LLM Group 2 Business Law Banking Laws 2015 Question Paper with Solutions

For full marks, cover: the statutory foundation first, because the examiner has set three heads that are all statutory functions and an answer that opens on economics rather than on the Reserve Bank of India Act, 1934, loses the law marks; then each head in turn with its own sections, because three heads means three separate treatments; under currency, the sole right of issue, the Issue Department, the minimum reserve system and the demonetisation power with the decision that tested it; under banker to the Government, the distinction between the obligation and the right, and the management of public debt; under bankers' bank, the cash reserve ratio, the clearing function and the lender of last resort; under bank rate, the definition the Act itself gives, the reason the rate has become a legal reference point rather than an operative one, and what displaced it.

The preamble states the mandate and is worth quoting in an answer because all three heads set by this question fall out of it. It speaks of regulating the issue of bank notes and keeping of reserves with a view to securing monetary stability in India, and generally operating the currency and credit system of the country to its advantage. The Finance Act, 2016, added a further clause, that the primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Currency is the first limb, the reserves of the banking system are the second, and the bank rate is one of the instruments by which the credit system is operated.

The Bank works through a Central Board constituted under section 8. It consists of the Governor, not more than four Deputy Governors, four Directors nominated one each from the four Local Boards, ten Directors nominated by the Central Government and two Government officials. Section 7 preserves a power in the Central Government to give directions in the public interest after consultation with the Governor, a section that has never formally been invoked but was publicly discussed during the disagreement between the Government and the Bank in 2018. The point for an answer is that the Bank's autonomy is statutory and qualified rather than constitutional.

The backing for the note issue rests on the minimum reserve system introduced by the Reserve Bank of India (Amendment) Act, 1957. Before that the Bank ran a proportional reserve system under which forty per cent of the note issue had to be covered by gold and sterling securities. Section 33 now requires the assets of the Issue Department to include gold coin, gold bullion and foreign securities of an aggregate value of not less than two hundred crore rupees, of which the gold component is not to be less than one hundred and fifteen crore rupees, the balance being made up of rupee securities and eligible bills. The change is significant in principle: the note issue is no longer tied to a metallic proportion, and the real discipline on the quantity of money is monetary policy rather than the cover requirement.

Section 26(1) makes every bank note legal tender for the amount expressed in it and guaranteed by the Central Government. Section 26(2) is the provision under which currency is withdrawn from circulation. It permits the Central Government, on the recommendation of the Central Board, by notification in the Gazette, to declare that any series of bank notes of any denomination shall cease to be legal tender, save at such office or agency and to such extent as may be specified.

Nagarathna J. dissented and the dissent is the more useful half of the case for an examination answer. She held that "any series" cannot be read to include the entire denomination, that a proposal originating with the Central Government cannot be dressed up as a recommendation of the Central Board, and that a measure withdrawing eighty six per cent of the currency in circulation by value could only be taken by legislation, since Parliament is the forum in which such a measure must be debated. She declined to grant relief because the notes had long since been exchanged, so the dissent is declaratory. It matters because it identifies the constitutional limit on an executive currency power and because it treats the Central Board's independent recommendation as a jurisdictional fact rather than a formality.

Currency regulation has since acquired a digital limb. The Finance Act, 2022, amended the definition of "bank note" in the Reserve Bank of India Act to include a bank note issued in digital form, which read with section 22 is what allows the Bank to issue central bank digital currency. The wholesale pilot of the digital rupee began on 1 November 2022 and the retail pilot on 1 December 2022. The legislative technique is worth noticing: rather than create a new instrument, Parliament extended the definition of the old one, so the digital rupee is legal tender on exactly the same footing as a printed note.

Three practical consequences follow and each is worth a sentence. First, the Bank manages the public debt of the Union and of the States, which means it conducts the auctions of dated securities and treasury bills, maintains the ownership records and services the interest. Secondly, it provides Ways and Means Advances, temporary accommodation to bridge the mismatch between receipts and payments, repayable within three months, which are limited in amount by agreement and are not a means of financing the deficit. Thirdly, since the Fiscal Responsibility and Budget Management Act, 2003, the Bank has been prohibited from subscribing to primary issues of Central Government securities, which ended the automatic monetisation of the deficit and is the single most important structural reform in this relationship.

The companion requirement, the statutory liquidity ratio, sits not in the Reserve Bank of India Act but in section 24 of the Banking Regulation Act, 1949, and requires every banking company to maintain in cash, gold or unencumbered approved securities a stated percentage of its demand and time liabilities, subject to a statutory ceiling of forty per cent. The two ratios do different work: the cash reserve ratio drains liquidity to the central bank, while the statutory liquidity ratio compels the banks to hold safe assets and so protects depositors as well as funding the Government. At the policy of August 2026 the cash reserve ratio stands at three per cent and the statutory liquidity ratio at eighteen per cent.

(c) Bank rate

Bank rate is defined by section 49 of the Reserve Bank of India Act as the standard rate at which the Bank is prepared to buy or rediscount bills of exchange or other commercial paper eligible for purchase under the Act. The section requires the Bank to make the rate public. Historically it was the pivot of monetary policy: raising it made refinance from the central bank dearer, which was passed on in lending rates and contracted credit, and lowering it did the reverse.

Its operative role has been displaced, and an answer that presents the bank rate as the working instrument of Indian monetary policy is out of date by many years. Since the liquidity adjustment facility was introduced the working rate has been the repo rate, the rate at which the Bank lends overnight to banks against Government securities. Since the realignment of February 2012 the bank rate has been kept equal to the marginal standing facility rate, which is itself fixed at a margin above the repo rate, so the bank rate now moves automatically with the repo rate and carries no independent signal.

Section 45ZB constitutes the Monetary Policy Committee of six members: the Governor as ex officio chairperson, the Deputy Governor in charge of monetary policy, an officer of the Bank nominated by the Central Board, and three members appointed by the Central Government. Decisions are by majority and the Governor has a casting vote in the event of a tie. The Committee must meet at least four times a year, and section 45ZN makes a failure to maintain the target for three consecutive quarters a failure that obliges the Bank to report to the Central Government with the reasons and the remedial action proposed.

The instruments the Committee actually uses are worth naming. The repo rate is the policy rate; the standing deposit facility, introduced in April 2022, is the floor of the corridor and absorbs liquidity without collateral; the marginal standing facility is the ceiling; and open market operations, the cash reserve ratio and the statutory liquidity ratio are the quantitative instruments. At the meeting of 5 August 2026 the Committee kept the repo rate at 5.25 per cent with a neutral stance. The legal significance of the 2016 framework is that monetary policy ceased to be the personal responsibility of the Governor and became a statutory committee decision against a statutory target, which is a substantial change in the constitutional position of the central bank.

The consequence is the whole of Part III. Because the discrimination is justified, the High Court may be bound rather than left with a discretion, the Reserve Bank rather than a creditor may hold the initiative, and the Bank's own opinion on solvency may be made the operative fact. Every feature of the winding up code that looks harsh beside ordinary company law rests on this decision.

Two later decisions mark the outer edge of the Bank's powers and both should be given. In Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd., (1987) 1 SCC 424, a residuary non banking company ran a savings scheme under which a subscriber who defaulted forfeited most of what he had paid, and the Bank issued directions regulating such schemes. The Supreme Court upheld the directions, holding them within the wide depositor protecting power in Chapter III B, so the Bank's reach extends to institutions that are not banks at all.

Conclusion. The three heads set by this question are not three separate activities but three faces of one statutory mandate. The Reserve Bank regulates currency because section 22 gives it the monopoly of note issue and section 33 tells it what must stand behind the notes; it is banker to the Government because sections 20 and 21 impose a duty and confer a corresponding right, and banker to the banks because section 42 compels every scheduled bank to keep its reserves with it and sections 17 and 18 make it the lender of last resort; and it fixes the bank rate under section 49 because the price of central bank money is how the credit system is operated to the country's advantage, which is what the preamble requires of it.