Business NewsNews

The Banking Regulation Act, 1949 has been amended by the Banking Regulation (Amendment) Act, 2020 notified for the Primary (Urban) Co-operative Banks (UCBs) on September 29, 2020, and deemed to have been effective from June 29, 2020. Consequently, Section 20 of the principal Act has become applicable to UCBs.

Keeping in view the above, the extant directions on the subject issued to UCBs have been reviewed and the revised directions are issued as under.

UCBs shall not make, provide or renew any loans and advances or extend any other financial accommodation to or on behalf of their directors or their relatives, or to the firms / companies / concerns in which the directors or their relatives are interested (collectively called as “director-related loans”). Further, the directors or their relatives or the firms / companies / concerns in which the directors or their relatives are interested shall also not stand as surety/guarantor to the loans and advances or any other financial accommodation sanctioned by UCBs. ‘Advances’ for the purpose shall include all types of funded / working capital limits such as cash credits, overdrafts, credit cards, etc.

  • The following categories of director-related loans shall, however, be excluded from “loans and advances” for the purpose of these directions:
  1. Regular employee-related loans to staff directors, if any, on the Boards of UCBs;
  2. Normal loans, as applicable to members, to the directors on the Boards of Salary Earners’ UCBs;
  3. Normal employee-related loans to Managing Directors / Chief Executive Officers of UCBs;
  4. Loans to directors or their relatives against Government Securities, Fixed Deposits and Life Insurance Policies standing in their own name.

Explanation: For the purpose of these directions –

i. The term ‘any other financial accommodation’ shall include funded and non-funded credit limits and underwritings and similar commitments, as under:

  1. The funded limits shall include loans and advances by way of bill/cheque purchase/ discounting, pre-shipment and post-shipment credit facilities and deferred payment guarantee limits extended for any purpose including purchase of capital equipment and acceptance limits in connection therewith sanctioned to borrowers, and guarantees by issue of which a bank undertakes financial obligation to enable its constituents to acquire capital assets. It shall also include investments which are in the nature of / in lieu of credit.
  2. The non-funded limits shall include letters of credit, guarantees other than those referred to in paragraph (a) above, underwritings and similar commitments. It shall also include off-balance sheet exposure in the form of derivatives.

ii. The word “relative” shall have the meaning as under:

A person shall be deemed to be a relative of another, if and only if:-

a) They are members of a Hindu Undivided Family; or

b) They are husband and wife; or

c) The one is related to the other (or vice-versa) in the manner indicated below:

  1. Father (including step-father)
  2. Mother (including step-mother)
  3. Son (including step-son)
  4. Son’s wife
  5. Daughter (including step-daughter)
  6. Daughter’s husband
  7. Brother (including step-brother)
  8. Brother’s wife
  9. Sister (including step-sister)
  10. Sister’s husband

iii. The word “interested” shall mean the director of the UCB or his relative, as the case may be, being a director, managing agent, manager, employee, proprietor, partner, coparcener or guarantor, as the case may be, of the firm / company / concern (including HUF):

Provided that a director of a UCB or his relative shall also be deemed to be interested in a company, being the subsidiary or holding company, if he/she is a director, managing agent, manager, employee or guarantor of the respective holding or subsidiary company:

Provided further that a director of a UCB shall also be deemed to be interested in a company/firm if he/she holds substantial interest in or is in control of the company/firm or in a company, being the subsidiary or holding company, if he/she holds substantial interest in or is in control of the respective holding or subsidiary company:

Provided further that a relative of a director of a UCB shall also be deemed to be interested in a company/firm if he/she is a major shareholder or is in control of the company/firm or in a company, being the subsidiary or holding company, if he/she is a major shareholder or is in control of the respective holding or subsidiary company:

iv. The term “substantial interest” shall have the same meaning as assigned to it in section 5(ne) of the Banking Regulation Act, 1949.

v. The term “control” shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in another manner.

vi. The term “major shareholder” shall mean a person holding 10% or more of the paid up share capital.

  • UCBs shall submit information pertaining to their director-related loans as at the end of each quarter (i.e. 31 March, 30 June, 30 September and 31 December), in the format given in the Annex to these directions, to the concerned Regional Office of Department of Supervision of Reserve Bank of India within fifteen days from the end of the respective quarter. In the case of UCBs functioning under Administrator(s) / Person(s)-in-Charge / Special Officers, the UCBs concerned should submit the information in respect of loans and advances availed by the Administrator(s) / Person(s)-in-Charge / Special Officers, including their relatives.
  • These directions supersede the earlier directives / instructions issued on the subject and shall come into force immediately. The existing director-related loans sanctioned/granted by UCBs in terms of the earlier directives / instructions prior to the issue of this circular, if any, may continue till their respective maturity and shall not be renewed further.

Reserve Bank of India

[Press Release dt. 05-02-2021]

Case BriefsSupreme Court

Supreme Court: In a breather to customers in the case relating to waiver of interest on loan during the moratorium period, the 3-judge bench of Ashok Bhushan*, R. Subhash Reddy and MR Shah, JJ has directed that all steps to implement the decision dated 23.10.2020 of the Government of India, Ministry of Finance be taken so that benefit to the eight categories contemplated in the affidavit can be extended.

The affidavit dated 23.10.2020, states that

“ (…) the decision taken by the Central Government for granting various reliefs for the COVID-19 pandemic for benefit of waiver of interest upto Rs.2 Crores in eight categories has been approved by the Union Cabinet in its meeting dated 21.10.2020 and Ministry of Finance has issued directions dated 23.10.2020 on the subject, which has been brought on record alongwith the affidavit.”

The eight categories are:

(i) MSME loans

(ii) Education loans

(iii) Housing loans

(iv) Consumer durable loans

(v) Credit card dues

(vi) Automobile loans

(vii) Personal loans to professionals

(viii) Consumption loans up

Solicitor General Tushar Mehta submitted before the Court that the Central Government is fully conscious of the difficulties faced by the various sectors and the stakeholders of various sectors and the Finance Ministry, after the outbreak of COVID-19, has taken several measures of reliefs dealing with the potential problems faced by several sectors and in several spheres of all financial worlds.

It was further highlighted that in pursuance of circular dated 23.10.2020,

“… the State Bank of India has informed that as on 13.11.2020, as per provisional, unaudited information received so far from various lending institutions, such lending institutions have released ex-gratia amount of an aggregate exceeding Rs.4,300 Crores in over 13.12 Crore accounts of borrowers covered under the Scheme.”

The Court will continue to hear the matter on 02.12.2020.

[Gajendra Sharma v. Union of India, 2020 SCC OnLine SC 963, decided on 27.11.2020]


*Justice Ashok Bhushan has penned this judgment

For petitioner: Senior Advocate Rajiv Dutta

For RBI: Solicitor General Tushar Mehta, Senior Advocate V. Giri and Advocate Ramesh Babu M.R.

Case BriefsSupreme Court

Supreme Court: The bench of Arun Mishra and UU Lalit, JJ directed the banks and financial institutions to release loans to home buyers of Amrapali Group, whose loans have been sanctioned, notwithstanding the fact that their accounts are declared as Non-Performing Assets (NPAs).

“Let there be restructuring of the loan amount. It may be released under the current norms of the RBI for releasing loans and the rates fixed by the RBI therefor.”

The Court further said that the disbursement of further loans may be based on the present rate of interest fixed by the RBI; this we order in the peculiar facts of the case. It may be released stage-wise and long-term restructuring of the loans may be done so that construction is completed and buyers are able to repay the loan.

Earlier, ASG Vikramjit Banerjee had submitted before the Court that that RBI instructions do not come in the way of releasing home buyers’ loans whose accounts are NPAs and that the banks were ready to release the loan to the home buyers.

Considering the fact that the housing projects have been stalled for the last several years, the Court noticed that the home buyers have obtained loans but cannot enjoy the fruits of their investment. At the same time, if projects are not completed and home buyers are not sure of handing over of flats, it would be difficult for them to pay bank dues till eternity and it is in the interest of home buyers as well as banks and financial institutions as they can recover money when projects are completed in an effective manner.

On Interest to be realized on the outstanding dues by Noida and Greater Noida Authorities

Receiver submitted before the Court that there is a lack of clarity concerning dues of local authorities/banks/lenders and that proper relaxations and concessions are required to be given concerning such dues. It was also submitted before the Court that the projects are incomplete, there were various litigations which created a huge financial impact and non-delivery of projects, which reflects the pathetic condition of the real estate sector. The developers and the home buyers both are adversely affected due to non-delivery of booked flats in the regions of Noida and Greater Noida etc.

Considering the current state of real estate, the projects are standstill, and in order to give impetus to such housing projects and mainly considering plight of home buyers and as pointed out by Noida and Greater Noida Authorities that 114 plots were allotted from 2005 onwards, most of projects are incomplete, the Court directed:

  • Rate of interest on the outstanding premium and other dues to be realized in all such cases at the rate of 8% per annum and the Noida and Greater Noida Authorities should do a restructuring of the repayment schedule so that amount is paid and Noida and Greater Noida Authorities are able to realize the same.
  • In case of failure to pay, the concession granted shall stand withdrawn.
  • Noida and Greater Noida Authorities shall also ensure that not only instalments/money are deposited, but also all such projects are completed within the stipulated time.

On NBCC’s scope of responsibilities and legal immunity

The Court directed that NBCC is immune from any legal actions for any existing disputes involving and in relation to the Amrapali Projects.

“we request the Courts/ Consumer Redressal Commission and other authorities not to permit impleadment of NBCC as respondent and not to issue summons to NBCC as they are doing the work under the supervision of this Court and are not answerable to any other court, tribunal, authorities.”

It further directed that NBCC is granted immunity to be sued in any other court or commission, and they are answerable to Supreme Court only in the pending proceedings. Thus, they cannot be dragged in the litigation filed by existing home buyers, previous contractors, co-developers, landowners, banks, financial institutions, other lenders and creditors, and any Government authorities before any other Court/ Commission or Authority.

It is also made clear that NBCC is not responsible for attending to queries made by the home buyers. They have to report the progress to the Receiver, who then, has to put progress reports of projects on the blog/website.

[Bikram Chatterjee v. Union of India, 2020 SCC OnLine SC 494 , decided on 10.06.2020]

Hot Off The PressNews

The Reserve Bank of India has been examining the feasibility of mandating the use of an external benchmark for determining the interest rate on floating-rate loans. In August 2017, the RBI constituted an Internal Study Group (ISG) to examine the working of the Marginal Cost of Fund Based Lending Rate (MCLR) system that was put in place in April 2016. The report of the ISG, which recommended the move over to an External Benchmark based Lending rate system, was placed in the public domain in October 2017. The comments of the Study Group on the responses to the report were also placed in the public domain as an addendum thereto in February 2018.

2. The RBI, in the Statement on Developmental and Regulatory Policies dated December 5, 2018, announced its intention to make it mandatory for banks to link all new floating rate personal or retail loans and floating rate loans to MSMEs to an external benchmark. As it was felt that the matter required further stakeholder consultations, it was announced in the Statement on Developmental and Regulatory Policies dated April 4, 2019, that RBI would hold further deliberations before taking a final decision in the matter.

3. It has been observed that due to various reasons, the transmission of policy rate changes to the lending rate of banks under the current MCLR framework has not been satisfactory. The RBI therefore issued a circular making it mandatory for banks to link all new floating rate personal or retail loans and floating rate loans to MSMEs to an external benchmark effective October 1, 2019. The banks are free to choose one of the several benchmarks indicated in the circular. The banks are also free to choose their spread over the benchmark rate, subject to the condition that the credit risk premium may undergo change only when borrower’s credit assessment undergoes a substantial change, as agreed upon in the loan contract.


Reserve Bank of India

[Press Release dt. 04-09-2019]

Experts CornerGaurav Pingle and Associates

Section 186 of the Companies Act, 2013 (“the Act”) relates to “loan and investment by company”. It provides for monetary threshold, approval matrix, recordkeeping, exemption from compliances, restrictions for giving loan, guarantee, security or making investment in another entity. The other relevant provisions are Rules made under Section 186 of the Act, Section 179 (relating to “powers of the Board of Directors”), Section 185 (relating to “loans to Directors”), Section 187 (relating to “investments of company to be held in its own name”). This article is a compilation and analysis of the relevant provisions relating to giving loan, guarantee or security or making investment under Section 186 of the Act. The article also contains the checklist for maintenance of documents, records and register under Section 186 of the Act. The company shall ensure compliance of the following provisions:

(1) Monetary threshold for approval of the Board of Directors— A company (i.e. private company or public company) with the approval of the Board of the Directors can directly or indirectly: (i) give any loan to any person or other body corporate; (ii) give any guarantee or provide security in connection with a loan to any other body corporate or person; and (iii) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate, up to 60% of its paid-up share capital, free reserves and securities premium account or 100% of its free reserves and securities premium account. In a company, the Accounts Department or Finance Committee or Chief Financial Officer (CFO) or Company Secretary (CS) shall monitor such limits on a regular basis.

(2) Exclusion from the said monetary limit—The word “person” does not include any individual who is in the employment of the company i.e. loan, guarantee or security provided by the company to its employees shall not be counted in the said limits. Therefore, loans, guarantee or security given by the company to its employees shall not be considered in the prescribed monetary limits.

(3) Monetary threshold for approval of the shareholders—Company shall not make any further investment, loan, guarantee or security unless it is previously authorised by a special resolution passed in a general meeting, if the aggregate of such investment, loan, guarantee or security made or given by the Board of Directors, exceed the prescribed limits (as discussed above). The special resolution passed at a general meeting shall specify the total amount up to which the Board of Directors is authorised to give such loan or guarantee, to provide such security or make such acquisition. The company shall obtain the prior approval of shareholders and the resolution shall specify further monetary limit i.e. the resolution cannot be an open-ended resolution.

(4) Exemption from the approval of shareholders—The previous approval of the shareholders by special resolution shall not be required where a loan or guarantee is given or where a security has been provided by a company to its wholly-owned subsidiary company or a joint venture company, or acquisition is made by a holding company, by way of subscription, purchase or otherwise of the securities of its wholly-owned subsidiary company. However, the company shall disclose the details of such loans or guarantee or security or acquisition in the financial statement.

(5) Disclosure in the financial statement—The company shall disclose to the members in the financial statement the full particulars of the loans given, investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security. Such disclosure can be part of Board’s report [Section 134(3)(g) of the Act] and notes to accounts.

(6) Mode of obtaining the approval of the Board of Directors—Investment, loan, guarantee or security shall be given by the company after the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting i.e. not by circular resolution. Pursuant to Section 179(3) of the Act, the Board of Directors of a company shall exercise the power to invest the funds of the company by means of resolutions passed at meetings of the Board of Directors. Such power can be delegated by the Board of Directors to any committee of directors, managing director, manager or any principal officer of the company or in the case of a branch office of the company, the principal officer of the branch office. Such delegation shall be made by passing a resolution at its meeting i.e. not by circular resolution.

(7) Prior approval of the public financial institution, in certain cases—The prior approval of the public financial institution is required where any term loan is subsisting and there is default in repayment of loan installments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution. The prior approval of public financial institution is required when there is default in payment of loan or interest and not when the payment is made regular basis.

(8) Rate of interest of the loan—The loan shall not be given under Section 186 of the Act at a rate of interest lower than the prevailing yield of 1-year, 3-year, 5-year or 10-year government security closest to the tenor of the loan.

(9) Restriction on giving loan, guarantee or security—A company which has defaulted in the repayment of any deposits accepted or in payment of interest thereon, shall not give any loan or give any guarantee or provide any security or make an acquisition till such default is subsisting. Such prohibition is applicable company makes a default in payment of loan or interest on deposits.

(10) Loan, guarantee or security to directors or relatives of directors—Section 185 of the Act relates to “loans to directors”. A company (whether private company or public company) shall not advance any loan (including any loan represented by a book debt to) or give any guarantee or provide any security in connection with any loan taken by: (i) any director of company, or director of a company which is its holding company or any partner or relative of any such director; and (ii) any firm in which any such director or relative is a partner. Therefore, the company shall confirm the party and its relation with the directors before advancing any loan or giving any guarantee or providing any security in connection with any loan. In certain cases, the company shall ensure compliance of Sections 185 and 186 of the Act.

(11)?Maintenance of register— Every company giving loan or giving a guarantee or providing security or making an acquisition shall keep a register which shall contain such particulars and shall be maintained in such manner as may be prescribed. Following are some important points relating to maintenance of the register :

(i) The company shall, from the date of its incorporation, maintain a register in Form MBP 2 and enter therein separately, the particulars of loans and guarantees given, securities provided and acquisitions made.

(ii) The entries in the register shall be made chronologically in respect of each such transaction within 7 days of making such loan or giving guarantee or providing security or making acquisition.

(iii) The register shall be kept in the custody of the Company Secretary of the company or any other person authorised by the Board for the purpose.

(iv) The register can be maintained either manually or in electronic mode.

(v) The entries in the register (either manual or electronic) shall be authenticated by the Company Secretary of the company or by any other person authorised by the Board of Directors for the purpose.

(12) Inspection and extracts of the register—The register maintained under Section 186 of the Act shall be kept at the registered office of the company. Such register shall be open to inspection at such office. The extracts of the register may be taken therefrom by any member, and copies thereof may be furnished to any member of the company on payment of such fees.

(13) Non-applicability of the provisions—The provisions of Section 186 of the Act (except the provisions relating to layers of investment companies) shall not apply: (i) to any loan made, any guarantee given or any security provided or any investment made by a banking company, or an insurance company, or a housing finance company in the ordinary course of its business, or a company established with the object of and engaged in the business of financing industrial enterprises, or of providing infrastructural facilities; (ii) to any investment made by an investment company, investment made in shares allotted in pursuance of rights issues; and  (iii) to any investment made in respect of investment or lending activities, by Non-Banking Finance Company (NBFC) registered the Reserve Bank of India (RBI) Act and whose principal business is acquisition of securities.


Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com