate of registration granted under this section and having the owned
funds of not less than two crore rupees or such other amount not exceeding fifteen per
cent of total financial assets acquired or to be acquired by the securitisation company or
reconstruction company, as specified by the Reserve Bank of India through notification.
It should be noted that the Reserve Bank of India has the authority to specify
different amounts of owned fund for different classes of securitisation companies or
reconstruction companies through notification.
Additionally, any securitisation company or reconstruction company that was in
existence at the commencement of this Act must apply for registration to the Reserve
Bank within six months from such commencement. They may continue to carry on the
business of securitisation or asset reconstruction until a certificate of registration is
granted or the rejection of the application for registration is communicated to them,
regardless of the provisions stated in this sub-section.
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Every securitisation company or reconstruction company is required to submit an

application for registration to the Reserve Bank in the form and manner specified by the
Reserve Bank.
For the purpose of considering the application for registration of a securitisation
company or reconstruction company to commence or carry on the business of
securitisation or asset reconstruction, the Reserve Bank of India may require to be
satisfied by conducting an inspection of the records or books of such securitisation
company or reconstruction company.
(II) Cancellation This likely refers to the
of Certificate of Registration (Section 4):
process or conditions under which a certificate of registration issued to a financial
institution can be canceled under the Act.
The Reserve Bank may cancel a certificate of registration granted to an asset
reconstruction company if such company ceases to carry on the business of
securitization or asset reconstruction or fails to comply with any of the conditions subject
to which the certificate of registration is granted or ceases to fulfill the conditions
specified under sub-section (3) of section 3.

(II) Acquisition of Rights or Interest in Economic Belongings (Section 5)

Not withstanding anything contained in any settlement or any other law in the
intervening time under pressure, any [asset reconstruction company] may additionally
collect the financial belongings of any bank or economic institution.
1. With the aid of issuing a debenture or bond or some other protection in the

nature of debenture, for consideration agreed upon between such organization and the
financial institution or financial institution, incorporating therein such terms and
conditions as can be agreed upon between them; or
2. With the aid of moving into an agreement with such financial institution or
monetary organization for the transfer of such financial belongings to such agency in
such phrases and situations as may be agreed upon between them.
Transfer of Pending Applications to any one of Debts Recovery Tribunals in
(IV)

Certain Cases (Section 5A): This section pertains to the transfer of pending cases
related to financial assets to Debts Recovery Tribunals (DRTS) when certain conditions
are met. DRTS handle the legal aspects of recovering debts.
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() Notice to Obligor and Discharge of Obligation of Such Obligor (Section 6):

This section specifies that when an ARC acquires financial assets, it must notify the
borrower (obligor) and provide an opportunity for them to settle their obligations. Once
the obligation is discharged, the ARC must update the status of the asset.
(VI) Issue of Security by Raising of Receipts or Funds by Asset Reconstruction
Company (Section 7): This section allows ARCs to issue security receipts or raise funds
through various means to carry out their activities in relation to the acquired financial
assets.
(VI) Exemption from Registration of Security Receipt (Section 8): It discusses
exemptions from the requirement of registering security receipts in certain cases, making
it easier for ARCs to operate.
(VIII)Measures for Assets Reconstruction (Section 9): This section provides
guidance on the measures and strategies that ARCs can adopt for the reconstruction and
resolution of acquired financial assets.
(IX)Other Functions of Asset Reconstruction Company (Section 10): This section
outlines various other functions and powers that ARCS may exercise to effectively
manage and resolve financial assets, such as taking possession of secured assets.
(X) Resolution of Disputes (Section 11): It addresses the resolution of disputes
between the obligor, the secured creditor, and the ARC, ensuring that conflicts are
settled in a legally defined manner.
(XI) Power of Reserve Bank to Determine Policy and Issue Directions (Section
12): This section grants the Reserve Bank of India (RBI) the authority to determine the
policy related to the SARFAESI Act and issue necessary directions to regulate ARCs.
(XII) Power of Reserve Bank to Call for Statements and Information
(Section 12A) : It empowers the RBI to request statements and information from ARCs,
ensuring compliance and proper functioning within the regulatory framework.
4.1.5 Enforcement of Security Interest (Section 13 to 19)
(I) Enforcement of Security Interest (Section 13)
Section 13 of the Indian Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (SARFAESI Act) deals with the enforcement of
security interests. It allows secured creditors to enforce security interests without the
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need for court or tribunal intervention. This means that if a borrower has defaulted on a
loan secured by specific assets, such as property or assets, the lender (secured creditor)
can take action to recover the debt by following the procedures outlined in the SARFAESI
Act, rather than going through a lengthy court process. This provision streamlines and
expedites the process for creditors to recover their dues when borrowers default on their
loans.
1. Any safety interest created in favour of any secured creditor may be enforced,
with out the intervention of the court or tribunal, through such creditor in accordance
with the provisions of this Act.
2. Where any borrower, who's under a legal responsibility to a secured creditor
beneatha protection agreement, makes any default in reimbursement of secured debt or
any instalment thereof, and his account in admire of such debt is assessed by way of the
secured creditor as non-appearing asset, then, the secured creditor may additionally
require the borrower by word in writing to discharge in complete his liabilities to the
secured creditor within sixty days from the date of note failing which the secured
creditor shall be entitled to exercising all or any of the rights under sub-section (4).
(II) Enforcement of Security Interest (Section 14)
Under the SARFAESI Act (Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act), 2002, Section 14 empowers the Chief Metropolitan
Magistrate or District Magistrate to assist secured creditors in taking possession of
secured assets. This section of the Act provides a legal framework for secured creditors
such as banks, to take possession of and sell the assets of a borrower in the event of
default on a loan.
The Chief Metropolitan Magistrate or District Magistrate plays a crucial role in
ensuring that the process of taking possession of the secured asset is carried out lawfully
and in accordance with the Act's provisions. They can issue orders and assist the secured
creditor in enforcing their security interest in the asset, including facilitating the physical
takeover of the asset.
This provision is an essential tool for financial institutions to recover their dues when
borrowers default on loans, and it helps streamline the process of enforcing security
interests while maintaining due process and legal safeguards.
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(I) Manner and Effect of Take Over of Management (Section 15)

Section 15 of the SARFAESI Act pertains to the manner and effect of the takeover of
management when the management of a borrower's business is taken over by either an
asset reconstruction company under clause (a) of section 9 or by a secured creditor
under clause (b) of sub-section (4) of section 13. When such a takeover occurs, the
secured creditor has the authority to appoint individuals. This appointment is done
through the following means:
1. If the borrower is a Company as defined
the Companies Act, 2013, the secured
in

creditor can appoint directors for that borrower, following the provisions of the
Companies Act, 2013.
2. In cases where the borrower is not a Company, the secured creditor can appoint
an administrator to manage the business of the borrower.
The appointment process is typically accompanied by publishing a notice in both an
English language newspaper and an Indian language newspaper in circulation in the
place where the borrower's principal office is located. This provision allows the secured
creditor to take over and manage the borrower's business when necessary, ensuring the
recovery of the debt or the resolution of financial issues.
(IV) No Compensation to Directors for Loss of Office (Section 16)
Managing directors, other directors, managers, or individuals responsible for
managing a borrower's business will not be entitled to any compensation for the loss of
their position or for the premature termination of any management contract with the
borrower, as per this Act.
However, the sub-section(1) does not affect the right of such managing directors,
directors, managers, or individuals to recover other monies owed to them from the
borrower's business, which is separate from compensation.
(V) Application against Measures to Recover Secured Debts (Section 17)
The section 17 of the SARFAESI Act 2000 deals with the "Application against
measures to recover secured debts." Any person, including the borrower, who is
aggrieved by the measures taken by the secured creditor or their authorized officer as
mentioned in section 13(4) of the SARFAESI Act, can file an application. The application
should be submitted to the Debt Recovery Tribunal having jurisdiction over the matter.
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The application must be filed within forty-five days from the date on which the
measure was taken. A fee, as prescribed, needs to be submitted along with the
application. The Act allows for different fees to be prescribed for making the application,
depending on whether the applicant is the borrower or a person other than the
borrower.
In essence, section 16 provides a legal avenue for individuals, including borrowers, to

challenge and seek redress for any measures taken by secured creditors in the process of
recovering secured debts under the SARFAESI Act.
(VI) Making of Application to Court of District Judge in Certain Cases (Section
17A)
Section 17A of the SARFAESI Act, which pertained to making an application to the
Court of District Judge in certain cases, has been omitted in the context of the Jammu
and Kashmir Reorganization (Adaptation of Central Laws) Order, 2020 and the Union
Territory of Ladakh Reorganisation (Adaptation of Central Laws) Order, 2020. This means
that this specific provision no longer applies in these regions as of the mentioned dates.
(VI) Appeal to Appellate Tribunal (Section 18)
The SARFAESI Act, Section 18 deals the process for appealing an order made by the
Debts Recovery Tribunal.
Any person who is aggrieved by an order issued by the Debts Recovery Tribunal
under Section 17 can file an appeal with the Appellate Tribunal. This appeal must be
submitted within thirty days from the date of receiving the order from the Debts
Recovery Tribunal.
The appeal must be accompanied by a prescribed fee. Different fees may apply
based on whether the appellant isthe borrower or someone other than the borrower.
A key condition is that the Appellate Tribunal will not entertain the appeal unless the

borrower has deposited with the Appellate Tribunal an amount equal to fifty percent of
the debt due from them, as claimed by the secured creditors or determined by the Debts
Recovery Tribunal, whichever is less. However, the Appellate Tribunal, for specific reasons
recorded in writing, may reduce this deposit to not less than twenty-five percent of the
debt.
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The Appellate Tribunal required to handle the appeal in accordance with the
provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.
This section of the SARFAESI Act outlines the process and requirements for appealing
decisions made by the Debts Recovery Tribunal to the Appellate Tribunal.
(VIII) Right of Borrower to Receive Compensation and Costs in Certain cases
(Section 19)
Ifthe Debts Recuperation Tribunal or the court of District judge, on an software
made underneath segment 17 or section 17A or the Appellate Tribunal or the excessive
court on an appeal preferred beneath segment 18 or segment 18A, holds that the
possession of secured property with the aid of the secured creditor isn't in accordance
with the provisions of this Act and policies made there under and directs the secured
lenders to return back such secured belongings to the concerned borrowers or any other
aggrieved man or woman, who has filed the utility underneath segment 17 or phase 17A
or appeal under section 18 or segment 18A, because the case may be, the borrower or
such different man or woman will be entitled to the price of such compensation and
expenses as can be determined by means of such Tribunal or court docket of District
decide or Appellate Tribunal or the High Court Docket noted in section 18B.
(IX) Amendment of Section 19
1. Omit "or the Court of District Judge", occurring at both the places;
2. Omit "or section 17A" occurring at both the places;
3. Omit "or the High Court;
4. Omit "or section 18A" occurring at both the places; and
5. Omit "or the High Court referred to in section 18B" occurring at the end.
Insertion of New Section :
:
After section 19, insert 19A. Transfer of Pending Applications the pendingAll

applications before the court of District Judge and the High Court under sections 17A
and 18B respectively, shall stand transferred to the Tribunal and the Appellate Tribunal,
as the case may be.
[Vide Order No. 3807(E) dated 26th October, 2020, the Union Territory of Jammu and
Kashmir Reorganisation (Adaptation of Central Laws) Third Order, 2020 (w.e.f. 26-10
2020)].

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4.1.6 Central Registry (Section 20 to 26)

Central Registry (Section 20) : The Central Registry under the Securitisation
(1)

and Reconstruction of Financial Assets and Enforcement of Security Interest

(SARFAESI) Act: The Central Registry is created to facilitate the registration of
transactions related to securitization, reconstruction of financial assets, and the creation
of security interest. The important concepts are as follows:
1. The Central Government has the authority to set-up the Central Registry through
a notification.
2. The Central Registry will have its own seal and is responsible for the registration
of transactions related to securitization and asset reconstruction.
3. The head office of the Central Registry willbe located at a place specified by the

Central Government, and branch offices may be established at other suitable locations to
facilitate registration.
4. The Central Government can define the territorial limits within which the office of
the Central Registry can operate and exercise its functions.
(I) Integration of Registration Systems with Central Registry (Section 20A)
The principal authorities may additionally, for the reason of presenting a principal
database, session with State Governments or other Government operating registration
in

machine for recording rights over any property or introduction, modification or delight
of any protection interest on such belongings, integrate the registration facts of such
registration structures with the records of important Registry set-up underneath section
20, in such way as can be prescribed.
(I) Delegation of Powers (Section 20B)
1. Delegation of Powers: The critical authorities may additionally, with the aid of
notification, delegate its powers and functions under this chapter, relation to status
quo, operations and regulation of the primary Registry to the Reserve financial institution
on such terms and situations as can be prescribed.
2. Central Registrar(Section 21)
The role of the Central Registrar, as outlined in Section 21 of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI
Act), involves the following key responsibilities:
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(a) Appointment for Registration: The Central Government has the authority to
appoint a person known as the Central Registrar. The Central Registrar is responsible for
the registration of transactions related to securitisation, reconstruction of financial assets,
and security interests created over properties. This includes maintaining records of these
transactions.
(b) Supervision and Direction : The Central Government also has the power to
appoint other officers with appropriate designations for the purpose of assisting the
Central Registrar. These officers operate under the superintendence and direction of the
Central Registrar. They are authorized by the Central Registrar to perform.
(IV) Register of Securitisation, Reconstruction and Security Interest
Transactions (Section 22)
1. For the purposes of this Act, a record called the important check in shall be

stored at the head workplace of the significant Registry for entering the details of the
transactions referring to
:

monetary assets;
(a) Securitisation of
(b) Reconstruction of financial property; and
(c) Advent of protection interest.
However something contained in sub-section (1), it shall be lawful for the primary
2.
Registrar to preserve the statistics absolutely or partly in computer, floppies, diskettes or
in another electronic form.
3. The check in willbe kept under the control of the principal Registrar.
() Filing of Transactions of Securitisation, Reconstruction and Creation of
Security Interest (Section 23)
Section 23 of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (SARFAESI Act), outlines the requirement for
filing transactions related to securitisation, asset reconstruction, and creation of security
interest.
Some important point relating to this are as follows :
1. All transactions related to securitisation, asset reconstruction, or creation of

security interest must be filed with the Central Registrar. The specific manner and fees for
filing are determined by regulations.
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2. The Central Government has the authority to mandate the registration of such
transactions, including those that were in existence before the establishment of the
Central Registry under Section 20 (7) of the SARFAESI Act.
3. The registration period and fees for such cases can be prescribed by the Central

Government through a notification.

4. The Central Government can also require the registration of transactions related
to various types of security interests created on different kinds of properties with the
Central Registry.
5. Forms for registration of different types of security interests are prescribed by the
Central Government through rules, along with the associated fees for registration.
(VI)Modification of Security Interest Registered under this Act (Section24)
Whenever the terms/conditions, or the extent or operation of any security interest
registered under this Chapter are or is ARC or the secured creditors, as the case may be,
to send to the Central Registrar, the particulars of such modification and the provisions
of this chapter as to registration of a security interest shall apply to such modification
modified, it shall be the duty of the ARC or of the such security interest.
4.1.7 Asset Reconstruction Company or Secured Creditors to Report
Satisfaction of Security Interest (Section 25)
Section 25 of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest (SARFAESI) Act, 2002 in India
deals with the reporting of
satisfaction of security interest by asset reconstruction companies or secured creditors.
The Asset Reconstruction Company or the secured creditors as the case may be, shall
give intimation to the Central Registrar of the payment or satisfaction in full, of any
security interest relating to the asset reconstruction company or the secured creditors
and requiring registration under this Chapter, within thirty days from the date of such
payment or satisfaction.
The section outlines the requirement for asset reconstruction companies or secured
creditors to report when the security interest in a financial asset has been satisfied. It
emphasizes the importance of timely reporting, ensuring that once the security interest
is fulfilled, the relevant parties promptly communicate this information.
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The section may provide details on the mode or format of reporting, ensuring a
standardized and efficient process for conveying the satisfaction of security interest. It
could include provisions for maintaining appropriate documentation to support the
satisfaction of security interest, creating a transparent and accountable system.
Compliance with Section 25 is crucial for asset reconstruction companies and secured
creditors to adhere to the legal requirements of the SARFAESI Act.
4.1.8 Right to Inspect Particulars of Securitisation, Reconstruction and
Security Interest Transactions (Section 26)
The characteristics of the Right to inspect particulars of securitisation, reconstruction,
and security interest transactions are as follows :
1. Accessibility : The particulars of securitisation, reconstruction, or security interest
recorded in the Central register (maintained under section 22) are accessible for
inspection.
2. Availability During Business Hours: The information is available for inspection
during business hours, ensuring reasonable access to interested parties.
Fee Requirement: Any person wishing to inspect these particulars must pay fees as
prescribed, emphasizing a regulated process for access.
3. Electronic Access : The Central Reqister, when maintained in electronic form, can
be inspected through electronic media, expanding accessibility options.
4. Electronic Inspection Fee: Similar to physical inspection, electronic access incurs
fees as prescribed, ensuring consistency in the regulatory framework.
These characteristics collectively establish a transparent and regulated framework for
individuals to access information regarding securitisation, reconstruction, and security
interest transactions.
4.1.9 Offences and Penalties (Section 27 to 30)
(I) Penalties (Section 27)
If adefault is made:

1. the particulars of each transaction of any securitisation

In filing below section 23,
or asset reconstruction or safety interest created through a asset reconstruction
company or secured creditors: or
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2. In sending under section 24, the particulars of the amendment mentioned in that
phase; or

3. In giving intimation below section 25, every employer and every officer of the
business enterprise or the secured lenders and each officer of the secured creditor who
is in default shall be punishable with first-rate which might also increase to 5 thousand
rupees for each day in the course of which the default continues:
2[Provided that provisions of this section shall be deemed to have been omitted
from the date of coming into force of the provisions of this Chapter and section 23 as
amended by the Enforcement of Security Interest and Recovery of Debts Laws and
Miscellaneous Provisions (Amendment) Act, 2016 (44 of 2016).]
(I) Section 28 - [Omitted.]
[Penalties for non-compliance of direction of Reserve Bank.] Omitted by the
Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous
Provisions (Amendment) Act, 2016 (44 of 2016) s. 20 (w.e.f. 1-9-2016).
(II) Section 29-0ffences
Section 29 of the Act mentioned the consequences for individuals involved in
contravening its provisions. Some of its features are: The section covers contravention,
attempted contravention, or abetment of contravention related to the specified Act or its
rules. Individuals found guilty under this section can face punishment in the form of
imprisonment for a period of up to one year. In addition to or instead of imprisonment,
fines can be imposed on those found guilty of offenses under this section.
(IV) Section 30- Consciousness of Offence
Section 30 regarding the cognizance of offences include:
Three [30. Cognizance of offences.--(1) No Court shall take cognizance of any offence
punishable under section 27 in relation to non-compliance with the provisions of section
23, section 24 or section 25 or under section 28 or section 29 or any other provisions of
the Act, except upon a complaint in writing made by an officer of the Central Registry or
an officer of the Reserve Bank, generally or specially authorised in writing in this behalf
by the Central Registrar or, as the case may be, the Reserve Bank.
(2) No Court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of
the first class shall try any offence punishable under this Act.

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4.1.10 Miscellaneous (Section 31 to 41)

As per Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 under Chapter VI, Miscellaneous
not to Apply in Certain Cases
:

(I) (Section 31)- Provisions of this Act

The provisions of this Act shall not apply to :
1 "a lien on any goods, money or security given by or under the Indian Contract
Act, 1872 (9 of 1872) or the Sale of Goods Act, 1930 (3 of 1930) or any other law
for the time being in force"
2. "a pledge of movables within the meaning of section 172 of the Indian Contract
Act, 1872 (9 of 1872)"
3. "creation any security in any aircraft as defined in clause (1) of section 2 of the
Aircraft Act, 1934 (24 of 1934)"
4. "creation of security interest in any vessel as defined in clause (55) of section 3 of
the Merchant Shipping Act, 1958 (44 of 1958)"
5. "any rights of unpaid seller under section 47 of the Sale of Goods Act, 1930 (3 of
1930)"
6. "any properties not liable to attachment (excluding the properties specifically
charged with the debt recoverable under this Act)]or sale under the first proviso
to sub-section of section 60 of the Code of Civil Procedure, 1908 (5 of 1908)"
(1)

7. "any security interest for securing repayment of any financial asset not exceeding

one lakh rupees"

8. "any security interest created in agricultural land"
9 "any case in which the amnount due is less than twenty per cent. of the principal
amount and interest thereon."
Section 31A. Power to exempt a class or classes of banks or financial institutions.
(I) (Section 32)- Protection of Action Taken in Good Faith:
No healthy, prosecution or different criminal complaints shall lie in opposition to the
Reserve Bank or the Central Registry or any secured creditor or any of its officers. For
anything performed or omitted to be completed in correct religion beneath this Act.

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(I) (Section 33)-Offences by Companies:

Section 33 of the Act - key features related to offences committed by companies:
Individuals in charge of and responsible for the company's conduct at the time of the
offence are deemed guilty and can be proceeded against and punished. The individuals
mentioned in (1) are not liable if they prove the offence occurred without their
knowledge or if they took all due diligence to prevent it. Directors, managers, secretaries,
or other officers of the company can be deemed guilty if the offence was committed
with their consent, connivance, or negligence.
The term "company" includes any body corporate, firm, or association of individuals.
In the context of a firm, a "director" is considered a partner in that firm.
(IV) (Section 34 )-Civil Court not to have Jurisdiction:
This section states that "No Civil Court shall have jurisdiction to entertain any suit or
proceeding in respect of any matter which a Debts Recovery Tribunal or the Appellate
Tribunal is empowered by or under this Act to determine and no injunction shall be
granted by any Court or other authority in respect of any action taken or to be taken in
pursuance of any power conferred by or under this Act or under the Recovery of Debts
Due to Banks and Financial Institutions Act, 1993 (51 of 1993)."
(V) (Section 35) The Provisions of
this Act to Override Other Laws:
"The provisions of this Act shall have effect, notwithstanding anything inconsistent
therewith contained in any other law for the time being in force or any instrument having
effect by virtue of any such law."
(VI) (Section 36)Limitation:
"No secured creditor shall be entitled to take all or any of the measures under sub
section (4) of section 13, unless his claim in respect of the financial asset is made within
the period of limitation prescribed under the Limitation Act, 1963 (36 of 1963)."
(VII) (Section 37) Application of Other Laws not barred :

The provisions of this Act or the rules made thereunder shall be in addition to, and
not in derogation of, the Companies Act, 1956 (1 of 1956), the Securities Contracts
(Regulation) Act, 1956 (42 of 1956), the Securities and Exchange Board of India Act, 1992

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(15 of 1992), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51
of 1993) or any other law for the time being in force.
(VIII) (Section 38) Power of Central Government to Make Rules :
"(1) The Central Government may, by notification and in the Electronic Gazette as
defined clause (s) of section 2 of the Information Technology Act, 2000 (21 of 2000),
in

make rules for carrying out the provisions of this Act."

(IX)(Section 39) Certain Provisions of this Act to Apply after Central Registry is
Set-up or Cause to be Set-up:
"The provisions of sub-sections (2), (3) and (4) of section 20 and sections 21, 22, 23,
24, 25, 26 and 27 shall apply after the Central Registry is set-up or cause to be set-up
under sub-section (1) of section 20."
(X) (Section 40) Power to Remove Difficulties :
(1) If any difficulty arises in giving effect to the provisions of this Act, the Central

Government may, by order published the Official Gazette, make such provisions not
in

inconsistent with the provisions of this Act as may appear to be necessary for removing
the difficulty:
Provided that no order shall be made under this section after the expiry of a period
of two years from the commencement of this Act.
(2) Every order made under this section shall be laid, as soon as may be after it is

made, before each House of Parliament.

Amendments to Certain Enactments:
(XI) (Section 41)
The enactments specified in the Schedule shall be amended in the manner specified
therein.
4.1.11 Relevant Amendments between 2004 and 2008 and Amendments
in SARFAESIAct in 2016
These amendments aimed to strengthen the rights of secured creditors and
streamline the process for the recovery of non-performing assets.
Between 2004 and 2008, several significant amendments were made to the
Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest (SARFAESI) Act, 2002 in India. Some changes during this period include:
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1 Extension of the Act : The scope of the SARFAESI Act was expanded to include
different types of secured creditors, not limited to banks and financial institutions.
2. Empowerment of Asset Reconstruction Companies (ARCs) :
Amendments in

2004 provided more regulatory powers to Asset Reconstruction Companies, allowing

them to play a more active role in acquiring and resolving distressed assets.
3. Revised Timeframe: The time limit for filing an application with the Debt
Recovery Tribunal (DRT) for challenging the possession of secured assets was reduced
from 45 days to 30 days.
4. Central Registry: The Central Registry of Securitization Asset Reconstruction and
Security Interest of India was established to maintain a central database of all security
interests created in favour of banks and financial institutions.
5. Creation of Security Interest: The concept of "security interest" was introduced
to include not only a mortgage, charge, or pledge but also any other right to secure
debt.
Amendments in 2016
In 2016, the SARFAESI Act was further amended to enhance the effectiveness of the
asset recovery process. Some notable amendments in 2016 included
:

1. Empowerment of District Magistrate: The District Magistrate was given more

authority to assist in the possession, seizure, and management of secured assets.
2. Right to Appeal: Borrowers were provided the right to appeal to the Debt
Recovery Tribunal (DRT) against the actions of secured creditors under the Act.
3. No Civil Court Intervention: The Act was modified to ensure that no civil court
can interfere with any action taken by a secured creditor under the Act.

4. Electronic Filing: The amendment allowed for the filing of applications, notices,
and documents electronically.
These amendments aimed to strengthen the rights of secured creditors and
streamline the process for the recovery of non-performing assets.

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QUESTIONS FOR DISCUSSION

1. Explain about the following under the SARFAESI Act:
(A) Cancellation of Certificate of Registration.
(B) Enforcement of Security Interest.
(C) Central Registry.
2. State the Amendments in the SARFAESI Act, 2002 in 2004, 2008 and 2016.
3. What does the Securitization Act 2002 deal with?
4. What is the limitation of SARFAESI Act 2002?
5. What is securitisation and reconstruction of financial assets and enforcement of
security interest?
6. What are the exceptions to the SARFAESI Act?
7. How do you challenge the SARFAESI Act?
8. Write Short Notes
(A) Appeal to Appellate Tribunal (SARFAESI Act, 2002)
(B) Offences and Penalties (SARFAESI Act, 2002)

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