CAIIB – Objective Notes

Banking Regulations and Business Laws (BRBL)

Compiled by Sekhar Pariti

Book No 73 from The Banking Tutor

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 Preface
With a view to help the young Bankers in preparation for Promotion Tests or
Professional Examinations conducted by various Institutes, I am sharing Objective
Notes related to Banking Regulations and Business Laws (BRBL)

IIBF Syllabus consists the following 4 Modules –

Module A: Regulations and Compliance

Module B: Important Acts/Laws & Legal Aspects of Banking Operations - Part A

Module C: Important Acts/Laws & Legal Aspects of Banking Operations – Part B

Module D: Commercial & other Laws with reference to Banking Operations

In this Book I am providing objective Notes related to all the 4 modules.

I have, deliberately, avoided certain concepts and examples as they are very much
complicated and as their awareness is not compulsory to a Ordinary Banker.

Some important concepts/terms are explained in the Last Chapter.

I hope this Book may be useful to those Bankers who are appearing for Promotion
Tests, Certificate/Diploma Examinations conducted by various Institutes.

15-05-2023 Sekhar Pariti

+91 94406 41014

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 Syllabus 2023
Banking Regulations and Business Laws

Module A: Regulations and Compliance

Legal Framework of Regulation of Banks

Control over Organisation of Banks

Regulation of Banking Business

Returns, Inspection, Winding Up, Mergers & Acquisitions

Public Sector Banks, Private Sector Banks, Regional Rural Banks, Differentiated
Banks and Co-operative Banks, Local Area Banks

Non-Banking Financial Companies (NBFCs)

Financial Sector Legislative Reforms and Financial Stability and Development

Council

Module B: Important Acts & Legal Aspects of Banking Operations –

Part A

The Prevention of Money Laundering Act, 2002

Negotiable Instruments Act, 1881
Foreign Exchange Management Act, 1999
Payment & Settlement Systems Act, 2007
Law Relating to Securities and Modes of Charge

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 Module C: Important Acts & Legal Aspects Of Banking Operations

Part B

Reserve Bank – Integrated Ombudsman Scheme, 2021

The Micro, Small and Medium Enterprises Development Act, 2006
SARFAESI Act, 2002
The Recovery of Debts and Bankruptcy Act, 1993
Insolvency and Bankruptcy Code, 2016
The Bankers’ Books Evidence Act, 1891
The Legal Services Authorities Act, 1987:
The Consumer Protection Act, 2019
The Law of Limitation
Tax Laws

Module D: Commercial & Banking Laws

Law of Contracts
Different Types of Firms
The Companies Act
Limited Liability Partnership Act, 2008
Transfer of Property Act, 1882
The Right to Information Act, 2005
Information Technology Act, 2000
Prevention of Corruption Act, 1988

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 Banking Regulations and Business Laws
Module A: Regulations and Compliance
Index
Chapter No Topic

01 Legal Framework of Regulation of Banks

02 Returns, Inspection, Winding Up, Mergers & Acquisitions

03 Various types of Banks

04 Non-Banking Financial Companies (NBFCs)

05 Financial Sector Legislative Reforms and Financial Stability

and Development Council

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 01 Legal Framework of Regulation of Banks
Banking in India is mainly governed by the Banking Regulation Act, 1949 (BR Act)
and the Reserve Bank of India Act, 1934 (RBI Act)

The applicability of the provisions of the BR Act and RBI Act to a bank depends
on its constitution; that is, whether it is a statutory corporation, a banking
company or a co-operative society.

Banking is defined in Section 5(b) of the Banking Regulation Act, 1949.

A Bank necessarily performs two essential functions:

a) Acceptance of deposits from the public and

b) Lending or investment of such deposits.

The banker can accept “deposits” of money only and not anything else.

Accepting deposits from the “public” does not imply that a banker accepts
deposits from anyone who offers money for such purpose. Actually, a banker can
refuse to open accounts of undesirable persons and further, the opening of such
accounts is subject to fulfilment of certain conditions like proper identification and
compliance with Know Your Customer (KYC) norms etc..

The KYC guidelines issued by the Reserve Bank require banks to follow certain
customer identification procedure for opening of accounts for protecting the
banks from frauds, etc., and also for monitoring transactions of a suspicious
nature for the purpose of reporting to appropriate authorities for taking anti-
money laundering measures and combating financing of terrorism.

Deposits Withdrawable by Cheque: Under Section 49A ofthe Banking

Regulation Act, no person other than a banking company is authorised to accept
deposits withdrawable by cheque. However, this section shall apply to any savings
bank scheme run by the Government.

Acceptance of deposits by non-banking financial companies is regulated by

the Reserve Bank under the Non-Banking Financial Companies Acceptance of
Public Deposits (Reserve Bank) Directions, 1998 and other directions issued by it
under Chapter IIIB of the Reserve Bank of India Act.

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Licence for Banking: In India, it is necessary to have a licence from the Reserve
Bank under Section 22 of the Banking Regulation Act for commencing or carrying
on the business of banking.

Usage of the terms Bank, Banking or Banking Company - Every banking

company has to use the word “bank” as part of its name (vide, Section 7 of the
Act) and no company other than a banking company can use the words “bank”,
“banker”, “banking” as part of its name. Further, no firm, individual or group of
individuals is permitted to use the words “bank”, “banking” or “banking company”
as a part of the name or for the purpose of business.

Exemptions to Section 7 of RBI Act - Subsidiaries of banks and association of

banks in certain cases, as also Primary Credit Societies, a co-operative society
formed for the purpose of protection of mutual interest of co-operative banks
and any cooperative society, not being a primary credit society, formed by the
employees of a banking company, State Bank of India or nationalized banks are
exempted from this restriction regarding usage of the terms Bank, Banking or
Banking Company.

Banks and Trading Activities - Section 8 of the Banking Regulation Act prohibits
a banking company from engaging directly or indirectly in trading activities and
undertaking trading risks.

The State Bank of India was constituted under the State Bank of India Act, 1955
while the seven associate/subsidiary banks were constituted under the State Bank
(Subsidiary Banks) Act, 1959. Overtime the seven subsidiaries/associates were
merged with the parent SBI and this process was completed in the FY 2017-18.

Regional Rural Banks (RRBs) were constituted under the Regional Rural Banks
Act, 1976. These banks are governed by the statutes creating them as also some
of the provisions of the Banking Regulation Act and the Reserve Bank of India Act.

All the foreign companies (treated as Foreign Banks) which transact banking
business in India are governed by the Banking Regulation Act and the RBI Act with
regard to their business of banking.

A co-operative bank conducts ordinary banking business but is established on a

co-operative basis.

The history of Indian cooperative banking dates back to the enactment of Co-
operative Societies Act in 1904.
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One of the main objectives enshrined in the Co-operative Societies Act in 1904
was the establishment and growth of co-operative credit societies “to encourage
thrift, self-help and co-operation among agriculturists, artisans and persons of
limited means.”

If a co-operative bank is operating in more than one state, the Central Act i.e.
Multi State Co-operative Societies Act applies. In other cases, the respective State
Co-operative Societies Act would apply.

The Reserve Bank of India Act 1934

In 1921, the Imperial Bank of India was established to perform as central bank of
India by the British Government.

Hilton Young Commission recommended formation of a Central Bank (RBI).

Vide Reserve Bank of India Act, 1934 The Parliament of India has constituted RBI
for the purposes of taking over the management of the currency from the Central
Government and of carrying on the business of banking in accordance with the
provisions of this Act.

Though considered a body with considerable institutional independence, the RBI

is not a constitutional body. It was established under the Reserve Bank of India
Act, 1934. Crucially, Section 7 has never been invoked before.

First Governor of RBI - Osborne Smith (April 1, 1935, to June 30, 1937), a Banker.

Preamble of Reserve Bank of India Act, 1934 specifies the objective of RBI is to:

a) Regulate the issue of Bank notes

b) Keeping of reserves with a view to securing monetary stability in India

c) Operate the currency and credit system of the country to its advantage

The Reserve Bank of India (RBI) was established on April 1, 1935, in accordance
with the Reserve Bank of India Act, 1934. The Reserve Bank is permanently
situated in Mumbai since 1937.

In January, 1949, RBI was nationalized.

This act along with the Companies Act , which was amended in 1936, were meant
to provide a framework for the supervision of banking firms in India.

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The First Schedule of the RBI Act 1934 defines the 4 areas under which the Indian
states should come. The 4 areas are Western Area, Eastern Area, Northern Area,
Southern Area.

The RBI Act defines a Scheduled Bank. Second Schedule of The RBI Act contains
the definition of the scheduled banks. These are banks which were to have paid
up capital and reserves above 5 lakh.

There are total 61 Sections in the RBI Act 1934.

Section 7 of RBI Act 1934 states that central government can legislate the
functioning of the RBI through the RBI board, and the RBI is not an autonomous
body.

On 01-11-2018 , Central Government has used Section 7 Act 1934, for the first
time in 83 years have used and issued amendment to direct the central bank on
the necessary issues for the development of public.

The RBI Act 1934 does not directly deal with regulation of the banking system
except for Section 42, which provides for cash reserves of scheduled banks to be
kept with the Reserve Bank, with a view to regulating the credit system and
ensuring monetary stability.

Section 17 of the of RBI Act 1934 t defines the manner in which the RBI can
conduct business. The RBI Act 1934 deals with the constitution, powers and
functions of the Reserve Bank.

Section 18 of RBI Act 1934 deals with emergency loans to banks. The section 19 of
the Reserve Bank of India Act, 1934 states that the Reserve Bank of India has been
prohibited from (a) making loans or advances; (b) drawing or accepting bills
payable otherwise than on demand ; (c) allowing interest on deposits or current
accounts.

Section 20 of RBI Act 1934 narrates obligation of the RBI to transact Government
business.

Section 21 of RBI Act 1934 states that the RBI must conduct banking affairs for the
central government and manage public debt .

Section 22 of RBI Act 1934 states that only the RBI has the exclusive rights to issue
currency notes in India.

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Section 24 of RBI Act 1934 states that the maximum denomination a note can be
is ₹10,000.

Section 26 of RBI Act 1934 describes the legal tender character of Indian bank
notes.

Section 26 (2) deals with withdrawal of legal tender of notes.

Section 27 of RBI Act 1934 states that the RBI shall not re-issue bank notes which
are torn, defaced or excessively soiled.

Section 28 of RBI Act 1934 allows the RBI to form rules regarding the exchange of
damaged and imperfect notes.

Section 31 of RBI Act 1934 states that in India, only the RBI or the central
government can issue and accept promissory notes that are payable on demand.
However, cheques , that are payable on demand, can be issued by anyone.

Section 42 of RBI Act 1934 states that Cash Reserves of Scheduled Banks to be
kept with the Bank (RBI).

Section 42(1) of RBI Act 1934 says that every scheduled bank must have an
average daily balance with the RBI. The amount of the deposit shall be a certain
percentage of its net time and demand liabilities in India.

Section 45 U of RBI Act 1934 defines Repo, Reverse Repo, Derivative, Money
Market Instruments and Securities.

In the RBI Act the most controversial and confusing section is Section 7. Although
this section has been used only once by the central govt, it puts a restriction on
the autonomy of the RBI. Section 7 states that central government can legislate
the functioning of the RBI through the RBI board, and the RBI is not an
autonomous body.

The Reserve Bank of India Act, 1934 was enacted to constitute the Reserve Bank of
India and came into force from 6th March 1934.

The RBI Act, 1934 . It was legislated, with the primary aim ‘to regulate the issue of
Bank notes and the keeping of reserves with a view to securing monetary stability
in India and generally to operate the currency and credit system of the country to
its advantage’.

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The Banking Regulation Act 1949

The Banking Regulation Act is the fundamental law governing banking activity
and Banks in India.

Passed as the Banking Companies Act 1949, it came into force from 16 March
1949 and changed to Banking Regulation Act 1949 from 1 March 1966.

The Banking Regulation Act 1949 has 56 Sections in total. There were initially 55
Sections, but in 1965 the Banking Regulation Act 1949 was amended to include
Cooperative banks in the 56th section.

Objectives of the Banking Regulation Act are:

a) to safeguard the interest of depositors;

b) to develop banking institutions on sound lines; and

c) to attune the monetary and credit system to the larger interests and priorities
of the nation.

We see contents of some sections hereunder

Section 5 of BR Act interprets the terms Bank and Banking Company.

Section 6 of BR Act deals with the forms of business a bank can undertake.

Section 7 of BR Act deals with usage of word bank, banker , banking or banking
company. No company other than a banking company shall use as part of its
name in connection with its business] any of the words "bank", "banker" or
"banking" and no company shall carry on the business of banking in India unless
it uses as part of its name at least one of such words.

Section 8 of BR Act prohibits a Bank from engaging directly or indirectly in any

trading.

Section 9 of BR Act deals with disposal of non banking assets

As per Section 10 B of BR Act a Banking company to be managed by whole time

chairman.

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Section 10BB of BR Act deals with Power of Reserve Bank to appoint Chairman of
the Board of directors appointed on a whole-time basis or a managing director] of
a banking company.

As per Section 14 of BR Act, no banking company shall create any charge upon
any unpaid capital of the company, and any such charge shall be invalid.

As per Section 15 of BR Act, no banking company shall pay any dividend on its
shares until all its capitalised expenses have been completely written off.

In terms of Section 16 of BR Act (prohibition of common directors) - no banking

company incorporated in India shall have as a director in its Board of directors any
person who is a director of any other banking company.

As per Section 17 of BR Act, every banking company shall create a reserve fund
and out of the balance of profit of each year as disclosed in the profit and loss
account and before any dividend is declared, transfer to the reserve fund a sum
equivalent to not less than 20% of such profit.

Section 18 of BR Act deals with Cash reserves to be maintained by Banks.

Section 20 of BR Act deals with the Restrictions on loans and advances

Section 20 A of BR Act stipulates Section 20A - Restrictions on power to remit

debts by Banks.

As per Section 20 of BR Act banking company shall not

(a) grant any loans or advances on the security of its own shares, or-

(b) enter into any commitment for granting any loan or advance to or on behalf
of-

(i) any of its directors,

(ii) any firm in which any of its directors is interested as partner, manager,
employee or guarantor.

RBI exercise control advances by banking companies as per Section 21 of BR Act.

As per Section 21A of BR Act, Rates of interest charged by banking companies not
to be subject to scrutiny by Courts.

Section 22 of BR Act deals with Licensing of banking companies.

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As per Section 26 of BR Act, Banks have to submit a Return of unclaimed deposits
(accounts which have not been operated upon for ten years, within thirty days
after the close of each calendar year.

Section 26A of BR Act deals with establishment of Depositor Education and

Awareness Fund (DEAF).

Section 35 of BR Act empowers RBI to inspect any banking company and its
books and accounts.

Section 35A of BR Act empowers Reserve Bank to give directions to Banking

Companies.

Section 44A of BR Act deals with the Procedure for amalgamation of banking
companies.

Section 44B of BR Act imposes Restriction on compromise or arrangement

between banking company and creditors.

Section 45 of BR Act deals with the Power of Reserve Bank to apply to Central
Government for suspension of business by a banking company and to prepare
scheme of reconstitution or amalgamation.

Section 45Z of BR Act deals with the Return of paid instruments to customers.

Section 45ZA of BR Act deals with Nomination in Deposit Accounts.

Section 45ZC of BR Act deals with the Nomination for Safe Custody Articles.

Section 49A of BR Act imposes restriction on acceptance of deposits withdrawable

by cheque. No person other than a banking company, the Reserve Bank, the State
Bank of India or any other banking institution shall accept from the public
deposits of money withdraw able by cheque.

The Act makes provisions for nomination facility in case of accounts.

Important Sections in Banking Regulation Act 1949 related to RBI‘s PCA (Prompt
Corrective Action) :

1) RBI to remove managerial persons under Section 36AA of the BR Act 1949 as
applicable.

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2) RBI to supersede the Board under Section 36ACA of the BR Act 1949 and
recommend supersession of the Board under Section 36ACA of the BR Act 1949
and recommend supersession of the Board as applicable.

The Banking Regulation Act is of vital importance governing banks.

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 02 Returns, Inspection, Winding Up, Mergers &
Acquisitions
Banking companies have to prepare their balance sheet and accounts annually as
provided in the Banking Regulation Act.

The audited balance sheet and accounts have to be submitted as returns to the
Reserve Bank and copies there of have to be submitted to the Registrar of
Companies.

The Banking Regulation Act also provides for inspection and scrutiny of the books
and accounts of banking companies. The Board for Financial Supervision has been
set up for this purpose.

All Banks whose shares are listed with Stock Exchanges are required to publish
their unaudited quarterly results as per format prescribed by the SEBI. Every
banking company has to prepare its balance sheet and profit and loss account as
stipulated in Section 29 ofthe Banking Regulation Act.

The balance sheet and profit and loss account, has to be prepared at the end of
each calendar year.

The balance sheet and profit and loss account have to be prepared in the forms
set out in the Third Schedule to the BR Act or as near thereto as circumstances
permit.

Clause 41 of the SEBI Listing Agreement requires listed Companies (which

includes listed Banking Companies) to furnish unaudited financial results on a
quarterly basis with effect from the Quarter ending on March 31,2000 in format
provided therein, after a limited review conducted by the auditors.

The accounts and balance sheet prepared under Section 29 of the Banking
Regulation Act along with the auditors’ report have to be published, as provided
in Section 31 thereof read with Rule 15 of the Banking Regulation (Companies)
Rules, 1949. Accordingly, the publication has to be made in a newspaper, which is
in circulation at the place where the banking company has its principal office,
within a period of six months from the end of the period to which the account
and balance sheet relate.

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As per current guidelines, banks whose shares are listed in the capital market are
required to publish their unaudited quarterly results as per proforma prescribed
by SEBI.

Every banking company has to submit three copies of its balance sheet and profit
and loss account to the Reserve Bank within three months from the end of the
period to which they relate. This period may be extended by the Reserve Bank by
a further period not exceeding three months.

Section 220 of the Companies Act 1956 (Section 129 of the Companies Act 2013)
provides for submission by companies of copies of accounts and balance sheet
along with the auditor’s report to the Registrar of Companies. However, in the
case of banking companies, Section 32 of the Banking Regulation Act provides for
furnishing to the registrar three copies of the accounts, balance sheet and
auditor’s report submitted to the Reserve Bank under Section 31 of the Act, which
would be dealt with in all respects, as if these were submitted under Section 220
of the Companies Act.

When any company submits additional information relating to balance sheet and
profit and loss account to the Reserve Bank under Section 27(2) of the Banking
Regulation Act, the company has to send a copy thereof to the Registrar as well.

Display of Balance Sheet and Accounts: Foreign banks (banking companies

incorporated outside India) operating in India have to display in a conspicuous
place, in their principal office a copy of the last audited balance sheet and profit
and loss account. This has to be done not later than the first Monday in August of
any year in which it carries on business. The accounts and balance sheet have to
be kept displayed until replaced by a copy of the subsequent balance sheet and
profit and loss account.

RBI approval is a must before a Bank appoints, re-appoints or removes any

auditor or auditors (Section 30(1) A).
Every banking company has to furnish several returns to the Reserve Bank under
various provisions of the Banking Regulation Act and under the Reserve Bank of
India Act. The following are some important Returns to be submitted by Banks.

a) Return on Liquid Assets: Every banking company has to submit a return of its
liquid assets under Section 24(3) of the Banking Regulation Act. The return has to
be submitted within twenty days from the end of the month to which it relates.
The return has to be in the form prescribed under Rule 13A of the Banking
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Regulation (Companies) Rules, 1949. The return should contain particulars of
assets and the demand and time liabilities, as at the close of business of each
alternate Friday or when such a Friday is a holiday, as at the close of business of
the preceding working day. The Reserve Bank is also empowered to require a
banking company to furnish returns showing particulars of assets and demand
and time liabilities as at the close of each day of the month.

b) Accounts and Balance Sheet: The annual accounts and balance sheet have to
be submitted to the Reserve Bank within three months from the end of the period
to which they relate. The Reserve Bank may extend the time by a further period of
three months.

c) Return of Assets in India: A banking company has to submit to Reserve Bank

under Section 25(1) of the Banking Regulation Act, a quarterly return regarding its
assets in India. The return has to be submitted within one month of the end of the
quarter. The return has to be filed in the form prescribed in the Rule 14A of the
Banking Regulation (Companies) Rules.

d) Return Deposits: Under Section 26 of the BR Act, a banking company has to

file within thirty days of the close of each calendar year a return on unclaimed
deposits (not operated for ten years) with the RBI. This has to be submitted as
specified in the Rule 14B of the Banking Regulation (Companies) Rules. Under the
Amending Act of 2013, section 26A has been introduced to establish the
“Depositor Education and Awareness Fund” (“Fund”) to create awareness among
the customers and to carry out such other promotional activities as specified oy
the RBI.

e) Return by Scheduled Banks: Under Section 42 of the RBI Act, scheduled banks
have to submit returns to the RBI of their demand and time liabilities (Form-I) as
specified in the sub-Section (2) thereof.

Preservation of Records and Return of Paid Instruments

Return of Paid Instruments: Under Section 45Z (l) of the Banking Regulation Act, a
bank is authorized to return paid instruments to their customers even before the
end of the period of preservation specified under the Act. However, in that case,
the bank shall not return the instrument without making and keeping in its
possession a true copy of all relevant parts of the instruments by a mechanical or
another process ensuring accuracy of the copy.

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Special Audit Section 30 (l B) of the BR Act empowers the RBI to order a ‘Special
Audit’ of the accounts of any banking company. This order is given usually only
where the RBI is of the opinion that the audit is necessary either in the interest of
the banking company or the interest of the depositor or in public interest.

Inspections: The RBI conducts Annual Financial Inspection (AFI) of banking

companies under Section 35 of the BR Act every year. Now a days this consists
mainly in assessing all types of risks under ‘Risk Based Supervision” through a
‘Supervisory Program on Assessment of Risk and Capital’ (SPARC) and issue of
‘Risk Assessment Reports’. The RBI may also conduct any other inspection
(including those of Bank branches) at any time.

Inspection at the behest of the Government: Where an inspection is carried out

at the behest of the Government of India, as stated above, copy of the report has
to be sent to them mandatorily and may be sent at the option of the RBI in case
of other inspections. On the basis of the report the Government of India will take
further action which may include prohibiting the Bank from taking further
deposits etc. depending on the gravity of the findings of the inspection contained
in the report.

Board for Financial Supervision

The BR Act, 1949 empowers the RBI to inspect and supervise commercial banks.

The Department of Banking Supervision (DBS) was tasked with the inspection and
surveillance functions mentioned above, relating to the commercial banks, from
1993.

In November 1994, the Board for Financial Supervision (BFS) was set up with the
objective of ensuring dedicated and integrated supervision over credit institutions
of all types which now includes Scheduled Commercial and Cooperative Banks, All
India Financial Institutions, Local Area Banks, Small Finance Banks, Payments
Banks, Credit Information Companies, Non-Banking Finance Companies and
Primary Dealers.

The DBS was bifurcated into Department of Banking Supervision (DBS) and
Department of Non-Banking Supervision (DNBS) in August 1997 and later the
Department of Cooperative Banks Supervision (DCBS) was set up.

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DBS is supervising Commercial Banks & All India Financial Institutions etc. The
DNBS - NBFCs etc. and DCBS Cooperative Banks. All these departments function
under the direction of the Board for Financial Supervision (BFS).

Daksh: Reserve Bank’s Advanced Supervisory Monitoring System

Daksh is a web-based end-to-end workflow application through which RBI shall

monitor compliance requirements in a more focused manner with the objective of
further improving the compliance culture in Supervised Entities (SEs) like Banks,
NBFCs, etc. The application will also enable seamless communication, inspection
planning and execution, cyber incident reporting and analysis, provision of various
MIS reports etc., through a Platform which enables anytime-anywhere secure
access. This application is expected to be used extensively by the regulator in its
Supervisory Function carried out under the BFS.

The Central Government can acquire the undertakings of banking companies in

certain cases as mentioned in Section 36AE of the Banking Regulation Act.

Voluntary Amalgamation: A banking company may be amalgamated with

another banking company under Section 44A of the Banking Regulation Act. For
this purpose, a scheme has to be prepared, containing the terms of such an
amalgamation in a draft and placed before the shareholders of the two
companies separately.

Amalgamation by Government: The Central Government is empowered to order

amalgamation of two banking companies under Section 396 of the Companies
Act, 1956. (Section 237 of Companies Act 2013). However, such power has to be
exercised only after consultation with the Reserve Bank.

Moratorium and Amalgamation: The Reserve Bank is authorised under Section

45 of the Banking Regulation Act to apply to the Central Government for an order
of moratorium in respect of any banking company where it appears to it that
there is good reason to do so. After considering the application, the Central
Government may pass an order of moratorium staying the commencement or
continuation of any action or proceedings against the banking company for a
fixed period.

This may be on such terms and conditions as the Government thinks fit and prefer
to impose. The period of moratorium is extendable from time to time. However,
the total period of moratorium shall not exceed six months.

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During the period of moratorium, the banking company shall not make any
payment to depositors or discharge any liabilities or obligations to any other
creditors unless otherwise directed by the Central Government in the order of
moratorium or at any time thereafter.

During the period of moratorium or at any other time, Reserve Bank may prepare
a scheme either for reconstruction of the banking company, or for amalgamation
of the banking company with any other banking institution.

The BR Act provides a machinery by which proceedings in liquidation of banking

companies could be expedited and speedily terminated.

A banking company which is temporarily unable to meet its obligations may apply
to the High Court under Section 37 of the Banking Regulation Act for staying the
commencement or continuance of any proceedings against it. Such stay will be
for a fixed period and subject to any terms and conditions imposed by the High
Court as it may think fit. The total period of such moratorium shall not exceed six
months. An application for moratorium shall be supported by a report of the
Reserve Bank indicating that the banking company will be able to pay its debts if
the application is allowed. The Court, for sufficient reasons, may grant the relief,
even if the application is not supported by the Reserve Bank’s report.

Penalties under the BR Act: Section 46 of the BR Act deals primarily on the
penalties which may be imposed on Banks under the Act.

The main offences inviting different penalties are summarized as follows:

a) Any false statement will-fully made in any return, balance sheet or other
document or in information required to be given under the Act, is punishable.
Similarly, will-full omission to make any material statement is also punishable. In
both cases, punishment is up to three years imprisonment and fine which may
extend to Rs. 1 crore or both.

b) If any person fails to produce any book, account or other document or to

furnish any statement or information which is his/her duty to produce or furnish,
or to answer any question which is asked by an officer of the RBI making an
inspection or scrutiny, may be punishable with a fine which may extend to Rs. 20
lakh in respect of each offence, and if he/she persists in such refusal, to a further
fine which may extend to Rs. 50 thousand for every day during which the offence
continues.

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c) If any deposits are received by a banking company in contravention of an order
every Director or other officer of the banking company, (unless he proves that the
contravention took place without his knowledge or that he exercised all due
diligence to prevent it) shall be deemed to be guilty of such contravention and
shall be punishable with a fine which may extend to twice the amount of the
deposits so received

d) If any other provision of the Act is contravened or if any default is made in

complying with any requirement of the Act or of any order etc. by any person,
such person shall be punishable with fine which may extend to Rs. 1 crore or twice
the amount involved in such contravention or default (where such amount is
quantifiable), whichever is more, and where a contravention or default continues,
with a further fine which may extend to Rs. 1 lakh rupees for every day, during
which the contravention or default continues.

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 03 Various types of Banks
Indian Banking Structure

The Banking system of a country is an important pillar holding up the financial

system of the country’s economy.

The major role of banks in a financial system is the mobilization of deposits and
disbursement of credit to various sectors of the economy.

The existing, elaborate banking structure of India has evolved over several
decades.

Banks are financial institutions that perform deposit and lending functions. There
are various types of banks in India and each is responsible to perform different
functions.

The bank takes deposit at a much lower rate from the public called the deposit
rate and lends money at a much higher rate called the lending rate.

Reserve Bank of India is the central bank of the country and regulates the banking
system of India.

The structure of the banking system of India can be broadly divided into
scheduled banks, non-scheduled banks and development banks.

Banks that are included in the second schedule of the Reserve Bank of India Act,
1934 are considered to be scheduled banks.

All scheduled banks enjoy the following facilities:

Such a bank becomes eligible for debts/loans on bank rate from the RBI

Such a bank automatically acquires the membership of a clearing house.

All banks which are not included in the second section of the Reserve Bank of
India Act, 1934 are Non-scheduled Banks. They are not eligible to borrow from
the RBI for normal banking purposes except for emergencies.

Scheduled banks are further divided into commercial and cooperative banks.

Scheduled, Non-Scheduled Banks and Development Banks

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Banks can be classified into various types as under.

Central Bank
Cooperative Banks
Commercial Banks
Regional Rural Banks (RRB)
Local Area Banks (LAB)
Specialized Banks
Small Finance Banks
Payments Banks
Functions of Banks

The major functions of banks are almost the same but the set of people each
sector or type deals with may differ.

Given below the functions of the banks in India:

Acceptance of deposits from the public

Provide demand withdrawal facility
Lending facility
Transfer of funds
Issue of drafts
Provide customers with locker facilities
Dealing with foreign exchange

Apart from the above, various utility functions also performed by the banks.

Central Bank

The Reserve Bank of India is the central bank of our country. Each country has a
central bank that regulates all the other banks in that particular country.

The main function of the central bank is to act as the Government’s Bank and
guide and regulate the other banking institutions in the country. Given below are
the functions of the central bank of a country:

Guiding other banks

Issuing currency
Implementing the monetary policies
Supervisor of the financial system

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In other words, the central bank of the country may also be known as the banker’s
bank as it provides assistance to the other banks of the country and manages the
financial system of the country, under the supervision of the Government.

Cooperative Banks

These banks are organised under the state government’s act. They give short term
loans to the agriculture sector and other allied activities.

The main goal of Cooperative Banks is to promote social welfare by providing

concessional loans

They are organised in the 3 tier structure

Tier 1 (State Level) – State Cooperative Banks (regulated by RBI, State Govt,
NABARD).

Funded by RBI, government, NABARD. Money is then distributed to the public.

Concessional CRR, SLR applies to these banks.

Owned by the state government and top management is elected by members

Tier 2 (District Level) – Central/District Cooperative Banks

Tier 3 (Village Level) – Primary Agriculture Cooperative Banks

Commercial Banks

Organised under the Banking Companies Act, 1956

They operate on a commercial basis and its main objective is profit.

They have a unified structure and are owned by the government, state, or any
private entity.

They tend to all sectors ranging from rural to urban These banks do not charge
concessional interest rates unless instructed by the RBI Public deposits are the
main source of funds for these banks Public sector Banks – A bank where the
majority stakes are owned by the Government or the central bank of the country.

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Nationalised Banks

The nationalized banks are those banks that were ones owned by the private
players but due to the financial or socio-economic exigencies, the ownership was
acquired by the government.

In more technical terms Nationalised Banks have such an ownership structure

where the government is the majority shareholder i.e. >50%.

Bank Nationalization is a policy decision, which is undertaken keeping certain

goals in mind. From time to time Central Government can carry out the
nationalization of banks. Nariman committee on banking reforms 1991 and 1998
has called for more private banks in India.

RBI or the Reserve Bank of India was the first nationalized bank in India.

Private sector Banks – A bank where the majority stakes are owned by a private
organization or an individual or a group of people.

Foreign Banks – The banks with their headquarters in foreign countries and
branches in our country, fall under this type of bank

Regional Rural Banks (RRB)

These are special types of commercial Banks that provide concessional credit to
agriculture and rural sector.

RRBs were established in 1975 and are registered under a Regional Rural Bank
Act, 1976.

RRBs are joint ventures between the Central government (50%), State government
(15%), and a Commercial Bank (35%).

One RRB cannot open its branches in more than 3 geographically connected
districts.

Local Area Banks (LAB)

Introduced in India in the year 1996. These are organized by the private sector.

Earning profit is the main objective of Local Area Banks. Local Area Banks are
registered under Companies Act, 1956.

At present, there are only 4 Local Area Banks all which are located in South India

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Specialized Banks

Certain banks are introduced for specific purposes only. Such banks are called
specialized banks. These include:

Small Industries Development Bank of India (SIDBI) – Loan for a small scale
industry or business can be taken from SIDBI. Financing small industries with
modern technology and equipment is done with the help of this bank

EXIM Bank – EXIM Bank stands for Export and Import Bank. To get loans or other
financial assistance with exporting or importing goods by foreign countries can be
done through this type of bank

National Bank for Agricultural & Rural Development (NABARD) – To get any
kind of financial assistance for rural, handicraft, village, and agricultural
development, people can turn to NABARD.

There are various other specialized banks and each possesses a different role in
helping develop the country financially.

Small Finance Banks

As the name suggests, this type of bank looks after the micro industries, small
farmers, and the unorganized sector of the society by providing them loans and
financial assistance. These banks are governed by the central bank of the country.

Payments Banks

A newly introduced form of banking, the payments bank have been

conceptualized by the Reserve Bank of India. People with an account in the
payments bank can only deposit an amount of up to Rs.1,00,000/- and cannot
apply for loans or credit cards under this account.

Options for online banking, mobile banking, the issue of ATM, and debit card can
be done through payments banks.

Public Sector Bank Vs. Nationalised Bank

The primary distinction between a nationalised bank and a public sector bank is
that a Public Sector Bank has always been under the control of the central or state
government, whereas the Nationalised Bank began as a private sector bank and
was chosen to take over by the administration for the betterment of the public.

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Miscellaneous

There are 12 Public Sector Banks in India in 2022.

After the massive merger, the total number of Public Sector Banks (PSBs) in India
has come down from 27 banks in 2017 to 12 in 2021.

Currently in India there are 12 banks in number that are nationalised, and their
names are Punjab National Bank, Bank of Baroda, Bank of India, Central Bank of
India, Canara Bank, Union Bank of India, Indian Overseas Bank, Punjab, and Sind
Bank, Indian Bank, UCO Bank, and Bank of Maharashtra, State Bank Of India.

Differentiated Banks, that are different from universal banks as they function in a
‘niche’ segment, may be basically defined as those that offer a limited range of
services/products or function under a different regulatory dispensation. They may
also be different on account of capital requirement, scope of activities or area of
operations.

Though the concept and name ‘Differentiated Banks’ was first discussed in 2007,
in a sense, the Urban Cooperative Banks, the Primary Agricultural Credit Societies,
the Regional Rural Banks and the Local Area Banks, which were in existence much
before 2007, may be considered as differentiated banks, as they operate in
localized areas.

Committee headed by Shri Nachiket Mor, on ‘Comprehensive Financial Services

for Small Businesses and Low-Income Households’ which was set up to look into
the issues relating to ‘Financial Inclusion’ came up with two broad designs for the
banking system in the country - the Horizontally Differentiated Banking System
(HDBS) and the Vertically Differentiated Banking System (VDBS) based on the
most basic functions of banks in India being that of payments, deposits and
credit.

In a HDBS model, the basic design of the bank remains one of it being a full-
service bank giving the entire gamut of services pertaining to payments, deposits,
and credit but is differentiated primarily on the dimension of size or geography or
sectoral focus. In the VDBS model, the banks specialize in one or more of
payments, deposits, and credit. The Committee also inter-alia suggested licensing
of Payments Bank and wholesale banks as differentiated banks.

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 04 Non-Banking Financial Companies (NBFCs)
NBFC stands for Non-Banking Financial Corporations. As per Section 451(c) of the
RBI Act, a Non-Banking Company that carries the business of a financial institution
is called a Non-Banking Financial Corporation or NBFC.

NBFC (Non-Banking Financial Institution) offers financial services and products,

but it is not officially recognized as a bank with a banking license.

A Non-Banking Financial Corporation is a company that is registered under the

Companies Act, 1956 of the Companies Act, 2013 and is involved in the lending
business, hire-purchase, leasing, insurance business, receiving deposits in some
cases, chit funds, stocks, and shares acquisition, etc.

The functions of the NBFCs are managed by both the Ministry of Corporate Affairs
and the Reserve Bank of India.

The activities of Non-Banking Financial Institutions (NBFI) include lending and

other financial services like providing loans & advances, credit facilities, trading in
the money market, savings and investment products, managing stock portfolios,
money transfers, etc. Additionally, their activities also include leasing, hiring,
venture capital finance, infrastructure finance, and so on.

Before beginning the Non-Banking Financial Institutions activities, NBFC

registration is required.

Financial Organisations which do not need a NBFC license Certain entities are
involved in the business of financial activities but do not require obtaining a
registration with the Reserve Bank of India (RBI). As these entities are regulated by
other financial sector regulators, they do not need either the NBFC registration or
the NBFC regulations of RBI. These entities are as follows:

Insurance Companies which are regulated by Insurance Regulatory and

Development Authority of India (IRDA)

Housing Finance Companies which are regulated by the National Housing Bank
Stock Broking Companies which are regulated by Securities and Exchange Board
of India.

Merchant Banking Companies which are regulated by Securities and Exchange

Board of India

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Mutual Funds which are regulated by Securities and Exchange Board of India

Venture Capital Companies which are regulated by Securities and Exchange Board
of India

Companies that run Collective Investment Schemes which are regulated by

Securities and Exchange Board of India

Chit Fund Companies which are regulated by the respective State Governments
Nidhi Companies which are regulated by the Ministry of Corporate Affairs (MCA)

Some of the popular examples of Non-Banking Financial Institutions include- ICICI

Ventures, SBI Factors, Kotak Mahindra Finance, and Sundaram Finance. Such
entities are registered under the Companies Act, 1956 and, as specified under
Section 45-IA of the RBI Act, 1934, do operation as a non-banking financial
institution.

An NBFC is primarily involved in the business of loans, stocks, equity acquisition,

insurance business, government-issued bonds, chit fund business, and much
more.

The key difference among NBFC & the Bank in which we can withdraw or deposit
cash in a bank when we required it, but NBFC does not allow withdrawals or
deposit cash when it is necessary.

NBFC deposits are not considered as investments, like the amount we invest for
our health insurance or LIC policy and so on. It is just long-term premiums or
deposits.

Types of NBFCs

There are three broad heads under which the NBFC in India can be categorized:

a) On the basis of deposits

b) On the Nature of their activity
c) On the basis of the size of their assets

On the basis of deposits

Deposit-taking non-banking finance companies

Non-Deposit taking Non-Banking Financial Institutions

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On the Nature of their activity

Asset Finance Company (AFC)

Non-Banking Financial Company-Factors (NBFC-Factors)
Investment Company (IC)
Systematically Important Core Investment Company (CIC-ND-SI)
Non-Banking Financial Company: Micro Finance Institutions (NBFCMFI)(IDF-
NBFC)
NBFC-Non-Operative Financial Holding Company (NOFHC)
Loan Company (LC)
Infrastructure Debt Fund: Non-Banking Financial Institutions
Infrastructure Finance Company (IFC)
Mortgage Guarantee Company (MGC)

On the basis of the size of their assets

Non-systematically Important NBFCs

Systematically Important Non-Banking Financial Institutions

Requirements to be fulfilled in order to obtain NBFC license:

The fundamental requirements which are to be fulfilled in order to apply for NBFC
license are as follows:

The company has to be registered under the Companies Act. That is the company
should either be a Limited Company or a Private Limited Company (PLC).

The minimum Net Owned Fund of the company must be Rs.2 crore.

The Net Owned Fund of a company can be defined as the funds owned by a
company after deducting the intangible assets and reserves from its Total Owned
Fund.

Guidelines prescribed by the RBI to be followed by NBFC :

a) NBFCs cannot accept demand deposits from public depositors or investors

b) The minimum time period for which the public deposits can be taken by the
company is 12 months, while the maximum tenure can be 60 months.

c) The Reserve Bank of India will not guarantee the repayment of any amount
which is taken by the NBFCs.

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d) The Company cannot charge an interest rate which is more than the rate
prescribed by the Reserve Bank of India.

e) NBFCs can issue cheques to their customers in order to make payments or

settlements.

f) The company has to furnish a record of the statutory return on the deposits
taken by the company in the form NBS- 1 every year.

g) The company has to furnish a quarterly return on the liquid assets of the
company.

h) The audited balance sheet of the company has to be submitted every year.

i) The company has to ascertain its credit ratings every 6 months and submit the
same to the RBI.

j) The companies which have a Public Deposit of Rs.20 Crore or more or have
assets worth Rs.100 Crore or more will have to submit a half-yearly ALM return.

k) The depositors of the NBFCs cannot avail the securing facility of the Deposit
Insurance and Credit Guarantee Corporation (DICGC).

l) Only the NBFCs that have been duly rated and matches the recommended
Minimum Investment Grade Credit (MIGC) rating, are eligible to accept
conditional deposits from public depositors.

m) The RBI has restricted the NBFCs from providing additional benefits, extra
incentives, or gifts to the customers or depositors, than those which are offered
by the banks.

n) The company has to maintain a minimum of 15% of the Public Deposits in its
Liquid Assets.

Action in case a NBFC defaults

In case the NBFC defaults and fails to make the payment of the amount taken, the
depositor can file a suit against the company to the Consumer Forum or the
National Company Law Tribunal.

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 05 Financial Sector Legislative Reforms and
Financial Stability and Development Council
Narasimhan Committee

India liberalized its economy in 1991, but after that, too, the banks were not
performing well. India has a mix of private and public sector banks, and during
any economic crisis, the banks must be more competitive and effective. The
Narasimhan Committee was consulted twice for banking sector reforms, one in
1991 and the other in 1998. Both times, the committee was under the
chairmanship of Maidavolu Narasimham. Maidavolu Narasimham was the 13th
Governor of the Reserve Bank of India (RBI) and served from 2 May 1977 to 30
November 1977.

Narasimhan Committee 1

The Narasimhan Committee 1 was established in 1991 by FM Manmohan Singh to

examine the functioning of banks. In August 1991, a nine-member committee was
appointed to suggest reforms to the financial system. The committee submitted
its recommendations and the report in December, 1991 to the Parliament. The
Report was titled Narasimham Committee Recommendations on the Financial
System (1991).

Narasimhan Committee 2

In 1998, the Narasimhan Committee 2 was formed by the FM P Chidambaram to

intimate on the banking sector reforms. The committee submitted its
recommendations to the government in April 1998. The government undertook
the report and recommendations as it emphasized more human resource
development, technological upgradation, and strengthening of the foundation of
the banking system by structure, which was the need of the hour.

Recommendations of Narasimhan Committee 1

a) Reduction in SLR and CRR- During 1991, both Statutory Liquidity Ratio (SLR)
and Cash Reserve Ratio (CRR) were extremely high. Due to this, bank resources
were not available for government use. The committee recommended reducing
the SLR and CRR from 38.5 per cent to 25 per cent and from 15 per cent to 3 to 5
per cent, respectively.

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b) Reorganization of the Banking sector- The Narasimhan Committee 1
recommended reduction in the number of public sector banks. The committee
suggested mergers and acquisitions increase the bank’s efficiency. The Committee
recommended nationwide the national recognition of 8 to 10 banks.

c) Establishment of the ARF Tribunal- During the 1991 economic crisis, banks’ bad
debts and Non-Performing Assets (NPA) were concerning. The committee
recommended setting up an Asset Reconstruction Fund (ARF) to take over the
proportion of bad and doubtful debts from banks and financial institutions.

d) Removal of Dual Control- At that point, the banking sector in India was
regulated by the RBI and the Ministry of Finance. The committee proposed RBI be
the sole primary regulator of banking in India.

e) Stop the Directed Credit Program- The committee recommended eliminating

government interest rate controls as they were not profitable.

f) Interest Rate Determination- The committee highlighted that the interest rates
should be determined based on market forces and not by the Government, which
was earlier the case.

g) More Freedom to Banks- To improve the workings of banks, the Narasimhan

Committee 1 recommended that every bank be free and autonomous to carry out
its work. Over-regulation and over-administration should be avoided, and the
selection of the Chief Executive and board of directors should be made solely on
merit.

Narasimhan Committee 2 Recommendations

The Narasimhan Committee 2 was formed in 1998 and suggested banking sector
reforms. The recommendations by the Narasimhan Committee 2 are as follows:

a) Robust Banking System- The Committee recommended merging major public

sector banks to boost trade.

b) NPAs and the Concept of Narrow Banking- High Non-Performing Assets (NPAs)
were a problem back in 1998, so the Committee recommended Narrow Banking
Concept where the banks could put their funds in short-term and risk-free assets.
The recommendations led to the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002.

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c) Role of RBI- The Narasimhan Committee 2 recommended that RBI be the
regulator. But, at the same time, they should not have ownership in any bank.

d) Capital Adequacy Ratio- The committee proposed the government should

increase the Capital Adequacy Ratio norms.

e) Foreign Exchange- The Committee recommended that the foreign exchange

open position limits carry 100% risk weight. The Committee also proposed that
the minimum start-up capital for foreign banks should be increased to $25 million
from $10 million.

Banking Sector Reforms

The main objective of banking sector reforms was to promote a diversified,

efficient and competitive financial system with the ultimate goal of improving the
allocative efficiency of resources through operational flexibility, improved financial
viability and institutional strengthening. In nut shell, the reforms can be of:

(a) Competition enhancing measures

(b) Measures enhancing role of market forces

(c) Prudential measures

(d) Institutional and legal measures

(e) Supervisory measures

(f) Technology related measures.

Reforms In Monetary Policy

Twin objectives of “maintaining price stability” and “ensuring availability of

adequate credit to productive sectors of the economy to support growth”
continue to govern the stance of monetary policy, though the relative emphasis
on these objectives has varied depending on the importance of maintaining an
appropriate balance;

Reflecting the increasing development of financial market and greater

liberalization, use of broad money as an intermediate target has been de-
emphasized and a multiple indicator approach has been adopted.

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Emphasis has been put on development of multiple instruments to transmit
liquidity and interest rate signals in the short-term in a flexible and bi-directional
manner.

Increase of the interlinkage between various segments of the financial market

including money, government security and forex markets. Instruments Move from
direct instruments(such as, administered interest rates, reserve requirements,
selective credit control) to indirect instruments (such as, open market operations,
purchase and repurchase of government securities) for the conduct of monetary
policy; Introduction of Liquidity Adjustment Facility (LAF), which operates through
repo, and reverse repo auctions, effectively provide a corridor for short-term
interest rate. LAF has emerged as the tool for both liquidity management and also
as a signalling devise for interest rate in the overnight market. On 8th April 2022
RBI has introduced Standing Deposit facility (SDF) which is the floor limit of the
Policy corridor while MSF being the cap of the corridor; Use of open market
operations (OMO) to deal with overall market liquidity situation especially those
emanating from capital flows; Introduction of Market Stabilization Scheme (MSS)
as an additional instrument to deal with enduring capital inflows without affecting
short-term liquidity management role of LAF, etc.

Financial Sector Development Council

Financial sector regulation is vital for developing a healthy and efficient financial
system in the economy.

Financial Sector Development Council (FSDC) was constituted in Dec. 2010. There
are different regulators for various segments of financial sectors, like the RBI for
commercial banks and NBFCs, SEBI for capital market, IRDA for insurance, PFRDA
for pension funds, etc.

The primary objective of FSDC is to strengthen and institutionalize the mechanism

for maintaining financial stability, promoting financial sector development and
enhancing internal regulatory co-ordination.

At the same time, there should be coordination among these financial sector
regulators to ensure better efficiency as well as for avoiding overlapping of
functions. In this direction the Government of India set up Financial Stability and
Development Council (FSDC) in December 2010 with the Finance Minister as the
Chairman. It is not a statutory body.

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EASE (Enhanced Access and Service Excellence) Reforms

Enhanced Access and Service Excellence(EASE) is a common reform agenda for

Public Sector Banks (PSBs). It is aimed at institutionalizing clean lending, better
customer service, simplified and enhanced credit and robust governance and HR
practices.

The EASE 1.0 was aimed at enabling banking from home, effective grievance
redressal and responsible banking through monitoring of large value stressed
loans among others.

EASE 2.0 was launched in FY20 to further build on the foundation of EASE 1.0. It
focussed on CLEAN and SMART banking.

EASE 3.0 was launched in FY21. It focuses on the transformation of Public Sector
Banks(PSBs) into Digital and Data-driven Banks through smart lending,
Technology enabled ease of Banking, Credit@click, Dial-a-loan, Prudent Banking
among others.

EASE 4.0 reforms looks at four key initiatives for public sector banks to adopt:
Smart lending backed by analytics; 24x7 banking with resilient technology and
cloud based IT systems; data enabled agriculture financing; and collaborating with
the financial ecosystem.

EASE 5.0: PSBs will continue to invest in new-age capabilities and deepen the
ongoing reforms to respond to evolving customer needs, changing competition
and the technology environment.

Focuses on Digital customer experience, and integrated and inclusive banking,

with emphasis on supporting small businesses and agriculture.

The initiatives will be across diverse themes: business growth, profitability, risk,
customer service, operations, and capability building.

EASENext would comprise two major initiatives - EASE 5.0 (common PSB reforms
agenda) and bank specific three-year strategic roadmap.

EASE Program expanded into EASENext from FY2022. The agenda for the fifth
edition of EASE was unveiled earlier this year by the Minister of Finance. The
reforms program has now been expanded into EASENext, which has been
conceptualised with two broad pillars:

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1) EASE 5.0 - Common reforms agenda to be achieved by all PSBs

2) Strategic 3-year roadmap specific to each PSB to focus on new strategic

initiatives beyond the common reforms’ agenda.

EASE 5.0 will continue to focus on driving an enhanced digital experience along
with data-driven, integrated, and inclusive banking across all banks. The 3-Year
Strategic Roadmap will offer each PSB the opportunity to set its own reforms
path, contextualised to its starting position and strategic priorities.

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 Index
Banking Regulations and Business Laws
Module B & C : Important Acts
Chapter No Topic

01 The Prevention of Money Laundering Act, 2002

02 Negotiable Instruments Act, 1881

03 Foreign Exchange Management Act, 1999

04 Payment & Settlement Systems Act, 2007

05 Law Relating to Securities and Modes of Charge

06 Reserve Bank – Integrated Ombudsman Scheme, 2021

07 The Micro, Small and Medium Enterprises Development Act, 2006

08 SARFAESI Act, 2002

09 The Recovery of Debts and Bankruptcy Act, 1993

10 Insolvency and Bankruptcy Code, 2016

11 The Bankers’ Books Evidence Act, 1891

12 The Legal Services Authorities Act, 1987

13 The Consumer Protection Act, 2019

14 The Law of Limitation

15 Tax Laws

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 01 The Prevention of Money Laundering Act, 2002
Money laundering

A person who is involved in illegal activities, like, child abuse, bribery, corruption,
terrorism, etc. and by such activities if he is earning money or asking someone on
his behalf to get involved but such earnings are shown as in the accounts as
legally earned money, then it is known as money laundering. For Instance, A is
involved in a business of selling clothes but the source from where he gathered
investments is through an illegitimate source that is from unlawful means and the
money which is gathered from such act he invests it in his apparel business
through this the illicit money turns into licit money. This whole process from illicit
money to licit money is called money laundering.

In money laundering, the main motive of the criminals is to change the source
from where the money is obtained. The source from where the facilitation of
money laundering is done cannot be traced easily because the money is tried to
be transferred in the bank account, however, banks inquire about the source of
the money but they may or may not figure it out if the money is laundered or
hard-earned. So, even if they have a doubt regarding the large amount of sum
which is transferred or withdrawn they have to report such acts under Section 35A
of the Banking Regulation Act, 1949 and also under the Prevention of Money
Laundering Rules, 2005.

The Prevention of Money Laundering Act (PMLA) was enacted in 2002 and it came
into force in 2005. The chief objective of this legislation is to fight money
laundering, that is, the process of converting black money into white.

The basic objectives of the PMLA are:

Preventing money laundering.

Combating the channelising of money into illegal activities and economic

crimes.

Providing for the confiscation of property derived from or involved in money

laundering.

Providing for any other matters connected with or incidental to the act of
money laundering.

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The Act enables government authorities to confiscate property and/or assets
earned from illegal sources and through money laundering.

Under the PMLA, the burden of proof lies with the accused, who has to prove that
the suspect property/assets have not been obtained through proceeds of crime.

Offences mentioned under Part A and C of the Schedule of this Act will attract its
provisions.

Part A includes offences under acts namely:

Indian Penal Code, Prevention of Corruption Act, Narcotics Drugs and

Psychotropic Substances Act, Antiquities and Art Treasures Act, Trademark Act,
Wildlife Protection Act, Copyright Act and Information Technology Act.

Part B includes offences that are mentioned in Part A, but are of a value of Rs 1
crore or more.

Part C includes trans-border crimes.

Penalties under PMLA

Various actions can be initiated against persons found to be guilty of money

laundering, such as:

a) Freezing or seizing of property and records, and/or attachment of property

obtained through crime proceeds.

b) Money laundering is punishable with:

Rigorous imprisonment for a minimum of 3 years and a maximum of 7 years.

Fine.

c) If the crime of money laundering is involved with the Narcotic Drugs and
Psychotropic Substances Act, 1985, the punishment can go up to 10 years, along
with fine.

Authorities that can Investigate under PMLA

The Enforcement Directorate (ED) is responsible for investigating offences under

the PMLA. Also, the Financial Intelligence Unit – India (FIU-IND) is the national
agency that receives, processes, analyses and disseminates information related to
suspect financial transactions.

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PMLA defined “Politically Exposed Persons” (PEPs) as individuals who have been
“entrusted with prominent public functions by a foreign country, including the
heads of States or Governments, senior politicians, senior government or judicial
or military officers, senior executives of state-owned corporations and important
political party officials”.

All the finance and revenue-related Government and public bodies like the
Enforcement Directorate, Department of Revenue, Ministry of Finance, SEBI, and
The Government of India are responsible for controlling the money laundering act
and related activities in the country.

The Act has further been amended from time to time. In the 2012 amendment the
definition of money laundering was enlarged by including activities such as
concealment, acquisition, possession and use of proceeds of crime as criminal
activities The Act provides rigorous punishment for the offence of money
laundering.

Certain obligations have been cast on banking companies, financial institutions

and intermediaries to maintain record of transactions, identity of clients, etc.

A director appointed by the Central Government has the right to call for records
and impose penalties if he/she finds that the banking company has failed to
comply with the requirement of the Act.

Central Government has, in consultation with the RBI, framed rules called the “The
Prevention of Money Laundering Maintenance of Records of the Nature and
Value of Transactions, the Procedure and Manner of Maintaining and Time for
Furnishing Information and Verification and Maintenance of Records of the
Identity of the Clients of the Banking Companies, Financial Institutions and
Intermediaries Rules, 2004” which has also been amended a few times.

The rules prescribe what records are to be maintained, retention of records,

verification of the identity of client and furnishing information in respect of the
transactions to the director, etc.

Records that need to be maintained under PMLA.

Section 12 of Prevention of Money Laundering Act, 2002 provides that every

reporting entity shall maintain a record of all transactions, including the
information furnished to FIU-IND, in such a manner as to enable it to reconstruct
individual transactions.
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In terms of Rule 3 of the act the following records to be maintained by the
reporting entity.

a) All cash transactions of the value of more than Rs.1000000 (Rupees ten lakh) or
its equivalent in foreign currency;

b) All series of cash transactions, even though individually each of the cash
transaction is below the value of Rs.10 lakh or equivalent value in foreign
currency, if they are integrally connected to each other and monthly aggregate
value is above Rs.10 lakh.

c) all cash transactions where forged or counterfeit currency notes or bank notes
have been used as genuine or where any forgery of a valuable security or a
document has taken place facilitating the transactions;

d) all suspicious transactions irrespective of they are made in cash or not;

e) All cross border wire transfers of the value exceeding Rs.5 lakh or its equivalent
in foreign currency where either the origin or destination of fund is in India;

f) All purchase and sale of immovable property valued at Rs.50 lakh or more that
is registered by the reporting entity.

As per Rule 3 of the Prevention of Money-laundering (Maintenance of Records)

Rules, 2005, the reporting entity shall maintain the records for a period of five
years from the date of cessation of the transactions with their clients.

The records defined under PMLA include the records maintained in the form of
books or stored in a computer or such other form as may be prescribed.

The reporting entities shall maintain transactions with their clients both in hard
and soft copies in accordance with the procedure and manner as may be specified
by the Reserve Bank of India or the Securities and Exchange Board of India or the
Insurance Regulatory and Development Authority, as the case may be.

The Financial Action Task Force (FATF) leads global action to tackle money
laundering, terrorist and proliferation financing. The 39-member body sets
international standards to ensure national authorities can effectively go after illicit
funds linked to drugs trafficking, the illicit arms trade, cyber fraud and other
serious crimes.

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The FATF researches how money is laundered and terrorism is funded, promotes
global standards to mitigate the risks, and assesses whether countries are taking
effective action.

The FATF's decision-making body, the FATF Plenary, meets three times per year
and holds countries to account if they do not comply with the Standards.

If a country repeatedly fails to implement FATF Standards then it can be named a

Jurisdiction under Increased Monitoring or a High Risk Jurisdiction. These are
often externally referred to as “the grey and black lists”.

The FATF was established in 1989 and is based in Paris.

The FATF conducts an assessment of the implementation of anti-money

laundering and counter-terrorist financing (AML/CFT) standards in India.

Financial Intelligence Unit – India (FIU-IND) was set by the Government of

India in November 2004 as the central national agency responsible for receiving,
processing, analyzing and disseminating information relating to suspect financial
transactions.

FIU-IND is also responsible for coordinating and strengthening efforts of national

and international intelligence, investigation and enforcement agencies in pursuing
the global efforts against money laundering and financing of terrorism. FIU-IND is
an independent body reporting directly to the Economic Intelligence Council (EIC)
headed by the Finance Minister.

Reports prescribed under PMLA, 2002

The Prevention of Money Laundering Act, 2002 and the Rules there under
requires every reporting entity (banking company, financial institution and
intermediaries) to furnish the following reports:

Cash Transaction reports (CTRs)

Suspicious Transaction Reports (STRs)

Counterfeit Currency Reports (CCRs)

Non-Profit Organisation reports (NPRs)

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Cash Transaction Reporting (CTR)

As per the PMLA rules, Bank is required to submit the details of, all cash
transactions of the value of more than rupees ten lakh or its equivalent in foreign
currency.

All series of cash transactions integrally connected to each other, which have been
valued below rupees ten lakh or its equivalent in foreign currency, where such
series of transactions have taken place within a month and the aggregate value of
such transactions exceeds rupees ten lakh.

Suspicious Transaction Report (STR)

Every banking company, financial institution, and intermediary shall furnish to FIU
information of all suspicious transactions whether or not made in cash.

Suspicions transaction means a transaction including an attempted transaction,

whether or not made in cash which, to a person acting in good faith –

(a) gives rise to a reasonable ground of suspicion that it may involve proceeds of
an offence specified in the Schedule to the Act, regardless of the value involved;

or

(b) appears to be made in circumstances of unusual or unjustified complexity;

or

(c) appears to have no economic rationale or bonafide purpose;

or

(d) gives rise to a reasonable ground of suspicion that it may involve

financing of the activities relating to terrorism;

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Broad categories of reason for suspicion and examples of suspicious transactions
for a banking company are indicated as under:

Identity of client

Suspicious background or links with known criminals

Multiple accounts

Activity in accounts

Nature of transactions

A suspicious transaction is a transaction which has apprehension or mistrust

about the person or group of persons involved or its unusual nature or
circumstances.

Suspicious Activity Report (SAR) Vs. Suspicious Transaction Report (STR)

The main difference between these two is the object of suspicion. For a SAR the
object of suspicion is the activity. For STRs the object is the transaction.

Suspicious Activity encompasses different actions performed by the customer,

such as adding a new wallet to his Binance account, refusing to provide the KYC
documents etc.

Suspicious Transactions, on the other hand, cover actions related directly to the
flow of funds: deposits, transfers to other accounts, and withdrawals.

If activity and transactions have a different object of suspicion, why is there so

little difference between them in practical terms? Well, from a conceptual point of
view, it would not be wrong to state that all transactions are a form of activity,
though vice versa is not true. Thus, when a customer executes a transaction, he
performs at the same time an activity. However, when we say that the customer
performs an activity, it does not necessarily mean that he is executing a
transaction.

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Counterfeit Currency Reporting (CCR)

The PMLA Rule 3(1) (C) read with rule 8 requires the reporting of all cash
transactions where forged or counterfeit Indian currency notes have been used as
genuine.

The said report is required to be filed not later than seven working days from the
date of occurrence of such transactions.

Non Profit Organisation ( NPOs) Transaction Report ( NTR) :

NPO means any organization that is registered as a Trust or society under

Societies Registration Act 1860 or any similar State Legislation or a company
registered under Section 25 of the Companies Act 1956.

Receipt transaction of more than Rs 10 Lacs or equivalent in foreign currency in

NPO accounts is reported to FIU-IND .

Tail Notes
Binance is an online exchange where users can trade cryptocurrencies.

Hawala and Money-Laundering:

The word “Hawala” means trust. Hawala is a system of transferring money and
property in a parallel arrangement avoiding the traditional banking system. It is a
simple way of money laundering and is banned in India.

Hawala works by transferring money without actually moving.

In a hawala transaction, no physical movement of cash is there.

It is an alternative or parallel remittance system, which works outside the circle of

banks and formal financial systems.

@@@

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 02 Negotiable Instruments Act, 1881
The Negotiable Instruments Act was passed during 1881 and came into force
w.e.f. March 01, 1882.

NI Act has 148 sections and 17 chapters.

The Act is applicable to entire India including Jammu & Kashmir.

The special feature of such an instrument is the privilege it confers to the person
who receives it bona fide and for value, to possess good title thereto, even if the
transferor has no title or had defective title to the instrument.

Distinctive features of Negotiable Instruments

a) Easily transferable from one person to another

b) Confers Absolute and Good Title on the Transferee

c) The Holder of a Negotiable Instrument is called as the Holder in Due Course

and possesses the right to sue upon the instrument in his own name.

The negotiation of Bearer Cheque (Bill Of Exchange & Promissory Note) is

completed by Delivery & that of Order cheque (Bill Of Exchange & Promissory
Note) by delivery & endorsement.

A negotiable instrument may be made payable to two or more payees jointly, or it

may be made payable in the alternative to one of two, or one or some of several
payees.

Negotiable Instruments (NI) not defined directly in the NI Act but as per Section
13, an NI means and include Promissory note, Bill of exchange and Cheque
payable to Order or Bearer.

Bank Drafts, Certificate of Deposit and Commercial Papers are also treated as
quasi-Negotiable instruments.

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Presumptions as to Negotiable Instruments (Section 118)

Until the contrary is proved, Section 118 provides certain assumptions as to NIs:

(a) For consideration - that every negotiable instrument was made or drawn for
con-sideration, and that every such instrument, when it has been accepted,
endorsed, negotiated or transferred, was accepted, endorsed, negotiated or
transferred for consideration;

(b) as to date - that every negotiable instrument bearing a date was made or
drawn on such date;

(c) as to time of acceptance -that every NI was accepted within a reasonable time
after its date and before its maturity;

(d) as to time of transfer - that every transfer of a negotiable instrument was

made before its maturity;

(e) as to order of endorsements - that the endorsements appearing upon a

negotiable instrument were made in the order in which they appear thereon;

(f) as to stamp - that a lost Negotiable Instrument was duly stamped & stamp
duly to be cancelled.

(g) that holder is a holder in due course - that the holder of a negotiable
instrument is a holder in due course; Provided that, where the instrument has
been obtained from its lawful owner, or from any person in lawful custody
thereof, by means of an offence or fraud, or has been obtained from the maker or
acceptor thereof by means of an offence or fraud, or for unlawful consideration,
the burden of proving that the holder is a holder in due course lies upon him
(Sec.9).

As per Indian Currency Act (Sec 21), a currency Note is not a Negotiable
Instruments though it is a Bearer Promissory Note.

As per Sec 8 of NI Act, the Holder is a person who:

(a) entitled in his own name to the possession thereof

(b) to receive the amount due thereon from parties thereto and

(c) consideration is not compulsory to become a holder (example – cheque

received as gift).

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As per Sec 9, a Holder in Due Course

(a) is a person (payee or endorsee or bearer) who must have the instruments in his
possession,

(b) possession is obtained for valuable and lawful consideration (and not as a gift)
before its maturity (in case of bill),

(c) he obtains it in good faith without sufficient reason to believe that any defect
existed in the title of the person from whom he obtained it.

Holder in Due Course gets defect free title even when the transferor had defective
title.

If neither Bearer nor Order is written on negotiable instrument, it is treated as

payable to ORDER.

If both Bearer and Order are written i.e. Bearer and Order and none is struck, then
it is payable to Bearer.

As per Section 31 of RBI Act, 1934, no person other than Central Government or
Reserve Bank of India or any other person authorized in this behalf, can issue
Bearer Promissory Notes (i.e., Currency Notes) and Demand Bills of exchange
payable to bearer.

As per Section 20 of NI Act 1881, an instrument on which date, payee or amount

is not mentioned, it is inchoate instrument. It can be completed by the Holder and
the completion is not treated as material alteration.

An instrument without signature is not treated as an instrument at all.

An instrument which can be treated as Bill of Exchange or Promissory Note.

Holder can treat it as BoE or PN.

Bearer instrument is negotiated by mere delivery.

Order instrument is negotiated by endorsement followed by delivery.

As per Section 15 of NI Act 1881, signing of an instrument on the back or face

thereof or on a slip or paper annexed thereto for the purpose of negotiation is
called endorsement.

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Blank Endorsement makes an instrument drawn originally payable to Order to
Bearer.

An endorsement in which the endorser himself becomes endorsee is called as

back to back endorsement. In this case, the endorsee can recover the amount only
from parties prior to his own endorsement.

When a drawer of a cheque himself becomes endorsee, it is called Negotiation

Back.

Endorsement can be made only for full amount. But in case part payment has
been received and a note to that effect is made on the instrument, then the same
can be endorsed for the balance amount.

Endorsement by Minor: A minor can endorse under section 26 of NI Act, but he

will not be liable as an endorser.

Paying Banker is concerned about regularity of endorsement and not its

genuineness. Regularity of endorsement i.e. no break in the chain of
endorsement-paying bank not concerned with genuineness.

As per Section 85(2) of NI Act, all endorsements on a bearer cheque are

meaningless (once a bearer, always bearer) endorsement has no effect.

As per Section 10 of NI Act, Payment in accordance with apparent tenor of the

instrument, with good faith and without negligence is called Payment in Due
Course.

As per Section 6 ―A cheque is a bill of exchange drawn on a specified banker and

not expressed to be payable otherwise than on demand.

However, after 2002 amendment, cheque includes the electronic image of a

truncated cheque and a cheque in the electronic form.

A cheque in the electronic form means a cheque which contains the exact
mirror image of a paper cheque, and is generated, written and signed in a secure
system ensuring the minimum safety standards with the use of digital signature
(with or without biometrics signature) and asymmetric crypto system.

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A truncated cheque means a cheque which is truncated during the course of a
clearing cycle, either by the clearing house or by the bank whether paying or
receiving payment, immediately on generation of an electronic image for
transmission, substituting the further physical movement of the cheque in writing.

A cheque can be drawn in different inks, different handwritings or different scripts.

It can be paid.

The cheque should be written in Hindi or English or Regional language.

A cheque dated prior to its date of its presentation is called ante dated cheque
and can be paid within 3 months from the date of issue.

Post dated cheque means a cheque which is dated subsequently to the date of
presentation.

Both ante dated and posted dated are valid as per Law. A post dated cheque can
be passed only on the date written on it or within 3 months thereafter.

A cheque becomes stale after 3 months of its issue.

A drawer of a cheque may reduce the validity of the cheque for less than 3
months. Such cheque should not be paid after that validity period.

The drawer can revalidate the cheque any number of times.

A cheque with impossible date like 31st June, should be paid on the last day of
the month or within 3 months of the last day of the month.

A cheque dated prior to the date of opening the account or prior to issue of
cheque book can be paid if otherwise is in order.

As per Section 18 of NI Act, if the Amount in words and figures differs, the
amount written in words will be the amount intended to be payable. Amount in
words can be paid.

If the balance available in the account is just equal to the amount of cheque, the
cheque can be paid.

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If number of cheques are presented at the same time and the balance is not
sufficient to pay all the cheques, then normally priority is given to cheques
favouring revenue authorities, then cheques favouring public authorities. If
balance is left, maximum number of cheques should be paid taking care that
cheque of very small amount is not dishonoured.

As per Section 65 of NI Act, the payment of a cheque should be made only during
banking hours. Otherwise, it will not be a payment in due course.

Reasonable amount can be paid to Drawer even after business hours.

If there is any mutilation of the cheque, it should be confirmed by the drawer.

Any change in date, amount or name of payee is called material alteration.

The change from Order to Bearer, Cancellation of Crossing or converting Special

Crossing into general crossing is also called as material alteration.

Bearer to Order, Crossing a cheque, converting general crossing to special

crossing is not material alteration.

If any material alteration on a cheque, it can be paid only after confirmation from
drawer i.e. drawer has to authenticate material alteration with full signature.

As per Section 89 of NI Act, Paying banker gets protection in case of payment of

materially altered cheque if the alteration is not apparent at the time of payment
and payment has been made in due course.

If Payee is a Fictitious Person, Cheque can be paid to bearer if it is payable to

bearer.

If Payee is a Fictitious Person, if cheque is payable to order, it can be paid only to

drawer.

If cheque is payable to Bearer or Order, it can be paid to bearer.

If Cheque does not indicate either bearer or order, it is payable to order.

If there is Forgery in signatures, such instrument is null and void.

Paying bank will not get protection if it pays such a cheque even though the
drawer might have been careless in custody of the cheque book or bank might
have sent statement of account and customer did not point out the mistake.

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If the cheque has been signed by the drawer himself but in a different fashion, the
banker will not be liable.

To avoid possibility of duplication of cheque series, six-digit SAN (Short Account

Number) is now being pre-printed in between MICR Code and Transaction Code
in the MICR band as an additional security feature in the redesigned cheque
leaves.

If a cheque or draft bears across its face addition of two parallel transverse lines
with or without addition of words - and Company‖ or any abbreviation thereof, it
is called General Crossing. (Section 123 of NI Act)

General Crossing is direction to Paying Banker to pay the cheque or draft through
some bank.

Even if the name of a city is written between two parallel lines like - Delhi, it will
continue to be a general crossing and the cheque can be paid to any bank.

When a cheque or Draft bears the name of bank across its face with or without
two parallel transverse lines either with or without the words ‘Not Negotiable’ it is
said to be specially crossed. (Section 124 of NI Act)

A cheque with special crossing can be paid only to the named bank or his
authorized agent for collection.

The special crossing is in favour of a Bank and not in favour of particular of

Branch.

The NI act does not restrict the payment of a Crossed Cheque to the banker in
cash.

For special crossing, it is not necessary that the cheque should bear two parallel
lines.

Provisions to crossing are applicable only to cheques and drafts and not to
Promissory Note and Bill of Exchange.

A cheque crossed to two banks has to be returned unpaid unless crossed by one
bank to another as his agent for collection. (Section 127 of NI Act)

Account Payee crossing is not recognized by law but is a long standing practice
among bankers.

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Account Payee Crossing is direction to Collection Banker. Cheque should be
credited to named payee.

Not Negotiable Crossing takes away an important characteristic of negotiability. It

can be transferred, but the transferee does not get better title. (Section 130 of NI
Act)

Cancellation of crossing can be done by drawer only under his full signatures by
writing the words crossing cancelled. In such cases, payment can be made in cash
to a person known to the Bank.

Paying banker will get protection in respect of crossed cheques or drafts provided
the instrument has been paid in accordance with the requirement of the crossing
and payment has been made in due course. (Section 128 of NI Act)

If a banker pays a cheque in violation of the crossing direction, it shall be liable to

true owner of the cheque for any loss he may sustain owing to payment of the
cheques. (Section 129 of NI Act)

When cheque/draft is crossed before it is lodged with bank for collection, the
bank receives payment for his customer, the bank acts as agent for collection and
not as holder for value and it receives payment in good faith and without
negligence. (Section 131 of NI Act).

Conversion is illegal interference with rights of true owner of instrument

inconsistent with his rights of ownership.

Forgery is an example of Conversion. In case where drawers signature is forged,

paying Banker has no right to debit the account and will be liable for wrongful
debit to the customer‘s account. The onus of proving the fact that the signature is
forged lies with the customer. The collecting Banker is protected under Section
131 of NI Act. The paying Banker has to report to RBI/Police about the fraud.

Penal provisions for Dishonour of cheques due to insufficient funds were

recommended by Rajamanar Committee, w.e.f. 01-04-1989.

If a cheque is returned by the bank unpaid, either with the reason funds
insufficient or similar reason, such person shall be deemed to have committed an
offence. (Section 138 of NI Act)

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Maximum punishment for dishonour of cheques for want of funds, is 2 years
imprisonment or twice the amount of cheque or both. For example if cheque
amount is Rs 10,000/- then penalty is Rs 20,000/- and principal is 10,000/- total
amount will be 30,000/-

As per Supreme Court judgment, cheques dishonoured on account of the

payment being stopped by the drawer or account being closed will attract penalty
under Section 138 of NI Act.

In case of a company, every person, who at the time of offence was committed,
was in charge of and was responsible to the company for the conduct of business
of the company as well as the company shall be deemed to be guilty of offence. (
Section 141 of NI Act)

Nominee Directors shall not be responsible for cheque bouncing for want of
funds.

Complaint should be made in the court of a metropolitan magistrate or a Judicial

magistrate of first class or above within one month of the date of cause of action,
i.e. payment not made within 15 days.

Bank‘s cheque returning memo having official mark of the bank shall be
presumed to be proof of dishonour of cheque.

Same rights and remedies will be available to the payee against dishonour of
electronic funds transfer as are available to the payee under Section 138 of the
Negotiable instruments Act, 1938.

Conditions are to be satisfied for applying Sec 138 of NI Act

a) cheque has been presented to the banker with in a period of 3 months from
the date on which it is drawn or within the period of its validity whichever is
earlier.

b) cheque has been received for consideration.

c) The payee or holder in due course of the cheque makes a demand for the
payment of the said amount of money by giving notice, in writing to the drawer,
of the cheque, within 30 days of the receipt of information by him from the bank
regarding return of cheque.

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d) The drawer of cheque fails to make the payment of the said amount, to the
holder in due course of the cheque, within 15 days of the receipt of the said
notice.

Bill of Exchange:

A Documentary bill is one which is accompanied by any document of title to

goods like LR, RR, and Bill of Lading etc.

Accommodation Bill means a bill issued without consideration. Dealing in such bill
is called as Kite Flying.

If in a bill of exchange or promissory note, interest rate is not mentioned, it will be

18% p.a.

To accept bill, drawee is allowed 48 hours excluding public holidays to accept the
bill.

If a usance bill is payable after date, its due date is calculated from the date of bill
and if it is payable after sight, its due date is calculated from the date of
acceptance.

3 days grace period is allowed in the case of Usance Bills. (Section 22 of NI Act)

If the due date is fixed on a particular day, no grace period. (Section 25 of NI Act)

If a bill matures for payment on public holiday, it falls due on immediate next
proceeding business day.

If the drawee does not accept the bill within stipulated period, it is treated as
dishonoured by non acceptance. If is not paid on due date, it is dishonour by non
payment.

If the dishonour is got certified from Notary Public, such certificate is called a
Protest.

For foreign bills, noting & protesting is compulsory. (Section 100 of NI Act).

If a Bill is dishonoured by Non Acceptance, the holder can recover the amount
from all prior parties except drawee. In this case, the drawer will be Principal
Debtor.

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If the bill is dishonoured due non-payment (after acceptance), the holder can
recover amount from all prior parties including the acceptor of the bill. In this
case, acceptor will be Principal Debtor.

Demand Bill need not be stamped.

In case of Usance Bills, if Usance period up-to 3 months, no stamp duty is levied if
the bill is for genuine trade transaction and bank is a party to the bill.

An order to pay money specified, drawn by one office of a bank upon another
office of the same bank , payable to order on demand is called Demand Draft .
(Section 85A of NI Act)

Lorry Receipts approved by IBA are negotiable instruments.

Airway Bill is neither a document to title to goods nor recognized as negotiable

instrument.

In case of promissory notes payable in instalments, on default in payment in one

instalment, entire amount becomes payable.

Following instruments are legally recognized as negotiable instruments as per

Customs and Usages of the trade:

Pay Order or Banker‘s Cheque ; Government Promissory Note; Certificate of

Deposit ; Commercial Paper ; Treasury Bills ; Hundi ; Bill of Lading ; Railway
Receipts ; Dock Warrant ; Warehouse Receipt (Wharfinger certificate) ; Delivery
Order; GRs issued by transport operators approved by IBA.

Certificate of Deposits and Commercial Papers are also been recognized

assurance promissory notes.

In case of Usance Promissory notes, 3 days of grace are to be added.

In case of CD, CP no grace period and the date mentioned in instrument is due
date.

As per Section 22 of NI Act, 3 days grace to be added.

If due date is mentioned, no grace period.

If the bills drawn in days, then while calculating the due date, 1st day is to be
excluded and last day to be included.

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Example : 45 days from 10th January. Days of January after 10th,- 21 Days In
February 24 days, Total 45 days. Adding 3 days of grace for February 24th, due
date is 27 th February. If maturity day is Sunday or Holiday, it will become payable
on next Preceding business day.

Rules of Due Date Calculation

Payable after so many months: (Section 23 of NI Act)

Becomes payable on the corresponding date of the month, after the stated
number of months. For Examples, in case of a bill dated 21.11.17 payable 3
months after date, 3 months shall complete on 21.02.2018. But it will be due on
3rd Day i.e. 24.02.2018.

Payable after so many months, where month has no corresponding dateIf the
month has no corresponding date, the period shall be held to terminate on the
last day of such month.

For example, for a bill of exchange dated 22.01.2018 accepted on 31.01.2018

payable one month after the date of acceptance, the one month shall be held to
terminate on 28.02.2018. The maturity date will be 3rd march 2018 after adding 3
days of grace period.

Payable after so many days (Section 24 of NI Act)

In calculating the date of maturity of a bill or note payable so many days after
date or sight or presentment or acceptance, the day of that date is excluded.

For examples, if a bill dated 21.08.2018 is payable 6 days after days, for calculating
6 days, the date 21st is excluded & 22nd August is counted as the first day, thus 6
days terminate on 27.08.2018 and the bill will be at maturity on 3rd day from
27.08.2018 i.e. 30.08.2018.

When Maturity date is a Public Holiday (Section 25 of NI Act)

As per section 25, such Instruments (BoE) shall be payable on the next preceding
business day (i.e. the previous business day)

Declaration of Public Holiday (Section 25 of NI Act)

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Under Section 25 of NI act, 1881, the public holiday includes Sunday, 2nd & 4th
Saturday & any other day declared by the Central Government by notification in
the Official Gazette (Power delegated to State Governments on 8th June 1957).

When Central Govt itself declare a day as ―Public Holiday‖ there is no need for
the banks to wait for state government notification.

A cheque drawn in electronic form by using any computer resource and signed in
a secure system with digital signature (with or without biometrics signature) and
asymmetric crypto system or with electronic signature is known as Electronic
Cheque. [NI (Amendment) Act 2015]

If the last day of grace is a public holiday, then the instrument will be due on
preceding business day – Section 25.

If the day of maturity is an emergency or unforeseen holiday, then the maturity

day will be the following business day.

Negotiable means transferability.

A negotiable instrument can be transferred infinitum, i.e., can be transferred any

number of times, till its payment.

Bank note or currency note is not a promissory note.

There are only two parties to a Promissory Note, one is the maker or the payer
and another one is the payee.

The person who make the note is known as the maker.

The payee to whom the promise is made is the Payee.

In case of Promissory Note, both the maker and the payee must be indicated with
certainty on the face of the instrument.

There are 3 parties in case of Bill of Exchange – Drawer, Drawee and Payee.

Drawer is the maker of a bill of exchange (i.e. who has signed the Bill) and he is
the person (Creditor) who is entitled to receive payment from other (known as
Drawee) the debtor.

Drawee is the person upon whom the bill of exchange is drawn. He is the debtor
who has to pay the money to the drawer. He is also known as ‘Acceptor‘.

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Payee is the person to whom payment has to be made. The payee may be the
drawer himself or a third party like Bank.

Payment of Bill of exchange before due date is known as the Retirement of bills of
exchange.

In case of Retirement of Bills, Drawer may allow some discount. Such discount is
known as Rebate on Bills.

In case of Demand Draft, Stop Payment can not be ordered.

Acceptor for Honour is the one who undertakes to accept and pay (in part or in
full) a bill of exchange that was dishonoured, either by non-acceptance or by non-
payment by the party on whom it was drawn.

Acceptor for Honour is also called acceptance supra protest.

It is not every person in possession of the instrument who is called a holder.

To be a holder, the person must be named in the instrument as the payee, or the
endorsee, or he must be the bearer thereof.

A person who has obtained possession of an instrument by theft, or under a

forged endorsement, is not a holder, as he is not entitled to recover the
instrument.

An agent holding an instrument for his principal is not a holder although he may
receive its payment.

The holder implies de jure (holder in law) holder and not de facto (holder in fact)
holder.

A payment will be regarded as a payment in due course if

(a) payment is done as per apparent tenor of instrument;

(b) it is made in good faith & without negligence

(c) it is made to the person who possesses the instrument who is entitled as
holder to obtain payment;

(d) payment is made in money & money only.

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There are two important conditions for negotiable instruments to become
payable to bearers.

a) parties to the transactions must express it to be so payable; or

b) The only endorsement for it should be an endorsement in blank.

When the instrument is transferred from one person to another with a view to
make the other person as holder then the instrument is deemed to have been
negotiated.

Partial Endorsement – Instrument which transfers the amount mentioned in the

instrument partially and not fully is called as partial endorsement. As per section
56 of NI Act Partial Endorsement is invalid.

Where an endorser negotiates an instrument and again becomes its holder, the
instrument is said to be negotiated back to that endorser and none of the
intermediary endorsees are then liable to him. (This is General endorsement)

Example – Mr A , the holder of a bill endorses it to Mrs B , Mrs B endorses to Mr C

and Mr C to Mrs D, and Mrs D endorses it again to Mr A. Mr A, being a holder in
due course of the bill by second endorsement by Mrs D, can recover the amount
thereof from Mrs B, Mr C and Mrs D and himself being a prior party is liable to all
of them. Therefore, Mr A having been relegated by the second endorsement to
his original position, cannot sue Mrs B, Mr C and Mrs D..

Where an endorser so excludes his liability and afterwards becomes the holder of
the instrument, all the intermediate endorsers are liable to him. (This is known as
Sans Recourse endorsement as the endorser excludes his liability).

Example – A is the payee of a negotiable instrument. He endorses the instrument

‗sans recourse‘ to B, B endorses to C , C endorses to D and D again endorses it to
A. In this case, A is not only reinstated in his former rights but has the right of an
endorsee against B, C and D.

An endorsement is conditional or qualified which limits or negatives the

liability of the endorser. An endorser may limit his liability in any of the following
ways :

a) By sans recourse endorsement

b) By making his liability depending upon happening of a specified event

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Restrictive endorsement seeks to put an end the principal characteristics of a
Negotiable Instrument and seals its further negotiability.

Restrictive endorsement prevents the risk of unauthorized person obtaining

payment through fraud or forgery and the drawer losing his money.

Endorsement Sans Recourse – Sans Recourse which means without recourse or

reference. As such a when the property in a negotiable instrument is transferred
sans recourse, the endorser, negatives his liability and excludes himself from
responsibility to all subsequent endorsees. It is one of the commonest forms of
qualified endorsement and virtually prohibits negotiation since the endorser says
in effect.

A minor, being incompetent to contract, cannot bind himself by becoming a party

to a negotiable instrument. Whether he is the drawer, maker, acceptor or
endorser, he is not liable on the instrument. Section 26 of NI Act excludes minor's
liability by stating that a minor binds all parties except himself.

A general authority to transact business and to discharge debt does not confer
upon an agent the power to indorse bills of exchange so as to bind his principal.

An agent cannot escape personal liability unless he indicates that he signs as an

agent and does not intend to incur personal liability.

Usually, the liability of the drawer of a bill or cheque is secondary and conditional.

The liability of the acceptor and maker of the bill and drawee of the cheque is
primary and unconditional.

The drawer's liability is conditional, i.e., it arises only in the event of a dishonour
by the drawee or acceptor. d) Once there has been dishonour and the notice of
dishonour has been given to the drawer, he is liable to compensate the holder
whatever be the state of the account between himself and the drawee or
acceptor.

Wrongful dishonour of customer's cheque entails exemplary damages against

banker and the amount of damages is inversely related to the amount of the
cheque dishonoured. That means as the amount of cheque is lower, the damages
will be higher.

Drawee's liability is primary and unconditional.

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An instrument made, drawn, accepted, indorsed, or transferred without
consideration creates no obligation of payment between the parties to the
instrument.

Only Bills of exchange requires presentment for acceptance.

Bill of exchange should be presented within a reasonable time, on business day

and during business hours to the drawee for acceptance.

Following bills must be presented for acceptance –

a) A bill payable after sight – Presentment is necessary in order to fix maturity of

the bills

b) Express condition – A bill in which there is an express condition shall be

presented for acceptance before it is presented for payment.

c) In case it is not presented for acceptance the bill is dishonoured due to non-
acceptance and no party is liable.

When a promissory note or bill of exchange has been dishonoured by non-

acceptance or non payment, the holder may cause such dishonour to be certified
(noted) by a notary public upon the instrument, or upon a paper attached thereto,
or partly upon each. Such note must be made within a reasonable time after
dishonour, and must specify the date of dishonour, the reason, if any, assigned for
such dishonour, or, if the instrument has not been expressly dishonoured, the
reason why the holder treats it as dishonoured, and the notary‘s charges. The
process of such certification is called Noting.

Special Crossing is also known as Restricted Crossing.

Specially Crossed Cheques can never be converted to General Crossing.

When the acceptor of a bill of exchange has become insolvent, or his credit has
been publicly impeached, before the maturity of the bill, the holder may, within a
reasonable time, cause a notary public to demand better security of the acceptor,
and on its being refused may, within a reasonable time, cause such facts to be
noted and certified as aforesaid. Such certificate is called a protest for better
security.

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Hundis are negotiable instruments written in an oriental language. They are
sometimes bills of exchange and sometimes promissory notes, and are not
covered under the Negotiable Instruments Act, 1881.

Hundis are governed by the customs and usages in the locality but if custom is
silent on the point in dispute before the Court, NI Act applies to the hundis.
(There are 8 types of Hundis. As Hundis are not much in use, the details of various
types of Hundis not explained).

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 03 Foreign Exchange Management Act, 1999
The Foreign Exchange Management Act 1999 (FEMA) was enacted on December
02, 1999 to replace Foreign Exchange Regulation Act (FERA) 1973.

The act came into force on June 01, 2000.

FEMA was basically introduced to de-regularize and have a liberal economy in

India.

The main objective for which FEMA was introduced in India was to facilitate
external trade and payments. In addition to this, FEMA was also formulated to
assist orderly development and maintenance of the Indian forex market.

The Foreign Exchange Management Act, 1999 (FEMA) deals with cross border
investments, foreign exchange transactions and transactions between residents
and non-residents.

FEMA empowers the Reserve Bank to frame regulations to prohibit, restrict &
regulate the opening, holding & maintaining of foreign currency accounts & the
limits up to which amounts can be held in such accounts by a person resident in
India.

FEMA has only 49 Sections.

FEMA extends to the whole of India.

FEMA applies to all branches, offices and agencies outside India, which are owned
or controlled by a person resident in India, in this respect FEMA can be said to
acquire extra-territorial jurisdiction.

All transactions involving foreign exchange have been classified either as capital
or current account transactions.

Capital Account Transaction means a transaction which alters foreign assets and
foreign liabilities (including contingent liabilities) of Indian residents and of non-
residents.

The definition of Capital Account transaction is an economic definition and not an

accounting or legal definition. It is intended to cover cross border investments,
cross-border loans and transfer of wealth across borders.

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Capital account recognises domestic investment in foreign assets and foreign
investment in domestic.

RBI has been empowered to regulate capital account transactions.

RBI cannot do all transactions in foreign exchange by itself. Therefore, the powers
are delegated to authorized persons with suitable guidelines, to deal in foreign
exchange and foreign securities.

Sec. 3 of FEMA 1999 require all dealing in FE through Authorized Person only.

Sec 2 (c) of FEMA 1999 define Authorized Person means an Authorized Dealer,
Money Changer , Offshore Banking Unit or any other person authorized to deal in
Foreign Exchange or Foreign Securities.

Authorized Dealer (AD) - is any person specifically authorized by the Reserve Bank
under Section 10(1) of FEMA, 1999, to deal in foreign exchange or foreign
securities and normally includes banks. Authorised Dealers are of 3 categories

a) Category I: Who can take all current and capital account transactions. Examples
- commercial banks, State Co-op Banks, Urban Co-op Banks.

b) Category II: Upgraded FFMC with a minimum net owned funds of INR 10 crore
and functioning for last 2 years. Regional Rural Banks (RRBs) can undertake non
trade related current a/c transactions.

c) Category III: Transactions incidental to the foreign exchange activities

undertaken by select financial institutions and other institutions authorized
dealers.

Authorised Money Changers (AMCs are entities, authorised by the Reserve Bank
under Section 10 of the Foreign Exchange Management Act, 1999.

An AMC is a Full Fledged Money Changer (FFMC) authorised by the Reserve Bank
to deal in foreign exchange for specified purposes. They are authorized to issue
and encash foreign currency travellers cheques and currency notes.

In FEMA the term ‗foreign exchange has been defined to mean foreign currency
and includes deposits, credits, balance payable in foreign currency, drafts,
travellers cheques, letters of credit, bills of exchange expressed or drawn in Indian
currency but payable in any foreign currency.

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Any draft, travellers cheque, letters of credit or bills of exchange drawn by banks,
institutions or persons outside India but payable in Indian currency has also been
included in the definition of foreign exchange.

The residential status of a person is determined to check the flow of foreign

exchange between persons enjoying different residential status.

A person cannot transfer/transmit more than a limit specified in the Foreign

Exchange Management Act (FEMA),1999 for different purpose.

As per Section 2(v) of FEMA,1999 Person Resident in India includes:-

1) A person residing in India for more than 182 days during the course of the
preceding financial year but does not include following two categories of persons
from the purview of definition.

a) A person who has gone out of India or who stays outside India, in either case-

for or on taking up employment outside India,

or
for carrying on outside India a business or vocation outside India,
or
for any other purpose, in such circumstances as would indicate his intention
to stay outside India for an uncertain period.

b) A person who has come to or stays in India, in either case, otherwise than-

for or on taking up employment in India,

or
for carrying on in India a business or vocation in India,
or
for any other purpose, in such circumstances as would indicate his intention
to stay in India for an uncertain period.

2. Any person or body corporate registered or incorporated in India.

3. An office, branch or agency in India owned or controlled by a person resident

outside India.

4. An office, branch or agency outside India owned or controlled by a person

resident in India.

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Unless the transaction is permitted as per regulations, Foreign Exchange (FX)
cannot be drawn for the same.

There are two purposes for which no restrictions can be imposed, either by RBI or
by the Government of India, viz.:

a) drawing of foreign exchange for the repayment of any loans and;

b) for replenishing depreciation of direct investments in the ordinary

course of business. (Section 6).

Current Account Transaction means all transactions, which are not capital account
transactions. Specifically, it includes:

a) Business transactions between residents and non-residents.

b) Short-term banking and credit facilities in the ordinary course of business.

c) Payments towards interest on loans and by way of income from investments.

d) Payment of expenses of parents, spouse or children living abroad or expenses

on their foreign travel, medical and education.

e) Scholarships / Chairs, etc.

The current account is an indicator of an economy‘s status.

Primarily there are no restrictions on current account transactions. A person may

sell or draw foreign exchange freely for his current account transactions, except in
a few cases where limits have been prescribed (Section 5).

The Central Government has the power to regulate current account transactions.

The Current Account transactions under the FEMA Act has been categorized into
three parts which, namely

a) Transactions prohibited by FEMA,

b) The transaction requires Central Government‘s permission,

c) The transaction requires RBI‘s permission

The head office of FEMA is situated in New Delhi and known as Enforcement
Directorate.

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Foreign exchange can be purchased from any authorised person, such as an AD
Category-I bank and AD Category II. Full-Fledged Money Changers (FFMCs) are
also permitted to release exchange for business and private visits.

Travellers going to all countries other than (a) and (b) below are allowed to
purchase foreign currency notes / coins only up to USD 3000 per visit. Balance
amount can be carried in the form of store value cards, travellers cheque or
banker‘s draft. Exceptions to this are

(a) travellers proceeding to Iraq and Libya who can draw foreign exchange in the
form of foreign currency notes and coins not exceeding USD 5000 or its
equivalent per visit;

(b) travellers proceeding to the Islamic Republic of Iran, Russian Federation and
other Republics of Commonwealth of Independent States who can draw entire
foreign exchange (up-to USD 250,000) in the form of foreign currency notes or
coins.
For travellers proceeding for Haj/ Umrah pilgrimage, full amount of entitlement
(USD 250,000) in cash or up to the cash limit as specified by the Haj Committee of
India, may be released by the ADs and FFMCs

A resident of India, who has gone out of India on a temporary visit may bring into
India at the time of his return from any place outside India (other than Nepal and
Bhutan), currency notes of Government of India and Reserve Bank of India notes
up to an amount not exceeding Rs.25,000.

A person may bring into India from Nepal or Bhutan, currency notes of
Government of India and Reserve Bank of India notes, in denomination not
exceeding Rs.100.

Any person resident outside India, not being a citizen of Pakistan and Bangladesh
and also not a traveller coming from and going to Pakistan and Bangladesh, and
visiting India may bring into India currency notes of Government of India and
Reserve Bank of India notes up to an amount not exceeding Rs.25,000 while
entering only through an airport.

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A person coming into India from abroad can bring with him foreign exchange
without any limit. However, if the aggregate value of the foreign exchange in the
form of currency notes, bank notes or travellers cheques brought in exceeds USD
10,000 or its equivalent and/or the value of foreign currency alone exceeds USD
5,000 or its equivalent, it should be declared to the Customs Authorities at the
Airport in the Currency Declaration Form (CDF), on arrival in India.

On return from a foreign trip, travellers are required to surrender unspent foreign
exchange held in the form of currency notes and travellers cheques within 180
days of return. However, they are free to retain foreign exchange up to USD 2,000,
in the form of foreign currency notes or TCs for future use or credit to their
Resident Foreign Currency (Domestic) [RFC (Domestic)] Accounts.

The residents can hold foreign coins without any limit.

Liberalized Remittance Scheme (LRS)

In terms of the Foreign Exchange Management Act, 1999, a person resident in

India is free to hold, own, transfer or invest in foreign currency, foreign security or
any immovable property situated outside India if such currency, security or
property was acquired, held or owned by such person when he was resident
outside India or inherited from a person who was resident outside India.

A resident individual can also acquire property and other assets overseas under
LRS.

Route for Drawal of Foreign Exchange - According to the RBI, Foreign Exchange
can be drawn from any authorized dealer by the Prior Approval Route or General
Permission Route

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The following table shows Amounts permitted under General Permissions.

S No Purpose Limit per year

01 Visiting privately to any country (except Bhutan USD 2,50,000/-

and Nepal)

02 Donations/Gift per donor USD 2,50,000/-

03 Corporate Donations 1 % of the forex earnings during the

preceding three financial years or US$
5,000,000, whichever is less, for a specified
purpose

04 Going out of India for the purpose of USD 2,50,000/-

employment

05 Remittance facility for emigrations USD 2,50,000/-

06 Business Travel Abroad USD 2,50,000/-

07 Attending specialized training or conference USD 2,50,000/- .

08 For Medical treatment USD 2,50,000/-

09 Maintenance of a patient going for medical USD 2,50,000/-.

check-up or medical treatment abroad

10 For Studying Abroad USD 250,000 per academic year or the

education institution‘s estimation, whichever
is higher

11 Expenses to attendant to a patient going USD 2,50,000/-

medical check-up or for medical treatment
abroad

12 Payment of commission to an agent outside USD 25,000 or five percent of the

India for selling of commercial or residential transaction, whichever is higher.
plot or flats in Indi

13 Pre-incorporation‘s expenses reimbursement USD 100,000 or 5 percent of the investment

brought into India whichever is higher.

14 Remittance for maintenance of relatives (only Salary (after the deduction of income tax,
close relative) outside India Provident Fund and other deduction) of a
person not being a permanent resident in
India and a citizen of foreign state other
than Pakistan or USD 2,50,000/- a year per
recipient in all other cases.

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 04 Payment & Settlement Systems Act, 2007
The Payment and Settlement Act System, 2007 (PSS Act, 2007) was set up by the
Reserve Bank of India (RBI) which received the assent of the President on 20th
December 2007. The Act empowers RBI (apex institution) to deal with the matters
relating to that purpose and other purposes for which RBI is authorized to
constitute a central authority known as the Board for Regulation and Supervision
of Payment and Settlement Systems (BPSS).

The Payment and Settlement Systems Regulations, 2008 was also made by RBI.
Both the regulations also came into force on 12th August 2008.

The objectives of The Payment and Settlement Systems Act, 2007 are:

a) To provide regulation and supervision of payment methods in India.

b) To designate RBI, the apex institution as authority for purposes related to

payment systems in India.

c) To constitute such regularities by RBI to exercise its power and perform its
functions.

d) To provide a legal basis for “netting” and “settlement finality”.

The two regulations made under the Act through RBI are Board for Regulation
and Supervision of Payment and Settlement Systems Regulations, 2008 and the
Payment and Settlement Systems Regulations, 2008.

The objective of the Board for Regulation and Supervision of Payment and
Settlement Systems Regulation, 2008 are:

a) To deal with the constitution of BPSS

b) To deal with the composition, powers, and functions, its meetings, and quorum
of BPSS

c) To constitute sub-committees or Advisory Committees by BPSS

d) To exercise its powers and perform its functions on behalf of the RBI.

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The objectives of the Payment and Settlement Systems Regulations, 2008
are:

a) It deals with matters relating to the form of application to authorize

commencing/ carrying on a payment system and grant of authorization.

b) It prescribes payment instructions and determines the standard of payment

systems.

c) It covers matters related to furnishing of returns or documents or other

information.

d) It also deals with the furnishing of accounts and balance sheets by system
providers.

Important definitions

Sec 2(1) deals with the definitions of the important words used in the Act.

Payment Obligation- It is an indebtedness which is owned by a participant of the

system to the other resulting from clearing or settlement of payment instructions
related to funds, securities or foreign exchange or derivatives or other
transactions.

Payment Instructions- Payment Instruction can be an instrument or

authorization or order in any form including an electronic means to carry out
payment by a person to another in the payment system or by a participant to
another participant in the payment system. The communication of the payment
can be done either manually or through electronic means. Instruments such as
cheque draft or payment order are manual means.

Settlement- It means the settlement of payment instructions. It also includes the

settlement of securities, foreign exchange, derivatives, or other transactions
involving payment obligations. It can be either on a net basis or on a gross basis.

Payment System- It is a system which enables a payment between a payer and a

beneficiary, including clearing, payment, or settlement service, but it does not
include a stock exchange. It further explained that the payment system includes a
system enabling credit card, debit card, smart card operations, or money transfer
operations, etc. Section 34 of the PSS Act states that stock exchange or clearing
corporations set up under stock exchange are not applicable under this Act.

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System Providers- The entities providing operations for clearing, settlement, or
payment are referred to as system providers. The entities operating a money
transfer system/card transfer system would also be referred to as system
providers.

Authorization of payment system

According to Section 4 of the PSS Act, only RBI has an authority to operate or
commence any payment system and if any person or system providers desire to
operate or commence a payment system then he has to apply for authorization
from RBI under Section 5 of the Act. The application of authorization shall be
made according to Form A under Regulation 3(2) under PSS Regulations, 2008.
The application should be filled and submitted along with the required
documents and fee of 10,000/- to the RBI. The application fee can be submitted in
cash, cheque, demand draft, payment order, or electronic fund transfer in favour
of RBI. It can also be submitted through electronic mode. The system providers
operating the payment systems or desires to set up such a payment system need
to get authority from the RBI from this link. Any unauthorized operation through a
payment system would be considered as an offence under this Act and would be
liable for punishment.

Foreign Entities

The Act doesn’t differentiate or discriminate between domestic and foreign

entities. It uses the expression “No Person” under Section 4 of the Act. Thus,
foreign entities are allowed to operate the payment system in India. To
commence a payment system in India, it is necessary to obtain license or approval
from the RBI, irrespective of being a domestic or foreign entity.

A foreign entity can provide any type of payment system or service. The PSS Act,
2007 does not put any restriction on the kind of payment system to be provided
by a foreign entity. Provided, the payment system or service should be in
accordance with the legal framework of the country. Foreign card networks like
MasterCard, Visa World Wide Pvt. Ltd., etc, have received authority from RBI and
are operating card schemes in India. Foreign entity service providers like Western
Union Financial Services Inc., USA, MoneyGram Payment Systems Inc, etc. have
also received authority and are also providing remittance services.

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Financial Market Infrastructures (FMI)

It is a multilateral system among participating institutions including the system

operator.

This system is used for purposes of clearing, settling, or recording payments,

securities, or other financial transactions.

FMI refers to Central Securities Depositories (CSDs), Securities Settlement Systems

(SSSs), Central Counter Parties (CCPs), and Trade Repositories (TRs) as “payment
systems” under the Act, to facilitate the clearing, settlement, and recording of
financial transactions.

The Committee on Payment and Settlement Systems (CPSS) and International

Organization of Securities Commissions (IOSC) issue the Principles for Financial
Market Infrastructures (PFMIs).

The FMIs are subjected to the rules and regulations of such PFMIs.

On 26th July 2013, RBI issued a press report on “Policy Document for regulation
and Supervision of Financial Market Infrastructures”. A foreign Financial Market
Infrastructure can also operate in India. The PSS Act does not prohibit its
operation.

Power of RBI

The Reserve Bank has following powers related to an application for authorization
of payment system:

According to Sec 7(3) of the Act, RBI can refuse to grant authorization to the
application by giving a written notice stating the reasons for refusal of the
application also give a reasonable opportunity to the applicant.

Section 8 of the Act empowers RBI to revoke the authorization granted by it. The
revocation is done if the system provider contravenes any provision of the Act or
regulation, or fails to comply with orders directions of the RBI, or violates the
terms and conditions under which it has received the authorization.

Section 7 empowers the RBI to collect authorization fees. RBI can also ask the
applicant to submit a security deposit for the proper conduct of the applied
payment system.

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Sec 10 empowers RBI to determine the standards. RBI can prescribe the format of
payment instructions, size and shape of the instrument, timings that are to be
maintained by the payment system, manner of transfer of fund in the payment
system, criteria for membership of the system payment, condition to participate in
fund transfers, and other standards to have complied with the payment system.

Section 12 and Section 13 empowers RBI to call for the system provider to furnish
returns, documents, and other information relating to the operation of the
payment system. It is the duty of all payment systems and system participants to
provide access to all the information asked by the RBI.

Section 15(3) gives an authority to RBI to disclose any document or information

obtained by it to any person or authority to whom it considers necessary for the
protection of the integrity, effectiveness or security of the payment system, or it is
necessary to disclose in the interest of banking or monetary policy or operation of
payment system or it is in the interest of the general public.

Section 14 of the Act empowers the RBI to ensure compliance with the provisions
of the Act. The Regulations constituted under the Act are empowered to depute
an officer to enter any premise where a payment system is being operated,
inspect any equipment, call and inquire upon any employee of the system
provider or participant to furnish any document or information.

RBI is authorized to conduct an on-site inspection.

Section 17 and Section 18 of the Act authorizes the RBI to issue directions to a
payment system or system participant to cease or prohibit from committing any
act or omission, or it can direct to perform any act, or it can also issue directions
for smooth function of the payment system.

Settlement of disputes

Section 24 of the Act prescribes for the system provider to make provisions for
the creation of a panel to decide the dispute between the system participants and
if any dispute arises between two or more system participants then they shall refer
the matter to the panel.

If the system participants are not satisfied with the decision of the panel or the
dispute arises between any system participant and system provider then the
dispute shall be referred to the Reserve Bank.

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If the dispute is referred to Reserve Bank then an officer of Reserve Bank
authorized on this behalf shall decide the matter and his decision shall be final
and binding.

When a dispute arises between Reserve Bank acting as a system provider or

system participant and any other system provider or system participant then the
matter shall be referred to the Central Government which authorizes an officer of
a rank not below the rank of Joint Secretary whose decision shall be final.

Offences and Penalties

Section 26, 27, 28, 29, 30, and 31 deals with the provisions related to offences and
penalties. Offences under the Act include the unauthorized operation of a
payment system, failure to comply with the terms of authorization, failure to
produce statements, return information, or documents providing false
information, disclosure of prohibited information, violating the provisions of the
Act, not acting in compliance of the directions given by the RBI.

For committing any of the offences, RBI is empowered to initiate a criminal

proceeding against the offender. RBI can even impose fines on the person for
contravening certain provisions of the Act.

Payment and Settlement System is used to carry out financial transactions in the
country which is covered by the Payment and Settlement Systems Act, 2007. The
Act is regulated by the Reserve Bank of India and the Board of Regulation and
Supervision of Payment and Settlement Systems.

RBI is working to encourage effective alternative methods to establish security

and efficiency in the payment system and make the entire working procedure
easier for banks.

The Reserve Bank of India (RBI) Governor, Shaktikanta Das, launched three key
digital payment initiatives at the Global Fintech Fest 2022.

The three digital payment initiatives that were launched by the RBI are RuPay
Credit Card on Unified Payments Interface (UPI), UPI Lite, and Bharat BillPay Cross-
Border Bill Payments.

The Reserve Bank of India has released the framework for geo-tagging of
payment system touchpoints under this act.

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Geo-tagging of payment system touchpoints will enable proper monitoring of the
availability of payment acceptance infrastructure like Points of Sale (PoS)
terminals, Quick Response (QR) codes, etc.

Reserve Bank of India (RBI) has imposed monetary penalties on two payment
system operators, One Mobikwik Systems Private Limited and Spice Money
Limited, for violation of norms referred to in Section 26 of the PSS Act.

Non-bank entities are allowed to set up White Label ATMs across India, after
getting authorization from RBI, under the Payment & Settlement Systems (PSS)
Act, 2007.

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 05 Law Relating to Securities and Modes of Charge
Types of Charges over Assets

By “Charge” we mean “transfer or creation of interest in the Asset”. Depending on

the nature of Asset and possession of the Asset, Charges are named differently -
Mortgage ; Hypothecation ; Pledge ; Lien ; Assignment.

Hypothecation : is transfer of interest in floating assets. Under hypothecation, the

possession of the security remains with the borrower itself. If the borrower
defaults on payments, the lender would have to first take possession of the
security (asset under hypothecation) and then sell the asset to recover dues. In
case of OCC, Kisan Credit Card (KCC), Vehicle Loans charge is created on assets by
way of hypothecation.

Pledge : Bailment of goods as security is known as the pledge. In case of KCC

(Keyshut Cash Credit), the stocks given as security will be stored in godown and
the godown keys will be with Bank. In such cases, the charge is known as Implied
Pledge. In case of loans against gold jewellery, the charge is known as Pledge.

Lien : Under a lien, the lender gets the right to hold up a property used as
collateral . However, unless the contract states otherwise, the lender doesn’t have
the right to sell the asset, if the borrower defaults . It is a right given to the
creditor to retain/possess the security until the loan amount is discharged. Since
possession is with the creditor, it is the strongest form of security. The words
‘under lien’ to VSL/OD......’ should not be used since it may imply restriction on the
Bank’s paramount lien.

A Mortgage is a transfer of interest in specific immovable property for the

purpose of securing payment of money advanced by way of loan or any present
or future debt.

Assignment : Transfer of ownership of a property, or of benefits, interests, rights

under a contract (such as an insurance policy or Receivables), by one party (the
assignor) to another (the assignee) by signing a document called deed of
assignment.

The charge in case of loans against book debts (Receivables) and against amounts
covered under Insurance Policies, Shares known as Assignment.

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Fixed Charge is the kind of charge created on properties/assets the identity /
nature/ownership of which does not change. For example, a fixed charge would
be created on Land & Building, Plant & Machinery.

Floating Charge is created on assets which undergo change of ownership – like

stocks of goods of a shop. A trading concern may take a loan, against its stock as
security. Such a stock may be used for business, i.e., it can be sold in the ordinary
course of its business. Thus the charge on the stock, which keeps changing, is
known as Floating Charge.

The Transfer of Property Act 1882

The Transfer of Property Act 1882 (TP Act) regulates the Transfer of Property in
India. It contains specific provisions regarding what constitutes a transfer and the
conditions attached to it. It came into force on 1 July 1882.

The TP Act is limited to the transfer of property by the act of parties that is,
through sale, exchange, gift, actionable claim, mortgage and lease. It does not
cover the transfer of property by the operation of law.

TP Act deals with the transfer of immovable property inter vivos that is, between
living persons.

TP Act pertains to voluntary transfers executed by the act of parties and does not
cover transfers by the operation of law in form of inheritance, insolvency,
forfeiture or sale in execution of a decree.

The Transfer of Property Act 1882 deals with the immovable properties.

The transactions governing sale, lease, mortgage, gift of immovable properties are
covered.

The T P Act has no application to the disposal of property by will and does not
deal with cases of succession of property.

According to the T P Act, 'transfer of property' means an act by which a person

conveys the property to one or more persons. The person may include an
individual, company or association or body of individuals, and any kind of
property may be transferred, including the transfer of immovable property.

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As per the TP Act , Immovable property does not includes standing timber,
growing crops or grass. However, it shall include land, benefits to arise out of the
land, and things attached to the earth, or permanently fastened to anything
attached to the earth.

Even when a person is mentally competent, but physically unable to sign any
contract, the property lawyer hired by him, can do that with the help of a power of
attorney.

Generally, only the person having interest in the property is authorized to transfer
his interest in the property and can pass on the proper title to any other person.

From the point of view of bank, provisions of the TP Act governing mortgage are
of vital importance.

A mortgage is a transfer of interest in specific immovable property for the

purpose of securing payment of money advanced by way of loan or any present
or future debt.

In a mortgage transaction , the transferor is called a mortgagor, the transferee a

mortgagee.

In a mortgage transaction the principal money and interest the payment of which
is secured for the time being are called the mortgage money.

In a mortgage transaction instrument by which the transfer is effected is called a

mortgage deed.

Essentials of a mortgage –

a) Transfer of interest.
b) Immovable property should be specifically mentioned.
c) To secure the payment of a loan

Various types of mortgages :

a) Simple mortgage
b) Mortgage by conditional sale
c) Usufructuary mortgage
d) English mortgage
e) Equitable mortgage
f) Anomalous mortgage

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Simple mortgage - It is a transaction where without delivering possession of
mortgaged property, the mortgagor binds himself personally, to pay the
mortgage money and agrees expressly or impliedly that mortgagee shall have the
right to sell the property through court and adjust the proceeds as far as
necessary.

Simple mortgage consists of two parts:

a) A covenant on the part of the mortgager to pay the debt and

b) an agreement empowering the mortgagee to realise his money out

of the property mortgaged to him. The mortgagee must however,
ordinarily obtain a decree directing a sale in order to make his
security available.

Hence, in the case of simple mortgage, mortgagee has two fold cause of action
on default of the debtor one arising out of the breach of the covenant to repay
and the other arising out of the mortgage and we sue the mortgagor on both the
causes of action.

In a Simple Mortgage, the mortgagee is not bound to sue for both the remedies
simultaneously. He may, if he likes bring his action on the covenant first and then
sue for the sale of mortgaged property.

Right of foreclosure is not available with the mortgagee in Simple Mortgage.

Mortgage by conditional sale - It is a transaction wherein the mortgagor

ostensibly sells the mortgaged property on the condition that

a) The sale shall become absolute on default of the payment of the mortgaged
money on a certain date or

b) shall become void on such payment being made or

c) that the buyer (mortgagee) shall transfer the property to the seller (mortgagor)
on such payment. The process of transforming the mortgage into sale can be
enforced by foreclosure suit.

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In case of Borrowal Accounts where Simple Mortgage is created, we cannot
proceed under SARFAESI Act. As such, please note to go for EMT with MODTD
wherever possible. However, in case of Agricultural Lands, we may go for Simple
Mortgage, as SARFAESI Act is notapplicable.

Usufructuary mortgage is one where the creditor is placed in possession of the

property to enjoy the rents and profits until his claim is satisfied. There is transfer
of one of the incidents of ownership viz., the right of possession and enjoyment of
the usufruct.

The essence of a usufructuary mortgage is - rents and profits of the property are
appropriated in lieu of interest or they are applied in payment of mortgage
money or they are received in lieu of interest and partly in payment of mortgage
money.

In case of usufructuary mortgage there is no personal liability on the part of the

mortgagor to pay; In case of usufructuary mortgage the mortgagee will not be
entitled to foreclose the mortgage or to sue for sale.

English mortgage - Under the English mortgage, the mortgagor personally binds
himself to repay the mortgaged money on a certain day.

In case of English Mortgage, the property mortgaged is transferred absolutely to

the mortgagee. This transfer is, however, subject to the proviso that the
mortgagee will reconvey the property to the mortgagor upon payment of the
mortgage money on the date fixed for repayment.

English mortgage is a combination of simple mortgage and mortgage by

conditional sale.

Under the English mortgage, ownership and possession will be with mortgagee.

Under the English mortgage, Mortgagor has personal liability to repay the loan.
Under the English mortgage, in case of default, mortgage can sell the property
with the permission of the court.

Equitable Mortgage- (Mortgage by deposit of title deeds) is one where a person

in any one of the metropolitan cities, namely Delhi, Kolkata, Chennai and Mumbai
or in any other town which the local government notification the Official Gazette,
delivers to a creditor or to his agent, documents of title to immovable property,
with an intention to create a security thereon.

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By deposit of title deeds followed by registered memorandum of deposit (MODTD
– Memorandum of Deposit of Title Deeds) - There may be instances where the
parties are in possession of only some of the material documents of title to the
property. In such cases, after satisfying about the creditworthiness of the borrower
and that the other material documents are not traceable in spite of best efforts
put by the borrowers, equitable mortgage by getting the Memorandum of
deposit of title deeds registered with the Registrar can be followed.

Anomalous Mortgage - A mortgage which is not a simple mortgage, a mortgage

by conditional sale, usufructuary mortgage, an English mortgage, or a mortgage
by deposit of title deeds is called an anomalous mortgage.

An anomalous mortgage is a combination of various other mortgages, for

example, a usufructuary mortgage may be created and the mortgagee shall have
the right of sale.

Mortgage versus Charge

A mortgage is transfer of an interest in the property made by the mortgagor as a

security for the loan.

Charge is not the transfer of any interest in the property though it is security for
the payment of an amount.

Sub-Mortgage - Where the mortgagee transfers by mortgage his interest in the

mortgaged property, or creates a mortgage of a mortgage the transaction is
known as a sub-mortgage.

For example, where R mortgages his house to M for Rs. 10,000 and M mortgage
his mortgagee right to A for Rs. 8,000. M creates a sub mortgage.

Puisne mortgage –Where the mortgagor, having mortgaged his property,

mortgages it to another person to secure another loan, the second mortgage is
called a puisne mortgage.

For example, where D mortgages his house worth Rs two lacs to M for Rs 90,000
and mortgages the same house to K for a further sum of Rs 50,000, the mortgage
to Mr. M is first mortgage and that to Mr. K the second or puisne mortgage. K is
the puisne mortgagee, and can recover the debt subject to the right of M, the first
mortgagee, to recover his debt of Rs 90,000 plus interest.

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Rights of Mortgagor –

a) Right of redemption – on repayment of loan, mortgagor can take the property

back.

b) Right against clog (obstruction) on equity of redemption – any condition which

stops the mortgagor from recovering property will be void and mortgagor and
take back.

c) Right of partial redemption

The bankers opt for equitable mortgage by deposit of title deeds looking at
simplicity of procedure. In case of default in paying mortgage debt in prescribed
manner, a mortgagee can sell the property. The mortgager however is entitled to
equity of redemption, i.e. A right to repay the dues and take back the property.

Foreclosure is the legal process by which a lender attempts to recover the amount
owed on a defaulted loan by taking ownership of the mortgaged property and
selling it.

Redemption- The mortgagor is entitled to get back his property on payment of

the principal and interest. This right of the mortgagor is called the Right of
Redemption.

Reversion – A ―reversion‖ is the residue of an original interest which is left after

the grantor has granted the lessee a small estate. For example,

Mr X , the owner of a land may lease it to Mrs B for a period of five years.

Here, after the period of 5 years the lease will come to an end and the property
reverts back to the lessor. The property which reverts back to him is called the
reversion or the reversionary interest.

Remainder – When the owner of the property grants a limited interest in favour of
a person or persons and gives the remaining to others, it is called a ―remainder‖.

For Example, Mr A , the owner of a land transfers property to B for life and then to
C absolutely. Here the interest in favour of B is a limited interest, i.e., it is only for
life. So long as B is alive B enjoys the property.

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B has a limited right since he cannot sell away the property. B‘s right is only to
enjoy the property. So, after B‘s death the property will go to C. Interest of C is
called a remainder.

Immovable Property can be transferred only by a registered instrument.

Attestation is valid and complete when two witnesses sign the instrument.

It is not necessary that both attesting witnesses should be present at the same
time.

Registration is an essential legal formality to effect a valid transfer in certain cases.

The advantage of registering a document is that any person who deals with the
property would be bound by the rights that are created in earlier registered
document.

Doctrine of Lis Pendens – Section 52 – Lis means dispute, Lis pendens means a
pending suit, action or petition. During the pendency of a suit in a Court of Law,
property which is subject to a litigation cannot be transferred.

For example, A and B are litigating in a Court of law over property X and during
the pendency of the suit A transfers the property X to C. The suit ends in B‘s
favour. Here C who obtained the property during the time of litigation cannot
claim the property. He is bound by the decree of the Court wherein B has been
given the property.

A suit in foreign Court cannot operate as lis pendens.

“Gift” is the transfer of certain existing moveable or immoveable property made

voluntarily and without consideration by one person called the donor, to another
called the donee and accepted by or on behalf of the donee.

If the donee dies before acceptance, the gift is void.

Actionable claims are claims to unsecured debts.

Marshalling means arranging things, systematize, or regulate things which mean

the things arranged in a proper manner or order. In the T P Act, section 81 deals
with the doctrine of marshalling. As per Rule of marshalling the subsequent
mortgagee has the right to claim to marshal.

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Example for Marshalling - W mortgaged two of his properties A and B to X.
Subsequently W mortgaged property A to Y and property B to Z. In this case , X‘s
mortgages will be apportioned proportionately between properties A and B and
the surplus of A will go to Y and surplus of B will go to Z. According to this, the
subsequent mortgagee under section 81 has right of marshalling securities

Marshalling is the right of the subsequent mortgagee and the contribution to

debt. (in other words, it is the right of the comortgagors of several shares in one
property).

The rule of contribution described in section 82 of the transfer of property act.

The meaning of the rule of the contribution means providing money for a
common fund. It is the right of a person who has discharged a common liability to
recover proportionate share from others. The doctrine of contribution requires
that the persons under common liabilities that liabilities equitable.

Mortgage by Conditional Sale Vs English Mortgage :

There are two major differences between Mortgage by Conditional Sale and
English Mortgage (Mortgage with condition of retransfer) as under :

1) In case of Mortgage by Conditional Sale , the existence of debt between seller

(mortgagor) and buyer (mortgagee) is necessary. However, in case of English
Mortgage (Mortgage with condition of Re-transfer) there is no relation of debtor
and buyer.

2) In the Mortgage by Conditional Sale, only some interest in the property is

transferred to the mortgagee while in case of English Mortgage (Mortgage with
condition of retransfer) all the interest in the property is transferred except a
personal right of repurchase.

Reverse Mortgage

A Reverse Mortgage is a loan where the lender pays the monthly instalments to
the Borrower instead of the borrower paying the lender. The payment stream is
reversed. A reverse mortgage allows people to get tax-free income from the value
of their home. They are mainly to improve older people's personal and financial
independence.

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Simple Mortgage & SARFAESI Act.

In case of Borrowal Accounts where Simple Mortgage is created, we cannot

proceed under SARFAESI Act. As such, please note to go for EMT with MODTD
wherever possible. However, in case of Agricultural Lands, we may go for Simple
Mortgage, as SARFAESI Act is not applicable.

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 06. RBI’s Integrated Ombudsman Scheme, 2021
The Reserve Bank – Integrated Ombudsman Scheme, 2021 (the Scheme)
integrates the existing three Ombudsman schemes of RBI namely,

a) the Banking Ombudsman Scheme, 2006;

b) the Ombudsman Scheme for Non-Banking Financial Companies, 2018;

c) the Ombudsman Scheme for Digital Transactions, 2019. The Scheme, framed by
the Reserve Bank in exercise of the powers conferred on it under Section 35A of
the Banking Regulation Act, 1949 (10 of 1949), Section 45L of the Reserve Bank of
India Act, 1934 (2 of 1934), and Section 18 of the Payment and Settlement
Systems Act, 2007 (51 of 2007), will provide cost-free redress of customer
complaints involving deficiency in services rendered by entities regulated by RBI, if
not resolved to the satisfaction of the customers or not replied within a period of
30 days by the regulated entity.

Some of the salient features of the Scheme are:

a) It will no longer be necessary for a complainant to identify under which scheme

he/she should file complaint with the Ombudsman.

b) The Scheme defines ‘deficiency in service’ as the ground for filing a complaint,
with a specified list of exclusions. Therefore, the complaints would no longer be
rejected simply on account of “not covered under the grounds listed in the
scheme”.

c) The Scheme has done away with the jurisdiction of each ombudsman office.

d) A Centralised Receipt and Processing Centre has been set up at RBI,

Chandigarh for receipt and initial processing of physical and email complaints in
any language.

e) The responsibility of representing the Regulated Entity and furnishing

information in respect of complaints filed by customers against the Regulated
Entity would be that of the Principal Nodal Officer in the rank of a General
Manager in a Public Sector Bank or equivalent.

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f) The Regulated Entity will not have the right to appeal in cases where an Award
is issued by the ombudsman against it for not furnishing satisfactory and timely
information/documents.

g) The Executive Director-in charge of Consumer Education and Protection

Department of RBI would be the Appellate Authority under the Scheme.

viii)Complaints can continue to be filed online on https://cms.rbi.org.in.

Complaints can also be filed through the dedicated e-mail or sent in physical
mode to the ‘Centralised Receipt and Processing Centre’ set up at Reserve Bank of
India, 4th Floor, Sector 17, Chandigarh - 160017 in the format. Additionally, a
Contact Centre with a toll-free number – 14448 (9:30 am to 5:15 pm) – is also
being operationalised in Hindi, English and in eight regional languages to begin
with and will be expanded to cover other Indian languages in due course. The
Contact Centre will provide information/clarifications regarding the alternate
grievance redress mechanism of RBI and to guide complainants in filing of a
complaint.

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 07. The Micro, Small and Medium Enterprises
Development Act, 2006
Micro, Small, Medium Enterprises (MSME’s) are entities that are involved in
production, manufacturing and processing of goods and commodities.

The concept of MSME was first introduced by the government of India through
the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006.

New definition of MSME effective from 01-07-2020. As per new definition, a

composite criterion of investment and turnover shall apply for classification of an
enterprise as micro, small or medium.

Micro Enterprise is an enterprise where the investment in plant and machinery or

equipment does not exceed ₹1 crore and turnover does not exceed ₹5 crore;

A Small Enterprise is an enterprise where the investment in plant and machinery

or equipment does not exceed ₹10 crore and turnover does not exceed ₹50 crore;
and

A Medium Enterprise is an enterprise where the investment in plant and

machinery or equipment does not exceed ₹50 crore and turnover does not
exceed ₹250 crore.

03. To be recognised as a Micro, Small or Medium Enterprise (MSME) :

(a) Any person who intends to establish a MSME may file Udyam Registration
online in the Udyam Registration portal, based on self declaration with no
requirement to upload documents, papers, certificates or proof.

(b) On Registration, an enterprise ( referred to as ―Udyam in the Udyam

Registration portal) will be assigned a permanent identity number to be known as
Udyam Registration Number (URN).

(c) An e-certificate, namely, ―Udyam Registration Certificate‖(URC) shall be issued

on completion of the registration process.

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If an enterprise crosses the ceiling limits specified for its present category in either
of the two criteria of investment or turnover, it will cease to exist in that category
and be placed in the next higher category but no enterprise shall be placed in the
lower category unless it goes below the ceiling limits specified for its present
category in both the criteria of investment as well as turnover.

All units with Goods and Services Tax Identification Number (GSTIN) listed against
the same Permanent Account Number (PAN) shall be collectively treated as one
enterprise and the turnover and investment figures for all of such entities shall be
seen together and only the aggregate values will be considered for deciding the
category as micro, small or medium enterprise.

National Board for Micro, Small & Medium Enterprises (NBMSME)

The Chapter II, Section 3 to Section 6 of the MSMED Act-2006 provides for
establishment of National Board for Micro, Small & Medium Enterprises
(NBMSME) and its functions etc.

The National Board for Micro, Small & Medium Enterprises (NBMSME) was
established / notified for the first time on 15th May 2007 consisting of 47
members including Chairman, Vice Chairman and Member Secretary.

The Minister in-charge of Ministry of MSME is ex-officio Chairman of the National

Board.

Salient Features of the NBMSME:

NBMSME is consisting of 47 members (18 Ex-officio members and 29 members-

the tenure of members is for two years from the date of notification).

NBMSME has statutory backing.

NBMSME Provides representation to all sections/segments including Associations

of Micro, Small and Medium manufacturing and service enterprises, women
enterprises, Central Ministries, States representing different regions of the
country, trade unions, etc.

NBMSME has to conduct Quarterly meeting of the Board which is mandatory as

per MSMED Act, 2006.

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Functions of the National Board:

a) Examine the factors affecting the promotion and development of Micro, Small
& Medium Enterprises and review the policies & programmes of the Central
Government in regards to facilitating the promotion & development & enhancing
the competitiveness of such enterprises and the impact thereof on such
enterprises.

b) Make recommendations on matters referred to in clause (a) above or any other

matter referred to it by the Central Government which, in the opinion of that
Government, is necessary or expedient for facilitating the promotion and
development and enhancing the competitiveness of the micro, small and medium
enterprises.

c) Advice the Central Government on the use of the Fund or Funds constituted
under section 12.

Advisory Committee for MSME

Section 7(2) of the MSMED Act, 2006 provides for constitution of Advisory
Committee for MSME, by notification under the Chairmanship of Secretary,
Ministry of Micro, Small Medium Enterprises.

The Advisory Committee comprises of five officers of the Central Government

having experience in matters relating to Micro, Small and Medium Enterprises,
three representatives of State Governments and one representative each from
Micro, Small and Medium Enterprise associations.

The Member Secretary of National Board of Micro, Small & Medium Enterprises
(NBMSME) is also the Member Secretary of Advisory Committee.

Functions of Advisory Committee for MSME

a) To examine matters referred by the NBMSME concerning promotion and

development of MSME sector and enhancing its competitiveness.

b) To provide advice to the Central Government on issues related to the

promotion, development and enhancement of competitiveness of micro, small
and medium enterprises, covered under Section 9 to 12 and Section 14 of the
MSMED Act, 2006, which include issues concerning Credit Facilities, Procurement
of Preference Policy, Constitution and Administration of Funds, etc.

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c) To provide advice to the State Governments (in case sought by any of them) on
issues relating to notifying any rule made to carry out the provisions of the
MSMED Act-2006 including the composition of Micro, Small Enterprises
Facilitation Councils etc. as provided under section 30.

d) Recommend or advice Central Government or State Governments or the Board,

as the case may be, in connection with the classification of a class(es) of
enterprises after taking into consideration the level of employment, investments,
need of higher investment in plant and machinery or equipment for technology
upgradation, employment generation and enhanced competitiveness and
international standards for classification of small and medium enterprises.

MSEFC - MSME Samadhaan

Chapter 5 of the statute inter- alia deals with the vexatious issue of delayed
payment by buyers of products/services from MSMEs. The Micro, Small and
Medium Enterprise Development (MSMED) Act, 2006 contains provisions of
Delayed Payment to Micro and Small Enterprise (MSEs). (Section 15- 24).

Liability of Buyer to make Payment

With the enactment of the MSMED Act 2006, for the goods and services supplied
by the MSME units, payments have to be made by the buyers as under:

(i) The buyer is to make payment on or before the date agreed on between him
and the supplier in writing or, in case of no agreement, before the appointed day.
The agreement between seller and buyer shall not exceed more than 45 days.

(ii) If the buyer fails to make payment of the amount to the supplier, he shall be
liable to pay compound interest with monthly rests to the supplier on the amount
from the appointed day or, on the date agreed on, at three times of the Bank Rate
notified by Reserve Bank.

To take care of the payment obligations of large corporate borrowers to MSEs,

banks have been advised that while sanctioning/renewing credit limits to their
large corporate borrowers (i.e. borrowers enjoying working capital limits of ₹10
crore and above from the banking system), to fix separate sub-limits, within the
overall limits, specifically for meeting payment obligations in respect of purchases
from MSEs either on cash basis or on bill basis.

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State Governments to establish Micro and Small Enterprise Facilitation Council
(MSEFC) for settlement of disputes on getting references/filing on Delayed
payments. (Section 20 and 21)

Nature of assistance

MSEFC of the State after examining the case filed by MSE unit will issue directions
to the buyer unit for payment of due amount along with interest as per the
provisions under the MSMED Act 2006.

Any Micro or small enterprise having valid Udyam Registration can apply.

The buyer is liable to pay compound interest with the monthly rests to the
supplier on the amount at the three times of the bank rate notified by RBI in case
he does not make payment to the supplier for his supplies of goods or services
within 45 days of the acceptance of the goods/service rendered. (Section 16).

Every reference made to MSEFC shall be decided within a period of ninety days
from the date of making such a reference as per provisions laid in the Act.

If the Appellant (not being the supplier) wants to file an appeal, no application for
setting aside any decree or award by the MSEFC shall be entertained by any court
unless the appellant (not being supplier) has deposited with it, the 75% of the
award amount. (Section 19)

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 08. SARFAESI Act, 2002
The Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest (SARFAESI) Act, 2002 is a legislation that helps financial
institutions to ensure asset quality in multiple ways. This means that the Act was
framed to address the problem of NPAs (NonPerforming Assets) or bad assets
through different processes and mechanisms.

The SARFAESI Act gives detailed provisions for the formation and activities of
Asset Securitization Companies (SC) and Asset Reconstruction Companies (ARC).

Following are the main objectives of the SARFAESI Act :

a) The Act provides the legal framework for Securitization Activities in India.

b) It gives the procedures for the transfer of NPAs to Asset Reconstruction

Companies for the reconstruction of the assets.

c) The Act enforces the security interest without Court‘s intervention .The Act give
powers to banks and financial institutions to take over the immovable property
that is hypothecated or charged to enforce the recovery of debt.

The Act provides following three methods for recovery of NPAs :

a) Securitization;

b) Asset Reconstruction; and

c) Enforcement of Security without the intervention of the Court.

Securitization is the process of pooling and repackaging of financial assets (like

loans given) into marketable securities that can be sold to investors.

In the context of bad asset management, securitization is the process of

conversion of existing less liquid assets (loans) into marketable securities.

The securitization company takes custody of the underlying mortgaged assets of

the loan taker.

Asset Reconstruction is the activity of converting a bad or nonperforming asset

into performing asset. The simple meaning of - asset reconstruction‖ is nothing
but converting bad or NPA‘s to be converted into performing assets.

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It starts with purchase of bad asset by dedicated Asset Reconstruction Company
which include hypothecated Asset, financing the bad assets converting into
issuing Bonds, Securities and cash.

By this method the Asset Reconstruction Company takes over or changes the
management of the business of the borrower, the sale or lease of a part or whole
of the business of the borrower; by rescheduling payment of debts payable by the
borrower.

Enforcement of Security Interests - The Act empowers the lender (banker),

when the borrower defaults, to issue notice to the defaulting borrower and
guarantor, calling to repay the debt within 60 days from the date of the notice.

If the borrower fails to comply with the notice, the bank may enforce security
interests by following the provisions of the Act:

a) Take possession of the security;

b) Sale or lease or assign the right over the security;

c) Appoint Manager to manage the security;

d) Ask any debtors of the borrower to pay any sum due to the borrower.

This Act Empowers the Banks to enforce the securities against the borrowers and
realize their dues without intervention of the Court.

Account Eligible to proceed under SARFAESI Act :

a) Account should be NPA.

b) Security interest should be created (right, title and interest of any kind
upto property such as mortgage, charge, hypothecation and assignment).

c) Amount claimable (including accrued interest) should be above Rs.1.00

lakh.

d) Amount due should be more than 20% of the Principal and interest
thereon.

Suit to be filed as per procedure and as per the period of limitation.

Action under SARFAESI Act can be initiated in suit filed account without
permission from Court/DRT.

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Action under SARFAESI Act can be initiated pending any other litigation.

The following are outside purview of the SARFAESI Act.

a) Claim / liability up to Rs.1.00 lakhs.

b) Security interest (mortgage) created in agricultural land.

c) Where the amount due is less than 20% of the principal amount & interest
thereon.

d) Lien on any goods, money or security .

e) Pledge of movables .

f) Creation of any security in any aircraft.

g) Creation of security interest in any vessel.

h) Rights of unpaid seller.

i) Properties not liable to attachment or sale.

Action under SARFAESI Act will not save Limitation.

In case of Borrowal Accounts where Simple Mortgage is created, we cannot

proceed under SARFAESI Act. As such, please note to go for EMT with MODTD
wherever possible. However, in case of Agricultural Lands, we may go for Simple
Mortgage, as SARFAESI Act is not applicable.

One of the most important criteria under this SARFAESI Act is that the same is
applicable only to the secured creditor resulting in the unsecured creditors being
out of the purview of this Act.

One important caveat for the above process is that in the event of there exist
more than 2 secured creditors then all decisions are taken only if 75% of them are
in agreement to take action under the SARFAESI Act 2002.

The process commences by giving 60 days‘ notice period to the Debtor to pay the
due amount.

On the failure the pay the said outstanding dues within the said statutory period
gives power to the Banks to enforce its Security Interest by initiating the following
steps:

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The Banks has the right to take over the possession of the said secured property.

The Banks have the option to deal with such property by Sale or Lease or assign
the right over the said security.

Under RDB Act, Any debt can be recovered. Whereas, under SARFAESI, only
secured debts i.e., debts secured by way of underlying assets can be recovered.

Minimum debt amount to approach a DRT is 20 lakhs. Whereas, minimum debt

amount eligible for recovery under SARFAESI is 1 lakh.

In the context of SARFAESI Act, ―originator” means the owner of a financial asset.

In the context of SARFAESI Act, ―obligor” means a person liable to the originator.

The Central Registry of Securitisation Asset Reconstruction and Security Interest of

India (CERSAI) is set up under section 20 of the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

Priority to secured creditors - Once charge created by borrower in favour of Bank

and if the Bank register such charges with CERSAI, the debts due to Bank (secured
creditor ) shall be paid in priority over all other debts and all revenues, taxes,
cesses and other rates payable to the Central Government or State Government or
local authority.

In case of Borrowal Accounts where Simple Mortgage is created, we cannot

proceed under SARFAESI Act. As such, please note to go for EMT with MODTD
wherever possible. However, in case of Agricultural Lands, we may go for Simple
Mortgage, as SARFAESI Act is not applicable.

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 09. The Recovery of Debts and Bankruptcy Act, 1993
RDBFI Act, 1993. (Debt Recovery Tribunal (DRT)

(Recovery of Debts due to Banks and Financial Institution Act, 1993)

The Government of India appointed a committee headed by Mr. T. Tiwari

who recommended that there has to be a quasi-judicial dedicated authority which

can exclusively deal with and expeditiously dispose of all recoveries of the NPA‘s
of the Banks. Accordingly, the Government promulgated the Recovery of Debts
due to Banks and Financial Institution (RDDBFI ) Act, 1993.

The Debts Recovery Tribunals (DRTs) and Debts Recovery Appellate Tribunals
(DRATs) were established under the Recovery of Debts Due to Banks and Financial
Institutions Act (RDDBFI Act), 1993 with the specific objective of providing
expeditious adjudication and recovery of debts due to Banks and Financial
Institution.

DRT jurisdiction covers loans of Banks with outstanding of Rs 20 lacs or more.

Originally, the cut off limit was Rs 10 lacs. The Central Government, in 2018, raised
the pecuniary limit from Rs 10 lakh to Rs 20 lakh.

The power of the tribunal is restricted to settling down the cases concerning the
recovery of the due amount from non-performing assets as affirmed by the banks
as per the RBI guidelines.

The Tribunal has the powers bestowed with the District Court. The Tribunal shall
have a Recovery officer who would be guiding towards executing the recovery
Certificates as passed through the Presiding Officers.

DRT is required to follow the legal process by stressing on prompt disposal of the
matters and fast execution of the final order.

The Debts Recovery Tribunal (DRT) enforces provisions of the Recovery of Debts
Due to Banks and Financial Institutions (RDDBFI) Act, 1993 and also Securitization
and Reconstruction of Financial Assets and Enforcement of Security Interests
(SARFAESI) Act, 2002.

The Debts Recovery Tribunal (DRT) are fully empowered to pass comprehensive
orders and can travel beyond the Civil procedure Code to render complete justice.

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A Debts Recovery Tribunal (DRT) can hear cross suits, counter claims and allow set
offs. However, a Debts Recovery Tribunal (DRT) cannot hear claims of damages or
deficiency of services or breach of contract or criminal negligence on the part of
the lenders. In addition, a Debts Recovery Tribunal (DRT) cannot express an
opinion beyond its domain, or the list pending before it.

The Debts Recovery Tribunal can appoint Receivers, Commissioners, pass ex-parte
orders, ad-interim orders, interim orders apart from powers to Review its own
decisions and hear appeals against orders passed by the Recovery Officers of the
Tribunal.

No court in the country other than the SC and the HCs and that too, only under
articles 226 and 227 of the Constitution have jurisdiction over this matter.

The Order passed by DRT is appealable , within 45 days from the date of receipt
of Order of DRT, to the Appellate Tribunal.

No appeal shall be entertained by the Appellate Tribunal unless the appellant

deposits 75% of the due amount.

The Appellate Authority may, waive or reduce the amount of such deposit.

The Petitions against orders passed through DRT, are to be disposed off by the
Debts Recovery Appellate Tribunal (DRAT) within 6 months from the date of
receipt of the Appeal.

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 10. Insolvency and Bankruptcy Code, 2016
The Insolvency and Bankruptcy Code, 2016 was passed by both the Houses of
Parliament and notified in May 2016. Being one of the major economic reforms it
paves the way focussing on creditor driven insolvency resolution.

The term insolvency is used for both individuals and organizations.

For individuals, the term insolvency known as bankruptcy and for corporate it is
called corporate insolvency.

Both Insolvency and Bankruptcy refer to a situation when an individual or

company are not able to pay the debt in present or near future and the value of
assets held by them are less than liability.

Insolvency in the IBC is regarded as a ―state‖ where assets are insufficient to

meet the liabilities.

If untreated, insolvency will lead to bankruptcy for non-corporates and liquidation

of corporates.

While insolvency is a situation which arises due to inability to pay off the debts
due to insufficient assets, bankruptcy is a situation wherein application is made to
an authority declaring insolvency and seeking to be declared as bankrupt, which
will continue until discharge.

Insolvency is a state and bankruptcy is a conclusion.

A bankrupt would be a conclusive insolvent whereas all insolvencies will not lead
to bankruptcies.

Insolvency situations have two options – resolution and recovery or liquidation.

Bankruptcy is a legal proceeding involving a person or business that is unable to

repay outstanding debts. The bankruptcy process begins with a petition filed by
the debtor, or by the creditors. All of the debtor's assets are measured and
evaluated, and the assets may be used to repay a portion of outstanding debt.

If any person or entity is unable to pay off the debts, it owes, to their creditor, on
time or as and when they became due and payable, then such person or entity is
regarded as ―insolvent.

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Liquidation is the winding up of a corporation or incorporated entity.

There are many entities that can initiate proceedings to cause the Liquidation,
those being:-

# The Regulatory Bodies;

# The Directors of a Company;

# The Shareholders of a Company; and

# An Unpaid Creditor of a Company

Insolvency is common to both bankruptcy and liquidation.

Not being able to pay debts as and when they became due and payable are the
leading cause of Liquidations and is the only way that can cause a natural person
to become a bankrupt.

The IBC is structured into 5 parts comprising of 255 sections and 11 Schedules.
Each part deals with a distinct aspect of the insolvency resolution process.

Applicability of the IBC - The provisions of the Code shall apply for insolvency,
liquidation, voluntary liquidation or bankruptcy of the following entities:-

(a) Any company incorporated under the Companies Act, 2013 or under any
previous law.

(b) Any other company governed by any special act for the time being in force,
except in so far as the said provision is inconsistent with the provisions of such
Special Act.

(c) Any Limited Liability Partnership under the LLP Act 2008.

(d) Any other body incorporated under any law for the time being in force, as the
Central Government may by notification specify in this behalf.

(e) Personal guarantors to corporate debtors

(f) Partnership firms and proprietorship firms and

(g) Individuals, other than persons referred to in clause (e)

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Exceptions to IBC - There is an exception to the applicability of the Code that it
shall not apply to corporate persons who are regulated financial service providers
like Banks, Financial Institutions and Insurance companies.

The Insolvency and Bankruptcy Code, 2016 has following distinguishing features:-

a) Comprehensive Law: Insolvency Code is a comprehensive law which envisages

and regulates the process of insolvency and bankruptcy of all persons including
corporates, partnerships, LLP‘s and individuals.

b) The Code has withered away the multiple laws covering the recovery of debts
and insolvency and liquidation process and presents singular platform for all the
reliefs relating to recovery of debts and insolvency.

c) The Code provides a low time resolution and defines fixed time frames for
insolvency resolution of companies and individuals. The process is mandated to
be completed within 180 days, extendable to maximum of 90 days. Further, for a
speedier process there is provision for fast-track resolution of corporate
insolvency within 90 days. If insolvency cannot be resolved, the assets of the
borrowers may be sold to repay creditors.

d) It has been drafted to provide one wind ow clearance to the applicant whereby
he gets the appropriate relief at the same authority unlike the earlier position of
law where in case the company is not able to revive the procedure for winding up
and liquidation has to be initiated under separate laws governed by separate
authorities.

e) There is one chain of authority under the IBC. It does not even allow the civil
courts to interfere with the application pending before the adjudicating authority,
thereby reducing the multiplicity of litigations.

f) The National Company Law Tribunal (NCLT) will adjudicate insolvency resolution
for companies. The Debt Recovery Tribunal (DRT) will adjudicate insolvency
resolution for individuals.

g) The IB Code also protects the interests of workman and employees. It excludes
dues payable to workmen under provident fund, pension fund and gratuity fund
from the debtor‘s assets during liquidation.

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h) IBC provides for constitution of a new regulatory authority ‘Insolvency and
Bankruptcy Board of India‘ to regulate professionals, agencies and information
utilities engaged in resolution of insolvencies of companies, partnership firms and
individuals.

Objectives of the Code- The Insolvency and Bankruptcy Code, 2016 is intended to
strike the right balance of interests of all stakeholders of the business enterprise
so that the corporates and other business entities enjoy availability of credit and
at the same time the creditor do not have to bear the losses on account of
default.

The purpose of enactment of the Insolvency and Bankruptcy Code, 2016 is as

follows:

(a) To consolidate and amend the laws relating to re-organization and insolvency
resolution of corporate persons, partnership firms and individuals.

(b) To fix time periods for execution of the law in a time bound manner.

(c) To maximize the value of assets of interested persons.

(d) To promote entrepreneurship

(e) To increase availability of credit.

(f) To balance the interests of all the stakeholders including alteration in the order
of priority of payment of Government dues.

(g) To establish an Insolvency and Bankruptcy Board of India as a regulatory body

for insolvency and bankruptcy law.

Insolvency and Bankruptcy Board of India-The Code provides for establishment of

a Regulator who will oversee these entities and to perform legislative, executive
and quasi-judicial functions with respect to the Insolvency Professionals,
Insolvency Professional Agencies and Information Utilities.

The Insolvency and Bankruptcy Board of India was established on October 1,

2016. The head office of the Board is located at New Delhi.

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The Board is a body corporate, having perpetual succession and a common seal,
with power, subject to the provisions of this Code, to acquire, hold and dispose of
property, both movable and immovable, and to contract, and shall, by the said
name, sue or be sued.

The Code has created one chain of authority for adjudication under the Code.

Civil Courts have been prohibited to interfere in the matters related with
application pending before the Adjudicating Authority.

No injunction shall be granted by any Court, Tribunal or Authority in respect of

any action taken by the NCLT.

For individuals and other persons, the Adjudicating Authority is the Debt Recovery
Tribunal (DRT), appeals lie to the Debt Recovery Appellate Tribunal (DRAT) and
thereafter to the Supreme Court.

Example : XY & Co., a firm applied to NCLT to be declared insolvent as the firm is
not able to pay off debts to his creditors in present and in coming future. State
whether the act of the firm is valid as to the filing of application in terms of
jurisdiction.

Answer: No, as per the Code, individual & firms in relation to Insolvency matters
shall apply to the DRT not to NCLT. Here there is violation of jurisdiction in
relation to adjudicating authority.

Under IBC a person includes:-

• an individual

• a Hindu Undivided Family

• a company

• a trust

• a partnership

• A limited liability partnership, and

• any other entity established under a Statute and includes a person resident
outside India

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Initiation date means the date on which a financial creditor, corporate applicant or
operational creditor, as the case may be, makes an application to the Adjudicating
Authority for initiating corporate insolvency resolution process;

Insolvency commencement date means the date of admission of an application

for initiating corporate insolvency resolution process by the Adjudicating
Authority.

Insolvency resolution process period means the period of one hundred and eighty
days beginning from the insolvency commencement date and ending on one
hundred and eightieth day.

Liquidation commencement date means the date on which proceedings for

liquidation commence.

Operational creditor means a person to whom an operational debt is owed and

includes any person to whom such debt has been legally assigned or transferred.

Related party, in relation to a corporate debtor, means (a) a director or partner or

a relative of a director or partner of the corporate debtor or a key managerial
personnel or a relative of a key managerial personnel of the corporate debtor.

Resolution plan means a plan proposed by resolution applicant for insolvency

resolution of the corporate debtor as a going concern.

Resolution professional means an insolvency professional appointed to conduct

the corporate insolvency resolution process and includes an interim resolution
professional.

Voting share means the share of the voting rights of a single financial creditor in
the committee of creditors which is based on the proportion of the financial debt
owed to such financial creditor in relation to the financial debt owed by the
corporate debtor.

Corporate Insolvency Resolution is a process during which financial creditors

assess whether the debtor's business is viable to continue and the options for its
rescue and revival, if any. If the insolvency resolution process fails or financial
creditors decide that the business of debtor cannot be carried on in a profitable
manner and it should be wound up, the debtor will undergo liquidation process
and the assets of the debtor shall be realized and distributed by the liquidator.

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The Insolvency Resolution Process provides a collective mechanism to lenders to
deal with the overall distressed position of a corporate debtor.

The IBC creates time-bound processes for insolvency resolution of companies and
individuals. These processes will be completed within 180 days, extendable by 90
days.

IBC also provides for fast-track resolution of corporate insolvency within 90 days.
If insolvency cannot be resolved, the assets of the borrowers may be sold to repay
creditors.

A comprehensive process that covers the gamut of insolvency resolution

framework for Corporates and includes processes relating to:-

• Filing of application before NCLT

• Adjudication: Admission or Rejection of application

• Moratorium and Public Announcement

• Appointment of Interim Resolution Professional

• Formation of the Committee of Creditors

• Preparation and approval of the Resolution Plan

• Consequences of non-submission of the Resolution Plan

The process of insolvency is triggered by occurrence of default.

The provisions relating to the insolvency and liquidation of corporate debtors

shall be applicable only when the amount of the default is one lakh rupees or
more.

The corporate insolvency process may be initiated against any defaulting

corporate debtor by making an application for corporate insolvency resolution.

The application for initiation Corporate Insolvency Process may be made by:-

(a) Financial creditor

(b) Operational creditor

(c) Corporate debtor

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Filling of an application by a financial creditor:

a) A financial creditor may lodge an application before the NCLT for initiating
corporate insolvency resolution process against a corporate debtor who commits
a default in payment of its dues.

b) Evidence in support of default and name of the Interim resolution professional

by financial creditor:

c) An operational creditor shall on the occurrence of default, shall :

i) first send a demand notice and a copy of invoice to the corporate debtor.

ii) The corporate debtor shall within a period of ten days of receipt of demand
notice notify the operational creditor about the existence of a dispute, if there is
any and record of pendency of any suit or arbitration proceedings.

iii) He shall also provide the details of repayment of unpaid operational debt in
case the debt has or is being paid.

iv) After the expiry of ten days, if the operational creditor does not receive his
payment or the confirmation of a dispute that existed even before the demand
notice was sent, he may file an application before the Adjudicating Authority for
initiating a corporate insolvency resolution process.

Filing of an application by corporate applicant: Where a corporate debtor has

committed a default, a corporate applicant thereof may file an application for
initiating corporate insolvency resolution process with the Adjudicating Authority.

The following persons are not entitled to initiate insolvency process

(a) A corporate debtor already undergoing an insolvency resolution process;

(b) A corporate debtor having completed corporate insolvency resolution process

12 months preceding the date of making of the application;

(c) A corporate debtor or a financial creditor who has violated any of the terms of
resolution plan which was approved 12 (twelve) months before the date of
making of an application;

(d) A corporate debtor in respect of whom a liquidation order has beenmade.

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The Adjudicating Authority may either accept or reject the application within
fourteen days of receipt of application. However, applicant should be allowed to
rectify the defect within seven days of receipt of notice of such rejection.

The insolvency resolution process shall commence from the date of admission of
application by the Adjudicating Authority. It is referred to as the Corporate
Insolvency Resolution Date.

After the commencement of corporate insolvency resolution a calm period for 180
days is declared, during which all suits and legal proceedings etc. against the
Corporate Debtor are held in abeyance to give time to the entity to resolve its
status. It is called the Moratorium Period. [Section 14]

Section 14 of the Code provides that the following acts shall be prohibited during
the moratorium period:-

(a) The institution of suits or continuation of any pending suits or proceedings

against the corporate debtor including execution of any judgment, decree or
order in any court of law, tribunal, arbitration panel or other authority;

(b) Transferring, encumbering, alienating or disposing of by the corporate debtor

any of its assets or any legal right or beneficial interest therein;

(c) Any action to foreclose, recover or enforce any security interest created by the
corporate debtor in respect of its property including any action under the
SARFAESI Act, 2002

(d) The recovery of any property by an owner or lessor where such property is
occupied by or in the possession of the corporate debtor. [Section 14]

Example: After commencement of Corporate Insolvency Resolution, NCLT

declared Moratorium against the corporate debtor. Within a month of declaration,
corporate debtor disposed of his property.

Validity of the act of corporate debtor.

As per section 14 of the Code, any transaction/disposal/ of any assets of

Corporate Debtor during the moratorium period which is 180 days from date of
commencement of corporate insolvency resolution, is prohibited. So such an act
of corporate debtor is not valid.

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Resolution Professional's primary function is to take over the management of the
corporate borrower and operate its business as a going concern under the broad
directions of a committee of creditors.

The thrust of the IBC is to allow a shift of control from the defaulting debtor's
management to its creditors, where the creditors drive the business of the debtor
with the Resolution Professional acting as their agent.

Interim Resolution Professional shall make the Public Announcement

immediately after his appointment Immediately here means not more than three
days from the date of appointment of the Interim Resolution Professional.

After the collation of all claims received against the corporate debtor and
determination of the financial position of the corporate debtor, the interim
resolution professional shall constitute a committee of creditors.

The Committee of creditors shall comprise of all financial creditors of a corporate

debtor. The Resolution Professional shall identify the financial creditors and
constitutes a creditors committee.

All the decisions of the committee of creditors shall be taken by vote of minimum
seventy five percent of the voting share of the financial creditors. The voting share
is determined based on the value of the debt of the creditor in proportion to the
total debt.

Where a corporate debtor does not have any financial creditors, the committee of
creditors shall be constituted and comprise of such persons to exercise such
functions in such manner as may be specified by the Board.

Facilitators of the insolvency resolution under the Code

The Insolvency Professionals: These professionals will administer the resolution

process, manage the assets of the debtor, and provide information for creditors to
assist them in decision making.

Insolvency Professional Agencies: insolvency professionals will be registered with

insolvency professional agencies. The agencies conduct examinations to certify
insolvency professionals and enforce a code of conduct for their performance.

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Information Utilities: Creditors will report financial information of the debt owed
to them by the debtor. Such information will include records of debt, liabilities
and defaults.

Adjudicating authorities: The proceedings of the resolution process will be

adjudicated by the National Companies Law Tribunal (NCLT), for companies; and
the Debt Recovery Tribunal (DRT), for individuals. The duties of the authorities will
include approval to initiate the resolution process, appoint the insolvency
professional, and approve the final decision of creditors.

Insolvency and Bankruptcy Board: The Board will regulate insolvency

professionals, insolvency professional agencies and information utilities set up
under the Code. When a default occurs, the resolution process may be initiated by
the debtor or creditor.

A committee of financial creditors will take a decision regarding the future of the
outstanding debt owed to them. They may choose to revive the debt owed to
them or sell (liquidate) the assets of the debtor to repay the debts owed to them.
If a decision is not taken in 180 days, the debtor‘s assets go into liquidation. If the
debtor goes into liquidation, an insolvency professional administers the
liquidation process. Proceeds from the sale of the debtor‘s assets are distributed
in the already established order of precedence.

The IBC (Amendment) Bill, 2021 provide for a pre-packaged resolution process for
stressed Micro, Small and Medium Enterprises. Under this mechanism, main
stakeholders such as creditors and shareholders come together to identify a
prospective buyer and negotiate instead of a public bidding process. It specifies a
minimum threshold of not more than Rs 1 crore for initiating the pre-packaged
insolvency resolution process.

A pre-pack is an agreement for the resolution of the debt of a distressed

company. It is an agreement between secured creditors and investors instead of a
public bidding process. The scheme allows only the debtor to trigger its own
bankruptcy process with the approval of financial creditors.

In general bankruptcy provisions, the proprietors or major shareholders of a small

business lose operational control of the enterprise to lenders.

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In a pre-pack insolvency scheme, the shareholders or proprietors do not lose
control over the enterprise. The creditors will agree to terms with the promoters
or a potential investor, and seek approval of the resolution plan from the NCLT.
The approval of at least 66 per cent of financial creditors that are unrelated to the
corporate debtor would be required before a resolution plan is submitted to the
NCLT.

The Prepack scheme would yield resolution faster than the corporate insolvency
resolution process (CIRP).

Allottees under a real estate project should be treated as financial creditors.

The voting threshold for routine decisions taken by the committee of creditors
has been reduced from 75% to 51%. For certain key decisions, this threshold has
been reduced to 66%. A resolution application submitted to the NCLT under the
Code may be withdrawn with the approval of 90% of the committee of creditors.

The Corporate Insolvency Resolution Process ('CIRP') is a recovery mechanism for

the creditors of a corporate debtor. A corporate debtor means a Company or LLP
that owes a debt to its creditors.

The quorum for the meeting of committee of creditors - There should be

members holding at least thirty three percent of voting rights either present in
person or by video conferencing or by audio visual means, to form a quorum.

Fair value means the estimated realizable value of the assets of the corporate
debtor, if they were to be exchanged on the insolvency commencement date
between a willing buyer and a willing seller in an arm‘s length transaction, where
the parties had acted knowledgeably, prudently and without compulsion.

Liquidation value means the estimated realizable value of the assets of the
corporate debtor, if the corporate debtor were to be liquidated on the insolvency
commencement date.

Every appeal before Supreme Court is to be filed within a period of 45 days from
the date of order by NCLAT. However, Supreme Court may allow an appeal after
the expiry of said period on genuine reasons but such period should not exceed
15 days.

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 11. The Bankers’ Books Evidence Act, 1891
Bankers books include all books like ledgers, day book, cash book, and all the
other records used in the ordinary business of a bank.

The records can be maintained in any form such manual records, printed
computer printouts, it can be in written form or stored in a film, magnetic tape or
any other form of mechanical or electronic data. Such a record can be either on-
site or at any off-site location including a backup or disaster recovery site.

The Banker‘s Books Evidence Act confers special privilege on the bankers.

The records and accounts maintained by banks are voluminous and it will be
difficult for a banker to produce the original ledger and records. It is presumed
that the same are maintained in a correct manner.

The term Banker‘s Books includes ledgers, day books, cash books, account books
and all other books used in ordinary course of business of bank.

The Act provides that 'certified copy‘ of banker‘s book will be admissible in
evidence. The term ‗certified copy‘ means a copy of any entry in books of a bank
together with a certificate written at the foot of such copy that it is a true copy of
such entry, that such entry is contained in one of the ordinary books of the bank
and was made in the usual and ordinary course of business and that such book is
still in the custody of the bank, such certificate being dated and subscribed by the
principal accountant or manager of the bank.

The term ‗legal proceedings‘ means any proceeding or inquiry in which evidence
may be given and includes arbitration and criminal proceedings. However, the
certified entry will need corroborative evidence.

No person can be charged with liability merely on the basis of entries in books of
account. There has to be further evidence to prove payment of money.

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 12. The Legal Services Authorities Act, 1987
In M.H. Hoskot vs. State of Maharashtra, Supreme Court stated that, because of
the proper procedures in court and preponderance of lawyers and charging of the
fee due to the technical nature of the law, a provision for free legal aid has to be
incorporated into the constitution of India.

The 42nd amendment act had incorporated article 39A (free legal aid), a provision
under directive principles of state policy which will provide free and competent
legal services to the weaker section of the society. It will ensure equal distribution
of justice to every citizen irrespective of their economic and social situation.

Importance Of Free Legal Aid

Equal access to the law is one of the basic rights of every citizen. The main
reasons that direct the necessity of free legal aid are:

1. It provides legal services to the vulnerable sections of society.

2. It enables the eradication of differences between rich and poor due to the
privileges bagged by the riches.

3. It will ensure that the restrictions are put on the privileged group of the
societies from taking the law into one’s hands.

Legal Services Authorities Act, 1987

The Legal Services Authorities Act 1987 was enacted by the parliament in the 38th
year of the Republic of India in 1987 but it came into force on 9th November
1995. It was introduced as a result of a recommendation made in the 14th report
of the law commission of India.

In 1960, the central government introduced a legal aid scheme but was scrapped
later due to financial dearth. But in 1973, the government introduced its second
phase by forming a committee under Justice V.R. Krishna Iyer for developing legal
aid schemes for every state.

The committee worked in a decentralised manner and formed a committee under

the leadership of Justice P.N. Bhagawathi to implement the legal aid scheme. They
suggested legal aid schemes for every district, state and centre.

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Important Provisions Under Legal Services Authorities Act, 1987

The main core of the Legal Services Authorities Act 1987 is the hierarchical legal
service institutions in the district, state and centre, criteria for providing legal aid,
Lok Adalat and free legal aid. The hierarchical legal service system in India exists
at three levels. They are:

National Legal Service Authority(NALSA) and Supreme Court Legal Services

Committee (SCLSC)

State Legal Service Authority (SLSA) and the High Court Legal Services Committee
(HCLSC)

District Legal Services Authority(DLSA)

1. National Legal Services Authority

NALSA has been constituted under Section 4 of the Legal Services Authorities Act
1987 to ensure free legal aid to every citizen in the society. It is a body constituted
by the central government. NALSA is currently housed at 12/11, jam Nagar house,
New Delhi-110011. The chief justice of India serves as the patron–in–chief. A
serving or retired judge of the supreme court of India serves as executive
chairman. They are nominated by the president in consultation with the chief
justice of India. The central authority constitutes to form a committee called the
Supreme Court legal services committee. NALSA ensures that justice is equally
distributed among the citizens and justice isn’t denied based on economic or
other factors. The major functions of NALSA are:

1. It organises legal aid camps by giving more focus on slums, rural areas and
labour colonies. It helps in providing education to the people living in such areas
regarding their rights and necessities. They also set up Lok Adalat to settle
disputes.

2. It focuses on establishing legal service clinics in law colleges, universities etc.

3. They settle disputes via arbitration, negotiation and conciliation.

4. They provide grant aid to social service institutions that work at the grassroots
level for the welfare of socially marginalised communities.

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5. It also promotes research activities for improving legal services for the poor.

6. It ensures commitment to the fundamental duties of the citizens.

7. For ensuring that the schemes and programmes are implemented properly they
tend to monitor and evaluate the action taken for the legal aid problems at
specific periodical intervals.

8. They laid down policies and schemes for making the legal services available.

9. It frames the most effective and economical schemes for making legal services
available.

10. It handles financial matters and allocates funds to respective state and district
legal services authorities.

2. State Legal Services Authority

Every state has a state legal service authority to provide legal services to people
who have no access to the same. It comes under section 6 of the Legal Services
Authorities Act 1987. It undertakes preventive and strategic legal aid programmes.
They also conduct Lok Adalat to resolve their problems. Their main task is to work
according to the direction of NALSA regarding the implementation of policies and
schemes. The chief justices of the high court serve as patron-in-chief. A retired or
serving judge of the high court serves as its executive chairman. the committee
formed by the state authority is called as high court legal service committee. It
consists of a chairman (sitting high court judge) and a secretary nominated by the
chief justice of the high court.

3. District Legal Service Authority

It comes under Section 9 of the Legal Services Authorities Act 1987. It ensures that
the legal aid programmes are implemented in every district effectively. They
conduct Lok Adalat at the district level. The district judge serves as its ex-officio
chairman. It coordinates the activities at the taluk legal service committee.

4. Criteria For Giving Legal Services

It comes under Section 12 of the Legal Services Authorities Act 1987. The criteria
for giving legal services are:

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The person should have an annual income of fewer than nine thousand rupees
according to the state government and twelve thousand rupees according to the
central government.

Victims of ethnic violence, mass disaster and natural calamities.

People are under custody especially in protective homes like juvenile homes.

People with disabilities

Women and children

People belonging to scheduled caste and scheduled tribe.

Victims of human trafficking or beggars.

5. Lok Adalat

The organisation of Lok Adalat comes under Section 19 of the Legal Services
Authorities Act 1987. All central, state and district legal service authority conducts
Lok Adalat. It acts as an Alternative dispute resolution system. It was under the
Legal Services Authorities Act 1987 it received its statutory status. They settle
cases which are pending or the cases that haven’t been brought before any court
of law. It constitutes judicial officers or people under central, state and district
legal service authority. After the conciliation of cases and getting consent from
the parties, the award is passed by conciliators according to Section 21 of the
Legal Services Authorities Act 1987. And it is deemed as a decree of civil court.

Functioning of Lok Adalat:

The members of Lok Adalat should deal with the parties fairly and impartially.

The cases that are pending in the court are dealt with in Lok Adalat. If the dispute
is settled in the Lok Adalat, the court fee paid in the court on the petition will be
received back

There is no need to pay a fee to the court when a dispute is filed in a Lok Adalat.

Types of cases at Lok Adalat:

Family disputes

Mutation of land cases

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Compoundable criminal offence

Encroachment on forest lands

Land acquisition disputes

Motor accident claim

Cases which are not sub-judice.

Types of Lok Adalat:

1. National level Lok Adalat: it is held at regular intervals throughout the country
at the Supreme Court to taluk levels wherein cases are disposed of in huge
numbers. It started in 2015 and is being held on a specific subject matter every
month.

2. Permanent Lok Adalat: it is organised under section 22B of the Legal Services
Authorities Act 1987. It provides a compulsory pre-litigation mechanism to settle
disputes related to public utility services like transport, telegraph, postal etc.

3. Mobile Lok Adalat: under this system, it travels from one place to other to settle
disputes. As of 30th September 2015, more than 15.14 lakhs Lok Adalat have been
conducted in the country and over 8.25 crore cases have been settled so far.

4. Mega Lok Adalat: this mechanism is held on a single day on the state level in all
courts of the state.

5. Daily Lok Adalat: it is held every single day.

6. Continuous Lok Adalat: it is conducted for a particular number of days

continuously.

6. Free Legal Aid

Article 39A of the constitution states that: “the state shall secure that the
operation of the legal system promotes justice based on an equal opportunity,
and shall, in particular, provide free legal aid, by suitable legislation or schemes or
in any other way, to ensure that opportunities for securing justice are not denied
to any citizen because of economic or other disabilities”. Article 14 and Article
22(1) also promotes the state to ensure equality before the law. Free legal aid
strengthens the idea of the constitution to see every individual be equal and to
provide necessary legal services to the poor and vulnerable group.

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Provisions under free legal aid are:

Advice on any legal matter.

Payment of all charges in connection with legal proceedings.

Providing a lawyer to carry out legal proceedings.

Procurement of certified copies of legal documents.

Preparation, printing and translation of legal documents.

As we all know that our Indian constitution put forward the idea of equality. The
essence of democracy is that every individual is equal in the eyes of law. Just like
that every citizen irrespective of economic status, caste, creed, gender, sex and
other social conditions have the right to receive equal access to law and equal
opportunities to receive legal services. To satisfy these necessities our government
had set up the Legal Services Authorities Act 1987. It also ensures the promotion
of justice based on equal opportunity.

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 13. The Consumer Protection Act, 2019
In order to protect the consumers from exploitation and to save them from
adulterated and substandard goods and deficient services, the Consumer
Protection Act came into force on 15th April 1986. It was replaced by the
Consumer Protection Act 2019.

The basic aim of the Consumer Protection Act, 2019 to save the rights of the
consumers by establishing authorities for timely and effective administration and
settlement of consumers‘ disputes.

The CP Act 2019 has widened the definition of ‗consumer‘. As per the CP Act
2019 , a person is called a consumer who avails the services and buys any good
for self-use. Worth to mention that if a person buys any good or avails any service
for resale or commercial purposes, he/she is not considered a consumer. This
definition covers all types of transactions i.e. offline and online through
teleshopping, direct selling or multi-level marketing.

The CP Act, 2019 has the provision for suggests establishment of the Central
Consumer Protection Authority (CCPA) as a regulatory authority.

As per The CP Act, 2019 to the consumer may file complaints with the
jurisdictional consumer forum located at the place of residence or work of the
consumer.

The CP Act 2019 has introduced the concept of product liability.

The CP Act, 2019 provides for mediation as an Alternate Dispute

Resolution mechanism. For mediation, there will be a strict timeline fixed in the
rules.

The CP Act 2019 has armed the authorities to take action against unfair trade
practices too.

The CP Act 2019 is applicable to all the products and services, until or unless any
product or service is especially debarred out of the scope of this Act by the
Central Government.

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Central Consumer Protection Authority will protect, promote and enforce the
rights of consumers and regulate cases related to unfair trade practices,
misleading advertisements, and violation of consumer rights.

CCPA is given wide-ranging powers.

The CCPA has the right to take suo-moto actions, recall products, order
reimbursement of the price of goods/services, cancel licenses, impose penalties
and file class-action suits.

The CCPA will have an investigation wing to conduct independent inquiry or

investigation into consumer law violations.

The Act has the provision of the establishment of Consumer Disputes Redressal
Commissions (CDRCs) at the national, state and district levels to entertain
consumer complaints.

The CDRCs will entertain complaints related to:

a) Overcharging or deceptive charging

b) Unfair or restrictive trade practices

c) Sale of hazardous goods and services which may be hazardous..

d) Sale of defective goods or services

As per the Consumer Disputes Redressal Commission Rules, there will be no fee
for filing cases up to Rs. 5 lakh.

The CP Act 2019 provides flexibility to the consumer to file complaints with the
jurisdictional consumer forum located at the place of residence or work of the
consumer.

The CP Act, 2019 contains enabling provisions for consumers to file complaints
electronically and for hearing and/or examining parties through video-
conferencing.

Consumers will also not need to hire a lawyer to represent their cases.

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Product Liability & Penal Consequences - The Act has introduced the concept of
product liability. A manufacturer or product service provider or product seller will
now be responsible to compensate for injury or damage caused by defective
products or deficiency in services.

Penalties for Misleading Advertisement - The CCPA may impose a penalty on a

manufacturer or an endorser, for a false or misleading advertisement. The CCPA
may also sentence them to imprisonment.

Provision for Alternate Dispute Resolution - The CP Act, 2019 provides for
mediation as an Alternate Dispute Resolution mechanism.

For mediation, there will be a strict timeline fixed in the rules.

There will be no appeal against settlement through mediation.

Unfair Trade Practices - The CP Act 2019 has armed the authorities to take action
against unfair trade practices too.

The Central Consumer Protection Council - The Consumer Protection Act

empowers the Central Government to establish a Central Consumer Protection
Council. It will act as an advisory body on consumer issues.

Responsible endorsement - The CP Act 2019 fixes liability on endorsers and make
all stakeholders – brands, agencies, celebrities, influencers and e-commerce
players – a lot more responsible.

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 14. The Law of Limitation
The Law of Limitation specifies the limit for every dispute so as to put an end to
litigation. Without an end to litigation by means of limitation, disputes keep
pending for a lot of time hence decreasing the productivity of the Government
and the citizens. Old cases come to the court causing hardship to the judiciary.
Death of parties and witnesses, loss of memory / remembrance by witnesses etc.
will render the case to become waste.

This Law does not create a right nor causes any action. It is limited to just pointing
out the time frame till when a legal remedy is possible to be sought. It says that
after the particular period, the relevant suit or proceeding cannot be instituted in
a court of law.

Limitation Law suggests that all disputes/claims/remedies should be kept alive

only for a legislatively fixed period of time, for otherwise disputes would be
Immortal when Man is Mortal.

A lien is not impaired because the remedy is barred by limitation.

However, in case of private owners contesting inter se the title to lands, the law
has established a limitation of twelve years: after that time it declares not simply
that the remedy is barred, but that the title is extinct in favour of the possessor.

Objective of Limitation :

The law assists those that are vigilant with their rights, and not those that sleep
there upon. Also to ensure..............>

That long dormant claims have more of cruelty than justice in them;

That the right not exercised for a long time is non-existence;

That the rights in property and rights in general should not be in a state of
constant uncertainty, doubt and suspense.

Present Limitation Act 1963, was passed to implement the Third Report of the Law
Commission on the Indian Limitation Act. The Limitation Act, 1963 specifies
certain prescribed period within which any suit appeal or application can be made.

A banker is allowed to take legal action by filing a suit, prefer an appeal and apply
for recovery only when the documents are within the period of limitation.

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If the documents are expired or are time barred, the banker cannot take any legal
course of action to recover the dues. Banks should be careful to ensure that all
legal loan documents held are valid and not time barred.

Banks should ensure that all loan documents are properly executed and they are
within the required limitation period as per the limitation act.

Banks are expected to hold valid legal documents as per the provisions of the
limitation act.

Extension of Limitation Period :

The limitation period can be extended in the following manners:

Acknowledgement of Debt (AOD) : By obtaining acknowledgement of debt in

writing from the borrower before expiry of the prescribed period of limitation,
limitation period is extended.

Part payment : Limitation period is extended when borrower of his duly

authorized agent makes part re- payment of the loan, before expiry of the
documents. Evidence of such payments should be under the signature of the
borrower or his authorized agent.

If the limitation period expires it can be extended only by executing fresh set of
documents. Fresh limitation period will be available from the date of execution of
such documents.

If Courts are closed on the date of expiration of limitation period, suit, the suit
appeal or application may be made, on the day when the court reopens.

Borrower abroad : The stay of a borrower abroad is not taken into consideration
while calculating the period of limitation. But if the borrower makes a trip to India
and stays in the country for a while before returning, the number of the days that
he stayed in India is to be taken into account for determining the limitation
period.

Acknowledgement from a guarantor : Acknowledgment is to be obtained from

a guarantor within three years from the date of invocation of guarantee. Serving a
notice is a demand on guarantor, and hence, the banks should be very careful
while issuing such notices as limitation period starts running from the date of
invocation.

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A normal guarantee agreement obtained by the banks from the guarantors is of a
continuing guarantee nature. Therefore, the period of limitation commences only
after a demand is made on the guarantor.

Cash Credit Accounts being mutual, open, running and continuous accounts, the
period of limitation will be further extended up to three years from the date of
last credit/debit entries (Article 1, Limitation Act 1963). However, a debit entry of
interest due on loans would not be considered for such purposes.

Balance Sheet Entries : A debit entry shown on the Liability side of a borrower‘s
balance sheet i.e., of a Limited Company, signed by its agents is considered an
acknowledgement of debt. If such acknowledgement is recorded within the
prescribed limitation period, it extends the limitation for a further prescribed
period.

AOS (Acknowledgement of Security) to be obtained to extend limitation period

in case of Mortgages.

Other Relevant Points :

A debtor may pay the time barred debt to the creditor. He cannot claim it back on
the plea that it was time barred.

A debtor who owes several debts to a creditor may pay a sum of money to the
Creditor.

If there is no specific mention, then the creditor can adjust the payment towards
any of the debts, including the one whose recovery is barred by limitation.

Similarly, an agreement in writing undertaking to pay a time barred debt is lawful

and binding.

Section 3 only bars the remedy but does not destroy the right which the remedy
relates to.

The Court is under an obligation to dismiss a suit if it is filed beyond the time
prescribed by the Limitation Act. The provisions of Section 3 are mandatory and
the Court will not proceed with the suit if it is barred by time.

Under Section 19 of Limitation Act, where payment on account of a debt or of

interest on legacy- a fresh period of limitation will be computed when payment
was made.

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 Period of limitation for certain documents

Nature of Documents Limitation Period

Demand Promissory Note 3 years from the date of DP Note.

Bill of exchange payable at sight 3 years when the bill is presented

or upon presentation.
Usance Bill of exchange 3 years from the due date

Money payable for money lent 3 years from the loan was made.

Guarantee 3 years from the date of invocation of

the guarantee

Mortgage - enforcement of payment of 12 years from the date the money sued
money becomes due

Mortgage – foreclosure 12 years from the money secured by

the mortgage becomes due.

mortgage – possession of Immovable 30 years when the mortgagee becomes

property entitled to possession

Condonation of delay means that extension of time given in certain cases

provided there is sufficient cause for such delay. Section 5 talks about the
extension of the prescribed period in certain cases. It provides that if the appellant
or the applicant satisfies the court that he had sufficient cause to not prefer the
appeal or application within that period, such appeal or application can be
admitted after the prescribed time. However, If a party does not show any cogent
ground for delay then the application, suit or appeal will be rejected by the court.

General Rule that the law of limitation only bars the remedy but does not bar the
right itself. Section 27 is an exception to this rule. It talks about adverse
possession. Adverse possession means someone who is in the possession of
another‘s land for an extended period of time can claim a legal title over it. In
other words, the title of the property will vest with the person who resides in or is
in possession of the land or property for a long period. If the rightful owner sleeps
over his right, then the right of the owner will be extinguished and the possessor
of the property will confer a good title over it.
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Section 27 is not limited to physical possession but also includes de jure
possession. As per the wordings of this Section, it applies and is limited only to
suits for possession of the property.

Due to difficulties faced on account of Covid 19 pandemic, Supreme Court has

ordered that in computing the period of limitation for any suit, appeal, application
or proceeding, the period from March 15, 2020 till October 2, 2021 shall stand
excluded. Consequently, the balance period of limitation remaining as on March
15, 2021, if any, shall become available with effect from October 3, 2021.

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 15. Tax Laws
The taxation system in India is such that the taxes are levied by the Central
Government and the State Governments. Some minor taxes are also levied by the
local authorities such as the Municipality and the Local Governments.

To run the government and manage the affairs of a state, money is required. So
the government imposes taxes in many forms on the incomes of individuals and
companies.

Classification of Taxes

Broadly taxes are divided into two categories:

1. Direct Taxes

2. Indirect Taxes

Direct Taxes

A direct tax can be defined as a tax that is paid directly by an individual or

organization to the imposing entity (generally government). A direct tax cannot
be shifted to another individual or entity. The individual or organization upon
which the tax is levied is responsible for the fulfillment of the tax payment.

The Central Board of Direct Taxes deals with matters related to levying and
collecting Direct Taxes and formulation of various policies related to direct taxes.

A taxpayer pays a direct tax to a government for different purposes, including real
property tax, personal property tax, income tax or taxes on assets, FBT, Gift Tax,
Capital Gains Tax, etc.

Indirect Taxes

The term indirect tax has more than one meaning. In the colloquial sense, an
indirect tax such as sales tax, a specific tax, value-added tax (VAT), or goods and
services tax (GST) is a tax collected by an intermediary (such as a retail store) from
the person who bears the ultimate economic burden of the tax (such as the
consumer).

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The intermediary later files a tax return and forwards the tax proceeds to the
government with the return. In this sense, the term indirect tax is contrasted with
a direct tax which is collected directly by the government from the persons (legal
or natural) on which it is imposed.

Income Tax Law

Administration

The Income Tax Act is administered by the Central Board of Direct Taxes (CBDT),
Department of Revenue, Ministry of Finance, Government of India.

The CBDT, from time to time, comes out with Circulars/Notifications clarifying the
provisions of law, framing rules, etc, in connection with effective implementation
of the provisions of the ITA.

Registration number of assesse

The registration number of dealer is expected to be passed on income tax PAN

number. PAN is a 10-digit number. Further 3 to 5 digits will be added. Thus, each
dealer will have 13/15 digit PAN-based registration number and each will have to
obtain state wide registration.

Chargeability of income tax - Article 265 of the Constitution of India provides

that “no tax shall be levied or collected except by the authority of law”. Therefore,
no tax can be levied or collected in India, unless it is explicitly and clearly
authorised by way of legislation. The Income-tax Act, 1961 (ITA) was enacted to
provide for levy and collection of tax on income earned by a person.

According to the ITA, every person, whose total income exceeds the maximum
amount not chargeable to tax, shall be chargeable to income tax at the rate or
rates prescribed in the Finance Act. The ITA defines the term “person” to include
an individual, an HUF, a company, a firm (including LLP), an AOP or a BOI; a local
authority and every other artificial juridical person.

The ITA provides an inclusive definition of the expression “income”. Therefore,

income includes not only those things which this definition explicitly declares, but
also all such things as the word signifies according to its natural import.

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Therefore, before arriving at a conclusion as to the tax implications of a receipt of
money, it is imperative to determine whether or not such a receipt amounts to
income under the ITA. There will be no incidence of income tax if a receipt of
money does not amount to income. For instance, it is important to distinguish a
capital receipt from a revenue receipt because, while all revenue receipts are
taxable under the ITA, unless specifically exempted, a capital receipt cannot be
taxed as income, unless otherwise provided for by the statute.

Residential status

Section 6 of the ITA defines the term “resident”, and contains different criteria to
determine the residence of various entities such as a company, a firm and an
individual, etc. A company is regarded as resident in India if it is an Indian
company; or the place of its effective management is in India in the relevant
financial year. The expression “place of effective management” has been defined
to mean a place where key management and commercial decisions that are
necessary for the conduct of the business of an entity as a whole are, in substance
made. An Association of Persons (AOP), a firm or HUF is considered resident in
India, except where during that financial year, the control and management of its
affairs is situated wholly outside India. An individual’s residential status is
dependent on the duration of stay in India.

A person resident in India is liable to tax on his global income. A non-resident is

liable to tax on income which is received or is deemed to be received in India or
which accrues or arises or is deemed to accrue or arise to him in India.

Scope of income

The total income of an assessee is determined on the basis of his residential status
in India. According to s 5 of the ITA, Indian residents are liable to be taxed on
their global income, whereas non-residents are taxed only on income that has its
source in India.

The scope of Section 5 is expanded by the legal fiction contained in Section 9,

which deems certain incomes to be of Indian source. Section 9 provides for
circumstances when various types of incomes are deemed to be Indian sourced
and hence are liable to tax in India. It specifically provides that all incomes
accruing or arising, whether directly or indirectly, through or from any business
connection in India, or through or from any property in India, or in the ITA.

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Tax year

The financial year in which the income is earned is called the “Previous Year” and
which is the year ending on the 31st day of March each year. The year
immediately succeeding the previous year is referred to as the “assessment year”.
The income of the previous year is taxed in the assessment year. The term
“Assessment Year” refers to a period of 12 months commencing on the 1st day of
April every year and ending on 31st day of March of the following year.

Rates of income tax

Applicable tax rates vary depending on the type of entity and the residential
status of the taxpayer. However, the applicable rates of income tax are amended
every financial year by the corresponding Finance Act.

In computation of the income of a non-resident, the provisions of the Double

Taxation Avoidance Agreement (DTAA) between India and the country of
residence of the non-resident are required to be examined, since the ITA provides
that its provisions shall be applicable only insofar as they are more beneficial to
the taxpayer. Thus, if the provisions of the DTAA are more beneficial as compared
to the provisions of the ITA, the non-resident can opt to be taxed with reference
to the provisions of the DTAA.

The only exception where beneficial provisions of DTAA are not available to a
non-resident is in case of applicability of General Anti Avoidance Rules or non
furnishing of Tax Residency Certificate by the non-resident.5

Heads of income

Income liable to tax in the hands of a person under the ITA has been classified
into five mutually exclusive heads of income, namely:

Salaries,

Income from house property,

Profits and gains from business or profession,

Capital gains, and

Income from other sources.

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The ITA details the manner of computation for each head of income. Various
exemptions and deductions are provided under each head of income and the net
amount (net of exemptions and deductions) is included in computing a person’s
total taxable income. Ad hoc deductions and exemptions are provided for, insofar
as salaries and income from house property are concerned. No expenditure other
than as prescribed can be deducted while computing income under the head
“salaries” and “income from house property”.

Computation of profits and gains from business or profession

All expenditure, other than capital or personal expenditure, incurred wholly and
exclusively for the purpose of business is allowed as a deduction while computing
the business income of an assessee. While this is the general rule, specific
deductions are prescribed for certain expenditures like rent, rates, taxes, repairs
and insurance for premises, used for the purposes of the business, repair and
insurance of machinery, plant and furniture, depreciation of various capital assets,
etc. The thrust is on taxing net current income and, therefore, receipts or
expenditure of a capital nature are usually not taken into consideration while
computing the taxable income of business or profession. However, depreciation is
allowed in relation to capital expenditure incurred for obtaining a tangible or
intangible asset.

Certain additional exemptions, concessions and deductions have been provided

to promote certain important industries, services or as the case may be, for the
economic development of a particular geographical area. For instance, profits and
gains derived by an assessee from a newly established undertaking set up in
Special Economic Zone (SEZs) will not be included in the total income of the
taxpayer for ten consecutive financial years from the date of commencement of
operations by such an undertaking.

Deduction in respect of profits and gains by an undertaking or enterprise

engaged in development of special economic zone Under s 80-IAB of ITA,
deduction of 100% of profits derived by a taxpayer from the business of
developing or developing, operating and maintaining a notified special economic
zone is available for a period of ten consecutive years out of a period of 15 years
commencing from the year of notification of the special economic zone.

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Computation of Capital Gains

Any profit or gain arising from the transfer of a capital asset during a financial
year is chargeable to tax under the head “capital gains”. Capital assets may either
be in the nature of long-term capital assets or be in the nature of short term
capital assets. A capital asset held by the taxpayer for not more than thirty six
months is a short-term capital asset, while other capital assets are long-term
capital assets.

However, the above-mentioned period of 36 months stands reduced to twelve

months in the case of security of a company listed on a recognised stock
exchange and unit of equity oriented mutual funds.

Therefore, equity or preference shares which are listed on recognised stock

exchange held by a taxpayer will be a long-term capital asset should it be held for
a period of twelve months or more.

Long-term capital gains are taxed at a lower rate as compared to the normal rate
of tax.

Transfer pricing

Section 92 of the ITA provides that income arising from an “international

transaction” shall be computed having regard to the arm’s length price.

Withholding tax

A person (except individuals in certain cases) is required to withhold tax from

certain specified payments. Separate provisions exist in respect of tax to be
deducted on specific transactions with residents and with non-residents.

The ITA provides for withholding of taxes from payments made to non-residents,
which are chargeable to tax under the ITA. Any person, whether resident or non-
resident, making payment to a non-resident would be liable to withhold tax from
such payment and deposit the same with the Government within the prescribed
time. Moreover, prescribed returns are also required to be filed periodically with
the tax authorities. The payee is entitled to adjust the taxes so withheld against his
tax liability in India on production of a (tax credit) certificate to be issued by the
person withholding the tax. If the tax rates, as per the DTAA, are more favourable,
the same would apply.

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However, if the non-resident payee does not have a Permanent Account Number
(PAN), the rate of tax withholding shall be 20% or the rates as per the aforesaid
table, whichever is higher.

Minimum Alternate Tax (MAT) is a measure to incorporate every firm in the

income tax bracket. It assures that no firm with proper finances and substantial
income can dodge paying income tax, even after claiming exemptions. It is a
provision in direct tax to limit tax exceptions that many firms avail to pay a
minimum amount of corporate tax to the Government. Under the book profit
Companies Act 2013, a minimum alternate tax is applicable when your taxed
income is found to be below 15.5% (including surcharge and cess as applied)
under Income Tax Act.

Alternative Minimum Tax (AMT) was introduced in 1969 so that wealthy

taxpayers could not deduct their way to zero tax liability. It puts a halt on the
taxes a few individuals should pay. It is mainly intended for wealthy taxpayers who
may have many tax subtractions and pay a minimal amount of their income as tax.
The alternative minimum tax limits specific tax breaks for impacted taxpayers. It
needs taxpayers above a particular income threshold to calculate their income tax
and pay the due tax. The calculation of alternative minimum tax involves removing
specific tax deductions and breaks.

Similarity Between Minimum Alternate Tax and Alternative Minimum Tax

Both minimum alternate tax and alternative minimum tax can be extended up to
fifteen years.

Both will lapse after the fifteen-year tenure ends.

Difference Between Minimum Alternate Tax and Alternative Minimum Tax

Minimum Alternate Tax is imposed on firms. On the other hand, an alternative

minimum tax is imposed on entities and individuals except for companies.

The AMT is calculated as adjusted overall income. On the other hand, a minimum
alternate tax on book profits.

The AMT rate is 18.5%, . MAT 15%

The alternative minimum tax is not imposed on Capital Gain Exempt. On the other
hand, the minimum alternate tax is imposed on Capital Gain Exempt.

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The minimum alternate tax is imposed when the income tax, including the
surcharge and the cess, calculated on the overall income, according to the
provisions mentioned in the Income Tax Act, is below fifteen percent of book
profit, surcharge, and cess. On the other hand, the alternative minimum tax is
imposed when the income tax, including surcharge and cess, calculated on the
overall income according to the provisions mentioned in the Income Tax Act is
below 18.5% of the adjusted overall income, surcharge, and cess.

Securities Transaction Tax

Securities Transaction Tax (STT) or turnover tax, as is generally known, is a tax

that is leviable on securities transaction carried through a recognized stock
exchange in India. STT is leviable on the taxable securities transactions, w.e.f.
October 1, 2004. Surcharge is not leviable on the STT. Long-term capital gains
arising on the sale of shares/securities, which is carried out through the stock
exchange and on which STT has been paid, are exempted from tax.

Dividend distribution tax

Section 115-O of the ITA provides that any amount declared, distributed or paid
by a domestic company by way of dividend shall be chargeable to dividend
distribution tax (DDT). Only a domestic company (not a foreign company) is liable
for DDT. Such tax on distributed profit is in addition to income tax chargeable in
respect of total income. It is applicable whether the dividend is interim or
otherwise and whether such dividend is paid out of the current profits or
accumulated profits.

Taxation of dividends received from foreign subsidiaries

Dividend received (gross) by an Indian company from its foreign subsidiary(ies) (in
which the recipient Indian company holds a minimum threshold shareholding of
26%) has now been taxable at a concessional rate of 15%.

Return of income

A person having income liable to tax in India is required to file a return of income
with the income tax authorities (also referred to as the “Revenue”). The return of
income must be filed before specific due dates prescribed for various kinds of
entities for each financial year. Every company, including a foreign company,
deriving income from India, is required to file such a return in India.

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Effective from 01.06.2011, the liaison offices of foreign companies are required to
furnish a statement of its activities in prescribed form to the income-tax
authorities within 60 days from the close of the financial year.

Assessment and dispute resolution

Detailed provisions exist in the ITA for assessing the income of a taxpayer for any
previous financial year. Normally, the assessment of income is made on the basis
of the return of income filed by the assessee. However, there may be cases where
the Revenue may call for certain details in order to make a correct assessment of
the taxpayer’s income. The income tax law in India also provides for reopening of
assessments in cases where income chargeable to tax had escaped assessment.
The Commissioner of Income Tax (CIT) has wide powers to revise an assessment if
the order is erroneous or prejudicial to the interest of Revenue.

Dispute Resolution Panel (DRP)

In order to facilitate expeditious disposal of disputes, a new dispute resolution

mechanism has been introduced.

The DRP is a panel consisting of three senior Revenue officers, who have been
given the powers to review the objections of the assessee and issue necessary
directions to the Revenue officer to pass the assessment order in accordance with
such directions.

An appeal against the order passed by the Revenue officer in accordance with the
directions of the DRP can be preferred directly before the second appellate
authority, the Income Tax Appellate Tribunal (ITAT). This mechanism is optional
and the assessee may decide not to avail of this resolution mechanism and take
the traditional approach and prefer an appeal before the first appellate authority,
the CIT(A) against the assessment order passed by the Revenue officer.

The advantage of opting for the DRP route is that there is no demand raised until
the final order is passed by the assessing officer after considering the directions of
DRP. Also, the assessee can approach the ITAT for stay of demand raised by the
assessing officer as per the final order, after filing appeal to the ITAT against such
order.

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Appeals: Administrative, Quasi-Judicial and Judicial Hierarchy

The ITA makes detailed provisions for appeals and revisions. Any assessee
aggrieved by an assessment order made by the Revenue may prefer an appeal
against the order to a Commissioner of Income Tax (Appeals) (CIT(A)), who is a
senior revenue officer and a quasi-judicial authority. The assessee can only
approach the CIT to seek revision of the order, if it is prejudicial to him.

The taxpayer as well as the Revenue has a right to prefer an appeal against the
order of the CIT(A) before the ITAT. The order of the ITAT may further be
appealed against before the appropriate High Court, if a substantial question of
law is involved. The order of the High Court is appealable before the Supreme
Court.

Advance Ruling

With as many as four statutory appellate forums, assessees often find themselves
caught in long-drawn and expensive litigations against the Revenue and, in the
process, face a great deal of uncertainty regarding their tax liability. To address
this situation, the ITA provides for advance rulings for certain eligible applicants.
The Authority for Advance Rulings (AAR) is required by statute to issue its ruling
within six months of receiving an application from an eligible applicant. These
rulings are binding on taxpayers as well as the Revenue.

Demerger

Demerger in the context of the Indian tax laws signifies a transfer of the division/
undertaking of a company to another company under a scheme of arrangement
approved by the Court. Provisions exist in the current laws to maintain tax
neutrality in respect of the assets transferred by the demerged company to the
resulting company through a scheme of demerger.

Tax Neutrality

A neutral tax is one that does not create incentives for firms or individuals to
change their behaviour—to invest more or less, to work more or less, to locate in
one place rather than another, to employ more or less labour or more or less
capital.

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Goods and Services Tax (GST)
The GST was launched on 1st July 2017.

GST was first recommended by the Kelkar committee task force.

It is a tax levied when a consumer buys a good or service. It is meant to be a

single, comprehensive tax that will subsume all the other smaller indirect taxes on
consumption like service tax, etc.

It subsumed 17 large taxes and 13 cesses.

It is a single tax on the supply of goods and services, right from the manufacturer
to the end consumer.

GST does not tax or get into specific commodities.

Credits of input taxes paid at each stage will be available in the subsequent stage
of value addition, which makes GST essentially a tax only on value addition at
each stage.

The final consumer will thus bear only the GST charged by the last dealer in the
supply chain, with set-off benefits at all the previous stages.

Salient features of the GST Bill:

No differentiation between good and services tax. One rate for both goods and
Services Subsumes most of the Indirect taxes at state and central level (barring
few exceptions listed below)

The Central GST (CGST) and the State GST (SGST) would be levied simultaneously
on every transaction of supply of goods and services except on exempted goods
and services, goods which are outside the purview of GST and the transactions
which are below the prescribed threshold limits. Further, both would be levied on
the same price or value unlike State VAT which is levied on the value of the goods
inclusive of Central Excise.

CGST and IGST will be administered by the Central Government while SGST will be
administered by respective State Governments. There will be separate returns,
separate payment of taxes, separate assessments and may be even separate
appeals.

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Commodities Transaction Tax
The commodity transaction tax is charged on the buyer and seller of exchange-
traded non-agricultural commodity derivatives in India.

It is calculated based on the contract's size. Non-farm items such as metals (gold,
silver, and copper) and energy products are among the commodities covered by
CTT (crude oil and natural gas).

Quite similar to Securities Transaction Tax which is a tax imposed on the purchase
and sale of securities, Commodities Transaction Tax is a tax levied on exchange-
traded non-agricultural commodity derivatives in India.

Commodity derivatives are financial contracts whose value is determined by the

value of underlying commodities like oil, gas, metals, agricultural products, and
minerals.

While agricultural commodities are exempted from CTT, non-agricultural

commodities such as gold, silver, and other non-ferrous metals including copper
will be taxed.

Apart from this, energy products like crude oil and natural gas will also be taxed
under the Commodity Transaction Tax.

The Commodities Transaction Tax was introduced in the 2013-14 Union Budget
by former Finance Minister Mr. P. Chidambaram to boost financial resources.

The fundamental goal of the tax was to distinguish between derivative trading in
the commodities market and derivative trading in the securities market. It aimed
to reduce price volatility and enhance government revenue from taxes.

While the majority of agricultural items were excluded from the levy, some
processed commodities were included.

CTT was also levied on commodities options in 2018.

Advantages of Commodity Transaction Tax

Deters speculation: The Commodity Transaction Tax, like all other financial
transaction taxes, tries to deter speculation, which is rampant in the market.

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Parity between securities and commodities market: The adoption of the
Commodity Transaction Tax policies brings the securities and commodities
markets closer to parity.

Widens Tax Base: The Commodity Transaction Tax was introduced with the
intention to broaden the tax base.

Disadvantages of Commodity Transaction Tax

Increases the cost of transaction: Brokers were previously compensated for their
services in the purchase and selling of commodities. However, with the adoption
of the commodities transaction tax, the transaction cost of trading commodities
has risen. Traders who already pay deposit margins, brokerage, transaction
charges, and brokerage are burdened by the Commodity Transaction Tax.

Affects India’s global ranking: CTT had a major negative influence on all
commodity trading volumes, causing India's global ranking to plummet to lower
levels.

Loss of government revenue: The revenue from CTT collection has been so low as
a result of the decreasing volume that it has been lumped in with other income
taxes in the Union Budget.

Increase in market volatility: As a result of CTT's implementation, the volume of

bullion, energy, and base metal contracts traded on commodities exchanges has
plummeted, while stock futures trading has increased unnecessarily.

Commodities derivatives are more important than equity since they assist
commodity producers and other manufacturers in managing price risk. Because
this sector is still in its infancy, burdening it with additional transaction taxes,
which bring in pitiful revenues for the government, makes little sense.

@@@

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 Banking Regulations and Business Laws
Module D: Commercial & Banking Laws
Index
Chapter No Topic

01 Law of Contracts

02 Different Types of Firms

03 The Companies Act

04 Limited Liability Partnership Act, 2008

05 Transfer of Property Act, 1882

06 The Right to Information Act, 2005

07 Information Technology Act, 2000

08 Prevention of Corruption Act, 1988

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 01 Law of Contracts
Indian Contract Act, 1872

Contract , is a promise (an agreement) enforceable by law. All contracts are

agreements but all agreements are not contracts.

An agreement comes into existence when one party makes a proposal or offer to
the other party and that other party signifies his assent thereto.

Offer versus Invitation to Offer

An offer and invitation to offer are two different terms. An offer is a proposal
while an invitation to offer (treat) is inviting someone to make a proposal. In an
offer, there is an intention to enter into a contract, of the party, making it and thus
it is certain. On the other hand, an invitation to offer is an act which leads to the
offer, which is made with an aim of inducing or negotiating the terms.

Offer and Acceptance

Firstly, there must be an offer and its acceptance. Such offer and acceptance
should create legal obligations between parties. This should result in a moral duty
on the person who promises or offers to do something. Similarly, this should also
give a right to the promise to claim its fulfilment. Such duties and rights should be
legal and not merely moral.

When one person signifies to another his willingness to do or to abstain from

doing anything, with a view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal.

When the person to whom the proposal is made signifies his assent thereto, the
proposal is said to be accepted. A proposal, when accepted, becomes a promise.

The person making the proposal is called the ―promisor‖, and the person
accepting the proposal is called the ―promise.

When, at the desire of the promisor, the promisee or any other person has done
or abstained from doing, or does or abstains from doing, or promises to do or to
abstain from doing, something, such act or abstinence or promise is called a
consideration for the promise.

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Every promise and every set of promises, forming the consideration for each
other, is an agreement.

Promises which form the consideration or part of the consideration for each other
are called reciprocal promises

An agreement not enforceable by law is said to be void.

An agreement enforceable by law is a contract.

An agreement which is enforceable by law at the option of one or more of the

parties thereto, but not at the option of the other or others, is a voidable contract.

A contract which ceases to be enforceable by law becomes void when it ceases to

be enforceable.

The communication of a proposal is complete when it comes to the knowledge of

the person to whom it is made.

The communication of an acceptance is complete, as against the proposer, when

it is put in a course of transmission to him.

The communication of an acceptance is complete as against the acceptor, when it

comes to the knowledge of the proposer.

The communication of a revocation is complete, as against the person who makes

it, when it is put into a course of transmission to the person to whom it is made.

The communication of a revocation is complete,—as against the person to whom

it is made, when it comes to his knowledge.

A proposal may be revoked at any time before the communication of its

acceptance is complete as against the proposer, but not afterwards.

An acceptance may be revoked at any time before the communication of the

acceptance is complete as against the acceptor, but not afterwards.

A proposal is revoked ………>

(a) by the communication of notice.

(b) by the lapse of the time prescribed, if no time is so prescribed, by the lapse of
a reasonable time, without communication of the acceptance.

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(c) by the failure of the acceptor to fulfil a pre-condition. or

(d) by the death or insanity of the proposer, if the fact of his death or insanity
comes to the knowledge of the acceptor before acceptance.

In order to convert a proposal into a promise, the acceptance must

(a) be absolute and unqualified and

(b) be expressed in some usual and reasonable manner, unless the proposal
prescribes the manner in which it is to be accepted.

If the proposal or acceptance of any promise is made in words, the promise is said
to be express.

If the proposal or acceptance is made otherwise than in words, the promise is said
to be implied.

Essentials of a Valid Contract

(a) Plurality of persons: There must be two or more persons to make an

agreement because one person cannot enter into an agreement with himself.

(b) Intent of Legal Obligations - an agreement to become a contract must give

rise to a legal obligation i.e. a duty enforceable by law.

(c) Certainty of Meaning - Consensus ad idem: The meeting of the minds is called
consensus-ad-idem. It means both the parties to an agreement must agree about
the subject matter of the agreement in the same sense and at the same time.

(d) Possibility of Performance

(e) Free Consent

(f) Competency of the Parties

(g) Lawful Consideration

(h) Case Specific Contracts (Contract of Insurance).

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Therefore, to form a valid contract there must be an agreement based on the
genuine consent of the parties, supported by a lawful consideration, made for a
lawful object, and between the competent parties.

When consent to an agreement is caused by coercion, fraud or misrepresentation,

the agreement is a contract voidable at the option of the party whose consent
was so caused.

When consent to an agreement is caused by undue influence, the agreement is a

contract voidable at the

When consent to an agreement is caused by undue influence, the agreement is a

contract voidable at the option of the party whose consent was so caused.

Where both the parties to an agreement are under a mistake as to a matter of fact
essential to the agreement, the agreement is void.

A person is competent to contract if he is of the age of majority and who is of

sound mind and not disqualified from contracting by any law to which he is
subject.

Free consent is an essential ingredient of contract.

Consent is said to be free when it is not caused by – (a) Coercion (b) undue
influence (c) fraud (d) misrepresentation (e) mistake.

Where both the parties to an agreement are under a mistake as to a matter of fact
essential to the agreement, the agreement is void.

A contract by which one party promises to save the other from the loss caused to
him by the conduct of promisor himself or by the conduct of some other person is
called a Contract of Indemnity.

If the parties to a contract agree to substitute a new contract for it, or alter it, the
original contract need not be performed. This known as ‘novation'.

An agreement without consideration is void unless it is made out of natural love

and affection and registered under the law for the time being in force, or a
promise to compensate a person who has voluntarily done something for the
promisor or is a promise to pay a time barred debt which is reduced in writing.

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The term ‘fraud‘ means and includes any of the acts committed by a party to a
contract or with his connivance or by his agent, with intent to deceive another
party or to induce him to enter into contract.

The considerations and object of a contract should be lawful. It is presumed to be

lawful unless -

(a) It is forbidden by law

(b) Is of such nature that if permitted, it would defeat the provisions of any law.

(c) Is fraudulent

(d) Involves or implies injury to person or property of another

(e) The Court regards it as immoral, or opposed to public policy.

The promise should be performed by the promisor himself or any other

competent person employed by him unless it was agreed that the promisor alone
should perform it.

In the case of joint promise, unless a contrary intention appears, all the promisors
can perform it jointly and after death of one or more of them, the remaining
along with the legal representatives of borrower must fulfil the promise.

When a contract has been broken, the party who suffers because of such breach is
entitled to receive compensation for any loss or damage caused to him from the
party who has broken the contract.

A Contract of Guarantee is a contract to perform the promise, or discharge the

liability of a third person in case of his default. The person who gives the
guarantee is called 'surety‘. The liability of surety is coextensive with that of
principal debtor.

A surety gets discharged by variance in terms of contract or release of security.

An agent is a person employed to do any act for another or represent another in

dealings with third parties. Any person including a minor can be an agent as far as
transactions with third parties are concerned.

No consideration is necessary to create agency. Authority of agent is express or

implied.

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An agent having authority to do an act has authority to do every lawful thing. In
an emergency, agent has further authority to do all such acts for the purpose of
protecting his principal from loss as would be done by a person of ordinary
prudence.

If the agent has exceeded authority, the principal may ratify or disown the acts.

An agency can be terminated by the principal. However, where the agent has
himself an interest in the property which forms subject matter of agency it can not
be terminated to prejudice such interest, If in case of a power of attorney, the
power is coupled with interest and the obligation is not discharged the power can
not be revoked.

The principal is not liable for the criminal acts of agents.

“Bailment‟ is delivery of goods by one person to another for some purpose, upon
a contract that they shall when the purpose is accomplished, be returned or
otherwise disposed of according to the directions of person delivering them.

The bailment of goods as security for payment of a debt or performance of a

promise is called ‘pledge‘.

Some contracts have special conditions that if not observed would render them
invalid or void. For example, the Contract of Insurance is not a valid contract
unless it is in the written form. Similarly, in the case of contracts like contracts for
immovable properties, registration of contract is necessary under the law for these
to be valid.

Quid Pro Quo means ‘something in return‘ which means that the parties must
accrue in the form of some profit, rights, interest, etc. or seem to have some form
of valuable consideration.

“Consent‖ defined as Two or more persons are said to consent when they agree
upon the same thing in the same sense.

“Free consent” defined as Consent is said to be free when it is not caused by— (a)
coercion, or (b) undue influence, or (c) fraud, or (d) misrepresentation, or (e)
mistake.

Agreement void, if considerations and objects are unlawful.

Agreements, the meaning of which is not certain are void.

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Agreements by way of wager are void.

Agreements entered into between parties under the condition that money is
payable by the first party to the second party on the happening of a future
uncertain event, and the second party to the first party when the event does not
happen, are called Wagering Agreements or Wager.

A contingent contract is a contract to do or not to do something, if some event,

collateral to such contract, does or does not happen.

Contingent agreements to do or not to do anything, if an impossible event

happens, are void, whether the impossibility of the event is known or not to the
parties to the agreement at the time when it is made.

Where two or more persons have made a joint promise, a release of one of such
joint promisors by the promisee does not discharge the other joint promisor or
joint promisors neither does it free the joint promisors so released from
responsibility to the other joint promisor or joint promisors.

An agreement to do an act impossible in itself is void.

A contract to do an act which, after the contract is made, becomes impossible, or,
by reason of some event which the promisor could not prevent, unlawful,
becomes void when the act becomes impossible or unlawful.

Where persons reciprocally promise, firstly, to do certain things which are legal,
and, secondly, under specified circumstances, to do certain other things which are
illegal, the first set of promises is a contract, but the second is a void agreement.

In the case of an alternative promise, one branch of which is legal and the other
illegal, the legal branch alone can be enforced.

Alternative promise refers to a contractual promise to perform one or more things

and any one of these things may satisfy the promise.

When the parties to an agreement make mutual promises to do or to abstain

from doing something, these are referred to as reciprocal promises. ... Thus, there
is an obligation on each party to perform his promise and to accept performance
of the other's promises.

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If the parties to a contract agree to substitute a new contract for it, or to rescind
or alter it, the original contract, need not be performed.

In contract law, rescission has been defined as the unmaking of a contract

between parties. Rescission is the unwinding of a transaction. This is done to bring
the parties, as far as possible, back to the position in which they were before they
entered into a contract (the status quo ante).

If a person, incapable of entering into a contract, or any one whom he is legally

bound to support, is supplied by another person with necessaries suited to his
condition in life, the person who has furnished such supplies is entitled to be
reimbursed from the property of such incapable person.

A person who finds goods belonging to another, and takes them into his custody,
is subject to the same responsibility as a bailee.

A person to whom money has been paid, or anything delivered, by mistake or

under coercion, must repay or return it.

When a contract has been broken, the party who suffers by such breach is entitled
to receive compensation for loss or damage caused to him. Such compensation is
not to be given for any remote and indirect loss or damage sustained by reason
of the breach.

A contract by which one party promises to save the other from loss caused to him
by the contract of the promisor himself, or by the conduct of any other person, is
called a contract of indemnity.

A contract of guarantee‖ is a contract to perform the promise, or discharge the

liability, of a third person in case of his default. The person who gives the
guarantee is called the surety; the person in respect of whose default the
guarantee is given is called the principal debtor‖, and the person to whom the
guarantee is given is called the creditor. A guarantee may be either oral or written.

Anything done, or any promise made, for the benefit of the principal debtor, may
be a sufficient consideration to the surety for giving the guarantee.

The liability of the surety is co- extensive with that of the principal debtor, unless
it is otherwise provided by the contract.

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A guarantee which extends to a series of transactions, is called a continuing
guarantee.

A continuing guarantee may at any time be revoked by the surety, as to future

transactions, by notice to the creditor.

The death of the surety operates, in the absence of any contract to the contrary,
as a revocation of a continuing guarantee, so far as regards future transactions.

Any variance, made without the surety‘s consent, in the terms of the contract
between the principal [debtor] and the creditor, discharges the surety as to
transactions subsequent to the variance.

The surety is discharged by any contract between the creditor and the principal
debtor, by which the principal debtor is released, or by any act or omission of the
creditor, the legal consequence of which is the discharge of the principal debtor.

Mere forbearance on the part of the creditor to sue the principal debtor or to
enforce any other remedy against him does not, in the absence of any provision in
the guarantee to the contrary, discharge the surety.

Where there are co-sureties, a release by the creditor of one of them does not
discharge the others; neither does it free the surety so released from his
responsibility to the other sureties.

If the creditor does any act which is inconsistent with the rights of the surety, or
omits to do any act which his duty to the surety requires him to do, and the
eventual remedy of the surety himself against the principal debtor is thereby
impaired, the surety is discharged.

Where a guaranteed debt has become due, or default of the principal debtor to
perform a guaranteed duty has taken place, the surety upon payment or
performance of all that he is liable for, is invested with all the rights which the
creditor had against the principal debtor.

A surety is entitled to the benefit of every security which the creditor has against
the principal debtor at the time when the contract of suretyship is entered into,
whether the surety knows of the existence of such security or not; and if the
creditor loses, or, without the consent of the surety, parts with such security, the
surety is discharged to the extent of the value of the security.

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A bailment‖ is the delivery of goods by one person to another for some purpose,
upon a contract that they shall, when the purpose is accomplished, be returned or
otherwise disposed of according to the directions of the person delivering them.
The person delivering the goods is called the ―bailor‖. The person to whom they
are delivered is called, the bailee.

In all cases of bailment the bailee is bound to take as much care of the goods
bailed to him as a man of ordinary prudence would, under similar circumstances,
take of his own goods of the same bulk, quality and value as the goods bailed.

The bailor is bound to disclose to the bailee faults in the goods bailed, of which
the bailor is aware, and which materially interfere with the use of them, or expose
the bailee to extraordinary risks; and if he does not make such disclosure, he is
responsible for damage arising to the bailee directly from such faults. If the goods
are bailed for hire, the bailor is responsible for such damage, whether he was or
was not aware of the existence of such faults in the goods bailed.

The bailee, in the absence of any special contract, is not responsible for the loss,
destruction or deterioration of the thing bailed, if he has taken due care.

A contract of bailment is avoidable at the option of the bailor, if the bailee does
any act with regard to the goods bailed, inconsistent with the conditions of the
bailment.

Gratuitous bailment is a type of bailment whereby the bailor transfers possession

of property to the bailee on the basis that no compensation is to be paid. This
type of bailment will arise in situations where a bailor will lend something to a
friend and normally will be for the exclusive benefit of the bailee.

A gratuitous bailment is terminated by the death either of the bailor or of the

bailee.

The finder of goods has no right to sue the owner for compensation for trouble
and expense voluntarily incurred by him to preserve the goods and to find out the
owner; but he may retain the goods against the owner until he receives such
compensation; and, where the owner has offered a specific reward for the return
of goods lost, the finder may sue for such reward, and may retain the goods until
he receives it.

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When a thing which is commonly the subject of sale is lost, if the owner cannot
with reasonable diligence be found, or if he refuses, upon demand, to pay the
lawful charges of the finder.

When a thing which is commonly the subject of sale is lost, if the owner cannot
with reasonable diligence be found, or if he refuses, upon demand, to pay the
lawful charges of the finder, the finder may sell it

a) when the thing is in danger of perishing or of losing the greater part of its
value, or,

b) when the lawful charges of the finder, in respect of the thing found, amount to
two-thirds of its value.

Where the bailee has, in accordance with the purpose of the bailment, rendered
any service involving the exercise of labour or skill in respect of the goods bailed,
he has, in the absence of a contract to the contrary, a right to retain such goods
until he receives due remuneration for the services he has rendered in respect of
them.

The bailment of goods as security for payment of a debt or performance of a

promise is called “pledge”. The bailor is in this case called the pawnor”. The bailee
is called the pawnee”.

The pawnee may retain the goods pledged, not only for payment of the debt or
the performance of the promise, but for the interest of the debt, and all necessary
expenses incurred by him in respect of the possession or for the preservation of
the goods pledged.

An “agent” is a person employed to do any act for another, or to represent

another in dealings with third persons. The person for whom such act is done, or
who is so represented, is called the ―principal.

Any person who is of the age of majority according to the law to which he is
subject, and who is of sound mind, may employ an agent.

No consideration is necessary to create an agency.

The authority of an agent may be expressed or implied.

An authority is said to be express when it is given by words spoken or written.

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An authority is said to be implied when it is to be inferred from the circumstances
of the case; and things spoken or written, or the ordinary course of dealing, may
be accounted circumstances of the case.

An agency is terminated by the principal revoking his authority; or by the agent

renouncing the business of the agency; or by the business of the agency being
completed; or by either the principal or agent dying or becoming of unsound
mind; or by the principal being adjudicated an insolvent under the provisions of
any Act for the time being in force for the relief of insolvent debtors.

Where the agent has himself an interest in the property which forms the subject-
matter of the agency, the agency cannot, in the absence of an express contract, be
terminated to the prejudice of such interest.

The principal may, save as is otherwise provided by the last preceding section,
revoke the authority given to his agent at any time before the authority has been
exercised so as to bind the principal.

The principal cannot revoke the authority given to his agent after the authority
has been partly exercised, so far as regards such acts and obligations as arise from
acts already done in the agency.

Where one person employs another to do an act which is criminal, the employer is
not liable to the agent, either upon an express or an implied promise, to
indemnify him against the consequences of that Act.

The principal must make compensation to his agent in respect of injury caused to
such agent by the principal‘s neglect or want of skill.

Contracts entered into through an agent, and obligations arising from acts done
by an agent, may be enforced in the same manner, and will have the same legal
consequences, as if the contracts had been entered into and the acts done by the
principal in person.

When an agent does more than he is authorized to do, and when the part of what
he does, which is within his authority, can be separated from the part which is
beyond his authority, so much only of what he does as is within his authority is
binding as between him and his principal.

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Where an agent does more than he is authorized to do, and what he does beyond
the scope of his authority cannot be separated from what is within it, the principal
is not bound to recognize the transaction.

Any notice given to or information obtained by the agent have the same legal
consequences as if it had been given to or obtained by the principal.

The Legal contracts can be classified into four different kinds , which can further
be listed as different types of contracts.

Based on Creation

Express Contract: An express contract deals with a contract which is either made
by spoken words or a written document.

Example- A customer buying a flat from a broker with a written document.

Implied Contract: An implied contract deals with a contract which is made in any
way other than a verbal agreement or a written record. In this particular case, it is
inferred from the conduct of a person or from that of any given circumstance.

Example- A bus shuttle service from the state government plies in a city, to use its
service you have to buy a ticket and the shuttle service isn‘t exclusively operating
for you.

Tacit Contract: A tacit contract deals with a contract which implies that it is made
in silence because there is an understanding that there is no contradiction or
objection from the circumstances.

Example: Withdrawing cash from an ATM machine

Based on Execution

Executed Contract: This is a contract signed between two parties who have
performed their legal obligations under the contract.

Example- A person selling his car to another person saying the car is for sale for a
sum of 5 lakh rupees and the same being obligated.

Executory Contract: This is a contract signed between two parties who are yet to
perform their legal obligations under the contract.

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Example- A person offers his bike for 1 lakh rupees and another person accepts
the offer, but the bike is yet to be delivered and the amount for it is also yet to be
paid.

Partly Executed Contract: This is a contract signed between two parties where one
of the mentioned parties is yet to perform a legal commitment whereas the other
party has satisfactorily completed the legal obligation as per the contract.

Example- A salesperson sells a flat to a customer but handing over of the keys to
the new flat takes a month‘s time.

Based on Enforceability

Valid Contract: A contract which duly follows the laws prescribed by any Court of
law is said to be a Valid contract.

Example- A man offers to marry a woman, the woman agrees to this offer.

Void Contract: At the time of contracting, the contract was valid but in due course
of time, the contract becomes void due to several reasons like a change of law or
a subsequent amendment to it, performance degradation and other
unforeseeable circumstances.

Example- A man marries a woman with her consent but later on the woman dies
due to illness. So initially the contract was valid and the same becomes void due
to the death of the spouse.

Void Agreement: If an agreement isn‘t enforceable by law, then such type of an

agreement is said to be void.

Example- An agreement made with a minor or a person of unsound mind or a

drunkard is considered to be void.

Voidable Contract: An agreement which is enforceable by one or more of the

legally bound parties but not at the option of the other party.

Example- A land shark threatens to kill a person if he doesn‘t sell his property for
1 lakh rupees. The payment is received because of forced coercion. It is a Voidable
contract.

Illegal Agreement: Illegal agreements are void from the very beginning because
the agreement made cannot be enforced by any law.

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Example- Contract killing or supari killing is void from the very beginning.

Unenforceable Contract: This is a valid contract but still it can‘t be enforceable

because of a technical lag.

Example- All arbitration agreements must be made in writing, any oral agreement
can‘t be taken into account and made enforceable.

Based on Duration

Full-time and Part-time Contracts:

A full-time contract usually involves 40 hours of work per week and it may go up
to a maximum of 60 hours per week.

A part-time contract generally hovers around the 30-hour mark per week.

Example- Salaried professionals like engineers are full-time employees and

delivery boys can be employed on a part-time basis.

Fixed-term Contracts: A fixed-term contract is set for a stipulated period within

which the set task must be accomplished.

Example- Construction workers were given a task to finish a building project

within 6 months.

Agency Staff Contracts: This contract deals with hiring employees on a temporary
basis from agencies which provide services for larger corporations.

Example- Agencies providing skilled labour for corporations like IBM, Yahoo,
Infosys etc.

Zero Hour Contracts: This type of contract deals with workers who can be
contacted for professional service but they are already working for some other
employer. It‘s not necessary that they should right away work on the assigned
work, unlike full-time employees.

Example- Freelancers providing content.

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Void Contract Vs Voidable Contract

A void contract differs from a voidable contract because, while a void contract is
one that was never legally valid to begin with (and will never be enforceable at
any future point in time), voidable contracts may be legally enforceable once
underlying contractual defects are corrected.

Implied Contract Vs Tacit Contract

An implied contract is created when two or more parties have no written contract,
but the law creates an obligation in the interest of fairness based on the parties'
conduct or circumstances. Tacit contracts are those that are inferred through the
conduct of parties.

Other name of tacit contract - gentlemen's agreement.

Unilateral and Bilateral Contracts

Unilateral contracts involve only one party promising to take action or provide
something of value. These are also known as one-sided contracts, and a common
example of them is when a reward is offered for something being found: the party
to whom the reward is offered is under no obligation to find the lost item, but if
they do find it, the offering party is under contract to provide the reward.

Bilateral contracts, on the other hand, involve both parties agreeing to exchange
items or services of value. These are also known as two-sided contracts and are
the kind of contract that is most commonly encountered.

Unconscionable contracts are contracts that are considered unjust by being

unfairly weighted to give advantage to one side over the other.

Examples of elements that may make a contract unconscionable include:

A limit on the damages a party may receive for breach of contract.

A limit on the rights of a party to seek satisfaction in court.

An inability to have a warranty honoured.

Whether or not a contract is unconscionable is a matter left for interpretation by

the courts. They usually rule a contract to be unconscionable if it is perceived as
being a contract that no mentally able person would sign, that no honest person
would offer, or that would undermine the court‘s integrity where it was enforced.

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Adhesion Contracts

An adhesion contract is one that is drafted by a party with a great deal more
bargaining power than the other party, meaning that the weaker party may only
accept the contract or not. Often called ―take it or leave it‖ contracts, these
contracts lack much, if any negotiation, since one party will have little to nothing
to negotiate with. Such contracts should not be confused with unconscionable
contracts, since a lack of bargaining power does not necessarily mean that the
terms set out will be unfair. That said, courts may still not enforce adhesion
contracts if they believe a meeting of the minds never existed.

Aleatory Contracts

Aleatory contracts are agreements that are not triggered until an outside event
occurs. Insurance policies would be examples of this, as they are agreements
involving fiscal protection in the face of unpredictable events. In such contracts,
both sides assume risks: the insured that they are paying for a service they will
never receive, and the insurer that they must pay out potentially more than they
receive from the insured.

Option Contracts

Option contracts allow a party to enter another contract with another party at a
later time. Entering into a second contract is called exercising the option, and a
good example of this is in real estate, where a prospective buyer will pay a seller
to take a property off the market, then, at a later date, have a new contract made
to buy the property outright, should they choose to do so.

Simple Contract

A simple contract is any kind of written or oral agreement. The following are not
required for a simple contract to be legally binding – (a) Witnesses (b) Signatures
and (c) Seals.

Quantum Meruit is a legal action brought to recover compensation for work done
and labour performed "where no price has been agreed." The term literally means
"as much as is deserved" and often can be seen as the legal form of equitable
compensation or restitution.

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Quantum meruit means "the amount he deserves" or "as much as he has earned".
In most cases it denotes a claim for a reasonable sum in respect of services or
goods supplied to the defendant.

A claim for quantum meruit cannot arise if the parties have a contract to pay an
agreed sum. In such circumstances, the parties' relationship is governed by the
law of contract.

A claim for quantum meruit may arise where the parties:

a) Have not agreed a contract, or there is a so-called quasi-contract. For example,

the parties may have agreed some of the contractual terms, but may have failed
to reach an agreement on an essential term, such as price.

b) Have not fixed a price for the services or goods supplied.

c) Have an agreement to pay a reasonable sum for the services or goods supplied.

d) Have agreed a scope of work under the original contract and the work carried
out falls outside that scope.

Exemplary or Vindictive Damages are the damages awarded against the party who
has committed a breach of the contract with the object of punishing the erring as
defaulting party and to compensate the aggrieved party. Generally, these
damages are awarded in case of action on lost or breach of promise.

Restitution in normal sense means to restore the benefit which a person has
obtained and its main purpose is First to restore the position of victim .i.e ‗
Plaintiff ‗ in case of a contract to the original position which he enjoyed before
entering into contract and secondly to prevent the unjust enrichment of the
defendant i.e. to stop him from making wrongful gains which he is not entitled as
per law to make.

Example.

Mr. X entered into a contract with MNP Ltd for a purchase of 200 tonnes of wheat.
Mr X paid an advance of Rs 1, 50,000 which was 20% of the total value of the
contract. Later at a future date, MNP Ltd rescinded the contract due to some
financial loss after which they were declared as insolvent and decided to wind up
their business. Now, in this case, the contract becomes void and MNP Ltd must
return the Rs.1,50,000 to Mr. X.

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Section 65 of the Indian contract act 1872 deals with the doctrine of restitution.
This doctrine is based on a very common rule of consideration which means that a
person pays consideration only when he gets something in return.

Provisions of Section 65 apply only when an agreement at a subsequent stage is

discovered to be void or when a contract becomes void later on by one person or
the other.

Section 65 will never come into play if the contract was void-ab-initio .i.e. void
from the very beginning.

The Doctrine of Ratification is an important concept under Indian Contract Act,

1872 and is explained via legal maxim & Sections 196 to 200 under the Act.

The basic meaning of Ratification is ―an act of voting on a decision or signing a

written agreement to make it official‖.

Legal Meaning of Ratification is ―The consent to an act that has already been
performed‖.

As per Section 196 of Indian Contract Act, 1872, a person can elect to ratify or
disown the act of another, when such other person performs any act on behalf of
him without his authority, knowledge or consent.

For Example – A sells good of B on credit to C without any authority. Then in such
a case, B may ratify the same or void the transaction by not ratifying the same.

As per Section 197 of Indian Contract Act, 1872, Ratification may either be
expressed or implied on behalf of that person who is in a position of election of
option of ratifying or disowning the transaction.

For Example – A lends money from B to C on interest. Then in such case, if B

accepts the interest from C. This is implied ratification under Indian Contract Act,
1872.

A‖ sells good of B on credit to C without any authority. Then in such a case, B

accepts the money from C after one month. This is expressed ratification under
Indian Contract Act, 1872.

As per Section 198 of Indian Contract Act, 1872, if A person is ratifying act of
another person, then such person must have complete knowledge of facts.

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Ratification is considered to be invalid if a person ratifies the act with knowledge
of the facts of the case is not complete.

For Example – A sells good of B on credit to C without any authority & A‖ does
not provide the material fact that on what price the goods have been sold then
ratification of transaction by B will be invalid.

As per Section 199 of Indian Contract Act, 1872, if a person is ratifying a single act
of another person of a transaction, then such ratification would be considered for
whole transaction but not for a single act.

Case of Hadley v. Baxendale

The classic contract-law case of Hadley v. Baxendale draws the principle that
consequential damages can be recovered only if, at the time the contract was
made, the breaching party had reason to foresee that, consequential damages
would be the probable result of breach.

Damages are limited to those that arise naturally from a breach and those that are
reasonably contemplated by the parties at the time of contracting.

The Hadley v Baxendale case is an English decision establishing the rule for the
determination of consequential damages in the event of a contractual breach. The
Hadley case states that the breaching party must be held liable for all the
foreseeable losses. In other words, a breaching party cannot be held liable for
damages that were not foreseeable at the conclusion of the contract.

An agreement giving rise to social obligation is not a contract. Social obligations

are not covered under ICA, 1872 (Indian Contract Act, 1872).

Types of Offers

a) General Offer - It is an offer to the whole world.

b) Specific offer - It is an offer made to a particular person or group of persons.

c) Express offer - It is an offer which is made by words either oral or in writing.

d) Implied offer - It is an offer which is made by conduct or gesture of the parties.

e) Counter offer - When a person to whom the offer is made does not accept the
offer [as it is] he counters the condition. This is called counter offer.

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f) Cross offer - When two offers of same terms and conditions cross each other at
same time, it is called cross offer.

g) Standing offer - An offer is a standing offer if it is intended to remain open for

a specified period.

Consideration means something in return. It may be an act or abstinence or

promise.

An agreement between two persons to go together to the cinema, or for a walk,

or for a dinner is an agreement of social nature and not covered under Indian
Contract Act, 1872. Domestic agreement between husband and wife is also not a
contract.

Past Consideration – In case of past consideration, the promisor had received the
consideration before the date of promise.

Present consideration (Executed consideration) – Present consideration is one in

which one of the parties to the contract has performed his part of the promise,
which Constitutes the consideration for the promise by the other side it is known
as present consideration.

Future Consideration (Executory consideration) – when consideration is to move

at a future date then it is called as future consideration.

Under following cases, a contract will be valid even without consideration

1) Promise made on account of natural love and affection

2) Promise to compensate for voluntary services
3) Promise made to pay a time barred debt
4) Completed Gifts
5) Creation of agency
6) Contract of Guarantee
7) Remission

No consideration is necessary to create an agency.

Gifts once made cannot be recovered on the ground of absence of consideration.

Absence of consideration will not affect the validity of any gift already made.

Contract of guarantee needs no consideration.

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Remission means lesser performance of the contract than what is actually to be
performed.

Doctrine of privity of contract means stranger to contract cannot sue.

Privity of Contract is a common law doctrine that provides that a contract cannot
confer rights or impose obligations that arise under the contract on anyone other
than one of the parties to the contract. As such, the only parties who should be
able to sue to enforce their rights or claim damages are the parties to the
contract.

Meeting of the Minds - The term meeting of the minds refers to an understanding
or mutual agreement between two or more parties and their understanding of
that agreement. In legal terms, the phrase denotes the essential element in the
validation of a contract.

A minor is capable to enter a contract for 'necessaries' (goods or services that are
suitable to the condition of life of a minor). A minor who fails to pay for the goods
or services can be sued for a breach of contract.

When one person expresses his will to another person to do or not to do

something, to take his approval, is known as an offer.

In the following case, stranger to a contract can also sue (exceptions to Doctrine
of privity) - Beneficiary of a trust – A trust is created for the benefit of a
beneficiary. Hence, the beneficiary can enforce the provisions of the trust even
though he is a stranger to the contract.

Coercion means – a) committing or threatening to commit any act forbidden

(prohibited) by Indian Penal Code against another person; or unlawful detaining
or threatening to detain the property of another person with a view to obtain
consent of another person A mere (only) threat to prosecute a man or file suit
against him does not constitute a coercion.

Charging high interest rate, high price etc. is not a coercion as the same is not
prohibited under the Indian Penal code.

A threat to commit suicide – Consent to an agreement may at times be obtained

by threatening to commit suicide. Threat to commit suicide also amounts to
coercion.

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Deceive – intentionally cause (someone) to believe something that is not true.

Connivance – willingness for being secretly involved in an immoral or illegal act

Silence will be considered as fraud in the following situations –

a) When there is a duty to speak

b) Where silence is equivalent to speech.
c) Where there is change in circumstances

Ignorance of law is not an excuse at all.

Ignorance of foreign law may be excused.

Mutual Mistake - Where both the parties to an agreement are under a mistake as
to a matter of fact essential to the agreement, the agreement is void. Mistake
must be mutual i.e. both the parties should misunderstand each other.

The literal meaning of the word “wager” is a ―bet‖. Wagering agreements are
nothing but ordinary betting agreements.

Quasi contract also known as implied contract. It is imposed by law and does not
arise by agreement. It is based on the principle of ―prevention of unjust
enrichment of one person at the cost of another‖. No essential of valid contract is
required

Substitution of a new contract in place of the existing contract is known as

―Novation of Contract”. It discharges the original contract. The new contract may
be between the same parties or between different parties.

Novation can take place only with the consent of all the parties.

Alteration means change in one or more of the terms of the contract.

In case of novation there may be a change of the parties, while in the case of
alteration, the parties remain the same.

Rescission ( Section 62) means the cancellation of the contract.

Remission (Section 63) means the acceptance of lesser fulfilment of the terms of
the promise.

Waiver means giving up or foregoing certain rights. When a party agrees to give
up its rights, the contract is discharged.

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An anticipatory breach is a breach of contract before the time of performance. So,
if a promisor denies to perform his promise and signifies his unwillingness before
the time for performance, then it is an anticipatory breach of contract.

While an anticipatory breach is before the time of performance, an actual breach

of contract is on the scheduled time of performance of the contract.

There are two types of damages according to the Contract Act,

a) Liquidated damages - Sometimes the parties to a contract will agree to the

amount payable in case of a breach. This is known as liquidated damages.

b) Unliquidated Damages - Here the amount payable due to the breach of

contract is assessed by the courts or any appropriate authorities.

An injunction is basically like a decree for specific performance but for a negative
contract. An injunction is a court order restraining a person from doing a
particular act. So, a court may grant an injunction to stop a party of a contract
from doing something he promised not to do. In a prohibitory injunction, the
court stops the commission of an act and in a mandatory injunction, it will stop
the continuance of an act that is unlawful.

Certain Concepts with Examples

001. The communication of a proposal is complete when it comes to the

knowledge of the person to whom it is made.

A proposes, by letter, to sell a house to B at a certain price. The communication of

the proposal is complete when B receives the letter.

B accepts A‘s proposal by a letter sent by post. The communication of the

acceptance is complete, as against A when the letter is post; as against B, when
the letter is received by A.

A revokes his proposal by telegram. The revocation is complete as against A when

the telegram is despatched. It is complete as against B when B receives it.

B revokes his acceptance by telegram. B‘s revocation is complete as against B

when the telegram is despatched, and as against A when it reaches him.

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002. An acceptance may be revoked at any time before the communication of the
acceptance is complete as against the acceptor, but not afterwards.

A proposes, by a letter sent by post, to sell his house to B. B accepts the proposal
by a letter sent by post.

A may revoke his proposal at any time before or at the moment when B posts his
letter of acceptance, but not afterwards.

B may revoke his acceptance at any time before or at the moment when the letter
communicating it reaches A, but not afterwards.

003. A person who is usually of unsound mind, but occasionally of sound mind,
may make a contract when he is of sound mind.

A person who is usually of sound mind, but occasionally of unsound mind, may
not make a contract when he is of unsound mind.

(a) A patient in a lunatic asylum, who is at intervals of sound mind, may contract
during those intervals.

(b) A sane man, who is delirious from fever or who is so drunk that he cannot
understand the terms of a contract, or form a rational judgment as to its effect on
his interests, cannot contract whilst such delirium or drunkenness lasts.

004. Mere silence as to facts likely to affect the willingness of a person to enter
into a contract is not fraud.

A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to

B about the horse‘s unsoundness. This is not fraud in A.

005. When consent to an agreement is caused by coercion, fraud or

misrepresentation, the agreement is a contract voidable at the option of the party
whose consent was so caused.

A, intending to deceive B, falsely represents that five hundred bags of indigo are
made annually at A‘s factory, and thereby induces B to buy the factory. The
contract is voidable at the option of B.

006. Contingent contracts to do or not to do anything if an uncertain future event

does not happen can be enforced when the happening of that event becomes
impossible, and not before.

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A agrees to pay B a sum of money if a certain ship does not return. The ship is
sunk. The contract can be enforced when the ship sinks.

007. A contract is said to be induced by “undue influence” where the relations

subsisting between the parties are such that one of the parties is in a position to
dominate the will of the other and uses that position to obtain an unfair
advantage over the other.

(a) A having advanced money to his son, B, during his minority, upon B‘s coming
of age obtains, by misuse of parental influence, a bond from B for a greater
amount than the sum due in respect of the advance. A employs undue influence.

(b) A, a man enfeebled by disease or age, is induced, by B‘s influence over him as
his medical attendant, to agree to pay B an unreasonable sum for his professional
services, B employs undue influence.

(c) A, being in debt to B, the money-lender of his village, contracts a fresh loan on
terms which appear to be unconscionable. It lies on B to prove that the contract
was not induced by undue influence.

(d) A applies to a banker for a loan at a time when there is stringency in the
money market. The banker declines to make the loan except at an unusually high
rate of interest. A accepts the loan on these terms. This is a transaction in the
ordinary course of business, and the contract is not induced by undue influence.

008. If consent was caused by misrepresentation or by silence, and if the party

whose consent was so caused had the means of discovering the truth with
ordinary diligence, then the contract is not voidable.

A, by a misrepresentation, leads B erroneously to believe that, five hundred bags

of indigo are made annually at A‘s factory. B examines the accounts of the factory,
which show that only four hundred bags of indigo have been made. After this B
buys the factory. The contract is not voidable on account of A‘s misrepresentation.

009. When consent to an agreement is caused by undue influence, the agreement

is a contract voidable at the option of the party whose consent was so caused.
Any such contract may be set aside.

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A, a money-lender, advances Rs. 100 to B, an agriculturist, and, by undue
influence, induces B to execute a bond for Rs. 200 with interest at 6 per cent. per
month. The Court may set the bond aside, ordering B to repay the Rs. 100 with
such interest as may seem just.

010. An erroneous opinion as to the value of the thing which forms the subject-
matter of the agreement, is not to be deemed a mistake as to a matter of fact.

(a) A agrees to sell to B a specific cargo of goods supposed to be on its way from
England to Bombay. It turns out that, before the day of the bargain, the ship
conveying the cargo had been cast away and the goods lost. Neither party was
aware of the these facts. The agreement is void.

(b) A agrees to buy from B a certain horse. It turns out that the horse was dead at
the time of bargain, though neither party was aware of the fact. The agreement is
void.

(c) A, being entitled to an estate for the life of B, agrees to sell it to C. B was dead
at the time of the agreement, but both parties were ignorant of the fact. The
agreement is void.

011. Every agreement of which the object or consideration is unlawful is void.

(a) A, B and C enter into an agreement for the division among them of gains
acquired or to be acquired, by them by fraud. The agreement is void, as its object
is unlawful.

(b) A promises to obtain for B an employment in the public service and B

promises to pay Rs 1,000/- to A. The agreement is void, as the consideration for it
is unlawful.

(c) A, being agent for a landed proprietor, agrees for money, without the
knowledge of his principal, to obtain for B a lease of land belonging to his
principal. The agreement between A and B is void. as it implies a fraud by
concealment, by A, on his principal.

(d) A promises B to drop a prosecution which he has instituted against B for

robbery, and B promises to restore the value of the things taken. The agreement
is void, as its object is unlawful.

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(e) A‘s estate is sold for arrears of revenue under the provisions of an Act of the
Legislature, by which the defaulter is prohibited from purchasing the estate. B,
upon an understanding with A, becomes the purchaser, and agrees to convey the
estate to A upon receiving from him the price which B has paid. The agreement is
void, as it renders the transaction, in effect, a purchase by the defaulter, and
would so defeat the object of the law.

(f) A, who is B‘s mukhtar, promises to exercise his influence, as such, with B in
favour of C, and C promises to pay Rs 1,000/- to A. The agreement is void,
because it is immoral.

(g) A agrees to let her daughter to hire to B for concubinage. The agreement is
void, because it is immoral, though the letting may not be punishable under the
Indian Penal Code.

012. An agreement to which the consent of the promisor is freely given is not void
merely because the consideration is inadequate.

a) A promises, for no consideration, to give to B Rs. 1,000/-. This is a void

agreement.

(b) A, for natural love and affection, promises to give his son, B, Rs. 1,000/-. A puts
his promise to B into writing and registers it. This is a contract.

(c) A finds B‘s purse and gives it to him. B promises to give A Rs. 50/-. This is a
contract.

(d) A supports B‘s infant son. B promises to pay A‘s expenses in so doing. This is a
contract.

(e) A owes B Rs. 1,000/-, but the debt is barred by the Limitation Act. A signs a
written promise to pay B Rs. 500/- on account of the debt. This is a contract.

(f) A agrees to sell a horse worth Rs. 1,000/- for Rs. 10/-. A‘s consent to the
agreement was freely given. The agreement is a contract notwithstanding the
inadequacy of the consideration.

013. Agreements, the meaning of which is not certain, or capable of being made
certain, are void.

a) A agrees to sell to B ―a hundred tons of oil‖. There is nothing whatever to

show what kind of oil was intended. The agreement is void for uncertainty.

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(b) A agrees to sell to B one hundred tons of oil of a specified description, known
as an article of commerce. There is no uncertainty here to make the agreement
void.

(c) A, who is a dealer in cocoanut-oil only, agrees to sell to B one hundred tons of
oil‖. The nature of A‘s trade affords an indication of the meaning of the words,
and A has entered into a contract for the sale of one hundred tons of cocoanut-
oil.

(d) A agrees to sell to B all the grain in my granary at Ramnagar. There is no

uncertainty here to make the agreement void.

(e) A agrees to sell B one thousand bags of rice at a price to be fixed by C. As the
price is capable of being made certain, there is no uncertainty here to make the
agreement void.

(f) A agrees to sell to B ―my white horse for rupees five hundred or rupees one
thousand‖. There is nothing to show which of the two prices was to be given. The
agreement is void.

014. If the event becomes impossible, such contracts become void.

(a) A makes a contract with B to buy B‘s horse if A survives C. This contract cannot
be enforced by law unless and until C dies in A‘s lifetime.

(b) A makes a contract with B to sell a horse to B at a specified price, if C, to whom

the horse has been offered, refuses to buy him. The contract cannot be enforced
by law unless and until C refuses to buy the horse.

(c) A contracts to pay B a sum of money when B marries C. C dies without being
married to B. The contract becomes void.

015. A “contingent contract is a contract to do or not to do something, if some

event, collateral to such contract, does or does not happen.

A contracts to pay B Rs. 10,000/- if B‘s house is burnt. This is a contingent

contract.

016. Contingent contracts to do or not to do anything, if a specified uncertain

event does not happen within a fixed time may be enforced by law when the time
fixed has expired and such event has not happened or, before the time fixed has
expired, if it becomes certain that such event will not happen.

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(a) A promises to pay B a sum of money if a certain ship returns within a year. The
contract may be enforced if the ship returns within the year, and becomes void if
the ship is burnt within the year.

(b) A promises to pay B a sum of money if a certain ship does not return within a
year. The contract may be enforced if the ship does not return within the year, or
is burnt within the year.

017. Contingent agreements to do or not to do anything, if an impossible event

happens, are void, whether the impossibility of the event is known or not to the
parties to the agreement at the time when it is made.

(a) A agrees to pay B Rs 1,000/- if two straight lines should enclose a space. The
agreement is void.

(b) A agrees to pay B Rs 1,000/- if B will marry A‘s daughter C. C was dead at the
time of the agreement. The agreement is void.

018. Promises bind the representatives of the promisors in case of the death of
such promisors before performance, unless a contrary intention appears from the
contract.

a) A promises to deliver goods to B on a certain day on payment of Rs. 1,000/-. A

dies before that day. A‘s representatives are bound to deliver the goods to B, and
B is bound to pay the Rs. 1,000/- to A‘s representatives.

(b) A promises to paint a picture for B by a certain day, at a certain price. A dies
before the day. The contract cannot be enforced either by A‘s representatives or
by B.

019. When a person has made a promise to two or more persons jointly, then,
unless a contrary intention appears from the contract, the right to claim
performance rests, as between him and them, with them during their joint lives,
and, after the death of any of them, with the representative of such deceased
person jointly with the survivor or survivors, and, after the death of the last
survivor, with the representatives of all jointly.

A, in consideration of Rs 5,000/-, lent to him by B and C, promises B and C jointly

to repay them that sum with interest on a day specified. B dies. The right to claim
performance rests with B‘s representative jointly with C during C‘s life, and after
the death of C with the representatives of B and C jointly.

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020. When a promise is to be performed on a certain day, and the promisor has
undertaken to perform it without application by the promisee, the promisor may
perform it at any time during the usual hours of business on such day and at the
place at which the promise ought to be performed.

A promises to deliver goods at B‘s warehouse on the first January. On that day A
brings the goods to B‘s warehouse, but after the usual hour for closing it, and they
are not received. A has not performed his promise.

021. An agreement to do an act impossible in itself is void.

(a) A agrees with B to discover treasure by magic. The agreement is void.

(b) A and B contract to marry each other. Before the time fixed for the marriage. A
goes mad. The contract becomes void.

(c) A contracts to marry B, being already married to C, and being forbidden by the
law to which he is subject to practise polygamy, A must make compensation to B
for the loss caused to her by the non performance of his promise.

(d) A contracts to take in cargo for B at a foreign port. A‘s Government afterwards
declares war against the country in which the port is situated. The contract
becomes void when war is declared.

(e) A contracts to act at a theatre for six months in consideration of a sum paid in
advance by B. On several occasions A is too ill to act. The contract to act on those
occasions becomes void.

022. Where persons reciprocally promise, firstly, to do certain things which are
legal, and, secondly, under specified circumstances, to do certain other things
which are illegal, the first set of promises is a contract, but the second is a void
agreement.

A and B agree that A shall sell B a house for Rs 10,000/- but that, if B uses it as a
gambling house, he shall pay A Rs 50,000/- for it. The first set of reciprocal
promises, namely, to sell the house and to pay Rs 10,000/ for it, is a contract. The
second set is for an unlawful object, namely, that B may use the house as a
gambling house, and is a void agreement.

023. In the case of an alternative promise, one branch of which is legal and the
other illegal, the legal branch alone can be enforced.

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A and B agree that A shall pay B Rs 1,000/-, for which B shall afterwards deliver to
A either rice or smuggled opium. This is a valid contract to deliver rice, and a void
agreement as to the opium.

024. Where a debtor, owing several distinct debts to one person, makes a
payment to him, either with express intimation, or under circumstances implying,
that the payment is to be applied to the discharge of some particular debt, the
payment, if accepted, must be applied accordingly.

(a) A owes B, among other debts, Rs 1,000/- upon a promissory note which falls
due on the first June. He owes B no other debt of that amount. On the first June,
A pays to B Rs 1,000/-. The payment is to be applied to the discharge of the
promissory note.

(b) A owes to B, among other debts, the sum of Rs 567/-. B writes to A and
demands payment of this sum. A sends to B Rs 567/-. This payment is to be
applied to the discharge of the debt of which B had demanded payment.

025. Anything done, or any promise made, for the benefit of the principal debtor,
may be a sufficient consideration to the surety for giving the guarantee.

(a) B requests A to sell and deliver to him goods on credit. A agrees to do so,
provided C will guarantee the payment of the price of the goods. C promises to
guarantee the payment in consideration of A‘s promise to deliver the goods. This
is a sufficient consideration for C‘s promise.

(b) A sells and delivers goods to B. C afterwards, without consideration, agrees to

pay for them in default of B. The agreement is void.

026. The liability of the surety is co- extensive with that of the principal debtor,
unless it is otherwise provided by the contract.

A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is

dishonoured by C. A is liable, not only for the amount of the bill, but also for any
interest and charges which may have become due on it.

027. A guarantee which extends to a series of transactions, is called a “continuing

guarantee”.

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(a) A, in consideration that B will employ C in collecting the rent of B‟s zamindari,
promises B to be responsible, to the amount of Rs 5,000/-, for the due collection
and payment by C of those rents. This is a continuing guarantee.

(b) A guarantees payment to B, a tea-dealer, to the amount of Rs 100/-, for any

tea he may from time to time supply to C. B supplies C with tea to above the value
of Rs 100/-, and C pays B for it. Afterwards, B supplies C with tea to the value of Rs
200/-. C fails to pay. The guarantee given by A was a continuing guarantee, and
he is accordingly liable to B to the extent of Rs 100/-.

(c) A guarantees payment to B of the price of five bags of flour to be delivered by

B to C and to be paid for in a month. B delivers five bags to C. C pays for them.
Afterwards B delivers four bags to C, which C does not pay for. The guarantee
given by A was not a continuing guarantee, and accordingly he is not liable for
the price of the four bags.

028. A continuing guarantee may at any time be revoked by the surety, as to

future transactions, by notice to the creditor.

(a) A, in consideration of B‘s discounting, at A‘s request, bills of exchange for C,

guarantees to B, for twelve months, the due payment of all such bills to the extent
of Rs 5,000/. B discounts bills for C to the extent of Rs 2,000/-Afterwards, at the
end of three months, A revokes the guarantee. This revocation discharges A from
all liability to B for any subsequent discount. But A is liable to B for the Rs 2,000/-,
on default of C.

(b) A guarantees to B, to the extent of Rs 10,000/-, that C shall pay all the bills that
B shall draw upon him. B draws upon C. C accepts the bill. A gives notice of
revocation. C dishonours the bill at maturity. A is liable upon his guarantee.

029. Any guarantee which the creditor has obtained by means of keeping silence
as to material circumstances, is invalid.

(a) A engages B as clerk to collect money for him. B fails to account for some of
his receipts, and A in consequence calls upon him to furnish security for his duly
accounting. C gives his guarantee for B‘s duly accounting. A does not acquaint C
with B‘s previous conduct. B afterwards makes default. The guarantee is invalid.

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(b) A guarantees to C payment for iron to be supplied by him to B to the amount
of 2,000 tons. B and C have privately agreed that B should pay five rupees per ton
beyond the market price, such excess to be applied in liquidation of an old debt.
This agreement is concealed from A. A is not liable as a surety.

030. In the absence of any contract to the contrary, the bailee is bound to deliver
to the bailor, or according to his directions, any increase or profit which may have
accrued from the goods bailed.

A leaves a cow in the custody of B to be taken care of. The cow has a calf. B is
bound to deliver the calf as well as the cow to A.

031. If an agent, without the knowledge of his principal, deals in the business of
the agency on his own account instead of on account of his principal, the principal
is entitled to claim from the agent any benefit which may have resulted to him
from the transaction.

A directs B, his agent, to buy a certain house for him. B tells A it cannot be
bought, and buys the house for himself. A may, on discovering that B has bought
the house, compel him to sell it to A at the price he gave for it.

032. Where one person employs another to do an act which is criminal, the
employer is not liable to the agent, either upon an express or an implied promise,
to indemnify him against the consequences of that Act.

(a) A employs B to beat C, and agrees to indemnify him against all consequences
of the act. B thereupon beats C, and has to pay damages to C for so doing. A is
not liable to indemnify B for those damages.

(b) B, the proprietor of a newspaper, publishes, at A‘s request, a libel upon C in the
paper, and A agrees to indemnify B against the consequences of the publication,
and all costs and damages of any action in respect thereof. B is sued by C and has
to pay damages, and also incurs expenses. A is not liable to B upon the indemnity.

033. The principal must make compensation to his agent in respect of injury
caused to such agent by the principal’s neglect or want of skill.

A employs B as a bricklayer in building a house, and puts up the scaffolding

himself. The scaffolding is unskilfully put up, and B is in consequence hurt. A must
make compensation to B.

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034. When an agent does more than he is authorized to do, and when the part of
what he does, which is within his authority, can be separated from the part which
is beyond his authority, so much only of what he does as is within his authority is
binding as between him and his principal.

A, being owner of a ship and cargo, authorizes B to procure an insurance for Rs

4,000/- on the ship. B procures a policy for Rs 4,000/- on the ship, and another for
the like sum on the cargo. A is bound to pay the premium for the policy on the
ship, but not the premium for the policy on the cargo.

035. Where an agent does more than he is authorized to do, and what he does
beyond the scope of his authority cannot be separated from what is within it, the
principal is not bound to recognize the transaction.

A authorizes B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for one
sum of Rs 6,000/-. A may repudiate the whole transaction.

036. When a person expresses something to another person, to invite him to

make an offer, it is known as invitation to offer. It is made to the general public
with intent to receive offers and negotiate the terms on which the contract is
created.

Examples for “Invitation to Offer” :

# Menu card of a restaurant showing the prices of food items.

# Railway timetable on which the train timings and fares are shown.
# Government Tender
# A Company invites application from public to subscribe for its shares.
# Recruitment advertisement inviting application

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 02 Different Types of Firms/Customers
Types of Customers

As per Indian Majority Act (Section 3) a Minor is one who has not attained the age
of 18 years, in case no Guardian appointed by the Court.

Where a guardian is appointed by court (for person, property or both) or where a

court of ward is appointed by a guardian, a person attains majority on completion
of 21 years of age.

As per Section 11 of Indian Contract Act, Minor is not competent for contract and
contract with minor is void-ab-initio.

As per Section 183 of Indian Contract Act, a Minor cannot appoint an agent.

A Minor can not delegate powers to others.

A Minor can be appointed as an agent and bind his principal.

As per Section 26 of NI Act, a minor can draw, endorse or negotiate a cheque or

bill but he can not be liable. Other parties to that instrument are liable.

A Minor can not appoint Nominee. In the case of a deposit made in the name of a
minor, the nomination shall be made by a person-lawfully entitled to act on
behalf of the minor.

A minor can be appointed as nominee.

A Minor can not become a partner but can be admitted for benefits of partnership
firm.

On attaining majority, within 6 months, Minor has to exercise his option to

continue in partnership. If he is silent, he is liable-ab-initio.

A minor can not stop payment of cheque issued by partnership firm.

On minor attaining majority, we should not pay cheques signed by guardian,

though the cheque is dated prior to attaining majority.

No deletion / substitution of Minor name be authorised except in the case of

death of Minor depositors.

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As per Section 6 of the Hindu Minority and Guardianship Act, 1956, Father is the
natural guardian of a Hindu Minor boy or an unmarried girl and after him, the
mother.

As per the Hindu Minority and Guardianship Act, 1956, in case of married Hindu
minor girl, her husband is the natural guardian. If husband is minor or minor girl
becomes widow, her father in law and after him the mother in Law will be the
guardians though they are not natural guardians.

When a guardian of a Hindu minor ceases to be a Hindu or he becomes a hermit

or sanyasi, he ceases to be natural guardian.

Guardian appointed by father of a minor, is called as Testamentary Guardian and

testamentary guardian will come into picture only after death of father.

As per personal law applicable to Muslims, father is natural guardian.

A Muslim father can appoint a testamentary guardian (Even mother of a Muslim

child can be testamentary guardian), who can act as guardian after his death.

In case of Muslims, if father dies without leaving behind a will, father’s father i.e.
paternal grandfather is the guardian. (If father appoints testamentary guardian,
testamentary guardian will have priority).

In case of Muslims, after death of paternal grandfather, testamentary guardian

appointed by Paternal grandfather will be guardian. If grandfather not appointed
any testamentary guardian and dies, then court will appoint testamentary
guardian.

In all schools of both the Sunnis and the Shias, the father is recognized as
guardian which term in the context is equivalent to natural guardian and the
mother in all schools of Muslim law is not recognized as a guardian, natural or
otherwise, even after the death of the father.

In case of Christian, Parsi & Jews, there is no specific law relating to Mother to be
treated as guardian. Only Father is the Guardian (except married daughter where
husband is competent to act as guardian) of a minor child. In absence of father,
mother has to get right through court.

In case of Hindu minor even if father is alive, mother can open and operate all
types of deposit accounts of minor (Permitted by Supreme Court)

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Other than Hindu, where account is opened under guardianship of Mother,
Mother has no right to give nomination on behalf of Minor. Nomination is to be
given by person Lawfully entitled person.

A Minor can open and operate accounts on attaining 10 years age and he is
literate.

Joint accounts of 2 minors can be opened provided both are at least 10 years age
and literates, belonging to same family and operation

In case of Joint accounts with minor and guardian, we can accept either or
survivor operation condition. It will be in dormant till minor attains majority and
on attaining majority, he can also operate the account.

A bearer cheque presented for cash payment by minor may be paid as a minor
can give a valid discharge in the capacity of Payee.

When a loan has been raised on a term deposit in the name of major person, his
request for addition of the name of minor cannot be entertained.

Minor cannot be declared as insolvent.

Declaration given by natural guardian is sufficient proof of date of birth.

Cheques issued by the guardian prior to the date on which the minor attains
majority, but presented after the above date, are to be treated as invalid.

Either or Survivor (other than illiterate customers) - It means, anyone can operate
the account till both are alive. After death of either of them, after obtaining Death
Certificate, the bank can delete the name of deceased depositor without any
formality. In case of death of all depositor claim is to be settled to Nominee/all
legal heirs of all deceased depositors.

In case of accounts where Operation condition is Either or Survivor, alteration of

cheque can be confirmed by any of the accountholders.

In case of accounts where Operation condition is Former or Survivor/s / No.1 or

Survivor/s (other than illiterate customers) - When both the depositors are alive,
former/No 1 alone can operate the account.

If the Former/No.1 expires after obtaining Death Certificate, the bank can delete
the name of deceased depositor without any formality.

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In case of accounts Jointly Operated - Payable jointly till both are alive, if one or
the two expires, the bank would pay balance to survivor along with legal heirs of
deceased person. In case of death of all depositor claim is to be settled to
Nominee/all legal heirs of all deceased depositors.

In case of accounts Jointly Operated any one of account holders can stop
payment of cheque but revocation has to be done by all jointly.

Operation Condition and Repayment Condition

Operation Conditions are applicable to running accounts such as SB, CA and OD

& OCC. Normally they are applicable in case of Joint Accounts of Individuals and
Representative Accounts (Firms, Companies, Trusts, Societies).

In case of Single Individual accounts, such as Accounts of Minor, NRI etc

operations may be other than the Depositor and/or through Letter of Authority.

‘Operation Severally’, ‘Operation Jointly’, ‘Operation by No 1 only’ are some of the

Operation Conditions.

‘Payable to No 1 only’, ‘Payable Jointly’, ‘Payment to by way of credit to SB

Account’….etc are some of the Repayment Options/Conditions.

Repayment Conditions apply in case of Term Deposits. This may include the mode
of payment of periodical interest (wherever applicable and/or Maturity Amount.

Partnership

As per companies act 2013, the number of partners can be 100 (Earlier this
number was restricted to 10 for Banking Business and 20 for business other than
banking.)

NBFC, HUF, Minor, Insolvent, Insane & alien enemy can not become a partner in
partnership.

Each partner is an agent of the firm and also agent for other partners.

Partners are jointly and severally liable for all the accounts.

Dissolution of the firm: Death, insolvency, retirement of a partner– causes

dissolution.

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If account is having credit balance, the remaining partners can give a valid
discharge to the bank.

If the account is having debit balance, operations should be stopped to decide

the liability of the deceased /insolvent/retired partner. Otherwise, the rule in
Clayton’s case will apply.

A registered partnership firm can sue others to enforce its rights arising out of
Contractual obligations.

An unregistered firm can not sue others in its own name though others can sue it
in its name.(sec 69 of Indian partnership Act 1932)

Any partner including sleeping partner has authority to stop payment of a cheque
issued by another partner of the firm. However, revocation of stop order requires
signatures of all partners on revocation letter.

A partner, being agent of partnership firm, cannot delegate his authority to an

outsider without the written consent of all other partners.

Limited Liability Partnership (LLP) Account

LLP is a hybrid corporate form entity, combining the features of existing

partnership firms and limited liability companies.

LLP is a body corporate & legal entity separate from its partners.

It has to suffix “Limited Liability Partnership” or ‘LLP’ with its name.

It is liable to the full extent of its assets. The liability of the partners would be
limited to their agreed contribution to the LLP

Two or more persons can form a LLP. No upper limit on the number of partners in
an LLP.

A body corporate (including a LLP) can be a partner in LLP.

Change of partners will not affect existence, rights or liability of LLP.

Conversion of a partnership firm or a private limited company or an unlisted

public company into LLP is allowed.

HUF cannot become a partner in LLP.

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A minor cannot be a partner in LLP.

LLP needs registration with Registrar of Companies (ROC).

In the name of LLP only Current account & Term Deposits can be opened.

Copy of LLP Agreement signed by all the partners. In case there is no LLP
agreement, Schedule I of the LLP Act signed by all the partners will prevail.

The authorized signatories of LLP are called as “Designated Partners”.

KYC norms are to be complied with in respect of each and every partner of LLP.

As per LLP Act, no resolution is required.

An LLP with more than two partners will continue to exist.

LLP cannot be converted into a company or partnership firm.

A Private Company; A partnership firm and an Unlisted Public Company can be

converted into an LLP as per the provisions of the LLP Act.

There is no provision under LLP act for registration of charges with ROC.

Joint Stock Companies:

Private Limited Company:

a) Number of members – maximum 200, minimum 2

b) General public can not contribute to the capital of the company
c) Number of Directors: min.2 maximum – No Ceiling
d) Minimum paid up capital – ₹ 1.00 lakh

Public Limited company

a) Affairs of the Public limited company will be managed by minimum 3

Directors & maximum no ceiling.
b) Companies Limited by Shares: Minimum 7 members. No maximum
ceiling. If number of Directors exceeds 15, they have to seek central
government permission.
c) Minimum paid up capital – ₹ 5.00 lakh.

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One Person Company Limited

a) Concept of One Person Company (OPC limited) Introduced by way of Company

Bill 2013.

b) Number of Director is 1.

Certificate of Incorporation is issued by Registrar of Companies

Certificate of Incorporation is birth certificate of company.

Certificate of Commencement of Business is issued by Registrar of companies

after it is satisfied that certain minimum capital has been subscribed by the public.

Certificate of Commencement of Business is not required in case of private limited

companies.

Memorandum of Association is the Constitution of the Company and it

establishes the relationship of the company with the rest of the world. Company
can not go beyond the memorandum. It contains:

a) Name of the Company with Ltd as last word, Registered Office address or State
in which the registered office of the company is situated.

b) Object/objectives of the company.

c) Authorised Capital/Issued capital of the company.

d) Limited liability clause.

e) Borrowing powers of the company.

f) For alteration of memorandum, special resolution with 3/4th majority in general

body meeting will be passed and approval from Central Government is required.

g) Any violation of memorandum is ultra-vires of the company and intra-vires of

the directories company is not responsible for violation and directors are
responsible.

Articles of Association are by laws and internal rules and regulations of the
company. Articles are indoor management of the company.

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Articles contain

a) Borrowing powers of directors, procedures for appointment and removal,

retirement and rotation of directors.

b) Articles can be amended by general body resolution. If the borrowing powers

are silent, still the company can avail the loan because every trading company has
the implied powers to borrow.

Private Limited Company’s Borrowing Powers are Unlimited

Borrowing Powers of a Public Ltd Company is restricted up-to paid up capital plus
free reserves of the company. If requires more than this, consent of shareholders
in general body meeting is required.

Death of a Director: does not affect the operations in the account.

The Directors of Company can not delegate their authority to any other person.

Common Seal in their account opening form is not a mandatory requirement.

Even in those cases, where the Memorandum of Association and Articles of

Association of the Company require affixing of Common Seal, the Company shall
be allowed to provide the same voluntarily and the account opening form of the
banks shall not have any such requirement for providing the Company Seal.

Charge creation is required to be registered when charge created on by way of

Hypothecation of stocks, book debts, mortgage of immovable properties, ship,
good will, uncalled share capital of the company.

Charge registration is not required in case of Pledge of goods or securities or

against Fixed Deposits.

Section 125 of Companies Act: Charges created on a company’s assets (except

pledge) have to be registered with Registrar of Companies within 30 days of
creation of the charge.

ROC can grant extension of 30 days in filing particulars of charge under Sec 125.

Company required paying additional fees not exceeding 10 times of specified

fees. Beyond this period, permission from Company Law Board is required.

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A person can not have more than 15 Directorship concurrently (Section 275 of
companies Act.)

Getting charge registered is company’s responsibility. If company getting failed to

register charge, as creditor, bank can register charge.

Non Filing of particulars/ non-registration renders the bank as unsecured creditor

And loan becomes payable immediately.

When charge in favour of two banks is registered, priority of charge is in favour of

bank, in whose favour it is created first i.e. date of documents.

For Registration of Charge or Modification Form CHG-1 to be filed with ROC.

For Satisfaction of Charge Form CHG-4 to be filed with ROC.

Hindu Undivided Family (HUF) Property, business or estate is ancestral and its
common possession, enjoyment and ownership are the basis of formation of HUF.

As per Hindu common law, the Hindus, Sikhs, Jains are the communities who can
form HUF.

Joint owners of HUF are known as coparceners.

There are two schools of Hindu Law i.e. Dayabehaga: applicable in Bengal and
Assam according to which father is absolute owner of property and Mitakshara:
applicable at other places and according to which all male members have a right
on joint family property by birth.

HUF consists of one common living ancestor and his male or female (w.e.f. Sep
2005) descendants up to 3 generation next to him.

The eldest coparcener including Female is Kartha. All male and female major
members are coparceners.

The eldest member will be Kartha even if he/she lives outside India. Kartha can
appoint any other coparcener or third party to conduct business of HUF.

Coparcener cannot stop payment of cheque unless he is authorized to operate

the account.

Kartha alone has the power to incur debts for family business and legal necessity
of the family.

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As per Supreme Court’s judgment, “A HUF directly or indirectly cannot become
partner of a firm because the firm is an association of individuals. HUF is a floating
body whose composition changes by births, deaths, marriages and divorces. A
HUF not being a ‘legal person’ cannot enter into an agreement of partnership”

Account of Trusts

A Trust is a relationship created by a person (Testator) where a person (Trustee)

holds property for the benefit of another person (beneficiary) or some object in a
way such that the real benefit of the property accrues to the beneficiary or the
objects of the trust. A Trust is generally created by a trust deed and all concerned
matters are governed by India Trusts Act, 1882.

Unless specifically provided for in the trust deed, No trustee or trustees can raise
loans against the security of the assets of trust.

Trustees can’t delegate powers to outsiders even with mutual consent.

Death or insolvency of trustee does not affect the trust property and the bank can
paycheques issued by the trustee prior to his death. The account of the trust will
have to be operated by persons authorized by the resolution.

Mandate and Power of Attorney

A mandate does not require witnessing or stamping.

Power of Attorney is stamped as per Stamp Act as applicable in concerned State.

It must be registered or notarized.

Any cheque signed by agent and presented for payment after cancellation of
authority shall not be paid.

Power of Attorney or Mandate is revoked by death, insanity, insolvency of the

Principal.

In case cheque issued by the agent is presented for payment after his death, the
same can be paid so long as the principal is alive, provided the same is dated
prior to date of death of agent.

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 03 The Companies Act
The Companies Act, 2013 was enacted to consolidate and amend the law relating
to the companies. The Companies Act, 2013 was preceded by the Companies Act,
1956.

Certificate of Incorporation - Section 7(2)

The Registrar on the basis of documents and information filed shall register all the
documents and information referred to in the register and issue a certificate of
incorporation in the prescribed form to the effect that the proposed company is
incorporated under this Act. The Certificate is a conclusive evidence that all the
requirements of the Act have been complied with and that the association is a
company authorised to be registered and duly registered under the Act. The

Certificate of Incorporation is to be verified before the account is opened by

Banker.

Corporate Identity Number (CIN)

The Registrar also (along with Certificate of Incorporation) allocates a Corporate

Identity Number (CIN) to the company which is a distinct identity for the
company.

Declaration of Commencement of Business: (Section 10 A) -

Certificate of ‗Commencement of Business‘ concept was there in the erstwhile

Companies Act, 1956 and it was also introduced by the Companies Act, 2013
under the Section 11 of the Companies Act 2013.

However, section 11 was omitted later on by the companies Act, 2015 w.e.f. 29th
May 2015. However, under Companies Ordinance 2018, all companies registered
in India after the commencement of the Companies (Amendment) Ordinance,
2018 and having a share capital are required to obtain Certificate of
commencement of Business before commencing any business or exercising any
borrowing powers.

Separate Legal Entity - A Company is legal person in the eyes of law distinct from
its members. A company is a separate person having its own rights and
obligations.

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Perpetual Succession - Death, insolvency, insanity etc. of any members does not
affect the continuity of the Company. Thus, the life of the company does not
depend upon the life of its members. Since a company is an artificial person
created by law, law alone can bring an end to its life. Members may come and go,
but the company goes on forever. Thus a company never dies.

Limited Liability - For the debts of the company, its creditors can sue it and not its
members whose liability is limited to the unpaid amount on shares held by them
or the guarantees provided by them to contribute on the winding up of the
company, depending on the type of company.

Common Seal is the official signature of the Company. Any document, on which
the common seal is affixed, is deemed to be signed by the Company. The Ministry
of Corporate Affairs through the Companies (Amendment) Act, 2015 has made
the provisions related to common seal as optional w.e.f. 29th May, 2015. This
amendment provides that the documents which need to be authenticated by a
common seal will be required to be so done, only if the company opts to have a
common seal. In case a company does not have a common seal, the authorization
shall be made by two directors or by a director and the Company Secretary.

Separate Property - A Company can own and enjoy property in its own name.
Members are not owners or co-owner of the company‘s property.

Ownership separate from Management - The members do not participate in the

day-to-day affairs of the Company. The management of the company lies in the
hands of elected representatives of members, commonly called as Board of
Directors or directors or simply the board.

The directors are appointed as well as removed by the members. Thus, the Act has
ensured the ultimate control of members over the company.

Corporate Veil refers to a legal concept whereby the company is identified

separately from the members of the company. The term Corporate Veil refers to
the concept that members of a company are shielded from liability connected to
the company‘s actions. If the company incurs any debts or contravenes any laws,
the corporate veil concept implies that members should not be liable for those
errors. In other words, they enjoy corporate insulation. Thus, the shareholders are
protected from the acts of the company.

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Lifting or Piercing the Corporate Veil means ignoring the separate identity of a
company. It means disregarding the corporate personality and looking behind the
real persons who are in the control of the company. Lifting is permissible only in
exceptional cases.

Private Company means a company having a minimum paid-up share capital as

may be prescribed, and which by its articles, -

1) Restricts the right to transfer its shares;

2) Limits the number of its members to 200.(Execption: One Person
Company)
3) The company is prohibited from making any invitation to public to
subscribe for any securities.

Public Company - Seven or more members are required to form the public
company. There is no limit on the maximum numbers of members. Subsidiary of a
public company is always a public company.

Differences between Private Co Public Co :

1) In case of a private company minimum number of persons to form a company

is 2 while it is 7 in case of a public company.

2) Maximum number of members: In case of private company, maximum number

must not exceed 200, whereas there is no restriction in the case of a public
company.

3)Transferability of Shares: As per Sec 44, the shares of any member in a company
shall be transferable. In case of private company, by its very definition, articles of a
private company have to contain restrictions on transferability of shares.

4) Prospectus: A private company cannot issue a prospectus while a public

company may, through prospectus; invite the general public to subscribe for its
securities.

5) Minimum number of Directors: A private company must have at least 2

directors, whereas a public company must have at least 3 directors.

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6) Exemptions: A private company has been granted exemptions from several
provisions of this Act(eg. appointment of independent directors, constitution of
audit committee, Nomination & remuneration committees),whereas as no such
exemptions are available to a public company.

OPC - One Person Company means a company which has only one person as a
member. Such a company is described under section 3(1)(c) as a private company.
One person company has been introduced to encourage entrepreneurship and
corporatization of business.

OPC differs from sole proprietary concern in an aspect that OPC is a separate
legal entity with a limited liability of the member whereas in the case of sole
proprietary, the liability of owner is not restricted and it extends to the owner‘s
entire assets constituting of official and personal.

In the case of a One Person Company, the memorandum shall state the name of a
person ,who in the event of death of subscriber ,shall become the member of the
company

In case of One Person Company, the words ‗One Person Company‘ shall be
mentioned in brackets below the name. No minor shall become member or
nominee of the OPC or can hold share with beneficial interest.

A natural person shall not be member of more than a One person company at any
point of time and the said person shall not be a nominee of more than a One
person company.

OPC cannot convert voluntarily into any kind of company unless two years have
expired from the date of incorporation, except where the paid up share capital is
increased beyond Rs 50 lakhs or its average annual turnover during the relevant
period exceeds Rs 2 Crores.

Small Company means a company, other than a public company which satisfies
both the following conditions :

(i) its paid-up share capital does not exceed Rs. 50 lakhs; or such higher amount
as may be prescribed (not being more than Rs. 10 crore).

(ii) Its turnover(as per the profit and loss account for immediately preceding
financial year) does not exceed Rs. 2 crore or such higher amount as may be
prescribed (not being more than Rs. 100 crore).

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Sick Company – A Company is assessed to be sick on a demand by the secured
creditors of a company representing 50% or more of its outstanding amount of
debt under the following circumstances:

The company has failed to pay the debt within a period of 30 days of the service
of the notice of demand

• The company has failed to secure or compound the debt to the reasonable
satisfaction of the creditors

The Memorandum of Association or MOA of a company defines the constitution

and the scope of powers of the company. In simple words, the MOA is the
foundation on which the company is built.

Under no circumstance can the company depart from the provisions specified in
the Memorandum. If it does so, then it would be Ultra Vires the company and
void.

The following information is mandatory in an MOA:

Association Clause ; Name Clause ;

Registered Office Clause Object Clause ;
Liability Clause ; Capital

Articles of Association - Every company needs a set of rules and regulations to

manage its internal affairs.

MoA Vs AoA –

There are two important business documents of a company, namely,

Memorandum of Association (MOA) and Articles of Association (AOA).

Articles are the rules and regulations framed by a company for its own
governance.

A company may include any additional matter in its articles which is considered
necessary for the management of the company.

The articles may contain the provisions for entrenchment (to protect something),
i.e. certain specified provisions of the articles can be altered only by complying
with such conditions or procedures as are more restrictive than those as are
applicable in case of a special resolution.

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Entrenchment : Entrenchment means fortification or protection.

The AOA can contain provisions for entrenchment for specific provisions.

The provisions for entrenchment can ensure that the specified provisions are
altered only if certain conditions or procedures are met or complied with. These
conditions are usually more restrictive than those applicable for a special
resolution.

Doctrine of Constructive Notice - The MoA and AoA are public documents. Before
any person deals with a company he must inspect its documents and establish
conformity with the provisions. However, even if a person fails to read them, the
law assumes that he is aware of the contents of the documents. Such an implied
or presumed notice is called Constructive Notice.

In simpler words, if a person enters into a contract which is beyond the powers of
a company, then he has no right under the said contract against the company.
The Memorandum of Association defines the powers of the company. Also, if the
contract is beyond the authority of the directors as defined in the Articles, the
person has no rights.

Doctrine of Indoor Management - The doctrine of indoor management is an

exception to the earlier doctrine of constructive notice.

It is important to note that the doctrine of constructive notice does not allow
outsiders to have notice of the internal affairs of the company.

Hence, if an act is authorized by the Memorandum or Articles of Association, then

the outsider can assume that all detailed formalities are observed in doing the act.
This is the Doctrine of Indoor Management or the Turquand Rule.

In simple words, the doctrine of indoor management means that a company‘s

indoor affairs are the company‘s problem.

Therefore, this rule of indoor management is important to people dealing with a

company through its directors or other persons. They can assume that the
members of the company are performing their acts within the scope of their
apparent authority. Hence, if an act which is valid under the Articles, is done in a
particular manner, then the outsider dealing with the company can assume that
the director/other officers have worked within their authority.

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NFRA (National Financial Reporting Authority) is an independent regulator to
oversee the auditing profession and accounting standards in India under
Companies Act 2013.

The establishment of NFRA as an independent regulator for the auditing

profession will improve the transparency and reliability of financial statements and
information presented by listed companies and large unlisted companies in India.
Companies are required to disclose information of their auditors to the NFRA .

NCLT (The National Company Law Tribunal) is a quasi-judicial body in India that
adjudicates issues relating to Indian companies. The tribunal was established
under the Companies Act 2013 and was constituted on 1 June 2016 by the
government of India.

All proceedings under the Companies Act, including proceedings relating to

Arbitration , Compromise, arrangements, reconstructions and the winding up of
companies shall be disposed off by the National Company Law Tribunal.

The National Company Law Tribunal is the adjudicating authority for the
Insolvency resolution process of companies and Limited Liability Partnerships
under the Insolvency and Bankruptcy Code 2016.

Financial statements : (Section 2(40))

Financial statements - in relation to a company, includes-

(i) A balance sheet as at the end of the financial year;

(ii) A profit and loss account, or in the case of a company carrying on any activity
not for profit, an income and expenditure account for the financial year;

(iii) Cash flow statement for the financial year; and

(iv) Provided that the financial statement, with respect to One Person Company,
small company and dormant company, may not include the cash flow statement.

Registration of Charges (Section 77-87)

Section 77 to 87 of the Companies Act, 2013, related to Registration of Charges

Created on the Assets of the Company.

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Section 77 requires a charge created by a company whether public or private
must be registered with the Registrar of Companies (ROC) having jurisdiction over
Registered Office of the Company.

Section 135: Corporate Social Responsibility

Section 137: Copy of financial statement to be filed with Registrar.

Section 179 of Companies Act, 2013 clearly provides that borrowing powers can
be exercised by Board of directors by means of a resolution passed at a board
meeting and not by means of a Circular resolution passed by them without
holding a board meeting.

Section 180: Restrictions on powers of Board

Section 453: Improper use of ―Limited‖ or ―Private Limited‖ punishable with fine
which shall not be less than five hundred rupees but may extend to two thousand
rupees for every day.

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 04. Limited Liability Partnership (LLP)
LLP Act came as a result of the recommendations made by several expert
committees like Bhatt Committee of 1972, Naik Committee of 1992, Abid Hussain
Committee of 1997, Gupta Committee of 2001, Naresh Chandra Committee of
2003 and the JJ Irani Committee of 2005.

LLP is Corporate vehicle with a flexibility of a partnership.

LLP is an alternative corporate business vehicle that not only gives the benefits of
limited liability at low compliance cost but allows its partners the exibility of
organising their internal structure as a traditional partnership.

The LLP is a separate legal entity separate from that of its partners and, while the
LLP itself will be liable for the full extent of its assets, the liability of the partners
will be limited.

Since LLP contains elements of both a corporate structure‘ as well as a partnership

firm structure‘ LLP is called a hybrid between a company and a partnership.

LLP is more suitable for service industry, and small and midsize enterprises.

LLP has perpetual succession. LLP can continue its existence irrespective of
changes in partners. Death, insanity, retirement or insolvency of partners has no
impact on the existence of LLP. It is capable of entering into contracts and holding
property in its own name.

The mutual rights and duties of partners of an LLP is governed by the agreement
and if the agreement is silent, it shall be governed by the provisions of the LLP
Act. proposed legislation.

In case of LLP, no partner would be liable on account of the independent or

unauthorized acts of other partners or their misconduct.

Further, no partner is liable on account of the independent or unauthorized

actions of other partners. All partners will be the agents of the LLP alone. No one
partner can bind the other partner by his acts.

Every LLP shall have at least two partners and shall also have at least two
individuals as Designated Partners, of whom at least one shall be resident in India.

There is no maximum limit on the partners in LLP

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Audit of LLP becomes mandatory for those companies whose contribution
exceeds Rs 25 lakhs or annual turnover exceeds Rs 40 lakhs.

A statement of accounts and solvency shall be filed by every LLP with the
Registrar every year.

The Central Government has power to investigate the affairs of an LLP, if required,
by appointment of competent inspector for the purpose.

A partnership firm, a private company and an unlisted public company may

convert themselves to LLP.

LLP is a separate legal entity, it can sue and can be sued

LLP required to execute a partnership agreement between the partners inter se or

between the LLP and its partners. In the absence of any agreement the provision
of LLP Act, 2008 will be applied.

The LLP Act, 2008 provides exibility to partner to devise the agreement as per
their choice. In the absence of any such agreement, the mutual rights and duties
shall be governed by the provisions of the LLP Act, 2008.

(exibility meaning the ability to bend easily or without breaking).

Registration becomes compulsory when it comes to LLP.

Any individual or body corporate may be a partner in a LLP.

No mandatory time period for meetings in case of LLP.

Mostly ownership and management be in the hands of the same person when it
comes to an LLP.

In case of a company, no individual director can conduct the business of the

company but in an LLP, each partner has the authority to do so unless expressly
prohibited by the partnership terms.

A LLP is an artificial legal person because it is created by a legal process and is

clothed with all rights of an individual. It can do everything which any natural
person can do, except of course that, it cannot be sent to jail, cannot take an oath,
cannot marry or get divorce nor can it practice a learned profession like CA or
Medicine.

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A LLP being an artificial person can act through its partners and designated
partners. LLP may have a common seal, if it decides to have one. Thus, it is not
mandatory for a LLP to have a common seal.

The partners in the LLP are entitled to manage the business of LLP. But only the
designated partners are responsible for legal compliances.

LLP required to complete and submit incorporation document in the form

prescribed with the Registrar electronically.

LLP required to have registered office in India to which all communications will be
made and received.

A person or nominee of body corporate intending to be appointed as designated

partner of LLP should hold a Designated Partner

Identification Number (DPIN) allotted by MCA.

The LLP cannot have the same name with any other LLP, Partnership Firm or
Company.

The first step to incorporate Limited Liability Partnership is reservation of name of

LLP. Applicant has to file e-Form 1, for ascertaining availability and reservation of
the name of a LLP business.

After reserving a name, user has to file e- Form 2 for incorporating a new Limited
Liability Partnership.

Execution of LLP Agreement is mandatory as per Section 23 of the Act.

LLP Agreement is required to be filed with the registrar in e-Form 3 within 30 days
of incorporation of LLP

An individual shall not be capable of becoming a partner of a LLP, if

a) he has been found to be of unsound mind by a Court of competent jurisdiction

and the finding is in force;

b) he is an undischarged insolvent; or

c) he has applied to be adjudicated as an insolvent and his application is pending

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The effects of registration of LLP

On registration, a LLP shall, by its name, be capable of

a) suing and being sued;

b) acquiring, owning, holding and developing or disposing of property, whether

movable or immovable, tangible or intangible;

c) having a common seal, if it decides to have one; and

d) doing and suffering such other acts and things as bodies corporate may
lawfully do and suffer.

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 05.Transfer of Property Act, 1882

Important points related to TP Act 1882 are furnished in Page No

80 of this Book. (In the Chapter No 5 related to Law Relating to
Securities and Modes of Charge). I am not furnishing here again to
avoid repetition.

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 06. The Right to Information Act, 2005
The right to information is a fundamental right under Article 19 (1) of the Indian
Constitution. In 1976, in the Raj Narain vs the State of Uttar Pradesh case, the
Supreme Court ruled that Right to information will be treated as a fundamental
right under article 19. The Supreme Court held that in Indian democracy, people
are the masters and they have the right to know about the working of the
government.

Thus the government enacted the Right to Information act in 2005 which provides
machinery for exercising this fundamental right.

The act is one of the most important acts which empowers ordinary citizens to
question the government and its working. This has been widely used by citizens
and media to uncover corruption, progress in government work, expenses-related
information, etc.

The primary goal of the Right to Information Act is to empower citizens, promote
openness and accountability in government operations, combat corruption, and
make our democracy truly function for the people. It goes without saying that an
informed citizen is better equipped to keep a required track on governance
instruments and hold the government responsible to the governed. The Act is a
significant step in informing citizens about the activities of the government.

All constitutional authorities, agencies, owned and controlled, also those

organisations which are substantially financed by the government comes under
the purview of the act. The act also mandates public authorities of union
government or state government, to provide timely response to the citizens’
request for information.

The act also imposes penalties if the authorities delay in responding to the citizen
in the stipulated time.

The citizens can seek any information from the government authorities that the
government can disclose to the parliament.

Some information that can affect the sovereignty and the integrity of India is
exempted from the purview of RTI.

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Information relating to internal security, relations with foreign countries,
intellectual property rights (IPR), cabinet discussions are exempted from RTI.

Objectives of the RTI Act

Empower citizens to question the government.

The act promotes transparency and accountability in the working of the

government.

The act also helps in containing corruption in the government and work for the
people in a better way.

The act envisages building better-informed citizens who would keep necessary
vigil about the functioning of the government machinery.

Important provisions under the Right to Information Act, 2005

Section 2(h): Public authorities mean all authorities and bodies under the union
government, state government or local bodies. The civil societies that are
substantially funded, directly or indirectly, by the public funds also fall within the
ambit of RTI.

Section 4 1(b): Government has to maintain and proactively disclose information.

Section 6: Prescribes a simple procedure for securing information.

Section 7: Prescribes a time frame for providing information(s) by PIOs.

Section 8: Only minimum information exempted from disclosure.

Section 8 (1) mentions exemptions against furnishing information under the RTI
Act.

Section 8 (2) provides for disclosure of information exempted under the Official
Secrets Act, 1923 if the larger public interest is served.

Section 19: Two-tier mechanism for appeal.

Section 20: Provides penalties in case of failure to provide information on time,

incorrect, incomplete or misleading or distorted information.

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Section 23: Lower courts are barred from entertaining suits or applications.
However, the writ jurisdiction of the Supreme Court of India and high courts
under Articles 32 and 226 of the Constitution remains unaffected.

Significance of the RTI Act

The RTI Act, 2005 empowers the citizen to question the secrecy and abuse of
power practised in governance.

It is through the information commissions at the central and state levels that
access to such information is provided.

RTI information can be regarded as a public good, for it is relevant to the interests
of citizens and is a crucial pillar for the functioning of a transparent and vibrant
democracy.

The information obtained not only helps in making government accountable but
also useful for other purposes which would serve the overall interests of the
society.

Every year, around six million applications are filed under the RTI Act, making it
the most extensively used sunshine legislation globally.

These applications seek information on a range of issues, from holding the

government accountable for the delivery of basic rights and entitlements to
questioning the highest offices of the country.

Using the RTI Act, people have sought information that governments would not
like to reveal as it may expose corruption, human rights violations, and
wrongdoings by the state.

The access to information about policies, decisions and actions of the government
that affect the lives of citizens is an instrument to ensure accountability.

The Supreme Court has, in several judgments, held that the RTI is a fundamental
right flowing from Articles 19 and 21 of the Constitution, which guarantee to
citizens the freedom of speech and expression and the right to life, respectively.

Recent Amendments

The RTI amendment Bill 2013 removes political parties from the ambit of the
definition of public authorities and hence from the purview of the RTI Act.

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The draft provision 2017 which provides for closure of case in case of death of
applicant can lead to more attacks on the lives of whistle-blowers.

The proposed RTI Amendment Act 2018 is aimed at giving the Centre the power
to fix the tenures and salaries of state and central information commissioners,
which are statutorily protected under the RTI Act. The move will dilute the
autonomy and independence of CIC.

The Act proposes to replace the fixed 5-year tenure with as much prescribed by
the government.

Criticism of RTI Act

One of the major set-back to the act is that poor record-keeping within the
bureaucracy results in missing files.

There is a lack of staffing to run the information commissions.

The supplementary laws like the Whistle Blower’s Act are diluted, this reduces the
effect of RTI law.

Since the government does not proactively publish information in the public
domain as envisaged in the act and this leads to an increase in the number of RTI
applications.

There have been reports of frivolous RTI applications and also the information
obtained have been used to blackmail the government authorities.

Different types of information are sought which has no public interest and
sometimes can be used to misuse the law and harass the public authorities. For
example-

Asking for desperate and voluminous information.

To attain publicity by filing RTI

RTI filed as a vindictive tool to harass or pressurize the public authority

Because of illiteracy and unawareness among the majority of the population in the
country, the RTI cannot be exercised.

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Though RTI’s aim is not to create a grievance redressal mechanism, the notices
from Information Commissions often spur the public authorities to redress
grievances.

Difference between Right to Information and Right to Privacy

The right to privacy and the right to information are both essential human rights
in modern society where technological information breach is very common.
These two rights complement each other in holding governments accountable to
individuals in a majority of the cases.

Right to Information provides a fundamental right for any person to access

information held by government bodies. At the same time, the right to privacy
laws grants individuals a fundamental right to control the collection of, access to,
and use of personal information about them that is held by governments and
private bodies.

Right To Information Act vs Legislations for Non Disclosure of Information

Some provisions of the Indian Evidence Act (Sections 123, 124, and 162) provide
to hold the disclosure of documents.

Under these provisions, head of department may refuse to provide information on

affairs of state and only swearing that it is a state secret will entitle not to disclose
the information.

In a similar manner no public officer shall be compelled to disclose

communications made to him in official confidence.

The Atomic Energy Act, 1912 provides that it shall be an offence to disclose
information restricted by the Central Government.

The Central Civil Services Act provides a government servant not to communicate
or part with any official documents except in accordance with a general or special
order of government.

The Official Secrets Act, 1923 provides that any government official can mark a
document as confidential so as to prevent its publication.

The Right to Information Act has not achieved its full objectives due to some
impediments created due to systematic failures. It was made to achieve social
justice, transparency and to make an accountable government.

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This law provides us with a priceless opportunity to redesign the processes of
governance, particularly at the grassroots level where the citizens’ interface is
maximum.

It is well recognized that the right to information is necessary, but not sufficient,
to improve governance. A lot more needs to be done to usher in accountability in
governance, including protection of whistle-blowers, decentralization of power
and fusion of authority with accountability at all levels.

As observed by Delhi High Court that misuse of the RTI Act has to be
appropriately dealt with; otherwise the public would lose faith and confidence in
this “sunshine Act”.

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 07. Information Technology Act, 2000
The Information Technology Act, 2000 was enacted by the Indian Parliament in
2000. It is the primary law in India for matters related to cybercrime and e-
commerce.

The act was enacted to give legal sanction to electronic commerce and electronic
transactions, to enable e-governance, and also to prevent cybercrime.

Under this law, for any crime involving a computer or a network located in India,
foreign nationals can also be charged.

The law prescribes penalties for various cybercrimes and fraud through
digital/electronic format.

It also gives legal recognition to digital signatures.

The IT Act also amended certain provisions of the Indian Penal Code (IPC), the
Banker’s Book Evidence Act, 1891, the Indian Evidence Act, 1872 and the Reserve
Bank of India Act, 1934 to modify these laws to make them compliant with new
digital technologies.

In the wake of the recent Indo-China border clash, the Government of India
banned various Chinese apps under the Information Technology Act. Read more
about this in an RSTV titled, ‘TikTok, Other Chinese Apps Banned’.

IT Act – 2008 Amendments

The IT Act, 2000 was amended in 2008. This amendment introduced the
controversial Section 66A into the Act.

Section 66A

Section 66A gave authorities the power to arrest anyone accused of posting
content on social media that could be deemed ‘offensive’.

This amendment was passed in the Parliament without any debate.

As per the said section, a person could be convicted if proved on the charges of
sending any ‘information that is grossly offensive or has menacing character’.

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It also made it an offence to send any information that the sender knows to be
false, but for the purpose of annoyance, inconvenience, danger, obstruction,
insult, injury, criminal intimidation, enmity, hatred or ill-will, through a computer
or electronic device.

The penalty prescribed for the above was up to three years’ imprisonment with
fine.

Arguments against Section 66A

Experts stated that the terms ‘offensive’, ‘menacing’, ‘annoyance’, etc. were vague
and ill-defined or not defined at all.

Anything could be construed as offensive by anybody.

There was a lot of scope for abuse of power using this provision to intimidate
people working in the media.

This also curbed the freedom of speech and expression enshrined as a

fundamental right in the Constitution.

The section was used most notably to arrest persons who made any uncharitable
remarks or criticisms against politicians.

The government contended that the section did not violate any fundamental right
and that only certain words were restricted. It stated that as the number of
internet users mushroomed in the country, there was a need to regulate the
content on the internet just like print and electronic media. The Supreme Court,
however, in 2015, struck down this section of the IT Act saying it was
unconstitutional as it violated Article 19(1)(a) of the Constitution. This was in the
famous Shreya Singhal v Union of India case (2015).

Section 69A

Section 69A empowers the authorities to intercept, monitor or decrypt any

information generated, transmitted, received or stored in any computer resource
if it is necessary or expedient to do so in the interest of the sovereignty or
integrity of India, defense of India, the security of the State, friendly relations with
foreign states or public order or for preventing incitement to the commission of
any cognizable offence or for investigation of any offence.

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It also empowers the government to block internet sites in the interests of the
nation. The law also contained the procedural safeguards for blocking any site.

When parties opposed to the section stated that this section violated the right to
privacy, the Supreme Court contended that national security is above individual
privacy. The apex court upheld the constitutional validity of the section. Also read
about privacy laws and India.

The recent banning of certain Chinese Apps was done citing provisions under
Section 69A of the IT Act.

Note:- The Indian Telegraph Act, 1885 allows the government to tap phones.
However, a 1996 SC judgement allows tapping of phones only during a ‘public
emergency’. Section 69A does not impose any public emergency restriction for
the government.

Information Technology Intermediary Guidelines (Amendment) Rules, 2018

The Rules have been framed under Section 79 of the Information Technology Act.
This section covers intermediary liability.

Section 79(2)(c) of the Act states that intermediaries must observe due diligence
while discharging their duties, and also observe such other guidelines as
prescribed by the Central Government.

Online Intermediaries:

An intermediary is a service that facilitates people to use the Internet, such as

Internet Services Providers (ISPs), search engines and social media platforms.

There are two categories of intermediaries:

Conduits: Technical providers of internet access or transmission services.

Hosts: Providers of content services (online platforms, storage services).

Information Technology Intermediary Guidelines (Amendment) Rules were first

released in 2011 and in 2018, the government made certain changes to those
rules.

In 2018, there was a rise in the number of mob lynchings spurred by fake news &
rumours and messages circulated on social media platforms like Whatsapp.

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To curb this, the government proposed stringent changes to Section 79 of the IT
Act.

According to the 2018 Rules, social media intermediaries should publish rules and
privacy policy to curb users from engaging in online material which is paedophilic,
pornographic, hateful, racially and ethnically objectionable, invasive of privacy, etc.

The 2018 Rules further provide that whenever an order is issued by the
government agencies seeking information or assistance concerning cybersecurity,
then the intermediaries must provide them the same within 72 hours.

The Rules make it obligatory for online intermediaries to appoint a ‘Nodal person
of Contact’ for 24X7 coordination with law enforcement agencies and officers to
ensure compliance.

The intermediaries are also required to deploy such technologies based on

automated tools and appropriate mechanisms for the purpose of identifying or
removing or disabling access to unlawful information.

The changes will also require online platforms to break end-to-end encryption in
order to ascertain the origin of messages.

Online Intermediaries are required to remove or disable access to unlawful

content within 24 hours. They should also preserve such records for a minimum
period of 180 days for the purpose of investigations.

Rationale behind the Rules

The government intends to make legal frameworks in order to make social media
accountable under the law and protect people and intermediaries from misusing
the same.

The government wants to curb the spread of fake news and rumours, and also
pre-empt mob violence/lynching.

There is a need to check the presentation of incorrect facts as news by social

media, that instigates people to commit crimes.

There has been criticism of the Rules from certain quarters, that says that the
State is intruding into the privacy of the individual. Some also say that this law
widens the scope of state surveillance of its citizens. These criticisms are
notwithstanding the fact that the new Rules are in line with recent SC rulings.

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Tehseen S. Poonawalla case (2018): SC said that authorities have full freedom to
curb the dissemination of explosive and irresponsible messages on social media,
that could incite mob violence and lynchings.

Prajwala Letter case (2018): SC ordered the government to frame the necessary
guidelines to “eliminate child pornography, rape and gang rape imagery, videos,
and sites in content hosting platforms and other applications”.

What is the main provision of IT Act 2000?

The original act addressed electronic documents, e-signatures, and authentication

of those records. It also enacted penalties for security breach offenses including
damaging computer systems or committing cyber terrorism.

What are the features of IT Act 2000?

Features of the Information Technology Act, 2000

All electronic contracts created through secure electronic channels were legally
valid.

Legal recognition for digital signatures.

Security measures for electronic records and conjointly digital signatures are in
place.

How many sections are in the IT Act 2000?

The original Act contained 94 sections, divided into 13 chapters and 4 schedules.

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 08 Prevention of Corruption Act, 1988
The Prevention of Corruption Act, 1988 (PCA, 1988) is an Act of the Parliament of
India enacted to combat corruption in government agencies and public sector
businesses in India. The PCA 1988 has gone through many amendments in order
to better implement it. This article will highlight the features of the Prevention of
Corruption Act and also shed light on the amendments implemented.

Highlights of Prevention of Corruption Act, 1988

The Prevention of Corruption Act was enacted in order to fight corruption and
other malpractices in government and public sector business in India. Under PCA,
1988 the Central Government has the power to appoint judges to investigate and
try those cases where the following offences have been committed

Offences punishable under the act - A conspiracy to commit or an attempt to

commit the offences specified under the act. The following are the offences
specified under the Prevention of Corruption Act as well as their subsequent
punishments:

Punishments and Offences under PCA, 1988

Offences Punishments

Taking gratification other than legal Those found guilty shill face
remuneration imprisonment of 6 months extendable
upto 5 years. A fine shall also be levied

Taking gratification with the purpose of Imprisonment for not less than three
influencing a public servant, through years which is expandable upto seven
illegal and corrupt means years. A fine shall also be levied.

Taking gratification with the purpose of Imprisonment not less than 6 months
wielding personal influence with public extendable upto 5 years. A fine shall
servant also be levied

Act of criminal misconduct by the public Imprisonment not less than 1year
servant expandable upto 7 years. A fine shall
also be levied.

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Investigation shall be done by a police officer not below the rank of:

In the case of Delhi, of an Inspector of Police.

In metropolitan areas, of an Assistant Commissioner of Police.

Elsewhere, a Deputy Superintendent of Police or an officer of equivalent rank shall

investigate any offence punishable under this Act without the order of a
Metropolitan Magistrate or a magistrate of first class, or make any arrest therefore
without a warrant.

Amendments to the Prevention of Corruption Act, 1988

Two amendment acts have been passed for the Prevention of Corruption Act,
1988. One in 2013 and the other in 2018. The highlights of both the amendment
acts are given below:

Highlights of the 2013 amendment act:

Bribery was made a punishable offence. A person who was compelled to bribe,
should he/she report this incident to the law enforcement within seven days shall
not be charged under the Prevention of Corruption Act.

Two types of offences were covered under the amended criminal misconduct. The
offences are illicit enrichment as in amassing wealth disproportionate to one’s
income sources and fraudulent misappropriation of property.

The amendments were made taking prior approval of the relevant government
authority to conduct any investigation regarding any offences allegedly
conducted by public cases. However, if the offender has been arrested on the spot
for taking bribes, then this approval is not needed.

The Trial Limit for cases under PCA was fixed within two years if it is handled by a
special judge. The total period for the trial should last only four years.

Highlights of the 2018 amendment act are as follows:

Bribery is a specific and a direct offence

Anyone taking bribes will face imprisonment for 3 to 7 years along with being
levied a fine.

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Those giving bribes can also be punished with imprisonment for upto 7 years and
levied a fine.

The 2018 amendment creates a provision to protect those who have been forced
to pay a bribe in the event the matter is reported to law enforcement agencies
within 7 days.

It redefines criminal misconduct and will now only cover misappropriation of

property and possession of disproportionate assets.

It proposes a ‘shield’ for government servants, including those retired, from

prosecution by making it mandatory for investigating agencies such as the Central
Bureau of Investigation to take prior approval from a competent authority before
conducting an inquiry against them.

However, it states that such permissions shall not be necessary for cases involving
the arrest of a person on the spot on the charge of accepting or attempting to
accept any undue advantage for himself or for any other person.

In any corruption case against a public servant, the factor of “undue advantage”
will have to be established.

The trial in cases pertaining to the exchange of bribes and corruption should be
completed within two years. Further, even after reasoned delays, the trial cannot
exceed four years.

It covers bribe-giving commercial organisations to be liable for punishment or

prosecution. However, charitable institutions have been left out of their ambit.

It provides powers and procedures for the attachment and forfeiture of a

corruption-accused public servant’s property.

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 Important Terms/Concepts
The “Override Clause” or “Overriding Provisions” implies the subordination of
fundamental principles— the system of constitutional values, the rule of law, and
human rights—solely in favour of the political interests of the political majority
and without any balance whatsoever.

Substantial interest refer to any matter, other than that of a trivial nature, that
pertains in whole or in part to any issue that is likely to be the subject of a
regulatory or policy decision by the Commission.

Corporate governance is the system of rules, practices, and processes by which a

firm is directed and controlled. Corporate governance essentially involves
balancing the interests of a company's many stakeholders, such as shareholders,
senior management executives, customers, suppliers, financiers, the government,
and the community.

Usury Loans refer to the Loans at an interest rate that is deemed unreasonably
high or higher than the rate ceiling set by the law. Unreasonably high-interest rate
makes it an unethical financial loan that unfairly benefits the lender and disfavors
the borrower.

Continuing Offence involves an offence committed over a prolonged period

which constitutes a fresh offence every time or occasion on which it continues.
Continuing offence has not clearly been defined in the Code of Criminal
Procedure ("C.r.P.C.") but its scope has been established in multiple judgements.

An 'On-tap' Facility means the RBI will accept applications and grant licenses for
banks throughout the year. The policy allows aspirants to apply for universal bank
license at any time, subject to the fulfillment of the set conditions.

A Sponsor Bank is a federal or state chartered bank, which is a member of one or

more of the credit card associations, who provides money-movement and
compliance oversight for fintechs, since most of them are not banks.

For any organization, its Core Competency refers to the capabilities, knowledge,
skills and resources that constitute its "defining strength." A company's core
competency is distinct, and therefore not easily replicated by other organizations,
whether they're existing competitors or new entrants into its market.

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Financial Repression is a term that describes measures by which governments
channel funds from the private sector to themselves as a form of debt reduction.
The overall policy actions result in the government being able to borrow at
extremely low interest rates, obtaining low-cost funding for government
expenditures.

Inchoate Stamped Instrument means an unregistered, unrecorded instrument

that becomes effective to third parties only when the instrument is recorded.
Where one person signs and delivers to another a paper stamped in accordance
with the law relating to negotiable instruments then in force in and either wholly
blank or having written thereon an incomplete negotiable instrument, he thereby
gives prima facie authority to the holder thereof to make or complete, as the case
may be, upon it a negotiable instrument, for any amount specified therein and not
exceeding the amount covered by the stamp. The person so signing shall be liable
upon such instrument, in the capacity in which he signed the same, to any holder
in due course for such amount; provided that no person other than a holder in
due course shall recover from the person delivering the instrument anything in
excess of the amount intended by him to be paid thereunder.

A Chose in Action is a comprehensive term used to describe a property right or

the right to possession of something that can only be obtained or enforced
through legal action.

Del Credere Agent is a person or company that receives commission (= payment)

for selling goods or services for another person or company, and that agrees to
pay for the goods even if no money is received from the buyer.

Civil Liability is a legal obligation that requires a party to pay for damages or to
follow other court-enforcements in a lawsuit.

“Habitual Offender” means a person— (a) who, during any continuous period of
five years, whether before. or after the commencement of this Act, has been
convicted and. sentenced to imprisonment more than twice on account of any.

The Doctrine of Caveat Emptor is an integral part of the Sale of Goods Act. It
translates to “let the buyer beware”. This means it lays the responsibility of their
choice on the buyer themselves.

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A Fiduciary Relationship is defined as “a relationship in which one person is
under a duty to act for the benefit of the other on the matters within the scope of
the relationship.”

The Latin phrase intra vires means "inside the powers," and it's often used to
contrast something that's ultra vires, "outside the powers."

Proprietary Rights, also known as Property Rights, are the theoretical or legal
rights that an entity has to own property, whether tangible or intangible. Property
rights are some of the most basic rights in a free society.

A Documentary Rights are the rights granted by contract and the rights
granted by law.

An Unlimited Liability Company includes general partnerships and sole

proprietors who are equally responsible for all debt and liabilities accrued by the
business. Most companies opt to form limited partnerships in which a partner's
liability can't exceed their investment in the company.

Doctrine of Estoppel - Section 115 defines estoppel under the Evidence Act as –
when any person deliberately declares something or causes to believe because of
some act or omission and other person acts on the same declaration or belief
then such person (1st one) is prohibited from denying the declaration or belief
later in a suit or proceeding. This section gives force to the fact that whatever is
admitted in the court of law cannot be denied. In rare cases, the admission of the
same will depend on logical reason (condonation) and the discretion of the court.

Foreign Register means the register of holders maintained by an issuer which is

listed on a Foreign Stock Exchange in the jurisdiction of that Foreign Stock
Exchange.

A Red Herring Prospectus, as a first or preliminary prospectus, is a document

submitted by a company (issuer) as part of a public offering of securities (either
stocks or bonds). Most frequently associated with an initial public offering (IPO).

A company must file a Shelf Prospectus if it wants to issue bonds to raise funds.
This prospectus will contain all the details regarding the securities being issued
such as their prices, maturity date, etc. This serves as both a legal and marketing
document for the bonds.

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District court is referred to as Sessions Court when it exercises its jurisdiction on
criminal matters under Code of Criminal procedure (CrPc) As per section 9 of CrPc,
the court is established by the State Government for every sessions division.

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 List of Books compiled by The Banking Tutor
So far the following Books are compiled by me which can be shared by any one
free of cost, without any permission from me or without any intimation to me.

Book No Title

01 Banking Jargon - Vol 01

02 Alerts - Vol 01

03 Forex - Vol 01

04 Banker and Legal Enactments - Vol 01

05 Banker and Financial Statements

06 Confusables – Vol 01

07 Banking Jargon - Vol 02

08 ABC (Awareness of Basics of Credit)

09 The Can Support_2020

10 The Core Support_2020

11 The Sundries_2020

12 The Soft Support

13 Management of W C Limits

14 The Notes_2021 (for Promotion Test)

15 Confusables - Vol 02

16 Banking Information

17 Banking Jargon - Vol 03

18 Bankers and Court Verdicts - Vol 01

19 Inland Bank Guarantees

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20 The Dirty Dozen

21 SPA (Not related to Banking)

22 Banks - Supporting Agencies - Vol 01

23 Banking Jargon - Volume 4

24 Banks - Supporting Agencies - Vol 2

25 Banks - Supporting Agencies - Vol 3

26 JAIIB Notes - PPB

27 JAIIB Notes - LRB

28 JAIIB Notes – AFB

29 CAIIB Notes – ABM

30 CAIIB Notes – BFM

31 Confusables - Vol 03

32 Banking Jargon - Vol 05

33 The Banking Regulations & Business Laws (BRBL)

34 Accounting & finance for Bankers

35 Bank Financial Management

36 Retail Banking & Wealth Management

37 Concepts for Credit Professional - OT

38 Advance Business Management

39 Principles & Practice of Banking

40 Indian Economy & Indian Financial System - OT

41 Concepts for Credit Professional - Notes

42 Less Known Forex Terminology

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43 KYC & AML – Notes & MCQ

44 Treasury Management - Objective Type

45 Treasury Management - Notes

46 Indian Economy & Indian Financial System - Notes

47 MSME -Notes

48 MSME – Objective Type

49 Banking Jargon – Volume 06

50 50 Essays in Practical Banking

51 Promotion 2022

52 Basics of Bank Audits

53 The Shortens

54 Recap TIN 2022

55 NumLogEx

56 Basic Statistics for Bankers

57 JAIIB IE & IFS - Module A : Indian Economic Architecture

58 JAIIB IE & IFS - Module B : Economic Concepts Related to Banking

59 JAIIB IE & IFS - Module C : Indian Financial Architecture

60 JAIIB IE & IFS - Module D : Financial Products and Services

61 Banking Jargon – Volume 07

62 JAIIB – PPB – Module A - General Banking Operations

63 JAIIB 2023 – IE & IFS – Objective Type

64 JAIIB Notes 2023 - PPB - Mod B - Functions of Banks

65 JAIIB Notes 2023 - PPB - Mod C - Technology and Mod D - Ethics

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66 JAIIB 2023 – PPB – Objective Type

67 JAIIB 2023 – AFM - Notes

68 JAIIB 2023 – AFM – Objective Type

69 JAIIB 2023 – RBWM - Notes

70 JAIIB 2023 – RBWM - Objective Type

71 CAIIB 2023 – AFBM – Objective Notes

72 CAIIB 2023 – ABM – Objective Notes

73 CAIIB 2023 – BRBL – Objective Notes

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 My Activity
I am sharing the following in my WhatsApp Groups (The Banking
Tutor), Telegram Group of The Banking Tutor ; TBT Exam Corner
and Blog (The Banking Tutor - TBT).

1. One Point related to Banking & Finance Daily (Daily Point).

Started on 16-09-2019, so far shared 1338 points without any
break.

2. Once 3 days (on 3rd, 6th, 9th ,12th….) one Lesson on Banking
& Finance (Banking Tutor’s Lessons - BTL), started on 06-09-
2018, so far shared 544 lessons.

3. Monthly Last day - TIN - Terms in News (related to Banking &

Finance). Started on 28-02-2021, so far shared 27 issues.

4. Monthly First Day – Recap of Daily Points shared during the

previous month.
5. Sharing lessons for IIB Exams and Promotion tests of various
Banks daily in Telegram Group “TBT- Exam Corner” (earlier Name
of this Group is “TBT JACA”)
My mail id – [email protected] ;

WhatsApp +91 94406 41014

Banking Tutor Blog – https://thebankingtutor.blogspot.com/
15-05-2023 Sekhar Pariti

+91 9440641014

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