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The Companies Act, 2013 is applicable to almost all kinds of companies. But the question arises as to whether such provisions under the Act are also applicable to banking companies? This article analyses the applicability as well as the implications imposed by the Companies Act, 2013 in case of banking companies. It also analyses the various provisions under the special act for banking companies, i.e. the Banking Regulation Act, 1949 and provides an overview of the Act.
Applicability of Companies Act
The Companies Act, 2013 is applicable to the following sets of body corporates as per Section 1 of the Act-
- Any company that has been incorporated under the 2013 Act or any previous Company law legislations;
- Insurance companies (as long as it is not inconsistent with the Insurance Regulatory and Development Act, 1999 or the Insurance Act, 1938);
- Banking Companies (as long as it is not inconsistent with the Banking Regulation Act, 1949);
- Electricity generating or electricity supplying companies (as long as it is not inconsistent with the Electricity Act, 2003);
- Other companies incorporated under Special Acts (as long as it is not inconsistent with the special act);
- Any body corporate that is notified by the Central Government
In terms of Banks
The Section 1(4)(c) of the Companies Act, 2013 expressly states that the Act is applicable to banking companies as well, to the extent that it is consistent with the Banking Regulation Act, 1949. Furthermore, Section 2(39) of the Companies Act, 2013 states that even a scheduled bank is included within the definition of a financial institution.
Implication of Companies Act, 2013 on Banks
The following Sections affect Banks considerably under the Companies Act-
- Section 67(2), which provides the restriction to give out loans by companies covered under the Act for the purchase of its shares is expressly made inapplicable to banks, where such loans are given in the normal course of business.
- Section 70, which prohibits the company to issue buy-backs in certain cases, stipulates that where there is any default of payment to the credit facility of a bank, there is a prohibition on such company to issue any buy-backs of shares.
- Section 73 prohibits the acceptance of deposits from the public as otherwise provided under the Act. It is however, inapplicable to banking companies.
- Section 129(1) which provides the compliances for filing financial statements is also inapplicable to banking companies as the provisions under the Banking Regulation Act, 1949 are applicable in this case.
- The part regarding borrowing of monies under Section 179 is not applicable to banking companies who take a loan from other banks, the Reserve Bank of India or other State Banks.
- Section 180 states that a special resolution is to be passed by the Board to accept deposits from the public, however, it provides further that such acceptance of deposits from public by banks, in the normal course of business, are not covered under the purview of this section.
- Section 185, which provides restrictions on the directors to take loans from the company also states that the restrictions are not applicable to lending companies where such loans are given out in the ordinary course of business and at the standard rate as provided by the Reserve Bank of India.
- Furthermore, any guarantee or security that is provided by a holding company regarding a loan made by a bank to its subsidiary company is exempted from the loan requirement under Rule 10, Chapter 12.
- Only Section 186(1) is applicable on banking companies and the other sub-sections under Section 186 are not applicable to banking companies where the loan, guarantee or security is made in the ordinary course of business.
- Section 186 makes is mandatory to get the approval of the respective banks before it makes any inter-corporate loan, guarantee, investment or security to any person, where the company defaults in the repayment of loan to the banks.
- Where a company defaults in the repayment of loan to banks, it cannot issue shares with differential voting rights.
- Where the outstanding loans of the company exceed Rs. 100 Crores from banks or financial institutions, in the preceding financial year, the company is required to appoint an internal auditor.
- The class action suit in case of oppression and mismanagement under Section 245 is not applicable to banking companies.
- Any listed company whose borrowings from the banks or financial institutions exceed Rs. 50 Crore in aggregate has to also establish a vigilance mechanism.
- The sections pertaining to appointment of nominee directors as lending contracts are also applicable to Non-Banking Financial Companies or NBFCs as long as the loan agreement provides for the requisite power. In simple terms, if the power is provided by the loan agreement, even NBFCs can appoint nominee directors in the borrowing company’s board of directors.
Banking Regulation Act, 1949
The following provisions under the Banking Regulation Act, 1949 are necessary for consideration by Banking Companies-
Who can manage or be employed a banking company?
- Managing agent;
- A person who is or has been an adjudicated insolvent; suspended payment or compounded payments with his creditors; convicted of a crime involving moral turpitude;
- A person who is being paid remuneration (except bonus and commission to any broker);
- A person whose remuneration is excessive.
A banking company can pay salary but not remuneration (for e.g., 10% of profits) to ensure the integrity of the employees.
Consideration of RBI- Sec. 10(2)
The RBI considers the following while determining excessive remuneration-
- “the financial condition and history of the banking company, its size and area of operation, its resources, the volume of its business, and the trend of its earning capacity;
- the number of its branches or offices;
- the qualifications, age and experience of the person concerned;
- the remuneration paid to other persons employed by the banking company or to any person occupying a similar position in any other banking company similarly situated; and
- the interests of its depositors.”
Sec. 10 (1)(c) Restriction on managing a banking company
The following persons cannot manage a banking company-
- a director of any other company (except a subsidiary of banking company or a company under S.25 of the Companies Act, 1956)
- a person engaged in another business or job
- a person whose term of managing office is exceeding 5 years at a time.
At least 50% of the BOD should have special knowledge in one or more of the following fields-
- agriculture and rural economy,
- small-scale industry,
- any other matter the special knowledge of, and practical experience in, which would, in the opinion of the Reserve Bank, be useful to the banking company
Further, at least two persons should have knowledge in respect of agriculture and rural economy, co-operation or small-scale industry.
Restrictions on directors
- The Directors cannot be connected with any company or any firm. (exceptions present)
- The Directors cannot indulge in proprietorship of any trading, commercial or industrial concern.
- The Directors (except chairman and whole time director) cannot hold office continuously for more than 8 years.
- A chairman or whole time director who has been removed from office ceases to be a director and cannot be elected as a director for 4 years.
- S. 16- A director of one banking company cannot be a director of another banking company. No more than 3 directors are entitled to exercise voting rights that are in excess of 20% of the total voting rights. Such provision is not applicable to the director appointed by RBI.
Whole Time Chairman -Section 10B
- Only whole time chairman can manage the banking company subject to the supervision of the BOD.
- For a part-time chairman, prior approval and adherence to conditions imposed by RBI is necessary. Such company would be managed by a managing director who would be subject to the supervision of the BOD.
- Tenure of the whole time chairman– a maximum of 5 years, however, eligible for re-election.
- A whole time chairman can also be a director of a charitable company or of a subsidiary of the banking company.
- Qualifications of whole time chairman- Special knowledge and practical experience of
- “the working of a banking company, or of the State Bank of India or any subsidiary bank or a financial institution, or
- financial, economic or business administration”
- Disqualifications of Whole time chairman-
- Director of any company, trading, commercial or industrial concern
- Partner of any firm
- Substantial interest in any firm or company
- Engagement in any other business or job
Power of RBI
- Section 10(B)(6)- The RBI has the power to order in writing to the banking company to elect or appoint any other person as the Whole time chairman id it deems that the present chairman is not a fit and proper person to hold such office. The banking company should have a reasonable opportunity to be heard. If the banking company fails to appoint such new person within 2 months, RBI can remove and appoint a new whole time chairman. Such person will hold office for the residue of the term of the precious whole time chairman.
- Section 10(B)(7)- Appeal against RBI’s decision can be made within 30 days to the Central Government. The decision of Central Government in this regard is final and cannot be questioned in a court of law.
- Section 10(B)(8)- The RBI can permit, in public interest, for any whole time chairman to undertake part-time honorary work as long as it does not interfere with the discharge of his duties in the banking company.
- Section 10(B)(9)- If the whole time manager dies or resigns or is by infirmity or otherwise rendered incapable of performing his duty, the banking company, with permission of RBI, make arrangements for a maximum of 4 months.
- Section 10BB- Power of RBI to appoint chairman- If the RBI believes that such vacancy will adversely affect the interests of banking company, it can appoint a new whole time chairman or managing director for such company. Maximum tenure- 3 years and eligible for re-appointment. He can only be removed by RBI. His pay and allowances are also determined by RBI.
- Section 10C- the WTC appointed by RBI is not required to hold qualification shares in the banking company.
- Section 10D- A person appointed under Section 10A, 10B or 10BB is not entitled to compensation for the loss or termination of office. This section has an overriding effect on other laws.
- Section 12A– The RBI may call for election of new directors in a general meeting, which may be conducted in not less than two months. Such elected director would hold office until the expiry of his predecessor’s term. No such election shall be questioned in a court of law.
RBI’s control over management
Part II-A, Control over management, inserted by Act 55 of 1963 (w.e.f. 1-2.1964).
- S. 36-AA. Power of RBI to remove Managerial and other persons
- S. 36-AB. Power of RBI to appoint additional directors
- S. 36-AA. Power of RBI to remove Managerial and other persons from office-
- RBI can remove the managerial or other personnel of a banking company through a reasoned order in writing for – public interest; to prevent the company for acting detrimentally to the interest of depositors or for the proper management of the company.
- Such an order can only be passed after giving such employees or managers a reasonable opportunity of making a representation. However, this compliance is not required if RBI is of the opinion that this would cause delay which would be detrimental to depositor’s interests.
- An appeal can be preferred against such order to the Central Government within 30 days of the passing of such order. Central Government’s decision in this regard is final and cannot be called into question in any court of law.
- A person who is removed from office under this section cannot be concerned with any banking company for a maximum of 5 years (as specified in the order).
- RBI can appoint a suitable person in case of such removals.
- Such person holds office during the pleasure of RBI for a maximum of 3 years or such further periods not exceeding three years at a time as specified. Such person is not liable for acts done in good faith.
- A person removed under this Section cannot claim compensation for loss or termination of office.
- 36AAA. Supersession of Board of directors of a multi-State co-operative bank
- 36AAB. Order of winding up of multi-State co-operative bank to be final in certain cases
- 36AAC. Reimbursement to Deposit Insurance Corporation by liquidator or transferee bank in case of multi-State co-operative banks
- Section 36AB- Power of Reserve Bank to appoint additional directors
- RBI can appoint additional directors in a banking company through a reasoned order in writing for – public interest; to prevent the company for acting detrimentally to the interest of depositors or for the proper management of the company.
- Such person holds office during the pleasure of RBI for a maximum of 3 years or such further periods not exceeding three years at a time as specified. Such person is not liable for acts done in good faith. He is not required to hold qualification shares in the company.
- To determine the proportion of directors, such additional director shall not be taken into account.
- Section 36AC- Section 36AA or 36AB has overriding effect over other laws.
- PART IIAB- Supersession of Board of Directors of Banking Company
Section 36ACA- Supersession of Board of Directors in certain cases RBI can supersede the BOD in a banking company through a reasoned order in writing for –to prevent the company for acting detrimentally to the interest of depositors or for the proper management of the company. Such period may not exceed 6 months.
 Banking Regulation Act, Act No. 10 of 1949, § 10(1)
 Banking Regulation Act, Act No. 10 of 1949, § 10(2)
 Banking Regulation Act, Act No. 10 of 1949, § 10(1)(c)
 Banking Regulation Act, Act No. 10 of 1949, § 10A
 Banking Regulation Act, Act No. 10 of 1949, § 16
 Banking Regulation Act, Act No. 10 of 1949, § 10B(1A)
 Banking Regulation Act, Act No. 10 of 1949, § 10B(2)
 Banking Regulation Act, Act No. 10 of 1949, § 10B(4)
 Ins. by Act 4 of 2013, sec. 10 (w.e.f. 18-1-2013, vide S.O. 192(E), dated 17-1-2013).