Economic and Financial Terminology Part 7

Salient Features Some Important Acts Relating to Banking & Finance Recently Amended

(A) Important Provisions of RBI Act
1) S 2.Inclusion of a bank under II Schedule – S 42 – deletion of banks
2) S 18 – Emergency loans to banks on liberal terms
3) S 20 & 21 – Transacting govt business
4) S 22 — Power to issue bank notes
5) S 24 – denomination 2,5, 10, 20, 50, 100, 500. 1000, 5000 & 10000. But Central Govt can direct discontinuation or non issue of any denomination
6) S 28 – rules relating to refund of mutilated, soiled or imperfect notes
7) S 31 – No one can issue Bill of Exch, Hundi or PN payable to bearer on demand
8) S 33 – Gold coins, bullions & foreign sec at any time not less than Rs.200 Crores of which gold coin and gold bullion not less than Rs 115 Crores
9) S 42 – CRR for Scheduled banks
10) S 45 – Recommendation to Central Govt. suspension of business (Moratorium) and reconstitution of Board
11) S 49 – Power to announce /publish BR
12) Amendment 2016 – Constitution of MPC to decide Policy Rates The RBI Governor’s sole power to decide policy rates has been substituted by the constitution of Monetary Policy Committee – 6 member committee – 3 from RBI with Governor as ex officio chairman + one Deputy Governor + one officer. – the other 3 members to be nominated by Govt of India- experts from the fields of Economics, Banking and Finance appointed by the Search Committee of the Cabinet chaired by the Cabinet secretary – Objective to improve transparency and visibility and collective accountability in policy rates.
13) The Fiscal Responsibility and Budgetary Management (FRBM) Act, which is being reviewed under the chairmanship of N K Singh, would act in tandem with the inflation targeting of Monetary Policy Committee (MPC). He feels that FRBM is to act in tandem with the inflation targeting of MPC to ensure resource flow to the economy, and that if the two did not act in tandem, in case of fiscal profligacy, RBI would follow a tight monetary policy which is not investment friendly and vice-versa. The MPC has set an inflation target of 4 per cent with an upper tolerance level of 6 per cent and lower limit of 2 per cent. The 14th Finance Commission had recommended 3 per cent fiscal deficit for the Centre and another 3 per cent for the states yielding a combined fiscal deficit of 6 per cent for the period 2015-16 to 2019-20.
14) FRBM Act 2003
– The Fiscal Reforms and Budgetary management Act came into effect on July 5, 2004.
a. Govt to take measures to reduce fiscal and revenue deficit so as to eliminate Revenue Deficit by March 31, 2008 (revised by UPA govt to March 31, 2009) and thereafter build up revenue surplus.
b. Govt not to borrow from RBI except by WMA (Ways and Means Advances are temporary borrowings of Govt from RBI on the basis of the limi on aggregate borrowings fixed by RBI in consultation with the Govt.)
c. Rules to be framed for annual reduction of RD by 0.5% pa and FD by 0.3% p.a. With this approach
– BD should have been brought down to 3% of GDP but has not been achieved till date.
– In the Budget for 2015-16 the present government has announced that the target of 3% will be achieved in 3 years. Accordingly the FD achievements and targets are 3.9%, 3.5% and 3 % for FYs 2015-16, 2016-17 & 2017-18 respectively.

(B) BR Act 1949 b
15) S 5 -Definitions – Approved Securities, Banking, Dl etc.
(Approved securities are those approved under S 20 of Indian Trusts Act)
16) S 11 & 12 -Paid up capital, reserves
17) S 21 –Control over advances by banks
18) S 22 –License is necessary for banking business
19) S 23 – Branch Licensing
20) S 24 – SLR –No min but RBI can prescribe upto 40%
21) S 35 – Inspection and issue of directions in Public Interest
Amendment 2012
22) – Voting right limits in Private banks increased from 10 to 26%
23) – Cooperative societies must get license from RBI to do banking business

C) Negotiable Instruments Act 1881
24) NIs include Promissory Notes (including CODs and CPs), Bill of Exchange, Cheque and Demand drafts.
25) Under S 137 of Transfer of Property Act some documents of title to goods are Negotiable which include Bill of Lading, Railway receipts, Dock Warrant, Warehouse Receipt, GRs approved by IBA, Wharfinger Certificate
26) Promissory Note – instrument in writing – appropriately stamped under Indian Stamp Act – containing unconditional undertaking or promise – signed by the maker- to pay a certain sum of money – to the order of a certain person or bearer of the Instrument
27) A Bill of Exchange is an instrument in writing (duly stamped) – signed by the maker – containing an unconditional order – 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
28) A Cheque is a BOE drawn on a specified bank – not expressed to be payable otherwise than on demand
29) Negotiable instruments can be either negotiated under NI Act or assigned under Transfer of Property Act
30) NIs can be drawn payable to bearer or order(specified /named person) and either on demand or after a specific (usance) period
31) Bearer instruments are transferred by simple delivery
32) Order instruments – negotiation is completed by endorsement and delivery
33) The currency note issued by RBI contains a promise and it is payable to the bearer on demand but as per S 21 of Indian Currency Act a currency note is not a NI
34) S 31 of RBI Act prohibits anyone other than RBI or Central Govt to draw NIs Both payable to bearer and on demand Negotiability means transfer without any restrictions and the transferee getting it for value and in good faith will get defect-free and absolute title
35) Holder is the person who has legal right to possess
36) Holder in due course is one who has possession after paying due consideration and obtained it in good faith
37) An Inchoate Instrument is an incomplete instrument – duly signed by the maker is legally valid – but some other particular is missing – It can be completed by the holder – but where an amount is not filled it cannot be more than what the holder is entitled to get
38) S 18 When amount of a cheque differs in words and figures, the amount in words should be paid irrespective of the fact which amount is less or more.
39) Drawer of a cheque is the account holder (who signs the cheque)
40) Drawee is the bank (always) with whom the account is maintained
41) Payee is the person named in the cheque
42) Collecting Banker is the bank of the account through which the payee/ endorsee receives the payment. Also called Receiving Banker, who collects on instruments like a cheque, draft or bill of exchange, lodged with himself for the credit of his customer’s account
43) Presenting Banker is one through which a collecting banker presents the cheque (in case of banks, which are not members of Payment and Settlement System or when the collecting banker is not a member of the local clearing)
44) Order Cheque is one in which a person is named as payee
45) Bearer Cheque is one in which no name is mentioned as payee
46) When nothing is mentioned about a cheque being order or bearer it should be treated as order cheque.
47) Order to Bearer conversion should be made with full signature
48) Once Bearer is always bearer
49) If both Order and Bearer are written and both not cancelled the cheque is treated as bearer
50) Ante Dated Cheque is one which bears a date prior to the date of presentation is valid and should be paid by a bank provided it is not a stale cheque
51) Stale Cheque – On date of presentation if the validity period of a cheque has already expired it is called a stale cheque.
Note: U/s 138 of NI Act, the validity period of a NI is 6 months. But as per RBI instructions (issued under S 35 of BR Act), with effect from 1.4.12 cheques, demand drafts & bankers cheques, presented after 3 months from their date, cannot be paid by banks
52) Post Dated Cheque is a cheque which a bears a date subsequent to the date on which it is drawn and the date has not fallen due till presentation. Such cheques are effective on the date mentioned on the body of the cheque.
53) Saka Samvat (National Calendar) dated cheques should be accepted for payment as per RBI advice date 21 January 2016
54) Cheque Truncation means stopping further physical movement of the cheque with the generation of electronic image either by the clearing house or by the bank whether receiving or making payment. Generally truncation takes place at the collecting branch, which sends the electronic image of the cheques to the paying branch through the clearing house and stores the paper cheques with it.
55) CTS 2010 Cheques – No corrections/ alterations should be made – other than date change for revalidation purposes –
Note: Changes in non CTS cheques can be made by the drawer under the provisions of NI Act
56) Courtesy Amount is amount printed in figures and
57) Legal Amount is amount printed in words
58) Endorsement means signing on the face or backside of the instrument
59) Blank endorsement means an endorser simply signs his name without adding any words – Converts order instrument into bearer instrument. The name of the endorsee or transferee is not mentioned on the instrument.
60) Endorsement in Full : Where the name of the endorsee or transferee appears on the instrument while making endorsement.
61) Restrictive Endorsement – prohibits and restricts further negotiability. The endorser desires that instrument is to be paid to particular person only, he restricts further negotiation or transfer by such words as “Pay to Ashok only”. Now Ashok cannot negotiate the instrument further.
62) Partial Endorsement – endorser transfer only a part of the amount
63) Conditional Endorsement – some conditions are stipulated by endorser
64) Facultative Endorsement – when endorser restricts or increases his liability by express words
65) Forged Endorsement – signed by a person other than the holder – subsequent endorsees do not get any title to the instrument
66) General Crossing of a Cheque – means drawing two parallel transverse lines on the face with or without words, such as `& Co’, ` Not Negotiable’ ` Payee’s account only’ etc A crossed cheque cannot be paid in cash across the counter, and A general crossing means that cheque can be paid through any bank and a special crossing, where the name of a bank is indicated on the cheque, can be paid only through the named bank.
67) A crossed cheque cannot be paid across the counter by the paying bank. It should be paid only to a banker through either by transfer, collection or clearing.
68) Special Crossing means a cheque bears the name of a bank with or without the words `Not Negotiable’ ; Payment should be made to only that bank.
69) Not Negotiable (with or without parallel lines) crossing restricts negotiability. That is the endorsee does not get a better title. Note: It does not restrict transferability but the transferee/endorsee takes it with a risk even if he had given value and received in good faith.
70) Account Payee crossing is a direction to the collecting bank that it should be collected only for the named payee.
Note: As per RBI instructions dated Jan 2006 the amount of an `account payee’ cheque should not be credited to third party.
71) Cancellation of the crossing can be done only by the drawer with word `crossing cancelled’ or `pay cash’ under full signature
72) Material Alteration of an NI is an alteration which changes the basic instructions/characteristics of the NI and relative liabilities/responsibilities of the parties
73) Material Alterations are i) change in date, amount, time of payment, place of payment, rate of interest ii) addition of new party iii) tearing material part of instrument iv) conversion of an order cheque into bearer cheque or cancellation of crossing
74) Material alteration can be corrected by the drawer of cheque only under full signature – not initials
75) Not Material Alterations are i) crossing an uncrossed ch ii) filling date, amount or name of the payee iii) converting a general crossing into a special crossing and iv) when alteration is confirmed by drawer
76) Dishonour of a cheque means Non-payment of a cheque by the paying banker with a return memo giving reasons for the non-payment.
77) Payment of a cheque can be stopped (countermanded) only by the drawer before the cheque is paid
78) A Demand Draft is an order to pay money – drawn by one office (branch) of a
79) bank – upon another office of the same bank – for a sum of money payable to order on demand.
80) Demand Drafts cannot be issued payable to bearer.
81) Purchase of DD for 50000 and above cannot be made against cash as per RBI instructions 1991
82) Purchaser can ask for duplicate DD against indemnity if he has not delivered the original to the payee or has not dispatched it
83) Duplicate can be issued upto Rs5000 without No Payment Advice from the drawee branch as per RBI Directives dt 2000
84) Payee can ask for duplicate if he had lost it after receipt or in transit or if the instrument is damaged
85) Stop or cancellation of DD can be requested by purchaser before it is delivered to the payee
86) Uncrossed DD can be issued for amount less than 20000.
87) The validity period of a DD is 3 months.
88) Relationship of a bank and purchaser of a draft is `Debtor and Creditor’
89) Relationship with the payee (in transit/delivered)`Trustee & Beneficiary’
90) NI Amendment Act 2015 – Two important provisions
Restricts inquiry and trial of dishonor of cheque only in the court in whose jurisdiction the collecting bank branch is located. If the ch is presented otherwise through an account the court having jurisdiction over the paying branch will be the relevant court
Note: The ch should be in discharge of a liability and not a gift cheque
91) Cheque in Electronic form is a ch drawn in electronic form by using any computer resource and signed in a secure system with digital signature (with or without biometric signature) and asymmetric crypto system or with electronic signature (NI Act Amendment 2015)

D) Companies Act 2013 – Salient Features
92) Max no of shareholders for private companies increased from 50 to 200
93) One person company allowed (earlier minimum 2 directors and minimum 2 shareholders
94) S 135 deals with CSR
95) Constitution of Company Law Tribunal and Appellate Tribunal
96) Atleast one woman director for certain class of companies
97) National Company Law Tribunal will replace present Company Law Board
98) National Company Law Appellate Tribunal to replace BIFR
99) Fast Track mergers with approval of government
100) Provides for Cross Border Mergers
101) Prohibition on forward dealings and insider trading
102) Atleast one third of the directors should be independent directors for listed companies

E) Debt Recovery Tribunal
103) DRTs are constituted under the RDDBFI Act 1993 (Recovery of Debts Due to Banks and Financial Institutions)
104) There are 33 DRTs and 5 APPELLLATE Tribunals are there covering the entire country
105) For loans of banks and FIs with outstanding of Rs.10 lakh or more
106) Central Govt can reduce the limit to Rs. one lakh
107) Headed by one Presiding Officer supported by one Registrar and normally two Recovery Officers appointed by Govt.
108) On establishment of a DRT no other court is to hear proceedings of such cases. All such existing cases are transferred to DRT
109) Within 30 days of receipt of application summon is issued to the defendant
110) Special feature of DRT is all evidences are submitted by affidavits only
111) If the claim of the bank/FI is upheld, Recovery Certificate is issued to the Recovery Officer
112) Appeal against order of DRT can be made within 45 days to Debt Recovery Appellate Tribunal with appropriate fees + deposit of 75% of dues
113) The Recovery Officer has powers such as attachment, sale, arrest, appointment of receivers , require the debtor to declare under affidavit the particulars of his/its assets. Appeal against the orders of RO can be made to DRT within 30 days

F) SARFAESI Act(Securitisation Asset Reconstruction Financial Assets
Enforcement of Security Interests Act) 2002
114) Powers of the secured creditor(bank)
i) Take possession, sell or lease the assets given as security
ii) Take over management of a business
iii) Appoint a manager
iv) To recover any money due to the borrower from third parties
115) Loans Not Eligible
i) Loans with outstanding upto Rs.100000
ii) Agriculture Land cannot be sold
iii) If 80% of principal + interest in the loan already recovered
iv) Assets secured by pledge, lien and bank deposits
v) If Limitation period had expired
vi) Where security is not charged to the bank
116) Notice of 60 days to be served on the borrowers to take possession
117) Borrowers can represent. If representation or objection not acceptable to bank it has to communicate justification for taking possession within 15 days of receipt of representation
118) Borrowers can also appeal to DRT by paying only stamp fees
119) If SARFAESI Act/Rules not followed DRT can declare the bank’s action invalid
120) If borrower not satisfied with DRT decision can appeal to APPELLATE DRT paying stamp fees and depositing 50% of dues
Amendments 2016:
121) District Magistrate (DM) to take possession over collateral within 30 days for securing the creditors.
122) DM to assist banks to take over the management of a company, in case the company is unable to repay loans.
123) To create a central database to integrate records of property registered under various registration systems with central registry meant for maintaining records of transaction related to secured assets.
124) Unless collateral is registered with the central registry, secured creditors will not be able to take possession over it.
125) Empowers RBI to carry out audit and inspection of Asset Reconstruction Companies (ARCs) and penalize them if they fail to comply with any directions issued by it.
126) Stamp duty exemption for transactions undertaken for transfer of financial assets (loans and collaterals) in favour of asset reconstruction companies.
G) Goods and Services Tax Features
127) GST is a constitutional Amendment Bill
128) Requires to be passed by both houses of Parliament by two thirds majority of members present and voting.(not the total strength of the house)
129) First passed by Lower House (Lok Sabha) then sent to Upper House (Rajya Sabha)
130) If RS proposes any amendment it has to be again passed by LS with minimum 50% majoity
131) Then requires to be passed by two thirds majority in two thirds of the states and UTs
132) Finally President’s approval is obtained
133) As on 8 September 2016, 17 states – Assam, Bihar, Chattisgarh, Haryana, Himachal Pradesh, Gujarat, Jharkhand, MP, Nagaland, Odisha, Goa, Mizoram, Sikkim, Telengana, Rajasthan, Maharashtra, AP and Delhi have approved. The remaining states are WB, TN, Karnataka, Punjab, Uttarkhand, Kerala, Arunchal Pradesh, JK, UP, Manipur, Meghalaya, Tripura and other 6 UTs who are yet to approve
134) President has approved the Bill in the second week of September and Govt of India has planned to implement it from 1 April 2017.
Present Position
135) Presently Centre has powers to levy taxes on manufacture of goods and States on Sales.
136) For inter state movements Centre levies CST – but collected and retained by origin states.
137) For services Centre alone levies taxes
138) On imports States have no power. Centre levies Customs Duty, Additional Customs Duty (counter balances excise , ST, State VAT etc levied on domestic production)
Future Position
139) GST will replace most central and state taxes such as VAT, Excise, Service Tax, Central Sales Tax, Additional Customs Duty, Special Additional Customs Duty and Special Additional Customs Duty
140) GST Council chaired by the Finance Minister with Central Minister of State for Revenue and State Finance Ministers as members will be apex decision making body.
141) GST will be applicable to all goods and services except alcohol for human consumption, electricity and Real Estate
142) Petroleum products will be covered from a future date as decided by the GSTC
143) GST will be of 3 types – Central GST (CGST), State GST (SGST), and Inter-state GST (IGST) covering inter state supply including stock transfer.
144) Exports would be zero rated
145) Import of goods and services would be treated as interstate supply and subject to IGST in addition to Customs Duty
146) For initial two years or for an extended period as recommended by GSTC an additional non-Vatable 1% on interstate supply of goods would be collected by Centre and assigned to origin states.
147) Turnovesr below a certain level would be exempted from GST
148) GSTN – N stands for Network has been set up as a Section 25 (Non Profit) company to provide front end services – registration, payment and return to taxpayers
149) GSTN has appointed Infosys as MSP (Managed Service Provider) for 5 years for a project cost of Rs. 1380 crores
150) Country would be divided into zones (groups of states) and ranges (1000 assesees)
Long Term Anticipated Benefits of GST
151) Eliminates cumulative multiple taxes –could reduce inflation
152) Ease of doing business will improve
153) Entire country will become a unified market providing uniform market access to all the players
154) Check tax evasion and boost growth
155) Will reduce logistics costs
156) Expected to strengthen the federal structure of Indian democracy
Short Term Challenges
157) Can have a negative impact of higher inflation in the short term
158) Temporary dip in growth before combine national market stats to kick in

H) Insolvency and Bankruptcy Code 2015 passed in May 2016
159) Provides for time bound settlement for insolvency cases (180 days –can be extended by another 90 days) Presently insolvency cases take very long time on an average a minimum of 4 years
160) Processes by Licensed Insolvency Professionals – will be members of IP Agency
161) Provides for establishment of Information Utilities
162) Insolvency adjudication by NCLT (National Company Law Tribunal) for companies and DRT for individuals
163) Statutory backing for establishing Insolvency and Bankruptcy Board of India