The Banking Regulation Act: Scheme and Application

Section 4: power to suspend the Act. The Central Government may, on a representation by the Reserve Bank and if satisfied that it is expedient, suspend by notification the operation of all or any of the provisions of the Act, generally or for a specified banking company, for a period not exceeding sixty days. In a special emergency the Governor of the Reserve Bank, or a Deputy Governor in his absence, may make such a suspension, and the Central Government may extend the period.

Section 5A: the Act overrides the company's own constitution. Save as otherwise expressly provided, the Act has effect notwithstanding anything to the contrary in the memorandum or articles of a banking company, or in any agreement executed by it, or in any resolution passed in general meeting or by its Board.

Broken down: the four questions section 5A answers

Section 5A matters more than its length suggests, because it settles what a bank may agree to.

One: can a bank's articles displace the Act? No. The articles are subordinate to it.

Two: can a bank contract out of the Act? No. An agreement executed by the banking company cannot prevail over the Act, so a term in a loan or deposit contract that conflicts with a provision is ineffective to that extent.

Three: can the shareholders authorise a breach? No. A resolution in general meeting has no more power than the articles.

Four: what is the exception? The opening words, "save as otherwise expressly provided in this Act". Where a section itself allows something to be done by agreement or by the articles, that provision governs.

Who the Act applies to, and how much of it

This is the single most misunderstood point in the module, because the Act does not apply uniformly.

A banking company gets the whole Act. That is a company transacting the business of banking in India, on the section 5(c) definition worked in chapter 10.

The State Bank of India and the nationalised banks get a list. Section 51 applies to them, without prejudice to their own statutes, a specified set of provisions: sections 10, 13 to 15, 17, 19 to 21A, 23 to 28, 29 excluding sub-section (3), 29A, parts of sections 30 and 31, 34, 35, 35A, 35AA, 35AB, 36 in part, and others. The list is the point. A provision not in it does not apply to a nationalised bank at all.

Co-operative societies get the Act as modified by section 56, which rewrites it clause by clause. Chapter 140 works it.

The excluded societies in section 3 get nothing, and their credit business is governed by co-operative law alone.

And an International Financial Services Centre is carved out by section 51A, which provides that the Reserve Bank's powers under this Act shall not extend to an International Financial Services Centre set up under section 18(1) of the Special Economic Zones Act, 2005, those powers being exercisable instead by the authority for that Centre.

A worked example

Sahyadri Bank Ltd. is a banking company incorporated in Maharashtra. Its articles of association, adopted in 1962, provide that any shareholder holding more than fifteen per cent of the paid-up capital shall have voting rights in proportion to his holding.

Is that provision good? No. Section 12(2) of the Act caps the voting rights of a shareholder of a banking company, and by section 5A the Act has effect notwithstanding anything to the contrary in the articles. The article is inoperative to the extent of the conflict; the bank does not need to amend it first, though it plainly should.

Now suppose Sahyadri Bank is amalgamated into a nationalised bank. The transferee is a corresponding new bank constituted under the Acquisition Act of 1970. Which provisions of the Banking Regulation Act now govern it? Only those section 51 applies, together with its own Acquisition Act. A student who answers "the whole Banking Regulation Act" has missed the section that does the work.

Now suppose instead that the Central Government, on the Reserve Bank's representation, suspends section 24 for forty days during a liquidity crisis. That is section 4, it is lawful, and the maximum initial period is sixty days.

The closing machinery

Section 52: rules. The Central Government may, after consultation with the Reserve Bank, make rules for carrying out the Act, published in the Official Gazette.

Section 53: exemption. The Central Government may, on the recommendation of the Reserve Bank, declare by notification that any or all provisions shall not apply to a banking company or institution or class of banking companies, generally or for a specified period.

Section 54: protection of action taken. No suit or other legal proceeding shall lie against the Central Government, the Reserve Bank or any officer for anything done or intended to be done in good faith in pursuance of the Act.

Section 55: amendment of the Reserve Bank of India Act, in the manner specified in the First Schedule, with the amendments to section 18 of that Act deemed effective from 20 September 1947.

Section 55A: power to remove difficulties, the familiar provision allowing the Central Government to make orders resolving difficulties in giving effect to the Act.

Two powers that look alike and are not

What it does NOT mean

It does not mean the Act replaces the Companies Act. Section 2 says the opposite: it is in addition to it.

It does not mean every bank in India is governed by every section. Section 51's list, section 56's modifications and section 3's exclusions each cut the Act down for a different category.

It does not mean section 5A lets the Reserve Bank do anything. Section 5A is about the company's own constitution and contracts, not about the limits of the regulator's powers, which come from the sections conferring them.

And section 54 is not an immunity for the Reserve Bank. It protects action taken in good faith; action outside the power conferred, or in bad faith, is not protected, and the Reserve Bank's directions are reviewable on the ordinary grounds.

Limits and criticism

Section 2 still names the Companies Act, 1956, which was replaced by the Companies Act, 2013. The reference carries over by section 8 of the General Clauses Act, 1897, but a consolidation that prints a repealed statute's name is a fair criticism of the state of the Act's drafting.

Section 51's technique of applying provisions by list is brittle. Every amendment to the Act requires the list to be updated, and it has been amended repeatedly for exactly that reason, which is visible in the accumulated brackets in the section's own text.

The sixty-day cap in section 4 has never been seriously tested, and whether a rolling series of extensions is within its spirit is an open question worth raising in an answer.

Quick revision

Section 1: short title, extends to the whole of India, commenced 16 March 1949; "Regulation" replaced "Companies" in 1965.

Section 2: in addition to, not in derogation of, the Companies Act and other laws.

Section 3: does not apply to a primary agricultural credit society, or to a co-operative society whose principal business is long-term agricultural finance, if it does not use the banking words.

Section 4: Central Government may suspend provisions for up to sixty days on the Reserve Bank's representation; the Governor may in a special emergency.

Section 5A: the Act overrides memorandum, articles, agreements and resolutions, save as expressly provided.

Section 51: a listed set of provisions applies to the State Bank and the nationalised banks. Section 51A: the Reserve Bank's powers do not extend to an International Financial Services Centre.

Sections 52 to 55A: rules after consultation; exemption on recommendation; good faith protection; amendment of the 1934 Act; removal of difficulties.

Test yourself

1. Does the Banking Regulation Act displace company law for a bank? No. Section 2 makes it additional to the Companies Act and other laws, save where the Act expressly provides otherwise, so a banking company remains a company and the Act is an overlay.

2. A bank's articles permit a loan to a director on terms the Act forbids. Which prevails, and why? The Act. Section 5A gives it effect notwithstanding anything to the contrary in the memorandum, articles, any agreement or any resolution.

3. Which provisions of the Act apply to a nationalised bank? Only those listed in section 51, together with the bank's own Acquisition Act. The list includes sections 10, 13 to 15, 17, 19 to 21A, 23 to 28 and others, and a provision outside it does not apply.

4. For how long may the operation of the Act be suspended, and by whom? By the Central Government on the Reserve Bank's representation, for a period not exceeding sixty days at a time, extendable; and in a special emergency by the Governor of the Reserve Bank or, in his absence, a Deputy Governor.

5. What does section 51A do? It provides that the Reserve Bank's powers under the Act do not extend to an International Financial Services Centre set up under section 18(1) of the Special Economic Zones Act, 2005, those powers being exercisable by that Centre's own authority instead.