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FEMA regulations on cross border merger

RBI issued the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (FEMA Regulations) on 20 March 2018 to address various issues that may arise concerning cross border mergers from an exchange control perspective.

By: Riya Singh, 4th year, BBA LLB, KLE Society’s Law College, Bangalore.

Introduction

On 13th April 2017, the Ministry of Corporate Affairs (MCA) notified Section 234 of the Companies Act, 2013 and inserted a new Rule 25A (merger or amalgamation of a Foreign Company with an Indian company and vice-versa) in the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016 (Compromises Rules), paving way for merger and amalgamation of a Foreign Company with an Indian company and vice-versa. Since Rule 25A required prior approval of the Reserve Bank of India (RBI) for the cross-border merger, without corresponding procedural aspects in place, the cross-border merger could not take-off. Now, with the RBI notifying the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (FEMA Regulations/Regulations) for mergers amalgamation and arrangement between Indian and foreign companies on 20th March 2018, this gap has been bridged.

Key definitions under the Regulations 

  • ‘Cross border merger’ means any merger, amalgamation, or arrangement between an Indian company and foreign company under the Act. 
  • ‘Foreign company’ means any company or body corporate incorporated outside India whether having a place of business in India or not. For outbound mergers, a foreign company should be incorporated in a specified jurisdiction. 
  • ‘Inbound merger’ means a cross border merger where the resultant company is an Indian company. 
  • ‘Indian company’ means a company incorporated under the Companies Act, 2013, or under any previous company law. 
  • ‘Outbound merger’ means a cross border merger where the resultant company is a foreign company. 
  • ‘Resultant Company’ means an Indian company or a foreign company, which takes over the assets and liabilities of the companies involved in the cross-border merger.
  • The Ministry of Corporate Affairs, Government of India notified Section 234 of the Companies Act, 2013 and Rule 25-A of the Companies Merger Rules, providing for a mandatory prior approval of the Reserve Bank of India, to transit mergers and amalgamations between Indian companies and companies incorporated in International/foreign jurisdiction (cross-border merger).

Cross-border merger: Procedural aspects

Inbound Mergers

When the Resultant Company is an Indian Company, the following procedure becomes applicable:

  • Issue/Transfer of securities:

The issue or transfer of any security and/or a foreign security, to a person resident outside India should be made under the pricing guidelines, entry routes, sectoral caps, attendant conditions, and reporting requirements for foreign investment as laid down in Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 (TISPRO). However, this is subject to the following conditions:

Where the Foreign Company is a joint venture (JV) or a wholly-owned subsidiary (WOS) of the Indian company, it shall comply with the conditions prescribed for transfer of shares of such JV/ WOS by the Indian party as laid down in Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004 (TIFS); 

where the Inbound Merger of the JV/WOS results in the acquisition of the Step-down subsidiary of JV/ WOS of the Indian party by the Resultant Company, then such acquisition should comply with Regulation 6 and 7 of TIFS which provide for permission for direct investment in certain cases and investment by Indian party engaged in financial services sector respectively.

  • Borrowings:

Any borrowing of the Foreign Company from overseas sources that becomes the borrowing of the Resultant Company shall conform within two years, to Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 or Foreign Exchange Management (Guarantee) Regulations, 2000, as applicable.

Outbound Mergers

  • Any person resident in India may acquire or hold securities of the resultant company under ODI Regulations5 (or under LRS6 in case of a resident individual). 
  • Any office of the Indian company in India shall be deemed to be a branch office of the resultant company under the Branch/Liaison Office Regulations, 20167. 
  • The guarantees or outstanding borrowings shall be repaid as per the sanctioned Scheme. Ø Any liability not in conformity with the FEMA regulations shall not be acquired by the resultant company. Further, a no-objection certificate to this effect is to be obtained from the Indian lenders. 
  • The resultant company may acquire, hold, and transfer any asset in India which a foreign company is otherwise permitted to acquire. 
  • Where the asset or security is not permitted to be acquired or held, the resultant company shall sell/ dispose of such asset or security within two years from the date of sanction of Scheme and repatriate sale proceeds outside India through banking channels. Repayment of Indian liabilities from sale proceeds of Indian assets within two years permissible.

The legislation provides that any transaction undertaken concerning a cross-border merger under the FEMA Regulations shall be deemed to be approved by RBI under Rule 25-A.

While the FEMA Regulations intend to cover cross-border “merger, amalgamation, demerger or arrangement”, the jurisdiction of legislative provisions of the Companies Act and Merger Rules are delimited to only “mergers and amalgamations”, without any explicit mention of “arrangement or demergers”. This is likely to have a trickle-down impact on insolvency and bankruptcy proceedings as well since it will encourage foreign bidders to consider buying Indian assets. In an inbound merger, the new rules allow the resultant company to issue or transfer any security to a person resident outside India subject to pricing and sectoral foreign investment conditions and FEMA regulations. For an outbound merger, the new provision allows resident Indian entities to acquire or hold securities of the resultant company under FEMA regulations.

Conclusion

After the introduction of the provisions for cross border merger in the Act, the notification of these Regulations would now enable active evaluation of cross border merger. Any transaction on account of a cross border merger undertaken in compliance with these Regulations shall be considered to have deemed approval of the RBI subject to obtaining other applicable regulatory approvals as provided under the Act. Further, for all practical purposes of corporate planning – extant direct and indirect tax laws, statutes governing corporate-conduct, accounting norms, and other relevant compliance provisions of respective jurisdictions need to be evaluated in greater detail concerning cross border arrangement.

Column

Broadcasting Rights in India

The reality of how broadcasting rights are interpreted and managed in India is rather grim as compared to the variety of provisions laid down by the law. India faces the problem of illegal and pirated documentation of movies which is highly dysfunctional in encouraging these broadcasters from reaping the full potential of the broadcasting industry. Indian law, in this domain, is still young and requires an effective legal mechanism for technological developments which have been established in international articles and treaties.

By: Muskan Nagdawne, Third Year Law Student at Symbiosis Law School, Pune.

Introduction

From local performing arts to large scale movie production- the range of what is covered under rights of broadcasting in India is immaculate. Under the legal provisions designed by jurists, the Copyright Act of 1957 governs the laws related to the display of artistic expression. Implementation of the same is not only to protect the database involved in creativity but also to encourage the society to lay a foundation for creativity by promoting their efforts and fair use of editorial or artistic work.  

The Copyright Act of India provides an arrangement of rights and liabilities when it comes to internet broadcasting and technical measures. These have been designed in a similar fashion to international guidelines for the protection of media. 

Broadcasting Rights under Copyright Law

Section 37 predominantly lays down the rights for broadcasting in India via seeking legislative and an interpretive theory for protection. The moment you perform something original, your performance acquires protection. The acquiring of a performer’s right enables you to bar anyone from:

  • Making a sound recording or visual recording of the performance without permission
  • Reproducing a sound recording or a visual recording, wherein such recording was made without the performer’s consent or was made for purposes different to what the performer had consented.
  • Broadcasting the performance.
  • Communicating the performance to the public.
  • Issuing copies of the performance to the public where such copies are not ones already in circulation.
  • Selling or giving it on commercial rental or offer for sale or commercial rental any copy of the recording.

In addition to this, the Copyright Act also vests certain moral rights in performers. These have been enumerated in S 38B of the Copyright Act. S 38B provides that even in the event of the assignment of rights, a performer has the right to:

  • Claim to be identified as the performer of his/her performance except where omission is dictated by the manner of use of performance.
  • Restrain or claim damages in respect of any distortion, mutilation, or other modification of his/her performance that would be prejudicial to his/her reputation.

With rights, come limitations. Exceptions to the rights of broadcasting in India are governed under S.39 of the Copyright Act, which provide that if:

  • The sound/video recording of the performance is made solely for private use or for bona fide teaching and research;
  • The use is consistent with fair dealing.
  • Any other act which does not constitute an infringement under S 52.

The performer in these events, cannot claim to have conducted a faithful performance of their rights. 

Concept of Neighbouring Rights

The concept of neighbouring rights is subject-matter to and for the full establishment of legal protection for pre-existing materials. It enables protection of the rights of broadcasters and performers by bestowing upon them rights in three distinguished categories; namely for Performers (actors/musicians); Producers of sound recordings (also referred to as phonograms); and Broadcasting organizations.

The reason for these to be called neighbouring rights is because even though broadcasting and performing are not the subject matter of copyright, they are incidental to it.

In this manner, by providing a narrow space for individuals of niche categories into the rights of a broader category of the understanding of copyright, the Indian law sets out to expand what is essentially a corporate notion into a moral dialogue. 

Commercial exploitation of original work of literary value and a profound poetic expression is as important to invest in and protect as any other legal rights. The justification provided primarily for the protection of neighbouring rights in such scenarios is that the public performer displays certain creativity in making the work enjoyable to the public. The aspect of the credibility of performance therefore is as much of an intellectual creation as a copyrighted work. Therefore, as long as they can easily satisfy the test of originality as has been required under traditional copyright protection, the remuneration for exploitation is likewise provided.

Legal Measures

In the event of an infringement of such rights, the person is made available with both civil and criminal remedies. In the case of civil remedies, the person would be able to claim for an injunction, damages, or accounts of profit. The remedy of injunction originates from tort law which is a restriction of conduction of certain activity by a person upon violation of rights. Apart from this, criminal remedies wherein the infringer shall be punished for a term not less than six months and which may extend to six years also exist. Furthermore, the infringer is liable to pay a fine not less than fifty thousand rupees which may extend to two lakh rupees. A subsequent offense would invite a higher punishment.

Judicial Interpretation

In the landmark judgement Of Eastern Book Company and Others V. D.B. Modak and another the Hon’ble Apex court pronounced that in case of reproduction or publication of work in the public domain, the same does not account for the infringement of any copyright issue.

The court went on to give that the pure novelty of an idea or how innovative an invention does not amount to arousal of any copyright protection of such broadcasts and that in order to establish any right, one much prove the labour, skill and capital invested in the project.

Therefore, the execution of the idea is a more quantifiable variable over the mere thought under S.51 of the Copyright Act.

The court in New Delhi Television Ltd V. Icc Development (International) Ltd & Anr an interpretation to the concept of “FAIR DEALING” was questioned before the court in deciding whether the use of the footage of cricket matches by NDTV channel is consistent with the principles of fair dealing envisaged under Section 39(b) and Section 52(1)(a)(iii) of the Copyright Act. The court announced in their judgement that in case of such broadcasts being in accordance to the ICC guidelines, but anything restrictive in the guidelines, which distorts the principle laid down here would not be protected under law. 

Conclusion

The reality of how broadcasting rights are interpreted and managed in India is rather grim as compared to the variety of provisions laid down by the law. The broadcasting bill of 1997 is one example, which provides for independent authority of broadcasting services to still be implemented in India. India faces the problem of illegal and pirated documentation of movies which is highly dysfunctional in encouraging these broadcasters from reaping the full potential of the broadcasting industry. Indian law, in this domain, is still young and requires an effective legal mechanism for technological developments which have been established in international articles and treaties.

Column

Conciliation: Meaning, Procedure and Importance

Conciliation is a process in which the parties to a dispute, with the assistance of a dispute resolution practitioner (the conciliator), identify the issues in dispute, develop options, consider alternatives to reach an agreement. There are different ways to conduct conciliation proceedings. What are they? What is the conciliators’ mode of appointment?

By: Shefali Jha

Introduction

The Arbitration and Conciliation Act, 1996 (“the Act”) is based on the UNCITRAL Model Law on international commercial arbitration and conciliation. While the Act was not intended to displace the judicial system, the new law ushered in an era of private arbitration and conciliation. It was also the first time that comprehensive legislation was made on the subject of conciliation in India. This bulletin will provide an overview of the conciliation proceedings in India along with the relevant provisions under various statutes.

Definition of conciliation

The term conciliation is not defined in the Act. However, simply put conciliation is a confidential, voluntary and private dispute resolution process in which a neutral person helps the parties to reach a negotiated settlement.

This method provides the disputing parties with an opportunity to explore options aided by an objective third party to exhaustively determine if a settlement is possible. Like arbitration, the Act covers both domestic and international disputes in the context of conciliation. International conciliation is confined only to disputes of “commercial” nature. As per the Act, the definition of international commercial conciliation is exactly similar to that of international commercial arbitration.2 Accordingly, the Act defines international commercial conciliation as conciliation proceedings relating to a dispute between two or more parties where at least one of them is a foreign party.3 The foreign party may be (1) an individual who is foreign national, (2) a company incorporated outside India, or (3) the government of a foreign country.

Conciliation under the Civil Procedure Code,1908 (“CPC”)

A 1999 amendment to the CPC enabled the courts to refer pending cases to arbitration, conciliation and mediation to facilitate early and amicable resolution of disputes.10 Before the amendment of the CPC, the Act did not contain any provision for reference by courts to arbitration or conciliation in the absence of the agreement between the parties to that effect. However, pursuant to the insertion of section 89 in the CPC, a court can refer the case to arbitration, conciliation, judicial settlement11 or mediation, “where it appears to the court that there exist elements of a settlement which may be acceptable to the parties.” Section 89 of the CPC empowers the court to formulate the terms of the settlement and give them to the parties for their observation and after receiving the observations, reformulate the terms of a possible settlement and refer the same for arbitration, conciliation, judicial settlement or mediation. Once a court refers a case to conciliation, the provisions shall not apply and the parties shall be bound by the provisions of the Act. This allows the parties to terminate the conciliation proceedings in accordance with section 76 of the Act,12 even if the dispute has not been resolved, thereby rendering the entire dispute resolution process futile.

Number of Conciliators and mode of appointment

After an invitation to conciliate is accepted, the next step is for the parties to agree upon the number of conciliators and the manner in which they are to be appointed.

The act envisages there will be only one conciliator unless the parties agree that there shall be two or three conciliators. The maximum number of permissible is three. In case there is more than one conciliator it is incumbent upon them, as a general rule to act jointly.

Rights and duties of the party

1. It is the duty of each party to co-operate with the conciliator in good faith in every sphere of the conciliation proceedings and in particular they should endeavour to comply with requests made by conciliator to submit written materials, provide evidence and attend meetings (Section 71).

 2. Each party may on his own initiative or at the invitation of the conciliator, submit suggestions for settlement of the dispute to the conciliator (Section 72).

 3. The conciliator and the parties shall keep confidential all matters relating to the conciliation proceedings. Confidentiality also extends to the settlement agreement, except where its disclosure is necessary for purposes of implementation and enforcement (Section 75).

 4. The parties shall not during the conciliation proceedings initiate any arbitral or judicial proceedings in respect of a dispute that is the subject-matter of the conciliation proceedings except where the resort to such proceedings is necessary for preserving his rights (Section 77).

Conduct of Conciliation Proceedings

  1. The principal aim of the conciliator shall be to assist the parties in an independent and impartial manner in their attempt to reach an amicable settlement of their disputes. He shall adopt the principles of objectivity, fairness, and justice. He may conduct the conciliation proceedings in a manner he considers appropriate taking into account the circumstances of the case, the wishes expressed by the parties including requests for an oral hearing and need for speedy settlement (Section 67).
  2. In order to facilitate the conduct of the conciliation proceedings, administrative assistance by a suitable institution or person may be arranged by the parties themselves or by the conciliator with the consent of the parties (Section 68).

3.The conciliator is not bound by the Code of Civil Procedure, 1908 or the Indian Evidence Act, 1872. These enactments prescribe rigid rules of procedure and evidence which govern court procedures whereas conciliation proceedings are governed by the principles of natural justice.

4.The conciliator may meet or communicate with the parties either together or with each of them separately. Communication between conciliator and parties may be made orally or in writing. The venue of conciliation meetings shall be fixed by the parties mutually, and if they fail to do so such a place shall be determined by the conciliator after consultation with the parties, having regard to the circumstances of the conciliation proceedings (Section 69).

Case Law:

Haresh Dayaram Thakur V. State of Maharashtra

The conciliator held some meetings with the parties in which there was discussion and thereafter drew up a settlement agreement by himself in secrecy and sent the same to court in a sealed cover. Naturally the so-called settlement agreement did not bear the signature of the parties. The High Court refused to even entertain any objection against the said settlement agreement and reiterated the position that the settlement arrived at by the conciliator will be binding on the parties.

The action of the conciliator was challenged before the Supreme Court. The Supreme Court held that in view of the apparent illegalities committed by the conciliator in drawing up the so-called settlement agreement, keeping it secret from the parties and sending it to the Court without obtaining their signatures on the same the order passed by the Bombay High Court confirming the settlement agreement received from the conciliator is wholly unsupportable. The position is well settled that if a statute prescribes a procedure for doing a thing, the thing has to be done according to that procedure.

Termination of Conciliation Proceedings

The conciliation proceedings shall stand terminated in the following circumstances-

1.On settlement – on the date of signing the settlement agreement (Section 76).

2.By consent – on the date of the written declaration of –

3.The conciliator after consultation with the parties to the effect that any further efforts at conciliation are no longer justified; or

4.The parties addressed to the conciliator to the effect that conciliation proceedings are terminated; or

5.A party to the other party and the conciliator, if appointed, to the effect that conciliation proceedings are terminated (Section 76).

6.By Default – The conciliation proceedings shall stand terminated on the date of the written declaration of the conciliator to the parties, on default of parties to pay the advance deposit or supplementary deposit in full within 30 days of call of such deposit, to the effect that conciliation proceedings are terminated [Section 79(3)].

Advantages of conciliation

When compared with arbitration and litigation, following are the advantages of conciliation:

  • It is more flexible, inexpensive and informal. 

• Parties are directly engaged in negotiating a settlement. 

• Conciliation enhances the likelihood of the parties continuing their amicable business relationship during and after the proceedings. The reason is that the parties are in a conciliatory mode, away from the hostile environment of a court or an arbitral tribunal where exhaustive arguments take place and reach a mutually acceptable settlement done volitionally, and in a congenial manner. Thus, the end result of a conciliation proceeding is that both parties are relatively pleased with the final outcome. 

• In our view, the chances of an appeal after the conclusion of conciliation proceedings are considerably lower as a mutual settlement is arrived at between the parties. However, there is no judicial precedent establishing this.

Conclusion

The introduction of conciliation as a means of alternate dispute resolution in the Act is definitely a positive step towards encouraging parties to opt for it. Taking into consideration the time effort and money involved in pursuing cases before a court or an arbitrator in India, conciliation should act as the perfect means for resolving disputes, especially those of commercial nature. Hence, parties should prior to initiating arbitration or judicial proceedings, opt for conciliation as a means for resolving disputes. In case conciliation proceedings fail, only then should the disputants look at arbitration or litigation to resolve the dispute.

Endnotes:

  1. Haresh Dayaram Thakur Vs. State of Maharashtra, (2000) SCC 179: (AIR 2000 SC 2281)
  2. https://legal-dictionary.thefreedictionary.com/conciliation
  3. https://www.legalbites.in/meaning-and-scope-of-conciliation/
  4. https://bailmeout.in/conciliation/
Competition Law
Column

Vertical Agreements defined in Section 3(4) of the Competition Act

Vertical agreements are agreements that are entered amongst enterprises or persons at different stages of the production chain. These are agreements that operate at different levels of trade.

By: Riya Singh, 4th year, BBA LLB, KLE Society’s Law College, Bangalore.

Competition Act, 2002, was enacted by the Parliament of India to establish a commission, to protect the interest of the consumers and guarantee freedom of trade in markets in India-

  • To prohibit the agreements or practices that restrict free trading and also the competition between two business entities,
  • To ban the abusive situation of the market monopoly,
  • To provide the opportunity to the entrepreneur for the competition in the market,
  • To have the international support and enforcement network across the world,
  • To prevent anti-competition practices and to promote fair and healthy competition in the market.

Agreement Under the Competition Act

Section 3[1] of the Competition Act states about the anti-competitive agreement, there are two kinds of agreement under the Act-

 1. Vertical

 2. Horizontal

The difference between Horizontal and Vertical Agreements is that in Horizontal Agreements there is the same level of competition whereas in Vertical Agreement there is a different level of competition.

Vertical Agreement

Section 3(4) states that any agreement amongst enterprises or persons at different stages or levels of the production chain in different markets, in respect of production, supply, distribution, storage, sale or price of, or trade-in goods or provision of services, including:

 (a) Tie-in arrangement;

 (b) Exclusive supply agreement;

 (c) Exclusive distribution agreement;

 (d) Refusal to deal;

 (e) Resale price maintenance,

There exists another category of agreements that might get hit from the prohibition created against the Anti- Competitive Agreements, if they result in an appreciable adverse effect on the competition and thus, fall under the ambit of those agreements that have to be judged by the application of ‘rule of reason’ instead of ‘rule of per se’. The burden to prove the same lies on the prosecutor or the investigator. These include-

  1. Tie- in Agreements – These are those agreements that require a buyer of the product, as a condition precedent to such purchase. It is an agreement with a condition that the party will sell the product only on the condition that the buyer will also buy another product.

In re. Godrej and Boyce Mfg. Co. Pvt. Ltd, the burden of proof is one the plaintiff who institutes the claim per se violation to prove that:-

  • The seller conditioned the sale of a product or service on the purchase of the second.
  • That the two products or services are two separate products that they are not parts of the same product.
  • That the seller has sufficient position on the market for tying the product to enforce it.

In Apple Case: Necessary Ingredients-

Presence of two separate products or services capable of being tied,

Seller: sufficient economic power in tying good to restrain competition in tied   good, and tying arrangement affects a not insubstantial amount of commerce.

Fx Enterprises v. Hyundai Motor India Limited

Allegations: Hyundai entered into exclusive supply agreements and refusal to deal arrangements with its distributors. Further, by prescribing maximum permissible discounts to its dealers, it was alleged that it was engaging in resale price maintenance. Additionally, it was alleged that it tied the sale of CNG kits, lubricants, oils, and car insurance.

  1.  Exclusive Distribution Agreements – Such an agreement is entered into for limiting or restricting or withholding the supply or output of any good or allocating any area or disposing in some market.

Bajaj Case: Bajaj was allocating areas of the business to all its dealers found to be an exclusive dealership agreement under Section 3(4)(c) of the Act however, no AAEC found, therefore, no violation.

Spare Parts Case: Agreement between OEM and local OESs preventing the latter from supplying to the aftermarket – found to violate Section 3(4)(c).

  1. Exclusive Supply Agreements – These are those agreements that restrict the buyer in any manner in the course of his business or trade from dealing or acquiring any good.

In the Intel Case – the CCI held that a requirement to inform the supplier when the distributor deals with products belonging to the suppliers competitors cannot amount to an exclusive supply arrangement.

  1. Refusal to Deal – These are those agreements that prohibit any person or class of persons from dealing with a particular good either selling a particular good or buying them.

Spare Parts Case: The agreement between OEM and local OESs preventing the latter from supplying to the aftermarket also held to amount to a refusal to deal.

Fx/Hyundai Case: No case of refusal to deal where the distributor only had to take prior permission from the supplier, before dealing with competitors products, and permission had never been denied.

  1.  Resale Price Maintenance – The agreements that cover the condition that the charges on the reselling of the goods by the buyer will be equivalent to the price that was stipulated by the seller.

It can be noted here, that all the above-mentioned concepts were covered under the Monopolies and Restrictive Practices Act, 1969 and were taken forward by the Competition Act, 2002.

Essentials of Vertical Agreement

As per Section 3 (4) of the Competition Act, 2002, the ingredients for classifying an agreement as a vertical agreement is:

  1. Existence of an agreement between the persons or enterprises
  1. Parties to the agreement must regulate at different stages of the production chain
  1. The agreement must result in an adverse impact on the competition.

Conclusion

The scope of vertical agreements within Section 3(4) is limited in nature. This section, by specifying certain forms of vertical agreements, disregards the existence of any novel agreements that are entered into, in the e-commerce sector. Vertical agreements are agreements that are entered amongst enterprises or persons at different stages of the production chain say e.g. an agreement between an input supplier and a manufacturer of a product using the input or agreements between principals and dealers etc. These are agreements that operate at different levels of trade.

Column

Origin and Scope of RBI in Indian Banking System

RBI plays a very important role yet is very less talked about because of its closed-off nature functioning. In this article, the author has discussed the role, functions and contributions of RBI in detail.

By: Muskan Nagdawne, Third Year Law Student at Symbiosis Law School, Pune.

Introduction

The RBI has always been a very important functional body to India and most valuable in the financial sector. Especially with the massive economic decline due to the global pandemic, RBI has been put into so much pressure to prevent the country from going into bankruptcy. RBI plays a very important role yet is very less talked about because of its closed-off nature functioning. Therefore, the author believes it was important to study and understand its functions and contributions to our country. 

Origin of RBI

RBI has evolved as an important institution over a rich history of over 100 years. The formation of the RBI system has its roots in the “HILTON YOUNG COMMISSION” which was a commission designed for the purpose of enquiry in 1926 by British Colonizers mainly situated in the Eastern and Central provinces of Africa controlled by the British rule.

Post-independence, India had faced with immediate challenges of population and unification, therefore affection the socio-economic conditions of India and to unify and stabilize this, the government had created various “FIVE YEAR PLANS” which were economic plans highlighting the national agendas of India. There promised ideas of development which the RBI was audited to support with loans. RBI acquired a controlling interest in the Imperial Bank of India in 1955 which was the oldest and largest commercial bank of India. 

Roles of RBI

RBI played a special role in the agricultural development by way of restructuring small and big banks for the purpose of accumulating finances and for this, RBI was the body in charge for controlling these said banks into structuring. 

The Preamble to the RBI Act describes the basic objective as to regulate the issue of Bank notes and 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.  

Functions

Duties and responsibilities of RBI flow from The Reserve Bank of India Act, 1934 (RBI Act). However, the range of functions, which the RBI is undertaking is not only covered under the RBI Act but is also covered under various other statutes such as the Banking Regulation Act 1949 and the Companies Act 2013, Foreign Exchange Management Act, 1999, Government Securities Act, 2006, Payment and Settlement Systems Act, 2007 etc. Thus, the legal backing for the functions of RBI is spread over a number of statutes.

The basic three operations of RBI:

  1. Issuance of currencySection 22 of RBI Act 1934, RBI has the authority to issue bank notes or currency notes. Section 23 states that the bank notes will be issued by “Department” of RBI.
  2. Banker to Government-Under Section 20 RBI has the authority to transact business for the Central Government and under Section 21 for the State Government.
  3. Banker’s Bank- RBI works like the central bank where the commercial banks are account holders. It is the duty of RBI to control the credit through the CRR Bank rate and open market operations.

RBI is also the:

  1. Controller of Banks- It issues license to entities intending to do banking business and controls over its business and managements.
  2. Controller of Credit- Under section 21 and 35A of the RBI Act, RBI can fix bank rates and exercise selective control change CRR and direct credit guidelines.
  3. Statutory Reserves- Statutory Liquidity Ratio (SLR) and CRR are determined by RBI maintained by banks in order to control the expansion of bank credit.
  4. Collector of Information- about the borrowers enjoying credit facility of Rupees 10 lacs and above and Rupees 5 lacs and below under section 45A to F.
  5. Maintenance of External Values- Maintain internal and external value of Rupee. Maintain foreign reserves and regulates FEMA.

 Provisions under Reserve Bank of India Act, 1934

Section 17 of the Act defines the manner in which the RBI (the central bank of India) can conduct business.

Section 18 deals with emergency loans to banks.

Section 19 describes the kinds of business the RBI cannot do such as trade, buying shares, make loans or advances, allow interest on deposits and currency accounts.

Section 26 of Act describes the legal tender character of Indian bank notes.

Section 28 allows the RBI to form rules regarding the exchange of damaged and imperfect notes.

Section 31 states that in India, only the RBI or the central government can issue and accept promissory notes that are payable on demand. However, cheques, that are payable on demand, can be issued by anyone.

Section 42(1) says that every scheduled bank must have an average daily balance with the RBI. The amount of the deposit shall be more that a certain percentage of its net time and demand liabilities in India.

Section 42C says that RBI has the power to add or delete the name of any bank from 2nd schedule of RBI Act 1934.

Conclusion

The RBI is successful in promoting development and stability throughout its challenging times. However, the author would like to point out some personal suggestions which the RBI or the Banking Institutions can be more mindful about, especially with the constant changing times.

  • Given that RBI does not only finance the Financial Institutions but also the Non-Financial institutions like building infrastructure for educational, marketing and research institutes that can provide massive employment and will help the country generate more income.

The RBI may invest more on institutions which aims at promoting employment, development and harmony amongst the public and not necessarily on infrastructures that creates biasness and division between different communities.

  • With the onset of the Global Pandemic, people have quickly shifted to e-banking, but having realized that the banking regulations are immature and vulnerable, e-banking is very easily prone to scams. There can be more uniformed and sophisticated banking apps that are solely approved by the RBI only. 
  • Small or rural based banks are more vulnerable to huge scams, proved by the history too, like the PNB scam. These banks need more strict rules and regulations in order to prevent such mishaps. It is such scams that makes the country poorer and widens the economic gap between the rich and the poor.  
  • Lastly, with privatization of “bad banks” I personally feel that RBI should have a more microscopic vigilance over the policies that are implemented by the Government, often times in order for the government to generate revenue the Government sells the public assets and in order to do that indirectly, the Government will implement policies that will gradually degrade the efficiency and productivity of those banks, Hence, turning them to “bad banks”. I personally feel that, for a developing country like India the Government should not privatize public assets as it takes away employment from people and the possibility that it will generate more income instead than to that of the total revenue the Government will generate by selling those assets.
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About Exponent

Exponent is a modern business theme, that lets you build stunning high performance websites using a fully visual interface. Start with any of the demos below or build one on your own.

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