Banking Law

[By Shobhit Shukla] The author is a student of Maharashtra National Law University, Mumbai.   In an effort to stop more damage in the banking industry, US regulators on May 1, 2023 seized struggling First Republic Bank and immediately sold all of its deposits and the majority of its assets to the nation’s largest bank, JPMorgan Chase. In the past few months, this is just another example of a bank collapsing post-COVID-19, adding it to the long list of major banks around the world such as Credit Suisse, Silicon Valley Bank, and Signature Bank. India however has remained a shelter during this global financial crisis. This is not unprecedented however, a similar outcome was also seen in 2008 where India with its domestic institutions, supported by good regulatory policies, displayed resilience uncanny to any other jurisdiction. This is remarkable because in the banking sector, unlike other industries, perception affects a majority of the business. As is the case in the current crisis, customers may run on the bank and cause liquidity problems, if they think the banks are about to declare bankruptcy. This perception by the customers has been at the core of the issue regarding the recent collapse of the banking sector around the world, therefore analysing the country’s banking system, with recent regulations to contain this becomes imperative. With reference to this, the article will examine recent measures that the regulator has implemented to lessen perception-based banking in India. In the age of startups and digitization, it will also examine how secure Indian banks have historically performed, particularly in response to some specific policy and judiciary measures. The article analyses the extent to which the government and the regulator have been involved with keeping the sector in check. Lastly, the article will analyse various case laws and their effect on the sector in India, and while also appreciating the regulator for its notable achievements, the article will conclude with some recommendations for what lies ahead. Introduction The Indian banking system has shown remarkable resilience in the face of various crises, such as the 2008 global financial crisis, and the recent post-COVID-19 pandemic banking crisis around the world. This resilience is attributable to a range of factors, including strong regulatory oversight, sound risk management practices, and a conservative approach to lending.  In recent years, the Reserve Bank of India (“RBI”), government, and judiciary have taken several steps to address issues related to the resilience of the Indian banking system. The RBI has issued several circulars and master directions aimed at strengthening the banking system and improving its resilience. For instance, in February 2021, the RBI issued a circular on the ‘Resolution Framework 2.0 for COVID-19 Related Stress’, which aimed to provide relief to borrowers affected by the pandemic and prevent the build-up of Non-Performing Assets (“NPAs”) in the banking system. The RBI has also taken measures to improve the governance and accountability of banks. In August 2020, the RBI issued a ‘Governance in Commercial Banks’ circular, which outlined the roles and responsibilities of board members and senior management in ensuring effective governance and risk management in banks. In addition, the government has taken steps to strengthen the banking system through legislative reforms. In September 2020, the government passed the Banking Regulation (Amendment) Act, 2020, which aimed to improve the regulation and supervision of cooperative banks in India. Lastly, even the judiciary has also played a role in curbing issues related to the resilience of the banking system. Overall, these efforts are aimed at ensuring that the banking system remains stable and resilient, even during times of economic stress and uncertainty. Policy-Based Measures Capital Adequacy One of the key measures of a bank’s resilience is its capital adequacy. Capital adequacy refers to the ability of a bank to absorb losses and continue to operate. In India, the RBI has set minimum capital adequacy norms for banks, which are in line with the Basel III framework. The minimum capital adequacy ratio (CAR) for banks is set at 9%, with a minimum Tier I capital ratio of 6%. The RBI’s guidelines on capital adequacy require banks to maintain capital levels that are commensurate with the risks they undertake. The guidelines require banks to assess their capital needs based on their risk profile and to maintain a buffer above the minimum regulatory requirement. Banks are also required to maintain capital conservation buffers, which are designed to ensure that banks have adequate capital during periods of stress. Risk Management Sound risk management practices are critical for ensuring the resilience of banks. In India, the RBI has put in place a range of guidelines and regulations to ensure that banks adopt sound risk management practices. The RBI’s guidelines on risk management cover various aspects, including credit risk, market risk, operational risk, and liquidity risk. The guidelines require banks to conduct regular stress tests to assess the impact of adverse economic scenarios on their portfolios. The RBI’s guidelines on market risk management require banks to adopt appropriate risk management policies and practices to manage their exposure to market risk. The guidelines require banks to conduct regular stress tests to assess the impact of adverse market scenarios on their portfolios. Liquidity Risk Liquidity risk refers to the risk of not being able to meet obligations as they fall due. In India, the RBI has put in place regulations to ensure that banks have adequate liquidity buffers to manage their liquidity risk. The RBI’s guidelines on liquidity risk management require banks to maintain a liquidity coverage ratio (LCR) of at least 100%. The LCR is designed to ensure that banks have sufficient high-quality liquid assets to meet their obligations during a 30-day stress scenario. Judiciary’s Perspective The Banking Regulation Act, 1949 (“the Act”), is the primary legislation governing the banking system in India. The Act provides for the regulation and supervision of banking companies in India and is designed to ensure the stability and soundness of the banking system. The Act also provides for the regulation of the business of

[By Naman Kothari] The author is a student of Government Law College, Mumbai.   Introduction This assessment delves into the flaws surrounding the issuance of bank licenses in India, with a focus on two crucial aspects. Firstly, it examines the shortcomings of the ‘fit and proper’ criteria, which lack precise guidelines and introduce subjectivity, potentially leading to favoritism and arbitrary decision-making. Secondly, it scrutinizes the refusal of licenses by the Reserve Bank of India (RBI) and the existing redressal mechanism. Specifically, it explores the need for transparency and fairness in the licensing process under the guidelines for ‘on tap’ licensing of universal and small finance banks in the private sector. The “Fit and Proper” Criteria: The “fit and proper” criteria entail various requirements, such as the eligible promoters (both individuals and entities/non-banking financial companies) having a minimum of 10 years of experience in banking and finance at a senior level. Additionally, they should possess a track record of sound credentials, integrity, financial soundness, and a successful professional history of at least 10 years. For entities, preference is given to those with a diversified portfolio in the case of Universal Banks. Furthermore, for Small Finance Banks, applicants must exhibit a record of sound credentials, integrity, financial soundness, and a successful track record of professional experience or running their businesses for a minimum period of five years. However, it is noteworthy that these criteria remain highly ambiguous, leaving significant room for subjective discretion by the RBI. The lack of precise guidelines in these areas introduces a potential for arbitrariness and invites allegations of favoritism. Despite revisions to the previous guidelines, this aspect has not been effectively addressed, perpetuating the concerns surrounding the subjective nature of the “fit and proper” criteria. To effectively assess whether a promoter meets the criteria of being “fit and proper” under the aforementioned guidelines, the RBI exercises its authority to conduct a comprehensive multi-layer scrutiny process. This includes the ability to request additional information from the promoter at any stage of the examination process, ensuring a thorough evaluation. Furthermore, the RBI has the power to collaborate with other regulatory bodies, as well as enforcement and investigative agencies such as the Income Tax Department, Enforcement Directorate, and the Central Bureau of Investigation (CBI), to review the promoter’s history and obtain relevant information. This level of scrutiny provides the RBI with a detailed understanding of the promoter’s background and financial standing. Though this level of discretion also allows a window for potential corruption or undue influence, where applicants may seek to manipulate or circumvent the scrutiny through illicit means. The subjective nature of assessing a promoter’s history, credentials, and financial standing introduces an additional challenge, as it allows for varying interpretations in the decision-making process. This subjectivity opens the door to apprehensions of bias, favoritism, or arbitrary decision-making, thereby eroding stakeholder and public confidence in the integrity of the licensing process. Refusal of License by RBI and Redressal Mechanism: Vide its press release dated April 15, August 30, and December 31 2021 the RBI announced names of Applicants under the Guidelines for ‘on tap’ Licensing of Universal Banks and Small Finance Banks in the Private Sector. A) The applicants under Guidelines for ‘on tap’ Licensing of Universal Banks: UAE Exchange and Financial Services Limited. The Repatriates Cooperative Finance and Development Bank Limited (REPCO Bank). Chaitanya India Fin Credit Private Limited. Shri Pankaj Vaish and others. B) The applicants under Guidelines for ‘on tap’ Licensing of Small Finance Banks: VSoft Technologies Private Limited. Calicut City Service Co-operative Bank Limited. Shri Akhil Kumar Gupta. Dvara Kshetriya Gramin Financial Services Private Limited. Cosmea Financial Holdings Private Limited. Tally Solutions Private Limited. West End Housing Finance Limited. On May 17, 2022, the RBI issued its decision regarding the 6 applications out of the 11 names provided earlier. The RBI declared that all applications submitted for the establishment of universal banks, specifically VSoft Technologies Private Limited, and Calicut City Service Co-operative Bank Limited under the category of Small Finance Banks, have been rejected. However, the applications of the remaining candidates are still under examination by the RBI. It is noteworthy that the RBI did not provide any specific reasons other than deeming the rejected entities unsuitable to receive a banking license. According to the guidelines set forth in 2016 and 2019, the RBI has the authority to reject applications if they fail to meet the “fit and proper” criteria and is not obligated to provide any reason for rejection. The applicants are also required to submit their business plans along with applications, which should be realistic and viable. The RBI holds the authority to assess the business plan and may impose penalties or restrictions if there is a deviation from the stated plan even after the issuance of a license. The business plan should address key aspects such as achieving financial inclusion, including the underlying assumptions, existing infrastructure, product lines, target clientele, target locations, utilization of technology, risk management, human resources, branch network, presence in unbanked rural areas, compliance with priority sector requirements, and financial projections for a period of five years. It is evident that, alongside the “fit and proper” criteria, the submission of a meticulously detailed business plan plays a pivotal role. It should be noted that any deviations or provision of incorrect information/objectives in the business plan may serve as grounds for rejection. The process for obtaining a banking license under the 2016 and 2019 guidelines is the same and it involves several stages. Initially, the applications are screened based on eligibility criteria provided in the guidelines, with the possibility of applying additional criteria beyond the prescribed “fit and proper” requirements. Subsequently, the RBI establishes a Standing External Advisory Committee (SEAC), comprising experienced individuals from the banking, financial sector, and relevant fields. The SEAC develops its screening procedures, periodically convenes meetings, and has the authority to request more information, hold discussions, and seek clarifications from applicants. The SEAC then presents its recommendations to the RBI for consideration. Further in the process,

[By Mahim Raval] The author is as student of Gujarat National Law University.   Introduction Recently, on 11 April, 2023 Reserve Bank of India (RBI) issued guidelines for Green Deposit framework for Scheduled Commercial Banks (SCBs), Non-Banking Financial Companies (NBFCs), & Housing Finance Companies (HFCs) excluding Regional Rural Banks (RRBs), Local Area Banks (LABs), and Payments Banks, which have now become effective from 1st June, 2023 onwards. This comes in the backdrop of RBI’s joining the Central Banks and Supervisors Network for Greening the Financial System (NGFS) in April, 2021. NGFS is a consortium of central banks of various countries which aims to green the financial ecosystem and sharing their experience and best trade-practices. It is in line with the release of discussion paper titled, ‘Climate Risk & Sustainable Finance’ by RBI in July, 2022 and also the speech of the deputy governor wherein he emphasized upon the role of banking institutions towards national environmental commitments. Green deposits are mainly interest-bearing deposits which aims to fund green ventures and activities. This helps to channel the depositor’s funds towards green initiatives which are still in nascent developmental stage and needs external funding to survive. However, for successful implementation of such initiative in Indian Financial system which needs necessary regulatory guidelines as well as an formal green taxonomy to address the concerns and apprehensions. This move can be seen as a pioneering one to making provisions for voluntary disclosures and third-party inspections for safeguarding depositor’s interests. Green deposits are no different than regular deposits, however the primary aim of ‘green’ deposit is to fund green projects and entice individuals and corporates to venture into green projects and activities. Before this framework, the green deposits were already in existence and offered by companies like HDFC Green & Sustainable Deposits and Federal bank. The eligibility criteria to classify a particular activity or project as a green one is listed out in the framework under different heads. This will be applicable on the ‘regulated entities’, and they will have to disclose their deposits and money raised in a particular financial year annually. In this article, the author will discuss upon the existing green deposits (GD Framework), greenwashing and other concerns, and potential solution for effective implementation of it in India. Framework Financing Aspects Various eligible activities and project enumerated in Para 7 can be financed with help of funds raised through such green deposits. RBI mentions that allocation of funds shall be done on the basis of introduction of formal green taxonomy however, since it is not yet functioning, it should be utilized for reduction of carbon emissions, incorporating energy efficiency in resource utilization as well as promoting preservation of natural ecosystem and biodiversity. To ensure that funds are utilized for these activities only, allocation & distribution of funds shall be approved by Board of directors of the regulated entity (RE) only. Supervision RBI has mandated that there should be a supervisory as well as advisory role of the board of directors of the RE. Every RE shall submit a comprehensive report about the implementation to its board of director in the initial 3 months of the new financial year. The board of directors shall be held responsible for overseeing the overall apprehended risks and controls, and it shall appoint the requisite experts to ensure that financial risks posed by climate change & degradation can be mitigated. Senior management and key managerial personnel shall also be updated about national & international policy initiatives and developments. In long term, such supervision will serve as a crucial aspect in effective implementation & enforcement of policy guidelines and it shall be also responsible for hiring the necessary workforce and training them to implement green policies. Disclosures REs shall disclose the amount & details of raised funds through green deposits while submitting their annual financial statements. The policy adopted and modified as per the need of the RE, framework related to raised funds, the report and suggestions of the third-party auditor as well as impact assessment report shall be disclosed and uploaded on the website of RE. The objective of such disclosure is to keep the depositors informed about the allocation of funds and investments in green initiatives done by the RE. This disclosure will help to keep a check on greenwashing and other concerns. Although, it seems that third-party auditing and reporting will help to provide authenticity and legitimacy of channeling of funds. However, it is not a complete solution and apprehensions related to integrity and accountability of such independent auditors are raised. Further, it could lead to a false sense of complacency. There is no regulation exists as of now to monitor those aspects however, RBI as an interim measure may implement stringent auditing system for these. One potential solution can be implementation of TFCD guidelines which will help the REs to disclose information in a better way. Third Party Audits In addition to the board’s primary obligation for adhering to the GD framework, including the end-use of funds authorized for green deposits, the RBI has added an extra check by subjecting REs to an objective third-party verification/assurance, which will be performed annually. Given that effect assessment is a developing field, the RBI has taken a flexible approach, as evidenced by its prescription enabling voluntary impact assessment for the fiscal year 2023-24. However, beginning with the fiscal year 2024-25, the same will be required. Furthermore, the RBI has established specific effect metrics for each category of qualifying project, such as ‘energy savings per year’ in the case of clean transport. If REs are unable to measure the impact of their lending/investment, they must explain the causes, the problems came across, and the time-bound future plans to remedy the same. The RBI’s ‘comply and explain’, solution-oriented, flexible, and forward-thinking approach allows some flexibility to REs. However, depositors face a problem. Because their funds are ostensibly being invested in green initiatives, there will be a need to ensure alignment between the pledge and actual investment, as well as

[By Anupama Reddy Eleti] The author is a student of Gujarat National Law University.   Introduction Recently the Supreme Court in the case of Yogesh Upadhyay vs. Atlanta Limited, established the power of the court under sec.406 of CrPC to transfer cases to include cases of cheque  dishonor under sec.138 of the Negotiable Instruments Act, 1881 (hereinafter “NI Act”). The court restored this power by “notwithstanding the non-obstante clause” present in sec.142(1) of the NI act, which provides for the procedure in which cognizance of sec.138 offences must be taken, as well as the territorial jurisdiction for such offences. The judgement delved into the jurisdictional conundrum surrounding sec.138 offences by tracing the evolution of cases on the same up until The Negotiable Instruments (Amendment) Act, 2015 (hereinafter “the 2015 amendment”) and conclusively justified extension of the scope of sec.406 by analyzing the underlying object of sec.142 and of the 2015 amendment. This article seeks to analyze the consequences of this judgement upon the rights of the drawer and payee of a cheque, in light of previous judgements and reasonings of the court. Background on the jurisdictional conundrum Earlier, a lack of clarity, broadness of legislation, and contrasting position of the judiciary in different cases, created confusion and burden on courts handling claims of territorial jurisdiction. Inundated with prosecutions on this issue, the apex court in K. Bhaskaran v. Sankaran Vaidhyan Balan (hereinafter “K.Bhaskaran”), framed five actions forming the essentials of the offence and declared, “the complainant can choose any one of those courts having jurisdiction over any one of the local areas within the territorial limits of which any one of those five acts was done”. Such leniency and expansive allocation of power in the hands of the payee to establish jurisdiction in a place of his convenience caused much expected upheaval. It was not until  Dashrath Rupsingh Rathod v State of Maharashtra & Anr (hereinafter “Dashrath Rupsingh”), that the court narrowed down the scope of jurisdiction. In this landmark judgement, the court observed that an unreasonable use of the court’s ruling in K.Bhaskaran as an instrument of oppression by the payee was leading to “hardship, harassment and inconvenience to the accused persons”. An unfair manipulation of the legal system by the payee for personal collateral benefits, while hindering the accused’s exercise of his right to fair trial was highlighted. The ratio in this instance was that the jurisdiction must be limited to the location of the drawee bank. In addition, the court expanded the scope of the ruling by giving it retrospective application, thereby offering relief to all accused. However, the Dashrath Rupsingh case only held the field for one year, until a subsequent amendment came about. The Negotiable Instruments (Amendment) Act, 2015 was introduced by the legislature with retrospective effect, upholding the rights of the payee. The present position of the law clearly demarcates the jurisdiction to try such an offence, in the Court within whose jurisdiction the branch of the Bank where the cheque was delivered for collection, through the account of the payee or holder in due course, is situated. The ordinance provided a definitive resolution to this confusion. Facts of the case In the present case, Yogesh Upadhyay and his proprietary concern, M/s. Shakti Buildcon, filed transfer petitions under Section 406 Cr.P.C. seeking the transfer of two cases titled ‘Atlanta Limited Vs. M/s Shakti Buildcon & Anr.’ pending before the Civil Judges at Nagpur, Maharashtra, to be tried along with four complaint cases titled ‘Atlanta Limited Vs. Yogesh Upadhyay’ pending before the Courts at Dwarka, New Delhi. These cases involved six cheques issued by the petitioners, out of which the first cheque was honoured, but the remaining six cheques were dishonoured on the basis of ‘Stop payment’ instructions. The first two complaint cases were filed in Nagpur, Maharashtra, as the first two cheques were presented there, and the remaining four complaint cases were filed in Dwarka, New Delhi, as the remaining four cheques were presented there. The counsel representing the respondent company argued that Section 142 of the Negotiable Instruments Act, 1881 superseded Section 406 of the Criminal Procedure Code (Cr.P.C.) due to the non-obstante clause present in Section 142. Consequently, the counsel asserted that the two cases filed in Nagpur, Maharashtra could not be transferred. Judicial Reasoning and Ratio Decidendi The court’s reasoning was three-fold. Firstly, it was noted that the ‘non-obstante clause’ is not a recent addition resulting from the amendment but has been present in the original Section 142 itself. It is to be noted that the amendment inserted two new additions, Sec.142(2) and 142A which clarified the territorial jurisdiction as well as attached retrospective application to it. Secondly, the non-obstante clause is present in Sec.142(1), which provides for certain procedural requirements that need to be fulfilled for cognizance of the offense. This includes, ensuring that the complaints for Sec.138 offences are filed within one month of the cause of action, unless the complainant can provide sufficient cause for the delay, allowing the court to take cognizance of the complaint even after the prescribed period. In light of this, the reasoning of the court in the instant case is that the non-obstante clause must be understood and applied only for the purposes of the section for which it is used and therefore cannot be taken to mean an express bar on the power of the court in Sec.406. Thirdly, the court placed reliance on a previous case, (A.E. Premanand Vs. Escorts Finance Ltd. & Others), wherein the court exercised its power under Sec.406  to transfer Sec.138 petitions. Herein the court found it appropriate in the “interest of justice” to transfer all petitions to be tried in one court. Owing to the foregoing reasons, the court finetuned the understanding of the non-obstante clause to state that, “notwithstanding the non obstante clause in Section 142(1) of the Act of 1881, the power of this Court to transfer criminal cases under Section 406 Cr.P.C. remains intact in relation to offences under Section 138 of

[By Mansi Verma] The author is a student of Gujarat National Law University.   Introduction Bank locker facilities continue to hold the popularity of bank’s customers as a secured safety vault guarded by the bank’s infrastructure. They keep the customer’s valuables, and any changes in such facilities’ operation directly impact the hirer. In this blog, the author primarily seeks to analyse how the new liability clause recently implemented by virtue of Reserve Bank of India (“RBI”) Locker facilities/Safe Deposit facility guidelines would affect the Banker Customer relationship vis a vis the position prior to the insertion of such a clause and what are the issues and challenges associated with the enforcement of the clause while proposing solutions for the benefit of the customers of a bank. RBI’s Safe Deposit Locker instructions Apart from performing their core functions of receiving money on deposit for the purposes of lending, commercial banks also perform several other ancillary functions in addition to their core functions, which include Agency Services and General Utility Services. The Safe Deposits Vaults, Safety Lockers or Bank Lockers form a part of a commercial bank’s General Utility Services. RBI, as the primal monetary authority of the nation, has powers under sections 35A, 45ZC and 45ZF of the Banking Regulation Act, 1949 Act read with Section 56 of the same Act to issue binding directions to the banking companies in the public interest. In exercising such powers, RBI issued the new binding Instructions on Safe deposit vaults (“revised instructions”), making the banks liable in case of loss of items placed in the locker under certain circumstances. Part VII of the revised instructions lays down the compensation policy and liability for Banks in cases of natural calamities, and Instruction Number 7.2 lays down “bank’s liability in events like fire, theft, burglary, dacoity, robbery, building collapse or in case of fraud committed by the employees of the bank”. The revised instructions entrust the liability  of  the bank to the tune of compensation if the events occur due to the bank’s own negligence with no fault on the part of the customer. When the events mentioned in instruction number 7.2 occur, the bank shall pay compensation amounting to 100 times the prevailing annual rent of the safe deposit locker. In light of the revised instructions, a timeline till 1 January 2023 was specified for the banks to renew their locker agreements with the existing customers incorporating the liability clause and ensuring the inclusion of fair terms. The Liability Clause: Issues and Challenges Including this clause in the new locker agreement is a promising provision in that it provides recourse to law for the customers availing the facility. However, long waiting lists make it difficult for the common man to avail the locker facilities and put their valuables in safe custody. In this regard, the Banks are undoubtedly in an advantageous position considering the stringent terms and conditions a customer must adhere to in the memorandum of letting. In this way, including the liability clause is a progressive step towards ensuring transparency and enhanced locker security standards. Examining the nuances of the provision, it is clear that the provision opens the legal avenues for the grant of relief to a   helpless locker holder who suffered the loss of items and had no remedy against redeeming the cost of the locker items because prior to the coming of the guidelines, the locker agreement contained a waiver of liability clause which ensured that the bank would not incur any liability to insure them. The current position of law requires the remedy to be sought in the court of law. The provision requires that the events mentioned in the provision must occur on the premises of the banks due to their own negligence, shortcomings or any act of omission or commission. This puts the burden of proof of negligence on the part of banks upon the customers. The Distorted Balance of power There is strong jurisprudence to show that it has been extremely difficult for the complainant customers to show knowledge on the part of the banks with respect to the contents stored in the locker as well as negligence on the part of the banks as it is standard industry practice for the banks to disclaim liability for the loss of goods kept in the locker. The cases of Mohinder Singh Nanda v. Bank of Maharashtra and Atul Mehra v. Bank of India are the most appropriate cases to show the distorted balance of power. In both these cases, the appellants could not prove knowledge of locker contents on the part of the respondent banks and could also not show the presence of the goods inside the locker. Hence even when there was a breach of duty on the part of the banks to take reasonable care of the goods, they could not be entrusted with the liability of the missing articles of the locker. The courts undoubtedly took a liberal route by lowering the threshold of proof for the customers, but that provided some respite. The national commission in Pune Zilla Madyawarti Sahakari Bank Limited v. Ashok Bayaji Ghogare even held that an affidavit of the locker holder, if not impeached by cross-examination can be accepted to prove the locker contents. However, even this was not very helpful as compelling evidence of the bank’s negligence and knowledge has to be shown by the customer claiming compensation. The issue of disparate positions taken by the banks regarding their relationship with the customer with respect to the contents of the locker was one of the astute observations made by the Competition Commission of India in the case of Amitabh Dasgupta v United Bank of India (Amitabh Das Gupta). The basis of making such an observation was non-uniform practices followed while assigning liabilities by commercial banks. The banks exhibited non-uniformity as some of them considered the facts and circumstances surrounding the loss of goods to assume liability, some strictly adhered to the conditions set out in the memorandum

[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,