Banking Law

[By Yuvraj Sharma] The author is a student of School of Law, Narsee Monjee Institute of Management and Studies, Hyderabad.   Introduction In a nine-page ruling, the Securities Appellate Tribunal (SAT) criticises SEBI’s approach to disclosure-based laws, which allows corporations that have committed wrongdoing to be exonerated if they gain post-facto approval from their shareholders. This ruling creates a problematic precedent by allowing businesses to seek approval for any conduct, regardless of its legality, and by tolerating wrongdoing by strong corporate clients. This precedent could be used by the legal profession to support unlawful behaviour. Investors, who will be affected by the decision, are mostly in the dark about it. In the Terrascope Ventures Limited (“Company”) case, which resulted in this choice, the business used the money for unlawful reasons that were later approved by shareholders. The Tribunal rejected SEBI’s decision and upheld the legality of a director’s violation of duty, contradicting SEBI’s contention that such post-facto validation for already committed acts is unlawful. The article talks about the recent decision by India’s SAT to let businesses to “ratify” director misconduct after the fact, despite the fact that the Companies Act of 2013 does not have any such a provision. The article underlines the worries of legal and financial professionals who think that such a clause may be simply misused and might perhaps put the interests of minority shareholders in danger. Additionally, there are no safeguards in place to guarantee that post-facto ratification is not abused. Since the SAT decision has an impact on the fundamentals of disclosure-based regulation in India, experts are urging SEBI to file an appeal and start a board discussion on the matter. Factual Matrix of the case Terrascope Venture vs. SEBI Terrascope Ventures Limited (“Company”) sought and gained shareholder permission for a preferential offer of 63,50,000 shares in October 2012, with the intention to use the money for operational expenses, including capital purchases., marketing, working capital, and international expansion. However, the company made share purchases and loan and advance payments to 19 entities named in the SEBI order rather than using the funds for the approved purposes. At their 2017 Annual General Meeting (AGM) in September, Terrascope Ventures Limited’s shareholders overwhelmingly approved a special resolution. The resolution approved spending the money on something that was not even close to what it was approved for during the preference issue. Five years after the funds were collected, they were finally ratified. After receiving a show-cause notice from SEBI’s Adjudicating officer in 2018, Terrascope Ventures Limited was fined in April 2020. During this time, Terrascope argued before SEBI’s AO that in 2014, they had expanded their object clause to include financing, investment, and share trading via a special resolution. They contended that the modified object clause was followed by allocating some of the proceeds from the preferential offering. What is the Principle of Disclosure & Disclosure base regulations? The principle of disclosure is basically an accounting rule that requires companies to disclose any of the information which materially impacts their financial results or financial position. This principle usually promotes the financial market transparency, it lowers the risk of fraud and it also protects the investors and analysts from the overabundance of irrelevant information. It can also be applied in commercial law to make sure that parties to a business transaction reveal all relevant facts prior to the completion of the deal. In 1992, India’s stock market became subject to disclosure-based regulation. The screening process for investors already includes sifting through annual reports, disclosures to stock exchanges, and offer paperwork, all of which are required by the listing agreement. All of these warnings are useless since that the SAT allows for ‘ratification’ by shareholders after the fact, long after the misappropriation of cash or questionable conduct has already taken place. The implications for initial public offerings (IPOs) are dire, as investors in high-profile technology businesses are already seeing significant losses. The Court needs to Restates Its Point of Judgement Ratification is defined and the rights of the parties and the consequences of ratification are spelt out in Section 196 of the Indian Contract Act of 1872. This approach only applies to contracts that can be voided, not those that are invalid or flawed from the beginning. Section 197 of the Act states that ratification may be communicated explicitly or implicitly by the conduct of the person for whom the Act is performed. However, if the ratification is made by someone with a materially flawed understanding of the relevant facts, it will be null and void as per Section 198 of the Act. In addition, per Section 198, a person’s consent to a transaction includes his knowledge of any illegal activity conducted on his behalf. The significance of communicating a contract’s confirmation may become clear in future dealings. While ratification is permitted under the Indian Companies Act, it is unclear whether or not acts that breach the duty of care can be ratified under the law. However, the Bombay High Court has ruled that board members cannot rely on this doctrine to justify a breach if they are the only shareholders in the company. The Securities Appellate Tribunal (SAT) in Mumbai overlooked the principle’s lack of statutory and judicial support. The failure to codify the notion of ratification suggests that legislators intended to bar shareholders from relieving directors of culpability by ratifying their actions. Directors may try to rationalise illegal behaviour by relying on the ratification concept, which was lifted wholely from English law without being adapted to Indian conditions. Without proper adjustments, imports of this nature are doomed to fail. The Act lacks statutory provisions that would allow for legal ratification, whereas other common law jurisdictions have established procedures for ratification. There could be serious consequences if foreign doctrines were imported into Indian law without the necessary legal systems or social structures. Conclusion  Regardless of the lack of such a provision in the Companies Act of 2013, the Securities Appellate Tribunal (SAT) of India has recently ruled that companies

[By Saloni Mehta] The author is a student of Symbiosis Law School, Pune.   Background on consumer protection laws Consumer protection laws have substantially impacted the legal framework governing the banking industry, particularly in ensuring that banks are held accountable for their actions and that consumers are treated equitably. Consumer Protection Laws safeguard against unfair commercial practices, deceptive marketing and dangerous products. Consumer Protection regulation have recently emphasised digital privacy and expanded data breach notification obligation. Financial Services regulations to avoid predatory lending and promoting financial transactions One of the most important implications of consumer protection laws on the banking industry is the creation of regulatory agencies to oversee the sector like The Reserve Bank of India (RBI) serves as the primary monetary authority of the nation, overseeing and monitoring the banking sector. The regulatory body possesses the authority to promulgate directives and mandates aimed at safeguarding consumers, as well as to impose sanctions on financial institutions that contravene statutes pertaining to consumer protection. Furthermore, The Securities and Exchange Board of India (SEBI) is the regulatory authority tasked with the oversight of the securities market in India, which encompasses banks that engage in the issuance of securities. The regulatory framework oversees banking operations that pertain to the trading of securities, encompassing activities such as underwriting, merchant banking, and portfolio management services Consumer protection laws have led to the development of new banking regulations. For instance, many nations require banks to disclose information about their products and services, including fees, interest rates, and other charges, to consumers. These regulations are intended to enable consumers to make informed decisions regarding their banking requirement. Moreover, consumer protection laws have expanded the rights of consumers in disputes with their institutions. Consumer protection laws have shaped the legal framework of the banking industry, ensuring that consumers are treated equitably and banks are held accountable for their actions. In order to maintain the confidence of their customers and the general public, banks must remain current on these laws and regulations and ensure that they are in compliance. Importance of consumer protection laws in the banking industry – Consumer protection regulations are extremely important in ensuring that the banking industry runs in an honest and open manner, as well as preventing consumers from being taken advantage of or mistreated in any way. The Consumer Protection Act (CPA) was implemented in 1986 in India with the aim of safeguarding consumer rights and curbing any instances of unjust trade practises. It offers a range of options to consumers, including the ability to pursue compensation, lodge a complaint with the consumer forum, and appeal to higher courts. The aforementioned provision serves the purpose of mitigating fraudulent and abusive activities by endowing consumers with lawful means to seek redress against unjust commercial conduct. Indian consumer protection laws protect customers from fraud and abuse while encouraging competition and innovation. Fair, open markets safeguard consumers within this system. Laws ensure that businesses operate ethically and that consumers have equal access to high-quality goods and services at fair pricing Assisting in the prevention of consumer fraud and abuse Consumer protection laws assist in the prevention of consumer fraud and abuse by providing legal protections for consumers against predatory practises such as deceptive marketing, unfair billing, and unauthorised transactions. In this way, consumer protection laws assist in the prevention of fraud and abuse. Consumer protection laws aim to guarantee that banks and other lenders operate in a fair and transparent manner, and that they do not engage in discriminatory lending practises that unjustly target specific categories of customers. In addition, these rules help to ensure that banks and other lenders do not engage in activities that would violate the consumer protection laws. The banking sector benefits from consumer protection laws because they provide industry with standards that are not only stated but are also enforced, which in turn encourage competition and innovation. . In this way, consumer protection laws help to encourage both innovation and competition. This helps to ensure that consumers have access to a greater range of financial products and services, and that banks are driven to compete on the basis of price, quality, and innovation in their offerings to customers. Stability in the financial system can be promoted with the help of consumer protection legislation by ensuring that financial institutions are properly regulated and do not engage in practises that are abusive or dangerous and therefore have the potential to disrupt the stability of the financial system. In general, The implementation of consumer protection regulations is imperative to ensure the banking system operates with integrity , transparency and responsiveness to its clientele They safeguard customers from exploitation, foster transparent and ethical lending practices, stimulate competition and ingenuity and uphold financial stability. The effectiveness of consumer protection laws in protecting consumers While the main objective of India’s consumer protection laws is to safeguard consumers and advance ethical business practises, there are a number of obstacles that prevent them from being fully implemented and enforced. Here are some of the main things that prevent them from working effectively – The lack of consumer awareness is one of the main obstacles to the implementation of consumer protection laws in India. Even when customers are aware of their legal options, pursuing them can be a time-consuming and laborious procedure. The overwhelming number of cases in consumer forums and courts causes delays in the resolution of disputes. Additionally, many consumers may find the cost of legal counsel to be prohibitive, which restricts their access to legal remedies. India frequently lacks the infrastructure and resources necessary to effectively enforce consumer protection legislation. The ability to enforce rulings by regulatory authorities like the National Consumer Disputes Redressal Commission (NCDRC) and the State Consumer Disputes Redressal Commissions (SCDRCs) restricts their efficacy. Furthermore, The unorganised sector accounts for a sizeable component of the Indian economy, making it challenging to control and uphold consumer protection legislation. It is challenging to ensure that small firms and suppliers abide by consumer protection regulations

[By Pranay Bhattacharya] The author is a is a lawyer focusing on banking & finance and insolvency & bankruptcy laws.   Introduction In a significant ruling, the division bench of the Supreme Court (“SC”) in State Bank of India & Ors v. Rajesh Agarwal & Ors, (Civil Appeal No. 7300 of 2022) on 27 March 2023 considered the long pending issue that whether the principles of natural justice should be read into the provisions of the Reserve Bank of India’s (“RBI”) Master Directions on Frauds – Classification and Reporting by commercial banks and select FIs dated 1 July 2016 (“Master Direction”). The SC disposed of a bunch of petitions challenging the orders before several High Courts on the contention that no opportunity of being heard is given to borrowers before classifying their accounts as fraudulent. Background of the Case In Rajesh Agarwal v. Reserve Bank of India and Others (writ petition no 19102 of 2019) (“Rajesh Agarwal case”) dated 10 December 2020, the Telangana High Court allowed a writ filed by the chairman and managing director of BS Limited under Article 226 (Power of High Courts to issue certain writs) of the Constitution of India, 1949 (“Constitution”) on the contention that the principles of natural justice must be read into the Master Direction and an opportunity of hearing should be given to a borrower before the declaration of its account as fraudulent. As a background, the BS Limited engaged in the business of power transmission failed to meet its payment obligations to lender banks, thereby defaulting in repayment of credit facilities. In accordance with the Master Direction, the lender banks formed a joint lenders forum with SBI as the lead bank and declared the assets of BS Limited as non-performing assets (“NPA”) by invoking Clause 2.2.1 (Classification of Frauds) of the Master Directions. Judgment of the Telangana High Court In view of the above, the Telangana High Court directed the lender banks: (i) to give an opportunity of a hearing to the borrowers after furnishing a copy of the forensic audit report; and (ii) to provide an opportunity of a personal hearing to the borrower before classifying their account as fraud. However, this judgment was challenged by the banks before the Supreme Court and the order that a personal hearing be given was stayed by the SC. It is to be noted that the Telangana High Court in Yashdeep Sharma vs. Reserve Bank of India and Ors. dated 31 December 2021 took a contrary view of the above judgment underling that the Master Direction already provides a comprehensive mechanism on fraud classification with the participation of the borrower and the banks. Further, it was also observed that the forensic audit prepared by the auditor is based upon the documents supplied by the borrower and the fraud classification is not a unilateral exercise on part of the forensic auditor of the bank. Therefore, the court took a contrary opinion from the earlier judgments highlighting that the manner of classification of fraud under the Master Direction is in line with the due process of law. As against the Rajesh Agarwal case, this judgment created a dichotomy for banks and lenders for grant of opportunity of hearing before classification of account as fraud owing to the fact that the Master Direction is silent on the issue. SC Judgment The SC made the following observations upholding the Rajesh Agarwal case: 1. Violation of principles of natural justice: Principles of natural justice are not mere legal formalities but are substantive obligations that need to be followed by the decision making and adjudicating authorities. Therefore, principles of audi alteram partem has to be read into the Master Direction to save it from the vice of arbitrariness. SC placed reliance on Union of India v. Col. J N Sinha dated 12 August 1970, stating that the rule of audi alteram partem applies to administrative actions, apart from judicial and quasi-judicial functions as applicable in this case. SC also relied on State of Orissa v. Dr (Miss) Binapani Dei dated 7 February 1967 wherein it held that “every authority which has the power to take punitive or damaging action has a duty to give a reasonable opportunity to be heard”. Further, an administrative action which involves civil consequences must be made consistent with the rules of natural justice. Therefore, in view of nature of the procedure adopted by the banks, it is practicable for the lenders to provide an opportunity of a hearing before classifying borrowers account as fraud. 2. No implied exclusion of audi alteram partem: Master Direction does not expressly exclude the right of hearing to the borrowers before classification of an account as fraudulent. The principles of natural justice can be read into a statute or a notification where it is silent on granting an opportunity of a hearing to a party whose rights and interests are likely to be affected by the orders that may be passed. 3. Civil and Criminal Consequences: Classification of an account as fraud may lead to serious civil and criminal consequences against the interest of borrowers even though the Master Direction is conceived in public interest. It amounts to “blacklisting” a borrower from availing any credit and affect an individual’s CIBIL score. SC also opined that the judgment in State Bank of India v. Jah Developers dated 9 May 2019 will be squarely applicable in the present case since the effect of declaring a borrower as wilful defaulter under Master Circular on wilful defaulters dated 1 July 2015 has similar consequences when the borrowers accounts is classified as fraud under the Master Direction. 4. Violation of Article 19(1)(g) of the Constitution: Classification of an account as fraud debars the borrower from raising institutional finances, thus, adversely affects the fundamental rights of a promoter/director to carry on a trade or a business, which is guaranteed under Article 19(1)(g) of the Constitution. Therefore, unilateral power to banks to declare a person/company as ‘a fraudulent borrower’ violates Article 19(1)(g) of the

[By Chytanya S Agarwal] The author is a student of National Law School of India University, Bangalore.   I.          Introduction The rationale behind Reverse Mortgage Loans (‘RMLs’) is to ensure adequate retirement income for senior citizens, whose wealth is majorly confined in the form of home equity, . RMLs are essentially the ‘reverse’ of conventional mortgages and entail periodic payments from the mortgagee (and not the mortgagor) for several decades. Under RMLs, the mortgagor is permitted to reside in his/her mortgaged property and there is no obligation to service the debt during one’s lifetime. When the mortgagor dies or the RML ends due to other reasons (contractual or statutory), the mortgagee has the right to recover the mortgage money by liquidating the mortgaged home. RMLs are normally provided only to senior citizens since their wealth is majorly confined in the form of home equity and, thus, is illiquid. They are the most suited for them  due to their inadequate current income, lower remaining lifetime, and tax incentives (Rajagopalan, pp.3-4). Particularly popular in developed nations with a pro-house ownership stance, RMLs ensure the release of locked private wealth for stimulating consumption and bearing old-age expenses like nursing and medical costs. In a context where RMLs are being mooted as an attractive source of retirement income (see here, here and here), in this article, the author argues that the current RML regulations in India are fraught with inconsistencies and employ a model of regulation that hightens market risks instead of mitigating them. To make this argument, firstly, I would explain the features, rationale, and risks associated with RMLs through a brief literature review; secondly, I would highlight the internal inconsistencies and ambiguities in the provisions governing RMLs in India and analyse their implications; and lastly, I espouse the ‘product governance’ model of regulation as the ideal approach for mitigating the risks intrinsic in the RML market. To make that argument, I would juxtapose Indian RML regulations with those of the US and delve into the theories of financial regulation. Kindly note that this article synonymously uses the terms ‘borrower’ and ‘mortgagor’, and ‘lender’ and ‘mortgagee’. II.          Explaining RMLs – Characteristics, Rationale, and Risks A.    Characteristics of RMLs RMLs, as explained, are the opposite of traditional mortgage loans as, in RMLs, it is the lender and not the borrower who makes periodic payments (or gives a lump-sum or line of credit) for a fixed period of time or till the latter’s death. The borrower is not bound to service such debt during his/her lifetime. The mortgage money is recovered by the sale of the property at the end of the borrower’s lifetime, although his heirs have the right to redeem the mortgaged property before its sale. It is considered extremely attractive source of income for senior citizens who are ‘house-rich’ but ‘cash-poor’. Per Syzmanoski (pp.6-10), due to the lack of periodic debt servicing, RMLs are characterised by ‘rising debt’ and ‘falling equity’ – which is the reverse of what happens in a conventional mortgage (see Figures 1 and 2). They are also non-recourse loans, implying that nothing beyond the value of the mortgaged home can be recovered by the mortgagor (see here and here). Figure-1 (Conventional loan): This graph shows that conventional mortgages have falling debt and rising equity. Figure-2 (RML): This graph shows rising debt and falling home equity in an RML.   B.    The economic rationale underlying RMLs Understanding RMLs involves delving into economic theories such as Modigliani’s Life Cycle Hypothesis (‘LCH’) and Friedman’s Permanent Income Hypothesis (‘PIH’) which argue that people tend to smoothen their consumption over the course of their lifetime. Modigliani (pp.305-306) posits that people save part of their income as wealth until retirement. After they retire, they dissave their accumulated savings (or wealth) for maintaining the same level of consumption till the end of their lifetime (see Figure-3). LCH can properly explain the purpose behind RMLs. This is because in RMLs, senior citizens subsequent to retirement follow LCH by expending their accumulated wealth or home equity (and, thus, dissaving) to source income for their remaining life (Sehgal, pp.170-171). Similar conclusion can be reached using PIH because of the income-smoothening rationale of RMLs (see Baily et al, p.24 and Bergman et al, p.27). Figure-3 (Life Cycle Hypothesis and RMLs): The graph shows how individuals maintain the same level of consumption throughout their lifetime. They save part of their income as wealth until their retirement. The triangle depicts rising wealth till retirement. Upon retirement, this wealth is expended/dissaved till the end of lifetime. RMLs work as a mechanism that gradually dissave this self-acquired wealth (in the form of home equity) to maintain a constant level of consumption. C.    Risks associated with RMLs Cross-over risk is the principal concern faced by RML lenders (Wang et al, p.346). It happens when the value of the loan exceeds the property’s value. It can happen due to three reasons (see Syzmanoski, pp.351-345): (a) the unexpected longevity of the borrower (Bank for International Settlements, pp.8-13), (b) fluctuating interest rates, and (c) when the property’s value did not rise as expected. Risk-averse lenders take mortgage insurance to avoid such losses (Syzmanoski, pp.347-349). In addition to the cross-over risk faced by lenders, borrowers also face longevity risk in fixed-term RMLs since they (and their spouses) face the risk of eviction on early loan termination. This can happen when the RMLs have a fixed period and this period does not extend till the end of the borrower’s lifetime. In addition, although most borrowers seem to favour lump-sum RMLs with fixed exchange rates, these are considered riskier than the other remaining modes of disbursing RMLs, namely, annuities and floating interest rates (Fuente et al, p.185). Moreover, the costs and interest rates of RMLs are generally higher than those of conventional loans (see Jakubowicz, p.184 and here). III.          Indian RML Regulations: Inconsistencies and Blind-spots The Central Board of Direct Taxes introduced the Reverse Mortgage Scheme (‘RMS’) through a notification under Section 47(xvi) of the Income-tax (Amendment) Act, 2008,

[By Aarya Parihar] The author is a student of Dr. Ram Manohar Lohiya National Law University. Account Aggregator Framework Have you ever wondered about consolidating all your financial data in one place? This is exactly the function the newly announced Account Aggregator Framework by Reserve Bank India (“RBI”)will carry out. This framework will put all your financial data in one place, that can be accessed by Financial Information Users (“FIUs”) for various purposes. One of the important functions is assessing the creditworthiness of an individual before sanctioning a loan by an FIU. The framework will consist of two more important players: Financial Information Providers (“FIPs”), who will provide the financial information, and Account Aggregators (“AAs”), who will store the financial information and will act as a link or consent/data fiduciary between the Individuals and the FIUs in providing data. AAs will extend the financial data forward only after receiving the due consent of the individuals. AAs can be a Non-Banking Financial Company (“NBFCs”) and other companies registered with the RBI. FIPs can be banks, mutual funds, pension funds, and some NBFCs, as may be notified by the authority. FIUs can be Banks, lending agencies, etc. The RBI framework of 2016 is the main piece of directive backed by an authority that discusses and lays down rules and regulations for the NBFCs signing up as AA. It also defines FIPs and FIUs in sub-section 3(xi) and 3(xii), respectively. Further, it lays the process of registration for NBFCs and also the consent architecture in place to protect the data of the individuals. History of Account Aggregator in India Account Aggregator in India is still at a very nascent stage. Its inception dates back to a meeting of the Financial Stability and Development Council Sub-Committee (“FSDC-SC”) held in 2013. The FSDC-SC for the first time manifested its desire to put in place a system where the financial data of individuals will be aggregated in one place. The Financial Stability and Development Council (“FSDC”) was set up in 2010 with the Finance Minister as its Chairperson, and other members included officials from RBI. Later, the Sub-committee was established with the Governor of RBI as its Chairperson. After that, there were different meetings every year of FSDC and FSDC-SC separately where the issue of Account Aggregator came up frequently for discussion. Finally, in the 552nd Meeting of the Central Board of RBI, the then Governor Shri Raghuram Rajan announced that the RBI would soon release the guidelines relating to the Account Aggregator framework. Thus, came the RBI’s Non-Banking Financial Company – Account Aggregator (Reserve Bank) Directions, 2016, which enumerated, among other things, definitions, duties, and procedures to carry out Account Aggregation in India. Open Banking in Other Jurisdictions The Account Aggregator Framework in India is similar to the Open Banking system in other countries. Open Banking refers to the consolidation of an individual’s financial data in one place with the involvement of banks, NBFCs, fintech companies, and government regulators. This data is shared securely among these entities, leading to a more accessible and efficient financial system. Some of the aforementioned players might be absent in one or the other jurisdiction since the Open Banking system varies around the globe. Nonetheless, the gist and crux remain the same: to consolidate and use the financial data of individuals for various lawful purposes. The implementation of Open Banking varies around the globe, with approaches categorized as mandatory, supportive, or neutral. In mandatory jurisdictions, implementation is forced by law, while in supportive jurisdictions, regulators encourage implementation without any legal requirement. In neutral jurisdictions, private industry leaders drive the adoption of Open Banking. The aim of Open Banking is to increase competitiveness and streamline the borrowing process, making it more inclusive. Some countries with mature Open Banking systems include United Kingdom, Singapore, Australia, and Japan. The rationale or aim behind Open Banking is also to increase competitiveness and to facilitate and quicken the financial borrowing mechanism. It aims to make it hassle-free and more inclusive. There are various countries where this system has become adequately mature and is working properly. I will discuss some of the countries with different approaches where this model has significantly matured or is adequately implemented. United Kingdom It can be safely argued that the Open Banking system in the UK is in its most mature phase if we compare it to that existing in any other jurisdiction. The whole ecosystem of Open Banking in the UK is authority-driven, or a mandatory approach is taken by it. It all started with a Retail Market Investigation Order 2017 by the Competition and Markets Authority (“CMA”) which required the nine largest banks to open up their financial data to third-party providers (“TPPs”) or entities mentioned in the order. The order laid down various guidelines and rules for the compliance by the banks and TPPs in the journey of Open Banking. Subsequently, the Open Banking Implementation Entity (“OBIE”) was formed to facilitate the implementation of the ecosystem devised by CMA. It is also important to allude to the Payment Service Regulation (“PSR”), which transposes Payment Services Directive 2015 (“PSD2”) into the national scenario of the UK. PSD2 is a regulation promulgated by European Union (“EU”), and it requires banking institutions to share financial data with TPPs after taking the consumer’s consent. It was mandated for all the EU nations to implement this directive in their national law by January 2018. PSD2 does not explicitly endorse Application Programming Interface (“APIs”) as the medium of sharing the information, whereas PSR of the UK requires Banks to utilise common APIs to share financial data. This piece of legislation is also instrumental in the growth of Open Banking in the UK. Technically, after Brexit, the UK has no obligation to follow the PSD2 directives, but due to constant interaction with European institutions, it still follows them to a certain extent. In March 2022, the OBIE was replaced with a cross-authority committee led by Financial Conduct Authority (“FCA”) and the and the Payment

[By Eilin Maria Baiju and Hemang Arrora] The authors are students of Gujrat National Law University. Introduction Post the Punjab and Maharashtra Cooperative Scam, the Banking sector of the country faced quite a setback affecting the financial market as well as disrupting the trust of innocent depositors. As eye-opening as it was for the banking sector, it also showed the Indian economy the need for regulating the conduct of the corporative bank sector. The cooperative banking of India had major age-old lacunas owing to the dual regulatory framework under the Reserve Bank of India and the Registrar of Cooperative Societies. That is the Urban Cooperatives Bank is supervised by the Registrar of Cooperative Societies whereas the licensing, regulation, and supervision are vested with the RBI. Under Schedule VII of the Indian Constitution, the regulation of corporate banks is a subject of both the State and the Centre. The problem originated from the 1966 rule[i] that extended the applicability of the provisions over certain categories of cooperative banks provided under the Reserve Bank of India. By the virtue of the 2020 amendment, these lacunas were attempted to be cemented and certain new progressive measures were implemented. These include changes pertaining to the cash reserve ratio, restrictions on holding shares and lending loans and advances, regulation of the board of directors, etc. Towards the end of this paper, the authors have also made a humble attempt to discuss how the amendment act possibly took away the Legislative powers of the State under Item 32 List II in Schedule 7 and discusses the constitutionality of the amendment act. Significance and Scope of Study The Banking Regulation Co-operative Societies Rules[ii] along with the amendment created Part V and extended the applicability of provisions to certain sectors of cooperative banking societies under the Second Schedule of the Reserve Bank of India Act.[iii] This not only constituted the conflict of interest between the Centre and the State but also helped in the budding of future scams in the banking sector. The scope of this study is to analyse the developments revolving around the 2020 amendment act[iv] and the recent measures of the Reserve Bank of India through various precedents and analyse the rationale behind the respective cases, by following a doctrinal type of interest. The Banking Ordinance: Formulation, Implementation, and Implications India’s banking system has often been criticized for its dual framework for regulating cooperative banks. There has always been a tussle between the Registrar of Cooperative Societies (‘ROCS’) and the Central Bank of India, i.e., the Reserve Bank of India (‘RBI’).[v] Although, at a broad level, the ROCS primarily deals with the administrative aspects of such banks like auditing and managing elections, on the other hand, the RBI deals with finance-related factors like the minimum liquidity ratio, maintenance of cash reserves, inspection, etc. The past indicates several flaws in the framework, which has led to inadequate measures in resolving those banks’ financial distress, which is finding it difficult to perform their everyday functions.[vi] A few of such failures include the government’s lack of success in reviving the cooperative bank of Madhavpura, wherein a ten-year plan scheme was implemented, but the same could not restore the bank.[vii] Similarly, in 2019, seeing Punjab and Maharashtra Cooperative Bank’s condition, the Reserve Bank of India was forced to issue directions under S.35A(1)[viii] to limit depositors’ daily withdrawals and take hold of the bank’s operations.[ix] The Rajya Sabha had recently passed the Banking Regulation (Amendment) Bill 2020 (Bill) in its session on September 22, 2020. Several aspects of the Bill will impact the banking industry long-term. It aims to alter the Banking Regulations Act (Act) and broaden its scope to include cooperative banks’ operations. While introducing the Bill in parliament, Finance Minister Nirmala Sitharaman stated that, in light of the recent failures of the Punjab and Maharashtra Cooperative Bank and other cooperative banks, it was imperative to regulate the conduct of such cooperative banks whose failures had severely impacted the financial market and disrupted depositor’s trust in the banking industry. Without a moratorium, devise a plan for reconstruction or merging Post the task of placing a bank under a moratorium, the Reserve Bank of India may propose a strategy for its amalgamation or reconstruction under the Banking Regulation Act. This could be done to ensure good bank administration or protect depositors, the banking system, or the wider public. For up to six months, banks that have been put under a moratorium are immune from legal action. Furthermore, banks will be unable to make any payments or discharge any liabilities during the moratorium. The Bill empowers the Reserve Bank to launch a bank restructuring or consolidation scheme without imposing a moratorium on a stressed lender.[x] Issuance of shares by the corporate banks Under the new BR Amendment Bill 2020, cooperative banks are exempt from the provision on the issuance of securities and shares. Other banks are permitted to issue equity or preference shares, and the RBI has the authority to impose preference share issue restrictions. In most cases, voting rights are distributed on a one-to-one basis. An equity shareholder’s voting rights are limited to 15 per cent under the Act (read with the directions of the Reserve Bank of India). Hence, no person would be entitled to demand towards surrender of shares issued by a co-operative bank in future. The bill changes the Banking Regulation Act to allow cooperative banks to offer equity, preference, or special shares to members or other persons who live in the banks’ operational zone at face value or at a premium, subject to the Reserve Bank’s approval. Unsecured debentures or bonds with a 10-year maturity period may also be issued by banks.[xi] Without clearance from the Reserve Bank, banks are unable to withdraw capital. Members are also not eligible for reimbursement from the bank if they relinquish their shares. Provisions related to the appointment of chairman, qualification of Board, etc. Prescription of management qualifications: Cooperative banks are exempt from the Banking Regulation Act’s restrictions on

[By Aayush Panwar] The author is a student of Gujarat National Law University, Gandhinagar. Introduction Banking and financial instruments are constantly evolving to suit the changing demands of the economy and business. Core banking and digitalization have contributed to the transformation of the banking industry from a traditional money lender to a modern banking system. Fintech and blockchain technology are the two fundamental components of digital banking. NEO Bank is one such evolution. NEO Bank is similar to any other commercial bank, with the difference of no physical presence, operating solely through digital modes. This is not a payment bank or e-wallet, it includes all the features of a commercial bank, and therefore no external bank account is to be linked to NEO Banks.[i] But these banks are not yet authorized with a banking license and are dependent on a banking service partner to provide other utility services like lending loans or issuing credit cards.[ii] This article throws light on necessity of NEO Banking, issues associated with its growth and proposing the solution to deal with this as NEO Banking will help in opening up a large horizon of fintech possibilities overcoming all the limitations of payment banks. Factors Affecting growth of neo banks There are various factors that are hampering the growth of NEO banks, especially in India. One of the pillars of the banking industry is the confidence of the public in the country’s banking system. For example, in Italy, only 37% of the population trusts the banking system of their country, and in France, a mere 27% of the population.[iii] In India, where a large portion of the population is not covered by the banking system, building trust through an online presence that does not involve cash is a herculean task. The NEO Banks, in the current legal scenario of the country, do not perform the core banking functions and offer limited products, which keeps away the High-Net-worth Individuals away from them. Another hurdle faced by them is the safety and security concerns which cannot be denied in the current scenario, where it is expected that the next world war will not be fought by arms and ammunition but will be a data war. Secured digital infrastructure, as well as awareness and assurance of customers, is a worrying fact. However, NEO Banks can easily overcome these hurdles keeping in mind the growth potential for such evolution in the banking sector. Legal Analysis Currently, in India, NEO Banks are just the FinTech companies performing some of the functions that appear to be banking functions, but as such, they cannot be called a bank. RBI does not allow for the grant of virtual banking licenses. RBI, in Master Circular on Mobile Banking Transactions, has mandated the physical presence of digital banking service providers. Since they are not recognized by the RBI and are therefore required to form a strategic partnership with the existing banks to provide services like the issue of debit/credit cards etc. They are also outsourcing their core banking functions to the license holders and provide services on their behalf. In many cases, such banks and fintech companies enter into an outsourcing arrangement where the non-banks verify data for credit requests or undertake the preliminary work for opening current accounts.[iv] This arrangement is governed by RBI Guidelines on Code of Conduct in Outsourcing of Financial Services by banks and RBI Guidelines on Financial Inclusion by Extension of Banking Services. In countries like the USA and Australia, NEO banks are recognized as banks.[v] Even Singapore and UAE have recently rolled out digital licenses to such entities.[vi]  But on the other hand, it cannot be said that the NEO Banks are working in an unregulated environment or are trying to doge the regulatory framework of various regulators, especially RBI. In one way or the other, they are regulated by the various laws, regulations, or bye-laws of the regulators, e.g., since they are in strategic partnerships with banks and NBFC, certain guidelines like Guidelines for engaging Business Correspondents under Master Circular on Branch Authorisation, Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by Banks, Framework on Outsourcing of Payment and Settlement related activities by Payment System Operators and Master Direction on Digital Payment Security Controls. Apart from that, as NEO Banks also offer services like Investment Advisories and Insurance Products, they are also regulated by their respective regulators like SEBI Guidelines on Outsourcing of Activities by Intermediaries and IRDAI (Outsourcing of activities by Indian Insurers) Regulations. These are just some of the regulatory frameworks applicable to them, and there are various other rules applicable to them. All these regulations are applicable only through the contractual relationship between NEO Banks and their partner organisations. They are not regulated independently, which is a matter of concern. Notwithstanding the above rules, NEO banks are additionally committed to consent to information security regulations since they work with various administrations between the shopper and the financial establishments by giving an internet-based stage. The Indian information protection system is set out in the Information Technology Act 2000 and the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 (SPDI Rules). The laws will be more stringent with the passing of the Data Protection Bill, 2022. Role in Economy In India, it is very much evident that technological advancement has led to an increase in digital banking transactions. As per PWC, digital payments have increased many folds. In 2020, the country recorded around 50 billion digital banking transactions, and was expected to rise even more. In the span of one-year, mobile banking users have increased by 13% in value and 92% in volume.[vii] A study suggests that by 2025, around 70% of the transaction will be undertaken digitally, either over internet banking or mobile banking.[viii] This shows the tilt of the population towards the new digital banking solutions, which are more efficient and cost-friendly than the traditional banking system. As per the reports of Venture Intelligence,

[By Kapil Devnani]  The author is a student at the Hidayatullah National Law University, Raipur.  Section 138 of the Negotiable Instrument Act, 1881 (hereinafter “NI Act”) is a penal provision that allows the payee to institute a suit against the payer in case the cheque drawn by him got dishonoured. Recently, in the month of January 2022, three important judgements of different High Courts regarding this provision came. The first one is Parvaiz Ahmad Bhat & Anr. v. Fida Mohamamd Ayoub, given by the Jammu and Kashmir and Ladakh High Court; the second one is Rajeswary v. State of Kerala, given by the Kerala High Court; and the last one if Kodam Danalakshmi v. State of Kerala, given by the Telangana High Court. This blog is an attempt to comprehend the scope of Section 138 through these decisions. Parvaiz Ahmad Bhat & Anr. V. Fida Mohamamd Ayoub (Dishonour of cheque due to incomplete signature will be considered as an offence under Section 138) Facts of the Case In this case, the Petitioners challenged the complaint that was filed by the Respondent against them under Section 138 of the NI Act read with Section 420 of the IPC. The complaint was still pending before the CJM, however, by an order dated August 27th, 2020 the learned Magistrate issued the process against the Petitioners, to which the Petitioners responded and filed the petition before the Jammu and Kashmir and Ladakh High Court. The issue in this case was that the Petitioner’s cheque was dishonoured due to an incomplete signature on the cheque, and the High Court needed to decide whether or not this constituted an offence under Section 138 of the NI Act. The Petitioner argued that the Respondent’s complaint is not maintainable because the cheque got dishonoured due to incomplete signature and not because of insufficient funds. They relied on the case of Vinod Tanna v. Zaheer Siddqui,  (hereinafter “Vinod Tanna’s case”) in which it was held that the dishonour of cheque just because of incomplete signature will not attract Section 138 of the NI Act. Analysing the Judgement A mere reading of Section 138 is sufficient to conclude that this provision is attracted in two situations. First, when the individual drawing the check has insufficient funds in his or her bank account and second, if the amount to be paid is greater than the amount arranged to be paid from that account. However, there have been instances where the dishonour of the cheque was the result of some other reasons, but the judiciary allowed the application of Section 138. The Supreme Court in NEPC Micon Limited v. Magma Leasing Limited, held that Section 138 should not be interpreted strictly and for giving this verdict it relied on the cases of Kanwar Singh v. Delhi Administration and Swantraj and Others v. State of Maharashtra, in which it was held that the narrow interpretation of this provision will defeat the legislative purpose for which it was enacted. Walking on the lines of these judgments, the Supreme Court in M.M.T.C. Ltd. v. M/S Medchl Chemicals held that in case a cheque is dishonoured because of the instruction to stop payment, then Section 138 would be attracted. The only protection available with the petitioner in this case was the verdict of Vinod Tanna’s case, however, this verdict of the Supreme Court came up for consideration in Laxmi Dyechem v. State of Gujarat. In this case, the SC did not follow the ratio laid down in the case of Vinod Tanna and the reason was that the case of Vinod Tanna was based on the verdict of Electronics Trade & Technology Development Corpn. Ltd. v. Indian Technologists and Engineers Ltd, however, the same was overruled by the case of Modi Cements Ltd v. Kuchil Kumar Nandi. In Laxmi Dyechem, the Supreme Court held that in case the cheque is dishonoured due to incomplete signature or wrong signature, Section 138 will be attracted. Both the judgments of Vinod Tanna and Laxmi Dyechem were given by the bench of equal strength. However, Laxmi Dyechem’s case is the latest one and based on that the SC in the present case gave the decision in the favour of the Respondent and held that in case a cheque has been dishonoured just because of incomplete signature, then in that scenario Section 138 would be attracted.  Rajeswary v. State of Kerala (The Case of Cheque Bounce under Section 138 could be closed in case the fine is paid directly to the Complainant) Facts of the Case In this case, the accused was convicted by the trial Court under Section 138 of the NI Act for simple imprisonment for a period of 1 year and further to pay a fine of Rs.7,17,000/- and in case of default, additional imprisonment for further 3 months. Later on, the Kerala High Court modified the imprisonment of 1 year awarded by the Trial Court as a sentence to pay a fine of Rs.7,17,000/-. Following that, the convict paid the plaintiff the fine of Rs.7,17,000/-, which was acknowledged by the plaintiff himself when he issued a receipt of the transaction. Thereafter, the convict presented that receipt before the Trial Court and requested to close the case. However, the Court rejected this petition, stating that the convict was required by the Court’s Order to deposit the amount of fine in the Court, but he instead paid the fine directly to the plaintiff, so the Court could not accept the receipt of the payment and the case would continue. Aggrieved by this, the convict preferred an appeal before the Kerala HC. Analysing the Judgement The question before the HC was to determine whether the case of cheque bounce be closed in case the convict pays the fine directly to the plaintiff. To determine this, the Court relied on the judgment of Beena v. Balakrishnan, (hereinafter“Beena’s case”) in which it was held that if the person receiving the fine directly from the convict (in this case, the petitioner) files