Financial Services Organization: formula sheet

Key formulas

RBI power to call for information and give directions (RBI Act, s. 45L)

Satisfaction that it is necessary to regulate the credit system to the country's advantage → RBI may require statements/information and give directions to financial institutions

Information may cover paid-up capital, reserves, liabilities, investments, persons financed, purposes, periods and terms including interest rates. Directions must have due regard to the institution's objects, statutory responsibilities and effect on money and capital market trends.

Resolution of an NBFC (RBI Act, s. 45MBA)

Inspection of books + public interest or financial stability → RBI frames scheme: amalgamation / reconstruction / splitting into units with Bridge Institutions

Scheme may reduce pay of CEO, MD, chairman or senior management, cancel their shares (or relatives' shares) and sell assets. Under s. 45MBA(3), those affected are not entitled to compensation.

Permitted business of a banking company (Banking Regulation Act, s. 6)

Banking business + forms listed in s. 6(1)(a) to (o); nothing else (s. 6(2))

Includes lending, bills, foreign exchange, underwriting, guarantees, trusts, agency business. Managing agent or secretary and treasurer business is excluded. Central Government may notify further forms under clause (o).

IFSC carve-out (RBI Act s. 57A; Banking Regulation Act s. 51A; Insurance Act s. 118A)

Powers of RBI / IRDAI (Authority) do not extend to an IFSC → exercised by IFSCA for products, services and institutions permitted in the IFSC

IFSC means one set up under section 18(1) of the Special Economic Zones Act, 2005. The carve-out applies notwithstanding any other law.

Regulator map

Banks and NBFCs → RBI; securities market and mutual funds → SEBI; insurance → IRDAI; IFSC → IFSCA

Use this one-line map to start any regulator question.

Supersession of NBFC Board: grounds (s. 45-IE(1))

Public interest OR protect depositors/creditors OR proper management OR financial stability, with reasons recorded in writing

Applies to NBFCs other than Government companies. The RBI acts by order.

Period of supersession

Period specified in order ≤ 5 years; extensions allowed, but total ≤ 5 years

Section 45-IE(1). The total period can never exceed five years.

Administrator (s. 45-IE(2), (3), (4), (9))

RBI appoints Administrator; directors vacate office; Administrator exercises Board and general meeting powers until Board reconstituted

The Administrator must follow RBI directions and vacates office as soon as the Board is reconstituted.

Committee to assist Administrator (s. 45-IE(5))

3 or more members with experience in law, finance, banking, administration or accountancy

Salary of the Administrator and committee is paid by the NBFC.

Compensation (s. 45-IE(8))

No person can claim compensation for loss or termination of office

Applies despite any other law or contract.

IFSC rule (s. 57A)

RBI powers under the Act do not extend to an IFSC; exercised by IFSCA for permitted financial products, services and institutions

Parallel provisions: s. 51A Banking Regulation Act, s. 118A Insurance Act.

Regulations by Central Board (s. 58)

Central Board + previous sanction of Central Government + notification in Official Gazette

Regulations are laid before Parliament for a total of thirty days. Copies are available to the public on payment.

Licence requirement

No company carries on banking business in India without an RBI licence - Section 22(1)

The RBI may attach conditions it thinks fit. Under section 22(2), every banking company in existence at commencement of the Act had to apply in writing within six months, and every other company must apply in writing to the RBI before commencing banking business.

Conditions before grant

Section 22(3): (a) pay depositors in full, (b) affairs not detrimental to depositors, (c) management not prejudicial, (d) adequate capital and earning prospects, (e) public interest, (f) no prejudice to banking system, (g) other conditions

The RBI 'may require to be satisfied' by inspection of books or otherwise.

Foreign banking company

Section 22(3A): section 22(3) conditions + public interest + no discrimination by home country + compliance with Act

Applies to companies incorporated outside India.

Cancellation of licence

Section 22(4): (i) ceases banking in India, or (ii) fails licence conditions, or (iii) section 22(3)/(3A) conditions not met

The opportunity to comply applies only to cancellation under clause (ii) or (iii), not clause (i). Even then, it is not given if the RBI thinks delay would prejudice depositors or the public.

Appeal against cancellation

Appeal to Central Government within 30 days of communication - Section 22(5); decision final - Section 22(6)

If no appeal is made, the RBI's decision is final.

IFSC carve-out

Section 51A: RBI powers do not extend to an IFSC; IFSCA exercises them for financial products, services and institutions permitted in the IFSC

The same pattern appears in section 57A of the RBI Act and section 118A of the Insurance Act.

CRR vs SLR

CRR = cash balance kept with the RBI (under the RBI Act, 1934); SLR = liquid assets such as cash, gold or approved securities kept by the bank itself, as a percentage of its liabilities

Percentages are set by the RBI from time to time, so do not memorise a fixed rate. CRR comes from the RBI Act, not the Banking Regulation Act. The section numbers for CRR and SLR are not covered in the text supplied for this page, so check them in your study material.

Section 118A: IFSC carve-out

Authority's powers under the Insurance Act: (a) do not extend to an IFSC; (b) are exercisable by the IFSCA

Applies only so far as regulation of financial products, services and institutions permitted in the IFSC is concerned. It operates notwithstanding any other law in force. Inserted by Act 50 of 2019, effective 1-10-2020.

Parallel IFSC provisions

Insurance Act s.118A | Banking Regulation Act s.51A | RBI Act s.57A

Same wording and effect: the regulator's powers (Authority, Reserve Bank, Bank) do not extend to an IFSC and pass to the IFSCA.

Section 64R: powers of the Councils

Life/General Insurance Council may appoint staff, fix service conditions, determine fee collection, keep list of member insurers, make bye-laws

Under s.64R(2), the Council may authorise its Executive Committee to use the powers in clauses (a), (b) and (c) of sub-section (1).

Section 45Y RBI Act: Joint Committee

Reference by RBI Governor, IRDAI, SEBI or PFRDA head; decision within 3 months; binding on RBI, SEBI, IRDAI, PFRDA

Chair: Union Finance Minister. Vice-Chair: RBI Governor. Convener: Secretary, Department of Financial Services. Applies to a difference of opinion on hybrid or composite instruments.

RBI Act, section 57A

Powers of the Bank under the Act: (a) do not extend to an IFSC; (b) are exercisable by IFSCA, for IFSC-permitted products, services and institutions

Starts with a non-obstante clause. Inserted w.e.f. 1-10-2020.

Banking Regulation Act, section 51A

Powers of the Reserve Bank under the Act: (a) do not extend to an IFSC; (b) are exercisable by IFSCA, to the same limited extent

Same two-limb structure as section 57A of the RBI Act.

Insurance Act, section 118A

Powers of the Authority under the Act: (a) do not extend to an IFSC; (b) are exercisable by IFSCA, to the same limited extent

Inserted by Act 50 of 2019, w.e.f. 1-10-2020.

Source of an IFSC

IFSC = set up under section 18(1) of the Special Economic Zones Act, 2005

IFSCA is established under section 4(1) of the IFSCA Act, 2019.

Insurance Act, section 2CA

Central Government may notify that Act provisions do not apply, or apply with exceptions, modifications and adaptations, to insurers in an SEZ

A government notification power. Different from the IFSCA transfer in section 118A.

Quick revision

• The chapter has five topics: financial system overview, RBI Act, Banking Regulation Act, Insurance Act and IFSC.
• Paper 3 is a written paper; answer with the provision, the analysis and a clear conclusion.
• Section 45Y of the RBI Act sets up a Joint Committee for differences of opinion on hybrid or composite instruments.
• The Union Finance Minister chairs the Joint Committee and the RBI Governor is Vice-Chairperson.
• The Secretary, Department of Financial Services, convenes the Joint Committee meetings.
• A reference to the Joint Committee can be made by the RBI Governor or the heads of IRDAI, SEBI or PFRDA.
• The Joint Committee gives its decision to the Central Government within three months, and the decision binds RBI, SEBI, IRDAI and PFRDA.
• Section 57A of the RBI Act, section 51A of the Banking Regulation Act and section 118A of the Insurance Act are the IFSC provisions.
• In an IFSC, the powers of the RBI or IRDAI under these Acts are exercised by the IFSC Authority for permitted financial products, services and institutions.
• A collective investment scheme under section 11AA of the SEBI Act needs pooled contributions, a profit motive, management on behalf of investors, and no day-to-day control by investors.
• Mutual fund subscriptions, insurance contracts and chit funds are excluded from the collective investment scheme definition.

Common mistakes

• Saying RBI regulates all financial services, including insurance and mutual funds. Fix: Learn the map: banks and NBFCs under RBI, securities market and mutual funds under SEBI, insurance under IRDAI.
• Believing a banking company may do any business it likes. Fix: Remember s. 6(1) lists permitted forms and s. 6(2) bars every other form. The Central Government can add forms only by notification under clause (o).
• Saying the RBI can supersede the Board of a Government NBFC under section 45-IE. Fix: Always write 'non-banking financial company (other than Government company)'.
• Stating that supersession can be extended without any overall limit. Fix: Remember the cap: the total period shall not exceed five years.
• Saying the RBI must always give notice before cancelling a licence. Fix: Write that an opportunity to comply is given only when cancelling under section 22(4)(ii) or (iii), and even then not if delay would prejudice depositors or the public. It does not apply to clause (i), where the company ceases banking business.
• Saying the appeal against cancellation goes to the RBI or a court. Fix: Under section 22(5), appeal lies to the Central Government within thirty days of the decision being communicated.
• Saying section 118A removes the Insurance Act from an IFSC completely. Fix: Write that only the Authority's powers do not extend to the IFSC, and the IFSCA exercises them for permitted products, services and institutions.
• Writing that the Reserve Bank regulates insurers under the Insurance Act. Fix: Link each Act with its regulator: Insurance Act with the Authority, Banking Regulation Act and RBI Act with the Reserve Bank.
• Saying the RBI or insurance regulator has no role anywhere once an entity has an IFSC unit. Fix: The carve-out covers the IFSC and the permitted products, services and institutions there. Business outside the IFSC stays under the usual regulator.
• Mixing up the section numbers of the three Acts. Fix: Remember the set: RBI Act 57A, Banking Regulation Act 51A, Insurance Act 118A.

Exam tips

• Begin any regulator question with the one-line map: RBI for banks and NBFCs, SEBI for securities, IRDAI for insurance, IFSCA for IFSCs.
• Learn s. 45L, s. 45MBA and s. 6 of the Banking Regulation Act in plain words, as facts can test them directly.
• Use the fund-based versus fee-based split whenever a question asks you to classify financial services.
• If a question mentions an IFSC or SEZ, mention the carve-out and that IFSCA exercises the powers.
• Write the provision, analysis and conclusion in separate short paragraphs, as ICSI answers are marked on structure.
• Learn section 45-IE as a list: grounds, reasons in writing, five-year cap, Administrator, committee, no compensation, Administrator vacates. Use it as a checklist in case studies.
• Always write the Act and section number for supersession (45-IE), IFSC (57A) and regulations (58). ICSI style rewards the provision first, then analysis, then conclusion.
• For 'difference between banking company and NBFC', name the governing Act, regulator and nature of business, and keep to points you are sure of.