Control over Organization of Banks: formula sheet

Key formulas

Licence requirement (S.22(1))

No licence from RBI = no banking business in India

RBI may issue the licence subject to such conditions as it thinks fit.

Application (S.22(2))

Every other company must apply in writing to RBI before commencing banking business in India

Companies existing at commencement of the Act had six months to apply and could continue until granted a licence or told in writing that it cannot be granted.

Conditions for grant (S.22(3))

(a) pay depositors in full as claims accrue; (b) affairs not detrimental to depositors; (c) management not prejudicial to public interest or depositors; (d) adequate capital structure and earning prospects; (e) public interest served; (f) no prejudice to operation and consolidation of banking system consistent with monetary stability and economic growth; (g) any other condition RBI considers necessary

RBI may require to be satisfied by inspecting books or otherwise.

Foreign company (S.22(3A))

Section 22(3) conditions + public interest + no discrimination by its home country against Indian banking companies + compliance with Act provisions for foreign banking companies

Applies to a company incorporated outside India.

Cancellation grounds (S.22(4))

(i) ceases to carry on banking business in India; (ii) fails to comply with licence conditions; (iii) any S.22(3) or (3A) condition not fulfilled

Chance to comply is given for grounds (ii) and (iii), unless delay would prejudice depositors or the public.

Appeal (S.22(5)-(6))

Appeal to Central Government within 30 days of communication of the cancellation decision

The Central Government's decision, or RBI's if no appeal, is final.

Foreign bank minimum (s. 11(2)(a))

Paid-up capital + reserves ≥ ₹15 lakh; ≥ ₹20 lakh if it has a place of business in Bombay or Calcutta or both

Applies to a banking company incorporated outside India.

Foreign bank deposit with RBI (s. 11(2)(b))

Deposit ≥ the minimum under clause (a), plus 20% of each year's profit from business through its Indian branches

Kept in cash or unencumbered approved securities, or both. Can be swapped between cash and securities if the total is unchanged. Central Government may exempt the yearly top-up on RBI's recommendation (s. 11(2A)).

Indian bank, more than one State (s. 11(3)(i))

Paid-up capital + reserves ≥ ₹5 lakh; ≥ ₹10 lakh if any place is in Bombay or Calcutta

For banks to which s. 11(2) does not apply.

Indian bank, one State, none in Bombay or Calcutta (s. 11(3)(ii))

₹1,00,000 (principal place) + ₹10,000 × other places in same district + ₹25,000 × places elsewhere in the State

Capped at ₹5 lakh in total. A bank with only one place need not exceed ₹50,000. A bank starting banking business for the first time after the Banking Companies (Amendment) Act, 1962 needs paid-up capital of at least ₹5 lakh.

Indian bank, one State, with Bombay or Calcutta (s. 11(3)(iii))

₹5,00,000 + ₹25,000 × each place outside Bombay or Calcutta

Capped at ₹10 lakh in total.

25-mile rule (Explanation to s. 11(3))

A place in another State within 25 miles of the principal place is treated as in the same State

Use it before deciding which clause applies.

Capital ratios (s. 12(1)(i))

Subscribed ≥ ½ × Authorised; Paid-up ≥ ½ × Subscribed

After a capital increase, comply within up to two years as RBI allows.

Voting ceiling (s. 12(2))

Voting rights on poll ≤ 10% of total voting rights of all shareholders

RBI may raise the ceiling in phased manner up to 26%.

Section 12B(1) threshold

Applicant's holding + holding of relative, associate enterprise and persons acting in concert ≥ 5% of paid-up capital or of voting rights → previous RBI approval needed

The test is on shares or voting rights, and covers direct and indirect acquisition and an agreement to acquire.

Approval test, section 12B(2)

RBI approves only if the applicant is a fit and proper person, judged on the stated grounds

Grounds include public interest, banking policy, and the interest of the banking and financial system.

Time limit for RBI decision, section 12B(6)

Decision within 90 days of receipt, excluding time taken by the applicant to furnish information called for

The clock stops while you supply information RBI asked for.

Voting cap, section 12B(8)

Person(s) holding more than 5% found not fit and proper → aggregate voting rights on poll limited to 5% of total voting rights

Needs an opportunity of being heard first.

Section 35B(1)(a)

Amendment of provisions on maximum number of directors, or appointment, re-appointment, termination or remuneration of chairman, MD, other directors, manager or CEO → no effect unless approved by RBI

Applies to provisions in the memorandum, articles, an agreement or a resolution.

Section 35B(1)(b)

Appointment, re-appointment or termination of chairman, managing or whole-time director, manager or CEO → no effect without RBI's previous approval

Covers termination too, not only appointment.

Board composition under section 10A(2)

Qualified directors ≥ 51% of total board strength

Total number of board members is the base, not the number present at a meeting. Qualified means special knowledge or practical experience in the listed fields and no disqualifying business interest.

Minimum sector directors

At least 2 of the qualified directors must be from agriculture and rural economy, co-operation or small-scale industry

These two are counted within the 51%, not on top of it.

Cap on tenure under section 10A(2A)(i)

Director other than chairman or whole-time director: continuous tenure ≤ 8 years

The chairman and whole-time directors are excluded from this cap.

Removed chairman or whole-time director, section 10A(2A)(ii)

Ceases to be a director and is ineligible for re-appointment for 4 years

Applies where removal was under the provisions of the Banking Regulation Act. The four years run from the date of ceasing to be chairman or whole-time director.

RBI approval under section 35B

Appointment, re-appointment or termination of chairman, MD, whole-time director, manager or CEO → previous RBI approval

Amendments to provisions on remuneration, or on the maximum number of directors, need RBI approval to have effect.

RBI direction to reconstitute under section 10A(5)

Hearing → written order → 2 months → removal by lots and RBI appointment

If the bank does not comply within two months of receiving the order, RBI may determine by lots whom to remove and appoint a suitable person.

Section 6(2): closed list

Business allowed = business of banking + section 6(1)(a) to (o). Anything else is prohibited.

Clause (n) covers incidental business. Clause (o) covers businesses notified by the Central Government.

Section 8: no trading

No dealing in goods or trade, except (i) realising security, (ii) bills for collection or negotiation, (iii) section 6(1)(i) business.

Goods exclude actionable claims, stocks, shares, money, bullion, specie and section 6(1)(a) instruments. The section does not apply to businesses notified under section 6(1)(o).

Section 20(1)(a)

No loan or advance on the security of the bank's own shares.

Applies notwithstanding section 77 of the Companies Act, 1956.

Section 20(1)(b)

No commitment to lend to: a director; a firm where a director is partner, manager, employee or guarantor; a linked company; an individual whose partner or guarantor is a director.

Linked company: one where a director is director, managing agent, manager, employee or guarantor, or holds substantial interest. Exceptions: subsidiary of the bank, section 25 company, Government company.

Section 20(2) to (4): old loans

Recover within the period stipulated at the time of the grant; where none was stipulated, within one year from commencement of section 5 of the Banking Laws (Amendment) Act, 1968. RBI may extend to a date not beyond three years from that commencement. Remission needs RBI's prior approval. If unpaid, the borrower-director is deemed to have vacated office.

Applies to loans that could not have been committed under clause (b), and to loans granted after that commencement under an earlier commitment. Where a period was stipulated, that period applies. The one-year period and the three-year outer limit for RBI extension run from commencement of section 5 of the Banking Laws (Amendment) Act, 1968. Sub-section (2) does not apply once the director vacates office.

Section 20(5)

Whether a transaction is a loan or advance is decided by RBI, and its decision is final.

RBI may also exclude transactions from the term by general or special order.

Section 10(1)(c)(iii): term of managing person

Term at one time ≤ 5 years.

Renewals are in blocks of up to five years, sanctioned no earlier than two years before they take effect.

Shareholder approval under section 44A(1)

Resolution by majority in number representing two-thirds in value of shareholders present in person or by proxy

Passed at a meeting called for the purpose, separately for each banking company. Both the number test and the value test must be met.

Notice of meeting, section 44A(2)

Notice to every shareholder per articles (time, place, object) + published once a week for 3 consecutive weeks in at least 2 newspapers

Newspapers must circulate where the registered offices are situated. One must be in a language commonly understood there.

Dissenting shareholder, section 44A(3)

Voted against, or gave written notice of dissent at or before the meeting, can claim share value fixed by the RBI

Right arises only if the RBI sanctions the scheme. The RBI's valuation is final for all purposes.

Sanction, section 44A(4)

Scheme approved by requisite majority, then submitted to RBI, sanctioned by written order, binding on banks and all shareholders

Without RBI sanction the scheme does not bind.

Vesting, section 44A(6)

On sanction, property and liabilities of the amalgamated bank pass to the acquiring bank

Subject to the provisions of the scheme as sanctioned.

Dissolution, sections 44A(6A) and (6B)

RBI further order, dissolution on specified date, copy to Registrar, Registrar strikes off name

Takes effect notwithstanding any other law.

Conclusive evidence, section 44A(6C)

RBI sanction order = conclusive evidence that all requirements of the section are complied with

A certified copy of the order and scheme is admissible as evidence.

Central Government power, section 44A(7)

Amalgamation under section 396 of the Companies Act, 1956, only after consultation with the RBI

Does not depend on the shareholder voting process in section 44A(1).

Banks covered by section 51

State Bank of India + corresponding new bank + Regional Rural Bank + subsidiary bank

The provisions apply to these as they apply to banking companies, so far as may be.

Provisions applied (as listed in the text)

Sections 10, 13 to 15, 17, 19 to 21A, 23 to 28, 29 (excluding sub-section (3)), 29A, 30(1B), (1C) and (2), 31, 34, 35, 35A, 35AA, 35AB, 36 (excluding clause (d) of sub-section (1)), 45Y to 45ZF, 46 to 48, 50, 52 and 53

Learn the three partial applications: section 29 without sub-section (3), section 30 only in part, section 36 without clause (d) of sub-section (1).

Saving clause

Without prejudice to the State Bank of India Act, 1955 or any other enactment

The bank's own statute stays in force alongside section 51.

Proviso (a)

Section 10(1)(c) does not apply to the SBI chairman or a subsidiary bank's managing director to the extent it bars being a director of, or holding office in, an institution approved by the RBI

Section 10 itself applies; only this bar is relaxed.

Proviso (b)

Section 20(1)(b)(iii) does not bar commitments to lend to a non-Government company with at least 40% paid-up capital held by the Central Government, the RBI or an RBI-owned corporation

Held singly or taken together.

Proviso (c)

Sections 46 and 47A do not apply to (i) a Central Government or RBI officer nominated or appointed as director of SBI, a corresponding new bank, a Regional Rural Bank, a subsidiary bank or a company, or (ii) an officer of SBI, a corresponding new bank, a Regional Rural Bank or a subsidiary bank nominated or appointed as director of any of these banks (not being the bank of which he is an officer) or of a banking company

In limb (ii), the exemption does not cover a directorship in the officer's own bank. It covers a directorship in another of these banks or in a banking company.

Sub-section (2)

Reference to a banking company in a rule or direction = also SBI, corresponding new bank, a Regional Rural Bank and subsidiary bank

Unless the rule or direction provides otherwise.

Quick revision

• No company may carry on banking business in India without an RBI licence, and the RBI may attach conditions.
• A company must apply in writing to the RBI before commencing banking business.
• The RBI may inspect books to check depositor protection, management character, capital and earning prospects, and public interest.
• The RBI may cancel a licence if the bank stops banking business or fails licence conditions.
• Before cancelling for condition failures, the RBI normally gives a chance to comply, unless delay harms depositors or the public.
• A bank may appeal against cancellation to the Central Government within thirty days of communication.
• Subscribed capital must be at least one-half of authorised capital.
• Paid-up capital must be at least one-half of subscribed capital.
• Capital may consist of equity shares only, or equity and preference shares as per RBI guidelines.
• A shareholder cannot exercise poll voting rights above ten per cent of total voting rights, subject to RBI phased increase up to twenty-six per cent.
• The chairman, managing director or CEO must file share-holding returns with the RBI through the bank.
• Section 51 applies listed provisions to SBI and notified banks so far as may be, subject to stated exceptions.

Common mistakes

• Saying only a bank that is a public company needs a licence. Fix: Section 22(1) says no company shall carry on banking business in India without a licence. The activity triggers the rule.
• Listing the conditions for grant from memory and missing clauses. Fix: Group them: depositors (a, b), management (c), capital and earnings (d), public interest and system (e, f), residual (g).
• Forgetting the cap after adding per-branch amounts Fix: Always compare the total with the cap: ₹5 lakh under s. 11(3)(ii), ₹10 lakh under s. 11(3)(iii). The cap applies even if the sum is higher.
• Treating nominal book value as the test Fix: State that s. 11(5)(b) uses real or exchangeable value, and that RBI's determination on a dispute is final under s. 11(6).
• Testing only the applicant's own shares against 5%. Fix: Always add the holdings of relatives, associate enterprises and persons acting in concert.
• Saying approval is needed only for an acquisition above 5%. Fix: The Act says 5% or more. Reaching exactly 5% triggers approval.
• Saying 51% must be experts only in banking. Fix: List all the fields: accountancy, agriculture and rural economy, banking, co-operation, economics, finance, law, small-scale industry, and others RBI finds useful.
• Treating the two sector directors as additional to the 51%. Fix: The proviso says out of the aforesaid number. They are part of the 51%.
• Saying a bank can never deal in goods, even to recover dues. Fix: Always list the exceptions: realising security, bills for collection or negotiation, and section 6(1)(i) business.
• Treating bullion or shares as "goods" under section 8. Fix: Quote the Explanation: goods exclude actionable claims, stocks, shares, money, bullion, specie and section 6(1)(a) instruments.

Exam tips

• Write Section 22(3) conditions as a short list. Examiners look for the coverage of depositors, management, capital, public interest and system tests.
• In case questions, always follow provision, analysis, conclusion, and name the sub-section you apply.
• Do not forget the proviso on opportunity to comply. It is the usual point in cancellation cases.
• State the thirty-day appeal period and finality of the decision. Both earn marks quickly.
• If the facts mention a foreign company, add Section 22(3A) at once.
• Write the section number with each rule: s. 11 for minimum amounts, s. 12 for structure and voting. Use only what the Act says.
• In numerical questions, show each component of the s. 11(3)(ii) or (iii) formula on its own line, then check the cap. Marks go for method.
• Check the 25-mile Explanation and the definition of place of business before you count branches.