Capital and Share capital

Abhay limaye
B.Com., LLB., CAIIB
Ex Deputy Chief General Manager
Saraswat Coop Bank
Retail Banking
Capital and share capital
 No banking company shall carry on business in India , unless it satisfies the following conditions
, namely
 1) That the subscribed capital of the company is not less than one – half of the authorised
capital , and the paid up capital is not less than one half of the subscribed capital and that , if the
capital is increased , it complies with the conditions prescribed in this clause within such period
not exceeding two years as the Reserve Bank of India may allow
 2) That the capital of the company exists of ordinary shares only or of ordinary shares or equity
shares and such preferential shares as may have been issued prior to the 1st, July,1944.
 3) No person holding shares in a banking company shall , in respect of shares held by him ,
exercise voting rights of all the shareholders of the banking company.
 4) Notwithstanding anything contained in any law for time being in force or in contract or
instrument no suit or other proceeding shall be maintained against any person registered as a
holder of share in a banking company on the ground that the title to the said shares vests in a
person other than the registered holder.
Capital and share capital
 ONLY ORDINARY OR EQUITY SHARES – section 12 ( 1) ( ii ) provides that the capital of the company
consists of ordinary shares or equity shares only. Thus , a banking company can issue only ordinary or
equity shares
 SHARE CAPITAL RATIO – The structure of share capital of a banking company like other companies
is as follows
1) Authorised Capital
2) Issued Capital
3) Subscribed Capital
4) Paid Up and Non Paid Up Capital
5) Reserve Fund
 Section 12 of the Act provides –
 1) The subscribed Share Capital of the Company is not less than one half ( ½) of the authorised
capital . ( e.g. AC is 4 Lac then SC must be between 4 to 2 lac )
 2) The Paid Up Capital is not less than one half ( ½ ) of the subscribed share capital < in above given
case if the SC is 3 Lac then the PC should be 1.50 Lac
 Where a banking company increases its share capital and thereby , issues new shares in that case it
complies with the conditions prescribed in this clause within two years as the RBI may allow
Capital and share capital
 VOTING RIGHTS – One of the essential features of equity share is that it contains voting right .
Strength of voting right is based upon the holding of shares. But in banking company no person
holding shares shall in respect of any shares held by him , exercise voting rights on polls in excess
of 10 % of the total voting rights of all the shareholders of the banking company.
 REQUIREMENT AS TO MINIMUM PAID UP CAPITAL AND RESERVES ( SECTION 11 )
 1) Every banking company shall comply with such of the requirements of this as are applicable to it
 2) In case of banking company incorporated outside India a) The Paid up capital and reserves shall
be less than Rs.15 lakhs and in case it has branch offices in city of Mumbai and or Calcutta , Rs.20
lakhs
 B) It shall keep in cash or unencumbered approved securities or partly both 1) an amount as
mentioned in Clause a .and 2) an amount equivalent to 20 % of its profit for that year in respect of
business carried inside India
 These banks are also allowed to replace the securities or the combination of cash / securities
component subject to total amount deposited is not affected .
 The Central government can on the recommendations of RBI can declare by order that the
provisions of sub clause 2 of Clause B of sub section 2 shall not apply to such banking company for
such period as may be specified in the Order .
Capital and share capital
 3) In case of any banking company to which the provisions of sub section 2 do not apply , the
aggregate value of its paid up capital and reserves shall not be less than
 1) If it has places of business in more than one state Rs.5 lakhs and if such places of business is
situated in the City of Bombay and or Calcutta , Rs.10 Lac
 2) If it has places of business in one state ( other than covering Bombay / Calcutta ) Rs.1 lakh in
respect of its Principal Place of business , plus rs.25,000 in respect of its other places of business
situated elsewhere in the state otherwise than in the district
 Provide no banking company to which this clause applies shall be required to have paid up capital
and reserves exceeding Rs.5 lakhs
 Provided the banking company has only one place of business shall be required to have paid up
capital and reserves exceeding an aggregate of rs.50,000
 Further in case of every banking company which the clause applies and has commenced business
after the act was enacted and amended in 1962 , the value of its paid up capital shall not be less
than rs. 5 lakh
 3) If it has its place of business in one state , one or more in Bombay and or Calcutta Rs.5 lakhs Plus
Rs.25,000 in respect of each of each place of business situated outside the Cities Bombay / Calcutta
 Provided that no banking company to which this clause applies shall be required to have paid up
capital and reserves exceeding Rs.10 lac
Capital and share capital
 4) Any amount so deposited with RBI will be the asset of that company if at alter date it ceases to be
a banking company on which the creditors will have first charge.
 5) For the purposes of this section
 A) Place of business means any office , sub office and any place of business at which the money /
deposits are received, cheques cashed or moneys lent
 B) Value means the real or exchangeable value and not the nominal value
 6) If any interpretation dispute arises later the RBI the determination by RBI will be final
 MINIMUM PAID UP CAPITAL AND RESERVE FOR A CO- OPERATIVE
 Sectio0n 56 ( h) provides for the purpose and paid up capital and reserve for a cooperative society as
per Section 11 provides that the provisions will prevail over any other laws and aggregate value of its
paid up capital and reserves is not less than Rs.1 lakh
 Provide that nothing in this subsection shall apply to
 Any bank which is carrying on such business at the commencement of the Banking Laws
( Application to Societies Act , 1965 ) for a period of three years from such commencement , or
 To a primary cooperative credit society which becomes a primary cooperative bank after such
commencement , for a period of two years from the date of conversion as primary cooperative bank
for further period of one year
Capital and share capital
 1) NO BANKING BUSINESS [ SECTION 11 ( 1) ]
 No banking company is allowed to carry on banking business unless the statutory requirements
as to capital and reserves are complied with
 2) FOREIGN BANKING COMPANY [ NOT LESS THAN RS.15 LAKHS ] [ Section 11 ( 2) ]
 The Foreign Banks should have paid up capital and reserves of Rs.15 lac . If the company has a
place of business in Bombay or Calcutta or at both places , the capital has to be not than Rs.20
lakh .It has further to deposit at the at the expiration of each year 20 % of its profits for the year.
 3) OTHER BANKING COMPANIES [ SECTION 11 (3) ]
 The aggregate value of its paid – up capital and reserves shall not be less than
 ( i) Rs.5 Lakh if place of business is in more than one State
 ( ii ) Rs.10 lakh if the place of business is at Bombay or Calcutta or at both places
 ( iii ) Rs.1 Lakh if the place of business is in one state ( not at Bombay or Calcutta ) in respect of
its principal place of business situated in same district in which its principle place of business plus
Rs.25,000 in respect of its each place of business situated elsewhere in the state than in same
district
Capital and share capital
 ( iv ) Rs.5 lakh , plus rs.25,000 in respect of each place of business if it has place of business in
one state , one or more of which is or are situated in the city of Bombay or Calcutta.
 PLACE OF BUSINESS
 Any office ,
 Sub office
 Sub pay office
 Any place of business at which
 Deposits are received
 Cheques cashed or
 Money lent
Capital and share capital
 DEPOSITS OF FOREIGN COMPANY [ SECTION 11( 4) ]
 When the business of the foreign company in India ceases , the amounts lying deposited with the
Reserve Bank are to be treated as an assets of the company on which claims of creditors in India is
to be first charge .
 REGULATIONS OF SHARES OR VOTING RIGHTS [ SECTION 12 B ]
 No one can hold / acquire can hold five percent or more of the paid up share capital or entitles him to
exercise 5 % or more of the voting rights in such banking company except with the prior approval of
RBI.
 Restrictions on Commission , brokerage , discount etc. on sale of shares ( Section 13 )
 No banking company shall pay out directly or indirectly by way of commission , brokerage , discount
or remuneration in any form any amount exceeding in the aggregate 2,1/2 of the paid of value of the
said shares .
 Prohibition of charge on unpaid capital ( Section 14 )
 No banking company shall create any change upon any unpaid capital of the company and any such
charge shall be invalid.
 Prohibition of floating charge on assets ( Section 14 A )
 No banking company shall create a floating charge on the undertaking or any property of the
company or any part thereof , unless the creation of such floating charge is certified by RBI.
Capital and share capital
 RESTRICTIONS AS TO PAYMENT OF DIVIDEND ( Section 15 )
 No banking company shall pay any dividend on its shares until all its capitalised expenses
( including preliminary expenses , organisation expenses , share selling commission , brokerage
, amounts of losses incurred and any other item of expenditure .
 Provisions of company law will not apply.
 A banking company can declare dividend only after deducting the amount of reserve fund under
section 17 of the Act.
 RESERVE FUND ( Section 17 )
 1) every banking company shall transfer to reserve fund a sum equivalent to not less than 20 %
of the balance of profit as disclosed in the profit and loss account prepared under section 29.
 1 – A ) The Government of recommendations of RBI depending on the capital adequacy
declare by order in writing that the provisions of sub section ( 1) shall not apply to the banking
company for such period as may be specified in the order
 2) Where a banking company appropriates any sum or sum of moneys from reserve fund
 Ii provides for appropriation from reserve fund and share premium account but the bank has to
explain it to RBI within 21 days from the date of appropriation , further the RBI may extend the
period or condone the delay .
Capital and share capital
 CASH RESERVE ( SECTION 18 )
 1) Every bank not being a scheduled bank ,shall maintain in India by way of cash reserve with itself or
by way of balance in Current Account with the Reserve Bank or by way of balances in current accounts (
with SBI or such other banks ) , minimum of 3 % of the total of its demand and time liabilities in India on
last Friday as Notified by RBI . And shall submit to the RBI before the 20 th day of every month a return
showing the amount so held on alternative Fridays during a month with particulars of its demand and
time liabilities in India on such Friday.
 In case there is default in maintaining this balance the bank will liable to pay penal interest of 3% above
the bank rate on the amount by which such balance falls short of the specified for the day and if the
default continues then at 5 % above bank rate in respect of each subsequent day during which the
default continues.
 COMMENTS OF SECTION 17 & 18
 Every banking company shall maintain a sum equivalent at least three percent of the total of its time and
demand liabilities in India by way of –
 1) Cash reserve with itself , or
 2) Balance in Current Account with RBI
 3) net balance in Current accounts
 4) In one or more aforesaid ways
Capital and share capital
 SCHEDULED BANKS [ EXEMPTED FROM SECTIONS 17 & 18 ]
 The Scheduled banks are exempted from are maintain cash reserve under section 17 & 18 of B R
Act as these banks are under statutory liability to maintain cash reserve with RBI.
 CASH RESERVE RATIO
 CRR is the statutory reserve that has to be maintained by Scheduled banks either in cash or as
balance as balance with the RBI. CRR is intended to be a reserve by which RBI assures itself that
the bank is safe and has the liquidity for servicing its depositors . As per section 42 of the RBI Act ,
RBI is allowed to announce any level of CRR depending on the market conditions within a certain
band , the minimum being 3 % and the maximum 15 % . At present CRR is ______
 CRR controls liquidity and constrains Inflation
 CRR is a tool to monitor and control the monetary supply in the country by RBI .
 No interest is paid on CRR
Restriction on nature of subsidiary companies
( Section 19 )

 A banking company shall not form any subsidiary company except a subsidiary company formed
for one or more of the following purposes namely
 A) the undertaking of any business which, under clauses (a) to ( o ) of sub section ( 1) of section
6 , is permissible for a banking company to undertake, or
 B) with the previous permission in writing of the RBI , the carrying on of the business of banking
exclusively outside India , or
 C) the undertaking of such other business , which the Reserve Bank may , with the prior approval
of the Central Government , consider to be conducive to the spread of banking in India or to be
otherwise useful or necessary in the public interest .
 For the Section 8 , a banking company shall not be deemed , by reason of its forming or having a
subsidiary company , to be engaged indirectly in the business carried on by such subsidiary
company.
 (2) save as provided in subsection ( 1) no banking company shall hold shares in any company ,
whether as pledgee , mortgagee or absolute owner , of an amount exceeding thirty per cent of the
paid up share capital and reserves , whichever is less.
A banking company cannot be a holding company
 Section 19 provides that a banking company shall not form any subsidiary company and for that
no banking company shall hold shares of any company whether as pledgee , mortgagee or
absolute owner , of an amount exceeding 30 % of the paid up share capital , whichever is less.
 Exceptions
 In the following cases a banking company can be holding company i.e. can form subsidiary
company
 1 ) The undertaking of any business which , under Clauses ( a) to ( o ) of sub section ( 1) of
Section 6 , is permissible for a banking company to undertake , or
 2) with the previous permission in writing of Reserve Bank the carrying on the business
exclusively outside India , or
 3) The Undertaking of such other business which the Reserve Bank may with the prior approval
of the Central Government , consider to be conducive to the spread of banking in India , or to be
otherwise useful or necessary in the public interest.