Banking Law-model Paper

8/18/2019 Banking Law-model Paper

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Subject: BANKING LAW

Duration: 3 hours Max.Marks: 1

1.Write an ex!"anator# note on the $unctions o$ %o&&ercia" Bank o$ In'ia.

(. Discuss the constitution an' $unctions o$ )eser*e Bank o$ In'ia.

3.+x!"ain the $eatures o$ Securitisation Act, ((.

-.What is Neotiab"e Instru&ent/ What are the kin's o$ Neotiab"e Instru&ents/

0.What is +n'orse&ent/ +x!"ain 'i$$erent kin's o$ +n'orse&ent.

. De$ine Banker an' %usto&er. Discuss the enera" an' s!ecia" re"ationshi! bet2een

banker an' custo&er.

. +x!"ain the !o2ers an' $unctions o$ Bankin 4&bu's&an.

5. Short Notes:

a) 6istor# o$ Bankin in In'ia

b7 Garnishee 4r'er

c7 +8Bankin:

9. So"*e !rob"e&s

a7 A; 2as a te&!orar# e&!"o#ee in M? @ %o; an' he 2as to be &a'e !er&anent

e&!"o#ee. 6e o*er're2 $ro& the ?; bank to a su& o$ 0, )s. 4n one 'a# A 'i' not

atten' to 'ut#. Director o$ =>? %o; te"e!hone' the &anaer o$ ? bank to take A;s

a''ress. In their con*ersation bank &anaer re*ea"e' in$or&ation about his a


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1.Write an ex!"anator# note on the $unctions o$ %o&&ercia" Bank o$ In'ia.

Ans:

Intro'uction

In modern economy commercial Banks Play an important role in the financial sector. ABank is an institution dealing in money and credit. Credit money is the major component of money supply in a modern economy. Commercial banks are the creators of credit. The strength

of economy of any country basically depends on a sound and solent banking system.

A Commercial bank is a profit seeking business firms dealing in money or rather claims to

money. It safeguards the saings of the public and gie loans and adances.The Banking Companies Act of !"#"$ defines banking company as %accepting for the

purpose of lending or inestment of deposit money from the public$ repayable on demand or

other&ise and &ithdra&able by che'ue$ drafts$ order or other&ise(.

EFN%I4NS 4E %4MM+)%IAL BANKS :8

odern commercial banks perform a ariety of functions. They keep the &heels of commerce$ trade and industry al&ays reoling. ajor functions of a commercial bank are: *

Primary or Banking functions and +econdary or ,on*Banking functions.

Primary-unctions :*

Commercial banks hae t&o important banking functions. ne is accepting deposits and other is

adancing loans.

!) /eposits :*

ne of the main function of a bank is to accept deposits from the public. /eposits are accepted

by the banks in arious forms.

a) Current Account /eposits :*

Current Accounts are usually opened by businessmen &ho hae a number of regular

transactions &ith the bank$ both deposits and &ithdra&ls. There is no restriction on number and

amount of deposits. There is also no restriction on &ithdra&ls. ,o interest is paid on current

deposits. Banks may een charge interest for proiding this facility. These accounts are also

kno&n as demand deposits as amount can be &ithdra&n on demand.

b) +aing Account /eposits :*

+aing Accounts are opened by salaried and other less income people. There is no restriction on

number and amount of deposits. &ithdra&ls are subject to certain restrictions. It earns Interest

but less than fi0ed deposits. It encourages saing habit among salary earners and others. +aing

deposits are an important source of funds for banks.


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c) -i0ed Account /eposits :*

/eposits in fi0ed account are time deposits. oney under this account is deposited for a certain

fi0ed period of time arying from !1 days to seeral years. A high rate of interest is paid. If

money is &ithdra&n before e0piry date$ the depositor receies lo&er rate of interest. /eposits

can be rene&ed for further period. any banks sanction loans against security of fi0ed deposits.

d) 2ecurring Account /eposits :*

In 2ecurring deposit$ a specified amount is regularly deposited by account holder$ at an internal

of usually a month. This is to form the habit of small saings among the people. At the end of

maturity period$ the account holder gets a substantial amount. Interest on this type of deposit is

almost e'ual to fi0ed deposits.

Thus by creating ariety of deposits$ banks motiate people in a ariety of &ays and encourage

saings in the economy.

3) 4oans And Adances :*

Banks not only mobili5e money but also lend to its credit &orthy customers for ma0imi5ing

profits. 4oans and Adances are granted To :*

a) Business And Trade :*

Commercial banks grant short*term loans to business and trade actiities in follo&ing forms:*

i) erdraft :*

Commercial banks grant oerdraft facility to current account holders 6nder this system a

borro&er is allo&ed to dra& more than &hat is deposited in his account. The borro&er is granted

to a fi0ed additional amount against collateral security. Interest is charged for actual amount

dra&n.

ii) Cash Credit :*

Cash credit is gien by the bank to any businessman to meet regular &orking capital needs$

against the security of goods or personal security. Interest is charged on actual amount dra&n bythe customer.

iii) /iscounting f Bills :*

7hen the holder of the bill is not in a position to &ait till the maturity of the bill and re'uires

cash urgently$ he sells the bill of e0change to bank. Bank adance credit by discounting bills of


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e0change$ goernment securities or any other approed financial instruments. The bank

purchases the instruments at a discount.

i) oney At Call :*

Banks also grant loans for a ery short period$ generally not e0ceeding 8 days. +uch adancesare repayable immediately at a short notice hence they are called as oney at Call or Call

money. These loans are gien to dealers or brokers in stock market against Collateral +ecurities.

) /irect 4oans :*

4oans are gien to customers against the security of moeable properties. Their maturity

aries from ! to !9 years. Interest has to be paid on entire loan amount sanctioned. 4oans are of

many types like :* personal loans$ term loans$ call loans$ participatie loans$ collateral loans etc.

b) 4oans to Agriculture :*

Banks grant short*term credit to agriculture at a lo&er rate of interest. 4oans are granted for

irrigation$ purchase of e'uipments$ inputs$ cattle etc.

c) 4oans To Industries :*

Banks grant secured loans to small and medium scale industries to meet their &orking capital

needs. The time period may be from one to fie years. It may be in the form of erdraft$ cash

credit or direct loan.

d) 4oans To -oreign Trade :*

4oans are granted to e0port and import in the form of direct loans$ discounting of bills$ guarantee

for deferred payments etc. ere the rate of interest is lo&.

e) Consumer Credit ; Personal loans :*

Banks also grant credit to household in a limited amount to buy some durable consumer goods

like teleision sets$ refrigerators$ &ashing machine etc. +uch consumer credit is repayable in

installments. 6nder 39*point programme$ the scope of consumer credit has been e0tended to

coer e0penses on marriage$ funeral etc.$ as &ell.

f) iscellaneous Adances :*

Banks also gies adances like packing credits to e0porters$ e0port bill purchased or discounted$

import finance$ finance to self*employed$ credit to &eaker sections of society at concessional

rates etc.


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II. +econdary -unctions :*

Banks gies arious forms of serices to public. +uch serices are termed as non* banking or

secondary functions :*

!. Agency +erices:*

Banks perform certain functions on behalf of their customers. 7hile performing these serices$

banks act as agents to their customers$ hence these are called as agency serices. Important

agency functions are :*

a) Collection :*

Commercial banks collect che'ues$ drafts$ bills$ promissory notes$ diidends$

subscriptions$ rents and any other receipts &hich are to be receied by the customer. -or these

serices banks charge a nominal amount.

b) payment :*

Banks also makes payments on behalf of their customers like paying insurance

premium$ rent$ ta0es$ electricity and telephone bills etc for such serices commission is charged.

c) Income < Ta0 Consultant :*

Commercial banks acts as income*ta0 consultants. They prepare and finalise the

income ta0 returns of their clients.

d) +ale And Purchase f -inancial Assets :*

As per the customers instruction banks undertake sale and purchase of securities$

shares and any other financial assets. ,ominal charges are charged by a bank.

e) Trustee$ =0ecutor And Attorney :*

As a trustee$ banks becomes the custodian and manager of customer funds. Bank also

acts as e0ecutor of deceased customer>s &ill. As an Attorney the banks sign the documents on

behalf of customer.

f) =* Banking :*

Through =lectronic Banking$ a customer can operate his bank account through internet.

e can make payments of arious bills. e can een transfer money from one place to another.


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3. 6tility +erices :*

odern Commercial banks also performs certain general utility serices for the community$

such as :*

a) 4etter f Credit :*

Banks also deal in foreign trade. They issue letter of credit and proide guarantee to

foreign traders for the soundness of their customers.

b) Transfer f -unds :*

Banks arrange transfer of funds cheaply and safely from one place to another. Transfer

can be in the form of /emand draft$ ail transfer Traellersche'ues etc.

c) ?uarantor :*

Banks offer a guarantee of payment on behalf of importer to facilitate imports &ithdeferred payments.

d) 6nder&riting :*

This facility is proided to @oint +tock Companies and to goernment to enable them to

raise funds. Banks guarantee the purchase of certain proportion of shares$ if not sold in the

market.

e) 4ocker -acility :*

+afe 4ockers are proided to the customers. +o that they can deposit their aluableslike @e&ellary$ +ecurities$ +hares and otherdocuments.

f) 2eferee :*

Banks may act as referee &ith respect to financial standing$ business reputation and

respectability of customers.

g) Credit Cards :*

Credit card facility hae been introduced by commercial banks. It enables the holder to

minimi5e the use of hard cash. Credit card is a conenient medium of e0change &hich enables itsholder to buy goods and serices from member < establishment &ithout using money.

III. +ubsidiary Actiities :*

any commercial banks also undertakes subsidiary actiities such as :*


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!) ousing -inance :*

ousing finance is proided against the security of immoeable property of land and buildings.

any banks such as +BI$ Bank of India etc. hae set up housing finance subsidiaries.

3) utual -unds :*

A utual fund is a financial intermediary that pools the saings of inestors for collectie

inestment in diersified portfolio securities any banks like +BI$ Indian Bank etc. hae set up

mutual fund subsidiaries.

) erchant Banking :*

A ariety of serices are offered by merchant banking like :*

anagement$ arketing and 6nder&riting of ne& issues$ project promotion$ corporate adisory

serices$ inestment adisory serices etc.

#) enture Capital -und :*

enture capital fund proides start*up share capital to ne& entures of little kno&n$ unregistered$

risky$ young and small priate business$ especially in technology oriented and kno&ledge

intensie business. any commercial banks like +BI$ Canara Bank etc. hae set up enture

Capital -und +ubsidiaries.

1) -actoring :*

-actoring is a continuing arrangement bet&een a financial intermediary factor) and a business

concern client) &here by the factor purchases the clients accounts receiable. Banks like +BI

and Canara Bank hae established subsidiaries to proide factoring serices.

(7 Discuss the constitution an' $unctions o$ )eser*e Bank o$ In'ia.


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Ans:

Introduction:

The 2esere Bank of India &as established on April !$ !"1 in accordance &ith the

proisions of the 2esere Bank of India Act$ !"#.In eery country there is one organi5ation

&hich &orks as the central bank. The function of the central bank of a country is to control and

monitor the banking and financial system of the country. In India$ the 2esere Bank of India

2BI) is the Central Bank.

The Central ffice of the 2esere Bank &as initially established in Calcutta but &as

permanently moed to umbai in !"8. The Central ffice is &here the ?oernor sits and

&here policies are formulated.Though originally priately o&ned$ since nationalisation in !"#"$

the 2esere Bank is fully o&ned by the ?oernment of India.

%entra" Boar'

The 2esere BankDs affairs are goerned by a central board of directors. The board is appointed

by the ?oernment of India in keeping &ith the 2esere Bank of India Act.

Appointed;nominated for a period of four years

%onstitution:

fficial /irectors

-ull*time : ?oernor and not more than four /eputy ?oernors

,on*fficial /irectors

,ominated by ?oernment: ten /irectors from arious fields and t&o goernment fficials

thers: four /irectors * one each from four local boards

The 2BI &as established in !"1. It &as nationalised in !"#". The 2BI plays role of

regulator of the banking system in India. The Banking 2egulation Act !"#" and the 2BI Act!"1 has gien the 2BI the po&er to regulate the banking system.

The 2BI has different functions in different roles. Belo&$ &e share and discuss some of

the functions of the 2BI.2BI is the 2egulator of -inancial +ystemThe 2BI regulates the Indian

banking and financial system by issuing broad guidelines and instructions.


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Eunctions !er$or&e' b# reser*e bank o$ In'ia are as $o""o2s:

As per the 2BI Act !"# it performs types of functions as that of any other central bank. They

are$

I. Banking -unctions

II. +uperisory -unctions and

III. Promotional -unctions.

The main functions of the 2BI are to regulate the money supply in the country. oreoer$ it has

been directed to take care of agriculture$ industry$ e0port promotion etc. The 2BI is also

responsible for the maintenance of e0ternal alue of rupee.

I. Bankin Eunctions:

1. Bank o$ Issue:

6nder section 33 of the 2esere Bank of India Act$ the bank has the sole right to issue bank

notes of all denominations. The distribution of one rupee notes and coins and small coins all oer

the country is undertaken by the 2esere Bank as agent of the ?oernment.

The 2esere Bank has a separate Issue /epartment &hich is entrusted &ith the issue of currencynotes. The assets and liabilities of the Issue /epartment are kept separate from those other

Banking /epartment.

riginally$ the assets of the Issue /epartment &ere to consist of not less than t&o*fifths of gold

coin$ gold bullion or sterling securities proided the amount of gold &as not less than 2s. #9

crores in alue. The remaining three *fifths of the assets might be held in rupees coins$

?oernment of India rupee securities$ eligible bills of e0change and promissory notes payable in

India.

/ue to the e0igencies of the +econd 7orld 7ar and the post*&ar period$ these proisions &ere

considerably modified. +ince !"18$ the 2esere Bank of India is re'uired to maintain gold and

foreign e0change reseres of 2s. 399 crores$ of &hich at least 2s. !!1 crores should be in gold.

The system as it e0ists today is kno&n$*as the minimum resere system.


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(7 Banker to Go*ern&ent:

The second important function of the 2esere Bank of India is to act as ?oernment banker$

agent and adiser. The 2esere Bank is agent of Central ?oernment and of all +tate

?oernments in India e0cepting that of @ammu and Eashmir.

The 2esere Bank has the obligation to transact ?oernment business$ ia to keep the cash

balances as deposits free of interest$ to receie and to make payments on behalf of the

?oernment and to carry out their e0change remittances and other banking operations.

The 2esere Bank of India helps the ?oernmentFboth the 6nion and the +tates to float ne&

loans and to manage public debt. The Bank makes &ays and means adances to the ?oernments

for "9 days. It makes loans and adances to the +tates and local authorities. It acts as adiser to

the ?oernment on all monetary and banking matters.

37 Bankers; Bank an' Len'er o$ the Last )esort:

The 2esere Bank of India acts as the banker>s bank. According to the proisions of the Banking

Companies Act of !"#"$ eery scheduled bank &as re'uired to maintain &ith the 2esere Bank a

cash balance e'uialent to 1G of its demand liabilities and 3 percent of its time liabilities in

India.

By an amendment of !"H3$ the distinction bet&een demand and time liabilities &as abolished

and banks hae been asked to keep cash reseres e'ual to percent of their aggregate deposit

liabilities. The minimum cash re'uirements can be changed by the 2esere Bank of India.

The scheduled banks can borro& from the 2esere Bank of India on the basis of eligible

securities or get financial accommodation in times of need or stringency by rediscounting bills of

e0change. +ince commercial banks can al&ays e0pect the 2esere Bank of India to come to their

help in times of banking crisis the 2esere Bank becomes not only the banker>s bank but also thelender of the last resort.

-7 %ontro""er o$ %re'it:


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The 2esere Bank of India is the controller of credit i.e. it has the po&er to influence the olume

of credit created by banks in India. It can do so through changing the Bank rate or through open

market operations.

According to the Banking 2egulation Act of !"#"$ the 2esere Bank of India can ask any

particular bank or the &hole banking system not to lend to particular groups or persons on the

basis of certain types of securities. +ince !"1H$ selectie controls of credit are increasingly being

used by the 2esere Bank.

The 2esere Bank of India is armed &ith many more po&ers to control the Indian money

market. =ery bank has to get licence from the 2esere Bank of India to do banking business

&ithin India. The licence can be cancelled by the 2esere Bank if certain stipulated conditions

are not fulfilled. =ery bank &ill hae to get the permission of the 2esere Bank before it can

open a ne& branch.

=ach scheduled bank must send a &eekly return to the 2esere Bank sho&ing in detail$ its assets

and liabilities. This po&er of the 2esere Bank to call for information is also intended to gie it

effectie control of the credit system. The 2esere Bank has also the po&er to inspect the

accounts of any commercial bank.

As su!re&e bankin authorit# in the countr#, the )eser*e Bank o$ In'ia, there$ore, has the

$o""o2in !o2ers:

a) It holds the cash reseres of all the scheduled banks.

b) It controls the credit operations of banks through 'uantitatie and 'ualitatie control.

c) It controls the banking system through the system of licensing$ inspection and calling for

information.

d) It acts as the lender of the last resort by proiding rediscount facilities to scheduled banks.

07 %usto'ian o$ Eorein )eser*e:


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The 2esere Bank of India has the responsibility to maintain the official rate of e0change.

According to the 2esere Bank of India Act of !"#$ the Bank &as re'uired to buy and sell at

fi0ed rates any 'uantity of sterling in lots of not less than 2s. !9$999.

The rate of e0change fi0ed &as 2e. I sh. Hd. +ince !"1 the Bank &as able to maintain the

e0change rate fi0ed at !sh. Hd though there &ere periods for e0treme pressure in faour of or

against the rupee.

After India becomes a member of the International onetary -und in !"#1$ the 2esere Bank

has the responsibility of maintaining fi0ed e0change rates &ith all other member countries of the

International onetary -und I..-.)

Besides maintaining the rate of e0change of the rupee$ the 2esere Bank has to act as the

custodian of India>s resere of international currencies. The ast sterling balances &ere ac'uired

and managed by the Bank. -urther$ the 2BI has the responsibility of administering the e0change

controls of the country.

II. Su!er*isor# Eunctions:

In addition to its traditional central banking functions$ the 2esere Bank has certain non*

monetary functions of the nature of superision of banks and promotion of sound banking in

India.

The 2esere Bank Act$ !"#$ and the Banking 2egulation Act$ !"#" hae gien the 2BI &ide

po&ers of superision and control oer commercial and co*operatie banks$ relating to licensing

and establishments$ branch e0pansion$ li'uidity of their assets$ management and methods of

&orking$ amalgamation$ reconstruction and li'uidation.

The 2BI is authorised to carry out periodical inspection of the banks and to call for returns and

necessary information from them. The nationalisation of !# major Indian scheduled banks in @uly

!"H" has imposed ne& responsibilities on the 2BI for directing the gro&th of banking and credit

policies to&ards more rapid deelopment of the economy and realisation of certain desired social

objecties.


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The superisory functions of the 2BI hae helped a great deal in improing the standard of

banking in India to deelop on sound lines and to improe the methods of their operation.

III. Cro&otiona" Eunctions:

7ith economic gro&th assuming a ne& urgency since independence$ the range of the 2esere

Bank>s functions has steadily &idened. The Bank no& performs a ariety of deelopmental and

promotional functions$ &hich$ at one time$ &ere regarded as outside the normal scope of central

banking.

The 2esere Bank &as asked to promote banking habit$ e0tend banking facilities to rural and

semi* urban areas$ and establish and promote ne& specialised financing agencies. Accordingly$

the 2esere Bank has helped in the setting up of the Industrial -inance Corporation of India and

the +tate -inancial CorporationsJ it set up the /eposit Insurance Corporation in !"H3$ the 6nit

Trust of India in !"H#$ the Industrial /eelopment Bank of India also in !"H#$ the Agricultural

2efinance Corporation of Indian in !"H and the Industrial 2econstruction Corporation of India

in !"83.

These institutions &ere set up directly or indirectly by the 2esere Bank to promote saing habit

and to mobili5e saings$ and to proide industrial finance as &ell as agricultural finance. As far

back as !"1$ the 2esere Bank of India set up the Agricultural Credit /epartment to proideagricultural credit. But only since !"1! the Bank>s role in this field has become e0tremely

important.

The Bank has deeloped the co*operatie credit moement to encourage saing$ to eliminate

moneylenders from the illages and to route its short term credit to agriculture. The 2BI has set

up the Agricultural 2efinance and /eelopment Corporation to proide long*term finance to

farmers.


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3.+x!"ain the $eatures o$ Securitisation Act, ((.

Ans:

Intro'uction:

-inancial indiscipline is the hallmark of Indian industry. The eer*gro&ing ,on PerformingAssets D,PAD)$ a fine euphemism coined to describe the bad loans$ prompted the passing of the

2ecoeries of /ebts due to Banks and -inancial Institutions Act$ !"" &hereby a special /ebt

2ecoery Tribunal D/2TD) &as set up for the recoery of ,PA. o&eer$ this could not speed upthe recoery on one hand and on the other the strict ciil la& re'uirements rendered almost

fruitless the attachment and foreclosure of the assets gien as security for the loan. -urther$ the

balance sheets of the banks and financial institutions &ere turning red due to heay mandatory proisions for ,PAs .

2eali5ing that eery fifth borro&er is a defaulter$ the ?oernment &as under pressure to make

ade'uate proisions for the recoery of the loans and also to foreclose the security. The

+ecuritisation and 2econstruction of -inancial Assets and =nforcement of +ecurity Interest Act$3993 Dthe +ecuritisation ActD) aims to achiee these t&in objecties besides proiding for a broad

legal frame&ork for asset securitisation and asset reconstruction.

Sche&e o$ the Act

The +ecuritisation Act contains #! sections in H Chapters and a +chedule. Chapter ! contains 3sections dealing &ith the applicability of the +ecuritisation Act and definitions of arious terms.

Chapter 3 contains !9 sections proiding for regulation of securitisation and reconstruction of

financial assets of banks and financial institutions$ setting up of securitisation and reconstruction

companies and matters related thereto. Chapter contains " sections proiding for theenforcement of security interest and allied and incidental matters. Chapter # contains 8 sections

proiding for the establishment of a Central 2egistry$ registration of securitisation$

reconstruction and security interest transactions and matters related thereto. Chapter 1 contains #sections proiding for offences$ penalties and punishments. Chapter H contains !9 sections

proiding for routine legal issues.

Sa"ient $eatures.

The salient features of the +ecuritisation Act are as under:

• Incorporation of +pecial Purpose ehicles i5. +ecuritisation Company and

2econstruction company.

• +ecuritisation of -inancial Assets.

• -unding of securitisation.

• Asset 2econstruction.


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• =nforcing security interest i.e. taking oer the assets gien as security for the loan.

• =stablishment of Central 2egistry for regulating and registering securitisation

transactions.

• ffences K Penalties.

• Boiler * plate proisions.

• /ilution of proisions of +ICA.

• =0empted transactions

Incor!oration @ )eistration o$ S!ecia" Cur!ose %o&!anies

The +ecuritisation Act proposes to securitise and reconstruct the financial assets through t&ospecial purpose ehicles i5. D+ecuritisation Company D+CD)D and D2econstruction Company

2C)D. +C and 2C ought to be a company incorporated under the Companies Act$!"1H

haing securitisation and asset reconstruction respectiely as main object.

The +ecuritisation Act re'uires compulsory registration of +C and 2C under the+ecuritisation Act before commencing its business. -urther a minimum financial stability

re'uirement is also proided by re'uiring +C and 2C to possess o&ned fund of 2s.3 crore or

up to !1G of the total financial assets ac'uired or to be ac'uired. The 2BI has the po&er tospecify the rate of o&ned fund from time to time. /ifferent rates can be prescribed for different

classes of +C and 2C. =0isting +C and 2C are also re'uired to get registered under the

+ecuritisation Act. The application for registration &ill hae to be made to 2BI.

The +C or 2C &hich has obtained the registration certificate under the +ecuritisation Actshall be a Public -inancial Institution &ithin the meaning of +ection #A of the Companies Act$

!"1H.

Besides itDs core business of securitisation and asset reconstruction a +C;2C may perform the

follo&ing functions:

• Acting as recoery agent on behalf of any bank or financial institution.

•

Acting as manager

!

to manage the secured assets the possession of &hich has been takenoer by the secured creditor.

• Acting as receier if appointed by any Court or /ebt 2ecoery Tribunal.

A +C or 2C$ &hich is carrying on any other business other than that of securitisation or

asset reconstruction before commencement of the +ecuritisation Act$ has to discontinue such

other business &ithin one year from the commencement of the +ecuritisation Act.


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Securitisation o$ $inancia" Assets

6nder the +ecuritisation Act only banks and financial institutions can securitise their financial

assets pertaining to ,PAs &ith a securitisation company. +ecuritisation means$ according to the+ecuritisation Act$ ac'uisition of financial assets by any securitisation company or reconstruction

company from any financial institution or banks. The necessary funds for such ac'uisition may be raised from D'ualified institutional buyers DLIBD)$ by issuing security receipts representing

undiided interest in such financial assets or other &ise.

-inancial assets are as under:

• A claim to any debt or receiables or part thereof$ &hether secured or unsecured.

• Any debt or receiables secured by$ mortgage of$ or charge on$ immoable property.

• A mortgage$ charge$ hypothecation or pledge of moable property.

• Any right or interest in the security &hether full or part underlying such debt or

receiables.

• Any beneficial interest in property$ &hether moable or immoable$ or in such debts$

receiables$ &hether such interest is e0isting$ future$ accruing$ conditional or contingent.

• Any financial assistance.

The much*needed legal frame&ork for the securitisation of financial assets has been made by theenactment of the +ecuritisation Act. +ecuritisation of financial assets is a financial tool for the

lenders to securitise their future cash flo&s from the secured assets and thus to release their funds

blocked in them. In the hands of the +C and 2C the secured assets become MmerchandiseM$realisation of &hich gies them their return. This aspect brings in the much*needed e0pertise in

adept handling in realisation of the secured assets. The legal impediments of normal ciil la&

procedure to foreclose the mortgaged assets hae thus been effectiely remoed by empo&ering

the enforcement of the secured assets.

+ecuritisation of financial assets may take some time to fructify as it re'uires sound accounting

principles also for &hich standards to be prescribed. In other &ords there should be accounting

frame&ork$ as &ell$ besides legal frame&ork.

Acuisition o$ )ihts an' interests in $inancia" assets .

This is the main part of securitisation. +ection 1 proides for the ac'uisition of rights or interestsin financial assets of any bank or financial institution by +C ; 2C$ not&ithstanding any

thingcontrary contained in any agreement or any other la& for the time being in force$ in either

of the follo&ing manner:


17/65

• Issuing a debenture or bond or any other security in the nature of debenture$ as

consideration agreed upon by a +C ;2C and bank;financial institution$ incorporating

therein the terms and conditions of issue.

• =ntering into an agreement &ith bank;financial institution for the transfer of such

financial assets on such terms and conditions as may be agreed upon.

6pon ac'uiring the financial assets from the bank;financial institution$ the +C;2C steps into

the shoes of the lender 'ua the borro&er. The +ecuritisation Act has proided for all necessary

rights and po&ers for +C;2C to reali5e the financial assets from the borro&er.

Eun'in o$ Securitisation.

The +C;2C may raise the necessary funds$ for the ac'uisition of financial assets$ from the

LIB by issuing a security receipt. +ecurity receipt is e0empted from compulsory registration

under the 2egistration Act. +ecurity receipts issued by any +C or 2C shall be MsecuritiesM

&ithin the meaning of +ection 3h)ic) of the +ecurities Contracts 2egulation) Act$ !"1H.

A +cheme of ac'uisition has to be formulated for eery ac'uisition detailing therein the

description of financial assets under ac'uisition$ the 'uantum of inestment$ rate of return

assured etc. -urther separate and distinct accounts hae to be maintained in respect of eachscheme of ac'uisition. 2eali5ations made from the financial assets hae to be held and applied

to&ards the redemption of inestments and payment of assured returns.

In the eent of non*reali5ation of financial assets$ the LIB holding not less than 81G of the total

alue of the security receipts issued$ are entitled to call a meeting of all LIB and pass resolutionand eery such resolution is binding on the +C;2C.

Assets )econstruction

A +C or 2C may$ according to the guidelines prescribed by 2BI$ carry out asset

reconstruction in any one of the follo&ing manners:

• Taking oer the management of the business of the borro&er.

• Changing the management of the business of the borro&er.

• +elling or leasing of a part or &hole of the business of the borro&er.

• 2escheduling of the payment schedule of the debt.

• =nforcing the security interest.

• =ntering into settlement &ith the borro&er for the payment of debt.


18/65

o&eer$ the aboe measures are subject to the proisions contained in any other la& for the

time being in force.

+n$orcin Securit# Interest

The second objectie of the +ecuritisation Act is to proide for the enforcement of security

interest i.e. taking possession of the assets gien as security for the loan. +ection ! of the

+ecuritisation Act contains elaborate proisions for a lender referred to as Dsecured creditorD) to

take possession of the security gien by the borro&er. The sum and substance of the proisionsare as under:

• The 4ender has to send a notice of demand$ giing details of the amount payable and the

secured assets1 intended to be enforced in the eent of non payment$ to the defaulting

borro&er to discharge his liabilities.

• ,o borro&er$ after the receipt of the demand notice$ shall transfer the secured assets in

&hatsoeer manner &ithout prior &ritten consent from the lender.

• The Borro&er has to discharge the liabilities &ithin H9 days from the date of receipt of

notice of demand.

• In the eent of non payment of demand by the borro&er$ the lender may take any one or

more of the follo&ing measures:

o Taking possession and ; or management of the secured assets of the borro&er &ith

a right to transfer the same by &ay of lease$ assignment or sale for realising thesecured asset.

o Appointing any person as manager to manage the secured assets the possession of

&hich has been taken oer.

o Asking any person$ &ho has ac'uired any of the secured assets from the borro&er

and o&es money to the borro&er$ to pay so much of the money &hich is sufficient

to pay the secured debt.

• Any transfer of secured assets made by the lender shall be deemed to be made by the

o&ner of such secured asset.

• If the borro&er pays all the dues together &ith all costs$ charges and e0penses incurred by

the lender before the date fi0ed for the sale of the secured assets$ the lender shall not

transfer or sell the secured assets.


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• 7hen the are more than one lender or joint financing$ the approal of lenders)

representing not less than 81G of the amount due is re'uired to take any steps to enforce

the security interest and such approal is binding on all the lenders.

• In the case of a corporate borro&er under li'uidation the sale proceeds from the secured

assets shall be distributed as per +ection 13"A of the companies Act$ !"1H.

• In the eent of lender opts to realise his security instead of relin'uishing his security and

proing his debt$ may retain the sale proceeds of his secured assets after depositing the

&orkmenDs dues &ith the 4i'uidator.

• If the sale proceeds of the secured assets are not fully satisfying the debt due$ the lender

may file a claim before the /2T or before a competent court for the recoery of the

shortfall.

• The lender also has an option to proceed against any of the guarantors or sell the pledged

assets &ithout taking any measures against the borro&er.

• The lender can take the assistance of the Chief etropoliton agistrate or /istrict

agistrate$ as the case may be$ in taking possession of the secured assets from the borro&er.

• If any person$ including the borro&er$ is aggrieed by any of the measures adopted by the

lender$ he may prefer an appeal to the /2T &ithin #1 days by depositing atleast 81G of

the claim of the lender. The decision of the /2T is further appealable to an AppellateTribunal.

• The lender can initiate any proceedings to enforce the security interest unless his claim of

the financial asset is made &ithin the period prescribed under the 4imitation Act$ !"H.

+stab"ish&ent o$ a %entra" )eistr#

The functions relating to securitisation$ asset reconstruction and creation of security interest issought to be administered and regulated by a Central 2egistry. Branch offices of the Central

2egistry may be established as and &hen the need is re'uired. A Central 2egistrar shall head the

2egistry. The functions of the Central 2egistry are as under:

•Particulars relating to securitisation of assets$ reconstruction of financial assets andcreation of security interest are entered in a record called Central 2egister.

• The records can be kept in electronic form also i.e. in floppies$ diskettes etc.

• The particulars of eery transaction of securitisation$ asset reconstruction or creation of

security interest shall be filed &ithin 9 days of the transaction by +C$ 2C or the

lender as the case may be.


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21/65

The follo&ing transactions are e0empted from the proisions of the +ecuritisation Act:

• 4ien on any goods$ money or securities gien under the Contract Act$!N83.

• Pledge of moables under the Contract Act$!N83.

• Creation of security on aircraft.

• Creation of security interest on essel.

• Conditional sale$ hire*purchase or lease in &hich no security interest is created.

• 2ights of unpaid seller under the +ale of ?oods Act$!"9.

• ,on attachable properties under the ciil Procedure Code.

• +ecurity interest on an amount less than or e'ual to 2s.! lakh.

• +ecurity interest created on agricultural land.

• Amount due is less than 39G of the principal sum and interest thereon.

-.What is Neotiab"e Instru&ent/ What are the kin's o$ Neotiab"e Instru&ents/

Ans:

Intro'uction:

A ,egotiable instrument is a &ritten document &hich entitles a person to a sum of money and&hich is transferable from person to person by mere deliery or indorsement and deliery.

The person to &hom it is so transferred becomes entitled to the money and also to the

right to further transfer it.The ,egotiable Instruments Act$ !NN! does not define a negotiable instrument and

+ection ! merely states that %A ,egotiable Instrument means a !ro&issor# note, bi"" o$ exchane or cheue !a#ab"e either to or'er or to bearer.

+ssentia" Eeatures o$ Neotiab"e Instru&ents are i*en be"o2:

!. 7riting and +ignature:


22/65

,egotiable Instruments must be &ritten and signed by the parties according to the rules relating

to Promissory ,otes$ Bills of =0change and Che'ues. /emand /rafts are also construel as

,egotiable Instruments in the limiting case as they hae the same property as ,.I. Instrumes.

3. oney:

,egotiable instruments are payable by legal tender money of India. The liabilities of the parties

of ,egotiable Instruments are fi0ed and determined in terms of legal tender money.

. ,egotiability:

,egotiable Instruments can be transferred from one person to another by a simple process. In the

case of bearer instruments$ deliery to the transferee is sufficient. In the case of order instruments

t&o things are re'uired for a alid transfer: endorsement i.e.$ signature of the holder) and

deliery. Any instrument may be made non*transferable by using suitable &ords$ e.g.$ %pay to O

only.(

#. Title:

The transferee of a negotiable instrument$ &hen he fulfils certain conditions$ is called the holder

in due course. The holder in due course gets a good title to the instrument een in cases &here

the title of the transferrer is defectie.

1. ,otice:

It is not necessary to gie notice of transfer of a negotiable instrument to the party liable to pay.

The transferee can sue in his o&n name.

H. Presumptions:

Certain presumptions apply to all negotiable instruments. =0ample: It is presumed that there is

consideration. It is not necessary to &rite in a promissory note the &ords %for alue receied( or

similar e0pressions because the payment of consideration is presumed. The &ords are usually

included to create additional eidence of consideration.

8. +pecial Procedure:

A special procedure is proided for suits on promissory notes and bills of e0change The

procedure is prescribed in the Ciil Procedure Code). A decree can be obtained much more'uickly than it can be in ordinary suits.

N. Popularity:

,egotiable instruments are popular in commercial transactions because of their easy

negotiability and 'uick remedies.


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". =idence:

A document &hich fails to 'ualify as a negotiable instrument may neertheless be used as

eidence of the fact of indebtedness.

C)4MISS4)> N4+S

+ec.#: % A Promissory note is an instrument in &riting$ not being a bank note A negotiable promissory note issued by a bank and payable to the bearer on demand. The amount payable is

statedon the face of the note) or a currency note$ containing an unconditional undertaking$ signed

by the maker$ to pay a certain sum of money only to or to the order of a certain person$ or to the

bearer of the instrument.(T&o parties:

aker: &ho makes the promissory note and promisses to pay.

Payee: the person to &hom the payment is to be made.

Ero& the 'e$inition i*en in the Act it is a!!arent that the $o""o2in essentia" reuire&ents

&ust be $u"$i""e' b# an instru&ent inten'e' to be a !ro&issor# note:

!. The instrument must be in &riting.

3. The instrument must be signed by the maker of it. A signature in pencil or by a rubber stamp

of facsimile is good. An illiterate person may use a mark or cross instead of &riting out his name.

The signature or mark may be placed any&here on the instrument$ not necessarily at the bottom.

It may be at the top or at the back of the instrument.

. The instrument must contain a promise to pay. The promise to pay must be e0press. It cannot

be implied or inferred. A mere ackno&ledgement of indebtedness is not enough.

=0ample: %r. +en I. . 6. 2s. !999. ere I. . 6. stands for$ %I o&e you.( This is only an

admission of indebtedness. There is no promise to pay and therefore the instrument is not a

promissory note.

#. The promise to pay must be unconditional. If the promise to pay is coupled &ith a condition it

is not a promissory note.

=0amples:

i) %I Promise to pay B 2s. !199 first deducting there out any money &hich he may o&e me.(

ii) %I promise to pay B 2s. !199 on />s death proided / leaes me enough to pay this sum.(

iii) %I promise to pay B 2s. !199$ seen days after @/>s marriage.( These instruments are not

promissory notes because the promise to pay is coupled &ith a condition. %I promise to pay B 2s.

199 on demand( is a note &ith an unconditional promise.


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+tipulations of the follo&ing type are not regarded as conditions: promise to pay at a specified

time or at a specified place or after the occurrence of an eent &hich is certain to occur$ or

payment after calculating interest at a certain rate.

=0ample:

%I promise to pay B 2s. !199 on !st April$ 3999.( %I promise to pay B 2s. !199 on demand at

Bombay.( %I promise to pay B 2s. 199 seen days after the death of C.( These are all alid

promissory notes.

1. The maker of the instrument must be certain and definite.

H. A Promissory note must be stamped according to the Indian +tamp Act.

8. The sum of money to be paid must be certain.

=0amples:

i) %I promise to pay B 2s. !199 and all other sums &hich shall be due to him.(

ii) %I promise to pay some money on the occasion of his marriage.( The aboe instruments are

not promissory notes because the sum of money to be paid is uncertain.

N. The payment must be in the legal tender currency of India. A promise to pay certain 'uantity

of goods or a certain amount of foreign money is not a promissory note.

". The money must be payable to a definite person or according to his order. A note is alid eenif the payee is misnamed or is indicated by his official designation only. =idence is admissible

to sho& &ho the payee really is.

=0ample:

A document$ if it other&ise satisfies the definition of promissory note$ &ill not cease to be so

merely because the &ords %to order( are absent in the document.

!9. The promissory note may be payable on demand or after a certain definite period of time.

!!. The 2esere Bank Act prohibits the creation of a promissory note payable on demand to the bearer of the note$ e0cept by the 2esere Bank and the ?oernment of India.

Kin's o$ !ro&issor# note:

+ingle promissory note: it is made by a single person.

@oint promissory note: made by t&o or more persons jointly@oint and seeral promissory note: made by t&o or more persons in their joint and seeral

capacity.


25/65

BILL 4E +=%6ANG+

+ec 1 of the ,egotiable Instrument Act defines % A Bill of =0change is an instrument in &riting$

containing an unconditional order$ signed by the maker$ directing a certain person to pay acertain sum of money only to$ or to the order of $ a certain person or to the bearer of the

instrument(.Parties to a Bill of =0change:

Three parties

/ra&er: &ho dra&s gies an order to pay) the bill./ra&ee: The person &ho is directed to pay

Payee: The person to &hom the payment is to be made.

A Bill of =0change is an instrument in &riting containing an unconditional order$ signed by the

maker$ directing a certain person to pay a certain sum of money only to$ or to the order of acertain person or to the bearer of the instrument.(

The maker of a bill of e0change is called the /ra&er. The person &ho is directed to pay is called

the /ra&ee. The person &ho &ill receie the money is called the Payee. 7hen the payee has

custody of the bill$ he is called the older. It is the holder>s duty to present the bill to the dra&ee

for his acceptance. The dra&ee signifies his acceptance by signing on the bill. After such

signature the dra&ee becomes the Acceptor.

In a bill of e0change sometimes the name of another person is mentioned as the person &ho &ill

accept the bill if the original dra&ee does not accept it. +uch a person is called the /ra&ee in

case of ,eed.

A bi"" o$ exchane to be *a"i' &ust $u"$i" the $o""o2in reuire&ents:

!. The instrument must be in &riting.

3. The instrument must be signed by the dra&er.

. The instrument must contain an order to pay$ &hich is e0press and unconditional.

#. The dra&er$ dra&ee and the payee must be certain and definite indiiduals.

1. The amount of money to be paid must be certain.

H. The payment must be in the legal tender currency of India.

8. The money must be payable to a definite person or according to his order.

N. A bill of e0change must be properly stamped.


26/65

". The bill may be made payable on demand or after a definite period of time. But no one e0cept

the 2esere Bank and the ?oernment of India can dra& a bill payable on demand to the bearer

of the bill.

The re'uirements are more or less the same as in promissory notes and are subject to similar

conditions as regards signature etc.

If any of the re'uirements mentioned aboe is not fulfilled$ the document is not a bill of

e0change.

=0amples:

i) %Please let the bearer hae seen pounds and oblige.( This is not a bill of e0change because it

is a re'uest and not an order. 4ittle . +lackford.

ii) %7e hereby authorise you to pay on our account to the order of O$ QH99.( This is not a bill of

e0change because it is not an order to pay. amilton +pottis&oode.

%6+HF+

/=-I,ITI, - C=L6=

+ec. H of ,egotiable Instruments Act$ !NN!: %Che'ue(. FA %che'ue( is a bill of e0change dra&non a specified banker and not e0pressed to be payable other&ise than on demand and it includes

the electronic image of a truncated che'ue and a che'ue in the electronic form. =0planation I. F

-or the purposes of this section$ the e0pressionsF

a) %a che'ue in the electronic form( means a che'ue &hich contains the e0act mirror image of a paper che'ue$ and is generated$ &ritten and signed in a secure system ensuring the minimum

safety standards &ith the use of digital signature &ith or &ithout biometrics signature) andasymmetric crypto systemJ

b) %a truncated che'ue( means a che'ue &hich is truncated during the course of a clearingcycle$ either by the clearing house or by the bank &hether paying or receiing payment$

immediately on generation of an electronic image for transmission$ substituting the further

physical moement of the che'ue in &riting.

=0planation II. F-or the purposes of this section$ the e0pression %clearing house( means theclearing house managed by the 2esere Bank of India or a clearing house recognised as such by

the 2esere Bank of India.

There are three parties in che'ue these are :

/ra&er: The person &ho dra&s the che'ue is kno&n as the dra&er. The person &hose name the

account stands is the dra&er.

/ra&ee: The bank on &hich the che'ue is dra&n is kno&n as the dra&ee.

http://indiankanoon.org/doc/53835861/http://indiankanoon.org/doc/157597719/http://indiankanoon.org/doc/157597719/http://indiankanoon.org/doc/53835861/


27/65

Payee: The person in &hose faor the che'ue is made payable is the payee. If the che'ue is

dra&n payable to self$ the dra&er himself &ould be the payee of the che'ue.

+SS+NIALS 4E %6+HF+

!. In 7riting :*The che'ue must be in &riting. It can not be oral.

3. 6nconditional :* The language used in a che'ue should be such as to coney an unconditional

order. If the banker is ordered to pay upon the condition of payeeDs signing the receipt$ then the

instrument is a conditional order and thus not a che'ue. DBut if the order regarding receipt is too

construed as addressed to the payee$ the instrument can be treated as a che'ue.

. +ignature of the /ra&er :* It must be signed by the maker.

#. Certain +um of oney :*The amount in the che'ue must be certain.

1. Payees ust be Certain :*It must be payable to specified person.

H. nly oney :*The payment should be of money only.

8. Payable n /emand :*It must be payable on demand.

N. 6pon a Bank :*It is an order of a depositor on a bank.

". The date column: /ate is the first item to be filled in by a customer. The date should not be

incomplete.

1. Sta"e %heues: out of date): The date on a che'ue may be a current one$ or an ante one or a

post one. A che'ue &hich bears date before the date of issue$ is said to be ante < dated.=0: A che'ue issued on 8th of @uly$ 39!1 may bear the date of !st july 39!1.

Che'ue should be produced before the e0piry of the term months. After months che'ue &ill become stale che'ue.

11. Cost 'ate' cheue: A che'ue &hich bears a date subse'uent to the date of issue is said to be post dated che'ue.

=0: If a che'ue dra&n on !st march 39!1$ bears the date of !1 th arch 39!1. it is post dated

che'ue.

!3. Payee column: The term Payee denotes the person to&hom the amount of the che'ue is

payable. Payee must be a certain person.

!. The amount Column: The amount of the che'ue must be certain and e0pressed both in &ords

and figures. The amount is ery correctly and legibly &ritten. If it is not done$ either the che'ue

&ill be dishonoured or a delay &ill be caused in the payment.The amount should al&ays be &ritten clearly &ith a pen. If there is any oer&riting or alteration$

it should be confirmed by the dra&er himself &ith his full signature.


28/65


29/65

This is a che'ue &hereby the printed &ord MBearerM on the che'ue is cancelled. The cancellation

of the &ord MBearerM automatically makes the che'ue an MorderM che'ue.

An order che'ue can be paid to the named payee across the bankDs account if so presented.

Identification must be insisted on by the bank &hen encashing the order che'ue for the presenter.The I/ number and the named payeeDs signature &ill be asked for on the back of the che'ue.

A che'ue dra&n thus:

Pay Cash... or rder the bearer is cancelled) is not a che'ue at all. ence$ it must not be

encashed or paid. The Act states that if a che'ue is to be made payable to order$ the payee must

be specified &ith certainty.An order che'ue can be negotiated to another person by the endorsement of the transferer. The

mere signature of the transferer &ill be sufficient to transfer or negotiate the che'ue.

Banks &ill collect che'ues made payable to order if deposited for collection by any person otherthan the named payee.

An order che'ue can be a bearer che'ue if the &ords or bearer are not cancelled out.

A crossed che'ue is a che'ue that has been marked to specify an instruction about the &ay it is to

be redeemed. A common instruction is to specify that it must be deposited directly into anaccount &ith a bank and not immediately cashed by a bank oer the counter. The format and

&ording aries bet&een countries$ but generally t&o parallel lines and;or the &ords DAccount

PayeeD or similar may be placed either ertically across the che'ue or in the top left hand corner.

By using crossed che'ues$ che'ue &riters can effectiely protect the che'ues they &rite from being stolen and cashed.

(.A crosse' cheue is a che'ue that is payable only through a collecting banker and not directly

at the counter of the bank. Crossing ensures security to the holder of the che'ue as only the

collecting banker credits the proceeds to the account of the payee of the che'ue.7hen t&o parallel transerse lines$ &ith or &ithout any &ords$ are dra&n generally$ on the left

hand top corner of the che'ue. A crossed che'ue does not affect the negotiability of the

instrument.

1. Genera" crossin: +ection !3 of the Act refers to general crossing.

7here a che'ue bears across its face t&o traerse lines &ith or &ithout the &ords or the &ords

Snot negotiable$ the che'ue is said to hae been crossed generally. 7here a che'ue is crossedgenerally$ the banker shall not pay it$ other&ise than to the banker( +ection !3H).

?enerally$ che'ues are crossed &henThere are t&o transerse parallel lines$ marked across its face or

The che'ue bears an abbreiation MK Co. Mbet&een the t&o parallel lines or

The che'ue bears the &ords M,ot ,egotiableM bet&een the t&o parallel lines or The che'ue bears the &ords MA;c. PayeeM bet&een the t&o parallel lines.

A crossed che'ue can be made bearer che'ue by cancelling the crossing and &riting that the

crossing is cancelled and affi0ing the full signature of dra&er.

http://en.wikipedia.org/wiki/Chequehttp://en.wikipedia.org/wiki/Chequehttp://en.wikipedia.org/wiki/Transactional_accounthttp://en.wikipedia.org/wiki/Transactional_accounthttp://en.wikipedia.org/wiki/Bankhttp://en.wiktionary.org/wiki/transversehttp://en.wiktionary.org/wiki/transversehttp://en.wikipedia.org/wiki/Chequehttp://en.wikipedia.org/wiki/Transactional_accounthttp://en.wikipedia.org/wiki/Bankhttp://en.wiktionary.org/wiki/transverse


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(. S!ecia" crossin: +ection !3# of the Act refers to +pecial crossing.

7here a che'ue bears across its face in addition to the name of the banker either &ith or &ithoutthe &ords or the &ords Snot negotiable$ then the che'ue is said to hae been crossed specially.

The object of special crossing is to direct the banker to pay the che'ue only if it is presented

through the particular bank mentioned.7hen a particular bankDs name is &ritten in bet&een the t&o parallel lines the che'ue is said to

be specially crossed.

S!eci&en o$ S!ecia" or )estricti*e %rossin

In addition to the &ord bank$ the &ords MA;c. Payee nlyM$ M,ot ,egotiableM may also be

&ritten. The payment of such che'ue is not made unless the bank named in crossing is presenting

the che'ue. The effect of special crossing is that the bank makes payment only to the banker

&hose name is &ritten in the crossing. +pecially crossed che'ues are more safe than a generallycrossed che'ues.

Not Neotiab"e crossin:

The &ords Dnot negotiableD can be added to general*crossing as &ell as special*crossing and acrossing &ith these &ords is kno&n as not negotiable crossing. The effect of such a crossing is

that it remoes the most important characteristic of a negotiable instrument:the transferee of such a crossed che'ue cannot get a better title than that of the transferor cannot

become a holder in due course) and cannot coney a better title to his o&n transferee$ but the

instrument remains transferable.

Account Ca#ee %rossin %heue:

This crossing can be made in both general and special crossing by adding the &ords Daccount

payeeD or DA;C payee onlyD. In this type of crossing$ the collecting banker is supposed to credit theamount of the che'ue to the account of the payee only. The che'ue remains transferable but the

collecting banker has more liability if he credits the che'ue proceeds to someone other than the

payee and the endorsement in faour of the last payee is proed forged. Thus$ the collecting banker must first inestigate the title of the last endorsee from the original payee named in the

che'ue$ before collecting.

4ther Instru&ents

1.Banker;s Dra$ts De&an' Dra$ts7:

Banker>s draft is a payment order issued by one office of a bank on another office of the same bank$ for a certain sum of money payable to order on demand. -or remitting money from one

place to another$ bankers issue demand drafts on their branches at the palce of destination. It is

issued on the re'uest of a customer &ho has to make a guaranteed payment$ that is incircumstances &here the payee &ishes to be certain that the che'ue &ill be paid upon

presentation.

Banker>s drafts can$ and should be crossed &ith a ie& to protecting the interests of the parties thereto i5. the dra&erissuing branch)$ the dra&eethe paying branch) and the payee.

(. Di*i'en' Warrants: The profit made by a company diided among its shareholders

according to their number of shares is called Sdiidend>. A diidend &arrant is an order$ issued

http://en.wikipedia.org/wiki/Negotiable_instrumenthttp://en.wikipedia.org/wiki/Negotiable_instrument


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by a joint stock company and dra&n on its bankers for payment of the specified sum of money to

the registered holder of one or more of its shares or debentures.

In India$ diidend &arrants are issued in conformity &ith the legal definition of a che'ue.ence diidend &arrants are treated as che'ues.

3. ra*e""er;scheue: Traeller>sche'ue is a method &hereby traellers take currency to another place in India or abnroad to proide for their e0penses. 7hen a person &ants to trael &ithout

taking the risk of carrying cash &ith him$ he may aail of the facility of traeller>sche'ue.

A traeller>sche'ue can be encashed at any office of the issuing bank and at any other place &ith arrangements i5. hotels$ petrol pumps$ sho&rooms$ departmental store etc.

Traeller>sche'ue is one of the negotiable instruments. It possesses all characteristic

features of a che'ue.

older$ older in /ue Course and older for alueolder: +ec.N of ,.I.Act!NN! defines: The holdr of a promissory note$ bill of e0change or

che'ue means any person entitled in his o&n name to the possession thereof and to receie or

recoer the amount due thereon from the parties thereto.

To a holder$ he should hae a right to possess. A person in possession of an instrument &ithouthaing a right to possess the same cannot be called the holder.

0.What is +n'orse&ent/ +x!"ain 'i$$erent kin's o$ +n'orse&ent.

Ans:

Introduction:

A negotiable instrument payable to order is negotiable by the holder by indorsement and delierythereof. Thus$ the negotiation of an order instrument re'uires t&o formalities i5$ first the holder

should indorse it and then delier it to the indorsee. 6nless the transferor signs his indorsement

on the instrument and deliers it$ the transferee does not become a holder. 7here an instrument

payable to order is transferred &ithout indorsement$ the transferee is not entitled to the rights of a

holder in due course$ and he cannot negotiate it to a third pary.

De$inition o$ +n'orse&ent

Sec. 10 o$ Neotiab"e Instru&ents Act 1551 'e$ines: 7hen the maker or holder of an

negotiable instrument signs the same$ other&ise than as such maker$ for the purpose of

negotiation$ one the back or face thereof or on a slip of paper anne0ed thereto$ or so signs for the

same purpose a stamped paperintended to be completed as a negotiable instrument$ he is said to

indorse the same$ and is called the endorser.

=ndorsement is the act of signing a che'ue for the purpose of transferring it to somebody else.

6nder ,egotiable Instruments Act it means the &riting of ones name on the back of the

instrument or any paper attached to it &ith the intention of transferring the rights therin. A bearer


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che'ue can be transferred by mere deliery but an order che'ue is transferred by endorsement

and deliery. =ndorsements are usually made on the back of the che'ue$ though they can be

made on its face as &ell. If$ ho&eer$ no space is left on the instrument$ it may be made on a

separate paper attached to it.

=ndorsement on the che'ue must be made in proper fashion$ other&ise the bank &ill not pay it.The endorser must sign his name e0actly as it has been &ritten on the che'ue. e must sign his

name &ith the same spellings as already appear on the che'ue. e may$ if he$ likes put do&n the

correct spellings after he has signed in the manner already appearing on the che'ue. 7here a

che'ue is endorsed on behalf of a company$ a firm or some other institution$ the person signing

the endorsement must so sign as to make it clear that he is so doing on behalf of the company or

the firm and not in his personal capacity.

+n'orse&ent in b"ank an' in $u""8en'orsee

If the endorser signs his name only$ the endorsement is said to be %in blank($ and if he adds a

direction to pay the amount mentioned in the instrument to$ or to the order of$ a specified person$

the endorsement is said to be %in full($ and the person so specified is called the %endorsee( of the

instrument.

I&!ortant kin's o$ en'orse&ents are i*en be"o2:

1. B"ank or enera" en'orse&ent:

If the endorser signs his name only and does not specify the name of the endorsee$ the

endorsement is said to be in blank +ec. !H!). The effect of a blank endorsement is to conert the

order instrument into bearer instrument +ec. 1#)$ &hich may be transferred merely by deliery.

(. +n'orse&ent in $u"" or s!ecia" en'orse&ent:

If the endorser$ in addition to his signature$ also adds a direction to pay the amount mentioned in

the instrument to$ or to the order of$ a specified person the endorsement is said to be in full +ec.

!H!)U.

If$ for e0ample$ A$ the holder of a bill of e0change$ &ants to make an endorsement in full to B$

he &ould &rite thus: %Pay to B or order$ +dA#.( After such an endorsement it is only the

endorsee$ i.e.$ B$ &ho is entitled to receie the payment of the instrument and to further negotiate

the instrument by his endorsement.


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A blank endorsement can easily be conerted into an endorsement in full$ According to +ection

#"$ the holder of a negotiable instrument endorsed in blank may$ &ithout signing his o&n name$

by &riting aboe the endorser>s signature a direction to pay to any other person as endorsee$

conert the endorsement in blank into an endorsement in fullJ and since such holder does not

sign himself on the instrument he does not thereby incur the responsibility of an endorser.

3. Cartia" +n'orse&ent:

+ection 1H proides that a negotiable instrument cannot be endorsed for a part of the amount

appearing to be due on the instrument. In other &ords$ a partial endorsement &hich transfers the

rights to receie only a part payment of the amount due on the instrument is inalid.

+uch an endorsement has been declared inalid because it &ould subject the prior parties to

plurality of actions one action by holder for part alue and another action by endorsee for partalue) %and &ill thus cause inconenience to them.

oreoer$ it &ould also interfere &ith the free circulation of negotiable instruments. It may be

noted that an endorsement &hich purports to transfer the instrument to t&o or more endorses

separately$ and not jointly is also treated as partial endorsement and hence &ould be inalid.

Thus$ &here A holds a bill for 2s 3$999 and endorses it in faour of B for 2s !$999 and in faour

of C for the remaining 2s !$999$ the endorsement is partial and inalid.

+ection 1H$ ho&eer$ further proides that &here an instrument has been paid in part$ a note to

that effect maJ be endorsed on the instrument and it may then be negotiated for the balance.

Thus$ if in the aboe illustration the acceptor has already paid 2s !$999 to A$ the holder of the

bill$ A can then make an endorsement saying %Pay B or order( 2s !$999 being the unpaid residue

of the bill.( +uch an endorsement &ould be alid.

-. )estricti*e en'orse&ent:

+tating the effect of endorsement$ +ection 19 proides that %the endorsement of negotiable

instrument follo&ed by deliery transfers to the endorsee the property herein &ith the right of

further negotiation.( o&eer$ +ection 19 permits restrictie endorsement.


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An endorsement &hich$ by e0press &ords$ prohibits the endorsee from further negotiating the

instrument or restricts the endorsee to deal &ith his instrument as directed by the endorser is

called Srestrictie> endorsement.

The endorsee under a restrictie endorsement gets all the rights of an endorser e0cept the right of further negotiation. In other &ords$ such an endorsement entitles the endorsee to receie the

payment on due date and sue the parties for it but he cannot further negotiate the instrument.

I""ustrations:

a) B$ the holder of the bill$ makes an endorsement on the bill saying %Pay C only.( It is a

restrictie endorsement as C cannot negotiate the bill further.

b) B$ the holder of the bill$ makes an indorsement on the bill$ saying %Pay C for my use or %Pay

C or order for the account of B.( In either case there is a restrictie endorsement as the right of

further negotiation by C has been e0cluded thereby.

The person liable on the hill must pay by dra&ing a che'ue in the name of the holder or the

endorser) B. If he makes the payment to C on C>s o&n account$ he &ill still be liable to B$ the

endorserJ ence C cannot endorse the bill further in his o&n name.

0. %on'itiona" en'orse&ent:

If the endorser of a negotiable instrument$ by e0press &ords in the endorsement$ makes his

liability$ dependent on the happening of a specified eent$ although such eent may neer

happen$ such endorsement is called a Sconditional> endorsement +ec. 13).

The la& permits a conditional endorsement and therefore it does not in any &ay affect the

negotiability of the instrument. Thus$ endorsements can alidly be made in the follo&ing terms:

i) %Pay B or order on his marriageJ(

ii) %Pay B on the arrial of Pearless ship at Bombay.(

In the case of a conditional endorsement the liability of the endorser &ould arise only upon the

happening of the eent specified. But the endorsee can sue other prior parties$ e.g.$ the maker$

acceptor$ etc.$ if the instrument is not duly met at maturity$ een though the specified eent did

not happen.


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. Sans recourse en'orse&ent Sec. 0(7:

7hen the endorser e0pressly e0cludes his o&n liability on the negotiable instrument to the

endorsee or any subse'uent holder in case of dishonour of the instrument$ the endorsement is

kno&n as Ssans recourse> endorsement.

+uch an endorsement is generally made by adding the &ords Ssans recourse> or S&ithout

recourse.> Thus$ %Pay O or order sans recourse( or %Pay O &ithout recourse to me( or %Pay O or

order at his o&n risk( is e0amples of this type of endorsement.

. Eacu"tati*e en'orse&ent:

7hen the endorser e0pressly gies up some of his rights under the negotiable instrument$ the

endorsement is called a Sfacultatie> endorsement. Thus$ %Pay O or order$ notice of dishonour

&aied( is a facultatie endorsement.

As a result of such an endorsement the endorsee is relieed of his duty to gie notice of

dishonour to the endorser and the latter remains liable to the endorsee for the non*payment of the

instrument$ een though no notice of dishonour has been gien to him.

. De$ine Banker an' %usto&er. Discuss the enera" an' s!ecia" re"ationshi! bet2een

banker an' custo&er.

Ans:

Intro'uction:

The relationship bet&een a banker and a customer depends on the actiitiesJ products or serices

proided by bank to its customers or aailed by the customer. Thus the relationship bet&een a

banker and customer is the transactional relationship. Bank>s business depends much on the

strong bondage &ith the customer. %Trust( plays an important role in building healthy

relationship bet&een a banker and customer.

/efinition of a Banker:

The Banking 2egulations Act B 2 Act) !"#" does not define the term Sbanker> but defines &hat


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banking isR

As per Sec.0 b) of the B 2 Act %BankingD means accepting$ for the purpose of lending or

inestment$ of deposits of money from the public repayable on demand or other&ise and

&ithdra&able by che'ue$ draft$ order or other&ise.M

As per Sec. 3 of the Indian ,egotiable Instruments Act !NN!$ the &ord %banker includes any

person acting as banker and any post office saings bank(.

According to +ec. 3 of the Bill of =0change Act$ !NN3$ Sbanker includes a body of persons$

&hether incorporated or not &ho carry on the business of banking.>

Sec.0c7 of Bandking 2egulation Act$ !"#" defines Mbanking companyM as a company that

transacts the business of banking in India. +ince a banker or a banking company undertakes

banking related actiities &e can derie the meaning of banker or a banking company from +ec

1b) as a body corporate that: a) Accepts deposits from public. b) 4ends or c) Inests the

money so collected by &ay of deposits. d) Allo&s &ithdra&als of deposits on demand or by any

other means.

Accepting deposits from the Spublic> means that a bank accepts deposits from anyone &ho offers

money for the purpose. 6nless a person has an account &ith the bank$ it does not accept deposit.

-or depositing or borro&ing money there has to be an account relationship &ith the bank. A bank

can refuse to open an account for undesirable persons. It is banks right to open an account.

2esere Bank of India has stipulated certain norms Kno2 >our %usto&er K>%) guidelines

for opening account and banks hae to strictly follo& them.

In addition to the actiities mentioned in +ec.1 b) of B 2 Act$ banks can also carry out actiities

mentioned in +ec. H of the Act.


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Who is a %usto&er;/

The term Customer has not been defined by any act. The &ord Scustomer> has been deried from

the &ord Scustom>$ &hich means a Shabit or tendency> to*do certain things in a regular or a

particular manner>s .In terms of +ec.!! of ,egotiable Instrument Act$ &hen a banker receies

payment of a crossed che'ue in good faith and &ithout negligence for a customer$ the bank does

not incur any liability to the true o&ner of the che'ue by reason only of haing receied such

payment. It obiously means that to become a customer account relationship is must. Account

relationship is a contractual relationship.

It is generally belieed that any indiidual or an organisation$ &hich conducts banking

transactions &ith a bank$ is the customer of bank. o&eer$ there are many persons &ho do

utili5e serices of banks$ but do not maintain any account &ith the bank.

Thus bank customers can be categori5ed in to four broad categories as under:

a)Those &ho maintain account relationship &ith banks i.e. =0isting customers.

b)Those &ho had account relationship &ith bank i.e. -ormer Customers

c)Those &ho do not maintain any account relationship &ith the bank but fre'uently

isit branch of a bank for aailing banking facilities such as for purchasing a

draft$ encashing a che'ue$ etc. Technically they are not customers$ as they do

not maintain any account &ith the bank branch.

d)Prospectie; Potential customers: Those &ho intend to hae account relationship

&ith the bank. A person &ill be deemed to be a DcustomerD een if he had only

handed oer the account opening form duly filled in and signed by him to the bank

and the bank has accepted the it for opening the account$ een though no

account has actually been opened by the bank in its books or record.

The term DcustomerD is used only &ith respect to the branch$ &here the account is maintained. e

cannot be treated as a ScustomerD for other branches of the same bank. o&eer &ith the


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implementation of> SCore Banking +olution> the customer is the customer of the bank and not of

a particular branch as he can operate his account from any branch of the bank and from

any&here. In the eent of arising any cause of action$ the customer is re'uired to approach the

branch &ith &hich it had opened account and not &ith any other branch.

Banker8%usto&er )e"ationshi!:

Banking is a trust*based relationship. There are numerous kinds of relationship bet&een the bank

and the customer. The relationship bet&een a banker and a customer depends on the type of

transaction. Thus the relationship is based on contract$ and on certain terms and conditions.

These relationships confer certain rights and obligations both on the part of the banker and on the

customer. o&eer$ the personal relationship bet&een the bank and its customers is the long

lasting relationship. +ome banks een say that they hae generation*to*generation banking

relationship &ith their customers.The banker customer relationship is fiducial relationship. The

terms and conditions goerning the relationship is not be leaked by the banker to a third party.

%"assi$ication o$ )e"ationshi!:

The relationship bet&een a bank and its customers can be broadly categori5ed in to ?eneral

2elationship and +pecial 2elationship.

If &e look at Sec 0b7 of Banking 2egulation Act$ &e &ould notice that bank>s business hoers

around accepting of deposits for the purposes of lending. Thus the relationship arising out of

these t&o main actiities are kno&n as ?eneral 2elationship. In addition to these t&o actiities

banks also undertake other actiities mentioned in +ec.H of Banking 2egulation Act.

2elationship arising out of the actiities mentioned in +ec.H of the act is termed as special


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7hile issuing /emand /raft$ ail ; Telegraphic Transfer$ bank becomes a debtor as it o&ns

money to the payee; beneficiary.

(. %re'itorJDebtor: 4ending money is the most important actiities of a bank. The resources

mobili5ed by banks are utili5ed for lending operations. Customer &ho borro&s money from bank

o&ns money to the bank. In the case of any loan;adances account$ the banker is the creditor and

the customer is the debtor. The relationship in the first case &hen a person deposits money &ith

the bank reerses &hen he borro&s money from the bank. Borro&er e0ecutes documents and

offer security to the bank before utili5ing the credit facility.

In addition to opening of a deposit;loan account banks proide ariety of serices$ &hich makes

the relationship more &ide and comple0. /epending upon the type of serices rendered and the

nature of transaction$ the banker acts as a bailee$ trustee$ principal$ agent$ lessor$ custodian etc.

Bank as a rustee:

As per Sec. 3 of Indian Trust Act$ !NN3

S A MtrustM is an obligation anne0ed to the o&nership of property$ and arising out of a confidence

reposed in and accepted by the o&ner$ or declared and accepted by him$ for the benefit of

another$ or of another and the o&ner.> Thus trustee is the holder of property on behalf of a

beneficiary.

As per Sec. 10 of the SIndian Trust Act$ !NN3 SA trustee is bound to deal &ith the trust*property

as carefully as a man of ordinary prudence &ould deal &ith such property if it &ere his o&nJ and$

in the absence of a contract to the contrary$ a trustee so dealing is not responsible for the loss$

destruction or deterioration of the trust*property.> A trustee has the right to reimbursement of

e0penses +ec.3 of Indian Trust Act.).

In case of trust banker customer relationship is a special contract. 7hen a person entrusts

aluable items &ith another person &ith an intention that such items &ould be returned on


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demand to the keeper the relationship becomes of a trustee and trustier. Customers keep certain

aluables or securities &ith the bank for safekeeping or deposits certain money for a specific

purpose =scro& accounts) the banker in such cases acts as a trustee. Banks charge fee for

safekeeping aluables.

. Bai"ee J Bai"or:

+ec.!#N of Indian Contract Act$ !N83$ defines MBailmentMMbailorM and MbaileeM.

A MbailmentM is the deliery of goods by one person to another for some purpose$

upon a contract that they shall$ &hen the purpose is accomplished$ be returned or other&ise

disposed of according to the directions of the person deliering them. The person deliering the

goods is called the MbailorM. The person to &hom they are deliered is called$ the MbaileeM.

Banks secure their adances by obtaining tangible securities. In some cases physical possession

of securities goods Pledge)$ aluables$ bonds etc.$ are taken. 7hile taking physical possession of

securities the bank becomes bailee and the customer bailor. Banks also keeps articles$ aluables$

securities etc.$ of its customers in +afe Custody and acts as a Bailee. As a bailee the bank is

re'uired to take care of the goods bailed.

#. Lessor an' Lessee:

+ec.!91 of STransfer of property Act !NN3> defines lease$ 4essor$ lessee$ premium and rent. As

per the section

%A lease of immoable property is a transfer of a right to enjoy such property$ made for a certain

time$ e0press or implied$ or in perpetuity$ in consideration of a price paid or promised$ or of

money$ a share of crops$ serice or any other thing of alue$ to be rendered periodically or on

specified occasions to the transferor by the transferee$ &ho accepts the transfer on such terms.(

- De$inition o$ Lessor, "essee, !re&iu& an' rent :


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!)The transferor is called the lessor$

3)The transferee is called the lessee$

)The price is called the premium$ and

#)The money$ share$ serice or other thing to be so rendered is called the rent.(

Proiding safe deposit lockers is as an ancillary serice proided by banks to customers. 7hile

proiding +afe /eposit ault;locker facility to their customers bank enters into an agreement

&ith the customer. The agreement is kno&n as %emorandum of letting( and attracts stamp

duty.

The relationship bet&een the bank and the customer is that of lessor and lessee. Banks lease hire

lockers to their customers) their immoable property to the customer and gie them the right to

enjoy such property during the specified period i.e. during the office; banking hours and charge

rentals. Bank has the right to break*open the locker in case the locker holder defaults in payment

of rent. Banks do not assume any liability or responsibility in case of any damage to the contents

kept in the locker. Banks do not insure the contents kept in the lockers by customers.

1. Aent an' Crinci!a":

Sec.15( of SThe Indian Contract Act$ !N83> defines %an agent( as a person employed to do any

act for another or to represent another in dealings &ith third persons. The person for &hom such

act is done or &ho is so represented is called %the Principal(.

Thus an agent is a person$ &ho acts for and on behalf of the principal and under the latter>s

e0press or implied authority and the acts done &ithin such authority are binding on his principal

and$ the principal is liable to the party for the acts of the agent.

Banks collect che'ues$ bills$ and makes payment to arious authorities i5.$ rent$ telephone bills$

insurance premium etc.$ on behalf of customers. . Banks also abides by the standing instructions

gien by its customers. In all such cases bank acts as an agent of its customer$ and charges for

theses serices. As per Indian contract Act agent is entitled to charges. ,o charges are leied in


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bills on his behalf.

c)/uty to pay bills etc.$ as per standing instructions of the customer.

d)/uty to proide proper serices.

Banking Law-model Paper

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