Regulatory Reform in India: The Banking Laws (Amendment) Bill, 2024
Introduction
India’s banking sector is regulated by regulatory legislation for financial stability, transparency, and accountability. The recent bill that proposes to amend the Reserve Bank of India Act 1934 (‘RBI Act’) and the Banking Regulation Act 1949 (‘BRA’) has brought key changes to the upgradation of certain features of regulatory compliance, especially on cash reserves, tenure of directors, common directorship in co-operative banks, and definition of substantial interest of a company. This article draws some in-depth comparisons of the situation before and after such amendments.
Tenure of Directors of Co-operative Banks
Initially, a director of a cooperative bank other than the chairman or the whole-time director was not allowed to hold office for more than eight consecutive years, according to the BRA. If this bill is implemented, it will increase this maximum tenure of ten successive years for the directors of co-operative banks. This increased term may lead to more continuity and stability in the governance of cooperative banks. The concern, however, is about the overstay in leadership positions that choke new ideas or initiatives.
Prohibition of Common Directors for Co-operative Banks
It was earlier Prohibited for a director of the board of a bank from holding the office of a director on the board of another bank, except on the RBI’s appointment of directors. However, this Bill expands the exception of common directorship by allowing common directorship between directors of central co-operative banks if they could serve as directors on the board of the state co-operative bank, wherein he happens to be a member.
Moreover, it has been enacted to strengthen cooperation in the co-operative banks for the directors to oversee more than one institute within the co-operative structure. Critics may opine that it would lead to conflicts of interest and not an efficient form of supervision.
Fortnight Definition for Cash Reserves
The RBI Act directed scheduled banks to maintain a minimum average daily balance with the RBI as cash reserves. Interestingly, such an average was essentially computed based on daily balances maintained by banks at the end of business hours each day during a fortnight, meaning, the period between Saturdays to the second following Friday including both days.
Substantial Interest in a Company
Under the BRA, a person who had an interest in a company was held to have a substantial interest therein, if he his spouse, or his minor child jointly held with any other person or persons either shares exceeding twenty-five lakh rupees or ten percent of the paid-up capital whichever is less. However, the bill strengthens the acceptance level for substantial interest up to two crore rupees allowing a more direct and indirect financial interaction without triggering regulatory restrictions.
Furthermore, this amount is also empowered to be changed by the central government by a notification only. The threshold has been increased to the level that it is more typical for the contemporary economic scenario, with the altered percentages of businesses and inflation. It enables investors to possess greater stakes and does not raise the eyes of the authorities, thus encouraging large investments by individuals in companies.
Nomination by account holders
The bill proposes to allow up to 4 nominees for deposits, items left in bank custody, or a locker hired from a bank. In cases of the death of the nominator, the nominee can access the deposit, articles, or locker in the bank.
The manner of nomination envisaged for deposits is either successive or simultaneous. For any other purpose, they can be appointed successively. In cases where nomination is simultaneous, the effect will follow the proportions declared. For successive nominations, a preference list order shall receive priority.
As per section 45ZA of the BRA, as of now, account holders can only nominate one legal heir. Hence, this move is expected to offer greater flexibility, and convenience to all stakeholders, i.e., the depositors and their legal heirs.
It would result in the simplification of the tiresome procedural and legal process currently laid down for the transfer of ownership by the legal heirs of a deceased. In addition, estate planning and succession can then be planned out in advance and in an efficient manner thereby mitigating potential disputes. Overall, this move seems to be welcomed as it caters to modern banking needs and ensures a more equitable asset distribution process.
Settlement of unclaimed amounts
Following Finance Minister Hon’ble Ms. Nirmala Sitaraman’s (‘FM’) statements, amendments to the State Bank of India Act, 1955 and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 will be introduced.
They seek to address unpaid or unclaimed dividends for more than seven years, and facilitate their transfer to the Investor Education and Protection Fund (‘IEPF’) as per the provisions of sections 124 and 125 of the Companies Act, 2013.
Also, it expands the scope of the current framework to include shares for which dividend has not been paid or claimed for seven consecutive years, and any interest or redemption amount for bonds which is unpaid or unclaimed for seven years. Most importantly, it envisages allowing individuals to claim transfers or refunds from the IEPF. Previously, unclaimed dividends, shares, and bonds redemption amounts remained with banks and no structured process was put in place for managing such assets.
To address this issue, the FM had then asked banking institutions to ensure that their customers nominate legal heirs to reduce unclaimed money left lying in accounts. In response, the RBI later launched the “UDGAM” portal and the “100 Days 100 Pays” initiative to help address the same.
This reform is expected to enhance the principle of integrity and the principle of transparency in the banking system, protecting both depositors and investors. It would help ensure that such assets would be prudently disposed of, retained within proper claimants, and that banks would not bear the stress of holding massive amount of assets that are not claimed.
Remuneration of auditors
This bill is intended to reduce the constraints and dependency of the banks by letting them set the remuneration of statutory auditors as per the norms of the industry and the individual bank’s needs. These new provisions are targeted towards raising the standing and effectiveness of the audit and governance in general. It envisages putting banks in a position where they would be able to agree on compensation which is commensurate with the level of specific audit services offered as the present one may not always be in tune with industry standards or as per the requirements of the individual banks.
Currently, the amount of remuneration paid is fixed by the Reserve Bank of India in consultation with the Government of India under and as per provisions of section 41 of the State Bank of India Act, 1955.
Such a provision is expected to please more number of auditors and enhance the areas of remuneration structures to be fair. The levels of overall governance within the banking sector have to improve considerably and there is a need to enhance quality of auditing services so as to uphold the concept of transparency and trust in the financial system.
Conclusion
The legislation proves to be a significant shift in the banking regulatory environment of India. Thus, the legislature is taking into account the key aspects of governance, compliance, and consumer protection. They mean to improve the stability and efficiency of banks, thereby reducing the difficulties of compliance and helping them cope effectively with their obligations.
Moreover, as a consequence of fewer regulatory restrictions, it is prophesied that the bill would be a factor in creating a more vibrant economy. The final objectives prescribed confirm the government’s dedication to the cause of transparency and accountability, thus cementing the integrity of the banking sector.
All these changes, together, have the common aim of modernizing banking and also ensuring that the depositor’s and investor’s interests are preserved which in turn, leads to a stronger financial system. As the industry aligns with these trends, periodic assessments will be absolutely essential to make sure these improvements are achieved and still the oversight and governance principles are strictly adhered to.
Author: Ashwasti Shravani, in case of any queries please contact/write back to us at support@ipandlegalfilings.com or IP & Legal Filing
