NEGOTIABLE INSTRUMENTS ACT

LEARNING AND KNOWLEDGE MANAGEMENT CENTRE

 Negotiable Instruments Act, 1881

• Negotiable Instruments Act 1881 came into force w.e.f. 01/03/1882.

• NI Act has 17 Chapters & 148 sections, and it extends to the whole of India
including J & K and Sikkim.

• As per Sec 13 of N.I. Act Negotiable instruments means promissory notes, bills of
exchange and cheques

• Some other instruments satisfy the features of negotiable instruments such as bank
drafts, certificates of deposit, commercial paper, Treasury bills, share warrants &
dividend warrants.

• The property in negotiable instruments can be transferred by mere delivery if it

is a bearer or by endorsement and delivery if it is an order one.
 Negotiable Instruments Act, 1881
• Sec. 13 – Negotiable Instrument – A promissory note or bill of exchange or cheque
which is payable either to order or to the bearer.
A negotiable instrument is an instrument –
• Which is acquired by anyone who takes it bonafide.
• For value.
• Notwithstanding any defect in the title of any prior party.
• Freely transferable from one person to another.
• Transferable Infinitum (i.e. indefinitely).

• Sec. 4 – Promissory Note – An instrument in writing (not being a bank note or a currency
note) containing an unconditional undertaking, signed by the maker to pay a certain sum of
money only to a certain person or the order of a certain person.
Promissory notes payable on demand are called Demand Promissory Notes (DPN) &
those payable after a definite period are called Usance Promissory notes.
Both demand & Usance Promissory notes must be stamped.
 Negotiable Instruments Act, 1881
• Sec. 9 – Holder in due course – Any person who for consideration became the possessor of
a promissory note, bill of exchange or cheque if payable to bearer, or the payee or endorsee
thereof, if payable to order before the amount mentioned in it became payable and without
having sufficient cause to believe that any defect existed in the title of the person from whom
he derived his title.

• Sec. 10 – Payment in due course – Payment in accordance with the apparent tenor of the
instrument in good faith and without negligence to any person in possession thereof under
circumstances, which do not afford a reasonable ground for believing that he is not entitled to
receive payment of the amount therein mentioned.

• Sec. 11 & 12 – Inland & Foreign Instrument :

Inland bill:
i. A bill which is drawn in India & payable in India.
ii. A bill which is drawn in India and the drawee is a person resident in India (may be
payable outside India)

Foreign Bill – A bill that is drawn in India but is payable by a person residing outside India or
bills drawn outside India.
 Negotiable Instruments Act, 1881
General Public is prohibited from issuing Demand or Usance Promissory notes
payable to the bearer.
Sec. 5 – Bill of Exchange – An instrument in writing containing an unconditional order
signed by the maker directing a certain person to pay a certain sum of money only to a certain
person or the order of a certain person or the bearer of the instrument.

• Sec. 6 – Cheque – A Bill of Exchange drawn on a specified Banker and not expressed to be
payable otherwise than on demand.

Order cheques:
❖ One person or more is specified on the cheque as payee or endorsee.
❖ Negotiated by endorsement and delivery

Bearer cheque:
❖ No person is specified in the cheque as payee or endorsee, or the words 'to bearer'
appear on the cheque.
❖ Negotiated by delivery only

Crossed cheques:
❖ Specific direction to the drawee financial institution not to pay the cheque over the
 Negotiable Instruments Act, 1881
Cheques drawn in different inks, scripts and handwritings – Such Cheques would be
paid, if otherwise in order and the paying bank is in a position to read and understand the
instructions of the drawer.
Cheques without date – Such cheques are to be returned by the Bank, A holder can
complete an inchoate cheque by filling in the date and take the payment of the cheque. A
cheque bearing a date being a holiday can be paid on the next working day.

Cheque bearing impossible date – A cheque bearing an impossible date means the
cheques drawn with a date, which never happens to exist. For example – November 31 or
February 30, which may be paid on November 30 and February 29/28 respectively, as the
case may be.
Ante-dated Cheques – An ante-dated cheque is one, which bears a date prior to the actual
date of signing the cheque or opening of an account and it can be paid till it becomes a stale
cheque.

Stale Cheques – A stale cheque is the one, validity period of which, on the date of
presentation, has already expired and due to that it cannot be paid.

Validity Period of a Cheque – Section 138 of the NI Act states the cheques should be
presented for payment within 6 months. RBI directions dated 04/11/2011 (U/s 35 A BR Act)
w.e.f 01.04.2012, cheques, demand draft & banker’s cheques presented after 3 months from
their date, cannot be paid by the Banks.
 Negotiable Instruments Act, 1881
Revalidation of cheques – After a cheque becomes stale, it can be revalidated, any no of times. The
fresh validity runs from the date of revalidation.
Post-dated cheque – The cheque, which bears a date after the date on which it is drawn, and the date
has not fallen due till presentation is called a post-dated cheque. Such cheques become effective on the
date mentioned on the body of the cheque. The drawer of such a cheque can be sued by the holder after
the mentioned date only.
Different types of dates on cheques –

Cheque Issued on Cheque dated as Type of Cheque

December 12, 2022 December 01, 2022 Ante dated
December 12, 2022 December 31, 2022 Post dated
December 12, 2022 August 12, 2022 Stale
CTS – 2010 STANDARD:
• Purpose: Achieving standardization of cheques
• Features of CTS Cheques
• Branch address with IFSC code printed on top
• Date in dd/mm/yyyy format with boxes.
• A pantograph that shows “VOID/COPY”
 Negotiable Instruments Act, 1881
• New rupee symbol instead of bilingual format.
• "Please sign above" is mentioned at the bottom
• Watermark “CTS INDIA”
• Ultraviolet logo of the Bank to be visible in UV lamps.
• Sec. 7 – Drawer and Drawee:
• The maker of a bill of exchange or cheque is called a “drawer”
• The person thereby directed to pay is called a “drawee”
• A bill of exchange may be payable on demand or may be payable on a future date. A Bill of
exchange payable on a future date is called a usance bill.

A bill of exchange has to be accepted and while calculating the date of maturity of the usance bill three
days of grace are given.

When a bill of exchange is dishonoured, a notice of dishonour is to be given to the drawer and other
parties entitled to receive such notice.
• Sec. 8 – Holder – The “holder” of a promissory note, bill of exchange or cheque means any
person entitled in his own name to the possession thereof and to receive or recover the
amount due thereon from the parties thereto.
 Negotiable Instruments Act, 1881
• Sec. 14 – Negotiation – When a promissory note, bill of exchange or cheque is transferred to
any person so as to constitute that person the holder thereof. The instrument is said to be
negotiated.

• Sec. 15 – Endorsement – Signing on the face or back of a negotiable instrument or on a slip

of paper annexed to the negotiable instrument called allonge by the holder of a negotiable
instrument for the purpose of negotiating such a negotiable instrument.

Types of Endorsements:
❖ Section 16 (1) – Endorsement in blank – Mere signature of the endorser on the back of an
instrument.
❖ Endorsement in full – When the endorser makes a direction to pay the amount specified in the
cheque to a certain person or his order then the endorsement is in full.
❖ Section 50 – Restrictive Endorsement – when the right of negotiation is restricted or excluded by
the endorsement.
❖ Section 52 – Sans Recourse Endorsement – The endorser can endorse the instrument in such a
manner as to escape his liability
 Negotiable Instruments Act, 1881
❖ Section 56 – Partial Endorsement – The endorser transfers only a part of the amount of the
instrument to the endorsee.
❖ Conditional Endorsement – The endorser may make his own liability on the instrument subject to
a condition. The condition can be the happening of a contingent event or make the right of the
endorsee to receive the payment upon the happening of such an event.
❖ Facultative Endorsement – The endorsee must give notice of dishonour to the endorser, but the
endorser may waive this right in writing to the endorsement as ‘Notice of dishonour waived’. The
endorser, however, remains liable to the endorsee for non-payment of the instrument.
❖ Forged endorsement – Where the endorsement is forged (signed by somebody other than the
person) all endorsees subsequent to the forged endorsement do not deliver any title if he derives
title through a forged endorsement.
❖ Liability of endorser – In case of dishonour of an instrument, each endorser is liable to the holder.
❖ Discharge of endorser’s liability – An endorser is not liable for the instrument when any
subsequent endorser destroys his remedy against prior parties.
❖ An endorsee, who obtains an instrument without consideration, has no recourse to his immediate
earlier endorser.

• Sec. 17 – Ambiguous Instrument – When an instrument due to its faulty drafting,

can be construed as a promissory note or bill of exchange it is called an ambiguous
instrument.
 Negotiable Instruments Act, 1881
• Sec. 18 – Amount stated differently in figures and words – if the amount
undertaken or ordered to be paid is stated differently in figures and in words,
the amount stated in words shall be the amount undertaken or ordered to be
paid.

• Sec. 19 – Instrument payable on Demand – An instrument on which the

time for payment is not specified and Expressed to be payable on demand,
can be presented for payment at any time.

• Sec. 20 – Inchoate (stamped) instruments – Holder has a right to

complete for any amount but not exceeding the amount covered by the stamp.
The person so signing the instrument will be liable to any holder in due course
for such amount and other than holder in due course cannot recover in excess
amount intended to be paid by the signor.
 Negotiable Instruments Act, 1881
• Sec. 22 – Maturity – The maturity of a promissory note or bill of exchange is
the date at which it falls due.
Days of grace: Every promissory note or bill of exchange which is not expressed to be
payable on demand, at sight or on presentment, is at maturity on the third day after the day
on which it is expressed to be payable.
Section 23 to 25 – Calculating Maturity:
Case Date of maturity
NI payable on stated Corresponding day of the relevant month (i.e., date on which
number of months after negotiable instrument is drawn + stated number of months) +
date 3rd day
NI payable on stated Corresponding day of the relevant month* (i.e., Date on which
number of months after negotiable instrument is presented for sight + stated number of
sight months) + 3rd day
NI payable on a stated Date on which negotiable instrument is drawn + stated number
number of days after date of days + 3rd day
NI payable on stated Date on which negotiable instrument is presented for sight +
number of days after sight stated number of days + 3rd day
 Negotiable Instruments Act, 1881
Capacity to make Promissory Notes etc. –
• Every person capable of contracting, may bind himself and be bound by the making,
drawing, acceptance, endorsement, delivery and negotiation of a promissory note, bill of
exchange or cheque.
• A minor may draw, endorse, deliver and negotiate such instruments so as to bind all
parties except himself.

Holder’s right to duplicate of the lost bill –

• When a bill of exchange has been lost before it is overdue, the person who was the
holder of it may apply to the drawer to give him another bill of the same tenor, giving
security to the drawer, if required, to indemnify him against all persons whatever in case
the bill alleged to have been lost shall be found again.
• If the drawer on request as aforesaid refuses to give such duplicate bill, he may be
compelled to do so.
Escrow – Conditional delivery of a negotiable instrument or for a special purpose for
safe custody/colloateral security & not for absolute transferring.
 Negotiable Instruments Act, 1881

• Sec. 36 – Liability of Prior Parties – Until the instrument is duly satisfied,

every prior party to a negotiable instrument has a liability towards the holder in
due course. The prior parties include the maker or drawer, the acceptor and
all the intervening endorsers. Also, their liability to a holder in due course is
joint and several. In the case of dishonour, the holder in due course may
declare any or all prior parties liable for the amount.
 Negotiable Instruments Act, 1881

• Sec. 87 – Effect of Material Alteration – Material alteration of the Instrument renders the
same void as against anyone who is a party thereto at the time of making such alteration
An alteration is a material alteration if it alters the character or operation (i.e. the legal
effect) of a negotiable instrument or the rights and liabilities of any of the parties to a
negotiable instrument. An alteration that changes / invalidates the instrument against the
persons not consenting to the change e.g., change in amount, date, payee, from order to
bearer.
 Negotiable Instruments Act, 1881
• Sec. 89 – When a promissory note, bill of exchange or cheque has been materially altered
but does not appear to have been so altered, payment thereof by a person or banker
otherwise in due course, shall discharge such person or banker from all liability thereon.

Crossing of Cheques:
❖ Section 123 – General Crossing is when a cheque bears across its face an addition of the words
“and company” or any abbreviation thereof, between two parallel transverse lines, or two
transverse lines simply, either with or without the words ‘not negotiable’ that addition shall be
deemed a crossing and cheque shall be deemed to be crossed generally.
❖ Section 124 – Special Crossing is when a cheque bears across its face an addition of the name of
a banker, either with or without the words ‘not negotiable’ that addition shall be deemed a crossing
and the cheque shall be deemed to be crossed specially.
❖ Section 125 – who can cross a cheque - When a cheque is uncrossed, the holder may cross it
generally or specially, when it is crossed generally, the holder can cross it specially when a
cheque is crossed generally or specially, the holder may add the words ‘Not Negotiable’ when a
cheque is crossed specially, the banker to whom it is specially crossed, may again cross it specially
to another banker, the later acting as agent for collection. The drawer/ holder can cross a cheque
generally or specially.
 Negotiable Instruments Act, 1881
Holder for value – When the bank has parted with the funds before collection proceeds of cheque
from another bank

Acceptance for honour – when a bill of exchange has been noted or protested for non-acceptance or
for better security and any person accepts it for the honour of the drawee or for any other endorsers
such person is called ‘Acceptance for Honour’

Allonge – A piece of paper used for subsequent endorsements if there is no space on the instrument.

• Sec. 99 – Noting – When a bill or promissory note is dishonoured by non-acceptance or non-

payment, the holder may cause such fact of dishonour noted on the bill or a paper attached to
it by a Notary.
Noting must contain the date of dishonour, reason of dishonour & notary’s charges.
• Sec. 100 – Protest – After getting the noting, the holder can get it protested. Protest is the
certificate issued by a Notary Public, containing the fact of dishonour, names of parties,
reason, time & place of dishonour.
Protest for better security - When an acceptor of a bill becomes insolvent or his credit is publicly
impeached, before the due date of the bill, the holder may cause a Notary to demand better security
from him.
 Negotiable Instruments Act, 1881
• Sec. 118 – Presumptions as to a Negotiable Instrument – Unless proved to
the contrary, the law presumes the following in the case of every negotiable
instrument:
•It is drawn/accepted, endorsed or negotiated for consideration.
•It is drawn/made on the date mentioned.
•It is transferred before its maturity.
•The endorsements appearing upon it are in the order in which they are appearing.
•Every holder is a holder in due course.
•If it is a bill of exchange that has been accepted, such acceptance is done before maturity
•The onus of proving that it is contrary to these presumptions lies with the person
challenging it.
❖Cancellation of crossing - Crossing can be cancelled by the drawer of the cheque only.
❖Section 127 – When a cheque is crossed specially to more than one banker except when
crossed to an agent for the purpose of collection, the banker on whom it is drawn shall
refuse payment thereof.
 Negotiable Instruments Act, 1881
• Sec. 128 – Payment in due course of crossed cheques – When the banker
on whom a crossed cheque is drawn, has paid the same in due course, the
banker paying the cheque, and (in case such cheque has come to the hands
of the payee) the drawer thereof, shall respectively be entitled to the same
rights, and be placed in the same position in all respects, as they would
respectively be entitled to and placed in if the amount of the cheque had been
paid to and received by the true owner thereof.

• Sec. 130 – Cheque bearing “Not Negotiable” – A person taking a cheque

crossed generally or especially bearing, in either case, the words ‘not
negotiable’ shall not have and shall not be capable of giving a better title to
the cheque than that which the person from whom he took it had. If the
transferor had no title, then the transferee will not get any title.
 Negotiable Instruments Act, 1881
The cheque marked ‘not negotiable’ to a crossed cheque does not bar it from being
transferred in the name of another person.
However, a person who takes a cheque marked ‘not negotiable’ does not acquire a better
title than the person from whom he acquired the cheque
• Sec. 131 – Protection to Collecting Banker – A banker who has in good
faith and without negligence received payment for a customer of a cheque
crossed generally or specifically to himself, shall not, in case the title to the
cheque proves defective, incur any liability to the true owner of the cheque by
reason of only having received such payment.
For Protection under section 131:
• The bank should have collected such cheque for a customer as an agent for collection and not as a
holder for a value.
• The proceeds of the collected cheque are credited only to the account of the payee or to the
account of the endorsee if endorsement on the instrument is regular.
The cheque should be crossed before it is deposited, collected for customer, in good faith and
without negligence.
 Negotiable Instruments Act, 1881
• Sec. 138 – Dishonour of cheque – When any cheque drawn by a person on an account
maintained by him with a banker for payment of any amount of money to another person from
out of that account for the discharge, in whole or in part, of any debt or other liability, is
returned by the bank unpaid either because of the amount of money standing to the credit of
that account is insufficient to honour the cheque or that it exceeds the amount arranged to be
paid from that account by an agreement made with that bank, such person shall be deemed to
have committed an offence and shall, without prejudice to any other provision of this Act, be
punished with imprisonment for a term which may extend to two years, or with fine
which may extend to twice the amount of the cheque, or with both.

Conditions for application of Section 138: Nothing contained in this section shall apply unless:
• The cheque has been presented to the bank within a period of three months from the date on which it is drawn
or within the period of its validity, whichever is earlier;
• The payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of
the said amount of money by giving a notice in writing, to the drawer of the cheque, within thirty days of the
receipt of information by him from the bank regarding the return of the cheque as unpaid; and
• The drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case
may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.
 Negotiable Instruments Act, 1881

• Sec. 146 – Bank’s Returning Memo – Bank’s Returning Memo shall be prima-
facie evidence for the dishonour of the cheque.

Earlier whenever a question arose whether there were insufficient funds in the account of the
drawer of the cheque, it was conceived to be a matter of evidence being a question of fact
and the onus was placed on the complainant and for discharging this onus the bank
personnel was to be examined. This naturally delayed things.

It has therefore been provided that based on the bank slip the Court would presume the fact
of dishonour, unless and until such fact is disproved.

If the drawer has intimated to the payee that he shall not present the said cheque
without his prior consent, in that event such case will not fall within the frame of Sec
138 to 147.
BANKING REGULATION ACT 1949

LEARNING AND KNOWLEDGE MANAGEMENT CENTRE

 Banking Regulation Act, 1949
• BR Act 1949 was enacted to consolidate and amend the law relating to
banking and provide for suitable framework for regulation of Banking
Co’s.
• The provisions of the Act are applicable to banking companies in addition
to other laws which are applicable to such companies , unless other wise
specially provided in the Act.
• Thus, Companies Act, 1956 is applicable except where special
provisions are made in BR Act.
• In short, the BR act deals with :-
i. Regulating business of banking companies
ii. Control over the management of banking companies
iii. Suspension & winding up of banking companies
iv. Penalties for violation of provisions of Act.
 Banking Regulation Act, 1949
• The Act came into effect from 16.03.1949
• Earlier the name was “BANKING COMPANIES ACT”.
• Name changed w.e.f. 01.03.1966.
• Was made applicable to J & K in 1956.
• The act extends to whole of India.
• Sec. 5(b) – BANKING means accepting money from the public for the
purpose of lending and investment, repayable on demand or otherwise
and withdraw able by cheque, drafts order or otherwise.
• Sec. 5(c) – Banking company means any company which transacts
the business of banking.
• Sec. 5(f) – Demand liabilities – which must be met on demand.
Time liabilities – which are not demand liabilities.
 Banking Regulation Act, 1949
Sec. 6.1 – Forms of business in which banking companies may engage –
Borrowing, raising, or taking up of money; the lending or advancing of money,
dealing in bills of exchange, hoondis, promissory notes, coupons, drafts, bills of
lading, railway receipts, warrants, debentures, certificates, scrips etc.

• Sec. 7 – Banking Co. must use the word ‘bank’, ‘banking’, ‘banker’ or
‘banking company’. No company other than a banking company can use the
word ‘bank’, ‘banker’, ‘banking’ as part of their name.
Subsidiaries of banks and association of banks in certain cases are
exempted from this restriction.
• Sec. 8 – Prohibits a banking company from engaging directly or indirectly in
trading activities, buying or selling or bartering of goods.
 Banking Regulation Act, 1949
But a bank can realize the securities given to it or held by it for a loan, for realization of amount lent.
• Sec. 9 – Prohibits a banking company from holding immovable property, howsoever acquired, except as
is required for its own use, for a period exceeding 7 years from acquisition.
RBI may extend the above period by 5 years.
Directors of a bank are of two categories:-
• Whole time (CMD, MD & ED)
• Part time directors
• Sec. 10.1 (c) (iii) – Whole time directors can hold office for a max period of 5 Years at any one time, the
term can be renewed for further periods not exceeding 5 years on each occasion. [10A(2A)]
Part time directors can not hold office for consecutive periods exceeding 8 years.
Insolvents, convicted by criminal course of offence involving moral turpitude can not be appointed
whole time directors.
Whole time directors cannot be director of any other company, except subsidiary or a Company
registered under Sec 25 of Companies act.
Whole time directors are not entitled to any commission or share or in profits of a banking company.
 Banking Regulation Act, 1949
• Sec. 10 A (2) – Not less than 51% of total no. of directors should have knowledge/ or other
experience of accountancy, agriculture, rural economy, banking, cooperation, economics, law,
finance, small-scale-industry etc.

One of the directors has to be appointed as Chairman of the board. If he is whole time
director, he is entrusted with the management of the bank.

Management of the bank is entrusted with MD If the chairman is a part-time director.

RBI may require a banking co. to elect or appoint any other person as whole-time chairman
or MD if in its opinion he is not fit and proper to hold office.
If the banking co. fails to comply within 2 months RBI may remove & appoint a suitable
person.
• Sec. 11 – Min. Paid-up Capital & Reserves
Bank incorporated in India having place of business in more than one state – ₹ 5.00 lakhs
If in Mumbai or Kolkata or both – ₹ 10.00 lakhs
 Banking Regulation Act, 1949

Bank incorporated outside India if it has no place of business in Mumbai or Kolkata – ₹ 15.00 lakhs
If in Mumbai or Kolkata or both – ₹ 20.00 lakhs

• Sec. 12 – Capital structure – The ratio of Authorized, Subscribed and Paid-up Capital must be
minimum 4:2:1

•Sec. 12 (2) – No person can exercise more than 10% of total voting rights of share
holders of a bank. Purpose of restriction is to prevent any powerful person or group from controlling
management.
The restrictions does not apply to the voting rights of GOI.
• Sec. 13 – A banking company is prohibited from Paying brokerage/ commission exceeding 2.5% of the
paid-up value of shares issued by it
• Sec. 14 – A banking company is prohibited from creating a charge on its unpaid capital & creating a
floating charge over its assets without prior permission of RBI (14A)
• Sec. 15 – Restriction on payment of dividend unless all capitalized expenses are written off.
 Banking Regulation Act, 1949
• Sec. 16 – A person who is already on the board of a banking company incorporated in India
can not be appointed as a director of another banking company.

A banking co. incorporated in India cannot have on its board more than 3 persons who are
directors of companies which are, among themselves, entitled to exercise more than 20% of
total voting rights of all shareholders of the banking company.

• Sec. 17 – A banking company is required to transfer not less than 20% of the profit made
during the year to reserve fund (RBI directed for minimum 25% of net profits wef 31/03/2001).
• Sec. 18 – A Non-Scheduled bank is required to maintain Cash Reserve at least 3% of its total
demand & time liabilities in India as on the last Friday of the second preceding fortnight, in the
form of balance with itself or with RBI or with other scheduled banks.
• Sec. 19(2) – Shareholding by banks whether as pledgee, mortgagee or absolute owner in
other companies can not exceed 30% of paid-up share capital of that company or 30% of its
own paid-up share capital & reserves whichever is less.
 Banking Regulation Act, 1949
• Sec. 20 – No banking company shall grant any loan or advance on the
security of its own shares
Restriction on loan advances to any firm in which any of its Director is interested as partner,
manager or guarantor.
Restriction on loan and advances to any individual in respect of whom any of its Director is a
guarantor.
• Sec. 21 – Empowers RBI to issue directives to banks to determine policy for
advances:
1. Purpose for which advance may or may not be made
2. Margin to be maintained
3. Maximum amount of advances
4. Rate of interest to be charged

• Sec. 21A – Rate of interest charged by banks shall not be reopened (not
subject to scrutiny) by any court on the ground that the rate of interest
charged by the bank is excessive.
 Banking Regulation Act, 1949
• Sec. 22 – It is necessary to have a license from RBI for commencing or carrying on the
business of banking in India.
No license required for temporary place of business (exhibition, mela, conference etc.) up to
one month.

• Sec. 24 – All banks are required to maintain SLR in cash, gold or unencumbered
approved securities, not less than 25% of their demand and time liabilities.
It can be varied by RBI up to maximum 40%. Present SLR is 18%.
SLR to be maintained on daily basis with reference to NDTL as on last Friday of the 2nd
preceding fortnight.
To be maintained in form of:
• Cash
• Net bank balance with any bank
• Unencumbered approved securities referred as SLR securities
• Dated securities issued up to 8th Sept 2009.
• Treasury Bills of GOI
• Dated securities issued by GOI
• Any other instrument as notified by RBI
• Any excess balance with RBI beyond CRR requirement.
 Banking Regulation Act, 1949
• Gold at not exceeding the market price.
Default will attract penalty:
• 3% p.a. above bank rate for the day on the short fall.
• If default continues – 5% p.a. above bank rate.
A return in form VIII is to be submitted to RBI before 20thof every month.

• Sec. 25 – The assets of a bank must not be less than 75% of its demand & time liabilities in
India as on last Friday of every quarter.
• Sec. 26 – Returns on unclaimed deposits to be submitted for accounts not operated
for 10 years & above within 30 days after the close of each calendar year to RBI.
• Sec. 26A – Establishment of depositor education and awareness fund.
• Sec. 27 – Every bank has to submit a return on Assets & Liabilities as on last Friday of
each quarter to RBI latest by end of next month (power to call for other information) .
• Sec. 29 – Banks have to prepare Balance Sheet as on 31st March.
It is to be signed by CMD & at least 3 Directors.
 Banking Regulation Act, 1949

• Sec. 31. – 3 copies of the Balance sheet duly audited must be furnished to RBI within 3 months
from the date of Balance Sheet.
• Sec. 32 – Submission of balance sheet to ROC.
• Sec. 35 – Inspections of banking companies by RBI on issues Banking Ombudsman, KYC, Clean Note
Policy, Rate of interest, on SB & time Deposits etc.
• Sec. 35 AA – Central Govt directs RBI to instruct Banking Companies to initiate Insolvency Resolution
Process under Insolvency and Bankruptcy Code’ 2016. (added vide B. R. (amendment) Act 2017
(25/08/2017))
• Sec. 35 AB – RBI can issue direction to a Bank for resolution of stressed assets. (added vide B. R.
(amendment) Act 2017 (25/08/2017))
• Sec. 35 B – Prior approval of RBI before appointment of Chairman/ MD/ chief Executive of a bank.
• Sec. 36 – RBI can terminate any Chairman or any employee of a bank where it considers desirable to
do so.
RBI can prohibit a banking company to enter into any particular transaction or a class of transaction.
Central Govt. may acquire any banking company with consultation of RBI
 Banking Regulation Act, 1949
• Sec. 45 – RBI has powers to apply to Central Govt. for suspension of business of a banking
company and prepare scheme of reconstitution & amalgamation.
• Sec. 45 Y – Preservation of records.
• Sec. 45 Z – Return of paid cheques to customers after keeping true copies of the cheques.
The customer has to preserve the cheques for a period of 8 years and produce them when
asked to do so.
• Sec. 45 ZA – Nomination for payment of Depositors’ money.
• Sec. 45 ZB – Notice of claim of other persons regarding deposit not receivable except Court
Order.
• Sec. 45 ZC – Nomination for return of articles kept in safe custody with banking company.
• Sec. 45 ZD – Notice of claim of other persons regarding articles not receivable except court
order.
• Sec. 45 ZE – Release of contents of safety lockers to nominee.
• Sec. 45 ZF – Notice of claim of other persons regarding safety lockers not receivable except
court order.
 Banking Regulation Act, 1949

• Sec. 46 – Penalties for providing false information in returns of inspectors of

RBI.
• Sec. 47 – No court (other than metropolitan magistrate or judicial magistrate
of first class or any court superior thereto) can admit appeal against order
made under Sec. 46 .
• Sec. 47 A – RBI can impose penalty for violations.
• Sec. 49 – No person other than a Banking Company / RBI & SBI can
accept from the public deposits of money withdrawable by cheque.
• Sec. 49 A – Other than a Banking Company / RBI / SBI, no person can accept
deposits of money withdrawable by cheque.
• Sec. 52 – Central Govt. can make rules for all matters.
RESERVE BANK OF INDIA ACT
1934

LEARNING AND KNOWLEDGE MANAGEMENT CENTRE

PREAMBLE

➢ An Act to constitute a Reserve Bank of India.

➢ Whereas it is expedient to constitute a Reserve Bank for India to regulate the issue of
Bank notes and the keeping of reserves with a view to securing monetary stability in
India and generally to operate the currency and credit system of the country to its
advantage;

➢ And whereas in the present disorganisation of the monetary systems of the world it is
not possible to determine what will be suitable as a permanent basis for the Indian
monetary system;

➢ But whereas it is expedient to make temporary provision on the basis of the existing
monetary system, and to leave the question of the monetary standard best suited to
India to be considered when the international monetary position has become
sufficiently clear and stable to make it possible to frame permanent measures.
• As per section 1 of RBI Act, This Act may be called the Reserve Bank
of India Act, 1934.

• It extends to the whole of India.

• As per section 3 of RBI Act, A bank to be called the Reserve Bank of

India shall be constituted for the purposes of taking over the
management of the currency from the Central Government and of
carrying on the business of banking in accordance with the provisions
of this Act.

• As per section 4 of RBI Act, The capital of the Bank shall be five
crores of rupees.
 Composition of the Central Board

As per section 8 of RBI Act, the Central Board shall consist of the
following Directors, namely:-

(a)A Governor and not more than four Deputy Governors to

be appointed by the Central Government;

(b) Four Directors to be nominated by the Central Government, one

from each of the four Local Boards as constituted by section 9;

(c) Ten Directors to be nominated by the Central Government; and

(d) One Government official to be nominated by the Central

Government.
 Business which the Bank may not transact.

As per section 19 of RBI Act, save as otherwise

provided in sections 17, 18, 42 and 45, the Bank
may not –
1. Engage in trade or otherwise have a direct
interest in any commercial, industrial, or other
undertaking.
2. Purchase the shares of any banking
company or of any other company, or grant
loans upon the security of any such shares;
 Bank to transact Government business of
States on agreement

As per section 21A of RBI Act The Bank may by

agreement with the Government of any State
undertake–
(a) all its money, remittance, exchange and
banking transactions in India, including in
particular, the deposit, free of interest, of all its
cash balances with the Bank; and
(b) the management of the public debt of, and the
issue of any new loans by, that State.
 Right to issue bank notes

As per section 22 of RBI Act, The Bank shall have the sole
right to issue bank notes in India, and may, for a period
which shall be fixed by the Central Government on the
recommendation of the Central Board, issue currency
notes of the Government of India supplied to it by the
Central Government, and the provisions of this Act
applicable to bank notes shall, unless a contrary intention
appears, apply to all currency notes of the Government of
India issued either by the Central Government or by the
Bank in like manner as if such currency notes were bank
notes, and references in this Act to bank notes shall be
construed accordingly.
 Issue Department

As per section 23 of RBI Act,

(1) The issue of bank notes shall be conducted by the Bank

in an Issue Department which shall be separated and kept
wholly distinct from the Banking Department, and the
assets of the Issue Department shall not be subject to any
liability other than the liabilities of the Issue Department as
hereinafter defined in section 34.
 Denominations of notes

As per section 24 of RBI Act,

(1) Subject to the provisions of sub-section (2), bank notes

shall be of the denominational values of two rupees, five
rupees, ten rupees, twenty rupees, fifty rupees, one
hundred rupees, five hundred rupees, one thousand
rupees, five thousand rupees and ten thousand rupees or
of such other denominational values, not exceeding ten
thousand rupees, as the Central Government may, on the
recommendation of the Central Board, specify in this
behalf.
 Denominations of notes

As per section 24 of RBI Act,

(2) The Central Government may, on the recommendation

of the Central Board, direct the non-issue or the
discontinuance of issue of bank notes of such
denominational values as it may specify in this behalf.
 Form of bank notes

As per section 25 of RBI Act,

The design, form and material of bank notes shall be such

as may be approved by the Central Government after
consideration of the recommendations made by Central
Board.
 Legal tender character of notes

As per section 26 of RBI Act,

(1) Subject to the provisions of sub-section

(2) every bank note shall be legal tender at any place in

India in payment or on account for the amount
expressed therein, and shall be guaranteed by the
Central Government.
 Recovery of notes lost, stolen, mutilated or
imperfect

As per section 28 of RBI Act,

Notwithstanding anything contained in any enactment or

rule of law to the contrary, no person shall of right be
entitled to recover from the Central Government or the
Bank, the value of any lost, stolen, mutilated or imperfect
currency note of the Government of India or bank note:
 Recovery of notes lost, stolen, mutilated or
imperfect

As per section 28 of RBI Act,

Provided that the Bank may, with the previous sanction of

the Central Government, prescribe the circumstances in
and the conditions and limitations subject to which the
value of such currency notes or bank notes may be
refunded as of grace and the rules made under this proviso
shall be laid on the table of Parliament.
 Bank exempt from stamp duty on bank notes

As per section 29 of RBI Act,

The Bank shall not be liable to the payment of any stamp

duty under the Indian Stamp Act, 1899, in respect of bank
notes issued by it.
 Obligations of Government and the Bank in
respect of rupee coin.

As per section 38 of RBI Act,

The Central Government shall undertake not to put into

circulation any rupees, except through the Bank ; and the
Bank shall undertake not to dispose of rupee coin
otherwise than for the purposes of circulation.
Cash reserves of scheduled banks to be kept
with the Bank
As per section 42 of RBI Act,

(1) Every bank included in the Second Schedule shall

maintain with the Bank an average daily balance the
amount of which shall not be less than such per cent. of
the total of the demand and time liabilities in India of
such bank as shown in the return referred to in sub-
section
(2) as the Bank may from time to time, having regard to the
needs of securing the monetary stability in the country,
notify in the Gazette of India:
Cash reserves of scheduled banks to be kept
with the Bank

As per section 42 of RBI Act,

Provided that the Bank may, by notification in the Gazette

of India, increase the said rate to such higher rate as may
be specified in the notification so however that the rate
shall not be more than twenty per cent of the total of the
demand and time liabilities.
Cash reserves of scheduled banks to be kept
with the Bank
As per section 42 of RBI Act,

Explanation.– For the purposes of this section,–

(a) ‘‘average daily balance’’ shall mean the average of the
balances held at the close of business on each day of a
fortnight;
(b) ‘‘fortnight’’ shall mean the period from Saturday to the
second following Friday, both days inclusive;
 Cash reserves of scheduled banks to be kept
with the Bank
As per section 42 of RBI Act, (NDTL)

(c) ‘‘liabilities’’ shall not include –

(i) the paid-up capital or the reserves or any credit balance

in the
profit and loss account of the bank;
(ii) the amount of any loan taken from the Bank or from the
Exim Bank or from the Reconstruction Bank or from the
National Housing Bank or from the National Bank or from
the Small Industries Bank.
 Definitions
As per section 45A of RBI Act,

A ‘‘banking company’’ means a banking company as

defined in section 5 of the Banking Regulation Act, 1949,
and includes the State Bank of India, any subsidiary bank
as defined in the State Bank of India (Subsidiary Banks)
Act, 1959, any corresponding new bank constituted by
section 3 of the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1970, and any other financial
institution notified by the Central Government in this
behalf];
 Power of Bank to determine policy and issue
directions

As per section 45-JA of RBI Act,

Every non-banking financial company shall create a

reserve fund and transfer therein a sum not less than
twenty per cent (presently 25%) of its net profit every year
as disclosed in the profit and loss account and before any
dividend is declared.
 Auditors

As per section 50 of RBI Act,

(1) Not less than two auditors shall be appointed, and their
remuneration fixed, by the Central Government.

(2) The auditors shall hold office for such term not
exceeding one year as the Central Government may fix
while appointing them, and shall be eligible for re-
appointment.
 Power of Bank to depute its employees to
other institutions

As per section 54 AA of RBI Act,

The Bank may, notwithstanding anything contained in any

law, or in any agreement, for the time being in force, depute
any member of its staff for such period as it may think fit.
 Liquidation of the Bank

As per section 57 of RBI Act,

Nothing in the Companies Act, 1956, shall apply to the

Bank, and the Bank shall not be placed in liquidation save
by order of the Central Government and in such manner as
it may direct.
LKMC