KYC NORMS : AN Overview


Way back to the second half of 2002, it is then RBI directed all the banks to implement the

KYC guidelines for all the new accounts that will be further getting into operation.

The main purpose of KYC norms was to restrict money laundering and terrorist financing when it was introduced in the late 1990’s in the United States. The US has has made changes in it’s major legislations-Bank Secrecy Act etc to make these norms effective.[1]

The KYC guidelines are issued by the RBI under Section 35A of the Banking Regulation Act,1949 and under Rule 9(14) of Prevention of Money laundering(Maintenance of Records) Rules,2005. Any bank contravenes with the said guidelines or any non-compliance would attract penalities under the Banking Regulation Act,1949.

However the guidelines issued by the RBI to the financial institutions or any other  will be subject to change by way of a Master Circular. The latest Master Circular that is available is  “DBR.AMLBC.No.15/14.01.001/2015-16”.

Objective of the KYC Norms : The main idea behind implementing KYC Norms is to avoid terrorist financing activities . It also helps the banks to know or understand who their customer is in order to avoid future risks.

Compliance Measures :  In the year 2002,when these were initially introduced there has been a lag in its implementation and hence there were certain measures adopted by the RBI for all the existing accounts too : Some of them includes :

1. Public Notice in  the national newspapers

2. Zonal Customer Identification

3.Individual notices to the customers with non-compliance

4. And a final notice in the newspapers for ensuring proper documentation within 7days from that particular day.


KYC Policy :

Now that banks or financial institutions has a facility to frame their KYC policies, but then the key criteria cannot be missed out.

1.Customer Acceptance Policy

2.Customer Identification Procedures

3.Monitoring of transactions

4.Risk Management [2]

All the above are nothing but due diligence measures that are generally taken by any bank/financial institution in order to make sure that no fraud takes place with respect to the transactions being operated in the bank. Proper scrutinization of documents that are provided by the customer will stand as a support to meet the objective of the KYC Norms.

Procedures again vary from a normal customer that one gets to know ,  non face-to-face customers(i.e customers who access through Internet banking/Mobile banking),additional documents maybe called upon for a better understanding of such customer.

Non-resident accounts can also be operated and special procedures are involved for he same(for foreign students).

Freezing of Accounts on Non-Compliance : Any  non-compliance thereof can lead to freezing of such account. However it is mandatory that a 3 month notice shall be served to the concerened customer detailing the subject-matter. A partial freezing is made on such account in which a 3months notice is served. If still the account tend to be in non-compliance after 6months , all the debits and credits would be disallowed  i.e the account cannot be operated further. In such a situation it is at the bank’s discretion to close such accounts. However reasons for such closure are to me mentioned clearly.

When the bank believes the account to be lacking a true identity, i.e in case of a suspicious account the bank should file a Suspicious Transaction Report(STR) with the Financial Intelligence unit-India under the Department of Revenue ,Ministry of Finance, Government of India.




The risk that is involved with the implementation of KYC can be categorised into 5 heads :

1.      Reputational risk

2.      Operational Risk

3.      Risks that arise legally

4.      Financial Risks

5.      Concentration Risk

1)Reputational Risk : Terrorist often resort to identity theft. The 9/11 terrorists had opened 14 accounts with a Florida Bank ,using false social security numbers and other documents.[3] Such instances cause immense damage to the reputation of that bank/financial institution. Future customers may avoid making business with that bank as such. Hence a reputational risk is always in place for bank and proper compliance with the norms must be taken care of.

2)Operational Risk : Operational risk is defined as the risk of loss resulting from adequate or failed internal processes ,people and systems or from external events.[4] To avoid these operational risks, as most of the operative part is in the hands of the bank staff, training must be provided on a strict pace. When every employee is aware of the basic issues to be taken care of, the risk may inturn decrease thereof.

3)Risks that arise legally :  As and when any business would attract penalities and adjudications on involving in illegal activities, its the same with the banks too. Not complying with the KYC Norms would lead to heavy penalties.

4)Financial Risks : There are financial risks involved in not complying with the KYC Norms because if so a bank gives a loan to a customer , and at the same time failed to identify the customer as such it is difficult for the bank to retrieve the load bank and may lose financially.

5)Concentration Risk : Banks usually tend to concentrate more so on a particular geographical area, or involving more into a particular kind of business activity in order to attract customers. Sudden downfall of suck concentration again leads to risk to the banks.



As earlier mentioned , documentation plays a pivotal role in identifying a customer as such. However the usual documentation we find slightly varies in accounts that are related to Companies ,Partnerhip firms, Trust Accounts , Accounts of unincorporated associations, Accounts of proprietors so on and so forth.

For Individual Accounts :

The proof of identities that are required in opening an individual account are PAN card, Passport(if available), Voters Identity , Any Job cards containing the Adhaar Number. These are mandatory .Any kind of utility bills or letter duly signed by any authorised Gazzette officer can be given if the bank insists.

Accounts for Companies :

 Generally for  Companies it would be Current accounts and the documents that had to be submitted while opening an account are : Certificate of Incorporation, Memorandum of Association , Any resolution that is made by the Board of Directors or say any officially valid document with respect to the managers,officers, employees etc.

Accounts for Partnership Firms :

A deed of partnership, registration certificate or any official documents that holds good are to be submitted.

Trust Accounts :

Trust Deed and a registration certificate.

Accounts of unincorporated Associations :

As a registration certificate cannot be obtained in case of unincorporated associations any resolutions made or any official document made with respect to the company or any document which in turn dictates the companies legal existence.

Proprietors Accounts :

All the certificates relating to tax liability, VAT ,registration, licence certificates, Sales or Income Tax returns need to be submitted in case of any proprietorship accounts. Extra diligence is involved here since proprietors hold huge amounts and operate huge sum transactions which has to be looked upon. Activity proofs are a must.



In the year 2013 all the three banks have been fined by the Reserve Bank of India with  5crores, 1 crore and 4.5 crores respectively in violating certain KYC Norms.

The RBI further detailed that in its investigation it found that the three top private banks in the country were not adhering to certain know your customer (KYC) norms and anti money laundering (AML) guidelines like risk categorisation and periodical review of risk profiling of account holders. The central bank also found that the banks were not filing cash transaction reports (CTRs) in respect of some cash transactions and were selling gold coins for cash beyond 50 thousand rupees.[5]

RBI also stated that the internal operations of the three banks were not to the mark.

The PAN numbers and where from the funds are being deposited in the accounts of the customers are all not taken care of by the banks –said the Central Bank.

However in this case no prima facie evidence has been obtained that an act of money laundering took place.

RBI gave these directions as suggestive measures stating : incentives should not be given to any operational managers of the banks and the information in regard to a customer must be taken seriously when informed by the other banks especially by the co-operative banks, since small account holders rests with the co-operative banks rather than the commercial banks.




The bank acting in compliance with the KYC Norms are undoubtedly benefitting the customers from a rural background.

Initially there wasn’t any awareness regarding these norms (be it employees or customers), it is mostly the weaker sections of the society who lack awareness. A flexibility is then provided to submit the concerned documents slowly so that the news reaches to a larger group. Employees were also being trained today in almost all the banks for a better work management as such. So an admission can be made that the negativity involved has almost reached to zero since today even the weaker sections provide all the required document due to the ongoing awareness that is created by every single bank that is in existence today. Boards with respect to the norms are displayed in banks even in the regional language and there are people or employees themselves detail regarding these if any person is unaware of.

“ KYC Guidelines are customer-friendly and the notion that KYC Norms are an impediment for  people from a rural background in availing banking facilities is not correct”.

Also to target the small account holders , especially the migrant workers RBI in the year 2013 relaxed the rules. It now abolished the lengthy procedures that banks insist upon to act on par with the KYC Norms by allowing just one identity proof in order to open an account. This mainly benefits the workers and daily workers since that it is really difficult for them to obtain two different proofs for identity and address as in most of them would be migrating from once place to another and so this incentive made a relief . Self-attestation with a credit limit of approximately 1lakh for an year and a minimal withdrawal of Rs.10,000 is also made available to the people with certain economic and social backgrounds.





1.      Risk management in electronic Banking, concepts and best practices – Jay Ram Konda Bagil (2007),Publisher – John Wiley & Sons (Asia) Pvt Ltd







1.Financial Express ( Article dated June 11th 2013 ,Column -Fe Beaureu-)

[1] (last visited on 2016-02-28 , 11:01pm)
[2] See generally “Master Circular-RBI/2015-16/42 , DBR.AML.BC.No.15/14.01.001/2015-16
[3] “Risk management in electronic banking:concepts and best practices, Page 199,200, Publisher-John Wiley &   Sons (Asia) Pvt Ltd –  Jaya Ram Kondabagil (2007)
[4] ( last visited on 2016-02-29 , 9:40pm)
[5]See generally “RBI fines Axis, ICICI and HDFC bank for KYC Norm breach”- Financial Express (Dated June 11th 2013)- Column :Fe Beaureu

Transfer Pricing: Capacity utilization adjustments

Transfer PricingTransfer Pricing: Capacity utilization adjustments

Tax authorities worldwide are investigating transfer pricing arrangements with increased vigour. In India too one witnesses the multifold increase in transfer pricing disputes and adjustments to the tune of INR 46,465 crore . One such issue, which has been the subject matter of dispute and very little guidance, is discussed in this article, i.e. on capacity utilization adjustments.
Indian transfer pricing regulations are largely aligned to international norms and methodologies, even while it has certain peculiarities. The central theme of the provisions is the arm’s length principle, which postulates charging of an arm’s length price for all transactions between associated enterprises.
The arm’s length price is to be determined using one of the methods prescribed under the Income-tax Act, 1961 (‘the Act’), while having regard to the nature or class of transaction or function performed. The Transactional Net Margin Method (‘TNMM’) is a prescribed method for determining the arm’s length price in some cases. TNMM enjoins the adjustment owing to capacity under-utilization differences. Since sizes of entities and level of activities differ, so does the available comparables for the purpose of transfer pricing adjustments. The rationale to eliminate capacity under-utilization when engaging TNMM is that the arm’s length price will be a proper comparable as the differences in the levels of absorption of indirect fixed costs would affect the net profit margin and not the gross margin / gross mark-up on cost.
The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, July 2010, prescribe the making of adjustments to eliminate differences in capacity utilization or idle capacity adjustments. Also, Rule 10B(1)(e)(iii) of the Income-tax Rules, 1962 (‘the Rules’) stipulates that an adjustment to the net profit margin can be made for “capacity under-utilization”.
Capacity under-utilization by enterprises is a factor affecting net profit margin because lower capacity utilization results in higher per unit costs, which, in turn, results in lower profits at a transactional or unit level. There is no debate on the need for adjustments, however the issue is as to the reasonable accuracy in the mechanism for such adjustments; so long as a reasonable adjustment mechanism can be employed, objections to the adjustment won’t hold. In this context, it is useful to recall the observations of the Hon’ble Delhi High Court in Sony Ericsson Mobile Communication India Pvt. Ltd. [March 2015]: “It must be stated that transfer pricing is not an exact science but a method of legitimate quantification which requires exercise of judgment on the part of the administration and the taxpayer. It is method and formula based and therefore is rational and scientific”. At present there is no authoritative guidance relating to capacity utilization adjustments but the decision of the Delhi Bench of the Income Tax Appellate Tribunal’s (‘the Tribunal’) in the case of Claas India Private Limited [ITA No. 1783/Del/2011], has put forth useful observations and guidelines on capacity utilization adjustment.
The Tribunal noted that the taxpayer had claimed idle capacity adjustment by reducing its own operating costs. The taxpayer, engaged in the manufacture, sale and export of farm equipments, claimed to have worked at a capacity of 29%. The Transfer Pricing Officer (‘TPO’) concluded 54% as being the average capacity utilization of the comparables chosen by him. Accordingly the TPO applied the factor of 29/54 (29% being the taxpayer’s capacity utilization and 54% being the average capacity utilization of the comparables chosen by the TPO) for reducing the operating costs actually incurred by the taxpayer. The judgment of the Tribunal states that in case there are some differences between the comparables and the taxpayer, then the effect of such differences should be ironed out by making suitable economic adjustment to the operating profit margin of comparables. The Tribunal held that the correct course of action provided under the law is to adjust the operating costs of the comparable and their resultant operating profit.
Since neither the Act nor the Rules provide the mechanism for computing capacity utilization adjustment, but in this judgment the Tribunal has laid down the following important principles:
• It is essential to ascertain the percentage of capacity utilization by the taxpayer and the comparables when applying the TNMM.
• The difference in the percentage of capacity utilization of the taxpayer vis-à-vis comparables should be given effect to in the operating profit of comparables by adjusting their respective operating costs.
The Tribunal explained that operating costs can be either fixed, variable or semi-variable:
• Semi-variable costs need to be split into fixed and variable part.
• The variable costs and the variable portion of the semi-variable costs remain unaffected due to any under or overutilization of capacity.
• The fixed operating costs and the fixed part of the semi-variable costs are scaled up or down by considering the percentage of capacity utilization by the taxpayer and such comparable.

To illustrate, the Tribunal employed the following example:
Comparable Company Name ABC Limited
Fixed Cost INR 100
Capacity Utilization 50%

The Tribunal explained that the taxpayer having capacity utilization of 25% incurs full fixed costs with 25% of the utilization of its capacity, vis-a-vis ABC Limited which incurred full fixed costs at 50% of its capacity utilization. At unit level, this reflects that the taxpayer has incurred relatively more fixed costs, whilst ABC Limited has incurred lower costs.
To improve the quality of comparability, there arises a need to eliminate the effect of this difference in capacity utilization. This can be done by proportionately scaling up the fixed costs incurred by ABC Limited so as to make it fully comparable with the taxpayer. Hence the need for increasing the fixed costs of ABC Limited to INR 200 [INR 100 x (50/25)] as against the actually incurred fixed costs by it at INR 100. When computing the operating profit of ABC Limited by substituting the fixed cost at INR 200 instead of the actual fixed cost of INR 100, it would mean that the fixed costs incurred by the taxpayer and ABC Limited are at the same capacity utilization.
The Tribunal as regard to capacity utilization re-emphasized the need for maintaining credible and accurate information for transfer pricing purposes. The decision is welcome addressing the concerns of industry and professionals alike and provides valuable guidance to both the Revenue and taxpayers when making capacity utilization adjustments whilst using TNMM methodology.

DISCLAIMER: This article has been authored by Ranjeet Mahtani, who is an Associate Partner and Darshi Shah, who is an Associate Manager at Economic Laws Practice (ELP), Advocates & Solicitors. The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.

Private Equity Investments – A Brief Overview

Private EquitySaloni Mody Dalal

Private Equity (“PE”) financing has emerged as a major investor class and has been a driver of economic growth of companies over the world. This note summarizes the key steps involved in consummation of a PE investment.

In order to make a PE investment, the PE investor has to undertake a series of steps. A typical private equity investment commences with the PE investor seeking out a company requiring investment or being approached by such a company. The selection of the investee company after undertaking a background check of the investee company and its holding company (ies) / promoters is the most significant step in a PE Investment.

Following this, a basic document, such as a term sheet, memorandum of understanding or a letter of intent is executed between the PE investor and the investee company, in order to lay out the broad terms and conditions of the investment and expressing the intention to enter into definitive agreements. The consummation of the investment and execution of definitive agreements may also be subject to fulfilment of certain conditions precedent, to be spelt out in the initial document. If the transaction necessitates a diligence, then the execution of definitive agreements is generally subject to a favourable outcome of such diligence.

Once the initial document is in place, the PE investor usually conducts a legal, tax and financial due diligence on the investee company. The scope of the due diligence largely depends on the nature of the PE investment. A PE investment that envisages an investment by way of the PE investor and the promoter coming together to incorporate a start-up investee company may not require a due diligence, unless the diligence to be carried out is on the promoter(s) itself. However, if the PE investment involves investment in the share capital of an existing company, a comprehensive due-diligence is imperative.

Simultaneously with the due diligence process, the PE investor and the investee company commence negotiations in respect of the definitive agreements. The most common definitive agreements in a PE transaction are investment documents, including share subscription agreements, share purchase agreements and shareholders’ agreements between the PE investor, the investee company and the promoters/shareholders. There may be other documentation agreed on between the parties depending on the structure and other terms of the deal, such as trade mark licenses and technology transfer agreements, where one of the parties transfers its business or technology to the newly incorporated company or an escrow agreement for safeguarding shares, consideration or assets, etc.

The critical part in drafting the definitive agreements is inclusion of the representations, warranties and indemnities to be provided by the investee company and the promoters to the PE investor. The representations and warranties are nothing but an assertion of facts – past, present and future, in relation to the business and affairs of the investee company, legal compliance, its financial condition, taxes, disputes, etc. The representations and warranties provided by the investee company and its promoters generally form the basis on which the PE investor is induced to make investment in the investee company and can be appropriately drafted by considering the findings of the due-diligence exercise. In the event there are any irregularities in the findings of the due-diligence exercise, the PE investor may require the same to be ironed out as a condition precedent to the investment. However, in the event there are certain irregularities which cannot be rectified as a condition precedent, the rectification of such irregularities is made a condition subsequent in the definitive agreements and is supplemented by a suitable indemnity.

Another important to consider in the documentation of the definitive agreements is the indemnity obligation of the investee company and the promoters. An indemnity in PE transactions is a contractual obligation of the investee company and the promoters to compensate the PE investor for any loss incurred by such the PE investor on account of a breach of a contractual obligation or misrepresentation undertaken by the indemnifying party. The right to indemnity is one given by the definitive agreement(s) and is in addition to the right to claim damages arising from such breach, which is available under law.

The definitive agreements set out the framework of corporate governance and decision making in the investee company. They also set out detailed provisions in respect of transfer of shares and other securities of the investee company. In most PE transactions, the PE investor has board representation in the investee company along with certain veto rights. The veto rights usually extend to matters relating to corporate governance (such as changes to board composition, amendments to the charter documents, related party transactions, mergers and acquisitions etc.) and certain high-level operational matters (such as entering into litigations, taking on loans, substantial sales of assets, etc.).

Exit strategy is a very critical part of making PE investments. It is important for the PE investor to be able to divest its shareholding and exit in the most profitable, tax-efficient and expeditious manner. The most common exit options available to a PE investor are as follows (i) Buy-back / Redemption of shares, (ii) Initial Public Offer (IPO); (iii) Put / Call Options; (iv) Strategic Sale; (v) Drag Along Right; etc.

The definitive agreements often enumerate certain ‘events of default’ or ‘material breaches’ upon the occurrence of which the PE investor shall have the right to accelerate an exit at a substantially higher default price and terminate the definitive agreements. In such events, a default drag along right / default put option right generally serve to act as a deterrent against breaches and defaults.

Lastly, the definitive agreements set out the governing law, jurisdiction and dispute resolution mechanism, in the event of there being any disagreements / disputes between the parties. Arbitration has emerged as an effective form of dispute resolution and institutional arbitration remains a popular choice for most PE investors. Further, it is necessary to identify the governing law, which serves to determine the sub¬stantive law that will apply to any legal proceedings which may arise from the agreement and an informed choice must therefore be made between jurisdictions when determining the governing law and jurisdiction of the definitive agreements.

A Critical essay on compounding of offenses under Companies Act, 2013


An ‘offence’ is defined as ‘any act or omission made punishable by any law for the time being in force’ under Section 3(38) of the General Clauses Act, 1897. Section 2(n) of Criminal Procedure Code 1973 (‘CrPC’) alsCompanies Acto defines ‘offence’ in the same way. A person guilty of committing an offence is liable to be prosecuted under the relevant provisions of law. Compounding of an offense in the context of law means an amicable settlement for the purpose of averting prosecution for an offense.

As per the Black’s Law Dictionary, to “Compound” means “to settle a matter by a money payment, in lieu of other liability.” This definition thoughtfully presents the concept of Compounding as a settlement mechanism that affords the offender an opportunity to avoid prosecution in exchange of him undertaking a liability that is pecuniary in character or otherwise. The landmark decision of the Calcutta High Court in Murray vs. The Queen-Empress lends the gist of this concept as one which “ signifies that the person against whom the offence has been committed has received some gratification, not necessarily of a pecuniary character, to act as an inducement of his desiring to abstain from a prosecution”.

The concept of compounding of offenses was incorporated as a measure to avoid the long drawn process of prosecution, which would save both cost and time in exchange of payment of a penalty to the aggrieved. In criminal law, the power to compound the offence is at the discretion of the victim. The perpetrator cannot demand for compounding of the offence. But in corporate law, compounding is at the discretion of the offender/offending company.

Through this Article, the Author endeavours to shed light on the scope and limitations of compounding under C-ompanies Act, 2013 in light of Section 24(1) of Companies Act, 2013 and the Supreme Court ruling in SEBI vs. Sahara India Real Estate Corporation Ltd. & Ors.


The meaning of word ‘Compounding’ is not defined under Companies Act, 2013 or in the erstwhile Companies Act, 1956. However its substance can be deciphered from a thorough reading of Section 441 under the Companies Act, 2013. In the context of the framework, compounding of an offence is a process by which a corporate entity may come forward suo-moto or on receipt of notice of default/initiation of prosecution by making an application before the Tribunal, admitting to the commission of the offense and praying for condonation of the same.

The compounding provision in the Act was inserted by the Companies Amendment Act, 1988 on the recommendation of the Sachar Committee. It was felt that leniency is required in the administration of the provisions of the Act particularly penalty provisions because a large number of defaults are of technical nature and arise out of ignorance on account of bewildering complexity of the provisions.

A careful reading of section 441, will unfold that all the offences under the Companies Act are compoundable save those offences which attract imprisonment as a mandatory part of the prescribed punishment. In other words, only the following offences that can be compounded under the Companies Act, 2013:
1. Offences punishable with fine only;
2. Offences punishable with fine or imprisonment;
3. Offences punishable with fine or imprisonment or both.

As per the said provision, the Central Government and the Tribunal shall be responsible for compounding of the offenses under the Act, based on their respective pecuniary jurisdiction prescribed under the same. Where the offence to be compounded is punishable with a fine not exceeding Rs.5,00,000/-, it shall be compounded by the Regional Director or any other officer authorised by the Central Government. The Tribunal shall compound all those offences under the Act where the fine imposed exceeds Rs.5,00,000. Furthermore, in case the offence committed by a corporation or its officer has been compounded earlier, such a corporate entity shall not be eligible for compounding of a similar offence for a period of 3 years from the date of compounding the first offence.


Since the nature compounding of an offense involves a trade-off between admission of guilt and absolution of guilt for the offender, it invites a lot of repercussions. This Author believes a sentient effort has been taken to draft Section 441 of the Act with reasonable circumspection of such repercussion by laying down sensible limitations on the exercise of the power to Compound. However, every piece of legislation has its limitation and fallibility and this Section is no exception.

A plain reading of the section gives us a crystallized understanding that the jurisdiction to compound any offense under the Companies Act lies with the Tribunal/Central Government as the case maybe. The words of the section denote a mandatory obligation on the part of the Tribunal/Central Government to compound any offense punishable under this Act. Also, this Section provides no parameters to determine if the offender has come before the Tribunal/Central Government with clean hands and bona fide intentions. It predicts a very black and white state of events that will surround the process compounding under the Act. As a result, it removes any scope of discretion at the hands of the Tribunal/Central Government to determine whether the offender merits such a compounding of the offenses that were committed.

Given that the object with which the compounding provision was inserted in the Companies Act is to avoid cumbersome litigation on technical grounds, it is surprising that the section allows all offences under the Companies Act, save those that attract mandatory imprisonment, to be compounded. Without any strictures laid down in the provision to gauge which of the offences were an act of inadvertence and which ones were not, the concept of compounding runs the risk of being abused by the wrongdoers.

One other grey area of compounding under the Company Law is the limitation in its application in respect of the provisions relating to transfer and issue securities under chapter III and IV of the Companies Act, 2013. For the purpose of illuminating these inconsistencies within the provision, it is vital to bring to attention Section 24 (1) in chapter IV of the Companies act, 2013 which is produced below verbatim :

24. (1) The provisions contained in this Chapter, Chapter IV and in section 127 shall,—
(a) in so far as they relate to —
(i) issue and transfer of securities; and
(ii) non-payment of dividend,
by listed companies or those companies which intend to get their securities listed on any recognized stock exchange in India, except as provided under this Act, be administered by the Securities and Exchange Board by making regulations in this behalf;
(b) in any other case, be administered by the Central Government

The above-mentioned section articulates that the jurisdiction insofar as matters relating to transfer and issue securities in Chapter III and IV of the Act with respect to listed companies and companies with the intention to list itself in a recognized stock exchange, lies with the Securities and Exchange Board of India (SEBI).

Owing to notorious OFCD racket of Sahara, the Supreme Court found it necessary to interpret the meaning of “those companies which intend to get their securities listed” found in Section 24(1) of the Companies Act, 2013 or the erstwhile section 55A of the Companies Act, 1956 to include unlisted companies in certain circumstances. It was held that “Section 55A can never be constructed or interpreted to mean that SEBI has no power in relation to the prospectus and the issue of securities by an unlisted public company, if the securities are offered to more than forty nine persons” .

This clarification on the intention and meaning of Section 24(1) by the Supreme Court has led to further uncertainty in the application of compounding to the provisions relating to transfer and issue securities contained within chapter III and IV of the Companies Act.

In view of the above-mentioned judgment, a conundrum would now present itself when a compounding application under Section 441 is made by an unlisted company to compound an offence under Chapter III or IV of the Act in relation to the issue of securities to more than 49 persons, as the jurisdiction in such a matter would fall within the purview of SEBI’s governance considering section 24(1), but at the same time, it would also be within the jurisdiction of the Tribunal/Central Government in light of Section 441.

What further complicates the issue is that both pieces of legislation viz., SEBI Act and Companies Act, have provisions for compounding offences under its respective legislations. As a result, there is severe ambiguity as to who between the Central Government and SEBI has the jurisdiction in respect of the compounding of offenses committed under the provisions of Chapter III and IV of the Act.

When the legislation does not adequately address a particular issue or is ambiguous in its nature, the judiciary takes it upon itself to rectify the deficiencies by astute and sagacious interpretations of the law keeping in mind the legislative intent. However, a definitive solution to the above-mentioned predicament is yet to be arrived at as there have not been many precedents set to make clear the issues cited above by this author.

When the jurisdiction in matters relating to issue and transfer of securities under Chapter III and IV of the Companies Act 2013 by an unlisted company falls within the ambit of SEBI’s governance, compounding it under Companies Act will defeat the purpose of section 24(1). Therefore the offences under Chapter III and IV relating to issue and transfer of securities must be compounded under Section 24A of the SEBI Act, 1992.

It was further held by the Supreme Court in the SEBI vs. Sahara India Real Estate Corporation Ltd. & Ors. that:
“From a collective perusal of sections 11, 11A, 11B and 11C of the SEBI Act, the conclusions drawn by the SAT, that on the subject of regulating the securities market and protecting interest of investors in securities, the SEBI Act is a standalone enactment, and the SEBI’s powers there under are not fettered by any other law including the Companies Act, is fully justified. In fact the aforesaid justification was rendered absolute, by the addition of section 55A in the Companies Act, whereby, administrative authority on the subjects relating to “issue and transfer of securities and non payment of dividend” which was earlier vested in the Central Government (Tribunal or Registrar of Companies) came to be exclusively transferred to the SEBI.”

The above-mentioned judgment makes amply clear that in the matters of regulating the securities market, SEBI’s jurisdiction will override all other laws including Companies Act, 2013. Hence, the Compounding provision under Section 441 will have no application in matters that shall fall within the ambit of SEBI in light of Section 24(1) of Companies Act, 2013.

This judgment brings the much needed clarity on the question of which authority has the jurisdiction in respect of the offences relating to issue and transfer of securities under Chapter III and IV of the Companies Act. However, it is not specific to the issue of compounding. Therefore, it would also be reasonable to interpret that the power of SEBI under Section 24(1) and the Central Government’s power to compound offenses under section 441 of the Companies Act, are parallel in nature and are independent of one another. This would mean that the compounding of the offences under Companies Act by the Central Government would not affect the proceedings under the SEBI Act.
This view was upheld by SEBI in Vibgyor Allied Infrastructure Ltd matter wherein it was held that:
“In this regard, I note that under section 621A of the Companies Act, the Central Government can compound any offence punishable with imprisonment only, or with imprisonment and also with fine under the Companies Act either before or after the institution of any prosecution. Such compounding bars only institution of prosecution for the offence under the Companies Act which has been compounded. Such compounding does not apply with regard to an offence under the SEBI Act and the regulations and it does not bar or preclude the civil proceedings under the Companies Act or the SEBI Act or the regulations made there under.

Conversely, this judgment does not address how SEBI can independently compound the offences committed by an unlisted company under the relevant SEBI regulations as a consequence of making a public offer under the Companies Act. Since the definition of what constitutes a ‘public offer’ is only found under Companies Act, the compounding of violations committed under the relevant SEBI regulations is dependent upon not compounding the offense of public offer and other related offenses under Companies Act. If at all the offense of public offer and other related offenses under the Companies Act are compounded under Section 441, it would lead to the offender’s acquittal from all the other contravention under the relevant SEBI regulations by way of concomitancy along with the offense committed under Companies Act.

These ambiguities in the compounding provision are likely to lead to an increase in litigation, challenging SEBI’s powers to initiate prosecution against the offenders in these circumstances. The issue is also likely to increase the friction between SEBI and the Department of Company Affairs. The Central Government needs to bring clarity in the compounding provision in this respect so that it benefits all concerned.

Reverse Mortagage

Reverse Mortagage
Reverse Mortagage

A ‘Mortgage’ means transfer of an interest in a specific immovable property for the purpose of securing the payment of money advanced as a loan, an existed or future debt. The transferor is called a ‘Mortgagor’ and transferee a ‘Mortgagee’ and an instrument by which transfer is made called ‘MORTGAGE DEED’ which actually depends upon the payment of money secured as ‘Mortgage Money’ as defined under ‘Section:58’ of ‘The Transfer Of Property Act, 1882’.

‘Reverse Mortgage’ is the new concept in India and less effective though it is very popular in the western countries, but in India it can be seen as from the numbers of persons i.e. 150 persons have availed its benefit till now and this type of mortgage is basically helps senior citizens to get regular payments from the financial entities or banks against the mortgage of his property. A reverse mortgage is totally a different concept from a regular mortgage process where a person pays the bank for a mortgaged property and unlike other loans, this need not be repaid by the borrower.

‘Reverse Mortgage’ is one of the important types of mortgage where owner of the immovable property surrenders his title of the property to a financial entity or bank. The concept is simple, a senior citizen who holds a house or property, but lacks a regular source of income can put mortgage his property with a bank or housing finance company (HFC) and the bank or financial entity pays the person a regular payment. The good thing is that the person who ‘reverse mortgages’ his property can stay in the same house for his life time and continue to receive the much needed regular payments. So, effectively owner of the property will continue to stay at the same place and also get paid for it. Any house owner over 60 years of age is eligible for a reverse mortgage and the maximum loan which can be granted is up to 60% of the value of residential property. The Reverse Mortgage is otherwise called as lifetime mortgage.

‘Reverse Mortgage’ loan amount based on the three things i.e. value of the property, term of the mortgage agreement and rate of payment with interest which depends upon the age of the owner of the property/ borrower of the loan amount. A mechanism for valuation and computation of the mortgage property depends upon the law of probability which will be assessed by the professionals. The loan amount can be provided through monthly, quarterly, half-yearly or annually or lump sum money based on the mutual understanding of the parties to the mortgage agreement. The maximum period of a loan which can be provided by the banks to the reverse mortgage borrower is for 15 years but the lender has to revaluate the property at least once in the 5 years so that it will assist him to get more money as a loan from the bank which is totally based on the value of the property. The value of the property is generally revisited periodically, if the value of the property increased then senior citizen will get an option to increase the loan amount.

An advantage of the Reverse Mortgage scheme is that the owner of property will not be liable to pay Income Tax under ‘Income Tax Act’ because in reverse mortgage transaction whatever amount has been received either in lump sum or monthly installment by the owner of the property as loan amount, will not be considered as a Income earned. A reverse mortgage scheme which is basically for the benefit of senior citizens, however in a reverse mortgage transaction any transfer of capital asset will not be considered as transfer or alienation of immovable property as it is also stated by the central government notification, hence it will not attract the provision of capital gains tax.

The financial entity or the bank has authoritative power to recover the loan amount, wherein it has been conferred with a right to sell the mortgage property in the case if incumbent or borrower either passes away or leaves the house. The loan amount can be repaid or prepaid by the legal heirs of the borrower at any time during the period of loan with the accumulated interest amount and have the mortgage released without resorting to the sale of property. In case if there is a sale of mortgage property by the bank for repayment of the loan amount then whatever is the additional amount received by the bank need to be paid to the heirs of the senior citizen but only after clearing the loan amount payment by the bank.

The reverse mortgage scheme offered by some of the leading banks in India could bring the required answers to the suffering senior citizens. Most of the people in the senior age groups, either by inheritance or by virtue of building assets have properties in their names, but they were not able to convert it into instant and regular income stream due to its illiquid nature. The ‘Union Budget 2007-2008’ had a great proposal which introduced the ‘Reverse Mortgage’ scheme. A Reverse Mortgage scheme is always provides more benefits to the senior citizens who does not have any source of income and through this scheme owner of the property can ensure a regular cash flow in times of need and can enjoy the benefit of staying in the property as well. But a reverse mortgage scheme is a big failure in the country like India where number of persons using this scheme is very less. Reverse Mortgage thus, is very beneficial for senior citizens who want a regular income to meet their everyday needs, without leaving their houses.


1. Introduction: The process of globalization and liberalization has virtually transformed the way of business across the globe. The technological innovation of improvements in the communication networking helped the banking sector activities through re-engineer its works. E-Banking is considered as an important input for rapid growth of economic development by providing mechanism of electronic inputs to the banking sector. E-banking is the banking of new era. The term Internet Banking or E-Banking Internet both are used as supplement. E-Banking system makes the banking transactions easy for the bankers as well as customers in the modern world where all persons are busy with their hectic schedule. In fact, banks have been using electronic and telecommunication networks for delivering a wide range of value added products and services. The devices have been telephone, personal computers including Automated Teller Machines (ATM).

2. Development of E-Banking System: The wind of globalization has affected each and every sector of its economy and entered into all the activities of the banking sector. Though the E-Banking system developed in the late ‘1980s and referred to the use of a terminal, keyboard and TV (or monitor) to access the banking system using a phone line. ‘Home banking’ can also refer to the use of a numeric keypad to send tones down a phone line with instructions to the bank. Online services started in ‘New York’ in 1981 when four of the city’s major banks (Citibank, Chase Manhattan, Chemical and Manufacturers Hanover) offered home banking services using the videotex system, television system and telephonic system. The UK’s first home online banking services were set up by the ‘Bank of Scotland’ in year 1983. The system (known as ‘Homelink’) allowed on-line viewing of statements, bank transfers and bill payments. In order to make bank transfers and bill payments. Though E-Banking system was more popularized amidst of the foreign countries later on in the early 1990’s E-Banking system developed in India too and development was not possible without creating sufficient infrastructure or presence of sufficient number of users. The experience of ICICI Bank Ltd. and HDFC Bank Ltd. shows that the number of transactions carried out on the internet is very limited in India.

3. Meaning of E-Banking: E-Banking refers to electronic banking and it is an automated delivery of new and traditional banking services which provides electronic facility for business and commercial transactions to its customers. E-banking is the easiest way to carry out banking transactions in today’s hectic schedule. E-Banking is also called as i.e. Internet Banaking, Net Banking, Virtual Banking or Online Banking. E-Banking (or I-banking) means any user with a personal computer and a browser can get connected to his bank’s website to perform any of the virtual banking functions. In internet banking system the bank has a centralized database that is web-enabled. All the services that the bank has permitted on the internet are displayed in menu. The fact is that many services that are now being offered with online banking are almost impossible to avail of in regular banking.

4. Services covered under E-Banking: E-Banking has numerous benefits to offer. Nowadays, all banks provide online banking facility to their customers as an additional advantage. Gone are the days, when one has to transact with a bank which was only in his local limits. Online banking has opened the doors for all customers, to operate beyond boundaries. The popular services covered under E-banking include :-

  •  Automated Teller Machines(ATM)
  •  Credit Cards
  •  Debit Cards
  •  Smart Cards
  •  Electronic Funds Transfer (EFT) System
  •  Cheques Truncation Payment System
  •  Mobile Banking
  •  Internet Banking
  •  Telephone Banking 

5. Problems While Using E-Banking Facilities: E-Banking system removes the traditionally geographical basis as it could reach out to all the customers of different countries and regions. The popularity of internet banking is growing rapidly as the transactions are becoming faster and more convenient. Internet banking is the latest development that has added a new dimension to banking transactions by making it more convenient, which has eliminated the long wearisome queues. But, there are some serious problems that a customer may encounter while banking through the internet, due to which many still prefer to go directly to the banks instead of availing this facility. There are certain problems of E-Banking system which are as follows:

  •       Computer and Internet knowledge is very much required for using the facility of E-Banking by the customer because of which limits number of persons willing to avail this facility. Therefore it is the major problem in the country like India where literacy ratio is low.
  •  While banking through the internet, you have to be careful about the security of your internet bank account. The security of your internet bank account depends to a great extent on the security of your computer, password and pin number. Any leakage of information regarding your password or pin number and banking transactions can allow computer hackers to gain access to your bank account, which is the most common internet banking problem. This can even lead to unauthorized and criminal transactions being conducted without your knowledge. By the time you get your bank statement and detect such transactions, it may be too late.
  •  Some proxy websites can easily access customer’s bank account, if they can crack one’s user name, password or pin number. Due to such security problems, many people are apprehensive about internet banking.
  •  Though E-Banking system saves the time of customers but it is very difficult to use this facility by customers who do  Lack of trust on d machines provided by the banks may be another problem as there is no safety of money through online banking.
  •  Technical problems with respect to the computers and internet facilities may be one of the problems which must be taken into consideration.
  •  Customer is always in problem with respect to the security of its password, pin number and bank related information.
  •  Customer care service also does not provide accurate information always as numbers of transactions are increasing along with customers.

6. Advantages of E-Banking System: E-banking system has gained wide acceptance internationally and it can be considered as a remarkable development in the banking sector. In India also the things are changing fast and most of the banks are providing E-Banking services to their customers and there are many advantages of using E-Banking service to the customers which are as follows:

  •  Paying Bills Online is the major advantage to the customer’s who can pay bills i.e. telephone, electricity, shopping, loans amount (EMI) and payment of tickets booking online.
  •  Time saving and easy to get information of bank account.
  •  Customers are no longer required to wait in those long and crowded queues of the banks to request a financial transaction or statement.
  •  E-Banking offers convenience to the customers as they are not required to go to the bank’s premises.
  •  E-Banking provides monthly e-statement facilities to the customers which saves the time of bankers as well as customers.
  •  Low incidence of errors increases the number of users/customers of E-Banking which results in the great advantage.
  •  The customers can obtain funds at any time from ATM machines.
  •  The credit cards and debit cards enables the Customers to obtain discounts from retail outlets.
  •  Reduction in the administrative costs and paperwork related to the transactions. Besides, banks can also cater to the needs of thousands of customers at the same time. All these factors have significantly increased the profit margins of commercial banks by lowering their operating costs.
  •          Transactions of transferring of funds from one person account to another person’s account became much more       faster     and convenient both national and international level.
  •          Accessing bank account information at any day or any time irrespective of banks off working hours.
  •          Quickest way to check and see if a transaction has cleared your account. This can help you to find out the amount of a     transaction after you have lost your receipt.
  •         E-Banking also allows customers to find out about unauthorized transactions of their accounts more quickly and to resolve the issues more quickly.

7. Disadvantages of E-Banking System: In today’s cyber world where when people do not have much time even for their personal work, E-Banking appears as a boon. Internet banking has become very popular in the recent years, as it is quick and easy. Though E-Banking provides more advantages than traditional banking however, it has some disadvantages too which are as listed:

  •  Setting up an account in the bank may take time though the E-Banking facility is provided by the banks.
  •  Internet account of customer with an Internet Service Provider (ISP) which may be another hectic experience.
  •  Banking sites can be difficult to navigate at first by the customers who do not have knowledge of computer and internet so getting acquitted with the banking sites software may require some time to read the tutorials in order to become comfortable in persons virtual lobby. There may be some difficulties to the customer for learning these activities of E-Banking.
  •  Some alterations or changes made in the banks sites due to technological advancement may lead to a problem to customers who have to provide all the personal information once again through online transaction.
  •  E-Banking is time consuming for the customers, though there is option of online transactions, in the end customers have to run to the ATM for withdrawing the cash.
  •  No personal contact with any of the bank staff, and if talk to any bank staff through the telephone, there is no guarantee to the customers that they had talked with a right person or not.
  •  “Hackers” who may access customer’s bank account is the main disadvantage to the customers who takes E-Banking facility very casually.
  •  Security concern is the important issue as cybercrimes activities are clutching up which decreases the number of customers to avail the benefit of E-Banking.
  •  Technical breakdowns where online banking websites sometimes go down. If this happens then, if customer wishes to close his bank account then he will definitely go penniless.
  •  Switching banks due to technical faults can be a major disadvantage of using E-Banking system to the customer.
  •  Increasing online frauds and attacks i.e. Trojan horse (Remote Attacker) are a major disadvantage of using E-Banking.
  •  However, in the case of Internet banking, one will find oneself making endless calls to the customer service department. There have been cases, where the person is put on hold or has been passed around from one person to another.
  •  Hackers and crackers attack on the bank account of customer by stealing passwords or using fake credit cards to cheat a person which will cause loss to the customer’s wealth.

8. Guidelines By Reserve Bank of India: Reserve Bank of India being the highest authoritative bank and main head of all the nationalized banks in India, had set up a ‘Working Group on Internet Banking’ to examine different aspects of Electronic Banking (E-banking). The Group had focused on three major areas of E-banking, i.e. (i) technology and security issues, (ii) legal issues and (iii) regulatory and supervisory issues. Accordingly, the following guidelines are issued for implementation by banks. Banks are also advised that they may be guided by the original report, for a detailed guidance on different issues. These issues can be defined as:

  1.  Technology and Security Issues: Banks should designate a network and database administrator with clearly defined roles as indicated in the Group’s report. Banks should have a security policy duly approved by the Board of Directors. There should be a segregation of duty of Security Officer exclusively with information systems security and Information Technology Division which actually implements the computer systems. Further, Banks should also adopt and implement some new policies relating to security check ups and should inform customers about new technologies concerning E-Banking. Banks should also take steps to
  2.  Legal Issues: There is always an obligation on the parts of banks to keep the proper records of its customers manually as well as electronic. While opening an account of customer by internet a complete identification documents must be collected by the customer and a physical verification need to be done so that it will assist bank to avoid any legal risk. From a legal prospective, security procedure adopted by banks for authenticating users needs to be recognized by law as a substitute for signature. There must be strict rules regarding instructions by the customers for stop-payment and banks should clearly state the consequences in which stop-payment instruction could be accepted by the bank.
  3.  Regulatory and Supervisory Issues: Only such banks which are licensed and supervised in India and have a physical presence in India will be permitted to offer Internet banking products to residents of India. The products and schemes of the bank should be limited to the account holders only but not to the extra territorial jurisdictional account holders. Indian overseas banks must be permitted to offer internet services. A supervisory authority need to be appointed so that it will assist in avoiding any illegal transactions.

9. Risk Involved In Using E-Banking: E-Banking poses some different risks as compared to the traditional banking. These risks are more pronounced in the case of Internet banking. Firstly, the risk of technological changes has to be carefully watched. This is essential to update technologies and remain cost effective and customer friendly. The banks have to be careful about risks involved in agreements with third parties. The security is an important area of risk. In fact it will be very crucial for the expansion of Net Banking. Another important area will emerge out of cross-border implications as ‘E- Banking’ breaks the geographical boundaries. Imposing regularity conditions on such transactions will be a difficult task.

10. E-Banking Frauds: Fraudsters are continuing their switch from traditional card fraud to raiding online bank accounts. According to the new research Fraud losses on UK credit and debit cards totalled £440m in 2009 – a drop of 28% compared with the previous year – the UK Cards Association said. But the number of “phishing” attacks rose by 16% in the same period. This is when fraudsters trick people into entering their personal details on a website or in e-mails. As there is expansion in the illegal activities of the hackers, crackers and Trojan horse there must be a strict law to punish such criminals. Online frauds are very common nowadays because it is easy to access or to obtain password, pin code and account number of customers by hackers. Recently there is a case which is known as ‘ICICI Bank Fraud Case’ where Rs/- 150000 was stolen by the person’s bank account and it was a heavy loss of money to the account holder though the complaint was filed by the account holder but banks are still silent on that issue as banks too have no idea how these activities are taking place.

11. Preventive Measures: As E-Banking is an important aspect for the bankers and customers as well, there must be some measures and policies which should be adopted by the banks before providing E-Banking facilities to the customers which can be taken as precautionary measure. A best preventive measure is that the account holder of the bank must be aware of increasing bank frauds and cybercrimes, and he should not give his password, pin number and credit cards number to anyone by using E-Banking facility. “As it is recognise that cards will always be targeted by criminals, so we are determined not only to continue to prevent, detect and deter those who are behind this type of crime, but also to make sure that innocent victims do not lose out,”. There is always necessity that “Customers need to protect themselves on their computer, remaining vigilant and using good security software.”

“A better-educated consumer is less likely to fall foul of phishing attacks” this saying has its own importance because consumer is the king with respect to the Indian trade and market but here while using E-Banking facilities a consumer need to be more careful of online frauds, so a consumer must take some necessary precautions while opting out for E-Banking facilities.

12. Conclusion: E-banking offers a higher level of convenience for managing one’s finances even from one’s bedroom. However, it continues to present challenges to the financial security and personal privacy. Many people have had their account details compromised, as a result of online banking. Thus, if one is going to use it for financial transactions, he should be aware of the risks involved. Awareness of the risks and problems enables him to take precautions for a more secured online banking experience. E-Banking system is not only popular nationally but also internationally where a person can transfer money through any part of the world. E-banking system is useful for the bankers as well as customers of banks.

Stamp Duty on Consortium Documents

Question: Whether Joint Deeds of Hypothecations and Joint Deeds of Mortgages executed in Consortium Finance are covered under Section 5 or under Section 6 of Bombay Stamp Act or they do embrace separate and distinct matters or transactions or not? Whether or not they are liable to be stamped as separate instrument with separate stamp duty?

Ans: No

Joint Deeds of Hypothecations and Joint Deeds of Mortgages are not covered under Section 5 nor under Section 6 of Bombay Stamp Act as they do not embrace separate and distinct matters or transactions and not liable to be stamped as separate instrument with separate stamp duty. That Joint Deed of Mortgage & Joint Deed of Hypothecation are executed by the Borrowers in prescribed formats devised by IBA under directions of RBI are not embracing separate deeds or transactions but the documents formats have statutory binding and force and are of one single transaction carried out as a lenders partnership with common rights and liabilities.


What is Consortium?

A group of Independent Companies participating in a Joint Venture for mutual benefit. Companies in a Consortium co-operate with one another, often sharing technology as needed. A Consortium allows the Companies to conduct operations that they would not be able to do individually. It is important to note, however, that a Consortium is not a merger and the Companies remain independent. A group of Organizations that participate in a Joint Venture. Airbus Industries, a European Airplane manufacturer, is a Consortium of four Public and Private Corporations in Britain, France, Spain and Germany. A group of Organizations, sharing the same goals, which combine their resources and risks. Consortium Banking was popular in the late 1970s, when a number of major Banks would combine to form a Merchant-Banking or Finance-Company offshoot. Many of Australia’s Merchant Banks were formed as consortia with European, Asian and US Banks teaming with Australian Banks. Consortium is a coalition of Organizations, such as Banks and Corporations, set up to fund ventures requiring large capital resources. A Consortium is an association of two or more Individuals, Companies, Organizations or Governments (or any combination of these entities) with the objective of participating in a common activity or pooling their resources for achieving a common goal. Consortium is a Latin word, meaning ‘partnership, association or society’ and derives from consors ‘’ Partner”, itself from con- ‘together’ and sors ‘fate’, meaning owner of means or comrade.

Consortium of Bank

A Subsidiary Bank owned by several different Banks. Each Owner Bank has an equal share so that no Bank is the majority shareholder. The Owner Banks are often in different countries. A Consortium Bank is created to finance a specific project; once the project is complete, the Consortium Bank dissolves itself. While they are not as common as they once were, they are useful when a project involves multiple currencies. 


A Banking Syndicate formed by multiple Banks, often from different countries, for the singular purpose of financing a specific project that is too large for any individual Bank to finance on its own. Under this arrangement participating Banks completion of the project the Consortium Bank is disbanded.

That it means Consortium of Bank itself is a community of interest and member brigs its resources in certain percentage in the common pool. And therefore it shares the security interest in common.

RBI’s Role in Consortium Finance:-

Large Lending’s are formed always under Consortiums as per the guidelines issued by DBOD of RBI. That DBOD of RBI as such issues circulars and guidelines from time to time including documentation one of such is enclosed at Annexure I hereunder which please be read as part of this opinion as our opinion Consortium of Bank itself is a community of interest and member brigs its resources in certain percentage in the common pool formed under statutory directives and documents are obtained as per the IBA formats strictly devised as per directions of RBI. That in terms of the guidelines which has statutory force the Consortium of Banks has a force of community of interest.

Now the question springs up for my opinion whether a deed of hypothecation or Mortgage created by a borrower in consortium lending shall be treated as one instrument or separate instruments for the purpose of section 5,6 of Bombay Stamp Act. Whether it is a multifarious instrument covering Several distinct matters? We will have to refer the provisions of Bombay Stamp Act

Where several distinct matters and transactions are embodied in a single Instrument, the Instrument is called the multifarious instrument.

Meaning of Distinct Matters: 

The expression “Distinct Matters” connotes distinct transaction. The Term Distinct Matters mean the Matters of different kinds such as agreement for service and a lease. Similarly where a document under consideration is both an agreement for dissolution of a partnership and a bond, it is chargeable under Section 5 with aggregate duty with which two such separate instruments would be chargeable. 

The word “Instrument” is defined in Section 2(14) to include “every document by which any right or liability is or purports to be, created, transferred, limited, extended, extinguished or recorded.” If by an Instrument a distinct right is transferred it should be described for the purpose of stamp duty as an instrument to transfer of such right. The subject of the schedule of the Stamp Act is the amount of duty to be charged on every instrument mentioned in it, as laid down by Section 3 of the Act. It appears to me to be a subject which is repugnant to the application of the rule that the singular should include the plural. The first column of the first schedule of the Stamp Act is headed as “description of Instrument,” and the second prescribes a duty with reference to the description thereof.

Distinct Matters would be comprised in an instrument, if different transactions are sought to be evidenced by the same deed. So long a transaction is one and the same it would not comprise Distinct Matters simply because the goods or properties dealt with by the transaction happen to be more than one.

When a transaction refers to several Distinct Matters documents can be executed in respect of those several Matters but for convenience can be jointly executed. Although for convenience one document is executed it should be treated as several documents and Section 35 of the Indian Stamp Act has to be applied to every one of those several instruments. It is true that when a document relates to several items of immovable properties and it does not bear a stamp chargeable in respect of all the properties it cannot be admitted in evidence in respect of some of the properties. A document which relates to a transaction relating to five distinct properties cannot be regarded as five documents relating to each of the five properties. But a document which relates to a mortgage of five properties and a receipt for the payment of `. 3500/- can be regarded as two instruments one relating to a Mortgage of immoveable properties and the second relating to the payment of `. 3500. In its popular sense, the expression “distinct matters” would connote something different from distinct “categories”. Two transactions might be of the same description, but all the same, they might be distinct.

Expression “distinct matters” in Section 5 and “description” in Section 6 – Whether have different connotations-Instrument in question-Whether comprised distinct matters. Can be decided only by strict construction and interpretation of relations which subject has with the object.

It is settled law that when two persons join in executing a Power of Attorney, whether it comprises distinct matters or not will depend on whether the interests of the executants in the subject matter of the power are separate or not. Conversely, if one person holding properties in two different capacities, each unconnected with the other, executes a power in respect of both of them, the instrument should logically be held to comprise distinct matters. It was held in 1956 AIR 35, 1955 SCR (2) 842, that the instrument in question in that case being braded as Exhibit A,-the impugned Power of Attorney -comprised distinct matters within the meaning of Section 5 of the Indian Stamp Act in respect of several capacities of the respondent mentioned therein. The fact that the donor of the Power of Attorney executes it in different capacities is not sufficient to constitute the instrument, one comprising distinct matters and thus requiring to be stamped with the aggregate amount of the duties with which separate instruments each comprising or relating to one of such matters would be chargeable under the Act, within the meaning of Section 5 of the Indian Stamp Act.

When two words of different import are used in a statute in two consecutive provisions, it cannot be maintained that they are used in the same sense and therefore the expression “distinct matters” in Section 5 and “description” in Section 6 have different connotations.

The statutory provisions bearing on the question are Sections 3 to 6 of the Act. Section 3 is the charging section, and it enacts that subject to certain exemptions, every instrument mentioned in the Schedule to the Act shall be chargeable with the duty of the amount indicated therein as the proper duty therefore. Section 4 lays down that when in the case of any sale, mortgage or settlement several instruments are employed for completing the transaction, only one of them called the principal instrument is chargeable with the duty mentioned in Schedule 1, and that the other instruments are chargeable each with a duty of one rupee. Section 5 enacts that any instrument comprising or relating to several distinct matters shall be chargeable with the aggregate amount of the duties with which separate instruments, each comprising or relating to one of such matters, would be chargeable under the Act. Section 6, so far as is material, runs as follows: “Subject to the provisions of the last preceding section, an instrument so framed as to come within two or more of the descriptions in Schedule I, shall, where the duties chargeable there under are different, be chargeable only with the highest of such duties”.

The point for decision is as to the meaning to be given to the words “distinct matters” in Section 5. The contention which found favour with the majority of the learned Judges is that the word “matters” in Section 5 is synonymous with the word “description” occurring in Section 6, and that they both refer to the several categories of instruments which are set out in the Schedule. The argument in support of this contention is that: Section 5 lays down that the duty payable when the instrument comprises or relates to distinct matters is the aggregate of what would be payable on separate instruments relating to each of these matters. An instrument would be chargeable under Section 3 only if it fell within one of the categories mentioned in the Schedule. Therefore, what is contemplated by Section 5 is a combination in one document of different categories of instruments such as sale and mortgage, sale and lease or mortgage and lease and the like, But when the category is one and the same, then Section 5 has no application, and as, in the present case, the instrument in question is a Power-of- Attorney, it would fall under Article 48 (a) in whatever capacity it was executed, and there being only one category, there are no distinct matters within Section 5. We are unable to accept the contention that the word “matter” in Section 5 was intended to convey the same meaning as the word “description” in Section 6. In its popular sense, the expression “distinct matters” would connote something different from distinct “categories”. Two transactions might be of the same description, but all the same, they might be distinct. If ‘A’ sells Survey No. 145 to ‘X’ and Mortgages Survey No. 155 to ‘Y’, the transactions fall under different categories, and they are also distinct matters. But if ‘A’ Mortgages Survey No. 145 to ‘X’ and Mortgages Survey No. 155 to ‘Y’, the two transactions fall under the same category, but they would certainly be distinct matters. But if ‘A’ Mortgages Survey No. 145 & 155 to ‘X’ and ‘Y’ jointly and severally, the two transactions fall under the same category, and they would certainly not be distinct matters. That in Consortium Finance there exist community or association common interest and therefore the Mortgage will be in favor of a group of persons branded as A Bank Consortium and therefore the interpretation that such Mortgage embraces separate and distinct subjects or matters or transaction is misnomer. That person interpreting such is not understanding the concept of consortium finance at all.

As held by Honorable Supreme Court of India in THE MEMBER, BOARD OF REVENUE Versus ARTHUR PAUL BENTHALL {1956 AIR 35 1955 SCR (2) 842} Conversely, if a number of persons join in executing one instrument, and there is community of interest between them in the subject-matter comprised therein, it will be chargeable with a single duty. That in the above case old celebrated judgments were relied on in deciding previously it was held in Davis v. Williams (1804 104 ER 358), Bowen v. Ashley (1804 104 ER 358), Good-son v. Forbes (1804 104 ER 358) and other cases. That if the interests of the executants are separate, the instrument must be construed as comprising distinct matters. In case of community of interest it should not be treated likewise.

Relying on the observations I have to opine that In case of Consortiums relations spurting out are from agreements between parties and a community of interest is created. if such community of interest is spelt out in the documents itself then such Mortgage or Hypothecation can not be said to have separate and distinct matters and such holding will be misinterpretations of law and misapplication of fiscal statute as well as it will be misunderstanding the concept of Consortiums rather it will be poor understanding of legal and factual position concerning Bank lending… 

In the said judgment it was further Held that “No instrument chargeable with stamp duty under the heading Letter or Power of Attorney and Commission, Factory, Mandate, or other instrument in the nature thereof’ in the First Schedule to the Stamp Act, 1891, shall be charged with duty more than once by reason only that more persons than one are named in the instrument as donors or donees (whether jointly or severally or otherwise), of the powers thereby conferred or that those powers relate to more than one matter”.

In the matter of Vide Freeman v. Commissioners of Inland Revenue {(1804) 104 ER 358}. Applying the same principle to Powers-of-Attorney, as held in Allen v. Morrison that when members of a mutual insurance club executed single power, it related to one matter, Lord Tenterdon, C. J. observing that “there was certainly a community of purpose actuating all the members of this club”. In Reference under Stamp Act, S. 46(1), a Power of Attorney executed by thirty-six persons in relation to a fund in which they were jointly interested was held to comprise a single matter. On the other hand, where several donors having separate interests execute a single Power-of-Attorney with reference to their respective properties as, for example, when ‘A’ constitutes ‘X’ as attorney for management of his estate Black-acre and ‘B’ constitutes the same person as attorney for the management of his estate White-acre, then the instrument must be held to comprise distinct matters.

If the intention of the legislature was that the expression ‘distinct matters’ in Section 5 should be understood not in its popular sense but narrowly as meaning different categories in the Schedule, nothing would have been easier than to say so. When two words of different import are used in a statute in two consecutive provisions, it would be difficult to maintain that they are used in the same sense, and the conclusion must follow that the expression “distinct matters” in Section 5 and “descriptions” in Section 6 have different connotations.

It is urged against this conclusion that if the word “matters” in Section 5 is construed as meaning anything other than “categories” or in the phraseology of Section 6, “descriptions” mentioned in the Schedule, then there could be no conflict between the two sections, and the clause in Section 6 that it is “subject to the provision of the last preceding section” would be meaningless and useless.

There is no provision in the statute law of this country similar to the above, and it is significant that it assumes that a power of attorney might consist of distinct matters by reason of the fact that there are several donors or donees mentioned in it, or that it relates to more than one matter.

It is, as has been stated above, settled law that when two persons join in executing a Power-of-Attorney, whether it comprises distinct matters or not will depend on whether the interests of the executants in the subject- matter of the power are separate or joint.

That will be in consonance with the generally accepted notion of what are distinct matters, and that certainly was the view that express recited in the power that the executants executed it both in his individual capacity and in his other capacities.

I have to rely on the views expressed in judgment part rendered by Justice BHAGWATI J.- “ dissentingly he observed that “I am unable to agree with the conclusion reached in the Judgment just delivered. While agreeing in the main with the construction put upon Sections 4, 5 and 6 of the Act and the connotation of the words “distinct matters” used in Section 5, I am of the view that the question still survives whether the instrument in question is a single Power of Attorney or a combination of several of them. The argument which has impressed my Brother Judges forming the majority of the Bench is that though the instrument is executed by one individual, if he fills several capacities and the authority conferred is general, there would be distinct delegations in respect of each of those capacities and the instrument should bear the aggregate of stamp duty payable in respect of each of such capacities. With the greatest respect I am unable to accede to that argument. I agree that the question whether a Power of Attorney relates to distinct matters is one that will have to be decided on the consideration of the terms of ‘the instrument and the nature and the extent of the authority, conferred thereby. The fact, however, that the donor of the Power of Attorney executes it in different capacities is not sufficient in my opinion to constitute the instrument one comprising distinct matters and thus requiring to be stamped with the aggregate amount of the duties with which separate instruments each comprising or relating to one of such matters would be chargeable under the Act, within the meaning of Section 5. The transaction is a single transaction whereby the donor constitutes the donees jointly and severally his attorneys for him and in his name and on his behalf to act for him in his individual capacity and also in his capacity as managing director, director, managing agent, agent, secretary or liquidator of any company in which he is or may at any time, thereafter be interested in any such capacity as aforesaid and also as executor, administrator, trustee or in any capacity whatsoever as occasion shall require”.

If the transaction or matter to which the instrument in question relates is single and indivisible and cannot be separated without destroying the object of the transaction it will not be treated as relating to two distinct matters within the meaning of Section 5, Stamp Act. The instrument contains only one contract, a demise; the option of renewal of the lease is ancillary to it and forms part of the consideration for entering into the lease.

It was there held that an instrument can be regarded as falling under two distinct categories each requiring a separate stamp, only where there is what is called a “distinct consideration” for each and not where there is a unity of consideration as in the present case.

The instrument clearly says that the properties shall continue as security until the entire amount due is discharged. Article 6 (2) relating to stamp duty payable, on a pledge runs:

“Article 6. Agreement relating to deposit of title deeds, pawn or pledge, that is to say, any instrument evidencing an agreement relating to …………………………………

(2) the pawn or pledge of moveable property, where such deposit, pawn or pledge has been made by way of security for the repayment of money advanced or to be advanced by way of loan or an existing or future debt.”

The very Article gives an Indication of what is meant by pawn or pledge of moveable property. The moveable property must have been given by way of security for the repayment of money advanced or to be advanced by way of loan or an existing or future debt. In this case, moveable property has been pledged for an existing debt. Section 172 of the Indian Contract Act defines “pawn” or “pledge” as bailment of goods as security for payment of a debt or performance of a promise. Clearly, the instrument also satisfies the requirement of Article 6. As the instrument is attested, it does not fall under the exemption to Article 6.

The fact that there has been so much difference of opinion shows that the Stamp Act on the point in question is capable of various interpretations. I think I have to accept that interpretation which is for the benefit of the subject borrower, the Act being purely a fiscal one it is to be construed strictly and no far and no further. That in matters of consortium advances basis of the consortium is not to be destroyed for Stamp Act.

Hence in our opinion Consortium of Bank itself is a community of interest and member brigs its resources in certain percentage in the common pool formed under statutory directives and documents are obtained as per the IBA formats strictly devised as per directions of RBI. That in terms of the guidelines which has statutory force the consortium of banks has a force of community of interest and bank documentation is to be strictly construed as Homogenous transaction and not separate transaction as apprehended.

As a conclusion:- Joint Deeds of Hypothecations and Joint Deeds of Mortgages are not covered under Section 5 nor under Section 6 of Bombay stamp Act as they do not embrace separate and distinct matters or transactions and not liable to be stamped as separate instrument with separate stamp duty. That Joint Deed of Mortgage & Joint Deed of Hypothecation are executed by the Borrowers in prescribed formats devised by IBA under directions of RBI are not embracing separate deeds or transactions but the documents formats have statutory binding and force and are of one single transaction carried out as a lenders partnership with common rights and liabilities. That thus it is admittedly proved fact that the joint documents are not separate and distinct contracts but interwoven as a single transaction and hence they do not embraces separate and distinct matters or transactions and hence not liable to be stamped as separate instrument with separate stamp duty.

This article is for removing the established misconception about the interpretation that such documents embraces separate and distinct matters or transactions and hence not liable to be stamped as separate instrument with separate stamp duty and based on that certain practice adopted by the Banks of over stamping it. It is suggested that borrowers are unnecessarily burdened with such unwarranted stamp duty. If Bank feels it a borrower may be directed to seek the opinion of competent Court and get the confirmation of the situation.

Annexure I


It is not uncommon to find a Borrower availing Term Loan as well as Working Capital limits from a number of Financial Institutions and Commercial Banks. A Term Loan to a Borrower may be sanctioned jointly by All India Financial Institutions and Banks. Similarly, Working Capital limits may also be availed by the Borrower from a number of Banks partly because of the large size of borrowing and partly to have a degree of flexibility in his operations with different Banks. 

The Borrower may have a multiple Banking relationship where he has independent arrangement with each Bank, security offered to each Bank is separate and no formal understanding exists between different Banks financing the same Borrower. Under this arrangement Banks may not be exchanging information on the Borrower and limits might have been sanctioned on different terms and conditions. This arrangement may be preferred by the Borrower as it affords him a great flexibility in operating his accounts with different Banks but goes contrary to the expectations of Reserve Bank which desires that a wholesome view of entire operations of a customer must be taken by the Banks and the assessment of credit needs be also done in totality. 

The other arrangement for sanctioning of credit limit to such a Borrower may be to form a Consortium of Banks to take care of the entire needs, of the Borrower. No definite guidelines on formation of consortium of Banks, however, existed in past and it was generally left to the Borrower to decide this issue. 

The first attempt in this regard was made by Reserve Bank of India while it constituted a study group in December, 1973, headed by Shri G. Lakshmmaryanan, which submitted its report in July, 1974. The report was accepted by Reserve Bank. 

RBI Guidelines on Consortium Advances 

The concept of Consortium Advance has since gone many changes and most of the large Borrowers are now being financed by Banks in consortium. Reserve Bank of India had also issued revised comprehensive guidelines in June 1987 on this subject. 

Reserve Bank of India further constituted a Committee in January, 1993. under the Chairmanship of Shri J.V. Setty, Chairman and Managing Director, Canara Bank, to review the extant guidelines on lending under Consortium arrangement and suggest measures for improving the efficiency of banking system in delivery of credit. Based upon the report submitted by the above Committee, Reserve Bank announced important changes in die existing guidelines. Guidelines m applicable to Consortium advance are as under.1 

• The overall exposure to a single borrower should not exceed 25%2 of the net worth of the banking institution. For this purpose non fund based facilities shall be counted @ 50%3 of limits sanctioned and added to total fund based facilities to arrive at total exposure to the borrower.

• Exposure limit to group has also now been stipulated. The overall exposure to a group should not exceed 50%2per cent (60%2 in case of infrastructure projects consisting of power, telecommunication, roads and ports) of the net worth of the banking institution. 

(a) The borrowers who are already having multiple banking arrangement and enjoy fund based credit limits of Rs. 50.00 crores or more must necessarily be brought under Consortium arrangements. The bank who is having the largest share in the credit facilities would automatically become the leader of Consortium and would ensure that Consortium arrangements are finalised immediately. 

(b) The borrowers who are already having multiple banking arrangement and enjoy fund based credit limits of less than Rs.50 crores should also be brought under formal Consortium arrangements at the time of further enhancements which would take the aggregate limits to Rs.50 crores or more. The enhancements in such cases would be considered jointly by the financing banks concerned and the bank which takes up the largest share of fund based limits shall be the leader of the Consortium. 

(c) These provisions would also be applicable to new units which approach more than one bank for sanctioning of working capital limits of Rs.50 crores or more. 

The net effect of these provision amounts to that no borrower will be allowed to have multiple banking arrangement if the total fund based credit limit sanctioned to him amounts to Rs.50 crores or more. A formal Consortium will have to he constituted in such cases and the bank having largest share in fund based credit limits will automatically assume the status of the leader of the Consortium. 

Reserve Bank has since withdrawn its instructions for obligatory formation of Consortium. It will thus not be obligatory on the part of banks to form a Consortium even if the credit limit per borrower exceeds Rs.50 crore. The need based Finance required by the borrowers may, therefore, be extended by the banks either entirely on their own, subject to observance of exposure limits, or in association with other banks. As an alternative to sole/multiple banking/ Consortium arrangement, banks may adopt loan syndication route, irrespective of the quantum of credit involved. 

• There is no ceiling on number of banks in a Consortium, whether it is obligatory (fund based credit limits of Rs.50 crates and above from more than one bank) or voluntary (fund based credit limits below Rs.50 crores from more than one bank) in nature. However, the share of a bank as member of Consortium should he a minimum of 5 per cent of the fund based credit limits or Rs.1 crore whichever is more. This provision would itself restrict the number of banks in a Consortium. To illustrate this point let us consider these two examples:

(a) In a Consortium for total fund based credit limits of Rs.3 crores, the minimum share should be Rs1.00 crore.

(b) In a Consortium for total fund based credit limits of Rs.50 crates, the minimum share should be Rs.2,50 crores.

• The banks who have sanctioned term loans to a unit or who have also participated in term loans sanctioned in Consortium with term lending financial institution should also provide working capital facilities to such a unit. ‘These banks may, however, associate other banks, if so warranted, to provide working capital Finance.

• The borrower who is being financed under a formal Consortium arrangement should not avail any additional credit facility by way of bills limits/ guarantees/acceptances, letters of credit etc. from any other bank outside the Consortium. It has been stipulated by Reserve Bank of India that any bank outside the Consortium should not extend any such facility or may not even open a current account without the knowledge and concurrence of the Consortium members. 

This stipulation is applicable to even those borrowers who are enjoying total fund based credit limits of above Rs.50 crores from a single bank or under syndication without a Consortium arrangement. 

• In case of borrowers enjoying aggregate fund based credit limits of Rs.1 crore and above but below Rs.50 crore from more than one bank, and where there is no formal Consortium arrangement, banks should obtain full details of the credit facilities (including ad hoe facilities) availed of by such borrowers from the banking system, each time any fresh facility/enhancement is sought. Also the banks should ensure timely exchange of information and co ordinated approach in the interest of overall health of advance made to such borrowers. Further, in the case of borrowal accounts enjoying fund based credit limits below Rs.50 crore from more than one bank, the concerned banks will be free to enter into a Consortium arrangement at their option.

• Banks/consortia treat borrowers having multi division/ multi product companies as one single unit, unless there is more than one published balance sheet. Similarly, in the case of merger, the merged unit will be treated as a single unit. In case of split, the separated units will be treated as separate borrowal accounts provided there is more than one published balance sheet.

• In case of borrowers enjoying fund based credit limits of Rs.50 crore and above, the concerned single bank and/or the leader of the existing Consortium, will be free to organise a ‘syndication’ of the credit limits.

• In cases, where banks/consortia/syndicates am unable to adhere to the recommended maximum time frames for disposal of loan applications/ proposals, borrowers will be free to bring in a new bank or new banks to form/ to join a Consortium /syndicate. Within seven days of sanction of any credit facility, such new banks should inform the existing Consortium /syndicate/ regular banks/(s) and. should not disburse the limit without obtaining ‘no objection’. In case such ‘no objection’ certificate is not received within next ten days, it would be doomed that existing consortia/syndicates/regular bank/(s) have no objection to the new bank/(s) joining/forming consortia/syndicates.

• In the cases of existing consortia, if a member bank is unable to take up its enhanced share, such enhanced share in full or in part could be reallocated among the other existing willing members. In case other existing member banks are also unable to take up such enhanced share of an existing & member bank, a new bank willing to take up the enhanced share may be inducted into the Consortium in consultation with the borrowers.

• While a member bank may be permitted not to take to up its enhanced/incremental shares it cannot be permitted to leave a Consortium before expiry of at least two years from the date of its joining the Consortium. An existing member bank way be permitted to withdraw from the Consortium after two years provided other existing member banks and/or a new bank is willing to take its sham by joining the Consortium.

• In cases whore the other existing member banks or a new bank an unwilling to take over the entire outstanding of an existing member desirous of moving out of the Consortium after the expiry of above mentioned period of two years, such bank may be permitted to leave the Consortium by selling its debt at a discount and/or furnishing an unconditional undertaking that the repayment of its dues would be deferred till the dues of other members are repaid in full. 

Note : It would be open to a borrower to choose his bank/(s) for obtaining credit facilities as also for the bank/(s) to take a credit decision on the borrower. However, once a Consortium(obligatory or voluntary) is formed, on” of a new member into a Consortium should be in consultation with the Consortium. 

• Quite often non availability of data or submission of incorrect data or non receipt of required financial statements results in banks/consortia being not able to take decisions within a stipulated period of time. These data/

• statements include, among other, audited financial results for the last two years, estimated and projected results for’ the current and subsequent years respectively. More often than not borrowers require an average time of at least six months to obtain audited financial statements. Considering all these aspects as also available technology, the following maximum time frames are prescribed for formal disposal of loan proposals provided applications/proposals are received together

• with required details/information supported by requisite financial and operating statements : 

Proposals for sanction of fresh/enhanced credit limits 60 days (45 days)

Proposals for renewal of existing credit limits 45 days (30 days)

Proposals for sanction of ad hoc credit facilities 30 days(15days)

Note: Figures in brackets are the maximum time frames for sanction of export credit limits. 

• Further, individual banks/consortia/syndicates should review the borrowal accounts during the first quarter of the current year on the basis of audited statements for the year before lust, provisional statements (where audited statements are not available) for the last accounting year, provisional estimates for the current accounting yew and forecast for the next year. Consequently, individual banks/consordia/syndicates, at their discretion, may release 50 per cent of the additional credit requirement during or before the second quarter of the current accounting year. The remaining 50 per cent could be released consequent to submission of audited results provided there is no significant difference between the provisional estimates and the audited results.

• No bank will be allowed to move out of the Consortium in case of sick/weak units since in such cases all the banks are required to associate themselves with rehabilitation efforts.

• The appraisal of credit proposals will be done by the lead bank.

The customer has to submit all the necessary papers and data regarding appraisal of his limits to the lead bank who will in turn arrange for preparation of necessary appraisal note and its circulation to other member banks. Lead bank must complete the entire work relating to appraisal within the maximum time frame. Reporting to and attending to any correspondence with Reserve Bank of India shall also be the responsibility of lead bank.

• There may sometimes be disagreement between the member banks on the quantum of permissible bank Finance, terms and conditions or any other matter. In such cases, decision of the Consortium will be binding on the lead bank as also other members. Lead bank will however, enjoy the freedom to sanction an additional credit upto a pre determined percentage in emergent situations. The lead bank should however, inform other members immediately together with their pro rata share.

• There also exists a provision for forming steering committee consisting of leader bank and the bank with next highest share in the Consortium. Normally steering committee banks must have more than 5 1 % share. Wherever Consortium fails to reach the consensus, other member banks shall follow the decision of the steering committee.

• Earlier, the terms and conditions including rate of interest, margin etc. finalised at the Consortium meeting were uniformly applicable to all banks. Reserve Bank has however, relaxed the guidelines in this regard with freedom granted to banks to determine their own lending rates for advances above Rs.2 lacs. The banks in a Consortium will now be free to offer different rates of interest and other charges on their shares.

• The ancillary and non fund based business should also be passed on by the borrower to all the member banks in almost the same proportion in which funds based limits are shared.

• The inspection/verification of securities may be done by the lead bank or members in rotation as per arrangement which may be finalised in the Consortium.

• The quarterly operating statements as required under Chore Corn mince for fixation of quarterly operative limits will also be required to be sent to the lead bank who shall in association with the bank having the next largest share in the credit facilities should meet at quarterly intervals and fix the operative limits and also individual bank’s share thereof for the next quarter.

• The information regarding quarterly operating limits fixed in such a manner would be communicated by the lead bank to other member banks.

• In a Consortium, lead bank or the lead bank and the bank with the next highest share will be the final authorities in case of differences of opinion and their views will prevail in all cases of disputes among the member relating to terms and conditions. 

From the above discussion it will be appreciated that the borrower under the Consortium arrangements is required to deal with the lead bank and bank having second largest share in total credit limits for an practical purposes. The borrowers were, however, put to inconvenience for execution of varied types of documents etc. with various banks in the Consortium. On the recommendations of ‘Mahadevan Committee’ who submitted its report in April, 1988, Reserve Bank revised guidelines in relation to Consortium advances and the ultimate ideal set for the banking industry is to achieve ‘Single Window Concept For Lending (SWCL), to minimise delay and inconvenience to the borrowers. Single Window Concept has now been brought into operation in respect of two important areas of lending in Consortium as under: 

First Disbursement 

Lead bank in all Consortium will have the authority from each of the other member banks to make available their shares of entire/enhanced limits if latter’s decision is not conveyed to the lead bank within the prescribed time of two months. The borrower will thus be able to avail first disbursement from the lead bank itself, if other member banks delay their decision. However, after first disbursement as above, the borrower will be allowed to operate his accounts with different member banks according to his requirements subject to the limits allocated to them. 


Important recommendations as accepted by Reserve Bank for implementation are as given below: 

(i) The borrower should tie required to execute only one document, which will be signed by the lead bank on its own behalf as well as on behalf of other members.

(ii) The lead bank should complete the formalities connected with creation and registration of charge etc. with the Registrar of Companies.

(iii) As soon as the documents are executed, the lead bank shall send a confirmation in this regard to other members by telex/telegram.

(iv) The sharing of security and the rights and responsibilities of the banks, including the lead bank, should be documented by means of an inter se agreement among the members of the Consortium. 

To bring, in the uniformity in respect of type of documents to be obtained by different banks. Indian Bank. Association has finalised model documents to be adopted by all the banks uniformly. The document procedure as recommended by IBA for implementation by the banks has been revised and now the execution of following documents: 

(i) Resolutions to be passed by the borrower’s Board of Directors authorising the borrowing company to borrow under the Consortium arrangement.

(ii) Working capital Consortium agreement.

(iii) Joint deed of hypothecation.

(iv) Revival letter for purposes of limitation.

(v) Letter of undertaking from the borrower for creating a second mortgage on the fixed assets.

(vi) Agreement to be signed with the lead bank who signs on behalf of itself and on behalf of other member banks. 

Model forms for all these documents have already been circulated by IBA to all the banks for implementation and borrowers may approach their bank to get copies of these documents. In addition the banks are required to sign various inter se agreements as per revised proforma adopted by IBA . 

Classification of Advance 

As per the norms specified by Reserve Bank each borrowal account is to be classified in any of the four categories as under: 

(i) Standard Asset

(ii) Sub standard Asset

(iii) Doubtful Asset

(iv) Loss Asset 

The banks are further required to make provisioning at the prescribed rates in their profit and loss ale on the basis of the above classification at the time of finalising their annual accounts. Classification of borrowal account has thus assumed an added significance. 

As per the practice, member banks were following the classification as given by the lead bank in a Consortium. It has now been stipulated by Reserve Bank that each member bank will classify the ale on its own keeping in view the relevant guidelines. If any bank under the Consortium classifies the ale as 1 sub standard’ all the Banks under the Consortium will have to classify such ale as ‘sub standard’. This stipulation has been brought into effect to ensure that borrower lakes steps to maintain his a/cs with all member banks free of irregularities. 

Lead Bank charges 

Reserve Bank has permitted the lead bank to charge a suitable fee (say 0.25 per cent of the limits) per annum for various services rendered to the borrower. Detailed guidelines in this regard are as under: 

(a) The fee of 0.25 percent per annum is to be reckoned with reference to the fund based working capital credit limits sanctioned by the Consortium.

(b) The rate of fee may be negotiated with the borrowers with the ceiling of 0.25%.

(c) Service charge on enhancement of limits after regular sanction has taken place will be charged on the amount of enhancement/incremental limits.

(d) No fee is payable on syndication of limits.

(c) No service charge is to be levied on working capital limits authorised under special arrangements, by Reserve Bank of India for procurement/purchase under price support/market intervention operations etc. to public sector corporations or agencies of State Government. 

It may be mentioned here that formation of Consortium is no more obligatory and instruction relating to conduct of Consortium which were issued by Reserve Bank Iron, time to time have also been withdrawn. Consortium members have been given powers to frame their own ground roles governing the Consortium arrangement viz. number of participating banks, minimum share of each bank, entry into/exit from the Consortium, sanction of additional/adhoc limit in emergent situations/contingencies by lead banks/ other banks, the fee to be charged by the lead bank for the services rendered by it, the grant of any facility by a non member bank etc. 

Consortium arrangement of lending for working capital needs will continue to exist for operational convenience of the participating banks as well as borrowers. The ground rules of Consortium arrangements discussed in earlier paragraphs will also hold good in most of the cases with certain modifications and hence may be considered relevant. 

Syndication of credit 

A syndicated credit is an agreement between two of more lending institutions to provide a borrower a credit facility using common loan documentation. A prospective borrower intending to raise resources through this method awards a mandate to a bank as ‘Lead Manager’ to arrange credit on his behalf. The mandate spells out the commercial terms of the credit and the prerogatives of the mandated bank in resolving contentious issues in the course of the transaction. The mandated bank prepares an Information Memorandum about the borrower in consultation with the latter and distributes the same amongst the prospective lenders soliciting their participation in the credit to be extended to the borrower. The Information Memorandum provides the basis for each lending bank making its own independent economic and financial evaluation of the borrower, if necessary, by seeking additional supporting information from other source as well Thereafter, the mandated bank convenes a meeting to discuss the syndication strategy relating to coordination, communication and control within the syndication process and finalises deal timing. charges towards management expenses and cost of credit, share of each participating bank in the credit, etc. The loan agreement is signed by all the participating banks. The borrower is required to give prior notice to the ‘Lead Manager’ or his agent for drawing the loan amount to enable the latter to tie up disbursements with the other lending banks. Syndication is thus very similar to the system of Consortium lending in terms of disposal of risk and is a convenient mode of raising long term funds by borrowers. 

Consortium of banks and financial institutions 

Banks are now taking increasing share in term loans sanctioned to borrowers by financial institutions. Granting of working capital assistance remains in the exclusive domain of commercial banks. To avoid delay in project implementation, it is desired that concept of ‘single window clearance’ is brought into operation. It is, therefore necessary that commercial banks either taking a share in term loans and/or financing working capital are associated by all India financial institutions at the appraisal stage of the project. For this purpose, all India financial institutions have to form a Consortium with commercial banks and have proper co ordination in dealing with new investments either by existing companies (as modernisation, diversification, expansion) or by new companies. A summary of important guidelines issued by Reserve Bank in this regard is given below: 

Association of commercial banks with the project appraisal: The promoter of a project must identify commercial bank(s) who should be willing to extend term loan and/or working capital Finance for the project. The bank which is to take the maximum share of term loans among the banks and/or working capital Finance should be associated with appraisal exercise initiated by lead financial institutions. The lead bank is to be given full opportunity for expressing views at the time of appraisal. The bank will not be allowed to withdraw unilaterally from the Consortium at a later date. Where more than one bank is associated, the appraisal as finalised jointly by the lead financial institutions and the lead bank should be accepted by other banks. An added advantage of this exercise would be correct estimation of margin required for working capital as part of project cost and help early sanction of requisite working capital limits after sanction of term loan assistance. 

Extent of participation in term loan by banks: Restriction earlier imposed by Reserve Bank on participation in term loans by banks were related to the cost of project which have since been modified. The restriction is now placed on the basis of quantum of loan irrespective of the cost of project. The present position in this regard is now as under: 

(i) The quantum of loan will be the determining criterion and not the cost of the project.

(ii) Maximum quantum of term Finance /loans sanctioned by a commercial bank together with its other exposures in the form of fund based and non fund based credit facilities, investments, underwriting, and any other commitment, will be restricted to the prudential exposure norm, as prescribed by the Reserve Bank of India from time to time, for individual borrowers/group of borrowers. The earlier ceiling of Rs. 50 crores for individual bank has since been withdrawn.

(iii) Subject to an individual ceiling of term loan for a bank, as per (ii) above various banks in consortia/syndicate may give loans uptoRs.500 crore for each project.

(iv) For projects requiring term finance assistance exceeding Rs.500crore, banks shall continue participating jointly with All India Financial Institutions, subject to share of individual banks not exceeding as per (it) above and that of the banking system Rs.500 crores. 

Ground Rules for Co ordination between hooks and financial institutions1

 (1) Time frame for sanction of facilities:

(a) If only two lenders we involved, all the issues with regard to sanction of facilities should be resolved by them by mutual discussion within 60 days front the date of sanction by the lead,

(b) Where more than two lenders we involved, their agreement or disagreement for sanction of facilities must he conveyed by the lead within 60 days from the date of receipt of complete loan application. The other participating institutions must convey their decision within 60days from there receipt of appraisal note from the lead.

(c) Prima facie rejection of the proposal should be conveyed within 30 days.

(d) Sanction in the case of fresh loan proposals involving more than 2 lenders should be conveyed within two months from the date of appraisal note by the lenders.

(e) Where restructuring is involved, the lead should complete the process within 3 months from die receipt of complete proposal and the other participants should convey their decision within 2 months from the receipt of appraisal note.

 (2) Asset Classification: Banks and Financial Institutions may classify the, recounts based on their performance as per their books. In cases of restructured and Consortium accounts the classification should he same for ill lenders.

(3) Disciplinary Borrowers: The views of the majority of lenders, in a Consortium (say 70% of total funded exposure), on a Consortium specific basis, should he adopted in regard to changing the management of a defaulting borrower unit.

(4) Levy of Charges: Consortium members should decide the rate of interest to be charged oil borrowal accounts. Punitive charges/penal interest, if any, should not exceed two percentage points above the contracted rate.

(5) Group Approach: Normal funding requirements of the healthy units belonging to a group should not be hampered by adopting group approach.

(6) Sharing of Securities and Cash Flow: Exact modalities with regard to sharing of securities and cash flow has it) he worked out between the Consortium members.

Working Capital Finance by Non Consortium Financial Institution 2

In the case of borrowers, whose working capital is financed under it multiple banking arrangement, file financial institution should obtain an auditor’s certificate indicating the extent of funds already borrowed, before considering the request of the borrower for further working capital Finance.

 Prudential Norms for Exposure Limits w.e.f. April, 2002

 To ensure that the banks have proper spread in their advance portfolio and do not commit large resources to a single borrower/group for better risk management, Reserve Bank of India has stipulated prudential norms for exposure to a single borrower or group as under:

 (a) The overall exposure to a single borrower shall not exceed 15% (20% in case of credit to infrastructure projects) of the capital funds of the banking institution.

(b) The overall exposure to a group shall not exceed 40% of the capital funds of the banking Institution (50% in case of credit to infrastructure projects)

 Exposure shall include credit exposure (funded and non funded credit limits) and investment exposure (underwriting and similar commitments) as well as certain types of investments in companies. The sanctioned limits or outstandings, whichever are higher, shall be reckoned for arriving at exposure limit. With effect from 1.4.2003, non fund based exposures should also be reckoned at 100% of the limit or outstandings. Loans and advances granted against the security of bank’s own term deposits may be excluded from the purview of the exposure ceiling. For details refer to Chapter 3 of the Book.

Banks must ensure that its overall commitment to a single borrower/group is invariably within the exposure limit as per prudential norms. No exception in this regard is permitted by Reserve Bank of India except the following exemptions:

 (a) The exposure limits would not he applicable to existing/additional credit facilities to weak/sick industrial units under rehabilitation packages; and

(b) Borrowers to whom limits we allocated directly by the Reserve Bank, for food credit, will be exempt from the ceiling.


[R1] Reserve Bank of India has since permitted the banks to decide modalities of the functioning of consortium. Banks may therefore, decide on all issues including rates of interest, allocation of limits, sharing pattern, sanction of adhoc limits etc. in the consortium meting The guidelines issued by Reserved Bank may thus be taken as indicative only.

[R2]The exposure ceiling limits applicable from 1.4.2002 is 15 percent of capital fund in case of single borrower and 40 percent in the case of a borrower group. In case of credit to infrastructure projects this ceiling shall he enhanced to 20% in case of a single borrower and 50% in case of a group.

[R3]Effective from April 1, 2003. non fund based exposure shall he taken at 100%.

[R4]The exposure ceiling limits applicable from 1.4.2002 is 15 percent of capital fund in case of single borrower and 40 percent in the case of a borrower group. In case of credit to infrastructure projects this ceiling shall he enhanced to 20% in case of a single borrower and 50% in case of a group.

[R5]The exposure ceiling limits applicable from 1.4.2002 is 15 percent of capital fund in case of single borrower and 40 percent in the case of a borrower group. In case of credit to infrastructure projects this ceiling shall he enhanced to 20% in case of a single borrower and 50% in case of a group.

[R6]Circular No. DBOD. BP. BC. 82/21.04.048/00 01, dt. 26.2.2001.

[R7] As per RBI FIC No. 85/01 02.00/95 96 dt. 26.6. 1996

[R8] Vide DBOD No. Dir, BC 20/13.03.00/2002-03 dt. 20.8.2002.

Source :

 Annexure II

Date: Aug 05, 2009

Lending under Consortium Arrangements/Multiple Banking Arrangements



August 5, 2009

The CEOs of the Select All-India Term-lending and Refinancing Institutions

(Exim Bank, NABARD, NHB and SIDBI)

Dear Sir,

Lending under Consortium Arrangements/Multiple Banking Arrangements

Please find enclosed Circular DBOD.No.BP.BC.46/08.12.001/2008-09 dated September 19, 2008 on the above subject along with subsequent circulars DBOD.No.BP.BC.94/ 08.12.001/2008-09 dated December 08, 2008 and DBOD No. BP. BC. 110 / 08. 12. 001 /2008-09 dated February 10, 2009 respectively and DBS.CO.FrMC.BC.No.8/23.04.001/2008-09 dated June 24, 2009. It is advised that the above guidelines on Consortium arrangements/multiple banking arrangements issued to banks, shall mutatis mutandis apply to the select all-India Financial Institutions (AIFIs) for sharing of information among the AIFIs and with banks.

Yours faithfully,

(Vinay Baijal)

Chief General Manager

Encls : As above



Reema Srivastava *

ABSTRACTS OF THE ARTICLE (as available on web)

Working capital is the fund invested in current assets and is needed for meeting

day to day expenses. Working capital is the fund invested in current assets. It occupies an important place in a firm’s Balance Sheet. Working capital financing is a specialized area and is designed to meet the working requirements of a business. The main sources of working capital financing are trade credit, bank credit, factoring and commercial paper.

Out of all these, this paper is related only to bank credit which represents the most

important source for financing of current assets. The firms generally enjoy easy access to the bank finance for meeting their working capital needs. But from time to time, Reserve Bank of India has been issuing guidelines and directives to the banks to strengthen the procedures and norms for working capital financing. This paper attempts to analyse the role of bank credit in financing working capital needs of firms. It also tries to give a bird’s eye view about the guidelines issued by RBI to banks in relation to working capital financing.


Working capital is that portion of a firm’s capital which is employed in short term

operations. Current assets represent Gross Working Capital. The excess of current assets over current liabilities is Net Working Capital. Current assets consists of all stocks including finished goods, work in progress, raw material, cash, marketable securities, accounts receivables, inventories, short term investments, etc. These assets can be converted into cash within an accounting year. Current liabilities represent the total amount of short term debt which must be settled within one year. They represent creditors, bills payable, bank overdraft, outstanding expenses, short term loans, etc.The working capital is the finance required to meet the costs involved during the operating cycle or business cycle. Operating cycle is the period involved from the time raw materials are purchased to the time they are converted into finished goods and the same are finally sold and realized. The need for current assets arises because of operating cycle. The opera ting cycle is a continuous process and therefore the need for current assets is felt constantly. Each and every current asset is nothing but blockage of funds.

Therefore, these current assets need to be financed which is done through Working Capital Financing.

There is always a minimum level of current assets or working capital which is

continuously required by the firm to carry on its business operations. This minimum level of current assets is known as permanent or fixed working capital. It is permanent in the same way as the firm’s fixed assets are. This portion of working capital has to be financed by permanent sources of funds such as; share capital, reserves, debentures and other forms of long term borrowings. The extra working capital needed to support the changing production and sales is called fluctuating or variable or temporary working capital. This has to be financed on short term basis. The main sources for financing this portion are trade credit, bank credit, factoring and commercial paper. It is in this context that bank financing assumes significance in the working capital financing of industrial concerns.


A commercial bank is a business organization which deals in money i.e. lending

and borrowing of money. They perform all types of functions like accepting deposits,

advancing loans, credit creation and agency functions. Besides these usual functions, one of the most important functions of banks is to finance working capital requirement of firms. Working capital advances forms major part of advance portfolio of banks. In determining working capital requirements of a firm, the bank takes into account its sales and production plans and desirable level of current assets. The amount approved by the bank for the firm’s working capital requirement is called credit limit. Thus, it is maximum fund which a firm can obtain from the bank. In the case of firms with seasonal businesses, the bank may approve separate limits for ‘peak season’ and ‘non-peak season’. These advances were usually given against the security of the current assets of the borrowing firm.

Usually, the bank credit is available in the following forms:

Cash Credit – Under this facility, the bank specifies a predetermined limit and the

borrower is allowed to withdraw funds from the bank up to that sanctioned credit

limit against a bond or other security. However, the borrower can not borrow the

entire sanctioned credit in lump sum; he can draw it periodically to the extent of his

requirements. Similarly, repayment can be made whenever desired during the period.

There is no commitment charge involved and interest is payable on the amount

actually utilized by the borrower and not on the sanctioned limit.

Overdraft – Under this arrangement, the borrower is allowed to withdraw funds in

excess of the actual credit balance in his current account up to a certain specified limit during a stipulated period against a security. Within the stipulated limits any number of withdrawals is permitted by the bank. Overdraft facility is generally available against the securities of life insurance policies, fixed deposits receipts, Government securities, shares and debentures, etc. of the corporate sector. Interest is charged on the amount actually withdrawn by the borrower, subject to some minimum (commitment) charges.

Loans – Under this system, the total amount of borrowing is credited to the current

account of the borrower or released to him in cash. The borrower has to pay interest

on the total amount of loan, irrespective of how much he draws. Loans are payable

either on demand or in periodical instalments. They can also be renewed from time to

time. As a form of financing, loans imply a financial discipline on the part of the


Bills Financing – This facility enables a borrower to obtain credit from a bank

against its bills. The bank purchases or discounts the bills of exchange and

promissory notes of the borrower and credits the amount in his account after

deducting discount. Under this facility, the amount provided is covered by cash credit

and overdraft limit. Before purchasing or discounting the bills, the bank satisfies itself

about the creditworthiness of the drawer and genuineness of the bill.

Letter of Credit – While the other forms of credit are direct forms of financing in

which the banks provide funds as well as bears the risk, letter of credit is an indirect

form of working capital financing in which banks assumes only the risk and the

supplier himself provide the funds. A letter of credit is the guarantee provided by the

buyer’s banker to the seller that in the case of default or failure of the buyer, the bank

shall make the payment to the seller. The bank opens letter of credit in favour of a

customer to facilitate his purchase of goods. This arrangement passes the risk of the

supplier to the bank. The customer pays bank charges for this facility to the bank.

Working Capital Loan – Sometimes a borrower may require additional credit in

excess of sanctioned credit limit to meet unforeseen contingencies. Banks provide

such credit through a Working Capital Demand Loan (WCDL) account or a separate

‘non–operable’ cash credit account. This arrangement is presently applicable to

borrowers having working capital requirement of Rs.10 crores or above. The

minimum period of WCDL keeps on changing. WCDL is granted for a fixed term on

maturity of which it has to be liquidated, renewed or rolled over. On such additional

credit, the borrower has to pay a higher rate of interest more than the normal rate of



Banks generally do not provide working capital Finance without adequate

security. The nature and extent of security offered play an important role in influencing the decision of the bank to advance working capital Finance. The bank provides credit on the basis of following modes of security:

Hypothecation – Under this mode of security, the banks provide working capital Finance to the borrower against the security of movable property, generally

inventories. It is a charge against property for the amount of debt where neither

ownership nor possession is passed to the creditor. In the case of default the bank has the legal right to sell the property to realise the amount of debt.

Pledge – A pledge is bailment of goods as security for the repayment of a debt or

fulfillment of a promise. Under this mode, the possession of goods offered as security

passes into the hands of the bank. The bank can retain the possession of goods

pledged with it till the debt (principal amount) together with interest and other

expenses are repaid. . In case of non-payment of loan the bank may either; Sue the

borrower for the amount due;Sue for the sale of goods pledged; or After giving due

notice, sell the goods.

Lien – Lien means right of the lender to retain property belonging to the borrower

until he repays the debt. It can be of two types: (i) Particular lien and (ii) General lien.

Particular lien is a right to retain property until the claim associated with the property

is fully paid. On the other hand, General lien is applicable till all dues of the lender

are paid. Banks usually enjoy general lien.

Mortgage – Mortgage is the transfer of a legal or equitable interest in a specific

immovable property for the payment of a debt. In case of mortgage, the possession of the property may remain with the borrower, while the lender enjoys the full legal title. The mortgage interest in the property is terminated as soon as the debt is paid.

Mortgages are taken as an additional security for working capital credit by banks.

Charge – Where immovable property of one person is made security for the payment of money to another and the transaction does not amount to mortgage, the latter person is said to have a charge on the property and all the provisions of simple

mortgage will apply to such a charge. A charge may be created by the act of parties or by the operation of law. It is only security for payment.


Till the sixties, bank credit for working capital was available easily and in

convenient form to industrial borrowers. Further, the cash credit arrangement, the

principal device through which such Finance has been provided, is quite advantageous from the point of view of borrowers. Banks have not been concerning themselves about the soundness of the borrower or about the actual end use of the loan. Bank financing was mainly security oriented. This security oriented system tended to favour borrowers with strong financial resources irrespective of their economic function. This resulted in the concentration of economic power. Another problem was that the increase in the bank credit was not commensurate with the expansion in the level of inventory and production. This resulted in a number of distortions in financing of working capital by banks. Major Banks was nationalized in 1969 and with that, approach to lending also changed. Consequently, bank credit has been subjected to various rules, regulations and controls. The basic objective of regulation and control of bank credit is to ensure its equitable distribution to various sectors of the Indian economy. The RBI has been trying, particularly from the mid-sixties onwards, to bring a measure of discipline among industrial borrowers and to redirect credit to priority sectors of the economy. The RBI has been issuing guidelines and directives to the banking sectors towards this end. Important guidelines and directives have derived from the recommendations of certain specially constituted groups assigned with the task of examining various aspects of bank finance to industry.


In the past, working capital financing was constrained with detailed regulations on

how much credit the banks could give to their customers. The recent changes made by RBI in the guidelines for bank credit for working capital Finance are discussed below:

1. The notion of Maximum Permissible Bank Finance (MPBF) has been abolished by RBI and a new system was proposed by the Indian Banking Association (IBA). This

has given banks greater freedom and responsibility for assessing credit needs and

credit worthiness. The salient features of new system are:

– For borrowers with requirements of upto Rs. 25 lakhs, credit limits will be

computed after detailed discussions with borrower, without going into detailed


– For borrowers with requirements above Rs. 25 lakhs, but upto Rs. 5 crores, credit

limit can be offered upto 20% of the projected gross sales of the borrower.

– For large borrowers not selling in the above categories, the cash budget system

may be used to identify the working capital needs.

However, RBI permits banks to follow Tandon/Chore Committee Guidelines and

retain MPBF concept with necessary modifications.

2. Earlier RBI had prescribed Consortium arrangements for financing working capital

beyond Rs. 50 crores. Now it is not essential to have Consortium arrangements.

However, banks may themselves decide to form Consortium so that the risks are

spread. The disintegration of Consortium system, the entry of term lending institutions into working capital finance and the emergence of money market borrowing options gives the best possible deal.

3. Banks were advised not to apply the second method of lending for assessment of

MPBF to those exporter borrowers, who had credit export of not less than 25% of

their total turnover during the previous accounting year, provided that their fund

based working capital needs from the banking system were less than Rs. 1 crore. RBI has also suggested that the units engaged in export activities need not bring in any contribution from their long term sources for financing that portion of current assets as is represented by export receivables.

4. RBI had also issued lending norms for working capital, under which the banks would decide the levels of holding of inventory and receivables, which should be supported by bank finance, after taking into account the operating cycle of an industry as well as other relevant factors. Other aspects of lending discipline, viz; maintenance of minimum current ratio, submission and use of data furnished under quarterly information system etc. would continue though with certain modifications, which would make it easier for smaller borrowers to comply with these guidelines.


From the above discussion we can say that bank credit occupies an important

place in financing working capital requirements of industries. Working capital financing is a specialized line of business and largely dominated by commercial banks. Generally, the bank finance for meeting working capital needs is easily available to firms. But it has been always difficult to determine the norms for an adequate quantum of bank credit required by an industry for working capital purpose. Various committees have been set up for examining the working capital financing by banks and to recommend norms for and to regulate bank credit. Besides this from time to time, Reserve Bank of India has been issuing guidelines and directives to the banks to strengthen the procedures and norms for working capital financing.


1. Bhalla, V. K., (2003), Working Capital Management, New Delhi, Anmol Publications Private Limited, 5th Edition.

2. Chandra, Prasanna, (2001), Financial Management: Theory and Practices, New

Delhi, Tata McGraw Hill Publishing Company Limited, 5th Edition,.

3. Khan, M. Y. and Jain, P. K., (2004), Financial Management: Text and Problems,

New Delhi, Tata McGraw Hill Publishing Company Limited, 4th Edition.

4. Maheshwari, S. N., (2004), Financial Management: Principles and Practices, New

Delhi, Sultan Chand & Sons Educational Publishers, 9th Edition.

5. Pandey, I. M., (2001), Financial Management, New Delhi, Vikas Publishing House

Private Limited, 8th Edition.

6. Srinivasa, S., (1999), Cash and Working Capital Management, New Delhi, Vikas

Publishing House Private Limited.

Scholarly Article written by Research Scholar Reema Shrivastava Faculty of Commerce BHU Waranasi

Available at:

Recovery of dues by banks

Recovery of dues by Banks
Recovery of dues by Banks

1.         Introduction:

Most of the companies and us approach Banks and Financial Institutions for loans. The reason for the loan may differ from person to person and company to company. All Banks should function in accordance with the guidelines/norms issued by the Banker’s Bank ‘The Reserve Bank of India’. Subject to the lending norms of Reserve Bank of India, the Banks and Financial Institutions sanction loans for different purposes. Though, the Banks and Financial Institutions can lend money even without security, normally, the Banks and Financial Institutions insist for security for the repayment of loan. The fixed assets, receivables etc. can be securities acceptable to the Banks and Financial Institutions for sanctioning the loans. The loan entitlements, the procedure for sanctioning the loan, the security issues etc., are exclusively governed by the guidelines/norms issued by the Reserve Bank of India. Again, loan, being an agreement or understanding between the Bank and the borrower, the general laws like Law of Contract, Transfer of Property Act, Specific Relief Act, Specific Performance etc., are applicable to all banking transactions depending upon the nature of transaction. The prime objective of Bank is to receive deposits and use those deposits efficiently so as to make money. The Banks will also render certain specific services on behalf of its customers. The Reserve Bank of India will issue guidelines and norms considering the policy of the Government too. Exercising control over flow of money from Banks and Financial Institutions, the Reserve Bank of India promotes the balanced growth. The Reserve Bank of India can contain inflation through certain measures and it is a financial measure to contain inflation as everybody knows.
When a borrower fails to repay the money to the Bank, what the Bank can do for recovering the loan is to file a civil suit earlier. We all know the issue of delay in rendering justice in traditional civil courts and with the inevitable delay, the Banks could not recover its dues effectively and it resulted in liquidity problems. Bank pays interest to the deposit holders; however, the Banks could not make money by using the deposits as the recovery gets delayed frequently. This led the government to appoint various committees for financial sector reforms. The concentration was on effective recovery by the Banks and Financial Institutions apart from other things.

It may be interesting and worthwhile to examine how the laws of the land have undergone changes to suit the current requirement of the banking and finance industry to protect the money lent by them and the consequent financial exposure undertaken by them.

Historically, in India the remedy available to lenders has been to file an ordinary money suit for recovery against the defaulting borrower for the outstanding amounts or to file a summary suit as provided for under Order 37 of Code of Civil Procedure 1908. Both these options have been time consuming. Another option available to the lender was to apply for foreclosure of mortgage, where borrower or guarantor had provided security by way of mortgage, in respect of outstanding towards the lender. Foreclosure and money suits have proved to be a long drawn battle in the court, consuming several years in litigation, owing to the delay on account of various reasons. The Indian courts, lower courts as well as high courts, were saddled with cases filed by the domestic banks, foreign banks and financial institutions. The delay in the disposal of such cases was deplorable.

The economic meltdown, being faced by the western world and the consequent retardation, has raised alarms for everyone connected with the financial world and India is no exception. India has a plethora of legislations, which govern and regulate the laws relating to recovery of money by the lenders. It may be important to note that although at a nascent stage, various judicial reforms have been carried out from time to time, which have controlled the burgeoning non-performing assets (NPAs) with the lenders. All these reasons lead to the banks and financial institutions to opt method, which makes the harassment of the customer, through their recovery agents. The Supreme Court, while emphasising that banks and other financial institutions cannot resort to muscle power for recovery of their loans, strongly expressed its intent of “putting an end” to this practice.

“…Banks have right to recover loans, but only through legal means,” the Bench comprising Justices A R Lakshmanan and Altamas Kabir made it clear, as it asked for the guidelines issued by Reserve Bank of India and Indian Bank Association on the issue of recovery of loans by defaulters[1].

The Bench was hearing an appeal filed by India’s largest private bank, ICICI, against an Allahabad High Court order, rejecting its plea to quash the criminal cases registered by the Uttar Pradesh Government against the managing director and other top officials for allegedly using criminal force against a loan defaulter. The case was registered at the instance of the High Court there on a complainant from an owner that the bank had sent musclemen to seize the vehicle for non-payment of loan instalments.[2]

In the case of ICICI Bank v. Shanti Devi Sharma & Others[3] a Bench of the Supreme Court comprising Dalveer Bhandari, J. and Tarun Chatterjee, J. warned ICICI (on May 15, 2008) against the use of musclemen to recover loans.[4]

The Supreme Court went on to remind financial institutions that they are bound by law. The recovery of loans or seizure of vehicles can only be done through legal means; we live in a civilized country and are governed by the rule of law.

In this case, the Supreme Court’s decision says, Mrs Sharma has alleged that her son, Rahul Dev Sharma, aged 34, committed suicide as a result of the manner in which ICICI Bank’s recovery agents had repossessed his motorcycle. In an FIR, she alleged that on October 16, 2005 at about 1.00 p.m., two recovery agents (referred to as ‘goons’) forcibly entered her son’s bedroom and started harassing and humiliating him for loan payments that were overdue on his two wheeler and on his personal loan. They repossessed the bike in the presence of his friends who ridiculed him for having lost it.

Therefore, it is strongly felt that judicial reforms are required to ensure that the rights of the Banks and Financial Institutions (FIs), popularly referred to as “lenders”, lending money to the corporates and individuals, are adequately protected.


2.         Judicial Reforms in Banking and Financial Sector:

Since the courts were overburdened with the money suits, inter alia, impacting the lender in a very serious way, it was deemed necessary to carry out changes in the law to support the lender in recovering the outstanding from delinquent borrowers.

The Committee on Financial Systems, headed by Shri M Narasimhan, had considered the setting up of the “special tribunals” with special powers for adjudication and speedy recovery of such matters as critical to the successful implementation of the financial sector reforms. An urgent need was, therefore, felt to work out a suitable mechanism through which the dues to the banks and financial institutions could be realised without delay.

In 1981, a committee under the Chairmanship of Shri T Tiwari had examined the legal and other difficulties faced by banks and financial institutions and suggested remedial measures including changes in law. The Tiwari Committee had also suggested setting up of special tribunals for recovery of dues of the banks and financial institutions by following a summary procedure.

Consequently, the Recovery of Debts Due to Banks and Financial Institutions Act 1993 in short DRT Act was passed.  The DRT Act definitely eased the pressures on the courts at an all India level and the Debt Recovery Tribunals (DRT) is today deemed to be effective tribunals to redress the grievances of the lenders.

The rationale behind the Act is contained in the Tiwari Committee Report, which stated:

“The civil courts are burdened with diverse types of cases. Recovery of dues due to Banks and Financial Institutions is not given any priority by the civil courts. The Banks and Financial Institutions like any other litigants have to go through a process of pursuing the cases for recovery through civil courts for unduly long periods.”


3.         Constitutional validity of the RDDBFI Act, 1993:

After 9 years of evolution of the Act was challenged for its constitutional validity in Union of India & Another v. Delhi Bar Ass. & Others[5].

The Constitutional validity of the Act was challenged on grounds of unreasonableness & that it violates Article 14 of the Constitution and that the same is beyond the legislative competence of the Parliament.

The validity of the Act was firstly challenged before the Delhi High Court in Delhi Bar Ass. & Others v. UOI & Another[6]. The Delhi High Court held that the DRT could be constituted by the Parliament even though it was not within the purview of Articles 323A and 323B of the Constitution of India and that the expression ‘administration of justice ‘ as appearing in List IIA of the Seventh Schedule to the Constitution includes Tribunals as well as ‘administration of justice’; the impugned Act was unconstitutional as it erodes the independence of the judiciary and was irrational, discriminatory, unreasonable, arbitrary and was hit by Art 14 of the constitution. It also quashed the appointment of the Presiding Officer of the Tribunal. The aforesaid conclusions were on the basis that the Act in particular, section 17 did not have a provision for a counter claim as provided in the Code of Civil Procedure, 1908 and was irrational and arbitrary. The Act lowered the authority of the High Courts on the basis of the pecuniary jurisdiction and eroded the independence of the judiciary since the jurisdiction of the civil courts had been truncated and vested in the Tribunal.

The court referred to DK Abdul Khader v. Union of India[7] where it was held that a Tribunal could not be constituted for any matter not specified in Art 323A & 323B of the Constitution.

3.1.      Finding of the Supreme Court:

It was held by the SC that “While Articles 323A and 323B specifically enable the legislature to enact laws for the establishment of tribunals, in relation to the matters specified therein, the powers of the Parliament to enact a law constituting a tribunal like a banking tribunal is not taken away” It was further specified that the recovery of dues is an essential function of any banking institution. In exercise of its legislative powers relating to banking, parliament can provide the mechanism by which monies due to banks and financial institutions can be recovered.

The preamble to the Act states “… for expeditious adjudication and recovery of debts due to banks and financial institutions and for matters connected therewith or incidental thereto’ this would squarely fall within the ambit of entry 45 of List I of the Constitution.

The Supreme Court disagreed with the view taken by the Delhi High Court that the provisions of the Act are in any way arbitrary or bad in law. In fact it held that the Act has been amended and whatever lacunae or infirmities existed have now been removed by the amending Act with the framing of more rules.

The view taken by the Delhi High Court was that the Act eroded the independence of the judiciary since the jurisdiction of the civil courts had been truncated and vested in the Tribunal. The SC held that the decision of the Delhi High Court proceeds on the assumption that it is an absolute right of anyone to demand that a civil court adjudicate his dispute. Where Arts 323A &323B contemplate establishment of Tribunals and this does not erode the independence of the judiciary, there is no reason to presume that the banking tribunals and the appellate tribunals so constituted would deny justice to the defendants or that the independence of the judiciary would stand eroded.

All these issues came before various courts after the introduction of the Act nine years ago. Now, almost all issues have come to rest and the Act is all set to take its vengeance on defaulters of loans and debts owed to banks and financial institutions.


4.         Problems in the DRT Act, 1993 leads to the passing of SARFAESI Act, 2002:

With the enactment of the DRT Act, the banking sector expected that most of the NPAs would be easy to recover, as against the conventional system of recovery of loan through civil courts, where considerable time, money and efforts were required to recover debt. However, in spite of DRT Act, on account of non-realisation of the NPAs, the Banks and Financial Institutions were facing problems relating to liquidity and asset liability mismatch, since their assets were blocked for considerable time in unproductive asset. There was no legal provision for facilitating securitisation of financial assets, and banks had no power to take possession of securities created in their favour in order to secure the facilities. Despite constituting special Tribunals like Debt Recovery Tribunals under RDDBFI Act, 1993, the Banks could not recover its dues to the extent expected. This led to further reforms in the process and curtailing the delay in adjudication.
Despite constituting special Tribunals like Debt Recovery Tribunals under RDDBFI Act, 1993, the Banks could not recover its dues to the extent expected. This led to further reforms in the process and curtailing the delay in adjudication.

In furtherance of financial reforms and extending the object of RDDBFI Act, 1993, the Government has enacted The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The SARFAESI Act, 2002 is to curtail the delay in the process of adjudication between the Banks and its borrowers. The question of recovery by the Banks and Financial Institutions will arise when the borrowers commit default in repaying the debt. When there is default, then, the Banks will categorize the account as Non-performing Asset in accordance with the norms prescribed by the Reserve Bank of India.

Therefore, to improve the health of the economy as well as the banking sector, stimulus was required to be given in the form of legal provisions, empowering banks with more powers to recover the assets blocked in Non-performing Assets.


5.         Background of the SARFAESI Act, 2002:

The pre-eminent problem faced by Banks and Financial Institutions is that of increasing bad debts euphemized as Non-performing Assets (NPAs).

To look in the prevailing problem and bring out suggestions three committees set up, namely, the Narasimham Committee I, Narasimham Committee II, and the Andhyarujina Committee.

Narsimham Committee I was constituted in 1991, it then mentions that according to the international practice, an asset is treated as non-performing when the interest is overdue for at least two quarters. Income of interest is considered as such, only when it is received and not on the accrual basis[8]. The Committee suggested that the same should be followed by the banks and financial institutions in India and advance is to be shown as Non-perfoming Asset where the interest remains due for more than 180 days.

Narasimham Committee II submitted its report in April, 1998 and recommend that banking industry should switch over to international practices with regard to recognized income by introducing a 90 days norm.

Andhyarujina Committee was constituted under the chairmanship of Sri T.R. Andhyarujina, former Solicitor General of India, in February 1999 to formulate specific proposals for giving effect to the suggestions made by the Narasimham Committee. The Committee submitted its report in May 2000, which cast the way for the passing of the present SARFAESI Act, 2002, the main recommendation of the Committee is as follows:

  1. Banks must vest with power of taking possession and sale of securities

without the intervention of the court as regards mortgaged properties;

b. The existing Recovery of Debts Due to Banks and Financial Institutions

Act, 1993 should be amended to make its provisions more effective; and

c. Amendment should also be made in the Contract Act, 1872 by making

provision of giving more time to Banks and Financial Institutions to  enforce their claims under Guarantee.


6.         Objects of the SARFAESI Act, 2002:

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 in short “SARFAESI Act” was enacted with the objective of regulating securitization and reconstruction of financial assets and enforcement of security interest created in favour of secured creditors.

The Act provides for three alternative methods for recovery of NPAs:

(a) securitisation;

(b) asset reconstruction; and

(c) enforcement of security without intervention of court.

More recently, the current Minister for Law and Justice Mr. Veerappa Moily has made statements assuring that the pendency in the courts will be checked and that the average time spent on litigation pending in the courts will be brought down.  He has also indicated setting up of commercial courts to speed up the disposal of commercial disputes. It is also heartening to note that in the Budget 2010-2011 speech, the Finance Minister indicated towards carrying out further judicial reforms in the interest of the financial world.


7.         Applicability of the SARFAESI Act, 2002:

The provision of the Act, 2002 is applicable only if the amount of the NPA loan account exceed Rupees One Lakhs; and

NPA loan account is more than twenty percentage of the principal and interest.

NPAs should be backed by securities charged to the banks by way of hypothecation, mortgage or assignment and the secured assets are not hit by the provision of the section 60 of the Code of Civil Procedure, 1908.

The secured asset must not be a lien on any goods, money, or security given by or under the Indian Contract Act, 1872 or the Sales of Goods Act, 1930 or under any other law for the time being in force; a pledge of movable within the meaning of section 172 the Indian Contract Act, 1872; security in aircraft/shipping vessels under section 3 of the Merchant Shipping Act, 1958; conditional sale, hire purchase, or lease where no security interest has been created; right of unpaid seller under section 47 of the Sale of Goods Act, 1930; property exempted under section 60 of the Code of Civil Procedure, 1908; security interest of any financial asset not exceeding one lakh rupees; security interest in agricultural land; case in which amount is less than twenty percent of the principal amount and interest thereon[9].


8.         Securitisation: Meaning.

The concept of securitisation has been adopted more recently from the American financial system and has been described as processing of acquiring financial asset and packaging the same for investments by several investors. The term ‘securitisation’ has not been defined as such, but has been used in certain rules, regulations and notifications. In the recently enacted the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short “the Securitisation Act”) the term securitisation has been defined as “a mechanism for acquisition of financial assets by any securitisation company or reconstruction company from any originator, whether by raising of funds by such securitisation company or reconstruction company from qualified institutional buyers by issue of security receipts representing undivided interests in such financial assets or otherwise”[10].

In Mardia Chemicals Ltd., v. Union of India[11] Supreme Court held that the practice of securitization of debts is in vogue all over the world. That is to say a measure of replenishing the funds by recourse to the secondary market. There are organizations who undertake exercise of securitization. Such organizations take over the financial assets and in turn issue securities.

Simply to say that, securitization is system to convert securities into cash, yet it is different from transfer of negotiable instruments or actionable claims as current in every day practice in the commercial field.


9.         Reconstruction of the Financial Assets:

The second concept contemplated under the SARFAESI Act, 2002 is reconstruction of financial assets, defined as “assets reconstruction”, which means acquisition by any securitization company or reconstruction company of any rights or interest of any bank or financial institution in any financial assistance for the purpose of realization of such financial assistance[12].

The concept of ‘financial assistance’ denotes any loan or advance granted or any debentures or bonds subscribed or any guarantee given or letters of credit established or any other credit facility extended by any bank or financial institution[13].

Thus, asset can be acquired only:

a. for the purpose of realization of the financial assistance; and

b. when the borrower is in default;

but not otherwise.


10.       Difference between RDDBFI Act, 1993 and SARFAESI Act, 2002:

The main difference between RDDBFI Act, 1993 and SARFAESI Act, 2002 is as follows:
10.1. The RDDBFI Act, 1993 enables the Bank to approach the Tribunals when the debt exceeds the prescribed limit i.e. Rupees Ten Lakhs.

10.2. Under RDDBFI Act, 1993, the Debt Recovery Tribunal will adjudicate the amount due and passes the final award.

10.3. The SAFAESI Act, 2002 provides a procedure wherein the bank or financial institution itself will adjudicate the debt. Only after adjudication by the bank or financial institution, the borrower is given right to prefer an appeal to the Tribunal under SARFAESI Act, 2002.

10.4. The Banks or Financial Institutions can invoke the provisions of SAFAESI Act, 2002 only in respect of secured assets and it should comes under the definition of NPA and the amount of due must exceed Rupees One Lakhs NPA loan account is more than twenty percentage of the principal and interest and not all loan.

In Garlon Polylab Industries Ltd. v. State Bank of India[14] it has been held by the Allahabad High Court that SARFAESI Act, 2002 being a special act overrides provisions of Recovery of Debts Due to Banks and Financial Acts, 1993 or any other Act of Parliament or State Legislature pertaining to the field it covers.


11.       Procedure to invoke remedy under SARFAESI Act, 2002:

11.1     Resolution of disputes through Arbitration or reconciliation:

Where any disputes relating to securitization or reconstruction or non-payment of any amount due including interest arises amongst any or the parties, namely, the bank, or financial institution, or securitization company or reconstruction company or qualified institutional buyer, such dispute shall be settled by conciliation or arbitration as provided in the Arbitration and Conciliation Act, 1996, as if the parties to the dispute have consented in writing for determination of such dispute by conciliation or arbitration and the provisions of that Act shall apply accordingly [15].

Under the SARFAESI Act, 2002, an exhaustive procedure has been laid down under the SARFAESI Act, 2002 along with rules defining the manner in which banks may exercise against the delinquent borrower to enforce the security interest in the asset.

11.2.    Classification of account as Non-performing Asset (NPA):

Invocation of Act for enforcement of security is triggered by classification of the account as “Non-performing Asset” by the Banks and Financial Institutions referred to as the secured creditors. In terms of the present Reserve Bank of India guidelines, in case any amount, which is due and payable by the borrower and has not, been paid for more than ninety days, the said account can be classified as NPA.

Further, the secured creditor can take over the management of the business of borrower, where substantial part of the business of the borrower is held as security for the debt.

In case any financial asset has been financed by more than one secured creditor, the notice can be issued only with the consent of secured assets representing not less than three-fourth in value of the amount outstanding.

11.3.    Power to take possession under section 13 of SARFAESI Act, 2002:

The procedure to take possession is as follows:

11.3.1. Upon classification of account of the secured creditor as non-performing asset, who defaults in the payment of secured debt or any installment thereof, the Bank or Financial Institution gives a prior notice to the defaulting borrower including the mortgagors and guarantors under section 13(2) calling upon them to pay the entire due amount within a period of sixty days[16].

11.3.2. The notice referred under section 13(2) shall give details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non-payment of secured debts by the borrower[17].

11.3.3.  Under section 13(3A) the borrower who receives the notice under section 13(2), may make the representation or send his objections to the authorised officer of the bank within the said time limit.

11.3.4. The authorized officer of the bank/secured creditor shall consider such representation or objections and if after considering such representation or objection secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he shall within one week from the date of its receipt of such representation or objection the reasons for non-acceptance it, to the borrower[18]. This enables the Bank to correct itself if it is wrong in the process of adjudication. Before this exercise is done and the borrower has been suitably replied to, the secured creditors cannot take possession of the secured asset and management of business of the borrower.

11.3.5.  In case the payment is not made by the borrower in full within the stipulated 60 days time period mentioned in the notice under section 13(2), the secured creditor may take one or more recourse mentioned in under section 13(4) namely,

i. To take possession of the secured assets of the borrower including the   right to transfer by way of lease, assignment or sale for releasing the secured asset. When it comes to taking possession of the property, there are two things like taking symbolic possession and taking actual possession[19].

ii. To take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for releasing the secured asset[20].

iii. Appoint the manager, to manage the secured asset whose possession has  been taken[21].

iii. Requiring money from any person who has acquired any of the secured assets from the borrower and from whom any money is due to the borrower, to pay to the secured creditor, by notice in writing[22].

11.3.6.  If the secured creditor obtains the possession of the secured asset or take over the management under section 13(4), it shall vest in the transferee all rights in or in relation to, the secured asset transferred as if the transfer had been made by the owner of such secured asset[23].

11.3.7.  The sale proceed shall, in the absence of any contract to the contrary, be held by the secured creditor in trust, to be applied, firstly, in the payment of such costs, charges and expenses and secondly, in discharge of the dues of the secured creditor and the residue of the money received shall be paid to the person entitled thereto in accordance with his rights and interests[24].

11.3.8.  If the borrower paid or tendered the dues with all costs, charges and expenses to the secured creditors then secured creditor shall not sold or transferred the secured asset[25].

11.3.9.  If the dues are not fully satisfied from the sale proceeds of the secured assets, the secured creditor may file an application before the Debt Recovery Tribunal (DRT) having jurisdiction or competent court, as the case may be for the recovery of the balance amount from the borrower(s)/guarantor(s)[26].

11.4.    Application for assistance:

Where the possession of any secured asset is required to be taken by the secured creditor or if secured asset is required to be sold or transferred by the secured creditor, the secured creditor may for the very same purpose request in writing to the jurisdictional Chief Metropolitan Magistrate or District Magistrate to take the possession thereof. Such Magistrate may thereupon take possession of such asset and forward the same to the secured creditor. And may use or cause to be use such force as may, in his opinion, be necessary[27].

In Apex Electricals Ltd. v ICICI Bank Ltd[28] it has been held by the Gujarat High Court, that the rights of the bank under sub section (1), (2), (3) and (4) of section 13 cannot be read as creating a lawless situation, but should and must be preserved by maintaining rule of law and not allowing the disturbances of law and order situation. And such rights of secured creditor cannot be read as giving authority or power to the secured creditor to apply force of muscle power for taking measure under section 13(4) of the Act, and for such situation where muscle power required secured creditor resort of the provisions of section 14 of the present Act.

11.5.    Right to appeal:

Any person aggrieved on account of any measure taken under section 13(4) by the secured creditor may make an application, along with requisite fees, to the Debt Recovery Tribunal within forty five days from the date on which such measures has been taken[29].

If the Debt Recovery Tribunal, after examining the facts and circumstances of the case and evidence produced by the parties, comes to the conclusion that the measures under section 13(4) are in contravention of the provision of the Act, it may declare the same invalid and restore the possession of the secured asset to the borrower[30].

And if the Debt Recovery Tribunal finds the measures taken by the secured creditor under section 13(4) in conformity with the provision of this Act, it may allow the secured creditor to proceed with the measure taken by him[31].

Aforesaid application must be disposed off as expeditiously as possible within sixty days from the date of such application. However, it may extend such period for reasons to be recorded in writing, for four months from the date of the making of the application[32].

In case the borrower is the resident of the State of Jammu and Kashmir, the application under section 17 shall be made to the Court of District Judge in that State having jurisdiction over the borrower[33].

11.6.    Remedy under section 17 of the SARFAESI Act, 2002 bars writ petition:

In V. Sriramulu v Karur Vyasa Bank Ltd[34] it has been held that proceeding under section 13(4) doest not perform any public duty and is not amenable to a writ petition of mandamus and the person aggrieved has the liberty to file an application under section 17 of the SARFAESI Act, 2002.

In Barak Valley Tea Co. v. Union of India[35] it has been held that any person aggrieved with an action under section 13(4), may invoke remedy under section 17 and this statutory remedy cannot be bypassed by invoking the writ petition.

11.7.    Appeal to Appellate Tribunal:

Any person aggrieved by an order of the Debt Recovery Tribunal passed under section 17 may prefer an appeal, along with requisite fees, to the Appellate Tribunal within thirty days from the date of the receipt of the order of the Debt Recovery Tribunal.

The appellant is bound to deposit fifty percent of the amount of the debt due from him, as claimed by the secured creditors or determined by the Debt Recovery Tribunal, which ever is less. However Tribunal may reduce such amount to not less than twenty five percent of the debt referred above.

In case the borrower is the resident of the State of Jammu and Kashmir, the appeal shall lie to the High Court having jurisdiction over the matter[36].

While it all appears to be simple, there is lot of criticism on this SARFAESI Act, 2002.

The criticism is that it is being misused by the Banks and Financial Institutions. In the course, we had to consider the following aspects:

It is pertinent to note that strong checks and balances have been put in place to ensure that there is no abuse of powers vested in the lenders.


12.       Important case laws under SARFAESI Act, 2002:

The Supreme Court of India and several high courts have delivered important judgments on various contentious issues, which arise under SARFAESI Act, 2002. Some of the issues and judgments are briefly discussed as under:

In Mardia Chemicals Ltd v. Union of India[37] laid down a strong foundation for the enforcement of SARFAESI Act, 2002. The Supreme Court upheld the validity of the Act, thereby putting an end to a large number of pending and expected litigation on the vies of the Act throughout the country. The Hon’ble Supreme Court observed that though a loan transaction may have a character of private contract, yet the question of great importance behind such transactions, as a whole having far reaching effect on the economy of the country, cannot be ignored when financing is through banks and financial institutions, utilising the money of people in general.  Therefore, where public interest is involved to such a large extent, and it may become necessary to achieve an object, which serves the public purpose, individual rights may have to give way.  Public interest has always been considered to be above the private interest. Even if few borrowers are affected by the enactment, it would not impinge upon validity of the Act, which otherwise serves larger interest.

In Sushil Kumar Agarwal v. Allahabad Bank[38] it has been held by the DRT that the words “without intervention of court” are more significant. If a suit had already been filed in court, there is definite intervention of court in the matter. Hence, pending its suit in the civil court, the bank cannot resort to simultaneous action under section 13(4).

In Transcore v. Union of India[39], it was held by the Supreme Court that the object of SARFAESI Act, 2002 and DRT Act, 1993 is the same, namely recovery of debts.  Conceptually, there is no inherent or implied inconsistency between the remedies provided under the two Acts and they are cumulative in nature for secured creditors.  Secured creditors are given the right to choose one or more of them. Though the DRT Act is a complete code in itself for recovery of debts and provides for various modes of recovery, it does not provide for expeditious enforcement of security interest of a non-adjudicatory process as has been provided for under the SARFAESI in order to prevent asset-liability mismatch in the balance sheet of the lender. It is for this reason that SARFAESI Act, 2002 is treated as an additional remedy, which is not inconsistent with the DRT Act, 1993. These two Acts together constitute one remedy and, therefore, the doctrine of election does not apply and banks and financial institutions are permitted to invoke one Act notwithstanding pendency of proceedings under the other Act.  Therefore, simultaneous proceedings for the recovery of debt under the DRT Act, 1993 as well as SARFAESI Act, 2002 are permissible.

In ICICI Bank v. Shanti Devi Sharma[40], while acknowledging that banks have vast powers under the Act, the Supreme Court held that the banks also have equal responsibilities and banks and financial institutions cannot adopt unfair practices for repossession of secured assets. Unfair trade practices have no place in India, which is civilised society governed by the rule of law.

In ATV Projects India Ltd. v. State of Maharashtra[41] the Division Bench of Bombay High Court held that statutory and equally efficacious remedies are available to a borrower under section 17 of the SARFAESI by filing application before the DRT against the action taken by secured creditor under section 13(4) of the Act. Therefore, a borrower cannot invoke extraordinary jurisdiction of the high court under article 226 to circumvent the legal process provided under special statute.

13.       Section 69 of the Transfer of Property Act, 1882 and section 13 of the SARFAESI Act, 2002:

Section 69 of the Transfer of Property Act, 1882, was modelled on the English Conveyancing Act, 1881 and the English Law of Property Act, 1925. Section 69 was later remodelled by amending Act 20 of 1929 drawing the principles from the English law.

Section 69 of the Transfer of Property Act, 1882 contains five sub-sections. Sub-sections (1) and (2) as detailed hereunder, deal with the circumstances under which the mortgagee’s right to exercise the power of sale without the intervention of the court arises. Sub-sections (3) and (4) respectively dwell on the title of the purchaser from the mortgagee and the manner of deployment of sale proceeds of the mortgaged property by the mortgagee, his duties and responsibilities. Sub-section (5) states that nothing in this section applies to powers conferred before the first day of July, 1882.

Basically we are concerned with the sub section (1) and (2) of section 69 of Transfer of property Act, 1882.

The power of sale, under Section 69, can be exercised only in the three cases mentioned in clauses (a), (b) and (c) of sub-section (1).

13.1.    Section 69(1)(a):

The first case in which the mortgagee can have the power to sell is mentioned in clause (a) of sub-section (1) of Section 69 of the Transfer of Property Act, 1882. It lays down the following conditions for the acquisition of the power, namely:

(1) that the mortgage must be an English mortgage, as defined in Section 58(e) of the Transfer of Property Act, 1882, and

(2) neither the mortgagor nor the mortgagee must be-

(i) a Hindu, Mohammedan or Buddhist, or

(ii) a member of any other race, sect, tribe, or class from time to time specified in this behalf by the State Government in the Official Gazette.

The power of sale is inherent in the mortgagee, if Conditions (1) and (2i) mentioned above are satisfied.

If the conditions in Section 69(1) (a) and Section 69(2) are complied with, mortgagee’s power of sale arises suo motu.


13.2.    Sections 69(1)(b):

The words “expressly conferred” in clauses (b) and (c) indicate that the inherent power available under clause (a) is not available under clauses (b) and (c).

To bring a case under Section 69(1) (b), it is necessary to establish that:
(i) a power of sale without the intervention of the court is expressly conferred on the mortgagee by the mortgage deed, and

(ii) the mortgagee is Government. This clause is applicable only where the mortgagee is the Government and does not extend to any other person. It applies both to the State Governments and the Central Government.

13.3.    Requirement of Section 69(1)(c):

Section 69(1)(c) requires that-

(i) a power of sale without the intervention of the court must have expressly been conferred on the mortgagee by the mortgage deed, and

(ii) the mortgaged property, or any part thereof, must, on the date of the execution of the mortgage deed, have been situate within the towns of Calcutta, Madras, Bombay or in any other town, or area, which the State Government may, by notification in the Official Gazette, specify in this behalf.

Therefore, it is observed that the three cases mentioned in clauses (a), (b) and (c) of sub-section (1) of Section 69 of the Transfer of Property Act are independent and mutually exclusive. Clause (a) applies only where the mortgage is an English mortgage and the parties do not belong to certain religions, or sects, etc. Clause (b) applies to cases where the mortgagee is the Government. Under clauses (a) and (b), it is not necessary that the property mortgaged should be situated in any particular place. It may be situated in any part of India. But an essential condition of clause (c) is that the mortgaged property must be situated within any of the towns or area, specified in the clause.

13.4.    Conditions for exercise of power:

Section 69(2)(a) and Section 69(2)(b) specify the conditions for exercise of the power. These conditions are imperative and cannot be varied by an agreement between the parties. The power to exercise the right of sale arises when

(i)         (a) notice in writing requiring payment of the principal money has been

served on the mortgagor, or on one of several mortgagors, and

(b) default has been made in payment of the principal money, or of part thereof, and

(c) such default has continued for three months after such service; or

(ii)               some interest under the mortgage amounting at least to five hundred rupees is

(a)    in arrear, and

(b) remains unpaid for three months after becoming due.

Conditions (i) and (ii) are in the alternative. It is sufficient if any one of them is fulfilled.
The power of sale under Section 69(1) can be exercised by the mortgagee only when the conditions under Section 69(2) are fulfilled.

No notice is necessary when default is made for the payment of interest. It is sufficient that interest under the mortgage amounting at least to five hundred rupees is in arrear and unpaid for three months after becoming due.

13.5.    Notice cannot be waived:

The notice required by Section 69(2) (a) is not only necessary but is imperative and even the period of three months cannot be curtailed by agreement of the parties.

13.6.    Secured creditor right to sell: Present Situation:

At present, an attempt has been made to change the situation by passing the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Act 54 of 2002), which protects the interests of the banks and other financial institutions by providing ways to recover their amounts by selling the assets of the mortgagor. Now, section 69 of the Transfer of Property Act, 1882 lost its relevance in the present scenario.

13.7.    Section 13 of the SARFAESI, Act 2002 overrides section 69 Transfer of Property Act, 1882:

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, fondly called by bankers as Securitisation Act, has recently been enacted conferring powers on banks and financial institutions, if they are secured creditors, to realize the securities by sale etc., without intervention of court. The Act contains a provision overriding the provision of Section 69 of the Transfer of Property Act, 1882. Sub-section (1) of Section 13 of the said Act reads as under:

“13. (1) Notwithstanding anything contained in Section 69 or Section 69-A of the Transfer of Property Act, 1882, any security interest created in favour of any secured creditor may be enforced, without the intervention of court or tribunal, by such creditor in accordance with the provisions of this Act.”

The provisions of the Act have been made applicable exclusively to banks and financial institutions as secured creditors to enforce their security interest with a view to recovering their debts. That is, if the banks and financial institutions are secured creditors having lent against securities like mortgage of immovable property, charge, hypothecation they can take over and sell such securities after giving 60 days’ notice to the borrowers so as to adjust the loan, without resort to litigation in a competent court of law. The provisions of the Act cannot be considered to have been extended to the secured creditors in general. In a nutshell, the Banks and Financial Institutions in the matter of recovery of their debts ex curia can ignore the provisions of Section 69 of the Transfer of Property Act, 1882 whereas other creditors have to file a suit in a competent court for recovery of the loan. Otherwise, Section 69 of the Transfer of Property Act, 1882 still remains on the statute and is applicable to other creditors who are not Banks and Financial Institutions. Hence the suggestion for the amendment to make the law uniform to all creditors who have lent against mortgage securities.


14.       Effect of SARFAESI Act, 2002 on the economy / banking sector:

The enactment of SARFAESI has been a major factor in improving the health of banks by enabling the banks to reduce their NPAs to substantially lower levels.  As per the information available with the RBI, the net NPA which stood at 7.63 per cent as in year 1998 has been reduced to 1.12 per cent by March, 2009. On account of availability of dual remedy, i.e., remedy under the SARFAESI and DRT Act, the banks and financial institutions have been able to substantially resolve the NPAs.


15.       Section 138 of the Negotiable Instrument Act: Boon for Banks and Financial Institutions:

Banks and Financial Institutions lend money to the borrowers, it may may secured or unsecured, but in both the cases borrowers is liable to pay the same in the form of equated monthly installments (EMIs) for which borrower is required to give post dated cheque for each installment equal to the tenure of the loan.

Before 1988 there being no effective legal provision to restrain people from issuing cheques without having sufficient funds in their account or any stringent provision to punish them in the vent of such cheque not being honoured by their bankers and returned unpaid. Of course on dishonour of cheques there is a civil liability accrued. However in reality the processes to seek civil justice becomes notoriously dilatory and recover by way of a civil suit takes an inordinately long time. To ensure promptitude and remedy against defaulters and to ensure credibility of the holders of the negotiable instrument a criminal remedy of penalty was inserted in Negotiable Instruments Act, 1881 in form of the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988, which were further, modified by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002.

Chapter XVII[42] of the Negotiable Instrument Act, 1881 specifically deals with the penalties in case of dishonour of certain cheques for insufficiency of funds in the accounts.

15.1.    Section 138 runs as dishonour of cheque for insufficiency, etc., of funds in the accounts:

Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall without prejudice to any other provisions of this Act, be punished with imprisonment for [“a term which may extend to two year”][43], or with fine which may extend to twice the amount of the cheque, or with both:
Provided that nothing contained in this section shall apply unless-

(a) The cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier.
(b) The payee or the holder induce course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer, of the cheque, [“within thirty days”][44] of the receipt of information by him from the bank regarding the return of the cheque as unpaid, and
(c) The drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

Explanation: For the purpose of this section, “debt or other liability” means a legally enforceable debt or other liability].

15.2.    Question of maintainability of criminal charge with a civil liability:
There is nothing in law to prevent the criminal courts from taking cognizance of the offence, merely because on the same facts, the person concerned might also be subjected to civil liability or because civil remedy is obtainable. Civil and criminal proceedings are co extensive and not exclusive[45].

15.3.    Shortcoming in Section 138 of Negotiable Instrument Act, 1881:

Though insertion of the penal provisions have helped to curtail the issue of cheque lightheartedly or in a playful manner or with a dishonest intention and the Banks and Financial Institutions are now feels more secured in receiving the payment through cheques. However there being no provision for recovery of the amount covered under the dishonoured cheque, in a case where accused is convicted under section 138 and the accused has served the sentence but, unable to deposit amount of fine, the only option left with the complainant is to file civil money recovery suit. The provisions of the Act do not permit any other alternative method of realization of the amount due to the complainant on the cheque being dishonored for any specified reason. The proper course to be adopted by the complainant in such a situation should be by filing a suit before the competent civil court, for realization/ recovery of the amount due to him for the reason of dishonoured cheque.

16.       Reserve Bank of India Guidelines for the recovery of loans:

A more comprehensive version of Guidelines was recently released on April 24, 2008. The Guidelines expressly reference the 5.5.2003 Guidelines at (ix)[46] with regard to the methods by which recovery agents collect on security interests. In addition, the April 24, 2008 Guidelines further referred paragraph 6 of the “Code of Bank’s Commitment to Customers” (BCSBI Code) pertaining to collection of dues.

RBI has expressed its concern about the number of litigations filed against the banks in the recent past for engaging recovery agents who have purportedly violated the law. In the letter accompanying its April 24th, 2008 Guidelines on Engagement of Recovery Agents, RBI stated: “In view of the rise in the number of disputes and litigations against banks for engaging recovery agents in the recent past, it is felt that the adverse publicity would result in serious reputational risk for the banking sector as a whole.” RBI has taken this issue seriously, as evidenced by the penalty that banks could face if they fail to comply with the Guidelines.

The relevant portion of the Guidelines formulated by RBI is set out as under:

Banks, as principals, are responsible for the actions of their agents. Hence, they should ensure that their agents engaged for recovery of their dues should strictly adhere to the above guidelines and instructions, including the BCSBI Code, while engaged in the process of recovery of dues.

Complaints received by Reserve Bank regarding violation of the above guidelines and adoption of abusive practices followed by banks’ recovery agents would be viewed seriously. Reserve Bank may consider imposing a ban on a bank from engaging recovery agents in a particular area, either jurisdictional or functional, for a limited period. In case of persistent breach of above guidelines, Reserve Bank may consider extending the period of ban or the area of ban. Similar supervisory action could be attracted when the High Courts or the Supreme Court pass strictures or impose penalties against any bank or its Directors/ Officers/ agents with regard to policy, practice and procedure related to the recovery process.

It is expected that banks would, in the normal course ensure that their employees or agents also adhere to the above guidelines during the loan recovery process.”


17.       Role of Lok Adalat’s in the recovery of bank dues:

The lok adalat is an effective mechanism for the settlement of banks dues. The lok adalat, as the word suggests, is organized for the “Lok” or for the people, thus aiming to the benefit of the masses and thereby strengthening the legal services.

The Legal Service Authority Act, 1987 gives a Lok Adalat a legal structure, conferring on it the power of the civil court, thereby formalizing the structure.

Preferring the lok adalat route to the time-consuming process of fighting civil cases in courts, banks have started queuing up at the State Legal Service Authority to recover bad loans.

On January 6, 2010 the Tamil Nadu State Legal Service Authority conducted an exclusive mega lok adalat for the Central Bank of India and helped the bank to dispose of 226 cases and recover a whopping Rs 11.2 crore on a single day. A total of 1,430 cases had originally been listed for hearing[47].

Lok adalats, the most popular of all alternative disputes redressal (ADR) mechanisms, are very effective in bringing about expeditious remedy because the settlements are done after mutual consultation and consent. The settlement is final, as neither of the parties can appeal against the lok adalat ruling. No court fee too needs to be paid for the exercise.

Pointing out that the Legal Services Authority Act had provisions to hear pre-litigation cases, T. Mathivanan, member-secretary of the TNSLSA, said it would reduce the burden on judicial forums, as in case of non-settlement of these disputes they would end up as civil suits in courts[48].

Therefore, now the time has ripe to grant the Lok Adalat a formal structure and to establish it as compulsory pre trial mechanism, as well as an optional settlement mechanism at any other stage of the trial, in the dispute.


18.       Suggestions:

18.1.    Central Registry : Need of the Hour:

The Central Government may, by notification, set up or cause to be set up  a registry to be known as Central Registry with its own seal for the purpose of registration of securitization and reconstruction of financial asset  and creation of security interest under SARFAESI Act, 2002[49].

Where the borrower is a company, there is a strong mechanism in place to verify the charges created by a company on its assets by way of searching the records of the company maintained with the concerned Registrar of Companies. However, there is no mechanism to verify such charges/encumbrances created by any individual, person, HUF, association of persons or any other entity (other than incorporated company). Therefore, it was a welcome step when the SARFAESI envisaged the establishment of a central registry for maintaining data relating to the charges created on any asset by any person.

Sections 20-26 of SARFAESI Act, 2002 relate to the concept of central registry. The Act came into force in the year 2002, but it is disappointing to note that the government has till date not notified the sections on establishing the central registry. Once the central registry is established and notified, substantial benefits will accrue to the lenders and innocent third parties. Some of these benefits are listed below:

a. Charges/encumbrances created on any asset by any unregistered entity including individuals, HUF, association of persons can be easily tracked and the information can be readily available.

b. Chances of use of false title deeds or false representations on the title of the assets can be eliminated. Accordingly, fraud on title of properties can be controlled, minimised and eliminated.

c. Due diligence on portfolio securitization can be eased out.

d. Due diligence on sale and purchase of assets/properties would become easy and transparent.

e. Gullible public and innocent buyers who are generally left in the hands of unscrupulous real estate brokers and builders can be saved and their interests protected.
f. Data on charged and encumbered properties can be made available in a transparent manner giving the industry reflection and exposure of the Lenders on such assets.

g. Once such a central registry is established the possibility of protecting the property in the nature of the title insurance on real estate properties can emerge in a big way.

As of date, the land records are not computerised in all the states and thus tracing the title to all the properties is still a complex problem. With the creation of a central registry, the lender can have a fair sense of the risk being undertaken by them to provide finance against the property, thereby making lending more easily and safely.


19.       Conclusion:

As we say above no law which deals with the recovery of the loan disbursed by the Banking and Financial Institutions are complete in itself, if we talk about the ordinary money recovery suit filed under the civil procedure in the Civil Court it will take a long to decide, and the laws which specifically deals with the recovery matters like Recovery of Debts Due to Banks and Financial Institutions Act 1993, it only competent to deals with the unsecured loan and for secured loan the remedy under it is not up to the mark and on the other hand the proceeding under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 deals specifically with the secured loan i.e. asset and there are lots of complications under the Act for obtaining possession without the intervention of the court and for taking peaceful and lawful possession the Banks and Financial Institutions will constrained to file an application for support before the Chief Metropolitan Magistrate or District Magistrate, which is itself a time taking process. So far as the provision of section 138 of Negotiable Instrument is concerned, it is competent only to put a defaulter behind the bars and do not provide any expeditious remedy for the recovery of the cheque amount. Thus, in all the aforesaid remedies are not complete in itself and dependent on others, which lead to the multiciplicity of the litigation and which directly or indirectly responsible of the pendency of cases in the Court of Law.


[1]…recovery…loans-only…/22687/United States visited on 25.08.10.

[2] bank-loans-only-throug /22687/ posted

on 07.02.2007 visited on 25.08.10.

[3] 2008 (7) SCC532

[5] (2002) 4 SCC 275.

[6] AIR 1995 Del 323.

[7] AIR 2001 Kant 176.

[8] Mardia Chemicals Ltd. v. Union of India AIR 2004 SC 2371.

[9] Section 31 of the the SARFAESI Act, 2002.

[10] Section 2(1)(z) of the SARFAESI Act, 2002.

[11] AIR 2004 SC 2371

[12] Section 2(1)(b) of the SARFAESI Act, 2002.

[13] Section 2(1)(k) of the SARFAESI Act, 2002.

[14] 2003(3) BC 626 (AII) (DB).

[15] Section 11 of the SARFAESI Act, 2002.

[16] Section 13(2) of the SARFAESI Act, 2002.

[17] Section 13(3) of the SARFAESI Act, 2002.

[18] Section 13(3A) of the SARFAESI Act, 2002.

[19] 13(4)(a) of the SARFAESI Act, 2002.

[20] 13(4)(b) of the SARFAESI Act, 2002.

[21] 13(4)(c) of the SARFAESI Act, 2002.

[22] 13(4)(d) of the SARFAESI Act, 2002.

[23] 13(6) of the SARFAESI Act, 2002.

[24] Section 13(7) of the SARFAESI Act, 2002.

[25] Section 13(8) of the SARFAESI Act, 2002.

[26] Section 13(10) of the SARFAESI Act, 2002.

[27] Section 14 of the SARFAESI Act, 2002.

[28] 2004 (1) Bank J 613 (Guj).

[29] Section 17 of the SARFAESI Act, 2002.

[30] Section 17(3) of the SARFAESI Act, 2002.

[31] Section 13(4) of the SARFAESI Act, 2002.

[32] Section 13(5) of the SARFAESI Act, 2002.

[33] Section 17A of the SARFAESI Act, 2002.

[34] 2006(4) BC 222 (AP).

[35] 2006 (133) Comp. Cas. 937 (Gau)

[36] Section 18B of the SARFAESI Act, 2002.

[37] 2004 (4) SCC 311.

[38] 2004 (2) BC 94 (DRT, Ranchi).

[39] (2008) 1 SCC 125.

[40] (2008) 7 SCC 532.

[41] (2007) 6 Mah LJ 231 (Bom)

[42] Inserted by Act 66 of 1988, sec. 4 (w.e.f. 1-4-1989).

[43] Substituted by Act 55 0f 2002, sec. 7 for “a term which may extended to one year” (w.e.f. 6-2-2003).

[44] Substituted by Act 55 of 2002, sec. 7, for “within Fifteen days” (w.e.f. 6-2-2003).

[45] Smt.Gayathri v. Smt.Clement Mary 2003 (Karnataka).

[46] “(ix) A reference is invited to (a) Circular DBOD.Leg.No.BC.104/ 09.07.007 /2002-03 dated May 5, 2003 regarding Guidelines on Fair Practices Code for Lenders (b) Circular DBOD.No.BP. 40/ 21.04.158/ 2006-07 dated November 3, 2006 regarding outsourcing of financial services and (c) Master Circular DBOD.FSD.BC.17/ 24.01.011/2007-08 dated July 2, 2007 on Credit Card Operations.

[48] Ibid.

[49] Section 20 of the SARFAESI Act, 2002.



Economists have proven that the wider the freedom of choice is, the higher the level of social welfare. In addition, wider choice implies greater respect for human rights. When an alternate concept such as Islamic banking is introduced, a new choice is open to the market, with obvious social and economic benefits.

Competition, not just between Islamic banks, but between Islamic banks and traditional banks would ensure a promising future to the banking industry. The future of banking in India rests upon the ability of banks to continue facing challenges with resourcefulness and creativity. Islamic banks merit an entry into the Indian financial system precisely because they have proven to face challenges with resourcefulness and creativity within the framework of social and economic justice across the world.

Contrary to assertions that there is a gap between the theory of Islamic finance and its practical implementation vis-a-vis conventional banking, the fact that Islamic finance has functioned with remarkable success the world over, suggests that such assertions should not be taken to restrain the entry of Islamic banking in India. Indeed, the Wall Street Journal has described Islamic finance as “an international quasi-parallel financial system” that stretches from “the US, Europe, Africa and the Middle East into the Indian subcontinent to the Far East.” Strangely, despite the important role India plays in the world economy, it has not allowed Islamic banking to enter its financial system. 

It is to make participative and responsive banking. Overall, while the people will gain from the introduction of Islamic banking, it should not be obligatory. The people can voluntarily choose from the different mode of financial services.

Accordingly, in the recent Judgement of Surbahmaniam Swamy vs State of Kerala, the honourable Kerala High Court held that there is no doubt that acceptance of Shariah banking will not arise only from the religious consideration but also from the fact that Shariah banking has an added facet to it i.e. interest-free banking. Thus, apart from the religious aspect, the rational aspects of Shariah banking should be highlighted to bring about its acceptance. One must look beyond the word ‘Shariah’ or ‘Islamic’ and must focus on the rational aspects of Islamic banking.

A ‘socialist, secular, democratic republic’ must always strive for inclusive growth so that the poor benefits. This is in accordance with the socialist principles in our Constitution.

The Court emphasized Islamic banking cannot be ignored on a narrow interpretation of the ‘secularism’. Certainly, including Islamic banking would only be in accordance with the principle of ‘secularism’ in our Constitution. Indeed, perceptions of Islamic banking should not be based on myths that suggest a wholly religious motive behind introducing Islamic banking.

Justice is one of the ideals on which our Constitution of India is based, and government policies strive to achieve economic justice. Islamic banking is based on equity, justice and fairness besides ensuring mobilisation in both resources and investment of the resources.

Banking runs not on identities or convictions, it runs on finance. Thus, the financial aspect must be recognized and not merely the Islamic aspect of interest-free banking. Nevertheless, the essence of the message of all religion calls for setting up norms and standard for human behaviour which extent to economic arena too. The presence of this economic commonality amongst different faiths implies that the word ‘shariah’ should be considered in pure economic and social benefits it entail and not which signify one particular faith only.

However, the court did not go into question of feasibility of Islamic banking under the supervision of Reserve bank of India. The Indian banking regulatory system does not permit the establishment of Islamic banks per-se. However, it does provide for the establishment of a variety of bank-like activities which can include Islamic-compliant transactions. Hence, the Islamic financial institutions – like interest free credit associations, interest free financial companies, and Islamic investment funds- operate as bank substitutes in the existing scheme  nbmof Non Banking Finance Companies Reserve (NBFCs) Bank Directives 1997 RBI (Amendment) Act 1997. A separate legislation can offer ample flexibility to synchronize the Shariah principals and the prevailing banking and investment laws and regulations of the jurisdiction in the current financial institutional set-up of the country.

The question that the secular government need to ask itself is, is it serious about Islamic financial system? Does government want to carry on financial transactions – considering the boost it can give to the overall economy of the country – as much as possible on Shariah principles? If the answer is yes, then it must come up with a statue which provides credibility to this alternate system of banking.

It is suggested that government should pay heed to high level committees’ reports which ironically have not been made public. If assuming purpose of the committee is not solved to know insights into how Islamic Finance is developing around the world, as well as evaluating the opportunities and challenges ahead, it should be done.

In these conditions, there is urgency to successfully implement the optimistic advancements and reforms in the banking sector to maximise the substantial prospects that lie ahead in this hitherto untapped area of Islamic finance.

Para-Banking activities and A Checklist for Indian Banks



Para Banking is a kind of banking wherein money is accepted for the purpose of saving from an individual as in case of a normal banking function. The acceptance of money under Para Banking is scheduled daily, monthly, quarterly, half yearly, yearly and even for fixed period for more than 01 year.


Other than the above mentioned function of accepting the money for saving schemes, Para banking also provides secured loan and pre-maturity facilities against the amount in the saving scheme.


The only major differentiation between a normal banking and Para Banking is that, under Para Banking one cannot option for current account facility and carry its day-to-day transaction for accepting and withdrawal of funds. Also, a depositor can’t issue any cheque’s against the amount in its Para banking saving schemes. Rather there is no concept of cheque system in Para banking.


One connects Para Banking activities to a Fixed Deposits facility provided by bank. Though the amount deposited under Para Banking Saving schemes is for a fixed period and it fetches fix sum of interest on its deposits, the major differentiation between Para banking Saving Schemes and Fixed Deposit Schemes of banks is that, an individual has the option of depositing Daily under Para banking. Whereas the only option under Fixed Deposit Schemes for the depositor is to deposit weekly, forth nightly, monthly and so on.


Para – Banking targets all class of individuals for their depositor schemes. Their intension was to encourage all class of individuals towards saving habits since the key success of any economy is the saving structure in the country. Thus the Para Banking launched various schemes considering the daily wage earner to the businessmen.


In Para-Banking majority of population are daily wage earners (i.e.) Small shopkeepers, hawkers, Auto rickshaw and taxi drivers etc. who hardly understand the importance of savings for their future periods. Not only that, their basic earning hardly supports them to save any amount. And over and above to all such problems, they hardly have proper infrastructure and facilities to deposit in banks since there are very few banks in rural areas.




The 1906 Swadeshi Revolution encouraged many cooperative bank to start up. With this unqualified and selfish entrepreneurs started operating such banks with unclear banking regulations of the government. This resulted into unsuccessful banking scenario and difficulties in growth of this banking sector.


The major drawback was the bankruptcy of many banks (i.e.) 108 banks during 1913 -1917, 372 banks during 1922 – 36 and 620 banks during 1937 – 48. This resulted in discomfort and insecurity amongst the general citizens and their confidence for banking sector was challenged.


In 1929 Central Banking Enquiry Committee investigate the following reasons for the


Failure for the current banking scenario:

1) Low level of Liquid Assets.

2) Unofficial business relationship between non- banking and banking officials.

3) Long term loans on short term deposits.

4) No proper guidelines from government or banking authorities.

5) Unlimited liabilities / irregular Credit policies / unqualified Directors.


After considering the above major drawbacks, government launched Banking companies’


regulation Act and Banking Branches Prohibition Act in the year 1946.




Banks can undertake certain eligible financial services or para-banking activities either departmentally or by setting up subsidiaries. Banks may form a subsidiary company for undertaking the types of business which a banking company is otherwise permitted to undertake, with prior approval of Reserve Bank of India. The instructions issued by Reserve Bank of India to banks for undertaking certain financial services or para-banking activities as permitted by RBI have been compiled in this Master Circular.




Under the provisions of Section 19(1) of the Banking Regulation Act, 1949, banks may form subsidiary companies for undertaking types of banking business which they are otherwise permitted to undertake [under clauses (a) to (o) of sub-section 1 of Section 6 of the Banking Regulation Act, 1949], carrying on the business of banking exclusively outside India and for such other business purposes as may be approved by the Central Government. Prior approval of the Reserve Bank of India should be taken by a bank to set up a subsidiary company.




Under the provisions of Section 19(2) of the Banking Regulation Act, 1949, a banking company cannot hold shares in any company whether as pledgee or mortgagee or absolute owner of an amount exceeding 30 per cent of the paid-up share capital of that company or 30 per cent of its own paid-up share capital and reserves, whichever is less. Besides, the investment by a bank in a subsidiary company, financial services company, financial institution, stock and other exchanges should not exceed 10 per cent of the bank’s paid-up share capital and reserves and the investments in all such companies, financial institutions, stock and other exchanges put together should not exceed 20 per cent of the bank’s paid-up share capital and reserves.




With the prior approval of the Reserve Bank of India, banks can form subsidiary companies for undertaking equipment leasing, hire purchase business and factoring services. The subsidiaries formed should primarily be engaged in any of these activities and such other activities as are incidental to equipment leasing, hire purchase business and factoring services. In other words, they should not engage themselves in direct lending or carrying on of activities which are not approved by the Reserve Bank and financing of other companies or concerns engaged in equipment leasing, hire purchase business and factoring services.




The permitted structure of Primary Dealership (PD) business has been expanded to include banks and banks fulfilling the following minimum eligibility criteria may apply to the Reserve Bank of India for approval for undertaking Primary Dealership (PD) business.


The following categories of banks may apply for PD licence:


(i) Banks, which do not at present, have a partly or wholly owned subsidiary and fulfill the following criteria:


a. Minimum Net Owned Funds of Rs. 1,000 crore.

b. Minimum CRAR of 9 percent

c. Net NPAs of less than 3 percent and a profit making record for the last three years.


(ii) Indian banks, undertaking PD business through a partly or wholly owned subsidiary and proposing to undertake PD business departmentally by merging/ taking over PD business from their partly/ wholly owned subsidiary should fulfill the criteria mentioned in 6.1.(i) (a) to (c) above.


(iii) Foreign banks operating in India, proposing to undertake PD business departmentally by merging the PD business being undertaken by group companies should fulfill criteria at 6.1.(i) (a) to (c).




(i) Prior approval of the RBI should be obtained by banks before undertaking mutual fund business. Bank-sponsored mutual funds should comply with guidelines issued by SEBI from time to time.


(ii) The bank-sponsored mutual funds should not use the name of the sponsoring bank as part of their name.


(iii) Banks may enter into agreements with mutual funds for marketing the mutual fund units subject to the following terms and conditions:


a) Banks should only act as an agent of the customers, forwarding the investors’ applications for purchase / sale of MF units to the Mutual Funds/ the Registrars / the transfer agents.


b) Banks should not acquire units of Mutual Funds from the secondary market.


c) Banks should not buy back units of Mutual Funds from their customers.


d) If a bank proposes to extend any credit facility to individuals against the security of units of Mutual Funds, sanction of such facility should be in accordance with the extant instructions of RBI on advances against shares / debentures and units of mutual funds.


e) Banks holding custody of MF units on behalf of their customers, should ensure that their own investments and investments made by / belonging to their customers are kept distinct from each other.


f) Banks should put in place adequate and effective control mechanisms in this regard. Besides, with a view to ensuring better control, retailing of units of mutual funds may be confined to certain select branches of a bank.




Banks may introduce smart/on-line debit cards with the approval of their Boards, keeping in view the Guidelines by RBI. In the case of debit cards, where authorization and settlement are off-line or where either authorization or settlement is off-line, banks should obtain prior approval of the Reserve Bank of India for introduction of the same by submitting the details on the mode of authorization and settlement, authentication method employed, technology used, tie-ups with other agencies/service providers (if any), together with Board note/Resolution. However, only banks with networth of Rs.100 crore and above should undertake issue of off-line debit cards. Banks cannot issue smart/debit cards in tie-up with other non-bank entities. Banks should review operations of smart/debit cards and put up review notes to their Boards at half-yearly intervals, say at the end of March and September, every year. A report on the operations of smart/debit cards issued by banks should be forwarded to the Department of Payment and Settlement Systems (DPSS) with a copy to the concerned Regional Office of Department of Banking Supervision on a half yearly basis, say at the end of March and September every year.




Any bank intending to undertake insurance business should obtain prior approval of Reserve Bank of India before engaging in such business. Banks may, therefore, submit necessary applications to RBI furnishing full details in respect of the parameters as specified in the above guidelines, details of equity contribution proposed in the joint venture/strategic investment, the name of the company with whom the bank would have tie-up arrangements in any manner in insurance business, etc. The relative Board note and Resolution passed thereon approving the bank’s proposal together with viability report prepared in this regard may also be forwarded to Reserve Bank. However, insurance business will not be permitted to be undertaken departmentally by the banks. Further, banks need not obtain prior approval of the RBI for engaging in insurance agency business or referral arrangement without any risk participation, subject to certain conditions by RBI.




Banks may undertake Pension Funds Management (PFM) through their subsidiaries set up for the purpose. This would be subject to their satisfying the eligibility criteria prescribed by PFRDA for Pension Fund Managers. PFM should not be undertaken departmentally. They should obtain prior approval of Reserve Bank of India before engaging in such business. The relative Board Note and Resolution passed thereon approving the bank’s proposal together with a detailed viability report prepared in this regard may also be forwarded to Reserve Bank.




Reserve Bank had observed that some banks/their subsidiaries were providing buy-back facilities under the name of ‘Safety Net’ Schemes in respect of certain public issues as part of their merchant banking activities. Under such schemes, large exposures are assumed by way of commitments to buy the relative securities from the original investors at any time during a stipulated period at a price determined at the time of issue, irrespective of the prevailing market price. In some cases, such schemes were offered suo motto without any request from the company whose issues are supported under the schemes. Apparently, there was no undertaking in such cases from the issuers to buy the securities. There is also no income commensurate with the risk of loss built into these schemes, as the investor will take recourse to the facilities offered under the schemes only when the market value of the securities falls below the pre-determined price. Banks/their subsidiaries have therefore been advised that they should refrain from offering such ‘Safety Net’ facilities by whatever name called.




There is no objection to banks offering referral services to their customers for financial products subject to the following conditions:


The bank/third party issuers of the financial products should strictly adhere to the KYC/AML guidelines in respect of the customers who are being referred to the third party issuers of the products.

1.The bank should ensure that the selection of third party issuers of the financial products is done in such a manner so as to take care of the reputational risks to which the bank may be exposed in dealing with the third party issuers of the products.



2.The bank should make it explicitly clear upfront to the customer that it is purely a referral service and strictly on a non-risk participation basis.



3.The third party issuers should adhere to the relevant regulatory guidelines applicable to them.



4.While offering referral services, the bank should strictly adhere to the relevant RBI guidelines.




Para-banking has been a part of the Indian financial services sector for some time now. There is an increasing need for various financial services at low affordable costs, particularly for the vast sections of disadvantaged and low income groups.


This can truly improve the standard of living for these segments. The need for para-banking should be evaluated in the context of financial inclusion and regulatory framework for supervision.


Para-banking activities, including bancassurance, depository service, like insurance, MFs, credit and debit cards, etc, have helped increase the reach of the banks and brought a vast segment of the population into the fold of basic financial services.


Thus, direct lending by banks, use of self-help groups and MFIs for indirect lending, use of post offices, local organisations and cooperatives as agents, focus on RRBs, the revamp of the cooperative credit structure, both urban and rural, NBFCs purveying micro-finance and even the possible use of accredited loan providers under money lending legislation, all these reflect this approach.


NBFCs and banks through their para-banking activities have played a useful role in financing various sectors of the economy. Considering the current scenario of branch banking, it will take some more time to reach the wider population across the country and provide financial services in a cost-effective manner from the larger banks.


Accordingly, there is room for regional or niche players to step in and meet the customer requirements in remote areas or the requirements of small ticket size segments in a cost-effective manner. On the other hand, para-banking services have to be carefully regulated and supervised by the regulator both on financial health of the service provider as well as customer protection.


Small and regional players become more difficult to regulate and supervise. Accordingly alternative models permitting franchisees or alliances between large institutions and regional players may provide an effective way upgrading smaller players.


Whilst there is a greater need for para-banking services for the wider population and supporting greater participation in the financial services “network coverage”, it is important to evolve new workable models for appropriate supervision.






Shishir Akhouri

IVth Yr.,B.B.A LL.B

Symbiosis Law School