1

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL No.8393  OF 2010 (Arising out of S.L.P.(C) No. 2240 of 2009)

ICICI Bank Limited                   …  Appellant(s)

          versus

Official Liquidator of  APS Star Industries Ltd. & Ors.                                     … Respondent(s)

with

Civil Appeal Nos.8394-8406  of 2010 (@  SLP(C) Nos. 2241-2253/09), Civil Appeal Nos.8407-8425  of 2010 (@ SLP(C) Nos. 2254-2272/09), Civil Appeal No.8426  of 2010 (@ SLP(C) No. 25151/09), Civil Appeal No.8427  of 2010 (@ SLP(C) No. 20617/09).

J U D G M E N T

S. H. KAPADIA, CJI

Leave granted.

2. The short question which we are  required to decide in  

this  batch  of  cases  is  –  Whether  inter  se  transfer  of  Non  

Performing  Assets  (“NPA”  for  short)  by  banks  is  illegal  under  

Banking Regulation Act, 1949 (“BR Act, 1949” for short) as held  

by the Gujarat High Court in the impugned judgment? According  

to the impugned judgment(s), assignment of debts by banks inter

2

se is not an activity which is permissible under the said BR Act,  

1949 and consequently all executed contracts of assignment of  

debts were illegal.  According to the impugned judgment(s),  the  

assignee  banks  were  not  entitled  to   substitution  in  place  of  

original lender (assignor) in proceedings relatable to companies in  

liquidation pending in the Company Court.

Facts in Civil Appeal @ S.L.P. (C) No. 2240 of 2009:

3. On  31.3.2006  a  Deed  of  Assignment  was  executed  

between Kotak Mahindra Bank Ltd.  as assignee (Applicant)  on  

one hand and ICICI Bank Ltd. as assignor.  The recitals in the  

Deed show that ICICI Bank, in the course of its business, had  

granted  various  credit  facilities  to  various  borrowers  (clients).  

These facilities are evidenced by various Financial  Instruments  

executed  by  the  borrowers  and/or  their  respective  

guarantors/pledgers. In the recitals, it has  been stipulated that  

ICICI  Bank  Ltd.  as  assignor  was  the  absolute  and  beneficial  

owner of Financial Instruments and receivables thereunder. An  

aggregate  of  Rs.  52.45  crores  being  the  principal  amount  

outstanding under the trade credit facilities was due and payable  

by the borrowers to ICICI Bank Ltd. (assignee). The assignor had  

agreed to sell and assign to the assignee, Kotak Mahindra Bank  

Ltd.,  all  debts together with interest on “as is where is” basis.

3

Kotak Mahindra Bank Ltd., in turn, agreed to acquire the said  

debts  on  “as  is  where  is”  basis.  In  consideration  of  Kotak  

Mahindra Bank Ltd. paying the purchase price to ICICI Bank Ltd.  

for  purchase  of  the  debts,  the  assignor  agreed  to  assign  

absolutely unto the assignee on “as is where is” basis, without  

the assignee having any recourse to the assignor. Consequently,  

Kotak  Mahindra  Bank  Ltd.,  assignee,  became  the  full  and  

absolute legal owner of the debts and as such the only person  

legally  entitled  to  receive  the  repayments  of  debts.  We  quote  

hereinbelow the relevant provision of the Deed:

“2.2 On and  from  the  date  of  the  Agreement  the  Assignee and the Assignor hereby agree, undertake and  confirm  that  notwithstanding   (i)  the  costs,  charges,  expense, taxes and duties to be paid or incurred by the  Assignee  towards the  realization of  the Debt;  and (ii)  any settlement or compromise or restructuring of the  Debt or the status of the Debt or creditworthiness of the  Clients,  the  amounts  to  be  paid  by  the  Assignee  towards  Purchase  Consideration  in  terms  of  the  Agreement shall remain irrevocable and unconditional  obligation of the Assignee hereof:

2.2.1The  Assignee  shall  have  the  sole  and  absolute  right  of  collecting  all  amounts  representing  the  Debts in such manner as the Assignee may in its  absolute discretion determines;

2.2.2The Assignor  shall  not  be subject  to any duties  and/  or  obligations  in  respect  of  the  Financial  Instruments;

2.2.3The  Assignee  shall  have  all  the  rights  and  obligations under the Financial Instruments as if  they were executed by the Clients in favour of the

4

Assignee.”

4. One of the borrowers of ICICI Bank Ltd. at the relevant  

time was M/s A.P.S.  Star  Industries Ltd.,  a  company which  

subsequently  went  under  liquidation.  By  way  of  Company  

Application  in  the  pending  winding  up proceedings  before  the  

Company  Court,  Kotak  Mahindra  Bank  Ltd.  moved  Company  

Application  for  being  substituted  in  place  of  original  secured  

creditor,  ICICI  Bank  Ltd.  This  was  pursuant  to  the  Deed  of  

Assignment  dated  31.3.2006.  The  Company  Application  for  

substitution was moved at a stage of provisional/final winding up  

proceedings. Before the Company Court, Kotak Mahindra Bank  

Ltd.  submitted  that,  as  per  BR  Act,  1949    read  with  the  

Guidelines of Reserve Bank of India dated 13.7.2005, sale and  

purchase of debts, including the rights in immovable properties  

being secured creditors, can be sold by loaners and purchased by  

banks/financial  institutions  as  assignees.  According  to  Kotak  

Mahindra  Bank  Ltd.,  since  proceedings  for  winding  up  were  

pending before the Company Court at various stages including  

the  stage  for  disposal  of  properties  of  the  companies  in  

liquidation,  they  had  approached  the  Company  Court  to  be  

substituted in place of the original secured creditor, ICICI Bank  

Ltd. Before the Company Court, the secured creditor, ICICI Bank

5

Ltd.  admitted  the  execution  of  the  Deed  of  Assignment  dated  

31.3.2006. They supported the substitution of Kotak Mahindra  

Bank Ltd. in the said application, however, such substitution was  

objected  by  the  borrowers,  who  contended  that  the  deed  of  

assignment had not lawfully conveyed rights to the assignee to  

step into the shoes of ICICI Bank Ltd. (secured creditor).  They  

raised  various  contentions  including  absence  of  proper  

conveyance and payment of stamp duty which aspects were not  

gone into by the impugned judgment of the Division Bench before  

us.  The  Company  Court  came  to  the  conclusion  that  the  

impugned Deed was not presented in terms of Section 21 and  

also that the impugned Deed did not meet the requirement of the  

said  section.  However,  the  Company Court  clarified  that  these  

were its prima facie observations. On the acquisition of rights by  

Kotak Mahindra Bank Ltd.,  the Company Court, however, held  

that the claimed rights were not acquired by the assignee, Kotak  

Mahindra  Bank  Ltd.,  through  the  process  known  in  law  and  

therefore they cannot be permitted to be substituted in place of  

ICICI  Bank  Ltd.  as  secured  creditor  of  the  company  in  

liquidation. Aggrieved by the said decision of the Company Court,  

the assignee,  Kotak Mahindra Bank Ltd.  carried the matter  in  

appeal to the Division Bench of the Gujarat High Court as can be  

seen from the impugned order. A number of questions of law were

6

framed, e.g., whether the Company Court was justified in holding  

that  a  separate  documentation  of  assignment  of  each  loan  

transaction was required to be registered; whether the Company  

Court  was  justified  in  concluding  that  the  Deed  was  not  

registered as per the provisions of Section 60 of the Registration  

Act, 1908 as also the question as to whether the Company Court  

was  right  in  holding  that  rights  were  not  acquired  by  the  

assignee, Kotak Mahindra Bank Ltd., through the process known  

to law and therefore they cannot be allowed to be substituted in  

place  of  the  secured  creditor  of  the  company  in  liquidation,  

namely, ICICI Bank Ltd.

5. At  this  stage,  it  may  be  noted  that  by  the  impugned  

judgment, the High Court upheld the order of the Company Court  

only on the ground that assignment of debts by banks is not an  

activity  which  is  permissible  under  the  BR  Act,  1949  and  

consequently the impugned Deed(s) was illegal and the assignee  

bank(s) was not entitled to substitution in place of ICICI Bank  

Ltd. (assignor). The Division Bench has not examined the other  

questions referred to above.

Submissions:

6. Shri Harish N. Salve, learned senior counsel, appearing

7

on behalf of the appellants submitted that the Division Bench of  

the  High  Court  erred  in  holding  that  in  assigning  debts  with  

underlying  security  the  assignor  banks  were  trading  in  debts  

which was not permissible under the BR Act, 1949 because the  

assignor bank had never purchased debts, it had advanced loans  

against security which was a part of its banking business. That,  

it was only when the account became NPA that the assignor bank  

decided to dispose of the debt(s) which was its asset along with  

the  underlying  security.  Similarly,  the  assignee  bank,  Kotak  

Mahindra Bank Ltd.,   which acquired the debt along with the  

underlying security also did not sell the debt or the underlying  

security  acquired as per  RBI  Guidelines.  On the  contrary,  the  

assignee bank seeks to enforce recovery. Therefore, according to  

the learned counsel, neither the assignor bank nor the assignee  

bank ever traded in the debts as wrongly held by the impugned  

judgment.  According  to  the  learned  senior  counsel,  there  is  a  

fundamental  error  in  the  approach  of  the  High  Court  in  the  

matter  of  interpretation  of  BR  Act,  1949.  That,  “banking  

company” as defined in Section 5(c)  read with Section 5(d) is, in  

the first instance, a company incorporated under the Companies  

Act, 1956. That, such companies are juridical entities which are  

entitled  to  assign  their  debts.  That,  unsecured  debts  are  

assignable as actionable claims under Transfer of Property Act,

8

1882  (“TP  Act”  for  short)  whereas  secured  debts  such  as  

mortgages were transferable by way of conveyance. Reliance in  

this  connection  was  placed  on  the  definition  of  the  words  

“actionable claims” read with Sections 5, 6 and 8 of the TP Act.  

According to the learned counsel, it is clear from Section 2 of the  

BR Act, 1949 that the provisions of that Act are in addition to  

and not in derogation of the Companies Act, 1956 or any other  

law for the time being in force. Therefore, according to the learned  

counsel,  in  order  to  take  away the  effect  of  the  TP Act,  there  

should be something in the BR Act, 1949 in the form of express  

provision so as to exclude the provisions of the TP Act and in the  

absence of express prohibition the provisions of the TP Act stand  

excluded. Therefore, according to the learned counsel, there is no  

merit in the contention advanced on behalf of the borrowers that  

assignment of debts is ultra vires Section 5 read with Section 6 of  

the BR Act, 1949. According to the learned counsel, Section 5(b)  

of the BR Act, 1949 refers to the core activity of a bank, however,  

according to the learned counsel, Section 5(b) is not exhaustive,  

the said sub-section does not specify the range of activities that  

can  be  carried  on  by  a  bank  for  coordination  of  the  banking  

business.  According  to  the  learned counsel,  assignment  is  not  

limited to only NPAs but to debts in general.  According to the  

learned  counsel,  as  per  Section  6(1)(a)  of  the  BR  Act,  1949

9

lending or advancing of money is indisputably a core activity of  

the bank. However, realization of such loans is an integral part of  

the core activity. In the alternative, it was submitted that, in any  

event, an activity of assignment of debt would fall within five of  

the clauses in Section 6(1) of the BR Act, 1949, namely, clause  

(a), clause (c), clause (g), clause (l) and clause (n). According to  

the learned counsel, only prohibition under the BR Act, 1949 so  

far  as  the  business  of  a  bank  is  concerned  is  contained  in  

Sections  8  and 9  and  neither  of  the  said  provisions  limits  or  

prohibits assignment of debts. According to the learned counsel,  

there is one more error in the impugned judgment. According to  

the  High  Court,  Parliament  had  enacted  Securitisation  and  

Reconstruction of Financial Assets and Enforcement of Security  

Interest Act, 2002 (“SARFAESI Act” for short) because the BR Act,  

1949 did not permit banks to assign debts; that the SARFAESI  

Act is an exclusive Act for assignment of debts and that the said  

SARFAESI Act  permitted banks to assign debts not inter se but  

only  to  certain  specified  entities  like  Asset  Management  

Companies (“AMC” for short)/ Asset Reconstruction Companies.  

According to the learned counsel,  the High Court had failed to  

appreciate  the  object  of  the  SARFAESI  Act.  It  has  failed  to  

appreciate the provisions of  that Act.  According to the learned  

counsel,  the  concept  of  securitization  is  an  economic  and

10

commercial concept; that, “asset construction” has been defined  

under Section 2(b) as acquisition by any securitization company  

or reconstruction company of any right or interest of any bank or  

financial institution in any financial assistance for the purpose of  

realization  of  such  financial  assistance;  that,  the  expression  

“financial assistance” was limited to loans and advances given by  

banks or financial institutions; that Section 5 of the SARFAESI  

Act  recognizes  securitization  as  acquisition  of  any  financial  

assets; that, securitization is a matter of contract and Section 5  

of the SARFAESI Act makes a special machinery where financial  

assets of banks are acquired. According to the learned counsel,  

this concept of securitization is a totally new concept as far as  

India is concerned and consequently the SARFAESI Act has no  

relevance as far as the issue in hand is concerned. Coming to the  

RBI Guidelines, learned counsel submitted that RBI is a regulator  

which has considered assignment of NPA not merely as part of  

the business of banking but also something which is conducive to  

the  banking  business;  that,  the  RBI  directives  and  guidelines  

have a statutory flavour and consequently if one goes through the  

said Guidelines they clearly indicate that banking is not confined  

only to the core activities enumerated in Section 5(b) of the BR  

Act, 1949.

11

7. One of the arguments advanced before us on behalf of the  

borrowers was that before the High Court,  Union of India had  

taken a position contra to the stand taken by RBI that trading in  

debts  was  not  permissible  under  BR  Act,  1949.  In  this  

connection,  learned  counsel  appearing  for  the  appellants  

submitted that Union of India, Ministry of Banking was never a  

party to the proceedings before the Company Court; that, in the  

winding  up  proceedings  the  BIFR was  a  party  along  with  the  

Commissioner of Central Excise as claimant. Before the Company  

Court, the learned ASG appeared on behalf of BIFR and Central  

Excise Department; that, no affidavit was filed by the Union of  

India commenting on the RBI guidelines. In the circumstances,  

learned counsel for the appellants submitted that position taken  

on behalf of the Union of India before the Company Court was not  

relevant. Learned counsel further pointed out that RBI appeared  

before  the  Company  Court  and  supported  the  case  of  the  

appellants herein by placing reliance on their Guidelines. For the  

aforestated  reasons,  learned  counsel  submitted  that  the  

impugned judgment is erroneous and is liable to be set aside.

8. In reply, Shri T.R. Andhyarujina, learned senior counsel  

appearing  for  the  borrower,  inter  alia  submitted  that  the  

assignment of financial instruments in possession of ICICI Bank

12

Ltd. to Kotak Mahindra Bank Ltd., transfers not only the right of  

recovering  debt  but  also  transfers  the  obligations  under  the  

financial instruments “as if the said financial instruments were  

executed by the clients of ICICI Bank in favour of the assignee”.  

That,  the  assignment  of  a  debt  can  never  carry  with  it  the  

assignment of the obligations of the assignor.  Unless there is a  

novation of the contract by all parties, there cannot be a transfer  

of  the  obligations  of  the  assignor.   In  this  connection,  Shri  

Andhyarujina  relied  upon  Section  130  of  the  TP  Act,  1882.  

Therefore, according to the learned counsel, such an assignment  

cannot be legally sustained without novation of original contract  

executed by the assignor and the debtor.   Consequently,  such  

assignment  cannot  under  any  circumstances  come  within  the  

permissible mode of business under Section 6(1) of the BR Act,  

1949.  According to the learned counsel, there is no merit in the  

argument of the appellant that the words in Section 6 of the BR  

Act, 1949 “in addition to the business of banking” itself give to  

the  ICICI  Bank  (assignor)  the  right  to  carry  on  all  kinds  of  

activities including the authority to assign debts owed to them  

irrespective  of  the  enumerated  items  in  Section  6(1)(a)  to  (o).  

According to the learned counsel for the borrower, the “business  

of banking” is found in the definition of “banking” and “banking  

company”  in  Sections  5(b)  and  (c)  and  restricts  “banking

13

business”  only  to  accepting  for  the  purpose  of  lending  or  

investment of deposits of money.  In other words, according to the  

learned counsel, the business of banking is restricted by the BR  

Act, 1949 only to hard core, traditional concept of banking.  That,  

there  cannot  be  an  activity  of  assigning  debts  by  accepting  

deposits under Sections 5(b) and 5(c).  Learned counsel further  

submitted that securitization involves assignment of debts under  

the  said  SARFAESI  Act.   In  this  connection,  learned  counsel  

placed reliance on Section 5 of that Act which inter alia states  

that  securitization  company  or  reconstruction  company  may  

“acquire” financial assets of a bank by entering into an agreement  

for the transfer of the financial assets.  Such acquisition can only  

be  if  the  originator  assigns  his  debt  to  the  securitization  

company.  According to the learned counsel, the Parliament has  

now prescribed the only legal way of transferring financial assets  

under  the  SARFAESI  Act  which would include  debts  due to  a  

bank  (NPA  or  otherwise),  by  transfer  to  any  securitization  

company or reconstruction company.  Therefore, according to the  

learned  counsel,  there  is  no  other  legal  way  of  transferring  

financial  assets  including  dues  due to  bank except  under  the  

SARFAESI Act, which has no application in the present case as  

the  said  Act  allows  such  transfers  only  in  favour  of  specified  

companies  namely,  securitization  company  or  reconstruction

14

company  and  not  in  favour  of  banks  or  any  other  financial  

institutions.   As  regards  NPA  Norms  of  RBI,  learned  senior  

counsel  submitted  that  RBI  has  not  issued  directives  under  

Section 35A; that the relevant circular is by way of guidelines and  

is entitled “RBI Prudential Norms on Income Recognition Asset  

Classification and Provisioning Pertaining to Advances” dated 30th  

August,  2001.   Lastly,  learned  counsel  submitted  that  

assignment  of  debt  by  ICICI  Bank is  not  a  mode  of  recovery.  

According  to  the  learned  counsel,  assignment  of  debt  and  

recovery  of  debt  are  two  different  concepts.   When  there  is  

recovery, the debt is totally extinguished whereas in the case of  

assignment the debt is not extinguished, the debt remains, the  

debtor remains, only the creditor changes.  That,  the assignee  

Bank cannot be said to be recovering debt when it in fact assigns  

the debt because both the debtor and the debt continue to exist  

and  they  are  not  extinguished.   In  the  written  submissions  

submitted  on  behalf  of  the  borrower,  one  additional  point  is  

taken.  According to the borrower, in the present batch of cases  

all  rights  and  liabilities  have  crystallized  on  the  date  of  the  

winding up order and, therefore, assignment of debt by a bank  

cannot be permitted after the company is ordered to be wound up  

as  that  would  amount  to  violating  the  provisions  of  the  

Companies Act, 1956.  For the afore-stated reasons, the learned

15

counsel  submitted  that  no  interference  is  called  for  with  the  

impugned judgment(s) and the appeals preferred by the assignor  

deserve to be dismissed.

9. Issues:

(i) Whether the Gujarat High Court was right in holding that  

assignment  of  debts  by  banks  inter  se  is  not  an  activity  

permissible  under  the  BR  Act,  1949  and  consequently  all  

executed contracts of assignment of debts were illegal?

(ii) Whether  the  High Court  was right  in  holding that  the  

assignee bank (s) was not entitled to substitution in place of the  

original lendor (assignor) in proceedings relating to companies in  

liquidation pending in the Company Court?

10. Reasons and Findings:

(i)  On the issue concerning assignment of debts by bank   inter se

  Before  dealing  with  Issue  No.  (i),  we  need  to  quote  

hereinbelow relevant provisions of BR Act, 1949:

“2 - Application of other laws not barred  

The provisions of this Act shall be in addition to, and  not,  save  as  hereinafter  expressly  provided,  in  derogation of the Companies Act, 1956 (1 of 1956 ), and  any other law for the time being in force.

5 - Interpretation  

In this Act, unless there is anything repugnant in the

16

subject or context, -

(b) "banking" means the accepting, for the purpose of  lending or investment,  of  deposits of  money from the  public,  repayable  on  demand  or  otherwise,  and  withdrawal by cheque, draft, order or otherwise;

(c)  "banking  company"  means  any  company  which  transacts the business of banking in India;

Explanation.--Any  company  which  is  engaged  in  the  manufacture  of  goods  or  carries  on  any  trade  and  which accepts deposits of money from the public merely  for the purpose of financing its business as such man- ufacturer or trader shall not be deemed to transact the  business of banking within the meaning of this clause;

(ca)  "banking  policy"  means  any  policy  which  is  specified from time to time by the Reserve Bank in the  interest  of  the  banking  system  or  in  the  interest  of  monetary stability  or  sound economic growth,  having  due regard to the interests of the depositors, the volume  of  deposits  and other  resources of  the  bank and the  need  for  equitable  allocation  and  the  efficient  use  of  these deposits and resources;

(d) "company" means any company as defined in section  3 of the Companies Act, 1956 (1 of 1956); and includes  a foreign company within the meaning of section 591 of  that Act;

(1)  "Reserve  Bank"  means the Reserve  Bank of  India  constituted  under  section  3  of  the  Reserve  Bank  of  India Act, 1934 (2 of 1934);

6 - Forms of business in which banking companies  may engage  

(1) In addition to the business of banking, a banking  company  may  engage  in  any  one  or  more  of  the  following forms of business, namely:-

17

(a) the borrowing, raising, or taking up of money; the  lending or advancing of money either upon or without  security; the drawing, making, accepting, discounting,  buying,  selling,  collecting  and  dealing  in  bills  of  exchange, hoondees, promissory notes, coupons, drafts,  bills of lading, railway receipts, warrants, debentures,  certificates, scrips and other instruments and securities  whether transferable or negotiable or not; the granting  and issuing of letters of credit, traveller's cheques and  circular notes; the buying, selling and dealing in bullion  and specie; the buying and selling of foreign exchange  including  foreign  bank  notes;  the  acquiring,  holding,  issuing  on  commission,  underwriting  and  dealing  in  stock,  funds,  shares,  debentures,  debenture  stock,  bonds,  obligations,  securities  and  investments  of  all  kinds; the purchasing and selling of bonds, scrips or  other forms of  securities on behalf  of  constituents or  others,  the  negotiating  of  loans  and  advances;  the  receiving of all kinds of bonds, scrips or valuables on  deposit or for safe custody or otherwise; the providing  of safe deposit vaults; the collecting and transmitting of  money and securities;

(f) managing, selling and realising any property which  may  come  into  the  possession  of  the  company  in  satisfaction or part satisfaction of any of its claims;

(g)  acquiring  and  holding  and  generally  dealing  with  any property or any right, title or interest in any such  property  which may form the  security  or  part  of  the  security  for  any loans or  advances  or  which may be  connected with any such security;

(l)  selling,  improving,  managing,  developing,  exchanging,  leasing,  mortgaging,  disposing  of  or  turning into  account or  otherwise  dealing  with all  or  any part of the property and rights of the company;

(n)  doing  all  such  other  things  as  are  incidental  or  conducive  to  the  promotion  or  advancement  of  the  business of the company;

(o)  any  other  form  of  business  which  the  Central

18

Government may, by notification in the Official Gazette,  specify as a form of business in which it is lawful for a  banking company to engage.

(2)  No banking company shall  engage in any form of  business other than those referred to in sub-section (1).

8 - Prohibition of trading  

Notwithstanding anything contained in section 6 or in  any  contract,  no  banking  company  shall  directly  or  indirectly deal in the buying or selling or bartering of  goods,  except  in  connection  with  the  realisation  of  security given to or held by it, or engage in any trade, or  buy, sell or barter goods for others otherwise than in  connection with bills of exchange received for collection  or negotiation or with such of its business as is referred  to in clause (i) of sub-section (1) of section 6:

9 - Disposal of non-banking assets  

Notwithstanding  anything  contained  in  section  6,  no  banking company shall  hold any immovable  property  howsoever acquired, except such as is required for its  own use, for any period exceeding seven years from the  acquisition thereof or from the commencement of this  Act, whichever is later or any extension of such period  as in this section provided, and such property shall be  disposed of within such period or extended period, as  the case may be:

Provided  that  the  banking  company  may,  within  the  period of seven years as aforesaid deal or trade in any  such  property  for  the  purpose  of  facilitating  the  disposal thereof:

Provided  further  that  the  Reserve  Bank  may  in  any  particular  case  extend  the  aforesaid  period  of  seven  years by such period not exceeding five years where it is  satisfied that such extension would be in the interests  of the depositors of the banking company.

12. Regulation of paid-up capital, subscribed capital  and  authorised  capital  and  voting  rights  of

19

shareholders

(1)  No  banking  company  shall  carry  on  business  in  India,  unless  it  satisfies  the  following  conditions,  namely:-

(i) 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 may allow;

(ii) that the capital of the company consists of ordinary  shares only or of ordinary shares or equity shares and  such preferential shares as may have been issued prior  to the 1st day of July, 1944:

Provided  that  nothing  contained  in  this  sub-section  shall  apply  to  any  banking  company  incorporated  before the 15th day of January, 1937.

(2)  No  person  holding  shares  in  a  banking  company  shall,  in respect  of  any shares held by him,  exercise  voting rights on poll  in excess of  ten per cent of  the  total voting rights of all the shareholders of the banking  company.

17. Reserve Fund

(1) Every banking company incorporated in India shall  create a reserve fund and shall, out of the balance of  profit  of each year as disclosed in the profit and loss  account  prepared  under  section  29  and  before  any  dividend is declared, transfer to the reserve fund a sum  equivalent  to  not  less  than  twenty  per  cent  of  such  profit.

(1A)  Notwithstanding  anything  contained  in  sub- section(1),  the  Central  Government  may,  on  the

20

recommendation  of  the  Reserve  Bank  and  having  regard  to  the  adequacy  of  the  paid-up  capital  and  reserves of a banking company in relation to its deposit  liabilities, 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:

Provided that no such order shall be made unless, at  the  time it  is  made,  the  amount  in  the  reserve fund  under sub-section (1), together with the amount in the  share premium account is  not less than the paid-up  capital of the banking company.

18. Cash reserve

(1)  Every  banking  company,  not  being  a  scheduled  bank, shall  maintain in India by way of cash reserve  with itself  or by way of balance in a current account  with  the  Reserve  Bank,  or  by  way of  net  balance  in  current  accounts  or  in  one  or  more  of  the  aforesaid  ways, a sum equivalent to at least three per cent of the  total of its demand and time liabilities in India as on  the last  Friday of  the second preceding fortnight  and  shall submit to the Reserve Bank before the twentieth  day of  every month a return showing the amount so  held  on  alternate  Fridays  during  a  month  with  particulars of its demand and time liabilities in India on  such Fridays or if any such Friday is a public holiday  under  the  Negotiable  Instruments  Act,  1881  (26  of  1881),  at  the  close  of  business  on  the  preceding  working day.

Explanation.--In this section, and in section 24,-

(a) "liabilities in India" shall not include-

(i)  the  paid-up  capital  or  the  reserves  or  any  credit  balance in the profit and loss account of the banking  company;

(ii) any advance taken from the Reserve Bank or from

21

the Development 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 by the banking company;

(iii) in the case of a Regional Rural Bank, also any loan  taken by such bank from its Sponsor Bank;

(b) "fortnight" shall mean the period from Saturday to  the second following Friday, both days inclusive;

(c) "net balance in current accounts" shall, in relation to  a  banking  company,  mean the  excess,  if  any,  of  the  aggregate  of  the  credit  balances  in  current  account  maintained by that banking company with State Bank  of India or a subsidiary bank or a corresponding new  bank  over  the  aggregate  of  the  credit  balances  in  current  account  held  by  the  said  banks  with  such  banking company;

(d)  for  the  purposes  of  computation of  liabilities,  the  aggregate of the liabilities of a banking company to the  State Bank of India, a subsidiary bank, a corresponding  new  bank,  a  regional  rural  bank,  another  banking  company,  a  co-operative  bank  or  any  other  financial  institution notified by the Central Government in this  behalf,  shall  be  reduced  by  the  aggregate  of  the  liabilities  of  all  such  banks  and  institutions  to  the  banking company;

(e)  the  expression  "co-operative  bank"  shall  have  the  meaning assigned to it in clause (cci) of section 56.

(2)  The  Reserve  Bank  may,  for  the  purposes  of  this  section and section 24, specify from time to time, with  reference to  any transaction or  class  of  transactions,  that such transaction or transactions shall be regarded  as liability in India of a banking company and, if any  question arises as to whether any transaction or class  of  transactions shall  be regarded for  the purposes of  this  section  and section  24  as  liability  in  India  of  a  banking  company,  the  decision  of  the  Reserve  Bank

22

thereon shall be final.

20. Restrictions on loans and advances

(1) Notwithstanding anything to the contrary contained  in section 77 of the Companies Act, 1956 (1 of 1956),  no banking company shall,-

(a) grant any loans or advances on the security of its  own shares, or-

(b) enter into any commitment for granting any loan or  advance to or on behalf of-

(i) any of its directors,

(ii) any firm in which any of its directors is interested as  partner, manager, employee or guarantor, or

(iii) any company [not being a subsidiary of the banking  company or a company registered under section 25 of  the Companies Act, 1956 (1 of 1956), or a Government  company  of  which  or  the  subsidiary  or  the  holding  company of which any of the directors of the banking  company  is  a  director,  managing  agent,  manager,  employee or guarantor or in which he holds substantial  interest, or

(iv)  any  individual  in  respect  of  whom  any  of  its  directors is a partner or guarantor.

(2)  Where any loan or advance granted by a banking  company  is  such  that  a  commitment  for  granting  it  could not have been made if clause (b) of sub-section  (1) had been in force on the date on which the loan or  advance was made, or is granted by a banking company  after  the commencement of  section 5 of  the Banking  Laws  (Amendment)  Act,  1968(58  of  1968),  but  in  pursuance of a commitment entered into before such  commencement,  steps  shall  be  taken  to  recover  the

23

amounts due to the banking company on account of  the loan, or advance together with interest, if any, due  thereon within the period stipulated at the time of the  grant of the loan or advance, or where no such period  has been stipulated, before the expiry of one year from  the commencement of the said section 5:

Provided that the Reserve Bank may, in any case, on an  application  in  writing  made  to  it  by  the  banking  company  in  this  behalf,  extend  the  period  for  the  recovery of  the  loan or  advance until  such date,  not  being a date beyond the period of three years from the  commencement  of  the  said section 5,  and subject  to  such terms and conditions, as the Reserve Bank may  deem fit:

Provided further that this sub-section shall not apply if  and when the director concerned vacates the office of  the director of the banking company, whether by death,  retirement, resignation or otherwise.

(3) No loan or advance, referred to in sub-section (2), or  any part thereof shall be remitted without the previous  approval  of  the  Reserve  Bank,  and  any  remission  without such approval shall be void and of no effect.

(4)  Where  any  loan  or  advance  referred  to  in  sub- section (2), payable by any person, has not been repaid  to the banking company within the period specified in  that  subsection,  then,  such  person  shall,  if  he  is  a  director of such banking company on the date of the  expiry of the said period, be deemed to have vacated his  office as such on the said date.

Explanation.--In this section-

(a) "loans or advance" shall not include any transaction  which  the  Reserve  Bank  may,  having  regard  to  the  nature of the transaction, the period within which, and  the manner and circumstances in which, any amount  due  on  account  of  the  transaction  is  likely  to  be  realised,  the  interest  of  the  depositors  and  other

24

relevant  considerations,  specify  by  general  or  special  order as not being a loan or advance for the purpose of  this section;

(b)  "director"  include  a  member  of  any  board  or  committee in India constituted by a banking company  for  the  purpose  of  managing,  or  for  the  purpose  of  advising it in regard to the management of, all or any of  its affairs.

(5) If any question arises whether any transaction is a  loan or advance for the purposes of this section, it shall  be  referred  to  the  Reserve  Bank,  whose  decision  thereon shall be final.

21 - Power of Reserve Bank to control advances by  banking companies  

(1)  Where  the  Reserve  Bank  is  satisfied  that  it  is  necessary or expedient in the public interest or in the  interests of depositors or banking policy so to do, it may  determine  the  policy  in  relation  to  advances  to  be  followed  by  banking  companies  generally  or  by  any  banking  company in  particular,  and when the  policy  has been so determined, all banking companies or the  banking company concerned, as the case may be, shall  be bound to follow the policy as so determined.

(2)  Without  prejudice  to  the  generality  of  the  power  vested in the Reserve Bank under sub-section (1) the  Reserve  Bank  may  give  directions  to  banking  companies, either generally or to any banking company  or group of banking companies in particular, as to-

(a) the purposes for which advances may or may not be  made,

(b) the margins to be maintained in respect of secured  advances,

(c) the maximum amount of advances or other financial  accommodation  which,  having  regard  to  the  paid-up

25

capital,  reserves  and deposits  of  a  banking  company  and other relevant considerations, may be made by that  banking  company  to  any  one  company,  firm,  association of persons or individual,

(d) the maximum amount up to which, having regard to  the considerations referred to in clause (c),guarantees  may be given by a banking company on behalf of any  one company, firm, association of persons or individual,  and

(e) the rate of interest and other terms and conditions  on which advances or other financial  accommodation  may be made or guarantees may be given.

3)  Every banking company shall  be bound to comply  with any directions given to it under this section.

22 - Licensing of banking companies  

(1)  Save  as  hereinafter  provided,  no  company  shall  carry on banking business in India unless it  holds a  licence issued in that behalf by the Reserve Bank and  any  such  licence  may  be  issued  subject  of  such  conditions as the Reserve Bank may think fit to impose.

23. Restrictions on opening of new, and transfer of  existing, places of business

(1)  Without  obtaining  the  prior  permission  of  the  Reserve Bank-

(a)  no  banking  company  shall  open  a  new  place  of  business in India or change otherwise than within the  same city,  town or village,  the location of an existing  place of business situated in India; and

(b)  no  banking  company  incorporated  in  India  shall  open a new place of business outside India or change,

26

otherwise than within the same city, town or village in  any country or area outside India,  the location of an  existing place of business situated in that country or  area:

24 - Maintenance of a percentage of assets  

(2A) A scheduled bank, in addition to the average daily  balance which it  is,  or  may be,  required to maintain  under section 42 of the Reserve Bank of India Act, 1934  (2  of  1934)  and  every  other  banking  company,  in  addition  to  the  cash  reserve  which  it  is  required  to  maintain  under  section  18,  shall  maintain  in  India,  assets, the value of which shall not be less than such  percentage not exceeding forty per cent, of the total of  its demand and time liabilities in India as on the last  Friday of the second preceding fortnight as the Reserve  Bank  may,  by  notification  in  the  Official  Gazette,  specify  from  time  to  time  and  such  assets  shall  be  maintained,  in  such  form  and  manner,  as  may  be  specified in such notification.

35A. Power of the Reserve Bank to give directions

(1) Where the Reserve Bank is satisfied that-

(a) in the public interest; or

(aa) in the interest of banking policy; or

(b) to prevent the affairs of any banking company being  conducted in a manner detrimental to the interests of  the  depositors  or  in  a  manner  prejudicial  to  the  interests of the banking company; or

(c)  to  secure the  proper  management of  any banking  company generally, it is necessary to issue directions to  banking  companies  generally  or  to  any  banking  company in particular, it may, from time to time, issue  such  directions  as  it  deems  fit,  and  the  banking  companies or the banking company, as the case may  be, shall be bound to comply with such directions.

27

(2) The Reserve Bank may, on representation made to it  or  on its own motion, modify or cancel  any direction  issued under  sub-section (1),  and in so modifying or  cancelling any direction may impose such conditions as  it  thinks  fit,  subject  to  which  the  modification  or  cancellation shall have effect.

36 - Further powers and functions of Reserve Bank  

(1) The Reserve Bank may-

(a)  caution  or  prohibit  banking  companies  or  any  banking  company  in  particular  against  entering  into  any particular transaction or class of transactions, and  generally give advice to any banking company;

(b)  on  a  request  by  the  companies  concerned  and  subject  to  the  provision  of  section  44A,  assist,  as  intermediary  or  otherwise,  in  proposals  for  the  amalgamation of such banking companies;

(c) give assistance to any banking company by means of  the grant of a loan or advance to it under clause(3) of  sub-section (1)  of  section 18 of  the  Reserve  Bank of  India Act, 1934 (2of 1934);

(d)  at  any  time,  if  it  is  satisfied  that  in  the  public  interest  or  in  the  interest  of  banking  policy  or  for  preventing  the  affairs  of  the  banking  company  being  conducted in a manner detrimental to the interests of  the banking company or its depositors it is necessary  so to do, by order in writing and on such terms and  conditions as may be specified therein-

(i) require the banking company to call a meeting of its  directors  for  the  purpose  of  considering  any  matter  relating to or arising out of the affairs of the banking  company; or require an officer of the banking company  to  discuss  any  such  matter  with  an  officer  of  the  Reserve Bank;

(ii)  depute  one  or  more  of  its  officers  to  which  the  proceedings at any meeting of the Board of directors of

28

the  banking company or  of  any committee  or  of  any  other  body  constituted  by  it;  require  the  banking  company  to  give  an  opportunity  to  the  officers  so  deputed to be heard at such meetings and also require  such officers to send a report of such proceedings to the  Reserve Bank;

(iii)  require  the  Board  of  directors  of  the  banking  company  or  any  committee  or  any  other  body  constituted  by  it  to  give  in  writing  to  any  officer  specified  by  the  Reserve  Bank  in  this  behalf  at  his  usual address all notices of, and other communications  relating  to,  any  meeting  of  the  Board,  committee  or  other body constituted by it;

(iv)  appoint one or more of its officers to observe the  manner in which the affairs of the banking company or  of its offices or branches are being conducted and make  a report thereon;

(v) require the banking company to make, within such  time as may be specified in the order, such changes in  the  management  as  the  Reserve  Bank  may  consider  necessary.

39. Reserve Bank to be official liquidator.-

(1) Notwithstanding anything contained in section 38A  of  this  Act  or  in  section  448  or  section  449  of  the  Companies  Act,  1956(1  of  1956),  where  in  any  proceeding for the winding up by the High Court of a  banking  company,  an  application  is  made  by  the  Reserve  Bank  in  this  behalf,  the  Reserve  Bank,  the  State Bank of India or any other bank notified by the  Central Government in this behalf or any individual, as  stated  in  such application  shall  be  appointed  as  the  official  liquidator  of  the  banking  company  in  such  proceeding  and  the  liquidator,  if  any,  functioning  in  such  proceeding  shall  vacate  office  upon  such  appointment.

29

(2) Subject to such directions as may be made by the  High Court, the remuneration of the official liquidator  appointed under this section, the cost and expenses of  this  establishment  and the  cost  and expenses of  the  winding  up  shall  be  met  out  of  the  assets  of  the  banking  company  which  is  being  wound  up,  and  notwithstanding anything to the contrary contained in  any other law for the time being in force, no fees shall  be payable to the Central Government, out of the assets  of the banking company.

46 - Penalties  

(4) If any other provision of this Act is contravened or if  any default is made in-

(i) complying with any requirement of this Act or of any  order,  rule  or  direction  made  or  condition  imposed  thereunder, or

(ii) carrying out the terms of, or the obligations under, a  scheme sanctioned under sub-section (7) of section 45,  by any person, such person shall be punishable with  fine which may extend to fifty thousand rupees or twice  the amount involved in such contravention or default  where such amount is quantifiable, whichever is more,  and where a contravention or default  is a continuing  one,  with  a  further  fine  which  may  extend  to  two  thousand and five hundred rupees for every day, during  which the contravention or default continues.

47A. Power of Reserve Bank to impose penalty

(1) Notwithstanding anything contained in section 46, if  a contravention or default of the nature referred to in  sub-section (3) or sub-section (4) of section 46, as the  case may be, is made by a banking company, then, the  Reserve Bank may impose on such banking company-

(a) where the contravention is of the nature referred to  in sub-section (3) of section 46, a penalty not exceeding  twice the amount of the deposits in respect of  which  such contravention was made;

30

(b) where the contravention or default is of the nature  referred to in sub-section (4)  of section 46, a penalty  not  exceeding  five  lakh  rupees  or  twice  the  amount  involved in such contravention or default where such  amount is quantifiable, whichever is more, and where  such the contravention or default is a continuing one, a  further  penalty  which  may  extend  to  twenty-five  thousand rupees for every day, after the first,  during  which the contravention of default continues.

51.  Application of  certain  provisions to the State  Bank of India and other notified banks

(1)  Without  prejudice  to  the  provisions  of  the  State  Bank  of  India  Act,  1955  (23  of  1955)  or  any  other  enactment, the provisions of sections 10, 13 to 15, 17,  19 to 21A, 23 to 28, 29 excluding sub-section (3) sub- section (1B), (1C) and (2) of sections 30,31, 34, 35, 35A,  36 excluding clause(a) of sub-section(1), 45Y to 45ZF,  46 to48 50, 52 and 53 shall also apply; so far as may  be, to and in relation to the State Bank of India or any  corresponding new bank or a Regional Rural Bank or  any subsidiary bank as they apply to and in relation to  banking companies:

Provided that-

(a) nothing contained in clause (c) of sub-section (1) of  section  10  shall  apply  to  the  chairman  of  the  State  Bank  of  India  or  to  a  managing  director  of  any  subsidiary  bank insofar  as the  said clause  precludes  him from being a director of, or holding an office in, any  institution approved by the Reserve Bank;

(b) nothing contained in sub-clause (iii) of clause (b) of  sub-section (1) of  section 20 shall  apply to any bank  referred to in sub-section (1), insofar as the said sub- clause  (iii)  of  clause  (b)  precludes  that  bank  from  entering into any commitment for granting any loan or  advance  to  or  on  behalf  of  a  company  (not  being  a  Government company) in which not less than forty per  cent of the paid-up capital  is held (whether singly or  taken  together)  by  the  Central  Government  or  the

31

Reserve Bank or a corporation owned by that bank; and

(c)  nothing contained in section 46 or in section 47A  shall apply to, -

(i) an officer of the Central Government or the Reserve  Bank, nominated or appointed as director of the State  Bank  of  India  or  any  corresponding  new  bank  or  a  Regional  Rural  Bank  or  any  subsidiary  bank  or  a  banking company; or

(ii)  an  officer  of  the  State  Bank  of  India  or  a  corresponding new bank or a Regional Rural Bank or a  subsidiary bank nominated or appointed as director of  any of the said banks (not being the bank of which he is  an officer) or of a banking company.;

(2)  References  to  a  banking  company  in  any  rule  or  direction relating to any provision of this Act referred to  in  sub-section  (1)  shall,  except  where  such  rule  or  direction provides otherwise, be construed as referring  also to the State Bank of India, a corresponding new  bank, a Regional Rural Bank and a subsidiary bank.”

11. For  the  purpose  of  deciding  Issue  No.  (i),  we  are  also  

required to quote relevant portion of RBI Guidelines dated    13th  

July, 2005, which reads as under:

“Guidelines  on purchase/ sale  of  Non Performing  Financial Assets  

Scope

1. These guidelines would be applicable to banks, FIs  and  NBFCs  purchasing/  selling  non  performing  financial  assets,  from/  to  other  banks/FIs/NBFCs  (excluding  securitisation  companies/  reconstruction  companies).

2.  A  financial  asset,  including  assets  under

32

multiple/consortium banking arrangements, would be  eligible for purchase/sale in terms of these guidelines  if  it  is  a  non-performing  asset/non  performing  investment in the books of the selling bank.

3.  The  reference  to  ‘bank’  in  the  guidelines  would  include financial institutions and NBFCs.”  

Brief analysis of the BR Act, 1949

12. The  BR  Act,  1949  provides  for  the  comprehensive  

definition  of  “banking”  so  as  to  bring  within  its  scope  all  

institutions which receive deposits for lending or investment and  

to give RBI a control over banking companies.   It  is an Act to  

consolidate and amend the law relating to banking.  Section 2  

clarifies  that  the  1949 Act  shall  be  in  addition  to  and not  in  

derogation of the Companies Act, 1956 and any other law for the  

time being in force save as therein expressly provided.  Section  

5(1)(a) is the interpretation section.  It defines “banking” to mean  

“accepting deposits for lending”.  This is principal business of a  

bank.  Section 5(1)(c) defines banking company as any company  

which  transacts  the  business of  banking.   Thus,  a  banking  

company  has  to  be  a  company  in  the  first  instance.   Section  

5(1)(ca)  defines  “banking  policy”  to  mean  any  policy  which  is  

specified  from time  to  time  by  RBI  in  the  interest  of  banking  

system or in the interest of monetary stability or economic growth  

having due regard to the interest of the depositors and efficient

33

use of these deposits.   Part II  deals with “business of banking  

companies”.  Section 6(1) in Part II says that  in addition to the  

business of banking, a banking company may engage in any one  

or more of the forms of business enumerated in clauses (a) to (o).  

It covers borrowing, lending, advancing of money; acquiring and  

holding and dealing  with property  (security)  or  right,  title  and  

interest therein; selling, improving leasing or turning into account  

or  otherwise  dealing  with  such  security;  doing  all  such  other  

things  as  are  incidental  or  conducive  to  the  promotion  or  

advancement of the business of the company and any other form  

of  business which the  Central  Government may notify.   Thus,  

Section  6(1)  has  a  general  provision  and  the  provision  which  

enumerates topics/fields in which the banks can carry on their  

business.  Section 8 begins with non-obstante clause.  It  says  

that no banking company shall deal in the buying or selling of  

goods  except  in  connection  with  the  realization  of  security.  

Section 9 also begins with a non-obstante clause.  It deals with  

restrictions on disposal of non-banking assets.  Both Sections 8  

and 9 are prohibitions and restrictions under the Act which are  

covered by the expression “save as except provided” in Section 2  

of the Act.  As stated earlier, BR Act, 1949 is in addition to the  

Companies Act, 1956 or any other law for the time being in force  

and its provisions shall not be treated to be in derogation of any

34

other laws save and except to the extent of any activity which is  

prohibited or restricted (See: Section 2).  Section 12 says that no  

banking  company  shall  carry  on  business  unless  it  satisfies  

certain conditions.  Section 17 refers to creation of Reserve Fund.  

Section 18 refers to creation of Cash Reserve.  Section 20 refers  

to restrictions on loans and advances.  Section 21 deals with the  

power of RBI to control advances by banking companies.  Section  

21 empowers RBI to frame policies in relation to advances to be  

followed by banking companies.  It further says that once such  

policy is made all banking companies shall  be bound to follow  

them.   Section  21(1)  is  once  again  a  general  provision  

empowering  RBI  to  determine  policy  in  relation  to  advances  

whereas Section 21(2) empowers RBI to give directions to banking  

companies  as  to  items  mentioned  there  i.e.  in  Section  21(2).  

Under Section 21(3) every banking company is bound to comply  

with directions given by RBI at the peril of penalty being levied for  

non-compliance.   Section 35A says that where RBI is  satisfied  

that  in  the  interest  of  Banking  Policy  it  is  necessary  to  issue  

directions to banking companies it may do so from time to time  

and the banking companies shall be bound to comply with such  

directions.  Thus, in exercise of the powers conferred by Sections  

21  and  35A  of  the  said  Act,  RBI  can  issue  directions  having  

statutory force of law.  Section 36 deals with further powers and

35

functions of RBI.  Under Section 39 it is the RBI who shall be the  

Official Liquidator in any proceedings concerning winding up of a  

banking company.   

13. The above analysis of the various provisions of the 1949  

Act shows that RBI is empowered to regulate the business of the  

banking  companies.   That,  RBI  is  empowered  to  control  

management of banking companies in certain situations.  It  is  

empowered  to  lay  down  conditions  on  which  the  banking  

companies  will  operate.   It  is  empowered  to  regulate  paid-up  

capital, reserve fund, cash fund and above all to lay down policies  

in the matter of advances to be made by the banking companies,  

allocation  of  resources  etc.   While  laying  down  such  policies  

under  the  said  Act,  RBI  can  lay  down  parameters  enabling  

banking companies to expand its business.  For example, RBI’s  

permission is required to be obtained if a banking company seeks  

to deal in “derivatives”.  It  is a business which will  not fall  in  

clauses  (a)  to  (o)  of  Section  6(1)(a)  and yet  RBI  can lay  down  

guidelines and directions enabling banking companies to deal in  

derivatives like futures and options.  The point we are trying to  

make  is  that  apart  from  the  principal  business  of  accepting  

deposits and lending the said 1949 Act leaves ample scope for the  

banking  companies  to  venture  into  new businesses  subject  to  

such businesses being subject to the control of the Regulator, viz.

36

RBI.  In other words, the 1949 Act allows banking companies to  

undertake activities and businesses as long as they do not attract  

prohibitions and restrictions like those contained in Sections 8  

and 9.  In this connection we need to emphasize  that Section  

6(1)(n)  enables  a  banking  company  to  do  all  things  as  are  

incidental  or  conducive  to  promotion  or  advancement  of  the  

business  of  the  company.   Section  6(1)  enables  banking  

companies  to  carry  on  different  types  of  businesses.   Under  

Section 6(1), these different types of businesses are in addition to  

business of banking, viz., core banking.  The importance of the  

words  “in  addition  to”  in  Section  6(1)  is  that  even if  different  

businesses under clauses (a) to (o) are shut down, the company  

would still  be a banking company as long as it  is  in the core  

banking  of  accepting  deposits  and  lending  so  that  its  main  

income is from the spread or what is called as “interest income”.  

Thus,  we may broadly  categorise  the  functions of  the banking  

company into two parts, viz., core banking of accepting deposits  

and lending and miscellaneous functions and services.  Section 6  

of the BR Act, 1949 provides for the form of business in which  

banking  companies  may  engage.   Thus,  RBI  is  empowered  to  

enact a policy which would enable banking companies to engage  

in  activities  in  addition to  core  banking and in  the  process  it  

defines as to what constitutes “banking business”.  The BR Act,

37

1949 basically seeks to regulate banking business.  In the cases  

in hand we are not concerned with the definition of banking but  

with what  constitutes “banking business”.   Thus,  the  said BR  

Act, 1949 is an open-ended Act.  It empowers RBI (regulator and  

policy framer in matter of advances and capital adequacy norms)  

to develop a healthy secondary market, by allowing banks inter se  

to deal in NPAs in order to clean the balance sheets of the banks  

which  guideline/policy  falls  under  Section  6(1)(a)  r/w  Section  

6(1)(n).   Therefore,  it  cannot  be  said  that  assignment  of  

debts/NPAs  is  not  an  activity  permissible  under  the  BR  Act,  

1949.   Thus,  accepting  deposits  and  lending  by  itself  is  not  

enough to constitute the “business of banking”.  The dependence  

of  commerce  on  banking  is  so  great  that  in  modern  money  

economy the cessation even for a day of the banking activities  

would completely paralyse the economic life of the nation.  Thus,  

the  BR  Act,  1949  mandates  a  statutory  comprehensive  and  

formal structure of banking regulation and supervision in India.

14. The test to be applied is – whether trading in NPAs has  

the characteristics of a bona fide banking business.  That test is  

satisfied  in  this  case.   The  guidelines  issued  by  RBI  dated  

13.7.2005 itself authorizes banks to deal inter se in NPAs.  These  

guidelines have been issued by the Regulator in exercise of the  

powers conferred by Sections 21 and 35A of the Act.  They have a

38

statutory force of  law.  They have allowed banks to engage in  

trading in NPAs with the purpose of cleaning the balance sheets  

so that they could raise the capital adequacy ratio.  All this comes  

within the ambit of Section 21 which enables RBI to frame the  

policy  in  relation  to  Advances  to  be  followed  by  the  banking  

companies and which empowers RBI to give directions to banking  

companies under Section 21(2).  These guidelines and directions  

following  them  have  a  statutory  force.   When  a  delegate  is  

empowered  by  the  Parliament  to  enact  a  Policy  and  to  issue  

directions which have a statutory force and when the delegatee  

(RBI) issues such guidelines (Policy) having statutory force, such  

guidelines have got to be read as supplement to the provisions of  

the  BR Act,  1949.  The “banking policy”  is  enunciated  by RBI.  

Such policy cannot be said to be ultra vires the Act.  The idea  

behind  empowering  RBI  to  determine  the  Policy  in  relation  to  

Advances  is  to  enable  banking  companies  to  expand  their  

business of banking and in that sense such guidelines also define  

– as to what constitutes banking business.

Trading in NPA -  a misnomer  

15. At the outset one needs to know what is NPA?  When a  

borrower who is under liability to pay to secured creditors, makes  

default in repayment of secured debt or any installment thereof,  

the  account  of  borrower  is  classified  as  Non-Performing  Asset

39

(NPA).  Such NPAs cannot be used for any productive purpose.  

Continuous growth in NPAs threatens the repayment capacity of  

the  banks.   They  have  an  adverse  impact  on  the  financial  

strength of the banks which in the present era of globalization are  

required  to  conform  to  International  Standards.   Thus,  NPA  

means an asset or account receivable of a borrower, which has  

been classified by banks or financial institutions in terms of RBI  

Guidelines as sub-standard, doubtful etc.  These guidelines are  

issued  to  improve  quality  of  assets  of  the  banks.   The  2005  

guidelines of RBI are not to eliminate NPAs but to restructure.  

The BR Act, 1949 vide Section 21 empowers RBI in the interest of  

the Banking Policy to lay down guidelines in relation to advances  

to be followed by banking companies.  The 2005 guidelines have  

been  issued  as  “a  restructuring  measure”  in  order  to  avoid  

setbacks in the banking system.  NPAs do not generate interest.  

85% of  the  Indian Banks’  income comes from interest.   Thus,  

NPAs  adversely  impact  profits  of  the  banks  and  hence,  as  a  

matter  of  Banking  Policy,  RBI  as  Regulator  seeks  through  its  

guidelines under Section 21 r/w Section 35A to manage these  

NPAs  and  not  to  eliminate.   The  said  guidelines  deal  with  

restructuring of the banking system which is one of the objects  

behind giving authority to RBI to frame “banking policy”.  One  

more aspect needs to be kept in mind.  In this batch of cases we

40

are  dealing  with  assets  in  the  hands  of  banks.   NPAs  are  

“Account Receivables”.  The impugned guidelines show that RBI  

considers inter se NPA assignment between banks to be a tool for  

resolving the issue of NPAs and in the interest of banking policy  

under Section 21 of the BR Act, 1949.  The object is to minimize  

the problem of credit risk.  The corporate debt restructuring is  

one of the methods for reducing NPAs.  Thus, such restructuring  

as a matter of banking policy cannot be treated as “trading”.  One  

has  to  keep  in  mind  the  object  behind  enactment  of  BR  Act,  

1949.   Thus,  the  said Guidelines  fall  under  Section  21 of  the  

1949  Act.   These  Guidelines  are  a  part  of  Credit  Appraisal  

Mechanism.  Thus, in our view the impugned Guidelines are not  

ultra vires the BR Act,  1949.   Dealing in NPAs as part  of  the  

Credit  Appraisal  Mechanism  and  as  a  part  of  Restructuring  

Mechanism falls within Section 21 r/w Section 35A of the Act.  

Hence, it cannot be said that “transfer of debts/NPAs”  inter  se  

between banks is an activity which is impermissible under the  

1949 Act. The BR Act, 1949 is an Act enacted to consolidate and  

amend the law relating to banking. Thus, while interpreting the  

Act  one needs to keep in mind not only the framework of  the  

banking law as it stood in 1949 but also the growth and the new  

concepts that have emerged in the course of time. (see: Principles  

of Statutory Interpretation by G.P. Singh, 11th  edition at page

41

328.)  

16. Thus, in our view on reading the provisions of the BR Act,  

1949  with  the  Guidelines  of  RBI  issued  from time  to  time  in  

relation to Advances and Re-structuring/Management of NPAs we  

are  of  the  view that  the  BR Act,  1949 is  a complete  Code on  

banking and that dealing in NPAs inter se by the banks needs to  

be looked in the larger framework of            “Re-structuring of  

banking System”. Thus, we need not go into the provisions of the  

said  TP  Act.  In  fact,  it  is  the  case  of  the  borrower(s)  that  

provisions of  the  said TP Act  has no application.  (See Written  

Submissions filed on 31.8.2010).

Invocation of Section 130 of TP Act, 1882

17. In  the  alternative,  since  the  borrower(s)  has  relied  on  

Section  130  of  the  said  TP  Act,  one  needs  to  analyse  the  

contentions raised in that regard.  According to the borrower(s)  

assignment of Financial Instruments in possession of ICICI Bank  

Ltd. to Kotak Mahindra Bank Ltd. transfers not merely the right  

to recover the debt but also transfers the obligations under the  

Financial Instruments “as if they were executed by the clients of  

ICICI Bank in favour of the assignee”, i.e., Kotak Mahindra Bank  

Ltd. According to the borrower(s), an assignment of a debt can  

never  carry  with  it  the  assignment  of  the  obligations  of  the  

assignor unless there is a novation of the contract by all parties.

42

Therefore,  according to  the  borrower(s),  the  impugned Deed of  

Assignment is legally unsustainable without novation of original  

contract between ICICI Bank Ltd. (assignor) and the borrower(s)  

(assignee). We find no merit in the above arguments.

18. As  stated  above,  an  outstanding  in  the  account  of  a  

borrower(s)  (customer)  is  a  debt  due  and  payable  by  the  

borrower(s) to the bank. Secondly, the bank is the owner of such  

debt.  Such debt  is  an  asset   in  the  hands  of  the  bank  as  a  

secured  creditor  or  mortgagee  or  hypothecatee.  The  bank  can  

always transfer its asset. Such transfer in no manner affects any  

right or interest of the borrower(s) (customer). Further, there is no  

prohibition  in  the  BR  Act,  1949  in  the  bank  transferring  its  

assets inter se. Even in the matter of assigning debts, it cannot  

be said that the banks are trading in debts, as held by the High  

Court(s). The assignor bank has never purchased the debt(s). It  

has  advanced  loans  against  security  as  part  of  its  banking  

business.  The  account  of  a  client  in  the  books  of  the  bank  

becomes Non Performing Asset when the client fails to repay. In  

assigning the debts with underlying security,  the bank is  only  

transferring  its  asset  and  is  not  acquiring  any  rights  of  its  

client(s). The bank transfers its asset for a particular agreed price  

and is no longer entitled to recover anything from the borrower(s).  

The moment ICICI Bank Ltd. transfers the debt with underlying

43

security, the borrower(s) ceases to be the borrower(s) of the ICICI  

Bank Ltd. and becomes the borrower(s) of Kotak Mahindra Bank  

Ltd. (assignee). At this stage, we wish to once again emphasize  

that  debts are assets of the assignor bank. The High Court(s) has  

erred  in  not  appreciating  that  the  assignor  bank  is  only  

transferring  its  rights  under  a  contract  and  its  own  asset,  

namely, the debt as also the mortgagee’s rights in the mortgaged  

properties  without  in  any  manner  affecting  the  rights  of  the  

borrower(s)/mortgagor(s) in the contract or in the assets. None of  

the clauses of the impugned Deed of Assignment transfers any  

obligations of the assignor towards the assignee. In the case of  

Khardah Company Ltd. v. Raymon & Co. (India) Private Ltd.  

reported in (1963) 3 S.C.R.  183 the Supreme Court has held that  

the law on the subject of assignment of a contract is well settled.  

An assignment of a contract might result by transfer either of the  

rights or by transfer of obligations thereunder.  There is a well  

recognized distinction between the two classes of assignments. As  

a rule, obligations under a contract cannot be assigned except  

with  the  consent  of  the  promisee,  and  when  such  consent  is  

given, it is really a novation resulting in substitution of liabilities.  

That, rights under a contract are always assignable unless the  

contract  is  personal  in  its  nature  or  unless  the  rights  are  

incapable  of  assignment,  either  under  the  law  or  under  an

44

agreement between the parties. A benefit under the contract can  

always  be  assigned.  That,  there  is,  in  law,  a  clear  distinction  

between assignment of rights under a contract by a party who  

has performed his obligation thereunder and an assignment of a  

claim for compensation which one party has against the other for  

breach of contract.

19. In the case of  Camdex International  Ltd. v.  Bank of  

Zambia reported in (1998) Q.B. 22 (CA) the following observation  

which is relevant to the present case needs to be quoted:

“The  assignment  of  a  debt  will  not  be  contrary  to  public policy solely on the grounds that the assignee  has purchased the debt for a considerably discounted  price  or  because  that  price  is  only  payable  after  a  period of credit. Nor will the assignment be contrary to  public policy simply because the assignee may make a  profit on the transaction at the end of the day. If there  was no prospect of  a profit,  Hobhouse LJ observed,  commercial entities would never purchase debts.”

20. Similarly, the following proposition in Chitty on Contracts,   

27th edn. (1994) at para 19.027 is relevant to be noted.

“It is also well established that a claim to a simple debt  is assignable even if the debtor has refused to pay. The  practice of assigning or ‘selling’ debts to debt collecting  agencies and credit factors could hardly be carried on if  the law were otherwise. ”

21. In view of the above exposition of law, we find that under  

the impugned Deed of Assignment only the Account Receivables  

in the books of ICICI Bank Ltd. has been transferred to Kotak

45

Mahindra Bank Ltd. The obligations of ICICI Bank Ltd. towards  

its borrower(s) (customer) under the loan agreement secured by  

deed of hypothecation/mortgage have not been assigned by ICICI  

Bank Ltd. to the assignee bank, namely, Kotak Mahindra Bank  

Ltd.  Hence,  it  cannot  be  said  that  the  impugned  Deed  of  

Assignment is unsustainable in law. The obligations referred to in  

the impugned Deed of Assignment are the obligations, if any, of  

ICICI Bank Ltd. towards Kotak Mahindra Bank Ltd. (assignee) in  

the matter of transfer of NPAs. For example, when an Account  

Receivable is treated as NPA and assigned to the assignee bank,  

the  parties  have  to follow certain Guidelines issued by RBI.  If  

there is a breach of the Guidelines or statutory directions issued  

by RBI by Assignor in regard to transfer of NPA then the assignee  

bank can enforce such obligations vis-à-vis the assignor bank. It  

is these obligations which are referred to in the impugned Deed of  

Assignment. That, an Account Receivable becomes an NPA only  

because of the default committed by the borrower(s) who fails to  

repay. Lastly, it may be mentioned that the said SARFAESI Act,  

2002 was enacted enabling specified SPVs to buy the NPAs from  

banks. However, from that it does not follow that banks inter se  

cannot transfer their own assets. Hence the said SARFAESI Act,  

2002 has no relevance in this case.

22. Before concluding, we may state that NPAs are created on

46

account of the breaches committed by the borrower. He violates  

his  obligation  to  repay  the  debts.  One  fails  to  appreciate  the  

opportunity he seeks to participate in the “Transfer of Account  

Receivable” from one bank to the other.   

Conclusion:

23. As stated above, by the impugned judgment, the Division  

Bench  of  the  Gujarat  High  Court  upheld  the  order  of  the  

Company Court only on one ground, namely, assignment of debts  

by the banks inter se is an activity which is impermissible under  

the Banking Regulation Act, 1949. However, the Division Bench  

did not go into other issues which arose for determination before  

the Company Court, including applicability of the provisions of  

the Registration Act, 1908.  

24. In  the  circumstances,  we  set  aside  the  impugned  

judgment(s) on the question of assignment of debts as an activity  

permissible under the Banking Regulation Act,  1949. However,  

we remit these matters to the Division Bench of the High Court(s)  

for  consideration of other issues raised in this batch of  cases.  

Subject to above, the impugned judgment(s) is set aside and the  

civil appeals are allowed with no order as to costs.

…..……………………….CJI (S. H. Kapadia)

47

……………………………..J. (Swatanter Kumar)

New Delhi;  September 30, 2010.