BRBL CAIIB notes – Unit 2

Unit-2 Control over organizations of Banks

Licensing of banking Companies

1. To do business, Licensing required from RBI – U/s 22 BR Act 1949.
2. RBI discretion to grant the license or not.

Conditions for License are

1. whether company will be able to pay the deposits.
2. conduct the business,
3. has adequate capital and making profits,
4. public interest will be served
5. potential of banking business in area of operation, etc.
6. RBI can cancel the license u/s 22 (4) of B R Act, where RBI is satisfied that company has stopped the business or has not complied with conditions.
7. Co. can appeal to Central Govt. against RBI decision of cancelation of license within 30 days of date of order.

Branch Licensing

1. U/s 23 of BR Act, license is required from RBI (RBI now follows annual branch authorization policy).
2. RBI may impose any conditions while granting the permission.
3. In case of RRBs, the application will be routed through NABARD.

Capital of Banks

Paid-up, subscribed capital and authorised capital: (Sec 12)

1. Subscribed capital should be min half of authorised and paid capital should be min half of subscribed capital.
2. Banks can issue equity capital; preference shares as innovative instruments under Basel 3 guidelines of RBI.

Paid-up Capital and reserves: (Sec 11)

Foreign banks-Min Rs. 15 lacs (for Mumbai, Kolkata Rs.20 lac). 20% of profits each year to be deposited with RBI)

Indian banks – Branches > one State – Rs.5 lac (Mumbai and Kolkata Rs.10 lac).  Branch in one State Rs. 1 lac.

Shareholding in Banking companies:

1. Voting rights of single shareholder – Max 10% of total voting rights in PSBs and 26% for PVT banks.
2. Application for transfer of shares above prescribed level (>5% of paid-up capital by single person), it should be referred to RBI.
3. Commission, brokerage, and discount – Max 2.5% of price, including premium, at which shares are issued. (Sec 13)
4. Dividend – should be given out of current year profits after writing off of capitalized expenses (Sec 15).

5.Conditions for Dividend – Min CAR is 9% for 3 years and net NPAs < 7%. Max dividend payout ratio is 40%.

Subsidiaries of Banking Companies

1. Subsidiary can be formed as per Section 19 of B R Act for business as per Section 6 (1) and also for business of banking exclusively outside India
2. For any other business RBI /Central Govt. permission required.
3. Sec 19(2) – Banks can hold shares in other companies with max of 30% of their capital + reserves or 30% of capital of the company, whichever tower.

Directors and Board of Directors

Board of Directors (Sec 10)

• Min 51% of directors should have special knowledge or practical experience.
• Min 2 directors to have special knowledge.
• Period of office: 8 years. If chairman or whole-time director is removed, he is not eligible for re-appointment for 4 years

Additional directors

• RBI can appoint one or more additional directors. Such director need not have shareholding.

Whole-time Chairman of a banking company

• Approval with RBI permission (Sec 10-B)
• Term of office – max 5 years.
• To have special knowledge or practical experience of working of a banking company
• RBI can advise a banking company to remove the chairman or working director within max of 2 months. If not done, RBI can remove.
• Removed person can appeal to Central Govt. within 30 days of such order.
• RBI can appoint chairman for a period up to 3 years.

Control over management

• RBI can remove Chairman, director or CEO or any other officer or employee of banking company.
• Appeal against RBI order can be made within 30 days to the Central Govt.
• Person cannot be in similar position for 5 years or more.
• Contravention of order is punishable with a fine of Rs.250 per day of contravention.
• RBI can supersede Board of a bank for a period up to 6 months, which can be extended up to 12 months.

Corporate Governance

Corporate governance stands for :

• overseeing by Board, of running of a company in a fair, transparent and accountable manner, by managers and
• accountability of Board to shareholders and company.
• The concept evolved with a study by Cadbury Committee 1992.

Corporate governance structure of Organization for Economic, Cooperation and Development (OECD) should consider, following aspects:

• Rights of shareholders and key ownership functions.
• Equitable treatment of shareholders
• Role of stakeholders in corporate governance
• Disclosure and transparency
• Responsibilities of the Board.
• Banks hold special position in corporate governance, because they accept large amount of public deposits in fiduciary capacity.
• In India, RBI announced policy on Corporate Governance in Oct 2002 on the basis of AS Ganguly committee recommendations.
• For private banks, these guidelines were issued in Feb 2005.
• Not more than one member from a family, should be on the Board of a bank.
• The board members should satisfy ‘fit and proper’ criteria.
• Banks to provide all information for seeking RBI approval for appointment of Chairman / CEO.

BCBS issued guidance in Feb 2006 to promote sound practices of corporate governance that include :

1. Role of Board of Directors
2. Effective management of conflict of interest
3. Role of internal and external auditors.

Dear CAIIB Aspirants,

These notes are a part of 2024 CAIIB Video library course of Banking Regulations and Business Laws (BRBL)  by Motivational Banker. These notes are intended to help you prepare better for your CAIIB exam.

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