LLM Group 2 Business Law Banking Laws 2023 Question Paper with Solutions

The objectives are four and each has a legal consequence worth naming.

Economies of scope. The same branch network, the same customer records and the same credit assessment can be used to sell several products, so the marginal cost of the second product is low. The legal consequence is that the group's value lies in shared information, which is precisely what the duty of secrecy in Tournier v. National Provincial and Union Bank of England, [1924] 1 KB 461, restricts, and what the Digital Personal Data Protection Act, 2023, now regulates.

Diversification of income. Fee income from insurance, mutual funds and advisory work does not move with the credit cycle, so a conglomerate's earnings are steadier than a pure lender's. The legal consequence is a prudential one: a bank earning fees carries operational and conduct risk rather than credit risk, and the capital framework had to be extended to cover it.

Convenience to the customer, which is the argument usually made publicly, and which is real: a single relationship for deposits, credit, payments, insurance and investment lowers the customer's own cost of dealing.

Section 8 prohibits trading, that is buying, selling or bartering goods, except in connection with the realisation of a security. Section 19 restricts the nature of subsidiary companies and limits the holding of shares in any company, whether as pledgee, mortgagee or absolute owner, to a stated proportion of that company's capital and of the bank's own funds.

The consequence is that the conglomerate structure is a legal necessity and not a commercial preference. A bank cannot itself carry on insurance business, so insurance is done by a subsidiary or a joint venture; it cannot trade, so commodity businesses are excluded; and section 19 caps what it may hold in the vehicles that do these things. Every genuinely new activity an Indian bank has taken up has needed either a notification under section 6(1)(o) or a separate company under section 19.

Secondly, conflict of interest, and this is where the law is most exposed. A bank that lends to a company whose share issue its own subsidiary is underwriting has an interest in the issue succeeding. A bank that sells its group's insurance policy at the counter is advising a depositor who trusts it. Section 20 addresses the sharpest form of the problem by prohibiting advances to directors and to concerns in which they are interested, and section 19 limits shareholdings, but neither reaches mis selling. That has had to be regulated instead, through the Reserve Bank's directions on the marketing of third party products and, since the Consumer Protection Act, 2019, through the concept of an unfair contract and the Central Consumer Protection Authority's power over misleading practices.

Fourthly, too big to fail. A conglomerate whose failure would be systemic enjoys an implicit public guarantee and therefore has an incentive to take more risk than it otherwise would. The Reserve Bank's answer is the framework for domestic systemically important banks, under which such banks carry an additional capital surcharge. The deeper legal problem is that India has no special resolution regime for a financial group at all: banks are excluded from the Insolvency and Bankruptcy Code, 2016, section 227 has been used for non banking financial companies and never for banks, and the Financial Resolution and Deposit Insurance Bill, 2017, was withdrawn in August 2018. A failing conglomerate would have to be dealt with entity by entity, the bank under section 45 of the Act of 1949 and the rest under the Code.

The limit on that power was drawn in Internet and Mobile Association of India v. Reserve Bank of India, decided on 4 March 2020. The Bank had directed the entities it regulates to stop providing services to virtual currency businesses, which cut a whole trade off from the banking system. The Court accepted the power but set the circular aside on proportionality, no damage to any regulated entity having been shown. For a conglomerate the lesson is practical: the Bank may reach the group's activities, but a direction that destroys a line of business must be justified by evidence.

And where a bank's multifunctional business goes wrong for a customer, the relationship is not treated as a bare licence or a bare contract. In Amitabha Dasgupta v. United Bank of India, decided on 19 February 2021, the Supreme Court refused to accept that a safe deposit locker hirer was a mere licensee, holding that the customer is entirely at the mercy of the bank because the locker cannot be operated without the bank's key, and directed the Reserve Bank to frame rules; the revised locker directions of August 2021 followed, with a duty of care and liability of one hundred times the annual rent for loss caused by the bank's negligence, fire, theft or employee fraud. A bank that sells many services is answerable for each of them.

The unresolved tension is between a market that expects one relationship to supply everything and a statute of 1949 that lists what a bank may do. Peerless shows the Reserve Bank's reach is wide enough to follow the business wherever it goes; Internet and Mobile Association of India shows that reach must be exercised proportionately; and the withdrawal of the Bill of 2017 means that if a large Indian conglomerate ever fails, the law that deals with it will be a chapter written before any of these businesses existed.