Legal Complexities in Insolvency of Banking Companies

Introduction

It is from the medieval era that corporates seem to have existed and continue to do so. It was only after a brief period that the trading companies came into the picture. The sixteenth century saw a sudden growth in such companies. The charters of incorporation were incorporated by the end of the seventeenth century.

The charter ensured certain advantages such as perpetual succession, the company shall be able to sue in its name, and on what basis can the acts of the company be considered distinct from its members. After this came a period wherein companies formed for establishing foreign trade gradually declined and those companies established for purposes of internal trading significantly increased.

The inherent reason behind the formation of Banking Companies is to help shape a better purpose wherein people would have trust at the time of depositing their hard-earned money and at the same time the companies can lend money to those who are in real need of it. However, contingencies are part and parcel of such companies as a result of which few are compelled to close down their running businesses.

The procedures that regulate the winding up of banking companies are somewhat similar to the Companies Act generally deals with the winding up of general companies. There is a slight distinction in the former meaning in the case of banking companies the overall supervision is done by the Reserve Bank of India. Sections 38 to 44 of the Banking Regulation Act, of 1949 are the specific provisions that concern themselves with the winding up of banking companies.

Winding-up of a company refers to the understanding in which it is observed that the company shall dissolve in due course and its asserts on one hand needs to be determined and on the other has to be diverted for payment of debts. It is only after the overall satisfaction of such debts if at all any balance is left the remaining amount shall be paid back to the respective members of the company. The fact that the remaining balance shall be paid to all such members in proportion largely depends on their contribution to raising the overall share capital of the company.

Defining the term would refer to the overall situation of winding up of a company as a ‘stage’ meaning the company shall take its last breath. The process of winding up is common in the field of business. Wherein one entity ceases to exist a new entity enters the place. Winding up reflects a situation commonly observed as the selling of assets and whatever proceeds collected shall be used up for discharging the existing liabilities. In such hardships, the liabilities shouldered upon the company are treated on a priority basis. Overall, the process that might seem quite straightforward is complicated and requires a due procedure to be followed.

There is a well-known quote given by Viscount Cave wherein he states that any such company that is busy freeing itself from liquidation is capable enough to retain back its existence but shall also resume the inherent power it exercised. A company is considered to be a legal person competent to function independently and can only put to an end only by instituting a legal process.

In the present times, both the nature and scope of financial trading have changed, only for being better than it already was. Which in turn has motivated people in forming new companies and subsequently close the ones that weren’t functioning effectively or had serious issues going on within. Besides shaping a progressive business, the company also provides standardized features to all the members operating within the structure.

This company can create a separate legal entity for itself, the shareholders can be directed to exercise limited liability from there on, the system should undertake centralized management to function better, shares should be made easily and freely transferable and there can also be the allocation of control rights.

The earlier companies were mandated to systematically register themselves either with the prior Companies Act, of 1913 or the Companies Act, of 1956.

The scope of the corporate sector has expanded to a point from which the lens the achieve self-sufficiency, self-reliance, and making a stable economy has been one of the main objectives of every operating entity. And to make the perceived effort a success, all nations whether big or small have been working effortlessly to ensure a strong and effective base. The need for ensuring better standards of corporate governance shall help equip the companies to cut through the competition going all around.

Petitioners of Winding Up

1. The company as a Petitioner

If a special resolution has been duly passed in favor of winding up of the company, the company can then move forward and file a petition for ‘Compulsory Winding Up’. Except for special grounds that require a special resolution, an ordinary resolution is enough by itself to provide authorization to the Company’s Managing Director or Directors, or the shareholders to present such a petition at an individual level.

2. Creditor as a Petitioner

A creditor may be a debenture holder, debenture-stock holder, or those acting as trustees who can apply to the winding up of a company. Such a situation is likely to arise wherein the company had consistently failed in paying back the interest or principal sum or any other undisputed debt that has been due. In case the debenture trust deed didn’t specify any direct agreement between the debenture holder and the company regarding the payment of interest or principal amount, it is only then can these trustees enforce their rights.

3. Registrar as a Petitioner

Unless a Company has passed a special resolution the Registrar of a Company can proceed in applying to wind up the company. However, the Registrar has to ensure the following conditions are fulfilled:

1. Any default in sending the statutory report to the Registrar and the inability to convene statutory meetings shall be a valid cause for the Registrar to initiate such proceedings: or
2. Upon incorporation, the company that was expected to commence its business within a year had failed in doing so.
3. There has to be proper and timely disclosure of the company’s financial statements that gets reflected in its balance sheet. The financial position can also come from the report prepared by the special auditor. Such an auditor is appointed under Section 233-A or any Inspector appointed under Section 235 to 237. If it can be proven that the company has been unable to pay back all its debts the company shall go into winding up.

The Registrar has the obligation or in other words, there is the requirement as in obtaining the previous sanction from the Central Government before he decides to file the petition for winding up the company. However, the petition has to be filed within a reasonable period and if not, the Court shall refuse from granting the petition.

The rejection is based on the principle of equitability which believes that a delay shall defeat the petitioner from seeking a further remedy. This means the reasonableness of time shall be decided by the circumstances of the case. Without the Court’s sanction, he shall not be able to file even an affidavit despite having obtained the support of the Creditor’s application thereby asking the Court to issue directions concerning winding up based on the additional grounds which were initially stated in the affidavit.

4. Central Government as a Petitioner

The Central Government has powers to appoint Inspectors under Section 237 and based on their investigation report if it is satisfied that the operating business was indeed engaged in fraudulent or unlawful purposes the government can then move ahead applying Section 243 of the Act that deals with winding up of such companies. It can also authorize any other person to execute the proceedings on its behalf as specified under Section 439 (1)(b).

5. Official Liquidator as a Petitioner

In a case wherein the Company voluntarily gets wound up, Section 440 allows the Official Liquidator to present a petition relating to the winding up of such a company. Section 448 of the Act states that every High Court shall attach an Official Liquidator who in turn shall be appointed by the Central government. And the Court shall not issue such a winding-up order unless satisfied that the ‘Voluntary Winding-Up” isn’t dependant on the common interests of the Creditors or Contributories or even both.

Deccan Urban Co-operative Bank

As the banking regulation act applies to the co-operative bank also [1], on 17th august, 2022 the reserve bank of India cancelled the license of Deccan urban co-operative bank through an official notification. Instantly after the official notification of cancellation bank will not be able to perform the banking operation with effect from 18th august, 2022. Also, the commissioner and registrar of the bank have applied to wind up the order of the bank and asked to appoint a liquidator. The reason for the cancellation of the bank license was:

The bank doesn’t have enough earning prospectus [2] due to which it fails to comply with minimum paid-up capital and reserves [3].

Also, the bank was not in a position to pay its depositors’ claims[4], also it did not conduct its manner for the interest of its depositors [5]. As the continuity of Deccan bank will not work for its depositor interest.

Considering all this Reserve Bank of India cancel the license.

Procedure for winding up of a banking company

The high court has the power to deal with the winding up of a banking company, under section 36B of the banking and regulation act, it is given that in context with a banking company, a high court has jurisdiction to deal with cases where the registered office of that banking company is situated, in case if the registered office of that particular banking company is situated outside from India, then the high court can exercise its jurisdiction where the principal place is situated.

If a banking company is unable to fulfil all its obligations or is not able to meet the liability and other debt then the banking company may file an application before the high court for staying the proceedings of the banks and can grant the moratorium period, for filing an application company needs to forward a copy of the application to the reserve bank. The stay will be given to the bank for a limited period which will not exceed six months [6]

A bank cannot file an application voluntarily, and no application will be valid if it is filed without the report given by the reserve bank. It is the decision of the reserve bank whether they will grant the application or not, by considering whether the banking company can pay the debt or not, if the reserve bank feels that the company is in a situation to pay its debt then the reserve bank can deny the grant but if they feel that company is not able to pay its debt than reserve bank will grant the application.

Also, the high court can grant the relief if there is sufficient reason and the application will entertain even without the report provided by the reserve bank but after the high court shall ask for the report from the reserve bank [7]

After the filling of an application before the high court under section 37(1) of this act, the high court may appoint an officer, particularly for that banking company and the officer shall take the control of all the books, documents, assets, or any other actionable items for which company is entitled. Also, he can exercise the power given by the high court in the interest of the banking company’s depositors [8]

After analysing the company if the reserve bank feels that the company cannot able to work for its depositor’s interest then the reserve bank may file an application before the high court for winding up of the company, after that application is made by the reserve bank the high court shall not further extend the stayed order [9] 

Winding up of the banking company by the high court

The high court shall give the order for the winding up of the banking company if Under section 37 of this act, the reserve bank has filed an application before the high court for the winding up of the banking company under the direction of the central government or if the company is not in the situation to repay its debt. The reserve bank can also file an application for winding up[10]

From the perspective of provisions specified

if the banking company did not meet the requirements specified in section 11 of this act, (regarding minimum paid-up capital and reserves)

For some reason under section 22 of this act, company is no more entitled to continue the banking business (rejection of license)

If the company fails to full fill the guidelines specified under section 35(4) of this act or section 42 of the RBI act (not maintaining Cash reserve ratio)

Fail to meet the requirement other than the requirement specified in section 11 of this act

From the perspective of reserve bank’s opinion

If the arrangement and compromises given by the court cannot work properly with or without the relevant changes in it. Statements and information given by the bank, clearly disclose that the bank cannot pay its debt If the continuance results in the disinterest of its depositors.

Any company which operates in the banking sector is considered to be unable to pay its debts, if it cannot or if it will not meet any of the demands which have been made in accordance with the law if it has been made at of its offices or branches within two working days if that particular office or branch is present in a location were the office, branch, agency of the reserve bank of India is located or within five working days if the demand is made in a place where the office or the branch of the reserve bank of India is not present and the reserve bank of India gives a written statement which certifies that such a banking company is unable to pay debts.

Reserve bank shall send a copy of all the applications to the banking company’s registrar under the Banking regulation act, 1949.

Court liquidator 

A court liquidator is a person appointed by the central government for conducting the liquidation process or winding up of banking companies or can perform duties as prescribed by the high court related to banking issues.

Official liquidator

Apart from section 448 and Section 449 of the Companies Act Section 38A of this act, Any proceeding by the high court related to the winding up of a banking company, with the order from the central government any bank, state bank, reserve bank, or any individual shall be appointed as the liquidator in that winding up proceeding and if there is any liquidator present already then, he shall leave the office so that the official liquidator appointed by the central government can proceed further.[11]

Apart from the payment of expenses during the winding up and remuneration of the official liquidator the banking company shall not pay any fees to the central government, and the payment of the expenses shall be clear out with the assets of the company.

Any provisions related to the liquidator under the companies’ act shall apply to the liquidator or the liquidator appointed by the central government unless it is not inconsistent with provisions under this act.

Stay of proceedings

If everything is consistent with the act then the high court shall not pass any staying order regarding the winding up of a banking company unless the high court is satisfied that after the arrangement process the company can repay the debt.[12]

Analyses of PMC (Punjab & Maharashtra Co-operative Bank)

Back in the year 1983, a multi-state co-operative bank known as Punjab & Maharashtra Co-operative Bank began its operations. The bank has diversified its business and also got itself registered under the Cooperative Society Act. It had built around 137 branches extending to various countries in Asia. Furthermore, there are nearly one hundred branches square measure in especially geographical areas.

The Federal Reserve Bank of Asian countries regulates the overall working of the bank. The bank has additional branches in different states including Delhi, Goa, Karnataka, Madhya Pradesh, and Gujrat. The bank has been recognized as one of the most profitable cooperative banks and has been estimated to have earned total revenue of Rs 1,297 Crores (around US$182 million) and profits of Rs 99.69 Crores (around US$ 14 million) in 2019.

Initially, at the time of its institution PMC was recognized as a cooperative bank. However, in the year 200, it proved successful in achieving the standing of ‘Schedule banking company.’ PMC is considered one of the youngest banks to have attained such standing by the depository financial institution. Furthermore, the Multi-State standing was ensured to the bank by the Central Registrar in 2004. In the following few years, the bank paved its way into the National platform and was also given its approved ‘Dealer class 1 License’.

What had happened to the PMC Bank?

It was on the 23^rd of September 2019 wherein obligatory operational restrictions were levied on the bank for 6 months. Henceforth, the different checking accounts were allowed to withdraw money beyond Rs 1000 from their accounts and the situation shall continue until further orders. The social control board decided to file a hiding case while the PMC scam was in operation.

Back in the year 2018-2019 the bank reported a considerable amount of profit that constituted about Rs 99.69 reflected in its financial statements including the annual reports. The bank put forth 3.76% (around Rs 315 crores) of advances (Rs 8,383 crores) as gross NPAs (Non-Performing Assets) that contributed a significant part when compared to the public-sector banks. The unacceptable part was wherein the bank concealed relevant data and came out with false monetary reports.

Financial Failure Factors

1. Major financial irregularities
2. Sudden failure in terms of internal control and system
3. Instances of wrongdoing and under-reporting of its lending exposures

After primary observation, the Federal Reserve Bank of India finally brought into the vision that they have noticed a couple of irregularities going on within the PMC as a consequence of which there shall be action taken against them. One such immediate action would be Section 35A of the RBI Act. PMC was liable to have committed various instances that included financial irregularities, failure to address the internal controls and systems and there were frequent instances of wrongdoing and under-reporting of lending exposures being carried out by the company.

It was observed by the Federal Bank that such financial irregularities as well as under-reporting of such lending exposures would gradually bring changes in the financial statements of the bank. On delving into all such details, it was found that the gross non-performing assets constituted around 3.76% with an additional 2.19% that was the Internet NPAs. The RBI noticed certain irregularities in these figures.

The loan book in specific was worth Rs 8383 crores. And the bank continued to claim that these loans were retail as in dealt with homes, cars, and gold including business loans and loans to MSMEs. Likewise, the bank had surely given loans to both land owners and players operating in the marketplace depending on their requirements. Comparing the financial stability, it was clear that the bank failed at offering a high rate of deposits. It was operating at a savings rate of around 4% once a year for one year which was against SBI’s directed 3.5%.

Numerous Risks Involved in this Case

1. Liquidity Risk

• At the point wherein PMC routed all its depositor’s funds that amounted to the value of INR 4335 Cr to HDIL, the bank ran out of all such funds due to which it suffered losses.
• The respective loans given to HDIL by the bank were provided against any collateral that eventually brought an increase in the risk of liquidity.
• Taking consideration of the situation around RBI decided to impose further restrictions on the cash withdrawal limit.

2. Operational Risk

• From a profitable standing, the bank fell drastically as a consequence of internal fraudulent activities.
• The bank made up many fictitious bank accounts, imitated wrong counts, and made fake reports. All this was done to somehow conceal the real numbers from the regulatory bodies.
• All the loans issued to the HDIL Group were sanctioned by the Director and the Chairman of the company.
• PMC’s Chairman Waryam Singh had been a member of the board of the Group for a consecutive period of nine years (2006-2015).

3. Credit Risk

• PMC doesn’t bother to check any of the credit ratings undertaken by HDIL because the latter exerts major political influence on the former
• Over time the total amount of loan that was issued by PMC to HDIL grew enormously to INR 6,500 crores in 2019 from INR 5000 crores in 2017.

Action against those who were involved in fraud

As there were various monetary irregularities involved in this case, the Economic Offences Wing (EOW) of Mumbai Police subsequently filed a primary FIR (First Information Report). The Mumbai Police had initiated the above process from where the procedure had been initiated. PMC’s director Joy Thomas was suspended along with Chairman Waryam Singh. Also, HDIL’s Rakesh Wadhwan and Sarang Wadhwan were individuals on whom further action was taken. Apart from the other HDIL-related entities, Promoters of PMC Bank and office bearers were all made liable within the filed FIR.

In no time the Mumbai Police’s Economic Offence Wing arrested all the HDIL bosses who had debts to them. Besides financial liability, these people also had charges of being involved in fraudulent activities with the PMC Bank. Furthermore, the Enforcement Directorate (ED) managed to confiscate 12 high-end cars, and charges were levied upon the Chairman of HDIL Rakesh Wadhwan, and his son Sarang Wadhawan.

Learning

Wherever there the existence of urban cooperative banks frequent instances of failures is most alarming. Their numbers which are always kept consistent with RBI’s issued guidelines and revealed statistical data experienced a significant drop from 1926 in 2004 to 1551 in 2018. The RBI doesn’t stringently regulate these cooperative banks more than the economic ones. RBI exerts significant power play over these cooperative banks.

In a country like India, various co-cooperative banks have been functioning effectively and systematically. At the same time, they have certain limitations and restrictions that have been levied on them. But they aim at providing easier mechanisms and put reliance on a personal approach.

Common people put their hard-earned money in the bank thereby assuming that it shall be safe there, forgetting that a bank is simply another business. And businesses have a high chance of failure. A bank follows a structured pattern wherein it first borrows money at a certain rate of interest and then lends that amount at a better rate. There is always some level of risk attached to the amount that is lent out for investment purposes. A reasonable and practical approach to handling this is to remain away from such banks that have a history of a high rate of bad loans. Anytime the rate goes above 10% is always a big no-no.

There is always a scarcity of transparency and accountability in most cooperative banks with the cash they take from the various depositors. The majority of the banks have links with various politicians and their cronies. It’s not always true that all cooperative banks are in their worst situations. However, it is a sad reality that RBI has failed to manage these banks and their management has been rather limited in nature. Given such facts, it seems rational to steer clear of cooperative banks that offer higher rates of interest on deposits than commercial banks.

Yes bank crisis

Yes Bank deals with banking and financial services in India, with a reach of more than 1040 branches across India. In the year 2003 Yes Bank got the permit For providing banking and financial services in India. The bank was established by Rana Kapoor and his brother-in-law Ashok Kapoor. Yes Bank was the biggest bank in 2004 following market capitalization. In 2005 Yes bank expand its operation, and started dealing with silver and gold cards with help of MasterCard. in 2014 the bank achieved a high score given by CARE and ICRA. Rana Kapoor was the CEO of Yes Bank.

The growth of the Yes Bank was quite impressive, by the end of 2018 Yes Bank had grown 26 times from the date of its incorporation.

Over time the amount for repaying the loan got increased, and for that reason, Kapoor stepped down from his post. As the bank was very large in terms of capitalization it was a very serious concern that the bank is not in a situation to repay its loans. An inquiry was set up against Kapoor and his family. Immediately after the inquiry Central Government interfere in the matter and ask for the Revival plan of Yes Bank by keeping the interest of the investors at large. RBI did not freeze the assets of the bank and planned to come up with a revival plan for the Yes Bank but at that time also put the bank under moratorium[13].

Ways to save the bank from insolvency

The government takes over the entire Bank under itself, so this way the entity of Yes bank would change from private to public.

Various private and public banks 10 can come up together and make a consortium for the rescue of the Yes Bank

Either a major bank can acquire some portion of the share in Yes Bank

Causes that result in a crisis

Increase in the bad loans, Yes bank had given loans to various companies like Anil Ambani’s Reliance group, dewan housing finance, infrastructure leasing and financial service limited, and Subhash Chandra Essel group which were already facing the crisis and facing difficulties to run the company. For that reason, the bank’s outstanding loan increased from 55,000 crores in the fiscal year 2014 to 2.41 trillion in the fiscal year 2019.

Due to the rise in bad loans, there was a sharp growth in NPA (non-performing assets) up to 17,000 crores in the fiscal year 2019.

Administrative failure in the bank led it towards crisis, due to the various problems while governing the company, in January Uttam Prakash Agarwal the independent director of the bank left the company’s board. Also, in 2019 Rana Kapoor resigned from the post of CEO.

Due to the internal management issues and related news regarding the increase in bad loans many investors of the bank started withdrawing their deposits, and due to that effect company’s share dropped rigorously.

As soon as RBI found that there are some managements in Yes Bank, they Communicate with the Yes Bank management   and try to figure out the liquidity position and relevant suggestions to improve it, but due to false assurance of Bank management that they have various investors who are interested investing in the Yes Bank

RBI’s step to bring out Yes Bank from the crisis

After going through the financial statement of Yes Bank RBI shows great concern regarding the working of the bank, so for that reason, the Reserve Bank of India took immediate action against the bank and implement various measures for the benefit of the depositors.

Yes, bank management under RBI’s control

After the crisis and all the parameters were checked, RBI Took over the control and appoint a financial officer from their side of the board.

RBI imposes a moratorium on Yes Bank as the bank was struggling for liquid resources and there is not enough funding in the bank and the rise of non-performing assets led the bank to it. The reason for not getting enough funding was the decrease in the credit score of Yes Bank.

Another reason for imposing the Moratorium was the issue of corporate governance, to resolve all these issues RBI fixed the Moratorium period for up to 1 month, under the period RBI imposes a limit of up to 50,000, so a person from his savings account can only withdraw 50,000.

The Moratorium is the same for all even if the person had multiple accounts in the Yes Bank, he can only withdraw 50000. For the health-related purpose, education purpose, marriage purpose, and other unavoidable circumstances RBI grant some relief also, by fixing the limit up to 5 lakhs.

Reconstruction proposal by RBI

RBI introduced a draft plan for the revival of Yes Bank, The plan begins with the alteration of authorized share capital, So the authorized share capital of Yes Bank was 800 crore, RBI plans to alter it and make it 5000 crores from 800 crores. Buy this an investor can acquire a 49% stake in Yes Bank by investing 2450 crore.

In the board

The financial officer appointed by RBI will leave the bank and the bank need to constitute a new board. There must be two nominee directors of the investor’s bank on the reconstructed bank’s board. The Board of directors of the reconstituted bank can leave the service at any point in time but after the completion of one year of their term in the reconstructed bank.

Two additional directors may appoint by RBI in the reconstructed bank, the number of members in the bank shall be consistent with the articles of association, officers or any other person appointed by RBI will not count in the list of members.

Liability

Everything will be in same the same manner as it was before like bonds, agreements, deeds, power of attorney, etc. unless there is an order from RBI.

Liabilities, rights, and deposit will continue in the same manner as it was before unless any changes are made by the RBI

Service

Employee’s salary and other related things in the reconstruction plan will be the same, there will be no change in that.

The branches of the reconstructed bank will be the same as it was before there will be no change in that and will work as it was working earlier, alteration could be done if there is a need to open a new branch or closing of a new branch the reconstructed bank must follow the guidelines prescribed by the Reserve Bank of India.

Even after the stability of the bank, the entity or a person who will invest in the bank cannot sell the stake below 26% for up to 3 years. After the completion of 3 years of the reconstructed bank, they can sell their stake.

Learning 

This kind of crisis is very common in India, many similar crises happened in past like the Satyam scandal case where the company presents false data and manipulation the accounting statement which leads to the overall crisis. So, here it is the same case in the Satyam case where management hides the data and gives false information to RBI regarding investment from various investors.

Providing loans to various companies and the directors were silent about it. Instead of using restoring policy Government need to practice a security policy which means the government needs to be more cautious in matter related to the companies whether it’s a private company, public company, or banking company.

The government needs to bring more regulators for banking companies. We cannot deny the fact that RBI had also at fault in this crisis by not checking or investigating the investors who are going to invest the capital in the Yes bank. They started blindly believing in the statements given by companies’ management. So, to curb this kind of scam in banking companies, RBI needs to work with SEBI (securities and exchange board of India) for the interest of depositors.

From this case, a question arises, is internal restructuring a good idea or it was better to proceed with a merger, acquisition, or takeover?

Instead of choosing internal restructuring, there was an option before RBI to proceed with the merger of the Yes Bank with any other bank but as the bank was very big in terms of capitalization and need to follow the regulations present in the insolvency and bankruptcy code.

Also, if we go through the previous cases of bank mergers between Global trust bank and Oriental Bank of commerce didn’t end well. Global trust bank was merged with oriental bank of commerce which was a good-performing bank with impressive profits.

But due to the merger with a loss-making bank OBC’s profit also goes down because the loans which were mentioned by the GTB during the merger were too much that was produced before the OBC. So, by restructuring, the Yes Bank RBI did the right thing and also fall under the interest of all the depositors of Yes Bank

Government open to giving more powers to RBI in insolvency cases

The government is very conscious of the prevailing situation and is keen to have a robust framework wherein they shall allow over sightedness.

Recently, the government has been quite liberal in its approach to providing more powers to the Reserve Bank of India. This was done in an attempt of directing various lenders to take action on stressed assets. The government views that there needs to be a certain level of regulatory supervision over debt resolution by the RBI.

The senior finance ministry official stated that everything cannot be left at the discretion of the banks. There needs to be a minimum level of regulatory supervision by the RBI in the banking sectors.

Earlier this year the Supreme Court decided to strike down the RBI’s circular on 12^th February 2018. The decision was based on the resolution of stressed assets and the same was considered ‘ultra vires’ of its legal authority. The only change in the scenario is that as of now, the banks in their capacity can proceed with such a resolution.

Section 35 AA of the Banking Regulation Act provides the central government can authorize the different central banks to issue further directions to lenders. The provision allows such banks to initiate insolvency resolution after a default has been committed under the provisions of the Insolvency and Bankruptcy Code. The finance ministry was in favor of strengthening the RBI within the existing framework. There won’t be many changes in the law.

Furthermore, the Supreme Court has drawn a well-defined distinction between various powers conferred on the RBI under Sections 35 AA and 35AB of the statute: The Banking Regulation Act. The RBI had exclusively issued directions on the banking institutions to move under the provisions of the IBC provided these two conditions are satisfied- firstly, the Central government has the sole authority to do so and this should be in respect of specific defaults.

Conclusion

The Reserve Bank of India is solely responsible for dealing with banking companies. There are high chances for mismanagement and frequent error. Both the RBI and SEBI had been working together for figuring out the reason behind misconduct in the banking company. Digital access to all the accounting statements was made available on an immediate basis. There is a need of power in specific areas wherein the bank gives a loan to a person or institution.

After due acknowledgement of the crises that were going on within the Yes Bank. After going through all the financial statements of the bank, RBI initiated due action against it and initiated various measures keeping the depositor’s interest in mind.

After checking all the parameters, RBI took over the entire control and also appointed a Financial Officer from the Board of the company. Through the introduction of the draft plan, RBI issued directions to the company to bring alternation of authorized share capital. RBI shall by itself appoint a financial officer and accordingly, the bank shall constitute a new board.

Accordingly, RBI shall appoint two additional directors. Likewise, bonds, agreements, deeds, and power of attorney will be operating in the same manner as before unless otherwise mandated by RBI. Similarly, there shall be no change in the employee’s salary or other related things. Eventually, considering the stability of the bank, any person or entity wouldn’t be permitted to sell their stakes beyond 26% for 3 years.

References

[1] Banking Regulation Act 1949, S 56.

[2] Banking Regulation Act 1949, S 22(3)(d).

[3] Banking Regulation Act 1949, S 11(1).

[4] Banking Regulation Act 1949, S 22(3)(a).

[5] Banking Regulation Act 1949, S 22(3)(b).

[6] Banking Regulation Act 1949, S 37(1).

[7] Banking Regulation Act 1949, S 37(2).

[8] Banking Regulation Act 1949, S 37(3).

[9] Banking Regulation Act 1949, S 37(4).

[10] Banking Regulation Act 1949, S 38(2)(b).

[11] Banking Regulation Act 1949, S 39(1)

[12] Banking Regulation Act 1949, S 40

[13] Banking Regulation Act 1949, S 45.

The article has been written by Priyadarshini Goenka and Samir Prasad Ram, 3rd-year students at National Law University, Odisha.